UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-22559
First Trust Exchange-Traded Fund IV
(Exact name of registrant as specified in charter)
Exact name of registrant as specified in charter)
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
(Address of principal executive offices) (Zip code)
W. Scott Jardine, Esq.
First Trust Portfolios L.P.
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
(Name and address of agent for service)
Registrant’s telephone number, including area code: (630) 765-8000
Date of fiscal year end: October 31
Date of reporting period: October 31, 2023
Form N-CSR is to be used by management investment companies to file reports with the Commission not later than 10 days after the transmission to stockholders of any report that is required to be transmitted to stockholders under Rule 30e-1 under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may use the information provided on Form N-CSR in its regulatory, disclosure review, inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR, and the Commission will make this information public. A registrant is not required to respond to the collection of information contained in Form N-CSR unless the Form displays a currently valid Office of Management and Budget (“OMB”) control number. Please direct comments concerning the accuracy of the information collection burden estimate and any suggestions for reducing the burden to Secretary, Securities and Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-0609. The OMB has reviewed this collection of information under the clearance requirements of 44 U.S.C. § 3507.
Item 1. Report to Stockholders.
The registrant’s annual report transmitted to shareholders pursuant to Rule 30e-1 under the Investment Company Act of 1940 is as follows:
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For the Period
April 26, 2023
(Commencement of Operations)
through October 31, 2023 |
First Trust Exchange-Traded Fund IV
FT Cboe Vest DJIA® Dogs 10 Target Income ETF (DOGG) |
FT Cboe Vest DJIA® Dogs 10 Target Income ETF
Annual Report
October 31, 2023
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 Cboe VestSM Financial LLC (“Cboe Vest” or the “Sub-Advisor”) and their respective representatives, taking into account the information currently available to them. Forward-looking statements include all statements that do not relate solely to current or historical fact. For example, forward-looking statements include the use of words such as “anticipate,” “estimate,” “intend,” “expect,” “believe,” “plan,” “may,” “should,” “would” or other words that convey uncertainty of future events or outcomes.
Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the series of First Trust Exchange-Traded Fund IV (the “Trust”) described in this report (FT Cboe Vest DJIA® Dogs 10 Target 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 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’s shares may therefore be less than what you paid for them. Accordingly, you can lose money investing in the Fund. See “Risk Considerations” in the Additional Information section of this report for a discussion of certain other risks of investing in the Fund.
Performance data quoted represents past performance, which is no guarantee of future results, and current performance may be lower or higher than the figures shown. For the most recent month-end performance figures, please visit www.ftportfolios.com or speak with your financial advisor. Investment returns, net asset value and share price will fluctuate and Fund shares, when sold, may be worth more or less than their original cost.
The Advisor may also periodically provide additional information on Fund performance on the Fund’s webpage at www.ftportfolios.com.
How to Read This Report
This report contains information that may help you evaluate your investment in the Fund. It includes details about the Fund and presents data and analysis that provide insight into the Fund’s performance and investment approach.
By reading the portfolio commentary from the portfolio management team of the Fund, you may obtain an understanding of how the market environment affected the Fund’s performance. The statistical information that follows may help you understand the Fund’s performance compared to that of relevant market benchmarks.
It is important to keep in mind that the opinions expressed by personnel of the Advisor and/or Sub-Advisor are just that: informed opinions. They should not be considered to be promises or advice. The opinions, like the statistics, cover the period through the date on the cover of this report. The material risks of investing in the Fund are spelled out in the prospectus, the statement of additional information, and other Fund regulatory filings.
FT Cboe Vest DJIA® Dogs 10 Target Income ETF (DOGG)
Annual Letter from the Chairman and CEO
October 31, 2023
Dear Shareholders,
First Trust is pleased to provide you with the annual report for the FT Cboe Vest DJIA® Dogs 10 Target Income ETF (the “Fund”), which contains detailed information about the Fund since its inception on April 26, 2023 through October 31, 2023. Please note that the information contained in this letter and the report prior to the Fund’s inception date does not apply to the Fund.
The Bureau of Economic Analysis recently announced that U.S. real gross domestic product (“GDP”) grew by a staggering 4.9% in the third quarter of 2023 and is now up 2.9% on a year-over-year basis from where it stood in the third quarter of 2022. The most recent quarter’s GDP data represents the fastest growth rate for any quarter since 2014. Consumer spending, which rose by 4.0% over the period, was responsible for 2.7 percentage points of the total increase in GDP. Whether the consumer can keep up this pace of spending remains to be seen, especially given recent news that excess savings from the pandemic-era stimulus have likely been depleted. From a global perspective, the International Monetary Fund (“IMF”) notes that progress in fighting inflation has led to lower economic growth. In their October 2023 publication of the World Economic Outlook, the IMF projected that the growth in world economic output is expected to slow from 3.5% in 2022 to 2.9% in 2024. The economic growth in advanced economies is projected to plummet from 2.6% in 2022 to 1.4% in 2024.
In the notes to their September 2023 meeting, the Federal Open Market Committee revealed that they may need to keep interest rates “higher for longer” as they continue to battle stubbornly high inflation. As many investors are likely aware, a higher Federal Funds target rate can have deep implications for consumers, such as driving up the cost of borrowing for homes, automobiles, and other large purchases. The American consumer has yet to feel the full weight of those burdens, in my opinion. That said, the data reveals a different story among corporate America. S&P Global Market Intelligence reported that a total of 516 U.S. corporations filed for bankruptcy protection on a year-to-date basis through September 30, 2023, up from a total of 263 corporate bankruptcy filings over the same period last year. Higher interest rates and Treasury bond yields have also sapped demand for commercial property loans. Data from Trepp, LLC, a leading provider of data and analytics to the commercial real estate and banking markets, revealed that just $28.2 billion of loans converted into commercial mortgage-backed securities have been issued in 2023, the lowest figure since 2011.
The financial markets battled a myriad of headwinds over the past year, from geopolitical uncertainty resulting from war (the conflicts between Israel and Hamas and Russia and Ukraine), to slowing global economic growth and sticky inflation. Brian Wesbury, Chief Economist at First Trust, notes that a U.S. economic recession is likely to begin at some point early next year. While calls for a recession may concern some investors, the following may offer solace. Data from Bloomberg reveals that the S&P 500® Index has posted positive total returns over the 3-year period following every recession since 1948.
Thank you for giving First Trust the opportunity to play a role in your financial future. We value our relationship with you and will report on the Fund again in six months.
Sincerely,
James A. Bowen
Chairman of the Board of Trustees
Chief Executive Officer of First Trust Advisors L.P.
Fund Performance Overview (Unaudited)
FT Cboe Vest DJIA® Dogs 10 Target Income ETF (DOGG)
FT Cboe Vest DJIA® Dogs 10 Target Income ETF (the “Fund”) seeks to provide current income with a secondary objective of providing capital appreciation. Under normal market conditions, the Fund will pursue its objective by investing primarily in common stocks, exchange-traded options (including FLexible EXchange options (“FLEX Options”)) and short-term U.S. Treasury securities. The Fund seeks to provide exposure to the “Dogs of the Dow,” the ten highest dividend-yielding stocks in the Dow Jones Industrial Average (“DJIA”) on an annual basis. The Fund will purchase securities comprising the Dogs of the Dow and gain synthetic exposure to the price movements of the securities comprising the Dogs of the Dow through the use of a combination of puts, calls and U.S. Treasury securities. The Fund will invest at least 80% of its net assets (plus any borrowings for investment purposes) in securities comprising the Dogs of the Dow or in options contracts that utilize Dogs of the Dow constituents as the reference asset. Through its investments in securities comprising the Dogs of the Dow and portfolio of investments that reference the Dogs of the Dow, the Fund seeks to provide exposure to a concentrated portfolio of large-capitalization U.S. equity securities while providing a consistent level of income that, when annualized, is approximately 8% (before fees and expenses) above the annualized yield of the DJIA.
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| Inception
(4/26/23)
to 10/31/23 |
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Dow Jones Industrial Average® - Price Return | |
S&P 500® Index - Price Return | |
Dow Jones High Yield Select 10 Index | |
Total returns for the period since inception are calculated from the inception date of the Fund. “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 of the national best bid and offer price (“NBBO”) as of the time that the Fund’s NAV is calculated. Under Securities and Exchange Commission rules, the NBBO consists of the highest displayed buy and lowest sell prices among the various exchanges trading the Fund at the time the Fund’s NAV is calculated. Since shares of the Fund did not trade in the secondary market until after its inception, for the period from inception to the first day of secondary market trading in shares of the Fund, the NAV of the Fund is used as a proxy for the secondary market trading price to calculate market returns. NAV and market returns assume that all distributions have been reinvested in the Fund at NAV and Market Price, respectively.
An index is a statistical composite that tracks a specified financial market or sector. Unlike the Fund, the indices do not actually hold a portfolio of securities and therefore do not incur the expenses incurred by the Fund. These expenses negatively impact the performance of the Fund. Also, market returns do not include brokerage commissions that may be payable on secondary market transactions. If brokerage commissions were included, market returns would be lower. The total returns presented reflect the reinvestment of dividends on securities in the indices. The returns presented do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. The investment return and principal value of shares of the Fund will vary with changes in market conditions. Shares of the Fund may be worth more or less than their original cost when they are redeemed or sold in the market. The Fund’s past performance is no guarantee of future performance.
The “Dow Jones Industrial Average” is a product of S&P Dow Jones Indices LLC (“SPDJI”), and has been licensed for use by First Trust. S&P® is a registered trademark of Standard & Poor’s Financial Services LLC (“S&P”); “Dow Jones®” and “DJIA” are trademarks of Dow Jones Trademark Holdings LLC (“Dow Jones”); and these trademarks have been licensed for use by SPDJI and sublicensed for certain purposes by First Trust. The Fund is not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, their respective affiliates, and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of the Index
Fund Performance Overview (Unaudited) (Continued)
FT Cboe Vest DJIA® Dogs 10 Target Income ETF (DOGG) (Continued)
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Net Other Assets and Liabilities | |
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U.S.Treasury Bill, 0.00%, 01/25/24 | |
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International Business Machines Corp. | |
Verizon Communications, Inc. | |
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Walgreens Boots Alliance, Inc. | |
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| Performance figures assume reinvestment of all distributions and do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. An index is a statistical composite that tracks a specified financial market or sector. Unlike the Fund, the indices do not actually hold a portfolio of securities and therefore do not incur the expenses incurred by the Fund. These expenses negatively impact the performance of the Fund. The Fund’s past performance does not predict future performance. |
Frequency Distribution of Discounts and Premiums
Information showing the number of days the market price of the Fund’s shares was greater (at a premium) and less (at a discount) than the Fund’s net asset value for the most recently completed year, and the most recently completed calendar quarters since that year (or life of the Fund, if shorter) is available at https://www.ftportfolios.com/Retail/etf/home.aspx.
FT Cboe Vest DJIA® Dogs 10 Target Income ETFAnnual ReportOctober 31, 2023 (Unaudited) Advisor
First Trust Advisors L.P. (“First Trust” or the “Advisor”) is the investment advisor to the FT Cboe Vest DJIA® Dogs 10 Target Income ETF (“DOGG” or the “Fund”). First Trust is responsible for the ongoing monitoring of the Fund’s investment portfolio, managing the Fund’s business affairs and providing certain administrative services necessary for the management of the Fund.
Sub-Advisor
Cboe VestSM Financial LLC (“Cboe Vest” or the “Sub-Advisor”) serves as the investment sub-advisor to the Fund. In this capacity, Cboe Vest is responsible for the selection and ongoing monitoring of the securities in the Fund’s investment portfolio. Cboe Vest, with principal offices at 8350 Broad Street, Suite 240, McLean, VA 22102, was founded in 2012. Cboe Vest had approximately $17.8 billion under management or committed to management as of October 31, 2023.
Portfolio Management Team
The following persons serve as the portfolio managers of the Fund:
Karan Sood, Managing Director of Cboe Vest
Howard Rubin, Managing Director of Cboe Vest
The portfolio managers are primarily and jointly responsible for the day-to-day management of the Fund. Each portfolio manager has served as a part of the portfolio management team of the Fund since April 2023.
Discussion of Fund Performance
This discussion is for the Fund for the period from the Fund’s inception date on April 26, 2023 through October 31, 2023 (the “Period”).
Market Recap
Equity markets showed remarkable resilience in the first half of 2023, followed by declines in the third quarter of 2023 and October of 2023 as recession fears resurfaced. The Federal Reserve (the “Fed”) responded to the increased inflation rate by hiking the Federal Funds target rate to 5.5% by the end of the Period.
U.S. equities, as measured by the S&P 500® Index-Total Return, gained 4.24%. Six of the 11 sectors within the S&P 500® Index were up during the Period. The top three sectors were the Communication Services, Technology, and Consumer Discretionary sectors, returning 17.0%, 13.7%, and 8.1%, respectively. The bottom three sectors were the Utilities, Consumer Staples, and Real Estate sectors, returning -11.1%, -8.5%, and -7.5%, respectively.
Performance Analysis
During the Period, the Fund held approximately equal weights in the 10 highest dividend-yielding stocks in the Dow Jones Industrial Average, as well as written call options on these stocks. The Fund also gained synthetic exposure to the price movements of the securities comprising the Dogs of the Dow through the use of a combination of puts, calls, and U.S. Treasury securities. The premiums received from the written call options, plus the dividends received from the equities, sum to approximately 8% in excess of the dividend yield of the Dow Jones Industrial Average annually.
For the Period, the Fund’s net asset value performance was -0.19%, while the Dow Jones High Yield Select 10 Index (the “MUTR Index”), performance was 1.30%. The underperformance of 1.49% can be explained by the following factors:
(1)
Fees and Expenses: Fees and expenses reduced the Fund’s performance by approximately 0.39%.
(2)
Execution Costs: Commissions, plus slippage due to trading securities at prices other than mid-market, reduced the Fund’s performance by approximately 0.19%.
(3)
Fund versus Index Holdings: While the Fund attempts to hold securities in the same proportion (i.e., weighting) as the MUTR Index, at times the Fund weights may deviate from the Index weights. The options positions may be “optimized” such that the Fund’s option weights are set to account for any liquidity concerns. That is, options that trade with wider bid-ask spreads may be
Portfolio Commentary (Continued)
FT Cboe Vest DJIA® Dogs 10 Target Income ETFAnnual ReportOctober 31, 2023 (Unaudited) excluded from the Fund holdings to minimize execution costs. For the Period we estimate that the difference in weights between the Fund and the Index had a net 0.91% negative impact to the Fund’s performance.
Using market prices for the Fund, the Fund’s performance for the Period was 0.01%.
Impact of Fund Holdings on Performance
The top five performing holdings in the Fund for the Period were Intel Corporation, International Business Machines Corporation, Cisco Systems, Inc., Amgen Inc., and JPMorgan Chase & Co., with returns of 26.6%, 17.9%, 13.7%, 9.0%, and 4.3%, respectively.
The bottom five performing holdings for the Period were Walgreens Boots Alliance, Inc., Chevron Corporation, 3M Company, Dow Inc., and Verizon Communications Inc., with returns of -37.4%, -10.5%, -9.0%, -5.6%, and -1.0%, respectively.
Market and Fund Outlook
During the 12-month period ended October 31, 2023, the Fed’s policy surrounding inflation remained a key driver of equity market performance. Moving into the next fiscal year, this will continue to be a dominant theme, in our opinion. The 2024 presidential election will also be front and center in the upcoming year. Over the course of 2023, Technology stocks led broad based indices, as investors flocked to companies developing Artificial Intelligence capabilities. The failure of Silicon Valley Bank in March 2023 sent shockwaves throughout the banking system and rising energy prices over the summer contributed to higher inflation. In late October 2023, 30-year fixed mortgage rates peaked at 7.79%. Investors are digesting a possible “higher for longer” period of sustained higher rates based on the Fed’s “dot plot” illustrating a median Federal Funds target rate of 5.1% for 2024, and 3.9% for 2025. Consumer Price Index inflation data has come down considerably, despite an unexpected 0.6% month-over-month reading in August 2023. The U.S. job market remains strong at 3.9% unemployment, with October 2023 marking the twenty-first straight month with unemployment below 4%. U.S. gross domestic product has posted five consecutive positive quarters as it recorded growth of 4.9% in the third quarter of 2023, up from 2.1% in the second quarter of 2023.
The Fund generally holds equal weights in the 10 highest dividend-yielding stocks within the Dow Jones Industrial Average. We believe that the Fund is properly positioned to achieve its investment objectives.
FT Cboe Vest DJIA® Dogs 10 Target Income ETFUnderstanding Your Fund ExpensesOctober 31, 2023 (Unaudited) As a shareholder of FT Cboe Vest DJIA® Dogs 10 Target Income ETF (the “Fund”), you incur two types of costs: (1) transaction costs; and (2) ongoing costs, including management fees, distribution and/or service (12b-1) fees, if any, and other Fund expenses. This Example is intended to help you understand your ongoing costs of investing in the Fund and to compare these costs with the ongoing costs of investing in other funds.
The Example is based on an investment of $1,000 invested at the beginning of the period and held through the six-month period ended October 31, 2023.
Actual Expenses
The first line in the following table provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During the Six-Month Period” to estimate the expenses you paid on your account during this six-month period.
Hypothetical Example for Comparison Purposes
The second line in the following table provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs such as brokerage commissions. Therefore, the second line in the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
| Beginning
Account Value
May 1, 2023 | Ending
Account Value
October 31, 2023 | Annualized
Expense Ratio
Based on the
Six-Month
Period | Expenses Paid
During the
Six-Month
Period (a) |
FT Cboe Vest DJIA® Dogs 10 Target Income ETF (DOGG) |
| | | | |
Hypothetical (5% return before expenses) | | | | |
| Expenses are equal to the annualized expense ratio as indicated in the table multiplied by the average account value over the period (May 1, 2023 through October 31, 2023), multiplied by 184/365 (to reflect the six-month period). |
FT Cboe Vest DJIA® Dogs 10 Target Income ETF (DOGG)Portfolio of InvestmentsOctober 31, 2023
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| Communications Equipment — 5.0% | |
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| Consumer Staples Distribution & Retail — 5.0% | |
| Walgreens Boots Alliance, Inc. (a) | |
| Diversified Telecommunication Services — 5.0% | |
| Verizon Communications, Inc. (a) | |
| Industrial Conglomerates — 4.9% | |
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| International Business Machines Corp. (a) | |
| Oil, Gas & Consumable Fuels — 5.0% | |
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| Semiconductors & Semiconductor Equipment — 5.0% | |
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U.S. TREASURY BILLS — 77.0% |
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| Total Investments — 127.0% | |
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| Call Options Purchased — 0.1% | |
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| International Business Machines Corp. | | | | |
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| Verizon Communications, Inc. | | | | |
| Walgreens Boots Alliance, Inc. | | | | |
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See Notes to Financial Statements
FT Cboe Vest DJIA® Dogs 10 Target Income ETF (DOGG)Portfolio of Investments (Continued)October 31, 2023 | | | | | |
WRITTEN OPTIONS — (29.0)% |
| Call Options Written — (0.1)% | |
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| International Business Machines Corp. | | | | |
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| Verizon Communications, Inc. | | | | |
| Walgreens Boots Alliance, Inc. | | | | |
| Total Call Options Written | |
| (Premiums received $7,849) | |
| Put Options Written — (28.9)% | |
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| International Business Machines Corp. | | | | |
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| Verizon Communications, Inc. | | | | |
| Walgreens Boots Alliance, Inc. | | | | |
| Total Put Options Written | |
| (Premiums received $2,035,668) | |
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| (Premiums received $2,043,517) | |
| Net Other Assets and Liabilities — 1.9% | |
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| All or a portion of this security is pledged as collateral for the options written. At October 31, 2023, the value of these securities amounts to $4,167,440. |
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Valuation InputsA summary of the inputs used to value the Fund’s investments as of October 31, 2023 is as follows (see Note 2A - Portfolio Valuation in the Notes to Financial Statements):
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| | | Level 2
Significant
Observable
Inputs | Level 3
Significant
Unobservable
Inputs |
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See Notes to Financial Statements
FT Cboe Vest DJIA® Dogs 10 Target Income ETF (DOGG)Portfolio of Investments (Continued)October 31, 2023 |
| | | Level 2
Significant
Observable
Inputs | Level 3
Significant
Unobservable
Inputs |
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| See Portfolio of Investments for industry breakout. |
See Notes to Financial Statements
FT Cboe Vest DJIA® Dogs 10 Target Income ETF (DOGG)Statement of Assets and Liabilities
October 31, 2023
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Options contracts purchased, at value | |
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Cash segregated as collateral for open written options contracts | |
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Investment securities sold | |
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Options contracts written, at value | |
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Investment securities purchased | |
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Accumulated distributable earnings (loss) | |
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NET ASSET VALUE, per share | |
Number of shares outstanding (unlimited number of shares authorized, par value $0.01 per share) | |
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Premiums paid on options contracts purchased | |
Premiums received on options contracts written | |
See Notes to Financial Statements
FT Cboe Vest DJIA® Dogs 10 Target Income ETF (DOGG)Statement of Operations
For the Period Ended October 31, 2023 (a)
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NET INVESTMENT INCOME (LOSS) | |
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NET REALIZED AND UNREALIZED GAIN (LOSS): | |
Net realized gain (loss) on: | |
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Written options contracts | |
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Net change in unrealized appreciation (depreciation) on: | |
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Purchased options contracts | |
Written options contracts | |
Net change in unrealized appreciation (depreciation) | |
NET REALIZED AND UNREALIZED GAIN (LOSS) | |
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS | |
| Inception date is April 26, 2023, which is consistent with the commencement of investment operations and is the date the initial creation units were established. |
See Notes to Financial Statements
FT Cboe Vest DJIA® Dogs 10 Target Income ETF (DOGG)Statement of Changes in Net Assets
| Period
Ended
10/31/2023 (a) |
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Net investment income (loss) | |
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Net change in unrealized appreciation (depreciation) | |
Net increase (decrease) in net assets resulting from operations | |
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DISTRIBUTIONS TO SHAREHOLDERS FROM: | |
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SHAREHOLDER TRANSACTIONS: | |
Proceeds from shares sold | |
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Net increase (decrease) in net assets resulting from shareholder transactions | |
Total increase (decrease) in net assets | |
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CHANGES IN SHARES OUTSTANDING: | |
Shares outstanding, beginning of period | |
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Shares outstanding, end of period | |
| Inception date is April 26, 2023, which is consistent with the commencement of investment operations and is the date the initial creation units were established. |
See Notes to Financial Statements
FT Cboe Vest DJIA® Dogs 10 Target Income ETF (DOGG)Financial Highlights
For a share outstanding throughout the period
| Period
Ended
10/31/2023 (a) |
|
Net asset value, beginning of period | |
Income from investment operations: | |
Net investment income (loss) (b) | |
Net realized and unrealized gain (loss) | |
Total from investment operations | |
Distributions paid to shareholders from: | |
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Net asset value, end of period | |
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Ratios to average net assets/supplemental data: | |
Net assets, end of period (in 000’s) | |
Ratio of total expenses to average net assets | |
Ratio of net investment income (loss) to average net assets | |
Portfolio turnover rate (e) | |
| Inception date is April 26, 2023, which is consistent with the commencement of investment operations and is the date the initial creation units were established. |
| Based on average shares outstanding. |
| 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 return presented does 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. |
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| 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
Notes to Financial Statements
FT Cboe Vest DJIA® Dogs 10 Target Income ETFOctober 31, 2023 1. Organization
First Trust Exchange-Traded Fund IV (the “Trust”) is an open-end management investment company organized as a Massachusetts business trust on September 15, 2010, and is registered with the Securities and Exchange Commission under the Investment Company Act of 1940, as amended (the “1940 Act”).
The Trust currently consists of eighteen exchange-traded funds that are offering shares. This report covers the FT Cboe Vest DJIA® Dogs 10 Target Income ETF (the “Fund”), a non-diversified series of the Trust, which trades under the ticker “DOGG” on Cboe BZX Exchange, Inc. (“Cboe BZX”). The Fund represents a separate series of shares of beneficial interest in the Trust. Unlike conventional mutual funds, the Fund issues and redeems shares on a continuous basis, at net asset value (“NAV”), only in large blocks of shares known as “Creation Units.”
The Fund is an actively managed exchange-traded fund. The Fund’s investment objective seeks to provide current income with a secondary objective of providing capital appreciation. Under normal market conditions, the Fund will pursue its investment objectives by investing primarily in common stocks, exchange-traded options (including FLexible EXchange options (“FLEX Options”)) and short-term U.S. Treasury securities. The Fund seeks to provide exposure to the “Dogs of the Dow,” the ten highest dividend-yielding stocks in the Dow Jones Industrial Average (“DJIA”) on an annual basis. The Fund will purchase securities comprising the Dogs of the Dow and gain synthetic exposure to the price movements of the securities comprising the Dogs of the Dow through the use of a combination of puts, calls and U.S. Treasury securities (the “Synthetic Replication”). The Fund will invest at least 80% of its net assets (plus any borrowings for investment purposes) in securities comprising the Dogs of the Dow or in options contracts that utilize Dogs of the Dow constituents as the reference asset.
2. Significant Accounting Policies
The Fund is considered an investment company and follows accounting and reporting guidance under Financial Accounting Standards Board Accounting Standards Codification Topic 946, “Financial Services-Investment Companies.” The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of the financial statements. The preparation of the financial statements in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates.
A. Portfolio Valuation
The Fund’s NAV is determined daily as of the close of regular trading on the New York Stock Exchange (“NYSE”), normally 4:00 p.m. Eastern time, on each day the NYSE is open for trading. If the NYSE closes early on a valuation day, the NAV is determined as of that time. The Fund’s NAV is calculated by dividing the value of all assets of the Fund (including accrued interest and dividends), less all liabilities (including accrued expenses and dividends declared but unpaid), by the total number of shares outstanding.
The Fund’s investments are valued daily at market value or, in the absence of market value with respect to any portfolio securities, at fair value. Market value prices represent readily available market quotations such as last sale or official closing prices from a national or foreign exchange (i.e., a regulated market) and are primarily obtained from third-party pricing services. Fair value prices represent any prices not considered market value prices and are either obtained from a third-party pricing service or are determined by the Pricing Committee of the Fund’s investment advisor, First Trust Advisors L.P. (“First Trust” or the “Advisor”), in accordance with valuation procedures approved by the Trust’s Board of Trustees, and in accordance with provisions of the 1940 Act and rules thereunder. Investments valued by the Advisor’s Pricing Committee, if any, are footnoted as such in the footnotes to the Portfolio of Investments. The Fund’s investments are valued as follows:
Common stocks and other equity securities listed on any national or foreign exchange (excluding Nasdaq, Inc. (“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 primary exchange for such securities.
Exchange-traded options contracts (other than FLEX Option contracts) are valued at the closing price in the market where such contracts are principally traded. If no closing price is available, exchange-traded options contracts are fair valued at the mean of their most recent bid and ask price, if both are available. Over-the-counter options contracts may be valued as follows,
Notes to Financial Statements (Continued)
FT Cboe Vest DJIA® Dogs 10 Target Income ETFOctober 31, 2023 depending on the market in which the instrument trades: (1) the mean of their most recent bid and ask price, if available; or (2) a price based on the equivalent exchange-traded option. FLEX Option contracts are normally valued using a model-based price provided by a third-party pricing vendor. On days when a trade in a FLEX Option contract occurs, the trade price will be used to value such FLEX Option contracts in lieu of the model price.
Equity securities traded in an over-the-counter market are valued at the close price or the last trade price.
U.S. Treasuries are fair valued on the basis of valuations provided by a third-party pricing service approved by the Trust’s Board of Trustees.
Certain securities may not be able to be priced by pre-established pricing methods. Such securities may be valued by 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 last sale price on the exchange on which they are principally traded or, for Nasdaq and AIM securities, the official closing price;
3)
the size of the holding;
4)
the initial cost of the security;
5)
transactions in comparable securities;
6)
price quotes from dealers and/or third-party pricing services;
7)
relationships among various securities;
8)
information obtained by contacting the issuer, analysts, or the appropriate stock exchange;
9)
an analysis of the issuer’s financial statements;
10)
the existence of merger proposals or tender offers that might affect the value of the security; and
11)
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:
• Level 1 – Level 1 inputs are quoted prices in active markets for identical investments. An active market is a market in which transactions for the investment occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
• Level 2 – Level 2 inputs are observable inputs, either directly or indirectly, and include the following:
o Quoted prices for similar investments in active markets.
o Quoted prices for identical or similar investments in markets that are non-active. A non-active market is a market where there are few transactions for the investment, the prices are not current, or price quotations vary substantially either over time or among market makers, or in which little information is released publicly.
o Inputs other than quoted prices that are observable for the investment (for example, interest rates and yield curves observable at commonly quoted intervals, volatilities, prepayment speeds, loss severities, credit risks, and default rates).
o Inputs that are derived principally from or corroborated by observable market data by correlation or other means.
• Level 3 – Level 3 inputs are unobservable inputs. Unobservable inputs may reflect the reporting entity’s own assumptions about the assumptions that market participants would use in pricing the investment.
The inputs or methodologies used for valuing investments are not necessarily an indication of the risk associated with investing in those investments. A summary of the inputs used to value the Fund’s investments as of October 31, 2023, is included with the Fund’s Portfolio of Investments.
Notes to Financial Statements (Continued)
FT Cboe Vest DJIA® Dogs 10 Target Income ETFOctober 31, 2023 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.
C. Options Contracts and FLEX Options
When the Fund sells call options as a means to generate income to achieve the Target Income Level, the Fund will employ a covered call strategy that seeks to sell call options having a strike price roughly equal to the value of each equity security held by the Fund (such options are said to be “at-the-money”) on some or all of the equity securities purchased by the Fund.
When utilizing Synthetic Replication, the Fund may utilize FLEX Options. FLEX Options are customized equity or index option contracts that trade on an exchange but provide investors with the ability to customize key contract terms like exercise prices, styles and expiration dates that are otherwise standardized in typical listed options contract. The Synthetic Replication is achieved through the combination of a purchasing a call and selling a put generally at the same strike price which synthetically creates the upside and downside participation in the price returns of the Dogs of the Dow.
When the Fund purchases a call or put option, the premium paid represents the cost of the call or put option, which is included in “Options contracts purchased, at value” on the Statement of Assets and Liabilities. When the Fund writes (sells) an option, an amount equal to the premium received by the Fund is included in “Options contracts written, at value” on the Statement of Assets and Liabilities. Options are marked-to-market daily and their value is affected by changes in the value of the underlying security, changes in interest rates, changes in the actual or perceived volatility of the securities markets and the underlying securities, and the remaining time to the option’s expiration. The value of options may also be adversely affected if the market for the options becomes less liquid or the trading volume diminishes. Gain or loss on purchased options, if any, is included in “Net realized gain (loss) on purchased options contracts” on the Statement of Operations. Gain or loss on written options, if any, is presented separately as “Net realized gain (loss) on written options contracts” on the Statement of Operations.
D. Dividends and Distributions to Shareholders
Dividends from net investment income of the Fund, if any, are declared and paid 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, are distributed at least annually. The Fund may also designate a portion of the amount paid to redeeming shareholders as a distribution for tax purposes.
Distributions from net investment income and realized capital gains are determined in accordance with federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These permanent differences are primarily due to the varying treatment of income and gain/loss on significantly modified portfolio securities held by the Fund and have no impact on net assets or NAV per share. Temporary differences, which arise from recognizing certain items of income, expense and gain/loss in different periods for financial statement and tax purposes, will reverse at some time in the future.
The tax character of distributions paid during the fiscal period ended October 31, 2023 was as follows:
As of October 31, 2023, the components of distributable earnings on a tax basis for the Fund were as follows:
Undistributed ordinary income | |
Accumulated capital and other gain (loss) | |
Net unrealized appreciation (depreciation) | |
E. Income Taxes
The Fund intends 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
Notes to Financial Statements (Continued)
FT Cboe Vest DJIA® Dogs 10 Target Income ETFOctober 31, 2023 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 2023 remains open to federal and state audit. As of October 31, 2023, management has evaluated the application of these standards to the Fund and has determined that no provision for income tax is required in the Fund’s 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, 2023, for federal income tax purposes, the Fund had no capital loss carryforwards available, to the extent provided by regulations, to offset future capital gains.
Certain losses realized during the current fiscal period may be deferred and treated as occurring on the first day of the following fiscal year for federal income tax purposes. For the fiscal period ended October 31, 2023, the Fund had no net late year ordinary or capital losses.
In order to present paid-in capital and accumulated distributable earnings (loss) (which consists of accumulated net investment income (loss), accumulated net realized gain (loss) on investments and net unrealized appreciation (depreciation) on investments) on the Statement of Assets and Liabilities that more closely represent their tax character, certain adjustments have been made to paid-in capital, accumulated net investment income (loss) and accumulated net realized gain (loss) on investments. These adjustments are primarily due to the difference between book and tax treatments of income and gains on various investment securities held by the Fund and in-kind transactions. The results of operations and net assets were not affected by these adjustments. For the fiscal period ended October 31, 2023, the adjustments for the Fund were as follows:
Accumulated
Net Investment
Income (Loss) | Accumulated
Net Realized
Gain (Loss)
on Investments | |
| | |
As of October 31, 2023, the aggregate cost, gross unrealized appreciation, gross unrealized depreciation, and net unrealized appreciation/(depreciation) on investments (including short positions and derivatives, if any) for federal income tax purposes were as follows:
| Gross Unrealized
Appreciation | Gross Unrealized
(Depreciation) | Net Unrealized
Appreciation
(Depreciation) |
| | | |
F. Expenses
Expenses, other than the investment advisory fee and other excluded expenses, are paid by the Advisor (see Note 3).
3. Investment Advisory Fee, Affiliated Transactions and Other Fee Arrangements
First Trust, the investment advisor to the Fund, is a limited partnership with one limited partner, Grace Partners of DuPage L.P., and one general partner, The Charger Corporation. The Charger Corporation is an Illinois corporation controlled by James A. Bowen, Chief Executive Officer of First Trust. First Trust is responsible for the selection and ongoing monitoring of the securities in the Fund’s portfolio, managing the Fund’s business affairs and providing certain administrative services necessary for the management of the Fund.
First Trust is responsible for the expenses of the Fund including the cost of transfer agency, sub-advisory, custody, fund administration, legal, audit and other services and license fees (if any), but excluding fee payments under the Investment Management Agreement, interest, taxes, acquired fund fees and expenses, if any, brokerage commissions and other expenses connected with the execution of portfolio transactions, distribution and service fees payable pursuant to a Rule 12b-1 plan, if any, and extraordinary
Notes to Financial Statements (Continued)
FT Cboe Vest DJIA® Dogs 10 Target Income ETFOctober 31, 2023 expenses. The annual unitary management fee payable by the Fund to First Trust for these services will be reduced at certain levels of the Fund’s net assets (“breakpoints”) and calculated pursuant to the following schedule:
| |
Fund net assets up to and including $2.5 billion | |
Fund net assets greater than $2.5 billion up to and including $5 billion | |
Fund net assets greater than $5 billion up to and including $7.5 billion | |
Fund net assets greater than $7.5 billion up to and including $10 billion | |
Fund net assets greater than $10 billion | |
Cboe VestSM Financial LLC (“Cboe Vest”), 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, on behalf of the Fund, and the Advisor, and the Investment Sub-Advisory Agreement among the Trust, on behalf of the Fund, the Advisor and Cboe Vest, First Trust will supervise Cboe Vest and its management of the investment of the Fund’s assets and will pay Cboe Vest for its services as the Fund’s sub-advisor. Cboe Vest receives a sub-advisory fee equal to 0.20% of the average daily net assets of the Fund. Cboe Vest’s fee is paid by the Advisor out of its management fee.
The Trust has multiple service agreements with The Bank of New York Mellon (“BNYM”). Under the service agreements, BNYM performs custodial, fund accounting, certain administrative services, and transfer agency services for the Fund. As custodian, BNYM is responsible for custody of the Fund’s assets. As fund accountant and administrator, BNYM is responsible for maintaining the books and records of the Fund’s securities and cash. As transfer agent, BNYM is responsible for maintaining shareholder records for the Fund. BNYM is a subsidiary of The Bank of New York Mellon Corporation, a financial holding company.
Each Trustee who is not an officer or employee of First Trust, any sub-advisor or any of their affiliates (“Independent Trustees”) is paid a fixed annual retainer that is allocated equally among each fund in the First Trust Fund Complex. Each Independent Trustee is also paid an annual per fund fee that varies based on whether the fund is a closed-end or other actively managed fund, a target outcome fund or an index fund.
Additionally, the Lead Independent Trustee and the Chairs of the Audit Committee, Nominating and Governance Committee and Valuation Committee are paid annual fees to serve in such capacities, with such compensation allocated pro rata among each fund in the First Trust Fund Complex based on net assets. Independent Trustees are reimbursed for travel and out-of-pocket expenses in connection with all meetings. The Lead Independent Trustee and Committee Chairs rotate every three years. The officers and “Interested” Trustee receive no compensation from the Trust for acting in such capacities.
4. Purchases and Sales of Securities
For the fiscal period ended October 31, 2023, the cost of purchases and proceeds from sales of investments, excluding short-term investments and in-kind transactions, were $5,667,413 and $8,566,849, respectively.
For the fiscal period ended October 31, 2023, the cost of in-kind purchases and proceeds from in-kind sales were $6,857,483 and $0, respectively.
5. Derivative Transactions
The following table presents the types of derivatives held by the Fund at October 31, 2023, the primary underlying risk exposure and the location of these instruments as presented on the Statement of Assets and Liabilities.
| | | |
| | Statement of Assets and
Liabilities Location | | Statement of Assets and
Liabilities Location | |
| | Options contracts purchased, at value | | Options contracts written, at value | |
Notes to Financial Statements (Continued)
FT Cboe Vest DJIA® Dogs 10 Target Income ETFOctober 31, 2023 The following table presents the amount of net realized gain (loss) and change in net unrealized appreciation (depreciation) recognized for the fiscal period ended October 31, 2023, on derivative instruments, as well as the primary underlying risk exposure associated with the instruments.
|
Statement of Operations Location | |
| |
Net realized gain (loss) on written options contracts | |
Net change in unrealized appreciation
(depreciation) on: | |
Purchased options contracts | |
Written options contracts | |
During the fiscal period ended October 31, 2023, the premiums for purchased options contracts opened were $9,740 and the premiums for purchased options contracts closed, exercised and expired were $0.
During the fiscal period ended October 31, 2023, the premiums for written options contracts opened were $2,186,722 and the premiums for written options contracts closed, exercised and expired were $143,205.
The Fund does not have the right to offset financial assets and financial liabilities related to options contracts on the Statement of Assets and Liabilities.
6. Creations, Redemptions and Transaction Fees
The Fund generally issues and redeems its shares in primary market transactions through a creation and redemption mechanism and does not sell or redeem individual shares. Instead, financial entities known as “Authorized Participants” have contractual arrangements with the Fund or one of the Fund’s service providers to purchase and redeem Fund shares directly with the Fund in large blocks of shares known as “Creation Units.” Prior to the start of trading on every business day, the Fund publishes through the National Securities Clearing Corporation the “basket” of securities, cash or other assets that it will accept in exchange for a Creation Unit of the Fund’s shares. An Authorized Participant that wishes to effectuate a creation of the Fund’s shares deposits with the Fund the “basket” of securities, cash or other assets identified by the Fund that day, and then receives the Creation Unit of the Fund’s shares in return for those assets. After purchasing a Creation Unit, the Authorized Participant may continue to hold the Fund’s shares or sell them in the secondary market. The redemption process is the reverse of the purchase process: the Authorized Participant redeems a Creation Unit of the Fund’s shares for a basket of securities, cash or other assets. The combination of the creation and redemption process with secondary market trading in the Fund’s shares and underlying securities provides arbitrage opportunities that are designed to help keep the market price of the Fund’s shares at or close to the NAV per share of the Fund.
The Fund imposes fees in connection with the purchase of Creation Units. These fees may vary based upon various fact-based circumstances, including, but not limited to, the composition of the securities included in the Creation Unit or the countries in which the transactions are settled. The price for each Creation Unit will equal the daily NAV per share of the Fund times the number of shares in a Creation Unit, plus the fees described above and, if applicable, any operational processing and brokerage costs, transfer fees, stamp taxes and part or all of the spread between the expected bid and offer side of the market related to the securities comprising the creation basket.
The Fund also imposes fees in connection with the redemption of Creation Units. These fees may vary based upon various fact-based circumstances, including, but not limited to, the composition of the securities included in the Creation Unit or the countries in which the transactions are settled. The price received for each Creation Unit will equal the daily NAV per share of the Fund times the number of shares in a Creation Unit, minus the fees described above and, if applicable, any operational processing and brokerage costs, transfer fees, stamp taxes and part or all of the spread between the expected bid and offer side of the market related to the securities comprising the redemption basket. Investors who use the services of a broker or other such intermediary in addition to an Authorized Participant to effect a redemption of a Creation Unit may also be assessed an amount to cover the cost of such services. The redemption fee charged by the Fund will comply with Rule 22c-2 of the 1940 Act which limits redemption fees to no more than 2% of the value of the shares redeemed.
Notes to Financial Statements (Continued)
FT Cboe Vest DJIA® Dogs 10 Target Income ETFOctober 31, 2023 7. Distribution Plan
The Board of Trustees adopted a Distribution and Service Plan pursuant to Rule 12b-1 under the 1940 Act. In accordance with the Rule 12b-1 plan, the Fund is authorized to pay an amount up to 0.25% of its average daily net assets each year to reimburse First Trust Portfolios L.P. (“FTP”), the distributor of the Fund, for amounts expended to finance activities primarily intended to result in the sale of Creation Units or the provision of investor services. FTP may also use this amount to compensate securities dealers or other persons that are Authorized Participants for providing distribution assistance, including broker-dealer and shareholder support and educational and promotional services.
No 12b-1 fees are currently paid by the Fund, and pursuant to a contractual arrangement, no 12b-1 fees will be paid any time before April 24, 2025.
8. Indemnification
The Trust, on behalf of the Fund, has a variety of indemnification obligations under contracts with its service providers. The Trust’s maximum exposure under these arrangements is unknown. However, the Trust has not had prior claims or losses pursuant to these contracts and expects the risk of loss to be remote.
9. Subsequent Events
Management has evaluated the impact of all subsequent events on the Fund through the date the financial statements were issued and has determined that there were no subsequent events requiring recognition or disclosure in the financial statements that have not already been disclosed.
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Trustees of First Trust Exchange-Traded Fund IV:
Opinion on the Financial Statements and Financial Highlights
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of FT Cboe Vest DJIA® Dogs 10 Target Income ETF (the “Fund”), one of the funds constituting the First Trust Exchange-Traded Fund IV, as of October 31, 2023, and the related statements of operations, changes in net assets, and the financial highlights for the period from April 26, 2023 (commencement of investment operations) through October 31, 2023, and the related notes. In our opinion, the financial statements and financial highlights present fairly, in all material respects, the financial position of the Fund as of October 31, 2023, and the results of its operations, the changes in its net assets, and the financial highlights for the period from April 26, 2023 (commencement of investment operations) through October 31, 2023, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on the Fund’s financial statements and financial highlights based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Fund in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement, whether due to error or fraud. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements and financial highlights, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements and financial highlights. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and financial highlights. Our procedures included confirmation of securities owned as of October 31, 2023, by correspondence with the custodian and brokers; when replies were not received from brokers, we performed other auditing procedures. We believe that our audit provides a reasonable basis for our opinion.
/s/ Deloitte & Touche, LLP
Chicago, Illinois
December 21, 2023
We have served as the auditor of one or more First Trust investment companies since 2001.
FT Cboe Vest DJIA® Dogs 10 Target Income ETFOctober 31, 2023 (Unaudited) Proxy Voting Policies and Procedures
A description of the policies and procedures that the Trust uses to determine how to vote proxies and information on how the Fund voted proxies relating to its portfolio securities during the most recent 12-month period ended June 30 is available (1) without charge, upon request, by calling (800) 988-5891; (2) on the Fund’s website at www.ftportfolios.com; and (3) on the Securities and Exchange Commission’s (“SEC”) website at www.sec.gov.
Portfolio Holdings
The Fund files portfolio holdings information for each month in a fiscal quarter within 60 days after the end of the relevant fiscal quarter on Form N-PORT. Portfolio holdings information for the third month of each fiscal quarter will be publicly available on the SEC’s website at www.sec.gov. The Fund’s complete schedule of portfolio holdings for the second and fourth quarters of each fiscal year is included in the semi-annual and annual reports to shareholders, respectively, and is filed with the SEC on Form N-CSR. The semi-annual and annual report for the Fund is available to investors within 60 days after the period to which it relates. The Fund’s Forms N-PORT and Forms N-CSR are available on the SEC’s website listed above.
Federal Tax Information
For the taxable period ended October 31, 2023, the following percentages of income dividend paid by the Fund qualify for the dividends received deduction available to corporations and are hereby designated as qualified dividend income:
Dividend Received Deduction | Qualified Dividend Income |
| |
Risk Considerations
Risks are inherent in all investing. Certain general risks that may be applicable to a Fund are identified below, but not all of the material risks relevant to each Fund are included in this report and not all of the risks below apply to each Fund. The material risks of investing in each Fund are spelled out in its prospectus, statement of additional information and other regulatory filings. Before investing, you should consider each Fund’s investment objective, risks, charges and expenses, and read each Fund’s prospectus and statement of additional information carefully. You can download each Fund’s prospectus at www.ftportfolios.com or contact First Trust Portfolios L.P. at (800) 621-1675 to request a prospectus, which contains this and other information about each Fund.
Concentration Risk. To the extent that a fund is able to invest a significant percentage of its assets in a single asset class or the securities of issuers within the same country, state, region, industry or sector, an adverse economic, business or political development may affect the value of the fund’s investments more than if the fund were more broadly diversified. A fund that tracks an index will be concentrated to the extent the fund’s corresponding index is concentrated. A concentration makes a fund more susceptible to any single occurrence and may subject the fund to greater market risk than a fund that is more broadly diversified.
Credit Risk. Credit risk is the risk that an issuer of a security will be unable or unwilling to make dividend, interest and/or principal payments when due and the related risk that the value of a security may decline because of concerns about the issuer’s ability to make such payments.
Cyber Security Risk. The funds are susceptible to potential operational risks through breaches in cyber security. A breach in cyber security refers to both intentional and unintentional events that may cause a fund to lose proprietary information, suffer data corruption or lose operational capacity. Such events could cause a fund to incur regulatory penalties, reputational damage, additional compliance costs associated with corrective measures and/or financial loss. In addition, cyber security breaches of a fund’s third-party service providers, such as its administrator, transfer agent, custodian, or sub-advisor, as applicable, or issuers in which the fund invests, can also subject a fund to many of the same risks associated with direct cyber security breaches.
Defined Outcome Funds Risk. To the extent a fund’s investment strategy is designed to deliver returns tied to the price performance of an underlying ETF, an investor may not realize the returns the fund seeks to achieve if that investor does not hold shares for the entire target outcome period. In the event an investor purchases shares after the first day of the target outcome period or sells shares prior to the end of the target outcome period, the buffer that the fund seeks to provide against a decline in the value of the underlying ETF may not be available, the enhanced returns that the fund seeks to provide (if any) may not be available and the investor may not participate in a gain in the value of the underlying ETF up to the cap for the investor’s investment period. Additionally, the fund will
Additional Information (Continued)
FT Cboe Vest DJIA® Dogs 10 Target Income ETFOctober 31, 2023 (Unaudited) not participate in gains of the underlying ETF above the cap and a shareholder may lose their entire investment. If the fund seeks enhanced returns, there are certain time periods when the value of the fund may fall faster than the value of the underlying ETF, and it is very unlikely that, on any given day during which the underlying ETF share price increases in value, the fund’s share price will increase at the same rate as the enhanced returns sought by the fund, which is designed for an entire target outcome period. Trading flexible exchange options involves risks different from, or possibly greater than, the risks associated with investing directly in securities, such as less liquidity and correlation and valuation risks. A fund may experience substantial downside from specific flexible exchange option positions and certain positions may expire worthless.
Derivatives Risk. To the extent a fund uses derivative instruments such as futures contracts, options contracts and swaps, the fund may experience losses because of adverse movements in the price or value of the underlying asset, index or rate, which may be magnified by certain features of the derivative. These risks are heightened when a fund’s portfolio managers use derivatives to enhance the fund’s return or as a substitute for a position or security, rather than solely to hedge (or offset) the risk of a position or security held by the fund.
Equity Securities Risk. To the extent a fund invests in equity securities, the value of the fund’s shares will fluctuate with changes in the value of the equity securities. Equity securities prices fluctuate for several reasons, including changes in investors’ perceptions of the financial condition of an issuer or the general condition of the relevant stock market, such as market volatility, or when political or economic events affecting the issuers occur. In addition, common stock prices may be particularly sensitive to rising interest rates, as the cost of capital rises and borrowing costs increase. Equity securities may decline significantly in price over short or extended periods of time, and such declines may occur in the equity market as a whole, or they may occur in only a particular country, company, industry or sector of the market.
ETF Risk. The shares of an ETF trade like common stock and represent an interest in a portfolio of securities. The risks of owning an ETF generally reflect the risks of owning the underlying securities, although lack of liquidity in an ETF could result in it being more volatile and ETFs have management fees that increase their costs. Shares of an ETF trade on an exchange at market prices rather than net asset value, which may cause the shares to trade at a price greater than net asset value (premium) or less than net asset value (discount). In times of market stress, decisions by market makers to reduce or step away from their role of providing a market for an ETF’s shares, or decisions by an ETF’s authorized participants that they are unable or unwilling to proceed with creation and/or redemption orders of an ETF’s shares, could result in shares of the ETF trading at a discount to net asset value and in greater than normal intraday bid-ask spreads.
Fixed Income Securities Risk. To the extent a fund invests in fixed income securities, the fund will be subject to credit risk, income risk, interest rate risk, liquidity risk and prepayment risk. Income risk is the risk that income from a fund’s fixed income investments could decline during periods of falling interest rates. Interest rate risk is the risk that the value of a fund’s fixed income securities will decline because of rising interest rates. Liquidity risk is the risk that a security cannot be purchased or sold at the time desired, or cannot be purchased or sold without adversely affecting the price. Prepayment risk is the risk that the securities will be redeemed or prepaid by the issuer, resulting in lower interest payments received by the fund. In addition to these risks, high yield securities, or “junk” bonds, are subject to greater market fluctuations and risk of loss than securities with higher ratings, and the market for high yield securities is generally smaller and less liquid than that for investment grade securities.
Index or Model Constituent Risk. Certain funds may be a constituent of one or more indices or ETF models. As a result, such a fund may be included in one or more index-tracking exchange-traded funds or mutual funds. Being a component security of such a vehicle could greatly affect the trading activity involving a fund, the size of the fund and the market volatility of the fund. Inclusion in an index could increase demand for the fund and removal from an index could result in outsized selling activity in a relatively short period of time. As a result, a fund’s net asset value could be negatively impacted and the fund’s market price may be significantly below its net asset value during certain periods. In addition, index rebalances may potentially result in increased trading activity in a fund’s shares.
Index Provider Risk. To the extent a fund seeks to track an index, it is subject to Index Provider Risk. There is no assurance that the Index Provider will compile the Index accurately, or that the Index will be determined, maintained, constructed, reconstituted, rebalanced, composed, calculated or disseminated accurately. To correct any such error, the Index Provider may carry out an unscheduled rebalance or other modification of the Index constituents or weightings, which may increase the fund’s costs. The Index Provider does not provide any representation or warranty in relation to the quality, accuracy or completeness of data in the Index, and it does not guarantee that the Index will be calculated in accordance with its stated methodology. Losses or costs associated with any Index Provider errors generally will be borne by the fund and its shareholders.
Additional Information (Continued)
FT Cboe Vest DJIA® Dogs 10 Target Income ETFOctober 31, 2023 (Unaudited) Investment Companies Risk. To the extent a fund invests in the securities of other investment vehicles, the fund will incur additional fees and expenses that would not be present in a direct investment in those investment vehicles. Furthermore, the fund’s investment performance and risks are directly related to the investment performance and risks of the investment vehicles in which the fund invests.
LIBOR Risk. To the extent a fund invests in floating or variable rate obligations that use the London Interbank Offered Rate (“LIBOR”) as a reference interest rate, it is subject to LIBOR Risk. The United Kingdom’s Financial Conduct Authority, which regulates LIBOR, has ceased making LIBOR available as a reference rate over a phase-out period that began December 31, 2021. There is no assurance that any alternative reference rate, including the Secured Overnight Financing Rate (“SOFR”) will be similar to or produce the same value or economic equivalence as LIBOR or that instruments using an alternative rate will have the same volume or liquidity. The unavailability or replacement of LIBOR may affect the value, liquidity or return on certain fund investments and may result in costs incurred in connection with closing out positions and entering into new trades. Any potential effects of the transition away from LIBOR on the fund or on certain instruments in which the fund invests can be difficult to ascertain, and they may vary depending on a variety of factors, and they could result in losses to the fund.
Management Risk. To the extent that a fund is actively managed, it is subject to management risk. In managing an actively-managed fund’s investment portfolio, the fund’s portfolio managers will apply investment techniques and risk analyses that may not have the desired result. There can be no guarantee that a fund will meet its investment objective.
Market Risk. Market risk is the risk that a particular security, or shares of a fund in general, may fall in value. Securities held by a fund, as well as shares of a fund itself, are subject to market fluctuations caused by factors such as general economic conditions, political events, regulatory or market developments, changes in interest rates and perceived trends in securities prices. Shares of a fund could decline in value or underperform other investments as a result of the risk of loss associated with these market fluctuations. In addition, local, regional or global events such as war, acts of terrorism, spread of infectious diseases or other public health issues, recessions, or other events could have a significant negative impact on a fund and its investments. Such events may affect certain geographic regions, countries, sectors and industries more significantly than others. In February 2022, Russia invaded Ukraine which has caused and could continue to cause significant market disruptions and volatility within the markets in Russia, Europe, and the United States. The hostilities and sanctions resulting from those hostilities could have a significant impact on certain fund investments as well as fund performance. The COVID-19 global pandemic and the ensuing policies enacted by governments and central banks have caused and may continue to cause significant volatility and uncertainty in global financial markets. While the U.S. has resumed “reasonably” normal business activity, many countries continue to impose lockdown measures. Additionally, there is no guarantee that vaccines will be effective against emerging variants of the disease. These events also adversely affect the prices and liquidity of a fund’s portfolio securities or other instruments and could result in disruptions in the trading markets. Any of such circumstances could have a materially negative impact on the value of a fund’s shares and result in increased market volatility. During any such events, a fund’s shares may trade at increased premiums or discounts to their net asset value and the bid/ask spread on a fund’s shares may widen.
Non-U.S. Securities Risk. To the extent a fund invests in non-U.S. securities, it is subject to additional risks not associated with securities of domestic issuers. Non-U.S. securities are subject to higher volatility than securities of domestic issuers due to: possible adverse political, social or economic developments; restrictions on foreign investment or exchange of securities; capital controls; lack of liquidity; currency exchange rates; excessive taxation; government seizure of assets; the imposition of sanctions by foreign governments; different legal or accounting standards; and less government supervision and regulation of exchanges in foreign countries. Investments in non-U.S. securities may involve higher costs than investments in U.S. securities, including higher transaction and custody costs, as well as additional taxes imposed by non-U.S. governments. These risks may be heightened for securities of companies located, or with significant operations, in emerging market countries.
Operational Risk. Each fund is subject to risks arising from various operational factors, including, but not limited to, human error, processing and communication errors, errors of a fund’s service providers, counterparties or other third-parties, failed or inadequate processes and technology or systems failures. Each fund relies on third-parties for a range of services, including custody. Any delay or failure relating to engaging or maintaining such service providers may affect a fund’s ability to meet its investment objective. Although the funds and the funds’ investment advisor seek to reduce these operational risks through controls and procedures, there is no way to completely protect against such risks.
Additional Information (Continued)
FT Cboe Vest DJIA® Dogs 10 Target Income ETFOctober 31, 2023 (Unaudited) Passive Investment Risk. To the extent a fund seeks to track an index, the fund will invest in the securities included in, or representative of, the index regardless of their investment merit. A fund generally will not attempt to take defensive positions in declining markets.
Preferred Securities Risk. Preferred securities combine some of the characteristics of both common stocks and bonds. Preferred securities are typically subordinated to bonds and other debt securities in a company’s capital structure in terms of priority to corporate income, subjecting them to greater credit risk than those debt securities. Generally, holders of preferred securities have no voting rights with respect to the issuing company unless preferred dividends have been in arrears for a specified number of periods, at which time the preferred security holders may obtain limited rights. In certain circumstances, an issuer of preferred securities may defer payment on the securities and, in some cases, redeem the securities prior to a specified date. Preferred securities may also be substantially less liquid than other securities, including common stock.
Valuation Risk. The valuation of certain securities may carry more risk than that of common stock. Uncertainties in the conditions of the financial markets, unreliable reference data, lack of transparency and inconsistency of valuation models and processes may lead to inaccurate asset pricing. A fund may hold investments in sizes smaller than institutionally sized round lot positions (sometimes referred to as odd lots). However, third-party pricing services generally provide evaluations on the basis of institutionally-sized round lots. If a fund sells certain of its investments in an odd lot transaction, the sale price may be less than the value at which such securities have been held by the fund. Odd lots often trade at lower prices than institutional round lots. There is no assurance that the fund will be able to sell a portfolio security at the price established by the pricing service, which could result in a loss to the fund.
NOT FDIC INSURED NOT BANK GUARANTEED MAY LOSE VALUE
Board of Trustees and Officers
FT Cboe Vest DJIA® Dogs 10 Target Income ETFOctober 31, 2023 (Unaudited) The following tables identify the Trustees and Officers of the Trust. Unless otherwise indicated, the address of all persons is 120 East Liberty Drive, Suite 400, Wheaton, IL 60187.
The Trust’s statement of additional information includes additional information about the Trustees and is available, without charge, upon request, by calling (800) 988-5891.
Name,
Year of Birth and
Position with the Trust | Term of Office
and Year First
Elected or
Appointed | Principal Occupations
During Past 5 Years | Number of
Portfolios in
the First Trust
Fund Complex
Overseen by
Trustee | Other
Trusteeships or
Directorships
Held by Trustee
During Past
5 Years |
|
Richard E. Erickson, Trustee
(1951) | • Indefinite Term • Since Inception | Retired; Physician, Edward-Elmhurst Medical Group (2021 to September 2023); Physician and Officer, Wheaton Orthopedics (1990 to 2021) | | |
Thomas R. Kadlec, Trustee
(1957) | • Indefinite Term • Since Inception | Retired; President, ADM Investors Services, Inc. (Futures Commission Merchant) (2010 to July 2022) | | Director, National Futures Association and ADMIS Singapore Ltd.; Formerly, Director of ADM Investor Services, Inc., ADM Investor Services International, ADMIS Hong Kong Ltd., and Futures Industry Association |
Denise M. Keefe, Trustee
(1964) | • Indefinite Term • Since 2021 | Executive Vice President, Advocate Aurora Health and President, Advocate Aurora Continuing Health Division (Integrated Healthcare System) | | Director and Board Chair of Advocate Home Health Services, Advocate Home Care Products and Advocate Hospice; Director and Board Chair of Aurora At Home (since 2018); Director of Advocate Physician Partners Accountable Care Organization; Director of RML Long Term Acute Care Hospitals; Director of Senior Helpers (since 2021); and Director of MobileHelp (since 2022) |
Robert F. Keith, Trustee
(1956) | • Indefinite Term • Since Inception | President, Hibs Enterprises (Financial and Management Consulting) | | Formerly, Director of Trust Company of Illinois |
Niel B. Nielson, Trustee
(1954) | • Indefinite Term • Since Inception | Senior Advisor (2018 to Present), Managing Director and Chief Operating Officer (2015 to 2018), Pelita Harapan Educational Foundation (Educational Products and Services) | | |
Bronwyn Wright, Trustee
(1971) | • Indefinite Term • Since 2023 | Independent Director to a number of Irish collective investment funds (2009 to Present); Various roles at international affiliates of Citibank (1994 to 2009), including Managing Director, Citibank Europe plc and Head of Securities and Fund Services, Citi Ireland (2007 to 2009) | | |
Board of Trustees and Officers (Continued)
FT Cboe Vest DJIA® Dogs 10 Target Income ETFOctober 31, 2023 (Unaudited) Name, Year of Birth and Position with the Trust | Term of Office and Year First Elected or Appointed | Principal Occupations During Past 5 Years | Number of Portfolios in the First Trust Fund Complex Overseen by Trustee | Other Trusteeships or Directorships Held by Trustee During Past 5 Years |
|
James A. Bowen(1), Trustee,
Chairman of the Board
(1955) | • Indefinite Term • Since Inception | Chief Executive Officer, First Trust Advisors L.P. and First Trust Portfolios L.P., Chairman of the Board of Directors, BondWave LLC (Software Development Company) and Stonebridge Advisors LLC (Investment Advisor) | | |
| Position and
Offices
with Trust | Term of Office
and Length of
Service | Principal Occupations
During Past 5 Years |
|
| President and Chief Executive Officer | • Indefinite Term • Since 2016 | Managing Director and Chief Financial Officer, First Trust Advisors L.P. and First Trust Portfolios L.P.; Chief Financial Officer, BondWave LLC (Software Development Company) and Stonebridge Advisors LLC (Investment Advisor) |
| Treasurer, Chief Financial Officer and Chief Accounting Officer | • Indefinite Term • Since 2023 | Senior Vice President, First Trust Advisors L.P. and First Trust Portfolios L.P., July 2021 to Present. Previously, Vice President, First Trust Advisors L.P. and First Trust Portfolios L.P., 2014 - 2021. |
| Secretary and Chief Legal Officer | • Indefinite Term • Since Inception | General Counsel, First Trust Advisors L.P. and First Trust Portfolios L.P.; Secretary and General Counsel, BondWave LLC; Secretary, Stonebridge Advisors LLC |
Daniel J. Lindquist
(1970) | | • Indefinite Term • Since Inception | Managing Director, First Trust Advisors L.P. and First Trust Portfolios L.P. |
| Chief Compliance Officer and Assistant Secretary | • Indefinite Term • Since Inception | Deputy General Counsel, First Trust Advisors L.P. and First Trust Portfolios L.P. |
| | • Indefinite Term • Since Inception | Senior Vice President, First Trust Advisors L.P. and First Trust Portfolios L.P. |
| | • Indefinite Term • Since Inception | Senior Vice President, First Trust Advisors L.P. and First Trust Portfolios L.P. |
(1)
Mr. Bowen is deemed an “interested person” of the Trust due to his position as Chief Executive Officer of First Trust Advisors L.P., investment advisor of the Trust.
(2)
The term “officer” means the president, vice president, secretary, treasurer, controller or any other officer who performs a policy making function.
FT Cboe Vest DJIA® Dogs 10 Target Income ETFOctober 31, 2023 (Unaudited) Privacy Policy
First Trust values our relationship with you and considers your privacy an important priority in maintaining that relationship. We are committed to protecting the security and confidentiality of your personal information.
Sources of Information
We collect nonpublic personal information about you from the following sources:
• Information we receive from you and your broker-dealer, investment professional or financial representative through interviews, applications, agreements or other forms;
• Information about your transactions with us, our affiliates or others;
• Information we receive from your inquiries by mail, e-mail or telephone; and
• Information we collect on our website through the use of “cookies.” For example, we may identify the pages on our website that your browser requests or visits.
Information Collected
The type of data we collect may include your name, address, social security number, age, financial status, assets, income, tax information, retirement and estate plan information, transaction history, account balance, payment history, investment objectives, marital status, family relationships and other personal information.
Disclosure of Information
We do not disclose any nonpublic personal information about our customers or former customers to anyone, except as permitted by law. In addition to using this information to verify your identity (as required under law), the permitted uses may also include the disclosure of such information to unaffiliated companies for the following reasons:
• In order to provide you with products and services and to effect transactions that you request or authorize, we may disclose your personal information as described above to unaffiliated financial service providers and other companies that perform administrative or other services on our behalf, such as transfer agents, custodians and trustees, or that assist us in the distribution of investor materials such as trustees, banks, financial representatives, proxy services, solicitors and printers.
• We may release information we have about you if you direct us to do so, if we are compelled by law to do so, or in other legally limited circumstances (for example to protect your account from fraud).
In addition, in order to alert you to our other financial products and services, we may share your personal information within First Trust.
Use of Website Analytics
We currently use third party analytics tools, Google Analytics and AddThis, to gather information for purposes of improving First Trust’s website and marketing our products and services to you. These tools employ cookies, which are small pieces of text stored in a file by your web browser and sent to websites that you visit, to collect information, track website usage and viewing trends such as the number of hits, pages visited, videos and PDFs viewed and the length of user sessions in order to evaluate website performance and enhance navigation of the website. We may also collect other anonymous information, which is generally limited to technical and web navigation information such as the IP address of your device, internet browser type and operating system for purposes of analyzing the data to make First Trust’s website better and more useful to our users. The information collected does not include any personal identifiable information such as your name, address, phone number or email address unless you provide that information through the website for us to contact you in order to answer your questions or respond to your requests. To find out how to opt-out of these services click on: Google Analytics and AddThis.
Confidentiality and Security
With regard to our internal security procedures, First Trust restricts access to your nonpublic personal information to those First Trust employees who need to know that information to provide products or services to you. We maintain physical, electronic and procedural safeguards to protect your nonpublic personal information.
Policy Updates and Inquiries
As required by federal law, we will notify you of our privacy policy annually. We reserve the right to modify this policy at any time, however, if we do change it, we will tell you promptly. For questions about our policy, or for additional copies of this notice, please go to www.ftportfolios.com, or contact us at 1-800-621-1675 (First Trust Portfolios) or 1-800-222-6822 (First Trust Advisors).
March 2023
First Trust Exchange-Traded Fund IV
INVESTMENT ADVISOR
First Trust Advisors L.P.
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
INVESTMENT SUB-ADVISOR
Cboe VestSM Financial LLC
8350 Broad Street, Suite 240
McLean, VA 22102
ADMINISTRATOR, CUSTODIAN,
FUND ACCOUNTANT &
TRANSFER AGENT
The Bank of New York Mellon
240 Greenwich Street
New York, NY 10286
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
111 South Wacker Drive
Chicago, IL 60606
LEGAL COUNSEL
Chapman and Cutler LLP
320 South Canal Street
Chicago, IL 60606
First Trust Exchange-Traded Fund IV
| First Trust North American Energy Infrastructure Fund (EMLP)
|
First Trust EIP Carbon Impact ETF (ECLN)
|
FT Energy Income Partners Strategy ETF (EIPX)
|
Annual Report
For the Period Ended
October 31, 2023 |
First Trust Exchange-Traded Fund IV
Annual Report
October 31, 2023
Caution Regarding Forward-Looking Statements
This report contains certain forward-looking statements within the meaning of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended. Forward-looking statements include statements regarding the goals, beliefs, plans or current expectations of First Trust Advisors L.P. (“First Trust” or the “Advisor”) and/or Energy Income Partners, LLC (“EIP” or the “Sub-Advisor”) and their respective representatives, taking into account the information currently available to them. Forward-looking statements include all statements that do not relate solely to current or historical fact. For example, forward-looking statements include the use of words such as “anticipate,” “estimate,” “intend,” “expect,” “believe,” “plan,” “may,” “should,” “would” or other words that convey uncertainty of future events or outcomes.
Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the series of First Trust Exchange-Traded Fund IV (the “Trust”) described in this report (each such series is referred to as a “Fund” and collectively, as the “Funds”) to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. When evaluating the information included in this report, you are cautioned not to place undue reliance on these forward-looking statements, which reflect the judgment of the Advisor and/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’s shares may therefore be less than what you paid for them. Accordingly, you can lose money investing in a Fund. See “Risk Considerations” in the Additional Information section of this report for a discussion of certain other risks of investing in the Funds.
Performance data quoted represents past performance, which is no guarantee of future results, and current performance may be lower or higher than the figures shown. For the most recent month-end performance figures, please visit www.ftportfolios.com or speak with your financial advisor. Investment returns, net asset value and share price will fluctuate and Fund shares, when sold, may be worth more or less than their original cost.
The Advisor may also periodically provide additional information on Fund performance on each Fund’s webpage at www.ftportfolios.com.
How to Read This Report
This report contains information that may help you evaluate your investment. It includes details about each Fund and presents data and analysis that provide insight into each Fund’s performance and investment approach.
By reading the portfolio commentary from the portfolio management team(s) of the Funds, you may obtain an understanding of how the market environment affected each Fund’s performance. The statistical information that follows may help you understand each Fund’s performance compared to that of relevant market benchmarks.
It is important to keep in mind that the opinions expressed by personnel of the Advisor 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, and other Fund regulatory filings.
First Trust Exchange-Traded Fund IV
Annual Letter from the Chairman and CEO
October 31, 2023
Dear Shareholders,
First Trust is pleased to provide you with the annual report for certain series of the First Trust Exchange-Traded Fund IV (the “Funds”), which contains detailed information about the Funds for the twelve months ended October 31, 2023. Please note that the FT Energy Income Partners Strategy ETF was incepted on November 2, 2022, and so the information in this letter and the annual report prior to that date does not apply to this Fund.
The Bureau of Economic Analysis recently announced that U.S. real gross domestic product (“GDP”) grew by a staggering 4.9% in the third quarter of 2023 and is now up 2.9% on a year-over-year basis from where it stood in the third quarter of 2022. The most recent quarter’s GDP data represents the fastest growth rate for any quarter since 2014. Consumer spending, which rose by 4.0% over the period, was responsible for 2.7 percentage points of the total increase in GDP. Whether the consumer can keep up this pace of spending remains to be seen, especially given recent news that excess savings from the pandemic-era stimulus have likely been depleted. From a global perspective, the International Monetary Fund (“IMF”) notes that progress in fighting inflation has led to lower economic growth. In their October 2023 publication of the World Economic Outlook, the IMF projected that the growth in world economic output is expected to slow from 3.5% in 2022 to 2.9% in 2024. The economic growth in advanced economies is projected to plummet from 2.6% in 2022 to 1.4% in 2024.
In the notes to their September 2023 meeting, the Federal Open Market Committee revealed that they may need to keep interest rates “higher for longer” as they continue to battle stubbornly high inflation. As many investors are likely aware, a higher Federal Funds target rate can have deep implications for consumers, such as driving up the cost of borrowing for homes, automobiles, and other large purchases. The American consumer has yet to feel the full weight of those burdens, in my opinion. That said, the data reveals a different story among corporate America. S&P Global Market Intelligence reported that a total of 516 U.S. corporations filed for bankruptcy protection on a year-to-date basis through September 30, 2023, up from a total of 263 corporate bankruptcy filings over the same period last year. Higher interest rates and Treasury bond yields have also sapped demand for commercial property loans. Data from Trepp, LLC, a leading provider of data and analytics to the commercial real estate and banking markets, revealed that just $28.2 billion of loans converted into commercial mortgage-backed securities have been issued in 2023, the lowest figure since 2011.
The financial markets battled a myriad of headwinds over the past year, from geopolitical uncertainty resulting from war (the conflicts between Israel and Hamas and Russia and Ukraine), to slowing global economic growth and sticky inflation. Brian Wesbury, Chief Economist at First Trust, notes that a U.S. economic recession is likely to begin at some point early next year. While calls for a recession may concern some investors, the following may offer solace. Data from Bloomberg reveals that the S&P 500® Index has posted positive total returns over the 3-year period following every recession since 1948.
Thank you for giving First Trust the opportunity to play a role in your financial future. We value our relationship with you and will report on the Funds again in six months.
Sincerely,
James A. Bowen
Chairman of the Board of Trustees
Chief Executive Officer of First Trust Advisors L.P.
Fund Performance Overview (Unaudited)
First Trust North American Energy Infrastructure Fund (EMLP)
The First Trust North American Energy Infrastructure Fund (the “Fund”) is an actively managed exchange-traded fund. The Fund’s investment objective is to seek total return. The Fund will invest, under normal market conditions, at least 80% of its net assets (including investment borrowings) in equity securities of companies deemed by Energy Income Partners, LLC (“EIP” or the “Sub- Advisor”) to be engaged in the energy infrastructure sector. These companies principally include U.S. and Canadian natural gas and electric utilities, corporations operating energy infrastructure assets such as pipelines or renewable energy production, utilities, publicly-traded master limited partnerships or limited liability companies taxed as partnerships (“MLPs”), MLP affiliates, and other companies that derive the majority of their revenues from operating or providing services in support of infrastructure assets such as pipelines, power transmission and petroleum and natural gas storage in the petroleum, natural gas and power generation industries (collectively, “energy infrastructure companies”). The Fund will invest principally in energy infrastructure companies. Under normal market conditions, the Fund will invest at least 80% of its net assets (including investment borrowings) in equity securities of companies headquartered or incorporated in the United States and Canada.
|
| | Average Annual Total Returns | |
| | | | Inception
(6/20/12)
to 10/31/23 | | | Inception
(6/20/12)
to 10/31/23 |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| The Blended Benchmark consists of the following two indices: 50% of the PHLX Utility Sector Index which is a market capitalization weighted index composed of geographically diverse public U.S. utility stocks; and 50% of the Alerian MLP Total Return Index which is a float-adjusted, capitalization weighted composite of the most prominent energy Master Limited Partnerships (MLPs). Indices are unmanaged and an investor cannot invest directly in an index. All index returns assume that distributions are reinvested when they are received. The Blended Benchmark returns are calculated by using the monthly return of the two indices during each period shown above. At the beginning of each month the two indices are rebalanced to a 50-50 ratio to account for divergence from that ratio that occurred during the course of each month. The monthly returns are then compounded for each period shown above, giving the performance for the Blended Benchmark for each period shown above. |
(See Notes to Fund Performance Overview on page 9.)
Fund Performance Overview (Unaudited) (Continued)
First Trust North American Energy Infrastructure Fund (EMLP) (Continued)
| % of Total
Long-Term
Investments |
Electric Power & Transmission | |
| |
Petroleum Product Transmission | |
Nat. Gas Gathering & Processing | |
| |
| |
| |
| |
| |
| |
| % of Total
Long-Term
Investments |
Enterprise Products Partners, L.P. | |
| |
Plains GP Holdings, L.P., Class A | |
| |
| |
| |
| |
| |
| |
American Electric Power Co., Inc. | |
| |
| Performance figures assume reinvestment of all distributions and do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. An index is a statistical composite that tracks a specified financial market or sector. Unlike the Fund, the indices do not actually hold a portfolio of securities and therefore do not incur the expenses incurred by the Fund. These expenses negatively impact the performance of the Fund. The Fund’s past performance does not predict future performance. |
Frequency Distribution of Discounts and Premiums
Information showing the number of days the market price of the Fund’s shares was greater (at a premium) and less (at a discount) than the Fund’s net asset value for the most recently completed year, and the most recently completed calendar quarters since that year (or life of the Fund, if shorter) is available at https://www.ftportfolios.com/Retail/etf/home.aspx.
Fund Performance Overview (Unaudited) (Continued)
First Trust EIP Carbon Impact ETF (ECLN)
The First Trust EIP Carbon Impact ETF (the “Fund”) seeks to achieve a competitive risk-adjusted total return balanced between dividends and capital appreciation. Under normal market conditions, the Fund will invest at least 80% of its net assets (including investment borrowings) in the equity securities of companies identified by the Fund’s investment sub-advisor, Energy Income Partners, LLC (“EIP” or the “Sub Advisor”), as having or seeking to have a positive carbon impact. The Sub-Advisor defines positive carbon impact companies as companies that reduce, have a publicly available plan to reduce, or enable the reduction of carbon and other greenhouse gas emissions from the production, transportation, conversion, storage and use of energy.
|
| | Average Annual Total Returns | |
| | Inception
(8/19/19)
to 10/31/23 | Inception
(8/19/19)
to 10/31/23 |
| | | |
| | | |
| | | |
| | | |
PHLX Utility Sector Index | | | |
| | | |
(See Notes to Fund Performance Overview on page 9.)
Fund Performance Overview (Unaudited) (Continued)
First Trust EIP Carbon Impact ETF (ECLN) (Continued)
| % of Total
Long-Term
Investments |
Electric Power & Transmission | |
| |
Nat. Gas Gathering & Processing | |
Petroleum Product Transmission | |
| |
| |
| |
| |
| |
| Amount is less than 0.1%. |
| % of Total
Long-Term
Investments |
| |
| |
Cheniere Energy Partners, L.P. | |
| |
American Electric Power Co., Inc. | |
| |
| |
| |
| |
Public Service Enterprise Group, Inc. | |
| |
| Performance figures assume reinvestment of all distributions and do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. An index is a statistical composite that tracks a specified financial market or sector. Unlike the Fund, the indices do not actually hold a portfolio of securities and therefore do not incur the expenses incurred by the Fund. These expenses negatively impact the performance of the Fund. The Fund’s past performance does not predict future performance. |
Frequency Distribution of Discounts and Premiums
Information showing the number of days the market price of the Fund’s shares was greater (at a premium) and less (at a discount) than the Fund’s net asset value for the most recently completed year, and the most recently completed calendar quarters since that year (or life of the Fund, if shorter) is available at https://www.ftportfolios.com/Retail/etf/home.aspx.
Fund Performance Overview (Unaudited) (Continued)
FT Energy Income Partners Strategy ETF (EIPX)
The FT Energy Income Partners Strategy ETF’s (the “Fund”) investment objective is to seek risk-adjusted total return. Under normal market conditions, the Fund will seek to achieve its investment objective by investing at least 80% of its net assets (plus any borrowing for investment purposes) in a portfolio of equity securities in the broader energy market (“Energy Companies”). Energy Companies include companies in the Global Industry Classification Standard (“GICS”) energy sector, companies in the GICS utility sector (excluding water utilities), or companies in any other GICS sectors that derive at least 50% of their revenues or profits from exploration, development, production, gathering, transportation, processing, storing, refining, distribution, mining or marketing, of natural gas, natural gas liquids (including propane), crude oil, refined petroleum products, petrochemicals, electricity, coal, uranium, hydrogen or other energy sources, renewable energy production, renewable energy equipment, energy storage, carbon, carbon dioxide, carbon dioxide and fugitive methane mitigation and management, as well as electric transmission, distribution, storage and system reliability support. Energy Companies also include companies providing engineering, consulting and construction services that derive at least 50% of their revenues or profits from the above, all of which are selected by Energy Income Partners, LLC, the Fund’s investment sub-advisor (“EIP” or the “Sub-Advisor”). These companies may include publicly traded master limited partnerships or limited liability companies taxed as partnerships (“MLPs”) and MLP affiliates.
|
| |
| Inception
(11/2/22)
to 10/31/23 |
| |
| |
| |
| |
S&P Global 1200 Energy Index | |
(See Notes to Fund Performance Overview on page 9.)
Fund Performance Overview (Unaudited) (Continued)
FT Energy Income Partners Strategy ETF (EIPX) (Continued)
| % of Total
Long-Term
Investments |
| |
| |
Petroleum Product Transmission | |
Electric Power & Transmission | |
| |
Nat. Gas Gathering & Processing | |
| |
| |
| |
| |
| % of Total
Long-Term
Investments |
| |
Enterprise Products Partners, L.P. | |
| |
| |
| |
Plains GP Holdings, L.P., Class A | |
| |
Cheniere Energy Partners, L.P. | |
| |
| |
| |
| 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
Information showing the number of days the market price of the Fund’s shares was greater (at a premium) and less (at a discount) than the Fund’s net asset value for the most recently completed year, and the most recently completed calendar quarters since that year (or life of the Fund, if shorter) is available at https://www.ftportfolios.com/Retail/etf/home.aspx.
Notes to Fund Performance Overview (Unaudited)
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 of the national best bid and offer price (“NBBO”) as of the time that the Fund’s NAV is calculated. Under Securities and Exchange Commission rules, the NBBO consists of the highest displayed buy and lowest sell prices among the various exchanges trading the Fund at the time the Fund’s NAV is calculated. Prior to January 1, 2019, the price used was the midpoint between the highest bid and the lowest offer on the stock exchange on which shares of the Fund were listed for trading as of the time that the Fund’s NAV was calculated. Since shares of each Fund did not trade in the secondary market until after the Fund’s inception, for the period from inception to the first day of secondary market trading in shares of the Fund, the NAV of each Fund is used as a proxy for the secondary market trading price to calculate market returns. NAV and market returns assume that all distributions have been reinvested in each Fund at NAV and Market Price, respectively.
An index is a statistical composite that tracks a specified financial market or sector. Unlike each Fund, the indices do not actually hold a portfolio of securities and therefore do not incur the expenses incurred by each Fund. These expenses negatively impact the performance of each Fund. Also, market returns do not include brokerage commissions that may be payable on secondary market transactions. If brokerage commissions were included, market returns would be lower. The total returns presented reflect the reinvestment of dividends on securities in the indices. The returns presented do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. The investment return and principal value of shares of each Fund will vary with changes in market conditions. Shares of each Fund may be worth more or less than their original cost when they are redeemed or sold in the market. Each Fund’s past performance is no guarantee of future performance.
First Trust Exchange-Traded Fund IVAnnual ReportOctober 31, 2023 (Unaudited) Advisor
First Trust Advisors L.P. (“First Trust”) is the investment advisor to the First Trust North American Energy Infrastructure Fund (“EMLP”), the First Trust EIP Carbon Impact ETF (“ECLN”) and the FT Energy Income Partners Strategy ETF (“EIPX”) (each a “Fund” and collectively, the “Funds”). First Trust is responsible for the ongoing monitoring of each Fund’s investment portfolio, managing each Fund’s business affairs and providing certain administrative services necessary for the management of each Fund.
Sub-Advisor
Energy Income Partners, LLC
Energy Income Partners, LLC (“EIP”), located in Westport, CT, was founded in 2003 to provide professional asset management services in publicly traded energy-related infrastructure companies with above average dividend payout ratios operating pipelines and related storage and handling facilities, electric power transmission and distribution as well as long contracted or regulated power generation from renewables and other sources. The corporate structure of the portfolio companies includes C-corporations, partnerships and energy infrastructure real estate investment trusts. EIP mainly focuses on investments in assets that receive steady fee-based or regulated income from their corporate and individual customers. EIP manages or supervises approximately $4.9 billion of assets as of October 31, 2023. EIP advises two privately offered partnerships for U.S. high net worth individuals and an open-end mutual fund. EIP also manages separately managed accounts and provides its model portfolio to unified managed accounts. Finally, in addition to the Funds, EIP serves as a sub-advisor to four closed-end management investment companies and a sleeve of a series of a variable insurance trust. EIP is a registered investment advisor with the Securities and Exchange Commission.
Portfolio Management Team
The following persons serve as portfolio managers of the Funds:
James J. Murchie, Co-Founder, Chief Executive Officer, Co-Portfolio Manager and Principal of Energy Income Partners, LLC
Eva Pao, Co-Founder, Co-Portfolio Manager and Principal of Energy Income Partners, LLC
John K. Tysseland, Co-Portfolio Manager and Principal of Energy Income Partners, LLC
The portfolio managers are primarily and jointly responsible for the day-to-day management of the Funds’ portfolios.
Commentary
First Trust North American Energy Infrastructure Fund
The Fund’s investment objective is to seek total return. The Fund pursues its investment objective by investing, under normal market conditions, at least 80% of its net assets (including investment borrowings) in equity securities of companies deemed by EIP to be engaged in the energy infrastructure sector. These companies principally include U.S. and Canadian natural gas and electric utilities, corporations operating energy infrastructure assets such as pipelines or renewable energy production, utilities, publicly-traded master limited partnerships or limited liability companies taxed as partnerships (“MLPs”), MLP affiliates, and other companies that derive the majority of their revenues from operating and providing services in support of infrastructure assets such as pipelines, power transmission and petroleum, natural gas storage in the petroleum, natural gas and power generation industries (collectively, “energy infrastructure companies”). The Fund will invest principally in energy infrastructure companies. Under normal market conditions, the Fund will invest at least 80% of its net assets (including investment borrowings) in equity securities of companies headquartered or incorporated in the United States and Canada. There can be no assurance that the Fund’s investment objective will be achieved. The Fund may not be appropriate for all investors.
Market Recap
As measured by the Alerian MLP Total Return Index (“AMZX” or “MLP Index”) and the PHLX Utility Sector Index (the “UTY Index”), the total return for energy-related MLPs and utilities for the 12-month period ended October 31, 2023 was 16.60% and -9.00%, respectively. These figures are according to data collected from Bloomberg. As measured by the S&P 500® Index (the Index”), the broader equity market over the same period returned 10.14%.
Portfolio Commentary (Continued)
First Trust Exchange-Traded Fund IVAnnual ReportOctober 31, 2023 (Unaudited) Performance Analysis
On a net asset value (“NAV”) basis for the 12-month period ended October 31, 2023, the Fund provided a total return of 2.49%, including the reinvestment of dividends. This compares, according to collected data, to a total return of 3.51%(1) or the compounded average of the two indices (the “Blended Benchmark”) (16.60% for the MLP Index and -9.00% for the UTY Index), and 10.14% for the Index.
The Fund declared quarterly distributions during the period as follows: $0.2094 per share in December 2022; $0.2688 per share in March 2023; $0.2929 per share in June 2023; and $0.2823 per share in September 2023.
The Fund’s NAV total return of 2.49% underperformed the Index by 765 basis points (“bps”) and underperformed the 3.51% average return of the Blended Benchmark by 102 bps. While strong performance of the Fund’s pipeline and midstream infrastructure companies helped drive positive returns over the last twelve months, the underperformance of the Fund relative to the Blended Benchmark was due to overweight positions in renewable developers that are not included in the Blended Benchmark.
The selloff in utilities was driven by concerns about higher costs for renewables as a bellwether large-cap company in the utilities sector reduced the growth outlook for its renewable subsidiary. This subsidiary provides the parent with a publicly traded financing option for completed renewable projects. However, declining share prices for all renewable developers led to a negative feedback loop rendering this financing vehicle less economic and ultimately led to the parent cutting its growth rate for the subsidiary in half. While this was a drag on sentiment for regulated utilities broadly, EIP does not view higher costs for renewables as an ongoing risk for the utility sector.
Most renewable projects are built by so-called renewable developers, not by the regulated utilities that are monopolies earning a regulated return on all investment. But it just so happens that a few utility parent companies also engage in renewable development as a separate business, and it is that connection that EIP believes scared investors in late September. Onshore wind and solar still account for 90% of planned capacity additions over the next five years and remain the low-cost source of power generation in the U.S. EIP believes any cost pressures driven by supply chain issues and higher financing costs will be passed through in higher prices sufficient to allow developers to make a competitive return on invested capital.
As for the MLP Index, it has continued to become more concentrated as companies representing over 19% of the MLP Index were acquired and are no longer trading as separately traded MLPs (thus excluded from the MLP Index). EIP has sought to consistently run a more conservative portfolio compared to the MLP Index. This conservatism is reflected in holding a more diversified set of higher quality companies that themselves have more conservative balance sheets, lower dividend payout ratios, less exposure to commodity prices and more stable cash flows.
Market and Fund Outlook
The underperformance of the Fund relative to the Index was not remarkable as most of the index performance was driven by fewer than 10 stocks. The nine largest companies of the Index accounted for over 90% of index performance in this period. As of October 31, 2023, the Fund trades at a 29% discount relative to the Index that trades at a forward 12-month P/E of 17.6x versus 16.5x a year ago. EIP’s view is optimistic regarding the Fund’s portfolio based on continued earnings growth among the energy infrastructure companies coupled with low valuations relative to the Index based on forward 12-month earnings expectations.
In EIP’s opinion, the long-term outlook for electricity and natural gas infrastructure is positive. As low-cost renewables continue to grow, additional infrastructure is necessary to connect increasingly diverse sources of energy supply to consumers. Utilities are also now experiencing incremental electricity demand from the electrification of vehicles to power hungry data centers, while the negative impact of more efficient devices, especially LED lighting, abates as the replacement cycle matures. Additionally, the long-term trend away from coal-fired power generation seems likely to continue. Publicly owned utilities’ five-year integrated resource plans and continued announcements of coal plant retirements support this view. In most cases, these retirements are being replaced with natural gas and/or renewables requiring new transport infrastructure. These necessary investments by utilities grow the investment base (known as “rate base”) upon which they earn their allowed rates of return which in turn grow earnings.
EIP is optimistic about the technological breakthroughs in energy and invest in companies like renewable developers and network utilities that, where renewable resources are abundant, benefit from the lower cost and higher performance of renewables, batteries, and other new grid-related innovations. But EIP is not a venture capitalist; companies in the Fund’s portfolio must have a track record
(1)
The total return is the monthly rebalanced return for the MLP Index and UTY Index
Portfolio Commentary (Continued)
First Trust Exchange-Traded Fund IVAnnual ReportOctober 31, 2023 (Unaudited) of profitability and a willingness to share some portion of that profitability through distributions. While the names in the portfolio change over time, the strategy and the sources of earnings stability and growth remain the same: investing in monopoly infrastructure that provides the low-cost way of shipping the lowest cost form of energy.
First Trust EIP Carbon Impact ETF
The Fund’s investment objective is to seek to achieve a competitive risk-adjusted total return balanced between dividends and capital appreciation. The Fund pursues its investment objective by investing, under normal market condition at least 80% of its net assets (including investment borrowings) in equity securities of companies identified by EIP as having or seeking to have a positive carbon impact. EIP defines positive carbon impact companies as companies that reduce, have a publicly available plan to reduce, or enable the reduction of carbon and other greenhouse gas (“GHG”) emissions from the production, transportation, conversion, storage and use of energy. The Fund’s investments will be concentrated in the industries constituting the energy infrastructure sector. These companies principally include: utilities; natural gas pipeline companies; manufacturers, contracted developers and/or owners of renewable energy; and other companies that derive the majority of their earnings from manufacturing, operating or providing services in support of infrastructure assets and/or infrastructure activities such as renewable energy equipment, energy storage, carbon capture and sequestration, fugitive methane abatement and energy transmission and distribution equipment. The Fund will generally not invest in companies comprising the following industries: coal production, oil exploration and production, or crude oil storage, transportation and delivery. The Fund’s portfolio will be principally composed of equity securities, including common stock, depositary receipts, and units issued by master limited partnerships (“MLPs”) and may also include investments in money market funds. Such securities may be issued by small, mid and large capitalization companies operating in developed market countries and may be denominated in a non U.S. currency. There can be no assurance that the Fund’s investment objective will be achieved. The Fund may not be appropriate for all investors.
Market Recap
As measured by the S&P 500® Index (the “Index”) and the PHLX Utility Sector Index (the “UTY Index”), the total returns for the 12-month period ended October 31, 2023 were 10.14% and -9.00%, respectively. These figures are according to data collected from Bloomberg.
Performance Analysis
On a net asset value (“NAV”) basis for the 12-month period ended October 31, 2023, the Fund provided a total return of -8.15%, including the reinvestment of dividends. The Fund’s NAV total return of -8.15% underperformed the Index by 1,829 basis points (“bps”) and outperformed the UTY Index by 85 bps. The Fund’s overweight positions in natural gas infrastructure companies (not in the UTY) and underweight positions in certain regulated utilities (in the UTY) contributed to the Fund’s outperformance during the period.
The selloff in utilities was driven by concerns about higher costs for renewables as a bellwether large-cap company in the utilities sector reduced the growth outlook for its renewable subsidiary. This subsidiary provides the parent with a publicly traded financing option for completed renewable projects. However, declining share prices for all renewable developers led to a negative feedback loop rendering this financing vehicle less economic and ultimately led to the parent cutting its growth rate for the subsidiary in half. While this was a drag on sentiment for regulated utilities broadly, EIP does not view higher costs for renewables as an ongoing risk for the utility sector.
Most renewable projects are built by so-called renewable developers, not by the regulated utilities that are monopolies earning a regulated return on all investment. But it just so happens that a few utility parent companies also engage in renewable development as a separate business, and it is that connection that EIP believes scared investors in late September. Onshore wind and solar still account for 90% of planned capacity additions over the next five years and remain the low-cost source of power generation in the U.S. EIP believes any cost pressures driven by supply chain issues and higher financing costs will be passed through in higher prices sufficient to allow developers to make a competitive return on invested capital.
Compared to the UTY Index, EIP has sought to consistently run a more diversified portfolio that invests in companies that have a positive carbon impact that includes regulated utilities, renewable developers and other companies that enable the reduction of carbon emissions. EIP believes that rapidly evolving state and federal energy policies and regulations, paired with technological innovation, continue to drive the transition to an energy system that is safer, cleaner and more reliable. EIP also believes investors in regulated utilities, renewable developers and other energy infrastructure companies have an opportunity to participate in these changes. EIP is optimistic that companies involved in activities aimed at reducing carbon and other GHG emissions have good growth potential.
Portfolio Commentary (Continued)
First Trust Exchange-Traded Fund IVAnnual ReportOctober 31, 2023 (Unaudited) The Fund declared quarterly distributions during the fiscal year as follows: $0.1564 per share in December 2022; $0.1138 per share in March 2023; $0.1459 per share in June 2023; and $0.1741 per share in September 2023.
Market and Fund Outlook
In EIP’s opinion, the long-term outlook for electricity and natural gas infrastructure is positive. As low-cost renewables continue to grow, additional infrastructure is necessary to connect increasingly diverse sources of energy supply to consumers. Utilities are also now experiencing incremental electricity demand from the electrification of vehicles to power hungry data centers, while the negative impact of more efficient devices, especially LED lighting, abates as the replacement cycle matures. Additionally, the long-term trend away from coal-fired power generation seems likely to continue. Publicly owned utilities’ five-year integrated resource plans and continued announcements of coal plant retirements support this view. In most cases, these retirements are being replaced with natural gas and/or renewables requiring new transport infrastructure. These necessary investments by utilities grow the investment base (known as “rate base”) upon which they earn their allowed rates of return which in turn grow earnings.
EIP is optimistic about the technological breakthroughs in energy and invest in companies like renewable developers and network utilities that, where renewable resources are abundant, benefit from the lower cost and higher performance of renewables, batteries, and other new grid-related innovations. But EIP is not a venture capitalist; companies in the Fund’s portfolio must have a track record of profitability and a willingness to share some portion of that profitability through distributions. While the names in the portfolio change over time, the strategy and the sources of earnings stability and growth remain the same: investing in monopoly infrastructure that provides the low-cost way of shipping the lowest cost form of energy.
FT Energy Income Partners Strategy ETF
The Fund’s investment objective is to seek risk-adjusted total return. The Fund pursues its investment objective by investing, under normal market conditions, at least 80% of its net assets (including investment borrowings) in a portfolio of equity securities in the broader energy market (“Energy Companies”). Energy Companies include companies in the Global Industry Classification Standard (“GICS”) energy sector, companies in the GICs utility sector (excluding water utilities), or companies in any other GICS sectors that derive at least 50% of their revenues or profits from exploration, development, production, gathering, transportation, processing, storing, refining, distribution, mining or marketing, of natural gas, natural gas liquids (including propane), crude oil, refined petroleum products, petrochemicals, electricity, coal, uranium, hydrogen or other energy sources, renewable energy production, renewable energy equipment, energy storage, carbon, carbon dioxide, carbon dioxide and fugitive methane mitigation and management, as well as electric transmission, distribution, storage and system reliability support. Energy Companies also include companies providing engineering, consulting and construction services that derive at least 50% of their revenues or profits from the above. These companies may include publicly traded master limited partnerships or limited liability companies taxed as partnerships (“MLPs”) and MLP affiliates. The Fund may invest in U.S. and non-U.S. companies, including depositary receipts and investments that are denominated in U.S. or non-U.S. currencies, with various market capitalizations. There can be no assurance that the Fund’s investment objective will be achieved. The Fund may not be appropriate for all investors.
Market Recap
As measured by the S&P Global 1200 Energy Index (“SPTRGL10” or the “Benchmark”), the total return from the Fund’s inception date of November 2, 2022 to October 31, 2023 was 4.65%. These figures are according to data collected from Bloomberg. As measured by the S&P 500® Index (the “Index”), the broader equity market over the same period returned 13.43%.
Performance Analysis
On a net asset value (“NAV”) basis from the Fund’s inception date to October 31, 2023, the Fund provided a total return of 8.71%, including the reinvestment of dividends. The Fund’s NAV total return of 8.71% outperformed the Benchmark by 406 basis points (“bps”). The outperformance for this period was partially driven by EIP’s overweight positions in pipeline MLPs that are not included in the Benchmark and overweight positions in some of the non-U.S. integrated oil and gas companies (“IOCs”). EIP believes performance for this period reflects EIP’s diversified approach to investing in energy. While the Benchmark includes a diversified group of energy companies, it does not include other sectors that can provide stable and growing earnings such as pipeline MLPs and utilities.
The Fund declared quarterly distributions during the fiscal period as follows: $0.0685 per share in December 2022; $0.1671 per share in March 2023; $0.1928 per share in June 2023; and $0.1968 per share in September 2023.
Portfolio Commentary (Continued)
First Trust Exchange-Traded Fund IVAnnual ReportOctober 31, 2023 (Unaudited) Market and Fund Outlook
The 592 basis points in underperformance of the portfolio relative to the Index was not remarkable as most of index performance was driven by fewer than 10 stocks. The nine largest companies of the Index accounted for over 90% of index performance in this period. Now, the portfolio trades at a 43% discount relative to the Index that trades at a forward 12-month P/E of 17.6x versus 16.5x a year ago.(1) EIP is optimistic regarding the Fund’s portfolio based on continued earnings growth among the energy infrastructure companies coupled with low valuations of the conventional energy companies in the portfolio relative to the Index based on forward 12-month earnings expectations.
EIP views the current level of capital discipline among conventional oil and gas producers as well as pipeline and midstream energy companies as a bullish development for investors. Global capital spending for upstream oil and gas has collapsed due to, in EIP’s opinion, previous over-investment, poor historical returns and environmental, social and corporate governance pressures. Instead, cash flows are being redirected to share repurchase, debt reduction, special dividends and in some cases renewable investments. EIP views these trends as positive for investors, but EIP does not view the current amount of capital spending as being sufficient to offset natural production declines nor to grow capacity. Fossil fuels such as natural gas, oil, and coal still account for more than 82% of global primary energy use. Global real gross domestic product (“GDP”) has a strong historical relationship to global primary energy use. Over the last fifty-plus years there has never been a five-year period where average global GDP or average global primary energy use has declined. In EIP’s opinion, the lack of conventional oil and gas supply growth and what appears to be inevitable demand growth over any reasonable investment horizon provides solid fundamentals for conventional energy investors. EIP also believes the long-term outlook for electricity and natural gas infrastructure is positive. As low-cost renewables continue to grow, additional infrastructure is necessary to connect increasingly diverse sources of energy supply to consumers. Utilities are also now experiencing incremental electricity demand from the electrification of vehicles to power hungry data centers, while the negative impact of more efficient devices, especially LED lighting, abates as the replacement cycle matures. Additionally, the long-term trend away from coal-fired power generation seems likely to continue. Publicly owned utilities’ five-year integrated resource plans and continued announcements of coal plant retirements support this view. In most cases, these retirements are being replaced with natural gas and/or renewables requiring new transport infrastructure. These necessary investments by utilities grow the investment base (known as “rate base”) upon which they earn their allowed rates of return which in turn grow earnings.
(1)
Source: Bloomberg as of October 31, 2023
First Trust Exchange-Traded Fund IVUnderstanding Your Fund ExpensesOctober 31, 2023 (Unaudited) As a shareholder of First Trust North American Energy Infrastructure Fund, First Trust EIP Carbon Impact ETF or FT Energy Income Partners Strategy ETF (each a “Fund” and collectively, the “Funds”), you incur two types of costs: (1) transaction costs; and (2) ongoing costs, including management fees, distribution and/or service (12b-1) fees, if any, and other Fund expenses. This Example is intended to help you understand your ongoing costs 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 October 31, 2023.
Actual Expenses
The first line in the following table provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During the Six-Month Period” to estimate the expenses you paid on your account during this six-month period.
Hypothetical Example for Comparison Purposes
The second line in the following table provides information about hypothetical account values and hypothetical expenses based on each Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not each Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Funds and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs such as brokerage commissions. Therefore, the second line in the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
| Beginning
Account Value
May 1, 2023 | Ending
Account Value
October 31, 2023 | Annualized
Expense Ratio
Based on the
Six-Month
Period | Expenses Paid
During the
Six-Month
Period (a) |
First Trust North American Energy Infrastructure Fund (EMLP) |
| | | | |
Hypothetical (5% return before expenses) | | | | |
First Trust EIP Carbon Impact ETF (ECLN) |
| | | | |
Hypothetical (5% return before expenses) | | | | |
FT Energy Income Partners Strategy ETF (EIPX) |
| | | | |
Hypothetical (5% return before expenses) | | | | |
| Expenses are equal to the annualized expense ratio as indicated in the table multiplied by the average account value over the period (May 1, 2023 through October 31, 2023), multiplied by 184/365 (to reflect the six-month period). |
First Trust North American Energy Infrastructure Fund (EMLP)Portfolio of InvestmentsOctober 31, 2023
| | |
COMMON STOCKS (a) — 67.9% |
| Construction & Engineering | |
| | |
| Electric Utilities — 17.6% | |
| | |
| American Electric Power Co., Inc. | |
| Constellation Energy Corp. | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| Energy Equipment & Services | |
| | |
| | |
| | |
| | |
| Chesapeake Utilities Corp. | |
| | |
| New Jersey Resources Corp. | |
| | |
| | |
| | |
| Independent Power and Renewable Electricity | |
| | |
| Clearway Energy, Inc., Class A | |
| Northland Power, Inc. (CAD) | |
| | |
| | |
| | |
| Canadian Utilities Ltd., Class A (CAD) | |
| | |
| | |
| | |
| | |
|
| Multi-Utilities (Continued) | |
| Public Service Enterprise Group, Inc. | |
| | |
| | |
| | |
| Oil, Gas & Consumable Fuels | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| Williams (The) Cos., Inc. | |
| | |
| Professional Services — 1.8% | |
| | |
| | |
| American Water Works Co., Inc. | |
| | |
| | |
| | |
MASTER LIMITED PARTNERSHIPS — 29.7% |
| | |
| Westlake Chemical Partners, L.P. | |
| Energy Equipment & Services | |
| USA Compression Partners, L.P. | |
| Independent Power and Renewable Electricity | |
| NextEra Energy Partners, L.P. (b) | |
| Oil, Gas & Consumable Fuels | |
| Cheniere Energy Partners, L.P. | |
| | |
| | |
| Enterprise Products Partners, L.P. | |
| Hess Midstream, L.P., Class A (b) | |
| | |
See Notes to Financial Statements
First Trust North American Energy Infrastructure Fund (EMLP)Portfolio of Investments (Continued)October 31, 2023 | | |
MASTER LIMITED PARTNERSHIPS (Continued) |
| Oil, Gas & Consumable Fuels (Continued) | |
| Plains GP Holdings, L.P., Class A (b) | |
| Western Midstream Partners, L.P. | |
| | |
| Total Master Limited Partnerships | |
| | |
| | |
MONEY MARKET FUNDS — 1.7% |
| Morgan Stanley Institutional Liquidity Funds - Treasury Portfolio - Institutional Class - 5.22% (c) | |
| | |
|
|
| Total Investments — 99.3% | |
| | |
| Net Other Assets and Liabilities — 0.7% | |
| | |
| Securities are issued in U.S. dollars unless otherwise indicated in the security description. |
| This security is taxed as a “C” corporation for federal income tax purposes. |
| Rate shown reflects yield as of October 31, 2023. |
Abbreviations throughout the Portfolio of Investments: |
| – American Depositary Receipt |
| |
Valuation InputsA summary of the inputs used to value the Fund’s investments as of October 31, 2023 is as follows (see Note 2A - Portfolio Valuation in the Notes to Financial Statements):
| | | Level 2
Significant
Observable
Inputs | Level 3
Significant
Unobservable
Inputs |
| | | | |
Master Limited Partnerships* | | | | |
| | | | |
| | | | |
| See Portfolio of Investments for industry breakout. |
See Notes to Financial Statements
First Trust EIP Carbon Impact ETF (ECLN)Portfolio of InvestmentsOctober 31, 2023
| | |
COMMON STOCKS (a) — 85.0% |
| Construction & Engineering | |
| | |
| | |
| | |
| Electric Utilities — 34.1% | |
| | |
| American Electric Power Co., Inc. | |
| Constellation Energy Corp. | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| Hydro One Ltd. (CAD) (c) (d) | |
| | |
| | |
| | |
| | |
| Orsted A/S (DKK) (c) (d) (e) | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| Chesapeake Utilities Corp. | |
| | |
| New Jersey Resources Corp. | |
| | |
| | |
| Independent Power and Renewable Electricity | |
| | |
| Brookfield Renewable Corp., Class A (CAD) | |
| Clearway Energy, Inc., Class A | |
| EDP Renovaveis S.A. (EUR) (e) | |
| Northland Power, Inc. (CAD) | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Multi-Utilities (Continued) | |
| | |
| Public Service Enterprise Group, Inc. | |
| | |
| | |
| | |
| Oil, Gas & Consumable Fuels | |
| | |
| | |
| Equitrans Midstream Corp. | |
| | |
| Williams (The) Cos., Inc. | |
| | |
| Professional Services — 0.6% | |
| | |
| | |
| American Water Works Co., Inc. | |
| | |
| | |
| | |
MASTER LIMITED PARTNERSHIPS — 7.9% |
| Independent Power and Renewable Electricity | |
| Brookfield Renewable Partners, L.P. (CAD) | |
| NextEra Energy Partners, L.P. (f) | |
| | |
| Oil, Gas & Consumable Fuels | |
| Cheniere Energy Partners, L.P. | |
| Total Master Limited Partnerships | |
| | |
See Notes to Financial Statements
First Trust EIP Carbon Impact ETF (ECLN)Portfolio of Investments (Continued)October 31, 2023 | | |
MONEY MARKET FUNDS — 7.0% |
| Morgan Stanley Institutional Liquidity Funds - Treasury Portfolio - Institutional Class - 5.22% (g) | |
| | |
|
|
| Total Investments — 99.9% | |
| | |
| Net Other Assets and Liabilities — 0.1% | |
| | |
| Securities are issued in U.S. dollars unless otherwise indicated in the security description. |
| Non-income producing security. |
| This security is exempt from registration upon resale under Rule 144A of the Securities Act of 1933, as amended (the “1933 Act”) and may be resold in transactions exempt from registration, normally to qualified institutional buyers. This security is not restricted on the foreign exchange where it trades freely without any additional registration. As such, it does not require the additional disclosure required of restricted securities. |
| This security may be resold to qualified foreign investors and foreign institutional buyers under Regulation S of the 1933 Act. |
| This security is fair valued by the Advisor’s Pricing Committee in accordance with procedures approved by the Trust’s Board of Trustees, and in accordance with provisions of the Investment Company Act of 1940 and rules thereunder, as amended. At October 31, 2023, securities noted as such are valued at $278,941 or 0.9% of net assets. Certain of these securities are fair valued using a factor provided by a third-party pricing service due to the change in value between the foreign markets’ close and the New York Stock Exchange close exceeding a certain threshold. On days when this threshold is not exceeded, these securities are typically valued at the last sale price on the exchange on which they are principally traded. |
| This security is taxed as a “C” corporation for federal income tax purposes. |
| Rate shown reflects yield as of October 31, 2023. |
Abbreviations throughout the Portfolio of Investments: |
| – American Depositary Receipt |
| |
| |
| |
Valuation InputsA summary of the inputs used to value the Fund’s investments as of October 31, 2023 is as follows (see Note 2A - Portfolio Valuation in the Notes to Financial Statements):
| | | Level 2
Significant
Observable
Inputs | Level 3
Significant
Unobservable
Inputs |
| | | | |
| | | | |
Independent Power and Renewable Electricity Producers | | | | |
Other Industry Categories* | | | | |
Master Limited Partnerships* | | | | |
| | | | |
| | | | |
| See Portfolio of Investments for industry breakout. |
See Notes to Financial Statements
FT Energy Income Partners Strategy ETF (EIPX)Portfolio of InvestmentsOctober 31, 2023
| | |
COMMON STOCKS (a) — 69.5% |
| Construction & Engineering | |
| | |
| Electric Utilities — 6.3% | |
| | |
| American Electric Power Co., Inc. | |
| Constellation Energy Corp. | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| Energy Equipment & Services | |
| | |
| | |
| | |
| Nabors Industries Ltd. (b) | |
| | |
| Patterson-UTI Energy, Inc. | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| Independent Power and Renewable Electricity | |
| | |
| Clearway Energy, Inc., Class A | |
| | |
| | |
| | |
| | |
| | |
| Public Service Enterprise Group, Inc. | |
| | |
| | |
| | |
| | |
|
| Oil, Gas & Consumable Fuels | |
| | |
| Canadian Natural Resources Ltd. (CAD) | |
| Cenovus Energy, Inc. (CAD) | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| Pioneer Natural Resources Co. | |
| | |
| | |
| | |
| Southwestern Energy Co. (b) | |
| | |
| | |
| | |
| Tourmaline Oil Corp. (CAD) | |
| | |
| | |
| Williams (The) Cos., Inc. | |
| | |
| Professional Services — 1.1% | |
| | |
| | |
| | |
| | |
MASTER LIMITED PARTNERSHIPS — 27.2% |
| Energy Equipment & Services | |
| USA Compression Partners, L.P. | |
| Independent Power and Renewable Electricity | |
| NextEra Energy Partners, L.P. (c) | |
| Oil, Gas & Consumable Fuels | |
| Alliance Resource Partners, L.P. | |
See Notes to Financial Statements
FT Energy Income Partners Strategy ETF (EIPX)Portfolio of Investments (Continued)October 31, 2023 | | |
MASTER LIMITED PARTNERSHIPS (Continued) |
| Oil, Gas & Consumable Fuels (Continued) | |
| Cheniere Energy Partners, L.P. | |
| | |
| Enterprise Products Partners, L.P. | |
| Hess Midstream, L.P., Class A (c) | |
| Kimbell Royalty Partners, L.P. (c) | |
| | |
| Natural Resource Partners, L.P. | |
| Plains GP Holdings, L.P., Class A (c) | |
| | |
| | |
| Total Master Limited Partnerships | |
| | |
| | |
MONEY MARKET FUNDS — 2.7% |
| Morgan Stanley Institutional Liquidity Funds - Treasury Portfolio - Institutional Class - 5.22% (d) | |
| | |
|
|
| Total Investments — 99.4% | |
| | |
| Net Other Assets and Liabilities — 0.6% | |
| | |
| Securities are issued in U.S. dollars unless otherwise indicated in the security description. |
| Non-income producing security. |
| This security is taxed as a “C” corporation for federal income tax purposes. |
| Rate shown reflects yield as of October 31, 2023. |
Abbreviations throughout the Portfolio of Investments: |
| – American Depositary Receipt |
| |
Valuation InputsA summary of the inputs used to value the Fund’s investments as of October 31, 2023 is as follows (see Note 2A - Portfolio Valuation in the Notes to Financial Statements):
| | | Level 2
Significant
Observable
Inputs | Level 3
Significant
Unobservable
Inputs |
| | | | |
Master Limited Partnerships* | | | | |
| | | | |
| | | | |
| See Portfolio of Investments for industry breakout. |
See Notes to Financial Statements
First Trust Exchange-Traded Fund IVStatements of Assets and Liabilities
October 31, 2023
| First Trust North American Energy Infrastructure Fund
(EMLP) | First Trust EIP Carbon Impact ETF
(ECLN) | FT Energy Income Partners Strategy ETF
(EIPX) |
| | | |
| | | |
Foreign currency, at value | | | |
| | | |
| | | |
Investment securities sold | | | |
| | | |
| | | |
| | | |
|
| | | |
| | | |
| | | |
Investment securities purchased | | | |
| | | |
| | | |
|
| | | |
| | | |
| | | |
Accumulated distributable earnings (loss) | | | |
| | | |
NET ASSET VALUE, per share | | | |
Number of shares outstanding (unlimited number of shares authorized, par value $0.01 per share) | | | |
| | | |
Foreign currency, at cost (proceeds) | | | |
See Notes to Financial Statements
First Trust Exchange-Traded Fund IVStatements of Operations
For the Period Ended October 31, 2023
| First Trust North American Energy Infrastructure Fund
(EMLP) | First Trust EIP Carbon Impact ETF
(ECLN) | FT Energy Income Partners Strategy ETF
(EIPX) (a) |
| | | |
| | | |
| | | |
| | | |
|
| | | |
| | | |
| | | |
NET INVESTMENT INCOME (LOSS) | | | |
|
NET REALIZED AND UNREALIZED GAIN (LOSS): | | | |
Net realized gain (loss) on: | | | |
| | | |
| | | |
Foreign currency transactions | | | |
| | | |
Net change in unrealized appreciation (depreciation) on: | | | |
| | | |
Foreign currency translation | | | |
Net change in unrealized appreciation (depreciation) | | | |
NET REALIZED AND UNREALIZED GAIN (LOSS) | | | |
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS | | | |
| Inception date is November 2, 2022, which is consistent with the commencement of investment operations and is the date the initial creation units were established. |
See Notes to Financial Statements
First Trust Exchange-Traded Fund IVStatements of Changes in Net Assets
| First Trust North American Energy Infrastructure Fund (EMLP) | First Trust EIP Carbon Impact ETF (ECLN) |
| | | | |
| | | | |
Net investment income (loss) | | | | |
| | | | |
Net change in unrealized appreciation (depreciation) | | | | |
Net increase (decrease) in net assets resulting from operations | | | | |
|
DISTRIBUTIONS TO SHAREHOLDERS FROM: | | | | |
| | | | |
| | | | |
Total distributions to shareholders | | | | |
|
SHAREHOLDER TRANSACTIONS: | | | | |
Proceeds from shares sold | | | | |
| | | | |
Net increase (decrease) in net assets resulting from shareholder transactions | | | | |
Total increase (decrease) in net assets | | | | |
|
| | | | |
| | | | |
| | | | |
|
CHANGES IN SHARES OUTSTANDING: | | | | |
Shares outstanding, beginning of period | | | | |
| | | | |
| | | | |
Shares outstanding, end of period | | | | |
| Inception date is November 2, 2022, which is consistent with the commencement of investment operations and is the date the initial creation units were established. |
See Notes to Financial Statements
FT Energy Income Partners Strategy ETF (EIPX) |
Period
Ended
10/31/2023 (a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Financial Statements
First Trust Exchange-Traded Fund IVFinancial Highlights
For a share outstanding throughout each period First Trust North American Energy Infrastructure Fund (EMLP)
| |
| | | | | |
Net asset value, beginning of period | | | | | |
Income from investment operations: | | | | | |
Net investment income (loss) | | | | | |
Net realized and unrealized gain (loss) | | | | | |
Total from investment operations | | | | | |
Distributions paid to shareholders from: | | | | | |
| | | | | |
| | | | | |
| | | | | |
Net asset value, end of period | | | | | |
| | | | | |
|
Ratios to average net assets/supplemental data: | | | | | |
Net assets, end of period (in 000’s) | | | | | |
Ratio of total expenses to average net assets | | | | | |
Ratio of net investment income (loss) to average net assets | | | | | |
Portfolio turnover rate (c) | | | | | |
| Based on average shares outstanding. |
| 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. |
| 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
First Trust Exchange-Traded Fund IVFinancial Highlights (Continued)
For a share outstanding throughout each period First Trust EIP Carbon Impact ETF (ECLN)
| | Period
Ended
10/31/2019 (a) |
| | | | |
Net asset value, beginning of period | | | | | |
Income from investment operations: | | | | | |
Net investment income (loss) | | | | | |
Net realized and unrealized gain (loss) | | | | | |
Total from investment operations | | | | | |
Distributions paid to shareholders from: | | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Net asset value, end of period | | | | | |
| | | | | |
|
Ratios to average net assets/supplemental data: | | | | | |
Net assets, end of period (in 000’s) | | | | | |
Ratio of total expenses to average net assets | | | | | |
Ratio of net investment income (loss) to average net assets | | | | | |
Portfolio turnover rate (e) | | | | | |
| Inception date is August 19, 2019, which is consistent with the commencement of investment operations and is the date the initial creation units were established. |
| Based on average shares outstanding. |
| 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. |
| |
| 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
First Trust Exchange-Traded Fund IVFinancial Highlights (Continued)
For a share outstanding throughout the period FT Energy Income Partners Strategy ETF (EIPX)
| Period
Ended
10/31/2023 (a) |
|
Net asset value, beginning of period | |
Income from investment operations: | |
Net investment income (loss) (b) | |
Net realized and unrealized gain (loss) | |
Total from investment operations | |
Distributions paid to shareholders from: | |
| |
Net asset value, end of period | |
| |
|
Ratios to average net assets/supplemental data: | |
Net assets, end of period (in 000’s) | |
Ratio of total expenses to average net assets | |
Ratio of net investment income (loss) to average net assets | |
Portfolio turnover rate (e) | |
| Inception date is November 2, 2022, which is consistent with the commencement of investment operations and is the date the initial creation units were established. |
| Based on average shares outstanding. |
| 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 return presented does 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. |
| |
| 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
Notes to Financial Statements
First Trust Exchange-Traded Fund IVOctober 31, 2023 1. Organization
First Trust Exchange-Traded Fund IV (the “Trust”) is an open-end management investment company organized as a Massachusetts business trust on September 15, 2010, and is registered with the Securities and Exchange Commission under the Investment Company Act of 1940, as amended (the “1940 Act”).
The Trust currently consists of eighteen exchange-traded funds that are offering shares. This report covers the three funds (each a “Fund” and collectively, the “Funds”) listed below, each a non-diversified series of the Trust. The shares of each Fund are listed and traded on the NYSE Arca, Inc.
First Trust North American Energy Infrastructure Fund – (ticker “EMLP”) |
First Trust EIP Carbon Impact ETF – (ticker “ECLN”) |
FT Energy Income Partners Strategy ETF – (ticker “EIPX”)(1) |
| Inception date is November 2, 2022, which is consistent with the commencement of investment operations and is the date the initial creation units were established. |
Each Fund represents a separate series of shares of beneficial interest in the Trust. Unlike conventional mutual funds, each Fund issues and redeems shares on a continuous basis, at net asset value (“NAV”), only in large blocks of shares known as “Creation Units.”
Each Fund is an actively managed exchange-traded fund. EMLP’s investment objective is to seek total return. EMLP will invest, under normal market conditions, at least 80% of its net assets (including investment borrowings) in equity securities of companies deemed by Energy Income Partners, LLC (“EIP” or the “Sub-Advisor”) to be engaged in the energy infrastructure sector, which principally include U.S. and Canadian natural gas and electric utilities, corporations operating energy infrastructure assets such as pipelines or renewable energy production, utilities, publicly-traded master limited partnerships or limited liability companies taxed as partnerships (“MLPs”), MLP affiliates, and other companies that derive the majority of their revenues from operating or providing services in support of infrastructure assets such as pipelines, power transmission and petroleum and natural gas storage in the petroleum, natural gas and power generation industries (collectively, “Energy Infrastructure Companies”). In addition, under normal market conditions, the Fund will invest at least 80% of its net assets (including investment borrowings) in equity securities of companies headquartered or incorporated in the United States and Canada. ECLN’s investment objective is to seek to achieve a competitive risk-adjusted total return balanced between dividends and capital appreciation. ECLN will invest, under normal market conditions, at least 80% of its net assets (including investment borrowings) in the equity securities of companies identified by EIP as having or seeking to have a positive carbon impact. The Sub-Advisor defines positive carbon impact companies as companies that reduce, have a publicly available plan to reduce, or enable the reduction of carbon and other greenhouse gas emissions from the production, transportation, conversion, storage and use of energy. ECLN’s investments will be concentrated in the industries constituting the energy infrastructure sector, which principally include utilities, natural gas pipeline companies, manufacturers, contracted developers and/or owners of renewable energy; and other companies that derive the majority of their earnings from manufacturing, operating or providing services in support of infrastructure assets and/or infrastructure activities such as renewable energy equipment, energy storage, carbon capture and sequestration, fugitive methane abatement and energy transmission and distribution equipment. EIPX’s investment objective is to seek risk-adjusted total return. EIPX will invest, under normal market conditions, at least 80% of its net assets (plus any borrowing for investment purposes) in a portfolio of equity securities in the broader energy market (“Energy Companies”), which principally include companies in the Global Industry Classification Standard (“GICS”) energy sector, companies in the GICS utility sector (excluding water utilities), or companies in any other GICS sectors that derive at least 50% of their revenues or profits from exploration, development, production, gathering, transportation, processing, storing, refining, distribution, mining or marketing, of natural gas, natural gas liquids (including propane), crude oil, refined petroleum products, petrochemicals, electricity, coal, uranium, hydrogen or other energy sources, renewable energy production, renewable energy equipment, energy storage, carbon, carbon dioxide, carbon dioxide and fugitive methane mitigation and management, as well as electric transmission, distribution, storage and system reliability support. Energy Companies also include companies providing engineering, consulting and construction services that derive at least 50% of their revenues or profits from the above, all of which are selected by EIP. These companies may include MLPs and MLP affiliates.
2. Significant Accounting Policies
The Funds are each considered an investment company and follow accounting and reporting guidance under Financial Accounting Standards Board Accounting Standards Codification Topic 946, “Financial Services-Investment Companies.” The following is a summary of significant accounting policies consistently followed by the Funds in the preparation of the financial statements. The
Notes to Financial Statements (Continued)
First Trust Exchange-Traded Fund IVOctober 31, 2023 preparation of the financial statements in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates.
A. Portfolio Valuation
Each Fund’s NAV is determined daily as of the close of regular trading on the New York Stock Exchange (“NYSE”), normally 4:00 p.m. Eastern time, on each day the NYSE is open for trading. If the NYSE closes early on a valuation day, the NAV is determined as of that time. Foreign securities are priced using data reflecting the earlier closing of the principal markets for those securities. Each Fund’s NAV is calculated by dividing the value of all assets of each Fund (including accrued interest and dividends), less all liabilities (including accrued expenses and dividends declared but unpaid), by the total number of shares outstanding.
Each Fund’s investments are valued daily at market value or, in the absence of market value with respect to any portfolio securities, at fair value. Market value prices represent readily available market quotations such as last sale or official closing prices from a national or foreign exchange (i.e., a regulated market) and are primarily obtained from third-party pricing services. Fair value prices represent any prices not considered market value prices and are either obtained from a third-party pricing service or are determined by the Pricing Committee of the Funds’ investment advisor, First Trust Advisors L.P. (“First Trust” or the “Advisor”), in accordance with valuation procedures approved by the Trust’s Board of Trustees, and in accordance with provisions of the 1940 Act and rules thereunder. Investments valued by the Advisor’s Pricing Committee, if any, are footnoted as such in the footnotes to the Portfolio of Investments. Each Fund’s investments are valued as follows:
Common stocks, MLPs and other equity securities listed on any national or foreign exchange (excluding Nasdaq, Inc. (“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 primary exchange for such securities.
Securities trading on foreign exchanges or over-the-counter markets that close prior to the NYSE close may be valued using a systematic fair valuation model provided by a third-party pricing service. If these foreign securities meet certain criteria in relation to the valuation model, their valuation is systematically adjusted to reflect the impact of movement in the U.S. market after the close of the foreign markets.
Shares of open-end funds are valued based on NAV per share.
Equity securities traded in an over-the-counter market are valued at the close price or the last trade price.
Certain securities may not be able to be priced by pre-established pricing methods. Such securities may be valued by the Advisor’s Pricing Committee at fair value. These securities generally include, but are not limited to, restricted securities (securities which may not be publicly sold without registration under the Securities Act of 1933, as amended) for which a third-party pricing service is unable to provide a market price; securities whose trading has been formally suspended; a security whose market or fair value price is not available from a pre-established pricing source; a security with respect to which an event has occurred that is likely to materially affect the value of the security after the market has closed but before the calculation of a Fund’s NAV or make it difficult or impossible to obtain a reliable market quotation; and a security whose price, as provided by the third-party pricing service, does not reflect the security’s fair value. As a general principle, the current fair value of a security would appear to be the amount which the owner might reasonably expect to receive for the security upon its current sale. When fair value prices are used, generally they will differ from market quotations or official closing prices on the applicable exchanges. A variety of factors may be considered in determining the fair value of such securities, including, but not limited to, the following:
1)
the last sale price on the exchange on which they are principally traded or, for Nasdaq and AIM securities, the official closing price;
3)
the size of the holding;
4)
the initial cost of the security;
5)
transactions in comparable securities;
6)
price quotes from dealers and/or third-party pricing services;
7)
relationships among various securities;
Notes to Financial Statements (Continued)
First Trust Exchange-Traded Fund IVOctober 31, 2023 8)
information obtained by contacting the issuer, analysts, or the appropriate stock exchange;
9)
an analysis of the issuer’s financial statements;
10)
the existence of merger proposals or tender offers that might affect the value of the security; and
11)
other relevant factors.
If the securities in question are foreign securities, the following additional information may be considered:
1)
the last sale price on the exchange on which they are principally traded;
2)
the value of similar foreign securities traded on other foreign markets;
3)
ADR trading of similar securities;
4)
closed-end fund or exchange-traded fund trading of similar securities;
5)
foreign currency exchange activity;
6)
the trading prices of financial products that are tied to baskets of foreign securities;
7)
factors relating to the event that precipitated the pricing problem;
8)
whether the event is likely to recur;
9)
whether the effects of the event are isolated or whether they affect entire markets, countries or regions; and
10)
other relevant factors.
Because foreign markets may be open on different days than the days during which investors may transact in the shares of a Fund, the value of the Fund’s securities may change on the days when investors are not able to transact in the shares of the Fund. The value of the securities denominated in foreign currencies is converted into U.S. dollars using exchange rates determined daily as of the close of regular trading on the NYSE.
The 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:
• Level 1 – Level 1 inputs are quoted prices in active markets for identical investments. An active market is a market in which transactions for the investment occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
• Level 2 – Level 2 inputs are observable inputs, either directly or indirectly, and include the following:
o Quoted prices for similar investments in active markets.
o Quoted prices for identical or similar investments in markets that are non-active. A non-active market is a market where there are few transactions for the investment, the prices are not current, or price quotations vary substantially either over time or among market makers, or in which little information is released publicly.
o Inputs other than quoted prices that are observable for the investment (for example, interest rates and yield curves observable at commonly quoted intervals, volatilities, prepayment speeds, loss severities, credit risks, and default rates).
o Inputs that are derived principally from or corroborated by observable market data by correlation or other means.
• Level 3 – Level 3 inputs are unobservable inputs. Unobservable inputs may reflect the reporting entity’s own assumptions about the assumptions that market participants would use in pricing the investment.
The inputs or methodologies used for valuing investments are not necessarily an indication of the risk associated with investing in those investments. A summary of the inputs used to value each Fund’s investments as of October 31, 2023, 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 investments in MLPs generally are comprised of return of capital and investment income. A 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.
Distributions received from a Fund’s investments in Real Estate Investment Trusts (“REITs”) may be comprised of return of capital, capital gains, and income. The actual character of the amounts received during the year are not known until after the REITs’ fiscal
Notes to Financial Statements (Continued)
First Trust Exchange-Traded Fund IVOctober 31, 2023 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. Foreign Currency
The books and records of the Funds are maintained in U.S. dollars. Foreign currencies, investments and other assets and liabilities are translated into U.S. dollars at the exchange rates prevailing at the end of the period. Purchases and sales of investments and items of income and expense are translated on the respective dates of such transactions. Unrealized gains and losses on assets and liabilities, other than investments in securities, which result from changes in foreign currency exchange rates have been included in “Net change in unrealized appreciation (depreciation) on foreign currency translation” on the Statements of Operations. Unrealized gains and losses on investments in securities which result from changes in foreign exchange rates are included with fluctuations arising from changes in market price and are shown in “Net change in unrealized appreciation (depreciation) on investments” on the Statements of Operations. Net realized foreign currency gains and losses include the effect of changes in exchange rates between trade date and settlement date on investment security transactions, foreign currency transactions and interest and dividends received and are included in “Net realized gain (loss) on foreign currency transactions” on the Statements of Operations. The portion of foreign currency gains and losses related to fluctuations in exchange rates between the initial purchase settlement date and subsequent sale trade date is included in “Net realized gain (loss) on investments” on the Statements of Operations.
D. Dividends and Distributions to Shareholders
Dividends from net investment income of each Fund, if any, are declared and paid quarterly, or as the Board of Trustees may determine from time to time. Distributions of net realized capital gains earned by each Fund, if any, are distributed at least annually. Each Fund may also designate a portion of the amount paid to redeeming shareholders as a distribution for tax purposes.
Distributions from net investment income and realized capital gains are determined in accordance with federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These permanent differences are primarily due to the varying treatment of income and gain/loss on significantly modified portfolio securities held by the Funds and have no impact on net assets or NAV per share. Temporary differences, which arise from recognizing certain items of income, expense and gain/loss in different periods for financial statement and tax purposes, will reverse at some time in the future.
The tax character of distributions paid by each Fund during the fiscal period ended October 31, 2023 was as follows:
| Distributions
paid from
Ordinary
Income | Distributions
paid from
Capital
Gains | Distributions
paid from
Return of
Capital |
First Trust North American Energy Infrastructure Fund | | | |
First Trust EIP Carbon Impact ETF | | | |
FT Energy Income Partners Strategy ETF | | | |
The tax character of distributions paid by each Fund during the fiscal year ended October 31, 2022 was as follows:
| Distributions
paid from
Ordinary
Income | Distributions
paid from
Capital
Gains | Distributions
paid from
Return of
Capital |
First Trust North American Energy Infrastructure Fund | | | |
First Trust EIP Carbon Impact ETF | | | |
Notes to Financial Statements (Continued)
First Trust Exchange-Traded Fund IVOctober 31, 2023 As of October 31, 2023, the components of distributable earnings on a tax basis for each Fund were as follows:
| Undistributed
Ordinary
Income | Accumulated
Capital and
Other
Gain (Loss) | Net
Unrealized
Appreciation
(Depreciation) |
First Trust North American Energy Infrastructure Fund | | | |
First Trust EIP Carbon Impact ETF | | | |
FT Energy Income Partners Strategy ETF | | | |
E. Income Taxes
Each Fund intends to qualify or 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. For EMLP and ECLN, the taxable years ended 2020, 2021, 2022, and 2023 remain open to federal and state audit. For EIPX, the taxable year ended 2023 remains open to federal and state audit. As of October 31, 2023, management has evaluated the application of these standards to the Funds and has determined that no provision for income tax is required in the Funds’ financial statements for uncertain tax positions.
Each Fund intends to utilize provisions of the federal income tax laws, which allow it to carry a realized capital loss forward indefinitely following the year of the loss and offset such loss against any future realized capital gains. Each Fund is subject to certain limitations under U.S. tax rules on the use of capital loss carryforwards and net unrealized built-in losses. These limitations apply when there has been a 50% change in ownership. At October 31, 2023, for federal income tax purposes, each applicable Fund had a capital loss carryforward available that is shown in the following table, to the extent provided by regulations, to offset future capital gains. To the extent that these loss carryforwards are used to offset future capital gains, it is probable that the capital gains so offset will not be distributed to each applicable Fund’s shareholders.
| Non-Expiring
Capital Loss
Carryforwards |
First Trust North American Energy Infrastructure Fund | |
First Trust EIP Carbon Impact ETF | |
FT Energy Income Partners Strategy ETF | |
During the taxable year ended October 31, 2023, the following Fund utilized capital loss carryforwards in the following amount:
| |
First Trust North American Energy Infrastructure Fund | |
Certain losses realized during the current fiscal period may be deferred and treated as occurring on the first day of the following fiscal year for federal income tax purposes. For the fiscal period ended October 31, 2023, the Funds had no net late year ordinary or capital losses.
In order to present paid-in capital and accumulated distributable earnings (loss) (which consists of accumulated net investment income (loss), accumulated net realized gain (loss) on investments and net unrealized appreciation (depreciation) on investments) on the Statements of Assets and Liabilities that more closely represent their tax character, certain adjustments have been made to paid-in capital, accumulated net investment income (loss) and accumulated net realized gain (loss) on investments. These adjustments are primarily due to the difference between book and tax treatments of income and gains on various investment securities held by the Funds and in-kind transactions. The results of operations and net assets were not affected by these adjustments. For the fiscal period ended October 31, 2023, the adjustments for each Fund were as follows:
Notes to Financial Statements (Continued)
First Trust Exchange-Traded Fund IVOctober 31, 2023 | Accumulated
Net Investment
Income (Loss) | Accumulated
Net Realized
Gain (Loss)
on Investments | |
First Trust North American Energy Infrastructure Fund | | | |
First Trust EIP Carbon Impact ETF | | | |
FT Energy Income Partners Strategy ETF | | | |
As of October 31, 2023, the aggregate cost, gross unrealized appreciation, gross unrealized depreciation, and net unrealized appreciation/(depreciation) on investments (including short positions and derivatives, if any) for federal income tax purposes were as follows:
| | Gross Unrealized
Appreciation | Gross Unrealized
(Depreciation) | Net Unrealized
Appreciation
(Depreciation) |
First Trust North American Energy Infrastructure Fund | | | | |
First Trust EIP Carbon Impact ETF | | | | |
FT Energy Income Partners Strategy ETF | | | | |
F. Expenses
Expenses, other than the investment advisory fee and other excluded expenses, are paid by the Advisor (see Note 3).
3. Investment Advisory Fee, Affiliated Transactions and Other Fee Arrangements
First Trust, the investment advisor to the Funds, is a limited partnership with one limited partner, Grace Partners of DuPage L.P., and one general partner, The Charger Corporation. The Charger Corporation is an Illinois corporation controlled by James A. Bowen, Chief Executive Officer of First Trust. First Trust is responsible for the 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.
The Trust, on behalf of the Funds, and First Trust have retained EIP, an affiliate of First Trust, to serve as the Funds’ investment sub-advisor. In this capacity, EIP is responsible for the selection and ongoing monitoring of the securities in each Fund’s investment portfolio. Pursuant to the Investment Management Agreement between the Trust and the Advisor, First Trust will supervise EIP and its management of the investment of each Fund’s assets and will pay EIP for its services as the Funds’ sub-advisor. First Trust will also be responsible for each 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, if any, brokerage commissions and other expenses connected with the execution of portfolio transactions, distribution and service fees payable pursuant to a Rule 12b-1 plan, if any, and extraordinary expenses. The annual unitary management fee payable by each Fund to First Trust for these services will be reduced at certain levels of each Fund’s net assets (“breakpoints”) and calculated pursuant to the following schedule:
| |
Fund net assets up to and including $2.5 billion | |
Fund net assets greater than $2.5 billion up to and including $5 billion | |
Fund net assets greater than $5 billion up to and including $7.5 billion | |
Fund net assets greater than $7.5 billion up to and including $10 billion | |
Fund net assets greater than $10 billion | |
EIP receives a sub-advisory fee for EMLP from First Trust equal to 45% of any remaining monthly investment management fee paid to First Trust after the Fund’s average Fund expenses accrued during the most recent twelve months are subtracted from the investment management fee in a given month. EIP receives a sub-advisory fee for ECLN and EIPX from First Trust equal to 50% of the monthly investment management fee paid to First Trust less one-half of the Fund’s expenses, for which EIP is responsible. During any period in which the Advisor’s management fee is reduced in accordance with the breakpoints described above, the investment sub-advisory fee (which is based on the Advisor’s management fee) paid to EIP will be reduced to reflect the reduction in the Advisor’s management fee.
First Trust Capital Partners, LLC (“FTCP”), an affiliate of First Trust, owns, through a wholly-owned subsidiary, a 15% ownership interest in each of EIP and EIP Partners, LLC, an affiliate of EIP.
Notes to Financial Statements (Continued)
First Trust Exchange-Traded Fund IVOctober 31, 2023 The Trust has multiple service agreements with The Bank of New York Mellon (“BNYM”). Under the service agreements, BNYM performs custodial, fund accounting, certain administrative services, and transfer agency services for each Fund. As custodian, BNYM is responsible for custody of each Fund’s assets. As fund accountant and administrator, BNYM is responsible for maintaining the books and records of each Fund’s securities and cash. As transfer agent, BNYM is responsible for maintaining shareholder records for each Fund. BNYM is a subsidiary of The Bank of New York Mellon Corporation, a financial holding company.
Each Trustee who is not an officer or employee of First Trust, any sub-advisor or any of their affiliates (“Independent Trustees”) is paid a fixed annual retainer that is allocated equally among each fund in the First Trust Fund Complex. Each Independent Trustee is also paid an annual per fund fee that varies based on whether the fund is a closed-end or other actively managed fund, a target outcome fund or an index fund.
Additionally, the Lead Independent Trustee and the Chairs of the Audit Committee, Nominating and Governance Committee and Valuation Committee are paid annual fees to serve in such capacities, with such compensation allocated pro rata among each fund in the First Trust Fund Complex based on net assets. Independent Trustees are reimbursed for travel and out-of-pocket expenses in connection with all meetings. The Lead Independent Trustee and Committee Chairs rotate every three years. The officers and “Interested” Trustee receive no compensation from the Trust for acting in such capacities.
4. Purchases and Sales of Securities
For the fiscal period ended October 31, 2023, the cost of purchases and proceeds from sales of investments for each Fund, excluding short-term investments and in-kind transactions, were as follows:
| | |
First Trust North American Energy Infrastructure Fund | | |
First Trust EIP Carbon Impact ETF | | |
FT Energy Income Partners Strategy ETF | | |
For the fiscal period ended October 31, 2023, the cost of in-kind purchases and proceeds from in-kind sales for each Fund were as follows:
| | |
First Trust North American Energy Infrastructure Fund | | |
First Trust EIP Carbon Impact ETF | | |
FT Energy Income Partners Strategy ETF | | |
5. Creations, Redemptions and Transaction Fees
Each Fund generally issues and redeems its shares in primary market transactions through a creation and redemption mechanism and does not sell or redeem individual shares. Instead, financial entities known as “Authorized Participants” have contractual arrangements with a Fund or one of the Fund’s service providers to purchase and redeem Fund shares directly with the Fund in large blocks of shares known as “Creation Units.” Prior to the start of trading on every business day, a Fund publishes through the National Securities Clearing Corporation the “basket” of securities, cash or other assets that it will accept in exchange for a Creation Unit of the Fund’s shares. An Authorized Participant that wishes to effectuate a creation of a Fund’s shares deposits with the Fund the “basket” of securities, cash or other assets identified by the Fund that day, and then receives the Creation Unit of the Fund’s shares in return for those assets. After purchasing a Creation Unit, the Authorized Participant may continue to hold the Fund’s shares or sell them in the secondary market. The redemption process is the reverse of the purchase process: the Authorized Participant redeems a Creation Unit of a Fund’s shares for a basket of securities, cash or other assets. The combination of the creation and redemption process with secondary market trading in a Fund’s shares and underlying securities provides arbitrage opportunities that are designed to help keep the market price of a Fund’s shares at or close to the NAV per share of the Fund.
Each Fund imposes fees in connection with the purchase of Creation Units. These fees may vary based upon various fact-based circumstances, including, but not limited to, the composition of the securities included in the Creation Unit or the countries in which the transactions are settled. The price for each Creation Unit will equal the daily NAV per share of a Fund times the number of shares in a Creation Unit, plus the fees described above and, if applicable, any operational processing and brokerage costs, transfer fees, stamp taxes and part or all of the spread between the expected bid and offer side of the market related to the securities comprising the creation basket.
Notes to Financial Statements (Continued)
First Trust Exchange-Traded Fund IVOctober 31, 2023 Each Fund also imposes fees in connection with the redemption of Creation Units. These fees may vary based upon various fact-based circumstances, including, but not limited to, the composition of the securities included in the Creation Unit or the countries in which the transactions are settled. The price received for each Creation Unit will equal the daily NAV per share of a Fund times the number of shares in a Creation Unit, minus the fees described above and, if applicable, any operational processing and brokerage costs, transfer fees, stamp taxes and part or all of the spread between the expected bid and offer side of the market related to the securities comprising the redemption basket. Investors who use the services of a broker or other such intermediary in addition to an Authorized Participant to effect a redemption of a Creation Unit may also be assessed an amount to cover the cost of such services. The redemption fee charged by a Fund will comply with Rule 22c-2 of the 1940 Act which limits redemption fees to no more than 2% of the value of the shares redeemed.
6. Distribution Plan
The Board of Trustees adopted a Distribution and Service Plan pursuant to Rule 12b-1 under the 1940 Act. In accordance with the Rule 12b-1 plan, the Funds are authorized to pay an amount up to 0.25% of their average daily net assets each year to reimburse First Trust Portfolios L.P. (“FTP”), the distributor of the Funds, for amounts expended to finance activities primarily intended to result in the sale of Creation Units or the provision of investor services. FTP may also use this amount to compensate securities dealers or other persons that are Authorized Participants for providing distribution assistance, including broker-dealer and shareholder support and educational and promotional services.
No 12b-1 fees are currently paid by the Funds, and pursuant to a contractual arrangement, no 12b-1 fees will be paid any time before March 31, 2025 for EMLP and ECLN and October 28, 2024 for EIPX.
7. Indemnification
The Trust, on behalf of the Funds, has a variety of indemnification obligations under contracts with its service providers. The Trust’s maximum exposure under these arrangements is unknown. However, the Trust has not had prior claims or losses pursuant to these contracts and expects the risk of loss to be remote.
8. Subsequent Events
Management has evaluated the impact of all subsequent events on the Funds through the date the financial statements were issued and has determined that there were no subsequent events requiring recognition or disclosure in the financial statements that have not already been disclosed.
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Trustees of First Trust Exchange-Traded Fund IV:
Opinion on the Financial Statements and Financial Highlights
We have audited the accompanying statements of assets and liabilities of First Trust North American Energy Infrastructure Fund, First Trust EIP Carbon Impact ETF, and FT Energy Income Partners Strategy ETF (the “Funds”), each a series of the First Trust Exchange-Traded Fund IV, including the portfolios of investments, as of October 31, 2023, the related statements of operations, the statements of changes in net assets, and the financial highlights for the periods indicated in the table below; and the related notes. In our opinion, the financial statements and financial highlights present fairly, in all material respects, the financial position of each of the Funds as of October 31, 2023, and the results of their operations, the changes in their net assets, and the financial highlights for the periods listed in the table below in conformity with accounting principles generally accepted in the United States of America.
Individual Funds Included
in the Trust | | Statements of Changes
in Net Assets | |
First Trust North American Energy Infrastructure Fund | For the year ended October 31, 2023 | For the years ended October 31, 2023, and 2022 | For the years ended October 31, 2023, 2022, 2021, 2020, and 2019 |
First Trust EIP Carbon Impact ETF | For the year ended October 31, 2023 | For the years ended October 31, 2023, and 2022 | For the years ended October 31, 2023, 2022, 2021, 2020, and for the period from August 19, 2019 (commencement of investment operations) through October 31, 2019 |
FT Energy Income Partners Strategy ETF | For the period from November 2, 2022 (commencement of investment operations) through October 31, 2023 |
Basis for Opinion
These financial statements and financial highlights are the responsibility of the Funds’ management. Our responsibility is to express an opinion on the Funds’ financial statements and financial highlights based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Funds in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement, whether due to error or fraud. The Funds are not required to have, nor were we engaged to perform, an audit of their internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Funds’ internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements and financial highlights, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements and financial highlights. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and financial highlights. Our procedures included confirmation of securities owned as of October 31, 2023, by correspondence with the custodian and brokers; when replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
/s/ Deloitte & Touche, LLP
Chicago, Illinois
December 19, 2023
We have served as the auditor of one or more First Trust investment companies since 2001.
First Trust Exchange-Traded Fund IVOctober 31, 2023 (Unaudited) Proxy Voting Policies and Procedures
A description of the policies and procedures that the Trust uses to determine how to vote proxies and information on how each Fund voted proxies relating to its portfolio securities during the most recent 12-month period ended June 30 is available (1) without charge, upon request, by calling (800) 988-5891; (2) on each Fund’s website at www.ftportfolios.com; and (3) on the Securities and Exchange Commission’s (“SEC”) website at www.sec.gov.
Portfolio Holdings
Each Fund files portfolio holdings information for each month in a fiscal quarter within 60 days after the end of the relevant fiscal quarter on Form N-PORT. Portfolio holdings information for the third month of each fiscal quarter will be publicly available on the SEC’s website at www.sec.gov. Each Fund’s complete schedule of portfolio holdings for the second and fourth quarters of each fiscal year is included in the semi-annual and annual reports to shareholders, respectively, and is filed with the SEC on Form N-CSR. The semi-annual and annual report for each Fund is available to investors within 60 days after the period to which it relates. Each Fund’s Forms N-PORT and Forms N-CSR are available on the SEC’s website listed above.
Federal Tax Information
For the taxable year ended October 31, 2023, the following percentages of income dividend paid by the Funds qualify for the dividends received deduction available to corporations:
| Dividends Received
Deduction |
First Trust North American Energy Infrastructure Fund | |
First Trust EIP Carbon Impact ETF | |
FT Energy Income Partners Strategy ETF | |
For the taxable year ended October 31, 2023, the following percentages of income dividend paid by the Funds are hereby designated as qualified dividend income:
| |
First Trust North American Energy Infrastructure Fund | |
First Trust EIP Carbon Impact ETF | |
FT Energy Income Partners Strategy ETF | |
A portion of each of the Funds’ 2023 ordinary dividends (including short-term capital gains) paid to its shareholders during the fiscal period ended October 31, 2023, may be eligible for the Qualified Business Income Deduction (QBI) under the Internal Revenue Code of 1986, as amended (the “Code”), Section 199A for the aggregate dividends each Fund received from the underlying Real Estate Investment Trusts (REITs) these Funds invest in.
Long-term capital gain distributions designated by the Funds are taxable at the applicable capital gain tax rates for federal income tax purposes. For the fiscal year ended October 31, 2023, the below Fund designated long-term capital gain distributions in the following amount.
| Long-Term Capital
Gain Distribution |
First Trust EIP Carbon Impact ETF | |
Risk Considerations
Risks are inherent in all investing. Certain general risks that may be applicable to a Fund are identified below, but not all of the material risks relevant to each Fund are included in this report and not all of the risks below apply to each Fund. The material risks of investing in each Fund are spelled out in its prospectus, statement of additional information and other regulatory filings. Before investing, you should consider each Fund’s investment objective, risks, charges and expenses, and read each Fund’s prospectus and statement of additional information carefully. You can download each Fund’s prospectus at www.ftportfolios.com or contact First Trust Portfolios L.P. at (800) 621-1675 to request a prospectus, which contains this and other information about each Fund.
Additional Information (Continued)
First Trust Exchange-Traded Fund IVOctober 31, 2023 (Unaudited) Concentration Risk. To the extent that a fund is able to invest a significant percentage of its assets in a single asset class or the securities of issuers within the same country, state, region, industry or sector, an adverse economic, business or political development may affect the value of the fund’s investments more than if the fund were more broadly diversified. A fund that tracks an index will be concentrated to the extent the fund’s corresponding index is concentrated. A concentration makes a fund more susceptible to any single occurrence and may subject the fund to greater market risk than a fund that is more broadly diversified.
Credit Risk. Credit risk is the risk that an issuer of a security will be unable or unwilling to make dividend, interest and/or principal payments when due and the related risk that the value of a security may decline because of concerns about the issuer’s ability to make such payments.
Cyber Security Risk. The funds are susceptible to potential operational risks through breaches in cyber security. A breach in cyber security refers to both intentional and unintentional events that may cause a fund to lose proprietary information, suffer data corruption or lose operational capacity. Such events could cause a fund to incur regulatory penalties, reputational damage, additional compliance costs associated with corrective measures and/or financial loss. In addition, cyber security breaches of a fund’s third-party service providers, such as its administrator, transfer agent, custodian, or sub-advisor, as applicable, or issuers in which the fund invests, can also subject a fund to many of the same risks associated with direct cyber security breaches.
Defined Outcome Funds Risk. To the extent a fund’s investment strategy is designed to deliver returns tied to the price performance of an underlying ETF, an investor may not realize the returns the fund seeks to achieve if that investor does not hold shares for the entire target outcome period. In the event an investor purchases shares after the first day of the target outcome period or sells shares prior to the end of the target outcome period, the buffer that the fund seeks to provide against a decline in the value of the underlying ETF may not be available, the enhanced returns that the fund seeks to provide (if any) may not be available and the investor may not participate in a gain in the value of the underlying ETF up to the cap for the investor’s investment period. Additionally, the fund will not participate in gains of the underlying ETF above the cap and a shareholder may lose their entire investment. If the fund seeks enhanced returns, there are certain time periods when the value of the fund may fall faster than the value of the underlying ETF, and it is very unlikely that, on any given day during which the underlying ETF share price increases in value, the fund’s share price will increase at the same rate as the enhanced returns sought by the fund, which is designed for an entire target outcome period. Trading flexible exchange options involves risks different from, or possibly greater than, the risks associated with investing directly in securities, such as less liquidity and correlation and valuation risks. A fund may experience substantial downside from specific flexible exchange option positions and certain positions may expire worthless.
Derivatives Risk. To the extent a fund uses derivative instruments such as futures contracts, options contracts and swaps, the fund may experience losses because of adverse movements in the price or value of the underlying asset, index or rate, which may be magnified by certain features of the derivative. These risks are heightened when a fund’s portfolio managers use derivatives to enhance the fund’s return or as a substitute for a position or security, rather than solely to hedge (or offset) the risk of a position or security held by the fund.
Equity Securities Risk. To the extent a fund invests in equity securities, the value of the fund’s shares will fluctuate with changes in the value of the equity securities. Equity securities prices fluctuate for several reasons, including changes in investors’ perceptions of the financial condition of an issuer or the general condition of the relevant stock market, such as market volatility, or when political or economic events affecting the issuers occur. In addition, common stock prices may be particularly sensitive to rising interest rates, as the cost of capital rises and borrowing costs increase. Equity securities may decline significantly in price over short or extended periods of time, and such declines may occur in the equity market as a whole, or they may occur in only a particular country, company, industry or sector of the market.
ETF Risk. The shares of an ETF trade like common stock and represent an interest in a portfolio of securities. The risks of owning an ETF generally reflect the risks of owning the underlying securities, although lack of liquidity in an ETF could result in it being more volatile and ETFs have management fees that increase their costs. Shares of an ETF trade on an exchange at market prices rather than net asset value, which may cause the shares to trade at a price greater than net asset value (premium) or less than net asset value (discount). In times of market stress, decisions by market makers to reduce or step away from their role of providing a market for an ETF’s shares, or decisions by an ETF’s authorized participants that they are unable or unwilling to proceed with creation and/or redemption orders of an ETF’s shares, could result in shares of the ETF trading at a discount to net asset value and in greater than normal intraday bid-ask spreads.
Fixed Income Securities Risk. To the extent a fund invests in fixed income securities, the fund will be subject to credit risk, income risk, interest rate risk, liquidity risk and prepayment risk. Income risk is the risk that income from a fund’s fixed income investments
Additional Information (Continued)
First Trust Exchange-Traded Fund IVOctober 31, 2023 (Unaudited) could decline during periods of falling interest rates. Interest rate risk is the risk that the value of a fund’s fixed income securities will decline because of rising interest rates. Liquidity risk is the risk that a security cannot be purchased or sold at the time desired, or cannot be purchased or sold without adversely affecting the price. Prepayment risk is the risk that the securities will be redeemed or prepaid by the issuer, resulting in lower interest payments received by the fund. In addition to these risks, high yield securities, or “junk” bonds, are subject to greater market fluctuations and risk of loss than securities with higher ratings, and the market for high yield securities is generally smaller and less liquid than that for investment grade securities.
Index or Model Constituent Risk. Certain funds may be a constituent of one or more indices or ETF models. As a result, such a fund may be included in one or more index-tracking exchange-traded funds or mutual funds. Being a component security of such a vehicle could greatly affect the trading activity involving a fund, the size of the fund and the market volatility of the fund. Inclusion in an index could increase demand for the fund and removal from an index could result in outsized selling activity in a relatively short period of time. As a result, a fund’s net asset value could be negatively impacted and the fund’s market price may be significantly below its net asset value during certain periods. In addition, index rebalances may potentially result in increased trading activity in a fund’s shares.
Index Provider Risk. To the extent a fund seeks to track an index, it is subject to Index Provider Risk. There is no assurance that the Index Provider will compile the Index accurately, or that the Index will be determined, maintained, constructed, reconstituted, rebalanced, composed, calculated or disseminated accurately. To correct any such error, the Index Provider may carry out an unscheduled rebalance or other modification of the Index constituents or weightings, which may increase the fund’s costs. The Index Provider does not provide any representation or warranty in relation to the quality, accuracy or completeness of data in the Index, and it does not guarantee that the Index will be calculated in accordance with its stated methodology. Losses or costs associated with any Index Provider errors generally will be borne by the fund and its shareholders.
Investment Companies Risk. To the extent a fund invests in the securities of other investment vehicles, the fund will incur additional fees and expenses that would not be present in a direct investment in those investment vehicles. Furthermore, the fund’s investment performance and risks are directly related to the investment performance and risks of the investment vehicles in which the fund invests.
LIBOR Risk. To the extent a fund invests in floating or variable rate obligations that use the London Interbank Offered Rate (“LIBOR”) as a reference interest rate, it is subject to LIBOR Risk. The United Kingdom’s Financial Conduct Authority, which regulates LIBOR, has ceased making LIBOR available as a reference rate over a phase-out period that began December 31, 2021. There is no assurance that any alternative reference rate, including the Secured Overnight Financing Rate (“SOFR”) will be similar to or produce the same value or economic equivalence as LIBOR or that instruments using an alternative rate will have the same volume or liquidity. The unavailability or replacement of LIBOR may affect the value, liquidity or return on certain fund investments and may result in costs incurred in connection with closing out positions and entering into new trades. Any potential effects of the transition away from LIBOR on the fund or on certain instruments in which the fund invests can be difficult to ascertain, and they may vary depending on a variety of factors, and they could result in losses to the fund.
Management Risk. To the extent that a fund is actively managed, it is subject to management risk. In managing an actively-managed fund’s investment portfolio, the fund’s portfolio managers will apply investment techniques and risk analyses that may not have the desired result. There can be no guarantee that a fund will meet its investment objective.
Market Risk. Market risk is the risk that a particular security, or shares of a fund in general, may fall in value. Securities held by a fund, as well as shares of a fund itself, are subject to market fluctuations caused by factors such as general economic conditions, political events, regulatory or market developments, changes in interest rates and perceived trends in securities prices. Shares of a fund could decline in value or underperform other investments as a result of the risk of loss associated with these market fluctuations. In addition, local, regional or global events such as war, acts of terrorism, spread of infectious diseases or other public health issues, recessions, or other events could have a significant negative impact on a fund and its investments. Such events may affect certain geographic regions, countries, sectors and industries more significantly than others. In February 2022, Russia invaded Ukraine which has caused and could continue to cause significant market disruptions and volatility within the markets in Russia, Europe, and the United States. The hostilities and sanctions resulting from those hostilities could have a significant impact on certain fund investments as well as fund performance. The COVID-19 global pandemic and the ensuing policies enacted by governments and central banks have caused and may continue to cause significant volatility and uncertainty in global financial markets. While the U.S. has resumed “reasonably” normal business activity, many countries continue to impose lockdown measures. Additionally, there is no guarantee that vaccines will be effective against emerging variants of the disease. These events also adversely affect the prices and liquidity of a
Additional Information (Continued)
First Trust Exchange-Traded Fund IVOctober 31, 2023 (Unaudited) fund’s portfolio securities or other instruments and could result in disruptions in the trading markets. Any of such circumstances could have a materially negative impact on the value of a fund’s shares and result in increased market volatility. During any such events, a fund’s shares may trade at increased premiums or discounts to their net asset value and the bid/ask spread on a fund’s shares may widen.
Non-U.S. Securities Risk. To the extent a fund invests in non-U.S. securities, it is subject to additional risks not associated with securities of domestic issuers. Non-U.S. securities are subject to higher volatility than securities of domestic issuers due to: possible adverse political, social or economic developments; restrictions on foreign investment or exchange of securities; capital controls; lack of liquidity; currency exchange rates; excessive taxation; government seizure of assets; the imposition of sanctions by foreign governments; different legal or accounting standards; and less government supervision and regulation of exchanges in foreign countries. Investments in non-U.S. securities may involve higher costs than investments in U.S. securities, including higher transaction and custody costs, as well as additional taxes imposed by non-U.S. governments. These risks may be heightened for securities of companies located, or with significant operations, in emerging market countries.
Operational Risk. Each fund is subject to risks arising from various operational factors, including, but not limited to, human error, processing and communication errors, errors of a fund’s service providers, counterparties or other third-parties, failed or inadequate processes and technology or systems failures. Each fund relies on third-parties for a range of services, including custody. Any delay or failure relating to engaging or maintaining such service providers may affect a fund’s ability to meet its investment objective. Although the funds and the funds’ investment advisor seek to reduce these operational risks through controls and procedures, there is no way to completely protect against such risks.
Passive Investment Risk. To the extent a fund seeks to track an index, the fund will invest in the securities included in, or representative of, the index regardless of their investment merit. A fund generally will not attempt to take defensive positions in declining markets.
Preferred Securities Risk. Preferred securities combine some of the characteristics of both common stocks and bonds. Preferred securities are typically subordinated to bonds and other debt securities in a company’s capital structure in terms of priority to corporate income, subjecting them to greater credit risk than those debt securities. Generally, holders of preferred securities have no voting rights with respect to the issuing company unless preferred dividends have been in arrears for a specified number of periods, at which time the preferred security holders may obtain limited rights. In certain circumstances, an issuer of preferred securities may defer payment on the securities and, in some cases, redeem the securities prior to a specified date. Preferred securities may also be substantially less liquid than other securities, including common stock.
Valuation Risk. The valuation of certain securities may carry more risk than that of common stock. Uncertainties in the conditions of the financial markets, unreliable reference data, lack of transparency and inconsistency of valuation models and processes may lead to inaccurate asset pricing. A fund may hold investments in sizes smaller than institutionally sized round lot positions (sometimes referred to as odd lots). However, third-party pricing services generally provide evaluations on the basis of institutionally-sized round lots. If a fund sells certain of its investments in an odd lot transaction, the sale price may be less than the value at which such securities have been held by the fund. Odd lots often trade at lower prices than institutional round lots. There is no assurance that the fund will be able to sell a portfolio security at the price established by the pricing service, which could result in a loss to the fund.
NOT FDIC INSURED NOT BANK GUARANTEED MAY LOSE VALUE
Advisory and Sub-Advisory Agreements
Board Considerations Regarding Approval of the Continuation of the Investment Management and Sub-Advisory Agreements
The Board of Trustees of First Trust Exchange-Traded Fund IV (the “Trust”), including the Independent Trustees, unanimously approved the continuation of the Investment Management Agreements (as applicable to a specific Fund, the “Advisory Agreement” and collectively, the “Advisory Agreements”) with First Trust Advisors L.P. (the “Advisor”) and the Investment Sub-Advisory Agreements (as applicable to a specific Fund, the “Sub-Advisory Agreement” and collectively, the “Sub-Advisory Agreements” and together with the Advisory Agreements, the “Agreements”) among the Trust, the Advisor and Energy Income Partners, LLC (the “Sub-Advisor”) on behalf of the following series of the Trust (each a “Fund” and collectively, the “Funds”):
First Trust North American Energy Infrastructure Fund (EMLP) |
First Trust EIP Carbon Impact ETF (ECLN) |
Additional Information (Continued)
First Trust Exchange-Traded Fund IVOctober 31, 2023 (Unaudited) FT Energy Income Partners Strategy ETF (EIPX) |
The Board approved the continuation of the applicable Agreements for each Fund for a one-year period ending June 30, 2024 at a meeting held on June 4–5, 2023. The Board determined for each Fund that the continuation of the applicable Agreements is in the best interests of the Fund in light of the nature, extent and quality of the services provided and such other matters as the Board considered to be relevant in the exercise of its business judgment.
To reach this determination for each Fund, the Board considered its duties under the Investment Company Act of 1940, as amended (the “1940 Act”), as well as under the general principles of state law, in reviewing and approving advisory contracts; the requirements of the 1940 Act in such matters; the fiduciary duty of investment advisors with respect to advisory agreements and compensation; the standards used by courts in determining whether investment company boards have fulfilled their duties; and the factors to be considered by the Board in voting on such agreements. At meetings held on April 17, 2023 and June 4–5, 2023, the Board, including the Independent Trustees, reviewed materials provided by the Advisor and the Sub-Advisor responding to requests for information from counsel to the Independent Trustees, submitted on behalf of the Independent Trustees, that, among other things, outlined: the services provided by the Advisor and the Sub-Advisor to each Fund (including the relevant personnel responsible for these services and their experience); the unitary fee rate schedule payable by each Fund as compared to fees charged to a peer group of funds (the “Expense Group”) and a broad peer universe of funds (the “Expense Universe”), each assembled by Broadridge Financial Solutions, Inc. (“Broadridge”), an independent source, and as compared to fees charged to other clients of the Advisor, including other exchange-traded funds (“ETFs”) managed by the Advisor; the sub-advisory fee as compared to fees charged to other clients of the Sub-Advisor; the expense ratio of each Fund as compared to expense ratios of the funds in the Fund’s Expense Group and Expense Universe; performance information for each Fund, including comparisons of each Fund’s performance to that of one or more relevant benchmark indexes and to that of a performance group of funds and a broad performance universe of funds (the “Performance Universe”), each assembled by Broadridge; the nature of expenses incurred in providing services to each Fund and the potential for the Advisor and the Sub-Advisor to realize economies of scale, if any; profitability and other financial data for the Advisor; financial data for the Sub-Advisor; any indirect benefits to the Advisor and its affiliates, First Trust Portfolios L.P. (“FTP”) and First Trust Capital Partners, LLC (“FTCP”), and the Sub-Advisor; and information on the Advisor’s and the Sub-Advisor’s compliance programs. The Board reviewed initial materials with the Advisor at the meeting held on April 17, 2023, prior to which the Independent Trustees and their counsel met separately to discuss the information provided by the Advisor and the Sub-Advisor. Following the April meeting, counsel to the Independent Trustees, on behalf of the Independent Trustees, requested certain clarifications and supplements to the materials provided, and the information provided in response to those requests was considered at an executive session of the Independent Trustees and their counsel held prior to the June 4–5, 2023 meeting, as well as at the June meeting. The Board applied its business judgment to determine whether the arrangements between the Trust and the Advisor and among the Trust, the Advisor and the Sub-Advisor continue to be reasonable business arrangements from each Fund’s perspective. The Board determined that, given the totality of the information provided with respect to the Agreements, the Board had received sufficient information to renew the Agreements. The Board considered that shareholders chose to invest or remain invested in a Fund knowing that the Advisor and the Sub-Advisor manage the Fund and knowing the Fund’s unitary fee.
In reviewing the applicable Agreements for each Fund, the Board considered the nature, extent and quality of the services provided by the Advisor and the Sub-Advisor under the applicable Agreements. With respect to the Advisory Agreements, the Board considered that the Advisor is responsible for the overall management and administration of the Trust and each Fund and reviewed all of the services provided by the Advisor to the Funds, including the oversight of the Sub-Advisor, as well as the background and experience of the persons responsible for such services. The Board noted that the Advisor oversees the Sub-Advisor’s day-to-day management of each Fund’s investments, including portfolio risk monitoring and performance review. In reviewing the services provided, the Board noted the compliance program that had been developed by the Advisor and considered that it includes a robust program for monitoring the Advisor’s, the Sub-Advisor’s and each Fund’s compliance with the 1940 Act, as well as each Fund’s compliance with its investment objective, policies and restrictions. The Board also considered a report from the Advisor with respect to its risk management functions related to the operation of the Funds. Finally, as part of the Board’s consideration of the Advisor’s services, the Advisor, in its written materials and at the April 17, 2023 meeting, described to the Board the scope of its ongoing investment in additional personnel and infrastructure to maintain and improve the quality of services provided to the Funds and the other funds in the First Trust Fund Complex. With respect to the Sub-Advisory Agreements, the Board noted that each Fund is an actively-managed ETF and the Sub-Advisor actively manages the Fund’s investments. The Board reviewed the materials provided by the Sub-Advisor and considered the services that the Sub-Advisor provides to each Fund, including the Sub-Advisor’s day-to-day management of the Funds’ investments. In considering the Sub-Advisor’s management of the Funds, the Board noted the background and experience of the Sub-Advisor’s portfolio management team, including the Board’s prior meetings with members of the portfolio management team.
Additional Information (Continued)
First Trust Exchange-Traded Fund IVOctober 31, 2023 (Unaudited) In light of the information presented and the considerations made, the Board concluded that the nature, extent and quality of the services provided to the Trust and each Fund by the Advisor and the Sub-Advisor under the Agreements have been and are expected to remain satisfactory and that the Sub-Advisor, under the oversight of the Advisor, has managed each Fund consistent with its investment objective, policies and restrictions.
The Board considered the unitary fee rate schedule payable by each Fund under the applicable Advisory Agreement for the services provided. The Board noted that the sub-advisory fee for each Fund is paid by the Advisor from the Fund’s unitary fee. The Board considered that as part of the unitary fee the Advisor is responsible for each Fund’s expenses, including the cost of sub-advisory, transfer agency, custody, fund administration, legal, audit and other services and license fees, if any, but excluding the fee payment under the applicable Advisory Agreement and 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 Rule 12b-1 plan, if any, and extraordinary expenses, if any. The Board received and reviewed information showing the fee rates and expense ratios of the peer funds in the Expense Groups, as well as advisory and unitary fee rates charged by the Advisor and the Sub-Advisor to other fund (including ETFs) and non-fund clients, as applicable. Because each Fund pays a unitary fee, the Board determined that expense ratios were the most relevant comparative data point. Based on the information provided, the Board noted that the total (net) expense ratio for ECLN was above the median total (net) expense ratio of the peer funds in its respective Expense Group and that the total (net) expense ratio for EMLP was below the median total (net) expense ratio of the peer funds in its respective Expense Group. With respect to the Expense Groups, the Board, at the April 17, 2023 meeting, discussed with Broadridge its methodology for assembling peer groups and discussed with the Advisor limitations in creating peer groups for actively-managed ETFs, including that the Expense Groups contained both actively-managed ETFs and open-end mutual funds, and different business models that may affect the pricing of services among ETF sponsors. The Board also noted that not all peer funds employ an advisor/sub-advisor management structure. The Board took these limitations and differences into account in considering the peer data. With respect to fees charged to other non-ETF clients, the Board considered differences between the Funds and other non-ETF clients that limited their comparability. In considering the unitary fee rate schedules overall, the Board also considered the Advisor’s statement that it seeks to meet investor needs through innovative and value-added investment solutions and the Advisor’s demonstrated long-term commitment to each Fund and the other funds in the First Trust Fund Complex.
The Board considered performance information for each Fund. The Board noted the process it has established for monitoring each Fund’s performance and portfolio risk on an ongoing basis, which includes quarterly performance reporting from the Advisor and the Sub-Advisor for the Funds. The Board determined that this process continues to be effective for reviewing each Fund’s performance. The Board received and reviewed information comparing ECLN’s performance for periods ended December 31, 2022 to the performance of the funds in its Performance Universe and to that of a benchmark index and information comparing EMLP’s performance for periods ended December 31, 2022 to the performance of the funds in its Performance Universe and to that of a blended benchmark index. Based on the information provided, the Board noted that ECLN outperformed its Performance Universe median and benchmark index for the one-year period ended December 31, 2022 and underperformed its Performance Universe median and outperformed its benchmark index for the three-year period ended December 31, 2022. The Board noted that EMLP underperformed its Performance Universe median for the one- and three-year periods ended December 31, 2022, outperformed its Performance Universe median for the five- and ten-year periods ended December 31, 2022 and underperformed its blended benchmark index for the one-, three-, five- and ten-year periods ended December 31, 2022.
On the basis of all the information provided on the unitary fee and performance of each Fund and the ongoing oversight by the Board, the Board concluded that the unitary fee for each Fund (out of which the Sub-Advisor is compensated) continues to be reasonable and appropriate in light of the nature, extent and quality of the services provided by the Advisor and the Sub-Advisor to each Fund under the Agreements.
The Board considered information and discussed with the Advisor whether there were any economies of scale in connection with providing advisory services to the Funds at current asset levels and whether the Funds may benefit from any economies of scale. The Board noted that the unitary fee rate schedule for each Fund includes breakpoints pursuant to which the unitary fee rate will be reduced as assets of the Fund meet certain thresholds. The Board considered the Advisor’s statement that it believes that its expenses relating to providing advisory services to the Funds will increase during the next twelve months as the Advisor continues to build infrastructure and add new staff. The Board also noted that under the unitary fee structure, any reduction in expenses associated with the management and operations of the Funds would benefit the Advisor, but that the unitary fee structure provides a level of certainty in expenses for shareholders of the Funds. The Board concluded that the unitary fee rate schedule for each Fund reflects an appropriate level of sharing of any economies of scale that may be realized in the management of the Fund at current asset levels. The Board considered the revenues and allocated costs (including the allocation methodology) of the Advisor in serving as investment
Additional Information (Continued)
First Trust Exchange-Traded Fund IVOctober 31, 2023 (Unaudited) advisor to each Fund for the twelve months ended December 31, 2022 and the estimated profitability level for each Fund calculated by the Advisor based on such data, as well as complex-wide and product-line profitability data, for the same period. The Board noted the inherent limitations in the profitability analysis and concluded that, based on the information provided, the Advisor’s profitability level for each Fund was not unreasonable. In addition, the Board considered indirect benefits described by the Advisor that may be realized from its relationship with the Funds. The Board noted that FTCP has an ownership interest in the Sub-Advisor and considered potential indirect benefits to the Advisor from such ownership interest. The Board also considered that the Advisor had identified as an indirect benefit to the Advisor and FTP their exposure to investors and brokers who, absent their exposure to the Funds, may have had no dealings with the Advisor or FTP. The Board concluded that the character and amount of potential indirect benefits to the Advisor were not unreasonable.
The Board considered that the Sub-Advisor anticipates that its expenses will continue to rise due to additions to personnel and system upgrades. The Board noted that the Advisor pays the Sub-Advisor for each Fund from the unitary fee, that the sub-advisory fee will be reduced consistent with the breakpoints in the unitary fee rate schedule and its understanding that each Fund’s sub-advisory fee was the product of an arm’s length negotiation. The Board did not review the profitability of the Sub-Advisor with respect to each Fund. The Board concluded that the profitability analysis for the Advisor was more relevant. The Board considered indirect benefits that may be realized by the Sub-Advisor from its relationship with the Funds, including soft-dollar arrangements, and considered a summary of such arrangements. The Board also considered the potential indirect benefits to the Sub-Advisor from the ownership interest of FTCP in the Sub-Advisor. The Board concluded that the character and amount of potential indirect benefits to the Sub-Advisor were not unreasonable.
Based on all of the information considered and the conclusions reached, the Board, including the Independent Trustees, unanimously determined that the terms of the Agreements continue to be fair and reasonable and that the continuation of the Agreements is in the best interests of each Fund. No single factor was determinative in the Board’s analysis.
The Board approved the continuation of the applicable Agreements for each Fund for a one-year period ending June 30, 2024 at a meeting held on June 4–5, 2023. The Board determined for each Fund that the continuation of the applicable Agreements is in the best interests of the Fund in light of the nature, extent and quality of the services provided and such other matters as the Board considered to be relevant in the exercise of its business judgment.
To reach this determination for each Fund, the Board considered its duties under the Investment Company Act of 1940, as amended (the “1940 Act”), as well as under the general principles of state law, in reviewing and approving advisory contracts; the requirements of the 1940 Act in such matters; the fiduciary duty of investment advisors with respect to advisory agreements and compensation; the standards used by courts in determining whether investment company boards have fulfilled their duties; and the factors to be considered by the Board in voting on such agreements. At meetings held on April 17, 2023 and June 4–5, 2023, the Board, including the Independent Trustees, reviewed materials provided by the Advisor and the Sub-Advisor responding to requests for information from counsel to the Independent Trustees, submitted on behalf of the Independent Trustees, that, among other things, outlined: the services provided by the Advisor and the Sub-Advisor to each Fund (including the relevant personnel responsible for these services and their experience); the unitary fee rate schedule payable by each Fund as compared to fees charged to a peer group of funds (the “Expense Group”) and a broad peer universe of funds (the “Expense Universe”), each assembled by Broadridge Financial Solutions, Inc. (“Broadridge”), an independent source, and as compared to fees charged to other clients of the Advisor, including other exchange-traded funds (“ETFs”) managed by the Advisor; the sub-advisory fee as compared to fees charged to other clients of the Sub-Advisor; the expense ratio of each Fund as compared to expense ratios of the funds in the Fund’s Expense Group and Expense Universe; performance information for each Fund, including comparisons of each Fund’s performance to that of one or more relevant benchmark indexes and to that of a performance group of funds and a broad performance universe of funds (the “Performance Universe”), each assembled by Broadridge; the nature of expenses incurred in providing services to each Fund and the potential for the Advisor and the Sub-Advisor to realize economies of scale, if any; profitability and other financial data for the Advisor; financial data for the Sub-Advisor; any indirect benefits to the Advisor and its affiliates, First Trust Portfolios L.P. (“FTP”) and First Trust Capital Partners, LLC (“FTCP”), and the Sub-Advisor; and information on the Advisor’s and the Sub-Advisor’s compliance programs. The Board reviewed initial materials with the Advisor at the meeting held on April 17, 2023, prior to which the Independent Trustees and their counsel met separately to discuss the information provided by the Advisor and the Sub-Advisor. Following the April meeting, counsel to the Independent Trustees, on behalf of the Independent Trustees, requested certain clarifications and supplements to the materials provided, and the information provided in response to those requests was considered at an executive session of the Independent Trustees and their counsel held prior to the June 4–5, 2023 meeting, as well as at the June meeting. The Board applied its business judgment to determine whether the arrangements between the Trust and the Advisor and among the Trust, the Advisor and the Sub-Advisor continue to be reasonable business arrangements from each Fund’s perspective. The Board determined that, given the totality
Additional Information (Continued)
First Trust Exchange-Traded Fund IVOctober 31, 2023 (Unaudited) of the information provided with respect to the Agreements, the Board had received sufficient information to renew the Agreements. The Board considered that shareholders chose to invest or remain invested in a Fund knowing that the Advisor and the Sub-Advisor manage the Fund and knowing the Fund’s unitary fee.
In reviewing the applicable Agreements for each Fund, the Board considered the nature, extent and quality of the services provided by the Advisor and the Sub-Advisor under the applicable Agreements. With respect to the Advisory Agreements, the Board considered that the Advisor is responsible for the overall management and administration of the Trust and each Fund and reviewed all of the services provided by the Advisor to the Funds, including the oversight of the Sub-Advisor, as well as the background and experience of the persons responsible for such services. The Board noted that the Advisor oversees the Sub-Advisor’s day-to-day management of each Fund’s investments, including portfolio risk monitoring and performance review. In reviewing the services provided, the Board noted the compliance program that had been developed by the Advisor and considered that it includes a robust program for monitoring the Advisor’s, the Sub-Advisor’s and each Fund’s compliance with the 1940 Act, as well as each Fund’s compliance with its investment objective, policies and restrictions. The Board also considered a report from the Advisor with respect to its risk management functions related to the operation of the Funds. Finally, as part of the Board’s consideration of the Advisor’s services, the Advisor, in its written materials and at the April 17, 2023 meeting, described to the Board the scope of its ongoing investment in additional personnel and infrastructure to maintain and improve the quality of services provided to the Funds and the other funds in the First Trust Fund Complex. With respect to the Sub-Advisory Agreements, the Board noted that each Fund is an actively-managed ETF and the Sub-Advisor actively manages the Fund’s investments. The Board reviewed the materials provided by the Sub-Advisor and considered the services that the Sub-Advisor provides to each Fund, including the Sub-Advisor’s day-to-day management of the Funds’ investments. In considering the Sub-Advisor’s management of the Funds, the Board noted the background and experience of the Sub-Advisor’s portfolio management team, including the Board’s prior meetings with members of the portfolio management team. In light of the information presented and the considerations made, the Board concluded that the nature, extent and quality of the services provided to the Trust and each Fund by the Advisor and the Sub-Advisor under the Agreements have been and are expected to remain satisfactory and that the Sub-Advisor, under the oversight of the Advisor, has managed each Fund consistent with its investment objective, policies and restrictions.
The Board considered the unitary fee rate schedule payable by each Fund under the applicable Advisory Agreement for the services provided. The Board noted that the sub-advisory fee for each Fund is paid by the Advisor from the Fund’s unitary fee. The Board considered that as part of the unitary fee the Advisor is responsible for each Fund’s expenses, including the cost of sub-advisory, transfer agency, custody, fund administration, legal, audit and other services and license fees, if any, but excluding the fee payment under the applicable Advisory Agreement and 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 Rule 12b-1 plan, if any, and extraordinary expenses, if any. The Board received and reviewed information showing the fee rates and expense ratios of the peer funds in the Expense Groups, as well as advisory and unitary fee rates charged by the Advisor and the Sub-Advisor to other fund (including ETFs) and non-fund clients, as applicable. Because each Fund pays a unitary fee, the Board determined that expense ratios were the most relevant comparative data point. Based on the information provided, the Board noted that the total (net) expense ratio for ECLN was above the median total (net) expense ratio of the peer funds in its respective Expense Group and that the total (net) expense ratio for EMLP was below the median total (net) expense ratio of the peer funds in its respective Expense Group. With respect to the Expense Groups, the Board, at the April 17, 2023 meeting, discussed with Broadridge its methodology for assembling peer groups and discussed with the Advisor limitations in creating peer groups for actively-managed ETFs, including that the Expense Groups contained both actively-managed ETFs and open-end mutual funds, and different business models that may affect the pricing of services among ETF sponsors. The Board also noted that not all peer funds employ an advisor/sub-advisor management structure. The Board took these limitations and differences into account in considering the peer data. With respect to fees charged to other non-ETF clients, the Board considered differences between the Funds and other non-ETF clients that limited their comparability. In considering the unitary fee rate schedules overall, the Board also considered the Advisor’s statement that it seeks to meet investor needs through innovative and value-added investment solutions and the Advisor’s demonstrated long-term commitment to each Fund and the other funds in the First Trust Fund Complex.
The Board considered performance information for each Fund. The Board noted the process it has established for monitoring each Fund’s performance and portfolio risk on an ongoing basis, which includes quarterly performance reporting from the Advisor and the Sub-Advisor for the Funds. The Board determined that this process continues to be effective for reviewing each Fund’s performance. The Board received and reviewed information comparing ECLN’s performance for periods ended December 31, 2022 to the performance of the funds in its Performance Universe and to that of a benchmark index and information comparing EMLP’s performance for periods ended December 31, 2022 to the performance of the funds in its Performance Universe and to that of a blended benchmark index. Based on the information provided, the Board noted that ECLN outperformed its Performance Universe
Additional Information (Continued)
First Trust Exchange-Traded Fund IVOctober 31, 2023 (Unaudited) median and benchmark index for the one-year period ended December 31, 2022 and underperformed its Performance Universe median and outperformed its benchmark index for the three-year period ended December 31, 2022. The Board noted that EMLP underperformed its Performance Universe median for the one- and three-year periods ended December 31, 2022, outperformed its Performance Universe median for the five- and ten-year periods ended December 31, 2022 and underperformed its blended benchmark index for the one-, three-, five- and ten-year periods ended December 31, 2022.
On the basis of all the information provided on the unitary fee and performance of each Fund and the ongoing oversight by the Board, the Board concluded that the unitary fee for each Fund (out of which the Sub-Advisor is compensated) continues to be reasonable and appropriate in light of the nature, extent and quality of the services provided by the Advisor and the Sub-Advisor to each Fund under the Agreements.
The Board considered information and discussed with the Advisor whether there were any economies of scale in connection with providing advisory services to the Funds at current asset levels and whether the Funds may benefit from any economies of scale. The Board noted that the unitary fee rate schedule for each Fund includes breakpoints pursuant to which the unitary fee rate will be reduced as assets of the Fund meet certain thresholds. The Board considered the Advisor’s statement that it believes that its expenses relating to providing advisory services to the Funds will increase during the next twelve months as the Advisor continues to build infrastructure and add new staff. The Board also noted that under the unitary fee structure, any reduction in expenses associated with the management and operations of the Funds would benefit the Advisor, but that the unitary fee structure provides a level of certainty in expenses for shareholders of the Funds. The Board concluded that the unitary fee rate schedule for each Fund reflects an appropriate level of sharing of any economies of scale that may be realized in the management of the Fund at current asset levels. The Board considered the revenues and allocated costs (including the allocation methodology) of the Advisor in serving as investment advisor to each Fund for the twelve months ended December 31, 2022 and the estimated profitability level for each Fund calculated by the Advisor based on such data, as well as complex-wide and product-line profitability data, for the same period. The Board noted the inherent limitations in the profitability analysis and concluded that, based on the information provided, the Advisor’s profitability level for each Fund was not unreasonable. In addition, the Board considered indirect benefits described by the Advisor that may be realized from its relationship with the Funds. The Board noted that FTCP has an ownership interest in the Sub-Advisor and considered potential indirect benefits to the Advisor from such ownership interest. The Board also considered that the Advisor had identified as an indirect benefit to the Advisor and FTP their exposure to investors and brokers who, absent their exposure to the Funds, may have had no dealings with the Advisor or FTP. The Board concluded that the character and amount of potential indirect benefits to the Advisor were not unreasonable.
The Board considered that the Sub-Advisor anticipates that its expenses will continue to rise due to additions to personnel and system upgrades. The Board noted that the Advisor pays the Sub-Advisor for each Fund from the unitary fee, that the sub-advisory fee will be reduced consistent with the breakpoints in the unitary fee rate schedule and its understanding that each Fund’s sub-advisory fee was the product of an arm’s length negotiation. The Board did not review the profitability of the Sub-Advisor with respect to each Fund. The Board concluded that the profitability analysis for the Advisor was more relevant. The Board considered indirect benefits that may be realized by the Sub-Advisor from its relationship with the Funds, including soft-dollar arrangements, and considered a summary of such arrangements. The Board also considered the potential indirect benefits to the Sub-Advisor from the ownership interest of FTCP in the Sub-Advisor. The Board concluded that the character and amount of potential indirect benefits to the Sub-Advisor were not unreasonable.
Based on all of the information considered and the conclusions reached, the Board, including the Independent Trustees, unanimously determined that the terms of the Agreements continue to be fair and reasonable and that the continuation of the Agreements is in the best interests of each Fund. No single factor was determinative in the Board’s analysis.
Remuneration
First Trust Advisors L.P. (“First Trust”) is authorised and regulated by the U.S. Securities and Exchange Commission and is entitled to market shares of certain First Trust Exchange-Traded Fund IV funds it manages (the “Funds”) in certain member states in the European Economic Area in accordance with the cooperation arrangements in Article 42 of the Alternative Investment Fund Managers Directive (the “Directive”). First Trust is required under the Directive to make disclosures in respect of remuneration. The following disclosures are made in line with First Trust’s interpretation of currently available regulatory guidance on remuneration disclosures.
During the year ended December 31, 2022, the amount of remuneration paid (or to be paid) by First Trust Advisors L.P. in respect of the Funds is $1,260,306. This figure is comprised of $48,858 paid (or to be paid) in fixed compensation and $1,211,448 paid (or to be paid) in variable compensation. There were a total of 24 beneficiaries of the remuneration described above. Those amounts include
Additional Information (Continued)
First Trust Exchange-Traded Fund IVOctober 31, 2023 (Unaudited) $664,689 paid (or to be paid) to senior management of First Trust Advisors L.P. and $595,617 paid (or to be paid) to other employees whose professional activities have a material impact on the risk profiles of First Trust Advisors L.P. or the Funds (collectively, “Code Staff”).
Code Staff included in the aggregated figures disclosed above are rewarded in line with First Trust’s remuneration policy (the “Remuneration Policy”) which is determined and implemented by First Trust’s senior management. The Remuneration Policy reflects First Trust’s ethos of good governance and encapsulates the following principal objectives:
i.
to provide a clear link between remuneration and performance of First Trust and to avoid rewarding for failure;
ii.
to promote sound and effective risk management consistent with the risk profiles of the funds managed by First Trust; and
iii.
to remunerate staff in line with the business strategy, objectives, values and interests of First Trust and the funds managed by First Trust in a manner that avoids conflicts of interest.
First Trust assesses various risk factors which it is exposed to when considering and implementing remuneration for Code Staff and considers whether any potential award to such person(s) would give rise to a conflict of interest. First Trust does not reward failure, or consider the taking of risk or failure to take risk in its remuneration of Code Staff.
First Trust assesses performance for the purposes of determining payments in respect of performance-related remuneration of Code Staff by reference to a broad range of measures including (i) individual performance (using financial and non-financial criteria), and (ii) the overall performance of First Trust. Remuneration is not based upon the performance of the Funds.
The elements of remuneration are balanced between fixed and variable and the senior management sets fixed salaries at a level sufficient to ensure that variable remuneration incentivises and rewards strong individual performance but does not encourage excessive risk taking.
No individual is involved in setting his or her own remuneration.
Board of Trustees and Officers
First Trust Exchange-Traded Fund IVOctober 31, 2023 (Unaudited) The following tables identify the Trustees and Officers of the Trust. Unless otherwise indicated, the address of all persons is 120 East Liberty Drive, Suite 400, Wheaton, IL 60187.
The Trust’s statement of additional information includes additional information about the Trustees and is available, without charge, upon request, by calling (800) 988-5891.
Name,
Year of Birth and
Position with the Trust | Term of Office
and Year First
Elected or
Appointed | Principal Occupations
During Past 5 Years | Number of
Portfolios in
the First Trust
Fund Complex
Overseen by
Trustee | Other
Trusteeships or
Directorships
Held by Trustee
During Past
5 Years |
|
Richard E. Erickson, Trustee
(1951) | • Indefinite Term • Since Inception | Retired; Physician, Edward-Elmhurst Medical Group (2021 to September 2023); Physician and Officer, Wheaton Orthopedics (1990 to 2021) | | |
Thomas R. Kadlec, Trustee
(1957) | • Indefinite Term • Since Inception | Retired; President, ADM Investors Services, Inc. (Futures Commission Merchant) (2010 to July 2022) | | Director, National Futures Association and ADMIS Singapore Ltd.; Formerly, Director of ADM Investor Services, Inc., ADM Investor Services International, ADMIS Hong Kong Ltd., and Futures Industry Association |
Denise M. Keefe, Trustee
(1964) | • Indefinite Term • Since 2021 | Executive Vice President, Advocate Aurora Health and President, Advocate Aurora Continuing Health Division (Integrated Healthcare System) | | Director and Board Chair of Advocate Home Health Services, Advocate Home Care Products and Advocate Hospice; Director and Board Chair of Aurora At Home (since 2018); Director of Advocate Physician Partners Accountable Care Organization; Director of RML Long Term Acute Care Hospitals; Director of Senior Helpers (since 2021); and Director of MobileHelp (since 2022) |
Robert F. Keith, Trustee
(1956) | • Indefinite Term • Since Inception | President, Hibs Enterprises (Financial and Management Consulting) | | Formerly, Director of Trust Company of Illinois |
Niel B. Nielson, Trustee
(1954) | • Indefinite Term • Since Inception | Senior Advisor (2018 to Present), Managing Director and Chief Operating Officer (2015 to 2018), Pelita Harapan Educational Foundation (Educational Products and Services) | | |
Bronwyn Wright, Trustee
(1971) | • Indefinite Term • Since 2023 | Independent Director to a number of Irish collective investment funds (2009 to Present); Various roles at international affiliates of Citibank (1994 to 2009), including Managing Director, Citibank Europe plc and Head of Securities and Fund Services, Citi Ireland (2007 to 2009) | | |
Board of Trustees and Officers (Continued)
First Trust Exchange-Traded Fund IVOctober 31, 2023 (Unaudited) Name, Year of Birth and Position with the Trust | Term of Office and Year First Elected or Appointed | Principal Occupations During Past 5 Years | Number of Portfolios in the First Trust Fund Complex Overseen by Trustee | Other Trusteeships or Directorships Held by Trustee During Past 5 Years |
|
James A. Bowen(1), Trustee,
Chairman of the Board
(1955) | • Indefinite Term • Since Inception | Chief Executive Officer, First Trust Advisors L.P. and First Trust Portfolios L.P., Chairman of the Board of Directors, BondWave LLC (Software Development Company) and Stonebridge Advisors LLC (Investment Advisor) | | |
| Position and
Offices
with Trust | Term of Office
and Length of
Service | Principal Occupations
During Past 5 Years |
|
| President and Chief Executive Officer | • Indefinite Term • Since 2016 | Managing Director and Chief Financial Officer, First Trust Advisors L.P. and First Trust Portfolios L.P.; Chief Financial Officer, BondWave LLC (Software Development Company) and Stonebridge Advisors LLC (Investment Advisor) |
| Treasurer, Chief Financial Officer and Chief Accounting Officer | • Indefinite Term • Since 2023 | Senior Vice President, First Trust Advisors L.P. and First Trust Portfolios L.P., July 2021 to Present. Previously, Vice President, First Trust Advisors L.P. and First Trust Portfolios L.P., 2014 - 2021. |
| Secretary and Chief Legal Officer | • Indefinite Term • Since Inception | General Counsel, First Trust Advisors L.P. and First Trust Portfolios L.P.; Secretary and General Counsel, BondWave LLC; Secretary, Stonebridge Advisors LLC |
Daniel J. Lindquist
(1970) | | • Indefinite Term • Since Inception | Managing Director, First Trust Advisors L.P. and First Trust Portfolios L.P. |
| Chief Compliance Officer and Assistant Secretary | • Indefinite Term • Since Inception | Deputy General Counsel, First Trust Advisors L.P. and First Trust Portfolios L.P. |
| | • Indefinite Term • Since Inception | Senior Vice President, First Trust Advisors L.P. and First Trust Portfolios L.P. |
| | • Indefinite Term • Since Inception | Senior Vice President, First Trust Advisors L.P. and First Trust Portfolios L.P. |
(1)
Mr. Bowen is deemed an “interested person” of the Trust due to his position as Chief Executive Officer of First Trust Advisors L.P., investment advisor of the Trust.
(2)
The term “officer” means the president, vice president, secretary, treasurer, controller or any other officer who performs a policy making function.
First Trust Exchange-Traded Fund IVOctober 31, 2023 (Unaudited) Privacy Policy
First Trust values our relationship with you and considers your privacy an important priority in maintaining that relationship. We are committed to protecting the security and confidentiality of your personal information.
Sources of Information
We collect nonpublic personal information about you from the following sources:
• Information we receive from you and your broker-dealer, investment professional or financial representative through interviews, applications, agreements or other forms;
• Information about your transactions with us, our affiliates or others;
• Information we receive from your inquiries by mail, e-mail or telephone; and
• Information we collect on our website through the use of “cookies.” For example, we may identify the pages on our website that your browser requests or visits.
Information Collected
The type of data we collect may include your name, address, social security number, age, financial status, assets, income, tax information, retirement and estate plan information, transaction history, account balance, payment history, investment objectives, marital status, family relationships and other personal information.
Disclosure of Information
We do not disclose any nonpublic personal information about our customers or former customers to anyone, except as permitted by law. In addition to using this information to verify your identity (as required under law), the permitted uses may also include the disclosure of such information to unaffiliated companies for the following reasons:
• In order to provide you with products and services and to effect transactions that you request or authorize, we may disclose your personal information as described above to unaffiliated financial service providers and other companies that perform administrative or other services on our behalf, such as transfer agents, custodians and trustees, or that assist us in the distribution of investor materials such as trustees, banks, financial representatives, proxy services, solicitors and printers.
• We may release information we have about you if you direct us to do so, if we are compelled by law to do so, or in other legally limited circumstances (for example to protect your account from fraud).
In addition, in order to alert you to our other financial products and services, we may share your personal information within First Trust.
Use of Website Analytics
We currently use third party analytics tools, Google Analytics and AddThis, to gather information for purposes of improving First Trust’s website and marketing our products and services to you. These tools employ cookies, which are small pieces of text stored in a file by your web browser and sent to websites that you visit, to collect information, track website usage and viewing trends such as the number of hits, pages visited, videos and PDFs viewed and the length of user sessions in order to evaluate website performance and enhance navigation of the website. We may also collect other anonymous information, which is generally limited to technical and web navigation information such as the IP address of your device, internet browser type and operating system for purposes of analyzing the data to make First Trust’s website better and more useful to our users. The information collected does not include any personal identifiable information such as your name, address, phone number or email address unless you provide that information through the website for us to contact you in order to answer your questions or respond to your requests. To find out how to opt-out of these services click on: Google Analytics and AddThis.
Confidentiality and Security
With regard to our internal security procedures, First Trust restricts access to your nonpublic personal information to those First Trust employees who need to know that information to provide products or services to you. We maintain physical, electronic and procedural safeguards to protect your nonpublic personal information.
Policy Updates and Inquiries
As required by federal law, we will notify you of our privacy policy annually. We reserve the right to modify this policy at any time, however, if we do change it, we will tell you promptly. For questions about our policy, or for additional copies of this notice, please go to www.ftportfolios.com, or contact us at 1-800-621-1675 (First Trust Portfolios) or 1-800-222-6822 (First Trust Advisors).
March 2023
First Trust Exchange-Traded Fund IV
INVESTMENT ADVISOR
First Trust Advisors L.P.
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
INVESTMENT SUB-ADVISOR
Energy Income Partners, LLC
10 Wright Street
Westport, CT 06880
ADMINISTRATOR, CUSTODIAN,
FUND ACCOUNTANT &
TRANSFER AGENT
The Bank of New York Mellon
240 Greenwich Street
New York, NY 10286
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
111 South Wacker Drive
Chicago, IL 60606
LEGAL COUNSEL
Chapman and Cutler LLP
320 South Canal Street
Chicago, IL 60606
Annual Report
For the Year Ended
October 31, 2023
First Trust Exchange-Traded Fund IV
First Trust SSI Strategic Convertible Securities (FCVT) |
First Trust Exchange-Traded Fund IV
First Trust SSI Strategic Convertible Securities ETF (FCVT)
For the Year Ended October 31, 2023
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First Trust SSI Strategic Convertible Securities ETF (FCVT)
Annual Report
October 31, 2023
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 SSI Investment Management LLC (“SSI” or the “Sub-Advisor”) and their respective representatives, taking into account the information currently available to them. Forward-looking statements include all statements that do not relate solely to current or historical fact. For example, forward-looking statements include the use of words such as “anticipate,” “estimate,” “intend,” “expect,” “believe,” “plan,” “may,” “should,” “would” or other words that convey uncertainty of future events or outcomes.
Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the series of First Trust Exchange-Traded Fund IV (the “Trust”) described in this report (First Trust SSI Strategic Convertible Securities 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’s shares may therefore be less than what you paid for them. Accordingly, you can lose money by investing in the Fund. See “Risk Considerations” in the Additional Information section of this report for a discussion of certain other risks of investing in the Fund.
Performance data quoted represents past performance, which is no guarantee of future results, and current performance may be lower or higher than the figures shown. For the most recent month-end performance figures, please visit www.ftportfolios.com or speak with your financial advisor. Investment returns, net asset value and share price will fluctuate and Fund shares, when sold, may be worth more or less than their original cost.
The Advisor may also periodically provide additional information on Fund performance on the Fund’s web page at www.ftportfolios.com.
How to Read This Report
This report contains information that may help you evaluate your investment in the Fund. It includes details about the Fund and presents data and analysis that provide insight into the Fund’s performance and investment approach.
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 a relevant market benchmark.
It is important to keep in mind that the opinions expressed by personnel of the Advisor and/or Sub-Advisor are just that: informed opinions. They should not be considered to be promises or advice. The opinions, like the statistics, cover the period through the date on the cover of this report. The material risks of investing in the Fund are spelled out in the prospectus, the statement of additional information, and other Fund regulatory filings.
First Trust SSI Strategic Convertible Securities ETF (FCVT)
Annual Letter from the Chairman and CEO
October 31, 2023
Dear Shareholders,
First Trust is pleased to provide you with the annual report for the First Trust SSI Strategic Convertible Securities ETF (the “Fund”), which contains detailed information about the Fund for the twelve months ended October 31, 2023.
The Bureau of Economic Analysis recently announced that U.S. real gross domestic product (“GDP”) grew by a staggering 4.9% in the third quarter of 2023 and is now up 2.9% on a year-over-year basis from where it stood in the third quarter of 2022. The most recent quarter’s GDP data represents the fastest growth rate for any quarter since 2014. Consumer spending, which rose by 4.0% over the period, was responsible for 2.7 percentage points of the total increase in GDP. Whether the consumer can keep up this pace of spending remains to be seen, especially given recent news that excess savings from the pandemic-era stimulus have likely been depleted. From a global perspective, the International Monetary Fund (“IMF”) notes that progress in fighting inflation has led to lower economic growth. In their October 2023 publication of the World Economic Outlook, the IMF projected that the growth in world economic output is expected to slow from 3.5% in 2022 to 2.9% in 2024. The economic growth in advanced economies is projected to plummet from 2.6% in 2022 to 1.4% in 2024.
In the notes to their September 2023 meeting, the Federal Open Market Committee revealed that they may need to keep interest rates “higher for longer” as they continue to battle stubbornly high inflation. As many investors are likely aware, a higher Federal Funds target rate can have deep implications for consumers, such as driving up the cost of borrowing for homes, automobiles, and other large purchases. The American consumer has yet to feel the full weight of those burdens, in my opinion. That said, the data reveals a different story among corporate America. S&P Global Market Intelligence reported that a total of 516 U.S. corporations filed for bankruptcy protection on a year-to-date basis through September 30, 2023, up from a total of 263 corporate bankruptcy filings over the same period last year. Higher interest rates and Treasury bond yields have also sapped demand for commercial property loans. Data from Trepp, LLC, a leading provider of data and analytics to the commercial real estate and banking markets, revealed that just $28.2 billion of loans converted into commercial mortgage-backed securities have been issued in 2023, the lowest figure since 2011.
The financial markets battled a myriad of headwinds over the past year, from geopolitical uncertainty resulting from war (the conflicts between Israel and Hamas and Russia and Ukraine), to slowing global economic growth and sticky inflation. Brian Wesbury, Chief Economist at First Trust, notes that a U.S. economic recession is likely to begin at some point early next year. While calls for a recession may concern some investors, the following may offer solace. Data from Bloomberg reveals that the S&P 500® Index has posted positive total returns over the 3-year period following every recession since 1948.
Thank you for giving First Trust the opportunity to play a role in your financial future. We value our relationship with you and will report on the Fund again in six months.
Sincerely,
James A. Bowen
Chairman of the Board of Trustees
Chief Executive Officer of First Trust Advisors L.P.
Fund Performance Overview (Unaudited)
First Trust SSI Strategic Convertible Securities ETF (FCVT)
The First Trust SSI Strategic Convertible Securities ETF (the “Fund”) is an actively managed exchange-traded fund that seeks total return by investing, under normal market conditions, at least 80% of its net assets (including investment borrowings) in a portfolio of U.S. and non-U.S. convertible securities. The shares of the Fund are listed and traded on Nasdaq, Inc. under the ticker symbol “FCVT.”
| Performance | | | | | | |
| | | Average Annual Total Returns | | Cumulative Total Returns |
| | 1 Year
Ended
10/31/23 | 5 Years
Ended
10/31/23 | Inception
(11/3/15)
to 10/31/23 | | 5 Years
Ended
10/31/23 | Inception
(11/3/15)
to 10/31/23 |
| Fund Performance | | | | | | |
| NAV | -6.08% | 6.79% | 6.84% | | 38.89% | 69.71% |
| Market Price | -6.50% | 6.61% | 6.73% | | 37.73% | 68.32% |
| Index Performance | | | | | | |
| ICE BofA All US Convertible Index | -0.48% | 8.73% | 8.40% | | 52.00% | 90.57% |
Total returns for the period since inception are calculated from the inception date of the Fund. “Average Annual Total Returns” represent the average annual change in value of an investment over the periods indicated. “Cumulative Total Returns” represent the total change in value of an investment over the periods indicated.
The Fund’s per share net asset value (“NAV”) is the value of one share of the Fund and is computed by dividing the value of all assets of the Fund (including accrued interest and dividends), less all liabilities (including accrued expenses and dividends declared but unpaid), by the total number of outstanding shares. The price used to calculate market return (“Market Price”) is determined by using the midpoint of the national best bid and offer price (“NBBO”) as of the time that the Fund’s NAV is calculated. Under SEC rules, the NBBO consists of the highest displayed buy and lowest sell prices among the various exchanges trading the Fund at the time the Fund’s NAV is calculated. Prior to January 1, 2019, the price used was the midpoint between the highest bid and the lowest offer on the stock exchange on which shares of the Fund were listed for trading as of the time that the Fund’s NAV was calculated. Since shares of the Fund did not trade in the secondary market until after its inception, for the period from inception to the first day of secondary market trading in shares of the Fund, the NAV of the Fund is used as a proxy for the secondary market trading price to calculate market returns. NAV and market returns assume that all distributions have been reinvested in the Fund at NAV and Market Price, respectively.
An index is a statistical composite that tracks a specified financial market or sector. Unlike the Fund, the 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.
Fund Performance Overview (Unaudited) (Continued)
First Trust SSI Strategic Convertible Securities ETF (FCVT) (Continued)
| Sector Allocation | % of Total
Investments |
| Information Technology | 24.6% |
| Health Care | 16.3 |
| Consumer Discretionary | 10.6 |
| Communication Services | 10.6 |
| Financials | 10.5 |
| Industrials | 10.3 |
| Utilities | 5.3 |
| Energy | 5.1 |
| Real Estate | 3.8 |
| Materials | 1.7 |
| Consumer Staples | 1.2 |
| Total | 100.0% |
| Top Ten Holdings | % of Total
Investments |
| Palo Alto Networks, Inc., 6/1/25 | 2.5% |
| Snap, Inc., 3/1/28 | 2.0 |
| Wells Fargo & Co., Series L | 1.9 |
| Uber Technologies, Inc., 12/15/25 | 1.7 |
| DexCom, Inc., 11/15/25 | 1.7 |
| ON Semiconductor Corp., 3/1/29 | 1.6 |
| Workiva, Inc., 8/15/28 | 1.3 |
| NCL Corp., Ltd., 2/15/27 | 1.3 |
| Liberty Media Corp., 9/30/53 | 1.3 |
| Pioneer Natural Resources Co., 5/15/25 | 1.3 |
| Total | 16.6% |
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.
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.
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Frequency Distribution of Discounts and Premiums
Information showing the number of days the market price of the Fund’s shares was greater (at a premium) and less (at a discount) than the Fund’s net asset value for the most recently completed year, and the most recently completed calendar quarters since that year (or life of the Fund, if shorter), is available at https://www.ftportfolios.com/Retail/etf/home.aspx.
Portfolio Commentary
First Trust SSI Strategic Convertible Securities ETF (FCVT)
Annual Report
October 31, 2023 (Unaudited)
Advisor
First Trust Advisors L.P. (“First Trust” or the “Advisor”) serves as the investment advisor to the First Trust SSI Strategic Convertible Securities ETF (the “Fund”). First Trust is responsible for the ongoing monitoring of the Fund’s investment portfolio, managing the Fund’s business affairs and providing certain administrative services necessary for the management of the Fund.
Sub-Advisor
SSI Investment Management LLC
SSI Investment Management LLC (“SSI” or the “Sub-Advisor”) is the sub-advisor to the Fund and is a registered investment advisor based in Los Angeles, California. SSI is an innovative investment management firm specializing in alternative investment solutions utilizing convertible assets, equity securities and hedging strategies.
Portfolio Management Team
The following persons serve as portfolio managers of the Fund.
George M. Douglas – CFA, Principal and Chief Investment Officer of SSI
Ravi Malik – CFA, Principal and Portfolio Manager of SSI
Michael J. Opre – CFA, Portfolio Manager of SSI
Florian Eitner – CFA, Portfolio Manager of SSI
Stephen R. Wachtel – CFA, Portfolio Manager of SSI
The portfolio managers are primarily and jointly responsible for the day-to-day management of the Fund. Each portfolio manager has served as part of the portfolio management team of the Fund since 2015, except for Mr. Wachtel, who has served as part of the Fund’s portfolio management team since 2020.
Commentary
Market Recap – For the 12-month period ended October 31, 2023:
| • | Declining inflation, continued monetary tightening by the Federal Reserve (the “Fed”) and flat earnings growth have acted as crosscurrents for the economy and capital markets. |
| • | U.S. real gross domestic product expanded by 4.9% in the third quarter of 2023, suggesting a near term recession is unlikely, in our opinion. |
| • | Corporate earnings growth is expected to be flat in 2023, before rebounding by 11% in 2024. |
| • | High Yield credit spreads narrowed by 27 basis points (“bps”). |
| • | Ten-year Treasury yields rose 88 bps to 4.93% as potential rate cuts were postponed and economic activity exceeded expectations. |
| • | Within the convertible universe, the Energy, Technology and Financials sectors outperformed, while the Transportation, Materials and Utilities sectors lagged. |
| • | Mid cap and yield alternatives convertibles outperformed. |
| • | Convertible new issuance rebounded from $39 billion in fiscal year 2022 to $50 billion in fiscal year 2023. |
Fund Performance
| • | Convertible performance was driven by mixed returns in equities and positive returns in high yield markets for the 12-month period ended October 31, 2023. The S&P 500® Index rose 10.14%, while the Russell 2000® Index fell 8.56% and the Bloomberg High Yield Index rose 6.23%, for the same period. |
| • | Fixed income posted slight positive returns with the Bloomberg US Aggregate Bond Index up 0.36% for the 12-month period ended October 31, 2023. |
Portfolio Commentary (Continued)
First Trust SSI Strategic Convertible Securities ETF (FCVT)
Annual Report
October 31, 2023 (Unaudited)
| • | On a one-year trailing basis, as of October 31, 2023, the Fund generated a net loss of 6.08% based on net asset value, while the ICE BofA All US Convertible Index (VXA0) (the “Benchmark”) declined 0.48%. |
| • | The Fund has historically emphasized balanced bonds while also overweighting higher quality, larger cap companies. During the 12-month period ended October 31, 2023, these market segments underperformed, causing portfolio returns to trail the Benchmark. |
| • | An underweight in the Utilities sector had the largest contribution to the Fund’s relative returns, while security selection in the Consumer Discretionary sector also aided relative returns for the 12-month period ended October 31, 2023. |
| • | For the same period, security selection in the Health Care and Information Technology sectors were the largest detractors to the Fund’s relative returns. |
Investment Outlook
| • | In our opinion, the Fed appears to be at the end of the current tightening cycle, although it has indicated that rates are likely to remain “higher for longer.” |
| • | Interest rates have moved up substantially, but inflation is in a downtrend and the economy has performed better than most investors expected. |
| • | Corporations are benefitting from the stronger economy and earnings are expected to rebound. |
| • | From a structural perspective, we believe the convertible market is attractively positioned to capture the upside in the markets while providing downside protection. Equity sensitivity and investment value premium for the convertible market are near or at multi-year lows. |
| • | Given the current environment, the Fund selectively increased exposure to yield-oriented convertibles. |
| • | The Fund’s portfolio is overweight the Industrials, Energy and Media sectors, while the Utilities and Consumer Discretionary sectors are the largest underweights. |
| • | Both portfolio duration (1.98 years) and credit quality (BB-) are generally in line with the Benchmark. |
| • | We believe convertibles offer significant participation if the markets, especially small and mid-cap stocks, resume their upward trend, but can also offer income and downside protection if the market is range-bound or experiences a downturn. |
First Trust SSI Strategic Convertible Securities ETF (FCVT)
Understanding Your Fund Expenses
October 31, 2023 (Unaudited)
As a shareholder of the First Trust SSI Strategic Convertible Securities ETF (the “Fund”), you incur two types of costs: (1) transaction costs; and (2) ongoing costs, including management fees, distribution and/or service (12b-1) fees, if any, and other Fund expenses. This Example is intended to help you understand your ongoing costs of investing in the Fund and to compare these costs with the ongoing costs of investing in other funds.
The Example is based on an investment of $1,000 invested at the beginning of the period and held through the six-month period ended October 31, 2023.
Actual Expenses
The first line in the following table provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During the Six-Month Period” to estimate the expenses you paid on your account during this six-month period.
Hypothetical Example for Comparison Purposes
The second line in the following table provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs such as brokerage commissions. Therefore, the second line in the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
| | Beginning
Account Value
May 1, 2023 | Ending
Account Value
October 31, 2023 | Annualized
Expense Ratio
Based on the
Six-Month
Period | Expenses Paid
During the
Six-Month
Period (a) |
| First Trust SSI Strategic Convertible Securities ETF (FCVT) |
| Actual | $1,000.00 | $952.70 | 0.95% | $4.68 |
| Hypothetical (5% return before expenses) | $1,000.00 | $1,020.42 | 0.95% | $4.84 |
| (a) | Expenses are equal to the annualized expense ratios as indicated in the table multiplied by the average account value over the period (May 1, 2023 through October 31, 2023), multiplied by 184/365 (to reflect the six-month period). |
First Trust SSI Strategic Convertible Securities ETF (FCVT)
Portfolio of Investments
October 31, 2023
Principal
Value | | Description | | Stated
Coupon | | Stated
Maturity | | Value |
| CONVERTIBLE CORPORATE BONDS – 91.4% |
| | | Aerospace & Defense – 1.8% | | | | | | |
| $750,000 | | Axon Enterprise, Inc. (a)
| | 0.50% | | 12/15/27 | | $808,875 |
| 593,000 | | JPMorgan Chase Financial Co., LLC
| | 0.50% | | 06/15/27 | | 656,451 |
| | | | | 1,465,326 |
| | | Air Freight & Logistics – 0.5% | | | | | | |
| 404,000 | | Air Transport Services Group, Inc. (a)
| | 3.88% | | 08/15/29 | | 374,912 |
| | | Automobile Components – 0.5% | | | | | | |
| 443,000 | | Patrick Industries, Inc.
| | 1.75% | | 12/01/28 | | 418,857 |
| | | Automobiles – 1.9% | | | | | | |
| 885,000 | | Ford Motor Co.
| | (b) | | 03/15/26 | | 811,987 |
| 675,000 | | Rivian Automotive, Inc. (a)
| | 4.63% | | 03/15/29 | | 713,138 |
| | | | | 1,525,125 |
| | | Banks – 0.7% | | | | | | |
| 540,000 | | Morgan Stanley Finance LLC
| | 1.00% | | 11/23/27 | | 538,910 |
| | | Biotechnology – 7.2% | | | | | | |
| 400,000 | | Alnylam Pharmaceuticals, Inc.
| | 1.00% | | 09/15/27 | | 347,815 |
| 405,000 | | Ascendis Pharma A/S
| | 2.25% | | 04/01/28 | | 358,931 |
| 392,000 | | BioMarin Pharmaceutical, Inc.
| | 1.25% | | 05/15/27 | | 378,846 |
| 555,000 | | Bridgebio Pharma, Inc.
| | 2.25% | | 02/01/29 | | 408,735 |
| 393,000 | | Cytokinetics, Inc.
| | 3.50% | | 07/01/27 | | 362,346 |
| 1,068,000 | | Exact Sciences Corp.
| | 0.38% | | 03/01/28 | | 887,783 |
| 366,000 | | Exact Sciences Corp. (a)
| | 2.00% | | 03/01/30 | | 377,163 |
| 745,000 | | Halozyme Therapeutics, Inc.
| | 1.00% | | 08/15/28 | | 653,738 |
| 635,000 | | Insmed, Inc.
| | 0.75% | | 06/01/28 | | 614,045 |
| 348,000 | | Mirum Pharmaceuticals, Inc. (a)
| | 4.00% | | 05/01/29 | | 406,508 |
| 309,000 | | Natera, Inc.
| | 2.25% | | 05/01/27 | | 377,366 |
| 210,000 | | Neurocrine Biosciences, Inc.
| | 2.25% | | 05/15/24 | | 309,750 |
| 486,000 | | Sarepta Therapeutics, Inc.
| | 1.25% | | 09/15/27 | | 416,296 |
| | | | | 5,899,322 |
| | | Capital Markets – 1.7% | | | | | | |
| 550,000 | | Coinbase Global, Inc.
| | 0.50% | | 06/01/26 | | 418,610 |
| 780,000 | | Morgan Stanley Finance LLC
| | 0.13% | | 02/07/28 | | 933,808 |
| | | | | 1,352,418 |
| | | Commercial Services & Supplies – 0.6% | | | | | | |
| 480,000 | | Tetra Tech, Inc. (a)
| | 2.25% | | 08/15/28 | | 466,798 |
| | | Construction & Engineering – 1.6% | | | | | | |
| 838,000 | | Fluor Corp. (a)
| | 1.13% | | 08/15/29 | | 808,460 |
| 488,000 | | Granite Construction, Inc. (a)
| | 3.75% | | 05/15/28 | | 524,112 |
| | | | | 1,332,572 |
| | | Consumer Finance – 2.4% | | | | | | |
| 407,000 | | Bread Financial Holdings, Inc. (a)
| | 4.25% | | 06/15/28 | | 370,027 |
| 520,000 | | LendingTree, Inc.
| | 0.50% | | 07/15/25 | | 410,800 |
| 780,000 | | SoFi Technologies, Inc. (a)
| | (b) | | 10/15/26 | | 590,850 |
| 944,000 | | Upstart Holdings, Inc.
| | 0.25% | | 08/15/26 | | 600,384 |
| | | | | 1,972,061 |
| | | Consumer Staples Distribution & Retail – 0.3% | | | | | | |
| 345,000 | | Chefs’ (The) Warehouse, Inc. (a)
| | 2.38% | | 12/15/28 | | 266,340 |
See Notes to Financial Statements
Page 7
First Trust SSI Strategic Convertible Securities ETF (FCVT)
Portfolio of Investments (Continued)
October 31, 2023
Principal
Value | | Description | | Stated
Coupon | | Stated
Maturity | | Value |
| CONVERTIBLE CORPORATE BONDS (Continued) |
| | | Diversified Consumer Services – 0.8% | | | | | | |
| $525,000 | | Stride, Inc.
| | 1.13% | | 09/01/27 | | $622,913 |
| | | Electric Utilities – 2.8% | | | | | | |
| 775,000 | | Duke Energy Corp. (a)
| | 4.13% | | 04/15/26 | | 756,532 |
| 640,000 | | FirstEnergy Corp. (a)
| | 4.00% | | 05/01/26 | | 624,640 |
| 963,000 | | Southern (The) Co. (a)
| | 3.88% | | 12/15/25 | | 949,518 |
| | | | | 2,330,690 |
| | | Electrical Equipment – 1.1% | | | | | | |
| 470,000 | | Array Technologies, Inc.
| | 1.00% | | 12/01/28 | | 453,080 |
| 515,000 | | Bloom Energy Corp. (a)
| | 3.00% | | 06/01/28 | | 445,056 |
| | | | | 898,136 |
| | | Electronic Equipment, Instruments & Components – 1.3% | | | | | | |
| 370,000 | | Advanced Energy Industries, Inc. (a)
| | 2.50% | | 09/15/28 | | 343,644 |
| 550,000 | | Itron, Inc.
| | (b) | | 03/15/26 | | 467,263 |
| 278,000 | | Vishay Intertechnology, Inc. (a)
| | 2.25% | | 09/15/30 | | 255,724 |
| | | | | 1,066,631 |
| | | Energy Equipment & Services – 1.7% | | | | | | |
| 375,000 | | Helix Energy Solutions Group, Inc.
| | 6.75% | | 02/15/26 | | 587,062 |
| 512,000 | | Transocean, Inc.
| | 4.00% | | 12/15/25 | | 774,588 |
| | | | | 1,361,650 |
| | | Entertainment – 1.8% | | | | | | |
| 450,000 | | IMAX Corp.
| | 0.50% | | 04/01/26 | | 409,741 |
| 655,000 | | Liberty Media Corp-Liberty Formula One
| | 2.25% | | 08/15/27 | | 659,730 |
| 503,000 | | Spotify USA, Inc.
| | (b) | | 03/15/26 | | 431,889 |
| | | | | 1,501,360 |
| | | Financial Services – 1.8% | | | | | | |
| 698,000 | | Affirm Holdings, Inc.
| | (b) | | 11/15/26 | | 501,234 |
| 576,000 | | Block, Inc.
| | 0.25% | | 11/01/27 | | 433,440 |
| 685,000 | | Repay Holdings Corp. (a)
| | (b) | | 02/01/26 | | 549,062 |
| | | | | 1,483,736 |
| | | Food Products – 0.3% | | | | | | |
| 221,000 | | Freshpet, Inc. (a)
| | 3.00% | | 04/01/28 | | 236,746 |
| | | Ground Transportation – 1.7% | | | | | | |
| 1,490,000 | | Uber Technologies, Inc.
| | (b) | | 12/15/25 | | 1,361,527 |
| | | Health Care Equipment & Supplies – 7.0% | | | | | | |
| 807,000 | | Alphatec Holdings, Inc.
| | 0.75% | | 08/01/26 | | 689,481 |
| 566,000 | | CONMED Corp.
| | 2.25% | | 06/15/27 | | 530,059 |
| 1,380,000 | | DexCom, Inc.
| | 0.25% | | 11/15/25 | | 1,311,000 |
| 903,000 | | DexCom, Inc. (a)
| | 0.38% | | 05/15/28 | | 798,252 |
| 404,000 | | Envista Holdings Corp. (a)
| | 1.75% | | 08/15/28 | | 349,864 |
| 570,000 | | Haemonetics Corp.
| | (b) | | 03/01/26 | | 491,653 |
| 430,000 | | Integer Holdings Corp. (a)
| | 2.13% | | 02/15/28 | | 473,755 |
| 446,000 | | Lantheus Holdings, Inc. (a)
| | 2.63% | | 12/15/27 | | 495,472 |
| 402,000 | | Shockwave Medical, Inc. (a)
| | 1.00% | | 08/15/28 | | 390,342 |
| 240,000 | | TransMedics Group, Inc. (a)
| | 1.50% | | 06/01/28 | | 185,497 |
| | | | | 5,715,375 |
Page 8
See Notes to Financial Statements
First Trust SSI Strategic Convertible Securities ETF (FCVT)
Portfolio of Investments (Continued)
October 31, 2023
Principal
Value | | Description | | Stated
Coupon | | Stated
Maturity | | Value |
| CONVERTIBLE CORPORATE BONDS (Continued) |
| | | Health Care REITs – 1.4% | | | | | | |
| $710,000 | | Ventas Realty L.P. (a)
| | 3.75% | | 06/01/26 | | $698,640 |
| 421,000 | | Welltower OP, LLC (a)
| | 2.75% | | 05/15/28 | | 433,630 |
| | | | | 1,132,270 |
| | | Hotel & Resort REITs – 1.1% | | | | | | |
| 512,000 | | Pebblebrook Hotel Trust
| | 1.75% | | 12/15/26 | | 405,818 |
| 575,000 | | Summit Hotel Properties, Inc.
| | 1.50% | | 02/15/26 | | 478,798 |
| | | | | 884,616 |
| | | Hotels, Restaurants & Leisure – 5.1% | | | | | | |
| 400,000 | | Booking Holdings, Inc.
| | 0.75% | | 05/01/25 | | 611,545 |
| 293,000 | | Carnival Corp. (a)
| | 5.75% | | 12/01/27 | | 348,345 |
| 485,000 | | Cheesecake (The) Factory, Inc.
| | 0.38% | | 06/15/26 | | 404,862 |
| 660,000 | | DraftKings Holdings, Inc.
| | (b) | | 03/15/28 | | 496,980 |
| 1,330,000 | | NCL Corp., Ltd.
| | 1.13% | | 02/15/27 | | 1,037,181 |
| 470,000 | | Royal Caribbean Cruises Ltd.
| | 6.00% | | 08/15/25 | | 860,335 |
| 588,000 | | Shake Shack, Inc.
| | (b) | | 03/01/28 | | 433,650 |
| | | | | 4,192,898 |
| | | Independent Power & Renewable Electricity Producers – 0.3% | | | | | | |
| 524,000 | | Sunnova Energy International, Inc.
| | 2.63% | | 02/15/28 | | 255,974 |
| | | Interactive Media & Services – 3.6% | | | | | | |
| 1,150,000 | | Liberty TripAdvisor Holdings, Inc. (a)
| | 0.50% | | 06/30/51 | | 914,250 |
| 510,000 | | Match Group Financeco 3, Inc. (a)
| | 2.00% | | 01/15/30 | | 414,689 |
| 2,380,000 | | Snap, Inc.
| | 0.13% | | 03/01/28 | | 1,624,350 |
| | | | | 2,953,289 |
| | | IT Services – 4.2% | | | | | | |
| 575,000 | | Akamai Technologies, Inc.
| | 0.13% | | 05/01/25 | | 668,333 |
| 911,000 | | Akamai Technologies, Inc. (a)
| | 1.13% | | 02/15/29 | | 899,613 |
| 780,000 | | DigitalOcean Holdings, Inc.
| | (b) | | 12/01/26 | | 587,360 |
| 505,000 | | MongoDB, Inc.
| | 0.25% | | 01/15/26 | | 862,161 |
| 530,000 | | Perficient, Inc.
| | 0.13% | | 11/15/26 | | 426,308 |
| | | | | 3,443,775 |
| | | Media – 4.8% | | | | | | |
| 845,000 | | Cable One, Inc.
| | 1.13% | | 03/15/28 | | 628,257 |
| 378,000 | | DISH Network Corp.
| | 2.38% | | 03/15/24 | | 362,880 |
| 815,000 | | DISH Network Corp.
| | (b) | | 12/15/25 | | 501,241 |
| 1,336,000 | | DISH Network Corp.
| | 3.38% | | 08/15/26 | | 691,380 |
| 720,000 | | Liberty Broadband Corp. (a)
| | 3.13% | | 03/31/53 | | 717,774 |
| 1,065,000 | | Liberty Media Corp. (a)
| | 2.38% | | 09/30/53 | | 1,034,115 |
| | | | | 3,935,647 |
| | | Metals & Mining – 1.7% | | | | | | |
| 195,000 | | ATI, Inc.
| | 3.50% | | 06/15/25 | | 482,625 |
| 323,000 | | Ivanhoe Mines Ltd. (a)
| | 2.50% | | 04/15/26 | | 379,047 |
| 625,000 | | MP Materials Corp. (a)
| | 0.25% | | 04/01/26 | | 518,169 |
| | | | | 1,379,841 |
| | | Multi-Utilities – 0.5% | | | | | | |
| 410,000 | | CenterPoint Energy, Inc. (a)
| | 4.25% | | 08/15/26 | | 402,415 |
| | | Oil, Gas & Consumable Fuels – 3.2% | | | | | | |
| 259,000 | | EQT Corp.
| | 1.75% | | 05/01/26 | | 751,615 |
See Notes to Financial Statements
Page 9
First Trust SSI Strategic Convertible Securities ETF (FCVT)
Portfolio of Investments (Continued)
October 31, 2023
Principal
Value | | Description | | Stated
Coupon | | Stated
Maturity | | Value |
| CONVERTIBLE CORPORATE BONDS (Continued) |
| | | Oil, Gas & Consumable Fuels (Continued) | | | | | | |
| $735,000 | | Northern Oil and Gas, Inc.
| | 3.63% | | 04/15/29 | | $869,505 |
| 403,000 | | Pioneer Natural Resources Co.
| | 0.25% | | 05/15/25 | | 1,029,291 |
| | | | | 2,650,411 |
| | | Passenger Airlines – 1.0% | | | | | | |
| 438,000 | | American Airlines Group, Inc.
| | 6.50% | | 07/01/25 | | 445,884 |
| 646,000 | | JetBlue Airways Corp.
| | 0.50% | | 04/01/26 | | 402,938 |
| | | | | 848,822 |
| | | Personal Care Products – 0.6% | | | | | | |
| 640,000 | | Beauty Health (The) Co. (a)
| | 1.25% | | 10/01/26 | | 482,319 |
| | | Pharmaceuticals – 1.6% | | | | | | |
| 370,000 | | Amphastar Pharmaceuticals, Inc. (a)
| | 2.00% | | 03/15/29 | | 362,045 |
| 597,000 | | Jazz Investments I Ltd.
| | 2.00% | | 06/15/26 | | 605,955 |
| 433,000 | | Revance Therapeutics, Inc.
| | 1.75% | | 02/15/27 | | 326,196 |
| | | | | 1,294,196 |
| | | Professional Services – 0.7% | | | | | | |
| 415,000 | | Parsons Corp.
| | 0.25% | | 08/15/25 | | 543,235 |
| | | Real Estate Management & Development – 1.2% | | | | | | |
| 985,000 | | Zillow Group, Inc.
| | 2.75% | | 05/15/25 | | 958,928 |
| | | Semiconductors & Semiconductor Equipment – 4.3% | | | | | | |
| 399,000 | | Impinj, Inc.
| | 1.13% | | 05/15/27 | | 369,568 |
| 460,000 | | MACOM Technology Solutions Holdings, Inc.
| | 0.25% | | 03/15/26 | | 479,780 |
| 1,467,000 | | ON Semiconductor Corp. (a)
| | 0.50% | | 03/01/29 | | 1,290,960 |
| 400,000 | | SK Hynix, Inc. (c)
| | 1.75% | | 04/11/30 | | 484,500 |
| 260,000 | | SMART Global Holdings, Inc.
| | 2.00% | | 02/01/29 | | 228,233 |
| 1,050,000 | | Wolfspeed, Inc. (a)
| | 1.88% | | 12/01/29 | | 630,000 |
| | | | | 3,483,041 |
| | | Software – 13.4% | | | | | | |
| 466,000 | | Barclays Bank PLC
| | (b) | | 02/04/25 | | 804,816 |
| 615,000 | | Bentley Systems, Inc.
| | 0.13% | | 01/15/26 | | 585,826 |
| 760,000 | | BILL Holdings, Inc.
| | (b) | | 12/01/25 | | 722,950 |
| 647,000 | | CyberArk Software Ltd.
| | (b) | | 11/15/24 | | 742,753 |
| 720,000 | | Datadog, Inc.
| | 0.13% | | 06/15/25 | | 796,320 |
| 595,000 | | Dropbox, Inc.
| | (b) | | 03/01/28 | | 552,978 |
| 381,000 | | HubSpot, Inc.
| | 0.38% | | 06/01/25 | | 596,074 |
| 413,000 | | MicroStrategy, Inc.
| | 0.75% | | 12/15/25 | | 518,675 |
| 528,000 | | MicroStrategy, Inc.
| | (b) | | 02/15/27 | | 384,554 |
| 345,000 | | Nutanix, Inc.
| | 0.25% | | 10/01/27 | | 310,155 |
| 260,000 | | PagerDuty, Inc. (a)
| | 1.50% | | 10/15/28 | | 255,710 |
| 798,000 | | Palo Alto Networks, Inc.
| | 0.38% | | 06/01/25 | | 1,952,706 |
| 373,000 | | Rapid7, Inc. (a)
| | 1.25% | | 03/15/29 | | 360,504 |
| 375,000 | | Tyler Technologies, Inc.
| | 0.25% | | 03/15/26 | | 357,759 |
| 211,000 | | Varonis Systems, Inc.
| | 1.25% | | 08/15/25 | | 262,273 |
| 1,144,000 | | Workiva, Inc. (a)
| | 1.25% | | 08/15/28 | | 1,040,468 |
| 609,000 | | Zscaler, Inc.
| | 0.13% | | 07/01/25 | | 744,807 |
| | | | | 10,989,328 |
| | | Specialty Retail – 2.0% | | | | | | |
| 476,000 | | Burlington Stores, Inc. (a)
| | 1.25% | | 12/15/27 | | 426,496 |
| 805,000 | | Wayfair, Inc.
| | 1.00% | | 08/15/26 | | 608,580 |
Page 10
See Notes to Financial Statements
First Trust SSI Strategic Convertible Securities ETF (FCVT)
Portfolio of Investments (Continued)
October 31, 2023
Principal
Value | | Description | | Stated
Coupon | | Stated
Maturity | | Value |
| CONVERTIBLE CORPORATE BONDS (Continued) |
| | | Specialty Retail (Continued) | | | | | | |
| $655,000 | | Wayfair, Inc.
| | 3.25% | | 09/15/27 | | $630,437 |
| | | | | 1,665,513 |
| | | Technology Hardware, Storage & Peripherals – 0.7% | | | | | | |
| 544,000 | | Seagate HDD Cayman (a)
| | 3.50% | | 06/01/28 | | 566,576 |
| | | Water Utilities – 0.5% | | | | | | |
| 420,000 | | American Water Capital Corp. (a)
| | 3.63% | | 06/15/26 | | 406,215 |
| | | Total Convertible Corporate Bonds
| | 74,660,714 |
| | | (Cost $75,831,005) | | | | | | |
| Shares | | Description | | Stated
Rate | | Stated
Maturity | | Value |
| CONVERTIBLE PREFERRED SECURITIES – 5.8% |
| | | Banks – 2.7% | | | | | | |
| 640 | | Bank of America Corp., Series L
| | 7.25% | | (d) | | 674,048 |
| 1,460 | | Wells Fargo & Co., Series L
| | 7.50% | | (d) | | 1,542,198 |
| | | | | 2,216,246 |
| | | Electric Utilities – 1.0% | | | | | | |
| 21,775 | | NextEra Energy, Inc.
| | 6.93% | | 09/01/25 | | 817,433 |
| | | Financial Services – 1.0% | | | | | | |
| 16,550 | | Apollo Global Management, Inc.
| | 6.75% | | 07/31/26 | | 796,221 |
| | | Machinery – 1.1% | | | | | | |
| 10,400 | | Chart Industries, Inc., Series B
| | 6.75% | | 12/15/25 | | 511,264 |
| 3,810 | | RBC Bearings, Inc., Series A
| | 5.00% | | 10/15/24 | | 400,774 |
| | | | | 912,038 |
| | | Total Convertible Preferred Securities
| | 4,741,938 |
| | | (Cost $5,392,195) | | | | | | |
| | | Total Investments – 97.2%
| | 79,402,652 |
| | | (Cost $81,223,200) | | | | | | |
| | Net Other Assets and Liabilities – 2.8%
| | 2,287,336 |
| | Net Assets – 100.0%
| | $81,689,988 |
| (a) | This security, sold within the terms of a private placement memorandum, is exempt from registration upon resale under Rule 144A of the Securities Act of 1933, as amended (the “1933 Act”), and may be resold in transactions exempt from registration, normally to qualified institutional buyers. Pursuant to procedures adopted by the Trust’s Board of Trustees, this security has been determined to be liquid by First Trust Advisors L.P. (the “Advisor”). Although market instability can result in periods of increased overall market illiquidity, liquidity for each security is determined based on security specific factors and assumptions, which require subjective judgment. At October 31, 2023, securities noted as such amounted to $25,143,267 or 30.8% of net assets. |
| (b) | Zero coupon security. |
| (c) | This security may be resold to qualified foreign investors and foreign institutional buyers under Regulation S of the 1933 Act. |
| (d) | Perpetual maturity. |
See Notes to Financial Statements
Page 11
First Trust SSI Strategic Convertible Securities ETF (FCVT)
Portfolio of Investments (Continued)
October 31, 2023
Valuation Inputs
A summary of the inputs used to value the Fund’s investments as of October 31, 2023 is as follows (see Note 2A - Portfolio Valuation in the Notes to Financial Statements):
| | Total
Value at
10/31/2023 | Level 1
Quoted
Prices | Level 2
Significant
Observable
Inputs | Level 3
Significant
Unobservable
Inputs |
Convertible Corporate Bonds*
| $ 74,660,714 | $ — | $ 74,660,714 | $ — |
Convertible Preferred Securities*
| 4,741,938 | 4,741,938 | — | — |
Total Investments
| $ 79,402,652 | $ 4,741,938 | $ 74,660,714 | $— |
| * | See Portfolio of Investments for industry breakout. |
Page 12
See Notes to Financial Statements
First Trust SSI Strategic Convertible Securities ETF (FCVT)
Statement of Assets and Liabilities
October 31, 2023
| ASSETS: | |
Investments, at value
| $ 79,402,652 |
Cash
| 1,304,256 |
| Receivables: | |
Investment securities sold
| 758,785 |
Interest
| 292,920 |
Total Assets
| 81,758,613 |
| LIABILITIES: | |
Investment advisory fees payable
| 68,625 |
Total Liabilities
| 68,625 |
NET ASSETS
| $81,689,988 |
| NET ASSETS consist of: | |
Paid-in capital
| $ 113,023,621 |
Par value
| 27,500 |
Accumulated distributable earnings (loss)
| (31,361,133) |
NET ASSETS
| $81,689,988 |
NET ASSET VALUE, per share
| $29.71 |
Number of shares outstanding (unlimited number of shares authorized, par value $0.01 per share)
| 2,750,002 |
Investments, at cost
| $81,223,200 |
See Notes to Financial Statements
Page 13
First Trust SSI Strategic Convertible Securities ETF (FCVT)
Statement of Operations
For the Year Ended October 31, 2023
| INVESTMENT INCOME: | |
Dividends
| $ 647,626 |
Foreign withholding tax
| (51) |
Interest
| (1,075,435) |
Total investment income
| (427,860) |
| EXPENSES: | |
Investment advisory fees
| 1,111,427 |
Total expenses
| 1,111,427 |
NET INVESTMENT INCOME (LOSS)
| (1,539,287) |
| NET REALIZED AND UNREALIZED GAIN (LOSS): | |
| Net realized gain (loss) on: | |
Investments
| (2,813,986) |
In-kind redemptions
| (312,823) |
Foreign currency transactions
| 18,031 |
Net realized gain (loss)
| (3,108,778) |
| Net change in unrealized appreciation (depreciation) on: | |
Investments
| (572,700) |
Foreign currency translation
| 114 |
Net change in unrealized appreciation (depreciation)
| (572,586) |
NET REALIZED AND UNREALIZED GAIN (LOSS)
| (3,681,364) |
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS
| $(5,220,651) |
Page 14
See Notes to Financial Statements
First Trust SSI Strategic Convertible Securities ETF (FCVT)
Statements of Changes in Net Assets
| | Year
Ended
10/31/2023 | | Year
Ended
10/31/2022 |
| OPERATIONS: | | | |
Net investment income (loss)
| $ (1,539,287) | | $ (7,119,395) |
Net realized gain (loss)
| (3,108,778) | | 16,463,008 |
Net change in unrealized appreciation (depreciation)
| (572,586) | | (67,343,746) |
Net increase (decrease) in net assets resulting from operations
| (5,220,651) | | (58,000,133) |
| DISTRIBUTIONS TO SHAREHOLDERS FROM: | | | |
Investment operations
| (1,784,251) | | (51,468,060) |
| SHAREHOLDER TRANSACTIONS: | | | |
Proceeds from shares sold
| — | | 141,338,091 |
Cost of shares redeemed
| (84,759,126) | | (163,876,174) |
Net increase (decrease) in net assets resulting from shareholder transactions
| (84,759,126) | | (22,538,083) |
Total increase (decrease) in net assets
| (91,764,028) | | (132,006,276) |
| NET ASSETS: | | | |
Beginning of period
| 173,454,016 | | 305,460,292 |
End of period
| $81,689,988 | | $173,454,016 |
| CHANGES IN SHARES OUTSTANDING: | | | |
Shares outstanding, beginning of period
| 5,400,002 | | 5,850,002 |
Shares sold
| — | | 3,500,000 |
Shares redeemed
| (2,650,000) | | (3,950,000) |
Shares outstanding, end of period
| 2,750,002 | | 5,400,002 |
See Notes to Financial Statements
Page 15
First Trust SSI Strategic Convertible Securities ETF (FCVT)
Financial Highlights
For a share outstanding throughout each period
| | Year EndedOctober 31, |
| 2023 | | 2022 | | 2021 | | 2020 | | 2019 |
Net asset value, beginning of period
| $ 32.12 | | $ 52.22 | | $ 40.14 | | $ 31.57 | | $ 28.72 |
| Income from investment operations: | | | | | | | | | |
Net investment income (loss)
| (0.42) (a) | | (1.39) | | (1.33) | | (0.55) | | (0.24) |
Net realized and unrealized gain (loss)
| (1.50) | | (8.63) | | 14.42 | | 9.65 | | 3.58 |
Total from investment operations
| (1.92) | | (10.02) | | 13.09 | | 9.10 | | 3.34 |
| Distributions paid to shareholders from: | | | | | | | | | |
Net investment income
| (0.49) | | (1.39) | | (0.62) | | (0.53) | | (0.49) |
Net realized gain
| — | | (8.69) | | (0.39) | | — | | — |
Total distributions
| (0.49) | | (10.08) | | (1.01) | | (0.53) | | (0.49) |
Net asset value, end of period
| $29.71 | | $32.12 | | $52.22 | | $40.14 | | $31.57 |
Total return (b)
| (6.08)% | | (22.76)% | | 32.74% | | 29.10% | | 11.72% |
| Ratios to average net assets/supplemental data: | | | | | | | | | |
Net assets, end of period (in 000’s)
| $ 81,690 | | $ 173,454 | | $ 305,460 | | $ 236,802 | | $ 194,158 |
Ratio of total expenses to average net assets
| 0.95% | | 0.95% | | 0.95% | | 0.95% | | 0.95% |
Ratio of net investment income (loss) to average net assets
| (1.32)% | | (3.44)% | | (2.60)% | | (1.36)% | | (0.63)% |
Portfolio turnover rate (c)
| 90% | | 94% | | 135% | | 119% | | 64% |
| (a) | Based on average shares outstanding. |
| (b) | Total return is calculated assuming an initial investment made at the net asset value at the beginning of the period, reinvestment of all distributions at net asset value during the period, and redemption at net asset value on the last day of the period. The returns presented do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. Total return is calculated for the time period presented and is not annualized for periods of less than a year. |
| (c) | 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 16
See Notes to Financial Statements
Notes to Financial Statements
First Trust SSI Strategic Convertible Securities ETF (FCVT)
October 31, 2023
1. Organization
First Trust Exchange-Traded Fund IV (the “Trust”) is an open-end management investment company organized as a Massachusetts business trust on September 15, 2010, and is registered with the Securities and Exchange Commission under the Investment Company Act of 1940, as amended (the “1940 Act”).
The Trust currently consists of eighteen funds that are offering shares. This report covers the First Trust SSI Strategic Convertible Securities ETF (the “Fund”), a diversified series of the Trust, which trades under the ticker “FCVT” on Nasdaq, Inc. (“Nasdaq”). Unlike conventional mutual funds, the Fund issues and redeems shares on a continuous basis, at net asset value (“NAV”), only in large blocks of shares known as “Creation Units.”
The Fund is an actively managed exchange-traded fund. The investment objective of the Fund is to seek total return. 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 a portfolio of U.S. and non-U.S. convertible securities. There can be no assurances that the Fund will achieve its investment objective. The Fund may not be appropriate for all investors.
2. Significant Accounting Policies
The Fund is considered an investment company and follows accounting and reporting guidance under Financial Accounting Standards Board Accounting Standards Codification Topic 946, “Financial Services-Investment Companies.” The 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 readily available market quotations such as last sale or official closing prices from a national or foreign exchange (i.e., a regulated market) and are primarily obtained from third-party pricing services. Fair value prices represent any prices not considered market value prices and are either obtained from a third-party pricing service or are determined by the Pricing Committee of the Fund’s investment advisor, First Trust Advisors L.P. (“First Trust” or the “Advisor”), in accordance with valuation procedures approved by the Trust’s Board of Trustees, and in accordance with provisions of the 1940 Act and rules thereunder. Investments valued by the Advisor’s Pricing Committee, if any, are footnoted as such in the footnotes to the Portfolio of Investments. The Fund’s investments are valued as follows:
Convertible preferred stocks and other equity securities listed on any national or foreign exchange (excluding Nasdaq and the London Stock Exchange Alternative Investment Market (“AIM”)) are valued at the last sale price on the exchange on which they are principally traded or, for Nasdaq and AIM securities, the official closing price. Securities traded on more than one securities exchange are valued at the last sale price or official closing price, as applicable, at the close of the securities exchange representing the primary exchange for such securities.
Convertible corporate 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 Advisor’s Pricing Committee, 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. |
Equity securities traded in an over-the-counter market are valued at the close price or the last trade price.
Notes to Financial Statements (Continued)
First Trust SSI Strategic Convertible Securities ETF (FCVT)
October 31, 2023
Fixed income and other debt securities having a remaining maturity of sixty 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 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.
Fair valuation of a debt security will be based on the consideration of all available information, including, but not limited to, the following:
| 1) | the most recent price provided by a pricing service; |
| 2) | the fundamental business data relating to the issuer; |
| 3) | an evaluation of the forces which influence the market in which these securities are purchased and sold; |
| 4) | the type, size and cost of the security; |
| 5) | the financial statements of the issuer; |
| 6) | the credit quality and cash flow of the issuer, based on the sub-advisor’s or external analysis; |
| 7) | the information as to any transactions in or offers for the security; |
| 8) | the price and extent of public trading in similar securities (or equity securities) of the issuer/borrower, or comparable companies; |
| 9) | the coupon payments; |
| 10) | the quality, value and salability of collateral, if any, securing the security; |
| 11) | 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; |
| 12) | the prospects for the issuer’s industry, and multiples (of earnings and/or cash flows) being paid for similar businesses in that industry; and |
| 13) | other relevant factors. |
Fair valuation of an equity security will be based on the consideration of all available information, including, but not limited to, the following:
| 1) | the last sale price on the exchange on which they are principally traded or, for Nasdaq and AIM securities, the official closing price; |
| 2) | the type of security; |
| 3) | the size of the holding; |
| 4) | the initial cost of the security; |
| 5) | transactions in comparable securities; |
| 6) | price quotes from dealers and/or third-party pricing services; |
| 7) | relationships among various securities; |
| 8) | information obtained by contacting the issuer, analysts, or the appropriate stock exchange; |
Notes to Financial Statements (Continued)
First Trust SSI Strategic Convertible Securities ETF (FCVT)
October 31, 2023
| 9) | an analysis of the issuer’s financial statements; |
| 10) | the existence of merger proposals or tender offers that might affect the value of the security; and |
| 11) | 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:
| • | Level 1 – Level 1 inputs are quoted prices in active markets for identical investments. An active market is a market in which transactions for the investment occur with sufficient frequency and volume to provide pricing information on an ongoing basis. |
| • | Level 2 – Level 2 inputs are observable inputs, either directly or indirectly, and include the following: |
| o | Quoted prices for similar investments in active markets. |
| o | Quoted prices for identical or similar investments in markets that are non-active. A non-active market is a market where there are few transactions for the investment, the prices are not current, or price quotations vary substantially either over time or among market makers, or in which little information is released publicly. |
| o | Inputs other than quoted prices that are observable for the investment (for example, interest rates and yield curves observable at commonly quoted intervals, volatilities, prepayment speeds, loss severities, credit risks, and default rates). |
| o | Inputs that are derived principally from or corroborated by observable market data by correlation or other means. |
| • | Level 3 – Level 3 inputs are unobservable inputs. Unobservable inputs may reflect the reporting entity’s own assumptions about the assumptions that market participants would use in pricing the investment. |
The inputs or methodologies used for valuing investments are not necessarily an indication of the risk associated with investing in those investments. A summary of the inputs used to value the Fund’s investments as of October 31, 2023, is included with the Fund’s Portfolio of Investments.
B. Securities Transactions and Investment Income
Securities transactions are recorded as of the trade date. Realized gains and losses from securities transactions are recorded on the identified cost basis. Dividend income is recorded on the ex-dividend date. Interest income is recorded daily on the accrual basis. Amortization of premiums and accretion of discounts are recorded using the effective interest method.
The Fund invests in convertible securities that are acquired at a price significantly above the principal value. Consequently, the amortization of premium may exceed the interest income earned on the securities.
C. Foreign Currency
The books and records of the Fund are maintained in U.S. dollars. Foreign currencies, investments and other assets and liabilities are translated into U.S. dollars at the exchange rates prevailing at the end of the period. Purchases and sales of investments and items of income and expense are translated on the respective dates of such transactions. Unrealized gains and losses on assets and liabilities, other than investments in securities, which result from changes in foreign currency exchange rates have been included in “Net change in unrealized appreciation (depreciation) on foreign currency translation” on the Statement of Operations. Unrealized gains and losses on investments in securities which result from changes in foreign exchange rates are included with fluctuations arising from changes in market price and are shown in “Net change in unrealized appreciation (depreciation) on investments” on the Statement of Operations. Net realized foreign currency gains and losses include the effect of changes in exchange rates between trade date and settlement date on investment security transactions, foreign currency transactions and interest and dividends received and are shown in “Net realized gain (loss) on foreign currency transactions” on the Statement of Operations. The portion of foreign currency gains and losses related to fluctuation in exchange rates between the initial purchase settlement date and subsequent sale trade date is included in “Net realized gain (loss) on investments” on the Statement of Operations.
D. Dividends and Distributions to Shareholders
Dividends from net investment income, if any, are declared and paid monthly by the Fund, or as the Board of Trustees may determine from time to time. Distributions of net realized capital gains earned by the Fund, if any, are distributed at least annually. The Fund may also designate a portion of the amount paid to redeeming shareholders as a distribution for tax purposes.
Distributions from net investment income and realized capital gains are determined in accordance with federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent
Notes to Financial Statements (Continued)
First Trust SSI Strategic Convertible Securities ETF (FCVT)
October 31, 2023
differences in order to reflect their tax character. These permanent differences are primarily due to the varying treatment of income and gain/loss on portfolio securities held by the Fund and have no impact on net assets or NAV per share. Temporary differences, which arise from recognizing certain items of income, expense and gain/loss in different periods for financial statement and tax purposes, will reverse at some time in the future.
The tax character of distributions paid by the Fund during the fiscal years ended October 31, 2023 and 2022, was as follows:
| Distributions paid from: | 2023 | 2022 |
Ordinary income
| $1,784,251 | $18,082,403 |
Capital gains
| — | 33,385,657 |
Return of capital
| — | — |
As of October 31, 2023, the components of distributable earnings on a tax basis were as follows:
Undistributed ordinary income
| $270,800 |
Accumulated capital and other gain (loss)
| (28,336,984) |
Net unrealized appreciation (depreciation)
| (3,294,949) |
E. Income Taxes
The Fund intends to continue to qualify as a regulated investment company by complying with the requirements under Subchapter M of the Internal Revenue Code of 1986, as amended, which includes distributing substantially all of its net investment income and net realized gains to shareholders. Accordingly, no provision has been made for federal and state income taxes. However, due to the timing and amount of distributions, the Fund may be subject to an excise tax of 4% of the amount by which approximately 98% of the Fund’s taxable income exceeds the distributions from such taxable income for the calendar year.
The Fund intends to utilize provisions of the federal income tax laws, which allow it to carry a realized capital loss forward indefinitely following the year of the loss and offset such loss against any future realized capital gains. The Fund is subject to certain limitations under U.S. tax rules on the use of capital loss carryforwards and net unrealized built-in losses. These limitations apply when there has been a 50% change in ownership. At October 31, 2023, for federal income tax purposes, the Fund had $28,336,984 of capital loss carryforwards available, to the extent provided by regulations, to offset future capital gains.
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, 2023, the Fund had no net ordinary losses.
The Fund is subject to accounting standards that establish a minimum threshold for recognizing, and a system for measuring, the benefits of a tax position taken or expected to be taken in a tax return. Taxable years ended 2020, 2021, 2022, and 2023 remain open to federal and state audit. As of October 31, 2023, management has evaluated the application of these standards to the Fund and has determined that no provision for income tax is required in the Fund’s financial statements for uncertain tax positions.
In order to present paid-in capital and accumulated distributable earnings (loss) (which consists of accumulated net investment income (loss), accumulated net realized gain (loss) on investments and net unrealized appreciation (depreciation) on investments) on the Statement of Assets and Liabilities that more closely represent their tax character, certain adjustments have been made to paid-in capital, accumulated net investment income (loss) and accumulated net realized gain (loss) on investments. These adjustments are primarily due to the difference between book and tax treatments of income and gains on various investment securities held by the Fund and in-kind transactions. The results of operations and net assets were not affected by these adjustments. For the fiscal year ended October 31, 2023, the adjustments for the Fund were as follows:
Accumulated
Net Investment
Income (Loss) | | Accumulated
Net Realized
Gain (Loss)
on Investments | | Paid-in
Capital |
| $6,190,693 | | $(5,877,868) | | $(312,825) |
Notes to Financial Statements (Continued)
First Trust SSI Strategic Convertible Securities ETF (FCVT)
October 31, 2023
As of October 31, 2023, the aggregate cost, gross unrealized appreciation, gross unrealized depreciation, and net unrealized appreciation/(depreciation) on investments (including short positions and derivatives, if any) for federal income tax purposes were as follows:
| Tax Cost | | Gross
Unrealized
Appreciation | | Gross
Unrealized
(Depreciation) | | Net Unrealized
Appreciation
(Depreciation) |
| $82,693,741 | | $3,697,772 | | $(6,988,861) | | $(3,291,089) |
F. Expenses
Expenses, other than the investment advisory fee and other excluded expenses, are paid by the Advisor (See Note 3).
3. Investment Advisory Fee, Affiliated Transactions and Other Fee Arrangements
First Trust, the investment advisor to the Fund, is a limited partnership with one limited partner, Grace Partners of DuPage L.P., and one general partner, The Charger Corporation. The Charger Corporation is an Illinois corporation controlled by James A. Bowen, Chief Executive Officer of First Trust. First Trust is responsible for supervising the selection and ongoing monitoring of the securities in the Fund’s portfolio, managing the Fund’s business affairs and providing certain administrative services necessary for the management of the Fund.
The Fund and First Trust have retained SSI Investment Management LLC (“SSI” or the “Sub-Advisor”) to serve as its investment sub-advisor. In this capacity, SSI is responsible for the selection and on-going monitoring of the securities in the Fund’s investment portfolio. Pursuant to the Investment Management Agreement between the Trust and the Advisor, First Trust will supervise SSI and its management of the investment of the Fund’s assets and will pay SSI for its services as the Fund’s sub-advisor. SSI receives a sub-advisory fee from First Trust equal to 50% of any remaining monthly investment management fee paid to First Trust after the average Fund expenses accrued during the most recent twelve months are subtracted from the investment management fee in a given month. During any period in which the Advisor’s management fee is reduced in accordance with the breakpoints described below, the investment sub-advisory fee (which is based on the Advisor’s management fee) paid to SSI will be reduced to reflect the reduction in the Advisor’s management fee.
First Trust will also be responsible for the Fund’s expenses, including the cost of transfer agency, custody, fund administration, legal, audit and other services, but excluding fee payments under the Investment Management Agreement, interest, taxes, acquired fund fees and expenses, brokerage commissions and other expenses connected with the execution of portfolio transactions, distribution and service fees pursuant to a Rule 12b-1 plan, if any, and extraordinary expenses. The annual unitary management fee payable by the Fund to First Trust for these services will be reduced at certain levels of the Fund’s net assets (“breakpoints”) and calculated pursuant to the following schedule:
| Breakpoints | | | | | | | |
| Fund net assets up to and including $2.5 billion | 0.95000% | | | | | | |
| Fund net assets greater than $2.5 billion up to and including $5 billion | 0.92625% | | | | | | |
| Fund net assets greater than $5 billion up to and including $7.5 billion | 0.90250% | | | | | | |
| Fund net assets greater than $7.5 billion up to and including $10 billion | 0.87875% | | | | | | |
| Fund net assets greater than $10 billion | 0.85500% | | | | | | |
First Trust also provides fund reporting services to the Fund for a flat annual fee in the amount of $9,250, which is covered under the annual unitary management fee.
The 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, a target outcome fund or an index fund.
Notes to Financial Statements (Continued)
First Trust SSI Strategic Convertible Securities ETF (FCVT)
October 31, 2023
Additionally, the Lead Independent Trustee and the Chairs of the Audit Committee, Nominating and Governance Committee and Valuation Committee are paid annual fees to serve in such capacities, with such compensation allocated pro rata among each fund in the First Trust Fund Complex based on net assets. Independent Trustees are reimbursed for travel and out-of-pocket expenses in connection with all meetings. The Lead Independent Trustee and Committee Chairs rotate every three years. The officers and “Interested” Trustee receive no compensation from the Trust for acting in such capacities.
4. Purchases and Sales of Securities
For the fiscal year ended October 31, 2023, the cost of purchases and proceeds from sales of securities, excluding short-term investments and in-kind transactions, were $103,400,035 and $183,920,492, respectively.
For the fiscal year ended October 31, 2023, the cost of in-kind purchases and proceeds from in-kind sales were $0 and $3,206,745, respectively.
5. Creations, Redemptions and Transaction Fees
The Fund generally issues and redeems its shares in primary market transactions through a creation and redemption mechanism and does not sell or redeem individual shares. Instead, financial entities known as “Authorized Participants” have contractual arrangements with the Fund or one of the Fund’s service providers to purchase and redeem Fund shares directly with the Fund in large blocks of shares known as “Creation Units.” Prior to the start of trading on every business day, the Fund publishes through the National Securities Clearing Corporation (“NSCC”) the “basket” of securities, cash or other assets that it will accept in exchange for a Creation Unit of the Fund’s shares. An Authorized Participant that wishes to effectuate a creation of the Fund’s shares deposits with the Fund the “basket” of securities, cash or other assets identified by the Fund that day, and then receives the Creation Unit of the Fund’s shares in return for those assets. After purchasing a Creation Unit, the Authorized Participant may continue to hold the Fund’s shares or sell them in the secondary market. The redemption process is the reverse of the purchase process: the Authorized Participant redeems a Creation Unit of the Fund’s shares for a basket of securities, cash or other assets. The combination of the creation and redemption process with secondary market trading in the Fund’s shares and underlying securities provides arbitrage opportunities that are designed to help keep the market price of the Fund’s shares at or close to the NAV per share of the Fund.
The Fund imposes fees in connection with the purchase of Creation Units. These fees may vary based upon various fact-based circumstances, including, but not limited to, the composition of the securities included in the Creation Unit or the countries in which the transactions are settled. The price for each Creation Unit will equal the daily NAV per share of the Fund times the number of shares in a Creation Unit, plus the fees described above and, if applicable, any operational processing and brokerage costs, transfer fees, stamp taxes and part or all of the spread between the expected bid and offer side of the market related to the securities comprising the creation basket.
The Fund also imposes fees in connection with the redemption of Creation Units. These fees may vary based upon various fact-based circumstances, including, but not limited to, the composition of the securities included in the Creation Unit or the countries in which the transactions are settled. The price received for each Creation Unit will equal the daily NAV per share of the Fund times the number of shares in a Creation Unit, minus the fees described above and, if applicable, any operational processing and brokerage costs, transfer fees, stamp taxes and part or all of the spread between the expected bid and offer side of the market related to the securities comprising the redemption basket. Investors who use the services of a broker or other such intermediary in addition to an Authorized Participant to effect a redemption of a Creation Unit may also be assessed an amount to cover the cost of such services. The redemption fee charged by the Fund will comply with Rule 22c-2 of the 1940 Act which limits redemption fees to no more than 2% of the value of the shares redeemed.
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 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 March 31, 2025.
Notes to Financial Statements (Continued)
First Trust SSI Strategic Convertible Securities ETF (FCVT)
October 31, 2023
7. Indemnification
The Trust, on behalf of the Fund, has a variety of indemnification obligations under contracts with its service providers. The Trust’s maximum exposure under these arrangements is unknown. However, the Trust has not had prior claims or losses pursuant to these contracts and expects the risk of loss to be remote.
8. Subsequent Events
Management has evaluated the impact of all subsequent events on the Fund through the date the financial statements were issued and has determined that there were the following subsequent events:
Pursuant to approval by the Trust’s Board of Trustees, The Bank of New York Mellon, 240 Greenwich Street, New York, New York, 10286, replaced Brown Brothers Harriman & Co. as the administrator, custodian, fund accountant and transfer agent for FCVT on November 6, 2023.
Additionally, the Board of Trustees of the Trust has voted to approve a new investment sub-advisory agreement with SSI for the Fund, subject to shareholder approval. A special meeting of shareholders of the Fund will be held at which the new sub-advisory agreement will be submitted to shareholders of the Fund for approval. There can be no assurance that the necessary percentage of the shareholders of the Fund will vote to approve the new sub-advisory agreement. To avoid any interruption of investment sub-advisory services prior to the receipt of shareholder approval of the new sub-advisory agreement, the Board also approved an interim investment sub-advisory agreement with SSI for the Fund.
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Trustees of First Trust Exchange-Traded Fund IV:
Opinion on the Financial Statements and Financial Highlights
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of First Trust SSI Strategic Convertible Securities ETF (the “Fund”), a series of the First Trust Exchange-Traded Fund IV, as of October 31, 2023, the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, the financial highlights for each of the five years in the period then ended, and the related notes. In our opinion, the financial statements and financial highlights present fairly, in all material respects, the financial position of the Fund as of October 31, 2023, and the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on the Fund’s financial statements and financial highlights based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Fund in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement, whether due to error or fraud. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements and financial highlights, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements and financial highlights. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and financial highlights. Our procedures included confirmation of securities owned as of October 31, 2023, by correspondence with the custodian and brokers; when replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
/s/ Deloitte & Touche, LLP
Chicago, Illinois
December 22, 2023
We have served as the auditor of one or more First Trust investment companies since 2001.
Additional Information
First Trust SSI Strategic Convertible Securities ETF (FCVT)
October 31, 2023 (Unaudited)
Proxy Voting Policies and Procedures
A description of the policies and procedures that the Trust uses to determine how to vote proxies and information on how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available (1) without charge, upon request, by calling (800) 988-5891; (2) on the Fund’s website at www.ftportfolios.com; and (3) on the Securities and Exchange Commission’s (“SEC”) website at www.sec.gov.
Portfolio Holdings
The Fund files portfolio holdings information for each month in a fiscal quarter within 60 days after the end of the relevant fiscal quarter on Form N-PORT. Portfolio holdings information for the third month of each fiscal quarter will be publicly available on the SEC’s website at www.sec.gov. The Fund’s complete schedule of portfolio holdings for the second and fourth quarters of each fiscal year is included in the semi-annual and annual reports to shareholders, respectively, and is filed with the SEC on Form N-CSR. The semi-annual and annual report for the Fund is available to investors within 60 days after the period to which it relates. The Fund’s Forms N-PORT and Forms N-CSR are available on the SEC’s website listed above.
Federal Tax Information
For the taxable year ended October 31, 2023, the following percentage of income dividends paid by the Fund qualify for the dividends received deduction available to corporations and are hereby designated as qualified dividend income:
| Dividends Received Deduction | | Qualified Dividend Income |
| 41.41% | | 41.41% |
Risk Considerations
Risks are inherent in all investing. Certain general risks that may be applicable to a Fund are identified below, but not all of the material risks relevant to each Fund are included in this report and not all of the risks below apply to each Fund. The material risks of investing in each Fund are spelled out in its prospectus, statement of additional information and other regulatory filings. Before investing, you should consider each Fund’s investment objective, risks, charges and expenses, and read each Fund’s prospectus and statement of additional information carefully. You can download each Fund’s prospectus at www.ftportfolios.com or contact First Trust Portfolios L.P. at (800) 621-1675 to request a prospectus, which contains this and other information about each Fund.
Concentration Risk. To the extent that a fund is able to invest a significant percentage of its assets in a single asset class or the securities of issuers within the same country, state, region, industry or sector, an adverse economic, business or political development may affect the value of the fund’s investments more than if the fund were more broadly diversified. A fund that tracks an index will be concentrated to the extent the fund’s corresponding index is concentrated. A concentration makes a fund more susceptible to any single occurrence and may subject the fund to greater market risk than a fund that is more broadly diversified.
Credit Risk. Credit risk is the risk that an issuer of a security will be unable or unwilling to make dividend, interest and/or principal payments when due and the related risk that the value of a security may decline because of concerns about the issuer’s ability to make such payments.
Cyber Security Risk. The funds are susceptible to potential operational risks through breaches in cyber security. A breach in cyber security refers to both intentional and unintentional events that may cause a fund to lose proprietary information, suffer data corruption or lose operational capacity. Such events could cause a fund to incur regulatory penalties, reputational damage, additional compliance costs associated with corrective measures and/or financial loss. In addition, cyber security breaches of a fund’s third-party service providers, such as its administrator, transfer agent, custodian, or sub-advisor, as applicable, or issuers in which the fund invests, can also subject a fund to many of the same risks associated with direct cyber security breaches.
Defined Outcome Funds Risk. To the extent a fund’s investment strategy is designed to deliver returns tied to the price performance of an underlying ETF, an investor may not realize the returns the fund seeks to achieve if that investor does not hold shares for the entire target outcome period. In the event an investor purchases shares after the first day of the target outcome period or sells shares prior to the end of the target outcome period, the buffer that the fund seeks to provide against a decline in the value of the underlying ETF may not be available, the enhanced returns that the fund seeks to provide (if any) may not be available and the investor may not participate in a gain in the value of the underlying ETF up to the cap for the investor’s investment period. Additionally, the fund will not participate in gains of the underlying ETF above the cap and a shareholder may lose their entire investment. If the fund seeks enhanced returns, there are certain time periods when the value of the fund may fall faster than the value of the underlying ETF, and it is very unlikely that, on any given day during which the underlying ETF share price increases in value, the fund’s share price will
Additional Information (Continued)
First Trust SSI Strategic Convertible Securities ETF (FCVT)
October 31, 2023 (Unaudited)
increase at the same rate as the enhanced returns sought by the fund, which is designed for an entire target outcome period. Trading flexible exchange options involves risks different from, or possibly greater than, the risks associated with investing directly in securities, such as less liquidity and correlation and valuation risks. A fund may experience substantial downside from specific flexible exchange option positions and certain positions may expire worthless.
Derivatives Risk. To the extent a fund uses derivative instruments such as futures contracts, options contracts and swaps, the fund may experience losses because of adverse movements in the price or value of the underlying asset, index or rate, which may be magnified by certain features of the derivative. These risks are heightened when a fund’s portfolio managers use derivatives to enhance the fund’s return or as a substitute for a position or security, rather than solely to hedge (or offset) the risk of a position or security held by the fund.
Equity Securities Risk. To the extent a fund invests in equity securities, the value of the fund’s shares will fluctuate with changes in the value of the equity securities. Equity securities prices fluctuate for several reasons, including changes in investors’ perceptions of the financial condition of an issuer or the general condition of the relevant stock market, such as market volatility, or when political or economic events affecting the issuers occur. In addition, common stock prices may be particularly sensitive to rising interest rates, as the cost of capital rises and borrowing costs increase. Equity securities may decline significantly in price over short or extended periods of time, and such declines may occur in the equity market as a whole, or they may occur in only a particular country, company, industry or sector of the market.
ETF Risk. The shares of an ETF trade like common stock and represent an interest in a portfolio of securities. The risks of owning an ETF generally reflect the risks of owning the underlying securities, although lack of liquidity in an ETF could result in it being more volatile and ETFs have management fees that increase their costs. Shares of an ETF trade on an exchange at market prices rather than net asset value, which may cause the shares to trade at a price greater than net asset value (premium) or less than net asset value (discount). In times of market stress, decisions by market makers to reduce or step away from their role of providing a market for an ETF’s shares, or decisions by an ETF’s authorized participants that they are unable or unwilling to proceed with creation and/or redemption orders of an ETF’s shares, could result in shares of the ETF trading at a discount to net asset value and in greater than normal intraday bid-ask spreads.
Fixed Income Securities Risk. To the extent a fund invests in fixed income securities, the fund will be subject to credit risk, income risk, interest rate risk, liquidity risk and prepayment risk. Income risk is the risk that income from a fund’s fixed income investments could decline during periods of falling interest rates. Interest rate risk is the risk that the value of a fund’s fixed income securities will decline because of rising interest rates. Liquidity risk is the risk that a security cannot be purchased or sold at the time desired, or cannot be purchased or sold without adversely affecting the price. Prepayment risk is the risk that the securities will be redeemed or prepaid by the issuer, resulting in lower interest payments received by the fund. In addition to these risks, high yield securities, or “junk” bonds, are subject to greater market fluctuations and risk of loss than securities with higher ratings, and the market for high yield securities is generally smaller and less liquid than that for investment grade securities.
Index or Model Constituent Risk. Certain funds may be a constituent of one or more indices or ETF models. As a result, such a fund may be included in one or more index-tracking exchange-traded funds or mutual funds. Being a component security of such a vehicle could greatly affect the trading activity involving a fund, the size of the fund and the market volatility of the fund. Inclusion in an index could increase demand for the fund and removal from an index could result in outsized selling activity in a relatively short period of time. As a result, a fund’s net asset value could be negatively impacted and the fund’s market price may be significantly below its net asset value during certain periods. In addition, index rebalances may potentially result in increased trading activity in a fund’s shares.
Index Provider Risk. To the extent a fund seeks to track an index, it is subject to Index Provider Risk. There is no assurance that the Index Provider will compile the Index accurately, or that the Index will be determined, maintained, constructed, reconstituted, rebalanced, composed, calculated or disseminated accurately. To correct any such error, the Index Provider may carry out an unscheduled rebalance or other modification of the Index constituents or weightings, which may increase the fund’s costs. The Index Provider does not provide any representation or warranty in relation to the quality, accuracy or completeness of data in the Index, and it does not guarantee that the Index will be calculated in accordance with its stated methodology. Losses or costs associated with any Index Provider errors generally will be borne by the fund and its shareholders.
Investment Companies Risk. To the extent a fund invests in the securities of other investment vehicles, the fund will incur additional fees and expenses that would not be present in a direct investment in those investment vehicles. Furthermore, the fund’s investment performance and risks are directly related to the investment performance and risks of the investment vehicles in which the fund invests.
LIBOR Risk. To the extent a fund invests in floating or variable rate obligations that use the London Interbank Offered Rate (“LIBOR”) as a reference interest rate, it is subject to LIBOR Risk. The United Kingdom’s Financial Conduct Authority, which regulates LIBOR has ceased making LIBOR available as a reference rate over a phase-out period that began December 31, 2021. There
Additional Information (Continued)
First Trust SSI Strategic Convertible Securities ETF (FCVT)
October 31, 2023 (Unaudited)
is no assurance that any alternative reference rate, including the Secured Overnight Financing Rate (“SOFR”) will be similar to or produce the same value or economic equivalence as LIBOR or that instruments using an alternative rate will have the same volume or liquidity. The unavailability or replacement of LIBOR may affect the value, liquidity or return on certain fund investments and may result in costs incurred in connection with closing out positions and entering into new trades. Any potential effects of the transition away from LIBOR on the fund or on certain instruments in which the fund invests can be difficult to ascertain, and they may vary depending on a variety of factors, and they could result in losses to the fund.
Management Risk. To the extent that a fund is actively managed, it is subject to management risk. In managing an actively-managed fund’s investment portfolio, the fund’s portfolio managers will apply investment techniques and risk analyses that may not have the desired result. There can be no guarantee that a fund will meet its investment objective.
Market Risk. Market risk is the risk that a particular security, or shares of a fund in general, may fall in value. Securities held by a fund, as well as shares of a fund itself, are subject to market fluctuations caused by factors such as general economic conditions, political events, regulatory or market developments, changes in interest rates and perceived trends in securities prices. Shares of a fund could decline in value or underperform other investments as a result of the risk of loss associated with these market fluctuations. In addition, local, regional or global events such as war, acts of terrorism, spread of infectious diseases or other public health issues, recessions, or other events could have a significant negative impact on a fund and its investments. Such events may affect certain geographic regions, countries, sectors and industries more significantly than others. In February 2022, Russia invaded Ukraine which has caused and could continue to cause significant market disruptions and volatility within the markets in Russia, Europe, and the United States. The hostilities and sanctions resulting from those hostilities could have a significant impact on certain fund investments as well as fund performance. The COVID-19 global pandemic and the ensuing policies enacted by governments and central banks have caused and may continue to cause significant volatility and uncertainty in global financial markets. While the U.S. has resumed “reasonably” normal business activity, many countries continue to impose lockdown measures. Additionally, there is no guarantee that vaccines will be effective against emerging variants of the disease. These events also adversely affect the prices and liquidity of a fund’s portfolio securities or other instruments and could result in disruptions in the trading markets. Any of such circumstances could have a materially negative impact on the value of a fund’s shares and result in increased market volatility. During any such events, a fund’s shares may trade at increased premiums or discounts to their net asset value and the bid/ask spread on a fund’s shares may widen.
Non-U.S. Securities Risk. To the extent a fund invests in non-U.S. securities, it is subject to additional risks not associated with securities of domestic issuers. Non-U.S. securities are subject to higher volatility than securities of domestic issuers due to: possible adverse political, social or economic developments; restrictions on foreign investment or exchange of securities; capital controls; lack of liquidity; currency exchange rates; excessive taxation; government seizure of assets; the imposition of sanctions by foreign governments; different legal or accounting standards; and less government supervision and regulation of exchanges in foreign countries. Investments in non-U.S. securities may involve higher costs than investments in U.S. securities, including higher transaction and custody costs, as well as additional taxes imposed by non-U.S. governments. These risks may be heightened for securities of companies located, or with significant operations, in emerging market countries.
Operational Risk. Each fund is subject to risks arising from various operational factors, including, but not limited to, human error, processing and communication errors, errors of a fund’s service providers, counterparties or other third-parties, failed or inadequate processes and technology or systems failures. Each fund relies on third-parties for a range of services, including custody. Any delay or failure relating to engaging or maintaining such service providers may affect a fund’s ability to meet its investment objective. Although the funds and the funds’ investment advisor seek to reduce these operational risks through controls and procedures, there is no way to completely protect against such risks.
Passive Investment Risk. To the extent a fund seeks to track an index, the fund will invest in the securities included in, or representative of, the index regardless of their investment merit. A fund generally will not attempt to take defensive positions in declining markets.
Preferred Securities Risk. Preferred securities combine some of the characteristics of both common stocks and bonds. Preferred securities are typically subordinated to bonds and other debt securities in a company’s capital structure in terms of priority to corporate income, subjecting them to greater credit risk than those debt securities. Generally, holders of preferred securities have no voting rights with respect to the issuing company unless preferred dividends have been in arrears for a specified number of periods, at which time the preferred security holders may obtain limited rights. In certain circumstances, an issuer of preferred securities may defer payment on the securities and, in some cases, redeem the securities prior to a specified date. Preferred securities may also be substantially less liquid than other securities, including common stock.
Valuation Risk. The valuation of certain securities may carry more risk than that of common stock. Uncertainties in the conditions of the financial markets, unreliable reference data, lack of transparency and inconsistency of valuation models and processes may lead to
Additional Information (Continued)
First Trust SSI Strategic Convertible Securities ETF (FCVT)
October 31, 2023 (Unaudited)
inaccurate asset pricing. A fund may hold investments in sizes smaller than institutionally sized round lot positions (sometimes referred to as odd lots). However, third-party pricing services generally provide evaluations on the basis of institutionally-sized round lots. If a fund sells certain of its investments in an odd lot transaction, the sale price may be less than the value at which such securities have been held by the fund. Odd lots often trade at lower prices than institutional round lots. There is no assurance that the fund will be able to sell a portfolio security at the price established by the pricing service, which could result in a loss to the fund.
| NOT FDIC INSURED | NOT BANK GUARANTEED | MAY LOSE VALUE |
Advisory and Sub-Advisory Agreements
Board Considerations Regarding Approval of the Continuation of the Investment Management and Sub-Advisory Agreements
The Board of Trustees of First Trust Exchange-Traded Fund IV (the “Trust”), including the Independent Trustees, unanimously approved the continuation of the Investment Management Agreement (the “Advisory Agreement”) with First Trust Advisors L.P. (the “Advisor”) on behalf of the First Trust SSI Strategic Convertible Securities ETF (the “Fund”) and the Investment Sub-Advisory Agreement (the “Sub-Advisory Agreement” and together with the Advisory Agreement, the “Agreements”) among the Trust, on behalf of the Fund, the Advisor and SSI Investment Management LLC (the “Sub-Advisor”). The Board approved the continuation of the Agreements for a one-year period ending June 30, 2024 at a meeting held on June 4–5, 2023. The Board determined that the continuation of the Agreements is in the best interests of the Fund in light of the nature, extent and quality of the services provided and such other matters as the Board considered to be relevant in the exercise of its business judgment.
To reach this determination, the Board considered its duties under the Investment Company Act of 1940, as amended (the “1940 Act”), as well as under the general principles of state law, in reviewing and approving advisory contracts; the requirements of the 1940 Act in such matters; the fiduciary duty of investment advisors with respect to advisory agreements and compensation; the standards used by courts in determining whether investment company boards have fulfilled their duties; and the factors to be considered by the Board in voting on such agreements. At meetings held on April 17, 2023 and June 4–5, 2023, the Board, including the Independent Trustees, reviewed materials provided by the Advisor and the Sub-Advisor responding to requests for information from counsel to the Independent Trustees, submitted on behalf of the Independent Trustees, that, among other things, outlined: the services provided by the Advisor and the Sub-Advisor to the Fund (including the relevant personnel responsible for these services and their experience); the unitary fee rate schedule payable by the Fund as compared to fees charged to a peer group of funds (the “Expense Group”) and a broad peer universe of funds (the “Expense Universe”), each assembled by Broadridge Financial Solutions, Inc. (“Broadridge”), an independent source, and as compared to fees charged to other clients of the Advisor, including other exchange-traded funds (“ETFs”) managed by the Advisor; the sub-advisory fee as compared to fees charged to other clients of the Sub-Advisor; the expense ratio of the Fund as compared to expense ratios of the funds in the Fund’s Expense Group and Expense Universe; performance information for the Fund, including comparisons of the Fund’s performance to that of one or more relevant benchmark indexes and to that of a performance group of funds and a broad performance universe of funds (the “Performance Universe”), each assembled by Broadridge; the nature of expenses incurred in providing services to the Fund and the potential for the Advisor and the Sub-Advisor to realize economies of scale, if any; profitability and other financial data for the Advisor; financial data for the Sub-Advisor; any indirect benefits to the Advisor and its affiliate, First Trust Portfolios L.P. (“FTP”), and the Sub-Advisor; and information on the Advisor’s and the Sub-Advisor’s compliance programs. The Board reviewed initial materials with the Advisor at the meeting held on April 17, 2023, prior to which the Independent Trustees and their counsel met separately to discuss the information provided by the Advisor and the Sub-Advisor. Following the April meeting, counsel to the Independent Trustees, on behalf of the Independent Trustees, requested certain clarifications and supplements to the materials provided, and the information provided in response to those requests was considered at an executive session of the Independent Trustees and their counsel held prior to the June 4–5, 2023 meeting, as well as at the June meeting. The Board applied its business judgment to determine whether the arrangements between the Trust and the Advisor and among the Trust, the Advisor and the Sub-Advisor continue to be reasonable business arrangements from the Fund’s perspective. The Board determined that, given the totality of the information provided with respect to the Agreements, the Board had received sufficient information to renew the Agreements. The Board considered that shareholders chose to invest or remain invested in the Fund knowing that the Advisor and the Sub-Advisor manage the Fund and knowing the Fund’s unitary fee.
In reviewing the Agreements, the Board considered the nature, extent and quality of the services provided by the Advisor and the Sub-Advisor under the Agreements. With respect to the Advisory Agreement, the Board considered that the Advisor is responsible for the overall management and administration of the Trust and the Fund and reviewed all of the services provided by the Advisor to the Fund, including the oversight of the Sub-Advisor, as well as the background and experience of the persons responsible for such services. The Board noted that the Advisor oversees the Sub-Advisor’s day-to-day management of the Fund’s investments, including portfolio risk monitoring and performance review. In reviewing the services provided, the Board noted the compliance program that had been developed by the Advisor and considered that it includes a robust program for monitoring the Advisor’s, the Sub-Advisor’s and the Fund’s compliance with the 1940 Act, as well as the Fund’s compliance with its investment objective, policies and restrictions.
Additional Information (Continued)
First Trust SSI Strategic Convertible Securities ETF (FCVT)
October 31, 2023 (Unaudited)
The Board also considered a report from the Advisor with respect to its risk management functions related to the operation of the Fund. Finally, as part of the Board’s consideration of the Advisor’s services, the Advisor, in its written materials and at the April 17, 2023 meeting, described to the Board the scope of its ongoing investment in additional personnel and infrastructure to maintain and improve the quality of services provided to the Fund and the other funds in the First Trust Fund Complex. With respect to the Sub-Advisory Agreement, the Board noted that the Fund is an actively-managed ETF and the Sub-Advisor actively manages the Fund’s investments. The Board reviewed the materials provided by the Sub-Advisor and considered the services that the Sub-Advisor provides to the Fund, including the Sub-Advisor’s day-to-day management of the Fund’s investments. In considering the Sub-Advisor’s management of the Fund, the Board noted the background and experience of the Sub-Advisor’s portfolio management team, including the Board’s prior meetings with members of the portfolio management team. In light of the information presented and the considerations made, the Board concluded that the nature, extent and quality of the services provided to the Trust and the Fund by the Advisor and the Sub-Advisor under the Agreements have been and are expected to remain satisfactory and that the Sub-Advisor, under the oversight of the Advisor, has managed the Fund consistent with its investment objective, policies and restrictions.
The Board considered the unitary fee rate schedule payable by the Fund under the Advisory Agreement for the services provided. The Board noted that the sub-advisory fee is paid by the Advisor from the unitary fee. The Board considered that as part of the unitary fee the Advisor is responsible for the Fund’s expenses, including the cost of sub-advisory, transfer agency, custody, fund administration, legal, audit and other services and license fees, if any, but excluding the fee payment under the Advisory Agreement and interest, taxes, brokerage commissions and other expenses connected with the execution of portfolio transactions, distribution and service fees pursuant to a Rule 12b-1 plan, if any, and extraordinary expenses, if any. The Board received and reviewed information showing the fee rates and expense ratios of the peer funds in the Expense Group, as well as advisory and unitary fee rates charged by the Advisor and the Sub-Advisor to other fund (including ETFs) and non-fund clients, as applicable. Because the Fund pays a unitary fee, the Board determined that expense ratios were the most relevant comparative data point. Based on the information provided, the Board noted that the total (net) expense ratio for the Fund was above the median total (net) expense ratio of the peer funds in the Expense Group. With respect to the Expense Group, the Board, at the April 17, 2023 meeting, discussed with Broadridge its methodology for assembling peer groups and discussed with the Advisor limitations in creating peer groups for actively-managed ETFs, including that the Expense Group contained both actively-managed ETFs and open-end mutual funds, and different business models that may affect the pricing of services among ETF sponsors. The Board also noted that not all peer funds employ an advisor/sub-advisor management structure. The Board took these limitations and differences into account in considering the peer data. With respect to fees charged to other non-ETF clients, the Board considered differences between the Fund and other non-ETF clients that limited their comparability. In considering the unitary fee rate schedule overall, the Board also considered the Advisor’s statement that it seeks to meet investor needs through innovative and value-added investment solutions and the Advisor’s demonstrated long-term commitment to the Fund and the other funds in the First Trust Fund Complex.
The Board considered performance information for the Fund. The Board noted the process it has established for monitoring the Fund’s performance and portfolio risk on an ongoing basis, which includes quarterly performance reporting from the Advisor and the Sub-Advisor for the Fund. The Board determined that this process continues to be effective for reviewing the Fund’s performance. The Board received and reviewed information comparing the Fund’s performance for periods ended December 31, 2022 to the performance of the funds in the Performance Universe and to that of a benchmark index. Based on the information provided, the Board noted that the Fund underperformed the Performance Universe median and the benchmark index for the one-, three- and five-year periods ended December 31, 2022.
On the basis of all the information provided on the unitary fee and performance of the Fund and the ongoing oversight by the Board, the Board concluded that the unitary fee for the Fund (out of which the Sub-Advisor is compensated) continues to be reasonable and appropriate in light of the nature, extent and quality of the services provided by the Advisor and the Sub-Advisor to the Fund under the Agreements.
The Board considered information and discussed with the Advisor whether there were any economies of scale in connection with providing advisory services to the Fund at current asset levels and whether the Fund may benefit from any economies of scale. The Board noted that the unitary fee rate schedule for the Fund includes breakpoints pursuant to which the unitary fee rate will be reduced as assets of the Fund meet certain thresholds. The Board considered the Advisor’s statement that it believes that its expenses relating to providing advisory services to the Fund will increase during the next twelve months as the Advisor continues to build infrastructure and add new staff. The Board also noted that under the unitary fee structure, any reduction in expenses associated with the management and operations of the Fund would benefit the Advisor, but that the unitary fee structure provides a level of certainty in expenses for shareholders of the Fund. The Board concluded that the unitary fee rate schedule for the Fund reflects an appropriate level of sharing of any economies of scale that may be realized in the management of the Fund at current asset levels. The Board considered the revenues and allocated costs (including the allocation methodology) of the Advisor in serving as investment advisor to the Fund for the twelve months ended December 31, 2022 and the estimated profitability level for the Fund calculated by the Advisor based on such data, as well as complex-wide and product-line profitability data, for the same period. The Board noted the inherent
Additional Information (Continued)
First Trust SSI Strategic Convertible Securities ETF (FCVT)
October 31, 2023 (Unaudited)
limitations in the profitability analysis and concluded that, based on the information provided, the Advisor’s profitability level for the Fund was not unreasonable. In addition, the Board considered indirect benefits described by the Advisor that may be realized from its relationship with the Fund. The Board considered that the Advisor had identified as an indirect benefit to the Advisor and FTP their exposure to investors and brokers who, absent their exposure to the Fund, may have had no dealings with the Advisor or FTP. The Board also considered the Advisor’s compensation for fund reporting services provided to the Fund pursuant to a separate Fund Reporting Services Agreement, which is paid from the unitary fee. The Board concluded that the character and amount of potential indirect benefits to the Advisor were not unreasonable.
The Board considered the Sub-Advisor’s statements that it has some fixed and some variable expenses in connection with providing services to the Fund, and that it expects its expenses related to the Fund to be greater in 2023 than they were in 2022, citing increases in costs of research and compensation and increases in business costs due to inflationary pressures. The Board noted that the Advisor pays the Sub-Advisor from the unitary fee, that the sub-advisory fee will be reduced consistent with the breakpoints in the unitary fee rate schedule and its understanding that the Fund’s sub-advisory fee was the product of an arm’s length negotiation. The Board did not review the profitability of the Sub-Advisor with respect to the Fund. The Board concluded that the profitability analysis for the Advisor was more relevant. The Board considered the potential indirect benefits to the Sub-Advisor from being associated with the Advisor and the Fund. The Board noted that the Sub-Advisor experiences indirect benefits in the form of soft dollar commissions generated by the Fund and considered a summary of the Sub-Advisor’s soft dollar arrangements. The Board concluded that the character and amount of potential indirect benefits to the Sub-Advisor were not unreasonable.
Based on all of the information considered and the conclusions reached, the Board, including the Independent Trustees, unanimously determined that the terms of the Agreements continue to be fair and reasonable and that the continuation of the Agreements is in the best interests of the Fund. No single factor was determinative in the Board’s analysis.
Board Considerations Regarding Approval of Interim and New Investment Sub-Advisory Agreements
The Board of Trustees of First Trust Exchange-Traded Fund IV (the “Trust”), including the Independent Trustees, unanimously approved (1) an Interim Investment Sub-Advisory Agreement (the “Interim Agreement”) among the Trust, on behalf of First Trust SSI Strategic Convertible Securities ETF (the “Fund”), First Trust Advisors L.P. (the “Advisor”) and SSI Investment Management LLC (the “Sub-Advisor”); and (2) a new Investment Sub-Advisory Agreement (the “New Agreement”) among the Trust, on behalf of the Fund, the Advisor and the Sub-Advisor. The Interim Agreement and the New Agreement are collectively referred to as the “Agreements.” The Board approved the Agreements at a meeting held on September 10–11, 2023. The Board determined that the approval of the Agreements is in the best interests of the Fund in light of the nature, quality and extent of the services expected to be provided and such other matters as the Board considered to be relevant in the exercise of its business judgment.
The Sub-Advisor currently serves as investment sub-advisor to the Fund pursuant to an Investment Sub-Advisory Agreement (the “Current Agreement”) among the Trust, on behalf of the Fund, the Advisor and the Sub-Advisor. Prior to the September 2023 meeting, the Board was informed that Resolute Investment Holdings, LLC (“Resolute”), the Sub-Advisor’s ultimate parent company, and its wholly-owned subsidiaries intended to complete a recapitalization transaction (the “Transaction”). The Board was informed that the consummation of the Transaction, which is expected to occur in the fourth quarter of 2023, would operate as an “assignment” of the Current Agreement under the Investment Company Act of 1940, as amended (the “1940 Act”), and as a result, the Current Agreement would terminate pursuant to its terms and the requirements of the 1940 Act. The Agreements were proposed to the Board in connection with the Transaction to provide for the continuous management of the Fund by the Sub-Advisor following the consummation of the Transaction. The Board noted that the New Agreement will be submitted to shareholders of the Fund for their approval, that Resolute will bear the costs associated with soliciting shareholder approval of the New Agreement and that the Interim Agreement would become effective only if shareholders of the Fund do not approve the New Agreement prior to the consummation of the Transaction and would remain in effect until the earlier of 150 days from the consummation of the Transaction or shareholder approval of the New Agreement.
On August 7, 2023, counsel to the Independent Trustees provided the Sub-Advisor with a request for information regarding the Transaction and its expected impact on the Sub-Advisor. At an executive session held on September 7, 2023, as well as at the meeting held on September 10–11, 2023, the Board, including the Independent Trustees, discussed the Transaction and reviewed the materials provided by the Sub-Advisor in response to the request that, among other things, outlined the structure and details of the Transaction and the Transaction’s expected impact on the Sub-Advisor’s management of the Fund under the Agreements.
To reach its determination in approving the Agreements for the Fund, the Board considered its duties under the 1940 Act, as well as under the general principles of state law, in reviewing and approving advisory contracts; the requirements of the 1940 Act in such matters; the fiduciary duty of investment advisors with respect to advisory agreements and compensation; the standards used by courts in determining whether investment company boards have fulfilled their duties; and the factors to be considered by the Board in voting on such agreements. In connection with its deliberations regarding the Agreements, the Board noted that, based on the information
Additional Information (Continued)
First Trust SSI Strategic Convertible Securities ETF (FCVT)
October 31, 2023 (Unaudited)
provided by the Advisor and the Sub-Advisor, any differences in the terms and conditions of each Agreement, including the effective and termination dates and any provisions of the Interim Agreement required by Rule 15a-4 under the 1940 Act, and the terms and conditions of the Current Agreement were immaterial to the Sub-Advisor’s management of the Fund. The Board considered that the information provided by the Sub-Advisor in response to the Independent Trustees’ request for information included representations that the Sub-Advisor anticipates no changes to its senior management or key personnel who work on matters relating to the Fund, including the portfolio management team and compliance personnel, as a result of the Transaction; that the sub-advisory fee rate for the Fund would remain the same; and that the Transaction would not result in any diminution in the nature, quality and extent of the services provided to the Fund by the Sub-Advisor. In addition, representatives of the Sub-Advisor joined the September 2023 Board meeting to discuss the Transaction and the Sub-Advisor’s continued services to the Fund with the Board.
| • | The Board considered that it had last approved the Current Agreement for the Fund during the annual contract renewal process that concluded at the Board’s June 4–5, 2023 meeting. Given the Sub-Advisor’s representations that there would be no changes in the services provided to the Fund as a result of the Transaction, that any differences in the terms of the Current Agreement and the New Agreement were immaterial to the Sub-Advisor’s management of the Fund and that the Board could continue to rely on the materials provided by the Sub-Advisor in connection with the June 2023 renewal of the Current Agreement, the Board determined that its prior considerations in approving the renewal of the Current Agreement remained relevant. The Board noted that, in reviewing and renewing the Current Agreement: |
| • | The Board considered the nature, quality and extent of the services provided by the Sub-Advisor and that the Sub-Advisor actively manages the Fund’s investments. In considering the Sub-Advisor’s management of the Fund, the Board noted the background and experience of the Sub-Advisor’s portfolio management team, including the Board’s prior meetings with members of the portfolio management team. In light of the information presented and the considerations made, the Board concluded that the nature, quality and extent of the services provided to the Fund by the Sub-Advisor have been and are expected to remain satisfactory and that the Sub-Advisor, under the oversight of the Advisor, has managd the Fund consistent with its investment objective, policies and restrictions. |
| • | The Board noted that the sub-advisory fee for the Fund is paid by the Advisor from the unitary fee payable under the Fund’s investment advisory agreement. The Board received and reviewed information showing the sub-advisory fee for the Fund as compared to fees charged to other clients of the Sub-Advisor. |
| • | The Board considered performance information for the Fund. The Board noted the process it has established for monitoring the Fund’s performance and portfolio risk on an ongoing basis, which includes quarterly performance reporting from the Advisor and the Sub-Advisor for the Fund. The Board determined that this process continues to be effective for reviewing the Fund’s performance. The Board received and reviewed information comparing the Fund’s performance for periods ended December 31, 2022 to that of a performance group of funds and a broad performance universe of funds (the “Performance Universe”), each assembled by Broadridge Financial Solutions, Inc., an independent source, and to that of a relevant benchmark index. |
| • | On the basis of all the information provided on the sub-advisory fee and performance of the Fund and the ongoing oversight by the Board, the Board concluded that the sub-advisory fee continues to be reasonable and appropriate in light of the nature, extent and quality of the services provided by the Sub-Advisor to the Fund under the Current Agreement. |
| • | The Board considered the Sub-Advisor’s statements that it has some fixed and some variable expenses in connection with providing services to the Fund, and that it expects its expenses related to the Fund to be greater in 2023 than they were in 2022, citing increases in costs of research and compensation and increases in business costs due to inflationary pressures. The Board noted that the Advisor pays the Sub-Advisor from the unitary fee, that the sub-advisory fee will be reduced consistent with the breakpoints in the unitary fee rate schedule, pursuant to which the unitary fee rate will be reduced as assets of the Fund meet certain thresholds, and its understanding that the Fund’s sub-advisory fee was the product of an arm’s length negotiation. The Board did not review the profitability of the Sub-Advisor with respect to the Fund. The Board concluded that the profitability analysis for the Advisor was more relevant. The Board considered the revenues and allocated costs (including the allocation methodology) of the Advisor in serving as investment advisor to the Fund for the twelve months ended December 31, 2022 and the estimated profitability level for the Fund calculated by the Advisor based on such data, as well as complex-wide and product-line profitability data, for the same period. The Board noted the inherent limitations in the profitability analysis and concluded that, based on the information provided, the Advisor’s profitability level for the Fund was not unreasonable. The Board considered the potential indirect benefits to the Sub-Advisor from being associated with the Advisor and the Fund. The Board noted that the Sub-Advisor experiences indirect benefits in the form of soft dollar commissions generated by the Fund and considered a summary of the Sub-Advisor’s soft dollar arrangements. The Board concluded that the character and amount of potential indirect benefits to the Sub-Advisor were not unreasonable. |
Additional Information (Continued)
First Trust SSI Strategic Convertible Securities ETF (FCVT)
October 31, 2023 (Unaudited)
Based on all of the information considered and the conclusions reached, including the information considered and conclusions reached in connection with the June 2023 renewal of the Current Agreement, the Board, including the Independent Trustees, unanimously determined that the terms of the Agreements were fair and reasonable and that the approval of the Agreements is in the best interests of the Fund. No single factor was determinative in the Board’s analysis.
Remuneration
First Trust Advisors L.P. (“First Trust”) is authorised and regulated by the U.S. Securities and Exchange Commission and is entitled to market shares of certain funds it manages, including First Trust SSI Strategic Convertible Securities ETF (the “Fund”), in certain member states in the European Economic Area in accordance with the cooperation arrangements in Article 42 of the Alternative Investment Fund Managers Directive (the “Directive”). First Trust is required under the Directive to make disclosures in respect of remuneration. The following disclosures are made in line with First Trust’s interpretation of currently available regulatory guidance on remuneration disclosures.
During the year ended December 31, 2022, the amount of remuneration paid (or to be paid) by First Trust Advisors L.P. in respect of the Fund is $92,366. This figure is comprised of $3,581 paid (or to be paid) in fixed compensation and $88,785 paid (or to be paid) in variable compensation. There were a total of 24 beneficiaries of the remuneration described above. Those amounts include $48,714 paid (or to be paid) to senior management of First Trust Advisors L.P. and $43,652 paid (or to be paid) to other employees whose professional activities have a material impact on the risk profiles of First Trust Advisors L.P. or the Fund (collectively, “Code Staff”).
Code Staff included in the aggregated figures disclosed above are rewarded in line with First Trust’s remuneration policy (the “Remuneration Policy”) which is determined and implemented by First Trust’s senior management. The Remuneration Policy reflects First Trust’s ethos of good governance and encapsulates the following principal objectives:
i. to provide a clear link between remuneration and performance of First Trust and to avoid rewarding for failure;
ii. to promote sound and effective risk management consistent with the risk profiles of the funds managed by First Trust; and
iii. to remunerate staff in line with the business strategy, objectives, values and interests of First Trust and the funds managed by First Trust in a manner that avoids conflicts of interest.
First Trust assesses various risk factors which it is exposed to when considering and implementing remuneration for Code Staff and considers whether any potential award to such person(s) would give rise to a conflict of interest. First Trust does not reward failure, or consider the taking of risk or failure to take risk in its remuneration of Code Staff.
First Trust assesses performance for the purposes of determining payments in respect of performance-related remuneration of Code Staff by reference to a broad range of measures including (i) individual performance (using financial and non-financial criteria), and (ii) the overall performance of First Trust. Remuneration is not based upon the performance of the Fund.
The elements of remuneration are balanced between fixed and variable and the senior management sets fixed salaries at a level sufficient to ensure that variable remuneration incentivises and rewards strong individual performance but does not encourage excessive risk taking.
No individual is involved in setting his or her own remuneration.
Board of Trustees and Officers
First Trust SSI Strategic Convertible Securities ETF (FCVT)
October 31, 2023 (Unaudited)
The following tables identify the Trustees and Officers of the Trust. Unless otherwise indicated, the address of all persons is 120 East Liberty Drive, Suite 400, Wheaton, IL 60187.
The Trust’s statement of additional information includes additional information about the Trustees and is available, without charge, upon request, by calling (800) 988-5891.
| Name, Year of Birth and Position with the Trust | Term of Office and Year First Elected or Appointed | Principal Occupations
During Past 5 Years | Number of Portfolios in the First Trust Fund Complex Overseen by Trustee | Other Trusteeships or Directorships Held by Trustee During Past 5 Years |
| INDEPENDENT TRUSTEES |
Richard E. Erickson, Trustee
(1951) | • Indefinite Term
• Since Inception | Retired; Physician, Edward-Elmhurst Medical Group (2021 to September 2023); Physician and Officer, Wheaton Orthopedics (1990 to 2021) | 254 | None |
Thomas R. Kadlec, Trustee
(1957) | • Indefinite Term
• Since Inception | Retired; President, ADM Investor Services, Inc. (Futures Commission Merchant) (2010 to July 2022) | 254 | Director, National Futures Association and ADMIS Singapore Ltd.; Formerly, Director of ADM Investor Services, Inc., ADM Investor Services International, ADMIS Hong Kong Ltd., and Futures Industry Association |
Denise M. Keefe, Trustee
(1964) | • Indefinite Term
• Since 2021 | Executive Vice President, Advocate Aurora Health and President, Advocate Aurora Continuing Health Division (Integrated Healthcare System) | 254 | Director and Board Chair of Advocate Home Health Services, Advocate Home Care Products and Advocate Hospice; Director and Board Chair of Aurora At Home (since 2018); Director of Advocate Physician Partners Accountable Care Organization; Director of RML Long Term Acute Care Hospitals; Director of Senior Helpers (since 2021); and Director of MobileHelp (since 2022) |
Robert F. Keith, Trustee
(1956) | • Indefinite Term
• Since Inception | President, Hibs Enterprises (Financial and Management Consulting) | 254 | Formerly, Director of Trust Company of Illinois |
Niel B. Nielson, Trustee
(1954) | • Indefinite Term
• Since Inception | Senior Advisor (2018 to Present), Managing Director and Chief Operating Officer (2015 to 2018), Pelita Harapan Educational Foundation (Educational Products and Services) | 254 | None |
Bronwyn Wright, Trustee
(1971) | • Indefinite Term
• Since Inception | Independent Director to a number of Irish collective investment funds (2009 to present); Various roles at international affiliates of Citibank (1994 to 2009), including Managing Director, Citibank Europe plc and Head of Securities and Fund Services, Citi Ireland (2007 to 2009) | 229 | None |
Board of Trustees and Officers (Continued)
First Trust SSI Strategic Convertible Securities ETF (FCVT)
October 31, 2023 (Unaudited)
| Name, Year of Birth and Position with the Trust | Term of Office and Year First Elected or Appointed | Principal Occupations
During Past 5 Years | Number of Portfolios in the First Trust Fund Complex Overseen by Trustee | Other Trusteeships or Directorships Held by Trustee During Past 5 Years |
| INTERESTED TRUSTEE |
James A. Bowen(1), Trustee and
Chairman of the Board
(1955) | • Indefinite Term
• Since Inception | Chief Executive Officer, First Trust Advisors L.P. and First Trust Portfolios L.P.; Chairman of the Board of Directors, BondWave LLC (Software Development Company) and Stonebridge Advisors LLC (Investment Advisor) | 254 | None |
| Name and Year of Birth | Position and Offices with Trust | Term of Office and Length of Service | Principal Occupations
During Past 5 Years |
| OFFICERS(2) |
James M. Dykas
(1966) | President and Chief Executive Officer | • Indefinite Term
• Since 2016 | Managing Director and Chief Financial Officer, First Trust Advisors L.P. and First Trust Portfolios L.P.; Chief Financial Officer, BondWave LLC (Software Development Company) and Stonebridge Advisors LLC (Investment Advisor) |
Derek D. Maltbie
(1972) | Treasurer, Chief Financial Officer and Chief Accounting Officer | • Indefinite Term
• Since 2023 | Senior Vice President, First Trust Advisors L.P. and First Trust Portfolios L.P., July 2021 to present. Previously, Vice President, First Trust Advisors L.P. and First Trust Portfolios L.P., 2014 to 2021. |
W. Scott Jardine
(1960) | Secretary and Chief Legal Officer | • Indefinite Term
• Since Inception | General Counsel, First Trust Advisors L.P. and First Trust Portfolios L.P.; Secretary and General Counsel, BondWave LLC; Secretary, Stonebridge Advisors LLC |
Daniel J. Lindquist
(1970) | Vice President | • Indefinite Term
• Since Inception | Managing Director, First Trust Advisors L.P. and First Trust Portfolios L.P. |
Kristi A. Maher
(1966) | Chief Compliance Officer and Assistant Secretary | • Indefinite Term
• Since Inception | Deputy General Counsel, First Trust Advisors L.P. and First Trust Portfolios L.P. |
Roger F. Testin
(1966) | Vice President | • Indefinite Term
• Since Inception | Senior Vice President, First Trust Advisors L.P. and First Trust Portfolios L.P. |
Stan Ueland
(1970) | Vice President | • Indefinite Term
• Since Inception | Senior Vice President, First Trust Advisors L.P. and First Trust Portfolios L.P. |
| (1) | Mr. Bowen is deemed an “interested person” of the Trust due to his position as CEO of First Trust Advisors L.P., investment advisor of the Trust. |
| (2) | The term “officer” means the president, vice president, secretary, treasurer, controller or any other officer who performs a policy making function. |
Privacy Policy
First Trust SSI Strategic Convertible Securities ETF (FCVT)
October 31, 2023 (Unaudited)
Privacy Policy
First Trust values our relationship with you and considers your privacy an important priority in maintaining that relationship. We are committed to protecting the security and confidentiality of your personal information.
Sources of Information
We collect nonpublic personal information about you from the following sources:
| • | Information we receive from you and your broker-dealer, investment professional or financial representative through interviews, applications, agreements or other forms; |
| • | Information about your transactions with us, our affiliates or others; |
| • | Information we receive from your inquiries by mail, e-mail or telephone; and |
| • | Information we collect on our website through the use of “cookies.” For example, we may identify the pages on our website that your browser requests or visits. |
Information Collected
The type of data we collect may include your name, address, social security number, age, financial status, assets, income, tax information, retirement and estate plan information, transaction history, account balance, payment history, investment objectives, marital status, family relationships and other personal information.
Disclosure of Information
We do not disclose any nonpublic personal information about our customers or former customers to anyone, except as permitted by law. In addition to using this information to verify your identity (as required under law), the permitted uses may also include the disclosure of such information to unaffiliated companies for the following reasons:
| • | In order to provide you with products and services and to effect transactions that you request or authorize, we may disclose your personal information as described above to unaffiliated financial service providers and other companies that perform administrative or other services on our behalf, such as transfer agents, custodians and trustees, or that assist us in the distribution of investor materials such as trustees, banks, financial representatives, proxy services, solicitors and printers. |
| • | We may release information we have about you if you direct us to do so, if we are compelled by law to do so, or in other legally limited circumstances (for example to protect your account from fraud). |
In addition, in order to alert you to our other financial products and services, we may share your personal information within First Trust.
Use of Website Analytics
We currently use third party analytics tools, Google Analytics and AddThis, to gather information for purposes of improving First Trust’s website and marketing our products and services to you. These tools employ cookies, which are small pieces of text stored in a file by your web browser and sent to websites that you visit, to collect information, track website usage and viewing trends such as the number of hits, pages visited, videos and PDFs viewed and the length of user sessions in order to evaluate website performance and enhance navigation of the website. We may also collect other anonymous information, which is generally limited to technical and web navigation information such as the IP address of your device, internet browser type and operating system for purposes of analyzing the data to make First Trust’s website better and more useful to our users. The information collected does not include any personal identifiable information such as your name, address, phone number or email address unless you provide that information through the website for us to contact you in order to answer your questions or respond to your requests. To find out how to opt-out of these services click on: Google Analytics and AddThis.
Confidentiality and Security
With regard to our internal security procedures, First Trust restricts access to your nonpublic personal information to those First Trust employees who need to know that information to provide products or services to you. We maintain physical, electronic and procedural safeguards to protect your nonpublic personal information.
Policy Updates and Inquiries
As required by federal law, we will notify you of our privacy policy annually. We reserve the right to modify this policy at any time, however, if we do change it, we will tell you promptly. For questions about our policy, or for additional copies of this notice, please go to www.ftportfolios.com, or contact us at 1-800-621-1675 (First Trust Portfolios) or 1-800-222-6822 (First Trust Advisors).
March 2023
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INVESTMENT ADVISOR
First Trust Advisors L.P.
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
INVESTMENT SUB-ADVISOR
SSI Investment Management LLC
2121 Avenue of the Stars, Suite 2050
Los Angeles, CA 90067
ADMINISTRATOR, CUSTODIAN,
FUND ACCOUNTANT &
TRANSFER AGENT*
Brown Brothers Harriman & Co.
50 Post Office Square
Boston, MA 02110
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
111 South Wacker Drive
Chicago, IL 60606
LEGAL COUNSEL
Chapman and Cutler LLP
320 South Canal Street
Chicago, IL 60606
* Effective November 6, 2023, the Administrator, Custodian, Fund Accountant & Transfer Agent for First Trust SSI Strategic Convertible Securities ETF changed to The Bank of New York Mellon, 240 Greenwich Street, New York, New York, 10286.
Annual Report
For the Period
August 2, 2023
(Commencement of Operations)
through October 31, 2023
First Trust Exchange-Traded Fund IV
First Trust Intermediate Duration Investment Grade Corporate ETF (FIIG) |
First Trust Intermediate Duration Investment Grade Corporate ETF (FIIG)
Annual Report
October 31, 2023
Caution Regarding Forward-Looking Statements
This report contains certain forward-looking statements within the meaning of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended. Forward-looking statements include statements regarding the goals, beliefs, plans or current expectations of First Trust Advisors L.P. (“First Trust” or the “Advisor”) and its representatives, taking into account the information currently available to them. Forward-looking statements include all statements that do not relate solely to current or historical fact. For example, forward-looking statements include the use of words such as “anticipate,” “estimate,” “intend,” “expect,” “believe,” “plan,” “may,” “should,” “would” or other words that convey uncertainty of future events or outcomes.
Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the series of First Trust Exchange-Traded Fund IV (the “Trust”) described in this report (First Trust Intermediate Duration Investment Grade Corporate ETF; hereinafter referred to as the “Fund”) to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. When evaluating the information included in this report, you are cautioned not to place undue reliance on these forward-looking statements, which reflect the judgment of the Advisor and its representatives only as of the date hereof. We undertake no obligation to publicly revise or update these forward-looking statements to reflect events and circumstances that arise after the date hereof.
Performance and Risk Disclosure
There is no assurance that the Fund will achieve its investment objective. The Fund is subject to market risk, which is the possibility that the market values of securities owned by the Fund will decline and that the value of the Fund’s shares may therefore be less than what you paid for them. Accordingly, you can lose money investing in the Fund. See “Risk Considerations” in the Additional Information section of this report for a discussion of certain other risks of investing in the Fund.
Performance data quoted represents past performance, which is no guarantee of future results, and current performance may be lower or higher than the figures shown. For the most recent month-end performance figures, please visit www.ftportfolios.com or speak with your financial advisor. Investment returns, net asset value and share price will fluctuate and Fund shares, when sold, may be worth more or less than their original cost.
The Advisor may also periodically provide additional information on Fund performance on the Fund’s webpage at www.ftportfolios.com.
How to Read This Report
This report contains information that may help you evaluate your investment in the Fund. It includes details about the Fund and presents data and analysis that provide insight into the Fund’s performance and investment approach.
By reading the portfolio commentary from the portfolio management team of the Fund, you may obtain an understanding of how the market environment affected the Fund’s performance. The statistical information that follows may help you understand the Fund’s performance compared to that of relevant market benchmarks.
It is important to keep in mind that the opinions expressed by personnel of the Advisor are just that: informed opinions. They should not be considered to be promises or advice. The opinions, like the statistics, cover the period through the date on the cover of this report. The material risks of investing in the Fund are spelled out in the prospectus, the statement of additional information, and other Fund regulatory filings.
First Trust Intermediate Duration Investment Grade Corporate ETF (FIIG)
Annual Letter from the Chairman and CEO
October 31, 2023
Dear Shareholders,
First Trust is pleased to provide you with the annual report for the First Trust Intermediate Duration Investment Grade Corporate ETF (the “Fund”), which contains detailed information about the Fund since its inception on August 2, 2023 through October 31, 2023. Please note that the information contained in this letter and the report prior to the Fund’s inception date does not apply to the Fund.
The Bureau of Economic Analysis recently announced that U.S. real gross domestic product (“GDP”) grew by a staggering 4.9% in the third quarter of 2023 and is now up 2.9% on a year-over-year basis from where it stood in the third quarter of 2022. The most recent quarter’s GDP data represents the fastest growth rate for any quarter since 2014. Consumer spending, which rose by 4.0% over the period, was responsible for 2.7 percentage points of the total increase in GDP. Whether the consumer can keep up this pace of spending remains to be seen, especially given recent news that excess savings from the pandemic-era stimulus have likely been depleted. From a global perspective, the International Monetary Fund (“IMF”) notes that progress in fighting inflation has led to lower economic growth. In their October 2023 publication of the World Economic Outlook, the IMF projected that the growth in world economic output is expected to slow from 3.5% in 2022 to 2.9% in 2024. The economic growth in advanced economies is projected to plummet from 2.6% in 2022 to 1.4% in 2024.
In the notes to their September 2023 meeting, the Federal Open Market Committee revealed that they may need to keep interest rates “higher for longer” as they continue to battle stubbornly high inflation. As many investors are likely aware, a higher Federal Funds target rate can have deep implications for consumers, such as driving up the cost of borrowing for homes, automobiles, and other large purchases. The American consumer has yet to feel the full weight of those burdens, in my opinion. That said, the data reveals a different story among corporate America. S&P Global Market Intelligence reported that a total of 516 U.S. corporations filed for bankruptcy protection on a year-to-date basis through September 30, 2023, up from a total of 263 corporate bankruptcy filings over the same period last year. Higher interest rates and Treasury bond yields have also sapped demand for commercial property loans. Data from Trepp, LLC, a leading provider of data and analytics to the commercial real estate and banking markets, revealed that just $28.2 billion of loans converted into commercial mortgage-backed securities have been issued in 2023, the lowest figure since 2011.
The financial markets battled a myriad of headwinds over the past year, from geopolitical uncertainty resulting from war (the conflicts between Israel and Hamas and Russia and Ukraine), to slowing global economic growth and sticky inflation. Brian Wesbury, Chief Economist at First Trust, notes that a U.S. economic recession is likely to begin at some point early next year. While calls for a recession may concern some investors, the following may offer solace. Data from Bloomberg reveals that the S&P 500® Index has posted positive total returns over the 3-year period following every recession since 1948.
Thank you for giving First Trust the opportunity to play a role in your financial future. We value our relationship with you and will report on the Fund again in six months.
Sincerely,
James A. Bowen
Chairman of the Board of Trustees
Chief Executive Officer of First Trust Advisors L.P.
Fund Performance Overview (Unaudited)
First Trust Intermediate Duration Investment Grade Corporate ETF (FIIG)
The First Trust Intermediate Duration Investment Grade Corporate ETF’s (the “Fund”) investment objective is to deliver current income and long-term capital appreciation. Under normal market conditions, the Fund seeks to achieve its objective by investing at least 80% if its net assets (plus any borrowings for investment purposes) in investment grade corporate debt securities. Corporate debt securities are debt obligations issued by businesses to finance their operations. Notes, bonds, loans, debentures and commercial paper are the most common types of corporate debt securities, with the primary differences being their maturities and secured or unsecured status. Commercial paper has the shortest term and is usually unsecured. Corporate debt securities may have fixed or floating interest rates. The corporate debt securities in which the Fund may invest also include senior loans and covenant-lite loans, substantially all of which are expected to be covenant-lite loans.
|
| |
| Inception
(8/2/23)
to 10/31/23 |
| |
| |
| |
| |
Bloomberg US Credit Corp 5-10 Year Index | |
Bloomberg US Aggregate Bond Index | |
Total returns for the period since inception are calculated from the inception date of the Fund. “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 of the national best bid and offer price (“NBBO”) as of the time that the Fund’s NAV is calculated. Under Securities and Exchange Commission rules, the NBBO consists of the highest displayed buy and lowest sell prices among the various exchanges trading the Fund at the time the Fund’s NAV is calculated. Since shares of the Fund did not trade in the secondary market until after its inception, for the period from inception to the first day of secondary market trading in shares of the Fund, the NAV of the Fund is used as a proxy for the secondary market trading price to calculate market returns. NAV and market returns assume that all distributions have been reinvested in the Fund at NAV and Market Price, respectively.
An index is a statistical composite that tracks a specified financial market or sector. Unlike the Fund, the indices do not actually hold a portfolio of securities and therefore do not incur the expenses incurred by the Fund. These expenses negatively impact the performance of the Fund. Also, market returns do not include brokerage commissions that may be payable on secondary market transactions. If brokerage commissions were included, market returns would be lower. The total returns presented reflect the reinvestment of dividends on securities in the indices. The returns presented do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. The investment return and principal value of shares of the Fund will vary with changes in market conditions. Shares of the Fund may be worth more or less than their original cost when they are redeemed or sold in the market. The Fund’s past performance is no guarantee of future performance.
Fund Performance Overview (Unaudited) (Continued)
First Trust Intermediate Duration Investment Grade Corporate ETF (FIIG) (Continued)
| % of Total
Long-Term
Investments |
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Property & Casualty Insurance | |
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Brokerage Assetmanagers Exchanges | |
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Diversified Manufacturing | |
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| % of Total
Long-Term
Investments |
Corporate Bonds and Notes | |
Foreign Corporate Bonds and Notes | |
| |
| % of Total
Long-Term
Investments |
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| |
Zoetis, Inc., 5.60%, 11/16/32 | |
JPMorgan Chase & Co., 4.49%, 03/24/31 | |
Bank of America Corp., Pool Medium-Term Note, 3.97%, 02/07/30 | |
Bank of America Corp., 4.57%, 04/27/33 | |
Brown & Brown, Inc., 4.20%, 03/17/32 | |
JPMorgan Chase & Co., 4.91%, 07/25/33 | |
United Rentals North America, Inc., 6.00%, 12/15/29 | |
UnitedHealth Group, Inc., 5.35%, 02/15/33 | |
IQVIA, Inc., 5.70%, 05/15/28 | |
Astrazeneca Finance LLC, 4.88%, 03/03/33 | |
| |
| The ratings are by one or more nationally recognized statistical rating organizations (NRSROs), including S&P Global Ratings, 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. Ratings are measured highest to lowest on a scale that generally ranges from AAA to D for long-term ratings and A-1 to C for short-term ratings. Investment grade is defined as those issuers that have a long-term credit rating of BBB- or higher or a short-term credit rating of A-3 or higher. “NR” indicates no rating. 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. |
Fund Performance Overview (Unaudited) (Continued)
First Trust Intermediate Duration Investment Grade Corporate ETF (FIIG) (Continued)
| Performance figures assume reinvestment of all distributions and do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. An index is a statistical composite that tracks a specified financial market or sector. Unlike the Fund, the indices do not actually hold a portfolio of securities and therefore do not incur the expenses incurred by the Fund. These expenses negatively impact the performance of the Fund. The Fund’s past performance does not predict future performance. |
Frequency Distribution of Discounts and Premiums
Information showing the number of days the market price of the Fund’s shares was greater (at a premium) and less (at a discount) than the Fund’s net asset value for the most recently completed year, and the most recently completed calendar quarters since that year (or life of the Fund, if shorter) is available at https://www.ftportfolios.com/Retail/etf/home.aspx.
First Trust Intermediate Duration Investment Grade Corporate ETF (FIIG)Annual ReportOctober 31, 2023 (Unaudited) Advisor
First Trust Advisors L.P. (“First Trust” or the “Advisor”) is the investment advisor to First Trust Intermediate Duration Investment Grade Corporate ETF (the “Fund” or “FIIG”). First Trust is responsible for the selection and ongoing monitoring of the Fund’s investment portfolio, managing the Fund’s business affairs and providing certain administrative services necessary for the management of the Fund.
Portfolio Management Team
The following persons serve as portfolio managers of the Fund.
William Housey, CFA, Managing Director of Fixed Income and Senior Portfolio Manager
Todd Larson, CFA, Senior Vice President and Senior Portfolio Manager
Eric R. Maisel, CFA, Senior Vice President and Portfolio Manager
Jeffrey Scott, CFA, Senior Vice President and Portfolio Manager
Nathan Simons, CFA, Vice President and Portfolio Manager
Scott Skowronski, CFA, Senior Vice President and Portfolio Manager
Sebastian Dassouli, Vice President and Portfolio Manager
The portfolio managers are primarily and jointly responsible for the day-to-day management of the Fund. Each portfolio manager has served as part of the portfolio management team of the Fund since its inception.
Commentary
Market Recap
At the beginning of the 12-month period ended October 31, 2023, inflation remained elevated as the November 2022 Consumer Price Index printed 7.1% on a year-over-year basis, while the Federal Reserve (the “Fed”) simultaneously reiterated its commitment to a 2.0% inflation target. At this point, the upper bound of the Federal Funds target rate sat at 3.25%. However, by the Fed’s December 2022 Federal Open Market Committee (“FOMC”) meeting, the committee projected a higher-than-expected terminal Federal Funds target rate of 5.00-5.25%, indicating the Fed’s lack of confidence that inflation would remain subdued. The FOMC raised its target rate once again to 5.25-5.50% at its July 2023 meeting in a continued attempt to mitigate inflation. At the September 2023 meeting, the FOMC held its target rate steady and upwardly revised its economic growth outlook for both this year and next, while reducing its 2024 rate cut projection; this proved a catalyst for higher yields, spread volatility, and lower equity values in the concluding weeks of the reporting period.
For the 12-month period ended October 31, 2023, the 10-Year U.S. Treasury yield increased 88 basis points from 4.05% to 4.93%. While the S&P 500® Index traded near 4,500 at the end of the second quarter of 2023, nearly 1,000 points above its October 2022 bottom, the S&P 500® Index closed at 4,194 on October 31, 2023, providing a 10.14% return over the 12-month period ended October 31, 2023.
Fund Performance
For the period from the Fund’s inception on August 2, 2023 through October 31, 2023, the Fund returned -3.91% on a net asset value (“NAV”) basis and -3.81% on a market price basis. The Bloomberg US Credit Corporate 5-10 Year Index (the “Benchmark”) returned -3.95% over the same period.
Duration was the largest headwind to performance during the period as the inverted yield curve and elevated interest rate volatility complicated timing of the extension trade. The Fund maintained defensive sector positioning during the period with overweight allocations to the Consumer Non-Cyclicals, Insurance, and Technology sectors versus underweights to the Banking, Retail, and Energy sectors. Defensive positioning benefitted the Fund during the period from the Fund’s inception through October 31, 2023, as risk remained under pressure due to higher yields and elevated volatility. Security selection was challenged by spread widening and volatility. Our up-in-quality positioning within the Utilities sector benefitted the Fund but was more than offset by weakness in lower credit quality securities held by the Fund.
Portfolio Commentary (Continued)
First Trust Intermediate Duration Investment Grade Corporate ETF (FIIG)Annual ReportOctober 31, 2023 (Unaudited) Market Outlook
Our market framework centers on our view that the Fed’s hiking cycle is nearing its end. While the Fed may leak incremental hikes into the market, we believe today’s fixed income markets are much more balanced when it comes to income and interest rate risk. Elevated yields continue to support future positive returns in fixed income. However, we expect market volatility to continue as investors attempt to gauge the likelihood, and timing of, a recession. Consequently, we favor increasing credit quality while defensively positioning in sectors with limited cyclicality. Improved valuations have created attractive opportunities in the corporate credit landscape, in our view. As we assess such market opportunities, we will continue to employ our bottom-up credit underwriting process and rigorous approach to risk management.
First Trust Intermediate Duration Investment Grade Corporate ETF (FIIG)Understanding Your Fund ExpensesOctober 31, 2023 (Unaudited) As a shareholder of First Trust Intermediate Duration Investment Grade Corporate ETF (the “Fund”), you incur two types of costs: (1) transaction costs; and (2) ongoing costs, including management fees, distribution and/or service (12b-1) fees, if any, and other Fund expenses. This Example is intended to help you understand your ongoing costs of investing in the Fund and to compare these costs with the ongoing costs of investing in other funds.
The Example is based on an investment of $1,000 invested at the beginning of the period (or since inception) and held through the six-month (or shorter) period ended October 31, 2023.
Actual Expenses
The first line in the following table provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During the Period” to estimate the expenses you paid on your account during this six-month (or shorter) period.
Hypothetical Example for Comparison Purposes
The second line in the following table provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs such as brokerage commissions. Therefore, the second line in the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
| Beginning
Account Value
August 2, 2023 (a) | Ending
Account Value
October 31, 2023 | Annualized
Expense Ratio
Based on the
Number of Days
in the Period | Expenses Paid
During the Period
August 2, 2023 (a)
to
October 31, 2023 (b) |
First Trust Intermediate Duration Investment Grade Corporate ETF (FIIG) |
| | | | |
Hypothetical (5% return before expenses) | | | | |
| |
| Actual expenses are equal to the annualized expense ratio as indicated in the table multiplied by the average account value over the period (August 2, 2023 through October 31, 2023), multiplied by 91/365. Hypothetical expenses are assumed for the most recent six-month period. |
First Trust Intermediate Duration Investment Grade Corporate ETF (FIIG)Portfolio of InvestmentsOctober 31, 2023
| | | | |
CORPORATE BONDS AND NOTES — 91.2% |
| | |
| | | | |
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| | | | |
| | |
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| | | | |
| Bank of America Corp., Medium-Term Note (a) | | | |
| Bank of America Corp. (a) | | | |
| Bank of New York Mellon Corp., Medium-Term Note (a) | | | |
| | | | |
| Goldman Sachs Group, Inc. (The) | | | |
| | | | |
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| Morgan Stanley, Global Medium-Term Note (a) | | | |
| Morgan Stanley, Medium-Term Note (a) | | | |
| PNC Financial Services Group, Inc. (The) | | | |
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| | | | |
| Truist Financial Corp., Medium-Term Note (a) | | | |
| | | | |
| Wells Fargo & Co., Medium-Term Note (a) | | | |
| | |
| Brokerage Assetmanagers Exchanges — 2.9% | |
| Intercontinental Exchange, Inc. | | | |
| Intercontinental Exchange, Inc. | | | |
| | | | |
| | |
| Building Materials — 0.9% | |
| | | | |
| | |
| CCO Holdings LLC / CCO Holdings Capital Corp. (b) | | | |
| Charter Communications Operating LLC/Charter Communications Operating Capital | | | |
| | | | |
| | | | |
| | | | |
| | |
| Construction Machinery — 2.5% | |
| Ashtead Capital, Inc. (b) | | | |
| United Rentals North America, Inc. (b) | | | |
| | |
| | |
| | | | |
| Diversified Manufacturing — 0.5% | |
| | | | |
| | |
| Duke Energy Carolinas LLC | | | |
| Duke Energy Carolinas LLC | | | |
See Notes to Financial Statements
First Trust Intermediate Duration Investment Grade Corporate ETF (FIIG)Portfolio of Investments (Continued)October 31, 2023 | | | | |
CORPORATE BONDS AND NOTES (Continued) |
| | |
| | | | |
| Florida Power & Light Co. | | | |
| Florida Power & Light Co. | | | |
| | | | |
| Public Service Electric & Gas Co. | | | |
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| Constellation Brands, Inc. | | | |
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| Avantor Funding, Inc. (b) | | | |
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| Thermo Fisher Scientific, Inc. | | | |
| Thermo Fisher Scientific, Inc. | | | |
| Universal Health Services, Inc. | | | |
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| | |
| American Water Capital Corp. | | | |
See Notes to Financial Statements
First Trust Intermediate Duration Investment Grade Corporate ETF (FIIG)Portfolio of Investments (Continued)October 31, 2023 | | | | |
CORPORATE BONDS AND NOTES (Continued) |
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| Property & Casualty Insurance — 5.9% | |
| Aon Corp./Aon Global Holdings PLC | | | |
| | | | |
| | | | |
| Marsh & McLennan Cos., Inc. | | | |
| Marsh & McLennan Cos., Inc. | | | |
| | |
| | |
| O’Reilly Automotive, Inc. | | | |
| | |
| | | | |
| Black Knight InfoServ LLC (b) | | | |
| Crowdstrike Holdings, Inc. | | | |
| FactSet Research Systems, Inc. | | | |
| Fidelity National Information Services, Inc. | | | |
| Fidelity National Information Services, Inc. | | | |
| | | | |
| | | | |
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| Open Text Holdings, Inc. (b) | | | |
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| SS&C Technologies, Inc. (b) | | | |
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| | | | |
| Total Corporate Bonds and Notes | |
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See Notes to Financial Statements
First Trust Intermediate Duration Investment Grade Corporate ETF (FIIG)Portfolio of Investments (Continued)October 31, 2023 | | | | |
FOREIGN CORPORATE BONDS AND NOTES — 7.2% |
| | |
| | | | |
| | | | |
| Toronto-Dominion Bank (The) Medium-Term Note | | | |
| Toronto-Dominion Bank (The) | | | |
| | |
| | |
| | | | |
| | |
| Bacardi Ltd./Bacardi-Martini BV (b) | | | |
| | | | |
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| Medtronic Global Holdings SCA | | | |
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| Pfizer Investment Enterprises Pte Ltd. | | | |
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| | | | |
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| Total Foreign Corporate Bonds and Notes | |
| | |
|
|
| Total Investments — 98.4% | |
| | |
| Net Other Assets and Liabilities — 1.6% | |
| | |
| Fixed-to-floating or fixed-to-variable rate security. The interest rate shown reflects the fixed rate in effect at October 31, 2023. At a predetermined date, the fixed rate will change to a floating rate or a variable rate. |
| This security, sold within the terms of a private placement memorandum, is exempt from registration upon resale under Rule 144A of the Securities Act of 1933, as amended (the “1933 Act”), and may be resold in transactions exempt from registration, normally to qualified institutional buyers. Pursuant to procedures adopted by the Trust’s Board of Trustees, this security has been determined to be liquid by First Trust Advisors L.P., the Fund’s advisor. Although market instability can result in periods of increased overall market illiquidity, liquidity for each security is determined based on security specific factors and assumptions, which require subjective judgment. At October 31, 2023, securities noted as such amounted to $1,253,724 or 13.2% of net assets. |
See Notes to Financial Statements
First Trust Intermediate Duration Investment Grade Corporate ETF (FIIG)Portfolio of Investments (Continued)October 31, 2023
Valuation InputsA summary of the inputs used to value the Fund’s investments as of October 31, 2023 is as follows (see Note 2A - Portfolio Valuation in the Notes to Financial Statements):
| | | Level 2
Significant
Observable
Inputs | Level 3
Significant
Unobservable
Inputs |
Corporate Bonds and Notes* | | | | |
Foreign Corporate Bonds and Notes* | | | | |
| | | | |
| See Portfolio of Investments for industry breakout. |
See Notes to Financial Statements
First Trust Intermediate Duration Investment Grade Corporate ETF (FIIG)Statement of Assets and Liabilities
October 31, 2023
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Investment advisory fees payable | |
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Accumulated distributable earnings (loss) | |
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NET ASSET VALUE, per share | |
Number of shares outstanding (unlimited number of shares authorized, par value $0.01 per share) | |
| |
See Notes to Financial Statements
First Trust Intermediate Duration Investment Grade Corporate ETF (FIIG)Statement of Operations
For the Period Ended October 31, 2023 (a)
| |
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|
| |
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NET INVESTMENT INCOME (LOSS) | |
|
NET REALIZED AND UNREALIZED GAIN (LOSS): | |
Net realized gain (loss) on investments | |
Net change in unrealized appreciation (depreciation) on investments | |
NET REALIZED AND UNREALIZED GAIN (LOSS) | |
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS | |
| Inception date is August 2, 2023, which is consistent with the commencement of investment operations and is the date the initial creation units were established. |
See Notes to Financial Statements
First Trust Intermediate Duration Investment Grade Corporate ETF (FIIG)Statement of Changes in Net Assets
| Period
Ended
10/31/2023 (a) |
| |
Net investment income (loss) | |
| |
Net change in unrealized appreciation (depreciation) | |
Net increase (decrease) in net assets resulting from operations | |
|
DISTRIBUTIONS TO SHAREHOLDERS FROM: | |
| |
|
SHAREHOLDER TRANSACTIONS: | |
Proceeds from shares sold | |
| |
Net increase (decrease) in net assets resulting from shareholder transactions | |
Total increase (decrease) in net assets | |
|
| |
| |
| |
|
CHANGES IN SHARES OUTSTANDING: | |
Shares outstanding, beginning of period | |
| |
| |
Shares outstanding, end of period | |
| Inception date is August 2, 2023, which is consistent with the commencement of investment operations and is the date the initial creation units were established. |
See Notes to Financial Statements
First Trust Intermediate Duration Investment Grade Corporate ETF (FIIG)Financial Highlights
For a share outstanding throughout the period
| Period
Ended
10/31/2023 (a) |
|
Net asset value, beginning of period | |
Income from investment operations: | |
Net investment income (loss) (b) | |
Net realized and unrealized gain (loss) | |
Total from investment operations | |
Distributions paid to shareholders from: | |
| |
Net asset value, end of period | |
| |
|
Ratios to average net assets/supplemental data: | |
Net assets, end of period (in 000’s) | |
Ratio of total expenses to average net assets | |
Ratio of net investment income (loss) to average net assets | |
Portfolio turnover rate (e) | |
| Inception date is August 2, 2023, which is consistent with the commencement of investment operations and is the date the initial creation units were established. |
| Based on average shares outstanding. |
| 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 return presented does 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. |
| |
| 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
Notes to Financial Statements
First Trust Intermediate Duration Investment Grade Corporate ETF (FIIG)October 31, 2023 1. Organization
First Trust Exchange-Traded Fund IV (the “Trust”) is an open-end management investment company organized as a Massachusetts business trust on September 15, 2010, and is registered with the Securities and Exchange Commission under the Investment Company Act of 1940, as amended (the “1940 Act”).
The Trust currently consists of eighteen exchange-traded funds that are offering shares. This report covers the First Trust Intermediate Duration Investment Grade Corporate ETF (the “Fund”), a non-diversified series of the Trust, which trades under the ticker “FIIG” on NYSE Arca, Inc. The Fund represents a separate series of shares of beneficial interest in the Trust. Unlike conventional mutual funds, the Fund issues and redeems shares on a continuous basis, at net asset value (“NAV”), only in large blocks of shares known as “Creation Units.”
The investment objective of the Fund is to deliver current income and long-term capital appreciation. Under normal market conditions, the Fund seeks to achieve its objective by investing at least 80% of its net assets (plus any borrowings for investment purposes) in investment grade corporate debt securities. Corporate debt securities are debt obligations issued by businesses to finance their operations. Notes, bonds, loans, debentures and commercial paper are the most common types of corporate debt securities, with the primary differences being their maturities and secured or unsecured status. Commercial paper has the shortest term and is usually unsecured. Corporate debt securities may have fixed or floating interest rates. The corporate debt securities in which the Fund may invest also include senior loans and covenant-lite loans, substantially all of which are expected to be covenant-lite loans.
2. Significant Accounting Policies
The Fund is considered an investment company and follows accounting and reporting guidance under Financial Accounting Standards Board Accounting Standards Codification Topic 946, “Financial Services-Investment Companies.” The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of the financial statements. The preparation of the financial statements in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates.
A. Portfolio Valuation
The Fund’s NAV is determined daily as of the close of regular trading on the New York Stock Exchange (“NYSE”), normally 4:00 p.m. Eastern time, on each day the NYSE is open for trading. If the NYSE closes early on a valuation day, the NAV is determined as of that time. Domestic debt securities and foreign securities are priced using data reflecting the earlier closing of the principal markets for those securities. The Fund’s NAV is calculated by dividing the value of all assets of the Fund (including accrued interest and dividends), less all liabilities (including accrued expenses and dividends declared but unpaid), by the total number of shares outstanding.
The Fund’s investments are valued daily at market value or, in the absence of market value with respect to any portfolio securities, at fair value. Market value prices represent readily available market quotations such as last sale or official closing prices from a national or foreign exchange (i.e., a regulated market) and are primarily obtained from third-party pricing services. Fair value prices represent any prices not considered market value prices and are either obtained from a third-party pricing service or are determined by the Pricing Committee of the Fund’s investment advisor, First Trust Advisors L.P. (“First Trust” or the “Advisor”), in accordance with valuation procedures approved by the Trust’s Board of Trustees, and in accordance with provisions of the 1940 Act and rules thereunder. Investments valued by the Advisor’s Pricing Committee, if any, are footnoted as such in the footnotes to the Portfolio of Investments. The Fund’s investments are valued as follows:
Corporate bonds, corporate notes and other debt securities are fair valued on the basis of valuations provided by a third-party pricing service approved by the Advisor’s Pricing Committee, which may use the following valuation inputs when available:
7)
reference data including market research publications.
Notes to Financial Statements (Continued)
First Trust Intermediate Duration Investment Grade Corporate ETF (FIIG)October 31, 2023 Fixed income and other debt securities having a remaining maturity of sixty 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 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 most recent price provided by a pricing service;
2)
available market prices for the fixed-income security;
3)
the fundamental business data relating to the borrower/issuer;
4)
an evaluation of the forces which influence the market in which these securities are purchased and sold;
5)
the type, size and cost of a security;
6)
the financial statements of the borrower/issuer or the financial condition of the country of issue;
7)
the credit quality and cash flow of the borrower/issuer, or country of issue, based on the Pricing Committee’s, sub-advisor’s or portfolio manager’s analysis, as applicable, or external analysis;
8)
the information as to any transactions in or offers for the security;
9)
the price and extent of public trading in similar securities of the borrower/issuer, or comparable companies;
11)
the quality, value and salability of collateral, if any, securing the security;
12)
the business prospects of the borrower/issuer, including any ability to obtain money or resources from a parent or affiliate and an assessment of the borrower’s/issuer’s management (for corporate debt only);
13)
the prospects for the borrower’s/issuer’s industry, and multiples (of earnings and/or cash flows) being paid for similar businesses in that industry (for corporate debt only);
14)
the borrower’s/issuer’s competitive position within the industry;
15)
the borrower’s/issuer’s ability to access additional liquidity through public and/or private markets; and
16)
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:
Notes to Financial Statements (Continued)
First Trust Intermediate Duration Investment Grade Corporate ETF (FIIG)October 31, 2023 • Level 1 – Level 1 inputs are quoted prices in active markets for identical investments. An active market is a market in which transactions for the investment occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
• Level 2 – Level 2 inputs are observable inputs, either directly or indirectly, and include the following:
o Quoted prices for similar investments in active markets.
o Quoted prices for identical or similar investments in markets that are non-active. A non-active market is a market where there are few transactions for the investment, the prices are not current, or price quotations vary substantially either over time or among market makers, or in which little information is released publicly.
o Inputs other than quoted prices that are observable for the investment (for example, interest rates and yield curves observable at commonly quoted intervals, volatilities, prepayment speeds, loss severities, credit risks, and default rates).
o Inputs that are derived principally from or corroborated by observable market data by correlation or other means.
• Level 3 – Level 3 inputs are unobservable inputs. Unobservable inputs may reflect the reporting entity’s own assumptions about the assumptions that market participants would use in pricing the investment.
The inputs or methodologies used for valuing investments are not necessarily an indication of the risk associated with investing in those investments. A summary of the inputs used to value the Fund’s investments as of October 31, 2023, is included with the Fund’s Portfolio of Investments.
B. Securities Transactions and Investment Income
Securities transactions are recorded as of the trade date. Realized gains and losses from securities transactions are recorded on the identified cost basis. Dividend income is recorded on the ex-dividend date. Interest income is recorded daily on the accrual basis. Amortization of premiums and accretion of discounts are recorded using the effective interest method.
C. Dividends and Distributions to Shareholders
Dividends from net investment income of the Fund, 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, are distributed at least annually. The Fund may also designate a portion of the amount paid to redeeming shareholders as a distribution for tax purposes.
Distributions in cash may be reinvested automatically in additional whole shares only if the broker through whom the shares were purchased makes such option available. Such shares will generally be reinvested by the broker based upon the market price of those shares and investors may be subject to customary brokerage commissions charged by the broker.
Distributions from net investment income and realized capital gains are determined in accordance with 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 NAV per share. Temporary differences, which arise from recognizing certain items of income, expense and gain/loss in different periods for financial statement and tax purposes, will reverse at some time in the future.
The tax character of distributions paid during the fiscal period ended October 31, 2023 was as follows:
As of October 31, 2023, the components of distributable earnings on a tax basis for the Fund were as follows:
Undistributed ordinary income | |
Accumulated capital and other gain (loss) | |
Net unrealized appreciation (depreciation) | |
D. Income Taxes
The Fund intends 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
Notes to Financial Statements (Continued)
First Trust Intermediate Duration Investment Grade Corporate ETF (FIIG)October 31, 2023 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 2023 remains open to federal and state audit. As of October 31, 2023, management has evaluated the application of these standards to the Fund and has determined that no provision for income tax is required in the Fund’s 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, 2023, for federal income tax purposes, the Fund had $16,208 of capital loss carryforwards available, to the extent provided by regulations, to offset future capital gains. To the extent that these loss carryforwards are used to offset future capital gains, it is probable that the capital gains so offset will not be distributed to the Fund’s shareholders.
Certain losses realized during the current fiscal period may be deferred and treated as occurring on the first day of the following fiscal year for federal income tax purposes. For the fiscal period ended October 31, 2023, the Fund had no net late year ordinary or capital losses.
In order to present paid-in capital and accumulated distributable earnings (loss) (which consists of accumulated net investment income (loss), accumulated net realized gain (loss) on investments and net unrealized appreciation (depreciation) on investments) on the Statement of Assets and Liabilities that more closely represent their tax character, certain adjustments have been made to paid-in capital, accumulated net investment income (loss) and accumulated net realized gain (loss) on investments. These adjustments are primarily due to the difference between book and tax treatments of income and gains on various investment securities held by the Fund. The results of operations and net assets were not affected by these adjustments. For the fiscal period ended October 31, 2023, there were no tax adjustments made to accumulated distributable earnings (loss) accounts due to differences between book and tax treatments.
As of October 31, 2023, the aggregate cost, gross unrealized appreciation, gross unrealized depreciation, and net unrealized appreciation/(depreciation) on investments (including short positions and derivatives, if any) for federal income tax purposes were as follows:
| Gross Unrealized
Appreciation | Gross Unrealized
(Depreciation) | Net Unrealized
Appreciation
(Depreciation) |
| | | |
E. Expenses
Expenses, other than the investment advisory fee and other excluded expenses, are paid by the Advisor (see Note 3).
3. Investment Advisory Fee, Affiliated Transactions and Other Fee Arrangements
First Trust, the investment advisor to the Fund, is a limited partnership with one limited partner, Grace Partners of DuPage L.P., and one general partner, The Charger Corporation. The Charger Corporation is an Illinois corporation controlled by James A. Bowen, Chief Executive Officer of First Trust. First Trust is responsible for the selection and ongoing monitoring of the 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, license fees and other services, but excluding fee payments under the Investment Management Agreement, interest, taxes, acquired fund fees and expenses, if any, brokerage commissions and other expenses connected with the execution of portfolio transactions, distribution and service fees payable pursuant to a Rule 12b-1 plan, if any, and extraordinary expenses. The annual unitary management fee payable by the Fund to First Trust for these services will be reduced at certain levels of the Fund’s net assets (“breakpoints”) and calculated pursuant to the following schedule:
Notes to Financial Statements (Continued)
First Trust Intermediate Duration Investment Grade Corporate ETF (FIIG)October 31, 2023
| |
Fund net assets up to and including $2.5 billion | |
Fund net assets greater than $2.5 billion up to and including $5 billion | |
Fund net assets greater than $5 billion up to and including $7.5 billion | |
Fund net assets greater than $7.5 billion up to and including $10 billion | |
Fund net assets greater than $10 billion up to and including $15 billion | |
Fund net assets greater than $15 billion | |
The Trust has multiple service agreements with The Bank of New York Mellon (“BNYM”). Under the service agreements, BNYM performs custodial, fund accounting, certain administrative services, and transfer agency services for the Fund. As custodian, BNYM is responsible for custody of the Fund’s assets. As fund accountant and administrator, BNYM is responsible for maintaining the books and records of the Fund’s securities and cash. As transfer agent, BNYM is responsible for maintaining shareholder records for the Fund. BNYM is a subsidiary of The Bank of New York Mellon Corporation, a financial holding company.
Each Trustee who is not an officer or employee of First Trust, any sub-advisor or any of their affiliates (“Independent Trustees”) is paid a fixed annual retainer that is allocated equally among each fund in the First Trust Fund Complex. Each Independent Trustee is also paid an annual per fund fee that varies based on whether the fund is a closed-end or other actively managed fund, a target outcome fund or an index fund.
Additionally, the Lead Independent Trustee and the Chairs of the Audit Committee, Nominating and Governance Committee and Valuation Committee are paid annual fees to serve in such capacities, with such compensation allocated pro rata among each fund in the First Trust Fund Complex based on net assets. Independent Trustees are reimbursed for travel and out-of-pocket expenses in connection with all meetings. The Lead Independent Trustee and Committee Chairs rotate every three years. The officers and “Interested” Trustee receive no compensation from the Trust for acting in such capacities.
4. Purchases and Sales of Securities
For the fiscal period ended October 31, 2023, the cost of purchases and proceeds from sales of investments, excluding short-term investments and in-kind transactions, were $10,508,348 and $635,542, respectively.
For the fiscal period ended October 31, 2023, the Fund had no in-kind transactions.
5. Creations, Redemptions and Transaction Fees
The Fund generally issues and redeems its shares in primary market transactions through a creation and redemption mechanism and does not sell or redeem individual shares. Instead, financial entities known as “Authorized Participants” have contractual arrangements with the Fund or one of the Fund’s service providers to purchase and redeem Fund shares directly with the Fund in large blocks of shares known as “Creation Units.” Prior to the start of trading on every business day, the Fund publishes through the National Securities Clearing Corporation the “basket” of securities, cash or other assets that it will accept in exchange for a Creation Unit of the Fund’s shares. An Authorized Participant that wishes to effectuate a creation of the Fund’s shares deposits with the Fund the “basket” of securities, cash or other assets identified by the Fund that day, and then receives the Creation Unit of the Fund’s shares in return for those assets. After purchasing a Creation Unit, the Authorized Participant may continue to hold the Fund’s shares or sell them in the secondary market. The redemption process is the reverse of the purchase process: the Authorized Participant redeems a Creation Unit of the Fund’s shares for a basket of securities, cash or other assets. The combination of the creation and redemption process with secondary market trading in the Fund’s shares and underlying securities provides arbitrage opportunities that are designed to help keep the market price of the Fund’s shares at or close to the NAV per share of the Fund.
The Fund imposes fees in connection with the purchase of Creation Units. These fees may vary based upon various fact-based circumstances, including, but not limited to, the composition of the securities included in the Creation Unit or the countries in which the transactions are settled. The price for each Creation Unit will equal the daily NAV per share of the Fund times the number of shares in a Creation Unit, plus the fees described above and, if applicable, any operational processing and brokerage costs, transfer fees, stamp taxes and part or all of the spread between the expected bid and offer side of the market related to the securities comprising the creation basket.
The Fund also imposes fees in connection with the redemption of Creation Units. These fees may vary based upon various fact-based circumstances, including, but not limited to, the composition of the securities included in the Creation Unit or the countries in which the transactions are settled. The price received for each Creation Unit will equal the daily NAV per share of the Fund times the number
Notes to Financial Statements (Continued)
First Trust Intermediate Duration Investment Grade Corporate ETF (FIIG)October 31, 2023 of shares in a Creation Unit, minus the fees described above and, if applicable, any operational processing and brokerage costs, transfer fees, stamp taxes and part or all of the spread between the expected bid and offer side of the market related to the securities comprising the redemption basket. Investors who use the services of a broker or other such intermediary in addition to an Authorized Participant to effect a redemption of a Creation Unit may also be assessed an amount to cover the cost of such services. The redemption fee charged by the Fund will comply with Rule 22c-2 of the 1940 Act which limits redemption fees to no more than 2% of the value of the shares redeemed.
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 July 31, 2025.
7. Indemnification
The Trust, on behalf of the Fund, has a variety of indemnification obligations under contracts with its service providers. The Trust’s maximum exposure under these arrangements is unknown. However, the Trust has not had prior claims or losses pursuant to these contracts and expects the risk of loss to be remote.
8. Subsequent Events
Management has evaluated the impact of all subsequent events on the Fund through the date the financial statements were issued and has determined that there were no subsequent events requiring recognition or disclosure in the financial statements that have not already been disclosed.
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Trustees of First Trust Exchange-Traded Fund IV:
Opinion on the Financial Statements and Financial Highlights
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of First Trust Intermediate Duration Investment Grade Corporate ETF (the “Fund”), one of the funds constituting the First Trust Exchange-Traded Fund IV, as of October 31, 2023, and the related statement of operations, changes in net assets, and the financial highlights for the period from August 2, 2023 (commencement of investment operations) through October 31, 2023, and the related notes. In our opinion, the financial statements and financial highlights present fairly, in all material respects, the financial position of the Fund as of October 31, 2023, and the results of its operations, the changes in its net assets, and the financial highlights for the period from August 2, 2023 (commencement of investment operations) through October 31, 2023, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on the Fund’s financial statements and financial highlights based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Fund in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement, whether due to error or fraud. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements and financial highlights, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements and financial highlights. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and financial highlights. Our procedures included confirmation of securities owned as of October 31, 2023, by correspondence with the custodian and brokers; when replies were not received from brokers, we performed other auditing procedures. We believe that our audit provides a reasonable basis for our opinion.
/s/ Deloitte & Touche, LLP
Chicago, Illinois
December 21, 2023
We have served as the auditor of one or more First Trust investment companies since 2001.
First Trust Intermediate Duration Investment Grade Corporate ETF (FIIG)October 31, 2023 (Unaudited) Proxy Voting Policies and Procedures
A description of the policies and procedures that the Trust uses to determine how to vote proxies and information on how the Fund voted proxies relating to its portfolio securities during the most recent 12-month period ended June 30 is available (1) without charge, upon request, by calling (800) 988-5891; (2) on the Fund’s website at www.ftportfolios.com; and (3) on the Securities and Exchange Commission’s (“SEC”) website at www.sec.gov.
Portfolio Holdings
The Fund files portfolio holdings information for each month in a fiscal quarter within 60 days after the end of the relevant fiscal quarter on Form N-PORT. Portfolio holdings information for the third month of each fiscal quarter will be publicly available on the SEC’s website at www.sec.gov. The Fund’s complete schedule of portfolio holdings for the second and fourth quarters of each fiscal year is included in the semi-annual and annual reports to shareholders, respectively, and is filed with the SEC on Form N-CSR. The semi-annual and annual report for the Fund is available to investors within 60 days after the period to which it relates. The Fund’s Forms N-PORT and Forms N-CSR are available on the SEC’s website listed above.
Federal Tax Information
Distributions paid to foreign shareholders during the Fund’s fiscal period ended October 31, 2023 that were properly designated by the Fund as “interest-related dividends” or “short-term capital gain dividends,” may not be subject to federal income tax provided that the income was earned directly by such foreign shareholders.
Of the ordinary income (including short-term capital gain) distributions made by the Fund during the fiscal period ended October 31, 2023, none qualify for the corporate dividends received deduction available to corporate shareholders or as qualified dividend income.
Risk Considerations
Risks are inherent in all investing. Certain general risks that may be applicable to a Fund are identified below, but not all of the material risks relevant to each Fund are included in this report and not all of the risks below apply to each Fund. The material risks of investing in each Fund are spelled out in its prospectus, statement of additional information and other regulatory filings. Before investing, you should consider each Fund’s investment objective, risks, charges and expenses, and read each Fund’s prospectus and statement of additional information carefully. You can download each Fund’s prospectus at www.ftportfolios.com or contact First Trust Portfolios L.P. at (800) 621-1675 to request a prospectus, which contains this and other information about each Fund.
Concentration Risk. To the extent that a fund is able to invest a significant percentage of its assets in a single asset class or the securities of issuers within the same country, state, region, industry or sector, an adverse economic, business or political development may affect the value of the fund’s investments more than if the fund were more broadly diversified. A fund that tracks an index will be concentrated to the extent the fund’s corresponding index is concentrated. A concentration makes a fund more susceptible to any single occurrence and may subject the fund to greater market risk than a fund that is more broadly diversified.
Credit Risk. Credit risk is the risk that an issuer of a security will be unable or unwilling to make dividend, interest and/or principal payments when due and the related risk that the value of a security may decline because of concerns about the issuer’s ability to make such payments.
Cyber Security Risk. The funds are susceptible to potential operational risks through breaches in cyber security. A breach in cyber security refers to both intentional and unintentional events that may cause a fund to lose proprietary information, suffer data corruption or lose operational capacity. Such events could cause a fund to incur regulatory penalties, reputational damage, additional compliance costs associated with corrective measures and/or financial loss. In addition, cyber security breaches of a fund’s third-party service providers, such as its administrator, transfer agent, custodian, or sub-advisor, as applicable, or issuers in which the fund invests, can also subject a fund to many of the same risks associated with direct cyber security breaches.
Defined Outcome Funds Risk. To the extent a fund’s investment strategy is designed to deliver returns tied to the price performance of an underlying ETF, an investor may not realize the returns the fund seeks to achieve if that investor does not hold shares for the entire target outcome period. In the event an investor purchases shares after the first day of the target outcome period or sells shares prior to the end of the target outcome period, the buffer that the fund seeks to provide against a decline in the value of the underlying ETF may not be available, the enhanced returns that the fund seeks to provide (if any) may not be available and the investor may not
Additional Information (Continued)
First Trust Intermediate Duration Investment Grade Corporate ETF (FIIG)October 31, 2023 (Unaudited) participate in a gain in the value of the underlying ETF up to the cap for the investor’s investment period. Additionally, the fund will not participate in gains of the underlying ETF above the cap and a shareholder may lose their entire investment. If the fund seeks enhanced returns, there are certain time periods when the value of the fund may fall faster than the value of the underlying ETF, and it is very unlikely that, on any given day during which the underlying ETF share price increases in value, the fund’s share price will increase at the same rate as the enhanced returns sought by the fund, which is designed for an entire target outcome period. Trading flexible exchange options involves risks different from, or possibly greater than, the risks associated with investing directly in securities, such as less liquidity and correlation and valuation risks. A fund may experience substantial downside from specific flexible exchange option positions and certain positions may expire worthless.
Derivatives Risk. To the extent a fund uses derivative instruments such as futures contracts, options contracts and swaps, the fund may experience losses because of adverse movements in the price or value of the underlying asset, index or rate, which may be magnified by certain features of the derivative. These risks are heightened when a fund’s portfolio managers use derivatives to enhance the fund’s return or as a substitute for a position or security, rather than solely to hedge (or offset) the risk of a position or security held by the fund.
Equity Securities Risk. To the extent a fund invests in equity securities, the value of the fund’s shares will fluctuate with changes in the value of the equity securities. Equity securities prices fluctuate for several reasons, including changes in investors’ perceptions of the financial condition of an issuer or the general condition of the relevant stock market, such as market volatility, or when political or economic events affecting the issuers occur. In addition, common stock prices may be particularly sensitive to rising interest rates, as the cost of capital rises and borrowing costs increase. Equity securities may decline significantly in price over short or extended periods of time, and such declines may occur in the equity market as a whole, or they may occur in only a particular country, company, industry or sector of the market.
ETF Risk. The shares of an ETF trade like common stock and represent an interest in a portfolio of securities. The risks of owning an ETF generally reflect the risks of owning the underlying securities, although lack of liquidity in an ETF could result in it being more volatile and ETFs have management fees that increase their costs. Shares of an ETF trade on an exchange at market prices rather than net asset value, which may cause the shares to trade at a price greater than net asset value (premium) or less than net asset value (discount). In times of market stress, decisions by market makers to reduce or step away from their role of providing a market for an ETF’s shares, or decisions by an ETF’s authorized participants that they are unable or unwilling to proceed with creation and/or redemption orders of an ETF’s shares, could result in shares of the ETF trading at a discount to net asset value and in greater than normal intraday bid-ask spreads.
Fixed Income Securities Risk. To the extent a fund invests in fixed income securities, the fund will be subject to credit risk, income risk, interest rate risk, liquidity risk and prepayment risk. Income risk is the risk that income from a fund’s fixed income investments could decline during periods of falling interest rates. Interest rate risk is the risk that the value of a fund’s fixed income securities will decline because of rising interest rates. Liquidity risk is the risk that a security cannot be purchased or sold at the time desired, or cannot be purchased or sold without adversely affecting the price. Prepayment risk is the risk that the securities will be redeemed or prepaid by the issuer, resulting in lower interest payments received by the fund. In addition to these risks, high yield securities, or “junk” bonds, are subject to greater market fluctuations and risk of loss than securities with higher ratings, and the market for high yield securities is generally smaller and less liquid than that for investment grade securities.
Index or Model Constituent Risk. Certain funds may be a constituent of one or more indices or ETF models. As a result, such a fund may be included in one or more index-tracking exchange-traded funds or mutual funds. Being a component security of such a vehicle could greatly affect the trading activity involving a fund, the size of the fund and the market volatility of the fund. Inclusion in an index could increase demand for the fund and removal from an index could result in outsized selling activity in a relatively short period of time. As a result, a fund’s net asset value could be negatively impacted and the fund’s market price may be significantly below its net asset value during certain periods. In addition, index rebalances may potentially result in increased trading activity in a fund’s shares.
Index Provider Risk. To the extent a fund seeks to track an index, it is subject to Index Provider Risk. There is no assurance that the Index Provider will compile the Index accurately, or that the Index will be determined, maintained, constructed, reconstituted, rebalanced, composed, calculated or disseminated accurately. To correct any such error, the Index Provider may carry out an unscheduled rebalance or other modification of the Index constituents or weightings, which may increase the fund’s costs. The Index Provider does not provide any representation or warranty in relation to the quality, accuracy or completeness of data in the Index, and
Additional Information (Continued)
First Trust Intermediate Duration Investment Grade Corporate ETF (FIIG)October 31, 2023 (Unaudited) it does not guarantee that the Index will be calculated in accordance with its stated methodology. Losses or costs associated with any Index Provider errors generally will be borne by the fund and its shareholders.
Investment Companies Risk. To the extent a fund invests in the securities of other investment vehicles, the fund will incur additional fees and expenses that would not be present in a direct investment in those investment vehicles. Furthermore, the fund’s investment performance and risks are directly related to the investment performance and risks of the investment vehicles in which the fund invests.
LIBOR Risk. To the extent a fund invests in floating or variable rate obligations that use the London Interbank Offered Rate (“LIBOR”) as a reference interest rate, it is subject to LIBOR Risk. The United Kingdom’s Financial Conduct Authority, which regulates LIBOR, has ceased making LIBOR available as a reference rate over a phase-out period that began December 31, 2021. There is no assurance that any alternative reference rate, including the Secured Overnight Financing Rate (“SOFR”) will be similar to or produce the same value or economic equivalence as LIBOR or that instruments using an alternative rate will have the same volume or liquidity. The unavailability or replacement of LIBOR may affect the value, liquidity or return on certain fund investments and may result in costs incurred in connection with closing out positions and entering into new trades. Any potential effects of the transition away from LIBOR on the fund or on certain instruments in which the fund invests can be difficult to ascertain, and they may vary depending on a variety of factors, and they could result in losses to the fund.
Management Risk. To the extent that a fund is actively managed, it is subject to management risk. In managing an actively-managed fund’s investment portfolio, the fund’s portfolio managers will apply investment techniques and risk analyses that may not have the desired result. There can be no guarantee that a fund will meet its investment objective.
Market Risk. Market risk is the risk that a particular security, or shares of a fund in general, may fall in value. Securities held by a fund, as well as shares of a fund itself, are subject to market fluctuations caused by factors such as general economic conditions, political events, regulatory or market developments, changes in interest rates and perceived trends in securities prices. Shares of a fund could decline in value or underperform other investments as a result of the risk of loss associated with these market fluctuations. In addition, local, regional or global events such as war, acts of terrorism, spread of infectious diseases or other public health issues, recessions, or other events could have a significant negative impact on a fund and its investments. Such events may affect certain geographic regions, countries, sectors and industries more significantly than others. In February 2022, Russia invaded Ukraine which has caused and could continue to cause significant market disruptions and volatility within the markets in Russia, Europe, and the United States. The hostilities and sanctions resulting from those hostilities could have a significant impact on certain fund investments as well as fund performance. The COVID-19 global pandemic and the ensuing policies enacted by governments and central banks have caused and may continue to cause significant volatility and uncertainty in global financial markets. While the U.S. has resumed “reasonably” normal business activity, many countries continue to impose lockdown measures. Additionally, there is no guarantee that vaccines will be effective against emerging variants of the disease. These events also adversely affect the prices and liquidity of a fund’s portfolio securities or other instruments and could result in disruptions in the trading markets. Any of such circumstances could have a materially negative impact on the value of a fund’s shares and result in increased market volatility. During any such events, a fund’s shares may trade at increased premiums or discounts to their net asset value and the bid/ask spread on a fund’s shares may widen.
Non-U.S. Securities Risk. To the extent a fund invests in non-U.S. securities, it is subject to additional risks not associated with securities of domestic issuers. Non-U.S. securities are subject to higher volatility than securities of domestic issuers due to: possible adverse political, social or economic developments; restrictions on foreign investment or exchange of securities; capital controls; lack of liquidity; currency exchange rates; excessive taxation; government seizure of assets; the imposition of sanctions by foreign governments; different legal or accounting standards; and less government supervision and regulation of exchanges in foreign countries. Investments in non-U.S. securities may involve higher costs than investments in U.S. securities, including higher transaction and custody costs, as well as additional taxes imposed by non-U.S. governments. These risks may be heightened for securities of companies located, or with significant operations, in emerging market countries.
Operational Risk. Each fund is subject to risks arising from various operational factors, including, but not limited to, human error, processing and communication errors, errors of a fund’s service providers, counterparties or other third-parties, failed or inadequate processes and technology or systems failures. Each fund relies on third-parties for a range of services, including custody. Any delay or failure relating to engaging or maintaining such service providers may affect a fund’s ability to meet its investment objective. Although the funds and the funds’ investment advisor seek to reduce these operational risks through controls and procedures, there is no way to completely protect against such risks.
Additional Information (Continued)
First Trust Intermediate Duration Investment Grade Corporate ETF (FIIG)October 31, 2023 (Unaudited) Passive Investment Risk. To the extent a fund seeks to track an index, the fund will invest in the securities included in, or representative of, the index regardless of their investment merit. A fund generally will not attempt to take defensive positions in declining markets.
Preferred Securities Risk. Preferred securities combine some of the characteristics of both common stocks and bonds. Preferred securities are typically subordinated to bonds and other debt securities in a company’s capital structure in terms of priority to corporate income, subjecting them to greater credit risk than those debt securities. Generally, holders of preferred securities have no voting rights with respect to the issuing company unless preferred dividends have been in arrears for a specified number of periods, at which time the preferred security holders may obtain limited rights. In certain circumstances, an issuer of preferred securities may defer payment on the securities and, in some cases, redeem the securities prior to a specified date. Preferred securities may also be substantially less liquid than other securities, including common stock.
Valuation Risk. The valuation of certain securities may carry more risk than that of common stock. Uncertainties in the conditions of the financial markets, unreliable reference data, lack of transparency and inconsistency of valuation models and processes may lead to inaccurate asset pricing. A fund may hold investments in sizes smaller than institutionally sized round lot positions (sometimes referred to as odd lots). However, third-party pricing services generally provide evaluations on the basis of institutionally-sized round lots. If a fund sells certain of its investments in an odd lot transaction, the sale price may be less than the value at which such securities have been held by the fund. Odd lots often trade at lower prices than institutional round lots. There is no assurance that the fund will be able to sell a portfolio security at the price established by the pricing service, which could result in a loss to the fund.
NOT FDIC INSURED NOT BANK GUARANTEED MAY LOSE VALUE
Advisory Agreement
Board Considerations Regarding Approval of the Investment Management Agreement
The Board of Trustees of First Trust Exchange-Traded Fund IV (the “Trust”), including the Independent Trustees, approved the Investment Management Agreement (the “Agreement”) with First Trust Advisors L.P. (the “Advisor”), on behalf of First Trust Intermediate Duration Investment Grade Corporate ETF (the “Fund”), for an initial two-year term at a meeting held on June 5, 2023. The Board determined that the Agreement is in the best interests of the Fund in light of the nature, extent and quality of the services expected to be provided and such other matters as the Board considered to be relevant in the exercise of its business judgment.
To reach this determination, the Board considered its duties under the Investment Company Act of 1940, as amended (the “1940 Act”), as well as under the general principles of state law, in reviewing and approving advisory contracts; the requirements of the 1940 Act in such matters; the fiduciary duty of investment advisors with respect to advisory agreements and compensation; the standards used by courts in determining whether investment company boards have fulfilled their duties; and the factors to be considered by the Board in voting on such agreements. To assist the Board in its evaluation of the Agreement for the Fund, the Independent Trustees received a report from the Advisor in advance of the Board meeting responding to a request for information from counsel to the Independent Trustees, submitted on behalf of the Independent Trustees, that, among other things, outlined: the services to be provided by the Advisor to the Fund (including the relevant personnel responsible for these services and their experience); the proposed unitary fee rate schedule payable by the Fund as compared to fees charged to a peer group of funds (the “Expense Group”) and a broad peer universe of funds (the “Expense Universe”), each assembled by Broadridge Financial Solutions, Inc. (“Broadridge”), an independent source, and as compared to fees charged to other exchange-traded funds (“ETFs”) managed by the Advisor; the estimated expense ratio of the Fund as compared to expense ratios of the funds in the Fund’s Expense Group and Expense Universe; the nature of expenses to be incurred in providing services to the Fund and the potential for the Advisor to realize economies of scale, if any; profitability and other financial data for the Advisor; any indirect benefits to the Advisor and its affiliate, First Trust Portfolios L.P. (“FTP”); and information on the Advisor’s compliance program. The Independent Trustees and their counsel also met separately to discuss the information provided by the Advisor. The Board applied its business judgment to determine whether the arrangement between the Trust and the Advisor is a reasonable business arrangement from the Fund’s perspective.
In evaluating whether to approve the Agreement for the Fund, the Board considered the nature, extent and quality of the services to be provided by the Advisor under the Agreement and considered that employees of the Advisor provide management services to other ETFs and to other funds in the First Trust Fund Complex with diligence and care. The Board considered that the Advisor will be responsible for the overall management and administration of the Fund and reviewed all of the services to be provided by the Advisor to the Fund, as well as the background and experience of the persons responsible for such services. The Board noted that the Fund will be an actively-managed ETF and considered that the Advisor manages other ETFs with a similar structure in the First Trust Fund
Additional Information (Continued)
First Trust Intermediate Duration Investment Grade Corporate ETF (FIIG)October 31, 2023 (Unaudited) Complex. The Board noted that the Advisor’s Investment Grade Fixed Income and Leveraged Finance Investment Groups will be responsible for the day-to-day management of the Fund’s investments and considered the background and experience of the members of the Investment Grade Fixed Income and Leveraged Finance Investment Groups. The Board considered that the Advisor applies the same oversight model internally with the Investment Grade Fixed Income and Leveraged Finance Investment Groups as it uses for overseeing external sub-advisors, including portfolio risk monitoring and performance review. In reviewing the services to be provided, the Board noted the compliance program that had been developed by the Advisor and considered that it includes a robust program for monitoring the Advisor’s and the Fund’s compliance with the 1940 Act, as well as the Fund’s compliance with its investment objective, policies and restrictions. At the meeting, the Trustees received a presentation from representatives of the Investment Grade Fixed Income and Leveraged Finance Investment Groups and were able to ask questions about the Groups and the proposed investment strategy for the Fund. Because the Fund had yet to commence investment operations, the Board could not consider the historical investment performance of the Fund. In light of the information presented and the considerations made, the Board concluded that the nature, extent and quality of the services to be provided to the Fund by the Advisor under the Agreement are expected to be satisfactory.
The Board considered the proposed unitary fee rate schedule payable by the Fund under the Agreement for the services to be provided. The Board noted that, under the unitary fee arrangement, the Fund would pay the Advisor a unitary fee starting at an annual rate of 0.65% of its average daily net assets, subject to a breakpoint schedule pursuant to which the unitary fee rate would be reduced as assets of the Fund meet certain thresholds. The Board noted that the Advisor would be responsible for the Fund’s expenses, including the cost of transfer agency, custody, fund administration, legal, audit and other services and license fees, if any, but excluding the fee payment under the Agreement and interest, taxes, acquired fund fees and expenses, if any, brokerage commissions and other expenses connected with the execution of portfolio transactions, distribution and service fees pursuant to a Rule 12b-1 plan, if any, and extraordinary expenses, if any. The Board received and reviewed information showing the fee rates and expense ratios of the peer funds in the Expense Group, as well as advisory and unitary fee rates charged by the Advisor to other ETFs. Because the Fund will pay a unitary fee, the Board determined that expense ratios were the most relevant comparative data point. Based on the information provided, the Board noted that the total (net) expense ratio for the Fund was above the median total (net) expense ratio of the peer funds in the Expense Group. With respect to the Expense Group, the Board discussed with representatives of the Advisor how the Expense Group was assembled and how the Fund compared and differed from the peer funds. The Board took this information into account in considering the peer data. With respect to fees charged to other ETFs managed by the Advisor, the Board considered the Advisor’s statements that the Fund will be a specialty, actively-managed ETF and that the proposed Fund has no material difference in fees from comparable First Trust fixed income funds. In light of the information considered and the nature, extent and quality of the services expected to be provided to the Fund under the Agreement, the Board determined that the proposed unitary fee was fair and reasonable.
The Board considered whether there are any potential economies of scale to be achieved in connection with the Advisor providing investment advisory services to the Fund and whether the Fund may benefit from any economies of scale. The Board noted that the proposed unitary fee rate schedule for the Fund includes breakpoints pursuant to which the unitary fee rate would be reduced as assets of the Fund meet certain thresholds. The Board considered that the Advisor has continued to build infrastructure and add new staff to improve the services to the funds in the First Trust Fund Complex. The Board also noted that under the unitary fee structure, any reduction in expenses associated with the management and operations of the Fund generally would benefit the Advisor, but that the unitary fee structure provides a level of certainty in expenses for shareholders of the Fund. The Board concluded that the proposed unitary fee rate schedule for the Fund reflects an appropriate level of sharing of any economies of scale that may be realized in the management of the Fund at reasonably foreseeable future asset levels. The Board took into consideration the types of costs to be borne by the Advisor in connection with its services to be performed for the Fund under the Agreement. The Board considered the Advisor’s estimate of the asset level for the Fund at which the Advisor expects the Agreement to be profitable to the Advisor and the Advisor’s estimate of the profitability of the Agreement if the Fund’s assets reach $100 million. The Board noted the inherent limitations in the profitability analysis and concluded that, based on the information provided, the Advisor’s estimated profitability level for the Fund was not unreasonable. In addition, the Board considered indirect benefits described by the Advisor that may be realized from its relationship with the Fund. The Board considered that the Advisor had identified as an indirect benefit to the Advisor and FTP their exposure to investors and brokers who, absent their exposure to the Fund, may have had no dealings with the Advisor or FTP, and noted that the Advisor will not utilize soft dollars in connection with the Fund. The Board concluded that the character and amount of potential indirect benefits to the Advisor were not unreasonable.
Based on all of the information considered and the conclusions reached, the Board, including the Independent Trustees, determined that the terms of the Agreement are fair and reasonable and that the approval of the Agreement is in the best interests of the Fund. No single factor was determinative in the Board’s analysis.
Additional Information (Continued)
First Trust Intermediate Duration Investment Grade Corporate ETF (FIIG)October 31, 2023 (Unaudited) Remuneration
First Trust Advisors L.P. (“First Trust”) is authorised and regulated by the U.S. Securities and Exchange Commission and is entitled to market shares of certain funds it manages, including First Trust Intermediate Duration Investment Grade Corporate ETF (the “Fund”), in certain member states in the European Economic Area in accordance with the cooperation arrangements in Article 42 of the Alternative Investment Fund Managers Directive (the “Directive”). First Trust is required under the Directive to make disclosures in respect of remuneration. The following disclosures are made in line with First Trust’s interpretation of currently available regulatory guidance on remuneration disclosures.
During the year ended December 31, 2022, the amount of remuneration paid (or to be paid) by First Trust Advisors L.P. in respect of the Funds is $4,887. This figure is comprised of $189 paid (or to be paid) in fixed compensation and $4,698 paid (or to be paid) in variable compensation. There were a total of 24 beneficiaries of the remuneration described above. Those amounts include $2,577 paid (or to be paid) to senior management of First Trust Advisors L.P. and $2,310 paid (or to be paid) to other employees whose professional activities have a material impact on the risk profiles of First Trust Advisors L.P. or the Funds (collectively, “Code Staff”).
Code Staff included in the aggregated figures disclosed above are rewarded in line with First Trust’s remuneration policy (the “Remuneration Policy”) which is determined and implemented by First Trust’s senior management. The Remuneration Policy reflects First Trust’s ethos of good governance and encapsulates the following principal objectives:
i.
to provide a clear link between remuneration and performance of First Trust and to avoid rewarding for failure;
ii.
to promote sound and effective risk management consistent with the risk profiles of the funds managed by First Trust; and
iii.
to remunerate staff in line with the business strategy, objectives, values and interests of First Trust and the funds managed by First Trust in a manner that avoids conflicts of interest.
First Trust assesses various risk factors which it is exposed to when considering and implementing remuneration for Code Staff and considers whether any potential award to such person(s) would give rise to a conflict of interest. First Trust does not reward failure, or consider the taking of risk or failure to take risk in its remuneration of Code Staff.
First Trust assesses performance for the purposes of determining payments in respect of performance-related remuneration of Code Staff by reference to a broad range of measures including (i) individual performance (using financial and non-financial criteria), and (ii) the overall performance of First Trust. Remuneration is not based upon the performance of the Fund.
The elements of remuneration are balanced between fixed and variable and the senior management sets fixed salaries at a level sufficient to ensure that variable remuneration incentivises and rewards strong individual performance but does not encourage excessive risk taking.
No individual is involved in setting his or her own remuneration.
Board of Trustees and Officers
First Trust Intermediate Duration Investment Grade Corporate ETF (FIIG)October 31, 2023 (Unaudited) The following tables identify the Trustees and Officers of the Trust. Unless otherwise indicated, the address of all persons is 120 East Liberty Drive, Suite 400, Wheaton, IL 60187.
The Trust’s statement of additional information includes additional information about the Trustees and is available, without charge, upon request, by calling (800) 988-5891.
Name,
Year of Birth and
Position with the Trust | Term of Office
and Year First
Elected or
Appointed | Principal Occupations
During Past 5 Years | Number of
Portfolios in
the First Trust
Fund Complex
Overseen by
Trustee | Other
Trusteeships or
Directorships
Held by Trustee
During Past
5 Years |
|
Richard E. Erickson, Trustee
(1951) | • Indefinite Term • Since Inception | Retired; Physician, Edward-Elmhurst Medical Group (2021 to September 2023); Physician and Officer, Wheaton Orthopedics (1990 to 2021) | | |
Thomas R. Kadlec, Trustee
(1957) | • Indefinite Term • Since Inception | Retired; President, ADM Investors Services, Inc. (Futures Commission Merchant) (2010 to July 2022) | | Director, National Futures Association and ADMIS Singapore Ltd.; Formerly, Director of ADM Investor Services, Inc., ADM Investor Services International, ADMIS Hong Kong Ltd., and Futures Industry Association |
Denise M. Keefe, Trustee
(1964) | • Indefinite Term • Since 2021 | Executive Vice President, Advocate Aurora Health and President, Advocate Aurora Continuing Health Division (Integrated Healthcare System) | | Director and Board Chair of Advocate Home Health Services, Advocate Home Care Products and Advocate Hospice; Director and Board Chair of Aurora At Home (since 2018); Director of Advocate Physician Partners Accountable Care Organization; Director of RML Long Term Acute Care Hospitals; Director of Senior Helpers (since 2021); and Director of MobileHelp (since 2022) |
Robert F. Keith, Trustee
(1956) | • Indefinite Term • Since Inception | President, Hibs Enterprises (Financial and Management Consulting) | | Formerly, Director of Trust Company of Illinois |
Niel B. Nielson, Trustee
(1954) | • Indefinite Term • Since Inception | Senior Advisor (2018 to Present), Managing Director and Chief Operating Officer (2015 to 2018), Pelita Harapan Educational Foundation (Educational Products and Services) | | |
Bronwyn Wright, Trustee
(1971) | • Indefinite Term • Since 2023 | Independent Director to a number of Irish collective investment funds (2009 to Present); Various roles at international affiliates of Citibank (1994 to 2009), including Managing Director, Citibank Europe plc and Head of Securities and Fund Services, Citi Ireland (2007 to 2009) | | |
Board of Trustees and Officers (Continued)
First Trust Intermediate Duration Investment Grade Corporate ETF (FIIG)October 31, 2023 (Unaudited) Name, Year of Birth and Position with the Trust | Term of Office and Year First Elected or Appointed | Principal Occupations During Past 5 Years | Number of Portfolios in the First Trust Fund Complex Overseen by Trustee | Other Trusteeships or Directorships Held by Trustee During Past 5 Years |
|
James A. Bowen(1), Trustee,
Chairman of the Board
(1955) | • Indefinite Term • Since Inception | Chief Executive Officer, First Trust Advisors L.P. and First Trust Portfolios L.P., Chairman of the Board of Directors, BondWave LLC (Software Development Company) and Stonebridge Advisors LLC (Investment Advisor) | | |
| Position and
Offices
with Trust | Term of Office
and Length of
Service | Principal Occupations
During Past 5 Years |
|
| President and Chief Executive Officer | • Indefinite Term • Since 2016 | Managing Director and Chief Financial Officer, First Trust Advisors L.P. and First Trust Portfolios L.P.; Chief Financial Officer, BondWave LLC (Software Development Company) and Stonebridge Advisors LLC (Investment Advisor) |
| Treasurer, Chief Financial Officer and Chief Accounting Officer | • Indefinite Term • Since 2023 | Senior Vice President, First Trust Advisors L.P. and First Trust Portfolios L.P., July 2021 to Present. Previously, Vice President, First Trust Advisors L.P. and First Trust Portfolios L.P., 2014 - 2021. |
| Secretary and Chief Legal Officer | • Indefinite Term • Since Inception | General Counsel, First Trust Advisors L.P. and First Trust Portfolios L.P.; Secretary and General Counsel, BondWave LLC; Secretary, Stonebridge Advisors LLC |
Daniel J. Lindquist
(1970) | | • Indefinite Term • Since Inception | Managing Director, First Trust Advisors L.P. and First Trust Portfolios L.P. |
| Chief Compliance Officer and Assistant Secretary | • Indefinite Term • Since Inception | Deputy General Counsel, First Trust Advisors L.P. and First Trust Portfolios L.P. |
| | • Indefinite Term • Since Inception | Senior Vice President, First Trust Advisors L.P. and First Trust Portfolios L.P. |
| | • Indefinite Term • Since Inception | Senior Vice President, First Trust Advisors L.P. and First Trust Portfolios L.P. |
(1)
Mr. Bowen is deemed an “interested person” of the Trust due to his position as Chief Executive Officer of First Trust Advisors L.P., investment advisor of the Trust.
(2)
The term “officer” means the president, vice president, secretary, treasurer, controller or any other officer who performs a policy making function.
First Trust Intermediate Duration Investment Grade Corporate ETF (FIIG)October 31, 2023 (Unaudited) Privacy Policy
First Trust values our relationship with you and considers your privacy an important priority in maintaining that relationship. We are committed to protecting the security and confidentiality of your personal information.
Sources of Information
We collect nonpublic personal information about you from the following sources:
• Information we receive from you and your broker-dealer, investment professional or financial representative through interviews, applications, agreements or other forms;
• Information about your transactions with us, our affiliates or others;
• Information we receive from your inquiries by mail, e-mail or telephone; and
• Information we collect on our website through the use of “cookies.” For example, we may identify the pages on our website that your browser requests or visits.
Information Collected
The type of data we collect may include your name, address, social security number, age, financial status, assets, income, tax information, retirement and estate plan information, transaction history, account balance, payment history, investment objectives, marital status, family relationships and other personal information.
Disclosure of Information
We do not disclose any nonpublic personal information about our customers or former customers to anyone, except as permitted by law. In addition to using this information to verify your identity (as required under law), the permitted uses may also include the disclosure of such information to unaffiliated companies for the following reasons:
• In order to provide you with products and services and to effect transactions that you request or authorize, we may disclose your personal information as described above to unaffiliated financial service providers and other companies that perform administrative or other services on our behalf, such as transfer agents, custodians and trustees, or that assist us in the distribution of investor materials such as trustees, banks, financial representatives, proxy services, solicitors and printers.
• We may release information we have about you if you direct us to do so, if we are compelled by law to do so, or in other legally limited circumstances (for example to protect your account from fraud).
In addition, in order to alert you to our other financial products and services, we may share your personal information within First Trust.
Use of Website Analytics
We currently use third party analytics tools, Google Analytics and AddThis, to gather information for purposes of improving First Trust’s website and marketing our products and services to you. These tools employ cookies, which are small pieces of text stored in a file by your web browser and sent to websites that you visit, to collect information, track website usage and viewing trends such as the number of hits, pages visited, videos and PDFs viewed and the length of user sessions in order to evaluate website performance and enhance navigation of the website. We may also collect other anonymous information, which is generally limited to technical and web navigation information such as the IP address of your device, internet browser type and operating system for purposes of analyzing the data to make First Trust’s website better and more useful to our users. The information collected does not include any personal identifiable information such as your name, address, phone number or email address unless you provide that information through the website for us to contact you in order to answer your questions or respond to your requests. To find out how to opt-out of these services click on: Google Analytics and AddThis.
Confidentiality and Security
With regard to our internal security procedures, First Trust restricts access to your nonpublic personal information to those First Trust employees who need to know that information to provide products or services to you. We maintain physical, electronic and procedural safeguards to protect your nonpublic personal information.
Policy Updates and Inquiries
As required by federal law, we will notify you of our privacy policy annually. We reserve the right to modify this policy at any time, however, if we do change it, we will tell you promptly. For questions about our policy, or for additional copies of this notice, please go to www.ftportfolios.com, or contact us at 1-800-621-1675 (First Trust Portfolios) or 1-800-222-6822 (First Trust Advisors).
March 2023
First Trust Exchange-Traded Fund IV
INVESTMENT ADVISOR
First Trust Advisors L.P.
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
ADMINISTRATOR, CUSTODIAN,
FUND ACCOUNTANT &
TRANSFER AGENT
The Bank of New York Mellon
240 Greenwich Street
New York, NY 10286
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
111 South Wacker Drive
Chicago, IL 60606
LEGAL COUNSEL
Chapman and Cutler LLP
320 South Canal Street
Chicago, IL 60606
Annual Report
For the Year Ended
October 31, 2023
First Trust Exchange-Traded Fund IV
First Trust Limited Duration Investment Grade Corporate ETF (FSIG) |
First Trust Limited Duration Investment Grade Corporate ETF (FSIG)
Annual Report
October 31, 2023
Caution Regarding Forward-Looking Statements
This report contains certain forward-looking statements within the meaning of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended. Forward-looking statements include statements regarding the goals, beliefs, plans or current expectations of First Trust Advisors L.P. (“First Trust” or the “Advisor”) and its representatives, taking into account the information currently available to them. Forward-looking statements include all statements that do not relate solely to current or historical fact. For example, forward-looking statements include the use of words such as “anticipate,” “estimate,” “intend,” “expect,” “believe,” “plan,” “may,” “should,” “would” or other words that convey uncertainty of future events or outcomes.
Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the series of First Trust Exchange-Traded Fund IV (the “Trust”) described in this report (First Trust Limited Duration Investment Grade Corporate ETF; hereinafter referred to as the “Fund”) to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. When evaluating the information included in this report, you are cautioned not to place undue reliance on these forward-looking statements, which reflect the judgment of the Advisor and its representatives only as of the date hereof. We undertake no obligation to publicly revise or update these forward-looking statements to reflect events and circumstances that arise after the date hereof.
Performance and Risk Disclosure
There is no assurance that the Fund will achieve its investment objective. The Fund is subject to market risk, which is the possibility that the market values of securities owned by the Fund will decline and that the value of the Fund’s shares may therefore be less than what you paid for them. Accordingly, you can lose money investing in the Fund. See “Risk Considerations” in the Additional Information section of this report for a discussion of certain other risks of investing in the Fund.
Performance data quoted represents past performance, which is no guarantee of future results, and current performance may be lower or higher than the figures shown. For the most recent month-end performance figures, please visit www.ftportfolios.com or speak with your financial advisor. Investment returns, net asset value and share price will fluctuate and Fund shares, when sold, may be worth more or less than their original cost.
The Advisor may also periodically provide additional information on Fund performance on the Fund’s webpage at www.ftportfolios.com.
How to Read This Report
This report contains information that may help you evaluate your investment in the Fund. It includes details about the Fund and presents data and analysis that provide insight into the Fund’s performance and investment approach.
By reading the portfolio commentary from the portfolio management team of the Fund, you may obtain an understanding of how the market environment affected the Fund’s performance. The statistical information that follows may help you understand the Fund’s performance compared to that of a relevant market benchmark.
It is important to keep in mind that the opinions expressed by personnel of the Advisor are just that: informed opinions. They should not be considered to be promises or advice. The opinions, like the statistics, cover the period through the date on the cover of this report. The material risks of investing in the Fund are spelled out in the prospectus, the statement of additional information, and other Fund regulatory filings.
First Trust Limited Duration Investment Grade Corporate ETF (FSIG)
Annual Letter from the Chairman and CEO
October 31, 2023
Dear Shareholders,
First Trust is pleased to provide you with the annual report for the First Trust Limited Duration Investment Grade Corporate ETF (the “Fund”), which contains detailed information about the Fund for the twelve months ended October 31, 2023.
The Bureau of Economic Analysis recently announced that U.S. real gross domestic product (“GDP”) grew by a staggering 4.9% in the third quarter of 2023 and is now up 2.9% on a year-over-year basis from where it stood in the third quarter of 2022. The most recent quarter’s GDP data represents the fastest growth rate for any quarter since 2014. Consumer spending, which rose by 4.0% over the period, was responsible for 2.7 percentage points of the total increase in GDP. Whether the consumer can keep up this pace of spending remains to be seen, especially given recent news that excess savings from the pandemic-era stimulus have likely been depleted. From a global perspective, the International Monetary Fund (“IMF”) notes that progress in fighting inflation has led to lower economic growth. In their October 2023 publication of the World Economic Outlook, the IMF projected that the growth in world economic output is expected to slow from 3.5% in 2022 to 2.9% in 2024. The economic growth in advanced economies is projected to plummet from 2.6% in 2022 to 1.4% in 2024.
In the notes to their September 2023 meeting, the Federal Open Market Committee revealed that they may need to keep interest rates “higher for longer” as they continue to battle stubbornly high inflation. As many investors are likely aware, a higher Federal Funds target rate can have deep implications for consumers, such as driving up the cost of borrowing for homes, automobiles, and other large purchases. The American consumer has yet to feel the full weight of those burdens, in my opinion. That said, the data reveals a different story among corporate America. S&P Global Market Intelligence reported that a total of 516 U.S. corporations filed for bankruptcy protection on a year-to-date basis through September 30, 2023, up from a total of 263 corporate bankruptcy filings over the same period last year. Higher interest rates and Treasury bond yields have also sapped demand for commercial property loans. Data from Trepp, LLC, a leading provider of data and analytics to the commercial real estate and banking markets, revealed that just $28.2 billion of loans converted into commercial mortgage-backed securities have been issued in 2023, the lowest figure since 2011.
The financial markets battled a myriad of headwinds over the past year, from geopolitical uncertainty resulting from war (the conflicts between Israel and Hamas and Russia and Ukraine), to slowing global economic growth and sticky inflation. Brian Wesbury, Chief Economist at First Trust, notes that a U.S. economic recession is likely to begin at some point early next year. While calls for a recession may concern some investors, the following may offer solace. Data from Bloomberg reveals that the S&P 500® Index has posted positive total returns over the 3-year period following every recession since 1948.
Thank you for giving First Trust the opportunity to play a role in your financial future. We value our relationship with you and will report on the Fund again in six months.
Sincerely,
James A. Bowen
Chairman of the Board of Trustees
Chief Executive Officer of First Trust Advisors L.P.
Fund Performance Overview (Unaudited)
First Trust Limited Duration Investment Grade Corporate ETF (FSIG)
The First Trust Limited Duration Investment Grade Corporate ETF’s (the “Fund”) primary investment objective is to deliver current income. Under normal market conditions, the Fund seeks to achieve its objectives by investing at least 80% of its net assets (plus any borrowings for investment purposes) in investment grade corporate debt securities. Corporate debt securities are debt obligations issued by businesses to finance their operations. Notes, bonds, loans, debentures and commercial paper are the most common types of corporate debt securities, with the primary differences being their maturities and secured or unsecured status. Commercial paper has the shortest term and is usually unsecured. Corporate debt securities may have fixed or floating interest rates. The corporate debt securities in which the Fund may invest may include senior loans and covenant-lite loans.
At least 80% of the Fund’s net assets will be invested in corporate debt securities that are, at the time of purchase, investment grade (i.e., rated Baa3/BBB- or above) by at least one nationally recognized statistical rating organization (“NRSRO”) rating such securities, or if unrated, debt securities determined by the Fund’s investment advisor to be of comparable quality. In the case of a split rating between one or more of the NRSROs, the Fund will consider the highest rating. For an unrated security to be considered investment grade, the Fund’s investment advisor will consider, at the time of purchase, whether such security is of comparable quality based on fundamental credit analysis of the unrated security and comparable securities that are rated by an NRSRO.
Although the Fund intends to invest primarily in investment grade corporate debt securities, the Fund may invest up to 20% of its net assets (plus any borrowings for investment purposes) in debt securities of any credit quality, including senior loans and other debt securities that are below investment grade, which are also known as high yield securities, or commonly referred to as “junk” bonds, or unrated securities that have not been judged by the Fund’s investment advisor to be of comparable quality to rated investment grade securities. The Fund is classified as “non-diversified” under the Investment Company Act of 1940, as amended. The Fund’s investments will be concentrated (i.e., invest more than 25% of Fund assets) in the industries or group of industries comprising the financials sector.
|
| | Average Annual Total Returns | |
| | Inception
(11/17/21)
to 10/31/23 | Inception
(11/17/21)
to 10/31/23 |
| | | |
| | | |
| | | |
| | | |
Bloomberg US Corporate Bond 1-5 Year Index | | | |
| On January 3, 2023, the fair value methodology used to value the senior loan investments held by the Fund was changed. Prior to that date, the senior loans were valued using the bid side price provided by a pricing service. After such date, the senior loans were valued using the midpoint between the bid and ask price provided by a pricing service. The change in the Fund’s fair value methodology on January 3, 2023, resulted in a one-time increase in the Fund’s net asset value of approximately $0.003 per share on that date, which represented a positive impact on the Fund’s performance of 0.01%. The change to the pricing methodology was negligible to the performance of the Fund on a NAV basis for the periods ended October 31, 2023. |
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 total returns would have been lower if certain fees had not been waived by the Advisor.
The Fund’s per share net asset value (“NAV”) is the value of one share of the Fund and is computed by dividing the value of all assets of the Fund (including accrued interest and dividends), less all liabilities (including accrued expenses and dividends declared but unpaid), by the total number of outstanding shares. The price used to calculate market return (“Market Price”) is determined by using the midpoint of the national best bid and offer price (“NBBO”) as of the time that the Fund’s NAV is calculated. Under Securities and Exchange Commission rules, the NBBO consists of the highest displayed buy and lowest sell prices among the various exchanges trading the Fund at the time the Fund’s NAV is calculated. 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.
Fund Performance Overview (Unaudited) (Continued)
First Trust Limited Duration Investment Grade Corporate ETF (FSIG) (Continued)
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Property & Casualty Insurance | |
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Brokerage Assetmanagers Exchanges | |
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Consumer Cyclical Services | |
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Diversified Manufacturing | |
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Corporate Bonds and Notes | |
Foreign Corporate Bonds and Notes | |
Senior Floating-Rate Loan Interests | |
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| % of Senior Loans
and Other
|
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Goldman Sachs Group (The), Inc. | |
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| Percentages are based on long-term positions. Commercial paper is excluded. |
| The ratings are by one or more nationally recognized statistical rating organizations (NRSROs), including S&P Global Ratings, 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. Ratings are measured highest to lowest on a scale that generally ranges from AAA to D for long-term ratings and A-1 to C for short-term ratings. Investment grade is defined as those issuers that have a long-term credit rating of BBB- or higher or a short-term credit rating of A-3 or higher. “NR” indicates no rating. 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. |
Fund Performance Overview (Unaudited) (Continued)
First Trust Limited Duration Investment Grade Corporate ETF (FSIG) (Continued)
| 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
Information showing the number of days the market price of the Fund’s shares was greater (at a premium) and less (at a discount) than the Fund’s net asset value for the most recently completed year, and the most recently completed calendar quarters since that year (or life of the Fund, if shorter) is available at https://www.ftportfolios.com/Retail/etf/home.aspx.
First Trust Limited Duration Investment Grade Corporate ETF (FSIG)Annual ReportOctober 31, 2023 (Unaudited) Advisor
First Trust Advisors L.P. (“First Trust” or the “Advisor”) is the investment advisor to First Trust Limited Duration Investment Grade Corporate ETF (the “Fund” or “FSIG”). First Trust is responsible for the selection and ongoing monitoring of the Fund’s investment portfolio, managing the Fund’s business affairs and providing certain administrative services necessary for the management of the Fund.
Portfolio Management Team
The following persons serve as portfolio managers of the Fund:
William Housey, CFA – Managing Director of Fixed Income and Senior Portfolio Manager of First Trust
Todd Larson, CFA – Senior Vice President and Portfolio Manager of First Trust
Eric R. Maisel, CFA – Senior Vice President and Portfolio Manager of First Trust
Jeffrey Scott, CFA – Senior Vice President and Portfolio Manager of First Trust
Nathan Simons, CFA – Vice President and Portfolio Manager of First Trust
Scott Skowronski, CFA – Senior Vice President and Portfolio Manager of First Trust
The portfolio managers are primarily and jointly responsible for the day-to-day management of the Fund. William Housey, Todd Larson, Eric R. Maisel, Jeffrey Scott, and Nathan Simons have served as a part of the portfolio management team of the Fund since November 2021. Scott Skowronski has served as part of the portfolio management team of the Fund since November 2022.
Commentary
Market Recap
At the beginning of the 12-month period ended October 31, 2023, inflation remained elevated as the November 2022 Consumer Price Index printed 7.1% on a year-over-year basis, while the Federal Reserve (the “Fed”) simultaneously reiterated its commitment to a 2.0% inflation target. At this point, the upper bound of the Federal Funds target rate sat at 3.25%. However, by the Fed’s December 2022 Federal Open Market Committee (“FOMC”) meeting, the committee projected a higher-than-expected terminal Federal Funds target rate of 5.00-5.25%, indicating the Fed’s lack of confidence that inflation would remain subdued. The FOMC raised its target rate once again to 5.25-5.50% at its July 2023 meeting in a continued attempt to mitigate inflation. At the September 2023 meeting, the FOMC held its target rate steady and upwardly revised its economic growth outlook for both this year and next, while reducing its 2024 rate cut projection; this proved a catalyst for higher yields, spread volatility, and lower equity values in the concluding weeks of the reporting period.
For the 12-month period ended October 31, 2023, the 10-Year U.S. Treasury yield increased 88 basis points from 4.05% to 4.93%. While the S&P 500® Index traded near 4,500 at the end of the second quarter of 2023, nearly 1,000 points above its October 2022 bottom, the S&P 500® Index closed at 4,194 on October 31, 2023, providing a 10.14% return over the 12-month period ended October 31, 2023.
Fund Performance
The Fund returned 3.68% on a net asset value (“NAV”) basis and 3.56% on a market price basis over the 12-month period ended October 31, 2023. The Bloomberg US Corporate Bond 1-5 Year Index (the “Benchmark”) returned 4.22% over the same period.
Duration was the largest headwind to performance during the period as the inverted yield curve and elevated interest rate volatility complicated timing of the extension trade. The Fund maintained defensive sector positioning during the period with overweight allocations to the Consumer Non-Cyclicals, Insurance, and Technology sectors versus underweights to the Banking, Retail, and Energy sectors. While the defensive positioning within sectors was a headwind to performance, it was more than offset by the benefit from being underweight corporate bonds versus term loans that benefited from lower interest rate sensitivity and higher carry. Strong security selection within the Food & Beverage, Healthcare, Pharmaceuticals, and Technology sectors was only partially offset by up-in-quality positioning to large U.S. banks within the Banking sector.
Market Outlook
Our market framework centers on our view that the Fed’s interest rate hiking cycle is nearing its end. While the Fed may leak incremental hikes into the market, today’s fixed income markets are much more balanced when it comes to income and interest rate
Portfolio Commentary (Continued)
First Trust Limited Duration Investment Grade Corporate ETF (FSIG)Annual ReportOctober 31, 2023 (Unaudited) risk, in our view. Elevated yields continue to support future positive returns in fixed income. However, we expect market volatility to continue as investors attempt to gauge the likelihood, and timing of, a recession. Consequently, we favor increasing credit quality while defensively positioning in sectors with limited cyclicality. Improved valuations have created attractive opportunities in the corporate credit landscape, in our view. As we assess such market opportunities, we will continue to employ our bottom-up credit underwriting process and rigorous approach to risk management.
First Trust Limited Duration Investment Grade Corporate ETF (FSIG)Understanding Your Fund ExpensesOctober 31, 2023 (Unaudited) As a shareholder of First Trust Limited Duration Investment Grade Corporate ETF (the “Fund”), you incur two types of costs: (1) transaction costs; and (2) ongoing costs, including management fees, distribution and/or service (12b-1) fees, if any, and other Fund expenses. This Example is intended to help you understand your ongoing costs of investing in the Fund and to compare these costs with the ongoing costs of investing in other funds.
The Example is based on an investment of $1,000 invested at the beginning of the period and held through the six-month period ended October 31, 2023.
Actual Expenses
The first line in the following table provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During the Six-Month Period” to estimate the expenses you paid on your account during this six-month period.
Hypothetical Example for Comparison Purposes
The second line in the following table provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs such as brokerage commissions. Therefore, the second line in the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
| Beginning
Account Value
May 1, 2023 | Ending
Account Value
October 31, 2023 | Annualized
Expense Ratio
Based on the
Six-Month
Period (a) | Expenses Paid
During the
Six-Month
Period (b) |
First Trust Limited Duration Investment Grade Corporate ETF (FSIG) |
| | | | |
Hypothetical (5% return before expenses) | | | | |
| These expense ratios reflect expense waivers. See Note 3 in the Notes to Financial Statements. |
| Expenses are equal to the annualized expense ratio as indicated in the table multiplied by the average account value over the period (May 1, 2023 through October 31, 2023), multiplied by 184/365 (to reflect the six-month period). |
First Trust Limited Duration Investment Grade Corporate ETF (FSIG)Portfolio of InvestmentsOctober 31, 2023
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CORPORATE BONDS AND NOTES — 84.9% |
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| Bank of America Corp., Medium-Term Note | | | |
| Bank of America Corp., Global Medium-Term Note | | | |
| Bank of America Corp. (a) | | | |
| Bank of America Corp., Medium-Term Note (a) | | | |
| Bank of America Corp. (a) | | | |
| Bank of New York Mellon (The) Corp., Medium-Term Note (a) | | | |
| Bank of New York Mellon (The) Corp., Medium-Term Note (a) | | | |
| Bank of New York Mellon (The) Corp. (a) | | | |
| Bank of New York Mellon (The) Corp. (a) | | | |
| Bank of New York Mellon (The) Corp. (a) | | | |
| Bank of New York Mellon (The) Corp., Medium-Term Note (a) | | | |
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| Goldman Sachs Group (The), Inc. | | | |
| Goldman Sachs Group (The), Inc. | | | |
| Goldman Sachs Group (The), Inc. (a) | | | |
| Goldman Sachs Group (The), Inc. (a) | | | |
| Goldman Sachs Group (The), Inc. (a) | | | |
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| Morgan Stanley, Global Medium-Term Note | | | |
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| PNC Financial Services Group (The), Inc. (a) | | | |
| PNC Financial Services Group (The), Inc. | | | |
| PNC Financial Services Group (The), Inc. (a) | | | |
| PNC Financial Services Group (The), Inc. (a) | | | |
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| Truist Financial Corp., Medium-Term Note (a) | | | |
| Truist Financial Corp., Medium-Term Note (a) | | | |
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| Wells Fargo & Co., Medium-Term Note | | | |
| Wells Fargo & Co., Medium-Term Note (a) | | | |
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See Notes to Financial Statements
First Trust Limited Duration Investment Grade Corporate ETF (FSIG)Portfolio of Investments (Continued)October 31, 2023 | | | | |
CORPORATE BONDS AND NOTES (Continued) |
| Brokerage Assetmanagers Exchanges — 2.4% | |
| Intercontinental Exchange, Inc. | | | |
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| Building Materials — 0.4% | |
| CRH America Finance, Inc. (b) | | | |
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| Charter Communications Operating LLC / Charter Communications Operating Capital | | | |
| Charter Communications Operating LLC/Charter Communications Operating Capital | | | |
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| Construction Machinery — 1.4% | |
| Ashtead Capital, Inc. (b) | | | |
| United Rentals North America, Inc. (b) | | | |
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| Consumer Cyclical Services — 0.5% | |
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| Go Daddy Operating Co. LLC / GD Finance Co., Inc. (b) | | | |
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| Mead Johnson Nutrition Co. | | | |
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| Diversified Manufacturing — 0.3% | |
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| CenterPoint Energy Houston Electric LLC | | | |
| FirstEnergy Transmission LLC (b) | | | |
| Florida Power & Light Co. | | | |
| Florida Power & Light Co. | | | |
| Florida Power & Light Co. | | | |
| Pacific Gas and Electric Co. | | | |
| Pacific Gas and Electric Co. | | | |
| Pacific Gas and Electric Co. | | | |
| Trans-Allegheny Interstate Line Co. (b) | | | |
See Notes to Financial Statements
First Trust Limited Duration Investment Grade Corporate ETF (FSIG)Portfolio of Investments (Continued)October 31, 2023 | | | | |
CORPORATE BONDS AND NOTES (Continued) |
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| Virginia Electric and Power Co., Series A | | | |
| Virginia Electric and Power Co., Series B | | | |
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| Constellation Brands, Inc. | | | |
| Constellation Brands, Inc. | | | |
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| Molson Coors Beverage Co. | | | |
| Nestle Holdings, Inc. (b) | | | |
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| VICI Properties L.P. / VICI Note Co., Inc. (b) | | | |
| VICI Properties L.P. / VICI Note Co., Inc. (b) | | | |
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| Avantor Funding, Inc. (b) | | | |
| Baxter International, Inc. | | | |
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See Notes to Financial Statements
First Trust Limited Duration Investment Grade Corporate ETF (FSIG)Portfolio of Investments (Continued)October 31, 2023 | | | | |
CORPORATE BONDS AND NOTES (Continued) |
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| Thermo Fisher Scientific, Inc. | | | |
| Zimmer Biomet Holdings, Inc. | | | |
| Zimmer Biomet Holdings, Inc. | | | |
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| Enterprise Products Operating LLC | | | |
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| American Water Capital Corp. | | | |
| American Water Capital Corp. | | | |
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| Packaging Corp. of America | | | |
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| Property & Casualty Insurance — 5.0% | |
| Aon Corp. / Aon Global Holdings PLC | | | |
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| Marsh & McLennan Cos., Inc. | | | |
| Marsh & McLennan Cos., Inc. | | | |
| Marsh & McLennan Cos., Inc. | | | |
| Willis North America, Inc. | | | |
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| McDonald’s Corp., Medium-Term Note | | | |
See Notes to Financial Statements
First Trust Limited Duration Investment Grade Corporate ETF (FSIG)Portfolio of Investments (Continued)October 31, 2023 | | | | |
CORPORATE BONDS AND NOTES (Continued) |
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| O’Reilly Automotive, Inc. | | | |
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| Black Knight InfoServ LLC (b) | | | |
| FactSet Research Systems, Inc. | | | |
| Fidelity National Information Services, Inc. | | | |
| Fidelity National Information Services, Inc. | | | |
| Fidelity National Information Services, Inc. | | | |
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| Verizon Communications, Inc. | | | |
| Verizon Communications, Inc. | | | |
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| Total Corporate Bonds and Notes | |
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FOREIGN CORPORATE BONDS AND NOTES — 8.4% |
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| Royal Bank of Canada Global Medium-Term Note | | | |
See Notes to Financial Statements
First Trust Limited Duration Investment Grade Corporate ETF (FSIG)Portfolio of Investments (Continued)October 31, 2023 | | | | |
FOREIGN CORPORATE BONDS AND NOTES (Continued) |
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| Royal Bank of Canada, Global Medium-Term Note | | | |
| Toronto-Dominion Bank (The) | | | |
| Toronto-Dominion Bank (The), Medium-Term Note | | | |
| Toronto-Dominion Bank (The), Medium-Term Note | | | |
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| Bacardi Ltd./Bacardi-Martini B.V. (b) | | | |
| Mondelez International Holdings Netherlands B.V. (b) | | | |
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| Medtronic Global Holdings SCA | | | |
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| Pfizer Investment Enterprises Pte Ltd. | | | |
| Pfizer Investment Enterprises Pte Ltd. | | | |
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| Total Foreign Corporate Bonds and Notes | |
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SENIOR FLOATING-RATE LOAN INTERESTS — 4.8% |
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| Charter Communications Operating LLC, Term Loan B1, 1 Mo. CME Term SOFR + 1.75%, 0.00% Floor | | | |
| Charter Communications Operating LLC, Term Loan B1, 3 Mo. CME Term SOFR + 1.75%, 0.00% Floor | | | |
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| IQVIA, Inc. (Quintiles), Term Loan B2, 3 Mo. CME Term SOFR + 1.75% + CSA, 0.00% Floor | | | |
| IQVIA, Inc. (Quintiles), Term Loan B3, 3 Mo. CME Term SOFR + 1.75% + CSA, 0.00% Floor | | | |
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| Open Text Corp. (GXS), Term Loan B, 1 Mo. CME Term SOFR + 1.75% + CSA, 0.00% Floor | | | |
| SS&C Technologies Holdings, Inc., Term Loan B-3, 1 Mo. CME Term SOFR + 1.75% + CSA, 0.00% Floor | | | |
| SS&C Technologies Holdings, Inc., Term Loan B-4, 1 Mo. CME Term SOFR + 1.75% + CSA, 0.00% Floor | | | |
See Notes to Financial Statements
First Trust Limited Duration Investment Grade Corporate ETF (FSIG)Portfolio of Investments (Continued)October 31, 2023 | | | | |
SENIOR FLOATING-RATE LOAN INTERESTS (Continued) |
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| SS&C Technologies Holdings, Inc., Term Loan B-5, 1 Mo. CME Term SOFR + 1.75% + CSA, 0.00% Floor | | | |
| Verscend Technologies, Inc. (Cotiviti), New Term Loan B-1, 1 Mo. CME Term SOFR + 4.00% + CSA, 0.00% Floor | | | |
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| SBA Senior Finance II LLC, Term Loan B, 1 Mo. CME Term SOFR + 1.75% + CSA, 0.00% Floor | | | |
| Total Senior Floating-Rate Loan Interests | |
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| | Annualized
Yield on Date of
Purchase | | |
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| Total Investments — 98.6% | |
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| Net Other Assets and Liabilities — 1.4% | |
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| Fixed-to-floating or fixed-to-variable rate security. The interest rate shown reflects the fixed rate in effect at October 31, 2023. At a predetermined date, the fixed rate will change to a floating rate or a variable rate. |
| This security, sold within the terms of a private placement memorandum, is exempt from registration upon resale under Rule 144A of the Securities Act of 1933, as amended, and may be resold in transactions exempt from registration, normally to qualified institutional buyers. Pursuant to procedures adopted by the Trust’s Board of Trustees, this security has been determined to be liquid by First Trust Advisors L.P., the Fund’s advisor. Although market instability can result in periods of increased overall market illiquidity, liquidity for each security is determined based on security specific factors and assumptions, which require subjective judgment. At October 31, 2023, securities noted as such amounted to $115,075,128 or 14.7% of net assets. |
| Senior Floating-Rate Loan Interests (“Senior Loans”) in which the Fund invests generally pay interest at rates which are periodically predetermined by reference to a base lending rate plus a premium. These base lending rates are generally (i) the lending rate offered by one or more major European banks, such as the LIBOR, (ii) the SOFR obtained from the U.S. Department of the Treasury’s Office of Financial Research or another major financial institution, (iii) the prime rate offered by one or more United States banks or (iv) the certificate of deposit rate. Certain Senior Loans are subject to a LIBOR or SOFR floor that establishes a minimum LIBOR or SOFR rate. When a range of rates is disclosed, the Fund holds more than one contract within the same tranche with identical LIBOR or SOFR period, spread and floor, but different LIBOR or SOFR reset dates. |
| Senior Loans generally are subject to mandatory and/or optional prepayment. As a result, the actual remaining maturity of Senior Loans may be substantially less than the stated maturities shown. |
Abbreviations throughout the Portfolio of Investments: |
| – Chicago Mercantile Exchange |
| – Credit Spread Adjustment |
| – London Interbank Offered Rate |
| – Secured Overnight Financing Rate |
See Notes to Financial Statements
First Trust Limited Duration Investment Grade Corporate ETF (FSIG)Portfolio of Investments (Continued)October 31, 2023
Valuation InputsA summary of the inputs used to value the Fund’s investments as of October 31, 2023 is as follows (see Note 2A - Portfolio Valuation in the Notes to Financial Statements):
| | | Level 2
Significant
Observable
Inputs | Level 3
Significant
Unobservable
Inputs |
Corporate Bonds and Notes* | | | | |
Foreign Corporate Bonds and Notes* | | | | |
Senior Floating-Rate Loan Interests* | | | | |
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| See Portfolio of Investments for industry breakout. |
See Notes to Financial Statements
First Trust Limited Duration Investment Grade Corporate ETF (FSIG)Statement of Assets and Liabilities
October 31, 2023
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Investment advisory fees payable | |
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Accumulated distributable earnings (loss) | |
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NET ASSET VALUE, per share | |
Number of shares outstanding (unlimited number of shares authorized, par value $0.01 per share) | |
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See Notes to Financial Statements
First Trust Limited Duration Investment Grade Corporate ETF (FSIG)Statement of Operations
For the Year Ended October 31, 2023
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Less fees waived by the investment advisor | |
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NET INVESTMENT INCOME (LOSS) | |
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NET REALIZED AND UNREALIZED GAIN (LOSS): | |
Net realized gain (loss) on investments | |
Net change in unrealized appreciation (depreciation) on investments | |
NET REALIZED AND UNREALIZED GAIN (LOSS) | |
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS | |
See Notes to Financial Statements
First Trust Limited Duration Investment Grade Corporate ETF (FSIG)Statements of Changes in Net Assets
| | Period
Ended
10/31/2022 (a) |
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Net investment income (loss) | | |
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Net change in unrealized appreciation (depreciation) | | |
Net increase (decrease) in net assets resulting from operations | | |
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DISTRIBUTIONS TO SHAREHOLDERS FROM: | | |
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SHAREHOLDER TRANSACTIONS: | | |
Proceeds from shares sold | | |
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Net increase (decrease) in net assets resulting from shareholder transactions | | |
Total increase (decrease) in net assets | | |
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CHANGES IN SHARES OUTSTANDING: | | |
Shares outstanding, beginning of period | | |
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Shares outstanding, end of period | | |
| Inception date is November 17, 2021, which is consistent with the commencement of investment operations and is the date the initial creation units were established. |
See Notes to Financial Statements
First Trust Limited Duration Investment Grade Corporate ETF (FSIG)Financial Highlights
For a share outstanding throughout each period
| | Period
Ended
10/31/2022 (a) |
|
Net asset value, beginning of period | | |
Income from investment operations: | | |
Net investment income (loss) | | |
Net realized and unrealized gain (loss) | | |
Total from investment operations | | |
Distributions paid to shareholders from: | | |
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Net asset value, end of period | | |
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Ratios to average net assets/supplemental data: | | |
Net assets, end of period (in 000’s) | | |
Ratio of total expenses to average net assets | | |
Ratio of net expenses to average net assets | | |
Ratio of net investment income (loss) to average net assets | | |
Portfolio turnover rate (e) | | |
| Inception date is November 17, 2021, which is consistent with the commencement of investment operations and is the date the initial creation units were established. |
| Based on average shares outstanding. |
| Total return is calculated assuming an initial investment made at the net asset value at the beginning of the period, reinvestment of all distributions at net asset value during the period, and redemption at net asset value on the last day of the period. The returns presented do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. Total return is calculated for the time period presented and is not annualized for periods of less than a year. The total returns would have been lower if certain fees had not been waived and expenses reimbursed by the investment advisor. |
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| 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
Notes to Financial Statements
First Trust Limited Duration Investment Grade Corporate ETF (FSIG)October 31, 2023 1. Organization
First Trust Exchange-Traded Fund IV (the “Trust”) is an open-end management investment company organized as a Massachusetts business trust on September 15, 2010, and is registered with the Securities and Exchange Commission under the Investment Company Act of 1940, as amended (the “1940 Act”).
The Trust currently consists of eighteen exchange-traded funds that are offering shares. This report covers the First Trust Limited Duration Investment Grade Corporate ETF (the “Fund”), a non-diversified series of the Trust, which trades under the ticker “FSIG” on NYSE Arca, Inc. The Fund represents a separate series of shares of beneficial interest in the Trust. Unlike conventional mutual funds, the Fund issues and redeems shares on a continuous basis, at net asset value (“NAV”), only in large blocks of shares known as “Creation Units.”
The primary investment objective of the Fund is to deliver current income. Under normal market conditions, the Fund seeks to achieve its objective by investing at least 80% of its net assets (plus any borrowings for investment purposes) in investment grade corporate debt securities. Corporate debt securities are debt obligations issued by businesses to finance their operations. Notes, bonds, loans, debentures and commercial paper are the most common types of corporate debt securities, with the primary differences being their maturities and secured or unsecured status. At least 80% of the Fund’s net assets will be invested in corporate debt securities that are, at the time of purchase, investment grade (i.e. rated Baa3/BBB- or above) by at least one nationally recognized statistical rating organization (“NRSRO”) rating such securities, or if unrated, debt securities determined by the Fund’s investment advisor, First Trust Advisors L.P. (“First Trust” or the “Advisor”) to be of comparable quality. In the case of a split rating between one or more of the NRSROs, the Fund will consider the highest rating. For an unrated security to be considered investment grade, the Advisor will consider, at the time of purchase, whether such security is of comparable quality based on fundamental credit analysis of the unrated security and comparable securities that are rated by an NRSRO.
2. Significant Accounting Policies
The Fund is considered an investment company and follows accounting and reporting guidance under Financial Accounting Standards Board Accounting Standards Codification Topic 946, “Financial Services-Investment Companies.” The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of the financial statements. The preparation of the financial statements in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates.
A. Portfolio Valuation
The Fund’s NAV is determined daily as of the close of regular trading on the New York Stock Exchange (“NYSE”), normally 4:00 p.m. Eastern time, on each day the NYSE is open for trading. If the NYSE closes early on a valuation day, the NAV is determined as of that time. Domestic debt securities and foreign securities are priced using data reflecting the earlier closing of the principal markets for those securities. The Fund’s NAV is calculated by dividing the value of all assets of the Fund (including accrued interest and dividends), less all liabilities (including accrued expenses and dividends declared but unpaid), by the total number of shares outstanding.
The Fund’s investments are valued daily at market value or, in the absence of market value with respect to any portfolio securities, at fair value. Market value prices represent readily available market quotations such as last sale or official closing prices from a national or foreign exchange (i.e., a regulated market) and are primarily obtained from third-party pricing services. Fair value prices represent any prices not considered market value prices and are either obtained from a third-party pricing service or are determined by the Advisor’s Pricing Committee in accordance with valuation procedures approved by the Trust’s Board of Trustees, and in accordance with provisions of the 1940 Act and rules thereunder. Investments valued by the Advisor’s Pricing Committee, if any, are footnoted as such in the footnotes to the Portfolio of Investments. The Fund’s investments are valued as follows:
Corporate bonds, corporate notes and other debt securities are fair valued on the basis of valuations provided by a third-party pricing service approved by the Advisor’s Pricing Committee, which may use the following valuation inputs when available:
Notes to Financial Statements (Continued)
First Trust Limited Duration Investment Grade Corporate ETF (FSIG)October 31, 2023 7)
reference data including market research publications.
Shares of open-end funds are valued based on NAV per share.
Senior Floating-Rate Loan Interests (“Senior Loans”)(1) are not listed on any securities exchange or board of trade. Senior Loans are typically bought and sold by institutional investors in individually negotiated private transactions that function in many respects like an over-the-counter secondary market, although typically no formal market-makers exist. This market, while having grown substantially since its inception, generally has fewer trades and less liquidity than the secondary market for other types of securities. Some Senior Loans have few or no trades, or trade infrequently, and information regarding a specific Senior Loan may not be widely available or may be incomplete. Accordingly, determinations of the market value of Senior Loans may be based on infrequent and dated information. Because there is less reliable, objective data available, elements of judgment may play a greater role in valuation of Senior Loans than for other types of securities. Typically, Senior Loans are valued using information provided by a third-party pricing service. The third-party pricing service primarily uses over-the-counter pricing from dealer runs and broker quotes from indicative sheets to value the Senior Loans.
Fixed income and other debt securities having a remaining maturity of sixty 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 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 most recent price provided by a pricing service;
2)
available market prices for the fixed-income security;
3)
the fundamental business data relating to the borrower/issuer;
4)
an evaluation of the forces which influence the market in which these securities are purchased and sold;
5)
the type, size and cost of a security;
6)
the financial statements of the borrower/issuer or the financial condition of the country of issue;
7)
the credit quality and cash flow of the borrower/issuer, or country of issue, based on the Pricing Committee’s, sub-advisor’s or portfolio manager’s analysis, as applicable, or external analysis;
8)
the information as to any transactions in or offers for the security;
9)
the price and extent of public trading in similar securities of the borrower/issuer, or comparable companies;
11)
the quality, value and salability of collateral, if any, securing the security;
(1)
The terms “security” and “securities” used throughout the Notes to Financial Statements include Senior Loans.
Notes to Financial Statements (Continued)
First Trust Limited Duration Investment Grade Corporate ETF (FSIG)October 31, 2023 12)
the business prospects of the borrower/issuer, including any ability to obtain money or resources from a parent or affiliate and an assessment of the borrower’s/issuer’s management (for corporate debt only);
13)
the prospects for the borrower’s/issuer’s industry, and multiples (of earnings and/or cash flows) being paid for similar businesses in that industry (for corporate debt only);
14)
the borrower’s/issuer’s competitive position within the industry;
15)
the borrower’s/issuer’s ability to access additional liquidity through public and/or private markets; and
16)
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:
• Level 1 – Level 1 inputs are quoted prices in active markets for identical investments. An active market is a market in which transactions for the investment occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
• Level 2 – Level 2 inputs are observable inputs, either directly or indirectly, and include the following:
o Quoted prices for similar investments in active markets.
o Quoted prices for identical or similar investments in markets that are non-active. A non-active market is a market where there are few transactions for the investment, the prices are not current, or price quotations vary substantially either over time or among market makers, or in which little information is released publicly.
o Inputs other than quoted prices that are observable for the investment (for example, interest rates and yield curves observable at commonly quoted intervals, volatilities, prepayment speeds, loss severities, credit risks, and default rates).
o Inputs that are derived principally from or corroborated by observable market data by correlation or other means.
• Level 3 – Level 3 inputs are unobservable inputs. Unobservable inputs may reflect the reporting entity’s own assumptions about the assumptions that market participants would use in pricing the investment.
The inputs or methodologies used for valuing investments are not necessarily an indication of the risk associated with investing in those investments. A summary of the inputs used to value the Fund’s investments as of October 31, 2023, is included with the Fund’s Portfolio of Investments.
B. Securities Transactions and Investment Income
Securities transactions are recorded as of the trade date. Realized gains and losses from securities transactions are recorded on the identified cost basis. Dividend income is recorded on the ex-dividend date. Interest income is recorded daily on the accrual basis. Amortization of premiums and accretion of discounts are recorded using the effective interest method.
The United Kingdom’s Financial Conduct Authority (the “FCA”), which regulates the London Interbank Offered Rates (“LIBOR”), ceased making LIBOR available as a reference rate over a phase-out period that began December 31, 2021. The overnight and 12-month USD LIBOR settings permanently ceased as of June 30, 2023. The FCA announced that the 1-, 3- and 6-month USD LIBOR settings will continue to be published using a synthetic methodology to serve as a fallback for non-U.S. contracts until September 2024. In response to the discontinuation of LIBOR, investors have added fallback provisions to existing contracts for investments whose value is tied to LIBOR, with most fallback provisions requiring the adoption of the Secured Overnight Financing Rate (“SOFR”) as a replacement rate. There is no assurance that any alternative reference rate, including SOFR, will be similar to or produce the same value or economic equivalence as LIBOR or that instruments using an alternative rate will have the same volume or liquidity. At this time, it is not possible to predict the full impact of the elimination of LIBOR and the establishment of an alternative reference rate on the Fund or its investments.
Securities purchased or sold on a when-issued, delayed-delivery or forward purchase commitment basis may have extended settlement periods. The value of the security so purchased is subject to market fluctuations during this period. Due to the nature of the Senior Loan market, the actual settlement date may not be certain at the time of the purchase or sale for some of the Senior Loans. Interest income on such Senior Loans is not accrued until settlement date. The Fund maintains liquid assets with a current value at least equal to the amount of its when-issued, delayed-delivery or forward purchase commitments until payment is made. At October 31, 2023, the Fund had no when-issued, delayed-delivery or forward purchase commitments.
Notes to Financial Statements (Continued)
First Trust Limited Duration Investment Grade Corporate ETF (FSIG)October 31, 2023 C. Unfunded Loan Commitments
The Fund may enter into certain credit agreements, all or a portion of which may be unfunded. The Fund is obligated to fund these loan commitments at the borrower’s discretion. Unfunded loan commitments are marked-to-market daily, and any unrealized appreciation (depreciation) is included in the Statement of Assets and Liabilities and Statement of Operations. In connection with these commitments, the Fund earns a commitment fee typically set as a percentage of the commitment amount. The commitment fees are included in “Interest” on the Statement of Operations. As of October 31, 2023, the Fund had no unfunded loan commitments.
D. Dividends and Distributions to Shareholders
Dividends from net investment income of the Fund, 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, are distributed at least annually. The Fund may also designate a portion of the amount paid to redeeming shareholders as a distribution for tax purposes.
Distributions in cash may be reinvested automatically in additional whole shares only if the broker through whom the shares were purchased makes such option available. Such shares will generally be reinvested by the broker based upon the market price of those shares and investors may be subject to customary brokerage commissions charged by the broker.
Distributions from net investment income and realized capital gains are determined in accordance with 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 NAV per share. Temporary differences, which arise from recognizing certain items of income, expense and gain/loss in different periods for financial statement and tax purposes, will reverse at some time in the future.
The tax character of distributions paid during the fiscal years ended October 31, 2023 and 2022 was as follows:
As of October 31, 2023, the components of distributable earnings on a tax basis for the Fund were as follows:
Undistributed ordinary income | |
Accumulated capital and other gain (loss) | |
Net unrealized appreciation (depreciation) | |
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 2022 and 2023 remain open to federal and state audit. As of October 31, 2023, management has evaluated the application of these standards to the Fund and has determined that no provision for income tax is required in the Fund’s 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, 2023, for federal income tax purposes, the Fund had $1,633,508 of capital loss carryforwards available, to the extent provided by regulations, to offset future capital gains. To the extent that these loss carryforwards are used to offset future capital gains, it is probable that the capital gains so offset will not be distributed to the Fund’s shareholders.
Notes to Financial Statements (Continued)
First Trust Limited Duration Investment Grade Corporate ETF (FSIG)October 31, 2023 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, 2023, the Fund had no net late year ordinary or capital losses.
In order to present paid-in capital and accumulated distributable earnings (loss) (which consists of accumulated net investment income (loss), accumulated net realized gain (loss) on investments and net unrealized appreciation (depreciation) on investments) on the Statement of Assets and Liabilities that more closely represent their tax character, certain adjustments have been made to paid-in capital, accumulated net investment income (loss) and accumulated net realized gain (loss) on investments. These adjustments are primarily due to the difference between book and tax treatments of income and gains on various investment securities held by the Fund. The results of operations and net assets were not affected by these adjustments. For the fiscal year ended October 31, 2023, the adjustments for the Fund were as follows:
Accumulated
Net Investment
Income (Loss) | Accumulated
Net Realized
Gain (Loss)
on Investments | |
| | |
As of October 31, 2023, the aggregate cost, gross unrealized appreciation, gross unrealized depreciation, and net unrealized appreciation/(depreciation) on investments (including short positions and derivatives, if any) for federal income tax purposes were as follows:
| Gross Unrealized
Appreciation | Gross Unrealized
(Depreciation) | Net Unrealized
Appreciation
(Depreciation) |
| | | |
F. Expenses
Expenses, other than the investment advisory fee and other excluded expenses, are paid by the Advisor (see Note 3).
3. Investment Advisory Fee, Affiliated Transactions and Other Fee Arrangements
First Trust, the investment advisor to the Fund, is a limited partnership with one limited partner, Grace Partners of DuPage L.P., and one general partner, The Charger Corporation. The Charger Corporation is an Illinois corporation controlled by James A. Bowen, Chief Executive Officer of First Trust. First Trust is responsible for the selection and ongoing monitoring of the 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, license fees and other services, but excluding fee payments under the Investment Management Agreement, interest, taxes, acquired fund fees and expenses, if any, brokerage commissions and other expenses connected with the execution of portfolio transactions, distribution and service fees payable pursuant to a Rule 12b-1 plan, if any, and extraordinary expenses. The annual unitary management fee payable by the Fund to First Trust for these services will be reduced at certain levels of the Fund’s net assets (“breakpoints”) and calculated pursuant to the following schedule:
| |
Fund net assets up to and including $2.5 billion | |
Fund net assets greater than $2.5 billion up to and including $5 billion | |
Fund net assets greater than $5 billion up to and including $7.5 billion | |
Fund net assets greater than $7.5 billion up to and including $10 billion | |
Fund net assets greater than $10 billion | |
Pursuant to a contractual agreement, First Trust has agreed to waive management fees of 0.10% of average daily net assets until November 12, 2023. During any period in which the waiver agreement is in effect, the Fund will not be eligible for any breakpoints described above. During the fiscal year ended October 31, 2023, the Advisor waived fees of $513,198.
Notes to Financial Statements (Continued)
First Trust Limited Duration Investment Grade Corporate ETF (FSIG)October 31, 2023 The Trust has multiple service agreements with The Bank of New York Mellon (“BNYM”). Under the service agreements, BNYM performs custodial, fund accounting, certain administrative services, and transfer agency services for the Fund. As custodian, BNYM is responsible for custody of the Fund’s assets. As fund accountant and administrator, BNYM is responsible for maintaining the books and records of the Fund’s securities and cash. As transfer agent, BNYM is responsible for maintaining shareholder records for the Fund. BNYM is a subsidiary of The Bank of New York Mellon Corporation, a financial holding company.
Each Trustee who is not an officer or employee of First Trust, any sub-advisor or any of their affiliates (“Independent Trustees”) is paid a fixed annual retainer that is allocated equally among each fund in the First Trust Fund Complex. Each Independent Trustee is also paid an annual per fund fee that varies based on whether the fund is a closed-end or other actively managed fund, a target outcome fund or an index fund.
Additionally, the Lead Independent Trustee and the Chairs of the Audit Committee, Nominating and Governance Committee and Valuation Committee are paid annual fees to serve in such capacities, with such compensation allocated pro rata among each fund in the First Trust Fund Complex based on net assets. Independent Trustees are reimbursed for travel and out-of-pocket expenses in connection with all meetings. The Lead Independent Trustee and Committee Chairs rotate every three years. The officers and “Interested” Trustee receive no compensation from the Trust for acting in such capacities.
4. Purchases and Sales of Securities
For the fiscal year ended October 31, 2023, the cost of purchases and proceeds from sales of investments, excluding short-term investments and in-kind transactions, were $942,490,760 and $177,965,114, respectively.
For the fiscal year ended October 31, 2023, the Fund had no in-kind transactions.
5. Creations, Redemptions and Transaction Fees
The Fund generally issues and redeems its shares in primary market transactions through a creation and redemption mechanism and does not sell or redeem individual shares. Instead, financial entities known as “Authorized Participants” have contractual arrangements with the Fund or one of the Fund’s service providers to purchase and redeem Fund shares directly with the Fund in large blocks of shares known as “Creation Units.” Prior to the start of trading on every business day, the Fund publishes through the National Securities Clearing Corporation the “basket” of securities, cash or other assets that it will accept in exchange for a Creation Unit of the Fund’s shares. An Authorized Participant that wishes to effectuate a creation of the Fund’s shares deposits with the Fund the “basket” of securities, cash or other assets identified by the Fund that day, and then receives the Creation Unit of the Fund’s shares in return for those assets. After purchasing a Creation Unit, the Authorized Participant may continue to hold the Fund’s shares or sell them in the secondary market. The redemption process is the reverse of the purchase process: the Authorized Participant redeems a Creation Unit of the Fund’s shares for a basket of securities, cash or other assets. The combination of the creation and redemption process with secondary market trading in the Fund’s shares and underlying securities provides arbitrage opportunities that are designed to help keep the market price of the Fund’s shares at or close to the NAV per share of the Fund.
The Fund imposes fees in connection with the purchase of Creation Units. These fees may vary based upon various fact-based circumstances, including, but not limited to, the composition of the securities included in the Creation Unit or the countries in which the transactions are settled. The price for each Creation Unit will equal the daily NAV per share of the Fund times the number of shares in a Creation Unit, plus the fees described above and, if applicable, any operational processing and brokerage costs, transfer fees, stamp taxes and part or all of the spread between the expected bid and offer side of the market related to the securities comprising the creation basket.
The Fund also imposes fees in connection with the redemption of Creation Units. These fees may vary based upon various fact-based circumstances, including, but not limited to, the composition of the securities included in the Creation Unit or the countries in which the transactions are settled. The price received for each Creation Unit will equal the daily NAV per share of the Fund times the number of shares in a Creation Unit, minus the fees described above and, if applicable, any operational processing and brokerage costs, transfer fees, stamp taxes and part or all of the spread between the expected bid and offer side of the market related to the securities comprising the redemption basket. Investors who use the services of a broker or other such intermediary in addition to an Authorized Participant to effect a redemption of a Creation Unit may also be assessed an amount to cover the cost of such services. The redemption fee charged by the Fund will comply with Rule 22c-2 of the 1940 Act which limits redemption fees to no more than 2% of the value of the shares redeemed.
Notes to Financial Statements (Continued)
First Trust Limited Duration Investment Grade Corporate ETF (FSIG)October 31, 2023 6. Distribution Plan
The Board of Trustees adopted a Distribution and Service Plan pursuant to Rule 12b-1 under the 1940 Act. In accordance with the Rule 12b-1 plan, the Fund is authorized to pay an amount up to 0.25% of its average daily net assets each year to reimburse First Trust Portfolios L.P. (“FTP”), the distributor of the Fund, for amounts expended to finance activities primarily intended to result in the sale of Creation Units or the provision of investor services. FTP may also use this amount to compensate securities dealers or other persons that are Authorized Participants for providing distribution assistance, including broker-dealer and shareholder support and educational and promotional services.
No 12b-1 fees are currently paid by the Fund, and pursuant to a contractual arrangement, no 12b-1 fees will be paid any time before March 31, 2025.
7. Indemnification
The Trust, on behalf of the Fund, has a variety of indemnification obligations under contracts with its service providers. The Trust’s maximum exposure under these arrangements is unknown. However, the Trust has not had prior claims or losses pursuant to these contracts and expects the risk of loss to be remote.
8. Subsequent Events
Management has evaluated the impact of all subsequent events on the Fund through the date the financial statements were issued and has determined that there were no subsequent events requiring recognition or disclosure in the financial statements that have not already been disclosed.
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Trustees of First Trust Exchange-Traded Fund IV:
Opinion on the Financial Statements and Financial Highlights
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of First Trust Limited Duration Investment Grade Corporate ETF (the “Fund”), one of the funds constituting the First Trust Exchange-Traded Fund IV, as of October 31, 2023, the related statement of operations for the year then ended, the statements of changes in net assets and the financial highlights for the year ended October 31, 2023 and for the period from November 17, 2021 (commencement of investment operations) through October 31, 2022, and the related notes. In our opinion, the financial statements and financial highlights present fairly, in all material respects, the financial position of the Fund as of October 31, 2023, and the results of its operations for the year then ended and the changes in its net assets and the financial highlights for the year ended October 31, 2023 and for the period from November 17, 2021 (commencement of investment operations) through October 31, 2022 in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on the Fund’s financial statements and financial highlights based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Fund in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement, whether due to error or fraud. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements and financial highlights, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements and financial highlights. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and financial highlights. Our procedures included confirmation of securities owned as of October 31, 2023, by correspondence with the custodian and brokers; when replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
/s/ Deloitte & Touche, LLP
Chicago, Illinois
December 21, 2023
We have served as the auditor of one or more First Trust investment companies since 2001.
First Trust Limited Duration Investment Grade Corporate ETF (FSIG)October 31, 2023 (Unaudited) Proxy Voting Policies and Procedures
A description of the policies and procedures that the Trust uses to determine how to vote proxies and information on how the Fund voted proxies relating to its portfolio securities during the most recent 12-month period ended June 30 is available (1) without charge, upon request, by calling (800) 988-5891; (2) on the Fund’s website at www.ftportfolios.com; and (3) on the Securities and Exchange Commission’s (“SEC”) website at www.sec.gov.
Portfolio Holdings
The Fund files portfolio holdings information for each month in a fiscal quarter within 60 days after the end of the relevant fiscal quarter on Form N-PORT. Portfolio holdings information for the third month of each fiscal quarter will be publicly available on the SEC’s website at www.sec.gov. The Fund’s complete schedule of portfolio holdings for the second and fourth quarters of each fiscal year is included in the semi-annual and annual reports to shareholders, respectively, and is filed with the SEC on Form N-CSR. The semi-annual and annual report for the Fund is available to investors within 60 days after the period to which it relates. The Fund’s Forms N-PORT and Forms N-CSR are available on the SEC’s website listed above.
Federal Tax Information
Distributions paid to foreign shareholders during the Fund’s fiscal year ended October 31, 2023 that were properly designated by the Fund as “interest-related dividends” or “short-term capital gain dividends,” may not be subject to federal income tax provided that the income was earned directly by such foreign shareholders.
Of the ordinary income (including short-term capital gain) distributions made by the Fund during the fiscal year ended October 31, 2023, none qualify for the corporate dividends received deduction available to corporate shareholders or as qualified dividend income.
Risk Considerations
Risks are inherent in all investing. Certain general risks that may be applicable to a Fund are identified below, but not all of the material risks relevant to each Fund are included in this report and not all of the risks below apply to each Fund. The material risks of investing in each Fund are spelled out in its prospectus, statement of additional information and other regulatory filings. Before investing, you should consider each Fund’s investment objective, risks, charges and expenses, and read each Fund’s prospectus and statement of additional information carefully. You can download each Fund’s prospectus at www.ftportfolios.com or contact First Trust Portfolios L.P. at (800) 621-1675 to request a prospectus, which contains this and other information about each Fund.
Concentration Risk. To the extent that a fund is able to invest a significant percentage of its assets in a single asset class or the securities of issuers within the same country, state, region, industry or sector, an adverse economic, business or political development may affect the value of the fund’s investments more than if the fund were more broadly diversified. A fund that tracks an index will be concentrated to the extent the fund’s corresponding index is concentrated. A concentration makes a fund more susceptible to any single occurrence and may subject the fund to greater market risk than a fund that is more broadly diversified.
Credit Risk. Credit risk is the risk that an issuer of a security will be unable or unwilling to make dividend, interest and/or principal payments when due and the related risk that the value of a security may decline because of concerns about the issuer’s ability to make such payments.
Cyber Security Risk. The funds are susceptible to potential operational risks through breaches in cyber security. A breach in cyber security refers to both intentional and unintentional events that may cause a fund to lose proprietary information, suffer data corruption or lose operational capacity. Such events could cause a fund to incur regulatory penalties, reputational damage, additional compliance costs associated with corrective measures and/or financial loss. In addition, cyber security breaches of a fund’s third-party service providers, such as its administrator, transfer agent, custodian, or sub-advisor, as applicable, or issuers in which the fund invests, can also subject a fund to many of the same risks associated with direct cyber security breaches.
Defined Outcome Funds Risk. To the extent a fund’s investment strategy is designed to deliver returns tied to the price performance of an underlying ETF, an investor may not realize the returns the fund seeks to achieve if that investor does not hold shares for the entire target outcome period. In the event an investor purchases shares after the first day of the target outcome period or sells shares prior to the end of the target outcome period, the buffer that the fund seeks to provide against a decline in the value of the underlying ETF may not be available, the enhanced returns that the fund seeks to provide (if any) may not be available and the investor may not
Additional Information (Continued)
First Trust Limited Duration Investment Grade Corporate ETF (FSIG)October 31, 2023 (Unaudited) participate in a gain in the value of the underlying ETF up to the cap for the investor’s investment period. Additionally, the fund will not participate in gains of the underlying ETF above the cap and a shareholder may lose their entire investment. If the fund seeks enhanced returns, there are certain time periods when the value of the fund may fall faster than the value of the underlying ETF, and it is very unlikely that, on any given day during which the underlying ETF share price increases in value, the fund’s share price will increase at the same rate as the enhanced returns sought by the fund, which is designed for an entire target outcome period. Trading flexible exchange options involves risks different from, or possibly greater than, the risks associated with investing directly in securities, such as less liquidity and correlation and valuation risks. A fund may experience substantial downside from specific flexible exchange option positions and certain positions may expire worthless.
Derivatives Risk. To the extent a fund uses derivative instruments such as futures contracts, options contracts and swaps, the fund may experience losses because of adverse movements in the price or value of the underlying asset, index or rate, which may be magnified by certain features of the derivative. These risks are heightened when a fund’s portfolio managers use derivatives to enhance the fund’s return or as a substitute for a position or security, rather than solely to hedge (or offset) the risk of a position or security held by the fund.
Equity Securities Risk. To the extent a fund invests in equity securities, the value of the fund’s shares will fluctuate with changes in the value of the equity securities. Equity securities prices fluctuate for several reasons, including changes in investors’ perceptions of the financial condition of an issuer or the general condition of the relevant stock market, such as market volatility, or when political or economic events affecting the issuers occur. In addition, common stock prices may be particularly sensitive to rising interest rates, as the cost of capital rises and borrowing costs increase. Equity securities may decline significantly in price over short or extended periods of time, and such declines may occur in the equity market as a whole, or they may occur in only a particular country, company, industry or sector of the market.
ETF Risk. The shares of an ETF trade like common stock and represent an interest in a portfolio of securities. The risks of owning an ETF generally reflect the risks of owning the underlying securities, although lack of liquidity in an ETF could result in it being more volatile and ETFs have management fees that increase their costs. Shares of an ETF trade on an exchange at market prices rather than net asset value, which may cause the shares to trade at a price greater than net asset value (premium) or less than net asset value (discount). In times of market stress, decisions by market makers to reduce or step away from their role of providing a market for an ETF’s shares, or decisions by an ETF’s authorized participants that they are unable or unwilling to proceed with creation and/or redemption orders of an ETF’s shares, could result in shares of the ETF trading at a discount to net asset value and in greater than normal intraday bid-ask spreads.
Fixed Income Securities Risk. To the extent a fund invests in fixed income securities, the fund will be subject to credit risk, income risk, interest rate risk, liquidity risk and prepayment risk. Income risk is the risk that income from a fund’s fixed income investments could decline during periods of falling interest rates. Interest rate risk is the risk that the value of a fund’s fixed income securities will decline because of rising interest rates. Liquidity risk is the risk that a security cannot be purchased or sold at the time desired, or cannot be purchased or sold without adversely affecting the price. Prepayment risk is the risk that the securities will be redeemed or prepaid by the issuer, resulting in lower interest payments received by the fund. In addition to these risks, high yield securities, or “junk” bonds, are subject to greater market fluctuations and risk of loss than securities with higher ratings, and the market for high yield securities is generally smaller and less liquid than that for investment grade securities.
Index or Model Constituent Risk. Certain funds may be a constituent of one or more indices or ETF models. As a result, such a fund may be included in one or more index-tracking exchange-traded funds or mutual funds. Being a component security of such a vehicle could greatly affect the trading activity involving a fund, the size of the fund and the market volatility of the fund. Inclusion in an index could increase demand for the fund and removal from an index could result in outsized selling activity in a relatively short period of time. As a result, a fund’s net asset value could be negatively impacted and the fund’s market price may be significantly below its net asset value during certain periods. In addition, index rebalances may potentially result in increased trading activity in a fund’s shares.
Index Provider Risk. To the extent a fund seeks to track an index, it is subject to Index Provider Risk. There is no assurance that the Index Provider will compile the Index accurately, or that the Index will be determined, maintained, constructed, reconstituted, rebalanced, composed, calculated or disseminated accurately. To correct any such error, the Index Provider may carry out an unscheduled rebalance or other modification of the Index constituents or weightings, which may increase the fund’s costs. The Index Provider does not provide any representation or warranty in relation to the quality, accuracy or completeness of data in the Index, and
Additional Information (Continued)
First Trust Limited Duration Investment Grade Corporate ETF (FSIG)October 31, 2023 (Unaudited) it does not guarantee that the Index will be calculated in accordance with its stated methodology. Losses or costs associated with any Index Provider errors generally will be borne by the fund and its shareholders.
Investment Companies Risk. To the extent a fund invests in the securities of other investment vehicles, the fund will incur additional fees and expenses that would not be present in a direct investment in those investment vehicles. Furthermore, the fund’s investment performance and risks are directly related to the investment performance and risks of the investment vehicles in which the fund invests.
LIBOR Risk. To the extent a fund invests in floating or variable rate obligations that use the London Interbank Offered Rate (“LIBOR”) as a reference interest rate, it is subject to LIBOR Risk. The United Kingdom’s Financial Conduct Authority, which regulates LIBOR, has ceased making LIBOR available as a reference rate over a phase-out period that began December 31, 2021. There is no assurance that any alternative reference rate, including the Secured Overnight Financing Rate (“SOFR”) will be similar to or produce the same value or economic equivalence as LIBOR or that instruments using an alternative rate will have the same volume or liquidity. The unavailability or replacement of LIBOR may affect the value, liquidity or return on certain fund investments and may result in costs incurred in connection with closing out positions and entering into new trades. Any potential effects of the transition away from LIBOR on the fund or on certain instruments in which the fund invests can be difficult to ascertain, and they may vary depending on a variety of factors, and they could result in losses to the fund.
Management Risk. To the extent that a fund is actively managed, it is subject to management risk. In managing an actively-managed fund’s investment portfolio, the fund’s portfolio managers will apply investment techniques and risk analyses that may not have the desired result. There can be no guarantee that a fund will meet its investment objective.
Market Risk. Market risk is the risk that a particular security, or shares of a fund in general, may fall in value. Securities held by a fund, as well as shares of a fund itself, are subject to market fluctuations caused by factors such as general economic conditions, political events, regulatory or market developments, changes in interest rates and perceived trends in securities prices. Shares of a fund could decline in value or underperform other investments as a result of the risk of loss associated with these market fluctuations. In addition, local, regional or global events such as war, acts of terrorism, spread of infectious diseases or other public health issues, recessions, or other events could have a significant negative impact on a fund and its investments. Such events may affect certain geographic regions, countries, sectors and industries more significantly than others. In February 2022, Russia invaded Ukraine which has caused and could continue to cause significant market disruptions and volatility within the markets in Russia, Europe, and the United States. The hostilities and sanctions resulting from those hostilities could have a significant impact on certain fund investments as well as fund performance. The COVID-19 global pandemic and the ensuing policies enacted by governments and central banks have caused and may continue to cause significant volatility and uncertainty in global financial markets. While the U.S. has resumed “reasonably” normal business activity, many countries continue to impose lockdown measures. Additionally, there is no guarantee that vaccines will be effective against emerging variants of the disease. These events also adversely affect the prices and liquidity of a fund’s portfolio securities or other instruments and could result in disruptions in the trading markets. Any of such circumstances could have a materially negative impact on the value of a fund’s shares and result in increased market volatility. During any such events, a fund’s shares may trade at increased premiums or discounts to their net asset value and the bid/ask spread on a fund’s shares may widen.
Non-U.S. Securities Risk. To the extent a fund invests in non-U.S. securities, it is subject to additional risks not associated with securities of domestic issuers. Non-U.S. securities are subject to higher volatility than securities of domestic issuers due to: possible adverse political, social or economic developments; restrictions on foreign investment or exchange of securities; capital controls; lack of liquidity; currency exchange rates; excessive taxation; government seizure of assets; the imposition of sanctions by foreign governments; different legal or accounting standards; and less government supervision and regulation of exchanges in foreign countries. Investments in non-U.S. securities may involve higher costs than investments in U.S. securities, including higher transaction and custody costs, as well as additional taxes imposed by non-U.S. governments. These risks may be heightened for securities of companies located, or with significant operations, in emerging market countries.
Operational Risk. Each fund is subject to risks arising from various operational factors, including, but not limited to, human error, processing and communication errors, errors of a fund’s service providers, counterparties or other third-parties, failed or inadequate processes and technology or systems failures. Each fund relies on third-parties for a range of services, including custody. Any delay or failure relating to engaging or maintaining such service providers may affect a fund’s ability to meet its investment objective. Although the funds and the funds’ investment advisor seek to reduce these operational risks through controls and procedures, there is no way to completely protect against such risks.
Additional Information (Continued)
First Trust Limited Duration Investment Grade Corporate ETF (FSIG)October 31, 2023 (Unaudited) Passive Investment Risk. To the extent a fund seeks to track an index, the fund will invest in the securities included in, or representative of, the index regardless of their investment merit. A fund generally will not attempt to take defensive positions in declining markets.
Preferred Securities Risk. Preferred securities combine some of the characteristics of both common stocks and bonds. Preferred securities are typically subordinated to bonds and other debt securities in a company’s capital structure in terms of priority to corporate income, subjecting them to greater credit risk than those debt securities. Generally, holders of preferred securities have no voting rights with respect to the issuing company unless preferred dividends have been in arrears for a specified number of periods, at which time the preferred security holders may obtain limited rights. In certain circumstances, an issuer of preferred securities may defer payment on the securities and, in some cases, redeem the securities prior to a specified date. Preferred securities may also be substantially less liquid than other securities, including common stock.
Valuation Risk. The valuation of certain securities may carry more risk than that of common stock. Uncertainties in the conditions of the financial markets, unreliable reference data, lack of transparency and inconsistency of valuation models and processes may lead to inaccurate asset pricing. A fund may hold investments in sizes smaller than institutionally sized round lot positions (sometimes referred to as odd lots). However, third-party pricing services generally provide evaluations on the basis of institutionally-sized round lots. If a fund sells certain of its investments in an odd lot transaction, the sale price may be less than the value at which such securities have been held by the fund. Odd lots often trade at lower prices than institutional round lots. There is no assurance that the fund will be able to sell a portfolio security at the price established by the pricing service, which could result in a loss to the fund.
NOT FDIC INSURED NOT BANK GUARANTEED MAY LOSE VALUE
Advisory Agreement
Board Considerations Regarding Approval of the Continuation of the Investment Management Agreement
The Board of Trustees of First Trust Exchange-Traded Fund IV (the “Trust”), including the Independent Trustees, unanimously approved the continuation of the Investment Management Agreement (the “Agreement”) with First Trust Advisors L.P. (the “Advisor”) on behalf of the First Trust Limited Duration Investment Grade Corporate ETF (the “Fund”). The Board approved the continuation of the Agreement for a one-year period ending June 30, 2024 at a meeting held on June 4–5, 2023. The Board determined that the continuation of the Agreement is in the best interests of the Fund in light of the nature, extent and quality of the services provided and such other matters as the Board considered to be relevant in the exercise of its business judgment.
To reach this determination, the Board considered its duties under the Investment Company Act of 1940, as amended (the “1940 Act”), as well as under the general principles of state law, in reviewing and approving advisory contracts; the requirements of the 1940 Act in such matters; the fiduciary duty of investment advisors with respect to advisory agreements and compensation; the standards used by courts in determining whether investment company boards have fulfilled their duties; and the factors to be considered by the Board in voting on such agreements. At meetings held on April 17, 2023 and June 4–5, 2023, the Board, including the Independent Trustees, reviewed materials provided by the Advisor responding to requests for information from counsel to the Independent Trustees, submitted on behalf of the Independent Trustees, that, among other things, outlined: the services provided by the Advisor to the Fund (including the relevant personnel responsible for these services and their experience); the unitary fee rate schedule payable by the Fund as compared to fees charged to a peer group of funds (the “Expense Group”) and a broad peer universe of funds (the “Expense Universe”), each assembled by Broadridge Financial Solutions, Inc. (“Broadridge”), an independent source, and as compared to fees charged to other clients of the Advisor, including other exchange-traded funds (“ETFs”) managed by the Advisor; the expense ratio of the Fund as compared to expense ratios of the funds in the Fund’s Expense Group and Expense Universe; performance information for the Fund, including comparisons of the Fund’s performance to that of one or more relevant benchmark indexes and to that of a performance group of funds and a broad performance universe of funds (the “Performance Universe”), each assembled by Broadridge; the nature of expenses incurred in providing services to the Fund and the potential for the Advisor to realize economies of scale, if any; profitability and other financial data for the Advisor; any indirect benefits to the Advisor and its affiliate, First Trust Portfolios L.P. (“FTP”); and information on the Advisor’s compliance program. The Board reviewed initial materials with the Advisor at the meeting held on April 17, 2023, prior to which the Independent Trustees and their counsel met separately to discuss the information provided by the Advisor. Following the April meeting, counsel to the Independent Trustees, on behalf of the Independent Trustees, requested certain clarifications and supplements to the materials provided, and the information provided in response to those requests was considered at an executive session of the Independent Trustees and their counsel held prior to the June 4–5, 2023 meeting, as well as at the June meeting. The Board applied its business judgment to determine whether the arrangement between the Trust and the Advisor continues to be a reasonable business arrangement from the Fund’s perspective. The
Additional Information (Continued)
First Trust Limited Duration Investment Grade Corporate ETF (FSIG)October 31, 2023 (Unaudited) Board determined that, given the totality of the information provided with respect to the Agreement, the Board had received sufficient information to renew the Agreement. The Board considered that shareholders chose to invest or remain invested in the Fund knowing that the Advisor manages the Fund and knowing the Fund’s unitary fee.
In reviewing the Agreement, the Board considered the nature, extent and quality of the services provided by the Advisor under the Agreement. The Board considered that the Advisor is responsible for the overall management and administration of the Trust and the Fund and reviewed all of the services provided by the Advisor to the Fund, as well as the background and experience of the persons responsible for such services. The Board noted that the Fund is an actively-managed ETF and noted that the Advisor’s Investment Grade Fixed Income Team and Leveraged Finance Investment Team are responsible for the day-to-day management of the Fund’s investments. The Board considered the background and experience of the members of the Investment Grade Fixed Income Team and the Leveraged Finance Investment Team and noted the Board’s prior meetings with members of the Teams. In reviewing the services provided, the Board noted the compliance program that had been developed by the Advisor and considered that it includes a robust program for monitoring the Advisor’s and the Fund’s compliance with the 1940 Act, as well as the Fund’s compliance with its investment objective, policies and restrictions. The Board also considered a report from the Advisor with respect to its risk management functions related to the operation of the Fund. Finally, as part of the Board’s consideration of the Advisor’s services, the Advisor, in its written materials and at the April 17, 2023 meeting, described to the Board the scope of its ongoing investment in additional personnel and infrastructure to maintain and improve the quality of services provided to the Fund and the other funds in the First Trust Fund Complex. In addition to the written materials provided by the Advisor, at the June 4–5, 2023 meeting, the Board also received a presentation from representatives of the Advisor’s Investment Grade Fixed Income Team, who discussed the services that the Team provides to the Fund, including the Team’s day-to-day management of the Fund’s investments. In light of the information presented and the considerations made, the Board concluded that the nature, extent and quality of the services provided to the Trust and the Fund by the Advisor under the Agreement have been and are expected to remain satisfactory and that the Advisor has managed the Fund consistent with its investment objective, policies and restrictions.
The Board considered the unitary fee rate schedule payable by the Fund under the Agreement for the services provided. The Board considered that as part of the unitary fee the Advisor is responsible for the Fund’s expenses, including the cost of transfer agency, custody, fund administration, legal, audit and other services and license fees, if any, but excluding the fee payment under the Agreement and 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 Rule 12b-1 plan, if any, and extraordinary expenses, if any. The Board noted that the Advisor had previously agreed to waive a portion of its unitary fee in an amount equal to 0.10% of the Fund’s average daily net assets through at least November 12, 2023. The Board received and reviewed information showing the fee rates and expense ratios of the peer funds in the Expense Group, as well as advisory and unitary fee rates charged by the Advisor to other fund (including ETFs) and non-fund clients, as applicable. Because the Fund pays a unitary fee, the Board determined that expense ratios were the most relevant comparative data point. Based on the information provided, the Board noted that the total (net) expense ratio for the Fund was above the median total (net) expense ratio of the peer funds in the Expense Group. With respect to the Expense Group, the Board, at the April 17, 2023 meeting, discussed with Broadridge its methodology for assembling peer groups and discussed with the Advisor limitations in creating peer groups for actively-managed ETFs, and different business models that may affect the pricing of services among ETF sponsors. The Board took these limitations and differences into account in considering the peer data. With respect to fees charged to other non-ETF clients, the Board considered differences between the Fund and other non-ETF clients that limited their comparability. In considering the unitary fee rate schedule overall, the Board also considered the Advisor’s statement that it seeks to meet investor needs through innovative and value-added investment solutions and the Advisor’s demonstrated long-term commitment to the Fund and the other funds in the First Trust Fund Complex.
The Board considered performance information for the Fund. The Board noted the process it has established for monitoring the Fund’s performance and portfolio risk on an ongoing basis, which includes quarterly performance reporting from the Advisor for the Fund. The Board determined that this process continues to be effective for reviewing the Fund’s performance. The Board received and reviewed information comparing the Fund’s performance for the one-year period ended December 31, 2022 to the performance of the funds in the Performance Universe and to that of a benchmark index. Based on the information provided, the Board noted that the Fund outperformed the Performance Universe median and the benchmark index for the one-year period ended December 31, 2022.
On the basis of all the information provided on the unitary fee and performance of the Fund and the ongoing oversight by the Board, the Board concluded that the unitary fee for the Fund continues to be reasonable and appropriate in light of the nature, extent and quality of the services provided by the Advisor to the Fund under the Agreement.
Additional Information (Continued)
First Trust Limited Duration Investment Grade Corporate ETF (FSIG)October 31, 2023 (Unaudited) The Board considered information and discussed with the Advisor whether there were any economies of scale in connection with providing advisory services to the Fund at current asset levels and whether the Fund may benefit from any economies of scale. The Board noted that the unitary fee rate schedule for the Fund includes breakpoints pursuant to which the unitary fee rate will be reduced as assets of the Fund meet certain thresholds. The Board considered the Advisor’s statement that it believes that its expenses relating to providing advisory services to the Fund will increase during the next twelve months as the Advisor continues to build infrastructure and add new staff. The Board also noted that under the unitary fee structure, any reduction in expenses associated with the management and operations of the Fund would benefit the Advisor, but that the unitary fee structure provides a level of certainty in expenses for shareholders of the Fund. The Board concluded that the unitary fee rate schedule for the Fund reflects an appropriate level of sharing of any economies of scale that may be realized in the management of the Fund at current asset levels. The Board considered the revenues and allocated costs (including the allocation methodology) of the Advisor in serving as investment advisor to the Fund for the twelve months ended December 31, 2022 and the estimated profitability level for the Fund calculated by the Advisor based on such data, as well as complex-wide and product-line profitability data, for the same period. The Board noted the inherent limitations in the profitability analysis and concluded that, based on the information provided, the Advisor’s profitability level for the Fund was not unreasonable. In addition, the Board considered indirect benefits described by the Advisor that may be realized from its relationship with the Fund. The Board considered that the Advisor had identified as an indirect benefit to the Advisor and FTP their exposure to investors and brokers who, absent their exposure to the Fund, may have had no dealings with the Advisor or FTP, and noted that the Advisor does not utilize soft dollars in connection with the Fund. The Board concluded that the character and amount of potential indirect benefits to the Advisor were not unreasonable.
Based on all of the information considered and the conclusions reached, the Board, including the Independent Trustees, unanimously determined that the terms of the Agreement continue to be fair and reasonable and that the continuation of the Agreement is in the best interests of the Fund. No single factor was determinative in the Board’s analysis.
Board of Trustees and Officers
First Trust Limited Duration Investment Grade Corporate ETF (FSIG)October 31, 2023 (Unaudited) The following tables identify the Trustees and Officers of the Trust. Unless otherwise indicated, the address of all persons is 120 East Liberty Drive, Suite 400, Wheaton, IL 60187.
The Trust’s statement of additional information includes additional information about the Trustees and is available, without charge, upon request, by calling (800) 988-5891.
Name,
Year of Birth and
Position with the Trust | Term of Office
and Year First
Elected or
Appointed | Principal Occupations
During Past 5 Years | Number of
Portfolios in
the First Trust
Fund Complex
Overseen by
Trustee | Other
Trusteeships or
Directorships
Held by Trustee
During Past
5 Years |
|
Richard E. Erickson, Trustee
(1951) | • Indefinite Term • Since Inception | Retired; Physician, Edward-Elmhurst Medical Group (2021 to September 2023); Physician and Officer, Wheaton Orthopedics (1990 to 2021) | | |
Thomas R. Kadlec, Trustee
(1957) | • Indefinite Term • Since Inception | Retired; President, ADM Investors Services, Inc. (Futures Commission Merchant) (2010 to July 2022) | | Director, National Futures Association and ADMIS Singapore Ltd.; Formerly, Director of ADM Investor Services, Inc., ADM Investor Services International, ADMIS Hong Kong Ltd., and Futures Industry Association |
Denise M. Keefe, Trustee
(1964) | • Indefinite Term • Since 2021 | Executive Vice President, Advocate Aurora Health and President, Advocate Aurora Continuing Health Division (Integrated Healthcare System) | | Director and Board Chair of Advocate Home Health Services, Advocate Home Care Products and Advocate Hospice; Director and Board Chair of Aurora At Home (since 2018); Director of Advocate Physician Partners Accountable Care Organization; Director of RML Long Term Acute Care Hospitals; Director of Senior Helpers (since 2021); and Director of MobileHelp (since 2022) |
Robert F. Keith, Trustee
(1956) | • Indefinite Term • Since Inception | President, Hibs Enterprises (Financial and Management Consulting) | | Formerly, Director of Trust Company of Illinois |
Niel B. Nielson, Trustee
(1954) | • Indefinite Term • Since Inception | Senior Advisor (2018 to Present), Managing Director and Chief Operating Officer (2015 to 2018), Pelita Harapan Educational Foundation (Educational Products and Services) | | |
Bronwyn Wright, Trustee
(1971) | • Indefinite Term • Since 2023 | Independent Director to a number of Irish collective investment funds (2009 to Present); Various roles at international affiliates of Citibank (1994 to 2009), including Managing Director, Citibank Europe plc and Head of Securities and Fund Services, Citi Ireland (2007 to 2009) | | |
Board of Trustees and Officers (Continued)
First Trust Limited Duration Investment Grade Corporate ETF (FSIG)October 31, 2023 (Unaudited) Name, Year of Birth and Position with the Trust | Term of Office and Year First Elected or Appointed | Principal Occupations During Past 5 Years | Number of Portfolios in the First Trust Fund Complex Overseen by Trustee | Other Trusteeships or Directorships Held by Trustee During Past 5 Years |
|
James A. Bowen(1), Trustee,
Chairman of the Board
(1955) | • Indefinite Term • Since Inception | Chief Executive Officer, First Trust Advisors L.P. and First Trust Portfolios L.P., Chairman of the Board of Directors, BondWave LLC (Software Development Company) and Stonebridge Advisors LLC (Investment Advisor) | | |
| Position and
Offices
with Trust | Term of Office
and Length of
Service | Principal Occupations
During Past 5 Years |
|
| President and Chief Executive Officer | • Indefinite Term • Since 2016 | Managing Director and Chief Financial Officer, First Trust Advisors L.P. and First Trust Portfolios L.P.; Chief Financial Officer, BondWave LLC (Software Development Company) and Stonebridge Advisors LLC (Investment Advisor) |
| Treasurer, Chief Financial Officer and Chief Accounting Officer | • Indefinite Term • Since 2023 | Senior Vice President, First Trust Advisors L.P. and First Trust Portfolios L.P., July 2021 to Present. Previously, Vice President, First Trust Advisors L.P. and First Trust Portfolios L.P., 2014 - 2021. |
| Secretary and Chief Legal Officer | • Indefinite Term • Since Inception | General Counsel, First Trust Advisors L.P. and First Trust Portfolios L.P.; Secretary and General Counsel, BondWave LLC; Secretary, Stonebridge Advisors LLC |
Daniel J. Lindquist
(1970) | | • Indefinite Term • Since Inception | Managing Director, First Trust Advisors L.P. and First Trust Portfolios L.P. |
| Chief Compliance Officer and Assistant Secretary | • Indefinite Term • Since Inception | Deputy General Counsel, First Trust Advisors L.P. and First Trust Portfolios L.P. |
| | • Indefinite Term • Since Inception | Senior Vice President, First Trust Advisors L.P. and First Trust Portfolios L.P. |
| | • Indefinite Term • Since Inception | Senior Vice President, First Trust Advisors L.P. and First Trust Portfolios L.P. |
(1)
Mr. Bowen is deemed an “interested person” of the Trust due to his position as Chief Executive Officer of First Trust Advisors L.P., investment advisor of the Trust.
(2)
The term “officer” means the president, vice president, secretary, treasurer, controller or any other officer who performs a policy making function.
First Trust Limited Duration Investment Grade Corporate ETF (FSIG)October 31, 2023 (Unaudited) Privacy Policy
First Trust values our relationship with you and considers your privacy an important priority in maintaining that relationship. We are committed to protecting the security and confidentiality of your personal information.
Sources of Information
We collect nonpublic personal information about you from the following sources:
• Information we receive from you and your broker-dealer, investment professional or financial representative through interviews, applications, agreements or other forms;
• Information about your transactions with us, our affiliates or others;
• Information we receive from your inquiries by mail, e-mail or telephone; and
• Information we collect on our website through the use of “cookies.” For example, we may identify the pages on our website that your browser requests or visits.
Information Collected
The type of data we collect may include your name, address, social security number, age, financial status, assets, income, tax information, retirement and estate plan information, transaction history, account balance, payment history, investment objectives, marital status, family relationships and other personal information.
Disclosure of Information
We do not disclose any nonpublic personal information about our customers or former customers to anyone, except as permitted by law. In addition to using this information to verify your identity (as required under law), the permitted uses may also include the disclosure of such information to unaffiliated companies for the following reasons:
• In order to provide you with products and services and to effect transactions that you request or authorize, we may disclose your personal information as described above to unaffiliated financial service providers and other companies that perform administrative or other services on our behalf, such as transfer agents, custodians and trustees, or that assist us in the distribution of investor materials such as trustees, banks, financial representatives, proxy services, solicitors and printers.
• We may release information we have about you if you direct us to do so, if we are compelled by law to do so, or in other legally limited circumstances (for example to protect your account from fraud).
In addition, in order to alert you to our other financial products and services, we may share your personal information within First Trust.
Use of Website Analytics
We currently use third party analytics tools, Google Analytics and AddThis, to gather information for purposes of improving First Trust’s website and marketing our products and services to you. These tools employ cookies, which are small pieces of text stored in a file by your web browser and sent to websites that you visit, to collect information, track website usage and viewing trends such as the number of hits, pages visited, videos and PDFs viewed and the length of user sessions in order to evaluate website performance and enhance navigation of the website. We may also collect other anonymous information, which is generally limited to technical and web navigation information such as the IP address of your device, internet browser type and operating system for purposes of analyzing the data to make First Trust’s website better and more useful to our users. The information collected does not include any personal identifiable information such as your name, address, phone number or email address unless you provide that information through the website for us to contact you in order to answer your questions or respond to your requests. To find out how to opt-out of these services click on: Google Analytics and AddThis.
Confidentiality and Security
With regard to our internal security procedures, First Trust restricts access to your nonpublic personal information to those First Trust employees who need to know that information to provide products or services to you. We maintain physical, electronic and procedural safeguards to protect your nonpublic personal information.
Policy Updates and Inquiries
As required by federal law, we will notify you of our privacy policy annually. We reserve the right to modify this policy at any time, however, if we do change it, we will tell you promptly. For questions about our policy, or for additional copies of this notice, please go to www.ftportfolios.com, or contact us at 1-800-621-1675 (First Trust Portfolios) or 1-800-222-6822 (First Trust Advisors).
March 2023
First Trust Exchange-Traded Fund IV
INVESTMENT ADVISOR
First Trust Advisors L.P.
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
ADMINISTRATOR, CUSTODIAN,
FUND ACCOUNTANT &
TRANSFER AGENT
The Bank of New York Mellon
240 Greenwich Street
New York, NY 10286
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
111 South Wacker Drive
Chicago, IL 60606
LEGAL COUNSEL
Chapman and Cutler LLP
320 South Canal Street
Chicago, IL 60606
First Trust Exchange-Traded Fund IV
| First Trust Senior Loan Fund (FTSL)
|
Annual Report
For the Year Ended
October 31, 2023 |
First Trust Senior Loan Fund (FTSL)
Annual Report
October 31, 2023
Caution Regarding Forward-Looking Statements
This report contains certain forward-looking statements within the meaning of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended. Forward-looking statements include statements regarding the goals, beliefs, plans or current expectations of First Trust Advisors L.P. (“First Trust” or the “Advisor”) and its representatives, taking into account the information currently available to them. Forward-looking statements include all statements that do not relate solely to current or historical fact. For example, forward-looking statements include the use of words such as “anticipate,” “estimate,” “intend,” “expect,” “believe,” “plan,” “may,” “should,” “would” or other words that convey uncertainty of future events or outcomes.
Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the series of First Trust Exchange-Traded Fund IV (the “Trust”) described in this report (First Trust Senior Loan Fund; hereinafter referred to as the “Fund”) to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. When evaluating the information included in this report, you are cautioned not to place undue reliance on these forward-looking statements, which reflect the judgment of the Advisor and its representatives only as of the date hereof. We undertake no obligation to publicly revise or update these forward-looking statements to reflect events and circumstances that arise after the date hereof.
Performance and Risk Disclosure
There is no assurance that the Fund will achieve its investment objectives. The Fund is subject to market risk, which is the possibility that the market values of securities owned by the Fund will decline and that the value of the Fund’s shares may therefore be less than what you paid for them. Accordingly, you can lose money investing in the Fund. See “Risk Considerations” in the Additional Information section of this report for a discussion of certain other risks of investing in the Fund.
Performance data quoted represents past performance, which is no guarantee of future results, and current performance may be lower or higher than the figures shown. For the most recent month-end performance figures, please visit www.ftportfolios.com or speak with your financial advisor. Investment returns, net asset value and share price will fluctuate and Fund shares, when sold, may be worth more or less than their original cost.
The Advisor may also periodically provide additional information on Fund performance on the Fund’s webpage at www.ftportfolios.com.
How to Read This Report
This report contains information that may help you evaluate your investment in the Fund. It includes details about the Fund and presents data and analysis that provide insight into the Fund’s performance and investment approach.
By reading the portfolio commentary from the portfolio management team of the Fund, you may obtain an understanding of how the market environment affected the Fund’s performance. The statistical information that follows may help you understand the Fund’s performance compared to that of a relevant market benchmark.
It is important to keep in mind that the opinions expressed by personnel of the Advisor are just that: informed opinions. They should not be considered to be promises or advice. The opinions, like the statistics, cover the period through the date on the cover of this report. The material risks of investing in the Fund are spelled out in the prospectus, the statement of additional information, and other Fund regulatory filings.
First Trust Senior Loan Fund (FTSL)
Annual Letter from the Chairman and CEO
October 31, 2023
Dear Shareholders,
First Trust is pleased to provide you with the annual report for the First Trust Senior Loan Fund (the “Fund”), which contains detailed information about the Fund for the twelve months ended October 31, 2023.
The Bureau of Economic Analysis recently announced that U.S. real gross domestic product (“GDP”) grew by a staggering 4.9% in the third quarter of 2023 and is now up 2.9% on a year-over-year basis from where it stood in the third quarter of 2022. The most recent quarter’s GDP data represents the fastest growth rate for any quarter since 2014. Consumer spending, which rose by 4.0% over the period, was responsible for 2.7 percentage points of the total increase in GDP. Whether the consumer can keep up this pace of spending remains to be seen, especially given recent news that excess savings from the pandemic-era stimulus have likely been depleted. From a global perspective, the International Monetary Fund (“IMF”) notes that progress in fighting inflation has led to lower economic growth. In their October 2023 publication of the World Economic Outlook, the IMF projected that the growth in world economic output is expected to slow from 3.5% in 2022 to 2.9% in 2024. The economic growth in advanced economies is projected to plummet from 2.6% in 2022 to 1.4% in 2024.
In the notes to their September 2023 meeting, the Federal Open Market Committee revealed that they may need to keep interest rates “higher for longer” as they continue to battle stubbornly high inflation. As many investors are likely aware, a higher Federal Funds target rate can have deep implications for consumers, such as driving up the cost of borrowing for homes, automobiles, and other large purchases. The American consumer has yet to feel the full weight of those burdens, in my opinion. That said, the data reveals a different story among corporate America. S&P Global Market Intelligence reported that a total of 516 U.S. corporations filed for bankruptcy protection on a year-to-date basis through September 30, 2023, up from a total of 263 corporate bankruptcy filings over the same period last year. Higher interest rates and Treasury bond yields have also sapped demand for commercial property loans. Data from Trepp, LLC, a leading provider of data and analytics to the commercial real estate and banking markets, revealed that just $28.2 billion of loans converted into commercial mortgage-backed securities have been issued in 2023, the lowest figure since 2011.
The financial markets battled a myriad of headwinds over the past year, from geopolitical uncertainty resulting from war (the conflicts between Israel and Hamas and Russia and Ukraine), to slowing global economic growth and sticky inflation. Brian Wesbury, Chief Economist at First Trust, notes that a U.S. economic recession is likely to begin at some point early next year. While calls for a recession may concern some investors, the following may offer solace. Data from Bloomberg reveals that the S&P 500® Index has posted positive total returns over the 3-year period following every recession since 1948.
Thank you for giving First Trust the opportunity to play a role in your financial future. We value our relationship with you and will report on the Fund again in six months.
Sincerely,
James A. Bowen
Chairman of the Board of Trustees
Chief Executive Officer of First Trust Advisors L.P.
Fund Performance Overview (Unaudited)
First Trust Senior Loan Fund (FTSL)
The First Trust Senior Loan Fund’s (the “Fund”) primary investment objective is to provide high current income. The Fund’s secondary investment objective is the preservation of capital. Under normal market conditions, the Fund invests at least 80% of its net assets (including investment borrowings) in first lien senior floating rate bank loans (“Senior Loans”).
A Senior Loan is an advance or commitment of funds made by one or more banks or similar financial institutions to one or more corporations, partnerships or other business entities and typically pays interest at a floating or adjusting rate that is determined periodically at a designated premium above a base lending rate, such as the London Interbank Offered Rate (“LIBOR”), the Secured Overnight Financing Rate (“SOFR”), a similar reference rate, or the prime rate offered by one or more major U.S. banks.
The Fund invests primarily in Senior Loans that are below investment grade quality at the time of investment. Securities rated below investment grade, commonly referred to as “junk” or “high-yield” securities, include securities that are rated Ba1/BB+/BB+ or below by Moody’s Investors Service, Inc., Fitch, Inc., or S&P Global Ratings, respectively. The Fund invests in Senior Loans made predominantly to businesses operating in North America, but may also invest in Senior Loans made to businesses operating outside of North America. The Senior Loans included in the Fund’s portfolio often maintain a duration of less than 90 days; however, the inclusion of LIBOR or SOFR floors on certain Senior Loans or other factors may cause interest rate duration to be longer than 90 days. The Fund may also invest up to 20% of its net assets in (1) non-Senior Loan debt securities, which may be fixed-rate or floating-rate income-producing securities (including, without limitation, U.S. government debt securities and corporate debt securities, which may include convertible bonds), (2) warrants, U.S. and non U.S. equity and equity-like positions and interests and other securities issued by or with respect to a borrower or its affiliates, and/or (3) securities of other investment companies.
|
| | Average Annual Total Returns | |
| | | | Inception
(5/1/13)
to 10/31/23 | | | Inception
(5/1/13)
to 10/31/23 |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Morningstar® LSTA® US Leveraged Loan Index | | | | | | | |
| On January 3, 2023, the fair value methodology used to value the senior loan investments held by the Fund was changed. Prior to that date, the senior loans were valued using the bid side price provided by a pricing service. After such date, the senior loans were valued using the midpoint between the bid and ask price provided by a pricing service. The change in the Fund’s fair value methodology on January 3, 2023, resulted in a one-time increase in the Fund’s net asset value of approximately $0.159 per share on that date, which represented a positive impact on the Fund’s performance of 0.35%. Without the change to the pricing methodology, the performance of the Fund on a NAV basis would have been 8.93%, 3.61%, 3.36%, 3.28%, 19.38%, 39.11%, and 40.39% in the one-year, five-years average annual, ten-years average annual, since inception average annual, five-years cumulative, ten-years cumulative, and since inception cumulative periods ended October 31, 2023, respectively. |
Total returns for the period since inception are calculated from the inception date of the Fund. “Average Annual Total Returns” represent the average annual change in value of an investment over the periods indicated. “Cumulative Total Returns” represent the total change in value of an investment over the periods indicated.
The Fund’s per share net asset value (“NAV”) is the value of one share of the Fund and is computed by dividing the value of all assets of the Fund (including accrued interest and dividends), less all liabilities (including accrued expenses and dividends declared but unpaid), by the total number of outstanding shares. The price used to calculate market return (“Market Price”) is determined by using the midpoint of the national best bid and offer price (“NBBO”) as of the time that the Fund’s NAV is calculated. Under Securities and Exchange Commission rules, the NBBO consists of the highest displayed buy and lowest sell prices among the various exchanges trading the Fund at the time the Fund’s NAV is calculated. Prior to January 1, 2019, the price used was the midpoint between the highest bid and the lowest offer on the stock exchange on which shares of the Fund were listed for trading as of the time that the Fund’s NAV was calculated. Since shares of the Fund did not trade in the secondary market until after its inception, for the period from inception to the first day of secondary market trading in shares of the Fund, the NAV of the Fund is used as a proxy for the secondary market trading price to calculate market returns. NAV and market returns assume that all distributions have been reinvested in the Fund at NAV and Market Price, respectively.
An index is a statistical composite that tracks a specified financial market or sector. Unlike the Fund, the 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
Fund Performance Overview (Unaudited) (Continued)
First Trust Senior Loan Fund (FTSL) (Continued)
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.
| % of Senior Loans
and other
|
| |
| |
| |
| |
Hotels, Restaurants & Leisure | |
| |
Health Care Providers & Services | |
Commercial Services & Supplies | |
| |
| |
Wireless Telecommunication Services | |
Diversified Telecommunication Services | |
Health Care Equipment & Supplies | |
| |
Trading Companies & Distributors | |
| |
| |
| |
| |
Diversified Consumer Services | |
Electronic Equipment, Instruments & Components | |
Diversified Financial Services | |
| |
| |
Life Sciences Tools & Services | |
Construction & Engineering | |
| |
| |
| |
Independent Power and Renewable Electricity Producers | |
| |
| |
| |
| % of Senior Loans
and other
|
Senior Floating-Rate Loan Interests | |
Corporate Bonds and Notes | |
Foreign Corporate Bonds and Notes | |
| |
| |
| |
Credit Quality (S&P ratings)(3) | % of Senior Loans
and other
|
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| % of Senior Loans
and other
|
| |
SS&C Technologies Holdings, Inc. | |
Verscend Technologies, Inc. (Cotiviti) | |
Zelis Payments Buyer, Inc. | |
| |
| |
Charter Communications Operating LLC | |
Cablevision (aka CSC Holdings LLC) | |
Clarivate Analytics PLC (Camelot) | |
| |
| |
| Percentages are based on long-term positions. Money market funds are excluded. |
| Amount is less than 0.1%. |
| The ratings are by S&P Global Ratings. A credit rating is an assessment provided by a nationally recognized statistical rating organization (NRSRO) of the creditworthiness of an issuer with respect to debt obligations except for those debt obligations that are privately rated. Ratings are measured on a scale that generally ranges from AAA (highest) to D (lowest). Investment grade is defined as those issuers that have a long- term credit rating of BBB- or higher. The credit ratings shown relate to the credit worthiness of the issuers of the underlying securities in the Fund, and not to the Fund or its shares. Credit ratings are subject to change. |
Fund Performance Overview (Unaudited) (Continued)
First Trust Senior Loan Fund (FTSL) (Continued)
| 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
Information showing the number of days the market price of the Fund’s shares was greater (at a premium) and less (at a discount) than the Fund’s net asset value for the most recently completed year, and the most recently completed calendar quarters since that year (or life of the Fund, if shorter) is available at https://www.ftportfolios.com/Retail/etf/home.aspx.
First Trust Senior Loan Fund (FTSL)Annual ReportOctober 31, 2023 (Unaudited) Advisor
The First Trust Advisors L.P. (“First Trust”) Leveraged Finance Team is comprised of 18 experienced investment professionals specializing in below investment grade securities. The team is comprised of portfolio management, research, trading and operations personnel. As of October 31, 2023, the First Trust Leveraged Finance Team managed or supervised approximately $5.5 billion in senior secured bank loans and high-yield bonds. These assets are managed across various strategies, including two closed-end funds, an open-end fund, and five exchange-traded funds on behalf of retail and institutional clients.
Portfolio Management Team
The following persons serve as portfolio managers of the Fund:
William Housey, CFA – Managing Director of Fixed Income, Senior Portfolio Manager
Jeffrey Scott, CFA – Senior Vice President and Portfolio Manager
The portfolio managers are primarily and jointly responsible for the day-to-day management of the Fund. Mr. Housey has served as a part of the portfolio management team of the Fund since 2013 while Mr. Scott has served as a part of the portfolio management team of the Fund since 2020.
Commentary
The First Trust Senior Loan Fund (the “Fund”) is an actively managed exchanged-traded fund (“ETF”). The Fund’s primary investment objective is to provide high current income, with a secondary objective of preservation of capital.
Market Recap
At the beginning of the 12-month period ended October 31, 2023, inflation remained elevated as the November 2022 Consumer Price Index printed 7.1% on a year-over-year basis, while the Federal Reserve (the “Fed”) simultaneously reiterated its commitment to a 2.0% inflation target. At this point, the upper bound of the Federal Funds target rate sat at 3.25%. However, by the Fed’s December 2022 Federal Open Market Committee (“FOMC”) meeting, the committee projected a higher-than-expected terminal Federal Funds target rate of 5.00-5.25%, indicating the Fed’s lack of confidence that inflation would remain subdued. The FOMC raised its target rate once again to 5.25-5.50% at its July 2023 meeting in a continued attempt to mitigate inflation. At the September 2023 meeting, the FOMC held its target rate steady and upwardly revised its economic growth outlook for both this year and next, while reducing its 2024 rate cut projection; this proved a catalyst for higher yields, spread volatility, and lower equity values in the concluding weeks of the reporting period.
For the 12-month period ended October 31, 2023, the 10-Year U.S. Treasury yield increased 88 basis points (“bps”) from 4.05% to 4.93%. While the S&P 500® Index traded near 4,500 at the end of the second quarter of 2023, nearly 1,000 points above its October 2022 bottom, the S&P 500® Index closed at 4,194 on October 31, 2023, providing a 10.14% return over the reporting period.
Senior Loan Market
Senior loan spreads over the Secured Overnight Financing Rate (“SOFR”) decreased by 110 bps to S+544 bps during the 12-month period ended October 31, 2023. The current spread is 27 bps above the long-term average spread of S+517 bps (December 1997 – October 2023). Senior loan funds realized inflows in the third quarter of 2023 amounting to $500 million. Outside of the third quarter, senior loan funds experienced outflows, bringing total last 12-month (“LTM”) net outflows to $27.3 billion. This compares to net inflows of $1.80 billion in the previous LTM period ended October 31, 2022.
In the LTM period, BB rated senior loans (+9.82%) underperformed both B rated (+13.27%) and CCC rated senior loans (+12.40%). The average senior loan price increased from $92.19 at the beginning of the period to $94.76 at the end of the period.
Default Rates
Default rates, as measured by the Morningstar® LSTA® US Leveraged Loan Index (the “Benchmark”), increased modestly over the LTM period ended October 31, 2023. The LTM default rate of the senior loan market rose from 0.83% at the beginning of the period to 1.36% at the end of the period, remaining below the long-term average of 2.70%.
Portfolio Commentary (Continued)
First Trust Senior Loan Fund (FTSL)Annual ReportOctober 31, 2023 (Unaudited) Fund Performance
The Fund returned 9.32% on a net asset value (“NAV”) basis and 9.50% on a market price basis over the LTM period ended October 31, 2023. The Benchmark returned 11.92% over the same period.
The Fund held 191 individual positions diversified across 32 industries at the end of the reporting period; by comparison, the Fund held 210 individual positions across 32 industries at the beginning of the period. Software (21.12%), Insurance (15.19%), and Healthcare Technology (11.80%) comprised the Fund’s top three industry exposures at the end of the period. The Fund increased its allocation to high-yield bonds by 75 bps from 10.89% to 11.64% over the period. The Fund’s duration slightly decreased from 0.61 years at the beginning of the period to 0.56 years at the end of the period.
As of October 31, 2023, the Fund’s allocations to BBB rated, BB rated, B rated, and CCC and below rated assets (including Not Rated) were 13.50%, 14.60%, 66.47%, and 5.43%, respectively. During the period, the Fund increased its allocation to BBB rated assets, while simultaneously decreasing its allocation to B rated assets, in an effort to reduce overall portfolio volatility and enhance liquidity.
Strong security selection within the Financial Services sector, as well as the Technology Hardware & Equipment sector, benefitted performance. The Fund’s security selection within the Media & Entertainment sector, as well as the Commercial & Professional Services sector, detracted from performance. Further, the Fund’s high-yield bond allocation proved a headwind to performance as high-yield bonds underperformed senior loans in the LTM period. The Fund’s cash position also detracted from performance; however, we believe this defensive positioning will serve the Fund well over time.
The Fund’s most recent monthly distribution of $0.2950 per share exceeds the distribution paid in October 2022 by $0.067 per share. The effective yield based on the Fund’s distributions over the trailing twelve months was 7.48%, based on NAV, at the end of the period.
The Fund experienced zero defaults in the LTM period. By comparison, the Benchmark experienced 21 defaults. Since inception, the Fund has experienced 10 defaults, compared to 173 within the Benchmark over the same period. The Fund’s LTM default rate of 0.00% compares to the Benchmark’s LTM default rate of 1.36% over the same period.
Market and Fund Outlook
Our market framework centers on our view that the Fed’s hiking cycle is nearing its end. While the Fed may leak incremental hikes into the market, we believe today’s fixed income markets are much more balanced when it comes to income and interest rate risk. Elevated yields continue to support future positive returns in fixed income. However, we expect market volatility to continue as investors attempt to gauge the likelihood, and timing of, a recession. Consequently, we favor increasing credit quality while defensively positioning in sectors with limited cyclicality. Improved valuations have created attractive opportunities in the corporate credit landscape, in our view. As we assess such market opportunities, we will continue to employ our bottom-up credit underwriting process and rigorous approach to risk management.
First Trust Senior Loan Fund (FTSL)Understanding Your Fund ExpensesOctober 31, 2023 (Unaudited) As a shareholder of First Trust Senior Loan Fund (the “Fund”), you incur two types of costs: (1) transaction costs; and (2) ongoing costs, including management fees, distribution and/or service (12b-1) fees, if any, and other Fund expenses. This Example is intended to help you understand your ongoing costs of investing in the Fund and to compare these costs with the ongoing costs of investing in other funds.
The Example is based on an investment of $1,000 invested at the beginning of the period and held through the six-month period ended October 31, 2023.
Actual Expenses
The first line in the following table provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During the Six-Month Period” to estimate the expenses you paid on your account during this six-month period.
Hypothetical Example for Comparison Purposes
The second line in the following table provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs such as brokerage commissions. Therefore, the second line in the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
| Beginning
Account Value
May 1, 2023 | Ending
Account Value
October 31, 2023 | Annualized
Expense Ratio
Based on the
Six-Month
Period (a) | Expenses Paid
During the
Six-Month
Period (a) (b) |
First Trust Senior Loan Fund (FTSL) |
| | | | |
Hypothetical (5% return before expenses) | | | | |
| Annualized expense ratio and expenses paid during the six-month period do not include fees and expenses of the underlying funds in which the Fund invests. |
| Expenses are equal to the annualized expense ratio as indicated in the table multiplied by the average account value over the period (May 1, 2023 through October 31, 2023), multiplied by 184/365 (to reflect the six-month period). |
First Trust Senior Loan Fund (FTSL)Portfolio of InvestmentsOctober 31, 2023
| | | | |
SENIOR FLOATING-RATE LOAN INTERESTS — 84.4% |
| Aerospace & Defense — 0.2% | |
| TransDigm, Inc., Term Loan H, 3 Mo. CME Term SOFR + 3.25%, 0.00% Floor | | | |
| Application Software — 13.2% | |
| Applied Systems, Inc., 2026 Term Loan, 3 Mo. CME Term SOFR + 4.50%, 0.50% Floor | | | |
| CCC Intelligent Solutions, Inc., Term Loan B, 1 Mo. CME Term SOFR + 2.25% + CSA, 0.50% Floor | | | |
| ConnectWise LLC, Term Loan B, 1 Mo. CME Term SOFR + 3.50% + CSA, 0.50% Floor | | | |
| Epicor Software Corp., Term Loan C (First Lien), 1 Mo. CME Term SOFR + 3.25% + CSA, 0.75% Floor | | | |
| Gainwell Acquisition Corp. (fka Milano), Term Loan B, 3 Mo. CME Term SOFR + 4.00% + CSA, 0.75% Floor | | | |
| Greeneden U.S. Holdings II LLC (Genesys Telecommunications Laboratories, Inc.), Initial Dollar Term Loan, 1 Mo. CME Term SOFR + 4.00% + CSA, 0.75% Floor | | | |
| Informatica Corp., Initial Term Loan B, 1 Mo. CME Term SOFR + 2.75% + CSA, 0.00% Floor | | | |
| Internet Brands, Inc. (WebMD/MH Sub I LLC), 2020 June New Term Loan, 1 Mo. CME Term SOFR + 3.75% + CSA, 1.00% Floor | | | |
| Internet Brands, Inc. (WebMD/MH Sub I LLC), Initial Term Loan, 1 Mo. CME Term SOFR + 3.75% + CSA, 0.00% Floor | | | |
| Internet Brands, Inc. (WebMD/MH Sub I LLC), Term Loan (Second Lien), 1 Mo. CME Term SOFR + 6.25%, 0.00% Floor | | | |
| ION Trading Technologies Ltd., Term Loan B, 3 Mo. CME Term SOFR + 4.75% + CSA, 0.00% Floor | | | |
| LogMeIn, Inc. (GoTo Group, Inc.), Term Loan B, 3 Mo. CME Term SOFR + 4.75% + CSA, 0.00% Floor | | | |
| McAfee Corp. (Condor Merger Sub, Inc.), Tranche B-1 Term Loan, 1 Mo. CME Term SOFR + 3.75% + CSA, 0.50% Floor | | | |
| Open Text Corp. (GXS), 2023 Replacement Term Loan, 1 Mo. CME Term SOFR + 2.75% + CSA, 0.50% Floor | | | |
| Open Text Corp. (GXS), Term Loan B, 1 Mo. CME Term SOFR + 1.75% + CSA, 0.00% Floor | | | |
| PowerSchool Holdings, Inc. (Severin), Extended Term Loan, 3 Mo. CME Term SOFR + 3.25% + CSA, 0.00% Floor | | | |
| Qlik Technologies (Project Alpha Intermediate Holding, Inc.), Term Loan B, 1 Mo. CME Term SOFR + 4.75%, 0.50% Floor | | | |
| RealPage, Inc., Term Loan (Second Lien), 1 Mo. CME Term SOFR + 6.50% + CSA, 0.75% Floor | | | |
| RealPage, Inc., Term Loan B, 1 Mo. CME Term SOFR + 3.00% + CSA, 0.50% Floor | | | |
| SolarWinds Holdings, Inc., 2022 Refinancing Term Loan, 1 Mo. CME Term SOFR + 3.75%, 0.00% Floor | | | |
| Solera Holdings, Inc. (Polaris Newco), Term Loan B, 1 Mo. CME Term SOFR + 4.00% + CSA, 0.50% Floor | | | |
| Tenable, Inc., Term Loan B, 1 Mo. CME Term SOFR + 2.75% + CSA, 0.50% Floor | | | |
| Ultimate Kronos Group (UKG, Inc.), 2021 Term Loan, 3 Mo. CME Term SOFR + 3.25% + CSA, 0.50% Floor | | | |
See Notes to Financial Statements
First Trust Senior Loan Fund (FTSL)Portfolio of Investments (Continued)October 31, 2023 | | | | |
SENIOR FLOATING-RATE LOAN INTERESTS (Continued) |
| Application Software (Continued) | |
| Ultimate Kronos Group (UKG, Inc.), Initial Term Loan B, 3 Mo. CME Term SOFR + 3.75% + CSA, 0.00% Floor | | | |
| Veeam Software Holdings Ltd. (VS Buyer LLC), Term Loan B, 1 Mo. CME Term SOFR + 3.25% + CSA, 0.00% Floor | | | |
| | |
| Asset Management & Custody Banks — 1.6% | |
| Edelman Financial Engines Center LLC, Term Loan (Second Lien), 1 Mo. CME Term SOFR + 6.75% + CSA, 0.00% Floor | | | |
| Edelman Financial Engines Center LLC, Term Loan B, 1 Mo. CME Term SOFR + 3.50% + CSA, 0.75% Floor | | | |
| | |
| Auto Parts & Equipment — 0.1% | |
| Clarios Global LP (Power Solutions), 2023 Term Loan, 1 Mo. CME Term SOFR + 3.75%, 0.00% Floor | | | |
| | |
| E.W. Scripps Co., Tranche B-3 Term Loan, 1 Mo. CME Term SOFR + 3.00% + CSA, 0.75% Floor | | | |
| Gray Television, Inc., Term Loan E, 1 Mo. CME Term SOFR + 2.50% + CSA, 0.00% Floor | | | |
| iHeartCommunications, Inc., Second Amendment Incremental Term Loan B, 1 Mo. CME Term SOFR + 3.25% + CSA, 0.50% Floor | | | |
| iHeartCommunications, Inc., Term Loan B, 1 Mo. CME Term SOFR + 3.00% + CSA, 0.00% Floor | | | |
| Nexstar Broadcasting, Inc., Incremental Term Loan B-4, 1 Mo. CME Term SOFR + 2.50% + CSA, 0.00% Floor | | | |
| Sinclair Television Group, Inc., Term Loan B-2, 1 Mo. CME Term SOFR + 2.50% + CSA, 0.00% Floor | | | |
| Univision Communications, Inc., 2021 Replacement New Term Loan (First Lien), 1 Mo. CME Term SOFR + 3.25% + CSA, 0.75% Floor | | | |
| | |
| | |
| American Builders & Contractors Supply Co., Inc., Term Loan B, 1 Mo. CME Term SOFR + 2.00% + CSA, 0.00% Floor | | | |
| Hunter Douglas, Inc. (Solis), Term Loan B, 3 Mo. CME Term SOFR + 3.50%, 0.50% Floor | | | |
| Quikrete Holdings, Inc., 2023 Term Loan, 1 Mo. CME Term SOFR + 2.75% + CSA, 0.00% Floor | | | |
| | |
| | |
| Cablevision (aka CSC Holdings LLC), March 2017 Term Loan B-1, 1 Mo. LIBOR + 2.25%, 0.00% Floor | | | |
| Charter Communications Operating LLC, Term Loan B1, 1 Mo. CME Term SOFR + 1.75%, 0.00% Floor | | | |
| Charter Communications Operating LLC, Term Loan B1, 3 Mo. CME Term SOFR + 1.75%, 0.00% Floor | | | |
| | |
See Notes to Financial Statements
First Trust Senior Loan Fund (FTSL)Portfolio of Investments (Continued)October 31, 2023 | | | | |
SENIOR FLOATING-RATE LOAN INTERESTS (Continued) |
| | |
| Golden Nugget, Inc. (Fertitta Entertainment LLC), Initial Term Loan B, 1 Mo. CME Term SOFR + 4.00%, 0.50% Floor | | | |
| Light & Wonder (FKA Scientific Games International, Inc.), Term Loan B, 1 Mo. CME Term SOFR + 3.00% + CSA, 0.50% Floor | | | |
| Scientific Games Holdings LP (Scientific Games Lottery), Initial Dollar Term Loan, 3 Mo. CME Term SOFR + 3.50%, 0.50% Floor | | | |
| Stars Group Holdings B.V. (Flutter Entertainment PLC), Term Loan B, 3 Mo. CME Term SOFR + 2.25% + CSA, 0.00% Floor | | | |
| | |
| Commercial Printing — 0.7% | |
| Multi-Color Corp. (LABL, Inc.), Initial Dollar Term Loan, 1 Mo. CME Term SOFR + 5.00% + CSA, 0.50% Floor | | | |
| Construction & Engineering — 0.2% | |
| APi Group DE, Inc., Initial Term Loan, 1 Mo. CME Term SOFR + 2.25% + CSA, 0.00% Floor | | | |
| Education Services — 0.3% | |
| Ascensus Holdings, Inc. (Mercury), Term Loan (First Lien), 1 Mo. CME Term SOFR + 3.50% + CSA, 0.50% Floor | | | |
| Electric Utilities — 0.9% | |
| PG&E Corp., Term Loan B, 1 Mo. CME Term SOFR + 3.00% + CSA, 0.50% Floor | | | |
| Electronic Equipment & Instruments — 0.6% | |
| Chamberlain Group, Inc. (Chariot), Term Loan B, 1 Mo. CME Term SOFR + 3.25%, 0.50% Floor | | | |
| Verifone Systems, Inc., Term Loan B, 3 Mo. CME Term SOFR + 4.00% + CSA, 0.00% Floor | | | |
| | |
| Environmental & Facilities Services — 0.3% | |
| GFL Environmental, Inc., 2023 Refinancing Term Loan, 3 Mo. CME Term SOFR + 2.50%, 0.50% Floor | | | |
| | |
| US Foods, Inc., Incremental B-2019 Term Loan, 1 Mo. CME Term SOFR + 2.00% + CSA, 0.00% Floor | | | |
| | |
| BJ’s Wholesale Club, Inc., Term Loan B, 1 Mo. CME Term SOFR + 2.00%, 0.00% Floor | | | |
| Health Care Facilities — 1.3% | |
| Ardent Health Services, Inc. (AHP Health Partners, Inc.), Term Loan B, 1 Mo. CME Term SOFR + 3.50% + CSA, 0.50% Floor | | | |
| Gentiva Health Services, Inc. (Kindred at Home/Charlotte Buyer), Term Loan B, 1 Mo. CME Term SOFR + 5.25%, 0.50% Floor | | | |
| Select Medical Corp., Tranche B-1, 1 Mo. CME Term SOFR + 3.00%, 0.00% Floor | | | |
| | |
| Health Care Services — 2.0% | |
| CHG Healthcare Services, Inc., Term Loan B, 1 Mo. CME Term SOFR + 3.25% + CSA, 0.50% Floor | | | |
See Notes to Financial Statements
First Trust Senior Loan Fund (FTSL)Portfolio of Investments (Continued)October 31, 2023 | | | | |
SENIOR FLOATING-RATE LOAN INTERESTS (Continued) |
| Health Care Services (Continued) | |
| DaVita, Inc., Tranche B-1 Term Loan, 1 Mo. CME Term SOFR + 1.75% + CSA, 0.00% Floor | | | |
| ExamWorks Group, Inc. (Electron Bidco), Term Loan B, 1 Mo. CME Term SOFR + 3.00% + CSA, 0.50% Floor | | | |
| Global Medical Response, Inc. (fka Air Medical), 2018 New Term Loan, 3 Mo. CME Term SOFR + 4.25% + CSA, 1.00% Floor | | | |
| Global Medical Response, Inc. (fka Air Medical), 2021 Refinancing Term Loan, 3 Mo. CME Term SOFR + 4.25% + CSA, 1.00% Floor | | | |
| | |
| Health Care Supplies — 1.8% | |
| Medline Borrower L.P. (Mozart), Initial Dollar Term Loan, 1 Mo. CME Term SOFR + 3.25% + CSA, 0.50% Floor | | | |
| Health Care Technology — 11.3% | |
| athenahealth, Inc. (Minerva Merger Sub, Inc.), Term Loan B, 1 Mo. CME Term SOFR + 3.25%, 0.50% Floor | | | |
| Ciox Health (Healthport/CT Technologies Intermediate Holdings, Inc.), New Term Loan B, 1 Mo. CME Term SOFR + 4.25% + CSA, 0.75% Floor | | | |
| Ensemble RCM LLC (Ensemble Health), Term Loan B, 3 Mo. CME Term SOFR + 3.75% + CSA, 0.00% Floor | | | |
| Mediware (Wellsky/Project Ruby Ultimate Parent Corp.), Term Loan B, 1 Mo. CME Term SOFR + 3.25% + CSA, 0.75% Floor | | | |
| Navicure, Inc. (Waystar Technologies, Inc.), Term Loan B, 1 Mo. CME Term SOFR + 4.00% + CSA, 0.00% Floor | | | |
| Verscend Technologies, Inc. (Cotiviti), New Term Loan B-1, 1 Mo. CME Term SOFR + 4.00% + CSA, 0.00% Floor | | | |
| Zelis Payments Buyer, Inc., New Term Loan B-1, 1 Mo. CME Term SOFR + 3.50% + CSA, 0.00% Floor | | | |
| | |
| Hotels, Resorts & Cruise Lines — 0.5% | |
| Alterra Mountain Co., Term Loan B-2, 1 Mo. CME Term SOFR + 3.50% + CSA, 0.50% Floor | | | |
| Four Seasons Holdings, Inc., 2023 Repricing Term Loan, 1 Mo. CME Term SOFR + 2.50% + CSA, 0.50% Floor | | | |
| Hilton Worldwide Finance LLC, Refinancing Series B-2 Term Loan, 1 Mo. CME Term SOFR + 1.75% + CSA, 0.00% Floor | | | |
| | |
| Household Appliances — 0.0% | |
| Weber-Stephen Products LLC, Term Loan B, 1 Mo. CME Term SOFR + 3.25% + CSA, 0.75% Floor | | | |
| Human Resource & Employment Services — 0.0% | |
| Alight, Inc. (fka Tempo Acq.), Fifth Incremental Term Loan 2023, 1 Mo. CME Term SOFR + 2.75%, 0.50% Floor | | | |
| Independent Power Producers & Energy Traders — 0.1% | |
| Calpine Corp., Term Loan B5, 1 Mo. CME Term SOFR + 2.50% + CSA, 0.00% Floor | | | |
| Industrial Machinery & Supplies & Components — 1.1% | |
| Copeland (Emerald Debt Merger Sub LLC/EMRLD), Initial Term Loan, 1 Mo. CME Term SOFR + 3.00%, 0.00% Floor | | | |
See Notes to Financial Statements
First Trust Senior Loan Fund (FTSL)Portfolio of Investments (Continued)October 31, 2023 | | | | |
SENIOR FLOATING-RATE LOAN INTERESTS (Continued) |
| Industrial Machinery & Supplies & Components (Continued) | |
| Filtration Group Corp., 2021 Incremental Term Loan B, 1 Mo. CME Term SOFR + 3.50% + CSA, 0.50% Floor | | | |
| Filtration Group Corp., 2023 Extended Term Loan, 1 Mo. CME Term SOFR + 4.25% + CSA, 0.50% Floor | | | |
| Gates Global LLC, Term Loan B-3, 1 Mo. CME Term SOFR + 2.50%, 0.75% Floor | | | |
| TK Elevator Newco GMBH (Vertical US Newco, Inc.), New Term Loan B1 (USD), 6 Mo. CME Term SOFR + 3.50% + CSA, 0.50% Floor | | | |
| | |
| Insurance Brokers — 12.5% | |
| Alliant Holdings I LLC, Term Loan B-4, 1 Mo. LIBOR + 3.50%, 0.50% Floor | | | |
| Alliant Holdings I LLC, Term Loan B-5, 1 Mo. CME Term SOFR + 3.50%, 0.50% Floor | | | |
| AmWINS Group, Inc., Feb. 2023 Incremental Term Loan, 1 Mo. CME Term SOFR + 2.75% + CSA, 0.75% Floor | | | |
| AmWINS Group, Inc., Term Loan B, 1 Mo. CME Term SOFR + 2.25% + CSA, 0.75% Floor | | | |
| AssuredPartners, Inc., 2021 Term Loan B, 1 Mo. CME Term SOFR + 3.50% + CSA, 0.50% Floor | | | |
| AssuredPartners, Inc., Incremental Term Loan 2022, 1 Mo. CME Term SOFR + 3.50%, 0.50% Floor | | | |
| AssuredPartners, Inc., Term Loan B, 1 Mo. CME Term SOFR + 3.50% + CSA, 0.00% Floor | | | |
| AssuredPartners, Inc., Term Loan B-4, 1 Mo. CME Term SOFR + 3.75%, 0.50% Floor | | | |
| BroadStreet Partners, Inc., Initial Term Loan B, 1 Mo. CME Term SOFR + 3.00% + CSA, 0.00% Floor | | | |
| BroadStreet Partners, Inc., Term Loan B-3, 1 Mo. CME Term SOFR + 4.00%, 0.00% Floor | | | |
| HUB International Ltd., 2023 Refinancing Term Loan B-5, 2 Mo. CME Term SOFR + 4.25%, 0.75% Floor | | | |
| HUB International Ltd., 2023 Refinancing Term Loan B-5, 3 Mo. CME Term SOFR + 4.25%, 0.75% Floor | | | |
| HUB International Ltd., Term Loan B4, 3 Mo. CME Term SOFR + 4.00%, 0.75% Floor | | | |
| IMA Financial Group, Inc., Incremental Term Loan B-2, 1 Mo. CME Term SOFR + 4.25%, 0.50% Floor | | | |
| National Financial Partners Corp. (NFP), Term Loan B, 1 Mo. CME Term SOFR + 3.25% + CSA, 0.00% Floor | | | |
| OneDigital Borrower LLC, Term Loan B, 1 Mo. CME Term SOFR + 4.25% + CSA, 0.50% Floor | | | |
| Ryan Specialty Group LLC, Term Loan B, 1 Mo. CME Term SOFR + 3.00% + CSA, 0.75% Floor | | | |
| USI, Inc. (fka Compass Investors, Inc.), 2022 New Term Loan, 3 Mo. CME Term SOFR + 3.75%, 0.50% Floor | | | |
| USI, Inc. (fka Compass Investors, Inc.), 2023 Refi Tranche, 3 Mo. CME Term SOFR + 3.25%, 0.00% Floor | | | |
| | |
See Notes to Financial Statements
First Trust Senior Loan Fund (FTSL)Portfolio of Investments (Continued)October 31, 2023 | | | | |
SENIOR FLOATING-RATE LOAN INTERESTS (Continued) |
| Integrated Telecommunication Services — 1.9% | |
| Numericable (Altice France S.A. or SFR), Term Loan B-11, 3 Mo. LIBOR + 2.75%, 0.00% Floor | | | |
| Numericable (Altice France S.A. or SFR), Term Loan B-12, 3 Mo. LIBOR + 3.69%, 0.00% Floor | | | |
| Numericable (Altice France S.A. or SFR), Term Loan B-13, 3 Mo. LIBOR + 4.00%, 0.00% Floor | | | |
| Zayo Group Holdings, Inc., Incremental Term Loan B-2, 1 Mo. CME Term SOFR + 4.33%, 0.50% Floor | | | |
| Zayo Group Holdings, Inc., Initial Dollar Term Loan, 1 Mo. CME Term SOFR + 3.00%, 0.00% Floor | | | |
| | |
| Internet Services & Infrastructure — 0.1% | |
| Go Daddy Operating Co. LLC, Term Loan B4, 1 Mo. CME Term SOFR + 2.00% + CSA, 0.00% Floor | | | |
| Investment Banking & Brokerage — 0.1% | |
| LPL Holdings, Inc., Term Loan B, 1 Mo. CME Term SOFR + 1.75% + CSA, 0.00% Floor | | | |
| IT Consulting & Other Services — 0.3% | |
| CDK Global, Inc. (Central Parent, Inc.), Term Loan B, 3 Mo. CME Term SOFR + 4.00%, 0.00% Floor | | | |
| Life Sciences Tools & Services — 0.1% | |
| WCG Purchaser Corp. (WIRB-Copernicus Group), Term Loan B, 1 Mo. CME Term SOFR + 4.00% + CSA, 1.00% Floor | | | |
| Managed Health Care — 0.2% | |
| Multiplan, Inc. (MPH), Term Loan B, 3 Mo. CME Term SOFR + 4.25% + CSA, 0.50% Floor | | | |
| Metal & Glass Containers — 1.8% | |
| Berry Global, Inc., Term Loan Z, 1 Mo. CME Term SOFR + 1.75%, 0.00% Floor | | | |
| ProAmpac PG Borrower LLC, Term Loan (First Lien), 3 Mo. CME Term SOFR + 4.50%, 0.75% Floor | | | |
| ProAmpac PG Borrower LLC, Term Loan (First Lien), Prime Rate + 3.50%, 1.75% Floor | | | |
| | |
| Office Services & Supplies — 1.4% | |
| Dun & Bradstreet Corp., New Term Loan B, 1 Mo. CME Term SOFR + 2.75% + CSA, 0.00% Floor | | | |
| Other Diversified Financial Services — 0.1% | |
| Worldpay (GTCR W Merger Sub LLC/Boost Newco LLC), Initial USD Term Loan, 1 Mo. CME Term SOFR + 3.00%, 0.50% Floor | | | |
| Packaged Foods & Meats — 0.4% | |
| Hostess Brands LLC (HB Holdings), Term Loan B 2030, 3 Mo. CME Term SOFR + 2.50%, 0.00% Floor | | | |
| | |
| Graham Packaging Co., L.P., Initial Term Loan, 1 Mo. CME Term SOFR + 3.00% + CSA, 0.75% Floor | | | |
| Pactiv LLC/Evergreen Packaging LLC (fka Reynolds Group Holdings), Term Loan B-2, 1 Mo. CME Term SOFR + 3.25%, 0.00% Floor | | | |
See Notes to Financial Statements
First Trust Senior Loan Fund (FTSL)Portfolio of Investments (Continued)October 31, 2023 | | | | |
SENIOR FLOATING-RATE LOAN INTERESTS (Continued) |
| Paper Packaging (Continued) | |
| Pactiv LLC/Evergreen Packaging LLC (fka Reynolds Group Holdings), Tranche B-3 U.S. Term Loan, 1 Mo. CME Term SOFR + 3.25%, 0.50% Floor | | | |
| Reynolds Consumer Products LLC, Initial Term Loan, 1 Mo. CME Term SOFR + 1.75%, 0.00% Floor | | | |
| | |
| | |
| ICON Clinical Investments LLC (PRA Health Sciences, Inc.), Lux Term Loan B, 3 Mo. CME Term SOFR + 2.25% + CSA, 0.50% Floor | | | |
| ICON Clinical Investments LLC (PRA Health Sciences, Inc.), US Term Loan B, 3 Mo. CME Term SOFR + 2.25% + CSA, 0.50% Floor | | | |
| IQVIA, Inc. (Quintiles), Term Loan B3, 3 Mo. CME Term SOFR + 1.75% + CSA, 0.00% Floor | | | |
| Parexel International Corp. (Phoenix Newco), Term Loan (First Lien), 1 Mo. CME Term SOFR + 3.25% + CSA, 0.50% Floor | | | |
| | |
| Property & Casualty Insurance — 0.8% | |
| Sedgwick Claims Management Services, Inc., 2023 Term Loan B, 1 Mo. CME Term SOFR + 3.75%, 0.00% Floor | | | |
| Research & Consulting Services — 2.7% | |
| AlixPartners, LLP, Term Loan B, 1 Mo. CME Term SOFR + 2.75% + CSA, 0.50% Floor | | | |
| Clarivate Analytics PLC (Camelot), Amendment No. 2 Incremental Term Loan, 1 Mo. CME Term SOFR + 3.00% + CSA, 1.00% Floor | | | |
| Corelogic, Inc., Term Loan B, 1 Mo. CME Term SOFR + 3.50% + CSA, 0.50% Floor | | | |
| J.D. Power (Project Boost Purchaser LLC), 2021 Incremental Term Loan B, 1 Mo. CME Term SOFR + 3.50% + CSA, 0.50% Floor | | | |
| Veritext Corp. (VT TopCo, Inc.), Initial Term Loan B, 3 Mo. CME Term SOFR + 4.25%, 0.50% Floor | | | |
| | |
| | |
| 1011778 B.C. Unlimited Liability Co. (Restaurant Brands) (aka Burger King/Tim Horton’s), Term B-5 Loan, 1 Mo. CME Term SOFR + 2.25%, 0.00% Floor | | | |
| IRB Holding Corp. (Arby’s/Inspire Brands), 2022 Replacement Term B Loan, 1 Mo. CME Term SOFR + 3.00% + CSA, 0.75% Floor | | | |
| Whatabrands LLC, Term Loan B, 1 Mo. CME Term SOFR + 3.25% + CSA, 0.50% Floor | | | |
| | |
| Security & Alarm Services — 0.8% | |
| Garda World Security Corp., Term Loan B-2, 3 Mo. CME Term SOFR + 4.25% + CSA, 0.00% Floor | | | |
| | |
| Tropicana (Naked Juice LLC/Bengal Debt Merger Sub LLC), Term Loan (First Lien), 3 Mo. CME Term SOFR + 3.25% + CSA, 0.50% Floor | | | |
See Notes to Financial Statements
First Trust Senior Loan Fund (FTSL)Portfolio of Investments (Continued)October 31, 2023 | | | | |
SENIOR FLOATING-RATE LOAN INTERESTS (Continued) |
| Specialized Consumer Services — 0.3% | |
| Asurion LLC, New B-8 Term Loan, 1 Mo. CME Term SOFR + 3.25% + CSA, 0.00% Floor | | | |
| Belron Finance US LLC, Dollar Second Incremental Facility Term Loan, 3 Mo. CME Term SOFR + 2.25% + CSA, 0.00% Floor | | | |
| | |
| Specialized Finance — 0.2% | |
| Radiate Holdco LLC (Astound), Amendment No. 6 Term Loan, 1 Mo. CME Term SOFR + 3.25%, 0.75% Floor | | | |
| Specialty Chemicals — 0.2% | |
| Avantor, Inc., Term Loan B5, 1 Mo. CME Term SOFR + 2.25% + CSA, 0.50% Floor | | | |
| | |
| Petco Health and Wellness Co., Inc., Initial Term Loan B, 3 Mo. CME Term SOFR + 3.25% + CSA, 0.75% Floor | | | |
| | |
| BMC Software Finance, Inc. (Boxer Parent), 2021 Replacement Dollar Term Loan, 1 Mo. CME Term SOFR + 3.75% + CSA, 0.00% Floor | | | |
| Gen Digital, Inc. (fka NortonLifeLock, Inc.), Term Loan B, 1 Mo. CME Term SOFR + 2.00% + CSA, 0.50% Floor | | | |
| Idera, Inc., Initial Term Loan, 3 Mo. CME Term SOFR + 3.75% + CSA, 0.75% Floor | | | |
| Proofpoint, Inc., Term Loan (Second Lien), 1 Mo. CME Term SOFR + 6.25% + CSA, 0.50% Floor | | | |
| Proofpoint, Inc., Term Loan B, 1 Mo. CME Term SOFR + 3.25% + CSA, 0.50% Floor | | | |
| Sophos Group PLC (Surf), Term Loan B, 1 Mo. CME Term SOFR + 3.50% + CSA, 0.00% Floor | | | |
| SS&C Technologies Holdings, Inc., Term Loan B-3, 1 Mo. CME Term SOFR + 1.75% + CSA, 0.00% Floor | | | |
| SS&C Technologies Holdings, Inc., Term Loan B-4, 1 Mo. CME Term SOFR + 1.75% + CSA, 0.00% Floor | | | |
| SS&C Technologies Holdings, Inc., Term Loan B-5, 1 Mo. CME Term SOFR + 1.75% + CSA, 0.00% Floor | | | |
| SUSE (Marcel Bidco LLC), New Term Loan B, Daily SOFR + 4.50%, 0.50% Floor | | | |
| | |
| Trading Companies & Distributors — 0.9% | |
| SRS Distribution, Inc., 2021 Refinancing Term Loan, 1 Mo. CME Term SOFR + 3.50% + CSA, 0.50% Floor | | | |
| SRS Distribution, Inc., 2022 Refinancing Term Loan, 1 Mo. CME Term SOFR + 3.50% + CSA, 0.50% Floor | | | |
| | |
| Wireless Telecommunication Services — 1.8% | |
| SBA Senior Finance II LLC, Term Loan B, 1 Mo. CME Term SOFR + 1.75% + CSA, 0.00% Floor | | | |
| Total Senior Floating-Rate Loan Interests | |
| | |
See Notes to Financial Statements
First Trust Senior Loan Fund (FTSL)Portfolio of Investments (Continued)October 31, 2023 | | | | |
CORPORATE BONDS AND NOTES — 10.0% |
| Aerospace & Defense — 0.5% | |
| | | | |
| Application Software — 0.1% | |
| | | | |
| | |
| Gray Television, Inc. (c) | | | |
| | | | |
| Sirius XM Radio, Inc. (c) | | | |
| | |
| | |
| CCO Holdings LLC / CCO Holdings Capital Corp. (c) | | | |
| | | | |
| | | | |
| | | | |
| | |
| | |
| VICI Properties, L.P. / VICI Note Co., Inc. (c) | | | |
| VICI Properties, L.P. / VICI Note Co., Inc. (c) | | | |
| | |
| Health Care Facilities — 0.3% | |
| | | | |
| | | | |
| | |
| Health Care Services — 0.7% | |
| Global Medical Response, Inc. (c) | | | |
| Independent Power Producers & Energy Traders — 0.1% | |
| | | | |
| | |
| | | | |
| AssuredPartners, Inc. (c) | | | |
| HUB International Ltd. (c) | | | |
| | | | |
| | |
| Integrated Telecommunication Services — 0.1% | |
| Zayo Group Holdings, Inc. (c) | | | |
| Internet Services & Infrastructure — 0.0% | |
| Go Daddy Operating Co. LLC / GD Finance Co., Inc. (c) | | | |
| Metal & Glass Containers — 0.1% | |
| | | | |
| | |
| Pactiv Evergreen Group Issuer, Inc. / Pactiv Evergreen Group Issuer LLC (c) | | | |
| | |
| | | | |
| Specialized Finance — 0.1% | |
| Radiate Holdco LLC / Radiate Finance, Inc. (c) | | | |
See Notes to Financial Statements
First Trust Senior Loan Fund (FTSL)Portfolio of Investments (Continued)October 31, 2023 | | | | |
CORPORATE BONDS AND NOTES (Continued) |
| | |
| | | | |
| SS&C Technologies, Inc. (c) | | | |
| | |
| Trading Companies & Distributors — 0.6% | |
| United Rentals North America, Inc. (c) | | | |
| Wireless Telecommunication Services — 0.3% | |
| | | | |
| Total Corporate Bonds and Notes | |
| | |
FOREIGN CORPORATE BONDS AND NOTES — 1.1% |
| Application Software — 0.7% | |
| | | | |
| | | | |
| | |
| Data Processing & Outsourced Services — 0.4% | |
| Paysafe Finance PLC / Paysafe Holdings US Corp. (c) | | | |
| Environmental & Facilities Services — 0.0% | |
| GFL Environmental, Inc. (c) | | | |
| Total Foreign Corporate Bonds and Notes | |
| | |
| | |
|
| | |
| | |
| | |
|
| Life Sciences Tools & Services — 0.0% | |
| New Millennium Holdco, Inc., Corporate Claim Trust, no expiration date (e) (g) (h) (i) | |
| New Millennium Holdco, Inc., Lender Claim Trust, no expiration date (e) (g) (h) (i) | |
| | |
| | |
MONEY MARKET FUNDS — 5.9% |
| Morgan Stanley Institutional Liquidity Funds - Treasury Portfolio - Institutional Class - 5.22% (j) | |
| | |
|
|
| Total Investments — 101.4% | |
| | |
| Net Other Assets and Liabilities — (1.4)% | |
| | |
See Notes to Financial Statements
First Trust Senior Loan Fund (FTSL)Portfolio of Investments (Continued)October 31, 2023 | Senior Floating-Rate Loan Interests (“Senior Loans”) in which the Fund invests generally pay interest at rates which are periodically predetermined by reference to a base lending rate plus a premium. These base lending rates are generally (i) the lending rate offered by one or more major European banks, such as the LIBOR, (ii) the SOFR obtained from the U.S. Department of the Treasury’s Office of Financial Research or another major financial institution, (iii) the prime rate offered by one or more United States banks or (iv) the certificate of deposit rate. Certain Senior Loans are subject to a LIBOR or SOFR floor that establishes a minimum LIBOR or SOFR rate. When a range of rates is disclosed, the Fund holds more than one contract within the same tranche with identical LIBOR or SOFR period, spread and floor, but different LIBOR or SOFR reset dates. |
| Senior Loans generally are subject to mandatory and/or optional prepayment. As a result, the actual remaining maturity of Senior Loans may be substantially less than the stated maturities shown. |
| This security, sold within the terms of a private placement memorandum, is exempt from registration upon resale under Rule 144A of the Securities Act of 1933, as amended (the “1933 Act”), and may be resold in transactions exempt from registration, normally to qualified institutional buyers. Pursuant to procedures adopted by the Trust’s Board of Trustees, this security has been determined to be liquid by First Trust Advisors L.P. (the “Advisor”). Although market instability can result in periods of increased overall market illiquidity, liquidity for each security is determined based on security specific factors and assumptions, which require subjective judgment. At October 31, 2023, securities noted as such amounted to $234,432,850 or 10.7% of net assets. |
| This issuer has filed for protection in bankruptcy court. |
| Non-income producing security. |
| Security received in a transaction exempt from registration under the 1933 Act. The security may be resold pursuant to an exemption from registration under the 1933 Act, typically to qualified institutional buyers (see Note 2D - Restricted Securities in the Notes to Financial Statements). |
| Pursuant to procedures adopted by the Trust’s Board of Trustees, this security has been determined to be illiquid by the Advisor. |
| This security is fair valued by the Advisor’s Pricing Committee in accordance with procedures approved by the Trust’s Board of Trustees, and in accordance with provisions of the Investment Company Act of 1940 and rules thereunder, as amended. At October 31, 2023, securities noted as such are valued at $0 or 0.0% of net assets. |
| This security’s value was determined using significant unobservable inputs (see Note 2A- Portfolio Valuation in the Notes to Financial Statements). |
| Rate shown reflects yield as of October 31, 2023. |
Abbreviations throughout the Portfolio of Investments: |
| – Chicago Mercantile Exchange |
| – Credit Spread Adjustment |
| – London Interbank Offered Rate |
| – Secured Overnight Financing Rate |
See Notes to Financial Statements
First Trust Senior Loan Fund (FTSL)Portfolio of Investments (Continued)October 31, 2023
Valuation InputsA summary of the inputs used to value the Fund’s investments as of October 31, 2023 is as follows (see Note 2A - Portfolio Valuation in the Notes to Financial Statements):
| | | Level 2
Significant
Observable
Inputs | Level 3
Significant
Unobservable
Inputs |
Senior Floating-Rate Loan Interests* | | | | |
Corporate Bonds and Notes* | | | | |
Foreign Corporate Bonds and Notes* | | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| See Portfolio of Investments for industry breakout. |
| Investments are valued at $0. |
Level 3 investments are fair valued by the Advisor’s Pricing Committee and are footnoted in the Portfolio of Investments. All Level 3 values are based on unobservable inputs.
See Notes to Financial Statements
First Trust Senior Loan Fund (FTSL)Statement of Assets and Liabilities
October 31, 2023
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Investment securities sold | |
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Investment securities purchased | |
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Accumulated distributable earnings (loss) | |
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NET ASSET VALUE, per share | |
Number of shares outstanding (unlimited number of shares authorized, par value $0.01 per share) | |
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See Notes to Financial Statements
First Trust Senior Loan Fund (FTSL)Statement of Operations
For the Year Ended October 31, 2023
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NET INVESTMENT INCOME (LOSS) | |
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NET REALIZED AND UNREALIZED GAIN (LOSS): | |
Net realized gain (loss) on investments | |
Net change in unrealized appreciation (depreciation) on: | |
| |
Unfunded loan commitments | |
Net change in unrealized appreciation (depreciation) | |
NET REALIZED AND UNREALIZED GAIN (LOSS) | |
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS | |
See Notes to Financial Statements
First Trust Senior Loan Fund (FTSL)Statements of Changes in Net Assets
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| | |
Net investment income (loss) | | |
| | |
Net change in unrealized appreciation (depreciation) | | |
Net increase (decrease) in net assets resulting from operations | | |
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DISTRIBUTIONS TO SHAREHOLDERS FROM: | | |
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| | |
Total distributions to shareholders | | |
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SHAREHOLDER TRANSACTIONS: | | |
Proceeds from shares sold | | |
| | |
Net increase (decrease) in net assets resulting from shareholder transactions | | |
Total increase (decrease) in net assets | | |
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CHANGES IN SHARES OUTSTANDING: | | |
Shares outstanding, beginning of period | | |
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Shares outstanding, end of period | | |
See Notes to Financial Statements
First Trust Senior Loan Fund (FTSL)Financial Highlights
For a share outstanding throughout each period
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| | | | | |
Net asset value, beginning of period | | | | | |
Income from investment operations: | | | | | |
Net investment income (loss) | | | | | |
Net realized and unrealized gain (loss) | | | | | |
Total from investment operations | | | | | |
Distributions paid to shareholders from: | | | | | |
| | | | | |
| | | | | |
| | | | | |
Net asset value, end of period | | | | | |
| | | | | |
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Ratios to average net assets/supplemental data: | | | | | |
Net assets, end of period (in 000’s) | | | | | |
Ratio of total expenses to average net assets (c) | | | | | |
Ratio of net investment income (loss) to average net assets | | | | | |
Portfolio turnover rate (d) | | | | | |
| Based on average shares outstanding. |
| Total return is calculated assuming an initial investment made at the net asset value at the beginning of the period, reinvestment of all distributions at net asset value during the period, and redemption at net asset value on the last day of the period. The returns presented do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. Total return is calculated for the time period presented and is not annualized for periods of less than a year. |
| The Fund indirectly bears its proportionate share of fees and expenses incurred by the underlying funds in which the Fund invests. This ratio does not include these indirect fees and expenses. |
| 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
Notes to Financial Statements
First Trust Senior Loan Fund (FTSL)October 31, 2023 1. Organization
First Trust Exchange-Traded Fund IV (the “Trust”) is an open-end management investment company organized as a Massachusetts business trust on September 15, 2010, and is registered with the Securities and Exchange Commission under the Investment Company Act of 1940, as amended (the “1940 Act”).
The Trust currently consists of eighteen exchange-traded funds that are offering shares. This report covers the First Trust Senior Loan Fund (the “Fund”), a diversified series of the Trust, which trades under the ticker “FTSL” on Nasdaq, Inc. (“Nasdaq”). The Fund represents a separate series of shares of beneficial interest in the Trust. Unlike conventional mutual funds, the Fund issues and redeems shares on a continuous basis, at net asset value (“NAV”), only in large blocks of shares known as “Creation Units.”
The Fund’s primary investment objective is to provide high current income. The Fund’s secondary investment objective is the preservation of capital. Under normal market conditions, the Fund invests at least 80% of its net assets (including investment borrowings) in first lien senior floating rate bank loans (“Senior Loans”)(1).
A Senior Loan is an advance or commitment of funds made by one or more banks or similar financial institutions to one or more corporations, partnerships or other business entities and typically pays interest at a floating or adjusting rate that is determined periodically at a designated premium above a base lending rate, such as the London Interbank Offered Rate (“LIBOR”), the Secured Overnight Financing Rate (“SOFR”), a similar reference rate, or the prime rate offered by one or more major U.S. banks. The Fund invests primarily in Senior Loans that are below investment grade quality at the time of investment. The Fund invests in Senior Loans made predominantly to businesses operating in North America, but may also invest in Senior Loans made to businesses operating outside of North America.
2. Significant Accounting Policies
The Fund is considered an investment company and follows accounting and reporting guidance under Financial Accounting Standards Board Accounting Standards Codification Topic 946, “Financial Services-Investment Companies.” The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of the financial statements. The preparation of the financial statements in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates.
A. Portfolio Valuation
The Fund’s NAV is determined daily as of the close of regular trading on the New York Stock Exchange (“NYSE”), normally 4:00 p.m. Eastern time, on each day the NYSE is open for trading. If the NYSE closes early on a valuation day, the NAV is determined as of that time. Domestic debt securities and foreign securities are priced using data reflecting the earlier closing of the principal markets for those securities. The Fund’s NAV is calculated by dividing the value of all assets of the Fund (including accrued interest and dividends), less all liabilities (including accrued expenses and dividends declared but unpaid), by the total number of shares outstanding.
The Fund’s investments are valued daily at market value or, in the absence of market value with respect to any portfolio securities, at fair value. Market value prices represent readily available market quotations such as last sale or official closing prices from a national or foreign exchange (i.e., a regulated market) and are primarily obtained from third-party pricing services. Fair value prices represent any prices not considered market value prices and are either obtained from a third-party pricing service or are determined by the Pricing Committee of the Fund’s investment advisor, First Trust Advisors L.P. (“First Trust” or the “Advisor”), in accordance with valuation procedures approved by the Trust’s Board of Trustees, and in accordance with provisions of the 1940 Act and rules thereunder. Investments valued by the Advisor’s Pricing Committee, if any, are footnoted as such in the footnotes to the Portfolio of Investments. The Fund’s investments are valued as follows:
Senior Loans are not listed on any securities exchange or board of trade. Senior Loans are typically bought and sold by institutional investors in individually negotiated private transactions that function in many respects like an over-the-counter secondary market, although typically no formal market-makers exist. This market, while having grown substantially since its inception, generally has fewer trades and less liquidity than the secondary market for other types of securities. Some Senior Loans have few or no trades, or trade infrequently, and information regarding a specific Senior Loan may not be widely available or may be incomplete. Accordingly, determinations of the market value of Senior Loans may be based on infrequent
(1)
The terms “security” and “securities” used throughout the Notes to Financial Statements include Senior Loans.
Notes to Financial Statements (Continued)
First Trust Senior Loan Fund (FTSL)October 31, 2023 and dated information. Because there is less reliable, objective data available, elements of judgment may play a greater role in valuation of Senior Loans than for other types of securities. Typically, Senior Loans are valued using information provided by a third-party pricing service. The third-party pricing service primarily uses over-the-counter pricing from dealer runs and broker quotes from indicative sheets to value the Senior Loans.
Corporate bonds, corporate notes and other debt securities are fair valued on the basis of valuations provided by a third-party pricing service approved by the Advisor’s Pricing Committee, which may use the following valuation inputs when available:
7)
reference data including market research publications.
Common stocks and other equity securities listed on any national or foreign exchange (excluding Nasdaq and the London Stock Exchange Alternative Investment Market (“AIM”)) are valued at the last sale price on the exchange on which they are principally traded or, for Nasdaq and AIM securities, the official closing price. Securities traded on more than one securities exchange are valued at the last sale price or official closing price, as applicable, at the close of the securities exchange representing the primary exchange for such securities.
Shares of open-end funds are valued based on NAV per share.
Equity securities traded in an over-the-counter market are valued at the close price or the last trade price.
Fixed income and other debt securities having a remaining maturity of sixty 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 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 most recent price provided by a pricing service;
2)
available market prices for the fixed-income security;
3)
the fundamental business data relating to the borrower/issuer;
4)
an evaluation of the forces which influence the market in which these securities are purchased and sold;
5)
the type, size and cost of a security;
Notes to Financial Statements (Continued)
First Trust Senior Loan Fund (FTSL)October 31, 2023 6)
the financial statements of the borrower/issuer or the financial condition of the country of issue;
7)
the credit quality and cash flow of the borrower/issuer, or country of issue, based on the Pricing Committee’s, sub-advisor’s or portfolio manager’s analysis, as applicable, or external analysis;
8)
the information as to any transactions in or offers for the security;
9)
the price and extent of public trading in similar securities of the borrower/issuer, or comparable companies;
11)
the quality, value and salability of collateral, if any, securing the security;
12)
the business prospects of the borrower/issuer, including any ability to obtain money or resources from a parent or affiliate and an assessment of the borrower’s/issuer’s management (for corporate debt only);
13)
the prospects for the borrower’s/issuer’s industry, and multiples (of earnings and/or cash flows) being paid for similar businesses in that industry (for corporate debt only);
14)
the borrower’s/issuer’s competitive position within the industry;
15)
the borrower’s/issuer’s ability to access additional liquidity through public and/or private markets; and
16)
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:
• Level 1 – Level 1 inputs are quoted prices in active markets for identical investments. An active market is a market in which transactions for the investment occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
• Level 2 – Level 2 inputs are observable inputs, either directly or indirectly, and include the following:
o Quoted prices for similar investments in active markets.
o Quoted prices for identical or similar investments in markets that are non-active. A non-active market is a market where there are few transactions for the investment, the prices are not current, or price quotations vary substantially either over time or among market makers, or in which little information is released publicly.
o Inputs other than quoted prices that are observable for the investment (for example, interest rates and yield curves observable at commonly quoted intervals, volatilities, prepayment speeds, loss severities, credit risks, and default rates).
o Inputs that are derived principally from or corroborated by observable market data by correlation or other means.
• Level 3 – Level 3 inputs are unobservable inputs. Unobservable inputs may reflect the reporting entity’s own assumptions about the assumptions that market participants would use in pricing the investment.
The inputs or methodologies used for valuing investments are not necessarily an indication of the risk associated with investing in those investments. A summary of the inputs used to value the Fund’s investments as of October 31, 2023, is included with the Fund’s Portfolio of Investments.
B. Securities Transactions and Investment Income
Securities transactions are recorded as of the trade date. Realized gains and losses from securities transactions are recorded on the identified cost basis. Dividend income is recorded on the ex-dividend date. Interest income is recorded daily on the accrual basis. Amortization of premiums and accretion of discounts are recorded using the effective interest method.
The United Kingdom’s Financial Conduct Authority (the “FCA”), which regulates the LIBOR, ceased making LIBOR available as a reference rate over a phase-out period that began December 31, 2021. The overnight and 12-month USD LIBOR settings permanently ceased as of June 30, 2023. The FCA announced that the 1-, 3- and 6-month USD LIBOR settings will continue to be published using a synthetic methodology to serve as a fallback for non-U.S. contracts until September 2024. In response to the discontinuation of LIBOR, investors have added fallback provisions to existing contracts for investments whose value is tied to LIBOR, with most fallback provisions requiring the adoption of the SOFR as a replacement rate. There is no assurance that any alternative reference rate, including SOFR, will be similar to or produce the same value or economic equivalence as LIBOR or that instruments using an alternative rate will have the same volume or liquidity. At this time, it is not possible to predict the full impact of the elimination of LIBOR and the establishment of an alternative reference rate on the Fund or its investments.
Securities purchased or sold on a when-issued, delayed-delivery or forward purchase commitment basis may have extended settlement periods. The value of the security so purchased is subject to market fluctuations during this period. Due to the nature of the Senior Loan market, the actual settlement date may not be certain at the time of the purchase or sale for some of the Senior Loans. Interest
Notes to Financial Statements (Continued)
First Trust Senior Loan Fund (FTSL)October 31, 2023 income on such Senior Loans is not accrued until settlement date. The Fund maintains liquid assets with a current value at least equal to the amount of its when-issued, delayed-delivery or forward purchase commitments until payment is made. At October 31, 2023, the Fund had no when-issued, delayed-delivery or forward purchase commitments.
C. Unfunded Loan Commitments
The Fund may enter into certain credit agreements, all or a portion of which may be unfunded. The Fund is obligated to fund these loan commitments at the borrower’s discretion. Unfunded loan commitments are marked-to-market daily, and any unrealized appreciation (depreciation) is included in the Statement of Assets and Liabilities and Statement of Operations. In connection with these commitments, the Fund earns a commitment fee typically set as a percentage of the commitment amount. The commitment fees are included in “Interest” on the Statement of Operations. As of October 31, 2023, the Fund had no unfunded loan commitments.
D. 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 October 31, 2023, the Fund held a restricted security as shown in the following table that the 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.
E. Dividends and Distributions to Shareholders
Dividends from net investment income of the Fund, 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, are distributed at least annually. The Fund may also designate a portion of the amount paid to redeeming shareholders as a distribution for tax purposes.
Distributions in cash may be reinvested automatically in additional whole shares only if the broker through whom the shares were purchased makes such option available. Such shares will generally be reinvested by the broker based upon the market price of those shares and investors may be subject to customary brokerage commissions charged by the broker.
Distributions from net investment income and realized capital gains are determined in accordance with 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 NAV per share. Temporary differences, which arise from recognizing certain items of income, expense and gain/loss in different periods for financial statement and tax purposes, will reverse at some time in the future.
The tax character of distributions paid during the fiscal years ended October 31, 2023 and 2022 was as follows:
As of October 31, 2023, the components of distributable earnings on a tax basis for the Fund were as follows:
Undistributed ordinary income | |
Accumulated capital and other gain (loss) | |
Net unrealized appreciation (depreciation) | |
Notes to Financial Statements (Continued)
First Trust Senior Loan Fund (FTSL)October 31, 2023 F. Income Taxes
The Fund intends to continue to qualify as a regulated investment company by complying with the requirements under Subchapter M of the Internal Revenue Code of 1986, as amended, which includes distributing substantially all of its net investment income and net realized gains to shareholders. Accordingly, no provision has been made for federal and state income taxes. However, due to the timing and amount of distributions, the Fund may be subject to an excise tax of 4% of the amount by which approximately 98% of the Fund’s taxable income exceeds the distributions from such taxable income for the calendar year.
The Fund 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 2020, 2021, 2022, and 2023 remain open to federal and state audit. As of October 31, 2023, management has evaluated the application of these standards to the Fund and has determined that no provision for income tax is required in the Fund’s 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, 2023, for federal income tax purposes, the Fund had $223,689,638 of capital loss carryforwards available, to the extent provided by regulations, to offset future capital gains. To the extent that these loss carryforwards are used to offset future capital gains, it is probable that the capital gains so offset will not be distributed to the Fund’s shareholders.
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, 2023, the Fund had no net late year ordinary or capital losses.
In order to present paid-in capital and accumulated distributable earnings (loss) (which consists of accumulated net investment income (loss), accumulated net realized gain (loss) on investments and net unrealized appreciation (depreciation) on investments) on the Statement of Assets and Liabilities that more closely represent their tax character, certain adjustments have been made to paid-in capital, accumulated net investment income (loss) and accumulated net realized gain (loss) on investments. These adjustments are primarily due to the difference between book and tax treatments of income and gains on various investment securities held by the Fund. The results of operations and net assets were not affected by these adjustments. For the fiscal year ended October 31, 2023, the adjustments for the Fund were as follows:
Accumulated
Net Investment
Income (Loss) | Accumulated
Net Realized
Gain (Loss)
on Investments | |
| | |
As of October 31, 2023, the aggregate cost, gross unrealized appreciation, gross unrealized depreciation, and net unrealized appreciation/(depreciation) on investments (including short positions and derivatives, if any) for federal income tax purposes were as follows:
| Gross Unrealized
Appreciation | Gross Unrealized
(Depreciation) | Net Unrealized
Appreciation
(Depreciation) |
| | | |
G. Expenses
Expenses, other than the investment advisory fee and other excluded expenses, are paid by the Advisor (see Note 3).
3. Investment Advisory Fee, Affiliated Transactions and Other Fee Arrangements
First Trust, the investment advisor to the Fund, is a limited partnership with one limited partner, Grace Partners of DuPage L.P., and one general partner, The Charger Corporation. The Charger Corporation is an Illinois corporation controlled by James A. Bowen, Chief Executive Officer of First Trust. First Trust is responsible for the selection and ongoing monitoring of the securities in the Fund’s portfolio, managing the Fund’s business affairs and providing certain administrative services necessary for the management of the Fund.
Notes to Financial Statements (Continued)
First Trust Senior Loan Fund (FTSL)October 31, 2023 Pursuant to the Investment Management Agreement between the Trust and the Advisor, First Trust manages the investment of the Fund’s assets and is responsible for the Fund’s expenses, including the cost of transfer agency, custody, fund administration, legal, audit, and other services, but excluding fee payments under the Investment Management Agreement, interest, taxes, acquired fund fees and expenses, if any, brokerage commissions and other expenses connected with the execution of portfolio transactions, distribution and service fees payable pursuant to a Rule 12b-1 plan, if any, and extraordinary expenses. The annual unitary management fee payable by the Fund to First Trust for these services will be reduced at certain levels of the Fund’s net assets (“breakpoints”) and calculated pursuant to the following schedule:
| |
Fund net assets up to and including $2.5 billion | |
Fund net assets greater than $2.5 billion up to and including $5 billion | |
Fund net assets greater than $5 billion up to and including $7.5 billion | |
Fund net assets greater than $7.5 billion up to and including $10 billion | |
Fund net assets greater than $10 billion | |
In addition, the Fund incurs acquired fund fees and expenses. The total of the unitary management fee and acquired fund fees and expenses represents the Fund’s total annual operating expenses.
The Trust has multiple service agreements with The Bank of New York Mellon (“BNYM”). Under the service agreements, BNYM performs custodial, fund accounting, certain administrative services, and transfer agency services for the Fund. As custodian, BNYM is responsible for custody of the Fund’s assets. As fund accountant and administrator, BNYM is responsible for maintaining the books and records of the Fund’s securities and cash. As transfer agent, BNYM is responsible for maintaining shareholder records for the Fund. BNYM is a subsidiary of The Bank of New York Mellon Corporation, a financial holding company.
Each Trustee who is not an officer or employee of First Trust, any sub-advisor or any of their affiliates (“Independent Trustees”) is paid a fixed annual retainer that is allocated equally among each fund in the First Trust Fund Complex. Each Independent Trustee is also paid an annual per fund fee that varies based on whether the fund is a closed-end or other actively managed fund, a target outcome fund or an index fund.
Additionally, the Lead Independent Trustee and the Chairs of the Audit Committee, Nominating and Governance Committee and Valuation Committee are paid annual fees to serve in such capacities, with such compensation allocated pro rata among each fund in the First Trust Fund Complex based on net assets. Independent Trustees are reimbursed for travel and out-of-pocket expenses in connection with all meetings. The Lead Independent Trustee and Committee Chairs rotate every three years. The officers and “Interested” Trustee receive no compensation from the Trust for acting in such capacities.
4. Purchases and Sales of Securities
For the fiscal year ended October 31, 2023, the cost of purchases and proceeds from sales of investments, excluding short-term investments and in-kind transactions, were $1,236,870,992 and $1,980,131,469, respectively.
For the fiscal year ended October 31, 2023, the Fund had no in-kind transactions.
5. Borrowings
The Trust, on behalf of the Fund, along with First Trust Exchange-Traded Fund III and First Trust Series Fund have a $550 million Credit Agreement with The Bank of Nova Scotia (“Scotia”) as administrative agent for a group of lenders. Prior to March 1, 2023, the commitment amount was $305 million. 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. 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 fiscal year ended October 31, 2023.
6. Creations, Redemptions and Transaction Fees
The Fund generally issues and redeems its shares in primary market transactions through a creation and redemption mechanism and does not sell or redeem individual shares. Instead, financial entities known as “Authorized Participants” have contractual arrangements with the Fund or one of the Fund’s service providers to purchase and redeem Fund shares directly with the Fund in large blocks of shares known as “Creation Units.” Prior to the start of trading on every business day, the Fund publishes through the National
Notes to Financial Statements (Continued)
First Trust Senior Loan Fund (FTSL)October 31, 2023 Securities Clearing Corporation the “basket” of securities, cash or other assets that it will accept in exchange for a Creation Unit of the Fund’s shares. An Authorized Participant that wishes to effectuate a creation of the Fund’s shares deposits with the Fund the “basket” of securities, cash or other assets identified by the Fund that day, and then receives the Creation Unit of the Fund’s shares in return for those assets. After purchasing a Creation Unit, the Authorized Participant may continue to hold the Fund’s shares or sell them in the secondary market. The redemption process is the reverse of the purchase process: the Authorized Participant redeems a Creation Unit of the Fund’s shares for a basket of securities, cash or other assets. The combination of the creation and redemption process with secondary market trading in the Fund’s shares and underlying securities provides arbitrage opportunities that are designed to help keep the market price of the Fund’s shares at or close to the NAV per share of the Fund.
The Fund imposes fees in connection with the purchase of Creation Units. These fees may vary based upon various fact-based circumstances, including, but not limited to, the composition of the securities included in the Creation Unit or the countries in which the transactions are settled. The price for each Creation Unit will equal the daily NAV per share of the Fund times the number of shares in a Creation Unit, plus the fees described above and, if applicable, any operational processing and brokerage costs, transfer fees, stamp taxes and part or all of the spread between the expected bid and offer side of the market related to the securities comprising the creation basket.
The Fund also imposes fees in connection with the redemption of Creation Units. These fees may vary based upon various fact-based circumstances, including, but not limited to, the composition of the securities included in the Creation Unit or the countries in which the transactions are settled. The price received for each Creation Unit will equal the daily NAV per share of the Fund times the number of shares in a Creation Unit, minus the fees described above and, if applicable, any operational processing and brokerage costs, transfer fees, stamp taxes and part or all of the spread between the expected bid and offer side of the market related to the securities comprising the redemption basket. Investors who use the services of a broker or other such intermediary in addition to an Authorized Participant to effect a redemption of a Creation Unit may also be assessed an amount to cover the cost of such services. The redemption fee charged by the Fund will comply with Rule 22c-2 of the 1940 Act which limits redemption fees to no more than 2% of the value of the shares redeemed.
7. Distribution Plan
The Board of Trustees adopted a Distribution and Service Plan pursuant to Rule 12b-1 under the 1940 Act. In accordance with the Rule 12b-1 plan, the Fund is authorized to pay an amount up to 0.25% of its average daily net assets each year to reimburse First Trust Portfolios L.P. (“FTP”), the distributor of the Fund, for amounts expended to finance activities primarily intended to result in the sale of Creation Units or the provision of investor services. FTP may also use this amount to compensate securities dealers or other persons that are Authorized Participants for providing distribution assistance, including broker-dealer and shareholder support and educational and promotional services.
No 12b-1 fees are currently paid by the Fund, and pursuant to a contractual arrangement, no 12b-1 fees will be paid any time before March 31, 2025.
8. Indemnification
The Trust, on behalf of the Fund, has a variety of indemnification obligations under contracts with its service providers. The Trust’s maximum exposure under these arrangements is unknown. However, the Trust has not had prior claims or losses pursuant to these contracts and expects the risk of loss to be remote.
9. Subsequent Events
Management has evaluated the impact of all subsequent events on the Fund through the date the financial statements were issued and has determined that there were no subsequent events requiring recognition or disclosure in the financial statements that have not already been disclosed.
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Trustees of First Trust Exchange-Traded Fund IV:
Opinion on the Financial Statements and Financial Highlights
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of First Trust Senior Loan Fund (the “Fund”), one of the funds constituting the First Trust Exchange-Traded Fund IV, as of October 31, 2023, the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, the financial highlights for each of the five years in the period then ended, and the related notes. In our opinion, the financial statements and financial highlights present fairly, in all material respects, the financial position of the Fund as of October 31, 2023, and the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on the Fund’s financial statements and financial highlights based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Fund in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement, whether due to error or fraud. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements and financial highlights, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements and financial highlights. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and financial highlights. Our procedures included confirmation of securities owned as of October 31, 2023, by correspondence with the custodian and brokers; when replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
/s/ Deloitte & Touche, LLP
Chicago, Illinois
December 22, 2023
We have served as the auditor of one or more First Trust investment companies since 2001.
First Trust Senior Loan Fund (FTSL)October 31, 2023 (Unaudited) Proxy Voting Policies and Procedures
A description of the policies and procedures that the Trust uses to determine how to vote proxies and information on how the Fund voted proxies relating to its portfolio securities during the most recent 12-month period ended June 30 is available (1) without charge, upon request, by calling (800) 988-5891; (2) on the Fund’s website at www.ftportfolios.com; and (3) on the Securities and Exchange Commission’s (“SEC”) website at www.sec.gov.
Portfolio Holdings
The Fund files portfolio holdings information for each month in a fiscal quarter within 60 days after the end of the relevant fiscal quarter on Form N-PORT. Portfolio holdings information for the third month of each fiscal quarter will be publicly available on the SEC’s website at www.sec.gov. The Fund’s complete schedule of portfolio holdings for the second and fourth quarters of each fiscal year is included in the semi-annual and annual reports to shareholders, respectively, and is filed with the SEC on Form N-CSR. The semi-annual and annual report for the Fund is available to investors within 60 days after the period to which it relates. The Fund’s Forms N-PORT and Forms N-CSR are available on the SEC’s website listed above.
Federal Tax Information
Distributions paid to foreign shareholders during the Fund’s fiscal year ended October 31, 2023 that were properly designated by the Fund as “interest-related dividends” or “short-term capital gain dividends,” may not be subject to federal income tax provided that the income was earned directly by such foreign shareholders.
Of the ordinary income (including short-term capital gain) distributions made by the Fund during the fiscal year ended October 31, 2023, none qualify for the corporate dividends received deduction available to corporate shareholders or as qualified dividend income.
Risk Considerations
Risks are inherent in all investing. Certain general risks that may be applicable to a Fund are identified below, but not all of the material risks relevant to each Fund are included in this report and not all of the risks below apply to each Fund. The material risks of investing in each Fund are spelled out in its prospectus, statement of additional information and other regulatory filings. Before investing, you should consider each Fund’s investment objective, risks, charges and expenses, and read each Fund’s prospectus and statement of additional information carefully. You can download each Fund’s prospectus at www.ftportfolios.com or contact First Trust Portfolios L.P. at (800) 621-1675 to request a prospectus, which contains this and other information about each Fund.
Concentration Risk. To the extent that a fund is able to invest a significant percentage of its assets in a single asset class or the securities of issuers within the same country, state, region, industry or sector, an adverse economic, business or political development may affect the value of the fund’s investments more than if the fund were more broadly diversified. A fund that tracks an index will be concentrated to the extent the fund’s corresponding index is concentrated. A concentration makes a fund more susceptible to any single occurrence and may subject the fund to greater market risk than a fund that is more broadly diversified.
Credit Risk. Credit risk is the risk that an issuer of a security will be unable or unwilling to make dividend, interest and/or principal payments when due and the related risk that the value of a security may decline because of concerns about the issuer’s ability to make such payments.
Cyber Security Risk. The funds are susceptible to potential operational risks through breaches in cyber security. A breach in cyber security refers to both intentional and unintentional events that may cause a fund to lose proprietary information, suffer data corruption or lose operational capacity. Such events could cause a fund to incur regulatory penalties, reputational damage, additional compliance costs associated with corrective measures and/or financial loss. In addition, cyber security breaches of a fund’s third-party service providers, such as its administrator, transfer agent, custodian, or sub-advisor, as applicable, or issuers in which the fund invests, can also subject a fund to many of the same risks associated with direct cyber security breaches.
Defined Outcome Funds Risk. To the extent a fund’s investment strategy is designed to deliver returns tied to the price performance of an underlying ETF, an investor may not realize the returns the fund seeks to achieve if that investor does not hold shares for the entire target outcome period. In the event an investor purchases shares after the first day of the target outcome period or sells shares prior to the end of the target outcome period, the buffer that the fund seeks to provide against a decline in the value of the underlying ETF may not be available, the enhanced returns that the fund seeks to provide (if any) may not be available and the investor may not participate in a gain in the value of the underlying ETF up to the cap for the investor’s investment period. Additionally, the fund will not participate in gains of the underlying ETF above the cap and a shareholder may lose their entire investment. If the fund seeks enhanced returns, there are certain time periods when the value of the fund may fall faster than the value of the underlying ETF, and it is very unlikely that, on any given day during which the underlying ETF share price increases in value, the fund’s share price will
Additional Information (Continued)
First Trust Senior Loan Fund (FTSL)October 31, 2023 (Unaudited) increase at the same rate as the enhanced returns sought by the fund, which is designed for an entire target outcome period. Trading flexible exchange options involves risks different from, or possibly greater than, the risks associated with investing directly in securities, such as less liquidity and correlation and valuation risks. A fund may experience substantial downside from specific flexible exchange option positions and certain positions may expire worthless.
Derivatives Risk. To the extent a fund uses derivative instruments such as futures contracts, options contracts and swaps, the fund may experience losses because of adverse movements in the price or value of the underlying asset, index or rate, which may be magnified by certain features of the derivative. These risks are heightened when a fund’s portfolio managers use derivatives to enhance the fund’s return or as a substitute for a position or security, rather than solely to hedge (or offset) the risk of a position or security held by the fund.
Equity Securities Risk. To the extent a fund invests in equity securities, the value of the fund’s shares will fluctuate with changes in the value of the equity securities. Equity securities prices fluctuate for several reasons, including changes in investors’ perceptions of the financial condition of an issuer or the general condition of the relevant stock market, such as market volatility, or when political or economic events affecting the issuers occur. In addition, common stock prices may be particularly sensitive to rising interest rates, as the cost of capital rises and borrowing costs increase. Equity securities may decline significantly in price over short or extended periods of time, and such declines may occur in the equity market as a whole, or they may occur in only a particular country, company, industry or sector of the market.
ETF Risk. The shares of an ETF trade like common stock and represent an interest in a portfolio of securities. The risks of owning an ETF generally reflect the risks of owning the underlying securities, although lack of liquidity in an ETF could result in it being more volatile and ETFs have management fees that increase their costs. Shares of an ETF trade on an exchange at market prices rather than net asset value, which may cause the shares to trade at a price greater than net asset value (premium) or less than net asset value (discount). In times of market stress, decisions by market makers to reduce or step away from their role of providing a market for an ETF’s shares, or decisions by an ETF’s authorized participants that they are unable or unwilling to proceed with creation and/or redemption orders of an ETF’s shares, could result in shares of the ETF trading at a discount to net asset value and in greater than normal intraday bid-ask spreads.
Fixed Income Securities Risk. To the extent a fund invests in fixed income securities, the fund will be subject to credit risk, income risk, interest rate risk, liquidity risk and prepayment risk. Income risk is the risk that income from a fund’s fixed income investments could decline during periods of falling interest rates. Interest rate risk is the risk that the value of a fund’s fixed income securities will decline because of rising interest rates. Liquidity risk is the risk that a security cannot be purchased or sold at the time desired, or cannot be purchased or sold without adversely affecting the price. Prepayment risk is the risk that the securities will be redeemed or prepaid by the issuer, resulting in lower interest payments received by the fund. In addition to these risks, high yield securities, or “junk” bonds, are subject to greater market fluctuations and risk of loss than securities with higher ratings, and the market for high yield securities is generally smaller and less liquid than that for investment grade securities.
Index or Model Constituent Risk. Certain funds may be a constituent of one or more indices or ETF models. As a result, such a fund may be included in one or more index-tracking exchange-traded funds or mutual funds. Being a component security of such a vehicle could greatly affect the trading activity involving a fund, the size of the fund and the market volatility of the fund. Inclusion in an index could increase demand for the fund and removal from an index could result in outsized selling activity in a relatively short period of time. As a result, a fund’s net asset value could be negatively impacted and the fund’s market price may be significantly below its net asset value during certain periods. In addition, index rebalances may potentially result in increased trading activity in a fund’s shares.
Index Provider Risk. To the extent a fund seeks to track an index, it is subject to Index Provider Risk. There is no assurance that the Index Provider will compile the Index accurately, or that the Index will be determined, maintained, constructed, reconstituted, rebalanced, composed, calculated or disseminated accurately. To correct any such error, the Index Provider may carry out an unscheduled rebalance or other modification of the Index constituents or weightings, which may increase the fund’s costs. The Index Provider does not provide any representation or warranty in relation to the quality, accuracy or completeness of data in the Index, and it does not guarantee that the Index will be calculated in accordance with its stated methodology. Losses or costs associated with any Index Provider errors generally will be borne by the fund and its shareholders.
Investment Companies Risk. To the extent a fund invests in the securities of other investment vehicles, the fund will incur additional fees and expenses that would not be present in a direct investment in those investment vehicles. Furthermore, the fund’s investment performance and risks are directly related to the investment performance and risks of the investment vehicles in which the fund invests.
Additional Information (Continued)
First Trust Senior Loan Fund (FTSL)October 31, 2023 (Unaudited) LIBOR Risk. To the extent a fund invests in floating or variable rate obligations that use the London Interbank Offered Rate (“LIBOR”) as a reference interest rate, it is subject to LIBOR Risk. The United Kingdom’s Financial Conduct Authority, which regulates LIBOR, has ceased making LIBOR available as a reference rate over a phase-out period that began December 31, 2021. There is no assurance that any alternative reference rate, including the Secured Overnight Financing Rate (“SOFR”) will be similar to or produce the same value or economic equivalence as LIBOR or that instruments using an alternative rate will have the same volume or liquidity. The unavailability or replacement of LIBOR may affect the value, liquidity or return on certain fund investments and may result in costs incurred in connection with closing out positions and entering into new trades. Any potential effects of the transition away from LIBOR on the fund or on certain instruments in which the fund invests can be difficult to ascertain, and they may vary depending on a variety of factors, and they could result in losses to the fund.
Management Risk. To the extent that a fund is actively managed, it is subject to management risk. In managing an actively-managed fund’s investment portfolio, the fund’s portfolio managers will apply investment techniques and risk analyses that may not have the desired result. There can be no guarantee that a fund will meet its investment objective.
Market Risk. Market risk is the risk that a particular security, or shares of a fund in general, may fall in value. Securities held by a fund, as well as shares of a fund itself, are subject to market fluctuations caused by factors such as general economic conditions, political events, regulatory or market developments, changes in interest rates and perceived trends in securities prices. Shares of a fund could decline in value or underperform other investments as a result of the risk of loss associated with these market fluctuations. In addition, local, regional or global events such as war, acts of terrorism, spread of infectious diseases or other public health issues, recessions, or other events could have a significant negative impact on a fund and its investments. Such events may affect certain geographic regions, countries, sectors and industries more significantly than others. In February 2022, Russia invaded Ukraine which has caused and could continue to cause significant market disruptions and volatility within the markets in Russia, Europe, and the United States. The hostilities and sanctions resulting from those hostilities could have a significant impact on certain fund investments as well as fund performance. The COVID-19 global pandemic and the ensuing policies enacted by governments and central banks have caused and may continue to cause significant volatility and uncertainty in global financial markets. While the U.S. has resumed “reasonably” normal business activity, many countries continue to impose lockdown measures. Additionally, there is no guarantee that vaccines will be effective against emerging variants of the disease. These events also adversely affect the prices and liquidity of a fund’s portfolio securities or other instruments and could result in disruptions in the trading markets. Any of such circumstances could have a materially negative impact on the value of a fund’s shares and result in increased market volatility. During any such events, a fund’s shares may trade at increased premiums or discounts to their net asset value and the bid/ask spread on a fund’s shares may widen.
Non-U.S. Securities Risk. To the extent a fund invests in non-U.S. securities, it is subject to additional risks not associated with securities of domestic issuers. Non-U.S. securities are subject to higher volatility than securities of domestic issuers due to: possible adverse political, social or economic developments; restrictions on foreign investment or exchange of securities; capital controls; lack of liquidity; currency exchange rates; excessive taxation; government seizure of assets; the imposition of sanctions by foreign governments; different legal or accounting standards; and less government supervision and regulation of exchanges in foreign countries. Investments in non-U.S. securities may involve higher costs than investments in U.S. securities, including higher transaction and custody costs, as well as additional taxes imposed by non-U.S. governments. These risks may be heightened for securities of companies located, or with significant operations, in emerging market countries.
Operational Risk. Each fund is subject to risks arising from various operational factors, including, but not limited to, human error, processing and communication errors, errors of a fund’s service providers, counterparties or other third-parties, failed or inadequate processes and technology or systems failures. Each fund relies on third-parties for a range of services, including custody. Any delay or failure relating to engaging or maintaining such service providers may affect a fund’s ability to meet its investment objective. Although the funds and the funds’ investment advisor seek to reduce these operational risks through controls and procedures, there is no way to completely protect against such risks.
Passive Investment Risk. To the extent a fund seeks to track an index, the fund will invest in the securities included in, or representative of, the index regardless of their investment merit. A fund generally will not attempt to take defensive positions in declining markets.
Preferred Securities Risk. Preferred securities combine some of the characteristics of both common stocks and bonds. Preferred securities are typically subordinated to bonds and other debt securities in a company’s capital structure in terms of priority to corporate income, subjecting them to greater credit risk than those debt securities. Generally, holders of preferred securities have no voting rights with respect to the issuing company unless preferred dividends have been in arrears for a specified number of periods, at which time the preferred security holders may obtain limited rights. In certain circumstances, an issuer of preferred securities may defer payment on the securities and, in some cases, redeem the securities prior to a specified date. Preferred securities may also be substantially less liquid than other securities, including common stock.
Additional Information (Continued)
First Trust Senior Loan Fund (FTSL)October 31, 2023 (Unaudited) Valuation Risk. The valuation of certain securities may carry more risk than that of common stock. Uncertainties in the conditions of the financial markets, unreliable reference data, lack of transparency and inconsistency of valuation models and processes may lead to inaccurate asset pricing. A fund may hold investments in sizes smaller than institutionally sized round lot positions (sometimes referred to as odd lots). However, third-party pricing services generally provide evaluations on the basis of institutionally-sized round lots. If a fund sells certain of its investments in an odd lot transaction, the sale price may be less than the value at which such securities have been held by the fund. Odd lots often trade at lower prices than institutional round lots. There is no assurance that the fund will be able to sell a portfolio security at the price established by the pricing service, which could result in a loss to the fund.
NOT FDIC INSURED NOT BANK GUARANTEED MAY LOSE VALUE
Advisory Agreement
Board Considerations Regarding Approval of the Continuation of the Investment Management Agreement
The Board of Trustees of First Trust Exchange-Traded Fund IV (the “Trust”), including the Independent Trustees, unanimously approved the continuation of the Investment Management Agreement (the “Agreement”) with First Trust Advisors L.P. (the “Advisor”) on behalf of the First Trust Senior Loan Fund (the “Fund”). The Board approved the continuation of the Agreement for a one-year period ending June 30, 2024 at a meeting held on June 4–5, 2023. The Board determined that the continuation of the Agreement is in the best interests of the Fund in light of the nature, extent and quality of the services provided and such other matters as the Board considered to be relevant in the exercise of its business judgment.
To reach this determination, the Board considered its duties under the Investment Company Act of 1940, as amended (the “1940 Act”), as well as under the general principles of state law, in reviewing and approving advisory contracts; the requirements of the 1940 Act in such matters; the fiduciary duty of investment advisors with respect to advisory agreements and compensation; the standards used by courts in determining whether investment company boards have fulfilled their duties; and the factors to be considered by the Board in voting on such agreements. At meetings held on April 17, 2023 and June 4–5, 2023, the Board, including the Independent Trustees, reviewed materials provided by the Advisor responding to requests for information from counsel to the Independent Trustees, submitted on behalf of the Independent Trustees, that, among other things, outlined: the services provided by the Advisor to the Fund (including the relevant personnel responsible for these services and their experience); the unitary fee rate schedule payable by the Fund as compared to fees charged to a peer group of funds (the “Expense Group”) and a broad peer universe of funds (the “Expense Universe”), each assembled by Broadridge Financial Solutions, Inc. (“Broadridge”), an independent source, and as compared to fees charged to other clients of the Advisor, including other exchange-traded funds (“ETFs”) managed by the Advisor; the expense ratio of the Fund as compared to expense ratios of the funds in the Fund’s Expense Group and Expense Universe; performance information for the Fund, including comparisons of the Fund’s performance to that of one or more relevant benchmark indexes and to that of a performance group of funds and a broad performance universe of funds (the “Performance Universe”), each assembled by Broadridge; the nature of expenses incurred in providing services to the Fund and the potential for the Advisor to realize economies of scale, if any; profitability and other financial data for the Advisor; any indirect benefits to the Advisor and its affiliate, First Trust Portfolios L.P. (“FTP”); and information on the Advisor’s compliance program. The Board reviewed initial materials with the Advisor at the meeting held on April 17, 2023, prior to which the Independent Trustees and their counsel met separately to discuss the information provided by the Advisor. Following the April meeting, counsel to the Independent Trustees, on behalf of the Independent Trustees, requested certain clarifications and supplements to the materials provided, and the information provided in response to those requests was considered at an executive session of the Independent Trustees and their counsel held prior to the June 4–5, 2023 meeting, as well as at the June meeting. The Board applied its business judgment to determine whether the arrangement between the Trust and the Advisor continues to be a reasonable business arrangement from the Fund’s perspective. The Board determined that, given the totality of the information provided with respect to the Agreement, the Board had received sufficient information to renew the Agreement. The Board considered that shareholders chose to invest or remain invested in the Fund knowing that the Advisor manages the Fund and knowing the Fund’s unitary fee.
In reviewing the Agreement, the Board considered the nature, extent and quality of the services provided by the Advisor under the Agreement. The Board considered that the Advisor is responsible for the overall management and administration of the Trust and the Fund and reviewed all of the services provided by the Advisor to the Fund, as well as the background and experience of the persons responsible for such services. The Board noted that the Fund is an actively-managed ETF and noted that the Advisor’s Leveraged Finance Investment Team is responsible for the day-to-day management of the Fund’s investments. The Board considered the background and experience of the members of the Leveraged Finance Investment Team and noted the Board’s prior meetings with members of the Team. The Board considered the Advisor’s statement that it applies the same oversight model internally with its Leveraged Finance Investment Team as it uses for overseeing external sub-advisors, including portfolio risk monitoring and performance review. In reviewing the services provided, the Board noted the compliance program that had been developed by the Advisor and considered that it includes a robust program for monitoring the Advisor’s and the Fund’s compliance with the 1940 Act, as well as the Fund’s compliance with its investment objectives, policies and restrictions. The Board also considered a report from the
Additional Information (Continued)
First Trust Senior Loan Fund (FTSL)October 31, 2023 (Unaudited) Advisor with respect to its risk management functions related to the operation of the Fund. Finally, as part of the Board’s consideration of the Advisor’s services, the Advisor, in its written materials and at the April 17, 2023 meeting, described to the Board the scope of its ongoing investment in additional personnel and infrastructure to maintain and improve the quality of services provided to the Fund and the other funds in the First Trust Fund Complex. In light of the information presented and the considerations made, the Board concluded that the nature, extent and quality of the services provided to the Trust and the Fund by the Advisor under the Agreement have been and are expected to remain satisfactory and that the Advisor has managed the Fund consistent with its investment objectives, policies and restrictions.
The Board considered the unitary fee rate schedule payable by the Fund under the Agreement for the services provided. The Board considered that as part of the unitary fee the Advisor is responsible for the Fund’s expenses, including the cost of transfer agency, custody, fund administration, legal, audit and other services and license fees, if any, but excluding the fee payment under the Agreement and 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 Rule 12b-1 plan, if any, and extraordinary expenses, if any. The Board received and reviewed information showing the fee rates and expense ratios of the peer funds in the Expense Group, as well as advisory and unitary fee rates charged by the Advisor to other fund (including ETFs) and non-fund clients, as applicable. Because the Fund pays a unitary fee, the Board determined that expense ratios were the most relevant comparative data point. Based on the information provided, the Board noted that the total (net) expense ratio for the Fund was above the median total (net) expense ratio of the peer funds in the Expense Group. With respect to the Expense Group, the Board, at the April 17, 2023 meeting, discussed with Broadridge its methodology for assembling peer groups and discussed with the Advisor limitations in creating peer groups for actively-managed ETFs, and different business models that may affect the pricing of services among ETF sponsors. The Board took these limitations and differences into account in considering the peer data. With respect to fees charged to other non-ETF clients, the Board considered differences between the Fund and other non-ETF clients that limited their comparability. In considering the unitary fee rate schedule overall, the Board also considered the Advisor’s statement that it seeks to meet investor needs through innovative and value-added investment solutions and the Advisor’s demonstrated long-term commitment to the Fund and the other funds in the First Trust Fund Complex.
The Board considered performance information for the Fund. The Board noted the process it has established for monitoring the Fund’s performance and portfolio risk on an ongoing basis, which includes quarterly performance reporting from the Advisor for the Fund. The Board determined that this process continues to be effective for reviewing the Fund’s performance. The Board received and reviewed information comparing the Fund’s performance for periods ended December 31, 2022 to the performance of the funds in the Performance Universe and to that of a benchmark index. Based on the information provided, the Board noted that the Fund outperformed the Performance Universe median and underperformed the benchmark index for the one-, three- and five-year periods ended December 31, 2022.
On the basis of all the information provided on the unitary fee and performance of the Fund and the ongoing oversight by the Board, the Board concluded that the unitary fee for the Fund continues to be reasonable and appropriate in light of the nature, extent and quality of the services provided by the Advisor to the Fund under the Agreement.
The Board considered information and discussed with the Advisor whether there were any economies of scale in connection with providing advisory services to the Fund at current asset levels and whether the Fund may benefit from any economies of scale. The Board noted that the unitary fee rate schedule for the Fund includes breakpoints pursuant to which the unitary fee rate will be reduced as assets of the Fund meet certain thresholds. The Board considered the Advisor’s statement that it believes that its expenses relating to providing advisory services to the Fund will increase during the next twelve months as the Advisor continues to build infrastructure and add new staff. The Board also noted that under the unitary fee structure, any reduction in expenses associated with the management and operations of the Fund would benefit the Advisor, but that the unitary fee structure provides a level of certainty in expenses for shareholders of the Fund. The Board concluded that the unitary fee rate schedule for the Fund reflects an appropriate level of sharing of any economies of scale that may be realized in the management of the Fund at current asset levels. The Board considered the revenues and allocated costs (including the allocation methodology) of the Advisor in serving as investment advisor to the Fund for the twelve months ended December 31, 2022 and the estimated profitability level for the Fund calculated by the Advisor based on such data, as well as complex-wide and product-line profitability data, for the same period. The Board noted the inherent limitations in the profitability analysis and concluded that, based on the information provided, the Advisor’s profitability level for the Fund was not unreasonable. In addition, the Board considered indirect benefits described by the Advisor that may be realized from its relationship with the Fund. The Board considered that the Advisor had identified as an indirect benefit to the Advisor and FTP their exposure to investors and brokers who, absent their exposure to the Fund, may have had no dealings with the Advisor or FTP, and noted that the Advisor does not utilize soft dollars in connection with the Fund. The Board concluded that the character and amount of potential indirect benefits to the Advisor were not unreasonable.
Additional Information (Continued)
First Trust Senior Loan Fund (FTSL)October 31, 2023 (Unaudited) Based on all of the information considered and the conclusions reached, the Board, including the Independent Trustees, unanimously determined that the terms of the Agreement continue to be fair and reasonable and that the continuation of the Agreement is in the best interests of the Fund. No single factor was determinative in the Board’s analysis.
Remuneration
First Trust Advisors L.P. (“First Trust”) is authorised and regulated by the U.S. Securities and Exchange Commission and is entitled to market shares of certain funds it manages, including First Trust Senior Loan Fund (the “Fund”), in certain member states in the European Economic Area in accordance with the cooperation arrangements in Article 42 of the Alternative Investment Fund Managers Directive (the “Directive”). First Trust is required under the Directive to make disclosures in respect of remuneration. The following disclosures are made in line with First Trust’s interpretation of currently available regulatory guidance on remuneration disclosures.
During the year ended December 31, 2022, the amount of remuneration paid (or to be paid) by First Trust Advisors L.P. in respect of the Funds is $7,915,390. This figure is comprised of $764,984 paid (or to be paid) in fixed compensation and $7,150,406 paid (or to be paid) in variable compensation. There were a total of 31 beneficiaries of the remuneration described above. Those amounts include $878,377 paid (or to be paid) to senior management of First Trust Advisors L.P. and $7,037,013 paid (or to be paid) to other employees whose professional activities have a material impact on the risk profiles of First Trust Advisors L.P. or the Funds (collectively, “Code Staff”).
Code Staff included in the aggregated figures disclosed above are rewarded in line with First Trust’s remuneration policy (the “Remuneration Policy”) which is determined and implemented by First Trust’s senior management. The Remuneration Policy reflects First Trust’s ethos of good governance and encapsulates the following principal objectives:
i.
to provide a clear link between remuneration and performance of First Trust and to avoid rewarding for failure;
ii.
to promote sound and effective risk management consistent with the risk profiles of the funds managed by First Trust; and
iii.
to remunerate staff in line with the business strategy, objectives, values and interests of First Trust and the funds managed by First Trust in a manner that avoids conflicts of interest.
First Trust assesses various risk factors which it is exposed to when considering and implementing remuneration for Code Staff and considers whether any potential award to such person(s) would give rise to a conflict of interest. First Trust does not reward failure, or consider the taking of risk or failure to take risk in its remuneration of Code Staff.
First Trust assesses performance for the purposes of determining payments in respect of performance-related remuneration of Code Staff by reference to a broad range of measures including (i) individual performance (using financial and non-financial criteria), and (ii) the overall performance of First Trust. Remuneration is not based upon the performance of the Fund.
The elements of remuneration are balanced between fixed and variable and the senior management sets fixed salaries at a level sufficient to ensure that variable remuneration incentivises and rewards strong individual performance but does not encourage excessive risk taking.
No individual is involved in setting his or her own remuneration.
Board of Trustees and Officers
First Trust Senior Loan Fund (FTSL)October 31, 2023 (Unaudited) The following tables identify the Trustees and Officers of the Trust. Unless otherwise indicated, the address of all persons is 120 East Liberty Drive, Suite 400, Wheaton, IL 60187.
The Trust’s statement of additional information includes additional information about the Trustees and is available, without charge, upon request, by calling (800) 988-5891.
Name,
Year of Birth and
Position with the Trust | Term of Office
and Year First
Elected or
Appointed | Principal Occupations
During Past 5 Years | Number of
Portfolios in
the First Trust
Fund Complex
Overseen by
Trustee | Other
Trusteeships or
Directorships
Held by Trustee
During Past
5 Years |
|
Richard E. Erickson, Trustee
(1951) | • Indefinite Term • Since Inception | Retired; Physician, Edward-Elmhurst Medical Group (2021 to September 2023); Physician and Officer, Wheaton Orthopedics (1990 to 2021) | | |
Thomas R. Kadlec, Trustee
(1957) | • Indefinite Term • Since Inception | Retired; President, ADM Investors Services, Inc. (Futures Commission Merchant) (2010 to July 2022) | | Director, National Futures Association and ADMIS Singapore Ltd.; Formerly, Director of ADM Investor Services, Inc., ADM Investor Services International, ADMIS Hong Kong Ltd., and Futures Industry Association |
Denise M. Keefe, Trustee
(1964) | • Indefinite Term • Since 2021 | Executive Vice President, Advocate Aurora Health and President, Advocate Aurora Continuing Health Division (Integrated Healthcare System) | | Director and Board Chair of Advocate Home Health Services, Advocate Home Care Products and Advocate Hospice; Director and Board Chair of Aurora At Home (since 2018); Director of Advocate Physician Partners Accountable Care Organization; Director of RML Long Term Acute Care Hospitals; Director of Senior Helpers (since 2021); and Director of MobileHelp (since 2022) |
Robert F. Keith, Trustee
(1956) | • Indefinite Term • Since Inception | President, Hibs Enterprises (Financial and Management Consulting) | | Formerly, Director of Trust Company of Illinois |
Niel B. Nielson, Trustee
(1954) | • Indefinite Term • Since Inception | Senior Advisor (2018 to Present), Managing Director and Chief Operating Officer (2015 to 2018), Pelita Harapan Educational Foundation (Educational Products and Services) | | |
Bronwyn Wright, Trustee
(1971) | • Indefinite Term • Since 2023 | Independent Director to a number of Irish collective investment funds (2009 to Present); Various roles at international affiliates of Citibank (1994 to 2009), including Managing Director, Citibank Europe plc and Head of Securities and Fund Services, Citi Ireland (2007 to 2009) | | |
Board of Trustees and Officers (Continued)
First Trust Senior Loan Fund (FTSL)October 31, 2023 (Unaudited) Name, Year of Birth and Position with the Trust | Term of Office and Year First Elected or Appointed | Principal Occupations During Past 5 Years | Number of Portfolios in the First Trust Fund Complex Overseen by Trustee | Other Trusteeships or Directorships Held by Trustee During Past 5 Years |
|
James A. Bowen(1), Trustee,
Chairman of the Board
(1955) | • Indefinite Term • Since Inception | Chief Executive Officer, First Trust Advisors L.P. and First Trust Portfolios L.P., Chairman of the Board of Directors, BondWave LLC (Software Development Company) and Stonebridge Advisors LLC (Investment Advisor) | | |
| Position and
Offices
with Trust | Term of Office
and Length of
Service | Principal Occupations
During Past 5 Years |
|
| President and Chief Executive Officer | • Indefinite Term • Since 2016 | Managing Director and Chief Financial Officer, First Trust Advisors L.P. and First Trust Portfolios L.P.; Chief Financial Officer, BondWave LLC (Software Development Company) and Stonebridge Advisors LLC (Investment Advisor) |
| Treasurer, Chief Financial Officer and Chief Accounting Officer | • Indefinite Term • Since 2023 | Senior Vice President, First Trust Advisors L.P. and First Trust Portfolios L.P., July 2021 to Present. Previously, Vice President, First Trust Advisors L.P. and First Trust Portfolios L.P., 2014 - 2021. |
| Secretary and Chief Legal Officer | • Indefinite Term • Since Inception | General Counsel, First Trust Advisors L.P. and First Trust Portfolios L.P.; Secretary and General Counsel, BondWave LLC; Secretary, Stonebridge Advisors LLC |
Daniel J. Lindquist
(1970) | | • Indefinite Term • Since Inception | Managing Director, First Trust Advisors L.P. and First Trust Portfolios L.P. |
| Chief Compliance Officer and Assistant Secretary | • Indefinite Term • Since Inception | Deputy General Counsel, First Trust Advisors L.P. and First Trust Portfolios L.P. |
| | • Indefinite Term • Since Inception | Senior Vice President, First Trust Advisors L.P. and First Trust Portfolios L.P. |
| | • Indefinite Term • Since Inception | Senior Vice President, First Trust Advisors L.P. and First Trust Portfolios L.P. |
(1)
Mr. Bowen is deemed an “interested person” of the Trust due to his position as Chief Executive Officer of First Trust Advisors L.P., investment advisor of the Trust.
(2)
The term “officer” means the president, vice president, secretary, treasurer, controller or any other officer who performs a policy making function.
First Trust Senior Loan Fund (FTSL)October 31, 2023 (Unaudited) Privacy Policy
First Trust values our relationship with you and considers your privacy an important priority in maintaining that relationship. We are committed to protecting the security and confidentiality of your personal information.
Sources of Information
We collect nonpublic personal information about you from the following sources:
• Information we receive from you and your broker-dealer, investment professional or financial representative through interviews, applications, agreements or other forms;
• Information about your transactions with us, our affiliates or others;
• Information we receive from your inquiries by mail, e-mail or telephone; and
• Information we collect on our website through the use of “cookies.” For example, we may identify the pages on our website that your browser requests or visits.
Information Collected
The type of data we collect may include your name, address, social security number, age, financial status, assets, income, tax information, retirement and estate plan information, transaction history, account balance, payment history, investment objectives, marital status, family relationships and other personal information.
Disclosure of Information
We do not disclose any nonpublic personal information about our customers or former customers to anyone, except as permitted by law. In addition to using this information to verify your identity (as required under law), the permitted uses may also include the disclosure of such information to unaffiliated companies for the following reasons:
• In order to provide you with products and services and to effect transactions that you request or authorize, we may disclose your personal information as described above to unaffiliated financial service providers and other companies that perform administrative or other services on our behalf, such as transfer agents, custodians and trustees, or that assist us in the distribution of investor materials such as trustees, banks, financial representatives, proxy services, solicitors and printers.
• We may release information we have about you if you direct us to do so, if we are compelled by law to do so, or in other legally limited circumstances (for example to protect your account from fraud).
In addition, in order to alert you to our other financial products and services, we may share your personal information within First Trust.
Use of Website Analytics
We currently use third party analytics tools, Google Analytics and AddThis, to gather information for purposes of improving First Trust’s website and marketing our products and services to you. These tools employ cookies, which are small pieces of text stored in a file by your web browser and sent to websites that you visit, to collect information, track website usage and viewing trends such as the number of hits, pages visited, videos and PDFs viewed and the length of user sessions in order to evaluate website performance and enhance navigation of the website. We may also collect other anonymous information, which is generally limited to technical and web navigation information such as the IP address of your device, internet browser type and operating system for purposes of analyzing the data to make First Trust’s website better and more useful to our users. The information collected does not include any personal identifiable information such as your name, address, phone number or email address unless you provide that information through the website for us to contact you in order to answer your questions or respond to your requests. To find out how to opt-out of these services click on: Google Analytics and AddThis.
Confidentiality and Security
With regard to our internal security procedures, First Trust restricts access to your nonpublic personal information to those First Trust employees who need to know that information to provide products or services to you. We maintain physical, electronic and procedural safeguards to protect your nonpublic personal information.
Policy Updates and Inquiries
As required by federal law, we will notify you of our privacy policy annually. We reserve the right to modify this policy at any time, however, if we do change it, we will tell you promptly. For questions about our policy, or for additional copies of this notice, please go to www.ftportfolios.com, or contact us at 1-800-621-1675 (First Trust Portfolios) or 1-800-222-6822 (First Trust Advisors).
March 2023
First Trust Exchange-Traded Fund IV
INVESTMENT ADVISOR
First Trust Advisors L.P.
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
ADMINISTRATOR, CUSTODIAN,
FUND ACCOUNTANT &
TRANSFER AGENT
The Bank of New York Mellon
240 Greenwich Street
New York, NY 10286
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
111 South Wacker Drive
Chicago, IL 60606
LEGAL COUNSEL
Chapman and Cutler LLP
320 South Canal Street
Chicago, IL 60606
First Trust Exchange-Traded Fund IV
| First Trust Enhanced Short Maturity ETF (FTSM)
|
Annual Report
For the Year Ended
October 31, 2023 |
First Trust Enhanced Short Maturity ETF (FTSM)
Annual Report
October 31, 2023
Caution Regarding Forward-Looking Statements
This report contains certain forward-looking statements within the meaning of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended. Forward-looking statements include statements regarding the goals, beliefs, plans or current expectations of First Trust Advisors L.P. (“First Trust” or the “Advisor”) and its representatives, taking into account the information currently available to them. Forward-looking statements include all statements that do not relate solely to current or historical fact. For example, forward-looking statements include the use of words such as “anticipate,” “estimate,” “intend,” “expect,” “believe,” “plan,” “may,” “should,” “would” or other words that convey uncertainty of future events or outcomes.
Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the series of First Trust Exchange-Traded Fund IV (the “Trust”) described in this report (First Trust Enhanced Short Maturity ETF; hereinafter referred to as the “Fund”) to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. When evaluating the information included in this report, you are cautioned not to place undue reliance on these forward-looking statements, which reflect the judgment of the Advisor and its representatives only as of the date hereof. We undertake no obligation to publicly revise or update these forward-looking statements to reflect events and circumstances that arise after the date hereof.
Performance and Risk Disclosure
There is no assurance that the Fund will achieve its investment objective. The Fund is subject to market risk, which is the possibility that the market values of securities owned by the Fund will decline and that the value of the Fund’s shares may therefore be less than what you paid for them. Accordingly, you can lose money investing in the Fund. See “Risk Considerations” in the Additional Information section of this report for a discussion of certain other risks of investing in the Fund.
Performance data quoted represents past performance, which is no guarantee of future results, and current performance may be lower or higher than the figures shown. For the most recent month-end performance figures, please visit www.ftportfolios.com or speak with your financial advisor. Investment returns, net asset value and share price will fluctuate and Fund shares, when sold, may be worth more or less than their original cost.
The Advisor may also periodically provide additional information on Fund performance on the Fund’s webpage at www.ftportfolios.com.
How to Read This Report
This report contains information that may help you evaluate your investment in the Fund. It includes details about the Fund and presents data and analysis that provide insight into the Fund’s performance and investment approach.
By reading the portfolio commentary from the portfolio management team of the Fund, you may obtain an understanding of how the market environment affected the Fund’s performance. The statistical information that follows may help you understand the Fund’s performance compared to that of a relevant market benchmark.
It is important to keep in mind that the opinions expressed by personnel of the Advisor are just that: informed opinions. They should not be considered to be promises or advice. The opinions, like the statistics, cover the period through the date on the cover of this report. The material risks of investing in the Fund are spelled out in the prospectus, the statement of additional information, and other Fund regulatory filings.
First Trust Enhanced Short Maturity ETF (FTSM)
Annual Letter from the Chairman and CEO
October 31, 2023
Dear Shareholders,
First Trust is pleased to provide you with the annual report for the First Trust Enhanced Short Maturity ETF (the “Fund”), which contains detailed information about the Fund for the twelve months ended October 31, 2023.
The Bureau of Economic Analysis recently announced that U.S. real gross domestic product (“GDP”) grew by a staggering 4.9% in the third quarter of 2023 and is now up 2.9% on a year-over-year basis from where it stood in the third quarter of 2022. The most recent quarter’s GDP data represents the fastest growth rate for any quarter since 2014. Consumer spending, which rose by 4.0% over the period, was responsible for 2.7 percentage points of the total increase in GDP. Whether the consumer can keep up this pace of spending remains to be seen, especially given recent news that excess savings from the pandemic-era stimulus have likely been depleted. From a global perspective, the International Monetary Fund (“IMF”) notes that progress in fighting inflation has led to lower economic growth. In their October 2023 publication of the World Economic Outlook, the IMF projected that the growth in world economic output is expected to slow from 3.5% in 2022 to 2.9% in 2024. The economic growth in advanced economies is projected to plummet from 2.6% in 2022 to 1.4% in 2024.
In the notes to their September 2023 meeting, the Federal Open Market Committee revealed that they may need to keep interest rates “higher for longer” as they continue to battle stubbornly high inflation. As many investors are likely aware, a higher Federal Funds target rate can have deep implications for consumers, such as driving up the cost of borrowing for homes, automobiles, and other large purchases. The American consumer has yet to feel the full weight of those burdens, in my opinion. That said, the data reveals a different story among corporate America. S&P Global Market Intelligence reported that a total of 516 U.S. corporations filed for bankruptcy protection on a year-to-date basis through September 30, 2023, up from a total of 263 corporate bankruptcy filings over the same period last year. Higher interest rates and Treasury bond yields have also sapped demand for commercial property loans. Data from Trepp, LLC, a leading provider of data and analytics to the commercial real estate and banking markets, revealed that just $28.2 billion of loans converted into commercial mortgage-backed securities have been issued in 2023, the lowest figure since 2011.
The financial markets battled a myriad of headwinds over the past year, from geopolitical uncertainty resulting from war (the conflicts between Israel and Hamas and Russia and Ukraine), to slowing global economic growth and sticky inflation. Brian Wesbury, Chief Economist at First Trust, notes that a U.S. economic recession is likely to begin at some point early next year. While calls for a recession may concern some investors, the following may offer solace. Data from Bloomberg reveals that the S&P 500® Index has posted positive total returns over the 3-year period following every recession since 1948.
Thank you for giving First Trust the opportunity to play a role in your financial future. We value our relationship with you and will report on the Fund again in six months.
Sincerely,
James A. Bowen
Chairman of the Board of Trustees
Chief Executive Officer of First Trust Advisors L.P.
Fund Performance Overview (Unaudited)
First Trust Enhanced Short Maturity ETF (FTSM)
The First Trust Enhanced Short Maturity ETF’s (the “Fund”) investment objective is to seek current income, consistent with preservation of capital and daily liquidity. Under normal market conditions, the Fund intends to achieve its investment objective by investing at least 80% of its net assets in a portfolio of U.S. dollar-denominated fixed- and variable-rate debt securities, including securities issued or guaranteed by the U.S. government or its agencies, instrumentalities or U.S. government-sponsored entities, residential and commercial mortgage-backed securities, asset-backed securities, U.S. corporate bonds, fixed income securities issued by non-U.S. corporations and governments, municipal obligations, privately issued securities and other debt securities bearing fixed or floating interest rates. The Fund may also invest in money market securities. Shares of the Fund are listed on Nasdaq, Inc. under the ticker symbol “FTSM.”
The Fund’s investment advisor, First Trust Advisors L.P. (the “Advisor”), selects securities for the portfolio by evaluating fixed income sectors and macro market trends while completing bottom-up analysis of individual securities. Portfolio securities are selected based upon relative value in the context of overall portfolio duration. Key inputs for the screens in the securities selection process include, but are not limited to, credit quality, yield, interest rate sensitivity and liquidity. The Fund’s holdings are systematically monitored for meaningful changes in performance and risk measures. A security will generally be sold when the Advisor believes that a security can be substituted for a similar investment that represents better relative value; it lacks adequate compensation for embedded credit risk; or when rebalancing the portfolio to maintain diversification. Under normal market conditions, the Fund’s portfolio is expected to have an average duration of less than one year and an average maturity of less than three years.
|
| | Average Annual Total Returns | |
| | | Inception
(8/5/14)
to 10/31/23 | | Inception
(8/5/14)
to 10/31/23 |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
ICE BofA 0-1 Year U.S. Treasury Index | | | | | |
Total returns for the period since inception are calculated from the inception date of the Fund. “Average Annual Total Returns” represent the average annual change in value of an investment over the periods indicated. “Cumulative Total Returns” represent the total change in value of an investment over the periods indicated.
The Fund’s per share net asset value (“NAV”) is the value of one share of the Fund and is computed by dividing the value of all assets of the Fund (including accrued interest and dividends), less all liabilities (including accrued expenses and dividends declared but unpaid), by the total number of outstanding shares. The price used to calculate market return (“Market Price”) is determined by using the midpoint of the national best bid and offer price (“NBBO”) as of the time that the Fund’s NAV is calculated. Under the Securities and Exchange Commission’s rules, the NBBO consists of the highest displayed buy and lowest sell prices among the various exchanges trading the Fund at the time the Fund’s NAV is calculated. Prior to January 1, 2019, the price used was the midpoint between the highest bid and the lowest offer on the stock exchange on which shares of the Fund were listed for trading as of the time that the Fund’s NAV was calculated. Since shares of the Fund did not trade in the secondary market until after its inception, for the period from inception to the first day of secondary market trading in shares of the Fund, the NAV of the Fund is used as a proxy for the secondary market trading price to calculate market returns. NAV and market returns assume that all distributions have been reinvested in the Fund at NAV and Market Price, respectively.
An index is a statistical composite that tracks a specified financial market or sector. Unlike the Fund, the 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.
Fund Performance Overview (Unaudited) (Continued)
First Trust Enhanced Short Maturity ETF (FTSM) (Continued)
| % of Total
Investments
& Cash |
Corporate Bonds and Notes | |
| |
Foreign Corporate Bonds and Notes | |
| |
U.S. Government Bonds and Notes | |
U.S. Government Agency Mortgage-Backed Securities | |
Mortgage-Backed Securities | |
| |
| |
| |
| |
| % of Total
Investments
& Cash |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
U.S. Treasury Note, 4.63%, 06/30/25 | |
U.S. Treasury Note, 4.63%, 02/28/25 | |
U.S. Treasury Note, 3.88%, 04/30/25 | |
AutoNation, Inc., 5.93%, 11/01/23 | |
Global Payments, Inc., 5.96%, 11/01/23 | |
Plains All American Pipeline, L.P., 5.73%, 11/01/23 | |
Federal Home Loan Mortgage Corporation Multifamily Structured Pass Through Certificates, 3.17%, 10/25/24 | |
Spectra Energy Partners, L.P., 4.75%, 03/15/24 | |
Bayer US Finance II LLC, 3.88%, 12/15/23 | |
Aon Global Ltd., 4.00%, 11/27/23 | |
| |
| Amount is less than 0.1%. |
| The ratings are by S&P Global Ratings. A credit rating is an assessment provided by a nationally recognized statistical rating organization (NRSRO) of the creditworthiness of an issuer with respect to debt obligations. Ratings are measured highest to lowest on a scale that generally ranges from AAA to D for long-term ratings and A-1+ to C for short-term ratings. Investment grade is defined as those issuers that have a long- term credit rating of BBB- or higher or a short-term credit rating of A-3 or higher. The credit ratings shown relate to the credit worthiness of the issuers of the underlying securities in the Fund, and not to the Fund or its shares. U.S. Treasury and U.S. Agency mortgage-backed securities appear under “Government & Agency.” Credit ratings are subject to change. |
Fund Performance Overview (Unaudited) (Continued)
First Trust Enhanced Short Maturity ETF (FTSM) (Continued)
| 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.
Performance in securitized product investment strategies can be impacted from the benefits of purchasing odd lot positions. The impact of these investments can be particularly meaningful when funds have limited assets under management and may not be a sustainable source of performance as a fund grows in size. |
Frequency Distribution of Discounts and Premiums
Information showing the number of days the market price of the Fund’s shares was greater (at a premium) and less (at a discount) than the Fund’s net asset value for the most recently completed year, and the most recently completed calendar quarters since that year (or life of the Fund, if shorter) is available at https://www.ftportfolios.com/Retail/etf/home.aspx.
First Trust Enhanced Short Maturity ETF (FTSM)Annual ReportOctober 31, 2023 (Unaudited) Advisor
First Trust Advisors L.P. (“First Trust” or the “Advisor”) is the investment advisor to First Trust Enhanced Short Maturity ETF (the “Fund” or “FTSM”). First Trust is responsible for the selection and ongoing monitoring of the Fund’s investment portfolio, managing the Fund’s business affairs and providing certain administrative services necessary for the management of the Fund.
Portfolio Management Team
The following persons serve as portfolio managers of the Fund:
Todd Larson, CFA – Senior Vice President and Portfolio Manager
Jeremiah Charles – Senior Vice President and Portfolio Manager
James Snyder – Senior Vice President and Portfolio Manager
Eric R. Maisel, CFA – Senior Vice President and Portfolio Manager
Scott Skowronski, CFA – Senior Vice President and Portfolio Manager
The portfolio managers are primarily and jointly responsible for the day-to-day management of the Fund. Each portfolio manager has served as part of the portfolio management team of the Fund since 2014, except for Eric R. Maisel who has served as part of the portfolio management team of the Fund since 2015, and Scott Skowronski, who has served as part of the portfolio management team of the Fund since 2022.
Commentary
The Fund is an actively managed exchange-traded fund that seeks current income, consistent with preservation of capital and daily liquidity.
Market Recap
At the beginning of the 12-month period ended October 31, 2023, inflation remained stubbornly elevated with the November 2022 Consumer Price Index (“CPI”) printing 7.1%. At the same time, the Federal Reserve (the “Fed”) continued to reiterate its commitment to bring inflation back to the 2.0% target rate. As of October 31, 2022, the Fed had just increased the Federal Funds target rate by 75 basis points (“bps”) in each of its last three Federal Open Market Committee (“FOMC”) meetings, shifting the upper bound of the Federal Funds target rate to 3.25%. And despite the equivalent of seventeen 25 bps rate increases in 2022, inflation consistently exceeded the Fed’s 2.00% stated inflation target as the labor market remained robust. Notably, at the December 2022 FOMC meeting, the Fed projected a higher-than-expected terminal Federal Funds target rate of 5.00-5.25%, indicating the Fed’s view that inflation would remain persistent. In sum, the Fed increased the Federal Funds target rate by 4.25% in 2022, while the 10-Year U.S. Treasury yield increased from 1.51% at the beginning of the year to 3.88% at year-end. As the result of such stark shifts in the Treasury market, negative returns permeated the bond market in 2022.
Inflation continued to run in excess of the Fed’s 2.0% target in the first quarter of 2023, as evidenced by the CPI printing 6.0% in February 2023. In response, the Fed raised its policy rate twice during the first quarter to 4.75%-5.00% while maintaining its terminal Federal Funds target rate of 5.00-5.25%. In early March, after a strong labor market report, the bond market expected a terminal Federal Funds target rate of 5.50-5.75%, higher than the Fed’s own “dot plot” projection. However, by quarter-end, investors had hastily reduced rate expectations amid chaos in the banking sector, pricing in a terminal Federal Funds target rate of 4.75-5.00%. Thus, in the first quarter of 2023, the market effectively moved from expecting as many as three more rate hikes in 2023, to as many as four rate cuts by January 2024.
The banking turmoil proved to be relatively brief, owing to liquidity support from the Fed. At the same time, inflation continued to be elevated and the labor market robust. This led the Fed to hike again at its May 2023 meeting and then held it unchanged in June at 5.00-5.25%. Forecasts for the Federal Funds target rate also rebalanced higher, with the peak terminal rate trading near 5.50%, and holding above 5.00% through June of 2024. As market expectations shifted, interest rates across the treasury curve continued to move higher, particularly on the short end of the curve where interest rates are most sensitive to Fed policy. While the S&P 500® Index traded near 4,500 at the end of the second quarter, nearly 1,000 points above its bottom in October 2022, the 2-Year/10-Year U.S. Treasury yield curve remained over 100 bps inverted, marking its steepest inversion since the 1980s. Further, the 3-Month/10-Year U.S. Treasury yield curve remained inverted, after initially inverting in November 2022.
Portfolio Commentary (Continued)
First Trust Enhanced Short Maturity ETF (FTSM)Annual ReportOctober 31, 2023 (Unaudited) The FOMC raised its target rate to 5.25-5.50% at its July 2023 meeting in a continued attempt to mitigate inflation. In response, the yield curve bear steepened (long-term rates increased faster than short term rates) in what would be a theme for the remainder of the reporting period. The highly anticipated Jackson Hole Fed conference in August 2023 did not deliver much new information and the ensuing uncertainty generated more rate volatility and weighed on risk assets. At its September 2023 meeting, the FOMC held its target rate steady and upwardly revised its economic growth outlook for both this year and next, while reducing its 2024 rate cut projection from 100 bps to 50 bps; this proved a catalyst for higher yields, spread volatility, and lower equity values in the concluding weeks of the reporting period. As the fourth quarter of 2023 commences, the market seemingly expects the Fed to hold rates at these higher levels further into the future. The market’s apparent expectation of a “soft landing” (no imminent recession) likely supports the recent rate move, as the absence of a recession suggests the potential for stronger, and more sustained, economic expansion, resulting in the need for higher interest rates for a longer period of time.
For the 12-month period ended October 31, 2023, the 10-Year U.S. Treasury yield increased 80 bps to 4.87%, the 2-Year U.S. Treasury yield increased 57 bps to 5.07%, and the 1-Year U.S. Treasury yield increased 82 bps to 5.45%. Commercial paper yields also rose on the back of Fed interest rate hikes. The average yield on 90-day Tier 1 commercial paper increased 119 bps to 5.62%.
Performance Analysis
The Fund returned 4.72% based on net asset value and 4.74% based on market price for the 12-month period ended October 31, 2023. This compares to the ICE BofA 0-1 Year U.S. Treasury Index’s (the “Benchmark”) return of 4.68%.
As a result of interest rate hikes from the Fed, yields on front-end securities, like those held by the Fund, are at the highest level since 2007. The income (yield) from these securities was the leading driver of the Fund’s return during the period. Compared to the Benchmark, the Fund’s allocation to corporate credit and securitized assets were primary drivers of relative performance. On the other hand, the Fund’s allocation to securities longer than one year to maturity, was a detractor from performance as interest rates rose. The allocations to corporate bonds, both fixed and floating-rate, and commercial mortgage-backed securities were leading sources of outperformance. The allocation to Treasurys and commercial paper detracted on a relative basis although the absolute return contribution from both sectors was very positive. Within corporate credit, industries delivering the best results were consumer cyclical, real estate investment trusts and communications while capital goods and basics were leading detractors. The Fund’s largest weights in corporate credit were in banking and consumer non-cyclical and the allocation to each was accretive to relative performance. From a rating quality perspective, BBB-rated bonds had better returns compared to those with an A rating due to better contribution from credit spread.
Throughout the reporting period, the Fund maintained a diversified allocation with an emphasis on securities having a high level of liquidity. Overall credit risk was kept low as the investment strategy focused on high quality, short-term holdings. The Fund’s weighted average maturity was kept around six months and effective duration approximately five months. By maintaining a low duration and low average maturity, the strategy successfully achieved its objective of seeking current income. By capturing rising interest rates, the Fund was able to raise its distribution rate during the period from an annualized rate of 3.2% to 4.9%.
Market and Fund Outlook
The investment team continues to capture yield through floating-rate securities, cash equivalents, and short-maturity fixed rate bonds within an interest rate managed framework. The investment team expects the Fed to stay the course, likely holding its policy rate around today’s range of 5.25-5.50%, with the possibility of an additional rate hike in 2023. The real 10-Year U.S. Treasury yield was 2.46% at the end of the reporting period. Higher real rates have historically placed pressure on the overall business cycle. Consequently, this hiking cycle is likely much closer to its end than its beginning, in our opinion. While the Fed may leak an additional hike into the market, we believe today’s fixed income markets are much more balanced when it comes to income and interest rate risk. Further, with interest rates at these elevated levels, the current bond math is significantly more supportive of future positive returns, in our opinion. Valuations in short maturity corporate bonds remain attractive, as market yields have shifted starkly higher, reaching levels well above average over the past two decades.
The investment team expects to extend the Fund’s duration where appropriate, while keeping corporate credit (both commercial paper and corporate bonds) as the largest exposure. The Fund will also seek to maintain its allocation to securitized debt (asset-backed securities/mortgage-backed securities) for diversification purposes, particularly when valuations present compelling opportunities relative to U.S. Treasuries and corporate bonds. As always, the focus will be in the senior part of the capital structure.
Portfolio Commentary (Continued)
First Trust Enhanced Short Maturity ETF (FTSM)Annual ReportOctober 31, 2023 (Unaudited) The investment team continues to favor more defensive areas of fixed income and continues to employ its bottom-up credit underwriting process alongside its rigorous approach to risk management. Durable sectors such as healthcare, software, and regulated utilities continue to present such defensive investment opportunities. We believe curve allocation should remain an important component of total return in the year ahead, as well as security selection and sector allocation. The investment team’s research process seeks to identify opportunities that offer the best risk/reward balance, with investment decisions predicated on data analysis and evidence-based conclusions. We believe the Fund is well positioned to add value relative to its Benchmark.
First Trust Enhanced Short Maturity ETF (FTSM)Understanding Your Fund ExpensesOctober 31, 2023 (Unaudited) As a shareholder of First Trust Enhanced Short Maturity ETF (the “Fund”), you incur two types of costs: (1) transaction costs; and (2) ongoing costs, including management fees, distribution and/or service (12b-1) fees, if any, and other Fund expenses. This Example is intended to help you understand your ongoing costs of investing in the Fund and to compare these costs with the ongoing costs of investing in other funds.
The Example is based on an investment of $1,000 invested at the beginning of the period and held through the six-month period ended October 31, 2023.
Actual Expenses
The first line in the following table provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During the Six-Month Period” to estimate the expenses you paid on your account during this six-month period.
Hypothetical Example for Comparison Purposes
The second line in the following table provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs such as brokerage commissions. Therefore, the second line in the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
| Beginning
Account Value
May 1, 2023 | Ending
Account Value
October 31, 2023 | Annualized
Expense Ratio
Based on the
Six-Month
Period (a) | Expenses Paid
During the
Six-Month
Period (b) |
First Trust Enhanced Short Maturity ETF (FTSM) |
| | | | |
Hypothetical (5% return before expenses) | | | | |
| These expense ratios reflect expense waivers. See Note 3 in the Notes to Financial Statements. |
| Expenses are equal to the annualized expense ratio as indicated in the table multiplied by the average account value over the period (May 1, 2023 through October 31, 2023), multiplied by 184/365 (to reflect the six-month period). |
First Trust Enhanced Short Maturity ETF (FTSM)Portfolio of InvestmentsOctober 31, 2023
| | | | |
CORPORATE BONDS AND NOTES — 45.9% |
| | |
| | | | |
| Auto Manufacturers — 1.2% | |
| BMW US Capital LLC, SOFR Compounded Index + 0.53% (a) (b) | | | |
| Daimler Trucks Finance North America LLC (a) | | | |
| Daimler Trucks Finance North America LLC, SOFR + 0.60% (a) (b) | | | |
| General Motors Financial Co., Inc., SOFR + 0.76% (b) | | | |
| Hyundai Capital America (a) | | | |
| Nissan Motor Acceptance Co. LLC, 3 Mo. CME Term SOFR + CSA + 0.64% (a) (b) | | | |
| Toyota Motor Credit Corp., Series B, SOFR + 0.29% (b) | | | |
| Toyota Motor Credit Corp., Medium-Term Note | | | |
| Volkswagen Group of America Finance LLC (a) | | | |
| Volkswagen Group of America Finance LLC (a) | | | |
| | |
| | |
| Bank of America Corp., SOFR + 0.69% (b) | | | |
| Bank of America Corp. (c) | | | |
| Bank of America Corp., Medium-Term Note | | | |
| Bank of America Corp., Medium-Term Note | | | |
| Bank of America Corp., Medium-Term Note (c) | | | |
| | | | |
| Bank of New York Mellon (The) Corp. (c) | | | |
| Bank of New York Mellon (The) Corp., Medium-Term Note | | | |
| Bank of New York Mellon (The) Corp., Medium-Term Note (c) | | | |
| Bank of New York Mellon (The) Corp., Medium-Term Note (c) | | | |
| | | | |
| | | | |
| Fifth Third Bank N.A. (c) | | | |
| Goldman Sachs Group (The), Inc. | | | |
| Goldman Sachs Group (The), Inc. | | | |
| Goldman Sachs Group (The), Inc. | | | |
| Goldman Sachs Group (The), Inc., SOFR + 0.50% (b) | | | |
| Goldman Sachs Group (The), Inc., SOFR + 0.49% (b) | | | |
| Goldman Sachs Group (The), Inc. | | | |
| | | | |
| JPMorgan Chase & Co., SOFR + 0.54% (b) | | | |
| JPMorgan Chase & Co., SOFR + 0.58% (b) | | | |
| | | | |
| | | | |
| Morgan Stanley, Global Medium-Term Note | | | |
| Morgan Stanley, Global Medium-Term Note (c) | | | |
| Morgan Stanley, Medium-Term Note, SOFR + 0.46% (b) | | | |
| | | | |
| PNC Financial Services Group (The), Inc. (c) | | | |
| PNC Financial Services Group (The), Inc. | | | |
| PNC Financial Services Group (The), Inc. (c) | | | |
| | | | |
| | | | |
| | | | |
See Notes to Financial Statements
First Trust Enhanced Short Maturity ETF (FTSM)Portfolio of Investments (Continued)October 31, 2023 | | | | |
CORPORATE BONDS AND NOTES (Continued) |
| | |
| Truist Financial Corp., Medium-Term Note | | | |
| Truist Financial Corp., Medium-Term Note, SOFR + 0.40% (b) | | | |
| U.S. Bancorp, Medium-Term Note | | | |
| Wells Fargo & Co., Medium-Term Note | | | |
| Wells Fargo & Co., Medium-Term Note | | | |
| Wells Fargo & Co., Medium-Term Note (c) | | | |
| | | | |
| | |
| | |
| Anheuser-Busch InBev Worldwide, Inc., 3 Mo. CME Term SOFR + CSA + 0.74% (b) | | | |
| Constellation Brands, Inc. | | | |
| Constellation Brands, Inc. | | | |
| Constellation Brands, Inc. | | | |
| | | | |
| | |
| | |
| | | | |
| | | | |
| | | | |
| | | | |
| | |
| Building Materials — 0.6% | |
| | | | |
| Martin Marietta Materials, Inc. | | | |
| | |
| | |
| | | | |
| | | | |
| | |
| Commercial Services — 0.3% | |
| | | | |
| | | | |
| | |
| | |
| | | | |
| Cosmetics/Personal Care — 0.3% | |
| | | | |
| | | | |
| | |
| Diversified Financial Services — 1.2% | |
| | | | |
| | | | |
| | | | |
| | | | |
| Capital One Financial Corp., SOFR + 0.69% (b) | | | |
See Notes to Financial Statements
First Trust Enhanced Short Maturity ETF (FTSM)Portfolio of Investments (Continued)October 31, 2023 | | | | |
CORPORATE BONDS AND NOTES (Continued) |
| Diversified Financial Services (Continued) | |
| Intercontinental Exchange, Inc. | | | |
| | | | |
| | |
| | |
| Alabama Power Co., Series 13-A | | | |
| CenterPoint Energy, Inc., SOFR Compounded Index + 0.65% (b) | | | |
| | | | |
| Delmarva Power & Light Co. | | | |
| | | | |
| FirstEnergy Transmission LLC (a) | | | |
| Florida Power & Light Co. | | | |
| NextEra Energy Capital Holdings, Inc., SOFR Compounded Index + 0.40% (b) | | | |
| NextEra Energy Capital Holdings, Inc. | | | |
| Oncor Electric Delivery Co. LLC | | | |
| Pacific Gas and Electric Co. | | | |
| Public Service Enterprise Group, Inc. | | | |
| Southwestern Public Service Co. | | | |
| Trans-Allegheny Interstate Line Co. (a) | | | |
| Virginia Electric and Power Co. | | | |
| Virginia Electric and Power Co., Series A | | | |
| | | | |
| | | | |
| | |
| Environmental Control — 0.9% | |
| | | | |
| | | | |
| | | | |
| | | | |
| | |
| | |
| | | | |
| | | | |
| Mondelez International, Inc. | | | |
| | |
| Healthcare-Products — 2.0% | |
| | | | |
| Baxter International, Inc., SOFR Compounded Index + 0.26% (b) | | | |
| Baxter International, Inc. | | | |
| Baxter International, Inc., SOFR Compounded Index + 0.44% (b) | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| Thermo Fisher Scientific, Inc. | | | |
| Zimmer Biomet Holdings, Inc. | | | |
| Zimmer Biomet Holdings, Inc. | | | |
| | |
See Notes to Financial Statements
First Trust Enhanced Short Maturity ETF (FTSM)Portfolio of Investments (Continued)October 31, 2023 | | | | |
CORPORATE BONDS AND NOTES (Continued) |
| Healthcare-Services — 3.2% | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | |
| | |
| Athene Global Funding, SOFR Compounded Index + 0.70% (a) (b) | | | |
| Brighthouse Financial Global Funding, SOFR + 0.76% (a) (b) | | | |
| | | | |
| Marsh & McLennan Cos., Inc. | | | |
| Marsh & McLennan Cos., Inc. | | | |
| Marsh & McLennan Cos., Inc. | | | |
| Metropolitan Life Global Funding I, SOFR + 0.30% (a) (b) | | | |
| New York Life Global Funding, SOFR Compounded Index + 0.43% (a) (b) | | | |
| Principal Life Global Funding II, SOFR + 0.45% (a) (b) | | | |
| Principal Life Global Funding II, SOFR + 0.38% (a) (b) | | | |
| Willis North America, Inc. | | | |
| | |
| | |
| | | | |
| | | | |
| | |
| | |
| | | | |
| Marriott International, Inc. | | | |
| | |
| Machinery-Construction & Mining — 0.3% | |
| Caterpillar Financial Services Corp. | | | |
| Machinery-Diversified — 0.2% | |
| John Deere Capital Corp., Medium-Term Note | | | |
| John Deere Capital Corp., Medium-Term Note | | | |
| | |
| | |
| Charter Communications Operating LLC / Charter Communications Operating Capital, 3 Mo. CME Term SOFR + CSA + 1.65% (b) | | | |
| Charter Communications Operating LLC / Charter Communications Operating Capital | | | |
See Notes to Financial Statements
First Trust Enhanced Short Maturity ETF (FTSM)Portfolio of Investments (Continued)October 31, 2023 | | | | |
CORPORATE BONDS AND NOTES (Continued) |
| | |
| | | | |
| | | | |
| | |
| Miscellaneous Manufacturing — 0.3% | |
| | | | |
| | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| Bayer US Finance II LLC (a) | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | |
| | |
| | | | |
| | | | |
| Energy Transfer, L.P. / Regency Energy Finance Corp. | | | |
| Enterprise Products Operating LLC | | | |
| Enterprise Products Operating LLC | | | |
| Kinder Morgan Energy Partners, L.P. | | | |
| Kinder Morgan Energy Partners, L.P. | | | |
| | | | |
| Sabine Pass Liquefaction LLC | | | |
| Sabine Pass Liquefaction LLC | | | |
| Spectra Energy Partners, L.P. | | | |
| Williams Cos., (The), Inc. | | | |
| Williams Cos., (The), Inc. | | | |
| | |
| Real Estate Investment Trusts — 0.2% | |
| Public Storage Operating Co., SOFR + 0.47% (b) | | | |
See Notes to Financial Statements
First Trust Enhanced Short Maturity ETF (FTSM)Portfolio of Investments (Continued)October 31, 2023 | | | | |
CORPORATE BONDS AND NOTES (Continued) |
| | |
| | | | |
| | | | |
| | |
| | |
| Microchip Technology, Inc. | | | |
| | | | |
| | |
| | |
| | | | |
| Cadence Design Systems, Inc. | | | |
| Fidelity National Information Services, Inc. | | | |
| Fidelity National Information Services, Inc. | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | |
| Telecommunications — 0.8% | |
| AT&T, Inc., 3 Mo. CME Term SOFR + CSA + 1.18% (b) | | | |
| | | | |
| Verizon Communications, Inc. | | | |
| Verizon Communications, Inc. | | | |
| | |
| | |
| | | | |
| | | | |
| | | | |
| | |
| | |
| American Water Capital Corp. | | | |
| American Water Capital Corp. | | | |
| | |
| Total Corporate Bonds and Notes | |
| | |
| | Annualized
Yield on Date of
Purchase | | |
|
| | |
| L3Harris Technologies, Inc. | | | |
| L3Harris Technologies, Inc. | | | |
| | |
See Notes to Financial Statements
First Trust Enhanced Short Maturity ETF (FTSM)Portfolio of Investments (Continued)October 31, 2023 | | Annualized Yield on Date of Purchase | | |
COMMERCIAL PAPER (Continued) |
| Auto Manufacturers — 1.3% | |
| American Honda Finance Corp. | | | |
| General Motors Financial Co., Inc. | | | |
| | | | |
| | | | |
| | | | |
| | |
| | |
| ANZ New Zealand Int’l Ltd., SOFR + 0.36% | | | |
| | | | |
| National Australia Bank Ltd. | | | |
| Skandinaviska Enskilda Banken AB | | | |
| Svenska Handelsbanken AB, SOFR + 0.65% | | | |
| | | | |
| Toronto-Dominion Bank (The) | | | |
| Toronto-Dominion Bank (The), SOFR + 0.68% | | | |
| | | | |
| | |
| | |
| | | | |
| | | | |
| | | | |
| | |
| | |
| | | | |
| | | | |
| | | | |
| | |
| Building Materials — 0.2% | |
| | | | |
| | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | |
| Commercial Services — 1.4% | |
| | | | |
| | | | |
See Notes to Financial Statements
First Trust Enhanced Short Maturity ETF (FTSM)Portfolio of Investments (Continued)October 31, 2023 | | Annualized Yield on Date of Purchase | | |
COMMERCIAL PAPER (Continued) |
| Commercial Services (Continued) | |
| | | | |
| | | | |
| | |
| Diversified Financial Services — 1.2% | |
| | | | |
| Intercontinental Exchange, Inc. | | | |
| Intercontinental Exchange, Inc. | | | |
| Intercontinental Exchange, Inc. | | | |
| | |
| | |
| American Electric Power Co., Inc. | | | |
| American Electric Power Co., Inc. | | | |
| American Electric Power Co., Inc. | | | |
| | | | |
| | | | |
| | | | |
| NextEra Energy Capital Holdings, Inc. | | | |
| NextEra Energy Capital Holdings, Inc. | | | |
| | | | |
| | | | |
| | | | |
| Southern California Edison Co. | | | |
| Southern California Edison Co. | | | |
| | |
| | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | |
| | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | |
| | |
| | | | |
| | | | |
| | | | |
| | | | |
| | |
| Healthcare-Products — 0.3% | |
| | | | |
See Notes to Financial Statements
First Trust Enhanced Short Maturity ETF (FTSM)Portfolio of Investments (Continued)October 31, 2023 | | Annualized Yield on Date of Purchase | | |
COMMERCIAL PAPER (Continued) |
| Healthcare-Services — 0.8% | |
| | | | |
| | | | |
| | | | |
| | |
| | |
| Marriott International, Inc. | | | |
| | |
| | | | |
| | | | |
| | |
| | |
| | | | |
| | | | |
| | | | |
| | |
| | |
| | | | |
| | |
| | | | |
| | | | |
| Plains All American Pipeline, L.P. | | | |
| Plains All American Pipeline, L.P. | | | |
| | | | |
| | | | |
| | | | |
| | |
| Real Estate Investment Trusts — 1.2% | |
| Alexandria Real Estate Equities, Inc. | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | |
| | |
| Alimentation Couche-Tard, Inc. | | | |
| Alimentation Couche-Tard, Inc. | | | |
| Alimentation Couche-Tard, Inc. | | | |
| Alimentation Couche-Tard, Inc. | | | |
| Alimentation Couche-Tard, Inc. | | | |
| | | | |
| O’Reilly Automotive, Inc. | | | |
| O’Reilly Automotive, Inc. | | | |
| O’Reilly Automotive, Inc. | | | |
| | |
See Notes to Financial Statements
First Trust Enhanced Short Maturity ETF (FTSM)Portfolio of Investments (Continued)October 31, 2023 | | Annualized Yield on Date of Purchase | | |
COMMERCIAL PAPER (Continued) |
| | |
| Microchip Technology, Inc. | | | |
| Microchip Technology, Inc. | | | |
| | |
| | |
| Fidelity National Information Services, Inc. | | | |
| Fidelity National Information Services, Inc. | | | |
| Fidelity National Information Services, Inc. | | | |
| Fidelity National Information Services, Inc. | | | |
| | |
| Telecommunications — 1.2% | |
| | | | |
| Bell Telephone Co. of Canada or Bell Canada (The) | | | |
| Verizon Communications, Inc. | | | |
| Verizon Communications, Inc. | | | |
| Verizon Communications, Inc. | | | |
| | |
| | |
| Canadian National Railway Co. | | | |
| Canadian Pacific Railway Co. | | | |
| | |
| | |
| | |
| | | | |
FOREIGN CORPORATE BONDS AND NOTES — 9.0% |
| | |
| Bank of Montreal, Series E, Medium-Term Note | | | |
| Bank of Montreal, Medium-Term Note, SOFR Compounded Index + 0.32% (b) | | | |
| Bank of Montreal, Series H, Medium-Term Note | | | |
| Bank of Nova Scotia (The), SOFR Compounded Index + 0.45% (b) | | | |
| Bank of Nova Scotia (The), SOFR + 0.38% (b) | | | |
| Banque Federative du Credit Mutuel S.A., SOFR Compounded Index + 0.41% (a) (b) | | | |
| | | | |
| Deutsche Bank AG/New York NY, Series E, SOFR + 0.50% (b) | | | |
| Federation des Caisses Desjardins du Quebec, SOFR + 0.43% (a) (b) | | | |
| Macquarie Group Ltd., SOFR + 0.71% (a) (b) | | | |
| National Bank of Canada, SOFR + 0.49% (b) | | | |
| NatWest Markets PLC, SOFR + 0.53% (a) (b) | | | |
| Royal Bank of Canada, Global Medium-Term Note, SOFR Compounded Index + 0.30% (b) | | | |
| Royal Bank of Canada, Global Medium-Term Note | | | |
| Royal Bank of Canada, SOFR Compounded Index + 0.36% (b) | | | |
| Royal Bank of Canada, Medium-Term Note | | | |
See Notes to Financial Statements
First Trust Enhanced Short Maturity ETF (FTSM)Portfolio of Investments (Continued)October 31, 2023 | | | | |
FOREIGN CORPORATE BONDS AND NOTES (Continued) |
| | |
| Royal Bank of Canada, Global Medium-Term Note | | | |
| Sumitomo Mitsui Trust Bank Ltd., SOFR + 0.44% (a) (b) | | | |
| Toronto-Dominion Bank (The), Medium-Term Note | | | |
| Toronto-Dominion Bank (The), Medium-Term Note, SOFR + 0.91% (b) | | | |
| Toronto-Dominion Bank (The), Global Medium-Term Note | | | |
| UBS AG/London, SOFR + 0.45% (a) (b) | | | |
| UBS AG/London, SOFR + 0.47% (a) (b) | | | |
| | | | |
| | | | |
| | |
| | |
| | | | |
| | | | |
| | |
| | |
| | | | |
| | |
| Mondelez International Holdings Netherlands B.V. (a) | | | |
| Healthcare-Products — 0.2% | |
| DH Europe Finance II Sarl | | | |
| | |
| | | | |
| | | | |
| | |
| | |
| Canadian Natural Resources Ltd. | | | |
| Oil & Gas Services — 0.2% | |
| Schlumberger Investment S.A. | | | |
| | |
| GlaxoSmithKline Capital PLC | | | |
| Pfizer Investment Enterprises Pte. Ltd. | | | |
| Takeda Pharmaceutical Co., Ltd. | | | |
| | |
| | |
| | | | |
| Enbridge, Inc., SOFR Compounded Index + 0.63% (b) | | | |
| | | | |
| | |
| | |
| Broadcom Corp. / Broadcom Cayman Finance Ltd. | | | |
| | |
| Canadian Pacific Railway Co. | | | |
| Total Foreign Corporate Bonds and Notes | |
| | |
See Notes to Financial Statements
First Trust Enhanced Short Maturity ETF (FTSM)Portfolio of Investments (Continued)October 31, 2023 | | | | |
ASSET-BACKED SECURITIES — 6.1% |
| |
| | | | |
| | | | |
| |
| | | | |
| | | | |
| |
| Series 2022-AA, Class A2 (a) | | | |
| Dell Equipment Finance Trust |
| Series 2023-1, Class A2 (a) | | | |
| Series 2023-2, Class A2 (a) | | | |
| Series 2023-3, Class A2 (a) | | | |
| |
| Series 2022-1A, Class A (a) | | | |
| Flagship Credit Auto Trust |
| Series 2021-3, Class A (a) | | | |
| Ford Credit Auto Owner Trust |
| | | | |
| | | | |
| GLS Auto Receivables Issuer Trust |
| Series 2022-1A, Class A (a) | | | |
| GM Financial Automobile Leasing Trust |
| | | | |
| | | | |
| GM Financial Consumer Automobile Receivables Trust |
| | | | |
| Honda Auto Receivables Owner Trust |
| | | | |
| | | | |
| Hyundai Auto Receivables Trust |
| | | | |
| |
| | | | |
| | | | |
| | | | |
| | | | |
| Mercedes-Benz Auto Lease Trust |
| | | | |
| Mercedes-Benz Auto Receivables Trust |
| | | | |
| | | | |
| |
| Series 2018-1A, Class A (a) | | | |
| |
| Series 2022-1A, Class A2 (a) | | | |
| |
| Series 2022-1A, Class A (a) | | | |
| Toyota Auto Receivables Owner Trust |
| | | | |
| | | | |
| | | | |
See Notes to Financial Statements
First Trust Enhanced Short Maturity ETF (FTSM)Portfolio of Investments (Continued)October 31, 2023 | | | | |
ASSET-BACKED SECURITIES (Continued) |
| |
| Series 2022-3, Class A, steps up to 3.76% on 11/20/23 (d) | | | |
| Series 2022-5, Class A1A, steps up to 4.47% on 01/20/24 (d) | | | |
| | | | |
| Series 2022-7, Class A1A, steps up to 5.98% on 11/20/24 (d) | | | |
| | | | |
| Westlake Automobile Receivables Trust |
| Series 2022-1A, Class A3 (a) | | | |
| World Omni Auto Receivables Trust |
| | | | |
| | | | |
| Total Asset-Backed Securities | |
| | |
U.S. GOVERNMENT BONDS AND NOTES — 4.4% |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| Total U.S. Government Bonds and Notes | |
| | |
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES — 3.7% |
| Collateralized Mortgage Obligations — 0.1% | |
| Federal Home Loan Mortgage Corporation | | | |
| Series 2017-4671, Class CA | | | |
| Federal National Mortgage Association | | | |
| | | | |
| | | | |
| | | | |
| | |
| Commercial Mortgage-Backed Securities — 3.6% | |
| Federal Home Loan Mortgage Corporation Multifamily Structured Pass Through Certificates | | | |
| Series 2014-K037, Class A2 | | | |
| Series 2014-K038, Class A2 | | | |
| Series 2014-K040, Class A2 | | | |
| Series 2014-K041, Class A2 | | | |
| Series 2015-K043, Class A2 | | | |
| Series 2015-K045, Class A2 | | | |
| Series 2015-K046, Class A1 | | | |
| Series 2015-K046, Class A2 | | | |
| Series 2015-K048, Class A2 | | | |
| Series 2015-K049, Class A2 | | | |
| Series 2017-K725, Class A2 | | | |
| Series 2017-K728, Class AM | | | |
| Series 2017-K729, Class A2 | | | |
| Series 2017-KJ12, Class A2 | | | |
| Series 2017-KL1E, Class A1E | | | |
| Series 2018-K732, Class A2 | | | |
| | |
See Notes to Financial Statements
First Trust Enhanced Short Maturity ETF (FTSM)Portfolio of Investments (Continued)October 31, 2023 | | | | |
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES (Continued) |
| Pass-Through Securities — 0.0% | |
| Federal Home Loan Mortgage Corporation |
| | | | |
| | | | |
| | | | |
| Federal National Mortgage Association |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| Government National Mortgage Association |
| | | | |
| | |
| Total U.S. Government Agency Mortgage-Backed Securities | |
| | |
MORTGAGE-BACKED SECURITIES — 0.8% |
| Collateralized Mortgage Obligations — 0.5% | |
| BRAVO Residential Funding Trust |
| Series 2021-NQM1, Class A1 (a) | | | |
| |
| Series 2019-INV1, Class A2, 30 Day Average SOFR + CSA + 1.00% (a) (b) | | | |
| Series 2019-INV2, Class A11, 30 Day Average SOFR + CSA + 0.95% (a) (b) | | | |
| Series 2019-INV3, Class A11, 30 Day Average SOFR + CSA + 0.95%, 5.50% Cap (a) (b) | | | |
| |
| Series 2020-2R, Class A1 (a) | | | |
| Credit Suisse Mortgage Trust |
| Series 2019-AFC1, Class A1 (a) | | | |
| Series 2020-NQM1, Class A1, steps up to 2.21% on 09/26/24 (a) (d) | | | |
| |
| Series 2020-NQM1, Class A1, steps up to 3.25% on 02/26/24 (a) (d) | | | |
| |
| Series 2019-7, Class A11, 1 Mo. CME Term SOFR + CSA + 0.90% (a) (b) | | | |
| Series 2019-8, Class A11, 1 Mo. CME Term SOFR + CSA + 0.85% (a) (b) | | | |
| Series 2019-INV1, Class A11, 1 Mo. CME Term SOFR + CSA + 0.95% (a) (b) | | | |
| Series 2019-LTV2, Class A11, 1 Mo. CME Term SOFR + CSA + 0.90% (a) (b) | | | |
| Series 2019-LTV3, Class A11, 1 Mo. CME Term SOFR + CSA + 0.85% (a) (b) | | | |
See Notes to Financial Statements
First Trust Enhanced Short Maturity ETF (FTSM)Portfolio of Investments (Continued)October 31, 2023 | | | | |
MORTGAGE-BACKED SECURITIES (Continued) |
| Collateralized Mortgage Obligations (Continued) | |
| JP Morgan Mortgage Trust (Continued) |
| Series 2020-2, Class A11, 1 Mo. CME Term SOFR + CSA + 0.80% (a) (b) | | | |
| Series 2020-LTV1, Class A11, 1 Mo. CME Term SOFR + CSA+ 1.00%, 6.00% Cap (a) (b) | | | |
| |
| Series 2020-INV1, Class A11, 1 Mo. CME Term SOFR + CSA + 0.90%, 6.00% Cap (a) (b) | | | |
| Residential Mortgage Loan Trust |
| Series 2019-3, Class A2 (a) | | | |
| Starwood Mortgage Residential Trust |
| Series 2020-1, Class A1 (a) | | | |
| Verus Securitization Trust |
| Series 2019-4, Class A2 (a) | | | |
| Series 2019-INV2, Class A2 (a) | | | |
| Series 2020-4, Class A2, steps up to 2.91% on 07/26/24 (a) (d) | | | |
| | |
| Commercial Mortgage-Backed Securities — 0.3% | |
| Citigroup Commercial Mortgage Trust |
| Series 2014-GC21, Class A4 | | | |
| Series 2014-GC23, Class A3 | | | |
| |
| Series 2019-KNSQ, Class A, 1 Mo. CME Term SOFR + CSA + 0.95% (a) (b) | | | |
| | |
| Total Mortgage-Backed Securities | |
| | |
CERTIFICATES OF DEPOSIT — 0.3% |
| | |
| Wells Fargo Bank N.A., SOFR + 0.42% (b) | | | |
| | | | |
U.S. TREASURY BILLS — 0.3% |
| | | | |
| | | | |
|
|
| Total Investments — 100.7% | |
| | |
| Net Other Assets and Liabilities — (0.7)% | |
| | |
| This security, sold within the terms of a private placement memorandum, is exempt from registration upon resale under Rule 144A of the Securities Act of 1933, as amended, and may be resold in transactions exempt from registration, normally to qualified institutional buyers. Pursuant to procedures adopted by the Trust’s Board of Trustees, this security has been determined to be liquid by First Trust Advisors L.P., the Fund’s advisor. Although market instability can result in periods of increased overall market illiquidity, liquidity for each security is determined based on security specific factors and assumptions, which require subjective judgment. At October 31, 2023, securities noted as such amounted to $457,257,953 or 6.1% of net assets. |
| Floating or variable rate security. |
| Fixed-to-floating or fixed-to-variable rate security. The interest rate shown reflects the fixed rate in effect at October 31, 2023. At a predetermined date, the fixed rate will change to a floating rate or a variable rate. |
See Notes to Financial Statements
First Trust Enhanced Short Maturity ETF (FTSM)Portfolio of Investments (Continued)October 31, 2023 | Step-up security. A security where the coupon increases or steps up at a predetermined date. |
| |
Abbreviations throughout the Portfolio of Investments: |
| – Chicago Mercantile Exchange |
| – Credit Spread Adjustment |
| – Secured Overnight Financing Rate |
Valuation InputsA summary of the inputs used to value the Fund’s investments as of October 31, 2023 is as follows (see Note 2A - Portfolio Valuation in the Notes to Financial Statements):
| | | Level 2
Significant
Observable
Inputs | Level 3
Significant
Unobservable
Inputs |
Corporate Bonds and Notes* | | | | |
| | | | |
Foreign Corporate Bonds and Notes* | | | | |
| | | | |
U.S. Government Bonds and Notes | | | | |
U.S. Government Agency Mortgage-Backed Securities | | | | |
Mortgage-Backed Securities | | | | |
| | | | |
| | | | |
| | | | |
| See Portfolio of Investments for industry breakout. |
See Notes to Financial Statements
First Trust Enhanced Short Maturity ETF (FTSM)Statement of Assets and Liabilities
October 31, 2023
| |
| |
| |
| |
| |
| |
| |
|
| |
| |
Investment securities purchased | |
Distributions to shareholders | |
| |
| |
| |
|
| |
| |
| |
Accumulated distributable earnings (loss) | |
| |
NET ASSET VALUE, per share | |
Number of shares outstanding (unlimited number of shares authorized, par value $0.01 per share) | |
| |
See Notes to Financial Statements
First Trust Enhanced Short Maturity ETF (FTSM)Statement of Operations
For the Year Ended October 31, 2023
| |
| |
| |
|
| |
| |
| |
Less fees waived by the investment advisor | |
| |
NET INVESTMENT INCOME (LOSS) | |
|
NET REALIZED AND UNREALIZED GAIN (LOSS): | |
Net realized gain (loss) on investments | |
Net change in unrealized appreciation (depreciation) on investments | |
NET REALIZED AND UNREALIZED GAIN (LOSS) | |
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS | |
See Notes to Financial Statements
First Trust Enhanced Short Maturity ETF (FTSM)Statements of Changes in Net Assets
| | |
| | |
Net investment income (loss) | | |
| | |
Net change in unrealized appreciation (depreciation) | | |
Net increase (decrease) in net assets resulting from operations | | |
|
DISTRIBUTIONS TO SHAREHOLDERS FROM: | | |
| | |
|
SHAREHOLDER TRANSACTIONS: | | |
Proceeds from shares sold | | |
| | |
Net increase (decrease) in net assets resulting from shareholder transactions | | |
Total increase (decrease) in net assets | | |
|
| | |
| | |
| | |
|
CHANGES IN SHARES OUTSTANDING: | | |
Shares outstanding, beginning of period | | |
| | |
| | |
Shares outstanding, end of period | | |
See Notes to Financial Statements
First Trust Enhanced Short Maturity ETF (FTSM)Financial Highlights
For a share outstanding throughout each period
| |
| | | | | |
Net asset value, beginning of period | | | | | |
Income from investment operations: | | | | | |
Net investment income (loss) | | | | | |
Net realized and unrealized gain (loss) | | | | | |
Total from investment operations | | | | | |
Distributions paid to shareholders from: | | | | | |
| | | | | |
Net asset value, end of period | | | | | |
| | | | | |
|
Ratios to average net assets/supplemental data: | | | | | |
Net assets, end of period (in 000’s) | | | | | |
Ratio of total expenses to average net assets | | | | | |
Ratio of net expenses to average net assets | | | | | |
Ratio of net investment income (loss) to average net assets | | | | | |
Portfolio turnover rate (c) | | | | | |
| Based on average shares outstanding. |
| Total return is calculated assuming an initial investment made at the net asset value at the beginning of the period, reinvestment of all distributions at net asset value during the period, and redemption at net asset value on the last day of the period. The returns presented do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. Total return is calculated for the time period presented and is not annualized for periods of less than a year. The total returns would have been lower if certain fees had not been waived and expenses reimbursed by the investment advisor. |
| 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
Notes to Financial Statements
First Trust Enhanced Short Maturity ETF (FTSM)October 31, 2023 1. Organization
First Trust Exchange-Traded Fund IV (the “Trust”) is an open-end management investment company organized as a Massachusetts business trust on September 15, 2010, and is registered with the Securities and Exchange Commission under the Investment Company Act of 1940, as amended (the “1940 Act”).
The Trust currently consists of eighteen exchange-traded funds that are offering shares. This report covers the First Trust Enhanced Short Maturity ETF (the “Fund”), a diversified series of the Trust, which trades under the ticker “FTSM” on Nasdaq, Inc. The Fund represents a separate series of shares of beneficial interest in the Trust. Unlike conventional mutual funds, the Fund issues and redeems shares on a continuous basis, at net asset value (“NAV”), only in large blocks of shares known as “Creation Units.”
The Fund is an actively managed exchange-traded fund (“ETF”). The Fund’s investment objective is to seek current income, consistent with preservation of capital and daily liquidity. Under normal market conditions, the Fund intends to achieve its investment objective by investing at least 80% of its net assets in a portfolio of U.S. dollar-denominated fixed- and variable-rate debt securities, including securities issued or guaranteed by the U.S. government or its agencies, instrumentalities or U.S. government-sponsored entities, residential and commercial mortgage-backed securities, asset-backed securities, U.S. corporate bonds, fixed income securities issued by non-U.S. corporations and governments, municipal obligations, privately issued securities and other debt securities bearing fixed or floating interest rates. The Fund may also invest in money market securities. The Fund may invest in investment companies, such as ETFs, that invest primarily in debt securities. The Fund intends to limit its investments in privately-issued, non-agency sponsored mortgage- and asset-backed securities to 20% of its net assets. The Fund may also invest up to 20% of its net assets in floating rate loans representing amounts borrowed by companies or other entities from banks and other lenders. A significant portion of these loans may be rated below investment grade or unrated. Floating rate loans held by the Fund may be senior or subordinate obligations of the borrower and may or may not be secured by collateral. Under normal market conditions, the Fund’s portfolio is expected to have an average duration of less than one year and an average maturity of less than three years. There can be no assurance that the Fund will achieve its investment objective. The Fund may not be appropriate for all investors.
2. Significant Accounting Policies
The Fund is considered an investment company and follows accounting and reporting guidance under Financial Accounting Standards Board Accounting Standards Codification Topic 946, “Financial Services-Investment Companies.” The 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 readily available market quotations such as last sale or official closing prices from a national or foreign exchange (i.e., a regulated market) and are primarily obtained from third-party pricing services. Fair value prices represent any prices not considered market value prices and are either obtained from a third-party pricing service or are determined by the Pricing Committee of the Fund’s investment advisor, First Trust Advisors L.P. (“First Trust” or the “Advisor”), in accordance with valuation procedures approved by the Trust’s Board of Trustees, and in accordance with provisions of the 1940 Act and rules thereunder. Investments valued by the Advisor’s Pricing Committee, if any, are footnoted as such in the footnotes to the Portfolio of Investments. The Fund’s investments are valued as follows:
Corporate bonds, corporate notes, U.S. government securities, mortgage-backed securities, asset-backed securities, certificates of deposit 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 Advisor’s Pricing Committee, which may use the following valuation inputs when available:
Notes to Financial Statements (Continued)
First Trust Enhanced Short Maturity ETF (FTSM)October 31, 2023 7)
reference data including market research publications.
Pricing services generally value fixed-income securities assuming orderly transactions of an institutional round lot size, but a Fund may hold or transact in such securities in smaller, odd lot sizes. Odd lots may trade at lower prices than institutional round lots.
Equity securities traded in an over-the-counter market are valued at the close price or the last trade price.
Commercial paper is 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.
Senior Floating-Rate Loan Interests (“Senior Loans”)(1) are not listed on any securities exchange or board of trade. Senior Loans are typically bought and sold by institutional investors in individually negotiated private transactions that function in many respects like an over-the-counter secondary market, although typically no formal market-makers exist. This market, while having grown substantially since its inception, generally has fewer trades and less liquidity than the secondary market for other types of securities. Some Senior Loans have few or no trades, or trade infrequently, and information regarding a specific Senior Loan may not be widely available or may be incomplete. Accordingly, determinations of the market value of Senior Loans may be based on infrequent and dated information. Because there is less reliable, objective data available, elements of judgment may play a greater role in valuation of Senior Loans than for other types of securities. Typically, Senior Loans are valued using information provided by a third-party pricing service. The third-party pricing service primarily uses over-the-counter pricing from dealer runs and broker quotes from indicative sheets to value the Senior Loans.
Certain securities may not be able to be priced by pre-established pricing methods. Such securities may be valued by 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 most recent price provided by a pricing service;
2)
available market prices for the fixed-income security;
3)
the fundamental business data relating to the borrower/issuer;
4)
an evaluation of the forces which influence the market in which these securities are purchased and sold;
5)
the type, size and cost of a security;
(1)
The terms “security” and “securities” used throughout the Notes to Financial Statements include Senior Loans.
Notes to Financial Statements (Continued)
First Trust Enhanced Short Maturity ETF (FTSM)October 31, 2023 6)
the financial statements of the borrower/issuer or the financial condition of the country of issue;
7)
the credit quality and cash flow of the borrower/issuer, or country of issue, based on the Pricing Committee’s, sub-advisor’s or portfolio manager’s analysis, as applicable, or external analysis;
8)
the information as to any transactions in or offers for the security;
9)
the price and extent of public trading in similar securities of the borrower/issuer, or comparable companies;
11)
the quality, value and salability of collateral, if any, securing the security;
12)
the business prospects of the borrower/issuer, including any ability to obtain money or resources from a parent or affiliate and an assessment of the borrower’s/issuer’s management (for corporate debt only);
13)
the prospects for the borrower’s/issuer’s industry, and multiples (of earnings and/or cash flows) being paid for similar businesses in that industry (for corporate debt only);
14)
the borrower’s/issuer’s ability to access additional liquidity through public and/or private markets; and
15)
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:
• Level 1 – Level 1 inputs are quoted prices in active markets for identical investments. An active market is a market in which transactions for the investment occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
• Level 2 – Level 2 inputs are observable inputs, either directly or indirectly, and include the following:
o Quoted prices for similar investments in active markets.
o Quoted prices for identical or similar investments in markets that are non-active. A non-active market is a market where there are few transactions for the investment, the prices are not current, or price quotations vary substantially either over time or among market makers, or in which little information is released publicly.
o Inputs other than quoted prices that are observable for the investment (for example, interest rates and yield curves observable at commonly quoted intervals, volatilities, prepayment speeds, loss severities, credit risks, and default rates).
o Inputs that are derived principally from or corroborated by observable market data by correlation or other means.
• Level 3 – Level 3 inputs are unobservable inputs. Unobservable inputs may reflect the reporting entity’s own assumptions about the assumptions that market participants would use in pricing the investment.
The inputs or methodologies used for valuing investments are not necessarily an indication of the risk associated with investing in those investments. A summary of the inputs used to value the Fund’s investments as of October 31, 2023, is included with the Fund’s Portfolio of Investments.
B. Securities Transactions and Investment Income
Securities transactions are recorded as of the trade date. Realized gains and losses from securities transactions are recorded on the identified cost basis. Dividend income is recorded on the ex-dividend date. Interest income is recorded daily on the accrual basis. Amortization of premiums and accretion of discounts are recorded using the effective interest method.
The United Kingdom’s Financial Conduct Authority (the “FCA”), which regulates the London Interbank Offered Rates (“LIBOR”), ceased making LIBOR available as a reference rate over a phase-out period that began December 31, 2021. The overnight and 12-month USD LIBOR settings permanently ceased as of June 30, 2023. The FCA announced that the 1-, 3- and 6-month USD LIBOR settings will continue to be published using a synthetic methodology to serve as a fallback for non-U.S. contracts until September 2024. In response to the discontinuation of LIBOR, investors have added fallback provisions to existing contracts for investments whose value is tied to LIBOR, with most fallback provisions requiring the adoption of the Secured Overnight Financing Rate (“SOFR”) as a replacement rate. There is no assurance that any alternative reference rate, including SOFR, will be similar to or produce the same value or economic equivalence as LIBOR or that instruments using an alternative rate will have the same volume or liquidity. At this time, it is not possible to predict the full impact of the elimination of LIBOR and the establishment of an alternative reference rate on the Fund or its investments.
Notes to Financial Statements (Continued)
First Trust Enhanced Short Maturity ETF (FTSM)October 31, 2023 C. Dividends and Distributions to Shareholders
Dividends from net investment income of the Fund, 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, are distributed at least annually. The Fund may also designate a portion of the amount paid to redeeming shareholders as a distribution for tax purposes.
Distributions in cash may be reinvested automatically in additional whole shares only if the broker through whom the shares were purchased makes such option available. Such shares will generally be reinvested by the broker based upon the market price of those shares and investors may be subject to customary brokerage commissions charged by the broker.
Distributions from net investment income and realized capital gains are determined in accordance with 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 NAV per share. Temporary differences, which arise from recognizing certain items of income, expense and gain/loss in different periods for financial statement and tax purposes, will reverse at some time in the future.
The tax character of distributions paid during the fiscal years ended October 31, 2023 and 2022 was as follows:
As of October 31, 2023, the components of distributable earnings on a tax basis for the Fund were as follows:
Undistributed ordinary income | |
Accumulated capital and other gain (loss) | |
Net unrealized appreciation (depreciation) | |
D. 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 2020, 2021, 2022, and 2023 remain open to federal and state audit. As of October 31, 2023, management has evaluated the application of these standards to the Fund and has determined that no provision for income tax is required in the Fund’s 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, 2023, for federal income tax purposes, the Fund had $14,455,601 of capital loss carryforwards available, to the extent provided by regulations, to offset future capital gains. To the extent that these loss carryforwards are used to offset future capital gains, it is probable that the capital gains so offset will not be distributed to the Fund’s shareholders.
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, 2023, the Fund had no net late year ordinary or capital losses.
In order to present paid-in capital and accumulated distributable earnings (loss) (which consists of accumulated net investment income (loss), accumulated net realized gain (loss) on investments and net unrealized appreciation (depreciation) on investments) on the Statement of Assets and Liabilities that more closely represent their tax character, certain adjustments have been made to paid-in
Notes to Financial Statements (Continued)
First Trust Enhanced Short Maturity ETF (FTSM)October 31, 2023 capital, accumulated net investment income (loss) and accumulated net realized gain (loss) on investments. These adjustments are primarily due to the difference between book and tax treatments of income and gains on various investment securities held by the Fund. The results of operations and net assets were not affected by these adjustments. For the fiscal year ended October 31, 2023, there were no tax adjustments made to accumulated distributable earnings (loss) accounts due to differences between book and tax treatments.
As of October 31, 2023, the aggregate cost, gross unrealized appreciation, gross unrealized depreciation, and net unrealized appreciation/(depreciation) on investments (including short positions and derivatives, if any) for federal income tax purposes were as follows:
| Gross Unrealized
Appreciation | Gross Unrealized
(Depreciation) | Net Unrealized
Appreciation
(Depreciation) |
| | | |
E. Expenses
Expenses, other than the investment advisory fee and other excluded expenses, are paid by the Advisor (see Note 3).
3. Investment Advisory Fee, Affiliated Transactions and Other Fee Arrangements
First Trust, the investment advisor to the Fund, is a limited partnership with one limited partner, Grace Partners of DuPage L.P., and one general partner, The Charger Corporation. The Charger Corporation is an Illinois corporation controlled by James A. Bowen, Chief Executive Officer of First Trust. First Trust is responsible for the selection and ongoing monitoring of the 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, license fees and other services, but excluding fee payments under the Investment Management Agreement, interest, taxes, acquired fund fees and expenses with the exception of those attributable to affiliated funds, brokerage commissions and other expenses connected with the execution of portfolio transactions, distribution and service fees payable pursuant to a Rule 12b-1 plan, if any, and extraordinary expenses. The annual unitary management fee payable by the Fund to First Trust for these services will be reduced at certain levels of the Fund’s net assets (“breakpoints”) and calculated pursuant to the following schedule:
| |
Fund net assets up to and including $2.5 billion | |
Fund net assets greater than $2.5 billion up to and including $5 billion | |
Fund net assets greater than $5 billion up to and including $7.5 billion | |
Fund net assets greater than $7.5 billion up to and including $10 billion | |
Fund net assets greater than $10 billion | |
First Trust had contractually agreed to waive management fees of 0.10% (0.20% prior to March 1, 2023) of average daily net assets until June 1, 2023. At that point, the waiver agreement expired and was not renewed. During any period in which the waiver agreement was in effect, the Fund was not eligible for the breakpoints described above. Pursuant to a separate contractual agreement between the Trust, on behalf of the Fund, and First Trust, the management fees paid to First Trust will be reduced by the portion of the management fees earned by First Trust from the Fund for assets invested in other investment companies advised by First Trust. This contractual agreement shall continue until the earlier of (i) its termination at the direction of the Trust’s Board of Trustees or (ii) upon termination of the Fund’s management agreement with First Trust; however, it is expected to remain in place at least until March 1, 2024. First Trust does not have the right to recover the fees waived that are attributable to the assets invested in other investment companies advised by First Trust. During the fiscal year ended October 31, 2023, the Advisor waived fees of $7,022,099.
The Trust has multiple service agreements with The Bank of New York Mellon (“BNYM”). Under the service agreements, BNYM performs custodial, fund accounting, certain administrative services, and transfer agency services for the Fund. As custodian, BNYM is responsible for custody of the Fund’s assets. As fund accountant and administrator, BNYM is responsible for maintaining the books and records of the Fund’s securities and cash. As transfer agent, BNYM is responsible for maintaining shareholder records for the Fund. BNYM is a subsidiary of The Bank of New York Mellon Corporation, a financial holding company.
Notes to Financial Statements (Continued)
First Trust Enhanced Short Maturity ETF (FTSM)October 31, 2023 Each Trustee who is not an officer or employee of First Trust, any sub-advisor or any of their affiliates (“Independent Trustees”) is paid a fixed annual retainer that is allocated equally among each fund in the First Trust Fund Complex. Each Independent Trustee is also paid an annual per fund fee that varies based on whether the fund is a closed-end or other actively managed fund, a target outcome fund or an index fund.
Additionally, the Lead Independent Trustee and the Chairs of the Audit Committee, Nominating and Governance Committee and Valuation Committee are paid annual fees to serve in such capacities, with such compensation allocated pro rata among each fund in the First Trust Fund Complex based on net assets. Independent Trustees are reimbursed for travel and out-of-pocket expenses in connection with all meetings. The Lead Independent Trustee and Committee Chairs rotate every three years. The officers and “Interested” Trustee receive no compensation from the Trust for acting in such capacities.
4. Purchases and Sales of Securities
The costs of purchases of U.S. Government securities and non-U.S. Government securities, excluding short-term investments, for the fiscal year ended October 31, 2023, were $821,179,727 and $2,708,663,757, respectively. The proceeds from sales and paydowns of U.S. Government securities and non-U.S. Government securities, excluding short-term investments, for the fiscal year ended October 31, 2023 were $419,411,425 and $1,535,962,422, respectively.
For the fiscal year ended October 31, 2023, the Fund had no in-kind transactions.
5. Creations, Redemptions and Transaction Fees
The Fund generally issues and redeems its shares in primary market transactions through a creation and redemption mechanism and does not sell or redeem individual shares. Instead, financial entities known as “Authorized Participants” have contractual arrangements with the Fund or one of the Fund’s service providers to purchase and redeem Fund shares directly with the Fund in large blocks of shares known as “Creation Units.” Prior to the start of trading on every business day, the Fund publishes through the National Securities Clearing Corporation the “basket” of securities, cash or other assets that it will accept in exchange for a Creation Unit of the Fund’s shares. An Authorized Participant that wishes to effectuate a creation of the Fund’s shares deposits with the Fund the “basket” of securities, cash or other assets identified by the Fund that day, and then receives the Creation Unit of the Fund’s shares in return for those assets. After purchasing a Creation Unit, the Authorized Participant may continue to hold the Fund’s shares or sell them in the secondary market. The redemption process is the reverse of the purchase process: the Authorized Participant redeems a Creation Unit of the Fund’s shares for a basket of securities, cash or other assets. The combination of the creation and redemption process with secondary market trading in the Fund’s shares and underlying securities provides arbitrage opportunities that are designed to help keep the market price of the Fund’s shares at or close to the NAV per share of the Fund.
The Fund imposes fees in connection with the purchase of Creation Units. These fees may vary based upon various fact-based circumstances, including, but not limited to, the composition of the securities included in the Creation Unit or the countries in which the transactions are settled. The price for each Creation Unit will equal the daily NAV per share of the Fund times the number of shares in a Creation Unit, plus the fees described above and, if applicable, any operational processing and brokerage costs, transfer fees, stamp taxes and part or all of the spread between the expected bid and offer side of the market related to the securities comprising the creation basket.
The Fund also imposes fees in connection with the redemption of Creation Units. These fees may vary based upon various fact-based circumstances, including, but not limited to, the composition of the securities included in the Creation Unit or the countries in which the transactions are settled. The price received for each Creation Unit will equal the daily NAV per share of the Fund times the number of shares in a Creation Unit, minus the fees described above and, if applicable, any operational processing and brokerage costs, transfer fees, stamp taxes and part or all of the spread between the expected bid and offer side of the market related to the securities comprising the redemption basket. Investors who use the services of a broker or other such intermediary in addition to an Authorized Participant to effect a redemption of a Creation Unit may also be assessed an amount to cover the cost of such services. The redemption fee charged by the Fund will comply with Rule 22c-2 of the 1940 Act which limits redemption fees to no more than 2% of the value of the shares redeemed.
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
Notes to Financial Statements (Continued)
First Trust Enhanced Short Maturity ETF (FTSM)October 31, 2023 of Creation Units or the provision of investor services. FTP may also use this amount to compensate securities dealers or other persons that are Authorized Participants for providing distribution assistance, including broker-dealer and shareholder support and educational and promotional services.
No 12b-1 fees are currently paid by the Fund, and pursuant to a contractual arrangement, no 12b-1 fees will be paid any time before March 31, 2025.
7. Indemnification
The Trust, on behalf of the Fund, has a variety of indemnification obligations under contracts with its service providers. The Trust’s maximum exposure under these arrangements is unknown. However, the Trust has not had prior claims or losses pursuant to these contracts and expects the risk of loss to be remote.
8. Subsequent Events
Management has evaluated the impact of all subsequent events on the Fund through the date the financial statements were issued and has determined that there were no subsequent events requiring recognition or disclosure in the financial statements that have not already been disclosed.
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Trustees of First Trust Exchange-Traded Fund IV:
Opinion on the Financial Statements and Financial Highlights
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of First Trust Enhanced Short Maturity ETF (the “Fund”), one of the funds constituting the First Trust Exchange-Traded Fund IV, as of October 31, 2023, the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, the financial highlights for each of the five years in the period then ended, and the related notes. In our opinion, the financial statements and financial highlights present fairly, in all material respects, the financial position of the Fund as of October 31, 2023, and the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on the Fund’s financial statements and financial highlights based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Fund in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement, whether due to error or fraud. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements and financial highlights, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements and financial highlights. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and financial highlights. Our procedures included confirmation of securities owned as of October 31, 2023, by correspondence with the custodian and brokers; when replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
/s/ Deloitte & Touche, LLP
Chicago, Illinois
December 20, 2023
We have served as the auditor of one or more First Trust investment companies since 2001.
First Trust Enhanced Short Maturity ETF (FTSM)October 31, 2023 (Unaudited) Proxy Voting Policies and Procedures
A description of the policies and procedures that the Trust uses to determine how to vote proxies and information on how the Fund voted proxies relating to its portfolio securities during the most recent 12-month period ended June 30 is available (1) without charge, upon request, by calling (800) 988-5891; (2) on the Fund’s website at www.ftportfolios.com; and (3) on the Securities and Exchange Commission’s (“SEC”) website at www.sec.gov.
Portfolio Holdings
The Fund files portfolio holdings information for each month in a fiscal quarter within 60 days after the end of the relevant fiscal quarter on Form N-PORT. Portfolio holdings information for the third month of each fiscal quarter will be publicly available on the SEC’s website at www.sec.gov. The Fund’s complete schedule of portfolio holdings for the second and fourth quarters of each fiscal year is included in the semi-annual and annual reports to shareholders, respectively, and is filed with the SEC on Form N-CSR. The semi-annual and annual report for the Fund is available to investors within 60 days after the period to which it relates. The Fund’s Forms N-PORT and Forms N-CSR are available on the SEC’s website listed above.
Federal Tax Information
Distributions paid to foreign shareholders during the Fund’s fiscal year ended October 31, 2023 that were properly designated by the Fund as “interest-related dividends” or “short-term capital gain dividends,” may not be subject to federal income tax provided that the income was earned directly by such foreign shareholders.
Of the ordinary income (including short-term capital gain) distributions made by the Fund during the fiscal year ended October 31, 2023, none qualify for the corporate dividends received deduction available to corporate shareholders or as qualified dividend income.
Risk Considerations
Risks are inherent in all investing. Certain general risks that may be applicable to a Fund are identified below, but not all of the material risks relevant to each Fund are included in this report and not all of the risks below apply to each Fund. The material risks of investing in each Fund are spelled out in its prospectus, statement of additional information and other regulatory filings. Before investing, you should consider each Fund’s investment objective, risks, charges and expenses, and read each Fund’s prospectus and statement of additional information carefully. You can download each Fund’s prospectus at www.ftportfolios.com or contact First Trust Portfolios L.P. at (800) 621-1675 to request a prospectus, which contains this and other information about each Fund.
Concentration Risk. To the extent that a fund is able to invest a significant percentage of its assets in a single asset class or the securities of issuers within the same country, state, region, industry or sector, an adverse economic, business or political development may affect the value of the fund’s investments more than if the fund were more broadly diversified. A fund that tracks an index will be concentrated to the extent the fund’s corresponding index is concentrated. A concentration makes a fund more susceptible to any single occurrence and may subject the fund to greater market risk than a fund that is more broadly diversified.
Credit Risk. Credit risk is the risk that an issuer of a security will be unable or unwilling to make dividend, interest and/or principal payments when due and the related risk that the value of a security may decline because of concerns about the issuer’s ability to make such payments.
Cyber Security Risk. The funds are susceptible to potential operational risks through breaches in cyber security. A breach in cyber security refers to both intentional and unintentional events that may cause a fund to lose proprietary information, suffer data corruption or lose operational capacity. Such events could cause a fund to incur regulatory penalties, reputational damage, additional compliance costs associated with corrective measures and/or financial loss. In addition, cyber security breaches of a fund’s third-party service providers, such as its administrator, transfer agent, custodian, or sub-advisor, as applicable, or issuers in which the fund invests, can also subject a fund to many of the same risks associated with direct cyber security breaches.
Defined Outcome Funds Risk. To the extent a fund’s investment strategy is designed to deliver returns tied to the price performance of an underlying ETF, an investor may not realize the returns the fund seeks to achieve if that investor does not hold shares for the entire target outcome period. In the event an investor purchases shares after the first day of the target outcome period or sells shares prior to the end of the target outcome period, the buffer that the fund seeks to provide against a decline in the value of the underlying ETF may not be available, the enhanced returns that the fund seeks to provide (if any) may not be available and the investor may not participate in a gain in the value of the underlying ETF up to the cap for the investor’s investment period. Additionally, the fund will not participate in gains of the underlying ETF above the cap and a shareholder may lose their entire investment. If the fund seeks enhanced returns, there are certain time periods when the value of the fund may fall faster than the value of the underlying ETF, and it is very unlikely that, on any given day during which the underlying ETF share price increases in value, the fund’s share price will
Additional Information (Continued)
First Trust Enhanced Short Maturity ETF (FTSM)October 31, 2023 (Unaudited) increase at the same rate as the enhanced returns sought by the fund, which is designed for an entire target outcome period. Trading flexible exchange options involves risks different from, or possibly greater than, the risks associated with investing directly in securities, such as less liquidity and correlation and valuation risks. A fund may experience substantial downside from specific flexible exchange option positions and certain positions may expire worthless.
Derivatives Risk. To the extent a fund uses derivative instruments such as futures contracts, options contracts and swaps, the fund may experience losses because of adverse movements in the price or value of the underlying asset, index or rate, which may be magnified by certain features of the derivative. These risks are heightened when a fund’s portfolio managers use derivatives to enhance the fund’s return or as a substitute for a position or security, rather than solely to hedge (or offset) the risk of a position or security held by the fund.
Equity Securities Risk. To the extent a fund invests in equity securities, the value of the fund’s shares will fluctuate with changes in the value of the equity securities. Equity securities prices fluctuate for several reasons, including changes in investors’ perceptions of the financial condition of an issuer or the general condition of the relevant stock market, such as market volatility, or when political or economic events affecting the issuers occur. In addition, common stock prices may be particularly sensitive to rising interest rates, as the cost of capital rises and borrowing costs increase. Equity securities may decline significantly in price over short or extended periods of time, and such declines may occur in the equity market as a whole, or they may occur in only a particular country, company, industry or sector of the market.
ETF Risk. The shares of an ETF trade like common stock and represent an interest in a portfolio of securities. The risks of owning an ETF generally reflect the risks of owning the underlying securities, although lack of liquidity in an ETF could result in it being more volatile and ETFs have management fees that increase their costs. Shares of an ETF trade on an exchange at market prices rather than net asset value, which may cause the shares to trade at a price greater than net asset value (premium) or less than net asset value (discount). In times of market stress, decisions by market makers to reduce or step away from their role of providing a market for an ETF’s shares, or decisions by an ETF’s authorized participants that they are unable or unwilling to proceed with creation and/or redemption orders of an ETF’s shares, could result in shares of the ETF trading at a discount to net asset value and in greater than normal intraday bid-ask spreads.
Fixed Income Securities Risk. To the extent a fund invests in fixed income securities, the fund will be subject to credit risk, income risk, interest rate risk, liquidity risk and prepayment risk. Income risk is the risk that income from a fund’s fixed income investments could decline during periods of falling interest rates. Interest rate risk is the risk that the value of a fund’s fixed income securities will decline because of rising interest rates. Liquidity risk is the risk that a security cannot be purchased or sold at the time desired, or cannot be purchased or sold without adversely affecting the price. Prepayment risk is the risk that the securities will be redeemed or prepaid by the issuer, resulting in lower interest payments received by the fund. In addition to these risks, high yield securities, or “junk” bonds, are subject to greater market fluctuations and risk of loss than securities with higher ratings, and the market for high yield securities is generally smaller and less liquid than that for investment grade securities.
Index or Model Constituent Risk. Certain funds may be a constituent of one or more indices or ETF models. As a result, such a fund may be included in one or more index-tracking exchange-traded funds or mutual funds. Being a component security of such a vehicle could greatly affect the trading activity involving a fund, the size of the fund and the market volatility of the fund. Inclusion in an index could increase demand for the fund and removal from an index could result in outsized selling activity in a relatively short period of time. As a result, a fund’s net asset value could be negatively impacted and the fund’s market price may be significantly below its net asset value during certain periods. In addition, index rebalances may potentially result in increased trading activity in a fund’s shares.
Index Provider Risk. To the extent a fund seeks to track an index, it is subject to Index Provider Risk. There is no assurance that the Index Provider will compile the Index accurately, or that the Index will be determined, maintained, constructed, reconstituted, rebalanced, composed, calculated or disseminated accurately. To correct any such error, the Index Provider may carry out an unscheduled rebalance or other modification of the Index constituents or weightings, which may increase the fund’s costs. The Index Provider does not provide any representation or warranty in relation to the quality, accuracy or completeness of data in the Index, and it does not guarantee that the Index will be calculated in accordance with its stated methodology. Losses or costs associated with any Index Provider errors generally will be borne by the fund and its shareholders.
Investment Companies Risk. To the extent a fund invests in the securities of other investment vehicles, the fund will incur additional fees and expenses that would not be present in a direct investment in those investment vehicles. Furthermore, the fund’s investment performance and risks are directly related to the investment performance and risks of the investment vehicles in which the fund invests.
Additional Information (Continued)
First Trust Enhanced Short Maturity ETF (FTSM)October 31, 2023 (Unaudited) LIBOR Risk. To the extent a fund invests in floating or variable rate obligations that use the London Interbank Offered Rate (“LIBOR”) as a reference interest rate, it is subject to LIBOR Risk. The United Kingdom’s Financial Conduct Authority, which regulates LIBOR, has ceased making LIBOR available as a reference rate over a phase-out period that began December 31, 2021. There is no assurance that any alternative reference rate, including the Secured Overnight Financing Rate (“SOFR”) will be similar to or produce the same value or economic equivalence as LIBOR or that instruments using an alternative rate will have the same volume or liquidity. The unavailability or replacement of LIBOR may affect the value, liquidity or return on certain fund investments and may result in costs incurred in connection with closing out positions and entering into new trades. Any potential effects of the transition away from LIBOR on the fund or on certain instruments in which the fund invests can be difficult to ascertain, and they may vary depending on a variety of factors, and they could result in losses to the fund.
Management Risk. To the extent that a fund is actively managed, it is subject to management risk. In managing an actively-managed fund’s investment portfolio, the fund’s portfolio managers will apply investment techniques and risk analyses that may not have the desired result. There can be no guarantee that a fund will meet its investment objective.
Market Risk. Market risk is the risk that a particular security, or shares of a fund in general, may fall in value. Securities held by a fund, as well as shares of a fund itself, are subject to market fluctuations caused by factors such as general economic conditions, political events, regulatory or market developments, changes in interest rates and perceived trends in securities prices. Shares of a fund could decline in value or underperform other investments as a result of the risk of loss associated with these market fluctuations. In addition, local, regional or global events such as war, acts of terrorism, spread of infectious diseases or other public health issues, recessions, or other events could have a significant negative impact on a fund and its investments. Such events may affect certain geographic regions, countries, sectors and industries more significantly than others. In February 2022, Russia invaded Ukraine which has caused and could continue to cause significant market disruptions and volatility within the markets in Russia, Europe, and the United States. The hostilities and sanctions resulting from those hostilities could have a significant impact on certain fund investments as well as fund performance. The COVID-19 global pandemic and the ensuing policies enacted by governments and central banks have caused and may continue to cause significant volatility and uncertainty in global financial markets. While the U.S. has resumed “reasonably” normal business activity, many countries continue to impose lockdown measures. Additionally, there is no guarantee that vaccines will be effective against emerging variants of the disease. These events also adversely affect the prices and liquidity of a fund’s portfolio securities or other instruments and could result in disruptions in the trading markets. Any of such circumstances could have a materially negative impact on the value of a fund’s shares and result in increased market volatility. During any such events, a fund’s shares may trade at increased premiums or discounts to their net asset value and the bid/ask spread on a fund’s shares may widen.
Non-U.S. Securities Risk. To the extent a fund invests in non-U.S. securities, it is subject to additional risks not associated with securities of domestic issuers. Non-U.S. securities are subject to higher volatility than securities of domestic issuers due to: possible adverse political, social or economic developments; restrictions on foreign investment or exchange of securities; capital controls; lack of liquidity; currency exchange rates; excessive taxation; government seizure of assets; the imposition of sanctions by foreign governments; different legal or accounting standards; and less government supervision and regulation of exchanges in foreign countries. Investments in non-U.S. securities may involve higher costs than investments in U.S. securities, including higher transaction and custody costs, as well as additional taxes imposed by non-U.S. governments. These risks may be heightened for securities of companies located, or with significant operations, in emerging market countries.
Operational Risk. Each fund is subject to risks arising from various operational factors, including, but not limited to, human error, processing and communication errors, errors of a fund’s service providers, counterparties or other third-parties, failed or inadequate processes and technology or systems failures. Each fund relies on third-parties for a range of services, including custody. Any delay or failure relating to engaging or maintaining such service providers may affect a fund’s ability to meet its investment objective. Although the funds and the funds’ investment advisor seek to reduce these operational risks through controls and procedures, there is no way to completely protect against such risks.
Passive Investment Risk. To the extent a fund seeks to track an index, the fund will invest in the securities included in, or representative of, the index regardless of their investment merit. A fund generally will not attempt to take defensive positions in declining markets.
Preferred Securities Risk. Preferred securities combine some of the characteristics of both common stocks and bonds. Preferred securities are typically subordinated to bonds and other debt securities in a company’s capital structure in terms of priority to corporate income, subjecting them to greater credit risk than those debt securities. Generally, holders of preferred securities have no voting rights with respect to the issuing company unless preferred dividends have been in arrears for a specified number of periods, at which time the preferred security holders may obtain limited rights. In certain circumstances, an issuer of preferred securities may defer payment on the securities and, in some cases, redeem the securities prior to a specified date. Preferred securities may also be substantially less liquid than other securities, including common stock.
Additional Information (Continued)
First Trust Enhanced Short Maturity ETF (FTSM)October 31, 2023 (Unaudited) Valuation Risk. The valuation of certain securities may carry more risk than that of common stock. Uncertainties in the conditions of the financial markets, unreliable reference data, lack of transparency and inconsistency of valuation models and processes may lead to inaccurate asset pricing. A fund may hold investments in sizes smaller than institutionally sized round lot positions (sometimes referred to as odd lots). However, third-party pricing services generally provide evaluations on the basis of institutionally-sized round lots. If a fund sells certain of its investments in an odd lot transaction, the sale price may be less than the value at which such securities have been held by the fund. Odd lots often trade at lower prices than institutional round lots. There is no assurance that the fund will be able to sell a portfolio security at the price established by the pricing service, which could result in a loss to the fund.
NOT FDIC INSURED NOT BANK GUARANTEED MAY LOSE VALUE
Advisory Agreement
Board Considerations Regarding Approval of the Continuation of the Investment Management Agreement
The Board of Trustees of First Trust Exchange-Traded Fund IV (the “Trust”), including the Independent Trustees, unanimously approved the continuation of the Investment Management Agreement (the “Agreement”) with First Trust Advisors L.P. (the “Advisor”) on behalf of the First Trust Enhanced Short Maturity ETF (the “Fund”). The Board approved the continuation of the Agreement for a one-year period ending June 30, 2024 at a meeting held on June 4–5, 2023. The Board determined that the continuation of the Agreement is in the best interests of the Fund in light of the nature, extent and quality of the services provided and such other matters as the Board considered to be relevant in the exercise of its business judgment.
To reach this determination, the Board considered its duties under the Investment Company Act of 1940, as amended (the “1940 Act”), as well as under the general principles of state law, in reviewing and approving advisory contracts; the requirements of the 1940 Act in such matters; the fiduciary duty of investment advisors with respect to advisory agreements and compensation; the standards used by courts in determining whether investment company boards have fulfilled their duties; and the factors to be considered by the Board in voting on such agreements. At meetings held on April 17, 2023 and June 4–5, 2023, the Board, including the Independent Trustees, reviewed materials provided by the Advisor responding to requests for information from counsel to the Independent Trustees, submitted on behalf of the Independent Trustees, that, among other things, outlined: the services provided by the Advisor to the Fund (including the relevant personnel responsible for these services and their experience); the unitary fee rate schedule payable by the Fund as compared to fees charged to a peer group of funds (the “Expense Group”) and a broad peer universe of funds (the “Expense Universe”), each assembled by Broadridge Financial Solutions, Inc. (“Broadridge”), an independent source, and as compared to fees charged to other clients of the Advisor, including other exchange-traded funds (“ETFs”) managed by the Advisor; the expense ratio of the Fund as compared to expense ratios of the funds in the Fund’s Expense Group and Expense Universe; performance information for the Fund, including comparisons of the Fund’s performance to that of one or more relevant benchmark indexes and to that of a performance group of funds and a broad performance universe of funds (the “Performance Universe”), each assembled by Broadridge; the nature of expenses incurred in providing services to the Fund and the potential for the Advisor to realize economies of scale, if any; profitability and other financial data for the Advisor; any indirect benefits to the Advisor and its affiliate, First Trust Portfolios L.P. (“FTP”); and information on the Advisor’s compliance program. The Board reviewed initial materials with the Advisor at the meeting held on April 17, 2023, prior to which the Independent Trustees and their counsel met separately to discuss the information provided by the Advisor. Following the April meeting, counsel to the Independent Trustees, on behalf of the Independent Trustees, requested certain clarifications and supplements to the materials provided, and the information provided in response to those requests was considered at an executive session of the Independent Trustees and their counsel held prior to the June 4–5, 2023 meeting, as well as at the June meeting. The Board applied its business judgment to determine whether the arrangement between the Trust and the Advisor continues to be a reasonable business arrangement from the Fund’s perspective. The Board determined that, given the totality of the information provided with respect to the Agreement, the Board had received sufficient information to renew the Agreement. The Board considered that shareholders chose to invest or remain invested in the Fund knowing that the Advisor manages the Fund and knowing the Fund’s unitary fee.
In reviewing the Agreement, the Board considered the nature, extent and quality of the services provided by the Advisor under the Agreement. The Board considered that the Advisor is responsible for the overall management and administration of the Trust and the Fund and reviewed all of the services provided by the Advisor to the Fund, as well as the background and experience of the persons responsible for such services. The Board noted that the Fund is an actively-managed ETF and considered the background and experience of the persons responsible for the day-to-day management of the Fund’s investments. In reviewing the services provided, the Board noted the compliance program that had been developed by the Advisor and considered that it includes a robust program for monitoring the Advisor’s and the Fund’s compliance with the 1940 Act, as well as the Fund’s compliance with its investment objective, policies and restrictions. The Board also considered a report from the Advisor with respect to its risk management functions related to the operation of the Fund. Finally, as part of the Board’s consideration of the Advisor’s services, the Advisor, in its written materials and at the April 17, 2023 meeting, described to the Board the scope of its ongoing investment in additional personnel and infrastructure to maintain and improve the quality of services provided to the Fund and the other funds in the First Trust Fund
Additional Information (Continued)
First Trust Enhanced Short Maturity ETF (FTSM)October 31, 2023 (Unaudited) Complex. In light of the information presented and the considerations made, the Board concluded that the nature, extent and quality of the services provided to the Trust and the Fund by the Advisor under the Agreement have been and are expected to remain satisfactory and that the Advisor has managed the Fund consistent with its investment objective, policies and restrictions.
The Board considered the unitary fee rate schedule payable by the Fund under the Agreement for the services provided. The Board considered that as part of the unitary fee the Advisor is responsible for the Fund’s expenses, including the cost of transfer agency, custody, fund administration, legal, audit and other services and license fees, if any, but excluding the fee payment under the Agreement and 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 Rule 12b-1 plan, if any, and extraordinary expenses, if any. The Board noted that the Advisor had previously agreed to reduce the unitary fee to the extent of acquired fund fees and expenses of shares of investment companies advised by the Advisor that are held by the Fund. The Board received and reviewed information showing the fee rates and expense ratios of the peer funds in the Expense Group, as well as advisory and unitary fee rates charged by the Advisor to other fund (including ETFs) and non-fund clients, as applicable. Because the Fund pays a unitary fee, the Board determined that expense ratios were the most relevant comparative data point. Based on the information provided, the Board noted that the total expense ratio for the Fund was above the median total (net) expense ratio of the peer funds in the Expense Group. With respect to the Expense Group, the Board, at the April 17, 2023 meeting, discussed with Broadridge its methodology for assembling peer groups and discussed with the Advisor limitations in creating peer groups for actively-managed ETFs, and different business models that may affect the pricing of services among ETF sponsors. The Board took these limitations and differences into account in considering the peer data. With respect to fees charged to other non-ETF clients, the Board considered differences between the Fund and other non-ETF clients that limited their comparability. In considering the unitary fee rate schedule overall, the Board also considered the Advisor’s statement that it seeks to meet investor needs through innovative and value-added investment solutions and the Advisor’s demonstrated long-term commitment to the Fund and the other funds in the First Trust Fund Complex.
The Board considered performance information for the Fund. The Board noted the process it has established for monitoring the Fund’s performance and portfolio risk on an ongoing basis, which includes quarterly performance reporting from the Advisor for the Fund. The Board determined that this process continues to be effective for reviewing the Fund’s performance. The Board received and reviewed information comparing the Fund’s performance for periods ended December 31, 2022 to the performance of the funds in the Performance Universe and to that of a benchmark index. Based on the information provided, the Board noted that the Fund outperformed the Performance Universe median and the benchmark index for the one-, three- and five-year periods ended December 31, 2022.
On the basis of all the information provided on the unitary fee and performance of the Fund and the ongoing oversight by the Board, the Board concluded that the unitary fee for the Fund continues to be reasonable and appropriate in light of the nature, extent and quality of the services provided by the Advisor to the Fund under the Agreement.
The Board considered information and discussed with the Advisor whether there were any economies of scale in connection with providing advisory services to the Fund at current asset levels and whether the Fund may benefit from any economies of scale. The Board noted that the unitary fee rate schedule for the Fund includes breakpoints pursuant to which the unitary fee rate will be reduced as assets of the Fund meet certain thresholds. The Board considered the Advisor’s statement that it believes that its expenses relating to providing advisory services to the Fund will increase during the next twelve months as the Advisor continues to build infrastructure and add new staff. The Board also noted that under the unitary fee structure, any reduction in expenses associated with the management and operations of the Fund would benefit the Advisor, but that the unitary fee structure provides a level of certainty in expenses for shareholders of the Fund. The Board concluded that the unitary fee rate schedule for the Fund reflects an appropriate level of sharing of any economies of scale that may be realized in the management of the Fund at current asset levels. The Board considered the revenues and allocated costs (including the allocation methodology) of the Advisor in serving as investment advisor to the Fund for the twelve months ended December 31, 2022 and the estimated profitability level for the Fund calculated by the Advisor based on such data, as well as complex-wide and product-line profitability data, for the same period. The Board noted the inherent limitations in the profitability analysis and concluded that, based on the information provided, the Advisor’s profitability level for the Fund was not unreasonable. In addition, the Board considered indirect benefits described by the Advisor that may be realized from its relationship with the Fund. The Board considered that the Advisor had identified as an indirect benefit to the Advisor and FTP their exposure to investors and brokers who, absent their exposure to the Fund, may have had no dealings with the Advisor or FTP, and noted that the Advisor does not utilize soft dollars in connection with the Fund. The Board concluded that the character and amount of potential indirect benefits to the Advisor were not unreasonable.
Based on all of the information considered and the conclusions reached, the Board, including the Independent Trustees, unanimously determined that the terms of the Agreement continue to be fair and reasonable and that the continuation of the Agreement is in the best interests of the Fund. No single factor was determinative in the Board’s analysis.
Additional Information (Continued)
First Trust Enhanced Short Maturity ETF (FTSM)October 31, 2023 (Unaudited) Remuneration
First Trust Advisors L.P. (“First Trust”) is authorised and regulated by the U.S. Securities and Exchange Commission and is entitled to market shares of certain funds it manages, including First Trust Enhanced Short Maturity ETF (the “Fund”), in certain member states in the European Economic Area in accordance with the cooperation arrangements in Article 42 of the Alternative Investment Fund Managers Directive (the “Directive”). First Trust is required under the Directive to make disclosures in respect of remuneration. The following disclosures are made in line with First Trust’s interpretation of currently available regulatory guidance on remuneration disclosures.
During the year ended December 31, 2022, the amount of remuneration paid (or to be paid) by First Trust Advisors L.P. in respect of the Funds is $7,541,592. This figure is comprised of $595,768 paid (or to be paid) in fixed compensation and $6,945,824 paid (or to be paid) in variable compensation. There were a total of 28 beneficiaries of the remuneration described above. Those amounts include $1,378,623 paid (or to be paid) to senior management of First Trust Advisors L.P. and $6,162,969 paid (or to be paid) to other employees whose professional activities have a material impact on the risk profiles of First Trust Advisors L.P. or the Funds (collectively, “Code Staff”).
Code Staff included in the aggregated figures disclosed above are rewarded in line with First Trust’s remuneration policy (the “Remuneration Policy”) which is determined and implemented by First Trust’s senior management. The Remuneration Policy reflects First Trust’s ethos of good governance and encapsulates the following principal objectives:
i.
to provide a clear link between remuneration and performance of First Trust and to avoid rewarding for failure;
ii.
to promote sound and effective risk management consistent with the risk profiles of the funds managed by First Trust; and
iii.
to remunerate staff in line with the business strategy, objectives, values and interests of First Trust and the funds managed by First Trust in a manner that avoids conflicts of interest.
First Trust assesses various risk factors which it is exposed to when considering and implementing remuneration for Code Staff and considers whether any potential award to such person(s) would give rise to a conflict of interest. First Trust does not reward failure, or consider the taking of risk or failure to take risk in its remuneration of Code Staff.
First Trust assesses performance for the purposes of determining payments in respect of performance-related remuneration of Code Staff by reference to a broad range of measures including (i) individual performance (using financial and non-financial criteria), and (ii) the overall performance of First Trust. Remuneration is not based upon the performance of the Fund.
The elements of remuneration are balanced between fixed and variable and the senior management sets fixed salaries at a level sufficient to ensure that variable remuneration incentivises and rewards strong individual performance but does not encourage excessive risk taking.
No individual is involved in setting his or her own remuneration.
Board of Trustees and Officers
First Trust Enhanced Short Maturity ETF (FTSM)October 31, 2023 (Unaudited) The following tables identify the Trustees and Officers of the Trust. Unless otherwise indicated, the address of all persons is 120 East Liberty Drive, Suite 400, Wheaton, IL 60187.
The Trust’s statement of additional information includes additional information about the Trustees and is available, without charge, upon request, by calling (800) 988-5891.
Name,
Year of Birth and
Position with the Trust | Term of Office
and Year First
Elected or
Appointed | Principal Occupations
During Past 5 Years | Number of
Portfolios in
the First Trust
Fund Complex
Overseen by
Trustee | Other
Trusteeships or
Directorships
Held by Trustee
During Past
5 Years |
|
Richard E. Erickson, Trustee
(1951) | • Indefinite Term • Since Inception | Retired; Physician, Edward-Elmhurst Medical Group (2021 to September 2023); Physician and Officer, Wheaton Orthopedics (1990 to 2021) | | |
Thomas R. Kadlec, Trustee
(1957) | • Indefinite Term • Since Inception | Retired; President, ADM Investors Services, Inc. (Futures Commission Merchant) (2010 to July 2022) | | Director, National Futures Association and ADMIS Singapore Ltd.; Formerly, Director of ADM Investor Services, Inc., ADM Investor Services International, ADMIS Hong Kong Ltd., and Futures Industry Association |
Denise M. Keefe, Trustee
(1964) | • Indefinite Term • Since 2021 | Executive Vice President, Advocate Aurora Health and President, Advocate Aurora Continuing Health Division (Integrated Healthcare System) | | Director and Board Chair of Advocate Home Health Services, Advocate Home Care Products and Advocate Hospice; Director and Board Chair of Aurora At Home (since 2018); Director of Advocate Physician Partners Accountable Care Organization; Director of RML Long Term Acute Care Hospitals; Director of Senior Helpers (since 2021); and Director of MobileHelp (since 2022) |
Robert F. Keith, Trustee
(1956) | • Indefinite Term • Since Inception | President, Hibs Enterprises (Financial and Management Consulting) | | Formerly, Director of Trust Company of Illinois |
Niel B. Nielson, Trustee
(1954) | • Indefinite Term • Since Inception | Senior Advisor (2018 to Present), Managing Director and Chief Operating Officer (2015 to 2018), Pelita Harapan Educational Foundation (Educational Products and Services) | | |
Bronwyn Wright, Trustee
(1971) | • Indefinite Term • Since 2023 | Independent Director to a number of Irish collective investment funds (2009 to Present); Various roles at international affiliates of Citibank (1994 to 2009), including Managing Director, Citibank Europe plc and Head of Securities and Fund Services, Citi Ireland (2007 to 2009) | | |
Board of Trustees and Officers (Continued)
First Trust Enhanced Short Maturity ETF (FTSM)October 31, 2023 (Unaudited) Name, Year of Birth and Position with the Trust | Term of Office and Year First Elected or Appointed | Principal Occupations During Past 5 Years | Number of Portfolios in the First Trust Fund Complex Overseen by Trustee | Other Trusteeships or Directorships Held by Trustee During Past 5 Years |
|
James A. Bowen(1), Trustee,
Chairman of the Board
(1955) | • Indefinite Term • Since Inception | Chief Executive Officer, First Trust Advisors L.P. and First Trust Portfolios L.P., Chairman of the Board of Directors, BondWave LLC (Software Development Company) and Stonebridge Advisors LLC (Investment Advisor) | | |
| Position and
Offices
with Trust | Term of Office
and Length of
Service | Principal Occupations
During Past 5 Years |
|
| President and Chief Executive Officer | • Indefinite Term • Since 2016 | Managing Director and Chief Financial Officer, First Trust Advisors L.P. and First Trust Portfolios L.P.; Chief Financial Officer, BondWave LLC (Software Development Company) and Stonebridge Advisors LLC (Investment Advisor) |
| Treasurer, Chief Financial Officer and Chief Accounting Officer | • Indefinite Term • Since 2023 | Senior Vice President, First Trust Advisors L.P. and First Trust Portfolios L.P., July 2021 to Present. Previously, Vice President, First Trust Advisors L.P. and First Trust Portfolios L.P., 2014 - 2021. |
| Secretary and Chief Legal Officer | • Indefinite Term • Since Inception | General Counsel, First Trust Advisors L.P. and First Trust Portfolios L.P.; Secretary and General Counsel, BondWave LLC; Secretary, Stonebridge Advisors LLC |
Daniel J. Lindquist
(1970) | | • Indefinite Term • Since Inception | Managing Director, First Trust Advisors L.P. and First Trust Portfolios L.P. |
| Chief Compliance Officer and Assistant Secretary | • Indefinite Term • Since Inception | Deputy General Counsel, First Trust Advisors L.P. and First Trust Portfolios L.P. |
| | • Indefinite Term • Since Inception | Senior Vice President, First Trust Advisors L.P. and First Trust Portfolios L.P. |
| | • Indefinite Term • Since Inception | Senior Vice President, First Trust Advisors L.P. and First Trust Portfolios L.P. |
(1)
Mr. Bowen is deemed an “interested person” of the Trust due to his position as Chief Executive Officer of First Trust Advisors L.P., investment advisor of the Trust.
(2)
The term “officer” means the president, vice president, secretary, treasurer, controller or any other officer who performs a policy making function.
First Trust Enhanced Short Maturity ETF (FTSM)October 31, 2023 (Unaudited) Privacy Policy
First Trust values our relationship with you and considers your privacy an important priority in maintaining that relationship. We are committed to protecting the security and confidentiality of your personal information.
Sources of Information
We collect nonpublic personal information about you from the following sources:
• Information we receive from you and your broker-dealer, investment professional or financial representative through interviews, applications, agreements or other forms;
• Information about your transactions with us, our affiliates or others;
• Information we receive from your inquiries by mail, e-mail or telephone; and
• Information we collect on our website through the use of “cookies.” For example, we may identify the pages on our website that your browser requests or visits.
Information Collected
The type of data we collect may include your name, address, social security number, age, financial status, assets, income, tax information, retirement and estate plan information, transaction history, account balance, payment history, investment objectives, marital status, family relationships and other personal information.
Disclosure of Information
We do not disclose any nonpublic personal information about our customers or former customers to anyone, except as permitted by law. In addition to using this information to verify your identity (as required under law), the permitted uses may also include the disclosure of such information to unaffiliated companies for the following reasons:
• In order to provide you with products and services and to effect transactions that you request or authorize, we may disclose your personal information as described above to unaffiliated financial service providers and other companies that perform administrative or other services on our behalf, such as transfer agents, custodians and trustees, or that assist us in the distribution of investor materials such as trustees, banks, financial representatives, proxy services, solicitors and printers.
• We may release information we have about you if you direct us to do so, if we are compelled by law to do so, or in other legally limited circumstances (for example to protect your account from fraud).
In addition, in order to alert you to our other financial products and services, we may share your personal information within First Trust.
Use of Website Analytics
We currently use third party analytics tools, Google Analytics and AddThis, to gather information for purposes of improving First Trust’s website and marketing our products and services to you. These tools employ cookies, which are small pieces of text stored in a file by your web browser and sent to websites that you visit, to collect information, track website usage and viewing trends such as the number of hits, pages visited, videos and PDFs viewed and the length of user sessions in order to evaluate website performance and enhance navigation of the website. We may also collect other anonymous information, which is generally limited to technical and web navigation information such as the IP address of your device, internet browser type and operating system for purposes of analyzing the data to make First Trust’s website better and more useful to our users. The information collected does not include any personal identifiable information such as your name, address, phone number or email address unless you provide that information through the website for us to contact you in order to answer your questions or respond to your requests. To find out how to opt-out of these services click on: Google Analytics and AddThis.
Confidentiality and Security
With regard to our internal security procedures, First Trust restricts access to your nonpublic personal information to those First Trust employees who need to know that information to provide products or services to you. We maintain physical, electronic and procedural safeguards to protect your nonpublic personal information.
Policy Updates and Inquiries
As required by federal law, we will notify you of our privacy policy annually. We reserve the right to modify this policy at any time, however, if we do change it, we will tell you promptly. For questions about our policy, or for additional copies of this notice, please go to www.ftportfolios.com, or contact us at 1-800-621-1675 (First Trust Portfolios) or 1-800-222-6822 (First Trust Advisors).
March 2023
First Trust Exchange-Traded Fund IV
INVESTMENT ADVISOR
First Trust Advisors L.P.
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
ADMINISTRATOR, CUSTODIAN,
FUND ACCOUNTANT &
TRANSFER AGENT
The Bank of New York Mellon
240 Greenwich Street
New York, NY 10286
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
111 South Wacker Drive
Chicago, IL 60606
LEGAL COUNSEL
Chapman and Cutler LLP
320 South Canal Street
Chicago, IL 60606
First Trust Exchange-Traded Fund IV
| First Trust High Income Strategic Focus ETF (HISF)
|
Annual Report
For the Year Ended
October 31, 2023 |
First Trust High Income Strategic Focus ETF (HISF)
Annual Report
October 31, 2023
Caution Regarding Forward-Looking Statements
This report contains certain forward-looking statements within the meaning of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended. Forward-looking statements include statements regarding the goals, beliefs, plans or current expectations of First Trust Advisors L.P. (“First Trust” or the “Advisor”) and its representatives, taking into account the information currently available to them. Forward-looking statements include all statements that do not relate solely to current or historical fact. For example, forward-looking statements include the use of words such as “anticipate,” “estimate,” “intend,” “expect,” “believe,” “plan,” “may,” “should,” “would” or other words that convey uncertainty of future events or outcomes.
Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the series of First Trust Exchange-Traded Fund IV (the “Trust”) described in this report (First Trust High Income Strategic Focus 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’s shares may therefore be less than what you paid for them. Accordingly, you can lose money investing in the Fund. See “Risk Considerations” in the Additional Information section of this report for a discussion of certain other risks of investing in the Fund.
Performance data quoted represents past performance, which is no guarantee of future results, and current performance may be lower or higher than the figures shown. For the most recent month-end performance figures, please visit www.ftportfolios.com or speak with your financial advisor. Investment returns, net asset value and share price will fluctuate and Fund shares, when sold, may be worth more or less than their original cost.
The Advisor may also periodically provide additional information on Fund performance on the Fund’s webpage at www.ftportfolios.com.
How to Read This Report
This report contains information that may help you evaluate your investment in the Fund. It includes details about the Fund and presents data and analysis that provide insight into the Fund’s performance and investment approach.
By reading the portfolio commentary from the portfolio management team of the Fund, you may obtain an understanding of how the market environment affected the Fund’s performance. The statistical information that follows may help you understand the Fund’s performance compared to that of relevant market benchmarks.
It is important to keep in mind that the opinions expressed by personnel of the Advisor are just that: informed opinions. They should not be considered to be promises or advice. The opinions, like the statistics, cover the period through the date on the cover of this report. The material risks of investing in the Fund are spelled out in the prospectus, the statement of additional information, and other Fund regulatory filings.
First Trust High Income Strategic Focus ETF (HISF)
Annual Letter from the Chairman and CEO
October 31, 2023
Dear Shareholders,
First Trust is pleased to provide you with the annual report for the First Trust High Income Strategic Focus ETF (the “Fund”), which contains detailed information about the Fund for the twelve months ended October 31, 2023.
The Bureau of Economic Analysis recently announced that U.S. real gross domestic product (“GDP”) grew by a staggering 4.9% in the third quarter of 2023 and is now up 2.9% on a year-over-year basis from where it stood in the third quarter of 2022. The most recent quarter’s GDP data represents the fastest growth rate for any quarter since 2014. Consumer spending, which rose by 4.0% over the period, was responsible for 2.7 percentage points of the total increase in GDP. Whether the consumer can keep up this pace of spending remains to be seen, especially given recent news that excess savings from the pandemic-era stimulus have likely been depleted. From a global perspective, the International Monetary Fund (“IMF”) notes that progress in fighting inflation has led to lower economic growth. In their October 2023 publication of the World Economic Outlook, the IMF projected that the growth in world economic output is expected to slow from 3.5% in 2022 to 2.9% in 2024. The economic growth in advanced economies is projected to plummet from 2.6% in 2022 to 1.4% in 2024.
In the notes to their September 2023 meeting, the Federal Open Market Committee revealed that they may need to keep interest rates “higher for longer” as they continue to battle stubbornly high inflation. As many investors are likely aware, a higher Federal Funds target rate can have deep implications for consumers, such as driving up the cost of borrowing for homes, automobiles, and other large purchases. The American consumer has yet to feel the full weight of those burdens, in my opinion. That said, the data reveals a different story among corporate America. S&P Global Market Intelligence reported that a total of 516 U.S. corporations filed for bankruptcy protection on a year-to-date basis through September 30, 2023, up from a total of 263 corporate bankruptcy filings over the same period last year. Higher interest rates and Treasury bond yields have also sapped demand for commercial property loans. Data from Trepp, LLC, a leading provider of data and analytics to the commercial real estate and banking markets, revealed that just $28.2 billion of loans converted into commercial mortgage-backed securities have been issued in 2023, the lowest figure since 2011.
The financial markets battled a myriad of headwinds over the past year, from geopolitical uncertainty resulting from war (the conflicts between Israel and Hamas and Russia and Ukraine), to slowing global economic growth and sticky inflation. Brian Wesbury, Chief Economist at First Trust, notes that a U.S. economic recession is likely to begin at some point early next year. While calls for a recession may concern some investors, the following may offer solace. Data from Bloomberg reveals that the S&P 500® Index has posted positive total returns over the 3-year period following every recession since 1948.
Thank you for giving First Trust the opportunity to play a role in your financial future. We value our relationship with you and will report on the Fund again in six months.
Sincerely,
James A. Bowen
Chairman of the Board of Trustees
Chief Executive Officer of First Trust Advisors L.P.
Fund Performance Overview (Unaudited)
First Trust High Income Strategic Focus ETF (HISF)
The First Trust High Income Strategic Focus ETF’s (the “Fund”) primary investment objective is to seek risk-adjusted income. The Fund’s secondary investment objective is capital appreciation. Under normal market conditions, the Fund seeks to achieve its investment objectives by investing in a portfolio of U.S.-listed exchange-traded funds (“Underlying ETFs”) that is designed to follow the High Income Model (the “High Income Model”) developed by the Fund’s investment advisor, First Trust Advisors L.P. (“First Trust” or the “Advisor”). The Fund, through its investments in the Underlying ETFs comprising the High Income Model, seeks to provide investors with a diversified income stream by holding a blend of fixed income assets that are actively managed to seek levels of high income and total return. The High Income Model is principally composed of ETFs for which First Trust serves as investment advisor. Therefore, a significant portion of the ETFs in which the Fund invests are advised by First Trust. However, the Fund may also invest in ETFs other than First Trust ETFs. Shares of the Fund are listed on Nasdaq, Inc. under the ticker symbol “HISF.”
|
| | Average Annual Total Returns | |
| | | Inception
(8/13/14)
to 10/31/23 | | Inception
(8/13/14)
to 10/31/23 |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Bloomberg U.S. Aggregate Bond Index | | | | | |
| | | | | |
| | | | | |
On February 28, 2022, the Fund changed its principal investment strategies. Therefore, the Fund’s performance and historical returns shown above are not necessarily indicative of the performance that the Fund, under its current strategy, would have generated.
| The Blended Index is comprised of the Bloomberg U.S. Aggregate Bond Index (70%) and the ICE BofA U.S. High Yield Constrained Index (30%). |
| The Prior Blended Index is equally weighted to include these six indices: the Alerian MLP Index, Dow Jones U.S. Select Dividend Index, ICE BofA Fixed Rate Preferred Securities Index, ICE BofA U.S. High Yield Index, Bloomberg EM USD Aggregate Index and Bloomberg U.S. MBS Index. An index does not charge management fees or brokerage expenses, and no such fees or expenses were deducted from the index performance shown. Indices are unmanaged and an investor cannot invest directly in an index. The Prior Blended Index returns are calculated by using the monthly return of the six indices during each period shown above. At the beginning of each month the six indices are rebalanced to a 16.66 percentage weighting for each to account for divergence from that percentage weighting that occurred during the course of each month. The monthly returns are then compounded for each period shown above, giving the performance of the Prior Blended Index for each period shown above. |
Fund Performance Overview (Unaudited) (Continued)
First Trust High Income Strategic Focus ETF (HISF) (Continued)
Total returns for the period since inception are calculated from the inception date of the Fund. “Average Annual Total Returns” represent the average annual change in value of an investment over the periods indicated. “Cumulative Total Returns” represent the total change in value of an investment over the periods indicated.
The Fund’s per share net asset value (“NAV”) is the value of one share of the Fund and is computed by dividing the value of all assets of the Fund (including accrued interest and dividends), less all liabilities (including accrued expenses and dividends declared but unpaid), by the total number of outstanding shares. The price used to calculate market return (“Market Price”) is determined by using the midpoint of the national best bid and offer price (“NBBO”) as of the time that the Fund’s NAV is calculated. Under the Securities and Exchange Commission’s rules, the NBBO consists of the highest displayed buy and lowest sell prices among the various exchanges trading the Fund at the time the Fund’s NAV is calculated. Prior to January 1, 2019, the price used was the midpoint between the highest bid and the lowest offer on the stock exchange on which shares of the Fund were listed for trading as of the time that the Fund’s NAV was calculated. Since shares of the Fund did not trade in the secondary market until after the Fund’s inception, for the period from inception to the first day of secondary market trading in shares of the Fund, the NAV of the Fund is used as a proxy for the secondary market trading price to calculate market returns. NAV and market returns assume that all distributions have been reinvested in the Fund at NAV and Market Price, respectively.
An index is a statistical composite that tracks a specified financial market or sector. Unlike the Fund, the indices do not actually hold a portfolio of securities and therefore do not incur the expenses incurred by the Fund. These expenses negatively impact the performance of the Fund. Also, market returns do not include brokerage commissions that may be payable on secondary market transactions. If brokerage commissions were included, market returns would be lower. The total returns presented reflect the reinvestment of dividends on securities in the indices. The returns presented do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. The investment return and principal value of shares of the Fund will vary with changes in market conditions. Shares of the Fund may be worth more or less than their original cost when they are redeemed or sold in the market. The Fund’s past performance is no guarantee of future performance.
| |
| |
Net Other Assets and Liabilities | |
| |
| Performance figures assume reinvestment of all distributions and do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. An index is a statistical composite that tracks a specified financial market or sector. Unlike the Fund, the indices do not actually hold a portfolio of securities and therefore do not incur the expenses incurred by the Fund. These expenses negatively impact the performance of the Fund. The Fund’s past performance does not predict future performance. |
Frequency Distribution of Discounts and Premiums
Information showing the number of days the market price of the Fund’s shares was greater (at a premium) and less (at a discount) than the Fund’s net asset value for the most recently completed year, and the most recently completed calendar quarters since that year (or life of the Fund, if shorter) is available at https://www.ftportfolios.com/Retail/etf/home.aspx.
First Trust High Income Strategic Focus ETF (HISF)Annual ReportOctober 31, 2023 (Unaudited) Advisor
First Trust Advisors L.P. (“First Trust” or the “Advisor”) is the investment advisor to the First Trust High Income Strategic Focus ETF (the “Fund” or “HISF”). First Trust is responsible for the selection and ongoing monitoring of the investments in the Fund’s portfolio and certain other services necessary for the management of the portfolio.
Portfolio Management Team
The following persons serve as portfolio managers of the Fund:
Daniel J. Lindquist, Chairman of the Investment Committee and Managing Director of First Trust;
David G. McGarel, Chief Investment Officer, Chief Operating Officer and Managing Director of First Trust;
Chris A. Peterson, CFA, Senior Vice President of First Trust;
William Housey, CFA, Managing Director of Fixed Income of First Trust; and
Steve Collins, CFA, Senior Vice President of First Trust
The portfolio managers are primarily and jointly responsible for the day-to-day management of the Fund. Daniel J. Lindquist, David G. McGarel and William Housey have served as part of the portfolio management team of the Fund since 2014. Chris A. Peterson has served as part of the portfolio management team of the Fund since 2016. Steve Collins has served as part of the portfolio management team of the Fund since 2021.
Commentary
Market Recap
In the 12-month period ended on October 31, 2023, the Federal Reserve (the “Fed”) raised the target range for the Federal Funds rate from 3.00 – 3.25% to 5.25 – 5.50%. This included tightening at each meeting over the period, with the exception of the June 2023 and September 2023 meetings. At the September 2023 meeting, the Fed increased their projection for 2023 and 2024 gross domestic product growth and projected a higher policy path, which, combined with rapid tightening we believe drove interest rates higher over the year. The 2-Year U.S. Treasury increased by 61 basis points (“bps”), from 4.48% to 5.09%, and the 10-Year U.S. Treasury increased by 88 bps, from 4.05% to 4.93%, resulting in a 27 basis point flattening. In March 2023, the rapidly rising interest rates induced stress in the banking system, including some regional bank failures. This situation stabilized after the implementation of a new term loan liquidity facility and the completion of UBS’s takeover of Credit Suisse. This interrupted the rate path higher for a short time, as yields retraced in the panic that saw the 2-Year rate dive from 5.07% to 3.75% over just a few weeks before heading higher again and peaking at 5.22% in October 2023. Throughout the 12-month period ended October 31, 2023, the economy continued to grow, and the labor market remained resilient. Overall, risk assets provided strong returns, with high-yield bond spreads declining by 20 bps, ending the period at 447 bps. The ICE BofA US High Yield Constrained Index returned 5.81%, and the S&P 500® Index returned 10.14% year-over-year. Climbing rates muted returns of longer duration fixed income, with the Bloomberg U.S. Aggregate Bond Index returning only 0.36%. Longer duration U.S. Treasuries fared even worse, with the Bloomberg U.S. Treasury: 20+ Year Total Return Index returning -9.97% for the period.
Performance Analysis
The Fund returned 0.52% based on net asset value (“NAV”) and 0.56% based on market price for the 12-month period ended October 31, 2023. The benchmark (the “Benchmark”), which is a blended benchmark consisting of 70% of the Bloomberg U.S. Aggregate Bond Index (which is a broad-based benchmark that measures the investment grade, U.S. Dollar-denominated, fixed-rate taxable bond market) and 30% of the ICE BofA US High Yield Constrained Index (which tracks the performance of U.S. dollar-denominated below investment grade corporate debt publicly issued in the U.S. domestic market but caps issuer exposure at 2%) returned 1.98% for the same period.
Longer duration fixed income broad-based positioning in the First Trust TCW Opportunistic Fixed Income ETF provided the lowest returns over the period, returning 0.07% and 0.19% (NAV and market price returns respectively). Given our view of increased economic risk, the Fund was also defensively positioned in high yield credit relative to the Benchmark, with an allocation to the First Trust Tactical High Yield ETF, which invests primarily in high yield bonds and senior loans, of 15% for most of the period, while the Benchmark maintains a 30% weight in the ICE BofA US High Yield Constrained Index. This negatively impacted relative performance given the superior returns in high yield and risk assets. The Fund maintained an underweight allocation to duration before beginning to extend nearer to the Benchmark in June and September this year as rates moved higher. Accordingly, the allocations to
Portfolio Commentary (Continued)
First Trust High Income Strategic Focus ETF (HISF)Annual ReportOctober 31, 2023 (Unaudited) short duration funds via investment grade credit in the First Trust Limited Duration Investment Grade Corporate ETF, short duration securitized assets in the First Trust Low Duration Opportunities ETF, and ultra short credit in the First Trust Enhanced Short Maturity ETF benefited performance, with returns that all exceeded the Benchmark, returning 3.68%, 3.29%, and 4.72% on a NAV basis, and 3.56%, 3.50%, and 4.74% based on market prices, respectively.
Market and Fund Outlook
The Fed has raised rates by 525 bps over this cycle and has now left rates unchanged at both the September 2023 and November 2023 meetings. While the market has begun pricing in more cuts in 2024 than the Fed has penciled in, we believe it is likely they will maintain rates higher for longer given the stickiness of inflation above its 2% target. Although it is possible the Fed may still leak additional interest rate hikes into the market, we believe we are much closer to the finish line of this interest rate hiking cycle than we are to its beginning. Consequently, over the next year, we believe that the reinvestment risk inherent in overweighting short-term securities likely poses a greater risk than owning duration, and we have extended duration nearer to the Benchmark in recent quarters. We remain defensively positioned in credit, expecting that economic conditions may deteriorate over the coming year due to the effects of sharply higher rates and tighter financial conditions.
First Trust High Income Strategic Focus ETF (HISF)Understanding Your Fund ExpensesOctober 31, 2023 (Unaudited) As a shareholder of First Trust High Income Strategic Focus ETF (the “Fund”), you incur two types of costs: (1) transaction costs; and (2) ongoing costs, including management fees, distribution and/or service (12b-1) fees, if any, and other Fund expenses. This Example is intended to help you understand your ongoing costs of investing in the Fund and to compare these costs with the ongoing costs of investing in other funds.
The Example is based on an investment of $1,000 invested at the beginning of the period and held through the six-month period ended October 31, 2023.
Actual Expenses
The first line in the following table provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During the Six-Month Period” to estimate the expenses you paid on your account during this six-month period.
Hypothetical Example for Comparison Purposes
The second line in the following table provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs such as brokerage commissions. Therefore, the second line in the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
| Beginning
Account Value
May 1, 2023 | Ending
Account Value
October 31, 2023 | Annualized
Expense Ratio
Based on the
Six-Month
Period (a) | Expenses Paid
During the
Six-Month
Period (a) (b) |
First Trust High Income Strategic Focus ETF (HISF) |
| | | | |
Hypothetical (5% return before expenses) | | | | |
| Annualized expense ratio and expenses paid during the six-month period do not include fees and expenses of the underlying funds in which the Fund invests. |
| Expenses are equal to the annualized expense ratio as indicated in the table multiplied by the average account value over the period (May 1, 2023 through October 31, 2023), multiplied by 184/365 (to reflect the six-month period). |
First Trust High Income Strategic Focus ETF (HISF)Portfolio of InvestmentsOctober 31, 2023
| | |
EXCHANGE-TRADED FUNDS — 99.9% |
| | |
| First Trust Enhanced Short Maturity ETF (a) | |
| First Trust Institutional Preferred Securities and Income ETF (a) | |
| First Trust Limited Duration Investment Grade Corporate ETF (a) | |
| First Trust Low Duration Opportunities ETF (a) | |
| First Trust Tactical High Yield ETF (a) | |
| First Trust TCW Opportunistic Fixed Income ETF (a) | |
| iShares 20+ Year Treasury Bond ETF | |
|
|
| Total Investments — 99.9% | |
| | |
| Net Other Assets and Liabilities — 0.1% | |
| | |
| Investment in an affiliated fund. |
Valuation InputsA summary of the inputs used to value the Fund’s investments as of October 31, 2023 is as follows (see Note 2A - Portfolio Valuation in the Notes to Financial Statements):
| | | Level 2
Significant
Observable
Inputs | Level 3
Significant
Unobservable
Inputs |
| | | | |
| See Portfolio of Investments for industry breakout. |
See Notes to Financial Statements
First Trust High Income Strategic Focus ETF (HISF)Statement of Assets and Liabilities
October 31, 2023
| |
Investments, at value - Affiliated | |
Investments, at value - Unaffiliated | |
Total investments, at value | |
| |
| |
| |
| |
| |
|
| |
Investment advisory fees payable | |
| |
| |
|
| |
| |
| |
Accumulated distributable earnings (loss) | |
| |
NET ASSET VALUE, per share | |
Number of shares outstanding (unlimited number of shares authorized, par value $0.01 per share) | |
Investments, at cost - Affiliated | |
Investments, at cost - Unaffiliated | |
Total investments, at cost | |
See Notes to Financial Statements
First Trust High Income Strategic Focus ETF (HISF)Statement of Operations
For the Year Ended October 31, 2023
| |
| |
| |
| |
|
| |
| |
| |
NET INVESTMENT INCOME (LOSS) | |
|
NET REALIZED AND UNREALIZED GAIN (LOSS): | |
Net realized gain (loss) on: | |
| |
Investments - Unaffiliated | |
In-kind redemptions - Affiliated | |
In-kind redemptions - Unaffiliated | |
| |
Net change in unrealized appreciation (depreciation) on: | |
| |
Investments - Unaffiliated | |
Foreign currency translation | |
Net change in unrealized appreciation (depreciation) | |
NET REALIZED AND UNREALIZED GAIN (LOSS) | |
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS | |
See Notes to Financial Statements
First Trust High Income Strategic Focus ETF (HISF)Statements of Changes in Net Assets
| | |
| | |
Net investment income (loss) | | |
| | |
Net change in unrealized appreciation (depreciation) | | |
Net increase (decrease) in net assets resulting from operations | | |
|
DISTRIBUTIONS TO SHAREHOLDERS FROM: | | |
| | |
|
SHAREHOLDER TRANSACTIONS: | | |
Proceeds from shares sold | | |
| | |
Net increase (decrease) in net assets resulting from shareholder transactions | | |
Total increase (decrease) in net assets | | |
|
| | |
| | |
| | |
|
CHANGES IN SHARES OUTSTANDING: | | |
Shares outstanding, beginning of period | | |
| | |
| | |
Shares outstanding, end of period | | |
See Notes to Financial Statements
First Trust High Income Strategic Focus ETF (HISF)Financial Highlights
For a share outstanding throughout each period
| |
| | | | | |
Net asset value, beginning of period | | | | | |
Income from investment operations: | | | | | |
Net investment income (loss) | | | | | |
Net realized and unrealized gain (loss) | | | | | |
Total from investment operations | | | | | |
Distributions paid to shareholders from: | | | | | |
| | | | | |
| | | | | |
| | | | | |
Net asset value, end of period | | | | | |
| | | | | |
|
Ratios to average net assets/supplemental data: | | | | | |
Net assets, end of period (in 000’s) | | | | | |
Ratio of total expenses to average net assets (d) | | | | | |
Ratio of net expenses to average net assets (d) | | | | | |
Ratio of net investment income (loss) to average net assets | | | | | |
Portfolio turnover rate (e) | | | | | |
| Based on average shares outstanding. |
| The Fund received a payment from the advisor in the amount of $1,758 in connection with a trade error, which represents less than $0.01 per share. Since the advisor reimbursed the Fund, there was no effect on the Fund’s total return. |
| Total return is calculated assuming an initial investment made at the net asset value at the beginning of the period, reinvestment of all distributions at net asset value during the period, and redemption at net asset value on the last day of the period. The returns presented do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. Total return is calculated for the time period presented and is not annualized for periods of less than a year. The total returns would have been lower if certain fees had not been waived by the Advisor. |
| The Fund indirectly bears its proportionate share of fees and expenses incurred by the underlying funds in which the Fund invests. This ratio does not include these indirect fees and expenses. |
| 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. |
| The variation in the portfolio turnover rate is due to the change in the Fund’s investment strategy effective February 28, 2022, which resulted in a rebalance of the Fund’s portfolio. |
See Notes to Financial Statements
Notes to Financial Statements
First Trust High Income Strategic Focus ETF (HISF)October 31, 2023 1. Organization
First Trust Exchange-Traded Fund IV (the “Trust”) is an open-end management investment company organized as a Massachusetts business trust on September 15, 2010, and is registered with the Securities and Exchange Commission under the Investment Company Act of 1940, as amended (the “1940 Act”).
The Trust currently consists of eighteen exchange-traded funds that are offering shares. This report covers the First Trust High Income Strategic Focus ETF (the “Fund”), a diversified series of the Trust, which trades under the ticker “HISF” on Nasdaq, Inc. (“Nasdaq”). The Fund represents a separate series of shares of beneficial interest in the Trust. Unlike conventional mutual funds, the Fund issues and redeems shares on a continuous basis, at net asset value (“NAV”), only in large blocks of shares known as “Creation Units.”
The Fund is an actively managed exchange-traded fund (“ETF”). The Fund’s primary investment objective is to seek risk-adjusted income. The Fund’s secondary investment objective is capital appreciation. Under normal market conditions, the Fund seeks to achieve its investment objectives by investing in a portfolio of U.S.-listed exchange-traded funds (“Underlying ETFs”) that is designed to follow the High Income Model (the “High Income Model”) developed by the Fund’s investment advisor, First Trust Advisors L.P. (“First Trust” or the “Advisor”). The Fund, through its investments in the Underlying ETFs comprising the High Income Model, seeks to provide investors with a diversified income stream by holding a blend of fixed income assets that are actively managed to seek levels of high income and total return. The High Income Model is principally composed of ETFs for which First Trust serves as investment advisor. Therefore, a significant portion of the ETFs in which the Fund invests are advised by First Trust. However, the Fund may also invest in ETFs other than First Trust ETFs.
2. Significant Accounting Policies
The Fund is considered an investment company and follows accounting and reporting guidance under Financial Accounting Standards Board Accounting Standards Codification Topic 946, “Financial Services-Investment Companies.” The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of the financial statements. The preparation of the financial statements in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates.
A. Portfolio Valuation
The Fund’s NAV is determined daily as of the close of regular trading on the New York Stock Exchange (“NYSE”), normally 4:00 p.m. Eastern time, on each day the NYSE is open for trading. If the NYSE closes early on a valuation day, the NAV is determined as of that time. The Fund’s NAV is calculated by dividing the value of all assets of the Fund (including accrued interest and dividends), less all liabilities (including accrued expenses and dividends declared but unpaid), by the total number of shares outstanding.
The Fund’s investments are valued daily at market value or, in the absence of market value with respect to any portfolio securities, at fair value. Market value prices represent readily available market quotations such as last sale or official closing prices from a national or foreign exchange (i.e., a regulated market) and are primarily obtained from third-party pricing services. Fair value prices represent any prices not considered market value prices and are either obtained from a third-party pricing service or are determined by the Advisor’s Pricing Committee in accordance with valuation procedures approved by the Trust’s Board of Trustees, and in accordance with provisions of the 1940 Act and rules thereunder. Investments valued by the Advisor’s Pricing Committee, if any, are footnoted as such in the footnotes to the Portfolio of Investments. All other assets of the Fund initially expressed in foreign currencies will be converted to U.S. dollars using exchange rates in effect at the time of valuation. The Fund’s investments are valued as follows:
Exchange-traded funds 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 primary exchange for such securities.
Certain securities may not be able to be priced by pre-established pricing methods. Such securities may be valued by 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
Notes to Financial Statements (Continued)
First Trust High Income Strategic Focus ETF (HISF)October 31, 2023 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 last sale price on the exchange on which they are principally traded or, for Nasdaq and AIM securities, the official closing price;
3)
the size of the holding;
4)
the initial cost of the security;
5)
transactions in comparable securities;
6)
price quotes from dealers and/or third-party pricing services;
7)
relationships among various securities;
8)
information obtained by contacting the issuer, analysts, or the appropriate stock exchange;
9)
an analysis of the issuer’s financial statements;
10)
the existence of merger proposals or tender offers that might affect the value of the security; and
11)
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:
• Level 1 – Level 1 inputs are quoted prices in active markets for identical investments. An active market is a market in which transactions for the investment occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
• Level 2 – Level 2 inputs are observable inputs, either directly or indirectly, and include the following:
o Quoted prices for similar investments in active markets.
o Quoted prices for identical or similar investments in markets that are non-active. A non-active market is a market where there are few transactions for the investment, the prices are not current, or price quotations vary substantially either over time or among market makers, or in which little information is released publicly.
o Inputs other than quoted prices that are observable for the investment (for example, interest rates and yield curves observable at commonly quoted intervals, volatilities, prepayment speeds, loss severities, credit risks, and default rates).
o Inputs that are derived principally from or corroborated by observable market data by correlation or other means.
• Level 3 – Level 3 inputs are unobservable inputs. Unobservable inputs may reflect the reporting entity’s own assumptions about the assumptions that market participants would use in pricing the investment.
The inputs or methodologies used for valuing investments are not necessarily an indication of the risk associated with investing in those investments. A summary of the inputs used to value the Fund’s investments as of October 31, 2023, 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.
C. Foreign Currency
The books and records of the Fund are maintained in U.S. dollars. Foreign currencies and other assets and liabilities are translated into U.S. dollars at the exchange rates prevailing at the end of the period. 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.
Notes to Financial Statements (Continued)
First Trust High Income Strategic Focus ETF (HISF)October 31, 2023 D. Affiliated Transactions
The Fund invests in securities of affiliated funds. The Fund’s investment performance and risks are directly related to the investment performance and risks of the affiliated funds. Dividend income, if any, realized gains and losses, and change in appreciation (depreciation) from affiliated funds are presented on the Statement of Operations.
Amounts relating to investments at October 31, 2023 and for the fiscal year then ended are as follows:
| | | | | Change in
Unrealized
Appreciation
(Depreciation) | | | |
First Trust Enhanced Short Maturity ETF | | | | | | | | |
First Trust Institutional Preferred Securities and Income ETF | | | | | | | | |
First Trust Limited Duration Investment Grade Corporate ETF | | | | | | | | |
First Trust Low Duration Opportunities ETF | | | | | | | | |
First Trust Tactical High Yield ETF | | | | | | | | |
First Trust TCW Opportunistic Fixed Income ETF | | | | | | | | |
| | | | | | | | |
E. Dividends and Distributions to Shareholders
Dividends from net investment income of the Fund, 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, are distributed at least annually. The Fund may also designate a portion of the amount paid to redeeming shareholders as a distribution for tax purposes.
Distributions from net investment income and realized capital gains are determined in accordance with federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These permanent differences are primarily due to the varying treatment of income and gain/loss on portfolio securities held by the Fund and have no impact on net assets or NAV per share. Temporary differences, which arise from recognizing certain items of income, expense and gain/loss in different periods for financial statement and tax purposes, will reverse at some time in the future.
The tax character of distributions paid during the fiscal years ended October 31, 2023 and 2022 was as follows:
As of October 31, 2023, the components of distributable earnings on a tax basis for the Fund were as follows:
Undistributed ordinary income | |
Accumulated capital and other gain (loss) | |
Net unrealized appreciation (depreciation) | |
F. Income Taxes
The Fund intends to continue to qualify as a regulated investment company by complying with the requirements under Subchapter M of the Internal Revenue Code of 1986, as amended, which includes distributing substantially all of its net investment income and net
Notes to Financial Statements (Continued)
First Trust High Income Strategic Focus ETF (HISF)October 31, 2023 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 2020, 2021, 2022, and 2023 remain open to federal and state audit. As of October 31, 2023, management has evaluated the application of these standards to the Fund and has determined that no provision for income tax is required in the Fund’s 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, 2023, for federal income tax purposes, the Fund had $8,546,144 of capital loss carryforwards available, to the extent provided by regulations, to offset future capital gains. To the extent that these loss carryforwards are used to offset future capital gains, it is probable that the capital gains so offset will not be distributed to the Fund’s shareholders.
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, 2023, the Fund had no net late year ordinary or capital losses.
In order to present paid-in capital and accumulated distributable earnings (loss) (which consists of accumulated net investment income (loss), accumulated net realized gain (loss) on investments and net unrealized appreciation (depreciation) on investments) on the Statement of Assets and Liabilities that more closely represent their tax character, certain adjustments have been made to paid-in capital, accumulated net investment income (loss) and accumulated net realized gain (loss) on investments. These adjustments are primarily due to the difference between book and tax treatments of income and gains on various investment securities held by the Funds and in-kind transactions. The results of operations and net assets were not affected by these adjustments. For the fiscal year ended October 31, 2023, the adjustments for the Fund were as follows:
Accumulated
Net Investment
Income (Loss) | Accumulated
Net Realized
Gain (Loss)
on Investments | |
| | |
As of October 31, 2023, the aggregate cost, gross unrealized appreciation, gross unrealized depreciation, and net unrealized appreciation/(depreciation) on investments (including short positions and derivatives, if any) for federal income tax purposes were as follows:
| Gross Unrealized
Appreciation | Gross Unrealized
(Depreciation) | Net Unrealized
Appreciation
(Depreciation) |
| | | |
G. Expenses
Expenses, other than the investment advisory fee and other excluded expenses, are paid by the Advisor (see Note 3).
3. Investment Advisory Fee, Affiliated Transactions and Other Fee Arrangements
First Trust, the investment advisor to the Fund, is a limited partnership with one limited partner, Grace Partners of DuPage L.P., and one general partner, The Charger Corporation. The Charger Corporation is an Illinois corporation controlled by James A. Bowen, Chief Executive Officer of First Trust. First Trust is responsible for the selection and ongoing monitoring of the 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,
Notes to Financial Statements (Continued)
First Trust High Income Strategic Focus ETF (HISF)October 31, 2023 audit, license fees and other services, but excluding fee payments under the Investment Management Agreement, interest, taxes, acquired fund fees and expenses, if any, brokerage commissions and other expenses connected with the execution of portfolio transactions, distribution and service fees payable pursuant to a Rule 12b-1 plan, if any, and extraordinary expenses. The annual unitary management fee payable by the Fund to First Trust for these services will be reduced at certain levels of the Fund’s net assets (“breakpoints”) and calculated pursuant to the following schedule:
| |
Fund net assets up to and including $2.5 billion | |
Fund net assets greater than $2.5 billion up to and including $5 billion | |
Fund net assets greater than $5 billion up to and including $7.5 billion | |
Fund net assets greater than $7.5 billion up to and including $10 billion | |
Fund net assets greater than $10 billion up to and including $15 billion | |
Fund net assets greater than $15 billion | |
In addition, the Fund incurs acquired fund fees and expenses. The total of the unitary management fee and acquired fund fees and expenses represents the Fund’s total annual operating expenses.
Pursuant to contractual agreement, First Trust has agreed to waive fees and/or reimburse Fund expenses to the extent that the operating expenses of the Fund (excluding interest expense, brokerage commissions and other trading expenses, taxes and extraordinary expenses but including acquired fund fees and expenses) exceed 0.87% of its average daily net assets (the “Expense Cap”) at least through March 1, 2025. Expenses reimbursed and fees waived under such agreement are not subject to recovery by First Trust.
The Trust has multiple service agreements with The Bank of New York Mellon (“BNYM”). Under the service agreements, BNYM performs custodial, fund accounting, certain administrative services, and transfer agency services for the Fund. As custodian, BNYM is responsible for custody of the Fund’s assets. As fund accountant and administrator, BNYM is responsible for maintaining the books and records of the Fund’s securities and cash. As transfer agent, BNYM is responsible for maintaining shareholder records for the Fund. BNYM is a subsidiary of The Bank of New York Mellon Corporation, a financial holding company.
Each Trustee who is not an officer or employee of First Trust, any sub-advisor or any of their affiliates (“Independent Trustees”) is paid a fixed annual retainer that is allocated equally among each fund in the First Trust Fund Complex. Each Independent Trustee is also paid an annual per fund fee that varies based on whether the fund is a closed-end or other actively managed fund, a target outcome fund or an index fund.
Additionally, the Lead Independent Trustee and the Chairs of the Audit Committee, Nominating and Governance Committee and Valuation Committee are paid annual fees to serve in such capacities, with such compensation allocated pro rata among each fund in the First Trust Fund Complex based on net assets. Independent Trustees are reimbursed for travel and out-of-pocket expenses in connection with all meetings. The Lead Independent Trustee and Committee Chairs rotate every three years. The officers and “Interested” Trustee receive no compensation from the Trust for acting in such capacities.
4. Purchases and Sales of Securities
For the fiscal year ended October 31, 2023, the cost of purchases and proceeds from sales of investments, excluding short-term investments and in-kind transactions, were $13,675,690 and $13,662,010, respectively.
For the fiscal year ended October 31, 2023, the cost of in-kind purchases and proceeds from in-kind sales were $2,229,779 and $10,951,639, respectively.
5. Creations, Redemptions and Transaction Fees
The Fund generally issues and redeems its shares in primary market transactions through a creation and redemption mechanism and does not sell or redeem individual shares. Instead, financial entities known as “Authorized Participants” have contractual arrangements with the Fund or one of the Fund’s service providers to purchase and redeem Fund shares directly with the Fund in large blocks of shares known as “Creation Units.” Prior to the start of trading on every business day, the Fund publishes through the National Securities Clearing Corporation the “basket” of securities, cash or other assets that it will accept in exchange for a Creation Unit of the Fund’s shares. An Authorized Participant that wishes to effectuate a creation of the Fund’s shares deposits with the Fund the “basket” of securities, cash or other assets identified by the Fund that day, and then receives the Creation Unit of the Fund’s shares in return for those assets. After purchasing a Creation Unit, the Authorized Participant may continue to hold the Fund’s shares or sell them in the
Notes to Financial Statements (Continued)
First Trust High Income Strategic Focus ETF (HISF)October 31, 2023 secondary market. The redemption process is the reverse of the purchase process: the Authorized Participant redeems a Creation Unit of the Fund’s shares for a basket of securities, cash or other assets. The combination of the creation and redemption process with secondary market trading in the Fund’s shares and underlying securities provides arbitrage opportunities that are designed to help keep the market price of the Fund’s shares at or close to the NAV per share of the Fund.
The Fund imposes fees in connection with the purchase of Creation Units. These fees may vary based upon various fact-based circumstances, including, but not limited to, the composition of the securities included in the Creation Unit or the countries in which the transactions are settled. The price for each Creation Unit will equal the daily NAV per share of the Fund times the number of shares in a Creation Unit, plus the fees described above and, if applicable, any operational processing and brokerage costs, transfer fees, stamp taxes and part or all of the spread between the expected bid and offer side of the market related to the securities comprising the creation basket.
The Fund also imposes fees in connection with the redemption of Creation Units. These fees may vary based upon various fact-based circumstances, including, but not limited to, the composition of the securities included in the Creation Unit or the countries in which the transactions are settled. The price received for each Creation Unit will equal the daily NAV per share of the Fund times the number of shares in a Creation Unit, minus the fees described above and, if applicable, any operational processing and brokerage costs, transfer fees, stamp taxes and part or all of the spread between the expected bid and offer side of the market related to the securities comprising the redemption basket. Investors who use the services of a broker or other such intermediary in addition to an Authorized Participant to effect a redemption of a Creation Unit may also be assessed an amount to cover the cost of such services. The redemption fee charged by the Fund will comply with Rule 22c-2 of the 1940 Act which limits redemption fees to no more than 2% of the value of the shares redeemed.
6. Distribution Plan
The Board of Trustees adopted a Distribution and Service Plan pursuant to Rule 12b-1 under the 1940 Act. In accordance with the Rule 12b-1 plan, the Fund is authorized to pay an amount up to 0.25% of its average daily net assets each year to reimburse First Trust Portfolios L.P. (“FTP”), the distributor of the Fund, for amounts expended to finance activities primarily intended to result in the sale of Creation Units or the provision of investor services. FTP may also use this amount to compensate securities dealers or other persons that are Authorized Participants for providing distribution assistance, including broker-dealer and shareholder support and educational and promotional services.
No 12b-1 fees are currently paid by the Fund, and pursuant to a contractual arrangement, no 12b-1 fees will be paid any time before March 31, 2025.
7. Indemnification
The Trust, on behalf of the Fund, has a variety of indemnification obligations under contracts with its service providers. The Trust’s maximum exposure under these arrangements is unknown. However, the Trust has not had prior claims or losses pursuant to these contracts and expects the risk of loss to be remote.
8. Subsequent Events
Management has evaluated the impact of all subsequent events on the Fund through the date the financial statements were issued and has determined that there were no subsequent events requiring recognition or disclosure in the financial statements that have not already been disclosed.
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Trustees of First Trust Exchange-Traded Fund IV:
Opinion on the Financial Statements and Financial Highlights
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of First Trust High Income Strategic Focus ETF (the “Fund”), one of the funds constituting the First Trust Exchange-Traded Fund IV, as of October 31, 2023, the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, the financial highlights for each of the five years in the period then ended, and the related notes. In our opinion, the financial statements and financial highlights present fairly, in all material respects, the financial position of the Fund as of October 31, 2023, and the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on the Fund’s financial statements and financial highlights based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Fund in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement, whether due to error or fraud. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements and financial highlights, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements and financial highlights. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and financial highlights. Our procedures included confirmation of securities owned as of October 31, 2023, by correspondence with the custodian and brokers; when replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
/s/ Deloitte & Touche, LLP
Chicago, Illinois
December 19, 2023
We have served as the auditor of one or more First Trust investment companies since 2001.
First Trust High Income Strategic Focus ETF (HISF)October 31, 2023 (Unaudited) Proxy Voting Policies and Procedures
A description of the policies and procedures that the Trust uses to determine how to vote proxies and information on how the Fund voted proxies relating to its portfolio securities during the most recent 12-month period ended June 30 is available (1) without charge, upon request, by calling (800) 988-5891; (2) on the Fund’s website at www.ftportfolios.com; and (3) on the Securities and Exchange Commission’s (“SEC”) website at www.sec.gov.
Portfolio Holdings
The Fund files portfolio holdings information for each month in a fiscal quarter within 60 days after the end of the relevant fiscal quarter on Form N-PORT. Portfolio holdings information for the third month of each fiscal quarter will be publicly available on the SEC’s website at www.sec.gov. The Fund’s complete schedule of portfolio holdings for the second and fourth quarters of each fiscal year is included in the semi-annual and annual reports to shareholders, respectively, and is filed with the SEC on Form N-CSR. The semi-annual and annual report for the Fund is available to investors within 60 days after the period to which it relates. The Fund’s Forms N-PORT and Forms N-CSR are available on the SEC’s website listed above.
Federal Tax Information
Distributions paid to foreign shareholders during the Fund’s fiscal year ended October 31, 2023 that were properly designated by the Fund as “interest-related dividends” or “short-term capital gain dividends,” may not be subject to federal income tax provided that the income was earned directly by such foreign shareholders.
Of the ordinary income (including short-term capital gain) distributions made by the Fund during the fiscal year ended October 31, 2023, none qualify for the corporate dividends received deduction available to corporate shareholders or as qualified dividend income.
Risk Considerations
Risks are inherent in all investing. Certain general risks that may be applicable to a Fund are identified below, but not all of the material risks relevant to each Fund are included in this report and not all of the risks below apply to each Fund. The material risks of investing in each Fund are spelled out in its prospectus, statement of additional information and other regulatory filings. Before investing, you should consider each Fund’s investment objective, risks, charges and expenses, and read each Fund’s prospectus and statement of additional information carefully. You can download each Fund’s prospectus at www.ftportfolios.com or contact First Trust Portfolios L.P. at (800) 621-1675 to request a prospectus, which contains this and other information about each Fund.
Concentration Risk. To the extent that a fund is able to invest a significant percentage of its assets in a single asset class or the securities of issuers within the same country, state, region, industry or sector, an adverse economic, business or political development may affect the value of the fund’s investments more than if the fund were more broadly diversified. A fund that tracks an index will be concentrated to the extent the fund’s corresponding index is concentrated. A concentration makes a fund more susceptible to any single occurrence and may subject the fund to greater market risk than a fund that is more broadly diversified.
Credit Risk. Credit risk is the risk that an issuer of a security will be unable or unwilling to make dividend, interest and/or principal payments when due and the related risk that the value of a security may decline because of concerns about the issuer’s ability to make such payments.
Cyber Security Risk. The funds are susceptible to potential operational risks through breaches in cyber security. A breach in cyber security refers to both intentional and unintentional events that may cause a fund to lose proprietary information, suffer data corruption or lose operational capacity. Such events could cause a fund to incur regulatory penalties, reputational damage, additional compliance costs associated with corrective measures and/or financial loss. In addition, cyber security breaches of a fund’s third-party service providers, such as its administrator, transfer agent, custodian, or sub-advisor, as applicable, or issuers in which the fund invests, can also subject a fund to many of the same risks associated with direct cyber security breaches.
Defined Outcome Funds Risk. To the extent a fund’s investment strategy is designed to deliver returns tied to the price performance of an underlying ETF, an investor may not realize the returns the fund seeks to achieve if that investor does not hold shares for the entire target outcome period. In the event an investor purchases shares after the first day of the target outcome period or sells shares prior to the end of the target outcome period, the buffer that the fund seeks to provide against a decline in the value of the underlying ETF may not be available, the enhanced returns that the fund seeks to provide (if any) may not be available and the investor may not
Additional Information (Continued)
First Trust High Income Strategic Focus ETF (HISF)October 31, 2023 (Unaudited) participate in a gain in the value of the underlying ETF up to the cap for the investor’s investment period. Additionally, the fund will not participate in gains of the underlying ETF above the cap and a shareholder may lose their entire investment. If the fund seeks enhanced returns, there are certain time periods when the value of the fund may fall faster than the value of the underlying ETF, and it is very unlikely that, on any given day during which the underlying ETF share price increases in value, the fund’s share price will increase at the same rate as the enhanced returns sought by the fund, which is designed for an entire target outcome period. Trading flexible exchange options involves risks different from, or possibly greater than, the risks associated with investing directly in securities, such as less liquidity and correlation and valuation risks. A fund may experience substantial downside from specific flexible exchange option positions and certain positions may expire worthless.
Derivatives Risk. To the extent a fund uses derivative instruments such as futures contracts, options contracts and swaps, the fund may experience losses because of adverse movements in the price or value of the underlying asset, index or rate, which may be magnified by certain features of the derivative. These risks are heightened when a fund’s portfolio managers use derivatives to enhance the fund’s return or as a substitute for a position or security, rather than solely to hedge (or offset) the risk of a position or security held by the fund.
Equity Securities Risk. To the extent a fund invests in equity securities, the value of the fund’s shares will fluctuate with changes in the value of the equity securities. Equity securities prices fluctuate for several reasons, including changes in investors’ perceptions of the financial condition of an issuer or the general condition of the relevant stock market, such as market volatility, or when political or economic events affecting the issuers occur. In addition, common stock prices may be particularly sensitive to rising interest rates, as the cost of capital rises and borrowing costs increase. Equity securities may decline significantly in price over short or extended periods of time, and such declines may occur in the equity market as a whole, or they may occur in only a particular country, company, industry or sector of the market.
ETF Risk. The shares of an ETF trade like common stock and represent an interest in a portfolio of securities. The risks of owning an ETF generally reflect the risks of owning the underlying securities, although lack of liquidity in an ETF could result in it being more volatile and ETFs have management fees that increase their costs. Shares of an ETF trade on an exchange at market prices rather than net asset value, which may cause the shares to trade at a price greater than net asset value (premium) or less than net asset value (discount). In times of market stress, decisions by market makers to reduce or step away from their role of providing a market for an ETF’s shares, or decisions by an ETF’s authorized participants that they are unable or unwilling to proceed with creation and/or redemption orders of an ETF’s shares, could result in shares of the ETF trading at a discount to net asset value and in greater than normal intraday bid-ask spreads.
Fixed Income Securities Risk. To the extent a fund invests in fixed income securities, the fund will be subject to credit risk, income risk, interest rate risk, liquidity risk and prepayment risk. Income risk is the risk that income from a fund’s fixed income investments could decline during periods of falling interest rates. Interest rate risk is the risk that the value of a fund’s fixed income securities will decline because of rising interest rates. Liquidity risk is the risk that a security cannot be purchased or sold at the time desired, or cannot be purchased or sold without adversely affecting the price. Prepayment risk is the risk that the securities will be redeemed or prepaid by the issuer, resulting in lower interest payments received by the fund. In addition to these risks, high yield securities, or “junk” bonds, are subject to greater market fluctuations and risk of loss than securities with higher ratings, and the market for high yield securities is generally smaller and less liquid than that for investment grade securities.
Index or Model Constituent Risk. Certain funds may be a constituent of one or more indices or ETF models. As a result, such a fund may be included in one or more index-tracking exchange-traded funds or mutual funds. Being a component security of such a vehicle could greatly affect the trading activity involving a fund, the size of the fund and the market volatility of the fund. Inclusion in an index could increase demand for the fund and removal from an index could result in outsized selling activity in a relatively short period of time. As a result, a fund’s net asset value could be negatively impacted and the fund’s market price may be significantly below its net asset value during certain periods. In addition, index rebalances may potentially result in increased trading activity in a fund’s shares.
Index Provider Risk. To the extent a fund seeks to track an index, it is subject to Index Provider Risk. There is no assurance that the Index Provider will compile the Index accurately, or that the Index will be determined, maintained, constructed, reconstituted, rebalanced, composed, calculated or disseminated accurately. To correct any such error, the Index Provider may carry out an unscheduled rebalance or other modification of the Index constituents or weightings, which may increase the fund’s costs. The Index Provider does not provide any representation or warranty in relation to the quality, accuracy or completeness of data in the Index, and
Additional Information (Continued)
First Trust High Income Strategic Focus ETF (HISF)October 31, 2023 (Unaudited) it does not guarantee that the Index will be calculated in accordance with its stated methodology. Losses or costs associated with any Index Provider errors generally will be borne by the fund and its shareholders.
Investment Companies Risk. To the extent a fund invests in the securities of other investment vehicles, the fund will incur additional fees and expenses that would not be present in a direct investment in those investment vehicles. Furthermore, the fund’s investment performance and risks are directly related to the investment performance and risks of the investment vehicles in which the fund invests.
LIBOR Risk. To the extent a fund invests in floating or variable rate obligations that use the London Interbank Offered Rate (“LIBOR”) as a reference interest rate, it is subject to LIBOR Risk. The United Kingdom’s Financial Conduct Authority, which regulates LIBOR, has ceased making LIBOR available as a reference rate over a phase-out period that began December 31, 2021. There is no assurance that any alternative reference rate, including the Secured Overnight Financing Rate (“SOFR”) will be similar to or produce the same value or economic equivalence as LIBOR or that instruments using an alternative rate will have the same volume or liquidity. The unavailability or replacement of LIBOR may affect the value, liquidity or return on certain fund investments and may result in costs incurred in connection with closing out positions and entering into new trades. Any potential effects of the transition away from LIBOR on the fund or on certain instruments in which the fund invests can be difficult to ascertain, and they may vary depending on a variety of factors, and they could result in losses to the fund.
Management Risk. To the extent that a fund is actively managed, it is subject to management risk. In managing an actively-managed fund’s investment portfolio, the fund’s portfolio managers will apply investment techniques and risk analyses that may not have the desired result. There can be no guarantee that a fund will meet its investment objective.
Market Risk. Market risk is the risk that a particular security, or shares of a fund in general, may fall in value. Securities held by a fund, as well as shares of a fund itself, are subject to market fluctuations caused by factors such as general economic conditions, political events, regulatory or market developments, changes in interest rates and perceived trends in securities prices. Shares of a fund could decline in value or underperform other investments as a result of the risk of loss associated with these market fluctuations. In addition, local, regional or global events such as war, acts of terrorism, spread of infectious diseases or other public health issues, recessions, or other events could have a significant negative impact on a fund and its investments. Such events may affect certain geographic regions, countries, sectors and industries more significantly than others. In February 2022, Russia invaded Ukraine which has caused and could continue to cause significant market disruptions and volatility within the markets in Russia, Europe, and the United States. The hostilities and sanctions resulting from those hostilities could have a significant impact on certain fund investments as well as fund performance. The COVID-19 global pandemic and the ensuing policies enacted by governments and central banks have caused and may continue to cause significant volatility and uncertainty in global financial markets. While the U.S. has resumed “reasonably” normal business activity, many countries continue to impose lockdown measures. Additionally, there is no guarantee that vaccines will be effective against emerging variants of the disease. These events also adversely affect the prices and liquidity of a fund’s portfolio securities or other instruments and could result in disruptions in the trading markets. Any of such circumstances could have a materially negative impact on the value of a fund’s shares and result in increased market volatility. During any such events, a fund’s shares may trade at increased premiums or discounts to their net asset value and the bid/ask spread on a fund’s shares may widen.
Non-U.S. Securities Risk. To the extent a fund invests in non-U.S. securities, it is subject to additional risks not associated with securities of domestic issuers. Non-U.S. securities are subject to higher volatility than securities of domestic issuers due to: possible adverse political, social or economic developments; restrictions on foreign investment or exchange of securities; capital controls; lack of liquidity; currency exchange rates; excessive taxation; government seizure of assets; the imposition of sanctions by foreign governments; different legal or accounting standards; and less government supervision and regulation of exchanges in foreign countries. Investments in non-U.S. securities may involve higher costs than investments in U.S. securities, including higher transaction and custody costs, as well as additional taxes imposed by non-U.S. governments. These risks may be heightened for securities of companies located, or with significant operations, in emerging market countries.
Operational Risk. Each fund is subject to risks arising from various operational factors, including, but not limited to, human error, processing and communication errors, errors of a fund’s service providers, counterparties or other third-parties, failed or inadequate processes and technology or systems failures. Each fund relies on third-parties for a range of services, including custody. Any delay or failure relating to engaging or maintaining such service providers may affect a fund’s ability to meet its investment objective. Although the funds and the funds’ investment advisor seek to reduce these operational risks through controls and procedures, there is no way to completely protect against such risks.
Additional Information (Continued)
First Trust High Income Strategic Focus ETF (HISF)October 31, 2023 (Unaudited) Passive Investment Risk. To the extent a fund seeks to track an index, the fund will invest in the securities included in, or representative of, the index regardless of their investment merit. A fund generally will not attempt to take defensive positions in declining markets.
Preferred Securities Risk. Preferred securities combine some of the characteristics of both common stocks and bonds. Preferred securities are typically subordinated to bonds and other debt securities in a company’s capital structure in terms of priority to corporate income, subjecting them to greater credit risk than those debt securities. Generally, holders of preferred securities have no voting rights with respect to the issuing company unless preferred dividends have been in arrears for a specified number of periods, at which time the preferred security holders may obtain limited rights. In certain circumstances, an issuer of preferred securities may defer payment on the securities and, in some cases, redeem the securities prior to a specified date. Preferred securities may also be substantially less liquid than other securities, including common stock.
Valuation Risk. The valuation of certain securities may carry more risk than that of common stock. Uncertainties in the conditions of the financial markets, unreliable reference data, lack of transparency and inconsistency of valuation models and processes may lead to inaccurate asset pricing. A fund may hold investments in sizes smaller than institutionally sized round lot positions (sometimes referred to as odd lots). However, third-party pricing services generally provide evaluations on the basis of institutionally-sized round lots. If a fund sells certain of its investments in an odd lot transaction, the sale price may be less than the value at which such securities have been held by the fund. Odd lots often trade at lower prices than institutional round lots. There is no assurance that the fund will be able to sell a portfolio security at the price established by the pricing service, which could result in a loss to the fund.
NOT FDIC INSURED NOT BANK GUARANTEED MAY LOSE VALUE
Advisory Agreement
Board Considerations Regarding Approval of the Continuation of the Investment Management Agreement
The Board of Trustees of First Trust Exchange-Traded Fund IV (the “Trust”), including the Independent Trustees, unanimously approved the continuation of the Investment Management Agreement (the “Agreement”) with First Trust Advisors L.P. (the “Advisor”) on behalf of the First Trust High Income Strategic Focus ETF (the “Fund”). The Board approved the continuation of the Agreement for a one-year period ending June 30, 2024 at a meeting held on June 4–5, 2023. The Board determined that the continuation of the Agreement is in the best interests of the Fund in light of the nature, extent and quality of the services provided and such other matters as the Board considered to be relevant in the exercise of its business judgment.
To reach this determination, the Board considered its duties under the Investment Company Act of 1940, as amended (the “1940 Act”), as well as under the general principles of state law, in reviewing and approving advisory contracts; the requirements of the 1940 Act in such matters; the fiduciary duty of investment advisors with respect to advisory agreements and compensation; the standards used by courts in determining whether investment company boards have fulfilled their duties; and the factors to be considered by the Board in voting on such agreements. At meetings held on April 17, 2023 and June 4–5, 2023, the Board, including the Independent Trustees, reviewed materials provided by the Advisor responding to requests for information from counsel to the Independent Trustees, submitted on behalf of the Independent Trustees, that, among other things, outlined: the services provided by the Advisor to the Fund (including the relevant personnel responsible for these services and their experience); the unitary fee rate schedule payable by the Fund as compared to fees charged to a peer group of funds (the “Expense Group”) and a broad peer universe of funds (the “Expense Universe”), each assembled by Broadridge Financial Solutions, Inc. (“Broadridge”), an independent source, and as compared to fees charged to other clients of the Advisor, including other exchange-traded funds (“ETFs”) managed by the Advisor; the expense ratio of the Fund as compared to expense ratios of the funds in the Fund’s Expense Group and Expense Universe; performance information for the Fund, including comparisons of the Fund’s performance to that of one or more relevant benchmark indexes and to that of a performance group of funds and a broad performance universe of funds (the “Performance Universe”), each assembled by Broadridge; the nature of expenses incurred in providing services to the Fund and the potential for the Advisor to realize economies of scale, if any; profitability and other financial data for the Advisor; any indirect benefits to the Advisor and its affiliate, First Trust Portfolios L.P. (“FTP”); and information on the Advisor’s compliance program. The Board reviewed initial materials with the Advisor at the meeting held on April 17, 2023, prior to which the Independent Trustees and their counsel met separately to discuss the information provided by the Advisor. Following the April meeting, counsel to the Independent Trustees, on behalf of the Independent Trustees, requested certain clarifications and supplements to the materials provided, and the information provided in response to those requests was considered at an executive session of the Independent Trustees and their counsel held prior to the June 4–5, 2023 meeting, as well as at the June meeting. The Board applied its business judgment to determine whether the arrangement between the Trust and the Advisor continues to be a reasonable business arrangement from the Fund’s perspective. The Board
Additional Information (Continued)
First Trust High Income Strategic Focus ETF (HISF)October 31, 2023 (Unaudited) determined that, given the totality of the information provided with respect to the Agreement, the Board had received sufficient information to renew the Agreement. The Board considered that shareholders chose to invest or remain invested in the Fund knowing that the Advisor manages the Fund and knowing the Fund’s unitary fee.
In reviewing the Agreement, the Board considered the nature, extent and quality of the services provided by the Advisor under the Agreement. The Board considered that the Advisor is responsible for the overall management and administration of the Trust and the Fund and reviewed all of the services provided by the Advisor to the Fund, as well as the background and experience of the persons responsible for such services. The Board noted that the Fund is an actively-managed ETF and noted that the Advisor’s Investment Committee is responsible for the day-to-day management of the Fund’s investments. The Board considered the background and experience of the members of the Investment Committee and noted the Board’s prior meetings with members of the Investment Committee. In reviewing the services provided, the Board noted the compliance program that had been developed by the Advisor and considered that it includes a robust program for monitoring the Advisor’s and the Fund’s compliance with the 1940 Act, as well as the Fund’s compliance with its investment objectives, policies and restrictions. The Board also considered a report from the Advisor with respect to its risk management functions related to the operation of the Fund. Finally, as part of the Board’s consideration of the Advisor’s services, the Advisor, in its written materials and at the April 17, 2023 meeting, described to the Board the scope of its ongoing investment in additional personnel and infrastructure to maintain and improve the quality of services provided to the Fund and the other funds in the First Trust Fund Complex. In light of the information presented and the considerations made, the Board concluded that the nature, extent and quality of the services provided to the Trust and the Fund by the Advisor under the Agreement have been and are expected to remain satisfactory and that the Advisor has managed the Fund consistent with its investment objectives, policies and restrictions.
The Board considered the unitary fee rate schedule payable by the Fund under the Agreement for the services provided. The Board considered that as part of the unitary fee the Advisor is responsible for the Fund’s expenses, including the cost of transfer agency, custody, fund administration, legal, audit and other services and license fees, if any, but excluding the fee payment under the Agreement and 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 Rule 12b-1 plan, if any, and extraordinary expenses, if any. The Board noted that because the Fund invests in underlying ETFs, including ETFs in the First Trust Fund Complex, the Fund incurs acquired fund fees and expenses, which are not payable out of the unitary fee, and that such acquired fund fees and expenses will change over time as assets are reallocated among the underlying ETFs. The Board considered that the Advisor agreed to cap the Fund’s combined unitary fee and acquired fund fees and expenses at 0.87% of its average daily net assets at least through March 1, 2024. The Board received and reviewed information showing the fee rates and expense ratios of the peer funds in the Expense Group, as well as advisory and unitary fee rates charged by the Advisor to other fund (including ETFs) and non-fund clients, as applicable. Because the Fund pays a unitary fee, the Board determined that expense ratios were the most relevant comparative data point. Based on the information provided, the Board noted that the total (net) expense ratio (excluding acquired fund fees and expenses) for the Fund was below the median total (net) expense ratio (excluding acquired fund fees and expenses) of the peer funds in the Expense Group. The Board also noted that the total (net) expense ratio (including acquired fund fees and expenses) for the Fund, after taking into account fee waivers, was below the median total (net) expense ratio (including acquired fund fees and expenses) of the peer funds in the Expense Group. With respect to the Expense Group, the Board, at the April 17, 2023 meeting, discussed with Broadridge its methodology for assembling peer groups and discussed with the Advisor limitations in creating peer groups for actively-managed ETFs, and different business models that may affect the pricing of services among ETF sponsors. The Board took these limitations and differences into account in considering the peer data. With respect to fees charged to other non-ETF clients, the Board considered differences between the Fund and other non-ETF clients that limited their comparability. The Board noted that, in connection with a change in the Fund’s investment strategy from a multi-manager, multi-strategy investment strategy to a fund-of-funds investment strategy that follows the Advisor’s High Income model, which shareholders approved effective February 28, 2022, the Fund’s unitary fee rate was reduced from 0.85% to 0.20% of the Fund’s average daily net assets. In considering the unitary fee rate schedule overall, the Board also considered the Advisor’s statement that it seeks to meet investor needs through innovative and value-added investment solutions and the Advisor’s demonstrated long-term commitment to the Fund and the other funds in the First Trust Fund Complex.
The Board considered performance information for the Fund. The Board noted the process it has established for monitoring the Fund’s performance and portfolio risk on an ongoing basis, which includes quarterly performance reporting from the Advisor for the Fund. The Board determined that this process continues to be effective for reviewing the Fund’s performance. The Board received and reviewed information comparing the Fund’s performance for periods ended December 31, 2022 to the performance of the funds in the Performance Universe and to that of a benchmark index. The Board noted the change in the Fund’s investment strategy approved by shareholders effective February 28, 2022. Based on the information provided, the Board noted that the Fund outperformed the Performance Universe median for the one- and five-year periods ended December 31, 2022, underperformed the Performance
Additional Information (Continued)
First Trust High Income Strategic Focus ETF (HISF)October 31, 2023 (Unaudited) Universe median for the three-year period ended December 31, 2022 and outperformed the benchmark index for the one-, three- and five-year periods ended December 31, 2022.
On the basis of all the information provided on the unitary fee and performance of the Fund and the ongoing oversight by the Board, the Board concluded that the unitary fee for the Fund continues to be reasonable and appropriate in light of the nature, extent and quality of the services provided by the Advisor to the Fund under the Agreement.
The Board considered information and discussed with the Advisor whether there were any economies of scale in connection with providing advisory services to the Fund at current asset levels and whether the Fund may benefit from any economies of scale. The Board noted that the unitary fee rate schedule for the Fund includes breakpoints pursuant to which the unitary fee rate will be reduced as assets of the Fund meet certain thresholds. The Board considered the Advisor’s statement that it believes that its expenses relating to providing advisory services to the Fund will increase during the next twelve months as the Advisor continues to build infrastructure and add new staff. The Board also noted that under the unitary fee structure, any reduction in expenses associated with the management and operations of the Fund would benefit the Advisor, but that the unitary fee structure provides a level of certainty in expenses for shareholders of the Fund. The Board concluded that the unitary fee rate schedule for the Fund reflects an appropriate level of sharing of any economies of scale that may be realized in the management of the Fund at current asset levels. The Board considered the revenues and allocated costs (including the allocation methodology) of the Advisor in serving as investment advisor to the Fund for the twelve months ended December 31, 2022 and the estimated profitability level for the Fund calculated by the Advisor based on such data, as well as complex-wide and product-line profitability data, for the same period. The Board noted the inherent limitations in the profitability analysis and concluded that, based on the information provided, the Advisor’s profitability level for the Fund was not unreasonable. In addition, the Board considered indirect benefits described by the Advisor that may be realized from its relationship with the Fund. The Board considered that the Advisor had identified as an indirect benefit to the Advisor and FTP their exposure to investors and brokers who, absent their exposure to the Fund, may have had no dealings with the Advisor or FTP, and noted that the Advisor does not utilize soft-dollars in connection with the Fund. In addition, the Board considered that the Advisor, as the investment advisor to certain of the underlying ETFs in which the Fund invests, will recognize additional revenue from such underlying ETFs if investment by the Fund causes the assets of the underlying ETFs to grow. The Board concluded that the character and amount of potential indirect benefits to the Advisor were not unreasonable.
Based on all of the information considered and the conclusions reached, the Board, including the Independent Trustees, unanimously determined that the terms of the Agreement continue to be fair and reasonable and that the continuation of the Agreement is in the best interests of the Fund. No single factor was determinative in the Board’s analysis.
Board of Trustees and Officers
First Trust High Income Strategic Focus ETF (HISF)October 31, 2023 (Unaudited) The following tables identify the Trustees and Officers of the Trust. Unless otherwise indicated, the address of all persons is 120 East Liberty Drive, Suite 400, Wheaton, IL 60187.
The Trust’s statement of additional information includes additional information about the Trustees and is available, without charge, upon request, by calling (800) 988-5891.
Name,
Year of Birth and
Position with the Trust | Term of Office
and Year First
Elected or
Appointed | Principal Occupations
During Past 5 Years | Number of
Portfolios in
the First Trust
Fund Complex
Overseen by
Trustee | Other
Trusteeships or
Directorships
Held by Trustee
During Past
5 Years |
|
Richard E. Erickson, Trustee
(1951) | • Indefinite Term • Since Inception | Retired; Physician, Edward-Elmhurst Medical Group (2021 to September 2023); Physician and Officer, Wheaton Orthopedics (1990 to 2021) | | |
Thomas R. Kadlec, Trustee
(1957) | • Indefinite Term • Since Inception | Retired; President, ADM Investors Services, Inc. (Futures Commission Merchant) (2010 to July 2022) | | Director, National Futures Association and ADMIS Singapore Ltd.; Formerly, Director of ADM Investor Services, Inc., ADM Investor Services International, ADMIS Hong Kong Ltd., and Futures Industry Association |
Denise M. Keefe, Trustee
(1964) | • Indefinite Term • Since 2021 | Executive Vice President, Advocate Aurora Health and President, Advocate Aurora Continuing Health Division (Integrated Healthcare System) | | Director and Board Chair of Advocate Home Health Services, Advocate Home Care Products and Advocate Hospice; Director and Board Chair of Aurora At Home (since 2018); Director of Advocate Physician Partners Accountable Care Organization; Director of RML Long Term Acute Care Hospitals; Director of Senior Helpers (since 2021); and Director of MobileHelp (since 2022) |
Robert F. Keith, Trustee
(1956) | • Indefinite Term • Since Inception | President, Hibs Enterprises (Financial and Management Consulting) | | Formerly, Director of Trust Company of Illinois |
Niel B. Nielson, Trustee
(1954) | • Indefinite Term • Since Inception | Senior Advisor (2018 to Present), Managing Director and Chief Operating Officer (2015 to 2018), Pelita Harapan Educational Foundation (Educational Products and Services) | | |
Bronwyn Wright, Trustee
(1971) | • Indefinite Term • Since 2023 | Independent Director to a number of Irish collective investment funds (2009 to Present); Various roles at international affiliates of Citibank (1994 to 2009), including Managing Director, Citibank Europe plc and Head of Securities and Fund Services, Citi Ireland (2007 to 2009) | | |
Board of Trustees and Officers (Continued)
First Trust High Income Strategic Focus ETF (HISF)October 31, 2023 (Unaudited) Name, Year of Birth and Position with the Trust | Term of Office and Year First Elected or Appointed | Principal Occupations During Past 5 Years | Number of Portfolios in the First Trust Fund Complex Overseen by Trustee | Other Trusteeships or Directorships Held by Trustee During Past 5 Years |
|
James A. Bowen(1), Trustee,
Chairman of the Board
(1955) | • Indefinite Term • Since Inception | Chief Executive Officer, First Trust Advisors L.P. and First Trust Portfolios L.P., Chairman of the Board of Directors, BondWave LLC (Software Development Company) and Stonebridge Advisors LLC (Investment Advisor) | | |
| Position and
Offices
with Trust | Term of Office
and Length of
Service | Principal Occupations
During Past 5 Years |
|
| President and Chief Executive Officer | • Indefinite Term • Since 2016 | Managing Director and Chief Financial Officer, First Trust Advisors L.P. and First Trust Portfolios L.P.; Chief Financial Officer, BondWave LLC (Software Development Company) and Stonebridge Advisors LLC (Investment Advisor) |
| Treasurer, Chief Financial Officer and Chief Accounting Officer | • Indefinite Term • Since 2023 | Senior Vice President, First Trust Advisors L.P. and First Trust Portfolios L.P., July 2021 to Present. Previously, Vice President, First Trust Advisors L.P. and First Trust Portfolios L.P., 2014 - 2021. |
| Secretary and Chief Legal Officer | • Indefinite Term • Since Inception | General Counsel, First Trust Advisors L.P. and First Trust Portfolios L.P.; Secretary and General Counsel, BondWave LLC; Secretary, Stonebridge Advisors LLC |
Daniel J. Lindquist
(1970) | | • Indefinite Term • Since Inception | Managing Director, First Trust Advisors L.P. and First Trust Portfolios L.P. |
| Chief Compliance Officer and Assistant Secretary | • Indefinite Term • Since Inception | Deputy General Counsel, First Trust Advisors L.P. and First Trust Portfolios L.P. |
| | • Indefinite Term • Since Inception | Senior Vice President, First Trust Advisors L.P. and First Trust Portfolios L.P. |
| | • Indefinite Term • Since Inception | Senior Vice President, First Trust Advisors L.P. and First Trust Portfolios L.P. |
(1)
Mr. Bowen is deemed an “interested person” of the Trust due to his position as Chief Executive Officer of First Trust Advisors L.P., investment advisor of the Trust.
(2)
The term “officer” means the president, vice president, secretary, treasurer, controller or any other officer who performs a policy making function.
First Trust High Income Strategic Focus ETF (HISF)October 31, 2023 (Unaudited) Privacy Policy
First Trust values our relationship with you and considers your privacy an important priority in maintaining that relationship. We are committed to protecting the security and confidentiality of your personal information.
Sources of Information
We collect nonpublic personal information about you from the following sources:
• Information we receive from you and your broker-dealer, investment professional or financial representative through interviews, applications, agreements or other forms;
• Information about your transactions with us, our affiliates or others;
• Information we receive from your inquiries by mail, e-mail or telephone; and
• Information we collect on our website through the use of “cookies.” For example, we may identify the pages on our website that your browser requests or visits.
Information Collected
The type of data we collect may include your name, address, social security number, age, financial status, assets, income, tax information, retirement and estate plan information, transaction history, account balance, payment history, investment objectives, marital status, family relationships and other personal information.
Disclosure of Information
We do not disclose any nonpublic personal information about our customers or former customers to anyone, except as permitted by law. In addition to using this information to verify your identity (as required under law), the permitted uses may also include the disclosure of such information to unaffiliated companies for the following reasons:
• In order to provide you with products and services and to effect transactions that you request or authorize, we may disclose your personal information as described above to unaffiliated financial service providers and other companies that perform administrative or other services on our behalf, such as transfer agents, custodians and trustees, or that assist us in the distribution of investor materials such as trustees, banks, financial representatives, proxy services, solicitors and printers.
• We may release information we have about you if you direct us to do so, if we are compelled by law to do so, or in other legally limited circumstances (for example to protect your account from fraud).
In addition, in order to alert you to our other financial products and services, we may share your personal information within First Trust.
Use of Website Analytics
We currently use third party analytics tools, Google Analytics and AddThis, to gather information for purposes of improving First Trust’s website and marketing our products and services to you. These tools employ cookies, which are small pieces of text stored in a file by your web browser and sent to websites that you visit, to collect information, track website usage and viewing trends such as the number of hits, pages visited, videos and PDFs viewed and the length of user sessions in order to evaluate website performance and enhance navigation of the website. We may also collect other anonymous information, which is generally limited to technical and web navigation information such as the IP address of your device, internet browser type and operating system for purposes of analyzing the data to make First Trust’s website better and more useful to our users. The information collected does not include any personal identifiable information such as your name, address, phone number or email address unless you provide that information through the website for us to contact you in order to answer your questions or respond to your requests. To find out how to opt-out of these services click on: Google Analytics and AddThis.
Confidentiality and Security
With regard to our internal security procedures, First Trust restricts access to your nonpublic personal information to those First Trust employees who need to know that information to provide products or services to you. We maintain physical, electronic and procedural safeguards to protect your nonpublic personal information.
Policy Updates and Inquiries
As required by federal law, we will notify you of our privacy policy annually. We reserve the right to modify this policy at any time, however, if we do change it, we will tell you promptly. For questions about our policy, or for additional copies of this notice, please go to www.ftportfolios.com, or contact us at 1-800-621-1675 (First Trust Portfolios) or 1-800-222-6822 (First Trust Advisors).
March 2023
First Trust Exchange-Traded Fund IV
INVESTMENT ADVISOR
First Trust Advisors L.P.
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
ADMINISTRATOR, CUSTODIAN,
FUND ACCOUNTANT &
TRANSFER AGENT
The Bank of New York Mellon
240 Greenwich Street
New York, NY 10286
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
111 South Wacker Drive
Chicago, IL 60606
LEGAL COUNSEL
Chapman and Cutler LLP
320 South Canal Street
Chicago, IL 60606
First Trust Exchange-Traded Fund IV
| First Trust Tactical High Yield ETF (HYLS) |
Annual Report
For the Year Ended
October 31, 2023 |
First Trust Tactical High Yield ETF (HYLS)
Annual Report
October 31, 2023
Caution Regarding Forward-Looking Statements
This report contains certain forward-looking statements within the meaning of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended. Forward-looking statements include statements regarding the goals, beliefs, plans or current expectations of First Trust Advisors L.P. (“First Trust” or the “Advisor”) and its representatives, taking into account the information currently available to them. Forward-looking statements include all statements that do not relate solely to current or historical fact. For example, forward-looking statements include the use of words such as “anticipate,” “estimate,” “intend,” “expect,” “believe,” “plan,” “may,” “should,” “would” or other words that convey uncertainty of future events or outcomes.
Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the series of First Trust Exchange-Traded Fund IV (the “Trust”) described in this report (First Trust Tactical High Yield ETF; hereinafter referred to as the “Fund”) to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. When evaluating the information included in this report, you are cautioned not to place undue reliance on these forward-looking statements, which reflect the judgment of the Advisor and its representatives only as of the date hereof. We undertake no obligation to publicly revise or update these forward-looking statements to reflect events and circumstances that arise after the date hereof.
Performance and Risk Disclosure
There is no assurance that the Fund will achieve its investment objectives. The Fund is subject to market risk, which is the possibility that the market values of securities owned by the Fund will decline and that the value of the Fund’s shares may therefore be less than what you paid for them. Accordingly, you can lose money investing in the Fund. See “Risk Considerations” in the Additional Information section of this report for a discussion of certain other risks of investing in the Fund.
Performance data quoted represents past performance, which is no guarantee of future results, and current performance may be lower or higher than the figures shown. For the most recent month-end performance figures, please visit www.ftportfolios.com or speak with your financial advisor. Investment returns, net asset value and share price will fluctuate and Fund shares, when sold, may be worth more or less than their original cost.
The Advisor may also periodically provide additional information on Fund performance on the Fund’s webpage at www.ftportfolios.com.
How to Read This Report
This report contains information that may help you evaluate your investment in the Fund. It includes details about the Fund and presents data and analysis that provide insight into the Fund’s performance and investment approach.
By reading the portfolio commentary from the portfolio management team of the Fund, you may obtain an understanding of how the market environment affected the Fund’s performance. The statistical information that follows may help you understand the Fund’s performance compared to that of a relevant market benchmark.
It is important to keep in mind that the opinions expressed by personnel of the Advisor are just that: informed opinions. They should not be considered to be promises or advice. The opinions, like the statistics, cover the period through the date on the cover of this report. The material risks of investing in the Fund are spelled out in the prospectus, the statement of additional information, and other Fund regulatory filings.
First Trust Tactical High Yield ETF (HYLS)
Annual Letter from the Chairman and CEO
October 31, 2023
Dear Shareholders,
First Trust is pleased to provide you with the annual report for the First Trust Tactical High Yield ETF (the “Fund”), which contains detailed information about the Fund for the twelve months ended October 31, 2023.
The Bureau of Economic Analysis recently announced that U.S. real gross domestic product (“GDP”) grew by a staggering 4.9% in the third quarter of 2023 and is now up 2.9% on a year-over-year basis from where it stood in the third quarter of 2022. The most recent quarter’s GDP data represents the fastest growth rate for any quarter since 2014. Consumer spending, which rose by 4.0% over the period, was responsible for 2.7 percentage points of the total increase in GDP. Whether the consumer can keep up this pace of spending remains to be seen, especially given recent news that excess savings from the pandemic-era stimulus have likely been depleted. From a global perspective, the International Monetary Fund (“IMF”) notes that progress in fighting inflation has led to lower economic growth. In their October 2023 publication of the World Economic Outlook, the IMF projected that the growth in world economic output is expected to slow from 3.5% in 2022 to 2.9% in 2024. The economic growth in advanced economies is projected to plummet from 2.6% in 2022 to 1.4% in 2024.
In the notes to their September 2023 meeting, the Federal Open Market Committee revealed that they may need to keep interest rates “higher for longer” as they continue to battle stubbornly high inflation. As many investors are likely aware, a higher Federal Funds target rate can have deep implications for consumers, such as driving up the cost of borrowing for homes, automobiles, and other large purchases. The American consumer has yet to feel the full weight of those burdens, in my opinion. That said, the data reveals a different story among corporate America. S&P Global Market Intelligence reported that a total of 516 U.S. corporations filed for bankruptcy protection on a year-to-date basis through September 30, 2023, up from a total of 263 corporate bankruptcy filings over the same period last year. Higher interest rates and Treasury bond yields have also sapped demand for commercial property loans. Data from Trepp, LLC, a leading provider of data and analytics to the commercial real estate and banking markets, revealed that just $28.2 billion of loans converted into commercial mortgage-backed securities have been issued in 2023, the lowest figure since 2011.
The financial markets battled a myriad of headwinds over the past year, from geopolitical uncertainty resulting from war (the conflicts between Israel and Hamas and Russia and Ukraine), to slowing global economic growth and sticky inflation. Brian Wesbury, Chief Economist at First Trust, notes that a U.S. economic recession is likely to begin at some point early next year. While calls for a recession may concern some investors, the following may offer solace. Data from Bloomberg reveals that the S&P 500® Index has posted positive total returns over the 3-year period following every recession since 1948.
Thank you for giving First Trust the opportunity to play a role in your financial future. We value our relationship with you and will report on the Fund again in six months.
Sincerely,
James A. Bowen
Chairman of the Board of Trustees
Chief Executive Officer of First Trust Advisors L.P.
Fund Performance Overview (Unaudited)
First Trust Tactical High Yield ETF (HYLS)
The First Trust Tactical High Yield ETF’s (the “Fund”) investment objective is to provide current income. The Fund’s secondary investment objective is to provide capital appreciation. Under normal market conditions, the Fund invests at least 80% of its net assets (including investment borrowings) in high yield debt securities that are rated below investment grade at the time of purchase or unrated securities deemed by the Fund’s advisor to be of comparable quality. Below investment grade securities are those that, at the time of purchase, are rated lower than “BBB-” by S&P Global Ratings, or lower than “Baa3” by Moody’s Investors Service, Inc., or comparably rated by another nationally recognized statistical rating organization. High yield debt securities that are rated below investment grade are commonly referred to as “junk” debt. Such securities may include U.S. and non-U.S. corporate debt obligations, bank loans and convertible bonds. For purposes of determining whether a security is below investment grade, the lowest available rating will be considered. The Fund may invest in non-income producing securities including Distressed Securities (defined below) and common stocks. Companies whose financial condition is troubled or uncertain and that may be involved in bankruptcy proceedings, reorganizations or financial restructurings are referred to herein as “Distressed Securities.” The Fund invests no more than 15% of its net assets in Distressed Securities, as determined at the time of investment. The Fund may, under normal market conditions, invest up to 40% of its net assets (including investment borrowings) in bank loans; however the Fund invests no more than 15% of its net assets (including investment borrowings) in loans other than first lien senior secured floating rate bank loans. The Fund may invest in listed and over-the-counter derivatives to the extent permitted by the listing rules of Nasdaq, Inc. The Fund may use certain credit derivatives to take on additional credit risk and obtain exposure to the high yield debt market, including utilizing credit default swap indices.The Fund may not be appropriate for all investors.
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| | Average Annual Total Returns | |
| | | | Inception
(2/25/13)
to 10/31/23 | | | Inception
(2/25/13)
to 10/31/23 |
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ICE BofA US High Yield Constrained Index | | | | | | | |
Total returns for the period since inception are calculated from the inception date of the Fund. “Average Annual Total Returns” represent the average annual change in value of an investment over the periods indicated. “Cumulative Total Returns” represent the total change in value of an investment over the periods indicated.
The Fund’s per share net asset value (“NAV”) is the value of one share of the Fund and is computed by dividing the value of all assets of the Fund (including accrued interest and dividends), less all liabilities (including accrued expenses and dividends declared but unpaid), by the total number of outstanding shares. The price used to calculate market return (“Market Price”) is determined by using the midpoint of the national best bid and offer price (“NBBO”) as of the time that the Fund’s NAV is calculated. Under Securities and Exchange Commission rules, the NBBO consists of the highest displayed buy and lowest sell prices among the various exchanges trading the Fund at the time the Fund’s NAV is calculated. Prior to January 1, 2019, the price used was the midpoint between the highest bid and the lowest offer on the stock exchange on which shares of the Fund were listed for trading as of the time that the Fund’s NAV was calculated. Since shares of the Fund did not trade in the secondary market until after its inception, for the period from inception to the first day of secondary market trading in shares of the Fund, the NAV of the Fund is used as a proxy for the secondary market trading price to calculate market returns. NAV and market returns assume that all distributions have been reinvested in the Fund at NAV and Market Price, respectively.
An index is a statistical composite that tracks a specified financial market or sector. Unlike the Fund, the 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.
| On January 3, 2023, the fair value methodology used to value the senior loan investments held by the Fund was changed. Prior to that date, the senior loans were valued using the bid side price provided by a pricing service. After such date, the senior loans were valued using the midpoint between the bid and ask price provided by a pricing service. The change in the Fund’s fair value methodology on January 3, 2023, resulted in a one-time increase in the Fund’s net asset value of approximately $0.035 per share on that date, which represented a positive impact on the Fund’s performance of 0.09%. Without the change to the pricing methodology, the performance of the Fund on a NAV basis would have been 3.41%, 1.73%, 2.83%, 3.27%, 8.96%, 32.15%, and 41.08%, in the one-year, five-year average annual, 10-year average annual, since inception average annual, five-year cumulative, ten-year cumulative and since inception cumulative periods ended October 31, 2023, respectively. |
Fund Performance Overview (Unaudited) (Continued)
First Trust Tactical High Yield ETF (HYLS) (Continued)
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Health Care Providers & Services | |
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Hotels, Restaurants & Leisure | |
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Trading Companies & Distributors | |
Diversified Telecommunication Services | |
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Commercial Services & Supplies | |
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Health Care Equipment & Supplies | |
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Interactive Media & Services | |
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Life Sciences Tools & Services | |
Independent Power and Renewable Electricity Producers | |
Wireless Telecommunication Services | |
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Construction & Engineering | |
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Electronic Equipment, Instruments & Components | |
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Diversified Financial Services | |
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Real Estate Management & Development | |
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Diversified Consumer Services | |
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Semiconductors & Semiconductor Equipment | |
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Corporate Bonds and Notes | |
Foreign Corporate Bonds and Notes | |
Senior Floating-Rate Loan Interests | |
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Credit Quality (S&P ratings)(3) | % of Senior Loans
and other
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Vercend Technologies, Inc. (Cotiviti) | |
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Alliant Holdings Intermediate LLC / Alliant Holdings Co-Issuer | |
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CCO Holdings LLC / CCO Holdings Capital Corp. | |
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| Percentages are based on the long positions only. Money market funds and short positions are excluded. |
| Amount is less than 0.1%. |
| The ratings are by S&P Global Ratings. A credit rating is an assessment provided by a nationally recognized statistical rating organization (NRSRO) of the creditworthiness of an issuer with respect to debt obligations except for those debt obligations that are privately rated. Ratings are measured on a scale that generally ranges from AAA (highest) to D (lowest). Investment grade is defined as those issuers that have a long- term credit rating of BBB- or higher. The credit ratings shown relate to the credit worthiness of the issuers of the underlying securities in the Fund, and not to the Fund or its shares. Credit ratings are subject to change. |
Fund Performance Overview (Unaudited) (Continued)
First Trust Tactical High Yield ETF (HYLS) (Continued)
| 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
Information showing the number of days the market price of the Fund’s shares was greater (at a premium) and less (at a discount) than the Fund’s net asset value for the most recently completed year, and the most recently completed calendar quarters since that year (or life of the Fund, if shorter) is available at https://www.ftportfolios.com/Retail/etf/home.aspx.
First Trust Tactical High Yield ETF (HYLS)Annual ReportOctober 31, 2023 (Unaudited) Advisor
The First Trust Advisors L.P. (“First Trust”) Leveraged Finance Team is comprised of 18 experienced investment professionals specializing in below investment grade securities. The team is comprised of portfolio management, research, trading and operations personnel. As of October 31, 2023, the First Trust Leveraged Finance Team managed or supervised approximately $5.5 billion in senior secured bank loans and high-yield bonds. These assets are managed across various strategies, including two closed-end funds, an open-end fund, and five exchange-traded funds on behalf of retail and institutional clients.
Portfolio Management Team
The following persons serve as portfolio managers of the Fund.
William Housey, CFA – Managing Director of Fixed Income and Senior Portfolio Manager
Jeffrey Scott, CFA – Senior Vice President and Portfolio Manager
The portfolio managers are primarily and jointly responsible for the day-to-day management of the Fund. Mr. Housey has served as a part of the portfolio management team of the Fund since 2013, while Mr. Scott has served as a part of the portfolio management team of the Fund since 2020.
Commentary
The First Trust Tactical High Yield ETF (the “Fund”) is an actively managed exchange-traded fund (“ETF”). The Fund’s primary investment objective is to provide current income, with a secondary objective of capital appreciation.
Market Recap
At the beginning of the 12-month period ended October 31, 2023, inflation remained elevated as the November 2022 Consumer Price Index printed 7.1% on a year-over-year basis, while the Federal Reserve (the “Fed”) simultaneously reiterated its commitment to a 2.0% inflation target. At this point, the upper bound of the Federal Funds target rate sat at 3.25%. However, by the Fed’s December 2022 Federal Open Market Committee (“FOMC”) meeting, the committee projected a higher-than-expected terminal Federal Funds target rate of 5.00-5.25%, indicating the Fed’s lack of confidence that inflation would remain subdued. The FOMC raised its target rate once again to 5.25-5.50% at its July 2023 meeting in a continued attempt to mitigate inflation. At the September 2023 meeting, the FOMC held its target rate steady and upwardly revised its economic growth outlook for both this year and next, while reducing its 2024 rate cut projection; this proved a catalyst for higher yields, spread volatility, and lower equity values in the concluding weeks of the reporting period.
For the 12-month period ended October 31, 2023, the 10-Year US Treasury yield increased 88 basis points (“bps”) from 4.05% to 4.93%. While the S&P 500® Index traded near 4,500 at the end of the second quarter of 2023, nearly 1,000 points above its October 2022 bottom, the S&P 500® Index closed at 4,194 on October 31, 2023, providing a 10.14% return over the 12-month period ended October 31, 2023.
High-Yield Bond Market
High-yield bond spreads over U.S. Treasuries tightened 20 bps to T+445 bps in the last 12-month period (“LTM”) ended October 31, 2023. The current spread is 102 bps below the long-term average spread of T+547 bps (December 1997 – October 2023). High-yield bond funds reported net outflows of $21.4 billion in the period. This compares to $49.9 billion in net outflows during the previous LTM period ending October 2022.
In the LTM period, BB rated bonds (+4.70%) underperformed B rated (+6.29%) and CCC rated bonds (+8.50%). The average high-yield bond price increased from $85.67 at the beginning of the period to $86.31 at the end of the period.
Senior Loan Market
Senior loan spreads over the 3-month Secured Overnight Funding Rate (“SOFR”) decreased by 110 bps to S+544 bps during the 12-month period ended October 31, 2023. The current spread is 27 bps above the long-term average spread of S+517 bps (December 1997 – October 2023). Senior loan funds realized inflows in the third quarter of 2023 amounting to $500 million. Outside of the third quarter, senior loan funds experienced outflows, bringing total LTM net outflows to $27.3 billion. This compares to net inflows of $1.80 billion in the previous LTM period ending October 2022.
Portfolio Commentary (Continued)
First Trust Tactical High Yield ETF (HYLS)Annual ReportOctober 31, 2023 (Unaudited) In the LTM period, BB rated senior loans (9.82%) underperformed both B rated (13.27%) and CCC rated senior loans (12.40%). The average senior loan price increased from $92.19 at the beginning of the period to $94.76 at the end of the period.
Default Rates
Both high-yield bond and senior loan default rates increased in the 12-month period ended October 31, 2023 as measured by the JP Morgan High-Yield Bond Universe and the Morningstar®LSTA® US Leveraged Loan Index. The LTM default rate of the high-yield bond market rose from 0.84% at the beginning of the period to 1.76% at the end of the period, while the LTM default rate of the senior loan market rose from 0.83% at the beginning of the period to 1.36% at the end of the period. Both high-yield and senior loan default rates remain below their long-term average default rates of 2.99% and 2.70%, respectively.
Fund Performance
The Fund returned 3.51% on a net asset value (“NAV”) basis and 3.53% on a market price basis over the LTM period ended October 31, 2023. The ICE BofA US High Yield Constrained Index (the “Index”) returned 5.81% over the same period.
The Fund held 310 individual positions diversified across 43 industries at the end of the reporting period. By comparison, the Fund held 292 individual positions across 44 industries at the beginning of the reporting period. Media (15.37%), Software (15.30%), and Insurance (14.95%) comprised the Fund’s three largest industry exposures at the end of the period. The Fund’s duration slightly increased from 3.60 years to 4.00 years as of October 31, 2023.
The Fund reduced leverage throughout the reporting period before tactically redeploying leverage toward the end of the period; the Fund’s leverage was 6.76% at the beginning of the period and ended the period at 9.78%. Leverage had a de minimis impact on performance in the period. The Fund’s allocation to senior loans enhanced performance as senior loans outperformed high-yield bonds. Strong security selection in the Technology & Electronics industry, as well as the Insurance and Healthcare industries, further bolstered performance. The Fund’s overweight allocation to the Media industry, as well as its security selection within the Leisure industry, proved headwinds to performance. The derivative position in the Fund had a positive impact on performance during the period.
The Fund’s most recent monthly distribution of $0.2150 per share is $0.0100 more than the monthly distribution paid in October 2022. The effective yield, based on the distributions over the trailing twelve months, was 6.43% based on NAV and 6.44% based on market price.
The Fund experienced zero defaults in the LTM period, compared to 21 defaults within the JP Morgan High-Yield Bond Universe over the same period. Since inception, the Fund has experienced 10 defaults; by comparison, the JP Morgan High-Yield Bond Universe has experienced 274 defaults over the same period. The Fund’s LTM default rate of 0.00% compares to the JP Morgan High-Yield Bond Universe’s LTM default rate of 1.76% at the end of the period.
Market and Fund Outlook
Our market framework centers on our view that the Fed’s hiking cycle is nearing its end. While the Fed may leak incremental hikes into the market, we believe today’s fixed income markets are much more balanced when it comes to income and interest rate risk. Elevated yields continue to support future positive returns in fixed income. However, we expect market volatility to continue as investors attempt to gauge the likelihood, and timing of, a recession. Consequently, we favor increasing credit quality while defensively positioning in sectors with limited cyclicality. Improved valuations have created attractive opportunities in the corporate credit landscape, in our view. As we assess such market opportunities, we will continue to employ our bottom-up credit underwriting process and rigorous approach to risk management.
First Trust Tactical High Yield ETF (HYLS)Understanding Your Fund ExpensesOctober 31, 2023 (Unaudited) As a shareholder of First Trust Tactical High Yield ETF (the “Fund”), you incur two types of costs: (1) transaction costs; and (2) ongoing costs, including management fees, distribution and/or service (12b-1) fees, if any, and other Fund expenses. This Example is intended to help you understand your ongoing costs of investing in the Fund and to compare these costs with the ongoing costs of investing in other funds.
The Example is based on an investment of $1,000 invested at the beginning of the period and held through the six-month period ended October 31, 2023.
Actual Expenses
The first line in the following table provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During the Six-Month Period” to estimate the expenses you paid on your account during this six-month period.
Hypothetical Example for Comparison Purposes
The second line in the following table provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs such as brokerage commissions. Therefore, the second line in the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
| Beginning
Account Value
May 1, 2023 | Ending
Account Value
October 31, 2023 | Annualized
Expense Ratio
Based on the
Six-Month
Period | Expenses Paid
During the
Six-Month
Period (a) |
First Trust Tactical High Yield ETF (HYLS) |
| | | | |
Hypothetical (5% return before expenses) | | | | |
| Expenses are equal to the annualized expense ratio as indicated in the table multiplied by the average account value over the period (May 1, 2023 through October 31, 2023), multiplied by 184/365 (to reflect the six-month period). |
First Trust Tactical High Yield ETF (HYLS)Portfolio of InvestmentsOctober 31, 2023
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CORPORATE BONDS AND NOTES — 87.3% |
| Aerospace & Defense — 0.9% | |
| Booz Allen Hamilton, Inc. (a) | | | |
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| Agricultural Products — 0.1% | |
| Lamb Weston Holdings, Inc. (a) | | | |
| Alternative Carriers — 0.2% | |
| Level 3 Financing, Inc. (a) | | | |
| Level 3 Financing, Inc. (a) | | | |
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| | | | |
| | |
| Application Software — 2.1% | |
| | | | |
| | | | |
| | | | |
| Open Text Holdings, Inc. (a) | | | |
| | | | |
| | |
| Automobile Manufacturers — 0.6% | |
| | | | |
| | | | |
| | |
| | |
| Gray Television, Inc. (a) (b) | | | |
| Gray Television, Inc. (a) | | | |
| Gray Television, Inc. (a) | | | |
| iHeartCommunications, Inc. | | | |
| Nexstar Media, Inc. (a) (b) | | | |
| | | | |
| Scripps Escrow II, Inc. (a) | | | |
| | | | |
| Sinclair Television Group, Inc. (a) (b) | | | |
| Sinclair Television Group, Inc. (a) | | | |
| Sinclair Television Group, Inc. (a) | | | |
| Sirius XM Radio, Inc. (a) | | | |
| Sirius XM Radio, Inc. (a) | | | |
| Sirius XM Radio, Inc. (a) | | | |
| Sirius XM Radio, Inc. (a) | | | |
| | | | |
| | |
| | |
| American Builders & Contractors Supply Co., Inc. (a) | | | |
| American Builders & Contractors Supply Co., Inc. (a) | | | |
| Beacon Roofing Supply, Inc. (a) | | | |
| Beacon Roofing Supply, Inc. (a) | | | |
See Notes to Financial Statements
First Trust Tactical High Yield ETF (HYLS)Portfolio of Investments (Continued)October 31, 2023 | | | | |
CORPORATE BONDS AND NOTES (Continued) |
| Building Products (Continued) | |
| Builders FirstSource, Inc. (a) | | | |
| Standard Industries, Inc. (a) | | | |
| Standard Industries, Inc. (a) | | | |
| Standard Industries, Inc. (a) | | | |
| Standard Industries, Inc. (a) | | | |
| | | | |
| | |
| | |
| CCO Holdings LLC / CCO Holdings Capital Corp. (a) | | | |
| CCO Holdings LLC / CCO Holdings Capital Corp. (a) (b) | | | |
| CCO Holdings LLC / CCO Holdings Capital Corp. (a) | | | |
| CCO Holdings LLC / CCO Holdings Capital Corp. (a) | | | |
| CCO Holdings LLC / CCO Holdings Capital Corp. (a) | | | |
| CCO Holdings LLC / CCO Holdings Capital Corp. (a) | | | |
| CCO Holdings LLC / CCO Holdings Capital Corp. (a) | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | |
| | |
| | | | |
| | | | |
| Caesars Entertainment, Inc. (a) | | | |
| Caesars Entertainment, Inc. (a) | | | |
| Caesars Entertainment, Inc. (a) | | | |
| CDI Escrow Issuer, Inc. (a) | | | |
| Fertitta Entertainment LLC / Fertitta Entertainment Finance Co., Inc. (a) | | | |
| Light & Wonder International, Inc. (a) | | | |
| MGM Resorts International | | | |
| MGM Resorts International | | | |
| Scientific Games Holdings L.P. / Scientific Games US FinCo, Inc. (a) | | | |
| | | | |
| VICI Properties L.P. / VICI Note Co., Inc. (a) | | | |
| VICI Properties L.P. / VICI Note Co., Inc. (a) | | | |
| VICI Properties L.P. / VICI Note Co., Inc. (a) | | | |
| | |
| Commercial Printing — 0.1% | |
| | | | |
| | | | |
| | |
See Notes to Financial Statements
First Trust Tactical High Yield ETF (HYLS)Portfolio of Investments (Continued)October 31, 2023 | | | | |
CORPORATE BONDS AND NOTES (Continued) |
| Construction & Engineering — 0.6% | |
| | | | |
| | | | |
| | |
| Construction Materials — 0.3% | |
| GYP Holdings III Corp. (a) | | | |
| Summit Materials LLC / Summit Materials Finance Corp. (a) | | | |
| | |
| | |
| Black Knight InfoServ LLC (a) | | | |
| | | | |
| | |
| Data Processing & Outsourced Services — 0.0% | |
| | | | |
| | | | |
| | |
| | |
| | | | |
| Bank of America Corp. (c) | | | |
| Bank of America Corp., Medium-Term Note | | | |
| Bank of America Corp., Medium-Term Note (c) | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| Wells Fargo & Co. Medium-Term Note (c) | | | |
| | | | |
| | |
| Diversified Support Services — 0.2% | |
| Ritchie Bros Holdings, Inc. (a) | | | |
| Ritchie Bros Holdings, Inc. (a) | | | |
| | |
| Electric Utilities — 1.0% | |
| | | | |
| Vistra Operations Co. LLC (a) | | | |
| Vistra Operations Co. LLC (a) | | | |
| Vistra Operations Co. LLC (a) | | | |
| | |
| Electrical Components & Equipment — 0.0% | |
| Sensata Technologies, Inc. (a) | | | |
| Environmental & Facilities Services — 0.3% | |
| | | | |
| Fertilizers & Agricultural Chemicals — 0.1% | |
| Scotts Miracle-Gro (The) Co. | | | |
| Scotts Miracle-Gro (The) Co. | | | |
| | |
| Financial Exchanges & Data — 0.8% | |
| | | | |
See Notes to Financial Statements
First Trust Tactical High Yield ETF (HYLS)Portfolio of Investments (Continued)October 31, 2023 | | | | |
CORPORATE BONDS AND NOTES (Continued) |
| Financial Exchanges & Data (Continued) | |
| | | | |
| | | | |
| | | | |
| | |
| | |
| | | | |
| Health Care Equipment — 0.0% | |
| | | | |
| Health Care Facilities — 4.6% | |
| Acadia Healthcare Co., Inc. (a) | | | |
| Acadia Healthcare Co., Inc. (a) | | | |
| AHP Health Partners, Inc. (a) | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| Select Medical Corp. (a) (b) | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | |
| Health Care Services — 2.1% | |
| | | | |
| | | | |
| | | | |
| | | | |
| Global Medical Response, Inc. (a) | | | |
| Service Corp. International | | | |
| | |
| Health Care Supplies — 1.5% | |
| | | | |
| Medline Borrower L.P. (a) (b) | | | |
| Medline Borrower L.P. (a) | | | |
| | |
| Health Care Technology — 3.6% | |
| AthenaHealth Group, Inc. (a) | | | |
| | | | |
| Verscend Escrow Corp. (a) (b) | | | |
| | |
| Hotels, Resorts & Cruise Lines — 0.0% | |
| Wyndham Hotels & Resorts, Inc. (a) | | | |
| Household Products — 0.2% | |
| Energizer Holdings, Inc. (a) | | | |
| Energizer Holdings, Inc. (a) | | | |
| | |
| Human Resource & Employment Services — 0.0% | |
| | | | |
See Notes to Financial Statements
First Trust Tactical High Yield ETF (HYLS)Portfolio of Investments (Continued)October 31, 2023 | | | | |
CORPORATE BONDS AND NOTES (Continued) |
| Independent Power Producers & Energy Traders — 0.9% | |
| | | | |
| Industrial Machinery & Supplies & Components — 0.7% | |
| Emerald Debt Merger Sub LLC (a) | | | |
| Gates Global LLC / Gates Corp. (a) | | | |
| | |
| Insurance Brokers — 16.3% | |
| Alliant Holdings Intermediate LLC / Alliant Holdings Co- Issuer (a) (b) | | | |
| Alliant Holdings Intermediate LLC / Alliant Holdings Co- Issuer (a) (b) | | | |
| Alliant Holdings Intermediate LLC / Alliant Holdings Co-Issuer (a) | | | |
| AmWINS Group, Inc. (a) (b) | | | |
| | | | |
| | | | |
| AssuredPartners, Inc. (a) | | | |
| AssuredPartners, Inc. (a) (b) | | | |
| BroadStreet Partners, Inc. (a) | | | |
| | | | |
| GTCR AP Finance, Inc. (a) | | | |
| HUB International Ltd. (a) (b) | | | |
| HUB International Ltd. (a) | | | |
| | | | |
| | | | |
| | | | |
| | |
| Integrated Telecommunication Services — 1.4% | |
| | | | |
| Zayo Group Holdings, Inc. (a) | | | |
| Zayo Group Holdings, Inc. (a) | | | |
| | |
| Interactive Media & Services — 1.4% | |
| | | | |
| Internet Services & Infrastructure — 1.2% | |
| Go Daddy Operating Co. LLC / GD Finance Co., Inc. (a) | | | |
| Go Daddy Operating Co. LLC / GD Finance Co., Inc. (a) | | | |
| | |
| Investment Banking & Brokerage — 0.7% | |
| Goldman Sachs Group, (The), Inc. | | | |
| Goldman Sachs Group, (The), Inc. | | | |
| | | | |
| | | | |
| Morgan Stanley, Global Medium-Term Note (c) | | | |
| | |
| IT Consulting & Other Services — 0.1% | |
| Central Parent, Inc. / CDK Global, Inc. (a) | | | |
| | | | |
| | | | |
| | |
See Notes to Financial Statements
First Trust Tactical High Yield ETF (HYLS)Portfolio of Investments (Continued)October 31, 2023 | | | | |
CORPORATE BONDS AND NOTES (Continued) |
| Leisure Facilities — 0.1% | |
| | | | |
| Cedar Fair L.P. / Canada’s Wonderland Co. / Magnum Management Corp. / Millennium Op | | | |
| SeaWorld Parks & Entertainment, Inc. (a) | | | |
| | |
| | |
| | | | |
| Managed Health Care — 1.4% | |
| | | | |
| Molina Healthcare, Inc. (a) | | | |
| Molina Healthcare, Inc. (a) | | | |
| MPH Acquisition Holdings LLC (a) | | | |
| MPH Acquisition Holdings LLC (a) | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | |
| Metal & Glass Containers — 2.3% | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| Owens-Brockway Glass Container, Inc. (a) | | | |
| Owens-Brockway Glass Container, Inc. (a) | | | |
| | | | |
| | |
| Movies & Entertainment — 0.6% | |
| Live Nation Entertainment, Inc. (a) | | | |
| Live Nation Entertainment, Inc. (a) | | | |
| WMG Acquisition Corp. (a) | | | |
| | |
| Office Services & Supplies — 0.1% | |
| Dun & Bradstreet (The) Corp. (a) | | | |
| Other Diversified Financial Services — 0.1% | |
| GTCR W-2 Merger Sub LLC (a) | | | |
| Packaged Foods & Meats — 0.8% | |
| | | | |
| Kraft Heinz Foods Co. (a) | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | |
| | |
| Graham Packaging Co., Inc. (a) (b) | | | |
See Notes to Financial Statements
First Trust Tactical High Yield ETF (HYLS)Portfolio of Investments (Continued)October 31, 2023 | | | | |
CORPORATE BONDS AND NOTES (Continued) |
| Paper Packaging (Continued) | |
| Graphic Packaging International LLC (a) | | | |
| Graphic Packaging International LLC (a) | | | |
| Pactiv Evergreen Group Issuer, Inc. / Pactiv Evergreen Group Issuer LLC (a) (b) | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | |
| | |
| Prestige Brands, Inc. (a) | | | |
| Prestige Brands, Inc. (a) | | | |
| | |
| | |
| Catalent Pharma Solutions, Inc. (a) | | | |
| Catalent Pharma Solutions, Inc. (a) | | | |
| Charles River Laboratories International, Inc. (a) | | | |
| Charles River Laboratories International, Inc. (a) | | | |
| Charles River Laboratories International, Inc. (a) | | | |
| | | | |
| | | | |
| | | | |
| | |
| Real Estate Services — 0.1% | |
| | | | |
| | | | |
| | | | |
| | |
| Research & Consulting Services — 1.0% | |
| Clarivate Science Holdings Corp. (a) | | | |
| Clarivate Science Holdings Corp. (a) | | | |
| | | | |
| | |
| | |
| Brinker International, Inc. (a) | | | |
| | | | |
| McDonald’s Corp., Medium-Term Note | | | |
| McDonald’s Corp., Medium-Term Note | | | |
| McDonald’s Corp., Medium-Term Note | | | |
| | |
| Security & Alarm Services — 0.2% | |
| | | | |
| | | | |
| | |
| | |
| | | | |
| | | | |
| | |
See Notes to Financial Statements
First Trust Tactical High Yield ETF (HYLS)Portfolio of Investments (Continued)October 31, 2023 | | | | |
CORPORATE BONDS AND NOTES (Continued) |
| Specialized Consumer Services — 0.1% | |
| Aramark Services, Inc. (a) | | | |
| Specialized Finance — 0.2% | |
| Radiate Holdco LLC / Radiate Finance, Inc. (a) | | | |
| Specialty Chemicals — 0.7% | |
| Avantor Funding, Inc. (a) | | | |
| Axalta Coating Systems LLC (a) | | | |
| | | | |
| | |
| | |
| Boxer Parent Co., Inc. (a) | | | |
| Crowdstrike Holdings, Inc. | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| SS&C Technologies, Inc. (a) (b) | | | |
| | |
| Technology Distributors — 0.0% | |
| CDW LLC / CDW Finance Corp. | | | |
| Trading Companies & Distributors — 3.2% | |
| | | | |
| SRS Distribution, Inc. (a) | | | |
| SRS Distribution, Inc. (a) | | | |
| United Rentals North America, Inc. | | | |
| United Rentals North America, Inc. (a) (b) | | | |
| | |
| Wireless Telecommunication Services — 0.8% | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | |
| Total Corporate Bonds and Notes | |
| | |
FOREIGN CORPORATE BONDS AND NOTES — 11.5% |
| Application Software — 3.3% | |
| ION Trading Technologies S.A.R.L. (a) | | | |
| | | | |
| | | | |
| | | | |
| | |
| Auto Parts & Equipment — 1.4% | |
| Clarios Global L.P. / Clarios US Finance Co. (a) | | | |
See Notes to Financial Statements
First Trust Tactical High Yield ETF (HYLS)Portfolio of Investments (Continued)October 31, 2023 | | | | |
FOREIGN CORPORATE BONDS AND NOTES (Continued) |
| | |
| | | | |
| | | | |
| Masonite International Corp. (a) | | | |
| | |
| | |
| Virgin Media Finance PLC (a) | | | |
| | |
| International Game Technology PLC (a) | | | |
| Data Processing & Outsourced Services — 0.9% | |
| Paysafe Finance PLC / Paysafe Holdings US Corp. (a) (b) | | | |
| Electrical Components & Equipment — 0.0% | |
| Sensata Technologies B.V. (a) | | | |
| Environmental & Facilities Services — 0.9% | |
| GFL Environmental, Inc. (a) | | | |
| GFL Environmental, Inc. (a) | | | |
| GFL Environmental, Inc. (a) | | | |
| GFL Environmental, Inc. (a) | | | |
| | |
| Integrated Telecommunication Services — 1.0% | |
| Altice France Holding S.A. (a) | | | |
| | | | |
| | | | |
| | | | |
| | |
| Metal & Glass Containers — 0.5% | |
| Trivium Packaging Finance B.V. (a) | | | |
| Research & Consulting Services — 0.1% | |
| | | | |
| | |
| 1011778 BC ULC / New Red Finance, Inc. (a) (b) | | | |
| Security & Alarm Services — 0.2% | |
| Garda World Security Corp. (a) | | | |
| Specialty Chemicals — 0.1% | |
| Axalta Coating Systems LLC / Axalta Coating Systems Dutch Holding B B.V. (a) | | | |
| Trading Companies & Distributors — 0.9% | |
| VistaJet Malta Finance PLC / Vista Management Holding, Inc. (a) | | | |
| VistaJet Malta Finance PLC / Vista Management Holding, Inc. (a) | | | |
| | |
| Total Foreign Corporate Bonds and Notes | |
| | |
See Notes to Financial Statements
First Trust Tactical High Yield ETF (HYLS)Portfolio of Investments (Continued)October 31, 2023 | | | | |
SENIOR FLOATING-RATE LOAN INTERESTS — 10.1% |
| Application Software — 5.2% | |
| Gainwell Acquisition Corp. (fka Milano), Term Loan B, 3 Mo. CME Term SOFR + 4.00% + CSA, 0.75% Floor | | | |
| Greeneden U.S. Holdings II LLC (Genesys Telecommunications Laboratories, Inc.), Initial Dollar Term Loan, 1 Mo. CME Term SOFR + 4.00% + CSA, 0.75% Floor | | | |
| Internet Brands, Inc. (WebMD/MH Sub I LLC), 2020 June New Term Loan, 1 Mo. CME Term SOFR + 3.75% + CSA, 1.00% Floor | | | |
| Internet Brands, Inc. (WebMD/MH Sub I LLC), Initial Term Loan, 1 Mo. CME Term SOFR + 3.75% + CSA, 0.00% Floor | | | |
| Internet Brands, Inc. (WebMD/MH Sub I LLC), Term Loan (Second Lien), 1 Mo. CME Term SOFR + 6.25%, 0.00% Floor | | | |
| LogMeIn, Inc. (GoTo Group, Inc.), Term Loan B, 3 Mo. CME Term SOFR + 4.75% + CSA, 0.00% Floor | | | |
| RealPage, Inc., Term Loan (Second Lien), 1 Mo. CME Term SOFR + 6.50% + CSA, 0.75% Floor | | | |
| | |
| Asset Management & Custody Banks — 0.5% | |
| Edelman Financial Engines Center LLC, Term Loan (Second Lien), 1 Mo. CME Term SOFR + 6.75% + CSA, 0.00% Floor | | | |
| Education Services — 0.0% | |
| Ascensus Holdings, Inc. (Mercury), Term Loan (Second Lien), 3 Mo. CME Term SOFR + 6.50% + CSA, 0.50% Floor | | | |
| Electronic Equipment & Instruments — 0.5% | |
| Verifone Systems, Inc., Term Loan B, 3 Mo. CME Term SOFR + 4.00% + CSA, 0.00% Floor | | | |
| Health Care Facilities — 0.1% | |
| Gentiva Health Services, Inc. (Kindred at Home/Charlotte Buyer), Term Loan B, 1 Mo. CME Term SOFR + 5.25%, 0.50% Floor | | | |
| Health Care Technology — 2.7% | |
| Ciox Health (Healthport/CT Technologies Intermediate Holdings, Inc.), New Term Loan B, 1 Mo. CME Term SOFR + 4.25% + CSA, 0.75% Floor | | | |
| Navicure, Inc. (Waystar Technologies, Inc.), Term Loan B, 1 Mo. CME Term SOFR + 4.00% + CSA, 0.00% Floor | | | |
| Verscend Technologies, Inc. (Cotiviti), New Term Loan B-1, 1 Mo. CME Term SOFR + 4.00% + CSA, 0.00% Floor | | | |
| | |
| Integrated Telecommunication Services — 0.3% | |
| Numericable (Altice France S.A. or SFR), Term Loan B-13, 3 Mo. LIBOR + 4.00%, 0.00% Floor | | | |
| Zayo Group Holdings, Inc., Incremental Term Loan B-2, 1 Mo. CME Term SOFR + 4.33%, 0.50% Floor | | | |
| Zayo Group Holdings, Inc., Initial Dollar Term Loan, 1 Mo. CME Term SOFR + 3.00%, 0.00% Floor | | | |
| | |
| Life Sciences Tools & Services — 0.3% | |
| WCG Purchaser Corp. (WIRB-Copernicus Group), Term Loan B, 1 Mo. CME Term SOFR + 4.00% + CSA, 1.00% Floor | | | |
See Notes to Financial Statements
First Trust Tactical High Yield ETF (HYLS)Portfolio of Investments (Continued)October 31, 2023 | | | | |
SENIOR FLOATING-RATE LOAN INTERESTS (Continued) |
| Metal & Glass Containers — 0.1% | |
| ProAmpac PG Borrower LLC, Term Loan (First Lien), 3 Mo. CME Term SOFR + 4.50%, 0.75% Floor | | | |
| ProAmpac PG Borrower LLC, Term Loan (First Lien), Prime Rate + 3.50%, 1.75% Floor | | | |
| | |
| | |
| BMC Software Finance, Inc. (Boxer Parent), 2021 Replacement Dollar Term Loan, 1 Mo. CME Term SOFR + 3.75% + CSA, 0.00% Floor | | | |
| Total Senior Floating-Rate Loan Interests | |
| | |
| | |
|
| | |
| | |
| | |
MONEY MARKET FUNDS — 0.2% |
| Morgan Stanley Institutional Liquidity Funds - Treasury Portfolio - Institutional Class - 5.22% (h) | |
| | |
|
|
| Total Investments — 109.1% | |
| | |
| | |
| Net Other Assets and Liabilities — 1.7% | |
| | |
| This security, sold within the terms of a private placement memorandum, is exempt from registration upon resale under Rule 144A of the Securities Act of 1933, as amended (the “1933 Act”), and may be resold in transactions exempt from registration, normally to qualified institutional buyers. Pursuant to procedures adopted by the Trust’s Board of Trustees, this security has been determined to be liquid by First Trust Advisors L.P. (the “Advisor”). Although market instability can result in periods of increased overall market illiquidity, liquidity for each security is determined based on security specific factors and assumptions, which require subjective judgment. At October 31, 2023, securities noted as such amounted to $1,163,445,666 or 84.6% of net assets. |
| This security or a portion of this security is segregated as collateral for borrowings. At October 31, 2023, the segregated value of these securities amounts to $320,079,660. |
| Fixed-to-floating or fixed-to-variable rate security. The interest rate shown reflects the fixed rate in effect at October 31, 2023. At a predetermined date, the fixed rate will change to a floating rate or a variable rate. |
| Senior Floating-Rate Loan Interests (“Senior Loans”) in which the Fund invests generally pay interest at rates which are periodically predetermined by reference to a base lending rate plus a premium. These base lending rates are generally (i) the lending rate offered by one or more major European banks, such as the LIBOR, (ii) the SOFR obtained from the U.S. Department of the Treasury’s Office of Financial Research or another major financial institution, (iii) the prime rate offered by one or more United States banks or (iv) the certificate of deposit rate. Certain Senior Loans are subject to a LIBOR or SOFR floor that establishes a minimum LIBOR or SOFR rate. When a range of rates is disclosed, the Fund holds more than one contract within the same tranche with identical LIBOR or SOFR period, spread and floor, but different LIBOR or SOFR reset dates. |
| Senior Loans generally are subject to mandatory and/or optional prepayment. As a result, the actual remaining maturity of Senior Loans may be substantially less than the stated maturities shown. |
| Non-income producing security. |
See Notes to Financial Statements
First Trust Tactical High Yield ETF (HYLS)Portfolio of Investments (Continued)October 31, 2023 | Security received in a transaction exempt from registration under the 1933 Act. The security may be resold pursuant to an exemption from registration under the 1933 Act, typically to qualified institutional buyers (see Note 2F - Restricted Securities in the Notes to Financial Statements). |
| Rate shown reflects yield as of October 31, 2023. |
Abbreviations throughout the Portfolio of Investments: |
| – Chicago Mercantile Exchange |
| – Credit Spread Adjustment |
| – London Interbank Offered Rate |
| – Secured Overnight Financing Rate |
Valuation InputsA summary of the inputs used to value the Fund’s investments as of October 31, 2023 is as follows (see Note 2A - Portfolio Valuation in the Notes to Financial Statements):
| | | Level 2
Significant
Observable
Inputs | Level 3
Significant
Unobservable
Inputs |
Corporate Bonds and Notes* | | | | |
Foreign Corporate Bonds and Notes* | | | | |
Senior Floating-Rate Loan Interests* | | | | |
| | | | |
| | | | |
| | | | |
| See Portfolio of Investments for industry breakout. |
See Notes to Financial Statements
First Trust Tactical High Yield ETF (HYLS)Statement of Assets and Liabilities
October 31, 2023
| |
| |
| |
| |
Investment securities sold | |
| |
| |
|
| |
| |
| |
Investment securities purchased | |
| |
| |
| |
| |
|
| |
| |
| |
Accumulated distributable earnings (loss) | |
| |
NET ASSET VALUE, per share | |
Number of shares outstanding (unlimited number of shares authorized, par value $0.01 per share) | |
| |
See Notes to Financial Statements
First Trust Tactical High Yield ETF (HYLS)Statement of Operations
For the Year Ended October 31, 2023
| |
| |
| |
| |
|
| |
| |
| |
| |
NET INVESTMENT INCOME (LOSS) | |
|
NET REALIZED AND UNREALIZED GAIN (LOSS): | |
Net realized gain (loss) on: | |
| |
| |
| |
Net change in unrealized appreciation (depreciation) on investments | |
NET REALIZED AND UNREALIZED GAIN (LOSS) | |
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS | |
See Notes to Financial Statements
First Trust Tactical High Yield ETF (HYLS)Statements of Changes in Net Assets
| | |
| | |
Net investment income (loss) | | |
| | |
Net change in unrealized appreciation (depreciation) | | |
Net increase (decrease) in net assets resulting from operations | | |
|
DISTRIBUTIONS TO SHAREHOLDERS FROM: | | |
| | |
| | |
Total distributions to shareholders | | |
|
SHAREHOLDER TRANSACTIONS: | | |
Proceeds from shares sold | | |
| | |
Net increase (decrease) in net assets resulting from shareholder transactions | | |
Total increase (decrease) in net assets | | |
|
| | |
| | |
| | |
|
CHANGES IN SHARES OUTSTANDING: | | |
Shares outstanding, beginning of period | | |
| | |
| | |
Shares outstanding, end of period | | |
See Notes to Financial Statements
First Trust Tactical High Yield ETF (HYLS)Statement of Cash Flows
For the Year Ended October 31, 2023
Cash flows from operating activities: | | |
Net increase (decrease) in net assets resulting from operations | | |
Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash provided by operating activities: | | |
| | |
Sales, maturities and paydowns of investments | | |
Net amortization/accretion of premiums/discounts on investments | | |
Net realized gain/loss on investments | | |
Net change in unrealized appreciation/depreciation on investments and unfunded loan commitments | | |
|
Changes in assets and liabilities | | |
Decrease in interest receivable | | |
Increase in dividends receivable | | |
Increase in margin interest expense payable | | |
Decrease in investment advisory fees payable | | |
Cash provided by operating activities | | |
|
Cash flows from financing activities: | | |
Proceeds from shares sold | | |
| | |
Distributions to shareholders from investment operations | | |
Distributions to shareholders from return of capital | | |
Net proceeds from borrowings | | |
Cash used in financing activities | | |
Decrease in cash and restricted cash | | |
Cash and restricted cash at beginning of period | | |
Cash and restricted cash at end of period | | |
|
Supplemental disclosure of cash flow information: | | |
Cash paid during the period for interest | | |
|
Cash and restricted cash reconciliation: | | |
| | |
| | |
Cash and restricted cash at end of period: | | |
See Notes to Financial Statements
First Trust Tactical High Yield ETF (HYLS)Financial Highlights
For a share outstanding throughout each period
| |
| | | | | |
Net asset value, beginning of period | | | | | |
Income from investment operations: | | | | | |
Net investment income (loss) | | | | | |
Net realized and unrealized gain (loss) | | | | | |
Total from investment operations | | | | | |
Distributions paid to shareholders from: | | | | | |
| | | | | |
| | | | | |
| | | | | |
Net asset value, end of period | | | | | |
| | | | | |
|
Ratios to average net assets/supplemental data: | | | | | |
Net assets, end of period (in 000’s) | | | | | |
Ratio of total expenses to average net assets | | | | | |
Ratio of net expenses to average net assets excluding interest expense | | | | | |
Ratio of net investment income (loss) to average net assets | | | | | |
Portfolio turnover rate (c) | | | | | |
| Based on average shares outstanding. |
| 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. |
| 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
Notes to Financial Statements
First Trust Tactical High Yield ETF (HYLS)October 31, 2023 1. Organization
First Trust Exchange-Traded Fund IV (the “Trust”) is an open-end management investment company organized as a Massachusetts business trust on September 15, 2010, and is registered with the Securities and Exchange Commission under the Investment Company Act of 1940, as amended (the “1940 Act”).
The Trust currently consists of eighteen exchange-traded funds that are offering shares. This report covers the First Trust Tactical High Yield ETF (the “Fund”), a diversified series of the Trust, which trades under the ticker “HYLS” on Nasdaq, Inc. (“Nasdaq”). The Fund represents a separate series of shares of beneficial interest in the Trust. Unlike conventional mutual funds, the Fund issues and redeems shares on a continuous basis, at net asset value (“NAV”), only in large blocks of shares known as “Creation Units.”
The primary investment objective of the Fund is to provide current income. The Fund’s secondary investment objective is to provide capital appreciation. Under normal market conditions, the Fund invests at least 80% of its net assets (including investment borrowings) in high yield debt securities that are rated below investment grade at the time of purchase or unrated securities deemed by the Fund’s advisor to be of comparable quality. Below investment grade securities are those that, at the time of purchase, are rated lower than “BBB-” by S&P Global Ratings, or lower than “Baa3” by Moody’s Investors Service, Inc., or comparably rated by another nationally recognized statistical rating organization. High yield debt securities that are rated below investment grade are commonly referred to as “junk” debt. Such securities may include U.S. and non-U.S. corporate debt obligations, bank loans and convertible bonds. For purposes of determining whether a security is below investment grade, the lowest available rating will be considered.
2. Significant Accounting Policies
The Fund is considered an investment company and follows accounting and reporting guidance under Financial Accounting Standards Board Accounting Standards Codification Topic 946, “Financial Services-Investment Companies.” The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of the financial statements. The preparation of the financial statements in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates.
A. Portfolio Valuation
The Fund’s NAV is determined daily as of the close of regular trading on the New York Stock Exchange (“NYSE”), normally 4:00 p.m. Eastern time, on each day the NYSE is open for trading. If the NYSE closes early on a valuation day, the NAV is determined as of that time. Domestic debt securities and foreign securities are priced using data reflecting the earlier closing of the principal markets for those securities. The Fund’s NAV is calculated by dividing the value of all assets of the Fund (including accrued interest and dividends), less all liabilities (including accrued expenses and dividends declared but unpaid), by the total number of shares outstanding.
The Fund’s investments are valued daily at market value or, in the absence of market value with respect to any portfolio securities, at fair value. Market value prices represent readily available market quotations such as last sale or official closing prices from a national or foreign exchange (i.e., a regulated market) and are primarily obtained from third-party pricing services. Fair value prices represent any prices not considered market value prices and are either obtained from a third-party pricing service or are determined by the Pricing Committee of the Fund’s investment advisor, First Trust Advisors L.P. (“First Trust” or the “Advisor”), in accordance with valuation procedures approved by the Trust’s Board of Trustees, and in accordance with provisions of the 1940 Act and rules thereunder. Investments valued by the Advisor’s Pricing Committee, if any, are footnoted as such in the footnotes to the Portfolio of Investments. The Fund’s investments are valued as follows:
Corporate bonds, corporate notes, U.S. government securities and other debt securities are fair valued on the basis of valuations provided by a third-party pricing service approved by the Advisor’s Pricing Committee, which may use the following valuation inputs when available:
Notes to Financial Statements (Continued)
First Trust Tactical High Yield ETF (HYLS)October 31, 2023 7)
reference data including market research publications.
Common stocks and other equity securities listed on any national or foreign exchange (excluding Nasdaq and the London Stock Exchange Alternative Investment Market (“AIM”)) are valued at the last sale price on the exchange on which they are principally traded or, for Nasdaq and AIM securities, the official closing price. Securities traded on more than one securities exchange are valued at the last sale price or official closing price, as applicable, at the close of the securities exchange representing the primary exchange for such securities.
Shares of open-end funds are valued based on NAV per share.
Equity securities traded in an over-the-counter market are valued at the close price or the last trade price.
Senior Floating-Rate Loan Interests (“Senior Loans”)(1) are not listed on any securities exchange or board of trade. Senior Loans are typically bought and sold by institutional investors in individually negotiated private transactions that function in many respects like an over-the-counter secondary market, although typically no formal market-makers exist. This market, while having grown substantially since its inception, generally has fewer trades and less liquidity than the secondary market for other types of securities. Some Senior Loans have few or no trades, or trade infrequently, and information regarding a specific Senior Loan may not be widely available or may be incomplete. Accordingly, determinations of the market value of Senior Loans may be based on infrequent and dated information. Because there is less reliable, objective data available, elements of judgment may play a greater role in valuation of Senior Loans than for other types of securities. Typically, Senior Loans are valued using information provided by a third-party pricing service. The third-party pricing service primarily uses over-the-counter pricing from dealer runs and broker quotes from indicative sheets to value the Senior Loans.
Fixed income and other debt securities having a remaining maturity of sixty 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 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 most recent price provided by a pricing service;
2)
available market prices for the fixed-income security;
3)
the fundamental business data relating to the borrower/issuer;
4)
an evaluation of the forces which influence the market in which these securities are purchased and sold;
5)
the type, size and cost of a security;
6)
the financial statements of the borrower/issuer or the financial condition of the country of issue;
(1)
The terms “security” and “securities” used throughout the Notes to Financial Statements include Senior Loans.
Notes to Financial Statements (Continued)
First Trust Tactical High Yield ETF (HYLS)October 31, 2023 7)
the credit quality and cash flow of the borrower/issuer, or country of issue, based on the Pricing Committee’s, sub-advisor’s or portfolio manager’s analysis, as applicable, or external analysis;
8)
the information as to any transactions in or offers for the security;
9)
the price and extent of public trading in similar securities of the borrower/issuer, or comparable companies;
11)
the quality, value and salability of collateral, if any, securing the security;
12)
the business prospects of the borrower/issuer, including any ability to obtain money or resources from a parent or affiliate and an assessment of the borrower’s/issuer’s management (for corporate debt only);
13)
the prospects for the borrower’s/issuer’s industry, and multiples (of earnings and/or cash flows) being paid for similar businesses in that industry (for corporate debt only);
14)
the borrower’s/issuer’s competitive position within the industry;
15)
the borrower’s/issuer’s ability to access additional liquidity through public and/or private markets; and
16)
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:
• Level 1 – Level 1 inputs are quoted prices in active markets for identical investments. An active market is a market in which transactions for the investment occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
• Level 2 – Level 2 inputs are observable inputs, either directly or indirectly, and include the following:
o Quoted prices for similar investments in active markets.
o Quoted prices for identical or similar investments in markets that are non-active. A non-active market is a market where there are few transactions for the investment, the prices are not current, or price quotations vary substantially either over time or among market makers, or in which little information is released publicly.
o Inputs other than quoted prices that are observable for the investment (for example, interest rates and yield curves observable at commonly quoted intervals, volatilities, prepayment speeds, loss severities, credit risks, and default rates).
o Inputs that are derived principally from or corroborated by observable market data by correlation or other means.
• Level 3 – Level 3 inputs are unobservable inputs. Unobservable inputs may reflect the reporting entity’s own assumptions about the assumptions that market participants would use in pricing the investment.
The inputs or methodologies used for valuing investments are not necessarily an indication of the risk associated with investing in those investments. A summary of the inputs used to value the Fund’s investments as of October 31, 2023, is included with the Fund’s Portfolio of Investments.
B. Securities Transactions and Investment Income
Securities transactions are recorded as of the trade date. Realized gains and losses from securities transactions are recorded on the identified cost basis. Dividend income is recorded on the ex-dividend date. Interest income is recorded daily on the accrual basis. Amortization of premiums and accretion of discounts are recorded using the effective interest method.
The United Kingdom’s Financial Conduct Authority (the “FCA”), which regulates the London Interbank Offered Rates (“LIBOR”), ceased making LIBOR available as a reference rate over a phase-out period that began December 31, 2021. The overnight and 12-month USD LIBOR settings permanently ceased as of June 30, 2023. The FCA announced that the 1-, 3- and 6-month USD LIBOR settings will continue to be published using a synthetic methodology to serve as a fallback for non-U.S. contracts until September 2024. In response to the discontinuation of LIBOR, investors have added fallback provisions to existing contracts for investments whose value is tied to LIBOR, with most fallback provisions requiring the adoption of the Secured Overnight Financing Rate (“SOFR”) as a replacement rate. There is no assurance that any alternative reference rate, including SOFR, will be similar to or produce the same value or economic equivalence as LIBOR or that instruments using an alternative rate will have the same volume or liquidity. At this time, it is not possible to predict the full impact of the elimination of LIBOR and the establishment of an alternative reference rate on the Fund or its investments.
Securities purchased or sold on a when-issued, delayed-delivery or forward purchase commitment basis may have extended settlement periods. The value of the security so purchased is subject to market fluctuations during this period. Due to the nature of the Senior Loan market, the actual settlement date may not be certain at the time of the purchase or sale for some of the Senior Loans. Interest
Notes to Financial Statements (Continued)
First Trust Tactical High Yield ETF (HYLS)October 31, 2023 income on such Senior Loans is not accrued until settlement date. The Fund maintains liquid assets with a current value at least equal to the amount of its when-issued, delayed-delivery or forward purchase commitments until payment is made. At October 31, 2023, the Fund had no when-issued, delayed-delivery or forward purchase commitments.
C. Short Sales
Short sales are utilized for investment and risk management purposes and are transactions in which securities or other instruments (such as options, forwards, futures or other derivative contracts) are sold that are not currently owned in the Fund’s portfolio. When the Fund engages in a short sale, the Fund must borrow the security sold short and deliver the security to the counterparty. Short selling allows the Fund to profit from a decline in a market price to the extent such decline exceeds the transaction costs and the costs of borrowing the securities. The Fund is charged a fee or premium to borrow the securities sold short and is obligated to repay the lenders of the securities. Any dividends or interest that accrues on the securities during the period of the loan are due to the lenders. A gain, limited to the price at which the security was sold short, or a loss, unlimited in size, will be recognized upon the termination of the short sale; which is effected by the Fund purchasing the security sold short and delivering the security to the lender. Any such gain or loss may be offset, completely or in part, by the change in the value of the long portion of the Fund’s portfolio. The Fund is subject to the risk it may be unable to reacquire a security to terminate a short position except at a price substantially in excess of the last quoted price. Also, there is the risk that the counterparty to a short sale may fail to honor its contractual terms, causing a loss to the Fund. There were no short sales outstanding as of October 31, 2023.
The Fund has established an account with Pershing, LLC for the purpose of purchasing or borrowing securities on margin. The Fund pays interest on any margin balance, which is calculated as the daily margin account balance times the broker’s margin interest rate. At October 31, 2023, the Fund had $149,000,000 in borrowings, which approximates fair value, as shown in “Borrowings” on the Statement of Assets and Liabilities. The borrowings are categorized as Level 2 within the fair value hierarchy. The Fund is charged interest on debit margin balance at a rate equal to the Overnight Bank Funding Rate plus 75 basis points. Free Credit Interest Balances are charged at a rate equal to Overnight Bank Funding Rate less 40 basis points. With regard to securities held short, the Fund is credited a rebate equal to the market value of its short positions at a rate equal to the Overnight Bank Funding Rate less 35 basis points. This rebate rate applies to easy to borrow securities. Securities that are hard to borrow may earn a rebate that is less than the foregoing or may be subject to a premium charge on a security by security basis. The different rebate rate is determined at the time of a short sale request. At October 31, 2023, the Fund had a debit margin balance of $149,000,000 with an interest rate of 6.07%. For the fiscal year ended October 31, 2023, the Fund had margin interest expense of $966,110, as shown on the Statement of Operations. For the fiscal year ended October 31, 2023, the average margin balance and interest rates were $63,187,132 and 5.22%, respectively.
D. Swap Agreements
The Fund may enter into credit default swap contracts (“CDS”) for investment purposes or to manage credit risk. A CDS is an agreement between two parties (“Counterparties”) to exchange the credit risk of an issuer. Swap agreements may be privately negotiated in the over-the-counter market as a bilateral contract or centrally cleared.
A buyer of a CDS is said to buy protection by paying a fixed payment over the life of the agreement and in some situations an upfront payment to the seller of the CDS. If a defined credit event occurs (such as payment default or bankruptcy), the Fund as a protection buyer would cease paying its fixed payment, the Fund would deliver eligible bonds issued by the reference entity to the seller, and the seller would pay the full notional value, or the “par value,” of the referenced obligation to the Fund. A seller of a CDS is said to sell protection and thus would receive a fixed payment over the life of the agreement and an upfront payment, if applicable. If a credit event occurs, the Fund as a protection seller would cease to receive the fixed payment stream, the Fund would pay the buyer “par value” or the full notional value of the referenced obligation, and the Fund would receive the eligible bonds issued by the reference entity. In turn, these bonds may be sold in order to realize a recovery value. Alternatively, the seller of the CDS and its Counterparty may agree to net the notional amount and the market value of the bonds and make a cash payment equal to the difference to the buyer of protection. If no credit event occurs, the Fund receives the fixed payment over the life of the agreement. As the seller, the Fund would effectively add leverage to its portfolio because, in addition to its total net assets, the Fund would be subject to investment exposure on the notional amount of the CDS. In connection with these agreements, cash and securities may be identified as collateral in accordance with the terms of the respective swap agreements to provide assets of value and recourse in the event of default under the swap agreement or bankruptcy/insolvency of a party to the swap agreement. In the event of a default by the Counterparty, the Fund will seek withdrawal of this collateral and may incur certain costs exercising its right with respect to the collateral. 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.
Notes to Financial Statements (Continued)
First Trust Tactical High Yield ETF (HYLS)October 31, 2023 Upon entering into a centrally cleared swap, the Fund is required to deposit initial margin with the broker in the form of cash or securities in an amount that varies depending on the size and risk profile of the particular swap. Cash deposited is segregated and included in “Cash segregated as collateral for open swap contracts” on the Statement of Assets and Liabilities. The daily change in valuation of centrally cleared swaps is included in “variation margin on swaps payable” in the Statement of Assets and Liabilities. Payments received from (paid to) the Counterparty, including at termination, are recorded as “net realized gain (loss) on swap contracts” on the Statement of Operations.
CDS contracts are marked to market daily based upon quotations from brokers, market makers or an independent pricing service and the change in value, if any, is recorded as unrealized appreciation (depreciation). For a CDS contract sold by the Fund, payment of the agreed upon amount made by the Fund in the event of default of the referenced debt obligation is recorded as the cost of the reference debt obligation purchased/received. At October 31, 2023, the Fund had no swap contracts.
E. Unfunded Loan Commitments
The Fund may enter into certain credit agreements, all or a portion of which may be unfunded. The Fund is obligated to fund these loan commitments at the borrower’s discretion. Unfunded loan commitments are marked-to-market daily, and any unrealized appreciation (depreciation) is included in the Statement of Assets and Liabilities and Statement of Operations. In connection with these commitments, the Fund earns a commitment fee typically set as a percentage of the commitment amount. The commitment fees are included in “Interest” on the Statement of Operations. As of October 31, 2023, the Fund had no unfunded loan commitments.
F. 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 October 31, 2023, the Fund held a restricted security as shown in the following table that the 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.
G. Dividends and Distributions to Shareholders
Dividends from net investment income of the Fund, 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, are distributed at least annually. The Fund may also designate a portion of the amount paid to redeeming shareholders as a distribution for tax purposes.
Distributions in cash may be reinvested automatically in additional whole shares only if the broker through whom the shares were purchased makes such option available. Such shares will generally be reinvested by the broker based upon the market price of those shares and investors may be subject to customary brokerage commissions charged by the broker.
Distributions from net investment income and realized capital gains are determined in accordance with federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These permanent differences are primarily due to the varying treatment of income and gain/loss on significantly modified portfolio securities held by the Fund and have no impact on net assets or NAV per share. Temporary differences, which arise from recognizing certain items of income, expense and gain/loss in different periods for financial statement and tax purposes, will reverse at some time in the future.
Notes to Financial Statements (Continued)
First Trust Tactical High Yield ETF (HYLS)October 31, 2023 The tax character of distributions paid during the fiscal years ended October 31, 2023 and 2022 was as follows:
As of October 31, 2023, the components of distributable earnings on a tax basis for the Fund were as follows:
Undistributed ordinary income | |
Accumulated capital and other gain (loss) | |
Net unrealized appreciation (depreciation) | |
H. 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 2020, 2021, 2022, and 2023 remain open to federal and state audit. As of October 31, 2023, management has evaluated the application of these standards to the Fund and has determined that no provision for income tax is required in the Fund’s 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, 2023, for federal income tax purposes, the Fund had $234,028,088 of capital loss carryforwards available, to the extent provided by regulations, to offset future capital gains. To the extent that these loss carryforwards are used to offset future capital gains, it is probable that the capital gains so offset will not be distributed to the Fund’s shareholders.
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, 2023, the Fund had no net late year ordinary or capital losses.
In order to present paid-in capital and accumulated distributable earnings (loss) (which consists of accumulated net investment income (loss), accumulated net realized gain (loss) on investments and net unrealized appreciation (depreciation) on investments) on the Statement of Assets and Liabilities that more closely represent their tax character, certain adjustments have been made to paid-in capital, accumulated net investment income (loss) and accumulated net realized gain (loss) on investments. These adjustments are primarily due to the difference between book and tax treatments of income and gains on various investment securities held by the Fund. The results of operations and net assets were not affected by these adjustments. For the fiscal year ended October 31, 2023, the adjustments for the Fund were as follows:
Accumulated
Net Investment
Income (Loss) | Accumulated
Net Realized
Gain (Loss)
on Investments | |
| | |
Notes to Financial Statements (Continued)
First Trust Tactical High Yield ETF (HYLS)October 31, 2023 As of October 31, 2023, the aggregate cost, gross unrealized appreciation, gross unrealized depreciation, and net unrealized appreciation/(depreciation) on investments (including short positions and derivatives, if any) for federal income tax purposes were as follows:
| Gross Unrealized
Appreciation | Gross Unrealized
(Depreciation) | Net Unrealized
Appreciation
(Depreciation) |
| | | |
I. Expenses
Expenses, other than the investment advisory fee and other excluded expenses, are paid by the Advisor (see Note 3). The Fund is subject to an interest expense due to the costs associated with the Fund’s short positions in securities.
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, if any, brokerage commissions and other expenses connected with the execution of portfolio transactions, distribution and service fees payable pursuant to a Rule 12b-1 plan, if any, and extraordinary expenses. The annual unitary management fee payable by the Fund to First Trust for these services will be reduced at certain levels of the Fund’s net assets (“breakpoints”) and calculated pursuant to the following schedule:
| |
Fund net assets up to and including $2.5 billion | |
Fund net assets greater than $2.5 billion up to and including $5 billion | |
Fund net assets greater than $5 billion up to and including $7.5 billion | |
Fund net assets greater than $7.5 billion up to and including $10 billion | |
Fund net assets greater than $10 billion | |
The Trust has multiple service agreements with The Bank of New York Mellon (“BNYM”). Under the service agreements, BNYM performs custodial, fund accounting, certain administrative services, and transfer agency services for the Fund. As custodian, BNYM is responsible for custody of the Fund’s assets. As fund accountant and administrator, BNYM is responsible for maintaining the books and records of the Fund’s securities and cash. As transfer agent, BNYM is responsible for maintaining shareholder records for the Fund. BNYM is a subsidiary of The Bank of New York Mellon Corporation, a financial holding company.
Each Trustee who is not an officer or employee of First Trust, any sub-advisor or any of their affiliates (“Independent Trustees”) is paid a fixed annual retainer that is allocated equally among each fund in the First Trust Fund Complex. Each Independent Trustee is also paid an annual per fund fee that varies based on whether the fund is a closed-end or other actively managed fund, a target outcome fund or an index fund.
Additionally, the Lead Independent Trustee and the Chairs of the Audit Committee, Nominating and Governance Committee and Valuation Committee are paid annual fees to serve in such capacities, with such compensation allocated pro rata among each fund in the First Trust Fund Complex based on net assets. Independent Trustees are reimbursed for travel and out-of-pocket expenses in connection with all meetings. The Lead Independent Trustee and Committee Chairs rotate every three years. The officers and “Interested” Trustee receive no compensation from the Trust for acting in such capacities.
Notes to Financial Statements (Continued)
First Trust Tactical High Yield ETF (HYLS)October 31, 2023 4. Purchases and Sales of Securities
For the fiscal year ended October 31, 2023 , the cost of purchases and proceeds from sales of investments, excluding short-term investments, investments sold short and in-kind transactions, were $435,510,809 and $556,059,118, respectively. The cost of purchases to cover short sales and the proceeds of short sales were $0 and $0, respectively.
For the fiscal year ended October 31, 2023, the Fund had no in-kind transactions.
5. Borrowings
The Trust, on behalf of the Fund, along with the First Trust Series Fund and First Trust Variable Insurance Trust, has a $200 million Credit Agreement with BNYM (“Line of Credit”), to be a liquidity backstop during periods of high redemption volume. 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 will be charged by BNYM, which First Trust allocates amongst the funds that have access to the Line of Credit. To the extent that the Fund accesses the Line of Credit, there would also be an interest fee charged. The Fund did not have any borrowings outstanding during the fiscal year ended October 31, 2023 associated with the Line of Credit.
6. Derivative Transactions
The following table presents the amount of net realized gain (loss) and change in net unrealized appreciation (depreciation) recognized for the fiscal year ended October 31, 2023, on derivative instruments, as well as the primary underlying risk exposure associated with the instruments.
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Statement of Operations Location | |
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Net realized gain (loss) on swap contracts | |
The Fund entered into credit default swap agreements on February 9, 2023. For the period February 9, 2023 through October 31, 2023, the average volume of credit default swaps was $4,491,509. There were no open credit default swaps at October 31, 2023.
The Fund does not have the right to offset financial assets and financial liabilities related to swap contracts on the Statement of Assets and Liabilities.
7. Creations, Redemptions and Transaction Fees
The Fund generally issues and redeems its shares in primary market transactions through a creation and redemption mechanism and does not sell or redeem individual shares. Instead, financial entities known as “Authorized Participants” have contractual arrangements with the Fund or one of the Fund’s service providers to purchase and redeem Fund shares directly with the Fund in large blocks of shares known as “Creation Units.” Prior to the start of trading on every business day, the Fund publishes through the National Securities Clearing Corporation the “basket” of securities, cash or other assets that it will accept in exchange for a Creation Unit of the Fund’s shares. An Authorized Participant that wishes to effectuate a creation of the Fund’s shares deposits with the Fund the “basket” of securities, cash or other assets identified by the Fund that day, and then receives the Creation Unit of the Fund’s shares in return for those assets. After purchasing a Creation Unit, the Authorized Participant may continue to hold the Fund’s shares or sell them in the secondary market. The redemption process is the reverse of the purchase process: the Authorized Participant redeems a Creation Unit of the Fund’s shares for a basket of securities, cash or other assets. The combination of the creation and redemption process with secondary market trading in the Fund’s shares and underlying securities provides arbitrage opportunities that are designed to help keep the market price of the Fund’s shares at or close to the NAV per share of the Fund.
The Fund imposes fees in connection with the purchase of Creation Units. These fees may vary based upon various fact-based circumstances, including, but not limited to, the composition of the securities included in the Creation Unit or the countries in which the transactions are settled. The price for each Creation Unit will equal the daily NAV per share of the Fund times the number of shares in a Creation Unit, plus the fees described above and, if applicable, any operational processing and brokerage costs, transfer fees, stamp taxes and part or all of the spread between the expected bid and offer side of the market related to the securities comprising the creation basket.
The Fund also imposes fees in connection with the redemption of Creation Units. These fees may vary based upon various fact-based circumstances, including, but not limited to, the composition of the securities included in the Creation Unit or the countries in which
Notes to Financial Statements (Continued)
First Trust Tactical High Yield ETF (HYLS)October 31, 2023 the transactions are settled. The price received for each Creation Unit will equal the daily NAV per share of the Fund times the number of shares in a Creation Unit, minus the fees described above and, if applicable, any operational processing and brokerage costs, transfer fees, stamp taxes and part or all of the spread between the expected bid and offer side of the market related to the securities comprising the redemption basket. Investors who use the services of a broker or other such intermediary in addition to an Authorized Participant to effect a redemption of a Creation Unit may also be assessed an amount to cover the cost of such services. The redemption fee charged by the Fund will comply with Rule 22c-2 of the 1940 Act which limits redemption fees to no more than 2% of the value of the shares redeemed.
8. Distribution Plan
The Board of Trustees adopted a Distribution and Service Plan pursuant to Rule 12b-1 under the 1940 Act. In accordance with the Rule 12b-1 plan, the Fund is authorized to pay an amount up to 0.25% of its average daily net assets each year to reimburse First Trust Portfolios L.P. (“FTP”), the distributor of the Fund, for amounts expended to finance activities primarily intended to result in the sale of Creation Units or the provision of investor services. FTP may also use this amount to compensate securities dealers or other persons that are Authorized Participants for providing distribution assistance, including broker-dealer and shareholder support and educational and promotional services.
No 12b-1 fees are currently paid by the Fund, and pursuant to a contractual arrangement, no 12b-1 fees will be paid any time before March 31, 2025.
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 on the Fund through the date the financial statements were issued and has determined that there were no subsequent events requiring recognition or disclosure in the financial statements that have not already been disclosed.
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Trustees of First Trust Exchange-Traded Fund IV:
Opinion on the Financial Statements and Financial Highlights
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of First Trust Tactical High Yield ETF (the “Fund”), one of the funds constituting the First Trust Exchange-Traded Fund IV, as of October 31, 2023, the related statements of operations and cash flows for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, the financial highlights for each of the five years in the period then ended, and the related notes. In our opinion, the financial statements and financial highlights present fairly, in all material respects, the financial position of the Fund as of October 31, 2023, and the results of its operations and its cash flows for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on the Fund’s financial statements and financial highlights based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Fund in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement, whether due to error or fraud. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements and financial highlights, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements and financial highlights. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and financial highlights. Our procedures included confirmation of securities owned as of October 31, 2023, by correspondence with the custodian and brokers; when replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
/s/ Deloitte & Touche, LLP
Chicago, Illinois
December 22, 2023
We have served as the auditor of one or more First Trust investment companies since 2001.
First Trust Tactical High Yield ETF (HYLS)October 31, 2023 (Unaudited) Proxy Voting Policies and Procedures
A description of the policies and procedures that the Trust uses to determine how to vote proxies and information on how the Fund voted proxies relating to its portfolio securities during the most recent 12-month period ended June 30 is available (1) without charge, upon request, by calling (800) 988-5891; (2) on the Fund’s website at www.ftportfolios.com; and (3) on the Securities and Exchange Commission’s (“SEC”) website at www.sec.gov.
Portfolio Holdings
The Fund files portfolio holdings information for each month in a fiscal quarter within 60 days after the end of the relevant fiscal quarter on Form N-PORT. Portfolio holdings information for the third month of each fiscal quarter will be publicly available on the SEC’s website at www.sec.gov. The Fund’s complete schedule of portfolio holdings for the second and fourth quarters of each fiscal year is included in the semi-annual and annual reports to shareholders, respectively, and is filed with the SEC on Form N-CSR. The semi-annual and annual report for the Fund is available to investors within 60 days after the period to which it relates. The Fund’s Forms N-PORT and Forms N-CSR are available on the SEC’s website listed above.
Federal Tax Information
Distributions paid to foreign shareholders during the Fund’s fiscal year ended October 31, 2023 that were properly designated by the Fund as “interest-related dividends” or “short-term capital gain dividends,” may not be subject to federal income tax provided that the income was earned directly by such foreign shareholders.
Of the ordinary income (including short-term capital gain) distributions made by the Fund during the fiscal year ended October 31, 2023, none qualify for the corporate dividends received deduction available to corporate shareholders or as qualified dividend income.
Risk Considerations
Risks are inherent in all investing. Certain general risks that may be applicable to a Fund are identified below, but not all of the material risks relevant to each Fund are included in this report and not all of the risks below apply to each Fund. The material risks of investing in each Fund are spelled out in its prospectus, statement of additional information and other regulatory filings. Before investing, you should consider each Fund’s investment objective, risks, charges and expenses, and read each Fund’s prospectus and statement of additional information carefully. You can download each Fund’s prospectus at www.ftportfolios.com or contact First Trust Portfolios L.P. at (800) 621-1675 to request a prospectus, which contains this and other information about each Fund.
Concentration Risk. To the extent that a fund is able to invest a significant percentage of its assets in a single asset class or the securities of issuers within the same country, state, region, industry or sector, an adverse economic, business or political development may affect the value of the fund’s investments more than if the fund were more broadly diversified. A fund that tracks an index will be concentrated to the extent the fund’s corresponding index is concentrated. A concentration makes a fund more susceptible to any single occurrence and may subject the fund to greater market risk than a fund that is more broadly diversified.
Credit Risk. Credit risk is the risk that an issuer of a security will be unable or unwilling to make dividend, interest and/or principal payments when due and the related risk that the value of a security may decline because of concerns about the issuer’s ability to make such payments.
Cyber Security Risk. The funds are susceptible to potential operational risks through breaches in cyber security. A breach in cyber security refers to both intentional and unintentional events that may cause a fund to lose proprietary information, suffer data corruption or lose operational capacity. Such events could cause a fund to incur regulatory penalties, reputational damage, additional compliance costs associated with corrective measures and/or financial loss. In addition, cyber security breaches of a fund’s third-party service providers, such as its administrator, transfer agent, custodian, or sub-advisor, as applicable, or issuers in which the fund invests, can also subject a fund to many of the same risks associated with direct cyber security breaches.
Defined Outcome Funds Risk. To the extent a fund’s investment strategy is designed to deliver returns tied to the price performance of an underlying ETF, an investor may not realize the returns the fund seeks to achieve if that investor does not hold shares for the entire target outcome period. In the event an investor purchases shares after the first day of the target outcome period or sells shares prior to the end of the target outcome period, the buffer that the fund seeks to provide against a decline in the value of the underlying ETF may not be available, the enhanced returns that the fund seeks to provide (if any) may not be available and the investor may not
Additional Information (Continued)
First Trust Tactical High Yield ETF (HYLS)October 31, 2023 (Unaudited) participate in a gain in the value of the underlying ETF up to the cap for the investor’s investment period. Additionally, the fund will not participate in gains of the underlying ETF above the cap and a shareholder may lose their entire investment. If the fund seeks enhanced returns, there are certain time periods when the value of the fund may fall faster than the value of the underlying ETF, and it is very unlikely that, on any given day during which the underlying ETF share price increases in value, the fund’s share price will increase at the same rate as the enhanced returns sought by the fund, which is designed for an entire target outcome period. Trading flexible exchange options involves risks different from, or possibly greater than, the risks associated with investing directly in securities, such as less liquidity and correlation and valuation risks. A fund may experience substantial downside from specific flexible exchange option positions and certain positions may expire worthless.
Derivatives Risk. To the extent a fund uses derivative instruments such as futures contracts, options contracts and swaps, the fund may experience losses because of adverse movements in the price or value of the underlying asset, index or rate, which may be magnified by certain features of the derivative. These risks are heightened when a fund’s portfolio managers use derivatives to enhance the fund’s return or as a substitute for a position or security, rather than solely to hedge (or offset) the risk of a position or security held by the fund.
Equity Securities Risk. To the extent a fund invests in equity securities, the value of the fund’s shares will fluctuate with changes in the value of the equity securities. Equity securities prices fluctuate for several reasons, including changes in investors’ perceptions of the financial condition of an issuer or the general condition of the relevant stock market, such as market volatility, or when political or economic events affecting the issuers occur. In addition, common stock prices may be particularly sensitive to rising interest rates, as the cost of capital rises and borrowing costs increase. Equity securities may decline significantly in price over short or extended periods of time, and such declines may occur in the equity market as a whole, or they may occur in only a particular country, company, industry or sector of the market.
ETF Risk. The shares of an ETF trade like common stock and represent an interest in a portfolio of securities. The risks of owning an ETF generally reflect the risks of owning the underlying securities, although lack of liquidity in an ETF could result in it being more volatile and ETFs have management fees that increase their costs. Shares of an ETF trade on an exchange at market prices rather than net asset value, which may cause the shares to trade at a price greater than net asset value (premium) or less than net asset value (discount). In times of market stress, decisions by market makers to reduce or step away from their role of providing a market for an ETF’s shares, or decisions by an ETF’s authorized participants that they are unable or unwilling to proceed with creation and/or redemption orders of an ETF’s shares, could result in shares of the ETF trading at a discount to net asset value and in greater than normal intraday bid-ask spreads.
Fixed Income Securities Risk. To the extent a fund invests in fixed income securities, the fund will be subject to credit risk, income risk, interest rate risk, liquidity risk and prepayment risk. Income risk is the risk that income from a fund’s fixed income investments could decline during periods of falling interest rates. Interest rate risk is the risk that the value of a fund’s fixed income securities will decline because of rising interest rates. Liquidity risk is the risk that a security cannot be purchased or sold at the time desired, or cannot be purchased or sold without adversely affecting the price. Prepayment risk is the risk that the securities will be redeemed or prepaid by the issuer, resulting in lower interest payments received by the fund. In addition to these risks, high yield securities, or “junk” bonds, are subject to greater market fluctuations and risk of loss than securities with higher ratings, and the market for high yield securities is generally smaller and less liquid than that for investment grade securities.
Index or Model Constituent Risk. Certain funds may be a constituent of one or more indices or ETF models. As a result, such a fund may be included in one or more index-tracking exchange-traded funds or mutual funds. Being a component security of such a vehicle could greatly affect the trading activity involving a fund, the size of the fund and the market volatility of the fund. Inclusion in an index could increase demand for the fund and removal from an index could result in outsized selling activity in a relatively short period of time. As a result, a fund’s net asset value could be negatively impacted and the fund’s market price may be significantly below its net asset value during certain periods. In addition, index rebalances may potentially result in increased trading activity in a fund’s shares.
Index Provider Risk. To the extent a fund seeks to track an index, it is subject to Index Provider Risk. There is no assurance that the Index Provider will compile the Index accurately, or that the Index will be determined, maintained, constructed, reconstituted, rebalanced, composed, calculated or disseminated accurately. To correct any such error, the Index Provider may carry out an unscheduled rebalance or other modification of the Index constituents or weightings, which may increase the fund’s costs. The Index Provider does not provide any representation or warranty in relation to the quality, accuracy or completeness of data in the Index, and
Additional Information (Continued)
First Trust Tactical High Yield ETF (HYLS)October 31, 2023 (Unaudited) it does not guarantee that the Index will be calculated in accordance with its stated methodology. Losses or costs associated with any Index Provider errors generally will be borne by the fund and its shareholders.
Investment Companies Risk. To the extent a fund invests in the securities of other investment vehicles, the fund will incur additional fees and expenses that would not be present in a direct investment in those investment vehicles. Furthermore, the fund’s investment performance and risks are directly related to the investment performance and risks of the investment vehicles in which the fund invests.
LIBOR Risk. To the extent a fund invests in floating or variable rate obligations that use the London Interbank Offered Rate (“LIBOR”) as a reference interest rate, it is subject to LIBOR Risk. The United Kingdom’s Financial Conduct Authority, which regulates LIBOR, has ceased making LIBOR available as a reference rate over a phase-out period that began December 31, 2021. There is no assurance that any alternative reference rate, including the Secured Overnight Financing Rate (“SOFR”) will be similar to or produce the same value or economic equivalence as LIBOR or that instruments using an alternative rate will have the same volume or liquidity. The unavailability or replacement of LIBOR may affect the value, liquidity or return on certain fund investments and may result in costs incurred in connection with closing out positions and entering into new trades. Any potential effects of the transition away from LIBOR on the fund or on certain instruments in which the fund invests can be difficult to ascertain, and they may vary depending on a variety of factors, and they could result in losses to the fund.
Management Risk. To the extent that a fund is actively managed, it is subject to management risk. In managing an actively-managed fund’s investment portfolio, the fund’s portfolio managers will apply investment techniques and risk analyses that may not have the desired result. There can be no guarantee that a fund will meet its investment objective.
Market Risk. Market risk is the risk that a particular security, or shares of a fund in general, may fall in value. Securities held by a fund, as well as shares of a fund itself, are subject to market fluctuations caused by factors such as general economic conditions, political events, regulatory or market developments, changes in interest rates and perceived trends in securities prices. Shares of a fund could decline in value or underperform other investments as a result of the risk of loss associated with these market fluctuations. In addition, local, regional or global events such as war, acts of terrorism, spread of infectious diseases or other public health issues, recessions, or other events could have a significant negative impact on a fund and its investments. Such events may affect certain geographic regions, countries, sectors and industries more significantly than others. In February 2022, Russia invaded Ukraine which has caused and could continue to cause significant market disruptions and volatility within the markets in Russia, Europe, and the United States. The hostilities and sanctions resulting from those hostilities could have a significant impact on certain fund investments as well as fund performance. The COVID-19 global pandemic and the ensuing policies enacted by governments and central banks have caused and may continue to cause significant volatility and uncertainty in global financial markets. While the U.S. has resumed “reasonably” normal business activity, many countries continue to impose lockdown measures. Additionally, there is no guarantee that vaccines will be effective against emerging variants of the disease. These events also adversely affect the prices and liquidity of a fund’s portfolio securities or other instruments and could result in disruptions in the trading markets. Any of such circumstances could have a materially negative impact on the value of a fund’s shares and result in increased market volatility. During any such events, a fund’s shares may trade at increased premiums or discounts to their net asset value and the bid/ask spread on a fund’s shares may widen.
Non-U.S. Securities Risk. To the extent a fund invests in non-U.S. securities, it is subject to additional risks not associated with securities of domestic issuers. Non-U.S. securities are subject to higher volatility than securities of domestic issuers due to: possible adverse political, social or economic developments; restrictions on foreign investment or exchange of securities; capital controls; lack of liquidity; currency exchange rates; excessive taxation; government seizure of assets; the imposition of sanctions by foreign governments; different legal or accounting standards; and less government supervision and regulation of exchanges in foreign countries. Investments in non-U.S. securities may involve higher costs than investments in U.S. securities, including higher transaction and custody costs, as well as additional taxes imposed by non-U.S. governments. These risks may be heightened for securities of companies located, or with significant operations, in emerging market countries.
Operational Risk. Each fund is subject to risks arising from various operational factors, including, but not limited to, human error, processing and communication errors, errors of a fund’s service providers, counterparties or other third-parties, failed or inadequate processes and technology or systems failures. Each fund relies on third-parties for a range of services, including custody. Any delay or failure relating to engaging or maintaining such service providers may affect a fund’s ability to meet its investment objective. Although the funds and the funds’ investment advisor seek to reduce these operational risks through controls and procedures, there is no way to completely protect against such risks.
Additional Information (Continued)
First Trust Tactical High Yield ETF (HYLS)October 31, 2023 (Unaudited) Passive Investment Risk. To the extent a fund seeks to track an index, the fund will invest in the securities included in, or representative of, the index regardless of their investment merit. A fund generally will not attempt to take defensive positions in declining markets.
Preferred Securities Risk. Preferred securities combine some of the characteristics of both common stocks and bonds. Preferred securities are typically subordinated to bonds and other debt securities in a company’s capital structure in terms of priority to corporate income, subjecting them to greater credit risk than those debt securities. Generally, holders of preferred securities have no voting rights with respect to the issuing company unless preferred dividends have been in arrears for a specified number of periods, at which time the preferred security holders may obtain limited rights. In certain circumstances, an issuer of preferred securities may defer payment on the securities and, in some cases, redeem the securities prior to a specified date. Preferred securities may also be substantially less liquid than other securities, including common stock.
Valuation Risk. The valuation of certain securities may carry more risk than that of common stock. Uncertainties in the conditions of the financial markets, unreliable reference data, lack of transparency and inconsistency of valuation models and processes may lead to inaccurate asset pricing. A fund may hold investments in sizes smaller than institutionally sized round lot positions (sometimes referred to as odd lots). However, third-party pricing services generally provide evaluations on the basis of institutionally-sized round lots. If a fund sells certain of its investments in an odd lot transaction, the sale price may be less than the value at which such securities have been held by the fund. Odd lots often trade at lower prices than institutional round lots. There is no assurance that the fund will be able to sell a portfolio security at the price established by the pricing service, which could result in a loss to the fund.
NOT FDIC INSURED NOT BANK GUARANTEED MAY LOSE VALUE
Advisory Agreement
Board Considerations Regarding Approval of the Continuation of the Investment Management Agreement
The Board of Trustees of First Trust Exchange-Traded Fund IV (the “Trust”), including the Independent Trustees, unanimously approved the continuation of the Investment Management Agreement (the “Agreement”) with First Trust Advisors L.P. (the “Advisor”) on behalf of the First Trust Tactical High Yield ETF (the “Fund”). The Board approved the continuation of the Agreement for a one-year period ending June 30, 2024 at a meeting held on June 4–5, 2023. The Board determined that the continuation of the Agreement is in the best interests of the Fund in light of the nature, extent and quality of the services provided and such other matters as the Board considered to be relevant in the exercise of its business judgment.
To reach this determination, the Board considered its duties under the Investment Company Act of 1940, as amended (the “1940 Act”), as well as under the general principles of state law, in reviewing and approving advisory contracts; the requirements of the 1940 Act in such matters; the fiduciary duty of investment advisors with respect to advisory agreements and compensation; the standards used by courts in determining whether investment company boards have fulfilled their duties; and the factors to be considered by the Board in voting on such agreements. At meetings held on April 17, 2023 and June 4–5, 2023, the Board, including the Independent Trustees, reviewed materials provided by the Advisor responding to requests for information from counsel to the Independent Trustees, submitted on behalf of the Independent Trustees, that, among other things, outlined: the services provided by the Advisor to the Fund (including the relevant personnel responsible for these services and their experience); the unitary fee rate schedule payable by the Fund as compared to fees charged to a peer group of funds (the “Expense Group”) and a broad peer universe of funds (the “Expense Universe”), each assembled by Broadridge Financial Solutions, Inc. (“Broadridge”), an independent source, and as compared to fees charged to other clients of the Advisor, including other exchange-traded funds (“ETFs”) managed by the Advisor; the expense ratio of the Fund as compared to expense ratios of the funds in the Fund’s Expense Group and Expense Universe; performance information for the Fund, including comparisons of the Fund’s performance to that of one or more relevant benchmark indexes and to that of a performance group of funds and a broad performance universe of funds (the “Performance Universe”), each assembled by Broadridge; the nature of expenses incurred in providing services to the Fund and the potential for the Advisor to realize economies of scale, if any; profitability and other financial data for the Advisor; any indirect benefits to the Advisor and its affiliate, First Trust Portfolios L.P. (“FTP”); and information on the Advisor’s compliance program. The Board reviewed initial materials with the Advisor at the meeting held on April 17, 2023, prior to which the Independent Trustees and their counsel met separately to discuss the information provided by the Advisor. Following the April meeting, counsel to the Independent Trustees, on behalf of the Independent Trustees, requested certain clarifications and supplements to the materials provided, and the information provided in response to those requests was considered at an executive session of the Independent Trustees and their counsel held prior to the June 4–5, 2023 meeting, as well as at the June meeting. The Board applied its business judgment to determine whether the arrangement between the Trust and the Advisor continues to be a reasonable business arrangement from the Fund’s perspective. The Board
Additional Information (Continued)
First Trust Tactical High Yield ETF (HYLS)October 31, 2023 (Unaudited) determined that, given the totality of the information provided with respect to the Agreement, the Board had received sufficient information to renew the Agreement. The Board considered that shareholders chose to invest or remain invested in the Fund knowing that the Advisor manages the Fund and knowing the Fund’s unitary fee.
In reviewing the Agreement, the Board considered the nature, extent and quality of the services provided by the Advisor under the Agreement. The Board considered that the Advisor is responsible for the overall management and administration of the Trust and the Fund and reviewed all of the services provided by the Advisor to the Fund, as well as the background and experience of the persons responsible for such services. The Board noted that the Fund is an actively-managed ETF and noted that the Advisor’s Leveraged Finance Investment Team is responsible for the day-to-day management of the Fund’s investments. The Board considered the background and experience of the members of the Leveraged Finance Investment Team and noted the Board’s prior meetings with members of the Team. The Board considered the Advisor’s statement that it applies the same oversight model internally with its Leveraged Finance Investment Team as it uses for overseeing external sub-advisors, including portfolio risk monitoring and performance review. In reviewing the services provided, the Board noted the compliance program that had been developed by the Advisor and considered that it includes a robust program for monitoring the Advisor’s and the Fund’s compliance with the 1940 Act, as well as the Fund’s compliance with its investment objectives, policies and restrictions. The Board also considered a report from the Advisor with respect to its risk management functions related to the operation of the Fund. Finally, as part of the Board’s consideration of the Advisor’s services, the Advisor, in its written materials and at the April 17, 2023 meeting, described to the Board the scope of its ongoing investment in additional personnel and infrastructure to maintain and improve the quality of services provided to the Fund and the other funds in the First Trust Fund Complex. In light of the information presented and the considerations made, the Board concluded that the nature, extent and quality of the services provided to the Trust and the Fund by the Advisor under the Agreement have been and are expected to remain satisfactory and that the Advisor has managed the Fund consistent with its investment objectives, policies and restrictions.
The Board considered the unitary fee rate schedule payable by the Fund under the Agreement for the services provided. The Board considered that as part of the unitary fee the Advisor is responsible for the Fund’s expenses, including the cost of transfer agency, custody, fund administration, legal, audit and other services and license fees, if any, but excluding the fee payment under the Agreement and interest, taxes, brokerage commissions and other expenses connected with the execution of portfolio transactions, distribution and service fees pursuant to a Rule 12b-1 plan, if any, and extraordinary expenses, if any. The Board received and reviewed information showing the fee rates and expense ratios of the peer funds in the Expense Group, as well as advisory and unitary fee rates charged by the Advisor to other fund (including ETFs) and non-fund clients, as applicable. Because the Fund pays a unitary fee, the Board determined that expense ratios were the most relevant comparative data point. Based on the information provided, the Board noted that the unitary fee rate for the Fund was above the median total (net) expense ratio of the peer funds in the Expense Group. With respect to the Expense Group, the Board, at the April 17, 2023 meeting, discussed with Broadridge its methodology for assembling peer groups and discussed with the Advisor limitations in creating peer groups for actively-managed ETFs, and different business models that may affect the pricing of services among ETF sponsors. The Board took these limitations and differences into account in considering the peer data. With respect to fees charged to other non-ETF clients, the Board considered differences between the Fund and other non-ETF clients that limited their comparability. In considering the unitary fee rate schedule overall, the Board also considered the Advisor’s statement that it seeks to meet investor needs through innovative and value-added investment solutions and the Advisor’s demonstrated long-term commitment to the Fund and the other funds in the First Trust Fund Complex.
The Board considered performance information for the Fund. The Board noted the process it has established for monitoring the Fund’s performance and portfolio risk on an ongoing basis, which includes quarterly performance reporting from the Advisor for the Fund. The Board determined that this process continues to be effective for reviewing the Fund’s performance. The Board received and reviewed information comparing the Fund’s performance for periods ended December 31, 2022 to the performance of the funds in the Performance Universe and to that of a benchmark index. Based on the information provided, the Board noted that the Fund underperformed the Performance Universe median and the benchmark index for the one-, three- and five-year periods ended December 31, 2022. The Board noted the Advisor’s discussion of the Fund’s performance at the April 17, 2023 meeting.
On the basis of all the information provided on the unitary fee and performance of the Fund and the ongoing oversight by the Board, the Board concluded that the unitary fee for the Fund continues to be reasonable and appropriate in light of the nature, extent and quality of the services provided by the Advisor to the Fund under the Agreement.
The Board considered information and discussed with the Advisor whether there were any economies of scale in connection with providing advisory services to the Fund at current asset levels and whether the Fund may benefit from any economies of scale. The Board noted that the unitary fee rate schedule for the Fund includes breakpoints pursuant to which the unitary fee rate will be reduced
Additional Information (Continued)
First Trust Tactical High Yield ETF (HYLS)October 31, 2023 (Unaudited) as assets of the Fund meet certain thresholds. The Board considered the Advisor’s statement that it believes that its expenses relating to providing advisory services to the Fund will increase during the next twelve months as the Advisor continues to build infrastructure and add new staff. The Board also noted that under the unitary fee structure, any reduction in expenses associated with the management and operations of the Fund would benefit the Advisor, but that the unitary fee structure provides a level of certainty in expenses for shareholders of the Fund. The Board concluded that the unitary fee rate schedule for the Fund reflects an appropriate level of sharing of any economies of scale that may be realized in the management of the Fund at current asset levels. The Board considered the revenues and allocated costs (including the allocation methodology) of the Advisor in serving as investment advisor to the Fund for the twelve months ended December 31, 2022 and the estimated profitability level for the Fund calculated by the Advisor based on such data, as well as complex-wide and product-line profitability data, for the same period. The Board noted the inherent limitations in the profitability analysis and concluded that, based on the information provided, the Advisor’s profitability level for the Fund was not unreasonable. In addition, the Board considered indirect benefits described by the Advisor that may be realized from its relationship with the Fund. The Board considered that the Advisor had identified as an indirect benefit to the Advisor and FTP their exposure to investors and brokers who, absent their exposure to the Fund, may have had no dealings with the Advisor or FTP, and noted that the Advisor does not utilize soft dollars in connection with the Fund. The Board concluded that the character and amount of potential indirect benefits to the Advisor were not unreasonable.
Based on all of the information considered and the conclusions reached, the Board, including the Independent Trustees, unanimously determined that the terms of the Agreement continue to be fair and reasonable and that the continuation of the Agreement is in the best interests of the Fund. No single factor was determinative in the Board’s analysis.
Remuneration
First Trust Advisors L.P. (“First Trust”) is authorised and regulated by the U.S. Securities and Exchange Commission and is entitled to market shares of certain undefined funds it manages (the “Fund”) in certain member states in the European Economic Area in accordance with the cooperation arrangements in Article 42 of the Alternative Investment Fund Managers Directive (the “Directive”). First Trust is required under the Directive to make disclosures in respect of remuneration. The following disclosures are made in line with First Trust’s interpretation of currently available regulatory guidance on remuneration disclosures.
During the year ended December 31, 2022, the amount of remuneration paid (or to be paid) by First Trust Advisors L.P. in respect of the Funds is $4,184,483. This figure is comprised of $404,410 paid (or to be paid) in fixed compensation and $3,780,073 paid (or to be paid) in variable compensation. There were a total of 31 beneficiaries of the remuneration described above. Those amounts include $464,355 paid (or to be paid) to senior management of First Trust Advisors L.P. and $3,720,128 paid (or to be paid) to other employees whose professional activities have a material impact on the risk profiles of First Trust Advisors L.P. or the Funds (collectively, “Code Staff”).
Code Staff included in the aggregated figures disclosed above are rewarded in line with First Trust’s remuneration policy (the “Remuneration Policy”) which is determined and implemented by First Trust’s senior management. The Remuneration Policy reflects First Trust’s ethos of good governance and encapsulates the following principal objectives:
i.
to provide a clear link between remuneration and performance of First Trust and to avoid rewarding for failure;
ii.
to promote sound and effective risk management consistent with the risk profiles of the funds managed by First Trust; and
iii.
to remunerate staff in line with the business strategy, objectives, values and interests of First Trust and the funds managed by First Trust in a manner that avoids conflicts of interest.
First Trust assesses various risk factors which it is exposed to when considering and implementing remuneration for Code Staff and considers whether any potential award to such person(s) would give rise to a conflict of interest. First Trust does not reward failure, or consider the taking of risk or failure to take risk in its remuneration of Code Staff.
First Trust assesses performance for the purposes of determining payments in respect of performance-related remuneration of Code Staff by reference to a broad range of measures including (i) individual performance (using financial and non-financial criteria), and (ii) the overall performance of First Trust. Remuneration is not based upon the performance of the Funds.
The elements of remuneration are balanced between fixed and variable and the senior management sets fixed salaries at a level sufficient to ensure that variable remuneration incentivises and rewards strong individual performance but does not encourage excessive risk taking.
Additional Information (Continued)
First Trust Tactical High Yield ETF (HYLS)October 31, 2023 (Unaudited) No individual is involved in setting his or her own remuneration.
Board of Trustees and Officers
First Trust Tactical High Yield ETF (HYLS)October 31, 2023 (Unaudited) The following tables identify the Trustees and Officers of the Trust. Unless otherwise indicated, the address of all persons is 120 East Liberty Drive, Suite 400, Wheaton, IL 60187.
The Trust’s statement of additional information includes additional information about the Trustees and is available, without charge, upon request, by calling (800) 988-5891.
Name,
Year of Birth and
Position with the Trust | Term of Office
and Year First
Elected or
Appointed | Principal Occupations
During Past 5 Years | Number of
Portfolios in
the First Trust
Fund Complex
Overseen by
Trustee | Other
Trusteeships or
Directorships
Held by Trustee
During Past
5 Years |
|
Richard E. Erickson, Trustee
(1951) | • Indefinite Term • Since Inception | Retired; Physician, Edward-Elmhurst Medical Group (2021 to September 2023); Physician and Officer, Wheaton Orthopedics (1990 to 2021) | | |
Thomas R. Kadlec, Trustee
(1957) | • Indefinite Term • Since Inception | Retired; President, ADM Investors Services, Inc. (Futures Commission Merchant) (2010 to July 2022) | | Director, National Futures Association and ADMIS Singapore Ltd.; Formerly, Director of ADM Investor Services, Inc., ADM Investor Services International, ADMIS Hong Kong Ltd., and Futures Industry Association |
Denise M. Keefe, Trustee
(1964) | • Indefinite Term • Since 2021 | Executive Vice President, Advocate Aurora Health and President, Advocate Aurora Continuing Health Division (Integrated Healthcare System) | | Director and Board Chair of Advocate Home Health Services, Advocate Home Care Products and Advocate Hospice; Director and Board Chair of Aurora At Home (since 2018); Director of Advocate Physician Partners Accountable Care Organization; Director of RML Long Term Acute Care Hospitals; Director of Senior Helpers (since 2021); and Director of MobileHelp (since 2022) |
Robert F. Keith, Trustee
(1956) | • Indefinite Term • Since Inception | President, Hibs Enterprises (Financial and Management Consulting) | | Formerly, Director of Trust Company of Illinois |
Niel B. Nielson, Trustee
(1954) | • Indefinite Term • Since Inception | Senior Advisor (2018 to Present), Managing Director and Chief Operating Officer (2015 to 2018), Pelita Harapan Educational Foundation (Educational Products and Services) | | |
Bronwyn Wright, Trustee
(1971) | • Indefinite Term • Since 2023 | Independent Director to a number of Irish collective investment funds (2009 to Present); Various roles at international affiliates of Citibank (1994 to 2009), including Managing Director, Citibank Europe plc and Head of Securities and Fund Services, Citi Ireland (2007 to 2009) | | |
Board of Trustees and Officers (Continued)
First Trust Tactical High Yield ETF (HYLS)October 31, 2023 (Unaudited) Name, Year of Birth and Position with the Trust | Term of Office and Year First Elected or Appointed | Principal Occupations During Past 5 Years | Number of Portfolios in the First Trust Fund Complex Overseen by Trustee | Other Trusteeships or Directorships Held by Trustee During Past 5 Years |
|
James A. Bowen(1), Trustee,
Chairman of the Board
(1955) | • Indefinite Term • Since Inception | Chief Executive Officer, First Trust Advisors L.P. and First Trust Portfolios L.P., Chairman of the Board of Directors, BondWave LLC (Software Development Company) and Stonebridge Advisors LLC (Investment Advisor) | | |
| Position and
Offices
with Trust | Term of Office
and Length of
Service | Principal Occupations
During Past 5 Years |
|
| President and Chief Executive Officer | • Indefinite Term • Since 2016 | Managing Director and Chief Financial Officer, First Trust Advisors L.P. and First Trust Portfolios L.P.; Chief Financial Officer, BondWave LLC (Software Development Company) and Stonebridge Advisors LLC (Investment Advisor) |
| Treasurer, Chief Financial Officer and Chief Accounting Officer | • Indefinite Term • Since 2023 | Senior Vice President, First Trust Advisors L.P. and First Trust Portfolios L.P., July 2021 to Present. Previously, Vice President, First Trust Advisors L.P. and First Trust Portfolios L.P., 2014 - 2021. |
| Secretary and Chief Legal Officer | • Indefinite Term • Since Inception | General Counsel, First Trust Advisors L.P. and First Trust Portfolios L.P.; Secretary and General Counsel, BondWave LLC; Secretary, Stonebridge Advisors LLC |
Daniel J. Lindquist
(1970) | | • Indefinite Term • Since Inception | Managing Director, First Trust Advisors L.P. and First Trust Portfolios L.P. |
| Chief Compliance Officer and Assistant Secretary | • Indefinite Term • Since Inception | Deputy General Counsel, First Trust Advisors L.P. and First Trust Portfolios L.P. |
| | • Indefinite Term • Since Inception | Senior Vice President, First Trust Advisors L.P. and First Trust Portfolios L.P. |
| | • Indefinite Term • Since Inception | Senior Vice President, First Trust Advisors L.P. and First Trust Portfolios L.P. |
(1)
Mr. Bowen is deemed an “interested person” of the Trust due to his position as Chief Executive Officer of First Trust Advisors L.P., investment advisor of the Trust.
(2)
The term “officer” means the president, vice president, secretary, treasurer, controller or any other officer who performs a policy making function.
First Trust Tactical High Yield ETF (HYLS)October 31, 2023 (Unaudited) Privacy Policy
First Trust values our relationship with you and considers your privacy an important priority in maintaining that relationship. We are committed to protecting the security and confidentiality of your personal information.
Sources of Information
We collect nonpublic personal information about you from the following sources:
• Information we receive from you and your broker-dealer, investment professional or financial representative through interviews, applications, agreements or other forms;
• Information about your transactions with us, our affiliates or others;
• Information we receive from your inquiries by mail, e-mail or telephone; and
• Information we collect on our website through the use of “cookies.” For example, we may identify the pages on our website that your browser requests or visits.
Information Collected
The type of data we collect may include your name, address, social security number, age, financial status, assets, income, tax information, retirement and estate plan information, transaction history, account balance, payment history, investment objectives, marital status, family relationships and other personal information.
Disclosure of Information
We do not disclose any nonpublic personal information about our customers or former customers to anyone, except as permitted by law. In addition to using this information to verify your identity (as required under law), the permitted uses may also include the disclosure of such information to unaffiliated companies for the following reasons:
• In order to provide you with products and services and to effect transactions that you request or authorize, we may disclose your personal information as described above to unaffiliated financial service providers and other companies that perform administrative or other services on our behalf, such as transfer agents, custodians and trustees, or that assist us in the distribution of investor materials such as trustees, banks, financial representatives, proxy services, solicitors and printers.
• We may release information we have about you if you direct us to do so, if we are compelled by law to do so, or in other legally limited circumstances (for example to protect your account from fraud).
In addition, in order to alert you to our other financial products and services, we may share your personal information within First Trust.
Use of Website Analytics
We currently use third party analytics tools, Google Analytics and AddThis, to gather information for purposes of improving First Trust’s website and marketing our products and services to you. These tools employ cookies, which are small pieces of text stored in a file by your web browser and sent to websites that you visit, to collect information, track website usage and viewing trends such as the number of hits, pages visited, videos and PDFs viewed and the length of user sessions in order to evaluate website performance and enhance navigation of the website. We may also collect other anonymous information, which is generally limited to technical and web navigation information such as the IP address of your device, internet browser type and operating system for purposes of analyzing the data to make First Trust’s website better and more useful to our users. The information collected does not include any personal identifiable information such as your name, address, phone number or email address unless you provide that information through the website for us to contact you in order to answer your questions or respond to your requests. To find out how to opt-out of these services click on: Google Analytics and AddThis.
Confidentiality and Security
With regard to our internal security procedures, First Trust restricts access to your nonpublic personal information to those First Trust employees who need to know that information to provide products or services to you. We maintain physical, electronic and procedural safeguards to protect your nonpublic personal information.
Policy Updates and Inquiries
As required by federal law, we will notify you of our privacy policy annually. We reserve the right to modify this policy at any time, however, if we do change it, we will tell you promptly. For questions about our policy, or for additional copies of this notice, please go to www.ftportfolios.com, or contact us at 1-800-621-1675 (First Trust Portfolios) or 1-800-222-6822 (First Trust Advisors).
March 2023
First Trust Exchange-Traded Fund IV
INVESTMENT ADVISOR
First Trust Advisors L.P.
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
ADMINISTRATOR, CUSTODIAN,
FUND ACCOUNTANT &
TRANSFER AGENT
The Bank of New York Mellon
240 Greenwich Street
New York, NY 10286
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
111 South Wacker Drive
Chicago, IL 60606
LEGAL COUNSEL
Chapman and Cutler LLP
320 South Canal Street
Chicago, IL 60606
Annual Report
For the Year Ended
October 31, 2023
First Trust Exchange-Traded Fund IV
FT Cboe Vest S&P 500® Dividend Aristocrats Target Income ETF (KNG) |
FT Cboe Vest S&P 500® Dividend Aristocrats Target Income ETF® (KNG)
Annual Report
October 31, 2023
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 Cboe VestSM Financial LLC (“Cboe Vest” or the “Sub-Advisor”) and their respective representatives, taking into account the information currently available to them. Forward-looking statements include all statements that do not relate solely to current or historical fact. For example, forward-looking statements include the use of words such as “anticipate,” “estimate,” “intend,” “expect,” “believe,” “plan,” “may,” “should,” “would” or other words that convey uncertainty of future events or outcomes.
Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the series of First Trust Exchange-Traded Fund IV (the “Trust”) described in this report (FT Cboe Vest S&P 500® Dividend Aristocrats Target 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 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’s shares may therefore be less than what you paid for them. Accordingly, you can lose money investing in the Fund. See “Risk Considerations” in the Additional Information section of this report for a discussion of certain other risks of investing in the Fund.
Performance data quoted represents past performance, which is no guarantee of future results, and current performance may be lower or higher than the figures shown. For the most recent month-end performance figures, please visit www.ftportfolios.com or speak with your financial advisor. Investment returns, net asset value and share price will fluctuate and Fund shares, when sold, may be worth more or less than their original cost.
The Advisor may also periodically provide additional information on Fund performance on the Fund’s webpage at www.ftportfolios.com.
How to Read This Report
This report contains information that may help you evaluate your investment in the Fund. It includes details about the Fund and presents data and analysis that provide insight into the Fund’s performance and investment approach.
By reading the portfolio commentary from the portfolio management team of the Fund, you may obtain an understanding of how the market environment affected the Fund’s performance. The statistical information that follows may help you understand the Fund’s performance compared to that of relevant market benchmarks.
It is important to keep in mind that the opinions expressed by personnel of the Advisor and/or Sub-Advisor are just that: informed opinions. They should not be considered to be promises or advice. The opinions, like the statistics, cover the period through the date on the cover of this report. The material risks of investing in the Fund are spelled out in the prospectus, the statement of additional information, and other Fund regulatory filings.
FT Cboe Vest S&P 500® Dividend Aristocrats Target Income ETF® (KNG)
Annual Letter from the Chairman and CEO
October 31, 2023
Dear Shareholders,
First Trust is pleased to provide you with the annual report for the FT Cboe Vest S&P 500® Dividend Aristocrats Target Income ETF® (the “Fund”), which contains detailed information about the Fund for the twelve months ended October 31, 2023.
The Bureau of Economic Analysis recently announced that U.S. real gross domestic product (“GDP”) grew by a staggering 4.9% in the third quarter of 2023 and is now up 2.9% on a year-over-year basis from where it stood in the third quarter of 2022. The most recent quarter’s GDP data represents the fastest growth rate for any quarter since 2014. Consumer spending, which rose by 4.0% over the period, was responsible for 2.7 percentage points of the total increase in GDP. Whether the consumer can keep up this pace of spending remains to be seen, especially given recent news that excess savings from the pandemic-era stimulus have likely been depleted. From a global perspective, the International Monetary Fund (“IMF”) notes that progress in fighting inflation has led to lower economic growth. In their October 2023 publication of the World Economic Outlook, the IMF projected that the growth in world economic output is expected to slow from 3.5% in 2022 to 2.9% in 2024. The economic growth in advanced economies is projected to plummet from 2.6% in 2022 to 1.4% in 2024.
In the notes to their September 2023 meeting, the Federal Open Market Committee revealed that they may need to keep interest rates “higher for longer” as they continue to battle stubbornly high inflation. As many investors are likely aware, a higher Federal Funds target rate can have deep implications for consumers, such as driving up the cost of borrowing for homes, automobiles, and other large purchases. The American consumer has yet to feel the full weight of those burdens, in my opinion. That said, the data reveals a different story among corporate America. S&P Global Market Intelligence reported that a total of 516 U.S. corporations filed for bankruptcy protection on a year-to-date basis through September 30, 2023, up from a total of 263 corporate bankruptcy filings over the same period last year. Higher interest rates and Treasury bond yields have also sapped demand for commercial property loans. Data from Trepp, LLC, a leading provider of data and analytics to the commercial real estate and banking markets, revealed that just $28.2 billion of loans converted into commercial mortgage-backed securities have been issued in 2023, the lowest figure since 2011.
The financial markets battled a myriad of headwinds over the past year, from geopolitical uncertainty resulting from war (the conflicts between Israel and Hamas and Russia and Ukraine), to slowing global economic growth and sticky inflation. Brian Wesbury, Chief Economist at First Trust, notes that a U.S. economic recession is likely to begin at some point early next year. While calls for a recession may concern some investors, the following may offer solace. Data from Bloomberg reveals that the S&P 500® Index has posted positive total returns over the 3-year period following every recession since 1948.
Thank you for giving First Trust the opportunity to play a role in your financial future. We value our relationship with you and will report on the Fund again in six months.
Sincerely,
James A. Bowen
Chairman of the Board of Trustees
Chief Executive Officer of First Trust Advisors L.P.
Fund Performance Overview (Unaudited)
FT Cboe Vest S&P 500® Dividend Aristocrats Target Income ETF® (KNG)
The FT Cboe Vest S&P 500® Dividend Aristocrats Target Income ETF® (the “Fund”) seeks investment results that correspond generally to the price and yield (before the Fund’s fees and expenses) of an equity index called the Cboe S&P 500® Dividend Aristocrats Target Income Index Monthly Series (the “Index”).
The Fund will normally invest at least 80% of its total assets (including investment borrowings) in the securities that comprise the Index. The Fund, using an indexing investment approach, attempts to replicate, before fees and expenses, the performance of the Index. The Index is owned, developed, maintained and calculated by S&P Opco, LLC (the “Index Provider”). The Index is a rules-based buy-write index designed with the primary goal of generating an annualized level of income from stock dividends and option premiums that is approximately 8% over the annual dividend yield of the S&P 500® Index and a secondary goal of generating capital appreciation. The Index’s objective to deliver a target level of income could result in the Fund selling securities to meet the target, which could make the Fund less tax-efficient than other ETFs. The Index is composed of two parts: (1) an equal-weighted portfolio of the stocks contained in the S&P 500® Dividend Aristocrats Index (the “Aristocrat Stocks”) that have options that trade on a national securities exchange and (2) a rolling series of short (written) call options on each of the Aristocrat Stocks (the “Covered Calls”). The S&P 500® Dividend Aristocrats Index includes companies in the S&P 500® Index that have increased dividend payments each year for at least 25 consecutive years and have a float adjusted market-cap of at least $3 billion as of the rebalancing reference date and have an average daily value traded of at least $5 million.
|
| | Average Annual Total Returns | |
| | | Inception
(3/26/18)
to 10/31/23 | | Inception
(3/26/18)
to 10/31/23 |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Cboe S&P 500® Dividend Aristocrats Target Income Index Monthly Series | | | | | |
S&P 500® Dividend Aristocrats Index | | | | | |
| | | | | |
Total returns for the period since inception are calculated from the inception date of the Fund. “Average Annual Total Returns” represent the average annual change in value of an investment over the periods indicated. “Cumulative Total Returns” represent the total change in value of an investment over the periods indicated.
The Fund’s per share net asset value (“NAV”) is the value of one share of the Fund and is computed by dividing the value of all assets of the Fund (including accrued interest and dividends), less all liabilities (including accrued expenses and dividends declared but unpaid), by the total number of outstanding shares. The price used to calculate market return (“Market Price”) is determined by using the midpoint of the national best bid and offer price (“NBBO”) as of the time that the Fund’s NAV is calculated. Under Securities and Exchange Commission rules, the NBBO consists of the highest displayed buy and lowest sell prices among the various exchanges trading the Fund at the time the Fund’s NAV is calculated. Since shares of the Fund did not trade in the secondary market until after its inception, for the period from inception to the first day of secondary market trading in shares of the Fund, the NAV of the Fund is used as a proxy for the secondary market trading price to calculate market returns. NAV and market returns assume that all distributions have been reinvested in the Fund at NAV and Market Price, respectively.
An index is a statistical composite that tracks a specified financial market or sector. Unlike the Fund, the indices do not actually hold a portfolio of securities and therefore do not incur the expenses incurred by the Fund. These expenses negatively impact the performance of the Fund. Also, market returns do not include brokerage commissions that may be payable on secondary market transactions. If brokerage commissions were included, market returns would be lower. The total returns presented reflect the reinvestment of dividends on securities in the indices. The returns presented do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. The investment return and principal value of shares of the Fund will vary with changes in market conditions. Shares of the Fund may be worth more or less than their original cost when they are redeemed or sold in the market. The Fund’s past performance is no guarantee of future performance.
Fund Performance Overview (Unaudited) (Continued)
FT Cboe Vest S&P 500® Dividend Aristocrats Target Income ETF® (KNG) (Continued)
| % of Total
Long-Term
Investments |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
Net Other Assets and Liabilities | |
| |
| Amount is less than 0.1%. |
| % of Total
Long-Term
Investments |
Stanley Black & Decker, Inc. | |
| |
| |
| |
International Business Machines Corp. | |
| |
| |
| |
Federal Realty Investment Trust | |
| |
| |
| Performance figures assume reinvestment of all distributions and do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. An index is a statistical composite that tracks a specified financial market or sector. Unlike the Fund, the indices do not actually hold a portfolio of securities and therefore do not incur the expenses incurred by the Fund. These expenses negatively impact the performance of the Fund. The Fund’s past performance does not predict future performance. |
Frequency Distribution of Discounts and Premiums
Information showing the number of days the market price of the Fund’s shares was greater (at a premium) and less (at a discount) than the Fund’s net asset value for the most recently completed year, and the most recently completed calendar quarters since that year (or life of the Fund, if shorter) is available at https://www.ftportfolios.com/Retail/etf/home.aspx.
FT Cboe Vest S&P 500® Dividend Aristocrats Target Income ETF® (KNG)Annual ReportOctober 31, 2023 (Unaudited) Advisor
First Trust Advisors L.P. (“First Trust” or the “Advisor”) is the investment advisor to the FT Cboe Vest S&P 500® Dividend Aristocrats Target Income ETF® (“KNG” or the “Fund”). First Trust is responsible for the ongoing monitoring of the Fund’s investment portfolio, managing the Fund’s business affairs and providing certain administrative services necessary for the management of the Fund.
Sub-Advisor
Cboe VestSM Financial LLC (“Cboe Vest” or the “Sub-Advisor”) serves as the investment sub-advisor to the Fund. In this capacity, Cboe Vest is responsible for the selection and ongoing monitoring of the securities in the Fund’s investment portfolio. Cboe Vest, with principal offices at 8350 Broad Street, Suite 240, McLean, VA 22102, was founded in 2012. Cboe Vest had approximately $17.8 billion under management or committed to management as of October 31, 2023.
Portfolio Management Team
Karan Sood, Managing Director of Cboe Vest
Howard Rubin, Managing Director of Cboe Vest
Discussion of Fund Performance
This discussion is for the Fund (the “Fund”) for the 12-month period ended October 31, 2023 (the “current fiscal period”). The Fund seeks to track the Cboe S&P 500® Dividend Aristocrats Target Income Index Monthly Series (the “SPATI Index” or the “Benchmark”).
Market Recap
Equity markets showed remarkable resilience in late 2022 and the first half of 2023, followed by declines in the third quarter of 2023 as well as October of 2023 as inflation and recession fears resurfaced. The Federal Reserve (the “Fed”) responded to the increased inflation rate during the period by hiking the Federal Funds target rate from 3.25% to 5.5% by the end of the current fiscal period.
U.S. equities, as measured by the S&P 500® Index (the “Index”), gained 10.14%. Five of the eleven sectors within the Index were up during the period. The top three sectors were the Communication Services, Information Technology, and Consumer Discretionary sectors, returning 35.7%, 30.9%, and 8.4%, respectively. The bottom three sectors were the Utilities, Real Estate, and Health Care sectors, returning -7.7%, -6.6%, and -4.6%, respectively.
Performance Analysis
During the current fiscal period, the Fund generally held approximately equal weights in 67 stocks, as well as written call options on almost all of these stocks. At the market close of July 21, 2023, the SPATI Index methodology updated from 3% to 8% per annum dividend yield in excess of the Index.
For the current fiscal period, the Fund’s net asset value (“NAV”) performance was -0.43%, while the SPATI Index performance was 0.38%. The underperformance of 0.81% can be explained by the following factors:
(1)
Fees and Expenses: Fees and expenses reduced the Fund’s performance by approximately 0.75%.
(2)
Execution Costs: Commissions, plus slippage due to trading securities at prices other than mid-market, reduced the Fund’s performance by approximately 0.06%.
(3)
Fund versus SPATI Index Holdings: While the Fund attempts to hold securities in the same proportion (i.e., weighting) as the SPATI Index, at times the Fund weights may deviate from the SPATI Index weights. The options positions may be “optimized” such that the Fund’s option weights are set to account for any liquidity concerns. That is, options that trade with wider bid-ask spreads may be excluded from the Fund holdings to minimize execution costs. For the current fiscal period, we estimate that the difference in weights between the Fund and the SPATI Index had a net 0.00% positive impact on the Fund’s performance.
Using market prices for the Fund, the Fund’s performance for the current fiscal period was -0.44%.
Portfolio Commentary (Continued)
FT Cboe Vest S&P 500® Dividend Aristocrats Target Income ETF® (KNG)Annual ReportOctober 31, 2023 (Unaudited) Impact of Fund Holdings on Performance
The top five performing holdings in the Fund for the current fiscal period were West Pharmaceutical Services, Pentair PLC, Linde PLC, A.O. Smith Corp., and W.W. Grainger, Inc., with returns of 38.7%, 37.4%, 30.4%, 29.7%, and 26.3%, respectively.
The bottom five performing holdings for the current fiscal period were Genuine Parts Co., Hormel Foods Corp., Target Corp., Walgreens Boots Alliance, Inc., and Albemarle Corp., with returns of -25.7%, -27.9%, -30.6%, -38.8%, and -54.4%, respectively.
Impact of Sector Weightings on Performance
For the current fiscal period, the Fund had sector weightings that were in line with the Benchmark, as the Fund seeks to track the SPATI Index. However, the Fund’s sector weightings were substantially different than the sector weightings of the Index. Relative to the Index, the Fund was significantly overweight the Consumer Staples, Industrials, and Materials sectors, and was significantly underweight the Information Technology, Communication Services, and Consumer Discretionary sectors. The net effect of the Fund’s sector weightings relative to the Index’s sector weightings negatively impacted the Fund’s performance relative to that of the Index.
Strong performances from the Fund’s holdings within the Industrials and Materials sectors, coupled with the Fund’s relative overweight in these sectors, contributed to relative overperformance for the Fund versus the Index.
Strong performance in the Information Technology sector, coupled with the Fund’s relative underweight in this sector, contributed to relative underperformance for the Fund versus the Index.
Market and Fund Outlook
During the current fiscal period, the Federal Reserve (the “Fed”) policy surrounding inflation remained a key driver of equity market performance. Moving into the next fiscal year, this will continue to be a dominant theme, in our opinion. The 2024 U.S. presidential election will also be front and center in the upcoming year. Over the course of 2023, Technology stocks led broad based indices, as investors flocked to companies developing Artificial Intelligence capabilities. The failure of Silicon Valley Bank in March 2023 sent shockwaves throughout the banking system and rising energy prices over the summer contributed to higher inflation. In late October 2023, 30-year fixed mortgage rates peaked at 7.79%. Investors are digesting a possible “higher for longer” period of sustained higher rates based on the Fed’s dot plot illustrating a median Federal Funds target rate of 5.1% for 2024, and 3.9% for 2025. Consumer Price Index inflation data has come down considerably, despite an unexpected 0.6% month-over-month reading in August 2023. The U.S. job market remains strong at 3.9% unemployment, with October 2023 marking the twenty-first straight month with unemployment below 4%. U.S. Gross domestic product has posted 5 consecutive positive quarters as it recorded growth of 4.9% in the third quarter of 2023, up from 2.1% in the second quarter of 2023.
The Fund generally holds equal weights in stocks within the Index that have increased their dividends for at least 25 consecutive years. We believe that the Fund is properly positioned to achieve its investment objective.
FT Cboe Vest S&P 500® Dividend Aristocrats Target Income ETF® (KNG)Understanding Your Fund ExpensesOctober 31, 2023 (Unaudited) As a shareholder of FT Cboe Vest S&P 500® Dividend Aristocrats Target Income ETF® (the “Fund”), you incur two types of costs: (1) transaction costs; and (2) ongoing costs, including management fees, distribution and/or service (12b-1) fees, if any, and other Fund expenses. This Example is intended to help you understand your ongoing costs of investing in the Fund and to compare these costs with the ongoing costs of investing in other funds.
The Example is based on an investment of $1,000 invested at the beginning of the period and held through the six-month period ended October 31, 2023.
Actual Expenses
The first line in the following table provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During the Six-Month Period” to estimate the expenses you paid on your account during this six-month period.
Hypothetical Example for Comparison Purposes
The second line in the following table provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs such as brokerage commissions. Therefore, the second line in the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
| Beginning
Account Value
May 1, 2023 | Ending
Account Value
October 31, 2023 | Annualized
Expense Ratio
Based on the
Six-Month
Period | Expenses Paid
During the
Six-Month
Period (a) |
FT Cboe Vest S&P 500® Dividend Aristocrats Target Income ETF® (KNG) |
| | | | |
Hypothetical (5% return before expenses) | | | | |
| Expenses are equal to the annualized expense ratio as indicated in the table multiplied by the average account value over the period (May 1, 2023 through October 31, 2023), multiplied by 184/365 (to reflect the six-month period). |
FT Cboe Vest S&P 500® Dividend Aristocrats Target Income ETF® (KNG)Portfolio of InvestmentsOctober 31, 2023
| | |
|
| Aerospace & Defense — 1.6% | |
| General Dynamics Corp. (a) | |
| Air Freight & Logistics — 2.9% | |
| C.H. Robinson Worldwide, Inc. (a) | |
| Expeditors International of Washington, Inc. (a) | |
| | |
| | |
| Brown-Forman Corp., Class B (a) | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| Franklin Resources, Inc. (a) | |
| | |
| T. Rowe Price Group, Inc. (a) | |
| | |
| | |
| Air Products and Chemicals, Inc. (a) | |
| | |
| | |
| | |
| | |
| Sherwin-Williams (The) Co. (a) | |
| | |
| Commercial Services & Supplies — 1.5% | |
| | |
| Consumer Staples Distribution & Retail — 6.0% | |
| | |
| | |
| Walgreens Boots Alliance, Inc. (a) | |
| | |
| | |
| Containers & Packaging — 1.5% | |
| | |
| | |
| | |
| Electric Utilities — 1.6% | |
| | |
| Electrical Equipment — 1.5% | |
| | |
| | |
| Archer-Daniels-Midland Co. (a) | |
| | |
See Notes to Financial Statements
FT Cboe Vest S&P 500® Dividend Aristocrats Target Income ETF® (KNG)Portfolio of Investments (Continued)October 31, 2023 | | |
COMMON STOCKS (Continued) |
| Food Products (Continued) | |
| J.M. Smucker (The) Co. (a) | |
| McCormick & Co., Inc. (a) | |
| | |
| | |
| | |
| Health Care Equipment & Supplies — 4.4% | |
| | |
| Becton, Dickinson & Co. (a) | |
| | |
| | |
| Health Care Providers & Services — 1.5% | |
| Cardinal Health, Inc. (a) | |
| Hotels, Restaurants & Leisure — 1.5% | |
| | |
| Household Products — 7.5% | |
| Church & Dwight Co., Inc. (a) | |
| | |
| Colgate-Palmolive Co. (a) | |
| | |
| Procter & Gamble (The) Co. (a) | |
| | |
| Industrial Conglomerates — 1.5% | |
| | |
| | |
| | |
| | |
| | |
| Cincinnati Financial Corp. (a) | |
| | |
| | |
| International Business Machines Corp. (a) | |
| Life Sciences Tools & Services — 1.3% | |
| West Pharmaceutical Services, Inc. (a) | |
| | |
| | |
| | |
| Illinois Tool Works, Inc. (a) | |
| | |
| | |
| Stanley Black & Decker, Inc. (a) | |
| | |
| | |
| | |
| | |
| Consolidated Edison, Inc. (a) | |
See Notes to Financial Statements
FT Cboe Vest S&P 500® Dividend Aristocrats Target Income ETF® (KNG)Portfolio of Investments (Continued)October 31, 2023 | | |
COMMON STOCKS (Continued) |
| Oil, Gas & Consumable Fuels — 2.9% | |
| | |
| | |
| | |
| Personal Care Products — 1.4% | |
| | |
| | |
| | |
| Professional Services — 1.4% | |
| Automatic Data Processing, Inc. (a) | |
| | |
| Essex Property Trust, Inc. (a) | |
| | |
| Federal Realty Investment Trust (a) | |
| | |
| | |
| | |
| Roper Technologies, Inc. (a) | |
| | |
| | |
| Trading Companies & Distributors — 1.6% | |
| | |
| | |
| | |
MONEY MARKET FUNDS — 0.2% |
| Dreyfus Government Cash Management Fund, Institutional Shares - 5.23% (b) | |
| | |
| Total Investments — 100.4% | |
| | |
| | | | | |
|
| Call Options Written — (0.4)% | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Air Products and Chemicals, Inc. | | | | |
| | | | | |
| | | | | |
| Archer-Daniels-Midland Co. | | | | |
| | | | | |
| Automatic Data Processing, Inc. | | | | |
| | | | | |
| | | | | |
| | | | | |
See Notes to Financial Statements
FT Cboe Vest S&P 500® Dividend Aristocrats Target Income ETF® (KNG)Portfolio of Investments (Continued)October 31, 2023 | | | | | |
WRITTEN OPTIONS (Continued) |
| Call Options Written (Continued) | |
| C.H. Robinson Worldwide, Inc. | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Church & Dwight Co., Inc. | | | | |
| Cincinnati Financial Corp. | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Consolidated Edison, Inc. | | | | |
| | | | | |
| | | | | |
| | | | | |
| Essex Property Trust, Inc. | | | | |
| Expeditors International of Washington, Inc. | | | | |
| | | | | |
| Federal Realty Investment Trust | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Illinois Tool Works, Inc. | | | | |
| International Business Machines Corp. | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Procter & Gamble (The) Co. | | | | |
| | | | | |
| | | | | |
| | | | | |
| Sherwin-Williams (The) Co. | | | | |
| Stanley Black & Decker, Inc. | | | | |
| | | | | |
| T. Rowe Price Group, Inc. | | | | |
| | | | | |
| | | | | |
See Notes to Financial Statements
FT Cboe Vest S&P 500® Dividend Aristocrats Target Income ETF® (KNG)Portfolio of Investments (Continued)October 31, 2023 | | | | | |
WRITTEN OPTIONS (Continued) |
| Call Options Written (Continued) | |
| Walgreens Boots Alliance, Inc. | | | | |
| | | | | |
| West Pharmaceutical Services, Inc. (c) (d) | | | | |
| | |
| (Premiums received $7,897,011) | |
| Net Other Assets and Liabilities — 0.0% | |
| | |
| All or a portion of this security is held as collateral for the options written. At October 31, 2023, the value of these securities amounts to $241,006,358. |
| Rate shown reflects yield as of October 31, 2023. |
| This security is fair valued by the Advisor’s Pricing Committee in accordance with procedures approved by the Trust’s Board of Trustees, and in accordance with provisions of the Investment Company Act of 1940 and rules thereunder, as amended. At October 31, 2023, securities noted as such are valued at $(1,400) or (0.0)% of net assets. |
| This security’s value was determined using significant unobservable inputs (see Note 2A- Portfolio Valuation in the Notes to Financial Statements). |
Valuation InputsA summary of the inputs used to value the Fund’s investments as of October 31, 2023 is as follows (see Note 2A - Portfolio Valuation in the Notes to Financial Statements):
|
| | | Level 2
Significant
Observable
Inputs | Level 3
Significant
Unobservable
Inputs |
| | | | |
| | | | |
| | | | |
|
| | | Level 2
Significant
Observable
Inputs | Level 3
Significant
Unobservable
Inputs |
| | | | |
| See Portfolio of Investments for industry breakout. |
Level 3 investments are fair valued by the Advisor’s Pricing Committee and are footnoted in the Portfolio of Investments. All Level 3 values are based on unobservable inputs.
See Notes to Financial Statements
FT Cboe Vest S&P 500® Dividend Aristocrats Target Income ETF® (KNG)Statement of Assets and Liabilities
October 31, 2023
| |
| |
| |
Cash segregated as collateral for open written options contracts | |
| |
Investment securities sold | |
| |
| |
| |
|
| |
Options contracts written, at value | |
| |
Investment securities purchased | |
| |
| |
| |
| |
|
| |
| |
| |
Accumulated distributable earnings (loss) | |
| |
NET ASSET VALUE, per share | |
Number of shares outstanding (unlimited number of shares authorized, par value $0.01 per share) | |
| |
Premiums received on options contracts written | |
See Notes to Financial Statements
FT Cboe Vest S&P 500® Dividend Aristocrats Target Income ETF® (KNG)Statement of Operations
For the Year Ended October 31, 2023
| |
| |
| |
|
| |
| |
| |
NET INVESTMENT INCOME (LOSS) | |
|
NET REALIZED AND UNREALIZED GAIN (LOSS): | |
Net realized gain (loss) on: | |
| |
| |
Written options contracts | |
| |
Net change in unrealized appreciation (depreciation) on: | |
| |
Written options contracts | |
Net change in unrealized appreciation (depreciation) | |
NET REALIZED AND UNREALIZED GAIN (LOSS) | |
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS | |
See Notes to Financial Statements
FT Cboe Vest S&P 500® Dividend Aristocrats Target Income ETF® (KNG)Statements of Changes in Net Assets
| | |
| | |
Net investment income (loss) | | |
| | |
Net change in unrealized appreciation (depreciation) | | |
Net increase (decrease) in net assets resulting from operations | | |
|
DISTRIBUTIONS TO SHAREHOLDERS FROM: | | |
| | |
|
SHAREHOLDER TRANSACTIONS: | | |
Proceeds from shares sold | | |
| | |
Net increase (decrease) in net assets resulting from shareholder transactions | | |
Total increase (decrease) in net assets | | |
|
| | |
| | |
| | |
|
CHANGES IN SHARES OUTSTANDING: | | |
Shares outstanding, beginning of period | | |
| | |
| | |
Shares outstanding, end of period | | |
See Notes to Financial Statements
FT Cboe Vest S&P 500® Dividend Aristocrats Target Income ETF® (KNG)Financial Highlights
For a share outstanding throughout each period
| |
| | | | | |
Net asset value, beginning of period | | | | | |
Income from investment operations: | | | | | |
Net investment income (loss) | | | | | |
Net realized and unrealized gain (loss) | | | | | |
Total from investment operations | | | | | |
Distributions paid to shareholders from: | | | | | |
| | | | | |
| | | | | |
| | | | | |
Capital share transactions: | | | | | |
| | | | | |
Net asset value, end of period | | | | | |
| | | | | |
|
Ratios to average net assets/supplemental data: | | | | | |
Net assets, end of period (in 000’s) | | | | | |
Ratio of total expenses to average net assets | | | | | |
Ratio of net investment income (loss) to average net assets | | | | | |
Portfolio turnover rate (e) | | | | | |
| Based on average shares outstanding. |
| Realized and unrealized gains (losses) per share are balancing amounts necessary to reconcile the change in net asset value per share for the period and may not reconcile with the aggregate gains and losses in the Statement of Operations due to share transactions for the period. |
| Amount is less than $0.01. |
| 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. |
| 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
Notes to Financial Statements
FT Cboe Vest S&P 500® Dividend Aristocrats Target Income ETF® (KNG)October 31, 2023 1. Organization
First Trust Exchange-Traded Fund IV (the “Trust”) is an open-end management investment company organized as a Massachusetts business trust on September 15, 2010, and is registered with the Securities and Exchange Commission under the Investment Company Act of 1940, as amended (the “1940 Act”).
The Trust currently consists of eighteen funds that are offering shares. This report covers the FT Cboe Vest S&P 500® Dividend Aristocrats Target Income ETF® (the “Fund”), a diversified series of the Trust, which trades under the ticker “KNG” on Cboe BZX Exchange, Inc. (“Cboe BZX”). The Fund represents a separate series of shares of beneficial interest in the Trust. Unlike conventional mutual funds, the Fund issues and redeems shares on a continuous basis, at net asset value (“NAV”), only in large blocks of shares known as “Creation Units.”
The Fund’s investment objective seeks investment results that correspond generally to the price and yield (before the Fund’s fees and expenses) of an equity index called the Cboe S&P 500® Dividend Aristocrats Target Income Index Monthly Series (the “Index”). The Fund will normally invest at least 80% of its total assets (including investment borrowings) in the securities that comprise the Index. The Index is a rules-based buy-write index designed with the primary goal of generating an annualized level of income from stock dividends and option premiums that is approximately 8% over the annual dividend yield of the S&P 500® Index and a secondary goal of generating capital appreciation.
2. Significant Accounting Policies
The Fund is considered an investment company and follows accounting and reporting guidance under Financial Accounting Standards Board Accounting Standards Codification Topic 946, “Financial Services-Investment Companies.” The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of the financial statements. The preparation of the financial statements in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates.
A. Portfolio Valuation
The Fund’s NAV is determined daily as of the close of regular trading on the New York Stock Exchange (“NYSE”), normally 4:00 p.m. Eastern time, on each day the NYSE is open for trading. If the NYSE closes early on a valuation day, the NAV is determined as of that time. The Fund’s NAV is calculated by dividing the value of all assets of the Fund (including accrued interest and dividends), less all liabilities (including accrued expenses and dividends declared but unpaid), by the total number of shares outstanding.
The Fund’s investments are valued daily at market value or, in the absence of market value with respect to any portfolio securities, at fair value. Market value prices represent readily available market quotations such as last sale or official closing prices from a national or foreign exchange (i.e., a regulated market) and are primarily obtained from third-party pricing services. Fair value prices represent any prices not considered market value prices and are either obtained from a third-party pricing service or are determined by the Pricing Committee of the Fund’s investment advisor, First Trust Advisors L.P. (“First Trust” or the “Advisor”), in accordance with valuation procedures approved by the Trust’s Board of Trustees, and in accordance with provisions of the 1940 Act and rules thereunder. Investments valued by the Advisor’s Pricing Committee, if any, are footnoted as such in the footnotes to the Portfolio of Investments. The Fund’s investments are valued as follows:
Common stocks and other equity securities listed on any national or foreign exchange (excluding Nasdaq, Inc. (“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 primary exchange for such securities.
Exchange-traded options contracts are valued at the closing price in the market where such contracts are principally traded. If no closing price is available, exchange-traded options contracts are valued at the mean of their most recent bid and ask price, if both are available. Options contracts traded in the over-the-counter market may be valued as follows, depending on the market in which the investment trades: (1) the mean of the most recent bid and ask price, if available; or (2) a price based on the equivalent exchange-traded option.
Equity securities traded in an over-the-counter market are valued at the close price or the last trade price.
Notes to Financial Statements (Continued)
FT Cboe Vest S&P 500® Dividend Aristocrats Target Income ETF® (KNG)October 31, 2023 Shares of open-end funds are valued based on NAV per share.
Certain securities may not be able to be priced by pre-established pricing methods. Such securities may be valued by 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 last sale price on the exchange on which they are principally traded or, for Nasdaq and AIM securities, the official closing price;
3)
the size of the holding;
4)
the initial cost of the security;
5)
transactions in comparable securities;
6)
price quotes from dealers and/or third-party pricing services;
7)
relationships among various securities;
8)
information obtained by contacting the issuer, analysts, or the appropriate stock exchange;
9)
an analysis of the issuer’s financial statements;
10)
the existence of merger proposals or tender offers that might affect the value of the security; and
11)
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:
• Level 1 – Level 1 inputs are quoted prices in active markets for identical investments. An active market is a market in which transactions for the investment occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
• Level 2 – Level 2 inputs are observable inputs, either directly or indirectly, and include the following:
o Quoted prices for similar investments in active markets.
o Quoted prices for identical or similar investments in markets that are non-active. A non-active market is a market where there are few transactions for the investment, the prices are not current, or price quotations vary substantially either over time or among market makers, or in which little information is released publicly.
o Inputs other than quoted prices that are observable for the investment (for example, interest rates and yield curves observable at commonly quoted intervals, volatilities, prepayment speeds, loss severities, credit risks, and default rates).
o Inputs that are derived principally from or corroborated by observable market data by correlation or other means.
• Level 3 – Level 3 inputs are unobservable inputs. Unobservable inputs may reflect the reporting entity’s own assumptions about the assumptions that market participants would use in pricing the investment.
The inputs or methodologies used for valuing investments are not necessarily an indication of the risk associated with investing in those investments. A summary of the inputs used to value the Fund’s investments as of October 31, 2023, 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.
Notes to Financial Statements (Continued)
FT Cboe Vest S&P 500® Dividend Aristocrats Target Income ETF® (KNG)October 31, 2023 C. Options Contracts
The Fund will employ a “partial covered call strategy,” meaning that covered calls will be typically written on a notional value less than the total value of each underlying stock contained in the S&P 500® Dividend Aristocrats Index (the “Aristocrat Stocks”), such that the short position in each call option is “covered” by a portion of the corresponding Aristocrat Stock held by the Fund, however, the notional value of the covered calls will not exceed 100% of the value of each underlying Aristocrat Stock. A written (sold) call option gives the seller the obligation to sell shares of the underlying asset at a specified price (“strike price”) at a specified date (“expiration date”). The writer (seller) of the call option receives an amount (premium) for writing (selling) the option. In the event the underlying asset appreciates above the strike price as of the expiration date, the writer (seller) of the call option will have to pay the difference between the value of the underlying asset and the strike price (which loss is offset by the premium initially received), and in the event the underlying asset declines in value, the call option may end up worthless and the writer (seller) of the call option retains the premium.
When the Fund writes (sells) an option, an amount equal to the premium received by the Fund is included in “Options contracts written, at value” on the Statement of Assets and Liabilities. Options are marked-to-market daily and their value is affected by changes in the value of the underlying security, changes in interest rates, changes in the actual or perceived volatility of the securities markets and the underlying securities, and the remaining time to the option’s expiration. The value of options may also be adversely affected if the market for the options becomes less liquid or the trading volume diminishes. Premiums received from writing options that expire unexercised are treated by the Fund on the expiration date as realized gains from options written. The difference between the premium and the amount paid on effecting a closing purchase transaction, including brokerage commissions, is also treated as a realized gain, or, if the premium is less than the amount paid for the closing purchase transaction, as a realized loss. If a call option is exercised, the premium is added to the proceeds from the sale of the underlying security in determining whether the Fund has realized a gain or loss. Any gain or loss on written options would be included in “Net realized gain (loss) on written options contracts” on the Statement of Operations. The Fund, as a writer of an option, bears the market risk of an unfavorable change in the price of the security underlying the written option.
D. Dividends and Distributions to Shareholders
Dividends from net investment income of the Fund, 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, are distributed at least annually. The Fund may also designate a portion of the amount paid to redeeming shareholders as a distribution for tax purposes.
Distributions from net investment income and realized capital gains are determined in accordance with federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These permanent differences are primarily due to the varying treatment of income and gain/loss on significantly modified portfolio securities held by the Fund and have no impact on net assets or NAV per share. Temporary differences, which arise from recognizing certain items of income, expense and gain/loss in different periods for financial statement and tax purposes, will reverse at some time in the future.
The tax character of distributions paid during the fiscal years ended October 31, 2023 and 2022 was as follows:
As of October 31, 2023, the components of distributable earnings on a tax basis for the Fund were as follows:
Undistributed ordinary income | |
Accumulated capital and other gain (loss) | |
Net unrealized appreciation (depreciation) | |
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
Notes to Financial Statements (Continued)
FT Cboe Vest S&P 500® Dividend Aristocrats Target Income ETF® (KNG)October 31, 2023 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 2020, 2021, 2022, and 2023 remain open to federal and state audit. As of October 31, 2023, management has evaluated the application of these standards to the Fund and has determined that no provision for income tax is required in the Fund’s 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, 2023, for federal income tax purposes, the Fund had no capital loss carryforwards available, to the extent provided by regulations, to offset future capital gains.
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, 2023, the Fund had no net late year ordinary or capital losses.
In order to present paid-in capital and accumulated distributable earnings (loss) (which consists of accumulated net investment income (loss), accumulated net realized gain (loss) on investments and net unrealized appreciation (depreciation) on investments) on the Statement of Assets and Liabilities that more closely represent their tax character, certain adjustments have been made to paid-in capital, accumulated net investment income (loss) and accumulated net realized gain (loss) on investments. These adjustments are primarily due to the difference between book and tax treatments of income and gains on various investment securities held by the Funds and in-kind transactions. The results of operations and net assets were not affected by these adjustments. For the fiscal year ended October 31, 2023, the adjustments for the Fund were as follows:
Accumulated
Net Investment
Income (Loss) | Accumulated
Net Realized
Gain (Loss)
on Investments | |
| | |
As of October 31, 2023, the aggregate cost, gross unrealized appreciation, gross unrealized depreciation, and net unrealized appreciation/(depreciation) on investments (including short positions and derivatives, if any) for federal income tax purposes were as follows:
| Gross Unrealized
Appreciation | Gross Unrealized
(Depreciation) | Net Unrealized
Appreciation
(Depreciation) |
| | | |
F. Expenses
Expenses, other than the investment advisory fee and other excluded expenses, are paid by the Advisor (see Note 3).
3. Investment Advisory Fee, Affiliated Transactions and Other Fee Arrangements
First Trust, the investment advisor to the Fund, is a limited partnership with one limited partner, Grace Partners of DuPage L.P., and one general partner, The Charger Corporation. The Charger Corporation is an Illinois corporation controlled by James A. Bowen, Chief Executive Officer of First Trust. First Trust is responsible for the selection and ongoing monitoring of the securities in the Fund’s portfolio, managing the Fund’s business affairs and providing certain administrative services necessary for the management of the Fund.
First Trust is responsible for the expenses of the Fund including the cost of transfer agency, sub-advisory, custody, fund administration, legal, audit and other services and license fees (if any), but excluding fee payments under the Investment Management Agreement, interest, taxes, acquired fund fees and expenses, if any, brokerage commissions and other expenses connected with the execution of portfolio transactions, distribution and service fees payable pursuant to a Rule 12b-1 plan, if any, and extraordinary
Notes to Financial Statements (Continued)
FT Cboe Vest S&P 500® Dividend Aristocrats Target Income ETF® (KNG)October 31, 2023 expenses. The annual unitary management fee payable by the Fund to First Trust for these services will be reduced at certain levels of the Fund’s net assets (“breakpoints”) and calculated pursuant to the following schedule:
| |
Fund net assets up to and including $2.5 billion | |
Fund net assets greater than $2.5 billion up to and including $5 billion | |
Fund net assets greater than $5 billion up to and including $7.5 billion | |
Fund net assets greater than $7.5 billion up to and including $10 billion | |
Fund net assets greater than $10 billion | |
Cboe VestSM Financial LLC (“Cboe Vest”), 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, on behalf of the Fund, and the Advisor, and the Investment Sub-Advisory Agreement among the Trust, on behalf of the Fund, the Advisor and Cboe Vest, First Trust will supervise Cboe Vest and its management of the investment of the Fund’s assets and will pay Cboe Vest for its services as the Fund’s sub-advisor. Cboe Vest receives a sub-advisory fee equal to 0.20% of the average daily net assets of the Fund. Cboe Vest’s fee is paid by the Advisor out of its management fee.
The Trust has multiple service agreements with The Bank of New York Mellon (“BNYM”). Under the service agreements, BNYM performs custodial, fund accounting, certain administrative services, and transfer agency services for the Fund. As custodian, BNYM is responsible for custody of the Fund’s assets. As fund accountant and administrator, BNYM is responsible for maintaining the books and records of the Fund’s securities and cash. As transfer agent, BNYM is responsible for maintaining shareholder records for the Fund. BNYM is a subsidiary of The Bank of New York Mellon Corporation, a financial holding company.
Each Trustee who is not an officer or employee of First Trust, any sub-advisor or any of their affiliates (“Independent Trustees”) is paid a fixed annual retainer that is allocated equally among each fund in the First Trust Fund Complex. Each Independent Trustee is also paid an annual per fund fee that varies based on whether the fund is a closed-end or other actively managed fund, a target outcome fund or an index fund.
Additionally, the Lead Independent Trustee and the Chairs of the Audit Committee, Nominating and Governance Committee and Valuation Committee are paid annual fees to serve in such capacities, with such compensation allocated pro rata among each fund in the First Trust Fund Complex based on net assets. Independent Trustees are reimbursed for travel and out-of-pocket expenses in connection with all meetings. The Lead Independent Trustee and Committee Chairs rotate every three years. The officers and “Interested” Trustee receive no compensation from the Trust for acting in such capacities.
4. Purchases and Sales of Securities
For the fiscal year ended October 31, 2023, the cost of purchases and proceeds from sales of investments, excluding short-term investments and in-kind transactions, were $716,142,508 and $723,323,824, respectively.
For the fiscal year ended October 31, 2023, the cost of in-kind purchases and proceeds from in-kind sales were $1,203,036,618 and $132,035,982, respectively.
5. Derivative Transactions
The following table presents the types of derivatives held by the Fund at October 31, 2023, the primary underlying risk exposure and the location of these instruments as presented on the Statement of Assets and Liabilities.
| | | |
| | Statement of Assets and
Liabilities Location | | Statement of Assets and
Liabilities Location | |
| | Options contracts purchased, at value | | Options contracts written, at value | |
Notes to Financial Statements (Continued)
FT Cboe Vest S&P 500® Dividend Aristocrats Target Income ETF® (KNG)October 31, 2023 The following table presents the amount of net realized gain (loss) and change in net unrealized appreciation (depreciation) recognized for the fiscal year ended October 31, 2023, on derivative instruments, as well as the primary underlying risk exposure associated with the instruments.
|
Statement of Operations Location | |
| |
Net realized gain (loss) on written options contracts | |
Net change in unrealized appreciation (depreciation) on written options contracts | |
During the fiscal year ended October 31, 2023, the premiums for written options contracts opened were $35,036,311 and the premiums for written options contracts closed, exercised and expired were $28,033,755.
6. Offsetting Assets and Liabilities
The Fund is subject to a Master Netting Arrangement, which governs the terms of certain transactions with select counterparties. The Master Netting Arrangement allows the Fund to close out and net its total exposure to a counterparty in the event of a default with respect to all the transactions governed under a single agreement with a counterparty. The Master Netting Arrangement also specifies collateral posting arrangements at pre-arranged exposure levels. Under the Master Netting Arrangement, collateral is routinely transferred if the total net exposure to certain transactions (net of existing collateral already in place) governed under the relevant Master Netting Arrangement with a counterparty in a given account exceeds a specified threshold depending on the counterparty and type of Master Netting Arrangement.
The following is a summary of the Statement of Assets and Liabilities subject to offsetting in the Fund as of the end of the reporting period:
| Gross
Amount of
Recognized
Liabilities | Gross Amount
Offset in the
Statement of
Assets and
Liabilities | Net Amount
of Liabilities
Presented in the
Statement of
Assets and
Liabilities | Gross Amount Not Offset
in the Statement of
Assets and Liabilities | |
| | | |
Written Options
Societe Generale | | | | | | |
In some instances, the collateral amounts disclosed in the tables were adjusted due to the requirement to limit the collateral amounts to avoid the effect of overcollateralization. Actual collateral received/pledged may be more than the amounts disclosed herein.
7. Creations, Redemptions and Transaction Fees
The Fund generally issues and redeems its shares in primary market transactions through a creation and redemption mechanism and does not sell or redeem individual shares. Instead, financial entities known as “Authorized Participants” have contractual arrangements with the Fund or one of the Fund’s service providers to purchase and redeem Fund shares directly with the Fund in large blocks of shares known as “Creation Units.” Prior to the start of trading on every business day, the Fund publishes through the National Securities Clearing Corporation the “basket” of securities, cash or other assets that it will accept in exchange for a Creation Unit of the Fund’s shares. An Authorized Participant that wishes to effectuate a creation of the Fund’s shares deposits with the Fund the “basket” of securities, cash or other assets identified by the Fund that day, and then receives the Creation Unit of the Fund’s shares in return for those assets. After purchasing a Creation Unit, the Authorized Participant may continue to hold the Fund’s shares or sell them in the secondary market. The redemption process is the reverse of the purchase process: the Authorized Participant redeems a Creation Unit of the Fund’s shares for a basket of securities, cash or other assets. The combination of the creation and redemption process with secondary market trading in the Fund’s shares and underlying securities provides arbitrage opportunities that are designed to help keep the market price of the Fund’s shares at or close to the NAV per share of the Fund.
The Fund imposes fees in connection with the purchase of Creation Units. These fees may vary based upon various fact-based circumstances, including, but not limited to, the composition of the securities included in the Creation Unit or the countries in which the transactions are settled. The price for each Creation Unit will equal the daily NAV per share of the Fund times the number of
Notes to Financial Statements (Continued)
FT Cboe Vest S&P 500® Dividend Aristocrats Target Income ETF® (KNG)October 31, 2023 shares in a Creation Unit, plus the fees described above and, if applicable, any operational processing and brokerage costs, transfer fees, stamp taxes and part or all of the spread between the expected bid and offer side of the market related to the securities comprising the creation basket.
The Fund also imposes fees in connection with the redemption of Creation Units. These fees may vary based upon various fact-based circumstances, including, but not limited to, the composition of the securities included in the Creation Unit or the countries in which the transactions are settled. The price received for each Creation Unit will equal the daily NAV per share of the Fund times the number of shares in a Creation Unit, minus the fees described above and, if applicable, any operational processing and brokerage costs, transfer fees, stamp taxes and part or all of the spread between the expected bid and offer side of the market related to the securities comprising the redemption basket. Investors who use the services of a broker or other such intermediary in addition to an Authorized Participant to effect a redemption of a Creation Unit may also be assessed an amount to cover the cost of such services. The redemption fee charged by the Fund will comply with Rule 22c-2 of the 1940 Act which limits redemption fees to no more than 2% of the value of the shares redeemed.
8. Distribution Plan
The Board of Trustees adopted a Distribution and Service Plan pursuant to Rule 12b-1 under the 1940 Act. In accordance with the Rule 12b-1 plan, the Fund is authorized to pay an amount up to 0.25% of its average daily net assets each year to reimburse First Trust Portfolios L.P. (“FTP”), the distributor of the Fund, for amounts expended to finance activities primarily intended to result in the sale of Creation Units or the provision of investor services. FTP may also use this amount to compensate securities dealers or other persons that are Authorized Participants for providing distribution assistance, including broker-dealer and shareholder support and educational and promotional services.
No 12b-1 fees are currently paid by the Fund, and pursuant to a contractual arrangement, no 12b-1 fees will be paid any time before March 31, 2025.
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 on the Fund through the date the financial statements were issued and has determined that there were no subsequent events requiring recognition or disclosure in the financial statements that have not already been disclosed.
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Trustees of First Trust Exchange-Traded Fund IV:
Opinion on the Financial Statements and Financial Highlights
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of FT Cboe Vest S&P 500® Dividend Aristocrats Target Income ETF® (the “Fund”), one of the funds constituting the First Trust Exchange-Traded Fund IV, as of October 31, 2023, the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, the financial highlights for each of the three years in the period then ended, and the related notes. In our opinion, the financial statements and financial highlights present fairly, in all material respects, the financial position of the Fund as of October 31, 2023, and the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the three years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. The financial highlights for the years ended October 31, 2020 and 2019 were audited by other auditors whose report dated December 23, 2020, expressed an unqualified opinion on such financial highlights.
Basis for Opinion
These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on the Fund’s financial statements and financial highlights based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Fund in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement, whether due to error or fraud. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements and financial highlights, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements and financial highlights. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and financial highlights. Our procedures included confirmation of securities owned as of October 31, 2023, by correspondence with the custodian and brokers; when replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
/s/ Deloitte & Touche, LLP
Chicago, Illinois
December 20, 2023
We have served as the auditor of one or more First Trust investment companies since 2001.
FT Cboe Vest S&P 500® Dividend Aristocrats Target Income ETF® (KNG)October 31, 2023 (Unaudited) Proxy Voting Policies and Procedures
A description of the policies and procedures that the Trust uses to determine how to vote proxies and information on how the Fund voted proxies relating to its portfolio securities during the most recent 12-month period ended June 30 is available (1) without charge, upon request, by calling (800) 988-5891; (2) on the Fund’s website at www.ftportfolios.com; and (3) on the Securities and Exchange Commission’s (“SEC”) website at www.sec.gov.
Portfolio Holdings
The Fund files portfolio holdings information for each month in a fiscal quarter within 60 days after the end of the relevant fiscal quarter on Form N-PORT. Portfolio holdings information for the third month of each fiscal quarter will be publicly available on the SEC’s website at www.sec.gov. The Fund’s complete schedule of portfolio holdings for the second and fourth quarters of each fiscal year is included in the semi-annual and annual reports to shareholders, respectively, and is filed with the SEC on Form N-CSR. The semi-annual and annual report for the Fund is available to investors within 60 days after the period to which it relates. The Fund’s Forms N-PORT and Forms N-CSR are available on the SEC’s website listed above.
Federal Tax Information
For the taxable year ended October 31, 2023, the following percentages of income dividend paid by the Fund qualify for the dividends received deduction available to corporations and are hereby designated as qualified dividend income:
Dividend Received Deduction | Qualified Dividend Income |
| |
For the fiscal year ended October 31, 2023, the amount of long-term capital gain designated by the Fund was $15,657,222, which is taxable at the applicable capital gain tax rates for federal income tax purposes.
A portion of the Fund’s 2023 ordinary dividends (including short-term capital gains) paid to shareholders during the fiscal year ended October 31, 2023, may be eligible for the Qualified Business Income Deduction (QBI) under Internal Revenue Code of 1986, as amended, Section 199A for the aggregate dividends Fund received from the underlying Real Estate Investment Trusts (REITs) it invests in.
Risk Considerations
Risks are inherent in all investing. Certain general risks that may be applicable to a Fund are identified below, but not all of the material risks relevant to each Fund are included in this report and not all of the risks below apply to each Fund. The material risks of investing in each Fund are spelled out in its prospectus, statement of additional information and other regulatory filings. Before investing, you should consider each Fund’s investment objective, risks, charges and expenses, and read each Fund’s prospectus and statement of additional information carefully. You can download each Fund’s prospectus at www.ftportfolios.com or contact First Trust Portfolios L.P. at (800) 621-1675 to request a prospectus, which contains this and other information about each Fund.
Concentration Risk. To the extent that a fund is able to invest a significant percentage of its assets in a single asset class or the securities of issuers within the same country, state, region, industry or sector, an adverse economic, business or political development may affect the value of the fund’s investments more than if the fund were more broadly diversified. A fund that tracks an index will be concentrated to the extent the fund’s corresponding index is concentrated. A concentration makes a fund more susceptible to any single occurrence and may subject the fund to greater market risk than a fund that is more broadly diversified.
Credit Risk. Credit risk is the risk that an issuer of a security will be unable or unwilling to make dividend, interest and/or principal payments when due and the related risk that the value of a security may decline because of concerns about the issuer’s ability to make such payments.
Cyber Security Risk. The funds are susceptible to potential operational risks through breaches in cyber security. A breach in cyber security refers to both intentional and unintentional events that may cause a fund to lose proprietary information, suffer data corruption or lose operational capacity. Such events could cause a fund to incur regulatory penalties, reputational damage, additional compliance costs associated with corrective measures and/or financial loss. In addition, cyber security breaches of a fund’s third-party service
Additional Information (Continued)
FT Cboe Vest S&P 500® Dividend Aristocrats Target Income ETF® (KNG)October 31, 2023 (Unaudited) providers, such as its administrator, transfer agent, custodian, or sub-advisor, as applicable, or issuers in which the fund invests, can also subject a fund to many of the same risks associated with direct cyber security breaches.
Defined Outcome Funds Risk. To the extent a fund’s investment strategy is designed to deliver returns tied to the price performance of an underlying ETF, an investor may not realize the returns the fund seeks to achieve if that investor does not hold shares for the entire target outcome period. In the event an investor purchases shares after the first day of the target outcome period or sells shares prior to the end of the target outcome period, the buffer that the fund seeks to provide against a decline in the value of the underlying ETF may not be available, the enhanced returns that the fund seeks to provide (if any) may not be available and the investor may not participate in a gain in the value of the underlying ETF up to the cap for the investor’s investment period. Additionally, the fund will not participate in gains of the underlying ETF above the cap and a shareholder may lose their entire investment. If the fund seeks enhanced returns, there are certain time periods when the value of the fund may fall faster than the value of the underlying ETF, and it is very unlikely that, on any given day during which the underlying ETF share price increases in value, the fund’s share price will increase at the same rate as the enhanced returns sought by the fund, which is designed for an entire target outcome period. Trading flexible exchange options involves risks different from, or possibly greater than, the risks associated with investing directly in securities, such as less liquidity and correlation and valuation risks. A fund may experience substantial downside from specific flexible exchange option positions and certain positions may expire worthless.
Derivatives Risk. To the extent a fund uses derivative instruments such as futures contracts, options contracts and swaps, the fund may experience losses because of adverse movements in the price or value of the underlying asset, index or rate, which may be magnified by certain features of the derivative. These risks are heightened when a fund’s portfolio managers use derivatives to enhance the fund’s return or as a substitute for a position or security, rather than solely to hedge (or offset) the risk of a position or security held by the fund.
Equity Securities Risk. To the extent a fund invests in equity securities, the value of the fund’s shares will fluctuate with changes in the value of the equity securities. Equity securities prices fluctuate for several reasons, including changes in investors’ perceptions of the financial condition of an issuer or the general condition of the relevant stock market, such as market volatility, or when political or economic events affecting the issuers occur. In addition, common stock prices may be particularly sensitive to rising interest rates, as the cost of capital rises and borrowing costs increase. Equity securities may decline significantly in price over short or extended periods of time, and such declines may occur in the equity market as a whole, or they may occur in only a particular country, company, industry or sector of the market.
ETF Risk. The shares of an ETF trade like common stock and represent an interest in a portfolio of securities. The risks of owning an ETF generally reflect the risks of owning the underlying securities, although lack of liquidity in an ETF could result in it being more volatile and ETFs have management fees that increase their costs. Shares of an ETF trade on an exchange at market prices rather than net asset value, which may cause the shares to trade at a price greater than net asset value (premium) or less than net asset value (discount). In times of market stress, decisions by market makers to reduce or step away from their role of providing a market for an ETF’s shares, or decisions by an ETF’s authorized participants that they are unable or unwilling to proceed with creation and/or redemption orders of an ETF’s shares, could result in shares of the ETF trading at a discount to net asset value and in greater than normal intraday bid-ask spreads.
Fixed Income Securities Risk. To the extent a fund invests in fixed income securities, the fund will be subject to credit risk, income risk, interest rate risk, liquidity risk and prepayment risk. Income risk is the risk that income from a fund’s fixed income investments could decline during periods of falling interest rates. Interest rate risk is the risk that the value of a fund’s fixed income securities will decline because of rising interest rates. Liquidity risk is the risk that a security cannot be purchased or sold at the time desired, or cannot be purchased or sold without adversely affecting the price. Prepayment risk is the risk that the securities will be redeemed or prepaid by the issuer, resulting in lower interest payments received by the fund. In addition to these risks, high yield securities, or “junk” bonds, are subject to greater market fluctuations and risk of loss than securities with higher ratings, and the market for high yield securities is generally smaller and less liquid than that for investment grade securities.
Index or Model Constituent Risk. Certain funds may be a constituent of one or more indices or ETF models. As a result, such a fund may be included in one or more index-tracking exchange-traded funds or mutual funds. Being a component security of such a vehicle could greatly affect the trading activity involving a fund, the size of the fund and the market volatility of the fund. Inclusion in an index could increase demand for the fund and removal from an index could result in outsized selling activity in a relatively short
Additional Information (Continued)
FT Cboe Vest S&P 500® Dividend Aristocrats Target Income ETF® (KNG)October 31, 2023 (Unaudited) period of time. As a result, a fund’s net asset value could be negatively impacted and the fund’s market price may be significantly below its net asset value during certain periods. In addition, index rebalances may potentially result in increased trading activity in a fund’s shares.
Index Provider Risk. To the extent a fund seeks to track an index, it is subject to Index Provider Risk. There is no assurance that the Index Provider will compile the Index accurately, or that the Index will be determined, maintained, constructed, reconstituted, rebalanced, composed, calculated or disseminated accurately. To correct any such error, the Index Provider may carry out an unscheduled rebalance or other modification of the Index constituents or weightings, which may increase the fund’s costs. The Index Provider does not provide any representation or warranty in relation to the quality, accuracy or completeness of data in the Index, and it does not guarantee that the Index will be calculated in accordance with its stated methodology. Losses or costs associated with any Index Provider errors generally will be borne by the fund and its shareholders.
Investment Companies Risk. To the extent a fund invests in the securities of other investment vehicles, the fund will incur additional fees and expenses that would not be present in a direct investment in those investment vehicles. Furthermore, the fund’s investment performance and risks are directly related to the investment performance and risks of the investment vehicles in which the fund invests.
LIBOR Risk. To the extent a fund invests in floating or variable rate obligations that use the London Interbank Offered Rate (“LIBOR”) as a reference interest rate, it is subject to LIBOR Risk. The United Kingdom’s Financial Conduct Authority, which regulates LIBOR, has ceased making LIBOR available as a reference rate over a phase-out period that began December 31, 2021. There is no assurance that any alternative reference rate, including the Secured Overnight Financing Rate (“SOFR”) will be similar to or produce the same value or economic equivalence as LIBOR or that instruments using an alternative rate will have the same volume or liquidity. The unavailability or replacement of LIBOR may affect the value, liquidity or return on certain fund investments and may result in costs incurred in connection with closing out positions and entering into new trades. Any potential effects of the transition away from LIBOR on the fund or on certain instruments in which the fund invests can be difficult to ascertain, and they may vary depending on a variety of factors, and they could result in losses to the fund.
Management Risk. To the extent that a fund is actively managed, it is subject to management risk. In managing an actively-managed fund’s investment portfolio, the fund’s portfolio managers will apply investment techniques and risk analyses that may not have the desired result. There can be no guarantee that a fund will meet its investment objective.
Market Risk. Market risk is the risk that a particular security, or shares of a fund in general, may fall in value. Securities held by a fund, as well as shares of a fund itself, are subject to market fluctuations caused by factors such as general economic conditions, political events, regulatory or market developments, changes in interest rates and perceived trends in securities prices. Shares of a fund could decline in value or underperform other investments as a result of the risk of loss associated with these market fluctuations. In addition, local, regional or global events such as war, acts of terrorism, spread of infectious diseases or other public health issues, recessions, or other events could have a significant negative impact on a fund and its investments. Such events may affect certain geographic regions, countries, sectors and industries more significantly than others. In February 2022, Russia invaded Ukraine which has caused and could continue to cause significant market disruptions and volatility within the markets in Russia, Europe, and the United States. The hostilities and sanctions resulting from those hostilities could have a significant impact on certain fund investments as well as fund performance. The COVID-19 global pandemic and the ensuing policies enacted by governments and central banks have caused and may continue to cause significant volatility and uncertainty in global financial markets. While the U.S. has resumed “reasonably” normal business activity, many countries continue to impose lockdown measures. Additionally, there is no guarantee that vaccines will be effective against emerging variants of the disease. These events also adversely affect the prices and liquidity of a fund’s portfolio securities or other instruments and could result in disruptions in the trading markets. Any of such circumstances could have a materially negative impact on the value of a fund’s shares and result in increased market volatility. During any such events, a fund’s shares may trade at increased premiums or discounts to their net asset value and the bid/ask spread on a fund’s shares may widen.
Non-U.S. Securities Risk. To the extent a fund invests in non-U.S. securities, it is subject to additional risks not associated with securities of domestic issuers. Non-U.S. securities are subject to higher volatility than securities of domestic issuers due to: possible adverse political, social or economic developments; restrictions on foreign investment or exchange of securities; capital controls; lack of liquidity; currency exchange rates; excessive taxation; government seizure of assets; the imposition of sanctions by foreign governments; different legal or accounting standards; and less government supervision and regulation of exchanges in foreign countries. Investments in non-U.S. securities may involve higher costs than investments in U.S. securities, including higher transaction
Additional Information (Continued)
FT Cboe Vest S&P 500® Dividend Aristocrats Target Income ETF® (KNG)October 31, 2023 (Unaudited) and custody costs, as well as additional taxes imposed by non-U.S. governments. These risks may be heightened for securities of companies located, or with significant operations, in emerging market countries.
Operational Risk. Each fund is subject to risks arising from various operational factors, including, but not limited to, human error, processing and communication errors, errors of a fund’s service providers, counterparties or other third-parties, failed or inadequate processes and technology or systems failures. Each fund relies on third-parties for a range of services, including custody. Any delay or failure relating to engaging or maintaining such service providers may affect a fund’s ability to meet its investment objective. Although the funds and the funds’ investment advisor seek to reduce these operational risks through controls and procedures, there is no way to completely protect against such risks.
Passive Investment Risk. To the extent a fund seeks to track an index, the fund will invest in the securities included in, or representative of, the index regardless of their investment merit. A fund generally will not attempt to take defensive positions in declining markets.
Preferred Securities Risk. Preferred securities combine some of the characteristics of both common stocks and bonds. Preferred securities are typically subordinated to bonds and other debt securities in a company’s capital structure in terms of priority to corporate income, subjecting them to greater credit risk than those debt securities. Generally, holders of preferred securities have no voting rights with respect to the issuing company unless preferred dividends have been in arrears for a specified number of periods, at which time the preferred security holders may obtain limited rights. In certain circumstances, an issuer of preferred securities may defer payment on the securities and, in some cases, redeem the securities prior to a specified date. Preferred securities may also be substantially less liquid than other securities, including common stock.
Valuation Risk. The valuation of certain securities may carry more risk than that of common stock. Uncertainties in the conditions of the financial markets, unreliable reference data, lack of transparency and inconsistency of valuation models and processes may lead to inaccurate asset pricing. A fund may hold investments in sizes smaller than institutionally sized round lot positions (sometimes referred to as odd lots). However, third-party pricing services generally provide evaluations on the basis of institutionally-sized round lots. If a fund sells certain of its investments in an odd lot transaction, the sale price may be less than the value at which such securities have been held by the fund. Odd lots often trade at lower prices than institutional round lots. There is no assurance that the fund will be able to sell a portfolio security at the price established by the pricing service, which could result in a loss to the fund.
NOT FDIC INSURED NOT BANK GUARANTEED MAY LOSE VALUE
Advisory and Sub-Advisory Agreements
Board Considerations Regarding approval of the Continuation of the Investment Management Agreement and Sub-Advisory Agreements
The Board of Trustees of First Trust Exchange-Traded Fund IV (the “Trust”), including the Independent Trustees, unanimously approved the continuation of the Investment Management Agreement (the “Advisory Agreement”) with First Trust Advisors L.P. (the “Advisor”) on behalf of the FT Cboe Vest S&P 500® Dividend Aristocrats Target Income ETF (the “Fund”) and the Investment Sub-Advisory Agreement (the “Sub-Advisory Agreement” and together with the Advisory Agreement, the “Agreements”) among the Trust, on behalf of the Fund, the Advisor and Cboe Vest Financial LLC (the “Sub-Advisor”). The Board approved the continuation of the Agreements for a one-year period ending June 30, 2024 at a meeting held on June 4–5, 2023. The Board determined that the continuation of the Agreements is in the best interests of the Fund in light of the nature, extent and quality of the services provided and such other matters as the Board considered to be relevant in the exercise of its business judgment.
To reach this determination, the Board considered its duties under the Investment Company Act of 1940, as amended (the “1940 Act”), as well as under the general principles of state law, in reviewing and approving advisory contracts; the requirements of the 1940 Act in such matters; the fiduciary duty of investment advisors with respect to advisory agreements and compensation; the standards used by courts in determining whether investment company boards have fulfilled their duties; and the factors to be considered by the Board in voting on such agreements. At meetings held on April 17, 2023 and June 4–5, 2023, the Board, including the Independent Trustees, reviewed materials provided by the Advisor and the Sub-Advisor responding to requests for information from counsel to the Independent Trustees, submitted on behalf of the Independent Trustees, that, among other things, outlined: the services provided by the Advisor and the Sub-Advisor to the Fund (including the relevant personnel responsible for these services and their experience); the unitary fee rate schedule payable by the Fund as compared to fees charged to a peer group of funds (the “Expense Group”) and a broad peer universe of funds (the “Expense Universe”), each assembled by Broadridge Financial Solutions, Inc. (“Broadridge”), an
Additional Information (Continued)
FT Cboe Vest S&P 500® Dividend Aristocrats Target Income ETF® (KNG)October 31, 2023 (Unaudited) independent source, and as compared to fees charged to other clients of the Advisor, including other exchange-traded funds (“ETFs”) managed by the Advisor; the sub-advisory fee as compared to fees charged to other clients of the Sub-Advisor; the expense ratio of the Fund as compared to expense ratios of the funds in the Fund’s Expense Group and Expense Universe; performance information for the Fund, including comparisons of the Fund’s performance to that of one or more relevant benchmark indexes and to that of a performance group of funds and a broad performance universe of funds (the “Performance Universe”), each assembled by Broadridge; the nature of expenses incurred in providing services to the Fund and the potential for the Advisor and the Sub-Advisor to realize economies of scale, if any; profitability and other financial data for the Advisor; financial data for the Sub-Advisor; any indirect benefits to the Advisor and its affiliates, First Trust Portfolios L.P. (“FTP”) and First Trust Capital Partners, LLC (“FTCP”), and the Sub-Advisor; and information on the Advisor’s and the Sub-Advisor’s compliance programs. The Board reviewed initial materials with the Advisor at the meeting held on April 17, 2023, prior to which the Independent Trustees and their counsel met separately to discuss the information provided by the Advisor and the Sub-Advisor. Following the April meeting, counsel to the Independent Trustees, on behalf of the Independent Trustees, requested certain clarifications and supplements to the materials provided, and the information provided in response to those requests was considered at an executive session of the Independent Trustees and their counsel held prior to the June 4–5, 2023 meeting, as well as at the June meeting. The Board applied its business judgment to determine whether the arrangements between the Trust and the Advisor and among the Trust, the Advisor and the Sub-Advisor continue to be reasonable business arrangements from the Fund’s perspective. The Board determined that, given the totality of the information provided with respect to the Agreements, the Board had received sufficient information to renew the Agreements. The Board considered that shareholders chose to invest or remain invested in the Fund knowing that the Advisor and the Sub-Advisor manage the Fund and knowing the Fund’s unitary fee.
In reviewing the Agreements, the Board considered the nature, extent and quality of the services provided by the Advisor and the Sub-Advisor under the Agreements. With respect to the Advisory Agreement, the Board considered that the Advisor is responsible for the overall management and administration of the Trust and the Fund and reviewed all of the services provided by the Advisor to the Fund, including the oversight of the Sub-Advisor, as well as the background and experience of the persons responsible for such services. The Board noted that the Advisor oversees the Sub-Advisor’s day-to-day management of the Fund’s investments, including portfolio risk monitoring and performance review. In reviewing the services provided, the Board noted the compliance program that had been developed by the Advisor and considered that it includes a robust program for monitoring the Advisor’s, the Sub-Advisor’s and the Fund’s compliance with the 1940 Act, as well as the Fund’s compliance with its investment objective, policies and restrictions. The Board also considered a report from the Advisor with respect to its risk management functions related to the operation of the Fund. Finally, as part of the Board’s consideration of the Advisor’s services, the Advisor, in its written materials and at the April 17, 2023 meeting, described to the Board the scope of its ongoing investment in additional personnel and infrastructure to maintain and improve the quality of services provided to the Fund and the other funds in the First Trust Fund Complex. With respect to the Sub-Advisory Agreement, the Board reviewed the materials provided by the Sub-Advisor and considered the services that the Sub-Advisor provides to the Fund, including the Sub-Advisor’s day-to-day management of the Fund’s investments. In considering the Sub-Advisor’s management of the Fund, the Board noted the background and experience of the Sub-Advisor’s portfolio management team, including the Board’s prior meetings with members of the portfolio management team. In light of the information presented and the considerations made, the Board concluded that the nature, extent and quality of the services provided to the Trust and the Fund by the Advisor and the Sub-Advisor under the Agreements have been and are expected to remain satisfactory and that the Sub-Advisor, under the oversight of the Advisor, has managed the Fund consistent with its investment objective, policies and restrictions.
The Board considered the unitary fee rate schedule payable by the Fund under the Advisory Agreement for the services provided. The Board noted that the sub-advisory fee is paid by the Advisor from the unitary fee. The Board considered that as part of the unitary fee the Advisor is responsible for the Fund’s expenses, including the cost of sub-advisory, transfer agency, custody, fund administration, legal, audit and other services and license fees, if any, but excluding the fee payment under the Advisory Agreement and interest, taxes, brokerage commissions and other expenses connected with the execution of portfolio transactions, distribution and service fees pursuant to a Rule 12b-1 plan, if any, and extraordinary expenses, if any. The Board received and reviewed information showing the fee rates and expense ratios of the peer funds in the Expense Group, as well as advisory and unitary fee rates charged by the Advisor and the Sub-Advisor to other fund (including ETFs) and non-fund clients, as applicable. Because the Fund pays a unitary fee, the Board determined that expense ratios were the most relevant comparative data point. Based on the information provided, the Board noted that the total (net) expense ratio for the Fund was above the median total (net) expense ratio of the peer funds in the Expense Group. With respect to the Expense Group, the Board, at the April 17, 2023 meeting, discussed with Broadridge its methodology for assembling peer groups and discussed with the Advisor limitations in creating peer groups for index ETFs, including differences in underlying indexes and index-tracking methodologies that can result in greater management complexities across seemingly comparable ETFs, and different business models that may affect the pricing of services among ETF sponsors. The Board also noted
Additional Information (Continued)
FT Cboe Vest S&P 500® Dividend Aristocrats Target Income ETF® (KNG)October 31, 2023 (Unaudited) that not all peer funds employ an advisor/sub-advisor management structure. The Board took these limitations and differences into account in considering the peer data. With respect to fees charged to other non-ETF clients, the Board considered differences between the Fund and other non-ETF clients that limited their comparability. In considering the unitary fee rate schedule overall, the Board also considered the Advisor’s statement that it seeks to meet investor needs through innovative and value-added investment solutions and the Advisor’s demonstrated long-term commitment to the Fund and the other funds in the First Trust Fund Complex.
The Board considered performance information for the Fund. The Board noted the process it has established for monitoring the Fund’s performance and portfolio risk on an ongoing basis, which includes quarterly performance reporting from the Advisor and the Sub-Advisor for the Fund. The Board determined that this process continues to be effective for reviewing the Fund’s performance. The Board received and reviewed information for periods ended December 31, 2022 regarding the performance of the Fund’s underlying index, the correlation between the Fund’s performance and that of its underlying index, the Fund’s tracking difference and the Fund’s excess return as compared to its benchmark index. The Board noted that during 2023, it approved changes to the Fund’s investment strategy and that, effective on or about July 24, 2023, the Fund’s underlying index will increase its target income level from approximately 3% to approximately 8% over the annual dividend yield of the S&P 500® Index and the 20% notional value cap on covered call options written by the Fund’s underlying index will be removed. Based on the information provided and its ongoing review of performance, the Board concluded that the Fund was correlated to its underlying index and that the tracking difference for the Fund was within a reasonable range. In addition, the Board reviewed data prepared by Broadridge comparing the Fund’s performance to that of the Performance Universe and to that of a broad-based benchmark index. However, given the Fund’s objective of seeking investment results that correspond generally to the performance of its underlying index, the Board placed more emphasis on its review of correlation and tracking difference.
On the basis of all the information provided on the unitary fee and performance of the Fund and the ongoing oversight by the Board, the Board concluded that the unitary fee for the Fund (out of which the Sub-Advisor is compensated) continues to be reasonable and appropriate in light of the nature, extent and quality of the services provided by the Advisor and the Sub-Advisor to the Fund under the Agreements.
The Board considered information and discussed with the Advisor whether there were any economies of scale in connection with providing advisory services to the Fund at current asset levels and whether the Fund may benefit from any economies of scale. The Board noted that the unitary fee rate schedule for the Fund includes breakpoints pursuant to which the unitary fee rate will be reduced as assets of the Fund meet certain thresholds. The Board considered the Advisor’s statement that it believes that its expenses relating to providing advisory services to the Fund will increase during the next twelve months as the Advisor continues to build infrastructure and add new staff. The Board also noted that under the unitary fee structure, any reduction in expenses associated with the management and operations of the Fund would benefit the Advisor, but that the unitary fee structure provides a level of certainty in expenses for shareholders of the Fund. The Board concluded that the unitary fee rate schedule for the Fund reflects an appropriate level of sharing of any economies of scale that may be realized in the management of the Fund at current asset levels. The Board considered the revenues and allocated costs (including the allocation methodology) of the Advisor in serving as investment advisor to the Fund for the twelve months ended December 31, 2022 and the estimated profitability level for the Fund calculated by the Advisor based on such data, as well as complex-wide and product-line profitability data, for the same period. The Board noted the inherent limitations in the profitability analysis and concluded that, based on the information provided, the Advisor’s profitability level for the Fund was not unreasonable. In addition, the Board considered indirect benefits described by the Advisor that may be realized from its relationship with the Fund. The Board considered that the Advisor had identified as an indirect benefit to the Advisor and FTP their exposure to investors and brokers who, absent their exposure to the Fund, may have had no dealings with the Advisor or FTP. The Board also noted that FTCP has a controlling ownership interest in the Sub-Advisor’s parent company and considered potential indirect benefits to the Advisor from such ownership interest. The Board concluded that the character and amount of potential indirect benefits to the Advisor were not unreasonable.
The Board considered the Sub-Advisor’s statement that it believes that the sub-advisory fee for the Fund is appropriate. The Board noted the Sub-Advisor’s statements that it continues to invest in infrastructure, technology and personnel, and that it anticipates that its expenses relating to providing services to the Fund will remain approximately the same for the next twelve months. The Board noted that the Advisor pays the Sub-Advisor from the unitary fee and its understanding that the Fund’s sub-advisory fee was the product of an arm’s length negotiation. The Board did not review the profitability of the Sub-Advisor with respect to the Fund. The Board concluded that the profitability analysis for the Advisor was more relevant. The Board considered the potential indirect benefits to the Sub-Advisor from being associated with the Advisor and the Fund, and noted the Sub-Advisor’s statements that it is the Sub-Advisor’s policy currently not to enter into soft-dollar arrangements for the procurement of research services in connection with client securities transactions and that, as a result, there are no foreseen indirect benefits from its relationship with the Fund. The Board also
Additional Information (Continued)
FT Cboe Vest S&P 500® Dividend Aristocrats Target Income ETF® (KNG)October 31, 2023 (Unaudited) considered the potential indirect benefits to the Sub-Advisor from FTCP’s controlling ownership interest in the Sub-Advisor’s parent company. The Board concluded that the character and amount of potential indirect benefits to the Sub-Advisor were not unreasonable.
Based on all of the information considered and the conclusions reached, the Board, including the Independent Trustees, unanimously determined that the terms of the Agreements continue to be fair and reasonable and that the continuation of the Agreements is in the best interests of the Fund. No single factor was determinative in the Board’s analysis.
Remuneration
First Trust Advisors L.P. (“First Trust”) is authorised and regulated by the U.S. Securities and Exchange Commission and is entitled to market shares of certain funds it manages, including FT Cboe Vest S&P 500® Dividend Aristocrats Target Income ETF® (the “Fund”), in certain member states in the European Economic Area in accordance with the cooperation arrangements in Article 42 of the Alternative Investment Fund Managers Directive (the “Directive”). First Trust is required under the Directive to make disclosures in respect of remuneration. The following disclosures are made in line with First Trust’s interpretation of currently available regulatory guidance on remuneration disclosures.
During the year ended December 31, 2022, the amount of remuneration paid (or to be paid) by First Trust Advisors L.P. in respect of the Funds is $238,569. This figure is comprised of $9,248 paid (or to be paid) in fixed compensation and $229,321 paid (or to be paid) in variable compensation. There were a total of 24 beneficiaries of the remuneration described above. Those amounts include $125,822 paid (or to be paid) to senior management of First Trust Advisors L.P. and $112,747 paid (or to be paid) to other employees whose professional activities have a material impact on the risk profiles of First Trust Advisors L.P. or the Funds (collectively, “Code Staff”).
Code Staff included in the aggregated figures disclosed above are rewarded in line with First Trust’s remuneration policy (the “Remuneration Policy”) which is determined and implemented by First Trust’s senior management. The Remuneration Policy reflects First Trust’s ethos of good governance and encapsulates the following principal objectives:
i.
to provide a clear link between remuneration and performance of First Trust and to avoid rewarding for failure;
ii.
to promote sound and effective risk management consistent with the risk profiles of the funds managed by First Trust; and
iii.
to remunerate staff in line with the business strategy, objectives, values and interests of First Trust and the funds managed by First Trust in a manner that avoids conflicts of interest.
First Trust assesses various risk factors which it is exposed to when considering and implementing remuneration for Code Staff and considers whether any potential award to such person(s) would give rise to a conflict of interest. First Trust does not reward failure, or consider the taking of risk or failure to take risk in its remuneration of Code Staff.
First Trust assesses performance for the purposes of determining payments in respect of performance-related remuneration of Code Staff by reference to a broad range of measures including (i) individual performance (using financial and non-financial criteria), and (ii) the overall performance of First Trust. Remuneration is not based upon the performance of the Fund.
The elements of remuneration are balanced between fixed and variable and the senior management sets fixed salaries at a level sufficient to ensure that variable remuneration incentivises and rewards strong individual performance but does not encourage excessive risk taking.
No individual is involved in setting his or her own remuneration.
Board of Trustees and Officers
FT Cboe Vest S&P 500® Dividend Aristocrats Target Income ETF® (KNG)October 31, 2023 (Unaudited) The following tables identify the Trustees and Officers of the Trust. Unless otherwise indicated, the address of all persons is 120 East Liberty Drive, Suite 400, Wheaton, IL 60187.
The Trust’s statement of additional information includes additional information about the Trustees and is available, without charge, upon request, by calling (800) 988-5891.
Name,
Year of Birth and
Position with the Trust | Term of Office
and Year First
Elected or
Appointed | Principal Occupations
During Past 5 Years | Number of
Portfolios in
the First Trust
Fund Complex
Overseen by
Trustee | Other
Trusteeships or
Directorships
Held by Trustee
During Past
5 Years |
|
Richard E. Erickson, Trustee
(1951) | • Indefinite Term • Since Inception | Retired; Physician, Edward-Elmhurst Medical Group (2021 to September 2023); Physician and Officer, Wheaton Orthopedics (1990 to 2021) | | |
Thomas R. Kadlec, Trustee
(1957) | • Indefinite Term • Since Inception | Retired; President, ADM Investors Services, Inc. (Futures Commission Merchant) (2010 to July 2022) | | Director, National Futures Association and ADMIS Singapore Ltd.; Formerly, Director of ADM Investor Services, Inc., ADM Investor Services International, ADMIS Hong Kong Ltd., and Futures Industry Association |
Denise M. Keefe, Trustee
(1964) | • Indefinite Term • Since 2021 | Executive Vice President, Advocate Aurora Health and President, Advocate Aurora Continuing Health Division (Integrated Healthcare System) | | Director and Board Chair of Advocate Home Health Services, Advocate Home Care Products and Advocate Hospice; Director and Board Chair of Aurora At Home (since 2018); Director of Advocate Physician Partners Accountable Care Organization; Director of RML Long Term Acute Care Hospitals; Director of Senior Helpers (since 2021); and Director of MobileHelp (since 2022) |
Robert F. Keith, Trustee
(1956) | • Indefinite Term • Since Inception | President, Hibs Enterprises (Financial and Management Consulting) | | Formerly, Director of Trust Company of Illinois |
Niel B. Nielson, Trustee
(1954) | • Indefinite Term • Since Inception | Senior Advisor (2018 to Present), Managing Director and Chief Operating Officer (2015 to 2018), Pelita Harapan Educational Foundation (Educational Products and Services) | | |
Bronwyn Wright, Trustee
(1971) | • Indefinite Term • Since 2023 | Independent Director to a number of Irish collective investment funds (2009 to Present); Various roles at international affiliates of Citibank (1994 to 2009), including Managing Director, Citibank Europe plc and Head of Securities and Fund Services, Citi Ireland (2007 to 2009) | | |
Board of Trustees and Officers (Continued)
FT Cboe Vest S&P 500® Dividend Aristocrats Target Income ETF® (KNG)October 31, 2023 (Unaudited) Name, Year of Birth and Position with the Trust | Term of Office and Year First Elected or Appointed | Principal Occupations During Past 5 Years | Number of Portfolios in the First Trust Fund Complex Overseen by Trustee | Other Trusteeships or Directorships Held by Trustee During Past 5 Years |
|
James A. Bowen(1), Trustee,
Chairman of the Board
(1955) | • Indefinite Term • Since Inception | Chief Executive Officer, First Trust Advisors L.P. and First Trust Portfolios L.P., Chairman of the Board of Directors, BondWave LLC (Software Development Company) and Stonebridge Advisors LLC (Investment Advisor) | | |
| Position and
Offices
with Trust | Term of Office
and Length of
Service | Principal Occupations
During Past 5 Years |
|
| President and Chief Executive Officer | • Indefinite Term • Since 2016 | Managing Director and Chief Financial Officer, First Trust Advisors L.P. and First Trust Portfolios L.P.; Chief Financial Officer, BondWave LLC (Software Development Company) and Stonebridge Advisors LLC (Investment Advisor) |
| Treasurer, Chief Financial Officer and Chief Accounting Officer | • Indefinite Term • Since 2023 | Senior Vice President, First Trust Advisors L.P. and First Trust Portfolios L.P., July 2021 to Present. Previously, Vice President, First Trust Advisors L.P. and First Trust Portfolios L.P., 2014 - 2021. |
| Secretary and Chief Legal Officer | • Indefinite Term • Since Inception | General Counsel, First Trust Advisors L.P. and First Trust Portfolios L.P.; Secretary and General Counsel, BondWave LLC; Secretary, Stonebridge Advisors LLC |
Daniel J. Lindquist
(1970) | | • Indefinite Term • Since Inception | Managing Director, First Trust Advisors L.P. and First Trust Portfolios L.P. |
| Chief Compliance Officer and Assistant Secretary | • Indefinite Term • Since Inception | Deputy General Counsel, First Trust Advisors L.P. and First Trust Portfolios L.P. |
| | • Indefinite Term • Since Inception | Senior Vice President, First Trust Advisors L.P. and First Trust Portfolios L.P. |
| | • Indefinite Term • Since Inception | Senior Vice President, First Trust Advisors L.P. and First Trust Portfolios L.P. |
(1)
Mr. Bowen is deemed an “interested person” of the Trust due to his position as Chief Executive Officer of First Trust Advisors L.P., investment advisor of the Trust.
(2)
The term “officer” means the president, vice president, secretary, treasurer, controller or any other officer who performs a policy making function.
FT Cboe Vest S&P 500® Dividend Aristocrats Target Income ETF® (KNG)October 31, 2023 (Unaudited) Privacy Policy
First Trust values our relationship with you and considers your privacy an important priority in maintaining that relationship. We are committed to protecting the security and confidentiality of your personal information.
Sources of Information
We collect nonpublic personal information about you from the following sources:
• Information we receive from you and your broker-dealer, investment professional or financial representative through interviews, applications, agreements or other forms;
• Information about your transactions with us, our affiliates or others;
• Information we receive from your inquiries by mail, e-mail or telephone; and
• Information we collect on our website through the use of “cookies.” For example, we may identify the pages on our website that your browser requests or visits.
Information Collected
The type of data we collect may include your name, address, social security number, age, financial status, assets, income, tax information, retirement and estate plan information, transaction history, account balance, payment history, investment objectives, marital status, family relationships and other personal information.
Disclosure of Information
We do not disclose any nonpublic personal information about our customers or former customers to anyone, except as permitted by law. In addition to using this information to verify your identity (as required under law), the permitted uses may also include the disclosure of such information to unaffiliated companies for the following reasons:
• In order to provide you with products and services and to effect transactions that you request or authorize, we may disclose your personal information as described above to unaffiliated financial service providers and other companies that perform administrative or other services on our behalf, such as transfer agents, custodians and trustees, or that assist us in the distribution of investor materials such as trustees, banks, financial representatives, proxy services, solicitors and printers.
• We may release information we have about you if you direct us to do so, if we are compelled by law to do so, or in other legally limited circumstances (for example to protect your account from fraud).
In addition, in order to alert you to our other financial products and services, we may share your personal information within First Trust.
Use of Website Analytics
We currently use third party analytics tools, Google Analytics and AddThis, to gather information for purposes of improving First Trust’s website and marketing our products and services to you. These tools employ cookies, which are small pieces of text stored in a file by your web browser and sent to websites that you visit, to collect information, track website usage and viewing trends such as the number of hits, pages visited, videos and PDFs viewed and the length of user sessions in order to evaluate website performance and enhance navigation of the website. We may also collect other anonymous information, which is generally limited to technical and web navigation information such as the IP address of your device, internet browser type and operating system for purposes of analyzing the data to make First Trust’s website better and more useful to our users. The information collected does not include any personal identifiable information such as your name, address, phone number or email address unless you provide that information through the website for us to contact you in order to answer your questions or respond to your requests. To find out how to opt-out of these services click on: Google Analytics and AddThis.
Confidentiality and Security
With regard to our internal security procedures, First Trust restricts access to your nonpublic personal information to those First Trust employees who need to know that information to provide products or services to you. We maintain physical, electronic and procedural safeguards to protect your nonpublic personal information.
Policy Updates and Inquiries
As required by federal law, we will notify you of our privacy policy annually. We reserve the right to modify this policy at any time, however, if we do change it, we will tell you promptly. For questions about our policy, or for additional copies of this notice, please go to www.ftportfolios.com, or contact us at 1-800-621-1675 (First Trust Portfolios) or 1-800-222-6822 (First Trust Advisors).
March 2023
First Trust Exchange-Traded Fund IV
INVESTMENT ADVISOR
First Trust Advisors L.P.
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
INVESTMENT SUB-ADVISOR
Cboe VestSM Financial LLC
8350 Broad Street, Suite 240
McLean, VA 22102
ADMINISTRATOR, CUSTODIAN,
FUND ACCOUNTANT &
TRANSFER AGENT
The Bank of New York Mellon
240 Greenwich Street
New York, NY 10286
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
111 South Wacker Drive
Chicago, IL 60606
LEGAL COUNSEL
Chapman and Cutler LLP
320 South Canal Street
Chicago, IL 60606
Annual Report
For the Year Ended
October 31, 2023
First Trust Exchange-Traded Fund IV
First Trust Long Duration Opportunities ETF (LGOV) |
First Trust Long Duration Opportunities ETF (LGOV)
Annual Report
October 31, 2023
Caution Regarding Forward-Looking Statements
This report contains certain forward-looking statements within the meaning of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended. Forward-looking statements include statements regarding the goals, beliefs, plans or current expectations of First Trust Advisors L.P. (“First Trust” or the “Advisor”) and its representatives, taking into account the information currently available to them. Forward-looking statements include all statements that do not relate solely to current or historical fact. For example, forward-looking statements include the use of words such as “anticipate,” “estimate,” “intend,” “expect,” “believe,” “plan,” “may,” “should,” “would” or other words that convey uncertainty of future events or outcomes.
Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the series of First Trust Exchange-Traded Fund IV (the “Trust”) described in this report (First Trust Long Duration Opportunities ETF; hereinafter referred to as the “Fund”) to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. When evaluating the information included in this report, you are cautioned not to place undue reliance on these forward-looking statements, which reflect the judgment of the Advisor and its representatives only as of the date hereof. We undertake no obligation to publicly revise or update these forward-looking statements to reflect events and circumstances that arise after the date hereof.
Performance and Risk Disclosure
There is no assurance that the Fund will achieve its investment objective. The Fund is subject to market risk, which is the possibility that the market values of securities owned by the Fund will decline and that the value of the Fund’s shares may therefore be less than what you paid for them. Accordingly, you can lose money investing in the Fund. See “Risk Considerations” in the Additional Information section of this report for a discussion of certain other risks of investing in the Fund.
Performance data quoted represents past performance, which is no guarantee of future results, and current performance may be lower or higher than the figures shown. For the most recent month-end performance figures, please visit www.ftportfolios.com or speak with your financial advisor. Investment returns, net asset value and share price will fluctuate and Fund shares, when sold, may be worth more or less than their original cost.
The Advisor may also periodically provide additional information on Fund performance on the Fund’s webpage at www.ftportfolios.com.
How to Read This Report
This report contains information that may help you evaluate your investment in the Fund. It includes details about the Fund and presents data and analysis that provide insight into the Fund’s performance and investment approach.
By reading the portfolio commentary from the portfolio management team of the Fund, you may obtain an understanding of how the market environment affected the Fund’s performance. The statistical information that follows may help you understand the Fund’s performance compared to that of a relevant market benchmark.
It is important to keep in mind that the opinions expressed by personnel of the Advisor are just that: informed opinions. They should not be considered to be promises or advice. The opinions, like the statistics, cover the period through the date on the cover of this report. The material risks of investing in the Fund are spelled out in the prospectus, the statement of additional information, and other Fund regulatory filings.
First Trust Long Duration Opportunities ETF (LGOV)
Annual Letter from the Chairman and CEO
October 31, 2023
Dear Shareholders,
First Trust is pleased to provide you with the annual report for the First Trust Long Duration Opportunities ETF (the “Fund”), which contains detailed information about the Fund for the twelve months ended October 31, 2023.
The Bureau of Economic Analysis recently announced that U.S. real gross domestic product (“GDP”) grew by a staggering 4.9% in the third quarter of 2023 and is now up 2.9% on a year-over-year basis from where it stood in the third quarter of 2022. The most recent quarter’s GDP data represents the fastest growth rate for any quarter since 2014. Consumer spending, which rose by 4.0% over the period, was responsible for 2.7 percentage points of the total increase in GDP. Whether the consumer can keep up this pace of spending remains to be seen, especially given recent news that excess savings from the pandemic-era stimulus have likely been depleted. From a global perspective, the International Monetary Fund (“IMF”) notes that progress in fighting inflation has led to lower economic growth. In their October 2023 publication of the World Economic Outlook, the IMF projected that the growth in world economic output is expected to slow from 3.5% in 2022 to 2.9% in 2024. The economic growth in advanced economies is projected to plummet from 2.6% in 2022 to 1.4% in 2024.
In the notes to their September 2023 meeting, the Federal Open Market Committee revealed that they may need to keep interest rates “higher for longer” as they continue to battle stubbornly high inflation. As many investors are likely aware, a higher Federal Funds target rate can have deep implications for consumers, such as driving up the cost of borrowing for homes, automobiles, and other large purchases. The American consumer has yet to feel the full weight of those burdens, in my opinion. That said, the data reveals a different story among corporate America. S&P Global Market Intelligence reported that a total of 516 U.S. corporations filed for bankruptcy protection on a year-to-date basis through September 30, 2023, up from a total of 263 corporate bankruptcy filings over the same period last year. Higher interest rates and Treasury bond yields have also sapped demand for commercial property loans. Data from Trepp, LLC, a leading provider of data and analytics to the commercial real estate and banking markets, revealed that just $28.2 billion of loans converted into commercial mortgage-backed securities have been issued in 2023, the lowest figure since 2011.
The financial markets battled a myriad of headwinds over the past year, from geopolitical uncertainty resulting from war (the conflicts between Israel and Hamas and Russia and Ukraine), to slowing global economic growth and sticky inflation. Brian Wesbury, Chief Economist at First Trust, notes that a U.S. economic recession is likely to begin at some point early next year. While calls for a recession may concern some investors, the following may offer solace. Data from Bloomberg reveals that the S&P 500® Index has posted positive total returns over the 3-year period following every recession since 1948.
Thank you for giving First Trust the opportunity to play a role in your financial future. We value our relationship with you and will report on the Fund again in six months.
Sincerely,
James A. Bowen
Chairman of the Board of Trustees
Chief Executive Officer of First Trust Advisors L.P.
Fund Performance Overview (Unaudited)
First Trust Long Duration Opportunities ETF (LGOV)
The First Trust Long Duration Opportunities ETF’s (the “Fund”) primary investment objective is to generate current income with a focus on preservation of capital. Under normal market conditions, the Fund will invest at least 80% of its net assets (including investment borrowings) in a portfolio of investment-grade debt securities issued or guaranteed by the U.S. government, its agencies or government-sponsored entities, including publicly-issued U.S. Treasury securities and mortgage-related securities. The Fund may also invest in exchange-traded funds (“ETFs”) that principally invest in such securities. The Fund may purchase mortgage-related securities in “to-be-announced” transactions (“TBA Transactions”), including mortgage dollar rolls.
|
| | Average Annual Total Returns | |
| | Inception
(1/22/19)
to 10/31/23 | Inception
(1/22/19)
to 10/31/23 |
| | | |
| | | |
| | | |
| | | |
ICE BofA 5+ Year US Treasury Index | | | |
Total returns for the period since inception are calculated from the inception date of the Fund. “Average Annual Total Returns” represent the average annual change in value of an investment over the periods indicated. “Cumulative Total Returns” represent the total change in value of an investment over the periods indicated.
The Fund’s per share net asset value (“NAV”) is the value of one share of the Fund and is computed by dividing the value of all assets of the Fund (including accrued interest and dividends), less all liabilities (including accrued expenses and dividends declared but unpaid), by the total number of outstanding shares. The price used to calculate market return (“Market Price”) is determined by using the midpoint of the national best bid and offer price (“NBBO”) as of the time that the Fund’s NAV is calculated. Under Securities and Exchange Commission rules, the NBBO consists of the highest displayed buy and lowest sell prices among the various exchanges trading the Fund at the time the Fund’s NAV is calculated. 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.
Fund Performance Overview (Unaudited) (Continued)
First Trust Long Duration Opportunities ETF (LGOV) (Continued)
| |
U.S. Government Agency Mortgage-Backed Securities | |
U.S. Government Bonds and Notes | |
| |
| |
| |
| |
| |
Net Other Assets and Liabilities(1) | |
| |
| % of Total Long
Fixed-Income
Investments, Cash
& Cash Equivalents |
| |
| |
| |
| |
Federal National Mortgage Association, Pool TBA, 3.50%, 11/15/53 | |
Federal Home Loan Mortgage Corporation, Series 2022-5213, Class DB, 3.00%, 04/25/52 | |
U.S. Treasury Bill, 0.00%, 02/08/24 | |
Federal National Mortgage Association, Pool TBA, 4.00%, 12/15/53 | |
U.S. Treasury Bill, 0.00%, 10/03/24 | |
Government National Mortgage Association, Series 2018-53, Class BZ, 3.50%, 04/20/48 | |
Government National Mortgage Association, Series 2014-26, Class MZ, 3.00%, 02/20/44 | |
Government National Mortgage Association, Series 2022-128, Class PN, 4.00%, 07/20/52 | |
U.S. Treasury Bill, 0.00%, 01/11/24 | |
U.S. Treasury Bill, 0.00%, 01/18/24 | |
| |
Weighted Average Effective Net Duration |
| |
| |
| |
| Includes variation margin on futures contracts. |
| The ratings are by S&P Global Ratings. A credit rating is an assessment provided by a nationally recognized statistical rating organization (NRSRO) of the creditworthiness of an issuer with respect to debt obligations. Ratings are measured highest to lowest on a scale that generally ranges from AAA to D for long-term ratings and A-1+ to C for short-term ratings. Investment grade is defined as those issuers that have a long- term credit rating of BBB- or higher or a short-term credit rating of A-3 or higher. The credit ratings shown relate to the credit worthiness of the issuers of the underlying securities in the Fund, and not to the Fund or its shares. U.S. Treasury and U.S. Agency mortgage-backed securities appear under “Government & Agency.” Credit ratings are subject to change. |
| Percentages are based on the long positions only. Money market funds and short positions are excluded. |
Fund Performance Overview (Unaudited) (Continued)
First Trust Long Duration Opportunities ETF (LGOV) (Continued)
| 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.
Performance in securitized product investment strategies can be impacted from the benefits of purchasing odd lot positions. The impact of these investments can be particularly meaningful when funds have limited assets under management and may not be a sustainable source of performance as a fund grows in size. |
Frequency Distribution of Discounts and Premiums
Information showing the number of days the market price of the Fund’s shares was greater (at a premium) and less (at a discount) than the Fund’s net asset value for the most recently completed year, and the most recently completed calendar quarters since that year (or life of the Fund, if shorter) is available at https://www.ftportfolios.com/Retail/etf/home.aspx.
First Trust Long Duration Opportunities ETF (LGOV)Annual ReportOctober 31, 2023 (Unaudited) Advisor
First Trust Advisors L.P. (“First Trust” or the “Advisor”) is the investment advisor to the First Trust Long Duration Opportunities ETF (the “Fund” or “LGOV”). First Trust is responsible for the selection and ongoing monitoring of the securities in the Fund’s portfolio and certain other services necessary for the management of the portfolio.
Portfolio Management Team
The following persons serve as portfolio managers of the Fund:
James Snyder – Senior Vice President and Senior Portfolio Manager
Jeremiah Charles – Senior Vice President and Senior Portfolio Manager
The portfolio managers are primarily and jointly responsible for the day-to-day management of the Fund. Each portfolio manager has served as part of the portfolio management team of the Fund since 2019.
Commentary
The Fund’s primary investment objective is to generate current income with a focus on preservation of capital. Under normal market conditions, the Fund will invest at least 80% of its net assets (including investment borrowings) in a portfolio of investment-grade debt securities issued or guaranteed by the U.S. government, its agencies or government-sponsored entities, including publicly-issued U.S. Treasury securities and mortgage-related securities.
Market Recap
The 12-month period ended October 31, 2023 began with markets under considerable strain as the Federal Reserve (the “Fed”) continued with its aggressive interest rate hiking campaign to combat soaring inflation. With volatility high and liquidity challenged as bond market participants suffered through outflows, bond market spreads remained under pressure. The market began to once again price in just how quickly inflation would cool, and how quickly the Fed would be “forced” to cut rates, just as the market incorrectly had done several times over the preceding year. Contrary to the market belief however, the labor market showed significant strength, and the Fed stood resolute pushing yields on the front end north of 5% in early March 2023, putting significant pressure on an already inverted curve, until it all unraveled mere days later as the first of the large banks, Silicon Valley Bank (“SVB”), began to fail. Front end Treasury yields plunged, which saw the 2-Year Treasury yield fall from 5.07% to sub 4%, while spreads gapped wider, with Option-Adjusted Spreads (“OAS”) on Agency Mortgage Backed Securities (“MBS”) widening approximately 20 basis points (“bps”), almost immediately. Ultimately the Federal Deposit Insurance Corporation took control of two banks, SVB, and Signature Bank, and eventually liquidated nearly $100 billion worth of high-quality bond assets. As markets found their footing following these relatively contained bank failures, the labor market remained stubbornly robust. Despite many forecasts, the housing market, and even the broader economy, have shown significant resilience in spite of the proverbial Fed punchbowl being removed. As such, front end yields began to climb back toward 5% once again and it would not take long for the longer maturity segment of the yield curve to follow suit. We believe the market was simply wrong in its call for the timing of a recession. As such, as this resilient, and sometimes robust, economic data came in, the market was forced to push back its call on interest rate cuts. After all, the Fed had not even stopped hiking. This change has reshaped the term “premium” across the curve. Couple that with a newly acquired market appreciation for just how poorly managed we believe the fiscal house of the United States continues to be post-pandemic, and the next, and perhaps even the final, stage of the ongoing bear market in rates made its appearance known. Volatility remained high. Spreads remained wide relative to historical data. The 2-Year Treasury yield breached 5%. The 30-Year Treasury yield breached 5%. Agency MBS spreads breached the 80 bps OAS level, with nominal spreads setting multi-decade wides near 180 bps. While the market is off these highs in rates, and wides in MBS spreads, it seems like a new world in fixed income relative to the post-Great Financial Crisis of 2008 era, which was defined by heavy handed government intervention and artificially suppressed volatility. Yes, we believe it is safe to say that the aggressive campaign the Fed was forced to undertake when it was too late to respond to the impending inflation debacle helped cause the banking issues and subsequent fallout. Less talked about however, is the importance of understanding the duration gap, and convexity embedded in a bond portfolio. These issues have been front and center in bond portfolios for the last 24 months as rates have risen so significantly in such a short amount of time. We believe that the ability to understand and manage these risks, properly and with skill, has never been more important.
Portfolio Commentary (Continued)
First Trust Long Duration Opportunities ETF (LGOV)Annual ReportOctober 31, 2023 (Unaudited) Performance Analysis
For the 12-month period ended October 31, 2023, the Fund returned -5.97% on a net asset value (“NAV”) basis.
For the same period, the ICE BofA 5+ Year US Treasury Index (the “Benchmark”) returned -4.64%. On a NAV basis, the Fund underperformed the benchmark by 133 bps, net of fees.
With bond market yields at levels not experienced in over a decade, the decision was made to increase the duration of the Fund in the latter half of the year. This proved to be slightly detrimental to the Fund over the short run as volatility soared and rates increased throughout the fourth quarter of the fiscal year. Generally speaking, the Fund is structurally positioned with meaningful positions in Agency MBS, while running against a pure Treasury benchmark. Given this, to the extent that MBS spreads widen on the year, the Fund may underperform, and conversely if MBS spreads were to tighten, the Fund may outperform. For the 12-month period ended October 31, 2023, OAS on Agency MBS blew out, widening from about 50 bps at the start of the period to close near 90 bps. This was detrimental to relative performance versus the benchmark. Given this significant widening of the Agency MBS sector, the Fund utilized Agency MBS “To-Be-Announced” securities to quickly and opportunistically add MBS spread beta. Additionally, as the Fund took in inflows, it ramped up its holding in Agency collateralized mortgage obligations throughout the period to take advantage of what were believed to be very attractive entry points to lock in yield and spread. As a reminder, to help manage the overall duration profile, the Fund does utilize derivatives, predominantly in Treasury futures and options. The Fund uses these in both long and short positions, to manage both its overall interest rate exposure, and its key rate or duration exposure by maturity point along the yield curve. Additionally, the Fund uses long Treasury futures to gain exposure to the U.S. government rates market. Since the Fund uses futures and options in such a way, and interest rates are higher on the year, the use of these instruments contributed to the negative total return of the Fund over the 12-month period ended October 31, 2023.
Market and Fund Outlook
In the Fed tightening cycle of 2004-2006 and subsequent pause, the funding rate peaked in early October 2007. It had been 2+ years of consistent Federal Funds rate tightening, but at a much slower rate than the current cycle. Unlike that period, most homeowners of today locked into long dated mortgages and the loan underwriting of housing has been vastly superior to that deployed nearly two decades ago. The tsunami that hit the mortgage market and banks that were leveraged to it in the 2007-2009 period does not exist, in our estimation, in this cycle and, as such, the economy remains very resilient to the Fed’s interest rate increases. Further, corporations are also not exposed in the very near term to significant funding cost increases, we believe. The implications are that the Fed’s expectation of the economy’s reaction function to its rate increases has been significantly overestimated leading it to the necessity of raising rates further than most market participants or the Fed itself would have expected necessary. So, in this world, with less sensitivity to interest rate rises and healthy U.S. hiring, where is the forward economic contraction going to come from? In short, how does this cycle end? We think the answer lies in both the government and U.S. corporations and, interestingly, we believe it is likely to have similar timing as the cycle two decades ago. We believe there will be three sources of future U.S. contraction that are baked in, and all of them highly foreseeable. First, corporations will likely start to see their funding costs go up as new projects become more expensive, but also, starting in 2025, we believe we will see meaningful amounts of corporate debt that needs to be refinanced and now at a much higher cost. Second, there will likely be cost pressures on U.S. corporations at full U.S. employment as workers’ look to recoup real wage losses experienced over the last several years as wages did not keep pace with inflation amidst government spending and Fed quantitative easing. We anticipate this financial pressure will negatively impact the economy but will be, and has been, more delayed in timing this cycle than during prior ones. Lastly, and likely the most important fact, is the U.S. government’s debt as a percentage of gross domestic product is much higher than any other period in modern U.S. history short of the height of the pandemic when the country was shut down. Further, funding costs were near zero in the pandemic but now are approximately 400 to 500 plus bps higher across the government’s borrowing maturities. In short, current U.S. government interest costs are much higher than the last 25 years and are comparable to those in the 1980s through late 1990s when U.S. inflation was much higher. In earlier periods however, entitlement programs were in much better shape such that very large tax increases, spending cuts or both were less necessary than today. We believe the contraction is coming; the timing is not as clear, but it is inevitable, in our opinion. The continued rise in U.S. Treasury longer maturity interest rates (10 years and longer) this quarter indicates there is little place for anyone borrowing to hide, least of all the U.S. government. We believe a recession is likely in our future, and one only needs to wait for these foreseeable events to play out.
We remain committed to finding value across the various sub-sectors of the Agency mortgage and overall U.S. government securities market, but also along the term spectrum of the U.S. yield curve. Given the massive increase in rates over the last 24 months, we have increased the interest rate sensitivity in the Fund as duration risks feel more balanced and perhaps at 5%, more skewed to go lower.
Portfolio Commentary (Continued)
First Trust Long Duration Opportunities ETF (LGOV)Annual ReportOctober 31, 2023 (Unaudited) We are buyers of longer bonds and will extend duration as the long maturity sector moves toward and through 5.0 % yield levels. To us, these real yield levels compensate us adequately for the inflation risk and, equally importantly, the expected slow-down in the U.S. economy. As mentioned above, we expect further interest rate rises from here to hinder growth and more likely over a strategic period to push interest rates lower. We remain committed to actively managing the convexity component in the portfolio and will look to continue to manage the Fund to a stable duration target; meaning we do not want to extend in duration as rates rise, and conversely, and at this point in the cycle, most importantly, we do not want to shorten or lose duration into a rally. From an asset allocation perspective, we plan to continue to take advantage of very wide spreads in select Agency MBS and Agency commercial mortgage-backed securities opportunities.
First Trust Long Duration Opportunities ETF (LGOV)Understanding Your Fund ExpensesOctober 31, 2023 (Unaudited) As a shareholder of First Trust Long Duration Opportunities ETF (the “Fund”), you incur two types of costs: (1) transaction costs; and (2) ongoing costs, including management fees, distribution and/or service (12b-1) fees, if any, and other Fund expenses. This Example is intended to help you understand your ongoing costs of investing in the Fund and to compare these costs with the ongoing costs of investing in other funds.
The Example is based on an investment of $1,000 invested at the beginning of the period and held through the six-month period ended October 31, 2023.
Actual Expenses
The first line in the following table provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During the Six-Month Period” to estimate the expenses you paid on your account during this six-month period.
Hypothetical Example for Comparison Purposes
The second line in the following table provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs such as brokerage commissions. Therefore, the second line in the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
| Beginning
Account Value
May 1, 2023 | Ending
Account Value
October 31, 2023 | Annualized
Expense Ratio
Based on the
Six-Month
Period (a) | Expenses Paid
During the
Six-Month
Period (a) (b) |
First Trust Long Duration Opportunities ETF (LGOV) |
| | | | |
Hypothetical (5% return before expenses) | | | | |
| Annualized expense ratio and expenses paid during the six-month period do not include fees and expenses of the underlying funds in which the Fund invests. |
| Expenses are equal to the annualized expense ratio as indicated in the table multiplied by the average account value over the period (May 1, 2023 through October 31, 2023), multiplied by 184/365 (to reflect the six-month period). |
First Trust Long Duration Opportunities ETF (LGOV)Portfolio of InvestmentsOctober 31, 2023
| | | | |
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES — 78.6% |
| Collateralized Mortgage Obligations — 44.1% | |
| Federal Home Loan Mortgage Corporation | | | |
| Series 2015-4471, Class JB | | | |
| Series 2017-4738, Class TY | | | |
| Series 2019-4924, Class XB | | | |
| Series 2021-5140, Class ZD | | | |
| Series 2021-5179, Class GZ | | | |
| Series 2022-5213, Class DB | | | |
| Federal National Mortgage Association | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| Series 2023-44, Class PO, PO | | | |
| Government National Mortgage Association | | | |
| | | | |
| | | | |
| Series 2015-164, Class MZ | | | |
| Series 2015-168, Class GI, IO | | | |
| | | | |
| Series 2016-111, Class PB | | | |
| | | | |
| | | | |
| Series 2022-124, Class MY | | | |
| Series 2022-128, Class PN | | | |
| Series 2022-137, Class JY | | | |
| | |
| Commercial Mortgage-Backed Securities — 23.0% | |
| Federal Home Loan Mortgage Corporation Multifamily Structured Pass Through Certificates | | | |
| Series 2018-K155, Class A3 | | | |
| Series 2018-K156, Class A3 | | | |
| Series 2018-K157, Class A3 | | | |
| Series 2018-K159, Class A3 | | | |
| Series 2019-K095, Class XAM, IO (b) | | | |
| Series 2019-K1510, Class A3 | | | |
| Series 2019-K1511, Class X1, IO (b) | | | |
| Series 2019-K1512, Class A3 | | | |
| Series 2019-K1514, Class A2 | | | |
| Series 2020-K111, Class XAM, IO (b) | | | |
| Series 2020-K120, Class XAM, IO (b) | | | |
| Series 2020-K1515, Class X1, IO (b) | | | |
| Series 2020-K1517, Class A2 | | | |
| Series 2021-K129, Class X1, IO (b) | | | |
| Series 2021-K1519, Class A2 | | | |
| Series 2021-K1520, Class A2 | | | |
| Series 2022-K140, Class XAM, IO (b) | | | |
| Series 2023-K153, Class X1, IO (b) | | | |
| Series 2023-KG08, Class A2 | | | |
| Series 2023-KPLB2, Class A | | | |
See Notes to Financial Statements
First Trust Long Duration Opportunities ETF (LGOV)Portfolio of Investments (Continued)October 31, 2023 | | | | |
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES (Continued) |
| Commercial Mortgage-Backed Securities (Continued) | |
| Federal Home Loan Mortgage Corporation Multifamily ML Certificates | | | |
| Series 2023-ML15, Class A (b) | | | |
| Government National Mortgage Association | | | |
| Series 2020-159, Class Z (c) | | | |
| Series 2020-197, Class Z (b) | | | |
| Series 2021-4, Class Z (b) | | | |
| Series 2021-28, Class Z (b) | | | |
| | |
| Pass-Through Securities — 11.5% | |
| Federal National Mortgage Association |
| | | | |
| | | | |
| | |
| Total U.S. Government Agency Mortgage-Backed Securities | |
| | |
U.S. GOVERNMENT BONDS AND NOTES — 1.7% |
| | | | |
| | | | |
| | |
EXCHANGE-TRADED FUNDS — 0.1% |
| | |
| First Trust Intermediate Government Opportunities ETF (d) | |
| | |
| | | | |
U.S. TREASURY BILLS — 23.1% |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| Total U.S. Treasury Bills | |
| | |
| | |
MONEY MARKET FUNDS — 7.0% |
| Morgan Stanley Institutional Liquidity Funds - Treasury Portfolio - Institutional Class - 5.22% (f) | |
| | |
| Total Investments — 110.5% | |
| | |
See Notes to Financial Statements
First Trust Long Duration Opportunities ETF (LGOV)Portfolio of Investments (Continued)October 31, 2023 | | | | | |
|
| Call Options Purchased — 1.1% | |
| U.S. 2-Year Treasury Futures Call | | | | |
| U.S. 5-Year Treasury Futures Call | | | | |
| U.S. 5-Year Treasury Futures Call | | | | |
| U.S. 10-Year Treasury Futures Call | | | | |
| U.S. 10-Year Treasury Futures Call | | | | |
| U.S. 10-Year Treasury Futures Call | | | | |
| U.S. 10-Year Treasury Futures Call | | | | |
| U.S. 10-Year Treasury Futures Call | | | | |
| U.S. Treasury Long Bond Futures Call | | | | |
| U.S. Treasury Long Bond Futures Call | | | | |
| Total Call Options Purchased | |
| | |
| Put Options Purchased — 0.0% | |
| CME 3-Month SOFR Futures Put | | | | |
| CME 3-Month SOFR Futures Put | | | | |
| Total Put Options Purchased | |
| | |
| | |
| | |
|
| Call Options Written — (0.1)% | |
| U.S. Treasury Long Bond Futures Call | | | | |
| U.S. Treasury Long Bond Futures Call | | | | |
| U.S. Treasury Long Bond Futures Call | | | | |
| U.S. Treasury Long Bond Futures Call | | | | |
| Total Call Options Written | |
| (Premiums received $164,555) | |
| Put Options Written — (0.0)% | |
| CME 3-Month SOFR Futures Put | | | | |
| U.S. 5-Year Treasury Futures Put | | | | |
| U.S. Treasury Long Bond Futures Put | | | | |
| Total Put Options Written | |
| (Premiums received $64,439) | |
| | |
| (Premiums received $228,994) | |
| Net Other Assets and Liabilities — (11.5)% | |
| | |
Futures Contracts at October 31, 2023 (See Note 2D - Futures Contracts in the Notes to Financial Statements):
| | | | | Unrealized
Appreciation
(Depreciation)/
Value |
U.S. 5-Year Treasury Notes | | | | | |
U.S. 10-Year Treasury Notes | | | | | |
U.S. Treasury Long Bond Futures | | | | | |
Ultra U.S. Treasury Bond Futures | | | | | |
| | | | | |
See Notes to Financial Statements
First Trust Long Duration Opportunities ETF (LGOV)Portfolio of Investments (Continued)October 31, 2023 | |
| Collateral Strip Rate security. Coupon is based on the weighted net interest rate of the investment’s underlying collateral. The interest rate resets periodically. |
| Weighted Average Coupon security. Coupon is based on the blended interest rate of the underlying holdings, which may have different coupons. The coupon may change in any period. |
| Investment in an affiliated fund. |
| All or a portion of this security is segregated as collateral for open futures and options contracts. At October 31, 2023, the segregated value of this security amounts to $1,979,114. |
| Rate shown reflects yield as of October 31, 2023. |
Abbreviations throughout the Portfolio of Investments: |
| – Chicago Mercantile Exchange |
| – Interest-Only Security - Principal amount shown represents par value on which interest payments are based |
| – Principal-Only Security |
| – Secured Overnight Financing Rate |
| – To-Be-Announced Security |
Valuation InputsA summary of the inputs used to value the Fund’s investments as of October 31, 2023 is as follows (see Note 2A - Portfolio Valuation in the Notes to Financial Statements):
|
| | | Level 2
Significant
Observable
Inputs | Level 3
Significant
Unobservable
Inputs |
U.S. Government Agency Mortgage-Backed Securities | | | | |
U.S. Government Bonds and Notes | | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
|
| | | Level 2
Significant
Observable
Inputs | Level 3
Significant
Unobservable
Inputs |
| | | | |
| | | | |
| | | | |
| Includes cumulative appreciation/depreciation on futures contracts as reported in the Futures Contracts table. Only the current day’s variation margin is presented on the Statement of Assets and Liabilities. |
See Notes to Financial Statements
First Trust Long Duration Opportunities ETF (LGOV)Statement of Assets and Liabilities
October 31, 2023
| |
Investments, at value - Unaffiliated | |
Investments, at value - Affiliated | |
Total investments, at value | |
Options contracts purchased, at value | |
| |
| |
| |
| |
| |
| |
|
| |
Options contracts written, at value | |
| |
| |
Investment securities purchased | |
| |
| |
| |
|
| |
| |
| |
Accumulated distributable earnings (loss) | |
| |
NET ASSET VALUE, per share | |
Number of shares outstanding (unlimited number of shares authorized, par value $0.01 per share) | |
Investments, at cost - Unaffiliated | |
Investments, at cost - Affiliated | |
Total investments, at cost | |
Premiums paid on options contracts purchased | |
Premiums received on options contracts written | |
See Notes to Financial Statements
First Trust Long Duration Opportunities ETF (LGOV)Statement of Operations
For the Year Ended October 31, 2023
| |
| |
| |
| |
|
| |
| |
| |
| |
NET INVESTMENT INCOME (LOSS) | |
|
NET REALIZED AND UNREALIZED GAIN (LOSS): | |
Net realized gain (loss) on: | |
Investments - Unaffiliated | |
| |
Purchased options contracts | |
Written options contracts | |
| |
| |
Net change in unrealized appreciation (depreciation) on: | |
Investments - Unaffiliated | |
| |
Purchased options contracts | |
Written options contracts | |
| |
Net change in unrealized appreciation (depreciation) | |
NET REALIZED AND UNREALIZED GAIN (LOSS) | |
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS | |
See Notes to Financial Statements
First Trust Long Duration Opportunities ETF (LGOV)Statements of Changes in Net Assets
| | |
| | |
Net investment income (loss) | | |
| | |
Net change in unrealized appreciation (depreciation) | | |
Net increase (decrease) in net assets resulting from operations | | |
|
DISTRIBUTIONS TO SHAREHOLDERS FROM: | | |
| | |
| | |
Total distributions to shareholders | | |
|
SHAREHOLDER TRANSACTIONS: | | |
Proceeds from shares sold | | |
| | |
Net increase (decrease) in net assets resulting from shareholder transactions | | |
Total increase (decrease) in net assets | | |
|
| | |
| | |
| | |
|
CHANGES IN SHARES OUTSTANDING: | | |
Shares outstanding, beginning of period | | |
| | |
| | |
Shares outstanding, end of period | | |
See Notes to Financial Statements
First Trust Long Duration Opportunities ETF (LGOV)Financial Highlights
For a share outstanding throughout each period
| | Period
Ended
10/31/2019 (a) |
| | | | |
Net asset value, beginning of period | | | | | |
Income from investment operations: | | | | | |
Net investment income (loss) | | | | | |
Net realized and unrealized gain (loss) | | | | | |
Total from investment operations | | | | | |
Distributions paid to shareholders from: | | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Net asset value, end of period | | | | | |
| | | | | |
|
Ratios to average net assets/supplemental data: | | | | | |
Net assets, end of period (in 000’s) | | | | | |
Ratio of total expenses to average net assets (d) | | | | | |
Ratio of net investment income (loss) to average net assets | | | | | |
Portfolio turnover rate (g) | | | | | |
| Inception date is January 22, 2019, which is consistent with the commencement of investment operations and is the date the initial creation units were established. |
| Based on average shares outstanding. |
| Total return is calculated assuming an initial investment made at the net asset value at the beginning of the period, reinvestment of all distributions at net asset value during the period, and redemption at net asset value on the last day of the period. The returns presented do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. Total return is calculated for the time period presented and is not annualized for periods of less than a year. |
| The Fund indirectly bears its proportionate share of fees and expenses incurred by the underlying funds in which the Fund invests. This ratio does not include these indirect fees and expenses. |
| Includes excise tax. If this excise tax expense was not included, the expense ratio would have been 0.65%. |
| |
| 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. |
| The portfolio turnover rate not including mortgage dollar rolls was 69%, 69%, 118% and 104% for the periods ended October 31, 2022, October 31, 2021, October 31, 2020 and October 31, 2019, respectively. |
See Notes to Financial Statements
Notes to Financial Statements
First Trust Long Duration Opportunities ETF (LGOV)October 31, 2023 1. Organization
First Trust Exchange-Traded Fund IV (the “Trust”) is an open-end management investment company organized as a Massachusetts business trust on September 15, 2010, and is registered with the Securities and Exchange Commission under the Investment Company Act of 1940, as amended (the “1940 Act”).
The Trust currently consists of eighteen exchange-traded funds that are offering shares. This report covers the First Trust Long Duration Opportunities ETF (the “Fund”), a diversified series of the Trust, which trades under the ticker “LGOV” on NYSE Arca, Inc. The Fund represents a separate series of shares of beneficial interest in the Trust. Unlike conventional mutual funds, the Fund issues and redeems shares on a continuous basis, at net asset value (“NAV”), only in large blocks of shares known as “Creation Units.”
The Fund is an actively managed exchange-traded fund (“ETF”). The Fund’s primary investment objective is to generate current income with a focus on preservation of capital. The Fund seeks to achieve its investment objective by investing, under normal market conditions, at least 80% of its net assets (including investment borrowings) in a portfolio of investment-grade debt securities issued or guaranteed by the U.S. government, its agencies or government-sponsored entities, including publicly-issued U.S. Treasury securities and mortgage-related securities. The Fund may also invest in ETFs that principally invest in such securities. The Fund’s investments in mortgage-related securities may include investments in fixed or adjustable-rate securities structured as “pass-through” securities and collateralized mortgage obligations, including residential and commercial mortgage-backed securities, stripped mortgage-backed securities and real estate mortgage investment conduits. The Fund will invest in mortgage-related securities issued or guaranteed by the U.S. government, its agencies (such as Ginnie Mae), and U.S. government-sponsored entities (such as Fannie Mae and Freddie Mac). The Fund may purchase government-sponsored mortgage-related securities in “to-be-announced” transactions (“TBA Transactions”), including mortgage dollar rolls. The Fund intends to enter into mortgage dollar rolls only with high quality securities dealers and banks, as determined by the Fund’s portfolio managers. In addition to its investment in securities issued or guaranteed by the U.S. government, its agencies and government-sponsored entities, the Fund may invest up to 20% of its net assets in other types of debt securities, including privately-issued, non-agency sponsored asset-backed and mortgage-related securities, futures contracts, options, swap agreements, cash and cash equivalents, and ETFs that invest principally in fixed income securities. Further, the Fund may enter into short sales as part of its overall portfolio management strategy, or to offset a potential decline in the value of a security; however, the Fund does not expect, under normal market conditions, to engage in short sales with respect to more than 30% of the value of its net assets. Although the Fund intends to invest primarily in investment grade securities, the Fund may invest up to 20% of its net assets in securities of any credit quality, including securities that are below investment grade, which are also known as high yield securities, or commonly referred to as “junk” bonds, or unrated securities that have not been judged by the portfolio managers to be of comparable quality to rated investment grade securities. In the case of a split rating between one or more of the nationally recognized statistical rating organizations, the Fund will consider the highest rating. Under normal market conditions, the portfolio managers will manage the Fund’s portfolio to have a weighted average effective duration of eight or more years.
2. Significant Accounting Policies
The Fund is considered an investment company and follows accounting and reporting guidance under Financial Accounting Standards Board Accounting Standards Codification Topic 946, “Financial Services-Investment Companies.” The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of the financial statements. The preparation of the financial statements in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates.
A. Portfolio Valuation
The Fund’s NAV is determined daily as of the close of regular trading on the New York Stock Exchange (“NYSE”), normally 4:00 p.m. Eastern time, on each day the NYSE is open for trading. If the NYSE closes early on a valuation day, the NAV is determined as of that time. Domestic debt securities and foreign securities are priced using data reflecting the earlier closing of the principal markets for those securities. The Fund’s NAV is calculated by dividing the value of all assets of the Fund (including accrued interest and dividends), less all liabilities (including accrued expenses and dividends declared but unpaid), by the total number of shares outstanding.
The Fund’s investments are valued daily at market value or, in the absence of market value with respect to any portfolio securities, at fair value. Market value prices represent readily available market quotations such as last sale or official closing prices from a national or foreign exchange (i.e., a regulated market) and are primarily obtained from third-party pricing services. Fair value prices represent any prices not considered market value prices and are either obtained from a third-party pricing service or are determined by the
Notes to Financial Statements (Continued)
First Trust Long Duration Opportunities ETF (LGOV)October 31, 2023 Pricing Committee of the Fund’s investment advisor, First Trust Advisors L.P. (“First Trust” or the “Advisor”), in accordance with valuation procedures approved by the Trust’s Board of Trustees, and in accordance with provisions of the 1940 Act and rules thereunder. Investments valued by the Advisor’s Pricing Committee, if any, are footnoted as such in the footnotes to the Portfolio of Investments. The Fund’s investments are valued as follows:
U.S. government securities, mortgage-backed securities, asset-backed securities, and other debt securities are fair valued on the basis of valuations provided by a third-party pricing service approved by the Advisor’s Pricing Committee, which may use the following valuation inputs when available:
7)
reference data including market research publications.
Pricing services generally value fixed-income securities assuming orderly transactions of an institutional round lot size, but a Fund may hold or transact in such securities in smaller, odd lot sizes. Odd lots may trade at lower prices than institutional round lots.
Equity securities traded in an over-the-counter market are valued at the close price or the last trade price.
Shares of open-end funds are valued based on NAV per share.
Exchange-traded futures contracts are valued at the end of the day settlement price.
Exchange-traded options contracts are valued at the closing price in the market where such contracts are principally traded. If no closing price is available, exchange-traded options contracts are valued at the mean of their most recent bid and ask price, if both are available. Options contracts traded in the over-the-counter market may be valued as follows, depending on the market in which the investment trades: (1) the mean of the most recent bid and ask price, if available; or (2) a price based on the equivalent exchange-traded option.
Fixed income and other debt securities having a remaining maturity of sixty 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 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
Notes to Financial Statements (Continued)
First Trust Long Duration Opportunities ETF (LGOV)October 31, 2023 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 most recent price provided by a pricing service;
2)
available market prices for the fixed-income security;
3)
the fundamental business data relating to the borrower/issuer;
4)
an evaluation of the forces which influence the market in which these securities are purchased and sold;
5)
the type, size and cost of a security;
6)
the financial statements of the borrower/issuer or the financial condition of the country of issue;
7)
the credit quality and cash flow of the borrower/issuer, or country of issue, based on the Pricing Committee’s, sub-advisor’s or portfolio manager’s analysis, as applicable, or external analysis;
8)
the information as to any transactions in or offers for the security;
9)
the price and extent of public trading in similar securities of the borrower/issuer, or comparable companies;
11)
the quality, value and salability of collateral, if any, securing the security;
12)
the business prospects of the borrower/issuer, including any ability to obtain money or resources from a parent or affiliate and an assessment of the borrower’s/issuer’s management (for corporate debt only);
13)
the prospects for the borrower’s/issuer’s industry, and multiples (of earnings and/or cash flows) being paid for similar businesses in that industry (for corporate debt only); and
14)
other relevant factors.
The Fund is subject to fair value accounting standards that define fair value, establish the framework for measuring fair value and provide a three-level hierarchy for fair valuation based upon the inputs to the valuation as of the measurement date. The three levels of the fair value hierarchy are as follows:
• Level 1 – Level 1 inputs are quoted prices in active markets for identical investments. An active market is a market in which transactions for the investment occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
• Level 2 – Level 2 inputs are observable inputs, either directly or indirectly, and include the following:
o Quoted prices for similar investments in active markets.
o Quoted prices for identical or similar investments in markets that are non-active. A non-active market is a market where there are few transactions for the investment, the prices are not current, or price quotations vary substantially either over time or among market makers, or in which little information is released publicly.
o Inputs other than quoted prices that are observable for the investment (for example, interest rates and yield curves observable at commonly quoted intervals, volatilities, prepayment speeds, loss severities, credit risks, and default rates).
o Inputs that are derived principally from or corroborated by observable market data by correlation or other means.
• Level 3 – Level 3 inputs are unobservable inputs. Unobservable inputs may reflect the reporting entity’s own assumptions about the assumptions that market participants would use in pricing the investment.
The inputs or methodologies used for valuing investments are not necessarily an indication of the risk associated with investing in those investments. A summary of the inputs used to value the Fund’s investments as of October 31, 2023, is included with the Fund’s Portfolio of Investments.
B. Securities Transactions and Investment Income
Securities transactions are recorded as of the trade date. Realized gains and losses from securities transactions are recorded on the identified cost basis. Dividend income is recorded on the ex-dividend date. Interest income is recorded daily on the accrual basis. Amortization of premiums and accretion of discounts are recorded using the effective interest method.
The United Kingdom’s Financial Conduct Authority (the “FCA”), which regulates the London Interbank Offered Rates (“LIBOR”), ceased making LIBOR available as a reference rate over a phase-out period that began December 31, 2021. The overnight and 12-month USD LIBOR settings permanently ceased as of June 30, 2023. The FCA announced that the 1-, 3- and 6-month USD LIBOR settings will continue to be published using a synthetic methodology to serve as a fallback for non-U.S. contracts until September 2024. In response to the discontinuation of LIBOR, investors have added fallback provisions to existing contracts for investments whose value is tied to LIBOR, with most fallback provisions requiring the adoption of the Secured Overnight Financing Rate (“SOFR”) as a replacement rate. There is no assurance that any alternative reference rate, including SOFR, will be similar to or
Notes to Financial Statements (Continued)
First Trust Long Duration Opportunities ETF (LGOV)October 31, 2023 produce the same value or economic equivalence as LIBOR or that instruments using an alternative rate will have the same volume or liquidity. At this time, it is not possible to predict the full impact of the elimination of LIBOR and the establishment of an alternative reference rate on the Fund or its investments.
The Fund invests in interest-only securities. For these securities, if there is a change in the estimated cash flows, based on an evaluation of current information, then the estimated yield is adjusted. Additionally, if the evaluation of current information indicates a permanent impairment of the security, the cost basis of the security is written down and a loss is recognized. Debt obligations may be placed on non-accrual status and the related interest income may be reduced by ceasing current accruals and writing off interest receivables when the collection of all or a portion of interest has become doubtful based on consistently applied procedures. A debt obligation is removed from non-accrual status when the issuer resumes interest payments or when collectability of interest is reasonably assured.
Securities purchased or sold on a when-issued, delayed-delivery or forward purchase commitment basis may have extended settlement periods. The value of the security so purchased is subject to market fluctuations during this period. The Fund maintains liquid assets with a current value at least equal to the amount of its when-issued, delayed-delivery or forward purchase commitments until payment is made. At October 31, 2023, the Fund had no when-issued, delayed-delivery securities, or forward purchase commitments.
C. Short Sales
Short sales are utilized to manage interest rate and spread risk, and are transactions in which securities or other instruments (such as options, forwards, futures or other derivative contracts) are sold that are not currently owned in the Fund’s portfolio. When the Fund engages in a short sale, the Fund must borrow the security sold short and deliver the security to the counterparty. Short selling allows the Fund to profit from a decline in a market price to the extent such decline exceeds the transaction costs and the costs of borrowing the securities. The Fund is charged a fee or premium to borrow the securities sold short and is obligated to repay the lenders of the securities. Any dividends or interest that accrues on the securities during the period of the loan are due to the lenders. A gain, limited to the price at which the security was sold short, or a loss, unlimited in size, will be recognized upon the termination of the short sale; which is effected by the Fund purchasing the security sold short and delivering the security to the lender. Any such gain or loss may be offset, completely or in part, by the change in the value of the long portion of the Fund’s portfolio. The Fund is subject to the risk it may be unable to reacquire a security to terminate a short position except at a price substantially in excess of the last quoted price. Also, there is the risk that the counterparty to a short sale may fail to honor its contractual terms, causing a loss to the Fund.
D. Futures Contracts
The Fund may purchase or sell (i.e., is long or short) exchange-listed futures contracts to hedge against changes in interest rates (interest rate risk). Futures contracts are agreements between the Fund and a counterparty to buy or sell a specific quantity of an underlying instrument at a specified price and at a specified date. Depending on the terms of the contract, futures contracts are settled either through physical delivery of the underlying instrument on the settlement date or by payment of a cash settlement amount on the settlement date. Open futures contracts can also be closed out prior to settlement by entering into an offsetting transaction in a matching futures contract. If the Fund is not able to enter into an offsetting transaction, the Fund will continue to be required to maintain margin deposits on the futures contract. When the contract is closed or expires, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed or expired. This gain or loss is included in “Net realized gain (loss) on futures contracts” on the Statement of Operations.
Upon entering into a futures contract, the Fund must deposit funds, called margin, with its custodian in the name of the clearing broker equal to a specified percentage of the current value of the contract. Open futures contracts are marked-to-market daily with the change in value recognized as a component of “Net change in unrealized appreciation (depreciation) on futures contracts” on the Statement of Operations. Pursuant to the contract, the Fund agrees to receive from or pay to the broker an amount of cash equal to the daily fluctuation in value of the contract. Such receipts or payments are known as variation margin and are included in “Variation margin” receivable or payable on the Statement of Assets and Liabilities. If market conditions change unexpectedly, the Fund may not achieve the anticipated benefits of the futures contract and may realize a loss. The use of futures contracts involves the risk of imperfect correlation in movements in the price of the futures contracts, interest rates and the underlying instruments.
E. Options Contracts
In the normal course of pursuing its investment objective, the Fund may invest up to 20% of its net assets in derivative instruments in connection with hedging strategies. The Fund may invest in exchange-listed options on U.S. Treasury securities, exchange-listed options on U.S. Treasury futures contracts, exchange-listed U.S. Treasury futures contracts and exchange-listed options on secured
Notes to Financial Statements (Continued)
First Trust Long Duration Opportunities ETF (LGOV)October 31, 2023 overnight financing rate futures contracts. The Fund uses derivative instruments primarily to hedge interest rate risk and actively manage interest rate exposure. The primary risk exposure is interest rate risk.
The Fund may purchase (buy) or write (sell) put and call options on futures contracts and enter into closing transactions with respect to such options to terminate an existing position. A futures option gives the holder the right, in return for the premium paid, to assume a long position (call) or short position (put) in a futures contract at a specified exercise price prior to the expiration of the option. Upon exercise of a call option, the holder acquires a long position in the futures contract and the writer is assigned the opposite short position. In the case of a put option, the opposite is true. Prior to exercise or expiration, a futures option contract may be closed out by an offsetting purchase or sale of a futures option of the same series. When the Fund writes (sells) an option, an amount equal to the premium received by the Fund is included in “Options contracts written, at value” on the Statement of Assets and Liabilities. When the Fund purchases (buys) an option, the premium paid represents the cost of the option, which is included in “Premiums paid on options contracts purchased” on the Statement of Assets and Liabilities. Options are marked-to-market daily and their value is affected by changes in the value of the underlying security, changes in interest rates, changes in the actual or perceived volatility of the securities markets and the underlying securities, and the remaining time to the option’s expiration. The value of options may also be adversely affected if the market for the options becomes less liquid or the trading volume diminishes.
The Fund uses options on futures contracts in connection with hedging strategies. Generally, these strategies are applied under the same market and market sector conditions in which the Fund uses put and call options on securities. The purchase of put options on futures contracts is analogous to the purchase of puts on securities so as to hedge the Fund’s securities holdings against the risk of declining market prices. The writing of a call option or the purchasing of a put option on a futures contract constitutes a partial hedge against declining prices of securities which are deliverable upon exercise of the futures contract. If the price at expiration of a written call option is below the exercise price, the Fund will retain the full amount of the option premium which provides a partial hedge against any decline that may have occurred in the Fund’s holdings of securities. If the price when the option is exercised is above the exercise price, however, the Fund will incur a loss, which may be offset, in whole or in part, by the increase in the value of the securities held by the Fund that were being hedged. Writing a put option or purchasing a call option on a futures contract serves as a partial hedge against an increase in the value of the securities the Fund intends to acquire. Realized gains and losses on written options are included in “Net realized gain (loss) on written options contracts” on the Statement of Operations. Realized gains and losses on purchased options are included in “Net realized gain (loss) on purchased options contracts” on the Statement of Operations.
The Fund is required to deposit and maintain margin with respect to put and call options on futures contracts written by it. Such margin deposits will vary depending on the nature of the underlying futures contract (and the related initial margin requirements), the current market value of the option and other futures positions held by the Fund. The Fund will pledge in a segregated account at the Fund’s custodian, liquid assets, such as cash, U.S. government securities or other high-grade liquid debt obligations equal in value to the amount due on the underlying obligation. Such segregated assets will be marked-to-market daily, and additional assets will be pledged in the segregated account whenever the total value of the pledged assets falls below the amount due on the underlying obligation.
The risks associated with the use of options on future contracts include the risk that the Fund may close out its position as a writer of an option only if a liquid secondary market exists for such options, which cannot be assured. The Fund’s successful use of options on futures contracts depends on the Advisor’s ability to correctly predict the movement in prices on futures contracts and the underlying instruments, which may prove to be incorrect. In addition, there may be imperfect correlation between the instruments being hedged and the futures contract subject to option.
F. Interest-Only Securities
An interest-only security (“IO Security”) is the interest-only portion of a mortgage-backed security that receives some or all of the interest portion of the underlying mortgage-backed security and little or no principal. A reference principal value called a notional value is used to calculate the amount of interest due to the IO Security. IO Securities are sold at a deep discount to their notional principal amount. Generally speaking, when interest rates are falling and prepayment rates are increasing, the value of an IO Security will fall. Conversely, when interest rates are rising and prepayment rates are decreasing, generally the value of an IO Security will rise. These securities, if any, are identified on the Portfolio of Investments.
G. Principal-Only Securities
A principal-only security (“PO Security”) is the principal-only portion of a mortgage-backed security that does not receive any interest, is priced at a deep discount to its redemption value and ultimately receives the redemption value. Generally speaking, when
Notes to Financial Statements (Continued)
First Trust Long Duration Opportunities ETF (LGOV)October 31, 2023 interest rates are falling and prepayment rates are increasing, the value of a PO Security will rise. Conversely, when interest rates are rising and prepayment rates are decreasing, generally the value of a PO Security will fall. These securities, if any, are identified on the Portfolio of Investments.
H. Stripped Mortgage-Backed Securities
Stripped mortgage-backed securities are created by segregating the cash flows from underlying mortgage loans or mortgage securities to create two or more new securities, each with a specified percentage of the underlying security’s principal or interest payments. Mortgage-backed securities may be partially stripped so that each investor class receives some interest and some principal. When securities are completely stripped, however, all of the interest is distributed to holders of one type of security known as an IO Security and all of the principal is distributed to holders of another type of security known as a PO Security. These securities, if any, are identified on the Portfolio of Investments.
I. Mortgage Dollar Rolls and TBA Transactions
The Fund may invest, without limitation, in mortgage dollar rolls. The Fund intends to enter into mortgage dollar rolls only with high quality securities dealers and banks, as determined by the Fund’s investment advisor. In a mortgage dollar roll, the Fund will sell (or buy) mortgage-backed securities for delivery on a specified date and simultaneously contract to repurchase (or sell) substantially similar (same type, coupon and maturity) securities on a future date. Mortgage dollar rolls are recorded as separate purchases and sales in the Fund. The Fund may also invest in TBA Transactions. A TBA Transaction is a method of trading mortgage-backed securities. TBA Transactions generally are conducted in accordance with widely-accepted guidelines which establish commonly observed terms and conditions for execution, settlement and delivery. In a TBA Transaction, the buyer and the seller agree on general trade parameters such as agency, settlement date, par amount and price.
J. Affiliated Transactions
The Fund invests in securities of affiliated funds. The Fund’s investment performance and risks are directly related to the investment performance and risks of the affiliated funds. Dividend income, if any, realized gains and losses, and change in appreciation (depreciation) from affiliated funds are presented on the Statement of Operations.
Amounts relating to these investments at October 31, 2023 and for the fiscal year then ended are as follows:
| | | | | Change in
Unrealized
Appreciation
(Depreciation) | | | |
First Trust Intermediate Government Opportunities ETF | | | | | | | | |
K. Dividends and Distributions to Shareholders
Dividends from net investment income of the Fund, 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, are distributed at least annually. The Fund may also designate a portion of the amount paid to redeeming shareholders as a distribution for tax purposes.
Distributions in cash may be reinvested automatically in additional whole shares only if the broker through whom the shares were purchased makes such option available. Such shares will generally be reinvested by the broker based upon the market price of those shares and investors may be subject to customary brokerage commissions charged by the broker.
Distributions from net investment income and realized capital gains are determined in accordance with 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 NAV per share. Temporary differences, which arise from recognizing certain items of income, expense and gain/loss in different periods for financial statement and tax purposes, will reverse at some time in the future.
Notes to Financial Statements (Continued)
First Trust Long Duration Opportunities ETF (LGOV)October 31, 2023 The tax character of distributions paid during the fiscal years ended October 31, 2023 and 2022 was as follows:
As of October 31, 2023, the components of distributable earnings on a tax basis for the Fund were as follows:
Undistributed ordinary income | |
Accumulated capital and other gain (loss) | |
Net unrealized appreciation (depreciation) | |
L. Income Taxes
The Fund intends to continue to qualify as a regulated investment company by complying with the requirements under Subchapter M of the Internal Revenue Code of 1986, as amended, which includes distributing substantially all of its net investment income and net realized gains to shareholders. Accordingly, no provision has been made for federal and state income taxes. However, due to the timing and amount of distributions, the Fund may be subject to an excise tax of 4% of the amount by which approximately 98% of the Fund’s taxable income exceeds the distributions from such taxable income for the calendar year.
The Fund 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 2020, 2021, 2022, and 2023 remain open to federal and state audit. As of October 31, 2023, management has evaluated the application of these standards to the Fund and has determined that no provision for income tax is required in the Fund’s 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, 2023, for federal income tax purposes, the Fund had $15,958,372 of capital loss carryforwards available, to the extent provided by regulations, to offset future capital gains. To the extent that these loss carryforwards are used to offset future capital gains, it is probable that the capital gains so offset will not be distributed to the Fund’s shareholders.
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, 2023, the Fund had no net late year ordinary or capital losses.
In order to present paid-in capital and accumulated distributable earnings (loss) (which consists of accumulated net investment income (loss), accumulated net realized gain (loss) on investments and net unrealized appreciation (depreciation) on investments) on the Statement of Assets and Liabilities that more closely represent their tax character, certain adjustments have been made to paid-in capital, accumulated net investment income (loss) and accumulated net realized gain (loss) on investments. These adjustments are primarily due to the difference between book and tax treatments of income and gains on various investment securities held by the Fund. The results of operations and net assets were not affected by these adjustments. For the fiscal year ended October 31, 2023, the adjustments for the Fund were as follows:
Accumulated
Net Investment
Income (Loss) | Accumulated
Net Realized
Gain (Loss)
on Investments | |
| | |
Notes to Financial Statements (Continued)
First Trust Long Duration Opportunities ETF (LGOV)October 31, 2023 As of October 31, 2023, the aggregate cost, gross unrealized appreciation, gross unrealized depreciation, and net unrealized appreciation/(depreciation) on investments (including short positions and derivatives, if any) for federal income tax purposes were as follows:
| Gross Unrealized
Appreciation | Gross Unrealized
(Depreciation) | Net Unrealized
Appreciation
(Depreciation) |
| | | |
M. Expenses
Expenses, other than the investment advisory fee and other excluded expenses, are paid by the Advisor (see Note 3).
3. Investment Advisory Fee, Affiliated Transactions and Other Fee Arrangements
First Trust, the investment advisor to the Fund, is a limited partnership with one limited partner, Grace Partners of DuPage L.P., and one general partner, The Charger Corporation. The Charger Corporation is an Illinois corporation controlled by James A. Bowen, Chief Executive Officer of First Trust. First Trust is responsible for the selection and ongoing monitoring of the 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, pro rata share of fees and expenses attributable to investments in other investment companies (“acquired fund fees and expenses”), brokerage commissions and other expenses connected with the execution of portfolio transactions, distribution and service fees payable pursuant to a Rule 12b-1 plan, if any, and extraordinary expenses. The annual unitary management fee payable by the Fund to First Trust for these services will be reduced at certain levels of the Fund’s net assets (“breakpoints”) and calculated pursuant to the following schedule:
| |
Fund net assets up to and including $2.5 billion | |
Fund net assets greater than $2.5 billion up to and including $5 billion | |
Fund net assets greater than $5 billion up to and including $7.5 billion | |
Fund net assets greater than $7.5 billion up to and including $10 billion | |
Fund net assets greater than $10 billion | |
The Trust has multiple service agreements with The Bank of New York Mellon (“BNYM”). Under the service agreements, BNYM performs custodial, fund accounting, certain administrative services, and transfer agency services for the Fund. As custodian, BNYM is responsible for custody of the Fund’s assets. As fund accountant and administrator, BNYM is responsible for maintaining the books and records of the Fund’s securities and cash. As transfer agent, BNYM is responsible for maintaining shareholder records for the Fund. BNYM is a subsidiary of The Bank of New York Mellon Corporation, a financial holding company.
Each Trustee who is not an officer or employee of First Trust, any sub-advisor or any of their affiliates (“Independent Trustees”) is paid a fixed annual retainer that is allocated equally among each fund in the First Trust Fund Complex. Each Independent Trustee is also paid an annual per fund fee that varies based on whether the fund is a closed-end or other actively managed fund, a target outcome fund or an index fund.
Additionally, the Lead Independent Trustee and the Chairs of the Audit Committee, Nominating and Governance Committee and Valuation Committee are paid annual fees to serve in such capacities, with such compensation allocated pro rata among each fund in the First Trust Fund Complex based on net assets. Independent Trustees are reimbursed for travel and out-of-pocket expenses in connection with all meetings. The Lead Independent Trustee and Committee Chairs rotate every three years. The officers and “Interested” Trustee receive no compensation from the Trust for acting in such capacities.
4. Purchases and Sales of Securities
The costs of purchases of U.S. Government securities and non-U.S. Government securities, excluding short-term investments and investments sold short, for the fiscal year ended October 31, 2023, were $309,585,179 and $113,287, respectively. The proceeds from
Notes to Financial Statements (Continued)
First Trust Long Duration Opportunities ETF (LGOV)October 31, 2023 sales and paydowns of U.S. Government securities and non-U.S. Government securities, excluding short-term investments and investments sold short, for the fiscal year ended October 31, 2023 were $151,450,474 and $0, respectively. The cost of purchases to cover short sales and the proceeds of short sales were $29,512,935 and $29,512,829, respectively.
For the fiscal year ended October 31, 2023, the Fund had no in-kind transactions.
5. Derivative Transactions
The following table presents the types of derivatives held by the Fund at October 31, 2023, the primary underlying risk exposure and the location of these instruments as presented on the Statement of Assets and Liabilities.
| | | |
| | Statement of Assets and
Liabilities Location | | Statement of Assets and
Liabilities Location | |
| | Options contracts purchased, at value | | Options contracts written, at value | |
| | Unrealized appreciation on futures contracts* | | Unrealized depreciation on futures contracts* | |
| Includes cumulative appreciation/depreciation on futures contracts as reported in the Fund’s Portfolio of Investments. Only the current day’s variation margin is presented on the Statement of Assets and Liabilities. |
The following table presents the amount of net realized gain (loss) and change in net unrealized appreciation (depreciation) recognized for the fiscal year ended October 31, 2023, on derivative instruments, as well as the primary underlying risk exposure associated with the instruments.
|
Statement of Operations Location | |
Interest Rate Risk Exposure | |
Net realized gain (loss) on: | |
Purchased options contracts | |
Written options contracts | |
| |
Net change in unrealized appreciation (depreciation) on: | |
Purchased options contracts | |
Written options contracts | |
| |
During the fiscal year ended October 31, 2023, the notional value of futures contracts opened and closed were $345,069,413 and $316,961,471, respectively.
During the fiscal year ended October 31, 2023, the premiums for purchased options contracts opened were $21,014,158 and the premiums for purchased options contracts closed, exercised and expired were $19,095,182.
During the fiscal year ended October 31, 2023, the premiums for written options contracts opened were $3,268,930 and the premiums for written options contracts closed, exercised and expired were $3,055,548.
The Fund does not have the right to offset financial assets and financial liabilities related to futures and options contracts on the Statement of Assets and Liabilities.
6. Creations, Redemptions and Transaction Fees
The Fund generally issues and redeems its shares in primary market transactions through a creation and redemption mechanism and does not sell or redeem individual shares. Instead, financial entities known as “Authorized Participants” have contractual arrangements with the Fund or one of the Fund’s service providers to purchase and redeem Fund shares directly with the Fund in large blocks of shares known as “Creation Units.” Prior to the start of trading on every business day, the Fund publishes through the National
Notes to Financial Statements (Continued)
First Trust Long Duration Opportunities ETF (LGOV)October 31, 2023 Securities Clearing Corporation the “basket” of securities, cash or other assets that it will accept in exchange for a Creation Unit of the Fund’s shares. An Authorized Participant that wishes to effectuate a creation of the Fund’s shares deposits with the Fund the “basket” of securities, cash or other assets identified by the Fund that day, and then receives the Creation Unit of the Fund’s shares in return for those assets. After purchasing a Creation Unit, the Authorized Participant may continue to hold the Fund’s shares or sell them in the secondary market. The redemption process is the reverse of the purchase process: the Authorized Participant redeems a Creation Unit of the Fund’s shares for a basket of securities, cash or other assets. The combination of the creation and redemption process with secondary market trading in the Fund’s shares and underlying securities provides arbitrage opportunities that are designed to help keep the market price of the Fund’s shares at or close to the NAV per share of the Fund.
The Fund imposes fees in connection with the purchase of Creation Units. These fees may vary based upon various fact-based circumstances, including, but not limited to, the composition of the securities included in the Creation Unit or the countries in which the transactions are settled. The price for each Creation Unit will equal the daily NAV per share of the Fund times the number of shares in a Creation Unit, plus the fees described above and, if applicable, any operational processing and brokerage costs, transfer fees, stamp taxes and part or all of the spread between the expected bid and offer side of the market related to the securities comprising the creation basket.
The Fund also imposes fees in connection with the redemption of Creation Units. These fees may vary based upon various fact-based circumstances, including, but not limited to, the composition of the securities included in the Creation Unit or the countries in which the transactions are settled. The price received for each Creation Unit will equal the daily NAV per share of the Fund times the number of shares in a Creation Unit, minus the fees described above and, if applicable, any operational processing and brokerage costs, transfer fees, stamp taxes and part or all of the spread between the expected bid and offer side of the market related to the securities comprising the redemption basket. Investors who use the services of a broker or other such intermediary in addition to an Authorized Participant to effect a redemption of a Creation Unit may also be assessed an amount to cover the cost of such services. The redemption fee charged by the Fund will comply with Rule 22c-2 of the 1940 Act which limits redemption fees to no more than 2% of the value of the shares redeemed.
7. Distribution Plan
The Board of Trustees adopted a Distribution and Service Plan pursuant to Rule 12b-1 under the 1940 Act. In accordance with the Rule 12b-1 plan, the Fund is authorized to pay an amount up to 0.25% of its average daily net assets each year to reimburse First Trust Portfolios L.P. (“FTP”), the distributor of the Fund, for amounts expended to finance activities primarily intended to result in the sale of Creation Units or the provision of investor services. FTP may also use this amount to compensate securities dealers or other persons that are Authorized Participants for providing distribution assistance, including broker-dealer and shareholder support and educational and promotional services.
No 12b-1 fees are currently paid by the Fund, and pursuant to a contractual arrangement, no 12b-1 fees will be paid any time before March 31, 2025.
8. Indemnification
The Trust, on behalf of the Fund, has a variety of indemnification obligations under contracts with its service providers. The Trust’s maximum exposure under these arrangements is unknown. However, the Trust has not had prior claims or losses pursuant to these contracts and expects the risk of loss to be remote.
9. Subsequent Events
Management has evaluated the impact of all subsequent events on the Fund through the date the financial statements were issued and has determined that there were no subsequent events requiring recognition or disclosure in the financial statements that have not already been disclosed.
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Trustees of First Trust Exchange-Traded Fund IV:
Opinion on the Financial Statements and Financial Highlights
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of First Trust Long Duration Opportunities ETF (the “Fund”), one of the funds constituting the First Trust Exchange-Traded Fund IV, as of October 31, 2023, the related statement of operations for the year then ended, the changes in net assets for each of the two years in the period then ended, the financial highlights for the years ended 2023, 2022, 2021, and 2020 and for the period from January 22, 2019 (commencement of investment operations) through October 31, 2019, and the related notes. In our opinion, the financial statements and financial highlights present fairly, in all material respects, the financial position of the Fund as of October 31, 2023, and the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period ended, and the financial highlights for the years ended 2023, 2022, 2021, and 2020, and for the period from January 22, 2019 (commencement of investment operations) through October 31, 2019, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on the Fund’s financial statements and financial highlights based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Fund in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement, whether due to error or fraud. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements and financial highlights, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements and financial highlights. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and financial highlights. Our procedures included confirmation of securities owned as of October 31, 2023, by correspondence with the custodian and brokers; when replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
/s/ Deloitte & Touche, LLP
Chicago, Illinois
December 19, 2023
We have served as the auditor of one or more First Trust investment companies since 2001.
First Trust Long Duration Opportunities ETF (LGOV)October 31, 2023 (Unaudited) Proxy Voting Policies and Procedures
A description of the policies and procedures that the Trust uses to determine how to vote proxies and information on how the Fund voted proxies relating to its portfolio securities during the most recent 12-month period ended June 30 is available (1) without charge, upon request, by calling (800) 988-5891; (2) on the Fund’s website at www.ftportfolios.com; and (3) on the Securities and Exchange Commission’s (“SEC”) website at www.sec.gov.
Portfolio Holdings
The Fund files portfolio holdings information for each month in a fiscal quarter within 60 days after the end of the relevant fiscal quarter on Form N-PORT. Portfolio holdings information for the third month of each fiscal quarter will be publicly available on the SEC’s website at www.sec.gov. The Fund’s complete schedule of portfolio holdings for the second and fourth quarters of each fiscal year is included in the semi-annual and annual reports to shareholders, respectively, and is filed with the SEC on Form N-CSR. The semi-annual and annual report for the Fund is available to investors within 60 days after the period to which it relates. The Fund’s Forms N-PORT and Forms N-CSR are available on the SEC’s website listed above.
Federal Tax Information
Distributions paid to foreign shareholders during the Fund’s fiscal year ended October 31, 2023 that were properly designated by the Fund as “interest-related dividends” or “short-term capital gain dividends,” may not be subject to federal income tax provided that the income was earned directly by such foreign shareholders.
Of the ordinary income (including short-term capital gain) distributions made by the Fund during the fiscal year ended October 31, 2023, none qualify for the corporate dividends received deduction available to corporate shareholders or as qualified dividend income.
Risk Considerations
Risks are inherent in all investing. Certain general risks that may be applicable to a Fund are identified below, but not all of the material risks relevant to each Fund are included in this report and not all of the risks below apply to each Fund. The material risks of investing in each Fund are spelled out in its prospectus, statement of additional information and other regulatory filings. Before investing, you should consider each Fund’s investment objective, risks, charges and expenses, and read each Fund’s prospectus and statement of additional information carefully. You can download each Fund’s prospectus at www.ftportfolios.com or contact First Trust Portfolios L.P. at (800) 621-1675 to request a prospectus, which contains this and other information about each Fund.
Concentration Risk. To the extent that a fund is able to invest a significant percentage of its assets in a single asset class or the securities of issuers within the same country, state, region, industry or sector, an adverse economic, business or political development may affect the value of the fund’s investments more than if the fund were more broadly diversified. A fund that tracks an index will be concentrated to the extent the fund’s corresponding index is concentrated. A concentration makes a fund more susceptible to any single occurrence and may subject the fund to greater market risk than a fund that is more broadly diversified.
Credit Risk. Credit risk is the risk that an issuer of a security will be unable or unwilling to make dividend, interest and/or principal payments when due and the related risk that the value of a security may decline because of concerns about the issuer’s ability to make such payments.
Cyber Security Risk. The funds are susceptible to potential operational risks through breaches in cyber security. A breach in cyber security refers to both intentional and unintentional events that may cause a fund to lose proprietary information, suffer data corruption or lose operational capacity. Such events could cause a fund to incur regulatory penalties, reputational damage, additional compliance costs associated with corrective measures and/or financial loss. In addition, cyber security breaches of a fund’s third-party service providers, such as its administrator, transfer agent, custodian, or sub-advisor, as applicable, or issuers in which the fund invests, can also subject a fund to many of the same risks associated with direct cyber security breaches.
Defined Outcome Funds Risk. To the extent a fund’s investment strategy is designed to deliver returns tied to the price performance of an underlying ETF, an investor may not realize the returns the fund seeks to achieve if that investor does not hold shares for the entire target outcome period. In the event an investor purchases shares after the first day of the target outcome period or sells shares prior to the end of the target outcome period, the buffer that the fund seeks to provide against a decline in the value of the underlying ETF may not be available, the enhanced returns that the fund seeks to provide (if any) may not be available and the investor may not
Additional Information (Continued)
First Trust Long Duration Opportunities ETF (LGOV)October 31, 2023 (Unaudited) participate in a gain in the value of the underlying ETF up to the cap for the investor’s investment period. Additionally, the fund will not participate in gains of the underlying ETF above the cap and a shareholder may lose their entire investment. If the fund seeks enhanced returns, there are certain time periods when the value of the fund may fall faster than the value of the underlying ETF, and it is very unlikely that, on any given day during which the underlying ETF share price increases in value, the fund’s share price will increase at the same rate as the enhanced returns sought by the fund, which is designed for an entire target outcome period. Trading flexible exchange options involves risks different from, or possibly greater than, the risks associated with investing directly in securities, such as less liquidity and correlation and valuation risks. A fund may experience substantial downside from specific flexible exchange option positions and certain positions may expire worthless.
Derivatives Risk. To the extent a fund uses derivative instruments such as futures contracts, options contracts and swaps, the fund may experience losses because of adverse movements in the price or value of the underlying asset, index or rate, which may be magnified by certain features of the derivative. These risks are heightened when a fund’s portfolio managers use derivatives to enhance the fund’s return or as a substitute for a position or security, rather than solely to hedge (or offset) the risk of a position or security held by the fund.
Equity Securities Risk. To the extent a fund invests in equity securities, the value of the fund’s shares will fluctuate with changes in the value of the equity securities. Equity securities prices fluctuate for several reasons, including changes in investors’ perceptions of the financial condition of an issuer or the general condition of the relevant stock market, such as market volatility, or when political or economic events affecting the issuers occur. In addition, common stock prices may be particularly sensitive to rising interest rates, as the cost of capital rises and borrowing costs increase. Equity securities may decline significantly in price over short or extended periods of time, and such declines may occur in the equity market as a whole, or they may occur in only a particular country, company, industry or sector of the market.
ETF Risk. The shares of an ETF trade like common stock and represent an interest in a portfolio of securities. The risks of owning an ETF generally reflect the risks of owning the underlying securities, although lack of liquidity in an ETF could result in it being more volatile and ETFs have management fees that increase their costs. Shares of an ETF trade on an exchange at market prices rather than net asset value, which may cause the shares to trade at a price greater than net asset value (premium) or less than net asset value (discount). In times of market stress, decisions by market makers to reduce or step away from their role of providing a market for an ETF’s shares, or decisions by an ETF’s authorized participants that they are unable or unwilling to proceed with creation and/or redemption orders of an ETF’s shares, could result in shares of the ETF trading at a discount to net asset value and in greater than normal intraday bid-ask spreads.
Fixed Income Securities Risk. To the extent a fund invests in fixed income securities, the fund will be subject to credit risk, income risk, interest rate risk, liquidity risk and prepayment risk. Income risk is the risk that income from a fund’s fixed income investments could decline during periods of falling interest rates. Interest rate risk is the risk that the value of a fund’s fixed income securities will decline because of rising interest rates. Liquidity risk is the risk that a security cannot be purchased or sold at the time desired, or cannot be purchased or sold without adversely affecting the price. Prepayment risk is the risk that the securities will be redeemed or prepaid by the issuer, resulting in lower interest payments received by the fund. In addition to these risks, high yield securities, or “junk” bonds, are subject to greater market fluctuations and risk of loss than securities with higher ratings, and the market for high yield securities is generally smaller and less liquid than that for investment grade securities.
Index or Model Constituent Risk. Certain funds may be a constituent of one or more indices or ETF models. As a result, such a fund may be included in one or more index-tracking exchange-traded funds or mutual funds. Being a component security of such a vehicle could greatly affect the trading activity involving a fund, the size of the fund and the market volatility of the fund. Inclusion in an index could increase demand for the fund and removal from an index could result in outsized selling activity in a relatively short period of time. As a result, a fund’s net asset value could be negatively impacted and the fund’s market price may be significantly below its net asset value during certain periods. In addition, index rebalances may potentially result in increased trading activity in a fund’s shares.
Index Provider Risk. To the extent a fund seeks to track an index, it is subject to Index Provider Risk. There is no assurance that the Index Provider will compile the Index accurately, or that the Index will be determined, maintained, constructed, reconstituted, rebalanced, composed, calculated or disseminated accurately. To correct any such error, the Index Provider may carry out an unscheduled rebalance or other modification of the Index constituents or weightings, which may increase the fund’s costs. The Index Provider does not provide any representation or warranty in relation to the quality, accuracy or completeness of data in the Index, and
Additional Information (Continued)
First Trust Long Duration Opportunities ETF (LGOV)October 31, 2023 (Unaudited) it does not guarantee that the Index will be calculated in accordance with its stated methodology. Losses or costs associated with any Index Provider errors generally will be borne by the fund and its shareholders.
Investment Companies Risk. To the extent a fund invests in the securities of other investment vehicles, the fund will incur additional fees and expenses that would not be present in a direct investment in those investment vehicles. Furthermore, the fund’s investment performance and risks are directly related to the investment performance and risks of the investment vehicles in which the fund invests.
LIBOR Risk. To the extent a fund invests in floating or variable rate obligations that use the London Interbank Offered Rate (“LIBOR”) as a reference interest rate, it is subject to LIBOR Risk. The United Kingdom’s Financial Conduct Authority, which regulates LIBOR, has ceased making LIBOR available as a reference rate over a phase-out period that began December 31, 2021. There is no assurance that any alternative reference rate, including the Secured Overnight Financing Rate (“SOFR”) will be similar to or produce the same value or economic equivalence as LIBOR or that instruments using an alternative rate will have the same volume or liquidity. The unavailability or replacement of LIBOR may affect the value, liquidity or return on certain fund investments and may result in costs incurred in connection with closing out positions and entering into new trades. Any potential effects of the transition away from LIBOR on the fund or on certain instruments in which the fund invests can be difficult to ascertain, and they may vary depending on a variety of factors, and they could result in losses to the fund.
Management Risk. To the extent that a fund is actively managed, it is subject to management risk. In managing an actively-managed fund’s investment portfolio, the fund’s portfolio managers will apply investment techniques and risk analyses that may not have the desired result. There can be no guarantee that a fund will meet its investment objective.
Market Risk. Market risk is the risk that a particular security, or shares of a fund in general, may fall in value. Securities held by a fund, as well as shares of a fund itself, are subject to market fluctuations caused by factors such as general economic conditions, political events, regulatory or market developments, changes in interest rates and perceived trends in securities prices. Shares of a fund could decline in value or underperform other investments as a result of the risk of loss associated with these market fluctuations. In addition, local, regional or global events such as war, acts of terrorism, spread of infectious diseases or other public health issues, recessions, or other events could have a significant negative impact on a fund and its investments. Such events may affect certain geographic regions, countries, sectors and industries more significantly than others. In February 2022, Russia invaded Ukraine which has caused and could continue to cause significant market disruptions and volatility within the markets in Russia, Europe, and the United States. The hostilities and sanctions resulting from those hostilities could have a significant impact on certain fund investments as well as fund performance. The COVID-19 global pandemic and the ensuing policies enacted by governments and central banks have caused and may continue to cause significant volatility and uncertainty in global financial markets. While the U.S. has resumed “reasonably” normal business activity, many countries continue to impose lockdown measures. Additionally, there is no guarantee that vaccines will be effective against emerging variants of the disease. These events also adversely affect the prices and liquidity of a fund’s portfolio securities or other instruments and could result in disruptions in the trading markets. Any of such circumstances could have a materially negative impact on the value of a fund’s shares and result in increased market volatility. During any such events, a fund’s shares may trade at increased premiums or discounts to their net asset value and the bid/ask spread on a fund’s shares may widen.
Non-U.S. Securities Risk. To the extent a fund invests in non-U.S. securities, it is subject to additional risks not associated with securities of domestic issuers. Non-U.S. securities are subject to higher volatility than securities of domestic issuers due to: possible adverse political, social or economic developments; restrictions on foreign investment or exchange of securities; capital controls; lack of liquidity; currency exchange rates; excessive taxation; government seizure of assets; the imposition of sanctions by foreign governments; different legal or accounting standards; and less government supervision and regulation of exchanges in foreign countries. Investments in non-U.S. securities may involve higher costs than investments in U.S. securities, including higher transaction and custody costs, as well as additional taxes imposed by non-U.S. governments. These risks may be heightened for securities of companies located, or with significant operations, in emerging market countries.
Operational Risk. Each fund is subject to risks arising from various operational factors, including, but not limited to, human error, processing and communication errors, errors of a fund’s service providers, counterparties or other third-parties, failed or inadequate processes and technology or systems failures. Each fund relies on third-parties for a range of services, including custody. Any delay or failure relating to engaging or maintaining such service providers may affect a fund’s ability to meet its investment objective. Although the funds and the funds’ investment advisor seek to reduce these operational risks through controls and procedures, there is no way to completely protect against such risks.
Additional Information (Continued)
First Trust Long Duration Opportunities ETF (LGOV)October 31, 2023 (Unaudited) Passive Investment Risk. To the extent a fund seeks to track an index, the fund will invest in the securities included in, or representative of, the index regardless of their investment merit. A fund generally will not attempt to take defensive positions in declining markets.
Preferred Securities Risk. Preferred securities combine some of the characteristics of both common stocks and bonds. Preferred securities are typically subordinated to bonds and other debt securities in a company’s capital structure in terms of priority to corporate income, subjecting them to greater credit risk than those debt securities. Generally, holders of preferred securities have no voting rights with respect to the issuing company unless preferred dividends have been in arrears for a specified number of periods, at which time the preferred security holders may obtain limited rights. In certain circumstances, an issuer of preferred securities may defer payment on the securities and, in some cases, redeem the securities prior to a specified date. Preferred securities may also be substantially less liquid than other securities, including common stock.
Valuation Risk. The valuation of certain securities may carry more risk than that of common stock. Uncertainties in the conditions of the financial markets, unreliable reference data, lack of transparency and inconsistency of valuation models and processes may lead to inaccurate asset pricing. A fund may hold investments in sizes smaller than institutionally sized round lot positions (sometimes referred to as odd lots). However, third-party pricing services generally provide evaluations on the basis of institutionally-sized round lots. If a fund sells certain of its investments in an odd lot transaction, the sale price may be less than the value at which such securities have been held by the fund. Odd lots often trade at lower prices than institutional round lots. There is no assurance that the fund will be able to sell a portfolio security at the price established by the pricing service, which could result in a loss to the fund.
NOT FDIC INSURED NOT BANK GUARANTEED MAY LOSE VALUE
Advisory Agreement
Board Considerations Regarding Approval of the Continuation of the Investment Management Agreement
The Board of Trustees of First Trust Exchange-Traded Fund IV (the “Trust”), including the Independent Trustees, unanimously approved the continuation of the Investment Management Agreement (the “Agreement”) with First Trust Advisors L.P. (the “Advisor”) on behalf of the First Trust Long Duration Opportunities ETF (the “Fund”). The Board approved the continuation of the Agreement for a one-year period ending June 30, 2024 at a meeting held on June 4–5, 2023. The Board determined that the continuation of the Agreement is in the best interests of the Fund in light of the nature, extent and quality of the services provided and such other matters as the Board considered to be relevant in the exercise of its business judgment.
To reach this determination, the Board considered its duties under the Investment Company Act of 1940, as amended (the “1940 Act”), as well as under the general principles of state law, in reviewing and approving advisory contracts; the requirements of the 1940 Act in such matters; the fiduciary duty of investment advisors with respect to advisory agreements and compensation; the standards used by courts in determining whether investment company boards have fulfilled their duties; and the factors to be considered by the Board in voting on such agreements. At meetings held on April 17, 2023 and June 4–5, 2023, the Board, including the Independent Trustees, reviewed materials provided by the Advisor responding to requests for information from counsel to the Independent Trustees, submitted on behalf of the Independent Trustees, that, among other things, outlined: the services provided by the Advisor to the Fund (including the relevant personnel responsible for these services and their experience); the unitary fee rate schedule payable by the Fund as compared to fees charged to a peer group of funds (the “Expense Group”) and a broad peer universe of funds (the “Expense Universe”), each assembled by Broadridge Financial Solutions, Inc. (“Broadridge”), an independent source, and as compared to fees charged to other clients of the Advisor, including other exchange-traded funds (“ETFs”) managed by the Advisor; the expense ratio of the Fund as compared to expense ratios of the funds in the Fund’s Expense Group and Expense Universe; performance information for the Fund, including comparisons of the Fund’s performance to that of one or more relevant benchmark indexes and to that of a performance group of funds and a broad performance universe of funds (the “Performance Universe”), each assembled by Broadridge; the nature of expenses incurred in providing services to the Fund and the potential for the Advisor to realize economies of scale, if any; profitability and other financial data for the Advisor; any indirect benefits to the Advisor and its affiliate, First Trust Portfolios L.P. (“FTP”); and information on the Advisor’s compliance program. The Board reviewed initial materials with the Advisor at the meeting held on April 17, 2023, prior to which the Independent Trustees and their counsel met separately to discuss the information provided by the Advisor. Following the April meeting, counsel to the Independent Trustees, on behalf of the Independent Trustees, requested certain clarifications and supplements to the materials provided, and the information provided in response to those requests was considered at an executive session of the Independent Trustees and their counsel held prior to the June 4–5, 2023 meeting, as well as at the June meeting. The Board applied its business judgment to determine whether the arrangement between the Trust and the Advisor continues to be a reasonable business arrangement from the Fund’s perspective. The Board
Additional Information (Continued)
First Trust Long Duration Opportunities ETF (LGOV)October 31, 2023 (Unaudited) determined that, given the totality of the information provided with respect to the Agreement, the Board had received sufficient information to renew the Agreement. The Board considered that shareholders chose to invest or remain invested in the Fund knowing that the Advisor manages the Fund and knowing the Fund’s unitary fee.
In reviewing the Agreement, the Board considered the nature, extent and quality of the services provided by the Advisor under the Agreement. The Board considered that the Advisor is responsible for the overall management and administration of the Trust and the Fund and reviewed all of the services provided by the Advisor to the Fund, as well as the background and experience of the persons responsible for such services. The Board noted that the Fund is an actively-managed ETF and noted that the Advisor’s Securitized Products Group is responsible for the day-to-day management of the Fund’s investments. The Board considered the background and experience of the members of the Securitized Products Group and noted the Board’s prior meetings with members of the Group. The Board considered the Advisor’s statement that it applies the same oversight model internally with its Securitized Products Group as it uses for overseeing external sub-advisors, including portfolio risk monitoring and performance review. In reviewing the services provided, the Board noted the compliance program that had been developed by the Advisor and considered that it includes a robust program for monitoring the Advisor’s and the Fund’s compliance with the 1940 Act, as well as the Fund’s compliance with its investment objective, policies and restrictions. The Board also considered a report from the Advisor with respect to its risk management functions related to the operation of the Fund. Finally, as part of the Board’s consideration of the Advisor’s services, the Advisor, in its written materials and at the April 17, 2023 meeting, described to the Board the scope of its ongoing investment in additional personnel and infrastructure to maintain and improve the quality of services provided to the Fund and the other funds in the First Trust Fund Complex. In light of the information presented and the considerations made, the Board concluded that the nature, extent and quality of the services provided to the Trust and the Fund by the Advisor under the Agreement have been and are expected to remain satisfactory and that the Advisor has managed the Fund consistent with its investment objective, policies and restrictions.
The Board considered the unitary fee rate schedule payable by the Fund under the Agreement for the services provided. The Board considered that as part of the unitary fee the Advisor is responsible for the Fund’s expenses, including the cost of transfer agency, custody, fund administration, legal, audit and other services and license fees, if any, but excluding the fee payment under the Agreement and 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 Rule 12b-1 plan, if any, and extraordinary expenses, if any. The Board received and reviewed information showing the fee rates and expense ratios of the peer funds in the Expense Group, as well as advisory and unitary fee rates charged by the Advisor to other fund (including ETFs) and non-fund clients, as applicable. Because the Fund pays a unitary fee, the Board determined that expense ratios were the most relevant comparative data point. Based on the information provided, the Board noted that the total (net) expense ratio for the Fund was above the median total (net) expense ratio of the peer funds in the Expense Group. With respect to the Expense Group, the Board, at the April 17, 2023 meeting, discussed with Broadridge its methodology for assembling peer groups and discussed with the Advisor limitations in creating peer groups for actively-managed ETFs, and different business models that may affect the pricing of services among ETF sponsors. The Board took these limitations and differences into account in considering the peer data. With respect to fees charged to other non-ETF clients, the Board considered differences between the Fund and other non-ETF clients that limited their comparability. In considering the unitary fee rate schedule overall, the Board also considered the Advisor’s statement that it seeks to meet investor needs through innovative and value-added investment solutions and the Advisor’s demonstrated long-term commitment to the Fund and the other funds in the First Trust Fund Complex.
The Board considered performance information for the Fund. The Board noted the process it has established for monitoring the Fund’s performance and portfolio risk on an ongoing basis, which includes quarterly performance reporting from the Advisor for the Fund. The Board determined that this process continues to be effective for reviewing the Fund’s performance. The Board received and reviewed information comparing the Fund’s performance for periods ended December 31, 2022 to the performance of the funds in the Performance Universe and to that of a benchmark index. Based on the information provided, the Board noted that the Fund underperformed the Performance Universe median for the one- and three-year periods ended December 31, 2022 and outperformed the benchmark index for the one- and three-year periods ended December 31, 2022. The Board noted the Advisor’s discussion of the Fund’s performance at the April 17, 2023 meeting.
On the basis of all the information provided on the unitary fee and performance of the Fund and the ongoing oversight by the Board, the Board concluded that the unitary fee for the Fund continues to be reasonable and appropriate in light of the nature, extent and quality of the services provided by the Advisor to the Fund under the Agreement.
The Board considered information and discussed with the Advisor whether there were any economies of scale in connection with providing advisory services to the Fund at current asset levels and whether the Fund may benefit from any economies of scale. The
Additional Information (Continued)
First Trust Long Duration Opportunities ETF (LGOV)October 31, 2023 (Unaudited) Board noted that the unitary fee rate schedule for the Fund includes breakpoints pursuant to which the unitary fee rate will be reduced as assets of the Fund meet certain thresholds. The Board considered the Advisor’s statement that it believes that its expenses relating to providing advisory services to the Fund will increase during the next twelve months as the Advisor continues to build infrastructure and add new staff. The Board also noted that under the unitary fee structure, any reduction in expenses associated with the management and operations of the Fund would benefit the Advisor, but that the unitary fee structure provides a level of certainty in expenses for shareholders of the Fund. The Board concluded that the unitary fee rate schedule for the Fund reflects an appropriate level of sharing of any economies of scale that may be realized in the management of the Fund at current asset levels. The Board considered the revenues and allocated costs (including the allocation methodology) of the Advisor in serving as investment advisor to the Fund for the twelve months ended December 31, 2022 and the estimated profitability level for the Fund calculated by the Advisor based on such data, as well as complex-wide and product-line profitability data, for the same period. The Board noted the inherent limitations in the profitability analysis and concluded that, based on the information provided, the Advisor’s profitability level for the Fund was not unreasonable. In addition, the Board considered indirect benefits described by the Advisor that may be realized from its relationship with the Fund. The Board considered that the Advisor had identified as an indirect benefit to the Advisor and FTP their exposure to investors and brokers who, absent their exposure to the Fund, may have had no dealings with the Advisor or FTP, and noted that the Advisor does not utilize soft dollars in connection with the Fund. The Board concluded that the character and amount of potential indirect benefits to the Advisor were not unreasonable.
Based on all of the information considered and the conclusions reached, the Board, including the Independent Trustees, unanimously determined that the terms of the Agreement continue to be fair and reasonable and that the continuation of the Agreement is in the best interests of the Fund. No single factor was determinative in the Board’s analysis.
Remuneration
First Trust Advisors L.P. (“First Trust”) is authorised and regulated by the U.S. Securities and Exchange Commission and is entitled to market shares of certain funds it manages, including First Trust Long Duration Opportunities ETF (the “Fund”), in certain member states in the European Economic Area in accordance with the cooperation arrangements in Article 42 of the Alternative Investment Fund Managers Directive (the “Directive”). First Trust is required under the Directive to make disclosures in respect of remuneration. The following disclosures are made in line with First Trust’s interpretation of currently available regulatory guidance on remuneration disclosures.
During the year ended December 31, 2022, the amount of remuneration paid (or to be paid) by First Trust Advisors L.P. in respect of the Funds is $28,224. This figure is comprised of $1,537 paid (or to be paid) in fixed compensation and $26,687 paid (or to be paid) in variable compensation. There were a total of 24 beneficiaries of the remuneration described above. Those amounts include $7,357 paid (or to be paid) to senior management of First Trust Advisors L.P. and $20,867 paid (or to be paid) to other employees whose professional activities have a material impact on the risk profiles of First Trust Advisors L.P. or the Funds (collectively, “Code Staff”).
Code Staff included in the aggregated figures disclosed above are rewarded in line with First Trust’s remuneration policy (the “Remuneration Policy”) which is determined and implemented by First Trust’s senior management. The Remuneration Policy reflects First Trust’s ethos of good governance and encapsulates the following principal objectives:
i.
to provide a clear link between remuneration and performance of First Trust and to avoid rewarding for failure;
ii.
to promote sound and effective risk management consistent with the risk profiles of the funds managed by First Trust; and
iii.
to remunerate staff in line with the business strategy, objectives, values and interests of First Trust and the funds managed by First Trust in a manner that avoids conflicts of interest.
First Trust assesses various risk factors which it is exposed to when considering and implementing remuneration for Code Staff and considers whether any potential award to such person(s) would give rise to a conflict of interest. First Trust does not reward failure, or consider the taking of risk or failure to take risk in its remuneration of Code Staff.
First Trust assesses performance for the purposes of determining payments in respect of performance-related remuneration of Code Staff by reference to a broad range of measures including (i) individual performance (using financial and non-financial criteria), and (ii) the overall performance of First Trust. Remuneration is not based upon the performance of the Fund.
Additional Information (Continued)
First Trust Long Duration Opportunities ETF (LGOV)October 31, 2023 (Unaudited) The elements of remuneration are balanced between fixed and variable and the senior management sets fixed salaries at a level sufficient to ensure that variable remuneration incentivises and rewards strong individual performance but does not encourage excessive risk taking.
No individual is involved in setting his or her own remuneration.
Board of Trustees and Officers
First Trust Long Duration Opportunities ETF (LGOV)October 31, 2023 (Unaudited) The following tables identify the Trustees and Officers of the Trust. Unless otherwise indicated, the address of all persons is 120 East Liberty Drive, Suite 400, Wheaton, IL 60187.
The Trust’s statement of additional information includes additional information about the Trustees and is available, without charge, upon request, by calling (800) 988-5891.
Name,
Year of Birth and
Position with the Trust | Term of Office
and Year First
Elected or
Appointed | Principal Occupations
During Past 5 Years | Number of
Portfolios in
the First Trust
Fund Complex
Overseen by
Trustee | Other
Trusteeships or
Directorships
Held by Trustee
During Past
5 Years |
|
Richard E. Erickson, Trustee
(1951) | • Indefinite Term • Since Inception | Retired; Physician, Edward-Elmhurst Medical Group (2021 to September 2023); Physician and Officer, Wheaton Orthopedics (1990 to 2021) | | |
Thomas R. Kadlec, Trustee
(1957) | • Indefinite Term • Since Inception | Retired; President, ADM Investors Services, Inc. (Futures Commission Merchant) (2010 to July 2022) | | Director, National Futures Association and ADMIS Singapore Ltd.; Formerly, Director of ADM Investor Services, Inc., ADM Investor Services International, ADMIS Hong Kong Ltd., and Futures Industry Association |
Denise M. Keefe, Trustee
(1964) | • Indefinite Term • Since 2021 | Executive Vice President, Advocate Aurora Health and President, Advocate Aurora Continuing Health Division (Integrated Healthcare System) | | Director and Board Chair of Advocate Home Health Services, Advocate Home Care Products and Advocate Hospice; Director and Board Chair of Aurora At Home (since 2018); Director of Advocate Physician Partners Accountable Care Organization; Director of RML Long Term Acute Care Hospitals; Director of Senior Helpers (since 2021); and Director of MobileHelp (since 2022) |
Robert F. Keith, Trustee
(1956) | • Indefinite Term • Since Inception | President, Hibs Enterprises (Financial and Management Consulting) | | Formerly, Director of Trust Company of Illinois |
Niel B. Nielson, Trustee
(1954) | • Indefinite Term • Since Inception | Senior Advisor (2018 to Present), Managing Director and Chief Operating Officer (2015 to 2018), Pelita Harapan Educational Foundation (Educational Products and Services) | | |
Bronwyn Wright, Trustee
(1971) | • Indefinite Term • Since 2023 | Independent Director to a number of Irish collective investment funds (2009 to Present); Various roles at international affiliates of Citibank (1994 to 2009), including Managing Director, Citibank Europe plc and Head of Securities and Fund Services, Citi Ireland (2007 to 2009) | | |
Board of Trustees and Officers (Continued)
First Trust Long Duration Opportunities ETF (LGOV)October 31, 2023 (Unaudited) Name, Year of Birth and Position with the Trust | Term of Office and Year First Elected or Appointed | Principal Occupations During Past 5 Years | Number of Portfolios in the First Trust Fund Complex Overseen by Trustee | Other Trusteeships or Directorships Held by Trustee During Past 5 Years |
|
James A. Bowen(1), Trustee,
Chairman of the Board
(1955) | • Indefinite Term • Since Inception | Chief Executive Officer, First Trust Advisors L.P. and First Trust Portfolios L.P., Chairman of the Board of Directors, BondWave LLC (Software Development Company) and Stonebridge Advisors LLC (Investment Advisor) | | |
| Position and
Offices
with Trust | Term of Office
and Length of
Service | Principal Occupations
During Past 5 Years |
|
| President and Chief Executive Officer | • Indefinite Term • Since 2016 | Managing Director and Chief Financial Officer, First Trust Advisors L.P. and First Trust Portfolios L.P.; Chief Financial Officer, BondWave LLC (Software Development Company) and Stonebridge Advisors LLC (Investment Advisor) |
| Treasurer, Chief Financial Officer and Chief Accounting Officer | • Indefinite Term • Since 2023 | Senior Vice President, First Trust Advisors L.P. and First Trust Portfolios L.P., July 2021 to Present. Previously, Vice President, First Trust Advisors L.P. and First Trust Portfolios L.P., 2014 - 2021. |
| Secretary and Chief Legal Officer | • Indefinite Term • Since Inception | General Counsel, First Trust Advisors L.P. and First Trust Portfolios L.P.; Secretary and General Counsel, BondWave LLC; Secretary, Stonebridge Advisors LLC |
Daniel J. Lindquist
(1970) | | • Indefinite Term • Since Inception | Managing Director, First Trust Advisors L.P. and First Trust Portfolios L.P. |
| Chief Compliance Officer and Assistant Secretary | • Indefinite Term • Since Inception | Deputy General Counsel, First Trust Advisors L.P. and First Trust Portfolios L.P. |
| | • Indefinite Term • Since Inception | Senior Vice President, First Trust Advisors L.P. and First Trust Portfolios L.P. |
| | • Indefinite Term • Since Inception | Senior Vice President, First Trust Advisors L.P. and First Trust Portfolios L.P. |
(1)
Mr. Bowen is deemed an “interested person” of the Trust due to his position as Chief Executive Officer of First Trust Advisors L.P., investment advisor of the Trust.
(2)
The term “officer” means the president, vice president, secretary, treasurer, controller or any other officer who performs a policy making function.
First Trust Long Duration Opportunities ETF (LGOV)October 31, 2023 (Unaudited) Privacy Policy
First Trust values our relationship with you and considers your privacy an important priority in maintaining that relationship. We are committed to protecting the security and confidentiality of your personal information.
Sources of Information
We collect nonpublic personal information about you from the following sources:
• Information we receive from you and your broker-dealer, investment professional or financial representative through interviews, applications, agreements or other forms;
• Information about your transactions with us, our affiliates or others;
• Information we receive from your inquiries by mail, e-mail or telephone; and
• Information we collect on our website through the use of “cookies.” For example, we may identify the pages on our website that your browser requests or visits.
Information Collected
The type of data we collect may include your name, address, social security number, age, financial status, assets, income, tax information, retirement and estate plan information, transaction history, account balance, payment history, investment objectives, marital status, family relationships and other personal information.
Disclosure of Information
We do not disclose any nonpublic personal information about our customers or former customers to anyone, except as permitted by law. In addition to using this information to verify your identity (as required under law), the permitted uses may also include the disclosure of such information to unaffiliated companies for the following reasons:
• In order to provide you with products and services and to effect transactions that you request or authorize, we may disclose your personal information as described above to unaffiliated financial service providers and other companies that perform administrative or other services on our behalf, such as transfer agents, custodians and trustees, or that assist us in the distribution of investor materials such as trustees, banks, financial representatives, proxy services, solicitors and printers.
• We may release information we have about you if you direct us to do so, if we are compelled by law to do so, or in other legally limited circumstances (for example to protect your account from fraud).
In addition, in order to alert you to our other financial products and services, we may share your personal information within First Trust.
Use of Website Analytics
We currently use third party analytics tools, Google Analytics and AddThis, to gather information for purposes of improving First Trust’s website and marketing our products and services to you. These tools employ cookies, which are small pieces of text stored in a file by your web browser and sent to websites that you visit, to collect information, track website usage and viewing trends such as the number of hits, pages visited, videos and PDFs viewed and the length of user sessions in order to evaluate website performance and enhance navigation of the website. We may also collect other anonymous information, which is generally limited to technical and web navigation information such as the IP address of your device, internet browser type and operating system for purposes of analyzing the data to make First Trust’s website better and more useful to our users. The information collected does not include any personal identifiable information such as your name, address, phone number or email address unless you provide that information through the website for us to contact you in order to answer your questions or respond to your requests. To find out how to opt-out of these services click on: Google Analytics and AddThis.
Confidentiality and Security
With regard to our internal security procedures, First Trust restricts access to your nonpublic personal information to those First Trust employees who need to know that information to provide products or services to you. We maintain physical, electronic and procedural safeguards to protect your nonpublic personal information.
Policy Updates and Inquiries
As required by federal law, we will notify you of our privacy policy annually. We reserve the right to modify this policy at any time, however, if we do change it, we will tell you promptly. For questions about our policy, or for additional copies of this notice, please go to www.ftportfolios.com, or contact us at 1-800-621-1675 (First Trust Portfolios) or 1-800-222-6822 (First Trust Advisors).
March 2023
First Trust Exchange-Traded Fund IV
INVESTMENT ADVISOR
First Trust Advisors L.P.
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
ADMINISTRATOR, CUSTODIAN,
FUND ACCOUNTANT &
TRANSFER AGENT
The Bank of New York Mellon
240 Greenwich Street
New York, NY 10286
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
111 South Wacker Drive
Chicago, IL 60606
LEGAL COUNSEL
Chapman and Cutler LLP
320 South Canal Street
Chicago, IL 60606
Annual Report
For the Year Ended
October 31, 2023
First Trust Exchange-Traded Fund IV
First Trust Low Duration Opportunities ETF (LMBS) |
First Trust Low Duration Opportunities ETF (LMBS)
Annual Report
October 31, 2023
Caution Regarding Forward-Looking Statements
This report contains certain forward-looking statements within the meaning of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended. Forward-looking statements include statements regarding the goals, beliefs, plans or current expectations of First Trust Advisors L.P. (“First Trust” or the “Advisor”) and its representatives, taking into account the information currently available to them. Forward-looking statements include all statements that do not relate solely to current or historical fact. For example, forward-looking statements include the use of words such as “anticipate,” “estimate,” “intend,” “expect,” “believe,” “plan,” “may,” “should,” “would” or other words that convey uncertainty of future events or outcomes.
Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the series of First Trust Exchange-Traded Fund IV (the “Trust”) described in this report (First Trust Low Duration Opportunities ETF; hereinafter referred to as the “Fund”) to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. When evaluating the information included in this report, you are cautioned not to place undue reliance on these forward-looking statements, which reflect the judgment of the Advisor and its representatives only as of the date hereof. We undertake no obligation to publicly revise or update these forward-looking statements to reflect events and circumstances that arise after the date hereof.
Performance and Risk Disclosure
There is no assurance that the Fund will achieve its investment objective. The Fund is subject to market risk, which is the possibility that the market values of securities owned by the Fund will decline and that the value of the Fund’s shares may therefore be less than what you paid for them. Accordingly, you can lose money investing in the Fund. See “Risk Considerations” in the Additional Information section of this report for a discussion of certain other risks of investing in the Fund.
Performance data quoted represents past performance, which is no guarantee of future results, and current performance may be lower or higher than the figures shown. For the most recent month-end performance figures, please visit www.ftportfolios.com or speak with your financial advisor. Investment returns, net asset value and share price will fluctuate and Fund shares, when sold, may be worth more or less than their original cost.
The Advisor may also periodically provide additional information on Fund performance on the Fund’s webpage at www.ftportfolios.com.
How to Read This Report
This report contains information that may help you evaluate your investment in the Fund. It includes details about the Fund and presents data and analysis that provide insight into the Fund’s performance and investment approach.
By reading the portfolio commentary from the portfolio management team of the Fund, you may obtain an understanding of how the market environment affected the Fund’s performance. The statistical information that follows may help you understand the Fund’s performance compared to that of a relevant market benchmark.
It is important to keep in mind that the opinions expressed by personnel of the Advisor are just that: informed opinions. They should not be considered to be promises or advice. The opinions, like the statistics, cover the period through the date on the cover of this report. The material risks of investing in the Fund are spelled out in the prospectus, the statement of additional information, and other Fund regulatory filings.
First Trust Low Duration Opportunities ETF (LMBS)
Annual Letter from the Chairman and CEO
October 31, 2023
Dear Shareholders,
First Trust is pleased to provide you with the annual report for the First Trust Low Duration Opportunities ETF (the “Fund”), which contains detailed information about the Fund for the twelve months ended October 31, 2023.
The Bureau of Economic Analysis recently announced that U.S. real gross domestic product (“GDP”) grew by a staggering 4.9% in the third quarter of 2023 and is now up 2.9% on a year-over-year basis from where it stood in the third quarter of 2022. The most recent quarter’s GDP data represents the fastest growth rate for any quarter since 2014. Consumer spending, which rose by 4.0% over the period, was responsible for 2.7 percentage points of the total increase in GDP. Whether the consumer can keep up this pace of spending remains to be seen, especially given recent news that excess savings from the pandemic-era stimulus have likely been depleted. From a global perspective, the International Monetary Fund (“IMF”) notes that progress in fighting inflation has led to lower economic growth. In their October 2023 publication of the World Economic Outlook, the IMF projected that the growth in world economic output is expected to slow from 3.5% in 2022 to 2.9% in 2024. The economic growth in advanced economies is projected to plummet from 2.6% in 2022 to 1.4% in 2024.
In the notes to their September 2023 meeting, the Federal Open Market Committee revealed that they may need to keep interest rates “higher for longer” as they continue to battle stubbornly high inflation. As many investors are likely aware, a higher Federal Funds target rate can have deep implications for consumers, such as driving up the cost of borrowing for homes, automobiles, and other large purchases. The American consumer has yet to feel the full weight of those burdens, in my opinion. That said, the data reveals a different story among corporate America. S&P Global Market Intelligence reported that a total of 516 U.S. corporations filed for bankruptcy protection on a year-to-date basis through September 30, 2023, up from a total of 263 corporate bankruptcy filings over the same period last year. Higher interest rates and Treasury bond yields have also sapped demand for commercial property loans. Data from Trepp, LLC, a leading provider of data and analytics to the commercial real estate and banking markets, revealed that just $28.2 billion of loans converted into commercial mortgage-backed securities have been issued in 2023, the lowest figure since 2011.
The financial markets battled a myriad of headwinds over the past year, from geopolitical uncertainty resulting from war (the conflicts between Israel and Hamas and Russia and Ukraine), to slowing global economic growth and sticky inflation. Brian Wesbury, Chief Economist at First Trust, notes that a U.S. economic recession is likely to begin at some point early next year. While calls for a recession may concern some investors, the following may offer solace. Data from Bloomberg reveals that the S&P 500® Index has posted positive total returns over the 3-year period following every recession since 1948.
Thank you for giving First Trust the opportunity to play a role in your financial future. We value our relationship with you and will report on the Fund again in six months.
Sincerely,
James A. Bowen
Chairman of the Board of Trustees
Chief Executive Officer of First Trust Advisors L.P.
Fund Performance Overview (Unaudited)
First Trust Low Duration Opportunities ETF (LMBS)
The primary investment objective of the First Trust Low Duration Opportunities ETF (the “Fund”) is to generate current income. The Fund’s secondary investment objective is to provide capital appreciation. The Fund is an actively managed exchange-traded fund. First Trust Advisors L.P. (“First Trust” or the “Advisor”) serves as the advisor. James Snyder, Jeremiah Charles and Owen Aronson are the Fund’s portfolio managers and are jointly and primarily responsible for the day-to-day management of the Fund’s investment portfolio.
Under normal market conditions, the Fund will seek to achieve its investment objectives by investing at least 60% of its net assets (including investment borrowings) in mortgage-related debt securities and other mortgage-related instruments (collectively, “Mortgage-Related Investments”). The Fund normally expects to invest in Mortgage-Related Investments tied to residential and commercial mortgages. Mortgage-Related Investments consist of: (1) residential mortgage-backed securities (RMBS); (2) commercial mortgage-backed securities (CMBS); (3) stripped mortgage-backed securities (SMBS), which are mortgage-backed securities where mortgage payments are divided up between paying the loan’s principal and paying the loan’s interest; and (4) collateralized mortgage obligations (CMOs) and real estate mortgage investment conduits (REMICs) where they are divided into multiple classes with each class being entitled to a different share of the principal and/or interest payments received from the pool of underlying assets. The Fund will limit its investment in Mortgage-Related Investments that are neither issued nor guaranteed by the U.S. government, its agencies or instrumentalities to 20% of its net assets (including investment borrowings). The Fund may invest up to 40% of its net assets (including investment borrowings), in the aggregate, in (i) cash, cash equivalents and short-term investments and (ii) non-mortgage direct obligations of the U.S. government and other non-mortgage securities issued and/or guaranteed by the U.S. government or its agencies or instrumentalities, or U.S. government-sponsored entities (collectively, “Government Entities”). The Fund may also invest up to 5% of its net assets (including investment borrowings) in asset-backed securities (“ABS”) (other than Mortgage-Related Investments) that are not issued and/or guaranteed by Government Entities. However, the Fund’s investments in (a) Mortgage-Related Investments that are not issued and/or guaranteed by Government Entities and (b) ABS may not, in the aggregate, exceed 20% of the Fund’s net assets (including investment borrowings). Although the Fund intends to invest primarily in investment grade securities, the Fund may invest up to 20% of its net assets (including investment borrowings) in securities of any credit quality, including securities that are below investment grade, which are also known as high yield securities, or commonly referred to as “junk” bonds, or unrated securities that have not been judged by the advisor to be of comparable quality to rated investment grade securities.
|
| | Average Annual Total Returns | |
| | | Inception
(11/4/14)
to 10/31/23 | | Inception
(11/4/14)
to 10/31/23 |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
ICE BofA 1-5 Year US Treasury & Agency Index | | | | | |
Total returns for the period since inception are calculated from the inception date of the Fund. “Average Annual Total Returns” represent the average annual change in value of an investment over the periods indicated. “Cumulative Total Returns” represent the total change in value of an investment over the periods indicated.
The Fund’s per share net asset value (“NAV”) is the value of one share of the Fund and is computed by dividing the value of all assets of the Fund (including accrued interest and dividends), less all liabilities (including accrued expenses and dividends declared but unpaid), by the total number of outstanding shares. The price used to calculate market return (“Market Price”) is determined by using the midpoint of the national best bid and offer price (“NBBO”) as of the time that the Fund’s NAV is calculated. Under Securities and Exchange Commission rules, the NBBO consists of the highest displayed buy and lowest sell prices among the various exchanges trading the Fund at the time the Fund’s NAV is calculated. Prior to January 1, 2019, the price used was the midpoint between the highest bid and the lowest offer on the stock exchange on which shares of the Fund were listed for trading as of the time that the Fund’s NAV was calculated. Since shares of the Fund did not trade in the secondary market until after its inception, for the period from inception to the first day of secondary market trading in shares of the Fund, the NAV of the Fund is used as a proxy for the secondary market trading price to calculate market returns. NAV and market returns assume that all distributions have been reinvested in the Fund at NAV and Market Price, respectively.
Fund Performance Overview (Unaudited) (Continued)
First Trust Low Duration Opportunities ETF (LMBS) (Continued)
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.
| |
U.S. Government Agency Mortgage-Backed Securities | |
Mortgage-Backed Securities | |
U.S. Government Bonds and Notes | |
| |
| |
| |
| |
| |
U.S. Government Agency Mortgage-Backed Securities Sold Short | |
| |
Net Other Assets and Liabilities(2) | |
| |
| % of Total Long
Fixed-Income
Investments, Cash
|
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
Federal National Mortgage Association, Pool TBA, 6.00%, 12/15/53 | |
Federal National Mortgage Association, Pool TBA, 5.00%, 12/15/53 | |
Federal National Mortgage Association, Pool TBA, 5.50%, 12/15/53 | |
U.S. Treasury Note, 4.63%, 10/15/26 | |
Federal National Mortgage Association, Pool FM3003, 4.00%, 05/01/49 | |
U.S. Treasury Bill, 0.00%, 09/05/24 | |
Federal National Mortgage Association, Pool FM2972, 4.00%, 12/01/44 | |
U.S. Treasury Bill, 0.00%, 05/16/24 | |
U.S. Treasury Note, 2.50%, 05/31/24 | |
U.S. Treasury Bill, 0.00%, 03/21/24 | |
| |
Weighted Average Effective Net Duration |
| |
| |
| |
| Amount is less than 0.1%. |
| Includes variation margin on futures contracts. |
| The ratings are by S&P Global Ratings. A credit rating is an assessment provided by a nationally recognized statistical rating organization (NRSRO) of the creditworthiness of an issuer with respect to debt obligations. Ratings are measured highest to lowest on a scale that generally ranges from AAA to D for long-term ratings and A-1+ to C for short-term ratings. Investment grade is defined as those issuers that have a long- term credit rating of BBB- or higher or a short-term credit rating of A-3 or higher. The credit ratings shown relate to the credit worthiness of the issuers of the underlying securities in the Fund, and not to the Fund or its shares. U.S. Treasury and U.S. Agency mortgage-backed securities appear under “Government & Agency.” Credit ratings are subject to change. |
| Percentages are based on the long positions only. Money market funds and short positions are excluded. |
Fund Performance Overview (Unaudited) (Continued)
First Trust Low Duration Opportunities ETF (LMBS) (Continued)
| 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.
Performance in securitized product investment strategies can be impacted from the benefits of purchasing odd lot positions. The impact of these investments can be particularly meaningful when funds have limited assets under management and may not be a sustainable source of performance as a fund grows in size. |
Frequency Distribution of Discounts and Premiums
Information showing the number of days the market price of the Fund’s shares was greater (at a premium) and less (at a discount) than the Fund’s net asset value for the most recently completed year, and the most recently completed calendar quarters since that year (or life of the Fund, if shorter) is available at https://www.ftportfolios.com/Retail/etf/home.aspx.
First Trust Low Duration Opportunities ETF (LMBS)Annual ReportOctober 31, 2023 (Unaudited) Advisor
First Trust Advisors L.P. (“First Trust” or the “Advisor”) is the investment advisor to the First Trust Low Duration Opportunities ETF (the “Fund” or “LMBS”). First Trust is responsible for the selection and ongoing monitoring of the investments in the Fund’s portfolio and certain other services necessary for the management of the portfolio.
Portfolio Management Team
The following persons serve as portfolio managers of the Fund:
James Snyder – Senior Vice President and Senior Portfolio Manager
Jeremiah Charles – Senior Vice President and Senior Portfolio Manager
Owen Aronson – Senior Investment Analyst and Portfolio Manager
The portfolio managers are primarily and jointly responsible for the day-to-day management of the Fund. Messrs. Snyder and Charles have served as part of the portfolio management team of the Fund since 2014 and Mr. Aronson since June 2023.
Commentary
Market Recap
The 12-month period ended October 31, 2023 began with markets under considerable strain as the Federal Reserve (the “Fed”) continued with its aggressive interest rate hiking campaign to combat soaring inflation. With volatility high and liquidity challenged as bond market participants suffered through outflows, bond market spreads remained under pressure. The market began to once again price in just how quickly inflation would cool, and how quickly the Fed would be “forced” to cut rates, just as the market incorrectly had done several times over the preceding year. Contrary to the market belief however, the labor market showed significant strength, and the Fed stood resolute pushing yields on the front end north of 5% in early March 2023, putting significant pressure on an already inverted curve, until it all unraveled mere days later as the first of the large banks, Silicon Valley Bank (“SVB”), began to fail. Front end Treasury yields plunged, which saw the 2-Year Treasury yield fall from 5.07% to sub 4%, while spreads gapped wider, with Option-Adjusted Spreads (“OAS”) on Agency mortgage-backed securities (“MBS”) widening approximately 20 basis points (“bps”), almost immediately. Ultimately the Federal Deposit Insurance Corporation took control of two banks, SVB, and Signature Bank, and eventually liquidated nearly $100 billion worth of high-quality bond assets. As markets found their footing following these relatively contained bank failures, the labor market remained stubbornly robust. Despite many forecasts the housing market, and even the broader economy, have shown significant resilience in spite of the proverbial Fed punchbowl being removed. As such, front end Treasury yields began to climb back toward 5% once again and it would not take long for the longer maturity segment of the yield curve to follow suit. We believe the market was simply wrong on its call for the timing of a recession. As this resilient, and sometimes robust, economic data came in, the market was forced to push back its call on the timing of interest rate cuts. After all, the Fed had not even stopped hiking. This change has reshaped the term “premium” across the curve. Couple that with a newly acquired market appreciation for just how poorly managed we believe the fiscal house of the United States continues to be post-pandemic, and the next, and perhaps even the final, stage of the ongoing bear market in rates made its appearance known. Volatility remained high. Spreads remained wide relative to historical data. The 2-Year Treasury yield breached 5%. The 30-Year Treasury yield breached 5%. Agency MBS spreads breached the 80 bps OAS level, with nominal spreads setting multi-decade wides near 180 bps. While the market is off these highs in rates, and wides in MBS spreads, it seems like a new world in fixed income relative to the post-Great Financial Crisis of 2008 era, which was defined by heavy handed government intervention and artificially suppressed volatility. Yes, we believe it is safe to say that the aggressive campaign the Fed was forced to undertake when it was too late to respond to the impending inflation debacle helped cause the banking issues and subsequent fallout. Less talked about however, is the importance of understanding the duration gap, and convexity embedded in a bond portfolio. These issues have been front and center in bond portfolios for the last 24 months as rates have risen so significantly in such a short amount of time. We believe that the ability to understand and manage these risks, properly and with skill, has never been more important.
Performance Analysis
For the 12-month period ended October 31, 2023, the Fund returned 3.29% on a net asset value (“NAV”) basis, net of fees.
For the same period, the ICE BofA 1-5 Year U.S. Treasury & Agency Index (the “Index”) returned 2.45%. On a NAV basis, the Fund outperformed the Index by 84 bps, net of fees.
Portfolio Commentary (Continued)
First Trust Low Duration Opportunities ETF (LMBS)Annual ReportOctober 31, 2023 (Unaudited) The duration profile of the Fund is always very actively managed relative to economic conditions and the relative term structure of interest rates. As such, managing through a fiscal year of heightened levels of interest rate volatility, a continued hawkish Fed, and market impacts associated with banking failures, this risk managed approach to rates proved to be beneficial to the Fund. Additionally, nearing the tail end of the fiscal year, a strategic decision was made to extend its duration in excess of the Index, as bond market yields priced at levels not experienced in well over a decade. Generally speaking, the Fund is structurally positioned with meaningful positions in Agency MBS, while running against an Index comprised of predominantly U.S. Treasuries. Given this, to the extent that MBS spreads widen on the year, the Fund may underperform, and conversely, if MBS spreads were to tighten, the Fund may outperform. Over the fiscal period, OAS on Agency MBS blew out, widening from about 50 bps at the start of the year to close near 90 bps. While this would normally be quite detrimental, the Fund’s active risk management of spread beta using MBS “To-Be-Announced” securities shorts, volatility and rate management using options on Treasury futures, and opportunistic security selection and sub-sector rotations, the Fund was able to weather the storm and drive significant alpha. As a reminder, to help manage the overall duration profile, the Fund does utilize derivatives, predominantly in Treasury futures and options. The Fund uses these in both long and short positions, to manage both its overall interest rate exposure and its key rate or duration exposure by maturity point along the yield curve. The Fund is typically short Treasury futures to offset the duration from the long MBS holdings. Since the Fund uses futures in such a way, and interest rates were higher over the year, the use of futures proved beneficial to the relative performance of the Fund.
Market and Fund Outlook
In the Fed tightening cycle of 2004-2006 and subsequent pause, the funding rate peaked in early October 2007. It had been 2+ years of consistent Fed funds rate tightening but at a much slower rate than the recent cycle. Unlike that period, most homeowners of today locked into long dated mortgages and the loan underwriting of housing has been vastly superior to that deployed nearly two decades ago. The tsunami that hit the mortgage market and banks that were leveraged to it in the 2007-2009 period does not exist, in our estimation, in this cycle, and, as such, the economy remains very resilient to the Fed’s interest rate increases. Further, corporations are also not exposed in the very near term to significant funding cost increases, we believe. The implications are that the Fed’s expectation of the economy’s reaction function to its rate increases has been significantly overestimated leading it to the necessity of raising rates further than most market participants or the Fed itself would have expected necessary. So, in this world, with less sensitivity to interest rate rises and healthy U.S. hiring, where is the forward economic contraction going to come from? In short, how does this cycle end? We think the answer lies in both the government and U.S. corporations and interestingly, we believe it is likely to have similar timing as the cycle two decades ago. We believe there will be three sources of future U.S. contraction that are baked in, and all of them highly foreseeable. First, corporations will likely start to see their funding costs go up as new projects become more expensive, but also starting in 2025, we believe we will see meaningful amounts of corporate debt that need to be refinanced and now at much higher costs. Second, there will likely be cost pressures on U.S. corporations at full U.S. employment as workers’ look to recoup real wage losses experienced over the last several years as wages did not keep pace with inflation amidst government spending and Fed quantitative easing. We anticipate this financial pressure will negatively impact the economy but will be and has been more delayed in timing this cycle than prior ones. Lastly, and likely the most important fact is the U.S. government’s debt as a percentage of gross domestic product is much higher than any other period in modern US history short of the height of the pandemic when the country was shut down. Further, funding costs were near zero in the pandemic but now are approximately 400 to 500 plus basis points higher across the government’s borrowing maturities. In short, current U.S. government interest costs are much higher than the last 25 years and are comparable to those in the 1980s through late 1990s when U.S. inflation was much higher. In earlier periods however, entitlement programs were in much better shape such that very large tax increases, spending cuts or both were less necessary than today. We believe the contraction is coming; the timing is not as clear, but it is inevitable, in our opinion. The continued rise in U.S. Treasury longer maturity interest rates (10 years and longer) indicates there is little place for anyone borrowing to hide, least of all the U.S. government. We believe a recession is likely in our future, and one only needs to wait for the foreseeable events to play out.
We remain strategic, and we remain committed to finding value across the various sectors of the mortgage and securitized market. Given the massive increase in rates over the last 24 months, we have elected to manage the Fund near the Index’s duration as interest rate duration risks feel more balanced and perhaps at 5%, more skewed to go lower. We are buyers all along the term spectrum of the U.S. yield curve, and specifically will look to extend duration if the long maturity sector moves toward and through 5.0 % yield levels. To us, these real yield levels compensate us adequately for the inflation risk and equally importantly the expected slow-down in the U.S. economy. As mentioned above, we expect any further interest rate rises from here to hinder growth and more likely over a strategic period to push interest rates lower. We remain committed to actively managing the convexity component in the portfolio and will look to continue to manage the Fund to a stable duration target; meaning we do not wish to extend in duration as rates rise, and
Portfolio Commentary (Continued)
First Trust Low Duration Opportunities ETF (LMBS)Annual ReportOctober 31, 2023 (Unaudited) conversely, and at this point in the cycle, most importantly, we do not want to shorten or lose duration into a rally. From an asset allocation perspective, we plan to continue to opportunistically position select Non-Agency commercial mortgage-backed securities (“CMBS”), residential mortgage-backed securities and Agency MBS opportunities that the managers find to be attractively priced in the short to intermediate part of the curve, while capturing intermediate and longer maturity opportunities in Agency MBS and Agency CMBS.
First Trust Low Duration Opportunities ETF (LMBS)Understanding Your Fund ExpensesOctober 31, 2023 (Unaudited) As a shareholder of First Trust Low Duration Opportunities ETF (the “Fund”), you incur two types of costs: (1) transaction costs; and (2) ongoing costs, including management fees, distribution and/or service (12b-1) fees, if any, and other Fund expenses. This Example is intended to help you understand your ongoing costs of investing in the Fund and to compare these costs with the ongoing costs of investing in other funds.
The Example is based on an investment of $1,000 invested at the beginning of the period and held through the six-month period ended October 31, 2023.
Actual Expenses
The first line in the following table provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During the Six-Month Period” to estimate the expenses you paid on your account during this six-month period.
Hypothetical Example for Comparison Purposes
The second line in the following table provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs such as brokerage commissions. Therefore, the second line in the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
| Beginning
Account Value
May 1, 2023 | Ending
Account Value
October 31, 2023 | Annualized
Expense Ratio
Based on the
Six-Month
Period (a) | Expenses Paid
During the
Six-Month
Period (a) (b) |
First Trust Low Duration Opportunities ETF (LMBS) |
| | | | |
Hypothetical (5% return before expenses) | | | | |
| Annualized expense ratio and expenses paid during the six-month period do not include fees and expenses of the underlying funds in which the Fund invests. |
| Expenses are equal to the annualized expense ratio as indicated in the table multiplied by the average account value over the period (May 1, 2023 through October 31, 2023), multiplied by 184/365 (to reflect the six-month period). |
First Trust Low Duration Opportunities ETF (LMBS)Portfolio of InvestmentsOctober 31, 2023
| | | | |
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES — 82.4% |
| Collateralized Mortgage Obligations — 31.6% | |
| Federal Home Loan Mortgage Corporation | | | |
| Series 1993-1630, Class PK | | | |
| Series 1994-1710, Class G, 30 Day Average SOFR + CSA + 1.50% (a) | | | |
| Series 1998-2089, Class PJ, IO | | | |
| Series 1998-2102, Class Z | | | |
| Series 2002-2405, Class BF | | | |
| Series 2002-2410, Class OG | | | |
| Series 2002-2437, Class SA, IO, (30 Day Average SOFR + CSA) ×-1+ 7.90% (b) | | | |
| Series 2003-2557, Class HL | | | |
| Series 2003-2564, Class AC | | | |
| Series 2003-2574, Class PE | | | |
| Series 2003-2577, Class LI, IO | | | |
| Series 2003-2581, Class LL | | | |
| Series 2003-2597, Class AE | | | |
| Series 2003-2613, Class LL | | | |
| Series 2003-2626, Class ZW | | | |
| Series 2003-2626, Class ZX | | | |
| Series 2004-2793, Class PE | | | |
| Series 2004-2891, Class ZA | | | |
| Series 2004-2907, Class DZ | | | |
| Series 2005-2973, Class GE | | | |
| Series 2005-3031, Class BI, IO, (30 Day Average SOFR + CSA) ×-1+ 6.69% (b) | | | |
| Series 2005-3054, Class ZW | | | |
| Series 2005-3074, Class ZH | | | |
| Series 2006-243, Class 11, IO, STRIPS (c) | | | |
| Series 2006-3117, Class ZU | | | |
| Series 2006-3196, Class ZK | | | |
| Series 2007-3274, Class B | | | |
| Series 2007-3322, Class NF, 30 Day Average SOFR ×2,566.67+ CSA - 16,683.33%, 0.00% Floor (a) | | | |
| Series 2007-3340, Class PF, 30 Day Average SOFR + CSA + 0.30% (a) | | | |
| Series 2007-3360, Class CB | | | |
| Series 2007-3380, Class FS, 30 Day Average SOFR + CSA + 0.35% (a) | | | |
| Series 2008-3406, Class B | | | |
| Series 2008-3413, Class B | | | |
| Series 2008-3420, Class AZ | | | |
| Series 2008-3448, Class SA, IO, (30 Day Average SOFR + CSA) ×-1+ 6.05% (b) | | | |
| Series 2009-3542, Class ZP | | | |
| Series 2009-3550, Class LL | | | |
| Series 2009-3563, Class ZP | | | |
| Series 2009-3572, Class JS, IO, (30 Day Average SOFR + CSA) ×-1+ 6.80% (b) | | | |
| Series 2009-3585, Class QZ | | | |
| Series 2009-3587, Class FX, 30 Day Average SOFR + CSA + 0.00% (a) | | | |
See Notes to Financial Statements
First Trust Low Duration Opportunities ETF (LMBS)Portfolio of Investments (Continued)October 31, 2023 | | | | |
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES (Continued) |
| Collateralized Mortgage Obligations (Continued) | |
| Federal Home Loan Mortgage Corporation (Continued) | | | |
| Series 2009-3593, Class F, 30 Day Average SOFR + CSA + 0.50% (a) | | | |
| Series 2009-3605, Class NC | | | |
| Series 2010-3622, Class PB | | | |
| Series 2010-3645, Class WD | | | |
| Series 2010-3667, Class PL | | | |
| Series 2010-3699, Class FD, 30 Day Average SOFR + CSA + 0.60% (a) | | | |
| Series 2010-3704, Class ED | | | |
| Series 2010-3714, Class PB | | | |
| Series 2010-3735, Class IK, IO | | | |
| Series 2010-3735, Class JI, IO | | | |
| Series 2010-3740, Class SC, IO, (30 Day Average SOFR + CSA) ×-1+ 6.00% (b) | | | |
| Series 2010-3770, Class GZ | | | |
| Series 2011-3796, Class PB | | | |
| Series 2011-3820, Class NC | | | |
| Series 2011-3895, Class PW | | | |
| Series 2011-3925, Class ZD | | | |
| Series 2011-3954, Class GS, IO, (30 Day Average SOFR + CSA) ×-1+ 6.00% (b) | | | |
| Series 2012-267, Class S5, IO, STRIPS, (30 Day Average SOFR + CSA) ×-1+ 6.00% (b) | | | |
| Series 2012-276, Class S5, IO, STRIPS, (30 Day Average SOFR + CSA) ×-1+ 6.00% (b) | | | |
| Series 2012-3999, Class WA (c) | | | |
| Series 2012-4000, Class PY | | | |
| Series 2012-4012, Class GC | | | |
| Series 2012-4015, Class KB | | | |
| Series 2012-4021, Class IP, IO | | | |
| Series 2012-4026, Class GZ | | | |
| Series 2012-4030, Class IL, IO | | | |
| Series 2012-4054, Class AI, IO | | | |
| Series 2012-4090, Class YZ | | | |
| Series 2012-4097, Class ES, IO, (30 Day Average SOFR + CSA) ×-1+ 6.10% (b) | | | |
| Series 2012-4097, Class SA, IO, (30 Day Average SOFR + CSA) ×-1+ 6.05% (b) | | | |
| Series 2012-4098, Class PE | | | |
| Series 2012-4103, Class HI, IO | | | |
| Series 2012-4116, Class AS, IO, (30 Day Average SOFR + CSA) ×-1+ 6.15% (b) | | | |
| Series 2012-4121, Class HI, IO | | | |
| Series 2012-4132, Class AI, IO | | | |
| Series 2012-4136, Class TU, IO, (30 Day Average SOFR + CSA) ×-22.50+ 139.5%, 4.50% Cap (b) | | | |
| Series 2012-4145, Class YI, IO | | | |
| Series 2013-299, Class S1, IO, STRIPS, (30 Day Average SOFR + CSA) ×-1+ 6.00% (b) | | | |
| Series 2013-303, Class C2, IO, STRIPS | | | |
See Notes to Financial Statements
First Trust Low Duration Opportunities ETF (LMBS)Portfolio of Investments (Continued)October 31, 2023 | | | | |
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES (Continued) |
| Collateralized Mortgage Obligations (Continued) | |
| Federal Home Loan Mortgage Corporation (Continued) | | | |
| Series 2013-304, Class C37, IO, STRIPS | | | |
| Series 2013-304, Class C40, IO, STRIPS | | | |
| Series 2013-4151, Class DI, IO | | | |
| Series 2013-4154, Class IB, IO | | | |
| Series 2013-4170, Class CO, PO | | | |
| Series 2013-4176, Class HE | | | |
| Series 2013-4177, Class GL | | | |
| Series 2013-4193, Class AI, IO | | | |
| Series 2013-4193, Class PB | | | |
| Series 2013-4199, Class BZ | | | |
| Series 2013-4211, Class PB | | | |
| Series 2013-4218, Class ZK | | | |
| Series 2013-4224, Class ME | | | |
| Series 2013-4226, Class NS, (30 Day Average SOFR + CSA) × -3+ 10.50%, 0.00% Floor (b) | | | |
| Series 2013-4247, Class AY | | | |
| Series 2013-4265, Class IB, IO | | | |
| Series 2014-4316, Class XZ | | | |
| Series 2014-4329, Class VZ | | | |
| Series 2014-4387, Class IE, IO | | | |
| Series 2015-4499, Class CZ | | | |
| Series 2015-4512, Class W (c) (e) | | | |
| Series 2015-4520, Class AI, IO | | | |
| Series 2015-4522, Class JZ | | | |
| Series 2016-4546, Class PZ | | | |
| Series 2016-4546, Class ZT | | | |
| Series 2016-4559, Class LI, IO | | | |
| Series 2016-4568, Class MZ | | | |
| Series 2016-4570, Class ST, IO, (30 Day Average SOFR + CSA) ×-1+ 6.00% (b) | | | |
| Series 2016-4572, Class LI, IO | | | |
| Series 2016-4587, Class ZH | | | |
| Series 2016-4591, Class GI, IO | | | |
| Series 2016-4600, Class WT | | | |
| Series 2016-4605, Class KS, (30 Day Average SOFR + CSA) × -1.57+ 4.71%, 0.00% Floor (b) | | | |
| Series 2016-4609, Class YI, IO | | | |
| Series 2017-4681, Class JY | | | |
| Series 2018-4774, Class SL, IO, (30 Day Average SOFR + CSA) ×-1+ 6.20% (b) | | | |
| Series 2018-4826, Class ME | | | |
| Series 2018-4833, Class PY | | | |
| Series 2019-4872, Class BZ | | | |
| Series 2019-4910, Class SA, IO, (30 Day Average SOFR + CSA) ×-1+ 6.05% (b) | | | |
| Series 2019-4919, Class FP, 30 Day Average SOFR + CSA + 0.45% (a) | | | |
| Series 2019-4928, Class F, 30 Day Average SOFR + CSA + 0.50% (a) | | | |
See Notes to Financial Statements
First Trust Low Duration Opportunities ETF (LMBS)Portfolio of Investments (Continued)October 31, 2023 | | | | |
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES (Continued) |
| Collateralized Mortgage Obligations (Continued) | |
| Federal Home Loan Mortgage Corporation (Continued) | | | |
| Series 2019-4938, Class BS, IO, (30 Day Average SOFR + CSA) ×-1+ 6.00% (b) | | | |
| Series 2019-4943, Class NS, IO, (30 Day Average SOFR + CSA) ×-1+ 6.00% (b) | | | |
| Series 2020-4974, Class IA, IO | | | |
| Series 2020-4991, Class DA | | | |
| Series 2020-5001, Class A | | | |
| Series 2020-5004, Class F, 30 Day Average SOFR + CSA + 0.35% (a) | | | |
| Series 2020-5034, Class IO, IO (c) | | | |
| Series 2020-5045, Class AF, 30 Day Average SOFR + 0.25% (a) | | | |
| Series 2020-5045, Class BF, 30 Day Average SOFR + 0.30% (a) | | | |
| Series 2021-5178, Class HL | | | |
| Series 2022-5208, Class HZ | | | |
| Series 2022-5208, Class Z | | | |
| Series 2022-5210, Class LB | | | |
| Series 2022-5220, Class KZ | | | |
| Series 2022-5221, Class VE | | | |
| Series 2022-5221, Class YC | | | |
| Series 2022-5222, Class BZ | | | |
| Series 2022-5222, Class DP | | | |
| Series 2022-5224, Class DZ | | | |
| Series 2022-5225, Class HZ | | | |
| Series 2022-5225, Class NZ | | | |
| Series 2022-5228, Class DZ | | | |
| Series 2022-5230, Class DL | | | |
| Series 2022-5232, Class GO, PO | | | |
| Series 2022-5255, Class KZ | | | |
| Series 2022-5270, Class AL | | | |
| Federal National Mortgage Association Grantor Trust | | | |
| Series 2005-T1, Class A1, 1 Mo. LIBOR + 0.40%, 5.41% Cap (a) | | | |
| | | | |
| Federal National Mortgage Association | | | |
| Series 1993-230, Class FA, 30 Day Average SOFR + CSA + 0.60% (a) | | | |
| Series 1994-61, Class FG, 30 Day Average SOFR + CSA + 1.50% (a) | | | |
| Series 1996-51, Class AY, IO | | | |
| | | | |
| Series 2001-34, Class SR, IO, (30 Day Average SOFR + CSA) × -1+ 8.10% (b) | | | |
| Series 2001-42, Class SB, (30 Day Average SOFR + CSA) ×-16 + 128.00%, 8.50% Cap (b) | | | |
| Series 2001-46, Class F, 30 Day Average SOFR + CSA + 0.40% (a) | | | |
| | | | |
| | | | |
| | | | |
| Series 2002-320, Class 2, IO, STRIPS | | | |
| Series 2002-323, Class 6, IO, STRIPS | | | |
See Notes to Financial Statements
First Trust Low Duration Opportunities ETF (LMBS)Portfolio of Investments (Continued)October 31, 2023 | | | | |
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES (Continued) |
| Collateralized Mortgage Obligations (Continued) | |
| Federal National Mortgage Association (Continued) | | | |
| Series 2002-324, Class 2, IO, STRIPS | | | |
| | | | |
| | | | |
| Series 2003-32, Class UI, IO | | | |
| | | | |
| Series 2003-63, Class F1, 30 Day Average SOFR + CSA + 0.30% (a) | | | |
| | | | |
| Series 2003-343, Class 2, IO, STRIPS | | | |
| Series 2003-345, Class 14, IO, STRIPS | | | |
| Series 2003-348, Class 17, IO, STRIPS | | | |
| Series 2003-348, Class 18, IO, STRIPS (c) | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| Series 2005-2, Class S, IO, (30 Day Average SOFR + CSA) ×-1 + 6.60% (b) | | | |
| Series 2005-2, Class TB, IO, (30 Day Average SOFR + CSA) × -1+ 5.90%, 0.40% Cap (b) | | | |
| | | | |
| Series 2005-40, Class SA, IO, (30 Day Average SOFR + CSA) × -1+ 6.70% (b) | | | |
| | | | |
| | | | |
| Series 2005-79, Class NS, IO, (30 Day Average SOFR + CSA) × -1+ 6.09% (b) | | | |
| | | | |
| | | | |
| Series 2005-359, Class 6, IO, STRIPS | | | |
| Series 2005-362, Class 13, IO, STRIPS | | | |
| Series 2006-5, Class 2A2, 30 Day Average SOFR + CSA + 0.14% (a) | | | |
| Series 2006-5, Class N2, IO (e) | | | |
| Series 2006-15, Class IS, IO, (30 Day Average SOFR + CSA) × -1+ 6.58% (b) | | | |
| Series 2006-20, Class PI, IO, (30 Day Average SOFR + CSA) × -1+ 6.68% (b) | | | |
| | | | |
| | | | |
| Series 2006-117, Class GF, 30 Day Average SOFR + CSA + 0.35% (a) | | | |
| Series 2006-118, Class A1, 30 Day Average SOFR + CSA + 0.60% (a) | | | |
| | | | |
| Series 2007-25, Class FB, 30 Day Average SOFR + CSA + 0.33% (a) | | | |
| | | | |
| | | | |
See Notes to Financial Statements
First Trust Low Duration Opportunities ETF (LMBS)Portfolio of Investments (Continued)October 31, 2023 | | | | |
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES (Continued) |
| Collateralized Mortgage Obligations (Continued) | |
| Federal National Mortgage Association (Continued) | | | |
| | | | |
| Series 2007-116, Class PB | | | |
| Series 2007-117, Class MD | | | |
| Series 2007-W10, Class 3A (e) | | | |
| Series 2008-3, Class FZ, 30 Day Average SOFR + CSA + 0.55% (a) | | | |
| | | | |
| Series 2008-17, Class IP, IO | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| Series 2009-103, Class PZ | | | |
| Series 2009-106, Class SN, IO, (30 Day Average SOFR + CSA) ×-1+ 6.25% (b) | | | |
| Series 2009-109, Class PZ | | | |
| Series 2009-115, Class HZ | | | |
| Series 2009-14, Class BS, IO, (30 Day Average SOFR + CSA) × -1+ 6.25% (b) (f) | | | |
| Series 2009-398, Class C13, IO, STRIPS (f) | | | |
| | | | |
| Series 2010-21, Class KO, PO | | | |
| | | | |
| | | | |
| | | | |
| Series 2010-68, Class BI, IO | | | |
| Series 2010-75, Class MT (e) | | | |
| Series 2010-115, Class PO, PO | | | |
| Series 2010-129, Class SM, IO, (30 Day Average SOFR + CSA) ×-1+ 6.00% (b) | | | |
| Series 2010-142, Class DL | | | |
| | | | |
| | | | |
| Series 2011-30, Class LS, IO (c) | | | |
| | | | |
| | | | |
| Series 2011-73, Class PI, IO | | | |
| Series 2011-74, Class TQ, IO, (30 Day Average SOFR + CSA) × -6.43+ 55.93%, 4.50% Cap (b) | | | |
| Series 2011-101, Class EI, IO | | | |
| Series 2011-105, Class MB | | | |
| Series 2011-111, Class PZ | | | |
| Series 2011-123, Class JS, IO, (30 Day Average SOFR + CSA) × -1+ 6.65% (b) | | | |
| | | | |
| | | | |
| Series 2012-66, Class DI, IO | | | |
| Series 2012-101, Class AI, IO | | | |
See Notes to Financial Statements
First Trust Low Duration Opportunities ETF (LMBS)Portfolio of Investments (Continued)October 31, 2023 | | | | |
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES (Continued) |
| Collateralized Mortgage Obligations (Continued) | |
| Federal National Mortgage Association (Continued) | | | |
| Series 2012-103, Class HI, IO | | | |
| Series 2012-118, Class IB, IO | | | |
| Series 2012-122, Class SD, IO, (30 Day Average SOFR + CSA) ×-1+ 6.10% (b) | | | |
| Series 2012-133, Class KO, PO | | | |
| Series 2012-138, Class MA | | | |
| Series 2012-146, Class QA | | | |
| Series 2012-409, Class 49, IO, STRIPS (c) | | | |
| Series 2012-409, Class 53, IO, STRIPS (c) | | | |
| | | | |
| Series 2013-13, Class IK, IO | | | |
| | | | |
| | | | |
| | | | |
| Series 2013-43, Class IX, IO | | | |
| | | | |
| Series 2013-55, Class AI, IO | | | |
| | | | |
| Series 2013-75, Class FC, 30 Day Average SOFR + 0.36% (a) | | | |
| | | | |
| Series 2013-105, Class BN | | | |
| Series 2013-105, Class KO, PO | | | |
| Series 2013-106, Class KN | | | |
| | | | |
| Series 2013-119, Class VZ | | | |
| Series 2013-119, Class ZB | | | |
| Series 2013-130, Class QY | | | |
| Series 2014-29, Class GI, IO | | | |
| Series 2014-44, Class NI, IO | | | |
| Series 2014-46, Class KA (a) | | | |
| Series 2014-68, Class GI, IO | | | |
| | | | |
| Series 2014-84, Class LI, IO | | | |
| | | | |
| Series 2015-76, Class BI, IO | | | |
| Series 2015-93, Class KI, IO | | | |
| | | | |
| | | | |
| Series 2016-40, Class MS, IO, (30 Day Average SOFR + CSA) × -1+ 6.00% (b) | | | |
| | | | |
| Series 2016-62, Class SB, IO, (30 Day Average SOFR + CSA) × -1+ 6.10% (b) | | | |
| Series 2016-73, Class PI, IO | | | |
| Series 2016-74, Class HI, IO | | | |
| Series 2016-84, Class DF, 30 Day Average SOFR + CSA + 0.42% (a) | | | |
| Series 2017-18, Class AS, IO, (30 Day Average SOFR + CSA) × -1+ 6.05% (b) | | | |
See Notes to Financial Statements
First Trust Low Duration Opportunities ETF (LMBS)Portfolio of Investments (Continued)October 31, 2023 | | | | |
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES (Continued) |
| Collateralized Mortgage Obligations (Continued) | |
| Federal National Mortgage Association (Continued) | | | |
| | | | |
| | | | |
| Series 2017-65, Class SA, IO, (30 Day Average SOFR + CSA) × -1+ 5.90% (b) | | | |
| | | | |
| Series 2017-87, Class GI, IO | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| Series 2019-38, Class CF, 30 Day Average SOFR + CSA + 0.45% (a) | | | |
| Series 2019-41, Class SN, IO, (30 Day Average SOFR + CSA) × -1+ 6.05% (b) | | | |
| | | | |
| | | | |
| | | | |
| Series 2019-70, Class WA, PO | | | |
| Series 2020-9, Class SJ, IO, (30 Day Average SOFR + CSA) ×-1 + 6.00% (b) | | | |
| Series 2020-20, Class KI, IO | | | |
| Series 2020-34, Class FA, 30 Day Average SOFR + CSA + 0.45% (a) | | | |
| Series 2020-38, Class NF, 30 Day Average SOFR + CSA + 0.45% (a) | | | |
| Series 2020-93, Class NI, IO | | | |
| | | | |
| Series 2023-44, Class PO, PO | | | |
| Government National Mortgage Association | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| Series 2004-71, Class ST, (1 Mo. CME Term SOFR + CSA) × -6.25+ 44.50%, 7.00% Cap (b) | | | |
| Series 2004-88, Class SM, IO, (1 Mo. CME Term SOFR + CSA) ×-1+ 6.10% (b) | | | |
See Notes to Financial Statements
First Trust Low Duration Opportunities ETF (LMBS)Portfolio of Investments (Continued)October 31, 2023 | | | | |
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES (Continued) |
| Collateralized Mortgage Obligations (Continued) | |
| Government National Mortgage Association (Continued) | | | |
| Series 2004-105, Class JZ | | | |
| Series 2004-105, Class KA | | | |
| | | | |
| | | | |
| Series 2005-7, Class MA, (1 Mo. CME Term SOFR + CSA) × -2.81+ 18.97% (b) | | | |
| | | | |
| | | | |
| | | | |
| Series 2005-93, Class PO, PO | | | |
| | | | |
| | | | |
| | | | |
| Series 2007-27, Class SD, IO, (1 Mo. CME Term SOFR + CSA) ×-1+ 6.20% (b) | | | |
| Series 2007-41, Class OL, PO | | | |
| Series 2007-42, Class SB, IO, (1 Mo. CME Term SOFR + CSA) ×-1+ 6.75% (b) | | | |
| | | | |
| Series 2007-81, Class FZ, 1 Mo. CME Term SOFR + CSA + 0.35% (a) | | | |
| Series 2008-33, Class XS, IO, (1 Mo. CME Term SOFR + CSA) ×-1+ 7.70% (b) | | | |
| | | | |
| | | | |
| Series 2008-71, Class JI, IO | | | |
| Series 2009-14, Class KI, IO | | | |
| Series 2009-14, Class KS, IO, (1 Mo. CME Term SOFR + CSA) ×-1+ 6.30% (b) | | | |
| Series 2009-25, Class SE, IO, (1 Mo. CME Term SOFR + CSA) ×-1+ 7.60% (b) | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| Series 2009-61, Class WQ, IO, (1 Mo. CME Term SOFR + CSA) ×-1+ 6.25% (b) | | | |
| | | | |
| | | | |
| | | | |
| Series 2009-79, Class OK, PO | | | |
| | | | |
| | | | |
| Series 2009-106, Class SL, IO, (1 Mo. CME Term SOFR + CSA) ×-1+ 6.10% (b) | | | |
| Series 2009-106, Class WZ | | | |
| Series 2009-126, Class LB | | | |
| | | | |
| | | | |
See Notes to Financial Statements
First Trust Low Duration Opportunities ETF (LMBS)Portfolio of Investments (Continued)October 31, 2023 | | | | |
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES (Continued) |
| Collateralized Mortgage Obligations (Continued) | |
| Government National Mortgage Association (Continued) | | | |
| Series 2010-85, Class SL, IO, (1 Mo. CME Term SOFR + CSA) ×-1+ 6.60% (b) | | | |
| Series 2010-116, Class BM | | | |
| Series 2010-116, Class JB | | | |
| Series 2010-157, Class OP, PO | | | |
| | | | |
| | | | |
| Series 2011-48, Class LI, IO | | | |
| Series 2011-61, Class WS, IO, (1 Mo. CME Term SOFR + CSA) ×-1+ 6.47% (b) | | | |
| Series 2011-63, Class BI, IO | | | |
| | | | |
| Series 2011-81, Class IC, IO, (1 Mo. CME Term SOFR + CSA) ×-1+ 6.72%, 0.62% Cap (b) | | | |
| Series 2011-112, Class IP, IO | | | |
| Series 2011-129, Class CL | | | |
| Series 2011-136, Class GB | | | |
| Series 2011-151, Class TB, IO, (1 Mo. CME Term SOFR + CSA) ×-70+ 465.50%, 3.50% Cap (b) | | | |
| Series 2012-84, Class QS, IO, (1 Mo. CME Term SOFR + CSA) ×-1+ 6.10% (b) | | | |
| Series 2012-84, Class SJ, (1 Mo. CME Term SOFR + CSA) × -0.57+ 2.51%, 0.00% Floor (b) | | | |
| Series 2012-108, Class KB | | | |
| Series 2012-143, Class TI, IO | | | |
| Series 2012-149, Class PC (c) | | | |
| Series 2013-5, Class IA, IO | | | |
| | | | |
| Series 2013-69, Class PI, IO | | | |
| | | | |
| | | | |
| Series 2013-130, Class WS, IO, (1 Mo. CME Term SOFR + CSA) ×-1+ 6.10% (b) | | | |
| Series 2013-183, Class PB | | | |
| Series 2014-44, Class IC, IO | | | |
| Series 2014-44, Class ID, IO (c) (e) | | | |
| Series 2014-91, Class JI, IO | | | |
| | | | |
| Series 2014-115, Class QI, IO | | | |
| Series 2014-116, Class SB, IO, (1 Mo. CME Term SOFR + CSA) ×-1+ 5.60% (b) | | | |
| Series 2014-118, Class TV, IO, (1 Mo. CME Term SOFR + CSA) ×-1+ 6.25% (b) | | | |
| | | | |
| Series 2015-66, Class LI, IO | | | |
| Series 2015-95, Class IK, IO (c) (f) | | | |
| Series 2015-124, Class DI, IO | | | |
| Series 2015-137, Class WA (c) (e) | | | |
| Series 2015-138, Class MI, IO | | | |
| Series 2015-151, Class KW (c) | | | |
See Notes to Financial Statements
First Trust Low Duration Opportunities ETF (LMBS)Portfolio of Investments (Continued)October 31, 2023 | | | | |
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES (Continued) |
| Collateralized Mortgage Obligations (Continued) | |
| Government National Mortgage Association (Continued) | | | |
| Series 2015-164, Class MZ | | | |
| Series 2015-168, Class GI, IO | | | |
| | | | |
| Series 2016-37, Class AF, 1 Mo. CME Term SOFR + CSA + 0.47% (a) | | | |
| Series 2016-55, Class PB (c) | | | |
| Series 2016-69, Class WI, IO | | | |
| Series 2016-75, Class SA, IO, (1 Mo. CME Term SOFR + CSA) ×-1+ 6.00% (b) | | | |
| Series 2016-78, Class UI, IO | | | |
| | | | |
| Series 2016-99, Class JA (c) | | | |
| Series 2016-109, Class ZM | | | |
| Series 2016-111, Class PI, IO | | | |
| Series 2016-120, Class AS, IO, (1 Mo. CME Term SOFR + CSA) ×-1+ 6.10% (b) | | | |
| Series 2016-141, Class PC | | | |
| Series 2016-145, Class LZ | | | |
| Series 2016-156, Class ZM | | | |
| Series 2016-160, Class LE | | | |
| Series 2016-167, Class KI, IO | | | |
| Series 2017-12, Class SD, IO, (1 Mo. CME Term SOFR + CSA) ×-1+ 6.10% (b) | | | |
| | | | |
| Series 2017-32, Class DI, IO | | | |
| | | | |
| Series 2017-56, Class BI, IO | | | |
| Series 2017-123, Class IO, IO | | | |
| Series 2017-130, Class LS, IO, (1 Mo. CME Term SOFR + CSA) ×-1+ 6.20% (b) | | | |
| Series 2017-133, Class JI, IO | | | |
| Series 2017-186, Class TI, IO, (1 Mo. CME Term SOFR + CSA) ×-1+ 6.50%, 0.50% Cap (b) | | | |
| | | | |
| Series 2018-79, Class IO, IO | | | |
| Series 2018-131, Class IA, IO | | | |
| Series 2018-134, Class KB | | | |
| Series 2018-155, Class KD | | | |
| Series 2018-160, Class GY | | | |
| Series 2018-78I, Class EZ | | | |
| Series 2019-27, Class DI, IO | | | |
| Series 2019-128, Class EF, 1 Mo. CME Term SOFR + CSA + 0.57%, 4.00% Cap (a) | | | |
| Series 2019-128, Class ES, IO, (1 Mo. CME Term SOFR + CSA) ×-1+ 3.43%, 0.00% Floor (b) | | | |
| Series 2020-62, Class IC, IO | | | |
| Series 2020-62, Class WI, IO | | | |
| Series 2020-84, Class IM, IO | | | |
| Series 2020-84, Class IO, IO | | | |
| Series 2021-46, Class IL, IO | | | |
See Notes to Financial Statements
First Trust Low Duration Opportunities ETF (LMBS)Portfolio of Investments (Continued)October 31, 2023 | | | | |
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES (Continued) |
| Collateralized Mortgage Obligations (Continued) | |
| Government National Mortgage Association (Continued) | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| Series 2022-124, Class EY | | | |
| Series 2022-124, Class MY | | | |
| Series 2022-146, Class MF, 30 Day Average SOFR + 0.45% (a) | | | |
| Series 2022-154, Class EZ | | | |
| Series 2022-204, Class YC | | | |
| | | | |
| Seasoned Credit Risk Transfer Trust | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| Seasoned Loans Structured Transaction Trust | | | |
| | | | |
| | | | |
| | | | |
| | |
| Commercial Mortgage-Backed Securities — 14.5% | |
| Federal Home Loan Mortgage Corporation Multiclass Certificates | | | |
| Series 2020-RR02, Class DX, IO (c) | | | |
| Series 2020-RR06, Class BX, IO (c) | | | |
| Series 2020-RR09, Class AX, IO (c) | | | |
| Series 2020-RR09, Class BX, IO (c) | | | |
| Series 2020-RR10, Class X, IO (c) | | | |
| Series 2020-RR11, Class AX, IO (c) | | | |
| Series 2020-RR11, Class BX, IO (c) | | | |
| Series 2021-P009, Class X, IO (e) | | | |
| Series 2021-P011, Class X1, IO (e) | | | |
| Series 2021-RR15, Class X, IO (e) | | | |
| Series 2021-RR18, Class X, IO (e) (g) (h) | | | |
| Series 2021-RR19, Class X, IO (e) | | | |
| Series 2021-RR20, Class X, IO (e) | | | |
See Notes to Financial Statements
First Trust Low Duration Opportunities ETF (LMBS)Portfolio of Investments (Continued)October 31, 2023 | | | | |
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES (Continued) |
| Commercial Mortgage-Backed Securities (Continued) | |
| Federal Home Loan Mortgage Corporation Multifamily Structured Pass Through Certificates | | | |
| Series 2015-K047, Class X3, IO (e) | | | |
| Series 2016-K054, Class A1 | | | |
| Series 2016-K152, Class A2 | | | |
| Series 2016-KIR1, Class X, IO (e) | | | |
| Series 2018-K156, Class A3 | | | |
| Series 2018-K157, Class A3 | | | |
| Series 2018-K158, Class A3 | | | |
| Series 2018-K159, Class A3 | | | |
| Series 2018-KSW4, Class A, 30 Day Average SOFR + CSA + 0.43% (a) | | | |
| Series 2019-1513, Class A2 | | | |
| Series 2019-K097, Class X1, IO (e) | | | |
| Series 2019-K099, Class X1, IO (e) | | | |
| Series 2019-K099, Class XAM, IO (e) | | | |
| Series 2019-K100, Class X1, IO (e) | | | |
| Series 2019-K101, Class X1, IO (c) | | | |
| Series 2019-K102, Class XAM, IO (c) | | | |
| Series 2019-K103, Class XAM, IO (e) | | | |
| Series 2019-K734, Class X1, IO (e) | | | |
| Series 2019-K734, Class XAM, IO (e) | | | |
| Series 2019-K735, Class X1, IO (e) | | | |
| Series 2019-K736, Class X1, IO (e) | | | |
| Series 2019-K1510, Class X1, IO (e) | | | |
| Series 2019-K1511, Class X1, IO (e) | | | |
| Series 2019-K1512, Class X1, IO (e) | | | |
| Series 2019-K1513, Class X1, IO (e) | | | |
| Series 2020-K109, Class XAM, IO (e) | | | |
| Series 2020-K110, Class X1, IO (e) | | | |
| Series 2020-K110, Class XAM, IO (e) | | | |
| Series 2020-K112, Class XAM, IO (e) | | | |
| Series 2020-K113, Class XAM, IO (e) | | | |
| Series 2020-K114, Class XAM, IO (e) | | | |
| Series 2020-K115, Class X1, IO (e) | | | |
| Series 2020-K115, Class XAM, IO (e) | | | |
| Series 2020-K116, Class X1, IO (e) | | | |
| Series 2020-K116, Class XAM, IO (e) | | | |
| Series 2020-K117, Class A2 | | | |
| Series 2020-K117, Class XAM, IO (e) | | | |
| Series 2020-K118, Class X1, IO (e) | | | |
| Series 2020-K118, Class XAM, IO (e) | | | |
| Series 2020-K119, Class XAM, IO (e) | | | |
| Series 2020-K120, Class A2 | | | |
| Series 2020-K120, Class XAM, IO (e) | | | |
| Series 2020-K121, Class X1, IO (e) | | | |
| Series 2020-K121, Class XAM, IO (e) | | | |
| Series 2020-K122, Class X1, IO (e) | | | |
| Series 2020-K122, Class XAM, IO (e) | | | |
| Series 2020-K737, Class X1, IO (c) | | | |
See Notes to Financial Statements
First Trust Low Duration Opportunities ETF (LMBS)Portfolio of Investments (Continued)October 31, 2023 | | | | |
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES (Continued) |
| Commercial Mortgage-Backed Securities (Continued) | |
| Federal Home Loan Mortgage Corporation Multifamily Structured Pass Through Certificates (Continued) | | | |
| Series 2020-K738, Class XAM, IO (c) | | | |
| Series 2020-K739, Class X1, IO (e) | | | |
| Series 2020-K739, Class XAM, IO (e) | | | |
| Series 2020-K740, Class XAM, IO (e) | | | |
| Series 2020-K1515, Class X1, IO (e) | | | |
| Series 2020-K1516, Class X1, IO (e) | | | |
| Series 2020-K1517, Class X1, IO (e) | | | |
| Series 2020-KG04, Class X1, IO (e) | | | |
| Series 2021-K123, Class A2 | | | |
| Series 2021-K124, Class A2 | | | |
| Series 2021-K128, Class XAM, IO (e) | | | |
| Series 2021-K129, Class X1, IO (e) | | | |
| Series 2021-K129, Class XAM, IO (e) | | | |
| Series 2021-K130, Class XAM, IO (e) | | | |
| Series 2021-K131, Class XAM, IO (e) | | | |
| Series 2021-K132, Class XAM, IO (e) | | | |
| Series 2021-K741, Class XAM, IO (e) | | | |
| Series 2021-K744, Class X1, IO (e) | | | |
| Series 2021-K1522, Class A1 | | | |
| Series 2021-KG05, Class X1, IO (e) | | | |
| Series 2021-KG06, Class X1, IO (e) | | | |
| Series 2022-K148, Class XAM, IO (e) | | | |
| Series 2023-KJ47, Class A2 | | | |
| Federal Home Loan Mortgage Corporation Multifamily ML Certificates | | | |
| Series 2023-ML15, Class A (e) | | | |
| Federal National Mortgage Association Alternative Credit Enhancement Securities | | | |
| Series 2023-M1, Class 2A1 (e) | | | |
| Series 2023-M1, Class Z (e) | | | |
| | | | |
| Series 2015-K44, Class B (e) (i) | | | |
| Series 2015-K45, Class B (e) (i) | | | |
| Government National Mortgage Association | | | |
| Series 2011-31, Class Z (c) | | | |
| Series 2012-120, Class Z (c) | | | |
| Series 2013-74, Class AG (e) | | | |
| Series 2013-194, Class AE (c) | | | |
| | | | |
| Series 2015-70, Class IO, IO (c) | | | |
| Series 2015-125, Class VA (c) | | | |
| Series 2016-11, Class IO, IO (c) | | | |
| Series 2016-26, Class IO, IO (c) | | | |
| Series 2016-52, Class IO, IO (c) | | | |
| Series 2016-127, Class IO, IO (c) | | | |
| | | | |
| Series 2017-35, Class Z (c) | | | |
| | | | |
See Notes to Financial Statements
First Trust Low Duration Opportunities ETF (LMBS)Portfolio of Investments (Continued)October 31, 2023 | | | | |
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES (Continued) |
| Commercial Mortgage-Backed Securities (Continued) | |
| Government National Mortgage Association (Continued) | | | |
| Series 2017-106, Class AE | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | |
| Pass-Through Securities — 36.3% | |
| Federal Home Loan Mortgage Corporation |
| Pool 760043, 5 Yr. Constant Maturity Treasury Rate + 1.39% (a) | | | |
| Pool 840359, FTSE USD IBOR Consumer Cash Fallbacks Term 1Y + 1.66% (a) | | | |
| | | | |
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See Notes to Financial Statements
First Trust Low Duration Opportunities ETF (LMBS)Portfolio of Investments (Continued)October 31, 2023 | | | | |
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES (Continued) |
| Pass-Through Securities (Continued) | |
| Federal Home Loan Mortgage Corporation (Continued) |
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See Notes to Financial Statements
First Trust Low Duration Opportunities ETF (LMBS)Portfolio of Investments (Continued)October 31, 2023 | | | | |
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES (Continued) |
| Pass-Through Securities (Continued) | |
| Federal Home Loan Mortgage Corporation (Continued) |
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| Federal National Mortgage Association |
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See Notes to Financial Statements
First Trust Low Duration Opportunities ETF (LMBS)Portfolio of Investments (Continued)October 31, 2023 | | | | |
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES (Continued) |
| Pass-Through Securities (Continued) | |
| Federal National Mortgage Association (Continued) |
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See Notes to Financial Statements
First Trust Low Duration Opportunities ETF (LMBS)Portfolio of Investments (Continued)October 31, 2023 | | | | |
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES (Continued) |
| Pass-Through Securities (Continued) | |
| Federal National Mortgage Association (Continued) |
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| Government National Mortgage Association |
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See Notes to Financial Statements
First Trust Low Duration Opportunities ETF (LMBS)Portfolio of Investments (Continued)October 31, 2023 | | | | |
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES (Continued) |
| Pass-Through Securities (Continued) | |
| Government National Mortgage Association (Continued) |
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See Notes to Financial Statements
First Trust Low Duration Opportunities ETF (LMBS)Portfolio of Investments (Continued)October 31, 2023 | | | | |
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES (Continued) |
| Pass-Through Securities (Continued) | |
| Government National Mortgage Association (Continued) |
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| Total U.S. Government Agency Mortgage-Backed Securities | |
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MORTGAGE-BACKED SECURITIES — 12.4% |
| Collateralized Mortgage Obligations — 7.1% | |
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| Series 2019-2, Class M1 (i) | | | |
| Series 2019-3, Class A3 (i) | | | |
| Series 2021-1R, Class A2 (i) | | | |
| Series 2021-1R, Class A3 (i) | | | |
| BRAVO Residential Funding Trust |
| Series 2021-NQM1, Class A2 (i) | | | |
| Series 2021-NQM1, Class A3 (i) | | | |
| Series 2021-NQM2, Class A1 (i) | | | |
| Series 2023-NQM1, Class A1, steps up to 6.76% on 01/01/27 (i) (k) | | | |
| Chase Home Lending Mortgage Trust |
| Series 2019-ATR2, Class A11, 1 Mo. CME Term SOFR + CSA + 0.90% (a) (i) | | | |
| CHL Mortgage Pass-Through Trust |
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| Series 2018-J1, Class A22 (i) | | | |
| Series 2019-INV1, Class A11 (i) | | | |
See Notes to Financial Statements
First Trust Low Duration Opportunities ETF (LMBS)Portfolio of Investments (Continued)October 31, 2023 | | | | |
MORTGAGE-BACKED SECURITIES (Continued) |
| Collateralized Mortgage Obligations (Continued) | |
| Citigroup Global Markets Mortgage Securities VII, Inc. |
| Series 2003-UP2, Class PO1, PO | | | |
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| Series 2022-5, Class A1 (i) | | | |
| Connecticut Avenue Securities Trust |
| Series 2019-R01, Class 2B1, 30 Day Average SOFR + CSA + 4.35% (a) (i) | | | |
| Series 2019-R01, Class 2M2, 30 Day Average SOFR + CSA + 2.45% (a) (i) | | | |
| Series 2021-R02, Class 2M2, 30 Day Average SOFR + 2.00% (a) (i) | | | |
| Series 2022-R02, Class 2M2, 30 Day Average SOFR + 3.00% (a) (i) | | | |
| Ellington Financial Mortgage Trust |
| Series 2022-2, Class A1 (i) | | | |
| Series 2023-1, Class A1, steps up to 6.73% on 01/01/27 (i) (k) | | | |
| Federal Home Loan Mortgage Corporation STACR Debt Notes |
| Series 2020-HQA5, Class M2, 30 Day Average SOFR + 2.60% (a) (i) | | | |
| Federal Home Loan Mortgage Corporation STACR REMIC Trust |
| Series 2020-DNA1, Class M2, 30 Day Average SOFR + CSA + 1.70% (a) (i) | | | |
| Series 2020-DNA2, Class B1, 30 Day Average SOFR + CSA + 2.50% (a) (i) | | | |
| Series 2020-HQA2, Class M2, 30 Day Average SOFR + CSA + 3.10% (a) (i) | | | |
| |
| Series 2018-2, Class A4 (i) | | | |
| Series 2018-4, Class B1 (e) (i) | | | |
| Series 2019-2, Class A11 (i) | | | |
| Series 2021-9INV, Class A1 (i) | | | |
| |
| Series 2021-NQM7, Class A1 (i) | | | |
| Series 2023-NQM3, Class A1 (i) | | | |
| GMACM Mortgage Loan Trust |
| Series 2003-J10, Class A1 | | | |
| GS Mortgage-Backed Securities Trust |
| Series 2019-PJ3, Class A1 (i) | | | |
| Series 2021-PJ6, Class A8 (i) | | | |
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| Series 2004-S2, Class 5A1 | | | |
| Series 2015-IVR2, Class A5 (e) (i) | | | |
| Series 2018-5, Class A1 (i) | | | |
| Series 2018-5, Class A13 (i) | | | |
| Series 2018-8, Class A7 (i) | | | |
| Series 2019-1, Class A5 (i) | | | |
| Series 2019-8, Class A15 (i) | | | |
| Series 2019-INV2, Class A15 (i) | | | |
| Series 2019-LTV2, Class A11, 1 Mo. CME Term SOFR + CSA + 0.90% (a) (i) | | | |
| Series 2020-INV1, Class A15 (i) | | | |
See Notes to Financial Statements
First Trust Low Duration Opportunities ETF (LMBS)Portfolio of Investments (Continued)October 31, 2023 | | | | |
MORTGAGE-BACKED SECURITIES (Continued) |
| Collateralized Mortgage Obligations (Continued) | |
| JP Morgan Wealth Management |
| Series 2020-ATR1, Class A5 (i) | | | |
| Mello Mortgage Capital Acceptance |
| Series 2018-MTG2, Class A9 (i) | | | |
| MetLife Securitization Trust |
| Series 2018-1A, Class A (i) | | | |
| |
| Series 2022-INV1, Class A1, steps up to 4.91% on 03/25/26 (i) (k) | | | |
| New Residential Mortgage Loan Trust |
| Series 2015-2A, Class B1 (i) | | | |
| Series 2016-1A, Class A1 (i) | | | |
| Series 2018-3A, Class A1 (i) | | | |
| Series 2018-4A, Class A1S, 1 Mo. CME Term SOFR + CSA + 0.75% (a) (i) | | | |
| Series 2019-NQM5, Class A1 (i) | | | |
| |
| Series 2018-EXP1, Class 1A3 (i) | | | |
| Series 2018-EXP1, Class 2A1, 1 Mo. CME Term SOFR + CSA + 0.85% (a) (i) | | | |
| |
| Series 2021-AFC1, Class A1 (i) | | | |
| Provident Funding Mortgage Trust |
| Series 2019-1, Class A5 (i) | | | |
| Series 2020-1, Class A5 (i) | | | |
| |
| Series 2022-NQM1, Class A1 (i) | | | |
| Seasoned Credit Risk Transfer Trust |
| Series 2017-2, Class M1 (i) | | | |
| |
| Series 2017-2, Class A19 (i) | | | |
| Series 2017-CH1, Class A13 (i) | | | |
| Series 2018-CH1, Class B1B (i) | | | |
| Series 2020-1, Class A19 (i) | | | |
| Series 2020-1, Class A7 (i) | | | |
| Starwood Mortgage Residential Trust |
| Series 2022-3, Class A1 (i) | | | |
| TIAA Bank Mortgage Loan Trust |
| Series 2018-3, Class A1 (i) | | | |
| Towd Point Mortgage Trust |
| Series 2019-1, Class A1 (i) | | | |
| Verus Securitization Trust |
| Series 2019-INV3, Class A2 (i) | | | |
| Series 2020-INV1, Class A3, steps up to 4.89% on 05/26/24 (i) (k) | | | |
| Series 2022-5, Class A1, steps up to 4.80% on 06/25/26 (i) (k) | | | |
| Vista Point Securitization Trust |
| Series 2020-1, Class M1 (i) | | | |
| Wells Fargo Mortgage Backed Securities Trust |
| Series 2019-1, Class A1 (i) | | | |
See Notes to Financial Statements
First Trust Low Duration Opportunities ETF (LMBS)Portfolio of Investments (Continued)October 31, 2023 | | | | |
MORTGAGE-BACKED SECURITIES (Continued) |
| Collateralized Mortgage Obligations (Continued) | |
| WinWater Mortgage Loan Trust |
| Series 2016-1, Class 1A18 (i) | | | |
| Series 2016-1, Class 2A3 (i) | | | |
| Series 2016-1, Class B1 (e) (i) | | | |
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| Commercial Mortgage-Backed Securities — 5.3% | |
| BAMLL Commercial Mortgage Securities Trust |
| Series 2013-WBRK, Class A (e) (i) | | | |
| |
| Series 2018-TALL, Class A, 1 Mo. CME Term SOFR + CSA + 0.87% (a) (i) | | | |
| |
| Series 2023-V2, Class XA, IO (e) | | | |
| |
| Series 2021-WILL, Class A, 1 Mo. CME Term SOFR + CSA + 1.75% (a) (i) | | | |
| Series 2022-OANA, Class A, 1 Mo. CME Term SOFR + CSA + 1.90% (a) (i) | | | |
| BX Commercial Mortgage Trust |
| Series 2019-IMC, Class A, 1 Mo. CME Term SOFR + CSA + 1.00% (a) (i) | | | |
| |
| Series 2023-CITY, Class A, 1 Mo. CME Term SOFR + 2.62% (a) (i) | | | |
| CFCRE Commercial Mortgage Trust |
| Series 2017-C8, Class XA, IO (e) | | | |
| Citigroup Commercial Mortgage Trust |
| Series 2014-GC23, Class B | | | |
| Series 2016-P4, Class XA, IO (e) | | | |
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| Series 2012-CR3, Class AM (i) | | | |
| Series 2013-CR13, Class AM | | | |
| Series 2014-CR15, Class AM | | | |
| Series 2014-CR21, Class AM | | | |
| Credit Suisse Mortgage Trust |
| Series 2020-WEST, Class A (i) | | | |
| CSAIL Commercial Mortgage Trust |
| Series 2020-C19, Class XA, IO (e) | | | |
| |
| Series 2023-V1, Class XA, IO (a) | | | |
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| Series 2016-HHV, Class A (i) | | | |
| JP Morgan Chase Commercial Mortgage Securities Trust |
| Series 2017-JP5, Class A4 | | | |
| Series 2018-PHH, Class A, 1 Mo. CME Term SOFR + CSA + 1.21% (a) (i) | | | |
| Series 2020-ACE, Class A (i) | | | |
See Notes to Financial Statements
First Trust Low Duration Opportunities ETF (LMBS)Portfolio of Investments (Continued)October 31, 2023 | | | | |
MORTGAGE-BACKED SECURITIES (Continued) |
| Commercial Mortgage-Backed Securities (Continued) | |
| |
| Series 2022-BMR2, Class A1, 1 Mo. CME Term SOFR + 1.30% (a) (i) | | | |
| MHC Commercial Mortgage Trust |
| Series 2021-MHC, Class A, 1 Mo. CME Term SOFR + CSA + 0.80% (a) (i) | | | |
| Morgan Stanley Bank of America Merrill Lynch Trust |
| Series 2014-C15, Class AS | | | |
| Series 2016-C31, Class A4 | | | |
| Morgan Stanley Capital I Trust |
| Series 2018-MP, Class A (e) (i) | | | |
| |
| Series 2019-OBP, Class A (i) | | | |
| Queens Center Mortgage Trust |
| Series 2013-QCA, Class A (i) | | | |
| RBS Commercial Funding, Inc. Trust |
| Series 2013-GSP, Class A (e) (i) | | | |
| Ready Capital Mortgage Financing LLC |
| Series 2021-FL6, Class A, 1 Mo. CME Term SOFR + CSA + 0.95% (a) (i) | | | |
| |
| Series 2022-FL8, Class A, 1 Mo. CME Term SOFR + 2.25% (a) (i) | | | |
| |
| Series 2021-HT1, Class A, 1 Mo. CME Term SOFR + CSA + 1.65% (a) (i) | | | |
| Wells Fargo Commercial Mortgage Trust |
| Series 2015-NXS2, Class B (e) | | | |
| Series 2020-SDAL, Class C, 1 Mo. CME Term SOFR + CSA + 1.74% (a) (i) | | | |
| |
| Series 2014-MONT, Class A (e) (i) | | | |
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| Total Mortgage-Backed Securities | |
| | |
U.S. GOVERNMENT BONDS AND NOTES — 5.0% |
| U.S. Treasury Inflation Indexed Note (l) | | | |
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| Total U.S. Government Bonds and Notes | |
| | |
ASSET-BACKED SECURITIES — 3.5% |
| American Credit Acceptance Receivables Trust |
| Series 2022-1, Class B (i) | | | |
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| |
| Series 2021-EBO1, Class M1 (i) | | | |
See Notes to Financial Statements
First Trust Low Duration Opportunities ETF (LMBS)Portfolio of Investments (Continued)October 31, 2023 | | | | |
ASSET-BACKED SECURITIES (Continued) |
| Citibank Credit Card Issuance Trust |
| Series 2017-A6, Class A6, 1 Mo. CME Term SOFR + CSA + 0.77% (a) | | | |
| Corevest American Finance Trust |
| Series 2020-1, Class A1 (i) | | | |
| Series 2020-3, Class A (i) | | | |
| Series 2020-4, Class A (i) | | | |
| CWABS, Inc. Asset-Backed Certificates Trust |
| Series 2004-5, Class M1, 1 Mo. CME Term SOFR + CSA + 0.86% (a) | | | |
| Diamond Resorts Owner Trust |
| Series 2021-1A, Class A (i) | | | |
| |
| Series 2021-1A, Class A (i) | | | |
| GM Financial Consumer Automobile Receivables Trust |
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| |
| Series 2006-SEA1, Class M2, 1 Mo. CME Term SOFR + CSA + 1.65% (a) (i) | | | |
| Hyundai Auto Receivables Trust |
| | | | |
| |
| Series 2021-CRE3, Class A, 1 Mo. CME Term SOFR + CSA + 1.50% (a) (i) | | | |
| |
| Series 2022-1A, Class A2 (i) | | | |
| |
| Series 2023-5, Class A (i) | | | |
| Sierra Timeshare Receivables Funding LLC |
| Series 2019-1A, Class A (i) | | | |
| Series 2020-2A, Class A (i) | | | |
| |
| Series 2020-SFR1, Class A (i) | | | |
| |
| Series 2022-7, Class A1A, steps up to 5.98% on 11/20/24 (k) | | | |
| | | | |
| Total Asset-Backed Securities | |
| | |
| | |
EXCHANGE-TRADED FUNDS — 0.0% |
| | |
| First Trust Intermediate Government Opportunities ETF (n) | |
| First Trust Long Duration Opportunities ETF (n) | |
| Total Exchange-Traded Funds | |
| | |
See Notes to Financial Statements
First Trust Low Duration Opportunities ETF (LMBS)Portfolio of Investments (Continued)October 31, 2023 | | | | |
U.S. TREASURY BILLS — 10.6% |
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| Total U.S. Treasury Bills | |
| | |
| | |
MONEY MARKET FUNDS — 1.7% |
| Morgan Stanley Institutional Liquidity Funds - Treasury Portfolio - Institutional Class - 5.22% (o) | |
| | |
| Total Investments — 115.6% | |
| | |
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|
| Call Options Purchased — 0.0% | |
| 2 Year Mid-Curve Options on 3 Months SOFR Futures Call | | | | |
| 2 Year Mid-Curve Options on 3 Months SOFR Futures Call | | | | |
| 2 Year Mid-Curve Options on 3 Months SOFR Futures Call | | | | |
| U.S. 2-Year Treasury Futures Call | | | | |
| U.S. 10-Year Treasury Futures Call | | | | |
| | |
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U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES SOLD SHORT — (6.5)% |
| Federal National Mortgage Association | | | |
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See Notes to Financial Statements
First Trust Low Duration Opportunities ETF (LMBS)Portfolio of Investments (Continued)October 31, 2023 | | | | |
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES SOLD SHORT (Continued) |
| Federal National Mortgage Association (Continued) | | | |
| | | | |
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| Total Investments Sold Short — (6.5)% | |
| | |
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|
| Call Options Written — (0.0)% | |
| 3 Month SOFR Futures Call | | | | |
| 1 Year Mid-Curve Options on 3 Months SOFR Futures Call | | | | |
| U.S. 2-Year Treasury Futures Call | | | | |
| U.S. 5-Year Treasury Futures Call | | | | |
| U.S. 10-Year Treasury Futures Call | | | | |
| U.S. 10-Year Treasury Futures Call | | | | |
| U.S. Treasury Long Bond Futures Call | | | | |
| U.S. Treasury Long Bond Futures Call | | | | |
| U.S. Treasury Long Bond Futures Call | | | | |
| U.S. Treasury Long Bond Futures Call | | | | |
| U.S. Treasury Long Bond Futures Call | | | | |
| U.S. Treasury Long Bond Futures Call | | | | |
| U.S. Treasury Long Bond Futures Call | | | | |
| Ultra U.S. Treasury Long Bond Futures Call | | | | |
| Ultra U.S. Treasury Long Bond Futures Call | | | | |
| Ultra U.S. Treasury Long Bond Futures Call | | | | |
| Total Call Options Written | |
| (Premiums received $3,198,884) | |
| Put Options Written — (0.7)% | |
| | | | | |
| 2 Year Mid-Curve Options on 3 Months SOFR Futures Put | | | | |
| 2 Year Mid-Curve Options on 3 Months SOFR Futures Put | | | | |
| U.S. 2-Year Treasury Futures Put | | | | |
| U.S. 2-Year Treasury Futures Put | | | | |
| U.S. 2-Year Treasury Futures Put | | | | |
| U.S. 2-Year Treasury Futures Put | | | | |
| U.S. 2-Year Treasury Futures Put | | | | |
| U.S. 5-Year Treasury Futures Put | | | | |
| U.S. 5-Year Treasury Futures Put | | | | |
| U.S. 5-Year Treasury Futures Put | | | | |
| U.S. 5-Year Treasury Futures Put | | | | |
| U.S. 5-Year Treasury Futures Put | | | | |
| U.S. 10-Year Treasury Futures Put | | | | |
| U.S. 10-Year Treasury Futures Put | | | | |
| U.S. Treasury Long Bond Futures Put | | | | |
| U.S. Treasury Long Bond Futures Put | | | | |
See Notes to Financial Statements
First Trust Low Duration Opportunities ETF (LMBS)Portfolio of Investments (Continued)October 31, 2023 | | | | | |
WRITTEN OPTIONS (Continued) |
| Put Options Written (Continued) | |
| Ultra U.S. Treasury Long Bond Futures Put | | | | |
| Ultra U.S. Treasury Long Bond Futures Put | | | | |
| Total Put Options Written | |
| (Premiums received $11,367,333) | |
| | |
| (Premiums received $14,566,217) | |
| Net Other Assets and Liabilities — (8.4)% | |
| | |
Futures Contracts at October 31, 2023 (See Note 2D - Futures Contracts in the Notes to Financial Statements):
| | | | | Unrealized
Appreciation
(Depreciation)/
Value |
U.S. 2-Year Treasury Notes | | | | | |
U.S. 5-Year Treasury Notes | | | | | |
U.S. 10-Year Treasury Notes | | | | | |
U.S. Treasury Long Bond Futures | | | | | |
Ultra 10-Year U.S. Treasury Notes | | | | | |
Ultra U.S. Treasury Bond Futures | | | | | |
| | | | | |
| Floating or variable rate security. |
| Inverse floating rate security. |
| Weighted Average Coupon security. Coupon is based on the blended interest rate of the underlying holdings, which may have different coupons. The coupon may change in any period. |
| |
| Collateral Strip Rate security. Coupon is based on the weighted net interest rate of the investment’s underlying collateral. The interest rate resets periodically. |
| Pursuant to procedures adopted by the Trust’s Board of Trustees, this security has been determined to be illiquid by First Trust Advisors L.P., the Fund’s advisor (the “Advisor”). |
| This security is fair valued by the Advisor’s Pricing Committee in accordance with procedures approved by the Trust’s Board of Trustees, and in accordance with provisions of the Investment Company Act of 1940 and rules thereunder, as amended. At October 31, 2023, securities noted as such are valued at $7,195,881 or 0.2% of net assets. |
| This security’s value was determined using significant unobservable inputs (see Note 2A- Portfolio Valuation in the Notes to Financial Statements). |
| This security, sold within the terms of a private placement memorandum, is exempt from registration upon resale under Rule 144A of the Securities Act of 1933, as amended, and may be resold in transactions exempt from registration, normally to qualified institutional buyers. Pursuant to procedures adopted by the Trust’s Board of Trustees, this security has been determined to be liquid by the Advisor. Although market instability can result in periods of increased overall market illiquidity, liquidity for each security is determined based on security specific factors and assumptions, which require subjective judgment. At October 31, 2023, securities noted as such amounted to $476,467,667 or 12.4% of net assets. |
| All or a portion of this security is part of a mortgage dollar roll agreement (see Note 2I - Mortgage Dollar Rolls and TBA Transactions in the Notes to Financial Statements). |
| Step-up security. A security where the coupon increases or steps up at a predetermined date. |
| Security whose principal value is adjusted in accordance with changes to the country’s Consumer Price Index. Interest is calculated on the basis of the current adjusted principal value. |
| All or a portion of this security is segregated as collateral for open futures and options contracts. At October 31, 2023, the segregated value of these securities amounts to $78,702,841. |
See Notes to Financial Statements
First Trust Low Duration Opportunities ETF (LMBS)Portfolio of Investments (Continued)October 31, 2023 | Investment in an affiliated fund. |
| Rate shown reflects yield as of October 31, 2023. |
Abbreviations throughout the Portfolio of Investments: |
| – Chicago Mercantile Exchange |
| – Credit Spread Adjustment |
| – Interest-Only Security - Principal amount shown represents par value on which interest payments are based |
| – London Interbank Offered Rate |
| – Principal-Only Security |
| – Real Estate Mortgage Investment Conduit |
| – Secured Overnight Financing Rate |
| – Separate Trading of Registered Interest and Principal of Securities |
| – To-Be-Announced Security |
Valuation InputsA summary of the inputs used to value the Fund’s investments as of October 31, 2023 is as follows (see Note 2A - Portfolio Valuation in the Notes to Financial Statements):
|
| | | Level 2
Significant
Observable
Inputs | Level 3
Significant
Unobservable
Inputs |
U.S. Government Agency Mortgage-Backed Securities | | | | |
Mortgage-Backed Securities | | | | |
U.S. Government Bonds and Notes | | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
|
| | | Level 2
Significant
Observable
Inputs | Level 3
Significant
Unobservable
Inputs |
U.S. Government Agency Mortgage-Backed Securities Sold Short | | | | |
| | | | |
| | | | |
| | | | |
| See Portfolio of Investments for industry breakout. |
| Includes cumulative appreciation/depreciation on futures contracts as reported in the Futures Contracts table. Only the current day’s variation margin is presented on the Statement of Assets and Liabilities. |
Level 3 investments are fair valued by the Advisor’s Pricing Committee and are footnoted in the Portfolio of Investments. All Level 3 values are based on unobservable inputs.
See Notes to Financial Statements
First Trust Low Duration Opportunities ETF (LMBS)Statement of Assets and Liabilities
October 31, 2023
| |
Investments, at value - Unaffiliated | |
Investments, at value - Affiliated | |
Total investments, at value | |
Options contracts purchased, at value | |
| |
Cash segregated as collateral for open futures and written options contracts | |
| |
Investment securities sold | |
| |
| |
| |
|
| |
Investments sold short, at value | |
Options contracts written, at value | |
| |
Investment securities purchased | |
Distributions to shareholders | |
| |
| |
| |
| |
| |
|
| |
| |
| |
Accumulated distributable earnings (loss) | |
| |
NET ASSET VALUE, per share | |
Number of shares outstanding (unlimited number of shares authorized, par value $0.01 per share) | |
Investments, at cost - Unaffiliated | |
Investments, at cost - Affiliated | |
Total investments, at cost | |
Premiums paid on options contracts purchased | |
Investments sold short, proceeds | |
Premiums received on options contracts written | |
See Notes to Financial Statements
First Trust Low Duration Opportunities ETF (LMBS)Statement of Operations
For the Year Ended October 31, 2023
| |
| |
| |
| |
| |
|
| |
| |
| |
NET INVESTMENT INCOME (LOSS) | |
|
NET REALIZED AND UNREALIZED GAIN (LOSS): | |
Net realized gain (loss) on: | |
Investments - Unaffiliated | |
| |
| |
Purchased options contracts | |
Written options contracts | |
| |
| |
Net change in unrealized appreciation (depreciation) on: | |
Investments - Unaffiliated | |
| |
| |
Purchased options contracts | |
Written options contracts | |
| |
Net change in unrealized appreciation (depreciation) | |
NET REALIZED AND UNREALIZED GAIN (LOSS) | |
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS | |
See Notes to Financial Statements
First Trust Low Duration Opportunities ETF (LMBS)Statements of Changes in Net Assets
| | |
| | |
Net investment income (loss) | | |
| | |
Net change in unrealized appreciation (depreciation) | | |
Net increase (decrease) in net assets resulting from operations | | |
|
DISTRIBUTIONS TO SHAREHOLDERS FROM: | | |
| | |
|
SHAREHOLDER TRANSACTIONS: | | |
Proceeds from shares sold | | |
| | |
Net increase (decrease) in net assets resulting from shareholder transactions | | |
Total increase (decrease) in net assets | | |
|
| | |
| | |
| | |
|
CHANGES IN SHARES OUTSTANDING: | | |
Shares outstanding, beginning of period | | |
| | |
| | |
Shares outstanding, end of period | | |
See Notes to Financial Statements
First Trust Low Duration Opportunities ETF (LMBS)Financial Highlights
For a share outstanding throughout each period
| |
| | | | | |
Net asset value, beginning of period | | | | | |
Income from investment operations: | | | | | |
Net investment income (loss) | | | | | |
Net realized and unrealized gain (loss) | | | | | |
Total from investment operations | | | | | |
Distributions paid to shareholders from: | | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Net asset value, end of period | | | | | |
| | | | | |
|
Ratios to average net assets/supplemental data: | | | | | |
Net assets, end of period (in 000’s) | | | | | |
Ratio of total expenses to average net assets (c) | | | | | |
Ratio of net investment income (loss) to average net assets | | | | | |
Portfolio turnover rate (d) (e) | | | | | |
| Based on average shares outstanding. |
| Total return is calculated assuming an initial investment made at the net asset value at the beginning of the period, reinvestment of all distributions at net asset value during the period, and redemption at net asset value on the last day of the period. The returns presented do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. Total return is calculated for the time period presented and is not annualized for periods of less than a year. |
| The Fund indirectly bears its proportionate share of fees and expenses incurred by the underlying funds in which the Fund invests. This ratio does not include these indirect fees and expenses. |
| 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. |
| The portfolio turnover rate not including mortgage dollar rolls was 556%, 641%, 368%, 245%, and 246% for the years ended October 31, 2023, 2022, 2021, 2020, and 2019 respectively. |
See Notes to Financial Statements
Notes to Financial Statements
First Trust Low Duration Opportunities ETF (LMBS)October 31, 2023 1. Organization
First Trust Exchange-Traded Fund IV (the “Trust”) is an open-end management investment company organized as a Massachusetts business trust on September 15, 2010, and is registered with the Securities and Exchange Commission under the Investment Company Act of 1940, as amended (the “1940 Act”).
The Trust currently consists of eighteen exchange-traded funds that are offering shares. This report covers the First Trust Low Duration Opportunities ETF (the “Fund”), a diversified series of the Trust, which trades under the ticker “LMBS” on Nasdaq, Inc. (“Nasdaq”). The Fund represents a separate series of shares of beneficial interest in the Trust. Unlike conventional mutual funds, the Fund issues and redeems shares on a continuous basis, at net asset value (“NAV”), only in large blocks of shares known as “Creation Units.”
The Fund is an actively managed exchange-traded fund (“ETF”). The Fund’s primary investment objective is to generate current income. The Fund’s secondary investment objective is to provide capital appreciation. The Fund seeks to achieve its investment objectives by investing, under normal market conditions, at least 60% of its net assets (including investment borrowings) in mortgage-related debt securities and other mortgage-related instruments (collectively, “Mortgage-Related Investments”). The Fund normally expects to invest in Mortgage-Related Investments tied to residential and commercial mortgages. Mortgage-Related Investments consist of: (1) residential mortgage-backed securities (RMBS); (2) commercial mortgage-backed securities (CMBS); (3) stripped mortgage-backed securities (SMBS), which are mortgage-backed securities where mortgage payments are divided up between paying the loan’s principal and paying the loan’s interests; and (4) collateralized mortgage obligations (CMOs) and real estate mortgage investment conduits (REMICs) where they are divided into multiple classes with each class being entitled to a different share of the principal and/or interest payments received from the pool of underlying assets. The Fund may also invest in investment companies, including ETFs, that invest primarily in Mortgage-Related Investments. The Fund will limit its investments in Mortgage-Related Investments that are neither issued nor guaranteed by Government Entities(1). to 20% of its net assets (including investment borrowings). The Fund may invest, without limitation, in mortgage dollar rolls. The Fund intends to enter into mortgage dollar rolls only with high quality securities dealers and banks, as determined by the Fund’s investment advisor, First Trust Advisors L.P. (“First Trust” or the “Advisor”). The Fund may also invest in to-be-announced transactions (“TBA Transactions”). Further, the Fund may enter into short sales as part of its overall portfolio management strategies or to offset a potential decline in the value of a security; however, the Fund does not expect, under normal market conditions, to engage in short sales with respect to more than 30% of the value of its net assets (including investment borrowings). Although the Fund intends to invest primarily in investment grade securities, the Fund may invest up to 20% of its net assets (including investment borrowings) in securities of any credit quality, including securities that are below investment grade, which are also known as high yield securities, or commonly referred to as “junk” bonds, or unrated securities that have not been judged by the Advisor to be of comparable quality to rated investment grade securities. In the case of a split rating between one or more of the nationally recognized statistical rating organizations, the Fund will consider the highest rating. The Fund targets an estimated effective duration of three years or less.
2. Significant Accounting Policies
The Fund is considered an investment company and follows accounting and reporting guidance under Financial Accounting Standards Board Accounting Standards Codification Topic 946, “Financial Services-Investment Companies.” The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of the financial statements. The preparation of the financial statements in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates.
A. Portfolio Valuation
The Fund’s NAV is determined daily as of the close of regular trading on the New York Stock Exchange (“NYSE”), normally 4:00 p.m. Eastern time, on each day the NYSE is open for trading. If the NYSE closes early on a valuation day, the NAV is determined as of that time. Domestic debt securities and foreign securities are priced using data reflecting the earlier closing of the principal markets for those securities. The Fund’s NAV is calculated by dividing the value of all assets of the Fund (including accrued interest and dividends), less all liabilities (including accrued expenses and dividends declared but unpaid), by the total number of shares outstanding.
(1)
“Government Entities” means the U.S. government, its agencies and instrumentalities, and U.S. government-sponsored entities.
Notes to Financial Statements (Continued)
First Trust Low Duration Opportunities ETF (LMBS)October 31, 2023 The Fund’s investments are valued daily at market value or, in the absence of market value with respect to any portfolio securities, at fair value. Market value prices represent readily available market quotations such as last sale or official closing prices from a national or foreign exchange (i.e., a regulated market) and are primarily obtained from third-party pricing services. Fair value prices represent any prices not considered market value prices and are either obtained from a third-party pricing service or are determined by the Advisor’s Pricing Committee in accordance with valuation procedures approved by the Trust’s Board of Trustees, and in accordance with provisions of the 1940 Act and rules thereunder. Investments valued by the Advisor’s Pricing Committee, if any, are footnoted as such in the footnotes to the Portfolio of Investments. The Fund’s investments are valued as follows:
U.S. government securities, mortgage-backed securities, asset-backed securities, and other debt securities are fair valued on the basis of valuations provided by a third-party pricing service approved by the Advisor’s Pricing Committee, which may use the following valuation inputs when available:
7)
reference data including market research publications.
Pricing services generally value fixed-income securities assuming orderly transactions of an institutional round lot size, but a Fund may hold or transact in such securities in smaller, odd lot sizes. Odd lots may trade at lower prices than institutional round lots.
Equity securities traded in an over-the-counter market are valued at the close price or the last trade price.
Common stocks, ETFs 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 primary exchange for such securities.
Shares of open-end funds are valued based on NAV per share.
Exchange-traded futures contracts are valued at the end of the day settlement price.
Exchange-traded options contracts are valued at the closing price in the market where such contracts are principally traded. If no closing price is available, exchange-traded options contracts are valued at the mean of their most recent bid and ask price, if both are available. Options contracts traded in the over-the-counter market may be valued as follows, depending on the market in which the investment trades: (1) the mean of the most recent bid and ask price, if available; or (2) a price based on the equivalent exchange-traded option.
Fixed income and other debt securities having a remaining maturity of sixty 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 Advisor’s Pricing Committee at fair value. These securities generally include, but are not limited to, restricted securities (securities which may
Notes to Financial Statements (Continued)
First Trust Low Duration Opportunities ETF (LMBS)October 31, 2023 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 most recent price provided by a pricing service;
2)
available market prices for the fixed-income security;
3)
the fundamental business data relating to the borrower/issuer;
4)
an evaluation of the forces which influence the market in which these securities are purchased and sold;
5)
the type, size and cost of a security;
6)
the financial statements of the borrower/issuer or the financial condition of the country of issue;
7)
the credit quality and cash flow of the borrower/issuer, or country of issue, based on the Pricing Committee’s, sub-advisor’s or portfolio manager’s analysis, as applicable, or external analysis;
8)
the information as to any transactions in or offers for the security;
9)
the price and extent of public trading in similar securities of the borrower/issuer, or comparable companies;
11)
the quality, value and salability of collateral, if any, securing the security;
12)
the business prospects of the borrower/issuer, including any ability to obtain money or resources from a parent or affiliate and an assessment of the borrower’s/issuer’s management (for corporate debt only);
13)
the prospects for the borrower’s/issuer’s industry, and multiples (of earnings and/or cash flows) being paid for similar businesses in that industry (for corporate debt only);
14)
other relevant factors.
The Fund is subject to fair value accounting standards that define fair value, establish the framework for measuring fair value and provide a three-level hierarchy for fair valuation based upon the inputs to the valuation as of the measurement date. The three levels of the fair value hierarchy are as follows:
• Level 1 – Level 1 inputs are quoted prices in active markets for identical investments. An active market is a market in which transactions for the investment occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
• Level 2 – Level 2 inputs are observable inputs, either directly or indirectly, and include the following:
o Quoted prices for similar investments in active markets.
o Quoted prices for identical or similar investments in markets that are non-active. A non-active market is a market where there are few transactions for the investment, the prices are not current, or price quotations vary substantially either over time or among market makers, or in which little information is released publicly.
o Inputs other than quoted prices that are observable for the investment (for example, interest rates and yield curves observable at commonly quoted intervals, volatilities, prepayment speeds, loss severities, credit risks, and default rates).
o Inputs that are derived principally from or corroborated by observable market data by correlation or other means.
• Level 3 – Level 3 inputs are unobservable inputs. Unobservable inputs may reflect the reporting entity’s own assumptions about the assumptions that market participants would use in pricing the investment.
The inputs or methodologies used for valuing investments are not necessarily an indication of the risk associated with investing in those investments. A summary of the inputs used to value the Fund’s investments as of October 31, 2023, is included with the Fund’s Portfolio of Investments.
B. Securities Transactions and Investment Income
Securities transactions are recorded as of the trade date. Realized gains and losses from securities transactions are recorded on the identified cost basis. Dividend income is recorded on the ex-dividend date. Interest income is recorded daily on the accrual basis. Amortization of premiums and accretion of discounts are recorded using the effective interest method.
Notes to Financial Statements (Continued)
First Trust Low Duration Opportunities ETF (LMBS)October 31, 2023 The United Kingdom’s Financial Conduct Authority (the “FCA”), which regulates the London Interbank Offered Rates (“LIBOR”), ceased making LIBOR available as a reference rate over a phase-out period that began December 31, 2021. The overnight and 12-month USD LIBOR settings permanently ceased as of June 30, 2023. The FCA announced that the 1-, 3- and 6-month USD LIBOR settings will continue to be published using a synthetic methodology to serve as a fallback for non-U.S. contracts until September 2024. In response to the discontinuation of LIBOR, investors have added fallback provisions to existing contracts for investments whose value is tied to LIBOR, with most fallback provisions requiring the adoption of the Secured Overnight Financing Rate (“SOFR”) as a replacement rate. There is no assurance that any alternative reference rate, including SOFR, will be similar to or produce the same value or economic equivalence as LIBOR or that instruments using an alternative rate will have the same volume or liquidity. At this time, it is not possible to predict the full impact of the elimination of LIBOR and the establishment of an alternative reference rate on the Fund or its investments.
The Fund invests in interest-only securities. For these securities, if there is a change in the estimated cash flows, based on an evaluation of current information, then the estimated yield is adjusted. Additionally, if the evaluation of current information indicates a permanent impairment of the security, the cost basis of the security is written down and a loss is recognized. Debt obligations may be placed on non-accrual status and the related interest income may be reduced by ceasing current accruals and writing off interest receivables when the collection of all or a portion of interest has become doubtful based on consistently applied procedures. A debt obligation is removed from non-accrual status when the issuer resumes interest payments or when collectability of interest is reasonably assured.
Securities purchased or sold on a when-issued, delayed-delivery or forward purchase commitment basis may have extended settlement periods. The value of the security so purchased is subject to market fluctuations during this period. The Fund maintains liquid assets with a current value at least equal to the amount of its when-issued, delayed-delivery or forward purchase commitments until payment is made. At October 31, 2023, the Fund had no when-issued and delayed-delivery securities. At October 31, 2023, the Fund held $641,040,228 of forward purchase commitments.
C. Short Sales
Short sales are utilized to manage interest rate and spread risk, and are transactions in which securities or other instruments (such as options, forwards, futures or other derivative contracts) are sold that are not currently owned in the Fund’s portfolio. When the Fund engages in a short sale, the Fund must borrow the security sold short and deliver the security to the counterparty. Short selling allows the Fund to profit from a decline in a market price to the extent such decline exceeds the transaction costs and the costs of borrowing the securities. The Fund is charged a fee or premium to borrow the securities sold short and is obligated to repay the lenders of the securities. Any dividends or interest that accrues on the securities during the period of the loan are due to the lenders. A gain, limited to the price at which the security was sold short, or a loss, unlimited in size, will be recognized upon the termination of the short sale; which is effected by the Fund purchasing the security sold short and delivering the security to the lender. Any such gain or loss may be offset, completely or in part, by the change in the value of the long portion of the Fund’s portfolio. The Fund is subject to the risk it may be unable to reacquire a security to terminate a short position except at a price substantially in excess of the last quoted price. Also, there is the risk that the counterparty to a short sale may fail to honor its contractual terms, causing a loss to the Fund.
D. Futures Contracts
The Fund may purchase or sell (i.e., is long or short) exchange-listed futures contracts to hedge against changes in interest rates (interest rate risk). Futures contracts are agreements between the Fund and a counterparty to buy or sell a specific quantity of an underlying instrument at a specified price and at a specified date. Depending on the terms of the contract, futures contracts are settled either through physical delivery of the underlying instrument on the settlement date or by payment of a cash settlement amount on the settlement date. Open futures contracts can also be closed out prior to settlement by entering into an offsetting transaction in a matching futures contract. If the Fund is not able to enter into an offsetting transaction, the Fund will continue to be required to maintain margin deposits on the futures contract. When the contract is closed or expires, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed or expired. This gain or loss is included in “Net realized gain (loss) on futures contracts” on the Statement of Operations.
Upon entering into a futures contract, the Fund must deposit funds, called margin, with its custodian in the name of the clearing broker equal to a specified percentage of the current value of the contract. Open futures contracts are marked-to-market daily with the change in value recognized as a component of “Net change in unrealized appreciation (depreciation) on futures contracts” on the Statement of Operations. Pursuant to the contract, the Fund agrees to receive from or pay to the broker an amount of cash equal to the daily fluctuation in value of the contract. Such receipts or payments are known as variation margin and are included in “Variation margin”
Notes to Financial Statements (Continued)
First Trust Low Duration Opportunities ETF (LMBS)October 31, 2023 receivable or payable on the Statement of Assets and Liabilities. If market conditions change unexpectedly, the Fund may not achieve the anticipated benefits of the futures contract and may realize a loss. The use of futures contracts involves the risk of imperfect correlation in movements in the price of the futures contracts, interest rates and the underlying instruments.
E. Options Contracts
The Fund may invest in exchange-listed options on U.S. Treasury securities, exchange-listed options on U.S. Treasury futures contracts and exchange-listed U.S. Treasury futures contracts. The Fund may also invest up to 20% of its net assets in over-the-counter derivatives. The Fund uses derivative instruments primarily to hedge interest rate risk and actively manage interest rate exposure. The primary risk exposure is interest rate risk.
The Fund may purchase (buy) or write (sell) put and call options on futures contracts and enter into closing transactions with respect to such options to terminate an existing position. A futures option gives the holder the right, in return for the premium paid, to assume a long position (call) or short position (put) in a futures contract at a specified exercise price prior to the expiration of the option. Upon exercise of a call option, the holder acquires a long position in the futures contract and the writer is assigned the opposite short position. In the case of a put option, the opposite is true. Prior to exercise or expiration, a futures option contract may be closed out by an offsetting purchase or sale of a futures option of the same series. When the Fund writes (sells) an option, an amount equal to the premium received by the Fund is included in “Options contracts written, at value” on the Statement of Assets and Liabilities. When the Fund purchases (buys) an option, the premium paid represents the cost of the option, which is included in “Premiums paid on options contracts purchased” on the Statement of Assets and Liabilities. Options are marked-to-market daily and their value is affected by changes in the value of the underlying security, changes in interest rates, changes in the actual or perceived volatility of the securities markets and the underlying securities, and the remaining time to the option’s expiration. The value of options may also be adversely affected if the market for the options becomes less liquid or the trading volume diminishes.
The Fund uses options on futures contracts in connection with hedging strategies. Generally, these strategies are applied under the same market and market sector conditions in which the Fund uses put and call options on securities. The purchase of put options on futures contracts is analogous to the purchase of puts on securities so as to hedge the Fund’s securities holdings against the risk of declining market prices. The writing of a call option or the purchasing of a put option on a futures contract constitutes a partial hedge against declining prices of securities which are deliverable upon exercise of the futures contract. If the price at expiration of a written call option is below the exercise price, the Fund will retain the full amount of the option premium which provides a partial hedge against any decline that may have occurred in the Fund’s holdings of securities. If the price when the option is exercised is above the exercise price, however, the Fund will incur a loss, which may be offset, in whole or in part, by the increase in the value of the securities held by the Fund that were being hedged. Writing a put option or purchasing a call option on a futures contract serves as a partial hedge against an increase in the value of the securities the Fund intends to acquire. Realized gains and losses on written options are included in “Net realized gain (loss) on written options contracts” on the Statement of Operations. Realized gains and losses on purchased options are included in “Net realized gain (loss) on purchased options contracts” on the Statement of Operations.
The Fund is required to deposit and maintain margin with respect to put and call options on futures contracts written by it. Such margin deposits will vary depending on the nature of the underlying futures contract (and the related initial margin requirements), the current market value of the option and other futures positions held by the Fund. The Fund will pledge in a segregated account at the Fund’s custodian, liquid assets, such as cash, U.S. government securities or other high-grade liquid debt obligations equal in value to the amount due on the underlying obligation. Such segregated assets will be marked-to-market daily, and additional assets will be pledged in the segregated account whenever the total value of the pledged assets falls below the amount due on the underlying obligation.
The risks associated with the use of options on future contracts include the risk that the Fund may close out its position as a writer of an option only if a liquid secondary market exists for such options, which cannot be assured. The Fund’s successful use of options on futures contracts depends on the Advisor’s ability to correctly predict the movement in prices on futures contracts and the underlying instruments, which may prove to be incorrect. In addition, there may be imperfect correlation between the instruments being hedged and the futures contract subject to option.
F. Interest-Only Securities
An interest-only security (“IO Security”) is the interest-only portion of a mortgage-backed security that receives some or all of the interest portion of the underlying mortgage-backed security and little or no principal. A reference principal value called a notional value is used to calculate the amount of interest due to the IO Security. IO Securities are sold at a deep discount to their notional
Notes to Financial Statements (Continued)
First Trust Low Duration Opportunities ETF (LMBS)October 31, 2023 principal amount. Generally speaking, when interest rates are falling and prepayment rates are increasing, the value of an IO Security will fall. Conversely, when interest rates are rising and prepayment rates are decreasing, generally the value of an IO Security will rise. These securities, if any, are identified on the Portfolio of Investments.
G. Principal-Only Securities
A principal-only security (“PO Security”) is the principal-only portion of a mortgage-backed security that does not receive any interest, is priced at a deep discount to its redemption value and ultimately receives the redemption value. Generally speaking, when interest rates are falling and prepayment rates are increasing, the value of a PO Security will rise. Conversely, when interest rates are rising and prepayment rates are decreasing, generally the value of a PO Security will fall. These securities, if any, are identified on the Portfolio of Investments.
H. Stripped Mortgage-Backed Securities
Stripped mortgage-backed securities are created by segregating the cash flows from underlying mortgage loans or mortgage securities to create two or more new securities, each with a specified percentage of the underlying security’s principal or interest payments. Mortgage-backed securities may be partially stripped so that each investor class receives some interest and some principal. When securities are completely stripped, however, all of the interest is distributed to holders of one type of security known as an IO Security and all of the principal is distributed to holders of another type of security known as a PO Security. These securities, if any, are identified on the Portfolio of Investments.
I. Mortgage Dollar Rolls and TBA Transactions
The Fund may invest, without limitation, in mortgage dollar rolls. The Fund intends to enter into mortgage dollar rolls only with high quality securities dealers and banks, as determined by the Fund’s investment advisor. In a mortgage dollar roll, the Fund will sell (or buy) mortgage-backed securities for delivery on a specified date and simultaneously contract to repurchase (or sell) substantially similar (same type, coupon and maturity) securities on a future date. Mortgage dollar rolls are recorded as separate purchases and sales in the Fund. The Fund may also invest in TBA Transactions. A TBA Transaction is a method of trading mortgage-backed securities. TBA Transactions generally are conducted in accordance with widely-accepted guidelines which establish commonly observed terms and conditions for execution, settlement and delivery. In a TBA Transaction, the buyer and the seller agree on general trade parameters such as agency, settlement date, par amount and price.
J. Affiliated Transactions
The Fund invests in securities of affiliated funds. The Fund’s investment performance and risks are directly related to the investment performance and risks of the affiliated funds. Dividend income, if any, realized gains and losses, and change in appreciation (depreciation) from affiliated funds are presented on the Statement of Operations.
Amounts relating to these investments at October 31, 2023 and for the fiscal year then ended are as follows:
| | | | | Change in
Unrealized
Appreciation
(Depreciation) | | | |
First Trust Intermediate Government Opportunities ETF | | | | | | | | |
First Trust Long Duration Opportunities ETF | | | | | | | | |
| | | | | | | | |
K. Dividends and Distributions to Shareholders
Dividends from net investment income of the Fund, 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, are distributed at least annually. The Fund may also designate a portion of the amount paid to redeeming shareholders as a distribution for tax purposes.
Distributions in cash may be reinvested automatically in additional whole shares only if the broker through whom the shares were purchased makes such option available. Such shares will generally be reinvested by the broker based upon the market price of those shares and investors may be subject to customary brokerage commissions charged by the broker.
Notes to Financial Statements (Continued)
First Trust Low Duration Opportunities ETF (LMBS)October 31, 2023 Distributions from net investment income and realized capital gains are determined in accordance with federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These permanent differences are primarily due to the varying treatment of income and gain/loss on portfolio securities held by the Fund and have no impact on net assets or NAV per share. Temporary differences, which arise from recognizing certain items of income, expense and gain/loss in different periods for financial statement and tax purposes, will reverse at some time in the future.
The tax character of distributions paid during the fiscal years ended October 31, 2023 and 2022 was as follows:
As of October 31, 2023, the components of distributable earnings on a tax basis for the Fund were as follows:
Undistributed ordinary income | |
Accumulated capital and other gain (loss) | |
Net unrealized appreciation (depreciation) | |
L. Income Taxes
The Fund intends to continue to qualify as a regulated investment company by complying with the requirements under Subchapter M of the Internal Revenue Code of 1986, as amended, which includes distributing substantially all of its net investment income and net realized gains to shareholders. Accordingly, no provision has been made for federal and state income taxes. However, due to the timing and amount of distributions, the Fund may be subject to an excise tax of 4% of the amount by which approximately 98% of the Fund’s taxable income exceeds the distributions from such taxable income for the calendar year.
The Fund 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 2020, 2021, 2022, and 2023 remain open to federal and state audit. As of October 31, 2023, management has evaluated the application of these standards to the Fund and has determined that no provision for income tax is required in the Fund’s 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, 2023, for federal income tax purposes, the Fund had $10,798,525 of capital loss carryforwards available, to the extent provided by regulations, to offset future capital gains. To the extent that these loss carryforwards are used to offset future capital gains, it is probable that the capital gains so offset will not be distributed to the Fund’s shareholders.
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, 2023, the Fund had no net late year ordinary or capital losses.
In order to present paid-in capital and accumulated distributable earnings (loss) (which consists of accumulated net investment income (loss), accumulated net realized gain (loss) on investments and net unrealized appreciation (depreciation) on investments) on the Statement of Assets and Liabilities that more closely represent their tax character, certain adjustments have been made to paid-in capital, accumulated net investment income (loss) and accumulated net realized gain (loss) on investments. These adjustments are primarily due to the difference between book and tax treatments of income and gains on various investment securities held by the Funds and in-kind transactions. The results of operations and net assets were not affected by these adjustments. For the fiscal year ended October 31, 2023, the adjustments for the Fund were as follows:
Notes to Financial Statements (Continued)
First Trust Low Duration Opportunities ETF (LMBS)October 31, 2023 Accumulated
Net Investment
Income (Loss) | Accumulated
Net Realized
Gain (Loss)
on Investments | |
| | |
As of October 31, 2023, the aggregate cost, gross unrealized appreciation, gross unrealized depreciation, and net unrealized appreciation/(depreciation) on investments (including short positions and derivatives, if any) for federal income tax purposes were as follows:
| Gross Unrealized
Appreciation | Gross Unrealized
(Depreciation) | Net Unrealized
Appreciation
(Depreciation) |
| | | |
M. Expenses
Expenses, other than the investment advisory fee and other excluded expenses, are paid by the Advisor (see Note 3).
3. Investment Advisory Fee, Affiliated Transactions and Other Fee Arrangements
First Trust, the investment advisor to the Fund, is a limited partnership with one limited partner, Grace Partners of DuPage L.P., and one general partner, The Charger Corporation. The Charger Corporation is an Illinois corporation controlled by James A. Bowen, Chief Executive Officer of First Trust. First Trust is responsible for the selection and ongoing monitoring of the securities in the Fund’s portfolio, managing the Fund’s business affairs and providing certain administrative services necessary for the management of the Fund.
Pursuant to the Investment Management Agreement between the Trust and the Advisor, First Trust manages the investment of the Fund’s assets and is responsible for the Fund’s expenses, including the cost of transfer agency, custody, fund administration, legal, audit, and other services, but excluding fee payments under the Investment Management Agreement, interest, taxes, acquired fund fees and expenses, if any, brokerage commissions and other expenses connected with the execution of portfolio transactions, distribution and service fees payable pursuant to a Rule 12b-1 plan, if any, and extraordinary expenses. The annual unitary management fee payable by the Fund to First Trust for these services will be reduced at certain levels of the Fund’s net assets (“breakpoints”) and calculated pursuant to the following schedule:
| |
Fund net assets up to and including $2.5 billion | |
Fund net assets greater than $2.5 billion up to and including $5 billion | |
Fund net assets greater than $5 billion up to and including $7.5 billion | |
Fund net assets greater than $7.5 billion up to and including $10 billion | |
Fund net assets greater than $10 billion | |
In addition, the Fund incurs acquired fund fees and expenses. The total of the unitary management fee and acquired fund fees and expenses represents the Fund’s total annual operating expenses.
The Trust has multiple service agreements with The Bank of New York Mellon (“BNYM”). Under the service agreements, BNYM performs custodial, fund accounting, certain administrative services, and transfer agency services for the Fund. As custodian, BNYM is responsible for custody of the Fund’s assets. As fund accountant and administrator, BNYM is responsible for maintaining the books and records of the Fund’s securities and cash. As transfer agent, BNYM is responsible for maintaining shareholder records for the Fund. BNYM is a subsidiary of The Bank of New York Mellon Corporation, a financial holding company.
Each Trustee who is not an officer or employee of First Trust, any sub-advisor or any of their affiliates (“Independent Trustees”) is paid a fixed annual retainer that is allocated equally among each fund in the First Trust Fund Complex. Each Independent Trustee is also paid an annual per fund fee that varies based on whether the fund is a closed-end or other actively managed fund, a target outcome fund or an index fund.
Additionally, the Lead Independent Trustee and the Chairs of the Audit Committee, Nominating and Governance Committee and Valuation Committee are paid annual fees to serve in such capacities, with such compensation allocated pro rata among each fund in
Notes to Financial Statements (Continued)
First Trust Low Duration Opportunities ETF (LMBS)October 31, 2023 the First Trust Fund Complex based on net assets. Independent Trustees are reimbursed for travel and out-of-pocket expenses in connection with all meetings. The Lead Independent Trustee and Committee Chairs rotate every three years. The officers and “Interested” Trustee receive no compensation from the Trust for acting in such capacities.
4. Purchases and Sales of Securities
The costs of purchases of U.S. Government securities and non-U.S. Government securities, excluding short-term investments and investments sold short, for the fiscal year ended October 31, 2023, were $18,510,474,458 and $357,686,554, respectively. The proceeds from sales and paydowns of U.S. Government securities and non-U.S. Government securities, excluding short-term investments and investments sold short, for the fiscal year ended October 31, 2023 were $19,023,922,288 and $546,329,019, respectively. The cost of purchases to cover short sales and the proceeds of short sales were $11,879,187,063 and $11,579,767,745, respectively.
For the fiscal year ended October 31, 2023, the Fund had no in-kind transactions.
5. Derivative Transactions
The following table presents the types of derivatives held by the Fund at October 31, 2023, the primary underlying risk exposure and the location of these instruments as presented on the Statement of Assets and Liabilities.
| | | |
| | Statement of Assets and
Liabilities Location | | Statement of Assets and
Liabilities Location | |
| | Options contracts purchased, at value | | Options contracts written, at value | |
| | Unrealized appreciation on futures contracts* | | Unrealized depreciation on futures contracts* | |
| Includes cumulative appreciation/depreciation on futures contracts as reported in the Fund’s Portfolio of Investments. Only the current day’s variation margin is presented on the Statement of Assets and Liabilities. |
The following table presents the amount of net realized gain (loss) and change in net unrealized appreciation (depreciation) recognized for the fiscal year ended October 31, 2023, on derivative instruments, as well as the primary underlying risk exposure associated with the instruments.
|
Statement of Operations Location | |
Interest Rate Risk Exposure | |
Net realized gain (loss) on: | |
Purchased options contracts | |
Written options contracts | |
| |
Net change in unrealized appreciation (depreciation) on: | |
Purchased options contracts | |
Written options contracts | |
| |
During the fiscal year ended October 31, 2023, the notional value of futures contracts opened and closed were $12,903,566,130 and $13,063,735,566, respectively.
During the fiscal year ended October 31, 2023, the premiums for purchased options contracts opened were $7,215,453 and the premiums for purchased options contracts closed, exercised and expired were $6,862,083.
During the fiscal year ended October 31, 2023, the premiums for written options contracts opened were $67,511,337 and the premiums for written options contracts closed, exercised and expired were $55,534,358.
Notes to Financial Statements (Continued)
First Trust Low Duration Opportunities ETF (LMBS)October 31, 2023 The Fund does not have the right to offset financial assets and financial liabilities related to futures and options contracts on the Statement of Assets and Liabilities.
6. Creations, Redemptions and Transaction Fees
The Fund generally issues and redeems its shares in primary market transactions through a creation and redemption mechanism and does not sell or redeem individual shares. Instead, financial entities known as “Authorized Participants” have contractual arrangements with the Fund or one of the Fund’s service providers to purchase and redeem Fund shares directly with the Fund in large blocks of shares known as “Creation Units.” Prior to the start of trading on every business day, the Fund publishes through the National Securities Clearing Corporation the “basket” of securities, cash or other assets that it will accept in exchange for a Creation Unit of the Fund’s shares. An Authorized Participant that wishes to effectuate a creation of the Fund’s shares deposits with the Fund the “basket” of securities, cash or other assets identified by the Fund that day, and then receives the Creation Unit of the Fund’s shares in return for those assets. After purchasing a Creation Unit, the Authorized Participant may continue to hold the Fund’s shares or sell them in the secondary market. The redemption process is the reverse of the purchase process: the Authorized Participant redeems a Creation Unit of the Fund’s shares for a basket of securities, cash or other assets. The combination of the creation and redemption process with secondary market trading in the Fund’s shares and underlying securities provides arbitrage opportunities that are designed to help keep the market price of the Fund’s shares at or close to the NAV per share of the Fund.
The Fund imposes fees in connection with the purchase of Creation Units. These fees may vary based upon various fact-based circumstances, including, but not limited to, the composition of the securities included in the Creation Unit or the countries in which the transactions are settled. The price for each Creation Unit will equal the daily NAV per share of the Fund times the number of shares in a Creation Unit, plus the fees described above and, if applicable, any operational processing and brokerage costs, transfer fees, stamp taxes and part or all of the spread between the expected bid and offer side of the market related to the securities comprising the creation basket.
The Fund also imposes fees in connection with the redemption of Creation Units. These fees may vary based upon various fact-based circumstances, including, but not limited to, the composition of the securities included in the Creation Unit or the countries in which the transactions are settled. The price received for each Creation Unit will equal the daily NAV per share of the Fund times the number of shares in a Creation Unit, minus the fees described above and, if applicable, any operational processing and brokerage costs, transfer fees, stamp taxes and part or all of the spread between the expected bid and offer side of the market related to the securities comprising the redemption basket. Investors who use the services of a broker or other such intermediary in addition to an Authorized Participant to effect a redemption of a Creation Unit may also be assessed an amount to cover the cost of such services. The redemption fee charged by the Fund will comply with Rule 22c-2 of the 1940 Act which limits redemption fees to no more than 2% of the value of the shares redeemed.
7. Distribution Plan
The Board of Trustees adopted a Distribution and Service Plan pursuant to Rule 12b-1 under the 1940 Act. In accordance with the Rule 12b-1 plan, the Fund is authorized to pay an amount up to 0.25% of its average daily net assets each year to reimburse First Trust Portfolios L.P. (“FTP”), the distributor of the Fund, for amounts expended to finance activities primarily intended to result in the sale of Creation Units or the provision of investor services. FTP may also use this amount to compensate securities dealers or other persons that are Authorized Participants for providing distribution assistance, including broker-dealer and shareholder support and educational and promotional services.
No 12b-1 fees are currently paid by the Fund, and pursuant to a contractual arrangement, no 12b-1 fees will be paid any time before March 31, 2025.
8. Indemnification
The Trust, on behalf of the Fund, has a variety of indemnification obligations under contracts with its service providers. The Trust’s maximum exposure under these arrangements is unknown. However, the Trust has not had prior claims or losses pursuant to these contracts and expects the risk of loss to be remote.
9. Subsequent Events
Management has evaluated the impact of all subsequent events on the Fund through the date the financial statements were issued and has determined that there were no subsequent events requiring recognition or disclosure in the financial statements that have not already been disclosed.
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Trustees of First Trust Exchange-Traded Fund IV:
Opinion on the Financial Statements and Financial Highlights
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of First Trust Low Duration Opportunities ETF (the “Fund”), one of the funds constituting the First Trust Exchange-Traded Fund IV, as of October 31, 2023, the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, the financial highlights for each of the five years in the period then ended, and the related notes. In our opinion, the financial statements and financial highlights present fairly, in all material respects, the financial position of the Fund as of October 31, 2023, and the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on the Fund’s financial statements and financial highlights based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Fund in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement, whether due to error or fraud. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements and financial highlights, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements and financial highlights. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and financial highlights. Our procedures included confirmation of securities owned as of October 31, 2023, by correspondence with the custodian and brokers; when replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
/s/ Deloitte & Touche, LLP
Chicago, Illinois
December 22, 2023
We have served as the auditor of one or more First Trust investment companies since 2001.
First Trust Low Duration Opportunities ETF (LMBS)October 31, 2023 (Unaudited) Proxy Voting Policies and Procedures
A description of the policies and procedures that the Trust uses to determine how to vote proxies and information on how the Fund voted proxies relating to its portfolio securities during the most recent 12-month period ended June 30 is available (1) without charge, upon request, by calling (800) 988-5891; (2) on the Fund’s website at www.ftportfolios.com; and (3) on the Securities and Exchange Commission’s (“SEC”) website at www.sec.gov.
Portfolio Holdings
The Fund files portfolio holdings information for each month in a fiscal quarter within 60 days after the end of the relevant fiscal quarter on Form N-PORT. Portfolio holdings information for the third month of each fiscal quarter will be publicly available on the SEC’s website at www.sec.gov. The Fund’s complete schedule of portfolio holdings for the second and fourth quarters of each fiscal year is included in the semi-annual and annual reports to shareholders, respectively, and is filed with the SEC on Form N-CSR. The semi-annual and annual report for the Fund is available to investors within 60 days after the period to which it relates. The Fund’s Forms N-PORT and Forms N-CSR are available on the SEC’s website listed above.
Federal Tax Information
Distributions paid to the foreign shareholders during the Fund’s fiscal year ended October 31, 2023 that were properly designated by the Fund as “interest-related dividends” or “short-term capital gain dividends,” may not be subject to federal income tax provided that the income was earned directly by such foreign shareholders.
Of the ordinary income (including short-term capital gain) distributions made by the Fund during the fiscal year ended October 31, 2023, none qualify for the corporate dividends received deduction available to corporate shareholders or as qualified dividend income.
Risk Considerations
Risks are inherent in all investing. Certain general risks that may be applicable to a Fund are identified below, but not all of the material risks relevant to each Fund are included in this report and not all of the risks below apply to each Fund. The material risks of investing in each Fund are spelled out in its prospectus, statement of additional information and other regulatory filings. Before investing, you should consider each Fund’s investment objective, risks, charges and expenses, and read each Fund’s prospectus and statement of additional information carefully. You can download each Fund’s prospectus at www.ftportfolios.com or contact First Trust Portfolios L.P. at (800) 621-1675 to request a prospectus, which contains this and other information about each Fund.
Concentration Risk. To the extent that a fund is able to invest a significant percentage of its assets in a single asset class or the securities of issuers within the same country, state, region, industry or sector, an adverse economic, business or political development may affect the value of the fund’s investments more than if the fund were more broadly diversified. A fund that tracks an index will be concentrated to the extent the fund’s corresponding index is concentrated. A concentration makes a fund more susceptible to any single occurrence and may subject the fund to greater market risk than a fund that is more broadly diversified.
Credit Risk. Credit risk is the risk that an issuer of a security will be unable or unwilling to make dividend, interest and/or principal payments when due and the related risk that the value of a security may decline because of concerns about the issuer’s ability to make such payments.
Cyber Security Risk. The funds are susceptible to potential operational risks through breaches in cyber security. A breach in cyber security refers to both intentional and unintentional events that may cause a fund to lose proprietary information, suffer data corruption or lose operational capacity. Such events could cause a fund to incur regulatory penalties, reputational damage, additional compliance costs associated with corrective measures and/or financial loss. In addition, cyber security breaches of a fund’s third-party service providers, such as its administrator, transfer agent, custodian, or sub-advisor, as applicable, or issuers in which the fund invests, can also subject a fund to many of the same risks associated with direct cyber security breaches.
Defined Outcome Funds Risk. To the extent a fund’s investment strategy is designed to deliver returns tied to the price performance of an underlying ETF, an investor may not realize the returns the fund seeks to achieve if that investor does not hold shares for the entire target outcome period. In the event an investor purchases shares after the first day of the target outcome period or sells shares prior to the end of the target outcome period, the buffer that the fund seeks to provide against a decline in the value of the underlying ETF may not be available, the enhanced returns that the fund seeks to provide (if any) may not be available and the investor may not
Additional Information (Continued)
First Trust Low Duration Opportunities ETF (LMBS)October 31, 2023 (Unaudited) participate in a gain in the value of the underlying ETF up to the cap for the investor’s investment period. Additionally, the fund will not participate in gains of the underlying ETF above the cap and a shareholder may lose their entire investment. If the fund seeks enhanced returns, there are certain time periods when the value of the fund may fall faster than the value of the underlying ETF, and it is very unlikely that, on any given day during which the underlying ETF share price increases in value, the fund’s share price will increase at the same rate as the enhanced returns sought by the fund, which is designed for an entire target outcome period. Trading flexible exchange options involves risks different from, or possibly greater than, the risks associated with investing directly in securities, such as less liquidity and correlation and valuation risks. A fund may experience substantial downside from specific flexible exchange option positions and certain positions may expire worthless.
Derivatives Risk. To the extent a fund uses derivative instruments such as futures contracts, options contracts and swaps, the fund may experience losses because of adverse movements in the price or value of the underlying asset, index or rate, which may be magnified by certain features of the derivative. These risks are heightened when a fund’s portfolio managers use derivatives to enhance the fund’s return or as a substitute for a position or security, rather than solely to hedge (or offset) the risk of a position or security held by the fund.
Equity Securities Risk. To the extent a fund invests in equity securities, the value of the fund’s shares will fluctuate with changes in the value of the equity securities. Equity securities prices fluctuate for several reasons, including changes in investors’ perceptions of the financial condition of an issuer or the general condition of the relevant stock market, such as market volatility, or when political or economic events affecting the issuers occur. In addition, common stock prices may be particularly sensitive to rising interest rates, as the cost of capital rises and borrowing costs increase. Equity securities may decline significantly in price over short or extended periods of time, and such declines may occur in the equity market as a whole, or they may occur in only a particular country, company, industry or sector of the market.
ETF Risk. The shares of an ETF trade like common stock and represent an interest in a portfolio of securities. The risks of owning an ETF generally reflect the risks of owning the underlying securities, although lack of liquidity in an ETF could result in it being more volatile and ETFs have management fees that increase their costs. Shares of an ETF trade on an exchange at market prices rather than net asset value, which may cause the shares to trade at a price greater than net asset value (premium) or less than net asset value (discount). In times of market stress, decisions by market makers to reduce or step away from their role of providing a market for an ETF’s shares, or decisions by an ETF’s authorized participants that they are unable or unwilling to proceed with creation and/or redemption orders of an ETF’s shares, could result in shares of the ETF trading at a discount to net asset value and in greater than normal intraday bid-ask spreads.
Fixed Income Securities Risk. To the extent a fund invests in fixed income securities, the fund will be subject to credit risk, income risk, interest rate risk, liquidity risk and prepayment risk. Income risk is the risk that income from a fund’s fixed income investments could decline during periods of falling interest rates. Interest rate risk is the risk that the value of a fund’s fixed income securities will decline because of rising interest rates. Liquidity risk is the risk that a security cannot be purchased or sold at the time desired, or cannot be purchased or sold without adversely affecting the price. Prepayment risk is the risk that the securities will be redeemed or prepaid by the issuer, resulting in lower interest payments received by the fund. In addition to these risks, high yield securities, or “junk” bonds, are subject to greater market fluctuations and risk of loss than securities with higher ratings, and the market for high yield securities is generally smaller and less liquid than that for investment grade securities.
Index or Model Constituent Risk. Certain funds may be a constituent of one or more indices or ETF models. As a result, such a fund may be included in one or more index-tracking exchange-traded funds or mutual funds. Being a component security of such a vehicle could greatly affect the trading activity involving a fund, the size of the fund and the market volatility of the fund. Inclusion in an index could increase demand for the fund and removal from an index could result in outsized selling activity in a relatively short period of time. As a result, a fund’s net asset value could be negatively impacted and the fund’s market price may be significantly below its net asset value during certain periods. In addition, index rebalances may potentially result in increased trading activity in a fund’s shares.
Index Provider Risk. To the extent a fund seeks to track an index, it is subject to Index Provider Risk. There is no assurance that the Index Provider will compile the Index accurately, or that the Index will be determined, maintained, constructed, reconstituted, rebalanced, composed, calculated or disseminated accurately. To correct any such error, the Index Provider may carry out an unscheduled rebalance or other modification of the Index constituents or weightings, which may increase the fund’s costs. The Index Provider does not provide any representation or warranty in relation to the quality, accuracy or completeness of data in the Index, and
Additional Information (Continued)
First Trust Low Duration Opportunities ETF (LMBS)October 31, 2023 (Unaudited) it does not guarantee that the Index will be calculated in accordance with its stated methodology. Losses or costs associated with any Index Provider errors generally will be borne by the fund and its shareholders.
Investment Companies Risk. To the extent a fund invests in the securities of other investment vehicles, the fund will incur additional fees and expenses that would not be present in a direct investment in those investment vehicles. Furthermore, the fund’s investment performance and risks are directly related to the investment performance and risks of the investment vehicles in which the fund invests.
LIBOR Risk. To the extent a fund invests in floating or variable rate obligations that use the London Interbank Offered Rate (“LIBOR”) as a reference interest rate, it is subject to LIBOR Risk. The United Kingdom’s Financial Conduct Authority, which regulates LIBOR, has ceased making LIBOR available as a reference rate over a phase-out period that began December 31, 2021. There is no assurance that any alternative reference rate, including the Secured Overnight Financing Rate (“SOFR”) will be similar to or produce the same value or economic equivalence as LIBOR or that instruments using an alternative rate will have the same volume or liquidity. The unavailability or replacement of LIBOR may affect the value, liquidity or return on certain fund investments and may result in costs incurred in connection with closing out positions and entering into new trades. Any potential effects of the transition away from LIBOR on the fund or on certain instruments in which the fund invests can be difficult to ascertain, and they may vary depending on a variety of factors, and they could result in losses to the fund.
Management Risk. To the extent that a fund is actively managed, it is subject to management risk. In managing an actively-managed fund’s investment portfolio, the fund’s portfolio managers will apply investment techniques and risk analyses that may not have the desired result. There can be no guarantee that a fund will meet its investment objective.
Market Risk. Market risk is the risk that a particular security, or shares of a fund in general, may fall in value. Securities held by a fund, as well as shares of a fund itself, are subject to market fluctuations caused by factors such as general economic conditions, political events, regulatory or market developments, changes in interest rates and perceived trends in securities prices. Shares of a fund could decline in value or underperform other investments as a result of the risk of loss associated with these market fluctuations. In addition, local, regional or global events such as war, acts of terrorism, spread of infectious diseases or other public health issues, recessions, or other events could have a significant negative impact on a fund and its investments. Such events may affect certain geographic regions, countries, sectors and industries more significantly than others. In February 2022, Russia invaded Ukraine which has caused and could continue to cause significant market disruptions and volatility within the markets in Russia, Europe, and the United States. The hostilities and sanctions resulting from those hostilities could have a significant impact on certain fund investments as well as fund performance. The COVID-19 global pandemic and the ensuing policies enacted by governments and central banks have caused and may continue to cause significant volatility and uncertainty in global financial markets. While the U.S. has resumed “reasonably” normal business activity, many countries continue to impose lockdown measures. Additionally, there is no guarantee that vaccines will be effective against emerging variants of the disease. These events also adversely affect the prices and liquidity of a fund’s portfolio securities or other instruments and could result in disruptions in the trading markets. Any of such circumstances could have a materially negative impact on the value of a fund’s shares and result in increased market volatility. During any such events, a fund’s shares may trade at increased premiums or discounts to their net asset value and the bid/ask spread on a fund’s shares may widen.
Non-U.S. Securities Risk. To the extent a fund invests in non-U.S. securities, it is subject to additional risks not associated with securities of domestic issuers. Non-U.S. securities are subject to higher volatility than securities of domestic issuers due to: possible adverse political, social or economic developments; restrictions on foreign investment or exchange of securities; capital controls; lack of liquidity; currency exchange rates; excessive taxation; government seizure of assets; the imposition of sanctions by foreign governments; different legal or accounting standards; and less government supervision and regulation of exchanges in foreign countries. Investments in non-U.S. securities may involve higher costs than investments in U.S. securities, including higher transaction and custody costs, as well as additional taxes imposed by non-U.S. governments. These risks may be heightened for securities of companies located, or with significant operations, in emerging market countries.
Operational Risk. Each fund is subject to risks arising from various operational factors, including, but not limited to, human error, processing and communication errors, errors of a fund’s service providers, counterparties or other third-parties, failed or inadequate processes and technology or systems failures. Each fund relies on third-parties for a range of services, including custody. Any delay or failure relating to engaging or maintaining such service providers may affect a fund’s ability to meet its investment objective. Although the funds and the funds’ investment advisor seek to reduce these operational risks through controls and procedures, there is no way to completely protect against such risks.
Additional Information (Continued)
First Trust Low Duration Opportunities ETF (LMBS)October 31, 2023 (Unaudited) Passive Investment Risk. To the extent a fund seeks to track an index, the fund will invest in the securities included in, or representative of, the index regardless of their investment merit. A fund generally will not attempt to take defensive positions in declining markets.
Preferred Securities Risk. Preferred securities combine some of the characteristics of both common stocks and bonds. Preferred securities are typically subordinated to bonds and other debt securities in a company’s capital structure in terms of priority to corporate income, subjecting them to greater credit risk than those debt securities. Generally, holders of preferred securities have no voting rights with respect to the issuing company unless preferred dividends have been in arrears for a specified number of periods, at which time the preferred security holders may obtain limited rights. In certain circumstances, an issuer of preferred securities may defer payment on the securities and, in some cases, redeem the securities prior to a specified date. Preferred securities may also be substantially less liquid than other securities, including common stock.
Valuation Risk. The valuation of certain securities may carry more risk than that of common stock. Uncertainties in the conditions of the financial markets, unreliable reference data, lack of transparency and inconsistency of valuation models and processes may lead to inaccurate asset pricing. A fund may hold investments in sizes smaller than institutionally sized round lot positions (sometimes referred to as odd lots). However, third-party pricing services generally provide evaluations on the basis of institutionally-sized round lots. If a fund sells certain of its investments in an odd lot transaction, the sale price may be less than the value at which such securities have been held by the fund. Odd lots often trade at lower prices than institutional round lots. There is no assurance that the fund will be able to sell a portfolio security at the price established by the pricing service, which could result in a loss to the fund.
NOT FDIC INSURED NOT BANK GUARANTEED MAY LOSE VALUE
Advisory Agreement
Board Considerations Regarding Approval of the Continuation of the Investment Management Agreement
The Board of Trustees of First Trust Exchange-Traded Fund IV (the “Trust”), including the Independent Trustees, unanimously approved the continuation of the Investment Management Agreement (the “Agreement”) with First Trust Advisors L.P. (the “Advisor”) on behalf of the First Trust Low Duration Opportunities ETF (the “Fund”). The Board approved the continuation of the Agreement for a one-year period ending June 30, 2024 at a meeting held on June 4–5, 2023. The Board determined that the continuation of the Agreement is in the best interests of the Fund in light of the nature, extent and quality of the services provided and such other matters as the Board considered to be relevant in the exercise of its business judgment.
To reach this determination, the Board considered its duties under the Investment Company Act of 1940, as amended (the “1940 Act”), as well as under the general principles of state law, in reviewing and approving advisory contracts; the requirements of the 1940 Act in such matters; the fiduciary duty of investment advisors with respect to advisory agreements and compensation; the standards used by courts in determining whether investment company boards have fulfilled their duties; and the factors to be considered by the Board in voting on such agreements. At meetings held on April 17, 2023 and June 4–5, 2023, the Board, including the Independent Trustees, reviewed materials provided by the Advisor responding to requests for information from counsel to the Independent Trustees, submitted on behalf of the Independent Trustees, that, among other things, outlined: the services provided by the Advisor to the Fund (including the relevant personnel responsible for these services and their experience); the unitary fee rate schedule payable by the Fund as compared to fees charged to a peer group of funds (the “Expense Group”) and a broad peer universe of funds (the “Expense Universe”), each assembled by Broadridge Financial Solutions, Inc. (“Broadridge”), an independent source, and as compared to fees charged to other clients of the Advisor, including other exchange-traded funds (“ETFs”) managed by the Advisor; the expense ratio of the Fund as compared to expense ratios of the funds in the Fund’s Expense Group and Expense Universe; performance information for the Fund, including comparisons of the Fund’s performance to that of one or more relevant benchmark indexes and to that of a performance group of funds and a broad performance universe of funds (the “Performance Universe”), each assembled by Broadridge; the nature of expenses incurred in providing services to the Fund and the potential for the Advisor to realize economies of scale, if any; profitability and other financial data for the Advisor; any indirect benefits to the Advisor and its affiliate, First Trust Portfolios L.P. (“FTP”); and information on the Advisor’s compliance program. The Board reviewed initial materials with the Advisor at the meeting held on April 17, 2023, prior to which the Independent Trustees and their counsel met separately to discuss the information provided by the Advisor. Following the April meeting, counsel to the Independent Trustees, on behalf of the Independent Trustees, requested certain clarifications and supplements to the materials provided, and the information provided in response to those requests was considered at an executive session of the Independent Trustees and their counsel held prior to the June 4–5, 2023 meeting, as well as at the June meeting. The Board applied its business judgment to determine whether the arrangement between the Trust and the Advisor continues to be a reasonable business arrangement from the Fund’s perspective. The Board
Additional Information (Continued)
First Trust Low Duration Opportunities ETF (LMBS)October 31, 2023 (Unaudited) determined that, given the totality of the information provided with respect to the Agreement, the Board had received sufficient information to renew the Agreement. The Board considered that shareholders chose to invest or remain invested in the Fund knowing that the Advisor manages the Fund and knowing the Fund’s unitary fee.
In reviewing the Agreement, the Board considered the nature, extent and quality of the services provided by the Advisor under the Agreement. The Board considered that the Advisor is responsible for the overall management and administration of the Trust and the Fund and reviewed all of the services provided by the Advisor to the Fund, as well as the background and experience of the persons responsible for such services. The Board noted that the Fund is an actively-managed ETF and noted that the Advisor’s Securitized Products Group is responsible for the day-to-day management of the Fund’s investments. The Board considered the background and experience of the members of the Securitized Products Group and noted the Board’s prior meetings with members of the Group. The Board considered the Advisor’s statement that it applies the same oversight model internally with its Securitized Products Group as it uses for overseeing external sub-advisors, including portfolio risk monitoring and performance review. In reviewing the services provided, the Board noted the compliance program that had been developed by the Advisor and considered that it includes a robust program for monitoring the Advisor’s and the Fund’s compliance with the 1940 Act, as well as the Fund’s compliance with its investment objectives, policies and restrictions. The Board also considered a report from the Advisor with respect to its risk management functions related to the operation of the Fund. Finally, as part of the Board’s consideration of the Advisor’s services, the Advisor, in its written materials and at the April 17, 2023 meeting, described to the Board the scope of its ongoing investment in additional personnel and infrastructure to maintain and improve the quality of services provided to the Fund and the other funds in the First Trust Fund Complex. In light of the information presented and the considerations made, the Board concluded that the nature, extent and quality of the services provided to the Trust and the Fund by the Advisor under the Agreement have been and are expected to remain satisfactory and that the Advisor has managed the Fund consistent with its investment objectives, policies and restrictions.
The Board considered the unitary fee rate schedule payable by the Fund under the Agreement for the services provided. The Board considered that as part of the unitary fee the Advisor is responsible for the Fund’s expenses, including the cost of transfer agency, custody, fund administration, legal, audit and other services and license fees, if any, but excluding the fee payment under the Agreement and 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 Rule 12b-1 plan, if any, and extraordinary expenses, if any. The Board received and reviewed information showing the fee rates and expense ratios of the peer funds in the Expense Group, as well as advisory and unitary fee rates charged by the Advisor to other fund (including ETFs) and non-fund clients, as applicable. Because the Fund pays a unitary fee, the Board determined that expense ratios were the most relevant comparative data point. Based on the information provided, the Board noted that the total (net) expense ratio for the Fund was above the median total (net) expense ratio of the peer funds in the Expense Group. With respect to the Expense Group, the Board, at the April 17, 2023 meeting, discussed with Broadridge its methodology for assembling peer groups and discussed with the Advisor limitations in creating peer groups for actively-managed ETFs, and different business models that may affect the pricing of services among ETF sponsors. The Board took these limitations and differences into account in considering the peer data. With respect to fees charged to other non-ETF clients, the Board considered differences between the Fund and other non-ETF clients that limited their comparability. In considering the unitary fee rate schedule overall, the Board also considered the Advisor’s statement that it seeks to meet investor needs through innovative and value-added investment solutions and the Advisor’s demonstrated long-term commitment to the Fund and the other funds in the First Trust Fund Complex.
The Board considered performance information for the Fund. The Board noted the process it has established for monitoring the Fund’s performance and portfolio risk on an ongoing basis, which includes quarterly performance reporting from the Advisor for the Fund. The Board determined that this process continues to be effective for reviewing the Fund’s performance. The Board received and reviewed information comparing the Fund’s performance for periods ended December 31, 2022 to the performance of the funds in the Performance Universe and to that of a benchmark index. Based on the information provided, the Board noted that the Fund outperformed the Performance Universe median for the one-, three- and five-year periods ended December 31, 2022, outperformed the benchmark index for the one- and three-year periods ended December 31, 2022 and performed equal to the benchmark index for the five-year period ended December 31, 2022.
On the basis of all the information provided on the unitary fee and performance of the Fund and the ongoing oversight by the Board, the Board concluded that the unitary fee for the Fund continues to be reasonable and appropriate in light of the nature, extent and quality of the services provided by the Advisor to the Fund under the Agreement.
The Board considered information and discussed with the Advisor whether there were any economies of scale in connection with providing advisory services to the Fund at current asset levels and whether the Fund may benefit from any economies of scale. The
Additional Information (Continued)
First Trust Low Duration Opportunities ETF (LMBS)October 31, 2023 (Unaudited) Board noted that the unitary fee rate schedule for the Fund includes breakpoints pursuant to which the unitary fee rate will be reduced as assets of the Fund meet certain thresholds. The Board considered the Advisor’s statement that it believes that its expenses relating to providing advisory services to the Fund will increase during the next twelve months as the Advisor continues to build infrastructure and add new staff. The Board also noted that under the unitary fee structure, any reduction in expenses associated with the management and operations of the Fund would benefit the Advisor, but that the unitary fee structure provides a level of certainty in expenses for shareholders of the Fund. The Board concluded that the unitary fee rate schedule for the Fund reflects an appropriate level of sharing of any economies of scale that may be realized in the management of the Fund at current asset levels. The Board considered the revenues and allocated costs (including the allocation methodology) of the Advisor in serving as investment advisor to the Fund for the twelve months ended December 31, 2022 and the estimated profitability level for the Fund calculated by the Advisor based on such data, as well as complex-wide and product-line profitability data, for the same period. The Board noted the inherent limitations in the profitability analysis and concluded that, based on the information provided, the Advisor’s profitability level for the Fund was not unreasonable. In addition, the Board considered indirect benefits described by the Advisor that may be realized from its relationship with the Fund. The Board considered that the Advisor had identified as an indirect benefit to the Advisor and FTP their exposure to investors and brokers who, absent their exposure to the Fund, may have had no dealings with the Advisor or FTP, and noted that the Advisor does not utilize soft dollars in connection with the Fund. The Board concluded that the character and amount of potential indirect benefits to the Advisor were not unreasonable.
Based on all of the information considered and the conclusions reached, the Board, including the Independent Trustees, unanimously determined that the terms of the Agreement continue to be fair and reasonable and that the continuation of the Agreement is in the best interests of the Fund. No single factor was determinative in the Board’s analysis.
Remuneration
First Trust Advisors L.P. (“First Trust”) is authorised and regulated by the U.S. Securities and Exchange Commission and is entitled to market shares of certain funds it manages, including First Trust Low Duration Opportunities ETF (the “Fund”), in certain member states in the European Economic Area in accordance with the cooperation arrangements in Article 42 of the Alternative Investment Fund Managers Directive (the “Directive”). First Trust is required under the Directive to make disclosures in respect of remuneration. The following disclosures are made in line with First Trust’s interpretation of currently available regulatory guidance on remuneration disclosures.
During the year ended December 31, 2022, the amount of remuneration paid (or to be paid) by First Trust Advisors L.P. in respect of the Funds is $5,307,545. This figure is comprised of $289,032 paid (or to be paid) in fixed compensation and $5,018,513 paid (or to be paid) in variable compensation. There were a total of 26 beneficiaries of the remuneration described above. Those amounts include $1,383,548 paid (or to be paid) to senior management of First Trust Advisors L.P. and $3,923,997 paid (or to be paid) to other employees whose professional activities have a material impact on the risk profiles of First Trust Advisors L.P. or the Funds (collectively, “Code Staff”).
Code Staff included in the aggregated figures disclosed above are rewarded in line with First Trust’s remuneration policy (the “Remuneration Policy”) which is determined and implemented by First Trust’s senior management. The Remuneration Policy reflects First Trust’s ethos of good governance and encapsulates the following principal objectives:
i.
to provide a clear link between remuneration and performance of First Trust and to avoid rewarding for failure;
ii.
to promote sound and effective risk management consistent with the risk profiles of the funds managed by First Trust; and
iii.
to remunerate staff in line with the business strategy, objectives, values and interests of First Trust and the funds managed by First Trust in a manner that avoids conflicts of interest.
First Trust assesses various risk factors which it is exposed to when considering and implementing remuneration for Code Staff and considers whether any potential award to such person(s) would give rise to a conflict of interest. First Trust does not reward failure, or consider the taking of risk or failure to take risk in its remuneration of Code Staff.
First Trust assesses performance for the purposes of determining payments in respect of performance-related remuneration of Code Staff by reference to a broad range of measures including (i) individual performance (using financial and non-financial criteria), and (ii) the overall performance of First Trust. Remuneration is not based upon the performance of the Fund.
Additional Information (Continued)
First Trust Low Duration Opportunities ETF (LMBS)October 31, 2023 (Unaudited) The elements of remuneration are balanced between fixed and variable and the senior management sets fixed salaries at a level sufficient to ensure that variable remuneration incentivises and rewards strong individual performance but does not encourage excessive risk taking.
No individual is involved in setting his or her own remuneration.
Board of Trustees and Officers
First Trust Low Duration Opportunities ETF (LMBS)October 31, 2023 (Unaudited) The following tables identify the Trustees and Officers of the Trust. Unless otherwise indicated, the address of all persons is 120 East Liberty Drive, Suite 400, Wheaton, IL 60187.
The Trust’s statement of additional information includes additional information about the Trustees and is available, without charge, upon request, by calling (800) 988-5891.
Name,
Year of Birth and
Position with the Trust | Term of Office
and Year First
Elected or
Appointed | Principal Occupations
During Past 5 Years | Number of
Portfolios in
the First Trust
Fund Complex
Overseen by
Trustee | Other
Trusteeships or
Directorships
Held by Trustee
During Past
5 Years |
|
Richard E. Erickson, Trustee
(1951) | • Indefinite Term • Since Inception | Retired; Physician, Edward-Elmhurst Medical Group (2021 to September 2023); Physician and Officer, Wheaton Orthopedics (1990 to 2021) | | |
Thomas R. Kadlec, Trustee
(1957) | • Indefinite Term • Since Inception | Retired; President, ADM Investors Services, Inc. (Futures Commission Merchant) (2010 to July 2022) | | Director, National Futures Association and ADMIS Singapore Ltd.; Formerly, Director of ADM Investor Services, Inc., ADM Investor Services International, ADMIS Hong Kong Ltd., and Futures Industry Association |
Denise M. Keefe, Trustee
(1964) | • Indefinite Term • Since 2021 | Executive Vice President, Advocate Aurora Health and President, Advocate Aurora Continuing Health Division (Integrated Healthcare System) | | Director and Board Chair of Advocate Home Health Services, Advocate Home Care Products and Advocate Hospice; Director and Board Chair of Aurora At Home (since 2018); Director of Advocate Physician Partners Accountable Care Organization; Director of RML Long Term Acute Care Hospitals; Director of Senior Helpers (since 2021); and Director of MobileHelp (since 2022) |
Robert F. Keith, Trustee
(1956) | • Indefinite Term • Since Inception | President, Hibs Enterprises (Financial and Management Consulting) | | Formerly, Director of Trust Company of Illinois |
Niel B. Nielson, Trustee
(1954) | • Indefinite Term • Since Inception | Senior Advisor (2018 to Present), Managing Director and Chief Operating Officer (2015 to 2018), Pelita Harapan Educational Foundation (Educational Products and Services) | | |
Bronwyn Wright, Trustee
(1971) | • Indefinite Term • Since 2023 | Independent Director to a number of Irish collective investment funds (2009 to Present); Various roles at international affiliates of Citibank (1994 to 2009), including Managing Director, Citibank Europe plc and Head of Securities and Fund Services, Citi Ireland (2007 to 2009) | | |
Board of Trustees and Officers (Continued)
First Trust Low Duration Opportunities ETF (LMBS)October 31, 2023 (Unaudited) Name, Year of Birth and Position with the Trust | Term of Office and Year First Elected or Appointed | Principal Occupations During Past 5 Years | Number of Portfolios in the First Trust Fund Complex Overseen by Trustee | Other Trusteeships or Directorships Held by Trustee During Past 5 Years |
|
James A. Bowen(1), Trustee,
Chairman of the Board
(1955) | • Indefinite Term • Since Inception | Chief Executive Officer, First Trust Advisors L.P. and First Trust Portfolios L.P., Chairman of the Board of Directors, BondWave LLC (Software Development Company) and Stonebridge Advisors LLC (Investment Advisor) | | |
| Position and
Offices
with Trust | Term of Office
and Length of
Service | Principal Occupations
During Past 5 Years |
|
| President and Chief Executive Officer | • Indefinite Term • Since 2016 | Managing Director and Chief Financial Officer, First Trust Advisors L.P. and First Trust Portfolios L.P.; Chief Financial Officer, BondWave LLC (Software Development Company) and Stonebridge Advisors LLC (Investment Advisor) |
| Treasurer, Chief Financial Officer and Chief Accounting Officer | • Indefinite Term • Since 2023 | Senior Vice President, First Trust Advisors L.P. and First Trust Portfolios L.P., July 2021 to Present. Previously, Vice President, First Trust Advisors L.P. and First Trust Portfolios L.P., 2014 - 2021. |
| Secretary and Chief Legal Officer | • Indefinite Term • Since Inception | General Counsel, First Trust Advisors L.P. and First Trust Portfolios L.P.; Secretary and General Counsel, BondWave LLC; Secretary, Stonebridge Advisors LLC |
Daniel J. Lindquist
(1970) | | • Indefinite Term • Since Inception | Managing Director, First Trust Advisors L.P. and First Trust Portfolios L.P. |
| Chief Compliance Officer and Assistant Secretary | • Indefinite Term • Since Inception | Deputy General Counsel, First Trust Advisors L.P. and First Trust Portfolios L.P. |
| | • Indefinite Term • Since Inception | Senior Vice President, First Trust Advisors L.P. and First Trust Portfolios L.P. |
| | • Indefinite Term • Since Inception | Senior Vice President, First Trust Advisors L.P. and First Trust Portfolios L.P. |
(1)
Mr. Bowen is deemed an “interested person” of the Trust due to his position as Chief Executive Officer of First Trust Advisors L.P., investment advisor of the Trust.
(2)
The term “officer” means the president, vice president, secretary, treasurer, controller or any other officer who performs a policy making function.
First Trust Low Duration Opportunities ETF (LMBS)October 31, 2023 (Unaudited) Privacy Policy
First Trust values our relationship with you and considers your privacy an important priority in maintaining that relationship. We are committed to protecting the security and confidentiality of your personal information.
Sources of Information
We collect nonpublic personal information about you from the following sources:
• Information we receive from you and your broker-dealer, investment professional or financial representative through interviews, applications, agreements or other forms;
• Information about your transactions with us, our affiliates or others;
• Information we receive from your inquiries by mail, e-mail or telephone; and
• Information we collect on our website through the use of “cookies.” For example, we may identify the pages on our website that your browser requests or visits.
Information Collected
The type of data we collect may include your name, address, social security number, age, financial status, assets, income, tax information, retirement and estate plan information, transaction history, account balance, payment history, investment objectives, marital status, family relationships and other personal information.
Disclosure of Information
We do not disclose any nonpublic personal information about our customers or former customers to anyone, except as permitted by law. In addition to using this information to verify your identity (as required under law), the permitted uses may also include the disclosure of such information to unaffiliated companies for the following reasons:
• In order to provide you with products and services and to effect transactions that you request or authorize, we may disclose your personal information as described above to unaffiliated financial service providers and other companies that perform administrative or other services on our behalf, such as transfer agents, custodians and trustees, or that assist us in the distribution of investor materials such as trustees, banks, financial representatives, proxy services, solicitors and printers.
• We may release information we have about you if you direct us to do so, if we are compelled by law to do so, or in other legally limited circumstances (for example to protect your account from fraud).
In addition, in order to alert you to our other financial products and services, we may share your personal information within First Trust.
Use of Website Analytics
We currently use third party analytics tools, Google Analytics and AddThis, to gather information for purposes of improving First Trust’s website and marketing our products and services to you. These tools employ cookies, which are small pieces of text stored in a file by your web browser and sent to websites that you visit, to collect information, track website usage and viewing trends such as the number of hits, pages visited, videos and PDFs viewed and the length of user sessions in order to evaluate website performance and enhance navigation of the website. We may also collect other anonymous information, which is generally limited to technical and web navigation information such as the IP address of your device, internet browser type and operating system for purposes of analyzing the data to make First Trust’s website better and more useful to our users. The information collected does not include any personal identifiable information such as your name, address, phone number or email address unless you provide that information through the website for us to contact you in order to answer your questions or respond to your requests. To find out how to opt-out of these services click on: Google Analytics and AddThis.
Confidentiality and Security
With regard to our internal security procedures, First Trust restricts access to your nonpublic personal information to those First Trust employees who need to know that information to provide products or services to you. We maintain physical, electronic and procedural safeguards to protect your nonpublic personal information.
Policy Updates and Inquiries
As required by federal law, we will notify you of our privacy policy annually. We reserve the right to modify this policy at any time, however, if we do change it, we will tell you promptly. For questions about our policy, or for additional copies of this notice, please go to www.ftportfolios.com, or contact us at 1-800-621-1675 (First Trust Portfolios) or 1-800-222-6822 (First Trust Advisors).
March 2023
First Trust Exchange-Traded Fund IV
INVESTMENT ADVISOR
First Trust Advisors L.P.
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
ADMINISTRATOR, CUSTODIAN,
FUND ACCOUNTANT &
TRANSFER AGENT
The Bank of New York Mellon
240 Greenwich Street
New York, NY 10286
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
111 South Wacker Drive
Chicago, IL 60606
LEGAL COUNSEL
Chapman and Cutler LLP
320 South Canal Street
Chicago, IL 60606
|
For the Period
August 2, 2023
(Commencement of Operations)
through October 31, 2023 |
First Trust Exchange-Traded Fund IV
First Trust Intermediate Government Opportunities ETF (MGOV) |
First Trust Intermediate Government Opportunities ETF (MGOV)
Annual Report
October 31, 2023
Caution Regarding Forward-Looking Statements
This report contains certain forward-looking statements within the meaning of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended. Forward-looking statements include statements regarding the goals, beliefs, plans or current expectations of First Trust Advisors L.P. (“First Trust” or the “Advisor”) and its representatives, taking into account the information currently available to them. Forward-looking statements include all statements that do not relate solely to current or historical fact. For example, forward-looking statements include the use of words such as “anticipate,” “estimate,” “intend,” “expect,” “believe,” “plan,” “may,” “should,” “would” or other words that convey uncertainty of future events or outcomes.
Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the series of First Trust Exchange-Traded Fund IV (the “Trust”) described in this report (First Trust Intermediate Government Opportunities ETF; hereinafter referred to as the “Fund”) to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. When evaluating the information included in this report, you are cautioned not to place undue reliance on these forward-looking statements, which reflect the judgment of the Advisor and its representatives only as of the date hereof. We undertake no obligation to publicly revise or update these forward-looking statements to reflect events and circumstances that arise after the date hereof.
Performance and Risk Disclosure
There is no assurance that the Fund will achieve its investment objective. The Fund is subject to market risk, which is the possibility that the market values of securities owned by the Fund will decline and that the value of the Fund’s shares may therefore be less than what you paid for them. Accordingly, you can lose money investing in the Fund. See “Risk Considerations” in the Additional Information section of this report for a discussion of certain other risks of investing in the Fund.
Performance data quoted represents past performance, which is no guarantee of future results, and current performance may be lower or higher than the figures shown. For the most recent month-end performance figures, please visit www.ftportfolios.com or speak with your financial advisor. Investment returns, net asset value and share price will fluctuate and Fund shares, when sold, may be worth more or less than their original cost.
The Advisor may also periodically provide additional information on Fund performance on the Fund’s webpage at www.ftportfolios.com.
How to Read This Report
This report contains information that may help you evaluate your investment in the Fund. It includes details about the Fund and presents data and analysis that provide insight into the Fund’s performance and investment approach.
By reading the portfolio commentary from the portfolio management team of the Fund, you may obtain an understanding of how the market environment affected the Fund’s performance. The statistical information that follows may help you understand the Fund’s performance compared to that of relevant market benchmarks.
It is important to keep in mind that the opinions expressed by personnel of the Advisor are just that: informed opinions. They should not be considered to be promises or advice. The opinions, like the statistics, cover the period through the date on the cover of this report. The material risks of investing in the Fund are spelled out in the prospectus, the statement of additional information, and other Fund regulatory filings.
First Trust Intermediate Government Opportunities ETF (MGOV)
Annual Letter from the Chairman and CEO
October 31, 2023
Dear Shareholders,
First Trust is pleased to provide you with the annual report for the First Trust Intermediate Government Opportunities ETF (the “Fund”), which contains detailed information about the Fund since its inception on August 2, 2023 through October 31, 2023. Please note that the information contained in this letter and the report prior to the Fund’s inception date does not apply to the Fund.
The Bureau of Economic Analysis recently announced that U.S. real gross domestic product (“GDP”) grew by a staggering 4.9% in the third quarter of 2023 and is now up 2.9% on a year-over-year basis from where it stood in the third quarter of 2022. The most recent quarter’s GDP data represents the fastest growth rate for any quarter since 2014. Consumer spending, which rose by 4.0% over the period, was responsible for 2.7 percentage points of the total increase in GDP. Whether the consumer can keep up this pace of spending remains to be seen, especially given recent news that excess savings from the pandemic-era stimulus have likely been depleted. From a global perspective, the International Monetary Fund (“IMF”) notes that progress in fighting inflation has led to lower economic growth. In their October 2023 publication of the World Economic Outlook, the IMF projected that the growth in world economic output is expected to slow from 3.5% in 2022 to 2.9% in 2024. The economic growth in advanced economies is projected to plummet from 2.6% in 2022 to 1.4% in 2024.
In the notes to their September 2023 meeting, the Federal Open Market Committee revealed that they may need to keep interest rates “higher for longer” as they continue to battle stubbornly high inflation. As many investors are likely aware, a higher Federal Funds target rate can have deep implications for consumers, such as driving up the cost of borrowing for homes, automobiles, and other large purchases. The American consumer has yet to feel the full weight of those burdens, in my opinion. That said, the data reveals a different story among corporate America. S&P Global Market Intelligence reported that a total of 516 U.S. corporations filed for bankruptcy protection on a year-to-date basis through September 30, 2023, up from a total of 263 corporate bankruptcy filings over the same period last year. Higher interest rates and Treasury bond yields have also sapped demand for commercial property loans. Data from Trepp, LLC, a leading provider of data and analytics to the commercial real estate and banking markets, revealed that just $28.2 billion of loans converted into commercial mortgage-backed securities have been issued in 2023, the lowest figure since 2011.
The financial markets battled a myriad of headwinds over the past year, from geopolitical uncertainty resulting from war (the conflicts between Israel and Hamas and Russia and Ukraine), to slowing global economic growth and sticky inflation. Brian Wesbury, Chief Economist at First Trust, notes that a U.S. economic recession is likely to begin at some point early next year. While calls for a recession may concern some investors, the following may offer solace. Data from Bloomberg reveals that the S&P 500® Index has posted positive total returns over the 3-year period following every recession since 1948.
Thank you for giving First Trust the opportunity to play a role in your financial future. We value our relationship with you and will report on the Fund again in six months.
Sincerely,
James A. Bowen
Chairman of the Board of Trustees
Chief Executive Officer of First Trust Advisors L.P.
Fund Performance Overview (Unaudited)
First Trust Intermediate Government Opportunities ETF (MGOV)
The First Trust Intermediate Government Opportunities ETF (the “Fund”) seeks to maximize long-term total return. Under normal market conditions, the Fund will invest at least 80% of its net assets (plus any borrowings for investment purposes) in a portfolio of debt securities issued or guaranteed by the U.S. government (including U.S. Treasury bonds, notes and bills), its agencies or government-sponsored entities (“Government Securities”). The Fund’s investments in Government Securities include publicly-issued U.S. Treasury securities and mortgage-related securities such as pass-through securities, collateralized mortgage obligations and commercial mortgage-backed securities. The Fund may also invest in exchange-traded funds (“ETFs”) that principally invest in Government Securities as well as futures contracts, options and swap agreements that utilize Government Securities as their reference asset. Such ETFs and derivatives (using their market values) count towards the 80% investment requirement set forth above. As discussed in more detail below, the Fund may purchase mortgage-related securities in “to-be-announced” transactions, including mortgage dollar rolls, which also count toward the 80% investment requirement set forth above. The Fund may invest in fixed or floating rate securities.
|
| |
| Inception
(8/2/23)
to 10/31/23 |
| |
| |
| |
| |
ICE US Treasury, Agency & MBS Index | |
Bloomberg US Aggregate Bond Index | |
Total returns for the period since inception are calculated from the inception date of the Fund. “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 of the national best bid and offer price (“NBBO”) as of the time that the Fund’s NAV is calculated. Under Securities and Exchange Commission rules, the NBBO consists of the highest displayed buy and lowest sell prices among the various exchanges trading the Fund at the time the Fund’s NAV is calculated. Since shares of the Fund did not trade in the secondary market until after its inception, for the period from inception to the first day of secondary market trading in shares of the Fund, the NAV of the Fund is used as a proxy for the secondary market trading price to calculate market returns. NAV and market returns assume that all distributions have been reinvested in the Fund at NAV and Market Price, respectively.
An index is a statistical composite that tracks a specified financial market or sector. Unlike the Fund, the indices do not actually hold a portfolio of securities and therefore do not incur the expenses incurred by the Fund. These expenses negatively impact the performance of the Fund. Also, market returns do not include brokerage commissions that may be payable on secondary market transactions. If brokerage commissions were included, market returns would be lower. The total returns presented reflect the reinvestment of dividends on securities in the indices. The returns presented do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. The investment return and principal value of shares of the Fund will vary with changes in market conditions. Shares of the Fund may be worth more or less than their original cost when they are redeemed or sold in the market. The Fund’s past performance is no guarantee of future performance.
Fund Performance Overview (Unaudited) (Continued)
First Trust Intermediate Government Opportunities ETF (MGOV) (Continued)
| |
U.S. Government Agency Mortgage-Backed Securities | |
U.S. Government Bonds and Notes | |
| |
| |
U.S. Government Agency Mortgage-Backed Securities Sold Short | |
| |
Net Other Assets and Liabilities(1) | |
| |
| % of Total
Long Fixed-Income
Investments, Cash
& Cash Equivalents |
| |
| |
| |
| |
Federal National Mortgage Association, Pool TBA, 4.00%, 11/15/53 | |
Federal National Mortgage Association, Pool TBA, 5.00%, 11/15/53 | |
Federal National Mortgage Association, Pool TBA, 4.00%, 12/15/53 | |
U.S. Treasury Note, 4.63%, 02/28/25 | |
U.S. Treasury Note, 4.50%, 11/30/24 | |
Federal Home Loan Mortgage Corporation Multifamily Structured Pass Through Certificates, Series 2023-KJ47, Class A2, 5.43%, 06/25/31 | |
Federal Home Loan Mortgage Corporation, Series 2017-4741, Class GY, 3.00%, 12/15/47 | |
Federal National Mortgage Association, Series 2016-94, Class MB, 2.50%, 12/25/46 | |
Federal National Mortgage Association, Pool TBA, 6.00%, 11/15/53 | |
Federal Home Loan Mortgage Corporation, Pool ZS9776, 3.50%, 08/01/46 | |
| |
Weighted Average Effective Net Duration |
| |
| |
| |
| Includes variation margin on futures contracts. |
| The ratings are by S&P Global Ratings. A credit rating is an assessment provided by a nationally recognized statistical rating organization (NRSRO) of the creditworthiness of an issuer with respect to debt obligations. Ratings are measured highest to lowest on a scale that generally ranges from AAA to D for long-term ratings and A-1+ to C for short-term ratings. Investment grade is defined as those issuers that have a long- term credit rating of BBB- or higher or a short-term credit rating of A-3 or higher. The credit ratings shown relate to the credit worthiness of the issuers of the underlying securities in the Fund, and not to the Fund or its shares. U.S. Treasury and U.S. Agency mortgage-backed securities appear under “Government & Agency.” Credit ratings are subject to change. |
| Percentages are based on the long positions only. Money market funds and short positions are excluded. |
Fund Performance Overview (Unaudited) (Continued)
First Trust Intermediate Government Opportunities ETF (MGOV) (Continued)
| 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.
Performance in securitized product investment strategies can be impacted from the benefits of purchasing odd lot positions. The impact of these investments can be particularly meaningful when funds have limited assets under management and may not be a sustainable source of performance as a fund grows in size. |
Frequency Distribution of Discounts and Premiums
Information showing the number of days the market price of the Fund’s shares was greater (at a premium) and less (at a discount) than the Fund’s net asset value for the most recently completed year, and the most recently completed calendar quarters since that year (or life of the Fund, if shorter) is available at https://www.ftportfolios.com/Retail/etf/home.aspx.
First Trust Intermediate Government Opportunities ETF (MGOV)Annual ReportOctober 31, 2023 (Unaudited) Advisor
First Trust Advisors L.P. (“First Trust” or the “Advisor”) is the investment advisor to the First Trust Intermediate Government Opportunities ETF (the “Fund” or “MGOV”). First Trust is responsible for the selection and ongoing monitoring of the securities in the Fund’s portfolio and certain other services necessary for the management of the portfolio.
Portfolio Management Team
The following persons serve as portfolio managers of the Fund:
James Snyder, Senior Vice President and Senior Portfolio Manager
Jeremiah Charles, Senior Vice President and Senior Portfolio Manager
Owen Aronson, Vice President and Portfolio Manager
The portfolio managers are primarily and jointly responsible for the day-to-day management of the Fund. Each portfolio manager has served as part of the portfolio management team of the Fund since the Fund’s inception.
Commentary
The Fund seeks to maximize long-term total return. Under normal market conditions, the Fund will invest at least 80% of its net assets (plus any borrowings for investment purposes) in a portfolio of debt securities issued or guaranteed by the U.S. government (including U.S. Treasury bonds, notes and bills), its agencies or government-sponsored entities (“Government Securities”).
Market Recap
The 12-month period ended October 31, 2023 began with markets under considerable strain as the Federal Reserve (the “Fed”) continued with its aggressive interest rate hiking campaign to combat soaring inflation. With volatility high and liquidity challenged as bond market participants suffered through outflows, bond market spreads remained under pressure. The market began to once again price in just how quickly inflation would cool, and how quickly the Fed would be “forced” to cut rates, just as the market incorrectly had done several times over the preceding year. Contrary to the market belief however, the labor market showed significant strength, and the Fed stood resolute pushing yields on the front end north of 5% in early March 2023, putting significant pressure on an already inverted curve, until it all unraveled mere days later as the first of the large banks, Silicon Valley Bank (“SVB”), began to fail. Front end Treasury yields plunged, which saw the 2-Year Treasury yield fall from 5.07% to sub 4%, while spreads gapped wider, with Option-Adjusted Spreads (“OAS”) on Agency mortgage-backed securities (“MBS”) widening approximately 20 basis points (“bps”), almost immediately. Ultimately the Federal Deposit Insurance Corporation took control of two banks, SVB, and Signature Bank, and eventually liquidated nearly $100 billion worth of high-quality bond assets. As markets found their footing following these relatively contained bank failures, the labor market remained stubbornly robust. Despite many forecasts the housing market, and even the broader economy, have shown significant resilience in spite of the proverbial Fed punchbowl being removed. As such, front end Treasury yields began to climb back toward 5% once again and it would not take long for the longer maturity segment of the yield curve to follow suit. We believe the market was simply wrong in its call for the timing of a recession. As such, as this resilient, and sometimes robust, economic data came in, the market was forced to push back its call on interest rate cuts. After all, the Fed had not even stopped hiking. This change has reshaped the term “premium” across the curve. Couple that with a newly acquired market appreciation for just how poorly managed we believe the fiscal house of the United States continues to be post-pandemic, and the next, and perhaps even the final, stage of the ongoing bear market in rates made its appearance known. Volatility remained high. Spreads remained wide relative to historical data. The 2-Year Treasury yield breached 5%. The 30-Year Treasury yield breached 5%. Agency MBS spreads breached the 80 bps OAS level, with nominal spreads setting multi-decade wides near 180 bps. While the market is off these highs in rates, and wides in MBS spreads, it seems like a new world in fixed income relative to the post-Great Financial Crisis of 2008 era, which was defined by heavy handed government intervention and artificially suppressed volatility. Yes, we believe it is safe to say that the aggressive campaign the Fed was forced to undertake when it was too late to respond to the impending inflation debacle helped cause the banking issues and subsequent fallout. Less talked about however, is the importance of understanding the duration gap, and convexity embedded in a bond portfolio. These issues have been front and center in bond portfolios for the last 24 months as rates have risen so significantly in such a short amount of time. We believe the ability to understand and manage these risks, properly and with skill, has never been more important.
Portfolio Commentary (Continued)
First Trust Intermediate Government Opportunities ETF (MGOV)Annual ReportOctober 31, 2023 (Unaudited) Performance Analysis
The Fund returned -4.66% on a net asset value (“NAV”) for the period from the Fund’s inception on August 2, 2023 through October 31, 2023.
Over the same period, the ICE US Treasury, Agency & MBS Index (the “Benchmark”) returned -3.95%. On a NAV basis, the Fund underperformed the Benchmark by 71bps, net of fees.
With bond market yields at levels not experienced in over a decade, the decision was made at the Fund’s launch to manage the Fund with more duration than the Benchmark. This proved to be slightly detrimental to the Fund over the short run as volatility soared and rates increased throughout the fourth quarter of the fiscal year. Generally speaking, the Fund is structurally positioned with meaningful positions in Agency MBS, while running against a Benchmark with nearly 70% of its weight in U.S. Treasuries. Given this, to the extent that MBS spreads widen on the year, the Fund may underperform, and conversely, if MBS spreads were to tighten, the Fund may outperform. Over the period from the Fund’s inception through October 31, 2023, OAS on Agency MBS blew out, widening from about 50 bps at the start of the fiscal year to close near 90 bps. This was detrimental to relative performance versus the Benchmark. Given this significant widening of the Agency MBS sector, the Fund utilized Agency MBS “To Be Announced” securities to quickly, and opportunistically, add MBS spread beta. To help manage the overall duration profile, the Fund does utilize derivatives, predominantly in Treasury futures and options. The Fund uses these in both long and short positions to manage both its overall interest rate exposure and its key rate or duration exposure by maturity point along the yield curve. Additionally, the Fund uses long Treasury futures to gain exposure to the U.S. government rates market. Since the Fund uses futures in such a way, and interest rates were higher for the period from the Fund’s inception through October 31, 2023, the use of futures has contributed to the negative total return of the Fund for the same period.
Market and Fund Outlook
In the Fed tightening cycle of 2004-2006 and subsequent pause, the funding rate peaked in early October 2007. It had been 2+ years of consistent Federal Funds interest rate tightening but at a much slower rate than the current cycle. Unlike that period, most homeowners of today locked into long dated mortgages and the loan underwriting of housing has been vastly superior to that deployed nearly 2 decades ago. The tsunami that hit the mortgage market and banks that were leveraged to it in the 2007-2009 period does not exist, in our estimation, in this cycle and, as such, the economy remains very resilient to the Fed’s interest rate increases. Further, corporations are also not exposed in the very near term to significant funding cost increases, we believe. The implications are that the Fed’s expectation of the economy’s reaction function to its interest rate increases has been significantly overestimated leading it to the necessity of raising rates further than most market participants or the Fed itself would have expected necessary. So, in this world, with less sensitivity to interest rate rises and healthy U.S. hiring, where is the forward economic contraction going to come from? In short, how does this cycle end? We think the answer lies in both the government and U.S. corporations and, interestingly, we believe it is likely to have similar timing as the cycle two decades ago. We believe there will be three sources of future U.S. contraction that are baked in, and all of them highly foreseeable. First, corporations will likely start to see their funding costs go up as new projects become more expensive, but also, starting in 2025, we believe we will see meaningful amounts of corporate debt that needs to be refinanced and now at a much higher cost. Second, there will likely be cost pressures on U.S. corporations at full U.S. employment as workers’ look to recoup real wage losses experienced over the last several years as wages did not keep pace with inflation amidst government spending and Fed quantitative easing. We anticipate this financial pressure will negatively impact the economy but will be, and has been, more delayed in timing this cycle than during prior ones. Lastly, and likely the most important fact, is the U.S. government’s debt as a percentage of gross domestic product is much higher than any other period in modern U.S. history short of the height of the pandemic when the country was shut down. Further, funding costs were near zero in the pandemic but now are approximately 400 to 500 plus bps higher across the government’s borrowing maturities. In short, current U.S. government interest costs are much higher than the last 25 years and are comparable to those in the 1980s through late 1990s when U.S. inflation was much higher. In earlier periods however, entitlement programs were in much better shape such that very large tax increases, spending cuts or both were less necessary than today. We believe the contraction is coming; the timing is not as clear, but it is inevitable, in our opinion. The continued rise in U.S. Treasury longer maturity interest rates (10 years and longer) this quarter indicates there is little place for anyone borrowing to hide, least of all the U.S. government. We believe a recession is likely in our future, and one only needs to wait for these foreseeable events to play out.
We remain strategic, and we remain committed to finding value across the various sub-sectors of the Agency mortgage and overall U.S. government securities market. Given the massive increase in rates over the last 24 months, we have elected to run the Fund at, or in excess of, the Benchmark’s duration as interest rate duration risks feel more balanced and perhaps near 5%, more skewed to go
Portfolio Commentary (Continued)
First Trust Intermediate Government Opportunities ETF (MGOV)Annual ReportOctober 31, 2023 (Unaudited) lower. We are buyers of longer bonds and will extend duration if the long maturity sector moves toward and through 5.0 % yield levels. To us, these real yield levels compensate us adequately for the inflation risk and, equally importantly, the expected slow-down in the U.S. economy. As mentioned above, we expect further interest rate rises from here to hinder growth and more likely over a strategic period to push interest rates lower. We remain committed to actively managing the convexity component in the portfolio and will look to continue to manage the Fund to a stable duration target; meaning we do not want to extend in duration as rates rise, and conversely, and at this point in the cycle, most importantly, we do not want to shorten or lose duration into a rally. From an asset allocation perspective, we plan to continue to take advantage of attractive spreads in select Agency MBS and Agency commercial mortgage-backed securities opportunities.
First Trust Intermediate Government Opportunities ETF (MGOV)Understanding Your Fund ExpensesOctober 31, 2023 (Unaudited) As a shareholder of First Trust Intermediate Government Opportunities ETF (the “Fund”), you incur two types of costs: (1) transaction costs; and (2) ongoing costs, including management fees, distribution and/or service (12b-1) fees, if any, and other Fund expenses. This Example is intended to help you understand your ongoing costs of investing in the Fund and to compare these costs with the ongoing costs of investing in other funds.
The Example is based on an investment of $1,000 invested at the beginning of the period (or since inception) and held through the six-month (or shorter) period ended October 31, 2023.
Actual Expenses
The first line in the following table provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During the Period” to estimate the expenses you paid on your account during this six-month (or shorter) period.
Hypothetical Example for Comparison Purposes
The second line in the following table provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs such as brokerage commissions. Therefore, the second line in the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
| Beginning
Account Value
August 2, 2023 (a) | Ending
Account Value
October 31, 2023 | Annualized
Expense Ratio
Based on the
Number of Days
in the Period | Expenses Paid
During the Period
August 2, 2023 (a)
to
October 31, 2023 (b) |
First Trust Intermediate Government Opportunities ETF (MGOV) |
| | | | |
Hypothetical (5% return before expenses) | | | | |
| |
| Actual expenses are equal to the annualized expense ratio as indicated in the table multiplied by the average account value over the period (August 2, 2023 through October 31, 2023), multiplied by 91/365. Hypothetical expenses are assumed for the most recent six-month period. |
First Trust Intermediate Government Opportunities ETF (MGOV)Portfolio of InvestmentsOctober 31, 2023
| | | | |
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES — 103.9% |
| Collateralized Mortgage Obligations — 21.8% | |
| Federal Home Loan Mortgage Corporation | | | |
| Series 2017-4741, Class GY | | | |
| Federal National Mortgage Association | | | |
| | | | |
| Government National Mortgage Association | | | |
| | | | |
| Seasoned Loans Structured Transaction Trust | | | |
| | | | |
| | | | |
| | |
| Commercial Mortgage-Backed Securities — 20.8% | |
| Federal Home Loan Mortgage Corporation Multiclass Certificates | | | |
| Series 2020-RR06, Class BX, IO (a) | | | |
| Federal Home Loan Mortgage Corporation Multifamily Structured Pass Through Certificates | | | |
| Series 2018-KSW4, Class A, 30 Day Average SOFR + CSA + 0.43% (b) | | | |
| Series 2020-K740, Class XAM, IO (c) | | | |
| Series 2021-K129, Class XAM, IO (c) | | | |
| Series 2023-KJ47, Class A2 | | | |
| | |
| Pass-Through Securities — 61.3% | |
| Federal Home Loan Mortgage Corporation |
| | | | |
| | | | |
| | | | |
| | | | |
| Federal National Mortgage Association |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | |
| Total U.S. Government Agency Mortgage-Backed Securities | |
| | |
U.S. GOVERNMENT BONDS AND NOTES — 24.4% |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| Total U.S. Government Bonds and Notes | |
| | |
See Notes to Financial Statements
First Trust Intermediate Government Opportunities ETF (MGOV)Portfolio of Investments (Continued)October 31, 2023 | | | | |
U.S. TREASURY BILLS — 1.7% |
| | | | |
| | | | |
| | |
MONEY MARKET FUNDS — 9.5% |
| Morgan Stanley Institutional Liquidity Funds - Treasury Portfolio - Institutional Class - 5.22% (f) | |
| | |
| Total Investments — 139.5% | |
| | |
| | | | |
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES SOLD SHORT — (6.0)% |
| Federal National Mortgage Association | | | |
| | | | |
| | | | |
| Total Investments Sold Short — (6.0)% | |
| | |
| | | | | |
|
| Call Options Written — (0.0)% | |
| U.S. 5-Year Treasury Futures Call | | | | |
| U.S. 10-Year Treasury Futures Call | | | | |
| U.S. Treasury Long Bond Futures Call | | | | |
| U.S. Treasury Long Bond Futures Call | | | | |
| U.S. Treasury Long Bond Futures Call | | | | |
| Total Call Options Written | |
| (Premiums received $13,844) | |
| Put Options Written — (0.8)% | |
| U.S. 10-Year Treasury Futures Put | | | | |
| U.S. Treasury Long Bond Futures Put | | | | |
| U.S. Treasury Long Bond Futures Put | | | | |
| Total Put Options Written | |
| (Premiums received $22,260) | |
| | |
| (Premiums received $36,104) | |
| Net Other Assets and Liabilities — (32.7)% | |
| | |
Futures Contracts at October 31, 2023 (See Note 2D - Futures Contracts in the Notes to Financial Statements):
| | | | | Unrealized
Appreciation
(Depreciation)/
Value |
U.S. 2-Year Treasury Notes | | | | | |
U.S. 5-Year Treasury Notes | | | | | |
See Notes to Financial Statements
First Trust Intermediate Government Opportunities ETF (MGOV)Portfolio of Investments (Continued)October 31, 2023 Futures Contracts at October 31, 2023 (See Note 2D - Futures Contracts in the Notes to Financial Statements):
| | | | | Unrealized Appreciation (Depreciation)/ Value |
Ultra U.S. Treasury Bond Futures | | | | | |
U.S. 10-Year Treasury Notes | | | | | |
U.S. Treasury Long Bond Futures | | | | | |
Ultra 10-Year U.S. Treasury Notes | | | | | |
| | | | | |
| Weighted Average Coupon security. Coupon is based on the blended interest rate of the underlying holdings, which may have different coupons. The coupon may change in any period. |
| Floating or variable rate security. |
| Collateral Strip Rate security. Coupon is based on the weighted net interest rate of the investment’s underlying collateral. The interest rate resets periodically. |
| All or a portion of this security is part of a mortgage dollar roll agreement (see Note 2I - Mortgage Dollar Rolls and TBA Transactions in the Notes to Financial Statements). |
| |
| Rate shown reflects yield as of October 31, 2023. |
Abbreviations throughout the Portfolio of Investments: |
| – Credit Spread Adjustment |
| – Interest-Only Security - Principal amount shown represents par value on which interest payments are based |
| – Secured Overnight Financing Rate |
| – To-Be-Announced Security |
Valuation InputsA summary of the inputs used to value the Fund’s investments as of October 31, 2023 is as follows (see Note 2A - Portfolio Valuation in the Notes to Financial Statements):
|
| | | Level 2
Significant
Observable
Inputs | Level 3
Significant
Unobservable
Inputs |
U.S. Government Agency Mortgage-Backed Securities | | | | |
U.S. Government Bonds and Notes | | | | |
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See Notes to Financial Statements
First Trust Intermediate Government Opportunities ETF (MGOV)Portfolio of Investments (Continued)October 31, 2023 |
| | | Level 2
Significant
Observable
Inputs | Level 3
Significant
Unobservable
Inputs |
U.S. Government Agency Mortgage-Backed Securities Sold Short | | | | |
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| Includes cumulative appreciation/depreciation on futures contracts as reported in the Futures Contracts table. Only the current day’s variation margin is presented on the Statement of Assets and Liabilities. |
See Notes to Financial Statements
First Trust Intermediate Government Opportunities ETF (MGOV)Statement of Assets and Liabilities
October 31, 2023
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Cash segregated as collateral for open futures and written options contracts | |
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Investment securities sold | |
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Investments sold short, at value | |
Options contracts written, at value | |
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Investment securities purchased | |
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Accumulated distributable earnings (loss) | |
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NET ASSET VALUE, per share | |
Number of shares outstanding (unlimited number of shares authorized, par value $0.01 per share) | |
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Investments sold short, proceeds | |
Premiums received on options contracts written | |
See Notes to Financial Statements
First Trust Intermediate Government Opportunities ETF (MGOV)Statement of Operations
For the Period Ended October 31, 2023 (a)
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NET INVESTMENT INCOME (LOSS) | |
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NET REALIZED AND UNREALIZED GAIN (LOSS): | |
Net realized gain (loss) on: | |
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Purchased options contracts | |
Written options contracts | |
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Net change in unrealized appreciation (depreciation) on: | |
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Written options contracts | |
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Net change in unrealized appreciation (depreciation) | |
NET REALIZED AND UNREALIZED GAIN (LOSS) | |
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS | |
| Inception date is August 2, 2023, which is consistent with the commencement of investment operations and is the date the initial creation units were established. |
See Notes to Financial Statements
First Trust Intermediate Government Opportunities ETF (MGOV)Statement of Changes in Net Assets
| Period
Ended
10/31/2023 (a) |
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Net investment income (loss) | |
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Net change in unrealized appreciation (depreciation) | |
Net increase (decrease) in net assets resulting from operations | |
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DISTRIBUTIONS TO SHAREHOLDERS FROM: | |
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SHAREHOLDER TRANSACTIONS: | |
Proceeds from shares sold | |
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Net increase (decrease) in net assets resulting from shareholder transactions | |
Total increase (decrease) in net assets | |
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CHANGES IN SHARES OUTSTANDING: | |
Shares outstanding, beginning of period | |
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Shares outstanding, end of period | |
| Inception date is August 2, 2023, which is consistent with the commencement of investment operations and is the date the initial creation units were established. |
See Notes to Financial Statements
First Trust Intermediate Government Opportunities ETF (MGOV)Financial Highlights
For a share outstanding throughout the period
| Period
Ended
10/31/2023 (a) |
|
Net asset value, beginning of period | |
Income from investment operations: | |
Net investment income (loss) (b) | |
Net realized and unrealized gain (loss) | |
Total from investment operations | |
Distributions paid to shareholders from: | |
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Net asset value, end of period | |
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Ratios to average net assets/supplemental data: | |
Net assets, end of period (in 000’s) | |
Ratio of total expenses to average net assets | |
Ratio of net investment income (loss) to average net assets | |
Portfolio turnover rate (e) (f) | |
| Inception date is August 2, 2023, which is consistent with the commencement of investment operations and is the date the initial creation units were established. |
| Based on average shares outstanding. |
| 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 return presented does 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. |
| |
| 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. |
| The portfolio turnover rate not including mortgage dollar rolls was 121% for the period ended October 31, 2023. |
See Notes to Financial Statements
Notes to Financial Statements
First Trust Intermediate Government Opportunities ETF (MGOV)October 31, 2023 1. Organization
First Trust Exchange-Traded Fund IV (the “Trust”) is an open-end management investment company organized as a Massachusetts business trust on September 15, 2010, and is registered with the Securities and Exchange Commission under the Investment Company Act of 1940, as amended (the “1940 Act”).
The Trust currently consists of eighteen exchange-traded funds that are offering shares. This report covers the First Trust Intermediate Government Opportunities ETF (the “Fund”), a non-diversified series of the Trust, which trades under the ticker “MGOV” on NYSE Arca, Inc. The Fund represents a separate series of shares of beneficial interest in the Trust. Unlike conventional mutual funds, the Fund issues and redeems shares on a continuous basis, at net asset value (“NAV”), only in large blocks of shares known as “Creation Units.”
The Fund is an actively managed exchange-traded fund (“ETF”). The Fund’s investment objective is to seek to maximize long-term total return. The Fund seeks to achieve its investment objective by investing, under normal market conditions, at least 80% of its net assets (plus any borrowings for investment purposes) in a portfolio of debt securities issued or guaranteed by the U.S. government (including U.S. Treasury bonds, notes and bills), its agencies or government-sponsored entities (“Government Securities”). The Fund’s investments in Government Securities include publicly-issued U.S. Treasury securities and mortgage-related securities such as pass-through securities, collateralized mortgage obligations and commercial mortgage-backed securities. The Fund may also invest in exchange-traded funds that principally invest in Government Securities as well as futures contracts, options and swap agreements that utilize Government Securities as their reference asset. The Fund may purchase mortgage-related securities in “to-be-announced” (“TBA”) transactions, including mortgage dollar rolls. The Fund may invest in fixed or floating rate securities.
2. Significant Accounting Policies
The Fund is considered an investment company and follows accounting and reporting guidance under Financial Accounting Standards Board Accounting Standards Codification Topic 946, “Financial Services-Investment Companies.” The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of the financial statements. The preparation of the financial statements in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates.
A. Portfolio Valuation
The Fund’s NAV is determined daily as of the close of regular trading on the New York Stock Exchange (“NYSE”), normally 4:00 p.m. Eastern time, on each day the NYSE is open for trading. If the NYSE closes early on a valuation day, the NAV is determined as of that time. Domestic debt securities and foreign securities are priced using data reflecting the earlier closing of the principal markets for those securities. The Fund’s NAV is calculated by dividing the value of all assets of the Fund (including accrued interest and dividends), less all liabilities (including accrued expenses and dividends declared but unpaid), by the total number of shares outstanding.
The Fund’s investments are valued daily at market value or, in the absence of market value with respect to any portfolio securities, at fair value. Market value prices represent readily available market quotations such as last sale or official closing prices from a national or foreign exchange (i.e., a regulated market) and are primarily obtained from third-party pricing services. Fair value prices represent any prices not considered market value prices and are either obtained from a third-party pricing service or are determined by the Pricing Committee of the Fund’s investment advisor, First Trust Advisors L.P. (“First Trust” or the “Advisor”), in accordance with valuation procedures approved by the Trust’s Board of Trustees, and in accordance with provisions of the 1940 Act and rules thereunder. Investments valued by the Advisor’s Pricing Committee, if any, are footnoted as such in the footnotes to the Portfolio of Investments. The Fund’s investments are valued as follows:
U.S. government securities, mortgage-backed securities, asset-backed securities, and other debt securities are fair valued on the basis of valuations provided by a third-party pricing service approved by the Advisor’s Pricing Committee, which may use the following valuation inputs when available:
Notes to Financial Statements (Continued)
First Trust Intermediate Government Opportunities ETF (MGOV)October 31, 2023 7)
reference data including market research publications.
Pricing services generally value fixed-income securities assuming orderly transactions of an institutional round lot size, but a Fund may hold or transact in such securities in smaller, odd lot sizes. Odd lots may trade at lower prices than institutional round lots.
Equity securities traded in an over-the-counter market are valued at the close price or the last trade price.
Shares of open-end funds are valued based on NAV per share.
Exchange-traded futures contracts are valued at the end of the day settlement price.
Exchange-traded options contracts are valued at the closing price in the market where such contracts are principally traded. If no closing price is available, exchange-traded options contracts are valued at the mean of their most recent bid and ask price, if both are available. Options contracts traded in the over-the-counter market may be valued as follows, depending on the market in which the investment trades: (1) the mean of the most recent bid and ask price, if available; or (2) a price based on the equivalent exchange-traded option.
Fixed income and other debt securities having a remaining maturity of sixty 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 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 most recent price provided by a pricing service;
2)
available market prices for the fixed-income security;
3)
the fundamental business data relating to the borrower/issuer;
4)
an evaluation of the forces which influence the market in which these securities are purchased and sold;
5)
the type, size and cost of a security;
6)
the financial statements of the borrower/issuer or the financial condition of the country of issue;
7)
the credit quality and cash flow of the borrower/issuer, or country of issue, based on the Pricing Committee’s, sub-advisor’s or portfolio manager’s analysis, as applicable, or external analysis;
8)
the information as to any transactions in or offers for the security;
9)
the price and extent of public trading in similar securities of the borrower/issuer, or comparable companies;
Notes to Financial Statements (Continued)
First Trust Intermediate Government Opportunities ETF (MGOV)October 31, 2023 11)
the quality, value and salability of collateral, if any, securing the security;
12)
the business prospects of the borrower/issuer, including any ability to obtain money or resources from a parent or affiliate and an assessment of the borrower’s/issuer’s management (for corporate debt only);
13)
the prospects for the borrower’s/issuer’s industry, and multiples (of earnings and/or cash flows) being paid for similar businesses in that industry (for corporate debt only);
14)
the borrower’s/issuer’s competitive position within the industry;
15)
the borrower’s/issuer’s ability to access additional liquidity through public and/or private markets; and
16)
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:
• Level 1 – Level 1 inputs are quoted prices in active markets for identical investments. An active market is a market in which transactions for the investment occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
• Level 2 – Level 2 inputs are observable inputs, either directly or indirectly, and include the following:
o Quoted prices for similar investments in active markets.
o Quoted prices for identical or similar investments in markets that are non-active. A non-active market is a market where there are few transactions for the investment, the prices are not current, or price quotations vary substantially either over time or among market makers, or in which little information is released publicly.
o Inputs other than quoted prices that are observable for the investment (for example, interest rates and yield curves observable at commonly quoted intervals, volatilities, prepayment speeds, loss severities, credit risks, and default rates).
o Inputs that are derived principally from or corroborated by observable market data by correlation or other means.
• Level 3 – Level 3 inputs are unobservable inputs. Unobservable inputs may reflect the reporting entity’s own assumptions about the assumptions that market participants would use in pricing the investment.
The inputs or methodologies used for valuing investments are not necessarily an indication of the risk associated with investing in those investments. A summary of the inputs used to value the Fund’s investments as of October 31, 2023, is included with the Fund’s Portfolio of Investments.
B. Securities Transactions and Investment Income
Securities transactions are recorded as of the trade date. Realized gains and losses from securities transactions are recorded on the identified cost basis. Dividend income is recorded on the ex-dividend date. Interest income is recorded daily on the accrual basis. Amortization of premiums and accretion of discounts are recorded using the effective interest method.
The United Kingdom’s Financial Conduct Authority (the “FCA”), which regulates the London Interbank Offered Rates (“LIBOR”), ceased making LIBOR available as a reference rate over a phase-out period that began December 31, 2021. The overnight and 12-month USD LIBOR settings permanently ceased as of June 30, 2023. The FCA announced that the 1-, 3- and 6-month USD LIBOR settings will continue to be published using a synthetic methodology to serve as a fallback for non-U.S. contracts until September 2024. In response to the discontinuation of LIBOR, investors have added fallback provisions to existing contracts for investments whose value is tied to LIBOR, with most fallback provisions requiring the adoption of the Secured Overnight Financing Rate (“SOFR”) as a replacement rate. There is no assurance that any alternative reference rate, including SOFR, will be similar to or produce the same value or economic equivalence as LIBOR or that instruments using an alternative rate will have the same volume or liquidity. At this time, it is not possible to predict the full impact of the elimination of LIBOR and the establishment of an alternative reference rate on the Fund or its investments.
The Fund invests in interest-only securities. For these securities, if there is a change in the estimated cash flows, based on an evaluation of current information, then the estimated yield is adjusted. Additionally, if the evaluation of current information indicates a permanent impairment of the security, the cost basis of the security is written down and a loss is recognized. Debt obligations may be placed on non-accrual status and the related interest income may be reduced by ceasing current accruals and writing off interest receivables when the collection of all or a portion of interest has become doubtful based on consistently applied procedures. A debt obligation is removed from non-accrual status when the issuer resumes interest payments or when collectability of interest is reasonably assured.
Notes to Financial Statements (Continued)
First Trust Intermediate Government Opportunities ETF (MGOV)October 31, 2023 Securities purchased or sold on a when-issued, delayed-delivery or forward purchase commitment basis may have extended settlement periods. The value of the security so purchased is subject to market fluctuations during this period. The Fund maintains liquid assets with a current value at least equal to the amount of its when-issued, delayed-delivery or forward purchase commitments until payment is made. At October 31, 2023, the Fund had no when-issued and delayed-delivery securities. At October 31, 2023, the Fund held $2,956,154 of forward purchase commitments.
C. Short Sales
Short sales are utilized to manage interest rate and spread risk, and are transactions in which securities or other instruments (such as options, forwards, futures or other derivative contracts) are sold that are not currently owned in the Fund’s portfolio. When the Fund engages in a short sale, the Fund must borrow the security sold short and deliver the security to the counterparty. Short selling allows the Fund to profit from a decline in a market price to the extent such decline exceeds the transaction costs and the costs of borrowing the securities. The Fund is charged a fee or premium to borrow the securities sold short and is obligated to repay the lenders of the securities. Any dividends or interest that accrues on the securities during the period of the loan are due to the lenders. A gain, limited to the price at which the security was sold short, or a loss, unlimited in size, will be recognized upon the termination of the short sale; which is effected by the Fund purchasing the security sold short and delivering the security to the lender. Any such gain or loss may be offset, completely or in part, by the change in the value of the long portion of the Fund’s portfolio. The Fund is subject to the risk it may be unable to reacquire a security to terminate a short position except at a price substantially in excess of the last quoted price. Also, there is the risk that the counterparty to a short sale may fail to honor its contractual terms, causing a loss to the Fund.
D. Futures Contracts
The Fund may purchase or sell (i.e., is long or short) exchange-listed futures contracts to hedge against or gain exposure to changes in interest rates (interest rate risk). Futures contracts are agreements between the Fund and a counterparty to buy or sell a specific quantity of an underlying instrument at a specified price and at a specified date. Depending on the terms of the contract, futures contracts are settled either through physical delivery of the underlying instrument on the settlement date or by payment of a cash settlement amount on the settlement date. Open futures contracts can also be closed out prior to settlement by entering into an offsetting transaction in a matching futures contract. If the Fund is not able to enter into an offsetting transaction, the Fund will continue to be required to maintain margin deposits on the futures contract. When the contract is closed or expires, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed or expired. This gain or loss is included in “Net realized gain (loss) on futures contracts” on the Statement of Operations.
Upon entering into a futures contract, the Fund must deposit funds, called margin, with its custodian in the name of the clearing broker equal to a specified percentage of the current value of the contract. Open futures contracts are marked-to-market daily with the change in value recognized as a component of “Net change in unrealized appreciation (depreciation) on futures contracts” on the Statement of Operations. Pursuant to the contract, the Fund agrees to receive from or pay to the broker an amount of cash equal to the daily fluctuation in value of the contract. Such receipts or payments are known as variation margin and are included in “Variation margin” receivable or payable on the Statement of Assets and Liabilities. If market conditions change unexpectedly, the Fund may not achieve the anticipated benefits of the futures contract and may realize a loss. The use of futures contracts involves the risk of imperfect correlation in movements in the price of the futures contracts, interest rates and the underlying instruments.
E. Options Contracts
The Fund may invest in exchange-listed options on U.S. Treasury securities, exchange-listed options on U.S. Treasury futures contracts, exchange-listed U.S. Treasury futures contracts and exchange-listed options on secured overnight financing rate futures contracts. The Fund uses derivative instruments primarily to hedge interest rate risk and actively manage interest rate exposure. The primary risk exposure is interest rate risk.
The Fund may purchase (buy) or write (sell) put and call options on futures contracts and enter into closing transactions with respect to such options to terminate an existing position. A futures option gives the holder the right, in return for the premium paid, to assume a long position (call) or short position (put) in a futures contract at a specified exercise price prior to the expiration of the option. Upon exercise of a call option, the holder acquires a long position in the futures contract and the writer is assigned the opposite short position. In the case of a put option, the opposite is true. Prior to exercise or expiration, a futures option contract may be closed out by an offsetting purchase or sale of a futures option of the same series. When the Fund writes (sells) an option, an amount equal to the premium received by the Fund is included in “Options contracts written, at value” on the Statement of Assets and Liabilities. When the Fund purchases (buys) an option, the premium paid represents the cost of the option, which is included in “Premiums paid on options contracts purchased” on the Statement of Assets and Liabilities. Options are marked-to-market daily and their value is affected
Notes to Financial Statements (Continued)
First Trust Intermediate Government Opportunities ETF (MGOV)October 31, 2023 by changes in the value of the underlying security, changes in interest rates, changes in the actual or perceived volatility of the securities markets and the underlying securities, and the remaining time to the option’s expiration. The value of options may also be adversely affected if the market for the options becomes less liquid or the trading volume diminishes.
The Fund uses options on futures contracts in connection with hedging strategies. Generally, these strategies are applied under the same market and market sector conditions in which the Fund uses put and call options on securities. The purchase of put options on futures contracts is analogous to the purchase of puts on securities so as to hedge the Fund’s securities holdings against the risk of declining market prices. The writing of a call option or the purchasing of a put option on a futures contract constitutes a partial hedge against declining prices of securities which are deliverable upon exercise of the futures contract. If the price at expiration of a written call option is below the exercise price, the Fund will retain the full amount of the option premium which provides a partial hedge against any decline that may have occurred in the Fund’s holdings of securities. If the price when the option is exercised is above the exercise price, however, the Fund will incur a loss, which may be offset, in whole or in part, by the increase in the value of the securities held by the Fund that were being hedged. Writing a put option or purchasing a call option on a futures contract serves as a partial hedge against an increase in the value of the securities the Fund intends to acquire. Realized gains and losses on written options are included in “Net realized gain (loss) on written options contracts” on the Statement of Operations. Realized gains and losses on purchased options are included in ���Net realized gain (loss) on purchased options contracts” on the Statement of Operations.
The Fund is required to deposit and maintain margin with respect to put and call options on futures contracts written by it. Such margin deposits will vary depending on the nature of the underlying futures contract (and the related initial margin requirements), the current market value of the option and other futures positions held by the Fund. The Fund will pledge in a segregated account at the Fund’s custodian, liquid assets, such as cash, U.S. government securities or other high-grade liquid debt obligations equal in value to the amount due on the underlying obligation. Such segregated assets will be marked-to-market daily, and additional assets will be pledged in the segregated account whenever the total value of the pledged assets falls below the amount due on the underlying obligation.
The risks associated with the use of options on future contracts include the risk that the Fund may close out its position as a writer of an option only if a liquid secondary market exists for such options, which cannot be assured. The Fund’s successful use of options on futures contracts depends on the Advisor’s ability to correctly predict the movement in prices on futures contracts and the underlying instruments, which may prove to be incorrect. In addition, there may be imperfect correlation between the instruments being hedged and the futures contract subject to option.
F. Interest-Only Securities
An interest-only security (“IO Security”) is the interest-only portion of a mortgage-backed security that receives some or all of the interest portion of the underlying mortgage-backed security and little or no principal. A reference principal value called a notional value is used to calculate the amount of interest due to the IO Security. IO Securities are sold at a deep discount to their notional principal amount. Generally speaking, when interest rates are falling and prepayment rates are increasing, the value of an IO Security will fall. Conversely, when interest rates are rising and prepayment rates are decreasing, generally the value of an IO Security will rise. These securities, if any, are identified on the Portfolio of Investments.
G. Principal-Only Securities
A principal-only security (“PO Security”) is the principal-only portion of a mortgage-backed security that does not receive any interest, is priced at a deep discount to its redemption value and ultimately receives the redemption value. Generally speaking, when interest rates are falling and prepayment rates are increasing, the value of a PO Security will rise. Conversely, when interest rates are rising and prepayment rates are decreasing, generally the value of a PO Security will fall. These securities, if any, are identified on the Portfolio of Investments.
H. Stripped Mortgage-Backed Securities
Stripped mortgage-backed securities are created by segregating the cash flows from underlying mortgage loans or mortgage securities to create two or more new securities, each with a specified percentage of the underlying security’s principal or interest payments. Mortgage-backed securities may be partially stripped so that each investor class receives some interest and some principal. When securities are completely stripped, however, all of the interest is distributed to holders of one type of security known as an IO Security and all of the principal is distributed to holders of another type of security known as a PO Security. These securities, if any, are identified on the Portfolio of Investments.
Notes to Financial Statements (Continued)
First Trust Intermediate Government Opportunities ETF (MGOV)October 31, 2023 I. Mortgage Dollar Rolls and TBA Transactions
The Fund may invest, without limitation, in mortgage dollar rolls. The Fund intends to enter into mortgage dollar rolls only with high quality securities dealers and banks, as determined by the Fund’s investment advisor. In a mortgage dollar roll, the Fund will sell (or buy) mortgage-backed securities for delivery on a specified date and simultaneously contract to repurchase (or sell) substantially similar (same type, coupon and maturity) securities on a future date. Mortgage dollar rolls are recorded as separate purchases and sales in the Fund. The Fund may also invest in TBA Transactions. A TBA Transaction is a method of trading mortgage-backed securities. TBA Transactions generally are conducted in accordance with widely-accepted guidelines which establish commonly observed terms and conditions for execution, settlement and delivery. In a TBA Transaction, the buyer and the seller agree on general trade parameters such as agency, settlement date, par amount and price.
J. Dividends and Distributions to Shareholders
Dividends from net investment income of the Fund, 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, are distributed at least annually. The Fund may also designate a portion of the amount paid to redeeming shareholders as a distribution for tax purposes.
Distributions in cash may be reinvested automatically in additional whole shares only if the broker through whom the shares were purchased makes such option available. Such shares will generally be reinvested by the broker based upon the market price of those shares and investors may be subject to customary brokerage commissions charged by the broker.
Distributions from net investment income and realized capital gains are determined in accordance with 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 NAV per share. Temporary differences, which arise from recognizing certain items of income, expense and gain/loss in different periods for financial statement and tax purposes, will reverse at some time in the future.
The tax character of distributions paid during the fiscal period ended October 31, 2023 was as follows:
As of October 31, 2023, the components of distributable earnings on a tax basis for the Fund were as follows:
Undistributed ordinary income | |
Accumulated capital and other gain (loss) | |
Net unrealized appreciation (depreciation) | |
K. Income Taxes
The Fund intends 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 2023 remains open to federal and state audit. As of October 31, 2023, management has evaluated the application of these standards to the Fund and has determined that no provision for income tax is required in the Fund’s 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, 2023, for federal income tax purposes, the Fund had $342,597 of
Notes to Financial Statements (Continued)
First Trust Intermediate Government Opportunities ETF (MGOV)October 31, 2023 capital loss carryforwards available, to the extent provided by regulations, to offset future capital gains. To the extent that these loss carryforwards are used to offset future capital gains, it is probable that the capital gains so offset will not be distributed to the Fund’s shareholders.
Certain losses realized during the current fiscal period may be deferred and treated as occurring on the first day of the following fiscal year for federal income tax purposes. For the fiscal period ended October 31, 2023, the Fund had no net late year ordinary or capital losses.
In order to present paid-in capital and accumulated distributable earnings (loss) (which consists of accumulated net investment income (loss), accumulated net realized gain (loss) on investments and net unrealized appreciation (depreciation) on investments) on the Statement of Assets and Liabilities that more closely represent their tax character, certain adjustments have been made to paid-in capital, accumulated net investment income (loss) and accumulated net realized gain (loss) on investments. These adjustments are primarily due to the difference between book and tax treatments of income and gains on various investment securities held by the Funds and in-kind transactions. The results of operations and net assets were not affected by these adjustments. For the fiscal period ended October 31, 2023, the adjustments for the Fund were as follows:
Accumulated
Net Investment
Income (Loss) | Accumulated
Net Realized
Gain (Loss)
on Investments | |
| | |
As of October 31, 2023, the aggregate cost, gross unrealized appreciation, gross unrealized depreciation, and net unrealized appreciation/(depreciation) on investments (including short positions and derivatives, if any) for federal income tax purposes were as follows:
| Gross Unrealized
Appreciation | Gross Unrealized
(Depreciation) | Net Unrealized
Appreciation
(Depreciation) |
| | | |
L. Expenses
Expenses, other than the investment advisory fee and other excluded expenses, are paid by the Advisor (see Note 3).
3. Investment Advisory Fee, Affiliated Transactions and Other Fee Arrangements
First Trust, the investment advisor to the Fund, is a limited partnership with one limited partner, Grace Partners of DuPage L.P., and one general partner, The Charger Corporation. The Charger Corporation is an Illinois corporation controlled by James A. Bowen, Chief Executive Officer of First Trust. First Trust is responsible for the selection and ongoing monitoring of the 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, license fees and other services, but excluding fee payments under the Investment Management Agreement, interest, taxes, acquired fund fees and expenses, if any, brokerage commissions and other expenses connected with the execution of portfolio transactions, distribution and service fees payable pursuant to a Rule 12b-1 plan, if any, and extraordinary expenses. The annual unitary management fee payable by the Fund to First Trust for these services will be reduced at certain levels of the Fund’s net assets (“breakpoints”) and calculated pursuant to the following schedule:
| |
Fund net assets up to and including $2.5 billion | |
Fund net assets greater than $2.5 billion up to and including $5 billion | |
Fund net assets greater than $5 billion up to and including $7.5 billion | |
Fund net assets greater than $7.5 billion up to and including $10 billion | |
Fund net assets greater than $10 billion up to and including $15 billion | |
Fund net assets greater than $15 billion | |
Notes to Financial Statements (Continued)
First Trust Intermediate Government Opportunities ETF (MGOV)October 31, 2023 The Trust has multiple service agreements with The Bank of New York Mellon (“BNYM”). Under the service agreements, BNYM performs custodial, fund accounting, certain administrative services, and transfer agency services for the Fund. As custodian, BNYM is responsible for custody of the Fund’s assets. As fund accountant and administrator, BNYM is responsible for maintaining the books and records of the Fund’s securities and cash. As transfer agent, BNYM is responsible for maintaining shareholder records for the Fund. BNYM is a subsidiary of The Bank of New York Mellon Corporation, a financial holding company.
Each Trustee who is not an officer or employee of First Trust, any sub-advisor or any of their affiliates (“Independent Trustees”) is paid a fixed annual retainer that is allocated equally among each fund in the First Trust Fund Complex. Each Independent Trustee is also paid an annual per fund fee that varies based on whether the fund is a closed-end or other actively managed fund, a target outcome fund or an index fund.
Additionally, the Lead Independent Trustee and the Chairs of the Audit Committee, Nominating and Governance Committee and Valuation Committee are paid annual fees to serve in such capacities, with such compensation allocated pro rata among each fund in the First Trust Fund Complex based on net assets. Independent Trustees are reimbursed for travel and out-of-pocket expenses in connection with all meetings. The Lead Independent Trustee and Committee Chairs rotate every three years. The officers and “Interested” Trustee receive no compensation from the Trust for acting in such capacities.
4. Purchases and Sales of Securities
The costs of purchases of U.S. Government securities and non-U.S. Government securities, excluding short-term investments and investments sold short, for the fiscal period ended October 31, 2023, were $41,513,581 and $0, respectively. The proceeds from sales and paydowns of U.S. Government securities and non-U.S. Government securities, excluding short-term investments and investments sold short, for the fiscal period ended October 31, 2023 were $22,450,510 and $0, respectively. The cost of purchases to cover short sales and the proceeds of short sales were $2,559,693 and $3,453,169, respectively.
For the fiscal period ended October 31, 2023, the Fund had no in-kind transactions.
5. Derivative Transactions
The following table presents the types of derivatives held by the Fund at October 31, 2023, the primary underlying risk exposure and the location of these instruments as presented on the Statement of Assets and Liabilities.
| | | |
| | Statement of Assets and
Liabilities Location | | Statement of Assets and
Liabilities Location | |
| | Options contracts purchased, at value | | Options contracts written, at value | |
| | Unrealized appreciation on futures contracts* | | Unrealized depreciation on futures contracts* | |
| Includes cumulative appreciation/depreciation on futures contracts as reported in the Fund’s Portfolio of Investments. Only the current day’s variation margin is presented on the Statement of Assets and Liabilities. |
The following table presents the amount of net realized gain (loss) and change in net unrealized appreciation (depreciation) recognized for the fiscal period ended October 31, 2023, on derivative instruments, as well as the primary underlying risk exposure associated with the instruments.
Statement of Operations Location | |
Interest Rate Risk Exposure | |
Net realized gain (loss) on: | |
Purchased options contracts | |
Written options contracts | |
| |
Net change in unrealized appreciation (depreciation) on: | |
Written options contracts | |
| |
Notes to Financial Statements (Continued)
First Trust Intermediate Government Opportunities ETF (MGOV)October 31, 2023 During the fiscal period ended October 31, 2023, the notional value of futures contracts opened and closed were $17,832,180 and $12,585,401, respectively.
During the fiscal period ended October 31, 2023, the premiums for purchased options contracts opened were $5,854 and the premiums for purchased options contracts closed, exercised and expired were $5,854.
During the fiscal period ended October 31, 2023, the premiums for written options contracts opened were $48,786 and the premiums for written options contracts closed, exercised and expired were $12,682.
The Fund does not have the right to offset financial assets and financial liabilities related to futures and options contracts on the Statement of Assets and Liabilities.
6. Creations, Redemptions and Transaction Fees
The Fund generally issues and redeems its shares in primary market transactions through a creation and redemption mechanism and does not sell or redeem individual shares. Instead, financial entities known as “Authorized Participants” have contractual arrangements with the Fund or one of the Fund’s service providers to purchase and redeem Fund shares directly with the Fund in large blocks of shares known as “Creation Units.” Prior to the start of trading on every business day, the Fund publishes through the National Securities Clearing Corporation the “basket” of securities, cash or other assets that it will accept in exchange for a Creation Unit of the Fund’s shares. An Authorized Participant that wishes to effectuate a creation of the Fund’s shares deposits with the Fund the “basket” of securities, cash or other assets identified by the Fund that day, and then receives the Creation Unit of the Fund’s shares in return for those assets. After purchasing a Creation Unit, the Authorized Participant may continue to hold the Fund’s shares or sell them in the secondary market. The redemption process is the reverse of the purchase process: the Authorized Participant redeems a Creation Unit of the Fund’s shares for a basket of securities, cash or other assets. The combination of the creation and redemption process with secondary market trading in the Fund’s shares and underlying securities provides arbitrage opportunities that are designed to help keep the market price of the Fund’s shares at or close to the NAV per share of the Fund.
The Fund imposes fees in connection with the purchase of Creation Units. These fees may vary based upon various fact-based circumstances, including, but not limited to, the composition of the securities included in the Creation Unit or the countries in which the transactions are settled. The price for each Creation Unit will equal the daily NAV per share of the Fund times the number of shares in a Creation Unit, plus the fees described above and, if applicable, any operational processing and brokerage costs, transfer fees, stamp taxes and part or all of the spread between the expected bid and offer side of the market related to the securities comprising the creation basket.
The Fund also imposes fees in connection with the redemption of Creation Units. These fees may vary based upon various fact-based circumstances, including, but not limited to, the composition of the securities included in the Creation Unit or the countries in which the transactions are settled. The price received for each Creation Unit will equal the daily NAV per share of the Fund times the number of shares in a Creation Unit, minus the fees described above and, if applicable, any operational processing and brokerage costs, transfer fees, stamp taxes and part or all of the spread between the expected bid and offer side of the market related to the securities comprising the redemption basket. Investors who use the services of a broker or other such intermediary in addition to an Authorized Participant to effect a redemption of a Creation Unit may also be assessed an amount to cover the cost of such services. The redemption fee charged by the Fund will comply with Rule 22c-2 of the 1940 Act which limits redemption fees to no more than 2% of the value of the shares redeemed.
7. Distribution Plan
The Board of Trustees adopted a Distribution and Service Plan pursuant to Rule 12b-1 under the 1940 Act. In accordance with the Rule 12b-1 plan, the Fund is authorized to pay an amount up to 0.25% of its average daily net assets each year to reimburse First Trust Portfolios L.P. (“FTP”), the distributor of the Fund, for amounts expended to finance activities primarily intended to result in the sale of Creation Units or 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 July 26, 2025.
Notes to Financial Statements (Continued)
First Trust Intermediate Government Opportunities ETF (MGOV)October 31, 2023 8. Indemnification
The Trust, on behalf of the Fund, has a variety of indemnification obligations under contracts with its service providers. The Trust’s maximum exposure under these arrangements is unknown. However, the Trust has not had prior claims or losses pursuant to these contracts and expects the risk of loss to be remote.
9. Subsequent Events
Management has evaluated the impact of all subsequent events on the Fund through the date the financial statements were issued and has determined that there were no subsequent events requiring recognition or disclosure in the financial statements that have not already been disclosed.
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Trustees of First Trust Exchange-Traded Fund IV:
Opinion on the Financial Statements and Financial Highlights
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of First Trust Intermediate Government Opportunities ETF (the “Fund”), one of the funds constituting the First Trust Exchange-Traded Fund IV, as of October 31, 2023, and the related statements of operations, changes in net assets, and the financial highlights for the period from August 2, 2023 (commencement of investment operations) through October 31, 2023, and the related notes. In our opinion, the financial statements and financial highlights present fairly, in all material respects, the financial position of the Fund as of October 31, 2023, and the results of its operations, the changes in its net assets, and the financial highlights for the period from August 2, 2023 (commencement of investment operations) through October 31, 2023, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on the Fund’s financial statements and financial highlights based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Fund in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement, whether due to error or fraud. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements and financial highlights, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements and financial highlights. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and financial highlights. Our procedures included confirmation of securities owned as of October 31, 2023, by correspondence with the custodian and brokers; when replies were not received from brokers, we performed other auditing procedures. We believe that our audit provides a reasonable basis for our opinion.
/s/ Deloitte & Touche, LLP
Chicago, Illinois
December 21, 2023
We have served as the auditor of one or more First Trust investment companies since 2001.
First Trust Intermediate Government Opportunities ETF (MGOV)October 31, 2023 (Unaudited) Proxy Voting Policies and Procedures
A description of the policies and procedures that the Trust uses to determine how to vote proxies and information on how the Fund voted proxies relating to its portfolio securities during the most recent 12-month period ended June 30 is available (1) without charge, upon request, by calling (800) 988-5891; (2) on the Fund’s website at www.ftportfolios.com; and (3) on the Securities and Exchange Commission’s (“SEC”) website at www.sec.gov.
Portfolio Holdings
The Fund files portfolio holdings information for each month in a fiscal quarter within 60 days after the end of the relevant fiscal quarter on Form N-PORT. Portfolio holdings information for the third month of each fiscal quarter will be publicly available on the SEC’s website at www.sec.gov. The Fund’s complete schedule of portfolio holdings for the second and fourth quarters of each fiscal year is included in the semi-annual and annual reports to shareholders, respectively, and is filed with the SEC on Form N-CSR. The semi-annual and annual report for the Fund is available to investors within 60 days after the period to which it relates. The Fund’s Forms N-PORT and Forms N-CSR are available on the SEC’s website listed above.
Federal Tax Information
Distributions paid to foreign shareholders during the Fund’s fiscal period ended October 31, 2023 that were properly designated by the Fund as “interest-related dividends” or “short-term capital gain dividends,” may not be subject to federal income tax provided that the income was earned directly by such foreign shareholders.
Of the ordinary income (including short-term capital gain) distributions made by the Fund during the fiscal period ended October 31, 2023, none qualify for the corporate dividends received deduction available to corporate shareholders or as qualified dividend income.
Risk Considerations
Risks are inherent in all investing. Certain general risks that may be applicable to a Fund are identified below, but not all of the material risks relevant to each Fund are included in this report and not all of the risks below apply to each Fund. The material risks of investing in each Fund are spelled out in its prospectus, statement of additional information and other regulatory filings. Before investing, you should consider each Fund’s investment objective, risks, charges and expenses, and read each Fund’s prospectus and statement of additional information carefully. You can download each Fund’s prospectus at www.ftportfolios.com or contact First Trust Portfolios L.P. at (800) 621-1675 to request a prospectus, which contains this and other information about each Fund.
Concentration Risk. To the extent that a fund is able to invest a significant percentage of its assets in a single asset class or the securities of issuers within the same country, state, region, industry or sector, an adverse economic, business or political development may affect the value of the fund’s investments more than if the fund were more broadly diversified. A fund that tracks an index will be concentrated to the extent the fund’s corresponding index is concentrated. A concentration makes a fund more susceptible to any single occurrence and may subject the fund to greater market risk than a fund that is more broadly diversified.
Credit Risk. Credit risk is the risk that an issuer of a security will be unable or unwilling to make dividend, interest and/or principal payments when due and the related risk that the value of a security may decline because of concerns about the issuer’s ability to make such payments.
Cyber Security Risk. The funds are susceptible to potential operational risks through breaches in cyber security. A breach in cyber security refers to both intentional and unintentional events that may cause a fund to lose proprietary information, suffer data corruption or lose operational capacity. Such events could cause a fund to incur regulatory penalties, reputational damage, additional compliance costs associated with corrective measures and/or financial loss. In addition, cyber security breaches of a fund’s third-party service providers, such as its administrator, transfer agent, custodian, or sub-advisor, as applicable, or issuers in which the fund invests, can also subject a fund to many of the same risks associated with direct cyber security breaches.
Defined Outcome Funds Risk. To the extent a fund’s investment strategy is designed to deliver returns tied to the price performance of an underlying ETF, an investor may not realize the returns the fund seeks to achieve if that investor does not hold shares for the entire target outcome period. In the event an investor purchases shares after the first day of the target outcome period or sells shares prior to the end of the target outcome period, the buffer that the fund seeks to provide against a decline in the value of the underlying ETF may not be available, the enhanced returns that the fund seeks to provide (if any) may not be available and the investor may not
Additional Information (Continued)
First Trust Intermediate Government Opportunities ETF (MGOV)October 31, 2023 (Unaudited) participate in a gain in the value of the underlying ETF up to the cap for the investor’s investment period. Additionally, the fund will not participate in gains of the underlying ETF above the cap and a shareholder may lose their entire investment. If the fund seeks enhanced returns, there are certain time periods when the value of the fund may fall faster than the value of the underlying ETF, and it is very unlikely that, on any given day during which the underlying ETF share price increases in value, the fund’s share price will increase at the same rate as the enhanced returns sought by the fund, which is designed for an entire target outcome period. Trading flexible exchange options involves risks different from, or possibly greater than, the risks associated with investing directly in securities, such as less liquidity and correlation and valuation risks. A fund may experience substantial downside from specific flexible exchange option positions and certain positions may expire worthless.
Derivatives Risk. To the extent a fund uses derivative instruments such as futures contracts, options contracts and swaps, the fund may experience losses because of adverse movements in the price or value of the underlying asset, index or rate, which may be magnified by certain features of the derivative. These risks are heightened when a fund’s portfolio managers use derivatives to enhance the fund’s return or as a substitute for a position or security, rather than solely to hedge (or offset) the risk of a position or security held by the fund.
Equity Securities Risk. To the extent a fund invests in equity securities, the value of the fund’s shares will fluctuate with changes in the value of the equity securities. Equity securities prices fluctuate for several reasons, including changes in investors’ perceptions of the financial condition of an issuer or the general condition of the relevant stock market, such as market volatility, or when political or economic events affecting the issuers occur. In addition, common stock prices may be particularly sensitive to rising interest rates, as the cost of capital rises and borrowing costs increase. Equity securities may decline significantly in price over short or extended periods of time, and such declines may occur in the equity market as a whole, or they may occur in only a particular country, company, industry or sector of the market.
ETF Risk. The shares of an ETF trade like common stock and represent an interest in a portfolio of securities. The risks of owning an ETF generally reflect the risks of owning the underlying securities, although lack of liquidity in an ETF could result in it being more volatile and ETFs have management fees that increase their costs. Shares of an ETF trade on an exchange at market prices rather than net asset value, which may cause the shares to trade at a price greater than net asset value (premium) or less than net asset value (discount). In times of market stress, decisions by market makers to reduce or step away from their role of providing a market for an ETF’s shares, or decisions by an ETF’s authorized participants that they are unable or unwilling to proceed with creation and/or redemption orders of an ETF’s shares, could result in shares of the ETF trading at a discount to net asset value and in greater than normal intraday bid-ask spreads.
Fixed Income Securities Risk. To the extent a fund invests in fixed income securities, the fund will be subject to credit risk, income risk, interest rate risk, liquidity risk and prepayment risk. Income risk is the risk that income from a fund’s fixed income investments could decline during periods of falling interest rates. Interest rate risk is the risk that the value of a fund’s fixed income securities will decline because of rising interest rates. Liquidity risk is the risk that a security cannot be purchased or sold at the time desired, or cannot be purchased or sold without adversely affecting the price. Prepayment risk is the risk that the securities will be redeemed or prepaid by the issuer, resulting in lower interest payments received by the fund. In addition to these risks, high yield securities, or “junk” bonds, are subject to greater market fluctuations and risk of loss than securities with higher ratings, and the market for high yield securities is generally smaller and less liquid than that for investment grade securities.
Index or Model Constituent Risk. Certain funds may be a constituent of one or more indices or ETF models. As a result, such a fund may be included in one or more index-tracking exchange-traded funds or mutual funds. Being a component security of such a vehicle could greatly affect the trading activity involving a fund, the size of the fund and the market volatility of the fund. Inclusion in an index could increase demand for the fund and removal from an index could result in outsized selling activity in a relatively short period of time. As a result, a fund’s net asset value could be negatively impacted and the fund’s market price may be significantly below its net asset value during certain periods. In addition, index rebalances may potentially result in increased trading activity in a fund’s shares.
Index Provider Risk. To the extent a fund seeks to track an index, it is subject to Index Provider Risk. There is no assurance that the Index Provider will compile the Index accurately, or that the Index will be determined, maintained, constructed, reconstituted, rebalanced, composed, calculated or disseminated accurately. To correct any such error, the Index Provider may carry out an unscheduled rebalance or other modification of the Index constituents or weightings, which may increase the fund’s costs. The Index Provider does not provide any representation or warranty in relation to the quality, accuracy or completeness of data in the Index, and
Additional Information (Continued)
First Trust Intermediate Government Opportunities ETF (MGOV)October 31, 2023 (Unaudited) it does not guarantee that the Index will be calculated in accordance with its stated methodology. Losses or costs associated with any Index Provider errors generally will be borne by the fund and its shareholders.
Investment Companies Risk. To the extent a fund invests in the securities of other investment vehicles, the fund will incur additional fees and expenses that would not be present in a direct investment in those investment vehicles. Furthermore, the fund’s investment performance and risks are directly related to the investment performance and risks of the investment vehicles in which the fund invests.
LIBOR Risk. To the extent a fund invests in floating or variable rate obligations that use the London Interbank Offered Rate (“LIBOR”) as a reference interest rate, it is subject to LIBOR Risk. The United Kingdom’s Financial Conduct Authority, which regulates LIBOR, has ceased making LIBOR available as a reference rate over a phase-out period that began December 31, 2021. There is no assurance that any alternative reference rate, including the Secured Overnight Financing Rate (“SOFR”) will be similar to or produce the same value or economic equivalence as LIBOR or that instruments using an alternative rate will have the same volume or liquidity. The unavailability or replacement of LIBOR may affect the value, liquidity or return on certain fund investments and may result in costs incurred in connection with closing out positions and entering into new trades. Any potential effects of the transition away from LIBOR on the fund or on certain instruments in which the fund invests can be difficult to ascertain, and they may vary depending on a variety of factors, and they could result in losses to the fund.
Management Risk. To the extent that a fund is actively managed, it is subject to management risk. In managing an actively-managed fund’s investment portfolio, the fund’s portfolio managers will apply investment techniques and risk analyses that may not have the desired result. There can be no guarantee that a fund will meet its investment objective.
Market Risk. Market risk is the risk that a particular security, or shares of a fund in general, may fall in value. Securities held by a fund, as well as shares of a fund itself, are subject to market fluctuations caused by factors such as general economic conditions, political events, regulatory or market developments, changes in interest rates and perceived trends in securities prices. Shares of a fund could decline in value or underperform other investments as a result of the risk of loss associated with these market fluctuations. In addition, local, regional or global events such as war, acts of terrorism, spread of infectious diseases or other public health issues, recessions, or other events could have a significant negative impact on a fund and its investments. Such events may affect certain geographic regions, countries, sectors and industries more significantly than others. In February 2022, Russia invaded Ukraine which has caused and could continue to cause significant market disruptions and volatility within the markets in Russia, Europe, and the United States. The hostilities and sanctions resulting from those hostilities could have a significant impact on certain fund investments as well as fund performance. The COVID-19 global pandemic and the ensuing policies enacted by governments and central banks have caused and may continue to cause significant volatility and uncertainty in global financial markets. While the U.S. has resumed “reasonably” normal business activity, many countries continue to impose lockdown measures. Additionally, there is no guarantee that vaccines will be effective against emerging variants of the disease. These events also adversely affect the prices and liquidity of a fund’s portfolio securities or other instruments and could result in disruptions in the trading markets. Any of such circumstances could have a materially negative impact on the value of a fund’s shares and result in increased market volatility. During any such events, a fund’s shares may trade at increased premiums or discounts to their net asset value and the bid/ask spread on a fund’s shares may widen.
Non-U.S. Securities Risk. To the extent a fund invests in non-U.S. securities, it is subject to additional risks not associated with securities of domestic issuers. Non-U.S. securities are subject to higher volatility than securities of domestic issuers due to: possible adverse political, social or economic developments; restrictions on foreign investment or exchange of securities; capital controls; lack of liquidity; currency exchange rates; excessive taxation; government seizure of assets; the imposition of sanctions by foreign governments; different legal or accounting standards; and less government supervision and regulation of exchanges in foreign countries. Investments in non-U.S. securities may involve higher costs than investments in U.S. securities, including higher transaction and custody costs, as well as additional taxes imposed by non-U.S. governments. These risks may be heightened for securities of companies located, or with significant operations, in emerging market countries.
Operational Risk. Each fund is subject to risks arising from various operational factors, including, but not limited to, human error, processing and communication errors, errors of a fund’s service providers, counterparties or other third-parties, failed or inadequate processes and technology or systems failures. Each fund relies on third-parties for a range of services, including custody. Any delay or failure relating to engaging or maintaining such service providers may affect a fund’s ability to meet its investment objective. Although the funds and the funds’ investment advisor seek to reduce these operational risks through controls and procedures, there is no way to completely protect against such risks.
Additional Information (Continued)
First Trust Intermediate Government Opportunities ETF (MGOV)October 31, 2023 (Unaudited) Passive Investment Risk. To the extent a fund seeks to track an index, the fund will invest in the securities included in, or representative of, the index regardless of their investment merit. A fund generally will not attempt to take defensive positions in declining markets.
Preferred Securities Risk. Preferred securities combine some of the characteristics of both common stocks and bonds. Preferred securities are typically subordinated to bonds and other debt securities in a company’s capital structure in terms of priority to corporate income, subjecting them to greater credit risk than those debt securities. Generally, holders of preferred securities have no voting rights with respect to the issuing company unless preferred dividends have been in arrears for a specified number of periods, at which time the preferred security holders may obtain limited rights. In certain circumstances, an issuer of preferred securities may defer payment on the securities and, in some cases, redeem the securities prior to a specified date. Preferred securities may also be substantially less liquid than other securities, including common stock.
Valuation Risk. The valuation of certain securities may carry more risk than that of common stock. Uncertainties in the conditions of the financial markets, unreliable reference data, lack of transparency and inconsistency of valuation models and processes may lead to inaccurate asset pricing. A fund may hold investments in sizes smaller than institutionally sized round lot positions (sometimes referred to as odd lots). However, third-party pricing services generally provide evaluations on the basis of institutionally-sized round lots. If a fund sells certain of its investments in an odd lot transaction, the sale price may be less than the value at which such securities have been held by the fund. Odd lots often trade at lower prices than institutional round lots. There is no assurance that the fund will be able to sell a portfolio security at the price established by the pricing service, which could result in a loss to the fund.
NOT FDIC INSURED NOT BANK GUARANTEED MAY LOSE VALUE
Advisory Agreements
Board Considerations Regarding Approval of the Investment Management Agreement
The Board of Trustees of First Trust Exchange-Traded Fund IV (the “Trust”), including the Independent Trustees, approved the Investment Management Agreement (the “Agreement”) with First Trust Advisors L.P. (the “Advisor”), on behalf of First Trust Intermediate Government Opportunities ETF (the “Fund”), for an initial two-year term at a meeting held on June 5, 2023. The Board determined that the Agreement is in the best interests of the Fund in light of the nature, extent and quality of the services expected to be provided and such other matters as the Board considered to be relevant in the exercise of its business judgment.
To reach this determination, the Board considered its duties under the Investment Company Act of 1940, as amended (the “1940 Act”), as well as under the general principles of state law, in reviewing and approving advisory contracts; the requirements of the 1940 Act in such matters; the fiduciary duty of investment advisors with respect to advisory agreements and compensation; the standards used by courts in determining whether investment company boards have fulfilled their duties; and the factors to be considered by the Board in voting on such agreements. To assist the Board in its evaluation of the Agreement for the Fund, the Independent Trustees received a report from the Advisor in advance of the Board meeting responding to a request for information from counsel to the Independent Trustees, submitted on behalf of the Independent Trustees, that, among other things, outlined: the services to be provided by the Advisor to the Fund (including the relevant personnel responsible for these services and their experience); the proposed unitary fee rate schedule payable by the Fund as compared to fees charged to a peer group of funds (the “Expense Group”) and a broad peer universe of funds (the “Expense Universe”), each assembled by Broadridge Financial Solutions, Inc. (“Broadridge”), an independent source, and as compared to fees charged to other exchange-traded funds (“ETFs”) managed by the Advisor; the estimated expense ratio of the Fund as compared to expense ratios of the funds in the Fund’s Expense Group and Expense Universe; the nature of expenses to be incurred in providing services to the Fund and the potential for the Advisor to realize economies of scale, if any; profitability and other financial data for the Advisor; any indirect benefits to the Advisor and its affiliate, First Trust Portfolios L.P. (“FTP”); and information on the Advisor’s compliance program. The Independent Trustees and their counsel also met separately to discuss the information provided by the Advisor. The Board applied its business judgment to determine whether the arrangement between the Trust and the Advisor is a reasonable business arrangement from the Fund’s perspective.
In evaluating whether to approve the Agreement for the Fund, the Board considered the nature, extent and quality of the services to be provided by the Advisor under the Agreement and considered that employees of the Advisor provide management services to other ETFs and to other funds in the First Trust Fund Complex with diligence and care. The Board considered that the Advisor will be responsible for the overall management and administration of the Fund and reviewed all of the services to be provided by the Advisor to the Fund, as well as the background and experience of the persons responsible for such services. The Board noted that the Fund will be an actively-managed ETF and considered that the Advisor manages other ETFs with a similar structure in the First Trust Fund
Additional Information (Continued)
First Trust Intermediate Government Opportunities ETF (MGOV)October 31, 2023 (Unaudited) Complex. The Board noted that the Advisor’s Securitized Products Group will be responsible for the day-to-day management of the Fund’s investments and considered the background and experience of the members of the Securitized Products Group. The Board considered that the Advisor applies the same oversight model internally with the Securitized Products Group as it uses for overseeing external sub-advisors, including portfolio risk monitoring and performance review. In reviewing the services to be provided, the Board noted the compliance program that had been developed by the Advisor and considered that it includes a robust program for monitoring the Advisor’s and the Fund’s compliance with the 1940 Act, as well as the Fund’s compliance with its investment objective, policies and restrictions. At the meeting, the Trustees received a presentation from representatives of the Securitized Products Group and were able to ask questions about the Group and the proposed investment strategy for the Fund. Because the Fund had yet to commence investment operations, the Board could not consider the historical investment performance of the Fund. In light of the information presented and the considerations made, the Board concluded that the nature, extent and quality of the services to be provided to the Fund by the Advisor under the Agreement are expected to be satisfactory.
The Board considered the proposed unitary fee rate schedule payable by the Fund under the Agreement for the services to be provided. The Board noted that, under the unitary fee arrangement, the Fund would pay the Advisor a unitary fee starting at an annual rate of 0.65% of its average daily net assets, subject to a breakpoint schedule pursuant to which the unitary fee rate would be reduced as assets of the Fund meet certain thresholds. The Board noted that the Advisor would be responsible for the Fund’s expenses, including the cost of transfer agency, custody, fund administration, legal, audit and other services and license fees, if any, but excluding the fee payment under the Agreement and interest, taxes, acquired fund fees and expenses, if any, brokerage commissions and other expenses connected with the execution of portfolio transactions, distribution and service fees pursuant to a Rule 12b-1 plan, if any, and extraordinary expenses, if any. The Board received and reviewed information showing the fee rates and expense ratios of the peer funds in the Expense Group, as well as advisory and unitary fee rates charged by the Advisor to other ETFs. Because the Fund will pay a unitary fee, the Board determined that expense ratios were the most relevant comparative data point. Based on the information provided, the Board noted that the total (net) expense ratio for the Fund was above the median total (net) expense ratio of the peer funds in the Expense Group. With respect to the Expense Group, the Board discussed with representatives of the Advisor how the Expense Group was assembled and how the Fund compared and differed from the peer funds. The Board took this information into account in considering the peer data. With respect to fees charged to other ETFs managed by the Advisor, the Board considered the Advisor’s statements that the Fund will be a specialty, actively-managed ETF and that the proposed Fund has no material difference in fees from comparable First Trust fixed income funds. In light of the information considered and the nature, extent and quality of the services expected to be provided to the Fund under the Agreement, the Board determined that the proposed unitary fee was fair and reasonable.
The Board considered whether there are any potential economies of scale to be achieved in connection with the Advisor providing investment advisory services to the Fund and whether the Fund may benefit from any economies of scale. The Board noted that the proposed unitary fee rate schedule for the Fund includes breakpoints pursuant to which the unitary fee rate would be reduced as assets of the Fund meet certain thresholds. The Board considered that the Advisor has continued to build infrastructure and add new staff to improve the services to the funds in the First Trust Fund Complex. The Board also noted that under the unitary fee structure, any reduction in expenses associated with the management and operations of the Fund generally would benefit the Advisor, but that the unitary fee structure provides a level of certainty in expenses for shareholders of the Fund. The Board concluded that the proposed unitary fee rate schedule for the Fund reflects an appropriate level of sharing of any economies of scale that may be realized in the management of the Fund at reasonably foreseeable future asset levels. The Board took into consideration the types of costs to be borne by the Advisor in connection with its services to be performed for the Fund under the Agreement. The Board considered the Advisor’s estimate of the asset level for the Fund at which the Advisor expects the Agreement to be profitable to the Advisor and the Advisor’s estimate of the profitability of the Agreement if the Fund’s assets reach $100 million. The Board noted the inherent limitations in the profitability analysis and concluded that, based on the information provided, the Advisor’s estimated profitability level for the Fund was not unreasonable. In addition, the Board considered indirect benefits described by the Advisor that may be realized from its relationship with the Fund. The Board considered that the Advisor had identified as an indirect benefit to the Advisor and FTP their exposure to investors and brokers who, absent their exposure to the Fund, may have had no dealings with the Advisor or FTP, and noted that the Advisor will not utilize soft dollars in connection with the Fund. The Board concluded that the character and amount of potential indirect benefits to the Advisor were not unreasonable.
Based on all of the information considered and the conclusions reached, the Board, including the Independent Trustees, determined that the terms of the Agreement are fair and reasonable and that the approval of the Agreement is in the best interests of the Fund. No single factor was determinative in the Board’s analysis.
Board of Trustees and Officers
First Trust Intermediate Government Opportunities ETF (MGOV)October 31, 2023 (Unaudited) The following tables identify the Trustees and Officers of the Trust. Unless otherwise indicated, the address of all persons is 120 East Liberty Drive, Suite 400, Wheaton, IL 60187.
The Trust’s statement of additional information includes additional information about the Trustees and is available, without charge, upon request, by calling (800) 988-5891.
Name,
Year of Birth and
Position with the Trust | Term of Office
and Year First
Elected or
Appointed | Principal Occupations
During Past 5 Years | Number of
Portfolios in
the First Trust
Fund Complex
Overseen by
Trustee | Other
Trusteeships or
Directorships
Held by Trustee
During Past
5 Years |
|
Richard E. Erickson, Trustee
(1951) | • Indefinite Term • Since Inception | Retired; Physician, Edward-Elmhurst Medical Group (2021 to September 2023); Physician and Officer, Wheaton Orthopedics (1990 to 2021) | | |
Thomas R. Kadlec, Trustee
(1957) | • Indefinite Term • Since Inception | Retired; President, ADM Investors Services, Inc. (Futures Commission Merchant) (2010 to July 2022) | | Director, National Futures Association and ADMIS Singapore Ltd.; Formerly, Director of ADM Investor Services, Inc., ADM Investor Services International, ADMIS Hong Kong Ltd., and Futures Industry Association |
Denise M. Keefe, Trustee
(1964) | • Indefinite Term • Since 2021 | Executive Vice President, Advocate Aurora Health and President, Advocate Aurora Continuing Health Division (Integrated Healthcare System) | | Director and Board Chair of Advocate Home Health Services, Advocate Home Care Products and Advocate Hospice; Director and Board Chair of Aurora At Home (since 2018); Director of Advocate Physician Partners Accountable Care Organization; Director of RML Long Term Acute Care Hospitals; Director of Senior Helpers (since 2021); and Director of MobileHelp (since 2022) |
Robert F. Keith, Trustee
(1956) | • Indefinite Term • Since Inception | President, Hibs Enterprises (Financial and Management Consulting) | | Formerly, Director of Trust Company of Illinois |
Niel B. Nielson, Trustee
(1954) | • Indefinite Term • Since Inception | Senior Advisor (2018 to Present), Managing Director and Chief Operating Officer (2015 to 2018), Pelita Harapan Educational Foundation (Educational Products and Services) | | |
Bronwyn Wright, Trustee
(1971) | • Indefinite Term • Since 2023 | Independent Director to a number of Irish collective investment funds (2009 to Present); Various roles at international affiliates of Citibank (1994 to 2009), including Managing Director, Citibank Europe plc and Head of Securities and Fund Services, Citi Ireland (2007 to 2009) | | |
Board of Trustees and Officers (Continued)
First Trust Intermediate Government Opportunities ETF (MGOV)October 31, 2023 (Unaudited) Name, Year of Birth and Position with the Trust | Term of Office and Year First Elected or Appointed | Principal Occupations During Past 5 Years | Number of Portfolios in the First Trust Fund Complex Overseen by Trustee | Other Trusteeships or Directorships Held by Trustee During Past 5 Years |
|
James A. Bowen(1), Trustee,
Chairman of the Board
(1955) | • Indefinite Term • Since Inception | Chief Executive Officer, First Trust Advisors L.P. and First Trust Portfolios L.P., Chairman of the Board of Directors, BondWave LLC (Software Development Company) and Stonebridge Advisors LLC (Investment Advisor) | | |
| Position and
Offices
with Trust | Term of Office
and Length of
Service | Principal Occupations
During Past 5 Years |
|
| President and Chief Executive Officer | • Indefinite Term • Since 2016 | Managing Director and Chief Financial Officer, First Trust Advisors L.P. and First Trust Portfolios L.P.; Chief Financial Officer, BondWave LLC (Software Development Company) and Stonebridge Advisors LLC (Investment Advisor) |
| Treasurer, Chief Financial Officer and Chief Accounting Officer | • Indefinite Term • Since 2023 | Senior Vice President, First Trust Advisors L.P. and First Trust Portfolios L.P., July 2021 to Present. Previously, Vice President, First Trust Advisors L.P. and First Trust Portfolios L.P., 2014 - 2021. |
| Secretary and Chief Legal Officer | • Indefinite Term • Since Inception | General Counsel, First Trust Advisors L.P. and First Trust Portfolios L.P.; Secretary and General Counsel, BondWave LLC; Secretary, Stonebridge Advisors LLC |
Daniel J. Lindquist
(1970) | | • Indefinite Term • Since Inception | Managing Director, First Trust Advisors L.P. and First Trust Portfolios L.P. |
| Chief Compliance Officer and Assistant Secretary | • Indefinite Term • Since Inception | Deputy General Counsel, First Trust Advisors L.P. and First Trust Portfolios L.P. |
| | • Indefinite Term • Since Inception | Senior Vice President, First Trust Advisors L.P. and First Trust Portfolios L.P. |
| | • Indefinite Term • Since Inception | Senior Vice President, First Trust Advisors L.P. and First Trust Portfolios L.P. |
(1)
Mr. Bowen is deemed an “interested person” of the Trust due to his position as Chief Executive Officer of First Trust Advisors L.P., investment advisor of the Trust.
(2)
The term “officer” means the president, vice president, secretary, treasurer, controller or any other officer who performs a policy making function.
First Trust Intermediate Government Opportunities ETF (MGOV)October 31, 2023 (Unaudited) Privacy Policy
First Trust values our relationship with you and considers your privacy an important priority in maintaining that relationship. We are committed to protecting the security and confidentiality of your personal information.
Sources of Information
We collect nonpublic personal information about you from the following sources:
• Information we receive from you and your broker-dealer, investment professional or financial representative through interviews, applications, agreements or other forms;
• Information about your transactions with us, our affiliates or others;
• Information we receive from your inquiries by mail, e-mail or telephone; and
• Information we collect on our website through the use of “cookies.” For example, we may identify the pages on our website that your browser requests or visits.
Information Collected
The type of data we collect may include your name, address, social security number, age, financial status, assets, income, tax information, retirement and estate plan information, transaction history, account balance, payment history, investment objectives, marital status, family relationships and other personal information.
Disclosure of Information
We do not disclose any nonpublic personal information about our customers or former customers to anyone, except as permitted by law. In addition to using this information to verify your identity (as required under law), the permitted uses may also include the disclosure of such information to unaffiliated companies for the following reasons:
• In order to provide you with products and services and to effect transactions that you request or authorize, we may disclose your personal information as described above to unaffiliated financial service providers and other companies that perform administrative or other services on our behalf, such as transfer agents, custodians and trustees, or that assist us in the distribution of investor materials such as trustees, banks, financial representatives, proxy services, solicitors and printers.
• We may release information we have about you if you direct us to do so, if we are compelled by law to do so, or in other legally limited circumstances (for example to protect your account from fraud).
In addition, in order to alert you to our other financial products and services, we may share your personal information within First Trust.
Use of Website Analytics
We currently use third party analytics tools, Google Analytics and AddThis, to gather information for purposes of improving First Trust’s website and marketing our products and services to you. These tools employ cookies, which are small pieces of text stored in a file by your web browser and sent to websites that you visit, to collect information, track website usage and viewing trends such as the number of hits, pages visited, videos and PDFs viewed and the length of user sessions in order to evaluate website performance and enhance navigation of the website. We may also collect other anonymous information, which is generally limited to technical and web navigation information such as the IP address of your device, internet browser type and operating system for purposes of analyzing the data to make First Trust’s website better and more useful to our users. The information collected does not include any personal identifiable information such as your name, address, phone number or email address unless you provide that information through the website for us to contact you in order to answer your questions or respond to your requests. To find out how to opt-out of these services click on: Google Analytics and AddThis.
Confidentiality and Security
With regard to our internal security procedures, First Trust restricts access to your nonpublic personal information to those First Trust employees who need to know that information to provide products or services to you. We maintain physical, electronic and procedural safeguards to protect your nonpublic personal information.
Policy Updates and Inquiries
As required by federal law, we will notify you of our privacy policy annually. We reserve the right to modify this policy at any time, however, if we do change it, we will tell you promptly. For questions about our policy, or for additional copies of this notice, please go to www.ftportfolios.com, or contact us at 1-800-621-1675 (First Trust Portfolios) or 1-800-222-6822 (First Trust Advisors).
March 2023
First Trust Exchange-Traded Fund IV
INVESTMENT ADVISOR
First Trust Advisors L.P.
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
ADMINISTRATOR, CUSTODIAN,
FUND ACCOUNTANT &
TRANSFER AGENT
The Bank of New York Mellon
240 Greenwich Street
New York, NY 10286
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
111 South Wacker Drive
Chicago, IL 60606
LEGAL COUNSEL
Chapman and Cutler LLP
320 South Canal Street
Chicago, IL 60606
Annual Report
For the Period Ended
October 31, 2023
First Trust Exchange-Traded Fund IV
FT Cboe Vest Rising Dividend Achievers Target Income ETF (RDVI) |
FT Cboe Vest SMID Rising Dividend Achievers Target Income ETF (SDVD) |
FT Cboe Vest Technology Dividend Target Income ETF (TDVI) |
First Trust Exchange-Traded Fund IV
Annual Report
October 31, 2023
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 Cboe VestSM Financial LLC (“Cboe Vest” or the “Sub-Advisor”) and their respective representatives, taking into account the information currently available to them. Forward-looking statements include all statements that do not relate solely to current or historical fact. For example, forward-looking statements include the use of words such as “anticipate,” “estimate,” “intend,” “expect,” “believe,” “plan,” “may,” “should,” “would” or other words that convey uncertainty of future events or outcomes.
Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the series of First Trust Exchange-Traded Fund IV (the “Trust”) described in this report (each such series is referred to as a “Fund” and collectively, as the “Funds”) to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. When evaluating the information included in this report, you are cautioned not to place undue reliance on these forward-looking statements, which reflect the judgment of the Advisor and/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 objectives. Each Fund is subject to market risk, which is the possibility that the market values of securities owned by the Fund will decline and that the value of the Fund’s shares may therefore be less than what you paid for them. Accordingly, you can lose money investing in a Fund. See “Risk Considerations” in the Additional Information section of this report for a discussion of certain other risks of investing in the Funds.
Performance data quoted represents past performance, which is no guarantee of future results, and current performance may be lower or higher than the figures shown. For the most recent month-end performance figures, please visit www.ftportfolios.com or speak with your financial advisor. Investment returns, net asset value and share price will fluctuate and Fund shares, when sold, may be worth more or less than their original cost.
The Advisor may also periodically provide additional information on Fund performance on each Fund’s webpage at www.ftportfolios.com.
How to Read This Report
This report contains information that may help you evaluate your investment. It includes details about each Fund and presents data and analysis that provide insight into each Fund’s performance and investment approach.
By reading the portfolio commentary from the portfolio management team(s) of the Funds, you may obtain an understanding of how the market environment affected each Fund’s performance. The statistical information that follows may help you understand each 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 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 the prospectus, statement of additional information, and other Fund regulatory filings.
First Trust Exchange-Traded Fund IV
Annual Letter from the Chairman and CEO
October 31, 2023
Dear Shareholders,
First Trust is pleased to provide you with the annual report for certain series of the First Trust Exchange-Traded Fund IV (the “Funds”), which contains detailed information about the Funds for the twelve months ended October 31, 2023. Please note that the FT Cboe Vest SMID Rising Dividend Achievers Target Income ETF and the FT Cboe Vest Technology Dividend Target Income ETF were incepted on August 9, 2023, and so the information in this letter and the annual report prior to that date does not apply to these Funds.
The Bureau of Economic Analysis recently announced that U.S. real gross domestic product (“GDP”) grew by a staggering 4.9% in the third quarter of 2023 and is now up 2.9% on a year-over-year basis from where it stood in the third quarter of 2022. The most recent quarter’s GDP data represents the fastest growth rate for any quarter since 2014. Consumer spending, which rose by 4.0% over the period, was responsible for 2.7 percentage points of the total increase in GDP. Whether the consumer can keep up this pace of spending remains to be seen, especially given recent news that excess savings from the pandemic-era stimulus have likely been depleted. From a global perspective, the International Monetary Fund (“IMF”) notes that progress in fighting inflation has led to lower economic growth. In their October 2023 publication of the World Economic Outlook, the IMF projected that the growth in world economic output is expected to slow from 3.5% in 2022 to 2.9% in 2024. The economic growth in advanced economies is projected to plummet from 2.6% in 2022 to 1.4% in 2024.
In the notes to their September 2023 meeting, the Federal Open Market Committee revealed that they may need to keep interest rates “higher for longer” as they continue to battle stubbornly high inflation. As many investors are likely aware, a higher Federal Funds target rate can have deep implications for consumers, such as driving up the cost of borrowing for homes, automobiles, and other large purchases. The American consumer has yet to feel the full weight of those burdens, in my opinion. That said, the data reveals a different story among corporate America. S&P Global Market Intelligence reported that a total of 516 U.S. corporations filed for bankruptcy protection on a year-to-date basis through September 30, 2023, up from a total of 263 corporate bankruptcy filings over the same period last year. Higher interest rates and Treasury bond yields have also sapped demand for commercial property loans. Data from Trepp, LLC, a leading provider of data and analytics to the commercial real estate and banking markets, revealed that just $28.2 billion of loans converted into commercial mortgage-backed securities have been issued in 2023, the lowest figure since 2011.
The financial markets battled a myriad of headwinds over the past year, from geopolitical uncertainty resulting from war (the conflicts between Israel and Hamas and Russia and Ukraine), to slowing global economic growth and sticky inflation. Brian Wesbury, Chief Economist at First Trust, notes that a U.S. economic recession is likely to begin at some point early next year. While calls for a recession may concern some investors, the following may offer solace. Data from Bloomberg reveals that the S&P 500® Index has posted positive total returns over the 3-year period following every recession since 1948.
Thank you for giving First Trust the opportunity to play a role in your financial future. We value our relationship with you and will report on the Funds again in six months.
Sincerely,
James A. Bowen
Chairman of the Board of Trustees
Chief Executive Officer of First Trust Advisors L.P.
Fund Performance Overview (Unaudited)
FT Cboe Vest Rising Dividend Achievers Target Income ETF (RDVI)
The FT Cboe Vest Rising Dividend Achievers Target Income ETF (the “Fund”) seeks to provide investors with current income with a secondary objective of providing capital appreciation. The shares of the Fund are listed on Cboe BZX Exchange, Inc. under the ticker symbol “RDVI.” Under normal market conditions, the Fund will pursue its investment objectives by investing in primarily in U.S. exchange-traded equity securities contained in the Nasdaq US Rising Dividend AchieversTM Index (the “Index”) and by utilizing an “option strategy” consisting of writing (selling) U.S. exchange-traded call options on the S&P 500® Index or exchange-traded funds that track the S&P 500® Index (“Underlying ETFs”). Under normal market conditions, the Fund will invest at least 80% of its net assets (plus any borrowings for investment purposes) in dividend-paying securities and/or investments that provide exposure to dividend-paying securities.
|
| | Average Annual Total Returns | |
| | Inception
(10/19/22)
to 10/31/23 | Inception
(10/19/22)
to 10/31/23 |
| | | |
| | | |
| | | |
| | | |
Nasdaq US Rising Dividend AchieversTM Index | | | |
| | | |
(See Notes to Fund Performance Overview on page 9.)
Fund Performance Overview (Unaudited) (Continued)
FT Cboe Vest Rising Dividend Achievers Target Income ETF (RDVI) (Continued)
| % of Total
Long-Term
Investments |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
Net Other Assets and Liabilities | |
| |
| % of Total
Long-Term
Investments |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| Performance figures assume reinvestment of all distributions and do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. An index is a statistical composite that tracks a specified financial market or sector. Unlike the Fund, the indices do not actually hold a portfolio of securities and therefore do not incur the expenses incurred by the Fund. These expenses negatively impact the performance of the Fund. The Fund’s past performance does not predict future performance. |
Frequency Distribution of Discounts and Premiums
Information showing the number of days the market price of the Fund’s shares was greater (at a premium) and less (at a discount) than the Fund’s net asset value for the most recently completed year, and the most recently completed calendar quarters since that year (or life of the Fund, if shorter) is available at https://www.ftportfolios.com/Retail/etf/home.aspx.
Fund Performance Overview (Unaudited) (Continued)
FT Cboe Vest SMID Rising Dividend Achievers Target Income ETF (SDVD)
The FT Cboe Vest SMID Rising Dividend Achievers Target Income ETF (the “Fund”) seeks to provide investors with current income with a secondary objective of providing capital appreciation. The shares of the Fund are listed on Cboe BZX Exchange, Inc. under the ticker symbol “SDVD.” Under normal market conditions, the Fund will pursue its investment objectives by investing primarily in U.S. exchange-traded equity securities contained in the Nasdaq US Small-Mid Cap Rising Dividend AchieversTM Index (the “Index”) and by utilizing an “option strategy” consisting of writing (selling) U.S. exchange-traded call options on the Russell 2000® Index or exchange-traded funds that track the Russell 2000® Index (“Underlying ETFs”). Under normal market conditions, the Fund will invest at least 80% of its net assets (plus any borrowings for investment purposes) in dividend-paying securities and/or investments that provide exposure to dividend-paying securities of small- and/or mid-capitalization companies.
|
| |
| Inception
(8/9/23)
to 10/31/23 |
| |
| |
| |
| |
| |
| |
Nasdaq US Small-Mid Cap Rising Dividend AchieversTM Index | |
(See Notes to Fund Performance Overview on page 9.)
Fund Performance Overview (Unaudited) (Continued)
FT Cboe Vest SMID Rising Dividend Achievers Target Income ETF (SDVD) (Continued)
| % of Total
Long-Term
Investments |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
Net Other Assets and Liabilities | |
| |
| % of Total
Long-Term
Investments |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| Performance figures assume reinvestment of all distributions and do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. An index is a statistical composite that tracks a specified financial market or sector. Unlike the Fund, the indices do not actually hold a portfolio of securities and therefore do not incur the expenses incurred by the Fund. These expenses negatively impact the performance of the Fund. The Fund’s past performance does not predict future performance. |
Frequency Distribution of Discounts and Premiums
Information showing the number of days the market price of the Fund’s shares was greater (at a premium) and less (at a discount) than the Fund’s net asset value for the most recently completed year, and the most recently completed calendar quarters since that year (or life of the Fund, if shorter) is available at https://www.ftportfolios.com/Retail/etf/home.aspx.
Fund Performance Overview (Unaudited) (Continued)
FT Cboe Vest Technology Dividend Target Income ETF (TDVI)
The FT Cboe Vest Technology Dividend Target Income ETF (the “Fund”) (the “Fund”) seeks to provide investors with current income with a secondary objective of providing capital appreciation. The shares of the Fund are listed on Cboe BZX Exchange, Inc. under the ticker symbol “TDVI.” Under normal market conditions, the Fund will pursue its investment objectives by investing primarily in U.S. exchange-traded equity securities contained in the Nasdaq Technology DividendTM Index (the “Index”) and by utilizing an “option strategy” consisting of writing (selling) U.S. exchange-traded call options on the Nasdaq-100® Index and/or the S&P 500® Index or exchange-traded funds that track the Nasdaq-100® Index or the S&P 500® Index (“Underlying ETFs”). Under normal market conditions, the Fund will invest at least 80% of its net assets (plus any borrowings for investment purposes) in dividend-paying securities and/or investments that provide exposure to dividend-paying securities of technology companies (i.e., securities classified under the Technology Industry or Telecommunications Industry as defined by the Industry Classification Benchmark (ICB)).
|
| |
| Inception
(8/9/23)
to 10/31/23 |
| |
| |
| |
| |
| |
| |
Nasdaq Technology DividendTM Index | |
(See Notes to Fund Performance Overview on page 9.)
Fund Performance Overview (Unaudited) (Continued)
FT Cboe Vest Technology Dividend Target Income ETF (TDVI) (Continued)
| % of Total
Long-Term
Investments |
| |
| |
| |
| |
| |
| |
| |
Net Other Assets and Liabilities | |
| |
| % of Total
Long-Term
Investments |
| |
International Business Machines Corp. | |
| |
| |
| |
| |
| |
Verizon Communications, Inc. | |
| |
| |
| |
| Performance figures assume reinvestment of all distributions and do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. An index is a statistical composite that tracks a specified financial market or sector. Unlike the Fund, the indices do not actually hold a portfolio of securities and therefore do not incur the expenses incurred by the Fund. These expenses negatively impact the performance of the Fund. The Fund’s past performance does not predict future performance. |
Frequency Distribution of Discounts and Premiums
Information showing the number of days the market price of the Fund’s shares was greater (at a premium) and less (at a discount) than the Fund’s net asset value for the most recently completed year, and the most recently completed calendar quarters since that year (or life of the Fund, if shorter) is available at https://www.ftportfolios.com/Retail/etf/home.aspx.
Notes to Fund Performance Overview (Unaudited)
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 of the national best bid and offer price (“NBBO”) as of the time that the Fund’s NAV is calculated. Under Securities and Exchange Commission rules, the NBBO consists of the highest displayed buy and lowest sell prices among the various exchanges trading the Fund at the time the Fund’s NAV is calculated. Since shares of each Fund did not trade in the secondary market until after the Fund’s inception, for the period from inception to the first day of secondary market trading in shares of the Fund, the NAV of each Fund is used as a proxy for the secondary market trading price to calculate market returns. NAV and market returns assume that all distributions have been reinvested in each Fund at NAV and Market Price, respectively.
An index is a statistical composite that tracks a specified financial market or sector. Unlike each Fund, the indices do not actually hold a portfolio of securities and therefore do not incur the expenses incurred by each Fund. These expenses negatively impact the performance of each Fund. Also, market returns do not include brokerage commissions that may be payable on secondary market transactions. If brokerage commissions were included, market returns would be lower. The total returns presented reflect the reinvestment of dividends on securities in the indices. The returns presented do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. The investment return and principal value of shares of each Fund will vary with changes in market conditions. Shares of each Fund may be worth more or less than their original cost when they are redeemed or sold in the market. Each Fund’s past performance is no guarantee of future performance.
First Trust Exchange-Traded Fund IVAnnual ReportOctober 31, 2023 (Unaudited) Advisor
First Trust Advisors L.P. (“First Trust” or the “Advisor”) is the investment advisor to the FT Cboe Vest Rising Dividend Achievers Target Income ETF (“RDVI”), the FT Cboe Vest SMID Rising Dividend Achievers Target Income ETF (“SDVD”), and the FT Cboe Vest Technology Dividend Target Income ETF (“TDVI”) (each a “Fund” and collectively, the “Funds”). First Trust is responsible for the ongoing monitoring of each Fund’s investment portfolio, managing the business affairs of each Fund and providing certain administrative services necessary for the management of each Fund.
Sub-Advisor
Cboe VestSM Financial LLC (“Cboe Vest” or the “Sub-Advisor”) serves as the investment sub-advisor to the Funds. In this capacity, Cboe Vest is responsible for the selection and ongoing monitoring of the securities in each Fund’s investment portfolio. Cboe Vest, with principal offices at 8350 Broad Street, Suite 240, McLean, VA 22102, was founded in 2012. Cboe Vest had approximately $17.8 billion under management or committed to management as of October 31, 2023.
Portfolio Management Team
The following persons serve as portfolio managers to the Funds:
Karan Sood, Managing Director of Cboe Vest
Howard Rubin, Managing Director of Cboe Vest
The portfolio managers are primarily and jointly responsible for the day-to-day management of the Funds. Each portfolio manager has served as a part of the portfolio management team of RDVI since October 2022 and SDVD and TDVI since August 2023.
Commentary
Market Recap
Equity markets showed remarkable resilience in late 2022 and the first half of 2023, followed by declines in the third quarter of 2023 as well as October of 2023, as inflation and recession fears resurfaced. The Federal Reserve (the “Fed”) responded to the increased inflation rate during the 12-month period ended October 31, 2023 (the “Period”) by hiking the Federal Funds target rate from 3.25% to 5.5% by the end of the Period.
U.S. equities, as measured by the S&P 500® Index, gained 10.12% during the Period. Five of the sectors within the S&P 500® Index were up, while six were down. The top three performing sectors were the Telecommunication Services, Information Technology, and Consumer Discretionary sectors, returning 35.8%, 30.9%, and 8.4%, respectively. The bottom three performing sectors were the Utilities, Real Estate, and Healthcare sectors, returning -7.7%, -6.6%, and -4.6%, respectively.
FT Cboe Vest Rising Dividend Achievers Target Income ETF (RDVI)
Discussion of Fund Performance
This discussion is for the FT Cboe Vest Rising Dividend Achievers Target Income ETF for the Period. The Fund’s inception date was October 19, 2022. The Fund’s performance is compared to an index called the Nasdaq US Rising Dividend AchieversTM Index (the “Index” or “NQDVRIST”).
Performance Analysis
Under normal market conditions, the Fund will pursue its investment objectives by investing primarily in U.S. exchange-traded equity securities contained in the Index and by utilizing an “option strategy” consisting of writing (selling) U.S. exchange-traded call options on the S&P 500® Index or exchange-traded funds that track the S&P 500® Index (“Underlying ETFs”).
During the Period, the Fund generally held approximately equal weights in 50 stocks, as well as written call options on the S&P 500® Index. The premiums received from the written call options, plus the dividends received from the equities, sum to approximately 8.0% in excess of the dividend yield of the S&P 500® Index annually.
For the Period, the Fund’s net asset value (“NAV”) performance was 4.02%, while the Index performance was 4.33%. The underperformance of 0.31% can be explained by the following factors:
Portfolio Commentary (Continued)
First Trust Exchange-Traded Fund IVAnnual ReportOctober 31, 2023 (Unaudited) (1)
Fees and Expenses: Fees and expenses reduced the Fund’s performance by approximately 0.75%.
(2)
Execution Costs: Commissions, plus slippage due to trading securities at prices other than mid-market, reduced the Fund’s performance by approximately 0.03%.
(3)
Fund versus Index Holdings: While the Fund attempts to hold equity securities in the same proportion (i.e., weighting) as the Index, the Fund also writes call options on the S&P 500® Index, whereas the Index does not. For the Period we estimate that the difference in the holdings between the Fund and the Index had a net 0.47% positive impact on the Fund’s performance.
Using market prices for the Fund, the Fund’s performance for the Period was 3.96%.
Impact of Fund Holdings on Performance
The top five performing holdings in the Fund for the Period were LAM Research Corp., Microsoft Corp., Lennar Corp., Reliance Steel & Aluminum Co., and MGIC Investment Corp., with returns of 47.2%, 47.1%, 34.0%, 28.3%, and 26.8%, respectively.
The bottom five performing holdings in the Fund for the Period were Comerica, Inc., Citizens Financial Group, Inc., Huntington Bancshares, Inc., Pfizer, Inc., and Regions Financial Corp., with returns of -40.7%, -38.8%, -32.86%, -31.68%, and -30.9%, respectively.
Impact of Sector Weightings on Performance
For the Period, the Fund had sector weightings that were in line with the Index. However, the Fund’s sector weightings were substantially different than the sector weightings of the S&P 500® Index.
Strong performances in the Information Technology and Communication Services sectors, coupled with the Fund’s relative underweights in these sectors, contributed to relative underperformance for the Fund versus the S&P 500® Index.
Weak performance in the Financials sector, coupled with the Fund’s relative overweight in this sector, contributed to additional relative underperformance for the Fund versus the S&P 500® Index.
Weak performances in the HealthCare, Consumer Staples, Utilities, and Real Estate sectors, coupled with the Fund’s relative underweight in each of these sectors, contributed to relative overperformance for the Fund versus the S&P 500® Index.
Market and Fund Outlook
During the Period, the Fed’s policy surrounding inflation remained a key driver of equity market performance. Moving into the next fiscal year, this will continue to be a dominant theme, in our opinion. The 2024 U.S. Presidential election will also be front and center in the upcoming year. Over the course of 2023, Technology stocks led broad based indices, as investors flocked to companies developing Artificial Intelligence capabilities. The failure of Silicon Valley Bank in March 2023 sent shockwaves throughout the banking system, and rising energy prices over the summer contributed to higher inflation. In late October 2023, the 30-Year fixed mortgage rates peaked at 7.79%. Investors are digesting a possible “higher for longer” period of sustained higher rates based on the Fed’s “dot plot” forecasting a median Federal Funds target rate of 5.1% for 2024, and 3.9% for 2025. Consumer Price Index inflation data has come down considerably, despite an unexpected 0.6% month-over-month reading in August 2023. The U.S. job market remains strong at 3.9% unemployment, with October 2023 marking the twenty-first straight month with unemployment below 4%. U.S. gross domestic product has posted five consecutive positive quarters as it recorded growth of 4.9% in the third quarter of 2023, up from 2.1% in the second quarter of 2023.
The Fund generally holds equities similar in name and weight to those equities in the NQDVRIST. This index is designed to assemble a portfolio of stocks that are positioned to continue increasing dividends. We believe that the Fund is properly positioned to achieve its investment objectives.
FT Cboe Vest SMID Rising Dividend Achievers Target Income ETF (SDVD)
Discussion of Fund Performance
This discussion is for the FT Cboe Vest SMID Rising Dividend Achievers Target Income ETF for the period from the Fund’s inception date on August 9, 2023 through October 31, 2023 (the “Period”). The Fund’s performance is compared to an index called the Nasdaq US Small-Mid Cap Rising Dividend AchieversTM Index (the “Index” or “NQDVSMRT”).
Portfolio Commentary (Continued)
First Trust Exchange-Traded Fund IVAnnual ReportOctober 31, 2023 (Unaudited) Performance Analysis
Under normal market conditions, the Fund will pursue its investment objectives by investing primarily in U.S. exchange-traded equity securities contained in the Index and by utilizing an “option strategy” consisting of writing (selling) U.S. exchange-traded call options on the Russell 2000® Index or exchange-traded funds that track the Russell 2000® Index (“Underlying ETFs”).
During the Period, the Fund generally held approximately equal weights in about 100 stocks, as well as written call options on the Russell 2000® Index. The premiums received from the written call options, plus the dividends received from the equities, sum to approximately 8.0% in excess of the dividend yield of the Russell 2000® Index annually.
For the Period, the Fund’s net asset value (“NAV”) performance was -9.56%, while the NQDVSMRT Index performance was -10.21%. The outperformance of 0.65% can be explained by the following factors:
(1)
Fees and Expenses: Fees and expenses reduced the Fund’s performance by approximately 0.19%.
(2)
Execution Costs: Commissions, plus slippage due to trading securities at prices other than mid-market, reduced the Fund’s performance by approximately 0.04%.
(3)
Fund versus Index Holdings: While the Fund attempts to hold equity securities in the same proportion (i.e., weighting) as the Index, the Fund also holds writes call options on the Russell 2000® Index, whereas the NQDVSMRT Index does not. For the Period we estimate that the difference in the holdings between the Fund and the Index had a net 0.88% positive impact on the Fund’s performance.
Using market prices for the Fund, the Fund’s performance for the Period was -9.46%.
Impact of Fund Holdings on Performance
The top five performing holdings in the Fund for the Period were Alpha Metallurgical Resources, Jackson Financial Inc., CONSOL Energy Inc., Insperity, Inc., and Matador Resources Company, with returns of 20.0%, 12.5%, 10.0%, 8.5%, and 4.8%, respectively.
The bottom five performing holdings in the Fund for the Period were Eagle Bancorp, Inc., Dick’s Sporting Goods, Inc., Regal Rexnord Corp., M.D.C. Holdings, Inc., and Terex Corporation, with returns of -26.0%, -25.8%, -25.5%, -25.3%, and -25.0%, respectively.
Impact of Sector Weightings on Performance
For the Period, the Fund had sector weightings that were in line with the NQDVSMRT. However, the Fund’s sector weightings were substantially different than the sector weightings of the S&P 500® Index.
Relatively strong performance in the Information Technology sector, coupled with the Fund’s relative underweight in this sector, contributed to relative underperformance for the Fund versus the S&P 500® Index.
Relatively weak performance in the Industrials sector, coupled with the Fund’s relative overweight in this sector, contributed to additional relative underperformance for the Fund versus the S&P 500® Index.
Relatively weak performance in the Health Care sector, coupled with the Fund’s relative underweight in this sector, contributed to relative outperformance for the Fund versus the S&P 500® Index.
Market and Fund Outlook
During the 12-month period ended October 31, 2023, the Fed’s policy surrounding inflation remained a key driver of equity market performance. Moving into the next fiscal year, this will continue to be a dominant theme, in our opinion. The 2024 U.S. Presidential election will also be front and center in the upcoming year. Over the course of 2023, Technology stocks led broad based indices, as investors flocked to companies developing Artificial Intelligence capabilities. The failure of Silicon Valley Bank in March 2023 sent shockwaves throughout the banking system, and rising energy prices over the summer contributed to higher inflation. The 30-year fixed mortgage rates peaked at 7.79% in late October 2023. Investors are digesting a possible “higher for longer” period of sustained higher rates based on the Fed’s “dot plot” forecasting a median Federal Funds target rate of 5.1% for 2024, and 3.9% for 2025. Consumer Price Index inflation data has come down considerably, despite an unexpected 0.6% month-over-month reading in August 2023. The U.S. job market remains strong at 3.9% unemployment, with October 2023 marking the twenty-first straight month with
Portfolio Commentary (Continued)
First Trust Exchange-Traded Fund IVAnnual ReportOctober 31, 2023 (Unaudited) unemployment below 4%. U.S. gross domestic product has posted five consecutive positive quarters as it recorded growth of 4.9% in the third quarter of 2023, up from 2.1% in the second quarter of 2023.
The Fund generally holds equities similar in name and weight to those equities in the NQDVSMRT. This index is designed to assemble a portfolio of stocks that are positioned to continue increasing dividends. We believe that the Fund is properly positioned to achieve its investment objectives.
FT Cboe Vest Technology Dividend Target Income ETF (TDVI)
Discussion of Fund Performance
This discussion is for the Fund for period from the Fund’s inception date on August 9, 2023 through October 31, 2023 (the “Period”). The Fund’s performance is compared to an index called the Nasdaq Technology DividendTM Index (the “Index” or “NQ96DVUX”).
Performance Analysis
Under normal market conditions, the Fund will pursue its investment objectives by investing primarily in U.S. exchange-traded equity securities contained in the Index and by utilizing an “option strategy” consisting of writing (selling) U.S. exchange-traded call options on the the Nasdaq-100® Index and/or the S&P 500® Index or exchange-traded funds that track the the Nasdaq-100® Index and/or the S&P 500® Index (“Underlying ETFs”).
During the Period, the Fund generally held about 83 Technology and Telecommunication stocks, as well as written call options on the Nasdaq-100® Index and S&P 500® Index. The premiums received from the written call options, plus the dividends received from the equities, sum to approximately 8.0% in excess of the dividend yield of the Nasdaq-100® Index annually.
For the Period, the Fund’s net asset value performance was -4.45%, while the NQ96DVUX performance was -4.99%. The outperformance of 0.54% can be explained by the following factors:
(1)
Fees and Expenses: Fees and expenses reduced the Fund’s performance by approximately 0.17%.
(2)
Execution Costs: Commissions, plus slippage due to trading securities at prices other than mid-market, reduced the Fund’s performance by approximately 0.02%.
(3)
Fund versus Index Holdings: While the Fund attempts to hold equity securities in the same proportion (i.e., weighting) as the Index, the Fund also holds writes call options on the Nasdaq-100® Index and/or the S&P 500® Index, whereas the NQ96DVUX Index does not. For the Period we estimate that the difference in the holdings between the Fund and the Index had a net 0.73% positive impact on the Fund’s performance.
Using market prices for the Fund, the Fund’s performance for the Period was -4.40%.
Impact of Fund Holdings on Performance
The top five performing holdings in the Fund for the Period were JOYY Inc., Dell Technologies Inc., Logitech International S.A., Cogent Communications Holdings, Inc., and Telephone and Data Systems, Inc., with returns of 19.9%, 19.0%, 18.4%, 12.9%, and 10.0%, respectively.
The bottom five performing holdings in the Fund for the Period were Methode Electronics, Inc., A10 Networks, Inc., Opera Limited, Ubiquiti Inc., and Kulicke & Soffa Industries, Inc., with returns of -29.5%, -28.8%, -27.9%, -27.2%, and -23.2%, respectively.
Impact of Sector Weightings on Performance
For the Period, the Fund had sector weightings that were in line with the NQ96DVUX. However, the Fund’s sector weightings were substantially different than the sector weightings of the S&P 500® Index. The Fund’s equity holdings are distributed approximately 80% to companies in the Information Technology sector and 20% to companies in the Telecommunications Services sector.
Both the Information Technology and Telecommunication Services sectors slightly outperformed the S&P 500® Index over the Period. This, coupled with the Fund’s overweight in these two sectors, contributed to relative overperformance for the Fund versus the S&P 500® Index.
Portfolio Commentary (Continued)
First Trust Exchange-Traded Fund IVAnnual ReportOctober 31, 2023 (Unaudited) Market and Fund Outlook
During the 12-month period ended October 31, 2023, the Fed’s policy surrounding inflation remained a key driver of equity market performance. Moving into the next fiscal year, this will continue to be a dominant theme, in our opinion. The 2024 U.S. Presidential election will also be front and center in the upcoming year. Over the course of 2023, Technology stocks led broad based indices, as investors flocked to companies developing Artificial Intelligence capabilities. The failure of Silicon Valley Bank in March 2023 sent shockwaves throughout the banking system, and rising energy prices over the summer contributed to higher inflation. The 30-year fixed mortgage rates peaked at 7.79% in late October of 2023. Investors are digesting a possible “higher for longer” period of sustained higher rates based on the Fed’s “dot plot” forecasting a median Federal Funds target rate of 5.1% for 2024, and 3.9% for 2025. Consumer Price Index inflation data has come down considerably, despite an unexpected 0.6% month-over-month reading in August 2023. The U.S. job market remains strong at 3.9% unemployment, with October 2023 marking the twenty-first straight month with unemployment below 4%. U.S. gross domestic product has posted five consecutive positive quarters as it recorded growth of 4.9% in the third quarter of 2023, up from 2.1% in the second quarter of 2023.
The Fund generally holds equities similar in name and weight to those equities in the NQ96DVUX. This index is designed to assemble a portfolio of Information Technology and Telecommunication Services stocks that pay high dividends. We believe that the Fund is properly positioned to achieve its investment objectives.
First Trust Exchange-Traded Fund IVUnderstanding Your Fund ExpensesOctober 31, 2023 (Unaudited) As a shareholder of FT Cboe Vest Rising Dividend Achievers Target Income ETF, FT Cboe Vest SMID Rising Dividend Achievers Target Income ETF, or FT Cboe Vest Technology Dividend Target Income ETF (each a “Fund” and collectively, the “Funds”), you incur two types of costs: (1) transaction costs; and (2) ongoing costs, including management fees, distribution and/or service (12b-1) fees, if any, and other Fund expenses. This Example is intended to help you understand your ongoing costs 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 (or since inception) and held through the six-month (or shorter) period ended October 31, 2023.
Actual Expenses
The first line in the following table provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During the Period” to estimate the expenses you paid on your account during this six-month (or shorter) period.
Hypothetical Example for Comparison Purposes
The second line in the following table provides information about hypothetical account values and hypothetical expenses based on each Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not each Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Funds and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs such as brokerage commissions. Therefore, the second line in the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
| Beginning
Account Value
May 1, 2023 | Ending
Account Value
October 31, 2023 | Annualized
Expense Ratio
Based on the
Six-Month
Period | Expenses Paid
During the
Six-Month
Period (a) |
FT Cboe Vest Rising Dividend Achievers Target Income ETF (RDVI) |
| | | | |
Hypothetical (5% return before expenses) | | | | |
| Beginning
Account Value
August 9, 2023 (b) | Ending
Account Value
October 31, 2023 | Annualized
Expense Ratio
Based on the
Number of Days
in the Period | Expenses Paid
During the Period
August 9, 2023 (b)
to
October 31, 2023 (c) |
FT Cboe Vest SMID Rising Dividend Achievers Target Income ETF (SDVD) |
| | | | |
Hypothetical (5% return before expenses) | | | | |
FT Cboe Vest Technology Dividend Target Income ETF (TDVI) |
| | | | |
Hypothetical (5% return before expenses) | | | | |
| Expenses are equal to the annualized expense ratio as indicated in the table multiplied by the average account value over the period (May 1, 2023 through October 31, 2023), multiplied by 184/365 (to reflect the six-month period). |
| |
| Actual expenses are equal to the annualized expense ratio as indicated in the table multiplied by the average account value over the period (August 9, 2023 through October 31, 2023), multiplied by 84/365. Hypothetical expenses are assumed for the most recent six-month period. |
FT Cboe Vest Rising Dividend Achievers Target Income ETF (RDVI)Portfolio of InvestmentsOctober 31, 2023
| | |
|
| | |
| Bank of America Corp. (a) | |
| Citizens Financial Group, Inc. (a) | |
| | |
| Huntington Bancshares, Inc. (a) | |
| | |
| PNC Financial Services Group (The), Inc. (a) | |
| | |
| Regions Financial Corp. (a) | |
| | |
| | |
| Goldman Sachs Group (The), Inc. (a) | |
| | |
| | |
| | |
| CF Industries Holdings, Inc. (a) | |
| Communications Equipment — 2.0% | |
| | |
| | |
| | |
| Capital One Financial Corp. (a) | |
| Discover Financial Services (a) | |
| | |
| | |
| Financial Services — 8.0% | |
| Equitable Holdings, Inc. (a) | |
| Mastercard, Inc., Class A (a) | |
| MGIC Investment Corp. (a) | |
| | |
| | |
| | |
| Archer-Daniels-Midland Co. (a) | |
| Health Care Equipment & Supplies — 2.0% | |
| | |
| Health Care Providers & Services — 4.5% | |
| Elevance Health, Inc. (a) | |
| | |
| | |
| Household Durables — 2.0% | |
| Lennar Corp., Class A (a) | |
| | |
| | |
| Principal Financial Group, Inc. (a) | |
| | |
| | |
| Accenture PLC, Class A (a) | |
| Cognizant Technology Solutions Corp., Class A (a) | |
| | |
See Notes to Financial Statements
FT Cboe Vest Rising Dividend Achievers Target Income ETF (RDVI)Portfolio of Investments (Continued)October 31, 2023 | | |
COMMON STOCKS (Continued) |
| | |
| Mueller Industries, Inc. (a) | |
| | |
| | |
| | |
| Interpublic Group of (The) Cos., Inc. (a) | |
| | |
| | |
| | |
| Freeport-McMoRan, Inc. (a) | |
| | |
| Reliance Steel & Aluminum Co. (a) | |
| | |
| | |
| Oil, Gas & Consumable Fuels — 12.0% | |
| | |
| | |
| Civitas Resources, Inc. (a) | |
| | |
| | |
| Magnolia Oil & Gas Corp., Class A (a) | |
| | |
| Paper & Forest Products — 1.8% | |
| Louisiana-Pacific Corp. (a) | |
| | |
| | |
| Semiconductors & Semiconductor Equipment — 5.9% | |
| | |
| Micron Technology, Inc. (a) | |
| Texas Instruments, Inc. (a) | |
| | |
| | |
| | |
| Technology Hardware, Storage & Peripherals — 2.0% | |
| | |
| | |
| | |
MONEY MARKET FUNDS — 0.2% |
| Dreyfus Government Cash Management Fund, Institutional Shares - 5.23% (b) | |
| | |
| Total Investments — 99.7% | |
| | |
See Notes to Financial Statements
FT Cboe Vest Rising Dividend Achievers Target Income ETF (RDVI)Portfolio of Investments (Continued)October 31, 2023 | | | | | |
|
| Call Options Written — (0.2)% | |
| | | | | |
| (Premiums received $555,381) | | | | |
| Net Other Assets and Liabilities — 0.5% | |
| | |
| All or a portion of this security is held as collateral for the options written. At October 31, 2023, the value of these securities amounts to $17,240,990. |
| Rate shown reflects yield as of October 31, 2023. |
Valuation InputsA summary of the inputs used to value the Fund’s investments as of October 31, 2023 is as follows (see Note 2A - Portfolio Valuation in the Notes to Financial Statements):
|
| | | Level 2
Significant
Observable
Inputs | Level 3
Significant
Unobservable
Inputs |
| | | | |
| | | | |
| | | | |
|
| | | Level 2
Significant
Observable
Inputs | Level 3
Significant
Unobservable
Inputs |
| | | | |
| See Portfolio of Investments for industry breakout. |
See Notes to Financial Statements
FT Cboe Vest SMID Rising Dividend Achievers Target Income ETF (SDVD)Portfolio of InvestmentsOctober 31, 2023
| | |
|
| | |
| Winnebago Industries, Inc. (a) | |
| | |
| | |
| | |
| Cathay General Bancorp (a) | |
| | |
| | |
| East West Bancorp, Inc. (a) | |
| | |
| International Bancshares Corp. (a) | |
| | |
| Pacific Premier Bancorp, Inc. (a) | |
| | |
| Synovus Financial Corp. (a) | |
| Veritex Holdings, Inc. (a) | |
| Wintrust Financial Corp. (a) | |
| | |
| | |
| | |
| Advanced Drainage Systems, Inc. (a) | |
| | |
| | |
| | |
| | |
| Evercore, Inc., Class A (a) | |
| Stifel Financial Corp. (a) | |
| | |
| | |
| | |
| Commercial Services & Supplies — 1.0% | |
| | |
| Communications Equipment — 1.0% | |
| Juniper Networks, Inc. (a) | |
| Construction & Engineering — 1.0% | |
| | |
| | |
| | |
| | |
| | |
| | |
| Electrical Equipment — 1.7% | |
| | |
| | |
| | |
| Electronic Equipment, Instruments & Components — 4.8% | |
| Advanced Energy Industries, Inc. (a) | |
| Benchmark Electronics, Inc. (a) | |
| | |
See Notes to Financial Statements
FT Cboe Vest SMID Rising Dividend Achievers Target Income ETF (SDVD)Portfolio of Investments (Continued)October 31, 2023 | | |
COMMON STOCKS (Continued) |
| Electronic Equipment, Instruments & Components (Continued) | |
| | |
| Vishay Intertechnology, Inc. (a) | |
| | |
| Financial Services — 5.9% | |
| Equitable Holdings, Inc. (a) | |
| | |
| Jackson Financial, Inc., Class A (a) | |
| MGIC Investment Corp. (a) | |
| | |
| Walker & Dunlop, Inc. (a) | |
| | |
| Ground Transportation — 2.8% | |
| Landstar System, Inc. (a) | |
| Marten Transport Ltd. (a) | |
| Schneider National, Inc., Class B (a) | |
| | |
| Household Durables — 5.8% | |
| Century Communities, Inc. (a) | |
| Ethan Allen Interiors, Inc. (a) | |
| | |
| M.D.C. Holdings, Inc. (a) | |
| | |
| | |
| | |
| | |
| American Financial Group, Inc. (a) | |
| Fidelity National Financial, Inc. (a) | |
| Principal Financial Group, Inc. (a) | |
| | |
| | |
| | |
| Sturm Ruger & Co., Inc. (a) | |
| | |
| | |
| | |
| | |
| | |
| Mueller Industries, Inc. (a) | |
| | |
| | |
| | |
| Marine Transportation — 1.1% | |
| | |
| | |
| Interpublic Group of (The) Cos., Inc. (a) | |
| | |
| | |
See Notes to Financial Statements
FT Cboe Vest SMID Rising Dividend Achievers Target Income ETF (SDVD)Portfolio of Investments (Continued)October 31, 2023 | | |
COMMON STOCKS (Continued) |
| | |
| Alpha Metallurgical Resources, Inc. (a) | |
| Commercial Metals Co. (a) | |
| Reliance Steel & Aluminum Co. (a) | |
| | |
| | |
| Oil, Gas & Consumable Fuels — 9.4% | |
| California Resources Corp. (a) | |
| | |
| Civitas Resources, Inc. (a) | |
| | |
| | |
| Magnolia Oil & Gas Corp., Class A (a) | |
| Matador Resources Co. (a) | |
| | |
| Texas Pacific Land Corp. (a) | |
| | |
| Paper & Forest Products — 1.0% | |
| Louisiana-Pacific Corp. (a) | |
| Personal Care Products — 1.9% | |
| | |
| | |
| | |
| Professional Services — 4.1% | |
| | |
| | |
| Resources Connection, Inc. (a) | |
| | |
| | |
| Real Estate Management & Development — 1.0% | |
| Marcus & Millichap, Inc. (a) | |
| Semiconductors & Semiconductor Equipment — 3.8% | |
| Amkor Technology, Inc. (a) | |
| Skyworks Solutions, Inc. (a) | |
| | |
| Universal Display Corp. (a) | |
| | |
| | |
| | |
| | |
| Dick’s Sporting Goods, Inc. (a) | |
| | |
| Technology Hardware, Storage & Peripherals — 1.0% | |
| | |
| Textiles, Apparel & Luxury Goods — 3.3% | |
| Columbia Sportswear Co. (a) | |
| | |
| | |
| | |
See Notes to Financial Statements
FT Cboe Vest SMID Rising Dividend Achievers Target Income ETF (SDVD)Portfolio of Investments (Continued)October 31, 2023 | | |
COMMON STOCKS (Continued) |
| Trading Companies & Distributors — 2.1% | |
| | |
| | |
| | |
| Total Investments — 98.5% | |
| | |
| | | | | |
|
| Call Options Written — (0.2)% | |
| Mini - Russell 2000 Index | | | | |
| (Premiums received $4,369) | | | | |
| Net Other Assets and Liabilities — 1.7% | |
| | |
| All or a portion of this security is held as collateral for the options written. At October 31, 2023, the value of these securities amounts to $976,630. |
Valuation InputsA summary of the inputs used to value the Fund’s investments as of October 31, 2023 is as follows (see Note 2A - Portfolio Valuation in the Notes to Financial Statements):
|
| | | Level 2
Significant
Observable
Inputs | Level 3
Significant
Unobservable
Inputs |
| | | | |
|
| | | Level 2
Significant
Observable
Inputs | Level 3
Significant
Unobservable
Inputs |
| | | | |
| See Portfolio of Investments for industry breakout. |
See Notes to Financial Statements
FT Cboe Vest Technology Dividend Target Income ETF (TDVI)Portfolio of InvestmentsOctober 31, 2023
| | |
|
| Communications Equipment — 6.0% | |
| ADTRAN Holdings, Inc. (a) | |
| | |
| Juniper Networks, Inc. (a) | |
| Motorola Solutions, Inc. (a) | |
| | |
| | |
| | |
| Diversified Telecommunication Services — 7.1% | |
| ATN International, Inc. (a) | |
| | |
| Cogent Communications Holdings, Inc. (a) | |
| | |
| Telkom Indonesia Persero Tbk PT, ADR (a) | |
| | |
| Verizon Communications, Inc. (a) | |
| | |
| Electronic Equipment, Instruments & Components — 5.4% | |
| Amphenol Corp., Class A (a) | |
| | |
| | |
| Benchmark Electronics, Inc. (a) | |
| | |
| | |
| Methode Electronics, Inc. (a) | |
| | |
| | |
| Vishay Intertechnology, Inc. (a) | |
| | |
| Interactive Media & Services — 0.5% | |
| | |
| | |
| | |
| | |
| | |
| | |
| Cognizant Technology Solutions Corp., Class A (a) | |
| Hackett Group (The), Inc. (a) | |
| | |
| International Business Machines Corp. (a) | |
| | |
| | |
| | |
| Comcast Corp., Class A (a) | |
| | |
| Professional Services — 1.5% | |
| | |
| CSG Systems International, Inc. (a) | |
| Dun & Bradstreet Holdings, Inc. (a) | |
See Notes to Financial Statements
FT Cboe Vest Technology Dividend Target Income ETF (TDVI)Portfolio of Investments (Continued)October 31, 2023 | | |
COMMON STOCKS (Continued) |
| Professional Services (Continued) | |
| | |
| Leidos Holdings, Inc. (a) | |
| Science Applications International Corp. (a) | |
| SS&C Technologies Holdings, Inc. (a) | |
| | |
| Semiconductors & Semiconductor Equipment — 34.3% | |
| Amkor Technology, Inc. (a) | |
| | |
| Applied Materials, Inc. (a) | |
| | |
| | |
| | |
| Kulicke & Soffa Industries, Inc. (a) | |
| | |
| Microchip Technology, Inc. (a) | |
| Micron Technology, Inc. (a) | |
| Monolithic Power Systems, Inc. (a) | |
| NXP Semiconductors N.V. (a) | |
| Power Integrations, Inc. (a) | |
| | |
| Skyworks Solutions, Inc. (a) | |
| Texas Instruments, Inc. (a) | |
| United Microelectronics Corp., ADR (a) | |
| Universal Display Corp. (a) | |
| | |
| | |
| | |
| | |
| Dolby Laboratories, Inc., Class A (a) | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| Progress Software Corp. (a) | |
| Roper Technologies, Inc. (a) | |
| | |
| Sapiens International Corp. N.V. (a) | |
| | |
| Technology Hardware, Storage & Peripherals — 7.0% | |
| Dell Technologies, Inc., Class C (a) | |
| Hewlett Packard Enterprise Co. (a) | |
| | |
| Logitech International S.A. (a) | |
| | |
See Notes to Financial Statements
FT Cboe Vest Technology Dividend Target Income ETF (TDVI)Portfolio of Investments (Continued)October 31, 2023 | | |
COMMON STOCKS (Continued) |
| Technology Hardware, Storage & Peripherals (Continued) | |
| Seagate Technology Holdings PLC (a) | |
| | |
| | |
| Wireless Telecommunication Services — 4.4% | |
| America Movil SAB de C.V., ADR (a) | |
| Rogers Communications, Inc., Class B (a) | |
| Telephone and Data Systems, Inc. | |
| | |
| | |
| Total Investments — 98.9% | |
| | |
| | | | | |
|
| Call Options Written — (0.2)% | |
| | | | | |
| (Premiums received $1,829) | | | | |
| Net Other Assets and Liabilities — 1.3% | |
| | |
| All or a portion of this security is held as collateral for the options written. At October 31, 2023, the value of these securities amounts to $988,184. |
Abbreviations throughout the Portfolio of Investments: |
| – American Depositary Receipt |
Valuation InputsA summary of the inputs used to value the Fund’s investments as of October 31, 2023 is as follows (see Note 2A - Portfolio Valuation in the Notes to Financial Statements):
|
| | | Level 2
Significant
Observable
Inputs | Level 3
Significant
Unobservable
Inputs |
| | | | |
|
| | | Level 2
Significant
Observable
Inputs | Level 3
Significant
Unobservable
Inputs |
| | | | |
| See Portfolio of Investments for industry breakout. |
See Notes to Financial Statements
First Trust Exchange-Traded Fund IVStatements of Assets and Liabilities
October 31, 2023
| FT Cboe Vest Rising Dividend Achievers Target Income ETF
(RDVI) | FT Cboe Vest SMID Rising Dividend Achievers Target Income ETF
(SDVD) | FT Cboe Vest Technology Dividend Target Income ETF
(TDVI) |
| | | |
| | | |
| | | |
Cash segregated as collateral for open written options contracts | | | |
| | | |
| | | |
Investment securities sold | | | |
| | | |
| | | |
|
| | | |
Options contracts written, at value | | | |
| | | |
| | | |
Investment securities purchased | | | |
| | | |
| | | |
|
| | | |
| | | |
| | | |
Accumulated distributable earnings (loss) | | | |
| | | |
NET ASSET VALUE, per share | | | |
Number of shares outstanding (unlimited number of shares authorized, par value $0.01 per share) | | | |
| | | |
Premiums received on options contracts written | | | |
See Notes to Financial Statements
First Trust Exchange-Traded Fund IVStatements of Operations
For the Period Ended October 31, 2023
| FT Cboe Vest Rising Dividend Achievers Target Income ETF
(RDVI) | FT Cboe Vest SMID Rising Dividend Achievers Target Income ETF
(SDVD) (a) | FT Cboe Vest Technology Dividend Target Income ETF
(TDVI) (a) |
| | | |
| | | |
| | | |
| | | |
|
| | | |
| | | |
| | | |
NET INVESTMENT INCOME (LOSS) | | | |
|
NET REALIZED AND UNREALIZED GAIN (LOSS): | | | |
Net realized gain (loss) on: | | | |
| | | |
| | | |
Written options contracts | | | |
| | | |
Net change in unrealized appreciation (depreciation) on: | | | |
| | | |
Written options contracts | | | |
Net change in unrealized appreciation (depreciation) | | | |
NET REALIZED AND UNREALIZED GAIN (LOSS) | | | |
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS | | | |
| Inception date is August 9, 2023, which is consistent with the commencement of investment operations and is the date the initial creation units were established. |
See Notes to Financial Statements
First Trust Exchange-Traded Fund IVStatements of Changes in Net Assets
| FT Cboe Vest Rising Dividend Achievers Target Income ETF (RDVI) | FT Cboe Vest SMID Rising Dividend Achievers Target Income ETF (SDVD) | FT Cboe Vest Technology Dividend Target Income ETF (TDVI) |
| | Period
Ended
10/31/2022 (a) | Period
Ended
10/31/2023 (b) | Period
Ended
10/31/2023 (b) |
| | | | |
Net investment income (loss) | | | | |
| | | | |
Net change in unrealized appreciation (depreciation) | | | | |
Net increase (decrease) in net assets resulting from operations | | | | |
|
DISTRIBUTIONS TO SHAREHOLDERS FROM: | | | | |
| | | | |
|
SHAREHOLDER TRANSACTIONS: | | | | |
Proceeds from shares sold | | | | |
| | | | |
Net increase (decrease) in net assets resulting from shareholder transactions | | | | |
Total increase (decrease) in net assets | | | | |
|
| | | | |
| | | | |
| | | | |
|
CHANGES IN SHARES OUTSTANDING: | | | | |
Shares outstanding, beginning of period | | | | |
| | | | |
| | | | |
Shares outstanding, end of period | | | | |
| Inception date is October 19, 2022, which is consistent with the commencement of investment operations and is the date the initial creation units were established. |
| Inception date is August 9, 2023, which is consistent with the commencement of investment operations and is the date the initial creation units were established. |
See Notes to Financial Statements
First Trust Exchange-Traded Fund IVFinancial Highlights
For a share outstanding throughout each period FT Cboe Vest Rising Dividend Achievers Target Income ETF (RDVI)
| | Period
Ended
10/31/2022 (a) |
|
Net asset value, beginning of period | | |
Income from investment operations: | | |
Net investment income (loss) | | |
Net realized and unrealized gain (loss) | | |
Total from investment operations | | |
Distributions paid to shareholders from: | | |
| | |
| | |
| | |
Net asset value, end of period | | |
| | |
|
Ratios to average net assets/supplemental data: | | |
Net assets, end of period (in 000’s) | | |
Ratio of total expenses to average net assets | | |
Ratio of net investment income (loss) to average net assets | | |
Portfolio turnover rate (g) | | |
| Inception date is October 19, 2022, which is consistent with the commencement of investment operations and is the date the initial creation units were established. |
| Based on average shares outstanding. |
| Amount represents less than $0.01. |
| Realized and unrealized gains (losses) per share are balancing amounts necessary to reconcile the change in net asset value per share for the period and may not reconcile with the aggregate gains and losses in the Statement of Operations due to share transactions for the period. |
| 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. |
| |
| 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
First Trust Exchange-Traded Fund IVFinancial Highlights (Continued)
For a share outstanding throughout the period FT Cboe Vest SMID Rising Dividend Achievers Target Income ETF (SDVD)
| Period
Ended
10/31/2023 (a) |
|
Net asset value, beginning of period | |
Income from investment operations: | |
Net investment income (loss) (b) | |
Net realized and unrealized gain (loss) | |
Total from investment operations | |
Distributions paid to shareholders from: | |
| |
| |
| |
Net asset value, end of period | |
| |
|
Ratios to average net assets/supplemental data: | |
Net assets, end of period (in 000’s) | |
Ratio of total expenses to average net assets | |
Ratio of net investment income (loss) to average net assets | |
Portfolio turnover rate (e) | |
| Inception date is August 9, 2023, which is consistent with the commencement of investment operations and is the date the initial creation units were established. |
| Based on average shares outstanding. |
| 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 return presented does 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. |
| |
| 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
First Trust Exchange-Traded Fund IVFinancial Highlights (Continued)
For a share outstanding throughout the period FT Cboe Vest Technology Dividend Target Income ETF (TDVI)
| Period
Ended
10/31/2023 (a) |
|
Net asset value, beginning of period | |
Income from investment operations: | |
Net investment income (loss) (b) | |
Net realized and unrealized gain (loss) | |
Total from investment operations | |
Distributions paid to shareholders from: | |
| |
| |
| |
Net asset value, end of period | |
| |
|
Ratios to average net assets/supplemental data: | |
Net assets, end of period (in 000’s) | |
Ratio of total expenses to average net assets | |
Ratio of net investment income (loss) to average net assets | |
Portfolio turnover rate (e) | |
| Inception date is August 9, 2023, which is consistent with the commencement of investment operations and is the date the initial creation units were established. |
| Based on average shares outstanding. |
| 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 return presented does 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. |
| |
| 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
Notes to Financial Statements
First Trust Exchange-Traded Fund IVOctober 31, 2023 1. Organization
First Trust Exchange-Traded Fund IV (the “Trust”) is an open-end management investment company organized as a Massachusetts business trust on September 15, 2010, and is registered with the Securities and Exchange Commission under the Investment Company Act of 1940, as amended (the “1940 Act”).
The Trust currently consists of eighteen funds that are offering shares. This report covers the three funds (each a “Fund” and collectively, the “Funds”) listed below, each a non-diversified series of the Trust. The shares of each Fund are listed and traded on the Cboe BZX Exchange, Inc.
FT Cboe Vest Rising Dividend Achievers Target Income ETF – RDVI |
FT Cboe Vest SMID Rising Dividend Achievers Target Income ETF – SDVD(1) |
FT Cboe Vest Technology Dividend Target Income ETF – TDVI(1) |
| Inception date is August 9, 2023, which is consistent with the commencement of investment operations and is the date the initial creation units were established. |
Each Fund represents a separate series of shares of beneficial interest in the Trust. Unlike conventional mutual funds, each Fund issues and redeems shares on a continuous basis, at net asset value (“NAV”), only in large blocks of shares known as “Creation Units.”
Each Fund is an actively managed exchange-traded fund.
RDVI’s investment objective seeks to provide investors with current income with a secondary objective of providing capital appreciation. Under normal market conditions, the Fund will pursue its investment objectives by investing primarily in U.S. exchange-traded equity securities contained in the Nasdaq US Rising Dividend AchieversTM Index and by utilizing an “option strategy” consisting of writing (selling) U.S. exchange-traded call options on the S&P 500® Index or exchange-traded funds (“ETFs”) that track the S&P 500® Index. Under normal market conditions, the Fund will invest at least 80% of its net assets (plus any borrowings for investment purposes) in dividend-paying securities and/or investments that provide exposure to dividend-paying securities.
SDVD’s investment objective seeks to provide investors with current income with a secondary objective of providing capital appreciation. Under normal market conditions, the Fund will pursue its investment objectives by investing primarily in U.S. exchange-traded equity securities contained in the Nasdaq US Small-Mid Cap Rising Dividend AchieverTM Index and by utilizing an “option strategy” consisting of writing (selling) U.S. exchange-traded call options on the Russell 2000® Index or ETFs that track the Russell 2000® Index. Under normal market conditions, the Fund will invest at least 80% of its net assets (plus any borrowings for investment purposes) in dividend-paying securities and/or investments that provide exposure to dividend-paying securities of small- and/or mid-capitalization companies.
TDVI’s investment objective seeks to provide investors with current income with a secondary objective of providing capital appreciation. Under normal market conditions, the Fund will pursue its investment objectives by investing primarily in U.S. exchange-traded equity securities contained in the Nasdaq Technology Dividend Index and by utilizing an “option strategy” consisting of writing (selling) U.S. exchange-traded call options on the Nasdaq-100® Index or the S&P 500® Index, or ETFs that track the Nasdaq-100® Index or the S&P 500® Index. Under normal market conditions, the Fund will invest at least 80% of its net assets (plus any borrowings for investment purposes) in dividend-paying securities and/or investments that provide exposure to dividend-paying securities of technology companies (i.e., securities classified under the Technology Industry or Telecommunications Industry as defined by the Industry Classification Benchmark (ICB)).
2. Significant Accounting Policies
The Funds are each considered an investment company and follow accounting and reporting guidance under Financial Accounting Standards Board Accounting Standards Codification Topic 946, “Financial Services-Investment Companies.” The following is a summary of significant accounting policies consistently followed by the Funds in the preparation of the financial statements. The preparation of the financial statements in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates.
Notes to Financial Statements (Continued)
First Trust Exchange-Traded Fund IVOctober 31, 2023 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. Each Fund’s NAV is calculated by dividing the value of all assets of each Fund (including accrued interest and dividends), less all liabilities (including accrued expenses and dividends declared but unpaid), by the total number of shares outstanding.
Each Fund’s investments are valued daily at market value or, in the absence of market value with respect to any portfolio securities, at fair value. Market value prices represent readily available market quotations such as last sale or official closing prices from a national or foreign exchange (i.e., a regulated market) and are primarily obtained from third-party pricing services. Fair value prices represent any prices not considered market value prices and are either obtained from a third-party pricing service or are determined by the Pricing Committee of the Funds’ investment advisor, First Trust Advisors L.P. (“First Trust” or the “Advisor”), in accordance with valuation procedures approved by the Trust’s Board of Trustees, and in accordance with provisions of the 1940 Act and rules thereunder. Investments valued by the Advisor’s Pricing Committee, if any, are footnoted as such in the footnotes to the Portfolio of Investments. Each Fund’s investments are valued as follows:
Common stocks and other equity securities listed on any national or foreign exchange (excluding Nasdaq, Inc. (“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 primary exchange for such securities.
Exchange-traded options contracts are valued at the closing price in the market where such contracts are principally traded. If no closing price is available, exchange-traded options contracts are valued at the mean of their most recent bid and ask price, if both are available. Options contracts traded in the over-the-counter market may be valued as follows, depending on the market in which the investment trades: (1) the mean of the most recent bid and ask price, if available; or (2) a price based on the equivalent exchange-traded option.
Equity securities traded in an over-the-counter market are valued at the close price or the last trade price.
Certain securities may not be able to be priced by pre-established pricing methods. Such securities may be valued by the Advisor’s Pricing Committee at fair value. These securities generally include, but are not limited to, restricted securities (securities which may not be publicly sold without registration under the Securities Act of 1933, as amended) for which a third-party pricing service is unable to provide a market price; securities whose trading has been formally suspended; a security whose market or fair value price is not available from a pre-established pricing source; a security with respect to which an event has occurred that is likely to materially affect the value of the security after the market has closed but before the calculation of a Fund’s NAV or make it difficult or impossible to obtain a reliable market quotation; and a security whose price, as provided by the third-party pricing service, does not reflect the security’s fair value. As a general principle, the current fair value of a security would appear to be the amount which the owner might reasonably expect to receive for the security upon its current sale. When fair value prices are used, generally they will differ from market quotations or official closing prices on the applicable exchanges. A variety of factors may be considered in determining the fair value of such securities, including, but not limited to, the following:
1)
the last sale price on the exchange on which they are principally traded or, for Nasdaq and AIM securities, the official closing price;
3)
the size of the holding;
4)
the initial cost of the security;
5)
transactions in comparable securities;
6)
price quotes from dealers and/or third-party pricing services;
7)
relationships among various securities;
8)
information obtained by contacting the issuer, analysts, or the appropriate stock exchange;
9)
an analysis of the issuer’s financial statements;
10)
the existence of merger proposals or tender offers that might affect the value of the security; and
11)
other relevant factors.
Notes to Financial Statements (Continued)
First Trust Exchange-Traded Fund IVOctober 31, 2023 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:
• Level 1 – Level 1 inputs are quoted prices in active markets for identical investments. An active market is a market in which transactions for the investment occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
• Level 2 – Level 2 inputs are observable inputs, either directly or indirectly, and include the following:
o Quoted prices for similar investments in active markets.
o Quoted prices for identical or similar investments in markets that are non-active. A non-active market is a market where there are few transactions for the investment, the prices are not current, or price quotations vary substantially either over time or among market makers, or in which little information is released publicly.
o Inputs other than quoted prices that are observable for the investment (for example, interest rates and yield curves observable at commonly quoted intervals, volatilities, prepayment speeds, loss severities, credit risks, and default rates).
o Inputs that are derived principally from or corroborated by observable market data by correlation or other means.
• Level 3 – Level 3 inputs are unobservable inputs. Unobservable inputs may reflect the reporting entity’s own assumptions about the assumptions that market participants would use in pricing the investment.
The inputs or methodologies used for valuing investments are not necessarily an indication of the risk associated with investing in those investments. A summary of the inputs used to value each Fund’s investments as of October 31, 2023, 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.
Withholding taxes and tax reclaims on foreign dividends have been provided for in accordance with each Fund’s understanding of the applicable country’s tax rules and rates.
C. Options Contracts
Each Fund is subject to equity price risk in the normal course of pursuing their investment objectives. RDVI will utilize an “option strategy” consisting of writing (selling) U.S. exchanged-traded call options on the S&P 500® Index or exchange-traded funds that track the S&P 500® Index. SDVD will utilize an “option strategy” consisting of writing (selling) U.S. exchanged-traded call options on the Russell 2000® Index or exchange-traded funds that track the Russell 2000® Index. TDVI will utilize an “option strategy” consisting of writing (selling) U.S. exchanged-traded call options on the Nasdaq-100® Index and/or the S&P 500® Index, or exchange-traded funds that track the Nasdaq-100® Index or the S&P 500® Index. A written (sold) call option gives the seller the obligation to sell shares of the underlying asset at a specified price (“strike price”) at a specified date (“expiration date”). The writer (seller) of the call option receives an amount (premium) for writing (selling) the option. In the event the underlying asset appreciates above the strike price as of the expiration date, the writer (seller) of the call option will have to pay the difference between the value of the underlying asset and the strike price (which loss is offset by the premium initially received), and in the event the underlying asset declines in value, the call option may end up worthless and the writer (seller) of the call option retains the premium.
When a Fund writes (sells) an option, an amount equal to the premium received by a Fund is included in “Options contracts written, at value” on the Statements of Assets and Liabilities. Options are marked-to-market daily and their value is affected by changes in the value of the underlying security, changes in interest rates, changes in the actual or perceived volatility of the securities markets and the underlying securities, and the remaining time to the option’s expiration. The value of options may also be adversely affected if the market for the options becomes less liquid or the trading volume diminishes. Premiums received from writing options that expire unexercised are treated by the Fund on the expiration date as realized gains from options written. The difference between the premium and the amount paid on effecting a closing purchase transaction, including brokerage commissions, is also treated as a realized gain, or, if the premium is less than the amount paid for the closing purchase transaction, as a realized loss. If a call option is exercised, the premium is added to the proceeds from the sale of the underlying security in determining whether the Fund has realized a gain or loss. Any gain or loss on written options would be included in “Net realized gain (loss) on written options contracts” on the Statements of Operations. The Fund, as a writer of an option, bears the market risk of an unfavorable change in the price of the security underlying the written option.
Notes to Financial Statements (Continued)
First Trust Exchange-Traded Fund IVOctober 31, 2023 D. Dividends and Distributions to Shareholders
Dividends from net investment income of each Fund, 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 each Fund, if any, are distributed at least annually. Each Fund may also designate a portion of the amount paid to redeeming shareholders as a distribution for tax purposes.
Distributions from net investment income and realized capital gains are determined in accordance with federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These permanent differences are primarily due to the varying treatment of income and gain/loss on significantly modified portfolio securities held by the Funds and have no impact on net assets or NAV per share. Temporary differences, which arise from recognizing certain items of income, expense and gain/loss in different periods for financial statement and tax purposes, will reverse at some time in the future.
The tax character of distributions paid by each Fund during the fiscal period ended October 31, 2023 was as follows:
| Distributions
paid from
Ordinary
Income | Distributions
paid from
Capital
Gains | Distributions
paid from
Return of
Capital |
FT Cboe Vest Rising Dividend Achievers Target Income ETF | | | |
FT Cboe Vest SMID Rising Dividend Achievers Target Income ETF | | | |
FT Cboe Vest Technology Dividend Target Income ETF | | | |
There were no distributions paid during the fiscal period ended October 31, 2022.
As of October 31, 2023, the components of distributable earnings on a tax basis for each Fund were as follows:
| Undistributed
Ordinary
Income | Accumulated
Capital and
Other
Gain (Loss) | Net
Unrealized
Appreciation
(Depreciation) |
FT Cboe Vest Rising Dividend Achievers Target Income ETF | | | |
FT Cboe Vest SMID Rising Dividend Achievers Target Income ETF | | | |
FT Cboe Vest Technology Dividend Target Income ETF | | | |
E. Income Taxes
Each Fund intends to qualify or 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. For RDVI, the taxable periods ended 2022 and 2023 remain open to federal and state audit. For SDVD and TDVI, the taxable period ended 2023 remains open to federal and state audit. As of October 31, 2023, management has evaluated the application of these standards to the Funds and has determined that no provision for income tax is required in the Funds’ financial statements for uncertain tax positions.
Each Fund intends to utilize provisions of the federal income tax laws, which allow it to carry a realized capital loss forward indefinitely following the year of the loss and offset such loss against any future realized capital gains. Each Fund is subject to certain limitations under U.S. tax rules on the use of capital loss carryforwards and net unrealized built-in losses. These limitations apply when there has been a 50% change in ownership. At October 31, 2023, for federal income tax purposes, the Funds had no capital loss carryforwards available, to the extent provided by regulations, to offset future capital gains.
Notes to Financial Statements (Continued)
First Trust Exchange-Traded Fund IVOctober 31, 2023 During the taxable year ended October 31, 2023, the following Fund utilized capital loss carryforwards in the following amount:
| |
FT Cboe Vest Rising Dividend Achievers Target Income ETF | |
In order to present paid-in capital and accumulated distributable earnings (loss) (which consists of accumulated net investment income (loss), accumulated net realized gain (loss) on investments and net unrealized appreciation (depreciation) on investments) on the Statements of Assets and Liabilities that more closely represent their tax character, certain adjustments have been made to paid-in capital, accumulated net investment income (loss) and accumulated net realized gain (loss) on investments. These adjustments are primarily due to the difference between book and tax treatments of income and gains on various investment securities held by the Funds and in-kind transactions. The results of operations and net assets were not affected by these adjustments. For the fiscal period ended October 31, 2023, the adjustments for each Fund were as follows:
| Accumulated
Net Investment
Income (Loss) | Accumulated
Net Realized
Gain (Loss)
on Investments | |
FT Cboe Vest Rising Dividend Achievers Target Income ETF | | | |
FT Cboe Vest SMID Rising Dividend Achievers Target Income ETF | | | |
FT Cboe Vest Technology Dividend Target Income ETF | | | |
As of October 31, 2023, the aggregate cost, gross unrealized appreciation, gross unrealized depreciation, and net unrealized appreciation/(depreciation) on investments (including short positions and derivatives, if any) for federal income tax purposes were as follows:
| | Gross Unrealized
Appreciation | Gross Unrealized
(Depreciation) | Net Unrealized
Appreciation
(Depreciation) |
FT Cboe Vest Rising Dividend Achievers Target Income ETF | | | | |
FT Cboe Vest SMID Rising Dividend Achievers Target Income ETF | | | | |
FT Cboe Vest Technology Dividend Target Income ETF | | | | |
F. Expenses
Expenses, other than the investment advisory fee and other excluded expenses, are paid by the Advisor (see Note 3).
3. Investment Advisory Fee, Affiliated Transactions and Other Fee Arrangements
First Trust, the investment advisor to the Funds, is a limited partnership with one limited partner, Grace Partners of DuPage L.P., and one general partner, The Charger Corporation. The Charger Corporation is an Illinois corporation controlled by James A. Bowen, Chief Executive Officer of First Trust. First Trust is responsible for the selection and ongoing monitoring of the securities in each Fund’s portfolio, managing the Funds’ business affairs and providing certain administrative services necessary for the management of the Funds.
First Trust is responsible for the expenses of each Fund including the cost of transfer agency, sub-advisory, custody, fund administration, legal, audit and other services and license fees (if any), but excluding fee payments under the Investment Management Agreement, interest, taxes, acquired fund fees and expenses, if any, brokerage commissions and other expenses connected with the execution of portfolio transactions, distribution and service fees payable pursuant to a Rule 12b-1 plan, if any, and extraordinary expenses. The annual unitary management fee payable by each Fund to First Trust for these services will be reduced at certain levels of the Fund’s net assets (“breakpoints”) and calculated pursuant to the following schedules:
Notes to Financial Statements (Continued)
First Trust Exchange-Traded Fund IVOctober 31, 2023 | | |
Fund net assets up to and including $2.5 billion | | |
Fund net assets greater than $2.5 billion up to and including $5 billion | | |
Fund net assets greater than $5 billion up to and including $7.5 billion | | |
Fund net assets greater than $7.5 billion up to and including $10 billion | | |
Fund net assets greater than $10 billion | | |
| |
Fund net assets up to and including $2.5 billion | |
Fund net assets greater than $2.5 billion up to and including $5 billion | |
Fund net assets greater than $5 billion up to and including $7.5 billion | |
Fund net assets greater than $7.5 billion up to and including $10 billion | |
Fund net assets greater than $10 billion up to and including $15 billion | |
Fund net assets greater than $15 billion | |
Cboe VestSM Financial LLC (“Cboe Vest”), an affiliate of First Trust, serves as the Fund’s sub-advisor and manages each Fund’s portfolio subject to First Trust’s supervision. Pursuant to the Investment Management Agreement, between the Trust, on behalf of the Funds, and the Advisor, and the Investment Sub-Advisory Agreement among the Trust, on behalf of the Funds, the Advisor and Cboe Vest, First Trust will supervise Cboe Vest and its management of the investment of each Fund’s assets and will pay Cboe Vest for its services as the Funds’ sub-advisor. Cboe Vest receives a sub-advisory fee equal to 0.20% of the average daily net assets of each Fund. Cboe Vest’s fee is paid by the Advisor out of its management fee.
The Trust has multiple service agreements with The Bank of New York Mellon (“BNYM”). Under the service agreements, BNYM performs custodial, fund accounting, certain administrative services, and transfer agency services for each Fund. As custodian, BNYM is responsible for custody of each Fund’s assets. As fund accountant and administrator, BNYM is responsible for maintaining the books and records of each Fund’s securities and cash. As transfer agent, BNYM is responsible for maintaining shareholder records for each Fund. BNYM is a subsidiary of The Bank of New York Mellon Corporation, a financial holding company.
Each Trustee who is not an officer or employee of First Trust, any sub-advisor or any of their affiliates (“Independent Trustees”) is paid a fixed annual retainer that is allocated equally among each fund in the First Trust Fund Complex. Each Independent Trustee is also paid an annual per fund fee that varies based on whether the fund is a closed-end or other actively managed fund, a target outcome fund or an index fund.
Additionally, the Lead Independent Trustee and the Chairs of the Audit Committee, Nominating and Governance Committee and Valuation Committee are paid annual fees to serve in such capacities, with such compensation allocated pro rata among each fund in the First Trust Fund Complex based on net assets. Independent Trustees are reimbursed for travel and out-of-pocket expenses in connection with all meetings. The Lead Independent Trustee and Committee Chairs rotate every three years. The officers and “Interested” Trustee receive no compensation from the Trust for acting in such capacities.
4. Purchases and Sales of Securities
For the fiscal period ended October 31, 2023, the cost of purchases and proceeds from sales of investments for each Fund, excluding short-term investments and in-kind transactions, were as follows:
| | |
FT Cboe Vest Rising Dividend Achievers Target Income ETF | | |
FT Cboe Vest SMID Rising Dividend Achievers Target Income ETF | | |
FT Cboe Vest Technology Dividend Target Income ETF | | |
For the fiscal period ended October 31, 2023, the cost of in-kind purchases and proceeds from in-kind sales for each Fund were as follows:
| | |
FT Cboe Vest Rising Dividend Achievers Target Income ETF | | |
FT Cboe Vest SMID Rising Dividend Achievers Target Income ETF | | |
FT Cboe Vest Technology Dividend Target Income ETF | | |
Notes to Financial Statements (Continued)
First Trust Exchange-Traded Fund IVOctober 31, 2023 5. Derivative Transactions
The following table presents the types of derivatives held by each Fund at October 31, 2023, the primary underlying risk exposure and the location of these instruments as presented on the Statements of Assets and Liabilities.
| | | |
| | Statements of Assets and
Liabilities Location | | Statements of Assets and
Liabilities Location | |
| | | | | |
| | Options contracts purchased, at value | | Options contracts written, at value | |
| | | | | |
| | Options contracts purchased, at value | | Options contracts written, at value | |
| | | | | |
| | Options contracts purchased, at value | | Options contracts written, at value | |
The following table presents the amount of net realized gain (loss) and change in net unrealized appreciation (depreciation) recognized for the fiscal period ended October 31, 2023, on each Fund’s derivative instruments, as well as the primary underlying risk exposure associated with the instruments.
|
Statements of Operations Location | | | |
| | | |
Net realized gain (loss) on written options contracts | | | |
Net change in unrealized appreciation (depreciation) on written options contracts | | | |
The Funds do not have the right to offset financial assets and financial liabilities related to options contracts on the Statements of Assets and Liabilities.
The following table presents the premiums for purchased options contracts opened, premiums for purchased options contracts closed, exercised and expired, premiums for written options contracts opened, and premiums for written options contracts closed, exercised and expired, for the fiscal period ended October 31, 2023, on each Fund’s options contracts.
| Premiums for
purchased
options contracts
opened | Premiums for
purchased
options contracts
closed, exercised
and expired | Premiums for
written options
contracts opened | Premiums for
written options
contracts closed,
exercised and
expired |
| | | | |
| | | | |
| | | | |
6. Creations, Redemptions and Transaction Fees
Each Fund generally issues and redeems its shares in primary market transactions through a creation and redemption mechanism and does not sell or redeem individual shares. Instead, financial entities known as “Authorized Participants” have contractual arrangements with a Fund or one of the Fund’s service providers to purchase and redeem Fund shares directly with the Fund in large blocks of shares known as “Creation Units.” Prior to the start of trading on every business day, a Fund publishes through the National Securities Clearing Corporation the “basket” of securities, cash or other assets that it will accept in exchange for a Creation Unit of the Fund’s shares. An Authorized Participant that wishes to effectuate a creation of a Fund’s shares deposits with the Fund the “basket” of securities, cash or other assets identified by the Fund that day, and then receives the Creation Unit of the Fund’s shares in return for those assets. After purchasing a Creation Unit, the Authorized Participant may continue to hold the Fund’s shares or sell them in the secondary market. The redemption process is the reverse of the purchase process: the Authorized Participant redeems a Creation Unit
Notes to Financial Statements (Continued)
First Trust Exchange-Traded Fund IVOctober 31, 2023 of a Fund’s shares for a basket of securities, cash or other assets. The combination of the creation and redemption process with secondary market trading in a Fund’s shares and underlying securities provides arbitrage opportunities that are designed to help keep the market price of a Fund’s shares at or close to the NAV per share of the Fund.
Each Fund imposes fees in connection with the purchase of Creation Units. These fees may vary based upon various fact-based circumstances, including, but not limited to, the composition of the securities included in the Creation Unit or the countries in which the transactions are settled. The price for each Creation Unit will equal the daily NAV per share of a Fund times the number of shares in a Creation Unit, plus the fees described above and, if applicable, any operational processing and brokerage costs, transfer fees, stamp taxes and part or all of the spread between the expected bid and offer side of the market related to the securities comprising the creation basket.
Each Fund also imposes fees in connection with the redemption of Creation Units. These fees may vary based upon various fact-based circumstances, including, but not limited to, the composition of the securities included in the Creation Unit or the countries in which the transactions are settled. The price received for each Creation Unit will equal the daily NAV per share of a Fund times the number of shares in a Creation Unit, minus the fees described above and, if applicable, any operational processing and brokerage costs, transfer fees, stamp taxes and part or all of the spread between the expected bid and offer side of the market related to the securities comprising the redemption basket. Investors who use the services of a broker or other such intermediary in addition to an Authorized Participant to effect a redemption of a Creation Unit may also be assessed an amount to cover the cost of such services. The redemption fee charged by a Fund will comply with Rule 22c-2 of the 1940 Act which limits redemption fees to no more than 2% of the value of the shares redeemed.
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 the provision of investor services. FTP may also use this amount to compensate securities dealers or other persons that are Authorized Participants for providing distribution assistance, including broker-dealer and shareholder support and educational and promotional services.
No 12b-1 fees are currently paid by the Funds, and pursuant to a contractual arrangement, no 12b-1 fees will be paid any time before October 18, 2024 for RDVI and August 4, 2025 for SDVD and TVDI.
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 on the Funds through the date the financial statements were issued and has determined that there were no subsequent events requiring recognition or disclosure in the financial statements that have not already been disclosed.
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Trustees of First Trust Exchange-Traded Fund IV:
Opinion on the Financial Statements and Financial Highlights
We have audited the accompanying statements of assets and liabilities of FT Cboe Vest Rising Dividend Achievers Target Income ETF, FT Cboe Vest SMID Rising Dividend Achievers Target Income ETF, and FT Cboe Vest Technology Dividend Target Income ETF (the “Funds”), each a series of the First Trust Exchange-Traded Fund IV, including the portfolios of investments, as of October 31, 2023, and the related statements of operations, changes in net assets, and the financial highlights for the periods indicated in the table below; and the related notes. In our opinion, the financial statements and financial highlights present fairly, in all material respects, the financial position of each of the Funds as of October 31, 2023, and the results of their operations, the changes in their net assets, and the financial highlights for the periods listed in the table below, in conformity with accounting principles generally accepted in the United States of America.
Individual Funds
Included in the Trust | | Statements of Changes
in Net Assets | |
FT Cboe Vest Rising Dividend Achievers Target Income ETF | For the year ended October 31, 2023 | For the year ended October 31, 2023, and for the period from October 19, 2022 (commencement of investment operations) through October 31, 2022 |
FT Cboe Vest SMID Rising Dividend Achievers Target Income ETF | For the period from August 9, 2023 (commencement of investment operations) through October 31, 2023 |
FT Cboe Vest Technology Dividend Target Income ETF |
Basis for Opinion
These financial statements and financial highlights are the responsibility of the Funds’ management. Our responsibility is to express an opinion on the Funds’ financial statements and financial highlights based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Funds in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement, whether due to error or fraud. The Funds are not required to have, nor were we engaged to perform, an audit of their internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Funds’ internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements and financial highlights, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements and financial highlights. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and financial highlights. Our procedures included confirmation of securities owned as of October 31, 2023, by correspondence with the custodian and brokers; when replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
/s/ Deloitte & Touche, LLP
Chicago, Illinois
December 20, 2023
We have served as the auditor of one or more First Trust investment companies since 2001.
First Trust Exchange-Traded Fund IVOctober 31, 2023 (Unaudited) Proxy Voting Policies and Procedures
A description of the policies and procedures that the Trust uses to determine how to vote proxies and information on how each Fund voted proxies relating to its portfolio securities during the most recent 12-month period ended June 30 is available (1) without charge, upon request, by calling (800) 988-5891; (2) on each Fund’s website at www.ftportfolios.com; and (3) on the Securities and Exchange Commission’s (“SEC”) website at www.sec.gov.
Portfolio Holdings
Each Fund files portfolio holdings information for each month in a fiscal quarter within 60 days after the end of the relevant fiscal quarter on Form N-PORT. Portfolio holdings information for the third month of each fiscal quarter will be publicly available on the SEC’s website at www.sec.gov. Each Fund’s complete schedule of portfolio holdings for the second and fourth quarters of each fiscal year is included in the semi-annual and annual reports to shareholders, respectively, and is filed with the SEC on Form N-CSR. The semi-annual and annual report for each Fund is available to investors within 60 days after the period to which it relates. Each Fund’s Forms N-PORT and Forms N-CSR are available on the SEC’s website listed above.
Federal Tax Information
For the taxable period ended October 31, 2023, the following percentages of income dividend paid by the Funds qualify for the dividends received deduction available to corporations:
| Dividends Received
Deduction |
FT Cboe Vest Rising Dividend Achievers Target Income ETF | |
FT Cboe Vest SMID Rising Dividend Achievers Target Income ETF | |
FT Cboe Vest Technology Dividend Target Income ETF | |
For the taxable period ended October 31, 2023, the following percentages of income dividend paid by the Funds are hereby designated as qualified dividend income:
| |
FT Cboe Vest Rising Dividend Achievers Target Income ETF | |
FT Cboe Vest SMID Rising Dividend Achievers Target Income ETF | |
FT Cboe Vest Technology Dividend Target Income ETF | |
Long-term capital gain distributions designated by the Funds are taxable at the applicable capital gain tax rates for federal income tax purposes. For the fiscal period ended October 31, 2023, the below Funds designated long-term capital gain distributions in the following amounts.
| Long-Term Capital
Gain Distribution |
FT Cboe Vest Rising Dividend Achievers Target Income ETF | |
FT Cboe Vest SMID Rising Dividend Achievers Target Income ETF | |
FT Cboe Vest Technology Dividend Target Income ETF | |
Risk Considerations
Risks are inherent in all investing. Certain general risks that may be applicable to a Fund are identified below, but not all of the material risks relevant to each Fund are included in this report and not all of the risks below apply to each Fund. The material risks of investing in each Fund are spelled out in its prospectus, statement of additional information and other regulatory filings. Before investing, you should consider each Fund’s investment objective, risks, charges and expenses, and
Additional Information (Continued)
First Trust Exchange-Traded Fund IVOctober 31, 2023 (Unaudited) read each Fund’s prospectus and statement of additional information carefully. You can download each Fund’s prospectus at www.ftportfolios.com or contact First Trust Portfolios L.P. at (800) 621-1675 to request a prospectus, which contains this and other information about each Fund.
Concentration Risk. To the extent that a fund is able to invest a significant percentage of its assets in a single asset class or the securities of issuers within the same country, state, region, industry or sector, an adverse economic, business or political development may affect the value of the fund’s investments more than if the fund were more broadly diversified. A fund that tracks an index will be concentrated to the extent the fund’s corresponding index is concentrated. A concentration makes a fund more susceptible to any single occurrence and may subject the fund to greater market risk than a fund that is more broadly diversified.
Credit Risk. Credit risk is the risk that an issuer of a security will be unable or unwilling to make dividend, interest and/or principal payments when due and the related risk that the value of a security may decline because of concerns about the issuer’s ability to make such payments.
Cyber Security Risk. The funds are susceptible to potential operational risks through breaches in cyber security. A breach in cyber security refers to both intentional and unintentional events that may cause a fund to lose proprietary information, suffer data corruption or lose operational capacity. Such events could cause a fund to incur regulatory penalties, reputational damage, additional compliance costs associated with corrective measures and/or financial loss. In addition, cyber security breaches of a fund’s third-party service providers, such as its administrator, transfer agent, custodian, or sub-advisor, as applicable, or issuers in which the fund invests, can also subject a fund to many of the same risks associated with direct cyber security breaches.
Defined Outcome Funds Risk. To the extent a fund’s investment strategy is designed to deliver returns tied to the price performance of an underlying ETF, an investor may not realize the returns the fund seeks to achieve if that investor does not hold shares for the entire target outcome period. In the event an investor purchases shares after the first day of the target outcome period or sells shares prior to the end of the target outcome period, the buffer that the fund seeks to provide against a decline in the value of the underlying ETF may not be available, the enhanced returns that the fund seeks to provide (if any) may not be available and the investor may not participate in a gain in the value of the underlying ETF up to the cap for the investor’s investment period. Additionally, the fund will not participate in gains of the underlying ETF above the cap and a shareholder may lose their entire investment. If the fund seeks enhanced returns, there are certain time periods when the value of the fund may fall faster than the value of the underlying ETF, and it is very unlikely that, on any given day during which the underlying ETF share price increases in value, the fund’s share price will increase at the same rate as the enhanced returns sought by the fund, which is designed for an entire target outcome period. Trading flexible exchange options involves risks different from, or possibly greater than, the risks associated with investing directly in securities, such as less liquidity and correlation and valuation risks. A fund may experience substantial downside from specific flexible exchange option positions and certain positions may expire worthless.
Derivatives Risk. To the extent a fund uses derivative instruments such as futures contracts, options contracts and swaps, the fund may experience losses because of adverse movements in the price or value of the underlying asset, index or rate, which may be magnified by certain features of the derivative. These risks are heightened when a fund’s portfolio managers use derivatives to enhance the fund’s return or as a substitute for a position or security, rather than solely to hedge (or offset) the risk of a position or security held by the fund.
Equity Securities Risk. To the extent a fund invests in equity securities, the value of the fund’s shares will fluctuate with changes in the value of the equity securities. Equity securities prices fluctuate for several reasons, including changes in investors’ perceptions of the financial condition of an issuer or the general condition of the relevant stock market, such as market volatility, or when political or economic events affecting the issuers occur. In addition, common stock prices may be particularly sensitive to rising interest rates, as the cost of capital rises and borrowing costs increase. Equity securities may decline significantly in price over short or extended periods of time, and such declines may occur in the equity market as a whole, or they may occur in only a particular country, company, industry or sector of the market.
ETF Risk. The shares of an ETF trade like common stock and represent an interest in a portfolio of securities. The risks of owning an ETF generally reflect the risks of owning the underlying securities, although lack of liquidity in an ETF could result in it being more volatile and ETFs have management fees that increase their costs. Shares of an ETF trade on an exchange at market prices rather than net asset value, which may cause the shares to trade at a price greater than net asset value (premium) or less than net asset value (discount). In times of market stress, decisions by market makers to reduce or step away from their role of providing a market for an
Additional Information (Continued)
First Trust Exchange-Traded Fund IVOctober 31, 2023 (Unaudited) ETF’s shares, or decisions by an ETF’s authorized participants that they are unable or unwilling to proceed with creation and/or redemption orders of an ETF’s shares, could result in shares of the ETF trading at a discount to net asset value and in greater than normal intraday bid-ask spreads.
Fixed Income Securities Risk. To the extent a fund invests in fixed income securities, the fund will be subject to credit risk, income risk, interest rate risk, liquidity risk and prepayment risk. Income risk is the risk that income from a fund’s fixed income investments could decline during periods of falling interest rates. Interest rate risk is the risk that the value of a fund’s fixed income securities will decline because of rising interest rates. Liquidity risk is the risk that a security cannot be purchased or sold at the time desired, or cannot be purchased or sold without adversely affecting the price. Prepayment risk is the risk that the securities will be redeemed or prepaid by the issuer, resulting in lower interest payments received by the fund. In addition to these risks, high yield securities, or “junk” bonds, are subject to greater market fluctuations and risk of loss than securities with higher ratings, and the market for high yield securities is generally smaller and less liquid than that for investment grade securities.
Index or Model Constituent Risk. Certain funds may be a constituent of one or more indices or ETF models. As a result, such a fund may be included in one or more index-tracking exchange-traded funds or mutual funds. Being a component security of such a vehicle could greatly affect the trading activity involving a fund, the size of the fund and the market volatility of the fund. Inclusion in an index could increase demand for the fund and removal from an index could result in outsized selling activity in a relatively short period of time. As a result, a fund’s net asset value could be negatively impacted and the fund’s market price may be significantly below its net asset value during certain periods. In addition, index rebalances may potentially result in increased trading activity in a fund’s shares.
Index Provider Risk. To the extent a fund seeks to track an index, it is subject to Index Provider Risk. There is no assurance that the Index Provider will compile the Index accurately, or that the Index will be determined, maintained, constructed, reconstituted, rebalanced, composed, calculated or disseminated accurately. To correct any such error, the Index Provider may carry out an unscheduled rebalance or other modification of the Index constituents or weightings, which may increase the fund’s costs. The Index Provider does not provide any representation or warranty in relation to the quality, accuracy or completeness of data in the Index, and it does not guarantee that the Index will be calculated in accordance with its stated methodology. Losses or costs associated with any Index Provider errors generally will be borne by the fund and its shareholders.
Investment Companies Risk. To the extent a fund invests in the securities of other investment vehicles, the fund will incur additional fees and expenses that would not be present in a direct investment in those investment vehicles. Furthermore, the fund’s investment performance and risks are directly related to the investment performance and risks of the investment vehicles in which the fund invests.
LIBOR Risk. To the extent a fund invests in floating or variable rate obligations that use the London Interbank Offered Rate (“LIBOR”) as a reference interest rate, it is subject to LIBOR Risk. The United Kingdom’s Financial Conduct Authority, which regulates LIBOR, has ceased making LIBOR available as a reference rate over a phase-out period that began December 31, 2021. There is no assurance that any alternative reference rate, including the Secured Overnight Financing Rate (“SOFR”) will be similar to or produce the same value or economic equivalence as LIBOR or that instruments using an alternative rate will have the same volume or liquidity. The unavailability or replacement of LIBOR may affect the value, liquidity or return on certain fund investments and may result in costs incurred in connection with closing out positions and entering into new trades. Any potential effects of the transition away from LIBOR on the fund or on certain instruments in which the fund invests can be difficult to ascertain, and they may vary depending on a variety of factors, and they could result in losses to the fund.
Management Risk. To the extent that a fund is actively managed, it is subject to management risk. In managing an actively-managed fund’s investment portfolio, the fund’s portfolio managers will apply investment techniques and risk analyses that may not have the desired result. There can be no guarantee that a fund will meet its investment objective.
Market Risk. Market risk is the risk that a particular security, or shares of a fund in general, may fall in value. Securities held by a fund, as well as shares of a fund itself, are subject to market fluctuations caused by factors such as general economic conditions, political events, regulatory or market developments, changes in interest rates and perceived trends in securities prices. Shares of a fund could decline in value or underperform other investments as a result of the risk of loss associated with these market fluctuations. In addition, local, regional or global events such as war, acts of terrorism, spread of infectious diseases or other public health issues, recessions, or other events could have a significant negative impact on a fund and its investments. Such events may affect certain geographic regions, countries, sectors and industries more significantly than others. In February 2022, Russia invaded Ukraine which has caused and could continue to cause significant market disruptions and volatility within the markets in Russia, Europe, and the
Additional Information (Continued)
First Trust Exchange-Traded Fund IVOctober 31, 2023 (Unaudited) United States. The hostilities and sanctions resulting from those hostilities could have a significant impact on certain fund investments as well as fund performance. The COVID-19 global pandemic and the ensuing policies enacted by governments and central banks have caused and may continue to cause significant volatility and uncertainty in global financial markets. While the U.S. has resumed “reasonably” normal business activity, many countries continue to impose lockdown measures. Additionally, there is no guarantee that vaccines will be effective against emerging variants of the disease. These events also adversely affect the prices and liquidity of a fund’s portfolio securities or other instruments and could result in disruptions in the trading markets. Any of such circumstances could have a materially negative impact on the value of a fund’s shares and result in increased market volatility. During any such events, a fund’s shares may trade at increased premiums or discounts to their net asset value and the bid/ask spread on a fund’s shares may widen.
Non-U.S. Securities Risk. To the extent a fund invests in non-U.S. securities, it is subject to additional risks not associated with securities of domestic issuers. Non-U.S. securities are subject to higher volatility than securities of domestic issuers due to: possible adverse political, social or economic developments; restrictions on foreign investment or exchange of securities; capital controls; lack of liquidity; currency exchange rates; excessive taxation; government seizure of assets; the imposition of sanctions by foreign governments; different legal or accounting standards; and less government supervision and regulation of exchanges in foreign countries. Investments in non-U.S. securities may involve higher costs than investments in U.S. securities, including higher transaction and custody costs, as well as additional taxes imposed by non-U.S. governments. These risks may be heightened for securities of companies located, or with significant operations, in emerging market countries.
Operational Risk. Each fund is subject to risks arising from various operational factors, including, but not limited to, human error, processing and communication errors, errors of a fund’s service providers, counterparties or other third-parties, failed or inadequate processes and technology or systems failures. Each fund relies on third-parties for a range of services, including custody. Any delay or failure relating to engaging or maintaining such service providers may affect a fund’s ability to meet its investment objective. Although the funds and the funds’ investment advisor seek to reduce these operational risks through controls and procedures, there is no way to completely protect against such risks.
Passive Investment Risk. To the extent a fund seeks to track an index, the fund will invest in the securities included in, or representative of, the index regardless of their investment merit. A fund generally will not attempt to take defensive positions in declining markets.
Preferred Securities Risk. Preferred securities combine some of the characteristics of both common stocks and bonds. Preferred securities are typically subordinated to bonds and other debt securities in a company’s capital structure in terms of priority to corporate income, subjecting them to greater credit risk than those debt securities. Generally, holders of preferred securities have no voting rights with respect to the issuing company unless preferred dividends have been in arrears for a specified number of periods, at which time the preferred security holders may obtain limited rights. In certain circumstances, an issuer of preferred securities may defer payment on the securities and, in some cases, redeem the securities prior to a specified date. Preferred securities may also be substantially less liquid than other securities, including common stock.
Valuation Risk. The valuation of certain securities may carry more risk than that of common stock. Uncertainties in the conditions of the financial markets, unreliable reference data, lack of transparency and inconsistency of valuation models and processes may lead to inaccurate asset pricing. A fund may hold investments in sizes smaller than institutionally sized round lot positions (sometimes referred to as odd lots). However, third-party pricing services generally provide evaluations on the basis of institutionally-sized round lots. If a fund sells certain of its investments in an odd lot transaction, the sale price may be less than the value at which such securities have been held by the fund. Odd lots often trade at lower prices than institutional round lots. There is no assurance that the fund will be able to sell a portfolio security at the price established by the pricing service, which could result in a loss to the fund.
NOT FDIC INSURED NOT BANK GUARANTEED MAY LOSE VALUE
Advisory and Sub-Advisory Agreements
Board Considerations Regarding Approval of the Investment Management Agreement and Sub-Advisory Agreements
FT Cboe Vest SMID Rising Dividend Achievers Target Income ETF
The Board of Trustees of First Trust Exchange-Traded Fund IV (the “Trust”), including the Independent Trustees, approved the Investment Management Agreement (the “Advisory Agreement”) with First Trust Advisors L.P. (the “Advisor”), on behalf of FT
Additional Information (Continued)
First Trust Exchange-Traded Fund IVOctober 31, 2023 (Unaudited) Cboe Vest SMID Rising Dividend Achievers Target Income ETF (the “Fund”), and the Investment Sub-Advisory Agreement (the “Sub-Advisory Agreement” and together with the Advisory Agreement, the “Agreements”) among the Trust, on behalf of the Fund, the Advisor and Cboe Vest Financial LLC (the “Sub-Advisor”), for an initial two-year term at a meeting held on June 5, 2023. The Board determined that the Agreements are in the best interests of the Fund in light of the nature, extent and quality of the services expected to be provided and such other matters as the Board considered to be relevant in the exercise of its business judgment.
To reach this determination, the Board considered its duties under the Investment Company Act of 1940, as amended (the “1940 Act”), as well as under the general principles of state law, in reviewing and approving advisory contracts; the requirements of the 1940 Act in such matters; the fiduciary duty of investment advisors with respect to advisory agreements and compensation; the standards used by courts in determining whether investment company boards have fulfilled their duties; and the factors to be considered by the Board in voting on such agreements. To assist the Board in its evaluation of the Agreements for the Fund, the Independent Trustees received a separate report from each of the Advisor and the Sub-Advisor in advance of the Board meeting responding to requests for information from counsel to the Independent Trustees, submitted on behalf of the Independent Trustees, that, among other things, outlined: the services to be provided by the Advisor and the Sub-Advisor to the Fund (including the relevant personnel responsible for these services and their experience); the proposed unitary fee rate schedule payable by the Fund as compared to fees charged to a peer group of funds (the “Expense Group”) and a broad peer universe of funds (the “Expense Universe”), each assembled by Broadridge Financial Solutions, Inc. (“Broadridge”), an independent source, and as compared to fees charged to other exchange-traded funds (“ETFs”) managed by the Advisor; the proposed sub-advisory fee as compared to fees charged to other clients of the Sub-Advisor; the estimated expense ratio of the Fund as compared to expense ratios of the funds in the Fund’s Expense Group and Expense Universe; the nature of expenses to be incurred in providing services to the Fund and the potential for the Advisor and the Sub-Advisor to realize economies of scale, if any; profitability and other financial data for the Advisor; financial data for the Sub-Advisor; any indirect benefits to the Advisor and its affiliates, First Trust Portfolios L.P. (“FTP”) and First Trust Capital Partners, LLC (“FTCP”), and the Sub-Advisor; and information on the Advisor’s and the Sub-Advisor’s compliance programs. The Independent Trustees and their counsel also met separately to discuss the information provided by the Advisor and the Sub-Advisor. The Board applied its business judgment to determine whether the arrangements between the Trust and the Advisor and among the Trust, the Advisor and the Sub-Advisor are reasonable business arrangements from the Fund’s perspective.
In evaluating whether to approve the Agreements for the Fund, the Board considered the nature, extent and quality of the services to be provided by the Advisor and the Sub-Advisor under the Agreements. With respect to the Advisory Agreement, the Board considered that the Advisor will be responsible for the overall management and administration of the Fund and reviewed all of the services to be provided by the Advisor to the Fund, including the oversight of the Sub-Advisor, as well as the background and experience of the persons responsible for such services. The Board considered that the Fund will be an actively-managed ETF and will employ an advisor/sub-advisor management structure and considered that the Advisor manages other ETFs with a similar structure in the First Trust Fund Complex. The Board noted that the Advisor will oversee the Sub-Advisor’s day-to-day management of the Fund’s investments, including portfolio risk monitoring and performance review. In reviewing the services to be provided, the Board noted the compliance program that had been developed by the Advisor and considered that it includes a robust program for monitoring the Advisor’s, the Sub-Advisor’s and the Fund’s compliance with the 1940 Act, as well as the Fund’s compliance with its investment objectives, policies and restrictions. The Board noted that employees of the Advisor provide management services to other ETFs and to other funds in the First Trust Fund Complex with diligence and care. With respect to the Sub-Advisory Agreement, in addition to the written materials provided by the Sub-Advisor, at the June 5, 2023 meeting, the Board also received a presentation from representatives of the Sub-Advisor discussing the services that the Sub-Advisor will provide to the Fund, and the Trustees were able to ask questions about the proposed strategy for the Fund. The Board noted the background and experience of the Sub-Advisor’s portfolio management team and the Sub-Advisor’s investment style. The Board also noted that the Sub-Advisor manages other target income ETFs with strategies similar to that of the Fund in the First Trust Fund Complex. Because the Fund had yet to commence investment operations, the Board could not consider the historical investment performance of the Fund. In light of the information presented and the considerations made, the Board concluded that the nature, extent and quality of the services to be provided to the Fund by the Advisor and the Sub-Advisor under the Agreements are expected to be satisfactory.
The Board considered the proposed unitary fee rate schedule payable by the Fund under the Advisory Agreement for the services to be provided. The Board noted that, under the unitary fee arrangement, the Fund would pay the Advisor a unitary fee starting at an annual rate of 0.85% of its average daily net assets, subject to a breakpoint schedule pursuant to which the unitary fee rate would be reduced as assets of the Fund meet certain thresholds. The Board considered that, from the unitary fee for the Fund, the Advisor would pay the Sub-Advisor a sub-advisory fee equal to an annual rate of 0.20% of the Fund’s average daily net assets. The Board noted that the Advisor would be responsible for the Fund’s expenses, including the cost of sub-advisory, transfer agency, custody, fund administration, legal, audit and other services and license fees, if any, but excluding the fee payment under the Advisory Agreement
Additional Information (Continued)
First Trust Exchange-Traded Fund IVOctober 31, 2023 (Unaudited) and interest, taxes, acquired fund fees and expenses, if any, brokerage commissions and other expenses connected with the execution of portfolio transactions, distribution and service fees pursuant to a Rule 12b-1 plan, if any, and extraordinary expenses, if any. The Board received and reviewed information showing the fee rates and expense ratios of the peer funds in the Expense Group, as well as advisory and unitary fee rates charged by the Advisor and the Sub-Advisor to other fund (including ETF) and non-fund clients, as applicable. Because the Fund will pay a unitary fee, the Board determined that expense ratios were the most relevant comparative data point. Based on the information provided, the Board noted that the total (net) expense ratio for the Fund was below the median total (net) expense ratio of the peer funds in the Expense Group. With respect to the Expense Group, the Board discussed with representatives of the Advisor how the Expense Group was assembled and how the Fund compared and differed from the peer funds. The Board took this information into account in considering the peer data. With respect to fees charged to other clients, the Board considered the Advisor’s statement that the Fund will be unique to the market and the First Trust Fund Complex but will be most similar to two other ETFs in the First Trust Fund Complex that are managed by the Advisor and sub-advised by the Sub-Advisor and employ options-based strategies, each of which has a unitary fee rate schedule starting at an annual rate of 0.85% of its average daily net assets. In light of the information considered and the nature, extent and quality of the services expected to be provided to the Fund under the Agreements, the Board determined that the proposed unitary fee, including the sub-advisory fee to be paid by the Advisor to the Sub-Advisor from the unitary fee, was fair and reasonable.
The Board considered whether there are any potential economies of scale to be achieved in connection with the Advisor providing investment advisory services to the Fund and whether the Fund may benefit from any economies of scale. The Board noted that the proposed unitary fee rate schedule for the Fund includes breakpoints pursuant to which the unitary fee rate would be reduced as assets of the Fund meet certain thresholds. The Board considered that the Advisor has continued to build infrastructure and add new staff to improve the services to the funds in the First Trust Fund Complex. The Board also noted that under the unitary fee structure, any reduction in expenses associated with the management and operations of the Fund generally would benefit the Advisor, but that the unitary fee structure provides a level of certainty in expenses for shareholders of the Fund. The Board concluded that the proposed unitary fee rate schedule for the Fund reflects an appropriate level of sharing of any economies of scale that may be realized in the management of the Fund at reasonably foreseeable future asset levels. The Board considered that the Sub-Advisor would be paid by the Advisor from the Fund’s unitary fee and its understanding that the sub-advisory fee for the Fund was the product of an arm’s length negotiation. The Board took into consideration the types of costs to be borne by the Advisor in connection with its services to be performed for the Fund under the Advisory Agreement. The Board considered the Advisor’s estimate of the asset level for the Fund at which the Advisor expects the Advisory Agreement to be profitable to the Advisor and the Advisor’s estimate of the profitability of the Advisory Agreement if the Fund’s assets reach $100 million. The Board noted the inherent limitations in the profitability analysis and concluded that, based on the information provided, the Advisor’s estimated profitability level for the Fund was not unreasonable. The Board reviewed financial information provided by the Sub-Advisor, but did not review any potential profitability of the Sub-Advisory Agreement to the Sub-Advisor. The Board concluded that the profitability analysis for the Advisor was more relevant. In addition, the Board considered indirect benefits described by the Advisor that may be realized from its relationship with the Fund. The Board noted that FTCP has a controlling ownership interest in the Sub-Advisor’s parent company and considered potential indirect benefits to the Advisor from such ownership interest. The Board also considered that the Advisor had identified as an indirect benefit to the Advisor and FTP their exposure to investors and brokers who, absent their exposure to the Fund, may have had no dealings with the Advisor or FTP. The Board also considered the potential indirect benefits to the Sub-Advisor from FTCP’s controlling ownership interest in the Sub-Advisor’s parent company. The Board noted the Sub-Advisor’s statements that it does not foresee any indirect benefits from its relationship with the Fund and that, as a policy, it does not enter into soft-dollar arrangements for the procurement of research services in connection with client securities transactions. The Board concluded that the character and amount of potential indirect benefits to the Advisor and the Sub-Advisor were not unreasonable.
Based on all of the information considered and the conclusions reached, the Board, including the Independent Trustees, determined that the terms of the Agreements are fair and reasonable and that the approval of the Agreements is in the best interests of the Fund. No single factor was determinative in the Board’s analysis.
FT Cboe Vest Technology Dividend Target Income ETF
The Board of Trustees of First Trust Exchange-Traded Fund IV (the “Trust”), including the Independent Trustees, approved the Investment Management Agreement (the “Advisory Agreement”) with First Trust Advisors L.P. (the “Advisor”), on behalf of FT Cboe Vest Technology Dividend Target Income ETF (the “Fund”), and the Investment Sub-Advisory Agreement (the “Sub-Advisory Agreement” and together with the Advisory Agreement, the “Agreements”) among the Trust, on behalf of the Fund, the Advisor and Cboe Vest Financial LLC (the “Sub-Advisor”), for an initial two-year term at a meeting held on June 5, 2023. The Board determined
Additional Information (Continued)
First Trust Exchange-Traded Fund IVOctober 31, 2023 (Unaudited) that the Agreements are in the best interests of the Fund in light of the nature, extent and quality of the services expected to be provided and such other matters as the Board considered to be relevant in the exercise of its business judgment.
To reach this determination, the Board considered its duties under the Investment Company Act of 1940, as amended (the “1940 Act”), as well as under the general principles of state law, in reviewing and approving advisory contracts; the requirements of the 1940 Act in such matters; the fiduciary duty of investment advisors with respect to advisory agreements and compensation; the standards used by courts in determining whether investment company boards have fulfilled their duties; and the factors to be considered by the Board in voting on such agreements. To assist the Board in its evaluation of the Agreements for the Fund, the Independent Trustees received a separate report from each of the Advisor and the Sub-Advisor in advance of the Board meeting responding to requests for information from counsel to the Independent Trustees, submitted on behalf of the Independent Trustees, that, among other things, outlined: the services to be provided by the Advisor and the Sub-Advisor to the Fund (including the relevant personnel responsible for these services and their experience); the proposed unitary fee rate schedule payable by the Fund as compared to fees charged to a peer group of funds (the “Expense Group”) and a broad peer universe of funds (the “Expense Universe”), each assembled by Broadridge Financial Solutions, Inc. (“Broadridge”), an independent source, and as compared to fees charged to other exchange-traded funds (“ETFs”) managed by the Advisor; the proposed sub-advisory fee as compared to fees charged to other clients of the Sub-Advisor; the estimated expense ratio of the Fund as compared to expense ratios of the funds in the Fund’s Expense Group and Expense Universe; the nature of expenses to be incurred in providing services to the Fund and the potential for the Advisor and the Sub-Advisor to realize economies of scale, if any; profitability and other financial data for the Advisor; financial data for the Sub-Advisor; any indirect benefits to the Advisor and its affiliates, First Trust Portfolios L.P. (“FTP”) and First Trust Capital Partners, LLC (“FTCP”), and the Sub-Advisor; and information on the Advisor’s and the Sub-Advisor’s compliance programs. The Independent Trustees and their counsel also met separately to discuss the information provided by the Advisor and the Sub-Advisor. The Board applied its business judgment to determine whether the arrangements between the Trust and the Advisor and among the Trust, the Advisor and the Sub-Advisor are reasonable business arrangements from the Fund’s perspective.
In evaluating whether to approve the Agreements for the Fund, the Board considered the nature, extent and quality of the services to be provided by the Advisor and the Sub-Advisor under the Agreements. With respect to the Advisory Agreement, the Board considered that the Advisor will be responsible for the overall management and administration of the Fund and reviewed all of the services to be provided by the Advisor to the Fund, including the oversight of the Sub-Advisor, as well as the background and experience of the persons responsible for such services. The Board considered that the Fund will be an actively-managed ETF and will employ an advisor/sub-advisor management structure and considered that the Advisor manages other ETFs with a similar structure in the First Trust Fund Complex. The Board noted that the Advisor will oversee the Sub-Advisor’s day-to-day management of the Fund’s investments, including portfolio risk monitoring and performance review. In reviewing the services to be provided, the Board noted the compliance program that had been developed by the Advisor and considered that it includes a robust program for monitoring the Advisor’s, the Sub-Advisor’s and the Fund’s compliance with the 1940 Act, as well as the Fund’s compliance with its investment objectives, policies and restrictions. The Board noted that employees of the Advisor provide management services to other ETFs and to other funds in the First Trust Fund Complex with diligence and care. With respect to the Sub-Advisory Agreement, in addition to the written materials provided by the Sub-Advisor, at the June 5, 2023 meeting, the Board also received a presentation from representatives of the Sub-Advisor discussing the services that the Sub-Advisor will provide to the Fund, and the Trustees were able to ask questions about the proposed strategy for the Fund. The Board noted the background and experience of the Sub-Advisor’s portfolio management team and the Sub-Advisor’s investment style. The Board also noted that the Sub-Advisor manages other target income ETFs with strategies similar to that of the Fund in the First Trust Fund Complex. Because the Fund had yet to commence investment operations, the Board could not consider the historical investment performance of the Fund. In light of the information presented and the considerations made, the Board concluded that the nature, extent and quality of the services to be provided to the Fund by the Advisor and the Sub-Advisor under the Agreements are expected to be satisfactory.
The Board considered the proposed unitary fee rate schedule payable by the Fund under the Advisory Agreement for the services to be provided. The Board noted that, under the unitary fee arrangement, the Fund would pay the Advisor a unitary fee starting at an annual rate of 0.75% of its average daily net assets, subject to a breakpoint schedule pursuant to which the unitary fee rate would be reduced as assets of the Fund meet certain thresholds. The Board considered that, from the unitary fee for the Fund, the Advisor would pay the Sub-Advisor a sub-advisory fee equal to an annual rate of 0.20% of the Fund’s average daily net assets. The Board noted that the Advisor would be responsible for the Fund’s expenses, including the cost of sub-advisory, transfer agency, custody, fund administration, legal, audit and other services and license fees, if any, but excluding the fee payment under the Advisory Agreement and interest, taxes, acquired fund fees and expenses, if any, brokerage commissions and other expenses connected with the execution of portfolio transactions, distribution and service fees pursuant to a Rule 12b-1 plan, if any, and extraordinary expenses, if any. The Board received and reviewed information showing the fee rates and expense ratios of the peer funds in the Expense Group, as well as
Additional Information (Continued)
First Trust Exchange-Traded Fund IVOctober 31, 2023 (Unaudited) advisory and unitary fee rates charged by the Advisor and the Sub-Advisor to other fund (including ETF) and non-fund clients, as applicable. Because the Fund will pay a unitary fee, the Board determined that expense ratios were the most relevant comparative data point. Based on the information provided, the Board noted that the total (net) expense ratio for the Fund was below the median total (net) expense ratio of the peer funds in the Expense Group. With respect to the Expense Group, the Board discussed with representatives of the Advisor how the Expense Group was assembled and how the Fund compared and differed from the peer funds. The Board took this information into account in considering the peer data. With respect to fees charged to other clients, the Board considered the Advisor’s statement that the Fund will be unique to the market and the First Trust Fund Complex but will be most similar to two other ETFs in the First Trust Fund Complex that are managed by the Advisor and sub-advised by the Sub-Advisor and employ options-based strategies, each of which has a unitary fee rate schedule starting at an annual rate of 0.85% of its average daily net assets. In light of the information considered and the nature, extent and quality of the services expected to be provided to the Fund under the Agreements, the Board determined that the proposed unitary fee, including the sub-advisory fee to be paid by the Advisor to the Sub-Advisor from the unitary fee, was fair and reasonable.
The Board considered whether there are any potential economies of scale to be achieved in connection with the Advisor providing investment advisory services to the Fund and whether the Fund may benefit from any economies of scale. The Board noted that the proposed unitary fee rate schedule for the Fund includes breakpoints pursuant to which the unitary fee rate would be reduced as assets of the Fund meet certain thresholds. The Board considered that the Advisor has continued to build infrastructure and add new staff to improve the services to the funds in the First Trust Fund Complex. The Board also noted that under the unitary fee structure, any reduction in expenses associated with the management and operations of the Fund generally would benefit the Advisor, but that the unitary fee structure provides a level of certainty in expenses for shareholders of the Fund. The Board concluded that the proposed unitary fee rate schedule for the Fund reflects an appropriate level of sharing of any economies of scale that may be realized in the management of the Fund at reasonably foreseeable future asset levels. The Board considered that the Sub-Advisor would be paid by the Advisor from the Fund’s unitary fee and its understanding that the sub-advisory fee for the Fund was the product of an arm’s length negotiation. The Board took into consideration the types of costs to be borne by the Advisor in connection with its services to be performed for the Fund under the Advisory Agreement. The Board considered the Advisor’s estimate of the asset level for the Fund at which the Advisor expects the Advisory Agreement to be profitable to the Advisor and the Advisor’s estimate of the profitability of the Advisory Agreement if the Fund’s assets reach $100 million. The Board noted the inherent limitations in the profitability analysis and concluded that, based on the information provided, the Advisor’s estimated profitability level for the Fund was not unreasonable. The Board reviewed financial information provided by the Sub-Advisor, but did not review any potential profitability of the Sub-Advisory Agreement to the Sub-Advisor. The Board concluded that the profitability analysis for the Advisor was more relevant. In addition, the Board considered indirect benefits described by the Advisor that may be realized from its relationship with the Fund. The Board noted that FTCP has a controlling ownership interest in the Sub-Advisor’s parent company and considered potential indirect benefits to the Advisor from such ownership interest. The Board also considered that the Advisor had identified as an indirect benefit to the Advisor and FTP their exposure to investors and brokers who, absent their exposure to the Fund, may have had no dealings with the Advisor or FTP. The Board also considered the potential indirect benefits to the Sub-Advisor from FTCP’s controlling ownership interest in the Sub-Advisor’s parent company. The Board noted the Sub-Advisor’s statements that it does not foresee any indirect benefits from its relationship with the Fund and that, as a policy, it does not enter into soft-dollar arrangements for the procurement of research services in connection with client securities transactions. The Board concluded that the character and amount of potential indirect benefits to the Advisor and the Sub-Advisor were not unreasonable.
Based on all of the information considered and the conclusions reached, the Board, including the Independent Trustees, determined that the terms of the Agreements are fair and reasonable and that the approval of the Agreements is in the best interests of the Fund. No single factor was determinative in the Board’s analysis.
Board of Trustees and Officers
First Trust Exchange-Traded Fund IVOctober 31, 2023 (Unaudited) The following tables identify the Trustees and Officers of the Trust. Unless otherwise indicated, the address of all persons is 120 East Liberty Drive, Suite 400, Wheaton, IL 60187.
The Trust’s statement of additional information includes additional information about the Trustees and is available, without charge, upon request, by calling (800) 988-5891.
Name,
Year of Birth and
Position with the Trust | Term of Office
and Year First
Elected or
Appointed | Principal Occupations
During Past 5 Years | Number of
Portfolios in
the First Trust
Fund Complex
Overseen by
Trustee | Other
Trusteeships or
Directorships
Held by Trustee
During Past
5 Years |
|
Richard E. Erickson, Trustee
(1951) | • Indefinite Term • Since Inception | Retired; Physician, Edward-Elmhurst Medical Group (2021 to September 2023); Physician and Officer, Wheaton Orthopedics (1990 to 2021) | | |
Thomas R. Kadlec, Trustee
(1957) | • Indefinite Term • Since Inception | Retired; President, ADM Investors Services, Inc. (Futures Commission Merchant) (2010 to July 2022) | | Director, National Futures Association and ADMIS Singapore Ltd.; Formerly, Director of ADM Investor Services, Inc., ADM Investor Services International, ADMIS Hong Kong Ltd., and Futures Industry Association |
Denise M. Keefe, Trustee
(1964) | • Indefinite Term • Since 2021 | Executive Vice President, Advocate Aurora Health and President, Advocate Aurora Continuing Health Division (Integrated Healthcare System) | | Director and Board Chair of Advocate Home Health Services, Advocate Home Care Products and Advocate Hospice; Director and Board Chair of Aurora At Home (since 2018); Director of Advocate Physician Partners Accountable Care Organization; Director of RML Long Term Acute Care Hospitals; Director of Senior Helpers (since 2021); and Director of MobileHelp (since 2022) |
Robert F. Keith, Trustee
(1956) | • Indefinite Term • Since Inception | President, Hibs Enterprises (Financial and Management Consulting) | | Formerly, Director of Trust Company of Illinois |
Niel B. Nielson, Trustee
(1954) | • Indefinite Term • Since Inception | Senior Advisor (2018 to Present), Managing Director and Chief Operating Officer (2015 to 2018), Pelita Harapan Educational Foundation (Educational Products and Services) | | |
Bronwyn Wright, Trustee
(1971) | • Indefinite Term • Since 2023 | Independent Director to a number of Irish collective investment funds (2009 to Present); Various roles at international affiliates of Citibank (1994 to 2009), including Managing Director, Citibank Europe plc and Head of Securities and Fund Services, Citi Ireland (2007 to 2009) | | |
Board of Trustees and Officers (Continued)
First Trust Exchange-Traded Fund IVOctober 31, 2023 (Unaudited) Name, Year of Birth and Position with the Trust | Term of Office and Year First Elected or Appointed | Principal Occupations During Past 5 Years | Number of Portfolios in the First Trust Fund Complex Overseen by Trustee | Other Trusteeships or Directorships Held by Trustee During Past 5 Years |
|
James A. Bowen(1), Trustee,
Chairman of the Board
(1955) | • Indefinite Term • Since Inception | Chief Executive Officer, First Trust Advisors L.P. and First Trust Portfolios L.P., Chairman of the Board of Directors, BondWave LLC (Software Development Company) and Stonebridge Advisors LLC (Investment Advisor) | | |
| Position and
Offices
with Trust | Term of Office
and Length of
Service | Principal Occupations
During Past 5 Years |
|
| President and Chief Executive Officer | • Indefinite Term • Since 2016 | Managing Director and Chief Financial Officer, First Trust Advisors L.P. and First Trust Portfolios L.P.; Chief Financial Officer, BondWave LLC (Software Development Company) and Stonebridge Advisors LLC (Investment Advisor) |
| Treasurer, Chief Financial Officer and Chief Accounting Officer | • Indefinite Term • Since 2023 | Senior Vice President, First Trust Advisors L.P. and First Trust Portfolios L.P., July 2021 to Present. Previously, Vice President, First Trust Advisors L.P. and First Trust Portfolios L.P., 2014 - 2021. |
| Secretary and Chief Legal Officer | • Indefinite Term • Since Inception | General Counsel, First Trust Advisors L.P. and First Trust Portfolios L.P.; Secretary and General Counsel, BondWave LLC; Secretary, Stonebridge Advisors LLC |
Daniel J. Lindquist
(1970) | | • Indefinite Term • Since Inception | Managing Director, First Trust Advisors L.P. and First Trust Portfolios L.P. |
| Chief Compliance Officer and Assistant Secretary | • Indefinite Term • Since Inception | Deputy General Counsel, First Trust Advisors L.P. and First Trust Portfolios L.P. |
| | • Indefinite Term • Since Inception | Senior Vice President, First Trust Advisors L.P. and First Trust Portfolios L.P. |
| | • Indefinite Term • Since Inception | Senior Vice President, First Trust Advisors L.P. and First Trust Portfolios L.P. |
(1)
Mr. Bowen is deemed an “interested person” of the Trust due to his position as Chief Executive Officer of First Trust Advisors L.P., investment advisor of the Trust.
(2)
The term “officer” means the president, vice president, secretary, treasurer, controller or any other officer who performs a policy making function.
First Trust Exchange-Traded Fund IVOctober 31, 2023 (Unaudited) Privacy Policy
First Trust values our relationship with you and considers your privacy an important priority in maintaining that relationship. We are committed to protecting the security and confidentiality of your personal information.
Sources of Information
We collect nonpublic personal information about you from the following sources:
• Information we receive from you and your broker-dealer, investment professional or financial representative through interviews, applications, agreements or other forms;
• Information about your transactions with us, our affiliates or others;
• Information we receive from your inquiries by mail, e-mail or telephone; and
• Information we collect on our website through the use of “cookies.” For example, we may identify the pages on our website that your browser requests or visits.
Information Collected
The type of data we collect may include your name, address, social security number, age, financial status, assets, income, tax information, retirement and estate plan information, transaction history, account balance, payment history, investment objectives, marital status, family relationships and other personal information.
Disclosure of Information
We do not disclose any nonpublic personal information about our customers or former customers to anyone, except as permitted by law. In addition to using this information to verify your identity (as required under law), the permitted uses may also include the disclosure of such information to unaffiliated companies for the following reasons:
• In order to provide you with products and services and to effect transactions that you request or authorize, we may disclose your personal information as described above to unaffiliated financial service providers and other companies that perform administrative or other services on our behalf, such as transfer agents, custodians and trustees, or that assist us in the distribution of investor materials such as trustees, banks, financial representatives, proxy services, solicitors and printers.
• We may release information we have about you if you direct us to do so, if we are compelled by law to do so, or in other legally limited circumstances (for example to protect your account from fraud).
In addition, in order to alert you to our other financial products and services, we may share your personal information within First Trust.
Use of Website Analytics
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As required by federal law, we will notify you of our privacy policy annually. We reserve the right to modify this policy at any time, however, if we do change it, we will tell you promptly. For questions about our policy, or for additional copies of this notice, please go to www.ftportfolios.com, or contact us at 1-800-621-1675 (First Trust Portfolios) or 1-800-222-6822 (First Trust Advisors).
March 2023
First Trust Exchange-Traded Fund IV
INVESTMENT ADVISOR
First Trust Advisors L.P.
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
INVESTMENT SUB-ADVISOR
Cboe VestSM Financial LLC
8350 Broad Street, Suite 240
McLean, VA 22102
ADMINISTRATOR, CUSTODIAN,
FUND ACCOUNTANT &
TRANSFER AGENT
The Bank of New York Mellon
240 Greenwich Street
New York, NY 10286
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
111 South Wacker Drive
Chicago, IL 60606
LEGAL COUNSEL
Chapman and Cutler LLP
320 South Canal Street
Chicago, IL 60606
Item 2. Code of Ethics.
| (a) | | The registrant, as of the end of the period covered by this report, has adopted a code of ethics that applies to the registrant’s principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, regardless of whether these individuals are employed by the registrant or a third party. |
| (c) | | There have been no amendments, during the period covered by this report, to a provision of the code of ethics that applies to the registrant's principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, regardless of whether these individuals are employed by the registrant or a third party, and that relates to any element of the code of ethics description. |
| (d) | | The registrant, during the period covered by this report, has not granted any waivers, including an implicit waiver, from a provision of the code of ethics that applies to the registrant’s principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, regardless of whether these individuals are employed by the registrant or a third party, that relates to one or more of the items set forth in paragraph (b) of this item’s instructions. |
| (f) | | A copy of the code of ethics that applies to the registrant’s principal executive officer, principal financial officer, principal accounting officer or controller is filed as an exhibit pursuant to Item 13(a)(1). |
Item 3. Audit Committee Financial Expert.
As of the end of the period covered by the report, the registrant’s Board of Trustees has determined that Thomas R. Kadlec, Robert F. Keith and Bronwyn Wright are qualified to serve as audit committee financial experts serving on its audit committee and that each of them is “independent,” as defined by Item 3 of Form N-CSR.
Item 4. Principal Accountant Fees and Services.
(a) Audit Fees (Registrant) -- The aggregate fees billed for professional services rendered by the principal accountant for the audit of the registrant’s annual financial statements or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements were $359,013 for the fiscal year ended October 31, 2022 and $478,975 for the fiscal year ended October 31, 2023.
(b) Audit-Related Fees (Registrant) -- The aggregate fees billed for assurance and related services by the principal accountant that are reasonably related to the performance of the audit of the registrant’s financial statements and are not reported under paragraph (a) of this Item were $0 for the fiscal year ended October 31, 2022 and $0 for the fiscal year ended October 31, 2023.
Audit-Related Fees (Investment Advisor) -- The aggregate fees billed for assurance and related services by the principal accountant that are reasonably related to the performance of the audit of the registrant’s financial statements and are not reported under paragraph (a) of this Item were $0 for the fiscal year ended October 31, 2022 and $0 for the fiscal year ended October 31, 2023.
Audit-Related Fees (Distributor) -- The aggregate fees billed for assurance and related services by the principal accountant that are reasonably related to the performance of the audit of the registrant’s financial statements and are not reported under paragraph (a) of this Item were $0 for the fiscal year ended October 31, 2022 and $0 for the fiscal year ended October 31, 2023.
(c) Tax Fees (Registrant) -- The aggregate fees billed for professional services rendered by the principal accountant for tax return review and debt instrument tax analysis and reporting were $296,018 for the fiscal year ended October 31, 2022 and $376,254 for the fiscal year ended October 31, 2023.
Tax Fees (Investment Advisor) -- The aggregate fees billed for professional services rendered by the principal accountant for tax compliance, tax advice, and tax planning to the registrant’s advisor and distributor were $0 for the fiscal year ended October 31, 2022 and $0 for the fiscal year ended October 31, 2023.
Tax Fees (Distributor) -- The aggregate fees billed for professional services rendered by the principal accountant for tax compliance, tax advice, and tax planning to the registrant’s distributor were $0 for the fiscal year ended October 31, 2022 and $0 for the fiscal year ended October 31, 2023. These fees were for tax consultation and/or tax return preparation and professional services rendered for PFIC (Passive Foreign Investment Company) Identification Services.
(d) All Other Fees (Registrant) -- The aggregate fees billed for products and services provided by the principal accountant to the registrant, other than the services reported in paragraphs (a) through (c) of this Item were $0 for the fiscal year ended October 31, 2022 and $0 for the fiscal year ended October 31, 2023.
All Other Fees (Investment Advisor) -- The aggregate fees billed for products and services provided by the principal accountant to the registrant’s investment advisor, other than the services reported in paragraphs (a) through (c) of this Item were $0 for the fiscal year ended October 31, 2022 and $0 for the fiscal year ended October 31, 2023.
All Other Fees (Distributor) -- The aggregate fees billed for products and services provided by the principal accountant to the registrant’s distributor, other than the services reported in paragraphs (a) through (c) of this Item were $0 for the fiscal year ended October 31, 2022 and $0 for the fiscal year ended October 31, 2023.
(e)(1) Disclose the audit committee’s pre-approval policies and procedures described in paragraph (c) (7) of Rule 2-01 of Regulation S-X.
Pursuant to its charter and its Audit and Non-Audit Services Pre-Approval Policy, the Audit Committee (the “Committee”) is responsible for the pre-approval of all audit services and permitted non-audit services (including the fees and terms thereof) to be performed for the registrant by its independent auditors. The Chairman of the Committee is authorized to give such pre-approvals on behalf of the Committee up to $25,000 and report any such pre-approval to the full Committee.
The Committee is also responsible for the pre-approval of the independent auditor’s engagements for non-audit services with the registrant’s advisor (not including a sub-advisor whose role is primarily portfolio management and is sub-contracted or overseen by another investment advisor) and any entity controlling, controlled by or under common control with the investment advisor that provides ongoing services to the registrant, if the engagement relates directly to the operations and financial reporting of the registrant, subject to the de minimis exceptions for non-audit services described in Rule 2-01 of Regulation S-X. If the independent auditor has provided non-audit services to the registrant’s advisor (other than any sub-advisor whose role is primarily portfolio management and is sub-contracted with or overseen by another investment advisor) and any entity controlling, controlled by or under common control with the investment advisor that provides ongoing services to the registrant that were not pre-approved pursuant to its policies, the Committee will consider whether the provision of such non-audit services is compatible with the auditor’s independence.
(e)(2) The percentage of services described in each of paragraphs (b) through (d) for the registrant and the registrant’s investment advisor and distributor of this Item that were approved by the audit committee pursuant to the pre-approval exceptions included in paragraph (c)(7)(i)(C) or paragraph(C)(7)(ii) of Rule 2-01 of Regulation S-X are as follows:
| | Registrant: | | Advisor and Distributor: | |
| | (b) 0% | | (b) 0% | |
| | (c) 0% | | (c) 0% | |
| | (d) 0% | | (d) 0% | |
(f) The percentage of hours expended on the principal accountant’s engagement to audit the registrant’s financial statements for the most recent fiscal year that were attributed to work performed by persons other than the principal accountant’s full-time, permanent employees was less than fifty percent.
(g) The aggregate non-audit fees billed by the registrant’s accountant for services rendered to the registrant, and rendered to the registrant’s investment advisor (not including any sub-advisor whose role is primarily portfolio management and is subcontracted with or overseen by another investment advisor), and any entity controlling, controlled by, or under common control with the advisor that provides ongoing services to the registrant for the fiscal year ended October 31, 2022 were $296,018 for the registrant, $0 for the registrant’s investment advisor and $0 for the registrant’s distributor; and for the fiscal year ended October 31, 2023 were $376,254 for the registrant, $44,000 for the registrant’s investment advisor and $60,500 for the registrant’s distributor.
(h) The registrant’s audit committee of its Board of Trustees has determined that the provision of non-audit services that were rendered to the registrant’s investment advisor (not including any sub-advisor whose role is primarily portfolio management and is subcontracted with or overseen by another investment advisor), and any entity controlling, controlled by, or under common control with the investment advisor that provides ongoing services to the registrant that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X is compatible with maintaining the principal accountant’s independence.
(i) Not applicable.
(j) Not applicable.
Items 5. Audit Committee of Listed Registrants.
| (a) | | The registrant has a separately designated standing audit committee established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934 consisting of all the independent directors of the registrant. The audit committee of the registrant is comprised of: Richard E. Erickson, Thomas R. Kadlec, Denise M. Keefe, Robert F. Keith, Niel B. Nielson and Bronwyn Wright. |
Item 6. Investments.
| (a) | | Schedule of Investments in securities of unaffiliated issuers as of the close of the reporting period is included as part of the report to shareholders filed under Item 1 of this form. |
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies.
Not applicable.
Item 8. Portfolio Managers of Closed-End Management Investment Companies.
Not applicable.
Item 9. Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers.
Not applicable.
Item 10. Submission of Matters to a Vote of Security Holders.
There have been no material changes to the procedures by which the shareholders may recommend nominees to the registrant’s board of directors, where those changes were implemented after the registrant last provided disclosure in response to the requirements of Item 407 (c) (2) (iv) of Regulation S-K (17 CFR 229.407) (as required by Item 22 (b) (15) of Schedule 14A (17 CFR 240.14a-101)), or this Item.
Item 11. Controls and Procedures.
| (a) | | The registrant’s principal executive and principal financial officers, or persons performing similar functions, have concluded that the registrant’s disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940, as amended (the “1940 Act”) (17 CFR 270.30a-3 (c))) are effective, as of a date within 90 days of the filing date of the report that includes the disclosure required by this paragraph, based on their evaluation of these controls and procedures required by Rule 30a-3(b) under the 1940 Act (17 CFR 270.30a-3(b)) and Rules 13a-15(b) or 15d-15(b) under the Securities Exchange Act of 1934, as amended (17 CFR 240.13a-15(b) or 240.15d-15 (b)). |
| (b) | | There were no changes in the registrant's internal control over financial reporting (as defined in Rule 30a-3(d) under the 1940 Act (17 CFR 270.30a-3(d)) that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the registrant's internal control over financial reporting. |
Item 12. Disclosure of Securities Lending Activities for Closed-End Management Investment Companies.
Not applicable.
Item 13. Exhibits.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| (registrant) | | First Trust Exchange-Traded Fund IV |
| By (Signature and Title)* | | /s/ James M. Dykas |
| | | James M. Dykas, President and Chief Executive Officer
(principal executive officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| By (Signature and Title)* | | /s/ James M. Dykas |
| | | James M. Dykas, President and Chief Executive Officer
(principal executive officer) |
| By (Signature and Title)* | | /s/ Derek D. Maltbie |
| | | Derek D. Maltbie, Treasurer, Chief Financial Officer
and Chief Accounting Officer
(principal financial officer) |
* Print the name and title of each signing officer under his or her signature.
