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 811-22245
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First Trust Exchange-Traded Fund III
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(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: October 31
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Date of reporting period: April 30, 2015
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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 semi-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 III
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First Trust Preferred Securities and Income ETF (FPE)
Semi-Annual Report
For the
Six Months Ended
April 30, 2015
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TABLE OF CONTENTS
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FIRST TRUST PREFERRED SECURITIES AND INCOME ETF (FPE)
SEMI-ANNUAL REPORT
APRIL 30, 2015
Shareholder Letter......................................................... 1
Fund Performance Overview.................................................. 2
Portfolio Management....................................................... 5
Understanding Your Fund Expenses........................................... 6
Portfolio of Investments................................................... 7
Statement of Assets and Liabilities........................................ 12
Statement of Operations.................................................... 13
Statements of Changes in Net Assets........................................ 14
Financial Highlights....................................................... 15
Notes to Financial Statements.............................................. 16
Additional Information..................................................... 22
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning of
the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934,
as amended. Forward-looking statements include statements regarding the goals,
beliefs, plans or current expectations of First Trust Advisors L.P. ("First
Trust" or the "Advisor") and/or Stonebridge Advisors LLC ("Stonebridge" or the
"Sub-Advisor") and their respective representatives, taking into account the
information currently available to them. Forward-looking statements include all
statements that do not relate solely to current or historical fact. For example,
forward-looking statements include the use of words such as "anticipate,"
"estimate," "intend," "expect," "believe," "plan," "may," "should," "would" or
other words that convey uncertainty of future events or outcomes.
Forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
the series of First Trust Exchange-Traded Fund III (the "Trust") described in
this report for the First Trust Preferred Securities and Income ETF (hereinafter
referred to as the "Fund") to be materially different from any future results,
performance or achievements expressed or implied by the forward-looking
statements. When evaluating the information included in this report, you are
cautioned not to place undue reliance on these forward-looking statements, which
reflect the judgment of the Advisor and/or Sub-Advisor and their respective
representatives only as of the date hereof. We undertake no obligation to
publicly revise or update these forward-looking statements to reflect events and
circumstances that arise after the date hereof.
PERFORMANCE AND RISK DISCLOSURE
There is no assurance that the Fund will achieve its investment objective. The
Fund is subject to market risk, which is the possibility that the market values
of securities owned by the Fund will decline and that the value of the Fund
shares may therefore be less than what you paid for them. Accordingly, you can
lose money by investing in the Fund. See "Risk Considerations" in the Additional
Information section of this report for a discussion of certain other risks of
investing in the Fund.
Performance data quoted represents past performance, which is no guarantee of
future results, and current performance may be lower or higher than the figures
shown. For the most recent month-end performance figures, please visit
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 in
the Fund. 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.
The material 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 PREFERRED SECURITIES AND INCOME ETF (FPE)
SEMI-ANNUAL LETTER FROM THE CHAIRMAN AND CEO
APRIL 30, 2015
Dear Shareholders:
Thank you for your investment in First Trust Preferred Securities and Income ETF
(the "Fund").
First Trust Advisors L.P. ("First Trust") is pleased to provide you with the
semi-annual report which contains detailed information about your investment for
the six months ended April 30, 2015. Additionally, First Trust compiles the
Fund's financial statements for you to review. We encourage you to read this
report and discuss it with your financial advisor.
U.S. markets, fueled by accelerating growth and an accommodating Federal
Reserve, enjoyed a prosperous year in 2014. However, for the six months covered
by this report, some economic and global factors, including the continued
conflict in the Middle East and a sharp decline in oil prices, created
volatility in the U.S. and global markets. Another factor that has impacted
markets is the fact that many economists are predicting the Federal Reserve will
begin to raise interest rates this year.
As I have written previously, First Trust believes investors should maintain
perspective about the markets and have realistic expectations about their
investments. Markets will always go up and down, but we believe that having a
long-term investment horizon and being invested in quality products can help you
reach your goals.
Thank you for giving First Trust the opportunity to be a part of your investment
plan. We value the relationship and will continue to focus on our disciplined
investment approach and long-term perspective to help investors reach their
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 PREFERRED SECURITIES AND INCOME ETF (FPE)
First Trust Preferred Securities and Income ETF's (the "Fund") investment
objective is to seek total return and to provide current income. Under normal
market conditions, the Fund invests at least 80% of its net assets (including
investment borrowings) in preferred securities ("Preferred Securities") and
income-producing debt securities ("Income Securities"). The Fund invests in
securities that are traded over-the-counter or listed on an exchange. For
purposes of the 80% test set forth above, securities of open-end funds,
closed-end funds or other exchange-traded funds ("ETFs") registered under the
Investment Company Act of 1940, as amended, that invest primarily in Preferred
Securities or Income Securities are deemed to be Preferred Securities or Income
Securities.
Preferred Securities held by the Fund generally pay fixed or adjustable-rate
distributions to investors and have preference over common stock in the payment
of distributions and the liquidation of a company's assets, but are generally
junior to all forms of the company's debt, including both senior and
subordinated debt. Certain of the Preferred Securities may be issued by trusts
or other special purpose entities created by companies specifically for the
purpose of issuing such securities. Income Securities that may be held by the
Fund include corporate bonds, high yield securities (commonly referred to as
"junk" bonds) and convertible securities. The broad category of corporate debt
securities includes debt issued by U.S. and non-U.S. companies of all kinds,
including those with small, mid and large capitalizations. Corporate debt may
carry fixed or floating rates of interest.
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PERFORMANCE
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AVERAGE ANNUAL CUMULATIVE
TOTAL RETURNS TOTAL RETURNS
6 Months Ended 1 Year Ended Inception (2/11/13) Inception (2/11/13)
4/30/15 4/30/15 to 4/30/15 to 4/30/15
FUND PERFORMANCE
NAV 3.85% 7.20% 3.58% 8.09%
Market Price 4.06% 7.35% 3.70% 8.37%
INDEX PERFORMANCE
BofA Merrill Lynch Fixed Rate Preferred Securities Index 4.47% 8.71% 5.78% 13.25%
BofA Merrill Lynch U.S. Capital Securities Index 3.54% 7.03% 7.62% 17.64%
Blended Benchmark(1) 4.01% 7.88% 6.71% 15.47%
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Total returns for the periods since inception are calculated from the inception
date of the Fund. "Average Annual Total Returns" represent the average annual
change in value of an investment over the periods indicated. "Cumulative Total
Returns" represent the total change in value of an investment over the periods
indicated.
The Fund's per share net asset value ("NAV") is the value of one share of the
Fund and is computed by dividing the value of all assets of the Fund (including
accrued interest and dividends), less all liabilities (including accrued
expenses and dividends declared but unpaid), by the total number of outstanding
shares. The price used to calculate market return ("Market Price") is determined
by using the midpoint 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 distributions have been
reinvested in the Fund at NAV and Market Price, respectively.
An index is a statistical composite that tracks a specified financial market or
sector. Unlike the Fund, the indices do not actually hold a portfolio of
securities and therefore do not incur the expenses incurred by the Fund. These
expenses negatively impact the performance of the Fund. Also, market returns do
not include brokerage commissions that may be payable on secondary market
transactions. If brokerage commissions were included, market returns would be
lower. The total returns presented reflect the reinvestment of dividends on
securities in the index. 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.
(1) The Blended Benchmark consists of a 50/50 blend of the BofA Merrill Lynch
Fixed Rate Preferred Securities Index and the BofA Merrill Lynch U.S.
Capital Securities Index. The Blended Benchmark was added to reflect the
diverse allocation of institutional preferred and hybrid securities in the
Fund's portfolio. The indices do not charge management fees or brokerage
expenses, and no such fees or expenses were deducted from the performance
shown. Indices are unmanaged and an investor cannot invest directly in an
index.
Page 2
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FUND PERFORMANCE OVERVIEW (UNAUDITED) (CONTINUED)
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FIRST TRUST PREFERRED SECURITIES AND INCOME ETF (FPE)
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PORTFOLIO SECTOR ALLOCATION AS OF APRIL 30, 2015
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% OF TOTAL
SECTOR INVESTMENTS
Financials 89.1%
Consumer Staples 5.1
Utilities 3.7
Telecommunication Services 2.1
Energy 0.0*
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Total 100.0%
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CREDIT QUALITY AS OF APRIL 30, 2015
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% OF TOTAL
CREDIT RATING(2) INVESTMENTS
A 1.9%
A- 1.4
BBB+ 13.9
BBB 9.0
BBB- 21.6
BB+ 20.1
BB 12.6
BB- 7.5
B+ 2.1
NR 9.9
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Total 100.0%
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TOP TEN PORTFOLIO HOLDINGS AS OF APRIL 30, 2015
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% OF TOTAL
SECURITY INVESTMENTS
Aquarius + Investments PLC for
Swiss Reinsurance Co., Ltd. 3.0%
CHS, Inc., Series 2 2.6
Morgan Stanley, Series F 2.4
Citigroup Capital XIII 2.4
Aspen Insurance Holdings Ltd. 2.3
First Niagara Financial Group., Inc., Series B 2.3
Sirius International Group Ltd. 2.2
Goldman Sachs Group, Inc., Series K 2.1
Lloyds Bank PLC 2.1
Endurance Specialty Holdings Ltd., Series A 2.1
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Total 23.5%
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COUNTRY EXPOSURE AS OF APRIL 30, 2015
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% OF TOTAL
COUNTRY INVESTMENTS
United States 61.1%
Bermuda 9.7
United Kingdom 7.6
Netherlands 5.2
France 4.7
Ireland 3.3
Italy 1.2
Chile 1.1
Switzerland 1.1
Luxembourg 1.0
Cayman Islands 1.0
Guernsey 0.8
Brazil 0.7
Spain 0.7
Belgium 0.5
Japan 0.3
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Total 100.0%
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* Amount is less than 0.1%
(2) The credit quality and ratings information presented above reflects the
ratings assigned by one or more nationally recognized statistical rating
organizations (NRSROs), including Standard & Poor's Ratings Group, a
division of the McGraw-Hill Companies, Inc., Moody's Investors Service,
Inc., Fitch Ratings or a comparably rated NRSRO. For situations in which a
security is rated by more than one NRSRO and the ratings are not
equivalent, the highest ratings are used. Sub-investment grade ratings are
those rated BB+/Ba1 or lower. Investment grade ratings are those rated
BBB-/Baa3 or higher. The credit ratings shown relate to the
creditworthiness of the issuers of the underlying securities in the Fund,
and not to the Fund or its shares. Credit ratings are subject to change.
Page 3
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FUND PERFORMANCE OVERVIEW (UNAUDITED) (CONTINUED)
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FIRST TRUST PREFERRED SECURITIES AND INCOME ETF (FPE)
PERFORMANCE OF A $10,000 INITIAL INVESTMENT
FEBRUARY 11, 2013 - APRIL 30, 2015
First Trust Preferred Securities BofA Merrill Lynch Fixed Rate BofA Merrill Lynch U.S. Blended
and Income ETF Preferred Securities Index Capital Securities Index Benchmark(1)
2/11/13 $10,000 $10,000 $10,000 $10,000
4/30/13 10,330 10,253 10,342 10,297
10/31/13 9,426 9,640 10,392 10,010
4/30/14 10,084 10,418 10,992 10,704
10/31/14 10,409 10,841 11,364 11,102
04/30/15 10,810 11,326 11,766 11,547
Performance figures assume reinvestment of all distributions and do not reflect
the deduction of taxes that a shareholder would pay on Fund distributions or the
redemption or sale of Fund shares. An index is a statistical composite that
tracks a specified financial market or sector. Unlike the Fund, the indices do
not actually hold a portfolio of securities and therefore do not incur the
expenses incurred by the Fund. These expenses negatively impact the performance
of the Fund. The Fund's past performance does not predict future performance.
FREQUENCY DISTRIBUTION OF DISCOUNTS AND PREMIUMS
BID/ASK MIDPOINT VS. NAV THROUGH APRIL 30, 2015
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 February 12, 2013
(commencement of trading) through April 30, 2015. 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%
2/12/13 - 10/31/13 96 7 0 0
11/1/13 - 10/31/14 140 2 0 0
11/1/14 - 4/30/15 116 1 0 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%
2/12/13 - 10/31/13 73 7 0 0
11/1/13 - 10/31/14 101 9 0 0
11/1/14 - 4/30/15 6 0 0 0
(1) The Blended Benchmark consists of a 50/50 blend of the BofA Merrill Lynch
Fixed Rate Preferred Securities Index and the BofA Merrill Lynch U.S.
Capital Securities Index. The Blended Benchmark was added to reflect the
diverse allocation of institutional preferred and hybrid securities in the
Fund's portfolio. The indices do not charge management fees or brokerage
expenses, and no such fees or expenses were deducted from the performance
shown. Indices are unmanaged and an investor cannot invest directly in an
index.
Page 4
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PORTFOLIO MANAGEMENT
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FIRST TRUST PREFERRED SECURITIES AND INCOME ETF (FPE)
SEMI-ANNUAL REPORT
APRIL 30, 2015
SUB-ADVISOR
STONEBRIDGE ADVISORS LLC
Stonebridge Advisors LLC ("Stonebridge" or the "Sub-Advisor") is the Sub-Advisor
to First Trust Preferred Securities and Income ETF (the "Fund") and is a
registered investment advisor based in Wilton, Connecticut. Stonebridge
specializes in the management of preferred securities and North American equity
income securities.
PORTFOLIO MANAGEMENT TEAM
SCOTT T. FLEMING - PRESIDENT AND CIO OF STONEBRIDGE ADVISORS LLC
ROBERT WOLF - VICE PRESIDENT, PORTFOLIO MANAGER AND SENIOR CREDIT ANALYST
DANIELLE SALTERS, CFA - CREDIT ANALYST
Page 5
FIRST TRUST PREFERRED SECURITIES AND INCOME ETF (FPE)
UNDERSTANDING YOUR FUND EXPENSES
APRIL 30, 2015 (UNAUDITED)
As a shareholder of First Trust Preferred Securities and Income ETF (the "Fund")
you incur two types of costs: (1) transaction costs; and (2) ongoing costs,
including management fees, distribution and/or service fees, if any, and other
Fund expenses. This Example is intended to help you understand your ongoing
costs of investing in the Fund and to compare these costs with the ongoing costs
of investing in other funds.
The Example is based on an investment of $1,000 invested at the beginning of the
period and held through the six-month period ended April 30, 2015.
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
NOVEMBER 1, 2014 APRIL 30, 2015 PERIOD PERIOD (a)
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FIRST TRUST PREFERRED SECURITIES AND INCOME ETF
Actual $1,000.00 $1,038.50 0.85% $4.30
Hypothetical (5% return before expenses) $1,000.00 $1,020.58 0.85% $4.26
(a) Expenses are equal to the annualized expense ratio as indicated in the
table multiplied by the average account value over the period (November 1,
2014 through April 30, 2015), multiplied by 181/365.
Page 6
FIRST TRUST PREFERRED SECURITIES AND INCOME ETF (FPE)
PORTFOLIO OF INVESTMENTS
APRIL 30, 2015 (UNAUDITED)
STATED STATED
SHARES DESCRIPTION RATE MATURITY VALUE
----------- ----------------------------------------------------------------- ------------- ---------- ------------
$25 PAR PREFERRED SECURITIES - 52.4%
BANKS - 17.7%
15,389 Bank of America Corp., Series Y.................................. 6.50% (a) $ 397,036
178,760 Citigroup Capital XIII (b)....................................... 7.88% 10/30/40 4,628,096
19,611 Citigroup, Inc., Series AA....................................... 8.13% (a) 578,721
13,295 Citigroup, Inc., Series J (b).................................... 7.13% (a) 368,803
148,400 Citigroup, Inc., Series K (b).................................... 6.88% (a) 4,039,448
93,028 Fifth Third Bancorp, Series I (b)................................ 6.63% (a) 2,616,878
164,378 First Niagara Financial Group., Inc., Series B (b)............... 8.63% (a) 4,545,052
88,881 FNB Corp. (b).................................................... 7.25% (a) 2,485,113
84,185 GMAC Capital Trust I, Series 2 (b)............................... 8.13% 02/15/40 2,212,382
24,152 HSBC USA, Inc., Series F (c)..................................... 3.50% (a) 560,810
17,420 HSBC USA, Inc., Series H......................................... 6.50% (a) 443,862
19,998 JPMorgan Chase & Co., Series W................................... 6.30% (a) 516,348
105,522 PNC Financial Services Group, Inc., Series P (b)................. 6.13% (a) 2,960,947
38,062 Regions Financial Corp., Series B (b)............................ 6.38% (a) 997,224
47,098 Royal Bank of Scotland Group PLC, Series P....................... 6.25% (a) 1,168,030
22,697 Royal Bank of Scotland Group PLC, Series R....................... 6.13% (a) 560,389
84,676 Royal Bank of Scotland Group PLC, Series S....................... 6.60% (a) 2,119,440
20,067 Royal Bank of Scotland Group PLC, Series T....................... 7.25% (a) 510,103
14,476 Santander Finance Preferred S.A., Series 6 (c)................... 4.00% (a) 331,066
52,035 US Bancorp, Series F (b)......................................... 6.50% (a) 1,549,602
30,356 Zions Bancorporation, Series F................................... 7.90% (a) 853,672
30,166 Zions Bancorporation, Series G (b)............................... 6.30% (a) 809,656
------------
35,252,678
------------
CAPITAL MARKETS - 9.4%
85,103 Apollo Investment Corp........................................... 6.63% 10/15/42 2,191,402
73,623 Apollo Investment Corp........................................... 6.88% 07/15/43 1,903,891
37,665 Ares Capital Corp................................................ 7.75% 10/15/40 968,744
67,654 BGC Partners, Inc................................................ 8.13% 06/15/42 1,827,334
5,769 Deutsche Bank Contingent Capital Trust III....................... 7.60% (a) 162,109
160,016 Goldman Sachs Group, Inc., Series K (b).......................... 6.38% (a) 4,192,419
36,239 Morgan Stanley, Series E (b)..................................... 7.13% (a) 1,027,376
172,115 Morgan Stanley, Series F (b)..................................... 6.88% (a) 4,715,951
18,735 Raymond James Financial, Inc..................................... 6.90% 03/15/42 505,470
4,414 Solar Capital Ltd................................................ 6.75% 11/15/42 109,864
43,919 State Street Corp., Series D (b)................................. 5.90% (a) 1,182,739
------------
18,787,299
------------
CONSUMER FINANCE - 1.0%
65,854 Ally Financial, Inc., Series A (b)............................... 8.50% (a) 1,745,131
8,561 Capital One Financial Corp., Series D............................ 6.70% (a) 229,948
------------
1,975,079
------------
DIVERSIFIED FINANCIAL SERVICES - 2.7%
14,304 Allied Capital Corp.............................................. 6.88% 04/15/47 364,609
5,820 Countrywide Capital IV........................................... 6.75% 04/01/33 148,410
69,931 KKR Financial Holdings LLC....................................... 8.38% 11/15/41 1,920,305
44,513 KKR Financial Holdings LLC, Series A............................. 7.38% (a) 1,156,448
22,644 RBS Capital Funding Trust V, Series E............................ 5.90% (a) 557,722
41,860 RBS Capital Funding Trust VI, Series F........................... 6.25% (a) 1,042,732
6,453 RBS Capital Funding Trust VII, Series G.......................... 6.08% (a) 160,615
------------
5,350,841
------------
See Notes to Financial Statements Page 7
FIRST TRUST PREFERRED SECURITIES AND INCOME ETF (FPE)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2015 (UNAUDITED)
STATED STATED
SHARES DESCRIPTION RATE MATURITY VALUE
----------- ----------------------------------------------------------------- ------------- ---------- ------------
$25 PAR PREFERRED SECURITIES - (CONTINUED)
DIVERSIFIED TELECOMMUNICATION SERVICES - 1.2%
36,015 Qwest Corp....................................................... 7.38% 06/01/51 $ 944,313
52,987 Qwest Corp....................................................... 6.88% 10/01/54 1,411,574
------------
2,355,887
------------
ELECTRIC UTILITIES - 0.1%
3,546 SCE Trust III (b)................................................ 5.75% (a) 96,274
------------
FOOD PRODUCTS - 3.9%
189,510 CHS, Inc., Series 2 (b).......................................... 7.10% (a) 5,058,022
85,512 CHS, Inc., Series 3 (b).......................................... 6.75% (a) 2,233,573
19,749 CHS, Inc., Series 4.............................................. 7.50% (a) 550,405
------------
7,842,000
------------
INSURANCE - 12.0%
93,474 Aegon N.V........................................................ 8.00% 02/15/42 2,619,141
6,160 Allstate Corp., Series D......................................... 6.63% (a) 165,396
5,860 Allstate Corp., Series E......................................... 6.63% (a) 158,689
21,616 American Financial Group, Inc.................................... 7.00% 09/30/50 556,828
94,462 Aspen Insurance Holdings Ltd. (b)................................ 5.95% (a) 2,430,507
24,318 Aspen Insurance Holdings Ltd..................................... 7.25% (a) 645,400
173,603 Aspen Insurance Holdings Ltd. (b)................................ 7.40% (a) 4,557,079
141,957 Aviva PLC........................................................ 8.25% 12/01/41 3,923,692
156,451 Endurance Specialty Holdings Ltd., Series A...................... 7.75% (a) 4,078,678
59,048 Hartford Financial Services Group, Inc. (b)...................... 7.88% 04/15/42 1,847,021
59,871 Montpelier Re Holdings Ltd., Series A............................ 8.88% (a) 1,562,034
36,838 PartnerRe Ltd., Series E......................................... 7.25% (a) 976,207
14,790 Reinsurance Group of America, Inc., Series D (b)................. 6.20% 09/15/42 424,029
------------
23,944,701
------------
MULTI-UTILITIES - 0.5%
38,686 Integrys Energy Group, Inc. (b).................................. 6.00% 08/01/73 1,058,836
------------
OIL, GAS & CONSUMABLE FUELS - 0.0%
1,633 NuStar Logistics LP (b).......................................... 7.63% 01/15/43 42,654
------------
REAL ESTATE INVESTMENT TRUSTS - 3.9%
155,823 American Realty Capital Properties, Inc., Series F............... 6.70% (a) 3,741,310
57,854 DuPont Fabros Technology, Inc., Series A......................... 7.88% (a) 1,490,319
9,983 DuPont Fabros Technology, Inc., Series B......................... 7.63% (a) 257,063
22,452 EPR Properties, Series F......................................... 6.63% (a) 580,384
14,957 Hospitality Properties Trust, Series D........................... 7.13% (a) 386,040
34,302 MFA Financial, Inc............................................... 8.00% 04/15/42 882,934
17,488 National Retail Properties, Inc., Series D....................... 6.63% (a) 457,311
------------
7,795,361
------------
TOTAL $25 PAR PREFERRED SECURITIES.......................................................... 104,501,610
(Cost $103,923,911) ------------
$100 PAR PREFERRED SECURITIES - 1.6%
BANKS - 0.8%
1,200 AgriBank FCB (b) (d)............................................. 6.88% (a) 125,588
8,500 CoBank ACB, Series F (b)......................................... 6.25% (a) 878,422
5,640 CoBank ACB, Series G............................................. 6.13% (a) 531,218
------------
1,535,228
------------
ELECTRIC UTILITIES - 0.7%
14,798 Southern California Edison Co., Series A (c)..................... 4.13% (a) 1,487,199
------------
Page 8 See Notes to Financial Statements
FIRST TRUST PREFERRED SECURITIES AND INCOME ETF (FPE)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2015 (UNAUDITED)
STATED STATED
SHARES DESCRIPTION RATE MATURITY VALUE
----------- ----------------------------------------------------------------- ------------- ---------- ------------
$100 PAR PREFERRED SECURITIES - (CONTINUED)
INSURANCE - 0.1%
2,250 Principal Financial Group, Inc., Series A (b).................... 5.56% (a) $ 225,281
------------
TOTAL $100 PAR PREFERRED SECURITIES......................................................... 3,247,708
(Cost $3,266,512) ------------
$1,000 PAR PREFERRED SECURITIES - 2.0%
BANKS - 0.6%
1,000 Farm Credit Bank of Texas, Series 1 (d).......................... 10.00% (a) 1,246,562
------------
INSURANCE - 0.4%
1,000 XLIT Ltd., Series D (c).......................................... 3.40% (a) 827,813
------------
REAL ESTATE INVESTMENT TRUSTS - 1.0%
1,456 Sovereign Real Estate Investment Trust (e)....................... 12.00% (a) 1,905,540
------------
TOTAL $1,000 PAR PREFERRED SECURITIES....................................................... 3,979,915
(Cost $4,047,010) ------------
PAR STATED STATED
AMOUNT DESCRIPTION RATE MATURITY VALUE
----------- ----------------------------------------------------------------- ------------- ---------- ------------
CAPITAL PREFERRED SECURITIES - 41.3%
BANKS - 17.4%
$ 1,000,000 Banco Bilbao Vizcaya Argentaria S.A. (b)......................... 9.00% (a) 1,083,750
1,000,000 Banco do Brasil S.A. (b) (f)..................................... 9.00% (a) 930,000
500,000 Banco do Brasil S.A. (b)......................................... 9.25% (a) 490,650
1,000,000 Bank of America Corp., Series Z (b).............................. 6.50% (a) 1,065,000
1,092,566 Barclays PLC (b)................................................. 6.63% (a) 1,085,550
500,000 Barclays PLC (b)................................................. 8.25% (a) 533,599
1,024,990 BBVA Global Finance Ltd.......................................... 7.00% 12/01/25 1,177,066
1,007,000 BPCE S.A. (b).................................................... 12.50% (a) 1,371,413
1,000,000 Citizens Financial Group, Inc. (b) (f)........................... 5.50% (a) 991,250
500,000 Credit Agricole S.A. (b) (f)..................................... 6.63% (a) 506,106
1,500,000 Credit Agricole S.A. (b)......................................... 8.38% (a) 1,780,125
2,000,000 Dresdner Funding Trust I......................................... 8.15% 06/30/31 2,543,760
2,000,000 Fuerstenberg Capital International Sarl & Cie SECS (b)........... 10.25% (a) 2,032,500
1,000,000 HSBC Holdings PLC (b)............................................ 6.38% (a) 1,035,000
1,000,000 HSBC USA Capital Trust III....................................... 7.75% 11/15/26 1,004,424
500,000 ING Groep N.V. (b)............................................... 6.00% (a) 500,312
500,000 ING Groep N.V. (b)............................................... 6.50% (a) 499,688
500,000 JPMorgan Chase & Co., Series S (b)............................... 6.75% (a) 548,650
1,500,000 JPMorgan Chase & Co., Series Z (b)............................... 5.30% (a) 1,501,875
2,000,000 LBG Capital No.1 PLC (b)......................................... 8.50% (a) 2,235,102
2,850,000 Lloyds Bank PLC (b).............................................. 12.00% (a) 4,096,875
1,000,000 Natixis S.A. (b)................................................. 10.00% (a) 1,195,000
1,000,000 NIBC Bank N.V.................................................... 7.63% (a) 1,017,612
1,000,000 Royal Bank of Scotland Group PLC (b)............................. 7.65% (a) 1,280,000
1,000,000 Societe Generale S.A. (b)........................................ 7.88% (a) 1,040,000
500,000 Wells Fargo & Co., Series U (b).................................. 5.88% (a) 531,875
2,449,000 Zions Bancorporation, Series J (b)............................... 7.20% (a) 2,643,695
------------
34,720,877
------------
CAPITAL MARKETS - 2.8%
1,500,000 Credit Suisse Group Guernsey I Ltd. (b).......................... 7.88% 02/24/41 1,590,937
2,000,000 Goldman Sachs Group, Inc., Series M (b).......................... 5.38% (a) 2,000,500
2,000,000 UBS Group AG (b)................................................. 7.13% (a) 2,085,540
------------
5,676,977
------------
See Notes to Financial Statements Page 9
FIRST TRUST PREFERRED SECURITIES AND INCOME ETF (FPE)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2015 (UNAUDITED)
PAR STATED STATED
AMOUNT DESCRIPTION RATE MATURITY VALUE
----------- ----------------------------------------------------------------- ------------- ---------- ------------
CAPITAL PREFERRED SECURITIES (CONTINUED)
DIVERSIFIED FINANCIAL SERVICES - 2.1%
$ 1,000,000 General Electric Capital Corp., Series A (b)..................... 7.13% (a) $ 1,166,250
2,000,000 Glen Meadow Pass Through Trust (b) (f)........................... 6.51% 02/12/67 1,880,000
1,000,000 Macquarie PMI LLC................................................ 8.38% (a) 1,036,501
------------
4,082,751
------------
DIVERSIFIED TELECOMMUNICATION SERVICES - 0.8%
1,500,000 Koninklijke KPN N.V. (b) (f)..................................... 7.00% 03/28/73 1,621,875
------------
ELECTRIC UTILITIES - 1.2%
2,000,000 Enel SpA (b) (f)................................................. 8.75% 09/24/73 2,417,000
------------
FOOD PRODUCTS - 1.1%
2,000,000 Land O'Lakes Capital Trust I (f)................................. 7.45% 03/15/28 2,175,000
------------
INDEPENDENT POWER AND RENEWABLE ELECTRICITY
PRODUCERS - 1.1%
1,500,000 AES Gener S.A. (b) (f)........................................... 8.38% 12/18/73 1,657,500
500,000 AES Gener S.A. (b)............................................... 8.38% 12/18/73 552,500
------------
2,210,000
------------
INSURANCE - 14.8%
800,000 AG Insurance S.A. N.V. (b)....................................... 6.75% (a) 875,800
5,150,000 Aquarius + Investments PLC for Swiss Reinsurance
Co., Ltd. (b)................................................. 8.25% (a) 5,768,000
3,675,000 Assured Guaranty Municipal Holdings, Inc. (b) (f)................ 6.40% 12/15/66 3,087,000
1,000,000 Aviva PLC........................................................ 8.25% (a) 1,121,825
500,000 Catlin Insurance Co., Ltd. (b)................................... 7.25% (a) 471,250
500,000 Cloverie PLC for Zurich Insurance Co., Ltd. (b).................. 8.25% (a) 573,813
500,000 CNP Assurances (b)............................................... 7.50% (a) 559,784
3,000,000 Friends Life Holdings PLC (b).................................... 7.88% (a) 3,408,435
350,000 Genworth Holdings, Inc. (b)...................................... 6.15% 11/15/66 224,000
2,500,000 La Mondiale SAM (b).............................................. 7.63% (a) 2,790,312
3,235,000 Liberty Mutual Group, Inc. (b) (f)............................... 7.00% 03/15/37 3,352,269
325,000 Liberty Mutual Group, Inc. (b) (f)............................... 10.75% 06/15/58 498,875
1,000,000 MetLife Capital Trust X (b) (f).................................. 9.25% 04/08/38 1,497,500
400,000 Mitsui Sumitomo Insurance Co., Ltd. (b) (f)...................... 7.00% 03/15/72 482,000
600,000 Nationwide Financial Services, Inc............................... 6.75% 05/15/37 642,000
4,000,000 Sirius International Group Ltd. (b) (e).......................... 7.51% (a) 4,210,000
------------
29,562,863
------------
TOTAL CAPITAL PREFERRED SECURITIES.......................................................... 82,467,343
(Cost $81,075,847) ------------
SHARES DESCRIPTION VALUE
----------- -------------------------------------------------------------------------------------------- ------------
CLOSED-END FUNDS - 0.6%
CAPITAL MARKETS - 0.6%
47,740 Flaherty & Crumrine Dynamic Preferred and Income Fund, Inc.................................. 1,142,896
------------
TOTAL CLOSED-END FUNDS...................................................................... 1,142,896
(Cost $1,084,765) ------------
TOTAL INVESTMENTS - 97.9%................................................................... 195,339,472
(Cost $193,398,045) (g)
NET OTHER ASSETS AND LIABILITIES - 2.1%..................................................... 4,146,894
------------
NET ASSETS - 100.0%......................................................................... $199,486,366
============
Page 10 See Notes to Financial Statements
FIRST TRUST PREFERRED SECURITIES AND INCOME ETF (FPE)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2015 (UNAUDITED)
(a) Perpetual maturity.
(b) Fixed-to-floating or fixed-to-variable rate security. The interest rate
shown reflects the fixed rate in effect at April 30, 2015. At a
predetermined date, the fixed rate will change to a floating rate or a
variable rate.
(c) Floating rate security. The interest rate shown reflects the rate in
effect at April 30, 2015.
(d) Pursuant to procedures adopted by the Trust's Board of Trustees, this
security has been determined to be illiquid by Stonebridge Advisors LLC,
the Fund's sub-advisor (the "Sub-Advisor").
(e) This security, sold within the terms of a private placement memorandum, is
exempt from registration upon resale under Rule 144A under the Securities
Act of 1933, as amended (the "1933 Act"), and may be resold in
transactions exempt from registration, normally to qualified institutional
buyers (see Note 2C - Restricted Securities in the Notes to Financial
Statements).
(f) This security, sold within the terms of a private placement memorandum, is
exempt from registration upon resale under Rule 144A under the 1933 Act,
and may be resold in transactions exempt from registration, normally to
qualified institutional buyers. Pursuant to procedures adopted by the
Trust's Board of Trustees, this security has been determined to be liquid
by the Sub-Advisor. Although market instability can result in periods of
increased overall market illiquidity, liquidity for each security is
determined based on security-specific factors and assumptions, which
require subjective judgment. At April 30, 2015, securities noted as such
amounted to $21,096,375 or 10.58% of net assets.
(g) Aggregate cost for financial reporting purposes, which approximates the
aggregate cost for federal income tax purposes. As of April 30, 2015, the
aggregate gross unrealized appreciation for all securities in which there
was an excess of value over tax cost was $3,102,658 and the aggregate
gross unrealized depreciation for all securities in which there was an
excess of tax cost over value was $1,161,231.
-----------------------------
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of April 30,
2015 is as follows (see Note 2A - Portfolio Valuation in the Notes to Financial
Statements):
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
INVESTMENTS 4/30/2015 PRICES INPUTS INPUTS
--------------------------------------------------- ------------- ------------- -------------- --------------
$25 Par Preferred Securities*...................... $ 104,501,610 $ 104,501,610 $ -- $ --
$100 Par Preferred Securities*..................... 3,247,708 -- 3,247,708 --
$1,000 Par Preferred Securities*................... 3,979,915 -- 3,979,915 --
Capital Preferred Securities*...................... 82,467,343 -- 82,467,343 --
Closed-End Funds*.................................. 1,142,896 1,142,896 -- --
------------- ------------- -------------- --------------
Total Investments.................................. $ 195,339,472 $ 105,644,506 $ 89,694,966 $ --
============= ============= ============== ==============
* See the Portfolio of Investments for industry breakout.
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 April 30, 2015.
See Notes to Financial Statements Page 11
FIRST TRUST PREFERRED SECURITIES AND INCOME ETF (FPE)
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 2015 (UNAUDITED)
ASSETS:
Investments, at value.................................................. $ 195,339,472
Receivables:
Capital shares sold................................................. 6,719,833
Interest............................................................ 1,680,970
Investment securities sold.......................................... 1,203,484
Dividends........................................................... 260,676
-----------------
Total Assets........................................................ 205,204,435
-----------------
LIABILITIES:
Due to custodian....................................................... 26,856
Payables:
Investment securities purchased..................................... 5,565,915
Investment advisory fees............................................ 125,298
-----------------
Total Liabilities................................................... 5,718,069
-----------------
NET ASSETS............................................................. $ 199,486,366
=================
NET ASSETS CONSIST OF:
Paid-in capital........................................................ $ 203,106,377
Par value.............................................................. 104,050
Accumulated net investment income (loss)............................... (238,168)
Accumulated net realized gain (loss) on investments.................... (5,427,320)
Net unrealized appreciation (depreciation) on investments.............. 1,941,427
-----------------
NET ASSETS............................................................. $ 199,486,366
=================
NET ASSET VALUE, per share............................................. $ 19.17
=================
Number of shares outstanding (unlimited number of
shares authorized, par value $0.01 per share)....................... 10,405,000
=================
Investments, at cost................................................... $ 193,398,045
=================
Page 12 See Notes to Financial Statements
FIRST TRUST PREFERRED SECURITIES AND INCOME ETF (FPE)
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED APRIL 30, 2015 (UNAUDITED)
INVESTMENT INCOME:
Dividends.............................................................. $ 2,580,786
Interest............................................................... 1,469,066
Foreign tax withholding................................................ 4,398
Other.................................................................. 8
-----------------
Total investment income............................................. 4,054,258
-----------------
EXPENSES:
Investment advisory fees............................................... 533,367
-----------------
Total expenses...................................................... 533,367
-----------------
NET INVESTMENT INCOME (LOSS)........................................... 3,520,891
-----------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments......................................................... 17,071
In-kind redemptions................................................. 96,498
-----------------
Net realized gain (loss)............................................... 113,569
-----------------
Net change in unrealized appreciation (depreciation) on investments.... 1,493,350
-----------------
NET REALIZED AND UNREALIZED GAIN (LOSS)................................ 1,606,919
-----------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS..................................................... $ 5,127,810
=================
See Notes to Financial Statements Page 13
FIRST TRUST PREFERRED SECURITIES AND INCOME ETF (FPE)
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE
SIX MONTHS FOR THE YEAR
ENDED 4/30/2015 ENDED
(UNAUDITED) 10/31/2014
-------------------- --------------------
OPERATIONS:
Net investment income (loss)....................................... $ 3,520,891 $ 3,895,121
Net realized gain (loss)........................................... 113,569 (2,534,995)
Net change in unrealized appreciation (depreciation)............... 1,493,350 4,543,169
-------------------- --------------------
Net increase (decrease) in net assets resulting from operations.... 5,127,810 5,903,295
-------------------- --------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income.............................................. (3,948,805) (3,548,355)
-------------------- --------------------
SHAREHOLDER TRANSACTIONS:
Proceeds from shares sold.......................................... 117,252,508 33,332,529
Cost of shares redeemed............................................ (5,663,344) (13,691,744)
-------------------- --------------------
Net increase (decrease) in net assets resulting from
shareholder transactions........................................ 111,589,164 19,640,785
-------------------- --------------------
Total increase (decrease) in net assets............................ 112,768,169 21,995,725
NET ASSETS:
Beginning of period................................................ 86,718,197 64,722,472
-------------------- --------------------
End of period...................................................... $ 199,486,366 $ 86,718,197
==================== ====================
Accumulated net investment income (loss) at end of period.......... $ (238,168) $ 189,746
==================== ====================
CHANGES IN SHARES OUTSTANDING:
Shares outstanding, beginning of period............................ 4,555,000 3,555,000
Shares sold........................................................ 6,150,000 1,750,000
Shares redeemed.................................................... (300,000) (750,000)
-------------------- --------------------
Shares outstanding, end of period.................................. 10,405,000 4,555,000
==================== ====================
Page 14 See Notes to Financial Statements
FIRST TRUST PREFERRED SECURITIES AND INCOME ETF (FPE)
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
SIX MONTHS FOR THE PERIOD
ENDED 2/11/2013 (a)
4/30/2015 YEAR ENDED THROUGH
(UNAUDITED) 10/31/2014 10/31/2013
-------------- ------------ --------------
Net asset value, beginning of period $ 19.04 $ 18.21 $ 19.99
---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) 0.53 1.10 0.65
Net realized and unrealized gain (loss) 0.19 0.76 (1.78)
---------- ---------- ----------
Total from investment operations 0.72 1.86 (1.13)
---------- ---------- ----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income (0.59) (1.03) (0.62)
Return of capital -- -- (0.03)
---------- ---------- ----------
Total distributions (0.59) (1.03) (0.65)
---------- ---------- ----------
Net asset value, end of period $ 19.17 $ 19.04 $ 18.21
========== ========== ==========
TOTAL RETURN (b) 3.85% 10.42% (5.74)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) $ 199,486 $ 86,718 $ 64,722
RATIOS TO AVERAGE NET ASSETS:
Ratio of total expenses to average net assets 0.85% (c) 0.85% 0.85% (c)
Ratio of net investment income (loss) to average
net assets 5.61% (c) 6.06% 5.44% (c)
Portfolio turnover rate (d) 29% 91% 45%
(a) Inception date is consistent with the commencement of investment
operations and is the date the initial creation units were established.
First Trust Portfolios L.P. seeded the First Trust Preferred Securities
and Income ETF on January 29, 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 and in-kind
transactions.
See Notes to Financial Statements Page 15
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FIRST TRUST PREFERRED SECURITIES AND INCOME ETF (FPE)
APRIL 30, 2015 (UNAUDITED)
1. ORGANIZATION
First Trust Exchange-Traded Fund III (the "Trust") is a non-diversified open-end
management investment company organized as a Massachusetts business trust on
January 9, 2008, and is registered with the Securities and Exchange Commission
under the Investment Company Act of 1940, as amended (the "1940 Act").
The Trust currently consists of four funds that are offering shares. This report
covers the First Trust Preferred Securities and Income ETF (the "Fund"), which
trades under the ticker FPE on the NYSE Arca, Inc. 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, a combination
of 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 total return and to provide current income. Under normal
market conditions, the Fund invests at least 80% of its net assets (including
investment borrowings) in preferred securities and income-producing debt
securities including corporate bonds, high-yield securities and convertible
securities. 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 following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of the financial statements. The
preparation of the financial statements in accordance with accounting principles
generally accepted in the United States of America ("U.S. GAAP") requires
management to make estimates and assumptions that affect the reported amounts
and disclosures in the financial statements. Actual results could differ from
those estimates.
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. If the NYSE closes early on a valuation day, the NAV
is determined as of that time. Domestic debt securities and foreign securities
are priced using data reflecting the earlier closing of the principal markets
for those securities. The Fund's NAV is calculated by dividing the value of all
assets of the Fund (including accrued interest and dividends), less all
liabilities (including accrued expenses and dividends declared but unpaid), by
the total number of shares outstanding.
The Fund's investments are valued daily at market value or, in the absence of
market value with respect to any portfolio securities, at fair value. Market
value prices represent 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:
Preferred stocks and other equity securities listed on any national or
foreign exchange (excluding The NASDAQ(R) Stock Market LLC ("NASDAQ") and
the London Stock Exchange Alternative Investment Market ("AIM")) are
valued at the last sale price on the exchange on which they are
principally traded or, for NASDAQ and AIM securities, the official closing
price. Securities traded on more than one securities exchange are valued
at the last sale price or official closing price, as applicable, at the
close of the securities exchange representing the principal market for
such securities.
Bonds, notes and other debt securities are valued on the basis of
valuations provided by dealers who make markets in such securities or by
an independent pricing service approved by the Trust's Board of Trustees,
which may use the following valuation inputs when available:
1) benchmark yields;
2) reported trades;
3) broker/dealer quotes;
4) issuer spreads;
5) benchmark securities;
6) bids and offers; and
7) reference data including market research publications.
Page 16
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST PREFERRED SECURITIES AND INCOME ETF (FPE)
APRIL 30, 2015 (UNAUDITED)
Certain securities may not be able to be priced by pre-established pricing
methods. Such securities may be valued by the Trust's Board of Trustees or its
delegate, the Advisor's Pricing Committee, at fair value. These securities
generally include, but are not limited to, restricted securities (securities
which may not be publicly sold without registration under the Securities Act of
1933, as amended (the "1933 Act")) for which a pricing service is unable to
provide a market price; securities whose trading has been formally suspended; a
security whose market or fair value price is not available from a
pre-established pricing source; a security with respect to which an event has
occurred that is likely to materially affect the value of the security after the
market has closed but before the calculation of the Fund's NAV or make it
difficult or impossible to obtain a reliable market quotation; and a security
whose price, as provided by the pricing service, does not reflect the security's
fair value. As a general principle, the current fair value of a security would
appear to be the amount which the owner might reasonably expect to receive for
the security upon its current sale. When fair value prices are used, generally
they will differ from market quotations or official closing prices on the
applicable exchanges. A variety of factors may be considered in determining the
fair value of such securities, including, but not limited to, the following:
1) the type of security;
2) the size of the holding;
3) the initial cost of the security;
4) transactions in comparable securities;
5) price quotes from dealers and/or pricing services;
6) relationships among various securities;
7) information obtained by contacting the issuer, analysts, or the
appropriate stock exchange;
8) an analysis of the issuer's financial statements; and
9) the existence of merger proposals or tender offers that might affect
the value of the security.
If the securities in question are foreign securities, the following additional
information may be considered:
1) the value of similar foreign securities traded on other foreign
markets;
2) ADR trading of similar securities;
3) closed-end fund trading of similar securities;
4) foreign currency exchange activity;
5) the trading prices of financial products that are tied to baskets of
foreign securities;
6) factors relating to the event that precipitated the pricing problem;
7) whether the event is likely to recur; and
8) whether the effects of the event are isolated or whether they affect
entire markets, countries or regions.
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 methodologies used for valuing investments are not necessarily an
indication of the risk associated with investing in those investments. A summary
of the inputs used to value the Fund's investments as of April 30, 2015, is
included with the Fund's Portfolio of Investments.
Page 17
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST PREFERRED SECURITIES AND INCOME ETF (FPE)
APRIL 30, 2015 (UNAUDITED)
B. SECURITIES TRANSACTIONS AND INVESTMENT INCOME
Securities transactions are recorded as of the trade date. Realized gains and
losses from securities transactions are recorded on the identified cost basis.
Dividend income is recorded on the ex-dividend date. Interest income, if any, is
recorded on the accrual basis. Amortization of premiums and accretion of
discounts are recorded using the effective interest method.
Distributions received from the Fund's investments in real estate investment
trusts ("REITs") may be comprised of return of capital, capital gains and
income. The actual character of the amounts received during the year are not
known until after the REIT's fiscal year end. The Fund records the character of
distributions received from the REITs during the year based on estimates
available. The characterization of distributions received by the Fund may be
subsequently revised based on information received from the REITs after their
tax reporting periods conclude.
C. RESTRICTED SECURITIES
The Fund invests in restricted securities, which are securities that may not be
offered for public sale without first being registered under the 1933 Act. Prior
to registration, restricted securities may only be resold in transactions exempt
from registration under Rule 144A under the 1933 Act, normally to qualified
institutional buyers. As of April 30, 2015, the Fund held restricted securities
as shown in the following table that Stonebridge Advisors LLC ("Stonebridge" or
the "Sub-Advisor") has deemed illiquid pursuant to procedures adopted by the
Trust's Board of Trustees. Although market instability can result in periods of
increased overall market illiquidity, liquidity for each security is determined
based on security-specific factors and assumptions, which require subjective
judgment. The Fund does not have the right to demand that such securities be
registered. These securities are valued according to the valuation procedures as
stated in the Portfolio Valuation note (Note 2A) and are not expressed as a
discount to the carrying value of a comparable unrestricted security. There are
no unrestricted securities with the same maturity dates and yields for these
issuers.
SHARES/ % OF
ACQUISITION PAR CARRYING NET
SECURITY DATE AMOUNT PRICE COST VALUE ASSETS
-----------------------------------------------------------------------------------------------------------------------------
Sirius International Group Ltd., 7.51% 8/06/14 -
4/24/15 $4,000,000 $ 1.05 $ 4,206,720 $ 4,210,000 2.11%
Sovereign Real Estate Investment Trust, 12.00% 5/12/14 -
2/5/15 1,456 1,308.75 1,945,760 1,905,540 0.96
------------- ------------- ------
$ 6,152,480 $ 6,115,540 3.07%
============= ============= ======
D. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
Dividends from net investment income, if any, are declared and paid monthly, or
as the Board of Trustees may determine from time to time. Distributions of net
realized capital gains earned by the Fund, if any, will be distributed at least
annually.
Distributions from income and capital gains are determined in accordance with
income tax regulations, which may differ from U.S. GAAP. Certain capital
accounts in the financial statements are periodically adjusted for permanent
differences in order to reflect their tax character. These permanent differences
are primarily due to the varying treatment of income and gain/loss on portfolio
securities held by the Fund and have no impact on net assets or net asset value
per share. Temporary differences, which arise from recognizing certain items of
income, expense and gain/loss in different periods for financial statement and
tax purposes, will reverse at some time in the future.
The tax character of distributions paid during the fiscal period ended October
31, 2014 was as follows:
Distributions paid from:
Ordinary income.................................... $ 3,548,355
Capital gain....................................... --
Return of capital.................................. --
As of October 31, 2014, the components of distributable earnings on a tax basis
were as follows:
Undistributed ordinary income...................... $ 432,357
Accumulated capital and other losses............... (5,759,772)
Net unrealized appreciation (depreciation)......... 424,349
Page 18
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST PREFERRED SECURITIES AND INCOME ETF (FPE)
APRIL 30, 2015 (UNAUDITED)
E. INCOME TAXES
The Fund intends to continue to qualify as a regulated investment company by
complying with the requirements under Subchapter M of the Internal Revenue Code
of 1986, as amended, which includes distributing substantially all of its net
investment income and net realized gains to shareholders. Accordingly, no
provision has been made for federal and state income taxes. However, due to the
timing and amount of distributions, the Fund may be subject to an excise tax of
4% of the amount by which approximately 98% of the Fund's taxable income exceeds
the distributions from such taxable income for the calendar year.
The Fund is subject to accounting standards that establish a minimum threshold
for recognizing, and a system for measuring, the benefits of a tax position
taken or expected to be taken in a tax return. The taxable years ended 2013 and
2014 remain open to federal and state audit. As of April 30, 2015, management
has evaluated the application of these standards to the Fund, and has determined
that no provision for income tax is required in the Fund's financial statements
for uncertain tax positions.
The Fund intends to utilize provisions of the federal income tax laws, which
allow it to carry a realized capital loss forward indefinitely following the
year of the loss and offset such loss against any future realized capital gains.
The Fund is subject to certain limitations under U.S. tax rules on the use of
capital carryforwards and net unrealized built-in losses. These limitations
apply when there has been a 50% change in ownership. At October 31, 2014, the
Fund had non-expiring capital loss carryforwards for federal income tax purposes
of $5,759,772.
Certain losses realized during the current fiscal year may be deferred and
treated as occurring on the first day of the following fiscal year for federal
income tax purposes. For the fiscal year ended October 31, 2014, the Fund had no
net ordinary losses.
F. EXPENSES
Expenses, other than the investment advisory fee and other excluded expenses,
are paid by the Advisor (See Note 3).
3. INVESTMENT ADVISORY FEE, AFFILIATED TRANSACTIONS AND OTHER FEE ARRANGEMENTS
First Trust, the investment advisor to the Fund, is a limited partnership with
one limited partner, Grace Partners of DuPage L.P., and one general partner, The
Charger Corporation. The Charger Corporation is an Illinois corporation
controlled by James A. Bowen, Chief Executive Officer of First Trust. First
Trust is responsible for supervising the selection and ongoing monitoring of the
securities in the Fund's portfolio, managing the Fund's business affairs and
providing certain administrative services necessary for the management of the
Fund.
Stonebridge, an affiliate of First Trust, serves as the Fund's sub-advisor and
manages the Fund's portfolio subject to First Trust's supervision. Pursuant to
the Investment Management Agreement between the Trust and the Advisor, First
Trust will supervise Stonebridge and its management of the investment of the
Fund's assets and will pay Stonebridge for its services as the Fund's
sub-advisor. First Trust and Stonebridge are equally responsible for the Fund's
expenses, including the cost of transfer agency, custody, fund administration,
legal, audit and other services, but excluding fee payments under the Investment
Management Agreement, interest, taxes, acquired fund fees and expenses,
brokerage commissions and other expenses connected with the execution of
portfolio transactions, distribution and 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 0.85% of its average daily net assets.
Stonebridge receives a sub-advisory fee equal to 0.425% of the average daily net
assets of the Fund less Stonebridge's share of the Fund's expenses. The
Sub-Advisor's fee is paid by the Advisor out of the Advisor's management fee.
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 service agreements, BBH performs custodial, fund accounting,
certain administrative services, and transfer agency services for the Fund. As
custodian, BBH is responsible for custody of the Fund's assets. As fund
accountant and administrator, BBH is responsible for maintaining the books and
records of the Fund's securities and cash. As transfer agent, BBH is responsible
for maintaining shareholder records for the Fund.
Each Trustee who is not an officer or employee of First Trust, any sub-advisor
or any of their affiliates ("Independent Trustees") is paid a fixed annual
retainer that is allocated 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.
Page 19
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST PREFERRED SECURITIES AND INCOME ETF (FPE)
APRIL 30, 2015 (UNAUDITED)
4. PURCHASES AND SALES OF SECURITIES
For the period ended April 30, 2015, the cost of purchases and proceeds from
sales of investments, excluding short-term investments and in-kind transactions,
for the Fund were $91,283,120 and $36,805,505, respectively.
For the period ended April 30, 2015, the cost of in-kind purchases and proceeds
from in-kind sales for the Fund was $57,916,522 and $2,893,416, respectively.
5. CREATIONS, REDEMPTIONS AND TRANSACTION FEES
Shares are created and redeemed by the Fund only in Creation Unit size
aggregations of 50,000 shares in transactions with broker-dealers or large
institutional investors that have entered into a participation agreement (an
"Authorized Participant"). In order to purchase Creation Units of the Fund, an
Authorized Participant must deposit (i) a designated portfolio of securities and
other instruments 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 Deposited
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 Authorized
Participant 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 Authorized Participant 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 Creation Transaction Fee is currently
$500. The price for each Creation Unit will equal the daily NAV per share times
the number of shares in a Creation Unit plus the fees described above and, if
applicable, any operational processing and brokerage costs, transfer fees or
stamp taxes. When 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.
Authorized Participants 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.
6. LINE OF CREDIT
Effective April 25, 2014, the Trust, First Trust Series Fund and First Trust
Exchange-Traded Fund IV entered into an $80 million Credit Agreement with the
Bank of Nova Scotia ("Scotia") as administrative agent for a group of lenders.
Prior to March 26, 2015, a commitment fee of 0.125% of the daily amount of the
excess of the commitment amount over the outstanding principal balance of the
loans was charged by Scotia. Effective March 26, 2015, the commitment fee was
changed to 0.15%. First Trust allocates the commitment fee amongst the funds
that have access to the credit line. To the extent that the Fund accesses the
credit line, there would also be an interest fee charged. The Fund did not have
any borrowings outstanding during the six months ended April 30, 2015.
7. DISTRIBUTION PLAN
The Board of Trustees adopted a Distribution and Service Plan pursuant to Rule
12b-1 under the 1940 Act. In accordance with the Rule 12b-1 plan, the Fund is
authorized to pay an amount up to 0.25% of its average daily net assets each
year to reimburse First Trust Portfolios L.P. ("FTP"), the distributor of the
Funds, for amounts expended to finance activities primarily intended to result
in the sale of Creation Units or to provide 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 February 28, 2017.
Page 20
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST PREFERRED SECURITIES AND INCOME ETF (FPE)
APRIL 30, 2015 (UNAUDITED)
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 EVENT
Management has evaluated the impact of all subsequent events to the Fund through
the date the financial statements were issued and has determined that there was
the following subsequent event:
On May 20, 2015, the Fund declared a distribution of $0.0790 per share to Common
Shareholders of record on May 26, 2015, payable May 29, 2015.
Page 21
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ADDITIONAL INFORMATION
--------------------------------------------------------------------------------
FIRST TRUST PREFERRED SECURITIES AND INCOME ETF (FPE)
APRIL 30, 2015 (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 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
is 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.
RISK CONSIDERATIONS
You could lose money by investing in the Fund. An investment in the Fund is not
a deposit of a bank and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other governmental agency. There can be no
assurance that the Fund's investment objective will be achieved.
CASH TRANSACTIONS RISK. The Fund may under certain circumstances effect a
portion of creations and redemptions for cash, rather than in-kind securities.
As a result, an investment in the Fund may be less tax-efficient than an
investment in an ETF that effects its creations and redemption for in-kind
securities. Because the Fund may effect a portion of redemptions for cash, it
may be required to sell portfolio securities in order to obtain the cash needed
to distribute redemption proceeds. A sale of shares may result in capital gains
or losses, and may also result in higher brokerage costs.
CONCENTRATION RISK. A fund concentrated in a single industry or sector is likely
to present more risks than a fund that is broadly diversified over several
industries or sectors. Compared to the broad market, an individual industry or
sector may be more strongly affected by changes in the economic climate, broad
market shifts, moves in a particular dominant stock, or regulatory changes.
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. Credit risk may be heightened
if the Fund invests in "high yield" or "junk" debt; such securities, while
generally offering higher yields than investment grade debt with similar
maturities, involve greater risks, including the possibility of dividend or
interest deferral, default or bankruptcy, and are regarded as predominantly
speculative with respect to the issuer's capacity to pay dividends or interest
and repay principal.
DEPOSITARY RECEIPTS RISK. Depositary receipts may be less liquid than the
underlying securities in their primary trading market. Any distributions paid to
the holders of depositary receipts are usually subject to a fee charged by the
depositary. Holders of depositary receipts may have limited voting rights, and
investment restrictions in certain countries may adversely impact the value of
depositary receipts because such restrictions may limit the ability to convert
the securities into depositary receipts and vice versa. Such restrictions may
cause the securities of the underlying issuer to trade at a discount or premium
to the market price of the depositary receipts.
FINANCIAL COMPANY RISK. Financial companies are especially subject to the
adverse effects of economic recession, currency exchange rates, government
regulation, decreases in the availability of capital, volatile interest rates,
portfolio concentrations in geographic markets and in commercial and residential
real estate loans, and competition from new entrants in their fields of
business.
HIGH YIELD SECURITIES RISK. High yield securities are subject to greater market
fluctuations and risk of loss than securities with higher ratings. These
securities are issued by companies that may have limited operating history,
narrowly focused operations, and/or other impediments to the timely payment of
periodic interest and principal at maturity. If the economy slows down or dips
into recession, the issuers of high yield securities may not have sufficient
resources to continue making timely payment of periodic interest and principal
at maturity. The market for high yield securities is smaller and less liquid
than that for investment grade securities. High yield securities are generally
not listed on a national securities exchange but trade in the over-the-counter
markets. Due to the smaller, less liquid market for high yield securities, the
bid-offer spread on such securities is generally greater than it is for
investment grade securities and the purchase or sale of such securities may take
longer to complete.
ILLIQUID SECURITIES RISK. Illiquid securities involve the risk that the
securities will not be able to be sold at the time desired by the Fund or at
prices approximately the value at which the Fund is carrying the securities on
its books.
Page 22
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ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST PREFERRED SECURITIES AND INCOME ETF (FPE)
APRIL 30, 2015 (UNAUDITED)
INCOME RISK. If interest rates fall, the income from the Fund's portfolio will
decline as the Fund invests the proceeds from new share sales, or from matured
or called debt securities, at interest rates that are below the portfolio's
current earnings rate.
INTEREST RATE RISK. If interest rates rise, the prices of the fixed-rate
instruments held by the Fund may fall.
MANAGEMENT RISK. The Fund is subject to management risk because it is an
actively managed portfolio. In managing the Fund's investment portfolio, the
sub-advisor will apply investment techniques and risk analyses that may not have
the desired result. There can be no guarantee that the Fund will meet its
investment objective.
MARKET RISK. Market risk is the risk that a particular security owned by the
Fund or shares of the Fund in general may fall in value. Securities are subject
to market fluctuations caused by such factors as economic, political, regulatory
or market developments, changes in interest rates and perceived trends in
securities prices. Overall securities values could decline generally or could
underperform other investments.
NEW FUND RISK. The Fund currently has fewer assets than larger funds, and like
other relatively new funds, large inflows and outflows may impact the Fund's
market exposure for limited periods of time. This impact may be positive or
negative, depending on the direction of market movement during the period
effected.
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 which may be invested in the securities of any one issuer by the
diversification requirements imposed by the Internal Revenue Code of 1986, as
amended. 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. SECURITIES RISK. The Fund may invest in securities of non-U.S. issuers.
Such securities are subject to higher volatility than securities of domestic
issuers due to possible adverse political, social or economic developments,
restrictions on foreign investment or exchange of securities, lack of liquidity,
currency exchange rates, excessive taxation, government seizure of assets,
different legal or accounting standards, and less government supervision and
regulation of exchanges in foreign countries.
PREFERRED SECURITIES RISK. Preferred Securities combine some of the
characteristics of both common stocks and bonds. Preferred Securities are
typically subordinated to bonds and other debt instruments in a company's
capital structure, in terms of priority to corporate income, and therefore will
be subject to greater credit risk than those debt instruments. Preferred
Securities are also subject to credit risk, interest rate risk and income risk.
REIT RISK. Investing in REITs involves risks related to their structure and
focus, which include, but are not limited to, dependency upon management skills,
limited diversification, the risks of locating and managing financing for
projects, heavy cash flow dependency, possible default by borrowers, the costs
and potential losses of self-liquidation of one or more holdings, the risk of a
possible lack of mortgage funds and associated interest rate risks,
overbuilding, property vacancies, increases in property taxes and operating
expenses, changes in zoning laws, losses due to environmental damages, changes
in neighborhood values and appeal to purchases, the possibility of failing to
maintain exemptions from registration under the 1940 Act and, in many cases,
relatively small market capitalization, which may result in less market
liquidity and greater price volatility. Fund shareholders indirectly pay REIT
fees and expenses.
BOARD CONSIDERATIONS REGARDING CONTINUATION OF INVESTMENT MANAGEMENT AGREEMENT
The Board of Trustees of the First Trust Exchange-Traded Fund III (the "Trust"),
including the Independent Trustees, unanimously approved the continuation of the
Investment Management Agreement (the "Advisory Agreement") with First Trust
Advisors L.P. (the "Advisor" or "First Trust") on behalf of the First Trust
Preferred Securities and Income ETF (the "Fund") and the Investment Sub-Advisory
Agreement (the "Sub-Advisory Agreement" and together with the Advisory
Agreement, the "Agreements") among the Trust on behalf of the Fund, the Advisor
and Stonebridge Advisors LLC (the "Sub-Advisor"). The Board approved the
continuation of the Agreements for a one-year period ending March 31, 2016, at a
meeting held on March 8-9, 2015. The Board of Trustees determined that the
continuation of the Agreements is in the best interests of the Fund in light of
the extent and quality of services provided and such other matters as the Board
considered to be relevant in the exercise of its reasonable business judgment.
To reach this determination, the Board considered its duties under the
Investment Company Act of 1940, as amended (the "1940 Act"), as well as under
the general principles of state law in reviewing and approving advisory
contracts; the requirements of the 1940 Act in such matters; the fiduciary duty
of investment advisors with respect to advisory agreements and compensation; the
standards used by courts in determining whether investment company boards have
fulfilled their duties; and the factors to be considered by the Board in voting
on such agreements. To assist the Board in its evaluation of the Agreements, the
Independent Trustees received a report from each of the Advisor and the
Sub-Advisor in advance of the Board meeting responding to a request for
Page 23
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST PREFERRED SECURITIES AND INCOME ETF (FPE)
APRIL 30, 2015 (UNAUDITED)
information from counsel to the Independent Trustees. The reports, among other
things, outlined the services provided by the Advisor and the Sub-Advisor to the
Fund (including the relevant personnel responsible for these services and their
experience); the unitary fee for the Fund as compared to fees charged to a peer
group of funds (all of which were exchange-traded funds or "ETFs") compiled by
Management Practice Inc. ("MPI"), an independent source (the "MPI Peer Group"),
and as compared to fees charged to other clients of the Advisor with similar
investment objectives and to other ETFs managed by the Advisor; the sub-advisory
fee as compared to fees charged to other clients of the Sub-Advisor with similar
investment objectives; expenses of the Fund compared to expense ratios of the
funds in the MPI Peer Group; the nature of expenses incurred in providing
services to the Fund and the potential for economies of scale, if any; financial
data on the Advisor and the Sub-Advisor; fall-out benefits to the Advisor and
its affiliates, First Trust Portfolios L.P. ("FTP") and the Sub-Advisor; and a
summary of the Advisor's and the Sub-Advisor's compliance programs. Following
receipt of this information, the Independent Trustees and their counsel met
separately to discuss the information provided by the Advisor and the
Sub-Advisor. The Board applied its business judgment to determine whether the
arrangements between the Trust and the Advisor and among the Trust, the Advisor
and the Sub-Advisor are reasonable business arrangements from the Fund's
perspective as well as from the perspective of shareholders. The Board
considered that shareholders chose to invest or remain invested in the Fund
knowing that the Advisor and the Sub-Advisor manage the Fund and knowing the
Fund's unitary fee.
In reviewing the Agreements, the Board considered the nature, extent and quality
of services provided by the Advisor and the Sub-Advisor under the Agreements.
The Board considered that, unlike most other ETFs to which First Trust currently
provides management services, the Fund is not designed to track the performance
of an index and the Fund employs an advisor/sub-advisor management structure.
With respect to the Advisory Agreement, the Board considered that the Advisor is
responsible for the overall management and administration of the Fund and
reviewed the services provided by the Advisor to the Fund, including the
oversight of the Sub-Advisor. The Board noted the compliance program that had
been developed by the Advisor and considered that it includes a robust program
for monitoring the Sub-Advisor's compliance with the 1940 Act and the Fund's
investment objective and policies. The Board considered the significant asset
growth of the First Trust Fund Complex (particularly in ETFs) and the Advisor's
concomitant investment in infrastructure and personnel dedicated to the First
Trust funds. The Board noted the background and experience of the Sub-Advisor's
portfolio management team. The Board noted that its familiarity with the
Sub-Advisor is also due to its oversight of four other funds in the First Trust
Fund Complex all or a portion of which are sub-advised by the Sub-Advisor. In
light of the information presented and the considerations made, the Board
concluded that the nature, extent and quality of services provided to the Fund
by the Advisor and the Sub-Advisor under the Agreements have been and are
expected to remain satisfactory and that the Sub-Advisor, under the oversight of
the Advisor, has managed the Fund consistent with its investment objective and
policies.
The Board considered the unitary fee payable by the Fund under the Advisory
Agreement, noting that the Fund pays the Advisor a fee equal to an annual rate
of 0.85% of its average daily net assets and that the Advisor pays the
Sub-Advisor a fee equal to an annual rate of 0.425% of the Fund's average daily
net assets from the fee it receives from the Fund. The Board noted that the
Advisor and Sub-Advisor are equally responsible for the Fund's expenses,
including the cost of transfer agency, custody, fund administration, legal,
audit and other services, but excluding interest, taxes, brokerage commissions
and other expenses connected with the execution of portfolio transactions,
distribution and service fees pursuant to a Rule 12b-1 plan, if any, and
extraordinary expenses. The Board also reviewed data prepared by MPI showing the
unitary fee for the Fund as compared to the advisory fees and expense ratios of
the peer funds in the MPI Peer Group and determined that, because the Fund
charges a unitary fee, expense ratios were the most relevant data point. Based
on the information provided, the Board noted that the unitary fee for the Fund
was above the median total (net) expense ratio of the peer funds in the MPI Peer
Group. The Independent Trustees discussed with representatives of the Advisor
and independent counsel limitations in creating peer groups for actively-managed
ETFs and different business models that affect the pricing of services among ETF
sponsors. The Board noted that all of the funds in the MPI Peer Group were
larger than the Fund - three significantly so. The Board also noted that none of
the peer funds had sub-advisors nor were any of the peer funds actively managed.
The Board took these limitation and differences into account in considering the
MPI data. The Board compared the Fund's unitary fee to the total expense ratios
(after fee waivers and/or expense reimbursements, if any) of other First Trust
ETFs, including First Trust ETFs that pay a unitary fee. The Board also
considered information provided by the Sub-Advisor as to the fees it charges for
investment advisory services provided to clients with similar investments, and
noted both that the fee rate was similar and that the Sub-Advisor does not share
in the expenses of the other funds.
The Board considered performance information for the Fund, noting that the
performance information included the Fund's quarterly performance report, which
is part of the process that the Board has established for monitoring the Fund's
performance on an ongoing basis. The Board determined that this process
continues to be effective for reviewing the Fund's performance. The Board
reviewed data prepared by MPI comparing the Fund's performance to the MPI Peer
Group and to broad-based benchmarks and a blended benchmark. The Board also
considered an analysis from the Sub-Advisor regarding the Fund's performance,
including a comparison to its blended benchmark and the MPI Peer Group for the
one year period ended December 31, 2014 and since its inception on February 11,
2013, which also addressed differences between the Fund and the peer funds, as
well as conditions in the preferred securities market during those times.
Page 24
--------------------------------------------------------------------------------
ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST PREFERRED SECURITIES AND INCOME ETF (FPE)
APRIL 30, 2015 (UNAUDITED)
On the basis of all the information provided on the unitary fee and performance
of the Fund, the Board concluded that the unitary fee for the Fund was
reasonable and appropriate in light of the nature, extent and quality of
services provided by the Advisor to the Fund under the Advisory Agreement.
The Board noted that the Advisor has made and continues to make significant
investments in personnel and infrastructure and considered whether the unitary
fee reflects any economies of scale for the benefit of shareholders. The Board
noted that any reduction in fixed costs associated with the management of the
Fund would benefit the Advisor and the Sub-Advisor, but that the unitary fee
structure provides a level of certainty in expenses for the Fund. The Board also
considered the costs of the services provided and any profits realized by the
Advisor and the Sub-Advisor from serving as investment advisors to the Fund for
the period ended December 31, 2014, as well as product-line profitability data
for the same period, as set forth in the materials provided to the Board. Based
on the information provided, the Board noted that the Fund was not profitable
for either the Advisor or the Sub-Advisor for calendar year 2014. The Board
considered that the Advisor had identified as a fall-out benefit to the Advisor
and FTP their exposure to investors and brokers who, in the absence of the Fund,
may have had no dealings with the Advisor or FTP, and noted that the Sub-Advisor
does not utilize soft dollars in connection with its management of the Fund's
portfolio. The Board considered the ownership interest of the Advisor in the
Sub-Advisor and potential fall-out benefits to the Advisor and the Sub-Advisor
from such ownership interest. The Board also considered the Advisor's
compensation for fund reporting services provided to the Fund pursuant to a
separate Fund Reporting Services Agreement, which is paid from the unitary fee.
Based on all of the information considered and the conclusions reached, the
Board, including the Independent Trustees, unanimously determined that the terms
of the Agreements continue to be fair and reasonable and that the continuation
of the Agreements is in the best interests of the Fund. No single factor was
determinative in the Board's analysis.
Page 25
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FIRST TRUST
First Trust Exchange-Traded Fund III
INVESTMENT ADVISOR
First Trust Advisors L.P.
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
INVESTMENT SUB-ADVISOR
Stonebridge Advisors LLC
187 Danbury Road
Wilton, CT 06897
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]
FIRST TRUST
First Trust Exchange-Traded Fund III
------------------------------------
First Trust Managed Municipal ETF (FMB)
Semi-Annual Report
For the
Six Months Ended
April 30, 2015
--------------------------------------------------------------------------------
TABLE OF CONTENTS
--------------------------------------------------------------------------------
FIRST TRUST MANAGED MUNICIPAL ETF (FMB)
SEMI-ANNUAL REPORT
APRIL 30, 2015
Shareholder Letter......................................................... 1
Fund Performance Overview.................................................. 2
Portfolio Management....................................................... 5
Understanding Your Fund Expenses........................................... 6
Portfolio of Investments................................................... 7
Statement of Assets and Liabilities........................................ 11
Statement of Operations.................................................... 12
Statements of Changes in Net Assets........................................ 13
Financial Highlights....................................................... 14
Notes to Financial Statements.............................................. 15
Additional Information..................................................... 20
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning of
the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934,
as amended. Forward-looking statements include statements regarding the goals,
beliefs, plans or current expectations of First Trust Advisors L.P. ("First
Trust" or the "Advisor") and its representatives, taking into account the
information currently available to them. Forward-looking statements include all
statements that do not relate solely to current or historical fact. For example,
forward-looking statements include the use of words such as "anticipate,"
"estimate," "intend," "expect," "believe," "plan," "may," "should," "would" or
other words that convey uncertainty of future events or outcomes.
Forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
the series of First Trust Exchange-Traded Fund III (the "Trust") described in
this report (First Trust Managed Municipal ETF hereinafter referred to as the
"Fund") to be materially different from any future results, performance or
achievements expressed or implied by the forward-looking statements. When
evaluating the information included in this report, you are cautioned not to
place undue reliance on these forward-looking statements, which reflect the
judgment of the Advisor and its representatives only as of the date hereof. We
undertake no obligation to publicly revise or update these forward-looking
statements to reflect events and circumstances that arise after the date hereof.
PERFORMANCE AND RISK DISCLOSURE
There is no assurance that the Fund will achieve its investment objectives. The
Fund is subject to market risk, which is the possibility that the market values
of securities owned by the Fund will decline and that the value of the Fund
shares may therefore be less than what you paid for them. Accordingly, you can
lose money investing in the Fund. See "Risk Considerations" in the Additional
Information section of this report for a discussion of certain other risks of
investing in the Fund.
Performance data quoted represents past performance, which is no guarantee of
future results, and current performance may be lower or higher than the figures
shown. For the most recent month-end performance figures, please visit
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 in
the Fund. 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.
The material risks of investing in the Fund are spelled out in its prospectus,
statement of additional information, this report and other Fund regulatory
filings.
--------------------------------------------------------------------------------
SHAREHOLDER LETTER
--------------------------------------------------------------------------------
FIRST TRUST MANAGED MUNICIPAL ETF (FMB)
SEMI-ANNUAL LETTER FROM THE CHAIRMAN AND CEO
APRIL 30, 2015
Dear Shareholders:
Thank you for your investment in First Trust Managed Municipal ETF (the "Fund").
First Trust Advisors L.P. ("First Trust") is pleased to provide you with the
semi-annual report which contains detailed information about your investment for
the six months ended April 30, 2015. Additionally, First Trust compiles the
Fund's financial statements for you to review. We encourage you to read this
report and discuss it with your financial advisor.
U.S. markets, fueled by accelerating growth and an accommodating Federal
Reserve, enjoyed a prosperous year in 2014. However, for the six months covered
by this report, some economic and global factors, including the continued
conflict in the Middle East and a sharp decline in oil prices, created
volatility in the U.S. and global markets. Another factor that has impacted
markets is the fact that many economists are predicting the Federal Reserve will
begin to raise interest rates this year.
As I have written previously, First Trust believes investors should maintain
perspective about the markets and have realistic expectations about their
investments. Markets will always go up and down, but we believe that having a
long-term investment horizon and being invested in quality products can help you
reach your goals.
Thank you for giving First Trust the opportunity to be a part of your investment
plan. We value the relationship and will continue to focus on our disciplined
investment approach and long-term perspective to help investors reach their
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
--------------------------------------------------------------------------------
FUND PERFORMANCE OVERVIEW (UNAUDITED)
--------------------------------------------------------------------------------
FIRST TRUST MANAGED MUNICIPAL ETF (FMB)
The primary investment objective of First Trust Managed Municipal ETF (the
"Fund") is to generate current income that is exempt from regular federal income
taxes, and its secondary objective is long-term capital appreciation. The Fund
lists and principally trades its shares on The NASDAQ(R) Stock Market, LLC under
the ticker symbol "FMB". Under normal market conditions, the Fund seeks to
achieve its investment objectives by investing at least 80% of its net assets
(plus the amount of any borrowings for investment purposes) in municipal debt
securities that pay interest that is exempt from regular federal income taxes.
-----------------------------------------------------------------------------------------------------
PERFORMANCE
-----------------------------------------------------------------------------------------------------
CUMULATIVE
TOTAL RETURNS
6 Months Ended Inception (5/13/14)
4/30/15 to 4/30/15
FUND PERFORMANCE
NAV 2.24% 5.85%
Market Price 2.09% 6.46%
INDEX PERFORMANCE
Barclays Municipal 10-Year Revenue Index 0.92% 3.91%
-----------------------------------------------------------------------------------------------------
Total returns for the period since inception are calculated from the inception
date of the Fund. "Cumulative Total Returns" represent the total change in value
of an investment over the period indicated.
The Fund's per share net asset value ("NAV") is the value of one share of the
Fund and is computed by dividing the value of all assets of the Fund (including
accrued interest and dividends), less all liabilities (including accrued
expenses and dividends declared but unpaid), by the total number of outstanding
shares. The price used to calculate market return ("Market Price") is determined
by using the midpoint 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 distributions have been
reinvested in the Fund at NAV and Market Price, respectively.
An index is a statistical composite that tracks a specified financial market or
sector. Unlike the Fund, the index does not actually hold a portfolio of
securities and therefore does not incur the expenses incurred by the Fund. These
expenses negatively impact the performance of the Fund. Also, market returns do
not include brokerage commissions that may be payable on secondary market
transactions. If brokerage commissions were included, market returns would be
lower. The total returns presented reflect the reinvestment of dividends on
securities in the index. 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.
Page 2
--------------------------------------------------------------------------------
FUND PERFORMANCE OVERVIEW (UNAUDITED) (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST MANAGED MUNICIPAL ETF (FMB)
-------------------------------------------------------
SECTOR ALLOCATION AS OF APRIL 30, 2015
-------------------------------------------------------
% OF TOTAL
INVESTMENTS
SECTOR (INCLUDING CASH)
Continuing Care Retirement Communities 18.4%
Insured 11.6
Hospital 10.1
Student Housing 7.8
Education 7.3
Gas 6.6
Utility 6.5
Higher Education 6.5
Special Assessment 4.9
Cash 4.2
Airport 3.0
Mass Transit 3.0
Industrial Development Bond 2.7
Government Obligation Bond -
Unlimited Tax 2.4
Government Obligation Bond -
Limited Tax 1.2
Pre-refunded/Escrowed-to-maturity 1.2
Tobacco 1.2
Port 0.8
Tax Increment 0.6
------
Total 100.0%
======
-------------------------------------------------------
CREDIT QUALITY AS OF APRIL 30, 2015
-------------------------------------------------------
% OF TOTAL
INVESTMENTS
CREDIT RATING(1) (INCLUDING CASH)
AA 16.3%
A 25.1
BBB 31.2
BB 6.7
B 3.5
Not Rated 13.0
Cash 4.2
------
Total 100.0%
======
(1) The credit quality information presented reflects the ratings assigned by
one or more nationally recognized statistical rating organizations
(NRSROs), including Standard & Poor's Ratings Group, a division of The
McGraw-Hill Companies, Inc., Moody's Investors Service, Inc., Fitch
Ratings or a comparably rated NRSRO. For situations in which a security is
rated by more than one NRSRO and ratings are not equivalent, the highest
ratings are used. Sub-investment grade ratings are those rated BB+/Ba1 or
lower. Investment grade ratings are those rated BBB-/Baa3 or higher. The
credit ratings shown relate to the creditworthiness of the issuers of the
underlying securities in the Fund, and not to the Fund or its shares.
Credit ratings are subject to change.
Page 3
--------------------------------------------------------------------------------
FUND PERFORMANCE OVERVIEW (UNAUDITED) (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST MANAGED MUNICIPAL ETF (FMB)
PERFORMANCE OF A $10,000 INITIAL INVESTMENT
MAY 13, 2014 - APRIL 30, 2015
First Trust Managed Barclays Municipal
Municipal ETF 10-Year Revenue Index
5/13/14 $10,000 $10,000
10/31/14 10,353 10,297
4/30/15 10,585 10,392
Performance figures assume reinvestment of all distributions and do not reflect
the deduction of taxes that a shareholder would pay on Fund distributions or the
redemption or sale of Fund shares. An index is a statistical composite that
tracks a specified financial market or sector. Unlike the Fund, the index does
not actually hold a portfolio of securities and therefore does 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 APRIL 30, 2015
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 May 14, 2014 (commencement of
trading) through April 30, 2015. 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.
--------------------------------------------------------------------------------
NUMBER OF DAYS BID/ASK MIDPOINT AT/ABOVE NAV
--------------------------------------------------------------------------------
FOR THE PERIOD 0.00%-0.49% 0.50%-0.99% 1.00%-1.99% >=2.00%
5/14/14 - 10/31/14 2 10 0 0
11/1/14 - 4/30/15 79 5 0 0
--------------------------------------------------------------------------------
NUMBER OF DAYS BID/ASK MIDPOINT BELOW NAV
--------------------------------------------------------------------------------
FOR THE PERIOD 0.00%-0.49% 0.50%-0.99% 1.00%-1.99% >=2.00%
5/14/14 - 10/31/14 64 43 0 0
11/1/14 - 4/30/15 39 0 0 0
Page 4
--------------------------------------------------------------------------------
PORTFOLIO MANAGEMENT
--------------------------------------------------------------------------------
FIRST TRUST MANAGED MUNICIPAL ETF (FMB)
SEMI-ANNUAL REPORT
APRIL 30, 2015
INVESTMENT MANAGER
The First Trust Advisors L.P. ("First Trust") Municipal Securities Team was
formed in September of 2013 and is headed by Tom Futrell, CFA and Johnathan
Wilhelm who serve as senior portfolio managers of the First Trust Managed
Municipal ETF (the "Fund"). Messrs. Futrell and Wilhelm have a combined 50+
years of investment experience and prior to joining First Trust, served as
portfolio managers of municipal bonds at Nuveen Investments and Performance
Trust Investment Advisors. In addition to the Fund, the team manages/consults
for a variety of investment portfolios and separately managed accounts.
PORTFOLIO MANAGEMENT TEAM
TOM FUTRELL, CFA; SENIOR VICE PRESIDENT, SENIOR PORTFOLIO MANAGER
JOHNATHAN N. WILHELM, SENIOR VICE PRESIDENT, SENIOR PORTFOLIO MANAGER
Page 5
FIRST TRUST MANAGED MUNICIPAL ETF (FMB)
UNDERSTANDING YOUR FUND EXPENSES
APRIL 30, 2015 (UNAUDITED)
As a shareholder of First Trust Managed Municipal ETF (the "Fund") you incur two
types of costs: (1) transaction costs; and (2) ongoing costs, including
management fees, distribution and/or service fees, if any, and other Fund
expenses. This Example is intended to help you understand your ongoing costs of
investing in the Fund and to compare these costs with the ongoing costs of
investing in other funds.
The Example is based on an investment of $1,000 invested at the beginning of the
period and held through the six-month period ended April 30, 2015.
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 each Fund's actual expense
ratio and an assumed rate of return of 5% per year before expenses, which is not
each Fund's actual return. The hypothetical account values and expenses may not
be used to estimate the actual ending account balance or expenses you paid for
the period. You may use this information to compare the ongoing costs of
investing in the 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.
---------------------------------------------------------------------------------------------------------------------------
ANNUALIZED
EXPENSE RATIO EXPENSES PAID
BEGINNING ENDING BASED ON THE DURING THE
ACCOUNT VALUE ACCOUNT VALUE SIX-MONTH SIX-MONTH
NOVEMBER 1, 2014 APRIL 30, 2015 PERIOD PERIOD (a)
---------------------------------------------------------------------------------------------------------------------------
FIRST TRUST MANAGED MUNICIPAL ETF
Actual $1,000.00 $1,022.40 0.65% $3.26
Hypothetical (5% return before expenses) $1,000.00 $1,021.57 0.65% $3.26
(a) Expenses are equal to the annualized expense ratio as indicated in the
table, multiplied by the average account value over the period (November
1, 2014 through April 30, 2015), multiplied by 181/365 (to reflect the
one-half year period).
Page 6
FIRST TRUST MANAGED MUNICIPAL ETF (FMB)
PORTFOLIO OF INVESTMENTS
APRIL 30, 2015 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
----------- ----------------------------------------------------------------- ------------- ---------- ------------
MUNICIPAL BONDS - 95.8%
ARIZONA - 1.0%
$ 200,000 Student & Academic Svcs LLC AZ Lease Rev Northern AZ
Capital Facs Fin Corp, BAM.................................... 5.00% 06/01/21 $ 232,282
------------
CALIFORNIA - 4.3%
75,000 CA St Hlth Facs Fing Auth Rev Ref Insd Marshall Med Ctr.......... 5.00% 11/01/25 87,983
275,000 Golden St Tobacco Securitization Corp. CA Tobacco Settlement
Asset-Backed Sr, Ser A-1...................................... 4.50% 06/01/27 267,253
210,000 La Verne CA Brethren Hillcrest Homes, COP........................ 5.00% 05/15/22 239,144
125,000 Riverside Cnty CA Redev Agy Desert Cmntys Proj Area, Ser D....... 5.00% 10/01/20 141,314
295,000 Rohnert Park CA Cmnty Dev Agy Capital Appreciation Rohnert
Redev Proj, NATL-RE........................................... (a) 08/01/20 253,564
------------
989,258
------------
COLORADO - 7.7%
500,000 CO St Edl & Cultural Facs Auth Rev Ref & Impt Chrt Sch Univ
Lab Bldg Corp. (b)............................................ 5.00% 12/15/28 523,035
250,000 CO St Hlth Facs Auth Rev Ref Covenant Retirement Cmntys,
Ser A......................................................... 5.00% 12/01/22 282,195
605,000 CO St Hlth Facs Auth Rev Ref Covenant Retirement Cmntys,
Ser A......................................................... 5.00% 12/01/27 663,631
55,000 E-470 CO Pub Highway Auth Capital Appreciation Sr, Ser B,
NATL-RE....................................................... (a) 09/01/22 44,353
250,000 Harvest Junction CO Met Dist Ref & Impt.......................... 5.00% 12/01/30 271,285
------------
1,784,499
------------
FLORIDA - 8.5%
225,000 Belle Isle FL Chrt Sch Lease Rev Cornerstone Chrt Academy &
Cornerstone Chrt High Sch..................................... 5.50% 10/01/22 234,140
605,000 Broward Cnty FL Fuel Sys Rev Ft Lauderdale Fuel Facs, Ser A,
AGM, AMT (c).................................................. 5.00% 04/01/22 709,580
25,000 Escambia Cnty FL Hlth Facs Auth Baptist Hosp Inc. Proj, Ser A.... 5.00% 08/15/19 28,005
410,000 Miami-Dade Ctny FL Indl Dev Auth Nccd-Biscayne Pptys, Ser A...... 4.00% 06/01/20 435,900
500,000 Palm Beach Cnty FL Hlth Facs Auth Rev Ref Lifespace
Communities, Ser C............................................ 5.00% 05/15/21 572,245
------------
1,979,870
------------
GEORGIA - 2.3%
500,000 Cobb Cnty GA Dev Auth Student Hsg Rev Junior Kennesaw St
Univ Ref, Ser C............................................... 5.00% 07/15/30 543,535
------------
GUAM - 1.6%
325,000 Guam Power Auth Rev Ref, Ser A, AGM (c).......................... 5.00% 10/01/20 379,704
------------
HAWAII - 0.8%
170,000 HI St Dept of Budget & Fin Spl Purpose Rev Ref HI Pacific Hlth
Oblig Group, Ser B........................................... 5.00% 07/01/30 191,417
------------
IDAHO - 3.5%
500,000 ID St Hlth Facs Auth Rev Trinity Hlth Ref, Ser D................ 5.00% 12/01/33 553,545
250,000 ID St Hsg & Fin Assn Nonprofit Facs Rev, Ser A.................. 5.00% 06/01/35 251,170
------------
804,715
------------
ILLINOIS - 0.2%
25,000 IL St Fin Auth Rev Central Dupage Hlth........................... 5.00% 11/01/27 28,458
15,000 IL St Fin Auth Rev Ref Lutheran Hillside Village................. 5.13% 02/01/26 15,585
------------
44,043
------------
See Notes to Financial Statements Page 7
FIRST TRUST MANAGED MUNICIPAL ETF (FMB)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2015 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
----------- ----------------------------------------------------------------- ------------- ---------- ------------
MUNICIPAL BONDS (CONTINUED)
INDIANA - 3.1%
$ 350,000 IN St Fin Auth Rev BHI Sr Living................................. 5.50% 11/15/26 $ 396,421
250,000 IN St Fin Auth Rev Greencroft Oblig Group, Ser A................. 5.75% 11/15/28 276,210
40,000 IN St Fin Auth Rev Greencroft Oblig Group, Ser A................. 6.00% 11/15/28 44,902
------------
717,533
------------
IOWA - 0.5%
100,000 IA St Fin Auth Midwestern Disaster Area Rev IA Fertilizer
Co Proj....................................................... 5.50% 12/01/22 106,901
------------
KENTUCKY - 1.5%
300,000 KY St Muni Pwr Agy Pwr Sys Rev Ref, Ser A, NATL-RE............... 5.00% 09/01/22 349,671
------------
MARYLAND - 0.8%
170,000 MD St Econ Dev Corp Econ Dev Rev Transn Facs Proj, Ser A......... 5.38% 06/01/25 185,599
------------
MASSACHUSETTS - 0.7%
140,000 MA St Dev Fin Agy Rev Simmons Collateral, Ser H, XLCA............ 5.25% 10/01/26 166,356
------------
MICHIGAN - 0.8%
175,000 MI St Fin Auth Rev Detroit Sch Dist.............................. 5.50% 06/01/21 195,253
------------
MINNESOTA - 3.2%
460,000 Hugo MN Chrt Sch Lease Rev Noble Academy Proj, Ser A............. 4.00% 07/01/21 489,661
250,000 Minneapolis MN Student Hsg Rev Riverton Cmnty Hsg Proj Ref....... 3.50% 08/01/20 252,137
------------
741,798
------------
MISSISSIPPI - 0.8%
155,000 MS St Dev Bank Spl Oblig Magnolia Regional Hlth Ctr Proj,
Ser A......................................................... 6.25% 10/01/26 182,867
------------
MISSOURI - 2.3%
500,000 MO St Hlth & Edl Facs Auth Sr Living Facs Lutheran Sr............ 5.38% 02/01/35 539,450
------------
NEBRASKA - 3.6%
750,000 Central Plains Energy Proj NE Gas Proj Rev Proj #3............... 5.00% 09/01/27 843,195
------------
NEVADA - 2.3%
490,000 Las Vegas NV Spl Impt Dist #808 & #810 Ref....................... 5.00% 06/01/22 527,412
------------
NEW JERSEY - 4.8%
315,000 NJ St Econ Dev Auth Rev Lions Gate Proj.......................... 4.00% 01/01/20 321,294
80,000 NJ St Hlth Care Facs Fing Auth Rev Ref Barnabas Hlth, Ser A...... 4.63% 07/01/23 89,932
600,000 NJ St Transit Corp, Ser A, GAN................................... 5.00% 09/15/21 692,652
------------
1,103,878
------------
NEW YORK - 1.9%
200,000 Cattaraugus Cnty NY Capital Resource Corp Rev St Bonaventure
Univ Proj..................................................... 5.00% 05/01/23 226,406
85,000 NY St Dorm Auth Revs Non St Supported Debt Pace Univ, Ser A...... 5.00% 05/01/23 96,094
100,000 Suffolk Cnty NY Econ Dev Corp Rev Catholic Hlth Svcs............. 5.00% 07/01/28 112,236
------------
434,736
------------
NORTH DAKOTA - 1.2%
225,000 Burleigh Cnty ND Hlth Care Rev St Alexius Med Ctr Proj,
Ser A......................................................... 5.00% 07/01/22 269,379
------------
OHIO - 1.7%
125,000 Butler Cnty OH Hosp Facs Kettering Hlth Network Oblig............ 5.00% 04/01/25 142,497
230,000 Southeastern OH Port Auth Hosp Facs Rev Ref Mem Hlth Sys......... 5.00% 12/01/23 247,064
------------
389,561
------------
OKLAHOMA - 2.0%
310,000 Tulsa OK Arpts Impt Trust Ref, Ser A, AMT, BAM................... 5.00% 06/01/23 351,534
Page 8 See Notes to Financial Statements
FIRST TRUST MANAGED MUNICIPAL ETF (FMB)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2015 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
----------- ----------------------------------------------------------------- ------------- ---------- ------------
MUNICIPAL BONDS (CONTINUED)
OKLAHOMA (CONTINUED)
$ 100,000 Tulsa OK Arpts Impt Trust Ref, Ser D, BAM........................ 5.00% 06/01/28 $ 108,169
------------
459,703
------------
PENNSYLVANIA - 6.0%
500,000 Beaver Cnty PA Indl Dev Auth Ref Firstenergy Nuclear,
Ser B (d)..................................................... 3.50% 06/01/20 518,355
225,000 Dallas PA Area Muni Auth Univ Rev Ref Misericordia Univ Proj..... 5.00% 05/01/21 253,573
500,000 Middletown PA Sch Dist, Ser A.................................... 5.00% 03/01/28 567,860
50,000 Montgomery Cnty PA Indl Dev Auth Acts Retirement Life Cmntys
Ref........................................................... 5.00% 11/15/29 54,376
------------
1,394,164
------------
PUERTO RICO - 0.8%
190,000 Puerto Rico Indl Tourist Edl Med & Envir Control Fac Ref Univ
Sacred Heart.................................................. 5.00% 10/01/22 184,500
------------
SOUTH CAROLINA - 4.4%
745,000 Piedmont SC Muni Power Agy Elec Rev Ref, Ser A-3................. 5.00% 01/01/23 841,798
150,000 SC St Jobs-Econ Dev Auth Hosp Rev Ref Palmetto Hlth, Ser A,
AGM (c)....................................................... 5.50% 08/01/24 179,089
------------
1,020,887
------------
SOUTH DAKOTA - 0.1%
30,000 SD St Hlth & Edl Facs Auth Avera Hlth, Ser B..................... 5.50% 07/01/35 33,233
------------
TENNESSEE - 3.0%
600,000 Memphis Shelby Cnty TN Arpt Auth Arpt Rev Ref, Ser B, AMT........ 5.75% 07/01/23 698,484
------------
TEXAS - 14.1%
600,000 Flower Mound TX Spl Assmt Rev River Walk Pub Impt Dist #1........ 6.13% 09/01/28 614,130
500,000 Houston TX Arpt Sys Rev Ref United Airls Inc. Terminal E Proj,
AMT........................................................... 4.50% 07/01/20 530,650
290,000 New Hope Cultural Ed Facs Fin Corp TX Retirement Fac Rev
Wesleyan Homes Inc. Proj...................................... 5.00% 01/01/24 301,252
500,000 New Hope Cultural Ed Facs Fin Corp TX Student Hsg Rev CHF
Collegiate Hsg Galveston I LLC TX A&M Univ Galveston.......... 5.00% 04/01/22 567,950
480,000 Red River TX Hlth Facs Dev Corp Retirement Fac Rev MRC
Crestview, Ser A.............................................. 7.75% 11/15/31 568,579
600,000 TX St Muni Gas Acquisition & Supply Corp III Gas Supply Rev...... 5.00% 12/15/24 687,690
------------
3,270,251
------------
WASHINGTON - 3.8%
155,000 Mason Cnty WA Pub Utility Dist #1 Sys............................ 3.50% 12/01/21 159,030
110,000 Skagit Cnty WA Pub Hosp Dist #1 Ref & Impt, Ser A................ 5.00% 12/01/22 124,800
25,000 Skagit Cnty WA Pub Hosp Dist #1 Skagit Valley Hosp............... 5.00% 12/01/20 28,149
500,000 WA St Hlth Care Facs Auth WA Central WA Hlth Svcs................ 6.00% 07/01/19 576,980
------------
888,959
------------
WISCONSIN - 2.5%
500,000 WI St Hlth & Edl Facs Auth Rev Ref Marquette Univ................ 5.00% 10/01/28 570,940
------------
TOTAL INVESTMENTS - 95.8%................................................................... 22,224,033
(Cost $21,727,219) (e)
NET OTHER ASSETS AND LIABILITIES - 4.2%..................................................... 975,402
------------
NET ASSETS - 100.0%......................................................................... $ 23,199,435
============
See Notes to Financial Statements Page 9
FIRST TRUST MANAGED MUNICIPAL ETF (FMB)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2015 (UNAUDITED)
(a) Zero coupon bond.
(b) This security, sold within the terms of a private placement memorandum, is
exempt from registration upon resale under Rule 144A of the Securities Act
of 1933, as amended (the "1933 Act"), and may be resold in transactions
exempt from registration, normally to qualified institutional buyers.
Pursuant to procedures adopted by the Trust's Board of Trustees, this
security has been determined to be liquid by First Trust Advisors L.P.,
the Fund's advisor. Although market instability can result in periods of
increased overall market illiquidity, liquidity for each security is
determined based on security-specific factors and assumptions, which
require subjective judgment. At April 30, 2015, securities noted as such
amounted to $523,035 or 2.25% of net assets.
(c) The following table provides a listing of those entities that have either
issued, guaranteed, backed or otherwise enhanced the credit quality of
more than 5% of the net assets of the Fund. In instances where the entity
has guaranteed, backed or otherwise enhanced the credit quality of a
security, it is not primarily responsible for the issuer's obligations but
may be called upon to satisfy the issuer's obligations.
Entity Percentage
-----------------------------------------------------
Assured Guaranty Municipal Corp. 5.5%
(d) Security has a mandatory put by the holder. Maturity date reflects such
put.
(e) Aggregate cost for financial reporting purposes, which approximates the
aggregate cost for federal income tax purposes. As of April 30, 2015, the
aggregate gross unrealized appreciation for all securities in which there
was an excess of value over tax cost was $511,548 and the aggregate gross
unrealized depreciation for all securities in which there was an excess of
tax cost over value was $14,734.
AGM Assured Guaranty Municipal Corp.
AMT Alternative Minimum Tax
BAM Building America Mutual
COP Certificates of Participation
GAN Grant Anticipation Notes
NATL-RE National Public Finance Guarantee Corp.
XLCA Syncora Guarantee Inc.
-----------------------------
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of April 30,
2015 is as follows (see Note 2A - Portfolio Valuation in the Notes to Financial
Statements):
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
INVESTMENTS 4/30/2015 PRICES INPUTS INPUTS
--------------------------------------------------- ------------- ------------- -------------- --------------
Municipal Bonds*................................... $ 22,224,033 $ -- $ 22,224,033 $ --
============= ============= ============== ==============
* See Portfolio of Investments for state breakout.
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 April 30, 2015.
Page 10 See Notes to Financial Statements
FIRST TRUST MANAGED MUNICIPAL ETF (FMB)
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 2015 (UNAUDITED)
ASSETS:
Investments, at value.................................................. $ 22,224,033
Cash................................................................... 978,699
Receivables:
Investment securities sold.......................................... 884,475
Interest............................................................ 253,886
-----------------
Total Assets........................................................ 24,341,093
-----------------
LIABILITIES:
Payables:
Investment securities purchased..................................... 1,129,188
Investment advisory fees............................................ 12,470
-----------------
Total Liabilities................................................... 1,141,658
-----------------
NET ASSETS............................................................. $ 23,199,435
=================
NET ASSETS CONSIST OF:
Paid-in capital........................................................ $ 22,554,274
Par value.............................................................. 4,500
Accumulated net investment income (loss)............................... 6,040
Accumulated net realized gain (loss) on investments.................... 137,807
Net unrealized appreciation (depreciation) on investments.............. 496,814
-----------------
NET ASSETS............................................................. $ 23,199,435
=================
NET ASSET VALUE, per share............................................. $ 51.55
=================
Number of shares outstanding (unlimited number of shares
authorized, par value $0.01 per share).............................. 450,002
=================
Investments, at cost................................................... $ 21,727,219
=================
See Notes to Financial Statements Page 11
FIRST TRUST MANAGED MUNICIPAL ETF (FMB)
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED APRIL 30, 2015 (UNAUDITED)
INVESTMENT INCOME:
Interest............................................................... $ 352,782
-----------------
Total investment income............................................. 352,782
-----------------
EXPENSES:
Investment advisory fees............................................... 68,836
-----------------
Total expenses...................................................... 68,836
-----------------
NET INVESTMENT INCOME (LOSS)........................................... 283,946
-----------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on investments............................. 137,807
Net change in unrealized appreciation (depreciation) on investments. 42,496
-----------------
NET REALIZED AND UNREALIZED GAIN (LOSS)................................ 180,303
-----------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS..................................................... $ 464,249
=================
Page 12 See Notes to Financial Statements
FIRST TRUST MANAGED MUNICIPAL ETF (FMB)
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE FOR THE PERIOD
SIX MONTHS ENDED 5/13/2014 (a)
4/30/2015 THROUGH
(UNAUDITED) 10/31/2014
-------------------- --------------------
OPERATIONS:
Net investment income (loss)........................................... $ 283,946 $ 225,551
Net realized gain (loss)............................................... 137,807 2,805
Net change in unrealized appreciation (depreciation)................... 42,496 454,318
-------------------- --------------------
Net increase (decrease) in net assets resulting from operations........ 464,249 682,674
-------------------- --------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income.................................................. (287,501) (218,761)
Return of capital...................................................... -- (39,240)
-------------------- --------------------
Total distributions to shareholders.................................... (287,501) (258,001)
-------------------- --------------------
SHAREHOLDER TRANSACTIONS:
Proceeds from shares sold.............................................. 2,577,914 20,020,100
Cost of shares redeemed................................................ -- --
-------------------- --------------------
Net increase (decrease) in net assets resulting from
shareholder transactions............................................... 2,577,914 20,020,100
-------------------- --------------------
Total increase (decrease) in net assets................................ 2,754,662 20,444,773
NET ASSETS:
Beginning of period.................................................... 20,444,773 --
-------------------- --------------------
End of period.......................................................... $ 23,199,435 $ 20,444,773
==================== ====================
Accumulated net investment income (loss) at end of period.............. $ 6,040 $ 9,595
==================== ====================
CHANGES IN SHARES OUTSTANDING:
Shares outstanding, beginning of period................................ 400,002 --
Shares sold............................................................ 50,000 400,002
Shares redeemed........................................................ -- --
-------------------- --------------------
Shares outstanding, end of period...................................... 450,002 400,002
==================== ====================
(a) Inception date is May 13, 2014, which is consistent with the commencement
of investment operations and is the date the initial creation units were
established.
See Notes to Financial Statements Page 13
FIRST TRUST MANAGED MUNICIPAL ETF (FMB)
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
SIX MONTHS FOR THE PERIOD
ENDED 5/13/2014 (a)
4/30/2015 THROUGH
(UNAUDITED) 10/31/2014
-------------- --------------
Net asset value, beginning of period $ 51.11 $ 50.00
---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) 0.68 0.56
Net realized and unrealized gain (loss) 0.45 1.20
---------- ----------
Total from investment operations 1.13 1.76
---------- ----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income (0.69) (0.55)
Return of capital -- (0.10)
---------- ----------
Total distributions (0.69) (0.65)
---------- ----------
Net asset value, end of period $ 51.55 $ 51.11
========== ==========
TOTAL RETURN (b) 2.24% 3.53%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) $ 23,199 $ 20,445
Ratio of total expenses to average net assets 0.65% (c) 0.65% (c)
Ratio of net investment income (loss) to
average net assets 2.68% (c) 2.40% (c)
Portfolio turnover rate (d) 60% 69%
(a) Inception date is consistent with the commencement of investment
operations and is the date the initial creation units were established.
(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 and in-kind
transactions.
Page 14 See Notes to Financial Statements
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FIRST TRUST MANAGED MUNICIPAL ETF (FMB)
APRIL 30, 2015 (UNAUDITED)
1. ORGANIZATION
First Trust Exchange-Traded Fund III (the "Trust") is a non-diversified open-end
management investment company organized as a Massachusetts business trust on
January 9, 2008, and is registered with the Securities and Exchange Commission
under the Investment Company Act of 1940, as amended (the "1940 Act").
The Trust consists of four funds that are currently offering shares. This report
covers the First Trust Managed Municipal ETF (the "Fund"), which trades under
the ticker FMB on The NASDAQ(R) Stock Market, LLC ("NASDAQ"). 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, a combination of both. Except when aggregated in Creation Units,
the Fund's shares are not redeemable securities.
The primary investment objective of the Fund is to generate current income that
is exempt from regular federal income taxes and its secondary objective is
long-term capital appreciation. Under normal market conditions, the Fund seeks
to achieve its investment objectives by investing at least 80% of its net assets
(including investment borrowings) in municipal debt securities that pay interest
that is exempt from regular federal income taxes. There can be no assurance that
the Fund will achieve its investment objectives. The Fund may not be appropriate
for all investors.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of the financial statements. The
preparation of the financial statements in accordance with accounting principles
generally accepted in the United States of America ("U.S. GAAP") requires
management to make estimates and assumptions that affect the reported amounts
and disclosures in the financial statements. Actual results could differ from
those estimates.
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. If the NYSE closes early on a valuation day, the NAV
is determined as of that time. Domestic debt securities are priced using data
reflecting the earlier closing of the principal markets for those securities.
The Fund's NAV is calculated by dividing the value of all assets of the Fund
(including accrued interest and dividends), less all liabilities (including
accrued expenses and dividends declared but unpaid), by the total number of
shares outstanding.
The Fund's investments are valued daily at market value or, in the absence of
market value with respect to any portfolio securities, at fair value. Market
value prices represent 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:
Municipal securities and other debt securities are fair valued on the
basis of fair valuations provided by dealers who make markets in such
securities or by an independent pricing service approved by the Trust's
Board of Trustees, which may use the following valuation inputs when
available:
1) benchmark yields;
2) reported trades;
3) broker/dealer quotes;
4) issuer spreads;
5) benchmark securities;
6) bids and offers; and
7) reference data including market research publications.
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:
Page 15
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST MANAGED MUNICIPAL ETF (FMB)
APRIL 30, 2015 (UNAUDITED)
1) the credit conditions in the relevant market and changes thereto;
2) the liquidity conditions in the relevant market and changes thereto;
3) the interest rate conditions in the relevant market and changes
thereto (such as significant changes in interest rates);
4) issuer-specific conditions (such as significant credit
deterioration); and
5) any other market-based data the Advisor's Pricing Committee
considers relevant. In this regard, the Advisor's Pricing Committee
may use last-obtained market-based data to assist it when valuing
portfolio securities using amortized cost.
Certain securities may not be able to be priced by pre-established pricing
methods. Such securities may be valued by the Trust's Board of Trustees or its
delegate, the Advisor's Pricing Committee, at fair value. These securities
generally include, but are not limited to, restricted securities (securities
which may not be publicly sold without registration under the Securities Act of
1933, as amended) for which a pricing service is unable to provide a market
price; securities whose trading has been formally suspended; a security whose
market or fair value price is not available from a pre-established pricing
source; a security with respect to which an event has occurred that is likely to
materially affect the value of the security after the market has closed but
before the calculation of the Fund's NAV or make it difficult or impossible to
obtain a reliable market quotation; and a security whose price, as provided by
the pricing service, does not reflect the security's fair value. As a general
principle, the current fair value of a security would appear to be the amount
which the owner might reasonably expect to receive for the security upon its
current sale. When fair value prices are used, generally they will differ from
market quotations or official closing prices on the applicable exchanges. A
variety of factors may be considered in determining the fair value of such
securities, including, but not limited to, the following:
1) the fundamental business data relating to the issuer;
2) an evaluation of the forces which influence the market in which
these securities are purchased and sold;
3) the type, size and cost of security;
4) the financial statements of the issuer;
5) the credit quality and cash flow of the issuer, based on the
advisor's or external analysis;
6) the information as to any transactions in or offers for the
security;
7) the price and extent of public trading in similar securities (or
equity securities) of the issuer/borrower, or comparable companies;
8) the coupon payments;
9) the quality, value and salability of collateral, if any, securing
the security; and
10) other relevant factors.
The Fund is subject to fair value accounting standards that define fair value,
establish the framework for measuring fair value and provide a three-level
hierarchy for fair valuation based upon the inputs to the valuation as of the
measurement date. The three levels of the fair value hierarchy are as follows:
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 methodologies used for valuing investments are not necessarily an
indication of the risk associated with investing in those investments. A summary
of the inputs used to value the Fund's investments as of April 30, 2015, is
included with the Fund's Portfolio of Investments.
B. SECURITIES TRANSACTIONS AND INVESTMENT INCOME
Securities transactions are recorded as of the trade date. Realized gains and
losses from securities transactions are recorded on the identified cost basis.
Interest income is recorded daily on the accrual basis. Amortization of premiums
and accretion of discounts are recorded using the effective interest method.
Page 16
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST MANAGED MUNICIPAL ETF (FMB)
APRIL 30, 2015 (UNAUDITED)
C. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
Dividends from net investment income, if any, are declared and paid monthly, or
as the Board of Trustees may determine from time to time. Distributions of net
realized capital gains earned by the Fund, if any, will be distributed at least
annually.
Distributions from income and capital gains are determined in accordance with
income tax regulations, which may differ from U.S. GAAP. Certain capital
accounts in the financial statements are periodically adjusted for permanent
differences in order to reflect their tax character. These permanent differences
are primarily due to the varying treatment of income and gain/loss on portfolio
securities held by the Fund and have no impact on net assets or net asset value
per share. Temporary differences, which arise from recognizing certain items of
income, expense and gain/loss in different periods for financial statement and
tax purposes, will reverse at some time in the future.
The tax character of distributions paid during the fiscal period ended October
31, 2014 was as follows:
Distributions paid from:
Ordinary income.................................... $ 8,427
Tax-exempt income.................................. 210,334
Return of capital.................................. 39,240
As of October 31, 2014, the components of distributable earnings on a tax basis
were as follows:
Undistributed ordinary income...................... $ --
Accumulated capital and other losses............... --
Net unrealized appreciation (depreciation)......... 463,913
D. INCOME TAXES
The Fund intends to qualify as a regulated investment company by complying with
the requirements under Subchapter M of the Internal Revenue Code of 1986, as
amended, which includes distributing substantially all of its net investment
income and net realized gains to shareholders. Accordingly, no provision has
been made for federal and state income taxes. However, due to the timing and
amount of distributions, the Fund may be subject to an excise tax of 4% of the
amount by which approximately 98% of the Fund's taxable income exceeds the
distributions from such taxable income for the calendar year.
In addition, the Fund intends to invest in such municipal securities to allow it
to pay shareholders "exempt dividends" as defined in the Internal Revenue Code.
The Fund is subject to accounting standards that establish a minimum threshold
for recognizing, and a system for measuring, the benefits of a tax position
taken or expected to be taken in a tax return. The taxable year ended 2014
remains open to federal and state audit. As of April 30, 2015, management has
evaluated the application of these standards to the Fund, and has determined
that no provision for income tax is required in the Fund's financial statements
for uncertain tax positions.
The Fund intends to utilize provisions of the federal income tax laws, which
allow it to carry a realized capital loss forward indefinitely following the
year of the loss and offset such loss against any future realized capital gains.
The Fund is subject to certain limitations under U.S. tax rules on the use of
capital carryforwards and net unrealized built-in losses. These limitations
apply when there has been a 50% change in ownership. At October 31, 2014, the
Fund had no non-expiring capital loss carryforwards for federal income tax
purposes.
E. EXPENSES
Expenses, other than the investment advisory fee and other excluded expenses,
are paid by the Advisor (See Note 3).
3. INVESTMENT ADVISORY FEE, AFFILIATED TRANSACTIONS AND OTHER FEE ARRANGEMENTS
First Trust, the investment advisor to the Fund, is a limited partnership with
one limited partner, Grace Partners of DuPage L.P., and one general partner, The
Charger Corporation. The Charger Corporation is an Illinois corporation
controlled by James A. Bowen, Chief Executive Officer of First Trust. First
Trust is responsible for the selection and ongoing monitoring of the securities
in the Fund's portfolio, managing the Fund's business affairs and providing
certain administrative services necessary for the management of the Fund.
Pursuant to the Investment Management Agreement between the Trust and the
Advisor, First Trust manages the investment of the Fund's assets and is
responsible for the Fund's expenses, including the cost of transfer agency,
custody, fund administration, legal, audit and other services, but excluding fee
payments under the Investment Management Agreement, interest, taxes, brokerage
commissions and other expenses connected with the execution of portfolio
transactions, distribution and service fees pursuant to a
Page 17
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST MANAGED MUNICIPAL ETF (FMB)
APRIL 30, 2015 (UNAUDITED)
12b-1 plan, if any, and extraordinary expenses. The Fund has agreed to pay First
Trust an annual unitary management fee equal to 0.65% 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 service agreements, BBH performs custodial, fund accounting,
certain administrative services, and transfer agency services for the Fund. As
custodian, BBH is responsible for custody of the Fund's assets. As fund
accountant and administrator, BBH is responsible for maintaining the books and
records of the Fund's securities and cash. As transfer agent, BBH is responsible
for maintaining shareholder records for the Fund.
Each Trustee who is not an officer or employee of First Trust, any sub-advisor
or any of their affiliates ("Independent Trustees") is paid a fixed annual
retainer that is allocated 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 SECURITIES
For the six months ended April 30, 2015, the cost of purchases and proceeds from
sales of investments, excluding short-term investments and in-kind transactions,
were $14,812,237 and $12,220,315, respectively.
For the six months ended April 30, 2015, the Fund had no in-kind transactions.
5. BORROWINGS
Effective March 26, 2015, the Fund was added to an $80 million Credit Agreement
with The Bank of Nova Scotia ("Scotia") as administrative agent for a group of
lenders. The Credit Agreement is to be used as a liquidity backstop during
periods of high redemption volume. A commitment fee of 0.15% of the daily amount
of the excess of the commitment amount over the outstanding principal balance of
the loans is charged by Scotia, which First Trust allocates amongst the funds
that have access to the credit line. To the extent that the Fund accesses the
credit line, there would also be an interest fee charged. The Fund did not have
any borrowings outstanding during the period ended April 30, 2015.
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 transactions with broker-dealers or large
institutional investors that have entered into a participation agreement (an
"Authorized Participant"). In order to purchase Creation Units of the Fund, an
Authorized Participant must deposit (i) a designated portfolio of securities and
other instruments 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 Deposited
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 Authorized
Participant 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 Authorized Participant 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 is currently
$500. 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 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.
Page 18
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST MANAGED MUNICIPAL ETF (FMB)
APRIL 30, 2015 (UNAUDITED)
Authorized Participants 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 First Trust Portfolios L.P. ("FTP"), the distributor of the
Fund, for amounts expended to finance activities primarily intended to result in
the sale of Creation Units or the provision of investor services. FTP may also
use this amount to compensate securities dealers or other persons that are
Authorized Participants for providing distribution assistance, including
broker-dealer and shareholder support and educational and promotional services.
No 12b-1 fees are currently paid by the Fund, and pursuant to a contractual
arrangement, no 12b-1 fees will be paid any time before May 15, 2016.
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. ADOPTION OF NON-FUNDAMENTAL INVESTMENT POLICY
On March 27, 2015, the Board of Trustees of the Fund approved the adoption of a
non-fundamental investment policy regarding the Fund's ability to invest in
other investment companies (the "Policy"). Pursuant to the Policy, beginning on
or about June 7, 2015, the Fund will not rely on Section 12(d)(1)(F) or
12(d)(1)(G) of the Investment Company Act of 1940, as amended, to invest in
other investment companies.
10. SUBSEQUENT EVENT
Management has evaluated the impact of all subsequent events to the Fund through
the date the financial statements were issued and has determined that there was
the following subsequent event:
On May 20, 2015, the Fund declared a distribution of $0.115 per share to
shareholders of record on May 26, 2015, payable May 29, 2015.
Page 19
--------------------------------------------------------------------------------
ADDITIONAL INFORMATION
--------------------------------------------------------------------------------
FIRST TRUST MANAGED MUNICIPAL ETF (FMB)
APRIL 30, 2015 (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 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
is 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.
RISK CONSIDERATIONS
You could lose money by investing in the Fund. An investment in the Fund is not
a deposit of a bank and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other governmental agency. There can be no
assurance that the Fund's investment objectives will be achieved.
ALTERNATIVE MINIMUM TAX RISK. The Fund has no limit as to the amount that can be
invested in alternative minimum tax bonds. Therefore, all or a portion of the
Fund's otherwise exempt-interest dividends may be taxable to those shareholders
subject to the federal alternative minimum tax.
CALL RISK. If an issuer calls higher-yielding debt instruments held by the Fund,
performance could be adversely impacted.
CASH TRANSACTIONS RISK. The Fund will, under most circumstances, effect a
portion of creations and redemptions for cash, rather than in-kind securities.
As a result, an investment in the Fund may be less tax-efficient than an
investment in an exchange-traded fund that effects its creations and redemption
for in-kind securities. Because the Fund may effect a portion of redemptions for
cash, it may be required to sell portfolio securities in order to obtain the
cash needed to distribute redemption proceeds. A sale of shares may result in
capital gains or losses and may also result in higher brokerage costs.
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.
HIGH YIELD SECURITIES RISK. High yield securities, or "junk" bonds, are subject
to greater market fluctuations and risk of loss than securities with higher
ratings, and therefore, are considered to be highly speculative. These
securities are issued by issuers that may have narrowly focused operations
and/or other impediments to the timely payment of periodic interest and
principal at maturity. If the economy slows down or dips into recession, the
issuers of high yield securities may not have sufficient resources to continue
making timely payment of periodic interest and principal at maturity. The market
for high yield securities is smaller and less liquid than that for investment
grade securities. High yield securities are generally not listed on a national
securities exchange but trade in the over-the-counter markets. Due to the
smaller, less liquid market for high yield securities, the bid-offer spread on
such securities is generally greater than it is for investment grade securities
and the purchase or sale of such securities may take longer to complete. In
general, high yield securities may have a greater risk of default than other
types of securities.
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.
When interest rates change, the values of longer duration debt securities
usually change more than the values of shorter duration debt securities.
MANAGEMENT RISK. The Fund is subject to management risk because it is an
actively managed portfolio. In managing the Fund's investment portfolio, the
advisor will apply investment techniques and risk analyses that may not have the
desired result. There can be no guarantee that the Fund will meet its investment
objectives.
Page 20
--------------------------------------------------------------------------------
ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST MANAGED MUNICIPAL ETF (FMB)
APRIL 30, 2015 (UNAUDITED)
MARKET RISK. Market risk is the risk that a particular security owned by the
Fund or shares of the Fund in general may fall in value. Securities are subject
to market fluctuations caused by such factors as economic, political, regulatory
or market developments, changes in interest rates and perceived trends in bond
prices. Also, certain of these factors may affect the liquidity of the bonds in
the Fund's portfolio and make it more difficult for the Fund to sell them.
Overall security values could decline generally or could underperform other
investments.
MUNICIPAL LEASE OBLIGATIONS RISK. Participation interests in municipal leases
pose special risks because many leases and contracts contain "non-appropriation"
clauses that provide that the governmental issuer has no obligation to make
future payments under the lease or contract unless money is appropriated for
this purpose by the appropriate legislative body.
NEW FUND RISK. The Fund currently has fewer assets than larger funds, and like
other relatively new funds, large inflows and outflows may impact the Fund's
market exposure for limited periods of time. This impact may be positive or
negative, depending on the direction of market movement during the period
affected.
NON-DIVERSIFICATION RISK. The Fund is classified as "non-diversified" under the
Investment Company Act of 1940 Act (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.
POLITICAL AND ECONOMIC RISKS. The values of Municipal Securities held by the
Fund may be adversely affected by local political and economic conditions and
developments. Adverse conditions in an industry significant to a local economy
could have a correspondingly adverse effect on the financial condition of local
issuers.
TAX RISK. Interest income from Municipal Securities is normally not subject to
regular federal income tax, but income from Municipal Securities held by the
Fund could be declared taxable because of, among other things, unfavorable
changes in tax laws, adverse interpretations by the Internal Revenue Service or
state tax authorities or noncompliant conduct of a bond issuer. Consequently,
the attractiveness of Municipal Securities in relation to other investment
alternatives is affected by changes in federal income tax rates or changes in
the tax-exempt status of interest income from Municipal Securities.
ZERO COUPON BONDS RISK. Zero coupon bonds do not pay interest on a current basis
and may be highly volatile as interest rates rise or fall. In addition, while
such bonds generate income for purposes of generally accepted accounting
standards, they do not generate cash flow and thus could cause the Fund to be
forced to liquidate securities at an inopportune time in order to distribute
cash, as required by tax laws.
Page 21
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FIRST TRUST
First Trust Exchange-Traded Fund III
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]
FIRST TRUST
FIRST TRUST EXCHANGE-TRADED FUND III
------------------------------------
FIRST TRUST LONG/SHORT EQUITY ETF (FTLS)
SEMI-ANNUAL REPORT
FOR THE SIX MONTHS ENDED
APRIL 30, 2015
--------------------------------------------------------------------------------
TABLE OF CONTENTS
--------------------------------------------------------------------------------
FIRST TRUST LONG/SHORT EQUITY ETF (FTLS)
SEMI-ANNUAL REPORT
APRIL 30, 2015
Shareholder Letter......................................................... 1
Fund Performance Overview.................................................. 2
Understanding Your Fund Expenses........................................... 5
Portfolio of Investments................................................... 6
Statement of Assets and Liabilities........................................ 13
Statement of Operations.................................................... 14
Statements of Changes in Net Assets........................................ 15
Financial Highlights....................................................... 16
Notes to Financial Statements.............................................. 17
Additional Information..................................................... 22
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning of
the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934,
as amended. Forward-looking statements include statements regarding the goals,
beliefs, plans or current expectations of First Trust Advisors L.P. ("First
Trust" or the "Advisor") and its representatives, taking into account the
information currently available to them. Forward-looking statements include all
statements that do not relate solely to current or historical fact. For example,
forward-looking statements include the use of words such as "anticipate,"
"estimate," "intend," "expect," "believe," "plan," "may," "should," "would" or
other words that convey uncertainty of future events or outcomes.
Forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
the series of First Trust Exchange-Traded Fund III (the "Trust") described in
this report for the First Trust Long/Short Equity ETF (hereinafter referred to
as the "Fund") to be materially different from any future results, performance
or achievements expressed or implied by the forward-looking statements. When
evaluating the information included in this report, you are cautioned not to
place undue reliance on these forward-looking statements, which reflect the
judgment of the Advisor and its representatives only as of the date hereof. We
undertake no obligation to publicly revise or update these forward-looking
statements to reflect events and circumstances that arise after the date hereof.
PERFORMANCE AND RISK DISCLOSURE
There is no assurance that the Fund will achieve its investment objective. The
Fund is subject to market risk, which is the possibility that the market values
of securities owned by the Fund will decline and that the value of the Fund
shares may therefore be less than what you paid for them. Accordingly, you can
lose money investing in the Fund. See "Risk Considerations" in the Additional
Information section of this report for a discussion of certain other risks of
investing in the Fund.
Performance data quoted represents past performance, which is no guarantee of
future results, and current performance may be lower or higher than the figures
shown. For the most recent month-end performance figures, please visit
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 in
the Fund. 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.
The material risks of investing in the Fund are spelled out in its prospectus,
statement of additional information, this report and other Fund regulatory
filings.
--------------------------------------------------------------------------------
SHAREHOLDER LETTER
--------------------------------------------------------------------------------
FIRST TRUST LONG/SHORT EQUITY ETF (FTLS)
SEMI-ANNUAL LETTER FROM THE CHAIRMAN AND CEO
APRIL 30, 2015
Dear Shareholders:
Thank you for your investment in First Trust Long/Short Equity ETF (the "Fund").
First Trust Advisors L.P. ("First Trust") is pleased to provide you with the
semi-annual report which contains detailed information about your investment for
the six months ended April 30, 2015. Additionally, First Trust compiles the
Fund's financial statements for you to review. We encourage you to read this
report and discuss it with your financial advisor.
U.S. markets, fueled by accelerating growth and an accommodating Federal
Reserve, enjoyed a prosperous year in 2014. However, for the six months covered
by this report, some economic and global factors, including the continued
conflict in the Middle East and a sharp decline in oil prices, created
volatility in the U.S. and global markets. Another factor that has impacted
markets is the fact that many economists are predicting the Federal Reserve will
begin to raise interest rates this year.
As I have written previously, First Trust believes investors should maintain
perspective about the markets and have realistic expectations about their
investments. Markets will always go up and down, but we believe that having a
long-term investment horizon and being invested in quality products can help you
reach your goals.
Thank you for giving First Trust the opportunity to be a part of your investment
plan. We value the relationship and will continue to focus on our disciplined
investment approach and long-term perspective to help investors reach their
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
--------------------------------------------------------------------------------
FUND PERFORMANCE OVERVIEW (UNAUDITED)
--------------------------------------------------------------------------------
FIRST TRUST LONG/SHORT EQUITY ETF (FTLS)
The investment objective of First Trust Long/Short Equity ETF (the "Fund") is to
seek to provide investors with long-term total return. The Fund pursued its
objective by establishing long and short positions in a portfolio of Equity
Securities (as defined below). Under normal circumstances, at least 80% of the
Fund's net assets (plus the amount of any borrowing for investment purposes)
will be exposed to U.S. exchange-listed equity securities of U.S. and foreign
companies by investing in such securities directly and/or in U.S.
exchange-traded funds ("ETFs") that provide exposure to such securities. The
securities of the companies and ETFs in which the Fund will invest are referred
to collectively as "Equity Securities." The Equity Securities held by the Fund
may include U.S. exchange-listed equity securities of foreign issuers, as well
as investments in the equity securities of foreign issuers that are in the form
of depositary receipts.
The Fund takes long and short positions in Equity Securities. As opposed to
taking long positions in which an investor seeks to profit from increases in the
price of a security, short selling is a technique that will be used by the Fund
to try and profit from the falling price of a security. Short selling involves
selling a security that has been borrowed from a third party with the intention
of buying an identical security back at a later date to return to that third
party.
Having both long and short positions in an equity security portfolio is a common
way to create returns that are independent of market moves. One advantage of a
long and short portfolio is that the long and short positions may offset one
another in a manner that results in a lower net exposure to the direction of the
market. In addition, cash balances arising from the use of short selling
typically will be held in money market instruments.
--------------------------------------------------------------------------------
PERFORMANCE
--------------------------------------------------------------------------------
CUMULATIVE
TOTAL RETURNS
6 Months Ended Inception (9/8/14)
4/30/15 to 4/30/15
FUND PERFORMANCE
NAV 6.96% 8.94%
Market Price 6.95% 9.08%
INDEX PERFORMANCE
S&P 500(R) Index 4.40% 5.50%
--------------------------------------------------------------------------------
Total returns for the period since inception are calculated from the inception
date of the Fund. "Cumulative Total Returns" represent the total change in value
of an investment over the period indicated.
The Fund's per share net asset value ("NAV") is the value of one share of the
Fund and is computed by dividing the value of all assets of the Fund (including
accrued interest and dividends), less all liabilities (including accrued
expenses and dividends declared but unpaid), by the total number of outstanding
shares. The price used to calculate market return ("Market Price") is determined
by using the midpoint 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 price returns assume that all distributions have been
reinvested in the Fund at NAV and Market Price, respectively.
An index is a statistical composite that tracks a specified financial market or
sector. Unlike the Fund, the index does not actually hold a portfolio of
securities and therefore does not incur the expenses incurred by the Fund. These
expenses negatively impact the performance of the Fund. Also, market returns do
not include brokerage commissions that may be payable on secondary market
transactions. If brokerage commissions were included, market returns would be
lower. The total returns presented reflect the reinvestment of dividends on
securities in the index. 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.
Page 2
--------------------------------------------------------------------------------
FUND PERFORMANCE OVERVIEW (UNAUDITED) (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST LONG/SHORT EQUITY ETF (FTLS)
-----------------------------------------------------------
PORTFOLIO SECTOR ALLOCATION AS OF APRIL 30, 2015
-----------------------------------------------------------
SECTOR %*
Information Technology 24.1%
Financials 16.9
Consumer Staples 12.4
Health Care 12.2
Industrials 11.2
Consumer Discretionary 10.2
Energy 7.8
Telecommunication 2.8
Materials 2.4
-------
Total 100.0%
=======
* Represents % of long-term investments and
securities sold short.
-----------------------------------------------------------
TOP TEN LONG-TERM PORTFOLIO HOLDINGS AS OF APRIL 30, 2015
-----------------------------------------------------------
SECURITY % OF NET ASSETS
Apple, Inc. 3.9%
Reynolds American, Inc. 3.6
Altria Group, Inc. 3.4
Boeing (The) Co. 3.3
Novo Nordisk A/S, ADR 3.0
Express Scripts Holding Co. 2.7
TransDigm Group, Inc. 2.4
Annaly Capital Management, Inc. 2.4
Fifth Third Bancorp 2.3
CIT Group, Inc. 2.1
-------
Total 29.1%
=======
-----------------------------------------------------------
TOP TEN SECURITIES SOLD SHORT AS OF APRIL 30, 2015
-----------------------------------------------------------
SECURITY % OF NET ASSETS
SPDR S&P 500 ETF Trust -1.2%
Horizon Pharma Plc -0.5
Microsoft Corp. -0.5
Cheniere Energy Partners L.P. -0.4
Southern Copper Corp. -0.4
Seaspan Corp. -0.4
Omnicell, Inc. -0.4
Telephone & Data Systems, Inc. -0.4
New York Community Bancop, Inc. -0.4
Telefonica S.A. ADR -0.4
-------
Total -5.0%
=======
Page 3
--------------------------------------------------------------------------------
FUND PERFORMANCE OVERVIEW (UNAUDITED) (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST LONG/SHORT EQUITY ETF (FTLS)
PERFORMANCE OF A $10,000 INITIAL INVESTMENT
SEPTEMBER 8, 2014 - APRIL 30, 2015
First Trust Long/Short Equity ETF S&P 500 Index
9/8/14 $10,000 $10,000
10/31/14 10,186 10,105
4/30/15 10,895 10,550
Performance figures assume reinvestment of all distributions and do not reflect
the deduction of taxes that a shareholder would pay on Fund distributions or the
redemption or sale of Fund shares. An index is a statistical composite that
tracks a specified financial market or sector. Unlike the Fund, the index does
not actually hold a portfolio of securities and therefore does 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 APRIL 30, 2015
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 September 9, 2014
(commencement of trading) through April 30, 2015. 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.
--------------------------------------------------------------------------------
NUMBER OF DAYS BID/ASK MIDPOINT AT/ABOVE NAV
--------------------------------------------------------------------------------
FOR THE PERIOD 0.00%-0.49% 0.50%-0.99% 1.00%-1.99% >=2.00%
9/9/14 - 10/31/14 23 3 0 0
11/1/14 - 4/30/15 74 6 0 1
--------------------------------------------------------------------------------
NUMBER OF DAYS BID/ASK MIDPOINT BELOW NAV
--------------------------------------------------------------------------------
FOR THE PERIOD 0.00%-0.49% 0.50%-0.99% 1.00%-1.99% >=2.00%
9/9/14 - 10/31/14 9 4 0 0
11/1/14 - 4/30/15 31 11 0 0
Page 4
FIRST TRUST LONG/SHORT EQUITY ETF (FTLS)
UNDERSTANDING YOUR FUND EXPENSES
APRIL 30, 2015 (UNAUDITED)
As a shareholder of First Trust Long/Short Equity ETF (the "Fund") you incur two
types of costs: (1) transaction costs; and (2) ongoing costs, including
management fees, distribution and/or service fees, if any, and other Fund
expenses. This Example is intended to help you understand your ongoing costs of
investing in the Fund and to compare these costs with the ongoing costs of
investing in other funds.
The Example is based on an investment of $1,000 invested at the beginning of the
period and held through the six-month period ended April 30, 2015.
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.
-----------------------------------------------------------------------------------------------------------------------------
ANNUALIZED
BEGINNING ENDING EXPENSE RATIO EXPENSES PAID
ACCOUNT VALUE ACCOUNT VALUE BASED ON THE DURING THE SIX-
NOVEMBER 1, 2014 APRIL 30, 2015 SIX-MONTH PERIOD MONTH PERIOD (a)
-----------------------------------------------------------------------------------------------------------------------------
FIRST TRUST LONG/SHORT EQUITY ETF
Actual $1,000.00 $1,069.60 0.95% $4.87
Hypothetical (5% return before expenses) $1,000.00 $1,020.08 0.95% $4.76
(a) Expenses are equal to the annualized expense ratio as indicated in the
table, multiplied by the average account value over the period (November
1, 2014 through April 30, 2015), and multiplied by 181/365.
Page 5
FIRST TRUST LONG/SHORT EQUITY ETF (FTLS)
PORTFOLIO OF INVESTMENTS
APRIL 30, 2015 (UNAUDITED)
SHARES DESCRIPTION VALUE
----------- -------------------------------------------------------------------------------------------- ------------
COMMON STOCKS - 92.9%
AEROSPACE & DEFENSE - 7.7%
3,360 Boeing (The) Co............................................................................. $ 481,622
1,872 Northrop Grumman Corp....................................................................... 288,363
1,683 TransDigm Group, Inc. (a)................................................................... 357,015
------------
1,127,000
------------
AIRLINES - 0.4%
1,123 Delta Air Lines, Inc. (a)................................................................... 50,131
277 Southwest Airlines Co. (a).................................................................. 11,235
------------
61,366
------------
AUTO COMPONENTS - 0.2%
783 Cooper Tire & Rubber Co..................................................................... 33,270
------------
BANKS - 5.8%
6,891 CIT Group, Inc.............................................................................. 310,302
1,610 Customers Bancorp, Inc. (b)................................................................. 40,588
16,819 Fifth Third Bancorp (a)..................................................................... 336,380
2,567 FirstMerit Corp............................................................................. 49,723
657 U.S. Bancorp (a)............................................................................ 28,165
1,689 UMB Financial Corp.......................................................................... 84,095
------------
849,253
------------
BIOTECHNOLOGY - 2.2%
366 Amgen, Inc. (a)............................................................................. 57,795
2,666 Gilead Sciences, Inc. (a)................................................................... 267,960
------------
325,755
------------
CHEMICALS - 1.0%
640 Innospec, Inc............................................................................... 27,968
1,161 LyondellBasell Industries NV (a)............................................................ 120,187
------------
148,155
------------
CONTAINERS & PACKAGING - 0.8%
2,423 Berry Plastics Group, Inc. (a) (b).......................................................... 82,915
1,960 Graphic Packaging Holding Co................................................................ 27,636
------------
110,551
------------
DIVERSIFIED CONSUMER SERVICES - 0.2%
2,060 LifeLock, Inc. (b).......................................................................... 30,097
------------
DIVERSIFIED FINANCIAL SERVICES - 2.0%
5,442 Citigroup, Inc. (a)......................................................................... 290,167
------------
DIVERSIFIED TELECOMMUNICATION SERVICES - 0.8%
5,501 Consolidated Communications Holdings, Inc. (a).............................................. 115,906
------------
ELECTRICAL EQUIPMENT - 0.2%
519 AMETEK, Inc. (a)............................................................................ 27,206
------------
FOOD & STAPLES RETAILING - 2.2%
2,023 Costco Wholesale Corp. (a).................................................................. 289,390
350 Wal-Mart Stores, Inc. (a)................................................................... 27,318
------------
316,708
------------
FOOD PRODUCTS - 1.5%
1,568 Hormel Foods Corp........................................................................... 85,221
1,198 Pilgrim's Pride Corp........................................................................ 29,590
2,734 Pinnacle Foods, Inc. (a).................................................................... 110,864
------------
225,675
------------
Page 6 See Notes to Financial Statements
FIRST TRUST LONG/SHORT EQUITY ETF (FTLS)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2015 (UNAUDITED)
SHARES DESCRIPTION VALUE
----------- -------------------------------------------------------------------------------------------- ------------
COMMON STOCKS (CONTINUED)
HEALTH CARE EQUIPMENT & SUPPLIES - 0.7%
1,091 Stryker Corp. (a)........................................................................... $ 100,634
------------
HEALTH CARE PROVIDERS & SERVICES - 5.3%
1,600 Amsurg Corp. (b)............................................................................ 100,352
4,521 Express Scripts Holding Co. (b)............................................................. 390,614
289 Henry Schein, Inc. (a) (b).................................................................. 39,622
3,423 MEDNAX, Inc. (a) (b)........................................................................ 242,280
------------
772,868
------------
HOTELS, RESTAURANTS & LEISURE - 1.9%
11,772 La Quinta Holdings, Inc. (a) (b)............................................................ 283,470
------------
HOUSEHOLD DURABLES - 2.4%
57 NVR, Inc. (b)............................................................................... 75,610
2,411 PulteGroup, Inc............................................................................. 46,532
4,463 Toll Brothers, Inc. (a) (b)................................................................. 158,615
1,018 Tupperware Brands Corp...................................................................... 68,064
------------
348,821
------------
INDUSTRIAL CONGLOMERATES - 0.3%
276 Roper Industries, Inc. (a).................................................................. 46,415
------------
INTERNET & CATALOG RETAIL - 3.4%
286 Amazon.com, Inc. (b)........................................................................ 120,629
2,186 Liberty Media Corp. - Interactive, Class A (a) (b).......................................... 62,869
2,558 Liberty Ventures (a) (b).................................................................... 106,618
1,816 PetMed Express, Inc......................................................................... 28,747
150 priceline.com, Inc. (a) (b)................................................................. 185,672
------------
504,535
------------
INTERNET SOFTWARE & SERVICES - 2.4%
1,835 eBay, Inc. (a) (b).......................................................................... 106,907
623 Envestnet, Inc. (b)......................................................................... 31,935
3,313 VeriSign, Inc. (a) (b)...................................................................... 210,409
------------
349,251
------------
IT SERVICES - 3.8%
512 Accenture PLC, Class A (a).................................................................. 47,437
425 Global Payments, Inc........................................................................ 42,619
3,177 Syntel, Inc. (a) (b)........................................................................ 143,028
3,212 Visa, Inc., Class A (a)..................................................................... 212,153
5,623 Western Union Co. (a)....................................................................... 114,034
------------
559,271
------------
MACHINERY - 2.9%
4,032 AGCO Corp................................................................................... 207,688
3,014 Allison Transmission Holdings, Inc. (a)..................................................... 92,470
270 Middleby (The) Corp. (b).................................................................... 27,362
1,089 Trinity Industries, Inc..................................................................... 29,501
1,257 Watts Water Technologies, Inc............................................................... 68,569
------------
425,590
------------
METALS & MINING - 0.8%
1,432 Steel Dynamics, Inc......................................................................... 31,690
1,781 SunCoke Energy, Inc. (a).................................................................... 31,221
2,468 Ternium S.A., ADR........................................................................... 52,322
------------
115,233
------------
See Notes to Financial Statements Page 7
FIRST TRUST LONG/SHORT EQUITY ETF (FTLS)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2015 (UNAUDITED)
SHARES DESCRIPTION VALUE
----------- -------------------------------------------------------------------------------------------- ------------
COMMON STOCKS (CONTINUED)
OIL, GAS & CONSUMABLE FUELS - 2.1%
900 PBF Energy, Inc............................................................................. $ 25,542
2,202 PetroChina Co., Ltd., ADR................................................................... 283,882
------------
309,424
------------
PERSONAL PRODUCTS - 0.5%
8,458 Avon Products, Inc.......................................................................... 69,102
------------
PHARMACEUTICALS - 4.5%
928 Bristol-Myers Squibb Co. (a)................................................................ 59,141
7,859 Novo Nordisk A/S, ADR....................................................................... 442,226
615 Shire PLC, ADR.............................................................................. 149,759
------------
651,126
------------
PROFESSIONAL SERVICES - 0.2%
549 Insperity, Inc.............................................................................. 26,440
------------
REAL ESTATE INVESTMENT TRUSTS - 10.3%
3,151 American Realty Capital Proper (a).......................................................... 28,454
34,788 Annaly Capital Management, Inc.............................................................. 350,315
1,060 Digital Realty Trust, Inc. (a).............................................................. 67,215
921 Health Care REIT, Inc. (a).................................................................. 66,330
4,736 Host Hotels & Resorts, Inc. (a)............................................................. 95,383
27,063 MFA Mortgage Investments, Inc. (a).......................................................... 210,280
4,839 Paramount Group, Inc........................................................................ 88,650
1,565 Public Storage (a).......................................................................... 294,079
1,703 Simon Property Group, Inc. (a).............................................................. 309,077
------------
1,509,783
------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT - 4.6%
3,296 Broadcom Corp. (a).......................................................................... 145,700
996 Monolithic Power Systems, Inc. (a).......................................................... 51,623
5,551 NVIDIA Corp................................................................................. 123,204
3,565 Texas Instruments, Inc. (a)................................................................. 193,258
3,700 Xilinx, Inc................................................................................. 160,432
------------
674,217
------------
SOFTWARE - 6.0%
1,393 Activision Blizzard, Inc.................................................................... 31,781
2,352 Adobe Systems, Inc. (a) (b)................................................................. 178,893
2,253 ANSYS, Inc. (a) (b)......................................................................... 193,398
4,402 Aspen Technology, Inc. (a) (b).............................................................. 195,405
2,277 CA, Inc. (a)................................................................................ 72,340
525 Electronic Arts, Inc. (b)................................................................... 30,497
188 FactSet Research Systems, Inc. (a).......................................................... 29,589
871 SolarWinds, Inc. (b)........................................................................ 42,488
1,711 SS&C Technologies Holdings, Inc. (a)........................................................ 102,951
------------
877,342
------------
SPECIALTY RETAIL - 1.8%
2,079 GameStop Corp., Class A..................................................................... 80,125
647 Home Depot (The), Inc. (a).................................................................. 69,216
1,009 Michaels Cos, Inc./The (b).................................................................. 26,093
498 Outerwall, Inc.............................................................................. 33,082
566 Tractor Supply Co........................................................................... 48,710
------------
257,226
------------
Page 8 See Notes to Financial Statements
FIRST TRUST LONG/SHORT EQUITY ETF (FTLS)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2015 (UNAUDITED)
SHARES/
UNITS DESCRIPTION VALUE
----------- -------------------------------------------------------------------------------------------- ------------
COMMON STOCKS (CONTINUED)
TECHNOLOGY HARDWARE, STORAGE & PERIPHERALS - 4.4%
4,587 Apple, Inc.................................................................................. $ 574,063
1,163 Seagate Technology PLC...................................................................... 68,291
------------
642,354
------------
TEXTILES, APPAREL & LUXURY GOODS - 0.3%
647 VF Corp..................................................................................... 46,862
------------
TOBACCO - 7.0%
9,925 Altria Group, Inc. (a)...................................................................... 496,746
7,144 Reynolds American, Inc...................................................................... 523,655
------------
1,020,401
------------
WIRELESS TELECOMMUNICATION SERVICES - 2.3%
7,819 VimpelCom Ltd., ADR......................................................................... 44,334
8,183 Vodafone Group PLC, ADR..................................................................... 288,041
------------
332,375
------------
TOTAL COMMON STOCKS......................................................................... 13,583,849
(Cost $13,512,780) ------------
MASTER LIMITED PARTNERSHIPS - 6.2%
OIL, GAS & CONSUMABLE FUELS - 6.2%
847 Alliance Holdings GP, L.P................................................................... 42,096
2,190 Buckeye Partners, L.P....................................................................... 178,660
5,421 Enterprise Products Partners, L.P........................................................... 185,669
793 Global Partners, L.P........................................................................ 31,831
2,969 Magellan Midstream Partners, L.P............................................................ 247,912
1,942 TC Pipelines, L.P........................................................................... 132,211
668 Terra Nitrogen Co, L.P...................................................................... 89,352
------------
TOTAL MASTER LIMITED PARTNERSHIPS........................................................... 907,731
(Cost $870,545) ------------
TOTAL LONG-TERM INVESTMENTS................................................................. 14,491,580
(Cost $14,383,325) (c) ------------
COMMON STOCKS SOLD SHORT - (18.1%)
AEROSPACE & DEFENSE - (1.2%)
(429) General Dynamics Corp....................................................................... (58,910)
(285) Lockheed Martin Corp........................................................................ (53,181)
(609) Rockwell Collins, Inc....................................................................... (59,274)
------------
(171,365)
------------
AUTOMOBILES - (0.4%)
(402) Toyota Motor Corp., ADR..................................................................... (55,886)
------------
BANKS - (1.0%)
(1,835) Banco Santander Chile S.A., ADR............................................................. (40,021)
(481) PNC Financial Services Group, Inc........................................................... (44,122)
(1,047) Wells Fargo & Co............................................................................ (57,690)
------------
(141,833)
------------
BEVERAGES - (0.4%)
(494) Constellation Brands, Inc................................................................... (57,274)
------------
See Notes to Financial Statements Page 9
FIRST TRUST LONG/SHORT EQUITY ETF (FTLS)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2015 (UNAUDITED)
SHARES DESCRIPTION VALUE
----------- -------------------------------------------------------------------------------------------- ------------
COMMON STOCKS SOLD SHORT (CONTINUED)
BIOTECHNOLOGY - (0.3%)
(1,144) Exact Sciences Corp. (b).................................................................... $ (23,910)
(1,368) Invitae Corp. (b)........................................................................... (14,979)
------------
(38,889)
------------
CAPITAL MARKETS - (0.4%)
(2,160) Credit Suisse Group AG, ADR................................................................. (55,663)
------------
CHEMICALS - (0.5%)
(158) CF Industries Holdings, Inc................................................................. (45,420)
(279) LSB Industries, Inc. (b).................................................................... (11,833)
(174) Scotts Miracle-Gro (The) Co., Class A....................................................... (11,225)
------------
(68,478)
------------
COMMERCIAL SERVICES & SUPPLIES - (0.7%)
(1,560) Copart, Inc. (b)............................................................................ (55,489)
(2,562) Covanta Holding Corp........................................................................ (51,983)
------------
(107,472)
------------
CONTAINERS & PACKAGING - (0.4%)
(738) Packaging Corp. of America.................................................................. (51,062)
------------
DIVERSIFIED TELECOMMUNICATION SERVICES - (0.4%)
(3,918) Telefonica S.A., ADR........................................................................ (59,397)
------------
ELECTRONIC EQUIPMENT, INSTRUMENTS & COMPONENTS - (0.7%)
(3,451) LG Display Co., Ltd, ADR.................................................................... (47,693)
(791) TE Connectivity Ltd......................................................................... (52,641)
------------
(100,334)
------------
FOOD & STAPLES RETAILING - (0.3%)
(4,199) SUPERVALU, Inc. (b)......................................................................... (36,909)
------------
FOOD PRODUCTS - (0.7%)
(1,269) Fresh Del Monte Produce, Inc................................................................ (46,864)
(1,867) Snyder's-Lance, Inc......................................................................... (55,133)
------------
(101,997)
------------
HEALTH CARE EQUIPMENT & SUPPLIES - (0.6%)
(316) Cooper Cos, Inc./The........................................................................ (56,270)
(1,112) LDR Holding Corp. (b)....................................................................... (37,641)
------------
(93,911)
------------
HEALTH CARE TECHNOLOGY - (0.8%)
(787) Cerner Corp. (b)............................................................................ (56,515)
(1,738) Omnicell, Inc. (b).......................................................................... (61,751)
------------
(118,266)
------------
HOTELS, RESTAURANTS & LEISURE - (0.6%)
(684) Norwegian Cruise Line Holdings Ltd (b)...................................................... (33,181)
(642) Wyndham Worldwide Corp...................................................................... (54,827)
------------
(88,008)
------------
LIFE SCIENCES TOOLS & SERVICES - (0.4%)
(472) Waters Corp. (b)............................................................................ (59,090)
------------
MACHINERY - (0.5%)
(212) Deere & Co.................................................................................. (19,190)
(594) Illinois Tool Works, Inc.................................................................... (55,587)
------------
(74,777)
------------
Page 10 See Notes to Financial Statements
FIRST TRUST LONG/SHORT EQUITY ETF (FTLS)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2015 (UNAUDITED)
SHARES DESCRIPTION VALUE
----------- -------------------------------------------------------------------------------------------- ------------
COMMON STOCKS SOLD SHORT (CONTINUED)
MARINE - (0.4%)
(3,141) Seaspan Corp................................................................................ $ (62,255)
------------
METALS & MINING - (0.4%)
(1,938) Southern Copper Corp........................................................................ (63,140)
------------
OIL, GAS & CONSUMABLE FUELS - (1.1%)
(464) ConocoPhillips.............................................................................. (31,515)
(1,102) Continental Resources Inc./OK (b)........................................................... (57,998)
(333) InterOil Corp. (b).......................................................................... (17,216)
(994) Nordic American Tankers Ltd................................................................. (12,157)
(274) Pioneer Natural Resources Co................................................................ (47,342)
------------
(166,228)
------------
PHARMACEUTICALS - (0.8%)
(1,202) Akorn, Inc. (b)............................................................................. (50,051)
(2,633) Horizon Pharma Plc (b)...................................................................... (74,040)
------------
(124,091)
------------
REAL ESTATE INVESTMENT TRUSTS - (1.3%)
(883) Douglas Emmett, Inc......................................................................... (25,165)
(1,598) Liberty Property Trust...................................................................... (55,674)
(3,114) NorthStar Realty Finance Corp............................................................... (58,419)
(829) WP Carey, Inc............................................................................... (52,625)
------------
(191,883)
------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT - (0.3%)
(5,498) STMicroelectronics NV....................................................................... (43,764)
------------
SOFTWARE - (0.7%)
(1,353) Microsoft Corp.............................................................................. (65,810)
(203) Ultimate Software Group, Inc. (b)........................................................... (33,743)
------------
(99,553)
------------
SPECIALTY RETAIL - (1.2%)
(539) Gap (The), Inc.............................................................................. (21,366)
(618) L Brands, Inc............................................................................... (55,224)
(307) Restoration Hardware Holdings, Inc. (b)..................................................... (26,454)
(660) Tiffany & Co................................................................................ (57,737)
(76) Ulta Salon Cosmetics & Fragrance, Inc. (b).................................................. (11,483)
------------
(172,264)
------------
TECHNOLOGY HARDWARE, STORAGE & PERIPHERALS - (0.4%)
(1,745) Hewlett-Packard Co.......................................................................... (57,533)
------------
THRIFTS & MORTGAGE FINANCE - (0.8%)
(3,456) New York Community Bancorp, Inc............................................................. (59,409)
(3,941) TFS Financial Corp.......................................................................... (57,617)
------------
(117,026)
------------
WIRELESS TELECOMMUNICATION SERVICES - (0.4%)
(2,238) Telephone & Data Systems, Inc............................................................... (59,777)
------------
TOTAL COMMON STOCKS SOLD SHORT.............................................................. (2,638,125)
(Proceeds $(2,674,225)) ------------
EXCHANGE - TRADED FUNDS SOLD SHORT - (1.2%)
CAPITAL MARKETS - (1.2%)
(843) SPDR S&P 500 ETF Trust...................................................................... (175,782)
------------
TOTAL EXCHANGE-TRADED FUNDS SOLD SHORT...................................................... (175,782)
(Proceeds $(177,555)) ------------
See Notes to Financial Statements Page 11
FIRST TRUST LONG/SHORT EQUITY ETF (FTLS)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2015 (UNAUDITED)
SHARES DESCRIPTION VALUE
----------- -------------------------------------------------------------------------------------------- ------------
MASTER LIMITED PARTNERSHIPS SOLD SHORT - (0.4%)
OIL, GAS & CONSUMABLE FUELS - (0.4%)
(1,938) Cheniere Energy Partners L.P................................................................ $ (63,159)
------------
TOTAL MASTER LIMITED PARTNERSHIPS SOLD SHORT................................................ (63,159)
(Proceeds $ (58,409)) ------------
TOTAL INVESTMENTS SOLD SHORT - (19.7)%...................................................... (2,877,066)
(Proceeds ($2,910,189)) ------------
NET OTHER ASSETS AND LIABILITIES - 20.6%.................................................... 3,003,689
------------
NET ASSETS - 100.0%......................................................................... $ 14,618,203
============
(a) The security or a portion of the security is segregated as collateral for
investments sold short.
(b) Non-income producing security.
(c) Aggregate cost for financial reporting purposes, which approximates the
aggregate cost for federal income tax purposes. As of April 30, 2015, the
aggregate gross unrealized appreciation for all securities in which there
was an excess of value over tax cost was $382,703 and the aggregate gross
unrealized depreciation for all securities in which there was an excess of
tax cost over value was $274,448.
ADR American Depositary Receipt
-----------------------------
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of April 30,
2015 is as follows (see Note 2A - Portfolio Valuation in the Notes to Financial
Statements):
ASSETS TABLE
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
INVESTMENTS 4/30/2015 PRICES INPUTS INPUTS
--------------------------------------------------- ------------- ------------- -------------- --------------
Common Stocks*..................................... $ 13,583,849 $ 13,583,849 $ -- $ --
Master Limited Partnerships*....................... 907,731 907,731 $ -- $ --
------------- ------------- -------------- --------------
Total Long-Term Investments........................ $ 14,491,580 $ 14,491,580 $ -- $ --
============= ============= ============== ==============
LIABILITIES TABLE
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
INVESTMENTS 4/30/2015 PRICES INPUTS INPUTS
--------------------------------------------------- ------------- ------------- -------------- --------------
Common Stocks Sold Short*.......................... $ (2,638,125) $ (2,638,125) $ -- $ --
Exchange-Traded Funds Sold Short*.................. (175,782) (175,782) -- --
Master Limited Partnerships Sold Short*............ (63,159) (63,159) -- --
------------- ------------- -------------- --------------
Total Investments Sold Short....................... $ (2,877,066) $ (2,877,066) $ -- $ --
============= ============= ============== ==============
* See the Portfolio of Investments for industry breakout.
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 April 30, 2015.
Page 12 See Notes to Financial Statements
FIRST TRUST LONG/SHORT EQUITY ETF (FTLS)
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 2015 (UNAUDITED)
ASSETS:
Investments, at value (Cost $14,383,325)............................... $ 14,491,580
Cash................................................................... 171,156
Restricted cash........................................................ 2,837,371
Receivables:
Dividends........................................................... 5,887
Dividend reclaims................................................... 207
Other assets........................................................... 4,163
-----------------
Total Assets........................................................ 17,510,364
-----------------
LIABILITIES:
Investments sold short, at value (proceeds $2,910,189)................. 2,877,066
Payables:
Investment advisory fees............................................ 10,478
Dividends payable on investments sold short......................... 4,431
Other liabilities...................................................... 186
-----------------
Total Liabilities................................................... 2,892,161
-----------------
NET ASSETS............................................................. $ 14,618,203
=================
NET ASSETS CONSIST OF:
Paid-in capital........................................................ $ 14,265,636
Par value.............................................................. 4,500
Accumulated net investment income (loss)............................... 2,227
Accumulated net realized gain (loss) on investments and investments
sold short.......................................................... 204,462
Net unrealized appreciation (depreciation) on investments and
investments sold short.............................................. 141,378
-----------------
NET ASSETS............................................................. $ 14,618,203
=================
NET ASSET VALUE, per share............................................. $ 32.48
=================
Number of shares outstanding (unlimited number of
shares authorized, par value $0.01 per share)....................... 450,002
=================
See Notes to Financial Statements Page 13
FIRST TRUST LONG/SHORT EQUITY ETF (FTLS)
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED APRIL 30, 2015 (UNAUDITED)
INVESTMENT INCOME:
Dividends.............................................................. $ 77,800
Other.................................................................. 2
-----------------
Total investment income............................................. 77,802
-----------------
EXPENSES:
Investment advisory fees............................................... 34,313
Dividend expense on investments sold short............................. 19,871
-----------------
Total expenses...................................................... 54,184
-----------------
NET INVESTMENT INCOME (LOSS)........................................... 23,618
-----------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments......................................................... (160,791)
In-kind redemptions................................................. 418,430
Short Sales......................................................... (52,903)
-----------------
Net realized gain (loss)............................................ 204,736
Net change in unrealized appreciation (depreciation) on:
Investments......................................................... 56,980
Short Positions..................................................... 35,299
-----------------
Net change in unrealized appreciation (depreciation)................... 92,279
-----------------
NET REALIZED AND UNREALIZED GAIN (LOSS)................................ 297,015
-----------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS..................................................... $ 320,633
=================
Page 14 See Notes to Financial Statements
FIRST TRUST LONG/SHORT EQUITY ETF (FTLS)
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE
SIX MONTHS FOR THE PERIOD
ENDED 9/8/2014 (a)
4/30/2015 THROUGH
(UNAUDITED) 10/31/2014
-------------- ---------------
OPERATIONS:
Net investment income (loss)............................................... $ 23,618 $ 4,614
Net realized gain (loss)................................................... 204,736 1,726
Net change in unrealized appreciation (depreciation)....................... 92,279 49,099
----------- -----------
Net increase (decrease) in net assets resulting from operations............ 320,633 55,439
----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income...................................................... (24,385) (1,620)
Net realized gain.......................................................... (2,000) --
----------- -----------
Total distributions to shareholders........................................ (26,385) (1,620)
----------- -----------
SHAREHOLDER TRANSACTIONS:
Proceeds from shares sold.................................................. 16,151,655 3,000,060
Cost of shares redeemed.................................................... (4,881,579) --
----------- -----------
Net increase (decrease) in net assets resulting from
shareholder transactions................................................ 11,270,076 3,000,060
----------- -----------
Total increase (decrease) in net assets.................................... 11,564,324 3,053,879
NET ASSETS:
Beginning of period........................................................ 3,053,879 --
----------- -----------
End of period.............................................................. $14,618,203 $ 3,053,879
=========== ===========
Accumulated net investment income (loss) at end of period.................. $ 2,227 $ 2,994
=========== ===========
CHANGES IN SHARES OUTSTANDING:
Shares outstanding, beginning of period.................................... 100,002 --
Shares sold................................................................ 500,000 100,002
Shares redeemed............................................................ (150,000) --
----------- -----------
Shares outstanding, end of period.......................................... 450,002 100,002
=========== ===========
(a) Inception date is consistent with the commencement of investment
operations and is the date the initial creation units were established.
See Notes to Financial Statements Page 15
FIRST TRUST LONG/SHORT EQUITY ETF (FTLS)
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
SIX MONTHS FOR THE PERIOD
ENDED 9/8/2014 (a)
4/30/2015 THROUGH
(UNAUDITED) 10/31/2014
-------------- ---------------
Net asset value, beginning of period.......... $ 30.54 $ 30.00
---------- -----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss).................. 0.16 0.05
Net realized and unrealized gain (loss)....... 1.96 0.51
---------- -----------
Total from investment operations.............. 2.12 0.56
---------- -----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income......................... (0.16) (0.02)
Net realized gain............................. (0.02) --
---------- -----------
Total distributions........................... (0.18) (0.02)
---------- -----------
Net asset value, end of period................ $ 32.48 $ 30.54
========== ===========
TOTAL RETURN (b).............................. 6.96% 1.86%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's).......... $ 14,618 $ 3,054
RATIOS TO AVERAGE NET ASSETS:
Ratio of total expenses to average net
assets..................................... 1.50% (c) 1.17% (c)
Ratio of total expenses to average net assets
excluding dividend expense................. 0.95% (c) 0.95% (c)
Ratio of net investment income (loss) to
average net assets......................... 0.65% (c) 1.08% (c)
Portfolio turnover rate (d)................... 149% 1%
(a) Inception date is consistent with the commencement of investment
operations and is the date the initial creation units were established.
(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 and in-kind
transactions.
Page 16 See Notes to Financial Statements
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NOTES TO FINANCIAL STATEMENTS
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FIRST TRUST LONG/SHORT EQUITY ETF (FTLS)
APRIL 30, 2015 (UNAUDITED)
1. ORGANIZATION
First Trust Exchange-Traded Fund III (the "Trust") is a non-diversified open-end
management investment company organized as a Massachusetts business trust on
January 9, 2008, and is registered with the Securities and Exchange Commission
under the Investment Company Act of 1940, as amended (the "1940 Act").
The Trust currently consists of four funds that are offering shares. This report
covers the First Trust Long/Short Equity ETF (the "Fund"), which trades under
the ticker "FTLS" on the NYSE Arca, Inc. 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, a combination of
both. Except when aggregated in Creation Units, the shares are not redeemable
securities of the Fund.
The investment objective of the Fund is to seek to provide investors with
long-term total return. The Fund pursues its investment objective by
establishing long and short positions in a portfolio of equity securities. Under
normal circumstances, at least 80% of the Fund's net assets (plus the amount of
any borrowing for investment purposes) will be exposed to U.S. exchange-listed
equity securities of U.S. and foreign companies by investing in such securities
directly and/or in U.S. exchange-traded funds ("ETFs") that provide exposure to
such securities. The equity securities held by the Fund may include U.S.
exchange-listed equity securities of foreign issuers, as well as investments in
the equity securities of foreign issuers that are in the form of depositary
receipts. 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 following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of the financial statements. The
preparation of the financial statements in accordance with accounting principles
generally accepted in the United States of America ("U.S. GAAP") requires
management to make estimates and assumptions that affect the reported amounts
and disclosures in the financial statements. Actual results could differ from
those estimates.
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. If the NYSE closes early on a valuation day, the NAV
is determined as of that time. Domestic debt securities and foreign securities
are priced using data reflecting the earlier closing of the principal markets
for those securities. The Fund's NAV is calculated by dividing the value of all
assets of the Fund (including accrued interest and dividends), less all
liabilities (including accrued expenses and dividends declared but unpaid), by
the total number of shares outstanding.
The Fund's investments are valued daily at market value or, in the absence of
market value with respect to any portfolio securities, at fair value. Market
value prices represent 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:
Common stocks and other equity securities listed on any national or
foreign exchange (excluding The NASDAQ(R) Stock Market LLC ("NASDAQ") and
the London Stock Exchange Alternative Investment Market ("AIM")) are
valued at the last sale price on the exchange on which they are
principally traded or, for NASDAQ and AIM securities, the official closing
price. Securities traded on one or more than one securities exchange are
valued at the last sale price or official closing price, as applicable, at
the close of the securities exchange representing the principal market for
such securities.
Securities traded in an over-the-counter market are fair valued at the
mean of their most recent bid and asked price, if available, and otherwise
at their closing bid price.
Certain securities may not be able to be priced by pre-established pricing
methods. Such securities may be valued by the Trust's Board of Trustees or its
delegate, the Advisor's Pricing Committee, at fair value. These securities
generally include, but are not limited to, restricted securities (securities
which may not be publicly sold without registration under the Securities Act of
1933, as amended), for which a pricing service is unable to provide a market
price; securities whose trading has been formally suspended; a
Page 17
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FIRST TRUST LONG/SHORT EQUITY ETF (FTLS)
APRIL 30, 2015 (UNAUDITED)
security whose market or fair value price is not available from a
pre-established pricing source; a security with respect to which an event has
occurred that is likely to materially affect the value of the security after the
market has closed but before the calculation of the Fund's NAV or make it
difficult or impossible to obtain a reliable market quotation; and a security
whose price, as provided by the pricing service, does not reflect the security's
fair value. As a general principle, the current fair value of a security would
appear to be the amount which the owner might reasonably expect to receive for
the security upon its current sale. When fair value prices are used, generally
they will differ from market quotations or official closing prices on the
applicable exchanges. A variety of factors may be considered in determining the
fair value of such securities, including, but not limited to, the following:
1) the type of security;
2) the size of the holding;
3) the initial cost of the security;
4) transactions in comparable securities;
5) price quotes from dealers and/or pricing services;
6) relationships among various securities;
7) information obtained by contacting the issuer, analysts, or the
appropriate stock exchange;
8) an analysis of the issuer's financial statements; and
9) the existence of merger proposals or tender offers that might affect
the value of the security.
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 methodologies used for valuing investments are not necessarily an
indication of the risk associated with investing in those investments. A summary
of the inputs used to value the Fund's investments as of April 30, 2015, is
included with the Fund's Portfolio of Investments.
B. SECURITIES TRANSACTIONS AND INVESTMENT INCOME
Securities transactions are recorded as of the trade date. Realized gains and
losses from securities transactions are recorded on the identified cost basis.
Dividend income is recorded on the ex-dividend date. Interest income, if any, is
recorded on the accrual basis.
Distributions received from the Fund's investments in real estate investment
trusts ("REITs") may be comprised of return of capital, capital gains and
income. The actual character of the amounts received during the year are not
known until after the REIT's fiscal year end. The Fund records the character of
distributions received from the REITs during the year based on estimates
available. The characterization of distributions received by the Fund may be
subsequently revised based on information received from the REITs after their
tax reporting periods conclude.
C. SHORT SALES
Short sales are utilized for investment and risk management purposes and are
transactions in which securities or other instruments (such as options forwards,
futures or other derivative contracts) are sold that are not currently owned in
the Fund's portfolio. When the Fund engages in a short sale, the Fund must
borrow the security sold short and deliver the security to the counterparty.
Short selling allows the Fund to profit from a decline in a market price to the
extent such decline exceeds the transaction costs and the
Page 18
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST LONG/SHORT EQUITY ETF (FTLS)
APRIL 30, 2015 (UNAUDITED)
costs of borrowing the securities. The Fund will pay a fee or premium to borrow
the securities sold short and is obligated to repay the lenders of the
securities. Any dividends or interest that accrues on the securities during the
period of the loan are due to the lenders. A gain, limited to the price at which
the security was sold short, or a loss, unlimited in size, will be recognized
upon the termination of the short sale; which is effected by the Fund purchasing
the security sold short in the market or otherwise and delivering the security
to the lender. Any such gain or loss may be offset, completely or in part, by
the change in the value of the long portion of the Fund's portfolio. The Fund is
subject to the risk that it may be unable to reacquire a security to terminate a
short position except at a price substantially in excess of the last quoted
price. Also, there is the risk that the counterparty to a short sale may fail to
honor its contractual terms, causing a loss to the Fund. The Fund has
established an account with Pershing, LLC ("Pershing") for the purpose of
purchasing securities on margin. The Fund pays interest on any margin balance,
which is calculated as the daily margin account balance times the broker's
margin interest rate. Restricted cash in the amount of $2,837,371, as shown on
the Statement of Assets and Liabilities, is associated with collateral at the
broker as of April 30, 2015.
D. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
Dividends from net investment income, if any, are declared and paid quarterly,
or as the Board of Trustees may determine from time to time. Distributions of
net realized capital gains earned by the Fund, if any, will be distributed at
least annually.
Distributions from income and capital gains are determined in accordance with
income tax regulations, which may differ from U.S. GAAP. Certain capital
accounts in the financial statements are periodically adjusted for permanent
differences in order to reflect their tax character. These permanent differences
are primarily due to the varying treatment of income and gain/loss on portfolio
securities held by the Fund and have no impact on net assets or net asset value
per share. Temporary differences, which arise from recognizing certain items of
income, expense and gain/loss in different periods for financial statement and
tax purposes, will reverse at some time in the future.
The tax character of distributions paid during the fiscal period ended October
31, 2014 was as follows:
Distributions paid from:
Ordinary income.................................... $ 1,620
As of October 31, 2014, the components of distributable earnings on a tax basis
to the Fund were as follows:
Undistributed ordinary income...................... $ 4,502
Accumulated capital and other losses............... 218
Net unrealized appreciation (depreciation)......... 49,099
E. INCOME TAXES
The Fund intends to qualify as a regulated investment company by complying with
the requirements under Subchapter M of the Internal Revenue Code of 1986, as
amended, which includes distributing substantially all of its net investment
income and net realized gains to shareholders. Accordingly, no provision has
been made for federal 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 Fund is subject to accounting standards that establish a minimum threshold
for recognizing, and a system for measuring, the benefits of a tax position
taken or expected to be taken in a tax return. The taxable year ended 2014
remains open to federal and state audit. As of April 30, 2015, management has
evaluated the application of these standards to the Fund, and has determined
that no provision for income tax is required in the Fund's financial statements
for uncertain tax positions.
Net capital losses may be carried forward indefinitely, and their character is
retained as short-term and/or long-term losses. At October 31, 2014, the Fund
had no net capital losses for federal income tax purposes. The Fund is subject
to certain limitations, under U.S. tax rules, on the use of capital loss
carryforwards and net unrealized built-in losses. These limitations apply when
there has been a 50% change in ownership.
F. EXPENSES
Expenses, other than the investment advisory fee, dividend expenses on
investments sold short and other excluded expenses, are paid by the Advisor (See
Note 3).
Page 19
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST LONG/SHORT EQUITY ETF (FTLS)
APRIL 30, 2015 (UNAUDITED)
3. INVESTMENT ADVISORY FEE, AFFILIATED TRANSACTIONS AND OTHER FEE ARRANGEMENTS
First Trust, the investment advisor to the Fund, is a limited partnership with
one limited partner, Grace Partners of DuPage L.P., and one general partner, The
Charger Corporation. The Charger Corporation is an Illinois corporation
controlled by James A. Bowen, Chief Executive Officer of First Trust. First
Trust is responsible for the selection and ongoing monitoring of the securities
in the Fund's portfolio, managing the Fund's business affairs and providing
certain administrative services necessary for the management of the Fund.
Pursuant to the Investment Management Agreement between the Trust and the
Advisor, First Trust manages the investment of the Fund's assets and is
responsible for the Fund's expenses, including the cost of transfer agency,
custody, fund administration, legal, audit and other services, but excluding fee
payments under the Investment Management Agreement, interest, taxes, brokerage
commissions and other expenses connected with the execution of portfolio
transactions, distribution and service fees pursuant to a 12b-1 plan, if any,
dividend expenses on investments sold short, 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 service agreements, BBH performs custodial, fund accounting,
certain administrative services, and transfer agency services for the Fund. As
custodian, BBH is responsible for custody of the Fund's assets. As fund
accountant and administrator, BBH is responsible for maintaining the books and
records of the Fund's securities and cash. As transfer agent, BBH is responsible
for maintaining shareholder records for the Fund.
Each Trustee who is not an officer or employee of First Trust, any sub-advisor
or any of their affiliates ("Independent Trustees") is paid a fixed annual
retainer that is allocated 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 SECURITIES
For the period ended April 30, 2015, the cost of purchases and proceeds from
sales of investments, excluding short-term investments and in-kind transactions,
for the Fund were $6,123,334 and $6,218,151, respectively. The cost of purchases
to cover short sales and the proceeds of short sales were $2,290,735 and
$4,538,894, respectively.
For the period ended April 30, 2015, the cost of in-kind purchases and proceeds
from in-kind sales for the Fund was $16,097,934 and $4,859,907, respectively.
5. CREATIONS, REDEMPTIONS AND TRANSACTION FEES
Shares are created and redeemed by the Fund only in Creation Unit size
aggregations of 50,000 shares in transactions with broker-dealers or large
institutional investors that have entered into a participation agreement (an
"Authorized Participant"). In order to purchase Creation Units of the Fund, an
Authorized Participant must deposit (i) a designated portfolio of equity
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 Authorized Participant 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 Authorized
Participant 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 Creation Transaction fee is currently $550. The price
for each Creation Unit will equal the daily NAV per
Page 20
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST LONG/SHORT EQUITY ETF (FTLS)
APRIL 30, 2015 (UNAUDITED)
share times the number of shares in a Creation Unit plus the fees described
above and, if applicable, any operational processing and brokerage costs,
transfer fees or stamp taxes. When 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.
Authorized Participants 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 $550. 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.
6. DISTRIBUTION PLAN
The Board of Trustees adopted a Distribution and Service Plan pursuant to Rule
12b-1 under the 1940 Act. In accordance with the Rule 12b-1 plan, the 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 September 4, 2016.
7. INDEMNIFICATION
The Trust, on behalf of the Fund, has a variety of indemnification obligations
under contracts with its service providers. The Trust's maximum exposure under
these arrangements is unknown. However, the Trust has not had prior claims or
losses pursuant to these contracts and expects the risk of loss to be remote.
8. ADOPTION OF NON-FUNDAMENTAL INVESTMENT POLICY
On March 27, 2015, the Board of Trustees of the Fund approved the adoption of a
non-fundamental investment policy regarding the Fund's ability to invest in
other investment companies (the "Policy"). Pursuant to the Policy, beginning on
or about June 7, 2015, the Fund will not rely on Section 12(d)(1)(F) or
12(d)(1)(G) of the Investment Company Act of 1940, as amended, to invest in
other investment companies.
9. SUBSEQUENT EVENTS
Management has evaluated the impact of all subsequent events to the Fund through
the date the financial statements were issued, and has determined there were no
subsequent events requiting recognition or disclosure in the financial
statements.
Page 21
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ADDITIONAL INFORMATION
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FIRST TRUST LONG/SHORT EQUITY ETF (FTLS)
APRIL 30, 2015 (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 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
is 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.
RISK CONSIDERATIONS
You could lose money by investing in the Fund. An investment in the Fund is not
a deposit of a bank and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other governmental agency. There can be no
assurance that the Fund's investment objective will be achieved.
CASH TRANSACTIONS RISK. The Fund may, under certain circumstances, affect a
portion of creations and redemptions for cash, rather than in-kind securities,
particularly for the puts and call options in which the Fund invests. As a
result, an investment in the Fund may be less tax-efficient than an investment
in an ETF that effects its creations and redemption for in-kind securities.
Because the Fund may affect a portion of redemptions for cash, it may be
required to sell portfolio securities in order to obtain the cash needed to
distribute redemption proceeds. A sale of shares may result in capital gains or
losses, and may also result in higher brokerage costs.
DEPOSITARY RECEIPTS RISK. Depositary receipts may be less liquid than the
underlying shares in their primary trading market. Any distributions paid to the
holders of depositary receipts are usually subject to a fee charged by the
depositary. Holders of depositary receipts may have limited voting rights, and
investment restrictions in certain countries may adversely impact the value of
depositary receipts because such restrictions may limit the ability to convert
the equity shares into depositary receipts and vice versa. Such restrictions may
cause the equity shares of the underlying issuer to trade at a discount or
premium to the market price of the depositary receipts.
DERIVATIVES RISK. The use of futures and other derivatives can lead to losses
because of adverse movements in the price or value of the underlying asset,
index or rate, which may be magnified by certain features of the derivatives.
These risks are heightened when the Fund's portfolio managers use derivatives to
enhance the Fund's return or as a substitute for a position or security, rather
than solely to hedge (or offset) the risk of a position or security held by the
Fund.
EQUITY SECURITIES RISK. The Fund invests in Equity Securities. The value of the
shares will fluctuate with changes in the value of these Equity Securities.
Equity Securities prices fluctuate for several reasons, including changes in
investors' perceptions of the financial condition of an issuer or the general
condition of the relevant stock market, such as the current market volatility,
or when political or economic events affecting the issuers occur. In addition,
common stock prices may be particularly sensitive to rising interest rates, as
the cost of the capital rises and borrowing costs increase.
ETF RISK. The Fund may invest in the shares of other ETFs, and therefore, the
Fund's investment performance and risks may be related to the investment
performance and risks of the underlying ETFs. In general, as a shareholder in
other ETFs, the Fund bears its ratable share of the underlying ETF's expenses,
and would be subject to duplicative expenses to the extent the Fund invests in
other ETFs.
MANAGEMENT RISK. The Fund is subject to management risk because it is an
actively managed portfolio. In managing the Fund's investment portfolio, the
Fund's investment advisor will apply investment techniques and risk analyses
that may not have the desired result. There can be no guarantee that the Fund
will meet its investment objective.
Page 22
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST LONG/SHORT EQUITY ETF (FTLS)
APRIL 30, 2015 (UNAUDITED)
MARKET RISK. Market risk is the risk that a particular security owned by the
Fund or shares of the Fund in general may fall in value. Securities are subject
to market fluctuations caused by such factors as economic, political, regulatory
or market developments, changes in interest rates and perceived trends in
securities prices. Overall securities values could decline generally or could
underperform other investments.
NEW FUND RISK. The Fund currently has fewer assets than larger funds, and like
other relatively new funds, large inflows and outflows may impact the Fund's
market exposure for limited periods of time. This impact may be positive or
negative, depending on the direction of market movement during the period
affected. Also, during the initial invest-up period, the Fund may depart from
its principal investment strategies and invest a larger amount or all of its
assets in cash equivalents or it may hold cash.
NON-DIVERSIFICATION RISK. The Fund is classified as "non-diversified" under the
Investment Company Act of 1940, as amended (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 invested in certain issuers.
NON-U.S. SECURITIES RISK. The Fund holds non-U.S. securities that are either
directly listed on a U.S. securities exchange or in the form of depositary
receipts. Non-U.S. securities are subject to higher volatility than securities
of domestic issuers due to possible adverse political, social or economic
developments; restrictions on foreign investment or exchange of securities; lack
of liquidity; currency exchange rates; excessive taxation; government seizure of
assets; different legal or accounting standards; and less government supervision
and regulation of exchanges in foreign countries.
SHORT SALES RISK. The Fund will incur a loss as a result of a short sale if the
price of the security sold short increases in value between the date of the
short sale and the date on which the Fund purchases the security to replace the
borrowed security. In addition, a lender of a security may request, or market
conditions may dictate, that securities sold short be returned to the lender on
short notice, which may result in the Fund having to buy the securities sold
short at an unfavorable price. If this occurs, any anticipated gain to the Fund
may be reduced or eliminated or the short sale may result in a loss. In a rising
stock market, the Fund's short positions may significantly impact the Fund's
overall performance and cause the Fund to underperform traditional long-only
equity funds or to sustain losses, particularly in a sharply rising market. The
use of short sales may also cause the Fund to have higher expenses than other
funds.
Page 23
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FIRST TRUST
First Trust Exchange-Traded Fund III
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]
FIRST TRUST
First Trust Exchange-Traded Fund III
------------------------------------
First Trust Emerging Markets Local Currency Bond ETF (FEMB)
Semi-Annual Report
For the Period
November 4, 2014
(Commencement of Operations)
through April 30, 2015
--------------------------------------------------------------------------------
TABLE OF CONTENTS
--------------------------------------------------------------------------------
FIRST TRUST EMERGING MARKETS LOCAL CURRENCY BOND ETF (FEMB)
SEMI-ANNUAL REPORT
APRIL 30, 2015
Shareholder Letter......................................................... 1
Fund Performance Overview.................................................. 2
Portfolio Management....................................................... 5
Understanding Your Fund Expenses........................................... 6
Portfolio of Investments................................................... 7
Statement of Assets and Liabilities........................................ 11
Statement of Operations.................................................... 12
Statement of Changes in Net Assets......................................... 13
Financial Highlights....................................................... 14
Notes to Financial Statements.............................................. 15
Additional Information..................................................... 22
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") or First Trust Global Portfolios Ltd. (the
"Sub-Advisor") and their respective representatives, taking into account the
information currently available to them. Forward-looking statements include all
statements that do not relate solely to current or historical fact. For example,
forward-looking statements include the use of words such as "anticipate,"
"estimate," "intend," "expect," "believe," "plan," "may," "should," "would" or
other words that convey uncertainty of future events or outcomes.
Forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
the series of First Trust Exchange-Traded Fund III (the "Trust") described in
this report for the First Trust Emerging Markets Local Currency Bond ETF
(hereinafter referred to as the "Fund") to be materially different from any
future results, performance or achievements expressed or implied by the
forward-looking statements. When evaluating the information included in this
report, you are cautioned not to place undue reliance on these forward-looking
statements, which reflect the judgment of the Advisor and/or Sub-Advisor and
their respective representatives only as of the date hereof. We undertake no
obligation to publicly revise or update these forward-looking statements to
reflect events and circumstances that arise after the date hereof.
PERFORMANCE AND RISK DISCLOSURE
There is no assurance that the Fund will achieve its investment objective. The
Fund is subject to market risk, which is the possibility that the market values
of securities owned by the Fund will decline and that the value of the Fund
shares may therefore be less than what you paid for them. Accordingly, you can
lose money by investing in the Fund. See "Risk Considerations" in the Additional
Information section of this report for a discussion of certain other risks of
investing in the Fund.
Performance data quoted represents past performance, which is no guarantee of
future results, and current performance may be lower or higher than the figures
shown. For the most recent month-end performance figures, please visit
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 in
the Fund. 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.
The material risks of investing in the Fund are spelled out in its prospectus,
statement of additional information, this report and other Fund regulatory
filings.
--------------------------------------------------------------------------------
SHAREHOLDER LETTER
--------------------------------------------------------------------------------
FIRST TRUST EMERGING MARKETS LOCAL CURRENCY BOND ETF (FEMB)
SEMI-ANNUAL LETTER FROM THE CHAIRMAN AND CEO
APRIL 30, 2015
Dear Shareholders:
Thank you for your investment in First Trust Emerging Markets Local Currency
Bond ETF (the "Fund").
First Trust Advisors L.P. ("First Trust") is pleased to provide you with the
semi-annual report which contains detailed information about your investment for
the six months ended April 30, 2015. Additionally, First Trust compiles the
Fund's financial statements for you to review. We encourage you to read this
report and discuss it with your financial advisor.
U.S. markets, fueled by accelerating growth and an accommodating Federal
Reserve, enjoyed a prosperous year in 2014. However, for the six months covered
by this report, there was only modest global economic growth. Several
geopolitical events, including trade sanctions between the U.S./Europe and
Russia due to its conflict with Ukraine, low interest rate levels on government
bonds in most developed nations, and the absence of any significant inflationary
pressures, weighed on global markets.
As I have written previously, First Trust believes investors should maintain
perspective about the markets and have realistic expectations about their
investments. Markets will always go up and down, but we believe that having a
long-term investment horizon and being invested in quality products can help you
reach your goals.
Thank you for giving First Trust the opportunity to be a part of your investment
plan. We value the relationship and will continue to focus on our disciplined
investment approach and long-term perspective to help investors reach their
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
--------------------------------------------------------------------------------
FUND PERFORMANCE OVERVIEW (UNAUDITED)
--------------------------------------------------------------------------------
FIRST TRUST EMERGING MARKETS LOCAL CURRENCY BOND ETF (FEMB)
First Trust Emerging Markets Local Currency Bond ETF (the "Fund") seeks maximum
total return and current income. The Fund lists and principally trades its
shares on The NASDAQ Stock Market LLC ("NASDAQ") under the ticker symbol "FEMB."
Under normal market conditions, the Fund seeks to achieve its investment
objective by investing at least 80% of its net assets (including investment
borrowings) in bonds, notes and bills issued or guaranteed by entities in
emerging market countries (collectively, "Bonds") that are denominated in the
local currency of the issuer.
In implementing the Fund's investment strategy, First Trust Global Portfolios
Ltd. (the "Sub-Advisor") will seek to provide current income and enhance
capital, while minimizing volatility. The Sub-Advisor will continually review
fundamental economic and structural themes that impact long and medium term
asset returns in emerging markets. The Sub-Advisor will also consider
shorter-term market drivers such as valuations, liquidity conditions and
sentiment to determine the appropriate positioning of the Fund's investments.
The Sub-Advisor will adjust the portfolio's country allocations, duration and
individual security positioning to reflect what the Sub-Advisor believes to be
the most attractive opportunities on a continuous basis.
The Fund may invest in foreign currencies and derivative instruments, including
exchange-listed futures contracts, exchange-listed options, exchange-listed
options on futures contracts, forward currency contracts, non-deliverable
forward currency contracts and exchange-listed currency options. The Fund will
use foreign currencies and derivative instruments primarily to hedge interest
rate risk and actively manage interest rate exposure and to hedge foreign
currency risk and actively manage foreign currency exposure. The Fund may also
use derivative instruments to enhance returns, as a substitue for, or to gain
exposure to, a position in an underlying asset, to reduce transaction costs, to
maintain full market exposure, to manage cash flows or to preserve capital.
---------------------------------------------------------------------------------------------------------
PERFORMANCE
---------------------------------------------------------------------------------------------------------
CUMULATIVE
TOTAL RETURNS
Inception (11/4/14)
to 4/30/14
FUND PERFORMANCE
NAV -6.60%
Market Price -6.49%
INDEX PERFORMANCE
Barclays Emerging Markets Local Currency Government - 10% Country Capped Index -5.50%
---------------------------------------------------------------------------------------------------------
Total returns for the periods since inception are calculated from the inception
date of the Fund. "Cumulative total returns" represent the total change in value
of an investment over the period indicated.
The Fund's per share net asset value ("NAV") is the value of one share of the
Fund and is computed by dividing the value of all assets of the Fund (including
accrued interest and dividends), less all liabilities (including accrued
expenses and dividends declared but unpaid), by the total number of outstanding
shares. The price used to calculate market return ("Market Price") is determined
by using the midpoint 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 distributions have been
reinvested in the Fund at NAV and Market Price, respectively.
An index is a statistical composite that tracks a specified financial market or
sector. Unlike the Fund, the index does not actually hold a portfolio of
securities and therefore does not incur the expenses incurred by the Fund. These
expenses negatively impact the performance of the Fund. Also, market returns do
not include brokerage commissions that may be payable on secondary market
transactions. If brokerage commissions were included, market returns would be
lower. The total returns presented reflect the reinvestment of dividends on
securities in the index. 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.
Page 2
--------------------------------------------------------------------------------
FUND PERFORMANCE OVERVIEW (UNAUDITED) (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST EMERGING MARKETS LOCAL CURRENCY BOND ETF (FEMB)
-----------------------------------------------------------
SECTOR ALLOCATION AS OF APRIL 30, 2015
-----------------------------------------------------------
% OF TOTAL
SECTOR INVESTMENTS
Sovereigns 85.0%
Supranationals 9.9
Central Bank 5.1
-------
Total 100.0%
=======
-----------------------------------------------------------
CREDIT QUALITY AS OF APRIL 30, 2015
-----------------------------------------------------------
% OF TOTAL
INVESTMENTS
CREDIT RATING(1) (INCLUDING CASH)
AAA 9.7%
A+ 3.4
A 17.7
A- 9.5
BBB+ 20.8
BBB 17.4
BBB- 14.5
NR 5.0
Cash 2.0
-------
Total 100.0%
=======
-----------------------------------------------------------
TOP 10 HOLDINGS AS OF APRIL 30, 2015
-----------------------------------------------------------
% OF TOTAL
TOP 10 HOLDINGS INVESTMENTS
Brazil Notas do Tesouro Nacional, Series F,
10.00%, 1/1/21 8.4%
Poland Government Bond, 4.00%, 10/25/23 8.0
Turkey Government Bond, 10.50%, 1/15/20 7.4
South Africa Government Bond, 10.50%,
12/21/26 5.7
Philippine Government International Bond,
3.90%, 11/26/22 5.4
Indonesia Treasury Bond, 8.38%, 3/15/24 5.2
Bonos del Banco Central de Chile en Pesos,
6.00%, 2/1/21 5.1
Romania Government Bond, 5.85%, 4/26/23 5.0
Malaysia Government Bond, 4.38%, 11/29/19 5.0
Peru Government Bond, 7.84%, 8/12/20 5.0
-------
Total 60.2%
=======
(1) The credit quality and ratings information presented above reflect the
ratings assigned by one or more nationally recognized statistical rating
organizations (NRSROs), including Standard & Poor's Ratings Group, a
division of The McGraw-Hill Companies, Inc., Moody's Investors Service,
Inc., Fitch Ratings or a comparably rated NRSRO. For situations in which a
security is rated by more than one NRSRO and the ratings are not
equivalent, the highest ratings are used. Sub-investment grade ratings are
those rated BB+/Ba1 or lower. Investment grade ratings are those rated
BBB-/Baa3 or higher. The credit ratings shown relate to the
creditworthiness of the issuers of the underlying securities in the Fund,
and not to the Fund or its shares. Credit ratings are subject to change.
Page 3
--------------------------------------------------------------------------------
FUND PERFORMANCE OVERVIEW (UNAUDITED) (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST EMERGING MARKETS LOCAL CURRENCY BOND ETF (FEMB)
PERFORMANCE OF A $10,000 INITIAL INVESTMENT
NOVEMBER 4, 2014 - APRIL 30, 2015
First Trust Emerging Markets Barclays Emerging Markets Local Currency
Local Currency Bond ETF Government - 10% Country Capped Index
5/13/14 $10,000 $10,000
10/31/14 9,340 9,450
Performance figures assume reinvestment of all distributions and do not reflect
the deduction of taxes that a shareholder would pay on Fund distributions or the
redemption or sale of Fund shares. An index is a statistical composite that
tracks a specified financial market or sector. Unlike the Fund, the index does
not actually hold a portfolio of securities and therefore does 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 APRIL 30, 2015
The following Frequency Distribution of Discounts and Premiums charts are
provided to show the frequency at which the bid/ask midpoint price for the Fund
was at a discount or premium to the daily NAV. The following tables are for
comparative purposes only and represent the period November 5, 2014
(commencement of trading) through April 30, 2015. 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.
--------------------------------------------------------------------------------
NUMBER OF DAYS BID/ASK MIDPOINT AT/ABOVE NAV
--------------------------------------------------------------------------------
FOR THE PERIOD 0.00%-0.49% 0.50%-0.99% 1.00%-1.99% >=2.00%
11/5/14 - 4/30/15 83 25 0 0
--------------------------------------------------------------------------------
NUMBER OF DAYS BID/ASK MIDPOINT BELOW NAV
--------------------------------------------------------------------------------
FOR THE PERIOD 0.00%-0.49% 0.50%-0.99% 1.00%-1.99% >=2.00%
11/5/14 - 4/30/15 13 0 0 0
Page 4
--------------------------------------------------------------------------------
PORTFOLIO MANAGEMENT
--------------------------------------------------------------------------------
FIRST TRUST EMERGING MARKETS LOCAL CURRENCY BOND ETF (FEMB)
SEMI-ANNUAL REPORT
APRIL 30, 2015 (UNAUDITED)
INVESTMENT ADVISOR
First Trust Advisors L.P. ("First Trust" or the "Advisor"), 120 East Liberty
Drive, Wheaton, Illinois 60187, is the investment advisor to the Fund. First
Trust Global Portfolios Ltd. ("FTGP"), an affiliate of First Trust, serves as
investment sub-advisor to the Fund.
INVESTMENT SUB-ADVISOR
FTGP will act as a sub-advisor of the Fund and is headed by Derek Fulton, a
director, chief executive officer and chief investment officer of FTGP. Mr.
Fulton has been managing global portfolios with a focus on fixed income for over
15 years. Prior to joining FTGP in 2011, he co-founded ISIS Asset Management
("ISIS AM") and led its investment team. Before starting ISIS AM he was Head of
Global & Closed-End Fixed Income Portfolios at Aberdeen Asset Management
("Aberdeen") in London and also held positions as Head of Asian Fixed Income
based in Singapore. At Aberdeen, Mr. Fulton oversaw in excess of $10 billion of
assets including institutional global government and global aggregate accounts.
He was also a member of the currency team running active currency overlays on
over $20 billion of institutional mandates.
PORTFOLIO MANAGEMENT TEAM
The following portfolio managers are primarily responsible for the day-to-day
management of the Fund. Each portfolio manager has managed the Fund since 2014.
DEREK FULTON, CHIEF EXECUTIVE OFFICER AND CHIEF INVESTMENT OFFICER, FTGP
LEONARDO DA COSTA, PORTFOLIO MANAGER, FTGP
Page 5
FIRST TRUST EMERGING MARKETS LOCAL CURRENCY BOND ETF (FEMB)
UNDERSTANDING YOUR FUND EXPENSES
APRIL 30, 2015 (UNAUDITED)
As a shareholder of First Trust Emerging Markets Local Currency Bond ETF (the
"Fund") you incur two types of costs: (1) transaction costs; and (2) ongoing
costs, including management fees, distribution and/or service fees, if any, and
other Fund expenses. This Example is intended to help you understand your
ongoing costs of investing in the Fund and to compare these costs with the
ongoing costs of investing in other funds.
The Example is based on an investment of $1,000 invested at the beginning of the
period (or since inception) and held through the six-month (or shorter) period
ended April 30, 2015.
ACTUAL EXPENSES
The first line in the following table provides information about actual account
values and actual expenses. You may use the information in this line, together
with the amount you invested, to estimate the expenses that you paid over the
period. Simply divide your account value by $1,000 (for example, an $8,600
account value divided by $1,000 = 8.6), then multiply the result by the number
in the first line under the heading entitled "Expenses Paid During the Period"
to estimate the expenses you paid on your account during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second line in the following table provides information about hypothetical
account values and hypothetical expenses based on the 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.
------------------------------------------------------------------------------------------------------------------------------
ANNUALIZED EXPENSES PAID
EXPENSE RATIO DURING THE PERIOD
BEGINNING ENDING BASED ON THE NOVEMBER 4, 2014 (a)
ACCOUNT VALUE ACCOUNT VALUE NUMBER OF DAYS TO
NOVEMBER 4, 2014 (a) APRIL 30, 2015 IN THE PERIOD APRIL 30, 2015 (b)
------------------------------------------------------------------------------------------------------------------------------
FIRST TRUST EMERGING MARKETS LOCAL CURRENCY BOND ETF (FEMB)
Actual $1,000.00 $ 934.00 0.85% $3.99
Hypothetical (5% return before expenses) $1,000.00 $1,020.12 0.85% $4.16
(a) Inception Date.
(b) Actual expenses are equal to the annualized expense ratio as indicated in
the table, multiplied by the average account value over the period
(November 4, 2014 through April 30, 2015), multiplied by 178/365.
Hypothetical expenses are assumed for the most recent half-year period.
Page 6
FIRST TRUST EMERGING MARKETS LOCAL CURRENCY BOND ETF (FEMB)
PORTFOLIO OF INVESTMENTS
APRIL 30, 2015 (UNAUDITED)
PRINCIPAL
VALUE
(LOCAL STATED STATED VALUE
CURRENCY) DESCRIPTION COUPON MATURITY (US DOLLARS)
------------- ----------------------------------------------------------------- ------------- ---------- ------------
FOREIGN SOVEREIGN BONDS AND NOTES - 83.7%
BRAZIL - 7.8%
1,200,000 Brazil Notas do Tesouro Nacional, Series F (BRL)................. 10.00% 01/01/21 $ 356,220
------------
CHILE - 4.7%
120,000,000 Bonos del Banco Central de Chile en Pesos (CLP).................. 6.00% 02/01/21 215,317
------------
COLOMBIA - 4.4%
457,000,000 Colombian TES (COP).............................................. 7.00% 05/04/22 199,369
------------
HUNGARY - 4.2%
45,000,000 Hungary Government Bond (HUF).................................... 6.50% 06/24/19 190,618
------------
INDONESIA - 9.6%
1,280,000,000 Indonesia Treasury Bond (IDR).................................... 8.38% 03/15/34 102,445
2,720,000,000 Indonesia Treasury Bond (IDR).................................... 8.38% 03/15/24 219,541
1,500,000,000 Indonesia Treasury Bond (IDR).................................... 7.88% 04/15/19 117,049
------------
439,035
------------
ISRAEL - 3.2%
470,000 Israel Government Bond - Fixed (ILS)............................. 6.00% 02/28/19 147,136
------------
MALAYSIA - 4.6%
730,000 Malaysia Government Bond (MYR)................................... 4.38% 11/29/19 211,738
------------
MEXICO - 4.7%
500,000 Mexican Bonos (MXN).............................................. 10.00% 12/05/24 42,290
2,340,000 Mexican Bonos (MXN).............................................. 7.75% 05/29/31 174,490
------------
216,780
------------
PERU - 4.6%
580,000 Peru Government Bond (PEN)....................................... 7.84% 08/12/20 210,872
------------
PHILIPPINES - 5.0%
10,000,000 Philippine Government International Bond (PHP)................... 3.90% 11/26/22 227,778
------------
POLAND - 7.4%
1,100,000 Poland Government Bond (PLN)..................................... 4.00% 10/25/23 338,907
------------
ROMANIA - 4.6%
700,000 Romania Government Bond (RON).................................... 5.85% 04/26/23 211,764
------------
SOUTH AFRICA - 7.6%
1,600,000 South Africa Government Bond (ZAR)............................... 6.25% 03/31/36 104,840
2,400,000 South Africa Government Bond (ZAR)............................... 10.50% 12/21/26 241,145
------------
345,985
------------
THAILAND - 4.4%
6,100,000 Thailand Government Bond (THB)................................... 3.63% 06/16/23 201,806
------------
TURKEY - 6.9%
800,000 Turkey Government Bond (TRY)..................................... 10.50% 01/15/20 315,648
------------
TOTAL FOREIGN SOVEREIGN BONDS AND NOTES...................................................... 3,828,973
(Cost $4,144,620) ------------
See Notes to Financial Statements Page 7
FIRST TRUST EMERGING MARKETS LOCAL CURRENCY BOND ETF (FEMB)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2015 (UNAUDITED)
PRINCIPAL
VALUE
(LOCAL STATED STATED VALUE
CURRENCY) DESCRIPTION COUPON MATURITY (US DOLLARS)
------------- ----------------------------------------------------------------- ------------- ---------- ------------
FOREIGN CORPORATE BONDS AND NOTES - 9.2%
SUPRANATIONALS - 9.2%
1,200,000 Inter-American Development Bank (MXN)............................ 8.00% 01/26/16 $ 81,369
1,200,000 European Investment Bank (ZAR)................................... 6.00% 10/21/19 94,686
270,000 International Finance Corp. (BRL)................................ 10.00% 06/12/17 88,143
10,000,000 European Bank for Reconstruction & Development (INR)............. 6.00% 03/03/16 156,341
------------
TOTAL FOREIGN CORPORATE BONDS AND NOTES...................................................... 420,539
(Cost $463,168) ------------
TOTAL INVESTMENTS - 92.9%.................................................................... 4,249,512
(Cost $4,607,788) (a)
NET OTHER ASSETS AND LIABILITIES - 7.1%...................................................... 325,084
------------
NET ASSETS - 100.0%.......................................................................... $ 4,574,596
============
(a) Aggregate cost for financial reporting purposes, which approximates the
aggregate cost for federal income tax purposes. As of April 30, 2015, the
aggregate gross unrealized appreciation for all securities in which there
was an excess of value over tax cost was $14,058 and the aggregate gross
unrealized depreciation for all securities in which there was an excess of
tax cost over value was $372,334.
Currency Abbreviations:
BRL Brazilian Real
CLP Chile Peso
COP Colombian Peso
HUF Hungarian Forint
IDR Indonesian Rupiah
ILS Israel Shekel
INR Indian Rupee
MXN Mexican Peso
MYR Malaysian Ringgit
PEN Peruvian New Sol
PHP Philippines Peso
PLN Polish Zloty
RON Romanian Lev
THB Thailand Baht
TRY Turkish Lira
ZAR South African Rand
Page 8 See Notes to Financial Statements
FIRST TRUST EMERGING MARKETS LOCAL CURRENCY BOND ETF (FEMB)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2015 (UNAUDITED)
-----------------------------
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of April 30,
2015 is as follows (see Note 2A - Portfolio Valuation in the Notes to Financial
Statements):
ASSETS TABLE
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
INVESTMENTS 4/30/2015 PRICES INPUTS INPUTS
--------------------------------------------------- ------------- ------------- -------------- --------------
Foreign Sovereign Bonds and Notes*................. $ 3,828,973 $ -- $ 3,828,973 $ --
Foreign Corporate Bonds and Notes*................. 420,539 -- 420,539 --
------------- ------------- -------------- --------------
Total Investments.................................. 4,249,512 -- 4,249,512 --
Other Financial Instruments:
Forward Foreign Currency Contracts**............... 2,107 -- 2,107 --
------------- ------------- -------------- --------------
Total.............................................. $ 4,251,619 $ -- $ 4,251,619 $ --
============= ============= ============== ==============
LIABILITIES TABLE
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
4/30/2015 PRICES INPUTS INPUTS
------------- ------------- -------------- --------------
Forward Foreign Currency Contracts**............... $ (422) $ -- $ (422) $ --
============= ============= ============== ==============
* See the Portfolio of Investments for country breakout.
** See the Forward Foreign Currency Contracts for contract and currency detail.
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 April 30, 2015.
See Notes to Financial Statements Page 9
FIRST TRUST EMERGING MARKETS LOCAL CURRENCY BOND ETF (FEMB)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2015 (UNAUDITED)
--------------------------------------------
% OF TOTAL
CURRENCY EXPOSURE INVESTMENTS
DIVERSIFICATION (INCLUDING CASH)+
--------------------------------------------
BRL 10.2%
ZAR 10.2
IDR 10.1
PLN 7.9
TRY 7.3
MXN 6.9
PHP 5.2
RON 5.1
CLP 4.9
MYR 4.9
PEN 4.9
THB 4.7
COP 4.6
HUF 4.4
INR 3.6
ILS 3.4
USD 1.7
-------
Total 100.0%
=======
+ The weightings include the impact of currency forwards.
FORWARD FOREIGN CURRENCY CONTRACTS (see Note 2C - Forward Foreign Currency
Contracts in the Notes to Financial Statements):
FORWARD FOREIGN CURRENCY CONTRACTS
------------------------------------------------
PURCHASE SALE UNREALIZED
SETTLEMENT AMOUNT AMOUNT VALUE AS OF VALUE AS OF APPRECIATION/
DATE COUNTERPARTY PURCHASED (1) SOLD (1) APRIL 30, 2015 APRIL 30, 2015 (DEPRECIATION)
-------------- -------------- -------------- -------------- -------------- -------------- --------------
05/29/15 BBH PLN 420,000 USD 114,463 $ 116,570 $ 114,463 $ 2,107
05/29/15 BBH USD 315,223 TRY 850,000 315,223 315,645 (422)
--------------
Net Unrealized Appreciation (Depreciation)........................................................... $ 1,685
==============
(1) Please see Portfolio of Investments for currency descriptions.
Counterparty Abbreviations:
BBH Brown Brothers Harriman & Co.
Page 10 See Notes to Financial Statements
FIRST TRUST EMERGING MARKETS LOCAL CURRENCY BOND ETF (FEMB)
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 2015 (UNAUDITED)
ASSETS:
Investments, at value.................................................. $ 4,249,512
Cash................................................................... 72,117
Foreign currency....................................................... 13,762
Unrealized appreciation on forward foreign currency contracts.......... 2,107
Receivables:
Investment securities sold.......................................... 139,311
Interest............................................................ 101,444
-----------------
Total Assets........................................................ 4,578,253
-----------------
LIABILITIES:
Unrealized depreciation on forward foreign currency contracts.......... 422
Payables:
Investment advisory fees............................................ 3,189
Deferred Indonesian capital gains tax............................... 46
-----------------
Total Liabilities................................................... 3,657
-----------------
NET ASSETS............................................................. $ 4,574,596
=================
NET ASSETS CONSIST OF:
Paid-in capital........................................................ $ 5,007,100
Par value.............................................................. 1,000
Accumulated net investment income (loss)............................... 1,190
Accumulated net realized gain (loss) on investments, forward foreign
currency contracts and foreign currency transactions................ (73,065)
Net unrealized appreciation (depreciation) on investments, forward
foreign currency contracts and foreign currency translation......... (361,629)
-----------------
NET ASSETS............................................................. $ 4,574,596
=================
NET ASSET VALUE, per share............................................. $ 45.75
=================
Number of shares outstanding (unlimited number of shares authorized,
par value $0.01 per share).......................................... 100,002
=================
Investments, at cost................................................... $ 4,607,788
=================
Foreign currency, at cost (proceeds)................................... $ 13,464
=================
See Notes to Financial Statements Page 11
FIRST TRUST EMERGING MARKETS LOCAL CURRENCY BOND ETF (FEMB)
STATEMENT OF OPERATIONS
FOR THE PERIOD NOVEMBER 4, 2014 (a) THROUGH APRIL 30, 2015
INVESTMENT INCOME:
Interest............................................................... $ 122,706
Foreign tax withholding................................................ (4,203)
-----------------
Total investment income............................................. 118,503
-----------------
EXPENSES:
Investment advisory fees............................................... 19,501
-----------------
Total expenses...................................................... 19,501
-----------------
NET INVESTMENT INCOME (LOSS)........................................... 99,002
-----------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments......................................................... (4,894)
Forward foreign currency contracts.................................. (16,629)
Foreign currency transactions....................................... (51,542)
-----------------
Net realized gain (loss)............................................... (73,065)
-----------------
Net change in unrealized appreciation (depreciation) on:
Investments......................................................... (358,276)
Forward foreign currency contracts.................................. 1,685
Foreign currency translation........................................ (4,992)
Net change in deferred Indonesian capital gains tax.................... (46)
-----------------
Net change in unrealized appreciation (depreciation)................... (361,629)
-----------------
NET REALIZED AND UNREALIZED GAIN (LOSS)................................ (434,694)
-----------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS..................................................... $ (335,692)
=================
(a) Inception date is November 4, 2014, which is consistent with the
commencement of investment operations and is the date the initial creation
units were established.
Page 12 See Notes to Financial Statements
FIRST TRUST EMERGING MARKETS LOCAL CURRENCY BOND ETF (FEMB)
STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD NOVEMBER 4, 2014 (a) THROUGH APRIL 30, 2015
OPERATIONS:
Net investment income (loss)........................................... $ 99,002
Net realized gain (loss)............................................... (73,065)
Net change in unrealized appreciation (depreciation)................... (361,629)
-----------------
Net increase (decrease) in net assets resulting from operations........ (335,692)
-----------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income.................................................. (97,812)
-----------------
Total distributions to shareholders.................................... (97,812)
-----------------
SHAREHOLDER TRANSACTIONS:
Proceeds from shares sold.............................................. 5,008,100
-----------------
Net increase (decrease) in net assets resulting from shareholder
transactions........................................................ 5,008,100
-----------------
Total increase (decrease) in net assets................................ 4,574,596
NET ASSETS:
Beginning of period.................................................... --
-----------------
End of period.......................................................... $ 4,574,596
=================
Accumulated net investment income (loss) at end of period.............. $ 1,190
=================
CHANGES IN SHARES OUTSTANDING:
Shares outstanding, beginning of period................................ --
Shares sold............................................................ 100,002
-----------------
Shares outstanding, end of period...................................... 100,002
=================
(a) Inception date is November 4, 2014, which is consistent with the
commencement of investment operations and is the date the initial creation
units were established.
See Notes to Financial Statements Page 13
FIRST TRUST EMERGING MARKETS LOCAL CURRENCY BOND ETF (FEMB)
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD
FOR THE PERIOD
11/4/2014 (a)
THROUGH
4/30/2015
--------------
Net asset value, beginning of period $ 50.00
----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) 0.99
Net realized and unrealized gain (loss) (4.26)
----------
Total from investment operations (3.27)
----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income (0.98)
----------
Total distributions (0.98)
----------
Net asset value, end of period $ 45.75
==========
TOTAL RETURN (b) (6.60)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) $ 4,575
Ratio of total expenses to
average net assets 0.85% (c)
Ratio of net investment income (loss) to
average net assets 4.32% (c)
Portfolio turnover rate (d) 25%
(a) Inception date is consistent with the commencement of investment
operations and is the date the initial creation unit was established.
(b) Total return is calculated assuming an initial investment made at the net
asset value at the beginning of the period, reinvestment of all
distributions at net asset value during the period, and redemption at net
asset value on the last day of the period. The return presented does not
reflect the deduction of taxes that a shareholder would pay on Fund
distributions or the redemption or sale of Fund shares. Total return 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 and in-kind
transactions.
Page 14 See Notes to Financial Statements
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FIRST TRUST EMERGING MARKETS LOCAL CURRENCY BOND ETF (FEMB)
APRIL 30, 2015 (UNAUDITED)
1. ORGANIZATION
First Trust Exchange-Traded Fund III (the "Trust") is a non-diversified open-end
management investment company organized as a Massachusetts business trust on
January 9, 2008, and is registered with the Securities and Exchange Commission
under the Investment Company Act of 1940, as amended (the "1940 Act").
The Trust currently consists of four funds that are offering shares. This report
covers the First Trust Emerging Markets Local Currency Bond ETF (the "Fund"),
which trades under the ticker FEMB on The NASDAQ(R) Stock Market, LLC
("NASDAQ"). 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, a combination of 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 maximum total return and current income. Under normal
market conditions, the Fund seeks to achieve its investment objective by
investing at least 80% of its net assets (including investment borrowings) in
bonds, notes, bills, certificates of deposit, time deposits, commercial paper
and loans issued by issuers in emerging market countries that are denominated in
the local currency of the issuer. The Fund may not be appropriate for all
investors.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of the financial statements. The
preparation of the financial statements in accordance with accounting principles
generally accepted in the United States of America ("U.S. GAAP") requires
management to make estimates and assumptions that affect the reported amounts
and disclosures in the financial statements. Actual results could differ from
those estimates.
A. PORTFOLIO VALUATION
The Fund's net asset value ("NAV") is determined daily as of the close of
regular trading on The New York Stock Exchange ("NYSE"), normally 4:00 p.m.
Eastern time, on each day the NYSE is open for trading. If the NYSE closes early
on a valuation day, the NAV is determined as of that time. Domestic debt
securities and foreign securities are priced using data reflecting the earlier
closing of the principal markets for those securities. The Fund's NAV is
calculated by dividing the value of all assets of the Fund (including accrued
interest and dividends), less all liabilities (including accrued expenses and
dividends declared but unpaid), by the total number of shares outstanding.
The Fund's investments are valued daily at market value or, in the absence of
market value with respect to any portfolio securities, at fair value. Market
value prices represent 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:
Bonds, notes and other debt securities are fair valued on the basis of
valuations provided by dealers who make markets in such securities or by
an independent pricing service approved by the Trust's Board of Trustees,
which may use the following valuation inputs when available:
1) benchmark yields;
2) reported trades;
3) broker/dealer quotes;
4) issuer spreads;
5) benchmark securities;
6) bids and offers; and
7) reference data including market research publications.
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
Page 15
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST EMERGING MARKETS LOCAL CURRENCY BOND ETF (FEMB)
APRIL 30, 2015 (UNAUDITED)
conditions existing at the time of the determination. Factors that may be
considered in determining the appropriateness of the use of amortized cost
include, but are not limited to, the following:
1) the credit conditions in the relevant market and changes thereto;
2) the liquidity conditions in the relevant market and changes thereto;
3) the interest rate conditions in the relevant market and changes
thereto (such as significant changes in interest rates);
4) issuer-specific conditions (such as significant credit
deterioration); and
5) any other market-based data the Advisor's Pricing Committee
considers relevant. In this regard, the Advisor's Pricing Committee
may use last-obtained market-based data to assist it when valuing
portfolio securities using amortized cost.
Forward foreign currency contracts are fair valued at the current day's
interpolated foreign exchange rate, as calculated using the current day's
spot rate, and the thirty, sixty, ninety, and one-hundred eighty day
forward rates provided by an independent pricing service.
Certain securities may not be able to be priced by pre-established pricing
methods. Such securities may be valued by the Trust's Board of Trustees or its
delegate, the Advisor's Pricing Committee, at fair value. These securities
generally include, but are not limited to, restricted securities (securities
which may not be publicly sold without registration under the Securities Act of
1933, as amended) for which a pricing service is unable to provide a market
price; securities whose trading has been formally suspended; a security whose
market or fair value price is not available from a pre-established pricing
source; a security with respect to which an event has occurred that is likely to
materially affect the value of the security after the market has closed but
before the calculation of the Fund's NAV or make it difficult or impossible to
obtain a reliable market quotation; and a security whose price, as provided by
the pricing service, does not reflect the security's fair value. As a general
principle, the current fair value of a security would appear to be the amount
which the owner might reasonably expect to receive for the security upon its
current sale. When fair value prices are used, generally they will differ from
market quotations or official closing prices on the applicable exchanges. A
variety of factors may be considered in determining the fair value of such
securities, including, but not limited to, the following:
1) the fundamental business data relating to the issuer, or economic
data relating to the country of issue;
2) an evaluation of the forces which influence the market in which
these securities are purchased and sold;
3) the type, size and cost of security;
4) the financial statements of the issuer, or the financial condition
of the country of issue;
5) the credit quality and cash flow of the issuer, or country of issue,
based on the Advisor's or external analysis;
6) the information as to any transactions in or offers for the
security;
7) the price and extent of public trading in similar securities (or
equity securities) of the issuer/borrower, or comparable companies;
8) the coupon payments;
9) the quality, value and salability of collateral, if any, securing
the security;
10) the business prospects of the issuer, including any ability to
obtain money or resources from a parent or affiliate and an
assessment of the issuer's management (for corporate debt only);
11) the economic, political and social prospects/developments of the
country of issue and the assessment of the country's governmental
leaders/officials (for sovereign debt only);
12) the prospects for the issuer's industry, and multiples (of earnings
and/or cash flows) being paid for similar businesses in that
industry (for corporate debt only); and
13) other relevant factors.
The Fund is subject to fair value accounting standards that define fair value,
establish the framework for measuring fair value and provide a three-level
hierarchy for fair valuation based upon the inputs to the valuation as of the
measurement date. The three levels of the fair value hierarchy are as follows:
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).
Page 16
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST EMERGING MARKETS LOCAL CURRENCY BOND ETF (FEMB)
APRIL 30, 2015 (UNAUDITED)
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 methodologies used for valuing investments are not necessarily an
indication of the risk associated with investing in those investments. A summary
of the inputs used to value the Fund's investments as of April 30, 2015, is
included with the Fund's Portfolio of Investments.
B. SECURITIES TRANSACTIONS AND INVESTMENT INCOME
Securities transactions are recorded as of the trade date. Realized gains and
losses from securities transactions are recorded on the identified cost basis.
Dividend income is recorded on the ex-dividend date. Interest income, if any, is
recorded on the accrual basis. Amortization of premiums and accretion of
discounts are recorded using the effective interest method.
C. FORWARD FOREIGN CURRENCY CONTRACTS
The Fund is subject to foreign currency risk in the normal course of pursuing
its investment objectives. Forward foreign currency contracts are agreements
between two parties ("Counterparties") to exchange one currency for another at a
future date and at a specified price. The Fund uses forward foreign currency
contracts to facilitate transactions in foreign securities and to manage the
Fund's foreign currency exposure. These contracts are valued daily, and the
Fund's net equity therein, representing unrealized gain or loss on the contracts
as measured by the difference between the forward foreign exchange rates at the
dates of entry into the contracts and the forward rates at the reporting date,
is included in "Unrealized appreciation (depreciation) on forward foreign
currency contracts" on the Statement of Assets and Liabilities. The change in
unrealized appreciation (depreciation) is included in "Net change in unrealized
appreciation (depreciation) on forward foreign currency contracts" on the
Statement of Operations. When the forward contract is closed, the Fund records a
realized gain or loss equal to the difference between the proceeds from (or the
cost of) the closing transaction and the Fund's basis in the contract. This
realized gain or loss is included in "Net realized gain (loss) on forward
foreign currency contracts" on the Statement of Operations. Risks arise from the
possible inability of counterparties to meet the terms of their contracts and
from movement in currency, securities values and interest rates. Due to the
risks, the Fund could incur losses in excess of the net unrealized value shown
on the Forward Foreign Currency Contracts table in the Portfolio of Investments.
In the event of default by the Counterparty, the Fund will provide notice to the
Counterparty of the Fund's intent to convert the currency held by the Fund into
the currency that the Counterparty agreed to exchange with the Fund. If a
Counterparty becomes bankrupt or otherwise fails to perform its obligations due
to financial difficulties, the Fund may experience significant delays in
obtaining any recovery in a bankruptcy or other reorganization proceeding. The
Fund may obtain only limited recovery or may obtain no recovery in such
circumstances.
D. OFFSETTING ON THE STATEMENT OF ASSETS AND LIABILITIES
Accounting Standards Update No. 2011-11 "Disclosures about Offsetting Assets and
Liabilities" ("ASU 2011-11") requires entities to disclose both gross and net
information about instruments and transactions eligible for offset on the
Statement of Assets and Liabilities, and disclose instruments and transactions
subject to master netting or similar agreements. These disclosure requirements
are intended to help investors and other financial statement users better assess
the effect or potential effect of offsetting arrangements on a fund's financial
position. In addition, Accounting Standards Update No. 2013-1 "Clarifying the
Scope of Offsetting Assets and Liabilities" ("ASU 2013-1"), specifies exactly
which transactions are subject to offsetting disclosures. The scope of the
disclosure requirements is limited to derivative instruments, repurchase
agreements and reverse repurchase agreements, and securities borrowing and
securities lending transactions.
For financial reporting purposes, the Fund does not offset financial assets and
financial liabilities that are subject to master netting arrangements ("MNAs")
or similar agreements on the Statement of Assets and Liabilities. MNAs provide
the right, in the event of default (including bankruptcy and insolvency), for
the non-defaulting counterparty to liquidate the collateral and calculate the
net exposure to the defaulting party or request additional collateral.
At April 30, 2015, derivative assets and liabilities (by type) on a gross basis
are as follows:
Gross Amounts not Offset in
the Statement of Assets
and Liabilities
---------------------------
Gross Amounts Net Amounts of Assets
Offset in the Presented in the Collateral
Gross Amounts of Statement of Assets Statement of Assets Financial Amounts
Recognized Assets and Liabilities and Liabilities Instruments Received Net Amount
----------------------------------------------------------------------------------------------------------------------------------
Forward Foreign Currency
Contracts* $ 2,107 $ -- $ 2,107 $ (422) $ -- $ 1,685
Page 17
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST EMERGING MARKETS LOCAL CURRENCY BOND ETF (FEMB)
APRIL 30, 2015 (UNAUDITED)
Gross Amounts not Offset in
the Statement of Assets
and Liabilities
---------------------------
Gross Amounts Net Amounts of Assets
Gross Amounts of Offset in the Presented in the Collateral
Recognized Statement of Assets Statement of Assets Financial Amounts
Liabilities and Liabilities and Liabilities Instruments Received Net Amount
----------------------------------------------------------------------------------------------------------------------------------
Forward Foreign Currency
Contracts* $ (422) $ -- $ (422) $ 422 $ -- $ --
*The respective counterparties for each contract are disclosed on the Forward
Foreign Currency Contracts table in the Portfolio of Investments.
E. FOREIGN CURRENCY
The books and records of the Fund are maintained in U.S. dollars. Foreign
currencies, investments and other assets and liabilities are translated into
U.S. dollars at the exchange rates prevailing at the end of the period.
Purchases and sales of investments and items of income and expense are
translated on the respective dates of such transactions. Unrealized gains and
losses on assets and liabilities, other than investments in securities, which
result from changes in foreign currency exchange rates have been included in
"Net change in unrealized appreciation (depreciation) on foreign currency
translation" on the Statement of Operations. Unrealized gains and losses on
investments in securities which result from changes in foreign exchange rates
are included with fluctuations arising from changes in market price and are
shown in "Net change in unrealized appreciation (depreciation) on investments"
on the Statement of Operations. Net realized foreign currency gains and losses
include the effect of changes in exchange rates between trade date and
settlement date on investment security transactions, foreign currency
transactions and interest and dividends received. The portion of foreign
currency gains and losses related to fluctuations in exchange rates between the
initial purchase settlement date and subsequent sale trade date is included in
"Net realized gain (loss) on investments" on the Statement of Operations.
F. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
Dividends from net investment income, if any, are declared and paid monthly, or
as the Board of Trustees may determine from time to time. Distributions of net
realized capital gains earned by the Fund, if any, will be distributed at least
annually.
Distributions from income and capital gains are determined in accordance with
income tax regulations, which may differ from U.S. GAAP. Certain capital
accounts in the financial statements are periodically adjusted for permanent
differences in order to reflect their tax character. These permanent differences
are primarily due to the varying treatment of income and gain/loss on portfolio
securities held by the Fund and have no impact on net assets or net asset value
per share. Temporary differences, which arise from recognizing certain items of
income, expense and gain/loss in different periods for financial statement and
tax purposes, will reverse at some time in the future.
G. INCOME TAXES
The Fund intends to qualify as a regulated investment company by complying with
the requirements under Subchapter M of the Internal Revenue Code of 1986, as
amended, which includes distributing substantially all of its net investment
income and net realized gains to shareholders. Accordingly, no provision has
been made for federal and state income taxes. However, due to the timing and
amount of distributions, the Fund may be subject to an excise tax of 4% of the
amount by which approximately 98% of the Fund's taxable income exceeds the
distributions from such taxable income for the calendar year.
The Fund is subject to accounting standards that establish a minimum threshold
for recognizing, and a system for measuring, the benefits of a tax position
taken or expected to be taken in a tax return. As of April 30, 2015, management
has evaluated the application of these standards to the Fund, and has determined
that no provision for income tax is required in the Fund's financial statements
for uncertain tax positions.
The Fund intends to utilize provisions of the federal income tax laws, which
allow it to carry a realized capital loss forward indefinitely following the
year of the loss and offset such loss against any future realized capital gains.
The Fund is subject to certain limitations under U.S. tax rules on the use of
capital carryforwards and net unrealized built-in losses. These limitations
apply when there has been a 50% change in ownership.
H. EXPENSES
Expenses, other than the investment advisory fee and other excluded expenses,
are paid by the Advisor (See Note 3).
Page 18
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST EMERGING MARKETS LOCAL CURRENCY BOND ETF (FEMB)
APRIL 30, 2015 (UNAUDITED)
3. INVESTMENT ADVISORY FEE, AFFILIATED TRANSACTIONS AND OTHER FEE ARRANGEMENTS
First Trust, the investment advisor to the Fund, is a limited partnership with
one limited partner, Grace Partners of DuPage L.P., and one general partner, The
Charger Corporation. The Charger Corporation is an Illinois corporation
controlled by James A. Bowen, Chief Executive Officer of First Trust. First
Trust is responsible for supervising the selection and ongoing monitoring of the
securities in the Fund's portfolio, managing the Fund's business affairs and
providing certain administrative services necessary for the management of the
Fund.
The Trust, on behalf of the Fund, and First Trust have retained First Trust
Global Portfolios Ltd. ("First Trust Global" or the "Sub-Advisor"), an affiliate
of First Trust, to serve as investment sub-advisor. In this capacity, First
Trust Global is responsible for the selection and ongoing monitoring of the
securities in the Fund's investment portfolio. First Trust is paid an annual
unitary management fee of 0.85% of the Fund's average daily net assets. First
Trust is responsible for the expenses of the Fund including the cost of transfer
agency, custody, fund administration, legal, audit and other services, including
any compensation to Trustees, and excluding Rule 12b-1 distribution and service
fees, if any, brokerage expenses, taxes, interest, acquired fund fees and
expenses, and extraordinary expenses, which are paid by each respective Fund.
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 BBH. Under the service
agreements, BBH performs custodial, fund accounting, certain administrative
services, and transfer agency services for the Fund. As custodian, BBH is
responsible for custody of the Fund's assets. As fund accountant and
administrator, BBH is responsible for maintaining the books and records of the
Fund's securities and cash. As transfer agent, BBH is responsible for
maintaining shareholder records for the Fund.
Each Trustee who is not an officer or employee of First Trust, any sub-advisor
or any of their affiliates ("Independent Trustees") is paid a fixed annual
retainer that is allocated 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 SECURITIES
For the period ended April 30, 2015, the cost of purchases and proceeds from
sales of investments, excluding short-term investments and in-kind transactions,
for the Fund were $5,720,741 and $1,089,197, respectively.
For the period ended April 30, 2015, the Fund had no in-kind transactions.
5. DERIVATIVES TRANSACTIONS
The following table presents the type of derivative held by the Fund at April
30, 2015, the primary underlying risk exposure and location of these instruments
as presented on the Statement of Assets and Liabilities.
ASSET DERIVATIVES LIABILITY DERIVATIVES
------------------------------------------- -------------------------------------------
DERIVATIVE STATEMENT OF ASSETS AND STATEMENT OF ASSETS AND
INSTRUMENT RISK EXPOSURE LIABILITIES LOCATION VALUE LIABILITIES LOCATION VALUE
------------------ -------------- ------------------------ ---------------- ------------------------ ----------------
Unrealized appreciation Unrealized depreciation
Forward foreign on forward foreign on forward foreign
currency contracts Currency Risk currency contracts $ 2,107 currency contracts $ 422
Page 19
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST EMERGING MARKETS LOCAL CURRENCY BOND ETF (FEMB)
APRIL 30, 2015 (UNAUDITED)
The following table presents the amount of net realized gain (loss) and change
in net unrealized appreciation (depreciation) recognized for the period ended
April 30, 2015, on derivative instruments, as well as the primary underlying
risk exposure associated with each instrument.
STATEMENT OF OPERATIONS LOCATION EQUITY RISK
-------------------------------------------------------------------------------
CURRENCY RISK EXPOSURE
Net realized gain (loss) on forward foreign currency contracts $ (16,629)
Net change in unrealized appreciation (depreciation) on forward
foreign currency contracts 1,685
During the period ended April 30, 2015, the amount of notional values of forward
foreign currency contracts opened and closed were $1,696,482 and $1,821,462,
respectively.
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 transactions with broker-dealers or large
institutional investors that have entered into a participation agreement (an
"Authorized Participant"). In order to purchase Creation Units of the Fund, an
Authorized Participant must deposit (i) a designated portfolio of securities and
other instruments 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 Authorized Participant 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 Authorized
Participant 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 is currently $500. 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 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.
Authorized Participants 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. LINE OF CREDIT
Effective March 26, 2015, the Fund was added to an $80 million Credit Agreement
with the Bank of Nova Scotia ("Scotia") as administrative agent for a group of
lenders. The Credit Agreement is to be used as a liquidity backstop during
periods of high redemption volume. A commitment fee of 0.15% of the daily amount
of the excess of the commitment amount over the outstanding principal balance of
the loans is charged by Scotia, which First Trust allocates amongst the funds
that have access to the credit line. To the extent that the Fund accesses the
credit line, there would also be an interest fee charged. The Fund did not have
any borrowings outstanding during the period ended April 30, 2015.
Page 20
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST EMERGING MARKETS LOCAL CURRENCY BOND ETF (FEMB)
APRIL 30, 2015 (UNAUDITED)
8. DISTRIBUTION PLAN
The Board of Trustees adopted a Distribution and Service Plan pursuant to Rule
12b-1 under the 1940 Act. In accordance with the Rule 12b-1 plan, the Fund is
authorized to pay an amount up to 0.25% of its average daily net assets each
year to reimburse First Trust Portfolios L.P. ("FTP"), the distributor of the
Fund, for amounts expended to finance activities primarily intended to result in
the sale of Creation Units or to provide 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 October 10, 2016.
9. 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.
10. ADOPTION OF NON-FUNDAMENTAL INVESTMENT POLICY
On March 27, 2015, the Board of Trustees of the Fund approved the adoption of a
non-fundamental investment policy regarding the Fund's ability to invest in
other investment companies (the "Policy"). Pursuant to the Policy, beginning on
or about June 7, 2015, the Fund will not rely on Section 12(d)(1)(F) or
12(d)(1)(G) of the 1940 Act, as amended, to invest in other investment
companies.
11. SUBSEQUENT EVENT
Management has evaluated the impact of all subsequent events to the Fund through
the date the financial statements were issued and has determined that there was
the following subsequent event:
On May 20, 2015, the Fund declared a distribution of $0.20 per share to
shareholders of record on May 26, 2015, payable May 29, 2015.
Page 21
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ADDITIONAL INFORMATION
--------------------------------------------------------------------------------
FIRST TRUST EMERGING MARKETS LOCAL CURRENCY BOND ETF (FEMB)
APRIL 30, 2015 (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 period ended June 30 will be
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 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
is 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.
RISK CONSIDERATIONS
YOU COULD LOSE MONEY BY INVESTING IN THE FUND. AN INVESTMENT IN THE FUND IS NOT
A DEPOSIT OF A BANK AND IS NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY. THERE CAN BE NO
ASSURANCE THAT THE FUND'S INVESTMENT OBJECTIVE WILL BE ACHIEVED.
CALL RISK. If an issuer calls higher-yielding debt instruments held by the Fund,
performance could be adversely impacted.
CASH TRANSACTIONS RISK. The Fund will, under most circumstances, effect a
portion of creations and redemptions for cash, rather than in-kind securities.
As a result, an investment in the Fund may be less tax-efficient than an
investment in an exchange-traded fund that effects its creations and redemption
for in-kind securities. Because the Fund may effect a portion of redemptions for
cash, it may be required to sell portfolio securities in order to obtain the
cash needed to distribute redemption proceeds. A sale of shares may result in
capital gains or losses and may also result in higher brokerage costs.
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.
CURRENCY EXCHANGE RATE RISK. The Fund holds investments that are denominated in
non-U.S. currencies, or in securities that provide exposure to such currencies,
currency exchange rates or interest rates denominated in such currencies.
Changes in currency exchange rates and the relative value of non-U.S. currencies
will affect the value of the Fund's investment and the value of your Fund
shares. Currency exchange rates can be very volatile and can change quickly and
unpredictably. As a result, the value of an investment in the Fund may change
quickly and without warning and you may lose money.
CURRENCY RISK. Because the Fund's net asset value is determined on the basis of
U.S. dollars and the Fund invests in non-U.S. dollar-denominated securities, you
may lose money if the local currency of a foreign market depreciates against the
U.S. dollar, even if the local currency value of the Fund's holdings goes up.
The Fund may hedge certain of its non-U.S. dollar holdings.
DERIVATIVES RISK. The use of options, futures contracts, forward contracts and
other derivative instruments can lead to losses because of adverse movements in
the price or value of the underlying asset, index or rate, which may be
magnified by certain features of the derivatives. These risks are heightened
when the Fund's portfolio managers use derivatives to enhance the Fund's return
or as a substitute for a position or security, rather than solely to hedge (or
offset) the risk of a position or security held by the Fund.
EMERGING MARKETS RISK. Investments in securities and instruments traded in
developing or emerging markets or that provide exposure to such securities or
markets, can involve additional risks relating to political, economic, or
regulatory conditions not associated with investments in U.S. securities and
instruments or investments in more developed international markets. Emerging
market governments may, without prior warning, impose capital controls on the
ability to transfer currency, securities or other assets. The Fund's ability to
access certain developing or emerging markets also may be limited due to a
variety of factors, including currency convertibility issues. Such conditions
may impact the ability of the Fund to buy, sell or otherwise transfer
securities, cause the Fund's returns to differ from those available to domestic
investors, adversely affect the trading market and price for Fund shares, and
cause the Fund to decline in value.
GLOBAL DEPOSITARY NOTES RISK. Any distributions paid to the holders of GDNs are
usually subject to a fee charged by the depositary bank. Holders of GDNs may
have limited rights, and investment restrictions in certain countries may
adversely impact the value of GDNs because such restrictions may limit the
ability to convert the Bonds into GDNs and vice versa.
Page 22
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ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST EMERGING MARKETS LOCAL CURRENCY BOND ETF (FEMB)
APRIL 30, 2015 (UNAUDITED)
HIGH YIELD SECURITIES RISK. High yield securities, or "junk" bonds, are subject
to greater market fluctuations and risk of loss than securities with higher
ratings, and therefore, are considered to be highly speculative. These
securities are issued by issuers that may have narrowly focused operations
and/or other impediments to the timely payment of periodic interest and
principal at maturity. If the global or local economy slows down or dips into
recession, the issuers of high yield securities may not have sufficient
resources to continue making timely payment of periodic interest and principal
at maturity. The market for high yield securities is generally smaller and less
liquid than that for investment grade securities. High yield securities are
generally not listed on a national securities exchange but trade in the
over-the-counter markets. Due to the smaller, less liquid market for high yield
securities, the bid-offer spread on such securities is generally greater than it
is for investment grade securities and the purchase or sale of such securities
may take longer to complete. In general, high yield securities may have a
greater risk of default than other types of securities.
ILLIQUID SECURITIES RISK. Some of the securities held by the Fund may be
illiquid. Illiquid securities involve the risk that the securities will not be
able to be sold at the time desired by the Fund or at prices approximately the
value at which the Fund is carrying the securities on its books.
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 fixed
income 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.
MANAGEMENT RISK. The Fund is subject to management risk because it is an
actively managed portfolio. In managing the Fund's investment portfolio, the
Fund's investment advisor will apply investment techniques and risk analyses
that may not have the desired result. There can be no guarantee that the Fund
will meet its investment objective.
MARKET RISK. Market risk is the risk that a particular security owned by the
Fund or shares of the Fund in general may fall in value. Securities are subject
to market fluctuations caused by such factors as economic, political, regulatory
or market developments, changes in interest rates and perceived trends in bond
prices. Also, certain of these factors may affect the liquidity of the Bonds in
the Fund's portfolio and make it more difficult for the Fund to sell them.
Overall securities values could decline generally or could underperform other
investments.
NEW FUND RISK. The Fund currently has fewer assets than larger funds, and like
other relatively new funds, large inflows and outflows may impact the Fund's
market exposure for limited periods of time. This impact may be positive or
negative, depending on the direction of market movement during the period
affected. Also, during the initial invest-up period, the Fund may depart from
its principal investment strategies and invest a larger amount or all of its
assets in cash equivalents or it may hold cash.
NON-DIVERSIFICATION RISK. The Fund is classified as "non-diversified" under the
Investment Company Act of 1940, as amended (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 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 invested in certain issuers.
NON-U.S. SECURITIES RISK. Non-U.S. securities are subject to higher volatility
than securities of domestic issuers due to possible adverse political, social or
economic developments; restrictions on foreign investment or exchange of
securities; lack of liquidity; currency exchange rates; excessive taxation;
government seizure of assets; different legal or accounting standards and less
government supervision and regulation of exchanges in foreign countries.
SOVEREIGN DEBT RISK. Investments in sovereign bonds involve special risks
because the governmental authority that controls the repayment of the debt may
be unwilling or unable to repay the principal and/or interest when due in
accordance with the terms of such securities; the availability of sufficient
foreign exchange on the date a payment is due; the relative size of the debt
service burden to the economy as a whole; or the government debtor's policy
towards the International Monetary Fund and the political constraints to which a
government debtor may be subject. If an issuer of sovereign bonds defaults on
payments of principal and/or interest, the Fund may have limited legal recourse
against the issuer and/ or guarantor. In certain cases, remedies must be pursued
in the courts of the defaulting party itself, and the Fund's ability to obtain
recourse may be limited. In times of economic uncertainty, the prices of these
securities may be more volatile than those of corporate debt obligations or of
other government debt obligations.
Page 23
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ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST EMERGING MARKETS LOCAL CURRENCY BOND ETF (FEMB)
APRIL 30, 2015 (UNAUDITED)
BOARD CONSIDERATIONS REGARDING APPROVAL OF INVESTMENT MANAGEMENT AGREEMENT
The Board of Trustees of the First Trust Exchange-Traded Fund III (the "Trust"),
including the Independent Trustees, unanimously approved the Investment
Management Agreement (the "Advisory Agreement") with First Trust Advisors L.P.
("First Trust" or the "Advisor") on behalf of the First Trust Emerging Markets
Local Currency Bond ETF (the "Fund") and the Investment Sub-Advisory Agreement
(the "Sub-Advisory Agreement" and together with the Advisory Agreement, the
"Agreements") among the Trust, on behalf of the Fund, the Advisor and First
Trust Global Portfolios Ltd. (the "Sub-Advisor"), for an initial two-year term
at a meeting held on September 15, 2014. The Board of Trustees determined that
the Agreements are in the best interests of the Fund in light of the extent and
quality of services expected to be provided and such other matters as the Board
considered to be relevant in the exercise of its reasonable business judgment.
To reach this determination, the Board considered its duties under the
Investment Company Act of 1940, as amended (the "1940 Act"), as well as under
the general principles of state law in reviewing and approving advisory
contracts; the requirements of the 1940 Act in such matters; the fiduciary duty
of investment advisors with respect to advisory agreements and compensation; the
standards used by courts in determining whether investment company boards have
fulfilled their duties; and the factors to be considered by the Board in voting
on such agreements. To assist the Board in its evaluation of the Agreements, the
Independent Trustees received a separate report from each of the Advisor and the
Sub-Advisor in advance of the Board meeting responding to a request for
information provided on behalf of the Independent Trustees that, among other
things, outlined the services to be provided by the Advisor and the Sub-Advisor
to the Fund (including the relevant personnel responsible for these services and
their experience); the proposed unitary fee structure for the Fund as compared
to fees charged by advisors to other comparable exchange-traded funds ("ETFs"),
and as compared to fees charged to other ETFs managed by First Trust; the
estimated expenses to be incurred in providing services to the Fund and the
potential for economies of scale, if any; financial data on the Advisor and the
Sub-Advisor; fall out benefits to First Trust and its affiliates, First Trust
Portfolios L.P. ("FTP") and the Sub-Advisor; and a summary of the Advisor's and
Sub-Advisor's compliance programs. The Independent Trustees also met separately
with their independent legal counsel to discuss the information provided by the
Advisor and the Sub-Advisor. The Board applied its business judgment to
determine whether the arrangement between the Trust and First Trust and among
the Trust, the Advisor and the Sub-Advisor are reasonable business arrangements
from the Fund's perspective as well as from the perspective of shareholders.
In evaluating whether to approve the Agreements for the Fund, the Board
considered the nature, extent and quality of services to be provided by the
Advisor and the Sub-Advisor under the Agreements and considered that the
Advisor's employees provide management services to other ETFs and to other
investment companies in the First Trust fund complex with diligence and care.
The Board considered that the Fund is not designed to track the performance of
an index and will employ an advisor/sub-advisor management structure. With
respect to the Advisory Agreement, the Board considered that First Trust will be
responsible for the overall management and administration of the Fund and
reviewed the services to be provided by First Trust to the Fund, including the
oversight of the Sub-Advisor. The Board considered the compliance program that
had been developed by First Trust and considered it includes a robust program
for monitoring the Sub-Advisor's compliance with the 1940 Act and the Fund's
investment objectives and policies. It also considered the efforts expended by
First Trust in organizing the Trust and in arranging for other entities to
provide services to the Fund. With respect to the Sub-Advisory Agreement, the
Board noted the background and experience of the Sub-Advisor's portfolio
management team and the Sub-Advisor's investment style. At the meeting, the
Trustees received a presentation from the two portfolio managers of the
Sub-Advisor, and were able to ask questions about the Sub-Advisor and the
Sub-Advisor's proposed investment strategies for the Fund. Since the Fund had
yet to commence investment operations, the Board could not consider the
historical investment performance of the Fund. In light of the information
presented and the considerations made, the Board concluded that the nature,
extent and quality of services to be provided to the Fund by the Advisor and the
Sub-Advisor under the Agreements are expected to be satisfactory.
The Board reviewed information regarding the proposed unitary fee structure for
the Fund. The Board noted that under the Fund's unitary fee arrangement, the
Fund would pay First Trust a fee equal to an annual rate of 0.85% of its average
daily net assets. The Board also noted that, from the unitary fee, First Trust
would pay the Sub-Advisor a sub-advisory fee equal to 40% of any remaining
monthly unitary fee paid to the Advisor after the Fund's average expenses
accrued during the most recent twelve months are subtracted from the unitary fee
for that month. The Board also noted that First Trust would be responsible for
the Fund's ordinary operating expenses, including the cost of transfer agency,
custody, fund administration, legal, audit and other services, but excluding the
fee payments under the Advisory Agreement, interest, taxes, brokerage
commissions and other expenses connected with the execution of portfolio
transactions, distribution and service fees pursuant to a Rule 12b-1 plan, if
any, and extraordinary expenses. The Board reviewed information provided by
Management Practice Inc. ("MPI") and Lipper Inc. ("Lipper"), independent
sources, as well as by First Trust, for the Fund on the advisory fees and
expense ratios of other comparable ETFs, but also noted First Trust's statements
about the limitations on the comparability of the peer groups with the Fund. The
Board noted that the Fund's expense ratio under its proposed unitary fee was
above the median expense ratio of its Lipper and First Trust peer groups and
equal to the median expense ratio of its MPI peer group. The Board compared the
Fund's unitary fee to the total expense ratios (after fee waivers and/or expense
reimbursements, if any) of other First Trust ETFs, including First Trust ETFs
that pay a unitary fee, and to the advisory fees charged by First Trust to other
advisory clients, noting that the Advisor and Sub-Advisor provide investment
advisory
Page 24
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ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST EMERGING MARKETS LOCAL CURRENCY BOND ETF (FEMB)
APRIL 30, 2015 (UNAUDITED)
and sub-advisory services, respectively, to First Trust Strategic Income ETF
("FDIV"), and the portion of FDIV that is managed by the Sub-Advisor has a
similar investment strategy as the Fund's, for which the Sub-Advisor receives a
sub-advisory fee at the same rate. In light of the information considered and
the nature, extent and quality of services expected to be provided to the Fund
under the Agreements, the Board determined that the proposed unitary fee for the
Fund was fair and reasonable.
The Board noted that the proposed unitary fee for the Fund was not structured to
pass the benefits of any economies of scale on to shareholders as the Fund's
assets grow. The Board noted that any reduction in fixed costs associated with
the management of the Fund would benefit the Advisor and the Sub-Advisor, but
that a unitary fee structure provides a level of certainty in expenses for the
Fund. The Board noted that First Trust has continued to invest in personnel and
infrastructure for the First Trust fund complex. The Board took the costs to be
borne by First Trust in connection with its services to be performed for the
Fund under the Advisory Agreement into consideration and noted that First Trust
was unable to estimate the profitability of the Advisory Agreement to First
Trust. The Board also considered that the Sub-Advisor was unable to estimate the
profitability of the Sub-Advisory Agreement to the Sub-Advisor and that the
Sub-Advisor would be paid by the Advisor from the unitary fee. The Board
considered fall-out benefits described by the Advisor that may be realized from
its and FTP's relationship with the Fund, including First Trust's compensation
for fund reporting services pursuant to a separate Fund Reporting Services
Agreement, which would be included under the unitary fee. The Board considered
fall-out benefits described by the Sub-Adviser and noted that the Sub-Advisor
would not utilize soft dollars in connection with its management of the Fund's
portfolio. The Board also considered the affiliations between First Trust and
the Sub-Advisor and noted the services provided by the Sub-Advisor to certain
First Trust products in Europe.
Based on all the information considered and the conclusions reached, the Board,
including the Independent Trustees, unanimously determined that the terms of the
Agreements are fair and reasonable and that the approval of the Agreements are
in the best interests of the Fund. No single factor was determinative in the
Board's analysis.
Page 25
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FIRST TRUST
First Trust Exchange-Traded Fund III
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.
Not applicable.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Not applicable.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Not applicable.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable.
ITEMS 6. SCHEDULE OF INVESTMENTS.
Schedules of Investments in securities of unaffiliated issuers as of the close
of the reporting period are included as part of the report to shareholders filed
under Item 1 of this form.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
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
that have materially affected, or are reasonably likely to materially
affect, the registrant's internal control over financial reporting.
ITEM 12. EXHIBITS.
(1)(a) Not applicable.
(2)(a) Certifications pursuant to Rule 30a-2(a) under the 1940 Act and Section
302 of the Sarbanes-Oxley Act of 2002 are attached hereto.
(3)(a) 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 III
--------------------------------------------------
By (Signature and Title)* /s/ Mark R. Bradley
----------------------------------------
Mark R. Bradley, President and
Chief Executive Officer
(principal executive officer)
Date: June 22, 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: June 22, 2015
------------------
By (Signature and Title)* /s/ James M. Dykas
----------------------------------------
James M. Dykas, Treasurer,
Chief Financial Officer and
Chief Accounting Officer
(principal financial officer)
Date: June 22, 2015
------------------
* Print the name and title of each signing officer under his or her signature.