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 811-22767
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First Trust Exchange-Traded Fund VII
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(Exact name of registrant as specified in charter)
Exact name of registrant as specified in charter)
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
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(Address of principal executive offices) (Zip code)
W. Scott Jardine, Esq.
First Trust Portfolios L.P.
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
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(Name and address of agent for service)
Registrant's telephone number, including area code: (630) 765-8000
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Date of fiscal year end: December 31
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Date of reporting period: December 31, 2014
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Form N-CSR is to be used by management investment companies to file reports with
the Commission not later than 10 days after the transmission to stockholders of
any report that is required to be transmitted to stockholders under Rule 30e-1
under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may
use the information provided on Form N-CSR in its regulatory, disclosure review,
inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR,
and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the
burden to Secretary, Securities and Exchange Commission, 450 Fifth Street, NW,
Washington, DC 20549-0609. The OMB has reviewed this collection of information
under the clearance requirements of 44 U.S.C. 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:
FIRST TRUST
First Trust Exchange-Traded Fund VII
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First Trust Global Tactical Commodity Strategy Fund (FTGC)
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Annual Report
December 31, 2014
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TABLE OF CONTENTS
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FIRST TRUST GLOBAL TACTICAL COMMODITY STRATEGY FUND (FTGC)
ANNUAL REPORT
DECEMBER 31, 2014
Shareholder Letter........................................................... 1
Fund Performance Overview.................................................... 2
Portfolio Commentary......................................................... 4
Understanding Your Fund Expenses............................................. 6
Consolidated Portfolio of Investments........................................ 7
Consolidated Statement of Assets and Liabilities............................. 9
Consolidated Statement of Operations......................................... 10
Consolidated Statements of Changes in Net Assets............................. 11
Consolidated Financial Highlights............................................ 12
Notes to Consolidated Financial Statements................................... 13
Report of Independent Registered Public Accounting Firm...................... 19
Additional Information....................................................... 20
Board of Trustees and Officers............................................... 24
Privacy Policy............................................................... 26
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning of
the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934,
as amended. Forward-looking statements include statements regarding the goals,
beliefs, plans or current expectations of First Trust Advisors L.P. ("First
Trust" or the "Advisor") and its representatives, taking into account the
information currently available to them. Forward-looking statements include all
statements that do not relate solely to current or historical fact. For example,
forward-looking statements include the use of words such as "anticipate,"
"estimate," "intend," "expect," "believe," "plan," "may," "should," "would" or
other words that convey uncertainty of future events or outcomes.
Forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
First Trust Global Tactical Commodity Strategy Fund (the "Fund") to be
materially different from any future results, performance or achievements
expressed or implied by the forward-looking statements. When evaluating the
information included in this report, you are cautioned not to place undue
reliance on these forward-looking statements, which reflect the judgment of the
Advisor and its representatives only as of the date hereof. We undertake no
obligation to publicly revise or update these forward-looking statements to
reflect events and circumstances that arise after the date hereof.
PERFORMANCE AND RISK DISCLOSURE
There is no assurance that the Fund will achieve its investment objective. The
Fund is subject to market risk, which is the possibility that the market values
of investments 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 the Fund. See "Risk Considerations" in the Additional
Information section of this report for a discussion of other risks of investing
in the Fund.
Performance data quoted represents past performance, which is no guarantee of
future results, and current performance may be lower or higher than the figures
shown. For the most recent month-end performance figures, please visit
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 Fund's portfolio and presents data and analysis that
provide insight into the Fund's performance and investment approach.
The statistical information that follows may help you understand the Fund's
performance compared to that of relevant market benchmarks.
It is important to keep in mind that the opinions expressed by personnel of the
Advisor are just that: informed opinions. They should not be considered to be
promises or advice. The opinions, like the statistics, cover the period through
the date on the cover of this report. The risks of investing in the Fund are
spelled out in its prospectus, statement of additional information, this report
and other Fund regulatory filings.
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SHAREHOLDER LETTER
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FIRST TRUST GLOBAL TACTICAL COMMODITY STRATEGY FUND (FTGC)
ANNUAL LETTER FROM THE CHAIRMAN AND CEO
DECEMBER 31, 2014
Dear Shareholders:
I am pleased to present you with the annual report for your investment in First
Trust Global Tactical Commodity Strategy Fund (the "Fund"). This report provides
detailed information about the Fund, including a performance review and the
financial statements for the 12 months ended December 31, 2014. I encourage you
to read this document and discuss it with your financial advisor.
Although markets have seemed choppy over the past 12 months, the U.S. has shown
sustained growth over the period. In fact, the S&P 500(R) Index, as measured on
a total return basis, rose 13.69% in the time covered by this report. First
Trust Advisors L.P. ("First Trust") believes that staying invested in quality
products through different types of markets can benefit investors over the long
term.
First Trust is pleased to offer a variety of products that we believe could fit
the financial plans for many investors seeking long-term investment success. We
invite you to look at our investment products with your financial advisor to
determine if any of them might fit your financial goals. We believe that
regularly discussing your financial objectives and investment options with your
financial advisor can help keep you on track.
First Trust will continue to make available up-to-date information about your
investments so you and your financial advisor are current on any First Trust
investments you own. We value our relationship with you, and thank you for the
opportunity to assist you in achieving your financial goals.
Sincerely,
/s/ James A. Bowen
James A. Bowen
Chairman of the Board of Trustees
Chief Executive Officer of First Trust Advisors L.P.
Page 1
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FUND PERFORMANCE OVERVIEW (UNAUDITED)
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FIRST TRUST GLOBAL TACTICAL COMMODITY STRATEGY FUND (FTGC)
First Trust Global Tactical Commodity Strategy Fund's (the "Fund") investment
objective is to seek to provide total return by providing investors with
commodity exposure while seeking a relatively stable risk profile. The Fund is
an actively managed exchange-traded fund ("ETF") that seeks to achieve
attractive risk-adjusted return by investing in commodity futures contracts and
exchange-traded commodity linked instruments (collectively, "Commodities
Instruments") through a wholly-owned subsidiary of the Fund organized under the
laws of the Cayman Islands (the "Subsidiary"). The Fund expects to gain exposure
to these investments exclusively by investing in the Subsidiary. The Subsidiary
is advised by First Trust Advisors L.P., the Fund's advisor (the "Advisor").
The Fund's investment in the Subsidiary is intended to provide the Fund with
exposure to commodity markets within the limits of current federal income tax
laws applicable to investment companies such as the Fund, which limit the
ability of investment companies to invest directly in Commodities Instruments.
The Subsidiary has the same investment objective as the Fund, but unlike the
Fund, it may invest without limitation in Commodities Instruments. Except as
otherwise noted, references to the Fund's investments include the Fund's
indirect investments through the Subsidiary. The Fund may invest up to 25% of
its total assets in the Subsidiary.
The Subsidiary seeks to make investments generally in Commodities Instruments
while managing volatility. Investment weightings of the underlying Commodities
Instruments held by the Subsidiary are rebalanced in an attempt to stabilize
risk levels. The dynamic weighting process is designed to result in a
disciplined, systematic investment process, which is keyed off of the Advisor's
volatility forecasting process. The Subsidiary may have both long and short
positions in Commodities Instruments. However, for a given Commodity Instrument,
the Subsidiary will provide a net long exposure.
The remainder of the Fund's assets will primarily be invested in: (1) short-term
investment grade fixed income securities that include U.S. government and agency
securities, sovereign debt obligations of non-U.S. countries and repurchase
agreements; (2) money market instruments; (3) ETFs and other investment
companies registered under the Investment Company Act of 1940, as amended; and
(4) cash and other cash equivalents. The Fund uses such instruments as
investments and to collateralize the Subsidiary's Commodities Instruments
exposure on a day-to-day basis.
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PERFORMANCE
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AVERAGE ANNUAL CUMULATIVE
TOTAL RETURNS TOTAL RETURNS
1 Year Ended Inception (10/22/13) Inception (10/22/2013)
12/31/2014 to 12/31/2014 to 12/31/2014
FUND PERFORMANCE
NAV -11.89% -10.60% -12.50%
Market Price -11.65% -10.37% -12.24%
INDEX PERFORMANCE
Bloomberg Commodity Index(1) -17.01% -15.80% -18.53%
S&P GSCI(R) Total Return Index(2) -33.06% -28.89% -33.39%
S&P 500(R) Index(2) 13.69% 16.76% 20.28%
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Total returns for the period since inception are calculated from the inception
date of the Fund. "Average annual total returns" represent the average annual
change in value of an investment over the period indicated. "Cumulative total
returns" represent the total change in value of an investment over the period
indicated.
The Fund's per share net asset value ("NAV") is the value of one share of the
Fund and is computed by dividing the value of all assets of the Fund (including
accrued interest and dividends), less all liabilities (including accrued
expenses and dividends declared but unpaid), by the total number of outstanding
shares. The price used to calculate market return ("Market Price") is determined
by using the midpoint between the highest bid and the lowest offer on 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 its inception, for the period from inception to the
first day of secondary market trading in shares of the Fund, the NAV of the Fund
is used as a proxy for the secondary market trading price to calculate market
returns. NAV and market returns assume that all 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, 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, index returns do not
include brokerage commissions that may be payable on secondary market
transactions. If brokerage commissions were included, index returns would be
lower. The total returns presented reflect the reinvestment of dividends on
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(1) The Bloomberg Commodity Index is the Fund's benchmark. The benchmark's
name changed from Dow Jones-UBS Commodity Index to Bloomberg Commodity
Index as of July 1, 2014.
(2) The S&P 500(R) Index is being replaced with the S&P GSCI(R) Total Return
Index, which will provide a better and more appropriate comparison to the
Fund.
Page 2
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FUND PERFORMANCE OVERVIEW (UNAUDITED) (CONTINUED)
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FIRST TRUST GLOBAL TACTICAL COMMODITY STRATEGY FUND (FTGC) (CONTINUED)
securities in the indices. The returns presented do not reflect the deduction of
taxes that a shareholder would pay on Fund distributions or the redemption or
sale of Fund shares. The investment return and principal value of shares of the
Fund will vary with changes in market conditions. Shares of the Fund may be
worth more or less than their original cost when they are redeemed or sold in
the market. The Fund's past performance is no guarantee of future performance.
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PERFORMANCE OF A $10,000 INITIAL INVESTMENT
OCTOBER 22, 2013 - DECEMBER 31, 2014
First Trust Global Bloomberg S&P GSCI(R)
Tactical Commodity Commodity Total Return S&P 500(R)
Strategy Fund (FTGC) Index Index Index
10/22/13 $10,000 $10,000 $10,000 $10,000
12/31/13 9,930 9,817 9,952 10,580
6/30/14 11,237 10,512 10,520 11,335
12/31/14 8,749 8,147 6,661 12,089
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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 does
not predict future performance.
FREQUENCY DISTRIBUTION OF DISCOUNTS AND PREMIUMS
BID/ASK MIDPOINT VS. NAV THROUGH DECEMBER 31, 2014
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 October 23, 2013
(commencement of trading) through December 31, 2014. Shareholders may pay more
than NAV when they buy Fund shares and receive less than NAV when they sell
those shares because shares are bought and sold at current market price. Data
presented represents past performance and cannot be used to predict future
results.
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NUMBER OF DAYS BID/ASK MIDPOINT AT/ABOVE NAV
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FOR THE PERIOD 0.00%-0.49% 0.50%-0.99% 1.00%-1.99% >=2.00%
10/23/13 - 12/31/13 36 0 0 0
1/1/14 - 12/31/14 188 5 1 0
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NUMBER OF DAYS BID/ASK MIDPOINT BELOW NAV
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FOR THE PERIOD 0.00%-0.49% 0.50%-0.99% 1.00%-1.99% >=2.00%
10/23/13 - 12/31/13 9 3 0 0
1/1/14 - 12/31/14 57 1 0 0
Page 3
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PORTFOLIO COMMENTARY
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FIRST TRUST GLOBAL TACTICAL COMMODITY STRATEGY FUND (FTGC)
ANNUAL REPORT
DECEMBER 31, 2014
INVESTMENT MANAGER
First Trust Advisors L.P. ("First Trust"), Wheaton, Illinois, is the investment
advisor, commodity pool operator and commodity trading advisor to the First
Trust Global Tactical Commodity Strategy Fund (the "Fund" or "FTGC"). In this
capacity, First Trust is responsible for the selection and ongoing monitoring of
the investments in the Fund's portfolio and certain other services necessary for
the management of the portfolio. First Trust serves as advisor for three mutual
fund portfolios, nine exchange-traded funds consisting of 94 series, 15
closed-end funds, a variable insurance trust consisting of two series and is
also the portfolio supervisor of certain unit investment trusts sponsored by
First Trust Portfolios L.P. ("FTP"), Wheaton, Illinois. There is no one
individual primarily responsible for portfolio management decisions for the
Fund. Investments are made under the direction of the Investment Committee with
daily decisions being primarily made by John Gambla and Rob A. Guttschow.
PORTFOLIO MANAGEMENT TEAM
JOHN GAMBLA - CFA, FRM, PRM, SENIOR PORTFOLIO MANAGER
ROB GUTTSCHOW - CFA, SENIOR PORTFOLIO MANAGER
DANIEL J. LINDQUIST - CHAIRMAN OF THE INVESTMENT COMMITTEE AND MANAGING DIRECTOR
JON C. ERICKSON - SENIOR VICE PRESIDENT
DAVID G. MCGAREL - CHIEF INVESTMENT OFFICER AND MANAGING DIRECTOR
ROGER F. TESTIN - SENIOR VICE PRESIDENT
TODD LARSON - CFA, VICE PRESIDENT, FIXED INCOME PORTFOLIO MANAGER
TIMOTHY S. HENRY - CFA, ETF PORTFOLIO MANAGER
COMMENTARY
FIRST TRUST GLOBAL TACTICAL COMMODITY STRATEGY FUND
The Fund is an actively managed exchange-traded fund. The Fund's investment
objective is to seek to provide total return by providing investors with
commodity exposure while seeking a relatively stable risk profile. For
performance measurement, the Fund is benchmarked versus the unmanaged Bloomberg
Commodity Index (the "benchmark" or "Index"). This commentary discusses the
12-month market and Fund performance ended December 31, 2014.
OVERALL MARKET RECAP
The U.S. economy dropped into a deep freeze in the first quarter of 2014, as
severe cold weather across the middle of the country dampened economic activity,
resulting in a -2.1% decline in annualized first quarter GDP. As temperatures
returned to normal, the economy rebounded strongly, posting 4.6% and 5.0%
annualized growth rates in the second and third quarters, respectively. The
Atlanta Federal Reserve's current estimate for fourth quarter GDP is 3.3%. The
strong economic growth resulted in solid job gains during the year with the
headline unemployment rate falling from 6.6% as of December 31, 2013 to 5.6% as
of December 31, 2014.
U.S. stocks responded to the good economic news by rallying strongly throughout
the year, with the S&P 500(R) Index rallying 13.69%. Surprising many economic
forecasters, U.S. 10-year government bond yields also fell during the year, with
on-the-run 10-year Treasury yields falling 86 basis points to a yield of 2.17%
as of December 31, 2014. Globally, stocks were more mixed, as anemic overseas
growth dampened earnings expectations. In Europe, the Deutsche Boerse AG German
Stock Index, the CAC Index and FTSE 100 Index were up 2.65%, 2.57% and 1.04%,
respectively. In Japan, the Nikkei 225 was up 8.91%, despite the apparent
recurring recession.
In Europe and Asia, economic growth continued to be below expectations. For
2014, economic growth within the Euro Zone appears to be just above 0.2%, with
fourth quarter numbers still undisclosed. Japan is reentering a recession, with
the first three quarters of 2014 posting an annualized negative GDP growth rate
of -3.2%. Finally, while better than Europe and Japan on an outright basis,
China's economic growth has slowed materially, dropping from 9.0% year-over-year
growth rate in 2010 and 2011 to only a 7.3% annualized growth rate in 2014.
Commodities performed well in the first half of the year as the severe cold
weather boosted prices of natural gas and grains. Cocoa and coffee also had big
price increases as a severe drought in Brazil impacted the early harvest
forecasts. As the year progressed, weather-related concerns in the U.S. and
Brazil faded, resulting in a return to more moderate pricing in the agricultural
sectors. In contrast, crude oil prices rose moderately in the first half of the
year but subsequently crashed in the second half of the year. Growing global
Page 4
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PORTFOLIO COMMENTARY (CONTINUED)
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FIRST TRUST GLOBAL TACTICAL COMMODITY STRATEGY FUND (FTGC)
ANNUAL REPORT
DECEMBER 31, 2014
production, especially within the U.S., combined with disappointing growth in
China, Japan and Europe, resulted in a glut of crude oil. Front month WTI crude
oil fell in price from $91.16 a barrel on September 30, 2014 to $53.27 a barrel
on December 31, 2014, a 41.5% decline.
The debate for 2015 is whether the shock of global crude oil falling by 41% in
three months will act as an effective tax cut to the global consumer, thus
boosting economic growth in the U.S. and abroad, or whether the investments in
crude oil production and their subsequent write-offs will result in slowing
economic growth as balance sheets are repaired and leverage is removed from the
system.
FUND PERFORMANCE
The Fund's performance for the fiscal year ended December 31, 2014 was -11.89%
on an NAV basis and -11.65% on a market price basis. The benchmark returned
-17.01% over the same period.
The global commodity market is made up of several separate markets including
agriculture, oil, industrial metals and precious metals. These commodities are
the building blocks of every economy in the world. Holding a physical commodity
is not practical for most investors, but the futures market provides an
alternative way to seek exposure to commodities. We believe individual commodity
futures contracts and the unmanaged benchmarks that measure their performance
offer attractive opportunities for investors to potentially diversify their
portfolios and protect themselves against unforeseen rises in inflation;
however, commodities and their benchmarks can be very volatile. FTGC employs an
investment style that seeks to control the Fund's risk profile to a relatively
stable band, thus providing investors with broadly diversified commodity
exposure with more risk stability than traditional unmanaged commodity
benchmarks.
During the performance period, the Fund held allocations in 20 different
commodities at various points in time. The Fund's average sector allocation was
36% energy, 13% industrial metals, 12% precious metals and 39%
agricultural/livestock. As of December 31, 2014, the Fund held 15% in
energy-related futures contracts, 19% in industrial metals, 6% in precious
metals and 60% in agricultural products. During the second half of the year, the
Fund reduced its exposure to the energy sector as prices became more volatile
and the correlations among energy-related futures contracts increased.
Offsetting energy, the agricultural/livestock sector allocation increased as
summer volatility faded and the Fund allocated to the lower volatility/lower
correlation agricultural commodities.
Relative to the benchmark, FTGC was generally invested further out on the
futures curve for each commodity in an attempt to maximize the Fund's expected
total return. By investing out the curve, the Fund is attempting to minimize the
negative roll yield associated with futures curves in contango and/or to
maximize the positive roll yield associated with futures curves in a state of
backwardation. The best-performing commodities for the Fund were coffee, soymeal
and cocoa while the worst-performing commodities for the Fund were CBOT wheat,
WTI crude and silver.
MARKET AND FUND OUTLOOK
As of December 31, 2014, we believe the Fund is well positioned to achieve its
investment objective of seeking to provide total return by providing investors
with commodity exposure while seeking a relatively stable risk profile. We
believe that the Fund is currently broadly diversified across commodity futures
and commodity sectors and that the risk control portfolio construction process
is working well. Additionally, we believe that commodities are and will continue
to be a valuable component of any well-diversified portfolio. Because
commodities are not highly correlated with traditional asset classes, we believe
they can potentially decrease portfolio volatility, enhance overall return and
provide meaningful diversification to an asset allocation strategy.
Page 5
FIRST TRUST GLOBAL TACTICAL COMMODITY STRATEGY FUND (FTGC)
UNDERSTANDING YOUR FUND EXPENSES
DECEMBER 31, 2014 (UNAUDITED)
As a shareholder of First Trust Global Tactical Commodity Strategy Fund (the
"Fund"), 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 Fund and to compare these costs with
the ongoing costs of investing in other funds.
The Example is based on an investment of $1,000 invested at the beginning of the
period and held through the six-month period ended December 31, 2014.
ACTUAL EXPENSES
The first line in the following table provides information about actual account
values and actual expenses. You may use the information in this line, together
with the amount you invested, to estimate the expenses that you paid over the
period. Simply divide your account value by $1,000 (for example, an $8,600
account value divided by $1,000 = 8.6), then multiply the result by the number
in the first line under the heading entitled "Expenses Paid During the Six-Month
Period" to estimate the expenses you paid on your account during this six-month
period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second line in the following table provides information about hypothetical
account values and hypothetical expenses based on the Fund's actual expense
ratio and an assumed rate of return of 5% per year before expenses, which is not
the Fund's actual return. The hypothetical account values and expenses may not
be used to estimate the actual ending account balance or expenses you paid for
the period. You may use this information to compare the ongoing costs of
investing in the Fund and other funds. To do so, compare this 5% hypothetical
example with the 5% hypothetical examples that appear in the shareholder reports
of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs such as brokerage
commissions. Therefore, the second line in the table is useful in comparing
ongoing costs only, and will not help you determine the relative total costs of
owning different funds. In addition, if these transactional costs were included,
your costs would have been higher.
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ANNUALIZED
EXPENSE RATIO EXPENSES PAID
BEGINNING ENDING BASED ON THE DURING THE
ACCOUNT VALUE ACCOUNT VALUE SIX-MONTH SIX-MONTH
JULY 1, 2014 DECEMBER 31, 2014 PERIOD PERIOD (a)
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FIRST TRUST GLOBAL TACTICAL COMMODITY
STRATEGY FUND (FTGC)
Actual $1,000.00 $ 778.60 0.95% $4.26
Hypothetical (5% return before expenses) $1,000.00 $1,020.42 0.95% $4.84
(a) Expenses are equal to the annualized expense ratio as indicated in the
table, multiplied by the average account value over the period (July 1,
2014 through December 31, 2014), multiplied by 184/365 (to reflect the
one-half year period).
Page 6
FIRST TRUST GLOBAL TACTICAL COMMODITY STRATEGY FUND (FTGC)
CONSOLIDATED PORTFOLIO OF INVESTMENTS
DECEMBER 31, 2014
Besides the following listed futures contracts of the Fund's wholly-owned
subsidiary, there were no investments held by the Fund at December 31, 2014.
The following futures contracts of the Fund's wholly-owned subsidiary were open
at December 31, 2014 (See Note 2B - Futures Contracts in the Notes to
Consolidated Financial Statements):
UNREALIZED
NUMBER NOTIONAL EXPIRATION APPRECIATION/
OF CONTRACTS VALUE DATE (DEPRECIATION)
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FUTURES CONTRACTS LONG:
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Brent Crude Futures 133 $ 13,976,606 May-15 $ (5,835,676)
Cattle Feeder Futures 101 11,324,825 Mar-15 (349,912)
Cocoa Futures 373 10,645,210 Mar-15 209,090
Cocoa Futures 246 6,939,660 May-15 174,660
Coffee "C" Futures 230 16,292,325 Mar-15 (1,923,075)
Copper Futures 249 18,845,027 Mar-15 (1,256,290)
Corn Futures 566 11,056,844 Mar-15 178,256
Cotton No. 2 Futures 203 6,162,765 Mar-15 (45,360)
Gas Oil (ICE) Futures 36 2,210,175 Jan-15 (366,075)
KC HRW Wheat Futures 276 8,567,150 Mar-15 78,550
Lean Hogs Futures 505 17,234,266 Feb-15 (831,866)
LME Nickel Futures 165 16,109,082 Mar-15 (1,121,472)
Natural Gas Futures 284 12,069,230 Feb-15 (3,844,590)
Silver Futures 133 10,713,206 Mar-15 (339,871)
Soybean Meal Futures 297 10,569,740 Mar-15 (246,020)
Soybean Oil Futures 170 3,312,258 Mar-15 (33,978)
Sugar #11 (World) Futures 133 2,274,900 Feb-15 (112,001)
WTI Crude Futures 136 8,473,850 Jun-15 (822,490)
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$ 186,777,119 $(16,488,120)
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See Notes to Consolidated Financial Statements Page 7
FIRST TRUST GLOBAL TACTICAL COMMODITY STRATEGY FUND (FTGC)
CONSOLIDATED PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 2014
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of December 31,
2014 is as follows (see Note 2A - Portfolio Valuation in the Notes to
Consolidated Financial Statements):
ASSETS TABLE
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
12/31/2014 PRICES INPUTS INPUTS
------------ ------------ ------------ ------------
Futures Contracts.................................... $ 640,556 $ 640,556 $ -- $ --
============ ============ ============ ============
LIABILITIES TABLE
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
12/31/2014 PRICES INPUTS INPUTS
------------ ------------ ------------ ------------
Futures Contracts.................................... $(17,128,676) $(17,128,676) $ -- $ --
============ ============ ============ ============
All transfers in and out of the Levels during the period are assumed to be
transferred on the last day of the period at their current value. There were no
transfers between Levels at December 31, 2014.
Page 8 See Notes to Consolidated Financial Statements
FIRST TRUST GLOBAL TACTICAL COMMODITY STRATEGY FUND (FTGC)
CONSOLIDATED STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 2014
ASSETS:
Cash.................................................................... $ 156,864,694
Cash segregated as collateral for open futures contracts................ 35,676,535
Receivables:
Variation margin..................................................... 640,556
Other................................................................ 841
--------------
Total Assets......................................................... 193,182,626
--------------
LIABILITIES:
Payables:
Variation margin..................................................... 17,128,676
Investment advisory fees............................................. 144,405
--------------
Total Liabilities.................................................... 17,273,081
--------------
NET ASSETS.............................................................. $ 175,909,545
==============
NET ASSETS CONSIST OF:
Paid-in capital......................................................... $ 189,217,601
Par value............................................................... 67,033
Accumulated net investment income (loss)................................ 3,113,031
Accumulated net realized gain (loss) on investments and futures......... --
Net unrealized appreciation (depreciation) on investments and futures... (16,488,120)
--------------
NET ASSETS.............................................................. $ 175,909,545
==============
NET ASSET VALUE, per share.............................................. $ 26.24
==============
Number of shares outstanding (unlimited number of shares
authorized, par value $0.01 per share)............................... 6,703,334
==============
See Notes to Consolidated Financial Statements Page 9
FIRST TRUST GLOBAL TACTICAL COMMODITY STRATEGY FUND (FTGC)
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2014
INVESTMENT INCOME:
Interest................................................................ $ 41,645
--------------
Total investment income.............................................. 41,645
--------------
EXPENSES:
Investment advisory fees................................................ 1,347,547
--------------
Total expenses....................................................... 1,347,547
--------------
NET INVESTMENT INCOME (LOSS)............................................ (1,305,902)
--------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on futures..................................... (31,439,367)
--------------
Net change in unrealized appreciation (depreciation) on:
Investments.......................................................... (2)
Futures.............................................................. (16,503,290)
--------------
Net change in unrealized appreciation (depreciation).................... (16,503,292)
--------------
NET REALIZED AND UNREALIZED GAIN (LOSS)................................. (47,942,659)
--------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS...................................................... $ (49,248,561)
==============
Page 10 See Notes to Consolidated Financial Statements
FIRST TRUST GLOBAL TACTICAL COMMODITY STRATEGY FUND (FTGC)
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
FOR THE PERIOD
FOR THE YEAR 10/22/2013 (a)
ENDED THROUGH
12/31/2014 12/31/2013
-------------- --------------
OPERATIONS:
Net investment income (loss)............................................. $ (1,305,902) $ (5,385)
Net realized gain (loss)................................................. (31,439,367) (33,026)
Net change in unrealized appreciation (depreciation)..................... (16,503,292) 15,172
-------------- --------------
Net increase (decrease) in net assets resulting from operations.......... (49,248,561) (23,239)
-------------- --------------
SHAREHOLDER TRANSACTIONS:
Proceeds from shares sold................................................ 331,704,489 3,100,020
Cost of shares redeemed.................................................. (109,623,164) --
-------------- --------------
Net increase (decrease) in net assets resulting from shareholder
transactions.......................................................... 222,081,325 3,100,020
-------------- --------------
Total increase (decrease) in net assets.................................. 172,832,764 3,076,781
NET ASSETS:
Beginning of period...................................................... 3,076,781 --
-------------- --------------
End of period............................................................ $ 175,909,545 $ 3,076,781
============== ==============
Accumulated net investment income (loss) at end of period................ $ 3,113,031 $ 19,101
============== ==============
CHANGES IN SHARES OUTSTANDING:
Shares outstanding, beginning of period.................................. 103,334 --
Shares sold.............................................................. 10,300,000 103,334
Shares redeemed.......................................................... (3,700,000) --
-------------- --------------
Shares outstanding, end of period........................................ 6,703,334 103,334
============== ==============
(a) Inception date is consistent with the commencement of investment
operations. First Trust Portfolios L.P. seeded the Fund on September 9,
2013 in order to provide initial capital required by SEC rules.
See Notes to Consolidated Financial Statements Page 11
FIRST TRUST GLOBAL TACTICAL COMMODITY STRATEGY FUND (FTGC)
CONSOLIDATED FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
FOR THE PERIOD
FOR THE YEAR 10/22/2013 (a)
ENDED THROUGH
12/31/2014 12/31/2013
-------------- --------------
Net asset value, beginning of period.......................... $ 29.78 $ 29.99
---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss).................................. (0.38) (0.05)
Net realized and unrealized gain (loss)....................... (3.16) (0.16)
---------- ----------
Total from investment operations.............................. (3.54) (0.21)
---------- ----------
Net asset value, end of period................................ $ 26.24 $ 29.78
========== ==========
TOTAL RETURN (b).............................................. (11.89)% (0.70)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's).......................... $ 175,910 $ 3,077
RATIOS TO AVERAGE NET ASSETS:
Ratio of total expenses to average net assets................. 0.95% 0.95% (c)
Ratio of net investment income (loss) to average net assets... (0.92)% (0.92)% (c)
Portfolio turnover rate (d)................................... 0% 0%
(a) Inception date is consistent with the commencement of investment
operations. First Trust Portfolios L.P. seeded the Fund on September 9,
2013 in order to provide initial capital required by SEC rules.
(b) Total return is calculated assuming an initial investment made at the net
asset value at the beginning of the period, reinvestment of all
distributions at net asset value during the period, and redemption at net
asset value on the last day of the period. The returns presented do not
reflect the deduction of taxes that a shareholder would pay on Fund
distributions or the redemption or sale of Fund shares. Total return is
calculated for the time period presented and is not annualized for periods
of less than a year.
(c) Annualized.
(d) Portfolio turnover is calculated for the time period presented and is not
annualized for periods of less than a year and does not include securities
received or delivered from processing creations or redemptions,
derivatives and in-kind transactions.
Page 12 See Notes to Consolidated Financial Statements
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FIRST TRUST GLOBAL TACTICAL COMMODITY STRATEGY FUND (FTGC)
DECEMBER 31, 2014
1. ORGANIZATION
First Trust Exchange-Traded Fund VII (the "Trust") is a non-diversified open-end
management investment company organized as a Massachusetts business trust on
November 6, 2012, 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 offers shares of one fund, the First Trust Global Tactical
Commodity Strategy Fund (the "Fund"), which trades under the ticker FTGC on The
NASDAQ(R) Stock Market LLC ("NASDAQ"), and commenced operations on October 22,
2013. Unlike conventional mutual funds, the Fund issues and redeems shares on a
continuous basis, at net asset value ("NAV"), only in large specified blocks
consisting of 50,000 shares called a "Creation Unit." Creation Units are issued
and redeemed for securities in which the Fund invests or for cash or, in certain
circumstances, for both. Except when aggregated in Creation Units, the shares
are not redeemable securities of the Fund.
The Fund is an actively managed exchange-traded fund. The investment objective
of the Fund is to seek to provide total return by providing investors with
commodity exposure while seeking a relatively stable risk profile. Under normal
market conditions, the Fund, through a wholly-owned subsidiary of the Fund, FT
Cayman Subsidiary II (the "Subsidiary"), organized under the laws of the Cayman
Islands, invests in a portfolio of commodity futures contracts and
exchange-traded commodity linked instruments (collectively, "Commodities
Instruments"). The Fund will not invest directly in Commodities Instruments. The
Fund seeks to gain exposure to these investments exclusively by investing in the
Subsidiary. The Fund's investment in the Subsidiary may not exceed 25% of the
Fund's total assets at the end of each fiscal quarter. There can be no assurance
that the Fund will achieve its investment objective. The Fund may not be
appropriate for all investors.
2. SIGNIFICANT ACCOUNTING POLICIES
The financial statements include the accounts on a consolidated basis of the
Subsidiary. All intercompany accounts and transactions have been eliminated in
consolidation. The following is a summary of significant accounting policies
consistently followed by the Fund in the preparation of the consolidated
financial statements. The preparation of the consolidated financial statements
in accordance with accounting principles generally accepted in the United States
of America ("U.S. GAAP") requires management to make estimates and assumptions
that affect the reported amounts and disclosures in the consolidated financial
statements. Actual results could differ from those estimates.
A. PORTFOLIO VALUATION
The Fund's NAV is determined daily as of the close of regular trading on the New
York Stock Exchange ("NYSE"), normally 4:00 p.m. Eastern time, on each day the
NYSE is open for trading. 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.
The Fund's investments are valued daily at market value or, in absence of market
value with respect to any portfolio securities, at fair value. Market value
prices represent last sale or official closing prices from a national or foreign
exchange (i.e., a regulated market) and are primarily obtained from third party
pricing services. Fair value prices represent any prices not considered market
value prices and are either obtained from a third party pricing service or are
determined by the Pricing Committee of the Fund's investment advisor, First
Trust Advisors L.P. ("First Trust" or the "Advisor"), in accordance with
valuation procedures adopted by the Trust's Board of Trustees, and in accordance
with provisions of the 1940 Act. Investments valued by the Advisor's Pricing
Committee, if any, are footnoted as such in the footnotes to the Portfolio of
Investments. The Fund's investments are valued as follows:
Exchange-traded futures contracts are valued at the closing price in the
market where such contracts are principally traded. If no closing price is
available, exchange-traded futures contracts are fair valued at the mean
of their most recent bid and asked price, if available, and otherwise at
their closing bid price.
U.S. Treasuries are fair valued on the basis of valuations provided by an
independent pricing service approved by the Trust's Board of Trustees.
Fixed income and other debt securities having a remaining maturity of 60
days or less when purchased are fair valued at cost adjusted for
amortization of premiums and accretion of discounts (amortized cost),
provided the Advisor's Pricing Committee has determined that the use of
amortized cost is an appropriate reflection of fair value given market and
issuer specific conditions existing at the time of the determination.
Factors that may be considered in determining the appropriateness of the
use of amortized cost include, but are not limited to, the following:
1) the credit conditions in the relevant market and changes
thereto;
2) the liquidity conditions in the relevant market and changes
thereto;
Page 13
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--------------------------------------------------------------------------------
FIRST TRUST GLOBAL TACTICAL COMMODITY STRATEGY FUND (FTGC)
DECEMBER 31, 2014
3) the interest rate conditions in the relevant market and
changes thereto (such as significant changes in interest
rates);
4) issuer-specific conditions (such as significant credit
deterioration); and
5) any other market-based data the Advisor's Pricing Committee
considers relevant. In this regard, the Advisor's Pricing
Committee may use last-obtained market-based data to assist it
when valuing portfolio securities using amortized cost.
If the Fund's investments are not able to be priced by their pre-established
pricing methods, such investments may be valued by the Trust's Board of Trustees
or its delegate, the Advisor's Pricing Committee, at fair value. A variety of
factors may be considered in determining the fair value of such investments.
Valuing the Fund's holdings using fair value pricing will result in using prices
for those holdings that may differ from current market valuations. The
Subsidiary's holdings will be valued in the same manner as the Fund's holdings.
The Fund is subject to fair value accounting standards that define fair value,
establish the framework for measuring fair value and provide a three-level
hierarchy for fair valuation based upon the inputs to the valuation as of the
measurement date. The three levels of the fair value hierarchy are as follows:
o Level 1 - Level 1 inputs are quoted prices in active markets for
identical investments. An active market is a market in which
transactions for the investment occur with sufficient frequency and
volume to provide pricing information on an ongoing basis.
o Level 2 - Level 2 inputs are observable inputs, either directly or
indirectly, and include the following:
o Quoted prices for similar investments in active markets.
o Quoted prices for identical or similar investments in markets
that are non-active. A non-active market is a market where
there are few transactions for the investment, the prices are
not current, or price quotations vary substantially either
over time or among market makers, or in which little
information is released publicly.
o Inputs other than quoted prices that are observable for the
investment (for example, interest rates and yield curves
observable at commonly quoted intervals, volatilities,
prepayment speeds, loss severities, credit risks, and default
rates).
o Inputs that are derived principally from or corroborated by
observable market data by correlation or other means.
o Level 3 - Level 3 inputs are unobservable inputs. Unobservable
inputs may reflect the reporting entity's own assumptions about the
assumptions that market participants would use in pricing the
investment.
The inputs or methodology used for valuing investments are not necessarily an
indication of the risk associated with investing in those investments. A summary
of the inputs used to value the Fund's investments as of December 31, 2014, is
included with the Fund's Consolidated Portfolio of Investments.
B. FUTURES CONTRACTS
The Fund, through the Subsidiary, may purchase and sell exchange-listed
commodity contracts. When the Fund purchases a listed futures contract, it
agrees to purchase a specified reference asset (e.g., commodity) at a specified
future date. When the Fund sells or shorts a listed futures contract, it agrees
to sell a specified reference asset (e.g., commodity) at a specified future
date. The price at which the purchase and sale will take place is fixed when the
Fund enters into the contract. The exchange clearing corporation is the ultimate
counterparty for all exchange-listed contracts, so credit risk is limited to the
creditworthiness of the exchange's clearing corporation. Margin deposits are
posted as collateral with the clearing broker and, in turn, with the exchange
clearing corporation.
Exchange-listed commodity futures contracts are generally based upon commodities
within the six principal commodity groups: energy, industrial metals,
agriculture, precious metals, foods and fibers, and livestock. The price of a
commodity futures contract will reflect the storage costs of purchasing the
physical commodity. These storage costs include the time value of money invested
in the physical commodity plus the actual costs of storing the commodity less
any benefits from ownership of the physical commodity that are not obtained by
the holder of a futures contract (this is sometimes referred to as the
"convenience yield"). To the extent that these storage costs change for an
underlying commodity while the Fund is in a long position on that commodity, the
value of the futures contract may change proportionately.
Upon entering into a futures contract, the Subsidiary must deposit funds, called
margin, with its custodian in the name of the clearing broker equal to a
specified percentage of the current value of the contract. Open futures
contracts are marked-to-market daily with the change in value recognized as a
component of "Net change in unrealized appreciation (depreciation) on futures"
on the Consolidated Statement of Operations. This daily fluctuation in value of
the contracts is also known as variation margin and is included as "Variation
margin" payable or receivable on the Consolidated Statement of Assets and
Liabilities.
When the Subsidiary purchases or sells a futures contract, the Subsidiary is
required to "cover" its position in order to limit the risk associated with the
use of leverage and other related risks. To cover its position, the Subsidiary
segregates assets consisting of cash or liquid securities that, when added to
any amounts deposited with a futures commission merchant as margin, are equal to
Page 14
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--------------------------------------------------------------------------------
FIRST TRUST GLOBAL TACTICAL COMMODITY STRATEGY FUND (FTGC)
DECEMBER 31, 2014
the market value of the futures contract or otherwise "cover" its position in a
manner consistent with the 1940 Act or the 1940 Act Rules and SEC
interpretations thereunder. As the Subsidiary continues to engage in the
described securities trading practices and properly segregates assets, the
segregated assets will function as a practical limit on the amount of leverage
which the Subsidiary may undertake and on the potential increase in the
speculative character of the Subsidiary's outstanding portfolio securities.
Additionally, such segregated assets generally ensure the availability of
adequate funds to meet the obligations of the Subsidiary arising from such
investment activities.
C. CASH
The Fund segregates assets consisting of cash and other short-term securities to
comply with SEC guidance with respect to coverage of futures positions by
registered investment companies. The cash on the books is held to cover the full
notional value of the futures contracts.
D. INVESTMENTS TRANSACTIONS AND INVESTMENT INCOME
Investments transactions are recorded as of the trade date. Realized gains and
losses from securities transactions are recorded on the identified cost basis.
Interest income, if any, is recorded on the accrual basis. Amortization of
premiums and the accretion of discounts are recorded using the effective
interest method.
E. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
Dividends from net investment income, if any, are declared and paid quarterly by
the Fund. The Fund distributes its net realized capital gains, if any, to
shareholders at least annually.
Distributions in cash may be reinvested automatically in additional whole shares
only if the broker through whom the shares were purchased makes such option
available. Such shares will generally be reinvested by the broker based upon the
market price of those shares and investors may be subject to customary brokerage
commissions charged by the broker.
Distributions from net investment income and realized capital gains are
determined in accordance with income tax regulations, which may differ from U.S.
GAAP. Certain capital accounts in the consolidated financial statements are
periodically adjusted for permanent differences in order to reflect their tax
character. These permanent differences are primarily due to the varying
treatment of income and gain/loss on portfolio securities held by the Fund and
have no impact on net assets or NAV per share. Temporary differences, which
arise from recognizing certain items of income, expense and gain/loss in
different periods for consolidated financial statement and tax purposes, will
reverse at some time in the future.
The tax character of distributions paid by the Fund during the period ended
December 31, 2014 was as follows:
Distributions Distributions Distributions
paid from paid from paid from
Ordinary Capital Return of
Income Gains Capital
--------------- --------------- ---------------
$ -- $ -- $ --
The tax character of distributions paid by the Fund during the period ended
December 31, 2013 was as follows:
Distributions Distributions Distributions
paid from paid from paid from
Ordinary Capital Return of
Income Gains Capital
--------------- --------------- ---------------
$ -- $ -- $ --
As of December 31, 2014, the components of distributable earnings on a tax basis
for the Fund were as follows:
Net
Undistributed Accumulated Unrealized
Ordinary Capital and Appreciation
Income Other Gains (Depreciation)
--------------- --------------- ---------------
$ -- $ (15,706,418) $ (781,702)
Page 15
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--------------------------------------------------------------------------------
FIRST TRUST GLOBAL TACTICAL COMMODITY STRATEGY FUND (FTGC)
DECEMBER 31, 2014
F. INCOME TAXES
The Fund intends to continue to qualify as a regulated investment company by
complying with the requirements under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "Code"), which includes distributing substantially all
of its net investment income and net realized gains to shareholders.
Accordingly, no provision has been made for federal or state income taxes.
However, due to the timing and amount of distributions, the Fund may be subject
to an excise tax of 4% of the amount by which approximately 98% of the Fund's
taxable income exceeds the distributions from such taxable income for the
calendar year.
The Subsidiary is classified as a controlled foreign corporation under
Subchapter N of the Code. Therefore, the Fund is required to increase its
taxable income by its share of the Subsidiary's income, whether or not such
earnings are distributed by the Subsidiary to the Fund. Net investment losses of
the Subsidiary cannot be deducted by the Fund in the current period nor carried
forward to offset taxable income in future periods.
The Fund intends to utilize provisions of the federal income tax laws, which
allow it to carry a realized capital loss forward indefinitely following the
year of the loss and offset such loss against any future realized capital gains.
The Fund is subject to certain limitations under U.S. tax rules on the use of
capital carryforwards and net unrealized built-in losses. These limitations
apply when there has been a 50% change in ownership. At December 31, 2014, the
Fund had no capital loss carryforwards outstanding for federal income tax
purposes.
The Fund is subject to accounting standards that establish a minimum threshold
for recognizing, and a system for measuring, the benefits of a tax position
taken or expected to be taken in a tax return. Taxable years ended 2013 and 2014
remain open to federal and state audit. As of December 31, 2014, management has
evaluated the application of these standards to the Fund and has determined that
no provision for income tax is required in the Fund's consolidated financial
statements for uncertain tax positions.
In order to present paid-in capital, accumulated net investment income (loss)
and accumulated net realized gain (loss) on investments on the Consolidated
Statement of Assets and Liabilities that more closely represent their tax
character, certain adjustments have been made to paid-in capital, accumulated
net investment income (loss) and accumulated net realized gain (loss) on
investments. These adjustments are primarily due to the difference between book
and tax treatment of net investment income from the Subsidiary. The results of
operations and net assets were not affected by these adjustments. For the year
ended December 31, 2014, the adjustments for the Fund were as follows:
Accumulated
Accumulated Net Realized
Net Investment Gain (Loss) Paid-in
Income (Loss) on Investments Capital
--------------- --------------- ---------------
$ 4,399,832 $ 31,439,367 $ (35,839,199)
G. EXPENSES
Expenses, other than the investment advisory fee and other excluded expenses,
are paid by First Trust (See Note 3).
3. INVESTMENT ADVISORY FEE, AFFILIATED TRANSACTIONS AND OTHER FEE ARRANGEMENTS
First Trust, the investment advisor to the Fund, is a limited partnership with
one limited partner, Grace Partners of DuPage L.P., and one general partner, The
Charger Corporation. The Charger Corporation is an Illinois corporation
controlled by James A. Bowen, Chief Executive Officer of First Trust. First
Trust is responsible for the selection and ongoing monitoring of the investments
in the Fund's and the Subsidiary's portfolio, managing the Fund's business
affairs and providing certain administrative services necessary for the
management of the Fund.
Pursuant to the Investment Management Agreement, First Trust manages the
investment of the Fund's assets and is responsible for the Fund's expenses,
including the cost of transfer agency, custody, fund administration, legal,
audit and other services, but excluding fee payments under the Investment
Management Agreement, interest, taxes, brokerage commissions and other expenses
connected with the execution of portfolio transactions, distribution and service
fees pursuant to a 12b-1 plan, if any, and extraordinary expenses. The Fund has
agreed to pay First Trust an annual unitary management fee equal to 0.95% of its
average daily net assets. First Trust also provides fund reporting services to
the Fund for a flat annual fee in the amount of $9,250, which is covered under
the annual unitary management fee.
The Trust has multiple service agreements with Brown Brothers Harriman & Co.
("BBH"). Under the servicing agreements, BBH performs custodial, fund
accounting, certain administrative services, and transfer agency services for
the Trust. As custodian, BBH is responsible for custody of the Trust's assets.
As fund accountant and administrator, BBH is responsible for maintaining the
books and records of the Trust's investments and cash. As transfer agent, BBH is
responsible for maintaining shareholder records for the Trust.
Page 16
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--------------------------------------------------------------------------------
FIRST TRUST GLOBAL TACTICAL COMMODITY STRATEGY FUND (FTGC)
DECEMBER 31, 2014
Each Trustee who is not an officer or employee of First Trust, any sub-advisor
or any of their affiliates ("Independent Trustees") is paid a fixed annual
retainer that is allocated pro rata among each fund in the First Trust Fund
Complex based on net assets. Each Independent Trustee is also paid an annual per
fund fee that varies based on whether the fund is a closed-end or other actively
managed fund, or is an index fund.
Additionally, the Lead Independent Trustee and the Chairmen of the Audit
Committee, Nominating and Governance Committee and Valuation Committee are paid
annual fees to serve in such capacities, with such compensation allocated pro
rata among each fund in the First Trust Fund Complex based on net assets.
Trustees are reimbursed for travel and out-of-pocket expenses in connection with
all meetings. The Lead Independent Trustee and Committee Chairmen rotate every
three years. The officers and "Interested" Trustee receive no compensation from
the Trust for acting in such capacities.
4. PURCHASES AND SALES OF INVESTMENTS
For the year ended December 31, 2014, the cost of purchases and proceeds from
sales of investment securities, excluding short-term investments, derivatives
and in-kind transactions, were $0 and $0, respectively.
For the year ended December 31, 2014, the Fund did not have any in-kind
purchases or sales.
5. DERIVATIVES TRANSACTIONS
The following table presents the types of derivatives held by the Subsidiary at
December 31, 2014, the primary underlying risk exposure and the location of
these instruments as presented on the Consolidated Statement of Assets and
Liabilities.
ASSET DERIVATIVES LIABILITY DERIVATIVES
-------------------------------------------- ---------------------------------------------
CONSOLIDATED CONSOLIDATED
DERIVATIVES STATEMENT OF ASSETS AND STATEMENT OF ASSETS AND
INSTRUMENT RISK EXPOSURE LIABILITIES LOCATION VALUE LIABILITIES LOCATION VALUE
-------------- ---------------- ------------------------------ ----------- ------------------------------ ------------
Futures Commodity Risk Variation Margin Receivable $ 640,556 Variation Margin Payable $ 17,128,676
The following table presents the amount of net realized gain (loss) and change
in net unrealized appreciation (depreciation) recognized for the year ended
December 31, 2014, on derivative instruments, as well as the primary underlying
risk exposure associated with each instrument.
CONSOLIDATED STATEMENT OF OPERATIONS LOCATION
-----------------------------------------------------------------------------
COMMODITY RISK EXPOSURE
Net realized gain (loss) on futures $(31,439,367)
Net change in unrealized appreciation (depreciation) on futures (16,503,290)
During the year ended December 31, 2014, the amount of notional values of
futures contracts opened and closed were $1,075,007,655 and $891,262,493,
respectively.
The Fund does not have the right to offset financial assets and financial
liabilities related to futures contracts on the Consolidated Statement of Assets
and Liabilities.
6. CREATIONS, REDEMPTIONS AND TRANSACTION FEES
Shares are created and redeemed by the Fund only in Creation Unit size
aggregations of 50,000 shares. In order to purchase Creation Units of the Fund,
an investor must deposit (i) a designated portfolio of securities determined by
First Trust (the "Deposit Securities") and generally make or receive a cash
payment referred to as the "Cash Component," which is an amount equal to the
difference between the NAV of the Fund shares (per Creation Unit aggregations)
and the market value of the Deposit Securities, and/or (ii) cash in lieu of all
or a portion of the Deposit Securities. If the Cash Component is a positive
number (i.e., the NAV per Creation Unit Aggregation exceeds the Deposit Amount),
the creator will deliver the Cash Component. If the Cash Component is a negative
number (i.e., the NAV per Creation Unit Aggregation is less than the Deposit
Amount), the creator will receive the Cash Component. Purchasers of Creation
Units must pay to BBH, as transfer agent, a creation fee (the "Creation
Transaction Fee") 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 the Fund's portfolio and the countries
in which the transactions are settled. The Creation Transaction Fee may increase
or decrease as the Fund's portfolio is adjusted to conform to changes in the
composition of the securities included in the Fund's portfolio and the countries
in which the transaction settled. 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
Page 17
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--------------------------------------------------------------------------------
FIRST TRUST GLOBAL TACTICAL COMMODITY STRATEGY FUND (FTGC)
DECEMBER 31, 2014
brokerage costs, transfer fees or stamp taxes. When the 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 BBH, as transfer agent, a
redemption transaction fee (the "Redemption Transaction Fee"), regardless of the
number of Creation Units redeemed in the transaction. The Redemption Transaction
Fee may vary and is based on the composition of the securities included in the
Fund's portfolio and the countries in which the transactions are settled. The
Redemption Transaction Fee is currently $500. The Fund reserves the right to
effect redemptions in cash. An Authorized Participant may request cash
redemption in lieu of securities; however, the Fund may, in its discretion,
reject any such request.
7. DISTRIBUTION PLAN
The Board of Trustees adopted a Distribution and Service Plan pursuant to Rule
12b-1 under the 1940 Act. In accordance with the Rule 12b-1 plan, the Fund is
authorized to pay an amount up to 0.25% of its average daily net assets each
year to reimburse FTP, the distributor of the Fund, for amounts expended to
finance activities primarily intended to result in the sale of Creation Units or
the provision of investor services. FTP may also use this amount to compensate
securities dealers or other persons that are Authorized Participants for
providing distribution assistance, including broker-dealer and shareholder
support and educational and promotional services.
No 12b-1 fees are currently paid by the Fund, and pursuant to a contractual
arrangement, no 12b-1 fees will be paid any time before April 30, 2015.
8. INDEMNIFICATION
The Trust, on behalf of the Fund, has a variety of indemnification obligations
under contracts with its service providers. The Trust's maximum exposure under
these arrangements is unknown. However, the Trust has not had prior claims or
losses pursuant to these contracts and expects the risk of loss to be remote.
9. SUBSEQUENT EVENTS
Management has evaluated the impact of all subsequent events on the Fund through
the date the consolidated financial statements were issued, and has determined
there were no subsequent events requiring recognition or disclosure in the
consolidated financial statements that have not already been disclosed.
Page 18
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
--------------------------------------------------------------------------------
TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF FIRST TRUST EXCHANGE-TRADED FUND
VII:
We have audited the accompanying consolidated statement of assets and
liabilities of First Trust Global Tactical Commodity Strategy Fund (the "Fund")
and Subsidiary, a series of the First Trust Exchange-Traded Fund VII, including
the consolidated portfolio of investments, as of December 31, 2014, and the
related consolidated statements of operations for the year then ended, and the
consolidated statements of changes in net assets and the consolidated financial
highlights for each of the periods presented. These consolidated financial
statements and consolidated financial highlights are the responsibility of the
Fund's 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 Fund is not required to have, nor were we engaged to perform, an audit of
its 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 Fund's 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 December 31, 2014 by correspondence with the Fund's
custodian and broker. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the consolidated financial statements and consolidated financial
highlights referred to above present fairly, in all material respects, the
financial position of First Trust Global Tactical Commodity Strategy Fund and
Subsidiary as of December 31, 2014, the results of their operations for the year
then ended, and the changes in their net assets and the financial highlights for
each of the periods presented, in conformity with accounting principles
generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
Chicago, Illinois
February 24, 2015
Page 19
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ADDITIONAL INFORMATION
--------------------------------------------------------------------------------
FIRST TRUST GLOBAL TACTICAL COMMODITY STRATEGY FUND (FTGC)
DECEMBER 31, 2014 (UNAUDITED)
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that the Trust uses to determine
how to vote proxies and information on how the Fund voted proxies relating to
portfolio investments during the most recent 12-month period ended June 30 is
available (1) without charge, upon request, by calling (800) 988-5891; (2) on
the Fund's website located at http://www.ftportfolios.com; and (3) on the
Securities and Exchange Commission's ("SEC") website located at
http://www.sec.gov.
PORTFOLIO HOLDINGS
The Trust files its complete schedule of the Fund's portfolio holdings with the
SEC for the first and third quarters of each fiscal year on Form N-Q. The
Trust's Forms N-Q are available (1) by calling (800) 988-5891; (2) on the Fund'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.
TAX INFORMATION
Of the ordinary income (including short-term capital gain) distributions made by
the Fund during the year ended December 31, 2014, none qualify for the corporate
dividends received deduction available to corporate shareholders or as qualified
dividend income.
RISK CONSIDERATIONS
RISKS ARE INHERENT IN ALL INVESTING. YOU SHOULD CONSIDER THE FUND'S INVESTMENT
OBJECTIVE, RISKS, CHARGES AND EXPENSES CAREFULLY BEFORE INVESTING. YOU CAN
DOWNLOAD THE FUND'S PROSPECTUS AT HTTP://WWW.FTPORTFOLIOS.COM OR CONTACT FIRST
TRUST PORTFOLIOS L.P. AT (800) 621-1675 TO REQUEST A PROSPECTUS, WHICH CONTAINS
THIS AND OTHER INFORMATION ABOUT THE FUND. FOR ADDITIONAL INFORMATION ABOUT THE
RISKS ASSOCIATED WITH INVESTING IN THE FUND, PLEASE SEE THE FUND'S STATEMENT OF
ADDITIONAL INFORMATION, AS WELL AS OTHER REGULATORY FILINGS. READ THESE
DOCUMENTS CAREFULLY BEFORE YOU INVEST. FIRST TRUST PORTFOLIOS L.P. IS THE
DISTRIBUTOR OF THE FIRST TRUST EXCHANGE-TRADED FUND VII.
The following summarizes some of the risks that should be considered for the
Fund.
CASH TRANSACTION RISK. Unlike most ETFs, the Fund currently intends to effect
most creations and redemptions, in whole or in part, for cash, rather than in
kind, because of the nature of the Fund's underlying investments. As a result,
an investment in the Fund may be less tax efficient than an investment in a more
conventional ETF.
CLEARING BROKER RISK. The failure or bankruptcy of the Fund's and the
Subsidiary's clearing broker could result in a substantial loss of Fund assets.
Under current Commodity Futures Trading Commission ("CFTC") regulations, a
clearing broker maintains customers' assets in a bulk segregated account. If a
clearing broker fails to do so, or is unable to satisfy a substantial deficit in
a customer account, its other customers may be subject to risk of loss of their
funds in the event of that clearing broker's bankruptcy. In that event, the
clearing broker's customers, such as the Fund and the Subsidiary, are entitled
to recover, even in respect of property specifically traceable to them, only a
proportional share of all property available for distribution to all of that
clearing broker's customers.
COMMODITY RISK. The value of Commodities Instruments typically is based upon the
price movements of a physical commodity or an economic variable linked to such
price movements. The prices of Commodities Instruments may fluctuate quickly and
dramatically and may not correlate to price movements in other asset classes. An
active trading market may not exist for certain commodities. Each of these
factors and events could have a significant negative impact on the Fund.
COUNTERPARTY RISK. The Fund bears the risk that the counterparty to a commodity,
derivative or other contract with a third party may default on its obligations
or otherwise fail to honor its obligations. If a counterparty defaults on its
payment obligations the Fund will lose money and the value of an investment in
Fund shares may decrease. In addition, the Fund may engage in such investment
transactions with a limited number of counterparties.
CREDIT RISK. Credit risk is the risk that an issuer of a security will be unable
or unwilling to make dividend, interest and/or principal payments when due and
the related risk that the value of a security may decline because of concerns
about the issuer's ability to make such payments.
Page 20
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ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST GLOBAL TACTICAL COMMODITY STRATEGY FUND (FTGC)
DECEMBER 31, 2014 (UNAUDITED)
ETF RISK. An ETF trades like common stock and represents a portfolio of
securities. The risks of owning an ETF generally reflect the risks of owning the
underlying securities, although lack of liquidity in an ETF could result in it
being more volatile and ETFs have management fees that increase their costs.
FOREIGN COMMODITY MARKETS RISK. The Fund, through the Subsidiary, will engage in
trading on commodity markets outside the United States on behalf of the Fund.
Trading on such markets is not regulated by any United States government agency
and may involve certain risks not applicable to trading on United States
exchanges. The Fund may not have the same access to certain trades as do various
other participants in foreign markets. Furthermore, as the Fund will determine
its net assets in United States dollars, with respect to trading in foreign
markets the Fund will be subject to the risk of fluctuations in the exchange
rate between the local currency and dollars as well as the possibility of
exchange controls. Certain futures contracts traded on foreign exchanges are
treated differently for federal income tax purposes than are domestic contracts.
FUTURES RISK. The Fund invests in futures through the Subsidiary. All futures
and futures-related products are highly volatile. Price movements are influenced
by, among other things, changing supply and demand relationships; climate;
government agricultural, trade, fiscal, monetary and exchange control programs
and policies; national and international political and economic events; crop
diseases; the purchasing and marketing programs of different nations; and
changes in interest rates. In addition, governments from time to time intervene,
directly and by regulation, in certain markets, particularly those in
currencies.
GAP RISK. The Fund is subject to the risk that a commodity price will change
from one level to another with no trading in between. Usually such movements
occur when there are adverse news announcements, which can cause a commodity
price to drop substantially from the previous day's closing price.
INCOME RISK. Income from the Fund's fixed income investments could decline
during periods of falling interest rates.
INTEREST RATE RISK. Interest rate risk is the risk that the value of the
securities in the Fund will decline because of rising market interest rates.
Interest rate risk is generally lower for shorter term investments and higher
for longer term investments.
INVESTMENT COMPANIES RISK. The Fund may invest in securities of other investment
companies, including ETFs. As a shareholder in other investment companies, the
Fund will bear its ratable share of that investment company's expenses, and
would remain subject to payment of the Fund's advisory and administrative fees
with respect to assets so invested. In addition, the Fund will incur brokerage
costs when purchasing and selling shares of ETFs or other exchange-traded
investment companies.
ISSUER SPECIFIC RISK. Issuer specific events, including changes in the financial
condition of an issuer, can have a negative impact on the value of the Fund.
LIQUIDITY RISK. The Fund invests in Commodities Instruments, which may be less
liquid than other types of investments. The illiquidity of Commodities
Instruments could have a negative effect on the Fund's ability to achieve its
investment objective and may result in losses to Fund shareholders.
MANAGEMENT RISK. The Fund is subject to management risk because it is an
actively managed portfolio. The Advisor will apply investment techniques and
risk analyses in making investment decisions for the Fund, but there can be no
guarantee that the Fund will meet its investment objective.
MARKET RISK. The trading prices of commodities futures, fixed income securities
and other instruments fluctuate in response to a variety of factors. The Fund's
net asset value and market price may fluctuate significantly in response to
these factors. As a result, an investor could lose money over short or long
periods of time.
NON-DIVERSIFICATION RISK. The Fund is classified as "non-diversified" under the
1940 Act. As a result, the Fund is only limited as to the percentage of its
assets that may be invested in the securities of any one issuer by the
diversification requirements imposed by the Internal Revenue Code of 1986, as
amended (the "Code"). The Fund may invest a relatively high percentage of its
assets in a limited number of issuers. As a result, the Fund may be more
susceptible to a single adverse economic or regulatory occurrence affecting one
or more of these issuers, experience increased volatility and be highly
concentrated in certain issuers.
NON-U.S. INVESTMENT RISK. The Fund may invest in commodity futures contracts
traded on non-U.S. exchanges or enter into OTC derivative contracts with
non-U.S. counterparties. Transactions on non-U.S. exchanges or with non-U.S.
counterparties present risks because they may not be subject to the same degree
of regulation as their U.S. counterparts.
Page 21
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ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST GLOBAL TACTICAL COMMODITY STRATEGY FUND (FTGC)
DECEMBER 31, 2014 (UNAUDITED)
PORTFOLIO TURNOVER RISK. The Fund's strategy may frequently involve buying and
selling portfolio securities to rebalance the Fund's exposure to various market
sectors. Higher portfolio turnover may result in the Fund paying higher levels
of transaction costs and generating greater tax liabilities for shareholders.
Portfolio turnover risk may cause the Fund's performance to be less than you
expect.
REGULATORY RISK. The CFTC has adopted amendments to CFTC Rule 4.5, which subject
the Fund and the Subsidiary to regulation by the CFTC and may impose additional
disclosure, reporting and recordkeeping rules on the Fund and the Subsidiary.
Compliance with these additional rules may increase Fund expenses. In addition,
certain exchanges may limit the maximum net long or net short speculative
positions that a party may hold or control in any particular futures or options
contracts, and it is possible that other regulatory authorities may adopt
similar limits. Position limits are currently the subject of disputes being
resolved in the U.S. court system. The Fund's investment decisions may need to
be modified, and commodity contract positions held by the Fund may have to be
liquidated at disadvantageous times or prices, to avoid exceeding any applicable
position limits, potentially subjecting the Fund to substantial losses. The
regulation of commodity transactions in the United States is a rapidly changing
area of law and is subject to ongoing modification by government,
self-regulatory and judicial action. The effect of any future regulatory change
on the Fund is impossible to predict, but could be substantial and adverse to
the Fund.
REPURCHASE AGREEMENT RISK. The Fund's investment in repurchase agreements may be
subject to market and credit risk with respect to the collateral securing the
repurchase agreements. Investments in repurchase agreements also may be subject
to the risk that the market value of the underlying obligations may decline
prior to the expiration of the repurchase agreement term.
SHORT SALES RISK. The Fund may engage in "short sale" transactions. The Fund
will lose value if the security or instrument that is the subject of a short
sale increases in value. The Fund also may enter into a short derivative
position through a futures contract. If the price of the security or derivative
that is the subject of a short sale increases, then the Fund will incur a loss
equal to the increase in price from the time that the short sale was entered
into plus any premiums and interest paid to a third party in connection with the
short sale. Therefore, short sales involve the risk that losses may be
exaggerated, potentially losing more money than the actual cost of the
investment. Also, there is the risk that the third party to the short sale may
fail to honor its contract terms, causing a loss to the Fund.
SUBSIDIARY INVESTMENT RISK. Changes in the laws of the United States and/or the
Cayman Islands, under which the Fund and the Subsidiary are organized,
respectively, could result in the inability of the Fund to operate as intended
and could negatively affect the Fund and its shareholders. The Subsidiary is not
registered under the 1940 Act and is not subject to all the investor protections
of the 1940 Act. Thus, the Fund, as an investor in the Subsidiary, will not have
all the protections offered to investors in registered investment companies.
TAX RISK. The Fund intends to treat any income it may derive from Commodities
Instruments (other than derivatives described in Revenue Rulings 2006 1 and 2006
31) received by the Subsidiary as "qualifying income" under the provisions of
the Internal Revenue Code of 1986, as amended, applicable to "regulated
investment companies" ("RICs"), based on a tax opinion received from special
counsel which was based, in part, on numerous private letter rulings ("PLRs")
provided to third parties not associated with the Fund or its affiliates (which
only those parties may rely on as precedent). Shareholders and potential
investors should be aware, however, that, in July 2011, the Internal Revenue
Service ("IRS") suspended the issuance of such PLRs pending its re-examination
of the policies underlying them, which was still ongoing at the date of this
prospectus. If, at the end of that re-examination, the IRS changes its position
with respect to the conclusions reached in those PLRs, then the Fund may be
required to restructure its investments to satisfy the qualifying income
requirement or might cease to qualify as a RIC.
If the Fund did not qualify as a RIC for any taxable year and certain relief
provisions were not available, the Fund's taxable income would be subject to tax
at the Fund level and to a further tax at the shareholder level when such income
is distributed. In such event, in order to re-qualify for taxation as a RIC, the
Fund might be required to recognize unrealized gains, pay substantial taxes and
interest and make certain distributions. This would cause investors to incur
higher tax liabilities than they otherwise would have incurred and would have a
negative impact on Fund returns. In such event, the Fund's Board of Trustees may
determine to reorganize or close the Fund or materially change the Fund's
investment objective and strategies.
In the event that the Fund fails to qualify as a RIC, the Fund will promptly
notify shareholders of the implications of the failure.
The Fund may invest a portion of its assets in equity repurchase agreements.
Recent changes in the law have the potential of changing the character and
source of such instruments potentially subjecting them to unexpected U.S.
taxation. Depending upon the terms of the contracts, the Fund may be required to
indemnify the counterparty for such increased tax.
Page 22
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ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST GLOBAL TACTICAL COMMODITY STRATEGY FUND (FTGC)
DECEMBER 31, 2014 (UNAUDITED)
U.S. GOVERNMENT AND AGENCY SECURITIES RISK. The Fund may invest in U.S.
government obligations. U.S. government obligations include U.S. Treasury
obligations and securities issued or guaranteed by various agencies of the U.S.
government or by various instrumentalities which have been established or
sponsored by the U.S. government. U.S. Treasury obligations are backed by the
"full faith and credit" of the U.S. government. Securities issued or guaranteed
by federal agencies and U.S. government sponsored instrumentalities may or may
not be backed by the full faith and credit of the U.S. government.
VOLATILITY RISK. Frequent or significant short-term price movements could
adversely impact the performance of the Fund. In addition, the net asset value
of the Fund over short-term periods may be more volatile than other investments
options because of the Fund's significant use of financial instruments that have
a leveraging effect. For example, because of the low margin deposits required,
futures trading involves an extremely high degree of leverage and as a result, a
relatively small price movement in a Commodities Instrument may result in
immediate and substantial losses to the Fund.
WHIPSAW MARKETS RISK. The Fund may be subject to the forces of the "whipsaw"
markets (as opposed to choppy or stable markets), in which significant price
movements develop but then repeatedly reverse, could cause substantial losses to
the Fund.
Page 23
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BOARD OF TRUSTEES AND OFFICERS
--------------------------------------------------------------------------------
FIRST TRUST GLOBAL TACTICAL COMMODITY STRATEGY FUND (FTGC)
DECEMBER 31, 2014 (UNAUDITED)
The Trust's statement of additional information includes additional information
about the Trustees and is available, without charge, upon request, by calling
(800) 988-5891.
NUMBER OF OTHER
PORTFOLIOS IN TRUSTEESHIPS OR
TERM OF OFFICE THE FIRST TRUST DIRECTORSHIPS
NAME, ADDRESS, AND YEAR FIRST FUND COMPLEX HELD BY TRUSTEE
DATE OF BIRTH AND ELECTED OR PRINCIPAL OCCUPATIONS OVERSEEN BY DURING PAST
POSITION WITH THE TRUST APPOINTED DURING PAST 5 YEARS TRUSTEE 5 YEARS
------------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
------------------------------------------------------------------------------------------------------------------------------------
Richard E. Erickson, Trustee o Indefinite Term Physician; President, Wheaton Orthopedics; 114 None
c/o First Trust Advisors L.P. Limited Partner, Gundersen Real Estate
120 East Liberty Drive, o Since Inception Limited Partnership; Member, Sportsmed
Suite 400 LLC
Wheaton, IL 60187
D.O.B.: 04/51
Thomas R. Kadlec, Trustee o Indefinite Term President (March 2010 to Present), Senior 114 Director of ADM
c/o First Trust Advisors L.P. Vice President and Chief Financial Officer Investor Services,
120 East Liberty Drive, o Since Inception (May 2007 to March 2010), ADM Investor Inc., ADM
Suite 400 Services, Inc. (Futures Commission Investor Services
Wheaton, IL 60187 Merchant) International, and
D.O.B.: 11/57 Futures Industry
Association
Robert F. Keith, Trustee o Indefinite Term President (2003 to Present), Hibs 114 Director of Trust
c/o First Trust Advisors L.P. Enterprises (Financial and Management Company of
120 East Liberty Drive, o Since Inception Consulting) Illinois
Suite 400
Wheaton, IL 60187
D.O.B.: 11/56
Niel B. Nielson, Trustee o Indefinite Term Managing Director and Chief Operating 114 Director of
c/o First Trust Advisors L.P. Officer (January 2015 to Present), Pelita Covenant
120 East Liberty Drive, o Since Inception Harapan Educational Foundation (Educational Transport, Inc.
Suite 400 Products and Services); President and Chief (May 2003 to
Wheaton, IL 60187 Executive Officer (June 2012 to September May 2014)
D.O.B.: 03/54 2014), Servant Interactive LLC (Educational
Products and Services); President and Chief
Executive Officer (June 2012 to September
2014), Dew Learning LLC (Educational
Products and Services); President (June 2002
to June 2012), Covenant College
------------------------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEE
------------------------------------------------------------------------------------------------------------------------------------
James A. Bowen(1), Trustee, o Indefinite Term Chief Executive Officer (December 2010 to 114 None
Chairman of the Board Present), President (until December 2010),
120 East Liberty Drive, o Since Inception First Trust Advisors L.P. and First Trust
Suite 400 Portfolios L.P.; Chairman of the Board of
Wheaton, IL 60187 Directors, BondWave LLC (Software
D.O.B.: 09/55 Development Company/Investment Advisor
and Stonebridge Advisors LLC (Investment
Advisor)
-------------------
(1) Mr. Bowen is deemed an "interested person" of the Trust due to his
position as Chief Executive Officer of First Trust Advisors L.P.,
investment advisor of the Trust.
Page 24
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BOARD OF TRUSTEES AND OFFICERS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST GLOBAL TACTICAL COMMODITY STRATEGY FUND (FTGC)
DECEMBER 31, 2014 (UNAUDITED)
POSITION AND TERM OF OFFICE
NAME, ADDRESS OFFICES AND LENGTH OF PRINCIPAL OCCUPATIONS
AND DATE OF BIRTH WITH TRUST SERVICE DURING PAST 5 YEARS
------------------------------------------------------------------------------------------------------------------------------------
OFFICERS(2)
------------------------------------------------------------------------------------------------------------------------------------
Mark R. Bradley President and Chief o Indefinite Term Chief Operating Officer (December 2010 to Present)
120 E. Liberty Drive, Executive Officer and Chief Financial Officer, First Trust Advisors
Suite 400 o Since Inception L.P. and First Trust Portfolios L.P.; Chief Financial
Wheaton, IL 60187 Officer, BondWave LLC (Software Development
D.O.B.: 11/57 Company/Investment Advisor) and Stonebridge
Advisors LLC (Investment Advisor)
James M. Dykas Treasurer, Chief Financial o Indefinite Term Controller (January 2011 to Present), Senior Vice
120 E. Liberty Drive, Officer and Chief President (April 2007 to Present), First Trust
Suite 400 Accounting Officer o Since Inception Advisors L.P. and First Trust Portfolios L.P.
Wheaton, IL 60187
D.O.B.: 01/66
W. Scott Jardine Secretary and Chief o Indefinite Term General Counsel, First Trust Advisors L.P. and First
120 E. Liberty Drive, Legal Officer Trust Portfolios L.P.; Secretary and General Counsel,
Suite 400 o Since Inception BondWave LLC (Software Development
Wheaton, IL 60187 Company/Investment Advisor); Secretary of
D.O.B.: 05/60 Stonebridge Advisors LLC (Investment Advisor)
Daniel J. Lindquist Vice President o Indefinite Term Managing Director (July 2012 to Present), Senior
120 E. Liberty Drive, Vice President (September 2005 to July 2012),
Suite 400 o Since Inception First Trust Advisors L.P. and First Trust Portfolios
Wheaton, IL 60187 L.P.
D.O.B.: 02/70
Kristi A. Maher Chief Compliance Officer o Indefinite Term Deputy General Counsel, First Trust Advisors
120 E. Liberty Drive, and Assistant Secretary L.P. and First Trust Portfolios L.P.
Suite 400 o Since Inception
Wheaton, IL 60187
D.O.B.: 12/66
Roger F. Testin Vice President o Indefinite Term Senior Vice President, First Trust Advisors L.P.
120 E. Liberty Drive, and First Trust Portfolios L.P.
Suite 400 o Since Inception
Wheaton, IL 60187
D.O.B.: 06/66
Stan Ueland Vice President o Indefinite Term Senior Vice President (September 2012 to Present),
120 E. Liberty Drive, Vice President (August 2005 to September 2012),
Suite 400 o Since Inception First Trust Advisors L.P. and First Trust Portfolios
Wheaton, IL 60187 L.P.
D.O.B.: 11/70
-------------------
(2) The term "officer" means the president, vice president, secretary,
treasurer, controller or any other officer who performs a policy making
function.
Page 25
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PRIVACY POLICY
--------------------------------------------------------------------------------
FIRST TRUST GLOBAL TACTICAL COMMODITY STRATEGY FUND (FTGC)
DECEMBER 31, 2014 (UNAUDITED)
PRIVACY POLICY
First Trust values our relationship with you and considers your privacy an
important priority in maintaining that relationship. We are committed to
protecting the security and confidentiality of your personal information.
SOURCES OF INFORMATION
We collect nonpublic personal information about you from the following sources:
o Information we receive from you and 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. In addition to using
this information to verify your identity (as required under law), the permitted
uses may also include the disclosure of such information to unaffiliated
companies for the following reasons:
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, proxy
services, solicitors 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 with affiliates of the Fund.
PRIVACY ONLINE
We allow third-party companies, including AddThis (a social media sharing
service), to collect certain anonymous information when you visit our website.
These companies may use non-personally identifiable information during your
visits to this and other websites in order to provide advertisements about goods
and services likely to be of greater interest to you. These companies typically
use a cookie, third party web beacon or pixel tags to collect this information.
To learn more about this behavioral advertising practice, you can visit
www.networkadvertising.org.
CONFIDENTIALITY AND SECURITY
With regard to our internal security procedures, we restrict 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 go to www.ftportfolios.com, or contact us at
1-800-621-1675 (First Trust Portfolios) or 1-800-222-6822 (First Trust
Advisors).
Page 26
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FIRST TRUST
First Trust Exchange-Traded Fund VII
INVESTMENT ADVISOR
First Trust Advisors L.P.
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
ADMINISTRATOR, CUSTODIAN,
FUND ACCOUNTANT &
TRANSFER AGENT
Brown Brothers Harriman & Co.
50 Post Office Square
Boston, MA 02110
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
111 S. Wacker Drive
Chicago, IL 60606
LEGAL COUNSEL
Chapman and Cutler LLP
111 W. Monroe Street
Chicago, IL 60603
[BLANK 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 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.
(e) Not applicable.
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 audit committee financial experts serving on its audit committee and
that each of them is "independent," as defined by Item 3 of Form N-CSR.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(a) Audit Fees (Registrant) -- The aggregate fees billed for the last
fiscal year and since the registrant's inception on October 22, 2013 through
December 31, 2013 (the "Inception Year") for professional services rendered by
the principal accountant for the audit of the registrant's annual financial
statements or services that are normally provided by the accountant in
connection with statutory and regulatory filings or engagements were $0 for the
fiscal year ended December 31, 2014 and $34,000 for the Inception Year.
(b) Audit-Related Fees (Registrant) -- The aggregate fees billed in the
last fiscal year and the Inception Year for assurance and related services by
the principal accountant that are reasonably related to the performance of the
audit of the registrant's financial statements and are not reported under
paragraph (a) of this Item were $0 for the fiscal year ended December 31, 2014
and $0 for the Inception Year.
Audit-Related Fees (Investment Adviser and Distributor) -- The aggregate
fees billed in the last fiscal year and the Inception Year for assurance and
related services by the principal accountant that are reasonably related to the
performance of the audit of the registrant's financial statements and are not
reported under paragraph (a) of this Item were $0 for the fiscal year ended
December 31, 2014 and $7,000 for the Inception Year.
(c) Tax Fees (Registrant) -- The aggregate fees billed in the last fiscal
year and the Inception Year for professional services rendered by the principal
accountant for tax compliance, tax advice, and tax planning were $6,000 for the
fiscal year ended December 31, 2014 and $0 for the Inception Year.
Tax Fees (Investment Adviser and Distributor) -- The aggregate fees billed
in the last fiscal year and the Inception Year for professional services
rendered by the principal accountant for tax compliance, tax advice, and tax
planning were $0 for the fiscal year ended December 31, 2014 and $0 for the
Inception Year.
(d) All Other Fees (Registrant) -- The aggregate fees billed in the last
fiscal year and the Inception Year for products and services provided by the
principal accountant to the registrant, other than the services reported in
paragraphs (a) through (c) of this Item were $0 for the fiscal year ended
December 31, 2014 and $0 for the Inception Year.
All Other Fees (Investment Adviser and Distributor) -- The aggregate fees
billed in the last fiscal year and the Inception Year for products and services
provided by the principal accountant to the registrant, other than the services
reported in paragraphs (a) through (c) of this Item were $0 for the fiscal year
ended December 31, 2014 and $0 for the Inception Year.
(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 for the registrant's
Inception Year were $0 for the registrant, $35,000 for the registrant's
investment adviser, and $0 for the registrant's distributor, and for the last
fiscal year ended December 31, 2014, were $6,000 for the registrant, $8,500 for
the registrant's investment adviser, and $43,500 for the registrant's
distributor.
(h) The registrant's audit committee of its Board of Trustees has
determined that the provision of non-audit services that were rendered to the
registrant's investment 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
consisting of all the independent directors of the registrant. The audit
committee of the registrant is comprised of: Richard E. Erickson, Thomas R.
Kadlec, Robert F. Keith and Niel B. Nielson.
ITEM 6. INVESTMENTS.
(a) Schedule of Investments in securities of unaffiliated issuers as of the
close of the reporting period is included as part of the report to
shareholders filed under Item 1 of this form.
(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 changes to the procedures by which the shareholders
may recommend nominees to the registrant's board of directors, where those
changes were implemented after the registrant last provided disclosure in
response to the requirements of Item 407(c)(2)(iv) of Regulation S-K (17 CFR
229.407) (as required by Item 22(b)(15) of Schedule 14A (17 CFR 240.14a-101)),
or this Item.
ITEM 11. CONTROLS AND PROCEDURES.
(a) The registrant's principal executive and principal financial officers, or
persons performing similar functions, have concluded that the registrant's
disclosure controls and procedures (as defined in Rule 30a-3(c) under the
Investment Company Act of 1940, as amended (the "1940 Act") (17 CFR
270.30a-3 (c))) are effective, as of a date within 90 days of the filing
date of the report that includes the disclosure required by this
paragraph, based on their evaluation of these controls and procedures
required by Rule 30a-3(b) under the 1940 Act (17 CFR 270.30a-3(b)) and
Rules 13a-15(b) or 15d-15(b) under the Securities Exchange Act of 1934, as
amended (17 CFR 240.13a-15(b) or 240.15d-15 (b)).
(b) There were no changes in the registrant's internal control over financial
reporting (as defined in Rule 30a-3(d) under the 1940 Act (17 CFR
270.30a-3(d)) that occurred during the 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 VII
--------------------------------------------------------
By (Signature and Title)* /s/ Mark R. Bradley
----------------------------------------
Mark R. Bradley, President and
Chief Executive Officer
(principal executive officer)
Date: February 24, 2015
-------------------
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title)* /s/ Mark R. Bradley
----------------------------------------
Mark R. Bradley, President and
Chief Executive Officer
(principal executive officer)
Date: February 24, 2015
-------------------
By (Signature and Title)* /s/ James M. Dykas
----------------------------------------
James M. Dykas, Treasurer,
Chief Financial Officer and
Chief Accounting Officer
(principal financial officer)
Date: February 24, 2015
-------------------
* Print the name and title of each signing officer under his or her signature.