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
---------
First Trust Exchange-Traded Fund II
---------------------------------------------------------------
(Exact name of registrant as specified in charter)
120 East Liberty Drive
Wheaton, Illinois 60187
---------------------------------------------------------------
(Address of principal executive offices) (Zip code)
W. Scott Jardine, Esq.
First Trust Portfolios L.P.
120 East Liberty Drive
Wheaton, Illinois 60187
---------------------------------------------------------------
(Name and address of agent for service)
Registrant's telephone number, including area code: (630) 765-8000
--------------
Date of fiscal year end: September 30
------------
Date of reporting period: September 30, 2008
------------------
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
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
First Trust Dow Jones Global Select Dividend Index Fund
First Trust ISE Global Wind Energy Index Fund
- ----------------------
Annual Report
September 30, 2008
- ----------------------
Front Cover
- -------------------------------------------------------------------------------
Table of Contents
- -------------------------------------------------------------------------------
First Trust Exchange-Traded Fund II
September 30, 2008
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
First Trust Dow Jones Global Select Dividend Index Fund 8
First Trust ISE Global Wind Energy Index Fund 10
Notes to Fund Performance Overview 12
Understanding Your Fund Expenses 13
Portfolio of Investments
First Trust DJ STOXX(R) Select Dividend 30 Index Fund 15
First Trust FTSE EPRA/NAREIT Global Real Estate Index Fund 17
First Trust Dow Jones Global Select Dividend Index Fund 21
First Trust ISE Global Wind Energy Index Fund 23
Statements of Assets and Liabilities 26
Statements of Operations 28
Statements of Changes in Net Assets 30
Financial Highlights 32
Notes to Financial Statements 34
Report of Independent Registered Public Accounting Firm 40
Additional Information 41
Board of Trustees and Officers 44
Risk Considerations 46
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Caution Regarding Forward-Looking Statements
This report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and the Securities
Exchange Act of 1934, as amended. Forward-looking statements include statements
regarding the goals, beliefs, plans or current expectations of First Trust
Advisors L.P. ("First Trust" or the "Advisor") and its respective
representatives, taking into account the information currently available to
them. Forward-looking statements include all statements that do not relate
solely to current or historical fact. For example, forward-looking statements
include the use of words such as "anticipate," "estimate," "intend," "expect,"
"believe," "plan," "may," "should," "would" or other words that convey
uncertainty of future events or outcomes.
Forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
any series of First Trust Exchange-Traded Fund 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 series of the Trust described in this report
(individually, each such series is referred to as a "Fund" and collectively, the
"Funds") will achieve its investment objective. Each Fund is subject to market
risk, which is the possibility that the market values of securities owned by the
Fund will decline and that the value of the Fund shares may therefore be less
than what you paid for them. Accordingly, you can lose money investing in a
Fund. See "Risk Considerations" at the end of this report for a discussion of
other risks of investing in the Funds.
Performance data quoted represents past performance, which is no guarantee of
future results, and current performance may be lower or higher than the figures
shown. For the most recent month-end performance figures, please visit
http://www.ftportfolios.com or speak with your financial advisor. Investment
returns, net asset value and share price will fluctuate and Fund shares, when
sold, may be worth more or less than their original cost.
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 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 personnel of the
Advisor are just that: informed opinions. They should not be considered to be
promises or advice. The opinions, like the statistics, cover the period through
the date on the cover of this report. The risks of investing in each Fund are
spelled out in its prospectus, statement of additional information, this report
and other regulatory filings.
Page 1
- -------------------------------------------------------------------------------
Shareholder Letter
- -------------------------------------------------------------------------------
First Trust Exchange-Traded Fund II
Annual Report
September 30, 2008
Dear Shareholders:
The majority of 2008 has been challenging for the financial markets and for most
investors. Yet, First Trust Advisors L.P. ("First Trust") believes that,
regardless of the market, in order to be successful in reaching their financial
goals, investors should be invested for the long term. First Trust also believes
that investors should seek professional help from a financial advisor who has
been through many types of markets, knows the range of investments available,
and is committed to bringing you investments suitable to your particular
situation.
Our goal at First Trust has always been to provide a wide range of investment
products, including our family of exchange-traded funds, to help financial
advisors give you the opportunity to meet your financial objectives. We have
continued to expand our product line to ensure that you have many choices to fit
your investment needs.
The report you hold contains detailed information about the Funds that comprise
First Trust Exchange-Traded Fund II for the 12-month period ended September 30,
2008. It contains each Fund's performance review and financial statements for
the period. I encourage you to read this document and discuss it with your
financial advisor.
First Trust has been through many types of markets and remains committed to
bringing you quality investment solutions regardless of the inevitable ups and
downs experienced in the market. We offer a variety of products that may fit
many financial plans to help those investors seeking long-term investment
success. As well, we are committed to giving you up-to-date information about
your investments so you and your financial advisor are always current on your
portfolio.
We continue to value our relationship with you, and we thank you for 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
Page 2
- -------------------------------------------------------------------------------
Market Overview
- -------------------------------------------------------------------------------
First Trust Exchange-Traded Fund II
Annual Report
September 30, 2008
[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.
State of the Global Economy
For the better part of the last 12 months, the combination of continued weakness
in the U.S. residential housing market (which migrated overseas), higher energy
and commodity prices, falling dollar, rising inflation and substantial losses
taken by financial institutions on subprime-related mortgage debt pushed stock
indices down significantly both domestically and abroad. As most are aware by
now, the billions of dollars of losses sustained by a number of major banking
institutions, mortgage lenders, securities firms and insurance companies,
primarily operating in the U.S. and Europe, required an orchestrated stimulus
effort (rate cuts and capital infusion) from central bankers and governments
throughout the industrialized world. Without such assistance, the credit markets
would likely have remained frozen for an extended period making it very
difficult for businesses and consumers to gain access to capital. The credit
crunch was severe enough to push the U.S. economy into recession as well as
temper global growth.
The International Monetary Fund ("IMF") estimates that the global growth rate
for 2008 and 2009 will be 3.9% and 3.0%, respectively, down from 5.0% in 2007.
Perhaps the IMF's most critical forecast calls for housing prices in the U.S. to
stabilize at some juncture in 2009. The precipitous drop in residential real
estate values in the U.S. over the past 12-18 months contributed greatly to the
collapse of subprime-based collateralized debt obligations ("CDOs") and related
securities. The declining property values were critical because the property
served as collateral. As property values eroded so did the value of the
collateral, which, in turn, drove the value of CDOs down - by over 70% in some
instances. Achieving stability in the residential real estate and credit markets
is paramount, in our opinion. The wealth effect can play an important role in
driving consumer sentiment, particularly in the U.S. where consumer spending
accounts for roughly two-thirds of economic activity. A homeowner who sees the
value of their home trending lower may consume less because they perceive they
possess less wealth.
Global Markets
When the U.S. sneezes the rest of the world catches a cold. Despite the
tremendous progress achieved by emerging and developed markets over the past
10-15 years it is quite clear that the U.S. still has a strong influence on
their well-being. The global growth story was largely intact until September
2008, when the Federal Reserve Bank ("Fed") changed its monetary policy. It cut
rates aggressively in an effort to counterbalance the ripple effect from the
weakness in the housing market. The Fed lowered the federal funds rate a total
of 3.25percentage points over a short span. The move, however, was correctly
viewed by the global markets as inflationary. Inflation rates rose sharply
around the globe as commodity prices surged. Inflation doubled in hot growth
markets such as China and India. While the U.S. was cutting interest rates many
foreign central banks were forced to either raise lending rates or maintain
current rate levels, as was the case in Europe, to combat rising costs. The
price of a barrel of oil spiked to nearly $150 as the value of the U.S.dollar
continued to erode. Global real estate markets, which had been more resilient
than the U.S. housing and commercial real estate markets, began regressing. Most
equities markets around the globe found themselves in or near bear market
territory by the end of September 2008. About the only safe haven for investors
were securities "backed by the full faith and credit of the U.S. government."
Page 3
- -------------------------------------------------------------------------------
Fund Performance Overview
- -------------------------------------------------------------------------------
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 NYSE Arca, Inc. under the ticker symbol "FDD." The Fund will
normally invest at least 90% of its 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 STOXX Index. The
Fund's shares began trading on August 30, 2007.
The STOXX Index consists of 30 high dividend-yielding 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 covers 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 as of September 30, 2008
- -------------------------------------------------------------------------------------------------------------
Average Annual Cumulative
Total Returns Total Returns
1 Year Ended Inception (08/27/07) Inception (08/27/07)
09/30/08 to 09/30/08 to 09/30/08
FUND PERFORMANCE
NAV -46.12% -41.53% -44.38%
Market Price -45.94% -41.07% -43.91%
INDEX PERFORMANCE
Dow Jones STOXX(R) Select Dividend 30 Index -46.24% -41.67% -44.61%
Dow Jones STOXX(R) 600 Index -30.97% -24.65% -26.67%
- -------------------------------------------------------------------------------------------------------------
(See Notes to Fund Performance Overview on page 12.)
Performance Review
All seven sectors represented in the Fund's portfolio posted negative returns
for the year ended September 30, 2008. Utilities was the best-performing sector,
followed by telecommunication services. The financials sector was the biggest
detractor from the Fund's performance. A large weighting in financials (41.8%
average weight), combined with poor performance from the sector, resulted in
negative contribution to the Fund. Consumer discretionary stocks posted the
worst returns in the portfolio.
Switzerland (6.7% average weight) was the only country to provide a positive
contribution to return for the year ended September 30, 2008. The United Kingdom
("UK") was the biggest drag on the Fund's performance. In addition to having the
largest weighting in the portfolio (40.4% average weight), the UK holdings were
among the worst performers for the period. Ireland (7.6% average weight) was the
worst-performing country for the Fund.
- -------------------------------------------------------------------------------
Top Five and Bottom Five Performing Stocks
- -------------------------------------------------------------------------------
(by contribution to return over the 12 months ended September 30, 2008)
TOP-PERFORMING STOCKS BOTTOM-PERFORMING STOCKS
Ciba Specialty Chemicals AG Cattles PLC
Amlin PLC Taylor Wimpey PLC
Provident Financial PLC DSG International PLC
Royal Bank of Scotland Group Trinity Mirror PLC
Zurich Financial Services AG Alliance & Leicester PLC
________________________
"STOXX," "Dow Jones STOXX(R) 600 Index" 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
- -------------------------------------------------------------------------------
Fund Performance Overview (Continued)
- -------------------------------------------------------------------------------
FDD - First Trust DJ STOXX(R)Select Dividend 30 Index Fund (Continued)
- -------------------------------------------------------------------------------
Portfolio Sector Allocation as of September 30, 2008
- -------------------------------------------------------------------------------
% OF TOTAL
SECTOR LONG-TERM INVESTMENTS
Financials 45.2%
Consumer Discretionary 12.7
Industrials 10.3
Utilities 7.1
Materials 5.6
Energy 2.8
Telecommunication Services 16.3
------
Total 100.0%
======
- -------------------------------------------------------------------------------
Top Ten Portfolio Holdings as of September 30, 2008
- -------------------------------------------------------------------------------
% OF TOTAL
SECURITY LONG-TERM INVESTMENTS
DSG International PLC 9.2%
Provident Financial PLC 6.5
Tomkins PLC 6.3
Brit Insurance Holdings PLC 5.8
Amlin PLC 5.1
Ciba Specialty Chemicals AG 4.8
United Utilities PLC 4.4
Alliance & Leicester PLC 4.1
Deutsche Telekom AG 3.7
Belgacom SA 3.7
------
Total 53.6%
======
GROWTH OF A $10,000 INITIAL INVESTMENT
AUGUST 27, 2007 - SEPTEMBER 30, 2008
[GRAPHIC OMITTED]
EDGARIZATION OF DATA POINTS
FUND/INDEX 8/27/07 9/30/07 9/30/08
- ---------- ------- ------- -------
First Trust DJ STOXX Select Dividend 30 Index Fund $10,000 $10,323 $ 5,562
Dow Jones STOXX Select Dividend 30 Index 10,000 10,304 5,539
Dow Jones STOXX 600 Index 10,000 10,622 7,332
Performance figures assume reinvest ment 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 through September 30, 2008
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, 2008.
- -----------------------------------------------------------------------------------------------------------------------------------
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
10/1/07 - 9/30/08 38 55 74 30
- -----------------------------------------------------------------------------------------------------------------------------------
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
10/1/07 - 9/30/08 25 12 10 9
Page 5
- -------------------------------------------------------------------------------
Fund Performance Overview (Continued)
- -------------------------------------------------------------------------------
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 NYSE Arca, Inc. under the ticker symbol "FFR." The Fund will
normally invest at least 90% of its 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's
shares 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. 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.
- -------------------------------------------------------------------------------------------------------------
Performance as of September 30, 2008
- -------------------------------------------------------------------------------------------------------------
Average Annual Cumulative
Total Returns Total Returns
1 Year Ended Inception (08/27/07) Inception (08/27/07)
09/30/08 to 09/30/08 to 09/30/08
FUND PERFORMANCE
NAV -30.35% -23.68% -25.57%
Market Price -31.50% -24.52% -26.48%
INDEX PERFORMANCE
EPRA/NAREITGlobal Index -30.61% -23.84% -25.80%
S&P/Citigroup Global REIT Index -24.54% -18.50% -20.80%
- -------------------------------------------------------------------------------------------------------------
(See Notes to Fund Performance Overview on page 12.)
Performance Review
Only three of the 10 REIT sub-industries represented in the Fund's portfolio
provided a positive contribution to return for the year ended September 30,
2008. The health care and self storage sub-industries were the best performers
over the period (measured by contribution to return). The specialty sub-industry
was the only other sub-industry to post a positive contribution to the Fund's
performance. The diversified sub-industry, with a 38.1% average weight in the
portfolio, was the biggest drag on the Fund's performance. The retail and office
sub-industries (22.5% and 13.5% average weights, respectively) also hurt the
Fund's returns.
Switzerland was the only country to provide a positive contribution over the
period. Hong Kong had an average weight of 12.3% in the portfolio over the
period and posted the largest negative contribution. Australia (11.1% average
weight) and Japan (12.0% average weight) were the second and third worst
performers, respectively, over the period. Securities from United States, United
Kingdom, Singapore and China all posted negative contributions to returns.
- -------------------------------------------------------------------------------
Top Five and Bottom Five Performing Stocks
- -------------------------------------------------------------------------------
(by contribution to return over the 12 months ended September 30, 2008)
TOP-PERFORMING STOCKS BOTTOM-PERFORMING STOCKS
Public Storage Sun Hung Kai Properties Ltd.
HCP, Inc. General Growth Properties, Inc.
Equity Residential Westfield Group
Ventas, Inc. Mitsubishi Estate Co., Ltd.
Simon Property Group, Inc. Goodman Group
________________________
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 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
- -------------------------------------------------------------------------------
Fund Performance Overview (Continued)
- -------------------------------------------------------------------------------
FFR - First Trust FTSE EPRA/NAREIT Global Real Estate Index Fund (Continued)
- -------------------------------------------------------------------------------
Portfolio Sector Allocation as of September 30, 2008
- -------------------------------------------------------------------------------
% OF TOTAL
SECTOR LONG-TERM INVESTMENTS
Financials 99.2%
Industrials 0.5
Consumer Discretionary 0.2
Health Care 0.1
------
Total 100.0%
======
- -------------------------------------------------------------------------------
Top Ten Portfolio Holdings as of September 30, 2008
- -------------------------------------------------------------------------------
% OF TOTAL
SECURITY LONG-TERM INVESTMENTS
Westfield Group 4.3%
Simon Property Group, Inc. 3.6
Mitsubishi Estate Co., Ltd. 3.3
Sun Hung Kai Properties Ltd. 3.2
Mitsui Fudosan Co., Ltd. 2.7
Unibail-Rodamco S.A. 2.7
Vornado Realty Trust 2.3
Public Storage 2.1
Equity Residential 2.0
Boston Properties, Inc. 1.8
------
Total 28.0%
======
GROWTH OF A $10,000 INITIAL INVESTMENT
AUGUST 27, 2007 - SEPTEMBER 30, 2008
[GRAPHIC OMITTED]
EDGARIZATION OF DATA POINTS
FUND/INDEX 8/27/07 9/30/07 9/30/08
- ---------- ------- ------- -------
First Trust FTSE EPRA/NAREIT Global Real Estate Index Fund $10,000 $10,686 $ 7,443
EPRA/NAREIT Global Real Estate Index $10,000 $10,693 $ 7,420
S&P Global REIT Index $10,000 $10,590 $ 7,991
Performance figures assume reinvest ment 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 through September 30, 2008
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, 2008.
- -----------------------------------------------------------------------------------------------------------------------------------
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
10/1/07 - 9/30/08 58 63 48 11
- -----------------------------------------------------------------------------------------------------------------------------------
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
10/1/07 - 9/30/08 35 21 12 5
Page 7
- -------------------------------------------------------------------------------
Fund Performance Overview (Continued)
- -------------------------------------------------------------------------------
FGD - First Trust Dow Jones Global Select Dividend Index Fund
First Trust Dow Jones Global Select Dividend 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 Global Select
Dividend Index(SM) (the "Select Dividend 30 Index"). The shares of the Fund are
listed and trade on the NYSE Arca, Inc. under the ticker symbol "FGD." The Fund
will normally invest at least 90% of its assets in common stocks that comprise
the Select Dividend 30 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 Select Dividend
30 Index. The Fund's shares began trading on November 27, 2007.
The Select Dividend 30 Index is an indicated annual dividend yield weighted
index of 100 stocks selected from the developed-market portion of the Dow Jones
World Developed Index(SM). Indicated annual dividend yield is a stock's
unadjusted indicated annual dividend (not including any special dividends)
divided by its unadjusted price.
- --------------------------------------------------------------------------------
Performance as of September 30, 2008
- --------------------------------------------------------------------------------
Cumulative
Total Returns
Inception (11/21/07)
to 09/30/08
FUND PERFORMANCE
NAV -29.72%
Market Price -30.82%
INDEX PERFORMANCE
Dow Jones Global Select Dividend Index(SM) -30.75%
Dow Jones World Developed Markets Index(SM) -21.84%
- --------------------------------------------------------------------------------
(See Notes to Fund Performance Overview on page 12.)
Performance Review
Although health care (0.1% average weight) was the best-performing sector for
the period ended September 30, 2008, due to its small weighting it had limited
contribution to return over the period. Additionally, at September 30, 2008, the
Fund held no securities within the health care sector. Consumer staples was the
only other sector to post a positive contribution over the period. The
financials sector (45.8% average weight) was the biggest drag on the Fund's
performance. The sector was the second worst performer over the period for both
the Fund and the benchmark. Industrials and telecommunication services also hurt
the Fund's returns.
All 17 countries represented in the Fund's portfolio posted negative
contributions for the period ended September 30, 2008. Canada and Hong Kong
posted the best performance. Australia and the United Kingdom were the two
biggest drags on performance. Combined, the two countries accounted for over 42%
of the portfolio. Ireland was the worst-performing country, losing almost 60%
over the period.
- -------------------------------------------------------------------------------
Top Five and Bottom Five Performing Stocks
- -------------------------------------------------------------------------------
(by contribution to return over the period
November 21, 2007 through September 30, 2008)
TOP-PERFORMING STOCKS BOTTOM-PERFORMING STOCKS
BB&T Corp. Telecom Corp. of New Zealand Ltd.
FKI PLC JJB Sports PLC
Jardine Lloyd Thompson Group PLC National City Corp.
UST, Inc. Kungsleden AB
HongKong Electric Holdings Ltd. Bradford & Bingley PLC
________________________
Dow Jones and Dow Jones Select Dividend Index(SM) 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 Select Dividend
Index(SM), is not sponsored, endorsed, sold or promoted by Dow Jones and Dow
Jones makes no representation regarding the advisability of trading or investing
in such product.
Page 8
- -------------------------------------------------------------------------------
Fund Performance Overview (Continued)
- -------------------------------------------------------------------------------
FGD - First Trust Dow Jones Global Select Dividend Index Fund (Continued)
- -------------------------------------------------------------------------------
Portfolio Sector Allocation as of September 30, 2008
- -------------------------------------------------------------------------------
% OF TOTAL
SECTOR LONG-TERM INVESTMENTS
Financials 47.0%
Utilities 13.0
Industrials 11.0
Telecommunication Services 9.1
Energy 6.1
Materials 4.4
Consumer Discretionary 4.2
Consumer Staples 3.5
Information Technology 1.7
------
Total 100.0%
======
- -------------------------------------------------------------------------------
Top Ten Portfolio Holdings as of September 30, 2008
- -------------------------------------------------------------------------------
% OF TOTAL
SECURITY LONG-TERM INVESTMENTS
Mullen Group Income Fund 2.8%
Kungsleden AB 2.1
Telecom Corp. of New Zeland Ltd. 2.0
Jardine Lloyd Thompson Group PLC 1.8
Russel Metals, Inc. 1.7
BB&T Corp. 1.7
HMV Group PLC 1.6
Canadian Oil Sands Trust 1.6
Insurance Australia Group Ltd. 1.5
FKP Property Group 1.5
------
Total 18.3%
======
GROWTH OF A $10,000 INITIAL INVESTMENT
NOVEMBER 21, 2007 - SEPTEMBER 30, 2008
[GRAPHIC OMITTED]
EDGARIZATION OF DATA POINTS
FUND/INDEX 11/21/07 9/30/08
- ---------- -------- -------
First Trust Dow Jones Global Select Dividend Index Fund $10,000 $ 7,028
Dow Jones Global Select Dividend Index(SM) $10,000 $ 6,925
Dow Jones World Developed Markets Index(SM) $10,000 $ 7,816
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 through September 30, 2008
The following Frequency Distribution of Discounts and Premiums charts are
provided to show the frequency at which the bid/ask midpoint price for the Fund
was at a discount or premium to the daily NAV. The following tables are for
comparative purposes only and represent the period November 27, 2007
(commencement of trading) through September 30, 2008.
- -----------------------------------------------------------------------------------------------------------------------------------
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
11/27/07 - 9/30/08 21 22 54 69
- -----------------------------------------------------------------------------------------------------------------------------------
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
11/27/07 - 9/30/08 17 6 12 12
Page 9
- -------------------------------------------------------------------------------
Fund Performance Overview (Continued)
- -------------------------------------------------------------------------------
FAN - First Trust ISE Global Wind Energy Index Fund
First Trust ISE Global Wind Energy 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 ISE Global Wind Energy Index (the
"ISE Index"). The shares of the Fund are listed and trade on the NYSE Arca, Inc.
under the ticker symbol "FAN." The Fund will normally invest at least 90% of its
assets in common stocks that comprise the ISE 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 ISE Index. The Fund's shares began trading on June 18, 2008.
The ISE Index was developed and is owned by the International Securities
Exchange, LLC ("ISE"), in consultation with Standard & Poor's, a Division of The
McGraw-Hill Companies, Inc. ("S&P"), which calculates and maintains the ISE
Index. The ISE Index provides a benchmark for investors interested in tracking
public companies throughout the world that are active in the wind energy
industry based on analysis of the products and services offered by those
companies. The inception date of the ISE Index was June 6, 2008, on which date,
there were 52 stocks that comprised the ISE Index, of which, 35 were issued by
non-U.S. issuers, which represented approximately 84% of the ISE Index.
- -------------------------------------------------------------------------------
Performance as of September 30, 2008
- -------------------------------------------------------------------------------
Cumulative
Total Returns
Inception (06/16/08)
to 09/30/08
FUND PERFORMANCE
NAV -36.30%
Market Price -36.23%
INDEX PERFORMANCE
ISE Global Wind Energy Index -36.86%
Russell 3000(R) Index -14.17%
- -------------------------------------------------------------------------------
(See Notes to Fund Performance Overview on page 12.)
Performance Review
Since inception (June 16, 2008), the Fund has significantly underperformed the
broader market's (Russell 3000 Index) return. Performance was hurt by rapidly
falling oil prices over the period, which reduced the attractiveness of
alternative energy sources such as wind energy. Oil prices peaked at over $145
per barrel in early July and fell 25% over the period (since the Fund's
inception.) Also hurting the Fund's performance was the increasing volatility in
the equity markets which resulted in investors fleeing growth-oriented names in
favor of more defensive, value-oriented names. Looking at the portfolio by
sector, over 90% of the Fund is invested in the industrials (53.9% average
weight) and utilities (37.4% average weight) sectors. Both sectors performed
poorly over the period since the Fund's inception, returning -34.3% and -40.0%,
respectively.
- ------------------------------------------------------------------------------------------------
Top Five and Bottom Five Performing Stocks
- ------------------------------------------------------------------------------------------------
(by contribution to return over the period June 16,
2008 through September 30, 2008)
TOP-PERFORMING STOCKS BOTTOM-PERFORMING STOCKS
A-Power Energy Generation Systems, Ltd. Broadwind Energy, Inc.
C. Rokas S.A. Vestas Wind Systems A/S
China High Speed Transmission Equipment Group Co., Ltd. Gamesa Corporacion Tecnologica S.A.
El Paso Electric Co. Theolia S.A.
Polish Energy Partners S.A. Hansen Transmissions International
________________________
"International Securities Exchange(TM)", "ISE(TM)" and "ISE Global Wind Energy
Index" are trademarks of the International Securities Exchange(TM) and have been
licensed for use for certain purposes by First Trust. The Fund, based on the ISE
Global Wind Energy Index, is not sponsored, endorsed, sold or promoted by the
International Securities Exchange(TM) and the International Securities Exchange(TM)
makes no representation regarding the advisability of trading in such products.
Page 10
- -------------------------------------------------------------------------------
Fund Performance Overview (Continued)
- -------------------------------------------------------------------------------
FAN - First Trust ISE Global Wind Energy Index Fund (Continued)
- -------------------------------------------------------------------------------
Portfolio Sector Allocation as of September 30, 2008
- -------------------------------------------------------------------------------
% OF TOTAL
SECTOR LONG-TERM INVESTMENTS
Industrials 57.6%
Utilities 34.1
Energy 5.9
Materials 1.5
Consumer Discretionary 0.7
Consumer Staples 0.2
------
Total 100.0%
======
- -------------------------------------------------------------------------------
Top Ten Portfolio Holdings as of September 30, 2008
- -------------------------------------------------------------------------------
% OF TOTAL
SECURITY LONG-TERM INVESTMENTS
Hansen Transmissions International 8.5%
REpower Systems AG 8.4
Gamesa Corporacion Tecnologica S.A. 7.6
Vestas Wind Systems A/S 7.6
Nordex AG 6.0
Babcock & Brown Wind Partners Group 4.0
Clipper Windpower PLC 3.8
Broadwind Energy, Inc. 3.5
Fersa Energias Renovables S.A. 3.1
Japan Wind Development Co., Ltd. 3.0
------
Total 55.5%
======
GROWTH OF A $10,000 INITIAL INVESTMENT
JUNE 16, 2008 - SEPTEMBER 30, 2008
[GRAPHIC OMITTED]
EDGARIZATION OF DATA POINTS
FUND/INDEX 6/16/08 9/30/08
- ---------- ------- -------
First Trust ISE Global Wind Energy Index Fund $10,000 $ 6,370
ISE Global Wind Energy Index $10,000 $ 6,314
Russell 3000(R) Index $10,000 $ 8,583
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 through September 30, 2008
The following Frequency Distribution of Discounts and Premiums charts are
provided to show the frequency at which the bid/ask midpoint price for the Fund
was at a discount or premium to the daily NAV. The following tables are for
comparative purposes only and represent the period June 18, 2008 (commencement
of trading) through September 30, 2008.
- -----------------------------------------------------------------------------------------------------------------------------------
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
6/18/08 - 9/30/08 24 17 13 2
- -----------------------------------------------------------------------------------------------------------------------------------
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
6/18/08 - 9/30/08 6 1 8 2
Page 11
- -------------------------------------------------------------------------------
Notes to Fund Performance Overview
- -------------------------------------------------------------------------------
Total returns for the periods since inception are calculated from the inception
date of each Fund. "Average annual total returns" represent the average annual
change in value of an investment over the periods indicated. "Cumulative total
returns" represent the total change in value of an investment over the periods
indicated. 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 12
First Trust Exchange-Traded Fund II
Understanding Your Fund Expenses
September 30, 2008 (Unaudited)
As a shareholder of First Trust DJ STOXX(R) Select Dividend 30 Index Fund, First
Trust FTSE EPRA/NAREIT Global Real Estate Index Fund, First Trust Dow Jones
Global Select Dividend Index Fund, or First Trust ISE Global Wind Energy Index
Fund (each a "Fund" and collectively, the "Funds"), you incur two types of
costs: (1) transaction costs; and (2) ongoing costs, including management fees,
distribution and/or service fees and other Fund expenses. This example is
intended to help you understand your ongoing costs (in U.S. dollars) of
investing in the Funds and to compare these costs with the ongoing costs of
investing in other funds.
The Example is based on an investment of $1,000 invested at April 1, 2008 (or
since inception) and held through the six-month period ended September 30, 2008.
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
six-month period. Simply divide your account value by $1,000 (for example, an
$8,600 account value divided by $1,000 = 8.6), then multiply the result by the
number in the first line under the heading entitled "Expenses Paid During the
Six-Month Period" to estimate the expenses you paid on your account during this
six-month period.
Hypothetical Example for Comparison Purposes
The second line in the following table provides information about hypothetical
account values and hypothetical expenses based on each Fund's actual expense
ratios and an assumed rate of return of 5% per year before expenses, which is
not each Fund's actual return. The hypothetical account values and expenses may
not be used to estimate the actual ending account balance or expenses you paid
for the period. You may use this information to compare the ongoing costs of
investing in the Funds and other funds. To do so, compare this 5% hypothetical
example with the 5% hypothetical examples that appear in the shareholder reports
of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs such as brokerage
commissions paid on purchases and sales of Fund 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
Beginning Ending Based on the During the
Account Value Account Value Six-Month Six-Month
April 1, 2008 September 30, 2008 Period (a) Period (b)
- ------------------------------------------------------------------------------------------------------------------------------------
FIRST TRUST DJ STOXX(R) SELECT DIVIDEND 30 INDEX FUND
Actual $1,000.00 $629.10 0.60% $2.44
Hypothetical (5% return before expenses) $1,000.00 $1,022.00 0.60% $3.03
FIRST TRUST FTSE EPRA/NAREIT GLOBAL REAL ESTATE INDEX FUND
Actual $1,000.00 $825.90 0.60% $2.74
Hypothetical (5% return before expenses) $1,000.00 $1,022.00 0.60% $3.03
FIRST TRUST DOW JONES SELECT GLOBAL DIVIDEND INDEX FUND
Actual $1,000.00 $752.10 0.60% $2.63
Hypothetical (5% return before expenses) $1,000.00 $1,022.00 0.60% $3.03
Page 13
First Trust Exchange-Traded Fund II
Understanding Your Fund Expenses (Continued)
September 30, 2008 (Unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
Annualized Expenses Paid
Expense Ratio During the Period
Beginning Ending Based on the June 16, 2008
Account Value Account Value Number of Days to
June 16, 2008 (c) September 30, 2008 in the Period (a) Sept. 30, 2008 (d)
- ------------------------------------------------------------------------------------------------------------------------------------
FIRST TRUST ISE GLOBAL WIND ENERGY INDEX FUND
Actual $1,000.00 $637.00 0.60% $1.44
Hypothetical (5% return before expenses) $1,000.00 $1,022.00 0.60% $3.03
<FN>
(a) These expense ratios reflect expense caps.
(b) Expenses are equal to the annualized expense ratio of 0.60%, multiplied by
the average account value over the period, multiplied by 183/366 (to reflect
the one-half year period).
(c) Inception date.
(d) Actual expenses are equal to the annualized expense ratio of 0.60%,
multiplied by the average account value over the period, multiplied by
107/366 (to reflect the actual period June 16, 2008 to September 30, 2008).
Hypothetical expenses are assumed for the most recent half-year period.
</FN>
Page 14
First Trust DJ STOXX (R) Select Dividend 30 Index Fund
Portfolio of Investments (a)
September 30, 2008
Shares Description Value
- -------------------------------------------------------------
Common Stocks--98.2%
Austria--4.1%
18,430 Telekom Austria AG $ 324,271
6,973 Wienerberger AG 189,319
-------------
513,590
-------------
Belgium--3.6%
11,982 Belgacom SA 451,437
-------------
Denmark--4.4%
10,278 Danske Bank A/S 247,469
6,428 NKT Holding A/S 302,719
-------------
550,188
-------------
France--6.5%
20,409 Credit Agricole SA 393,073
14,929 France Telecom SA 418,752
-------------
811,825
-------------
Germany--9.1%
4,736 Deutsche Bank AG 343,894
30,317 Deutsche Telekom AG 460,644
4,696 RWE AG 338,102
-------------
1,142,640
-------------
Ireland--5.5%
24,480 Allied Irish Banks PLC 201,238
42,039 Bank of Ireland Group 234,364
37,055 Irish Life & Permanent PLC 259,585
-------------
695,187
-------------
Norway--5.5%
30,899 DnB NOR ASA 239,708
14,779 Norsk Hydro ASA 99,983
14,684 StatoilHydro ASA 348,941
-------------
688,632
-------------
Switzerland--10.0%
13,858 Ciba Specialty Chemicals AG 593,140
1,165 Swisscom AG 347,189
1,129 Zurich Financial Services AG 312,643
-------------
1,252,972
-------------
United Kingdom--49.5%
104,345 Alliance & Leicester PLC 508,725
109,932 Amlin PLC 629,037
216,685 Brit Insurance Holdings PLC 708,517
208,818 Cattles PLC 291,075
1,300,899 DSG International PLC 1,132,366
100,198 Lloyds TSB Group PLC 402,623
26,543 Persimmon PLC 193,132
51,333 Provident Financial PLC 796,434
279,022 Tomkins PLC 779,050
155,077 Trinity Mirror PLC 235,669
43,811 United Utilities PLC 543,691
-------------
6,220,319
-------------
Total Common Stocks--98.2%
(Cost $18,605,498) 12,326,790
Shares Description Value
- -------------------------------------------------------------
Money Market Fund--0.5%
United States--0.5%
59,691 Morgan Stanley Institutional Treasury
Money Market Fund --0.66% (b)
(Cost $59,691) $ 59,691
-------------
Total Investments--98.7%
(Cost $18,665,189) (c) 12,386,481
Net Other Assets and
Liabilities--1.3% 158,957
-------------
Net Assets--100.0% $ 12,545,438
=============
(a) All percentages shown in the Portfolio of Investments are based on net
assets.
(b) Represents annualized 7-day yield at September 30, 2008.
(c) Aggregate cost for federal income tax purposes is $19,451,964. As of
September 30, 2008, the aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost was $125,115
and the aggregate gross unrealized depreciation for all securities in which
there was an excess of tax cost over value was $7,190,598.
Security Valuation Inputs
A summary of the inputs used to value the Fund's net assets as of September 30,
2008 is as follows (See Note 2A):
Investments
Valuation Inputs in Securities
- --------------------------------------------------------------
Level 1 - Quoted Prices - Investments $ --
Level 2 - Other Significant Observable Inputs 12,386,481
Level 3 - Significant Unobservable Inputs --
- --------------------------------------------------------------
Total $12,386,481
=============
See Notes to Financial Statements Page 15
First Trust DJ STOXX (R) Select Dividend 30 Index Fund
Portfolio of Investments (a) (Continued)
September 30, 2008
% of
Industry Net Assets
- --------------------------------------------------------------
Commercial Banks 17.8%
Diversified Telecommunication Services 16.0
Insurance 15.2
Specialty Retail 9.0
Consumer Finance 8.7
Multi-Utilities 7.0
Industrial Conglomerates 6.2
Chemicals 4.7
Oil, Gas & Consumable Fuels 2.8
Capital Markets 2.7
Machinery 2.4
Media 1.9
Household Durables 1.5
Building Products 1.5
Metals & Mining 0.8
Money Market 0.5
- --------------------------------------------------------------
Total Investments 98.7
Net Other Asset and Liabilities 1.3
------------
Total 100.0%
============
Page 16 See Notes to Financial Statements
First Trust FTSE EPRA/NAREIT Global Real Estate Index Fund
Portfolio of Investments (a)
September 30, 2008
Shares Description Value
- -------------------------------------------------------------
Common Stocks--99.7%
Australia--9.6%
7,607 Abacus Property Group $ 5,565
10,986 Australand Property Group 4,913
6,138 Babcock & Brown Japan Property
Trust 2,938
3,572 Bunnings Warehouse Property Trust 5,156
27,094 Centro Retail Group 2,541
19,866 CFS Retail Property Trust 36,045
19,134 Commonwealth Property Office
Fund 22,545
34,745 DB RREEF Trust 40,870
3,091 FKP Property Group 9,608
20,291 Goodman Group 40,946
26,060 GPT Group 38,093
13,236 ING Industrial Fund 16,771
14,913 ING Office Fund 17,343
15,824 Macquarie CountryWide Trust 12,494
24,047 Macquarie Office Trust 15,364
13,047 Mirvac Group 26,594
17,188 Stockland 77,162
2,831 Sunland Group Ltd. 5,527
18,039 Valad Property Group 4,416
22,831 Westfield Group 312,737
-------------
697,628
-------------
Austria--0.6%
1,034 CA Immobilien Anlagen AG (b) 10,171
1,012 Conwert Immobilien Invest AG (b) 9,545
5,439 ImmoFinanz Immobilien
Analagen AG 19,241
807 Sparkassen Immobilien AG (b) 5,549
-------------
44,506
-------------
Belgium--0.6%
155 Befimmo S.C.A. 15,704
101 Cofinimmo S.A. 17,629
82 Intervest Offices NV 3,115
19 Leasinvest Real Estate S.C.A. 1,850
76 Warehouses De Pauw S.C.A 4,178
25 Wereldhave Belgium S.C.A. 1,774
-------------
44,250
-------------
Bermuda--1.5%
3,582 Great Eagle Holdings Ltd. 7,966
19,922 Hongkong Land Holdings Ltd. 58,969
6,979 Hopson Development Holdings
Ltd. 3,546
6,699 Kerry Properties Ltd. 21,712
503 Orient-Express Hotels Ltd.,
Class A 12,137
-------------
104,330
-------------
Canada--3.6%
367 Allied Properties Real Estate
Investment Trust 6,393
589 Boardwalk Real Estate Investment 19,758
3,490 Brookfield Properties 54,502
Shares Description Value
- -------------------------------------------------------------
Canada (Continued)
916 Calloway Real Estate Investment
Trust $ 16,061
787 Canadian Apartment Properties
Real Estate Investment Trust 11,758
716 Canadian Real Estate Investment
Trust 19,066
1,165 Chartwell Seniors Housing Real
Estate Investment Trust 7,772
535 Cominar Real Estate Investment
Trust 10,617
203 Dundee Real Estate Investment Trust 5,688
775 Extendicare Real Estate Investment
Trust 5,061
1,718 H&R Real Estate Investment Trust 24,182
870 InnVest Real Estate Investment Trust 7,153
525 Morguard Real Estate Investment
Trust 5,831
267 Northern Property Real Estate
Investment Trust 5,698
732 Primaris Retail Real Estate
Investment Trust 11,232
2,602 RioCan Real Estate Investment
Trust 49,412
-------------
260,184
-------------
Cayman Islands--0.9%
17,755 Agile Property Holdings Ltd. 8,111
23,115 China Resources Land Ltd. 24,548
38,774 Country Garden Holdings, Co., Ltd. 12,319
13,516 New World China Land Ltd. 3,164
15,607 Shimao Property Holdings Ltd. 9,001
14,878 Shui On Land Ltd. 6,212
-------------
63,355
-------------
Denmark--0.0%
332 TK Development A/S (b) 1,798
-------------
Finland--0.2%
1,953 Citycon Oyj 6,397
985 Sponda Oyj 5,943
679 Technopolis Oyj 4,706
-------------
17,046
-------------
France--4.7%
554 Acanthe Developpement S.A. 1,475
48 Affine Group 1,876
243 Fonciere des Regions Group 25,375
221 Gecina S.A. 23,820
233 Icade 18,876
844 Klepierre LLC 33,033
356 Mercialys 15,138
62 Societe de la Tour Eiffel 5,524
154 Societe Immobiliere de Location
pour l'Industrie et le Commerce 19,044
964 Unibail-Rodamco S.A. 195,045
-------------
339,206
-------------
See Notes to Financial Statements Page 17
First Trust FTSE EPRA/NAREIT Global Real Estate Index Fund
Portfolio of Investments (a) (Continued)
September 30, 2008
Shares Description Value
- -------------------------------------------------------------
Common Stocks (Continued)
Germany--0.4%
332 Alstria Office AG $ 4,241
266 Colonia Real Estate AG 1,474
407 Deutsche Euroshop AG 13,234
305 Deutsche Wohnen AG (b) 3,912
279 DIC Asset AG 3,900
309 Patrizia Immobilien AG (b) 895
235 Vivacon AG 2,311
-------------
29,967
-------------
Greece--0.2%
302 Babis Vovos International
Construction S.A. (b) 8,314
217 Eurobank Properties Real Estate
Investment Co. 2,331
156 Lamda Development S.A. (b) 1,265
-------------
11,910
-------------
Guernsey--0.3%
3,377 F&C Commercial Property Trust
Ltd. 4,764
3,928 ING UK Real Estate Income
Trust Ltd. 3,251
3,965 Invista Foundation Property
Trust Ltd. 3,368
672 ISIS Property Trust Ltd. 1,004
982 ISIS Property Trust 2 Ltd. 1,260
139 Mapeley Ltd. 2,223
1,232 Standard Life Investment Property
Income Trust PLC 1,558
1,692 Teesland Advantage Property
Income Trust Ltd. 1,303
3,083 UK Commercial Property Trust
Ltd. 4,072
-------------
22,803
-------------
Hong Kong--7.8%
26,180 Champion Real Estate Investment
Trust 10,705
45,877 China Overseas Land & Investment
Ltd. 55,605
24,543 Hang Lung Properties Ltd. 57,775
12,720 Henderson Land Development Co.,
Ltd. 56,703
9,225 Hysan Development Co., Ltd. 24,013
6,818 Kowloon Development Co., Ltd. 6,105
25,329 Link (The) REIT 52,653
32,812 New World Development Co., Ltd. 36,544
19,069 Shenzhen Investment Ltd. 2,854
28,513 Sino Land Co., Ltd. 31,934
22,140 Sun Hung Kai Properties Ltd. 228,149
-------------
563,040
-------------
Italy--0.2%
9,075 Beni Stabili S.p.A. 8,386
1,466 Immobiliare Grande Distribuzione 3,300
Shares Description Value
- -------------------------------------------------------------
Italy (Continued)
1,300 Risanamento S.p.A. (b) $ 1,565
-------------
13,251
-------------
Japan--12.1%
1,116 AEON Mall Co., Ltd. 33,262
737 DAIBIRU Corp. 5,558
1,840 HEIWA Real Estate, Co., Ltd. 6,593
7 Japan Prime Realty Investment Corp. 16,598
5 Japan Real Estate Investment Corp. 40,347
5 Japan Retail Fund Investment Corp. 20,557
2 Kenedix Realty Investment Corp. 7,444
11,930 Mitsubishi Estate Co., Ltd. 235,083
10,081 Mitsui Fudosan Co., Ltd. 194,785
1 MORI TRUST Sogo Reit, Inc. 7,667
6 Nippon Building Fund, Inc. 58,003
3 Nippon Commercial Investment Corp. 6,550
4 Nomura Real Estate Office Fund, Inc. 27,334
16 NTT Urban Development Corp. 19,456
3 ORIX JREIT, Inc. 15,035
2 Premier Investment Co. 8,514
5,744 Sumitomo Realty & Development
Co., Ltd. 125,097
1,092 TOC Co., Ltd. 4,128
2,375 Tokyo Tatemono Co., Ltd. 11,294
4,297 Tokyu Land Corp. 15,972
2 TOKYU REIT, Inc. 13,002
2 United Urban Investment Corp. 8,770
-------------
881,049
-------------
Jersey--0.0%
1,819 Invesco Property Income Trust Ltd. 589
-------------
Luxembourg--0.2%
533 Gagfah SA 6,788
671 ProLogis European Properties 5,976
-------------
12,764
-------------
Netherlands--1.8%
797 Corio NV 56,625
424 Eurocommercial Properties NV 18,460
424 Nieuwe Steen Investments
Funds NV 9,450
1,386 Plaza Centers (Europe) NV 1,822
245 VastNed Offices/Industrial NV 5,085
198 Vastned Retail NV 13,919
246 Wereldhave NV 24,010
-------------
129,371
-------------
New Zealand--0.1%
8,438 Kiwi Income Property Trust 6,596
-------------
Norway--0.0%
1,792 Norwegian Property ASA 3,121
-------------
Poland--0.2%
1,300 Globe Trade Centre S.A. (b) 11,945
-------------
Page 18 See Notes to Financial Statements
First Trust FTSE EPRA/NAREIT Global Real Estate Index Fund
Portfolio of Investments (a) (Continued)
September 30, 2008
Shares Description Value
- -------------------------------------------------------------
Common Stocks (Continued)
Singapore--2.2%
9,539 Allgreen Properties, Ltd. $ 4,247
15,400 Ascendas Real Estate Investment
Trust 20,344
11,945 CapitaCommercial Trust 11,107
25,020 Capitaland Ltd. 54,538
14,728 CapitaMall Trust 23,487
4,064 Keppel Land Ltd. 8,117
16,790 Mapletree Logistics Trust 8,615
2,000 Singapore Land Ltd. 6,747
18,197 Suntec Real Estate Investment
Trust 14,878
7,087 Wing Tai Holdings Ltd. 4,714
-------------
156,794
-------------
Spain--0.0%
119 Renta Corporation Real Estate SA 685
-------------
Sweden--0.8%
2,038 Castellum AB 17,918
2,006 Fabege AB 11,394
962 Hufvudstaden AB 7,472
1,480 Klovern AB 3,811
1,618 Kungsleden AB 10,406
444 Wihlborgs Fastigheter AB 6,184
-------------
57,185
-------------
Switzerland--0.8%
67 Allreal Holding AG 7,589
556 PSP Swiss Property AG 32,362
228 Swiss Prime Site AG (b) 13,081
404 Zueblin Immobilien Holding AG 2,759
-------------
55,791
-------------
United Kingdom--6.8%
284 A.J. Mucklow Group PLC 1,426
1,019 Big Yellow Group PLC 5,985
6,062 British Land Co., PLC 81,768
3,214 Brixton PLC 12,103
841 Capital & Regional PLC 2,577
575 CLS Holdings PLC (b) 3,561
58 Daejan Holdings PLC 2,911
1,192 Derwent London PLC 22,434
482 Development Securities PLC 3,345
1,148 Grainger PLC 4,181
2,145 Great Portland Estates PLC 12,971
3,442 Hammerson PLC 60,682
1,129 Helical Bar PLC 6,143
5,513 Land Securities Group PLC 124,514
4,299 Liberty International PLC 74,337
1,895 Minerva PLC (b) 1,192
398 Primary Health Properties PLC 1,949
1,533 Quintain Estates & Development
PLC 5,558
5,131 Segro PLC 38,685
1,602 Shaftesbury PLC 12,225
1,074 St. Modwen Properties PLC 5,629
Shares Description Value
- -------------------------------------------------------------
United Kingdom (Continued)
1,473 Unite Group PLC $ 6,054
2,055 Workspace Group PLC 4,809
-------------
495,039
-------------
United States--44.1%
381 Acadia Realty Trust 9,632
92 Agree Realty Corp. 2,631
24 Alexander's, Inc. (b) 9,600
378 Alexandria Real Estate Equities, Inc. 42,525
1,160 AMB Property Corp. 52,548
501 American Campus Communities, Inc. 16,974
1,015 Apartment Investment &
Management Co. 35,545
1,419 Ashford Hospitality Trust 5,747
194 Associated Estates Realty Corp. 2,528
912 AvalonBay Communities, Inc. 89,759
850 BioMed Realty Trust, Inc. 22,483
1,410 Boston Properties, Inc. 132,061
1,050 Brandywine Realty Trust 16,832
604 BRE Properties, Inc. 29,596
630 Camden Property Trust 28,892
786 CBL & Associates Properties, Inc. 15,783
524 Cedar Shopping Centers, Inc. 6,927
567 Colonial Properties Trust 10,597
564 Corporate Office Properties Trust 22,757
1,475 Corrections Corp. of America (b) 36,654
458 Cousins Properties, Inc. 11,555
2,035 DCT Industrial Trust, Inc. 15,242
1,415 Developers Diversified Realty Corp. 44,841
1,092 DiamondRock Hospitality Co. 9,937
852 Digital Realty Trust, Inc. 40,257
1,078 Douglas Emmett, Inc. 24,869
1,725 Duke Realty Corp. 42,401
420 DuPont Fabros Technology, Inc. 6,405
295 EastGroup Properties, Inc. 14,319
338 Education Realty Trust, Inc. 3,745
389 Entertainment Properties Trust 21,286
292 Equity Lifestyle Properties, Inc. 15,485
437 Equity One, Inc. 8,954
3,194 Equity Residential 141,846
302 Essex Property Trust, Inc. 35,736
971 Extra Space Storage, Inc. 14,915
697 Federal Realty Investment Trust 59,663
745 FelCor Lodging Trust, Inc. 5,334
523 First Industrial Realty Trust, Inc. 15,000
287 First Potomac Realty Trust 4,934
934 Forest City Enterprises, Inc., Class A 28,646
3,170 General Growth Properties, Inc. 47,867
219 Getty Realty Corp. 4,855
446 Glimcher Realty Trust 4,656
2,959 HCP, Inc. 118,745
1,125 Health Care REIT, Inc. 59,884
601 Healthcare Realty Trust, Inc. 17,519
562 Hersha Hospitality Trust 4,181
683 Highwoods Properties, Inc. 24,287
501 Hilltop Holdings, Inc. (b) 5,170
375 Home Properties, Inc. 21,731
See Notes to Financial Statements Page 19
First Trust FTSE EPRA/NAREIT Global Real Estate Index Fund
Portfolio of Investments (a) (Continued)
September 30, 2008
Shares Description Value
- -------------------------------------------------------------
Common Stocks (Continued)
United States (Continued)
1,112 Hospitality Properties Trust $ 22,818
6,207 Host Hotels & Resorts, Inc. 82,491
2,697 HRPT Properties Trust 18,582
781 Inland Real Estate Corp. 12,254
680 Investors Real Estate Trust 7,609
384 Kilroy Realty Corp. 18,351
3,000 Kimco Realty Corp. 110,820
342 Kite Realty Group Trust 3,762
479 LaSalle Hotel Properties 11,170
765 Lexington Realty Trust 13,173
1,106 Liberty Property Trust 41,641
272 LTC Properties, Inc. 7,975
886 Macerich (The) Co. 56,394
778 Mack-Cali Realty Corp. 26,351
568 Maguire Properties, Inc. 3,385
786 Medical Properties Trust, Inc. 8,921
326 Mid-America Apartment
Communities, Inc. 16,020
114 National Healthcare Corp. 5,372
870 National Retail Properties, Inc. 20,837
1,142 Nationwide Health Properties, Inc. 41,089
897 OMEGA Healthcare Investors, Inc. 17,635
180 Parkway Properties, Inc. 6,815
471 Pennsylvania Real Estate Investment
Trust 8,878
520 Post Properties, Inc. 14,544
3,107 ProLogis 128,226
181 PS Business Parks, Inc. 10,426
1,512 Public Storage 149,703
219 Ramco-Gershenson Properties 4,910
1,197 Realty Income Corp. 30,643
825 Regency Centers Corp. 55,019
159 Saul Centers, Inc. 8,036
1,357 Senior Housing Properties Trust 32,337
2,647 Simon Property Group, Inc. 256,758
689 SL Green Realty Corp. 44,647
258 Sovran Self Storage, Inc. 11,530
881 Strategic Hotels & Resorts, Inc. 6,652
217 Sun Communities, Inc. 4,299
609 Sunstone Hotel Investors, Inc. 8,222
375 Tanger Factory Outlet Centers, Inc. 16,421
470 Taubman Centers, Inc. 23,500
1,520 UDR, Inc. 39,748
140 Universal Health Realty Income Trust 5,446
222 Urstadt Biddle Properties, Inc. 4,163
684 U-Store-It Trust 8,393
1,693 Ventas, Inc. 83,668
1,820 Vornado Realty Trust 165,529
582 Washington Real Estate Investment
Trust 21,319
995 Weingarten Realty Investors 35,492
699 Winthrop Realty Trust, Inc. 2,726
-------------
3,199,036
-------------
Total Common Stocks--99.7%
(Cost $9,636,606) 7,223,239
Shares Description Value
- -------------------------------------------------------------
Money Market Fund--0.5%
United States--0.5%
38,340 Morgan Stanley Institutional Treasury
Money Market Fund--0.66% (c)
(Cost $38,340) $ 38,340
-------------
Total Investments--100.2%
(Cost $9,674,946) (d) 7,261,579
Net Other Assets and
Liabilities--(0.2%) (12,920)
-------------
Net Assets--100.0% $ 7,248,659
=============
(a) All percentages shown in the Portfolio of Investments are based on net
assets.
(b) Non-income producing security.
(c) Represents 7-day annualized yield at September 30, 2008.
(d) Aggregate cost for federal income tax purposes is $9,695,165. As of
September 30, 2008, the aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost was $126,658
and the aggregate gross unrealized depreciation for all securities in which
there was an excess of tax cost over value was $2,560,244.
REIT - Real Estate Investment Trust.
Security Valuation Inputs
A summary of the inputs used to value the Fund's net assets as of September 30,
2008 is as follows (See Note 2A):
Investments
Valuation Inputs in Securities
- --------------------------------------------------------------
Level 1 - Quoted Prices - Investments $ 3,551,429
Level 2 - Other Significant Observable Inputs 3,710,150
Level 3 - Significant Unobservable Inputs --
- --------------------------------------------------------------
Total $ 7,261,579
===============
% of
Industry Net Assets
- --------------------------------------------------------------
Real Estate Investment Trusts 74.1%
Real Estate Management & Development 24.6
Commercial Services & Supplies 0.5
Hotels, Restaurants & Leisure 0.2
Capital Markets 0.1
Health Care Providers & Services 0.1
Insurance 0.1
Money Market Fund 0.5
- --------------------------------------------------------------
Total Investments 100.2
Net Other Asset and Liabilities (0.2)
------------
Total 100.0%
============
Page 20 See Notes to Financial Statements
First Trust Dow Jones Global Select Dividend Index Fund
Portfolio of Investments (a)
September 30, 2008
Shares Description Value
- -------------------------------------------------------------
Common Stocks--100.2%
Australia--24.7%
2,112 Australia & New Zealand Banking
Group Ltd. $ 32,629
6,295 BlueScope Steel Ltd. 37,100
855 Commonwealth Bank of Australia 30,133
42,916 Commonwealth Property Office
Fund 50,567
20,424 CSR Ltd. 40,924
10,697 Fairfax Meolia Ltd. 22,920
19,306 FKP Property Group 60,013
32,159 ING Industrial Fund 40,747
45,976 ING Office Fund 53,466
18,235 Insurance Australia Group Ltd. 60,527
5,522 Lion Nathan Ltd. 41,342
18,409 Macquarie Airports 40,472
24,473 Macquarie Infrastructure Group 46,405
59,834 Macquarie Office Trust 38,229
2,018 National Australia Bank Ltd. 40,728
10,648 Qantas Airways Ltd. 27,146
1,708 Sims Group Ltd. 41,382
1,700 St. George Bank Ltd. 40,125
7,146 Stockland 32,081
3,810 Suncorp-Metway Ltd. 28,959
14,903 Telestra Corp. Ltd. 49,999
28,739 Tishman Speyer Office Fund 21,698
1,517 Wesfarmers Ltd. 35,279
2,849 Westfield Group 39,025
1,786 Westpac Banking Corp. 31,656
-------------
983,552
-------------
Belgium--1.1%
645 Mobistar S.A. 45,397
-------------
Bermuda--1.2%
8,057 VTech Holdings Ltd. 47,124
-------------
Canada--8.4%
862 Bell Aliant Regional
Communications Income Fund 20,241
1,723 Canadian Oil Sands Trust 62,752
1,343 Manitoba Telecom Services, Inc. 49,530
7,049 Mullen Group Income Fund 112,532
6,774 Norbord, Inc. 22,787
3,130 Russel Metals, Inc. 67,644
-------------
335,486
-------------
Finland--0.8%
990 Fortum Oyj 33,224
-------------
France--1.9%
1,340 France Telecom S.A. 37,586
408 Societe Generale 36,650
-------------
74,236
-------------
Germany--0.7%
278 RWE AG 26,680
-------------
Hong Kong--4.6%
18,422 BOC Hong Kong Holdings Ltd. 32,934
8,027 Citic Pacific Ltd. 23,464
Shares Description Value
- -------------------------------------------------------------
Hong Kong (Continued)
6,814 CLP Holdings Ltd. $ 54,966
8,722 HongKong Electric Holdings Ltd. 54,783
6,875 Orient Overseas International Ltd. 17,612
-------------
183,759
-------------
Ireland--1.8%
2,507 Allied Irish Banks PLC 20,609
4,598 Bank of Ireland 25,633
3,488 Irish Life & Permanent PLC 24,435
-------------
70,677
-------------
Italy--4.1%
10,176 Banca Monte dei Paschi di Sien S.p.A. 25,326
1,514 Eni S.p.A. 40,130
8,520 Milano Assicurazioni S.p.A. 37,753
2,147 Pirelli & C. Real Estate S.p.A. 27,547
20,747 Telecom Italia S.p.A. 30,877
-------------
161,633
-------------
Japan--0.9%
2,830 TAKEFUJI Corp. 36,827
-------------
Netherlands--3.4%
1,658 Heijmans N.V. 27,237
1,463 ING Groep N.V. 31,363
2,905 OCE N.V. 20,746
585 Wereldhave N.V. 57,099
-------------
136,445
-------------
New Zealand--2.0%
42,507 Telecom Corp. of New Zealand Ltd. 78,634
-------------
Norway--1.5%
3,158 DnB NOR ASA 24,499
5,420 Norsk Hydro ASA 36,668
-------------
61,167
-------------
Singapore--2.1%
9,000 Singapore Petroleum Co., Ltd. 29,246
64,000 UOB-Kay Hian Holdings Ltd. 56,256
-------------
85,502
-------------
Sweden--2.8%
12,918 Kungsleden AB 83,080
2,934 NCC AB, Class B 29,067
-------------
112,147
-------------
United Kingdom--16.5%
7,053 Alliance & Leicester PLC 34,386
7,203 Amlin PLC 41,216
6,469 Barclays PLC 38,435
14,622 Brit Insurance Holdings PLC 47,811
9,655 BT Group PLC 27,990
28,118 HMV Group PLC 64,389
4,951 IMI PLC 33,405
9,031 Jardine Lloyd Thompson Group PLC 72,059
8,160 Lloyds TSB Group PLC 32,789
3,627 Provident Financial PLC 56,273
21,525 Rentokil Initial PLC 26,706
See Notes to Financial Statements Page 21
First Trust Dow Jones Global Select Dividend Index Fund
Portfolio of Investments (a) (Continued)
September 30, 2008
Shares Description Value
- -------------------------------------------------------------
Common Stocks (Continued)
United Kingdom (Continued)
5,220 Rexam PLC $ 37,087
1,385 Severn Trent PLC 33,606
21,345 Tomkins PLC 59,597
9,300 Trinity Mirror PLC 14,133
3,168 United Utilities PLC 39,315
-------------
659,197
-------------
United States--21.7%
545 Altria Group, Inc. 10,813
935 AT&T, Inc. 26,105
1,456 Bank of America Corp. 50,960
1,740 BB&T Corp. 65,773
2,355 Citigroup, Inc. 48,301
1,491 Comerica, Inc. 48,891
975 Consolidated Edison, Inc. 41,886
4,129 D.R. Horton, Inc. 53,760
942 DTE Energy Co. 37,793
4,609 First Horizon National Corp. 43,140
5,417 Huntington Bancshares, Inc. 43,282
2,707 KeyCorp 32,322
3,369 Lee Enterprises, Inc. 11,792
1,303 Pepco Holdings, Inc. 29,852
1,033 Progress Energy, Inc. 44,553
2,694 Regions Financial Corp. 25,862
974 SCANA Corp. 37,918
1,091 Southern Co. 41,120
561 SunTrust Banks, Inc. 25,239
2,664 TECO Energy, Inc. 41,904
3,558 Umpqua Holdings Corp. 52,339
775 UST, Inc. 51,568
-------------
865,173
-------------
Total Investments--100.2%
(Cost $5,042,666) (b) 3,996,860
Net Other Assets and
Liabilities--(0.2%) (6,975)
-------------
Net Assets--100.0% $ 3,989,885
=============
(a) All percentages shown in the Portfolio of Investments are based on net
assets.
(b) Aggregate cost for federal income tax purposes is $5,085,769. As of
September 30, 2008, the aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost was $72,534
and the aggregate gross unrealized depreciation for all securities in which
there was an excess of tax cost over value was $1,161,443.
Security Valuation Inputs
A summary of the inputs used to value the Fund's net assets as of September 30,
2008 is as follows (See Note 2A):
Investments
Valuation Inputs in Securities
- --------------------------------------------------------------
Level 1 - Quoted Prices - Investments $ 1,200,659
Level 2 - Other Significant Observable Inputs 2,796,201
Level 3 - Significant Unobservable Inputs --
- --------------------------------------------------------------
Total $ 3,996,860
===============
% of
Industry Net Assets
- --------------------------------------------------------------
Commercial Banks 19.6%
Real Estate Investment Trusts 8.4
Diversified Telecommunication 8.0
Insurance 7.9
Electric Utilities 6.5
Multi-Utilities 5.7
Real Estate Management & Development 4.3
Oil, Gas & Consumable Fuels 3.3
Diversified Financial Services 3.3
Industrial Conglomerates 3.1
Metals & Mining 2.9
Energy Equipment & Services 2.8
Consumer Finance 2.3
Transportation Infrastructure 2.2
Trading Companies & Distributors 1.7
Specialty Retail 1.6
Tobacco 1.6
Construction & Engineering 1.4
Capital Markets 1.4
Household Durables 1.4
Media 1.2
Communications Equipment 1.2
Wireless Telecommunication Services 1.1
Beverages 1.0
Containers & Packaging 0.9
Food & Staples Retailing 0.9
Water Utilities 0.8
Machinery 0.8
Airlines 0.7
Commercial Services & Supplies 0.7
Paper & Forest Products 0.6
Office Electronics 0.5
Marine 0.4
- --------------------------------------------------------------
Total Investments 100.2
Net Other Asset and Liabilities (0.2)
------------
Total 100.0%
============
Page 22 See Notes to Financial Statements
First Trust ISE Global Wind Energy Index Fund
Portfolio of Investments (a)
September 30, 2008
Shares Description Value
- -------------------------------------------------------------
Common Stocks--99.8%
Australia--5.2%
66,391 AGL Energy Ltd. $ 732,200
3,017,784 Babcock & Brown Wind
Partners Group 2,534,745
-------------
3,266,945
-------------
Belgium--8.5%
1,289,342 Hansen Transmissions
International (b) 5,374,343
-------------
Brazil--0.8%
36,022 Centrais Eletricas Brasileiras
SA ADR (b) 515,788
-------------
Canada--2.3%
28,179 Boralex, Inc. (b) 227,180
81,413 Canadian Hydro Developers,
Inc. (b) 315,937
790,631 EarthFirst Canada, Inc. (b) 222,870
25,441 Heroux-Devtek, Inc. (b) 143,670
25,515 Innergex Renewable Energy,
Inc. (b) 175,015
300,991 Western Wind Energy Corp. (b) 381,807
-------------
1,466,479
-------------
China--1.7%
400,393 China High Speed Transmission
Equipment Group Co., Ltd. 732,799
276,606 Harbin Power Equipment Co., Ltd. 198,150
874,272 Shanghai Prime Machinery
Co., Ltd. 115,542
-------------
1,046,491
-------------
Denmark--9.0%
169,280 Greentech Energy Systems A/S (b) 920,209
54,786 Vestas Wind Systems A/S (b) 4,781,990
-------------
5,702,199
-------------
France--5.4%
8,902 Alstom SA 675,744
542 Areva SA 421,928
14,583 EDF Energies Nouvelles 726,624
148,169 Theolia SA (b) 1,586,764
-------------
3,411,060
-------------
Germany--18.7%
20,066 Conergy AG (b) 178,289
16,530 E.ON AG ADR 833,558
134,011 Nordex AG (b) 3,752,739
18,406 REpower Systems AG (b) 5,265,036
8,817 RWE AG 846,185
9,489 Siemens AG ADR 890,922
-------------
11,766,729
-------------
Greece--0.9%
17,262 C. Rokas S.A. 392,777
38,217 Terna Energy S.A. 200,546
-------------
593,323
-------------
Shares Description Value
- -------------------------------------------------------------
Hong Kong--0.2%
3,092,723 China Windpower Group Ltd. (b) $ 106,784
-------------
Japan--3.9%
733 Japan Wind Development
Co., Ltd. 1,878,023
49,000 Mitsui & Co., Ltd. 608,302
-------------
2,486,325
-------------
Poland--0.3%
15,616 Polish Energy Partners S.A. (b) 189,911
-------------
Portugal--1.0%
153,342 EDP-Energias de Portugal S.A. 643,548
-------------
Spain--16.3%
3,392 Acciona S.A. 516,971
111,197 EDP Renovaveis S.A. (b) 875,074
21,450 Endesa S.A. 783,798
446,019 Fersa Energias Renovables S.A. 1,968,808
140,455 Gamesa Corporacion
Tecnologica S.A. 4,812,252
126,653 Iberdrola Renovables S.A. (b) 553,408
77,509 Iberdrola S.A. 787,410
-------------
10,297,721
-------------
Sweden--1.2%
106,217 Morphic Technologies AB (b) 73,117
50,903 SKF AB 650,305
-------------
723,422
-------------
Switzerland--0.3%
215 Gurit Holding AG 178,371
-------------
United Kingdom--8.2%
15,922 BP PLC ADR 798,807
392,556 Clipper Windpower PLC (b) 2,359,407
122,861 Novera Energy PLC (b) 164,913
514,553 Renewable Energy Regeneration 1,057,967
13,660 Royal Dutch Shell PLC ADR 806,077
-------------
5,187,171
-------------
United States--15.9%
43,367 AES Corp (b) 506,960
13,245 Allegheny Technologies, Inc. 391,390
17,615 Alliant Energy Corp. 567,379
15,712 American Superconductor Corp. (b) 370,332
3,747 Ameron International Corp. 268,473
247,531 Broadwind Energy, Inc. (b) 2,227,779
117,912 Capstone Turbine Corp. (b) 152,106
47,104 China Wind Systems, Inc. (b) 57,467
187,082 Composite Technology Corp. (b) 136,570
20,445 El Paso Electric Co. (b) 429,345
34,083 Federal Mogul Corp. (b) 427,742
12,942 FPL Group, Inc. 650,983
37,417 General Electric Co. 954,133
9,924 GreenHunter Energy, Inc. (b) 141,417
11,210 Kaydon Corp. 505,123
19,913 NRG Energy, Inc. (b) 492,847
11,031 Otter Tail Corp. 338,983
16,788 Trinity Industries, Inc. 431,955
See Notes to Financial Statements Page 23
First Trust ISE Global Wind Energy Index Fund
Portfolio of Investments (a) (Continued)
September 30, 2008
Shares Description Value
- -------------------------------------------------------------
Common Stocks (Continued)
United States (Continued)
16,452 Woodward Governor Co. $ 580,262
22,200 Zoltek Cos., Inc. (b) 379,842
-------------
10,011,088
-------------
Total Common Stocks--99.8%
(Cost $93,041,584) 62,967,698
Rights--0.1%
Sweden--0.1%
112,653 Morphic Technologies AB
expiring 10/13/08 (b) 31,565
(Cost $42,130)
Warrants--0.0%
United States--0.0%
959 GreenHunter Energy, Inc.
expiring 9/15/11@ $0 (b) --
(Cost $0)
-------------
Total Investments--99.9%
(Cost $93,083,714) (c) 62,999,263
Net Other Assets and
Liabilities--0.1% 67,674
-------------
Net Assets--100.0% $ 63,066,937
=============
(a) All percentages shown in the Portfolio of Investments are based on net
assets.
(b) Non-income producing security.
(c) Aggregate cost for federal income tax purposes is $93,239,430. As of
September 30, 2008, the aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost was $4,339
and the aggregate gross unrealized depreciation for all securities in which
there was an excess of tax cost over value was $30,244,506.
ADR - American Depositary Receipt.
Security Valuation Inputs
A summary of the inputs used to value the Fund's net assets as of September 30,
2008 is as follows (See Note 2A):
Investments
Valuation Inputs in Securities
- --------------------------------------------------------------
Level 1 - Quoted Prices - Investments $ 16,394,271
Level 2 - Other Significant Observable Inputs 46,604,992
Level 3 - Significant Unobservable Inputs --
- --------------------------------------------------------------
Total $ 62,999,263
===============
% of
Industry Net Assets
- --------------------------------------------------------------
Electrical Equipment 38.5%
Independent Power Producers & Energy Traders 19.5
Machinery 11.5
Electric Utilities 11.3
Oil, Gas & Consumable Fuels 5.9
Industrial Conglomerates 3.5
Multi-Utilities 3.4
Construction & Engineering 2.5
Trading Companies & Distributors 1.0
Chemicals 0.9
Auto Components 0.7
Metals & Mining 0.6
Building Products 0.4
Aerospace & Defense 0.2
- --------------------------------------------------------------
Total Investments 99.9
Net Other Asset and Liabilities 0.1
------------
Total 100.0%
============
Page 24 See Notes to Financial Statements
This page is intentionally left blank.
Page 25
First Trust Exchange Traded Fund II
Statements of Assets and Liabilities
September 30, 2008
First Trust First Trust
DJ STOXX(R) FTSE EPRA/NAREIT
Select Dividend 30 Global Real Estate
Index Fund Index Fund
----------------------- ---------------------------
ASSETS:
Investments at value $ 12,386,481 $ 7,261,579
Cash -- 2,537
Foreign currency at value -- 5,067
Receivables:
Investment securities sold -- --
Dividends 117,582 26,284
From investment advisor 31,056 24,531
Foreign tax reclaims 37,368 583
Interest 1 27
Prepaid expenses 31,399 3,940
-------------- --------------
Total Assets 12,603,887 7,324,548
-------------- --------------
LIABILITIES:
Due to custodian 124 --
Payables:
Investment securities purchased -- 4,159
Capital shares redeemed -- --
Investment advisory fees 4,496 2,494
Audit and tax fees 31,300 37,050
Printing fees 13,318 18,561
Licensing fees -- 2,351
Accrued expenses and other liabilities 9,211 11,274
-------------- --------------
Total Liabilities 58,449 75,889
-------------- --------------
NET ASSETS $ 12,545,438 $ 7,248,659
============== ==============
NET ASSETS consist of:
Paid-in capital $ 22,287,853 $ 9,717,935
Par value 8,033 2,000
Accumulated net investment income (loss) (8,661) 34,313
Accumulated net realized gain (loss) on investments (3,454,191) (91,855)
Net unrealized appreciation (depreciation) on investments, foreign
currency transactions and translation of assets and liabilities
denominated in foreign currencies (6,287,596) (2,413,734)
-------------- --------------
NET ASSETS $ 12,545,438 $ 7,248,659
============== ==============
NET ASSET VALUE, per share $ 15.62 $ 36.24
============== ==============
Number of shares outstanding
(unlimited number of shares authorized, par value $0.01 per share) 803,334 200,002
-------------- --------------
Investments at cost $ 18,665,189 $ 9,674,946
============== ==============
Foreign currency at cost $ -- $ 5,269
============== ==============
Page 26 See Notes to Financial Statements
First Trust First Trust
Dow Jones ISE
Global Select Dividend Global Wind Energy
Index Fund Index Fund
---------------------------- -------------------------
$ 3,996,860 $ 62,999,263
-- 966,745
8,352 14,297
26,833 4,389,479
31,645 23,600
7,698 38,129
812 1,449
36 --
6,307 --
----------------- -----------------
4,078,543 68,432,962
----------------- -----------------
8,951 --
25,251 1,472,338
-- 3,797,056
1,416 25,880
32,050 29,300
5,240 6,494
-- 17,120
15,750 17,837
----------------- -----------------
88,658 5,366,025
----------------- -----------------
$ 3,989,885 $ 63,066,937
================= =================
$ 5,198,996 $ 93,415,550
2,000 33,000
7,499 19,319
(171,047) (329,902)
(1,047,563) (30,071,030)
----------------- -----------------
$ 3,989,885 $ 63,066,937
================= =================
$ 19.95 $ 19.11
================= =================
200,002 3,300,002
----------------- -----------------
$ 5,042,666 $ 93,083,714
================= =================
$ 8,746 $ 15,025
================= =================
See Notes to Financial Statements Page 27
First Trust Exchange-Traded Fund II
Statement of Operations
First Trust First Trust
DJ STOXX(R) FTSE EPRA/NAREIT
Select Dividend 30 Global Real Estate
Index Fund Index Fund
------------------------ ------------------------
For the Year For the Year
Ended Ended
September 30, 2008 September 30, 2008
------------------------ ------------------------
INVESTMENT INCOME:
Dividends (b) $ 968,022 $ 217,728
Interest 1,159 1,036
-------------- --------------
Total investment income 969,181 218,764
-------------- --------------
EXPENSES:
Licensing fees 75,206 7,157
Investment advisory fees 55,153 23,857
Legal fees 33,000 18,500
Audit and tax fees 29,300 32,550
Listing fees 23,548 20,607
Printing fees 15,000 15,000
Trustees' fees and expenses 14,428 2,655
Accounting and administration fees 12,104 26,672
Custodian fees 4,331 7,233
Transfer agent fees 690 298
Registration and filing fees 678 184
Other expenses 5,327 4,848
-------------- --------------
Total expenses 268,765 159,561
Less fees waived and expenses reimbursed by the investment advisor (186,036) (123,776)
-------------- --------------
Net expenses 82,729 35,785
-------------- --------------
NET INVESTMENT INCOME (LOSS) 886,452 182,979
-------------- --------------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments (3,453,673) (97,808)
In-kind redemptions -- --
Foreign currency transactions (10,874) (737)
-------------- --------------
Net realized gain (loss) (3,464,547) (98,545)
Net change in unrealized appreciation (depreciation) on:
Investments (6,375,797) (2,741,682)
Foreign currency translation (8,957) (1,772)
-------------- --------------
Net change in unrealized appreciation (depreciation) (6,384,754) (2,743,454)
-------------- --------------
NET REALIZED AND UNREALIZED GAIN (LOSS) (9,849,301) (2,841,999)
-------------- --------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS $ (8,962,849) $ (2,659,020)
============== ==============
(a) Inception date.
(b) Net of foreign withholding tax of $57,082 for the First Trust DJ STOXX(R)
Select Dividend 30 Index Fund, $19,693 for the First Trust FTSE EPRA/NAREIT
Global Real Estate Index Fund, $14,219 for the First Trust Dow Jones Global
Select Dividend Index Fund and $30,744 for the First Trust ISE Global Wind
Energy Index Fund.
Page 28 See Notes to Financial Statements
First Trust First Trust
Dow Jones ISE
Global Select Dividend Global Wind Energy
Index Fund Index Fund
----------------------------- -------------------------
For the Period For the Period
November 21, 2007 (a) June 16, 2008 (a)
through through
September 30, 2008 September 30, 2008
------------------------ ------------------------
$ 188,253 $ 151,755
-- --
--------------- ---------------
188,253 151,755
--------------- ---------------
21,107 18,048
10,876 72,193
10,600 8,500
32,800 29,300
24,309 4,303
6,000 7,500
3,934 7,369
13,765 11,525
3,720 10,000
136 902
147 3,849
2,832 2,500
--------------- ---------------
130,226 175,989
(113,913) (67,700)
--------------- ---------------
16,313 108,289
--------------- ---------------
171,940 43,466
--------------- ---------------
(170,715) (332,746)
-- (1,211,584)
(2,590) (24,685)
--------------- ---------------
(173,305) (1,569,015)
(1,045,806) (30,084,451)
(1,757) 13,421
--------------- -----------------
(1,047,563) (30,071,030)
--------------- -----------------
(1,220,868) (31,640,045)
--------------- -----------------
$ (1,048,928) $ (31,596,579)
=============== ===============
See Notes to Financial Statements Page 29
First Trust Exchange-Traded Fund II
Statement of Changes in Net Assets
First Trust
DJ STOXX(R)
Select Dividend 30
Index Fund
---------------------------------------------------
For the Period
For the Year August 27, 2007 (a)
Ended through
September 30, 2008 September 30, 2007
---------------------- ------------------------
OPERATIONS:
Net investment income (loss) $ 886,452 $ 3,218
Net realized gain (loss) (3,464,547) (74)
Net change in unrealized appreciation (depreciation) (6,384,754) 97,158
-------------- --------------
Net increase (decrease) in net assets resulting from operations (8,962,849) 100,302
-------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (887,901) --
-------------- --------------
Total distributions to shareholders (887,901) --
-------------- --------------
SHAREHOLDER TRANSACTIONS:
Proceeds from shares sold 19,195,866 3,100,020
Value of shares repurchased -- --
-------------- --------------
Net increase (decrease) in net assets resulting from shareholder
transactions 19,195,866 3,100,020
-------------- --------------
Total increase (decrease) in net assets 9,345,116 3,200,322
NET ASSETS:
Beginning of period 3,200,322 --
-------------- --------------
End of period $ 12,545,438 $ 3,200,322
============== ==============
Accumulated net investment income (loss) at end of period $ (8,661) $ 3,144
============== ==============
CHANGES IN SHARES OUTSTANDING
Shares outstanding, beginning of period 103,334 --
Shares sold 700,000 103,334
Shares repurchased -- --
-------------- --------------
Shares outstanding, end of period 803,334 103,334
============== ==============
(a) Inception date.
Page 30 See Notes to Financial Statements
First Trust First Trust First Trust
FTS EEPRA/NAREIT Dow Jones ISE
Global Real Estate Global Select Dividend Global Wind Energy
Index Fund Index Fund Index Fund
- ----------------------------------------------------- ----------------------------- ---------------------------
For the Period For the Period For the Period
For the Year August 27, 2007 (a) November 21, 2007 (a) June 16, 2008 (a)
Ended through through through
September 30, 2008 September 30, 2007 September 30, 2008 September 30, 2008
- ------------------------ ------------------------ ------------------------ ------------------------
$ 182,979 $ 14,412 $ 171,940 $ 43,466
(98,545) (1,066) (173,305) (1,569,015)
(2,743,454) 329,720 (1,047,563) (30,071,030)
---------------- --------------- ---------------- ---------------
(2,659,020) 343,066 (1,048,928) (31,596,579)
---------------- --------------- ---------------- ---------------
(155,322) -- (162,183) --
---------------- --------------- ---------------- ---------------
(155,322) -- (162,183) --
---------------- --------------- ---------------- ---------------
4,719,835 5,000,100 5,200,996 100,602,595
-- -- -- (5,939,079)
---------------- --------------- ---------------- ---------------
4,719,835 5,000,100 5,200,996 94,663,516
---------------- --------------- ---------------- ---------------
1,905,493 5,343,166 3,989,885 63,066,937
5,343,166 -- -- --
---------------- --------------- ---------------- ---------------
$ 7,248,659 $ 5,343,166 $ 3,989,885 $ 63,066,937
================ =============== ================ ===============
$ 34,313 $ 14,735 $ 7,499 $ 19,319
================ =============== ================ ===============
100,002 -- -- --
100,000 100,002 200,002 3,600,002
-- -- -- (300,000)
----------------- --------------- ----------------- ---------------
200,002 100,002 200,002 3,300,002
================= =============== ================= ===============
See Notes to Financial Statements Page 31
First Trust Exchange-Traded Fund II
Financial Highlights
For a Share outstanding throughtout each period
First Trust DJ STOXX(R) Select Dividend 30 Index Fund
For the Period
For the August 27, 2007 (a)
Year Ended through
September 30, 2008 September 30, 2007
------------------------ ------------------------
Net asset value, beginning of period $ 30.97 $ 30.00
--------------- ---------------
Income from investment operations:
Net investment income (loss) 1.26 0.03(b)
Net realized and unrealized gain (loss) (15.32) 0.94
--------------- ---------------
Total from investment operations (14.06) 0.97
Distributions paid to shareholders from:
Net investment income (1.29) --
--------------- ---------------
Net asset value, end of period $ 15.62 $ 30.97
=============== ===============
TOTAL RETURN (c) (46.12)% 3.23%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) $ 12,545 $ 3,200
Ratios to average net assets:
Ratio of total expenses to average net assets 1.95% 19.64%(d)
Ratio of net expenses to average net assets 0.60% 0.60%(d)
Ratio of net investment income to average net assets 6.43% 1.18%(d)
Portfolio turnover rate (e) 80% 0%
First Trust FTSE EPRA/NAREIT Global Real Estate Index Fund
For the Period
For the August 27, 2007 (a)
Year Ended through
September 30, 2008 September 30, 2007
------------------------ ------------------------
Net asset value, beginning of period $ 53.43 $ 50.00
-------------- ---------------
Income from investment operations:
Net investment income (loss) 1.25 0.14(b)
Net realized and unrealized gain (loss) (17.25) 3.29
-------------- ---------------
Total from investment operations (16.00) 3.43
Distributions paid to shareholders from:
Net investment income (1.19) --
-------------- ---------------
Net asset value, end of period $ 36.24 $ 53.43
============== ===============
TOTAL RETURN (c) (30.35)% 6.86%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) $ 7,249 $ 5,343
Ratios to average net assets:
Ratio of total expenses to average net assets 2.68% 11.51%(d)
Ratio of net expenses to average net assets 0.60% 0.60%(d)
Ratio of net investment income to average net assets 3.07% 3.22%(d)
Portfolio turnover rate (e) 7% 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
distributions at net asset value during the period, and redemption at net
asset value on the last day of the period. The returns presented do not
reflect the deduction of taxes that a shareholder would pay on Fund
distributions or the redemption or sale of Fund shares. Total return
calculated for a period of less than one year is not annualized. The total
returns 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 and in-kind
transactions.
Page 32 See Notes to Financial Statements
First Trust Exchange-Traded Fund II
Financial Highlights
For a Share outstanding throughout the period
First Trust Dow Jones Global Select Dividend Index Fund
For the Period
November 21, 2007 (a)
through
September 30, 2008
--------------------------
Net asset value, beginning of period $ 30.00
--------------
Income from investment operations:
Net investment income (loss) 1.38
Net realized and unrealized gain (loss) (10.10)
--------------
Total from investment operations (8.72)
Distributions paid to shareholders from:
Net investment income (1.33)
--------------
Net asset value, end of period $ 19.95
==============
TOTAL RETURN (b) (29.72)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) $ 3,990
Ratios to average net assets:
Ratio of total expenses to average net assets 4.79%(c)
Ratio of net expenses to average net assets 0.60%(c)
Ratio of net investment income to average net assets 6.33%(c)
Portfolio turnover rate (d) 42%
First Trust ISE Global Wind Energy Index Fund For the Period
June 16, 2008 (a)
through
September 30, 2008
------------------------
Net asset value, beginning of period $ 30.00
--------------
Income from investment operations:
Net investment income (loss) (b) 0.01
Net realized and unrealized gain (loss) (10.90)
--------------
Total from investment operations (10.89)
--------------
Net asset value, end of period $ 19.11
==============
TOTAL RETURN (b) (36.30)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) $ 63,067
Ratios to average net assets:
Ratio of total expenses to average net assets 0.98%(c)
Ratio of net expenses to average net assets 0.60%(c)
Ratio of net investment income to average net assets 0.24%(c)
Portfolio turnover rate (d) 13%
(a) Inception date.
(b) Total return is calculated assuming an initial investment made at the net
asset value at the beginning of the period, reinvestment of all
distributions at net asset value during the period, and redemption at net
asset value on the last day of the period. The 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.
(c) Annualized.
(d) Portfolio turnover is not annualized and does not include securities
received or delivered from processing creations or redemptions and in-kind
transactions.
See Notes to Financial Statements Page 33
- --------------------------------------------------------------------------------
Notes to Financial Statements
- --------------------------------------------------------------------------------
First Trust Exchange-Traded Fund II
September 30, 2008
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").
The Trust currently consists of four funds:
First Trust DJ STOXX(R) Select Dividend 30 Index Fund - (NYSE Arca, Inc.
ticker "FDD")
First Trust FTSE EPRA/NAREIT Global Real Estate Index Fund - (NYSE Arca,
Inc. ticker "FFR")
First Trust Dow Jones Global Select Dividend Index Fund - (NYSE Arca,
Inc. ticker "FGD")
First Trust ISE Global Wind Energy Index Fund - (NYSE Arca, Inc. ticker
"FAN")
Subsequent to September 30, 2008, the date of this annual report, First Trust
ISE Global Engineering and Construction Index Fund, an additional series of the
Trust, began trading under the ticker symbol "FLM" on the NYSEArca, Inc.
Each Fund represents a separate series of shares of beneficial interest in the
Trust (individually, each a "Fund" and collectively, the "Funds"). The shares of
the Funds are listed and traded on the NYSE Arca, Inc. ("NYSE Arca"). 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
a specified amount of shares called "Creation Units." Creation Units are issued
and redeemed principally in-kind for securities included in a Fund's 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
First Trust Dow Jones Global Select Dividend Index Fund Dow Jones Global Select Dividend Index(SM)
First Trust ISE Global Wind Energy Index Fund ISE Global Wind Energy Index
First Trust ISE Global Engineering and Construction Index Fund ISE Global Engineering and Construction 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
The NAV of each Fund's shares 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 calculated by
dividing the value of all assets of the Fund (including accrued interest and
dividends), less all liabilities (including accrued expenses and dividends
declared but unpaid), by the total number of shares outstanding.
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 National Market ("NASDAQ") and the London
Stock Exchange Alternative Investment Market ("AIM") are valued at the last sale
price on the business day as of which such value is being determined. Securities
listed on the NASDAQ or the AIM are valued at the official closing price on the
business day as of which such value is being determined. If there has been no
sale on such day, or no official closing price in the case of securities traded
on the NASDAQ or the AIM, the securities are valued at the mean of the most
recent bid and ask prices on such day. Portfolio securities traded on more than
one securities exchange are valued at the last sale price or official closing
price, as applicable, 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 trading on the NASDAQ and the AIM, are valued at the
closing bid prices. Short-term investments that mature in less than 60 days,
when purchased, 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. The use of fair value pricing by each Fund is governed by
valuation procedures adopted by the Board of Trustees and is in accordance with
the provisions of the 1940 Act. These securities generally include, but are not
limited to, restricted securities (securities which may not be publicly sold
without registration under the Securities Act of 1933, as amended) for which a
pricing service is unable to provide a market price; securities whose trading
has been formally suspended; a security with respect to which an event has
occurred that is likely to materially affect the value of the security after the
Page 34
- --------------------------------------------------------------------------------
Notes to Financial Statements (Continued)
- --------------------------------------------------------------------------------
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 prices that may differ from current market quotations or
the official closing sale prices on the applicable exchange. A variety of
factors may be considered in determining the fair value of such securities. In
addition, the use of fair value prices and certain current market quotations
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 its 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 a relevant Index may adversely affect the Fund's ability to track the
Index.
In September 2006, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No.157, Fair Value Measurements
("FAS 157"), effective for fiscal years beginning after November 15, 2007. This
standard clarifies the definition of fair value for financial reporting,
establishes a framework for measuring fair value and requires additional
disclosures about the use of fair value measurements. FAS 157 became effective
for the Funds as of October 1, 2008, the beginning of each Fund's current fiscal
year; however, this standard has been adopted early for each Fund and is
disclosed in this report. The three levels of the fair value hierarchy under FAS
157 are described below:
o Level 1- quoted prices in active markets for identical securities
o Level 2- other significant observable inputs (including quoted
prices for similar securities, interest rates, prepayment speeds,
credit risk, etc.)
o Level 3- significant unobservable inputs (including the Fund's own
assumption in determining the fair value of investments)
The inputs or methodology used for valuing securities are not necessarily an
indication of the risk associated with investing in those securities. A summary
of the inputs used to value each Funds' net assets as of September 30, 2008 is
included with each Fund's Portfolio of Investments.
B. Securities Transactions and Investment Income
Securities transactions are recorded as of the trade date. Realized gains and
losses from securities transactions are recorded on the identified cost basis.
Dividend income is recorded on the ex-dividend date. Interest income, if any, is
recorded on the accrual basis.
A Fund may hold publicly-traded master limited partnerships ("MLPs") and real
estate investment trusts ("REITs"). Distributions from such investments may
include a return of capital component from the MLP or REIT to the extent of the
cost basis of such MLP or REIT investments. The actual character of amounts
received during the year, are not known until after the fiscal year end. A Fund
records the character of distributions received from the MLPs or REITs during
the year based on estimates available. A Fund's characterization may be
subsequently revised based on information received from the MLPs or REITs after
their tax reporting periods conclude.
C. Foreign Currency
The books and records of the Fund are maintained in U.S. dollars. Foreign
currencies, investments and other assets and liabilities are translated into
U.S. dollars at the exchange rates prevailing at the end of the period.
Purchases and sales of investment securities and items of income and expense are
translated on the respective dates of such transactions. Unrealized gains and
losses which result from changes in foreign currency exchange rates have been
included in "Net change in unrealized appreciation (depreciation) on foreign
currency translation" on the Statement of Operations. Net realized foreign
currency gains and losses include the effect of changes in exchange rates
between trade date and settlement date on investment security transactions,
foreign currency transactions and interest and dividends received. The portion
of foreign currency gains and losses related to fluctuations in exchange rates
between the initial purchase trade date and subsequent sale trade date is
included in "Net realized gain (loss) on foreign currency transactions" on the
Statement of Operations.
D. 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 the
First Trust Dow Jones Global Select Dividend Index Fund and semi-annually by the
First Trust FTSE EPRA/NAREIT Global Real Estate Index Fund and the First Trust
ISE Global Wind Energy 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.
Page 35
- --------------------------------------------------------------------------------
Notes to Financial Statements - (Continued)
- --------------------------------------------------------------------------------
First Trust Exchange-Traded Fund II
September 30, 2008
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.
The tax character of distributions paid by each Fund during the period ended
September 30, 2008 were as follows:
Distributions paid from Distributions paid from
Ordinary Income Return of Capital
---------------------------- ----------------------------
First Trust DJ STOXX(R) Select Dividend 30 Index Fund $ 887,901 $ --
First Trust FTSE EPRA/NAREIT Global Real Estate Index Fund 155,322 --
First Trust Dow Jones Global Select Dividend Index Fund 162,183 --
First Trust ISE Global Wind Energy Index Fund -- --
There were no distributions paid during the period ended September 30, 2007.
As of September 30, 2008, 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 $ 22,038 $ -- $ (7,074,371)
First Trust FTSE EPRA/NAREIT Global Real Estate Index Fund 66,332 2,767 (2,433,953)
First Trust Dow Jones Global Select Dividend Index Fund 10,907 -- (1,090,666)
First Trust ISE Global Wind Energy Index Fund 19,319 -- (30,226,746)
E. Income Taxes
Each Fund intends to qualify or continue to qualify as a regulated investment
company by complying with the requirements under Subchapter M of the Internal
Revenue Code of 1986, as amended, which includes distributing substantially all
of its net investment income and net realized gains to shareholders.
Accordingly, no provision has been made for federal and state income taxes.
In June 2006, FASB issued Interpretation No. 48 ("FIN 48"), "Accounting for
Uncertainty in Income Taxes." FIN 48 establishes a minimum threshold for
recognizing, and a system for measuring, the benefits of a tax position taken or
expected to be taken in a tax return, and is effective for the Funds' current
fiscal year. As of September 30, 2008, management has evaluated the application
of FIN 48 to the Fund, and has determined that no provision for income tax is
required in the Funds' financial statements.
At September 30, 2008, 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, 2016
--------------------------
First Trust DJ STOXX(R) Select Dividend 30 Index Fund $ --
First Trust FTSE EPRA/NAREIT Global Real Estate Index Fund --
First Trust Dow Jones Global Select Dividend Index Fund 131,352
First Trust ISE Global Wind Energy Index Fund 174,186
During the year ended September 30, 2008 the FTSE EPRA/NAREIT Global Real Estate
Index Fund utilized capital loss carryforwards of $1,389 to offset realized
gains. The Funds are subject to certain limitations, under U.S. tax rules, on
the use of capital loss carryforwards and net unrealized built-in losses. These
limitations apply when there has been a 50% change in ownership.
Capital losses incurred after October 31 ("Post-October Losses") within the
taxable year can be deemed to arise on the first business day of the Funds'
next taxable year.
Page 36
- --------------------------------------------------------------------------------
Notes to Financial Statements - (Continued)
- --------------------------------------------------------------------------------
The following Funds incurred and elected to defer net capital and currency
losses as follows:
Post October Losses
Capital Losses Currency Losses
------------------ -------------------
First Trust DJ STOXX(R) Select Dividend 30 Index Fund $ 2,667,562 $ 30,553
First Trust FTSE EPRA/NAREIT Global Real Estate Index Fund 75,259 31,163
First Trust Dow Jones Global Select Dividend Index Fund -- --
First Trust ISE Global Wind Energy Index Fund -- --
In order to present paid-in capital 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 paid-in
capital, accumulated net investment income (loss) and accumulated net realized
gain (loss) on investments. These adjustments are primarily due to the
differences between book and tax treatments of income and gains on various
investment securities held by the Funds and in-kind transactions. The results of
operations and net assets were not affected by these adjustments. For the period
ended September 30, 2008, the adjustments were as follows:
Accumulated
Accumulated Net Realized
Net Investment Gain (Loss) Paid-in
Income (Loss) on Investments Capital
------------------- ------------------ ---------------
First Trust DJ STOXX(R) Select Dividend 30 Index Fund $ (10,356) $ 10,356 $ --
First Trust FTSE EPRA/NAREIT Global Real Estate Index Fund (8,079) 8,079 --
First Trust Dow Jones Global Select Dividend Index Fund (2,258) 2,258 --
First Trust ISE Global Wind Energy Index Fund (24,147) 1,239,113 (1,214,966)
F. 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 Advisors L.P.
("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
First Trust Dow Jones Global Select Dividend Index Fund Dow Jones & Company, Inc.
First Trust ISE Global Wind Energy Index Fund International Securities Exchange, LLC
The respective license agreements allow for the use by First Trust of certain
trademarks and trade names of the respective 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.
G. Accounting Pronouncement
In March 2008, FASB released Statement of Financial Accounting Standards No.
161, "Disclosures about Derivative Instruments and Hedging Activities" ("FAS
161"). FAS 161 requires qualitative disclosures about objectives and strategies
for using derivatives, quantitative disclosures about fair value amounts of and
gains and losses on derivative instruments, and disclosures about credit risk
related contingent features in derivative agreements. The application of FAS 161
is required for fiscal years beginning after November 15, 2008 and interim
periods within those fiscal years. Management is currently evaluating the impact
the adoption of FAS161 will have on the Funds' financial statement disclosures,
if any.
3. Investment Advisory Fee and Other Affiliated Transactions
First Trust 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 providing certain other services
necessary for the management of the Funds.
For these services, First Trust is entitled to receive monthly fees from each
Fund calculated at an annual rate of 0.40% of such Fund's average daily net
assets.
Page 37
- --------------------------------------------------------------------------------
Notes to Financial Statements - (Continued)
- --------------------------------------------------------------------------------
First Trust Exchange-Traded Fund II
September 30, 2008
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 two years from the Fund's
inception. Expenses borne by the Advisor are subject to reimbursement by the
Funds for 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.
The advisory fee waivers and expense reimbursements for the period ended
September 30, 2008 and the expenses borne by the Advisor subject to
reimbursement by each Fund from inception through September 30, 2008 were as
follows:
Expenses Borne by
Advisory Fee Expense Advisor Subject
Waivers Reimbursements to Reimbursement
---------------- -------------------- --------------------
First Trust DJ STOXX(R) Select Dividend 30 Index Fund $ 55,153 $ 130,883 $ 238,175
First Trust FTSE EPRA/NAREIT Global Real Estate Index Fund 23,857 99,919 172,631
First Trust Dow Jones Global Select Dividend Index Fund 10,876 104,500 115,376
First Trust ISE Global Wind Energy Index Fund 67,700 -- 67,700
The Trust has multiple service agreements with The Bank of New York Mellon
("BNYM") (formerly known as The Bank of New York). Under the service agreements,
BNYM performs custodial, fund accounting, certain administrative services, and
transfer agency services for the Trust. As custodian, BNYM is responsible for
custody of the Trust's assets. As fund accountant and administrator, BNYM is
responsible for maintaining the books and records of the Trust's securities and
cash. As transfer agent, BNYM is responsible for performing transfer agency
services for the Trust. BNYM is a subsidiary of the Bank of New York Mellon
Corporation, a financial holding company.
PNC Global Investment Servicing (U.S.) Inc. ("PNC"), formerly known as
PFPC, Inc., provides certain administrative services to the Trust and the Funds
in connection with the meetings of the Trust's Board 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 additional trust of 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, the Lead Independent Trustee is paid $10,000 annually and the
Audit Committee Chairman is paid $5,000 annually with such compensation paid by
the trusts in the First Trust Fund Complex and divided among those trusts.
Trustees are also reimbursed by the trusts in the First Trust Fund Complex for
travel and out-of-pocket expenses in connection with all meetings. Effective
January 1, 2008, each of the chairmen of the Nominating and Governance Committee
and the Valuation Committee are paid $2,500 annually to serve in such capacities
with such compensation paid by the trusts in the First Trust Fund Complex and
divided among those trusts. Also effective January 1, 2008, the Lead Independent
Trustee and each committee chairman will serve two-year terms. The officers and
interested trustee receive no compensation from the trusts for serving in such
capacities.
4. Purchases and Sales of Securities
For the period ended September 30, 2008, 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 $ 10,810,338 $ 10,792,404
First Trust FTSE EPRA/NAREIT Global Real Estate Index Fund 623,690 430,080
First Trust Dow Jones Global Select Dividend Index Fund 1,436,169 1,350,666
First Trust ISE Global Wind Energy Index Fund 12,605,635 8,485,853
Page 38
- --------------------------------------------------------------------------------
Notes to Financial Statements - (Continued)
- --------------------------------------------------------------------------------
First Trust Exchange-Traded Fund II
September 30, 2008
For the period ended September 30, 2008, 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 $ 19,097,598 $ --
First Trust FTSE EPRA/NAREIT Global Real Estate Index Fund 4,612,690 --
First Trust Dow Jones Global Select Dividend Index Fund 5,129,829 --
First Trust ISE Global Wind Energy Index Fund 96,471,504 5,918,707
Gains on in-kind transactions are not considered taxable for federal income
tax purposes.
5. Creations, Redemptions and Transaction Fees
Shares are created and redeemed by each Fund only in Creation Unit size
aggregations of 100,000 shares. Effective December 1, 2008, shares will be
created and redeemed by each Fund only in Creation Unit size aggregations of
50,000 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 to BNYM, as transfer agent, a creation fee (the "Creation Transaction Fee"),
which is currently $4,000 for the First Trust FTSE EPRA/NAREIT Global Real
Estate Index Fund, $500 for the First Trust DJ STOXX(R) Select Dividend 30 Index
Fund, $1,000 for the First Trust Dow Jones Global Select Dividend Index Fund and
$1,000 for the First Trust ISE Global Wind Energy 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 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 to BNYM, as transfer agent, 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, $500 for the First Trust DJ STOXX(R) Select Dividend 30 Index Fund, $1,000
for the First Trust Dow Jones Global Select Dividend Index Fund and $1,000 for
the First Trust ISE Global Wind Energy Index Fund, regardless of the number of
Creation Units redeemed in the transaction. The Redemp tion 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 of the
Funds, for amounts expended to finance activities primarily intended to result
in the sale of Creation Units or the provision of investor services. FTP may
also use this amount to compensate securities dealers or other persons that are
Authorized Participants for providing distribution assistance, including
broker-dealer and shareholder support and educational and promotional services.
No 12b-1 fees are currently paid by the Funds, and pursuant to a contractual
arrangement, the Funds will not pay 12b-1 fees any time before June 30, 2009.
7. Indemnification
The Trust, on behalf of the Funds, has a variety of indemnification obligations
under contracts with its service providers. The Trust's maximum exposure under
these arrangements is unknown. However, the Trust has not had prior claims or
losses pursuant to these contracts and expects the risk of loss to be remote.
8. 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 39
- --------------------------------------------------------------------------------
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, comprised of the First Trust DJ STOXX(R) Select
Dividend 30 Index Fund, First Trust FTSE EPRA/NAREIT Global Real Estate Index
Fund, First Trust Dow Jones Global Select Dividend Index Fund and First Trust
ISE Global Wind Energy Index Fund (collectively, the "Funds"), including the
portfolios of investments, as of September 30, 2008, the related statements of
operations, statements of changes in net assets and the financial highlights for
each of the periods presented. 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 audits 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, 2008, 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, 2008, the results of their
operations, changes in their net assets, and the financial highlights for the
periods presented, in conformity with accounting principles generally accepted
in the United States of America.
/s/ Deloitte & Touche LLP
Chicago, Illinois
November 25, 2008
Page 40
- --------------------------------------------------------------------------------
Additional Information
- --------------------------------------------------------------------------------
First Trust Exchange-Traded Fund II
September 30, 2008
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 period ending June 30, 2008 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.
Federal Tax Information
For the taxable year ended September 30, 2008, the following percentages of
income dividends paid by the Funds qualify for the dividends received deduction
available for corporations:
Dividends Received Deduction
----------------------------------
First Trust DJ STOXX(R) Select Dividend 30 Index Fund 0%
First Trust FTSE EPRA/NAREIT Global Real Estate Index Fund 0%
First Trust Dow Jones Global Select Dividend Index Fund 15%
First Trust ISE Global Wind Energy Index Fund 63%
For the taxable year ended September 30, 2008, the following percentages of
income dividends paid by the Funds are designated as qualified dividend income:
Qualified Dividend Income
----------------------------------
First Trust DJ STOXX(R) Select Dividend 30 Index Fund 95%
First Trust FTSE EPRA/NAREIT Global Real Estate Index Fund 34%
First Trust Dow Jones Global Select Dividend Index Fund 90%
First Trust ISE Global Wind Energy Index Fund 100%
The Fund meets the requirements of Section 853 of the Internal Revenue Code and
elects to pass through to its shareholders credit for foreign taxes paid. The
total amounts of income received by the Funds from sources within foreign
countries and possessions of the United States and of taxes paid to such
countries are as follows:
Income Received Foreign Taxes Paid
Amount Per Share Amount Per Share
-------------------------------- ----------------------------
First Trust DJ STOXX(R) Select Dividend 30 Index Fund $968,305 $1.21 $55,731 $0.07
First Trust FTSE EPRA/NAREIT Global Real Estate Index Fund 124,324 0.62 17,254 0.09
First Trust Dow Jones Global Select Dividend Index Fund 159,321 0.80 14,002 0.07
First Trust ISE Global Wind Energy Index Fund 118,974 0.04 27,748 0.01
Advisory Agreement
Board Considerations Regarding Approval of First Trust ISE Global Wind Energy
Index Fund's Advisory Contract
The Board of Trustees of the First Trust Exchange-Traded Fund II (the "Trust"),
including a majority of the Independent Trustees, approved the Investment
Management Agreement (the "Agreement") with First Trust Advisors L.P. ("First
Trust") on behalf of the First Trust ISE Global Wind Energy Index Fund (the
"Fund") for an initial two-year term at a meeting held on May 22, 2008. The
Board of Trustees determined 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, 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
Page 41
- --------------------------------------------------------------------------------
Additional Information - (Continued)
- --------------------------------------------------------------------------------
First Trust Exchange-Traded Fund II
September 30, 2008
standards used by courts in determining whether investment company boards have
fulfilled their duties; and the factors to be considered by the Board in voting
on such agreements. To assist the Board in its evaluation of the Agreement, 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 the Fund as compared to those of
comparable funds; the nature of expenses to be incurred in providing services to
the 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. The Board applied its business judgment to determine
whether the arrangement between the Trust and First Trust is a reasonable
business arrangement from the Fund's perspective as well as from the perspective
of shareholders.
In evaluating whether to approve the Agreement, the Board considered the nature,
extent and quality of services to be provided under the Agreement, and noted
that First Trust employees provide management services to other series of the
Trust and to other investment companies 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 Fund. It also considered the efforts expended by First Trust in
organizing the Trust and making arrangements for entities to provide services to
the Fund. Since the Fund is newly organized, the Board did not consider
investment performance of the Fund. The Board concluded it was comfortable that
First Trust had the capabilities and resources to oversee the operations of the
Fund, including the services to be provided by other service providers.
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 consisted solely of three other exchange-traded funds ("ETFs")
investing in the energy sector, but considered that no peer ETF invested
primarily in the wind energy industry. The Board noted the small number of ETFs
in the peer group and considered certain other limitations in the comparability
of the ETFs in the peer group. The Board noted the services to be provided by
First Trust for the annual advisory fee of 0.40% of the Fund's average daily net
assets and that the proposed advisory fee for the Fund was lower than the
advisory fees of the other ETFs in the peer group, one of which paid a unitary
fee. The Board also considered that First Trust has agreed to waive fees and/or
pay Fund expenses to the extent necessary to prevent the operating expenses of
the Fund (excluding interest expense, brokerage commissions, trading expenses,
taxes and extraordinary expenses) from exceeding 0.60% of average daily net
assets per year for two years. 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 Fund's, noting that those fees generally were the
same as the fee to be charged to the Fund, and for those funds for which First
Trust served as sub-adviser, for which the annual fee usually was 0.35% of
average daily net assets, the Board noted First Trust's statement that the
services provided to these funds (which are not ETFs) may not be comparable to
those to be provided to the Fund. In light of the nature, extent and quality of
services to be provided under the Agreement, and in light of First Trust's
agreement to waive fees and/or pay Fund expenses for at least two years, the
Board determined that the investment advisory fee for the 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 Fund 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, but had agreed to cap the
Fund's expenses for two years and did not anticipate making a profit in the near
term. 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 Fund 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 the Fundportfolio.
After discussion, the Board of Trustees, including the Independent Trustees,
concluded that First Trust had the capabilities, resources and personnel
necessary to manage the Fund. Based upon such information as it considered
necessary to the exercise of its reasonable business judgment, the Trustees
concluded that it was in the best interests of the 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.
Page 42
- --------------------------------------------------------------------------------
Additional Information - (Continued)
- --------------------------------------------------------------------------------
First Trust Exchange-Traded Fund II
September 30, 2008
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.
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 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.
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 43
- --------------------------------------------------------------------------------
Board of Trustees and Officers (Unaudited)
- --------------------------------------------------------------------------------
First Trust Exchange-Traded Fund II
September 30, 2008
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.
NUMBER OF
PORTFOLIOS IN
THE FIRST TRUST OTHER
TERM OF OFFICE FUND COMPLEX TRUSTEESHIPS OR
NAME, ADDRESS AND YEAR FIRST OVERSEEN BY DIRECTORSHIPS
DATE OF BIRTH AND ELECTED OR PRINCIPAL OCCUPATIONS TRUSTEE HELD BY TRUSTEE
POSITION WITH THE TRUST APPOINTED DURING PAST 5 YEARS
- ----------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
- ----------------------------------------------------------------------------------------------------------------------------------
Richard E. Erickson, Trustee o Indefinite Term Physician; President, 60 None
c/o First Trust Advisors L.P. Wheaton Orthopedics;
120 East Liberty Drive o Since Inception Co-owner and Co-Director
Suite 400 (January 1996 to May
Wheaton, IL 60187 2007), Sports Med Center
D.O.B. : 04/51 for Fitness; Limited
Partner, Gundersen Real
Estate Partnership;
Limited Partner, Sportsmed LLC
Thomas R. Kadlec, Trustee o Indefinite Term Senior Vice President and 60 Director of ADM Investor
c/o First Trust Advisors L.P. Chief Financial Officer Services, Inc.
120 East Liberty Drive o Since Inception (May 2007 to Present), and Director of
Suite 400 Vice President and Chief Archer Financial
Wheaton, IL 60187 Financial Officer (1990 to Services, Inc.
D.O.B. : 11/57 May 2007), ADM Investor
Services, Inc. (Futures
Commission Merchant);
President (May 2005 to
Present), ADM Derivatives,
Inc.; Registered
Representative (2000 to
Present), Segerdahl &
Company, Inc., a FINRA
member (Broker-Dealer)
Robert F. Keith, Trustee o Indefinite Term President (2003 to 60 None
c/o First Trust Advisors L.P. Present), Hibs Enterprises
120 East Liberty Drive o Since Inception (Financial and Management
Suite 400 Consulting); President
Wheaton, IL 60187 (2001 to 2003), Aramark
D.O.B. : 11/56 Service Master Management;
President and Chief
Operating Officer (1998 to
2003), Service Master
Management Services
Niel B. Nielson, Trustee o Indefinite Term President (June 2002 to 60 Director of
c/o First Trust Advisors L.P. Present), Covenant College Covenant
120 East Liberty Drive o Since Inception Transport Inc.
Suite 400
Wheaton, IL 60187
D.O.B. : 03/54
- ----------------------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEE
- ----------------------------------------------------------------------------------------------------------------------------------
James A. Bowen(1), Trustee, o Indefinite Term President, First Trust 60 Trustee of
President, Chairman of the Board Advisors L.P. and First Wheaton College
and CEO o Since Inception Trust Portfolios L.P.;
120 East Liberty Drive Chairman of the Board of
Suite 400 Directors, BondWave
Wheaton, IL 60187 LLC (Software Development
D.O.B. : 09/55 Company/Broker-Dealer/Investment
Advisor) and Stonebridge
Advisors LLC (Investment Advisor)
_______________________
(1) Mr. Bowen is deemed an "interested person" of the Trust due to his position
as President of First Trust Advisors L.P., investment advisor of the Trust.
Page 44
- --------------------------------------------------------------------------------
Board of Trustees and Officers (Unaudited) (Continued)
- --------------------------------------------------------------------------------
First Trust Exchange-Traded Fund II
September 30, 2008
NAME, ADDRESS POSITION AND OFFICES TERM OF OFFICE AND PRINCIPAL OCCUPATIONS
AND DATE OF BIRTH WITH TRUST LENGTH OF SERVICE DURING PAST 5 YEARS
- ----------------------------------------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES(2)
- ----------------------------------------------------------------------------------------------------------------------------------
Mark R. Bradley Treasurer, Controller, o Indefinite Term Chief Financial Officer,
120 East Liberty Drive Chief Financial Officer First Trust Advisors L.P. and
Suite 400 and Chief Accounting o Since Inception First Trust Portfolios L.P.;
Wheaton, IL 60187 Officer Chief Financial Officer,
D.O.B. : 11/57 BondWave LLC (Software
Development
Company/Broker-Dealer/Investment
Advisor) and Stonebridge
Advisors LLC (Investment
Advisor)
James M. Dykas Assistant Treasurer o Indefinite Senior Vice President (April
120 East Liberty Drive Term 2007 to Present), Vice
Suite 400 President (January 2005 to
Wheaton, IL 60187 o Since Inception April 2007), First Trust
D.O.B. : 01/66 Advisors L.P. and First Trust
D.O.B. : 01/66 Portfolios L.P.; Executive
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
120 East Liberty Drive Compliance Officer Advisors L.P. and First Trust
Suite 400 o Since Inception Portfolios L.P.; Secretary,
Wheaton, IL 60187 BondWave LLC (Software
D.O.B. : 05/60 Development
Company/Broker-Dealer/Investment
Advisor)and Stonebridge Advisors
LLC (Investment Advisor)
Daniel J. Lindquist Vice President o Indefinite Senior Vice President
120 East Liberty Drive Term (September 2005 to Present),
Suite 400 Vice President (April 2004 to
Wheaton, IL 60187 o Since Inception September 2005), First Trust
D.O.B. : 02/70 Advisors L.P. and First Trust
Portfolios L.P.; Chief
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
120 East Liberty Drive 2007 to Present), Assistant
Suite 400 o Since Inception General Counsel (March 2004
Wheaton, IL 60187 to May 2007), First Trust
D.O.B. : 12/66 Advisors L.P. and First Trust
Portfolios L.P.; Associate
(December 1995 to March
2004), Chapman and Cutler LLP
Roger F. Testin Vice President o Indefinite Term Senior Vice President,(November 2003 to
120 East Liberty Drive Present), Vice President(August 2001 to
Suite 400 o Since Inception November 2003), First Trust Advisors L.P.
Wheaton, IL 60187 and First TRust Portfolios L.P.;
D.O.B. : 06/66 Analyst (1998-2001), Dolan
Capital Management
Coleen D. Lynch Assistant Vice President o Indefinite Term Assistant Vice President
120 East Liberty Drive (January 2008 to Present),
Suite 400 o Since July, 2008 First Trust Advisors L.P. and
Wheaton, IL 60187 First Trust Portfolios L.P.;
D.O.B. : 07/58 Vice President (May 1998 to
January 2008), Van Kampen
Asset Management and Morgan
Stanley Investment Managment
Stan Ueland Vice President o Indefinite Term Vice President (August 2005
120 East Liberty Drive to Present), First Trust
Suite 400 o Since Inception Advisors L.P. and First Trust
Wheaton, IL 60187 Portfolios L.P; Vice
D.O.B. : 11/70 President (May 2004 to August
2005), BondWave LLC (Software
Development
Company/Broker-Dealer/Investment
Advisor); 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
___________________
(2) The term "officer" means the president, vice president, secretary,
treasurer, controller or any other officer who performs a policy making
function.
Page 45
- --------------------------------------------------------------------------------
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 Fund shares directly from a Fund and individual Fund 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. Fund shares are subject to market fluctuations caused by such factors as
economic, political, regulatory or market developments, changes in interest
rates and perceived trends in stock prices. Overall stock values could decline
generally or could underperform other investments. In 2008, securities markets
have been significantly negatively affected by the financial crisis that
initially resulted from the downturn in the subprime mortgage market in the
United States. The potential impact of the financial crisis on securities
markets may prove to be significant and long-lasting and may have a substantial
impact on the value of a Fund.
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 indices, 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 licenses and related
sublicenses 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. A concentration makes a Fund more susceptible to any single
occurrence affecting the industry and may subject a Fund to greater market risk
than more diversified funds.
The Funds are not actively managed. The Funds may be affected by a general
decline in certain market segments relating to their corresponding index. The
Funds invest in securities included in or representative of its Index regardless
of the securities' investment merit. The Funds generally will not attempt to
take defensive positions in declining markets.
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 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. Some of these risks may include, but are not limited to, the
following: (i) there may be less publicly available information about non-U.S.
issuers or markets due to less rigorous disclosure or accounting standards or
regulatory practices; (ii) non-U.S. markets may be smaller, less liquid and more
volatile than the U.S. market; (iii) potential adverse effects of fluctuations
in currency exchange rates or controls on the value of a Fund's investments;
(iv) the economies of non-U.S. countries may grow at slower rates than expected
Page 46
- --------------------------------------------------------------------------------
Risk Considerations (Unaudited) (Continued)
- --------------------------------------------------------------------------------
or may experience a downturn or recession; (v) the impact of economic,
political, social or diplomatic events; (vi) certain non-U.S. countries may
impose restrictions on the ability of non-U.S. issuers to make distribution
payments to investors located in the United States due to blockage of non-U.S.
currency exchanges or otherwise; and (vii) withholding and other non-U.S. taxes
may decrease a Fund's return. These risks may be more pronounced to the extent
that the Fund invests a significant amount of its assets in companies located in
one country.
Because each Fund's NAV is determined on the basis of U.S. dollars, you may lose
money if the local currency of a foreign market depreciates against the U.S.
dollar, even if the local currency value of a Fund's holdings goes up.
Each Fund may 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 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 as a result of several
factors, including limited trading volumes, products or financial resources,
management inexperience and less publicly available information. Accordingly,
such companies are generally subject to greater market risk than larger, more
established companies.
Each Fund may invest in companies that are considered to be PFICs, which are
generally certain non-U.S. corporations that receive at least 75% of their
annual gross income from passive sources (such as interest, dividends, certain
rents and royalties or capital gains) or that hold at least 50% of their assets
in investments producing such passive income. Therefore, such Funds could be
subject to U.S. federal income tax and additional interest charges on gains and
certain distributions with respect to those equity interests, even if all the
income or gain is distributed to its shareholders in a timely manner. Such Fund
will not be able to pass through to its shareholders any credit or deduction for
such taxes.
Each Fund may invest in securities issued by companies headquartered in Europe.
Such Funds are therefore subject to certain risks associated specifically with
Europe. A significant number of countries in Europe are member states in the EU,
and the member states no longer control their own monetary policies by directing
independent interest rates for their currencies. In these member states, the
authority to direct monetary policies, including money supply and official
interest rates for the Euro, is exercised by the European Central Bank. In
addition, European corporations, and other entities with significant markets or
operations in Europe (whether or not in the participating countries), face
strategic challenges as these entities adapt to a single transnational currency.
The Euro conversion 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.
The First Trust FTSE EPRA/NAREIT Global Real Estate Index Fund invests in
securities issued by companies headquartered in Asia and is therefore subject to
certain risks associated specifically with Asia. For example, some of the
currencies of these countries have experienced devaluations relative to the U.S.
dollar, and adjustments have been made periodically in certain of such
currencies. Certain countries, such as Indonesia, face serious exchange
constraints. Jurisdictional disputes also exist, for example, between South
Korea and North Korea. The Tokyo stock market, as measured by the Tokyo Stock
Price Index, has been volatile. Declines in the Tokyo stock market have made the
country's banks and financial institutions vulnerable because of their large
share portfolios. Japanese banks have been left with large numbers of
nonperforming loans. The Japanese economy labors under a heavy government budget
deficit and historically low interest rates. As a result of these factors,
several high-profile bankruptcies of Japanese banks, brokerage firms and
insurance companies have occurred.
The Funds may invest in companies that may be significantly affected by the
downturn in the U.S. and world economies that began with the significant decline
in the subprime mortgage lending market in the United States. Due to the
downturn, subprime mortgage loans have in recent periods experienced increased
rates of delinquency, foreclosure, bankruptcy and loss, and are likely to
continue to be subject to interest rates that are significantly higher than
those experienced by mortgage loans underwritten in a traditional manner. The
downturn in the subprime mortgage lending market and the resulting impact on the
world's economies has had a significant adverse effect on the financials sector
and the economy and may have far-reaching consequences into various aspects of
the financials sector, and consequently, the value of the Fund may decline in
response to such developments.
The First Trust FTSE EPRA/NAREIT Global Real Estate Index Fund invests in
companies in the real estate industry, including REITs and therefore, the Fund
is subject to the risks associated with investing in real estate, which may
include, but are not limited to, possible declines in the value of real estate,
adverse general and local economic conditions, possible lack of availability of
mortgage funds, overbuilding in a REIT's market, changes in interest rates and
environmental problems. Because the Fund invests in REITs it is subject to
certain other risks related to REIT structure and focus, which include, but are
not limited to, dependency upon management skills, limited diversification, the
risks of locating and managing financing for projects, heavy cash flow
Page 47
- --------------------------------------------------------------------------------
Risk Considerations (Unaudited) (Continued)
- --------------------------------------------------------------------------------
dependency, possible default by borrowers, the costs and potential losses of
selfliquidation of one or more holdings, and, in many cases, relatively small
market capitalization, which may result in less market liquidity and greater
price volatility.
The First Trust FTSE EPRA/NAREIT Global Real Estate Index Fund is also subject
to interest rate risk. 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. Because the market price of REIT stocks
may change based upon investors' collective perceptions of future earnings, 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. Subprime loans have higher
defaults and losses than prime loans. Subprime loans also have higher serious
delinquency rates than prime loans. 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.
The First Trust Dow Jones Global Select Dividend Index Fund and the First Trust
DJ STOXX(R) Select Dividend 30 Index Fund invest in the securities of companies
in the financials sector. Banks, thrifts and their holding companies are
especially subject to the adverse effects of economic recession; volatile
interest rates; portfolio concentrations in geographic markets and in commercial
and residential real estate loans; and competition from new entrants in their
fields of business. These industries are generally extensively regulated and may
be adversely affected by increased regulations.
The First Trust ISE Global Wind Energy Index Fund invests in wind energy
companies. Wind energy companies can be significantly affected by obsolescence
of existing technology, short product cycles, falling prices and profits,
competition from new market entrants and general economic conditions. This can
be significantly affected by fluctuations in energy prices and supply and demand
of alternative energy fuels, energy conservation, the success of exploration
projects and tax and other government regulations. Wind energy companies could
be adversely affected by commodity price volatility, changes in exchange rates,
imposition of import controls, increased competition, depletion of resources,
technological developments and labor relations.
The First Trust ISE Global Wind Energy Index Fund invests in the securities of
companies in the industrials sector. Many companies in this sector convert
unfinished goods into finished durables used to manufacture other goods or
provide services. Some industries included in this sector are electrical
equipment and components, industrial products, manufactured housing and
telecommunications equipment. General risks of these companies include the
general state of the economy, intense competition, consolidation, domestic and
international politics, excess capacity and consumer demand and spending trends.
In addition, they may also be significantly affected by overall capital spending
levels, economic cycles, technical obsolescence, delays in modernization, labor
relations, government regulations and e-commerce initiatives.
The First Trust ISE Global Wind Energy Index Fund invests in the securities of
companies in the utilities sector. General problems of issuers in the utilities
sector include the imposition of rate caps, increased competition due to
deregulation, the difficulty in obtaining an adequate return on invested capital
or in financing large construction projects, the limitations on operations and
increased costs and delays attributable to environmental considerations and the
capital market's ability to absorb utility debt. In addition, taxes, government
regulation, international politics, price and supply fluctuations, volatile
interest rates and energy conservation may cause difficulties for utilities. All
of such issuers have been experiencing certain of these problems in varying
degrees.
NOT FDIC INSURED NOT BANK GUARANTEED MAY LOSE VALUE
Page 48
[BLANK INSIDE BACK COVER]
LOGO OMMITTED FIRST TRUST
FIRST TRUST EXCHANGE-TRADED FUND II
- -------------------------------------------------------------------------------
INVESTMENT ADVISOR
First Trust Advisors L.P.
120 East Liberty Drive
Wheaton, Il 60187
ADMINISTRATOR, CUSTODIAN,
FUND ACCOUNTANT &
TRANSFER AGENT
The Bank of New York Mellon
101 Barclay Street
New York, Ny 10286
BOARD ADMINISTRATOR
PNC Global Investment Servicing (U.S.) 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 description.
(d) The registrant, during the period covered by this report, has not
granted any waivers, including an implicit waiver, from a provision of
the code of ethics that applies to the registrant's principal executive
officer, principal financial officer, principal accounting officer or
controller, or persons performing similar functions, regardless of
whether these individuals are employed by the registrant or a third
party, that relates to one or more of the items set forth in paragraph
(b) of this item's instructions.
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 each of
the last two fiscal years 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 for those fiscal years were
$6,500 from the inception of the registrant on August 27, 2007 through September
30, 2007 and $50,000 for the fiscal year ended September 30, 2008.
(b) Audit-Related Fees (Registrant) -- The aggregate fees billed in
each of the last two fiscal years 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 and $0 for the fiscal year ended September 30, 2008.
Audit-Related Fees (Investment Adviser and Distributor) -- The
aggregate fees billed in each of the last two fiscal years 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 and $0 for the fiscal
year ended September 30, 2008.
(c) Tax Fees (Registrant) -- The aggregate fees billed in each of the
last two fiscal years 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 and $2,250 for the fiscal year ended September 30, 2008.
These fees were for tax consultation.
Tax Fees (Investment Adviser and Distributor) -- The aggregate fees
billed in each of the last two fiscal years for professional services rendered
by the principal accountant for tax compliance, tax advice, and tax planning to
the registrant's adviser and distributor were $0 from the inception of the
registrant on August 27, 2007 through September 30, 2007 and $0 for the fiscal
year ended September 30, 2008.
(d) All Other Fees (Registrant) -- The aggregate fees billed in each of
the last two fiscal years for products and services provided by the principal
accountant to the registrant, other than the services reported in paragraphs (a)
through (c) of this Item were $0 from the inception of the registrant on August
27, 2007 through September 30, 2007 and $0 for the fiscal year ended September
30, 2008.
All Other Fees (Investment Adviser and Distributor) -- The
aggregate fees billed in each of the last two fiscal years for products and
services provided by the principal accountant to the registrant's investment
adviser and distributor, other than the services reported in paragraphs (a)
through (c) of this Item were $0 from the inception of the registrant on August
27, 2007 through September 30, 2007 and $0 for the fiscal year ended September
30, 2008.
(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 from the
inception of the registrant on August 27, 2007 through September 30, 2007, were
$0 for the registrant, $7,000 for the registrant's investment adviser and $6,800
for the registrant's distributor, and for the fiscal year ended September 30,
2008, were $2,250 for the registrant, $12,143 for the registrant's investment
adviser and $36,288 for the registrant's distributor.
(h) The registrant's audit committee of its Board of Trustees has
determined that the provision of non-audit services that were rendered to the
registrant's investment 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.
(a) Schedule of Investments in securities of unaffiliated issuers as of the
close of the reporting period is included as part of the report to
shareholders filed under Item 1 of this form.
(b) Not applicable.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT
INVESTMENT COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There have been no material change to the procedures by which the shareholders
may recommend nominees to the registrant's board of directors, where those
changes were implemented after the registrant last provided disclosure in
response to the requirements of Item 407 (c) (2) (iv) of Regulation S-K (17 CFR
229.407) (as required by Item 22 (b) (15) of Schedule 14A (17 CFR 240.14a-101)),
or this Item.
ITEM 11. CONTROLS AND PROCEDURES.
(a) The registrant's principal executive and principal financial officers, or
persons performing similar functions, have concluded that the registrant's
disclosure controls and procedures (as defined in Rule 30a-3(c) under the
Investment Company Act of 1940, as amended (the "1940 Act") (17 CFR
270.30a-3 (c))) are effective, as of a date within 90 days of the filing
date of the report that includes the disclosure required by this
paragraph, based on their evaluation of these controls and procedures
required by Rule 30a-3(b) under the 1940 Act (17 CFR 270.30a-3(b)) and
Rules 13a-15(b) or 15d-15(b) under the Securities Exchange Act of 1934, as
amended (17 CFR 240.13a-15(b) or 240.15d-15 (b)).
(b) There were no changes in the registrant's internal control over financial
reporting (as defined in Rule 30a-3(d) under the 1940 Act (17 CFR
270.30a-3(d)) that occurred during the registrant's last fiscal quarter of
the period covered by this report that have materially affected, or are
reasonably likely to materially affect, the registrant's internal control
over financial reporting.
ITEM 12. EXHIBITS.
(a) (1) Code of ethics, or any amendment thereto, that is the subject of
disclosure required by Item 2 is attached 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.
(a) (3) Not Applicable
(b) Certifications pursuant to Rule 30a-2(b) under the 1940 Act and Section 906
of the Sarbanes-Oxley Act of 2002 are attached hereto.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant) First Trust Exchange-Traded Fund II
By: /s/ James A. Bowen
------------------------------------
Name: James A. Bowen
Title: Chairman of the Board, President and Chief Executive Officer
Date: November 24, 2008
-----------------------------
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 24, 2008
-----------------------------
By: /s/ Mark R. Bradley
------------------------------------
Name: Mark R. Bradley
Title: Treasurer, Controller, Chief Financial Officer and Chief
Accounting Officer
Date: November 24, 2008
-----------------------------