CHAPMAN AND CUTLER LLP 111 WEST MONROE STREET
CHICAGO, ILLINOIS 60603
October 10, 2014
VIA EDGAR CORRESPONDENCE
------------------------
Karen Rossotto
United States Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549
Re: First Trust Exchange-Traded Fund II (the "Trust")
File Nos. 811-21944 and 333-143964
-------------------------------------------------------
Dear Ms. Rossotto:
This letter responds to your comments regarding the registration statement
filed on Form N-1A for First Trust Exchange-Traded Fund II (the "Trust") with
the Securities and Exchange Commission (the "Commission") on July 25, 2014 (the
"Registration Statement"). The Registration Statement relates to the First Trust
International IPO ETF (the "Fund"), a series of the Trust. Capitalized terms
used herein, but not otherwise defined, have the meanings ascribed to them in
the Registration Statement.
Please also note that to the extent that your previous comments to
recently filed registration statements for the First Trust family of open-end
and exchange-traded funds were applicable, we have made the corresponding
changes to the prospectus and statement of additional information of this Fund.
COMMENT 1 - COVER PAGE
The narrative on the Cover Page that starts with the third sentence of the
second paragraph is neither required nor permitted in Form N-1A. Consider
removing the second and third sentence of the second paragraph on the Cover
Page.
RESPONSE TO COMMENT 1
This disclosure has not been removed from the Cover Page because the
exemptive relief on which the Trust relies (Investment Company Act Release Nos.
20751 (August 25, 2005) (notice) and 27068 (September 20, 2005) (order))
requires this disclosure.
Karen Rossotto
October 10, 2014
Page 2
COMMENT 2 - ANNUAL FUND OPERATING EXPENSES
Footnote 1 to the Annual Fund Operating Expenses Table discloses that the
Fund has adopted a 12b-1 plan that will not require the Fund to pay 12b-1 fees
for a certain period of time. Confirm that the Fund will not pay 12b-1 fees for
at least one year from the date of this prospectus.
RESPONSE TO COMMENT 2
It is confirmed that the Fund will not pay 12b-1 fees for at least one
year from the date of this prospectus.
COMMENT 3 - PRINCIPAL INVESTMENT STRATEGIES
The third sentence of the second paragraph in this section states that
"the Index utilizes a 10% capping on all constituents and includes the 50
largest, typically best performing and most liquid initial public offerings
("IPOs") of companies domiciled outside the United States in the IPOX(R) Global
Composite Index." Provide a "plain English" explanation of the capping mechanism
as applied to the largest constituents.
RESPONSE TO COMMENT 3
The disclosure has been revised in accordance with this comment.
COMMENT 4 - PRINCIPAL INVESTMENT STRATEGIES
The third sentence of the second paragraph in this section mentions that
the Index includes the "most liquid" IPOs. How does the Index Provider determine
which IPOs are most liquid. Explain how components are handled when they are no
longer deemed to be liquid and the mechanism by which such components are
removed from the Index.
RESPONSE TO COMMENT 4
Liquidity is determined by calculating the average and median equity
turnover in U.S. dollars of a respective stock over a 21-trading-day rolling
window after its IPO. To eliminate the influence of the first trading day, which
typically captures abnormal equity turnover in an IPO, the Index Provider starts
its calculations on the second trading day of the IPO. Companies will be
eligible for consideration if the average and median 21-trading-day equity
turnover exceeds $4 million. Should this value decline substantially over time,
Karen Rossotto
October 10, 2014
Page 3
an Index constituent may be subject to removal at the next quarterly
rebalancing. The disclosure has been revised in accordance with this comment.
COMMENT 5 - PRINCIPAL INVESTMENT STRATEGIES
The third sentence of the second paragraph states that the Index includes
securities of companies domiciled outside of the United States. Describe the
criteria used in determining the country in which a company is domiciled. Are
there any countries that are "overly represented" in the Index? Will the Index
focus on any specific countries? Will the Index have representation from
emerging market countries? Provide the appropriate disclosure.
RESPONSE TO COMMENT 5
The criteria is based on the legal domicile of a company. This information
is publicly available and processed by the Index Provider using Bloomberg and
Datastream. If Bloomberg and Datastream provide contradictory information, the
Index Provider manually verifies publicly available documents. The Index does
not seek to limit the influence of any country or region through the application
of capping restrictions; as such, it is possible from time to time that the
Index will have emerging markets exposure or may be concentrated in certain
regions.
COMMENT 6 - PRINCIPAL INVESTMENT STRATEGIES
Please provide the general market capitalization ranges for securities
included in the Index.
RESPONSE TO COMMENT 6
The disclosure has been revised in accordance with this comment.
COMMENT 7 - PRINCIPAL INVESTMENT STRATEGIES
The fourth sentence of the second paragraph of this section states that an
IPO is a public offering in which the shares of stock in a company are sold to
the general public for the first time, "usually on an exchange." Confirm that
the language implying that securities involved in an IPO can be sold off of an
exchange is appropriate. Clarify the disclosure as appropriate.
Karen Rossotto
October 10, 2014
Page 4
RESPONSE TO COMMENT 7
The Index captures only constituents that trade publicly on an accessible
global stock exchange. The disclosure has been revised accordingly.
COMMENT 8 - PRINCIPAL INVESTMENT STRATEGIES AND PRINCIPAL RISKS
To the extent that the Index or Fund has any concentration in a sector or
industry, provide the appropriate disclosures in the Principal Investment
Strategies and Principal Risks sections.
RESPONSE TO COMMENT 8
Due to the nature of the Index's focus on IPOs, the Index Provider is
unable to predict the sector(s) or industry(ies) of concentration of the Index.
The disclosure will reflect that the Fund will be concentrated in a sector or
industry to the extent that the Index is so concentrated.
COMMENT 9 - PRINCIPAL INVESTMENT STRATEGIES
The penultimate sentence of paragraph two states that "eligible
constituents are added on the sixth day of trading and remain eligible to be
included in the Index for approximately four years." Describe the mechanism for
how the Index is rebalanced on the sixth day of trading. Also, provide an
explanation for why the Index Provider believes that a security that has been
trading for four years can be appropriately included in an IPO index fund. Will
the Fund utilize sampling or will it hold securities in the same weights as
those of the Index?
RESPONSE TO COMMENT 9
Eligible constituents are added to the IPOX(R) Global Composite Index (the
"Base Index") on the sixth day of trading. The Index and Fund portfolio are
rebalanced quarterly based on the Base Index at that time. The disclosure has
been revised accordingly.
The Index Provider believes, based on empirical evidence concerning
short-run over-performance and a large dispersion of equally-weighted IPO
returns up to approximately four years in aftermarket trading, that four years
is an appropriate length of time for securities to remain in an IPO index.
Karen Rossotto
October 10, 2014
Page 5
COMMENT 10 - PRINCIPAL INVESTMENT STRATEGIES
Provide explicit disclosure that securities will not be added to the Index
until they have traded for six days and that investors will not have access to
the gains derived from the initial run-up in the IPO's price.
RESPONSE TO COMMENT 10
The disclosure has been revised in accordance with this comment.
COMMENT 11 - PRINCIPAL INVESTMENT STRATEGIES AND PRINCIPAL RISKS
To the extent that emerging markets will be a part of the Fund's principal
investment strategy, provide the appropriate disclosure in both the Principal
Investment Strategies and Principal Risks sections.
RESPONSE TO COMMENT 11
The disclosure has been revised in accordance with this comment.
COMMENT 12 - PRINCIPAL RISKS
To the extent the Fund anticipates periods of high turnover, provide
appropriate risk disclosure.
RESPONSE TO COMMENT 12
The disclosure has been revised in accordance with this comment.
COMMENT 13 - PRINCIPAL RISKS
With respect to the Depositary Receipts Risk, provide the appropriate risk
disclosure if the Fund anticipates investing in unsponsored depositary receipts.
RESPONSE TO COMMENT 13
The Fund does not anticipate investing in unsponsored depositary receipts.
Karen Rossotto
October 10, 2014
Page 6
COMMENT 14 - PRINCIPAL RISKS
To the extent that the Fund anticipates that financial companies will be a
part of the Fund's principal investment strategy, provide the appropriate
disclosure in the Principal Investment Strategies section.
RESPONSE TO COMMENT 14
The disclosure has been revised in accordance with this comment.
COMMENT 15 - PRINCIPAL RISKS
To the extent there might be liquidity concerns for the securities
comprising the Index, include appropriate risk disclosure in the "IPO Risks"
under the Principal Risks section.
RESPONSE TO COMMENT 15
The Index Provider rebalances the Index quarterly and consequently does
not anticipate liquidity concerns.
COMMENT 16 - ADDITIONAL INFORMATION ON THE FUND'S INVESTMENT OBJECTIVE AND
STRATEGIES
If derivatives are used by the Fund, particularly with respect to the 90%
of the securities that comprise the Index, disclose that such derivatives will
be valued according to their market value and not their notional value.
RESPONSE TO COMMENT 16
Derivatives will not be used by the Fund to meet the 90% test of
investment in securities that comprise the Index.
COMMENT 17 - ADDITIONAL INFORMATION ON THE FUND'S INVESTMENT OBJECTIVE AND
STRATEGIES
The final sentence of the second paragraph states the Fund may sell
securities that are represented in the Index in anticipation of their removal
Karen Rossotto
October 10, 2014
Page 7
from the Index or purchase securities not represented in the Index in
anticipation of their addition to the Index. Provide an explanation for how this
will work.
RESPONSE TO COMMENT 17
The Fund may sell securities that are represented in the Index primarily
for tax purposes. For example, the Fund may sell the security of a company that
is going to be acquired/merged, which if held by the Fund would result in a
capital gain. Also, such a corporate event would result in the security being
removed from the Index. The fund will not purchase securities not represented in
the Index in anticipation of their addition to the Index. The disclosure has
been revised accordingly.
COMMENT 18 - FUND INVESTMENTS AND PRINCIPAL RISKS
To the extent that the Fund invests in a particular asset class as a part
of its principal investment strategy, provide the appropriate related risk
disclosure.
RESPONSE TO COMMENT 18
The disclosure has been revised in accordance with this comment.
COMMENT 19 - MANAGEMENT OF THE FUND
Because there is no one individual primarily responsible for the portfolio
management decisions of the Fund, provide disclosure that the Investment
Committee members are jointly and primarily responsible for the day-to-day
management of the Fund. See Item 5, Instruction 2 of Form N-1A.
RESPONSE TO COMMENT 19
The disclosure has been revised in accordance with this comment.
COMMENT 20 - INDEX INFORMATION
The final sentence of the first paragraph states, "The IPOX Global
Composite currently captures _____ companies with $__ trillion market cap, $__
float and a daily average equity turnover of approximately $__billion." Confirm
that this language is correct.
Karen Rossotto
October 10, 2014
Page 8
RESPONSE TO COMMENT 20
The disclosure has been revised in accordance with this comment.
COMMENT 21 - INDEX INFORMATION
The second paragraph of this section indicates that the Index is
constructed and managed to provide a broad and objective view of global
aftermarket performance of IPOs and spin-offs in all world countries. Since
spin-offs may not be IPOs, explain why they may be included in an IPO index.
RESPONSE TO COMMENT 21
The Index Provider has included spin-offs in the Index because spin-offs
share similar statistical properties with IPOs, such as a lack of historical
price information, potentially implying a high uncertainty over a company's true
value when "going public."
From an Index construction point of view, spin-offs are typically
large-cap companies with sustainable underlying businesses that add a large-cap
tilt, dividends and substantial equity turnover to the portfolio. They have
typically demonstrated corporate performance trends after the "going public"
event similar to IPOs.
COMMENT 22 - INDEX INFORMATION
The first sentence of the fourth paragraph states that the Index provides
"average, rather than median, exposure" to the performance of non-U.S. IPOs.
Describe the significance of this distinction.
RESPONSE TO COMMENT 22
The Index seeks to address the skewing related to the average performance
of global IPOs, whereby the positive aftermarket return of an equally-weighted
sample as a whole is driven by a limited number of companies that substantially
outperform expectations. The Index seeks to take advantage of this higher
average through an applied market-cap weighted methodology.
Karen Rossotto
October 10, 2014
Page 9
COMMENT 23 - STATEMENT OF ADDITIONAL INFORMATION - GENERAL DESCRIPTION OF
HEDGING STRATEGIES
The final sentence of the first paragraph states that Futures are not a
part of the principal investment strategy of the Fund. Explain whether this
means that the use of other derivatives is part of the principal investment
strategy of the Fund.
RESPONSE TO COMMENT 23
The disclosure has been revised in accordance with this comment.
COMMENT 24 - STATEMENT OF ADDITIONAL INFORMATION - INVESTMENT RISKS
Confirm whether the risk disclosure language pertaining to Financials
Concentration Risk is applicable.
RESPONSE TO COMMENT 24
The disclosure has been revised in accordance with this comment.
COMMENT 25 - STATEMENT OF ADDITIONAL INFORMATION - ADDITIONAL RISKS OF INVESTING
IN THE FUND
Provide an explanation for why some of the risks included in the
"Additional Risks of Investing in the Fund" section of the statement of
additional information do not necessarily match the risks provided in the
prospectus. Reconcile these differences. Specifically, distinguish between the
risks that are principal risks and those that are other risks of investing in
the Fund.
RESPONSE TO COMMENT 25
The disclosure has been revised in accordance with this comment.
* * *
Karen Rossotto
October 10, 2014
Page 10
TANDY ACKNOWLEDGMENT
In connection with the Trust's Registration Statement, the Trust
acknowledges that:
o it is responsible for the adequacy and accuracy of the disclosure in
the filing;
o staff comments or changes to disclosure in response to staff
comments in the filings reviewed by the staff do not foreclose the
Commission from taking any action with respect to the filing; and
o the Trust may not assert staff comments as a defense in any
proceeding initiated by the Commission or any person under the
federal securities laws of the United States.
Please call me at (312) 845-3484 if you have any questions or issues you
would like to discuss regarding these matters.
Sincerely yours,
CHAPMAN AND CUTLER LLP
By: /s/ Morrison C. Warren
----------------------------
Morrison C. Warren