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 811-21944
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First Trust Exchange-Traded Fund II
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(Exact name of registrant as specified in charter)
1001 Warrenville Road, Suite 300
Lisle, Illinois 60532
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(Address of principal executive offices) (Zip code)
W. Scott Jardine, Esq.
First Trust Portfolios L.P.
1001 Warrenville Road, Suite 300
Lisle, Illinois 60532
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(Name and address of agent for service)
Registrant's telephone number, including area code: 630-241-4141
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Date of fiscal year end: September 30
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Date of reporting period: September 30, 2007
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Form N-CSR is to be used by management investment companies to file
reports with the Commission not later than 10 days after the transmission
to stockholders of any report that is required to be transmitted to
stockholders under Rule 30e-1 under the Investment Company Act of 1940
(17 CFR 270.30e-1). The Commission may use the information provided on
Form N-CSR in its regulatory, disclosure review, inspection, and
policymaking roles.
A registrant is required to disclose the information specified by Form
N-CSR, and the Commission will make this information public. A registrant
is not required to respond to the collection of information contained in
Form N-CSR unless the Form displays a currently valid Office of
Management and Budget ("OMB") control number. Please direct comments
concerning the accuracy of the information collection burden estimate and
any suggestions for reducing the burden to Secretary, Securities and
Exchange Commission, 100 F Street, NE, Washington, DC 20549. The OMB has
reviewed this collection of information under the clearance requirements
of 44 U.S.C. ss. 3507.
Item 1. Report to Stockholders.
The registrant's annual report transmitted to shareholders pursuant to
Rule 30e-1 under the Investment Company Act of 1940 is as follows:
[LOGO OMMITTED] FIRST TRUST
ADVISORS L.P.
FIRST TRUST EXCHANGE-TRADED FUND II
First Trust DJ STOXX(R) Select Dividend 30 Index Fund
First Trust FTSE EPRA/NAREIT Global Real Estate Index Fund
Annual Report
September 30, 2007
Front Cover
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Table of Contents
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First Trust Exchange-Traded Fund II
September 30, 2007
Shareholder Letter 2
Market Overview 3
Fund Performance Overview
First Trust DJ STOXX(R) Select Dividend 30 Index Fund 4
First Trust FTSE EPRA/NAREIT Global Real Estate Index Fund 6
Notes to Fund Performance Overview 8
Understanding Your Fund Expenses 9
Portfolio of Investments
First Trust DJ STOXX(R) Select Dividend 30 Index Fund 10
First Trust FTSE EPRA/NAREIT Global Real Estate Index Fund 11
Statements of Assets and Liabilities 16
Statements of Operations 17
Statements of Changes in Net Assets 18
Financial Highlights 19
Notes to Financial Statements 20
Report of Independent Registered Public Accounting Firm 25
Additional Information 26
Board of Trustees and Officers 29
Risk Considerations 31
Caution Regarding Forward-Looking Statements
This report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933. Forward-looking statements include
statements regarding the goals, beliefs, plans or current expectations of First
Trust Advisors L.P. (the "Advisor") and its 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
First Trust Exchange-Traded Fund II (the "Trust") 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 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 (individually called a "Fund" and
collectively, the "Funds") of the Trust will achieve its investment objective.
Each Fund of the Trust is subject to market risk, which is the possibility that
the market values of securities owned by the Fund will decline and that the
value of the Fund shares may therefore be less than what you paid for them.
Accordingly, you can lose money investing in a Fund.
Performance data quoted represents past performance, which is no guarantee of
future results, and current performance may be lower or higher than the figures
shown. For the most recent month-end performance figures, please visit
http://www.ftportfolios.com or speak with your financial advisor. Investment
returns, net asset value and share price will fluctuate and Fund shares may be
worth more or less than their original cost.
How to Read This Report
This report contains information that may help you evaluate your investment. It
includes details about the portfolios and presents data and analysis that
provide insight into each Fund's performance and investment approach.
By reading the letter from the President of the Trust, James A. Bowen, together
with the portfolio commentary by Robert F. Carey, Chief Investment Officer of
the Advisor, you may obtain an understanding of how the market environment
affected the performance of each Fund. 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 Mr. Bowen and Mr.
Carey 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. Of course, the risks of investing in each
Fund are spelled out in its prospectus.
Page 1
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Shareholder Letter
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First Trust Exchange-Traded Fund II
Annual Report
For the period August 27, 2007 (inception date) to September 30, 2007
Dear Shareholders:
We believe investment opportunities abound, both here and abroad, affording the
potential for exceptional returns for investors. At First Trust Advisors L.P.
("First Trust"), we realize that we must be mindful of the complexities of the
global economy and at the same time address the needs of our customers through
the types of investments we bring to market.
First Trust is single-minded about providing a range of investment products,
including our family of exchange-traded funds ("ETFs"), to help us meet the
challenge of maximizing our customers' financial opportunities. Translating
investment ideas into products which can deliver performance over the long term
while continuing to support our current product line remains a focus for First
Trust as we head into the future.
This report gives you information on two series of First Trust Exchange-Traded
Fund II, one or both of which you have purchased: the First Trust DJ STOXX(R)
Select Dividend 30 Index Fund ("FDD") and the First Trust FTSE EPRA/NAREIT
Global Real Estate Index Fund ("FFR"). We are proud to bring these unique
investments to our customers, and are pleased you have chosen FDD and/or FFR for
a portion of your investment portfolio.
The report you hold will give you detailed information about the two ETFs
mentioned above. I encourage you to read this report and discuss it with your
financial advisor. First Trust will continue to offer you current information
about your investment, as well as new opportunities in the financial
marketplace, through your financial advisor. We value our relationship with you
and appreciate the opportunity to assist you in achieving your financial goals.
Sincerely,
/s/ James A. Bowen
James A. Bowen
President of First Trust Exchange-Traded Fund II
November 9, 2007
Page 2
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Market Overview
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First Trust Exchange-Traded Fund II
Annual Report
For the period August 27, 2007 to September 30, 2007
[PHOTO OMMITTED] Robert F. Carey, CFA
Senior Vice President and Chief Investment Officer
First Trust Advisors L.P.
Mr. Carey is responsible for the overall management of research and analysis of
the First Trust product line. Mr. Carey has 21 years of experience as an Equity
and Fixed-Income Analyst and is a recipient of the Chartered Financial Analyst
("CFA") designation. He is a graduate of the University of Illinois at
Champaign-Urbana with a B.S. in Physics. He is also a member of the Investment
Analysts Society of Chicago and the CFA Institute. Mr. Carey has appeared as a
guest on such programs as Bloomberg TV, CNBC, and WBBM Radio, and has been
quoted by several publications, including The Wall Street Journal, The Wall
Street Reporter, Bloomberg News Service, and Registered Rep.
MARKET OVERVIEW - FIRST TRUST DJ STOXX(R) SELECT DIVIDEND 30 INDEX FUND. The
weakness in the dollar had a significant impact on the return of the First Trust
DJ STOXX(R) Select Dividend 30 Index Fund ("FDD"). While this type of weakness
in the U.S. dollar is beyond the norm for such a narrow scope of time (the month
covering the inception of FDD to 9/30/07), this illustrates one of the primary
reasons why U.S. investors diversify into non-dollar denominated securities.
The first month of trading for FDD would have been largely uneventful had it not
been for a shift in the Federal Reserve Board's (the "Fed") monetary policy
which was not well received by foreign investors. The Fed cut the federal funds
target rate by 50 basis points on September 18, 2007 to 4.75% and again on
October 31, 2007 to 4.50%. The added stimulus to the economy was intended to
counter the growing weakness in the U.S. housing market and fallout from the
surge in non-performing subprime mortgages.
However, foreign investors viewed the rate cut as inflationary in nature.
Foreign investors sold out of U.S. securities, which, in turn, drove down the
already sluggish U.S. dollar. From August 27 through September 30, 2007, the
dollar declined in value by 3.82% against the Euro -- a significant drop for
such a short time span, as mentioned above. Since FDD's inception, the U.S.
dollar also declined 3.70% versus a basket of major currencies (U.S.
Trade-Weighted Index), nearly matching the decline against the Euro.
MARKET OVERVIEW - FIRST TRUST FTSE EPRA/NAREIT GLOBAL REAL ESTATE INDEX FUND.
The First Trust FTSE EPRA/NAREIT Global Real Estate Index Fund ("FFR") posted a
high return in its first month of trading compared to the broad market. The
strong performance was driven by Asia and North America. Europe was down
slightly. Of the three regions, Asia has been the best-performing commercial
real estate market so far in 2007. North America and Europe have experienced
more inflationary pressures than Asia. The European Central Bank (the "ECB"), in
particular, has been steadfast in boosting its lending rates in an effort to
curb inflation. While the Fed did lower its federal funds target rate by 50
basis points in September, the ECB did not follow suit. Real estate, like many
debt securities, can depreciate in value in the face of rising interest rates.
We do not believe that current rate levels are problematic at this time.
The U.S. dollar declined 3.70% versus a basket of major currencies (U.S.
Trade-Weighted Index) since FFR's inception. The weakness in the dollar did
contribute to FFR's high return, especially in regards to the holdings in Asia.
While this type of weakness in the U.S. dollar is beyond the norm for such a
narrow scope of time (the month covering the inception of FFR to 9/30/07), this
illustrates one of the primary reasons why U.S. investors diversify into
non-dollar denominated securities.
Page 3
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Fund Performance Overview
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FDD - FIRST TRUST DJ STOXX(R) SELECT DIVIDEND 30 INDEX FUND
First Trust DJ STOXX(R) Select Dividend 30 Index Fund (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 Dow Jones STOXX(R)
Select Dividend 30 Index (the "STOXX Index"). The Shares of the Fund are listed
and trade on the American Stock Exchange under the ticker symbol "FDD." The Fund
will normally invest at least 90% of its total assets in non-U.S. common stocks
that comprise the STOXX Index or in depositary receipts that may include
American Depositary Receipts, Global Depositary Receipts, European Depositary
Receipts, New York shares or global shares representing securities in the Index.
The Fund began trading on August 30, 2007.
The STOXX Index consists of 30 securities selected from the Dow Jones STOXX(R)
600 Index, including secondary lines of those companies (where there are
multiple lines of equity capital in a company), which includes the highest
dividend-yielding companies across 18 European countries: Austria, Belgium,
Denmark, Finland, France, Germany, Greece, Iceland, Ireland, Italy, Luxembourg,
the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United
Kingdom. The STOXX Index is compiled and maintained by STOXX Limited. Only
dividend-paying companies in the Dow Jones STOXX(R) 600 Index (including
secondary lines of those companies) are considered for inclusion in the STOXX
Index. In addition, a company must have a non-negative five-year
dividend-per-share growth rate and a dividend-to-earnings ratio of 60% or less.
PERFORMANCE REVIEW
From inception (August 27, 2007) through September 30, 2007, the Fund has posted
an NAV return of 3.23%, vs. 6.22% for its benchmark index, the Dow Jones
STOXX(R) 600 Index.
The top five performing stocks, over the period ended September 30, 2007, by
contribution to return, were StatoilHydro ASA, Vodafone Group PLC, France
Telecom SA, RWE AG and Amlin PLC. The worst-performing stocks, by percentage
loss, were Alliance & Leicester PLC, DSG International PLC, Independent News &
Media PLC, Norske Skogindustrier ASA and Irish Life & Permanent PLC.
Telecommunications services and energy were the best-performing sectors over the
period ended September 30, 2007. The energy sector was the best performing
sector with a return of 16.3% and an 8.9% average weight in the Fund.
Telecommunications services returned 9.6% and had an average weighting of 24.3%.
Consumer discretionary, with a 6.6% average weight in the Fund, detracted from
performance with a negative return of 15.9%. The materials sector also hurt
performance with a negative return of 3.7% and a 7.3% average weighting.
German and Norwegian securities had the biggest contribution to return over the
period. German securities contributed +127 basis points to the Fund's return and
had a 15.0% average weight. Norwegian securities contributed +103 basis points
to the Fund's return and had a 10.7% average weight in the Fund. Irish
securities (-94 basis points, 8.4% average weight) and United Kingdom securities
(-20 basis points, 29.3% average weight) both detracted from performance.
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Performance as of September 30, 2007
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Since Fund Inception
(August 27, 2007)
FUND PERFORMANCE
NAV 3.23%
Market Price 3.77%
INDEX PERFORMANCE
Dow Jones STOXX(R) Select Dividend 30 Index 3.04%
Dow Jones STOXX(R) 600 Index 6.22%
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(See Notes to Fund Performance Overview on page 8.)
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"STOXX" and "Dow Jones STOXX(R) Select Dividend 30 Index" are trademarks of Dow
Jones & Company, Inc. ("Dow Jones") and have been licensed for use for certain
purposes by First Trust and the Fund. The Fund, based on the Dow Jones STOXX(R)
Select Dividend 30 Index, is not sponsored, endorsed, sold or promoted by STOXX
or Dow Jones and neither STOXX nor Dow Jones makes any representation regarding
the advisability of trading or investing in such product.
Page 4
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Fund Performance Overview (Continued)
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FDD - FIRST TRUST DJ STOXX(R) SELECT DIVIDEND 30 INDEX FUND (CONTINUED)
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Portfolio Sector Allocation as of September 30, 2007
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SECTOR % OF NET ASSETS
Financials 35.59%
Telecommunications Services 25.21
Utilities 13.06
Energy 9.38
Materials 7.01
Consumer Discretionary 5.77
Industrials 1.89
Net Other Assets and Liabilities 2.09
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Total 100.00%
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Top Ten Portfolio Holdings as of September 30, 2007
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SECURITY % OF NET ASSETS
Vodafone Group PLC 5.91%
Lloyds TSB Group PLC 5.82
United Utilities PLC 5.38
France Telecom SA 5.33
StatoilHydro ASA 5.24
Deutsche Telekom AG 4.77
RWE AG 4.36
Eni S.p.A. 4.14
Belgacom 4.10
DSG International PLC 3.59
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Total 48.64%
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GROWTH OF A $10,000 INITIAL INVESTMENT
AUGUST 27, 2007 - SEPTEMBER 30, 2007
[GRAPHIC OMITTED]
EDGARIZATION OF DATA POINTS
INDEX 8/27/07 9/30/07
- ----- ------- -------
First Trust DJ STOXX Select Dividend 30 Index Fund $10,000 $10,323
Dow Jones STOXX Select Dividend 30 Index 10,000 10,304
Dow Jones STOXX 600 Index 10,000 10,622
Performance figures assume reinvestment of all dividend 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 is no
guarantee of future results.
FREQUENCY DISTRIBUTION OF DISCOUNTS AND PREMIUMS
BID/ASK MIDPOINT VS. NAV AS OF SEPTEMBER 30, 2007
The following Frequency Distribution of Discounts and Premiums charts are
provided to show the frequency at which the bid/ask midpoint price for the Fund
was at a discount or premium to the daily NAV. The following tables are for
comparative purposes only and represent the period August 30, 2007 (commencement
of trading) through September 30, 2007.
NUMBER OF DAYS BID/ASK MIDPOINT AT/ABOVE NAV
For the Period 0-49 Basis Points 50-99 Basis Points 100-199 Basis Points >= 200 Basis Points
8/30/07 - 9/30/07 7 9 4 0
NUMBER OF DAYS BID/ASK MIDPOINT BELOW NAV
For the Period 0-49 Basis Points 50-99 Basis Points 100-199 Basis Points >= 200 Basis Points
8/30/07 - 9/30/07 1 0 0 0
Page 5
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Fund Performance Overview (Continued)
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FFR - FIRST TRUST FTSE EPRA/NAREIT GLOBAL REAL ESTATE INDEX FUND
First Trust FTSE EPRA/NAREIT Global Real Estate Index Fund (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 FTSE EPRA/NAREIT Global
Real Estate Index (the "FTSE Index"). The Shares of the Fund are listed and
trade on the American Stock Exchange under the ticker symbol "FFR." The Fund
will normally invest at least 90% of its total assets in common stocks that
comprise the FTSE Index or in depositary receipts that may include American
Depositary Receipts, Global Depositary Receipts, European Depositary Receipts,
New York shares or global shares representing securities in the FTSE Index. The
Fund began trading on August 30, 2007.
The FTSE Index is compiled and maintained by FTSE International Limited. The
FTSE Index is modified market cap weighted based on free float market
capitalization and tracks the performance of listed real estate companies or
real estate investment trusts ("REITs") in North America, Europe and Asia. As of
September 30, 2007, the FTSE Index was comprised of 302 real estate companies
domiciled in 22 different countries. The FTSE Index is comprised of the FTSE
EPRA/NAREIT North America Series, the FTSE EPRA/NAREIT Europe Series and the
FTSE EPRA/NAREIT Asia Series.
FUND PERFORMANCE
From inception (August 27, 2007) through September 30, 2007, the Fund has posted
an NAV return of 6.86%, vs. 5.90% for its benchmark index, the S&P Global REIT
Index.
The top five performing stocks, over the period ended September 30 2007, by
contribution to return, were Sun Hung Kai Properties Ltd, Westfield Group,
ProLogis, Simon Property Group, Inc. and Mitsubishi Estate Co., Ltd. The
worst-performing stocks, by percentage loss, were British Land Co., PLC, Land
Securities Group PLC, Hammerson PLC, Immoeast AG and Fonciere des Regions Group.
The diversified and retail real estate sub-industries had the most positive
contribution to return over the period with 260 and 172 basis point
contributions, respectively. Diversified real estate had a 37.3% average weight
in the Fund while retail real estate had a 21.9% average weight. There were no
sectors posting negative returns over the period; however, the specialty real
estate (3 basis point contribution) and industrial/office mixed real estate (8
basis point contribution) sub-industries posted smaller contributions to return.
U.S. securities returned 6.6% to the Fund's return (contributing 259 basis
points) and had a 37.5% average weight. Hong Kong securities returned 16.1% to
the Fund's return (contributing 171 basis points) and had a 10.9% average weight
in the Fund. United Kingdom securities and Austrian securities had negative
returns over the period. United Kingdom securities reduced the Fund's return by
55 basis points and had an 8.5% average weight in the Fund. Austrian securities
had a 1 basis point negative contribution and had a 1.5% average weight in the
Fund.
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Performance as of September 30, 2007
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Since Fund Inception
(August 27, 2007)
FUND PERFORMANCE
NAV 6.86%
Market Price 7.34%
INDEX PERFORMANCE
EPRA/NAREIT Global Real Estate Index 6.93%
S&P Global REIT Index 5.90%
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(See Notes to Fund Performance Overview on page 8.)
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The FTSE EPRA/NAREIT Global Real Estate Index is calculated by FTSE
International Limited ("FTSE"). FTSE does not sponsor, endorse or promote the
First Trust FTSE EPRA/NAREIT Global Real Estate Index Fund. All copyright in the
index values and constituent list vests in FTSE and/or its licensors. First
Trust Advisors L.P. and the First Trust FTSE EPRA/NAREIT Global Real Estate
Index Fund has obtained full license from FTSE to use such copyright in the
creation of the First Trust FTSE EPRA/NAREIT Global Real Estate Index Fund.
"FTSE(R)","FT-SE(R)" and "Footsie(R)" are trademarks jointly owned by the London
Stock Exchange Plc and the Financial Times Limited and are used by FTSE under
license. "NAREIT(R)" is the trademark of the National Association of Real Estate
Investment Trusts and "EPRA(R)" is the trademark of the European Public Real
Estate Association and are used by FTSE under license.
Page 6
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Fund Performance Overview (Continued)
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FFR - FIRST TRUST FTSE EPRA/NAREIT GLOBAL REAL ESTATE INDEX FUND (CONTINUED)
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Portfolio Sector Allocation as of September 30, 2007
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SECTOR % OF NET ASSETS
Financials 97.67%
Industrials 0.35
Consumer Discretionary 0.31
Health Care 0.05
Net Other Assets and Liabilities 1.62
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Total 100.00%
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Top Ten Portfolio Holdings as of September 30, 2007
- -------------------------------------------------------
SECURITY % OF NET ASSETS
Westfield Group 4.04%
Sun Hung Kai Properties Ltd. 3.43
Mitsubishi Estate Co., Ltd. 3.18
Mitsui Fudosan Co., Ltd. 2.64
Simon Property Group, Inc. 2.43
Unibail-Rodamco 2.28
ProLogis European Properties 1.85
Vornado Realty Trust 1.81
Sumitomo Realty & Development Co., Ltd. 1.81
Land Securities Group PLC 1.77
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Total 25.24%
=====
GROWTH OF A $10,000 INITIAL INVESTMENT
AUGUST 27, 2007 - SEPTEMBER 30, 2007
[GRAPHIC OMITTED]
EDGARIZATION OF DATA POINTS
INDEX 8/27/07 9/30/07
- ----- ------- -------
First Trust FTSE EPRA/NAREIT Global Real Estate Index Fund $10,000 $10,686
EPRA/NAREIT Global Real Estate Index $10,000 $10,693
S&P Global REIT Index $10,000 $10,590
Performance figures assume reinvestment of all dividend 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 is no
guarantee of future results.
FREQUENCY DISTRIBUTION OF DISCOUNTS AND PREMIUMS
BID/ASK MIDPOINT VS. NAV AS OF SEPTEMBER 30, 2007
The following Frequency Distribution of Discounts and Premiums charts are
provided to show the frequency at which the bid/ask midpoint price for the Fund
was at a discount or premium to the daily NAV. The following tables are for
comparative purposes only and represent the period August 30, 2007 (commencement
of trading) through September 30, 2007.
NUMBER OF DAYS BID/ASK MIDPOINT AT/ABOVE NAV
For the Period 0-49 Basis Points 50-99 Basis Points 100-199 Basis Points >= 200 Basis Points
8/30/07 - 9/30/07 9 10 1 0
NUMBER OF DAYS BID/ASK MIDPOINT BELOW NAV
For the Period 0-49 Basis Points 50-99 Basis Points 100-199 Basis Points >= 200 Basis Points
8/30/07 - 9/30/07 1 0 0 0
Page 7
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Notes to Fund Performance Overview
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Total returns for the period since inception are calculated from the inception
date of each Fund. 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 between the highest bid and the lowest offer on the the
stock exchange on which shares of the Fund are listed for trading as of the time
that the Fund's NAV is calculated. Since shares of the Fund did not trade in the
secondary market until after the Fund's inception, for the period from inception
to the first day of secondary market trading in shares of the Fund, the NAV of
the Fund is used as a proxy for the secondary market trading price to calculate
market returns. NAV and market returns assume that all dividend 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 results.
Page 8
First Trust Exchange-Traded Fund II
Understanding Your Fund Expenses
September 30, 2007 (Unaudited)
As a shareholder of First Trust DJ STOXX(R) Select Dividend 30 Index Fund or
First Trust FTSE EPRA/NAREIT Global Real Estate Index Fund (collectively, the
"Funds"), you incur two types of costs: (1) transaction costs; and (2) ongoing
costs, including management fees, distribution and/or service fees, and other
Fund expenses. This Example is intended to help you understand your ongoing
costs (in dollars) of investing in the Funds and to compare these costs with the
ongoing costs of investing in other funds.
The Hypothetical example is based on an investment of $1,000 invested for the
most recent fiscal half-year ended September 30, 2007. The Actual example is
based on an investment of $1,000 invested for the period since inception through
September 30, 2007.
Actual Expenses
The first line in the following table provides information about actual account
values and actual expenses. You may use the information in this line, together
with the amount you invested, to estimate the expenses that you paid over the
period. Simply divide your account value by $1,000 (for example, an $8,600
account value divided by $1,000 = 8.6), then multiply the result by the number
in the first line under the heading entitled "Expenses Paid During the Period"
to estimate the expenses you paid on your account during this 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 Funds' actual expense
ratios and an assumed rate of return of 5% per year before expenses, which are
not the Funds' actual returns. 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 to 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 paid on purchases and sales of the Funds' shares. Therefore, the
second line in the table is useful in comparing ongoing costs only, and will not
help you determine the relative total costs of owning different funds. In
addition, if these transactional costs were included, your costs would have been
higher.
- ------------------------------------------------------------------------------------------------------------------------------------
Annualized
Expense Ratio Expenses Paid
Ending Based on the During the Period
Beginning Account Value Number of Days Ended
Account Value September 30, 2007 in the Period(c) September 30, 2007(d)
- ------------------------------------------------------------------------------------------------------------------------------------
FIRST TRUST DJ STOXX(R) SELECT DIVIDEND 30 INDEX FUND
Actual $1,000.00 (a) $1,032.30 0.60% $0.58
Hypothetical (5% return before expenses) $1,000.00 (b) $1,022.06 0.60% $3.04
FIRST TRUST FTSE EPRA/NAREIT GLOBAL REAL ESTATE INDEX FUND
Actual $1,000.00 (a) $1,068.60 0.60% $0.60
Hypothetical (5% return before expenses) $1,000.00 (b) $1,022.06 0.60% $3.04
(a) Beginning account value as of inception date of August 27, 2007.
(b) Beginning account value as of April 1, 2007.
(c) These expense ratios reflect expense caps.
(d) Actual expenses are equal to the annualized expense ratio of 0.60%,
multiplied by the average account value over the period, multiplied by
35/365 (to reflect the actual period August 27, 2007 to September 30, 2007).
Hypothetical expenses are assumed for the most recent fiscal half-year.
Page 9
First Trust DJ STOXX(R) Select Dividend 30 Index Fund
Portfolio of Investments
September 30, 2007
Market
Shares Description Value
- ----------------------------------------------------------------
COMMON STOCKS--97.9%
AUSTRIA--7.7%
917 Boehler-Uddeholm AG $ 96,029
3,409 Telekom Austria AG 89,200
968 Wienerberger AG 60,541
----------
245,770
----------
BELGIUM--4.1%
2,829 Belgacom SA 131,266
----------
DENMARK--1.8%
1,414 Danske Bank A/S 57,408
----------
FRANCE--5.3%
5,092 France Telecom SA 170,558
----------
GERMANY--15.5%
765 Deutsche Bank AG 98,591
7,772 Deutsche Telekom AG 152,716
575 E.ON AG 106,311
1,240 RWE AG 139,597
----------
497,215
----------
IRELAND--7.8%
2,420 Allied Irish Banks PLC 58,663
3,286 Bank of Ireland Group 60,913
18,838 Independent News & Media PLC 70,110
2,760 Irish Life & Permanent PLC 61,199
----------
250,885
----------
ITALY--7.0%
3,575 Eni S.p.A. 132,490
28,865 Unipol Gruppo Finanziario S.p.A. 90,552
----------
223,042
----------
NORWAY--11.0%
7,415 DnB NOR ASA 113,744
6,606 Norske Skogindustrier ASA 70,701
4,916 StatoilHydro ASA 167,553
----------
351,998
----------
SWEDEN--2.4%
6,434 Fabege AB 76,630
----------
SWITZERLAND--6.1%
1,130 Ciba Specialty Chemicals AG 57,604
195 Swisscom AG 74,156
212 Zurich Financial Services AG 63,595
----------
195,355
----------
Market
Shares Description Value
- ----------------------------------------------------------------
UNITED KINGDOM--29.2%
6,450 Alliance & Leicester PLC $ 104,518
11,922 Amlin PLC 80,373
16,774 Lloyds TSB Group PLC 186,182
41,555 DSG International PLC 114,779
4,728 Provident Financial PLC 86,481
12,015 United Utilities PLC 172,078
52,337 Vodafone Group PLC 188,998
----------
933,409
----------
RIGHTS--0.0%
AUSTRIA--0.0%
968 Wienerberger AG-Rights 0
----------
TOTAL INVESTMENTS--97.9%
(Cost $3,036,447) 3,133,536
NET OTHER ASSETS AND LIABILITIES--2.1% 66,786
----------
NET ASSETS--100.0% $3,200,322
==========
% of
Industry Net Assets
- ------------------------------------------------------
Diversified Telecommunications 19.3%
Commercial Banks 18.2
Multi-Utilities 9.7
Oil, Gas & Consumable Fuels 9.4
Insurance 9.2
Wireless Telecommunication Services 5.9
Specialty Retail 3.6
Electric Utilities 3.3
Capital Markets 3.1
Metals & Mining 3.0
Consumer Finance 2.7
Real Estate Management & Development 2.4
Media 2.2
Paper & Forest Products 2.2
Building Products 1.9
Chemicals 1.8
- -------------------------------------------------
Total Investments 97.9
Net Other Asset and Liabilities 2.1
-----
Total 100.0%
=====
Page 10 See Notes to Financial Statements.
First Trust FTSE EPRA/NAREIT Global Real Estate Index Fund
Portfolio of Investments
September 30, 2007
Market
Shares Description Value
- ----------------------------------------------------------------
COMMON STOCKS--98.4%
AUSTRALIA--12.6%
3,678 Abacus Property Group $ 6,266
2,701 Australand Property Group 5,560
2,873 Babcock & Brown Japan Property Trust 4,372
1,756 Bunnings Warehouse Property Trust 3,631
4,923 Centro Properties Group 32,195
6,605 Centro Retail Group 9,553
9,766 CFS Retail Property Trust 20,711
9,407 Commonwealth Property Office Fund 13,898
16,863 DB RREEF Trust 30,076
1,520 FKP Property Group 9,334
5,988 Galileo Shopping America Trust 5,632
9,861 Goodman Group 60,464
11,893 GPT Group 53,822
6,416 ING Industrial Fund 16,112
7,051 ING Office Fund 11,137
7,593 Macquarie CountryWide Trust 13,408
5,415 Macquarie DDR Trust 5,646
11,647 Macquarie Office Trust 16,174
5,910 Mirvac Group 28,581
3,659 Multiplex Group 16,267
8,450 Stockland 67,483
1,392 Sunland Group Ltd. 5,003
1,998 Tishman Speyer Office Fund 3,900
8,868 Valad Property Group 15,738
11,224 Westfield Group 216,125
----------
671,088
----------
AUSTRIA--1.2%
508 CA Immobilien Anlagen AG (a) 13,466
497 Conwert Immobilien Invest AG (a) 9,185
2,674 Immofinanz Immobilien Analagen AG (a) 33,364
13 Sparkassen Immo Invest Genusscheine 1,817
397 Sparkassen Immobilien AG (a) 4,642
----------
62,474
----------
BELGIUM--0.4%
76 Befimmo S.C.A 7,904
46 Cofinimmo SA 8,138
40 Intervest Offices NV 1,643
12 Leasinvest Real Estate S.C.A. 1,237
38 Warehouses De Pauw S.C.A. 2,601
12 Wereldhave Belgium S.C.A. 1,011
----------
22,534
----------
Market
Shares Description Value
- ----------------------------------------------------------------
BERMUDA--1.8%
1,761 Great Eagle Holdings Ltd. $ 6,683
9,922 Hongkong Land Holdings Ltd. 44,847
2,246 Hopson Development Holdings Ltd. 7,483
3,083 Kerry Properties Ltd. 23,676
245 Orient-Express Hotels Ltd. 12,561
----------
95,250
----------
CANADA--3.4%
145 Allied Properties Real Estate
Investment Trust 3,217
301 Boardwalk Real Estate Investment 14,329
1,734 Brookfield Properties 43,060
436 Calloway Real Estate Investment
Trust 10,867
210 Canadian Hotel Income Properties
Real Estate Investment Trust 4,030
352 Canadian Real Estate Investment
Trust 10,599
353 Canadian Apartment Properties Real
Estate Investment Trust 6,779
546 Chartwell Seniors Housing Real
Estate Investment Trust 7,026
260 Cominar Real Estate Investment Trust 5,604
98 Dundee Real Estate Investment Trust 3,816
352 Extendicare Real Estate Investment
Trust 5,269
780 H&R Real Estate Investment Trust 18,664
326 InnVest Real Estate Investment Trust 3,933
258 Morguard Real Estate Investment
Trust 3,556
131 Northern Property Real Estate
Investment Trust 3,082
360 Primaris Retail Real Estate Investment
Trust 6,703
1,215 RioCan Real Estate Investment
Trust 30,355
----------
180,889
----------
CAYMAN ISLANDS--2.0%
8,729 Agile Property Holdings Ltd. 18,325
8,720 China Resources Land Ltd. 18,172
19,062 Country Garden Holdings, Co., Ltd. (a) 32,416
6,645 New World China Land Ltd. 6,368
7,673 Shimao Property Holdings Ltd. 23,343
7,314 Shui On Land Ltd. 8,900
----------
107,524
----------
DENMARK--0.1%
309 Keops A/S (a) 1,419
163 TK Development A/S (a) 3,102
----------
4,521
----------
See Notes to Financial Statements. Page 11
First Trust FTSE EPRA/NAREIT Global Real Estate Index Fund
Portfolio of Investments
September 30, 2007
Market
Shares Description Value
- ----------------------------------------------------------------
COMMON STOCKS (CONTINUED)
FINLAND--0.3%
960 Citycon Oyj $ 6,119
484 Sponda Oyj 6,729
246 Technopolis Oyj 2,147
----------
14,995
----------
FRANCE--4.0%
252 Acanthe Developpement SA 1,060
23 Affine Group 1,443
121 Fonciere des Regions Group 17,730
73 Gecina SA 12,387
154 Icade 11,221
403 Klepierre LLC 23,118
170 Mercialys 6,579
30 Societe de la Tour Eiffel 5,275
76 Societe Immobiliere de Location
pour l'Industrie et le Commerce 12,774
474 Unibail-Rodamco S.A. 121,993
----------
213,580
----------
GERMANY--0.9%
163 Alstria Office AG (a) 3,026
128 Colonia Real Estate AG (a) 4,955
200 Deutsche Euroshop AG 7,386
110 Deutsche Wohnen AG 4,753
125 DIC Asset AG 4,365
506 IVG Immobilien AG 18,940
152 Patrizia Immobilien AG 2,328
112 Vivacon AG 2,915
----------
48,668
----------
GREECE--0.1%
148 Babis Vovos International
Construction S.A. (a) 5,090
43 Eurobank Properties Real Estate
Investment Co. 838
77 Lamda Development S.A. 1,691
----------
7,619
----------
GUERNSEY--0.7%
1,356 Assura Group Ltd. 5,757
1,713 F&C Commercial Property
Trust Ltd. 4,223
1,931 ING UK Real Estate Income
Trust Ltd. 4,010
2,060 Invista Foundation Property
Trust Ltd. 4,731
331 ISIS Property Trust Ltd. 914
483 ISIS Property Trust 2 Ltd. 1,223
69 Mapeley Ltd. 2,979
606 Standard Life Investment Property
Income Trust PLC 1,398
581 Stobart Group Ltd. 1,759
Market
Shares Description Value
- ----------------------------------------------------------------
GUERNSEY (CONTINUED)
832 Teesland Advantage Property
Income Trust Ltd. $ 1,796
1,113 UK Balanced Property Trust
(The) Ltd. 3,826
1,538 UK Commercial Property Trust
Ltd. 2,643
----------
35,259
----------
HONG KONG--8.6%
7,989 Champion Real Estate Investment Trust 4,542
21,483 China Overseas Land & Investment Ltd. 49,024
12,066 Hang Lung Properties Ltd. 54,014
4,527 Henderson Land Development Co., Ltd. 35,901
4,627 Hysan Development Co., Ltd. 12,827
3,352 Kowloon Development Co., Ltd. 8,555
16,131 New World Development Co., Ltd. 44,613
8,685 Shenzhen Investment Ltd. 7,753
13,376 Sino Land Co., Ltd. 33,277
10,884 Sun Hung Kai Properties Ltd. 183,411
12,452 Link (The) REIT 27,390
----------
461,307
----------
ITALY--0.3%
441 Aedes S.p.A. 2,971
4,462 Beni Stabili S.p.A. 5,593
721 Immobiliare Grande Distribuzione 2,827
639 Risanamento S.p.A. (a) 4,825
----------
16,216
----------
JAPAN--12.4%
416 AEON Mall Co., Ltd 12,712
337 DAIBIRU Corp. 4,242
83 GOLDCREST Co., Ltd. 3,815
840 HEIWA Real Estate, Co., Ltd. 5,806
4 Japan Prime Realty Investment Corp. 16,680
2 Japan Real Estate Investment Corp. 24,028
2 Japan Retail Fund Investment Corp. 17,412
1 Kenedix Realty Investment Corp. 6,965
5,930 Mitsubishi Estate Co., Ltd. 169,849
5,081 Mitsui Fudosan Co., Ltd. 141,108
3 Nippon Building Fund, Inc. 43,616
1 Nippon Commercial Investment Corp. 4,344
2 Nomura Real Estate Office Fund, Inc. 20,894
8 NTT Urban Development Corp. 16,576
1 ORIX JREIT, Inc. 6,825
1 Premier Investment Co. 7,235
2,744 Sumitomo Realty & Development Co., Ltd. 96,511
592 TOC Co., Ltd. 5,448
1,375 Tokyo Tatemono Co., Ltd. 17,537
2,297 Tokyu Land Corp. 23,057
Page 12 See Notes to Financial Statements.
First Trust FTSE EPRA/NAREIT Global Real Estate Index Fund
Portfolio of Investments (Continued)
September 30, 2007
Market
Shares Description Value
- ----------------------------------------------------------------
COMMON STOCKS (CONTINUED)
JAPAN (CONTINUED)
1 TOKYU REIT, Inc. $ 9,751
1 United Urban Investment Corp. 6,886
----------
661,297
----------
JERSEY--0.0%
894 Invesco Property Income Trust Ltd. 1,948
----------
LUXEMBOURG--0.2%
262 Gagfah SA 5,156
330 ProLogis European Properties 5,576
----------
10,732
----------
NETHERLANDS--1.5%
392 Corio NV 33,482
206 Eurocommercial Properties NV 11,456
208 Nieuwe Steen Investments NV 5,793
681 Plaza Centers (Europe) BV (a) 2,505
123 Vastned Offices/Industrial NV 3,888
98 VastNed Retail NV 7,888
121 Wereldhave N.V. 14,571
----------
79,583
----------
NEW ZEALAND--0.1%
4,148 Kiwi Income Property Trust 4,558
----------
NORWAY--0.1%
420 Norwegian Property ASA 5,064
----------
POLAND--0.2%
631 Globe Trade Centre S.A. (a) 11,332
----------
SINGAPORE--2.6%
4,539 Allgreen Properties Ltd. 5,867
7,400 Ascendas Real Estate Investment Trust 13,599
5,945 CapitaCommercial Trust 11,366
8,020 Capitaland, Ltd. 44,001
6,728 CapitaMall Trust 17,664
1,558 Guocoland Ltd. 5,349
2,064 Keppel Land Ltd. 11,532
4,790 Mapletree Logistics Trust 4,031
1,000 Singapore Land Ltd. 6,866
8,197 Suntec Real Estate Investment Trust 10,760
3,087 Wing Tai Holdings Ltd. 8,021
----------
139,056
----------
SPAIN--0.0%
58 Renta Corporacion Real Estate SA 1,924
----------
SWEDEN--0.9%
1,002 Castellum AB 12,478
1,040 Fabege AB 12,387
473 Hufvudstaden AB 5,101
Market
Shares Description Value
- ----------------------------------------------------------------
SWEDEN (CONTINUED)
728 Klovern AB $ 2,858
795 Kungsleden AB 10,240
224 Wihlborgs Fastigheter AB 4,154
----------
47,218
----------
SWITZERLAND--0.5%
28 Allreal Holding AG 3,285
273 PSP Swiss Property AG 14,491
112 Swiss Prime Site AG 6,368
192 Zueblin Immobilien Holding AG 1,657
----------
25,801
----------
UNITED KINGDOM--7.5%
140 A.J. Mucklow Group PLC 899
501 Big Yellow Group PLC 5,123
3,019 British Land Co., PLC 72,393
1,563 Brixton PLC 11,584
414 Capital & Regional PLC 6,234
308 CLS Holdings PLC (a) 3,211
28 Daejan Holdings PLC 2,152
586 Derwent London PLC 20,094
237 Development Securities PLC 2,609
564 Grainger PLC 5,164
1,055 Great Portland Estates PLC 12,897
1,692 Hammerson PLC 40,573
555 Helical Bar PLC 5,187
2,741 Land Securities Group PLC 94,328
2,113 Liberty International PLC 49,328
235 Marylebone Warwick Balfour Group PLC (a) 1,296
932 Minerva PLC (a) 4,314
196 Primary Health Properties PLC 1,396
754 Quintain Estates & Development PLC 11,416
2,522 Segro PLC 25,774
778 Shaftesbury PLC 7,887
528 St. Modwen Properties PLC 5,134
716 Unite Group PLC 5,292
1,010 Workspace Group PLC 6,546
----------
400,831
----------
UNITED STATES--36.0%
187 Acadia Realty Trust 5,073
45 Agree Realty Corp. 1,410
12 Alexander's, Inc. (a) 4,626
171 Alexandria Real Estate Equities, Inc. 16,460
576 AMB Property Corp. 34,451
137 American Campus Communities, Inc. 4,013
760 American Financial Realty Trust 6,118
566 Apartment Investment & Management Co. 25,544
1,299 Archstone-Smith Trust 78,122
714 Ashford Hospitality Trust 7,176
102 Associated Estates Realty Corp. 1,330
458 AvalonBay Communities, Inc. 54,071
See Notes to Financial Statements. Page 13
First Trust FTSE EPRA/NAREIT Global Real Estate Index Fund
Portfolio of Investments (Continued)
September 30, 2007
Market
Shares Description Value
- ----------------------------------------------------------------
COMMON STOCKS (CONTINUED)
UNITED STATES (CONTINUED)
382 BioMed Realty Trust, Inc. $ 9,206
693 Boston Properties, Inc. 72,003
507 Brandywine Realty Trust 12,832
294 BRE Properties, Inc. 16,443
327 Camden Property Trust 21,010
381 CBL & Associates Properties, Inc. 13,354
257 Cedar Shopping Centers, Inc. 3,500
274 Colonial Properties Trust 9,398
274 Corporate Office Properties Trust 11,407
715 Corrections Corp. of America (a) 18,712
225 Cousins Properties, Inc. 6,606
973 DCT Industrial Trust, Inc. 10,187
728 Developers Diversified Realty Corp. 40,673
551 DiamondRock Hospitality Co. 9,593
354 Digital Realty Trust, Inc. 13,944
320 Douglas Emmett, Inc. 7,914
797 Duke Realty Corp. 26,947
138 EastGroup Properties, Inc. 6,246
166 Education Realty Trust, Inc. 2,241
154 Entertainment Properties Trust 7,823
321 Equity Inns, Inc. 7,248
142 Equity Lifestyle Properties, Inc. 7,356
215 Equity One, Inc. 5,848
1,615 Equity Residential 68,411
147 Essex Property Trust, Inc. 17,283
378 Extra Space Storage, Inc. 5,817
327 Federal Realty Investment Trust 28,972
361 FelCor Lodging Trust, Inc. 7,195
264 First Industrial Realty Trust, Inc. 10,262
141 First Potomac Realty Trust 3,074
449 Forest City Enterprises, Inc., Class A 24,767
1,428 General Growth Properties, Inc. 76,569
108 Getty Realty Corp. 2,938
219 Glimcher Realty Trust 5,147
242 GMH Communities Trust 1,876
1,197 HCP, Inc. 39,704
469 Health Care REIT, Inc. 20,749
278 Healthcare Realty Trust, Inc. 7,411
237 Hersha Hospitality Trust 2,346
330 Highwoods Properties, Inc. 12,101
246 Hilltop Holdings, Inc. (a) 2,888
196 Home Properties, Inc. 10,227
547 Hospitality Properties Trust 22,236
3,051 Host Hotels & Resorts, Inc. 68,464
1,223 HRPT Properties Trust 12,095
379 Inland Real Estate Corp. 5,871
281 Investors Real Estate Trust 3,035
189 Kilroy Realty Corp. 11,459
1,475 Kimco Realty Corp. 66,685
168 Kite Realty Group Trust 3,158
233 LaSalle Hotel Properties 9,805
373 Lexington Realty Trust 7,464
536 Liberty Property Trust 21,553
137 LTC Properties, Inc. 3,243
Market
Shares Description Value
- ----------------------------------------------------------------
UNITED STATES (CONTINUED)
418 Macerich (The) Co. $ 36,608
396 Mack-Cali Realty Corp. 16,276
274 Maguire Properties, Inc. 7,077
287 Medical Properties Trust, Inc. 3,823
148 Mid-America Apartment Communities, Inc. 7,378
55 National Healthcare Corp. 2,826
389 National Retail Properties, Inc. 9,484
530 Nationwide Health Properties, Inc. 15,969
396 OMEGA Healthcare Investors, Inc. 6,150
93 Parkway Properties, Inc. 4,105
226 Pennsylvania Real Estate Investment Trust 8,800
252 Post Properties, Inc. 9,752
1,493 ProLogis 99,061
93 PS Business Parks, Inc. 5,287
744 Public Storage 58,516
108 Ramco-Gershenson Properties 3,374
588 Realty Income Corp. 16,435
400 Regency Centers Corp. 30,700
152 Republic Property Trust 2,230
77 Saul Centers, Inc. 3,966
482 Senior Housing Properties Trust 10,633
1,301 Simon Property Group, Inc. 130,101
347 SL Green Realty Corp. 40,519
126 Sovran Self Storage, Inc. 5,776
433 Strategic Hotels & Resorts, Inc. 8,915
106 Sun Communities, Inc. 3,188
349 Sunstone Hotel Investors, Inc. 8,948
182 Tanger Factory Outlet Centers, Inc. 7,387
231 Taubman Centers, Inc. 12,647
784 UDR, Inc. 19,067
68 Universal Health Realty Income Trust 2,416
109 Urstadt Biddle Properties 1,686
332 U-Store-It Trust 4,382
776 Ventas, Inc. 32,126
883 Vornado Realty Trust 96,556
272 Washington Real Estate Investment Trust 9,025
499 Weingarten Realty Investors 20,689
286 Winthrop Realty Trust, Inc. 1,925
----------
$1,925,493
----------
Total Investments--98.4%
(Cost $4,928,446) 5,256,761
Net Other Assets and Liabilities--1.6% 86,405
----------
Net Assets--100.0% $5,343,166
==========
(a) Non-income producing security.
REIT- Real Estate Investment Trust
Page 14 See Notes to Financial Statements.
First Trust FTSE EPRA/NAREIT Global Real Estate Index Fund
Portfolio of Investments (Continued)
September 30, 2007
% of
Industry Net Assets
- ------------------------------------------------------
Real Estate Investment Trusts 67.3%
Real Estate Management & Development 30.2
Commercial Services & Supplies 0.3
Hotels, Restaurants & Leisure 0.2
Capital Markets 0.1
Health Care Providers & Services 0.1
Household Durables 0.1
Insurance 0.1
- ------------------------------------------------------
Total Investments 98.4
Net Other Asset and Liabilities 1.6
-----
Total 100.0%
=====
See Notes to Financial Statements. Page 15
First Trust Exchange-Traded Fund II
Statements of Assets and Liabilities
September 30, 2007
First Trust First Trust
DJ STOXX(R) FTSE EPRA/NAREIT
Select Dividend 30 Global Real Estate
Index Fund Index Fund
------------------ ------------------
ASSETS:
Investments at value $ 3,133,536 $ 5,256,761
Cash 67,801 44,915
Foreign currency at value -- 23,495
Receivables:
Investment securities sold -- 35,469
Dividends 4,928 14,155
From investment advisor 52,139 48,855
----------- -----------
Total Assets 3,258,404 5,423,650
----------- -----------
LIABILITIES:
Payables:
Investment securities purchased 4,307 28,960
Investment advisory fees 1,094 1,787
Accrued expenses and other liabilities 52,681 49,737
----------- -----------
Total Liabilities 58,082 80,484
----------- -----------
NET ASSETS $ 3,200,322 $ 5,343,166
=========== ===========
NET ASSETS consist of:
Paid-in capital $ 3,098,987 $ 4,999,100
Par value 1,033 1,000
Accumulated net investment income (loss) 3,144 14,735
Accumulated net realized gain (loss) on investments -- (1,389)
Net unrealized appreciation (depreciation) on investments, foreign
currency transactions and translation of assets and liabilities
denominated in foreign currencies 97,158 329,720
----------- -----------
NET ASSETS $ 3,200,322 $ 5,343,166
=========== ===========
NET ASSET VALUE, per share $ 30.97 $ 53.43
=========== ===========
Number of shares outstanding
(unlimited number of shares authorized, par value $0.01 per share) 103,334 100,002
----------- -----------
Investments at cost $ 3,036,447 $ 4,928,446
=========== ===========
Foreign currency at cost $ -- $ 22,349
=========== ===========
Page 16 See Notes to Financial Statements.
First Trust Exchange-Traded Fund II
Statements of Operations
First Trust First Trust
DJ STOXX(R) FTSE EPRA/NAREIT
Select Dividend 30 Global Real Estate
Index Fund Index Fund
------------------ ------------------
For the Period For the Period
August 27, 2007 (a) August 27, 2007 (a)
through through
September 30, 2007 September 30, 2007
------------------ ------------------
INVESTMENT INCOME:
Dividends (b) $ 4,859 $ 17,091
----------- -----------
Total investment income 4,859 17,091
----------- -----------
EXPENSES:
Audit fees 25,000 27,500
Tax fees 4,250 4,250
Printing fees 7,500 7,500
Licensing fees 6,575 536
Trustees' fees and expenses 5,216 5,219
Legal fees 2,150 2,192
Investment advisory fees 1,094 1,787
Listing fees 932 932
Custodian fees 277 589
Accounting and administration fees 137 223
Registration and filing fees 95 153
Transfer agent fees 14 22
Other expenses 540 631
----------- -----------
Total expenses 53,780 51,534
Less fees waived and expenses reimbursed by the investment advisor (52,139) (48,855)
----------- -----------
Net expenses 1,641 2,679
----------- -----------
NET INVESTMENT INCOME (LOSS) 3,218 14,412
----------- -----------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on investments (74) (1,066)
Net change in unrealized appreciation (depreciation) on:
Investments 97,089 328,315
Foreign currency translation 69 1,405
----------- -----------
Net change in unrealized appreciation (depreciation) 97,158 329,720
----------- -----------
NET REALIZED AND UNREALIZED GAIN (LOSS) 97,084 328,654
----------- -----------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS $ 100,302 $ 343,066
=========== ===========
(a) Inception date
(b) Net of foreign withholding tax of $371 for the First Trust FTSE
EPRA/NAREIT Global Real Estate Index Fund.
See Notes to Financial Statements. Page 17
First Trust Exchange-Traded Fund II
Statements of Changes in Net Assets
First Trust First Trust
DJ STOXX(R) FTSE EPRA/NAREIT
Select Dividend 30 Global Real Estate
Index Fund Index Fund
------------------ ------------------
For the Period For the Period
August 27, 2007 (a) August 27, 2007 (a)
through through
September 30, 2007 September 30, 2007
------------------ ------------------
OPERATIONS:
Net investment income (loss) $ 3,218 $ 14,412
Net realized gain (loss) (74) (1,066)
Net change in unrealized appreciation (depreciation) 97,158 329,720
----------- -----------
Net increase (decrease) in net assets resulting from operations 100,302 343,066
----------- -----------
SHAREHOLDER TRANSACTIONS:
Proceeds from shares sold 3,100,020 5,000,100
----------- -----------
Net increase (decrease) in net assets resulting from shareholder
transactions 3,100,020 5,000,100
----------- -----------
Net increase (decrease) in net assets 3,200,322 5,343,166
NET ASSETS:
Beginning of period -- --
----------- -----------
End of period $ 3,200,322 $ 5,343,166
=========== ===========
Accumulated net investment income (loss) at end of period $ 3,144 $ 14,735
=========== ===========
CHANGES IN SHARES OUTSTANDING:
Shares outstanding, beginning of period -- --
Shares sold 103,334 100,002
Shares repurchased -- --
----------- -----------
Shares outstanding, end of period 103,334 100,002
=========== ===========
(a) Inception date.
Page 18 See Notes to Financial Statements.
First Trust Exchange-Traded Fund II
Financial Highlights
For a Share outstanding throughout the period
First Trust DJ STOXX(R) Select Dividend 30 Index Fund
For the Period
August 27, 2007 (a)
through
September 30, 2007
-------------------
Net asset value, beginning of period $ 30.00
------------
Income from investment operations:
Net investment income (loss) (b) 0.03
Net realized and unrealized gain (loss) 0.94
------------
Total from investment operations 0.97
------------
Net asset value, end of period $ 30.97
============
TOTAL RETURN (c) 3.23%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) $ 3,200
Ratios to average net assets:
Ratio of total expenses to average net assets 19.64%(d)
Ratio of net expenses to average net assets 0.60%(d)
Ratio of net investment income to average net assets 1.18%(d)
Portfolio turnover rate (e) 0%
First Trust FTSE EPRA/NAREIT Global Real Estate Index Fund
For the Period
August 27, 2007 (a)
through
September 30, 2007
-------------------
Net asset value, beginning of period $ 50.00
------------
Income from investment operations:
Net investment income (loss) (b) 0.14
Net realized and unrealized gain (loss) 3.29
------------
Total from investment operations 3.43
------------
Net asset value, end of period $ 53.43
============
TOTAL RETURN (c) 6.86%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) $ 5,343
Ratios to average net assets:
Ratio of total expenses to average net assets 11.51%(d)
Ratio of net expenses to average net assets 0.60%(d)
Ratio of net investment income to average net assets 3.22%(d)
Portfolio turnover rate (e) 1%
(a) Inception date.
(b) Based on average shares outstanding.
(c) Total return is calculated assuming an initial investment made at the net
asset value at the beginning of the period, reinvestment of all dividend
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
calculated for a period of less than one year is not annualized. The total
return would have been lower if certain fees had not been waived and
expenses reimbursed by the investment advisor.
(d) Annualized.
(e) Portfolio turnover is not annualized and does not include securities
received or delivered from processing creations or redemptions.
Notes to Financial Statements. Page 19
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Notes to Financial Statements
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First Trust Exchange-Traded Fund II
September 30, 2007
1. ORGANIZATION
First Trust Exchange-Traded Fund II (the "Trust") is an open-end management
investment company organized as a Massachusetts business trust on July 20, 2006,
and is registered with the Securities and Exchange Commission ("SEC") under the
Investment Company Act of 1940, as amended (the "1940 Act"). Both Funds within
the Trust had an inception date of August 27, 2007, with commencement of trading
on August 30, 2007.
The Trust currently consists of two funds:
First Trust DJ STOXX(R) Select Dividend 30 Index Fund-(AMEX ticker "FDD")
First Trust FTSE EPRA/NAREIT Global Real Estate Index Fund-(AMEX ticker "FFR")
Each fund represents a separate series of beneficial interest in the Trust (the
"Fund" or collectively, the "Funds"). Each Fund's shares are listed and traded
on the American Stock Exchange ("AMEX"). Unlike conventional mutual funds, each
Fund issues and redeems shares on a continuous basis, at net asset value ("
NAV"), only in large specified blocks consisting of 100,000 shares called a
"Creation Unit". Creation Units are issued and redeemed principally in-kind for
securities included in the relevant index. Except when aggregated in Creation
Units, shares are not redeemable securities of a Fund. The investment objective
of each Fund is to seek investment results that correspond generally to the
price and yield (before the Fund's fees and expenses) of the following indices:
FUND INDEX
First Trust DJ STOXX(R) Select Dividend 30 Index Fund Dow Jones STOXX(R) Select
Dividend 30 Index First Trust FTSE EPRA/NAREIT Global Real Estate Index Fund FTSE EPRA/NAREIT Global Real Estate Index
2. SIGNIFICANT ACCOUNTING POLICIES
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 requires management to make
estimates and assumptions that affect the reported amounts and disclosures in
the financial statements. Actual results could differ from those estimates.
A. Portfolio Valuation
Each Fund's NAV is determined daily, as of the close of regular trading on the
New York Stock Exchange ("NYSE"), normally 4:00 p.m. Eastern time, on each day
the NYSE is open for trading. The NAV 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 shares outstanding.
Each Fund's investments are valued at market value or, in the absence of market
value with respect to any portfolio securities, at fair value according to
procedures adopted by the Trust's Board of Trustees. Portfolio securities listed
on any exchange other than The NASDAQ(R) Stock Market, Inc. ("NASDAQ(R)") are
valued at the last sale price on the business day as of which such value is
being determined. If there has been no sale on such day, the securities are
valued at the mean of the most recent bid and asked prices on such day.
Securities traded on the NASDAQ(R) are valued at the NASDAQ(R) Official Closing
Price as determined by NASDAQ(R). Portfolio securities traded on more than one
securities exchange are valued at the last sale price on the business day as of
which such value is being determined at the close of the exchange representing
the principal market for such securities. Portfolio securities traded in the
over-the-counter market, but excluding securities traded on the NASDAQ(R), are
valued at the closing bid prices. Short-term investments that mature in less
than 60 days are valued at amortized cost.
Certain securities may not be able to be priced by pre-established pricing
methods. Such securities may be valued by the Board of Trustees or its delegate
at fair value. These securities generally include, but are not limited to,
restricted securities (securities which may not be publicly sold without
registration under the Securities Act of 1933) for which a pricing service is
unable to provide a market price; securities whose trading has been formally
suspended; a security whose market price is not available from a pre-established
pricing source; a security with respect to which an event has occurred that is
likely to materially affect the value of the security after the market has
closed but before the calculation of a Fund's NAV or make it difficult or
impossible to obtain a reliable market quotation; and a security whose price, as
provided by the pricing service, does not reflect the security's "fair value."
As a general principle, the current "fair value" of a security would appear to
be the amount which the owner might reasonably expect to receive for the
security upon its current sale. The use of fair value prices by a Fund generally
results in the prices used by a Fund differing from the closing sale prices on
the applicable exchange and fair value prices may not reflect the actual value
of a security. A variety of factors may be considered in determining the fair
value of such securities.
Page 20
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Notes to Financial Statements - (Continued)
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First Trust Exchange-Traded Fund II
September 30, 2007
Valuing a Fund's securities using fair value pricing will result in using prices
for those securities that may differ from current market valuations. Use of fair
value prices and certain current market valuations could result in a difference
between the prices used to calculate a Fund's NAV and the prices used by the
Index, which, in turn, could result in a difference between a Fund's performance
and the performance of the Index.
Because foreign markets may be open on different days than the days during which
investors may purchase the shares of each Fund, the value of each Fund's
securities may change on the days when investors are not able to purchase the
shares of the Fund. The value of securities denominated in foreign currencies is
converted into U.S. dollars using exchange rates determined daily as of the
close of regular trading on the NYSE. Any use of a different rate from the rates
used by the Index may adversely affect the Fund's ability to track the Index.
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.
C. Dividends and Distribution to Shareholders
Dividends from net investment income of the Funds, if any, are declared and paid
quarterly by the First Trust DJ STOXX(R) Select Dividend 30 Index Fund and
semi-annually by the First Trust FTSE EPRA/NAREIT Global Real Estate Index Fund
or as the Board of Trustees may determine from time to time. Distributions of
net realized capital gains earned by each Fund, if any, are distributed at least
annually.
Distributions from income and capital gains are determined in accordance with
income tax regulations, which may differ from accounting principles generally
accepted in the United States of America. These differences are primarily due to
differing treatments of income and gains on various investment securities held
by the Funds, timing differences and differing characterization of distributions
made by the Funds.
There were no distributions paid during the period ended September 30, 2007.
As of September 30, 2007, the components of distributable earnings on a tax
basis for the Funds were as follows:
Accumulated Net Unrealized
Undistributed Capital Appreciation
Ordinary Income Gain (Loss) (Depreciation)
--------------- ----------- --------------
First Trust DJ STOXX(R) Select Dividend 30 Index Fund $ 4,004 $ -- $ 96,298
First Trust FTSE EPRA/NAREIT Global Real Estate Index Fund 39,936 (1,389) 304,519
D. Income Taxes
Each 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, by 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.
In June 2006, Financial Accounting Standards Board Interpretation No. 48,
"Accounting for Uncertainty in Income Taxes" - an interpretation of FASB
Statement 109 ("FIN 48") was issued and is effective for fiscal years beginning
after December 15, 2006. This interpretation prescribes a minimum threshold for
financial statement recognition of the benefit of a tax position taken or
expected to be taken in a tax return. As of September 30, 2007, management has
evaluated the application of FIN 48 to the Funds, and has determined that there
is no material impact resulting from the adoption of this interpretation on the
Funds' financial statements.
At September 30, 2007, for federal income tax purposes, the Funds have capital
loss carryforwards available as shown in the table below, to the extent provided
by regulations, to offset future capital gains through the year indicated. To
the extent that these capital loss carryforwards are used to offset future
capital gains, it is probable that the capital gains so offset will not be
distributed to shareholders.
Capital Loss
Available Through
September 30, 2015
------------------
First Trust DJ STOXX(R) Select Dividend 30 Index Fund $ --
First Trust FTSE EPRA/NAREIT Global Real Estate Index Fund 1,389
Page 21
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Notes to Financial Statements - (Continued)
- --------------------------------------------------------------------------------
First Trust Exchange-Traded Fund II
September 30, 2007
In order to present accumulated net investment income (loss) and accumulated net
realized gain (loss) on investments on the Statements of Assets and Liabilities
that more closely represent their tax character, certain adjustments have been
made to accumulated net investment income (loss) and accumulated net realized
gain (loss) on investments. For the period ended September 30, 2007, the
adjustments were as follows:
Accumulated
Accumulated Net Realized
Net Investment Gain (Loss)
Income (Loss) on Investments
-------------- --------------
First Trust DJ STOXX(R) Select Dividend 30 Index Fund $ (74) $ 74
First Trust FTSE EPRA/NAREIT Global Real Estate Index Fund 323 (323)
E. Expenses
Expenses that are directly related to one of the Funds are charged directly to
the respective Fund. General expenses of the Trust are allocated to all the
Funds based upon the average net assets of each Fund. First Trust has entered
into licensing agreements with each of the following "Licensors" for the
respective Funds:
FUNDS LICENSOR
First Trust DJ STOXX(R) Select Dividend 30 Index Fund STOXX Limited
First Trust FTSE EPRA/NAREIT Global Real Estate Index Fund FTSE International Limited
The license agreements allow for the use by First Trust Advisors L.P. ("First
Trust") of certain trademarks and trade names of the Licensors. The Funds are
sub-licensees to the applicable license agreements. As such, the Funds pay
licensing fees, which are shown on the Statements of Operations.
F. Accounting Pronouncement
In September 2006, Statement of Financial Accounting Standards No. 157 Fair
Value Measurements ("SFAS 157") was issued by the FASB and is effective for
fiscal years beginning after November 15, 2007. SFAS 157 defines fair value,
establishes a framework for measuring fair value and expands disclosures about
fair value measurements. Management is currently evaluating the impact the
adoption of SFAS 157 will have on the Funds' financial statement disclosures.
3. INVESTMENT ADVISORY FEE AND OTHER AFFILIATED TRANSACTIONS
First Trust (or the "Advisor") is a limited partnership with one limited
partner, Grace Partners of DuPage L.P., and one general partner, The Charger
Corporation. First Trust serves as investment advisor to the Funds pursuant to
an Investment Management Agreement. First Trust is responsible for the selection
and ongoing monitoring of the securities in each Fund's portfolio and certain
other services necessary for the management of the Funds.
For these services, First Trust will receive annual fees from each Fund equal to
0.40% of such Fund's average daily net assets.
The Trust and the Advisor have entered into an Expense Reimbursement, Fee Waiver
and Recovery Agreement in which the Advisor has agreed to waive fees and/or
reimburse the Funds to the extent that the operating expenses of each Fund
(excluding interest expense, brokerage commissions and other trading expenses,
taxes and extraordinary expenses) exceed 0.60% of average daily net assets per
year (the "Expense Cap").
Each Fund's Expense Cap will be in effect for at least until August 30, 2009.
Expenses borne by the Advisor are subject to reimbursement by the Funds up to
three years from the date the fee or expense was incurred, but no reimbursement
payment will be made by a Fund if it would result in the Fund exceeding its
Expense Cap.
For the period ended September 30, 2007, the advisory fee waivers and
reimbursements of expenses (in order to maintain the Expense Caps) were as
follows:
Advisory Expense
Fee Waivers Reimbursements
---------------- --------------
First Trust DJ STOXX(R) Select Dividend 30 Index Fund $ 1,094 $ 51,045
First Trust FTSE EPRA/NAREIT Global Real Estate Index Fund 1,787 47,068
Page 22
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Notes to Financial Statements - (Continued)
- --------------------------------------------------------------------------------
First Trust Exchange-Traded Fund II
September 30, 2007
The Bank of New York is the administrator, custodian, fund accountant and
transfer agent for each Fund. Effective July 2, 2007, The Bank of New York
merged with Mellon Financial Corporation and the combined entity was named The
Bank of New York Mellon Corporation.
The Trust, on behalf of the Funds, has entered into an agreement with PFPC, Inc.
("PFPC"), whereby PFPC will provide certain administrative services to the Trust
and the Funds in connection with the Board's meetings and other related matters.
Each Trustee who is not an officer or employee of First Trust, any sub-advisor
or any of their affiliates ("Independent Trustees") is paid an annual retainer
of $10,000 per trust for the first 14 trusts of the First Trust Fund Complex and
an annual retainer of $7,500 per trust for each subsequent trust added to the
First Trust Fund Complex. The annual retainer is allocated equally among each of
the trusts. No additional meeting fees are paid in connection with board or
committee meetings.
Additionally, Thomas R. Kadlec is paid $10,000 annually to serve as the Lead
Independent Trustee and Niel B. Nielson is paid $5,000 annually to serve as the
chairman of the Audit Committee, with such compensation paid by the funds in the
First Trust Fund Complex and divided among those funds. Independent Trustees are
also reimbursed by the funds in the First Trust Fund Complex for travel and
out-of-pocket expenses in connection with all meetings.
4. PURCHASES AND SALES OF SECURITIES
For the period ended September 30, 2007, the cost of purchases and proceeds from
sales of investment securities, excluding short-term investments and in-kind
transactions, were as follows:
Purchases Sales
---------- -------
First Trust DJ STOXX(R) Select Dividend 30 Index Fund $ 100,252 $ --
First Trust FTSE EPRA/NAREIT Global Real Estate Index Fund 100,727 74,072
For the period ended September 30, 2007, the cost of in-kind purchases and
proceeds from in-kind sales were as follows:
Purchases Sales
---------- -------
First Trust DJ STOXX(R) Select Dividend 30 Index Fund $2,936,195 $ --
First Trust FTSE EPRA/NAREIT Global Real Estate Index Fund 4,902,822 --
Gains on in-kind transactions are not considered taxable for federal income tax
purposes.
As of September 30, 2007, the costs of investments for federal income tax
purposes and accumulated net unrealized appreciation (depreciation) on
investments were as follows:
Net Unrealized Gross Gross
Appreciation Unrealized Unrealized
Cost (Depreciation) Appreciation Depreciation
---------- -------------- ------------ ------------
First Trust DJ STOXX(R) Select Dividend 30 Index Fund $3,037,307 $ 96,229 $ 196,335 $ (100,106)
First Trust FTSE EPRA/NAREIT Global Real Estate Index Fund 4,953,647 303,114 342,176 (39,062)
5. CREATIONS, REDEMPTIONS AND TRANSACTION FEES
Shares are created and redeemed by each Fund only in Creation Unit size
aggregations of 100,000 shares. In order to purchase Creation Units of a Fund,
an investor must deposit (i) cash in lieu of all or a portion of the Deposit
Securities, as defined below, and/or (ii) a designated portfolio of equity
securities determined by First Trust (the "Deposit Securities") and generally
make a cash payment referred to as the "Cash Component." Purchasers of Creation
Units must pay a creation fee (the "Creation Transaction Fee"), which is
currently $4,000 for the First Trust FTSE EPRA/NAREIT Global Real Estate Index
Fund and $500 for the First Trust DJ STOXX(R) Select Dividend 30 Index Fund,
regardless of the number of Creation Units purchased in the transaction. The
Creation Transaction Fee may vary and is based on the composition of the
securities included in each Fund's portfolio and the countries in which the
transactions are settled. The Creation Transaction Fee may increase or decrease
as each Fund's portfolio is adjusted to conform to changes in the composition of
its corresponding index. The price for each Creation Unit will equal the daily
NAV per share times the number of shares in a Creation Unit plus the fees
described above and, if applicable, any operational processing and brokerage
Page 23
- --------------------------------------------------------------------------------
Notes to Financial Statements - (Continued)
- --------------------------------------------------------------------------------
First Trust Exchange-Traded Fund II
September 30, 2007
costs, transfer fees or stamp taxes. When a Fund permits an Authorized
Participant to substitute cash or a different security in lieu of depositing one
or more of the requisite Deposit Securities, the Authorized Participant may also
be assessed an amount to cover the cost of purchasing the Deposit Securities
and/or disposing of the substituted securities, including operational processing
and brokerage costs, transfer fees, stamp taxes, and part or all of the spread
between the expected bid and offer side of the market related to such Deposit
Securities and/or substitute securities.
Parties redeeming Creation Units must pay a redemption transaction fee (the
"Redemption Transaction Fee"), which is currently $4,000 for the First Trust
FTSE EPRA/NAREIT Global Real Estate Index Fund and $500 for the First Trust DJ
STOXX(R) Select Dividend 30 Index Fund, regardless of the number of Creation
Units redeemed in the transaction. The Redemption Transaction Fee may vary and
is based on the composition of the securities included in each Fund's portfolio
and the countries in which the transactions are settled. The Redemption
Transaction Fee may increase or decrease as each Fund's portfolio is adjusted to
conform to changes in the composition of its corresponding index. Each Fund
reserves the right to effect redemptions in cash. A shareholder may request a
cash redemption in lieu of securities; however, each Fund may, in its
discretion, reject any such request.
6. DISTRIBUTION PLAN
The Board of Trustees adopted a Distribution and Service Plan pursuant to Rule
12b-1 under the 1940 Act. In accordance with the Rule 12b-1 plan, the 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, 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, the Funds will not pay 12b-1 fees any time before April 30, 2009.
7. INDEMNIFICATION
The Fund has a variety of indemnification obligations under contracts with its
service providers. The Fund's maximum exposure under these arrangements is
unknown. However, the Fund has not had prior claims or losses pursuant to these
contracts and expects the risk of loss to be remote.
8. CONCENTRATION RISK
Each Fund may be concentrated in stocks of companies in an individual industry
or sector if the Fund's corresponding index is concentrated in an individual
industry or sector. You should be aware that an investment in a portfolio that
is concentrated in an individual industry or sector involves additional risk,
including limited diversification.
Page 24
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Report of Independent Registered Public Accounting Firm
- --------------------------------------------------------------------------------
To the Board of Trustees and Shareholders of First Trust
Exchange-Traded Fund II:
We have audited the accompanying statements of assets and liabilities of First
Trust Exchange-Traded Fund II, comprising First Trust DJ Stoxx(R) Select
Dividend 30 Index Fund and First Trust FTSE EPRA/NAREIT Global Real Estate Index
Fund (collectively, the "Funds"), including the portfolios of investments, as of
September 30, 2007, and the related statements of operations and changes in net
assets and the financial highlights for the period August 27, 2007 (inception)
through September 30, 2007. These financial statements and financial highlights
are the responsibility of the Funds' management. Our responsibility is to
express an opinion on these financial statements and financial highlights based
on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. The Funds
are not required to have, nor were we engaged to perform, an audit of their
internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Funds' internal control over
financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. Our procedures included confirmation
of securities owned as of September 30, 2007, by correspondence with the Funds'
custodian and brokers; where replies were not received, we performed other
auditing procedures. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of First
Trust Exchange-Traded Fund II as of September 30, 2007, the results of their
operations, changes in their net assets, and the financial highlights for the
period August 27, 2007 (inception) through September 30, 2007, in conformity
with accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
Chicago, Illinois
November 9, 2007
Page 25
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Additional Information (Unaudited)
- --------------------------------------------------------------------------------
First Trust Exchange-Traded Fund II
September 30, 2007
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that the Funds use to determine how
to vote proxies and information on how the Funds voted proxies relating to
portfolio securities during the most recent 12-month period ended June 30, 2007
is available (1) without charge, upon request, by calling (800) 988-5891; (2) on
the Trust's website located at http://www.ftportfolios.com; and (3) on the
Securities and Exchange Commission's website at http://www.sec.gov.
PORTFOLIO HOLDINGS
The Trust files its complete schedule of portfolio holdings with the Securities
and Exchange Commission ("SEC") for the first and third quarters of each fiscal
year on Form N-Q. The Trust's Form N-Q is available (1) by calling
(800) 988-5891; (2) on the Trust's website located at
http://www.ftportfolios.com; (3) on the SEC's website at http://www.sec.gov;
and (4) for review and copying at the SEC's Public Reference Room ("PRR")
in Washington, DC. Information regarding the operation of the PRR may be
obtained by calling (800) SEC-0330.
ADVISORY AGREEMENT
Board Considerations Regarding Approval of First Trust Exchange-Traded
Fund II's Advisory Contract
The Board of Trustees of the First Trust Exchange-Traded Fund
II (the "Trust"), including the Independent Trustees, approved the Investment
Management Agreement (the "Agreement") with First Trust Advisors L.P. ("First
Trust") on behalf of the First Trust DJ STOXX(R) Select Dividend 30 Index Fund
and the First Trust FTSE EPRA/NAREIT Global Real Estate Index Fund (each a
"Fund" and collectively, the "Funds") for an initial two-year term at a meeting
held on April 16, 2007. The Board of Trustees determined for each Fund that the
Agreement is in the best interests of the Fund in light of the services,
expenses and such other matters as the Board considered to be relevant in the
exercise of its reasonable business judgment.
To reach this determination for each Fund, the Board considered its duties under
the Investment Company Act of 1940, as amended (the "1940 Act"), as well as
under the general principles of state law in reviewing and approving advisory
contracts; the requirements of the 1940 Act in such matters; the fiduciary duty
of investment advisers with respect to advisory agreements and compensation; the
standards used by courts in determining whether investment company boards of
trustees have fulfilled their duties; and the factors to be considered by the
Board in voting on such agreements. To assist the Board in its evaluation of the
Agreement for each Fund, the Independent Trustees received a report in advance
of the Board meeting responding to a request for information from counsel to the
Independent Trustees. The report, among other things, outlined the services to
be provided by First Trust (including the relevant personnel responsible for
these services and their experience); the proposed advisory fee as compared to
fees charged by investment advisers to comparable funds and as compared to fees
charged to other First Trust clients; estimated expenses of each Fund as
compared to those of comparable funds; the nature of expenses to be incurred in
providing services to each Fund and the potential for economies of scale, if
any; financial data on First Trust; fall-out benefits to First Trust and First
Trust Portfolios L.P.; and a summary of First Trust's compliance program. The
Independent Trustees also met separately with their independent legal counsel to
discuss the information provided by First Trust with respect to each Fund. The
Board also applied its business judgment to determine whether the arrangement
between the Trust and First Trust is a reasonable business arrangement from each
Fund's perspective as well as from the perspective of shareholders.
In evaluating whether to approve the Agreement for each Fund, the Board
considered the nature, extent and quality of services to be provided under the
Agreement, and noted that First Trust's employees provide management services to
other investment companies, including other exchange-traded funds ("ETFs"), in
the First Trust complex with diligence and care. The Board also considered the
compliance program that had been developed by First Trust and the skills of its
employees who would be working with the Funds. It also considered the efforts
expended by First Trust in organizing the Trust and making arrangements for
entities to provide services to the Funds. Since each Fund is newly organized,
the Board did not consider investment performance of the Funds, but the Board
did consider performance of the applicable index for each Fund. The Board
concluded it was comfortable that First Trust had the capabilities and resources
to oversee the operations of each Fund, including the services to be provided by
other service providers.
For each Fund, the Trustees also reviewed information showing the advisory fee
and estimated expense ratio of the Fund as compared to those of a peer group.
They noted that the peer group for each Fund consisted solely of other ETFs. The
Board considered the limitations of each peer group, including the small number
of funds. The Board noted the services to be provided by First Trust to each
Fund for the annual advisory fee of 0.40% of the Fund's average daily net
assets. The Board noted that the proposed advisory fee for each Fund was was
lowest in the peer group, but considered that the other funds in the peer group
paid unitary fees. The Board also considered that First Trust has agreed to
waive fees and/or pay expenses for each Fund to the extent necessary to prevent
the annual operating expenses of the Fund (excluding interest expense, brokerage
commissions and other trading expenses, taxes and extraordinary expenses) from
Page 26
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Additional Information (Unaudited)(Continued)
- --------------------------------------------------------------------------------
First Trust Exchange-Traded Fund II
September 30, 2007
exceeding 0.60% of average daily net assets for two years. For each Fund, the
Trustees noted that expenses borne by First Trust are proposed to be subject to
reimbursement by the Fund for up to three years from the date the fee or expense
was incurred, but no reimbursement payment would be made by the Fund if it would
result in the Fund exceeding its expense cap, or if the expense cap is no longer
in effect, would result in the Fund exceeding an expense ratio equal to its most
recent expense cap. The Board considered the fees charged by First Trust to
funds with investment objectives and policies similar to the Funds', noting that
those fees generally were similar for other ETFs, but higher for non-ETFs,
except non-ETFs for which First Trust served as sub-advisor, for which the
annual fee usually was 0.35% of average daily net assets, and the Board noted
First Trust's statement that the services provided to these funds may not be
comparable to those to be provided to the Funds. In light of the nature, extent
and quality of services to be provided to each Fund under the Agreement, and in
light of First Trust's agreement to waive fees and/or pay each Fund's expenses
for at least two years up to the expense cap, the Board determined that the
investment advisory fee for each Fund was fair and reasonable.
Finally, the Board noted First Trust's commitment to attempt to
analyze whether economies of scale can be realized as each Fund's assets
increase and operations experience is accumulated, and noted that First Trust
intended to continue to make investments in infrastructure and personnel. The
Board took the costs to be borne by First Trust in connection with its services
to be performed under the Agreement into consideration and noted that First
Trust was unable to estimate the profitability of the Agreement to First Trust
for each Fund, but had agreed to cap each Fund's expenses for two years. The
Board considered that First Trust had identified as a fall-out benefit to First
Trust and First Trust Portfolios L.P. their exposure to investors and brokers
who, in the absence of the Funds or other funds of the Trust, may have had no
dealings with First Trust. The Board also noted that First Trust would not
utilize soft dollars in connection with its management of each Fund's portfolio.
After discussion of the Agreement for each Fund, the Board of Trustees,
including the Independent Trustees, concluded that First Trust had the
capabilities, resources and personnel necessary to manage each Fund. Based upon
such information as it considered necessary to the exercise of its reasonable
business judgment, the Board of Trustees concluded that it was in the best
interests of each Fund to approve the Agreement. No single factor was
determinative in the Board's analysis.
PRIVACY POLICY
The open-end and closed-end funds advised by First Trust Advisors L.P. (each a
"Fund") consider your privacy an important priority in maintaining our
relationship. We are committed to protecting the security and confidentiality of
your personal information.
Sources of Information
We may collect nonpublic personal information about you from the following
sources:
o Information we receive from you or your broker-dealer,
investment advisor or financial representative through
interviews, applications, agreements or other forms;
o Information about your transactions with us, our affiliates
or others;
o Information we receive from your inquiries by mail, e-mail or
telephone; and
o Information we collect on our website through the use of
"cookies." For example, we may identify the pages on our
website that your browser requests or visits.
Information Collected
The type of data we collect may include your name, address, social security
number, age, financial status, assets, income, tax information, retirement and
estate plan information, transaction history, account balance, payment history,
investment objectives, marital status, family relationships and other personal
information.
Disclosure of Information
We do not disclose any nonpublic personal information about our customers or
former customers to anyone, except as permitted by law. The permitted uses
include the disclosure of such information to unaffiliated companies for the
following reasons:
o In order to provide you with products and services and to
effect transactions that you request or authorize, we may
disclose your personal information as described above to
unaffiliated financial service providers and other companies
that perform administrative or other services on our behalf,
such as transfer agents, custodians and trustees, or that
assist us in the distribution of investor materials such as
trustees, banks, financial representatives and printers.
Page 27
- --------------------------------------------------------------------------------
Additional Information (Unaudited)(Continued)
- --------------------------------------------------------------------------------
First Trust Exchange-Traded Fund II
September 30, 2007
o We may release information we have about you if you direct us to do
so, if we are compelled by law to do so, or in other legally
limited circumstances (for example to protect your account from
fraud).
In addition, in order to alert you to our other financial products and services,
we may share your personal information with affiliates of the Fund. Please note,
however, that the California Financial Information Privacy Act contains an "opt
out" mechanism that California consumers may use to prevent us from sharing
nonpublic personal information with affiliates.
Confidentiality and Security
With regard to our internal security procedures, the Fund restricts access to
your nonpublic personal information to those individuals who need to know that
information to provide products or services to you. We maintain physical,
electronic and procedural safeguards to protect your nonpublic personal
information.
Policy Updates and Inquiries
As required by federal law, we will notify you of our privacy policy annually.
We reserve the right to modify this policy at any time; however, if we do change
it, we will tell you promptly.
For questions about our policy, or for additional copies of this notice, please
contact us at (800) 621-1675.
Page 28
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Board of Trustees and Officers (Unaudited)
- --------------------------------------------------------------------------------
First Trust Exchange-Traded Fund II
September 30, 2007
Each Fund's respective statement of additional information includes additional
information about the Trustees and is available without charge, upon request, by
calling (800) 988-5891.
- -----------------------------------------------------------------------------------------------------------------------------------
Interested Trustee
- -----------------------------------------------------------------------------------------------------------------------------------
NUMBER OF
PORTFOLIOS IN
TERM OF OFFICE THE FIRST TRUST OTHER
POSITION AND AND YEAR FIRST FUND COMPLEX TRUSTEESHIPS OR
NAME, ADDRESS OFFICES WITH ELECTED OR PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
AND DATE OF BIRTH TRUST APPOINTED DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
- -----------------------------------------------------------------------------------------------------------------------------------
James A. Bowen(1) President, o Indefinite term President, First Trust 57 Trustee of
1001 Warrenville Road Chairman of Advisors L.P. and First Wheaton College
Suite 300 the Board, o 2006 Trust Portfolios L.P.;
Lisle, IL 60532 Chief Chairman of the Board,
DOB: 9/55 Executive BondWave LLC (Software
Officer and Development Company/
Trustee Broker-Dealer) and
Stonebridge Advisors LLC
(Investment Advisor)
- -----------------------------------------------------------------------------------------------------------------------------------
Independent Trustees
- -----------------------------------------------------------------------------------------------------------------------------------
Richard E. Erickson Trustee o Indefinite term Physician; President, 57 NONE
c/o First Trust Advisors Wheaton Orthopedics;
L.P. o 2006 Co-Owner and Co-Director,
1001 Warrenville Road (January 1996 to May 2007),
Suite 300 Sports Med Center for
Lisle, IL 60532 Fitness; Limited Partner,
DOB: 4/51 Gundersen Real Estate
Partnership; Limited
Partner, Sportsmed LLC
Thomas R. Kadlec Trustee o Indefinite term Senior Vice President (May 57 NONE
c/o First Trust Advisors 2007 to Present), Vice
L.P. o 2006 President and Chief
1001 Warrenville Road Financial Officer (1990 to
Suite 300 May 2007), ADM Investor
Lisle, IL 60532 Services, Inc. (Futures
DOB: 11/57 Commission Merchant); Vice
President (May 2005 to
Present), ADM Derivatives,
Inc.; Registered
Representative (2000 to
present), Segerdahl &
Company, Inc., an NASD
member (Broker-Dealer)
Robert F. Keith Trustee o Indefinite term President (2003 to Present), 57 NONE
c/o First Trust Advisors Hibs Enterprises (Financial
L.P. o 2006 and Management Consulting);
1001 Warrenville Road President (2001 to 2003),
Suite 300 Aramark Service Master
Lisle, IL 60532 Management; President and
DOB: 11/58 Chief Operating Officer
(1998 to 2003), Service
Master Management Services
Niel B. Nielson Trustee o Indefinite term President (June 2002 to 57 Director of
c/o First Trust Advisors Present), Covenant College Covenant
L.P. o 2006 Transport Inc.
1001 Warrenville Road
Suite 300
Lisle, IL 60532
DOB: 3/54
- --------------------
1 Mr. Bowen is deemed an "interested person" of the Funds due to his position
as President of First Trust Advisors L.P., investment advisor of the Funds.
Page 29
- --------------------------------------------------------------------------------
Board of Trustees and Officers (Unaudited) (Continued)
- --------------------------------------------------------------------------------
FIRST TRUST EXCHANGE-TRADED FUND II
SEPTEMBER 30, 2007
- -----------------------------------------------------------------------------------------------------------------------------------
Officers
- -----------------------------------------------------------------------------------------------------------------------------------
POSITION(S) TERM OF OFFICE
NAME, ADDRESS, AND HELD WITH AND LENGTH OF PRINCIPAL OCCUPATION(S)
DATE OF BIRTH FUNDS TIME SERVED DURING PAST FIVE YEARS
- -----------------------------------------------------------------------------------------------------------------------------------
Mark R. Bradley Treasurer, Controller, o Indefinite term Chief Financial Officer, First Trust Advisors
1001 Warrenville Road Chief Financial Officer L.P. and First Trust Portfolios L.P.; Chief
Suite 300 and Chief Accounting o 2006 Financial Officer, BondWave LLC (Software
Lisle, IL 60532 Officer Development Company/Broker-Dealer) and
DOB: 11/57 Stonebridge Advisors LLC (Investment Advisor)
Kelley Christensen Vice President o Indefinite term Assistant Vice President, First Trust
1001 Warrenville Road Portfolios L.P. and First Trust Advisors L.P.
Suite 300 o 2006
Lisle, IL 60532
DOB: 9/70
James M. Dykas Assistant Treasurer o Indefinite term Senior Vice President (April 2007 to
1001 Warrenville Road Present), Vice President (January 2005 to
Suite 300 o 2006 April 2007), First Trust Advisors L.P. and
Lisle, IL 60532 First Trust Portfolios L.P.; Executive
DOB: 1/66 Director (December 2002 to January 2005),
Vice President (December 2000 to December
2002), Van Kampen Asset Management and Morgan
Stanley Investment Management
W. Scott Jardine Secretary and Chief o Indefinite term General Counsel, First Trust Advisors L.P.
1001 Warrenville Road Compliance Officer and First Trust Portfolios L.P.; Secretary,
Suite 300 o 2006 BondWave LLC (Software Development
Lisle, IL 60532 Company/Broker-Dealer) and Stonebridge
DOB: 5/60 Advisors LLC (Investment Advisor)
Daniel J. Lindquist Vice President o Indefinite term Senior Vice President (September 2005 to
1001 Warrenville Road Present), Vice President (April 2004 to
Suite 300 o 2006 September 2005), First Trust Advisors L.P.
Lisle, IL 60532 and First Trust Portfolios L.P.; Chief
DOB: 2/70 Operating Officer (January 2004 to April
2004), Mina Capital Management, LLC; Chief
Operating Officer (April 2000 to January
2004), Samaritan Asset Management Services,
Inc.
Kristi A. Maher Assistant Secretary o Indefinite term Deputy General Counsel (May 2007 to Present),
1001 Warrenville Road Assistant General Counsel (March 2004 to May
Suite 300 o 2006 2007), First Trust Advisors L.P. and First
Lisle, IL 60532 Trust Portfolios L.P.; Associate (1995-2004),
DOB: 12/66 Chapman and Cutler LLP
Roger Testin Vice President o Indefinite term Senior Vice President (November 2003 to
1001 Warrenville Road Present), Vice President (August 2001 to
Suite 300 o 2006 November 2003), First Trust Portfolios L.P.
Lisle, IL 60532 and First Trust Advisors L.P.; Analyst (1998
DOB: 6/66 to 2001), Dolan Capital Management
Stan Ueland Vice President o Indefinite term Vice President (August 2005 to Present),
1001 Warrenville Road First Trust Advisors L.P. and First Trust
Suite 300 o 2006 Portfolios L.P; Vice President (May 2004 to
Lisle, IL 60532 August 2005), BondWave LLC (Software
DOB: 11/70 Development Company/Broker-Dealer); Account
Executive (January 2003 to May 2004), Mina
Capital Management, LLC and Samaritan Asset
Management Services, Inc.; Sales Consultant
(January 1997 to January 2003), Oracle Corporation
Page 30
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Risk Considerations (Unaudited)
- --------------------------------------------------------------------------------
Risk Considerations
YOU SHOULD CONSIDER EACH FUND'S INVESTMENT OBJECTIVE, RISKS, AND CHARGES AND
EXPENSES CAREFULLY BEFORE INVESTING. YOU CAN DOWNLOAD EACH FUND'S PROSPECTUS AT
HTTP://WWW.FTPORTFOLIOS.COM OR CONTACT FIRST TRUST PORTFOLIOS L.P. AT
1-800-621-1675 TO REQUEST A PROSPECTUS, WHICH CONTAINS THIS AND OTHER
INFORMATION ABOUT THE PARTICULAR FUND. READ IT CAREFULLY BEFORE YOU INVEST.
FIRST TRUST PORTFOLIOS L.P. IS THE DISTRIBUTOR OF FIRST TRUST EXCHANGE-TRADED
FUND II.
Each Fund's shares will change in value, and you could lose money by investing
in a Fund. An investment in a Fund involves risks similar to those of investing
in any fund of equity securities traded on an exchange. Investors buying or
selling Fund shares on the secondary market may incur brokerage commissions. In
addition, investors who sell Fund shares may receive less than the shares' net
asset value. Unlike shares of open-end funds, investors are generally not able
to purchase ETF shares directly from a Fund and individual ETF shares are not
redeemable. However, specified large blocks of shares called creation units can
be purchased from, or redeemed to, the Fund.
You should anticipate that the value of each Fund's shares will decline, more or
less, in correlation with any decline in the value of that Fund's corresponding
index.
Each Fund's return may not match the return of its corresponding index for a
number of reasons. For example, the Funds incur operating expenses not
applicable to their corresponding indexes, and may incur costs in buying and
selling securities, especially when rebalancing the Fund's portfolio holdings to
reflect changes in the composition of its corresponding index. In addition, each
Fund's portfolio holdings may not exactly replicate the securities included in
its corresponding index or the ratios between the securities included in such
index.
Each Fund is exposed to additional market risk due to its policy of investing
principally in the securities included in its corresponding index. As a result
of this policy, securities held by each Fund will generally not be bought or
sold in response to market fluctuations and the securities may be issued by
companies concentrated in a particular industry. Therefore, the Funds will
generally not sell a stock because the stock's issuer is in financial trouble,
unless that stock is removed or is anticipated to be removed from a Fund's
index.
Each Fund relies on a license and related sublicense that permits it to use its
corresponding index and associated trade names and trademarks in connection with
the name and investment strategies of the Fund. Such license and related
sublicense may be terminated by the index provider and, as a result, a Fund may
lose its ability to use such intellectual property. In the event the license is
terminated or the index provider does not have rights to license such
intellectual property, it may have a significant effect on the operation of the
respective Fund.
The value of an individual security or particular type of security can be more
volatile than the market as a whole and can perform differently from the value
of the market as a whole.
Each Fund may be concentrated in stocks of companies in an individual industry
or sector if the Fund's corresponding index is concentrated in an individual
industry or sector. You should be aware that an investment in a portfolio that
is concentrated in an individual industry or sector involves additional risk,
including limited diversification.
Each Fund is classified as "non-diversified" under the Investment Company Act of
1940, as amended. As a result, each Fund is only limited as to the percentage of
its assets which may be invested in the securities of any one issuer by the
diversification requirements imposed by the Internal Revenue Code of 1986, as
amended. Because the Funds may invest a relatively high percentage of their
assets in a limited number of issuers, the Funds may be more susceptible to any
single economic, political or regulatory occurrence and to the financial
conditions of the issuers in which they invest.
Each Fund invests in securities of European companies and, therefore, is subject
to certain risks associated specifically with Europe. A significant number of
countries in Europe are member states in the European Union (the "EU"), and the
member states no longer control their own monetary policies by directing
independent interest rates for their currencies. Additionally, European
corporations and other entities with significant markets or operations in Europe
adapting to a single transnational currency, the Euro, may have a material
impact on revenues, expenses or income from operations; increase competition due
to the increased price transparency of EU markets; affect issuers' currency
exchange rate risk and derivatives exposure; disrupt current contracts; cause
issuers to increase spending on information technology updates required for the
conversion; and result in potential adverse tax consequences. Furthermore, you
should be aware that investments in such companies are subject to additional
risks associated with possible adverse economic, political and social
occurrences in Europe.
Page 31
- --------------------------------------------------------------------------------
Risk Considerations (Unaudited) (Continued)
- --------------------------------------------------------------------------------
Furthermore, the First Trust DJ STOXX(R) Select Dividend 30 Index Fund has a
significant portion of its investment in securities issued by companies
headquartered in the United Kingdom. The Fund may therefore be more susceptible
to adverse economic, political or social occurrences in the United Kingdom and
may subject the Fund to greater risk than funds that are not significantly
invested in issuers headquartered in the United Kingdom.
The First Trust FTSE EPRA/NAREIT Global Real Estate Index Fund invests in
securities of Asian companies and, therefore, is subject to certain risks
associated with possible adverse economic, political and social occurrences in
Asia.
Each Fund's NAV is determined on the basis of the U.S. dollar. You may lose
money if the local currency of a foreign market depreciates against the U.S.
dollar, even if the local currency value of the Fund's holdings goes up.
Each Fund may hold securities of certain non-U.S. and non-Canadian companies in
the form of Depositary Receipts. Depositary Receipts may not necessarily be
denominated in the same currency as the underlying securities into which they
may be converted. The issuers of unsponsored Depositary Receipts are not
obligated to disclose material information in the United States; therefore,
there may be less information available regarding such issuers and there may not
be a correlation between such information and the market value of the Depositary
Receipts.
Each Fund invests in securities of non-U.S. issuers. Investing in securities of
non-U.S. issuers, which are generally denominated in non-U.S. currencies, may
involve certain risks not typically associated with investing in securities of
U.S. issuers such as there being less publicly available information about
non-U.S. issuers or markets and non-U.S. markets being smaller, less liquid and
more volatile than the U.S. market. These risks may be more pronounced to the
extent that each Fund invests a significant amount of its assets in companies
located in one region.
Each Fund may invest in small capitalization and mid capitalization companies.
Such companies may be more vulnerable to adverse general market or economic
developments, and their securities may be less liquid and may experience greater
price volatility than larger, more established companies.
The First Trust FTSE EPRA/NAREIT Global Real Estate Index Fund invests in
companies that are considered to be "passive foreign investment companies" and
could be subject to U.S. federal income tax and additional interest charges on
gains and certain distributions with respect to those equity interests.
The First Trust FTSE EPRA/NAREIT Global Real Estate Index Fund invests in
companies in the real estate industry, including real estate investment trusts
("REITS") and is subject to the risks associated with investing in real estate
such as possible declines in the value of real estate, adverse general and local
economic conditions and changes in interest rates and environmental problems.
Additionally, the First Trust FTSE EPRA/NAREIT Global Real Estate Index Fund's
investment in REITs involves certain other risks related to their structure and
focus such as dependency upon management skills, limited diversification and the
risks of locating and managing financing for projects.
Furthermore, for the First Trust FTSE EPRA/NAREIT Global Real Estate Index Fund,
increases in interest rates typically lower the present value of a REIT's future
earnings stream, and may make financing property purchases and improvements more
costly. The value of the Fund will generally decline when investors anticipate
or experience rising interest rates.
The First Trust FTSE EPRA/NAREIT Global Real Estate Index Fund may invest in
real estate companies that may be affected by the downturn in the subprime
mortgage lending market in the United States. The downturn in the subprime
mortgage lending market may have far-reaching consequences into many aspects and
geographic regions of the real estate business, and consequently, the value of
the Fund may decline in response to such developments.
NOT FDIC INSURED NOT BANK GUARANTEED MAY LOSE VALUE
Page 32
- --------------------------------------------------------------------------------
[LOGO OMMITTED] FIRST TRUST
ADVISORS L.P.
FIRST TRUST EXCHANGE-TRADED FUND II
- --------------------------------------------------------------------------------
INVESTMENT ADVISOR
First Trust Advisors L.P.
1001 Warrenville Road
Lisle, IL 60532
ADMINISTRATOR, CUSTODIAN,
FUND ACCOUNTANT &
TRANSFER AGENT
The Bank of New York
101 Barclay Street
New York, NY 10286
BOARD ADMINISTRATOR
PFPC, Inc.
301 Bellevue Parkway
Wilmington, DE 19809
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
111 S. Wacker Drive
Chicago, IL 60606
LEGAL COUNSEL
Chapman and Cutler LLP
111 W. Monroe Street
Chicago, IL 60603
Back Cover
Item 2. Code of Ethics.
(a) The registrant, as of the end of the period covered by this
report, has adopted a code of ethics that applies to the
registrant's principal executive officer, principal financial
officer, principal accounting officer or controller, or persons
performing similar functions, regardless of whether these
individuals are employed by the registrant or a third party.
(c) There have been no amendments, during the period covered by
this report, to a provision of the code of ethics that applies
to the registrant's principal executive officer, principal
financial officer, principal accounting officer or controller,
or persons performing similar functions, regardless of whether
these individuals are employed by the registrant or a third
party, and that relates to any element of the code of ethics
definition enumerated in paragraph (b) of this Item's
instructions.
(d) The registrant has not, during the period covered by this
report, granted any waivers, including an implicit waiver, from
a provision of the code of ethics that applies to the
registrant's principal executive officer, principal financial
officer, principal accounting officer or controller, or persons
performing similar functions, regardless of whether these
individuals are employed by the registrant or a third party,
that relates to one or more of the items set forth in paragraph
(b) of this item's instructions.
Item 3. Audit Committee Financial Expert.
As of the end of the period covered by the report, the registrant's Board
of Trustees has determined that Thomas R. Kadlec and Robert F. Keith are
qualified to serve as an audit committee financial experts serving on the
registrant's audit committee and that each is "independent," as defined
by Item 3 of Form N-CSR.
Item 4. Principal Accountant Fees and Services.
(a) Audit Fees (Registrant) -- The aggregate fees billed for
professional services rendered by the principal accountant for the audit
of the registrant's annual financial statements or services that are
normally provided by the accountant in connection with statutory and
regulatory filings or engagements was $6,500 for the registrant, from the
inception of the registrant on August 27, 2007 through September 30,
2007.
(b) Audit-Related Fees (Registrant) -- The aggregate fees billed
for assurance and related services by the principal accountant that are
reasonably related to the performance of the audit of the registrant's
financial statements and are not reported under paragraph (a) of this
Item were $0 from the inception of the registrant on August 27, 2007
through September 30, 2007.
Audit-Related Fees (Investment Adviser) -- The aggregate
fees billed for assurance and related services by the principal
accountant that are reasonably related to the performance of the audit of
the registrant's financial statements and are not reported under
paragraph (a) of this Item were $0 from the inception of the registrant
on August 27, 2007 through September 30, 2007.
(c) Tax Fees (Registrant) -- The aggregate fees billed for
professional services rendered by the principal accountant for tax
compliance, tax advice, and tax planning to the registrant were $0 from
the inception of the registrant on August 27, 2007 through September 30,
2007.
Tax Fees (Investment Adviser) -- The aggregate fees billed
for professional services rendered by the principal accountant for tax
compliance, tax advice, and tax planning to the registrant's adviser were
$7,000 from the inception of the registrant on August 27, 2007 through
September 30, 2007.
(d) All Other Fees (Registrant) -- The aggregate fees billed for
products and services provided by the principal accountant to the
registrant's investment adviser, other than the services reported in
paragraphs (a) through (c) of this Item were $0 from inception of the
registrant on August 27, 2007 through September 30, 2007.
All Other Fees (Investment Adviser) -- The aggregate fees
billed for products and services provided by the principal accountant to
the registrant's investment adviser, other than the services reported in
paragraphs (a) through (c) of this Item were $0 from inception of the
registrant on August 27, 2007 through September 30, 2007.
(e)(1) Disclose the audit committee's pre-approval policies and
procedures described in paragraph (c)(7) of Rule 2-01 of
Regulation S-X.
Pursuant to its charter and its Audit and Non-Audit Services
Pre-Approval Policy, the Audit Committee (the "Committee") is responsible
for the pre-approval of all audit services and permitted non-audit
services (including the fees and terms thereof) to be performed for the
registrant by its independent auditors. The Chairman of the Committee is
authorized to give such pre-approvals on behalf of the Committee up to
$25,000 and report any such pre-approval to the full Committee.
The Committee is also responsible for the pre-approval of the
independent auditor's engagements for non-audit services with the
registrant's adviser (not including a sub-adviser whose role is primarily
portfolio management and is sub-contracted or overseen by another
investment adviser) and any entity controlling, controlled by or under
common control with the investment adviser that provides ongoing services
to the registrant, if the engagement relates directly to the operations
and financial reporting of the registrant, subject to the de minimis
exceptions for non-audit services described in Rule 2-01 of Regulation
S-X. If the independent auditor has provided non-audit services to the
registrant's adviser (other than any sub-adviser whose role is primarily
portfolio management and is sub-contracted with or overseen by another
investment adviser) and any entity controlling, controlled by or under
common control with the investment adviser that provides ongoing services
to the registrant that were not pre-approved pursuant to its policies,
the Committee will consider whether the provision of such non-audit
services is compatible with the auditor's independence.
(e)(2) The percentage of services described in each of paragraphs (b)
through (d) for the registrant and the registrant's investment
adviser of this Item that were approved by the audit committee
pursuant to the pre-approval exceptions included in paragraph
(c)(7)(i)(c) or paragraph (c)(7)(ii) of Rule 2-01 of Regulation
S-X are as follows:
(b) 0%
(c) 0%
(d) 0%
(f) The percentage of hours expended on the principal accountant's
engagement to audit the registrant's financial statements for
the most recent fiscal year that were attributed to work
performed by persons other than the principal accountant's
full-time, permanent employees was less than fifty percent.
(g) The aggregate non-audit fees billed by the registrant's
accountant for services rendered to the registrant, and rendered
to the registrant's investment adviser (not including any
sub-adviser whose role is primarily portfolio management and is
subcontracted with or overseen by another investment adviser),
and any entity controlling, controlled by, or under common
control with the adviser that provides ongoing services to the
registrant were $0 for the registrant and $13,800 for the
registrant's investment adviser and any entity controlling,
controlled by or under common control with the adviser that
provides ongoing services to the registrant.
(h) The registrant's audit committee of its Board of Trustees has
determined that the provision of non-audit services that were
rendered to the registrant's investment adviser (not including
any sub-adviser whose role is primarily portfolio management and
is subcontracted with or overseen by another investment
adviser), and any entity controlling, controlled by, or under
common control with the investment adviser that provides ongoing
services to the registrant that were not pre-approved pursuant
to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X is
compatible with maintaining the principal accountant's
independence.
Items 5. Audit Committee of Listed Registrants.
The registrant has a separately designated standing audit committee
established in accordance with Section 3(a)(58)(A) of the Securities
Exchange Act of 1934. The audit committee of the registrant is comprised
of: Richard E. Erickson, Thomas R. Kadlec, Robert F. Keith and Niel B.
Nielson.
Item 6. Schedule of Investments.
Schedules of Investments in securities of unaffiliated issuers as of the
close of the reporting period are included as part of the report to
shareholders filed under Item 1 of this form.
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.
At the Registrant's organizational meeting the registrant's Board of
Trustees adopted a Nominating and Governance Committee Charter which
includes procedures by which shareholders may recommend nominees to the
Registrant's board of trustees as described below:
Any proposal to elect any person nominated by shareholders for election
as trustee may only be brought before an annual meeting of the Registrant
if timely written notice (the "Shareholder Notice") is provided to the
secretary of the Registrant. Unless a greater or lesser period is
required under applicable law, to be timely, the Shareholder Notice must
be delivered to or mailed and received at Registrant's address, 1001
Warrenville Road, Suite 300, Lisle, Illinois 60532, Attn: W. Scott
Jardine, not less than forty-five (45) days nor more than sixty (60) days
prior to the first anniversary date of the date of the Registrant's proxy
statement released to shareholders for the prior year's annual meeting;
provided, however, if and only if the annual meeting is not scheduled to
be held within a period that commences thirty (30) days before the first
anniversary date of the annual meeting for the preceding year and ends
thirty (30) days after such anniversary date (an annual meeting date
outside such period being referred to herein as an "Other Annual Meeting
Date"), such Shareholder Notice must be given in the manner provided
herein by the later of the close of business on (i) the date forty-five
(45) days prior to such Other Annual Meeting Date or (ii) the tenth
(10th) business day following the date such Other Annual Meeting Date is
first publicly announced or disclosed.
Any shareholder submitting a nomination of any person or persons (as the
case may be) for election as a trustee or trustees of the Registrant
shall deliver, as part of such Shareholder Notice: (i) a statement in
writing setting forth (A) the name, age, date of birth, business address,
residence address and nationality of the person or persons to be
nominated; (B) the class or series and number of all shares of the
Registrant owned of record or beneficially by each such person or
persons, as reported to such shareholder by such nominee(s); (C) any
other information regarding each such person required by paragraphs (a),
(d), (e) and (f) of Item 401 of Regulation S-K or paragraph (b) of Item
22 of Rule 14a-101 (Schedule 14A) under the Securities Exchange Act of
1934, as amended (the "Exchange Act") (or any successor provision
thereto); (D) any other information regarding the person or persons to be
nominated that would be required to be disclosed in a proxy statement or
other filings required to be made in connection with solicitation of
proxies for election of trustees or directors pursuant to Section 14 of
the Exchange Act and the rules and regulations promulgated thereunder;
and (E) whether such shareholder believes any nominee is or will be an
"interested person" of the Registrant (as defined in the Investment
Company Act of 1940) and, if not an "interested person," information
regarding each nominee that will be sufficient for the Registrant to make
such determination; and (ii) the written and signed consent of any person
to be nominated to be named as a nominee and to serve as a trustee if
elected. In addition, the trustees may require any proposed nominee to
furnish such other information as they may reasonably require or deem
necessary to determine the eligibility of such proposed nominee to serve
as a trustee.
Without limiting the foregoing, any shareholder who gives a Shareholder
Notice of any matter proposed to be brought before a shareholder meeting
(whether or not involving nominees for trustees) shall deliver, as part
of such Shareholder Notice: (i) the description of and text of the
proposal to be presented; (ii) a brief written statement of the reasons
why such shareholder favors the proposal; (iii) such shareholder's name
and address as they appear on the Registrant's books; (iv) any other
information relating to the shareholder that would be required to be
disclosed in a proxy statement or other filings required to be made in
connection with the solicitation of proxies with respect to the matter(s)
proposed pursuant to Section 14 of the Exchange Act; (v) the class or
series and number of all shares of the Registrant owned beneficially and
of record by such shareholder; (vi) any material interest of such
shareholder in the matter proposed (other than as a shareholder); (vii) a
representation that the shareholder intends to appear in person or by
proxy at the shareholder meeting to act on the matter(s) proposed; (viii)
if the proposal involves nominee(s) for trustees, a description of all
arrangements or understandings between the shareholder and each proposed
nominee and any other person or persons (including their names) pursuant
to which the nomination(s) are to be made by the shareholder; and (ix) in
the case of a shareholder (a "Beneficial Owner") that holds shares
entitled to vote at the meeting through a nominee or "street name" holder
of record, evidence establishing such Beneficial Owner's indirect
ownership of, and entitlement to vote, shares at the meeting of
shareholders. As used herein, shares "beneficially owned" shall mean all
shares which such person is deemed to beneficially own pursuant to Rules
13d-3 and 13d-5 under the Exchange Act.
A copy of the Nominating and Governance Committee Charter is available on
the Registrant's website at www.ftportfolios.com.
Item 11. Controls and Procedures.
(a) The registrant's principal executive and principal financial
officers, or persons performing similar functions, have concluded
that the registrant's disclosure controls and procedures (as
defined in Rule 30a-3(c) under the Investment Company Act of 1940,
as amended (the "1940 Act") (17 CFR 270.30a-3 (c))) are effective,
as of a date within 90 days of the filing date of the report that
includes the disclosure required by this paragraph, based on their
evaluation of these controls and procedures required by Rule
30a-3(b) under the 1940 Act (17 CFR 270.30a-3(b)) and Rules
13a-15(b) or 15d-15(b) under the Securities Exchange Act of 1934,
as amended (17 CFR 240.13a-15(b) or 240.15d-15 (b)).
(b) There were no changes in the registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the 1940 Act
(17 CFR 270.30a-3(d)) that occurred during the registrant's second
fiscal quarter that have materially affected, or are reasonably
likely to materially affect, the registrant's internal control over
financial reporting.
Item 12. Exhibits.
(a)(1) Code of ethics, or any amendment thereto, that is the
subject of disclosure required by Item 2 is aattached hereto.
(a)(2) Certifications pursuant to Rule 30a-2(a) under the 1940 Act
and Section 302 of the Sarbanes-Oxley Act of 2002 are attached
hereto.
(b) Certifications pursuant to Rule 30a-2(b) under the 1940 Act and
Section 906 of the Sarbanes-Oxley Act of 2002 are attached hereto.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934 and the Investment Company Act of 1940, the registrant has duly
caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
(Registrant) First Trust Exchange-Traded Fund II
By: /s/ James A. Bowen
------------------------------------
Name: James A. Bowen
Title: Chairman of the Board, President and Chief Executive Officer
Date: November 27, 2007
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Pursuant to the requirements of the Securities Exchange Act of
1934 and the Investment Company Act of 1940, this report has been signed
by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
By: /s/ James A. Bowen
------------------------------------
Name: James A. Bowen
Title: Chairman of the Board, President and Chief Executive Officer
Date: November 27, 2007
-----------------------------