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)
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: April 30, 2024
Form N-CSR is to be used by management investment companies to file reports with the Commission not later than 10 days after the transmission to stockholders of any report that is required to be transmitted to stockholders under Rule 30e-1 under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may use the information provided on Form N-CSR in its regulatory, disclosure review, inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR, and the Commission will make this information public. A registrant is not required to respond to the collection of information contained in Form N-CSR unless the Form displays a currently valid Office of Management and Budget (“OMB”) control number. Please direct comments concerning the accuracy of the information collection burden estimate and any suggestions for reducing the burden to Secretary, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549. The OMB has reviewed this collection of information under the clearance requirements of 44 U.S.C. § 3507.
Item 1. Report to Stockholders.
| (a) | | The registrant's semi-annual report transmitted to shareholders pursuant to Rule 30e-1 under the Investment Company Act of 1940 is as follows: |
First Trust Exchange-Traded Fund IV
| First Trust North American Energy Infrastructure Fund (EMLP)
|
First Trust EIP Carbon Impact ETF (ECLN)
|
FT Energy Income Partners Strategy ETF (EIPX)
|
Semi-Annual Report
For the Six Months Ended
April 30, 2024 |
First Trust Exchange-Traded Fund IV
Semi-Annual Report
April 30, 2024
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 by 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.
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.
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
Semi-Annual Letter from the Chairman and CEO
April 30, 2024
First Trust is pleased to provide you with the semi-annual report for certain series of the First Trust Exchange-Traded Fund IV (the “Funds”), which contains detailed information about the Funds for the six-month period ended April 30, 2024.
On March 16, 2022, the Federal Reserve (the “Fed”) initiated the first of what have been eleven increases to the Federal Funds target rate thus far in the current cycle. Given its potential impact, financial pundits have been debating the direction and timing of the Fed’s interest rate policy ever since. In December 2023, the Fed gave some guidance, announcing that it expected to implement up to three interest rate cuts totaling 75 basis points (“bps”) in 2024. Investors responded to the news with exuberance. In the U.S., the S&P 500® Index surged by 10.56% on a total return basis in the first quarter of 2024, adding to its already stunning 26.29% total return in 2023. For comparison, the yield on the 10-Year Treasury Note (“T-Note”) stood at 3.80% on December 27, 2023, down a stunning 119 bps from its most recent high of 4.99% set just months prior on October 19, 2023. Bond yields generally move in the opposite direction of prices. Given this relationship, the decline in the 10-Year T-Note’s yield is indicative of investor’s desire to lock in higher income payments prior to the Fed reducing its policy rate.
At this point, it makes sense to step back and highlight several ways the Fed’s interest rate policy has impacted the U.S. economy. We’ll start with the good news. On April 30, 2024, inflation, as measured by the trailing 12-month rate on the Consumer Price Index, stood at 3.4%, down significantly from its most recent peak of 9.1% set in June 2022. Additionally, the higher Federal Funds target rate has been a boon for those investors with assets in fixed income, money market, and other interest-bearing accounts. The total value of assets held in U.S. money market accounts stood at $6.0 trillion on May 1, 2024, nearly double where it stood just five years ago. Notably, the weekly yield on the benchmark U.S. Treasury 3-Month Money Market Index more than doubled from 2.40% to 5.32% between the end of April 2019 and April 2024.
Now for the not-so-good news. Higher interest rates often restrict the ability of consumers and businesses to spend and finance growth, respectively. While the consumer has remained relatively unscathed thus far, evidence that they are stretching their budgets is mounting. The Federal Reserve Bank of New York reported that the total balance of U.S. credit card debt stood at a record $1.13 trillion at the end of 2023, while the average annual percentage rate for all cards rose to a record 21.59% in the first quarter of 2024. Perhaps unsurprisingly, delinquency rates have been surging. Data from the Federal Reserve Bank of St. Louis revealed that the delinquency rate on credit card loans for all U.S. commercial banks rose to 3.10% in the fourth quarter of 2023, up from 2.62% in the fourth quarter of 2019 (pre-COVID-19). In April 2024, 43% of small and mid-sized U.S. businesses were unable to pay their rent on time and in full. In addition, higher interest rates are impacting economic growth. In the U.S., real gross domestic product growth was a tepid 1.6% in the first quarter of 2024, far below consensus expectations of 2.5%. Not even the U.S. government is immune to the impacts of higher interest rates. At the end of the first quarter of 2024, the interest payments paid by the Federal government stood at a record $1.06 trillion, nearly double their total of $0.56 trillion at the end of the fourth quarter of 2019.
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 4/30/24 | | | Inception
(6/20/12)
to 4/30/24 |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| 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 27 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 | |
| |
| |
| |
| |
| |
| |
| Amount is less than 0.1%. |
| % of Total
Long-Term
Investments |
Enterprise Products Partners, L.P. | |
| |
Plains GP Holdings, L.P., Class A | |
| |
| |
| |
| |
| |
| |
| |
| |
| 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 4/30/24 | Inception
(8/19/19)
to 4/30/24 |
| | | | |
| | | | |
| | | | |
| | | | |
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 |
| |
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.
|
| | | Average Annual Total Returns | |
| | | Inception
(11/2/22)
to 4/30/24 | Inception
(11/2/22)
to 4/30/24 |
| | | | |
| | | | |
| | | | |
| | | | |
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 |
| |
| |
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 | |
| |
| |
| |
| |
| 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. 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 its 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 IVSemi-Annual ReportApril 30, 2024 (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.
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 $5.0 billion of assets as of April 30, 2024. 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.
First Trust Exchange-Traded Fund IVUnderstanding Your Fund ExpensesApril 30, 2024 (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 April 30, 2024.
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
November 1, 2023 | Ending
Account Value
April 30, 2024 | 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 (November 1, 2023 through April 30, 2024), multiplied by 182/366 (to reflect the six-month period). |
First Trust North American Energy Infrastructure Fund (EMLP)Portfolio of InvestmentsApril 30, 2024 (Unaudited)
| | |
COMMON STOCKS (a) — 69.0% |
| Construction & Engineering | |
| | |
| | |
| | |
| Electric Utilities — 16.9% | |
| | |
| 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. | |
| | |
| | |
| American Water Works Co., Inc. | |
| Essential Utilities, Inc. | |
| | |
| | |
| | |
| | |
MASTER LIMITED PARTNERSHIPS — 28.8% |
| | |
| Westlake Chemical Partners, L.P. | |
| Energy Equipment & Services | |
| USA Compression Partners, L.P. | |
| Independent Power and Renewable Electricity | |
| NextEra Energy Partners, L.P. (c) | |
| Oil, Gas & Consumable Fuels | |
| Cheniere Energy Partners, L.P. | |
| | |
| | |
| Enterprise Products Partners, L.P. | |
See Notes to Financial Statements
First Trust North American Energy Infrastructure Fund (EMLP)Portfolio of Investments (Continued)April 30, 2024 (Unaudited) | | |
MASTER LIMITED PARTNERSHIPS (Continued) |
| Oil, Gas & Consumable Fuels (Continued) | |
| Hess Midstream, L.P., Class A (c) | |
| | |
| Plains GP Holdings, L.P., Class A (c) | |
| | |
| | |
| Total Master Limited Partnerships | |
| | |
| | |
MONEY MARKET FUNDS — 1.8% |
| Morgan Stanley Institutional Liquidity Funds - Treasury Portfolio - Institutional Class - 5.15% (d) | |
| | |
|
|
| Total Investments — 99.6% | |
| | |
| Net Other Assets and Liabilities — 0.4% | |
| | |
| 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 April 30, 2024. |
Abbreviations throughout the Portfolio of Investments: |
| – American Depositary Receipt |
| |
Valuation InputsA summary of the inputs used to value the Fund’s investments as of April 30, 2024 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 InvestmentsApril 30, 2024 (Unaudited)
| | |
COMMON STOCKS (a) — 88.4% |
| Construction & Engineering | |
| | |
| | |
| | |
| Electric Utilities — 33.7% | |
| | |
| American Electric Power Co., Inc. | |
| Constellation Energy Corp. | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| Hydro One Ltd. (CAD) (c) (d) | |
| | |
| | |
| | |
| Orsted A/S (DKK) (b) (c) (d) (e) | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| Chesapeake Utilities Corp. | |
| | |
| New Jersey Resources Corp. | |
| | |
| | |
| Independent Power and Renewable Electricity | |
| | |
| 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 | |
| | |
| | |
| | |
| Williams (The) Cos., Inc. | |
| | |
| | |
| American Water Works Co., Inc. | |
| Essential Utilities, Inc. | |
| | |
| | |
| | |
| | |
MASTER LIMITED PARTNERSHIPS (a) — 5.7% |
| 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 | |
| | |
| | |
MONEY MARKET FUNDS — 5.9% |
| Morgan Stanley Institutional Liquidity Funds - Treasury Portfolio - Institutional Class - 5.15% (g) | |
| | |
|
|
| Total Investments — 100.0% | |
| | |
| Net Other Assets and Liabilities — 0.0% | |
| | |
See Notes to Financial Statements
First Trust EIP Carbon Impact ETF (ECLN)Portfolio of Investments (Continued)April 30, 2024 (Unaudited) | 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. |
| 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 April 30, 2024, securities noted as such are valued at $198,483 or 0.7% 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 April 30, 2024. |
Abbreviations throughout the Portfolio of Investments: |
| – American Depositary Receipt |
| |
| |
| |
Valuation InputsA summary of the inputs used to value the Fund’s investments as of April 30, 2024 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 InvestmentsApril 30, 2024 (Unaudited)
| | |
COMMON STOCKS (a) — 71.9% |
| Construction & Engineering | |
| | |
| Electric Utilities — 8.6% | |
| | |
| American Electric Power Co., Inc. | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| Energy Equipment & Services | |
| | |
| | |
| | |
| | |
| | |
| Patterson-UTI Energy, Inc. | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| Independent Power and Renewable Electricity | |
| | |
| Clearway Energy, Inc., Class A | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| Public Service Enterprise Group, Inc. | |
| | |
|
| Multi-Utilities (Continued) | |
| | |
| | |
| | |
| Oil, Gas & Consumable Fuels | |
| | |
| Canadian Natural Resources Ltd. (CAD) | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| Southwestern Energy Co. (b) | |
| | |
| | |
| | |
| Tourmaline Oil Corp. (CAD) | |
| | |
| Williams (The) Cos., Inc. | |
| | |
| | |
| Essential Utilities, Inc. | |
| | |
| | |
| | |
MASTER LIMITED PARTNERSHIPS — 23.8% |
| Energy Equipment & Services | |
| USA Compression Partners, L.P. | |
| Independent Power and Renewable Electricity | |
| NextEra Energy Partners, L.P. (c) | |
See Notes to Financial Statements
FT Energy Income Partners Strategy ETF (EIPX)Portfolio of Investments (Continued)April 30, 2024 (Unaudited) | | |
MASTER LIMITED PARTNERSHIPS (Continued) |
| Oil, Gas & Consumable Fuels | |
| Alliance Resource Partners, L.P. | |
| Cheniere Energy Partners, L.P. | |
| | |
| Enterprise Products Partners, L.P. | |
| 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 — 4.4% |
| Morgan Stanley Institutional Liquidity Funds - Treasury Portfolio - Institutional Class - 5.15% (d) | |
| | |
|
|
| Total Investments — 100.1% | |
| | |
| 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 taxed as a “C” corporation for federal income tax purposes. |
| Rate shown reflects yield as of April 30, 2024. |
Abbreviations throughout the Portfolio of Investments: |
| – American Depositary Receipt |
| |
Valuation InputsA summary of the inputs used to value the Fund’s investments as of April 30, 2024 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
April 30, 2024 (Unaudited)
| 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 | | | |
| | | |
| | | |
| | | |
| | | |
|
| | | |
Due to custodian foreign currency | | | |
| | | |
| | | |
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 Six Months Ended April 30, 2024 (Unaudited)
| First Trust North American Energy Infrastructure Fund
(EMLP) | First Trust EIP Carbon Impact ETF
(ECLN) | FT Energy Income Partners Strategy ETF
(EIPX) |
| | | |
| | | |
| | | |
| | | |
|
| | | |
| | | |
| | | |
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 | | | |
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) |
| Six Months
Ended
4/30/2024 (Unaudited) | | Six Months
Ended
4/30/2024 (Unaudited) | |
| | | | |
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 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) |
Six Months
Ended
4/30/2024 (Unaudited) | 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)
| Six Months
Ended
4/30/2024
(Unaudited) | |
| | | | | |
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 (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. |
| |
| 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)
| Six Months
Ended
4/30/2024
(Unaudited) | | 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 each period FT Energy Income Partners Strategy ETF (EIPX)
| Six Months
Ended
4/30/2024
(Unaudited) | 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 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 Exchange-Traded Fund IVApril 30, 2024 (Unaudited) 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 twenty-two 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”) |
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 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 IVApril 30, 2024 (Unaudited) 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;
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 IVApril 30, 2024 (Unaudited) 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 April 30, 2024, 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 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.
Notes to Financial Statements (Continued)
First Trust Exchange-Traded Fund IVApril 30, 2024 (Unaudited) 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 | | | |
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 | | | |
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,
Notes to Financial Statements (Continued)
First Trust Exchange-Traded Fund IVApril 30, 2024 (Unaudited) 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 April 30, 2024, 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.
As of April 30, 2024, 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 | | | | |
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,
Notes to Financial Statements (Continued)
First Trust Exchange-Traded Fund IVApril 30, 2024 (Unaudited) 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.
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 Chairs of the Audit Committee, Nominating and Governance Committee and Valuation Committee, the Vice Chair of the Audit Committee, the Lead Independent Trustee and the Vice Lead Independent Trustee 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 Committee Chairs, the Audit Committee Vice Chair, the Lead Independent Trustee and the Vice Lead Independent Trustee rotate periodically in serving in such capacities. The officers and “Interested” Trustee receive no compensation from the Trust for acting in such capacities.
4. Purchases and Sales of Securities
For the six months ended April 30, 2024, 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 six months ended April 30, 2024, 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 | | |
Notes to Financial Statements (Continued)
First Trust Exchange-Traded Fund IVApril 30, 2024 (Unaudited) | | |
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 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.
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.
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.
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.
Notes to Financial Statements (Continued)
First Trust Exchange-Traded Fund IVApril 30, 2024 (Unaudited) 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.
First Trust Exchange-Traded Fund IVApril 30, 2024 (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.
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.
Risks are inherent in all investing. Certain general risks that may be applicable to a Fund are identified below, but not all of the material risks relevant to each Fund are included in this report and not all of the risks below apply to each Fund. The material risks of investing in each Fund are spelled out in its prospectus, statement of additional information and other regulatory filings. Before investing, you should consider each Fund’s investment objective, risks, charges and expenses, and read each Fund’s prospectus and statement of additional information carefully. You can download each Fund’s prospectus at www.ftportfolios.com or contact First Trust Portfolios L.P. at (800) 621-1675 to request a prospectus, which contains this and other information about each Fund.
Concentration Risk. To the extent that a fund is able to invest a significant percentage of its assets in a single asset class or the securities of issuers within the same country, state, region, industry or sector, an adverse economic, business or political development may affect the value of the fund’s investments more than if the fund were more broadly diversified. A fund that tracks an index will be concentrated to the extent the fund’s corresponding index is concentrated. A concentration makes a fund more susceptible to any single occurrence and may subject the fund to greater market risk than a fund that is more broadly diversified.
Credit Risk. Credit risk is the risk that an issuer of a security will be unable or unwilling to make dividend, interest and/or principal payments when due and the related risk that the value of a security may decline because of concerns about the issuer’s ability to make such payments.
Cyber Security Risk. The funds are susceptible to potential operational risks through breaches in cyber security. A breach in cyber security refers to both intentional and unintentional events that may cause a fund to lose proprietary information, suffer data corruption or lose operational capacity. Such events could cause a fund to incur regulatory penalties, reputational damage, additional compliance costs associated with corrective measures and/or financial loss. In addition, cyber security breaches of a fund’s third-party service providers, such as its administrator, transfer agent, custodian, or sub-advisor, as applicable, or issuers in which the fund invests, can also subject a fund to many of the same risks associated with direct cyber security breaches.
Defined Outcome Funds Risk. To the extent a fund’s investment strategy is designed to deliver returns tied to the price performance of an underlying ETF, an investor may not realize the returns the fund seeks to achieve if that investor does not hold shares for the entire target outcome period. In the event an investor purchases shares after the first day of the target outcome period or sells shares prior to the end of the target outcome period, the buffer that the fund seeks to provide against a decline in the value of the underlying ETF may not be available, the enhanced returns that the fund seeks to provide (if any) may not be available and the investor may not participate in a gain in the value of the underlying ETF up to the cap for the investor’s investment period. Additionally, the fund will not participate in gains of the underlying ETF above the cap and a shareholder may lose their entire investment. If the fund seeks enhanced returns, there are certain time periods when the value of the fund may fall faster than the value of the underlying ETF, and it is very unlikely that, on any given day during which the underlying ETF share price increases in value, the fund’s share price will increase at the same rate as the enhanced returns sought by the fund, which is designed for an entire target outcome period. Trading flexible exchange options involves risks different from, or possibly greater than, the risks associated with investing directly in securities, such as less liquidity and correlation and valuation risks. A fund may experience substantial downside from specific flexible exchange option positions and certain positions may expire worthless.
Additional Information (Continued)
First Trust Exchange-Traded Fund IVApril 30, 2024 (Unaudited) 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.
Additional Information (Continued)
First Trust Exchange-Traded Fund IVApril 30, 2024 (Unaudited) 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
Additional Information (Continued)
First Trust Exchange-Traded Fund IVApril 30, 2024 (Unaudited) 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
Liquidity Risk Management Program
In accordance with Rule 22e-4 under the Investment Company Act of 1940, as amended (the “1940 Act”), the Funds and each other fund in the First Trust Fund Complex, other than the closed-end funds, have adopted and implemented a liquidity risk management program (the “Program”) reasonably designed to assess and manage the funds’ liquidity risk, i.e., the risk that a fund could not meet requests to redeem shares issued by the fund without significant dilution of remaining investors’ interests in the fund. The Board of Trustees of the First Trust Funds has appointed First Trust Advisors L.P. (the “Advisor”) as the person designated to administer the Program, and in this capacity the Advisor performs its duties primarily through the activities and efforts of the First Trust Liquidity Committee.
Pursuant to the Program, the Liquidity Committee classifies the liquidity of each fund’s portfolio investments into one of the four liquidity categories specified by Rule 22e-4: highly liquid investments, moderately liquid investments, less liquid investments and illiquid investments. The Liquidity Committee determines certain of the inputs for this classification process, including reasonably anticipated trade sizes and significant investor dilution thresholds. The Liquidity Committee also determines and periodically reviews a highly liquid investment minimum for certain funds, monitors the funds’ holdings of assets classified as illiquid investments to seek to ensure they do not exceed 15% of a fund’s net assets and establishes policies and procedures regarding redemptions in kind.
At the April 25, 2024 meeting of the Board of Trustees, as required by Rule 22e-4 and the Program, the Advisor provided the Board with a written report prepared by the Advisor that addressed the operation of the Program during the period from March 23, 2023 through the Liquidity Committee’s annual meeting held on March 14, 2024 and assessed the Program’s adequacy and effectiveness of implementation during this period, including the operation of the highly liquid investment minimum for each fund that is required under the Program to have one, and any material changes to the Program. Note that because the Funds primarily hold assets that are highly liquid investments, the Funds have not adopted a highly liquid investment minimums.
As stated in the written report, during the review period, no fund breached the 15% limitation on illiquid investments, no fund with a highly liquid investment minimum breached that minimum during the reporting period and no fund was required to file a Form N-RN during the reporting period. The Advisor concluded that each fund’s investment strategy is appropriate for an open-end fund; that the Program operated effectively in all material respects during the review period; and that the Program is reasonably designed to assess and manage the liquidity risk of each fund and to maintain compliance with Rule 22e-4.
First Trust Exchange-Traded Fund IV
First Trust Advisors L.P.
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
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
Chapman and Cutler LLP
320 South Canal Street
Chicago, IL 60606
First Trust Exchange-Traded Fund IV
| First Trust Senior Loan Fund (FTSL)
|
Semi-Annual Report
For the Six Months Ended
April 30, 2024 |
First Trust Senior Loan Fund (FTSL)
Semi-Annual Report
April 30, 2024
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.
This report contains information that may help you evaluate your investment in the Fund. It includes details about the Fund and presents data and analysis that provide insight into the Fund’s performance and investment approach.
The statistical information that follows may help you understand the Fund’s performance compared to that of relevant market benchmarks.
It is important to keep in mind that the opinions expressed by personnel of the Advisor are just that: informed opinions. They should not be considered to be promises or advice. The opinions, like the statistics, cover the period through the date on the cover of this report. The material risks of investing in the Fund are spelled out in the prospectus, the statement of additional information, and other Fund regulatory filings.
First Trust Senior Loan Fund (FTSL)
Semi-Annual Letter from the Chairman and CEO
April 30, 2024
First Trust is pleased to provide you with the semi-annual report for the First Trust Senior Loan Fund (the “Fund”), which contains detailed information about the Fund for the six-month period ended April 30, 2024.
On March 16, 2022, the Federal Reserve (the “Fed”) initiated the first of what have been eleven increases to the Federal Funds target rate thus far in the current cycle. Given its potential impact, financial pundits have been debating the direction and timing of the Fed’s interest rate policy ever since. In December 2023, the Fed gave some guidance, announcing that it expected to implement up to three interest rate cuts totaling 75 basis points (“bps”) in 2024. Investors responded to the news with exuberance. In the U.S., the S&P 500® Index surged by 10.56% on a total return basis in the first quarter of 2024, adding to its already stunning 26.29% total return in 2023. For comparison, the yield on the 10-Year Treasury Note (“T-Note”) stood at 3.80% on December 27, 2023, down a stunning 119 bps from its most recent high of 4.99% set just months prior on October 19, 2023. Bond yields generally move in the opposite direction of prices. Given this relationship, the decline in the 10-Year T-Note’s yield is indicative of investor’s desire to lock in higher income payments prior to the Fed reducing its policy rate.
At this point, it makes sense to step back and highlight several ways the Fed’s interest rate policy has impacted the U.S. economy. We’ll start with the good news. On April 30, 2024, inflation, as measured by the trailing 12-month rate on the Consumer Price Index, stood at 3.4%, down significantly from its most recent peak of 9.1% set in June 2022. Additionally, the higher Federal Funds target rate has been a boon for those investors with assets in fixed income, money market, and other interest-bearing accounts. The total value of assets held in U.S. money market accounts stood at $6.0 trillion on May 1, 2024, nearly double where it stood just five years ago. Notably, the weekly yield on the benchmark U.S. Treasury 3-Month Money Market Index more than doubled from 2.40% to 5.32% between the end of April 2019 and April 2024.
Now for the not-so-good news. Higher interest rates often restrict the ability of consumers and businesses to spend and finance growth, respectively. While the consumer has remained relatively unscathed thus far, evidence that they are stretching their budgets is mounting. The Federal Reserve Bank of New York reported that the total balance of U.S. credit card debt stood at a record $1.13 trillion at the end of 2023, while the average annual percentage rate for all cards rose to a record 21.59% in the first quarter of 2024. Perhaps unsurprisingly, delinquency rates have been surging. Data from the Federal Reserve Bank of St. Louis revealed that the delinquency rate on credit card loans for all U.S. commercial banks rose to 3.10% in the fourth quarter of 2023, up from 2.62% in the fourth quarter of 2019 (pre-COVID-19). In April 2024, 43% of small and mid-sized U.S. businesses were unable to pay their rent on time and in full. In addition, higher interest rates are impacting economic growth. In the U.S., real gross domestic product growth was a tepid 1.6% in the first quarter of 2024, far below consensus expectations of 2.5%. Not even the U.S. government is immune to the impacts of higher interest rates. At the end of the first quarter of 2024, the interest payments paid by the Federal government stood at a record $1.06 trillion, nearly double their total of $0.56 trillion at the end of the fourth quarter of 2019.
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 4/30/24 | | | Inception
(5/1/13)
to 4/30/24 |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Morningstar® LSTA® US Leveraged Loan Index | | | | | | | | |
Bloomberg US Aggregate Bond 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 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 Senior Loan Fund (FTSL) (Continued)
| % of Senior Loans
and other
|
| |
| |
| |
| |
Hotels, Restaurants & Leisure | |
| |
Health Care Providers & Services | |
| |
Commercial Services & Supplies | |
| |
Diversified Telecommunication Services | |
| |
Health Care Equipment & Supplies | |
Trading Companies & Distributors | |
Diversified Consumer Services | |
| |
| |
| |
Wireless Telecommunication Services | |
| |
| |
| |
| |
Electronic Equipment, Instruments & Components | |
Independent Power and Renewable Electricity Producers | |
| |
| |
Life Sciences Tools & Services | |
| |
Construction & Engineering | |
| |
| |
| |
| |
| % 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. | |
1011778 B.C. Unlimited Liability Co. (Restaurant Brands) (aka Burger King/Tim Horton’s) | |
IRB Holding Corp. (Arby’s/Inspire Brands) | |
| |
BroadStreet Partners, Inc. | |
Medline Borrower, L.P. (Mozart) | |
athenahealth, Inc. (Minerva Merger Sub, Inc.) | |
| |
Edelman Financial Engines Center LLC | |
| |
| 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. “NR” indicates no rating. 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 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 Senior Loan Fund (FTSL)Semi-Annual ReportApril 30, 2024 (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 April 30, 2024, the First Trust Leveraged Finance Team managed or supervised approximately $6.1 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.
First Trust Senior Loan Fund (FTSL)Understanding Your Fund ExpensesApril 30, 2024 (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 April 30, 2024.
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
November 1, 2023 | Ending
Account Value
April 30, 2024 | 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 (November 1, 2023 through April 30, 2024), multiplied by 182/366 (to reflect the six-month period). |
First Trust Senior Loan Fund (FTSL)Portfolio of InvestmentsApril 30, 2024 (Unaudited)
| | | | |
SENIOR FLOATING-RATE LOAN INTERESTS — 85.1% |
| Aerospace & Defense — 0.3% | |
| TransDigm, Inc., Term Loan J, 3 Mo. CME Term SOFR + 3.25%, 0.00% Floor | | | |
| TransDigm, Inc., Term Loan K, 3 Mo. CME Term SOFR + 2.75%, 0.00% Floor | | | |
| | |
| Alternative Carriers — 0.6% | |
| Level 3 Financing, Inc., Term Loan B1, 1 Mo. CME Term SOFR + 6.56%, 0.00% Floor | | | |
| Application Software — 15.2% | |
| Applied Systems, Inc., 2024 Term Loan, 3 Mo. CME Term SOFR + 3.50%, 0.00% Floor | | | |
| CCC Intelligent Solutions, Inc., Term Loan B, 1 Mo. CME Term SOFR + CSA + 2.25%, 0.50% Floor | | | |
| ConnectWise LLC, Term Loan B, 3 Mo. CME Term SOFR + CSA + 3.50%, 0.50% Floor | | | |
| Epicor Software Corp., Term Loan C (First Lien), 1 Mo. CME Term SOFR + CSA + 3.25%, 0.75% Floor | | | |
| Gainwell Acquisition Corp. (fka Milano), Term Loan B, 3 Mo. CME Term SOFR + CSA + 4.00%, 0.75% Floor | | | |
| Genesys Cloud Services Holding II LLC (f/k/a Greeneden), 2024 Incremental Term Loan, 1 Mo. CME Term SOFR + CSA + 3.75%, 0.75% Floor | | | |
| Genesys Cloud Services Holding II LLC (fka Greeneden), Term Loan B, 1 Mo. CME Term SOFR + 3.50%, 0.75% Floor | | | |
| Informatica Corp., Initial Term Loan B, 1 Mo. CME Term SOFR + CSA + 2.75%, 0.00% Floor | | | |
| Instructure Holdings, Inc., Term Loan B, 3 Mo. CME Term SOFR + CSA + 2.75%, 0.50% Floor | | | |
| Internet Brands, Inc. (WebMD/MH Sub I LLC), 2023 New Term Loan B, 1 Mo. CME Term SOFR + 4.25%, 0.50% 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 + CSA + 4.75%, 0.00% Floor | | | |
| LogMeIn, Inc. (GoTo Group, Inc.), First Out Term Loan (First Lien), 1 Mo. CME Term SOFR + CSA + 4.75%, 0.00% Floor | | | |
| LogMeIn, Inc. (GoTo Group, Inc.), Second Out Term Loan (First Lien), 1 Mo. CME Term SOFR + CSA + 4.75%, 0.00% Floor | | | |
| McAfee Corp. (Condor Merger Sub, Inc.), Tranche B-1 Term Loan, 1 Mo. CME Term SOFR + CSA + 3.75%, 0.50% Floor | | | |
| Open Text Corp. (GXS), 2023 Replacement Term Loan, 1 Mo. CME Term SOFR + CSA + 2.75%, 0.50% Floor | | | |
| Open Text Corp. (GXS), Term Loan B, 1 Mo. CME Term SOFR + CSA + 1.75%, 0.00% Floor | | | |
| PowerSchool Holdings, Inc. (Severin), Extended Term Loan, 3 Mo. CME Term SOFR + 3.00%, 0.00% Floor | | | |
| Qlik Technologies (Project Alpha Intermediate Holding, Inc.), Term Loan B, 3 Mo. CME Term SOFR + 4.75%, 0.50% Floor | | | |
| RealPage, Inc., Term Loan B, 1 Mo. CME Term SOFR + CSA + 3.00%, 0.50% Floor | | | |
| SolarWinds Holdings, Inc., 2024 Refi Term Loan, 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)April 30, 2024 (Unaudited) | | | | |
SENIOR FLOATING-RATE LOAN INTERESTS (Continued) |
| Application Software (Continued) | |
| Solera Holdings, Inc. (Polaris Newco), Term Loan B, 3 Mo. CME Term SOFR + CSA + 4.00%, 0.50% Floor | | | |
| Tenable, Inc., Term Loan B, 1 Mo. CME Term SOFR + CSA + 2.75%, 0.50% Floor | | | |
| Ultimate Kronos Group (UKG, Inc.), 2024 Term Loan B, 3 Mo. CME Term SOFR + 3.50%, 0.00% Floor | | | |
| Veeam Software Holdings Ltd. (VS Buyer LLC), 2024 Initial Term Loan, 1 Mo. CME Term SOFR + 3.25%, 0.00% Floor | | | |
| | |
| Asset Management & Custody Banks — 1.6% | |
| Edelman Financial Engines Center LLC, Term Loan (Second Lien), 1 Mo. CME Term SOFR + CSA + 6.75%, 0.00% Floor | | | |
| Edelman Financial Engines Center LLC, Term Loan B, 1 Mo. CME Term SOFR + CSA + 3.50%, 0.75% Floor | | | |
| | |
| Automotive Parts & Equipment — 0.7% | |
| Caliber Collision (Wand NewCo 3, Inc.), Term Loan B, 1 Mo. CME Term SOFR + 3.75%, 0.00% Floor | | | |
| Clarios Global, L.P. (Power Solutions), 2024 Refi Term Loan B, 1 Mo. CME Term SOFR + 3.00%, 0.00% Floor | | | |
| | |
| | |
| Les Schwab Tire Centers (LS Group OpCo Acq. LLC), Term B Loan, 1 Mo. CME Term SOFR + 3.00%, 0.00% Floor | | | |
| Mavis Tire Express Services Topco Corp., 2024 Term Loan B, 1 Mo. CME Term SOFR + 3.75%, 0.75% Floor | | | |
| | |
| | |
| E.W. Scripps Co., Tranche B-3 Term Loan, 1 Mo. CME Term SOFR + CSA + 3.00%, 0.75% Floor | | | |
| Gray Television, Inc., Term Loan E, 1 Mo. CME Term SOFR + CSA + 2.50%, 0.00% Floor | | | |
| iHeartCommunications, Inc., Second Amendment Incremental Term Loan B, 1 Mo. CME Term SOFR + CSA + 3.25%, 0.50% Floor | | | |
| iHeartCommunications, Inc., Term Loan B, 1 Mo. CME Term SOFR + CSA + 3.00%, 0.00% Floor | | | |
| Nexstar Broadcasting, Inc., Incremental Term Loan B-4, 1 Mo. CME Term SOFR + CSA + 2.50%, 0.00% Floor | | | |
| Sinclair Television Group, Inc., Term Loan B-2, 3 Mo. CME Term SOFR + CSA + 2.50%, 0.00% Floor | | | |
| Univision Communications, Inc., 2021 Replacement New Term Loan (First Lien), 1 Mo. CME Term SOFR + CSA + 3.25%, 0.75% Floor | | | |
| | |
| | |
| American Builders & Contractors Supply Co., Inc., 2024 Refi Term Loan, 1 Mo. CME Term SOFR + 2.00%, 0.00% Floor | | | |
| Hunter Douglas, Inc. (Solis), Term Loan B, 3 Mo. CME Term SOFR + 3.50%, 0.50% Floor | | | |
See Notes to Financial Statements
First Trust Senior Loan Fund (FTSL)Portfolio of Investments (Continued)April 30, 2024 (Unaudited) | | | | |
SENIOR FLOATING-RATE LOAN INTERESTS (Continued) |
| Building Products (Continued) | |
| Miter Brands Acq. Holdco, Inc. (MIWD), 2024 Incremental Term Loan, 1 Mo. CME Term SOFR + 3.50%, 0.00% Floor | | | |
| Quikrete Holdings, Inc., 2024 Refi Term Loan, 1 Mo. CME Term SOFR + 2.25%, 0.00% Floor | | | |
| | |
| | |
| Charter Communications Operating LLC, Term Loan B2, 3 Mo. CME Term SOFR + 1.75%, 0.00% Floor | | | |
| Charter Communications Operating LLC, Term Loan B4, 1 Mo. CME Term SOFR + 2.00%, 0.00% Floor | | | |
| | |
| | |
| Caesars Entertainment, Inc. (f/k/a Eldorado Resorts), 2024 Term Loan B-1, 1 Mo. CME Term SOFR + 2.75%, 0.50% Floor | | | |
| Golden Nugget, Inc. (Fertitta Entertainment LLC), 2024 Refi Term Loan, 1 Mo. CME Term SOFR + 3.75%, 0.50% Floor | | | |
| Light & Wonder, Inc. (FKA Scientific Games International, Inc), Term Loan B-1, 1 Mo. CME Term SOFR + 2.75%, 0.50% Floor | | | |
| Scientific Games Holdings, L.P. (Scientific Games Lottery), Initial Dollar Term Loan, 3 Mo. CME Term SOFR + 3.25%, 0.50% Floor | | | |
| Stars Group Holdings B.V. (Flutter Entertainment PLC), Term Loan B, 3 Mo. CME Term SOFR + 2.25%, 0.50% Floor | | | |
| | |
| Commercial Printing — 0.7% | |
| Multi-Color Corp. (LABL, Inc.), Initial Dollar Term Loan, 1 Mo. CME Term SOFR + CSA + 5.00%, 0.50% Floor | | | |
| Construction & Engineering — 0.1% | |
| APi Group DE, Inc., Initial Term Loan, 1 Mo. CME Term SOFR + CSA + 2.25%, 0.00% Floor | | | |
| Construction Materials — 0.0% | |
| Summit Materials LLC, Term Loan B-2, 3 Mo. CME Term SOFR + 2.50%, 0.00% Floor | | | |
| Diversified Support Services — 0.7% | |
| Consilio (Skopima Consilio Parent LLC), Initial Term Loan, 1 Mo. CME Term SOFR + CSA + 4.00%, 0.50% Floor | | | |
| Vestis Corp., Term Loan B-1, 1 Mo. CME Term SOFR + 2.25%, 0.00% Floor | | | |
| | |
| Education Services — 0.6% | |
| Ascensus Holdings, Inc. (Mercury), Term Loan (First Lien), 1 Mo. CME Term SOFR + CSA + 3.50%, 0.50% Floor | | | |
| Electric Utilities — 0.2% | |
| Vistra Operations Company LLC (TEX/TXU), Term Loan B, 1 Mo. CME Term SOFR + 2.00%, 0.00% Floor | | | |
See Notes to Financial Statements
First Trust Senior Loan Fund (FTSL)Portfolio of Investments (Continued)April 30, 2024 (Unaudited) | | | | |
SENIOR FLOATING-RATE LOAN INTERESTS (Continued) |
| Electronic Equipment & Instruments — 0.5% | |
| Chamberlain Group, Inc. (Chariot), Term Loan B, 1 Mo. CME Term SOFR + CSA + 3.25%, 0.50% Floor | | | |
| Verifone Systems, Inc., Term Loan B, 3 Mo. CME Term SOFR + CSA + 4.00%, 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 + CSA + 2.00%, 0.00% Floor | | | |
| | |
| BJ’s Wholesale Club, Inc., Term Loan B, 1 Mo. CME Term SOFR + 2.00%, 0.00% Floor | | | |
| Health Care Facilities — 2.2% | |
| Ardent Health Services, Inc. (AHP Health Partners, Inc.), Term Loan B, 1 Mo. CME Term SOFR + CSA + 3.50%, 0.50% Floor | | | |
| Gentiva Health Services, Inc. (Kindred at Home/Charlotte Buyer), Initial Term B Loan, 1 Mo. CME Term SOFR + 5.25%, 0.50% Floor | | | |
| IVC Evidensia (IVC Acquisition Midco Ltd.), Facility B9, 3 Mo. CME Term SOFR + 5.50%, 0.50% Floor | | | |
| Select Medical Corp., Tranche B-1, 1 Mo. CME Term SOFR + 3.00%, 0.00% Floor | | | |
| Southern Veterinary Partners, Initial Term Loan, 1 Mo. CME Term SOFR + CSA + 4.00%, 1.00% Floor | | | |
| | |
| Health Care Services — 2.4% | |
| Agiliti Health, Inc. (Universal Hospital Services), Incremental Term Loan B, 3 Mo. CME Term SOFR + 3.00%, 0.00% Floor | | | |
| CHG Healthcare Services, Inc., Term Loan B, 1 Mo. CME Term SOFR + CSA + 3.25%, 0.50% Floor | | | |
| DaVita, Inc., Tranche B-1 Term Loan, 1 Mo. CME Term SOFR + CSA + 1.75%, 0.00% Floor | | | |
| ExamWorks Group, Inc. (Electron Bidco), Term Loan B, 1 Mo. CME Term SOFR + CSA + 3.00%, 0.50% Floor | | | |
| Radnet Management, Inc., Initial Term Loan B, 3 Mo. CME Term SOFR + 2.50%, 0.00% Floor | | | |
| Surgery Centers Holdings, Inc., Term Loan B, 1 Mo. CME Term SOFR + 3.50%, 0.00% Floor | | | |
| | |
| Health Care Supplies — 1.6% | |
| Medline Borrower, L.P. (Mozart), 2024 Refi Term Loan B, 1 Mo. CME Term SOFR + 2.75%, 0.50% Floor | | | |
| Health Care Technology — 8.3% | |
| athenahealth, Inc. (Minerva Merger Sub, Inc.), Term Loan B, 1 Mo. CME Term SOFR + 3.25%, 0.50% Floor | | | |
| Datavant Group (fka Ciox) (CT Technologies Intermediate Holdings, Inc.), New Term Loan B, 1 Mo. CME Term SOFR + CSA + 4.25%, 0.75% Floor | | | |
See Notes to Financial Statements
First Trust Senior Loan Fund (FTSL)Portfolio of Investments (Continued)April 30, 2024 (Unaudited) | | | | |
SENIOR FLOATING-RATE LOAN INTERESTS (Continued) |
| Health Care Technology (Continued) | |
| Ensemble RCM LLC (Ensemble Health), 2024 Refi Loan, 3 Mo. CME Term SOFR + 3.00%, 0.00% Floor | | | |
| Mediware (Wellsky/Project Ruby Ultimate Parent Corp.), 2024 Incremental Term Loan, 1 Mo. CME Term SOFR + CSA + 3.50%, 0.00% Floor | | | |
| Mediware (Wellsky/Project Ruby Ultimate Parent Corp.), Term Loan B, 1 Mo. CME Term SOFR + CSA + 3.25%, 0.75% Floor | | | |
| R1 RCM Holdco, Inc., Term Loan B, 1 Mo. CME Term SOFR + 3.00%, 0.50% Floor | | | |
| Verscend Technologies, Inc. (Cotiviti), Fixed Rate Term Loan, Fixed Rate at 7.63% | | | |
| Verscend Technologies, Inc. (Cotiviti), Floating Rate Loan, 3 Mo. CME Term SOFR + 3.25%, 0.00% Floor | | | |
| Waystar Technologies, Inc., 2024 Refi Term Loan, 1 Mo. CME Term SOFR + 4.00%, 0.00% Floor | | | |
| WS Audiology (Auris Lux III SARL), USD Term Loan B, 6 Mo. CME Term SOFR + CSA + 4.25%, 0.00% Floor | | | |
| Zelis Payments Buyer, Inc., Term Loan B-2, 1 Mo. CME Term SOFR + 2.75%, 0.00% Floor | | | |
| | |
| Hotels, Resorts & Cruise Lines — 0.1% | |
| Alterra Mountain Co., Term Loan B, 1 Mo. CME Term SOFR + 3.25%, 0.00% Floor | | | |
| Household Products — 0.1% | |
| Energizer Spinco, Inc., 2020 Term Loan B, 1 Mo. CME Term SOFR + CSA + 2.25%, 0.50% 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 — 0.4% | |
| Calpine Construction Finance Co., L.P., Term Loan B, 1 Mo. CME Term SOFR + 2.25%, 0.00% Floor | | | |
| Calpine Corp., 2024 Refi Term Loan B5, 1 Mo. CME Term SOFR + 2.00%, 0.00% Floor | | | |
| | |
| Industrial Machinery & Supplies & Components — 0.9% | |
| Filtration Group Corp., 2021 Incremental Term Loan B, 1 Mo. CME Term SOFR + CSA + 3.50%, 0.50% Floor | | | |
| Filtration Group Corp., 2023 Extended Term Loan, 1 Mo. CME Term SOFR + CSA + 4.25%, 0.50% Floor | | | |
| Gates Global LLC, Term Loan B-3, 1 Mo. CME Term SOFR + CSA + 2.50%, 0.75% Floor | | | |
| TK Elevator Newco GMBH (Vertical U.S. Newco, Inc.), 2024 USD Refi Loan, 3 Mo. CME Term SOFR + 3.50%, 0.50% Floor | | | |
| | |
| Insurance Brokers — 12.9% | |
| Alliant Holdings I LLC, Term Loan B-6, 1 Mo. CME Term SOFR + 3.50%, 0.50% Floor | | | |
| AmWINS Group, Inc., Feb. 2023 Incremental Term Loan, 1 Mo. CME Term SOFR + CSA + 2.75%, 0.75% Floor | | | |
See Notes to Financial Statements
First Trust Senior Loan Fund (FTSL)Portfolio of Investments (Continued)April 30, 2024 (Unaudited) | | | | |
SENIOR FLOATING-RATE LOAN INTERESTS (Continued) |
| Insurance Brokers (Continued) | |
| AmWINS Group, Inc., Term Loan B, 1 Mo. CME Term SOFR + CSA + 2.25%, 0.75% Floor | | | |
| AssuredPartners, Inc., 2024 Term Loan B5, 1 Mo. CME Term SOFR + 3.50%, 0.50% Floor | | | |
| BroadStreet Partners, Inc., 2023 Term B Loan, 1 Mo. CME Term SOFR + 3.75%, 0.00% Floor | | | |
| BroadStreet Partners, Inc., Initial Term Loan B, 1 Mo. CME Term SOFR + CSA + 3.00%, 0.00% Floor | | | |
| HUB International Ltd., 2024 Refi Term Loan B, 1 Mo. CME Term SOFR + 3.25%, 0.75% Floor | | | |
| HUB International Ltd., 2024 Refi Term Loan B, 3 Mo. CME Term SOFR + 3.25%, 0.75% Floor | | | |
| Hyperion Insurance Group Ltd. (aka - Howden Group), 2023 USD Term Loan, 1 Mo. CME Term SOFR + 4.00%, 0.50% Floor | | | |
| IMA Financial Group, Inc., Term Loan B-1, 1 Mo. CME Term SOFR + CSA + 3.75%, 0.50% Floor | | | |
| OneDigital Borrower LLC, Term Loan B, 1 Mo. CME Term SOFR + CSA + 4.25%, 0.50% Floor | | | |
| Ryan Specialty Group LLC, 2024 Term Loan, 1 Mo. CME Term SOFR + 2.75%, 0.75% Floor | | | |
| Truist Insurance Holdings LLC (McGriff/Panther Escrow), Term Loan (Second Lien), 2 Mo. CME Term SOFR + 4.75%, 0.00% Floor | | | |
| Truist Insurance Holdings LLC (McGriff/Panther Escrow), Term Loan B, 2 Mo. CME Term SOFR + 3.25%, 0.00% Floor | | | |
| USI, Inc., 2023 2nd Funding New Term Loan, 3 Mo. CME Term SOFR + 3.25%, 0.00% Floor | | | |
| USI, Inc., 2023-B New Term Loan, 3 Mo. CME Term SOFR + 3.00%, 0.00% Floor | | | |
| | |
| Integrated Telecommunication Services — 1.1% | |
| 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 | | | |
| | |
| Internet Services & Infrastructure — 0.7% | |
| Go Daddy Operating Co. LLC, Term Loan B4, 1 Mo. CME Term SOFR + CSA + 2.00%, 0.00% Floor | | | |
| Go Daddy Operating Co. LLC, Term Loan B6, 1 Mo. CME Term SOFR + 2.00%, 0.00% Floor | | | |
| | |
| Investment Banking & Brokerage — 0.1% | |
| LPL Holdings, Inc., Term Loan B, 1 Mo. CME Term SOFR + CSA + 1.75%, 0.00% Floor | | | |
See Notes to Financial Statements
First Trust Senior Loan Fund (FTSL)Portfolio of Investments (Continued)April 30, 2024 (Unaudited) | | | | |
SENIOR FLOATING-RATE LOAN INTERESTS (Continued) |
| 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 | | | |
| | |
| Amer Sports Co., Initial Term Loan B, 3 Mo. CME Term SOFR + 3.25%, 0.00% Floor | | | |
| Life Sciences Tools & Services — 0.1% | |
| WCG Purchaser Corp. (WIRB-Copernicus Group), Term Loan B, 1 Mo. CME Term SOFR + CSA + 4.00%, 1.00% Floor | | | |
| Metal, Glass & Plastic Containers — 1.1% | |
| ProAmpac PG Borrower LLC, 2024 Refi Term Loan B, 1 Mo. CME Term SOFR + CSA + 4.00%, 0.75% Floor | | | |
| ProAmpac PG Borrower LLC, 2024 Refi Term Loan B, 3 Mo. CME Term SOFR + CSA + 4.00%, 0.75% Floor | | | |
| Tekni-Plex (Trident TPI Holdings, Inc.), Tranche B-6 Term Loan, 3 Mo. CME Term SOFR + 4.00%, 0.50% Floor | | | |
| TricorBraun, Inc., Initial Term Loan, 1 Mo. CME Term SOFR + CSA + 3.25%, 0.50% Floor | | | |
| | |
| Other Specialty Retail — 0.2% | |
| Petco Health and Wellness Co., Inc., Initial Term Loan B, 3 Mo. CME Term SOFR + CSA + 3.25%, 0.75% Floor | | | |
| Packaged Foods & Meats — 1.3% | |
| Nomad Foods Ltd., Term Loan B-4, 6 Mo. CME Term SOFR + 3.00%, 0.50% Floor | | | |
| Shearer’s Foods LLC (Fiesta Purchaser, Inc.), Initial Term Loan B, 1 Mo. CME Term SOFR + 4.00%, 0.00% Floor | | | |
| Utz Quality Foods LLC, 2024 Refi Term Loan B, 1 Mo. CME Term SOFR + CSA + 2.75%, 0.00% Floor | | | |
| | |
| Paper & Plastic Packaging Products & Materials — 3.1% | |
| Graham Packaging Co., L.P., Term Loan B, 1 Mo. CME Term SOFR + CSA + 3.00%, 0.75% Floor | | | |
| Pactiv LLC/Evergreen Packaging LLC (fka Reynolds Group Holdings), Term Loan B-2, 1 Mo. CME Term SOFR + CSA + 3.25%, 0.00% Floor | | | |
| Pactiv LLC/Evergreen Packaging LLC (fka Reynolds Group Holdings), Tranche B-3 U.S. Term Loan, 1 Mo. CME Term SOFR + CSA + 3.25%, 0.50% Floor | | | |
| Reynolds Consumer Products LLC, Initial Term Loan, 1 Mo. CME Term SOFR + 1.75%, 0.00% Floor | | | |
| Veritiv Corp. (Verde Purchaser LLC), Term Loan B, 3 Mo. CME Term SOFR + 5.00%, 0.00% Floor | | | |
| | |
| | |
| ICON Clinical Investments LLC (PRA Health Sciences, Inc.), Lux Term Loan B, 3 Mo. CME Term SOFR + 2.00%, 0.50% Floor | | | |
| ICON Clinical Investments LLC (PRA Health Sciences, Inc.), US Term Loan B, 3 Mo. CME Term SOFR + 2.00%, 0.50% Floor | | | |
See Notes to Financial Statements
First Trust Senior Loan Fund (FTSL)Portfolio of Investments (Continued)April 30, 2024 (Unaudited) | | | | |
SENIOR FLOATING-RATE LOAN INTERESTS (Continued) |
| Pharmaceuticals (Continued) | |
| IQVIA, Inc., Incremental Term Loan B-4, 3 Mo. CME Term SOFR + 2.00%, 0.00% Floor | | | |
| Parexel International Corp. (Phoenix Newco), Term Loan (First Lien), 1 Mo. CME Term SOFR + CSA + 3.25%, 0.50% Floor | | | |
| | |
| Property & Casualty Insurance — 0.9% | |
| Sedgwick Claims Management Services, Inc., 2023 Term Loan B, 1 Mo. CME Term SOFR + 3.75%, 0.00% Floor | | | |
| Research & Consulting Services — 4.0% | |
| AlixPartners, LLP, Term Loan B, 1 Mo. CME Term SOFR + CSA + 2.50%, 0.50% Floor | | | |
| Clarivate Analytics PLC (Camelot), 2024 Term Loan B, 1 Mo. CME Term SOFR + 2.75%, 0.00% Floor | | | |
| Dun & Bradstreet Corp., 2024 Refi Term Loan, 1 Mo. CME Term SOFR + 2.75%, 0.00% Floor | | | |
| J.D. Power (Project Boost Purchaser LLC), 2021 Incremental Term Loan B, 1 Mo. CME Term SOFR + CSA + 3.50%, 0.50% Floor | | | |
| J.D. Power (Project Boost Purchaser LLC), 2021 Incremental Term Loan B, 3 Mo. CME Term SOFR + CSA + 3.50%, 0.50% Floor | | | |
| Veritext Corp. (VT TopCo, Inc.), Initial Term Loan B, 1 Mo. CME Term SOFR + 3.50%, 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), 2024 Replacement Term Loan B, 1 Mo. CME Term SOFR + CSA + 2.75%, 0.75% Floor | | | |
| Whatabrands LLC, Term Loan B, 1 Mo. CME Term SOFR + CSA + 3.25%, 0.50% Floor | | | |
| | |
| Security & Alarm Services — 1.0% | |
| Garda World Security Corp., 2024 Refi Term Loan, 3 Mo. CME Term SOFR + 4.25%, 0.00% Floor | | | |
| Specialized Consumer Services — 1.1% | |
| Asurion LLC, New B-8 Term Loan, 1 Mo. CME Term SOFR + CSA + 3.25%, 0.00% Floor | | | |
| Belron Finance US LLC, Dollar Second Incremental Facility Term Loan, 3 Mo. CME Term SOFR + CSA + 2.25%, 0.00% Floor | | | |
| Mister Car Wash Holdings, Inc., 2024 Refinancing Term Loans, 1 Mo. CME Term SOFR + 3.00%, 0.00% Floor | | | |
| | |
| Specialized Finance — 0.3% | |
| Radiate Holdco LLC (Astound), Amendment No. 6 Term Loan, 1 Mo. CME Term SOFR + CSA + 3.25%, 0.75% Floor | | | |
| Specialty Chemicals — 0.2% | |
| Avantor, Inc., 2024 Refi Term Loan, 1 Mo. CME Term SOFR + CSA + 2.00%, 0.50% Floor | | | |
See Notes to Financial Statements
First Trust Senior Loan Fund (FTSL)Portfolio of Investments (Continued)April 30, 2024 (Unaudited) | | | | |
SENIOR FLOATING-RATE LOAN INTERESTS (Continued) |
| | |
| Gen Digital, Inc. (fka NortonLifeLock, Inc.), Term Loan B, 1 Mo. CME Term SOFR + CSA + 2.00%, 0.50% Floor | | | |
| Idera, Inc., Initial Term Loan, 3 Mo. CME Term SOFR + CSA + 3.75%, 0.75% Floor | | | |
| Proofpoint, Inc., Term Loan B, 1 Mo. CME Term SOFR + CSA + 3.25%, 0.50% Floor | | | |
| Sophos Group PLC (Surf), Term Loan B, 1 Mo. CME Term SOFR + CSA + 3.50%, 0.00% Floor | | | |
| SS&C Technologies Holdings, Inc., Term Loan B-3, 1 Mo. CME Term SOFR + CSA + 1.75%, 0.00% Floor | | | |
| SS&C Technologies Holdings, Inc., Term Loan B-4, 1 Mo. CME Term SOFR + CSA + 1.75%, 0.00% Floor | | | |
| SS&C Technologies Holdings, Inc., Term Loan B-5, 1 Mo. CME Term SOFR + CSA + 1.75%, 0.00% Floor | | | |
| SUSE (Marcel Bidco LLC), 2024 Refi Term Loan B, Daily CME Term SOFR + CSA + 4.00%, 0.50% Floor | | | |
| | |
| Trading Companies & Distributors — 1.0% | |
| SRS Distribution, Inc., 2021 Refinancing Term Loan, 1 Mo. CME Term SOFR + CSA + 3.50%, 0.50% Floor | | | |
| SRS Distribution, Inc., 2022 Refinancing Term Loan, 1 Mo. CME Term SOFR + CSA + 3.25%, 0.50% Floor | | | |
| United Rentals, Inc., Term Loan, 1 Mo. CME Term SOFR + 1.75%, 0.00% Floor | | | |
| | |
| Transaction & Payment Processing Services — 0.2% | |
| Worldpay (GTCR W Merger Sub LLC/Boost Newco LLC), Initial USD Term Loan, 3 Mo. CME Term SOFR + 3.00%, 0.50% Floor | | | |
| Wireless Telecommunication Services — 0.8% | |
| SBA Senior Finance II LLC, 2024 Refi Term Loan B, 1 Mo. CME Term SOFR + 2.00%, 0.00% Floor | | | |
| Total Senior Floating-Rate Loan Interests | |
| | |
| | | | |
CORPORATE BONDS AND NOTES — 8.3% |
| Aerospace & Defense — 0.4% | |
| | | | |
| | | | |
| | |
| Application Software — 0.1% | |
| | | | |
| | | | |
| | |
| | |
| Gray Television, Inc. (c) | | | |
See Notes to Financial Statements
First Trust Senior Loan Fund (FTSL)Portfolio of Investments (Continued)April 30, 2024 (Unaudited) | | | | |
CORPORATE BONDS AND NOTES (Continued) |
| | |
| | | | |
| Sirius XM Radio, Inc. (c) | | | |
| | |
| | |
| American Builders & Contractors Supply Co., Inc. (c) | | | |
| | |
| | | | |
| | | | |
| | | | |
| | |
| | |
| | | | |
| VICI Properties, L.P. / VICI Note Co., Inc. (c) | | | |
| VICI Properties, L.P. / VICI Note Co., Inc. (c) | | | |
| | |
| Health Care Facilities — 0.2% | |
| | | | |
| Health Care Supplies — 0.1% | |
| Medline Borrower, L.P. / Medline Co-Issuer, Inc. (c) | | | |
| Independent Power Producers & Energy Traders — 0.1% | |
| | | | |
| | |
| | | | |
| | | | |
| Arthur J. Gallagher & Co. | | | |
| Panther Escrow Issuer LLC (c) | | | |
| | |
| Internet Services & Infrastructure — 0.0% | |
| Go Daddy Operating Co. LLC / GD Finance Co., Inc. (c) | | | |
| Metal, Glass & Plastic Containers — 0.3% | |
| | | | |
| | | | |
| | |
| Packaged Foods & Meats — 0.8% | |
| | | | |
| Paper & Plastic Packaging Products & Materials — 0.4% | |
| Pactiv Evergreen Group Issuer, Inc. / Pactiv Evergreen Group Issuer LLC (c) | | | |
| | |
| | | | |
| Specialized Finance — 0.1% | |
| Radiate Holdco LLC / Radiate Finance, Inc. (c) | | | |
| | |
| Crowdstrike Holdings, Inc. | | | |
| | | | |
| SS&C Technologies, Inc. (c) | | | |
| | |
See Notes to Financial Statements
First Trust Senior Loan Fund (FTSL)Portfolio of Investments (Continued)April 30, 2024 (Unaudited) | | | | |
CORPORATE BONDS AND NOTES (Continued) |
| Trading Companies & Distributors — 0.6% | |
| United Rentals North America, Inc. (c) | | | |
| Wireless Telecommunication Services — 0.2% | |
| | | | |
| Total Corporate Bonds and Notes | |
| | |
FOREIGN CORPORATE BONDS AND NOTES — 1.9% |
| Application Software — 0.7% | |
| | | | |
| | | | |
| | |
| | |
| Flutter Treasury Designated Activity Co. (c) | | | |
| Data Processing & Outsourced Services — 0.4% | |
| Paysafe Finance PLC / Paysafe Holdings US Corp. (c) | | | |
| Environmental & Facilities Services — 0.4% | |
| GFL Environmental, Inc. (c) | | | |
| GFL Environmental, Inc. (c) | | | |
| | |
| | |
| 1011778 BC ULC / New Red Finance, 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 — 7.1% |
| Morgan Stanley Institutional Liquidity Funds - Treasury Portfolio - Institutional Class - 5.15% (j) | |
| | |
|
|
| Total Investments — 102.4% | |
| | |
| Net Other Assets and Liabilities — (2.4)% | |
| | |
See Notes to Financial Statements
First Trust Senior Loan Fund (FTSL)Portfolio of Investments (Continued)April 30, 2024 (Unaudited) | 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 April 30, 2024, securities noted as such amounted to $215,715,793 or 9.6% 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 April 30, 2024, 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 April 30, 2024. |
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)April 30, 2024 (Unaudited)
Valuation InputsA summary of the inputs used to value the Fund’s investments as of April 30, 2024 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
April 30, 2024 (Unaudited)
| |
| |
| |
| |
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 Senior Loan Fund (FTSL)Statement of Operations
For the Six Months Ended April 30, 2024 (Unaudited)
| |
| |
| |
| |
|
| |
| |
| |
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 Senior Loan Fund (FTSL)Statements of Changes in Net Assets
| Six Months
Ended
4/30/2024 (Unaudited) | |
| | |
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 Senior Loan Fund (FTSL)Financial Highlights
For a share outstanding throughout each period
| Six Months
Ended
4/30/2024
(Unaudited) | |
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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: | | | | | | |
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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 (c) | | | | | | |
Ratio of net investment income (loss) to average net assets (c) | | | | | | |
Portfolio turnover rate (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. |
| Ratio of total expenses to average net assets and ratio of net investment income (loss) to average net assets do not reflect the Fund’s proportionate share of expenses and income of underlying investment companies in which the Fund invests. |
| |
| 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)April 30, 2024 (Unaudited) 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 twenty-two 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.
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)April 30, 2024 (Unaudited) 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)April 30, 2024 (Unaudited) 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 April 30, 2024, 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)April 30, 2024 (Unaudited) 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 April 30, 2024, 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 April 30, 2024, the Fund had no unfunded loan commitments.
The Fund invests in restricted securities, which are securities that may not be offered for public sale without first being registered under the 1933 Act. Prior to registration, restricted securities may only be resold in transactions exempt from registration under Rule 144A under the 1933 Act, normally to qualified institutional buyers. As of April 30, 2024, 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.
| Amount is less than 0.01%. |
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 year 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) | |
Notes to Financial Statements (Continued)
First Trust Senior Loan Fund (FTSL)April 30, 2024 (Unaudited) 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 April 30, 2024, 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 non-expiring 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.
As of April 30, 2024, 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) |
| | | |
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:
Notes to Financial Statements (Continued)
First Trust Senior Loan Fund (FTSL)April 30, 2024 (Unaudited) | |
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 Chairs of the Audit Committee, Nominating and Governance Committee and Valuation Committee, the Vice Chair of the Audit Committee, the Lead Independent Trustee and the Vice Lead Independent Trustee 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 Committee Chairs, the Audit Committee Vice Chair, the Lead Independent Trustee and the Vice Lead Independent Trustee rotate periodically in serving in such capacities. The officers and “Interested” Trustee receive no compensation from the Trust for acting in such capacities.
4. Purchases and Sales of Securities
For the six months ended April 30, 2024, the cost of purchases and proceeds from sales of investments, excluding short-term investments and in-kind transactions, were $1,318,366,870 and $1,292,319,135, respectively.
For the six months ended April 30, 2024, the Fund had no in-kind transactions.
Effective February 28, 2024, the Trust, on behalf of the Fund, along with First Trust Exchange-Traded Fund III, First Trust Series Fund and First Trust Variable Insurance Trust, entered into a new Credit Agreement with BNYM as administrative agent for a group of lenders. The borrowing rate is the higher of the federal funds effective rate and the adjusted daily simple SOFR rate plus 1.00%. The commitment amount under the credit agreement is $620 million and such commitment amount may be increased up to $700 million with the consent of one or more lenders. BNYM charges on behalf of the lenders a commitment fee of 0.20% of the daily amount of the excess of the commitment amount over the outstanding principal balance of the loans, and an agency fee. Prior to February 28, 2024, the Trust, on behalf of the Fund, along with First Trust Exchange-Traded Fund III and First Trust Series Fund, had a $550 million Credit Agreement with The Bank of Nova Scotia (“Scotia”) as administrative agent for a group of lenders. Scotia charged 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 six months ended April 30, 2024.
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 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
Notes to Financial Statements (Continued)
First Trust Senior Loan Fund (FTSL)April 30, 2024 (Unaudited) 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.
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.
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.
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.
First Trust Senior Loan Fund (FTSL)April 30, 2024 (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.
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.
Risks are inherent in all investing. Certain general risks that may be applicable to a Fund are identified below, but not all of the material risks relevant to each Fund are included in this report and not all of the risks below apply to each Fund. The material risks of investing in each Fund are spelled out in its prospectus, statement of additional information and other regulatory filings. Before investing, you should consider each Fund’s investment objective, risks, charges and expenses, and read each Fund’s prospectus and statement of additional information carefully. You can download each Fund’s prospectus at www.ftportfolios.com or contact First Trust Portfolios L.P. at (800) 621-1675 to request a prospectus, which contains this and other information about each Fund.
Concentration Risk. To the extent that a fund is able to invest a significant percentage of its assets in a single asset class or the securities of issuers within the same country, state, region, industry or sector, an adverse economic, business or political development may affect the value of the fund’s investments more than if the fund were more broadly diversified. A fund that tracks an index will be concentrated to the extent the fund’s corresponding index is concentrated. A concentration makes a fund more susceptible to any single occurrence and may subject the fund to greater market risk than a fund that is more broadly diversified.
Credit Risk. Credit risk is the risk that an issuer of a security will be unable or unwilling to make dividend, interest and/or principal payments when due and the related risk that the value of a security may decline because of concerns about the issuer’s ability to make such payments.
Cyber Security Risk. The funds are susceptible to potential operational risks through breaches in cyber security. A breach in cyber security refers to both intentional and unintentional events that may cause a fund to lose proprietary information, suffer data corruption or lose operational capacity. Such events could cause a fund to incur regulatory penalties, reputational damage, additional compliance costs associated with corrective measures and/or financial loss. In addition, cyber security breaches of a fund’s third-party service providers, such as its administrator, transfer agent, custodian, or sub-advisor, as applicable, or issuers in which the fund invests, can also subject a fund to many of the same risks associated with direct cyber security breaches.
Defined Outcome Funds Risk. To the extent a fund’s investment strategy is designed to deliver returns tied to the price performance of an underlying ETF, an investor may not realize the returns the fund seeks to achieve if that investor does not hold shares for the entire target outcome period. In the event an investor purchases shares after the first day of the target outcome period or sells shares prior to the end of the target outcome period, the buffer that the fund seeks to provide against a decline in the value of the underlying ETF may not be available, the enhanced returns that the fund seeks to provide (if any) may not be available and the investor may not participate in a gain in the value of the underlying ETF up to the cap for the investor’s investment period. Additionally, the fund will not participate in gains of the underlying ETF above the cap and a shareholder may lose their entire investment. If the fund seeks enhanced returns, there are certain time periods when the value of the fund may fall faster than the value of the underlying ETF, and it is very unlikely that, on any given day during which the underlying ETF share price increases in value, the fund’s share price will increase at the same rate as the enhanced returns sought by the fund, which is designed for an entire target outcome period. Trading flexible exchange options involves risks different from, or possibly greater than, the risks associated with investing directly in securities, such as less liquidity and correlation and valuation risks. A fund may experience substantial downside from specific flexible exchange option positions and certain positions may expire worthless.
Derivatives Risk. To the extent a fund uses derivative instruments such as futures contracts, options contracts and swaps, the fund may experience losses because of adverse movements in the price or value of the underlying asset, index or rate, which may be
Additional Information (Continued)
First Trust Senior Loan Fund (FTSL)April 30, 2024 (Unaudited) 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 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
Additional Information (Continued)
First Trust Senior Loan Fund (FTSL)April 30, 2024 (Unaudited) 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 inaccurate asset pricing. A fund may hold investments in sizes smaller than institutionally sized round lot positions (sometimes referred to as odd lots). However, third-party pricing services generally provide evaluations on the basis of institutionally-sized round lots. If a fund sells certain of its investments in an odd lot transaction, the sale price may be less than the value at which such securities
Additional Information (Continued)
First Trust Senior Loan Fund (FTSL)April 30, 2024 (Unaudited) have been held by the fund. Odd lots often trade at lower prices than institutional round lots. There is no assurance that the fund will be able to sell a portfolio security at the price established by the pricing service, which could result in a loss to the fund.
NOT FDIC INSURED NOT BANK GUARANTEED MAY LOSE VALUE
Liquidity Risk Management Program
In accordance with Rule 22e-4 under the Investment Company Act of 1940, as amended (the “1940 Act”), the Fund and each other fund in the First Trust Fund Complex, other than the closed-end funds, have adopted and implemented a liquidity risk management program (the “Program”) reasonably designed to assess and manage the funds’ liquidity risk, i.e., the risk that a fund could not meet requests to redeem shares issued by the fund without significant dilution of remaining investors’ interests in the fund. The Board of Trustees of the First Trust Funds has appointed First Trust Advisors L.P. (the “Advisor”) as the person designated to administer the Program, and in this capacity the Advisor performs its duties primarily through the activities and efforts of the First Trust Liquidity Committee.
Pursuant to the Program, the Liquidity Committee classifies the liquidity of each fund’s portfolio investments into one of the four liquidity categories specified by Rule 22e-4: highly liquid investments, moderately liquid investments, less liquid investments and illiquid investments. The Liquidity Committee determines certain of the inputs for this classification process, including reasonably anticipated trade sizes and significant investor dilution thresholds. The Liquidity Committee also determines and periodically reviews a highly liquid investment minimum for certain funds (including the Fund), monitors the funds’ holdings of assets classified as illiquid investments to seek to ensure they do not exceed 15% of a fund’s net assets and establishes policies and procedures regarding redemptions in kind.
At the April 25, 2024 meeting of the Board of Trustees, as required by Rule 22e-4 and the Program, the Advisor provided the Board with a written report prepared by the Advisor that addressed the operation of the Program during the period from March 23, 2023 through the Liquidity Committee’s annual meeting held on March 14, 2024 and assessed the Program’s adequacy and effectiveness of implementation during this period, including the operation of the highly liquid investment minimum for each fund, including the Fund, that is required under the Program to have one, and any material changes to the Program.
As stated in the written report, during the review period, no fund breached the 15% limitation on illiquid investments, no fund with a highly liquid investment minimum breached that minimum during the reporting period and no fund was required to file a Form N-RN during the reporting period. The Advisor concluded that each fund’s investment strategy is appropriate for an open-end fund; that the Program operated effectively in all material respects during the review period; and that the Program is reasonably designed to assess and manage the liquidity risk of each fund and to maintain compliance with Rule 22e-4.
First Trust Exchange-Traded Fund IV
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
Chapman and Cutler LLP
320 South Canal Street
Chicago, IL 60606
First Trust Exchange-Traded Fund IV
| First Trust Tactical High Yield ETF (HYLS) |
Semi-Annual Report
For the Six Months Ended
April 30, 2024 |
First Trust Tactical High Yield ETF (HYLS)
Semi-Annual Report
April 30, 2024
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 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 webpage at www.ftportfolios.com.
This report contains information that may help you evaluate your investment in the Fund. It includes details about the Fund and presents data and analysis that provide insight into the Fund’s performance and investment approach.
The statistical information that follows may help you understand the Fund’s performance compared to that of relevant market benchmarks.
It is important to keep in mind that the opinions expressed by personnel of the Advisor are just that: informed opinions. They should not be considered to be promises or advice. The opinions, like the statistics, cover the period through the date on the cover of this report. The material risks of investing in the Fund are spelled out in the prospectus, the statement of additional information, and other Fund regulatory filings.
First Trust Tactical High Yield ETF (HYLS)
Semi-Annual Letter from the Chairman and CEO
April 30, 2024
First Trust is pleased to provide you with the semi-annual report for the First Trust Tactical High Yield ETF (the “Fund”), which contains detailed information about the Fund for the six-month period ended April 30, 2024.
On March 16, 2022, the Federal Reserve (the “Fed”) initiated the first of what have been eleven increases to the Federal Funds target rate thus far in the current cycle. Given its potential impact, financial pundits have been debating the direction and timing of the Fed’s interest rate policy ever since. In December 2023, the Fed gave some guidance, announcing that it expected to implement up to three interest rate cuts totaling 75 basis points (“bps”) in 2024. Investors responded to the news with exuberance. In the U.S., the S&P 500® Index surged by 10.56% on a total return basis in the first quarter of 2024, adding to its already stunning 26.29% total return in 2023. For comparison, the yield on the 10-Year Treasury Note (“T-Note”) stood at 3.80% on December 27, 2023, down a stunning 119 bps from its most recent high of 4.99% set just months prior on October 19, 2023. Bond yields generally move in the opposite direction of prices. Given this relationship, the decline in the 10-Year T-Note’s yield is indicative of investor’s desire to lock in higher income payments prior to the Fed reducing its policy rate.
At this point, it makes sense to step back and highlight several ways the Fed’s interest rate policy has impacted the U.S. economy. We’ll start with the good news. On April 30, 2024, inflation, as measured by the trailing 12-month rate on the Consumer Price Index, stood at 3.4%, down significantly from its most recent peak of 9.1% set in June 2022. Additionally, the higher Federal Funds target rate has been a boon for those investors with assets in fixed income, money market, and other interest-bearing accounts. The total value of assets held in U.S. money market accounts stood at $6.0 trillion on May 1, 2024, nearly double where it stood just five years ago. Notably, the weekly yield on the benchmark U.S. Treasury 3-Month Money Market Index more than doubled from 2.40% to 5.32% between the end of April 2019 and April 2024.
Now for the not-so-good news. Higher interest rates often restrict the ability of consumers and businesses to spend and finance growth, respectively. While the consumer has remained relatively unscathed thus far, evidence that they are stretching their budgets is mounting. The Federal Reserve Bank of New York reported that the total balance of U.S. credit card debt stood at a record $1.13 trillion at the end of 2023, while the average annual percentage rate for all cards rose to a record 21.59% in the first quarter of 2024. Perhaps unsurprisingly, delinquency rates have been surging. Data from the Federal Reserve Bank of St. Louis revealed that the delinquency rate on credit card loans for all U.S. commercial banks rose to 3.10% in the fourth quarter of 2023, up from 2.62% in the fourth quarter of 2019 (pre-COVID-19). In April 2024, 43% of small and mid-sized U.S. businesses were unable to pay their rent on time and in full. In addition, higher interest rates are impacting economic growth. In the U.S., real gross domestic product growth was a tepid 1.6% in the first quarter of 2024, far below consensus expectations of 2.5%. Not even the U.S. government is immune to the impacts of higher interest rates. At the end of the first quarter of 2024, the interest payments paid by the Federal government stood at a record $1.06 trillion, nearly double their total of $0.56 trillion at the end of the fourth quarter of 2019.
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 4/30/24 | | | Inception
(2/25/13)
to 4/30/24 |
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ICE BofA US High Yield Constrained Index | | | | | | | | |
Bloomberg US Aggregate Bond 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 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 Tactical High Yield ETF (HYLS) (Continued)
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Hotels, Restaurants & Leisure | |
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Health Care Providers & Services | |
Trading Companies & Distributors | |
Commercial Services & Supplies | |
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Diversified Telecommunication Services | |
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Health Care Equipment & Supplies | |
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Interactive Media & Services | |
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Construction & Engineering | |
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Wireless Telecommunication Services | |
Diversified Financial Services | |
Life Sciences Tools & Services | |
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Independent Power and Renewable Electricity Producers | |
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Electronic Equipment, Instruments & Components | |
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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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Alliant Holdings Intermediate LLC / Alliant Holdings Co.-Issuer | |
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United Rentals North America, Inc. | |
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1011778 BC ULC / New Red Finance Inc | |
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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. “NR” indicates no rating. 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 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 Tactical High Yield ETF (HYLS)Semi-Annual ReportApril 30, 2024 (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 April 30, 2024, the First Trust Leveraged Finance Team managed or supervised approximately $6.1 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.
First Trust Tactical High Yield ETF (HYLS)Understanding Your Fund ExpensesApril 30, 2024 (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 April 30, 2024.
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
November 1, 2023 | Ending
Account Value
April 30, 2024 | Annualized
Expense Ratio
Based on the
Six-Month
Period | Expenses Paid
During the
Six-Month
Period (a) |
First Trust Tactical High Yield ETF (HYLS) |
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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 (November 1, 2023 through April 30, 2024), multiplied by 182/366 (to reflect the six-month period). |
First Trust Tactical High Yield ETF (HYLS)Portfolio of InvestmentsApril 30, 2024 (Unaudited)
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CORPORATE BONDS AND NOTES — 81.9% |
| Aerospace & Defense — 1.4% | |
| Booz Allen Hamilton, Inc. (a) | | | |
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| Agricultural Products & Services — 0.7% | |
| Lamb Weston Holdings, Inc. (a) | | | |
| Lamb Weston Holdings, Inc. (a) | | | |
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| Alternative Carriers — 0.8% | |
| Level 3 Financing, Inc. (a) | | | |
| Level 3 Financing, Inc. (a) | | | |
| Level 3 Financing, Inc. (a) | | | |
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| Application Software — 3.2% | |
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| Open Text Holdings, Inc. (a) | | | |
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| Automobile Manufacturers — 0.6% | |
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| Automotive Parts & Equipment — 0.2% | |
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| Mavis Tire Express Services Topco Corp. (a) | | | |
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| Gray Television, Inc. (a) (b) | | | |
| iHeartCommunications, Inc. | | | |
| Nexstar Media, Inc. (a) (b) | | | |
| Scripps Escrow II, Inc. (a) | | | |
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| Sinclair Television Group, Inc. (a) (b) | | | |
| Sirius XM Radio, Inc. (a) | | | |
| Sirius XM Radio, Inc. (a) | | | |
| Sirius XM Radio, Inc. (a) | | | |
See Notes to Financial Statements
First Trust Tactical High Yield ETF (HYLS)Portfolio of Investments (Continued)April 30, 2024 (Unaudited) | | | | |
CORPORATE BONDS AND NOTES (Continued) |
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| Sirius XM Radio, Inc. (a) | | | |
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| American Builders & Contractors Supply Co., Inc. (a) | | | |
| American Builders & Contractors Supply Co., Inc. (a) | | | |
| Beacon Roofing Supply, Inc. (a) | | | |
| Beacon Roofing Supply, Inc. (a) | | | |
| Builders FirstSource, Inc. (a) | | | |
| Builders FirstSource, Inc. (a) | | | |
| Miter Brands Acquisition Holdco, Inc. / MIWD Borrower LLC (a) | | | |
| Standard Industries, Inc. (a) | | | |
| Standard Industries, Inc. (a) | | | |
| Standard Industries, Inc. (a) | | | |
| Standard Industries, Inc. (a) | | | |
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| 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) | | | |
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| Caesars Entertainment, Inc. (a) | | | |
| Caesars Entertainment, Inc. (a) | | | |
| Caesars Entertainment, Inc. (a) | | | |
| Churchill Downs, Inc. (a) | | | |
| Fertitta Entertainment LLC / Fertitta Entertainment Finance Co., Inc. (a) | | | |
| Light & Wonder International, Inc. (a) | | | |
| MGM Resorts International | | | |
| MGM Resorts International | | | |
| MGM Resorts International | | | |
| Scientific Games Holdings, L.P. / Scientific Games US FinCo, Inc. (a) | | | |
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| VICI Properties, L.P. / VICI Note Co., Inc. (a) | | | |
See Notes to Financial Statements
First Trust Tactical High Yield ETF (HYLS)Portfolio of Investments (Continued)April 30, 2024 (Unaudited) | | | | |
CORPORATE BONDS AND NOTES (Continued) |
| Casinos & Gaming (Continued) | |
| VICI Properties, L.P. / VICI Note Co., Inc. (a) | | | |
| VICI Properties, L.P. / VICI Note Co., Inc. (a) | | | |
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| Commercial Printing — 0.1% | |
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| Construction & Engineering — 1.0% | |
| Advanced Drainage Systems, Inc. (a) | | | |
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| Construction Materials — 0.3% | |
| GYP Holdings III Corp. (a) | | | |
| Summit Materials LLC / Summit Materials Finance Corp. (a) | | | |
| Summit Materials LLC / Summit Materials Finance Corp. (a) | | | |
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| Data Processing & Outsourced Services — 0.0% | |
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| Bank of America Corp. (c) | | | |
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| Bank of America Corp. (c) | | | |
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| Diversified Financial Services — 0.1% | |
| Boost Newco Borrower LLC (a) | | | |
| Diversified Support Services — 0.2% | |
| Ritchie Bros Holdings, Inc. (a) | | | |
| Ritchie Bros Holdings, Inc. (a) | | | |
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| Electric Utilities — 0.7% | |
| Vistra Operations Co. LLC (a) | | | |
See Notes to Financial Statements
First Trust Tactical High Yield ETF (HYLS)Portfolio of Investments (Continued)April 30, 2024 (Unaudited) | | | | |
CORPORATE BONDS AND NOTES (Continued) |
| Electric Utilities (Continued) | |
| Vistra Operations Co. LLC (a) | | | |
| Vistra Operations Co. LLC (a) | | | |
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| Electrical Components & Equipment — 0.0% | |
| Sensata Technologies, Inc. (a) | | | |
| Environmental & Facilities Services — 0.5% | |
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| Fertilizers & Agricultural Chemicals — 0.1% | |
| Scotts Miracle-Gro (The) Co. | | | |
| Scotts Miracle-Gro (The) Co. | | | |
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| Financial Exchanges & Data — 0.8% | |
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| Health Care Equipment — 0.0% | |
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| Health Care Facilities — 3.0% | |
| Acadia Healthcare Co., Inc. (a) | | | |
| Acadia Healthcare Co., Inc. (a) | | | |
| AHP Health Partners, Inc. (a) | | | |
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| Select Medical Corp. (a) (b) | | | |
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| Health Care Services — 0.4% | |
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| Service Corp. International | | | |
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| Health Care Supplies — 1.7% | |
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| Medline Borrower, L.P. (a) (b) | | | |
| Medline Borrower, L.P. (a) | | | |
| Medline Borrower, L.P. / Medline Co-Issuer, Inc. (a) | | | |
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| Health Care Technology — 3.6% | |
| AthenaHealth Group, Inc. (a) | | | |
See Notes to Financial Statements
First Trust Tactical High Yield ETF (HYLS)Portfolio of Investments (Continued)April 30, 2024 (Unaudited) | | | | |
CORPORATE BONDS AND NOTES (Continued) |
| Health Care Technology (Continued) | |
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| Verscend Escrow Corp. (a) | | | |
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| Hotels, Resorts & Cruise Lines — 0.2% | |
| Vail Resorts, Inc. (a) (d) | | | |
| Wyndham Hotels & Resorts, Inc. (a) | | | |
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| Household Products — 0.5% | |
| Energizer Holdings, Inc. (a) | | | |
| Energizer Holdings, Inc. (a) | | | |
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| Human Resource & Employment Services — 0.4% | |
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| Independent Power Producers & Energy Traders — 0.6% | |
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| Industrial Conglomerates — 0.3% | |
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| Industrial Machinery & Supplies & Components — 0.5% | |
| EMRLD Borrower, L.P. / Emerald Co-Issuer, Inc. (a) | | | |
| Gates Global LLC / Gates Corp. (a) | | | |
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| Insurance Brokers — 12.6% | |
| 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) | | | |
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| AmWINS Group, Inc. (a) (b) | | | |
| Arthur J. Gallagher & Co. | | | |
| Arthur J. Gallagher & Co. | | | |
| Arthur J. Gallagher & Co. | | | |
| Arthur J. Gallagher & Co. | | | |
| Arthur J. Gallagher & Co. | | | |
| AssuredPartners, Inc. (a) (b) | | | |
| AssuredPartners, Inc. (a) | | | |
| BroadStreet Partners, Inc. (a) | | | |
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| GTCR AP Finance, Inc. (a) | | | |
| HUB International Ltd. (a) | | | |
| HUB International Ltd. (a) | | | |
| HUB International Ltd. (a) | | | |
| Panther Escrow Issuer LLC (a) | | | |
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See Notes to Financial Statements
First Trust Tactical High Yield ETF (HYLS)Portfolio of Investments (Continued)April 30, 2024 (Unaudited) | | | | |
CORPORATE BONDS AND NOTES (Continued) |
| Integrated Telecommunication Services — 0.9% | |
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| Zayo Group Holdings, Inc. (a) | | | |
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| Interactive Media & Services — 1.4% | |
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| Internet Services & Infrastructure — 1.4% | |
| Go Daddy Operating Co. LLC / GD Finance Co., Inc. (a) | | | |
| Go Daddy Operating Co. LLC / GD Finance Co., Inc. (a) | | | |
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| Investment Banking & Brokerage — 0.7% | |
| Goldman Sachs Group (The), Inc. | | | |
| Goldman Sachs Group (The), Inc. | | | |
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| IT Consulting & Other Services — 0.1% | |
| Central Parent, Inc. / CDK Global, Inc. (a) | | | |
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| Leisure Facilities — 0.2% | |
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| Cedar Fair, L.P. / Canada’s Wonderland Co. / Magnum Management Corp. / Millennium Op | | | |
| SeaWorld Parks & Entertainment, Inc. (a) | | | |
| Six Flags Entertainment Corp. / Six Flags Theme Parks, Inc. (a) (d) | | | |
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| Managed Health Care — 1.3% | |
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| Molina Healthcare, Inc. (a) | | | |
| Molina Healthcare, Inc. (a) | | | |
| Molina Healthcare, Inc. (a) | | | |
| MPH Acquisition Holdings LLC (a) | | | |
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| Metal, Glass & Plastic Containers — 2.6% | |
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See Notes to Financial Statements
First Trust Tactical High Yield ETF (HYLS)Portfolio of Investments (Continued)April 30, 2024 (Unaudited) | | | | |
CORPORATE BONDS AND NOTES (Continued) |
| Metal, Glass & Plastic Containers (Continued) | |
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| Owens-Brockway Glass Container, Inc. (a) | | | |
| Owens-Brockway Glass Container, Inc. (a) | | | |
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| Movies & Entertainment — 0.6% | |
| Live Nation Entertainment, Inc. (a) | | | |
| Live Nation Entertainment, Inc. (a) | | | |
| WMG Acquisition Corp. (a) | | | |
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| Packaged Foods & Meats — 2.0% | |
| Fiesta Purchaser, Inc. (a) | | | |
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| Kraft Heinz Foods Co. (a) | | | |
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| Paper & Plastic Packaging Products & Materials — 3.8% | |
| Graham Packaging Co., Inc. (a) (b) | | | |
| Graphic Packaging International LLC (a) | | | |
| Graphic Packaging International LLC (a) | | | |
| Graphic Packaging International LLC (a) | | | |
| Pactiv Evergreen Group Issuer, Inc. / Pactiv Evergreen Group Issuer LLC (a) (b) | | | |
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| Sealed Air Corp. / Sealed Air Corp. U.S. (a) | | | |
| Sealed Air Corp. / Sealed Air Corp. U.S. (a) | | | |
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| Personal Care Products — 0.1% | |
| Prestige Brands, Inc. (a) | | | |
| Prestige Brands, Inc. (a) | | | |
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| Charles River Laboratories International, Inc. (a) | | | |
| Charles River Laboratories International, Inc. (a) | | | |
| Charles River Laboratories International, Inc. (a) | | | |
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| Rail Transportation — 0.1% | |
| Genesee & Wyoming, Inc. (a) | | | |
See Notes to Financial Statements
First Trust Tactical High Yield ETF (HYLS)Portfolio of Investments (Continued)April 30, 2024 (Unaudited) | | | | |
CORPORATE BONDS AND NOTES (Continued) |
| Real Estate Services — 0.4% | |
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| Research & Consulting Services — 0.7% | |
| Clarivate Science Holdings Corp. (a) | | | |
| Clarivate Science Holdings Corp. (a) | | | |
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| Dun & Bradstreet (The) Corp. (a) | | | |
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| Brinker International, Inc. (a) | | | |
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| Raising Cane’s Restaurants LLC (a) | | | |
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| Security & Alarm Services — 0.2% | |
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| Specialized Consumer Services — 0.1% | |
| Aramark Services, Inc. (a) | | | |
| Specialized Finance — 0.4% | |
| Radiate Holdco LLC / Radiate Finance, Inc. (a) | | | |
| Specialty Chemicals — 0.5% | |
| Avantor Funding, Inc. (a) | | | |
| Axalta Coating Systems LLC (a) | | | |
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| Boxer Parent Co., Inc. (a) | | | |
| Crowdstrike Holdings, Inc. | | | |
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| SS&C Technologies, Inc. (a) (b) | | | |
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See Notes to Financial Statements
First Trust Tactical High Yield ETF (HYLS)Portfolio of Investments (Continued)April 30, 2024 (Unaudited) | | | | |
CORPORATE BONDS AND NOTES (Continued) |
| Technology Distributors — 0.0% | |
| CDW LLC / CDW Finance Corp. | | | |
| Trading Companies & Distributors — 2.7% | |
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| SRS Distribution, Inc. (a) | | | |
| SRS Distribution, Inc. (a) | | | |
| United Rentals North America, Inc. | | | |
| United Rentals North America, Inc. (a) (b) | | | |
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| Wireless Telecommunication Services — 0.9% | |
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| Total Corporate Bonds and Notes | |
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FOREIGN CORPORATE BONDS AND NOTES — 12.5% |
| Application Software — 3.3% | |
| ION Trading Technologies S.A.R.L. (a) | | | |
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| Automotive Parts & Equipment — 1.3% | |
| Clarios Global, L.P. / Clarios US Finance Co. (a) (b) | | | |
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| Masonite International Corp. (a) | | | |
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| Virgin Media Finance PLC (a) | | | |
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| Flutter Treasury Designated Activity Co. (a) | | | |
| Electrical Components & Equipment — 0.0% | |
| Sensata Technologies B.V. (a) | | | |
| Environmental & Facilities Services — 1.5% | |
| GFL Environmental, Inc. (a) | | | |
| GFL Environmental, Inc. (a) | | | |
| GFL Environmental, Inc. (a) | | | |
| GFL Environmental, Inc. (a) | | | |
| GFL Environmental, Inc. (a) | | | |
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See Notes to Financial Statements
First Trust Tactical High Yield ETF (HYLS)Portfolio of Investments (Continued)April 30, 2024 (Unaudited) | | | | |
FOREIGN CORPORATE BONDS AND NOTES (Continued) |
| Integrated Telecommunication Services — 0.7% | |
| Altice France Holding S.A. (a) | | | |
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| IT Consulting & Other Services — 0.4% | |
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| Metal, Glass & Plastic Containers — 0.8% | |
| Trivium Packaging Finance B.V. (a) | | | |
| Research & Consulting Services — 0.1% | |
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| 1011778 BC ULC / New Red Finance, Inc. (a) (b) | | | |
| Security & Alarm Services — 0.3% | |
| Garda World Security Corp. (a) | | | |
| Garda World Security Corp. (a) | | | |
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| Specialty Chemicals — 0.1% | |
| Axalta Coating Systems LLC / Axalta Coating Systems Dutch Holding B B.V. (a) | | | |
| Trading Companies & Distributors — 1.0% | |
| VistaJet Malta Finance PLC / Vista Management Holding, Inc. (a) | | | |
| VistaJet Malta Finance PLC / Vista Management Holding, Inc. (a) | | | |
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| Transaction & Payment Processing Services — 0.8% | |
| Paysafe Finance PLC / Paysafe Holdings US Corp. (a) (b) | | | |
| Total Foreign Corporate Bonds and Notes | |
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SENIOR FLOATING-RATE LOAN INTERESTS — 8.3% |
| Application Software — 4.2% | |
| Gainwell Acquisition Corp. (fka Milano), Term Loan B, 3 Mo. CME Term SOFR + CSA + 4.00%, 0.75% Floor | | | |
| Genesys Cloud Services Holding II LLC (fka Greeneden), Term Loan B, 1 Mo. CME Term SOFR + 3.50%, 0.75% 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.), First Out Term Loan (First Lien), 1 Mo. CME Term SOFR + CSA + 4.75%, 0.00% Floor | | | |
| LogMeIn, Inc. (GoTo Group, Inc.), Second Out Term Loan (First Lien), 1 Mo. CME Term SOFR + CSA + 4.75%, 0.00% Floor | | | |
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| Asset Management & Custody Banks — 0.5% | |
| Edelman Financial Engines Center LLC, Term Loan (Second Lien), 1 Mo. CME Term SOFR + CSA + 6.75%, 0.00% Floor | | | |
See Notes to Financial Statements
First Trust Tactical High Yield ETF (HYLS)Portfolio of Investments (Continued)April 30, 2024 (Unaudited) | | | | |
SENIOR FLOATING-RATE LOAN INTERESTS (Continued) |
| Electronic Equipment & Instruments — 0.4% | |
| Verifone Systems, Inc., Term Loan B, 3 Mo. CME Term SOFR + CSA + 4.00%, 0.00% Floor | | | |
| Health Care Facilities — 0.3% | |
| Gentiva Health Services, Inc. (Kindred at Home/Charlotte Buyer), Initial Term B Loan, 1 Mo. CME Term SOFR + 5.25%, 0.50% Floor | | | |
| IVC Evidensia (IVC Acquisition Midco Ltd.), Facility B9, 3 Mo. CME Term SOFR + 5.50%, 0.50% Floor | | | |
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| Health Care Technology — 1.7% | |
| Datavant Group (fka Ciox) (CT Technologies Intermediate Holdings, Inc.), New Term Loan B, 1 Mo. CME Term SOFR + CSA + 4.25%, 0.75% Floor | | | |
| Verscend Technologies, Inc. (Cotiviti), Fixed Rate Term Loan, Fixed Rate at 7.63% | | | |
| Waystar Technologies, Inc., 2024 Refi Term Loan, 1 Mo. CME Term SOFR + 4.00%, 0.00% Floor | | | |
| WS Audiology (Auris Lux III SARL), USD Term Loan B, 6 Mo. CME Term SOFR + CSA + 4.25%, 0.00% Floor | | | |
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| Truist Insurance Holdings LLC (McGriff/Panther Escrow), Term Loan (Second Lien), 2 Mo. CME Term SOFR + 4.75%, 0.00% Floor | | | |
| Integrated Telecommunication Services — 0.2% | |
| 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 | | | |
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| Life Sciences Tools & Services — 0.3% | |
| WCG Purchaser Corp. (WIRB-Copernicus Group), Term Loan B, 1 Mo. CME Term SOFR + CSA + 4.00%, 1.00% Floor | | | |
| Metal, Glass & Plastic Containers — 0.1% | |
| ProAmpac PG Borrower LLC, 2024 Refi Term Loan B, 1 Mo. CME Term SOFR + CSA + 4.00%, 0.75% Floor | | | |
| ProAmpac PG Borrower LLC, 2024 Refi Term Loan B, 3 Mo. CME Term SOFR + CSA + 4.00%, 0.75% Floor | | | |
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| Specialized Finance — 0.3% | |
| Radiate Holdco LLC (Astound), Amendment No. 6 Term Loan, 1 Mo. CME Term SOFR + CSA + 3.25%, 0.75% Floor | | | |
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| Idera, Inc., Term Loan (Second Lien), 3 Mo. CME Term SOFR + CSA + 6.75%, 0.75% Floor | | | |
| Total Senior Floating-Rate Loan Interests | |
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See Notes to Financial Statements
First Trust Tactical High Yield ETF (HYLS)Portfolio of Investments (Continued)April 30, 2024 (Unaudited) | | |
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MONEY MARKET FUNDS — 0.1% |
| Morgan Stanley Institutional Liquidity Funds - Treasury Portfolio - Institutional Class - 5.15% (i) | |
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| Total Investments — 102.8% | |
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| Net Other Assets and Liabilities — 1.3% | |
| | |
| 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 April 30, 2024, securities noted as such amounted to $1,147,724,883 or 80.4% of net assets. |
| This security or a portion of this security is segregated as collateral for borrowings. At April 30, 2024, the segregated value of these securities amounts to $181,365,100. |
| Fixed-to-floating or fixed-to-variable rate security. The interest rate shown reflects the fixed rate in effect at April 30, 2024. At a predetermined date, the fixed rate will change to a floating rate or a variable rate. |
| When-issued security. The interest rate shown reflects the rate in effect at April 30, 2024. Interest will begin accruing on the security’s first settlement date. |
| 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. |
| 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 April 30, 2024. |
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 Tactical High Yield ETF (HYLS)Portfolio of Investments (Continued)April 30, 2024 (Unaudited)
Valuation InputsA summary of the inputs used to value the Fund’s investments as of April 30, 2024 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
April 30, 2024 (Unaudited)
| |
| |
| |
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 Six Months Ended April 30, 2024 (Unaudited)
| |
| |
| |
| |
|
| |
| |
| |
| |
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 Tactical High Yield ETF (HYLS)Statements of Changes in Net Assets
| Six Months
Ended
4/30/2024 (Unaudited) | |
| | |
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 Six Months Ended April 30, 2024
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 | | |
Decrease 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 | | |
Net proceeds from borrowings | | |
Cash used in financing activities | | |
Increase 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
| Six Months
Ended
4/30/2024
(Unaudited) | |
| | | | | |
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 (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. |
| |
| 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)April 30, 2024 (Unaudited) 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 twenty-two 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.
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)April 30, 2024 (Unaudited) 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)April 30, 2024 (Unaudited) 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 April 30, 2024, 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)April 30, 2024 (Unaudited) 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 April 30, 2024, the Fund held $2,604,227 of when-issued or delayed-delivery securities. At April 30, 2024, the Fund had no forward purchase commitments.
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 April 30, 2024.
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 April 30, 2024, the Fund had $58,000,000 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 April 30, 2024, the Fund had a debit margin balance of $58,000,000 with an interest rate of 6.07%. For the six months ended April 30, 2024, the Fund had margin interest expense of $1,448,302, as shown on the Statement of Operations. For the six months ended April 30, 2024, the average margin balance and interest rates were $65,578,575 and 6.07%, respectively.
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
Notes to Financial Statements (Continued)
First Trust Tactical High Yield ETF (HYLS)April 30, 2024 (Unaudited) 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.
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 April 30, 2024, 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 April 30, 2024, the Fund had no unfunded loan commitments.
The Fund invests in restricted securities, which are securities that may not be offered for public sale without first being registered under the 1933 Act. Prior to registration, restricted securities may only be resold in transactions exempt from registration under Rule 144A under the 1933 Act, normally to qualified institutional buyers. As of April 30, 2024, 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.
| Amount is less than 0.01%. |
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)April 30, 2024 (Unaudited) The tax character of distributions paid during the fiscal year 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) | |
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 April 30, 2024, 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 non-expiring 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.
As of April 30, 2024, 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) |
| | | |
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.
Notes to Financial Statements (Continued)
First Trust Tactical High Yield ETF (HYLS)April 30, 2024 (Unaudited) 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 Chairs of the Audit Committee, Nominating and Governance Committee and Valuation Committee, the Vice Chair of the Audit Committee, the Lead Independent Trustee and the Vice Lead Independent Trustee 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 Committee Chairs, the Audit Committee Vice Chair, the Lead Independent Trustee and the Vice Lead Independent Trustee rotate periodically in serving in such capacities. The officers and “Interested” Trustee receive no compensation from the Trust for acting in such capacities.
4. Purchases and Sales of Securities
For the six months ended April 30, 2024, the cost of purchases and proceeds from sales of investments, excluding short-term investments, investments sold short and in-kind transactions, were $296,226,696 and $402,348,717, respectively. The cost of purchases to cover short sales and the proceeds of short sales were $0 and $0, respectively.
For the six months ended April 30, 2024, the Fund had no in-kind transactions.
Effective February 28, 2024, the Trust, on behalf of the Fund, along with First Trust Exchange-Traded Fund III, First Trust Series Fund and First Trust Variable Insurance Trust, entered into a new Credit Agreement with BNYM as administrative agent for a group of lenders. The borrowing rate is the higher of the federal funds effective rate and the adjusted daily simple SOFR rate plus 1.00%. The commitment amount under the credit agreement is $620 million and such commitment amount may be increased up to $700 million with the consent of one or more lenders. BNYM charges on behalf of the lenders a commitment fee of 0.20% of the daily amount of the excess of the commitment amount over the outstanding principal balance of the loans, and an agency fee. Prior to February 28, 2024, the Trust, on behalf of the Fund, along with First Trust Exchange-Traded Fund III and First Trust Series Fund, had a $200 million Credit Agreement with BNYM. BNYM charged 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. First Trust allocates the commitment fee and agency fee amongst the funds that have access to the credit line. To the extent that the Fund accesses the credit line, there would also be an interest fee charged. The Fund did not have any borrowings outstanding during the six months ended April 30, 2024.
Notes to Financial Statements (Continued)
First Trust Tactical High Yield ETF (HYLS)April 30, 2024 (Unaudited) 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 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.
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.
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.
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.
First Trust Tactical High Yield ETF (HYLS)April 30, 2024 (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.
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.
Risks are inherent in all investing. Certain general risks that may be applicable to a Fund are identified below, but not all of the material risks relevant to each Fund are included in this report and not all of the risks below apply to each Fund. The material risks of investing in each Fund are spelled out in its prospectus, statement of additional information and other regulatory filings. Before investing, you should consider each Fund’s investment objective, risks, charges and expenses, and read each Fund’s prospectus and statement of additional information carefully. You can download each Fund’s prospectus at www.ftportfolios.com or contact First Trust Portfolios L.P. at (800) 621-1675 to request a prospectus, which contains this and other information about each Fund.
Concentration Risk. To the extent that a fund is able to invest a significant percentage of its assets in a single asset class or the securities of issuers within the same country, state, region, industry or sector, an adverse economic, business or political development may affect the value of the fund’s investments more than if the fund were more broadly diversified. A fund that tracks an index will be concentrated to the extent the fund’s corresponding index is concentrated. A concentration makes a fund more susceptible to any single occurrence and may subject the fund to greater market risk than a fund that is more broadly diversified.
Credit Risk. Credit risk is the risk that an issuer of a security will be unable or unwilling to make dividend, interest and/or principal payments when due and the related risk that the value of a security may decline because of concerns about the issuer’s ability to make such payments.
Cyber Security Risk. The funds are susceptible to potential operational risks through breaches in cyber security. A breach in cyber security refers to both intentional and unintentional events that may cause a fund to lose proprietary information, suffer data corruption or lose operational capacity. Such events could cause a fund to incur regulatory penalties, reputational damage, additional compliance costs associated with corrective measures and/or financial loss. In addition, cyber security breaches of a fund’s third-party service providers, such as its administrator, transfer agent, custodian, or sub-advisor, as applicable, or issuers in which the fund invests, can also subject a fund to many of the same risks associated with direct cyber security breaches.
Defined Outcome Funds Risk. To the extent a fund’s investment strategy is designed to deliver returns tied to the price performance of an underlying ETF, an investor may not realize the returns the fund seeks to achieve if that investor does not hold shares for the entire target outcome period. In the event an investor purchases shares after the first day of the target outcome period or sells shares prior to the end of the target outcome period, the buffer that the fund seeks to provide against a decline in the value of the underlying ETF may not be available, the enhanced returns that the fund seeks to provide (if any) may not be available and the investor may not participate in a gain in the value of the underlying ETF up to the cap for the investor’s investment period. Additionally, the fund will not participate in gains of the underlying ETF above the cap and a shareholder may lose their entire investment. If the fund seeks enhanced returns, there are certain time periods when the value of the fund may fall faster than the value of the underlying ETF, and it is very unlikely that, on any given day during which the underlying ETF share price increases in value, the fund’s share price will increase at the same rate as the enhanced returns sought by the fund, which is designed for an entire target outcome period. Trading flexible exchange options involves risks different from, or possibly greater than, the risks associated with investing directly in securities, such as less liquidity and correlation and valuation risks. A fund may experience substantial downside from specific flexible exchange option positions and certain positions may expire worthless.
Additional Information (Continued)
First Trust Tactical High Yield ETF (HYLS)April 30, 2024 (Unaudited) 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.
Additional Information (Continued)
First Trust Tactical High Yield ETF (HYLS)April 30, 2024 (Unaudited) 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
Additional Information (Continued)
First Trust Tactical High Yield ETF (HYLS)April 30, 2024 (Unaudited) 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
Liquidity Risk Management Program
In accordance with Rule 22e-4 under the Investment Company Act of 1940, as amended (the “1940 Act”), the Fund and each other fund in the First Trust Fund Complex, other than the closed-end funds, have adopted and implemented a liquidity risk management program (the “Program”) reasonably designed to assess and manage the funds’ liquidity risk, i.e., the risk that a fund could not meet requests to redeem shares issued by the fund without significant dilution of remaining investors’ interests in the fund. The Board of Trustees of the First Trust Funds has appointed First Trust Advisors L.P. (the “Advisor”) as the person designated to administer the Program, and in this capacity the Advisor performs its duties primarily through the activities and efforts of the First Trust Liquidity Committee.
Pursuant to the Program, the Liquidity Committee classifies the liquidity of each fund’s portfolio investments into one of the four liquidity categories specified by Rule 22e-4: highly liquid investments, moderately liquid investments, less liquid investments and illiquid investments. The Liquidity Committee determines certain of the inputs for this classification process, including reasonably anticipated trade sizes and significant investor dilution thresholds. The Liquidity Committee also determines and periodically reviews a highly liquid investment minimum for certain funds, monitors the funds’ holdings of assets classified as illiquid investments to seek to ensure they do not exceed 15% of a fund’s net assets and establishes policies and procedures regarding redemptions in kind.
At the April 25, 2024 meeting of the Board of Trustees, as required by Rule 22e-4 and the Program, the Advisor provided the Board with a written report prepared by the Advisor that addressed the operation of the Program during the period from March 23, 2023 through the Liquidity Committee’s annual meeting held on March 14, 2024 and assessed the Program’s adequacy and effectiveness of implementation during this period, including the operation of the highly liquid investment minimum for each fund that is required under the Program to have one, and any material changes to the Program. Note that because the Fund primarily holds assets that are highly liquid investments, the Fund has not adopted a highly liquid investment minimum.
As stated in the written report, during the review period, no fund breached the 15% limitation on illiquid investments, no fund with a highly liquid investment minimum breached that minimum during the reporting period and no fund was required to file a Form N-RN during the reporting period. The Advisor concluded that each fund’s investment strategy is appropriate for an open-end fund; that the Program operated effectively in all material respects during the review period; and that the Program is reasonably designed to assess and manage the liquidity risk of each fund and to maintain compliance with Rule 22e-4.
First Trust Exchange-Traded Fund IV
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
Chapman and Cutler LLP
320 South Canal Street
Chicago, IL 60606
First Trust Exchange-Traded Fund IV
| First Trust Enhanced Short Maturity ETF (FTSM)
|
Semi-Annual Report
For the Six Months Ended
April 30, 2024 |
First Trust Enhanced Short Maturity ETF (FTSM)
Semi-Annual Report
April 30, 2024
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.
This report contains information that may help you evaluate your investment in the Fund. It includes details about the Fund and presents data and analysis that provide insight into the Fund’s performance and investment approach.
The statistical information that follows may help you understand the Fund’s performance compared to that of relevant market benchmarks.
It is important to keep in mind that the opinions expressed by personnel of the Advisor are just that: informed opinions. They should not be considered to be promises or advice. The opinions, like the statistics, cover the period through the date on the cover of this report. The material risks of investing in the Fund are spelled out in the prospectus, the statement of additional information, and other Fund regulatory filings.
First Trust Enhanced Short Maturity ETF (FTSM)
Semi-Annual Letter from the Chairman and CEO
April 30, 2024
First Trust is pleased to provide you with the semi-annual report for the First Trust Enhanced Short Maturity ETF (the “Fund”), which contains detailed information about the Fund for the six-month period ended April 30, 2024.
On March 16, 2022, the Federal Reserve (the “Fed”) initiated the first of what have been eleven increases to the Federal Funds target rate thus far in the current cycle. Given its potential impact, financial pundits have been debating the direction and timing of the Fed’s interest rate policy ever since. In December 2023, the Fed gave some guidance, announcing that it expected to implement up to three interest rate cuts totaling 75 basis points (“bps”) in 2024. Investors responded to the news with exuberance. In the U.S., the S&P 500® Index surged by 10.56% on a total return basis in the first quarter of 2024, adding to its already stunning 26.29% total return in 2023. For comparison, the yield on the 10-Year Treasury Note (“T-Note”) stood at 3.80% on December 27, 2023, down a stunning 119 bps from its most recent high of 4.99% set just months prior on October 19, 2023. Bond yields generally move in the opposite direction of prices. Given this relationship, the decline in the 10-Year T-Note’s yield is indicative of investor’s desire to lock in higher income payments prior to the Fed reducing its policy rate.
At this point, it makes sense to step back and highlight several ways the Fed’s interest rate policy has impacted the U.S. economy. We’ll start with the good news. On April 30, 2024, inflation, as measured by the trailing 12-month rate on the Consumer Price Index, stood at 3.4%, down significantly from its most recent peak of 9.1% set in June 2022. Additionally, the higher Federal Funds target rate has been a boon for those investors with assets in fixed income, money market, and other interest-bearing accounts. The total value of assets held in U.S. money market accounts stood at $6.0 trillion on May 1, 2024, nearly double where it stood just five years ago. Notably, the weekly yield on the benchmark U.S. Treasury 3-Month Money Market Index more than doubled from 2.40% to 5.32% between the end of April 2019 and April 2024.
Now for the not-so-good news. Higher interest rates often restrict the ability of consumers and businesses to spend and finance growth, respectively. While the consumer has remained relatively unscathed thus far, evidence that they are stretching their budgets is mounting. The Federal Reserve Bank of New York reported that the total balance of U.S. credit card debt stood at a record $1.13 trillion at the end of 2023, while the average annual percentage rate for all cards rose to a record 21.59% in the first quarter of 2024. Perhaps unsurprisingly, delinquency rates have been surging. Data from the Federal Reserve Bank of St. Louis revealed that the delinquency rate on credit card loans for all U.S. commercial banks rose to 3.10% in the fourth quarter of 2023, up from 2.62% in the fourth quarter of 2019 (pre-COVID-19). In April 2024, 43% of small and mid-sized U.S. businesses were unable to pay their rent on time and in full. In addition, higher interest rates are impacting economic growth. In the U.S., real gross domestic product growth was a tepid 1.6% in the first quarter of 2024, far below consensus expectations of 2.5%. Not even the U.S. government is immune to the impacts of higher interest rates. At the end of the first quarter of 2024, the interest payments paid by the Federal government stood at a record $1.06 trillion, nearly double their total of $0.56 trillion at the end of the fourth quarter of 2019.
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 4/30/24 | | Inception
(8/5/14)
to 4/30/24 |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
ICE BofA 0-1 Year U.S. Treasury Index | | | | | | |
Bloomberg US Aggregate Bond 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 total returns would have been lower if certain fees had not been waived and expenses reimbursed 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. Prior to January 1, 2019, the price used was the midpoint between the highest bid and the lowest offer on the stock exchange on which shares of the Fund were listed for trading as of the time that the Fund’s NAV was calculated. Since shares of the Fund did not trade in the secondary market until after its inception, for the period from inception to the first day of secondary market trading in shares of the Fund, the NAV of the Fund is used as a proxy for the secondary market trading price to calculate market returns. NAV and market returns assume that all distributions have been reinvested in the Fund at NAV and Market Price, respectively.
An index is a statistical composite that tracks a specified financial market or sector. Unlike the Fund, the indices do not actually hold a portfolio of securities and therefore do not incur the expenses incurred by the Fund. These expenses negatively impact the performance of the Fund. Also, market returns do not include brokerage commissions that may be payable on secondary market transactions. If brokerage commissions were included, market returns would be lower. The total returns presented reflect the reinvestment of dividends on securities in the indices. The returns presented do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. The investment return and principal value of shares of the Fund will vary with changes in market conditions. Shares of the Fund may be worth more or less than their original cost when they are
Fund Performance Overview (Unaudited) (Continued)
First Trust Enhanced Short Maturity ETF (FTSM) (Continued)
redeemed or sold in the market. The Fund’s past performance is no guarantee of future performance.
| % 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, 3.88%, 04/30/25 | |
U.S. Treasury Inflation Indexed Bonds, 0.13%, 04/15/25 | |
U.S. Treasury Note, 4.63%, 02/28/25 | |
Plains All American Pipeline, L.P., 5.69%- 5.75%, 05/01/24 | |
AutoNation, Inc., 5.90%, 05/01/24 | |
Global Payments, Inc., 5.96%, 05/01/24 | |
T-Mobile US Trust, Series 2022-1A, Class A, 4.91%, 05/22/28 | |
Targa Resources Corp., 5.90%, 05/01/24 | |
Federal Home Loan Mortgage Corporation Multifamily Structured Pass Through Certificates, Series 2014-K041, Class A2, 3.17%, 10/25/24 | |
FMC Corp., 5.95%, 05/01/24 | |
| |
| Amount is less than 0.1%. |
| The ratings shown 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 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 Enhanced Short Maturity ETF (FTSM)Semi-Annual ReportApril 30, 2024 (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.
First Trust Enhanced Short Maturity ETF (FTSM)Understanding Your Fund ExpensesApril 30, 2024 (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 April 30, 2024.
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
November 1, 2023 | Ending
Account Value
April 30, 2024 | 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 (November 1, 2023 through April 30, 2024), multiplied by 182/366 (to reflect the six-month period). |
First Trust Enhanced Short Maturity ETF (FTSM)Portfolio of InvestmentsApril 30, 2024 (Unaudited)
| | | | |
CORPORATE BONDS AND NOTES — 47.1% |
| | |
| | | | |
| | | | |
| | |
| Auto Manufacturers — 0.3% | |
| Hyundai Capital America (a) | | | |
| Toyota Motor Credit Corp., Series B, SOFR + 0.29% (b) | | | |
| Volkswagen Group of America Finance LLC (a) | | | |
| | |
| | |
| Bank of America Corp. (c) | | | |
| Bank of America Corp. (c) | | | |
| Bank of America Corp. (c) | | | |
| Bank of America Corp. (c) | | | |
| | | | |
| Bank of New York Mellon (The) Corp. (c) | | | |
| Bank of New York Mellon (The) Corp. (c) | | | |
| Bank of New York Mellon (The) Corp. (c) | | | |
| Bank of New York Mellon (The) Corp. (c) | | | |
| | | | |
| | | | |
| Fifth Third Bank N.A. (c) | | | |
| Goldman Sachs Bank USA (c) | | | |
| Goldman Sachs Group (The), Inc., SOFR + 0.50% (b) | | | |
| Goldman Sachs Group (The), Inc., SOFR + 0.49% (b) | | | |
| Goldman Sachs Group (The), Inc. | | | |
| Huntington National Bank (c) | | | |
| | | | |
| JPMorgan Chase & Co., SOFR + 0.54% (b) | | | |
| JPMorgan Chase & Co., SOFR + 0.58% (b) | | | |
| | | | |
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| Morgan Stanley, SOFR + 0.51% (b) | | | |
| | | | |
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| Morgan Stanley Bank N.A. (c) | | | |
| PNC Financial Services Group (The), Inc. (c) | | | |
| PNC Financial Services Group (The), Inc. (c) | | | |
| PNC Financial Services Group (The), Inc. (c) | | | |
| | | | |
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| Truist Financial Corp., SOFR + 0.40% (b) | | | |
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See Notes to Financial Statements
First Trust Enhanced Short Maturity ETF (FTSM)Portfolio of Investments (Continued)April 30, 2024 (Unaudited) | | | | |
CORPORATE BONDS AND NOTES (Continued) |
| | |
| | | | |
| | | | |
| | |
| | |
| Constellation Brands, Inc. | | | |
| Constellation Brands, Inc. | | | |
| Constellation Brands, Inc. | | | |
| | | | |
| Molson Coors Beverage Co. | | | |
| PepsiCo, Inc., SOFR Compounded Index + 0.40% (b) | | | |
| | |
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| | | | |
| | |
| Building Materials — 1.3% | |
| | | | |
| | | | |
| Martin Marietta Materials, Inc. | | | |
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| | |
| Commercial Services — 0.8% | |
| | | | |
| | | | |
| | |
| | |
| | | | |
| Dell International LLC / EMC Corp. | | | |
| | |
| Diversified Financial Services — 2.0% | |
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| | | | |
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| | | | |
| | | | |
| Intercontinental Exchange, Inc. | | | |
| | | | |
| | |
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| CenterPoint Energy, Inc., SOFR Compounded Index + 0.65% (b) | | | |
| | | | |
| DTE Energy Co., steps up to 4.22% on 11/01/2024 (d) | | | |
See Notes to Financial Statements
First Trust Enhanced Short Maturity ETF (FTSM)Portfolio of Investments (Continued)April 30, 2024 (Unaudited) | | | | |
CORPORATE BONDS AND NOTES (Continued) |
| | |
| FirstEnergy Transmission LLC (a) | | | |
| Florida Power & Light Co. | | | |
| | | | |
| NextEra Energy Capital Holdings, Inc. | | | |
| Northern States Power Co. | | | |
| Oncor Electric Delivery Co. LLC | | | |
| Southwestern Public Service Co. | | | |
| Trans-Allegheny Interstate Line Co. (a) | | | |
| Virginia Electric and Power Co., Series A | | | |
| Virginia Power Fuel Securitization LLC, Series A-1 | | | |
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| Environmental Control — 1.1% | |
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| Healthcare-Products — 2.9% | |
| | | | |
| Baxter International, Inc. | | | |
| Baxter International, Inc., SOFR Compounded Index + 0.44% (b) | | | |
| GE HealthCare Technologies, Inc. | | | |
| GE HealthCare Technologies, Inc. | | | |
| | | | |
| | | | |
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| Thermo Fisher Scientific, Inc. | | | |
| Zimmer Biomet Holdings, Inc. | | | |
| Zimmer Biomet Holdings, Inc. | | | |
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| Healthcare-Services — 3.3% | |
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See Notes to Financial Statements
First Trust Enhanced Short Maturity ETF (FTSM)Portfolio of Investments (Continued)April 30, 2024 (Unaudited) | | | | |
CORPORATE BONDS AND NOTES (Continued) |
| Healthcare-Services (Continued) | |
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| Athene Global Funding, SOFR Compounded Index + 0.70% (a) (b) | | | |
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| 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 + 0.38% (a) (b) | | | |
| Willis North America, Inc. | | | |
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| Charter Communications Operating LLC / Charter Communications Operating Capital | | | |
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| Miscellaneous Manufacturing — 0.5% | |
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| Packaging & Containers — 0.7% | |
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See Notes to Financial Statements
First Trust Enhanced Short Maturity ETF (FTSM)Portfolio of Investments (Continued)April 30, 2024 (Unaudited) | | | | |
CORPORATE BONDS AND NOTES (Continued) |
| Pharmaceuticals (Continued) | |
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| Energy Transfer Operating LP | | | |
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| Enterprise Products Operating LLC | | | |
| Kinder Morgan Energy Partners, L.P. | | | |
| Plains All American Pipeline LP / PAA Finance Corp. | | | |
| Sabine Pass Liquefaction LLC | | | |
| Sabine Pass Liquefaction LLC | | | |
| Spectra Energy Partners, L.P. | | | |
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| Microchip Technology, Inc. | | | |
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| Cadence Design Systems, Inc. | | | |
| Fidelity National Information Services, Inc. | | | |
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| Telecommunications — 1.1% | |
| AT&T, Inc., 3 Mo. CME Term SOFR + CSA + 1.18% (b) | | | |
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| Verizon Communications, Inc. | | | |
See Notes to Financial Statements
First Trust Enhanced Short Maturity ETF (FTSM)Portfolio of Investments (Continued)April 30, 2024 (Unaudited) | | | | |
CORPORATE BONDS AND NOTES (Continued) |
| Telecommunications (Continued) | |
| Verizon Communications, Inc. | | | |
| Verizon Communications, Inc. | | | |
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| American Water Capital Corp. | | | |
| Total Corporate Bonds and Notes | |
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| | Annualized
Yield on Date of
Purchase | | |
|
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| L3Harris Technologies, Inc. | | | |
| L3Harris Technologies, Inc. | | | |
| L3Harris Technologies, Inc. | | | |
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| Auto Manufacturers — 2.4% | |
| American Honda Finance Corp. | | | |
| American Honda Finance Corp. | | | |
| American Honda Finance Corp. | | | |
| American Honda Finance Corp. | | | |
| General Motors Financial Co., Inc. | | | |
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| Toronto-Dominion Bank (The) | | | |
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| Building Materials — 1.3% | |
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| CRH America Finance, Inc. | | | |
| CRH America Finance, Inc. | | | |
See Notes to Financial Statements
First Trust Enhanced Short Maturity ETF (FTSM)Portfolio of Investments (Continued)April 30, 2024 (Unaudited) | | Annualized Yield on Date of Purchase | | |
COMMERCIAL PAPER (Continued) |
| Building Materials (Continued) | |
| CRH America Finance, Inc. | | | |
| CRH America Finance, Inc. | | | |
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| Commercial Services — 0.8% | |
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| Diversified Financial Services — 0.2% | |
| Intercontinental Exchange, Inc. | | | |
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| Southern California Edison Co. | | | |
| Virginia Electric and Power Co. | | | |
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| Environmental Control — 0.3% | |
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| Mondelez International, Inc. | | | |
| Mondelez International, Inc. | | | |
| Mondelez International, Inc. | | | |
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See Notes to Financial Statements
First Trust Enhanced Short Maturity ETF (FTSM)Portfolio of Investments (Continued)April 30, 2024 (Unaudited) | | Annualized Yield on Date of Purchase | | |
COMMERCIAL PAPER (Continued) |
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| Healthcare-Products — 0.5% | |
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| Marriott International, Inc. | | | |
| Marriott International, Inc. | | | |
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| Canadian Natural Resources Ltd. | | | |
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| Packaging & Containers — 0.3% | |
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| Plains All American Pipeline, L.P. | | | |
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| TransCanada PipeLines Ltd. | | | |
| TransCanada PipeLines Ltd. | | | |
See Notes to Financial Statements
First Trust Enhanced Short Maturity ETF (FTSM)Portfolio of Investments (Continued)April 30, 2024 (Unaudited) | | Annualized Yield on Date of Purchase | | |
COMMERCIAL PAPER (Continued) |
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| TransCanada PipeLines Ltd. | | | |
| TransCanada PipeLines Ltd. | | | |
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| Real Estate Investment Trusts — 0.8% | |
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| | | | |
| | |
| | |
| Alimentation Couche-Tard, Inc. | | | |
| Alimentation Couche-Tard, Inc. | | | |
| Alimentation Couche-Tard, Inc. | | | |
| Alimentation Couche-Tard, Inc. | | | |
| | | | |
| | |
| Telecommunications — 1.0% | |
| | | | |
| | | | |
| Verizon Communications, Inc. | | | |
| Verizon Communications, Inc. | | | |
| Verizon Communications, Inc. | | | |
| | |
| | |
| Canadian National Railway Co. | | | |
| | | | |
| | |
| | |
| | |
| | | | |
ASSET-BACKED SECURITIES — 12.3% |
| |
| Series 2020-SFR2, Class A (a) | | | |
| Series 2020-SFR1, Class A (a) | | | |
| Bank of America Auto Trust |
| Series 2023-2A, Class A2 (a) | | | |
| |
| | | | |
| | | | |
| | | | |
| |
| | | | |
| Citizens Auto Receivables Trust |
| Series 2024-1, Class A2A (a) | | | |
| Series 2024-2, Class A3 (a) | | | |
See Notes to Financial Statements
First Trust Enhanced Short Maturity ETF (FTSM)Portfolio of Investments (Continued)April 30, 2024 (Unaudited) | | | | |
ASSET-BACKED SECURITIES (Continued) |
| Corevest American Finance Trust |
| Series 2020-2, Class A (a) | | | |
| Dell Equipment Finance Trust |
| Series 2023-1, Class A2 (a) | | | |
| Series 2023-2, Class A2 (a) | | | |
| Series 2023-3, Class A2 (a) | | | |
| Flagship Credit Auto Trust |
| Series 2021-3, Class A (a) | | | |
| Ford Credit Auto Owner Trust |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| GM Financial Automobile Leasing Trust |
| | | | |
| GM Financial Consumer Automobile Receivables Trust |
| | | | |
| Honda Auto Receivables Owner Trust |
| | | | |
| | | | |
| | | | |
| |
| Series 2024-1A, Class A2 (a) | | | |
| |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| Kubota Credit Owner Trust |
| Series 2024-1A, Class A2 (a) | | | |
| Mercedes-Benz Auto Lease Trust |
| | | | |
| | | | |
| Mercedes-Benz Auto Receivables Trust |
| | | | |
| | | | |
| | | | |
| | | | |
| |
| Series 2018-1A, Class A (a) | | | |
| Porsche Financial Auto Securitization Trust |
| Series 2023-2A, Class A2A (a) | | | |
| |
| Series 2022-1A, Class A (a) | | | |
| Series 2024-1A, Class A (a) | | | |
| Toyota Auto Receivables Owner Trust |
| | | | |
| | | | |
| | | | |
See Notes to Financial Statements
First Trust Enhanced Short Maturity ETF (FTSM)Portfolio of Investments (Continued)April 30, 2024 (Unaudited) | | | | |
ASSET-BACKED SECURITIES (Continued) |
| Toyota Auto Receivables Owner Trust (Continued) |
| | | | |
| | | | |
| | | | |
| | | | |
| |
| | | | |
| Series 2022-7, Class A1A, steps up to 5.98% on 11/20/24 (d) | | | |
| | | | |
| | | | |
| Volkswagen Auto Lease Trust |
| | | | |
| World Omni Auto Receivables Trust |
| | | | |
| | | | |
| Total Asset-Backed Securities | |
| | |
FOREIGN CORPORATE BONDS AND NOTES — 8.8% |
| | |
| Bank of Montreal, SOFR Compounded Index + 0.32% (b) | | | |
| Bank of Montreal, Series H | | | |
| Bank of Nova Scotia (The), SOFR + 0.38% (b) | | | |
| Banque Federative du Credit Mutuel S.A., SOFR Compounded Index + 0.41% (a) (b) | | | |
| | | | |
| | | | |
| Cooperatieve Rabobank U.A. | | | |
| Cooperatieve Rabobank U.A. | | | |
| | | | |
| 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, SOFR Compounded Index + 0.36% (b) | | | |
| | | | |
| | | | |
| Sumitomo Mitsui Trust Bank Ltd., SOFR + 0.44% (a) (b) | | | |
| Svenska Handelsbanken NY, SOFR + 0.23% (b) | | | |
| UBS AG/London, SOFR + 0.45% (a) (b) | | | |
| UBS AG/London, SOFR + 0.47% (a) (b) | | | |
| | | | |
| | | | |
| | |
| | |
| | | | |
| | | | |
| | |
See Notes to Financial Statements
First Trust Enhanced Short Maturity ETF (FTSM)Portfolio of Investments (Continued)April 30, 2024 (Unaudited) | | | | |
FOREIGN CORPORATE BONDS AND NOTES (Continued) |
| | |
| | | | |
| Cosmetics/Personal Care — 0.3% | |
| | | | |
| | |
| Mondelez International Holdings Netherlands B.V. (a) | | | |
| Mondelez International Holdings Netherlands B.V. (a) | | | |
| Mondelez International Holdings Netherlands B.V. (a) | | | |
| | |
| Healthcare-Products — 0.2% | |
| DH Europe Finance II Sarl | | | |
| Healthcare-Services — 0.1% | |
| | | | |
| | |
| | | | |
| | |
| | | | |
| | |
| Canadian Natural Resources Ltd. | | | |
| Packaging & Containers — 0.2% | |
| | | | |
| | |
| GlaxoSmithKline Capital PLC | | | |
| Pfizer Investment Enterprises Pte. Ltd. | | | |
| | |
| | |
| | | | |
| | |
| Canadian Pacific Railway Co. | | | |
| Total Foreign Corporate Bonds and Notes | |
| | |
U.S. GOVERNMENT BONDS AND NOTES — 3.3% |
| U.S. Treasury Inflation Indexed Bonds | | | |
| | | | |
| | | | |
| Total U.S. Government Bonds and Notes | |
| | |
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES — 3.0% |
| Collateralized Mortgage Obligations — 0.1% | |
| Federal Home Loan Mortgage Corporation | | | |
| Series 2017-4671, Class CA | | | |
| Federal National Mortgage Association | | | |
| | | | |
| | | | |
| | | | |
| | |
See Notes to Financial Statements
First Trust Enhanced Short Maturity ETF (FTSM)Portfolio of Investments (Continued)April 30, 2024 (Unaudited) | | | | |
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES (Continued) |
| Commercial Mortgage-Backed Securities — 2.9% | |
| Federal Home Loan Mortgage Corporation Multifamily Structured Pass Through Certificates | | | |
| Series 2014-K040, Class A2 | | | |
| Series 2014-K041, Class A2 | | | |
| Series 2015-K043, Class A2 | | | |
| Series 2015-K045, Class A2 | | | |
| Series 2015-K046, Class A2 | | | |
| Series 2017-K728, Class AM | | | |
| Series 2017-K729, Class A2 | | | |
| Series 2017-KL1E, Class A1E | | | |
| Series 2018-K732, Class A2 | | | |
| | |
| 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 — 0.6% |
| 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 09/01/24 (a) (d) | | | |
| |
| Series 2020-NQM1, Class A1 (a) | | | |
| |
| Series 2019-7, Class A11, 1 Mo. CME Term SOFR + CSA + 0.90% (a) (b) | | | |
See Notes to Financial Statements
First Trust Enhanced Short Maturity ETF (FTSM)Portfolio of Investments (Continued)April 30, 2024 (Unaudited) | | | | |
MORTGAGE-BACKED SECURITIES (Continued) |
| Collateralized Mortgage Obligations (Continued) | |
| JP Morgan Mortgage Trust (Continued) |
| 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-LTV3, Class A11, 1 Mo. CME Term SOFR + CSA + 0.85% (a) (b) | | | |
| Series 2020-2, Class A11, 1 Mo. CME Term SOFR + CSA + 0.80%, 6.00% Cap (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 07/01/24 (a) (d) | | | |
| | |
| Commercial Mortgage-Backed Securities — 0.1% | |
| GS Mortgage Securities Trust |
| Series 2014-GC24, Class A4 | | | |
| | |
| Total Mortgage-Backed Securities | |
| | |
|
|
| 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 April 30, 2024, securities noted as such amounted to $584,140,817 or 9.0% 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 April 30, 2024. At a predetermined date, the fixed rate will change to a floating rate or a variable rate. |
| 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 |
See Notes to Financial Statements
First Trust Enhanced Short Maturity ETF (FTSM)Portfolio of Investments (Continued)April 30, 2024 (Unaudited)
Valuation InputsA summary of the inputs used to value the Fund’s investments as of April 30, 2024 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
April 30, 2024 (Unaudited)
| |
| |
| |
| |
| |
|
| |
| |
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 Six Months Ended April 30, 2024 (Unaudited)
| |
| |
| |
|
| |
| |
| |
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
| Six Months
Ended
4/30/2024 (Unaudited) | |
| | |
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
| Six Months
Ended
4/30/2024
(Unaudited) | |
| | | | | |
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 (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 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)April 30, 2024 (Unaudited) 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 twenty-two 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.
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)April 30, 2024 (Unaudited) 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.
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 ability to access additional liquidity through public and/or private markets; and
Notes to Financial Statements (Continued)
First Trust Enhanced Short Maturity ETF (FTSM)April 30, 2024 (Unaudited) 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 April 30, 2024, 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.
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.
Notes to Financial Statements (Continued)
First Trust Enhanced Short Maturity ETF (FTSM)April 30, 2024 (Unaudited) The tax character of distributions paid during the fiscal year 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) | |
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 April 30, 2024, 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 non-expiring 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.
As of April 30, 2024, 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) |
| | | |
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 Enhanced Short Maturity ETF (FTSM)April 30, 2024 (Unaudited) 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 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 | |
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, 2025. 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 six months ended April 30, 2024, there were no fees waived by the Advisor.
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 Chairs of the Audit Committee, Nominating and Governance Committee and Valuation Committee, the Vice Chair of the Audit Committee, the Lead Independent Trustee and the Vice Lead Independent Trustee 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 Committee Chairs, the Audit Committee Vice Chair, the Lead Independent Trustee and the Vice Lead Independent Trustee rotate periodically in serving in such capacities. 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 six months ended April 30, 2024, were $0 and $1,308,129,676, respectively. The proceeds from sales and paydowns of U.S. Government securities and non-U.S. Government securities, excluding short-term investments, for the six months ended April 30, 2024 were $267,888,250 and $852,363,247, respectively.
For the six months ended April 30, 2024, 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 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
Notes to Financial Statements (Continued)
First Trust Enhanced Short Maturity ETF (FTSM)April 30, 2024 (Unaudited) 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.
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.
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.
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.
First Trust Enhanced Short Maturity ETF (FTSM)April 30, 2024 (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.
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.
Risks are inherent in all investing. Certain general risks that may be applicable to a Fund are identified below, but not all of the material risks relevant to each Fund are included in this report and not all of the risks below apply to each Fund. The material risks of investing in each Fund are spelled out in its prospectus, statement of additional information and other regulatory filings. Before investing, you should consider each Fund’s investment objective, risks, charges and expenses, and read each Fund’s prospectus and statement of additional information carefully. You can download each Fund’s prospectus at www.ftportfolios.com or contact First Trust Portfolios L.P. at (800) 621-1675 to request a prospectus, which contains this and other information about each Fund.
Concentration Risk. To the extent that a fund is able to invest a significant percentage of its assets in a single asset class or the securities of issuers within the same country, state, region, industry or sector, an adverse economic, business or political development may affect the value of the fund’s investments more than if the fund were more broadly diversified. A fund that tracks an index will be concentrated to the extent the fund’s corresponding index is concentrated. A concentration makes a fund more susceptible to any single occurrence and may subject the fund to greater market risk than a fund that is more broadly diversified.
Credit Risk. Credit risk is the risk that an issuer of a security will be unable or unwilling to make dividend, interest and/or principal payments when due and the related risk that the value of a security may decline because of concerns about the issuer’s ability to make such payments.
Cyber Security Risk. The funds are susceptible to potential operational risks through breaches in cyber security. A breach in cyber security refers to both intentional and unintentional events that may cause a fund to lose proprietary information, suffer data corruption or lose operational capacity. Such events could cause a fund to incur regulatory penalties, reputational damage, additional compliance costs associated with corrective measures and/or financial loss. In addition, cyber security breaches of a fund’s third-party service providers, such as its administrator, transfer agent, custodian, or sub-advisor, as applicable, or issuers in which the fund invests, can also subject a fund to many of the same risks associated with direct cyber security breaches.
Defined Outcome Funds Risk. To the extent a fund’s investment strategy is designed to deliver returns tied to the price performance of an underlying ETF, an investor may not realize the returns the fund seeks to achieve if that investor does not hold shares for the entire target outcome period. In the event an investor purchases shares after the first day of the target outcome period or sells shares prior to the end of the target outcome period, the buffer that the fund seeks to provide against a decline in the value of the underlying ETF may not be available, the enhanced returns that the fund seeks to provide (if any) may not be available and the investor may not participate in a gain in the value of the underlying ETF up to the cap for the investor’s investment period. Additionally, the fund will not participate in gains of the underlying ETF above the cap and a shareholder may lose their entire investment. If the fund seeks enhanced returns, there are certain time periods when the value of the fund may fall faster than the value of the underlying ETF, and it is very unlikely that, on any given day during which the underlying ETF share price increases in value, the fund’s share price will increase at the same rate as the enhanced returns sought by the fund, which is designed for an entire target outcome period. Trading flexible exchange options involves risks different from, or possibly greater than, the risks associated with investing directly in securities, such as less liquidity and correlation and valuation risks. A fund may experience substantial downside from specific flexible exchange option positions and certain positions may expire worthless.
Derivatives Risk. To the extent a fund uses derivative instruments such as futures contracts, options contracts and swaps, the fund may experience losses because of adverse movements in the price or value of the underlying asset, index or rate, which may be
Additional Information (Continued)
First Trust Enhanced Short Maturity ETF (FTSM)April 30, 2024 (Unaudited) 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 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
Additional Information (Continued)
First Trust Enhanced Short Maturity ETF (FTSM)April 30, 2024 (Unaudited) 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 inaccurate asset pricing. A fund may hold investments in sizes smaller than institutionally sized round lot positions (sometimes referred to as odd lots). However, third-party pricing services generally provide evaluations on the basis of institutionally-sized round lots. If a fund sells certain of its investments in an odd lot transaction, the sale price may be less than the value at which such securities
Additional Information (Continued)
First Trust Enhanced Short Maturity ETF (FTSM)April 30, 2024 (Unaudited) have been held by the fund. Odd lots often trade at lower prices than institutional round lots. There is no assurance that the fund will be able to sell a portfolio security at the price established by the pricing service, which could result in a loss to the fund.
NOT FDIC INSURED NOT BANK GUARANTEED MAY LOSE VALUE
Liquidity Risk Management Program
In accordance with Rule 22e-4 under the Investment Company Act of 1940, as amended (the “1940 Act”), the Fund and each other fund in the First Trust Fund Complex, other than the closed-end funds, have adopted and implemented a liquidity risk management program (the “Program”) reasonably designed to assess and manage the funds’ liquidity risk, i.e., the risk that a fund could not meet requests to redeem shares issued by the fund without significant dilution of remaining investors’ interests in the fund. The Board of Trustees of the First Trust Funds has appointed First Trust Advisors L.P. (the “Advisor”) as the person designated to administer the Program, and in this capacity the Advisor performs its duties primarily through the activities and efforts of the First Trust Liquidity Committee.
Pursuant to the Program, the Liquidity Committee classifies the liquidity of each fund’s portfolio investments into one of the four liquidity categories specified by Rule 22e-4: highly liquid investments, moderately liquid investments, less liquid investments and illiquid investments. The Liquidity Committee determines certain of the inputs for this classification process, including reasonably anticipated trade sizes and significant investor dilution thresholds. The Liquidity Committee also determines and periodically reviews a highly liquid investment minimum for certain funds, monitors the funds’ holdings of assets classified as illiquid investments to seek to ensure they do not exceed 15% of a fund’s net assets and establishes policies and procedures regarding redemptions in kind.
At the April 25, 2024 meeting of the Board of Trustees, as required by Rule 22e-4 and the Program, the Advisor provided the Board with a written report prepared by the Advisor that addressed the operation of the Program during the period from March 23, 2023 through the Liquidity Committee’s annual meeting held on March 14, 2024 and assessed the Program’s adequacy and effectiveness of implementation during this period, including the operation of the highly liquid investment minimum for each fund that is required under the Program to have one, and any material changes to the Program. Note that because the Fund primarily holds assets that are highly liquid investments, the Fund has not adopted a highly liquid investment minimum.
As stated in the written report, during the review period, no fund breached the 15% limitation on illiquid investments, no fund with a highly liquid investment minimum breached that minimum during the reporting period and no fund was required to file a Form N-RN during the reporting period. The Advisor concluded that each fund’s investment strategy is appropriate for an open-end fund; that the Program operated effectively in all material respects during the review period; and that the Program is reasonably designed to assess and manage the liquidity risk of each fund and to maintain compliance with Rule 22e-4.
First Trust Exchange-Traded Fund IV
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
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)
|
Semi-Annual Report
For the Six Months Ended
April 30, 2024 |
First Trust High Income Strategic Focus ETF (HISF)
Semi-Annual Report
April 30, 2024
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.
This report contains information that may help you evaluate your investment in the Fund. It includes details about the Fund and presents data and analysis that provide insight into the Fund’s performance and investment approach.
The statistical information that follows may help you understand the Fund’s performance compared to that of relevant market benchmarks.
It is important to keep in mind that the opinions expressed by personnel of the Advisor are just that: informed opinions. They should not be considered to be promises or advice. The opinions, like the statistics, cover the period through the date on the cover of this report. The material risks of investing in the Fund are spelled out in the prospectus, the statement of additional information, and other Fund regulatory filings.
First Trust High Income Strategic Focus ETF (HISF)
Semi-Annual Letter from the Chairman and CEO
April 30, 2024
First Trust is pleased to provide you with the semi-annual report for the First Trust High Income Strategic Focus ETF (the “Fund”), which contains detailed information about the Fund for the six-month period ended April 30, 2024.
On March 16, 2022, the Federal Reserve (the “Fed”) initiated the first of what have been eleven increases to the Federal Funds target rate thus far in the current cycle. Given its potential impact, financial pundits have been debating the direction and timing of the Fed’s interest rate policy ever since. In December 2023, the Fed gave some guidance, announcing that it expected to implement up to three interest rate cuts totaling 75 basis points (“bps”) in 2024. Investors responded to the news with exuberance. In the U.S., the S&P 500® Index surged by 10.56% on a total return basis in the first quarter of 2024, adding to its already stunning 26.29% total return in 2023. For comparison, the yield on the 10-Year Treasury Note (“T-Note”) stood at 3.80% on December 27, 2023, down a stunning 119 bps from its most recent high of 4.99% set just months prior on October 19, 2023. Bond yields generally move in the opposite direction of prices. Given this relationship, the decline in the 10-Year T-Note’s yield is indicative of investor’s desire to lock in higher income payments prior to the Fed reducing its policy rate.
At this point, it makes sense to step back and highlight several ways the Fed’s interest rate policy has impacted the U.S. economy. We’ll start with the good news. On April 30, 2024, inflation, as measured by the trailing 12-month rate on the Consumer Price Index, stood at 3.4%, down significantly from its most recent peak of 9.1% set in June 2022. Additionally, the higher Federal Funds target rate has been a boon for those investors with assets in fixed income, money market, and other interest-bearing accounts. The total value of assets held in U.S. money market accounts stood at $6.0 trillion on May 1, 2024, nearly double where it stood just five years ago. Notably, the weekly yield on the benchmark U.S. Treasury 3-Month Money Market Index more than doubled from 2.40% to 5.32% between the end of April 2019 and April 2024.
Now for the not-so-good news. Higher interest rates often restrict the ability of consumers and businesses to spend and finance growth, respectively. While the consumer has remained relatively unscathed thus far, evidence that they are stretching their budgets is mounting. The Federal Reserve Bank of New York reported that the total balance of U.S. credit card debt stood at a record $1.13 trillion at the end of 2023, while the average annual percentage rate for all cards rose to a record 21.59% in the first quarter of 2024. Perhaps unsurprisingly, delinquency rates have been surging. Data from the Federal Reserve Bank of St. Louis revealed that the delinquency rate on credit card loans for all U.S. commercial banks rose to 3.10% in the fourth quarter of 2023, up from 2.62% in the fourth quarter of 2019 (pre-COVID-19). In April 2024, 43% of small and mid-sized U.S. businesses were unable to pay their rent on time and in full. In addition, higher interest rates are impacting economic growth. In the U.S., real gross domestic product growth was a tepid 1.6% in the first quarter of 2024, far below consensus expectations of 2.5%. Not even the U.S. government is immune to the impacts of higher interest rates. At the end of the first quarter of 2024, the interest payments paid by the Federal government stood at a record $1.06 trillion, nearly double their total of $0.56 trillion at the end of the fourth quarter of 2019.
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.”
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| | | Average Annual Total Returns | |
| | | | Inception
(8/13/14)
to 4/30/24 | | Inception
(8/13/14)
to 4/30/24 |
| | | | | | |
| | | | | | |
| | | | | | |
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Bloomberg U.S. Aggregate Bond Index | | | | | | |
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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 US Aggregate Bond Index (70%) and the ICE BofA U.S. High Yield Constrained Index (30%). The Blended Benchmark returns are calculated by using the monthly returns of the two indices during each period shown above. At the beginning of each month the two indices are rebalanced to a 70/30 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. |
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 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 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.
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Net Other Assets and Liabilities | |
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| Amount is less than 0.1%. |
| 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)Semi-Annual ReportApril 30, 2024 (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, 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:
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.
First Trust High Income Strategic Focus ETF (HISF)Understanding Your Fund ExpensesApril 30, 2024 (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 April 30, 2024.
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
November 1, 2023 | Ending
Account Value
April 30, 2024 | 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 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 (November 1, 2023 through April 30, 2024), multiplied by 182/366 (to reflect the six-month period). |
First Trust High Income Strategic Focus ETF (HISF)Portfolio of InvestmentsApril 30, 2024 (Unaudited)
| | |
EXCHANGE-TRADED FUNDS — 99.9% |
| Capital Markets (a) — 99.9% | |
| First Trust Emerging Markets Local Currency Bond ETF | |
| First Trust Intermediate Duration Investment Grade Corporate ETF | |
| First Trust Limited Duration Investment Grade Corporate ETF | |
| First Trust Long Duration Opportunities ETF | |
| First Trust Low Duration Opportunities ETF | |
| First Trust Senior Loan Fund | |
| First Trust Tactical High Yield ETF | |
| First Trust TCW Opportunistic Fixed Income ETF | |
| Total Exchange-Traded Funds | |
| | |
MONEY MARKET FUNDS — 0.1% |
| Dreyfus Government Cash Management Fund, Institutional Shares - 5.19% (b) | |
| | |
|
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| Total Investments — 100.0% | |
| | |
| Net Other Assets and Liabilities — (0.0)% | |
| | |
| Represents investments in affiliated funds. |
| Rate shown reflects yield as of April 30, 2024. |
Valuation InputsA summary of the inputs used to value the Fund’s investments as of April 30, 2024 is as follows (see Note 2A - Portfolio Valuation in the Notes to Financial Statements):
| | | 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
First Trust High Income Strategic Focus ETF (HISF)Statement of Assets and Liabilities
April 30, 2024 (Unaudited)
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Investments, at value - Affiliated | |
Investments, at value - Unaffiliated | |
Total investments, at value | |
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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) | |
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 Six Months Ended April 30, 2024 (Unaudited)
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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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Investments - Unaffiliated | |
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Net change in unrealized appreciation (depreciation) on: | |
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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
| Six Months
Ended
4/30/2024 (Unaudited) | |
| | |
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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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 | | |
See Notes to Financial Statements
First Trust High Income Strategic Focus ETF (HISF)Financial Highlights
For a share outstanding throughout each period
| Six Months
Ended
4/30/2024
(Unaudited) | |
| | | | | |
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 (d) | | | | | | |
Ratio of net expenses to average net assets (d) | | | | | | |
Ratio of net investment income (loss) to average net assets (d) | | | | | | |
Portfolio turnover rate (f) | | | | | | |
| 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. |
| Ratios of expenses to average net assets and ratio of net investment income (loss) to average net assets do not reflect the Fund’s proportionate share of expenses and income of underlying investment companies in which the Fund invests. |
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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. |
| 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)April 30, 2024 (Unaudited) 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 twenty-two 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.
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.
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
Notes to Financial Statements (Continued)
First Trust High Income Strategic Focus ETF (HISF)April 30, 2024 (Unaudited) 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 April 30, 2024, 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.
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)April 30, 2024 (Unaudited) 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. The affiliated funds’ financial statements may be found at SEC.gov. 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 in affiliated funds at April 30, 2024, and for the six months then ended are as follows:
| | | | | Change in
Unrealized
Appreciation
(Depreciation) | | | |
First Trust Emerging Markets Local Currency Bond ETF | | | | | | | | |
First Trust Enhanced Short Maturity ETF | | | | | | | | |
First Trust Institutional Preferred Securities and Income ETF | | | | | | | | |
First Trust Intermediate Duration Investment Grade Corporate ETF | | | | | | | | |
First Trust Limited Duration Investment Grade Corporate ETF | | | | | | | | |
First Trust Long Duration Opportunities ETF | | | | | | | | |
First Trust Low Duration Opportunities ETF | | | | | | | | |
First Trust Senior Loan Fund | | | | | | | | |
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 year ended October 31, 2023 was as follows:
Notes to Financial Statements (Continued)
First Trust High Income Strategic Focus ETF (HISF)April 30, 2024 (Unaudited) 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) | |
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 April 30, 2024, 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 non-expiring 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.
As of April 30, 2024, 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) |
| | | |
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
Notes to Financial Statements (Continued)
First Trust High Income Strategic Focus ETF (HISF)April 30, 2024 (Unaudited) 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 Chairs of the Audit Committee, Nominating and Governance Committee and Valuation Committee, the Vice Chair of the Audit Committee, the Lead Independent Trustee and the Vice Lead Independent Trustee 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 Committee Chairs, the Audit Committee Vice Chair, the Lead Independent Trustee and the Vice Lead Independent Trustee rotate periodically in serving in such capacities. The officers and “Interested” Trustee receive no compensation from the Trust for acting in such capacities.
4. Purchases and Sales of Securities
For the six months ended April 30, 2024, the cost of purchases and proceeds from sales of investments, excluding short-term investments and in-kind transactions, were $8,464,392 and $8,461,145, respectively.
For the six months ended April 30, 2024, the cost of in-kind purchases and proceeds from in-kind sales were $2,212,974 and $0, 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 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
Notes to Financial Statements (Continued)
First Trust High Income Strategic Focus ETF (HISF)April 30, 2024 (Unaudited) 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.
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.
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.
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.
First Trust High Income Strategic Focus ETF (HISF)April 30, 2024 (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.
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.
Risks are inherent in all investing. Certain general risks that may be applicable to a Fund are identified below, but not all of the material risks relevant to each Fund are included in this report and not all of the risks below apply to each Fund. The material risks of investing in each Fund are spelled out in its prospectus, statement of additional information and other regulatory filings. Before investing, you should consider each Fund’s investment objective, risks, charges and expenses, and read each Fund’s prospectus and statement of additional information carefully. You can download each Fund’s prospectus at www.ftportfolios.com or contact First Trust Portfolios L.P. at (800) 621-1675 to request a prospectus, which contains this and other information about each Fund.
Concentration Risk. To the extent that a fund is able to invest a significant percentage of its assets in a single asset class or the securities of issuers within the same country, state, region, industry or sector, an adverse economic, business or political development may affect the value of the fund’s investments more than if the fund were more broadly diversified. A fund that tracks an index will be concentrated to the extent the fund’s corresponding index is concentrated. A concentration makes a fund more susceptible to any single occurrence and may subject the fund to greater market risk than a fund that is more broadly diversified.
Credit Risk. Credit risk is the risk that an issuer of a security will be unable or unwilling to make dividend, interest and/or principal payments when due and the related risk that the value of a security may decline because of concerns about the issuer’s ability to make such payments.
Cyber Security Risk. The funds are susceptible to potential operational risks through breaches in cyber security. A breach in cyber security refers to both intentional and unintentional events that may cause a fund to lose proprietary information, suffer data corruption or lose operational capacity. Such events could cause a fund to incur regulatory penalties, reputational damage, additional compliance costs associated with corrective measures and/or financial loss. In addition, cyber security breaches of a fund’s third-party service providers, such as its administrator, transfer agent, custodian, or sub-advisor, as applicable, or issuers in which the fund invests, can also subject a fund to many of the same risks associated with direct cyber security breaches.
Defined Outcome Funds Risk. To the extent a fund’s investment strategy is designed to deliver returns tied to the price performance of an underlying ETF, an investor may not realize the returns the fund seeks to achieve if that investor does not hold shares for the entire target outcome period. In the event an investor purchases shares after the first day of the target outcome period or sells shares prior to the end of the target outcome period, the buffer that the fund seeks to provide against a decline in the value of the underlying ETF may not be available, the enhanced returns that the fund seeks to provide (if any) may not be available and the investor may not participate in a gain in the value of the underlying ETF up to the cap for the investor’s investment period. Additionally, the fund will not participate in gains of the underlying ETF above the cap and a shareholder may lose their entire investment. If the fund seeks enhanced returns, there are certain time periods when the value of the fund may fall faster than the value of the underlying ETF, and it is very unlikely that, on any given day during which the underlying ETF share price increases in value, the fund’s share price will increase at the same rate as the enhanced returns sought by the fund, which is designed for an entire target outcome period. Trading flexible exchange options involves risks different from, or possibly greater than, the risks associated with investing directly in securities, such as less liquidity and correlation and valuation risks. A fund may experience substantial downside from specific flexible exchange option positions and certain positions may expire worthless.
Additional Information (Continued)
First Trust High Income Strategic Focus ETF (HISF)April 30, 2024 (Unaudited) 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.
Additional Information (Continued)
First Trust High Income Strategic Focus ETF (HISF)April 30, 2024 (Unaudited) 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
Additional Information (Continued)
First Trust High Income Strategic Focus ETF (HISF)April 30, 2024 (Unaudited) 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
Liquidity Risk Management Program
In accordance with Rule 22e-4 under the Investment Company Act of 1940, as amended (the “1940 Act”), the Fund and each other fund in the First Trust Fund Complex, other than the closed-end funds, have adopted and implemented a liquidity risk management program (the “Program”) reasonably designed to assess and manage the funds’ liquidity risk, i.e., the risk that a fund could not meet requests to redeem shares issued by the fund without significant dilution of remaining investors’ interests in the fund. The Board of Trustees of the First Trust Funds has appointed First Trust Advisors L.P. (the “Advisor”) as the person designated to administer the Program, and in this capacity the Advisor performs its duties primarily through the activities and efforts of the First Trust Liquidity Committee.
Pursuant to the Program, the Liquidity Committee classifies the liquidity of each fund’s portfolio investments into one of the four liquidity categories specified by Rule 22e-4: highly liquid investments, moderately liquid investments, less liquid investments and illiquid investments. The Liquidity Committee determines certain of the inputs for this classification process, including reasonably anticipated trade sizes and significant investor dilution thresholds. The Liquidity Committee also determines and periodically reviews a highly liquid investment minimum for certain funds, monitors the funds’ holdings of assets classified as illiquid investments to seek to ensure they do not exceed 15% of a fund’s net assets and establishes policies and procedures regarding redemptions in kind.
At the April 25, 2024 meeting of the Board of Trustees, as required by Rule 22e-4 and the Program, the Advisor provided the Board with a written report prepared by the Advisor that addressed the operation of the Program during the period from March 23, 2023 through the Liquidity Committee’s annual meeting held on March 14, 2024 and assessed the Program’s adequacy and effectiveness of implementation during this period, including the operation of the highly liquid investment minimum for each fund that is required under the Program to have one, and any material changes to the Program. Note that because the Fund primarily holds assets that are highly liquid investments, the Fund has not adopted a highly liquid investment minimum.
As stated in the written report, during the review period, no fund breached the 15% limitation on illiquid investments, no fund with a highly liquid investment minimum breached that minimum during the reporting period and no fund was required to file a Form N-RN during the reporting period. The Advisor concluded that each fund’s investment strategy is appropriate for an open-end fund; that the Program operated effectively in all material respects during the review period; and that the Program is reasonably designed to assess and manage the liquidity risk of each fund and to maintain compliance with Rule 22e-4.
First Trust Exchange-Traded Fund IV
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
Chapman and Cutler LLP
320 South Canal Street
Chicago, IL 60606
|
For the Six Months Ended
April 30, 2024 |
First Trust Exchange-Traded Fund IV
First Trust Low Duration Opportunities ETF (LMBS) |
First Trust Low Duration Opportunities ETF (LMBS)
Semi-Annual Report
April 30, 2024
Caution Regarding Forward-Looking Statements
This report contains certain forward-looking statements within the meaning of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended. Forward-looking statements include statements regarding the goals, beliefs, plans or current expectations of First Trust Advisors L.P. (“First Trust” or the “Advisor”) and its representatives, taking into account the information currently available to them. Forward-looking statements include all statements that do not relate solely to current or historical fact. For example, forward-looking statements include the use of words such as “anticipate,” “estimate,” “intend,” “expect,” “believe,” “plan,” “may,” “should,” “would” or other words that convey uncertainty of future events or outcomes.
Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the series of First Trust Exchange-Traded Fund IV (the “Trust”) described in this report (First Trust Low Duration Opportunities ETF; hereinafter referred to as the “Fund”) to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. When evaluating the information included in this report, you are cautioned not to place undue reliance on these forward-looking statements, which reflect the judgment of the Advisor and its representatives only as of the date hereof. We undertake no obligation to publicly revise or update these forward-looking statements to reflect events and circumstances that arise after the date hereof.
Performance and Risk Disclosure
There is no assurance that the Fund will achieve its investment objectives. The Fund is subject to market risk, which is the possibility that the market values of securities owned by the Fund will decline and that the value of the Fund’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.
This report contains information that may help you evaluate your investment in the Fund. It includes details about the Fund and presents data and analysis that provide insight into the Fund’s performance and investment approach.
The statistical information that follows may help you understand the Fund’s performance compared to that of relevant market benchmarks.
It is important to keep in mind that the opinions expressed by personnel of the Advisor are just that: informed opinions. They should not be considered to be promises or advice. The opinions, like the statistics, cover the period through the date on the cover of this report. The material risks of investing in the Fund are spelled out in the prospectus, the statement of additional information, and other Fund regulatory filings.
First Trust Low Duration Opportunities ETF (LMBS)
Semi-Annual Letter from the Chairman and CEO
April 30, 2024
First Trust is pleased to provide you with the semi-annual report for the First Trust Low Duration Opportunities ETF (the “Fund”), which contains detailed information about the Fund for the six-month period ended April 30, 2024.
On March 16, 2022, the Federal Reserve (the “Fed”) initiated the first of what have been eleven increases to the Federal Funds target rate thus far in the current cycle. Given its potential impact, financial pundits have been debating the direction and timing of the Fed’s interest rate policy ever since. In December 2023, the Fed gave some guidance, announcing that it expected to implement up to three interest rate cuts totaling 75 basis points (“bps”) in 2024. Investors responded to the news with exuberance. In the U.S., the S&P 500® Index surged by 10.56% on a total return basis in the first quarter of 2024, adding to its already stunning 26.29% total return in 2023. For comparison, the yield on the 10-Year Treasury Note (“T-Note”) stood at 3.80% on December 27, 2023, down a stunning 119 bps from its most recent high of 4.99% set just months prior on October 19, 2023. Bond yields generally move in the opposite direction of prices. Given this relationship, the decline in the 10-Year T-Note’s yield is indicative of investor’s desire to lock in higher income payments prior to the Fed reducing its policy rate.
At this point, it makes sense to step back and highlight several ways the Fed’s interest rate policy has impacted the U.S. economy. We’ll start with the good news. On April 30, 2024, inflation, as measured by the trailing 12-month rate on the Consumer Price Index, stood at 3.4%, down significantly from its most recent peak of 9.1% set in June 2022. Additionally, the higher Federal Funds target rate has been a boon for those investors with assets in fixed income, money market, and other interest-bearing accounts. The total value of assets held in U.S. money market accounts stood at $6.0 trillion on May 1, 2024, nearly double where it stood just five years ago. Notably, the weekly yield on the benchmark U.S. Treasury 3-Month Money Market Index more than doubled from 2.40% to 5.32% between the end of April 2019 and April 2024.
Now for the not-so-good news. Higher interest rates often restrict the ability of consumers and businesses to spend and finance growth, respectively. While the consumer has remained relatively unscathed thus far, evidence that they are stretching their budgets is mounting. The Federal Reserve Bank of New York reported that the total balance of U.S. credit card debt stood at a record $1.13 trillion at the end of 2023, while the average annual percentage rate for all cards rose to a record 21.59% in the first quarter of 2024. Perhaps unsurprisingly, delinquency rates have been surging. Data from the Federal Reserve Bank of St. Louis revealed that the delinquency rate on credit card loans for all U.S. commercial banks rose to 3.10% in the fourth quarter of 2023, up from 2.62% in the fourth quarter of 2019 (pre-COVID-19). In April 2024, 43% of small and mid-sized U.S. businesses were unable to pay their rent on time and in full. In addition, higher interest rates are impacting economic growth. In the U.S., real gross domestic product growth was a tepid 1.6% in the first quarter of 2024, far below consensus expectations of 2.5%. Not even the U.S. government is immune to the impacts of higher interest rates. At the end of the first quarter of 2024, the interest payments paid by the Federal government stood at a record $1.06 trillion, nearly double their total of $0.56 trillion at the end of the fourth quarter of 2019.
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 4/30/24 | | Inception
(11/4/14)
to 4/30/24 |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
ICE BofA 1-5 Year US Treasury & Agency Index | | | | | | |
Bloomberg US Aggregate Bond 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 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.
| |
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(1) | |
| |
| % of Total Long
Fixed-Income
Investments, Cash
& Cash Equivalents |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
Federal National Mortgage Association, Pool TBA, 5.00%, 06/15/54 | |
Federal National Mortgage Association, Pool TBA, 4.00%, 06/15/54 | |
U.S. Treasury Note, 4.75%, 10/15/26 | |
Federal National Mortgage Association, Pool TBA, 4.50%, 06/15/54 | |
Federal National Mortgage Association, Pool FM3003, 4.00%, 05/01/49 | |
U.S. Treasury Note, 4.63%, 09/15/26 | |
Federal National Mortgage Association, Pool FM2972, 4.00%, 12/01/44 | |
U.S. Treasury Note, 2.50%, 05/31/24 | |
Federal National Mortgage Association, Pool TBA, 3.50%, 06/15/54 | |
Federal National Mortgage Association, Pool TBA, 3.00%, 06/15/54 | |
| |
Weighted Average Effective Net Duration |
| |
| |
| |
| Includes variation margin on futures contracts. |
| 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, DBRS, Inc., Kroll Bond Rating Agency, Inc. 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 rating is used. A credit rating is an assessment provided by a NRSRO, of the creditworthiness of an issuer with respect to debt obligations. 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. “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. U.S. Agency, U.S. Agency mortgage-backed, and U.S. Treasury securities appear under “Government & Agency.” Credit ratings are subject to change. |
| Amount is less than 0.1%. |
| 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 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 Low Duration Opportunities ETF (LMBS)Semi-Annual ReportApril 30, 2024 (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.
First Trust Low Duration Opportunities ETF (LMBS)Understanding Your Fund ExpensesApril 30, 2024 (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 April 30, 2024.
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
November 1, 2023 | Ending
Account Value
April 30, 2024 | 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 (November 1, 2023 through April 30, 2024), multiplied by 182/366 (to reflect the six-month period). |
First Trust Low Duration Opportunities ETF (LMBS)Portfolio of InvestmentsApril 30, 2024 (Unaudited)
| | | | |
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES — 82.7% |
| Collateralized Mortgage Obligations — 37.2% | |
| Federal Home Loan Mortgage Corporation STACR REMIC Trust | | | |
| Series 2024-HQA1, Class M2, 30 Day Average SOFR + 2.00% (a) (b) | | | |
| Federal Home Loan Mortgage Corporation | | | |
| Series 1998-2089, Class PJ, IO | | | |
| Series 1998-2102, Class Z | | | |
| Series 2002-2410, Class OG | | | |
| Series 2002-2437, Class SA, IO, (30 Day Average SOFR + CSA) ×-1+ 7.90% (c) | | | |
| 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% (c) | | | |
| Series 2005-3054, Class ZW | | | |
| Series 2005-3074, Class ZH | | | |
| Series 2006-243, Class 11, IO, STRIPS (d) | | | |
| Series 2006-3117, Class ZU | | | |
| Series 2006-3196, Class ZK | | | |
| Series 2007-3274, Class B | | | |
| Series 2007-3322, Class NF, (30 Day Average SOFR + CSA) × 2,566.67 - 16,683.33%, 0.00% Floor (b) | | | |
| Series 2007-3340, Class PF, 30 Day Average SOFR + CSA + 0.30% (b) | | | |
| Series 2007-3360, Class CB | | | |
| Series 2007-3380, Class FS, 30 Day Average SOFR + CSA + 0.35% (b) | | | |
| 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% (c) | | | |
| 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% (c) | | | |
| Series 2009-3585, Class QZ | | | |
| Series 2009-3587, Class FX, 30 Day Average SOFR + CSA + 0.00% (b) | | | |
See Notes to Financial Statements
First Trust Low Duration Opportunities ETF (LMBS)Portfolio of Investments (Continued)April 30, 2024 (Unaudited) | | | | |
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% (b) | | | |
| Series 2009-3605, Class NC | | | |
| Series 2010-3622, Class PB | | | |
| Series 2010-3645, Class WD | | | |
| Series 2010-3667, Class PL | | | |
| 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% (c) | | | |
| 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% (c) | | | |
| Series 2012-267, Class S5, IO, STRIPS, (30 Day Average SOFR + CSA) ×-1+ 6.00% (c) | | | |
| Series 2012-276, Class S5, IO, STRIPS, (30 Day Average SOFR + CSA) ×-1+ 6.00% (c) | | | |
| Series 2012-3999, Class WA (d) | | | |
| 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% (c) | | | |
| Series 2012-4097, Class SA, IO, (30 Day Average SOFR + CSA) ×-1+ 6.05% (c) | | | |
| 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% (c) | | | |
| Series 2012-4121, Class HI, IO | | | |
| Series 2012-4136, Class TU, IO, (30 Day Average SOFR + CSA) ×-22.50+ 139.5%, 4.50% Cap (c) | | | |
| Series 2012-4145, Class YI, IO | | | |
| Series 2013-299, Class S1, IO, STRIPS, (30 Day Average SOFR + CSA) ×-1+ 6.00% (c) | | | |
| Series 2013-303, Class C2, IO, STRIPS | | | |
| Series 2013-304, Class C37, IO, STRIPS | | | |
| Series 2013-304, Class C40, IO, STRIPS | | | |
| Series 2013-4151, Class DI, IO | | | |
See Notes to Financial Statements
First Trust Low Duration Opportunities ETF (LMBS)Portfolio of Investments (Continued)April 30, 2024 (Unaudited) | | | | |
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES (Continued) |
| Collateralized Mortgage Obligations (Continued) | |
| Federal Home Loan Mortgage Corporation (Continued) | | | |
| 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 2013-4213, Class GZ | | | |
| 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 (c) | | | |
| Series 2013-4247, Class AY | | | |
| Series 2013-4265, Class IB, IO (f) | | | |
| Series 2014-4316, Class BZ | | | |
| 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 (d) (g) | | | |
| Series 2015-4520, Class AI, IO | | | |
| Series 2016-4546, Class PZ | | | |
| Series 2016-4546, Class ZT | | | |
| Series 2016-4568, Class MZ | | | |
| Series 2016-4570, Class ST, IO, (30 Day Average SOFR + CSA) ×-1+ 6.00% (c) | | | |
| 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 (c) | | | |
| 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% (c) | | | |
| Series 2018-4798, Class GZ | | | |
| 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% (c) | | | |
| Series 2019-4919, Class FP, 30 Day Average SOFR + CSA + 0.45% (b) | | | |
| Series 2019-4928, Class F, 30 Day Average SOFR + CSA + 0.50% (b) | | | |
| Series 2019-4929, Class FB, 30 Day Average SOFR + CSA + 0.45% (b) | | | |
| Series 2019-4938, Class BS, IO, (30 Day Average SOFR + CSA) ×-1+ 6.00% (c) | | | |
See Notes to Financial Statements
First Trust Low Duration Opportunities ETF (LMBS)Portfolio of Investments (Continued)April 30, 2024 (Unaudited) | | | | |
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES (Continued) |
| Collateralized Mortgage Obligations (Continued) | |
| Federal Home Loan Mortgage Corporation (Continued) | | | |
| Series 2019-4942, Class FA, 30 Day Average SOFR + CSA + 0.50% (b) | | | |
| Series 2019-4943, Class NS, IO, (30 Day Average SOFR + CSA) ×-1+ 6.00% (c) | | | |
| Series 2020-4959, Class JF, 30 Day Average SOFR + CSA + 0.45% (b) | | | |
| Series 2020-4959, Class LB | | | |
| Series 2020-4974, Class IA, IO | | | |
| Series 2020-4980, Class FP, 30 Day Average SOFR + CSA + 0.40% (b) | | | |
| Series 2020-4990, Class AF, 30 Day Average SOFR + CSA + 0.40% (b) | | | |
| Series 2020-4991, Class DA | | | |
| Series 2020-5001, Class A | | | |
| Series 2020-5004, Class F, 30 Day Average SOFR + CSA + 0.35% (b) | | | |
| Series 2020-5004, Class FG, 30 Day Average SOFR + CSA + 0.40% (b) | | | |
| Series 2020-5034, Class IO, IO (d) | | | |
| Series 2020-5045, Class AF, 30 Day Average SOFR + 0.25% (b) | | | |
| Series 2020-5045, Class BF, 30 Day Average SOFR + 0.30% (b) | | | |
| Series 2021-5178, Class HL | | | |
| Series 2022-5201, Class PF, 30 Day Average SOFR + 0.30% (b) | | | |
| 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 | | | |
| Series 2022-5282, Class MB | | | |
| Series 2023-5357, Class OB, PO | | | |
| Federal National Mortgage Association Grantor Trust | | | |
| Series 2005-T1, Class A1, 1 Mo. CME Term SOFR + CSA + 0.40%, 5.41% Cap (b) | | | |
| Federal National Mortgage Association | | | |
| Series 1996-51, Class AY, IO | | | |
| Series 2001-34, Class SR, IO, (30 Day Average SOFR + CSA) × -1+ 8.10% (c) | | | |
| Series 2001-42, Class SB, (30 Day Average SOFR + CSA) ×-16 + 128.00%, 8.50% Cap (c) | | | |
See Notes to Financial Statements
First Trust Low Duration Opportunities ETF (LMBS)Portfolio of Investments (Continued)April 30, 2024 (Unaudited) | | | | |
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES (Continued) |
| Collateralized Mortgage Obligations (Continued) | |
| Federal National Mortgage Association (Continued) | | | |
| | | | |
| | | | |
| Series 2002-320, Class 2, IO, STRIPS | | | |
| Series 2002-323, Class 6, IO, STRIPS | | | |
| 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% (b) | | | |
| | | | |
| 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 (d) | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| Series 2005-2, Class S, IO, (30 Day Average SOFR + CSA) ×-1 + 6.60% (c) | | | |
| Series 2005-2, Class TB, IO, (30 Day Average SOFR + CSA) × -1+ 5.90%, 0.40% Cap (c) | | | |
| | | | |
| Series 2005-40, Class SA, IO, (30 Day Average SOFR + CSA) × -1+ 6.70% (c) | | | |
| | | | |
| | | | |
| Series 2005-79, Class NS, IO, (30 Day Average SOFR + CSA) × -1+ 6.09% (c) | | | |
| | | | |
| | | | |
| 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% (b) | | | |
| Series 2006-5, Class N2, IO (g) | | | |
| Series 2006-15, Class IS, IO, (30 Day Average SOFR + CSA) × -1+ 6.58% (c) | | | |
| Series 2006-20, Class PI, IO, (30 Day Average SOFR + CSA) × -1+ 6.68% (c) | | | |
| | | | |
| | | | |
| Series 2006-117, Class GF, 30 Day Average SOFR + CSA + 0.35% (b) | | | |
| Series 2006-118, Class A1, 30 Day Average SOFR + CSA + 0.60% (b) | | | |
| | | | |
See Notes to Financial Statements
First Trust Low Duration Opportunities ETF (LMBS)Portfolio of Investments (Continued)April 30, 2024 (Unaudited) | | | | |
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES (Continued) |
| Collateralized Mortgage Obligations (Continued) | |
| Federal National Mortgage Association (Continued) | | | |
| Series 2007-25, Class FB, 30 Day Average SOFR + CSA + 0.33% (b) | | | |
| | | | |
| | | | |
| | | | |
| Series 2007-116, Class PB | | | |
| Series 2007-117, Class MD | | | |
| Series 2007-W10, Class 3A (g) | | | |
| Series 2008-3, Class FZ, 30 Day Average SOFR + CSA + 0.55% (b) | | | |
| | | | |
| 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% (c) | | | |
| Series 2009-109, Class PZ | | | |
| Series 2009-115, Class HZ | | | |
| Series 2009-398, Class C13, IO, STRIPS (f) | | | |
| | | | |
| Series 2010-21, Class KO, PO | | | |
| | | | |
| | | | |
| | | | |
| Series 2010-68, Class BI, IO | | | |
| Series 2010-115, Class PO, PO | | | |
| Series 2010-129, Class SM, IO, (30 Day Average SOFR + CSA) ×-1+ 6.00% (c) | | | |
| Series 2010-142, Class DL | | | |
| | | | |
| | | | |
| Series 2011-30, Class LS, IO (d) | | | |
| | | | |
| | | | |
| Series 2011-73, Class PI, IO | | | |
| Series 2011-74, Class TQ, IO, (30 Day Average SOFR + CSA) × -6.43+ 55.93%, 4.50% Cap (c) | | | |
| 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% (c) | | | |
| | | | |
| | | | |
| Series 2012-66, Class DI, IO | | | |
See Notes to Financial Statements
First Trust Low Duration Opportunities ETF (LMBS)Portfolio of Investments (Continued)April 30, 2024 (Unaudited) | | | | |
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES (Continued) |
| Collateralized Mortgage Obligations (Continued) | |
| Federal National Mortgage Association (Continued) | | | |
| Series 2012-101, Class AI, IO | | | |
| 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% (c) | | | |
| Series 2012-133, Class KO, PO | | | |
| Series 2012-138, Class MA | | | |
| Series 2012-146, Class QA | | | |
| Series 2012-409, Class 49, IO, STRIPS (d) | | | |
| Series 2012-409, Class 53, IO, STRIPS (d) | | | |
| | | | |
| 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 + CSA + 0.25% (b) | | | |
| | | | |
| 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 2014-46, Class KA (d) | | | |
| 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% (c) | | | |
| | | | |
| Series 2016-62, Class SB, IO, (30 Day Average SOFR + CSA) × -1+ 6.10% (c) | | | |
| Series 2016-63, Class AF, 30 Day Average SOFR + CSA + 0.50% (b) | | | |
| Series 2016-73, Class PI, IO | | | |
| Series 2016-74, Class HI, IO | | | |
See Notes to Financial Statements
First Trust Low Duration Opportunities ETF (LMBS)Portfolio of Investments (Continued)April 30, 2024 (Unaudited) | | | | |
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES (Continued) |
| Collateralized Mortgage Obligations (Continued) | |
| Federal National Mortgage Association (Continued) | | | |
| Series 2016-84, Class DF, 30 Day Average SOFR + CSA + 0.42% (b) | | | |
| Series 2017-18, Class AS, IO, (30 Day Average SOFR + CSA) × -1+ 6.05% (c) | | | |
| | | | |
| | | | |
| Series 2017-65, Class SA, IO, (30 Day Average SOFR + CSA) × -1+ 5.90% (c) | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| Series 2018-72, Class FB, 30 Day Average SOFR + CSA + 0.35% (b) | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| Series 2019-38, Class CF, 30 Day Average SOFR + CSA + 0.45% (b) | | | |
| Series 2019-41, Class SN, IO, (30 Day Average SOFR + CSA) × -1+ 6.05% (c) | | | |
| | | | |
| | | | |
| | | | |
| Series 2019-70, Class WA, PO | | | |
| Series 2020-9, Class SJ, IO, (30 Day Average SOFR + CSA) ×-1 + 6.00% (c) | | | |
| Series 2020-20, Class KI, IO | | | |
| Series 2020-34, Class FA, 30 Day Average SOFR + CSA + 0.45% (b) | | | |
| Series 2020-38, Class NF, 30 Day Average SOFR + CSA + 0.45% (b) | | | |
| Series 2020-93, Class NI, IO | | | |
| | | | |
| Series 2023-44, Class PO, PO | | | |
| Government National Mortgage Association | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
See Notes to Financial Statements
First Trust Low Duration Opportunities ETF (LMBS)Portfolio of Investments (Continued)April 30, 2024 (Unaudited) | | | | |
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES (Continued) |
| Collateralized Mortgage Obligations (Continued) | |
| Government National Mortgage Association (Continued) | | | |
| | | | |
| Series 2004-71, Class ST, (1 Mo. CME Term SOFR + CSA) × -6.25+ 44.50%, 7.00% Cap (c) | | | |
| Series 2004-88, Class SM, IO, (1 Mo. CME Term SOFR + CSA) ×-1+ 6.10% (c) | | | |
| 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% (c) | | | |
| | | | |
| | | | |
| | | | |
| Series 2005-93, Class PO, PO | | | |
| | | | |
| | | | |
| | | | |
| Series 2007-27, Class SD, IO, (1 Mo. CME Term SOFR + CSA) ×-1+ 6.20% (c) | | | |
| Series 2007-41, Class OL, PO | | | |
| Series 2007-42, Class SB, IO, (1 Mo. CME Term SOFR + CSA) ×-1+ 6.75% (c) | | | |
| | | | |
| Series 2007-81, Class FZ, 1 Mo. CME Term SOFR + CSA + 0.35% (b) | | | |
| Series 2008-33, Class XS, IO, (1 Mo. CME Term SOFR + CSA) ×-1+ 7.70% (c) | | | |
| | | | |
| | | | |
| 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% (c) | | | |
| Series 2009-25, Class SE, IO, (1 Mo. CME Term SOFR + CSA) ×-1+ 7.60% (c) | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| Series 2009-61, Class WQ, IO, (1 Mo. CME Term SOFR + CSA) ×-1+ 6.25% (c) | | | |
| | | | |
| | | | |
| | | | |
| Series 2009-79, Class OK, PO | | | |
| | | | |
| | | | |
| Series 2009-106, Class SL, IO, (1 Mo. CME Term SOFR + CSA) ×-1+ 6.10% (c) | | | |
See Notes to Financial Statements
First Trust Low Duration Opportunities ETF (LMBS)Portfolio of Investments (Continued)April 30, 2024 (Unaudited) | | | | |
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES (Continued) |
| Collateralized Mortgage Obligations (Continued) | |
| Government National Mortgage Association (Continued) | | | |
| Series 2009-106, Class WZ | | | |
| Series 2009-126, Class LB | | | |
| | | | |
| | | | |
| Series 2010-85, Class SL, IO, (1 Mo. CME Term SOFR + CSA) ×-1+ 6.60% (c) | | | |
| 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% (c) | | | |
| Series 2011-63, Class BI, IO | | | |
| Series 2011-81, Class IC, IO, (1 Mo. CME Term SOFR + CSA) ×-1+ 6.72%, 0.62% Cap (c) | | | |
| Series 2011-112, Class IP, IO | | | |
| Series 2011-129, Class CL | | | |
| Series 2011-151, Class TB, IO, (1 Mo. CME Term SOFR + CSA) ×-70+ 465.50%, 3.50% Cap (c) | | | |
| Series 2012-84, Class QS, IO, (1 Mo. CME Term SOFR + CSA) ×-1+ 6.10% (c) | | | |
| Series 2012-84, Class SJ, (1 Mo. CME Term SOFR + CSA) × -0.57+ 2.51%, 0.00% Floor (c) | | | |
| Series 2012-108, Class KB | | | |
| Series 2012-143, Class TI, IO | | | |
| Series 2012-149, Class PC (d) | | | |
| 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% (c) | | | |
| Series 2013-183, Class PB | | | |
| Series 2014-44, Class IC, IO | | | |
| Series 2014-44, Class ID, IO (d) (g) | | | |
| 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% (c) | | | |
| Series 2014-118, Class TV, IO, (1 Mo. CME Term SOFR + CSA) ×-1+ 6.25% (c) | | | |
| | | | |
| Series 2015-66, Class LI, IO | | | |
| Series 2015-95, Class IK, IO (d) (f) | | | |
| Series 2015-123, Class ZA | | | |
| Series 2015-124, Class DI, IO | | | |
See Notes to Financial Statements
First Trust Low Duration Opportunities ETF (LMBS)Portfolio of Investments (Continued)April 30, 2024 (Unaudited) | | | | |
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES (Continued) |
| Collateralized Mortgage Obligations (Continued) | |
| Government National Mortgage Association (Continued) | | | |
| Series 2015-137, Class WA (d) (g) | | | |
| Series 2015-138, Class MI, IO | | | |
| Series 2015-151, Class KW (d) | | | |
| Series 2015-164, Class MZ | | | |
| Series 2015-168, Class GI, IO | | | |
| | | | |
| Series 2016-37, Class AF, 1 Mo. CME Term SOFR + CSA + 0.47% (b) | | | |
| Series 2016-55, Class PB (d) | | | |
| Series 2016-69, Class WI, IO | | | |
| Series 2016-75, Class SA, IO, (1 Mo. CME Term SOFR + CSA) ×-1+ 6.00% (c) | | | |
| Series 2016-78, Class UI, IO | | | |
| | | | |
| Series 2016-99, Class JA (d) | | | |
| 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% (c) | | | |
| 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% (c) | | | |
| | | | |
| 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% (c) | | | |
| Series 2017-133, Class JI, IO | | | |
| Series 2017-186, Class TI, IO, (1 Mo. CME Term SOFR + CSA) ×-1+ 6.50%, 0.50% Cap (c) | | | |
| | | | |
| 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 (b) | | | |
| Series 2019-128, Class ES, IO, (1 Mo. CME Term SOFR + CSA) ×-1+ 3.43%, 0.00% Floor (c) | | | |
| Series 2020-62, Class IC, IO | | | |
| Series 2020-62, Class WI, IO | | | |
See Notes to Financial Statements
First Trust Low Duration Opportunities ETF (LMBS)Portfolio of Investments (Continued)April 30, 2024 (Unaudited) | | | | |
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES (Continued) |
| Collateralized Mortgage Obligations (Continued) | |
| Government National Mortgage Association (Continued) | | | |
| Series 2020-84, Class IM, IO | | | |
| Series 2020-84, Class IO, IO | | | |
| Series 2021-46, Class IL, IO | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| Series 2022-124, Class EY | | | |
| Series 2022-124, Class MY | | | |
| Series 2022-146, Class MF, 30 Day Average SOFR + 0.45% (b) | | | |
| Series 2022-154, Class EZ | | | |
| Series 2022-204, Class YC | | | |
| Seasoned Credit Risk Transfer Trust | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| Seasoned Loans Structured Transaction Trust | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | |
| Commercial Mortgage-Backed Securities — 13.0% | |
| Federal Home Loan Mortgage Corporation Multiclass Certificates | | | |
| Series 2020-RR02, Class DX, IO (d) | | | |
| Series 2020-RR06, Class BX, IO (d) | | | |
| Series 2020-RR09, Class AX, IO (d) | | | |
| Series 2020-RR09, Class BX, IO (d) | | | |
| Series 2020-RR10, Class X, IO (d) | | | |
| Series 2020-RR11, Class AX, IO (d) | | | |
| Series 2020-RR11, Class BX, IO (d) | | | |
See Notes to Financial Statements
First Trust Low Duration Opportunities ETF (LMBS)Portfolio of Investments (Continued)April 30, 2024 (Unaudited) | | | | |
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES (Continued) |
| Commercial Mortgage-Backed Securities (Continued) | |
| Federal Home Loan Mortgage Corporation Multiclass Certificates (Continued) | | | |
| Series 2021-P009, Class X, IO (g) | | | |
| Series 2021-P011, Class X1, IO (g) | | | |
| Series 2021-RR15, Class X, IO (g) | | | |
| Series 2021-RR18, Class X, IO (g) | | | |
| Series 2021-RR19, Class X, IO (g) | | | |
| Series 2021-RR20, Class X, IO (g) | | | |
| Federal Home Loan Mortgage Corporation Multifamily Structured Pass Through Certificates | | | |
| Series 2015-K047, Class X3, IO (g) | | | |
| Series 2016-K054, Class A1 | | | |
| Series 2016-K152, Class A2 | | | |
| Series 2016-KIR1, Class X, IO (g) | | | |
| Series 2018-K157, Class A3 | | | |
| Series 2018-K158, Class A3 | | | |
| Series 2018-KSW4, Class A, 30 Day Average SOFR + CSA + 0.43% (b) | | | |
| Series 2019-K097, Class X1, IO (g) | | | |
| Series 2019-K099, Class X1, IO (g) | | | |
| Series 2019-K099, Class XAM, IO (g) | | | |
| Series 2019-K100, Class X1, IO (g) | | | |
| Series 2019-K101, Class X1, IO (d) | | | |
| Series 2019-K102, Class XAM, IO (d) | | | |
| Series 2019-K103, Class XAM, IO (g) | | | |
| Series 2019-K734, Class X1, IO (g) | | | |
| Series 2019-K734, Class XAM, IO (g) | | | |
| Series 2019-K735, Class X1, IO (g) | | | |
| Series 2019-K736, Class X1, IO (g) | | | |
| Series 2019-K1510, Class X1, IO (g) | | | |
| Series 2019-K1511, Class X1, IO (g) | | | |
| Series 2019-K1512, Class X1, IO (g) | | | |
| Series 2019-K1513, Class X1, IO (g) | | | |
| Series 2020-K109, Class XAM, IO (g) | | | |
| Series 2020-K110, Class X1, IO (g) | | | |
| Series 2020-K110, Class XAM, IO (g) | | | |
| Series 2020-K112, Class XAM, IO (g) | | | |
| Series 2020-K113, Class XAM, IO (g) | | | |
| Series 2020-K114, Class XAM, IO (g) | | | |
| Series 2020-K115, Class X1, IO (g) | | | |
| Series 2020-K115, Class XAM, IO (g) | | | |
| Series 2020-K116, Class X1, IO (g) | | | |
| Series 2020-K116, Class XAM, IO (g) | | | |
| Series 2020-K117, Class A2 | | | |
| Series 2020-K117, Class XAM, IO (g) | | | |
| Series 2020-K118, Class X1, IO (g) | | | |
| Series 2020-K118, Class XAM, IO (g) | | | |
| Series 2020-K119, Class XAM, IO (g) | | | |
| Series 2020-K120, Class XAM, IO (g) | | | |
| Series 2020-K121, Class X1, IO (g) | | | |
See Notes to Financial Statements
First Trust Low Duration Opportunities ETF (LMBS)Portfolio of Investments (Continued)April 30, 2024 (Unaudited) | | | | |
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-K121, Class XAM, IO (g) | | | |
| Series 2020-K122, Class X1, IO (g) | | | |
| Series 2020-K122, Class XAM, IO (g) | | | |
| Series 2020-K737, Class X1, IO (d) | | | |
| Series 2020-K738, Class XAM, IO (d) | | | |
| Series 2020-K739, Class X1, IO (g) | | | |
| Series 2020-K739, Class XAM, IO (g) | | | |
| Series 2020-K740, Class XAM, IO (g) | | | |
| Series 2020-K1515, Class X1, IO (g) | | | |
| Series 2020-K1516, Class X1, IO (g) | | | |
| Series 2020-K1517, Class X1, IO (g) | | | |
| Series 2020-KG04, Class X1, IO (g) | | | |
| Series 2021-K123, Class A2 | | | |
| Series 2021-K124, Class A2 | | | |
| Series 2021-K128, Class XAM, IO (g) | | | |
| Series 2021-K129, Class X1, IO (g) | | | |
| Series 2021-K129, Class XAM, IO (g) | | | |
| Series 2021-K130, Class XAM, IO (g) | | | |
| Series 2021-K131, Class XAM, IO (g) | | | |
| Series 2021-K132, Class XAM, IO (g) | | | |
| Series 2021-K741, Class XAM, IO (g) | | | |
| Series 2021-K744, Class X1, IO (g) | | | |
| Series 2021-K1522, Class A1 | | | |
| Series 2021-KG05, Class X1, IO (g) | | | |
| Series 2022-K148, Class XAM, IO (g) | | | |
| Series 2023-KJ47, Class A2 | | | |
| Federal Home Loan Mortgage Corporation Multifamily Structured Pass-Through Certificates | | | |
| Series 2014-K039, Class X3, IO (g) | | | |
| Federal National Mortgage Association Alternative Credit Enhancement Securities | | | |
| Series 2023-M1, Class 2A1 (g) | | | |
| Series 2023-M1, Class Z (g) | | | |
| Series 2024-M3, Class Z (g) | | | |
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| Series 2015-K44, Class B (a) (g) | | | |
| Series 2015-K45, Class B (a) (g) | | | |
| Series 2019-KL4F, Class BAS (a) (g) | | | |
| Government National Mortgage Association | | | |
| Series 2011-31, Class Z (d) | | | |
| Series 2012-120, Class Z (d) | | | |
| Series 2013-74, Class AG (g) | | | |
| Series 2013-194, Class AE (d) | | | |
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| Series 2015-125, Class VA (d) | | | |
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| Series 2017-35, Class Z (d) | | | |
| Series 2017-106, Class AE | | | |
See Notes to Financial Statements
First Trust Low Duration Opportunities ETF (LMBS)Portfolio of Investments (Continued)April 30, 2024 (Unaudited) | | | | |
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES (Continued) |
| Commercial Mortgage-Backed Securities (Continued) | |
| Government National Mortgage Association (Continued) | | | |
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| Pass-Through Securities — 32.5% | |
| Federal Home Loan Mortgage Corporation |
| Pool 760043, 5 Yr. Constant Maturity Treasury Rate + 1.39% (b) | | | |
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See Notes to Financial Statements
First Trust Low Duration Opportunities ETF (LMBS)Portfolio of Investments (Continued)April 30, 2024 (Unaudited) | | | | |
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)April 30, 2024 (Unaudited) | | | | |
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)April 30, 2024 (Unaudited) | | | | |
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)April 30, 2024 (Unaudited) | | | | |
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)April 30, 2024 (Unaudited) | | | | |
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 — 6.5% |
| Collateralized Mortgage Obligations — 3.9% | |
| |
| Series 2019-2, Class M1 (a) | | | |
| Series 2019-3, Class A3 (a) | | | |
See Notes to Financial Statements
First Trust Low Duration Opportunities ETF (LMBS)Portfolio of Investments (Continued)April 30, 2024 (Unaudited) | | | | |
MORTGAGE-BACKED SECURITIES (Continued) |
| Collateralized Mortgage Obligations (Continued) | |
| Arroyo Mortgage Trust (Continued) |
| Series 2021-1R, Class A2 (a) | | | |
| Series 2021-1R, Class A3 (a) | | | |
| BRAVO Residential Funding Trust |
| Series 2021-NQM1, Class A2 (a) | | | |
| Series 2021-NQM1, Class A3 (a) | | | |
| Series 2023-NQM1, Class A1, steps up to 6.76% on 01/01/27 (a) (i) | | | |
| Chase Home Lending Mortgage Trust |
| Series 2019-ATR2, Class A11, 1 Mo. CME Term SOFR + CSA + 0.90% (a) (b) | | | |
| CHL Mortgage Pass-Through Trust |
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| |
| Series 2019-INV1, Class A11 (a) | | | |
| Citigroup Global Markets Mortgage Securities VII, Inc. |
| Series 2003-UP2, Class PO1, PO | | | |
| Connecticut Avenue Securities Trust |
| Series 2021-R02, Class 2M2, 30 Day Average SOFR + 2.00% (a) (b) | | | |
| Series 2022-R02, Class 2M2, 30 Day Average SOFR + 3.00% (a) (b) | | | |
| Series 2024-R01, Class 1M1, 30 Day Average SOFR + 1.05% (a) (b) | | | |
| Ellington Financial Mortgage Trust |
| Series 2019-2, Class M1 (a) | | | |
| Series 2022-2, Class A1 (a) | | | |
| Series 2023-1, Class A1, steps up to 6.73% on 01/01/27 (a) (i) | | | |
| |
| Series 2024-1, Class A (a) (g) | | | |
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| Series 2018-2, Class A4 (a) | | | |
| Series 2018-4, Class B1 (a) (g) | | | |
| Series 2019-2, Class A11 (a) | | | |
| GMACM Mortgage Loan Trust |
| Series 2003-J10, Class A1 | | | |
| GS Mortgage-Backed Securities Trust |
| Series 2019-PJ3, Class A1 (a) | | | |
| Series 2021-PJ6, Class A8 (a) | | | |
| |
| Series 2004-S2, Class 5A1 | | | |
| Series 2015-IVR2, Class A5 (a) (g) | | | |
| Series 2019-1, Class A5 (a) | | | |
| Series 2019-8, Class A15 (a) | | | |
| Series 2019-INV2, Class A15 (a) | | | |
| Series 2020-INV1, Class A15 (a) | | | |
| Mello Mortgage Capital Acceptance |
| Series 2018-MTG2, Class A9 (a) | | | |
| MetLife Securitization Trust |
| Series 2018-1A, Class A (a) | | | |
See Notes to Financial Statements
First Trust Low Duration Opportunities ETF (LMBS)Portfolio of Investments (Continued)April 30, 2024 (Unaudited) | | | | |
MORTGAGE-BACKED SECURITIES (Continued) |
| Collateralized Mortgage Obligations (Continued) | |
| New Residential Mortgage Loan Trust |
| Series 2015-2A, Class B1 (a) | | | |
| Series 2016-1A, Class A1 (a) | | | |
| Series 2018-4A, Class A1S, 1 Mo. CME Term SOFR + CSA + 0.75% (a) (b) | | | |
| |
| Series 2018-EXP1, Class 1A3 (a) | | | |
| Series 2018-EXP1, Class 2A1, 1 Mo. CME Term SOFR + CSA + 0.85% (a) (b) | | | |
| Onslow Bay Mortgage Loan Trust |
| Series 2021-NQM4, Class A1 (a) | | | |
| Provident Funding Mortgage Trust |
| Series 2019-1, Class A5 (a) | | | |
| Series 2020-1, Class A5 (a) | | | |
| Seasoned Credit Risk Transfer Trust |
| Series 2017-2, Class M1 (a) | | | |
| |
| Series 2017-CH1, Class A13 (a) | | | |
| Series 2018-CH1, Class B1B (a) | | | |
| Starwood Mortgage Residential Trust |
| Series 2022-3, Class A1 (a) | | | |
| TIAA Bank Mortgage Loan Trust |
| Series 2018-3, Class A1 (a) | | | |
| Towd Point Mortgage Trust |
| Series 2017-2, Class A2 (a) | | | |
| Series 2019-1, Class A1 (a) | | | |
| Verus Securitization Trust |
| Series 2020-INV1, Class A3, steps up to 4.89% on 05/26/24 (a) (i) | | | |
| Vista Point Securitization Trust |
| Series 2020-1, Class M1 (a) | | | |
| Wells Fargo Mortgage Backed Securities Trust |
| Series 2019-1, Class A1 (a) | | | |
| WinWater Mortgage Loan Trust |
| Series 2016-1, Class 2A3 (a) | | | |
| Series 2016-1, Class B1 (a) (g) | | | |
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| Commercial Mortgage-Backed Securities — 2.6% | |
| BAMLL Commercial Mortgage Securities Trust |
| Series 2013-WBRK, Class A (a) (g) | | | |
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| Series 2018-TALL, Class A, 1 Mo. CME Term SOFR + CSA + 0.87% (a) (b) | | | |
| |
| Series 2023-V2, Class XA, IO (g) | | | |
| Series 2024-V6, Class XA, IO (g) | | | |
| |
| Series 2024-5C3, Class XA, IO (g) | | | |
See Notes to Financial Statements
First Trust Low Duration Opportunities ETF (LMBS)Portfolio of Investments (Continued)April 30, 2024 (Unaudited) | | | | |
MORTGAGE-BACKED SECURITIES (Continued) |
| Commercial Mortgage-Backed Securities (Continued) | |
| |
| Series 2021-WILL, Class A, 1 Mo. CME Term SOFR + CSA + 1.75% (a) (b) | | | |
| Series 2022-OANA, Class A, 1 Mo. CME Term SOFR + 1.90% (a) (b) | | | |
| BX Commercial Mortgage Trust |
| Series 2019-IMC, Class A, 1 Mo. CME Term SOFR + CSA + 1.00% (a) (b) | | | |
| CFCRE Commercial Mortgage Trust |
| Series 2017-C8, Class XA, IO (g) | | | |
| Citigroup Commercial Mortgage Trust |
| Series 2014-GC23, Class B | | | |
| Series 2016-P4, Class XA, IO (g) | | | |
| |
| Series 2014-CR21, Class AM | | | |
| Credit Suisse Mortgage Trust |
| Series 2020-WEST, Class A (a) | | | |
| CSAIL Commercial Mortgage Trust |
| Series 2020-C19, Class XA, IO (g) | | | |
| |
| Series 2023-V1, Class XA, IO | | | |
| GS Mortgage Securities Trust |
| Series 2019-GC38, Class XA, IO (g) | | | |
| |
| Series 2016-HHV, Class A (a) | | | |
| 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) (b) | | | |
| Morgan Stanley Capital I Trust |
| Series 2018-MP, Class A (a) (g) | | | |
| Queens Center Mortgage Trust |
| Series 2013-QCA, Class A (a) | | | |
| Ready Capital Mortgage Financing LLC |
| Series 2021-FL6, Class A, 1 Mo. CME Term SOFR + CSA + 0.95% (a) (b) | | | |
| |
| Series 2021-HT1, Class A, 1 Mo. CME Term SOFR + CSA + 1.65% (a) (b) | | | |
| |
| Series 2014-MONT, Class A (a) (g) | | | |
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| Total Mortgage-Backed Securities | |
| | |
U.S. GOVERNMENT BONDS AND NOTES — 6.5% |
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See Notes to Financial Statements
First Trust Low Duration Opportunities ETF (LMBS)Portfolio of Investments (Continued)April 30, 2024 (Unaudited) | | | | |
U.S. GOVERNMENT BONDS AND NOTES (Continued) |
| | | | |
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| Total U.S. Government Bonds and Notes | |
| | |
ASSET-BACKED SECURITIES — 2.4% |
| |
| Series 2020-SFR1, Class A (a) | | | |
| Series 2020-SFR4, Class A (a) | | | |
| |
| | | | |
| |
| Series 2021-EBO1, Class M1 (a) | | | |
| Citizens Auto Receivables Trust |
| Series 2024-1, Class A3 (a) | | | |
| Corevest American Finance Trust |
| Series 2020-1, Class A1 (a) | | | |
| Series 2020-4, Class A (a) | | | |
| CoreVest American Finance Trust |
| Series 2020-3, Class A (a) | | | |
| Series 2021-2, Class A (a) | | | |
| CWABS, Inc. Asset-Backed Certificates Trust |
| Series 2004-5, Class M1, 1 Mo. CME Term SOFR + CSA + 0.86% (b) | | | |
| Diamond Resorts Owner Trust |
| Series 2021-1A, Class A (a) | | | |
| |
| Series 2020-SFR1, Class A (a) | | | |
| |
| Series 2021-1A, Class A (a) | | | |
| |
| Series 2006-SEA1, Class M2, 1 Mo. CME Term SOFR + CSA + 1.65% (a) (b) | | | |
| Hyundai Auto Receivables Trust |
| | | | |
| |
| Series 2021-CRE3, Class A, 1 Mo. CME Term SOFR + CSA + 1.50% (a) (b) | | | |
| |
| Series 2023-5, Class A (a) | | | |
| Sierra Timeshare Receivables Funding LLC |
| Series 2020-2A, Class A (a) | | | |
| |
| Series 2022-7, Class A1A, steps up to 5.98% on 11/20/24 (i) | | | |
| Total Asset-Backed Securities | |
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EXCHANGE-TRADED FUNDS — 0.1% |
| | |
| First Trust Commercial Mortgage Opportunities ETF (k) | |
See Notes to Financial Statements
First Trust Low Duration Opportunities ETF (LMBS)Portfolio of Investments (Continued)April 30, 2024 (Unaudited) | | |
EXCHANGE-TRADED FUNDS (Continued) |
| Capital Markets (Continued) | |
| First Trust Intermediate Government Opportunities ETF (k) | |
| First Trust Long Duration Opportunities ETF (k) | |
| Total Exchange-Traded Funds | |
| | |
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U.S. TREASURY BILLS — 1.0% |
| | | | |
| | | | |
| | |
MONEY MARKET FUNDS — 9.1% |
| Morgan Stanley Institutional Liquidity Funds - Treasury Portfolio - Institutional Class - 5.15% (l) | |
| | |
| Total Investments — 108.3% | |
| | |
| | | | |
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES SOLD SHORT — (0.3)% |
| Pass-Through Securities — (0.3)% | |
| Federal National Mortgage Association | |
| | | | |
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| Total Investments Sold Short — (0.3)% | |
| | |
| | | | | |
|
| Call Options Written — (0.1)% | |
| 3 Month SOFR Futures Call | | | | |
| U.S. 2-Year Treasury Futures Call | | | | |
| U.S. 2-Year Treasury Futures Call | | | | |
| U.S. 2-Year Treasury Futures Call | | | | |
| U.S. 2-Year Treasury Futures Call | | | | |
| U.S. 5-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. 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 | | | | |
See Notes to Financial Statements
First Trust Low Duration Opportunities ETF (LMBS)Portfolio of Investments (Continued)April 30, 2024 (Unaudited) | | | | | |
WRITTEN OPTIONS (Continued) |
| Call Options Written (Continued) | |
| Ultra 10-Year U.S. Treasury 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 $4,497,131) | |
| Put Options Written — (0.2)% | |
| | | | | |
| 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. 10-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 | | | | |
| U.S. Treasury Long Bond Futures Put | | | | |
| U.S. Treasury Long Bond Futures Put | | | | |
| U.S. Treasury Long Bond Futures Put | | | | |
| U.S. Treasury Long Bond Futures Put | | | | |
| U.S. Treasury Long Bond Futures Put | | | | |
| U.S. Treasury Long Bond Futures Put | | | | |
| U.S. Treasury Long Bond Futures Put | | | | |
| Ultra 10-Year U.S. Treasury Futures Put | | | | |
| Ultra U.S. Treasury Long Bond Futures Put | | | | |
| Ultra U.S. Treasury Long Bond Futures Put | | | | |
| Ultra U.S. Treasury Long Bond Futures Put | | | | |
| Total Put Options Written | |
| (Premiums received $4,418,974) | |
| | |
| (Premiums received $8,916,105) | |
| Net Other Assets and Liabilities — (7.7)% | |
| | |
Futures Contracts at April 30, 2024 (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 Low Duration Opportunities ETF (LMBS)Portfolio of Investments (Continued)April 30, 2024 (Unaudited) Futures Contracts at April 30, 2024 (Continued):
| | | | | Unrealized Appreciation (Depreciation)/ Value |
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 | | | | | |
| | | | | |
| 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 “Advisor”). Although market instability can result in periods of increased overall market illiquidity, liquidity for each security is determined based on security specific factors and assumptions, which require subjective judgment. At April 30, 2024, securities noted as such amounted to $321,023,834 or 8.1% of net assets. |
| 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. |
| |
| Pursuant to procedures adopted by the Trust’s Board of Trustees, this security has been determined to be illiquid by the Advisor. |
| 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). |
| Step-up security. A security where the coupon increases or steps up at a predetermined date. |
| All or a portion of this security is segregated as collateral for open futures and options contracts. At April 30, 2024, the segregated value of this security amounts to $59,855,120. |
| Investment in an affiliated fund. |
| Rate shown reflects yield as of April 30, 2024. |
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 |
| – Principal-Only Security |
| – Real Estate Mortgage Investment Conduit |
| – Secured Overnight Financing Rate |
| – Structured Agency Credit Risk |
| – Separate Trading of Registered Interest and Principal of Securities |
| – To-Be-Announced Security |
See Notes to Financial Statements
First Trust Low Duration Opportunities ETF (LMBS)Portfolio of Investments (Continued)April 30, 2024 (Unaudited)
Valuation InputsA summary of the inputs used to value the Fund’s investments as of April 30, 2024 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. |
See Notes to Financial Statements
First Trust Low Duration Opportunities ETF (LMBS)Statement of Assets and Liabilities
April 30, 2024 (Unaudited)
| |
Investments, at value - Unaffiliated | |
Investments, at value - Affiliated | |
Total investments, at value | |
Cash segregated as collateral for open futures and written options contracts | |
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Investment securities sold | |
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| |
| |
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|
| |
Investments sold short, at value | |
Options contracts written, at value | |
| |
Investment securities purchased | |
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| |
| |
|
| |
| |
| |
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 | |
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 Six Months Ended April 30, 2024 (Unaudited)
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| |
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|
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| |
NET INVESTMENT INCOME (LOSS) | |
|
NET REALIZED AND UNREALIZED GAIN (LOSS): | |
Net realized gain (loss) on: | |
Investments - Unaffiliated | |
| |
Purchased options contracts | |
Written options contracts | |
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| |
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
| Six Months
Ended
4/30/2024 (Unaudited) | |
| | |
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 | | |
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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 Low Duration Opportunities ETF (LMBS)Financial Highlights
For a share outstanding throughout each period
| Six Months
Ended
4/30/2024
(Unaudited) | |
| | | | | |
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 (c) | | | | | | |
Portfolio turnover rate (e) (f) | | | | | | |
| 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. |
| Ratio of total expenses to average net assets and ratio of net investment income (loss) to average net assets do not reflect the Fund’s proportionate share of expenses and income of underlying investment companies in which the Fund invests. |
| |
| 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 259% for the six months ended April 30, 2024, and 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)April 30, 2024 (Unaudited) 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 twenty-two 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.
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
(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)April 30, 2024 (Unaudited) 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 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 Low Duration Opportunities ETF (LMBS)April 30, 2024 (Unaudited) 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 April 30, 2024, 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-
Notes to Financial Statements (Continued)
First Trust Low Duration Opportunities ETF (LMBS)April 30, 2024 (Unaudited) 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 April 30, 2024, the Fund had no when-issued or delayed-delivery securities. At April 30, 2024, the Fund held $241,172,364 of forward purchase commitments.
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.
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” payable or receivable on the Statement of Assets and Liabilities.
Notes to Financial Statements (Continued)
First Trust Low Duration Opportunities ETF (LMBS)April 30, 2024 (Unaudited) 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.
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)April 30, 2024 (Unaudited) 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. The affiliated funds’ financial statements may be found at SEC.gov. 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 in affiliated funds at April 30, 2024, and for the six months then ended are as follows:
| | | | | Change in
Unrealized
Appreciation
(Depreciation) | | | |
First Trust Commercial Mortgage Opportunities ETF | | | | | | | | |
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.
Notes to Financial Statements (Continued)
First Trust Low Duration Opportunities ETF (LMBS)April 30, 2024 (Unaudited) 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 year 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) | |
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 April 30, 2024, 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 non-expiring 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.
As of April 30, 2024, 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) |
| | | |
Notes to Financial Statements (Continued)
First Trust Low Duration Opportunities ETF (LMBS)April 30, 2024 (Unaudited) 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 | |
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 Chairs of the Audit Committee, Nominating and Governance Committee and Valuation Committee, the Vice Chair of the Audit Committee, the Lead Independent Trustee and the Vice Lead Independent Trustee 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 Committee Chairs, the Audit Committee Vice Chair, the Lead Independent Trustee and the Vice Lead Independent Trustee rotate periodically in serving in such capacities. 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 six months ended April 30, 2024, were $6,749,707,752 and $77,564,340, 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 six months ended April 30, 2024 were $6,597,860,812 and $308,072,280, respectively. The cost of purchases to cover short sales and the proceeds of short sales were $5,210,563,978 and $4,966,286,340, respectively.
For the six months ended April 30, 2024, the Fund had no in-kind transactions.
Notes to Financial Statements (Continued)
First Trust Low Duration Opportunities ETF (LMBS)April 30, 2024 (Unaudited) 5. Derivative Transactions
The following table presents the types of derivatives held by the Fund at April 30, 2024, 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 six months ended April 30, 2024, 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 | |
| |
For the six months ended April 30, 2024, the notional value of futures contracts opened and closed were $6,196,376,829 and $5,595,696,568, respectively.
During the six months ended April 30, 2024, the premiums for purchased options contracts opened were $2,112,207 and the premiums for purchased options contracts closed, exercised and expired were $2,898,580.
During the six months ended April 30, 2024, the premiums for written options contracts opened were $42,666,585 and the premiums for written options contracts closed, exercised and expired were $48,316,697.
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 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
Notes to Financial Statements (Continued)
First Trust Low Duration Opportunities ETF (LMBS)April 30, 2024 (Unaudited) 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.
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.
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.
Management has evaluated the impact of all subsequent events on the Fund through the date the financial statements were issued and has identified the following subsequent event requiring recognition or disclosure in the financial statements:
On June 2, 2024, the Board of Trustees of the Trust approved a Fee Offset Agreement on behalf of the Fund. Effective July 1, 2024, the Advisor has agreed to offset the acquired fund fees that the Fund pays as an investor in other ETFs advised by the Advisor. The offset will take the form of a reduction of the management fee the Advisor charges to the Fund.
First Trust Low Duration Opportunities ETF (LMBS)April 30, 2024 (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.
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.
Risks are inherent in all investing. Certain general risks that may be applicable to a Fund are identified below, but not all of the material risks relevant to each Fund are included in this report and not all of the risks below apply to each Fund. The material risks of investing in each Fund are spelled out in its prospectus, statement of additional information and other regulatory filings. Before investing, you should consider each Fund’s investment objective, risks, charges and expenses, and read each Fund’s prospectus and statement of additional information carefully. You can download each Fund’s prospectus at www.ftportfolios.com or contact First Trust Portfolios L.P. at (800) 621-1675 to request a prospectus, which contains this and other information about each Fund.
Concentration Risk. To the extent that a fund is able to invest a significant percentage of its assets in a single asset class or the securities of issuers within the same country, state, region, industry or sector, an adverse economic, business or political development may affect the value of the fund’s investments more than if the fund were more broadly diversified. A fund that tracks an index will be concentrated to the extent the fund’s corresponding index is concentrated. A concentration makes a fund more susceptible to any single occurrence and may subject the fund to greater market risk than a fund that is more broadly diversified.
Credit Risk. Credit risk is the risk that an issuer of a security will be unable or unwilling to make dividend, interest and/or principal payments when due and the related risk that the value of a security may decline because of concerns about the issuer’s ability to make such payments.
Cyber Security Risk. The funds are susceptible to potential operational risks through breaches in cyber security. A breach in cyber security refers to both intentional and unintentional events that may cause a fund to lose proprietary information, suffer data corruption or lose operational capacity. Such events could cause a fund to incur regulatory penalties, reputational damage, additional compliance costs associated with corrective measures and/or financial loss. In addition, cyber security breaches of a fund’s third-party service providers, such as its administrator, transfer agent, custodian, or sub-advisor, as applicable, or issuers in which the fund invests, can also subject a fund to many of the same risks associated with direct cyber security breaches.
Defined Outcome Funds Risk. To the extent a fund’s investment strategy is designed to deliver returns tied to the price performance of an underlying ETF, an investor may not realize the returns the fund seeks to achieve if that investor does not hold shares for the entire target outcome period. In the event an investor purchases shares after the first day of the target outcome period or sells shares prior to the end of the target outcome period, the buffer that the fund seeks to provide against a decline in the value of the underlying ETF may not be available, the enhanced returns that the fund seeks to provide (if any) may not be available and the investor may not participate in a gain in the value of the underlying ETF up to the cap for the investor’s investment period. Additionally, the fund will not participate in gains of the underlying ETF above the cap and a shareholder may lose their entire investment. If the fund seeks enhanced returns, there are certain time periods when the value of the fund may fall faster than the value of the underlying ETF, and it is very unlikely that, on any given day during which the underlying ETF share price increases in value, the fund’s share price will increase at the same rate as the enhanced returns sought by the fund, which is designed for an entire target outcome period. Trading flexible exchange options involves risks different from, or possibly greater than, the risks associated with investing directly in securities, such as less liquidity and correlation and valuation risks. A fund may experience substantial downside from specific flexible exchange option positions and certain positions may expire worthless.
Additional Information (Continued)
First Trust Low Duration Opportunities ETF (LMBS)April 30, 2024 (Unaudited) 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.
Additional Information (Continued)
First Trust Low Duration Opportunities ETF (LMBS)April 30, 2024 (Unaudited) 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
Additional Information (Continued)
First Trust Low Duration Opportunities ETF (LMBS)April 30, 2024 (Unaudited) 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
Liquidity Risk Management Program
In accordance with Rule 22e-4 under the Investment Company Act of 1940, as amended (the “1940 Act”), the Fund and each other fund in the First Trust Fund Complex, other than the closed-end funds, have adopted and implemented a liquidity risk management program (the “Program”) reasonably designed to assess and manage the funds’ liquidity risk, i.e., the risk that a fund could not meet requests to redeem shares issued by the fund without significant dilution of remaining investors’ interests in the fund. The Board of Trustees of the First Trust Funds has appointed First Trust Advisors L.P. (the “Advisor”) as the person designated to administer the Program, and in this capacity the Advisor performs its duties primarily through the activities and efforts of the First Trust Liquidity Committee.
Pursuant to the Program, the Liquidity Committee classifies the liquidity of each fund’s portfolio investments into one of the four liquidity categories specified by Rule 22e-4: highly liquid investments, moderately liquid investments, less liquid investments and illiquid investments. The Liquidity Committee determines certain of the inputs for this classification process, including reasonably anticipated trade sizes and significant investor dilution thresholds. The Liquidity Committee also determines and periodically reviews a highly liquid investment minimum for certain funds, monitors the funds’ holdings of assets classified as illiquid investments to seek to ensure they do not exceed 15% of a fund’s net assets and establishes policies and procedures regarding redemptions in kind.
At the April 25, 2024 meeting of the Board of Trustees, as required by Rule 22e-4 and the Program, the Advisor provided the Board with a written report prepared by the Advisor that addressed the operation of the Program during the period from March 23, 2023 through the Liquidity Committee’s annual meeting held on March 14, 2024 and assessed the Program’s adequacy and effectiveness of implementation during this period, including the operation of the highly liquid investment minimum for each fund that is required under the Program to have one, and any material changes to the Program. Note that because the Fund primarily holds assets that are highly liquid investments, the Fund has not adopted a highly liquid investment minimum.
As stated in the written report, during the review period, no fund breached the 15% limitation on illiquid investments, no fund with a highly liquid investment minimum breached that minimum during the reporting period and no fund was required to file a Form N-RN during the reporting period. The Advisor concluded that each fund’s investment strategy is appropriate for an open-end fund; that the Program operated effectively in all material respects during the review period; and that the Program is reasonably designed to assess and manage the liquidity risk of each fund and to maintain compliance with Rule 22e-4.
First Trust Exchange-Traded Fund IV
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
Chapman and Cutler LLP
320 South Canal Street
Chicago, IL 60606
|
For the Six Months Ended
April 30, 2024 |
First Trust Exchange-Traded Fund IV
First Trust SSI Strategic Convertible Securities ETF (FCVT) |
First Trust SSI Strategic Convertible Securities ETF (FCVT)
Semi-Annual Report
April 30, 2024
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 webpage at www.ftportfolios.com.
This report contains information that may help you evaluate your investment in the Fund. It includes details about the Fund and presents data and analysis that provide insight into the Fund’s performance and investment approach.
The statistical information that follows may help you understand the Fund’s performance compared to that of relevant market benchmarks.
It is important to keep in mind that the opinions expressed by personnel of the Advisor 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 its prospectus, statement of additional information, and other Fund regulatory filings.
First Trust SSI Strategic Convertible Securities ETF (FCVT)
Semi-Annual Letter from the Chairman and CEO
April 30, 2024
First Trust is pleased to provide you with the semi-annual report for the First Trust SSI Strategic Convertible Securities ETF (the “Fund”), which contains detailed information about the Fund for the six-month period ended April 30, 2024.
On March 16, 2022, the Federal Reserve (the “Fed”) initiated the first of what have been eleven increases to the Federal Funds target rate thus far in the current cycle. Given its potential impact, financial pundits have been debating the direction and timing of the Fed’s interest rate policy ever since. In December 2023, the Fed gave some guidance, announcing that it expected to implement up to three interest rate cuts totaling 75 basis points (“bps”) in 2024. Investors responded to the news with exuberance. In the U.S., the S&P 500® Index surged by 10.56% on a total return basis in the first quarter of 2024, adding to its already stunning 26.29% total return in 2023. For comparison, the yield on the 10-Year Treasury Note (“T-Note”) stood at 3.80% on December 27, 2023, down a stunning 119 bps from its most recent high of 4.99% set just months prior on October 19, 2023. Bond yields generally move in the opposite direction of prices. Given this relationship, the decline in the 10-Year T-Note’s yield is indicative of investor’s desire to lock in higher income payments prior to the Fed reducing its policy rate.
At this point, it makes sense to step back and highlight several ways the Fed’s interest rate policy has impacted the U.S. economy. We’ll start with the good news. On April 30, 2024, inflation, as measured by the trailing 12-month rate on the Consumer Price Index, stood at 3.4%, down significantly from its most recent peak of 9.1% set in June 2022. Additionally, the higher Federal Funds target rate has been a boon for those investors with assets in fixed income, money market, and other interest-bearing accounts. The total value of assets held in U.S. money market accounts stood at $6.0 trillion on May 1, 2024, nearly double where it stood just five years ago. Notably, the weekly yield on the benchmark U.S. Treasury 3-Month Money Market Index more than doubled from 2.40% to 5.32% between the end of April 2019 and April 2024.
Now for the not-so-good news. Higher interest rates often restrict the ability of consumers and businesses to spend and finance growth, respectively. While the consumer has remained relatively unscathed thus far, evidence that they are stretching their budgets is mounting. The Federal Reserve Bank of New York reported that the total balance of U.S. credit card debt stood at a record $1.13 trillion at the end of 2023, while the average annual percentage rate for all cards rose to a record 21.59% in the first quarter of 2024. Perhaps unsurprisingly, delinquency rates have been surging. Data from the Federal Reserve Bank of St. Louis revealed that the delinquency rate on credit card loans for all U.S. commercial banks rose to 3.10% in the fourth quarter of 2023, up from 2.62% in the fourth quarter of 2019 (pre-COVID-19). In April 2024, 43% of small and mid-sized U.S. businesses were unable to pay their rent on time and in full. In addition, higher interest rates are impacting economic growth. In the U.S., real gross domestic product growth was a tepid 1.6% in the first quarter of 2024, far below consensus expectations of 2.5%. Not even the U.S. government is immune to the impacts of higher interest rates. At the end of the first quarter of 2024, the interest payments paid by the Federal government stood at a record $1.06 trillion, nearly double their total of $0.56 trillion at the end of the fourth quarter of 2019.
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.”
|
| | | Average Annual Total Returns | |
| | | | Inception
(11/3/15)
to 4/30/24 | | Inception
(11/3/15)
to 4/30/24 |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
ICE BofA All US Convertible Index | | | | | | |
Bloomberg US Aggregate Bond 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 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 SSI Strategic Convertible Securities ETF (FCVT) (Continued)
| % of Total
Long-Term
Investments |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| % of Total
Long-Term
Investments |
| |
| |
| |
Royal Caribbean Cruises Ltd. | |
Morgan Stanley Finance LLC, Medium-Term Note | |
| |
Akamai Technologies, Inc. | |
| |
Apollo Global Management, 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.
First Trust SSI Strategic Convertible Securities ETF (FCVT)Semi-Annual ReportApril 30, 2024 (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.
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 the 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.
First Trust SSI Strategic Convertible Securities ETF (FCVT)Understanding Your Fund ExpensesApril 30, 2024 (Unaudited) As a shareholder of 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 April 30, 2024.
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
November 1, 2023 | Ending
Account Value
April 30, 2024 | 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) |
| | | | |
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 (November 1, 2023 through April 30, 2024), multiplied by 182/366 (to reflect the six-month period). |
First Trust SSI Strategic Convertible Securities ETF (FCVT)Portfolio of InvestmentsApril 30, 2024 (Unaudited)
| | | | |
CONVERTIBLE CORPORATE BONDS AND NOTES — 85.2% |
| Aerospace & Defense — 1.8% | |
| | | | |
| JPMorgan Chase Financial Co., LLC | | | |
| | | | | |
| Automobile Components — 0.5% | |
| | | | |
| | |
| | | | |
| Rivian Automotive, Inc. (b) | | | |
| | | | | |
| | |
| Morgan Stanley Finance LLC | | | |
| | |
| | | | |
| | | | |
| | | | |
| | | | |
| Halozyme Therapeutics, Inc. | | | |
| Immunocore Holdings PLC (b) | | | |
| | | | |
| Ionis Pharmaceuticals, Inc. | | | |
| Mirum Pharmaceuticals, Inc. (b) | | | |
| | | | |
| Sarepta Therapeutics, Inc. | | | |
| | | | | |
| | |
| | | | |
| Commercial Services & Supplies — 0.7% | |
| | | | |
| Communications Equipment — 0.4% | |
| Lumentum Holdings, Inc. (b) | | | |
| Construction & Engineering — 1.9% | |
| | | | |
| Granite Construction, Inc. (b) | | | |
| | | | | |
| | |
| Bread Financial Holdings, Inc. (b) | | | |
| | | | |
| SoFi Technologies, Inc. (b) | | | |
| | | | |
| | | | | |
| Consumer Staples Distribution & Retail — 0.4% | |
| Chefs’ (The) Warehouse, Inc. | | | |
| Diversified Consumer Services — 0.5% | |
| | | | |
| Electric Utilities — 2.3% | |
| | | | |
See Notes to Financial Statements
First Trust SSI Strategic Convertible Securities ETF (FCVT)Portfolio of Investments (Continued)April 30, 2024 (Unaudited) | | | | |
CONVERTIBLE CORPORATE BONDS AND NOTES (Continued) |
| Electric Utilities (Continued) | |
| NextEra Energy Capital Holdings, Inc. (b) | | | |
| | | | |
| | | | | |
| Electrical Equipment — 0.9% | |
| | | | |
| | | | |
| | | | | |
| Electronic Equipment, Instruments & Components — 1.1% | |
| Advanced Energy Industries, Inc. (b) | | | |
| | | | |
| | | | | |
| | |
| | | | |
| | | | |
| Sphere Entertainment Co. (b) | | | |
| | | | | |
| Financial Services — 3.3% | |
| | | | |
| | | | |
| Global Payments, Inc. (b) | | | |
| | | | |
| | | | | |
| | |
| | | | |
| | | | |
| | | | | |
| Ground Transportation — 2.1% | |
| | | | |
| | | | |
| Uber Technologies, Inc. (b) | | | |
| | | | | |
| Health Care Equipment & Supplies — 5.6% | |
| | | | |
| | | | |
| Envista Holdings Corp. (b) | | | |
| | | | |
| | | | |
| | | | |
| Merit Medical Systems, Inc. (b) | | | |
| TransMedics Group, Inc. (b) | | | |
| | | | | |
| | |
| | | | |
| | | | |
| | | | | |
| Health Care Technology — 0.5% | |
| | | | |
See Notes to Financial Statements
First Trust SSI Strategic Convertible Securities ETF (FCVT)Portfolio of Investments (Continued)April 30, 2024 (Unaudited) | | | | |
CONVERTIBLE CORPORATE BONDS AND NOTES (Continued) |
| Hotel & Resort REITs — 0.8% | |
| | | | |
| Summit Hotel Properties, Inc. | | | |
| | | | | |
| Hotels, Restaurants & Leisure — 7.1% | |
| | | | |
| | | | |
| Cheesecake (The) Factory, Inc. | | | |
| DraftKings Holdings, Inc. | | | |
| | | | |
| | | | |
| Royal Caribbean Cruises Ltd. | | | |
| | | | |
| | | | | |
| | |
| | | | |
| Interactive Media & Services — 4.2% | |
| Liberty TripAdvisor Holdings, Inc. (b) | | | |
| Match Group Financeco 3, Inc. (b) | | | |
| Morgan Stanley Finance LLC, Medium-Term Note | | | |
| | | | |
| | | | | |
| | |
| Akamai Technologies, Inc. | | | |
| DigitalOcean Holdings, Inc. | | | |
| | | | |
| | | | | |
| | |
| | | | |
| | |
| | | | |
| | | | |
| | | | |
| | | | | |
| | |
| Two Harbors Investment Corp. | | | |
| | |
| CenterPoint Energy, Inc. (b) | | | |
| Oil, Gas & Consumable Fuels — 1.8% | |
| | | | |
| Permian Resources Operating LLC | | | |
| Pioneer Natural Resources Co. | | | |
| | | | | |
| Passenger Airlines — 1.1% | |
| American Airlines Group, Inc. | | | |
| | | | |
| | | | | |
See Notes to Financial Statements
First Trust SSI Strategic Convertible Securities ETF (FCVT)Portfolio of Investments (Continued)April 30, 2024 (Unaudited) | | | | |
CONVERTIBLE CORPORATE BONDS AND NOTES (Continued) |
| Personal Care Products — 0.5% | |
| Beauty Health (The) Co. (b) | | | |
| | |
| Amphastar Pharmaceuticals, Inc. (b) | | | |
| | | | |
| | | | |
| Revance Therapeutics, Inc. | | | |
| | | | | |
| Professional Services — 1.0% | |
| | | | |
| Real Estate Management & Development — 1.3% | |
| | | | |
| | | | |
| | | | | |
| Semiconductors & Semiconductor Equipment — 4.5% | |
| | | | |
| | | | |
| MACOM Technology Solutions Holdings, Inc. | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | | |
| | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | | |
| | |
| Burlington Stores, Inc. (b) | | | |
| | | | |
| | | | |
| | | | | |
| Technology Hardware, Storage & Peripherals — 3.2% | |
| | | | |
See Notes to Financial Statements
First Trust SSI Strategic Convertible Securities ETF (FCVT)Portfolio of Investments (Continued)April 30, 2024 (Unaudited) | | | | |
CONVERTIBLE CORPORATE BONDS AND NOTES (Continued) |
| Technology Hardware, Storage & Peripherals (Continued) | |
| Super Micro Computer, Inc. (b) | | | |
| Western Digital Corp. (b) | | | |
| | | | | |
| | |
| American Water Capital Corp. (b) | | | |
| Total Convertible Corporate Bonds and Notes | |
| | |
| | | | | |
CONVERTIBLE PREFERRED SECURITIES — 6.7% |
| | |
| Bank of America Corp., Series L | | | |
| Wells Fargo & Co., Series L | | | |
| | | | | |
| | |
| | | | |
| Electric Utilities — 0.4% | |
| | | | |
| Financial Services — 1.3% | |
| Apollo Global Management, Inc. | | | |
| | |
| Chart Industries, Inc., Series B | | | |
| RBC Bearings, Inc., Series A | | | |
| | | | | |
| Total Convertible Preferred Securities | |
| | |
| | |
MONEY MARKET FUNDS — 3.9% |
| Dreyfus Government Cash Management Fund, Institutional Shares - 5.19% (e) | |
| | |
|
|
| Total Investments — 95.8% | |
| | |
| Net Other Assets and Liabilities — 4.2% | |
| | |
| |
| 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 April 30, 2024, securities noted as such amounted to $20,540,148 or 26.0% of net assets. |
| This security may be resold to qualified foreign investors and foreign institutional buyers under Regulation S of the 1933 Act. |
See Notes to Financial Statements
First Trust SSI Strategic Convertible Securities ETF (FCVT)Portfolio of Investments (Continued)April 30, 2024 (Unaudited) | |
| Rate shown reflects yield as of April 30, 2024. |
Abbreviations throughout the Portfolio of Investments: |
| – Real Estate Investment Trusts |
Valuation InputsA summary of the inputs used to value the Fund’s investments as of April 30, 2024 is as follows (see Note 2A - Portfolio Valuation in the Notes to Financial Statements):
| | | Level 2
Significant
Observable
Inputs | Level 3
Significant
Unobservable
Inputs |
Convertible Corporate Bonds and Notes* | | | | |
Convertible Preferred Securities* | | | | |
| | | | |
| | | | |
| See Portfolio of Investments for industry breakout. |
See Notes to Financial Statements
First Trust SSI Strategic Convertible Securities ETF (FCVT)Statement of Assets and Liabilities
April 30, 2024 (Unaudited)
| |
| |
| |
| |
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 SSI Strategic Convertible Securities ETF (FCVT)Statement of Operations
For the Six Months Ended April 30, 2024 (Unaudited)
| |
| |
| |
| |
| |
|
| |
| |
| |
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 SSI Strategic Convertible Securities ETF (FCVT)Statements of Changes in Net Assets
| Six Months
Ended
4/30/2024 (Unaudited) | |
| | |
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 SSI Strategic Convertible Securities ETF (FCVT)Financial Highlights
For a share outstanding throughout each period
| Six Months
Ended
4/30/2024
(Unaudited) | |
| | | | | |
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) | | | | | | |
| Amount represents less than $0.01. |
| 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 SSI Strategic Convertible Securities ETF (FCVT)April 30, 2024 (Unaudited) 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 twenty-two 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”). 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 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.
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 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 SSI Strategic Convertible Securities ETF (FCVT)April 30, 2024 (Unaudited) 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.
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)
available market prices for the fixed-income security;
3)
the fundamental business data relating to the 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 the security;
6)
the financial statements of the issuer;
7)
the credit quality and cash flow of the issuer, based on the sub-advisor’s 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 (or equity securities) of the issuer/borrower, or comparable companies;
11)
the quality, value and salability of collateral, if any, securing the security;
12)
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;
13)
the prospects for the issuer’s industry, and multiples (of earnings and/or cash flows) being paid for similar businesses in that industry; and
14)
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;
Notes to Financial Statements (Continued)
First Trust SSI Strategic Convertible Securities ETF (FCVT)April 30, 2024 (Unaudited) 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 April 30, 2024, 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.
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 included in “Net realized gain (loss) on foreign currency transactions” on the Statement of Operations. The portion of foreign currency gains and losses related to fluctuations in exchange rates between the initial purchase settlement date and subsequent sale trade date is included in “Net realized gain (loss) on investments” on the Statement of Operations.
Notes to Financial Statements (Continued)
First Trust SSI Strategic Convertible Securities ETF (FCVT)April 30, 2024 (Unaudited) 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 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 year 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) | |
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 April 30, 2024, 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 $28,336,984 of non-expiring 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.
Notes to Financial Statements (Continued)
First Trust SSI Strategic Convertible Securities ETF (FCVT)April 30, 2024 (Unaudited) As of April 30, 2024, 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) |
| | | |
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.
The shareholders of the Fund voted at the special meeting of shareholders on April 15, 2024 to approve for the Fund (1) a new investment sub-advisory agreement (the “New Sub-Advisory Agreement”) among the Trust, on behalf of the Fund, the Advisor, as investment advisor, and SSI, as investment sub-advisor, and (2) a “manager of managers” structure (the “Manager of Managers Structure”). SSI (or its predecessor entity, SSI Investment Management Inc.) has served as the investment sub-advisor to the Fund since the Fund’s inception and continues to sub-advise the Fund. Resolute Investment Managers, Inc. (“RIM”), an indirect wholly-owned subsidiary of Resolute Topco, Inc. (“Topco”), has held a majority ownership interest in SSI since 2019. On December 29, 2023, RIM and certain of its affiliates (collectively, “Resolute”) and their equity owners completed a transaction (the “Transaction”) with certain creditors of RIM to strengthen Resolute’s capital structure (the “Closing”). In connection with the Closing, (i) RIM, Resolute Investment Holdings, LLC (“RIH”), Topco (which was a wholly-owned subsidiary of RIH) and certain of their affiliates and (ii) the prior owners of approximately 93% of RIH entered into an exchange agreement with certain creditors of RIM (the “New Ownership Group”) pursuant to which, among other things, new equity interests in Topco were issued to members of the New Ownership Group and the then-existing equity interests in RIH were retired and canceled. Since the Closing, SSI has been majority owned indirectly by the New Ownership Group. The Closing operated as an “assignment” (as defined in the 1940 Act), resulting in the automatic termination of the Fund’s then-existing investment sub-advisory agreement with SSI as of December 29, 2023. Since then, prior to the receipt of shareholder approval of the New Sub-Advisory Agreement, SSI had been providing investment sub-advisory services to the Fund on an interim basis, as permitted under the 1940 Act. The New Sub-Advisory Agreement became effective upon shareholder approval. In general terms, under the Fund’s Manager of Managers Structure, the Advisor, subject to approval by the Board of Trustees of the Trust, may appoint and replace affiliated and unaffiliated investment sub-advisors and enter into and materially amend investment sub-advisory agreements for the Fund without shareholder approval. In addition, under the Manager of Managers Structure, the Fund is permitted to disclose, as applicable, certain information regarding investment advisory and
sub-advisory fees on an aggregate, rather than an individual, basis in various disclosure documents.
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
Notes to Financial Statements (Continued)
First Trust SSI Strategic Convertible Securities ETF (FCVT)April 30, 2024 (Unaudited) 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:
| |
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 | |
Prior to November 6, 2023, First Trust also provided fund reporting services to the Fund for a flat annual fee in the amount of $9,250, which was covered under the annual unitary management fee.
Effective November 6, 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.
Prior to November 6, 2023, the Trust had multiple service agreements with Brown Brothers Harriman & Co. (“BBH”). Under the service agreements, BBH performed custodial, fund accounting, certain administrative services, and transfer agency services for the Fund. As custodian, BBH was responsible for custody of the Fund’s assets. As fund accountant and administrator, BBH was responsible for maintaining the books and records of the Fund’s securities and cash. As transfer agent, BBH was 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.
Additionally, the Chairs of the Audit Committee, Nominating and Governance Committee and Valuation Committee, the Vice Chair of the Audit Committee, the Lead Independent Trustee and the Vice Lead Independent Trustee 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 Committee Chairs, the Audit Committee Vice Chair, the Lead Independent Trustee and the Vice Lead Independent Trustee rotate periodically in serving in such capacities. The officers and “Interested” Trustee receive no compensation from the Trust for acting in such capacities.
4. Purchases and Sales of Securities
For the six months ended April 30, 2024, the cost of purchases and proceeds from sales of investments, excluding short-term investments and in-kind transactions, were $40,902,811 and $54,819,730, respectively.
For the six months ended April 30, 2024, the cost of in-kind purchases and proceeds from in-kind sales were $0 and $3,278,462, 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 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.
Notes to Financial Statements (Continued)
First Trust SSI Strategic Convertible Securities ETF (FCVT)April 30, 2024 (Unaudited) 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.
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.
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.
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.
First Trust SSI Strategic Convertible Securities ETF (FCVT)April 30, 2024 (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.
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.
Submission of Matters to a Vote of Shareholders
FCVT held its Special Meeting of Shareholders (the “Special Meeting”) on April 15, 2024. At the Special Meeting, the shareholders approved (1) a new investment sub-advisory agreement (the “New Sub-Advisory Agreement”) among the Trust, on behalf of the Fund, FTA, as investment advisor, and SSI Investment Management LLC (“SSI”), as investment sub-advisor, and (2) a “manager of managers” structure (the “Manager of Managers Structure”). Out of 3,100,002 outstanding shares, 1,667,735 total shares voted for each proposal (53.80% of shares voted) constituting a quorum. Of the 1,667,735 shares that voted regarding the proposal to approve the new investment sub-advisory agreement, 1,382,306 (82.89% of shares that voted) voted for it, 20,620 (1.24% of shares voted) voted against it, and 264,809 (15.88% of shares voted) abstained. Of the 1,667,735 of shares that voted regarding the manager of managers structure, 1,367,470 (82.00% of shares that voted) voted for it, 37,672 (2.26% of shares voted) voted against it, and 262,593 (15.75% of shares voted) abstained.
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
Additional Information (Continued)
First Trust SSI Strategic Convertible Securities ETF (FCVT)April 30, 2024 (Unaudited) 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 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
Additional Information (Continued)
First Trust SSI Strategic Convertible Securities ETF (FCVT)April 30, 2024 (Unaudited) 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 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.
Additional Information (Continued)
First Trust SSI Strategic Convertible Securities ETF (FCVT)April 30, 2024 (Unaudited) 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
Liquidity Risk Management Program
In accordance with Rule 22e-4 under the Investment Company Act of 1940, as amended (the “1940 Act”), the Fund and each other fund in the First Trust Fund Complex, other than the closed-end funds, have adopted and implemented a liquidity risk management program (the “Program”) reasonably designed to assess and manage the funds’ liquidity risk, i.e., the risk that a fund could not meet requests to redeem shares issued by the fund without significant dilution of remaining investors’ interests in the fund. The Board of Trustees of the First Trust Funds has appointed First Trust Advisors L.P. (the “Advisor”) as the person designated to administer the Program, and in this capacity the Advisor performs its duties primarily through the activities and efforts of the First Trust Liquidity Committee.
Pursuant to the Program, the Liquidity Committee classifies the liquidity of each fund’s portfolio investments into one of the four liquidity categories specified by Rule 22e-4: highly liquid investments, moderately liquid investments, less liquid investments and illiquid investments. The Liquidity Committee determines certain of the inputs for this classification process, including reasonably anticipated trade sizes and significant investor dilution thresholds. The Liquidity Committee also determines and periodically reviews a highly liquid investment minimum for certain funds, monitors the funds’ holdings of assets classified as illiquid investments to seek to ensure they do not exceed 15% of a fund’s net assets and establishes policies and procedures regarding redemptions in kind.
At the April 25, 2024 meeting of the Board of Trustees, as required by Rule 22e-4 and the Program, the Advisor provided the Board with a written report prepared by the Advisor that addressed the operation of the Program during the period from March 23, 2023 through the Liquidity Committee’s annual meeting held on March 14, 2024 and assessed the Program’s adequacy and effectiveness of implementation during this period, including the operation of the highly liquid investment minimum for each fund that is required under the Program to have one, and any material changes to the Program. Note that because the Fund primarily holds assets that are highly liquid investments, the Fund has not adopted a highly liquid investment minimum.
As stated in the written report, during the review period, no fund breached the 15% limitation on illiquid investments, no fund with a highly liquid investment minimum breached that minimum during the reporting period and no fund was required to file a Form N-RN during the reporting period. The Advisor concluded that each fund’s investment strategy is appropriate for an open-end fund; that the Program operated effectively in all material respects during the review period; and that the Program is reasonably designed to assess and manage the liquidity risk of each fund and to maintain compliance with Rule 22e-4.
First Trust Exchange-Traded Fund IV
First Trust Advisors L.P.
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
SSI Investment Management LLC
2121 Avenue of the Stars, Suite 2050
Los Angeles, CA 90067
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
Chapman and Cutler LLP
320 South Canal Street
Chicago, IL 60606
|
For the Six Months Ended
April 30, 2024 |
First Trust Exchange-Traded Fund IV
First Trust Long Duration Opportunities ETF (LGOV) |
First Trust Long Duration Opportunities ETF (LGOV)
Semi-Annual Report
April 30, 2024
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.
This report contains information that may help you evaluate your investment in the Fund. It includes details about the Fund and presents data and analysis that provide insight into the Fund’s performance and investment approach.
The statistical information that follows may help you understand the Fund’s performance compared to that of relevant market benchmarks.
It is important to keep in mind that the opinions expressed by personnel of the Advisor are just that: informed opinions. They should not be considered to be promises or advice. The opinions, like the statistics, cover the period through the date on the cover of this report. The material risks of investing in the Fund are spelled out in the prospectus, the statement of additional information, and other Fund regulatory filings.
First Trust Long Duration Opportunities ETF (LGOV)
Semi-Annual Letter from the Chairman and CEO
April 30, 2024
First Trust is pleased to provide you with the semi-annual report for the First Trust Long Duration Opportunities ETF (the “Fund”), which contains detailed information about the Fund for the six-month period ended April 30, 2024.
On March 16, 2022, the Federal Reserve (the “Fed”) initiated the first of what have been eleven increases to the Federal Funds target rate thus far in the current cycle. Given its potential impact, financial pundits have been debating the direction and timing of the Fed’s interest rate policy ever since. In December 2023, the Fed gave some guidance, announcing that it expected to implement up to three interest rate cuts totaling 75 basis points (“bps”) in 2024. Investors responded to the news with exuberance. In the U.S., the S&P 500® Index surged by 10.56% on a total return basis in the first quarter of 2024, adding to its already stunning 26.29% total return in 2023. For comparison, the yield on the 10-Year Treasury Note (“T-Note”) stood at 3.80% on December 27, 2023, down a stunning 119 bps from its most recent high of 4.99% set just months prior on October 19, 2023. Bond yields generally move in the opposite direction of prices. Given this relationship, the decline in the 10-Year T-Note’s yield is indicative of investor’s desire to lock in higher income payments prior to the Fed reducing its policy rate.
At this point, it makes sense to step back and highlight several ways the Fed’s interest rate policy has impacted the U.S. economy. We’ll start with the good news. On April 30, 2024, inflation, as measured by the trailing 12-month rate on the Consumer Price Index, stood at 3.4%, down significantly from its most recent peak of 9.1% set in June 2022. Additionally, the higher Federal Funds target rate has been a boon for those investors with assets in fixed income, money market, and other interest-bearing accounts. The total value of assets held in U.S. money market accounts stood at $6.0 trillion on May 1, 2024, nearly double where it stood just five years ago. Notably, the weekly yield on the benchmark U.S. Treasury 3-Month Money Market Index more than doubled from 2.40% to 5.32% between the end of April 2019 and April 2024.
Now for the not-so-good news. Higher interest rates often restrict the ability of consumers and businesses to spend and finance growth, respectively. While the consumer has remained relatively unscathed thus far, evidence that they are stretching their budgets is mounting. The Federal Reserve Bank of New York reported that the total balance of U.S. credit card debt stood at a record $1.13 trillion at the end of 2023, while the average annual percentage rate for all cards rose to a record 21.59% in the first quarter of 2024. Perhaps unsurprisingly, delinquency rates have been surging. Data from the Federal Reserve Bank of St. Louis revealed that the delinquency rate on credit card loans for all U.S. commercial banks rose to 3.10% in the fourth quarter of 2023, up from 2.62% in the fourth quarter of 2019 (pre-COVID-19). In April 2024, 43% of small and mid-sized U.S. businesses were unable to pay their rent on time and in full. In addition, higher interest rates are impacting economic growth. In the U.S., real gross domestic product growth was a tepid 1.6% in the first quarter of 2024, far below consensus expectations of 2.5%. Not even the U.S. government is immune to the impacts of higher interest rates. At the end of the first quarter of 2024, the interest payments paid by the Federal government stood at a record $1.06 trillion, nearly double their total of $0.56 trillion at the end of the fourth quarter of 2019.
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.
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| | | Average Annual Total Returns | |
| | | | Inception
(1/22/19)
to 4/30/24 | | Inception
(1/22/19)
to 4/30/24 |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
ICE BofA 5+ Year US Treasury Index | | | | | | |
Bloomberg US Aggregate Bond 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)
First Trust Long Duration Opportunities ETF (LGOV) (Continued)
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U.S. Government Agency Mortgage-Backed Securities | |
U.S. Government Bonds and Notes | |
U.S. Government Agency Securities | |
| |
| |
| |
Net Other Assets and Liabilities(2) | |
| |
| % of Total Long
Fixed-Income
Investments, Cash
& Cash Equivalents |
| |
| |
| |
| |
Federal National Mortgage Association, Series 2012-134, Class ZC, 2.50%, 12/25/42 | |
U.S. Treasury Bond, 4.38%, 08/15/43 | |
Federal Home Loan Mortgage Corporation, Pool SD7550, 3.00%, 02/01/52 | |
U.S. Treasury Bond, 4.50%, 02/15/44 | |
Federal National Mortgage Association, Pool FM9712, 3.50%, 11/01/50 | |
U.S. Treasury Bond, 4.75%, 11/15/43 | |
U.S. Treasury Bond, 4.75%, 11/15/53 | |
Federal Home Loan Mortgage Corporation, Pool SD7509, 3.00%, 11/01/49 | |
Federal National Mortgage Association, Series 2024-6, Class AL, 2.00%, 03/25/44 | |
Government National Mortgage Association, Series 2023-164, Class AZ, 3.00%, 01/20/52 | |
| |
Weighted Average Effective Net Duration |
| |
| |
| |
| Amount is less than 0.1%. |
| Includes variation margin on futures contracts. |
| 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, DBRS, Inc., Kroll Bond Rating Agency, Inc. 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 rating is used. A credit rating is an assessment provided by a NRSRO, of the creditworthiness of an issuer with respect to debt obligations. 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. “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. U.S. Agency, U.S. Agency mortgage-backed, and U.S. Treasury 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 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 Long Duration Opportunities ETF (LGOV)Semi-Annual ReportApril 30, 2024 (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.
First Trust Long Duration Opportunities ETF (LGOV)Understanding Your Fund ExpensesApril 30, 2024 (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 April 30, 2024.
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
November 1, 2023 | Ending
Account Value
April 30, 2024 | 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 (November 1, 2023 through April 30, 2024), multiplied by 182/366 (to reflect the six-month period). |
First Trust Long Duration Opportunities ETF (LGOV)Portfolio of InvestmentsApril 30, 2024 (Unaudited)
| | | | |
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES — 74.9% |
| Collateralized Mortgage Obligations — 45.5% | |
| | | | |
| Series 2024-1, Class A2 (a) (b) | | | |
| Federal Home Loan Mortgage Corporation | | | |
| Series 2015-4471, Class JB | | | |
| Series 2015-4499, Class CZ | | | |
| Series 2017-4680, Class YZ | | | |
| Series 2017-4738, Class TY | | | |
| Series 2017-4745, Class CZ | | | |
| 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 2012-134, Class ZC | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| 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 | | | |
| Series 2023-164, Class AZ | | | |
| | | | |
| | | | |
| | | | |
| Series 2024-59, Class Z (d) | | | |
| | |
| Commercial Mortgage-Backed Securities — 10.9% | |
| Federal Home Loan Mortgage Corporation Multifamily Structured Pass Through Certificates | | | |
| Series 2018-K155, Class A3 | | | |
| Series 2018-K157, Class A3 | | | |
| Series 2019-K095, Class XAM, IO (b) | | | |
| Series 2019-K1510, Class A3 | | | |
See Notes to Financial Statements
First Trust Long Duration Opportunities ETF (LGOV)Portfolio of Investments (Continued)April 30, 2024 (Unaudited) | | | | |
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 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-K131, Class XAM, IO (b) | | | |
| Series 2021-K1519, Class A2 | | | |
| Series 2022-K140, Class XAM, IO (b) | | | |
| Series 2022-K145, Class A2 | | | |
| Series 2022-K146, Class A2 | | | |
| Series 2023-K153, Class X1, IO (b) | | | |
| Series 2023-KG08, Class A2 | | | |
| Federal National Mortgage Association Alternative Credit Enhancement Securities | | | |
| Series 2024-M3, Class Z (b) | | | |
| Government National Mortgage Association | | | |
| Series 2020-159, Class Z (e) | | | |
| Series 2020-197, Class Z (b) | | | |
| Series 2021-4, Class Z (b) | | | |
| Series 2021-28, Class Z (b) | | | |
| | |
| Pass-Through Securities — 18.5% | |
| Federal Home Loan Mortgage Corporation |
| | | | |
| | | | |
| Federal National Mortgage Association |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | |
| Total U.S. Government Agency Mortgage-Backed Securities | |
| | |
U.S. GOVERNMENT BONDS AND NOTES — 17.4% |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
See Notes to Financial Statements
First Trust Long Duration Opportunities ETF (LGOV)Portfolio of Investments (Continued)April 30, 2024 (Unaudited) | | | | |
U.S. GOVERNMENT BONDS AND NOTES (Continued) |
| | | | |
| | | | |
| Total U.S. Government Bonds and Notes | |
| | |
U.S. GOVERNMENT AGENCY SECURITIES — 4.9% |
| Tennessee Valley Authority | | | |
| Tennessee Valley Authority | | | |
| Tennessee Valley Authority | | | |
| Total U.S. Government Agency Securities | |
| | |
| | |
EXCHANGE-TRADED FUNDS — 0.1% |
| | |
| First Trust Intermediate Government Opportunities ETF (f) | |
| | |
MONEY MARKET FUNDS — 8.7% |
| Morgan Stanley Institutional Liquidity Funds - Treasury Portfolio - Institutional Class - 5.15% (g) | |
| | |
| Total Investments — 106.0% | |
| | |
| | | | | |
|
| Call Options Written — (0.0)% | |
| U.S. Treasury Long Bond Futures Call | | | | |
| (Premiums received $24,934) | | | | |
| Put Options Written — (0.0)% | |
| U.S. 5-Year Treasury Futures Put | | | | |
| U.S. 5-Year Treasury Futures Put | | | | |
| U.S. 10-Year Treasury Futures Put | | | | |
| U.S. Treasury Long Bond Futures Put | | | | |
| Total Put Options Written | |
| (Premiums received $170,369) | |
| | |
| (Premiums received $195,303) | |
| Net Other Assets and Liabilities — (6.0)% | |
| | |
Futures Contracts at April 30, 2024 (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 | | | | | |
See Notes to Financial Statements
First Trust Long Duration Opportunities ETF (LGOV)Portfolio of Investments (Continued)April 30, 2024 (Unaudited) Futures Contracts at April 30, 2024 (Continued):
| | | | | Unrealized Appreciation (Depreciation)/ Value |
U.S. Treasury Long Bond Futures | | | | | |
Ultra U.S. Treasury Bond Futures | | | | | |
Ultra 10-Year U.S. Treasury Notes | | | | | |
| | | | | |
| 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 April 30, 2024, securities noted as such amounted to $3,196,014 or 0.7% of net assets. |
| Collateral Strip Rate security. Coupon is based on the weighted net interest rate of the investment’s underlying collateral. The interest rate resets periodically. |
| |
| 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 April 30, 2024, securities noted as such are valued at $10,242,500 or 2.4% of net assets. |
| 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. |
| Rate shown reflects yield as of April 30, 2024. |
Abbreviations throughout the Portfolio of Investments: |
| – Interest-Only Security - Principal amount shown represents par value on which interest payments are based |
| – Principal-Only Security |
| – To-Be-Announced Security |
Valuation InputsA summary of the inputs used to value the Fund’s investments as of April 30, 2024 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 | | | | |
U.S. Government Agency Securities | | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
See Notes to Financial Statements
First Trust Long Duration Opportunities ETF (LGOV)Portfolio of Investments (Continued)April 30, 2024 (Unaudited) |
| | | Level 2
Significant
Observable
Inputs | Level 3
Significant
Unobservable
Inputs |
| | | | |
| | | | |
| | | | |
| 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. |
See Notes to Financial Statements
First Trust Long Duration Opportunities ETF (LGOV)Statement of Assets and Liabilities
April 30, 2024 (Unaudited)
| |
Investments, at value - Unaffiliated | |
Investments, at value - Affiliated | |
Total investments, at value | |
| |
Cash segregated as collateral for open futures and 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) | |
Investments, at cost - Unaffiliated | |
Investments, at cost - Affiliated | |
Total investments, at cost | |
Premiums received on options contracts written | |
See Notes to Financial Statements
First Trust Long Duration Opportunities ETF (LGOV)Statement of Operations
For the Six Months Ended April 30, 2024 (Unaudited)
| |
| |
| |
| |
| |
|
| |
| |
| |
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
| Six Months
Ended
4/30/2024 (Unaudited) | |
| | |
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
| Six Months
Ended
4/30/2024
(Unaudited) | | 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 (e) | | | | | | |
Ratio of net investment income (loss) to average net assets (e) | | | | | | |
Portfolio turnover rate (h) | | | | | | |
| 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. |
| The per share amount does not correlate with the aggregate realized and unrealized gain (loss) due to the timing of the Fund share sales and repurchases in relation to market value fluctuation of the underlying investments. |
| 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. |
| Ratio of total expenses to average net assets and ratio of net investment income (loss) to average net assets do not reflect the Fund’s proportionate share of expenses and income of underlying investment companies in which the Fund invests. |
| |
| 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 130%, 69%, 69%, 118% and 104% for the periods ended April 30, 2024, 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)April 30, 2024 (Unaudited) 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 twenty-two 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.
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)April 30, 2024 (Unaudited) 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)April 30, 2024 (Unaudited) 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 April 30, 2024, 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)April 30, 2024 (Unaudited) 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 April 30, 2024, the Fund had no when-issued, delayed-delivery securities, or forward purchase commitments.
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.
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” payable or receivable on the Statement of Assets and Liabilities.
If market conditions change unexpectedly, the Fund may not achieve the anticipated benefits of the futures contract and may realize a loss. The use of futures contracts involves the risk of imperfect correlation in movements in the price of the futures contracts, interest rates and the underlying instruments.
Notes to Financial Statements (Continued)
First Trust Long Duration Opportunities ETF (LGOV)April 30, 2024 (Unaudited) 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 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.
Notes to Financial Statements (Continued)
First Trust Long Duration Opportunities ETF (LGOV)April 30, 2024 (Unaudited) 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. The affiliated funds’ financial statements may be found at SEC.gov. 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 in affiliated funds at April 30, 2024, and for the six months 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,
Notes to Financial Statements (Continued)
First Trust Long Duration Opportunities ETF (LGOV)April 30, 2024 (Unaudited) which arise from recognizing certain items of income, expense and gain/loss in different periods for financial statement and tax purposes, will reverse at some time in the future.
The tax character of distributions paid during the fiscal year ended October 31, 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) | |
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 April 30, 2024, 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 non-expiring 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.
As of April 30, 2024, 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) |
| | | |
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,
Notes to Financial Statements (Continued)
First Trust Long Duration Opportunities ETF (LGOV)April 30, 2024 (Unaudited) 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 Chairs of the Audit Committee, Nominating and Governance Committee and Valuation Committee, the Vice Chair of the Audit Committee, the Lead Independent Trustee and the Vice Lead Independent Trustee 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 Committee Chairs, the Audit Committee Vice Chair, the Lead Independent Trustee and the Vice Lead Independent Trustee rotate periodically in serving in such capacities. 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 six months ended April 30, 2024, were $602,619,423 and $265,273, 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 six months ended April 30, 2024 were $328,320,542 and $0, respectively. The cost of purchases to cover short sales and the proceeds of short sales were $64,132,481 and $64,211,543, respectively.
For the six months ended April 30, 2024, the Fund had no in-kind transactions.
Notes to Financial Statements (Continued)
First Trust Long Duration Opportunities ETF (LGOV)April 30, 2024 (Unaudited) 5. Derivative Transactions
The following table presents the types of derivatives held by the Fund at April 30, 2024, 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 six months ended April 30, 2024, 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 six months ended April 30, 2024, the notional value of futures contracts opened and closed were $655,277,133 and $453,248,780, respectively.
During the six months ended April 30, 2024, the premiums for purchased options contracts opened were $4,693,030 and the premiums for purchased options contracts closed, exercised and expired were $6,791,966.
During the six months ended April 30, 2024, the premiums for written options contracts opened were $1,196,878 and the premiums for written options contracts closed, exercised and expired were $1,230,569.
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 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
Notes to Financial Statements (Continued)
First Trust Long Duration Opportunities ETF (LGOV)April 30, 2024 (Unaudited) 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.
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.
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.
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.
First Trust Long Duration Opportunities ETF (LGOV)April 30, 2024 (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.
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.
Risks are inherent in all investing. Certain general risks that may be applicable to a Fund are identified below, but not all of the material risks relevant to each Fund are included in this report and not all of the risks below apply to each Fund. The material risks of investing in each Fund are spelled out in its prospectus, statement of additional information and other regulatory filings. Before investing, you should consider each Fund’s investment objective, risks, charges and expenses, and read each Fund’s prospectus and statement of additional information carefully. You can download each Fund’s prospectus at www.ftportfolios.com or contact First Trust Portfolios L.P. at (800) 621-1675 to request a prospectus, which contains this and other information about each Fund.
Concentration Risk. To the extent that a fund is able to invest a significant percentage of its assets in a single asset class or the securities of issuers within the same country, state, region, industry or sector, an adverse economic, business or political development may affect the value of the fund’s investments more than if the fund were more broadly diversified. A fund that tracks an index will be concentrated to the extent the fund’s corresponding index is concentrated. A concentration makes a fund more susceptible to any single occurrence and may subject the fund to greater market risk than a fund that is more broadly diversified.
Credit Risk. Credit risk is the risk that an issuer of a security will be unable or unwilling to make dividend, interest and/or principal payments when due and the related risk that the value of a security may decline because of concerns about the issuer’s ability to make such payments.
Cyber Security Risk. The funds are susceptible to potential operational risks through breaches in cyber security. A breach in cyber security refers to both intentional and unintentional events that may cause a fund to lose proprietary information, suffer data corruption or lose operational capacity. Such events could cause a fund to incur regulatory penalties, reputational damage, additional compliance costs associated with corrective measures and/or financial loss. In addition, cyber security breaches of a fund’s third-party service providers, such as its administrator, transfer agent, custodian, or sub-advisor, as applicable, or issuers in which the fund invests, can also subject a fund to many of the same risks associated with direct cyber security breaches.
Defined Outcome Funds Risk. To the extent a fund’s investment strategy is designed to deliver returns tied to the price performance of an underlying ETF, an investor may not realize the returns the fund seeks to achieve if that investor does not hold shares for the entire target outcome period. In the event an investor purchases shares after the first day of the target outcome period or sells shares prior to the end of the target outcome period, the buffer that the fund seeks to provide against a decline in the value of the underlying ETF may not be available, the enhanced returns that the fund seeks to provide (if any) may not be available and the investor may not participate in a gain in the value of the underlying ETF up to the cap for the investor’s investment period. Additionally, the fund will not participate in gains of the underlying ETF above the cap and a shareholder may lose their entire investment. If the fund seeks enhanced returns, there are certain time periods when the value of the fund may fall faster than the value of the underlying ETF, and it is very unlikely that, on any given day during which the underlying ETF share price increases in value, the fund’s share price will increase at the same rate as the enhanced returns sought by the fund, which is designed for an entire target outcome period. Trading flexible exchange options involves risks different from, or possibly greater than, the risks associated with investing directly in securities, such as less liquidity and correlation and valuation risks. A fund may experience substantial downside from specific flexible exchange option positions and certain positions may expire worthless.
Additional Information (Continued)
First Trust Long Duration Opportunities ETF (LGOV)April 30, 2024 (Unaudited) 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.
Additional Information (Continued)
First Trust Long Duration Opportunities ETF (LGOV)April 30, 2024 (Unaudited) 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
Additional Information (Continued)
First Trust Long Duration Opportunities ETF (LGOV)April 30, 2024 (Unaudited) 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
Liquidity Risk Management Program
In accordance with Rule 22e-4 under the Investment Company Act of 1940, as amended (the “1940 Act”), the Fund and each other fund in the First Trust Fund Complex, other than the closed-end funds, have adopted and implemented a liquidity risk management program (the “Program”) reasonably designed to assess and manage the funds’ liquidity risk, i.e., the risk that a fund could not meet requests to redeem shares issued by the fund without significant dilution of remaining investors’ interests in the fund. The Board of Trustees of the First Trust Funds has appointed First Trust Advisors L.P. (the “Advisor”) as the person designated to administer the Program, and in this capacity the Advisor performs its duties primarily through the activities and efforts of the First Trust Liquidity Committee.
Pursuant to the Program, the Liquidity Committee classifies the liquidity of each fund’s portfolio investments into one of the four liquidity categories specified by Rule 22e-4: highly liquid investments, moderately liquid investments, less liquid investments and illiquid investments. The Liquidity Committee determines certain of the inputs for this classification process, including reasonably anticipated trade sizes and significant investor dilution thresholds. The Liquidity Committee also determines and periodically reviews a highly liquid investment minimum for certain funds, monitors the funds’ holdings of assets classified as illiquid investments to seek to ensure they do not exceed 15% of a fund’s net assets and establishes policies and procedures regarding redemptions in kind.
At the April 25, 2024 meeting of the Board of Trustees, as required by Rule 22e-4 and the Program, the Advisor provided the Board with a written report prepared by the Advisor that addressed the operation of the Program during the period from March 23, 2023 through the Liquidity Committee’s annual meeting held on March 14, 2024 and assessed the Program’s adequacy and effectiveness of implementation during this period, including the operation of the highly liquid investment minimum for each fund that is required under the Program to have one, and any material changes to the Program. Note that because the Fund primarily holds assets that are highly liquid investments, the Fund has not adopted a highly liquid investment minimum.
As stated in the written report, during the review period, no fund breached the 15% limitation on illiquid investments, no fund with a highly liquid investment minimum breached that minimum during the reporting period and no fund was required to file a Form N-RN during the reporting period. The Advisor concluded that each fund’s investment strategy is appropriate for an open-end fund; that the Program operated effectively in all material respects during the review period; and that the Program is reasonably designed to assess and manage the liquidity risk of each fund and to maintain compliance with Rule 22e-4.
First Trust Exchange-Traded Fund IV
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
Chapman and Cutler LLP
320 South Canal Street
Chicago, IL 60606
|
For the Six Months Ended
April 30, 2024 |
First Trust Exchange-Traded Fund IV
FT Vest S&P 500® Dividend Aristocrats Target Income ETF® (KNG) |
FT Vest S&P 500® Dividend Aristocrats Target Income ETF® (KNG)
Semi-Annual Report
April 30, 2024
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 Vest Financial LLC (“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 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 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 webpage at www.ftportfolios.com.
This report contains information that may help you evaluate your investment in the Fund. It includes details about the Fund and presents data and analysis that provide insight into the Fund’s performance and investment approach.
The statistical information that follows may help you understand the Fund’s performance compared to that of relevant market benchmarks.
It is important to keep in mind that the opinions expressed by personnel of the Advisor 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 Vest S&P 500® Dividend Aristocrats Target Income ETF® (KNG)
Semi-Annual Letter from the Chairman and CEO
April 30, 2024
First Trust is pleased to provide you with the semi-annual report for the FT Vest S&P 500® Dividend Aristocrats Target Income ETF® (the “Fund”), which contains detailed information about the Fund for the six-month period ended April 30, 2024.
On March 16, 2022, the Federal Reserve (the “Fed”) initiated the first of what have been eleven increases to the Federal Funds target rate thus far in the current cycle. Given its potential impact, financial pundits have been debating the direction and timing of the Fed’s interest rate policy ever since. In December 2023, the Fed gave some guidance, announcing that it expected to implement up to three interest rate cuts totaling 75 basis points (“bps”) in 2024. Investors responded to the news with exuberance. In the U.S., the S&P 500® Index surged by 10.56% on a total return basis in the first quarter of 2024, adding to its already stunning 26.29% total return in 2023. For comparison, the yield on the 10-Year Treasury Note (“T-Note”) stood at 3.80% on December 27, 2023, down a stunning 119 bps from its most recent high of 4.99% set just months prior on October 19, 2023. Bond yields generally move in the opposite direction of prices. Given this relationship, the decline in the 10-Year T-Note’s yield is indicative of investor’s desire to lock in higher income payments prior to the Fed reducing its policy rate.
At this point, it makes sense to step back and highlight several ways the Fed’s interest rate policy has impacted the U.S. economy. We’ll start with the good news. On April 30, 2024, inflation, as measured by the trailing 12-month rate on the Consumer Price Index, stood at 3.4%, down significantly from its most recent peak of 9.1% set in June 2022. Additionally, the higher Federal Funds target rate has been a boon for those investors with assets in fixed income, money market, and other interest-bearing accounts. The total value of assets held in U.S. money market accounts stood at $6.0 trillion on May 1, 2024, nearly double where it stood just five years ago. Notably, the weekly yield on the benchmark U.S. Treasury 3-Month Money Market Index more than doubled from 2.40% to 5.32% between the end of April 2019 and April 2024.
Now for the not-so-good news. Higher interest rates often restrict the ability of consumers and businesses to spend and finance growth, respectively. While the consumer has remained relatively unscathed thus far, evidence that they are stretching their budgets is mounting. The Federal Reserve Bank of New York reported that the total balance of U.S. credit card debt stood at a record $1.13 trillion at the end of 2023, while the average annual percentage rate for all cards rose to a record 21.59% in the first quarter of 2024. Perhaps unsurprisingly, delinquency rates have been surging. Data from the Federal Reserve Bank of St. Louis revealed that the delinquency rate on credit card loans for all U.S. commercial banks rose to 3.10% in the fourth quarter of 2023, up from 2.62% in the fourth quarter of 2019 (pre-COVID-19). In April 2024, 43% of small and mid-sized U.S. businesses were unable to pay their rent on time and in full. In addition, higher interest rates are impacting economic growth. In the U.S., real gross domestic product growth was a tepid 1.6% in the first quarter of 2024, far below consensus expectations of 2.5%. Not even the U.S. government is immune to the impacts of higher interest rates. At the end of the first quarter of 2024, the interest payments paid by the Federal government stood at a record $1.06 trillion, nearly double their total of $0.56 trillion at the end of the fourth quarter of 2019.
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 Vest S&P 500® Dividend Aristocrats Target Income ETF® (KNG)
The FT 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 based on the returns of the equity components of the Index. 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 that have options that trade on a national securities exchange (the “Aristocrat Stocks”) 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 meet certain capitalization and liquidity requirements.
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| | | Average Annual Total Returns | |
| | | | Inception
(3/26/18)
to 4/30/24 | | Inception
(3/26/18)
to 4/30/24 |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
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 Vest S&P 500® Dividend Aristocrats Target Income ETF® (KNG) (Continued)
| % of Total
Long-Term
Investments |
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Net Other Assets and Liabilities | |
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| Amount is less than 0.1%. |
| % of Total
Long-Term
Investments |
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Essex Property Trust, Inc. | |
Consolidated Edison, 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 Vest S&P 500® Dividend Aristocrats Target Income ETF® (KNG)Semi-Annual ReportApril 30, 2024 (Unaudited) Advisor
First Trust Advisors L.P. (“First Trust” or the “Advisor”) is the investment advisor to the FT 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.
Vest Financial LLC (“Vest” or the “Sub-Advisor”) serves as the sub-advisor to the Fund. In this capacity, Vest is responsible for the selection and ongoing monitoring of the securities in the Fund’s investment portfolio. Vest, with principal offices at 8350 Broad St., Suite 240, McLean, VA 22102, was founded in 2012. Vest had approximately $26.7 billion under management or committed to management as of April 30, 2024.
Portfolio Management Team
The following persons serve as the portfolio managers of the Fund:
Karan Sood, Managing Director of Vest
Howard Rubin, Managing Director of Vest
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 March 2021.
FT Vest S&P 500® Dividend Aristocrats Target Income ETF® (KNG)Understanding Your Fund ExpensesApril 30, 2024 (Unaudited) As a shareholder of FT 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 April 30, 2024.
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
November 1, 2023 | Ending
Account Value
April 30, 2024 | Annualized
Expense Ratio
Based on the
Six-Month
Period | Expenses Paid
During the
Six-Month
Period (a) |
FT 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 (November 1, 2023 through April 30, 2024), multiplied by 182/366 (to reflect the six-month period). |
FT Vest S&P 500® Dividend Aristocrats Target Income ETF® (KNG)Portfolio of InvestmentsApril 30, 2024 (Unaudited)
| | |
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| Aerospace & Defense — 1.5% | |
| General Dynamics Corp. (a) | |
| Air Freight & Logistics — 3.0% | |
| C.H. Robinson Worldwide, Inc. (a) | |
| Expeditors International of Washington, Inc. (a) | |
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| Brown-Forman Corp., Class B (a) | |
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| Franklin Resources, Inc. (a) | |
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| T. Rowe Price Group, Inc. (a) | |
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| Air Products and Chemicals, Inc. (a) | |
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| | |
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| Sherwin-Williams (The) Co. (a) | |
| | |
| Commercial Services & Supplies — 1.5% | |
| | |
| Consumer Staples Distribution & Retail — 4.4% | |
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| | |
| Containers & Packaging — 1.5% | |
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| | |
| | |
| Electric Utilities — 1.5% | |
| | |
| Electrical Equipment — 1.5% | |
| | |
| | |
| Archer-Daniels-Midland Co. (a) | |
| | |
See Notes to Financial Statements
FT Vest S&P 500® Dividend Aristocrats Target Income ETF® (KNG)Portfolio of Investments (Continued)April 30, 2024 (Unaudited) | | |
COMMON STOCKS (Continued) |
| Food Products (Continued) | |
| J.M. Smucker (The) Co. (a) | |
| McCormick & Co., Inc. (a) | |
| | |
| | |
| | |
| Health Care Equipment & Supplies — 4.5% | |
| | |
| Becton Dickinson & Co. (a) | |
| | |
| | |
| Health Care Providers & Services — 1.5% | |
| Cardinal Health, Inc. (a) | |
| Hotels, Restaurants & Leisure — 1.5% | |
| | |
| Household Products — 7.7% | |
| Church & Dwight Co., Inc. (a) | |
| | |
| Colgate-Palmolive Co. (a) | |
| | |
| Procter & Gamble (The) Co. (a) | |
| | |
| Industrial Conglomerates — 1.6% | |
| | |
| | |
| | |
| | |
| | |
| Cincinnati Financial Corp. (a) | |
| | |
| | |
| International Business Machines Corp. (a) | |
| Life Sciences Tools & Services — 1.4% | |
| 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 Vest S&P 500® Dividend Aristocrats Target Income ETF® (KNG)Portfolio of Investments (Continued)April 30, 2024 (Unaudited) | | |
COMMON STOCKS (Continued) |
| Oil, Gas & Consumable Fuels — 3.0% | |
| | |
| | |
| | |
| Personal Care Products — 1.5% | |
| | |
| | |
| | |
| Professional Services — 1.5% | |
| Automatic Data Processing, Inc. (a) | |
| | |
| Essex Property Trust, Inc. (a) | |
| | |
| Federal Realty Investment Trust (a) | |
| | |
| | |
| | |
| Roper Technologies, Inc. (a) | |
| | |
| | |
| Trading Companies & Distributors — 3.0% | |
| | |
| | |
| | |
| | |
| | |
MONEY MARKET FUNDS — 0.0% |
| Dreyfus Government Cash Management Fund, Institutional Shares - 5.19% (b) | |
| | |
| Total Investments — 100.4% | |
| | |
| | | | | |
|
| Call Options Written — (0.5)% | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Air Products and Chemicals, Inc. | | | | |
| | | | | |
| | | | | |
| Archer-Daniels-Midland Co. | | | | |
| | | | | |
| Automatic Data Processing, Inc. | | | | |
| | | | | |
See Notes to Financial Statements
FT Vest S&P 500® Dividend Aristocrats Target Income ETF® (KNG)Portfolio of Investments (Continued)April 30, 2024 (Unaudited) | | | | | |
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. | | | | |
| | | | | |
See Notes to Financial Statements
FT Vest S&P 500® Dividend Aristocrats Target Income ETF® (KNG)Portfolio of Investments (Continued)April 30, 2024 (Unaudited) | | | | | |
WRITTEN OPTIONS (Continued) |
| Call Options Written (Continued) | |
| T. Rowe Price Group, Inc. | | | | |
| | | | | |
| | | | | |
| | | | | |
| West Pharmaceutical Services, Inc. | | | | |
| | |
| (Premiums received $15,435,688) | |
| Net Other Assets and Liabilities — 0.1% | |
| | |
| All or a portion of this security is held as collateral for the options written. At April 30, 2024, the value of these securities amounts to $526,554,280. |
| Rate shown reflects yield as of April 30, 2024. |
Abbreviations throughout the Portfolio of Investments: |
| – Real Estate Investment Trusts |
Valuation InputsA summary of the inputs used to value the Fund’s investments as of April 30, 2024 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 Vest S&P 500® Dividend Aristocrats Target Income ETF® (KNG)Statement of Assets and Liabilities
April 30, 2024 (Unaudited)
| |
| |
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 Vest S&P 500® Dividend Aristocrats Target Income ETF® (KNG)Statement of Operations
For the Six Months Ended April 30, 2024 (Unaudited)
| |
| |
| |
|
| |
| |
| |
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 Vest S&P 500® Dividend Aristocrats Target Income ETF® (KNG)Statements of Changes in Net Assets
| Six Months
Ended
4/30/2024 (Unaudited) | |
| | |
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 Vest S&P 500® Dividend Aristocrats Target Income ETF® (KNG)Financial Highlights
For a share outstanding throughout each period
| Six Months
Ended
4/30/2024
(Unaudited) | |
| | | | | |
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 (f) | | | | | | |
| 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 represents 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 Vest S&P 500® Dividend Aristocrats Target Income ETF® (KNG)April 30, 2024 (Unaudited) 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 twenty-two funds that are offering shares. This report covers the FT 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 based on the returns of the equity components of the Index.
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.
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 Vest S&P 500® Dividend Aristocrats Target Income ETF® (KNG)April 30, 2024 (Unaudited) 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 April 30, 2024, 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 Vest S&P 500® Dividend Aristocrats Target Income ETF® (KNG)April 30, 2024 (Unaudited) 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 year 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) | |
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 Vest S&P 500® Dividend Aristocrats Target Income ETF® (KNG)April 30, 2024 (Unaudited) 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 April 30, 2024, 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 non-expiring 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.
As of April 30, 2024, 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) |
| | | |
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 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 | |
Vest Financial LLC (“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 Vest, First Trust will
Notes to Financial Statements (Continued)
FT Vest S&P 500® Dividend Aristocrats Target Income ETF® (KNG)April 30, 2024 (Unaudited) supervise Vest and its management of the investment of the Fund’s assets and will pay Vest for its services as the Fund’s sub-advisor. Vest receives a sub-advisory fee equal to 0.20% of the average daily net assets of the Fund. 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 Chairs of the Audit Committee, Nominating and Governance Committee and Valuation Committee, the Vice Chair of the Audit Committee, the Lead Independent Trustee and the Vice Lead Independent Trustee 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 Committee Chairs, the Audit Committee Vice Chair, the Lead Independent Trustee and the Vice Lead Independent Trustee rotate periodically in serving in such capacities. The officers and “Interested” Trustee receive no compensation from the Trust for acting in such capacities.
4. Purchases and Sales of Securities
For the six months ended April 30, 2024, the cost of purchases and proceeds from sales of investments, excluding short-term investments and in-kind transactions, were $1,794,356,332 and $1,810,316,304, respectively.
For the six months ended April 30, 2024, the cost of in-kind purchases and proceeds from in-kind sales were $1,264,569,850 and $190,178,488, respectively.
5. Derivative Transactions
The following table presents the types of derivatives held by the Fund at April 30, 2024, 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 | |
The following table presents the amount of net realized gain (loss) and change in net unrealized appreciation (depreciation) recognized for the six months ended April 30, 2024, 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 six months ended April 30, 2024, the premiums for written options contracts opened were $73,394,190 and the premiums for written options contracts closed, exercised and expired were $65,855,513.
Notes to Financial Statements (Continued)
FT Vest S&P 500® Dividend Aristocrats Target Income ETF® (KNG)April 30, 2024 (Unaudited) 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 | |
| |
| | | | | | |
| | | | | | |
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 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 Vest S&P 500® Dividend Aristocrats Target Income ETF® (KNG)April 30, 2024 (Unaudited) 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.
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.
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.
FT Vest S&P 500® Dividend Aristocrats Target Income ETF® (KNG)April 30, 2024 (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.
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.
Risks are inherent in all investing. Certain general risks that may be applicable to a Fund are identified below, but not all of the material risks relevant to each Fund are included in this report and not all of the risks below apply to each Fund. The material risks of investing in each Fund are spelled out in its prospectus, statement of additional information and other regulatory filings. Before investing, you should consider each Fund’s investment objective, risks, charges and expenses, and read each Fund’s prospectus and statement of additional information carefully. You can download each Fund’s prospectus at www.ftportfolios.com or contact First Trust Portfolios L.P. at (800) 621-1675 to request a prospectus, which contains this and other information about each Fund.
Concentration Risk. To the extent that a fund is able to invest a significant percentage of its assets in a single asset class or the securities of issuers within the same country, state, region, industry or sector, an adverse economic, business or political development may affect the value of the fund’s investments more than if the fund were more broadly diversified. A fund that tracks an index will be concentrated to the extent the fund’s corresponding index is concentrated. A concentration makes a fund more susceptible to any single occurrence and may subject the fund to greater market risk than a fund that is more broadly diversified.
Credit Risk. Credit risk is the risk that an issuer of a security will be unable or unwilling to make dividend, interest and/or principal payments when due and the related risk that the value of a security may decline because of concerns about the issuer’s ability to make such payments.
Cyber Security Risk. The funds are susceptible to potential operational risks through breaches in cyber security. A breach in cyber security refers to both intentional and unintentional events that may cause a fund to lose proprietary information, suffer data corruption or lose operational capacity. Such events could cause a fund to incur regulatory penalties, reputational damage, additional compliance costs associated with corrective measures and/or financial loss. In addition, cyber security breaches of a fund’s third-party service providers, such as its administrator, transfer agent, custodian, or sub-advisor, as applicable, or issuers in which the fund invests, can also subject a fund to many of the same risks associated with direct cyber security breaches.
Defined Outcome Funds Risk. To the extent a fund’s investment strategy is designed to deliver returns tied to the price performance of an underlying ETF, an investor may not realize the returns the fund seeks to achieve if that investor does not hold shares for the entire target outcome period. In the event an investor purchases shares after the first day of the target outcome period or sells shares prior to the end of the target outcome period, the buffer that the fund seeks to provide against a decline in the value of the underlying ETF may not be available, the enhanced returns that the fund seeks to provide (if any) may not be available and the investor may not participate in a gain in the value of the underlying ETF up to the cap for the investor’s investment period. Additionally, the fund will not participate in gains of the underlying ETF above the cap and a shareholder may lose their entire investment. If the fund seeks enhanced returns, there are certain time periods when the value of the fund may fall faster than the value of the underlying ETF, and it is very unlikely that, on any given day during which the underlying ETF share price increases in value, the fund’s share price will increase at the same rate as the enhanced returns sought by the fund, which is designed for an entire target outcome period. Trading flexible exchange options involves risks different from, or possibly greater than, the risks associated with investing directly in securities, such as less liquidity and correlation and valuation risks. A fund may experience substantial downside from specific flexible exchange option positions and certain positions may expire worthless.
Additional Information (Continued)
FT Vest S&P 500® Dividend Aristocrats Target Income ETF® (KNG)April 30, 2024 (Unaudited) 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.
Additional Information (Continued)
FT Vest S&P 500® Dividend Aristocrats Target Income ETF® (KNG)April 30, 2024 (Unaudited) 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
Additional Information (Continued)
FT Vest S&P 500® Dividend Aristocrats Target Income ETF® (KNG)April 30, 2024 (Unaudited) 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
Liquidity Risk Management Program
In accordance with Rule 22e-4 under the Investment Company Act of 1940, as amended (the “1940 Act”), the Fund and each other fund in the First Trust Fund Complex, other than the closed-end funds, have adopted and implemented a liquidity risk management program (the “Program”) reasonably designed to assess and manage the funds’ liquidity risk, i.e., the risk that a fund could not meet requests to redeem shares issued by the fund without significant dilution of remaining investors’ interests in the fund. The Board of Trustees of the First Trust Funds has appointed First Trust Advisors L.P. (the “Advisor”) as the person designated to administer the Program, and in this capacity the Advisor performs its duties primarily through the activities and efforts of the First Trust Liquidity Committee.
Pursuant to the Program, the Liquidity Committee classifies the liquidity of each fund’s portfolio investments into one of the four liquidity categories specified by Rule 22e-4: highly liquid investments, moderately liquid investments, less liquid investments and illiquid investments. The Liquidity Committee determines certain of the inputs for this classification process, including reasonably anticipated trade sizes and significant investor dilution thresholds. The Liquidity Committee also determines and periodically reviews a highly liquid investment minimum for certain funds, monitors the funds’ holdings of assets classified as illiquid investments to seek to ensure they do not exceed 15% of a fund’s net assets and establishes policies and procedures regarding redemptions in kind.
At the April 25, 2024 meeting of the Board of Trustees, as required by Rule 22e-4 and the Program, the Advisor provided the Board with a written report prepared by the Advisor that addressed the operation of the Program during the period from March 23, 2023 through the Liquidity Committee’s annual meeting held on March 14, 2024 and assessed the Program’s adequacy and effectiveness of implementation during this period, including the operation of the highly liquid investment minimum for each fund that is required under the Program to have one, and any material changes to the Program. Note that because the Fund primarily holds assets that are highly liquid investments, the Fund has not adopted a highly liquid investment minimum.
As stated in the written report, during the review period, no fund breached the 15% limitation on illiquid investments, no fund with a highly liquid investment minimum breached that minimum during the reporting period and no fund was required to file a Form N-RN during the reporting period. The Advisor concluded that each fund’s investment strategy is appropriate for an open-end fund; that the Program operated effectively in all material respects during the review period; and that the Program is reasonably designed to assess and manage the liquidity risk of each fund and to maintain compliance with Rule 22e-4.
First Trust Exchange-Traded Fund IV
First Trust Advisors L.P.
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
Vest 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
Chapman and Cutler LLP
320 South Canal Street
Chicago, IL 60606
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For the Six Months Ended
April 30, 2024 |
First Trust Exchange-Traded Fund IV
First Trust Limited Duration Investment Grade Corporate ETF (FSIG) |
First Trust Limited Duration Investment Grade Corporate ETF (FSIG)
Semi-Annual Report
April 30, 2024
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.
This report contains information that may help you evaluate your investment in the Fund. It includes details about the Fund and presents data and analysis that provide insight into the Fund’s performance and investment approach.
The statistical information that follows may help you understand the Fund’s performance compared to that of relevant market benchmarks.
It is important to keep in mind that the opinions expressed by personnel of the Advisor are just that: informed opinions. They should not be considered to be promises or advice. The opinions, like the statistics, cover the period through the date on the cover of this report. The material risks of investing in the Fund are spelled out in the prospectus, the statement of additional information, and other Fund regulatory filings.
First Trust Limited Duration Investment Grade Corporate ETF (FSIG)
Semi-Annual Letter from the Chairman and CEO
April 30, 2024
First Trust is pleased to provide you with the semi-annual report for the First Trust Limited Duration Investment Grade Corporate ETF (the “Fund”), which contains detailed information about the Fund for the six-month period ended April 30, 2024.
On March 16, 2022, the Federal Reserve (the “Fed”) initiated the first of what have been eleven increases to the Federal Funds target rate thus far in the current cycle. Given its potential impact, financial pundits have been debating the direction and timing of the Fed’s interest rate policy ever since. In December 2023, the Fed gave some guidance, announcing that it expected to implement up to three interest rate cuts totaling 75 basis points (“bps”) in 2024. Investors responded to the news with exuberance. In the U.S., the S&P 500® Index surged by 10.56% on a total return basis in the first quarter of 2024, adding to its already stunning 26.29% total return in 2023. For comparison, the yield on the 10-Year Treasury Note (“T-Note”) stood at 3.80% on December 27, 2023, down a stunning 119 bps from its most recent high of 4.99% set just months prior on October 19, 2023. Bond yields generally move in the opposite direction of prices. Given this relationship, the decline in the 10-Year T-Note’s yield is indicative of investor’s desire to lock in higher income payments prior to the Fed reducing its policy rate.
At this point, it makes sense to step back and highlight several ways the Fed’s interest rate policy has impacted the U.S. economy. We’ll start with the good news. On April 30, 2024, inflation, as measured by the trailing 12-month rate on the Consumer Price Index, stood at 3.4%, down significantly from its most recent peak of 9.1% set in June 2022. Additionally, the higher Federal Funds target rate has been a boon for those investors with assets in fixed income, money market, and other interest-bearing accounts. The total value of assets held in U.S. money market accounts stood at $6.0 trillion on May 1, 2024, nearly double where it stood just five years ago. Notably, the weekly yield on the benchmark U.S. Treasury 3-Month Money Market Index more than doubled from 2.40% to 5.32% between the end of April 2019 and April 2024.
Now for the not-so-good news. Higher interest rates often restrict the ability of consumers and businesses to spend and finance growth, respectively. While the consumer has remained relatively unscathed thus far, evidence that they are stretching their budgets is mounting. The Federal Reserve Bank of New York reported that the total balance of U.S. credit card debt stood at a record $1.13 trillion at the end of 2023, while the average annual percentage rate for all cards rose to a record 21.59% in the first quarter of 2024. Perhaps unsurprisingly, delinquency rates have been surging. Data from the Federal Reserve Bank of St. Louis revealed that the delinquency rate on credit card loans for all U.S. commercial banks rose to 3.10% in the fourth quarter of 2023, up from 2.62% in the fourth quarter of 2019 (pre-COVID-19). In April 2024, 43% of small and mid-sized U.S. businesses were unable to pay their rent on time and in full. In addition, higher interest rates are impacting economic growth. In the U.S., real gross domestic product growth was a tepid 1.6% in the first quarter of 2024, far below consensus expectations of 2.5%. Not even the U.S. government is immune to the impacts of higher interest rates. At the end of the first quarter of 2024, the interest payments paid by the Federal government stood at a record $1.06 trillion, nearly double their total of $0.56 trillion at the end of the fourth quarter of 2019.
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 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 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.
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| | | Average Annual Total Returns | |
| | | Inception
(11/17/21)
to 4/30/24 | Inception
(11/17/21)
to 4/30/24 |
| | | | |
| | | | |
| | | | |
| | | | |
Bloomberg US Corporate Bond 1-5 Year Index | | | | |
Bloomberg US Aggregate Bond 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 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 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 Limited Duration Investment Grade Corporate ETF (FSIG) (Continued)
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Property & Casualty Insurance | |
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Brokerage/Asset Managers/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 | |
| |
| % of Senior Loans
and other
|
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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 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 Limited Duration Investment Grade Corporate ETF (FSIG)Semi-Annual ReportApril 30, 2024 (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 Senior 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.
First Trust Limited Duration Investment Grade Corporate ETF (FSIG)Understanding Your Fund ExpensesApril 30, 2024 (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 April 30, 2024.
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
November 1, 2023 | Ending
Account Value
April 30, 2024 | 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 (November 1, 2023 through April 30, 2024), multiplied by 182/366 (to reflect the six-month period). |
First Trust Limited Duration Investment Grade Corporate ETF (FSIG)Portfolio of InvestmentsApril 30, 2024 (Unaudited)
| | | | |
CORPORATE BONDS AND NOTES — 84.9% |
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| Bank of America Corp. (a) | | | |
| Bank of America Corp. (a) | | | |
| Bank of America 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. (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) | | | |
| | | | |
| Goldman Sachs Bank USA (a) | | | |
| Goldman Sachs Group (The), Inc. (a) | | | |
| Goldman Sachs Group (The), Inc. (a) | | | |
| Goldman Sachs Group (The), Inc. (a) | | | |
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| Morgan Stanley Bank N.A. (a) | | | |
| 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) | | | |
| PNC Financial Services Group (The), Inc. (a) | | | |
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See Notes to Financial Statements
First Trust Limited Duration Investment Grade Corporate ETF (FSIG)Portfolio of Investments (Continued)April 30, 2024 (Unaudited) | | | | |
CORPORATE BONDS AND NOTES (Continued) |
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| Truist Financial Corp. (a) | | | |
| Truist Financial Corp. (a) | | | |
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| Brokerage/Asset Managers/Exchanges — 2.2% | | | | |
| Intercontinental Exchange, Inc. | | | |
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| Building Materials — 1.0% | | | | |
| 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 — 1.8% | | | | |
| Ashtead Capital, Inc. (b) | | | |
| Ashtead Capital, Inc. (b) | | | |
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| United Rentals North America, Inc. (b) | | | |
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| Consumer Cyclical Services — 0.6% | | | | |
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| Go Daddy Operating Co. LLC / GD Finance Co., Inc. (b) | | | |
| | |
See Notes to Financial Statements
First Trust Limited Duration Investment Grade Corporate ETF (FSIG)Portfolio of Investments (Continued)April 30, 2024 (Unaudited) | | | | |
CORPORATE BONDS AND NOTES (Continued) |
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| Mead Johnson Nutrition Co. | | | |
| Procter & Gamble (The) Co. | | | |
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| Diversified Manufacturing — 0.2% | | | | |
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| CenterPoint Energy Houston Electric LLC | | | |
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| FirstEnergy Transmission LLC (b) | | | |
| Florida Power & Light Co. | | | |
| Florida Power & Light Co. | | | |
| Florida Power & Light Co. | | | |
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| Trans-Allegheny Interstate Line Co. (b) | | | |
| Virginia Electric and Power Co., Series A | | | |
| Virginia Electric and Power Co., Series B | | | |
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| Constellation Brands, Inc. | | | |
| Constellation Brands, Inc. | | | |
| Constellation Brands, Inc. | | | |
| Constellation Brands, Inc. | | | |
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| Molson Coors Beverage Co. | | | |
| Mondelez International, Inc. | | | |
| Nestle Holdings, Inc. (b) | | | |
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See Notes to Financial Statements
First Trust Limited Duration Investment Grade Corporate ETF (FSIG)Portfolio of Investments (Continued)April 30, 2024 (Unaudited) | | | | |
CORPORATE BONDS AND NOTES (Continued) |
| Food and Beverage (Continued) | | | | |
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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) | | | |
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| Charles River Laboratories International, Inc. (b) | | | |
| Charles River Laboratories International, Inc. (b) | | | |
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| GE HealthCare Technologies, Inc. | | | |
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| PRA Health Sciences, Inc. (b) | | | |
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See Notes to Financial Statements
First Trust Limited Duration Investment Grade Corporate ETF (FSIG)Portfolio of Investments (Continued)April 30, 2024 (Unaudited) | | | | |
CORPORATE BONDS AND NOTES (Continued) |
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| Thermo Fisher Scientific, Inc. | | | |
| Zimmer Biomet Holdings, Inc. | | | |
| Zimmer Biomet Holdings, Inc. | | | |
| Zimmer Biomet Holdings, Inc. | | | |
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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 — 4.9% | | | | |
| Aon Corp. / Aon Global Holdings PLC | | | |
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| Arthur J. Gallagher & Co. | | | |
| Arthur J. Gallagher & Co. | | | |
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| Marsh & McLennan Cos., Inc. | | | |
| Marsh & McLennan Cos., Inc. | | | |
| Willis North America, Inc. | | | |
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See Notes to Financial Statements
First Trust Limited Duration Investment Grade Corporate ETF (FSIG)Portfolio of Investments (Continued)April 30, 2024 (Unaudited) | | | | |
CORPORATE BONDS AND NOTES (Continued) |
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| O’Reilly Automotive, Inc. | | | |
| O’Reilly Automotive, Inc. | | | |
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| Black Knight InfoServ LLC (b) | | | |
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| Crowdstrike Holdings, Inc. | | | |
| FactSet Research Systems, Inc. | | | |
| Fidelity National Information Services, Inc. | | | |
| Fidelity National Information Services, Inc. | | | |
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See Notes to Financial Statements
First Trust Limited Duration Investment Grade Corporate ETF (FSIG)Portfolio of Investments (Continued)April 30, 2024 (Unaudited) | | | | |
CORPORATE BONDS AND NOTES (Continued) |
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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 — 12.5% |
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| Toronto-Dominion Bank (The) | | | |
| Toronto-Dominion Bank (The) | | | |
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| GFL Environmental, Inc. (b) | | | |
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| Bacardi Ltd. / Bacardi-Martini B.V. (b) | | | |
| Mondelez International Holdings Netherlands B.V. (b) | | | |
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| Flutter Treasury Designated Activity Co. (b) | | | |
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| Icon Investments Six Designated Activity Co. (c) | | | |
| Medtronic Global Holdings S.C.A | | | |
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| Smurfit Kappa Treasury ULC (b) | | | |
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| 1011778 BC ULC / New Red Finance, Inc. (b) | | | |
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| Alimentation Couche-Tard, Inc. (b) | | | |
See Notes to Financial Statements
First Trust Limited Duration Investment Grade Corporate ETF (FSIG)Portfolio of Investments (Continued)April 30, 2024 (Unaudited) | | | | |
FOREIGN CORPORATE BONDS AND NOTES (Continued) |
| | |
| Constellation Software, Inc. (b) | | | |
| Constellation Software, Inc. (b) | | | |
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| Total Foreign Corporate Bonds and Notes | |
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SENIOR FLOATING-RATE LOAN INTERESTS — 1.0% |
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| Charter Communications Operating LLC, Term Loan B4, 1 Mo. CME Term SOFR + 2.00%, 0.00% Floor | | | |
| | | | | |
| Open Text Corp. (GXS), Term Loan B, 1 Mo. CME Term SOFR + CSA + 1.75%, 0.00% Floor | | | |
| SS&C Technologies Holdings, Inc., Term Loan B-3, 1 Mo. CME Term SOFR + CSA + 1.75%, 0.00% Floor | | | |
| SS&C Technologies Holdings, Inc., Term Loan B-4, 1 Mo. CME Term SOFR + CSA + 1.75%, 0.00% Floor | | | |
| SS&C Technologies Holdings, Inc., Term Loan B-5, 1 Mo. CME Term SOFR + CSA + 1.75%, 0.00% Floor | | | |
| | |
| Total Senior Floating-Rate Loan Interests | |
| | |
| | Annualized
Yield on Date of
Purchase | | |
|
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|
|
| Total Investments — 99.1% | |
| | |
| Net Other Assets and Liabilities — 0.9% | |
| | |
| Fixed-to-floating or fixed-to-variable rate security. The interest rate shown reflects the fixed rate in effect at April 30, 2024. 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 April 30, 2024, securities noted as such amounted to $223,716,902 or 20.8% of net assets. |
See Notes to Financial Statements
First Trust Limited Duration Investment Grade Corporate ETF (FSIG)Portfolio of Investments (Continued)April 30, 2024 (Unaudited) | When-issued security. The interest rate shown reflects the rate in effect at April 30, 2024. Interest will begin accruing on the security’s first settlement date. |
| 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 |
Valuation InputsA summary of the inputs used to value the Fund’s investments as of April 30, 2024 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
April 30, 2024 (Unaudited)
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Investment securities sold | |
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Investment securities purchased | |
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|
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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 Limited Duration Investment Grade Corporate ETF (FSIG)Statement of Operations
For the Six Months Ended April 30, 2024 (Unaudited)
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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 Limited Duration Investment Grade Corporate ETF (FSIG)Statements of Changes in Net Assets
| Six Months
Ended
4/30/2024 (Unaudited) | |
| | |
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 | | |
|
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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 Limited Duration Investment Grade Corporate ETF (FSIG)Financial Highlights
For a share outstanding throughout each period
| Six Months
Ended
4/30/2024
(Unaudited) | | 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 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. |
| |
| 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)April 30, 2024 (Unaudited) 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 twenty-two 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.
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)April 30, 2024 (Unaudited) 7)
reference data including market research publications.
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.
Commercial paper 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)April 30, 2024 (Unaudited) 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 April 30, 2024, 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 April 30, 2024, the Fund had no forward purchase commitments. At April 30, 2024, the Fund held $5,000,000 of when-issued or delayed-delivery securities.
Notes to Financial Statements (Continued)
First Trust Limited Duration Investment Grade Corporate ETF (FSIG)April 30, 2024 (Unaudited) 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 April 30, 2024, 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 year 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) | |
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 April 30, 2024, 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 non-expiring 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)April 30, 2024 (Unaudited) 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.
As of April 30, 2024, 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) |
| | | |
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 | |
Pursuant to a contractual agreement, First Trust agreed to waive management fees of 0.10% of average daily net assets until November 12, 2023. As of November 12, 2023, the waiver agreement terminated. First Trust does not have the right to recover the fees waived. During the six months ended April 30, 2024, the Advisor waived fees of $25,869.
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 Chairs of the Audit Committee, Nominating and Governance Committee and Valuation Committee, the Vice Chair of the Audit Committee, the Lead Independent Trustee and the Vice Lead Independent Trustee 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.
Notes to Financial Statements (Continued)
First Trust Limited Duration Investment Grade Corporate ETF (FSIG)April 30, 2024 (Unaudited) Independent Trustees are reimbursed for travel and out-of-pocket expenses in connection with all meetings. The Committee Chairs, the Audit Committee Vice Chair, the Lead Independent Trustee and the Vice Lead Independent Trustee rotate periodically in serving in such capacities. The officers and “Interested” Trustee receive no compensation from the Trust for acting in such capacities.
4. Purchases and Sales of Securities
For the six months ended April 30, 2024, the cost of purchases and proceeds from sales of investments, excluding short-term investments and in-kind transactions, were $399,923,802 and $123,353,213, respectively.
For the six months ended April 30, 2024, 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 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.
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.
Notes to Financial Statements (Continued)
First Trust Limited Duration Investment Grade Corporate ETF (FSIG)April 30, 2024 (Unaudited) 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.
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.
First Trust Limited Duration Investment Grade Corporate ETF (FSIG)April 30, 2024 (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.
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.
Risks are inherent in all investing. Certain general risks that may be applicable to a Fund are identified below, but not all of the material risks relevant to each Fund are included in this report and not all of the risks below apply to each Fund. The material risks of investing in each Fund are spelled out in its prospectus, statement of additional information and other regulatory filings. Before investing, you should consider each Fund’s investment objective, risks, charges and expenses, and read each Fund’s prospectus and statement of additional information carefully. You can download each Fund’s prospectus at www.ftportfolios.com or contact First Trust Portfolios L.P. at (800) 621-1675 to request a prospectus, which contains this and other information about each Fund.
Concentration Risk. To the extent that a fund is able to invest a significant percentage of its assets in a single asset class or the securities of issuers within the same country, state, region, industry or sector, an adverse economic, business or political development may affect the value of the fund’s investments more than if the fund were more broadly diversified. A fund that tracks an index will be concentrated to the extent the fund’s corresponding index is concentrated. A concentration makes a fund more susceptible to any single occurrence and may subject the fund to greater market risk than a fund that is more broadly diversified.
Credit Risk. Credit risk is the risk that an issuer of a security will be unable or unwilling to make dividend, interest and/or principal payments when due and the related risk that the value of a security may decline because of concerns about the issuer’s ability to make such payments.
Cyber Security Risk. The funds are susceptible to potential operational risks through breaches in cyber security. A breach in cyber security refers to both intentional and unintentional events that may cause a fund to lose proprietary information, suffer data corruption or lose operational capacity. Such events could cause a fund to incur regulatory penalties, reputational damage, additional compliance costs associated with corrective measures and/or financial loss. In addition, cyber security breaches of a fund’s third-party service providers, such as its administrator, transfer agent, custodian, or sub-advisor, as applicable, or issuers in which the fund invests, can also subject a fund to many of the same risks associated with direct cyber security breaches.
Defined Outcome Funds Risk. To the extent a fund’s investment strategy is designed to deliver returns tied to the price performance of an underlying ETF, an investor may not realize the returns the fund seeks to achieve if that investor does not hold shares for the entire target outcome period. In the event an investor purchases shares after the first day of the target outcome period or sells shares prior to the end of the target outcome period, the buffer that the fund seeks to provide against a decline in the value of the underlying ETF may not be available, the enhanced returns that the fund seeks to provide (if any) may not be available and the investor may not participate in a gain in the value of the underlying ETF up to the cap for the investor’s investment period. Additionally, the fund will not participate in gains of the underlying ETF above the cap and a shareholder may lose their entire investment. If the fund seeks enhanced returns, there are certain time periods when the value of the fund may fall faster than the value of the underlying ETF, and it is very unlikely that, on any given day during which the underlying ETF share price increases in value, the fund’s share price will increase at the same rate as the enhanced returns sought by the fund, which is designed for an entire target outcome period. Trading flexible exchange options involves risks different from, or possibly greater than, the risks associated with investing directly in securities, such as less liquidity and correlation and valuation risks. A fund may experience substantial downside from specific flexible exchange option positions and certain positions may expire worthless.
Additional Information (Continued)
First Trust Limited Duration Investment Grade Corporate ETF (FSIG)April 30, 2024 (Unaudited) 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.
Additional Information (Continued)
First Trust Limited Duration Investment Grade Corporate ETF (FSIG)April 30, 2024 (Unaudited) 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
Additional Information (Continued)
First Trust Limited Duration Investment Grade Corporate ETF (FSIG)April 30, 2024 (Unaudited) 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
Liquidity Risk Management Program
In accordance with Rule 22e-4 under the Investment Company Act of 1940, as amended (the “1940 Act”), the Fund and each other fund in the First Trust Fund Complex, other than the closed-end funds, have adopted and implemented a liquidity risk management program (the “Program”) reasonably designed to assess and manage the funds’ liquidity risk, i.e., the risk that a fund could not meet requests to redeem shares issued by the fund without significant dilution of remaining investors’ interests in the fund. The Board of Trustees of the First Trust Funds has appointed First Trust Advisors L.P. (the “Advisor”) as the person designated to administer the Program, and in this capacity the Advisor performs its duties primarily through the activities and efforts of the First Trust Liquidity Committee.
Pursuant to the Program, the Liquidity Committee classifies the liquidity of each fund’s portfolio investments into one of the four liquidity categories specified by Rule 22e-4: highly liquid investments, moderately liquid investments, less liquid investments and illiquid investments. The Liquidity Committee determines certain of the inputs for this classification process, including reasonably anticipated trade sizes and significant investor dilution thresholds. The Liquidity Committee also determines and periodically reviews a highly liquid investment minimum for certain funds, monitors the funds’ holdings of assets classified as illiquid investments to seek to ensure they do not exceed 15% of a fund’s net assets and establishes policies and procedures regarding redemptions in kind.
At the April 25, 2024 meeting of the Board of Trustees, as required by Rule 22e-4 and the Program, the Advisor provided the Board with a written report prepared by the Advisor that addressed the operation of the Program during the period from March 23, 2023 through the Liquidity Committee’s annual meeting held on March 14, 2024 and assessed the Program’s adequacy and effectiveness of implementation during this period, including the operation of the highly liquid investment minimum for each fund that is required under the Program to have one, and any material changes to the Program. Note that because the Fund primarily holds assets that are highly liquid investments, the Fund has not adopted a highly liquid investment minimum.
As stated in the written report, during the review period, no fund breached the 15% limitation on illiquid investments, no fund with a highly liquid investment minimum breached that minimum during the reporting period and no fund was required to file a Form N-RN during the reporting period. The Advisor concluded that each fund’s investment strategy is appropriate for an open-end fund; that the Program operated effectively in all material respects during the review period; and that the Program is reasonably designed to assess and manage the liquidity risk of each fund and to maintain compliance with Rule 22e-4.
First Trust Exchange-Traded Fund IV
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
Chapman and Cutler LLP
320 South Canal Street
Chicago, IL 60606
|
For the Period Ended
April 30, 2024 |
First Trust Exchange-Traded Fund IV
FT Vest Rising Dividend Achievers Target Income ETF (RDVI) |
FT Vest SMID Rising Dividend Achievers Target Income ETF (SDVD) |
FT Vest Technology Dividend Target Income ETF (TDVI) |
FT Vest Dow Jones Internet & Target Income ETF (FDND) |
First Trust Exchange-Traded Fund IV
Semi-Annual Report
April 30, 2024
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 Vest Financial LLC (“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 by 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.
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.
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 the prospectus, statement of additional information, and other Fund regulatory filings.
First Trust Exchange-Traded Fund IV
Semi-Annual Letter from the Chairman and CEO
April 30, 2024
First Trust is pleased to provide you with the semi-annual report for certain series of the First Trust Exchange-Traded Fund IV (the “Funds”), which contains detailed information about the Funds for the six-month period ended April 30, 2024. Please note that the FT Vest Dow Jones Internet & Target Income ETF was incepted on March 20, 2024, so the information in this letter and the report prior to that date does not apply to this Fund.
On March 16, 2022, the Federal Reserve (the “Fed”) initiated the first of what have been eleven increases to the Federal Funds target rate thus far in the current cycle. Given its potential impact, financial pundits have been debating the direction and timing of the Fed’s interest rate policy ever since. In December 2023, the Fed gave some guidance, announcing that it expected to implement up to three interest rate cuts totaling 75 basis points (“bps”) in 2024. Investors responded to the news with exuberance. In the U.S., the S&P 500® Index surged by 10.56% on a total return basis in the first quarter of 2024, adding to its already stunning 26.29% total return in 2023. For comparison, the yield on the 10-Year Treasury Note (“T-Note”) stood at 3.80% on December 27, 2023, down a stunning 119 bps from its most recent high of 4.99% set just months prior on October 19, 2023. Bond yields generally move in the opposite direction of prices. Given this relationship, the decline in the 10-Year T-Note’s yield is indicative of investor’s desire to lock in higher income payments prior to the Fed reducing its policy rate.
At this point, it makes sense to step back and highlight several ways the Fed’s interest rate policy has impacted the U.S. economy. We’ll start with the good news. On April 30, 2024, inflation, as measured by the trailing 12-month rate on the Consumer Price Index, stood at 3.4%, down significantly from its most recent peak of 9.1% set in June 2022. Additionally, the higher Federal Funds target rate has been a boon for those investors with assets in fixed income, money market, and other interest-bearing accounts. The total value of assets held in U.S. money market accounts stood at $6.0 trillion on May 1, 2024, nearly double where it stood just five years ago. Notably, the weekly yield on the benchmark U.S. Treasury 3-Month Money Market Index more than doubled from 2.40% to 5.32% between the end of April 2019 and April 2024.
Now for the not-so-good news. Higher interest rates often restrict the ability of consumers and businesses to spend and finance growth, respectively. While the consumer has remained relatively unscathed thus far, evidence that they are stretching their budgets is mounting. The Federal Reserve Bank of New York reported that the total balance of U.S. credit card debt stood at a record $1.13 trillion at the end of 2023, while the average annual percentage rate for all cards rose to a record 21.59% in the first quarter of 2024. Perhaps unsurprisingly, delinquency rates have been surging. Data from the Federal Reserve Bank of St. Louis revealed that the delinquency rate on credit card loans for all U.S. commercial banks rose to 3.10% in the fourth quarter of 2023, up from 2.62% in the fourth quarter of 2019 (pre-COVID-19). In April 2024, 43% of small and mid-sized U.S. businesses were unable to pay their rent on time and in full. In addition, higher interest rates are impacting economic growth. In the U.S., real gross domestic product growth was a tepid 1.6% in the first quarter of 2024, far below consensus expectations of 2.5%. Not even the U.S. government is immune to the impacts of higher interest rates. At the end of the first quarter of 2024, the interest payments paid by the Federal government stood at a record $1.06 trillion, nearly double their total of $0.56 trillion at the end of the fourth quarter of 2019.
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 Vest Rising Dividend Achievers Target Income ETF (RDVI)
The FT 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 4/30/24 | Inception
(10/19/22)
to 4/30/24 |
| | | | |
| | | | |
| | | | |
| | | | |
Nasdaq US Rising Dividend AchieversTM Index | | | | |
| | | | |
(See Notes to Fund Performance Overview on page 11.)
Fund Performance Overview (Unaudited) (Continued)
FT Vest Rising Dividend Achievers Target Income ETF (RDVI) (Continued)
| % of Total
Long-Term
Investments |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
Net Other Assets and Liabilities | |
| |
| Amount is less than 0.1%. |
| % of Total
Long-Term
Investments |
Jackson Financial, Inc., Class A | |
| |
| |
| |
| |
| |
Capital One Financial Corp. | |
Discover Financial Services | |
| |
Magnolia Oil & Gas Corp., Class A | |
| |
| 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 Vest SMID Rising Dividend Achievers Target Income ETF (SDVD)
The FT 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 4/30/24 |
| | |
| | |
| | |
| | |
| | |
| | |
Nasdaq US Small-Mid Cap Rising Dividend AchieversTM Index | | |
(See Notes to Fund Performance Overview on page 11.)
Fund Performance Overview (Unaudited) (Continued)
FT Vest SMID Rising Dividend Achievers Target Income ETF (SDVD) (Continued)
| % of Total
Long-Term
Investments |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
Net Other Assets and Liabilities | |
| |
| Amount is less than 0.1%. |
| % of Total
Long-Term
Investments |
Dell Technologies, Inc., Class C | |
Jackson Financial, Inc., Class A | |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| 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 Vest Technology Dividend Target Income ETF (TDVI)
The FT Vest Technology Dividend 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 “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 4/30/24 |
| | |
| | |
| | |
| | |
| | |
| | |
Nasdaq Technology DividendTM Index | | |
(See Notes to Fund Performance Overview on page 11.)
Fund Performance Overview (Unaudited) (Continued)
FT Vest Technology Dividend Target Income ETF (TDVI) (Continued)
| % of Total
Long-Term
Investments |
| |
| |
| |
| |
| |
| |
| |
| |
| |
Net Other Assets and Liabilities | |
| |
| Amount is less than 0.1%. |
| % of Total
Long-Term
Investments |
| |
| |
| |
International Business Machines Corp. | |
| |
| |
| |
Taiwan Semiconductor Manufacturing Co., Ltd., ADR | |
| |
| |
| |
| 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 Vest Dow Jones Internet & Target Income ETF (FDND)
The FT Vest Dow Jones Internet & 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 “FDND.” Under normal market conditions, the Fund will pursue its investment objectives by investing in primarily in U.S. exchange-traded equity securities intended to track the Dow Jones Internet Composite Index (the “Index”) and by utilizing an “option strategy” consisting of writing (selling) U.S. exchange-traded call options on the Nasdaq-100® Index or exchange-traded funds that track the Nasdaq-100® 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 securities of Internet Companies and securities intended to provide income to the Fund in the form of option premiums. “Internet Companies” are companies that generate at least 50% of sales or revenue from the Internet, and belong to either the “Internet Commerce” sector (i.e., online retail, search, financial services, investment products, social media, advertising, and travel platforms, and internet radio) or the “Internet Services” sector (i.e., various services performed via the internet, cloud computing, enterprise software, networking capabilities, website creation tools, and digital marketing platforms).
|
| |
| Inception
(3/20/24)
to 4/30/24 |
| |
| |
| |
| |
Dow Jones Internet Composite IndexSM | |
| |
(See Notes to Fund Performance Overview on page 11.)
Fund Performance Overview (Unaudited) (Continued)
FT Vest Dow Jones Internet & Target Income ETF (FDND) (Continued)
| % of Total
Long-Term
Investments |
| |
| |
| |
| |
| |
| |
| |
| |
| |
Net Other Assets and Liabilities | |
| |
| Amount is less than 0.1%. |
| % of Total
Long-Term
Investments |
| |
Meta Platforms, Inc., Class A | |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| 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 its 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 IVSemi-Annual ReportApril 30, 2024 (Unaudited) Advisor
First Trust Advisors L.P. (“First Trust” or the “Advisor”) is the investment advisor to the FT Vest Rising Dividend Achievers Target Income ETF (“RDVI”), the FT Vest SMID Rising Dividend Achievers Target Income ETF (“SDVD”), the FT Vest Technology Dividend Target Income ETF (“TDVI”), and the FT Vest Dow Jones Internet & Target Income ETF (“FDND”) (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.
Vest Financial LLC (“Vest” or the “Sub-Advisor”) serves as the sub-advisor to the Funds. In this capacity, Vest is responsible for the selection and ongoing monitoring of the securities in each Fund’s investment portfolio. Vest, with principal offices at 8350 Broad St., Suite 240, McLean, VA 22102, was founded in 2012. Vest had approximately $26.7 billion under management or committed to management as of April 30, 2024.
Portfolio Management Team
The following persons serve as portfolio managers to the Funds:
Karan Sood, Managing Director of Vest
Howard Rubin, Managing Director of 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, SDVD and TDVI since August 2023, and FDND since March 2024.
First Trust Exchange-Traded Fund IVUnderstanding Your Fund ExpensesApril 30, 2024 (Unaudited) As a shareholder of FT Vest Rising Dividend Achievers Target Income ETF, FT Vest SMID Rising Dividend Achievers Target Income ETF, FT Vest Technology Dividend Target Income ETF, or FT Vest Dow Jones Internet & 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 April 30, 2024.
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
November 1, 2023 | Ending
Account Value
April 30, 2024 | Annualized
Expense Ratio
Based on the
Six-Month
Period | Expenses Paid
During the
Six-Month
Period (a) |
FT Vest Rising Dividend Achievers Target Income ETF (RDVI) |
| | | | |
Hypothetical (5% return before expenses) | | | | |
FT Vest SMID Rising Dividend Achievers Target Income ETF (SDVD) |
| | | | |
Hypothetical (5% return before expenses) | | | | |
FT Vest Technology Dividend Target Income ETF (TDVI) |
| | | | |
Hypothetical (5% return before expenses) | | | | |
| Beginning
Account Value
March 20, 2024 (b) | Ending
Account Value
April 30, 2024 | Annualized
Expense Ratio
Based on the
Number of Days
in the Period | Expenses Paid
During the Period
March 20, 2024 (b)
to
April 30, 2024 (c) |
FT Vest Dow Jones Internet & Target Income ETF (FDND) |
| | | | |
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 (November 1, 2023 through April 30, 2024), multiplied by 182/366 (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 (March 20, 2024 through April 30, 2024), multiplied by 42/366. Hypothetical expenses are assumed for the most recent six-month period. |
FT Vest Rising Dividend Achievers Target Income ETF (RDVI)Portfolio of InvestmentsApril 30, 2024 (Unaudited)
| | |
|
| | |
| Bank of America Corp. (a) | |
| East West Bancorp, Inc. (a) | |
| | |
| | |
| | |
| Regions Financial Corp. (a) | |
| | |
| | |
| CF Industries Holdings, Inc. (a) | |
| Communications Equipment — 1.9% | |
| | |
| | |
| | |
| Capital One Financial Corp. (a) | |
| Discover Financial Services (a) | |
| | |
| | |
| | |
| Financial Services — 12.1% | |
| Equitable Holdings, Inc. (a) | |
| Jackson Financial, Inc., Class A (a) | |
| Mastercard, Inc., Class A (a) | |
| MGIC Investment Corp. (a) | |
| | |
| | |
| | |
| Ground Transportation — 1.7% | |
| Old Dominion Freight Line, Inc. (a) | |
| Health Care Providers & Services — 2.1% | |
| Elevance Health, Inc. (a) | |
| Household Durables — 5.9% | |
| | |
| | |
| Lennar Corp., Class A (a) | |
| | |
| | |
| | |
| | |
| Hartford Financial Services Group (The), Inc. (a) | |
| | |
| | |
| Accenture PLC, Class A (a) | |
| Cognizant Technology Solutions Corp., Class A (a) | |
| | |
| | |
| Mueller Industries, Inc. (a) | |
See Notes to Financial Statements
FT Vest Rising Dividend Achievers Target Income ETF (RDVI)Portfolio of Investments (Continued)April 30, 2024 (Unaudited) | | |
COMMON STOCKS (Continued) |
| | |
| | |
| | |
| | |
| | |
| Interpublic Group of (The) Cos., Inc. (a) | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| Oil, Gas & Consumable Fuels — 10.6% | |
| California Resources Corp. (a) | |
| Chesapeake Energy Corp. (a) | |
| | |
| | |
| Magnolia Oil & Gas Corp., Class A (a) | |
| | |
| Semiconductors & Semiconductor Equipment — 8.1% | |
| Applied Materials, Inc. (a) | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| Williams-Sonoma, Inc. (a) | |
| Technology Hardware, Storage & Peripherals — 2.0% | |
| | |
| Textiles, Apparel & Luxury Goods — 1.9% | |
| | |
| | |
| | |
MONEY MARKET FUNDS — 0.2% |
| Dreyfus Government Cash Management Fund, Institutional Shares - 5.19% (b) | |
| | |
| Total Investments — 100.0% | |
| | |
See Notes to Financial Statements
FT Vest Rising Dividend Achievers Target Income ETF (RDVI)Portfolio of Investments (Continued)April 30, 2024 (Unaudited) | | | | | |
|
| Call Options Written — (0.0)% | |
| | | | | |
| (Premiums received $1,307,741) | | | | |
| Net Other Assets and Liabilities — 0.0% | |
| | |
| All or a portion of this security is held as collateral for the options written. At April 30, 2024, the value of these securities amounts to $53,726,703. |
| Rate shown reflects yield as of April 30, 2024. |
Valuation InputsA summary of the inputs used to value the Fund’s investments as of April 30, 2024 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 Vest SMID Rising Dividend Achievers Target Income ETF (SDVD)Portfolio of InvestmentsApril 30, 2024 (Unaudited)
| | |
|
| Air Freight & Logistics — 0.9% | |
| Expeditors International of Washington, Inc. (a) | |
| Automobile Components — 2.0% | |
| | |
| | |
| | |
| | |
| Winnebago Industries, Inc. (a) | |
| | |
| | |
| | |
| Citizens Financial Group, Inc. (a) | |
| | |
| East West Bancorp, Inc. (a) | |
| Eastern Bankshares, Inc. (a) | |
| | |
| | |
| Huntington Bancshares, Inc. (a) | |
| International Bancshares Corp. (a) | |
| | |
| Regions Financial Corp. (a) | |
| Synovus Financial Corp. (a) | |
| Wintrust Financial Corp. (a) | |
| | |
| | |
| | |
| | |
| Advanced Drainage Systems, Inc. (a) | |
| | |
| | |
| | |
| | |
| Franklin Resources, Inc. (a) | |
| | |
| CF Industries Holdings, Inc. (a) | |
| | |
| | |
| Construction & Engineering — 2.1% | |
| Comfort Systems USA, Inc. (a) | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| Diversified Consumer Services — 1.1% | |
| Perdoceo Education Corp. (a) | |
See Notes to Financial Statements
FT Vest SMID Rising Dividend Achievers Target Income ETF (SDVD)Portfolio of Investments (Continued)April 30, 2024 (Unaudited) | | |
COMMON STOCKS (Continued) |
| Electronic Equipment, Instruments & Components — 1.1% | |
| Vishay Intertechnology, Inc. (a) | |
| Energy Equipment & Services — 4.2% | |
| Atlas Energy Solutions, Inc. (a) | |
| Cactus, Inc., Class A (a) | |
| | |
| Select Water Solutions, Inc. (a) | |
| | |
| | |
| Endeavor Group Holdings, Inc., Class A (a) | |
| Financial Services — 7.2% | |
| Corebridge Financial, Inc. (a) | |
| Equitable Holdings, Inc. (a) | |
| | |
| Jackson Financial, Inc., Class A (a) | |
| MGIC Investment Corp. (a) | |
| | |
| | |
| | |
| | |
| Cal-Maine Foods, Inc. (a) | |
| Ground Transportation — 1.0% | |
| Landstar System, Inc. (a) | |
| Hotels, Restaurants & Leisure — 1.0% | |
| Monarch Casino & Resort, Inc. (a) | |
| Household Durables — 7.9% | |
| Century Communities, Inc. (a) | |
| Ethan Allen Interiors, Inc. (a) | |
| | |
| Installed Building Products, Inc. (a) | |
| | |
| | |
| | |
| | |
| | |
| | |
| American Financial Group, Inc. (a) | |
| Cincinnati Financial Corp. (a) | |
| | |
| Reinsurance Group of America, Inc. (a) | |
| | |
| | |
| Interactive Media & Services — 0.9% | |
| | |
| | |
| | |
| | |
| | |
| | |
See Notes to Financial Statements
FT Vest SMID Rising Dividend Achievers Target Income ETF (SDVD)Portfolio of Investments (Continued)April 30, 2024 (Unaudited) | | |
COMMON STOCKS (Continued) |
| | |
| | |
| Lincoln Electric Holdings, Inc. (a) | |
| Mueller Industries, Inc. (a) | |
| | |
| | |
| | |
| Marine Transportation — 1.0% | |
| | |
| | |
| Interpublic Group of (The) Cos., Inc. (a) | |
| | |
| | |
| | |
| Commercial Metals Co. (a) | |
| | |
| | |
| | |
| | |
| Oil, Gas & Consumable Fuels — 6.2% | |
| California Resources Corp. (a) | |
| Chesapeake Energy Corp. (a) | |
| | |
| Magnolia Oil & Gas Corp., Class A (a) | |
| | |
| Texas Pacific Land Corp. (a) | |
| | |
| Paper & Forest Products — 1.2% | |
| | |
| Professional Services — 3.9% | |
| | |
| | |
| Jacobs Solutions, Inc. (a) | |
| | |
| | |
| Semiconductors & Semiconductor Equipment — 1.1% | |
| Amkor Technology, Inc. (a) | |
| | |
| | |
| Dick’s Sporting Goods, Inc. (a) | |
| Williams-Sonoma, Inc. (a) | |
| | |
| Technology Hardware, Storage & Peripherals — 2.2% | |
| Dell Technologies, Inc., Class C (a) | |
| | |
| | |
| Textiles, Apparel & Luxury Goods — 2.8% | |
| | |
See Notes to Financial Statements
FT Vest SMID Rising Dividend Achievers Target Income ETF (SDVD)Portfolio of Investments (Continued)April 30, 2024 (Unaudited) | | |
COMMON STOCKS (Continued) |
| Textiles, Apparel & Luxury Goods (Continued) | |
| | |
| | |
| | |
| Trading Companies & Distributors — 1.0% | |
| | |
| | |
| | |
MONEY MARKET FUNDS — 0.0% |
| Dreyfus Government Cash Management Fund, Institutional Shares - 5.19% (b) | |
| | |
| Total Investments — 100.1% | |
| | |
| | | | | |
|
| Call Options Written — (0.1)% | |
| | | | | |
| (Premiums received $119,770) | | | | |
| Net Other Assets and Liabilities — (0.0)% | |
| | |
| All or a portion of this security is held as collateral for the options written. At April 30, 2024, the value of these securities amounts to $6,605,219. |
| Rate shown reflects yield as of April 30, 2024. |
Valuation InputsA summary of the inputs used to value the Fund’s investments as of April 30, 2024 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 Vest Technology Dividend Target Income ETF (TDVI)Portfolio of InvestmentsApril 30, 2024 (Unaudited)
| | |
|
| Communications Equipment — 4.8% | |
| | |
| Motorola Solutions, Inc. (a) | |
| | |
| Telefonaktiebolaget LM Ericsson, ADR | |
| | |
| | |
| Diversified Telecommunication Services — 8.8% | |
| | |
| ATN International, Inc. (a) | |
| | |
| Cogent Communications Holdings, Inc. (a) | |
| Iridium Communications, Inc. | |
| | |
| | |
| Telkom Indonesia Persero Tbk PT, ADR (a) | |
| | |
| Verizon Communications, Inc. (a) | |
| | |
| Electronic Equipment, Instruments & Components — 4.9% | |
| Amphenol Corp., Class A (a) | |
| | |
| Benchmark Electronics, Inc. (a) | |
| | |
| | |
| Methode Electronics, Inc. (a) | |
| | |
| | |
| Vishay Intertechnology, Inc. (a) | |
| | |
| Health Care Technology — 0.0% | |
| | |
| Interactive Media & Services — 0.3% | |
| | |
| | |
| | |
| | |
| | |
| Cognizant Technology Solutions Corp., Class A (a) | |
| Hackett Group (The), Inc. (a) | |
| | |
| International Business Machines Corp. (a) | |
| | |
| | |
| | |
| Comcast Corp., Class A (a) | |
| | |
| Professional Services — 1.3% | |
| CSG Systems International, Inc. (a) | |
See Notes to Financial Statements
FT Vest Technology Dividend Target Income ETF (TDVI)Portfolio of Investments (Continued)April 30, 2024 (Unaudited) | | |
COMMON STOCKS (Continued) |
| Professional Services (Continued) | |
| Dun & Bradstreet Holdings, Inc. (a) | |
| | |
| Leidos Holdings, Inc. (a) | |
| | |
| Science Applications International Corp. (a) | |
| SS&C Technologies Holdings, Inc. (a) | |
| | |
| Semiconductors & Semiconductor Equipment — 36.8% | |
| Amkor Technology, Inc. (a) | |
| | |
| Applied Materials, Inc. (a) | |
| ASE Technology Holding Co., Ltd., ADR | |
| | |
| | |
| 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) | |
| | |
| Taiwan Semiconductor Manufacturing Co., Ltd., ADR (a) | |
| Texas Instruments, Inc. (a) | |
| United Microelectronics Corp., ADR (a) | |
| Universal Display Corp. (a) | |
| | |
| | |
| | |
| | |
| Clear Secure, Inc., Class A | |
| Dolby Laboratories, Inc., Class A (a) | |
| | |
| | |
| | |
| | |
| | |
| | |
| Progress Software Corp. (a) | |
| Roper Technologies, Inc. (a) | |
| | |
| | |
| Technology Hardware, Storage & Peripherals — 13.7% | |
| | |
| Dell Technologies, Inc., Class C (a) | |
| Hewlett Packard Enterprise Co. (a) | |
| | |
See Notes to Financial Statements
FT Vest Technology Dividend Target Income ETF (TDVI)Portfolio of Investments (Continued)April 30, 2024 (Unaudited) | | |
COMMON STOCKS (Continued) |
| Technology Hardware, Storage & Peripherals (Continued) | |
| Logitech International S.A. (a) | |
| | |
| Seagate Technology Holdings PLC (a) | |
| | |
| | |
| Wireless Telecommunication Services — 3.4% | |
| America Movil S.A.B. de C.V., ADR (a) | |
| Rogers Communications, Inc., Class B (a) | |
| Telephone and Data Systems, Inc. (a) | |
| Vodafone Group PLC, ADR (a) | |
| | |
| | |
| | |
MONEY MARKET FUNDS — 0.0% |
| Dreyfus Government Cash Management Fund, Institutional Shares - 5.19% (b) | |
| | |
| Total Investments — 99.9% | |
| | |
| | | | | |
|
| Call Options Written — (0.0)% | |
| | | | | |
| (Premiums received $26,527) | | | | |
| Net Other Assets and Liabilities — 0.1% | |
| | |
| All or a portion of this security is held as collateral for the options written. At April 30, 2024, the value of these securities amounts to $2,499,262. |
| Rate shown reflects yield as of April 30, 2024. |
Abbreviations throughout the Portfolio of Investments: |
| – American Depositary Receipt |
See Notes to Financial Statements
FT Vest Technology Dividend Target Income ETF (TDVI)Portfolio of Investments (Continued)April 30, 2024 (Unaudited)
Valuation InputsA summary of the inputs used to value the Fund’s investments as of April 30, 2024 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 Vest Dow Jones Internet & Target Income ETF (FDND)Portfolio of InvestmentsApril 30, 2024 (Unaudited)
| | |
|
| | |
| | |
| | |
| | |
| Communications Equipment — 10.0% | |
| Arista Networks, Inc. (a) (b) | |
| | |
| | |
| CommScope Holding Co., Inc. (a) (b) | |
| Juniper Networks, Inc. (b) | |
| | |
| | |
| | |
| ROBLOX Corp., Class A (a) (b) | |
| | |
| Financial Services — 3.6% | |
| PayPal Holdings, Inc. (a) (b) | |
| Health Care Technology — 2.6% | |
| Teladoc Health, Inc. (a) (b) | |
| Veeva Systems, Inc., Class A (a) (b) | |
| | |
| Hotels, Restaurants & Leisure — 7.4% | |
| Airbnb, Inc., Class A (a) (b) | |
| DoorDash, Inc., Class A (a) (b) | |
| DraftKings, Inc., Class A (a) (b) | |
| | |
| Interactive Media & Services — 25.3% | |
| Alphabet, Inc., Class A (a) (b) | |
| Alphabet, Inc., Class C (a) (b) | |
| Match Group, Inc. (a) (b) | |
| Meta Platforms, Inc., Class A (b) | |
| Pinterest, Inc., Class A (a) (b) | |
| Snap, Inc., Class A (a) (b) | |
| ZoomInfo Technologies, Inc. (a) (b) | |
| | |
| | |
| Akamai Technologies, Inc. (a) (b) | |
| Cloudflare, Inc., Class A (a) (b) | |
| Fastly, Inc., Class A (a) (b) | |
| GoDaddy, Inc., Class A (a) (b) | |
| | |
| Snowflake, Inc., Class A (a) (b) | |
| | |
| | |
| Atlassian Corp., Class A (a) (b) | |
| Box, Inc., Class A (a) (b) | |
| Confluent, Inc., Class A (a) (b) | |
| Datadog, Inc., Class A (a) (b) | |
| | |
See Notes to Financial Statements
FT Vest Dow Jones Internet & Target Income ETF (FDND)Portfolio of Investments (Continued)April 30, 2024 (Unaudited) | | |
COMMON STOCKS (Continued) |
| | |
| Dropbox, Inc., Class A (a) (b) | |
| Marathon Digital Holdings, Inc. (a) (b) | |
| Nutanix, Inc., Class A (a) (b) | |
| | |
| Smartsheet, Inc., Class A (a) (b) | |
| Workday, Inc., Class A (a) (b) | |
| Zoom Video Communications, Inc., Class A (a) (b) | |
| | |
| | |
| | |
| Total Investments — 99.9% | |
| | |
| | | | | |
|
| Call Options Written — (0.0)% | |
| | | | | |
| (Premiums received $1,684) | | | | |
| Net Other Assets and Liabilities — 0.1% | |
| | |
| Non-income producing security. |
| All or a portion of this security is held as collateral for the options written. At April 30, 2024, the value of these securities amounts to $961,250. |
Valuation InputsA summary of the inputs used to value the Fund’s investments as of April 30, 2024 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 |
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| See Portfolio of Investments for industry breakout. |
See Notes to Financial Statements
First Trust Exchange-Traded Fund IVStatements of Assets and Liabilities
April 30, 2024 (Unaudited)
| FT Vest Rising Dividend Achievers Target Income ETF
(RDVI) | FT Vest SMID Rising Dividend Achievers Target Income ETF
(SDVD) | FT Vest Technology Dividend Target Income ETF
(TDVI) | FT Vest Dow Jones Internet & Target Income ETF
(FDND) |
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Cash segregated as collateral for open written options contracts | | | | |
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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 received on options contracts written | | | | |
See Notes to Financial Statements
First Trust Exchange-Traded Fund IVStatements of Operations
For the Period Ended April 30, 2024 (Unaudited)
| FT Vest Rising Dividend Achievers Target Income ETF
(RDVI) | FT Vest SMID Rising Dividend Achievers Target Income ETF
(SDVD) | FT Vest Technology Dividend Target Income ETF
(TDVI) | FT Vest Dow Jones Internet & Target Income ETF
(FDND) (a) |
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NET INVESTMENT INCOME (LOSS) | | | | |
|
NET REALIZED AND UNREALIZED GAIN (LOSS): | | | | |
Net realized gain (loss) on: | | | | |
| | | | |
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Written options contracts | | | | |
Foreign currency transactions | | | | |
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Net change in unrealized appreciation (depreciation) on: | | | | |
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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 March 20, 2024, which is consistent with the commencement of investment operations and is the date the initial creation units were established. |
See Notes to Financial Statements
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First Trust Exchange-Traded Fund IVStatements of Changes in Net Assets
| FT Vest Rising Dividend Achievers Target Income ETF (RDVI) | FT Vest SMID Rising Dividend Achievers Target Income ETF (SDVD) |
| Six Months
Ended
4/30/2024 (Unaudited) | | Six Months
Ended
4/30/2024 (Unaudited) | 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 | | | | |
|
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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 9, 2023, which is consistent with the commencement of investment operations and is the date the initial creation units were established. |
| Inception date is March 20, 2024, 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 Vest Technology Dividend Target Income ETF (TDVI) | FT Vest Dow Jones Internet & Target Income ETF (FDND) |
Six Months
Ended
4/30/2024 (Unaudited) | Period
Ended
10/31/2023 (a) | |
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See Notes to Financial Statements
First Trust Exchange-Traded Fund IVFinancial Highlights
For a share outstanding throughout each period FT Vest Rising Dividend Achievers Target Income ETF (RDVI)
| Six Months
Ended
4/30/2024
(Unaudited) | | 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 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 each period FT Vest SMID Rising Dividend Achievers Target Income ETF (SDVD)
| Six Months
Ended
4/30/2024
(Unaudited) | 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 | | |
| | |
|
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 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 FT Vest Technology Dividend Target Income ETF (TDVI)
| Six Months
Ended
4/30/2024
(Unaudited) | 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 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 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 Vest Dow Jones Internet & Target Income ETF (FDND)
| Period
Ended
4/30/2024 (a)
(Unaudited) |
|
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 | |
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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 March 20, 2024, 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 IVApril 30, 2024 (Unaudited) 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 twenty-two funds that are offering shares. This report covers the four 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 Vest Rising Dividend Achievers Target Income ETF – RDVI |
FT Vest SMID Rising Dividend Achievers Target Income ETF – SDVD |
FT Vest Technology Dividend Target Income ETF – TDVI |
FT Vest Dow Jones Internet & Target Income ETF – FDND(1) |
| Commenced investment operations on March 20, 2024. |
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 AchieversTM 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 DividendTM 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 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)).
FDND’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 intended to track the Dow Jones Internet Composite Index and by utilizing an “option strategy” consisting of writing (selling) U.S. exchange-traded call options on the Nasdaq-100® Index or ETFs that track the Nasdaq-100® Index. Under normal market conditions, the Fund will invest at least 80% of its net assets (plus any borrowings for investment purposes) in securities and/or investments that provide exposure to securities of Internet Companies and securities intended to provide income to the Fund in the form of option premiums. “Internet Companies” are companies that generate at least 50% of sales or revenue from the Internet, and belong to either the “Internet Commerce” sector (i.e., online retail, search, financial services, investment products, social media, advertising, and travel platforms, and internet radio) or the “Internet Services” sector (i.e., various services performed via the internet, cloud computing, enterprise software, networking capabilities, website creation tools, and digital marketing platforms).
Notes to Financial Statements (Continued)
First Trust Exchange-Traded Fund IVApril 30, 2024 (Unaudited) 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.
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.
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 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;
Notes to Financial Statements (Continued)
First Trust Exchange-Traded Fund IVApril 30, 2024 (Unaudited) 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 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 April 30, 2024, 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.
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. FDND will utilize an “option strategy” consisting of writing (selling) U.S. exchanged-traded call options on the Nasdaq-100® Index or exchange-traded funds that track the Nasdaq-100® 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.
Notes to Financial Statements (Continued)
First Trust Exchange-Traded Fund IVApril 30, 2024 (Unaudited) 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.
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 Vest Rising Dividend Achievers Target Income ETF | | | |
FT Vest SMID Rising Dividend Achievers Target Income ETF | | | |
FT Vest Technology Dividend Target Income ETF | | | |
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 Vest Rising Dividend Achievers Target Income ETF | | | |
FT Vest SMID Rising Dividend Achievers Target Income ETF | | | |
FT Vest Technology Dividend Target Income ETF | | | |
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
Notes to Financial Statements (Continued)
First Trust Exchange-Traded Fund IVApril 30, 2024 (Unaudited) April 30, 2024, 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 non-expiring capital loss carryforwards available, to the extent provided by regulations, to offset future capital gains.
During the taxable year ended October 31, 2023, the following Fund utilized capital loss carryforwards in the following amount:
| |
FT Vest Rising Dividend Achievers Target Income ETF | |
As of April 30, 2024, 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 Vest Rising Dividend Achievers Target Income ETF | | | | |
FT Vest SMID Rising Dividend Achievers Target Income ETF | | | | |
FT Vest Technology Dividend Target Income ETF | | | | |
FT Vest Dow Jones Internet & Target Income ETF | | | | |
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:
| | | |
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 | | | |
Notes to Financial Statements (Continued)
First Trust Exchange-Traded Fund IVApril 30, 2024 (Unaudited) | |
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 | |
Vest Financial LLC (“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 Vest, First Trust will supervise Vest and its management of the investment of each Fund’s assets and will pay Vest for its services as the Funds’ sub-advisor. Vest receives a sub-advisory fee equal to 0.20% of the average daily net assets of each Fund. 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 Chairs of the Audit Committee, Nominating and Governance Committee and Valuation Committee, the Vice Chair of the Audit Committee, the Lead Independent Trustee and the Vice Lead Independent Trustee 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 Committee Chairs, the Audit Committee Vice Chair, the Lead Independent Trustee and the Vice Lead Independent Trustee rotate periodically in serving in such capacities. The officers and “Interested” Trustee receive no compensation from the Trust for acting in such capacities.
4. Purchases and Sales of Securities
For the period ended April 30, 2024, 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 Vest Rising Dividend Achievers Target Income ETF | | |
FT Vest SMID Rising Dividend Achievers Target Income ETF | | |
FT Vest Technology Dividend Target Income ETF | | |
FT Vest Dow Jones Internet & Target Income ETF | | |
For the period ended April 30, 2024, the cost of in-kind purchases and proceeds from in-kind sales for each Fund were as follows:
| | |
FT Vest Rising Dividend Achievers Target Income ETF | | |
FT Vest SMID Rising Dividend Achievers Target Income ETF | | |
FT Vest Technology Dividend Target Income ETF | | |
FT Vest Dow Jones Internet & Target Income ETF | | |
Notes to Financial Statements (Continued)
First Trust Exchange-Traded Fund IVApril 30, 2024 (Unaudited) 5. Derivative Transactions
The following table presents the types of derivatives held by each Fund at April 30, 2024, 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 | |
| | | | | |
| | 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 period ended April 30, 2024, 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 period ended April 30, 2024, 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 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
Notes to Financial Statements (Continued)
First Trust Exchange-Traded Fund IVApril 30, 2024 (Unaudited) 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.
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.
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 RDVI, August 3, 2025 for SDVD and TVDI, and March 14, 2026 for FDND.
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.
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.
First Trust Exchange-Traded Fund IVApril 30, 2024 (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.
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.
Risks are inherent in all investing. Certain general risks that may be applicable to a Fund are identified below, but not all of the material risks relevant to each Fund are included in this report and not all of the risks below apply to each Fund. The material risks of investing in each Fund are spelled out in its prospectus, statement of additional information and other regulatory filings. Before investing, you should consider each Fund’s investment objective, risks, charges and expenses, and read each Fund’s prospectus and statement of additional information carefully. You can download each Fund’s prospectus at www.ftportfolios.com or contact First Trust Portfolios L.P. at (800) 621-1675 to request a prospectus, which contains this and other information about each Fund.
Concentration Risk. To the extent that a fund is able to invest a significant percentage of its assets in a single asset class or the securities of issuers within the same country, state, region, industry or sector, an adverse economic, business or political development may affect the value of the fund’s investments more than if the fund were more broadly diversified. A fund that tracks an index will be concentrated to the extent the fund’s corresponding index is concentrated. A concentration makes a fund more susceptible to any single occurrence and may subject the fund to greater market risk than a fund that is more broadly diversified.
Credit Risk. Credit risk is the risk that an issuer of a security will be unable or unwilling to make dividend, interest and/or principal payments when due and the related risk that the value of a security may decline because of concerns about the issuer’s ability to make such payments.
Cyber Security Risk. The funds are susceptible to potential operational risks through breaches in cyber security. A breach in cyber security refers to both intentional and unintentional events that may cause a fund to lose proprietary information, suffer data corruption or lose operational capacity. Such events could cause a fund to incur regulatory penalties, reputational damage, additional compliance costs associated with corrective measures and/or financial loss. In addition, cyber security breaches of a fund’s third-party service providers, such as its administrator, transfer agent, custodian, or sub-advisor, as applicable, or issuers in which the fund invests, can also subject a fund to many of the same risks associated with direct cyber security breaches.
Defined Outcome Funds Risk. To the extent a fund’s investment strategy is designed to deliver returns tied to the price performance of an underlying ETF, an investor may not realize the returns the fund seeks to achieve if that investor does not hold shares for the entire target outcome period. In the event an investor purchases shares after the first day of the target outcome period or sells shares prior to the end of the target outcome period, the buffer that the fund seeks to provide against a decline in the value of the underlying ETF may not be available, the enhanced returns that the fund seeks to provide (if any) may not be available and the investor may not participate in a gain in the value of the underlying ETF up to the cap for the investor’s investment period. Additionally, the fund will not participate in gains of the underlying ETF above the cap and a shareholder may lose their entire investment. If the fund seeks enhanced returns, there are certain time periods when the value of the fund may fall faster than the value of the underlying ETF, and it is very unlikely that, on any given day during which the underlying ETF share price increases in value, the fund’s share price will increase at the same rate as the enhanced returns sought by the fund, which is designed for an entire target outcome period. Trading flexible exchange options involves risks different from, or possibly greater than, the risks associated with investing directly in securities, such as less liquidity and correlation and valuation risks. A fund may experience substantial downside from specific flexible exchange option positions and certain positions may expire worthless.
Additional Information (Continued)
First Trust Exchange-Traded Fund IVApril 30, 2024 (Unaudited) 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.
Additional Information (Continued)
First Trust Exchange-Traded Fund IVApril 30, 2024 (Unaudited) 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
Additional Information (Continued)
First Trust Exchange-Traded Fund IVApril 30, 2024 (Unaudited) 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 Agreement
FT Vest Dow Jones Internet & 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 Vest Dow Jones Internet & 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 Vest Financial LLC (the “Sub-Advisor”), for an initial two-year term at a meeting held on February 14, 2024. 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
Additional Information (Continued)
First Trust Exchange-Traded Fund IVApril 30, 2024 (Unaudited) 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 February 14, 2024 meeting, the Board also received a presentation from representatives of the Sub-Advisor, who discussed the services that the Sub-Advisor will provide to the Fund, and the Trustees were able to ask questions about the proposed investment 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 fee rates charged by the Advisor and the Sub-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 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
Additional Information (Continued)
First Trust Exchange-Traded Fund IVApril 30, 2024 (Unaudited) 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.
Liquidity Risk Management Program
In accordance with Rule 22e-4 under the Investment Company Act of 1940, as amended (the “1940 Act”), the Funds and each other fund in the First Trust Fund Complex, other than the closed-end funds, have adopted and implemented a liquidity risk management program (the “Program”) reasonably designed to assess and manage the funds’ liquidity risk, i.e., the risk that a fund could not meet requests to redeem shares issued by the fund without significant dilution of remaining investors’ interests in the fund. The Board of Trustees of the First Trust Funds has appointed First Trust Advisors L.P. (the “Advisor”) as the person designated to administer the Program, and in this capacity the Advisor performs its duties primarily through the activities and efforts of the First Trust Liquidity Committee.
Pursuant to the Program, the Liquidity Committee classifies the liquidity of each fund’s portfolio investments into one of the four liquidity categories specified by Rule 22e-4: highly liquid investments, moderately liquid investments, less liquid investments and illiquid investments. The Liquidity Committee determines certain of the inputs for this classification process, including reasonably anticipated trade sizes and significant investor dilution thresholds. The Liquidity Committee also determines and periodically reviews a highly liquid investment minimum for certain funds, monitors the funds’ holdings of assets classified as illiquid investments to seek to ensure they do not exceed 15% of a fund’s net assets and establishes policies and procedures regarding redemptions in kind.
At the April 25, 2024 meeting of the Board of Trustees, as required by Rule 22e-4 and the Program, the Advisor provided the Board with a written report prepared by the Advisor that addressed the operation of the Program during the period from March 23, 2023 through the Liquidity Committee’s annual meeting held on March 14, 2024 and assessed the Program’s adequacy and effectiveness of implementation during this period, including the operation of the highly liquid investment minimum for each fund that is required under the Program to have one, and any material changes to the Program. Note that because the Funds primarily hold assets that are highly liquid investments, the Funds have not adopted a highly liquid investment minimum.
As stated in the written report, during the review period, no fund breached the 15% limitation on illiquid investments, no fund with a highly liquid investment minimum breached that minimum during the reporting period and no fund was required to file a Form N-RN during the reporting period. The Advisor concluded that each fund’s investment strategy is appropriate for an open-end fund; that the Program operated effectively in all material respects during the review period; and that the Program is reasonably designed to assess and manage the liquidity risk of each fund and to maintain compliance with Rule 22e-4.
First Trust Exchange-Traded Fund IV
First Trust Advisors L.P.
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
Vest 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
Chapman and Cutler LLP
320 South Canal Street
Chicago, IL 60606
|
For the Six Months Ended
April 30, 2024 |
First Trust Exchange-Traded Fund IV
FT Vest DJIA® Dogs 10 Target Income ETF (DOGG) |
FT Vest DJIA® Dogs 10 Target Income ETF
Semi-Annual Report
April 30, 2024
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 Vest Financial LLC (“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 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 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 webpage at www.ftportfolios.com.
This report contains information that may help you evaluate your investment in the Fund. It includes details about the Fund and presents data and analysis that provide insight into the Fund’s performance and investment approach.
The statistical information that follows may help you understand the Fund’s performance compared to that of relevant market benchmarks.
It is important to keep in mind that the opinions expressed by personnel of the Advisor 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 Vest DJIA® Dogs 10 Target Income ETF (DOGG)
Semi-Annual Letter from the Chairman and CEO
April 30, 2024
First Trust is pleased to provide you with the semi-annual report for the FT Vest DJIA® Dogs 10 Target Income ETF (the “Fund”), which contains detailed information about the Fund for the six-month period ended April 30, 2024.
On March 16, 2022, the Federal Reserve (the “Fed”) initiated the first of what have been eleven increases to the Federal Funds target rate thus far in the current cycle. Given its potential impact, financial pundits have been debating the direction and timing of the Fed’s interest rate policy ever since. In December 2023, the Fed gave some guidance, announcing that it expected to implement up to three interest rate cuts totaling 75 basis points (“bps”) in 2024. Investors responded to the news with exuberance. In the U.S., the S&P 500® Index surged by 10.56% on a total return basis in the first quarter of 2024, adding to its already stunning 26.29% total return in 2023. For comparison, the yield on the 10-Year Treasury Note (“T-Note”) stood at 3.80% on December 27, 2023, down a stunning 119 bps from its most recent high of 4.99% set just months prior on October 19, 2023. Bond yields generally move in the opposite direction of prices. Given this relationship, the decline in the 10-Year T-Note’s yield is indicative of investor’s desire to lock in higher income payments prior to the Fed reducing its policy rate.
At this point, it makes sense to step back and highlight several ways the Fed’s interest rate policy has impacted the U.S. economy. We’ll start with the good news. On April 30, 2024, inflation, as measured by the trailing 12-month rate on the Consumer Price Index, stood at 3.4%, down significantly from its most recent peak of 9.1% set in June 2022. Additionally, the higher Federal Funds target rate has been a boon for those investors with assets in fixed income, money market, and other interest-bearing accounts. The total value of assets held in U.S. money market accounts stood at $6.0 trillion on May 1, 2024, nearly double where it stood just five years ago. Notably, the weekly yield on the benchmark U.S. Treasury 3-Month Money Market Index more than doubled from 2.40% to 5.32% between the end of April 2019 and April 2024.
Now for the not-so-good news. Higher interest rates often restrict the ability of consumers and businesses to spend and finance growth, respectively. While the consumer has remained relatively unscathed thus far, evidence that they are stretching their budgets is mounting. The Federal Reserve Bank of New York reported that the total balance of U.S. credit card debt stood at a record $1.13 trillion at the end of 2023, while the average annual percentage rate for all cards rose to a record 21.59% in the first quarter of 2024. Perhaps unsurprisingly, delinquency rates have been surging. Data from the Federal Reserve Bank of St. Louis revealed that the delinquency rate on credit card loans for all U.S. commercial banks rose to 3.10% in the fourth quarter of 2023, up from 2.62% in the fourth quarter of 2019 (pre-COVID-19). In April 2024, 43% of small and mid-sized U.S. businesses were unable to pay their rent on time and in full. In addition, higher interest rates are impacting economic growth. In the U.S., real gross domestic product growth was a tepid 1.6% in the first quarter of 2024, far below consensus expectations of 2.5%. Not even the U.S. government is immune to the impacts of higher interest rates. At the end of the first quarter of 2024, the interest payments paid by the Federal government stood at a record $1.06 trillion, nearly double their total of $0.56 trillion at the end of the fourth quarter of 2019.
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 Vest DJIA® Dogs 10 Target Income ETF (DOGG)
FT 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.
|
| | | Average Annual Total Returns | |
| | | Inception
(4/26/23)
to 4/30/24 | Inception
(4/26/23)
to 4/30/24 |
| | | | |
| | | | |
| | | | |
| | | | |
Dow Jones Industrial Average® | | | | |
| | | | |
Total returns for the period since inception are calculated from the inception date of the Fund. “Average Annual Total Returns” represent the average annual change in value of an investment over the period indicated. “Cumulative Total Returns” represent the total change in value of an investment over the period indicated.
The Fund’s per share net asset value (“NAV”) is the value of one share of the Fund and is computed by dividing the value of all assets of the Fund (including accrued interest and dividends), less all liabilities (including accrued expenses and dividends declared but unpaid), by the total number of outstanding shares. The price used to calculate market return (“Market Price”) is determined by using the midpoint 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 or its affiliates (“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® is a registered trademark 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 or 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 Vest DJIA® Dogs 10 Target Income ETF (DOGG) (Continued)
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Net Other Assets and Liabilities | |
| |
| |
U.S. Treasury Bill, 0.00%, 01/23/25 | |
| |
Walgreens Boots Alliance, Inc. | |
International Business Machines Corp. | |
Verizon Communications, Inc. | |
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| Money market funds are excluded. |
| 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 Vest DJIA® Dogs 10 Target Income ETFSemi-Annual ReportApril 30, 2024 (Unaudited) Advisor
First Trust Advisors L.P. (“First Trust” or the “Advisor”) is the investment advisor to the FT 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.
Vest Financial LLC (“Vest” or the “Sub-Advisor”) serves as the sub-advisor to the Fund. In this capacity, Vest is responsible for the selection and ongoing monitoring of the securities in the Fund’s investment portfolio. Vest, with principal offices at 8350 Broad St., Suite 240, McLean, VA 22102, was founded in 2012. Vest had approximately $26.7 billion under management or committed to management as of April 30, 2024.
Portfolio Management Team
The following persons serve as the portfolio managers of the Fund:
Karan Sood, Managing Director of Vest
Howard Rubin, Managing Director of 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.
FT Vest DJIA® Dogs 10 Target Income ETFUnderstanding Your Fund ExpensesApril 30, 2024 (Unaudited) As a shareholder of FT 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 April 30, 2024.
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
November 1, 2023 | Ending
Account Value
April 30, 2024 | Annualized
Expense Ratio
Based on the
Six-Month
Period | Expenses Paid
During the
Six-Month
Period (a) |
FT 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 (November 1, 2023 through April 30, 2024), multiplied by 182/366 (to reflect the six-month period). |
FT Vest DJIA® Dogs 10 Target Income ETF (DOGG)Portfolio of InvestmentsApril 30, 2024 (Unaudited)
| | |
|
| | |
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| Communications Equipment — 4.9% | |
| | |
| Consumer Staples Distribution & Retail — 4.9% | |
| Walgreens Boots Alliance, Inc. (a) | |
| Diversified Telecommunication Services — 4.9% | |
| Verizon Communications, Inc. (a) | |
| Industrial Conglomerates — 4.9% | |
| | |
| | |
| International Business Machines Corp. (a) | |
| Oil, Gas & Consumable Fuels — 4.9% | |
| | |
| | |
| | |
| | |
| | |
| | | | |
U.S. TREASURY BILLS — 48.3% |
| | | | |
| | | | |
| | |
MONEY MARKET FUNDS — 0.2% |
| Dreyfus Government Cash Management Fund, Institutional Shares - 5.19% (c) | |
| | |
| Total Investments — 97.0% | |
| | |
| | | | | |
|
| Call Options Purchased — 0.1% | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| International Business Machines Corp. | | | | |
See Notes to Financial Statements
FT Vest DJIA® Dogs 10 Target Income ETF (DOGG)Portfolio of Investments (Continued)April 30, 2024 (Unaudited) | | | | | |
PURCHASED OPTIONS (Continued) |
| Call Options Purchased (Continued) | |
| | | | | |
| Verizon Communications, Inc. | | | | |
| Walgreens Boots Alliance, Inc. | | | | |
| | |
| | |
WRITTEN OPTIONS — (28.0)% |
| Call Options Written — (0.1)% | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| International Business Machines Corp. | | | | |
| | | | | |
| Verizon Communications, Inc. | | | | |
| Walgreens Boots Alliance, Inc. | | | | |
| Total Call Options Written | |
| (Premiums received $29,804) | |
| Put Options Written — (27.9)% | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| International Business Machines Corp. | | | | |
| | | | | |
| Verizon Communications, Inc. | | | | |
| Walgreens Boots Alliance, Inc. | | | | |
| Total Put Options Written | |
| (Premiums received $8,060,112) | |
| | |
| (Premiums received $8,089,916) | |
| Net Other Assets and Liabilities — 30.9% | |
| | |
| All or a portion of this security is pledged as collateral for the options written. At April 30, 2024, the value of these securities amounts to $16,520,556. |
| |
| Rate shown reflects yield as of April 30, 2024. |
See Notes to Financial Statements
FT Vest DJIA® Dogs 10 Target Income ETF (DOGG)Portfolio of Investments (Continued)April 30, 2024 (Unaudited)
Valuation InputsA summary of the inputs used to value the Fund’s investments as of April 30, 2024 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 |
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| See Portfolio of Investments for industry breakout. |
See Notes to Financial Statements
FT Vest DJIA® Dogs 10 Target Income ETF (DOGG)Statement of Assets and Liabilities
April 30, 2024 (Unaudited)
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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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|
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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) | |
| |
Premiums paid on options contracts purchased | |
Premiums received on options contracts written | |
See Notes to Financial Statements
FT Vest DJIA® Dogs 10 Target Income ETF (DOGG)Statement of Operations
For the Six Months Ended April 30, 2024 (Unaudited)
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NET INVESTMENT INCOME (LOSS) | |
|
NET REALIZED AND UNREALIZED GAIN (LOSS): | |
Net realized gain (loss) on: | |
| |
| |
Purchased options contracts | |
Written options contracts | |
| |
Net change in unrealized appreciation (depreciation) on: | |
| |
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
FT Vest DJIA® Dogs 10 Target Income ETF (DOGG)Statements of Changes in Net Assets
| Six Months
Ended
4/30/2024 (Unaudited) | 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 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 Vest DJIA® Dogs 10 Target Income ETF (DOGG)Financial Highlights
For a share outstanding throughout each period
| Six Months
Ended
4/30/2024
(Unaudited) | 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 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 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 Vest DJIA® Dogs 10 Target Income ETFApril 30, 2024 (Unaudited) 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 twenty-two funds that are offering shares. This report covers the FT 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.
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 valued at the mean of their most recent bid and ask price, if both are available. Over-the-counter options contracts are valued as follows, depending on the
Notes to Financial Statements (Continued)
FT Vest DJIA® Dogs 10 Target Income ETFApril 30, 2024 (Unaudited) 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 valued on the basis of valuations provided by a third-party pricing service approved by the Trust’s Board of Trustees.
Shares of open-end funds are valued based on NAV per share.
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.
Notes to Financial Statements (Continued)
FT Vest DJIA® Dogs 10 Target Income ETFApril 30, 2024 (Unaudited) The inputs or methodologies used for valuing investments are not necessarily an indication of the risk associated with investing in those investments. A summary of the inputs used to value the Fund’s investments as of April 30, 2024, 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. 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) | |
Notes to Financial Statements (Continued)
FT Vest DJIA® Dogs 10 Target Income ETFApril 30, 2024 (Unaudited) 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 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 April 30, 2024, 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 non-expiring 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.
As of April 30, 2024, 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) |
| | | |
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 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 | |
Notes to Financial Statements (Continued)
FT Vest DJIA® Dogs 10 Target Income ETFApril 30, 2024 (Unaudited) Vest Financial LLC (“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 Vest, First Trust will supervise Vest and its management of the investment of the Fund’s assets and will pay Vest for its services as the Fund’s sub-advisor. Vest receives a sub-advisory fee equal to 0.20% of the average daily net assets of the Fund. 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 Chairs of the Audit Committee, Nominating and Governance Committee and Valuation Committee, the Vice Chair of the Audit Committee, the Lead Independent Trustee and the Vice Lead Independent Trustee 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 Committee Chairs, the Audit Committee Vice Chair, the Lead Independent Trustee and the Vice Lead Independent Trustee rotate periodically in serving in such capacities. The officers and “Interested” Trustee receive no compensation from the Trust for acting in such capacities.
4. Purchases and Sales of Securities
For the six months ended April 30, 2024, the cost of purchases and proceeds from sales of investments, excluding short-term investments and in-kind transactions, were $30,278,774 and $40,054,716, respectively.
For the six months ended April 30, 2024, the cost of in-kind purchases and proceeds from in-kind sales were $35,128,777 and $12,229,679, respectively.
5. Derivative Transactions
The following table presents the types of derivatives held by the Fund at April 30, 2024, 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 Vest DJIA® Dogs 10 Target Income ETFApril 30, 2024 (Unaudited) The following table presents the amount of net realized gain (loss) and change in net unrealized appreciation (depreciation) recognized for the six months ended April 30, 2024, on derivative instruments, as well as the primary underlying risk exposure associated with the instruments.
Statement of Operations Location | |
| |
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 six months ended April 30, 2024, the premiums for purchased options contracts opened were $123,754 and the premiums for purchased options contracts closed, exercised and expired were $47,289.
During the six months ended April 30, 2024, the premiums for written options contracts opened were $9,492,326 and the premiums for written options contracts closed, exercised and expired were $3,445,927.
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 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 Vest DJIA® Dogs 10 Target Income ETFApril 30, 2024 (Unaudited) 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.
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.
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.
FT Vest DJIA® Dogs 10 Target Income ETFApril 30, 2024 (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.
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.
Risks are inherent in all investing. Certain general risks that may be applicable to a Fund are identified below, but not all of the material risks relevant to each Fund are included in this report and not all of the risks below apply to each Fund. The material risks of investing in each Fund are spelled out in its prospectus, statement of additional information and other regulatory filings. Before investing, you should consider each Fund’s investment objective, risks, charges and expenses, and read each Fund’s prospectus and statement of additional information carefully. You can download each Fund’s prospectus at www.ftportfolios.com or contact First Trust Portfolios L.P. at (800) 621-1675 to request a prospectus, which contains this and other information about each Fund.
Concentration Risk. To the extent that a fund is able to invest a significant percentage of its assets in a single asset class or the securities of issuers within the same country, state, region, industry or sector, an adverse economic, business or political development may affect the value of the fund’s investments more than if the fund were more broadly diversified. A fund that tracks an index will be concentrated to the extent the fund’s corresponding index is concentrated. A concentration makes a fund more susceptible to any single occurrence and may subject the fund to greater market risk than a fund that is more broadly diversified.
Credit Risk. Credit risk is the risk that an issuer of a security will be unable or unwilling to make dividend, interest and/or principal payments when due and the related risk that the value of a security may decline because of concerns about the issuer’s ability to make such payments.
Cyber Security Risk. The funds are susceptible to potential operational risks through breaches in cyber security. A breach in cyber security refers to both intentional and unintentional events that may cause a fund to lose proprietary information, suffer data corruption or lose operational capacity. Such events could cause a fund to incur regulatory penalties, reputational damage, additional compliance costs associated with corrective measures and/or financial loss. In addition, cyber security breaches of a fund’s third-party service providers, such as its administrator, transfer agent, custodian, or sub-advisor, as applicable, or issuers in which the fund invests, can also subject a fund to many of the same risks associated with direct cyber security breaches.
Defined Outcome Funds Risk. To the extent a fund’s investment strategy is designed to deliver returns tied to the price performance of an underlying ETF, an investor may not realize the returns the fund seeks to achieve if that investor does not hold shares for the entire target outcome period. In the event an investor purchases shares after the first day of the target outcome period or sells shares prior to the end of the target outcome period, the buffer that the fund seeks to provide against a decline in the value of the underlying ETF may not be available, the enhanced returns that the fund seeks to provide (if any) may not be available and the investor may not participate in a gain in the value of the underlying ETF up to the cap for the investor’s investment period. Additionally, the fund will not participate in gains of the underlying ETF above the cap and a shareholder may lose their entire investment. If the fund seeks enhanced returns, there are certain time periods when the value of the fund may fall faster than the value of the underlying ETF, and it is very unlikely that, on any given day during which the underlying ETF share price increases in value, the fund’s share price will increase at the same rate as the enhanced returns sought by the fund, which is designed for an entire target outcome period. Trading flexible exchange options involves risks different from, or possibly greater than, the risks associated with investing directly in securities, such as less liquidity and correlation and valuation risks. A fund may experience substantial downside from specific flexible exchange option positions and certain positions may expire worthless.
Additional Information (Continued)
FT Vest DJIA® Dogs 10 Target Income ETFApril 30, 2024 (Unaudited) 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.
Additional Information (Continued)
FT Vest DJIA® Dogs 10 Target Income ETFApril 30, 2024 (Unaudited) 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
Additional Information (Continued)
FT Vest DJIA® Dogs 10 Target Income ETFApril 30, 2024 (Unaudited) 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
Liquidity Risk Management Program
In accordance with Rule 22e-4 under the Investment Company Act of 1940, as amended (the “1940 Act”), the Fund and each other fund in the First Trust Fund Complex, other than the closed-end funds, have adopted and implemented a liquidity risk management program (the “Program”) reasonably designed to assess and manage the funds’ liquidity risk, i.e., the risk that a fund could not meet requests to redeem shares issued by the fund without significant dilution of remaining investors’ interests in the fund. The Board of Trustees of the First Trust Funds has appointed First Trust Advisors L.P. (the “Advisor”) as the person designated to administer the Program, and in this capacity the Advisor performs its duties primarily through the activities and efforts of the First Trust Liquidity Committee.
Pursuant to the Program, the Liquidity Committee classifies the liquidity of each fund’s portfolio investments into one of the four liquidity categories specified by Rule 22e-4: highly liquid investments, moderately liquid investments, less liquid investments and illiquid investments. The Liquidity Committee determines certain of the inputs for this classification process, including reasonably anticipated trade sizes and significant investor dilution thresholds. The Liquidity Committee also determines and periodically reviews a highly liquid investment minimum for certain funds, monitors the funds’ holdings of assets classified as illiquid investments to seek to ensure they do not exceed 15% of a fund’s net assets and establishes policies and procedures regarding redemptions in kind.
At the April 25, 2024 meeting of the Board of Trustees, as required by Rule 22e-4 and the Program, the Advisor provided the Board with a written report prepared by the Advisor that addressed the operation of the Program during the period from March 23, 2023 through the Liquidity Committee’s annual meeting held on March 14, 2024 and assessed the Program’s adequacy and effectiveness of implementation during this period, including the operation of the highly liquid investment minimum for each fund that is required under the Program to have one, and any material changes to the Program. Note that because the Fund primarily holds assets that are highly liquid investments, the Fund has not adopted a highly liquid investment minimum.
As stated in the written report, during the review period, no fund breached the 15% limitation on illiquid investments, no fund with a highly liquid investment minimum breached that minimum during the reporting period and no fund was required to file a Form N-RN during the reporting period. The Advisor concluded that each fund’s investment strategy is appropriate for an open-end fund; that the Program operated effectively in all material respects during the review period; and that the Program is reasonably designed to assess and manage the liquidity risk of each fund and to maintain compliance with Rule 22e-4.
First Trust Exchange-Traded Fund IV
First Trust Advisors L.P.
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
Vest 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
Chapman and Cutler LLP
320 South Canal Street
Chicago, IL 60606
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For the Six Months Ended
April 30, 2024 |
First Trust Exchange-Traded Fund IV
First Trust Intermediate Duration Investment Grade Corporate ETF (FIIG) |
First Trust Intermediate Duration Investment Grade Corporate ETF (FIIG)
Semi-Annual Report
April 30, 2024
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.
This report contains information that may help you evaluate your investment in the Fund. It includes details about the Fund and presents data and analysis that provide insight into the Fund’s performance and investment approach.
The statistical information that follows may help you understand the Fund’s performance compared to that of relevant market benchmarks.
It is important to keep in mind that the opinions expressed by personnel of the Advisor are just that: informed opinions. They should not be considered to be promises or advice. The opinions, like the statistics, cover the period through the date on the cover of this report. The material risks of investing in the Fund are spelled out in the prospectus, the statement of additional information, and other Fund regulatory filings.
First Trust Intermediate Duration Investment Grade Corporate ETF (FIIG)
Semi-Annual Letter from the Chairman and CEO
April 30, 2024
First Trust is pleased to provide you with the semi-annual report for the First Trust Intermediate Duration Investment Grade Corporate ETF (the “Fund”), which contains detailed information about the Fund for the six-month period ended April 30, 2024.
On March 16, 2022, the Federal Reserve (the “Fed”) initiated the first of what have been eleven increases to the Federal Funds target rate thus far in the current cycle. Given its potential impact, financial pundits have been debating the direction and timing of the Fed’s interest rate policy ever since. In December 2023, the Fed gave some guidance, announcing that it expected to implement up to three interest rate cuts totaling 75 basis points (“bps”) in 2024. Investors responded to the news with exuberance. In the U.S., the S&P 500® Index surged by 10.56% on a total return basis in the first quarter of 2024, adding to its already stunning 26.29% total return in 2023. For comparison, the yield on the 10-Year Treasury Note (“T-Note”) stood at 3.80% on December 27, 2023, down a stunning 119 bps from its most recent high of 4.99% set just months prior on October 19, 2023. Bond yields generally move in the opposite direction of prices. Given this relationship, the decline in the 10-Year T-Note’s yield is indicative of investor’s desire to lock in higher income payments prior to the Fed reducing its policy rate.
At this point, it makes sense to step back and highlight several ways the Fed’s interest rate policy has impacted the U.S. economy. We’ll start with the good news. On April 30, 2024, inflation, as measured by the trailing 12-month rate on the Consumer Price Index, stood at 3.4%, down significantly from its most recent peak of 9.1% set in June 2022. Additionally, the higher Federal Funds target rate has been a boon for those investors with assets in fixed income, money market, and other interest-bearing accounts. The total value of assets held in U.S. money market accounts stood at $6.0 trillion on May 1, 2024, nearly double where it stood just five years ago. Notably, the weekly yield on the benchmark U.S. Treasury 3-Month Money Market Index more than doubled from 2.40% to 5.32% between the end of April 2019 and April 2024.
Now for the not-so-good news. Higher interest rates often restrict the ability of consumers and businesses to spend and finance growth, respectively. While the consumer has remained relatively unscathed thus far, evidence that they are stretching their budgets is mounting. The Federal Reserve Bank of New York reported that the total balance of U.S. credit card debt stood at a record $1.13 trillion at the end of 2023, while the average annual percentage rate for all cards rose to a record 21.59% in the first quarter of 2024. Perhaps unsurprisingly, delinquency rates have been surging. Data from the Federal Reserve Bank of St. Louis revealed that the delinquency rate on credit card loans for all U.S. commercial banks rose to 3.10% in the fourth quarter of 2023, up from 2.62% in the fourth quarter of 2019 (pre-COVID-19). In April 2024, 43% of small and mid-sized U.S. businesses were unable to pay their rent on time and in full. In addition, higher interest rates are impacting economic growth. In the U.S., real gross domestic product growth was a tepid 1.6% in the first quarter of 2024, far below consensus expectations of 2.5%. Not even the U.S. government is immune to the impacts of higher interest rates. At the end of the first quarter of 2024, the interest payments paid by the Federal government stood at a record $1.06 trillion, nearly double their total of $0.56 trillion at the end of the fourth quarter of 2019.
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.
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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)
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Property & Casualty Insurance | |
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Corporate Bonds and Notes | |
Foreign Corporate Bonds and Notes | |
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Brown & Brown, Inc., 4.20%, 03/17/32 | |
Adobe, Inc., 4.95%, 04/04/34 | |
ServiceNow, Inc., 1.40%, 09/01/30 | |
United Rentals North America, Inc., 6.00%, 12/15/29 | |
Workday, Inc., 3.80%, 04/01/32 | |
Bank of America Corp., 3.97%, 02/07/30 | |
Alcon Finance Corp., 5.38%, 12/06/32 | |
MSCI, Inc., 3.88%, 02/15/31 | |
Campbell Soup, 5.40%, 03/21/34 | |
Constellation Brands, Inc., 4.75%, 05/09/32 | |
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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 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)Semi-Annual ReportApril 30, 2024 (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.
First Trust Intermediate Duration Investment Grade Corporate ETF (FIIG)Understanding Your Fund ExpensesApril 30, 2024 (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 and held through the six-month period ended April 30, 2024.
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
November 1, 2023 | Ending
Account Value
April 30, 2024 | Annualized
Expense Ratio
Based on the
Six-Month
Period | Expenses Paid
During the
Six-Month
Period (a) |
First Trust Intermediate Duration Investment Grade Corporate ETF (FIIG) |
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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 (November 1, 2023 through April 30, 2024), multiplied by 182/366 (to reflect the six-month period). |
First Trust Intermediate Duration Investment Grade Corporate ETF (FIIG)Portfolio of InvestmentsApril 30, 2024 (Unaudited)
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CORPORATE BONDS AND NOTES — 86.8% |
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| Bank of America Corp. (a) | | | |
| Bank of America Corp. (a) | | | |
| Bank of New York Mellon (The) Corp. (a) | | | |
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| Goldman Sachs Group, Inc. (The) | | | |
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| PNC Financial Services Group (The), Inc. | | | |
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| Truist Financial Corp. (a) | | | |
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| Brokerage/Asset Managers/Exchanges — 2.9% | | | | |
| Intercontinental Exchange, Inc. | | | |
| Intercontinental Exchange, Inc. | | | |
| Intercontinental Exchange, Inc. | | | |
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| Building Materials — 0.9% | | | | |
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| CCO Holdings LLC / CCO Holdings Capital Corp. (b) | | | |
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| Construction Machinery — 2.2% | | | | |
| Ashtead Capital, Inc. (b) | | | |
See Notes to Financial Statements
First Trust Intermediate Duration Investment Grade Corporate ETF (FIIG)Portfolio of Investments (Continued)April 30, 2024 (Unaudited) | | | | |
CORPORATE BONDS AND NOTES (Continued) |
| Construction Machinery (Continued) | | | | |
| Ashtead Capital, Inc. (b) | | | |
| United Rentals North America, Inc. (b) | | | |
| | |
| Consumer Cyclical Services — 0.4% | | | | |
| Go Daddy Operating Co. LLC / GD Finance Co., Inc. (b) | | | |
| Go Daddy Operating Co. LLC / GD Finance Co., Inc. (b) | | | |
| | |
| | | | | |
| | | | |
| | | | | |
| Duke Energy Carolinas LLC | | | |
| Duke Energy Carolinas LLC | | | |
| | | | |
| Florida Power & Light Co. | | | |
| Florida Power & Light Co. | | | |
| Florida Power & Light Co. | | | |
| | | | |
| Public Service Electric & Gas Co. | | | |
| | |
| | | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | |
| | | | | |
| Anheuser-Busch InBev Worldwide, Inc. | | | |
| | | | |
| | | | |
| Constellation Brands, Inc. | | | |
| Constellation Brands, Inc. | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| Keurig Dr Pepper, Inc., Series 10 | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| Molson Coors Beverage Co. | | | |
| Mondelez International, Inc. | | | |
| Nestle Holdings, Inc. (b) | | | |
| | | | |
| | | | |
| | |
See Notes to Financial Statements
First Trust Intermediate Duration Investment Grade Corporate ETF (FIIG)Portfolio of Investments (Continued)April 30, 2024 (Unaudited) | | | | |
CORPORATE BONDS AND NOTES (Continued) |
| | | | | |
| | | | |
| | | | |
| | |
| | | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | |
| | | | | |
| Agilent Technologies, Inc. | | | |
| | | | |
| Avantor Funding, Inc. (b) | | | |
| | | | |
| | | | |
| | | | |
| Charles River Laboratories International, Inc. (b) | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| GE HealthCare Technologies, Inc. | | | |
| GE HealthCare Technologies, Inc. | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| Thermo Fisher Scientific, Inc. | | | |
| Thermo Fisher Scientific, Inc. | | | |
| Universal Health Services, Inc. | | | |
| | |
| | | | | |
| | | | |
| | | | | |
| Marriott International, Inc., Series FF | | | |
See Notes to Financial Statements
First Trust Intermediate Duration Investment Grade Corporate ETF (FIIG)Portfolio of Investments (Continued)April 30, 2024 (Unaudited) | | | | |
CORPORATE BONDS AND NOTES (Continued) |
| | | | | |
| American Water Capital Corp. | | | |
| American Water Capital Corp. | | | |
| | |
| | | | | |
| | | | |
| | | | |
| | | | |
| | |
| | | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | |
| Property & Casualty Insurance — 6.3% | | | | |
| Aon Corp. / Aon Global Holdings PLC | | | |
| | | | |
| Arthur J. Gallagher & Co. | | | |
| Arthur J. Gallagher & Co. | | | |
| | | | |
| Marsh & McLennan Cos., Inc. | | | |
| Marsh & McLennan Cos., Inc. | | | |
| Marsh & McLennan Cos., Inc. | | | |
| Willis North America, 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. | | | |
| Fidelity National Information Services, Inc. | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
See Notes to Financial Statements
First Trust Intermediate Duration Investment Grade Corporate ETF (FIIG)Portfolio of Investments (Continued)April 30, 2024 (Unaudited) | | | | |
CORPORATE BONDS AND NOTES (Continued) |
| | | | | |
| | | | |
| Open Text Holdings, Inc. (b) | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| SS&C Technologies, Inc. (b) | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | |
| | | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | |
| | | | | |
| | | | |
| Verizon Communications, Inc. | | | |
| | |
| Total Corporate Bonds and Notes | |
| | |
FOREIGN CORPORATE BONDS AND NOTES — 10.1% |
| | |
| | | | |
| | | | |
| Toronto-Dominion Bank (The) | | | |
| Toronto-Dominion Bank (The) | | | |
| | | | |
| | | | |
| | |
| | |
| | | | |
| | |
| Bacardi Ltd. / Bacardi-Martini B.V. (b) | | | |
| | |
| Icon Investments Six Designated Activity Co. (c) | | | |
See Notes to Financial Statements
First Trust Intermediate Duration Investment Grade Corporate ETF (FIIG)Portfolio of Investments (Continued)April 30, 2024 (Unaudited) | | | | |
FOREIGN CORPORATE BONDS AND NOTES (Continued) |
| | |
| Medtronic Global Holdings S.C.A. | | | |
| | | | |
| | |
| | |
| | | | |
| | |
| Smurfit Kappa Treasury ULC (b) | | | |
| | |
| Pfizer Investment Enterprises Pte Ltd. | | | |
| Pfizer Investment Enterprises Pte Ltd. | | | |
| | |
| | |
| Alimentation Couche-Tard, Inc. (b) | | | |
| Alimentation Couche-Tard, Inc. (b) | | | |
| Alimentation Couche-Tard, Inc. (b) | | | |
| | |
| | |
| Constellation Software, Inc. (b) | | | |
| | | | |
| | | | |
| | | | |
| | |
| Total Foreign Corporate Bonds and Notes | |
| | |
| | Annualized
Yield on Date of
Purchase | | |
|
| | | | | |
| | | | |
| | | | |
|
|
| Total Investments — 98.6% | |
| | |
| Net Other Assets and Liabilities — 1.4% | |
| | |
| Fixed-to-floating or fixed-to-variable rate security. The interest rate shown reflects the fixed rate in effect at April 30, 2024. 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 April 30, 2024, securities noted as such amounted to $25,147,648 or 16.1% of net assets. |
| When-issued security. The interest rate shown reflects the rate in effect at April 30, 2024. Interest will begin accruing on the security’s first settlement date. |
See Notes to Financial Statements
First Trust Intermediate Duration Investment Grade Corporate ETF (FIIG)Portfolio of Investments (Continued)April 30, 2024 (Unaudited)
Valuation InputsA summary of the inputs used to value the Fund’s investments as of April 30, 2024 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
April 30, 2024 (Unaudited)
| |
| |
| |
| |
| |
| |
| |
|
| |
| |
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 Intermediate Duration Investment Grade Corporate ETF (FIIG)Statement of Operations
For the Six Months Ended April 30, 2024 (Unaudited)
| |
| |
| |
|
| |
| |
| |
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 Intermediate Duration Investment Grade Corporate ETF (FIIG)Statements of Changes in Net Assets
| Six Months
Ended
4/30/2024 (Unaudited) | 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 each period
| Six Months
Ended
4/30/2024
(Unaudited) | 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 (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. |
| The per share amount does not correlate with the aggregate realized and unrealized gain (loss) due to the timing of the Fund share sales and repurchases in relation to market value fluctuation of the underlying investments. |
| 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 Intermediate Duration Investment Grade Corporate ETF (FIIG)April 30, 2024 (Unaudited) 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 twenty-two 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.
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)April 30, 2024 (Unaudited) 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)April 30, 2024 (Unaudited) • 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 April 30, 2024, 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.
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 April 30, 2024, the Fund had no forward purchase commitments. At April 30, 2024, the Fund held $1,498,440 of when-issued or delayed-delivery securities.
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:
Notes to Financial Statements (Continued)
First Trust Intermediate Duration Investment Grade Corporate ETF (FIIG)April 30, 2024 (Unaudited) 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) | |
The Fund intends to continue to qualify as a regulated investment company by complying with the requirements under Subchapter M of the Internal Revenue Code of 1986, as amended, which includes distributing substantially all of its net investment income and net realized gains to shareholders. Accordingly, no provision has been made for federal and state income taxes. However, due to the timing and amount of distributions, the Fund may be subject to an excise tax of 4% of the amount by which approximately 98% of the Fund’s taxable income exceeds the distributions from such taxable income for the calendar year.
The Fund is subject to accounting standards that establish a minimum threshold for recognizing, and a system for measuring, the benefits of a tax position taken or expected to be taken in a tax return. The taxable year ended 2023 remains open to federal and state audit. As of April 30, 2024, 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 non-expiring 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.
As of April 30, 2024, 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) |
| | | |
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
Notes to Financial Statements (Continued)
First Trust Intermediate Duration Investment Grade Corporate ETF (FIIG)April 30, 2024 (Unaudited) 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 | |
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 Chairs of the Audit Committee, Nominating and Governance Committee and Valuation Committee, the Vice Chair of the Audit Committee, the Lead Independent Trustee and the Vice Lead Independent Trustee 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 Committee Chairs, the Audit Committee Vice Chair, the Lead Independent Trustee and the Vice Lead Independent Trustee rotate periodically in serving in such capacities. The officers and “Interested” Trustee receive no compensation from the Trust for acting in such capacities.
4. Purchases and Sales of Securities
For the six months ended April 30, 2024, the cost of purchases and proceeds from sales of investments, excluding short-term investments and in-kind transactions, were $149,087,583 and $3,655,079, respectively.
For the six months ended April 30, 2024, 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 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.
Notes to Financial Statements (Continued)
First Trust Intermediate Duration Investment Grade Corporate ETF (FIIG)April 30, 2024 (Unaudited) 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.
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.
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.
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.
First Trust Intermediate Duration Investment Grade Corporate ETF (FIIG)April 30, 2024 (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.
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.
Risks are inherent in all investing. Certain general risks that may be applicable to a Fund are identified below, but not all of the material risks relevant to each Fund are included in this report and not all of the risks below apply to each Fund. The material risks of investing in each Fund are spelled out in its prospectus, statement of additional information and other regulatory filings. Before investing, you should consider each Fund’s investment objective, risks, charges and expenses, and read each Fund’s prospectus and statement of additional information carefully. You can download each Fund’s prospectus at www.ftportfolios.com or contact First Trust Portfolios L.P. at (800) 621-1675 to request a prospectus, which contains this and other information about each Fund.
Concentration Risk. To the extent that a fund is able to invest a significant percentage of its assets in a single asset class or the securities of issuers within the same country, state, region, industry or sector, an adverse economic, business or political development may affect the value of the fund’s investments more than if the fund were more broadly diversified. A fund that tracks an index will be concentrated to the extent the fund’s corresponding index is concentrated. A concentration makes a fund more susceptible to any single occurrence and may subject the fund to greater market risk than a fund that is more broadly diversified.
Credit Risk. Credit risk is the risk that an issuer of a security will be unable or unwilling to make dividend, interest and/or principal payments when due and the related risk that the value of a security may decline because of concerns about the issuer’s ability to make such payments.
Cyber Security Risk. The funds are susceptible to potential operational risks through breaches in cyber security. A breach in cyber security refers to both intentional and unintentional events that may cause a fund to lose proprietary information, suffer data corruption or lose operational capacity. Such events could cause a fund to incur regulatory penalties, reputational damage, additional compliance costs associated with corrective measures and/or financial loss. In addition, cyber security breaches of a fund’s third-party service providers, such as its administrator, transfer agent, custodian, or sub-advisor, as applicable, or issuers in which the fund invests, can also subject a fund to many of the same risks associated with direct cyber security breaches.
Defined Outcome Funds Risk. To the extent a fund’s investment strategy is designed to deliver returns tied to the price performance of an underlying ETF, an investor may not realize the returns the fund seeks to achieve if that investor does not hold shares for the entire target outcome period. In the event an investor purchases shares after the first day of the target outcome period or sells shares prior to the end of the target outcome period, the buffer that the fund seeks to provide against a decline in the value of the underlying ETF may not be available, the enhanced returns that the fund seeks to provide (if any) may not be available and the investor may not participate in a gain in the value of the underlying ETF up to the cap for the investor’s investment period. Additionally, the fund will not participate in gains of the underlying ETF above the cap and a shareholder may lose their entire investment. If the fund seeks enhanced returns, there are certain time periods when the value of the fund may fall faster than the value of the underlying ETF, and it is very unlikely that, on any given day during which the underlying ETF share price increases in value, the fund’s share price will increase at the same rate as the enhanced returns sought by the fund, which is designed for an entire target outcome period. Trading flexible exchange options involves risks different from, or possibly greater than, the risks associated with investing directly in securities, such as less liquidity and correlation and valuation risks. A fund may experience substantial downside from specific flexible exchange option positions and certain positions may expire worthless.
Additional Information (Continued)
First Trust Intermediate Duration Investment Grade Corporate ETF (FIIG)April 30, 2024 (Unaudited) 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.
Additional Information (Continued)
First Trust Intermediate Duration Investment Grade Corporate ETF (FIIG)April 30, 2024 (Unaudited) 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
Additional Information (Continued)
First Trust Intermediate Duration Investment Grade Corporate ETF (FIIG)April 30, 2024 (Unaudited) 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
Liquidity Risk Management Program
In accordance with Rule 22e-4 under the Investment Company Act of 1940, as amended (the “1940 Act”), the Fund and each other fund in the First Trust Fund Complex, other than the closed-end funds, have adopted and implemented a liquidity risk management program (the “Program”) reasonably designed to assess and manage the funds’ liquidity risk, i.e., the risk that a fund could not meet requests to redeem shares issued by the fund without significant dilution of remaining investors’ interests in the fund. The Board of Trustees of the First Trust Funds has appointed First Trust Advisors L.P. (the “Advisor”) as the person designated to administer the Program, and in this capacity the Advisor performs its duties primarily through the activities and efforts of the First Trust Liquidity Committee.
Pursuant to the Program, the Liquidity Committee classifies the liquidity of each fund’s portfolio investments into one of the four liquidity categories specified by Rule 22e-4: highly liquid investments, moderately liquid investments, less liquid investments and illiquid investments. The Liquidity Committee determines certain of the inputs for this classification process, including reasonably anticipated trade sizes and significant investor dilution thresholds. The Liquidity Committee also determines and periodically reviews a highly liquid investment minimum for certain funds, monitors the funds’ holdings of assets classified as illiquid investments to seek to ensure they do not exceed 15% of a fund’s net assets and establishes policies and procedures regarding redemptions in kind.
At the April 25, 2024 meeting of the Board of Trustees, as required by Rule 22e-4 and the Program, the Advisor provided the Board with a written report prepared by the Advisor that addressed the operation of the Program during the period from March 23, 2023 through the Liquidity Committee’s annual meeting held on March 14, 2024 and assessed the Program’s adequacy and effectiveness of implementation during this period, including the operation of the highly liquid investment minimum for each fund that is required under the Program to have one, and any material changes to the Program. Note that because the Fund primarily holds assets that are highly liquid investments, the Fund has not adopted a highly liquid investment minimum.
As stated in the written report, during the review period, no fund breached the 15% limitation on illiquid investments, no fund with a highly liquid investment minimum breached that minimum during the reporting period and no fund was required to file a Form N-RN during the reporting period. The Advisor concluded that each fund’s investment strategy is appropriate for an open-end fund; that the Program operated effectively in all material respects during the review period; and that the Program is reasonably designed to assess and manage the liquidity risk of each fund and to maintain compliance with Rule 22e-4.
First Trust Exchange-Traded Fund IV
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
Chapman and Cutler LLP
320 South Canal Street
Chicago, IL 60606
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For the Six Months Ended
April 30, 2024 |
First Trust Exchange-Traded Fund IV
First Trust Intermediate Government Opportunities ETF (MGOV) |
First Trust Intermediate Government Opportunities ETF (MGOV)
Semi-Annual Report
April 30, 2024
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.
This report contains information that may help you evaluate your investment in the Fund. It includes details about the Fund and presents data and analysis that provide insight into the Fund’s performance and investment approach.
The statistical information that follows may help you understand the Fund’s performance compared to that of relevant market benchmarks.
It is important to keep in mind that the opinions expressed by personnel of the Advisor are just that: informed opinions. They should not be considered to be promises or advice. The opinions, like the statistics, cover the period through the date on the cover of this report. The material risks of investing in the Fund are spelled out in the prospectus, the statement of additional information, and other Fund regulatory filings.
First Trust Intermediate Government Opportunities ETF (MGOV)
Semi-Annual Letter from the Chairman and CEO
April 30, 2024
First Trust is pleased to provide you with the semi-annual report for the First Trust Intermediate Government Opportunities ETF (the “Fund”), which contains detailed information about the Fund for the six-month period ended April 30, 2024.
On March 16, 2022, the Federal Reserve (the “Fed”) initiated the first of what have been eleven increases to the Federal Funds target rate thus far in the current cycle. Given its potential impact, financial pundits have been debating the direction and timing of the Fed’s interest rate policy ever since. In December 2023, the Fed gave some guidance, announcing that it expected to implement up to three interest rate cuts totaling 75 basis points (“bps”) in 2024. Investors responded to the news with exuberance. In the U.S., the S&P 500® Index surged by 10.56% on a total return basis in the first quarter of 2024, adding to its already stunning 26.29% total return in 2023. For comparison, the yield on the 10-Year Treasury Note (“T-Note”) stood at 3.80% on December 27, 2023, down a stunning 119 bps from its most recent high of 4.99% set just months prior on October 19, 2023. Bond yields generally move in the opposite direction of prices. Given this relationship, the decline in the 10-Year T-Note’s yield is indicative of investor’s desire to lock in higher income payments prior to the Fed reducing its policy rate.
At this point, it makes sense to step back and highlight several ways the Fed’s interest rate policy has impacted the U.S. economy. We’ll start with the good news. On April 30, 2024, inflation, as measured by the trailing 12-month rate on the Consumer Price Index, stood at 3.4%, down significantly from its most recent peak of 9.1% set in June 2022. Additionally, the higher Federal Funds target rate has been a boon for those investors with assets in fixed income, money market, and other interest-bearing accounts. The total value of assets held in U.S. money market accounts stood at $6.0 trillion on May 1, 2024, nearly double where it stood just five years ago. Notably, the weekly yield on the benchmark U.S. Treasury 3-Month Money Market Index more than doubled from 2.40% to 5.32% between the end of April 2019 and April 2024.
Now for the not-so-good news. Higher interest rates often restrict the ability of consumers and businesses to spend and finance growth, respectively. While the consumer has remained relatively unscathed thus far, evidence that they are stretching their budgets is mounting. The Federal Reserve Bank of New York reported that the total balance of U.S. credit card debt stood at a record $1.13 trillion at the end of 2023, while the average annual percentage rate for all cards rose to a record 21.59% in the first quarter of 2024. Perhaps unsurprisingly, delinquency rates have been surging. Data from the Federal Reserve Bank of St. Louis revealed that the delinquency rate on credit card loans for all U.S. commercial banks rose to 3.10% in the fourth quarter of 2023, up from 2.62% in the fourth quarter of 2019 (pre-COVID-19). In April 2024, 43% of small and mid-sized U.S. businesses were unable to pay their rent on time and in full. In addition, higher interest rates are impacting economic growth. In the U.S., real gross domestic product growth was a tepid 1.6% in the first quarter of 2024, far below consensus expectations of 2.5%. Not even the U.S. government is immune to the impacts of higher interest rates. At the end of the first quarter of 2024, the interest payments paid by the Federal government stood at a record $1.06 trillion, nearly double their total of $0.56 trillion at the end of the fourth quarter of 2019.
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. 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. Shares of the Fund are listed on NYSE Arca under the ticker symbol “MGOV.”
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to 4/30/24 |
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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 BF0207, 4.50%, 04/01/47 | |
Federal National Mortgage Association, Pool AS7738, 3.00%, 08/01/46 | |
Government National Mortgage Association, Series 2015-123, Class ZA, 3.50%, 09/20/45 | |
Federal Home Loan Mortgage Corporation, Pool SD7509, 3.00%, 11/01/49 | |
Federal National Mortgage Association, Series 2024-6, Class AL, 2.00%, 03/25/44 | |
Federal Home Loan Mortgage Corporation, Series 2014-4316, Class BZ, 3.00%, 03/15/44 | |
Federal Home Loan Mortgage Corporation, Series 2013-4213, Class GZ, 3.50%, 06/15/43 | |
Federal Home Loan Mortgage Corporation, Series 2019-4929, Class FB, 5.89%, 09/25/49 | |
Federal National Mortgage Association, Series 2014-12, Class ZB, 3.00%, 03/25/39 | |
Federal Home Loan Mortgage Corporation Multifamily Structured Pass Through Certificates, Series 2023-KJ47, Class A2, 5.43%, 06/25/31 | |
| |
Weighted Average Effective Net Duration |
| |
| |
| |
| Includes variation margin on futures contracts. |
| 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, DBRS, Inc., Kroll Bond Rating Agency, Inc. 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 rating is used. A credit rating is an assessment provided by a NRSRO, of the creditworthiness of an issuer with respect to debt obligations. 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. “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. U.S. Agency, U.S. Agency mortgage-backed, and U.S. Treasury 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)Semi-Annual ReportApril 30, 2024 (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.
First Trust Intermediate Government Opportunities ETF (MGOV)Understanding Your Fund ExpensesApril 30, 2024 (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 and held through the six-month period ended April 30, 2024.
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
November 1, 2023 | Ending
Account Value
April 30, 2024 | Annualized
Expense Ratio
Based on the
Six-Month
Period | Expenses Paid
During the
Six-Month
Period (a) |
First Trust Intermediate Government Opportunities ETF (MGOV) |
| | | | |
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 (November 1, 2023 through April 30, 2024), multiplied by 182/366 (to reflect the six-month period). |
First Trust Intermediate Government Opportunities ETF (MGOV)Portfolio of InvestmentsApril 30, 2024 (Unaudited)
| | | | |
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES — 93.1% |
| Collateralized Mortgage Obligations — 39.6% | |
| Federal Home Loan Mortgage Corporation | | | |
| Series 2013-4213, Class GZ | | | |
| Series 2014-4316, Class BZ | | | |
| Series 2014-4316, Class XZ | | | |
| Series 2017-4741, Class GY | | | |
| Series 2018-4798, Class GZ | | | |
| Series 2019-4929, Class FB, 30 Day Average SOFR + CSA + 0.45% (a) | | | |
| Series 2020-4959, Class LB | | | |
| Federal National Mortgage Association | | | |
| Series 2012-134, Class ZC | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| Government National Mortgage Association | | | |
| Series 2015-123, Class ZA | | | |
| Seasoned Credit Risk Transfer Trust | | | |
| | | | |
| Seasoned Loans Structured Transaction Trust | | | |
| | | | |
| | | | |
| | |
| Commercial Mortgage-Backed Securities — 12.6% | |
| Federal Home Loan Mortgage Corporation Multiclass Certificates | | | |
| Series 2020-RR06, Class BX, IO (b) | | | |
| Federal Home Loan Mortgage Corporation Multifamily Structured Pass Through Certificates | | | |
| Series 2018-KSW4, Class A, 30 Day Average SOFR + CSA + 0.43% (a) | | | |
| Series 2020-K110, Class X1, IO (c) | | | |
| Series 2020-K740, Class XAM, IO (c) | | | |
| Series 2020-KG04, Class X1, IO (c) | | | |
| Series 2021-K129, Class XAM, IO (c) | | | |
| Series 2021-KG05, Class X1, IO (c) | | | |
| Series 2023-KJ47, Class A2 | | | |
| | | | |
| Series 2019-KL4F, Class BAS (c) (d) | | | |
| | |
| Pass-Through Securities — 40.9% | |
| Federal Home Loan Mortgage Corporation |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| Federal National Mortgage Association |
| | | | |
| | | | |
See Notes to Financial Statements
First Trust Intermediate Government Opportunities ETF (MGOV)Portfolio of Investments (Continued)April 30, 2024 (Unaudited) | | | | |
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES (Continued) |
| Pass-Through Securities (Continued) | |
| Federal National Mortgage Association (Continued) |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | |
| Total U.S. Government Agency Mortgage-Backed Securities | |
| | |
U.S. GOVERNMENT BONDS AND NOTES — 10.6% |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| Total U.S. Government Bonds and Notes | |
| | |
| | |
EXCHANGE-TRADED FUNDS — 0.3% |
| | |
| iShares 20+ Year Treasury Bond ETF | |
| | |
MONEY MARKET FUNDS — 4.0% |
| Morgan Stanley Institutional Liquidity Funds - Treasury Portfolio - Institutional Class - 5.15% (e) | |
| | |
| Total Investments — 108.0% | |
| | |
See Notes to Financial Statements
First Trust Intermediate Government Opportunities ETF (MGOV)Portfolio of Investments (Continued)April 30, 2024 (Unaudited) | | | | |
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES SOLD SHORT — (1.5)% |
| Pass-Through Securities — (1.5)% | |
| Federal National Mortgage Association | |
| | | | |
| Total Investments Sold Short — (1.5)% | |
| | |
| | | | | |
|
| Call Options Written — (0.0)% | |
| 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 | | | | |
| Ultra 10-Year U.S. Treasury Futures Call | | | | |
| Total Call Options Written | |
| (Premiums received $34,791) | |
| Put Options Written — (0.2)% | |
| U.S. 5-Year Treasury Futures Put | | | | |
| U.S. 5-Year Treasury Futures Put | | | | |
| U.S. Treasury Long Bond Futures Put | | | | |
| U.S. Treasury Long Bond Futures Put | | | | |
| U.S. Treasury Long Bond Futures Put | | | | |
| U.S. Treasury Long Bond Futures Put | | | | |
| U.S. Treasury Long Bond Futures Put | | | | |
| Ultra U.S. Treasury Long Bond Futures Put | | | | |
| Total Put Options Written | |
| (Premiums received $22,456) | |
| | |
| (Premiums received $57,247) | |
| Net Other Assets and Liabilities — (6.3)% | |
| | |
Futures Contracts at April 30, 2024 (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. Treasury Long Bond Futures | | | | | |
U.S. 10-Year Treasury Notes | | | | | |
Ultra 10-Year U.S. Treasury Notes | | | | | |
| | | | | |
| Floating or variable 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. |
See Notes to Financial Statements
First Trust Intermediate Government Opportunities ETF (MGOV)Portfolio of Investments (Continued)April 30, 2024 (Unaudited) | Collateral Strip Rate security. Coupon is based on the weighted net interest rate of the investment’s underlying collateral. The interest rate resets periodically. |
| 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 April 30, 2024, securities noted as such amounted to $483,290 or 1.5% of net assets. |
| Rate shown reflects yield as of April 30, 2024. |
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 April 30, 2024 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 |
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. |
See Notes to Financial Statements
First Trust Intermediate Government Opportunities ETF (MGOV)Statement of Assets and Liabilities
April 30, 2024 (Unaudited)
| |
| |
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 | |
| |
| |
| |
|
| |
| |
| |
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 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 Six Months Ended April 30, 2024 (Unaudited)
| |
| |
| |
| |
|
| |
| |
| |
NET INVESTMENT INCOME (LOSS) | |
|
NET REALIZED AND UNREALIZED GAIN (LOSS): | |
Net realized gain (loss) on: | |
| |
| |
Purchased options contracts | |
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
First Trust Intermediate Government Opportunities ETF (MGOV)Statements of Changes in Net Assets
| Six Months
Ended
4/30/2024 (Unaudited) | 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 Government Opportunities ETF (MGOV)Financial Highlights
For a share outstanding throughout each period
| Six Months
Ended
4/30/2024
(Unaudited) | 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 (f) (g) | | |
| 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. |
| The per share amount does not correlate with the aggregate realized and unrealized gain (loss) due to the timing of the Fund share sales and repurchases in relation to market value fluctuation of the underlying investments. |
| 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. |
| The portfolio turnover rate not including mortgage dollar rolls was 246% and 121% for the periods ended April 30, 2024 and October 31, 2023, respectively. |
See Notes to Financial Statements
Notes to Financial Statements
First Trust Intermediate Government Opportunities ETF (MGOV)April 30, 2024 (Unaudited) 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 twenty-two 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.
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)April 30, 2024 (Unaudited) 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;
11)
the quality, value and salability of collateral, if any, securing the security;
Notes to Financial Statements (Continued)
First Trust Intermediate Government Opportunities ETF (MGOV)April 30, 2024 (Unaudited) 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 April 30, 2024, 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)April 30, 2024 (Unaudited) 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 April 30, 2024, the Fund had no when-issued, delayed-delivery securities, or forward purchase commitments.
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.
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” payable or receivable on the Statement of Assets and Liabilities.
If market conditions change unexpectedly, the Fund may not achieve the anticipated benefits of the futures contract and may realize a loss. The use of futures contracts involves the risk of imperfect correlation in movements in the price of the futures contracts, interest rates and the underlying instruments.
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
Notes to Financial Statements (Continued)
First Trust Intermediate Government Opportunities ETF (MGOV)April 30, 2024 (Unaudited) 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 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)April 30, 2024 (Unaudited) 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) | |
The Fund intends to continue to qualify as a regulated investment company by complying with the requirements under Subchapter M of the Internal Revenue Code of 1986, as amended, which includes distributing substantially all of its net investment income and net realized gains to shareholders. Accordingly, no provision has been made for federal and state income taxes. However, due to the timing and amount of distributions, the Fund may be subject to an excise tax of 4% of the amount by which approximately 98% of the Fund’s taxable income exceeds the distributions from such taxable income for the calendar year.
The Fund is subject to accounting standards that establish a minimum threshold for recognizing, and a system for measuring, the benefits of a tax position taken or expected to be taken in a tax return. The taxable year ended 2023 remains open to federal and state audit. As of April 30, 2024, 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)April 30, 2024 (Unaudited) non-expiring 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 period ended October 31, 2023, the Fund had no net late year ordinary or capital losses.
As of April 30, 2024, 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) |
| | | |
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 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 Chairs of the Audit Committee, Nominating and Governance Committee and Valuation Committee, the Vice Chair of the Audit Committee, the Lead Independent Trustee and the Vice Lead Independent Trustee are paid annual fees to serve in such
Notes to Financial Statements (Continued)
First Trust Intermediate Government Opportunities ETF (MGOV)April 30, 2024 (Unaudited) 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 Committee Chairs, the Audit Committee Vice Chair, the Lead Independent Trustee and the Vice Lead Independent Trustee rotate periodically in serving in such capacities. 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 six months ended April 30, 2024, were $58,895,147 and $138,266, 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 six months ended April 30, 2024 were $44,631,760 and $20,031, respectively. The cost of purchases to cover short sales and the proceeds of short sales were $30,552,043 and $30,136,045, respectively.
For the six months ended April 30, 2024, the Fund had no in-kind transactions.
5. Derivative Transactions
The following table presents the types of derivatives held by the Fund at April 30, 2024, 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 six months ended April 30, 2024, 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 | |
| |
During the six months ended April 30, 2024, the notional value of futures contracts opened and closed were $14,642,017 and $14,031,502, respectively.
During the six months ended April 30, 2024, the premiums for purchased options contracts opened were $11,360 and the premiums for purchased options contracts closed, exercised and expired were $11,360.
During the six months ended April 30, 2024, the premiums for written options contracts opened were $221,730 and the premiums for written options contracts closed, exercised and expired were $200,587.
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.
Notes to Financial Statements (Continued)
First Trust Intermediate Government Opportunities ETF (MGOV)April 30, 2024 (Unaudited) 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 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.
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.
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.
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.
First Trust Intermediate Government Opportunities ETF (MGOV)April 30, 2024 (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.
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.
Risks are inherent in all investing. Certain general risks that may be applicable to a Fund are identified below, but not all of the material risks relevant to each Fund are included in this report and not all of the risks below apply to each Fund. The material risks of investing in each Fund are spelled out in its prospectus, statement of additional information and other regulatory filings. Before investing, you should consider each Fund’s investment objective, risks, charges and expenses, and read each Fund’s prospectus and statement of additional information carefully. You can download each Fund’s prospectus at www.ftportfolios.com or contact First Trust Portfolios L.P. at (800) 621-1675 to request a prospectus, which contains this and other information about each Fund.
Concentration Risk. To the extent that a fund is able to invest a significant percentage of its assets in a single asset class or the securities of issuers within the same country, state, region, industry or sector, an adverse economic, business or political development may affect the value of the fund’s investments more than if the fund were more broadly diversified. A fund that tracks an index will be concentrated to the extent the fund’s corresponding index is concentrated. A concentration makes a fund more susceptible to any single occurrence and may subject the fund to greater market risk than a fund that is more broadly diversified.
Credit Risk. Credit risk is the risk that an issuer of a security will be unable or unwilling to make dividend, interest and/or principal payments when due and the related risk that the value of a security may decline because of concerns about the issuer’s ability to make such payments.
Cyber Security Risk. The funds are susceptible to potential operational risks through breaches in cyber security. A breach in cyber security refers to both intentional and unintentional events that may cause a fund to lose proprietary information, suffer data corruption or lose operational capacity. Such events could cause a fund to incur regulatory penalties, reputational damage, additional compliance costs associated with corrective measures and/or financial loss. In addition, cyber security breaches of a fund’s third-party service providers, such as its administrator, transfer agent, custodian, or sub-advisor, as applicable, or issuers in which the fund invests, can also subject a fund to many of the same risks associated with direct cyber security breaches.
Defined Outcome Funds Risk. To the extent a fund’s investment strategy is designed to deliver returns tied to the price performance of an underlying ETF, an investor may not realize the returns the fund seeks to achieve if that investor does not hold shares for the entire target outcome period. In the event an investor purchases shares after the first day of the target outcome period or sells shares prior to the end of the target outcome period, the buffer that the fund seeks to provide against a decline in the value of the underlying ETF may not be available, the enhanced returns that the fund seeks to provide (if any) may not be available and the investor may not participate in a gain in the value of the underlying ETF up to the cap for the investor’s investment period. Additionally, the fund will not participate in gains of the underlying ETF above the cap and a shareholder may lose their entire investment. If the fund seeks enhanced returns, there are certain time periods when the value of the fund may fall faster than the value of the underlying ETF, and it is very unlikely that, on any given day during which the underlying ETF share price increases in value, the fund’s share price will increase at the same rate as the enhanced returns sought by the fund, which is designed for an entire target outcome period. Trading flexible exchange options involves risks different from, or possibly greater than, the risks associated with investing directly in securities, such as less liquidity and correlation and valuation risks. A fund may experience substantial downside from specific flexible exchange option positions and certain positions may expire worthless.
Additional Information (Continued)
First Trust Intermediate Government Opportunities ETF (MGOV)April 30, 2024 (Unaudited) 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.
Additional Information (Continued)
First Trust Intermediate Government Opportunities ETF (MGOV)April 30, 2024 (Unaudited) 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
Additional Information (Continued)
First Trust Intermediate Government Opportunities ETF (MGOV)April 30, 2024 (Unaudited) 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
Liquidity Risk Management Program
In accordance with Rule 22e-4 under the Investment Company Act of 1940, as amended (the “1940 Act”), the Fund and each other fund in the First Trust Fund Complex, other than the closed-end funds, have adopted and implemented a liquidity risk management program (the “Program”) reasonably designed to assess and manage the funds’ liquidity risk, i.e., the risk that a fund could not meet requests to redeem shares issued by the fund without significant dilution of remaining investors’ interests in the fund. The Board of Trustees of the First Trust Funds has appointed First Trust Advisors L.P. (the “Advisor”) as the person designated to administer the Program, and in this capacity the Advisor performs its duties primarily through the activities and efforts of the First Trust Liquidity Committee.
Pursuant to the Program, the Liquidity Committee classifies the liquidity of each fund’s portfolio investments into one of the four liquidity categories specified by Rule 22e-4: highly liquid investments, moderately liquid investments, less liquid investments and illiquid investments. The Liquidity Committee determines certain of the inputs for this classification process, including reasonably anticipated trade sizes and significant investor dilution thresholds. The Liquidity Committee also determines and periodically reviews a highly liquid investment minimum for certain funds, monitors the funds’ holdings of assets classified as illiquid investments to seek to ensure they do not exceed 15% of a fund’s net assets and establishes policies and procedures regarding redemptions in kind.
At the April 25, 2024 meeting of the Board of Trustees, as required by Rule 22e-4 and the Program, the Advisor provided the Board with a written report prepared by the Advisor that addressed the operation of the Program during the period from March 23, 2023 through the Liquidity Committee’s annual meeting held on March 14, 2024 and assessed the Program’s adequacy and effectiveness of implementation during this period, including the operation of the highly liquid investment minimum for each fund that is required under the Program to have one, and any material changes to the Program. Note that because the Fund primarily holds assets that are highly liquid investments, the Fund has not adopted a highly liquid investment minimum.
As stated in the written report, during the review period, no fund breached the 15% limitation on illiquid investments, no fund with a highly liquid investment minimum breached that minimum during the reporting period and no fund was required to file a Form N-RN during the reporting period. The Advisor concluded that each fund’s investment strategy is appropriate for an open-end fund; that the Program operated effectively in all material respects during the review period; and that the Program is reasonably designed to assess and manage the liquidity risk of each fund and to maintain compliance with Rule 22e-4.
First Trust Exchange-Traded Fund IV
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
Chapman and Cutler LLP
320 South Canal Street
Chicago, IL 60606
(b) Not applicable.
Item 2. Code of Ethics.
Not applicable.
Item 3. Audit Committee Financial Expert.
Not applicable.
Item 4. Principal Accountant Fees and Services.
Not applicable.
Item 5. Audit Committee of Listed Registrants.
Not applicable.
Items 6. Investments.
| (a) | Schedules of Investments in securities of unaffiliated issuers as of the close of the reporting period are included as part of the reports 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.
Item [18]. Recovery of Erroneously Awarded Compensation.
Not applicable.
Item 14. 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.
