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 811-22709
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First Trust Exchange-Traded Fund V
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(Exact name of registrant as specified in charter)
Exact name of registrant as specified in charter)
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
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(Address of principal executive offices) (Zip code)
W. Scott Jardine, Esq.
First Trust Portfolios L.P.
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
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(Name and address of agent for service)
Registrant's telephone number, including area code: (630) 765-8000
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Date of fiscal year end: December 31
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Date of reporting period: June 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 V
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First Trust Morningstar Managed Futures Strategy
Fund (FMF)
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Semi-Annual Report
For the Six Months Ended
June 30, 2015
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TABLE OF CONTENTS
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FIRST TRUST MORNINGSTAR MANAGED FUTURES STRATEGY FUND (FMF)
SEMI-ANNUAL REPORT
JUNE 30, 2015
Shareholder Letter......................................................... 1
Fund Performance Overview.................................................. 2
Portfolio Management....................................................... 4
Understanding Your Fund Expenses........................................... 5
Consolidated Portfolio of Investments...................................... 6
Consolidated Statement of Assets and Liabilities........................... 8
Consolidated Statement of Operations....................................... 9
Consolidated Statements of Changes in Net Assets........................... 10
Consolidated Financial Highlights.......................................... 11
Notes to Consolidated Financial Statements................................. 12
Additional Information..................................................... 18
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning of
the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934,
as amended. Forward-looking statements include statements regarding the goals,
beliefs, plans or current expectations of First Trust Advisors L.P. ("First
Trust" or the "Advisor") and its representatives, taking into account the
information currently available to them. Forward-looking statements include all
statements that do not relate solely to current or historical fact. For example,
forward-looking statements include the use of words such as "anticipate,"
"estimate," "intend," "expect," "believe," "plan," "may," "should," "would" or
other words that convey uncertainty of future events or outcomes.
Forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
First Trust Morningstar Managed Futures Strategy Fund (the "Fund") to be
materially different from any future results, performance or achievements
expressed or implied by the forward-looking statements. When evaluating the
information included in this report, you are cautioned not to place undue
reliance on these forward-looking statements, which reflect the judgment of the
Advisor and its representatives only as of the date hereof. We undertake no
obligation to publicly revise or update these forward-looking statements to
reflect events and circumstances that arise after the date hereof.
PERFORMANCE AND RISK DISCLOSURE
There is no assurance that the Fund will achieve its investment objective. The
Fund is subject to market risk, which is the possibility that the market values
of investments owned by the Fund will decline and that the value of the Fund
shares may therefore be less than what you paid for them. Accordingly, you can
lose money investing in the Fund. See "Risk Considerations" in the Additional
Information section of this report for a discussion of other risks of investing
in the Fund.
Performance data quoted represents past performance, which is no guarantee of
future results, and current performance may be lower or higher than the figures
shown. For the most recent month-end performance figures, please visit
http://www.ftportfolios.com or speak with your financial advisor. Investment
returns, net asset value and share price will fluctuate and Fund shares, when
sold, may be worth more or less than their original cost.
The Advisor may also periodically provide additional information on Fund
performance on the Fund's webpage at http://www.ftportfolios.com.
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.
It is important to keep in mind that the opinions expressed by personnel of the
Advisor are just that: informed opinions. They should not be considered to be
promises or advice. The opinions, like the statistics, cover the period through
the date on the cover of this report. The 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 MORNINGSTAR MANAGED FUTURES STRATEGY FUND (FMF)
SEMI-ANNUAL LETTER FROM THE CHAIRMAN AND CEO
JUNE 30, 2015
Dear Shareholders:
Thank you for your investment in First Trust Morningstar Managed Futures
Strategy Fund (the "Fund").
First Trust Advisors L.P. ("First Trust") is pleased to provide you with this
semi-annual report which contains detailed information about your investment for
the six months ended June 30, 2015. Additionally, First Trust has compiled 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 over the next few months.
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
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FIRST TRUST MORNINGSTAR MANAGED FUTURES STRATEGY FUND (FMF)
First Trust Morningstar Managed Futures Strategy Fund's (the "Fund") investment
objective is to seek to provide investors with positive returns. The Fund is an
actively managed exchange-traded fund ("ETF") that seeks to achieve positive
returns that are not directly correlated to broad market equity or fixed income
returns. The Fund uses as a benchmark the Morningstar Diversified Futures Index
(the "Benchmark"), which is developed, maintained and sponsored by Morningstar,
Inc. ("Morningstar"). The Fund seeks to exceed the performance of the Benchmark
by actively selecting investments for the Fund with varying maturities from the
underlying components of the Benchmark. The Fund is not an "index tracking" ETF
and is not required to invest in all of the components of the Benchmark.
However, the Fund will generally seek to hold similar instruments to those
included in the Benchmark and seek exposure to commodities, currencies and
equity indices included in the Benchmark.
The Fund is not sponsored, endorsed, sold or promoted by Morningstar.
Morningstar's only relationship to the Fund is the licensing of certain service
marks and service names of Morningstar and of the Benchmark, which is
determined, composed and calculated by Morningstar without regard to the Fund's
advisor or the Fund. The Fund is not obligated to invest in the same instruments
included in the Benchmark. There can be no assurance that the Fund's performance
will exceed the performance of the Benchmark at any time.
Under normal market conditions, the Fund, through a wholly-owned subsidiary of
the Fund organized under the laws of the Cayman Islands (the "Subsidiary"),
invests in a portfolio of exchange-listed commodity futures, currency futures
and equity index futures (collectively, "Futures Instruments").
The Fund does not invest directly in Futures Instruments. The Fund gains
exposure to these investments exclusively by investing in the Subsidiary. The
Subsidiary is advised by First Trust Advisors L.P., the Fund's advisor.
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PERFORMANCE
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AVERAGE ANNUAL CUMULATIVE
TOTAL RETURNS TOTAL RETURNS
Inception Inception
6 Months Ended 1 Year Ended (8/1/13) (8/1/13)
6/30/15 6/30/15 to 6/30/15 to 6/30/15
FUND PERFORMANCE
NAV 1.60% 0.56% 1.50% 2.89%
Market Price 0.89% -2.41% 1.12% 2.16%
INDEX PERFORMANCE
Morningstar Diversified Futures Index 1.77% 1.36% 2.16% 4.17%
Bank of America Merrill Lynch 0-3 Month US T-Bill Index 0.01% 0.02% 0.04% 0.07%
S&P 500(R) Index 1.23% 7.42% 12.75% 25.79%
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Total returns for the period since inception are calculated from the inception
date of the Fund.
The Fund's per share net asset value ("NAV") is the value of one share of the
Fund and is computed by dividing the value of all assets of the Fund (including
accrued interest and dividends), less all liabilities (including accrued
expenses and dividends declared but unpaid), by the total number of outstanding
shares. The price used to calculate market return ("Market Price") is determined
by using the midpoint between the highest bid and the lowest offer on the stock
exchange on which shares of the Fund are listed for trading as of the time that
the Fund's NAV is calculated. Since shares of the Fund did not trade in the
secondary market until after its inception, for the period from inception to the
first day of secondary market trading in shares of the Fund, the NAV of the Fund
is used as a proxy for the secondary market trading price to calculate market
returns. NAV and market returns assume that all dividend distributions have been
reinvested in the Fund at NAV and Market Price, respectively.
An index is a statistical composite that tracks a specified financial market or
sector. Unlike the Fund, 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, index returns do
not include brokerage commissions that may be payable on secondary market
transactions. If brokerage commissions were included, index returns would be
lower. The total returns presented reflect the reinvestment of dividends on
securities in the indices. The returns presented do not reflect the deduction of
taxes that a shareholder would pay on Fund distributions or the redemption or
sale of Fund shares. The investment return and principal value of shares of the
Fund will vary with changes in market conditions. Shares of the Fund may be
worth more or less than their original cost when they are redeemed or sold in
the market. The Fund's past performance is no guarantee of future performance.
Page 2
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FUND PERFORMANCE OVERVIEW (CONTINUED)
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FIRST TRUST MORNINGSTAR MANAGED FUTURES STRATEGY FUND (FMF) (CONTINUED)
PERFORMANCE OF A $10,000 INITIAL INVESTMENT
AUGUST 1, 2013 - JUNE 30, 2015
First Trust Morningstar Morningstar Bank of America
Managed Futures Strategy Diversified Merrill Lynch 0-3 Month S&P 500(R)
Fund (FMF) Futures Index US T-Bill Index Index
8/1/13 $10,000 $10,000 $10,000 $10,000
12/31/13 10,387 10,352 10,001 10,929
6/30/14 10,231 10,276 10,003 11,709
12/31/14 10,127 10,235 10,004 12,425
6/30/15 10,289 10,416 10,005 12,578
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 investments 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 JUNE 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 August 2, 2013 (commencement
of trading) through June 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%
8/2/13 - 12/31/13 46 0 1 1
1/1/14 - 12/31/14 67 16 28 40
1/1/15 - 6/30/15 27 13 39 1
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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%
8/2/13 - 12/31/13 55 2 0 0
1/1/14 - 12/31/14 66 33 0 2
1/1/15 - 6/30/15 23 19 1 1
Page 3
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PORTFOLIO MANAGEMENT
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FIRST TRUST MORNINGSTAR MANAGED FUTURES STRATEGY FUND (FMF)
JUNE 30, 2015
INVESTMENT ADVISOR
First Trust Advisors L.P. ("First Trust"), Wheaton, Illinois, is the investment
advisor, commodity pool operator and commodity trading advisor to the First
Trust Morningstar Managed Futures Strategy Fund (the "Fund" or "FMF"). In this
capacity, First Trust is responsible for the selection and ongoing monitoring of
the investments in the Fund's portfolio and certain other services necessary for
the management of the portfolio. First Trust serves as advisor for three mutual
fund portfolios, nine exchange-traded funds consisting of 95 series, 15
closed-end funds, a variable insurance trust consisting of two series and is
also the portfolio supervisor of certain unit investment trusts sponsored by
First Trust Portfolios L.P. ("FTP"), Wheaton, Illinois. There is no one
individual primarily responsible for portfolio management decisions for the
Fund. Investments are made under the direction of the Investment Committee with
daily decisions being primarily made by John Gambla and Rob A. Guttschow.
PORTFOLIO MANAGEMENT TEAM
JOHN GAMBLA - CFA, FRM, PRM, SENIOR PORTFOLIO MANAGER
ROB A. GUTTSCHOW - CFA, SENIOR PORTFOLIO MANAGER
DANIEL J. LINDQUIST - CHAIRMAN OF THE INVESTMENT COMMITTEE AND MANAGING DIRECTOR
JON C. ERICKSON - SENIOR VICE PRESIDENT
DAVID G. MCGAREL - CHIEF INVESTMENT OFFICER AND MANAGING DIRECTOR
ROGER F. TESTIN - SENIOR VICE PRESIDENT
Page 4
FIRST TRUST MORNINGSTAR MANAGED FUTURES STRATEGY FUND (FMF)
UNDERSTANDING YOUR FUND EXPENSES
JUNE 30, 2015 (UNAUDITED)
As a shareholder of First Trust Morningstar Managed Futures Strategy Fund (the
"Fund"), you incur two types of costs: (1) transaction costs; and (2) ongoing
costs, including management fees, distribution and/or service fees, if any, and
other Fund expenses. This Example is intended to help you understand your
ongoing costs (in U.S. dollars) of investing in the Fund and to compare these
costs with the ongoing costs of investing in other funds.
The Example is based on an investment of $1,000 invested at the beginning of the
period and held through the six-month period ended June 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
JANUARY 1, 2015 JUNE 30, 2015 PERIOD PERIOD (a)
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FIRST TRUST MORNINGSTAR MANAGED FUTURES STRATEGY FUND (FMF)
Actual $1,000.00 $ 1,016.00 1.00% $5.00
Hypothetical (5% return before expenses) $1,000.00 $ 1,019.84 1.00% $5.01
(a) Expenses are equal to the annualized expense ratio as indicated in the
table, multiplied by the average account value over the period (January 1,
2015 through June 30, 2015), multiplied by 181/365 (to reflect the
one-half year period).
Page 5
FIRST TRUST MORNINGSTAR MANAGED FUTURES STRATEGY FUND (FMF)
CONSOLIDATED PORTFOLIO OF INVESTMENTS
JUNE 30, 2015 (UNAUDITED)
Besides the following listed futures contracts of the Fund's wholly-owned
subsidiary, there were no investments held by the Fund at June 30, 2015.
The following futures contracts of the Fund's wholly-owned subsidiary were open
at June 30, 2015 (see Note 2B - Futures Contracts in the Notes to Consolidated
Financial Statements):
UNREALIZED
NUMBER NOTIONAL EXPIRATION APPRECIATION/
OF CONTRACTS VALUE DATE (DEPRECIATION)
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FUTURES CONTRACTS LONG:
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CAC 40(R) 10 Euro Index Futures 4 $ 215,612 Sep-15 $ (2,118)
Cocoa Futures 3 97,800 Sep-15 270
Cotton No.2 Futures 3 97,440 Dec-15 4,425
DAX Index Futures 1 308,145 Sep-15 (1,519)
FTSE 100 Index Futures 2 209,322 Sep-15 (5,248)
FTSE MIB Index Futures 1 124,389 Sep-15 1,438
IBEX 35 Index Futures 1 120,565 Jul-15 (441)
Live Cattle Futures 4 242,320 Aug-15 (5,400)
NIKKEI 225 (OSE) Futures 3 492,977 Sep-15 2,917
Swiss Franc Currency Futures 1 134,606 Sep-15 (581)
S&P 500 E-mini Futures 14 1,452,920 Sep-15 (14,840)
SPI 200 Index Futures 1 105,992 Sep-15 (1,890)
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$ 3,602,088 $ (22,987)
============ ===============
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FUTURES CONTRACTS SHORT:
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Australian Dollar Currency Futures 2 $ (154,370) Sep-15 $ 670
British Pound Currency Futures 8 (775,800) Sep-15 (10,450)
Canadian Dollar Currency Futures 3 (244,260) Sep-15 4,320
Coffee "C" Futures 3 (148,556) Sep-15 (394)
Copper Futures 2 (130,800) Sep-15 50
Corn Futures 19 (346,275) Sep-15 (54,625)
Euro FX Currency Futures 12 (1,699,575) Sep-15 26,175
Gold 100oz Futures 5 (602,360) Aug-15 16,460
Japanese Yen Currency Futures 4 (408,000) Sep-15 (1,125)
Lean Hogs Futures 5 (168,090) Jul-15 15,690
S&P TSX 60 IX Futures 1 (135,468) Sep-15 336
Silver Futures 2 (157,650) Sep-15 1,840
Soybean Futures 10 (481,375) Nov-15 (37,250)
Soybean (Meal) Futures 5 (159,860) Dec-15 (12,840)
Soybean Oil Futures 5 (98,970) Aug-15 (1,980)
Sugar #11 (World) Futures 14 (199,102) Sep-15 3,573
Wheat Futures 6 (162,213) Sep-15 (22,513)
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$ (6,072,724) $ (72,063)
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TOTAL $ (2,470,636) $ (95,050)
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Page 6 See Notes to Consolidated Financial Statements
FIRST TRUST MORNINGSTAR MANAGED FUTURES STRATEGY FUND (FMF)
CONSOLIDATED PORTFOLIO OF INVESTMENTS (CONTINUED)
JUNE 30, 2015 (UNAUDITED)
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of June 30, 2015
is as follows (see Note 2A - Portfolio Valuation in the Notes to Consolidated
Financial Statements):
ASSETS TABLE
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
6/30/2015 PRICES INPUTS INPUTS
------------ ------------ ------------ ------------
Futures Contracts.................................... $ 78,164 $ 78,164 $ -- $ --
============ ============ ============ ============
LIABILITIES TABLE
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
6/30/2015 PRICES INPUTS INPUTS
------------ ------------ ------------ ------------
Futures Contracts.................................... $ (173,214) $ (173,214) $ -- $ --
============ ============ ============ ============
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 June 30, 2015.
See Notes to Consolidated Financial Statements Page 7
FIRST TRUST MORNINGSTAR MANAGED FUTURES STRATEGY FUND (FMF)
CONSOLIDATED STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 2015 (UNAUDITED)
ASSETS:
Cash................................................................... $ 12,097,269
Cash segregated as collateral for open futures contracts............... 695,494
Receivables:
Variation margin.................................................... 78,164
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Total Assets..................................................... 12,870,927
--------------
LIABILITIES:
Foreign currency due to custodian...................................... 23,125
Payables:
Variation margin.................................................... 173,214
Investment advisory fees............................................ 10,049
--------------
Total Liabilities................................................ 206,388
--------------
NET ASSETS............................................................. $ 12,664,539
==============
NET ASSETS CONSIST OF:
Paid-in capital........................................................ $ 12,402,191
Par value.............................................................. 2,520
Accumulated net investment income (loss)............................... (47,812)
Accumulated net realized gain (loss) on investments, futures
contracts and foreign currency transactions......................... 404,120
Net unrealized appreciation (depreciation) on investments, futures
contracts and foreign currency translation.......................... (96,480)
--------------
NET ASSETS............................................................. $ 12,664,539
==============
NET ASSET VALUE, per share............................................. $ 50.26
==============
Number of shares outstanding (unlimited number of shares
authorized, par value $0.01 per share).............................. 252,000
==============
Foreign currency, at proceeds.......................................... (21,695)
==============
Page 8 See Notes to Consolidated Financial Statements
FIRST TRUST MORNINGSTAR MANAGED FUTURES STRATEGY FUND (FMF)
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2015 (UNAUDITED)
INVESTMENT INCOME:
Interest............................................................... $ 2,362
--------------
Total investment income............................................. 2,362
--------------
EXPENSES:
Investment advisory fees............................................... 60,258
Interest expense on margin account..................................... 3,287
--------------
Total expenses...................................................... 63,545
--------------
NET INVESTMENT INCOME (LOSS)........................................... (61,183)
--------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Futures.......................................................... 386,746
Foreign currency transactions.................................... 17,374
--------------
Net realized gain (loss)............................................ 404,120
--------------
Net change in unrealized appreciation (depreciation) on:
Futures............................................................. (141,966)
Foreign currency translation........................................ (4,249)
--------------
Net change in unrealized appreciation (depreciation)................... (146,215)
--------------
NET REALIZED AND UNREALIZED GAIN (LOSS)................................ 257,905
--------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS..................................................... $ 196,722
==============
See Notes to Consolidated Financial Statements Page 9
FIRST TRUST MORNINGSTAR MANAGED FUTURES STRATEGY FUND (FMF)
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
FOR THE SIX MONTHS ENDED JUNE 30, 2015 (UNAUDITED)
FOR THE SIX
MONTHS ENDED FOR THE YEAR
6/30/2015 ENDED
(UNAUDITED) 12/31/2014
-------------- --------------
OPERATIONS:
Net investment income (loss)........................................ $ (61,183) $ (75,115)
Net realized gain (loss)............................................ 404,120 (13,841)
Net change in unrealized appreciation (depreciation)................ (146,215) (24,807)
-------------- --------------
Net increase (decrease) in net assets resulting from operations..... 196,722 (113,763)
-------------- --------------
SHAREHOLDER TRANSACTIONS:
Proceeds from shares sold........................................... 2,585,913 7,404,739
Cost of shares redeemed............................................. (2,583,328) --
-------------- --------------
Net increase (decrease) in net assets resulting from shareholder
transactions..................................................... 2,585 7,404,739
-------------- --------------
Total increase (decrease) in net assets............................. 199,307 7,290,976
NET ASSETS:
Beginning of period................................................. 12,465,232 5,174,256
-------------- --------------
End of period....................................................... $ 12,664,539 $ 12,465,232
============== ==============
Accumulated net investment income (loss) at end of period........... $ (47,812) $ 13,371
============== ==============
CHANGES IN SHARES OUTSTANDING:
Shares outstanding, beginning of period............................. 252,000 102,000
Shares sold......................................................... 50,000 150,000
Shares redeemed..................................................... (50,000) --
-------------- --------------
Shares outstanding, end of period................................... 252,000 252,000
============== ==============
Page 10 See Notes to Consolidated Financial Statements
FIRST TRUST MORNINGSTAR MANAGED FUTURES STRATEGY FUND (FMF)
CONSOLIDATED FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
SIX MONTHS FOR THE PERIOD
ENDED YEAR 8/1/2013 (a)
6/30/2015 ENDED THROUGH
(UNAUDITED) 12/31/2014 12/31/2013
-------------- -------------- --------------
Net asset value, beginning of period..................... $ 49.47 $ 50.73 $ 50.00
---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss)............................. (0.24) (0.55) (0.19)
Net realized and unrealized gain (loss).................. 1.03 (0.71) 2.13
---------- ---------- ----------
Total from investment operations......................... 0.79 (1.26) 1.94
---------- ---------- ----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net realized gain........................................ -- -- (1.21)
---------- ---------- ----------
Net asset value, end of period........................... 50.26 $ 49.47 $ 50.73
========== ========== ==========
TOTAL RETURN (b)......................................... 1.60% (2.50)% 3.87%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's)..................... $ 12,665 $ 12,465 $ 5,174
RATIOS TO AVERAGE NET ASSETS:
Ratio of total expenses to average net assets............ 1.00% (c) 0.95% 0.95% (c)
Ratio of total expenses to average net assets
excluding interest expense............................ 0.95% (c) 0.95% 0.95% (c)
Ratio of net investment income (loss) to average net assets (0.96)% (c) (0.94)% (0.92)% (c)
Portfolio turnover rate (d).............................. 0% 0% 0%
(a) Inception date is consistent with the commencement of investment
operations and is the date the initial creation unit was established.
First Trust Portfolios L.P. seeded the Fund on June 12, 2013, in order to
provide initial capital required by SEC rules.
(b) Total return is calculated assuming an initial investment made at the net
asset value at the beginning of the period, reinvestment of all
distributions at net asset value during the period, and redemption at net
asset value on the last day of the period. The returns presented do not
reflect the deduction of taxes that a shareholder would pay on Fund
distributions or the redemption or sale of Fund shares. Total return is
calculated for the time period presented and is not annualized for periods
of less than a year.
(c) Annualized.
(d) Portfolio turnover is calculated for the time period presented and is not
annualized for periods of less than a year and does not include securities
received or delivered from processing creations or redemptions,
derivatives and in-kind transactions.
See Notes to Consolidated Financial Statements Page 11
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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FIRST TRUST MORNINGSTAR MANAGED FUTURES STRATEGY FUND (FMF)
JUNE 30, 2015 (UNAUDITED)
1. ORGANIZATION
First Trust Exchange-Traded Fund V (the "Trust") is an open-end management
investment company organized as a Massachusetts business trust on April 10,
2012, and is registered with the Securities and Exchange Commission ("SEC")
under the Investment Company Act of 1940, as amended (the "1940 Act").
The Trust currently consists of one fund, the First Trust Morningstar Managed
Futures Strategy Fund (the "Fund"), which trades under the ticker FMF on the
NYSE Arca, Inc. and commenced operations on August 1, 2013. Unlike conventional
mutual funds, the Fund issues and redeems shares on a continuous basis, at net
asset value ("NAV"), only in large specified blocks consisting of 50,000 shares
called a "Creation Unit." Creation Units are issued and redeemed for securities
in which the Fund invests, or for cash or, in certain circumstances, for both.
Except when aggregated in Creation Units, the shares are not redeemable
securities of the Fund.
The Fund is an actively managed exchange-traded fund. The investment objective
of the Fund is to seek to provide investors with positive returns. Under normal
market conditions, the Fund, through a wholly-owned subsidiary of the Fund, FT
Cayman Subsidiary (the "Subsidiary"), organized under the laws of the Cayman
Islands, invests in a portfolio of exchange-listed commodity futures, currency
futures and equity index futures (collectively, "Futures Instruments"). The Fund
will not invest directly in Futures Instruments. The Fund seeks to gain exposure
to these investments exclusively by investing in the Subsidiary. The Fund's
investment in the Subsidiary may not exceed 25% of the Fund's total assets at
the end of each fiscal quarter.
2. SIGNIFICANT ACCOUNTING POLICIES
The Fund, which is an investment company within the scope of Financial
Accounting Standards Board ("FASB") Accounting Standards Update 2013-08, follows
accounting and reporting guidance under FASB Accounting Standards Codification
Topic 946, "Financial Services-Investment Companies." The consolidated financial
statements include the accounts on a consolidated basis of the Subsidiary. All
intercompany accounts and transactions have been eliminated in consolidation.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of the consolidated financial
statements. The preparation of the consolidated financial statements in
accordance with accounting principles generally accepted in the United States of
America ("U.S. GAAP") requires management to make estimates and assumptions that
affect the reported amounts and disclosures in the consolidated financial
statements. Actual results could differ from those estimates.
A. PORTFOLIO VALUATION
The Fund's NAV is determined daily as of the close of regular trading on the New
York Stock Exchange ("NYSE"), normally 4:00 p.m. Eastern time, on each day the
NYSE is open for trading. The 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 Consolidated Portfolio of Investments. The Fund's investments
are valued as follows:
Exchange-traded futures contracts are valued at the closing price in the
market where such contracts are principally traded. If no closing price is
available, exchange-traded futures contracts are fair valued at the mean
of their most recent bid and asked price, if available, and otherwise at
their closing bid price.
U.S. Treasuries are fair valued on the basis of valuations provided by an
independent pricing service approved by the Trust's Board of Trustees.
Fixed income and other debt securities having a remaining maturity of 60
days or less when purchased are fair valued at cost adjusted for
amortization of premiums and accretion of discounts (amortized cost),
provided the Advisor's Pricing Committee has determined that the use of
amortized cost is an appropriate reflection of fair value given market and
issuer specific conditions existing at the time of the determination.
Factors that may be considered in determining the appropriateness of the
use of amortized cost include, but are not limited to, the following:
1) the credit conditions in the relevant market and changes
thereto;
2) the liquidity conditions in the relevant market and changes
thereto;
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
Page 12
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FIRST TRUST MORNINGSTAR MANAGED FUTURES STRATEGY FUND (FMF)
JUNE 30, 2015 (UNAUDITED)
5) any other market-based data the Advisor's Pricing Committee
considers relevant. In this regard, the Advisor's Pricing
Committee may use last-obtained market-based data to assist it
when valuing portfolio securities using amortized cost.
If the Fund's investments are not able to be priced by their pre-established
pricing methods, such investments may be valued by the Trust's Board of Trustees
or its delegate, the Advisor's Pricing Committee, at fair value. A variety of
factors may be considered in determining the fair value of such investments.
Valuing the Fund's holdings using fair value pricing will result in using prices
for those holdings that may differ from current market valuations. The
Subsidiary's holdings will be valued in the same manner as the Fund's holdings.
The Fund is subject to fair value accounting standards that define fair value,
establish the framework for measuring fair value and provide a three-level
hierarchy for fair valuation based upon the inputs to the valuation as of the
measurement date. The three levels of the fair value hierarchy are as follows:
o Level 1 - Level 1 inputs are quoted prices in active markets for
identical investments. An active market is a market in which
transactions for the investment occur with sufficient frequency and
volume to provide pricing information on an ongoing basis.
o Level 2 - Level 2 inputs are observable inputs, either directly or
indirectly, and include the following:
o Quoted prices for similar investments in active markets.
o Quoted prices for identical or similar investments in markets
that are non-active. A non-active market is a market where
there are few transactions for the investment, the prices are
not current, or price quotations vary substantially either
over time or among market makers, or in which little
information is released publicly.
o Inputs other than quoted prices that are observable for the
investment (for example, interest rates and yield curves
observable at commonly quoted intervals, volatilities,
prepayment speeds, loss severities, credit risks, and default
rates).
o Inputs that are derived principally from or corroborated by
observable market data by correlation or other means.
o Level 3 - Level 3 inputs are unobservable inputs. Unobservable
inputs may reflect the reporting entity's own assumptions about the
assumptions that market participants would use in pricing the
investment.
The inputs or 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 June 30, 2015, is
included with the Fund's Consolidated Portfolio of Investments.
B. FUTURES CONTRACTS
The Fund, through the Subsidiary, may purchase and sell exchange-listed
commodity, currency and equity index futures contracts. When the Subsidiary
purchases a listed futures contract, it agrees to purchase a specified reference
asset (e.g., commodity, currency or equity index) at a specified future date.
When the Subsidiary sells or shorts a listed futures contract, it agrees to sell
a specified reference asset (e.g., commodity, currency or equity index) at a
specified future date. The price at which the purchase and sale will take place
is fixed when the Subsidiary enters into the contract. The exchange clearing
corporation is the ultimate counterparty for all exchange-listed contracts, so
credit risk is limited to the creditworthiness of the exchange's clearing
corporation. Margin deposits are posted as collateral with the clearing broker
and, in turn, with the exchange clearing corporation.
1. EXCHANGE-LISTED COMMODITY FUTURES CONTRACTS -- Commodity futures
contracts are generally based upon commodities within the six
principal commodity groups: energy, industrial metals, agriculture,
precious metals, foods and fibers, and livestock. The price of a
commodity futures contract will reflect the storage costs of
purchasing the physical commodity. These storage costs include the
time value of money invested in the physical commodity plus the
actual costs of storing the commodity less any benefits from
ownership of the physical commodity that are not obtained by the
holder of a futures contract (this is sometimes referred to as the
"convenience yield"). To the extent that these storage costs change
for an underlying commodity while the Fund is in a long position on
that commodity, the value of the futures contract may change
proportionately.
2. INDEX FUTURES CONTRACTS -- An index futures contract is a bilateral
agreement pursuant to which two parties agree to take or make
delivery of an amount of cash equal to a specified dollar amount
times the difference between the index value at the close of trading
of the contract and the price at which the futures contract was
originally struck. No physical delivery of the securities comprising
the index is made. Instead, settlement in cash must occur upon the
termination of the contract, with the settlement being the
difference between the contract price and the actual level of the
index at the expiration of the contract.
3. CURRENCY FUTURES CONTRACTS -- Currency futures contracts are
transferable futures contracts that specify a price at which a
currency can be bought or sold at a future date. Currency future
contracts allow investors to hedge against foreign currency exchange
risk. Because currency futures contracts are marked-to-market daily,
investors can exit their obligation to buy or
Page 13
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST MORNINGSTAR MANAGED FUTURES STRATEGY FUND (FMF)
JUNE 30, 2015 (UNAUDITED)
sell the currency prior to the contract's delivery date by closing
out the position. With currency futures contracts, the price is
determined when the contract is signed, just as it is in the foreign
currency exchange market, and the currency pair is exchanged on the
delivery date, which is usually sometime in the distant future.
Upon entering into a futures contract, the Subsidiary must deposit funds, called
margin, with its custodian in the name of the clearing broker equal to a
specified percentage of the current value of the contract. Open futures
contracts are marked-to-market daily with the change in value recognized as a
component of "Net change in unrealized appreciation (depreciation) on futures"
on the Consolidated Statement of Operations. This daily fluctuation in value of
the contract is also known as variation margin and is included as "Variation
margin" payable and/or receivable on the Consolidated Statement of Assets and
Liabilities.
When the Subsidiary purchases or sells a futures contract, the Subsidiary is
required to "cover" its position in order to limit the risk associated with the
use of leverage and other related risks. To cover its position, the Subsidiary
segregates assets consisting of cash or liquid securities that, when added to
any amounts deposited with a futures commission merchant as margin, are equal to
the market value of the futures contract or otherwise "cover" its position in a
manner consistent with the 1940 Act or the 1940 Act Rules and SEC
interpretations thereunder. As the Subsidiary continues to engage in the
described securities trading practices and properly segregates assets, the
segregated assets will function as a practical limit on the amount of leverage
which the Subsidiary may undertake and on the potential increase in the
speculative character of the Subsidiary's outstanding portfolio securities.
Additionally, such segregated assets generally ensure the availability of
adequate funds to meet the obligations of the Subsidiary arising from such
investment activities.
C. INVESTMENT TRANSACTIONS AND INVESTMENT INCOME
Investment transactions are recorded as of the trade date. Realized gains and
losses from securities transactions are recorded on the identified cost basis.
Interest income, if any, is recorded on the accrual basis. Amortization of
premiums and the accretion of discounts are recorded using the effective
interest method.
D. CASH AND FOREIGN CURRENCY
The Fund segregates assets consisting of cash and other short-term securities to
comply with SEC guidance with respect to coverage of futures positions by
registered investment companies. The cash on the books is held to cover the full
notional value of the futures contracts. The restricted foreign currency is held
for margin requirements. The books and records of the Fund are maintained in
U.S. dollars. Foreign currencies, futures contracts 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 futures contracts and items of income and expense are
translated on the respective dates of such transactions. Unrealized gains and
losses on assets and liabilities 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 Consolidated Statement of
Operations. Unrealized gains and losses on futures contracts 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 futures" on the Consolidated 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 foreign currency
transactions and interest and dividends received. The portion of foreign
currency gains and losses related to fluctuation in exchange rates between the
initial purchase trade date and subsequent sale trade date is included in "Net
realized gain (loss) on foreign currency transactions" on the Consolidated
Statement of Operations.
E. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
Dividends from net investment income, if any, are declared and paid quarterly by
the Fund. The Fund distributes its net realized capital gains, if any, to
shareholders at least annually.
Distributions in cash may be reinvested automatically in additional whole shares
only if the broker through whom the shares were purchased makes such option
available. Such shares will generally be reinvested by the broker based upon the
market price of those shares and investors may be subject to customary brokerage
commissions charged by the broker.
Distributions from net investment income and realized capital gains are
determined in accordance with income tax regulations, which may differ from U.S.
GAAP. Certain capital accounts in the consolidated financial statements are
periodically adjusted for permanent differences in order to reflect their tax
character. These permanent differences are primarily due to the varying
treatment of income and gain/loss on portfolio securities held by the Fund and
have no impact on net assets or NAV per share. Temporary differences, which
arise from recognizing certain items of income, expense and gain/loss in
different periods for financial statement and tax purposes, will reverse at some
time in the future.
The tax character of distributions paid by the Fund during the period ended
December 31, 2014 was as follows:
Page 14
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST MORNINGSTAR MANAGED FUTURES STRATEGY FUND (FMF)
JUNE 30, 2015 (UNAUDITED)
Distributions Distributions Distributions
paid from paid from paid from
Ordinary Capital Return of
Income Gains Capital
----------------- ----------------- -----------------
$ -- $ -- $ --
As of December 31, 2014, the components of distributable earnings on a tax basis
for the Fund were as follows:
Accumulated Net
Undistributed Capital and Unrealized
Ordinary Other Appreciation
Income Gains (Depreciation)
----------------- ----------------- -----------------
$ -- $ 152,802 $ (103,067)
F. INCOME TAXES
The Fund intends to continue to qualify as a regulated investment company by
complying with the requirements under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "Code"), which includes distributing substantially all
of its net investment income and net realized gains to shareholders.
Accordingly, no provision has been made for federal 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 Subsidiary is classified as a controlled foreign corporation under
Subchapter N of the Code. Therefore, the Fund is required to increase its
taxable income by its share of the Subsidiary's income, whether or not such
earnings are distributed by the Subsidiary to the Fund. Net investment losses of
the Subsidiary cannot be deducted by the Fund in the current period nor carried
forward to offset taxable income in future periods.
The Fund intends to utilize provisions of the federal income tax laws, which
allow it to carry a realized capital loss forward indefinitely following the
year of the loss and offset such loss against any future realized capital gains.
At December 31, 2014, the Fund had no capital loss carryforwards outstanding 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.
The Fund is subject to accounting standards that establish a minimum threshold
for recognizing, and a system for measuring, the benefits of a tax position
taken or expected to be taken in a tax return. Taxable years ended 2013 and 2014
remain open to federal and state audit. As of June 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 consolidated financial
statements for uncertain tax positions.
G. EXPENSES
Expenses, other than the investment advisory fee and other excluded expenses,
are paid by First Trust (see Note 3).
3. INVESTMENT ADVISORY FEE, AFFILIATED TRANSACTIONS AND OTHER FEE ARRANGEMENTS
First Trust, the investment advisor to the Fund, is a limited partnership with
one limited partner, Grace Partners of DuPage L.P., and one general partner, The
Charger Corporation. The Charger Corporation is an Illinois corporation
controlled by James A. Bowen, Chief Executive Officer of First Trust. First
Trust is responsible for the selection and ongoing monitoring of the investments
in the Fund's and the Subsidiary's portfolio, managing the Fund's business
affairs and providing certain administrative services necessary for the
management of the Fund.
Pursuant to the Investment Management Agreement 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,
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.
Page 15
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST MORNINGSTAR MANAGED FUTURES STRATEGY FUND (FMF)
JUNE 30, 2015 (UNAUDITED)
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 investments 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 INVESTMENTS
For the six months ended June 30, 2015, the cost of purchases and proceeds from
sales of investment securities for the Fund, excluding short-term investments,
derivatives, and in-kind transactions, were $0 and $0, respectively.
For the six months ended June 30, 2015, the Fund did not have any in-kind
purchases or sales.
5. DERIVATIVE TRANSACTIONS
The following table presents the types of derivatives held by the Subsidiary at
June 30, 2015, the primary underlying risk exposure and the location of these
instruments as presented on the Consolidated Statement of Assets and
Liabilities.
ASSET DERIVATIVES LIABILITY DERIVATIVES
-------------------------------------------- --------------------------------------------
CONSOLIDATED CONSOLIDATED
DERIVATIVES STATEMENT OF ASSETS AND STATEMENT OF ASSETS AND
INSTRUMENT RISK EXPOSURE LIABILITIES LOCATION VALUE LIABILITIES LOCATION VALUE
-------------- ---------------- ------------------------------ ----------- ------------------------------ -----------
Futures Commodity Risk Variation Margin Receivable $ 42,308 Variation Margin Payable $ 135,002
Futures Equity Risk Variation Margin Receivable 4,691 Variation Margin Payable 26,056
Futures Currency Risk Variation Margin Receivable 31,165 Variation Margin Payable 12,156
The following table presents the amount of net realized gain (loss) and change
in net unrealized appreciation (depreciation) recognized for the six months
ended June 30, 2015, on derivative instruments, as well as the primary
underlying risk exposure associated with each instrument.
CONSOLIDATED STATEMENT OF OPERATIONS LOCATION COMMODITY RISK EQUITY RISK CURRENCY RISK
------------------------------------------------------------------ ----------------- ----------------- -----------------
Net realized gain (loss) on futures $ 177,255 $ 73,252 $ 136,239
Net change in unrealized appreciation (depreciation) on futures (116,194) (10,089) (15,683)
During the six months ended June 30, 2015, the amounts of notional values of
futures contracts opened and closed were as follows:
Notional Amount*
-----------------------------
Total Commodity Risk $ 15,772,707
Futures Contracts Opened $ 7,945,860
Futures Contracts Closed 7,826,847
Total Equity Risk 15,129,009
Futures Contracts Opened 7,651,357
Futures Contracts Closed 7,477,652
Total Currency Risk 13,612,023
Futures Contracts Opened 6,952,886
Futures Contracts Closed 6,659,137
*Amounts based on activity levels during the period.
The Fund does not have the right to offset financial assets and financial
liabilities related to futures contracts on the Consolidated Statement of Assets
and Liabilities.
Page 16
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--------------------------------------------------------------------------------
FIRST TRUST MORNINGSTAR MANAGED FUTURES STRATEGY FUND (FMF)
JUNE 30, 2015 (UNAUDITED)
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
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 its
corresponding index. The price for each Creation Unit will equal the daily NAV
per share times the number of shares in a Creation Unit plus the fees described
above and, if applicable, any operational processing and brokerage costs,
transfer fees or stamp taxes. When 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. 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 April 30, 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 EVENTS
Management has evaluated the impact of all subsequent events on the Fund through
the date the consolidated financial statements were issued, and has determined
there were no subsequent events requiring recognition or disclosure in the
consolidated financial statements that have not already been disclosed.
Page 17
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ADDITIONAL INFORMATION
--------------------------------------------------------------------------------
FIRST TRUST MORNINGSTAR MANAGED FUTURES STRATEGY FUND (FMF)
JUNE 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 the Fund's portfolio holdings with the
SEC for the first and third quarters of each fiscal year on Form N-Q. The
Trust's Form N-Qs are available (1) by calling (800) 988-5891; (2) on the Fund's
website located at http://www.ftportfolios.com; (3) on the SEC's website at
http://www.sec.gov; and (4) for review and copying at the SEC's Public Reference
Room ("PRR") in Washington, DC. Information regarding the operation of the PRR
may be obtained by calling (800) SEC-0330.
RISK CONSIDERATIONS
RISKS ARE INHERENT IN ALL INVESTING. YOU SHOULD CONSIDER THE FUND'S INVESTMENT
OBJECTIVE, RISKS, CHARGES AND EXPENSES CAREFULLY BEFORE INVESTING. YOU CAN
DOWNLOAD THE FUND'S PROSPECTUS AT HTTP://WWW.FTPORTFOLIOS.COM OR CONTACT FIRST
TRUST PORTFOLIOS L.P. AT (800) 621-1675 TO REQUEST A PROSPECTUS, WHICH CONTAINS
THIS AND OTHER INFORMATION ABOUT THE FUND. FOR ADDITIONAL INFORMATION ABOUT THE
RISKS ASSOCIATED WITH INVESTING IN THE FUND, PLEASE SEE THE FUND'S STATEMENT OF
ADDITIONAL INFORMATION, AS WELL AS OTHER REGULATORY FILINGS. READ THESE
DOCUMENTS CAREFULLY BEFORE YOU INVEST. FIRST TRUST PORTFOLIOS L.P. IS THE
DISTRIBUTOR OF FIRST TRUST EXCHANGE-TRADED FUND V.
The following summarizes some of the risks that should be considered for the
Fund.
BENCHMARK RISK. The Fund seeks to exceed the performance of the Morningstar
Diversified Futures Index (the "Benchmark") by actively selecting investments
for the Fund with varying maturities from the underlying components of the
Benchmark. The Benchmark is entirely model-based. As market dynamics shift over
time, the model may become outdated or inaccurate. The Benchmark and the Fund
will take both long and short positions and should not be used as proxies for
taking long-only positions. The Benchmark and the Fund could lose significant
value during periods when long-only indexes rise. Similarly, the Benchmark and
the Fund are not a substitute for short-only positions. The Benchmark is based
on historical price trends. There can be no assurance that such trends will be
reflected in future market movements. In markets without sustained price trends,
or markets with significant price movements that quickly reverse, the Benchmark
and the Fund may suffer significant losses. The Benchmark is based on the price
of futures contracts. Futures contracts reflect the expected future value of a
commodity, currency or equity index. The Benchmark and the Fund do not reflect
"spot" prices. Spot prices reflect immediate delivery value, not expected future
value.
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.
CLEARING BROKER RISK. The failure or bankruptcy of the Fund's and the
Subsidiary's clearing broker could result in a substantial loss of Fund assets.
Under current Commodity Futures Trading Commission ("CFTC") regulations, a
clearing broker maintains customers' assets in a bulk segregated account. If a
clearing broker fails to do so, or is unable to satisfy a substantial deficit in
a customer account, its other customers may be subject to risk of loss of their
funds in the event of that clearing broker's bankruptcy. In that event, the
clearing broker's customers, such as the Fund and the Subsidiary, are entitled
to recover, even in respect of property specifically traceable to them, only a
proportional share of all property available for distribution to all of that
clearing broker's customers.
COMMODITY RISK. The value of Futures Instruments typically is based upon the
price movements of a physical commodity or an economic variable linked to such
price movements. The prices of Futures Instruments may fluctuate quickly and
dramatically and may not correlate to price movements in other asset classes. An
active trading market may not exist for certain commodities. Each of these
factors and events could have a significant negative impact on the Fund.
COUNTERPARTY RISK. The Fund bears the risk that the counterparty to a commodity
derivative or other contract with a third party may default on its obligations
or otherwise fail to honor its obligations. If a counterparty defaults on its
payment obligations, the Fund will lose money and the value of an investment in
Fund shares may decrease. In addition, the Fund may engage in such investment
transactions with a limited number of counterparties.
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FIRST TRUST MORNINGSTAR MANAGED FUTURES STRATEGY FUND (FMF)
JUNE 30, 2015 (UNAUDITED)
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 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.
ETF RISK. An ETF trades like common stock and represents a portfolio of
securities. The risks of owning an ETF generally reflect the risks of owning the
underlying securities, although lack of liquidity in an ETF could result in it
being more volatile and ETFs have management fees that increase their costs.
FOREIGN COMMODITY MARKETS RISK. The Fund, through the Subsidiary, engages in
trading on commodity markets outside the United States on behalf of the Fund.
Trading on such markets is not regulated by any United States government agency
and may involve certain risks not applicable to trading on United States
exchanges. The Fund may not have the same access to certain trades as do various
other participants in foreign markets. Furthermore, as the Fund will determine
its net assets in United States dollars, with respect to trading in foreign
markets the Fund will be subject to the risk of fluctuations in the exchange
rate between the local currency and dollars as well as the possibility of
exchange controls. Certain futures contracts traded on foreign exchanges are
treated differently for federal income tax purposes than are domestic contracts.
FREQUENT TRADING RISK. The Fund regularly purchases and subsequently sells,
i.e., "rolls," individual commodity futures contracts throughout the year so as
to maintain a fully invested position. As the commodity contracts near their
expiration dates, the Fund rolls them over into new contracts. This frequent
trading of contracts may increase the amount of commissions or mark-ups to
broker-dealers that the Fund pays when it buys and sells contracts, which may
detract from the Fund's performance.
FUTURES RISK. The Fund invests in futures through the Subsidiary. All futures
and futures-related products are highly volatile. Price movements are influenced
by, among other things, changing supply and demand relationships; climate;
government agricultural, trade, fiscal, monetary and exchange control programs
and policies; national and international political and economic events; crop
diseases; the purchasing and marketing programs of different nations; and
changes in interest rates. In addition, governments from time to time intervene,
directly and by regulation, in certain markets, particularly those in
currencies.
GAP RISK. The Fund is subject to the risk that a commodity price will change
from one level to another with no trading in between. Usually such movements
occur when there are adverse news announcements, which can cause a commodity
price to drop substantially from the previous day's closing price.
INCOME RISK. Income from the Fund's fixed income investments could decline
during periods of falling interest rates.
INTEREST RATE RISK. Interest rate risk is the risk that the value of the
securities in the Fund will decline because of rising market interest rates. The
Fund may be subject to a greater risk of rising interest rates than would
normally be the case due to the recent period of historically low rates and the
effect of potential government fiscal policy initiatives and resulting market
reaction to those initiatives. Interest rate risk is generally lower for
shorter-term investments and higher for longer-term investments.
INVESTMENT COMPANIES RISK. The Fund may invest in securities of other investment
companies, including ETFs. As a shareholder in other investment companies, the
Fund will bear its ratable share of that investment company's expenses, and
would remain subject to payment of the Fund's advisory and administrative fees
with respect to assets so invested. Shareholders would therefore be subject to
duplicative expenses to the extent the Fund invests in other investment
companies. In addition, the Fund will incur brokerage costs when purchasing and
selling shares of ETFs or other exchange-traded investment companies.
LIQUIDITY RISK. The Fund invests in Futures Instruments, which may be less
liquid than other types of investments. The illiquidity of Futures Instruments
could have a negative effect on the Fund's ability to achieve its investment
objective and may result in losses to Fund shareholders.
MANAGEMENT RISK. The Fund is subject to management risk because it is an
actively managed portfolio. The Advisor will apply investment techniques and
risk analyses in making investment decisions for the Fund, but there can be no
guarantee that the Fund will meet its investment objective.
MARKET RISK. The trading prices of commodities futures, fixed income securities
and other instruments fluctuate in response to a variety of factors. The Fund's
net asset value and market price may fluctuate significantly in response to
these factors. As a result, an investor could lose money over short or long
periods of time.
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FIRST TRUST MORNINGSTAR MANAGED FUTURES STRATEGY FUND (FMF)
JUNE 30, 2015 (UNAUDITED)
NON-CORRELATION RISK. The Fund's return may not correlate the return of the
Benchmark for a number of reasons. For example, the Advisor may elect not to
have the Fund's portfolio holdings exactly replicate the securities included in
the Benchmark or the ratios between the securities included in the Benchmark. In
addition, the Fund incurs operating expenses not applicable to the Benchmark,
and may incur costs in buying and selling securities, especially when
rebalancing the Fund's portfolio holdings to reflect changes in the composition
of the Benchmark.
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. INVESTMENT RISK. The Fund may invest in commodity futures contracts
traded on non-U.S. exchanges or enter into over-the-counter derivative contracts
with non-U.S. counterparties. Transactions on non-U.S. exchanges or with
non-U.S. counterparties present risks because they may not be subject to the
same degree of regulation as their U.S. counterparts.
PORTFOLIO TURNOVER RISK. The Fund's strategy may frequently involve buying and
selling portfolio securities by the Subsidiary to rebalance the Fund's exposure
to various market sectors. The Subsidiary's higher portfolio turnover may result
in the Fund paying higher levels of transaction costs and generating greater tax
liabilities for shareholders. Portfolio turnover risk may cause the Fund's
performance to be less than you expect.
REGULATORY RISK. The Fund's investment decisions may need to be modified, and
commodity contract positions held by the Fund may have to be liquidated at
disadvantageous times or prices, to avoid exceeding any applicable position
limits established by the CFTC, potentially subjecting the Fund to substantial
losses. The regulation of commodity transactions in the United States is a
rapidly changing area of law and is subject to ongoing modification by
government, self-regulatory and judicial action. The effect of any future
regulatory change with respect to any aspect of the Fund is impossible to
predict, but could be substantial and adverse to the Fund.
REPURCHASE AGREEMENT RISK. The Fund's investment in repurchase agreements may be
subject to market and credit risk with respect to the collateral securing the
repurchase agreements. Investments in repurchase agreements also may be subject
to the risk that the market value of the underlying obligations may decline
prior to the expiration of the repurchase agreement term.
SHORT SALES RISK. The Fund may engage in "short sale" transactions. The Fund
will lose value if the security or instrument that is the subject of a short
sale increases in value. The Fund also may enter into a short derivative
position through futures contracts, or short positions on currency futures. If
the price of the security or derivative that is the subject of a short sale
increases, then the Fund will incur a loss equal to the increase in price from
the time that the short sale was entered into plus any premiums and interest
paid to a third party in connection with the short sale. Therefore, short sales
involve the risk that losses may be exaggerated, potentially losing more money
than the actual cost of the investment. Also, there is the risk that the third
party to the short sale may fail to honor its contract terms, causing a loss to
the Fund.
SUBSIDIARY INVESTMENT RISK. Changes in the laws of the United States and/or the
Cayman Islands, under which the Fund and the Subsidiary are organized,
respectively, could result in the inability of the Fund to operate as intended
and could negatively affect the Fund and its shareholders. The Subsidiary is not
registered under the 1940 Act and is not subject to all the investor protections
of the 1940 Act. Thus, the Fund, as an investor in the Subsidiary, will not have
all the protections offered to investors in registered investment companies.
TAX RISK. The Fund intends to treat any income it may derive from Futures
Instruments (other than derivatives described in Revenue Rulings 2006 1 and 2006
31) received by the Subsidiary as "qualifying income" under the provisions of
the Internal Revenue Code of 1986, as amended, applicable to "regulated
investment companies" ("RICs"), based on a tax opinion received from special
counsel which was based, in part, on numerous private letter rulings ("PLRs")
provided to third parties not associated with the Fund or its affiliates (which
only those parties may rely on as precedent). Shareholders and potential
investors should be aware, however, that, in July 2011, the Internal Revenue
Service ("IRS") suspended the issuance of such PLRs pending its re-examination
of the policies underlying them, which is still ongoing. If, at the end of that
re-examination, the IRS changes its position with respect to the conclusions
reached in those PLRs, then the Fund may be required to restructure its
investments to satisfy the qualifying income requirement or might cease to
qualify as a RIC.
If the Fund did not qualify as a RIC for any taxable year and certain relief
provisions were not available, the Fund's taxable income would be subject to tax
at the Fund level and to a further tax at the shareholder level when such income
is distributed. In such event, in order to re-qualify for taxation as a RIC, the
Fund might be required to recognize unrealized gains, pay substantial taxes and
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FIRST TRUST MORNINGSTAR MANAGED FUTURES STRATEGY FUND (FMF)
JUNE 30, 2015 (UNAUDITED)
interest and make certain distributions. This would cause investors to incur
higher tax liabilities than they otherwise would have incurred and would have a
negative impact on Fund returns. In such event, the Fund's Board of Trustees may
determine to reorganize or close the Fund or materially change the Fund's
investment objective and strategies.
In the event that the Fund fails to qualify as a RIC, the Fund will promptly
notify shareholders of the implications of that failure.
The Fund may invest a portion of its assets in equity repurchase agreements.
Recent changes in the law have the potential of changing the character and
source of such instruments potentially subjecting them to unexpected U.S.
taxation. Depending upon the terms of the contracts, the Fund may be required to
indemnify the counterparty for such increased tax.
U.S. GOVERNMENT AND AGENCY SECURITIES RISK. The Fund may invest in U.S.
government obligations. U.S. government obligations include U.S. Treasury
obligations and securities issued or guaranteed by various agencies of the U.S.
government or by various instrumentalities which have been established or
sponsored by the U.S. government. U.S. Treasury obligations are backed by the
"full faith and credit" of the U.S. government. Securities issued or guaranteed
by federal agencies and U.S. government sponsored instrumentalities may or may
not be backed by the full faith and credit of the U.S. government.
VOLATILITY RISK. The Fund seeks to exceed the performance of the Benchmark. The
Fund and the Benchmark are designed to capture the long-term economic benefits
of rising or declining market trends. Frequent or significant short-term price
movements could adversely impact the performance of the Benchmark and the Fund.
In addition, the net asset value of the Fund over short-term periods may be more
volatile than other investment options because of the Fund's significant use of
financial instruments that have a leveraging effect. For example, because of the
low margin deposits required, futures trading involves an extremely high degree
of leverage and as a result, a relatively small price movement in a Futures
Instrument may result in immediate and substantial losses to the Fund.
WHIPSAW MARKETS RISK. The Fund may be subject to the forces of "whipsaw" markets
(as opposed to choppy or stable markets), in which significant price movements
develop but then repeatedly reverse. Such market conditions could cause
substantial losses to the Benchmark and the Fund.
ADVISORY AGREEMENT
BOARD CONSIDERATIONS REGARDING APPROVAL OF CONTINUATION OF INVESTMENT MANAGEMENT
AGREEMENT
The Board of Trustees of the First Trust Exchange-Traded Fund V (the "Trust"),
including the Independent Trustees, unanimously approved the continuation of the
Investment Management Agreement (the "Agreement") with First Trust Advisors L.P.
(the "Advisor" or "First Trust") on behalf of the First Trust Morningstar
Managed Futures Strategy Fund (the "Fund"). The Board approved the continuation
of the Agreement 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 Agreement 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 Agreement, the
Independent Trustees received a report in advance of the Board meeting
responding to a request for information from counsel to the Independent
Trustees. The report, among other things, outlined the services provided by the
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 which were either mutual funds or
exchange-traded funds ("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; 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; fall-out benefits to the Advisor and its affiliate, First
Trust Portfolios L.P. ("FTP"); and a summary of the Advisor's compliance
program. Following receipt of this information, the Independent Trustees and
their counsel met separately to discuss the information provided by the Advisor.
The Board applied its business judgment to determine whether the arrangement
between the Trust and the Advisor is a reasonable business arrangement 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 manages the Fund and knowing the Fund's unitary fee.
In reviewing the Agreement, the Board considered the nature, extent and quality
of services provided by the Advisor under the Agreement. 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. With
respect to the Agreement, the Board considered that the Advisor is responsible
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FIRST TRUST MORNINGSTAR MANAGED FUTURES STRATEGY FUND (FMF)
JUNE 30, 2015 (UNAUDITED)
for the overall management and administration of the Fund and reviewed the
services provided by the Advisor to the Fund. The Board also considered the
background and experience of the Advisor's employees responsible for the
day-to-day management of the Fund. The Board considered the compliance program
that had been developed by the Advisor and the procedures in place to monitor
the Fund's investment program. 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. 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 under the Agreement have been and are expected to remain
satisfactory and that 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 Agreement,
noting that the Fund pays the Advisor a fee equal to an annual rate of 0.95% of
its average daily net assets and that the Advisor is 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 below 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 took these limitations and
differences into account in considering the MPI data. The Board also 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 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 a broad-based benchmark, and noted that the Fund underperformed for
the one-year and since-inception (August 1, 2013) periods ended December 31,
2014.
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 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, 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 from serving as
investment advisor 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 the Advisor for the 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 Advisor does not utilize soft dollars in connection with its management
of the Fund's portfolio. 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 Agreement continue to be fair and reasonable and that the continuation of
the Agreement is in the best interests of the Fund. No single factor was
determinative in the Board's analysis.
BOARD CONSIDERATIONS REGARDING APPROVAL OF CONTINUATION OF INVESTMENT
MANAGEMENT AGREEMENT
The Board of Trustees of the First Trust Exchange-Traded Fund V (the "Trust"),
including the Independent Trustees, unanimously approved the continuation of the
Investment Management Agreement (the "Fund Agreement") with First Trust Advisors
L.P. (the "Advisor" or "First Trust") on behalf of the First Trust Morningstar
Managed Futures Strategy Fund (the "Fund"). The Board approved the continuation
of the Agreement for a one-year period ending June 30, 2016, at a meeting held
on June 16, 2015. Because the Fund invests in commodity, equity and currency
futures contracts through a wholly-owned subsidiary of the Fund, the Board,
including the Independent Trustees, also approved the continuation of an
Investment Management Agreement (the "Subsidiary Agreement" and together with
the Fund Agreement, the "Agreements") with First Trust for the wholly-owned
subsidiary (the "Subsidiary"), also for a one-year period. The Board 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.
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FIRST TRUST MORNINGSTAR MANAGED FUTURES STRATEGY FUND (FMF)
JUNE 30, 2015 (UNAUDITED)
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. At meetings held on March 8-9, 2015, April 20, 2015 and June
16, 2015, the Board, including the Independent Trustees, reviewed materials
provided by the Advisor responding to requests for information from counsel to
the Independent Trustees that, among other things, outlined the services
provided by the Advisor to the Fund and the Subsidiary (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 which were
either mutual funds or exchange-traded funds ("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; expenses of the Fund
compared to expense ratios of the funds in the MPI Peer Group; performance
information for the Fund; 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; any fall-out benefits to the Advisor and its affiliate, First Trust
Portfolios L.P. ("FTP"); and a summary of the Advisor's compliance program. The
Board reviewed initial materials with the Advisor at the meeting held on March
8-9, 2015, and additional materials at a special meeting held on April 20, 2015,
at each of which the Independent Trustees and their counsel met separately to
discuss the information provided by the Advisor. Following the April meeting,
independent legal counsel on behalf of the Independent Trustees requested
certain clarifications and supplements to the materials provided, and those were
considered at an executive session of the Independent Trustees and independent
legal counsel held prior to the June 16, 2015 meeting, as well as at the
meeting. The Board applied its business judgment to determine whether the
arrangements between the Trust and the Advisor and between the Advisor and the
Subsidiary 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 manages 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 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. With
respect to the Agreements, the Board considered that the Advisor is responsible
for the overall management and administration of the Trust, the Fund and the
Subsidiary and reviewed the services provided by the Advisor to the Trust, the
Fund and the Subsidiary. The Board also considered the background and experience
of the Advisor's employees responsible for the day-to-day management of the Fund
and the Subsidiary. The Board considered the compliance program that had been
developed by the Advisor and the procedures in place to monitor the Fund's
investment program. 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.
In light of the information presented and the considerations made, the Board
concluded that the nature, extent and quality of services provided to the Trust,
the Fund and the Subsidiary by the Advisor under the Agreements have been and
are expected to remain satisfactory and that the Advisor has managed the Fund
consistent with the Fund's investment objective and policies.
The Board considered the unitary fee payable by the Fund under the Fund
Agreement, noting that the Fund pays the Advisor a fee equal to an annual rate
of 0.95% of its average daily net assets and that the Advisor is 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 noted that First Trust
receives no compensation under the Subsidiary Agreement. 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 below 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 took these limitations and
differences into account in considering the MPI data. The Board also 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 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 a broad-based benchmark, and noted that the Fund underperformed the
MPI Peer Group average and the benchmark for the one-year and since-inception
(August 1, 2013) periods ended December 31, 2014.
Page 23
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ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST MORNINGSTAR MANAGED FUTURES STRATEGY FUND (FMF)
JUNE 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 Agreements.
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, 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 from serving as
investment advisor 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. The Board noted the inherent limitations in the
profitability analysis, and noted that the Fund was not profitable for the
Advisor. 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 Advisor does not utilize soft dollars in connection with its
management of the Fund's portfolio. 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 Trust and the Fund. No single
factor was determinative in the Board's analysis.
Page 24
FIRST TRUST
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.
ITEMS 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable.
ITEM 6. INVESTMENTS.
(a) Schedule of Investments in securities of unaffiliated issuers as of the
close of the reporting period is included as part of the report to
shareholders filed under Item 1 of this form.
(b) Not applicable.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There have been no material changes to the procedures by which the shareholders
may recommend nominees to the registrant's board of directors, where those
changes were implemented after the registrant last provided disclosure in
response to the requirements of Item 407(c)(2)(iv) of Regulation S-K (17 CFR
229.407) (as required by Item 22(b)(15) of Schedule 14A (17 CFR 240.14a-101)),
or this Item.
ITEM 11. CONTROLS AND PROCEDURES.
(a) The registrant's principal executive and principal financial officers, or
persons performing similar functions, have concluded that the registrant's
disclosure controls and procedures (as defined in Rule 30a-3(c) under the
Investment Company Act of 1940, as amended (the "1940 Act") (17 CFR
270.30a-3 (c))) are effective, as of a date within 90 days of the filing
date of the report that includes the disclosure required by this
paragraph, based on their evaluation of these controls and procedures
required by Rule 30a-3(b) under the 1940 Act (17 CFR 270.30a-3(b)) and
Rules 13a-15(b) or 15d-15(b) under the Securities Exchange Act of 1934, as
amended (17 CFR 240.13a-15(b) or 240.15d-15 (b)).
(b) There were no changes in the registrant's internal control over financial
reporting (as defined in Rule 30a-3(d) under the 1940 Act (17 CFR
270.30a-3(d)) that occurred during the registrant's last fiscal quarter of
the period covered by this report that have materially affected, or are
reasonably likely to materially affect, the registrant's internal control
over financial reporting.
ITEM 12. EXHIBITS.
(a)(1) Code of ethics, or any amendment thereto, that is the subject of
disclosure required by Item 2 is attached hereto.
(a)(2) Certifications pursuant to Rule 30a-2(a) under the 1940 Act and
Section 302 of the Sarbanes-Oxley Act of 2002 are attached hereto.
(a)(3) Not Applicable
(b) Certifications pursuant to Rule 30a-2(b) under the 1940 Act and Section
906 of the Sarbanes-Oxley Act of 2002 are attached hereto.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
(registrant) First Trust Exchange-Traded Fund V
------------------------------------------------
By (Signature and Title)* /s/ Mark R. Bradley
----------------------------------------
Mark R. Bradley, President and
Chief Executive Officer
(principal executive officer)
Date: August 14, 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: August 14, 2015
------------------
By (Signature and Title)* /s/ James M. Dykas
----------------------------------------
James M. Dykas, Treasurer,
Chief Financial Officer and
Chief Accounting Officer
(principal financial officer)
Date: August 14, 2015
------------------
* Print the name and title of each signing officer under his or her signature.