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 811-22559
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First Trust Exchange-Traded Fund IV
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(Exact name of registrant as specified in charter)
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
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(Address of principal executive offices) (Zip code)
W. Scott Jardine, Esq.
First Trust Portfolios L.P.
120 East Liberty Drive, Suite 400
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Wheaton, IL 60187
(Name and address of agent for service)
Registrant's telephone number, including area code: (630) 765-8000
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Date of fiscal year end: October 31
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Date of reporting period: April 30, 2016
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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, 100 F Street, NE,
Washington, DC 20549. The OMB has reviewed this collection of information under
the clearance requirements of 44 U.S.C. ss. 3507.
ITEM 1. REPORT TO STOCKHOLDERS.
The registrant's 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 IV
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First Trust North American
Energy Infrastructure Fund
(EMLP)
Semi-Annual Report
For the Six Months Ended
April 30, 2016
Energy Income Partners, LLC
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TABLE OF CONTENTS
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FIRST TRUST NORTH AMERICAN ENERGY INFRASTRUCTURE FUND (EMLP)
APRIL 30, 2016
Shareholder Letter........................................................... 1
Fund Performance Overview.................................................... 2
Portfolio Management......................................................... 4
Understanding Your Fund Expenses............................................. 5
Portfolio of Investments..................................................... 6
Statement of Assets and Liabilities.......................................... 8
Statement of Operations...................................................... 9
Statements of Changes in Net Assets.......................................... 10
Financial Highlights......................................................... 11
Notes to 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/or Energy Income Partners, LLC ("EIP" or the
Sub-Advisor) and their respective representatives, taking into account the
information currently available to them. Forward-looking statements include all
statements that do not relate solely to current or historical fact. For example,
forward-looking statements include the use of words such as "anticipate,"
"estimate," "intend," "expect," "believe," "plan," "may," "should," "would" or
other words that convey uncertainty of future events or outcomes.
Forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
the series of First Trust Exchange-Traded Fund IV (the "Trust") described in
this report (First Trust North American Energy Infrastructure Fund; hereinafter
referred to as the "Fund") to be materially different from any future results,
performance or achievements expressed or implied by the forward-looking
statements. When evaluating the information included in this report, you are
cautioned not to place undue reliance on these forward-looking statements, which
reflect the judgment of the Advisor and/or Sub-Advisor and their respective
representatives only as of the date hereof. We undertake no obligation to
publicly revise or update these forward-looking statements to reflect events and
circumstances that arise after the date hereof.
PERFORMANCE AND RISK DISCLOSURE
There is no assurance that the Fund will achieve its investment objective. The
Fund is subject to market risk, which is the possibility that the market values
of securities owned by the Fund will decline and that the value of the Fund
shares may therefore be less than what you paid for them. Accordingly, you can
lose money 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 and/or Sub-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 the prospectus, the statement of
additional information, this report and other Fund regulatory filings.
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SHAREHOLDER LETTER
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FIRST TRUST NORTH AMERICAN ENERGY INFRASTRUCTURE FUND (EMLP)
SEMI-ANNUAL LETTER FROM THE CHAIRMAN AND CEO
APRIL 30, 2016
Dear Shareholders:
Thank you for your investment in First Trust North American Energy
Infrastructure Fund (the "Fund").
First Trust Advisors L.P. ("First Trust") is pleased to provide you with the
semi-annual report which contains detailed information about your investment for
the six months ended April 30, 2016. Additionally, First Trust compiled the
Fund's financial statements for you to review. We encourage you to read this
report and discuss it with your financial advisor.
While markets were up and down during 2015, we believe there are three important
things to remember. First, the U.S. economy grew, despite the massive decline in
oil prices, and second, the tapering that began in 2014 by the Federal Reserve
(the "Fed") did not stop growth in the U.S. economy. Finally, the
long-anticipated rate hike by the Fed in December had little effect on the money
supply, and the stock market was not shocked by the hike. Early in 2016, many
investors were concerned that the volatility we saw in the market in 2015 would
continue, and it did. From December 31, 2015 through February 11, 2016, the S&P
500(R) Index declined by 10.27%. Since then, the market has made a steady
comeback, and as of April 30, 2016, the S&P 500(R) Index was up 13.39%.
First Trust believes that having a long-term investment horizon and being
invested in quality products can help you reach your goals, despite how the
market behaves. We have always maintained perspective about the markets and
believe investors should as well. We will continue to strive to provide quality
investments each and every day, which has been one of the hallmarks of our firm
since its inception 25 years ago.
Thank you for giving First Trust the opportunity to be a part of your investment
plan. We value our relationship with you and will continue to focus on helping
investors like you reach your financial goals.
Sincerely,
/s/ James A. Bowen
James A. Bowen
Chairman of the Board of Trustees
Chief Executive Officer of First Trust Advisors L.P.
Page 1
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FUND PERFORMANCE OVERVIEW (UNAUDITED)
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FIRST TRUST NORTH AMERICAN ENERGY INFRASTRUCTURE FUND (EMLP)
The investment objective of the First Trust North American Energy Infrastructure
Fund (the "Fund") is to seek total return. The Fund pursues its objective by
investing at least 80% of its net assets under normal market conditions (plus
the amount of any borrowing for investment purposes) in equity securities of
companies engaged in the energy infrastructure sector. These companies
principally include publicly-traded master limited partnerships and limited
liability companies taxed as partnerships ("MLPs"), MLP affiliates, Canadian
Income Equities, pipeline companies, utilities and other companies that derive
at least 50% of their revenues from operating or providing services in support
of infrastructure assets such as pipelines, power transmission and petroleum and
natural gas storage in the petroleum, natural gas and power generation
industries (collectively, "Energy Infrastructure Companies"). The Fund will be
generally concentrated in Energy Infrastructure Companies. Under normal market
conditions, the Fund will invest at least 80% of its net assets (plus the amount
of any borrowing for investment purposes) in equity securities of companies
headquartered or incorporated in the United States and Canada. There can be no
assurance that the Fund's investment objective will be achieved. The Fund may
not be appropriate for all investors.
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PERFORMANCE
----------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL CUMULATIVE
TOTAL RETURNS TOTAL RETURNS
6 Months Ended 1 Year Ended Inception (6/20/12) Inception (6/20/12)
4/30/16 4/30/16 to 4/30/16 to 4/30/16
FUND PERFORMANCE
NAV 1.65% -13.34% 7.04% 30.04%
Market Price 1.56% -13.29% 7.06% 30.14%
INDEX PERFORMANCE
Blended Benchmark(1) 4.09% -9.21% 5.97% 25.10%
S&P 500(R) Index 0.43% 1.21% 13.92% 65.37%
----------------------------------------------------------------------------------------------------------------
Total returns for the period since inception are calculated from the inception
date of the Fund. "Average Annual Total Returns" represent the average annual
change in value of an investment over the period indicated. "Cumulative Total
Returns" represent the total change in value of an investment over the period
indicated.
The Fund's per share net asset value ("NAV") is the value of one share of the
Fund and is computed by dividing the value of all assets of the Fund (including
accrued interest and dividends), less all liabilities (including accrued
expenses and dividends declared but unpaid), by the total number of outstanding
shares. The price used to calculate market return ("Market Price") is determined
by using the midpoint between the highest bid and the lowest offer on the stock
exchange on which shares of the Fund are listed for trading as of the time that
the Fund's NAV is calculated. Since shares of the Fund did not trade in the
secondary market until after the Fund's inception, for the period from inception
to the first day of secondary market trading in shares of the Fund, the NAV of
the Fund is used as a proxy for the secondary market trading price to calculate
market returns. NAV and market returns assume that all distributions have been
reinvested in the Fund at NAV and Market Price, respectively.
An index is a statistical composite that tracks a specified financial market or
sector. Unlike the Fund, the indices do not actually hold a portfolio of
securities and therefore do not incur the expenses incurred by the Fund. These
expenses negatively impact the performance of the Fund. Also, market returns do
not include brokerage commissions that may be payable on secondary market
transactions. If brokerage commissions were included, market returns would be
lower. The total returns presented reflect the reinvestment of dividends on
securities in the indices. The returns presented do not reflect the deduction of
taxes that a shareholder would pay on Fund distributions or the redemption or
sale of Fund shares. The investment return and principal value of shares of the
Fund will vary with changes in market conditions. Shares of the Fund may be
worth more or less than their original cost when they are redeemed or sold in
the market. The Fund's past performance is no guarantee of future performance.
-----------------------------
(1) The Blended Benchmark consists of the following two indices: 50% of the
Philadelphia Stock Exchange Utility Index, which is a market
capitalization weighted index composed of geographically diverse public
U.S. utility stocks; and 50% of the Alerian MLP Total Return Index, which
is a float-adjusted, capitalization-weighted composite of the 50 most
prominent energy Master Limited Partnerships (MLPs). Indices are unmanaged
and an investor cannot invest directly in an index. All index returns
assume that distributions are reinvested when they are received.
Page 2
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FUND PERFORMANCE OVERVIEW (UNAUDITED) (CONTINUED)
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FIRST TRUST NORTH AMERICAN ENERGY INFRASTRUCTURE FUND (EMLP)
-----------------------------------------------------------
% OF TOTAL
INDUSTRY CLASSIFICATION INVESTMENTS
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Pipeline 51.04%
Electric Power 33.58
Natural Gas Utility 5.95
Propane 3.95
Gathering & Processing 2.77
Coal 1.73
Other 0.98
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Total 100.00%
=======
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% OF TOTAL
TOP TEN HOLDINGS INVESTMENTS
-----------------------------------------------------------
Enbridge Energy Management, LLC 7.43%
TransCanada Corp. 6.88
Kinder Morgan, Inc. 4.58
Enterprise Products Partners, L.P. 4.15
Enbridge Income Fund Holdings, Inc. 3.16
Spectra Energy Corp. 2.90
Public Service Enterprise Group, Inc. 2.89
NextEra Energy, Inc. 2.85
American Electric Power Co., Inc. 2.79
Plains All American Pipeline, L.P. 2.54
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Total 40.17%
=======
PERFORMANCE OF A $10,000 INITIAL INVESTMENT
JUNE 20, 2012 - APRIL 30, 2016
First Trust
North American
Energy Blended S&P 500(R)
Infrastructure Fund Benchmark(1) Index
6/20/12 $10,000 $10,000 $10,000
10/31/12 10,690 10,609 10,495
4/30/13 12,380 12,218 12,009
10/31/13 12,138 12,041 13,347
4/30/14 13,343 13,356 14,463
10/31/14 14,861 14,357 15,652
4/30/15 15,005 13,778 16,340
10/31/15 12,793 12,019 16,466
4/30/16 13,004 12,510 16,537
Performance figures assume reinvestment of all distributions and do not reflect
the deduction of taxes that a shareholder would pay on Fund distributions or the
redemption or sale of Fund shares. An index is a statistical composite that
tracks a specified financial market or sector. Unlike the Fund, the indices do
not actually hold a portfolio of securities and therefore do not incur the
expenses incurred by the Fund. These expenses negatively impact the performance
of the Fund. The Fund's past performance does not predict future performance.
FREQUENCY DISTRIBUTION OF DISCOUNTS AND PREMIUMS
BID/ASK MIDPOINT VS. NAV THROUGH APRIL 30, 2016
The following Frequency Distribution of Discounts and Premiums charts are
provided to show the frequency at which the bid/ask midpoint price for the Fund
was at a discount or premium to the daily NAV. The following tables are for
comparative purposes only and represent the period June 21, 2012 (commencement
of trading) through April 30, 2016. Shareholders may pay more than NAV when they
buy Fund shares and receive less than NAV when they sell those shares because
shares are bought and sold at current market price. Data presented represents
past performance and cannot be used to predict future results.
NUMBER OF DAYS BID/ASK MIDPOINT NUMBER OF DAYS BID/ASK MIDPOINT
AT/ABOVE NAV BELOW NAV
---------------------------------------- ----------------------------------------
0.00%- 0.50%- 1.00%- 0.00%- 0.50%- 1.00%-
FOR THE PERIOD 0.49% 0.99% 1.99% >=2.00% 0.49% 0.99% 1.99% >=2.00%
6/21/12 - 10/31/12 78 4 0 0 9 0 0 0
11/1/12 - 10/31/13 226 2 0 0 24 0 0 0
11/1/13 - 10/31/14 231 0 0 0 21 0 0 0
11/1/14 - 10/31/15 158 0 0 0 93 0 0 0
11/1/15 - 4/30/16 100 0 0 0 24 0 0 0
Page 3
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PORTFOLIO MANAGEMENT
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FIRST TRUST NORTH AMERICAN ENERGY INFRASTRUCTURE FUND (EMLP)
SEMI-ANNUAL REPORT
APRIL 30, 2016
SUB-ADVISOR
ENERGY INCOME PARTNERS, LLC
Energy Income Partners, LLC ("EIP or the "Sub-Advisor"), located in Westport,
CT, serves as the investment sub-advisor to the First Trust North American
Energy Infrastructure Fund ("EMLP" or the "Fund"). EIP was founded in 2003 and
provides professional asset management services in the area of energy-related
master limited partnerships ("MLPs") and other high-payout securities such as
pipeline companies, power utilities, Yield-Co's, and energy infrastructure real
estate investment trusts ("REITs"). EIP mainly focuses on investments in
energy-related infrastructure assets such as pipelines, petroleum storage and
terminals and power transmission and distribution that receive fee-based or
regulated income from their corporate and individual customers. As of April 30,
2016, EIP had approximately $4.6 billion of assets under management or
supervision. Private funds advised by EIP include a partnership for U.S. high
net worth individuals and an open-end registered investment company for
institutions. EIP also manages separately managed accounts and provides its
model portfolio to unified managed accounts. Finally, in addition to the Fund,
EIP serves as a sub-advisor to four closed-end management investment companies,
to a sleeve of an actively managed exchange-traded fund and to a sleeve of a
series of a variable insurance trust. EIP is an investment advisor registered
with the Securities and Exchange Commission.
PORTFOLIO MANAGEMENT TEAM
JAMES J. MURCHIE EVA PAO
PORTFOLIO MANAGER CO-PORTFOLIO MANAGER
FOUNDER AND CEO OF ENERGY PRINCIPAL OF ENERGY
INCOME PARTNERS, LLC INCOME PARTNERS, LLC
JOHN TYSSELAND
CO-PORTFOLIO MANAGER
PRINCIPAL OF ENERGY INCOME PARTNERS, LLC
Page 4
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FIRST TRUST NORTH AMERICAN ENERGY INFRASTRUCTURE FUND (EMLP)
--------------------------------------------------------------------------------
UNDERSTANDING YOUR FUND EXPENSES
APRIL 30, 2016 (UNAUDITED)
As a shareholder of First Trust North American Energy Infrastructure 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 of investing in the Fund and to compare these costs with the
ongoing costs of investing in other funds.
The Example is based on an investment of $1,000 invested at the beginning of the
period and held through the six-month period ended April 30, 2016.
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 period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second line in the following table provides information about hypothetical
account values and hypothetical expenses based on the Fund's actual expense
ratio and an assumed rate of return of 5% per year before expenses, which is not
the Fund's actual return. The hypothetical account values and expenses may not
be used to estimate the actual ending account balance or expenses you paid for
the period. You may use this information to compare the ongoing costs of
investing in the Fund and other funds. To do so, compare this 5% hypothetical
example with the 5% hypothetical examples that appear in the shareholder reports
of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs such as brokerage
commissions. Therefore, the second line in the table is useful in comparing
ongoing costs only, and will not help you determine the relative total costs of
owning different funds. In addition, if these transactional costs were included,
your costs would have been higher.
-----------------------------------------------------------------------------------------------------------------------
ANNUALIZED
EXPENSE RATIO EXPENSES PAID
BEGINNING ENDING BASED ON THE DURING THE
ACCOUNT VALUE ACCOUNT VALUE SIX-MONTH SIX-MONTH
NOVEMBER 1, 2015 APRIL 30, 2016 PERIOD PERIOD (a)
-----------------------------------------------------------------------------------------------------------------------
FIRST TRUST NORTH AMERICAN ENERGY INFRASTRUCTURE FUND (EMLP)
Actual $1,000.00 $1,016.50 0.95% $4.76
Hypothetical (5% return before expenses) $1,000.00 $1,020.14 0.95% $4.77
(a) Expenses are equal to the annualized expense ratio as indicated in the
table, multiplied by the average account value over the period (November
1, 2015 through April 30, 2016), multiplied by 182/366 (to reflect the
one-half year period).
Page 5
FIRST TRUST NORTH AMERICAN ENERGY INFRASTRUCTURE FUND (EMLP)
PORTFOLIO OF INVESTMENTS
APRIL 30, 2016 (UNAUDITED)
SHARES DESCRIPTION VALUE
-----------------------------------------------------------
COMMON STOCKS -- 71.3%
ELECTRIC UTILITIES -- 16.1%
74,851 Alliant Energy Corp. $ 5,278,493
479,701 American Electric Power Co.,
Inc. 30,461,013
131,656 Duke Energy Corp. 10,371,860
455,812 Emera, Inc. (CAD) 16,518,508
451,862 Eversource Energy 25,503,091
594,582 Exelon Corp. 20,863,882
351,713 Fortis, Inc. (CAD) 11,156,593
148,587 Hydro One Ltd. (CAD) (a) 2,790,077
135,156 IDACORP, Inc. 9,829,896
264,600 NextEra Energy, Inc. 31,111,668
207,245 Southern (The) Co. 10,382,975
127,169 Xcel Energy, Inc. 5,090,575
--------------
179,358,631
--------------
GAS UTILITIES -- 6.4%
185,749 Atmos Energy Corp. 13,476,090
198,288 Chesapeake Utilities Corp. 11,802,102
438,365 New Jersey Resources Corp. 15,640,863
136,668 ONE Gas, Inc. 7,990,978
558,042 UGI Corp. 22,455,610
--------------
71,365,643
--------------
MULTI-UTILITIES -- 15.3%
369,805 ATCO Ltd., Class I (CAD) 12,078,273
407,101 Canadian Utilities Ltd.,
Class A (CAD) 11,709,791
255,819 CMS Energy Corp. 10,406,717
299,554 National Grid PLC, ADR 21,570,883
702,367 NiSource, Inc. 15,950,755
683,860 Public Service Enterprise Group,
Inc. 31,546,462
301,763 SCANA Corp. 20,728,100
203,725 Sempra Energy 21,054,979
441,820 WEC Energy Group, Inc. 25,718,342
--------------
170,764,302
--------------
OIL, GAS & CONSUMABLE FUELS
-- 32.9%
3,822,653 Enbridge Energy Management,
LLC (b) 81,002,017
1,491,205 Enbridge Income Fund Holdings,
Inc. (CAD) 34,454,477
542,872 Enbridge, Inc. 22,550,903
814,152 Inter Pipeline Ltd. (CAD) 17,409,499
347,646 Keyera Corp. (CAD) 11,196,601
2,815,825 Kinder Morgan, Inc. 50,009,052
598,897 ONEOK, Inc. 21,650,127
1,012,273 Spectra Energy Corp. 31,653,777
563,662 Targa Resources Corp. 22,805,764
1,808,836 TransCanada Corp. 75,048,606
--------------
367,780,823
--------------
SHARES/
UNITS DESCRIPTION VALUE
-----------------------------------------------------------
REAL ESTATE INVESTMENT TRUSTS
-- 0.6%
124,865 CorEnergy Infrastructure Trust,
Inc. $ 2,658,376
274,187 InfraREIT, Inc. 4,546,020
--------------
7,204,396
--------------
TOTAL COMMON STOCKS -- 71.3% 796,473,795
(Cost $791,259,941) --------------
MASTER LIMITED PARTNERSHIPS
-- 26.3%
CHEMICALS -- 0.1%
46,929 Westlake Chemical Partners, L.P. 898,221
--------------
GAS UTILITIES -- 1.8%
241,301 AmeriGas Partners, L.P. 10,460,399
338,354 Suburban Propane Partners, L.P. 10,214,907
--------------
20,675,306
--------------
INDEPENDENT POWER AND RENEWABLE
ELECTRICITY PRODUCERS -- 2.5%
953,505 NextEra Energy Partners, L.P. 27,546,759
--------------
OIL, GAS & CONSUMABLE FUELS
-- 21.9%
347,298 Alliance Holdings GP, L.P. 6,112,445
813,948 Alliance Resource Partners, L.P. 12,738,286
81,879 Buckeye Partners, L.P. 5,895,288
604,880 Columbia Pipeline Partners, L.P. 8,788,906
500,954 Enbridge Energy Partners, L.P. 10,840,645
1,697,703 Enterprise Products Partners,
L.P. 45,311,693
273,591 EQT Midstream Partners, L.P. 21,693,030
441,804 Holly Energy Partners, L.P. 15,118,533
148,269 Magellan Midstream Partners,
L.P. 10,685,747
575,532 NGL Energy Partners, L.P. 7,355,299
374,566 ONEOK Partners, L.P. 13,282,110
1,205,325 Plains All American Pipeline,
L.P. 27,650,156
351,954 Spectra Energy Partners, L.P. 17,749,040
369,325 Tallgrass Energy Partners, L.P. 15,179,258
308,269 TC PipeLines, L.P. 16,883,893
240,399 TransMontaigne Partners, L.P. 9,832,319
--------------
245,116,648
--------------
TOTAL MASTER LIMITED
PARTNERSHIPS -- 26.3% 294,236,934
(Cost $301,819,923) --------------
TOTAL INVESTMENTS -- 97.6% 1,090,710,729
(Cost $1,093,079,864) (c)
NET OTHER ASSETS AND
LIABILITIES -- 2.4% 26,429,346
--------------
NET ASSETS -- 100.0% $1,117,140,075
==============
Page 6 See Notes to Financial Statements
FIRST TRUST NORTH AMERICAN ENERGY INFRASTRUCTURE FUND (EMLP)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2016 (UNAUDITED)
(a) This security is restricted in the U.S. and cannot be offered for public
sale without first being registered under the Securities Act of 1933, as
amended. This security is not restricted on the foreign exchange where it
trades freely without any additional registration. As such, it does not
require the additional disclosure required of restricted securities.
(b) Non-income producing security which makes payment-in-kind ("PIK")
distributions. For the six months ended April 30, 2016, the Fund received
173,817 PIK shares of Enbridge Energy Management, LLC.
(c) Aggregate cost for financial reporting purposes, which approximates the
aggregate cost for federal income tax purposes. As of April 30, 2016, the
aggregate gross unrealized appreciation for all securities in which there
was an excess of value over tax cost was $95,060,826 and the aggregate
gross unrealized depreciation for all securities in which there was an
excess of tax cost over value was $97,429,961.
ADR American Depositary Receipt
CAD Canadian Dollar - Security is denominated in Canadian Dollars and is
translated into U.S. Dollars based upon the current exchange rate.
-----------------------------
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of April 30,
2016 is as follows (see Note 2A - Portfolio Valuation in the Notes to Financial
Statements):
Level 1 - Quoted Prices
Level 2 - Other Significant Observable Inputs
Level 3 - Significant Unobservable Inputs
INVESTMENTS LEVEL 1 LEVEL 2 LEVEL 3
--------------------------------------------------------------
Common Stocks* $ 796,473,795 $ -- $ --
Master Limited
Partnerships* 294,236,934 -- --
-----------------------------------------
Total Investments $1,090,710,729 $ -- $ --
=========================================
* See Portfolio of Investments for industry breakout.
All transfers in and out of the Levels during the period are assumed to be
transferred on the last day of the period at their current value. There were no
transfers between Levels at April 30, 2016.
See Notes to Financial Statements Page 7
FIRST TRUST NORTH AMERICAN ENERGY INFRASTRUCTURE FUND (EMLP)
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 2016 (UNAUDITED)
ASSETS:
Investments, at value.................................................. $ 1,090,710,729
Cash................................................................... 17,867,747
Foreign currency, at value............................................. 816
Receivables:
Dividends........................................................... 5,192,907
Investment securities sold.......................................... 4,132,236
Capital shares sold................................................. 3,438,844
----------------
Total Assets..................................................... 1,121,343,279
----------------
LIABILITIES:
Payables:
Investment securities purchased..................................... 3,379,446
Investment advisory fees............................................ 823,758
----------------
Total Liabilities................................................ 4,203,204
----------------
NET ASSETS............................................................. $ 1,117,140,075
================
NET ASSETS CONSIST OF:
Paid-in capital........................................................ $ 1,228,628,073
Par value.............................................................. 488,050
Accumulated net investment income (loss)............................... (9,963,341)
Accumulated net realized gain (loss) on investments and foreign
currency transactions............................................... (99,644,426)
Net unrealized appreciation (depreciation) on investments and
foreign currency translation........................................ (2,368,281)
----------------
NET ASSETS............................................................. $ 1,117,140,075
================
NET ASSET VALUE, per share............................................. $ 22.89
================
Number of shares outstanding (unlimited number of shares
authorized, par value $0.01 per share).............................. 48,805,000
================
Investments, at cost................................................... $ 1,093,079,864
================
Foreign currency, at cost (proceeds)................................... $ 816
================
Page 8 See Notes to Financial Statements
FIRST TRUST NORTH AMERICAN ENERGY INFRASTRUCTURE FUND (EMLP)
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED APRIL 30, 2016 (UNAUDITED)
INVESTMENT INCOME:
Dividends.............................................................. $ 12,539,100
Foreign tax withholding................................................ (563,275)
----------------
Total investment income............................................. 11,975,825
----------------
EXPENSES:
Investment advisory fees............................................... 4,375,255
----------------
Total expenses...................................................... 4,375,255
----------------
NET INVESTMENT INCOME (LOSS)........................................... 7,600,570
----------------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments......................................................... (78,522,403)
In-kind redemptions................................................. 6,634,548
Foreign currency transactions....................................... (414)
----------------
Net realized gain (loss)............................................... (71,888,269)
----------------
Net change in unrealized appreciation (depreciation) on:
Investments......................................................... 88,948,911
Foreign currency translation........................................ 422
----------------
Net change in unrealized appreciation (depreciation)................... 88,949,333
----------------
NET REALIZED AND UNREALIZED GAIN (LOSS)................................ 17,061,064
----------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS..................................................... $ 24,661,634
================
See Notes to Financial Statements Page 9
FIRST TRUST NORTH AMERICAN ENERGY INFRASTRUCTURE FUND (EMLP)
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE
SIX MONTHS ENDED FOR THE
4/30/2016 YEAR ENDED
(UNAUDITED) 10/31/2015
------------------ ------------------
OPERATIONS:
Net investment income (loss)........................................ $ 7,600,570 $ 15,528,848
Net realized gain (loss)............................................ (71,888,269) 22,512,851
Net change in unrealized appreciation (depreciation)................ 88,949,333 (204,121,247)
-------------- --------------
Net increase (decrease) in net assets resulting from operations..... 24,661,634 (166,079,548)
-------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income............................................... (21,180,756) (36,418,951)
-------------- --------------
SHAREHOLDER TRANSACTIONS:
Proceeds from shares sold........................................... 220,572,133 543,756,857
Cost of shares redeemed............................................. (59,521,848) (335,596,477)
-------------- --------------
Net increase (decrease) in net assets resulting
from shareholder transactions.................................... 161,050,285 208,160,380
-------------- --------------
Total increase (decrease) in net assets............................. 164,531,163 5,661,881
NET ASSETS:
Beginning of period................................................. 952,608,912 946,947,031
-------------- --------------
End of period....................................................... $1,117,140,075 $ 952,608,912
============== ==============
Accumulated net investment income (loss) at end of period........... $ (9,963,341) $ 3,616,845
============== ==============
CHANGES IN SHARES OUTSTANDING:
Shares outstanding, beginning of period............................. 41,355,000 34,155,000
Shares sold......................................................... 10,400,000 20,200,000
Shares redeemed..................................................... (2,950,000) (13,000,000)
-------------- --------------
Shares outstanding, end of period................................... 48,805,000 41,355,000
============== ==============
Page 10 See Notes to Financial Statements
FIRST TRUST NORTH AMERICAN ENERGY INFRASTRUCTURE FUND (EMLP)
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
SIX MONTHS FOR THE PERIOD
ENDED YEAR ENDED OCTOBER 31, 6/20/2012 (a)
4/30/2016 ---------------------------------------------- THROUGH
(UNAUDITED) 2015 2014 2013 10/31/2012
------------ ------------ ------------ ------------ ------------
Net asset value, beginning of period $ 23.03 $ 27.72 $ 23.40 $ 21.26 $ 19.99
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) 0.18 0.39 0.45 0.39 0.05
Net realized and unrealized gain (loss) 0.15 (4.18) 4.71 2.46 1.33
-------- -------- -------- -------- --------
Total from investment operations 0.33 (3.79) 5.16 2.85 1.38
-------- -------- -------- -------- --------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income (0.47) (0.90) (0.84) (0.71) (0.05)
Return of capital -- -- -- -- (0.06)
-------- -------- -------- -------- --------
Total distributions (0.47) (0.90) (0.84) (0.71) (0.11)
-------- -------- -------- -------- --------
Net asset value, end of period $ 22.89 $ 23.03 $ 27.72 $ 23.40 $ 21.26
======== ======== ======== ======== ========
TOTAL RETURN (b) 1.65% (13.92)% 22.44% 13.54% 6.90%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) $1,117,140 $952,609 $946,947 $433,099 $101,109
RATIOS TO AVERAGE NET ASSETS:
Ratio of total expenses to average net assets 0.95% (c) 0.95% 0.95% 0.95% 0.95% (c)
Ratio of net investment income (loss) to
average net assets 1.65% (c) 1.47% 1.11% 1.28% 0.89% (c)
Portfolio turnover rate (d) 22% 34% 7% 22% 3%
(a) Inception date is consistent with the commencement of investment
operations and is the date the initial creation units were established.
First Trust Portfolios L.P. seeded the First Trust North American Energy
Infrastructure Fund on June 1, 2012 in order to provide initial capital
required by SEC rules.
(b) Total return is calculated assuming an initial investment made at the net
asset value at the beginning of the period, reinvestment of all
distributions at net asset value during the period, and redemption at net
asset value on the last day of the period. The returns presented do not
reflect the deduction of taxes that a shareholder would pay on Fund
distributions or the redemption or sale of Fund shares. Total return is
calculated for the time period presented and is not annualized for periods
of less than a year.
(c) Annualized.
(d) Portfolio turnover is calculated for the time period presented and is not
annualized for periods of less than a year and does not include securities
received or delivered from processing creations or redemptions and in-kind
transactions.
See Notes to Financial Statements Page 11
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FIRST TRUST NORTH AMERICAN ENERGY INFRASTRUCTURE FUND (EMLP)
APRIL 30, 2016 (UNAUDITED)
1. ORGANIZATION
First Trust Exchange-Traded Fund IV (the "Trust") is an open-end management
investment company organized as a Massachusetts business trust on September 15,
2010, and is registered with the Securities and Exchange Commission under the
Investment Company Act of 1940, as amended (the "1940 Act").
The Trust currently consists of eight funds that are offering shares. This
report covers the First Trust North American Energy Infrastructure Fund (the
"Fund"), which trades under the ticker "EMLP" on the NYSE Arca, Inc. ("NYSE
Arca"). 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 principally in-kind for securities in which the Fund invests or for
cash or, in certain circumstances, a combination of both. Except when aggregated
in Creation Units, the Fund's shares are not redeemable securities.
The Fund is an actively managed exchange-traded fund. The investment objective
of the Fund is to seek total return. The Fund invests in energy infrastructure
companies which principally include publicly-traded master limited partnerships
and limited liability companies taxed as partnerships ("MLPs"), MLP affiliates,
Canadian Income Equities, pipeline companies, utilities, and other companies
that derive at least 50% of their revenues from operating or providing services
in support of infrastructure assets such as pipelines, power transmission and
petroleum and natural gas storage in the petroleum, natural gas and power
generation industries (collectively, "Energy Infrastructure Companies").
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 following is a summary
of significant accounting policies consistently followed by the Fund in the
preparation of the financial statements. The preparation of the financial
statements in accordance with accounting principles generally accepted in the
United States of America ("U.S. GAAP") requires management to make estimates and
assumptions that affect the reported amounts and disclosures in the financial
statements. Actual results could differ from those estimates.
A. PORTFOLIO VALUATION
The Fund's NAV is determined daily as of the close of regular trading on the New
York Stock Exchange ("NYSE"), normally 4:00 p.m. Eastern time, on each day the
NYSE is open for trading. If the NYSE closes early on a valuation day, the NAV
is determined as of that time. Foreign securities are priced using data
reflecting the earlier closing of the principal markets for those securities.
The Fund's NAV is calculated by dividing the value of all assets of the Fund
(including accrued interest and dividends), less all liabilities (including
accrued expenses and dividends declared but unpaid), by the total number of
shares outstanding.
The Fund's investments are valued daily at market value or, in the absence of
the market value with respect to any portfolio securities, at fair value. Market
value prices represent last sale or official closing prices from a national or
foreign exchange (i.e., a regulated market) and are primarily obtained from
third-party pricing services. Fair value prices represent any prices not
considered market value prices and are either obtained from a third-party
pricing service or are determined by the Pricing Committee of the Fund's
investment advisor, First Trust Advisors L.P. ("First Trust" or the "Advisor"),
in accordance with valuation procedures adopted by the Trust's Board of
Trustees, and in accordance with provisions of the 1940 Act. Investments valued
by the Advisor's Pricing Committee, if any, are footnoted as such in the
footnotes to the Portfolio of Investments. The Fund's investments are valued as
follows:
Common stocks, MLPs and other equity securities listed on any national or
foreign exchange (excluding The Nasdaq Stock Market LLC ("Nasdaq") and the
London Stock Exchange Alternative Investment Market ("AIM")) are valued at
the last sale price on the exchange on which they are principally traded
or, for Nasdaq and AIM securities, the official closing price. Securities
traded on more than one securities exchange are valued at the last sale
price or official closing price, as applicable, at the close of the
securities exchange representing the principal market for such securities.
Securities traded in an over-the-counter market are fair valued at the
mean of their most recent bid and asked price, if available, and otherwise
at their closing bid price.
Page 12
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST NORTH AMERICAN ENERGY INFRASTRUCTURE FUND (EMLP)
APRIL 30, 2016 (UNAUDITED)
Certain securities may not be able to be priced by pre-established pricing
methods. Such securities may be valued by the Trust's Board of Trustees or its
delegate, the Advisor's Pricing Committee, at fair value. These securities
generally include, but are not limited to, restricted securities (securities
which may not be publicly sold without registration under the Securities Act of
1933, as amended) for which a pricing service is unable to provide a market
price; securities whose trading has been formally suspended; a security whose
market or fair value price is not available from a pre-established pricing
source; a security with respect to which an event has occurred that is likely to
materially affect the value of the security after the market has closed but
before the calculation of the Fund's NAV or make it difficult or impossible to
obtain a reliable market quotation; and a security whose price, as provided by
the pricing service, does not reflect the security's fair value. As a general
principle, the current fair value of a security would appear to be the amount
which the owner might reasonably expect to receive for the security upon its
current sale. When fair value prices are used, generally they will differ from
market quotations or official closing prices on the applicable exchanges. A
variety of factors may be considered in determining the fair value of such
securities, including, but not limited to, the following:
1) the type of security;
2) the size of the holding;
3) the initial cost of the security;
4) transactions in comparable securities;
5) price quotes from dealers and/or pricing services;
6) relationships among various securities;
7) information obtained by contacting the issuer, analysts, or the
appropriate stock exchange;
8) an analysis of the issuer's financial statements; and
9) the existence of merger proposals or tender offers that might affect
the value of the security.
If the securities in question are foreign securities, the following additional
information may be considered:
1) the value of similar foreign securities traded on other foreign
markets;
2) ADR trading of similar securities;
3) closed-end fund trading of similar securities;
4) foreign currency exchange activity;
5) the trading prices of financial products that are tied to baskets of
foreign securities;
6) factors relating to the event that precipitated the pricing problem;
7) whether the event is likely to recur; and
8) whether the effects of the event are isolated or whether they affect
entire markets, countries or regions.
Because foreign markets may be open on different days than the days during which
investors may transact in the shares of the Fund, the value of the Fund's
securities may change on the days when investors are not able to transact in the
shares of the Fund. The value of securities denominated in foreign currencies is
converted into U.S. dollars using exchange rates determined daily as of the
close of regular trading on the NYSE.
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.
Page 13
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST NORTH AMERICAN ENERGY INFRASTRUCTURE FUND (EMLP)
APRIL 30, 2016 (UNAUDITED)
The inputs or methodologies used for valuing investments are not necessarily an
indication of the risk associated with investing in those investments. A summary
of the inputs used to value the Fund's investments as of April 30, 2016, is
included with the Fund's Portfolio of Investments.
B. SECURITIES TRANSACTIONS AND INVESTMENT INCOME
Securities transactions are recorded as of the trade date. Realized gains and
losses from securities transactions are recorded on the identified cost basis.
Dividend income is recorded on the ex-dividend date. Interest income, if any, is
recorded on the accrual basis.
Distributions received from the Fund's investments in MLPs generally are
comprised of return of capital and investment income. The Fund records estimated
return of capital and investment income based on historical information
available from each MLP. These estimates may subsequently be revised based on
information received from the MLPs after their tax reporting periods are
concluded.
C. FOREIGN CURRENCY
The books and records of the Fund are maintained in U.S. dollars. Foreign
currencies, investments and other assets and liabilities are translated into
U.S. dollars at the exchange rates prevailing at the end of the period.
Purchases and sales of investments and items of income and expense are
translated on the respective dates of such transactions. Unrealized gains and
losses on assets and liabilities, other than investments in securities, which
result from changes in foreign currency exchange rates have been included in
"Net change in unrealized appreciation (depreciation) on foreign currency
translation" on the Statement of Operations. Unrealized gains and losses on
investments in securities which result from changes in foreign exchange rates
are included with fluctuations arising from changes in market price and are
shown in "Net change in unrealized appreciation (depreciation) on investments"
on the Statement of Operations. Net realized foreign currency gains and losses
include the effect of changes in exchange rates between trade date and
settlement date on investment security transactions, foreign currency
transactions and interest and dividends received and are shown in "Net realized
gain (loss) on foreign currency transactions" on the Statement of Operations.
The portion of foreign currency gains and losses related to fluctuations in
exchange rates between the initial purchase settlement date and subsequent sale
trade date is included in "Net realized gain (loss) on investments" on the
Statement of Operations.
D. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
Dividends from net investment income of the Fund, if any, are declared and paid
quarterly, or as the Board of Trustees may determine from time to time.
Distributions of net realized gains earned by the Fund, if any, are distributed
at least annually.
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 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 significantly modified 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 during the fiscal year ended October 31,
2015 was as follows:
Distributions paid from:
Ordinary income................................. $ 36,418,951
Capital gain.................................... --
Return of capital............................... --
As of October 31, 2015, the components of distributable earnings on a tax basis
for the Fund were as follows:
Undistributed ordinary income................... $ --
Accumulated capital and other gain (loss)....... (20,930,851)
Net unrealized appreciation (depreciation)...... (94,526,075)
Page 14
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST NORTH AMERICAN ENERGY INFRASTRUCTURE FUND (EMLP)
APRIL 30, 2016 (UNAUDITED)
E. INCOME TAXES
The Fund intends to continue to qualify as a regulated investment company by
complying with the requirements under Subchapter M of the Internal Revenue Code
of 1986, as amended, which includes distributing substantially all of its net
investment income and net realized gains to shareholders. Accordingly, no
provision has been made for federal and state income taxes. However, due to the
timing and amount of distributions, the Fund may be subject to an excise tax of
4% of the amount by which approximately 98% of the Fund's taxable income exceeds
the distributions from such taxable income for the calendar year.
The Fund intends to utilize provisions of the federal income tax laws, which
allow it to carry a realized capital loss forward indefinitely following the
year of the loss and offset such loss against any future realized capital gains.
The Fund is subject to certain limitations under U.S. tax rules on the use of
capital loss carryforwards and net unrealized built-in losses. These limitations
apply when there has been a 50% change in ownership. At October 31, 2015, the
Fund had non-expiring capital loss carryforwards available for federal income
tax purposes of $20,930,851.
Certain losses realized during the current fiscal year may be deferred and
treated as occurring on the first day of the following fiscal year for federal
income tax purposes. For the fiscal year ended October 31, 2015, the Fund had no
net ordinary losses.
The Fund is subject to accounting standards that establish a minimum threshold
for recognizing, and a system for measuring, the benefits of a tax position
taken or expected to be taken in a tax return. The taxable years ended 2012,
2013, 2014 and 2015 remain open to federal and state audit. As of April 30,
2016, management has evaluated the application of these standards to the Fund
and has determined that no provision for income tax is required in the Fund's
financial statements for uncertain tax positions.
F. EXPENSES
Expenses, other than the investment advisory fee and other excluded expenses,
are paid by the Advisor (see Note 3).
3. INVESTMENT ADVISORY FEE, AFFILIATED TRANSACTIONS AND OTHER FEE ARRANGEMENTS
First Trust, the investment advisor to the Fund, is a limited partnership with
one limited partner, Grace Partners of DuPage L.P., and one general partner, The
Charger Corporation. The Charger Corporation is an Illinois corporation
controlled by James A. Bowen, Chief Executive Officer of First Trust. First
Trust is responsible for the ongoing monitoring of the securities in the Fund's
portfolio, managing the Fund's business affairs and providing certain
administrative services necessary for the management of the Fund.
The Fund and First Trust have retained Energy Income Partners, LLC ("EIP" or the
"Sub-Advisor"), an affiliate of First Trust, to serve as its investment
sub-advisor. In this capacity, EIP is responsible for the selection and on-going
monitoring of the securities in the Fund's investment portfolio. Pursuant to the
Investment Management Agreement between the Trust and the Advisor, First Trust
will supervise EIP and its management of the investment of the Fund's assets and
will pay EIP for its services as the Fund's sub-advisor. First Trust will also
be 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. EIP
receives a sub-advisory fee from First Trust equal to 45% of any remaining
monthly investment management fee paid to First Trust after the average Fund
expenses accrued during the most recent twelve months are subtracted from the
investment management fee in a given month.
First Trust Capital Partners, LLC ("FTCP"), an affiliate of First Trust, owns,
through a wholly-owned subsidiary, a 15% ownership interest in each of EIP and
EIP Partners, LLC, an affiliate of EIP.
The Trust has multiple service agreements with The Bank of New York Mellon
("BNYM"). Under the service agreements, BNYM performs custodial, fund
accounting, certain administrative services, and transfer agency services for
the Fund. As custodian, BNYM is responsible for custody of the Fund's assets. As
fund accountant and administrator, BNYM is responsible for maintaining the books
and records of the Fund's securities and cash. As transfer agent, BNYM is
responsible for maintaining shareholder records for the Fund. BNYM is a
subsidiary of The Bank of New York Mellon Corporation, a financial holding
company.
Page 15
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST NORTH AMERICAN ENERGY INFRASTRUCTURE FUND (EMLP)
APRIL 30, 2016 (UNAUDITED)
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 equally among each fund in the First Trust Fund
Complex. Prior to January 1, 2016, the fixed annual retainer was allocated pro
rata based on each fund's 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
actively managed fund, or is an index fund.
Additionally, the Lead Independent Trustee and the Chairmen of the Audit
Committee, Nominating and Governance Committee and Valuation Committee are paid
annual fees to serve in such capacities, with such compensation allocated pro
rata among each fund in the First Trust Fund Complex based on net assets.
Trustees are reimbursed for travel and out-of-pocket expenses in connection with
all meetings. The Lead Independent Trustee and Committee Chairmen rotate every
three years. The officers and "Interested" Trustee receive no compensation from
the Trust for acting in such capacities.
4. PURCHASES AND SALES OF SECURITIES
For the six months ended April 30, 2016, the cost of purchases and proceeds from
sales of investments, excluding short-term investments and in-kind transactions,
were $204,901,923 and $203,142,462 respectively.
For the six months ended April 30, 2016, the cost of in-kind purchases and
proceeds from in-kind sales were $211,110,053 and $58,412,405, respectively.
5. CREATIONS, REDEMPTIONS AND TRANSACTION FEES
Shares are created and redeemed by the Fund only in Creation Unit size
aggregations of 50,000 shares in transactions with broker-dealers or large
institutional investors that have entered into a participation agreement (an
"Authorized Participant"). In order to purchase Creation Units of the Fund, an
Authorized Participant must deposit (i) a designated portfolio of equity
securities determined by First Trust (the "Deposit Securities") and generally
make or receive a cash payment referred to as the "Cash Component," which is an
amount equal to the difference between the NAV of the Fund Shares (per Creation
Unit Aggregation) 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. Authorized Participants purchasing
Creation Units must pay to BNYM, as transfer agent, a creation transaction fee
(the "Creation Transaction Fee") regardless of the number of Creation Units
purchased in the transaction. The Creation Transaction Fee is based on the
composition of the securities included in the Fund's portfolio and the countries
in which the transactions are settled. The Creation Transaction Fee is currently
$500. The 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 BNYM, as transfer
agent, a standard redemption transaction fee (the "Redemption Transaction Fee"),
regardless of the number of Creation Units redeemed in the transaction. The
Redemption Transaction Fee may vary and is based on the composition of the
securities included in the Fund's portfolio and the countries in which the
transactions are settled. The Redemption Transaction Fee is currently $500. The
Fund reserves the right to effect redemptions in cash. An Authorized Participant
may request cash redemption in lieu of securities; however, the Fund may, in its
discretion, reject any such request.
6. 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.
Page 16
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST NORTH AMERICAN ENERGY INFRASTRUCTURE FUND (EMLP)
APRIL 30, 2016 (UNAUDITED)
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 March 31, 2017.
7. INDEMNIFICATION
The Trust, on behalf of the Fund, has a variety of indemnification obligations
under contracts with its service providers. The Trust's maximum exposure under
these arrangements is unknown. However, the Trust has not had prior claims or
losses pursuant to these contracts and expects the risk of loss to be remote.
8. SUBSEQUENT EVENTS
Management has evaluated the impact of all subsequent events on the Fund through
the date the financial statements were issued, and has determined that there
were no subsequent events requiring recognition or disclosure in the financial
statements that have not already been disclosed.
Page 17
--------------------------------------------------------------------------------
ADDITIONAL INFORMATION
--------------------------------------------------------------------------------
FIRST TRUST NORTH AMERICAN ENERGY INFRASTRUCTURE FUND (EMLP)
APRIL 30, 2016 (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
its portfolio securities 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 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 THE FIRST TRUST EXCHANGE-TRADED FUND IV.
The following summarizes some of the risks that should be considered for the
Fund.
CONCENTRATION RISK. A fund concentrated in a single industry or sector is likely
to present more risks than a fund that is broadly diversified over several
industries or sectors. Compared to the broad market, an individual industry or
sector may be more strongly affected by changes in the economic climate, broad
market shifts, moves in a particular dominant stock, or regulatory changes.
DEPOSITARY RECEIPTS RISK. Depositary receipts may be less liquid than the
underlying shares in their primary trading market. Any distributions paid to the
holders of depositary receipts are usually subject to a fee charged by the
depositary. Holders of depositary receipts may have limited voting rights, and
investment restrictions in certain countries may adversely impact the value of
depositary receipts because such restrictions may limit the ability to convert
the equity shares into depositary receipts and vice versa. Such restrictions may
cause the equity shares of the underlying issuer to trade at a discount or
premium to the market price of the depositary receipts.
EQUITY SECURITIES RISK. Because the Fund invests in equity securities, the value
of the Fund's shares will fluctuate with changes in the value of these equity
securities. Equity securities prices fluctuate for several reasons, including
changes in investors' perceptions of the financial condition of an issuer or the
general condition of the relevant stock market, such as market volatility, or
when political or economic events affecting the issuers occur. In addition,
common stock prices may be particularly sensitive to rising interest rates, as
the cost of the capital rises and borrowing costs increase.
SMALLER COMPANIES RISK. The Fund invests in small and/or mid capitalization
companies. Such companies may be more vulnerable to adverse general market or
economic developments, and their securities may be less liquid and may
experience greater price volatility than larger, more established companies as a
result of several factors, including limited trading volumes, products or
financial resources, management inexperience and less publicly available
information. Accordingly, such companies are generally subject to greater market
risk than larger, more established companies.
MARKET RISK. Market risk is the risk that a particular security owned by the
Fund, Shares of the Fund or securities in general may fall in value. Shares are
subject to market fluctuations caused by such factors as economic, political,
regulatory or market developments, changes in interest rates and perceived
trends in securities prices. Overall securities values could decline generally
or could underperform other investments.
Page 18
--------------------------------------------------------------------------------
ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST NORTH AMERICAN ENERGY INFRASTRUCTURE FUND (EMLP)
APRIL 30, 2016 (UNAUDITED)
NON-DIVERSIFICATION RISK. Because the Fund is non-diversified, it may invest a
relatively high percentage of its assets in a limited number of issuers. As a
result, the Fund may be more susceptible to a single adverse economic or
regulatory occurrence affecting one or more of these issuers, experience
increased volatility and be highly concentrated in certain issues.
ENERGY INFRASTRUCTURE COMPANIES RISK. The Fund invests in Energy Infrastructure
Companies and is subject to certain risks inherent in investing in these types
of securities. Energy Infrastructure Companies may be directly affected by
energy commodity prices, especially those Energy Infrastructure Companies which
own the underlying energy commodity. A decrease in the production or
availability of natural gas, natural gas liquids ("NGLs"), crude oil, coal or
other energy commodities or a decrease in the volume of such commodities
available for transportation, processing, storage or distribution may adversely
impact the financial performance of Energy Infrastructure Companies. Energy
Infrastructure Companies are subject to significant federal, state and local
government regulation in virtually every aspect of their operations, including
how facilities are constructed, maintained and operated, environmental and
safety controls, and the prices they may charge for products and services.
Various governmental authorities have the power to enforce compliance with these
regulations and the permits issued under them and violators are subject to
administrative, civil and criminal penalties, including civil fines, injunctions
or both. Stricter laws, regulations or enforcement policies could be enacted in
the future which would likely increase compliance costs and may adversely affect
the financial performance of Energy Infrastructure Companies. Natural disasters,
such as hurricanes in the Gulf of Mexico, also may impact Energy Infrastructure
Companies.
Certain Energy Infrastructure Companies are subject to the imposition of rate
caps, increased competition due to deregulation, the difficulty in obtaining an
adequate return on invested capital or in financing large construction projects,
the limitations on operations and increased costs and delays attributable to
environmental considerations, and the capital market's ability to absorb utility
debt. In addition, taxes, government regulation, international politics, price
and supply fluctuations, volatile interest rates and energy conservation may
cause difficulties for these companies. Such issuers have been experiencing
certain of these problems to varying degrees.
MLP RISK. An investment in MLP units involves risks which differ from an
investment in common stock of a corporation. Holders of MLP units have limited
control and voting rights on matters affecting the partnership. In addition,
there are certain tax risks associated with an investment in MLP units and
conflicts of interest exist between common unit holders and the general partner,
including those arising from incentive distribution payments. In addition, there
is the risk that a MLP could be, contrary to its intention, taxed as a
corporation, resulting in decreased returns from such MLP.
GEOGRAPHIC RISK. The Fund invests primarily in securities of companies
headquartered or incorporated in the United States and Canada. An investment in
a particular geographic region may be particularly susceptible to changes in the
political, diplomatic and economic conditions of that region or any new
regulatory requirements of the region. Accordingly, an investment in the Fund
may be more volatile than an investment diversified across several geographic
regions.
NON-U.S. SECURITIES. The Fund invests in securities of non-U.S. issuers,
including non-U.S. dollar-denominated securities traded in Canada or other
foreign countries and U.S. dollar-denominated securities of non-U.S. issuers
traded in the United States. Such securities are subject to higher volatility
than securities of domestic issuers due to possible adverse political, social or
economic developments; restrictions on foreign investment or exchange of
securities; lack of liquidity; excessive taxation; government seizure of assets;
different legal or accounting standards; and less government supervision and
regulation of exchanges in foreign countries. These risks may be heightened for
securities of companies located in, or with significant operations in, emerging
market countries.
CURRENCY RISK. Because the Fund's NAV is determined on the basis of U.S. dollars
and the Fund invests in foreign securities, you may lose money if the local
currency of a foreign market depreciates against the U.S. dollar, even if the
local currency value of the Fund's holdings goes up.
INTEREST RATE RISK. Rising interest rates could adversely impact the financial
performance of MLPs, MLP-related entities and energy companies. Rising interest
rates may increase an MLP's, MLP-related entity's or energy company's cost of
capital, which would increase operating costs and may reduce an MLP's,
MLP-related entity's or energy company's ability to execute acquisitions or
expansion projects in a cost-effective manner. Rising interest rates may also
impact the price of MLP units, MLP-related entity securities and energy company
shares as the yields on alternative investments increase.
MANAGEMENT RISK. The Fund is subject to management risk because it is an
actively managed portfolio. In managing the Fund's investment portfolio, Energy
Income Partners will apply investment techniques and risk analyses that may not
have the desired result. There can be no guarantee that the Fund will meet its
investment objective.
Page 19
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FIRST TRUST
First Trust Exchange-Traded Fund IV
INVESTMENT ADVISOR
First Trust Advisors L.P.
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
INVESTMENT SUB-ADVISOR
Energy Income Partners, LLC
49 Riverside Avenue
Westport, CT 06880
ADMINISTRATOR, CUSTODIAN,
FUND ACCOUNTANT &
TRANSFER AGENT
The Bank of New York Mellon
101 Barclay Street
New York, NY 10286
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
111 S. Wacker Drive
Chicago, IL 60606
LEGAL COUNSEL
Chapman and Cutler LLP
111 W. Monroe Street
Chicago, IL 60603
[BLANK BACK COVER]
FIRST TRUST
First Trust Exchange-Traded Fund IV
--------------------------------------------------------------------------------
First Trust Senior Loan Fund (FTSL)
Semi-Annual Report
For the Six Months Ended
April 30, 2016
--------------------------------------------------------------------------------
TABLE OF CONTENTS
--------------------------------------------------------------------------------
FIRST TRUST SENIOR LOAN FUND (FTSL)
SEMI-ANNUAL REPORT
APRIL 30, 2016
Shareholder Letter........................................................... 1
Fund Performance Overview.................................................... 2
Portfolio Management......................................................... 5
Understanding Your Fund Expenses............................................. 6
Portfolio of Investments..................................................... 7
Statement of Assets and Liabilities.......................................... 19
Statement of Operations...................................................... 20
Statements of Changes in Net Assets.......................................... 21
Financial Highlights......................................................... 22
Notes to Financial Statements................................................ 23
Additional Information....................................................... 29
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning of
the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934,
as amended. Forward-looking statements include statements regarding the goals,
beliefs, plans or current expectations of First Trust Advisors L.P. ("First
Trust" or the "Advisor") and its representatives, taking into account the
information currently available to them. Forward-looking statements include all
statements that do not relate solely to current or historical fact. For example,
forward-looking statements include the use of words such as "anticipate,"
"estimate," "intend," "expect," "believe," "plan," "may," "should," "would" or
other words that convey uncertainty of future events or outcomes.
Forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
the series of First Trust Exchange-Traded Fund IV (the "Trust") described in
this report (First Trust Senior Loan Fund; hereinafter referred to as the
"Fund") to be materially different from any future results, performance or
achievements expressed or implied by the forward-looking statements. When
evaluating the information included in this report, you are cautioned not to
place undue reliance on these forward-looking statements, which reflect the
judgment of the Advisor and its representatives only as of the date hereof. We
undertake no obligation to publicly revise or update these forward-looking
statements to reflect events and circumstances that arise after the date hereof.
PERFORMANCE AND RISK DISCLOSURE
There is no assurance that the Fund will achieve its investment objectives. The
Fund is subject to market risk, which is the possibility that the market values
of securities owned by the Fund will decline and that the value of the Fund
shares may therefore be less than what you paid for them. Accordingly, you can
lose money investing in the Fund. See "Risk Considerations" in the Additional
Information section of this report for a discussion of 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 the prospectus, the statement of additional information,
this report and other Fund regulatory filings.
--------------------------------------------------------------------------------
SHAREHOLDER LETTER
--------------------------------------------------------------------------------
FIRST TRUST SENIOR LOAN FUND (FTSL)
SEMI-ANNUAL LETTER FROM THE CHAIRMAN AND CEO
APRIL 30, 2016
Dear Shareholders:
Thank you for your investment in First Trust Senior Loan Fund (the "Fund").
First Trust Advisors L.P. ("First Trust") is pleased to provide you with the
semi-annual report which contains detailed information about your investment for
the six months ended April 30, 2016. Additionally, First Trust compiled the
Fund's financial statements for you to review. We encourage you to read this
report and discuss it with your financial advisor.
While markets were up and down during 2015, we believe there are three important
things to remember. First, the U.S. economy grew, despite the massive decline in
oil prices. Second, the tapering that began in 2014 by the Federal Reserve (the
"Fed") did not stop growth in the U.S. economy. Finally, the long-anticipated
rate hike by the Fed in December had little effect on the money supply, and the
stock market was not shocked by the hike. Early in 2016, many investors were
concerned that the volatility we saw in the market in 2015 would continue, and
it did. From December 31, 2015 through February 11, 2016, the S&P 500(R) Index
declined by 10.27%. Since then, the market has made a steady comeback, and as of
April 30, 2016, the S&P 500(R) Index was up 13.39%.
First Trust believes that having a long-term investment horizon and being
invested in quality products can help you reach your goals, despite how the
market behaves. We have always maintained perspective about the markets and
believe investors should as well. We will continue to strive to provide quality
investments each and every day, which has been one of the hallmarks of our firm
since its inception 25 years ago.
Thank you for giving First Trust the opportunity to be a part of your investment
plan. We value our relationship with you and will continue to focus on helping
investors like you reach your financial goals.
Sincerely,
/s/ James A. Bowen
James A. Bowen
Chairman of the Board of Trustees
Chief Executive Officer of First Trust Advisors L.P.
Page 1
--------------------------------------------------------------------------------
FUND PERFORMANCE OVERVIEW (UNAUDITED)
--------------------------------------------------------------------------------
FIRST TRUST SENIOR LOAN FUND (FTSL)
The First Trust Senior Loan Fund's (the "Fund") primary investment objective is
to provide high current income. The Fund's secondary investment objective is the
preservation of capital. The Fund pursues its objectives by investing at least
80% of its net assets (plus the amount of any borrowing for investment purposes)
under normal market conditions in a diversified portfolio of first lien senior
floating rate loan interests ("Senior Loans"). A Senior Loan is an advance or
commitment of funds made by one or more banks or similar financial institutions
to one or more corporations, partnerships or other business entities and
typically pays interest at a floating or adjusting rate that is determined
periodically at a designated premium above a base lending rate, most commonly
the London Interbank Offered Rate ("LIBOR"). A Senior Loan is considered senior
to all other unsecured claims against the borrower, senior to or equal with all
other secured claims; this means that in the event of a bankruptcy, the Senior
Loan, together with other first lien claims, is entitled to be the first to be
repaid out of proceeds of the assets securing the loans, before other existing
unsecured claims or interests receive repayment. However, in bankruptcy
proceedings, there may be other claims, such as taxes or additional advances
that take precedence.
The Fund invests primarily in Senior Loans that are below investment grade
quality at the time of investment. Securities rated below investment grade,
commonly referred to as "junk" or "high-yield" securities, include securities
that are rated Ba1/BB+/BB+ or below by Moody's Investors Service, Inc., Fitch,
Inc., or Standard & Poor's Ratings Group, respectively. The Fund invests in
Senior Loans made predominantly to businesses operating in North America, but
may also invest in Senior Loans made to businesses operating outside of North
America. The Senior Loans included in the Fund's portfolio often maintain an
average interest rate duration of less than 90 days; however, the inclusion of
LIBOR floors on certain Senior Loans or other factors may cause interest rate
duration to be longer than 90 days. The Fund may also invest up to 20% of its
net assets in (1) non-Senior Loan debt securities, which may be fixed-rate or
floating-rate income-producing securities (including, without limitation, U.S.
government debt securities and corporate debt securities), (2) warrants and
equity securities issued by a borrower or its affiliates, and/or (3) securities
of other investment companies.
-------------------------------------------------------------------------------------------------------------------------
PERFORMANCE
-------------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL CUMULATIVE
TOTAL RETURNS TOTAL RETURNS
6 Months Ended 1 Year Ended Inception (5/1/13) Inception (5/1/13)
4/30/16 4/30/16 to 4/30/16 to 4/30/16
FUND PERFORMANCE
NAV 1.86% 1.17% 2.49% 7.64%
Market Price 1.61% 1.29% 2.50% 7.68%
INDEX PERFORMANCE
Markit iBoxx USD Liquid Leveraged Loan Index 1.98% -1.04% 1.59% 4.84%
S&P/LSTA Leveraged Loan 100 Index 2.52% -0.59% 1.73% 5.27%
-------------------------------------------------------------------------------------------------------------------------
Total returns for the period since inception are calculated from the inception
date of the Fund. "Average Annual Total Returns" represent the average annual
change in value of an investment over the period indicated. "Cumulative Total
Returns" represent the total change in value of an investment over the period
indicated.
The Fund's per share net asset value ("NAV") is the value of one share of the
Fund and is computed by dividing the value of all assets of the Fund (including
accrued interest and dividends), less all liabilities (including accrued
expenses and dividends declared but unpaid), by the total number of outstanding
shares. The price used to calculate market return ("Market Price") is determined
by using the midpoint between the highest bid and the lowest offer on the stock
exchange on which shares of the Fund are listed for trading as of the time that
the Fund's NAV is calculated. Since shares of the Fund did not trade in the
secondary market until after the Fund's inception, for the period from inception
to the first day of secondary market trading in shares of the Fund, the NAV of
the Fund is used as a proxy for the secondary market trading price to calculate
market returns. NAV and market returns assume that all distributions have been
reinvested in the Fund at NAV and Market Price, respectively.
An index is a statistical composite that tracks a specified financial market or
sector. Unlike the Fund, the indices do not actually hold a portfolio of
securities and therefore do not incur the expenses incurred by the Fund. These
expenses negatively impact the performance of the Fund. Also, market returns do
not include brokerage commissions that may be payable on secondary market
transactions. If brokerage commissions were included, market returns would be
lower. The total returns presented reflect the reinvestment of dividends on
securities in the indices. The returns presented do not reflect the deduction of
taxes that a shareholder would pay on Fund distributions or the redemption or
sale of Fund shares. The investment return and principal value of shares of the
Fund will vary with changes in market conditions. Shares of the Fund may be
worth more or less than their original cost when they are redeemed or sold in
the market. The Fund's past performance is no guarantee of future performance.
Page 2
--------------------------------------------------------------------------------
FUND PERFORMANCE OVERVIEW (UNAUDITED) (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST SENIOR LOAN FUND (FTSL)
-----------------------------------------------------------
% OF SENIOR LOANS
AND OTHER
INDUSTRY CLASSIFICATION SECURITIES
-----------------------------------------------------------
Hotels, Restaurants & Leisure 13.4%
Health Care Providers & Services 11.4
Media 8.7
Pharmaceuticals 6.6
Semiconductors & Semiconductor
Equipment 5.6
Food & Staples Retailing 5.1
Specialty Retail 5.0
Life Sciences Tools & Services 4.4
Professional Services 4.0
Food Products 4.0
Software 3.6
Diversified Telecommunication Services 3.3
Health Care Equipment & Supplies 3.2
Containers & Packaging 3.1
Technology Hardware, Storage, &
Peripherals 2.5
Diversified Financial Services 2.3
Diversified Consumer Services 2.0
Insurance 1.8
Real Estate Management & Development 1.7
Commercial Services & Supplies 1.3
Building Products 0.8
Beverages 0.8
Health Care Technology 0.8
Chemicals 0.6
Distributors 0.6
Aerospace & Defense 0.6
Auto Components 0.5
Wireless Telecommunication Services 0.4
Capital Markets 0.4
Independent Power and Renewable
Electricity Producers 0.3
Consumer Finance 0.3
Electronic Equipment & Instruments 0.2
Road & Rail 0.2
Oil, Gas & Consumable Fuels 0.2
IT Services 0.1
Household Products 0.1
Construction Materials 0.1
Trading Companies & Distributors 0.0*
Electric Utilities 0.0*
------
Total 100.0%
======
* Amount represents less than 0.1%.
-----------------------------------------------------------
% OF SENIOR LOANS
AND OTHER
ASSET CLASSIFICATION SECURITIES
-----------------------------------------------------------
Senior Floating-Rate Loan Interests 90.5%
Corporate Bonds 8.4
Foreign Corporate Bonds 1.1
Common Stocks 0.0*
Rights 0.0*
------
Total 100.0%
======
-----------------------------------------------------------
% OF SENIOR LOANS
AND OTHER
CREDIT QUALITY (S&P RATINGS)(1) DEBT SECURITIES
-----------------------------------------------------------
BBB 5.8%
BBB- 5.5
BB+ 1.9
BB 9.9
BB- 22.0
B+ 21.4
B 19.9
B- 8.9
CCC+ 2.8
CCC 1.2
CC 0.2
D 0.0*
Not Rated 0.5
------
Total 100.0%
======
-----------------------------------------------------------
% OF SENIOR LOANS
AND OTHER
TOP 10 ISSUERS SECURITIES
-----------------------------------------------------------
Avago Technologies Cayman Ltd. 2.9%
Albertsons LLC 2.8
Univision Communications, Inc. 2.7
Hilton Worldwide Finance LLC 2.6
PetSmart, Inc. 2.5
Dell, Inc. 2.5
BJ's Wholesale Club, Inc. 2.3
New HB Acquisition LLC 2.2
Valeant Pharmaceuticals International, Inc. 2.1
NXP B.V. 2.1
------
Total 24.7%
======
(1) The ratings are by Standard & Poor's Ratings Group, a division of the
McGraw-Hill Companies, Inc. A credit rating is an assessment provided by a
nationally recognized statistical rating organization (NRSRO) of the
creditworthiness of an issuer with respect to debt obligations except for
those debt obligations that are only privately rated. Ratings are measured
on a scale that generally ranges from AAA (highest) to D (lowest).
Investment grade is defined as those issuers that have a long-term credit
rating of BBB- or higher. The credit ratings shown relate to the
creditworthiness of the issuers of the underlying securities in the Fund,
and not to the Fund or its shares. Credit ratings are subject to change.
Page 3
--------------------------------------------------------------------------------
FUND PERFORMANCE OVERVIEW (UNAUDITED) (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST SENIOR LOAN FUND (FTSL)
PERFORMANCE OF A $10,000 INITIAL INVESTMENT
MAY 1, 2013 - APRIL 30, 2016
Markit iBoxxUSD
First Trust Liquid Leveraged S&P/LSTA Leveraged
Senior Loan Fund Loan Index Loan 100 Index
5/1/13 $10,000 $10,000 $10,000
10/31/13 10,092 10,103 10,122
4/30/14 10,275 10,323 10,338
10/31/14 10,385 10,389 10,434
4/30/15 10,637 10,594 10,589
10/31/15 10,567 10,280 10,268
4/30/16 10,763 10,484 10,527
Performance figures assume reinvestment of all distributions and do not reflect
the deduction of taxes that a shareholder would pay on Fund distributions or the
redemption or sale of Fund shares. An index is a statistical composite that
tracks a specified financial market or sector. Unlike the Fund, the indices do
not actually hold a portfolio of securities and therefore do not incur the
expenses incurred by the Fund. These expenses negatively impact the performance
of the Fund. The Fund's past performance does not predict future performance.
FREQUENCY DISTRIBUTION OF DISCOUNTS AND PREMIUMS
BID/ASK MIDPOINT VS. NAV THROUGH APRIL 30, 2016
The following Frequency Distribution of Discounts and Premiums charts are
provided to show the frequency at which the bid/ask midpoint price for the Fund
was at a discount or premium to the daily NAV. The following tables are for
comparative purposes only and represent the period May 2, 2013 (commencement of
trading) through April 30, 2016. Shareholders may pay more than NAV when they
buy Fund shares and receive less than NAV when they sell those shares because
shares are bought and sold at current market price. Data presented represents
past performance and cannot be used to predict future results.
NUMBER OF DAYS BID/ASK MIDPOINT NUMBER OF DAYS BID/ASK MIDPOINT
AT/ABOVE NAV BELOW NAV
---------------------------------------- ----------------------------------------
0.00%- 0.50%- 1.00%- 0.00%- 0.50%- 1.00%-
FOR THE PERIOD 0.49% 0.99% 1.99% >=2.00% 0.49% 0.99% 1.99% >=2.00%
5/2/13 - 10/31/13 97 20 4 0 7 0 0 0
11/1/13 - 10/31/14 197 0 0 0 54 1 0 0
11/1/14 - 10/31/15 180 20 1 0 50 0 0 0
11/1/15 - 4/30/16 71 2 0 0 51 0 0 0
Page 4
--------------------------------------------------------------------------------
PORTFOLIO MANAGEMENT
--------------------------------------------------------------------------------
FIRST TRUST SENIOR LOAN FUND (FTSL)
SEMI-ANNUAL REPORT
APRIL 30, 2016 (UNAUDITED)
INVESTMENT MANAGER
The First Trust Advisors L.P. ("First Trust" or the "Advisor") Leveraged Finance
Team is comprised of twelve experienced investment professionals specializing in
below investment grade securities. The team is comprised of portfolio
management, research, trading and operations. As of April 30, 2016, the First
Trust Leveraged Finance Team managed or supervised approximately $2.16 billion
in senior secured bank loans and high-yield bonds. These assets are managed
across various strategies, including a closed-end fund, an open-end fund, four
exchange-traded funds and a series of unit investment trusts on behalf of retail
and institutional clients.
PORTFOLIO MANAGEMENT TEAM
WILLIAM HOUSEY, CFA - SENIOR VICE PRESIDENT, SENIOR PORTFOLIO MANAGER
SCOTT D. FRIES, CFA - SENIOR VICE PRESIDENT, PORTFOLIO MANAGER
Page 5
FIRST TRUST SENIOR LOAN FUND (FTSL)
UNDERSTANDING YOUR FUND EXPENSES
APRIL 30, 2016 (UNAUDITED)
As a shareholder of First Trust Senior Loan 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 of
investing in the Fund and to compare these costs with the ongoing costs of
investing in other funds.
The Example is based on an investment of $1,000 invested at the beginning of the
period and held through the six-month period ended April 30, 2016.
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 period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second line in the following table provides information about hypothetical
account values and hypothetical expenses based on the Fund's actual expense
ratio and an assumed rate of return of 5% per year before expenses, which is not
the Fund's actual return. The hypothetical account values and expenses may not
be used to estimate the actual ending account balance or expenses you paid for
the period. You may use this information to compare the ongoing costs of
investing in the Fund and other funds. To do so, compare this 5% hypothetical
example with the 5% hypothetical examples that appear in the shareholder reports
of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs such as brokerage
commissions. Therefore, the second line in the table is useful in comparing
ongoing costs only, and will not help you determine the relative total costs of
owning different funds. In addition, if these transactional costs were included,
your costs would have been higher.
---------------------------------------------------------------------------------------------------------------------------
ANNUALIZED
EXPENSE RATIO EXPENSES PAID
BEGINNING ENDING BASED ON THE DURING THE
ACCOUNT VALUE ACCOUNT VALUE SIX-MONTH SIX-MONTH
NOVEMBER 1, 2015 APRIL 30, 2016 PERIOD PERIOD (a)
---------------------------------------------------------------------------------------------------------------------------
FIRST TRUST SENIOR LOAN FUND (FTSL)
Actual $1,000.00 $1,018.60 0.85% $4.27
Hypothetical (5% return before expenses) $1,000.00 $1,020.64 0.85% $4.27
(a) Expenses are equal to the annualized expense ratio as indicated in the
table, multiplied by the average account value over the period (November
1, 2015 through April 30, 2016), multiplied by 182/366 (to reflect the
one-half year period).
Page 6
FIRST TRUST SENIOR LOAN FUND (FTSL)
PORTFOLIO OF INVESTMENTS
APRIL 30, 2016 (UNAUDITED)
PRINCIPAL STATED
VALUE DESCRIPTION RATE (a) MATURITY (b) VALUE
---------------- ---------------------------------------------------------------- ------------- ------------ ---------------
SENIOR FLOATING-RATE LOAN INTERESTS -- 85.2%
AEROSPACE & DEFENSE -- 0.3%
$ 504,183 DynCorp International, Inc., Term Loan........................ 6.25% 07/07/16 $ 486,537
983,893 Transdigm, Inc., Term Loan C.................................. 3.75% 02/28/20 982,171
---------------
1,468,708
---------------
AGRICULTURAL PRODUCTS -- 0.2%
750,000 Darling International, Inc., Term B USD Loan.................. 3.25% 01/06/21 749,250
---------------
ALTERNATIVE CARRIERS -- 0.9%
1,000,000 Level 3 Financing, Inc., Term Loan B-3........................ 4.00% 08/01/19 1,002,500
1,420,000 Level 3 Financing, Inc., Tranche B 2020 Term Loan............. 4.00% 01/15/20 1,423,905
1,517,837 Level 3 Financing, Inc., Tranche B-II 2022 Term Loan.......... 3.50% 05/31/22 1,518,110
---------------
3,944,515
---------------
APPAREL RETAIL -- 0.6%
2,763,286 Neiman Marcus Group Inc. (The), Other Term Loan............... 4.25% 10/25/20 2,629,432
---------------
APPLICATION SOFTWARE -- 1.4%
2,084,250 Epicor Software Corp., Term B Loan............................ 4.75% 06/01/22 1,998,275
1,639,450 Infor (US), Inc. , Tranche B-5 Term Loan...................... 3.75% 06/03/20 1,599,152
1,415,962 Informatica Corp. (Italic Merger Sub., Inc.), Dollar Term
Loan....................................................... 4.25% 08/05/22 1,391,182
1,227,288 Mitchell International, Inc., Initial Term Loan............... 4.50% 10/13/20 1,219,102
189,290 Triple Point Technologies, Inc., Term Loan B.................. 5.25% 07/10/20 132,882
---------------
6,340,593
---------------
ASSET MANAGEMENT & CUSTODY BANKS -- 0.3%
550,875 Guggenheim Partners Investment Management Holdings LLC,
Initial Term Loan.......................................... 4.25% 07/22/20 552,252
956,538 Hamilton Lane Advisors LLC, Initial Term Loan................. 4.25% 07/08/22 954,147
---------------
1,506,399
---------------
AUTO PARTS & EQUIPMENT -- 0.4%
1,522,875 Cooper Standard Holdings (CS Intermediate Holdco 2 LLC),
Term Loan.................................................. 4.00% 04/04/21 1,520,499
322,712 Tower Automotive Holdings USA LLC, Initial Term Loan
(2014)..................................................... 4.00% 04/23/20 321,905
---------------
1,842,404
---------------
AUTOMOTIVE RETAIL -- 0.2%
690,698 KAR Auction Services, Inc., Tranche B-3 Term Loan............. 4.25% 03/09/23 693,288
---------------
BROADCASTING -- 3.5%
3,300,000 Clear Channel Communications, Inc., Tranche E Term Loan....... 7.94% 07/30/19 2,452,989
1,137,917 Gray Television, Inc., Term Loan C............................ 4.25% 06/13/21 1,141,615
724,750 Media General, Inc., Term Loan B.............................. 4.00% 07/31/20 724,301
160,167 Tribune Media Co., Term B Loan................................ 3.75% 12/27/20 159,917
1,728,626 Univision Communications, Inc., 2013 Incremental Term Loan.... 4.00% 03/01/20 1,723,579
9,494,660 Univision Communications, Inc., Replacement First-Lien
Term Loan.................................................. 4.00% 03/01/20 9,479,374
---------------
15,681,775
---------------
BUILDING PRODUCTS -- 0.8%
210,536 Hillman Group, Inc. (The), Initial Term Loan.................. 4.50% 06/30/21 208,167
3,363,047 Quikrete Holdings, Inc., Initial Loan (First Lien)............ 4.00% 09/28/20 3,357,801
---------------
3,565,968
---------------
See Notes to Financial Statements Page 7
FIRST TRUST SENIOR LOAN FUND (FTSL)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2016 (UNAUDITED)
PRINCIPAL STATED
VALUE DESCRIPTION RATE (a) MATURITY (b) VALUE
---------------- ---------------------------------------------------------------- ------------- ------------ ---------------
SENIOR FLOATING-RATE LOAN INTERESTS (CONTINUED)
CABLE & SATELLITE -- 1.5%
$ 498,750 Cequel Communications LLC (Altice US Finance I Corp.),
Initial Term Loan.......................................... 4.25% 12/14/22 $ 498,002
623,188 Charter Communications Operating LLC, Bridge Loan -
Unsecured 1yr (c) (d)...................................... 3.75% 05/21/16 619,293
5,500,000 CSC Holdings, Inc. (Neptune Finco Corp.), Initial Term Loan... 5.00% 10/09/22 5,517,215
---------------
6,634,510
---------------
CASINOS & GAMING -- 6.4%
8,963,986 Amaya Holdings B.V., Initial Term B Loan (First Lien)......... 5.00% 08/01/21 8,566,255
4,464,604 Caesars Growth Partners LLC, Term B Loan (First Lien)......... 6.25% 05/08/21 3,973,498
7,013,146 CityCenter Holdings LLC, Term B Loan.......................... 4.25% 10/16/20 7,027,172
615,385 MGM Growth Properties Operating Partnership LP, Term
Loan B..................................................... 4.00% 04/07/23 618,591
231,230 ROC Finance LLC, Funded Term B Loan........................... 5.00% 06/20/19 219,282
7,945,419 Station Casinos, Inc, B Term Loan............................. 4.25% 03/02/20 7,955,351
---------------
28,360,149
---------------
COAL & CONSUMABLE FUELS -- 0.0%
487,403 Arch Coal, Inc., Term Loan (e) (f)............................ 7.50% 05/16/18 203,491
---------------
COMPUTER HARDWARE -- 2.4%
10,660,256 Dell, Inc., Term B-2 Loan..................................... 4.00% 04/29/20 10,651,728
---------------
CONSTRUCTION MATERIALS -- 0.1%
347,375 Summit Materials, Inc., Restatement Effective Date Term Loans. 4.00% 07/15/22 346,680
---------------
CONSUMER FINANCE -- 0.2%
142,286 Altisource Solutions S.A.R.L. , Term B Loan................... 4.50% 12/09/20 123,967
1,046,015 Walter Investment Management Corp., Tranche B Term Loan....... 4.75% 12/18/20 916,246
---------------
1,040,213
---------------
DATA PROCESSING & OUTSOURCED SERVICES -- 0.1%
611,884 Sungard Availability Services Capital, Inc., Term Loan B...... 6.00% 03/29/19 546,106
---------------
DISTRIBUTORS -- 0.6%
2,611,499 HD Supply, Inc., Term Loan.................................... 3.75% 08/13/21 2,612,151
---------------
DIVERSIFIED CHEMICALS -- 0.3%
1,187,994 Ineos US Finance LLC, 2022 Dollar Term Loan................... 4.25% 03/31/22 1,179,832
---------------
DIVERSIFIED SUPPORT SERVICES -- 0.5%
1,000,000 Brickman Group Holdings, Inc, Initial Term Loan (First Lien).. 4.00% 12/18/20 992,920
1,183,977 SMG Holdings, Inc., Term Loan B............................... 4.50% - 6.00% 02/27/20 1,166,217
---------------
2,159,137
---------------
EDUCATION SERVICES -- 0.0%
123,438 Bright Horizons Family Solutions, Inc., Term B-1 Loan......... 4.25% 01/30/20 123,670
---------------
ELECTRIC UTILITIES -- 0.0%
300,000 TXU (Texas Competitive Electric Holdings Co. LLC), 2014
Term Loan (Non-Extending) (e) (f).......................... 4.91% 10/10/14 99,975
---------------
ELECTRONIC EQUIPMENT & INSTRUMENTS -- 0.2%
332,500 Linxens LLC (Lully Finance LLC), Initial Term B-1 Loan
(First Lien)............................................... 5.00% 10/17/22 331,669
666,477 Zebra Technologies Corp., Initial Term Loan................... 4.75% 10/27/21 671,222
---------------
1,002,891
---------------
Page 8 See Notes to Financial Statements
FIRST TRUST SENIOR LOAN FUND (FTSL)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2016 (UNAUDITED)
PRINCIPAL STATED
VALUE DESCRIPTION RATE (a) MATURITY (b) VALUE
---------------- ---------------------------------------------------------------- ------------- ------------ ---------------
SENIOR FLOATING-RATE LOAN INTERESTS (CONTINUED)
ENVIRONMENTAL & FACILITIES SERVICES -- 0.4%
$ 148,125 PSSI (Packers Holdings LLC), Term B Loan...................... 4.25% 12/02/21 $ 147,940
936,740 ServiceMaster Co., Initial Term Loan.......................... 4.25% 07/01/21 939,672
782,000 WTG Holdings III Corp. (EWT Holdings III Corp.), Term Loan
(First Lien)............................................... 4.75% 01/15/21 766,360
---------------
1,853,972
---------------
FOOD RETAIL -- 2.6%
10,240,643 Albertsons LLC, Term B-4 Loan................................. 5.50% 08/25/21 10,269,727
1,593,905 Albertsons LLC, Term Loan B-2................................. 5.50% 03/21/19 1,595,897
---------------
11,865,624
---------------
HEALTH CARE EQUIPMENT -- 2.6%
782,638 Alere, Inc., Term B Loan...................................... 4.25% 06/15/22 774,811
5,008,419 DJO Finance LLC (ReAble Therapeutics Finance LLC), Initial
Term Loan.................................................. 4.25% 06/08/20 4,864,427
833,519 Hill-Rom Holdings, Term Loan B................................ 3.50% 09/08/22 836,820
4,947,028 Kinetic Concepts, Inc., Dollar Term E-1 Loan.................. 4.50% 05/04/18 4,942,922
---------------
11,418,980
---------------
HEALTH CARE FACILITIES -- 2.1%
272,414 Acadia Healthcare Co., Inc., Tranche B Term Loan.............. 4.25% 02/11/22 274,231
997,500 Acadia Healthcare Co., Inc., Tranche B-2 Term Loan............ 4.50% 02/16/23 1,004,044
2,302,709 CHS/Community Health Systems, Inc., Incremental 2021
Term H Loan................................................ 4.00% 01/27/21 2,267,639
1,612,813 Concentra, Inc. (MJ Acquisition Corp.), Term Loan B........... 4.00% - 5.50% 05/15/22 1,596,684
723,222 HCA, Inc., Tranche B-4 Term Loan.............................. 3.50% 05/01/18 725,544
1,324,082 Kindred Healthcare, Inc., New Term Loan....................... 4.25% 04/09/21 1,320,772
2,194,954 Select Medical Corp., Term Loan F............................. 6.00% 02/28/21 2,200,441
---------------
9,389,355
---------------
HEALTH CARE SERVICES -- 5.4%
1,187,013 21st Century Oncology, Inc., Tranche B Term Loan.............. 6.50% 04/30/22 1,050,506
1,488,750 Air Medical Group Holdings, Inc., Initial Term Loan........... 4.25% 04/28/22 1,467,044
2,688,456 CareCore National LLC, Term Loan.............................. 5.50% 03/05/21 2,490,182
2,276,119 CHG Healthcare Services, Inc, Term Loan (First Lien).......... 4.25% 11/19/19 2,275,413
2,475,000 Curo Health Services Holdings, Inc., Term B Loan (First
Lien)...................................................... 6.50% 02/07/22 2,460,571
1,496,250 Envision Healthcare Corp. (Emergency Medical Services Corp.),
Tranche B-2 Term Loan...................................... 4.50% 10/28/22 1,499,183
3,288,888 Healogics, Inc. (CDRH Parent, Inc.), Initial Term Loan (First
Lien)...................................................... 5.25% 07/01/21 3,080,603
325,030 Heartland Dental Care LLC, Term B-1 Loan (First Lien)......... 5.50% 12/21/18 321,172
2,278,693 Surgery Centers Holdings, Inc., Initial Term Loan (First
Lien)...................................................... 5.25% 11/03/20 2,282,977
1,815,000 Surgical Care Affiliates LLC, Initial Term Loan............... 4.25% 03/17/22 1,809,700
3,996,879 Team Health, Inc., Tranche B Term Loan........................ 4.50% 11/23/22 4,021,859
1,832,906 U.S. Renal Care, Inc., Term Loan B............................ 5.25% 12/30/22 1,834,061
---------------
24,593,271
---------------
HEALTH CARE SUPPLIES -- 0.1%
238,825 Convatec Inc., Term Loan B.................................... 4.25% 06/30/20 238,600
---------------
See Notes to Financial Statements Page 9
FIRST TRUST SENIOR LOAN FUND (FTSL)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2016 (UNAUDITED)
PRINCIPAL STATED
VALUE DESCRIPTION RATE (a) MATURITY (b) VALUE
---------------- ---------------------------------------------------------------- ------------- ------------ ---------------
SENIOR FLOATING-RATE LOAN INTERESTS (CONTINUED)
HEALTH CARE TECHNOLOGY -- 0.7%
$ 2,864,099 Connolly Holdings, Inc. (Cotiviti Corp.), Term Loan B......... 4.50% 05/14/21 $ 2,855,735
495,092 Healthport Technologies LLC (CT Technologies Intermediate
Holdings, Inc.), Initial Term Loan......................... 5.25% 12/01/21 491,171
---------------
3,346,906
---------------
HOMEFURNISHING RETAIL -- 0.9%
4,011,003 Serta Simmons Holdings LLC, Term Loan B....................... 4.25% 10/01/19 4,017,902
---------------
HOTELS, RESORTS & CRUISE LINES -- 2.4%
10,946,382 Hilton Worldwide Finance LLC, Initial Term Loan............... 3.50% 10/25/20 10,982,505
---------------
HOUSEHOLD PRODUCTS -- 0.1%
505,148 Spectrum Brands, Inc., USD Term Loan.......................... 3.50% 06/23/22 506,664
---------------
HYPERMARKETS & SUPER CENTERS -- 2.1%
728,758 BJ's Wholesale Club, Inc., 2013 (November) Replacement Loan
(Second Lien).............................................. 8.50% 03/26/20 704,469
8,949,656 BJ's Wholesale Club, Inc., New 2013 (November) Replacement
Loan (First Lien).......................................... 4.50% 09/26/19 8,848,973
---------------
9,553,442
---------------
INDEPENDENT POWER PRODUCERS & ENERGY TRADERS -- 0.2%
987,212 Calpine Corp., Term Loan...................................... 4.00% 10/09/19 987,459
---------------
INSURANCE BROKERS -- 1.6%
454,345 Amwins Group LLC, Term Loan B................................. 5.25% 09/06/19 455,104
1,760,800 Confie Seguros Holding II Co., Term B Loan (First Lien)....... 5.75% 11/09/18 1,731,447
2,332,578 HUB International Ltd., Initial Term Loan (New)............... 4.25% 10/02/20 2,304,401
396,000 Hyperion Finance S.A.R.L., Initial Term Loan.................. 5.50% 04/29/22 390,389
1,953,945 National Financial Partners Corp., 2014 Specified Refinancing
Term Loan.................................................. 4.50% 07/01/20 1,931,552
340,393 USI, Inc. (Compass Investors, Inc.), Initial Term Loan........ 4.25% 12/27/19 335,927
---------------
7,148,820
---------------
INTEGRATED TELECOMMUNICATION SERVICES -- 1.4%
3,328,724 Numericable U.S. LLC (Altice France S.A.), Term Loan B-7...... 5.00% 01/31/24 3,340,507
3,214,430 Numericable U.S. LLC (Altice France S.A.), USD Term
Loan B-6................................................... 4.75% 02/10/23 3,215,587
---------------
6,556,094
---------------
LEISURE FACILITIES -- 0.9%
2,075,755 ClubCorp Club Operations, Inc. , Term Loan B.................. 4.25% 12/08/22 2,074,717
687,115 Life Time Fitness, Inc., Closing Date Term Loan............... 4.25% 06/10/22 682,821
1,122,953 Planet Fitness Holdings LLC, Term Loan........................ 4.50% 03/31/21 1,125,760
---------------
3,883,298
---------------
LIFE SCIENCES TOOLS & SERVICES -- 3.7%
4,282,425 Immucor, Inc., Term B-2 Loan.................................. 5.00% 08/19/18 4,068,304
2,850,317 InVentiv Health, Inc., Term B-4 Loan.......................... 7.75% 05/15/18 2,852,113
404,646 Millennium Laboratories LLC (New Millennium Holdco.),
Closing Date Term Loan (g)................................. 7.50% 12/21/20 301,461
3,533,012 Ortho-Clinical Diagnostics, Inc. (Crimson Merger Sub, Inc.),
Initial Term Loan.......................................... 4.75% 06/30/21 3,341,840
495,970 Pharmaceutical Product Development, Inc., Incremental
Term Loan.................................................. 4.25% 08/18/22 494,834
Page 10 See Notes to Financial Statements
FIRST TRUST SENIOR LOAN FUND (FTSL)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2016 (UNAUDITED)
PRINCIPAL STATED
VALUE DESCRIPTION RATE (a) MATURITY (b) VALUE
---------------- ---------------------------------------------------------------- ------------- ------------ ---------------
SENIOR FLOATING-RATE LOAN INTERESTS (CONTINUED)
LIFE SCIENCES TOOLS & SERVICES (CONTINUED)
$ 4,565,819 Pharmaceutical Product Development, Inc., Initial Term Loan... 4.25% 08/18/22 $ 4,555,363
995,000 Sterigenics International (STHI Intermediate Holding Corp.),
Initial Term Loan.......................................... 4.25% 05/16/22 992,513
---------------
16,606,428
---------------
METAL & GLASS CONTAINERS -- 1.0%
780,645 Anchor Glass Container Corp., Term B Loan..................... 4.25% 07/01/22 782,113
1,225,000 Ardagh Holdings USA, Inc. (Ardagh Packaging Finance S.A.),
New Term Loan.............................................. 4.00% 12/17/19 1,221,938
2,597,093 Berlin Packaging LLC, Initial Term Loan (First Lien).......... 4.50% 10/01/21 2,597,742
---------------
4,601,793
---------------
MOVIES & ENTERTAINMENT -- 1.4%
215,583 AMC Entertainment, Inc., Term Loan B.......................... 4.00% 12/10/22 216,392
395,000 Creative Artists Agency LLC (CAA Holdings LLC), Incremental
Term Loan.................................................. 5.50% 12/17/21 394,340
5,548,666 Formula One (Delta 2 Lux S.A.R.L.), Facility B3 (USD)......... 4.75% 07/30/21 5,445,627
366,998 WME IMG Worldwide, Inc., Term Loan (First Lien)............... 5.25% 05/06/21 366,172
---------------
6,422,531
---------------
OIL & GAS EXPLORATION & PRODUCTION -- 0.0%
400,000 American Energy Marcellus Holdings LLC, Initial Loan
(First Lien)............................................... 5.25% 08/04/20 106,400
361,111 American Energy Marcellus Holdings LLC, Initial Loan
(Second Lien).............................................. 8.50% 08/04/21 43,333
---------------
149,733
---------------
OTHER DIVERSIFIED FINANCIAL SERVICES -- 1.5%
6,610,029 First Data Corp., 2021 New Dollar Term Loan................... 4.44% 03/24/21 6,623,778
---------------
PACKAGED FOODS & MEATS -- 2.8%
1,664,286 B&G Foods, Inc., Tranche B Term Loan.......................... 3.75% - 5.00% 11/02/22 1,672,607
1,125,786 Ferrara Candy Co. (Candy Intermediate Holdings, Inc.), Initial
Term Loan.................................................. 7.50% 06/18/18 1,128,600
7,426,964 New HB Acquisition LLC, Term B Loan (First Lien).............. 4.50% 08/03/22 7,448,651
1,757,491 New HB Acquisition LLC, Term B Loan (Second Lien)............. 8.50% 08/03/23 1,722,341
648,375 Pinnacle Foods Finance LLC, Tranche I Term Loan............... 3.75% 01/13/23 651,176
---------------
12,623,375
---------------
PAPER PACKAGING -- 1.8%
8,240,019 Reynolds Group Holdings, Inc., Incremental U.S. Term Loan..... 4.50% 12/01/18 8,255,510
---------------
PHARMACEUTICALS -- 6.0%
1,128,313 Akorn, Inc., Loan............................................. 6.00% 04/16/21 1,129,724
528,125 AMAG Pharmaceuticals, Inc., Initial Term Loan................. 4.75% 08/17/21 524,164
1,732,959 Amneal Pharmaceuticals LLC, Term Loan B....................... 4.50% - 6.00% 11/01/19 1,727,899
655,002 Catalent Pharma Solutions, Inc., Dollar Term Loan............. 4.25% 05/20/21 657,766
3,241,875 Concordia Healthcare Corp., Initial Dollar Term Loan.......... 5.25% 10/21/21 3,206,214
7,336,625 Endo Pharmaceuticals Holdings, Inc., 2015 Incremental
Term B Loan................................................ 3.75% 06/27/22 7,309,113
3,036,093 Horizon Pharma, Inc., Term Loan B............................. 4.50% 04/30/21 2,937,420
589,500 Patheon, Inc. (JLL/Delta Dutch Newco B.V.), Initial Dollar
Term Loan.................................................. 4.25% 03/11/21 582,868
See Notes to Financial Statements Page 11
FIRST TRUST SENIOR LOAN FUND (FTSL)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2016 (UNAUDITED)
PRINCIPAL STATED
VALUE DESCRIPTION RATE (a) MATURITY (b) VALUE
---------------- ---------------------------------------------------------------- ------------- ------------ ---------------
SENIOR FLOATING-RATE LOAN INTERESTS (CONTINUED)
PHARMACEUTICALS (CONTINUED)
$ 8,701,928 Valeant Pharmaceuticals International, Inc., Series F-1
Tranche B Term Loan........................................ 5.00% 04/01/22 $ 8,475,678
---------------
26,550,846
---------------
PROPERTY & CASUALTY INSURANCE -- 0.2%
380,111 Cunningham Lindsey U.S., Inc., Initial Term Loan (First
Lien) (c).................................................. 5.00% 12/10/19 270,829
600,000 Sedgwick Claims Management Services, Inc., Initial Loan
(Second Lien).............................................. 6.75% 02/28/22 570,000
---------------
840,829
---------------
REAL ESTATE SERVICES -- 1.5%
5,935,920 DTZ Worldwide Ltd., 2015-1 Additional Term Loan............... 4.25% 11/04/21 5,918,587
750,000 Realogy Corp., Initial Term B Loan 2014....................... 3.75% 03/05/20 749,378
---------------
6,667,965
---------------
RESEARCH & CONSULTING SERVICES -- 3.8%
8,111,221 Acosta, Inc., Term Loan B..................................... 4.25% 09/26/21 8,019,969
7,484,524 Advantage Sales & Marketing, Inc., Initial Term Loan
(First Lien)............................................... 4.25% 07/23/21 7,414,394
402,431 Information Resources, Inc., Term Loan........................ 4.75% 09/30/20 402,431
1,191,568 TransUnion LLC, 2015 Term B-2 Loan............................ 3.50% 04/09/21 1,185,908
---------------
17,022,702
---------------
RESTAURANTS -- 2.8%
2,401,772 Burger King Corp. (1011778 B.C. ULC), Term B-2 Loan........... 3.75% 12/10/21 2,405,903
1,831,915 Focus Brands, Inc., Refinancing Term Loan (First Lien)........ 4.25% 02/21/18 1,834,205
8,213,086 Portillo's Holdings LLC, Term B Loan (First Lien)............. 4.75% 08/02/21 8,014,575
422,143 Red Lobster Management LLC, Initial Term Loan (First Lien).... 6.25% 07/28/21 420,560
---------------
12,675,243
---------------
SECURITY & ALARM SERVICES -- 0.3%
248,900 Garda World Security Corp., Term B Delayed Draw Loan.......... 4.00% 11/06/20 245,789
972,975 Garda World Security Corp., Term Loan B....................... 4.00% 10/18/20 960,813
---------------
1,206,602
---------------
SEMICONDUCTORS -- 5.3%
12,133,333 Avago Technologies Cayman Ltd., Term B-1 Dollar Loan.......... 4.25% 02/01/23 12,135,518
600,000 Micron Technology, Inc., Term Loan B.......................... 6.00% 04/15/22 602,064
8,645,000 NXP B.V., Tranche B Loan...................................... 3.75% 12/07/20 8,666,613
2,350,000 Western Digital Corp., Term Loan B............................ 6.25% 03/30/23 2,293,201
---------------
23,697,396
---------------
SOFT DRINKS -- 0.8%
3,442,400 Keurig Green Mountain, Inc. (Maple Holdings Acquisition
Corp.), Term B USD Loan.................................... 5.25% 03/03/23 3,451,729
---------------
SPECIALIZED CONSUMER SERVICES -- 1.8%
750,000 Aramark Corp., Term Loan F.................................... 3.25% 02/24/21 750,000
4,298,477 Asurion LLC, Incremental Tranche B-1 Term Loan................ 5.00% 05/24/19 4,282,358
2,484,235 Asurion LLC, Incremental Tranche B-4 Term Loan................ 5.00% 08/04/22 2,466,051
352,941 Asurion LLC, Term Loan (Second Lien).......................... 8.50% 03/03/21 338,319
---------------
7,836,728
---------------
Page 12 See Notes to Financial Statements
FIRST TRUST SENIOR LOAN FUND (FTSL)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2016 (UNAUDITED)
PRINCIPAL STATED
VALUE DESCRIPTION RATE (a) MATURITY (b) VALUE
---------------- ---------------------------------------------------------------- ------------- ------------ ---------------
SENIOR FLOATING-RATE LOAN INTERESTS (CONTINUED)
SPECIALIZED FINANCE -- 0.7%
$ 1,393,000 AlixPartners LLP, Initial Term Loan........................... 4.50% 07/15/22 $ 1,398,224
1,661,028 Duff & Phelps Corp., Initial Term Loan........................ 4.75% 04/23/20 1,650,646
---------------
3,048,870
---------------
SPECIALTY CHEMICALS -- 0.3%
1,282,568 Platform Specialty Products Corp. (fka: Macdermid, Inc.),
Tranche B-2 Term Loan...................................... 5.50% 06/07/20 1,258,788
264,667 Trinseo Materials Operating S.C.A., Term Loan B............... 4.25% 10/13/21 264,225
---------------
1,523,013
---------------
SPECIALTY STORES -- 3.0%
691,198 Dollar Tree, Inc., DLTR TL B 1L USD........................... 3.50% 05/26/22 693,935
596,967 Party City Holdings, Inc., Term Loan.......................... 4.25% 08/06/22 594,233
10,677,952 PetSmart, Inc., Tranche B-1 Loan.............................. 4.25% 03/11/22 10,641,967
491,393 Toys "R" US-Delaware, Inc., Term B-2 Loan..................... 5.25% 05/25/18 432,426
1,002,288 Toys "R" US-Delaware, Inc., Term B4 Loan...................... 9.75% 04/25/20 848,186
---------------
13,210,747
---------------
SYSTEMS SOFTWARE -- 1.9%
206,266 Applied Systems, Inc., Initial Term Loan (First Lien)......... 4.25% - 5.75% 01/25/21 205,406
218,154 Applied Systems, Inc., Initial Term Loan (Second Lien)........ 7.50% 01/24/22 213,700
1,194,000 Blue Coat Systems, Inc., Initial Term Loan.................... 4.50% 05/20/22 1,186,537
5,448,571 BMC Software Finance, Inc., Initial US Term Loan.............. 5.00% 09/10/20 4,678,960
703,125 Compuware Corp., Term Loan B.................................. 6.25% 12/31/19 684,373
523,143 SS&C Technologies Holdings, Inc., Term B-1 Loan............... 4.00% - 4.08% 07/08/22 524,451
74,533 SS&C Technologies Holdings, Inc., Term B-2 Loan............... 4.00% - 4.08% 07/08/22 74,719
957,454 Vertafore, Inc., Term Loan 2013............................... 4.25% 10/03/19 958,651
---------------
8,526,797
---------------
TRUCKING -- 0.2%
95,544 Kenan Advantage Group, Inc., Delayed Draw Term 1 Loan (h)..... 1.50% (i) 07/29/22 95,186
680,725 Kenan Advantage Group, Inc., Term Loan B1..................... 4.00% 07/31/22 678,172
217,128 Kenan Advantage Group, Inc., Term Loan B-2.................... 4.00% 07/31/22 216,313
---------------
989,671
---------------
TOTAL SENIOR FLOATING-RATE LOAN INTERESTS................................................... 382,258,043
(Cost $387,026,802) ---------------
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- ---------------------------------------------------------------- ------------- ------------ ---------------
CORPORATE BONDS -- 7.9%
AEROSPACE & DEFENSE -- 0.1%
250,000 Aerojet Rocketdyne Holdings, Inc.............................. 7.13% 03/15/21 263,796
---------------
AGRICULTURAL PRODUCTS -- 0.5%
2,000,000 Darling Ingredients, Inc...................................... 5.38% 01/15/22 2,095,000
---------------
ALTERNATIVE CARRIERS -- 0.3%
813,000 Level 3 Communications, Inc................................... 5.75% 12/01/22 837,805
500,000 Level 3 Financing, Inc........................................ 5.13% 05/01/23 510,625
---------------
1,348,430
---------------
See Notes to Financial Statements Page 13
FIRST TRUST SENIOR LOAN FUND (FTSL)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2016 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- ---------------------------------------------------------------- ------------- ------------ ---------------
CORPORATE BONDS (CONTINUED)
APPLICATION SOFTWARE -- 0.1%
$ 500,000 Infor US, Inc................................................. 6.50% 05/15/22 $ 464,005
---------------
AUTO PARTS & EQUIPMENT -- 0.0%
125,000 MPG Holdco I, Inc............................................. 7.38% 10/15/22 125,625
---------------
BROADCASTING -- 0.3%
125,000 LIN Television Corp........................................... 5.88% 11/15/22 128,125
100,000 Nexstar Broadcasting, Inc. (j)................................ 6.13% 02/15/22 100,750
1,000,000 Sinclair Television Group, Inc................................ 6.13% 10/01/22 1,072,500
215,000 Sinclair Television Group, Inc. (j)........................... 5.88% 03/15/26 223,063
---------------
1,524,438
---------------
CABLE & SATELLITE -- 1.5%
5,350,000 CCO Holdings LLC / CCO Holdings Capital Corp.................. 5.75% 01/15/24 5,624,187
600,000 CCO Holdings LLC / CCO Holdings Capital Corp. (j)............. 5.88% 04/01/24 630,000
---------------
6,254,187
---------------
CASINOS & GAMING -- 0.1%
600,000 Caesars Growth Properties Holdings LLC / Caesars Growth
Properties Finance, Inc.................................... 9.38% 05/01/22 525,000
---------------
DIVERSIFIED REAL ESTATE ACTIVITIES -- 0.1%
250,000 KB Home....................................................... 7.00% 12/15/21 256,250
250,000 Taylor Morrison Communities Inc. / Monarch Communities,
Inc. (j)................................................... 5.88% 04/15/23 250,625
---------------
506,875
---------------
HEALTH CARE EQUIPMENT -- 0.4%
83,000 Alere, Inc.................................................... 6.50% 06/15/20 82,585
1,000,000 Alere, Inc. (j)............................................... 6.38% 07/01/23 1,025,000
300,000 Kinetic Concepts, Inc. / KCI USA, Inc......................... 10.50% 11/01/18 304,695
576,000 Kinetic Concepts, Inc. / KCI USA, Inc......................... 12.50% 11/01/19 554,400
---------------
1,966,680
---------------
HEALTH CARE FACILITIES -- 3.0%
3,165,000 CHS/Community Health Systems, Inc............................. 6.88% 02/01/22 2,880,150
1,000,000 HCA, Inc...................................................... 5.38% 02/01/25 1,023,750
1,750,000 Kindred Healthcare, Inc....................................... 8.00% 01/15/20 1,751,750
250,000 LifePoint Health, Inc......................................... 5.50% 12/01/21 260,625
1,500,000 Select Medical Corp........................................... 6.38% 06/01/21 1,430,625
170,000 Tenet Healthcare Corp......................................... 6.00% 10/01/20 181,050
1,250,000 Tenet Healthcare Corp......................................... 8.13% 04/01/22 1,303,125
4,500,000 Tenet Healthcare Corp......................................... 6.75% 06/15/23 4,460,624
---------------
13,291,699
---------------
HEALTH CARE SERVICES -- 0.2%
761,000 Surgical Care Affiliates, Inc. (j)............................ 6.00% 04/01/23 772,415
---------------
HOMEFURNISHING RETAIL -- 0.1%
500,000 Serta Simmons Bedding LLC (j)................................. 8.13% 10/01/20 528,750
---------------
INDEPENDENT POWER PRODUCERS & ENERGY TRADERS -- 0.1%
350,000 NRG Energy, Inc............................................... 7.88% 05/15/21 365,610
---------------
INTEGRATED TELECOMMUNICATION SERVICES -- 0.0%
110,000 Frontier Communications Corp.................................. 6.25% 09/15/21 102,850
---------------
Page 14 See Notes to Financial Statements
FIRST TRUST SENIOR LOAN FUND (FTSL)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2016 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- ---------------------------------------------------------------- ------------- ------------ ---------------
CORPORATE BONDS (CONTINUED)
LIFE SCIENCES TOOLS & SERVICES -- 0.4%
$ 2,375,000 Crimson Merger Sub, Inc. (j).................................. 6.63% 05/15/22 $ 1,995,000
---------------
OIL & GAS STORAGE & TRANSPORTATION -- 0.1%
300,000 Crestwood Midstream Partners LP / Crestwood Midstream
Finance Corp............................................... 6.13% 03/01/22 275,250
---------------
PACKAGED FOODS & MEATS -- 0.3%
1,164,000 JBS USA LLC / JBS USA Finance, Inc. (j)....................... 5.88% 07/15/24 1,088,340
125,000 Post Holdings, Inc. (j)....................................... 6.75% 12/01/21 131,329
150,000 Post Holdings, Inc. (j)....................................... 7.75% 03/15/24 163,875
---------------
1,383,544
---------------
TRADING COMPANIES & DISTRIBUTORS -- 0.0%
209,000 BlueLine Rental Finance Corp. (j)............................. 7.00% 02/01/19 184,443
---------------
WIRELESS TELECOMMUNICATION SERVICES -- 0.3%
250,000 Sprint Corp................................................... 7.25% 09/15/21 203,125
625,000 T-Mobile USA, Inc............................................. 6.73% 04/28/22 660,156
150,000 T-Mobile USA, Inc............................................. 6.00% 03/01/23 158,062
500,000 T-Mobile USA, Inc............................................. 6.63% 04/01/23 536,250
---------------
1,557,593
---------------
TOTAL CORPORATE BONDS....................................................................... 35,531,190
(Cost $36,450,611) ---------------
FOREIGN CORPORATE BONDS -- 1.0%
AEROSPACE & DEFENSE -- 0.1%
334,000 Bombardier, Inc. (j).......................................... 5.50% 09/15/18 330,660
250,000 Bombardier, Inc. (j).......................................... 7.75% 03/15/20 248,125
---------------
578,785
---------------
ALTERNATIVE CARRIERS -- 0.2%
1,000,000 Intelsat Luxembourg SA........................................ 6.75% 06/01/18 777,500
---------------
INTEGRATED TELECOMMUNICATION SERVICES -- 0.2%
1,000,000 Numericable-SFR SA (j)........................................ 6.00% 05/15/22 1,005,050
---------------
METAL & GLASS CONTAINERS -- 0.1%
62,000 Ardagh Packaging Finance PLC / Ardagh Holdings USA,
Inc. (j)................................................... 6.25% 01/31/19 63,705
373,588 Ardagh Packaging Finance PLC / Ardagh Holdings USA,
Inc. (j)................................................... 7.00% 11/15/20 354,909
---------------
418,614
---------------
PHARMACEUTICALS -- 0.3%
552,000 Capsugel SA (j) (k)........................................... 7.00% 05/15/19 556,140
250,000 Mallinckrodt International Finance SA / Mallinckrodt CB
LLC (j).................................................... 5.63% 10/15/23 235,625
350,000 Valeant Pharmaceuticals International, Inc. (j)............... 5.38% 03/15/20 311,719
---------------
1,103,484
---------------
RESTAURANTS -- 0.0%
100,000 1011778 B.C. ULC / New Red Finance, Inc. (j).................. 6.00% 04/01/22 103,500
---------------
See Notes to Financial Statements Page 15
FIRST TRUST SENIOR LOAN FUND (FTSL)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2016 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- ---------------------------------------------------------------- ------------- ------------ ---------------
FOREIGN CORPORATE BONDS (CONTINUED)
SECURITY & ALARM SERVICES -- 0.1%
$ 500,000 Garda World Security Corp. (j)................................ 7.25% 11/15/21 $ 406,250
---------------
TOTAL FOREIGN CORPORATE BONDS............................................................... 4,393,183
(Cost $4,766,978) ---------------
SHARES DESCRIPTION VALUE
---------------- --------------------------------------------------------------------------------------------- ---------------
COMMON STOCKS -- 0.0%
LIFE SCIENCES TOOLS & SERVICES -- 0.0%
11,850 New Millennium Holdco, Inc. (g) (l)......................................................... 90,848
---------------
TOTAL COMMON STOCKS......................................................................... 90,848
(Cost $59,250) ---------------
RIGHTS -- 0.0%
LIFE SCIENCES TOOLS & SERVICES -- 0.0%
1 New Millennium Holdco, Inc., Corporate Claim Trust (c) (d) (g) (l).......................... 0
1 New Millennium Holdco, Inc., Lender Claim Trust (c) (d) (g) (l)............................. 0
---------------
TOTAL RIGHTS................................................................................ 0
(Cost $0) ---------------
MONEY MARKET FUNDS -- 8.3%
37,191,009 Morgan Stanley Institutional Liquidity Fund - Treasury
Portfolio - Institutional Class - 0.22% (m).............................................. 37,191,009
(Cost $37,191,009) ---------------
TOTAL INVESTMENTS -- 102.4%................................................................. 459,464,273
(Cost $465,494,650) (n)
NET OTHER ASSETS AND LIABILITIES -- (2.4)%.................................................. (10,564,232)
---------------
NET ASSETS -- 100.0%........................................................................ $ 448,900,041
===============
-----------------------------
(a) Senior Floating-Rate Loan Interests ("Senior Loans") in which the Fund
invests generally pay interest at rates which are periodically
predetermined by reference to a base lending rate plus a premium. These
base lending rates are generally (i) the lending rate offered by one or
more major European banks, such as the London Inter-Bank Offered Rate
("LIBOR"), (ii) the prime rate offered by one or more United States banks
or (iii) the certificate of deposit rate. Certain Senior Loans are subject
to a LIBOR floor that establishes a minimum LIBOR rate. The interest rate
shown reflects the rate in effect at April 30, 2016. When a range of rates
is disclosed, the Fund holds more than one contract within the same
tranche at varying rates.
(b) Senior Loans generally are subject to mandatory and/or optional
prepayment. As a result, the actual remaining maturity of Senior Loans may
be substantially less than the stated maturities shown.
(c) Pursuant to procedures adopted by the Trust's Board of Trustees, this
security has been determined to be illiquid by the investment advisor,
First Trust Advisors L.P. (the "Advisor").
(d) This security is fair valued by the Advisor's Pricing Committee in
accordance with procedures adopted by the Trust's Board of Trustees, and
in accordance with provisions of the Investment Company Act of 1940, as
amended. At April 30, 2016, securities noted as such amounted to $619,293
or 0.1% of net assets.
(e) This issuer has filed for protection in federal bankruptcy court.
(f) This issuer is in default but interest is still being accrued by the Fund
and paid by the issuer.
Page 16 See Notes to Financial Statements
FIRST TRUST SENIOR LOAN FUND (FTSL)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2016 (UNAUDITED)
(g) On December 21, 2015, Millennium Health, LLC completed a Bankruptcy Plan
of Reorganization. As part of the Bankruptcy Plan of Reorganization, the
holders of Millennium Laboratories LLC, Tranche B Term Loan received a
portion of a new term loan and a pro rata share of the newly issued common
equity shares in New Millennium Holdco, Inc., the new company. Each lender
was also issued a beneficial interest in the Corporate Claim Trust
entitling it, as holder of such beneficial interest, to receive Corporate
Claim Trust Distributions when and if net cash proceeds from the pursuit
of Retained Corporate Causes of Action are available to make such a
distribution. In addition, each lender was issued a beneficial interest in
the Lender Claim Trust entitling it, as holder of such beneficial
interest, to receive Lender Claim Trust Distributions when and if net cash
proceeds from the pursuit of Retained Lender Causes of Action are
available to make such a distribution.
(h) Delayed Draw Loan (See Note 2C - Unfunded Loan Commitments in the Notes to
Financial Statements).
(i) Represents commitment fee rate on Unfunded Loan Commitment.
(j) This security, sold within the terms of a private placement memorandum, is
exempt from registration upon resale under Rule 144A of the Securities Act
of 1933, as amended, and may be resold in transactions exempt from
registration, normally to qualified institutional buyers. Pursuant to
procedures adopted by the Trust's Board of Trustees, this security has
been determined to be liquid by the Advisor. Although market instability
can result in periods of increased overall market illiquidity, liquidity
for each security is determined based on security-specific factors and
assumptions, which require subjective judgment. At April 30, 2016,
securities noted as such amounted to $10,709,273 or 2.4% of net assets.
(k) These notes are Payment-in-Kind ("PIK") Notes whereby the issuer may, at
its option, elect to pay interest on the notes (1) entirely in cash or (2)
entirely in PIK Interest. Interest paid in cash will accrue at the rate of
7.000% per annum ("Cash Interest Rate") and PIK Interest will accrue on
the Notes at a rate per annum equal to the Cash Interest Rate plus 75
basis points. For the six months ended April 30, 2016, this security paid
all of its interest in cash.
(l) Non-income producing security.
(m) Interest rate shown reflects yield as of April 30, 2016.
(n) Aggregate cost for financial reporting purposes, which approximates the
aggregate cost for federal income tax purposes. As of April 30, 2016, the
aggregate gross unrealized appreciation for all securities in which there
was an excess of value over tax cost was $2,235,483 and the aggregate
gross unrealized depreciation for all securities in which there was an
excess of tax cost over value was $8,265,860.
-----------------------------
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of April 30,
2016 is as follows (see Note 2A - Portfolio Valuation in the Notes to Financial
Statements):
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
4/30/2016 PRICES INPUTS INPUTS
-------------- -------------- -------------- --------------
Senior Floating-Rate Loan Interests:
Cable & Satellite.............................. $ 619,293 $ -- $ -- $ 619,293
Property & Casualty Insurance.................. 270,829 -- -- 270,829
Other Industry Categories*..................... 381,367,921 -- 381,367,921 --
-------------- -------------- -------------- --------------
Total Senior Floating-Rate Loan Interests......... 382,258,043 -- 381,367,921 890,122
Corporate Bonds*.................................. 35,531,190 -- 35,531,190 --
Foreign Corporate Bonds*.......................... 4,393,183 -- 4,393,183 --
Common Stocks*.................................... 90,848 -- 90,848 --
Rights*........................................... --** -- -- --**
Money Market Funds................................ 37,191,009 37,191,009 -- --
-------------- -------------- -------------- --------------
Total Investments................................. $ 459,464,273 $ 37,191,009 $ 421,383,142 $ 890,122
============== ============== ============== ==============
* See Portfolio of Investments for industry breakout. Industry categories
are only shown separately if they include holdings in two or more levels
or have holdings in only Level 3.
** Investment is valued at $0.
All transfers in and out of the Levels during the period are assumed to be
transferred on the last day of the period at their current value. There were no
transfers between Levels at April 30, 2016.
See Notes to Financial Statements Page 17
FIRST TRUST SENIOR LOAN FUND (FTSL)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2016 (UNAUDITED)
Level 3 Senior Floating-Rate Loan Interests that are fair valued by the
Advisor's Pricing Committee are footnoted in the Portfolio of Investments. Level
3 Senior Floating-Rate Loan Interests are valued based on either third-party
pricing service prices obtained from dealer runs and indicative sheets from
brokers or are valued using broker quotes. The values are based on unobservable
and non-quantitative inputs. The Trust's Board of Trustees has adopted valuation
procedures that are utilized by the Advisor's Pricing Committee to oversee the
day-to-day valuation of the Fund's investments. The Advisor's Pricing Committee,
through the Fund's fund accounting agent, monitors the daily pricing via
tolerance checks and stale and unchanged price reviews. The Advisor's Pricing
Committee also reviews monthly back testing of pricing service prices by
comparing sales prices of the Fund's investments to prior day pricing service
prices. Additionally, the Advisor's Pricing Committee reviews periodic
information from the Fund's third-party pricing service that compares secondary
market trade prices to their daily valuations.
The following table presents the activity of the Fund's investments measured at
fair value on a recurring basis using significant unobservable inputs (Level 3)
for the period presented:
BEGINNING BALANCE AT OCTOBER 31, 2015
Senior Floating-Rate Loan Interests $ 1,413,777
Rights --
Net Realized Gain (Loss)
Senior Floating-Rate Loan Interests 1,889
Rights --
Change in Unrealized Appreciation /(Depreciation)
Senior Floating-Rate Loan Interests (16,293)
Rights --
Purchases
Senior Floating-Rate Loan Interests --
Rights --*
Sales
Senior Floating-Rate Loan Interests (509,251)
Rights --
Transfers In
Senior Floating-Rate Loan Interests --
Rights --
Transfers Out
Senior Floating-Rate Loan Interests --
Rights --
--------------
ENDING BALANCE AT APRIL 30, 2016
Senior Floating-Rate Loan Interests 890,122
Rights --*
--------------
Total Level 3 holdings $ 890,122
==============
* Investment is valued at $0.
There was a net change of $(18,055) in unrealized appreciation (depreciation)
from Level 3 investments held as of April 30, 2016.
Page 18 See Notes to Financial Statements
FIRST TRUST SENIOR LOAN FUND (FTSL)
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 2016 (UNAUDITED)
ASSETS:
Investments, at value..................................................... $ 459,464,273
Receivables:
Investment securities sold............................................. 4,835,534
Interest............................................................... 1,954,372
---------------
Total Assets........................................................ 466,254,179
---------------
LIABILITIES:
Payables:
Investment securities purchased........................................ 16,948,173
Investment advisory fees............................................... 310,779
Unfunded loan commitments.............................................. 95,186
---------------
Total Liabilities................................................... 17,354,138
---------------
NET ASSETS................................................................ $ 448,900,041
===============
NET ASSETS CONSIST OF:
Paid-in capital........................................................... $ 458,011,301
Par value................................................................. 93,500
Accumulated net investment income (loss).................................. 251,021
Accumulated net realized gain (loss) on investments....................... (3,425,404)
Net unrealized appreciation (depreciation) on investments................. (6,030,377)
---------------
NET ASSETS................................................................ $ 448,900,041
===============
NET ASSET VALUE, per share................................................ $ 48.01
===============
Number of shares outstanding (unlimited number of shares
authorized, par value $0.01 per share)................................. 9,350,002
===============
Investments, at cost...................................................... $ 465,494,650
===============
See Notes to Financial Statements Page 19
FIRST TRUST SENIOR LOAN FUND (FTSL)
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED APRIL 30, 2016 (UNAUDITED)
INVESTMENT INCOME:
Interest.................................................................. $ 9,871,955
---------------
Total investment income................................................ 9,871,955
---------------
EXPENSES:
Investment advisory fees.................................................. 1,774,582
---------------
Total expenses......................................................... 1,774,582
---------------
NET INVESTMENT INCOME (LOSS).............................................. 8,097,373
---------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on investments................................ (2,687,339)
Net change in unrealized appreciation (depreciation) on investments.... 3,277,022
---------------
NET REALIZED AND UNREALIZED GAIN (LOSS)................................... 589,683
---------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS........................................................ $ 8,687,056
===============
Page 20 See Notes to Financial Statements
FIRST TRUST SENIOR LOAN FUND (FTSL)
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE
SIX MONTHS
ENDED FOR THE
4/30/2016 YEAR ENDED
(UNAUDITED) 10/31/2015
-------------- --------------
OPERATIONS:
Net investment income (loss)........................................... $ 8,097,373 $ 10,823,916
Net realized gain (loss)............................................... (2,687,339) (365,525)
Net change in unrealized appreciation (depreciation)................... 3,277,022 (7,431,519)
-------------- --------------
Net increase (decrease) in net assets resulting from operations........ 8,687,056 3,026,872
-------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income.................................................. (8,244,002) (10,638,104)
-------------- --------------
SHAREHOLDER TRANSACTIONS:
Proceeds from shares sold.............................................. 97,255,408 198,520,058
Cost of shares redeemed................................................ (11,697,037) (24,352,367)
-------------- --------------
Net increase (decrease) in net assets resulting
from shareholder transactions....................................... 85,558,371 174,167,691
-------------- --------------
Total increase (decrease) in net assets................................ 86,001,425 166,556,459
NET ASSETS:
Beginning of period.................................................... 362,898,616 196,342,157
-------------- --------------
End of period.......................................................... $ 448,900,041 $ 362,898,616
============== ==============
Accumulated net investment income (loss) at end of period.............. $ 251,021 $ 397,650
============== ==============
CHANGES IN SHARES OUTSTANDING:
Shares outstanding, beginning of period................................ 7,550,002 4,000,002
Shares sold............................................................ 2,050,000 4,050,000
Shares redeemed........................................................ (250,000) (500,000)
-------------- --------------
Shares outstanding, end of period...................................... 9,350,002 7,550,002
============== ==============
See Notes to Financial Statements Page 21
FIRST TRUST SENIOR LOAN FUND (FTSL)
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
SIX MONTHS FOR THE PERIOD
ENDED YEAR ENDED OCTOBER 31, 5/1/2013 (a)
4/30/2016 ----------------------------- THROUGH
(UNAUDITED) 2015 2014 10/31/2013
----------- ----------- ----------- -----------
Net asset value, beginning of period........................ $ 48.07 $ 49.09 $ 49.45 $ 50.00
----------- ----------- ----------- -----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss)................................ 0.89 1.90 1.77 0.90
Net realized and unrealized gain (loss)..................... (0.03) (1.03) (0.36) (0.45)
----------- ----------- ----------- -----------
Total from investment operations............................ 0.86 0.87 1.41 0.45
----------- ----------- ----------- -----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income....................................... (0.92) (1.89) (1.77) (0.85)
Return of capital........................................... -- -- -- (0.15)
----------- ----------- ----------- -----------
Total distributions paid to shareholders.................... (0.92) (1.89) (1.77) (1.00)
----------- ----------- ----------- -----------
Net asset value, end of period.............................. $ 48.01 $ 48.07 $ 49.09 $ 49.45
=========== =========== =========== ===========
TOTAL RETURN (b)............................................ 1.86% 1.75% 2.91% 0.92%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's)........................ $ 448,900 $ 362,899 $ 196,342 $ 96,432
RATIOS TO AVERAGE NET ASSETS:
Ratio of total expenses to average net assets............... 0.85% (c) 0.85% 0.85% 0.85% (c)
Ratio of net investment income (loss) to average net
assets................................................... 3.88% (c) 3.97% 3.61% 3.29% (c)
Portfolio turnover rate (d)................................. 39% 71% 97% 51%
(a) Inception date is consistent with the commencement of investment
operations and is the date the initial creation units were established.
(b) Total return is calculated assuming an initial investment made at the net
asset value at the beginning of the period, reinvestment of all
distributions at net asset value during the period, and redemption at net
asset value on the last day of the period. The returns presented do not
reflect the deduction of taxes that a shareholder would pay on Fund
distributions or the redemption or sale of Fund shares. Total return is
calculated for the time period presented and is not annualized for periods
of less than a year.
(c) Annualized.
(d) Portfolio turnover is calculated for the time period presented and is not
annualized for periods of less than a year and does not include securities
received or delivered from processing creations or redemptions and in-kind
transactions.
Page 22 See Notes to Financial Statements
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FIRST TRUST SENIOR LOAN FUND (FTSL)
APRIL 30, 2016 (UNAUDITED)
1. ORGANIZATION
First Trust Exchange-Traded Fund IV (the "Trust") is an open-end management
investment company organized as a Massachusetts business trust on September 15,
2010, and is registered with the Securities and Exchange Commission under the
Investment Company Act of 1940, as amended (the "1940 Act").
The Trust currently consists of eight funds that are offering shares. This
report covers the First Trust Senior Loan Fund (the "Fund"), which trades under
the ticker "FTSL" on The Nasdaq Stock Market LLC ("Nasdaq"). Unlike conventional
mutual funds, the Fund issues and redeems shares on a continuous basis, at net
asset value ("NAV"), only in large specified blocks consisting of 50,000 shares
called a "Creation Unit." Creation Units are generally issued and redeemed for
cash and, in certain circumstances, in-kind for securities in which the Fund
invests. Except when aggregated in Creation Units, the shares are not redeemable
securities of the Fund.
The Fund's primary investment objective is to provide high current income. The
Fund's secondary investment objective is the preservation of capital. The Fund
pursues its objectives by investing at least 80% of its net assets (plus the
amount of any borrowing for investment purposes) under normal market conditions
in a diversified portfolio of first lien senior floating rate loan interests
("Senior Loans")(1). A Senior Loan is an advanced or commitment of funds made by
one or more banks or similar financial institutions to one or more corporations,
partnerships or other business entities and typically pays interest at a
floating or adjusting rate that is determined periodically at a designated
premium above a base lending rate, most commonly the London Interbank Offered
Rate ("LIBOR"). The Fund invests primarily in Senior Loans that are below
investment grade quality at the time of investment. The Fund invests in Senior
Loans made predominantly to businesses operating in North America, but may also
invest in Senior Loans made to businesses operating outside of North America.
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 following is a summary
of significant accounting policies consistently followed by the Fund in the
preparation of the financial statements. The preparation of the financial
statements in accordance with accounting principles generally accepted in the
United States of America ("U.S. GAAP") requires management to make estimates and
assumptions that affect the reported amounts and disclosures in the financial
statements. Actual results could differ from those estimates.
A. PORTFOLIO VALUATION
The Fund's NAV is determined daily as of the close of regular trading on the New
York Stock Exchange ("NYSE"), normally 4:00 p.m. Eastern time, on each day the
NYSE is open for trading. If the NYSE closes early on a valuation day, the NAV
is determined as of that time. Domestic debt securities and foreign securities
are priced using data reflecting the earlier closing of the principal markets
for those securities. The Fund's NAV is calculated by dividing the value of all
assets of the Fund (including accrued interest and dividends), less all
liabilities (including accrued expenses and dividends declared but unpaid), by
the total number of shares outstanding.
The Fund's investments are valued daily at market value or, in the absence of
market value with respect to any portfolio securities, at fair value. Market
value prices represent last sale or official closing prices from a national or
foreign exchange (i.e., a regulated market) and are primarily obtained from
third-party pricing services. Fair value prices represent any prices not
considered market value prices and are either obtained from a third-party
pricing service or are determined by the Pricing Committee of the Fund's
investment advisor, First Trust Advisors L.P. ("First Trust" or the "Advisor"),
in accordance with valuation procedures adopted by the Trust's Board of
Trustees, and in accordance with provisions of the 1940 Act. Investments valued
by the Advisor's Pricing Committee, if any, are footnoted as such in the
footnotes to the Portfolio of Investments. The Fund's investments are valued as
follows:
Senior Loans in which the Fund invests are not listed on any securities
exchange or board of trade. Senior Loans are typically bought and sold by
institutional investors in individually negotiated private transactions
that function in many respects like an over-the-counter secondary market,
although typically no formal market-makers exist. This market, while
having grown substantially since its inception, generally has fewer trades
and less liquidity than the secondary market for other types of
securities. Some Senior Loans have few or no trades, or trade
infrequently, and information regarding a specific Senior Loan may not be
widely available or may be incomplete. Accordingly, determinations of the
market value of Senior Loans may be based on infrequent and dated
information. Because there is less reliable, objective data available,
elements of judgment may play a greater role in valuation of Senior Loans
-----------------------------
(1) The terms "security" and "securities" used throughout the Notes to
Financial Statements include Senior Loans.
Page 23
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST SENIOR LOAN FUND (FTSL)
APRIL 30, 2016 (UNAUDITED)
than for other types of securities. Typically, Senior Loans are valued
using information provided by a third-party pricing service. The
third-party pricing service primarily uses over-the-counter pricing from
dealer runs and broker quotes from indicative sheets to value the Senior
Loans.
Corporate bonds, corporate notes and other debt securities are fair valued
on the basis of valuations provided by dealers who make markets in such
securities or by an independent pricing service approved by the Trust's
Board of Trustees, which may use the following valuation inputs when
available:
1) benchmark yields;
2) reported trades;
3) broker/dealer quotes;
4) issuer spreads;
5) benchmark securities;
6) bids and offers; and
7) reference data including market research publications.
Shares of open-end funds are valued at fair value which is based on NAV
per share.
Securities traded in an over-the-counter market are fair valued at the
mean of their most recent bid and asked price, if available, and otherwise
at their closing bid price.
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
5) any other market-based data the Advisor's Pricing Committee
considers relevant. In this regard, the Advisor's Pricing
Committee may use last-obtained market-based data to assist it
when valuing portfolio securities using amortized cost.
Certain securities may not be able to be priced by pre-established pricing
methods. Such securities may be valued by the Trust's Board of Trustees or its
delegate, the Advisor's Pricing Committee, at fair value. These securities
generally include, but are not limited to, restricted securities (securities
which may not be publicly sold without registration under the Securities Act of
1933, as amended) for which a pricing service is unable to provide a market
price; securities whose trading has been formally suspended; a security whose
market or fair value price is not available from a pre-established pricing
source; a security with respect to which an event has occurred that is likely to
materially affect the value of the security after the market has closed but
before the calculation of the Fund's NAV or make it difficult or impossible to
obtain a reliable market quotation; and a security whose price, as provided by
the pricing service, does not reflect the security's fair value. As a general
principle, the current fair value of a security would appear to be the amount
which the owner might reasonably expect to receive for the security upon its
current sale. When fair value prices are used, generally they will differ from
market quotations or official closing prices on the applicable exchanges. A
variety of factors may be considered in determining the fair value of such
securities, including, but not limited to, the following:
1) the fundamental business data relating to the borrower/issuer;
2) an evaluation of the forces which influence the market in which
these securities are purchased and sold;
3) the type, size and cost of a security;
4) the financial statements of the borrower/issuer;
5) the credit quality and cash flow of the borrower/issuer, based on
the Advisor's or external analysis;
6) the information as to any transactions in or offers for the
security;
7) the price and extent of public trading in similar securities (or
equity securities) of the borrower/issuer, or comparable companies;
8) the coupon payments;
Page 24
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST SENIOR LOAN FUND (FTSL)
APRIL 30, 2016 (UNAUDITED)
9) the quality, value and salability of collateral, if any, securing
the security;
10) the business prospects of the borrower/issuer, including any ability
to obtain money or resources from a parent or affiliate and an
assessment of the borrower's/issuer's management;
11) the prospects for the borrower's/issuer's industry, and multiples
(of earnings and/or cash flows) being paid for similar businesses in
that industry;
12) borrower's/issuer's competitive position within the industry;
13) borrower's/issuer's ability to access additional liquidity through
public and/or private markets; and
14) other relevant factors.
The Fund is subject to fair value accounting standards that define fair value,
establish the framework for measuring fair value and provide a three-level
hierarchy for fair valuation based upon the inputs to the valuation as of the
measurement date. The three levels of the fair value hierarchy are as follows:
o Level 1 - Level 1 inputs are quoted prices in active markets for
identical investments. An active market is a market in which
transactions for the investment occur with sufficient frequency and
volume to provide pricing information on an ongoing basis.
o Level 2 - Level 2 inputs are observable inputs, either directly or
indirectly, and include the following:
o Quoted prices for similar investments in active markets.
o Quoted prices for identical or similar investments in markets
that are non-active. A non-active market is a market where
there are few transactions for the investment, the prices are
not current, or price quotations vary substantially either
over time or among market makers, or in which little
information is released publicly.
o Inputs other than quoted prices that are observable for the
investment (for example, interest rates and yield curves
observable at commonly quoted intervals, volatilities,
prepayment speeds, loss severities, credit risks, and default
rates).
o Inputs that are derived principally from or corroborated by
observable market data by correlation or other means.
o Level 3 - Level 3 inputs are unobservable inputs. Unobservable
inputs may reflect the reporting entity's own assumptions about the
assumptions that market participants would use in pricing the
investment.
The inputs or methodologies used for valuing investments are not necessarily an
indication of the risk associated with investing in those investments. A summary
of the inputs used to value the Fund's investments as of April 30, 2016, is
included with the Fund's Portfolio of Investments.
B. SECURITIES TRANSACTIONS AND INVESTMENT INCOME
Securities transactions are recorded as of the trade date. Realized gains and
losses from securities transactions are recorded on the identified cost basis.
Interest income is recorded daily on the accrual basis. Amortization of premiums
and accretion of discounts are recorded using the effective interest method over
the expected life of each respective borrowing for loans.
Securities purchased or sold on a when-issued, delayed-delivery or forward
purchase commitment basis may have extended settlement periods. The value of the
security so purchased is subject to market fluctuations during this period. Due
to the nature of the Senior Loan market, the actual settlement date may not be
certain at the time of the purchase or sale for some of the Senior Loans.
Interest income on such Senior Loans is not accrued until settlement date. The
Fund maintains liquid assets with a current value at least equal to the amount
of its when-issued, delayed delivery or forward purchase commitments. The Fund
had no when-issued, delayed-delivery, or forward purchase commitments (other
than unfunded commitments discussed below) as of April 30, 2016.
C. UNFUNDED LOAN COMMITMENTS
The Fund may enter into certain credit agreements, all or a portion of which may
be unfunded. The Fund is obligated to fund these loan commitments at the
borrower's discretion. The Fund had unfunded delayed drawn loan commitments of
$95,186 as of April 30, 2016.
D. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
Dividends from net investment income, if any, are declared and paid monthly 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.
Page 25
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST SENIOR LOAN FUND (FTSL)
APRIL 30, 2016 (UNAUDITED)
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 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 during the fiscal year ended October 31,
2015 was as follows:
Distributions Distributions Distributions
paid from paid from paid from
Ordinary Capital Return of
Income Gains Capital
------------- ------------- -------------
$ 10,638,104 $ -- $ --
As of October 31, 2015, 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 (Loss) (Depreciation)
------------- ------------- -------------
$ 397,650 $ (496,979) $ (9,548,485)
E. INCOME TAXES
The Fund intends to continue to qualify as a regulated investment company by
complying with the requirements under Subchapter M of the Internal Revenue Code
of 1986, as amended, which includes distributing substantially all of its net
investment income and net realized gains to shareholders. Accordingly, no
provision has been made for federal and state income taxes. However, due to the
timing and amount of distributions, the Fund may be subject to an excise tax of
4% of the amount by which approximately 98% of the Fund's taxable income exceeds
the distributions from such taxable income for the calendar year.
The Fund intends to utilize provisions of the federal income tax laws, which
allow it to carry a realized capital loss forward indefinitely following the
year of the loss and offset such loss against any future realized capital gains.
The Fund is subject to certain limitations under U.S. tax rules on the use of
capital loss carryforwards and net unrealized built-in losses. These limitations
apply when there has been a 50% change in ownership. As of October 31, 2015, the
Fund had $496,979 of non-expiring capital loss carryforwards that may be carried
forward indefinitely.
Certain losses realized during the current fiscal year may be deferred and
treated as occurring on the first day of the following fiscal year for federal
income tax purposes. For the fiscal year ended October 31, 2015, the Fund had no
net ordinary losses.
The Fund is subject to accounting standards that establish a minimum threshold
for recognizing, and a system for measuring, the benefits of a tax position
taken or expected to be taken in a tax return. The taxable years ended 2013,
2014 and 2015 remain open to federal and state audit. As of April 30, 2016,
management has evaluated the application of these standards to the Fund and has
determined that no provision for income tax is required in the Fund's financial
statements for uncertain tax positions.
F. EXPENSES
Expenses, other than the investment advisory fee and other excluded expenses,
are paid by the Advisor (see Note 3).
3. INVESTMENT ADVISORY FEE, AFFILIATED TRANSACTIONS AND OTHER FEE ARRANGEMENTS
First Trust, the investment advisor to the Fund, is a limited partnership with
one limited partner, Grace Partners of DuPage L.P., and one general partner, The
Charger Corporation. The Charger Corporation is an Illinois corporation
controlled by James A. Bowen, Chief Executive Officer of First Trust. First
Trust is responsible for the selection and ongoing monitoring of the securities
in the Fund's portfolio, managing the Fund's business affairs and providing
certain administrative services necessary for the management of the Fund.
Page 26
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST SENIOR LOAN FUND (FTSL)
APRIL 30, 2016 (UNAUDITED)
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, acquired
fund fees and expenses, brokerage commissions and other expenses connected with
the execution of portfolio transactions, distribution and service fees pursuant
to a 12b-1 plan, if any, and extraordinary expenses. The Fund has agreed to pay
First Trust an annual unitary management fee equal to 0.85% of its average daily
net assets.
The Trust has multiple service agreements with The Bank of New York Mellon
("BNYM"). Under the service agreements, BNYM performs custodial, fund
accounting, certain administrative services, and transfer agency services for
the Fund. As custodian, BNYM is responsible for custody of the Fund's assets. As
fund accountant and administrator, BNYM is responsible for maintaining the books
and records of the Fund's securities and cash. As transfer agent, BNYM is
responsible for maintaining shareholder records for the Fund. BNYM is a
subsidiary of The Bank of New York Mellon Corporation, a financial holding
company.
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 equally among each fund in the First Trust Fund
Complex. Prior to January 1, 2016, the fixed annual retainer was allocated pro
rata based on each fund's 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 the Valuation Committee are
paid annual fees to serve in such capacities, with such compensation allocated
pro rata among each fund in the First Trust Fund Complex based on net assets.
Trustees are reimbursed for travel and out-of-pocket expenses in connection with
all meetings. The Lead Independent Trustee and Committee Chairmen rotate every
three years. The officers and "Interested" Trustee receive no compensation from
the Trust for acting in such capacities.
4. PURCHASES AND SALES OF SECURITIES
For the six months ended April 30, 2016, the cost of purchases and proceeds from
sales of investments, excluding short-term investments and in-kind transactions,
were $228,451,112 and $154,427,674, respectively.
For the six months ended April 30, 2016, there were no in-kind transactions.
5. BORROWINGS
The Trust, on behalf of the Fund, along with First Trust Exchange-Traded Fund
III and First Trust Series Fund entered into a $140 million Credit Agreement
with The Bank of Nova Scotia ("Scotia") as administrative agent for a group of
lenders. Scotia charges a commitment fee of 0.25% of the daily amount of the
excess of the commitment amount over the outstanding principal balance of the
loans. Prior to March 9, 2016, the commitment amount was $80 million and the
commitment fee was 0.15%. First Trust allocates the commitment fee amongst the
funds that have access to the credit line. To the extent that the Fund accesses
the credit line, there would also be an interest fee charged. The Fund did not
have any borrowings outstanding during the six months ended April 30, 2016.
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
Aggregation) and the market value of the Deposit Securities, and/or (ii) cash in
lieu of all or a portion of the Deposit Securities. The Fund's Creation Units
are generally issued and redeemed for cash. 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. Authorized Participants purchasing Creation Units must pay to BNYM,
as transfer agent, a creation transaction fee (the "Creation Transaction Fee")
regardless of the number of Creation Units purchased in the transaction. The
Creation Transaction Fee is based on the composition of the securities included
in the Fund's portfolio and the countries in which the transactions are settled.
The Creation Transaction Fee is currently $500. The 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
Page 27
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST SENIOR LOAN FUND (FTSL)
APRIL 30, 2016 (UNAUDITED)
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 BNYM, as transfer
agent, a standard 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 March 31, 2017.
8. INDEMNIFICATION
The Trust, on behalf of the Fund, has a variety of indemnification obligations
under contracts with its service providers. The Trust's maximum exposure under
these arrangements is unknown. However, the Trust has not had prior claims or
losses pursuant to these contracts and expects the risk of loss to be remote.
9. SUBSEQUENT EVENTS
Management has evaluated the impact of all subsequent events on the Fund through
the date the financial statements were issued, and has determined that there was
the following subsequent event:
On May 19, 2016, the Fund declared a distribution of $0.15 per share to
shareholders of record on May 24, 2016, payable May 31, 2016.
Page 28
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ADDITIONAL INFORMATION
--------------------------------------------------------------------------------
FIRST TRUST SENIOR LOAN FUND (FTSL)
APRIL 30, 2016 (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
its portfolio securities 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 at http://www.sec.gov.
PORTFOLIO HOLDINGS
The Trust files its complete schedule of the Fund's portfolio holdings with the
SEC for the first and third quarters of each fiscal year on Form N-Q. The
Trust's Forms N-Q are available (1) by calling (800) 988-5891; (2) on the Fund's
website located at http://www.ftportfolios.com; (3) on the SEC's website at
http://www.sec.gov; and (4) for review and copying at the SEC's Public Reference
Room ("PRR") in Washington, DC. Information regarding the operation of the PRR
may be obtained by calling (800) SEC-0330.
RISK CONSIDERATIONS
RISKS ARE INHERENT IN ALL INVESTING. YOU SHOULD CONSIDER THE FUND'S INVESTMENT
OBJECTIVE, RISKS, CHARGES AND EXPENSES CAREFULLY BEFORE INVESTING. YOU CAN
DOWNLOAD THE FUND'S PROSPECTUS AT HTTP://WWW.FTPORTFOLIOS.COM OR CONTACT FIRST
TRUST PORTFOLIOS L.P. AT (800) 621-1675 TO REQUEST A PROSPECTUS, WHICH CONTAINS
THIS AND OTHER INFORMATION ABOUT THE FUND. FOR ADDITIONAL INFORMATION ABOUT THE
RISKS ASSOCIATED WITH INVESTING IN THE FUND, PLEASE SEE THE FUND'S STATEMENT OF
ADDITIONAL INFORMATION, AS WELL AS OTHER REGULATORY FILINGS. READ THESE
DOCUMENTS CAREFULLY BEFORE YOU INVEST. FIRST TRUST PORTFOLIOS L.P. IS THE
DISTRIBUTOR OF THE FIRST TRUST EXCHANGE-TRADED FUND IV.
The following summarizes some of the risks that should be considered for the
Fund.
BANK LOAN RISK: An investment in Senior Loans subjects the Fund to credit risk,
which is heightened for Senior Loans in which the Fund invests because companies
that issue such loans tend to be highly leveraged and thus are more susceptible
to the risks of interest deferral, default and/or bankruptcy. Senior Loans are
usually rated below investment grade but may also be unrated. An economic
downturn would generally lead to a higher non-payment rate, and a Senior Loan
may lose significant market value before a default occurs. Moreover, any
specific collateral used to secure a Senior Loan may decline in value or become
illiquid, which would adversely affect the loan's value. Unlike the securities
markets, there is no central clearinghouse for Senior Loan trades, and the
Senior Loan market has not established enforceable settlement standards or
remedies for failure to settle. Therefore, portfolio transactions in Senior
Loans may have uncertain settlement time periods. Senior Loans are subject to a
number of risks described elsewhere in this prospectus, including liquidity risk
and the risk of investing in below investment grade fixed-income instruments.
CALL RISK. If an issuer calls higher-yielding securities held by the Fund,
performance could be adversely impacted.
CASH TRANSACTION RISK: The Fund currently intends to effect a significant
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 redemptions
for in-kind securities. Because the Fund principally effects 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.
CONVERTIBLE BONDS RISK. The market values of convertible bonds tend to decline
as interest rates increase and, conversely, to increase as interest rates
decline. A convertible bond's market value also tends to reflect the market
price of the common stock of the issuing company.
CREDIT RISK: Credit risk is the risk that an issuer of a security will be unable
or unwilling to make dividend, interest and/or principal payments when due and
the related risk that the value of a security may decline because of concerns
about the issuer's ability to make such payments. Credit risk may be heightened
for the Fund because it may invest a substantial portion of its net assets in
high yield or "junk" debt; such securities, while generally offering higher
yields than investment-grade debt with similar maturities, involve greater
risks, including the possibility of dividend or interest deferral, default or
bankruptcy, and are regarded as predominantly speculative with respect to the
issuer's capacity to pay dividends or interest and repay principal. Credit risk
is heightened for loans in which the Fund invests because companies that issue
such loans tend to be highly leveraged and thus are more susceptible to the
risks of interest deferral, default and/or bankruptcy.
Page 29
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST SENIOR LOAN FUND (FTSL)
APRIL 30, 2016 (UNAUDITED)
CURRENCY RISK. Because the Fund's net asset value is determined on the basis of
U.S. dollars and the Fund invests in foreign securities, you may lose money if
the local currency of a foreign market depreciates against the U.S. dollar, even
if the local currency value of the Fund's holdings goes up. The Fund intends to
hedge its non-U.S. dollar holdings.
HIGH YIELD SECURITIES RISK: High yield securities, or "junk" bonds, are subject
to greater market fluctuations and risk of loss than securities with higher
ratings, and therefore, may be highly speculative. These securities are issued
by companies that may have limited operating history, narrowly focused
operations, and/or other impediments to the timely payment of periodic interest
and principal at maturity. If the economy slows down or dips into recession, the
issuers of high yield securities may not have sufficient resources to continue
making timely payment of periodic interest and principal at maturity. The market
for high yield securities is smaller and less liquid than that for investment
grade securities. High yield securities are generally not listed on a national
securities exchange but trade in the over-the-counter markets. Due to the
smaller, less liquid market for high yield securities, the bid-offer spread on
such securities is generally greater than it is for investment grade securities
and the purchase or sale of such securities may take longer to complete.
ILLIQUID SECURITIES RISK. Illiquid securities involve the risk that the
securities will not be able to be sold at the time desired by the Fund or at
prices approximately the value at which the Fund is carrying the securities on
its books.
INCOME RISK: If interest rates fall, the income from the Fund's portfolio will
likely decline because the Fund holds floating rate debt that will adjust lower
with falling interest rates. For loans, interest rates typically reset
periodically.
INTEREST RATE RISK: Interest rate risk is the risk that the value of the debt
securities in the Fund will decline because of rising market interest rates.
Interest rate risk is generally lower for shorter-term investments and higher
for longer-term investments. Duration is a common measure of interest rate risk,
which measures a bond's expected life on a present value basis, taking into
account the bond's yield, interest payments and final maturity. Duration is a
reasonably accurate measure of a bond's price sensitivity to changes in interest
rates. The longer the duration of a bond, the greater the bond's price
sensitivity is to changes in interest rates.
LIQUIDITY RISK: The Fund invests a substantial portion of its assets in
lower-quality debt issued by companies that are highly leveraged. Lower-quality
debt tends to be less liquid than higher-quality debt. Moreover, smaller debt
issues tend to be less liquid than larger debt issues. If the economy
experiences a sudden downturn, or if the debt markets for such companies become
distressed, the Fund may have particular difficulty selling its assets in
sufficient amounts, at reasonable prices and in a sufficiently timely manner to
raise the cash necessary to meet any potentially heavy redemption requests by
Fund shareholders.
MANAGEMENT RISK: The Fund is subject to management risk because it is an
actively managed portfolio. In managing the Fund's investment portfolio, the
Advisor will apply investment techniques and risk analyses that may not have the
desired result. There can be no guarantee that the Fund will meet its investment
objectives.
MARKET RISK. Market risk is the risk that a particular security owned by the
Fund or shares of the Fund in general may fall in value. Securities are subject
to market fluctuations caused by such factors as economic, political, regulatory
or market developments, changes in interest rates and perceived trends in
securities prices. Shares of the Fund could decline in value generally or could
underperform other investments.
NON-DIVERSIFICATION RISK: The Fund is classified as "non-diversified" under the
Investment Company Act of 1940, as amended. As a result, the Fund is only
limited as to the percentage of its assets that may be invested in the
securities of any one issuer by the diversification requirements imposed by the
Internal Revenue Code of 1986, as amended. The Fund may invest a relatively high
percentage of its assets in a limited number of issuers. As a result, the Fund
may be more susceptible to a single adverse economic or regulatory occurrence
affecting one or more of these issuers, experience increased volatility and be
highly concentrated in certain issuers.
NON-U.S. SECURITIES RISK: Non-U.S. securities are subject to higher volatility
than securities of domestic issuers due to possible adverse political, social or
economic developments; restrictions on foreign investment or exchange of
securities; lack of liquidity; currency exchange rates; excessive taxation;
government seizure of assets; different legal or accounting standards; and less
government supervision and regulation of exchanges in foreign countries.
Page 30
--------------------------------------------------------------------------------
ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST SENIOR LOAN FUND (FTSL)
APRIL 30, 2016 (UNAUDITED)
OTHER DEBT SECURITIES RISK: Secured loans that are not first lien, loans that
are unsecured and debt securities are subject to many of the same risks that
affect Senior Loans; however they are often unsecured and/or lower in the
issuer's capital structure than Senior Loans, and thus may be exposed to greater
risk of default and lower recoveries in the event of a default. This risk can be
further heightened in the case of below investment grade instruments.
Additionally, most fixed-income securities are fixed-rate and thus are generally
more susceptible than floating rate loans to price volatility related to changes
in prevailing interest rates.
PREPAYMENT RISK: Loans are subject to pre-payment risk. The degree to which
borrowers prepay loans, whether as a contractual requirement or at their
election, may be affected by general business conditions, the financial
condition of the borrower and competitive conditions among loan investors, among
others. As such, prepayments cannot be predicted with accuracy. Upon a
prepayment, either in part or in full, the actual outstanding debt on which the
Fund derives interest income will be reduced. The Fund may not be able to
reinvest the proceeds received on terms as favorable as the prepaid loan.
Page 31
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FIRST TRUST
First Trust Exchange-Traded Fund IV
INVESTMENT ADVISOR
First Trust Advisors L.P.
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
ADMINISTRATOR, CUSTODIAN,
FUND ACCOUNTANT &
TRANSFER AGENT
The Bank of New York Mellon
101 Barclay Street
New York, NY 10286
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
111 S. Wacker Drive
Chicago, IL 60606
LEGAL COUNSEL
Chapman and Cutler LLP
111 W. Monroe Street
Chicago, IL 60603
[BLANK BACK COVER]
FIRST TRUST
First Trust Exchange-Traded Fund IV
--------------------------------------------------------------------------------
First Trust Tactical High
Yield ETF (HYLS)
Semi-Annual Report
For the Six Months Ended
April 30, 2016
--------------------------------------------------------------------------------
TABLE OF CONTENTS
--------------------------------------------------------------------------------
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
SEMI-ANNUAL REPORT
APRIL 30, 2016
Shareholder Letter........................................................... 1
Fund Performance Overview.................................................... 2
Portfolio Management......................................................... 5
Understanding Your Fund Expenses............................................. 6
Portfolio of Investments..................................................... 7
Statement of Assets and Liabilities.......................................... 21
Statement of Operations...................................................... 22
Statements of Changes in Net Assets.......................................... 23
Statement of Cash Flows...................................................... 24
Financial Highlights......................................................... 25
Notes to Financial Statements................................................ 26
Additional Information....................................................... 33
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning of
the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934,
as amended. Forward-looking statements include statements regarding the goals,
beliefs, plans or current expectations of First Trust Advisors L.P. ("First
Trust" or the "Advisor") and its representatives, taking into account the
information currently available to them. Forward-looking statements include all
statements that do not relate solely to current or historical fact. For example,
forward-looking statements include the use of words such as "anticipate,"
"estimate," "intend," "expect," "believe," "plan," "may," "should," "would" or
other words that convey uncertainty of future events or outcomes.
Forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
the series of First Trust Exchange-Traded Fund IV (the "Trust") described in
this report (First Trust Tactical High Yield ETF; hereinafter referred to as the
"Fund") to be materially different from any future results, performance or
achievements expressed or implied by the forward-looking statements. When
evaluating the information included in this report, you are cautioned not to
place undue reliance on these forward-looking statements, which reflect the
judgment of the Advisor and its representatives only as of the date hereof. We
undertake no obligation to publicly revise or update these forward-looking
statements to reflect events and circumstances that arise after the date hereof.
PERFORMANCE AND RISK DISCLOSURE
There is no assurance that the Fund will achieve its investment objectives. The
Fund is subject to market risk, which is the possibility that the market values
of securities owned by the Fund will decline and that the value of the Fund
shares may therefore be less than what you paid for them. Accordingly, you can
lose money investing in the Fund. See "Risk Considerations" in the Additional
Information section of this report for a discussion of 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 the prospectus, the statement of additional information,
this report and other Fund regulatory filings.
--------------------------------------------------------------------------------
SHAREHOLDER LETTER
--------------------------------------------------------------------------------
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS) SEMI-ANNUAL
LETTER FROM THE CHAIRMAN AND CEO
APRIL 30, 2016
Dear Shareholders:
Thank you for your investment in First Trust Tactical High Yield ETF (the
"Fund").
First Trust Advisors L.P. ("First Trust") is pleased to provide you with the
semi-annual report which contains detailed information about your investment for
the six months ended April 30, 2016. Additionally, First Trust compiled the
Fund's financial statements for you to review. We encourage you to read this
report and discuss it with your financial advisor.
While markets were up and down during 2015, we believe there are three important
things to remember. First, the U.S. economy grew, despite the massive decline in
oil prices. Second, the tapering that began in 2014 by the Federal Reserve (the
"Fed") did not stop growth in the U.S. economy. Finally, the long-anticipated
rate hike by the Fed in December had little effect on the money supply, and the
stock market was not shocked by the hike. Early in 2016, many investors were
concerned that the volatility we saw in the market in 2015 would continue, and
it did. From December 31, 2015 through February 11, 2016, the S&P 500(R) Index
declined by 10.27%. Since then, the market has made a steady comeback, and as of
April 30, 2016, the S&P 500(R) Index was up 13.39%.
First Trust believes that having a long-term investment horizon and being
invested in quality products can help you reach your goals, despite how the
market behaves. We have always maintained perspective about the markets and
believe investors should as well. We will continue to strive to provide quality
investments each and every day, which has been one of the hallmarks of our firm
since its inception 25 years ago.
Thank you for giving First Trust the opportunity to be a part of your investment
plan. We value our relationship with you and will continue to focus on helping
investors like you reach your financial goals.
Sincerely,
/s/ James A. Bowen
James A. Bowen
Chairman of the Board of Trustees
Chief Executive Officer of First Trust Advisors L.P.
Page 1
--------------------------------------------------------------------------------
FUND PERFORMANCE OVERVIEW (UNAUDITED)
--------------------------------------------------------------------------------
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
The primary investment objective of the First Trust Tactical High Yield ETF (the
"Fund") is to provide current income. The Fund's secondary investment objective
is to provide capital appreciation. The Fund seeks to achieve its investment
objectives by investing at least 80% of its net assets including investment
borrowings, under normal market conditions, in high yield debt securities that
are rated below investment grade at the time of purchase or unrated securities
deemed by the Fund's advisor to be of comparable quality. Below investment grade
securities are those that, at the time of purchase, are rated lower than "BBB-"
by Standard & Poor's Ratings Group, a division of the McGraw Hill Companies,
Inc., or lower than "Baa3" by Moody's Investors Service, Inc., or comparably
rated by another nationally recognized statistical rating organization. High
yield debt securities that are rated below investment grade are commonly
referred to as "junk" bonds. Such securities may include U.S. and non-U.S.
corporate debt obligations, bank loans and convertible bonds. For purposes of
determining whether a security is below investment grade, the lowest available
rating will be considered. There can be no assurance that the Fund's investment
objective will be achieved. The Fund may not be appropriate for all investors.
-------------------------------------------------------------------------------------------------------------------
PERFORMANCE
-------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL CUMULATIVE
TOTAL RETURNS TOTAL RETURNS
6 Months Ended 1 Year Ended Inception (2/25/13) Inception (2/25/13)
4/30/16 4/30/16 to 4/30/16 to 4/30/16
FUND PERFORMANCE
NAV 1.26% 0.21% 4.56% 15.20%
Market Price 1.00% 0.14% 4.56% 15.21%
INDEX PERFORMANCE
BofA Merrill Lynch US High Yield
Constrained Index 2.25% -1.33% 3.31% 10.89%
-------------------------------------------------------------------------------------------------------------------
Total returns for the period since inception are calculated from the inception
date of the Fund. "Average Annual Total Returns" represent the average annual
change in value of an investment over the period indicated. "Cumulative Annual
Total Returns" represent the total change in value of an investment over the
period indicated.
The Fund's per share net asset value ("NAV") is the value of one share of the
Fund and is computed by dividing the value of all assets of the Fund (including
accrued interest and dividends), less all liabilities (including accrued
expenses and dividends declared but unpaid), by the total number of outstanding
shares. The price used to calculate market return ("Market Price") is determined
by using the midpoint between the highest bid and the lowest offer on the stock
exchange on which shares of the Fund are listed for trading as of the time that
the Fund's NAV is calculated. Since shares of the Fund did not trade in the
secondary market until after the Fund's inception, for the period from inception
to the first day of secondary market trading in shares of the Fund, the NAV of
the Fund is used as a proxy for the secondary market trading price to calculate
market returns. NAV and market returns assume that all distributions have been
reinvested in the Fund at NAV and Market Price, respectively.
An index is a statistical composite that tracks a specified financial market or
sector. Unlike the Fund, the index does not actually hold a portfolio of
securities and therefore does not incur the expenses incurred by the Fund. These
expenses negatively impact the performance of the Fund. Also, market returns do
not include brokerage commissions that may be payable on secondary market
transactions. If brokerage commissions were included, market returns would be
lower. The total returns presented reflect the reinvestment of dividends on
securities in the index. The returns presented do not reflect the deduction of
taxes that a shareholder would pay on Fund distributions or the redemption or
sale of Fund shares. The investment return and principal value of the shares of
the Fund will vary with changes in market conditions. Shares of the Fund may be
worth more or less than their original cost when they are redeemed or sold in
the market. The Fund's past performance is no guarantee of future performance.
Page 2
--------------------------------------------------------------------------------
FUND PERFORMANCE OVERVIEW (UNAUDITED) (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
-----------------------------------------------------------
% OF TOTAL LONG-TERM
INDUSTRY CLASSIFICATION INVESTMENTS
-----------------------------------------------------------
Health Care Providers & Services 15.2%
Media 13.8
Hotels, Restaurants & Leisure 9.8
Pharmaceuticals 7.3
Food Products 7.2
Diversified Telecommunication
Services 5.4
Speciality Retail 4.2
Food & Staples Retailing 4.1
Real Estate Management & Development 3.3
Semiconductors & Semiconductor
Equipment 3.0
Health Care Equipment & Supplies 2.8
Professional Services 2.6
Aerospace & Defense 2.1
Life Sciences Tools & Services 2.1
Software 1.9
Wireless Telecommunication Services 1.9
Building Products 1.6
Beverages 1.4
Containers & Packaging 1.3
Diversified Consumer Services 1.2
Trading Companies & Distributors 1.1
Auto Components 0.8
Commercial Services & Supplies 0.7
Automobiles 0.7
Oil, Gas & Consumable Fuels 0.7
Independent Power and Renewable
Electricity Producers 0.6
Insurance 0.6
Diversified Financial Services 0.5
Real Estate Investment Trusts 0.4
Technology Hardware, Storage, &
Peripherals 0.3
Chemicals 0.3
Household Products 0.3
Distributors 0.2
Road & Rail 0.2
Internet Software & Services 0.1
Machinery 0.1
Consumer Finance 0.1
IT Services 0.1
Health Care Technology 0.0*
Construction Materials 0.0*
Internet & Catalog Retail 0.0*
Electric Utilities 0.0*
------
Total 100.0%
======
* Amount is less than 0.1%.
-----------------------------------------------------------
% OF TOTAL LONG-TERM
ASSET CLASSIFICATION INVESTMENTS
-----------------------------------------------------------
Corporate Bonds 53.3%
Senior Floating-Rate Loan Interests 33.4
Foreign Corporate Bonds 13.3
------
Total 100.0%
======
-----------------------------------------------------------
% OF TOTAL LONG-TERM
CREDIT QUALITY (S&P RATINGS)(1) INVESTMENTS
-----------------------------------------------------------
BBB 1.9%
BBB- 1.4
BB+ 3.3
BB 6.7
BB- 20.3
B+ 18.0
B 19.7
B- 12.3
CCC+ 13.9
CCC 2.1
CCC- 0.0*
CC 0.3
Not Rated 0.1
------
Total 100.0%
======
-----------------------------------------------------------
% OF TOTAL LONG-TERM
TOP 10 ISSUERS INVESTMENTS
-----------------------------------------------------------
Tenet Healthcare Corp. 3.1%
CCO Holdings LLC / CCO Holdings
Capital Corp. 2.9
Albertsons LLC 2.8
New HB Acquisition LLC 2.7
Numericable-SFR SA 2.4
Valeant Pharmaceuticals International, Inc. 2.4
Endo Ltd. / Endo Finance LLC / Endo
Finco, Inc. 2.1
Univision Communications, Inc. 2.1
HCA, Inc. 2.0
Select Medical Corp. 1.9
------
Total 24.4%
======
(1) The ratings are by Standard & Poor's Rating Group, a division of the
McGraw-Hill Companies, Inc. A credit rating is an assessment provided by a
nationally recognized statistical rating organization (NRSRO) of the
creditworthiness of an issuer with respect to debt obligations except for
those debt obligations that are only privately rated. Ratings are measured
on a scale that generally ranges from AAA (highest) to D (lowest).
Investment grade is defined as those issuers that have a long-term credit
rating of BBB- or higher. The credit ratings shown relate to the
creditworthiness of the issuers of the underlying securities in the Fund,
and not to the Fund or its shares. Credit ratings are subject to change.
Page 3
--------------------------------------------------------------------------------
FUND PERFORMANCE OVERVIEW (UNAUDITED) (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
PERFORMANCE OF A $10,000 INITIAL INVESTMENT
FEBRUARY 25, 2013 - APRIL 30, 2016
First Trust BofA Merrill Lynch
Tactical High US High Yield
Yield ETF Constrained Index
2/25/13 $10,000 $10,000
4/30/13 10,403 10,308
10/31/13 10,676 10,458
4/30/14 11,167 10,956
10/31/14 11,285 11,070
4/30/15 11,493 11,238
10/31/15 11,376 10,845
4/30/16 11,519 11,089
Performance figures assume reinvestment of all distributions and do not reflect
the deduction of taxes that a shareholder would pay on Fund distributions or the
redemption or sale of Fund shares. An index is a statistical composite that
tracks a specified financial market or sector. Unlike the Fund, the index does
not actually hold a portfolio of securities and therefore does not incur the
expenses incurred by the Fund. These expenses negatively impact the performance
of the Fund. The Fund's past performance does not predict future performance.
FREQUENCY DISTRIBUTION OF DISCOUNTS AND PREMIUMS
BID/ASK MIDPOINT VS. NAV THROUGH APRIL 30, 2016
The following Frequency Distribution of Discounts and Premiums charts are
provided to show the frequency at which the bid/ask midpoint price for the Fund
was at a discount or premium to the daily NAV. The following tables are for
comparative purposes only and represent the period February 27, 2013
(commencement of trading) through April 30, 2016. Shareholders may pay more than
NAV when they buy Fund shares and receive less than NAV when they sell those
shares because shares are bought and sold at current market price. Data
presented represents past performance and cannot be used to predict future
results.
NUMBER OF DAYS BID/ASK MIDPOINT NUMBER OF DAYS BID/ASK MIDPOINT
AT/ABOVE NAV BELOW NAV
------------------------------------- -------------------------------------
0.00%- 0.50%- 1.00%- 0.00%- 0.50%- 1.00%-
FOR THE PERIOD 0.49% 0.99% 1.99% >=2.00% 0.49% 0.99% 1.99% >=2.00%
2/27/13 - 10/31/13 94 37 0 0 37 5 0 0
11/1/13 - 10/31/14 158 29 0 0 63 2 0 0
11/1/14 - 10/31/15 177 8 2 0 60 4 0 0
11/1/15 - 4/30/16 93 6 0 0 23 2 0 0
Page 4
--------------------------------------------------------------------------------
PORTFOLIO MANAGEMENT
--------------------------------------------------------------------------------
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
SEMI-ANNUAL REPORT
APRIL 30, 2016 (UNAUDITED)
INVESTMENT MANAGER
The First Trust Leveraged Finance Team is comprised of twelve experienced
investment professionals specializing in below investment grade securities. The
team is comprised of portfolio management, research, trading and operations
personnel. As of April 30, 2016, the First Trust Leveraged Finance Team managed
or supervised approximately $2.16 billion in senior secured bank loans and
high-yield bonds. These assets are spread across various strategies, including a
closed-end fund, an open-end fund, four exchange-traded funds (including the
Fund) and a series of unit investment trusts on behalf of retail and
institutional clients.
PORTFOLIO MANAGEMENT TEAM
WILLIAM HOUSEY, CFA - SENIOR VICE PRESIDENT, SENIOR PORTFOLIO MANAGER, LEVERAGED
FINANCE TEAM SCOTT D. FRIES, CFA - SENIOR VICE PRESIDENT, PORTFOLIO MANAGER,
LEVERAGED FINANCE TEAM ORLANDO PURPURA, CFA - SENIOR VICE PRESIDENT, PORTFOLIO
MANAGER, LEVERAGED FINANCE TEAM
Page 5
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
UNDERSTANDING YOUR FUND EXPENSES
APRIL 30, 2016 (UNAUDITED)
As a shareholder of First Trust Tactical High Yield ETF (the "Fund"), you incur
two types of costs: (1) transaction costs; and (2) ongoing costs, including
management fees, distribution and/or service fees, if any, and other Fund
expenses. This Example is intended to help you understand your ongoing costs of
investing in the Fund and to compare these costs with the ongoing costs of
investing in other funds.
The Example is based on an investment of $1,000 invested at the beginning of the
period and held through the six-month period ended April 30, 2016.
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 period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second line in the following table provides information about hypothetical
account values and hypothetical expenses based on the Fund's actual expense
ratio and an assumed rate of return of 5% per year before expenses, which is not
the Fund's actual return. The hypothetical account values and expenses may not
be used to estimate the actual ending account balance or expenses you paid for
the period. You may use this information to compare the ongoing costs of
investing in the Fund and other funds. To do so, compare this 5% hypothetical
example with the 5% hypothetical examples that appear in the shareholder reports
of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs such as brokerage
commissions. Therefore, the second line in the table is useful in comparing
ongoing costs only, and will not help you determine the relative total costs of
owning different funds. In addition, if these transactional costs were included,
your costs would have been higher.
--------------------------------------------------------------------------------------------------------------------------------
ANNUALIZED
EXPENSE RATIO
BEGINNING ENDING BASED ON THE EXPENSES PAID
ACCOUNT VALUE ACCOUNT VALUE SIX-MONTH DURING THE
NOVEMBER 1, 2015 APRIL 30, 2016 PERIOD SIX-MONTH PERIOD (a)
--------------------------------------------------------------------------------------------------------------------------------
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
Actual $1,000.00 $1,012.60 1.16% $5.80
Hypothetical (5% return before expenses) $1,000.00 $1,019.10 1.16% $5.82
(a) Expenses are equal to the annualized expense ratio as indicated in the
table, multiplied by the average account value over the period (November
1, 2015 through April 30, 2016), multiplied by 182/366 (to reflect the
one-half year period).
Page 6
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
PORTFOLIO OF INVESTMENTS
APRIL 30, 2016 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- ---------------------------------------------------------------- ------------ ------------ ---------------
CORPORATE BONDS -- 51.8%
AEROSPACE & DEFENSE -- 1.3%
$ 2,068,000 Aerojet Rocketdyne Holdings, Inc. (a)......................... 7.13% 03/15/21 $ 2,182,121
4,650,000 DigitalGlobe, Inc. (a) (b).................................... 5.25% 02/01/21 4,225,687
100,000 Orbital ATK, Inc.............................................. 5.25% 10/01/21 105,250
1,500,000 TransDigm, Inc................................................ 7.50% 07/15/21 1,571,063
2,000,000 TransDigm, Inc................................................ 6.00% 07/15/22 2,034,400
500,000 TransDigm, Inc................................................ 6.50% 07/15/24 506,250
---------------
10,624,771
---------------
AGRICULTURAL PRODUCTS -- 0.8%
5,000,000 Darling Ingredients, Inc. (a)................................. 5.38% 01/15/22 5,237,500
1,182,000 Pinnacle Operating Corp. (c) (d).............................. 9.00% 11/15/20 1,010,610
---------------
6,248,110
---------------
ALTERNATIVE CARRIERS -- 1.3%
7,437,000 Level 3 Communications, Inc. (a).............................. 5.75% 12/01/22 7,663,903
500,000 Level 3 Financing, Inc........................................ 5.38% 08/15/22 513,125
500,000 Level 3 Financing, Inc........................................ 5.13% 05/01/23 510,625
2,000,000 Level 3 Financing, Inc. (b)................................... 5.38% 01/15/24 2,035,000
---------------
10,722,653
---------------
APPLICATION SOFTWARE -- 0.7%
400,000 ACI Worldwide, Inc. (a) (b)................................... 6.38% 08/15/20 414,500
250,000 Infor US, Inc. (b)............................................ 5.75% 08/15/20 264,375
5,400,000 Infor US, Inc. (a)............................................ 6.50% 05/15/22 5,011,254
---------------
5,690,129
---------------
AUTO PARTS & EQUIPMENT -- 0.7%
425,000 American Axle & Manufacturing, Inc. (a)....................... 7.75% 11/15/19 476,000
1,000,000 American Axle & Manufacturing, Inc............................ 6.63% 10/15/22 1,062,500
250,000 Dana Holding Corp............................................. 5.38% 09/15/21 256,563
4,035,000 MPG Holdco I, Inc............................................. 7.38% 10/15/22 4,055,175
---------------
5,850,238
---------------
AUTOMOTIVE RETAIL -- 0.2%
1,500,000 Asbury Automotive Group, Inc.................................. 6.00% 12/15/24 1,556,250
---------------
BROADCASTING -- 6.2%
8,065,000 Gray Television, Inc. (a)..................................... 7.50% 10/01/20 8,488,413
1,375,000 LIN Television Corp........................................... 5.88% 11/15/22 1,409,375
3,812,000 Nexstar Broadcasting, Inc. (a)................................ 6.88% 11/15/20 4,012,130
4,200,000 Nexstar Broadcasting, Inc. (b)................................ 6.13% 02/15/22 4,231,500
495,000 Sinclair Television Group, Inc................................ 5.38% 04/01/21 515,419
2,000,000 Sinclair Television Group, Inc. (a)........................... 6.38% 11/01/21 2,125,000
4,000,000 Sinclair Television Group, Inc. (a)........................... 6.13% 10/01/22 4,289,999
2,500,000 Sinclair Television Group, Inc. (b)........................... 5.63% 08/01/24 2,578,125
1,690,000 Sinclair Television Group, Inc. (b)........................... 5.88% 03/15/26 1,753,375
4,000,000 Tribune Media Co. (b)......................................... 5.88% 07/15/22 3,990,000
11,152,000 Univision Communications, Inc. (a) (b)........................ 6.75% 09/15/22 11,876,879
2,000,000 Univision Communications, Inc. (b)............................ 5.13% 05/15/23 2,025,000
1,750,000 Univision Communications, Inc. (b)............................ 5.13% 02/15/25 1,734,688
---------------
49,029,903
---------------
BUILDING PRODUCTS -- 0.1%
500,000 Allegion US Holding Co., Inc. (a)............................. 5.75% 10/01/21 525,000
125,000 American Builders & Contractors Supply Co., Inc. (b).......... 5.63% 04/15/21 130,000
---------------
655,000
---------------
See Notes to Financial Statements Page 7
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2016 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- ---------------------------------------------------------------- ------------ ------------ ---------------
CORPORATE BONDS (CONTINUED)
CABLE & SATELLITE -- 4.0%
$ 6,000,000 Altice US Finance I Corp. (b)................................. 5.50% 05/15/26 $ 6,075,000
12,500,000 CCO Holdings LLC / CCO Holdings Capital Corp. (a)............. 5.75% 01/15/24 13,140,624
6,700,000 CCO Holdings LLC / CCO Holdings Capital Corp. (b)............. 5.88% 04/01/24 7,035,000
1,500,000 CCO Holdings LLC / CCO Holdings Capital Corp. (b)............. 5.50% 05/01/26 1,533,750
2,000,000 Cequel Communications Holdings I LLC / Cequel Capital
Corp. (b).................................................. 6.38% 09/15/20 2,055,060
2,000,000 Cequel Communications Holdings I LLC / Cequel Capital
Corp. (a) (b).............................................. 5.13% 12/15/21 1,895,000
100,000 Mediacom Broadband LLC / Mediacom Broadband Corp.............. 5.50% 04/15/21 102,625
---------------
31,837,059
---------------
CASINOS & GAMING -- 2.5%
100,000 Boyd Gaming Corp. (b)......................................... 6.38% 04/01/26 102,750
1,900,000 Caesars Growth Properties Holdings LLC / Caesars Growth
Properties Finance, Inc.................................... 9.38% 05/01/22 1,662,500
888,000 GLP Capital LP / GLP Financing II, Inc........................ 5.38% 04/15/26 927,960
250,000 Isle of Capri Casinos, Inc.................................... 5.88% 03/15/21 261,875
8,600,000 MGM Resorts International (a)................................. 7.75% 03/15/22 9,642,750
2,200,000 MGM Resorts International (a)................................. 6.00% 03/15/23 2,290,750
4,585,000 Station Casinos LLC (a)....................................... 7.50% 03/01/21 4,859,247
---------------
19,747,832
---------------
COMPUTER & ELECTRONICS RETAIL -- 0.1%
850,000 Energizer Holdings, Inc. (b).................................. 5.50% 06/15/25 852,219
---------------
CONSTRUCTION MACHINERY & HEAVY TRUCKS -- 0.1%
550,000 Oshkosh Corp.................................................. 5.38% 03/01/22 569,938
---------------
CONSTRUCTION MATERIALS -- 0.0%
300,000 Summit Materials LLC / Summit Materials Finance Corp.......... 6.13% 07/15/23 303,750
---------------
DISTRIBUTORS -- 0.2%
1,450,000 HD Supply, Inc. (b)........................................... 5.75% 04/15/24 1,524,313
---------------
DIVERSIFIED REAL ESTATE ACTIVITIES -- 3.0%
5,810,000 KB Home (a)................................................... 7.00% 12/15/21 5,955,250
500,000 KB Home....................................................... 7.63% 05/15/23 512,500
1,000,000 Meritage Homes Corp........................................... 7.00% 04/01/22 1,077,500
3,700,000 PulteGroup, Inc............................................... 5.50% 03/01/26 3,838,750
1,275,000 Taylor Morrison Communities, Inc. / Monarch Communities,
Inc. (a) (b)............................................... 5.25% 04/15/21 1,278,188
3,000,000 Taylor Morrison Communities Inc. / Monarch Communities,
Inc. (b)................................................... 5.88% 04/15/23 3,007,500
8,210,000 TRI Pointe Holdings, Inc./TRI Pointe Homes, Inc. (a).......... 5.88% 06/15/24 8,292,099
---------------
23,961,787
---------------
FERTILIZERS & AGRICULTURAL CHEMICALS -- 0.0%
100,000 Scotts Miracle-Gro (The) Co. (b).............................. 6.00% 10/15/23 106,250
---------------
FOOD RETAIL -- 0.7%
5,278,000 Albertson's Holdings LLC/Safeway, Inc. (b).................... 7.75% 10/15/22 5,665,564
---------------
HEALTH CARE EQUIPMENT -- 2.7%
1,500,000 Alere, Inc.................................................... 7.25% 07/01/18 1,534,688
3,834,000 Alere, Inc. (a)............................................... 6.50% 06/15/20 3,814,829
1,750,000 Alere, Inc. (b)............................................... 6.38% 07/01/23 1,793,750
6,950,000 DJO Finco, Inc. / DJO Finance LLC / DJO Finance Corp. (a) (b). 8.13% 06/15/21 6,116,000
Page 8 See Notes to Financial Statements
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2016 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- ---------------------------------------------------------------- ------------ ------------ ---------------
CORPORATE BONDS (CONTINUED)
HEALTH CARE EQUIPMENT (CONTINUED)
$ 700,000 Hill-Rom Holdings, Inc. (b)................................... 5.75% 09/01/23 $ 728,875
750,000 Kinetic Concepts, Inc. / KCI USA, Inc......................... 10.50% 11/01/18 761,738
6,800,000 Kinetic Concepts, Inc. / KCI USA, Inc. (a).................... 12.50% 11/01/19 6,544,999
---------------
21,294,879
---------------
HEALTH CARE FACILITIES -- 9.2%
250,000 Acadia Healthcare Co., Inc. (b)............................... 6.50% 03/01/24 264,375
3,500,000 CHS/Community Health Systems, Inc............................. 8.00% 11/15/19 3,539,375
10,000,000 CHS/Community Health Systems, Inc. (a)........................ 6.88% 02/01/22 9,100,000
1,000,000 HCA, Inc...................................................... 7.50% 02/15/22 1,137,500
3,000,000 HCA, Inc...................................................... 5.88% 05/01/23 3,170,625
10,780,000 HCA, Inc. (a)................................................. 5.38% 02/01/25 11,036,024
134,000 HealthSouth Corp. (a)......................................... 7.75% 09/15/22 140,030
250,000 HealthSouth Corp.............................................. 5.13% 03/15/23 251,875
2,900,000 HealthSouth Corp.............................................. 5.75% 11/01/24 3,008,750
250,000 HealthSouth Corp.............................................. 5.75% 09/15/25 259,875
4,750,000 Kindred Healthcare, Inc....................................... 8.00% 01/15/20 4,754,750
2,500,000 Kindred Healthcare, Inc. (a).................................. 6.38% 04/15/22 2,296,875
3,000,000 LifePoint Health, Inc......................................... 5.50% 12/01/21 3,127,500
7,500,000 Select Medical Corp. (a)...................................... 6.38% 06/01/21 7,153,125
1,000,000 Tenet Healthcare Corp......................................... 5.50% 03/01/19 1,005,000
1,000,000 Tenet Healthcare Corp......................................... 8.00% 08/01/20 1,032,500
16,000,000 Tenet Healthcare Corp. (a).................................... 8.13% 04/01/22 16,679,999
5,000,000 Tenet Healthcare Corp......................................... 6.75% 06/15/23 4,956,250
---------------
72,914,428
---------------
HEALTH CARE SERVICES -- 1.3%
2,700,000 Amsurg Corp. (a).............................................. 5.63% 07/15/22 2,781,000
1,000,000 DaVita HealthCare Partners, Inc............................... 5.00% 05/01/25 1,002,500
3,000,000 Envision Healthcare Corp. (b)................................. 5.13% 07/01/22 3,067,500
3,040,000 Surgical Care Affiliates, Inc. (b)............................ 6.00% 04/01/23 3,085,600
---------------
9,936,600
---------------
HOMEFURNISHING RETAIL -- 1.8%
13,730,000 Serta Simmons Bedding LLC (a) (b)............................. 8.13% 10/01/20 14,519,475
100,000 Tempur Sealy International, Inc............................... 5.63% 10/15/23 104,500
---------------
14,623,975
---------------
HOTELS, RESORTS & CRUISE LINES -- 0.7%
3,600,000 ESH Hospitality, Inc. (b)..................................... 5.25% 05/01/25 3,568,500
2,100,000 FelCor Lodging LP............................................. 6.00% 06/01/25 2,178,750
---------------
5,747,250
---------------
HOUSEHOLD PRODUCTS -- 0.3%
2,000,000 Spectrum Brands, Inc.......................................... 6.13% 12/15/24 2,147,500
---------------
INDEPENDENT POWER PRODUCERS & ENERGY TRADERS -- 0.6%
500,000 Calpine Corp.................................................. 5.50% 02/01/24 507,500
2,534,000 NRG Energy, Inc. (a).......................................... 7.88% 05/15/21 2,647,017
1,500,000 NRG Energy, Inc............................................... 6.25% 07/15/22 1,477,980
---------------
4,632,497
---------------
INSURANCE BROKERS -- 0.1%
1,000,000 HUB International Ltd. (b).................................... 7.88% 10/01/21 982,500
---------------
See Notes to Financial Statements Page 9
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2016 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- ---------------------------------------------------------------- ------------ ------------ ---------------
CORPORATE BONDS (CONTINUED)
INTEGRATED TELECOMMUNICATION SERVICES -- 1.2%
$ 825,000 Cincinnati Bell, Inc. (a)..................................... 8.38% 10/15/20 $ 849,750
4,000,000 Frontier Communications Corp.................................. 7.13% 03/15/19 4,239,999
1,375,000 Frontier Communications Corp. (b)............................. 8.88% 09/15/20 1,460,938
280,000 Frontier Communications Corp.................................. 6.25% 09/15/21 261,800
3,075,000 Frontier Communications Corp. (a)............................. 8.75% 04/15/22 3,051,938
---------------
9,864,425
---------------
INTERNET RETAIL -- 0.0%
250,000 Netflix, Inc.................................................. 5.88% 02/15/25 263,250
---------------
LEISURE FACILITIES -- 0.1%
775,000 Six Flags Entertainment Corp. (b)............................. 5.25% 01/15/21 806,000
---------------
LIFE SCIENCES TOOLS & SERVICES -- 1.2%
4,750,000 Crimson Merger Sub, Inc. (a) (b).............................. 6.63% 05/15/22 3,990,000
2,000,000 inVentiv Health, Inc. (b)..................................... 9.00% 01/15/18 2,070,000
3,100,000 Jaguar Holding Co. II / Pharmaceutical Product Development
LLC (b).................................................... 6.38% 08/01/23 3,228,650
---------------
9,288,650
---------------
MANAGED HEALTH CARE -- 0.3%
2,250,000 Centene Corp. (b)............................................. 6.13% 02/15/24 2,379,375
---------------
METAL & GLASS CONTAINERS -- 0.1%
795,000 Owens-Brockway Glass Container, Inc. (b)...................... 5.88% 08/15/23 856,116
---------------
MOVIES & ENTERTAINMENT -- 0.5%
1,625,000 Cinemark USA, Inc. (a)........................................ 4.88% 06/01/23 1,621,116
500,000 Live Nation Entertainment, Inc. (b)........................... 7.00% 09/01/20 524,177
1,100,000 Live Nation Entertainment, Inc. (a) (b)....................... 5.38% 06/15/22 1,141,250
500,000 Regal Entertainment Group..................................... 5.75% 03/15/22 523,125
---------------
3,809,668
---------------
OIL & GAS EXPLORATION & PRODUCTION -- 0.2%
1,000,000 Rice Energy, Inc.............................................. 7.25% 05/01/23 1,015,000
250,000 Sanchez Energy Corp........................................... 7.75% 06/15/21 206,875
125,000 Sanchez Energy Corp........................................... 6.13% 01/15/23 94,063
---------------
1,315,938
---------------
OIL & GAS REFINING & MARKETING -- 0.0%
250,000 CITGO Petroleum Corp. (b)..................................... 6.25% 08/15/22 245,000
---------------
OIL & GAS STORAGE & TRANSPORTATION -- 0.4%
875,000 Crestwood Midstream Partners LP / Crestwood Midstream
Finance Corp. (a).......................................... 6.13% 03/01/22 802,813
100,000 Crestwood Midstream Partners LP / Crestwood Midstream
Finance Corp. (b).......................................... 6.25% 04/01/23 91,750
1,750,000 Holly Energy Partners LP / Holly Energy Finance Corp. (a)..... 6.50% 03/01/20 1,767,500
312,000 Summit Midstream Holdings LLC / Summit Midstream
Finance Corp............................................... 5.50% 08/15/22 254,280
196,000 Tesoro Logistics LP / Tesoro Logistics Finance Corp........... 5.88% 10/01/20 200,900
---------------
3,117,243
---------------
PACKAGED FOODS & MEATS -- 2.8%
6,795,000 JBS USA LLC / JBS USA Finance, Inc. (a) (b)................... 5.88% 07/15/24 6,353,325
1,500,000 JBS USA LLC / JBS USA Finance, Inc. (b)....................... 5.75% 06/15/25 1,387,500
1,600,000 Pilgrim's Pride Corp. (b)..................................... 5.75% 03/15/25 1,636,000
3,125,000 Post Holdings, Inc. (b)....................................... 6.75% 12/01/21 3,283,219
Page 10 See Notes to Financial Statements
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2016 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- ---------------------------------------------------------------- ------------ ------------ ---------------
CORPORATE BONDS (CONTINUED)
PACKAGED FOODS & MEATS (CONTINUED)
$ 4,750,000 Post Holdings, Inc............................................ 7.38% 02/15/22 $ 5,023,124
800,000 Post Holdings, Inc. (b)....................................... 6.00% 12/15/22 824,500
1,250,000 Post Holdings, Inc. (b)....................................... 7.75% 03/15/24 1,365,625
1,708,000 Post Holdings, Inc. (b)....................................... 8.00% 07/15/25 1,902,285
775,000 TreeHouse Foods, Inc. (b)..................................... 6.00% 02/15/24 828,281
---------------
22,603,859
---------------
PHARMACEUTICALS -- 1.0%
5,200,000 Endo Finance LLC (b).......................................... 5.75% 01/15/22 5,122,000
1,000,000 Endo Finance LLC / Endo Finco, Inc. (a) (b)................... 7.25% 01/15/22 1,040,000
2,000,000 Endo Finance LLC / Endo Finco, Inc. (b)....................... 5.38% 01/15/23 1,925,000
---------------
8,087,000
---------------
RESEARCH & CONSULTING SERVICES -- 0.1%
1,125,000 Nielsen Finance LLC / Nielsen Finance Co. (b)................. 5.00% 04/15/22 1,151,719
---------------
SEMICONDUCTOR EQUIPMENT -- 0.4%
3,450,000 Western Digital Corp. (b)..................................... 7.38% 04/01/23 3,490,969
---------------
SEMICONDUCTORS -- 0.2%
850,000 Freescale Semiconductor, Inc. (b)............................. 6.00% 01/15/22 903,125
350,000 Micron Technology, Inc. (b)................................... 7.50% 09/15/23 363,125
---------------
1,266,250
---------------
SPECIALIZED FINANCE -- 0.2%
1,146,000 MSCI, Inc. (b)................................................ 5.75% 08/15/25 1,224,788
---------------
SPECIALIZED REITS (REAL ESTATE INVESTMENT TRUSTS) -- 0.2%
400,000 GEO Group (The), Inc.......................................... 5.88% 01/15/22 410,000
750,000 GEO Group (The), Inc.......................................... 5.88% 10/15/24 768,750
---------------
1,178,750
---------------
SPECIALTY CHEMICALS -- 0.0%
300,000 OMNOVA Solutions, Inc......................................... 7.88% 11/01/18 302,250
---------------
SPECIALTY STORES -- 1.0%
6,575,000 Argos Merger Sub, Inc. (a) (b)................................ 7.13% 03/15/23 6,739,375
1,325,000 Dollar Tree, Inc. (b)......................................... 5.75% 03/01/23 1,421,460
---------------
8,160,835
---------------
SYSTEMS SOFTWARE -- 0.2%
975,000 BMC Software Finance, Inc. (a) (b)............................ 8.13% 07/15/21 726,375
500,000 BMC Software, Inc............................................. 7.25% 06/01/18 447,500
---------------
1,173,875
---------------
TRADING COMPANIES & DISTRIBUTORS -- 1.1%
1,500,000 Ashtead Capital, Inc. (a) (b)................................. 6.50% 07/15/22 1,590,000
1,078,000 BlueLine Rental Finance Corp. (b)............................. 7.00% 02/01/19 951,335
850,000 United Rentals North America, Inc. (a)........................ 7.63% 04/15/22 911,625
5,000,000 United Rentals North America, Inc............................. 5.75% 11/15/24 5,093,750
250,000 United Rentals North America, Inc............................. 5.50% 07/15/25 249,554
---------------
8,796,264
---------------
TRUCKING -- 0.2%
300,000 Avis Budget Car Rental LLC / Avis Budget Finance, Inc. (b).... 5.13% 06/01/22 285,938
875,000 Avis Budget Car Rental LLC / Avis Budget Finance, Inc. (a).... 5.50% 04/01/23 839,605
250,000 Hertz (The) Corp.............................................. 7.38% 01/15/21 259,063
---------------
1,384,606
---------------
See Notes to Financial Statements Page 11
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2016 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- ---------------------------------------------------------------- ------------ ------------ ---------------
CORPORATE BONDS (CONTINUED)
WIRELESS TELECOMMUNICATION SERVICES -- 1.8%
$ 4,000,000 Sprint Capital Corp........................................... 6.90% 05/01/19 $ 3,680,000
2,250,000 Sprint Communications, Inc. (a)............................... 7.00% 08/15/20 1,878,750
2,750,000 Sprint Corp. (a).............................................. 7.25% 09/15/21 2,234,375
1,560,000 T-Mobile USA, Inc............................................. 6.73% 04/28/22 1,647,750
150,000 T-Mobile USA, Inc............................................. 6.00% 03/01/23 158,063
2,500,000 T-Mobile USA, Inc............................................. 6.63% 04/01/23 2,681,250
2,000,000 T-Mobile USA, Inc............................................. 6.84% 04/28/23 2,140,000
---------------
14,420,188
---------------
TOTAL CORPORATE BONDS....................................................................... 412,412,413
(Cost $412,640,943) ---------------
FOREIGN CORPORATE BONDS -- 12.9%
AEROSPACE & DEFENSE -- 0.6%
2,583,000 Bombardier, Inc. (b).......................................... 5.50% 09/15/18 2,557,170
2,000,000 Bombardier, Inc. (b).......................................... 7.75% 03/15/20 1,985,000
---------------
4,542,170
---------------
ALTERNATIVE CARRIERS -- 0.3%
2,000,000 Intelsat Luxembourg SA........................................ 6.75% 06/01/18 1,555,000
2,650,000 Intelsat Luxembourg SA (a).................................... 7.75% 06/01/21 887,750
---------------
2,442,750
---------------
APPLICATION SOFTWARE -- 0.1%
1,000,000 Open Text Corp. (b)........................................... 5.63% 01/15/23 1,030,000
---------------
AUTOMOBILE MANUFACTURERS -- 0.5%
4,000,000 Fiat Chrysler Automobiles NV.................................. 5.25% 04/15/23 4,060,160
---------------
BUILDING PRODUCTS -- 1.2%
250,000 Allegion PLC.................................................. 5.88% 09/15/23 265,625
5,880,000 Cemex SAB de C.V. (b)......................................... 7.25% 01/15/21 6,291,600
2,000,000 Cemex SAB de C.V. (b)......................................... 7.75% 04/16/26 2,135,000
1,100,000 Masonite International Corp. (b).............................. 5.63% 03/15/23 1,155,000
---------------
9,847,225
---------------
CABLE & SATELLITE -- 1.1%
2,480,000 Virgin Media Finance PLC (b).................................. 6.00% 10/15/24 2,538,900
200,000 Virgin Media Finance PLC (b).................................. 5.75% 01/15/25 202,250
6,000,000 Virgin Media Secured Finance PLC (b).......................... 5.50% 08/15/26 6,048,780
---------------
8,789,930
---------------
CASINOS & GAMING -- 1.3%
250,000 International Game Technology PLC (b)......................... 5.63% 02/15/20 263,125
1,329,000 International Game Technology PLC (b)......................... 6.25% 02/15/22 1,359,168
6,000,000 MCE Finance Ltd. (b).......................................... 5.00% 02/15/21 5,811,342
3,240,000 Wynn Macau Ltd. (b)........................................... 5.25% 10/15/21 3,118,500
---------------
10,552,135
---------------
DIVERSIFIED CHEMICALS -- 0.2%
1,600,000 INEOS Group Holdings SA (a) (b)............................... 6.13% 08/15/18 1,621,000
250,000 INEOS Group Holdings SA (b)................................... 5.88% 02/15/19 254,688
---------------
1,875,688
---------------
HEALTH CARE SUPPLIES -- 0.0%
400,000 ConvaTec Healthcare E SA (a) (b).............................. 10.50% 12/15/18 410,000
---------------
Page 12 See Notes to Financial Statements
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2016 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- ---------------------------------------------------------------- ------------ ------------ ---------------
FOREIGN CORPORATE BONDS (CONTINUED)
INTEGRATED TELECOMMUNICATION SERVICES -- 2.4%
$ 18,750,000 Numericable-SFR SA (a) (b).................................... 6.00% 05/15/22 $ 18,844,688
---------------
METAL & GLASS CONTAINERS -- 0.5%
2,126,000 Ardagh Packaging Finance PLC / Ardagh Holdings USA,
Inc. (b)................................................... 6.25% 01/31/19 2,184,465
1,188,177 Ardagh Packaging Finance PLC / Ardagh Holdings USA,
Inc. (a) (b)............................................... 7.00% 11/15/20 1,128,768
250,000 Ardagh Packaging Finance PLC / Ardagh Holdings USA,
Inc. (b)................................................... 6.75% 01/31/21 251,875
300,000 Ardagh Packaging Finance PLC / Ardagh Holdings USA,
Inc. (b)................................................... 7.25% 05/15/24 300,000
---------------
3,865,108
---------------
PAPER PACKAGING -- 0.3%
1,000,000 Cascades, Inc. (b)............................................ 5.50% 07/15/22 970,000
1,500,000 Coveris Holdings SA (a) (b)................................... 7.88% 11/01/19 1,447,500
---------------
2,417,500
---------------
PHARMACEUTICALS -- 3.5%
4,084,000 Capsugel SA (a) (b) (e)....................................... 7.00% 05/15/19 4,114,630
5,080,000 Endo Ltd. / Endo Finance LLC / Endo Finco, Inc. (b)........... 6.00% 07/15/23 5,010,150
3,585,000 Endo Ltd. / Endo Finance LLC / Endo Finco, Inc. (b)........... 6.00% 02/01/25 3,441,600
500,000 Grifols Worldwide Operations Ltd.............................. 5.25% 04/01/22 517,500
1,000,000 Mallinckrodt International Finance SA/Mallinckrodt CB
LLC (b).................................................... 5.75% 08/01/22 948,750
1,000,000 Mallinckrodt International Finance SA/Mallinckrodt CB
LLC (b).................................................... 5.63% 10/15/23 942,500
1,750,000 Mallinckrodt International Finance SA/Mallinckrodt CB
LLC (b).................................................... 5.50% 04/15/25 1,588,125
8,500,000 Valeant Pharmaceuticals International, Inc. (b)............... 6.75% 08/15/18 8,244,999
2,040,000 Valeant Pharmaceuticals International, Inc. (b)............... 5.38% 03/15/20 1,816,875
1,000,000 Valeant Pharmaceuticals International, Inc. (b)............... 7.50% 07/15/21 920,000
---------------
27,545,129
---------------
RESEARCH & CONSULTING SERVICES -- 0.1%
825,000 Nielsen Co. Luxembourg S.A.R.L. (The) (b)..................... 5.50% 10/01/21 863,156
---------------
RESTAURANTS -- 0.4%
3,000,000 1011778 B.C. ULC / New Red Finance, Inc. (a) (b).............. 6.00% 04/01/22 3,105,000
---------------
SECURITY & ALARM SERVICES -- 0.4%
2,500,000 Garda World Security Corp. (a) (b)............................ 7.25% 11/15/21 2,031,250
1,500,000 Garda World Security Corp. (b)................................ 7.25% 11/15/21 812,500
---------------
2,843,750
---------------
TOTAL FOREIGN CORPORATE BONDS............................................................... 103,034,389
(Cost $105,692,684) ---------------
See Notes to Financial Statements Page 13
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2016 (UNAUDITED)
PRINCIPAL STATED
VALUE DESCRIPTION RATE (f) MATURITY (g) VALUE
---------------- ---------------------------------------------------------------- ------------ ------------ ---------------
SENIOR FLOATING-RATE LOAN INTERESTS -- 32.4%
AEROSPACE & DEFENSE -- 0.2%
$ 308,789 DynCorp International, Inc., Term Loan........................ 6.25% 07/07/16 $ 297,981
983,893 Transdigm, Inc., Term Loan C.................................. 3.75% 02/28/20 982,172
---------------
1,280,153
---------------
APPAREL RETAIL -- 0.2%
1,390,835 Neiman Marcus Group (The), Inc., Other Term Loan.............. 4.25% 10/25/20 1,323,463
---------------
APPLICATION SOFTWARE -- 0.2%
938,731 Infor (US), Inc., Tranche B-5 Term Loan....................... 3.75% 06/03/20 915,657
408,205 Informatica Corp., Dollar Term Loan........................... 4.25% 08/05/22 401,062
264,949 Triple Point Technologies, Inc., Term Loan B.................. 5.25% 07/10/20 185,994
---------------
1,502,713
---------------
AUTOMOTIVE RETAIL -- 0.2%
1,841,860 KAR Auction Services, Inc., Tranche B-3 Term Loan............. 4.25% 03/09/23 1,848,767
---------------
BROADCASTING -- 0.2%
1,000,000 Clear Channel Communications, Inc., Tranche E Term Loan....... 7.94% 07/30/19 743,330
833,702 Univision Communications, Inc., 2013 Incremental Term Loan.... 4.00% 03/01/20 831,267
---------------
1,574,597
---------------
BUILDING PRODUCTS -- 0.3%
2,000,000 Quikrete Holdings, Inc., Initial Loan (First Lien)............ 4.00% 09/28/20 1,996,880
---------------
CABLE & SATELLITE -- 0.9%
467,391 Charter Communications Operating LLC, Bridge Loan -
Unsecured 1 Year (d) (h)................................... 3.75% 05/21/16 464,470
7,000,000 CSC Holdings, Inc. (Neptune Finco Corp.), Initial Term Loan... 5.00% 10/09/22 7,021,910
---------------
7,486,380
---------------
CASINOS & GAMING -- 3.2%
1,312,500 Amaya Holdings B.V., 2nd Lien Term Loan....................... 8.00% 07/31/22 1,296,094
9,500,753 Amaya Holdings B.V., Initial Term B Loan (First Lien)......... 5.00% 08/01/21 9,079,205
3,237,829 Caesars Growth Partners LLC, Term B Loan (First Lien)......... 6.25% 05/08/21 2,881,668
8,643,993 CityCenter Holdings LLC , Term B Loan......................... 4.25% 10/16/20 8,661,281
91,350 ROC Finance LLC, Funded Term B Loan........................... 5.00% 06/20/19 86,630
3,868,878 Station Casinos, Inc., B Term Loan............................ 4.25% 03/02/20 3,873,714
---------------
25,878,592
---------------
COMPUTER HARDWARE -- 0.3%
2,500,000 Dell, Inc., Term B-2 Loan..................................... 4.00% 04/29/20 2,498,000
---------------
CONSUMER FINANCE -- 0.1%
490,224 Walter Investment Management Corp., Tranche B Term Loan....... 4.75% 12/18/20 429,407
---------------
DATA PROCESSING & OUTSOURCED SERVICES -- 0.0%
437,060 Sungard Availability Services Capital, Inc., Term Loan B...... 6.00% 03/29/19 390,076
---------------
DIVERSIFIED SUPPORT SERVICES -- 0.3%
2,800,000 Brickman Group Holdings, Inc, Second Lien Term Loan........... 7.50% 12/31/21 2,741,676
---------------
ELECTRIC UTILITIES -- 0.0%
100,000 TXU (Texas Competitive Electric Holdings Co. LLC), 2014
Term Loan (Non-Extending) (i) (j).......................... 4.91% 10/10/14 33,325
---------------
ENVIRONMENTAL & FACILITIES SERVICES -- 0.0%
148,125 PSSI (Packers Holdings LLC), Term B Loan...................... 4.25% 12/02/21 147,940
---------------
Page 14 See Notes to Financial Statements
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2016 (UNAUDITED)
PRINCIPAL STATED
VALUE DESCRIPTION RATE (f) MATURITY (g) VALUE
---------------- ---------------------------------------------------------------- ------------ ------------ ---------------
SENIOR FLOATING-RATE LOAN INTERESTS (CONTINUED)
FOOD RETAIL -- 2.0%
$ 11,475,148 Albertsons LLC, Term B-4 Loan................................. 5.50% 08/25/21 $ 11,507,738
1,000,000 Albertsons LLC, Term B-5 Loan................................. 5.50% 12/21/22 1,002,920
3,306,494 Albertsons LLC, Term Loan B3.................................. 5.13% 08/25/19 3,306,923
---------------
15,817,581
---------------
HEALTH CARE FACILITIES -- 1.5%
272,414 Acadia Healthcare Co., Inc., Tranche B Term Loan.............. 4.25% 02/11/22 274,231
997,500 Acadia Healthcare Co., Inc., Tranche B-2 Term Loan............ 4.50% 02/16/23 1,004,044
2,967,387 Kindred Healthcare, Inc., New Term Loan....................... 4.25% 04/09/21 2,959,968
7,853,211 Select Medical Corp., Term Loan F............................. 6.00% 02/28/21 7,872,844
---------------
12,111,087
---------------
HEALTH CARE SERVICES -- 2.6%
791,342 21st Century Oncology, Inc., Tranche B Term Loan.............. 6.50% 04/30/22 700,337
744,375 Air Medical Group Holdings, Inc., Initial Term Loan........... 4.25% 04/28/22 733,522
1,994,023 CareCore National LLC, Term Loan.............................. 5.50% 03/05/21 1,846,964
2,970,000 Curo Health Services Holdings, Inc., Term B Loan (First Lien). 6.50% 02/07/22 2,952,685
997,500 Envision Healthcare Corp. (Emergency Medical Services Corp.),
Tranche B-2 Term Loan...................................... 4.50% 10/28/22 999,455
3,514,401 Healogics, Inc. (CDRH Parent, Inc.), Initial Term Loan
(First Lien)............................................... 5.25% 07/01/21 3,291,834
3,271,250 Surgery Centers Holdings, Inc., Initial Term Loan (First Lien). 5.25% 11/03/20 3,277,400
3,757,823 Team Health, Inc., Tranche B Term Loan........................ 4.50% 11/23/22 3,781,310
3,000,000 U.S. Renal Care, Inc., Term Loan B............................ 5.25% 12/30/22 3,001,890
---------------
20,585,397
---------------
HEALTH CARE TECHNOLOGY -- 0.0%
371,319 Healthport Technologies LLC (CT Technologies Intermediate
Holdings, Inc.), Initial Term Loan......................... 5.25% 12/01/21 368,378
---------------
HYPERMARKETS & SUPER CENTERS -- 1.3%
10,511,285 BJ's Wholesale Club, Inc., 2013 (November) Replacement
Loan (Second Lien)......................................... 8.50% 03/26/20 10,160,944
---------------
INSURANCE BROKERS -- 0.4%
1,500,000 Amwins Group LLC, 2nd Lien.................................... 9.50% 09/06/20 1,497,195
1,879,091 Confie Seguros Holding II Co., Term B Loan (First Lien)....... 5.75% 11/09/18 1,847,767
---------------
3,344,962
---------------
LEISURE FACILITIES -- 0.2%
305,385 Life Time Fitness, Inc., Closing Date Term Loan............... 4.25% 06/10/22 303,476
965,289 Planet Fitness Holdings LLC, Term Loan........................ 4.50% 03/31/21 967,702
---------------
1,271,178
---------------
LIFE SCIENCES TOOLS & SERVICES -- 0.9%
994,859 Immucor, Inc., Term B-2 Loan.................................. 5.00% 08/19/18 945,116
4,188,472 InVentiv Health, Inc., Term B-4 Loan.......................... 7.75% 05/15/18 4,191,110
1,974,874 Ortho-Clinical Diagnostics, Inc. (Crimson Merger Sub, Inc.),
Initial Term Loan.......................................... 4.75% 06/30/21 1,868,014
---------------
7,004,240
---------------
MOVIES & ENTERTAINMENT -- 0.3%
790,000 Creative Artists Agency LLC (CAA Holdings LLC),
Incremental Term Loan...................................... 5.50% 12/17/21 788,681
1,471,671 WME IMG Worldwide, Inc., Term Loan (First Lien)............... 5.25% 05/06/21 1,468,360
---------------
2,257,041
---------------
See Notes to Financial Statements Page 15
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2016 (UNAUDITED)
PRINCIPAL STATED
VALUE DESCRIPTION RATE (f) MATURITY (g) VALUE
---------------- ---------------------------------------------------------------- ------------ ------------ ---------------
SENIOR FLOATING-RATE LOAN INTERESTS (CONTINUED)
OIL & GAS EXPLORATION & PRODUCTION -- 0.0%
$ 1,027,778 American Energy Marcellus Holdings LLC, Initial Loan
(Second Lien).............................................. 8.50% 08/04/21 $ 123,333
---------------
OIL & GAS STORAGE & TRANSPORTATION -- 0.0%
1,000,000 Fieldwood Energy LLC, Closing Date Loan (Second Lien)......... 8.38% 09/30/20 255,000
---------------
OTHER DIVERSIFIED FINANCIAL SERVICES -- 0.4%
1,000,000 First Data Corp., 2021 New Dollar Term Loan................... 4.44% 03/24/21 1,002,080
2,000,000 First Data Corp., Term Loan B 7/2022.......................... 4.19% 07/10/22 2,000,500
---------------
3,002,580
---------------
PACKAGED FOODS & MEATS -- 3.3%
5,953,943 Ferrara Candy Co. (Candy Intermediate Holdings, Inc.),
Initial Term Loan.......................................... 7.50% 06/18/18 5,968,827
2,652,008 New HB Acquisition LLC, Term B Loan (First Lien).............. 4.50% 08/03/22 2,659,752
18,240,655 New HB Acquisition LLC, Term B Loan (Second Lien)............. 8.50% 08/03/23 17,875,843
---------------
26,504,422
---------------
PAPER PACKAGING -- 0.4%
3,000,000 Reynolds Group Holdings, Inc., Incremental U.S. Term Loan..... 4.50% 12/01/18 3,005,640
---------------
PHARMACEUTICALS -- 2.6%
101,563 AMAG Pharmaceuticals, Inc., Initial Term Loan................. 4.75% 08/17/21 100,801
10,143,750 Concordia Healthcare Corp., Initial Dollar Term Loan.......... 5.25% 10/21/21 10,032,169
3,407,202 Horizon Pharma, Inc., Term Loan B............................. 4.50% 04/30/21 3,296,468
7,394,353 Valeant Pharmaceuticals International, Inc., Series F-1
Tranche B Term Loan........................................ 5.00% 04/01/22 7,202,100
---------------
20,631,538
---------------
PROPERTY & CASUALTY INSURANCE -- 0.1%
600,000 Sedgwick Claims Management Services, Inc., Initial Loan
(Second Lien).............................................. 6.75% 02/28/22 570,000
---------------
REAL ESTATE SERVICES -- 0.2%
1,944,341 DTZ Worldwide Ltd., 2015-1 Additional Term Loan............... 4.25% 11/04/21 1,938,663
---------------
RESEARCH & CONSULTING SERVICES -- 2.5%
12,767,048 Acosta, Inc., Term Loan B..................................... 4.25% 09/26/21 12,623,419
7,189,766 Advantage Sales & Marketing, Inc., Initial Term Loan
(First Lien)............................................... 4.25% 07/23/21 7,122,398
---------------
19,745,817
---------------
RESTAURANTS -- 1.1%
8,233,559 Portillo's Holdings LLC, Term B Loan (First Lien)............. 4.75% 08/02/21 8,034,554
422,143 Red Lobster Management LLC, Initial Term Loan (First Lien).... 6.25% 07/28/21 420,560
---------------
8,455,114
---------------
RETAIL REITS (REAL ESTATE INVESTMENT TRUSTS) -- 0.3%
2,250,000 Capital Automotive LLC, Term Loan (Second Lien)............... 6.00% 04/30/20 2,255,625
---------------
SEMICONDUCTORS -- 2.3%
12,333,333 Avago Technologies Cayman Ltd., Term B-1 Dollar Loan.......... 4.25% 02/01/23 12,335,553
4,750,000 Micron Technology, Inc., Term Loan B.......................... 6.44% 04/15/22 4,766,340
995,000 NXP B.V., Tranche B Loan...................................... 3.75% 12/07/20 997,488
---------------
18,099,381
---------------
SOFT DRINKS -- 1.3%
10,516,222 Keurig Green Mountain, Inc. (Maple Holdings Acquisition
Corp.), Term B USD Loan.................................... 5.25% 03/03/23 10,544,721
---------------
Page 16 See Notes to Financial Statements
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2016 (UNAUDITED)
PRINCIPAL STATED
VALUE DESCRIPTION RATE (f) MATURITY (g) VALUE
---------------- ---------------------------------------------------------------- ------------ ------------ ---------------
SENIOR FLOATING-RATE LOAN INTERESTS (CONTINUED)
SPECIALIZED CONSUMER SERVICES -- 1.1%
$ 3,420,226 Asurion LLC, Incremental Tranche B-1 Term Loan................ 5.00% 05/24/19 $ 3,407,400
1,512,117 Asurion LLC, Incremental Tranche B-4 Term Loan................ 5.00% 08/04/22 1,501,048
4,205,882 Asurion LLC, Term Loan (Second Lien).......................... 8.50% 03/03/21 4,031,632
---------------
8,940,080
---------------
SPECIALTY STORES -- 0.7%
2,443,349 PetSmart, Inc., Tranche B-1 Loan.............................. 4.25% 03/11/22 2,435,116
1,581,982 Toys "R" US-Delaware, Inc., Term B-2 Loan..................... 5.25% 05/25/18 1,392,144
2,004,576 Toys "R" US-Delaware, Inc., Term B4 Loan...................... 9.75% 04/25/20 1,696,372
---------------
5,523,632
---------------
SYSTEMS SOFTWARE -- 0.8%
484,788 Applied Systems, Inc., Initial Term Loan (Second Lien)........ 7.50% 01/24/22 474,888
5,642,941 BMC Software Finance, Inc., Initial US Term Loan.............. 5.00% 09/10/20 4,845,876
937,500 Compuware Corp., Term Loan B.................................. 6.25% 12/31/19 912,497
---------------
6,233,261
---------------
TRUCKING -- 0.0%
142,369 SIRVA Worldwide, Inc., Loan (d)............................... 7.50% 03/27/19 134,539
---------------
TOTAL SENIOR FLOATING-RATE LOAN INTERESTS................................................... 258,016,123
(Cost $261,118,531) ---------------
MONEY MARKET FUNDS -- 7.5%
59,975,453 Morgan Stanley Institutional Liquidity Fund - Treasury Portfolio
- Institutional Class - 0.22% (k)........................................................ 59,975,453
(Cost $59,975,453) ---------------
TOTAL INVESTMENTS -- 104.6%................................................................. 833,438,378
(Cost $839,427,611) (l) ---------------
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- ---------------------------------------------------------------- ------------ ------------ ---------------
U.S. GOVERNMENT NOTES SOLD SHORT -- (8.0%)
(17,000,000) United States Treasury Note................................... 1.00% 03/15/18 (17,076,041)
(3,650,000) United States Treasury Note................................... 1.25% 11/30/18 (3,686,142)
(4,775,000) United States Treasury Note................................... 1.50% 10/31/19 (4,850,450)
(2,000,000) United States Treasury Note................................... 1.63% 12/31/19 (2,039,376)
(500,000) United States Treasury Note................................... 2.00% 11/30/20 (516,612)
(700,000) United States Treasury Note................................... 2.25% 04/30/21 (731,910)
(15,750,000) United States Treasury Note................................... 2.75% 11/15/23 (17,004,771)
(5,000,000) United States Treasury Note................................... 2.13% 05/15/25 (5,142,090)
(1,000,000) United States Treasury Note................................... 2.00% 08/15/25 (1,017,188)
(11,000,000) United States Treasury Note................................... 2.25% 11/15/25 (11,418,517)
---------------
TOTAL U.S. GOVERNMENT NOTES SOLD SHORT...................................................... (63,483,097)
(Proceeds $61,568,292) ---------------
NET OTHER ASSETS AND LIABILITIES -- 3.4%.................................................... 26,997,446
---------------
NET ASSETS -- 100.0%........................................................................ $ 796,952,727
===============
See Notes to Financial Statements Page 17
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2016 (UNAUDITED)
-----------------------------
(a) This security or a portion of this security is segregated as collateral
for investments sold short.
(b) This security, sold within the terms of a private placement memorandum, is
exempt from registration upon resale under Rule 144A under the Securities
Act of 1933, as amended (the "1933 Act"), and may be resold in
transactions exempt from registration, normally to qualified institutional
buyers. Pursuant to procedures adopted by the Trust's Board of Trustees,
this security has been determined to be liquid by First Trust Advisors
L.P., the Fund's advisor (the "Advisor"). Although market instability can
result in periods of increased overall market illiquidity, liquidity for
each security is determined based on security-specific factors and
assumptions, which require subjective judgment. At April 30, 2016,
securities noted as such amounted to $258,584,462 or 32.4% of net assets.
(c) This security, sold within the terms of a private placement memorandum, is
exempt from registration upon resale under 144A under the 1933 Act, and
may be resold in transactions exempt from registration, normally to
qualified institutional buyers (see Note 2E - Restricted Securities in the
Notes to Financial Statements).
(d) Pursuant to procedures adopted by the Trust's Board of Trustees, this
security has been determined to be illiquid by the Advisor.
(e) These notes are Senior Payment-In-Kind ("PIK") Toggle Notes whereby the
issuer may, at its option, elect to pay interest on the notes (1) entirely
in cash or (2) entirely in PIK interest. Interest paid in cash will accrue
at the rate of 7.00% per annum ("Cash Interest Rate") and PIK interest
will accrue on the notes at a rate per annum equal to the Cash Interest
Rate plus 75 basis points. For the six months ended April 30, 2016, this
security paid all of its interest in cash.
(f) Senior Floating-Rate Loan Interests ("Senior Loans") in which the Fund
invests generally pay interest at rates which are periodically
predetermined by reference to a base lending rate plus a premium. These
base lending rates are generally (i) the lending rate offered by one or
more major European banks, such as the London Inter-Bank Offered Rate
("LIBOR"), (ii) the prime rate offered by one or more United States banks
or (iii) the certificate of deposit rate. Certain Senior Loans are subject
to a LIBOR floor that establishes a minimum LIBOR rate. The interest rate
shown reflects the rate in effect at April 30, 2016. When a range of rates
is disclosed, the Fund holds more than one contract within the same
tranche at varying rates.
(g) Senior Loans generally are subject to mandatory and/or optional
prepayment. As a result, the actual remaining maturity of Senior Loans may
be substantially less than the stated maturities shown.
(h) This security is fair valued by the Advisor's Pricing Committee in
accordance with procedures adopted by the Trust's Board of Trustees and in
accordance with provisions of the Investment Company Act of 1940, as
amended. At April 30, 2016, securities noted as such are valued at
$464,470 or 0.06% of net assets.
(i) This issuer has filed for protection in federal bankruptcy court.
(j) This issuer is in default but interest is still being accrued by the Fund
and paid by the issuer.
(k) Interest rate shown reflects yield as of April 30, 2016.
(l) Aggregate cost for financial reporting purposes, which approximates the
aggregate cost for federal income tax purposes. As of April 30, 2016, the
aggregate gross unrealized appreciation for all securities in which there
was an excess of value over tax cost was $11,564,002 and the aggregate
gross unrealized depreciation for all securities in which there was an
excess of tax cost over value was $17,553,235.
Page 18 See Notes to Financial Statements
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2016 (UNAUDITED)
-----------------------------
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of April 30,
2016 is as follows (see Note 2A - Portfolio Valuation in the Notes to Financial
Statements):
ASSETS TABLE
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
4/30/2016 PRICES INPUTS INPUTS
--------------- --------------- --------------- ---------------
Corporate Bonds:
Agricultural Products.......................... $ 6,248,110 $ -- $ 5,237,500 $ 1,010,610
Other Industry Categories*..................... 406,164,303 -- 406,164,303 --
Foreign Corporate Bonds*.......................... 103,034,389 -- 103,034,389 --
Senior Floating-Rate Loan Interests:
Cable & Satellite.............................. 7,486,380 -- 7,021,910 464,470
Trucking....................................... 134,539 -- -- 134,539
Other Industry Categories*..................... 250,395,204 -- 250,395,204 --
Money Market Funds................................ 59,975,453 59,975,453 -- --
--------------- --------------- --------------- ---------------
Total Investments................................. $ 833,438,378 $ 59,975,453 $ 771,853,306 $ 1,609,619
=============== =============== =============== ===============
LIABILITIES TABLE
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
4/30/2016 PRICES INPUTS INPUTS
--------------- --------------- --------------- ---------------
U.S. Government Notes Sold Short.................. $ (63,483,097) $ -- $ (63,483,097) $ --
=============== =============== =============== ===============
* See Portfolio of Investments for industry breakout. Industry categories
are only shown separately if they include holdings in two or more levels
or have holdings in only Level 3.
There were no transfers between Level 1 and Level 2.
All transfers in and out of Level 3 during the period are assumed to be
transferred on the last day of the period at their current value. As of April
30, 2016, the Fund transferred Senior Floating-Rate Loan Interests valued at
$134,539 from Level 2 to Level 3 of the fair value hierarchy. The Senior
Floating-Rate Loan Interests that transferred from Level 2 to Level 3 did so
primarily as a result of a change in information obtained from an independent
third-party pricing service relating to the market activity of individual Senior
Floating-Rate Loan Interests and a lack of trading activity in certain Senior
Floating-Rate Loan Interests.
As of April 30, 2016, the Fund transferred Corporate Bonds valued at $1,010,610
from Level 2 to Level 3 of the fair value hierarchy. The Corporate Bonds that
transferred from Level 2 to Level 3 did so primarily as a result of a change in
information obtained from an independent third-party pricing service relating to
the market activity of individual Corporate Bonds and a lack of trading activity
in certain Corporate Bonds.
Level 3 Senior Floating-Rate Loan Interests that are fair valued by the
Advisor's Pricing Committee are footnoted in the Portfolio of Investments. Level
3 Senior Floating-Rate Loan Interests are valued based on either third-party
pricing services prices obtained from dealer runs and indicative sheets from
brokers or are valued using broker quotes. The values are based on unobservable
and non-quantitative inputs. The Trust's Board of Trustees has adopted valuation
procedures that are utilized by the Advisor's Pricing Committee to oversee
day-to-day valuation of the Fund's investments. The Advisor's Pricing Committee,
through the Fund's fund accounting agent, monitors daily pricing via tolerance
checks and stale and unchanged price reviews. The Advisor's Pricing Committee
also reviews monthly back testing of pricing service prices by comparing sales
prices of the Fund investments to prior day pricing service prices.
Additionally, the Advisor's Pricing Committee reviews periodic information from
the Fund's third-party pricing service that compares secondary market trade
prices to their daily valuations.
See Notes to Financial Statements Page 19
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2016 (UNAUDITED)
The following table presents the activity of the Fund's investments measured at
fair value on a recurring basis using significant unobservable inputs (Level 3)
for the period presented.
BEGINNING BALANCE AT OCTOBER 31, 2015
Senior Floating-Rate Loan Interests $ 842,527
Corporate Bonds --
Net Realized Gain (Loss):
Senior Floating-Rate Loan Interests 1,427
Change in Unrealized Appreciation / Depreciation:
Senior Floating-Rate Loan Interests 951
Purchases --
Sales:
Senior Floating-Rate Loan Interests (380,435)
Transfers In:
Senior Floating-Rate Loan Interests 134,539
Corporate Bonds 1,010,610
Transfers Out --
------------------
ENDING BALANCE AT APRIL 30, 2016
Senior Floating-Rate Loan Interests 599,009
Corporate Bonds 1,010,610
------------------
Total Level 3 holdings $ 1,609,619
==================
There was no net change in unrealized appreciation (depreciation) from Level 3
investments held as of April 30, 2016.
Page 20 See Notes to Financial Statements
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 2016 (UNAUDITED)
ASSETS:
Investments, at value..................................................... $ 833,438,378
Cash...................................................................... 119,133
Restricted cash........................................................... 59,754,471
Receivables:
Investment securities sold............................................. 60,577,370
Interest............................................................... 9,192,694
Capital shares sold.................................................... 71,801
--------------
Total Assets........................................................ 963,153,847
--------------
LIABILITIES:
Investments sold short, at value (proceeds $61,568,292)................... 63,483,097
Payables:
Capital shares redeemed................................................ 71,801,302
Investment securities purchased........................................ 29,801,962
Investment advisory fees............................................... 646,855
Interest on investments sold short..................................... 467,132
Margin interest expense................................................ 772
--------------
Total Liabilities................................................... 166,201,120
--------------
NET ASSETS................................................................ $ 796,952,727
==============
NET ASSETS CONSIST OF:
Paid-in capital........................................................... $ 816,719,783
Par value................................................................. 166,500
Accumulated net investment income (loss).................................. (2,476,446)
Accumulated net realized gain (loss) on investments and
investments sold short................................................. (9,553,072)
Net unrealized appreciation (depreciation) on investments and
investments sold short................................................. (7,904,038)
--------------
NET ASSETS................................................................ $ 796,952,727
==============
NET ASSET VALUE, per share................................................ $ 47.87
==============
Number of shares outstanding (unlimited number of shares
authorized, par value $0.01 per share)................................. 16,650,002
==============
Investments, at cost...................................................... $ 839,427,611
==============
See Notes to Financial Statements Page 21
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED APRIL 30, 2016 (UNAUDITED)
INVESTMENT INCOME:
Interest.................................................................. $ 20,138,317
--------------
Total investment income................................................ 20,138,317
--------------
EXPENSES:
Investment advisory fees.................................................. 2,963,616
Interest on investments sold short........................................ 557,206
Margin interest expense................................................... 86,438
--------------
Total expenses......................................................... 3,607,260
--------------
NET INVESTMENT INCOME (LOSS).............................................. 16,531,057
--------------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments............................................................ (6,714,328)
Investments sold short................................................. 1,638
--------------
Net realized gain (loss)............................................... (6,712,690)
--------------
Net change in unrealized appreciation (depreciation) on:
Investments............................................................ 7,180,604
Investments sold short................................................. (1,028,677)
--------------
Net change in unrealized appreciation (depreciation)...................... 6,151,927
--------------
NET REALIZED AND UNREALIZED GAIN (LOSS)................................... (560,763)
--------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS........................................................ $ 15,970,294
==============
Page 22 See Notes to Financial Statements
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE
SIX MONTHS
ENDED FOR THE YEAR
4/30/2016 ENDED
(UNAUDITED) 10/31/2015
-------------- --------------
OPERATIONS:
Net investment income (loss)........................................... $ 16,531,057 $ 22,421,293
Net realized gain (loss)............................................... (6,712,690) (465,756)
Net increase from payment by the advisor............................... -- 24,541
Net change in unrealized appreciation (depreciation)................... 6,151,927 (13,012,099)
-------------- --------------
Net increase (decrease) in net assets resulting from operations........ 15,970,294 8,967,979
-------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income.................................................. (19,007,503) (23,871,521)
Net realized gain...................................................... -- (1,043,000)
Return of capital...................................................... -- (332,485)
-------------- --------------
Total distributions to shareholders.................................... (19,007,503) (25,247,006)
-------------- --------------
SHAREHOLDER TRANSACTIONS:
Proceeds from shares sold.............................................. 443,196,945 382,508,142
Cost of shares redeemed................................................ (164,161,122) (24,808,028)
-------------- --------------
Net increase (decrease) in net assets resulting
from shareholder transactions....................................... 279,035,823 357,700,114
-------------- --------------
Total increase (decrease) in net assets................................ 275,998,614 341,421,087
NET ASSETS:
Beginning of period.................................................... 520,954,113 179,533,026
-------------- --------------
End of period.......................................................... $ 796,952,727 $ 520,954,113
============== ==============
Accumulated net investment income (loss) at end of period.............. $ (2,476,446) $ --
============== ==============
CHANGES IN SHARES OUTSTANDING:
Shares outstanding, beginning of period................................ 10,700,002 3,500,002
Shares sold............................................................ 9,450,000 7,700,000
Shares redeemed........................................................ (3,500,000) (500,000)
-------------- --------------
Shares outstanding, end of period...................................... 16,650,002 10,700,002
============== ==============
See Notes to Financial Statements Page 23
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED APRIL 30, 2016 (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase (decrease) in net assets resulting from operations .......... $ 15,970,294
Adjustments to reconcile net increase (decrease) in net assets resulting
from operations to net cash used in operating activities:
Purchases of investments ........................................... (396,296,065)
Borrowed investments sold short .................................... 11,084,844
Cost to cover short positions ...................................... (14,382,437)
Sales, maturities and paydowns of investments ...................... 52,663,569
Net amortization/accretion of premiums/discounts on investments..... 470,772
Net realized gain/loss on investments and investments sold short.... 6,712,690
Net change in unrealized appreciation/depreciation on investments... (7,180,604)
Net change in unrealized appreciation/depreciation on investments
sold short ...................................................... 1,028,677
Increase in restricted cash ........................................ (15,214,041)
CHANGES IN ASSETS AND LIABILITIES
Increase in interest receivable .................................... (1,406,251)
Decrease in capital shares receivable............................... 2,365,922
Increase in capital shares redeemed................................. 71,801,302
Increase in interest payable on investments sold short ............. 68,841
Decrease in interest expense payable on investments sold short ..... (4,344)
Increase in investment advisory fees payable ....................... 248,982
--------------
CASH USED IN OPERATING ACTIVITIES......................................... $ (272,067,849)
--------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from shares sold .......................................... 443,196,945
Cost of shares redeemed............................................. (164,161,122)
Distributions to shareholders from net investment income ........... (19,007,503)
--------------
CASH PROVIDED BY FINANCING ACTIVITIES .................................... 260,028,320
--------------
Decrease in cash ......................................................... (12,039,529)
Cash at beginning of period .............................................. 12,158,662
--------------
CASH AT END OF PERIOD .................................................... $ 119,133
==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest ................................. $ 90,782
==============
Page 24 See Notes to Financial Statements
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
SIX MONTHS FOR THE PERIOD
ENDED YEAR ENDED OCTOBER 31, 2/25/2013 (a)
4/30/2016 --------------------------------- THROUGH
(UNAUDITED) 2015 2014 10/31/2013
--------------- --------------- --------------- ---------------
Net asset value, beginning of period $ 48.69 $ 51.30 $ 51.16 $ 50.00
----------- ----------- ----------- -----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) 1.24 2.64 2.58 1.93
Net realized and unrealized gain (loss) (0.67) (2.23) (b) 0.29 1.38
----------- ----------- ----------- -----------
Total from investment operations 0.57 0.41 2.87 3.31
----------- ----------- ----------- -----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income (1.39) (2.84) (2.73) (2.15)
Net realized gain -- (0.14) -- --
Return of capital -- (0.04) -- --
----------- ----------- ----------- -----------
Total distributions (1.39) (3.02) (2.73) (2.15)
----------- ----------- ----------- -----------
Net asset value, end of period $ 47.87 $ 48.69 $ 51.30 $ 51.16
=========== =========== =========== ===========
TOTAL RETURN (c) 1.26% 0.80% (b) 5.72% 6.76%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) $ 796,953 $ 520,954 $ 179,533 $ 74,178
RATIOS TO AVERAGE NET ASSETS:
Ratio of total expenses to average net assets 1.16% (d) 1.23% 1.29% 1.28% (d)
Ratio of net expenses to average net assets excluding
interest expense 0.95% (d) 0.95% 0.95% 0.95% (d)
Ratio of net investment income (loss) to average
net assets 5.30% (d) 5.49% 5.02% 5.10% (d)
Portfolio turnover rate (e) 12% 34% 54% 52%
(a) Inception date is consistent with the commencement of investment
operations and is the date the initial creation units were established.
(b) The Fund received a payment from the advisor in the amount of $24,541 in
connection with a trade error. The payment from the advisor represents
less than $0.01 per share and had no effect on the Fund's total return.
(c) Total return is calculated assuming an initial investment made at the net
asset value at the beginning of the period, reinvestment of all
distributions at net asset value during the period, and redemption at net
asset value on the last day of the period. The returns presented do not
reflect the deduction of taxes that a shareholder would pay on Fund
distributions or the redemption or sale of Fund shares. Total return is
calculated for the time period presented and is not annualized for periods
of less than a year.
(d) Annualized.
(e) Portfolio turnover is calculated for the time period presented and is not
annualized for periods of less than a year and does not include securities
received or delivered from processing creations or redemptions and in-kind
transactions.
See Notes to Financial Statements Page 25
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
APRIL 30, 2016 (UNAUDITED)
1. ORGANIZATION
First Trust Exchange-Traded Fund IV (the "Trust") is an open-end management
investment company organized as a Massachusetts business trust on September 15,
2010, and is registered with the Securities and Exchange Commission under the
Investment Company Act of 1940, as amended (the "1940 Act").
The Trust currently consists of eight funds that are offering shares. This
report covers the First Trust Tactical High Yield ETF (the "Fund"), which trades
under the ticker "HYLS" on The Nasdaq Stock Market LLC ("Nasdaq"). Unlike
conventional mutual funds, the Fund issues and redeems shares on a continuous
basis, at net asset value ("NAV"), only in large specified blocks consisting of
50,000 shares called a "Creation Unit." Creation Units are generally issued and
redeemed for cash and, in certain circumstances, in-kind for securities in which
the Fund invests. Except when aggregated in Creation Units, the Fund's shares
are not redeemable securities.
The primary investment objective of the Fund is to provide current income. The
Fund's secondary investment objective is to provide capital appreciation. The
Fund seeks to achieve its investment objectives by investing at least 80% of its
net assets including investment borrowings, under normal market conditions, in
high yield debt securities that are rated below investment grade at the time of
purchase or unrated securities deemed by the Fund's advisor to be of comparable
quality. Below investment grade securities are those that, at the time of
purchase, are rated lower than "BBB-" by Standard & Poor's Ratings Group, a
division of the McGraw Hill Companies, Inc., or lower than "Baa3" by Moody's
Investors Service, Inc., or comparably rated by another nationally recognized
statistical rating organization. High yield debt securities that are rated below
investment grade are commonly referred to as "junk" bonds. Such securities may
include U.S. and non-U.S. corporate debt obligations, bank loans and convertible
bonds. For purposes of determining whether a security is below investment grade,
the lowest available rating will be considered. There can be no assurance that
the Fund's investment objective will be achieved. The Fund may not be
appropriate for all investors.
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 following is a summary
of significant accounting policies consistently followed by the Fund in the
preparation of the financial statements. The preparation of the financial
statements in accordance with accounting principles generally accepted in the
United States of America ("U.S. GAAP") requires management to make estimates and
assumptions that affect the reported amounts and disclosures in the financial
statements. Actual results could differ from those estimates.
A. PORTFOLIO VALUATION
The Fund's NAV is determined daily as of the close of regular trading on the New
York Stock Exchange ("NYSE"), normally 4:00 p.m. Eastern time, on each day the
NYSE is open for trading. If the NYSE closes early on a valuation day, the NAV
is determined as of that time. Domestic debt securities and foreign securities
are priced using data reflecting the earlier closing of the principal markets
for those securities. The Fund's NAV is calculated by dividing the value of all
assets of the Fund (including accrued interest and dividends), less all
liabilities (including accrued expenses and dividends declared but unpaid), by
the total number of shares outstanding.
The Fund's investments are valued daily at market value or, in the absence of
market value with respect to any portfolio securities, at fair value. Market
value prices represent last sale or official closing prices from a national or
foreign exchange (i.e., a regulated market) and are primarily obtained from
third-party pricing services. Fair value prices represent any prices not
considered market value prices and are either obtained from a third-party
pricing service or are determined by the Advisor's Pricing Committee in
accordance with valuation procedures adopted by the Trust's Board of Trustees,
and in accordance with provisions of the 1940 Act. Investments valued by the
Advisor's Pricing Committee, if any, are footnoted as such in the footnotes to
the Portfolio of Investments. The Fund's investments are valued as follows:
Corporate bonds, corporate notes, U.S. government securities and other
debt securities are fair valued on the basis of valuations provided by
dealers who make markets in such securities or by an independent pricing
service approved by the Trust's Board of Trustees, which may use the
following valuation inputs when available:
1) benchmark yields;
2) reported trades;
3) broker/dealer quotes;
4) issuer spreads;
5) benchmark securities;
6) bids and offers; and
7) reference data including market research publications.
Page 26
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
APRIL 30, 2016 (UNAUDITED)
Securities traded in an over-the-counter market are fair valued at the
mean of their most recent bid and asked price, if available, and otherwise
at their closing bid price.
Senior Loans(1) in which the Fund invests are not listed on any securities
exchange or board of trade. Senior Loans are typically bought and sold by
institutional investors in individually negotiated private transactions
that function in many respects like an over-the-counter secondary market,
although typically no formal market-makers exist. This market, while
having grown substantially since its inception, generally has fewer trades
and less liquidity than the secondary market for other types of
securities. Some Senior Loans have few or no trades, or trade
infrequently, and information regarding a specific Senior Loan may not be
widely available or may be incomplete. Accordingly, determinations of the
market value of Senior Loans may be based on infrequent and dated
information. Because there is less reliable, objective data available,
elements of judgment may play a greater role in valuation of Senior Loans
than for other types of securities. Typically, Senior Loans are fair
valued using information provided by a third-party pricing service. The
third-party pricing service primarily uses over-the-counter pricing from
dealer runs and broker quotes from indicative sheets to value the Senior
Loans.
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
5) any other market-based data the Advisor's Pricing Committee
considers relevant. In this regard, the Advisor's Pricing
Committee may use last-obtained market-based data to assist it
when valuing portfolio securities using amortized cost.
Certain securities may not be able to be priced by pre-established pricing
methods. Such securities may be valued by the Trust's Board of Trustees or its
delegate, the Advisor's Pricing Committee, at fair value. These securities
generally include, but are not limited to, restricted securities (securities
which may not be publicly sold without registration under the Securities Act of
1933, as amended (the "1933 Act")) for which a pricing service is unable to
provide a market price; securities whose trading has been formally suspended; a
security whose market or fair value price is not available from a
pre-established pricing source; a security with respect to which an event has
occurred that is likely to materially affect the value of the security after the
market has closed but before the calculation of the Fund's NAV or make it
difficult or impossible to obtain a reliable market quotation; and a security
whose price, as provided by the pricing service, does not reflect the security's
fair value. As a general principle, the current fair value of a security would
appear to be the amount which the owner might reasonably expect to receive for
the security upon its current sale. When fair value prices are used, generally
they will differ from market quotations or official closing prices on the
applicable exchanges. A variety of factors may be considered in determining the
fair value of such securities, including, but not limited to, the following:
1) the fundamental business data relating to the borrower/issuer;
2) an evaluation of the forces which influence the market in
which these securities are purchased and sold;
3) the type, size and cost of a security;
4) the financial statements of the borrower/issuer;
5) the credit quality and cash flow of the borrower/issuer, based
on the Advisor's or external analysis;
6) the information as to any transactions in or offers for the
security;
7) the price and extent of public trading in similar securities
of the issuer/borrower, or comparable companies;
8) the coupon payments;
9) the quality, value and salability of collateral, if any,
securing the security;
10) the business prospects of the borrower/issuer, including any
ability to obtain money or resources from a parent or
affiliate and an assessment of the issuer's management;
11) the prospects for the borrower's/issuer's industry, and
multiples (of earnings and/or cash flows) being paid for
similar businesses in that industry;
12) borrower's/issuer's competitive position within the industry;
13) borrower's/issuer's ability to access additional liquidity
through public and/or private markets; and
14) other relevant factors.
-----------------------------
(1) The terms "security" and "securities" used throughout the Notes to
Financial Statements include Senior Loans.
Page 27
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
APRIL 30, 2016 (UNAUDITED)
The Fund is subject to fair value accounting standards that define fair value,
establish the framework for measuring fair value and provide a three-level
hierarchy for fair valuation based upon the inputs to the valuation as of the
measurement date. The three levels of the fair value hierarchy are as follows:
o Level 1 - Level 1 inputs are quoted prices in active markets for
identical investments. An active market is a market in which
transactions for the investment occur with sufficient frequency and
volume to provide pricing information on an ongoing basis.
o Level 2 - Level 2 inputs are observable inputs, either directly or
indirectly, and include the following:
o Quoted prices for similar investments in active markets.
o Quoted prices for identical or similar investments in markets
that are non-active. A non-active market is a market where
there are few transactions for the investment, the prices are
not current, or price quotations vary substantially either
over time or among market makers, or in which little
information is released publicly.
o Inputs other than quoted prices that are observable for the
investment (for example, interest rates and yield curves
observable at commonly quoted intervals, volatilities,
prepayment speeds, loss severities, credit risks, and default
rates).
o Inputs that are derived principally from or corroborated by
observable market data by correlation or other means.
o Level 3 - Level 3 inputs are unobservable inputs. Unobservable
inputs may reflect the reporting entity's own assumptions about the
assumptions that market participants would use in pricing the
investment.
The inputs or methodologies used for valuing investments are not necessarily an
indication of the risk associated with investing in those investments. A summary
of the inputs used to value the Fund's investments as of April 30, 2016, is
included with the Fund's Portfolio of Investments.
B. SECURITIES TRANSACTIONS AND INVESTMENT INCOME
Securities transactions are recorded as of the trade date. Realized gains and
losses from securities transactions are recorded on the identified cost basis.
Interest income is recorded daily on the accrual basis. Amortization of premiums
and accretion of discounts are recorded using the effective interest method over
the expected life of each respective borrowing for loans.
Securities purchased or sold on a when-issued, delayed-delivery or forward
purchase commitment basis may have extended settlement periods. The value of the
security so purchased is subject to market fluctuations during this period. Due
to the nature of the Senior Loan market, the actual settlement date may not be
certain at the time of the purchase or sale for some of the Senior Loans.
Interest income on such Senior Loans is not accrued until settlement date. The
Fund maintains liquid assets with a current value at least equal to the amount
of its when-issued, delayed-delivery or forward purchase commitments. The Fund
did not have any when-issued, delayed-delivery, or forward purchase commitments
as of April 30, 2016.
C. SHORT SALES
Short sales are utilized for investment and risk management purposes and are
transactions in which securities or other instruments (such as options,
forwards, futures or other derivative contracts) are sold that are not currently
owned in the Fund's portfolio. When the Fund engages in a short sale, the Fund
must borrow the security sold short and deliver the security to the
counterparty. Short selling allows the Fund to profit from a decline in a market
price to the extent such decline exceeds the transaction costs and the costs of
borrowing the securities. The Fund is charged a fee or premium to borrow the
securities sold short and is obligated to repay the lenders of the securities.
Any dividends or interest that accrues on the securities during the period of
the loan are due to the lenders. A gain, limited to the price at which the
security was sold short, or a loss, unlimited in size, will be recognized upon
the termination of the short sale; which is effected by the Fund purchasing the
security sold short and delivering the security to the lender. Any such gain or
loss may be offset, completely or in part, by the change in the value of the
long portion of the Fund's portfolio. The Fund is subject to the risk it may be
unable to reacquire a security to terminate a short position except at a price
substantially in excess of the last quoted price. Also, there is the risk that
the counterparty to a short sale may fail to honor its contractual terms,
causing a loss to the Fund.
The Fund has established an account with Pershing, LLC for the purpose of
purchasing or borrowing securities on margin. The Fund pays interest on any
margin balance, which is calculated as the daily margin account balance times
the broker's margin interest rate. At April 30, 2016, the Fund had $59,754,471
in restricted cash associated with investments sold short and $63,483,097 of
investments sold short as shown on the Statement of Asset and Liabilities.
Interest is charged on these balances at a rate equal to the Federal Funds rate
plus 75 basis points and is charged on payable credit margin balances at a rate
equal to the Federal Funds rate less 40 basis points. At April 30, 2016, the
Fund had a debit margin balance with an interest rate of 1.04%. For the six
months ended April 30, 2016, margin interest expense was $86,438, which is shown
in "Margin interest expense" on the Statement of Operations. For the six months
ended April 30, 2016, the average margin balance and interest rates were
$16,135,229 and 1.04%, respectively.
Page 28
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
APRIL 30, 2016 (UNAUDITED)
D. UNFUNDED LOAN COMMITMENTS
The Fund may enter into credit agreements, all or a portion of which may be
unfunded. The Fund is obligated to fund these loan commitments at the borrower's
discretion. The Fund had no unfunded loan commitments as of April 30, 2016.
E. RESTRICTED SECURITIES
The Fund invests in restricted securities, which are securities that may not be
offered for public sale without first being registered under the 1933 Act. Prior
to registration, restricted securities may only be resold in transaction exempt
from registration under Rule 144A under the 1933 Act, normally to qualified
institutional buyers. As of April 30, 2016, the Fund held restricted securities
as shown in the following table that the Advisor has deemed illiquid pursuant to
procedures adopted by the Fund's Board of Trustees. Although market instability
can result in periods of increaded overall market illiquidity, liquidity for
each security is determined based on security-specified factors and assumptions,
which require subjective judgement.The Fund does not have the right to demand
that such securities be registered. These securities are valued according to the
valuation procedures as stated in the Portfolio Valuation note (Note 2A) and are
not expressed as a discount to the carrying value of a comparable unrestricted
security. There are no unrestricted securities with the same maturity dates and
yields for these issuers.
ACQUISITION PAR CURRENT CARRYING % OF NET
SECURITY DATE AMOUNT PRICE COST VALUE ASSETS
------------------------ -------------- ------------- ------------- ------------- ------------- -------------
Pinnacle Operating Corp.,
9.00%, 11/15/20 9/13/13-12/19/14 $ 1,182,000 $ 85.50 $ 1,211,260 $ 1,010,610 0.13%
F. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
Dividends from net investment income, if any, are declared and paid monthly 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 federal income tax regulations, which may differ
from U.S. GAAP. Certain capital accounts in the financial statements are
periodically adjusted for permanent differences in order to reflect their tax
character. These permanent differences are primarily due to the varying
treatment of income and gain/loss on significantly modified 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 during the fiscal year ended October 31,
2015 was as follows:
Distributions paid from:
Ordinary income................................. $ 24,914,521
Capital gain.................................... --
Return of capital............................... 332,485
As of October 31, 2015, the components of distributable earnings on a tax basis
for the Fund were as follows:
Undistributed ordinary income................... $ --
Accumulated capital and other losses............ (930,645)
Net unrealized appreciation (depreciation)...... (15,965,702)
G. INCOME TAXES
The Fund intends to continue to qualify as a regulated investment company by
complying with the requirements under Subchapter M of the Internal Revenue Code
of 1986, as amended, which includes distributing substantially all of its net
investment income and net realized gains to shareholders. Accordingly, no
provision has been made for federal and state income taxes. However, due to the
timing and amount of distributions, the Fund may be subject to an excise tax of
4% of the amount by which approximately 98% of the Fund's taxable income exceeds
the distributions from such taxable income for the calendar year.
Page 29
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
APRIL 30, 2016 (UNAUDITED)
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.
As of October 31, 2015, the Fund has non-expiring capital loss carryforwards of
$930,645 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.
Certain losses realized during the current fiscal year may be deferred and
treated as occurring on the first day of the following fiscal year for federal
income tax purposes. For the fiscal year ended October 31, 2015, the Fund had no
net ordinary losses.
The Fund is subject to accounting standards that establish a minimum threshold
for recognizing, and a system for measuring, the benefits of a tax position
taken or expected to be taken in a tax return. The taxable years ended 2013,
2014 and 2015 remain open to federal and state audit. As of April 30, 2016,
management has evaluated the application of these standards to the Fund and has
determined that no provision for income tax is required in the Fund's financial
statements for uncertain tax positions.
H. EXPENSES
Expenses, other than the investment advisory fee and other excluded expenses,
are paid by the Advisor (see Note 3). The Fund is subject to an interest expense
due to the costs associated with the Fund's short positions in securities.
3. INVESTMENT ADVISORY FEE, AFFILIATED TRANSACTIONS AND OTHER FEE ARRANGEMENTS
First Trust, the investment advisor to the Fund, is a limited partnership with
one limited partner, Grace Partners of DuPage L.P., and one general partner, The
Charger Corporation. The Charger Corporation is an Illinois corporation
controlled by James A. Bowen, Chief Executive Officer of First Trust. First
Trust is responsible for the selection and ongoing monitoring of the securities
in the Fund's portfolio, managing the Fund's business affairs and providing
certain administrative services necessary for the management of the Fund.
Pursuant to the Investment Management Agreement between the Trust and the
Advisor, First Trust manages the investment of the Fund's assets and is
responsible for the Fund's expenses, including the cost of transfer agency,
custody, fund administration, legal, audit and other services, but excluding fee
payments under the Investment Management Agreement, interest, taxes, brokerage
commissions and other expenses connected with the execution of portfolio
transactions, distribution and service fees pursuant to a 12b-1 plan, if any,
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.
During the year ended October 31, 2015, the Fund received a payment from the
Advisor of $24,541 in connection with a trade error.
The Trust has multiple service agreements with The Bank of New York Mellon
("BNYM"). Under the service agreements, BNYM performs custodial, fund
accounting, certain administrative services, and transfer agency services for
the Fund. As custodian, BNYM is responsible for custody of the Fund's assets. As
fund accountant and administrator, BNYM is responsible for maintaining the books
and records of the Fund's securities and cash. As transfer agent, BNYM is
responsible for maintaining shareholder records for the Fund. BNYM is a
subsidiary of The Bank of New York Mellon Corporation, a financial holding
company.
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 equally among each fund in the First Trust Fund
Complex. Prior to January 1, 2016, the fixed annual retainer was allocated pro
rata based on each fund's net assets. Each Independent Trustee is also paid an
annual per fund fee that varies based on whether the fund is a closed-end or
other actively managed fund or is an index fund.
Additionally, the Lead Independent Trustee and the Chairmen of the Audit
Committee, Nominating and Governance Committee and Valuation Committee are paid
annual fees to serve in such capacities, with such compensation allocated pro
rata among each fund in the First Trust Fund Complex based on net assets.
Trustees are reimbursed for travel and out-of-pocket expenses in connection with
all meetings. The Lead Independent Trustee and Committee Chairmen rotate every
three years. The officers and "Interested" Trustee receive no compensation from
the Trust for acting in such capacities.
4. PURCHASES AND SALES OF SECURITIES
For the six months ended April 30, 2016, the cost of purchases and proceeds from
sales of investments, excluding short-term investments and in-kind transactions,
were $312,763,481 and $77,734,480, respectively.
For the six months ended April 30, 2016, the Fund had no in-kind transactions.
Page 30
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
APRIL 30, 2016 (UNAUDITED)
5. BORROWINGS
The Trust, on behalf of the Fund, along with the First Trust Series Fund and
First Trust Variable Insurance Trust, entered into a $135 million Credit
Agreement ("Line of Credit") with BNYM, to be a liquidity backstop during
periods of high redemption volume. A commitment fee of 0.15% of the daily amount
of the excess of the commitment amount over the outstanding principal balance of
the loans will be charged by BNYM, which First Trust allocates amongst the funds
that had access to the Line of Credit. To the extent that the Fund accesses the
Line of Credit, there would also be an interest fee charged. For the six months
ended April 30, 2016, the Fund did not have any outstanding borowings under the
Line of Credit.
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 Partcipant"). In order to purchase Creation Units of the Fund, an
Authorized Participant must deposit (i) a designated portfolio of equity
securities determined by First Trust (the "Deposit Securities") and generally
make or receive a cash payment referred to as the "Cash Component," which is an
amount equal to the difference between the NAV of the Fund Shares (per Creation
Unit Aggregation) and the market value of the Deposit Securities, and/or (ii)
cash in lieu of all or a portion of the Deposit Securities. The Fund's Creation
Units are generally issued and redeemed for cash. 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. Authorized Participants purchasing Creation Units must pay to BNYM,
as transfer agent, a creation transaction fee (the "Creation Transaction Fee")
regardless of the number of Creation Units purchased in the transaction. The
Creation Transaction Fee is based on the composition of the securities included
in the Fund's portfolio and the countries in which the transactions are settled.
The Creation Transaction Fee is currently $500. The 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 BNYM, 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 March 31, 2017.
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.
Page 31
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
APRIL 30, 2016 (UNAUDITED)
9. SUBSEQUENT EVENTS
Management has evaluated the impact of all subsequent events on the Fund through
the date the financial statements were issued, and has determined there was the
following subsequent event:
On May 19, 2016, the Fund declared a distribution of $0.2150 per share to
shareholders of record on May 24, 2016, payable May 31, 2016.
Page 32
--------------------------------------------------------------------------------
ADDITIONAL INFORMATION
--------------------------------------------------------------------------------
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
APRIL 30, 2016 (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
its portfolio securities 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 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
OBJECTIVES, RISKS, CHARGES AND EXPENSES CAREFULLY BEFORE INVESTING. YOU CAN
DOWNLOAD THE FUND'S PROSPECTUS AT HTTP://WWW.FTPORTFOLIOS.COM OR CONTACT FIRST
TRUST PORTFOLIOS L.P. AT (800) 621-1675 TO REQUEST A PROSPECTUS, WHICH CONTAINS
THIS AND OTHER INFORMATION ABOUT THE FUND. FOR ADDITIONAL INFORMATION ABOUT THE
RISKS ASSOCIATED WITH INVESTING IN THE FUND, PLEASE SEE THE FUND'S STATEMENT OF
ADDITIONAL INFORMATION, AS WELL AS OTHER REGULATORY FILINGS. READ THESE
DOCUMENTS CAREFULLY BEFORE YOU INVEST. FIRST TRUST PORTFOLIOS L.P. IS THE
DISTRIBUTOR OF THE FIRST TRUST EXCHANGE-TRADED FUND IV.
The following summarizes some of the risks that should be considered for the
Fund.
BANK LOANS RISK. An investment in bank loans subjects the Fund to credit risk,
which is heightened for bank loans in which the Fund invests because companies
that issue such loans tend to be highly leveraged and thus are more susceptible
to the risks of interest deferral, default and/or bankruptcy. Senior Loans, in
which the Fund may invest, are usually rated below investment grade but may also
be unrated. As a result, the risks associated with these Senior Loans are
similar to the risks of high yield fixed income instruments. An economic
downturn would generally lead to a higher non-payment rate, and a Senior Loan
may lose significant market value before a default occurs. Moreover, any
specific collateral used to secure a Senior Loan may decline in value or become
illiquid, which would adversely affect the Senior Loan's value. Unlike the
securities markets, there is no central clearinghouse for loan trades, and the
loan market has not established enforceable settlement standards or remedies for
failure to settle. Therefore, portfolio transactions in Senior Loans may have
uncertain settlement time periods. Senior Loans are subject to a number of risks
described elsewhere in this prospectus, including liquidity risk and the risk of
investing in below investment grade fixed income instruments. Furthermore,
increases in interest rates may result in greater volatility of Senior Loans and
average duration may fluctuate with fluctuations in interest rates.
CALL RISK: If an issuer calls higher-yielding securities held by the Fund,
performance could be adversely impacted.
CASH TRANSACTIONS RISK: The Fund will, under most circumstances, effect a
portion of creations and redemptions for cash, rather than in-kind securities.
As a result, an investment in the Fund may be less tax-efficient than an
investment in an exchange-traded fund that effects its creations and redemption
for in-kind securities. Because the Fund may effect a portion of redemptions for
cash, it may be required to sell portfolio securities in order to obtain the
cash needed to distribute redemption proceeds. A sale of shares may result in
capital gains or losses and may also result in higher brokerage costs.
CONVERTIBLE BONDS RISK: The market values of convertible bonds tend to decline
as interest rates increase and, conversely, to increase as interest rates
decline. A convertible bond's market value also tends to reflect the market
price of the common stock of the issuing company.
COUNTERPARTY RISK: Certain Derivative Instruments that involve counterparties
subject the Fund to the risk that the counterparty could default on its
obligations under the agreement, either through the counterparty's bankruptcy or
failure to perform its obligations. In the event of default, the Fund could
experience lengthy delays in recovering some or all of its assets or no recovery
at all. The Fund's investments in the futures markets also introduce the risk
that its futures commission merchant ("FCM") would default on an obligation set
forth in an agreement between the Fund and the FCM, including the FCM's
obligation to return margin posted in connection with the Fund's futures
contracts.
Page 33
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ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
APRIL 30, 2016 (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. Credit risk may be heightened
for the Fund because it invests a substantial portion of its net assets in high
yield or "junk" debt; such securities, while generally offering higher yields
than investment grade debt with similar maturities, involve greater risks,
including the possibility of dividend or interest deferral, default or
bankruptcy, and are regarded as predominantly speculative with respect to the
issuer's capacity to pay dividends or interest and repay principal. Credit risk
is heightened for loans in which the Fund invests because companies that issue
such loans tend to be highly leveraged and thus are more susceptible to the
risks of interest deferral, default and/or bankruptcy.
CURRENCY RISK: Because the Fund's net asset value is determined on the basis of
U.S. dollars and the Fund invests in foreign securities, you may lose money if
the local currency of a foreign market depreciates against the U.S. dollar, even
if the local currency value of the Fund's holdings goes up. The Fund intends to
hedge its non-U.S. dollar holdings.
DERIVATIVES RISK: The use of Derivative Instruments can lead to losses because
of adverse movements in the price or value of the underlying asset, index or
rate, which may be magnified by certain features of the Derivative Instruments.
These risks are heightened when the Fund's portfolio managers use derivatives to
enhance the Fund's return or as a substitute for a position or security, rather
than solely to hedge (or offset) the risk of a position or security held by the
Fund.
DISTRESSED SECURITIES RISK: The Fund may invest in Distressed Securities,
including stressed, distressed and bankrupt issuers and debt obligations that
are in default. In any investment involving Distressed Securities, there exists
the risk that the transaction involving such securities will be unsuccessful.
Distressed Securities might be repaid only after lengthy workout or bankruptcy
proceedings, during which the issuer might not make any interest or other
payments. Many Distressed Securities are illiquid or trade in low volumes and
thus may be more difficult to value. Companies whose financial condition is
troubled or uncertain and that may be involved in bankruptcy proceedings,
reorganizations or financial restructurings are referred to herein as
"Distressed Securities."
HIGH YIELD SECURITIES RISK: High yield securities are subject to greater market
fluctuations and risk of loss than securities with higher ratings. These
securities are issued by companies that may have limited operating history,
narrowly focused operations, and/or other impediments to the timely payment of
periodic interest and principal at maturity. If the economy slows down or dips
into recession, the issuers of high yield securities may not have sufficient
resources to continue making timely payment of periodic interest and principal
at maturity. The market for high yield securities is smaller and less liquid
than that for investment grade securities. High yield securities are generally
not listed on a national securities exchange but trade in the over-the-counter
markets. Due to the smaller, less liquid market for high yield securities, the
bid-offer spread on such securities is generally greater than it is for
investment grade securities and the purchase or sale of such securities may take
longer to complete.
ILLIQUID SECURITIES RISK: Illiquid securities involve the risk that the
securities will not be able to be sold at the time desired by the Fund or at
prices approximately the value at which the Fund is carrying the securities on
its books.
INCOME RISK: If interest rates fall, the income from the Fund's portfolio will
decline as the Fund invests the proceeds from new share sales, or from matured
or called debt securities, at interest rates that are below the portfolio's
current earnings rate.
INTEREST RATE RISK: Interest rate risk is the risk that the value of the debt
securities in the Fund's portfolio will decline because of rising market
interest rates. Interest rate risk is generally lower for shorter term debt
securities and higher for longer term debt securities. Duration is a measure of
the expected price volatility of a debt security as a result of changes in
market rates of interest, based on, among other factors, the weighted average
timing of the debt security's expected principal and interest payments. In
general, duration represents the expected percentage in the value of a security
for an immediate 1% change in interest rates. Therefore, prices of debt
securities with shorter durations tend to be less sensitive to interest rate
changes than debt securities with longer durations. As the value of a debt
security changes over time, so will its duration.
LIQUIDITY RISK: The Fund invests a substantial portion of its assets in
lower-quality debt issued by companies that are highly leveraged. Lower-quality
debt tends to be less liquid than higher-quality debt. Moreover, smaller debt
issues tend to be less liquid than larger debt issues. If the economy
experiences a sudden downturn, or if the debt markets for such companies become
distressed, the Fund may have particular difficulty selling its assets in
sufficient amounts, at reasonable prices and in a sufficiently timely manner to
raise the cash necessary to meet any potentially heavy redemption requests by
Fund shareholders. As of the fourth quarter of 2015, the market for high yield
debt has experienced decreased liquidity, and investor perception of increased
risk has caused yield spreads to widen. Decreased liquidity may negatively
affect the Fund's ability to mitigate risk and meet redemptions.
Page 34
--------------------------------------------------------------------------------
ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST TACTICAL HIGH YIELD ETF (HYLS)
APRIL 30, 2016 (UNAUDITED)
MANAGEMENT RISK: The Fund is subject to management risk because it is an
actively managed portfolio. In managing the Fund's investment portfolio, the
advisor will apply investment techniques and risk analyses that may not have the
desired result. There can be no guarantee that the Fund will meet its investment
objectives.
MARKET RISK: Market risk is the risk that a particular security owned by the
Fund or shares of the Fund in general may fall in value. Securities are subject
to market fluctuations caused by such factors as economic, political, regulatory
or market developments, changes in interest rates and perceived trends in stock
prices. Overall stock values could decline generally or could underperform other
investments.
NON-U.S. SECURITIES RISK: Non-U.S. securities are subject to higher volatility
than securities of domestic issuers due to possible adverse political, social or
economic developments; restrictions on foreign investment or exchange of
securities; lack of liquidity; currency exchange rates; excessive taxation;
government seizure of assets; different legal or accounting standards; and less
government supervision and regulation of exchanges in foreign countries.
OTHER DEBT SECURITIES RISK: Secured loans that are not first lien, loans that
are unsecured and debt securities are subject to many of the same risks that
affect senior loans; however they are often unsecured and/or lower in the
issuer's capital structure than senior loans, and thus may be exposed to greater
risk of default and lower recoveries in the event of a default. This risk can be
further heightened in the case of below investment grade instruments.
Additionally, most fixed-income securities are fixed-rate and thus are generally
more susceptible than floating rate loans to price volatility related to changes
in prevailing interest rates.
PREPAYMENT RISK: Loans are subject to pre-payment risk. The degree to which
borrowers prepay loans, whether as a contractual requirement or at their
election, may be affected by general business conditions, the financial
condition of the borrower and competitive conditions among loan investors, among
others. As such, prepayments cannot be predicted with accuracy. Upon a
prepayment, either in part or in full, the actual outstanding debt on which the
Fund derives interest income will be reduced. The Fund may not be able to
reinvest the proceeds received on terms as favorable as the prepaid loan.
SHORT SALE RISK: The Fund uses short sales for investment and risk management
purposes, including when the Fund's advisor anticipates that the market price of
securities will decline or in the aggregate will underperform the Index. In
times of unusual or adverse market, economic, regulatory or political
conditions, the Fund may not be able, fully or partially, to implement its short
selling strategy. Periods of unusual or adverse market, economic, regulatory or
political conditions may exist for relatively long periods of time. The Fund
will have substantial short positions and must borrow those securities to make
delivery to the buyer. The Fund may not be able to borrow a security that it
needs to deliver or it may not be able to close out a short position at an
acceptable price and may have to sell related long positions before it had
intended to do so. Thus, the Fund may not be able to successfully implement its
short sale strategy due to limited availability of desired securities or for
other reasons. Also, there is the risk that the counterparty to a short sale may
fail to honor its contractual terms, causing a loss to the Fund.
Page 35
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FIRST TRUST
First Trust Exchange-Traded Fund IV
INVESTMENT ADVISOR
First Trust Advisors L.P.
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
ADMINISTRATOR, CUSTODIAN,
FUND ACCOUNTANT &
TRANSFER AGENT
The Bank of New York Mellon
101 Barclay Street
New York, NY 10286
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
111 S. Wacker Drive
Chicago, IL 60606
LEGAL COUNSEL
Chapman and Cutler LLP
111 W. Monroe Street
Chicago, IL 60603
[BLANK BACK COVER]
FIRST TRUST
First Trust Exchange-Traded Fund IV
--------------------------------------------------------------------------------
First Trust Enhanced Short
Maturity ETF (FTSM)
Semi-Annual Report
For the Six Months Ended
April 30, 2016
--------------------------------------------------------------------------------
TABLE OF CONTENTS
--------------------------------------------------------------------------------
FIRST TRUST ENHANCED SHORT MATURITY ETF (FTSM)
SEMI-ANNUAL REPORT
APRIL 30, 2016
Shareholder Letter........................................................... 1
Fund Performance Overview.................................................... 2
Portfolio Management......................................................... 5
Understanding Your Fund Expenses............................................. 6
Portfolio of Investments..................................................... 7
Statement of Assets and Liabilities.......................................... 18
Statement of Operations...................................................... 19
Statements of Changes in Net Assets.......................................... 20
Financial Highlights......................................................... 21
Notes to Financial Statements................................................ 22
Additional Information....................................................... 28
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning of
the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934,
as amended. Forward-looking statements include statements regarding the goals,
beliefs, plans or current expectations of First Trust Advisors L.P. ("First
Trust" or the "Advisor") and its representatives, taking into account the
information currently available to them. Forward-looking statements include all
statements that do not relate solely to current or historical fact. For example,
forward-looking statements include the use of words such as "anticipate,"
"estimate," "intend," "expect," "believe," "plan," "may," "should," "would" or
other words that convey uncertainty of future events or outcomes.
Forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
the series of First Trust Exchange-Traded Fund IV (the "Trust") described in
this report (First Trust Enhanced Short Maturity ETF; hereinafter referred to as
the "Fund") to be materially different from any future results, performance or
achievements expressed or implied by the forward-looking statements. When
evaluating the information included in this report, you are cautioned not to
place undue reliance on these forward-looking statements, which reflect the
judgment of the Advisor and its representatives only as of the date hereof. We
undertake no obligation to publicly revise or update these forward-looking
statements to reflect events and circumstances that arise after the date hereof.
PERFORMANCE AND RISK DISCLOSURE
There is no assurance that the Fund will achieve its investment objective. The
Fund is subject to market risk, which is the possibility that the market values
of securities owned by the Fund will decline and that the value of the Fund
shares may therefore be less than what you paid for them. Accordingly, you can
lose money investing in the Fund. See "Risk Considerations" in the Additional
Information section of this report for a discussion of 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 the prospectus, the statement of additional information,
this report and other Fund regulatory filings.
--------------------------------------------------------------------------------
SHAREHOLDER LETTER
--------------------------------------------------------------------------------
FIRST TRUST ENHANCED SHORT MATURITY ETF (FTSM)
SEMI-ANNUAL LETTER FROM THE CHAIRMAN AND CEO
APRIL 30, 2016
Dear Shareholders:
Thank you for your investment in First Trust Enhanced Short Maturity ETF (the
"Fund").
First Trust Advisors L.P. ("First Trust") is pleased to provide you with the
semi-annual report which contains detailed information about your investment for
the six months ended April 30, 2016. Additionally, First Trust compiled the
Fund's financial statements for you to review. We encourage you to read this
report and discuss it with your financial advisor.
While markets were up and down during 2015, we believe there are three important
things to remember. First, the U.S. economy grew, despite the massive decline in
oil prices. Second, the tapering that began in 2014 by the Federal Reserve (the
"Fed") did not stop growth in the U.S. economy. Finally, the long-anticipated
rate hike by the Fed in December had little effect on the money supply, and the
stock market was not shocked by the hike. Early in 2016, many investors were
concerned that the volatility we saw in the market in 2015 would continue, and
it did. From December 31, 2015 through February 11, 2016, the S&P 500(R) Index
declined by 10.27%. Since then, the market has made a steady comeback, and as of
April 30, 2016, the S&P 500(R) Index was up 13.39%.
First Trust believes that having a long-term investment horizon and being
invested in quality products can help you reach your goals, despite how the
market behaves. We have always maintained perspective about the markets and
believe investors should as well. We will continue to strive to provide quality
investments each and every day, which has been one of the hallmarks of our firm
since its inception 25 years ago.
Thank you for giving First Trust the opportunity to be a part of your investment
plan. We value our relationship with you and will continue to focus on helping
investors like you reach your financial goals.
Sincerely,
/s/ James A. Bowen
James A. Bowen
Chairman of the Board of Trustees
Chief Executive Officer of First Trust Advisors L.P
Page 1
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FUND PERFORMANCE OVERVIEW (UNAUDITED)
--------------------------------------------------------------------------------
FIRST TRUST ENHANCED SHORT MATURITY ETF (FTSM)
The investment objective of First Trust Enhanced Short Maturity ETF (the "Fund")
is to seek current income, consistent with preservation of capital and daily
liquidity. Under normal market conditions, the Fund intends to achieve its
investment objective by investing at least 80% of its net assets in a portfolio
of U.S. dollar-denominated fixed- and variable-rate instruments (collectively,
"Fixed Income Securities") issued by U.S. and non-U.S. public and private sector
entities. Fixed Income Securities will include the following types of fixed- and
variable-rate debt securities: corporate and government bonds and notes; agency
securities; instruments of non-U.S. issuers in developed markets; privately
issued securities; asset-backed securities; mortgage-related securities;
municipal bonds; and money market securities. Shares of the Fund are listed on
The Nasdaq Stock Market LLC under the ticker symbol "FTSM."
The Fund's investment advisor, First Trust Advisors L.P. (the "Advisor") selects
securities for the portfolio by evaluating fixed income sectors and macro market
trends while completing bottom-up analysis of individual securities. Portfolio
securities are selected based upon relative value in the context of overall
portfolio duration. Key inputs for the screens in the securities selection
process include, but are not limited to, credit quality, yield, interest rate
sensitivity and liquidity. The Fund's holdings are systematically monitored for
meaningful changes in performance and risk measures. A security will generally
be sold when the Advisor believes that a security can be substituted for a
similar investment that represents better relative value; it lacks adequate
compensation for embedded credit risk; or when rebalancing the portfolio to
maintain diversification. Under normal market conditions, the Fund's average
duration is expected to be below one year and the average maturity of the Fund's
portfolio is expected to be below three years.
--------------------------------------------------------------------------------------------------------------------------
PERFORMANCE
--------------------------------------------------------------------------------------------------------------------------
ANNUAL AVERAGE CUMULATIVE
TOTAL RETURNS TOTAL RETURNS
6 Months Ended 1 Year Ended Inception (8/5/14) Inception (8/5/14)
4/30/16 4/30/16 to 4/30/16 to 4/30/16
FUND PERFORMANCE
NAV 0.34% 0.32% 0.46% 0.79%
Market Price 0.38% 0.32% 0.44% 0.76%
INDEX PERFORMANCE
BofA Merrill Lynch 0-1 Year U.S. Treasury Index 0.25% 0.34% 0.26% 0.45%
--------------------------------------------------------------------------------------------------------------------------
Total returns for the period since inception are calculated from the inception
date of the Fund. "Average Annual Total Returns" represent the average annual
change in value of an investment over the period indicated. "Cumulative Total
Returns" represent the total change in value of an investment over the period
indicated.
The Fund's per share net asset value ("NAV") is the value of one share of the
Fund and is computed by dividing the value of all assets of the Fund (including
accrued interest and dividends), less all liabilities (including accrued
expenses and dividends declared but unpaid), by the total number of outstanding
shares. The price used to calculate market return ("Market Price") is determined
by using the midpoint between the highest bid and the lowest offer on the stock
exchange on which shares of the Fund are listed for trading as of the time that
the Fund's NAV is calculated. Since shares of the Fund did not trade in the
secondary market until after the Fund's inception, for the period from inception
to the first day of secondary market trading in shares of the Fund, the NAV of
the Fund is used as a proxy for the secondary market trading price to calculate
market returns. NAV and market returns assume that all distributions have been
reinvested in the Fund at NAV and Market Price, respectively.
An index is a statistical composite that tracks a specified financial market or
sector. Unlike the Fund, the index does not actually hold a portfolio of
securities and therefore does not incur the expenses incurred by the Fund. These
expenses negatively impact the performance of the Fund. Also, market returns do
not include brokerage commissions that may be payable on secondary market
transactions. If brokerage commissions were included, market returns would be
lower. The total returns presented reflect the reinvestment of dividends on
securities in the 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 (UNAUDITED) (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST ENHANCED SHORT MATURITY ETF (FTSM)
--------------------------------------------------------
% OF TOTAL
ASSET CLASSIFICATION INVESTMENTS & CASH
--------------------------------------------------------
Commercial Paper 47.39%
Corporate Bonds 32.42
Mortgage-Backed Securities 9.47
U.S. Government Agency Mortgage-
Backed Securities 6.18
Foreign Corporate Bonds 4.27
U.S. Government Notes 0.26
Cash 0.01
-------
Total 100.00%
=======
--------------------------------------------------------
% OF TOTAL
CREDIT QUALITY(1) INVESTMENTS & CASH
--------------------------------------------------------
Government 6.39%
AAA 5.94
AA+ 0.84
AA 1.71
AA- 3.37
A+ 1.76
A 5.23
A- 6.32
BBB+ 10.81
BBB 5.14
BBB- 2.64
A-1+ (Short-Term) 0.53
A-1 (Short-Term) 1.05
A-2 (Short-Term) 25.28
A-3 (Short-Term) 20.53
Not Rated 2.45
Cash 0.01
-------
Total 100.00%
=======
--------------------------------------------------------
% OF TOTAL
TOP TEN HOLDINGS INVESTMENTS
--------------------------------------------------------
Nabors Industries, Inc. 1.58%
Williams Partners, L.P. 1.58
Ford Motor Credit Co. LLC 1.32
Hawaiian Electric Industries, Inc. 1.32
Pentair Finance S.A. 1.32
Discovery Communications LLC 1.28
Commercial Mortgage Trust 2007-GG9,
Class A4 1.24
Kroger (The) Co. 1.13
Becton Dickinson and Co. 1.10
JP Morgan Chase Commercial Mortgage
Securities Trust 2007-CB18,
Class A1A 1.07
-------
Total 12.94%
=======
-----------------------------
(1) The ratings are by Standard & Poor's Ratings Group, a division of The
McGraw-Hill Companies, Inc. A credit rating is an assessment provided by a
nationally recognized statistical rating organization (NRSRO) of the
creditworthiness of an issuer with respect to debt obligations. Ratings
are measured highest to lowest on a scale that generally ranges from AAA
to D for long-term ratings and A-1+ to C for short-term ratings.
Investment grade is defined as those issuers that have a long-term credit
rating of BBB- or higher or a short-term credit rating of A-3 or higher.
The credit ratings shown relate to the credit worthiness of the issuers of
the underlying securities in the Fund, and not to the Fund or its shares.
U.S. Treasury and U.S. Agency mortgage-backed securities appear under
"Government". Credit ratings are subject to change.
Page 3
--------------------------------------------------------------------------------
FUND PERFORMANCE OVERVIEW (UNAUDITED) (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST ENHANCED SHORT MATURITY ETF (FTSM)
PERFORMANCE OF A $10,000 INITIAL INVESTMENT
AUGUST 5, 2014 - APRIL 30, 2016
First Trust BofA Merrill Lynch
Enhanced Short 0-1 Year U.S.
Maturity ETF Treasury Index
8/5/14 $10,000 $10,000
10/31/14 10,016 10,002
4/30/15 10,047 10,011
10/31/15 10,045 10,020
4/30/16 10,079 10,045
Performance figures assume reinvestment of all distributions and do not reflect
the deduction of taxes that a shareholder would pay on Fund distributions or the
redemption or sale of Fund shares. An index is a statistical composite that
tracks a specified financial market or sector. Unlike the Fund, the index does
not actually hold a portfolio of securities and therefore does not incur the
expenses incurred by the Fund. These expenses negatively impact the performance
of the Fund. The Fund's past performance does not predict future performance.
FREQUENCY DISTRIBUTION OF DISCOUNTS AND PREMIUMS
BID/ASK MIDPOINT VS. NAV THROUGH APRIL 30, 2016
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 6, 2014 (commencement
of trading) through April 30, 2016. Shareholders may pay more than NAV when they
buy Fund shares and receive less than NAV when they sell those shares because
shares are bought and sold at current market price. Data presented represents
past performance and cannot be used to predict future results.
NUMBER OF DAYS BID/ASK MIDPOINT NUMBER OF DAYS BID/ASK MIDPOINT
AT/ABOVE NAV BELOW NAV
------------------------------------- -------------------------------------
0.00%- 0.50%- 1.00%- 0.00%- 0.50%- 1.00%-
FOR THE PERIOD 0.49% 0.99% 1.99% >=2.00% 0.49% 0.99% 1.99% >=2.00%
8/6/14 - 10/31/14 47 0 0 0 15 0 0 0
11/1/14 - 10/31/15 54 0 0 0 197 0 0 0
11/1/15 - 4/30/16 52 0 0 0 72 0 0 0
Page 4
PORTFOLIO MANAGEMENT
FIRST TRUST ENHANCED SHORT MATURITY ETF (FTSM)
SEMI-ANNUAL REPORT
APRIL 30, 2016 (UNAUDITED)
INVESTMENT MANAGER
First Trust Advisors L.P. ("First Trust") is the investment advisor to the First
Trust Enhanced Short Maturity ETF (the "Fund" or "FTSM"). 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 or sub-advisor for
seven mutual fund portfolios, nine exchange-traded trusts consisting of 102
series and 16 closed-end funds and is also the portfolio supervisor of certain
unit investment trusts sponsored by First Trust Portfolios L.P. ("FTP").
PORTFOLIO MANAGEMENT TEAM
TODD LARSON, CFA - VICE PRESIDENT, PORTFOLIO MANAGER
JEREMIAH CHARLES - VICE PRESIDENT, PORTFOLIO MANAGER
JAMES SNYDER - VICE PRESIDENT, PORTFOLIO MANAGER
ERIC MAISEL, CFA - VICE PRESIDENT, PORTFOLIO MANAGER
WILLIAM HOUSEY, CFA - SENIOR VICE PRESIDENT, SENIOR PORTFOLIO MANAGER
SCOTT D. FRIES, CFA - SENIOR VICE PRESIDENT, PORTFOLIO MANAGER
Page 5
FIRST TRUST ENHANCED SHORT MATURITY ETF (FTSM)
UNDERSTANDING YOUR FUND EXPENSES
APRIL 30, 2016 (UNAUDITED)
As a shareholder of First Trust Enhanced Short Maturity ETF (the "Fund"), you
incur two types of costs: (1) transaction costs; and (2) ongoing costs,
including management fees, distribution and/or service fees, if any, and other
Fund expenses. This Example is intended to help you understand your ongoing
costs of investing in the Fund and to compare these costs with the ongoing costs
of investing in other funds.
The Example is based on an investment of $1,000 invested at the beginning of the
period and held through the six-month period ended April 30, 2016.
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 period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second line in the following table provides information about hypothetical
account values and hypothetical expenses based on the Fund's actual expense
ratio and an assumed rate of return of 5% per year before expenses, which is not
the Fund's actual return. The hypothetical account values and expenses may not
be used to estimate the actual ending account balance or expenses you paid for
the period. You may use this information to compare the ongoing costs of
investing in the Fund and other funds. To do so, compare this 5% hypothetical
example with the 5% hypothetical examples that appear in the shareholder reports
of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs such as brokerage
commissions. Therefore, the second line in the table is useful in comparing
ongoing costs only, and will not help you determine the relative total costs of
owning different funds. In addition, if these transactional costs were included,
your costs would have been higher.
-------------------------------------------------------------------------------------------------------------------------
ANNUALIZED
EXPENSE RATIO EXPENSES PAID
BEGINNING ENDING BASED ON THE DURING THE
ACCOUNT VALUE ACCOUNT VALUE SIX-MONTH SIX-MONTH
NOVEMBER 1, 2015 APRIL 30, 2016 PERIOD (a) PERIOD (b)
-------------------------------------------------------------------------------------------------------------------------
FIRST TRUST ENHANCED SHORT MATURITY ETF (FTSM)
Actual $1,000.00 $1,003.40 0.24% $1.20
Hypothetical (5% return before expenses) $1,000.00 $1,023.67 0.24% $1.21
(a) These expense ratios reflect expense waivers. See Note 3 in the Notes to
Financial Statements.
(b) Expenses are equal to the annualized expense ratio as indicated in the
table, multiplied by the average account value over the period (November
1, 2015 through April 30, 2016), multiplied by 182/366 (to reflect the
one-half year period).
Page 6
FIRST TRUST ENHANCED SHORT MATURITY ETF (FTSM)
PORTFOLIO OF INVESTMENTS
APRIL 30, 2016 (UNAUDITED)
ANNUALIZED
PRINCIPAL YIELD ON DATE STATED
VALUE DESCRIPTION OF PURCHASE MATURITY VALUE
---------------- --------------------------------------------- ------------- -------- ---------------
COMMERCIAL PAPER -- 47.2%
AGRICULTURE -- 0.5%
$ 2,000,000 BAT International Finance PLC................ 0.83% 05/17/16 $ 1,999,280
---------------
CHEMICALS -- 2.4%
2,000,000 Albemarle Corp. ............................. 1.18% 05/03/16 1,999,873
2,000,000 Albemarle Corp. ............................. 1.18% 05/04/16 1,999,808
2,000,000 Albemarle Corp. ............................. 1.23% 05/11/16 1,999,333
2,950,000 Valspar (The) Corp. ......................... 0.71% 05/04/16 2,949,828
---------------
8,948,842
---------------
COMPUTERS -- 1.0%
4,000,000 EMC Corp. ................................... 0.84% 05/10/16 3,999,180
---------------
DIVERSIFIED FINANCIAL SERVICES -- 1.3%
1,000,000 Hitachi Capital America Corp. ............... 0.99% 05/13/16 999,677
3,000,000 Volvo Treasury North America, L.P. .......... 0.84% 05/05/16 2,999,727
1,000,000 Volvo Treasury North America, L.P. .......... 0.85% 05/11/16 999,769
---------------
4,999,173
---------------
ELECTRIC -- 5.0%
2,000,000 Duke Energy Corp. ........................... 0.70% 05/05/16 1,999,847
2,000,000 Duke Energy Corp. ........................... 0.82% 05/12/16 1,999,511
2,000,000 Entergy Corp. ............................... 1.07% 05/17/16 1,999,067
2,000,000 Entergy Corp. ............................... 1.18% 05/26/16 1,998,402
1,000,000 Exelon Generation Co. LLC.................... 0.97% 05/06/16 999,868
5,000,000 Hawaiian Electric Industries, Inc. .......... 0.97% 05/05/16 4,999,472
2,000,000 Pepco Holdings LLC........................... 0.82% 05/05/16 1,999,822
2,000,000 SCANA Corp. ................................. 1.02% 05/04/16 1,999,833
1,100,000 SCANA Corp. ................................. 1.02% 05/12/16 1,099,664
---------------
19,095,486
---------------
ELECTRONICS -- 1.3%
3,000,000 Arrow Electronics, Inc. ..................... 0.92% 05/04/16 2,999,775
2,000,000 Arrow Electronics, Inc. ..................... 0.97% 05/11/16 1,999,472
---------------
4,999,247
---------------
FOOD -- 1.3%
2,000,000 Kraft Heinz Foods Co......................... 0.97% 05/18/16 1,999,102
2,000,000 Kraft Heinz Foods Co......................... 1.02% 05/25/16 1,998,667
1,000,000 Kraft Heinz Foods Co......................... 1.02% 06/01/16 999,139
---------------
4,996,908
---------------
GAS -- 2.5%
2,000,000 NiSource Finance Corp. ...................... 0.88% 05/02/16 1,999,953
2,000,000 NiSource Finance Corp. ...................... 0.87% 05/09/16 1,999,622
2,000,000 NiSource Finance Corp. ...................... 0.97% 05/16/16 1,999,208
1,350,000 Sempra Global................................ 0.92% 05/02/16 1,349,966
2,000,000 Sempra Global................................ 0.92% 05/12/16 1,999,450
---------------
9,348,199
---------------
HEALTH CARE PRODUCTS -- 1.5%
2,000,000 Thermo Fisher Scientific, Inc. .............. 0.87% 05/03/16 1,999,906
3,826,000 Thermo Fisher Scientific, Inc. .............. 0.88% - 0.97% 05/12/16 3,824,911
---------------
5,824,817
---------------
See Notes to Financial Statements Page 7
FIRST TRUST ENHANCED SHORT MATURITY ETF (FTSM)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2016 (UNAUDITED)
ANNUALIZED
PRINCIPAL YIELD ON DATE STATED
VALUE DESCRIPTION OF PURCHASE MATURITY VALUE
---------------- --------------------------------------------- ------------- -------- ---------------
COMMERCIAL PAPER (CONTINUED)
HEALTH CARE SERVICES -- 1.0%
$ 2,000,000 Humana, Inc. ................................ 0.88% 05/09/16 $ 1,999,618
2,000,000 Humana, Inc. ................................ 0.87% 05/27/16 1,998,772
---------------
3,998,390
---------------
HOUSEWARES -- 0.5%
2,000,000 Newell Brands, Inc. ......................... 1.33% 06/09/16 1,997,182
---------------
LODGING -- 1.6%
4,000,000 Wyndham Worldwide Corp. ..................... 0.92% - 0.99% 05/03/16 3,999,797
1,000,000 Wyndham Worldwide Corp. ..................... 0.97% 05/10/16 999,762
1,000,000 Wyndham Worldwide Corp. ..................... 0.92% 05/17/16 999,600
---------------
5,999,159
---------------
MEDIA -- 3.1%
4,850,000 Discovery Communications LLC................. 0.87% 05/02/16 4,849,885
1,823,000 Thomson Reuters Corp. ....................... 0.82% 05/25/16 1,822,028
3,000,000 Viacom, Inc. ................................ 1.23% - 1.28% 05/05/16 2,999,595
2,000,000 Viacom, Inc. ................................ 1.08% 05/11/16 1,999,411
---------------
11,670,919
---------------
MINING -- 1.0%
1,700,000 Alcoa, Inc. ................................. 1.00% 05/03/16 1,699,907
2,300,000 Alcoa, Inc. ................................. 1.00% 05/05/16 2,299,750
---------------
3,999,657
---------------
MISCELLANEOUS MANUFACTURING -- 2.4%
1,000,000 ITT Corp. ................................... 0.88% 05/02/16 999,976
1,000,000 ITT Corp. ................................... 0.87% 05/06/16 999,882
5,000,000 Pentair Finance S.A. ........................ 1.18% - 1.23% 05/05/16 4,999,345
2,000,000 Textron, Inc. ............................... 0.92% 05/23/16 1,998,900
---------------
8,998,103
---------------
OFFICE & BUSINESS EQUIPMENT -- 2.4%
2,000,000 Pitney Bowes, Inc. .......................... 0.97% 05/04/16 1,999,842
2,000,000 Pitney Bowes, Inc. .......................... 0.94% 05/18/16 1,999,131
3,000,000 Xerox Corp. ................................. 1.10% 05/09/16 2,999,280
2,000,000 Xerox Corp. ................................. 1.10% 05/17/16 1,999,040
---------------
8,997,293
---------------
OIL & GAS -- 5.3%
1,000,000 Canadian Natural Resources Ltd. ............. 1.02% 05/03/16 999,944
2,000,000 Canadian Natural Resources Ltd. ............. 1.02% 05/04/16 1,999,834
2,000,000 Canadian Natural Resources Ltd. ............. 1.12% 05/06/16 1,999,694
2,000,000 Eni Finance USA, Inc. ....................... 0.83% 05/13/16 1,999,460
2,000,000 Marathon Petroleum Corp. .................... 0.87% 05/02/16 1,999,953
2,000,000 Motiva Enterprises LLC....................... 1.28% 05/02/16 1,999,930
2,000,000 Motiva Enterprises LLC....................... 1.23% 05/09/16 1,999,467
1,000,000 Motiva Enterprises LLC....................... 1.35% 05/16/16 999,450
6,000,000 Nabors Industries, Inc. ..................... 1.18% 05/02/16 5,999,807
---------------
19,997,539
---------------
Page 8 See Notes to Financial Statements
FIRST TRUST ENHANCED SHORT MATURITY ETF (FTSM)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2016 (UNAUDITED)
ANNUALIZED
PRINCIPAL YIELD ON DATE STATED
VALUE DESCRIPTION OF PURCHASE MATURITY VALUE
---------------- --------------------------------------------- ------------- -------- ---------------
COMMERCIAL PAPER (CONTINUED)
OIL & GAS SERVICES -- 1.6%
$ 2,000,000 FMC Technologies, Inc. ...................... 0.87% 05/02/16 $ 1,999,953
2,000,000 FMC Technologies, Inc. ...................... 0.92% 05/12/16 1,999,450
2,000,000 Schlumberger Holdings Corp. ................. 0.82% 05/18/16 1,999,244
---------------
5,998,647
---------------
PHARMACEUTICALS -- 1.0%
4,000,000 Baxalta, Inc. ............................... 0.94% 05/12/16 3,998,876
---------------
PIPELINES -- 7.6%
2,000,000 Enbridge Energy Partners, L.P. .............. 1.20% - 1.24% 05/02/16 1,999,934
2,000,000 Enbridge Energy Partners, L.P. .............. 1.23% 05/04/16 1,999,800
2,000,000 Enbridge Energy Partners, L.P. .............. 1.33% 05/05/16 1,999,711
4,000,000 Kinder Morgan, Inc. ......................... 1.12% 05/03/16 3,999,756
1,000,000 Kinder Morgan, Inc. ......................... 1.12% 05/06/16 999,847
3,000,000 ONEOK Partners, L.P. ........................ 1.02% 05/04/16 2,999,750
2,000,000 Spectra Energy Partners, L.P. ............... 0.87% 05/09/16 1,999,622
2,000,000 Spectra Energy Partners, L.P. ............... 0.92% 05/16/16 1,999,250
3,000,000 Sunoco Logistics Partners Operations, L.P. .. 1.12% 05/02/16 2,999,909
1,000,000 Sunoco Logistics Partners Operations, L.P. .. 1.12% 05/04/16 999,908
1,000,000 Sunoco Logistics Partners Operations, L.P. .. 1.07% 05/06/16 999,854
6,000,000 Williams Partners, L.P. ..................... 1.23% 05/02/16 5,999,799
---------------
28,997,140
---------------
RETAIL -- 1.6%
1,000,000 AutoNation, Inc. ............................ 0.97% 05/02/16 999,974
3,000,000 AutoNation, Inc. ............................ 1.07% 05/03/16 2,999,824
2,000,000 AutoNation, Inc. ............................ 1.07% 05/11/16 1,999,417
---------------
5,999,215
---------------
TRANSPORTATION -- 1.3%
2,730,000 Tyco International Finance S.A. ............. 0.87% - 0.88% 05/02/16 2,729,935
1,100,000 Tyco International Finance S.A. ............. 0.87% 05/10/16 1,099,766
1,000,000 Tyco International Finance S.A. ............. 0.87% 05/16/16 999,646
---------------
4,829,347
---------------
TOTAL COMMERCIAL PAPER.................................................... 179,692,599
(Cost $179,692,599) ---------------
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- --------------------------------------------- ------------- -------- ---------------
CORPORATE BONDS -- 32.3%
AGRICULTURE -- 0.3%
1,266,000 Reynolds American, Inc. ..................... 3.50% 08/04/16 1,274,652
---------------
AUTO MANUFACTURERS -- 4.0%
1,000,000 American Honda Finance Corp., Medium-Term
Note (a).................................. 1.44% 02/22/19 1,003,175
1,300,000 Daimler Finance North America LLC (a) (b).... 1.30% 08/01/16 1,300,633
500,000 Daimler Finance North America LLC (b)........ 2.63% 09/15/16 503,173
250,000 Daimler Finance North America LLC (a) (b).... 0.99% 03/10/17 249,757
5,020,000 Ford Motor Credit Co. LLC (a)................ 1.87% 05/09/16 5,020,743
2,050,000 Ford Motor Credit Co. LLC, Medium-Term
Note (a).................................. 1.41% 01/17/17 2,047,934
See Notes to Financial Statements Page 9
FIRST TRUST ENHANCED SHORT MATURITY ETF (FTSM)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2016 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- --------------------------------------------- ------------- -------- ---------------
CORPORATE BONDS (CONTINUED)
AUTO MANUFACTURERS (CONTINUED)
$ 1,256,000 General Motors Financial Co., Inc. .......... 2.75% 05/15/16 $ 1,256,731
500,000 General Motors Financial Co., Inc. (a)....... 2.69% 01/15/19 503,238
2,075,000 Nissan Motor Acceptance Corp. (a) (b)........ 1.33% 09/26/16 2,078,795
500,000 Toyota Motor Credit Corp., Medium-Term
Note (a).................................. 1.01% 04/06/18 500,203
800,000 Toyota Motor Credit Corp., Medium-Term
Note (a).................................. 1.44% 02/19/19 808,004
---------------
15,272,386
---------------
BANKS -- 13.2%
600,000 Bank of America Corp. ....................... 3.75% 07/12/16 603,301
400,000 Bank of America Corp. ....................... 5.63% 10/14/16 408,230
1,030,000 Bank of America Corp., Medium-Term Note (a).. 1.24% 08/25/17 1,027,198
300,000 Bank of America Corp., Medium-Term Note (a).. 1.69% 03/22/18 301,608
2,600,000 Bank of America N.A. (a)..................... 0.91% 06/15/16 2,600,384
500,000 Bank of America N.A. (a)..................... 1.09% 11/14/16 500,505
1,000,000 Bank of America N.A. (a)..................... 1.09% 02/14/17 1,000,663
1,000,000 Bank of New York Mellon (The) Corp.,
Medium-Term Note (a)...................... 1.49% 08/17/20 997,509
1,575,000 BB&T Corp., Medium-Term Note (a)............. 1.49% 06/15/18 1,575,970
500,000 Capital One Financial Corp. ................. 3.15% 07/15/16 502,209
825,000 Capital One N.A./Mclean VA. (a).............. 1.30% 02/05/18 823,517
2,300,000 Citigroup, Inc. (a).......................... 0.91% 06/09/16 2,300,264
2,280,000 Citigroup, Inc. (a).......................... 1.60% 07/25/16 2,283,636
400,000 Citigroup, Inc. ............................. 1.30% 11/15/16 400,363
900,000 Citigroup, Inc. (a).......................... 1.18% 03/10/17 899,206
500,000 Citigroup, Inc. (a).......................... 1.32% 04/27/18 497,387
500,000 Citigroup, Inc. (a).......................... 1.95% 10/26/20 502,239
1,900,000 Fifth Third Bank (a)......................... 1.13% 11/18/16 1,902,641
500,000 Goldman Sachs Group, (The), Inc. ............ 5.75% 10/01/16 509,861
400,000 Goldman Sachs Group, (The), Inc. ............ 5.63% 01/15/17 411,952
500,000 Goldman Sachs Group, (The), Inc. (a)......... 1.84% 04/30/18 502,730
1,000,000 Goldman Sachs Group, (The), Inc. (a)......... 1.68% 04/25/19 1,001,095
500,000 Goldman Sachs Group, (The), Inc. (a)......... 1.83% 09/15/20 498,032
2,000,000 Goldman Sachs Group, (The), Inc.,
Medium-Term Note (a)...................... 1.26% 06/04/17 1,999,476
3,950,000 JPMorgan Chase & Co. (a)..................... 1.14% 02/15/17 3,951,816
500,000 JPMorgan Chase & Co. (a)..................... 1.54% 01/25/18 502,298
1,000,000 JPMorgan Chase & Co. (a)..................... 1.46% 03/22/19 1,000,099
1,350,000 JPMorgan Chase Bank N.A. (a)................. 0.96% 06/13/16 1,350,414
2,421,000 KeyBank N.A. (a)............................. 1.12% 11/25/16 2,423,600
2,010,000 Morgan Stanley, Global Medium-Term Note (a).. 1.92% 04/25/18 2,034,564
1,900,000 Morgan Stanley, Medium-Term Note............. 5.75% 10/18/16 1,940,746
2,800,000 Morgan Stanley, Medium-Term Note (a)......... 1.08% 10/18/16 2,802,338
325,000 National City Bank/Cleveland OH (a).......... 1.01% 06/07/17 324,286
800,000 PNC Bank N.A. (a)............................ 0.92% 08/01/17 797,794
2,700,000 US Bank N.A./Cincinnati OH (a)............... 1.22% 01/29/18 2,701,034
1,000,000 Wachovia Corp. (a)........................... 1.00% 10/15/16 1,000,503
2,105,000 Wachovia Corp. (a)........................... 0.90% 06/15/17 2,100,786
400,000 Wells Fargo & Co............................. 5.13% 09/15/16 406,181
280,000 Wells Fargo Bank N.A......................... 5.75% 05/16/16 280,459
Page 10 See Notes to Financial Statements
FIRST TRUST ENHANCED SHORT MATURITY ETF (FTSM)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2016 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- --------------------------------------------- ------------- -------- ---------------
CORPORATE BONDS (CONTINUED)
BANKS (CONTINUED)
$ 2,000,000 Wells Fargo Bank N.A. (a).................... 1.17% 09/07/17 $ 2,003,048
500,000 Wells Fargo Bank N.A. Medium-Term Note (a)... 1.38% 01/22/18 502,498
---------------
50,172,440
---------------
BEVERAGES -- 0.4%
1,400,000 Anheuser-Busch InBev Finance Inc. (a)........ 1.88% 02/01/21 1,431,874
---------------
BIOTECHNOLOGY -- 1.4%
2,150,000 Amgen, Inc. ................................. 2.30% 06/15/16 2,154,296
3,000,000 Amgen, Inc. (a).............................. 1.00% 05/22/17 2,994,069
---------------
5,148,365
---------------
COMPUTERS -- 0.9%
1,500,000 Apple, Inc. (a).............................. 0.87% 05/03/18 1,500,738
950,000 Hewlett Packard Enterprise Co. (a) (b)....... 2.37% 10/05/17 956,245
1,000,000 International Business Machines Corp. (a).... 1.07% 08/18/17 1,003,180
---------------
3,460,163
---------------
DIVERSIFIED FINANCIAL SERVICES -- 1.2%
800,000 American Express Co. (a)..................... 1.21% 05/22/18 796,968
1,199,000 American Express Credit Corp., Medium-Term
Note (a).................................. 0.91% 06/05/17 1,193,958
2,500,000 HSBC Finance Corp. (a)....................... 1.07% 06/01/16 2,500,473
---------------
4,491,399
---------------
ELECTRIC -- 0.6%
35,000 Commonwealth Edison Co., Series 104.......... 5.95% 08/15/16 35,502
1,000,000 Dominion Resources, Inc. .................... 1.95% 08/15/16 1,002,984
300,000 Ohio Power Co., Series K..................... 6.00% 06/01/16 301,056
1,000,000 Southern (The) Co............................ 1.95% 09/01/16 1,003,776
---------------
2,343,318
---------------
FOOD -- 2.1%
3,560,000 ConAgra Foods, Inc. (a)...................... 1.00% 07/21/16 3,559,915
4,283,000 Kroger (The) Co. (a)......................... 1.16% 10/17/16 4,287,874
---------------
7,847,789
---------------
GAS -- 0.2%
701,000 CenterPoint Energy Resources Corp. .......... 6.15% 05/01/16 701,000
---------------
HEALTH CARE PRODUCTS -- 1.3%
4,180,000 Becton Dickinson and Co. (a)................. 1.08% 06/15/16 4,181,580
900,000 Medtronic, Inc. (a).......................... 1.43% 03/15/20 901,722
---------------
5,083,302
---------------
HEALTH CARE SERVICES -- 0.5%
2,000,000 UnitedHealth Group, Inc. (a)................. 1.08% 01/17/17 2,003,222
---------------
INSURANCE -- 1.2%
1,900,000 Berkshire Hathaway Finance Corp. (a)......... 1.18% 03/07/18 1,909,300
500,000 Berkshire Hathaway Finance Corp. (a)......... 1.32% 03/15/19 504,459
850,000 Metropolitan Life Global Funding I (a) (b)... 1.01% 04/10/17 850,958
1,351,000 Prudential Financial, Inc., Medium-Term
Note (a).................................. 1.40% 08/15/18 1,348,303
---------------
4,613,020
---------------
See Notes to Financial Statements Page 11
FIRST TRUST ENHANCED SHORT MATURITY ETF (FTSM)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2016 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- --------------------------------------------- ------------- -------- ---------------
CORPORATE BONDS (CONTINUED)
OIL & GAS -- 0.6%
$ 500,000 Chevron Corp. (a)............................ 0.98% 11/09/17 $ 499,918
85,000 Chevron Corp. (a)............................ 0.80% 03/02/18 84,459
1,000,000 Exxon Mobil Corp. (a)........................ 1.23% 02/28/18 1,008,593
500,000 Exxon Mobil Corp. (a)........................ 1.41% 03/01/19 504,923
---------------
2,097,893
---------------
RETAIL -- 1.1%
550,000 AutoZone, Inc. .............................. 6.95% 06/15/16 553,742
300,000 CVS Health Corp. ............................ 6.13% 08/15/16 304,642
1,000,000 Lowe's Cos., Inc. (a)........................ 0.87% 04/15/19 999,830
2,500,000 Walgreens Boots Alliance, Inc. (a)........... 1.07% 05/18/16 2,500,420
---------------
4,358,634
---------------
TELECOMMUNICATIONS -- 3.3%
3,250,000 AT&T, Inc. .................................. 2.95% 05/15/16 3,252,463
3,000,000 AT&T, Inc. (a)............................... 1.05% 03/30/17 3,001,866
1,215,000 Cisco Systems, Inc. (a)...................... 1.24% 02/21/18 1,223,652
1,250,000 Verizon Communications, Inc. (a)............. 2.16% 09/15/16 1,255,936
3,900,000 Verizon Communications, Inc. (a)............. 1.04% 06/09/17 3,903,526
---------------
12,637,443
---------------
TOTAL CORPORATE BONDS..................................................... 122,936,900
(Cost $122,768,408) ---------------
MORTGAGE-BACKED SECURITIES -- 9.4%
COLLATERALIZED MORTGAGE OBLIGATIONS -- 1.0%
Credit Suisse Mortgage Capital Certificates
851,585 Series 2009-3R, Class 30A1 (a) (b)........ 2.41% 07/27/37 853,233
1,758,753 Series 2009-16R, Class 1A1 (b)............ 6.00% 11/26/37 1,768,454
JP Morgan Resecuritization Trust
411,797 Series 2009-12, Class 8A3 (b)............. 5.50% 08/26/37 412,754
Residential Asset Securitization Trust
664 Series 2003-A4, Class A1.................. 4.25% 05/25/33 665
Wells Fargo Mortgage Loan Trust
1,015,189 Series 2010-RR1, Class 1A1 (a) (b)........ 2.63% 02/27/37 1,022,795
---------------
4,057,901
---------------
COMMERCIAL MORTGAGE-BACKED SECURITIES -- 8.4%
BAMLL Re-REMIC Trust
602,273 Series 2011-07C1, Class A3A (b)........... 5.38% 11/15/16 605,072
Banc of America Commercial Mortgage Trust
130,645 Series 2006-4, Class A4................... 5.63% 07/10/46 130,666
Bear Stearns Commercial Mortgage Securities
Trust
986,578 Series 2006-PW13, Class A1A............... 5.53% 09/11/41 992,073
491,037 Series 2006-PW13, Class A4................ 5.54% 09/11/41 492,123
1,106,352 Series 2006-PW14, Class A1A............... 5.19% 12/11/38 1,121,064
1,414,133 Series 2006-T24, Class A4................. 5.54% 10/12/41 1,423,707
113,752 Series 2007-PW16, Class A4 (a)............ 5.91% 06/11/40 117,338
Page 12 See Notes to Financial Statements
FIRST TRUST ENHANCED SHORT MATURITY ETF (FTSM)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2016 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- --------------------------------------------- ------------- -------- ---------------
MORTGAGE-BACKED SECURITIES (CONTINUED)
COMMERCIAL MORTGAGE-BACKED SECURITIES (CONTINUED)
CD Commercial Mortgage Trust
$ 79,069 Series 2006-CD3, Class A5................. 5.62% 10/15/48 $ 79,253
1,319,305 Series 2007-CD4, Class A1A (a)............ 5.29% 12/11/49 1,347,209
2,079,875 Series 2007-CD4, Class A4................. 5.32% 12/11/49 2,115,383
CFCRE Commercial Mortgage Trust
627,305 Series 2011-C2, Class A2.................. 3.06% 12/15/47 630,363
Citigroup Commercial Mortgage Trust
1,032,909 Series 2010-RR3, Class MLSR (a) (b)....... 5.81% 06/14/50 1,054,650
Commercial Mortgage Pass Through Certificates
171,301 Series 2012-CR3, Class A1................. 0.67% 10/15/45 171,090
Commercial Mortgage Trust
943,215 Series 2006-C8, Class A1A................. 5.29% 12/10/46 958,701
297,758 Series 2006-C8, Class A4.................. 5.31% 12/10/46 301,356
4,628,587 Series 2007-GG9, Class A4................. 5.44% 03/10/39 4,708,071
213,537 Series 2013-CR9, Class A1................. 1.34% 07/10/45 213,513
Credit Suisse Commercial Mortgage Trust
1,146,215 Series 2006-C5, Class A3.................. 5.31% 12/15/39 1,152,017
Credit Suisse Mortgage Capital Certificates
1,059,044 Series 2006-C4, Class A3.................. 5.47% 09/15/39 1,062,101
DBUBS Mortgage Trust
428,420 Series 2011-LC2A, Class A2 (b)............ 3.39% 07/10/44 428,637
215,217 Series 2011-LC3A, Class A2................ 3.64% 08/10/44 215,308
GS Mortgage Securities Trust
357,546 Series 2006-GG8, Class A1A................ 5.55% 11/10/39 359,944
74,303 Series 2006-GG8, Class A4................. 5.56% 11/10/39 74,718
171,065 Series 2011-GC5, Class A2................. 3.00% 08/10/44 171,165
JP Morgan Chase Commercial Mortgage
Securities Trust
334,558 Series 2006-CB16, Class A1A............... 5.55% 05/12/45 335,860
109,323 Series 2006-LDP7, Class A1A (a)........... 6.15% 04/17/45 109,249
4,008,855 Series 2007-CB18, Class A1A (a)........... 5.43% 06/12/47 4,075,191
185,060 Series 2012-C8, Class A2.................. 1.80% 10/15/45 185,649
LB-UBS Commercial Mortgage Trust
513,048 Series 2006-C4, Class A4 (a).............. 6.10% 06/15/38 513,122
723,801 Series 2006-C6, Class A4.................. 5.37% 09/15/39 729,397
78,296 Series 2006-C7, Class A3.................. 5.35% 11/15/38 78,881
Merrill Lynch Mortgage Trust
91,810 Series 2006-C2, Class A1A (a)............. 5.74% 08/12/43 92,039
121,029 Series 2006-C2, Class A4 (a).............. 5.74% 08/12/43 121,151
ML-CFC Commercial Mortgage Trust
472,017 Series 2006-4, Class A3................... 5.17% 12/12/49 475,922
Morgan Stanley Capital I Trust
191,043 Series 2007-T27, Class A1A (a)............ 5.82% 06/11/42 198,476
2,475,669 Series 2007-T27, Class A4 (a)............. 5.82% 06/11/42 2,576,332
795,402 Series 2012-C4, Class A2.................. 2.11% 03/15/45 798,598
Morgan Stanley Re-REMIC Trust
249,214 Series 2009-GG10, Class A4A (a) (b)....... 5.99% 08/12/45 255,305
RBSCF Trust
93,473 Series 2010-RR3, Class CSCA (b)........... 5.47% 09/16/39 93,423
See Notes to Financial Statements Page 13
FIRST TRUST ENHANCED SHORT MATURITY ETF (FTSM)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2016 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- --------------------------------------------- ------------- -------- ---------------
MORTGAGE-BACKED SECURITIES (CONTINUED)
COMMERCIAL MORTGAGE-BACKED SECURITIES (CONTINUED)
UBS-Citigroup Commercial Mortgage Trust
$ 115,000 Series 2011-C1, Class A2.................. 2.80% 01/10/45 $ 115,502
Wachovia Bank Commercial Mortgage Trust
392,901 Series 2006-C29, Class A1A................ 5.30% 11/15/48 398,525
65,357 Series 2007-C32, Class A2 (a)............. 5.88% 06/15/49 65,565
WFRBS Commercial Mortgage Trust
395,000 Series 2012-C6, Class A2.................. 2.19% 04/15/45 395,864
309,836 Series 2013-C12, Class A1................. 0.74% 03/15/48 309,390
---------------
31,848,963
---------------
TOTAL MORTGAGE-BACKED SECURITIES.......................................... 35,906,864
(Cost $36,045,364) ---------------
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES -- 6.2%
COLLATERALIZED MORTGAGE OBLIGATIONS -- 6.0%
Federal Home Loan Banks
160,154 Series 2008-1372, Class 1................. 4.75% 05/18/18 169,260
Federal Home Loan Mortgage Corporation
1,955 Series 1998-2038, Class PC................ 5.50% 02/15/28 1,957
60,513 Series 2002-2538, Class CB................ 5.00% 12/15/17 61,930
1,247,723 Series 2003-2614, Class BY................ 4.50% 05/15/18 1,281,509
61,848 Series 2003-2672, Class NH................ 4.00% 09/15/18 63,175
234,599 Series 2004-2828, Class JE................ 4.50% 07/15/19 243,399
168,290 Series 2005-2920, Class HD................ 4.50% 01/15/20 173,217
132,529 Series 2005-2945, Class HB................ 5.00% 03/15/20 138,734
509,689 Series 2005-2995, Class JK................ 4.50% 06/15/20 524,407
1,039,070 Series 2007-3266, Class D................. 5.00% 01/15/22 1,071,250
174,434 Series 2007-3294, Class DB................ 4.50% 03/15/22 181,279
60 Series 2007-3345, Class FP (a)............ 0.63% 11/15/36 60
31,077 Series 2009-3567, Class B................. 3.00% 08/15/19 31,158
689,375 Series 2010-3659, Class EB................ 2.00% 06/15/18 694,005
10,406 Series 2010-3728, Class EL................ 1.50% 09/15/20 10,410
2,762,751 Series 2010-3740, Class NP................ 2.00% 01/15/37 2,787,234
324,765 Series 2010-3772, Class HE................ 2.50% 10/15/18 328,848
29,365 Series 2011-3786, Class EY................ 4.50% 01/15/32 29,520
418,047 Series 2011-3812, Class BE................ 2.75% 09/15/18 424,745
1,156,325 Series 2011-3825, Class AB................ 3.00% 08/15/20 1,177,908
43,953 Series 2011-3826, Class MB................ 1.50% 07/15/18 44,126
1,426,377 Series 2012-4011, Class KM................ 2.00% 03/15/22 1,445,134
3,421,220 Series 2015-4459, Class NC................ 5.00% 07/15/25 3,528,790
Federal National Mortgage Association
1,502 Series 2001-69, Class OG.................. 5.50% 12/25/16 1,515
119,781 Series 2003-44, Class CD.................. 3.50% 03/25/33 121,339
260,983 Series 2004-79, Class FA (a).............. 0.73% 08/25/32 261,019
1,401,506 Series 2004-90, Class XQ.................. 4.50% 09/25/34 1,455,457
1,876,499 Series 2009-14, Class EB.................. 4.50% 03/25/24 1,937,566
8,997 Series 2010-104, Class BJ................. 2.00% 02/25/24 9,005
407,726 Series 2010-110, Class AE................. 9.75% 11/25/18 437,116
1,319,012 Series 2010-116, Class AD................. 2.00% 08/25/20 1,332,173
1,040,669 Series 2011-3, Class EG................... 2.00% 05/25/20 1,049,901
Page 14 See Notes to Financial Statements
FIRST TRUST ENHANCED SHORT MATURITY ETF (FTSM)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2016 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- --------------------------------------------- ------------- -------- ---------------
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES (CONTINUED)
COLLATERALIZED MORTGAGE OBLIGATIONS (CONTINUED)
Federal National Mortgage Association (Continued)
$ 580,605 Series 2011-13, Class AD.................. 2.00% 07/25/21 $ 587,834
9,100 Series 2011-15, Class AB.................. 9.75% 08/25/19 9,752
Government National Mortgage Association
61,534 Series 2000-9, Class FG (a)............... 1.04% 02/16/30 62,027
44,416 Series 2009-29, Class NC.................. 4.50% 06/16/36 44,544
80,054 Series 2009-118, Class AW................. 3.00% 05/20/37 80,645
790,575 Series 2009-121, Class NG................. 3.50% 04/20/37 797,787
66,687 Series 2010-23, Class LA.................. 3.00% 10/20/37 67,763
40,442 Series 2010-107, Class L.................. 4.00% 04/20/36 40,578
94,908 Series 2010-167, Class CT................. 4.25% 09/20/33 96,133
---------------
22,804,209
---------------
PASS-THROUGH SECURITIES -- 0.2%
Federal Home Loan Mortgage Corporation
19,116 Pool B18688............................... 5.00% 02/01/20 19,932
13,550 Pool E99249............................... 5.50% 09/01/18 14,006
20,869 Pool G12255............................... 5.50% 07/01/21 22,632
11,631 Pool G12631............................... 5.50% 04/01/17 11,784
Federal National Mortgage Association
54,094 Pool 256889............................... 5.50% 09/01/17 54,997
29,833 Pool 723399............................... 4.50% 09/01/18 30,703
261,454 Pool 735646............................... 4.50% 07/01/20 272,808
62,193 Pool 739798............................... 4.50% 09/01/18 64,008
35,128 Pool 775019............................... 4.50% 05/01/19 36,252
30,486 Pool 889191............................... 4.50% 04/01/21 31,500
49,296 Pool 889847............................... 4.50% 04/01/21 51,395
---------------
610,017
---------------
TOTAL U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES................... 23,414,226
(Cost $23,438,243) ---------------
FOREIGN CORPORATE BONDS -- 4.3%
AEROSPACE & DEFENSE -- 0.1%
500,000 BAE Systems PLC (b).......................... 3.50% 10/11/16 505,450
---------------
BANKS -- 2.3%
900,000 Bank of Montreal, Medium-Term Note (a)....... 1.23% 04/09/18 899,204
500,000 Bank of Nova Scotia (The) (a)................ 0.94% 04/11/17 499,844
250,000 Bank of Nova Scotia (The) (a)................ 1.46% 01/15/19 250,447
1,025,000 BNP Paribas S.A., Medium-Term Note (a)....... 1.22% 12/12/16 1,027,290
25,000 Credit Agricole S.A. (a) (b)................. 1.48% 10/03/16 25,044
1,000,000 Credit Suisse/New York, NY, Global
Medium-Term Note (a)...................... 1.12% 05/26/17 997,906
65,000 Deutsche Bank AG/London (a).................. 1.23% 02/13/17 64,848
500,000 Mizuho Bank Ltd. (a) (b)..................... 1.82% 10/20/18 501,589
800,000 Nordea Bank AB (a) (b)....................... 0.99% 04/04/17 800,387
300,000 Royal Bank of Canada, Global Medium-Term
Note (a).................................. 0.89% 10/13/17 298,914
500,000 Royal Bank of Canada, Global Medium-Term
Note (a).................................. 1.34% 04/15/19 500,350
1,000,000 Toronto-Dominion Bank (The), Medium-Term
Note, Series 1 (a)........................ 1.19% 04/30/18 1,000,367
See Notes to Financial Statements Page 15
FIRST TRUST ENHANCED SHORT MATURITY ETF (FTSM)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2016 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- --------------------------------------------- ------------- -------- ---------------
FOREIGN CORPORATE BONDS (CONTINUED)
BANKS (CONTINUED)
$ 850,000 UBS AG/Stamford CT (a)....................... 1.20% 06/01/17 $ 850,343
850,000 UBS AG/Stamford CT, Global Medium-Term
Note (a).................................. 1.33% 03/26/18 850,061
---------------
8,566,594
---------------
OIL & GAS -- 0.8%
1,017,000 BP Capital Markets PLC (a)................... 1.04% 11/07/16 1,017,532
2,017,000 Shell International Finance BV (a)........... 0.94% 05/10/17 2,017,204
---------------
3,034,736
---------------
PHARMACEUTICALS -- 0.8%
900,000 Actavis Funding SCS (a)...................... 1.51% 09/01/16 901,163
2,100,000 Actavis Funding SCS (a)...................... 1.71% 03/12/18 2,110,206
---------------
3,011,369
---------------
PIPELINES -- 0.3%
1,025,000 Enbridge, Inc. (a)........................... 1.28% 10/01/16 1,017,822
50,000 Enbridge, Inc. (a)........................... 1.08% 06/02/17 48,526
---------------
1,066,348
---------------
TOTAL FOREIGN CORPORATE BONDS............................................. 16,184,497
(Cost $16,192,118) ---------------
U.S. GOVERNMENT NOTES -- 0.3%
1,000,000 U.S. Treasury Note........................... 0.63% 06/30/17 999,844
---------------
TOTAL U.S. GOVERNMENT NOTES............................................... 999,844
(Cost $999,300) ---------------
TOTAL INVESTMENTS -- 99.7%................................................ 379,134,930
(Cost $379,136,032) (c)
NET OTHER ASSETS AND LIABILITIES -- 0.3%.................................. 1,165,735
---------------
NET ASSETS -- 100.0%...................................................... $ 380,300,665
===============
-----------------------------
(a) Floating or variable rate security. The interest rate shown reflects the
rate in effect at April 30, 2016.
(b) This security, sold within the terms of a private placement memorandum, is
exempt from registration upon resale under Rule 144A under the Securities
Act of 1933, as amended, and may be resold in transactions exempt from
registration, normally to qualified institutional buyers. Pursuant to
procedures adopted by the Trust's Board of Trustees, this security has
been determined to be liquid by First Trust Advisors L.P., the Fund's
advisor. Although market instability can result in periods of increased
overall market illiquidity, liquidity for each security is determined
based on security specific factors and assumptions, which require
subjective judgment. At April 30, 2016, securities noted as such amounted
to $14,266,354 or 3.8% of net assets.
(c) Aggregate cost for financial reporting purposes, which approximates the
aggregate cost for federal income tax purposes. As of April 30, 2016, the
aggregate gross unrealized appreciation for all securities in which there
was an excess of value over tax cost was $225,041 and the aggregate gross
unrealized depreciation for all securities in which there was an excess of
tax cost over value was $226,143.
Page 16 See Notes to Financial Statements
FIRST TRUST ENHANCED SHORT MATURITY ETF (FTSM)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2016 (UNAUDITED)
-----------------------------
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of April 30,
2016 is as follows (see Note 2A - Portfolio Valuation in the Notes to Financial
Statements):
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
4/30/2016 PRICES INPUTS INPUTS
------------- ------------- ------------- -------------
Commercial Paper*.................................. $ 179,692,599 $ -- $ 179,692,599 $ --
Corporate Bonds*................................... 122,936,900 -- 122,936,900 --
Mortgage-Backed Securities......................... 35,906,864 -- 35,906,864 --
U.S. Government Agency Mortgage-Backed
Securities...................................... 23,414,226 -- 23,414,226 --
Foreign Corporate Bonds*........................... 16,184,497 -- 16,184,497 --
U.S. Government Notes.............................. 999,844 -- 999,844 --
------------- ------------- ------------- -------------
Total Investments.................................. $ 379,134,930 $ -- $ 379,134,930 $ --
============= ============= ============= =============
* See Portfolio of Investments for industry breakout.
All transfers in and out of the Levels during the period are assumed to be
transferred on the last day of the period at their current value. There were no
transfers between Levels at April 30, 2016.
See Notes to Financial Statements Page 17
FIRST TRUST ENHANCED SHORT MATURITY ETF (FTSM)
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 2016 (UNAUDITED)
ASSETS:
Investments, at value..................................................... $ 379,134,930
Cash...................................................................... 55,006
Receivables:
Investment securities sold............................................. 602,250
Interest............................................................... 592,110
--------------
Total Assets........................................................... 380,384,296
--------------
LIABILITIES:
Payables:
Investment advisory fees............................................... 83,631
--------------
Total Liabilities...................................................... 83,631
--------------
NET ASSETS................................................................ $ 380,300,665
==============
NET ASSETS CONSIST OF:
Paid-in capital........................................................... $ 381,663,331
Par value................................................................. 63,497
Accumulated net investment income (loss).................................. 464,243
Accumulated net realized gain (loss) on investments....................... (1,889,304)
Net unrealized appreciation (depreciation) on investments................. (1,102)
--------------
NET ASSETS................................................................ $ 380,300,665
==============
NET ASSET VALUE, per share................................................ $ 59.89
==============
Number of shares outstanding (unlimited number of shares authorized,
par value $0.01 per share)............................................. 6,349,724
==============
Investments, at cost...................................................... $ 379,136,032
==============
Page 18 See Notes to Financial Statements
FIRST TRUST ENHANCED SHORT MATURITY ETF (FTSM)
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED APRIL 30, 2016 (UNAUDITED)
INVESTMENT INCOME:
Interest.................................................................. $ 1,609,451
Dividends - Affiliated (See Note 2C)...................................... 30,312
--------------
Total investment income................................................ 1,639,763
--------------
EXPENSES:
Investment advisory fees.................................................. 583,213
Less fees waived by the investment advisor............................. (266,449)
--------------
Net expenses........................................................... 316,764
--------------
NET INVESTMENT INCOME (LOSS).............................................. 1,322,999
--------------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments - Unaffiliated............................................. (10,364)
Investments - Affiliated (See Note 2C)................................. (223,734)
--------------
Net realized gain (loss).................................................. (234,098)
--------------
Net change in unrealized appreciation (depreciation) on:
Investments - Unaffiliated............................................. 107,687
Investments - Affiliated (See Note 2C)................................. 78,707
--------------
Net change in unrealized appreciation (depreciation)...................... 186,394
--------------
NET REALIZED AND UNREALIZED GAIN (LOSS)................................... (47,704)
--------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS........................................................ $ 1,275,295
==============
See Notes to Financial Statements Page 19
FIRST TRUST ENHANCED SHORT MATURITY ETF (FTSM)
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE
SIX MONTHS FOR THE
ENDED YEAR
4/30/2016 ENDED
(UNAUDITED) 10/31/2015
-------------- --------------
OPERATIONS:
Net investment income (loss)........................................... $ 1,322,999 $ 3,254,542
Net realized gain (loss)............................................... (234,098) (1,626,924)
Net change in unrealized appreciation (depreciation)................... 186,394 (209,955)
-------------- --------------
Net increase (decrease) in net assets resulting from operations........ 1,275,295 1,417,663
-------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income.................................................. (1,271,930) (2,887,800)
-------------- --------------
SHAREHOLDER TRANSACTIONS:
Proceeds from shares sold.............................................. 580,748,570 2,912,255,614
Cost of shares redeemed................................................ (350,280,138) (3,328,309,273)
-------------- --------------
Net increase (decrease) in net assets resulting from shareholder
transactions........................................................ 230,468,432 (416,053,659)
-------------- --------------
Total increase (decrease) in net assets................................ 230,471,797 (417,523,796)
NET ASSETS:
Beginning of period.................................................... 149,828,868 567,352,664
-------------- --------------
End of period.......................................................... $ 380,300,665 $ 149,828,868
============== ==============
Accumulated net investment income (loss) at end of period.............. $ 464,243 $ 413,174
============== ==============
CHANGES IN SHARES OUTSTANDING:
Shares outstanding, beginning of period................................ 2,499,724 9,450,001
Shares sold............................................................ 9,700,000 66,800,000
Shares redeemed as a result of reverse stock split (See Note 4) ....... -- (18,300,277)
Shares redeemed........................................................ (5,850,000) (55,450,000)
-------------- --------------
Shares outstanding, end of period...................................... 6,349,724 2,499,724
============== ==============
Page 20 See Notes to Financial Statements
FIRST TRUST ENHANCED SHORT MATURITY ETF (FTSM)
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
SIX MONTHS FOR THE PERIOD
ENDED 8/5/2014 (a)
4/30/2016 YEAR ENDED THROUGH
(UNAUDITED) 10/31/2015 10/31/2014 (b)
-------------- -------------- --------------
Net asset value, beginning of period........................... $ 59.94 $ 60.04 $ 60.00
-------- -------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss)................................... 0.30 (c) 0.43 0.06
Net realized and unrealized gain (loss)........................ (0.09) (0.26) 0.04
-------- -------- --------
Total from investment operations............................... 0.21 0.17 0.10
-------- -------- --------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income.......................................... (0.26) (0.27) (0.06)
-------- -------- --------
Net asset value, end of period................................. $ 59.89 $ 59.94 $ 60.04
======== ======== ========
TOTAL RETURN (d)............................................... 0.34% 0.29% 0.16%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's)........................... $380,301 $149,829 $567,353
RATIOS TO AVERAGE NET ASSETS:
Ratio of total expenses to average net assets.................. 0.45% (e) 0.45% 0.45% (e)
Ratio of net expenses to average net assets.................... 0.24% (e) 0.23% 0.26% (e)
Ratio of net investment income (loss) to average net assets.... 1.02% (e) 0.51% 0.64% (e)
Portfolio turnover rate (f).................................... 89% 406% 0%
(a) Inception date is consistent with the commencement of investment
operations and is the date the initial creation units were established.
(b) All per share amounts and net asset values have been adjusted to reflect
the impact of the 1-for-2 reverse stock split on November 10, 2014. The
net asset value reported on October 31, 2014 prior to the reverse stock
split restatement was $30.02.
(c) Based on average shares outstanding.
(d) 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. The total returns would have been lower if certain
fees had not been waived by the investment advisor.
(e) Annualized.
(f) Portfolio turnover is calculated for the time period presented and is not
annualized for periods of less than a year and does not include securities
received or delivered from processing creations or redemptions and in-kind
transactions, if any.
See Notes to Financial Statements Page 21
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FIRST TRUST ENHANCED SHORT MATURITY ETF (FTSM)
APRIL 30, 2016 (UNAUDITED)
1. ORGANIZATION
First Trust Exchange-Traded Fund IV (the "Trust") is an open-end management
investment company organized as a Massachusetts business trust on September 15,
2010, and is registered with the Securities and Exchange Commission under the
Investment Company Act of 1940, as amended (the "1940 Act").
The Trust currently consists of eight funds that are offering shares. This
report covers the First Trust Enhanced Short Maturity ETF (the "Fund"), which
trades under the ticker "FTSM" on The Nasdaq Stock Market LLC ("Nasdaq"). Unlike
conventional mutual funds, the Fund issues and redeems shares on a continuous
basis, at net asset value ("NAV"), only in large specified blocks consisting of
50,000 shares called a "Creation Unit." Creation Units are generally issued and
redeemed for cash, and in certain circumstances, in-kind for securities in which
the Fund invests. Except when aggregated in Creation Units, the Fund's shares
are not redeemable securities.
The Fund is an actively managed exchange-traded fund ("ETF"). The Fund's
investment objective is to seek current income, consistent with preservation of
capital and daily liquidity. Under normal market conditions, the Fund will
invest at least 80% of its net assets in a portfolio of U.S. dollar-denominated
fixed- and variable-rate instruments (collectively, "Fixed Income Securities")
issued by U.S. and non-U.S. public and private sector entities. Fixed Income
Securities will include the following types of fixed- and variable-rate debt
securities: corporate and government bonds and notes; agency securities;
instruments of non-U.S. issuers in developed markets; privately issued
securities; asset-backed securities; mortgage-related securities; municipal
bonds and money market securities. The Fund may also invest in investment
companies, such as ETFs, that invest in primarily Fixed Income Securities. The
Fund will limit its investments in asset-backed securities and non-agency
mortgage-backed securities (in the aggregate) to 20% of its net assets. The Fund
may also invest up to 20% of its net assets in floating rate loans. The floating
rate loans will represent amounts borrowed by companies or other entities from
banks and other lenders and a significant portion of such floating rate loans
may be rated below investment grade or unrated. Floating rate loans held by the
Fund may be senior or subordinate obligations of the borrower and may or may not
be secured by collateral. Under normal market conditions, the Fund's average
duration is expected to be below one year and the average maturity of the Fund's
portfolio is expected to be below three years.
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 following is a summary
of significant accounting policies consistently followed by the Fund in the
preparation of the financial statements. The preparation of the financial
statements in accordance with accounting principles generally accepted in the
United States of America ("U.S. GAAP") requires management to make estimates and
assumptions that affect the reported amounts and disclosures in the financial
statements. Actual results could differ from those estimates.
A. PORTFOLIO VALUATION
The Fund's NAV is determined daily as of the close of regular trading on the New
York Stock Exchange ("NYSE"), normally 4:00 p.m. Eastern time, on each day the
NYSE is open for trading. If the NYSE closes early on a valuation day, the NAV
is determined as of that time. Domestic debt securities and foreign securities
are priced using data reflecting the earlier closing of the principal markets
for those securities. The Fund's NAV is calculated by dividing the value of all
assets of the Fund (including accrued interest and dividends), less all
liabilities (including accrued expenses and dividends declared but unpaid), by
the total number of shares outstanding.
The Fund's investments are valued daily at market value or, in the absence of
market value with respect to any portfolio securities, at fair value. Market
value prices represent last sale or official closing prices from a national or
foreign exchange (i.e., a regulated market) and are primarily obtained from
third-party pricing services. Fair value prices represent any prices not
considered market value prices and are either obtained from a third-party
pricing service or are determined by the Pricing Committee of the Fund's
investment advisor, First Trust Advisors L.P. ("First Trust" or the "Advisor"),
in accordance with valuation procedures adopted by the Trust's Board of
Trustees, and in accordance with provisions of the 1940 Act. Investments valued
by the Advisor's Pricing Committee, if any, are footnoted as such in the
footnotes to the Portfolio of Investments. The Fund's investments are valued as
follows:
Corporate bonds, corporate notes, municipal securities, U.S. government
securities, mortgage-backed securities, asset-backed securities and other
debt securities are fair valued on the basis of valuations provided by
dealers who make markets in such securities or by an independent pricing
service approved by the Trust's Board of Trustees, which may use the
following valuation inputs when available:
1) benchmark yields;
2) reported trades;
3) broker/dealer quotes;
4) issuer spreads;
Page 22
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST ENHANCED SHORT MATURITY ETF (FTSM)
APRIL 30, 2016 (UNAUDITED)
5) benchmark securities;
6) bids and offers; and
7) reference data including market research publications.
Common stocks and other equity securities listed on any national or
foreign exchange (excluding Nasdaq and the London Stock Exchange
Alternative Investment Market ("AIM")) are valued at the last sale price
on the exchange on which they are principally traded or, for Nasdaq and
AIM securities, the official closing price. Securities traded on more than
one securities exchange are valued at the last sale price or official
closing price, as applicable, at the close of the securities exchange
representing the principal market for such securities.
Securities traded in an over-the-counter market are fair valued at the
mean of their most recent bid and asked price, if available, and otherwise
at their closing bid price.
Commercial paper, 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
5) any other market-based data the Advisor's Pricing Committee
considers relevant. In this regard, the Advisor's Pricing
Committee may use last-obtained market-based data to assist it
when valuing portfolio securities using amortized cost.
Certain securities may not be able to be priced by pre-established pricing
methods. Such securities may be valued by the Trust's Board of Trustees or its
delegate, the Advisor's Pricing Committee, at fair value. These securities
generally include, but are not limited to, restricted securities (securities
which may not be publicly sold without registration under the Securities Act of
1933, as amended) for which a pricing service is unable to provide a market
price; securities whose trading has been formally suspended; a security whose
market or fair value price is not available from a pre-established pricing
source; a security with respect to which an event has occurred that is likely to
materially affect the value of the security after the market has closed but
before the calculation of the Fund's NAV or make it difficult or impossible to
obtain a reliable market quotation; and a security whose price, as provided by
the pricing service, does not reflect the security's fair value. As a general
principle, the current fair value of a security would appear to be the amount
which the owner might reasonably expect to receive for the security upon its
current sale. When fair value prices are used, generally they will differ from
market quotations or official closing prices on the applicable exchanges. A
variety of factors may be considered in determining the fair value of such
securities, including, but not limited to, the following:
1) the fundamental business data relating to the borrower/issuer;
2) an evaluation of the forces which influence the market in
which these securities are purchased and sold;
3) the type, size and cost of a security;
4) the financial statements of the borrower/issuer;
5) the credit quality and cash flow of the borrower/issuer, based
on the Advisor's or external analysis;
6) the information as to any transactions in or offers for the
security;
7) the price and extent of public trading in similar securities
of the borrower/issuer, or comparable companies;
8) the coupon payments;
9) the quality, value and salability of collateral, if any,
securing the security;
10) the business prospects of the borrower/issuer, including any
ability to obtain money or resources from a parent or
affiliate and an assessment of the borrower's/issuer's
management (for corporate debt only);
11) the prospects for the borrower's/issuer's industry, and
multiples (of earnings and/or cash flows) being paid for
similar businesses in that industry (for corporate debt only);
12) the borrower's/issuer's competitive position within the
industry;
13) the borrower's/issuer's ability to access additional liquidity
through public and/or private markets; and
14) other relevant factors.
The Fund is subject to fair value accounting standards that define fair value,
establish the framework for measuring fair value and provide a three-level
hierarchy for fair valuation based upon the inputs to the valuation as of the
measurement date. The three levels of the fair value hierarchy are as follows:
Page 23
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST ENHANCED SHORT MATURITY ETF (FTSM)
APRIL 30, 2016 (UNAUDITED)
o Level 1 - Level 1 inputs are quoted prices in active markets for
identical investments. An active market is a market in which
transactions for the investment occur with sufficient frequency and
volume to provide pricing information on an ongoing basis.
o Level 2 - Level 2 inputs are observable inputs, either directly or
indirectly, and include the following:
o Quoted prices for similar investments in active markets.
o Quoted prices for identical or similar investments in markets
that are non-active. A non-active market is a market where
there are few transactions for the investment, the prices are
not current, or price quotations vary substantially either
over time or among market makers, or in which little
information is released publicly.
o Inputs other than quoted prices that are observable for the
investment (for example, interest rates and yield curves
observable at commonly quoted intervals, volatilities,
prepayment speeds, loss severities, credit risks, and default
rates).
o Inputs that are derived principally from or corroborated by
observable market data by correlation or other means.
o Level 3 - Level 3 inputs are unobservable inputs. Unobservable
inputs may reflect the reporting entity's own assumptions about the
assumptions that market participants would use in pricing the
investment.
The inputs or methodologies used for valuing investments are not necessarily an
indication of the risk associated with investing in those investments. A summary
of the inputs used to value the Fund's investments as of April 30, 2016, is
included with the Fund's Portfolio of Investments.
B. SECURITIES TRANSACTIONS AND INVESTMENT INCOME
Securities transactions are recorded as of the trade date. Realized gains and
losses from securities transactions are recorded on the identified cost basis.
Dividend income is recorded on the ex-dividend date. Interest income is recorded
daily on the accrual basis. Amortization of premiums and accretion of discounts
are recorded using the effective interest method.
C. AFFILIATED TRANSACTIONS
The Fund invests in an affiliated fund. Dividend income, realized gains and
losses, and change in appreciation (depreciation) from the affiliated fund are
presented on the Statement of Operations. The Fund's investment performance and
risks are directly related to the investment performance and risks of the
affiliated fund.
Amounts related to this investment for the six months ended April 30, 2016 are
as follows:
SHARE ACTIVITY
-----------------------------------------------------
BALANCE AT BALANCE AT VALUE AT DIVIDEND REALIZED
SECURITY NAME 10/31/15 PURCHASES SALES 4/30/16 4/30/16 INCOME GAIN (LOSS)
---------------------------- ----------- ----------- ----------- ----------- ------------ ----------- -----------
First Trust Senior Loan Fund 147,215 -- (147,215) -- $ -- $ 30,312 $ (223,734)
D. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
Dividends from net investment income, if any, are declared and paid monthly 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 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 during the fiscal year ended October 31,
2015 was as follows:
Distributions paid from:
Ordinary income................................. $ 2,887,800
Capital gain.................................... --
Return of capital............................... --
Page 24
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST ENHANCED SHORT MATURITY ETF (FTSM)
APRIL 30, 2016 (UNAUDITED)
As of October 31, 2015, the components of distributable earnings and net assets
on a tax basis for the Fund were as follows:
Undistributed ordinary income................... $ 413,174
Accumulated capital and other losses............ (1,505,466)
Net unrealized appreciation (depreciation)...... (337,236)
E. INCOME TAXES
The Fund intends to continue to qualify as a regulated investment company by
complying with the requirements under Subchapter M of the Internal Revenue Code
of 1986, as amended, which includes distributing substantially all of its net
investment income and net realized gains to shareholders. Accordingly, no
provision has been made for federal and state income taxes. However, due to the
timing and amount of distributions, the Fund may be subject to an excise tax of
4% of the amount by which approximately 98% of the Fund's taxable income exceeds
the distributions from such taxable income for the calendar year.
The Fund intends to utilize provisions of the federal income tax laws, which
allow it to carry a realized capital loss forward indefinitely following the
year of the loss and offset such loss against any future realized capital gains.
The Fund is subject to certain limitations under U.S. tax rules on the use of
capital loss carryforwards and net unrealized built-in losses. These limitations
apply when there has been a 50% change in ownership. At October 31, 2015, the
Fund had $1,505,466 of non-expiring capital loss carryforwards that may be
carried forward indefinitely.
Certain losses realized during the current fiscal year may be deferred and
treated as occurring on the first day of the following fiscal year for federal
income tax purposes. For the fiscal year ended October 31, 2015, the Fund had no
net ordinary losses.
The Fund is subject to accounting standards that establish a minimum threshold
for recognizing, and a system for measuring, the benefits of a tax position
taken or expected to be taken in a tax return. The taxable years ended 2014 and
2015 remain open to federal and state audit. As of April 30, 2016, management
has evaluated the application of these standards to the Fund and has determined
that no provision for income tax is required in the Fund's financial statements
for uncertain tax positions.
F. EXPENSES
Expenses, other than the investment advisory fee and other excluded expenses,
are paid by the Advisor (see Note 3).
3. INVESTMENT ADVISORY FEE, AFFILIATED TRANSACTIONS AND OTHER FEE ARRANGEMENTS
First Trust, the investment advisor to the Fund, is a limited partnership with
one limited partner, Grace Partners of DuPage L.P., and one general partner, The
Charger Corporation. The Charger Corporation is an Illinois corporation
controlled by James A. Bowen, Chief Executive Officer of First Trust. First
Trust is responsible for the selection and ongoing monitoring of the securities
in the Fund's portfolio, managing the Fund's business affairs and providing
certain administrative services necessary for the management of the Fund.
Pursuant to the Investment Management Agreement between the Trust and 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, acquired fund fees
and expenses with the exception of those attributable to affiliated funds,
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 0.45% of its average daily net assets.
Pursuant to contractual agreements, First Trust has agreed to waive management
fees of 0.20% of average daily net assets until March 1, 2017. The waiver
agreement may be terminated by action of the Trust's Board of Trustees at any
time upon 60 days' written notice by the Trust on behalf of the Fund or by the
Fund's investment advisor only after March 1, 2017. Pursuant to a contractual
agreement between the Trust, on behalf of the Fund, and First Trust, the
management fees paid to First Trust will be reduced by the portion of the
management fees earned by First Trust from the Fund for assets invested in other
investment companies advised by First Trust. This contractual agreement shall
continue until the earlier of (i) its termination at the direction of the
Trust's Board of Trustees or (ii) upon termination of the Fund's management
agreement with First Trust; however, it is expected to remain in place at least
until March 1, 2017. First Trust does not have the right to recover the fees
waived that are attributable to the assets invested in other investment
companies advised by First Trust.
Page 25
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST ENHANCED SHORT MATURITY ETF (FTSM)
APRIL 30, 2016 (UNAUDITED)
The Trust has multiple service agreements with The Bank of New York Mellon
("BNYM"). Under the service agreements, BNYM performs custodial, fund
accounting, certain administrative services, and transfer agency services for
the Fund. As custodian, BNYM is responsible for custody of the Fund's assets. As
fund accountant and administrator, BNYM is responsible for maintaining the books
and records of the Fund's securities and cash. As transfer agent, BNYM is
responsible for maintaining shareholder records for the Fund. BNYM is a
subsidiary of The Bank of New York Mellon Corporation, a financial holding
company.
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 equally among each fund in the First Trust Fund
Complex. Prior to January 1, 2016, the fixed annual retainer was allocated pro
rata based on each fund's 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 will rotate
every three years. The officers and "Interested" Trustee receive no compensation
from the Trust for acting in such capacities.
4. REVERSE STOCK SPLIT
On October 29, 2014, the Trust's Board of Trustees approved a one-for-two
reverse stock split, whereby each share of the Fund outstanding as of the close
of business on November 7, 2014 automatically converted to one-half share as of
the opening of business on November 10, 2014. For the fiscal year ended October
31, 2015, the share transactions on the Statements of Changes in Net Assets
reflect the actual transactions, including the impact of the reverse stock
split. As a result of the reverse stock split, fractional shares totaling 277
shares were redeemed and paid out to shareholders. The reverse stock split had
no impact on the overall value of a shareholder's investment in the Fund.
5. PURCHASES AND SALES OF SECURITIES
The cost of purchases of U.S. Government securities and non-U.S. Government
securities, excluding short-term investments, for the six months ended April 30,
2016, were $32,333,399 and $109,129,826, respectively. The proceeds from sales
and paydowns of U.S. Government securities and non-U.S. Government securities,
excluding short-term investments, for the six months ended April 30, 2016 were
$14,620,661 and $66,204,522, respectively.
For the six months ended April 30, 2016, the Fund had no in-kind transactions.
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
Aggregation) and the market value of the Deposit Securities, and/or (ii) cash in
lieu of all or a portion of the Deposit Securities. The Fund's Creation Units
are generally issued and redeemed for cash. 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. Authorized Participants purchasing Creation Units must pay to BNYM,
as transfer agent, a creation transaction fee (the "Creation Transaction Fee")
regardless of the number of Creation Units purchased in the transaction. The
Creation Transaction Fee is based on the composition of the securities included
in the Fund's portfolio and the countries in which the transactions are settled.
The Creation Transaction Fee is currently $500. The price for each Creation Unit
will equal the daily NAV per share times the number of shares in a Creation Unit
plus the fees described above and, if applicable, any operational processing and
brokerage costs, transfer fees or stamp taxes. When the Fund permits an
Authorized Participant to substitute cash or a different security in lieu of
depositing one or more of the requisite Deposit Securities, the Authorized
Participant may also be assessed an amount to cover the cost of purchasing the
Deposit Securities and/or disposing of the substituted securities, including
operational processing and brokerage costs, transfer fees, stamp taxes, and part
or all of the spread between the expected bid and offer side of the market
related to such Deposit Securities and/or substitute securities.
Page 26
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST ENHANCED SHORT MATURITY ETF (FTSM)
APRIL 30, 2016 (UNAUDITED)
Authorized Participants redeeming Creation Units must pay to BNYM, 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 March 31, 2017.
8. INDEMNIFICATION
The Trust, on behalf of the Fund, has a variety of indemnification obligations
under contracts with its service providers. The Trust's maximum exposure under
these arrangements is unknown. However, the Trust has not had prior claims or
losses pursuant to these contracts and expects the risk of loss to be remote.
9. SUBSEQUENT EVENTS
Management has evaluated the impact of all subsequent events on the Fund through
the date the financial statements were issued, and has determined there was the
following subsequent event:
On May 19, 2016, the Fund declared a distribution of $0.045 per share to
shareholders of record on May 24, 2016, payable May 31, 2016.
Page 27
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ADDITIONAL INFORMATION
--------------------------------------------------------------------------------
FIRST TRUST ENHANCED SHORT MATURITY ETF (FTSM)
APRIL 30, 2016 (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
its portfolio securities 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 at http://www.sec.gov.
PORTFOLIO HOLDINGS
The Trust files its complete schedule of the Fund's portfolio holdings with the
SEC for the first and third quarters of each fiscal year on Form N-Q. The
Trust's Forms N-Q are available (1) by calling (800) 988-5891; (2) on the Fund's
website located at http://www.ftportfolios.com; (3) on the SEC's website at
http://www.sec.gov; and (4) for review and copying at the SEC's Public Reference
Room ("PRR") in Washington, DC. Information regarding the operation of the PRR
may be obtained by calling (800) SEC-0330.
RISK CONSIDERATIONS
PRINCIPAL RISKS
You could lose money by investing in the Fund. An investment in the Fund is not
a deposit of a bank and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other governmental agency. There can be no
assurance that the Fund's investment objective will be achieved.
ASSET-BACKED AND MORTGAGE-RELATED SECURITIES RISK. The risk of investing in
mortgage-related and other asset-backed securities, including interest rate
risk, extension risk and prepayment risk. Generally, rising interest rates tend
to extend the duration of fixed rate mortgage-related securities, making them
more sensitive to changes in interest rates. Extension risk is prevalent when in
a period of rising interest rates, the Fund holds mortgage-related securities
and such securities exhibit additional volatility. Prepayment risk is prevalent
when in a period of declining interest rates, borrowers may pay off their
mortgages sooner than expected. Prepayments can reduce the returns of the Fund
because the Fund may have to reinvest that money at the lower prevailing
interest rates. The Fund's investments in asset-backed securities are subject to
risks similar to those associated with mortgage-related securities, as well as
additional risks associated with the nature of the assets and the servicing of
those assets.
CALL RISK. If an issuer calls higher yielding debt instruments held by the Fund,
performance could be adversely impacted.
CASH TRANSACTIONS RISK. The Fund will, under most circumstances, effect a
portion of creations and redemptions for cash, rather than in kind securities.
As a result, an investment in the Fund may be less tax efficient than an
investment in an ETF that effects its creations and redemption for in kind
securities. Because the Fund may effect a portion of redemptions for cash, it
may be required to sell portfolio securities in order to obtain the cash needed
to distribute redemption proceeds. A sale of shares may result in capital gains
or losses, and may also result in higher brokerage costs.
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.
FIXED INCOME SECURITIES RISK. An investment in the Fund involves risk associated
with an investment in fixed income securities including the risk that certain of
the securities in the Fund may not have the benefit of covenants that would
prevent the issuer from engaging in capital restructurings or borrowing
transactions in connection with corporate acquisitions, leveraged buyouts or
restructurings. This limitation could reduce the ability of the issuer to meet
its payment obligations and might result in increased credit risk. In addition,
certain of the securities may be redeemed or prepaid by the issuer, resulting in
lower interest payments received by the Fund and reduced distributions to
shareholders.
FLOATING RATE LOAN RISK. An investment in floating rate loans subjects the Fund
to credit risk, which is heightened for loans in which the Fund invests because
companies that issue such loans tend to be highly leveraged and thus are more
susceptible to the risks of interest deferral, default and/or bankruptcy. The
loans are usually rated below investment grade but may also be unrated. An
economic downturn would generally lead to a higher non-payment rate, and a loan
may lose significant market value before a default occurs. Moreover, any
specific collateral used to secure a loan may decline in value or become
illiquid, which would adversely affect the loan's value. Unlike the securities
markets, there is no central clearinghouse for loan trades, and the loan market
has not established enforceable settlement standards or remedies for failure to
settle. Therefore, portfolio transactions in loans may have uncertain settlement
time periods. Loans are subject to a number of risks described elsewhere in this
Page 28
--------------------------------------------------------------------------------
ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST ENHANCED SHORT MATURITY ETF (FTSM)
APRIL 30, 2016 (UNAUDITED)
prospectus, including liquidity risk and the risk of investing in below
investment grade debt instruments. Floating rate loans are subject to prepayment
risk. The degree to which borrowers prepay loans, whether as a contractual
requirement or at their election, may be affected by general business
conditions, the financial condition of the borrower and competitive conditions
among loan investors, among others. As such, prepayments cannot be predicted
with accuracy. Upon a prepayment, either in part or in full, the actual
outstanding debt on which the Fund derives interest income will be reduced. The
Fund may not be able to reinvest the proceeds received on terms as favorable as
the prepaid loan.
HIGH YIELD SECURITIES RISK. High yield securities, or "junk" bonds, are subject
to greater market fluctuations and risk of loss than securities with higher
ratings, and therefore, may be highly speculative. These securities are issued
by companies that may have limited operating history, narrowly focused
operations, and/or other impediments to the timely payment of periodic interest
and principal at maturity. If the economy slows down or dips into recession, the
issuers of high yield securities may not have sufficient resources to continue
making timely payment of periodic interest and principal at maturity. The market
for high yield securities is generally smaller and less liquid than that for
investment grade securities. High yield securities are generally not listed on a
national securities exchange but trade in the over the counter markets. Due to
the smaller, less liquid market for high yield securities, the bid offer spread
on such securities is generally greater than it is for investment grade
securities and the purchase or sale of such securities may take longer to
complete. In general, high yield securities may have a greater risk of default
than other types of securities.
ILLIQUID SECURITIES RISK. Some of the securities held by the Fund may be
illiquid. Illiquid securities involve the risk that the securities will not be
able to be sold at the time desired by the Fund or at prices approximately the
value at which the Fund is carrying the securities on its books.
INCOME RISK. Income from the Fund's fixed income investments could decline
during periods of falling interest rates.
INTEREST RATE RISK. Interest rate risk is the risk that the value of the Fixed
Income Securities in the Fund's portfolio will decline because of rising market
interest rates. Interest rate risk is generally lower for shorter term Fixed
Income Securities and higher for longer term Fixed Income Securities. Duration
is a measure of the expected price volatility of a debt security as a result of
changes in market rates of interest, based on, among other factors, the weighted
average timing of the Fixed Income Security's expected principal and interest
payments. In general, duration represents the expected percentage change in the
value of a security for an immediate 1% change in interest rates. Therefore,
prices of Fixed Income Securities with shorter durations tend to be less
sensitive to interest rate changes than Fixed Income Securities with longer
durations. As the value of a Fixed Income Security changes over time, so will
its duration. Mortgage-related securities are particularly subject to the risk
that interest rate volatility may adversely impact the valuation and price of
such securities.
INVESTMENT COMPANIES RISK. The Fund may invest in the shares of other investment
companies, and therefore, the Fund's investment performance and risks may be
related to the investment performance and risks of the underlying funds. In
general, as a shareholder in other investment companies, the Fund bears its
ratable share of the underlying fund's expenses, and would be subject to
duplicative expenses to the extent the Fund invests in other investment
companies. Pursuant to a contractual agreement, the Fund's investment advisor
has agreed to reduce the management fee paid by the Fund by the proportional
amount of the acquired fund fees and expenses of the shares of investment
companies held by the Fund so that the Fund would not bear the indirect costs of
holding them, provided, that, the investment companies are advised by the Fund's
investment advisor.
MANAGEMENT RISK. The Fund is subject to management risk because it is an
actively managed portfolio. The Fund's investment advisor will apply investment
techniques and risk analyses that may not have the desired result. There can be
no guarantee that the Fund will meet its investment objectives.
MARKET RISK. Market risk is the risk that a particular security owned by the
Fund or shares of the Fund in general may fall in value. Securities are subject
to market fluctuations caused by such factors as economic, political, regulatory
or market developments, changes in interest rates and perceived trends in
securities prices. Overall security values could decline generally or could
underperform other investments.
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.
Page 29
--------------------------------------------------------------------------------
ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST ENHANCED SHORT MATURITY ETF (FTSM)
APRIL 30, 2016 (UNAUDITED)
NON-U.S. SECURITIES RISK. The Fund invests in securities of non-U.S. issuers.
Non-U.S. securities are subject to higher volatility than securities of domestic
issuers due to possible adverse political, social or economic developments;
restrictions on foreign investment or exchange of securities; lack of liquidity;
currency exchange rates; excessive taxation; government seizure of assets;
different legal or accounting standards and less government supervision and
regulation of exchanges in foreign countries.
PORTFOLIO TURNOVER RISK. The Fund's strategy may frequently involve buying and
selling portfolio securities to rebalance the Fund's exposure to various market
sectors. High 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.
SOVEREIGN DEBT RISK. Investments in debt securities issued by foreign
governments ("Sovereign Debt") involve special risks because the governmental
authority that controls the repayment of the debt may be unwilling or unable to
repay the principal and/or interest when due in accordance with the terms of
such securities; the relative size of the debt service burden to the economy as
a whole; or the government debtor's policy towards the International Monetary
Fund and the political constraints to which a government debtor may be subject.
If an issuer of sovereign debt defaults on payments of principal and/or
interest, the Fund may have limited legal recourse against the issuer and/or
guarantor. In certain cases, remedies must be pursued in the courts of the
defaulting party itself, and the Fund's ability to obtain recourse may be
limited.
VOLATILITY RISK. The market price and net asset value of the Fund's shares and
the Fund's yield will change daily. There may be instances when the Fund will
experience large in flows and out flows, which will significantly alter the
Fund's size. At times, these fluctuations may negatively impact the Fund's
yield, result in increased transaction costs for the Fund and contribute to the
overall volatility of the Fund. The risk will be more prevalent when the Fund is
smaller in size, such as during the Fund's invest up period. An investor may
lose money by investing in this Fund because this Fund is not a money market
fund and may experience significant fluctuations in its net asset value.
Page 30
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FIRST TRUST
First Trust Exchange-Traded Fund IV
INVESTMENT ADVISOR
First Trust Advisors L.P.
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
ADMINISTRATOR, CUSTODIAN,
FUND ACCOUNTANT &
TRANSFER AGENT
The Bank of New York Mellon
101 Barclay Street
New York, NY 10286
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
111 S. Wacker Drive
Chicago, IL 60606
LEGAL COUNSEL
Chapman and Cutler LLP
111 W. Monroe Street
Chicago, IL 60603
{BLANK BACK COVER}
FIRST TRUST
First Trust Exchange-Traded Fund IV
--------------------------------------------------------------------------------
First Trust Strategic Income
ETF (FDIV)
Semi-Annual Report
For the Six Months Ended
April 30, 2016
--------------------------------------------------------------------------------
TABLE OF CONTENTS
--------------------------------------------------------------------------------
FIRST TRUST STRATEGIC INCOME ETF (FDIV)
SEMI-ANNUAL REPORT
APRIL 30, 2016
Shareholder Letter........................................................... 1
Fund Performance Overview.................................................... 2
Portfolio Management......................................................... 4
Understanding Your Fund Expenses............................................. 5
Portfolio of Investments..................................................... 6
Statement of Assets and Liabilities.......................................... 15
Statement of Operations...................................................... 16
Statements of Changes in Net Assets.......................................... 17
Financial Highlights......................................................... 18
Notes to Financial Statements................................................ 19
Additional Information....................................................... 30
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning of
the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934,
as amended. Forward-looking statements include statements regarding the goals,
beliefs, plans or current expectations of First Trust Advisors L.P. ("First
Trust" or the "Advisor") and/or First Trust Global Portfolios Ltd. ("FTGP");
Energy Income Partners, LLC ("EIP"); Stonebridge Advisors LLC ("Stonebridge");
and/or Richard Bernstein Advisors LLC ("RBA") (each, a "Sub-Advisor" and
together, the "Sub-Advisors") and their respective representatives, taking into
account the information currently available to them. Forward-looking statements
include all statements that do not relate solely to current or historical fact.
For example, forward-looking statements include the use of words such as
"anticipate," "estimate," "intend," "expect," "believe," "plan," "may,"
"should," "would" or other words that convey uncertainty of future events or
outcomes.
Forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
the series of First Trust Exchange-Traded Fund IV (the "Trust") described in
this report (First Trust Strategic Income ETF; hereinafter referred to as the
"Fund") to be materially different from any future results, performance or
achievements expressed or implied by the forward-looking statements. When
evaluating the information included in this report, you are cautioned not to
place undue reliance on these forward-looking statements, which reflect the
judgment of the Advisor and/or Sub-Advisors and their respective representatives
only as of the date hereof. We undertake no obligation to publicly revise or
update these forward-looking statements to reflect events and circumstances that
arise after the date hereof.
PERFORMANCE AND RISK DISCLOSURE
There is no assurance that the Fund will achieve its investment objectives. The
Fund is subject to market risk, which is the possibility that the market values
of securities owned by the Fund will decline and that the value of the Fund
shares may therefore be less than what you paid for them. Accordingly, you can
lose money investing in the Fund. See "Risk Considerations" in the Additional
Information section of this report for a discussion of 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 and/or Sub-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 the prospectus, the statement of
additional information, this report and other Fund regulatory filings.
--------------------------------------------------------------------------------
SHAREHOLDER LETTER
--------------------------------------------------------------------------------
FIRST TRUST STRATEGIC INCOME ETF (FDIV)
SEMI-ANNUAL LETTER FROM THE CHAIRMAN AND CEO
APRIL 30, 2016
Dear Shareholders:
Thank you for your investment in First Trust Strategic Income ETF (the "Fund").
First Trust Advisors L.P. ("First Trust") is pleased to provide you with the
semi-annual report which contains detailed information about your investment for
the six months ended April 30, 2016. Additionally, First Trust compiled the
Fund's financial statements for you to review. We encourage you to read this
report and discuss it with your financial advisor.
While markets were up and down during 2015, we believe there are three important
things to remember. First, the U.S. economy grew, despite the massive decline in
oil prices. Second, the tapering that began in 2014 by the Federal Reserve (the
"Fed") did not stop growth in the U.S. economy. Finally, the long-anticipated
rate hike by the Fed in December had little effect on the money supply, and the
stock market was not shocked by the hike. Early in 2016, many investors were
concerned that the volatility we saw in the market in 2015 would continue, and
it did. From December 31, 2015 through February 11, 2016, the S&P 500(R) Index
declined by 10.27%. Since then, the market has made a steady comeback, and as of
April 30, 2016, the S&P 500(R) Index was up 13.39%.
First Trust believes that having a long-term investment horizon and being
invested in quality products can help you reach your goals, despite how the
market behaves. We have always maintained perspective about the markets and
believe investors should as well. We will continue to strive to provide quality
investments each and every day, which has been one of the hallmarks of our firm
since its inception 25 years ago.
Thank you for giving First Trust the opportunity to be a part of your investment
plan.
Sincerely,
/s/ James A. Bowen
James A. Bowen
Chairman of the Board of Trustees
Chief Executive Officer of First Trust Advisors L.P.
Page 1
--------------------------------------------------------------------------------
FUND PERFORMANCE OVERVIEW (UNAUDITED)
--------------------------------------------------------------------------------
FIRST TRUST STRATEGIC INCOME ETF (FDIV)
The primary investment objective of the First Trust Strategic Income ETF (the
"Fund") is to seek risk-adjusted income. The Fund's secondary investment
objective is capital appreciation. The Fund is a multi-manager, multi-strategy
actively managed exchange-traded fund. First Trust Advisors L.P. ("First Trust"
or the "Advisor") serves as the advisor. The Advisor's Investment Committee
determines the Fund's strategic allocation among various general investment
categories and allocates the Fund's assets to portfolio management teams
comprised of personnel of the Advisor and/or a sub-advisor (each, a "Management
Team"), which employ their respective investment strategies. Shares of the Fund
are listed on The Nasdaq Stock Exchange LLC under the ticker symbol "FDIV."
The Fund's investment categories are: (i) high yield corporate bonds, commonly
referred to as "junk" bonds, and first lien senior secured floating rate bank
loans; (ii) mortgage-related investments; (iii) preferred securities; (iv)
international sovereign bonds, including emerging markets debt; (v) equity
securities of Energy Infrastructure Companies, certain of which are master
limited partnerships ("MLPs"); and (vi) dividend paying U.S. exchange-traded
equity securities and depositary receipts. The Management Teams may utilize a
related option overlay strategy and/or derivative instruments in implementing
their respective investment strategies for the Fund. Additionally, the
Management Team may seek to gain exposure to the Fund's investment categories
through investments in exchange-traded funds. The Fund seeks to achieve its
objectives by having each Management Team focus on those instruments within its
respective investment category. The Fund may add or remove investment categories
or Management Teams at the discretion of the Advisor.
-----------------------------------------------------------------------------------------------------------------------------
PERFORMANCE
-----------------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL CUMULATIVE
TOTAL RETURNS TOTAL RETURNS
6 Months Ended 1 Year Ended Inception (8/13/14) Inception (8/13/14)
4/30/16 4/30/16 to 4/30/16 to 4/30/16
FUND PERFORMANCE
NAV 4.47% 1.02% 2.52% 4.35%
Market Price 2.11% -1.61% 0.87% 1.50%
INDEX PERFORMANCE
Blended Index(1) 2.78% -1.82% 0.03% 0.05%
Barclays Capital U.S. Aggregate Bond Index 2.83% 2.74% 3.29% 5.70%
Russell 3000(R) Index 0.06% -0.18% 4.84% 8.44%
-----------------------------------------------------------------------------------------------------------------------------
Total returns for the period since inception are calculated from the inception
date of the Fund. "Average Annual Total Returns" represent the average annual
change in value of an investment over the period indicated. "Cumulative Total
Returns" represent the total change in value of an investment over the period
indicated.
The Fund's per share net asset value ("NAV") is the value of one share of the
Fund and is computed by dividing the value of all assets of the Fund (including
accrued interest and dividends), less all liabilities (including accrued
expenses and dividends declared but unpaid), by the total number of outstanding
shares. The price used to calculate market return ("Market Price") is determined
by using the midpoint between the highest bid and the lowest offer on the stock
exchange on which shares of the Fund are listed for trading as of the time that
the Fund's NAV is calculated. Since shares of the Fund did not trade in the
secondary market until after the Fund's inception, for the period from inception
to the first day of secondary market trading in shares of the Fund, the NAV of
the Fund is used as a proxy for the secondary market trading price to calculate
market returns. NAV and market returns assume that all distributions have been
reinvested in the Fund at NAV and Market Price, respectively.
An index is a statistical composite that tracks a specified financial market or
sector. Unlike the Fund, the indices do not actually hold a portfolio of
securities and therefore do not incur the expenses incurred by the Fund. These
expenses negatively impact the performance of the Fund. Also, market returns do
not include brokerage commissions that may be payable on secondary market
transactions. If brokerage commissions were included, market returns would be
lower. The total returns presented reflect the reinvestment of dividends on
securities in the indices. The returns presented do not reflect the deduction of
taxes that a shareholder would pay on Fund distributions or the redemption or
sale of Fund shares. The investment return and principal value of shares of the
Fund will vary with changes in market conditions. Shares of the Fund may be
worth more or less than their original cost when they are redeemed or sold in
the market. The Fund's past performance is no guarantee of future performance.
-----------------------------
(1) The Blended Index is equally weighted to include these six indices: the
Alerian MLP Index, Dow Jones U.S. Select Dividend Index, BofA Merrill
Lynch Fixed Rate Preferred Securities Index, BofA Merrill Lynch U.S. High
Yield Index, Barclays EM USD Aggregate Index and Barclays U.S. MBS Index.
An index does not charge management fees or brokerage expenses, and no
such fees or expenses were deducted from the index performance shown.
Indices are unmanaged and an investor cannot invest directly in an index.
Page 2
--------------------------------------------------------------------------------
FUND PERFORMANCE OVERVIEW (UNAUDITED) (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST STRATEGIC INCOME ETF (FDIV)
-----------------------------------------------------------
% OF TOTAL
ASSET CLASSIFICATION INVESTMENTS
-----------------------------------------------------------
Exchange-Traded Funds 39.44%
Common Stocks 22.43
U.S. Government Agency Mortgage-
Backed Securities 13.29
Master Limited Partnerships 13.19
Foreign Sovereign Bonds 3.07
Mortgage-Backed Securities 2.90
$25 Par Preferred Securities 2.76
Real Estate Investment Trusts 2.13
Asset-Backed Securities 0.78
Call Options Purchased 0.01
--------
Total 100.00%
========
-----------------------------------------------------------
% OF TOTAL
TOP TEN HOLDINGS INVESTMENTS
-----------------------------------------------------------
First Trust Tactical High Yield ETF 18.64%
First Trust Preferred Securities and
Income ETF 10.11
iShares J.P. Morgan USD Emerging
Markets Bond ETF 5.24
First Trust Emerging Markets Local
Currency Bond ETF 5.08
Enterprise Products Partners, L.P. 1.99
Enbridge Energy Partners, L.P. 1.38
Spectra Energy Partners, L.P. 1.16
Magellan Midstream Partners, L.P. 1.15
TransCanada Corp. 1.06
Plains All American Pipeline, L.P. 1.00
--------
Total 46.81%
========
PERFORMANCE OF A $10,000 INITIAL INVESTMENT
AUGUST 13, 2014 - APRIL 30, 2016
First Trust Barclays Capital
Strategic Blended U.S. Aggregate Russell 3000(R)
Income ETF Index(1) Bond Index Index
8/13/14 $10,000 $10,002 $10,003 $10,000
10/31/14 10,177 10,129 10,080 10,371
4/30/15 10,330 10,191 10,288 10,863
10/31/15 9,989 9,735 10,280 10,837
4/30/16 10,436 10,006 10,571 10,844
Performance figures assume reinvestment of all distributions and do not reflect
the deduction of taxes that a shareholder would pay on Fund distributions or the
redemption or sale of Fund shares. An index is a statistical composite that
tracks a specified financial market or sector. Unlike the Fund, the indices do
not actually hold a portfolio of securities and therefore do not incur the
expenses incurred by the Fund. These expenses negatively impact the performance
of the Fund. The Fund's past performance does not predict future performance.
FREQUENCY DISTRIBUTION OF DISCOUNTS AND PREMIUMS
BID/ASK MIDPOINT VS. NAV THROUGH APRIL 30, 2016
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 14, 2014 (commencement
of trading) through April 30, 2016. Shareholders may pay more than NAV when they
buy Fund shares and receive less than NAV when they sell those shares because
shares are bought and sold at current market price. Data presented represents
past performance and cannot be used to predict future results.
NUMBER OF DAYS BID/ASK MIDPOINT NUMBER OF DAYS BID/ASK MIDPOINT
AT/ABOVE NAV BELOW NAV
---------------------------------------- ----------------------------------------
0.00%- 0.50%- 1.00%- 0.00%- 0.50%- 1.00%-
FOR THE PERIOD 0.49% 0.99% 1.99% >=2.00% 0.49% 0.99% 1.99% >=2.00%
8/14/14 - 10/31/14 16 0 0 0 35 5 0 0
11/1/14 - 10/31/15 36 6 6 2 152 33 9 7
11/1/15 - 4/30/16 29 3 1 0 71 16 3 1
Page 3
--------------------------------------------------------------------------------
PORTFOLIO MANAGEMENT
--------------------------------------------------------------------------------
FIRST TRUST STRATEGIC INCOME ETF (FDIV)
SEMI-ANNUAL REPORT
APRIL 30, 2016
First Trust Advisors L.P. ("First Trust" or the "Advisor"), 120 East Liberty
Drive, Wheaton, Illinois 60187, is the investment advisor to the First Trust
Strategic Income ETF ("FDIV" or the "Fund"). The following serve as investment
sub-advisors (each, a "Sub-Advisor") to the Fund: First Trust Global Portfolios
Ltd. ("FTGP"); Energy Income Partners, LLC ("EIP"); Stonebridge Advisors LLC
("Stonebridge"); and Richard Bernstein Advisors LLC ("RBA"). The Advisor's
Investment Committee determines the Fund's strategic allocation among various
general investment categories and allocates the Fund's assets to portfolio
management teams comprised of personnel of the Advisor and/or a Sub-Advisor,
which employ their respective investment strategies.
PORTFOLIO MANAGEMENT TEAM
ADVISOR'S INVESTMENT COMMITTEE
The Advisor's Investment Committee, which determines the Fund's strategic
allocation among various general investment categories and allocates the Fund's
assets, consists of:
o DANIEL J. LINDQUIST, CHAIRMAN OF THE INVESTMENT COMMITTEE AND MANAGING
DIRECTOR OF FIRST TRUST;
o DAVID G. MCGAREL, CHIEF INVESTMENT OFFICER AND MANAGING DIRECTOR OF FIRST
TRUST;
o JON C. ERICKSON, SENIOR VICE PRESIDENT OF FIRST TRUST;
o ROGER F. TESTIN, SENIOR VICE PRESIDENT OF FIRST TRUST;
o TODD LARSON, CFA, VICE PRESIDENT AND PORTFOLIO MANAGER OF FIRST TRUST;
o JOHN GAMBLA, CFA, FRM, PRM, SENIOR PORTFOLIO MANAGER OF FIRST TRUST;
o ROB A. GUTTSCHOW, CFA, SENIOR PORTFOLIO MANAGER OF FIRST TRUST; AND
o CHRIS A. PETERSON, CFA, PORTFOLIO MANAGER OF FIRST TRUST
ADVISOR PORTFOLIO MANAGERS
o WILLIAM HOUSEY, SENIOR VICE PRESIDENT AND SENIOR PORTFOLIO MANAGER OF
FIRST TRUST, LEVERAGED FINANCE TEAM;
o SCOTT D. FRIES, SENIOR VICE PRESIDENT OF FIRST TRUST, LEVERAGED FINANCE
TEAM;
o JEREMIAH CHARLES, VICE PRESIDENT AND PORTFOLIO MANAGER OF FIRST TRUST,
FTA-MORTGAGE BACKED SECURITIES TEAM; AND
o JAMES SNYDER, VICE PRESIDENT AND PORTFOLIO MANAGER OF FIRST TRUST,
FTA-MORTGAGE BACKED SECURITIES TEAM.
SUB-ADVISOR PORTFOLIO MANAGERS
o JAMES J. MURCHIE, FOUNDER, CHIEF EXECUTIVE OFFICER, CO-PORTFOLIO MANAGER
AND PRINCIPAL OF EIP.
o DEREK FULTON, CHIEF EXECUTIVE OFFICER AND CHIEF INVESTMENT OFFICER OF
FTGP.
o LEONARDO DACOSTA, PORTFOLIO MANAGER OF FTGP.
o RICHARD BERNSTEIN, CHIEF EXECUTIVE OFFICER AND CHIEF INVESTMENT OFFICER OF
RBA.
o SCOTT T. FLEMING, PRESIDENT AND CHIEF INVESTMENT OFFICER OF STONEBRIDGE.
Page 4
FIRST TRUST STRATEGIC INCOME ETF (FDIV)
UNDERSTANDING YOUR FUND EXPENSES
APRIL 30, 2016 (UNAUDITED)
As a shareholder of First Trust Strategic Income ETF (the "Fund"), you incur two
types of costs: (1) transaction costs; and (2) ongoing costs, including
management fees, distribution and/or service fees, if any, and other Fund
expenses. This Example is intended to help you understand your ongoing costs of
investing in the Fund and to compare these costs with the ongoing costs of
investing in other funds.
The Example is based on an investment of $1,000 invested at the beginning of the
period and held through the six-month period ended April 30, 2016.
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 period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second line in the following table provides information about hypothetical
account values and hypothetical expenses based on the Fund's actual expense
ratio and an assumed rate of return of 5% per year before expenses, which is not
the Fund's actual return. The hypothetical account values and expenses may not
be used to estimate the actual ending account balance or expenses you paid for
the period. You may use this information to compare the ongoing costs of
investing in the Fund and other funds. To do so, compare this 5% hypothetical
example with the 5% hypothetical examples that appear in the shareholder reports
of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs such as brokerage
commissions. Therefore, the second line in the table is useful in comparing
ongoing costs only, and will not help you determine the relative total costs of
owning different funds. In addition, if these transactional costs were included,
your costs would have been higher.
---------------------------------------------------------------------------------------------------------------------------
ANNUALIZED
EXPENSE RATIO EXPENSES PAID
BEGINNING ENDING BASED ON THE DURING THE
ACCOUNT VALUE ACCOUNT VALUE SIX-MONTH SIX-MONTH
NOVEMBER 1, 2015 APRIL 30, 2016 PERIOD (a) PERIOD (b)
---------------------------------------------------------------------------------------------------------------------------
FIRST TRUST STRATEGIC INCOME ETF (FDIV)
Actual $1,000.00 $1,044.70 0.55% $2.80
Hypothetical (5% return before expenses) $1,000.00 $1,022.13 0.55% $2.77
(a) These expense ratios reflect expense waivers. See Note 3 in the Notes to
Financial Statements.
(b) Expenses are equal to the annualized expense ratio as indicated in the
table, multiplied by the average account value over the period (November
1, 2015 through April 30, 2016), multiplied by 182/366 (to reflect the
one-half year period).
Page 5
FIRST TRUST STRATEGIC INCOME ETF (FDIV)
PORTFOLIO OF INVESTMENTS
APRIL 30, 2016 (UNAUDITED)
SHARES DESCRIPTION VALUE
---------------- --------------------------------------------------------------------------------------------- ---------------
EXCHANGE-TRADED FUNDS -- 38.7%
CAPITAL MARKETS -- 38.7%
17,100 First Trust Emerging Markets Local Currency Bond ETF (a)..................................... $ 730,170
76,911 First Trust Preferred Securities and Income ETF (a).......................................... 1,454,387
55,885 First Trust Tactical High Yield ETF (a)...................................................... 2,679,686
155 iShares 20+ Year Treasury Bond ETF........................................................... 20,054
195 iShares 7-10 Year Treasury Bond ETF.......................................................... 21,450
6,750 iShares J.P. Morgan USD Emerging Markets Bond ETF............................................ 753,502
113 iShares MBS ETF.............................................................................. 12,362
---------------
TOTAL EXCHANGE-TRADED FUNDS.................................................................. 5,671,611
(Cost $5,679,951) ---------------
COMMON STOCKS -- 22.0%
BANKS -- 4.1%
2,740 Access National Corp. ....................................................................... 53,868
2,063 American National Bankshares, Inc. .......................................................... 55,144
1,964 Arrow Financial Corp. ....................................................................... 55,306
1,108 City Holding Co.............................................................................. 54,425
1,474 Community Trust Bancorp, Inc. ............................................................... 52,872
1,941 NBT Bancorp, Inc. ........................................................................... 55,008
2,183 Northrim BanCorp, Inc. ...................................................................... 56,322
1,388 Peoples Financial Services Corp. ............................................................ 54,715
1,432 United Bankshares, Inc. ..................................................................... 55,404
2,740 Univest Corp. of Pennsylvania................................................................ 54,088
1,380 Washington Trust Bancorp, Inc. .............................................................. 50,549
---------------
597,701
---------------
BIOTECHNOLOGY -- 0.4%
352 Amgen, Inc. ................................................................................. 55,722
---------------
CAPITAL MARKETS -- 0.8%
1,828 Federated Investors, Inc., Class B........................................................... 57,765
712 T. Rowe Price Group, Inc. ................................................................... 53,606
---------------
111,371
---------------
COMMUNICATIONS EQUIPMENT -- 0.3%
1,872 Cisco Systems, Inc. ......................................................................... 51,461
---------------
CONTAINERS & PACKAGING -- 0.3%
1,076 Sonoco Products Co........................................................................... 50,454
---------------
DIVERSIFIED CONSUMER SERVICES -- 0.4%
988 Capella Education Co......................................................................... 54,646
---------------
ELECTRIC UTILITIES -- 3.4%
941 ALLETE, Inc. ................................................................................ 52,875
285 Alliant Energy Corp. ........................................................................ 20,098
1,432 American Electric Power Co., Inc. ........................................................... 90,931
81 Duke Energy Corp. ........................................................................... 6,381
361 Emera, Inc. (CAD)............................................................................ 13,083
1,579 Eversource Energy............................................................................ 89,119
1,485 Exelon Corp. ................................................................................ 52,109
703 IDACORP, Inc. ............................................................................... 51,129
1,000 NextEra Energy, Inc. ........................................................................ 117,579
---------------
493,304
---------------
Page 6 See Notes to Financial Statements
FIRST TRUST STRATEGIC INCOME ETF (FDIV)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2016 (UNAUDITED)
SHARES DESCRIPTION VALUE
---------------- --------------------------------------------------------------------------------------------- ---------------
COMMON STOCKS (CONTINUED)
ELECTRICAL EQUIPMENT -- 0.4%
966 Emerson Electric Co.......................................................................... $ 52,773
---------------
FOOD PRODUCTS -- 0.4%
2,835 Flowers Foods, Inc. ......................................................................... 54,319
---------------
GAS UTILITIES -- 0.7%
534 Atmos Energy Corp. .......................................................................... 38,742
315 Chesapeake Utilities Corp. .................................................................. 18,749
362 New Jersey Resources Corp. .................................................................. 12,916
214 ONE Gas, Inc. ............................................................................... 12,513
648 UGI Corp. ................................................................................... 26,076
---------------
108,996
---------------
HEALTH CARE EQUIPMENT & SUPPLIES -- 0.3%
2,480 Meridian Bioscience, Inc. ................................................................... 47,393
---------------
HOTELS, RESTAURANTS & LEISURE -- 0.3%
341 Cracker Barrel Old Country Store, Inc. ...................................................... 49,926
---------------
INSURANCE -- 0.8%
1,185 Arthur J. Gallagher & Co..................................................................... 54,557
1,335 Principal Financial Group, Inc. ............................................................. 56,978
---------------
111,535
---------------
INTERNET & CATALOG RETAIL -- 0.4%
2,949 PetMed Express, Inc. ........................................................................ 53,967
---------------
IT SERVICES -- 0.3%
965 Paychex, Inc. ............................................................................... 50,296
---------------
MULTILINE RETAIL -- 0.3%
634 Target Corp. ................................................................................ 50,403
---------------
MULTI-UTILITIES -- 3.4%
688 Consolidated Edison, Inc. ................................................................... 51,325
367 National Grid PLC, ADR....................................................................... 26,428
851 NorthWestern Corp. .......................................................................... 48,371
1,969 Public Service Enterprise Group, Inc. ....................................................... 90,830
1,321 SCANA Corp. ................................................................................. 90,739
887 Sempra Energy................................................................................ 91,670
1,033 Vectren Corp. ............................................................................... 50,462
728 WEC Energy Group, Inc. ...................................................................... 42,377
---------------
492,202
---------------
OIL, GAS & CONSUMABLE FUELS -- 2.9%
1,764 Enbridge Income Fund Holdings, Inc. (CAD).................................................... 40,757
337 Enbridge, Inc. .............................................................................. 13,999
1,354 Inter Pipeline Ltd. (CAD).................................................................... 28,953
7,414 Kinder Morgan, Inc. ......................................................................... 131,673
1,328 Targa Resources Corp. ....................................................................... 53,731
3,664 TransCanada Corp. ........................................................................... 152,020
---------------
421,133
---------------
PHARMACEUTICALS -- 0.4%
1,317 Sanofi, ADR.................................................................................. 54,129
---------------
See Notes to Financial Statements Page 7
FIRST TRUST STRATEGIC INCOME ETF (FDIV)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2016 (UNAUDITED)
SHARES DESCRIPTION VALUE
---------------- --------------------------------------------------------------------------------------------- ---------------
COMMON STOCKS (CONTINUED)
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT -- 0.7%
1,180 Linear Technology Corp. ..................................................................... $ 52,486
926 NVE Corp. ................................................................................... 53,134
---------------
105,620
---------------
SOFTWARE -- 0.4%
5,952 American Software, Inc., Class A............................................................. 54,401
---------------
TOBACCO -- 0.3%
1,042 Reynolds American, Inc. ..................................................................... 51,683
---------------
WATER UTILITIES -- 0.3%
1,914 Artesian Resources Corp., Class A............................................................ 51,659
---------------
TOTAL COMMON STOCKS.......................................................................... 3,225,094
(Cost $3,072,510) ---------------
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- ---------------------------------------------------------------- ----------- -------------- ---------------
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES -- 13.0%
COLLATERALIZED MORTGAGE OBLIGATIONS -- 3.0%
Federal Home Loan Mortgage Corporation
$ 23,250 Series 1998-192,Class IO, IO, STRIPS......................... 6.50% 02/01/28 4,295
1,036 Series 2002-2495, Class UJ................................... 3.50% 07/15/32 1,048
1,513 Series 2003-2637, Class F (b)................................ 0.83% 06/15/18 1,515
22,713 Series 2004-2776, Class QP................................... 4.00% 01/15/34 23,259
7,123 Series 2005-3031, Class AG................................... 5.00% 02/15/34 7,123
161,442 Series 2006-3114, Class GI, IO (b)........................... 6.17% 02/15/36 39,187
14,290 Series 2006-3200, Class PO, PO............................... (c) 08/15/36 12,818
19,092 Series 2007-3373, Class TO, PO............................... (c) 04/15/37 18,121
331,693 Series 2007-3380, Class SI, IO (b)........................... 5.94% 10/15/37 60,718
10,000 Series 2010-3626, Class ME................................... 5.00% 01/15/40 11,582
17,009 Series 2011-3795, Class CA................................... 4.50% 05/15/39 17,565
39,288 Series 2011-3851, Class SC (b)............................... 7.93% 05/15/40 41,548
36,995 Series 2011-3917, Class AI, IO............................... 4.50% 07/15/26 3,695
18,541 Series 2012-4101, Class QN................................... 3.50% 09/15/42 19,786
Federal National Mortgage Association
11,790 Series 1992-205, Class Z..................................... 7.00% 11/25/22 12,960
47,193 Series 1993-247, Class 2, IO, STRIPS......................... 7.50% 10/25/23 7,825
251 Series 2002-19, Class PE..................................... 6.00% 04/25/17 252
15,206 Series 2002-94, Class HQ..................................... 4.50% 01/25/18 15,520
21,953 Series 2003-W2, Class 1A1.................................... 6.50% 07/25/42 25,696
62,080 Series 2005-45, Class SR, IO (b)............................. 6.28% 06/25/35 11,048
170,992 Series 2012-409, Class C17, IO, STRIPS....................... 4.00% 11/25/41 30,515
112,463 Series 2015-14, Class IK, IO................................. 0.75% 03/25/45 13,259
Government National Mortgage Association
68,835 Series 1999-30, Class S, IO (b).............................. 8.16% 08/16/29 17,612
2,033 Series 2005-91, Class PC..................................... 5.50% 01/20/35 2,090
57,520 Series 2012-34, Class SD, IO (b)............................. 5.61% 03/16/42 11,999
76,991 Series 2013-20, Class KI, IO................................. 5.00% 01/20/43 12,687
78,039 Series 2013-67, Class PI, IO................................. 4.00% 12/16/42 11,177
---------------
434,900
---------------
Page 8 See Notes to Financial Statements
FIRST TRUST STRATEGIC INCOME ETF (FDIV)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2016 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- ---------------------------------------------------------------- ----------- -------------- ---------------
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES (CONTINUED)
PASS-THROUGH SECURITIES -- 10.0%
Federal Home Loan Mortgage Corporation
$ 99,350 Pool A47829.................................................. 4.00% 08/01/35 $ 106,476
88,508 Pool A94951.................................................. 4.00% 11/01/40 95,714
53,595 Pool A95134.................................................. 4.50% 11/01/40 58,751
54,758 Pool A97601.................................................. 4.50% 03/01/41 60,902
63,434 Pool G06501.................................................. 4.00% 04/01/41 68,249
83,459 Pool G07412.................................................. 3.50% 06/01/43 87,842
22,278 Pool O20138 (b).............................................. 5.00% 11/01/30 24,663
56,735 Pool Q05201.................................................. 4.00% 12/01/41 61,042
Federal National Mortgage Association
48,044 Pool AB2265.................................................. 4.00% 02/01/41 52,228
88,590 Pool AH1568.................................................. 4.50% 12/01/40 96,914
17,324 Pool AI1191.................................................. 4.50% 04/01/41 18,988
67,643 Pool AI7800.................................................. 4.50% 07/01/41 74,621
40,566 Pool AJ5299.................................................. 4.00% 11/01/41 44,099
52,076 Pool AJ5300.................................................. 4.00% 11/01/41 56,244
59,900 Pool AK3103.................................................. 4.00% 02/01/42 64,481
76,995 Pool AL3484.................................................. 4.50% 10/01/42 84,374
31,523 Pool AO4133.................................................. 3.50% 06/01/42 33,299
24,299 Pool AP4795.................................................. 3.50% 09/01/42 25,578
25,774 Pool AQ7081.................................................. 3.50% 12/01/42 27,217
28,326 Pool AR3315.................................................. 3.50% 02/01/43 29,995
22,736 Pool AT2887.................................................. 3.50% 04/01/43 23,922
31,085 Pool AU3741.................................................. 3.50% 08/01/43 32,807
88,771 Pool AU4726.................................................. 4.00% 09/01/43 95,790
Government National Mortgage Association
23,741 Pool 3500.................................................... 5.50% 01/20/34 26,788
14,964 Pool 3513.................................................... 5.00% 02/20/34 16,829
39,201 Pool 3555.................................................... 5.00% 05/20/34 44,052
57,268 Pool 609116.................................................. 4.50% 02/15/44 63,894
---------------
1,475,759
---------------
TOTAL U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES...................................... 1,910,659
(Cost $1,873,528) ---------------
UNITS DESCRIPTION VALUE
---------------- --------------------------------------------------------------------------------------------- ---------------
MASTER LIMITED PARTNERSHIPS -- 12.9%
CHEMICALS -- 0.3%
2,337 Westlake Chemical Partners, L.P. ............................................................ 44,730
---------------
GAS UTILITIES -- 0.7%
1,525 AmeriGas Partners, L.P. ..................................................................... 66,109
1,052 Suburban Propane Partners, L.P. ............................................................. 31,760
---------------
97,869
---------------
INDEPENDENT POWER AND RENEWABLE ELECTRICITY PRODUCERS -- 0.6%
3,033 NextEra Energy Partners, L.P. ............................................................... 87,623
---------------
See Notes to Financial Statements Page 9
FIRST TRUST STRATEGIC INCOME ETF (FDIV)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2016 (UNAUDITED)
UNITS DESCRIPTION VALUE
---------------- --------------------------------------------------------------------------------------------- ---------------
MASTER LIMITED PARTNERSHIPS (CONTINUED)
OIL, GAS & CONSUMABLE FUELS -- 11.3%
1,608 Alliance Holdings GP, L.P. .................................................................. $ 28,301
3,922 Alliance Resource Partners, L.P. ............................................................ 61,379
390 Buckeye Partners, L.P. ...................................................................... 28,080
5,250 Columbia Pipeline Partners, L.P. ............................................................ 76,283
9,175 Enbridge Energy Partners, L.P. .............................................................. 198,547
10,729 Enterprise Products Partners, L.P. .......................................................... 286,357
1,432 EQT Midstream Partners, L.P. ................................................................ 113,543
3,870 Holly Energy Partners, L.P. ................................................................. 132,431
2,298 Magellan Midstream Partners, L.P. ........................................................... 165,617
2,103 ONEOK Partners, L.P. ........................................................................ 74,572
6,289 Plains All American Pipeline, L.P. .......................................................... 144,270
3,302 Spectra Energy Partners, L.P. ............................................................... 166,520
2,120 Tallgrass Energy Partners, L.P. ............................................................. 87,132
1,880 TC PipeLines, L.P. .......................................................................... 102,968
---------------
1,666,000
---------------
TOTAL MASTER LIMITED PARTNERSHIPS............................................................ 1,896,222
(Cost $1,998,014) ---------------
PRINCIPAL
VALUE
(LOCAL STATED STATED VALUE
CURRENCY) DESCRIPTION COUPON MATURITY (U.S. DOLLAR)
---------------- ---------------------------------------------------------------- ----------- -------------- ---------------
FOREIGN SOVEREIGN BONDS -- 3.0%
AUSTRALIA -- 0.1%
20,000 Australia Government Bond, Series 137 (AUD)..................... 2.75% 04/21/24 15,591
---------------
BRAZIL -- 0.2%
125,000 Brazil Notas Do Tesouro Nacional, Series NTNF (BRL)............. 10.00% 01/01/17 35,652
---------------
COLOMBIA -- 0.4%
165,000,000 Colombian TES, Series B (COP)................................... 5.00% 11/21/18 55,244
---------------
CZECH REPUBLIC -- 0.3%
1,020,000 Czech Republic Government Bond, Series 89 (CZK)................. 2.40% 09/17/25 50,949
---------------
INDONESIA -- 0.3%
517,000,000 Indonesia Treasury Bond, Series FR70 (IDR)...................... 8.38% 03/15/24 41,049
---------------
ISRAEL -- 0.1%
50,000 Israel Government Bond, Series 1026 (ILS)....................... 6.25% 10/30/26 18,910
---------------
MALAYSIA -- 0.3%
150,000 Malaysia Government Bond, Series 0111 (MYR)..................... 4.16% 07/15/21 39,365
---------------
MEXICO -- 0.3%
620,000 Mexican Bonos, Series M 20 (MXN)................................ 10.00% 12/05/24 46,516
---------------
PERU -- 0.1%
30,000 Peru Government Bond (PEN)...................................... 7.84% 08/12/20 10,041
---------------
POLAND -- 0.3%
150,000 Poland Government Bond, Series 1019 (PLN)....................... 5.50% 10/25/19 44,209
---------------
Page 10 See Notes to Financial Statements
FIRST TRUST STRATEGIC INCOME ETF (FDIV)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2016 (UNAUDITED)
PRINCIPAL
VALUE
(LOCAL STATED STATED VALUE
CURRENCY) DESCRIPTION COUPON MATURITY (U.S. DOLLAR)
---------------- ---------------------------------------------------------------- ----------- -------------- ---------------
FOREIGN SOVEREIGN BONDS (CONTINUED)
SOUTH AFRICA -- 0.3%
350,000 South Africa Government Bond, Series R186 (ZAR)................. 10.50% 12/21/26 $ 27,141
300,000 South Africa Government Bond, Series R209 (ZAR)................. 6.25% 03/31/36 14,960
---------------
42,101
---------------
TURKEY -- 0.3%
110,000 Turkey Government Bond (TRY).................................... 10.50% 01/15/20 41,358
---------------
TOTAL FOREIGN SOVEREIGN BONDS................................................................ 440,985
(Cost $493,852) ---------------
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- ---------------------------------------------------------------- ----------- -------------- ---------------
MORTGAGE-BACKED SECURITIES -- 2.8%
COLLATERALIZED MORTGAGE OBLIGATIONS -- 1.9%
ABN AMRO Mortgage Corp.
$ 26,116 Series 2003-6, Class 2A2..................................... 4.50% 05/25/18 26,283
Banc of America Alternative Loan Trust
46,491 Series 2004-7, Class 4A1..................................... 5.00% 08/25/19 47,197
Banc of America Mortgage Trust
34,133 Series 2004-11, Class 1A5.................................... 5.50% 01/25/35 34,252
BCAP LLC Trust
42,470 Series 2011-R11, Class 30A5 (b) (d).......................... 2.58% 01/26/34 41,938
JPMorgan Resecuritization Trust
28,803 Series 2009-7, Class 5A1 (b) (d)............................. 6.00% 02/27/37 28,999
MASTR Alternative Loan Trust
34,123 Series 2004-13, Class 10A2................................... 5.50% 01/25/35 34,231
Residential Accredit Loans, Inc.
35,561 Series 2003-QS5, Class A2 (b)................................ 13.95% 03/25/18 37,429
21,913 Series 2003-QS20, Class CB................................... 5.00% 11/25/18 22,146
Wells Fargo Alternative Loan Trust
7,673 Series 2007-PA5, Class 2A1................................... 6.00% 11/25/22 7,779
---------------
280,254
---------------
COMMERCIAL MORTGAGE-BACKED SECURITIES -- 0.9%
Banc of America Commercial Mortgage Trust
15,242 Series 2006-4, Class A4...................................... 5.63% 07/10/46 15,244
Morgan Stanley Re-REMIC Trust
100,000 Series 2010-GG10, Class A4B (b) (d).......................... 5.99% 08/15/45 102,345
Wachovia Bank Commercial Mortgage Trust
19,488 Series 2006-C27, Class A3 (b)................................ 5.77% 07/15/45 19,460
---------------
137,049
---------------
TOTAL MORTGAGE-BACKED SECURITIES............................................................. 417,303
(Cost $417,234) ---------------
See Notes to Financial Statements Page 11
FIRST TRUST STRATEGIC INCOME ETF (FDIV)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2016 (UNAUDITED)
STATED STATED
SHARES DESCRIPTION RATE MATURITY VALUE
---------------- ---------------------------------------------------------------- ----------- -------------- ---------------
$25 PAR PREFERRED SECURITIES -- 2.7%
BANKS -- 1.2%
4,890 Citigroup, Inc., Series K (b)................................... 6.88% (e) $ 134,915
1,572 GMAC Capital Trust I, Series 2 (b).............................. 6.40% 02/15/40 39,410
---------------
174,325
---------------
CAPITAL MARKETS -- 0.8%
4,054 Morgan Stanley, Series E (b).................................... 7.13% (e) 116,553
---------------
INSURANCE -- 0.7%
4,035 PartnerRe Ltd., Series E........................................ 7.25% (e) 105,354
---------------
TOTAL $25 PAR PREFERRED SECURITIES........................................................... 396,232
(Cost $393,038) ---------------
SHARES DESCRIPTION VALUE
---------------- --------------------------------------------------------------------------------------------- ---------------
REAL ESTATE INVESTMENT TRUSTS -- 2.1%
HEALTH CARE REITS -- 0.7%
1,152 LTC Properties, Inc. ........................................................................ 53,441
786 National Health Investors, Inc. ............................................................. 53,519
---------------
106,960
---------------
OFFICE REITS -- 0.4%
5,016 Franklin Street Properties Corp. ............................................................ 53,270
---------------
RETAIL REITS -- 0.3%
836 Realty Income Corp. ......................................................................... 49,491
---------------
SPECIALIZED REITS -- 0.7%
1,642 Corrections Corp. of America................................................................. 49,950
446 Sovran Self Storage, Inc. ................................................................... 47,374
---------------
97,324
---------------
TOTAL REAL ESTATE INVESTMENT TRUSTS.......................................................... 307,045
(Cost $274,112) ---------------
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- ---------------------------------------------------------------- ----------- -------------- ---------------
ASSET-BACKED SECURITIES -- 0.8%
Ameriquest Mortgage Securities, Inc.
$ 23,202 Series 2004-R6, Class A1 (b)................................. 0.86% 07/25/34 22,906
First Alliance Mortgage Loan Trust
54,970 Series 1999-1, Class A1...................................... 7.18% 06/20/30 55,327
Home Equity Asset Trust
15,388 Series 2004-5, Class A3 (b).................................. 1.48% 11/25/34 15,324
Lehman XS Trust
19,900 Series 2005-2, Class 1A2 (b)................................. 1.14% 08/25/35 18,852
---------------
TOTAL ASSET-BACKED SECURITIES................................................................ 112,409
(Cost $110,621) ---------------
Page 12 See Notes to Financial Statements
FIRST TRUST STRATEGIC INCOME ETF (FDIV)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2016 (UNAUDITED)
NUMBER OF
CONTRACTS DESCRIPTION VALUE
---------------- --------------------------------------------------------------------------------------------- ---------------
CALL OPTIONS PURCHASED -- 0.0%
1 U.S. Treasury Long Bond Futures Call
@ $164.00 due May 2016.................................................................... $ 1,234
(Cost $1,271) ---------------
TOTAL INVESTMENTS -- 98.0%.................................................................... 14,378,794
(Cost $14,314,131) (f)
NET OTHER ASSETS AND LIABILITIES -- 2.0%...................................................... 287,326
---------------
NET ASSETS -- 100.0%.......................................................................... $ 14,666,120
===============
-----------------------------
(a) Investment in an affiliated fund.
(b) Floating or variable rate security. The interest rate shown reflects the
rate in effect at April 30, 2016.
(c) Zero coupon security.
(d) This security, sold within the terms of a private placement memorandum, is
exempt from registration upon resale under Rule 144A under the Securities
Act of 1933, as amended, and may be resold in transactions exempt from
registration, normally to qualified institutional buyers. Pursuant to
procedures adopted by the Trust's Board of Trustees, this security has
been determined to be liquid by First Trust Advisors L.P., the Fund's
advisor. Although market instability can result in periods of increased
overall market illiquidity, liquidity for each security is determined
based on security specific factors and assumptions, which require
subjective judgment. At April 30, 2016, securities noted as such amounted
to $173,282 or 1.2% of net assets.
(e) Perpetual maturity.
(f) Aggregate cost for financial reporting purposes, which approximates the
aggregate cost for federal income tax purposes. As of April 30, 2016, the
aggregate gross unrealized appreciation for all securities in which there
was an excess of value over tax cost was $578,719 and the aggregate gross
unrealized depreciation for all securities in which there was an excess of
tax cost over value was $514,056.
ADR - American Depositary Receipt
IO - Interest-Only Security - Principal amount shown represents par value on
which interest payments are based.
PO - Principal-Only Security
STRIPS - Separate Trading of Registered Interest and Principal of Securities.
Currency Abbreviations:
AUD Australian Dollar
BRL Brazilian Real
CAD Canadian Dollar
COP Colombian Peso
CZK Czech Koruna
IDR Indonesian Rupiah
ILS Israeli New Shequel
MYR Malaysian Ringgit
MXN Mexican Peso
PEN Peruvian Nuevo Sol
PLN Polish Zloty
TRY Turkish Lira
ZAR South African Rand
See Notes to Financial Statements Page 13
FIRST TRUST STRATEGIC INCOME ETF (FDIV)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2016 (UNAUDITED)
-----------------------------
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of April 30,
2016 is as follows (see Note 2A - Portfolio Valuation in the Notes to Financial
Statements):
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
4/30/2016 PRICES INPUTS INPUTS
--------------- --------------- --------------- ---------------
Exchange-Traded Funds*............................ $ 5,671,611 $ 5,671,611 $ -- $ --
Common Stocks*.................................... 3,225,094 3,225,094 -- --
U.S. Government Agency Mortgage-Backed
Securities..................................... 1,910,659 -- 1,910,659 --
Master Limited Partnerships*...................... 1,896,222 1,896,222 -- --
Foreign Sovereign Bonds**......................... 440,985 -- 440,985 --
Mortgage-Backed Securities........................ 417,303 -- 417,303 --
$25 Par Preferred Securities*..................... 396,232 396,232 -- --
Real Estate Investment Trusts*.................... 307,045 307,045 -- --
Asset-Backed Securities........................... 112,409 -- 112,409 --
Call Options Purchased............................ 1,234 1,234 -- --
--------------- --------------- --------------- ---------------
Total Investments................................. $ 14,378,794 $ 11,497,438 $ 2,881,356 $ --
=============== =============== =============== ===============
* See Portfolio of Investments for industry breakout.
** See Portfolio of Investments for country breakout.
All transfers in and out of the Levels during the period are assumed to be
transferred on the last day of the period at their current value. There were no
transfers between Levels at April 30, 2016.
Page 14 See Notes to Financial Statements
FIRST TRUST STRATEGIC INCOME ETF (FDIV)
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 2016 (UNAUDITED)
ASSETS:
Investments, at value - Unaffiliated................................... $ 9,514,551
Investments, at value - Affiliated..................................... 4,864,243
Cash................................................................... 227,701
Restricted cash........................................................ 11,059
Foreign currency, at value............................................. 6,748
Receivables:
Investment securities sold.......................................... 45,163
Dividends........................................................... 24,353
Interest............................................................ 19,994
Reclaims............................................................ 1,210
--------------
Total Assets...................................................... 14,715,022
--------------
LIABILITIES:
Payables:
Investment securities purchased..................................... 42,062
Investment advisory fees............................................ 6,840
--------------
Total Liabilities................................................. 48,902
--------------
NET ASSETS............................................................. $ 14,666,120
==============
NET ASSETS CONSIST OF:
Paid-in capital........................................................ $ 14,977,393
Par value.............................................................. 3,000
Accumulated net investment income (loss)............................... (30,082)
Accumulated net realized gain (loss) on investments, futures contracts,
forward foreign currency contracts, foreign currency transactions
and written options................................................. (349,566)
Net unrealized appreciation (depreciation) on investments, futures
contracts, forward foreign currency contracts and foreign currency
translation......................................................... 65,375
--------------
NET ASSETS............................................................. $ 14,666,120
==============
NET ASSET VALUE, per share............................................. $ 48.89
==============
Number of shares outstanding (unlimited number of shares authorized,
par value $0.01 per share).......................................... 300,002
==============
Investments, at cost - Unaffiliated.................................... $ 9,405,154
==============
Investments, at cost - Affiliated...................................... $ 4,908,977
==============
Foreign currency, at cost (proceeds)................................... $ 6,500
==============
See Notes to Financial Statements Page 15
FIRST TRUST STRATEGIC INCOME ETF (FDIV)
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED APRIL 30, 2016 (UNAUDITED)
INVESTMENT INCOME:
Dividends - Unaffiliated............................................... $ 157,550
Dividends - Affiliated................................................. 180,007
Interest............................................................... 53,286
Foreign tax withholding................................................ (1,173)
--------------
Total investment income............................................. 389,670
--------------
EXPENSES:
Investment advisory fees............................................... 76,130
Excise tax............................................................. 109
--------------
Total expenses...................................................... 76,239
Less fees waived by the investment advisor.......................... (27,304)
--------------
Net expenses........................................................ 48,935
--------------
NET INVESTMENT INCOME (LOSS)........................................... 340,735
--------------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments - Unaffiliated.......................................... 105,901
Investments - Affiliated............................................ (87,956)
Distribution of capital gains from investment companies............. 1,636
Futures contracts................................................... 8,308
Forward foreign currency contracts.................................. 1,660
Foreign currency transactions....................................... (3,076)
Written options..................................................... 1,563
--------------
Net realized gain (loss)............................................... 28,036
--------------
Net change in unrealized appreciation (depreciation) on:
Investments - Unaffiliated.......................................... 333,636
Investments - Affiliated............................................ 41,996
Futures contracts................................................... (3,433)
Forward foreign currency contracts.................................. (392)
Foreign currency translation........................................ 1,396
--------------
Net change in unrealized appreciation (depreciation)................... 373,203
--------------
NET REALIZED AND UNREALIZED GAIN (LOSS)................................ 401,239
--------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS..................................................... $ 741,974
==============
Page 16 See Notes to Financial Statements
FIRST TRUST STRATEGIC INCOME ETF (FDIV)
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE
SIX MONTHS FOR THE
ENDED YEAR
4/30/2016 ENDED
(UNAUDITED) 10/31/2015
-------------- ---------------
OPERATIONS:
Net investment income (loss)........................................ $ 340,735 $ 667,991
Net realized gain (loss)............................................ 28,036 (414,578)
Net increase from payment by the advisor............................ -- 23,478
Net change in unrealized appreciation (depreciation)................ 373,203 (642,603)
-------------- ---------------
Net increase (decrease) in net assets resulting from operations..... 741,974 (365,712)
-------------- ---------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income............................................... (368,002) (559,024)
Return of capital................................................... -- (208,980)
-------------- ---------------
Total distributions to shareholders................................. (368,002) (768,004)
-------------- ---------------
SHAREHOLDER TRANSACTIONS:
Proceeds from shares sold........................................... -- --
Cost of shares redeemed............................................. (4,810,172) --
-------------- ---------------
Net increase (decrease) in net assets resulting from
shareholder transactions......................................... (4,810,172) --
-------------- ---------------
Total increase (decrease) in net assets............................. (4,436,200) (1,133,716)
NET ASSETS:
Beginning of period................................................. 19,102,320 20,236,036
-------------- ---------------
End of period....................................................... $ 14,666,120 $ 19,102,320
-------------- ---------------
Accumulated net investment income (loss) at end of period........... $ (30,082) $ (2,815)
============== ===============
CHANGES IN SHARES OUTSTANDING:
Shares outstanding, beginning of period............................. 400,002 400,002
Shares sold......................................................... -- --
Shares redeemed..................................................... (100,000) --
-------------- ---------------
Shares outstanding, end of period................................... 300,002 400,002
============== ===============
See Notes to Financial Statements Page 17
FIRST TRUST STRATEGIC INCOME ETF (FDIV)
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
SIX MONTHS FOR THE PERIOD
ENDED YEAR 8/13/2014 (a)
4/30/2016 ENDED THROUGH
(UNAUDITED) 10/31/2015 10/31/2014
--------------- --------------- ---------------
Net asset value, beginning of period $ 47.76 $ 50.59 $ 50.00
--------- --------- ---------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) 0.87 1.67 0.29
Net realized and unrealized gain (loss) 1.22 (2.58) (b) 0.59
--------- --------- ---------
Total from investment operations 2.09 (0.91) 0.88
--------- --------- ---------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income (0.96) (1.40) (0.27)
Return of capital -- (0.52) (0.02)
--------- --------- ---------
Total distributions (0.96) (1.92) (0.29)
--------- --------- ---------
Net asset value, end of period $ 48.89 $ 47.76 $ 50.59
========= ========= =========
TOTAL RETURN (c) 4.47% (1.85)% (b) 1.77%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) $ 14,666 $ 19,102 $ 20,236
RATIOS TO AVERAGE NET ASSETS:
Ratio of total expenses to average net assets 0.85% (d) 0.85% 0.85% (d)
Ratio of net expenses to average net assets 0.55% (d) 0.61% 0.69% (d)
Ratio of net investment income (loss) to average net assets 3.80% (d) 3.37% 2.71% (d)
Portfolio turnover rate (e) 42% 125% 33%
(a) Inception date is consistent with the commencement of investment
operations and is the date the initial creation units were established.
(b) The Fund received a payment from the advisor in the amount of $23,478 in
connection with a trade error. The payment from the advisor represents
$0.06 per share and had no effect on the Fund's total return.
(c) Total return is calculated assuming an initial investment made at the net
asset value at the beginning of the period, reinvestment of all
distributions at net asset value during the period, and redemption at net
asset value on the last day of the period. The returns presented do not
reflect the deduction of taxes that a shareholder would pay on Fund
distributions or the redemption or sale of Fund shares. Total return is
calculated for the time period presented and is not annualized for periods
of less than a year. The total returns would have been lower if certain
fees had not been waived by the advisor.
(d) Annualized.
(e) Portfolio turnover is calculated for the time period presented and is not
annualized for periods of less than a year and does not include securities
received or delivered from processing creations or redemptions and in-kind
transactions.
Page 18 See Notes to Financial Statements
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FIRST TRUST STRATEGIC INCOME ETF (FDIV)
APRIL 30, 2016 (UNAUDITED)
1. ORGANIZATION
First Trust Exchange-Traded Fund IV (the "Trust") is an open-end management
investment company organized as a Massachusetts business trust on September 15,
2010, and is registered with the Securities and Exchange Commission under the
Investment Company Act of 1940, as amended (the "1940 Act").
The Trust currently consists of eight funds that are offering shares. This
report covers the First Trust Strategic Income ETF (the "Fund"), which trades
under the ticker "FDIV" on The Nasdaq Stock Market LLC ("Nasdaq"). Unlike
conventional mutual funds, the Fund issues and redeems shares on a continuous
basis, at net asset value ("NAV"), only in large specified blocks consisting of
50,000 shares called a "Creation Unit." Creation Units are generally issued and
redeemed for cash and, in certain circumstances, in-kind for securities in which
the Fund invests. Except when aggregated in Creation Units, the Fund's shares
are not redeemable securities.
The Fund is a multi-manager, multi-strategy actively managed exchange-traded
fund. The Fund's primary investment objective is to seek risk-adjusted income.
The Fund's secondary investment objective is capital appreciation.
First Trust Advisors L.P. ("First Trust" or the "Advisor") is the investment
advisor to the Fund. The following serve as investment sub-advisors to the Fund:
First Trust Global Portfolios Ltd. ("FTGP"); Energy Income Partners, LLC
("EIP"); Stonebridge Advisors LLC ("Stonebridge"); and Richard Bernstein
Advisors LLC ("RBA") (each, a "Sub-Advisor" and together, the "Sub-Advisors").
The Advisor's Investment Committee determines the Fund's strategic allocation
among various general investment categories and allocates the Fund's assets to
portfolio management teams comprised of personnel of the Advisor and/or a
Sub-Advisor (each, a "Management Team"), which employ their respective
investment strategies. The Fund seeks to achieve its objectives by having each
Management Team focus on those investments within its respective investment
category. The Fund may add or remove investment categories or Management Teams
at the discretion of the Advisor.
Under normal market conditions, the Fund will invest in various asset classes,
which include high-yield corporate bonds, senior floating-rate loan interests,
mortgage-related investments, preferred securities, international sovereign
bonds, equity securities of Energy Infrastructure Companies(1), certain of which
are master limited partnerships ("MLPs") and dividend paying U.S.
exchange-traded equity securities and depositary receipts. The Management Team
may utilize a related option overlay strategy and/or derivative instruments in
implementing their respective investment strategies for the Fund. Additionally,
the Management Team may seek exposure to these asset classes through investments
in exchange-traded funds.
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 following is a summary
of significant accounting policies consistently followed by the Fund in the
preparation of the financial statements. The preparation of the financial
statements in accordance with accounting principles generally accepted in the
United States of America ("U.S. GAAP") requires management to make estimates and
assumptions that affect the reported amounts and disclosures in the financial
statements. Actual results could differ from those estimates.
A. PORTFOLIO VALUATION
The Fund's NAV is determined daily as of the close of regular trading on the New
York Stock Exchange ("NYSE"), normally 4:00 p.m. Eastern time, on each day the
NYSE is open for trading. If the NYSE closes early on a valuation day, the NAV
is determined as of that time. Domestic debt securities and foreign securities
are priced using data reflecting the earlier closing of the principal markets
for those securities. The Fund's NAV is calculated by dividing the value of all
assets of the Fund (including accrued interest and dividends), less all
liabilities (including accrued expenses and dividends declared but unpaid), by
the total number of shares outstanding.
The Fund's investments are valued daily at market value or, in the absence of
market value with respect to any portfolio securities, at fair value. Market
value prices represent last sale or official closing prices from a national or
foreign exchange (i.e., a regulated market) and are primarily obtained from
third-party pricing services. Fair value prices represent any prices not
considered market value prices and are either obtained from a third-party
pricing service or are determined by the Advisor's Pricing Committee in
-----------------------------
(1) Energy Infrastructure Companies are publicly-traded MLPs, MLP affiliates,
Canadian income trusts and their successor companies, pipeline companies,
utilities, and other companies that are involved in operating or providing
services in support of infrastructure assets such as pipeline, power
transmission and petroleum and natural gas storage in the petroleum,
natural gas and power generation industries.
Page 19
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST STRATEGIC INCOME ETF (FDIV)
APRIL 30, 2016 (UNAUDITED)
accordance with valuation procedures adopted by the Trust's Board of Trustees,
and in accordance with provisions of the 1940 Act. Investments valued by the
Advisor's Pricing Committee, if any, are footnoted as such in the footnotes to
the Portfolio of Investments. All securities and other assets of the Fund
initially expressed in foreign currencies will be converted to U.S. dollars
using exchange rates in effect at the time of valuation. The Fund's investments
are valued as follows:
Corporate bonds, corporate notes, U.S. government securities,
mortgage-backed securities, asset-backed securities and other debt
securities are fair valued on the basis of valuations provided by dealers
who make markets in such securities or by an independent pricing service
approved by the Trust's Board of Trustees, which may use the following
valuation inputs when available:
1) benchmark yields;
2) reported trades;
3) broker/dealer quotes;
4) issuer spreads;
5) benchmark securities;
6) bids and offers; and
7) reference data including market research publications.
Common stocks, preferred stocks, MLPs and other equity securities listed
on any national or foreign exchange (excluding Nasdaq and the London Stock
Exchange Alternative Investment Market ("AIM")) are valued at the last
sale price on the exchange on which they are principally traded or, for
Nasdaq and AIM securities, the official closing price. Securities traded
on more than one securities exchange are valued at the last sale price or
official closing price, as applicable, at the close of the securities
exchange representing the principal market for such securities.
Securities traded in an over-the-counter market are fair valued at the
mean of their most recent bid and asked price, if available, and otherwise
at their closing bid price.
Forward foreign currency contracts are fair valued at the current day's
interpolated foreign exchange rate, as calculated using the current day's
spot rate, and the thirty, sixty, ninety, and one-hundred eighty day
forward rates provided by an independent pricing service.
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.
Exchange-traded options contracts are valued at the closing price in the
market where such contracts are principally traded. If no closing price is
available, exchange-traded options contracts are fair valued at the mean
of their most recent bid and asked price, if available, and otherwise at
their closing bid price.
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
5) any other market-based data the Advisor's Pricing Committee
considers relevant. In this regard, the Advisor's Pricing
Committee may use last-obtained market-based data to assist it
when valuing portfolio securities using amortized cost.
Certain securities may not be able to be priced by pre-established pricing
methods. Such securities may be valued by the Trust's Board of Trustees or its
delegate, the Advisor's Pricing Committee, at fair value. These securities
generally include, but are not limited to, restricted securities (securities
which may not be publicly sold without registration under the Securities Act of
1933, as amended) for which a pricing service is unable to provide a market
price; securities whose trading has been formally suspended; a security whose
market or fair value price is not available from a pre-established pricing
source; a security with respect to which an event has occurred that is likely to
materially affect the value of the security after the market has closed but
before the calculation of the Fund's NAV or make it difficult or impossible
Page 20
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST STRATEGIC INCOME ETF (FDIV)
APRIL 30, 2016 (UNAUDITED)
to obtain a reliable market quotation; and a security whose price, as provided
by the pricing service, does not reflect the security's fair value. As a general
principle, the current fair value of a security would appear to be the amount
which the owner might reasonably expect to receive for the security upon its
current sale. When fair value prices are used, generally they will differ from
market quotations or official closing prices on the applicable exchanges. A
variety of factors may be considered in determining the fair value of such
securities.
Fair valuation of a debt security will be based on the consideration of all
available information, including, but not limited to, the following:
1) the fundamental business data relating to the issuer;
2) an evaluation of the forces which influence the market in
which these securities are purchased and sold;
3) the type, size and cost of a security;
4) the financial statements of the issuer;
5) the credit quality and cash flow of the issuer, based on the
Advisor's or external analysis;
6) the information as to any transactions in or offers for the
security;
7) the price and extent of public trading in similar securities
of the issuer/borrower, or comparable companies;
8) the coupon payments;
9) the quality, value and salability of collateral, if any,
securing the security;
10) the business prospects of the issuer, including any ability to
obtain money or resources from a parent or affiliate and an
assessment of the issuer's management (for corporate debt
only);
11) the economic, political and social prospects/developments of
the country of issue and the assessment of the country's
government leaders/officials (for sovereign debt only)
12) the prospects for the issuer's industry, and multiples (of
earnings and/or cash flows) being paid for similar businesses
in that industry (for corporate debt only); and
13) other relevant factors.
Fair valuation of an equity security will be based on the consideration of all
available information, including, but not limited to, the following:
1) the type of security;
2) the size of the holding;
3) the initial cost of the security;
4) transactions in comparable securities;
5) price quotes from dealers and/or pricing services;
6) relationships among various securities;
7) information obtained by contacting the issuer, analysts, or
the appropriate stock exchange;
8) an analysis of the issuer's financial statements; and
9) the existence of merger proposals or tender offers that might
affect the value of the security
Because foreign markets may be open on different days than the days during which
investors may transact in the shares of the Fund, the value of the Fund's
securities may change on the days when investors are not able to transact in the
shares of the Fund. The value of the securities denominated in foreign
currencies is converted into U.S. dollars using exchange rates determined daily
as of the close of regular trading on the NYSE.
The Fund is subject to fair value accounting standards that define fair value,
establish the framework for measuring fair value and provide a three-level
hierarchy for fair valuation based upon the inputs to the valuation as of the
measurement date. The three levels of the fair value hierarchy are as follows:
o Level 1 - Level 1 inputs are quoted prices in active markets for
identical investments. An active market is a market in which
transactions for the investment occur with sufficient frequency and
volume to provide pricing information on an ongoing basis.
o Level 2 - Level 2 inputs are observable inputs, either directly or
indirectly, and include the following:
o Quoted prices for similar investments in active markets.
o Quoted prices for identical or similar investments in markets
that are non-active. A non-active market is a market where
there are few transactions for the investment, the prices are
not current, or price quotations vary substantially either
over time or among market makers, or in which little
information is released publicly.
o Inputs other than quoted prices that are observable for the
investment (for example, interest rates and yield curves
observable at commonly quoted intervals, volatilities,
prepayment speeds, loss severities, credit risks, and default
rates).
Page 21
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST STRATEGIC INCOME ETF (FDIV)
APRIL 30, 2016 (UNAUDITED)
o Inputs that are derived principally from or corroborated by
observable market data by correlation or other means.
o Level 3 - Level 3 inputs are unobservable inputs. Unobservable
inputs may reflect the reporting entity's own assumptions about the
assumptions that market participants would use in pricing the
investment.
The inputs or methodologies used for valuing investments are not necessarily an
indication of the risk associated with investing in those investments. A summary
of the inputs used to value the Fund's investments as of April 30, 2016, is
included with the Fund's Portfolio of Investments.
B. SECURITIES TRANSACTIONS AND INVESTMENT INCOME
Securities transactions are recorded as of the trade date. Realized gains and
losses from securities transactions are recorded on the identified cost basis.
Dividend income is recorded on the ex-dividend date. Interest income is recorded
daily on the accrual basis. Amortization of premiums and accretion of discounts
are recorded using the effective interest method.
Distributions received from the Fund's investments in MLPs generally are
comprised of return of capital and investment income. The Fund records estimated
return of capital and investment income based on historical information
available from each MLP. These estimates may subsequently be revised based on
information received from the MLPs after their tax reporting periods are
concluded.
Distributions received from the Fund's investments in real estate investment
trusts ("REITs") may be comprised of return of capital, capital gains and
income. The actual character of the amounts received during the year is not
known until after the REITs' fiscal year end. The Fund records the character of
distributions received from the REITs during the year based on estimates
available. The characterization of distributions received by the Fund may be
subsequently revised based on information received from the REITs after their
tax reporting periods conclude.
C. FORWARD FOREIGN CURRENCY CONTRACTS
The Fund is subject to foreign currency risk in the normal course of pursuing
its investment objectives. Forward foreign currency contracts are agreements
between two parties ("Counterparties") to exchange one currency for another at a
future date and at a specified price. The Fund uses forward foreign currency
contracts to facilitate transactions in foreign securities and to manage the
Fund's foreign currency exposure. These contracts are valued daily, and the
Fund's net equity therein, representing unrealized gain or loss on the contracts
as measured by the difference between the forward foreign exchange rates at the
dates of entry into the contracts and the forward rates at the reporting date,
is included in "Unrealized appreciation (depreciation) on forward foreign
currency contracts" on the Statement of Assets and Liabilities. When the forward
contract is closed, the Fund records a realized gain or loss equal to the
difference between the proceeds from (or the cost of) the closing transaction
and the Fund's basis in the contract. This realized gain or loss is included in
"Net realized gain (loss) on forward foreign currency contracts" on the
Statement of Operations. Risks arise from the possible inability of
counterparties to meet the terms of their contracts and from movement in
currency and securities values and interest rates. Due to the risks, the Fund
could incur losses in excess of the net unrealized value shown on the forward
foreign currency contracts table in the Portfolio of Investments. In the event
of default by the Counterparty, the Fund will provide notice to the Counterparty
of the Fund's intent to convert the currency held by the Fund into the currency
that the Counterparty agreed to exchange with the Fund. If a Counterparty
becomes bankrupt or otherwise fails to perform its obligations due to financial
difficulties, the Fund may experience significant delays in obtaining any
recovery in a bankruptcy or other reorganization proceeding. The Fund may obtain
only limited recovery or may obtain no recovery in such circumstances.
As of April 30, 2016, the Fund had no open forward foreign currency contracts.
D. FUTURES CONTRACTS
The Fund purchases or sells (i.e., is long or short) exchange-listed futures
contracts to hedge against changes in interest rates (interest rate risk).
Futures contracts are agreements between the Fund and a counterparty to buy or
sell a specific quantity of an underlying instrument at a specified price and at
a specified date. Depending on the terms of the contract, futures contracts are
settled either through physical delivery of the underlying instrument on the
settlement date or by payment of a cash settlement amount on the settlement
date. Open futures contracts can also be closed out prior to settlement by
entering into an offsetting transaction in a matching futures contract. If the
Fund is not able to enter into an offsetting transaction, the Fund will continue
to be required to maintain margin deposits on the futures contract. When the
contract is closed or expires, the Fund records a realized gain or loss equal to
the difference between the value of the contract at the time it was opened and
the value at the time it was closed or expired. This gain or loss is included in
"Net realized gain (loss) on futures contracts" on the Statement of Operations.
Page 22
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST STRATEGIC INCOME ETF (FDIV)
APRIL 30, 2016 (UNAUDITED)
Upon entering into a futures contract, the Fund 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 contacts
are marked-to-market daily with the change in value recognized as a component of
"Net change in unrealized appreciation (depreciation) on futures contracts" on
the Statement of Operations. Pursuant to the contract, the Fund agrees to
receive from or pay to the broker an amount of cash equal to the daily
fluctuation in value of the contract. Such receipts or payments are known as
variation margin and are included in "Variation margin payable or receivable" on
the Statement of Assets and Liabilities. If market conditions change
unexpectedly, the Fund may not achieve the anticipated benefits of the futures
contract and may realize a loss. The use of futures contracts involves the risk
of imperfect correlation in movements in the price of the futures contracts,
interest rates and the underlying instruments.
As of April 30, 2016, the Fund had no open futures contracts.
E. OPTIONS CONTRACTS
In the normal course of pursuing its investment objective, the Fund may invest
up to 20% of its net assets in derivative instruments in connection with hedging
strategies. The Fund may invest in exchange-listed futures contracts,
exchange-listed options, exchange-listed options on futures contracts, and
exchange-listed stock index options.
The Fund may purchase (buy) or write (sell) put and call options on futures
contracts and enter into closing transactions with respect to such options to
terminate an existing position. A futures option gives the holder the right, in
return for the premium paid, to assume a long position (call) or short position
(put) in a futures contract at a specified exercise price prior to the
expiration of the option. Upon exercise of a call option, the holder acquires a
long position in the futures contract and the writer is assigned the opposite
short position. In the case of a put option, the opposite is true. Prior to
exercise or expiration, a futures contract may be closed out by an offsetting
purchase or sale of a futures option of the same series. Options are
marked-to-market daily and their value is affected by changes in the value of
the underlying security, changes in interest rates, changes in the actual or
perceived volatility of the securities markets and the underlying securities,
and the remaining time to the option's expiration. The value of options may also
be adversely affected if the market for the options becomes less liquid or the
trading volume diminishes.
The Fund uses options on futures contracts in connection with hedging
strategies. Generally, these strategies are applied under the same market and
market sector conditions in which the Fund uses put and call options on
securities or indices. The purchase of put options on futures contracts is
analogous to the purchase of puts on securities or indices so as to hedge the
Fund's securities holdings against the risk of declining market prices. The
writing of a call option or the purchasing of a put option on a futures contract
constitutes a partial hedge against declining prices of securities which are
deliverable upon exercise of the futures contract. If the price at expiration of
a written call option is below the exercise price, the Fund will retain the full
amount of the option premium which provides a partial hedge against any decline
that may have occurred in the Fund's holdings of securities. If the price when
the option is exercised is above the exercise price, however, the Fund will
incur a loss, which may be offset, in whole or in part, by the increase in the
value of the securities held by the Fund that were being hedged. Writing a put
option or purchasing a call option on a futures contract serves as a partial
hedge against an increase in the value of the securities the Fund intends to
acquire. Realized gains and losses on purchased options are included in "Net
realized gain (loss) on investments" on the Statement of Operations.
The Fund is required to deposit and maintain margin with respect to put and call
options on futures contracts written by it. Such margin deposits will vary
depending on the nature of the underlying futures contract (and the related
initial margin requirements), the current market value of the option and other
futures positions held by the Fund. The Fund will pledge in a segregated account
at the Fund's custodian, liquid assets, such as cash, U.S. government securities
or other high-grade liquid debt obligations equal in value to the amount due on
the underlying obligation. Such segregated assets will be marked-to-market
daily, and additional assets will be pledged in the segregated account whenever
the total value of the pledged assets falls below the amount due on the
underlying obligation.
The risks associated with the use of options on future contracts include the
risk that the Fund may close out its position as a writer of an option only if a
liquid secondary market exists for such options, which cannot be assured. The
Fund's successful use of options on futures contracts depends on the Advisor's
ability to correctly predict the movement in prices on futures contracts and the
underlying instruments, which may prove to be incorrect. In addition, there may
be imperfect correlation between the instruments being hedged and the futures
contract subject to option.
F. FOREIGN CURRENCY
The books and records of the Fund are maintained in U.S. dollars. Foreign
currencies, investments and other assets and liabilities are translated into
U.S. dollars at the exchange rates prevailing at the end of the period.
Purchases and sales of investments and items of income and expense are
translated on the respective dates of such transactions. Unrealized gains and
losses on assets and liabilities, other than investments in securities, which
Page 23
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST STRATEGIC INCOME ETF (FDIV)
APRIL 30, 2016 (UNAUDITED)
result from changes in foreign currency exchange rates have been included in
"Net change in unrealized appreciation (depreciation) on foreign currency
translation" on the Statement of Operations. Unrealized gains and losses on
investments in securities which result from changes in foreign exchange rates
are included with fluctuations arising from changes in market price and are
shown in "Net change in unrealized appreciation (depreciation) on investments"
on the Statement of Operations. Net realized foreign currency gains and losses
include the effect of changes in exchange rates between trade date and
settlement date on investment security transactions, foreign currency
transactions and interest and dividends received is included in "Net realized
gain (loss) on foreign currency trasactions" on the Statement of Operations. The
portion of foreign currency gains and losses related to fluctuation in exchange
rates between the initial purchase settlement date and subsequent sale trade
date for fixed-income securities is included in "Net realized gain (loss) on
investments" on the Statement of Operations.
G. INTEREST-ONLY SECURITIES
An interest-only security ("IO Security") is the interest-only portion of a
mortgage-backed security that receives some or all of the interest portion of
the underlying mortgage-backed security and little or no principal. A reference
principal value called a notional value is used to calculate the amount of
interest due to the IO Security. IO Securities are sold at a deep discount to
their notional principal amount. Generally speaking, when interest rates are
falling and prepayment rates are increasing, the value of an IO Security will
fall. Conversely, when interest rates are rising and prepayment rates are
decreasing, generally the value of an IO Security will rise. These securities,
if any, are identified on the Portfolio of Investments.
H. PRINCIPAL-ONLY SECURITIES
A principal-only security ("PO Security") is the principal-only portion of a
mortgage-backed security that does not receive any interest, is priced at a deep
discount to its redemption value and ultimately receives the redemption value.
Generally speaking, when interest rates are falling and prepayment rates are
increasing, the value of a PO Security will rise. Conversely, when interest
rates are rising and prepayment rates are decreasing, generally the value of a
PO Security will fall. These securities, if any, are identified on the Portfolio
of Investments.
I. STRIPPED MORTGAGE-BACKED SECURITIES
Stripped mortgage-backed securities are created by segregating the cash flows
from underlying mortgage loans or mortgage securities to create two or more new
securities, each with a specified percentage of the underlying security's
principal or interest payments. Mortgage-backed securities may be partially
stripped so that each investor class receives some interest and some principal.
When securities are completely stripped, however, all of the interest is
distributed to holders of one type of security known as an IO Security and all
of the principal is distributed to holders of another type of security known as
a PO Security. These securities, if any, are identified on the Portfolio of
Investments.
J. AFFILIATED TRANSACTIONS
The Fund invests in securities of affiliated funds. Dividend income and realized
gains and losses, and change in appreciation (depreciation) from affiliated
funds are presented on the Statement of Operations. The Fund's investment
performance and risks are directly related to the investment performance and
risks of the affiliated funds.
Amounts related to these investments in the Fund's Portfolio of Investments at
April 30, 2016, and for the six months ended are as follows:
SHARE ACTIVITY
----------------------------------------------------
BALANCE AT BALANCE AT VALUE AT DIVIDEND REALIZED
SECURITY NAME 10/31/15 PURCHASES SALES 4/30/16 4/30/16 INCOME GAIN (LOSS)
------------------------------------------------------------------------------------------------------------------------------
First Trust Emerging Markets
Local Currency Bond ETF 6,600 16,100 (5,600) 17,100 $ 730,170 $ 19,318 $ (6,669)
First Trust Low Duration
Opportunities ETF -- 2,603 (2,603) -- -- -- 526
First Trust Preferred
Securities and Income ETF 166,265 -- (89,354) 76,911 1,454,387 80,282 (18,353)
First Trust Tactical High
Yield ETF 67,818 4,176 (16,109) 55,885 2,679,686 80,407 (63,460)
---------------------------------------
$ 4,864,243 $ 180,007 $ (87,956)
=======================================
Page 24
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST STRATEGIC INCOME ETF (FDIV)
APRIL 30, 2016 (UNAUDITED)
K. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
Dividends from net investment income, if any, are declared and paid monthly by
the Fund. The Fund distributes its net realized capital gains, if any, to
shareholders at least annually.
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 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 significantly modified 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 during the fiscal year ended October 31,
2015 was as follows:
Distributions paid from:
Ordinary income................................. $ 559,024
Capital gain.................................... --
Return of capital............................... 208,980
As of October 31, 2015, the components of distributable earnings and net assets
on a tax basis for the Fund were as follows:
Undistributed ordinary income................... $ (842)
Accumulated capital and other losses............ (365,713)
Net unrealized appreciation (depreciation)...... (321,690)
L. INCOME TAXES
The Fund intends to continue to qualify as a regulated investment company by
complying with the requirements under Subchapter M of the Internal Revenue Code
of 1986, as amended, which includes distributing substantially all of its net
investment income and net realized gains to shareholders. Accordingly, no
provision has been made for federal and state income taxes. However, due to the
timing and amount of distributions, the Fund may be subject to an excise tax of
4% of the amount by which approximately 98% of the Fund's taxable income exceeds
the distributions from such taxable income for the calendar year.
The Fund intends to utilize provisions of the federal income tax laws, which
allow it to carry a realized capital loss forward indefinitely following the
year of the loss and offset such loss against any future realized capital gains.
The Fund is subject to certain limitations under U.S. tax rules on the use of
capital loss carryforwards and net unrealized built-in losses. These limitations
apply when there has been a 50% change in ownership. At October 31, 2015, the
Fund had $365,713 of non-expiring capital loss carryforwards for federal income
tax purposes.
Certain losses realized during the current fiscal year may be deferred and
treated as occurring on the first day of the following fiscal year for federal
income tax purposes. For the fiscal year ended October 31, 2015, the Fund had no
net ordinary losses.
The Fund is subject to accounting standards that establish a minimum threshold
for recognizing, and a system for measuring, the benefits of a tax position
taken or expected to be taken in a tax return. The taxable years ended 2014 and
2015 remain open to federal and state audit. As of April 30, 2016, management
has evaluated the application of these standards to the Fund and has determined
that no provision for income tax is required in the Fund's financial statements
for uncertain tax positions.
M. EXPENSES
Expenses, other than the investment advisory fee and other excluded expenses,
are paid by the Advisor (see Note 3).
3. INVESTMENT ADVISORY FEE, AFFILIATED TRANSACTIONS AND OTHER FEE ARRANGEMENTS
First Trust, the investment advisor to the Fund, is a limited partnership with
one limited partner, Grace Partners of DuPage L.P., and one general partner, The
Charger Corporation. The Charger Corporation is an Illinois corporation
controlled by James A. Bowen, Chief Executive Officer of First Trust. First
Trust is responsible for supervising the selection and ongoing monitoring of the
securities in the Fund's portfolio, managing the Fund's business affairs and
providing certain administrative services necessary for the management of the
Fund.
Page 25
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST STRATEGIC INCOME ETF (FDIV)
APRIL 30, 2016 (UNAUDITED)
The Fund and First Trust have retained the Sub-Advisors to provide
recommendations to the Advisor regarding the selection and on-going monitoring
of the securities in the Fund's investment portfolio. First Trust executes all
transactions on behalf of the Fund, with the exception of the securities that
are selected by FTGP. EIP, an affiliate of First Trust, provides recommendations
regarding the selection of MLP securities for the Fund's investment portfolio
and provides ongoing monitoring of the MLP securities, MLP affiliate and energy
infrastructure securities in the Fund's investment portfolio selected by EIP.
EIP exercises discretion only with respect to assets of the Fund allocated to
EIP by the Advisor. FTGP, an affiliate of First Trust, selects international
sovereign debt securities for the Fund's investment portfolio and provides
ongoing monitoring of the international sovereign debt securities in the Fund's
investment portfolio selected by FTGP. RBA provides recommendations regarding
longer term investment strategies that combine top-down, macroeconomic analysis
and quantitatively-driven portfolio construction. Stonebridge, an affiliate of
First Trust, provides recommendations regarding the selection and ongoing
monitoring of the preferred and hybrid securities in the Fund's investment
portfolio.
Pursuant to the Investment Management Agreement between the Trust and Advisor,
First Trust will supervise the Sub-Advisors and their management of the
investment of the Fund's assets and will pay EIP, FTGP, RBA and Stonebridge for
their services as the Fund's sub-advisors. First Trust will also be responsible
for the Fund's expenses, including the cost of transfer agency, custody, fund
administration, legal, audit and other services, but excluding fee payments
under the Investment Management Agreement, interest, taxes, acquired fund fees
and expenses with the exception of those attributable to affiliated Funds,
brokerage commissions and other expenses connected with the execution of
portfolio transactions, distribution and service fees pursuant to a 12b-1 plan,
if any, and extraordinary expenses. The Fund has agreed to pay First Trust an
annual unitary management fee equal to 0.85% of its average daily net assets.
Pursuant to a contractual agreement between the Trust, on behalf of the Fund,
and First Trust, the management fees paid to First Trust will be reduced by the
proportional amount of the acquired fund fees and expenses of the shares of
investment companies held by the Fund so that the Fund would not bear the
indirect costs of holding them, provided, that, the investment companies are
advised by First Trust. This contractual agreement shall continue until the
earlier of (i) its termination at the direction of the Trust's Board of Trustees
or (ii) the termination of the Fund's management agreement with First Trust.
First Trust does not have the right to recover the fees waived that are
attributable to acquired fund fees and expenses on the shares of investment
companies advised by First Trust. During the six months ended April 30, 2016,
the Advisor waived fees of $27,304.
During the year ended October 31, 2015, the Fund received a payment from the
Advisor of $23,478 in connection with a trade error.
The Trust has multiple service agreements with The Bank of New York Mellon
("BNYM"). Under the service agreements, BNYM performs custodial, fund
accounting, certain administrative services, and transfer agency services for
the Fund. As custodian, BNYM is responsible for custody of the Fund's assets. As
fund accountant and administrator, BNYM is responsible for maintaining the books
and records of the Fund's securities and cash. As transfer agent, BNYM is
responsible for maintaining shareholder records for the Fund. BNYM is a
subsidiary of The Bank of New York Mellon Corporation, a financial holding
company.
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 equally among each fund in the First Trust Fund
Complex. Prior to January 1, 2016, the fixed annual retainer was allocated pro
rata based on each fund's 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 will rotate
every three years. The officers and "Interested" Trustee receive no compensation
from the Trust for acting in such capacities.
4. PURCHASES AND SALES OF SECURITIES
The cost of purchases of U.S. Government securities and non-U.S. Government
securities, excluding short-term investments, for the six months ended April 30,
2016, were $326,101 and $7,235,100, respectively. The proceeds from sales and
paydowns of U.S. Government securities and non-U.S. Government securities,
excluding short-term investments, for the six months ended April 30, 2016 were
$267,386 and $12,017,490, respectively.
For the six months ended April 30, 2016, the Fund had no in-kind transactions.
Page 26
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST STRATEGIC INCOME ETF (FDIV)
APRIL 30, 2016 (UNAUDITED)
5. DERIVATIVE TRANSACTIONS
The following table presents the types of derivatives held by the Fund at April
30, 2016, the primary underlying risk exposure and the location of these
instruments as presented on the Statement of Assets and Liabilities.
ASSET DERIVATIVES LIABILITY DERIVATIVES
------------------------------------ -----------------------------------
DERIVATIVE RISK STATEMENT OF ASSETS AND STATEMENT OF ASSETS AND
INSTRUMENTS EXPOSURE LIABILITIES LOCATION VALUE LIABILITIES LOCATION VALUE
------------------ ------------- ----------------------- ---------- ----------------------- ---------
Options Interest Investments, at value $ 1,234* -- $ --
Rate Risk
* Represents call options purchased, included in Investments, at value.
The following table presents the amount of net realized gain (loss) and change
in net unrealized appreciation (depreciation) recognized for the six months
ended April 30, 2016, on derivative instruments, as well as the primary
underlying risk exposure associated with the instruments.
STATEMENT OF OPERATIONS LOCATION
----------------------------------
CURRENCY RISK EXPOSURE
Net realized gain (loss) on forward foreign currency contracts $ 1,660
Net change in unrealized appreciation (depreciation) on forward
foreign currency contracts (392)
INTEREST RATE RISK EXPOSURE
Net realized gain (loss) on investments** (4,151)
Net realized gain (loss) on futures contracts 8,308
Net realized gain (loss) on written options 1,563
Net change in unrealized appreciation (depreciation) on
investments** 1,271
Net change in unrealized appreciation (depreciation) on futures
contracts (3,433)
** Represents call options purchased.
During the six months ended April 30, 2016, the notional values of forward
foreign currency contracts opened and closed were $310,591 and $349,522,
respectively.
During the six months ended April 30, 2016, the notional values of futures
contracts opened and closed were $514,814 and $361,810, respectively.
The Fund does not have the right to offset financial assets and financial
liabilities related to options contracts on the Statement of Assets and
Liabilities.
Written options activity for the Fund for the six months ended April 30, 2016
was as follows:
NUMBER OF
WRITTEN OPTIONS CONTRACTS PREMIUMS
----------------------------------------- ----------- ----------
Options outstanding at October 31, 2015 -- $ --
Options Written 3 2,719
Options Expired -- --
Options Exercised -- --
Options Closed (3) (2,719)
----- -------
Options outstanding at April 30, 2016 -- $ --
===== =======
During the six months ended April 30, 2016, the number of purchased option
contracts opened and closed were 3 and 2, respectively.
Page 27
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST STRATEGIC INCOME ETF (FDIV)
APRIL 30, 2016 (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
Aggregation) and the market value of the Deposit Securities, and/or (ii) cash in
lieu of all or a portion of the Deposit Securities. The Fund's Creation Units
are generally issued and redeemed for cash. 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. Authorized Participants purchasing Creation Units must pay to BNYM,
as transfer agent, a creation transaction fee (the "Creation Transaction Fee")
regardless of the number of Creation Units purchased in the transaction. The
Creation Transaction Fee is based on the composition of the securities included
in the Fund's portfolio and the countries in which the transactions are settled.
The Creation Transaction Fee is currently $500. The 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 BNYM, 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. BORROWINGS
The Trust on behalf of the Fund, along with First Trust Series Fund and First
Trust Variable Insurance Trust, entered into a $135 million Credit Agreement
(the "BNYM Line of Credit") with BNYM, to be a liquidity backstop during periods
of high redemption volume. A commitment fee of 0.15% of the daily amount of the
excess of the commitment amount over the outstanding principal balance of the
loan is charged by BNYM, which First Trust allocates amongst the funds that have
access to the BNYM Line of Credit. To the extent that the Fund accesses the
credit line, there would also be an interest fee charged. The Fund did not have
any borrowings during the six months ended April 30, 2016.
8. DISTRIBUTION PLAN
The Board of Trustees adopted a Distribution and Service Plan pursuant to Rule
12b-1 under the 1940 Act. In accordance with the Rule 12b-1 plan, the Fund is
authorized to pay an amount up to 0.25% of its average daily net assets each
year to reimburse First Trust Portfolios L.P. ("FTP"), the distributor of the
Fund, for amounts expended to finance activities primarily intended to result in
the sale of Creation Units or 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 March 31, 2017.
9. INDEMNIFICATION
The Trust, on behalf of the Fund, has a variety of indemnification obligations
under contracts with its service providers. The Fund's maximum exposure under
these arrangements is unknown. However, the Fund has not had prior claims or
losses pursuant to these contracts and expects the risk of loss to be remote.
Page 28
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST STRATEGIC INCOME ETF (FDIV)
APRIL 30, 2016 (UNAUDITED)
10. SUBSEQUENT EVENTS
Management has evaluated the impact of all subsequent events on the Fund through
the date the financial statements were issued, and has determined there was the
following subsequent event:
On May 19, 2016, the Fund declared a distribution of $0.16 per share to
shareholders of record on May 24, 2016, payable May 31, 2016.
Page 29
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ADDITIONAL INFORMATION
--------------------------------------------------------------------------------
FIRST TRUST STRATEGIC INCOME ETF (FDIV)
APRIL 30, 2016 (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
its portfolio securities 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 at http://www.sec.gov.
PORTFOLIO HOLDINGS
The Trust files its complete schedule of the Fund's portfolio holdings with the
SEC for the first and third quarters of each fiscal year on Form N-Q. The
Trust's Forms N-Q are available (1) by calling (800) 988-5891; (2) on the Fund's
website located at http://www.ftportfolios.com; (3) on the SEC's website at
http://www.sec.gov; and (4) for review and copying at the SEC's Public Reference
Room ("PRR") in Washington, DC. Information regarding the operation of the PRR
may be obtained by calling (800) SEC-0330.
RISK CONSIDERATIONS
PRINCIPAL RISKS
You could lose money by investing in the Fund. An investment in the Fund is not
a deposit of a bank and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other governmental agency. There can be no
assurance that the Fund's investment objectives will be achieved.
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 ETF that effects its creations and redemption for in kind
securities. Because the Fund may effect a portion of redemptions for cash, it
may be required to sell portfolio securities in order to obtain the cash needed
to distribute redemption proceeds. A sale of shares may result in capital gains
or losses, and may also result in higher brokerage costs.
COVERED CALL RISK. The Fund may invest in covered call options. Covered call
risk is the risk that the Fund will forgo, during the option's life, the
opportunity to profit from increases in the market value of the security
covering the call option above the sum of the premium and the strike price of
the call, but has retained the risk of loss should the price of the underlying
security decline. In addition, as the Fund writes covered calls over more of its
portfolio, its ability to benefit from capital appreciation becomes more
limited. The writer of an option has no control over the time when it may be
required to fulfill its obligation as a writer of the option. Once an option
writer has received an exercise notice, it cannot effect a closing purchase
transaction in order to terminate its obligation under the option and must
deliver the underlying security at the exercise price.
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 may hold 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.
DEPOSITARY RECEIPTS RISK. Depositary receipts may be less liquid than the
underlying shares in their primary trading market. Any distributions paid to the
holders of depositary receipts are usually subject to a fee charged by the
depositary. Holders of depositary receipts may have limited voting rights, and
investment restrictions in certain countries may adversely impact the value of
depositary receipts because such restrictions may limit the ability to convert
the equity shares into depositary receipts and vice versa. Such restrictions may
cause the equity shares of the underlying issuer to trade at a discount or
premium to the market price of the depositary receipts.
Page 30
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ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST STRATEGIC INCOME ETF (FDIV)
APRIL 30, 2016 (UNAUDITED)
DERIVATIVES RISK. The use of options and other derivatives can lead to losses
because of adverse movements in the price or value of the underlying asset,
index or rate, which may be magnified by certain features of the derivatives.
These risks are heightened when the Fund's portfolio managers use derivatives to
enhance the Fund's return or as a substitute for a position or security, rather
than solely to hedge (or offset) the risk of a position or security held by the
Fund.
ENERGY INFRASTRUCTURE COMPANIES RISK. Energy Infrastructure Companies may be
directly affected by energy commodity prices, especially those companies that
own the underlying energy commodity. A decrease in the production or
availability of natural gas, natural gas liquids, crude oil, coal or other
energy commodities or a decrease in the volume of such commodities available for
transportation, processing, storage or distribution may adversely impact the
financial performance of Energy Infrastructure Companies. Energy Infrastructure
Companies are subject to significant federal, state and local government
regulation in virtually every aspect of their operations, including how
facilities are constructed, maintained and operated, environmental and safety
controls, and the prices they may charge for products and services. Various
governmental authorities have the power to enforce compliance with these
regulations and the permits issued under them and violators are subject to
administrative, civil and criminal penalties, including civil fines, injunctions
or both. Stricter laws, regulations or enforcement policies could be enacted in
the future which would likely increase compliance costs and may adversely affect
the financial performance of Energy Infrastructure Companies. Natural disasters,
such as hurricanes in the Gulf of Mexico, also may impact Energy Infrastructure
Companies.
Certain Energy Infrastructure Companies in the utilities industry are subject to
imposition of rate caps, increased competition due to deregulation, difficulty
in obtaining an adequate return on invested capital or in financing large
construction projects, limitations on operations and increased costs and delays
attributable to environmental considerations, and the capital market's ability
to absorb utility debt. In addition, taxes, government regulation, international
politics, price and supply fluctuations, volatile interest rates and energy
conservation may cause difficulties for these companies. Such issuers have been
experiencing certain of these problems to varying degrees.
EQUITY SECURITIES RISK. The Fund invests in equity securities. The value of the
shares will fluctuate with changes in the value of these equity securities.
Equity securities prices fluctuate for several reasons, including changes in
investors' perceptions of the financial condition of an issuer or the general
condition of the relevant stock market, such as the current market volatility,
or when political or economic events affecting the issuers occur. In addition,
common stock prices may be particularly sensitive to rising interest rates, as
the cost of the capital rises and borrowing costs increase.
FINANCIAL COMPANIES RISK. The Fund invests in financial companies, including
banks, thrifts and their holding companies. Financial companies are especially
subject to the adverse effects of economic recession, currency exchange rates,
government regulation, decreases in the availability of capital, volatile
interest rates, portfolio concentrations in geographic markets and in commercial
and residential real estate loans, and competition from new entrants in their
fields of business.
FIXED INCOME SECURITIES RISK. An investment in the Fund involves risk associated
with an investment in fixed income securities including the risk that certain of
the securities in the Fund may not have the benefit of covenants that would
prevent the issuer from engaging in capital restructurings or borrowing
transactions in connection with corporate acquisitions, leveraged buyouts or
restructurings. This limitation could reduce the ability of the issuer to meet
its payment obligations and might result in increased credit risk. In addition,
certain of the securities may be redeemed or prepaid by the issuer, resulting in
lower interest payments received by the Fund and reduced distributions to
shareholders.
HIGH YIELD SECURITIES RISK. High yield securities, or "junk" bonds, are subject
to greater market fluctuations and risk of loss than securities with higher
ratings, and therefore, may be highly speculative. These securities are issued
by companies that may have limited operating history, narrowly focused
operations, and/or other impediments to the timely payment of periodic interest
and principal at maturity. If the economy slows down or dips into recession, the
issuers of high yield securities may not have sufficient resources to continue
making timely payment of periodic interest and principal at maturity. The market
for high yield securities is generally smaller and less liquid than that for
investment grade securities. High yield securities are generally not listed on a
national securities exchange but trade in the over-the-counter markets. Due to
the smaller, less liquid market for high yield securities, the bid-offer spread
on such securities is generally greater than it is for investment grade
securities and the purchase or sale of such securities may take longer to
complete.
ILLIQUID SECURITIES RISK. Some of the securities held by the Fund may be
illiquid. Illiquid securities involve the risk that the securities will not be
able to be sold at the time desired by the Fund or at prices approximately the
value at which the Fund is carrying the securities on its books.
Page 31
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ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST STRATEGIC INCOME ETF (FDIV)
APRIL 30, 2016 (UNAUDITED)
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 debt
securities in the Fund's portfolio will decline because of rising market
interest rates. Interest rate risk is generally lower for shorter term debt
securities and higher for longer term investments. Duration is a measure of the
expected price volatility of a debt security as a result of changes in market
rates of interest, based on, among other factors, the weighted average timing of
the debt security's expected principal and interest payments. In general,
duration represents the expected percentage change in the value of a security
for an immediate 1% change in interest rates. Therefore, prices of debt
securities with shorter durations tend to be less sensitive to interest rate
changes than debt securities with longer durations. As the value of a debt
security changes over time, so will its duration. Mortgage-related securities
are particularly subject to the risk that interest rate volatility may adversely
impact the valuation and price of such securities.
INVESTMENT COMPANIES RISK. The Fund may invest in the shares of other investment
companies, and therefore, the Fund's investment performance and risks may be
related to the investment performance and risks of the underlying funds. In
general, as a shareholder in other investment companies, the Fund bears its
ratable share of the underlying fund's expenses, and would be subject to
duplicative expenses to the extent the Fund invests in other investment
companies. Pursuant to a contractual agreement, the Advisor has agreed to reduce
the management fee paid by the Fund by the proportional amount of the acquired
fund fees and expenses of the shares of investment companies held by the Fund so
that the Fund would not bear the indirect costs of holding them, provided, that
the investment companies are advised by the Advisor.
LIQUIDITY RISK. The Fund invests a substantial portion of its assets in
lower-quality debt issued by companies that are highly leveraged. Lower-quality
debt tends to be less liquid than higher-quality debt. Moreover, smaller debt
issues tend to be less liquid than larger debt issues. If the economy
experiences a sudden downturn, or if the debt markets for such companies become
distressed, the Fund may have particular difficulty selling its assets in
sufficient amounts, at reasonable prices and in a sufficiently timely manner to
raise the cash necessary to meet any potentially heavy redemption requests by
Fund shareholders. As of the fourth quarter of 2015, the market for high yield
debt has experienced decreased liquidity, and investor perception of increased
risk has caused yield spreads to widen. Decreased liquidity may negatively
affect the Fund's ability to mitigate risk and meet redemptions.
MANAGEMENT RISK. The Fund is subject to management risk because it is an
actively managed portfolio. In managing the Fund's investment portfolio, the
Management Teams will apply investment techniques and risk analyses that may not
have the desired result. There can be no guarantee that the Fund will meet its
investment objectives.
MARKET RISK. Market risk is the risk that a particular security owned by the
Fund or shares of the Fund in general may fall in value. Securities are subject
to market fluctuations caused by such factors as economic, political, regulatory
or market developments, changes in interest rates and perceived trends in
securities prices. Overall security values could decline generally or could
underperform other investments.
MLP RISK. An investment in MLP units involves risks which differ from an
investment in common stock of a corporation. Holders of MLP units have limited
control and voting rights on matters affecting the partnership. In addition,
there are certain tax risks associated with an investment in MLP units and
conflicts of interest may exist between common unit holders and the general
partner, including those arising from incentive distribution payments. In
addition, there is the risk that an MLP could be, contrary to its intention,
taxed as a corporation, resulting in decreased returns from such MLP.
MORTGAGE SECURITIES RISK. The Fund invests in mortgage-related securities,
including mortgage-backed securities, which may make the Fund more susceptible
to adverse economic, political or regulatory events that affect the value of
real estate. Changes in local, state and federal policies could negatively
impact the mortgage-related securities market, which include various government
initiated and sponsored homeowner assistance programs and eminent domain issues.
Mortgage-related securities may also face liquidity issues when the Fund seeks
to sell such securities, but is unable to find buyers at a bid ask spread to
make the transaction feasible. These securities are also subject to the risk
that the underlying borrowers may default on their mortgages, resulting in a
non-payment of principal and interest. Finally, the mortgage-related securities
market may be negatively impacted by regulatory changes including those that are
related to the mandate or existence of the government-sponsored enterprises,
Fannie Mae, Freddie Mac and Ginnie Mae. Mortgage-related securities are subject
to the risk that the rate of mortgage prepayments decreases, which extends the
average life of a security and increases the interest rate exposure.
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
Page 32
--------------------------------------------------------------------------------
ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST STRATEGIC INCOME ETF (FDIV)
APRIL 30, 2016 (UNAUDITED)
a relatively high percentage of its assets in a limited number of issuers. As a
result, the Fund may be more susceptible to a single adverse economic or
regulatory occurrence affecting one or more of these issuers, experience
increased volatility and be highly invested in certain issuers.
NON-U.S. SECURITIES RISK AND EMERGING MARKETS RISK. Non-U.S. securities are
subject to higher volatility than securities of domestic issuers due to possible
adverse political, social or economic developments; restrictions on foreign
investment or exchange of securities; lack of liquidity; currency exchange
rates; excessive taxation; government seizure of assets; different legal or
accounting standards and less government supervision and regulation of exchanges
in foreign countries. These risks may be heightened for securities of companies
located in, or with significant operations in, emerging market countries.
PORTFOLIO TURNOVER RISK. The Fund's strategy may frequently involve buying and
selling portfolio securities to rebalance the Fund's exposure to various market
sectors. High 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.
PREFERRED SECURITIES RISK. Preferred securities combine some of the
characteristics of both common stocks and bonds. Preferred securities are
typically subordinated to bonds and other debt instruments in a company's
capital structure in terms of priority to corporate income, and therefore will
be subject to greater credit risk than those debt instruments. Preferred
securities are also subject to credit risk, interest rate risk and income risk.
SENIOR LOAN RISK. An investment in senior loans subjects the Fund to credit
risk, which is heightened for loans in which the Fund invests because companies
that issue such loans tend to be highly leveraged and thus are more susceptible
to the risks of interest deferral, default and/or bankruptcy. The loans are
usually rated below investment grade but may also be unrated. An economic
downturn would generally lead to a higher non payment rate, and a loan may lose
significant market value before a default occurs. Moreover, any specific
collateral used to secure a loan may decline in value or become illiquid, which
would adversely affect the loan's value. Unlike the securities markets, there is
no central clearinghouse for loan trades, and the loan market has not
established enforceable settlement standards or remedies for failure to settle.
Therefore, portfolio transactions in loans may have uncertain settlement time
periods. Loans are subject to a number of risks described elsewhere in this
prospectus, including liquidity risk and the risk of investing in below
investment grade debt instruments. Floating rate loans are subject to prepayment
risk. The degree to which borrowers prepay loans, whether as a contractual
requirement or at their election, may be affected by general business
conditions, the financial condition of the borrower and competitive conditions
among loan investors, among others. As such, prepayments cannot be predicted
with accuracy. Upon a prepayment, either in part or in full, the actual
outstanding debt on which the Fund derives interest income will be reduced. The
Fund may not be able to reinvest the proceeds received on terms as favorable as
the prepaid loan.
SMALL FUND RISK. The Fund currently has fewer assets than larger funds, and like
other relatively smaller funds, large inflows and outflows may impact the Fund's
market exposure for limited periods of time. This impact may be positive or
negative, depending on the direction of market movement during the period
affected.
SMALLER COMPANIES RISK. The Fund invests in small and/or mid capitalization
companies. Such companies may be more vulnerable to adverse general market or
economic developments, and their securities may be less liquid and may
experience greater price volatility than larger, more established companies as a
result of several factors, including limited trading volumes, products or
financial resources, management inexperience and less publicly available
information. Accordingly, such companies are generally subject to greater market
risk than larger, more established companies.
Page 33
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FIRST TRUST
First Trust Exchange-Traded Fund IV
INVESTMENT ADVISOR
First Trust Advisors L.P.
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
INVESTMENT SUB-ADVISORS
Energy Income Partners, LLC
49 Riverside Avenue
Westport, CT 06880
First Trust Global Portfolios Limited
8 Angel Court
London EC2R 7HJ
Richard Bernstein Advisors, LLC
120 West 45th Street, 36th Floor
New York, NY 10036
Stonebridge Advisors LLC
187 Danbury Road
Wilton, Connecticut, 06897
ADMINISTRATOR, CUSTODIAN,
FUND ACCOUNTANT &
TRANSFER AGENT
The Bank of New York Mellon
101 Barclay Street
New York, NY 10286
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
111 S. Wacker Drive
Chicago, IL 60606
LEGAL COUNSEL
Chapman and Cutler LLP
111 W. Monroe Street
Chicago, IL 60603
[BLANK BACK COVER]
FIRST TRUST
First Trust Exchange-Traded Fund IV
--------------------------------------------------------------------------------
First Trust Low Duration Opportunities ETF (LMBS)
Semi-Annual Report
for the Six Months Ended
April 30, 2016
--------------------------------------------------------------------------------
TABLE OF CONTENTS
--------------------------------------------------------------------------------
FIRST TRUST LOW DURATION OPPORTUNITIES ETF (LMBS)
SEMI-ANNUAL REPORT
APRIL 30, 2016 (UNAUDITED)
Shareholder Letter........................................................... 1
Fund Performance Overview.................................................... 2
Portfolio Management ........................................................ 5
Understanding Your Fund Expenses............................................. 6
Portfolio of Investments..................................................... 7
Statement of Assets and Liabilities.......................................... 18
Statement of Operations...................................................... 19
Statements of Changes in Net Assets.......................................... 20
Financial Highlights......................................................... 21
Notes to Financial Statements................................................ 22
Additional Information....................................................... 30
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning of
the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934,
as amended. Forward-looking statements include statements regarding the goals,
beliefs, plans or current expectations of First Trust Advisors L.P. ("First
Trust" or the "Advisor") and its representatives, taking into account the
information currently available to them. Forward-looking statements include all
statements that do not relate solely to current or historical fact. For example,
forward-looking statements include the use of words such as "anticipate,"
"estimate," "intend," "expect," "believe," "plan," "may," "should," "would" or
other words that convey uncertainty of future events or outcomes.
Forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
the series of First Trust Exchange-Traded Fund IV (the "Trust") described in
this report (First Trust Low Duration Opportunities ETF; hereinafter referred to
as the "Fund") to be materially different from any future results, performance
or achievements expressed or implied by the forward-looking statements. When
evaluating the information included in this report, you are cautioned not to
place undue reliance on these forward-looking statements, which reflect the
judgment of the Advisor and its representatives only as of the date hereof. We
undertake no obligation to publicly revise or update these forward-looking
statements to reflect events and circumstances that arise after the date hereof.
PERFORMANCE AND RISK DISCLOSURE
There is no assurance that the Fund will achieve its investment objectives. The
Fund is subject to market risk, which is the possibility that the market values
of securities owned by the Fund will decline and that the value of the Fund
shares may therefore be less than what you paid for them. Accordingly, you can
lose money investing in the Fund. See "Risk Considerations" in the Additional
Information section of this report for a discussion of 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 the prospectus, the statement of additional information,
this report and other Fund regulatory filings.
--------------------------------------------------------------------------------
SHAREHOLDER LETTER
--------------------------------------------------------------------------------
FIRST TRUST LOW DURATION OPPORTUNITIES ETF (LMBS)
SEMI-ANNUAL LETTER FROM THE CHAIRMAN AND CEO
APRIL 30, 2016 (UNAUDITED)
Dear Shareholders:
Thank you for your investment in First Trust Low Duration Opportunities ETF (the
"Fund").
First Trust Advisors L.P. ("First Trust") is pleased to provide you with the
semi-annual report which contains detailed information about your investment for
the six months ended April 30, 2016. Additionally, First Trust compiled the
Fund's financial statements for you to review. We encourage you to read this
report and discuss it with your financial advisor.
While markets were up and down during 2015, we believe there are three important
things to remember. First, the U.S. economy grew, despite the massive decline in
oil prices. Second, the tapering that began in 2014 by the Federal Reserve (the
"Fed") did not stop growth in the U.S. economy. Finally, the long-anticipated
rate hike by the Fed in December had little effect on the money supply, and the
stock market was not shocked by the hike. Early in 2016, many investors were
concerned that the volatility we saw in the market in 2015 would continue, and
it did. From December 31, 2015 through February 11, 2016, the S&P 500(R) Index
declined by 10.27%. Since then, the market has made a steady comeback, and as of
April 30, 2016, the S&P 500(R) Index was up 13.39%.
First Trust believes that having a long-term investment horizon and being
invested in quality products can help you reach your goals, despite how the
market behaves. We have always maintained perspective about the markets and
believe investors should as well. We will continue to strive to provide quality
investments each and every day, which has been one of the hallmarks of our firm
since its inception 25 years ago.
Thank you for giving First Trust the opportunity to be a part of your investment
plan. We value our relationship with you and will continue to focus on helping
investors like you reach your financial goals.
Sincerely,
/s/ James A. Bowen
James A. Bowen
Chairman of the Board of Trustees
Chief Executive Officer of First Trust Advisors L.P.
Page 1
--------------------------------------------------------------------------------
FUND PERFORMANCE OVERVIEW (UNAUDITED)
--------------------------------------------------------------------------------
FIRST TRUST LOW DURATION OPPORTUNITIES ETF (LMBS)
The primary investment objective of the First Trust Low Duration Opportunities
ETF (the "Fund") is to generate current income. The Fund's secondary investment
objective is capital appreciation. The Fund is an actively managed
exchange-traded fund. First Trust Advisors L.P. ("First Trust" or the "Advisor")
serves as the advisor. Jim Snyder and Jeremiah Charles are the Fund's portfolio
managers and are jointly and primarily responsible for the day-to-day management
of the Fund's investment portfolio.
The Fund's investment categories are: (i) mortgage-related investments,
including mortgage-backed securities that may be, but are not required to be,
issued or guaranteed by the U.S. government or its agencies or
instrumentalities; (ii) U.S. government securities, including callable agency
securities, which give the issuer (the U.S. government agency) the right to
redeem the security prior to maturity, and U.S. government inflation-indexed
securities; and (iii) high yield debt, commonly referred to as "junk" debt.
Although the Fund intends to invest primarily in investment grade securities,
the Fund may invest up to 20% of its net assets (including investment
borrowings) in securities of any credit quality, including securities that are
below investment grade (as described in (iii) above), illiquid securities, and
derivative instruments.
-------------------------------------------------------------------------------------------------------------------------
PERFORMANCE
-------------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL CUMULATIVE
TOTAL RETURNS TOTAL RETURNS
6 Months Ended 1 Year Ended Inception (11/4/14) Inception (11/4/14)
4/30/16 4/30/16 to 4/30/16 to 4/30/16
FUND PERFORMANCE
NAV 3.50% 4.77% 4.82% 7.25%
Market Price 3.85% 4.33% 4.82% 7.24%
INDEX PERFORMANCE
BofA Merrill Lynch 1-5 Year US Treasury &
Agency Index 1.10% 1.57% 1.71% 2.55%
-------------------------------------------------------------------------------------------------------------------------
Total returns for the periods since inception are calculated from the inception
date of the Fund. "Average Annual Total Returns" represent the average annual
change in value of an investment over the period indicated. "Cumulative Total
Returns" represent the total change in value of an investment over the period
indicated.
The Fund's per share net asset value ("NAV") is the value of one share of the
Fund and is computed by dividing the value of all assets of the Fund (including
accrued interest and dividends), less all liabilities (including accrued
expenses and dividends declared but unpaid), by the total number of outstanding
shares. The price used to calculate market return ("Market Price") is determined
by using the midpoint between the highest bid and the lowest offer on the stock
exchange on which shares of the Fund are listed for trading as of the time that
the Fund's NAV is calculated. Since shares of the Fund did not trade in the
secondary market until after its inception, for the period from inception to the
first day of secondary market trading in shares of the Fund, the NAV of the Fund
is used as a proxy for the secondary market trading price to calculate market
returns. NAV and market returns assume that all distributions have been
reinvested in the Fund at NAV and Market Price, respectively.
An index is a statistical composite that tracks a specified financial market or
sector. Unlike the Fund, the index does not actually hold a portfolio of
securities and therefore does not incur the expenses incurred by the Fund. These
expenses negatively impact the performance of the Fund. Also, market returns do
not include brokerage commissions that may be payable on secondary market
transactions. If brokerage commissions were included, market returns would be
lower. The total returns presented reflect the reinvestment of dividends on
securities in the index. The returns presented do not reflect the deduction of
taxes that a shareholder would pay on Fund distributions or the redemption or
sale of Fund shares. The investment return and principal value of shares of the
Fund will vary with changes in market conditions. Shares of the Fund may be
worth more or less than their original cost when they are redeemed or sold in
the market. The Fund's past performance is no guarantee of future performance.
Page 2
--------------------------------------------------------------------------------
FUND PERFORMANCE OVERVIEW (UNAUDITED) (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST LOW DURATION OPPORTUNITIES ETF (LMBS)
-----------------------------------------------------------
% OF LONG-TERM
ASSET CLASSIFICATION INVESTMENTS
-----------------------------------------------------------
U.S. Government Agency Mortgage-Backed
Securities 83.21%
Mortgage-Backed Securities 8.77
Asset-Backed Securities 4.25
Exchange-Traded Funds 3.77
--------
Total 100.00%
========
-----------------------------------------------------------
% OF TOTAL LONG
FIXED-INCOME
CREDIT QUALITY(1) INVESTMENTS & CASH
-----------------------------------------------------------
Government 87.64%
AAA 1.23
AA+ 1.52
AA 0.10
AA- 0.04
A+ 0.23
A- 0.19
BBB+ 0.31
BBB- 0.32
Below Investment Grade 3.60
Not Rated 6.17
Cash -1.35
--------
Total 100.00%
========
-----------------------------------------------------------
% OF LONG-TERM
TOP TEN HOLDINGS INVESTMENTS
-----------------------------------------------------------
Federal Home Loan Mortgage
Corporation, Pool G07329 3.91%
Federal National Mortgage Association,
Pool AL2551 3.36
iShares 7-10 Year Treasury Bond ETF 2.66
Federal Home Loan Mortgage
Corporation, Pool A95441 2.18
Government National Mortgage
Association, Pool 737996 1.93
Federal National Mortgage Association,
Pool AB7765 1.88
Federal National Mortgage Association,
Pool AK3103 1.63
Federal Home Loan Mortgage
Corporation, Pool G04814 1.55
Federal National Mortgage Association,
Pool AU3751 1.49
Federal Home Loan Mortgage
Corporation, Pool A47829 1.44
--------
Total 22.03%
========
-----------------------------
(1) The ratings are by Standard & Poor's Ratings Group, a division of The
McGraw-Hill Companies, Inc. A credit rating is an assessment provided by a
nationally recognized statistical rating organization (NRSRO), of the
creditworthiness of an issuer with respect to debt obligations. Ratings
are measured highest to lowest on a scale that generally ranges from AAA
to D for long-term ratings and A-1+ to C for short-term ratings.
Investment grade is defined as those issuers that have a long-term credit
rating of BBB- or higher or a short-term credit rating of A-3 or higher.
The credit ratings shown relate to the credit worthiness of the issuers of
the underlying securities in the Fund, and not to the Fund or its shares.
U.S. Treasury and U.S. Agency mortgage-backed securities appear under
"Government". Credit ratings are subject to change.
Page 3
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FUND PERFORMANCE OVERVIEW (UNAUDITED) (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST LOW DURATION OPPORTUNITIES ETF (LMBS)
PERFORMANCE OF A $10,000 INITIAL INVESTMENT
NOVEMBER 4, 2014 - APRIL 30, 2016
First Trust BofA Merrill Lynch
Low Duration 1-5 Year US Treasury
Opportunities ETF & Agency Index
11/4/14 $10,000 $10,000
4/30/15 10,236 10,097
10/31/15 10,362 10,144
4/30/16 10,725 10,256
Performance figures assume reinvestment of all distributions and do not reflect
the deduction of taxes that a shareholder would pay on Fund distributions or the
redemption or sale of Fund shares. An index is a statistical composite that
tracks a specified financial market or sector. Unlike the Fund, the index does
not actually hold a portfolio of securities and therefore does not incur the
expenses incurred by the Fund. These expenses negatively impact the performance
of the Fund. The Fund's past performance does not predict future performance.
FREQUENCY DISTRIBUTION OF DISCOUNTS AND PREMIUMS
BID/ASK MIDPOINT VS. NAV THROUGH APRIL 30, 2016
The following Frequency Distribution of Discounts and Premiums charts are
provided to show the frequency at which the bid/ask midpoint price for the Fund
was at a discount or premium to the daily NAV. The following tables are for
comparative purposes only and represent the period November 5, 2014
(commencement of trading) through April 30, 2016. Shareholders may pay more than
NAV when they buy Fund shares and receive less than NAV when they sell those
shares because shares are bought and sold at current market price. Data
presented represents past performance and cannot be used to predict future
results.
NUMBER OF DAYS BID/ASK MIDPOINT NUMBER OF DAYS BID/ASK MIDPOINT
AT/ABOVE NAV BELOW NAV
---------------------------------------- ----------------------------------------
0.00%- 0.50%- 1.00%- 0.00%- 0.50%- 1.00%-
FOR THE PERIOD 0.49% 0.99% 1.99% >=2.00% 0.49% 0.99% 1.99% >=2.00%
11/5/14 - 10/31/15 144 40 0 1 62 3 0 0
11/1/15 - 4/30/16 67 6 0 0 50 1 0 0
Page 4
--------------------------------------------------------------------------------
PORTFOLIO MANAGEMENT
--------------------------------------------------------------------------------
FIRST TRUST LOW DURATION OPPORTUNITIES ETF (LMBS)
SEMI-ANNUAL REPORT
APRIL 30, 2016 (UNAUDITED)
INVESTMENT MANAGER
First Trust Advisors L.P. ("First Trust" or the "Advisor") is the investment
advisor to the First Trust Low Duration Opportunities ETF (the "Fund" or
"LMBS"). 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 or sub-advisor for seven mutual fund portfolios, nine exchange-traded
trusts consisting of 102 series and 16 closed-end funds and is also the
portfolio supervisor of certain unit investment trusts sponsored by First Trust
Portfolios L.P. ("FTP").
PORTFOLIO MANAGEMENT TEAM
JEREMIAH CHARLES - VICE PRESIDENT, PORTFOLIO MANAGER
JIM SNYDER - VICE PRESIDENT, PORTFOLIO MANAGER
Page 5
FIRST TRUST LOW DURATION OPPORTUNITIES ETF (LMBS)
UNDERSTANDING YOUR FUND EXPENSES
APRIL 30, 2016 (UNAUDITED)
As a shareholder of First Trust Low Duration Opportunities ETF (the "Fund"), you
incur two types of costs: (1) transaction costs; and (2) ongoing costs,
including management fees, distribution and/or service fees, if any, and other
Fund expenses. This Example is intended to help you understand your ongoing
costs of investing in the Fund and to compare these costs with the ongoing costs
of investing in other funds.
The Example is based on an investment of $1,000 invested at the beginning of the
period and held through the six-month period ended April 30, 2016.
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 period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second line in the following table provides information about hypothetical
account values and hypothetical expenses based on the Fund's actual expense
ratio and an assumed rate of return of 5% per year before expenses, which is not
the Fund's actual return. The hypothetical account values and expenses may not
be used to estimate the actual ending account balance or expenses you paid for
the period. You may use this information to compare the ongoing costs of
investing in the Fund and other funds. To do so, compare this 5% hypothetical
example with the 5% hypothetical examples that appear in the shareholder reports
of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs such as brokerage
commissions. Therefore, the second line in the table is useful in comparing
ongoing costs only, and will not help you determine the relative total costs of
owning different funds. In addition, if these transactional costs were included,
your costs would have been higher.
----------------------------------------------------------------------------------------------------------------------------------
ANNUALIZED
EXPENSE RATIO EXPENSES PAID
BEGINNING ENDING BASED ON THE DURING THE
ACCOUNT VALUE ACCOUNT VALUE SIX MONTH SIX MONTH
NOVEMBER 1, 2015 APRIL 30, 2016 PERIOD PERIOD (a)
----------------------------------------------------------------------------------------------------------------------------------
FIRST TRUST LOW DURATION OPPORTUNITIES ETF (LMBS)
Actual $1,000.00 $1,035.00 0.65% $3.29
Hypothetical (5% return before expenses) $1,000.00 $1,021.63 0.65% $3.27
(a) Expenses are equal to the annualized expense ratio as indicated in the
table, multiplied by the average account value over the period (November
1, 2015 through April 30, 2016), multiplied by 182/366 (to reflect the
one-half year period).
Page 6
FIRST TRUST LOW DURATION OPPORTUNITIES ETF (LMBS)
PORTFOLIO OF INVESTMENTS
APRIL 30, 2016 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- -------------------------------------------------------------- ----------- -------------- ---------------
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES -- 75.6%
COLLATERALIZED MORTGAGE OBLIGATIONS -- 22.4%
Federal Home Loan Mortgage Corporation
$ 2,489 Series 1989-74, Class F.................................... 6.00% 10/15/20 $ 2,612
128 Series 1990-147, Class G................................... 7.50% 04/15/21 129
76 Series 1990-172, Class J................................... 7.00% 07/15/21 79
146 Series 1990-186, Class E................................... 6.00% 08/15/21 152
298 Series 1990-188, Class H................................... 7.00% 09/15/21 318
10,491 Series 1992-205, Class A (a)............................... 0.88% 05/15/23 10,546
51,847 Series 1993-1498, Class I (a).............................. 1.58% 04/15/23 53,089
1,304 Series 1993-1577, Class PK................................. 6.50% 09/15/23 1,425
3,219 Series 1993-1643, Class PK................................. 6.50% 12/15/23 3,539
4,381 Series 1998-2089, Class PJ, IO............................. 7.00% 10/15/28 510
5,603 Series 1998-2102, Class Z.................................. 6.00% 12/15/28 6,357
3,336 Series 2001-2390, Class WD................................. 5.50% 12/15/16 3,369
2,082 Series 2003-2586, Class ND................................. 4.50% 03/15/18 2,134
244,728 Series 2003-2626, Class ZX................................. 5.00% 06/15/33 303,244
8,447 Series 2003-2646, Class MX................................. 4.00% 11/15/32 8,525
1,344 Series 2003-2725, Class PE................................. 4.50% 09/15/33 1,345
312,183 Series 2005-3031, Class BI, IO (a)......................... 6.26% 08/15/35 71,423
15,940 Series 2005-3074, Class ZH................................. 5.50% 11/15/35 20,649
5,477 Series 2005-3076, Class PG................................. 5.50% 10/15/34 5,568
817,333 Series 2006-243, Class 11, IO, STRIPS (a).................. 7.25% 08/15/36 244,142
32,707 Series 2006-3100, Class PO, PO............................. (b) 01/15/36 30,585
471,032 Series 2006-3114, Class GI, IO (a)......................... 6.17% 02/15/36 114,333
53,757 Series 2006-3200, Class PO, PO............................. (b) 08/15/36 48,219
724 Series 2007-3317, Class PG................................. 5.00% 04/15/36 738
1,328 Series 2007-3347, Class PF (a)............................. 0.78% 01/15/36 1,330
71,064 Series 2007-3373, Class TO, PO............................. (b) 04/15/37 67,451
107,436 Series 2009-3523, Class SD (a)............................. 18.47% 06/15/36 148,927
178,513 Series 2009-3607, Class BO, PO............................. (b) 04/15/36 168,679
159 Series 2010-3676, Class CA................................. 4.00% 07/15/24 159
216,898 Series 2010-3699, Class QI, IO............................. 5.50% 02/15/39 12,368
2,906 Series 2010-3740, Class KC................................. 4.00% 07/15/37 2,951
771,033 Series 2010-3740, Class SC, IO (a)......................... 5.57% 10/15/40 119,209
26,727 Series 2010-3752, Class KF (a)............................. 0.93% 12/15/37 26,872
139,170 Series 2011-3785, Class LS (a)............................. 9.03% 01/15/41 162,835
4,111 Series 2011-3795, Class ED................................. 3.00% 10/15/39 4,247
104,489 Series 2011-3828, Class SY (a)............................. 11.90% 02/15/41 140,063
54,597 Series 2011-3842, Class BS (a)............................. 20.58% 04/15/41 113,656
100,000 Series 2011-3844, Class PC................................. 5.00% 04/15/41 119,198
19,000 Series 2012-4012, Class GC................................. 3.50% 06/15/40 20,226
39,705 Series 2012-4015, Class KB................................. 1.75% 05/15/41 35,796
1,407,238 Series 2012-4021, Class IP, IO............................. 3.00% 03/15/27 123,150
126,705 Series 2012-4097, Class ES, IO (a)......................... 5.67% 08/15/42 25,059
130,834 Series 2012-4116, Class AS, IO (a)......................... 5.72% 10/15/42 26,882
Federal National Mortgage Association
574 Series 1990-11, Class G.................................... 6.50% 02/25/20 599
35,072 Series 1990-13, Class E.................................... 9.00% 02/25/20 38,353
2,294 Series 1990-108, Class G................................... 7.00% 09/25/20 2,460
2,415 Series 1990-109, Class J................................... 7.00% 09/25/20 2,549
37,983 Series 1990-112, Class G................................... 8.50% 09/25/20 41,274
1,622 Series 1992-44, Class ZQ................................... 8.00% 07/25/22 1,676
1,950 Series 1993-3, Class K..................................... 7.00% 02/25/23 2,149
See Notes to Financial Statements Page 7
FIRST TRUST LOW DURATION OPPORTUNITIES ETF (LMBS)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2016 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- -------------------------------------------------------------- ----------- -------------- ---------------
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES (CONTINUED)
COLLATERALIZED MORTGAGE OBLIGATIONS (CONTINUED)
Federal National Mortgage Association (Continued)
$ 4,553 Series 1993-46, Class FH (a)............................... 1.50% 04/25/23 $ 4,489
130,697 Series 1993-214, Class 2, IO, STRIPS....................... 7.50% 03/25/23 22,132
768 Series 1994-24, Class H, PO................................ (b) 11/25/23 713
121,558 Series 1996-51, Class AY, IO............................... 7.00% 12/18/26 27,493
158,853 Series 1997-10, Class SA, IO (a)........................... 8.46% 03/18/27 40,694
18,901 Series 1998-37, Class VZ................................... 6.00% 06/17/28 21,315
68,133 Series 1999-49, Class SC, IO (a)........................... 7.46% 10/25/17 2,159
1,645,600 Series 2000-45, Class SD, IO (a)........................... 7.51% 12/18/30 361,481
44,184 Series 2001-8, Class SE, IO (a)............................ 8.16% 02/17/31 2,740
548,521 Series 2001-34, Class SR, IO (a)........................... 7.66% 08/18/31 86,634
6,394 Series 2001-42, Class SB (a)............................... 8.50% 09/25/31 8,155
3,109 Series 2002-22, Class G.................................... 6.50% 04/25/32 3,484
1,107 Series 2002-74, Class LE................................... 5.00% 11/25/17 1,132
241,208 Series 2002-320, Class 2, IO, STRIPS....................... 7.00% 04/25/32 64,966
26,459 Series 2002-329, Class 1, PO, STRIPS....................... (b) 01/25/33 24,565
8,440 Series 2003-21, Class OA................................... 4.00% 03/25/33 8,855
43,949 Series 2003-109, Class YB.................................. 6.00% 11/25/33 53,135
29,658 Series 2003-119, Class ME.................................. 4.50% 04/25/33 30,644
53,512 Series 2003-W1, Class 1A1 (a).............................. 5.68% 12/25/42 60,944
37,762 Series 2003-W10, Class 1A4................................. 4.51% 06/25/43 40,705
143,887 Series 2003-W12, Class 1A8................................. 4.55% 06/25/43 156,856
13,059 Series 2004-36, Class TA................................... 5.50% 08/25/33 13,798
25,000 Series 2004-60, Class AC................................... 5.50% 04/25/34 28,968
2,616 Series 2004-60, Class JB................................... 5.50% 04/25/34 2,617
13,534 Series 2004-W9, Class 1A3.................................. 6.05% 02/25/44 15,956
5,277 Series 2005-3, Class CD.................................... 5.50% 07/25/34 5,337
43,462 Series 2005-29, Class ZT................................... 5.00% 04/25/35 49,853
130,940 Series 2005-45, Class SR, IO (a)........................... 6.28% 06/25/35 23,303
1,661 Series 2005-48, Class AR................................... 5.50% 02/25/35 1,760
15,472 Series 2005-48, Class MD................................... 5.00% 04/25/34 15,845
24,110 Series 2005-67, Class SC (a)............................... 13.46% 08/25/35 32,724
10,365 Series 2005-70, Class KJ................................... 5.50% 09/25/34 10,866
145,324 Series 2005-79, Class NS, IO (a)........................... 5.65% 09/25/35 24,448
18,747 Series 2005-95, Class WZ................................... 6.00% 11/25/35 26,244
946 Series 2005-110, Class CA.................................. 5.50% 01/25/35 948
173,543 Series 2006-15, Class IS, IO (a)........................... 6.14% 03/25/36 38,032
18,194 Series 2006-31, Class PZ................................... 6.00% 05/25/36 25,354
30,000 Series 2006-46, Class UD................................... 5.50% 06/25/36 36,518
33,359 Series 2006-126, Class DZ.................................. 5.50% 01/25/37 35,679
51,857 Series 2006-377, Class 1, PO, STRIPS....................... (b) 10/25/36 44,159
116,952 Series 2007-67, Class SA, IO (a)........................... 6.31% 04/25/37 9,137
109,939 Series 2008-3, Class FZ (a)................................ 0.99% 02/25/38 114,201
17,509 Series 2008-51, Class B.................................... 4.50% 06/25/23 17,990
270,412 Series 2009-14, Class BS, IO (a)........................... 5.81% 03/25/24 25,861
47,000 Series 2009-92, Class DB................................... 5.00% 11/25/39 56,420
2,022,560 Series 2009-398, Class C13, IO, STRIPS..................... 4.00% 06/25/24 175,079
103,279 Series 2010-3, Class DZ.................................... 4.50% 02/25/40 122,752
688,858 Series 2010-106, Class BI, IO.............................. 3.50% 09/25/20 32,634
4,002 Series 2010-145, Class PE.................................. 3.25% 10/25/24 4,123
1,093,203 Series 2011-30, Class LS, IO (a)........................... 1.86% 04/25/41 74,632
74,478 Series 2011-60, Class OA, PO............................... (b) 08/25/39 68,083
Page 8 See Notes to Financial Statements
FIRST TRUST LOW DURATION OPPORTUNITIES ETF (LMBS)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2016 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- -------------------------------------------------------------- ----------- -------------- ---------------
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES (CONTINUED)
COLLATERALIZED MORTGAGE OBLIGATIONS (CONTINUED)
Federal National Mortgage Association (Continued)
$ 543,343 Series 2011-72, Class TI, IO............................... 4.00% 09/25/40 $ 34,613
802,826 Series 2011-86, Class DI, IO............................... 3.50% 09/25/21 50,122
71,275 Series 2011-90, Class QI, IO............................... 5.00% 05/25/34 6,308
958 Series 2011-134, Class PA.................................. 4.00% 09/25/40 990
1,147,550 Series 2011-141, Class EI, IO.............................. 3.00% 07/25/21 44,633
1,497,061 Series 2012-101, Class AI, IO.............................. 3.00% 06/25/27 140,658
331,769 Series 2012-118, Class IB, IO.............................. 3.50% 11/25/42 61,803
1,903,830 Series 2012-149, Class CI, IO.............................. 3.00% 01/25/28 169,415
311,809 Series 2012-409, Class C17, IO, STRIPS..................... 4.00% 11/25/41 55,645
20,891 Series 2013-23, Class ZB................................... 3.00% 03/25/43 23,591
7,000 Series 2013-35, Class LP................................... 3.00% 01/25/43 7,197
108,860 Series 2013-70, Class JZ................................... 3.00% 07/25/43 109,425
566,351 Series 2014-29, Class GI, IO............................... 3.00% 05/25/29 65,000
Government National Mortgage Association
146,481 Series 1999-30, Class S, IO (a)............................ 8.16% 08/16/29 37,479
70,897 Series 2001-60, Class PZ................................... 6.00% 12/20/31 81,903
102,801 Series 2002-20, Class PM................................... 4.50% 03/20/32 112,578
113,066 Series 2002-72, Class ZB................................... 6.00% 10/20/32 151,335
959,923 Series 2003-11, Class SM, IO (a)........................... 7.26% 02/16/33 252,416
524,314 Series 2003-42, Class SA, IO (a)........................... 6.16% 07/16/31 94,299
90,587 Series 2003-62, Class MZ................................... 5.50% 07/20/33 111,633
58,881 Series 2004-49, Class MZ................................... 6.00% 06/20/34 73,295
7,372 Series 2004-53, Class GE................................... 5.00% 08/20/32 7,514
171,654 Series 2004-71, Class ST (a)............................... 7.00% 09/20/34 193,611
176,031 Series 2004-105, Class JZ.................................. 5.00% 12/20/34 226,137
176,031 Series 2005-3, Class KZ.................................... 5.00% 01/16/35 211,743
34,855 Series 2005-7, Class AJ (a)................................ 20.26% 02/16/35 56,953
11,078 Series 2005-41, Class PA................................... 4.00% 05/20/35 12,227
434,219 Series 2007-27, Class SD, IO (a)........................... 5.76% 05/20/37 84,295
265,347 Series 2008-33, Class XS, IO (a)........................... 7.26% 04/16/38 57,044
613,419 Series 2008-47, Class MI, IO............................... 6.00% 10/16/37 47,546
37,000 Series 2008-54, Class PE................................... 5.00% 06/20/38 42,686
835 Series 2008-85, Class HP................................... 4.00% 04/20/38 847
339,396 Series 2009-25, Class SE, IO (a)........................... 7.16% 09/20/38 70,373
31,573 Series 2009-81, Class TZ................................... 5.50% 09/20/39 41,749
19,969 Series 2009-91, Class JD................................... 3.50% 08/20/32 20,003
49,772 Series 2009-106, Class DZ.................................. 5.50% 11/20/39 62,662
317,875 Series 2010-4, Class SL, IO (a)............................ 5.96% 01/16/40 64,670
100,059 Series 2011-4, Class PZ.................................... 5.00% 01/20/41 122,649
239,265 Series 2011-129, Class CL.................................. 5.00% 03/20/41 292,569
247,801 Series 2011-146, Class EI, IO.............................. 5.00% 11/16/41 55,088
173,762 Series 2011-151, Class TB, IO (a).......................... 3.50% 04/20/41 21,000
281,151 Series 2013-5, Class IA, IO................................ 3.50% 10/16/42 35,831
153,983 Series 2013-20, Class KI, IO............................... 5.00% 01/20/43 25,373
8,000 Series 2013-117, Class VB.................................. 3.50% 02/20/32 8,526
154,765 Series 2014-91, Class JI, IO............................... 4.50% 01/20/40 21,390
496,614 Series 2014-99, Class HI, IO............................... 4.50% 06/20/44 95,622
145,510 Series 2015-95, Class IK, IO............................... 1.00% 05/16/37 5,298
---------------
8,065,504
---------------
See Notes to Financial Statements Page 9
FIRST TRUST LOW DURATION OPPORTUNITIES ETF (LMBS)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2016 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- -------------------------------------------------------------- ----------- -------------- ---------------
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES (CONTINUED)
COMMERCIAL MORTGAGE-BACKED SECURITIES -- 0.4%
Federal National Mortgage Association
$ 50,000 Series 2013-M6, Class 1AC (a).............................. 4.00% 02/25/43 $ 52,412
Government National Mortgage Association
100,000 Series 2013-74, Class AG (a).................................. 2.79% 12/16/53 93,204
---------------
145,616
---------------
PASS-THROUGH SECURITIES -- 52.8%
Federal Home Loan Mortgage Corporation
438,466 Pool A47829................................................ 4.00% 08/01/35 469,918
128,174 Pool A86143................................................ 5.00% 05/01/39 142,726
62,413 Pool A90319................................................ 5.00% 12/01/39 69,590
24,590 Pool A93093................................................ 4.50% 07/01/40 27,130
176,695 Pool A94843................................................ 4.00% 11/01/40 191,893
657,104 Pool A95441................................................ 4.00% 12/01/40 710,603
101,818 Pool A96380................................................ 4.00% 01/01/41 109,546
303,173 Pool A97294................................................ 4.00% 02/01/41 324,789
10,797 Pool C01310................................................ 6.50% 03/01/32 12,471
22,373 Pool C01444................................................ 6.00% 01/01/33 25,661
40,448 Pool C01574................................................ 5.00% 06/01/33 45,086
38,239 Pool C01848................................................ 6.00% 06/01/34 44,093
42,660 Pool C03458................................................ 5.00% 02/01/40 47,038
106,805 Pool C03949................................................ 3.50% 05/01/42 112,767
10,875 Pool G01443................................................ 6.50% 08/01/32 12,987
48,562 Pool G01737................................................ 5.00% 12/01/34 54,016
28,787 Pool G01829................................................ 6.00% 03/01/35 33,134
32,414 Pool G01840................................................ 5.00% 07/01/35 36,030
53,364 Pool G04452................................................ 6.00% 07/01/38 61,040
77,066 Pool G04593................................................ 5.50% 01/01/37 86,393
65,051 Pool G04632................................................ 5.00% 11/01/36 72,108
449,268 Pool G04814................................................ 5.50% 10/01/38 505,162
85,568 Pool G05173................................................ 4.50% 11/01/31 94,331
79,118 Pool G05792................................................ 4.50% 02/01/40 86,695
24,493 Pool G05938................................................ 5.00% 01/01/36 26,995
55,603 Pool G06252................................................ 4.00% 02/01/41 59,823
217,789 Pool G06359................................................ 4.00% 02/01/41 234,319
97,794 Pool G06501................................................ 4.00% 04/01/41 105,217
202,977 Pool G06739................................................ 4.50% 09/01/41 222,522
42,947 Pool G07219................................................ 5.00% 10/01/41 47,354
1,186,323 Pool G07329................................................ 4.00% 01/01/43 1,277,028
32,413 Pool G07613................................................ 6.00% 04/01/39 37,253
8,133 Pool G08113................................................ 6.50% 02/01/36 9,269
20,962 Pool G11880................................................ 5.00% 12/01/20 22,120
17,362 Pool G12978................................................ 5.50% 12/01/22 18,947
14,970 Pool J03523................................................ 5.00% 09/01/21 15,592
171,835 Pool O20138 (a)............................................ 5.00% 11/01/30 190,227
201,498 Pool Q00841................................................ 4.50% 05/01/41 220,900
114,260 Pool Q03139................................................ 4.00% 09/01/41 123,459
134,049 Pool Q05035................................................ 4.00% 12/01/41 144,224
224,896 Pool Q07189................................................ 4.00% 04/01/42 242,148
70,191 Pool Q07479................................................ 3.50% 04/01/42 73,850
84,350 Pool Q11791................................................ 3.50% 10/01/42 88,781
150,346 Pool Q11836................................................ 3.50% 10/01/42 158,832
Page 10 See Notes to Financial Statements
FIRST TRUST LOW DURATION OPPORTUNITIES ETF (LMBS)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2016 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- -------------------------------------------------------------- ----------- -------------- ---------------
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES (CONTINUED)
PASS-THROUGH SECURITIES (CONTINUED)
Federal National Mortgage Association
$ 63,873 Pool 254636................................................ 5.00% 02/01/33 $ 71,095
90,921 Pool 255190................................................ 5.50% 05/01/34 102,903
23,097 Pool 545759................................................ 6.50% 07/01/32 27,249
12,238 Pool 555528................................................ 6.00% 04/01/33 14,156
41,626 Pool 555851................................................ 6.50% 01/01/33 49,027
56,858 Pool 725228................................................ 6.00% 03/01/34 65,877
58,061 Pool 725690................................................ 6.00% 08/01/34 66,954
28,480 Pool 725704................................................ 6.00% 08/01/34 32,911
32,879 Pool 735503................................................ 6.00% 04/01/35 37,941
13,105 Pool 745875................................................ 6.50% 09/01/36 15,147
50,413 Pool 831663................................................ 6.00% 08/01/36 57,527
78,800 Pool 890588................................................ 4.50% 09/01/41 86,227
48,428 Pool 916916................................................ 6.00% 05/01/37 55,674
30,906 Pool 930562................................................ 5.00% 02/01/39 34,925
178,978 Pool 973561................................................ 5.00% 03/01/23 191,528
42,080 Pool 995002................................................ 5.00% 07/01/37 46,835
54,176 Pool AA0916................................................ 5.00% 08/01/37 60,133
144,370 Pool AB1953................................................ 4.00% 12/01/40 156,054
57,377 Pool AB2092................................................ 4.00% 01/01/41 61,967
53,863 Pool AB2275................................................ 4.50% 02/01/41 59,036
56,406 Pool AB2467................................................ 4.50% 03/01/41 62,368
223,633 Pool AB4937................................................ 3.50% 04/01/42 235,406
215,395 Pool AB5174................................................ 3.50% 05/01/42 227,518
146,821 Pool AB5500................................................ 3.50% 07/01/42 154,550
173,597 Pool AB6632................................................ 3.50% 10/01/42 182,301
595,205 Pool AB7765................................................ 3.00% 02/01/43 612,718
71,436 Pool AB9382................................................ 4.00% 05/01/43 77,188
102,649 Pool AB9683................................................ 4.00% 06/01/43 110,456
134,783 Pool AB9959................................................ 4.00% 07/01/43 145,515
38,860 Pool AD0163................................................ 6.00% 11/01/34 44,976
45,174 Pool AD0217................................................ 6.00% 08/01/37 52,339
17,756 Pool AD0440................................................ 6.00% 10/01/39 20,488
168,684 Pool AD6938................................................ 4.50% 06/01/40 184,996
70,082 Pool AD8526................................................ 4.50% 08/01/40 77,028
43,807 Pool AE0504................................................ 4.50% 11/01/40 47,946
248,647 Pool AE4476................................................ 4.00% 03/01/41 266,560
183,079 Pool AE8075................................................ 4.00% 12/01/40 197,053
93,029 Pool AE9284................................................ 4.00% 11/01/40 99,730
33,872 Pool AH0057................................................ 4.50% 02/01/41 37,366
384,880 Pool AH1089................................................ 4.00% 11/01/40 414,645
154,060 Pool AH1141................................................ 4.50% 12/01/40 168,685
37,151 Pool AH1568................................................ 4.50% 12/01/40 40,642
222,477 Pool AH7204................................................ 4.00% 03/01/41 238,506
36,215 Pool AH8090................................................ 4.50% 06/01/41 39,692
91,656 Pool AI1190................................................ 4.50% 04/01/41 100,749
165,378 Pool AI1191................................................ 4.50% 04/01/41 181,260
74,033 Pool AI1969................................................ 4.50% 05/01/41 81,378
68,830 Pool AI7800................................................ 4.50% 07/01/41 75,931
74,414 Pool AI8448................................................ 4.50% 08/01/41 81,561
67,553 Pool AJ5301................................................ 4.00% 11/01/41 72,710
33,080 Pool AJ8203................................................ 4.50% 01/01/42 36,521
See Notes to Financial Statements Page 11
FIRST TRUST LOW DURATION OPPORTUNITIES ETF (LMBS)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2016 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- -------------------------------------------------------------- ----------- -------------- ---------------
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES (CONTINUED)
PASS-THROUGH SECURITIES (CONTINUED)
Federal National Mortgage Association (Continued)
$ 374,340 Pool AJ9332................................................ 4.00% 01/01/42 $ 404,368
153,199 Pool AJ9333................................................ 4.00% 01/01/42 164,922
493,459 Pool AK3103................................................ 4.00% 02/01/42 531,196
163,798 Pool AK4520................................................ 4.00% 03/01/42 175,554
343,809 Pool AK5555................................................ 4.00% 04/01/42 368,517
34,850 Pool AL0147................................................ 4.00% 04/01/41 37,885
273,817 Pool AL2392................................................ 3.50% 08/01/42 288,589
1,035,398 Pool AL2551................................................ 3.50% 10/01/42 1,096,533
40,148 Pool AL3484................................................ 4.50% 10/01/42 43,995
98,817 Pool AO2976................................................ 3.50% 05/01/42 104,019
95,646 Pool AO4133................................................ 3.50% 06/01/42 101,036
44,432 Pool AP4795................................................ 3.50% 09/01/42 46,771
235,198 Pool AT2887................................................ 3.50% 04/01/43 247,465
69,621 Pool AT6306................................................ 4.00% 06/01/43 75,640
99,068 Pool AT9657................................................ 4.00% 07/01/43 106,603
453,089 Pool AU3751................................................ 4.00% 08/01/43 487,552
106,046 Pool AU4386................................................ 4.00% 10/01/43 114,111
Government National Mortgage Association
23,071 Pool 3390.................................................. 5.50% 05/20/33 26,075
358,962 Pool 3529.................................................. 5.00% 03/20/34 403,440
58,801 Pool 3555.................................................. 5.00% 05/20/34 66,078
27,592 Pool 3596.................................................. 5.50% 08/20/34 31,128
58,303 Pool 3786.................................................. 5.50% 11/20/35 65,498
152,165 Pool 553144................................................ 5.50% 04/15/33 174,235
56,934 Pool 615403................................................ 4.50% 08/15/33 63,432
27,220 Pool 627123................................................ 5.50% 03/15/34 31,224
75,014 Pool 687833................................................ 6.00% 08/15/38 84,664
79,313 Pool 706840................................................ 4.50% 05/15/40 88,542
271,351 Pool 736617................................................ 4.00% 12/15/35 292,638
578,636 Pool 737996................................................ 4.00% 02/15/41 630,731
79,218 Pool 748939................................................ 4.00% 09/20/40 86,082
101,432 Pool 781623................................................ 5.00% 06/15/33 113,626
35,754 Pool 781862................................................ 5.50% 01/15/35 40,910
---------------
18,949,074
---------------
TOTAL U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES..................................... 27,160,194
(Cost $26,563,009) ---------------
MORTGAGE-BACKED SECURITIES -- 8.0%
COLLATERALIZED MORTGAGE OBLIGATIONS -- 7.1%
Alternative Loan Trust
23,050 Series 2004-3T1, Class A3.................................. 5.00% 05/25/34 23,361
916 Series 2004-J8, Class 4A1.................................. 6.00% 02/25/17 915
Banc of America Alternative Loan Trust
77,680 Series 2003-5, Class 2A1................................... 5.00% 07/25/18 78,054
142,837 Series 2003-7, Class 2A4................................... 5.00% 09/25/18 143,558
96,557 Series 2004-7, Class 4A1................................... 5.00% 08/25/19 98,024
Banc of America Mortgage Trust
1,965 Series 2003-8, Class 3A4................................... 5.50% 11/25/33 1,973
Page 12 See Notes to Financial Statements
FIRST TRUST LOW DURATION OPPORTUNITIES ETF (LMBS)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2016 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- -------------------------------------------------------------- ----------- -------------- ---------------
MORTGAGE-BACKED SECURITIES (CONTINUED)
COLLATERALIZED MORTGAGE OBLIGATIONS (CONTINUED)
Banc of America Mortgage Trust (Continued)
$ 4,437 Series 2004-11, Class 1A5.................................. 5.50% 01/25/35 $ 4,453
124,524 Series 2004-3, Class 1A26.................................. 5.50% 04/25/34 125,915
33,677 Series 2004-3, Class 3A1................................... 5.00% 04/25/19 34,088
31,738 Series 2004-5, Class 4A1................................... 4.75% 06/25/19 31,772
BCAP LLC Trust
43,579 Series 2009-RR6, Class 2A1 (a) (c)......................... 2.74% 08/26/35 43,181
34,765 Series 2009-RR14, Class 1A1 (a) (c)........................ 6.00% 05/26/37 36,390
CHL Mortgage Pass-Through Trust...............................
10,438 Series 2004-4, Class A13................................... 5.25% 05/25/34 10,487
8,314 Series 2004-8, Class 2A1................................... 4.50% 06/25/19 8,502
1,285 Series 2004-J2, Class A7................................... 5.50% 03/25/34 1,287
45,604 Series 2005-6, Class 1A2................................... 5.00% 04/25/35 45,763
Citicorp Mortgage Securities REMIC Pass-Through Certificates
Trust
3,426 Series 2005-5, Class 1A6................................... 5.50% 08/25/35 3,449
1,020 Series 2005-5, Class 1A7................................... 5.50% 08/25/35 1,021
Citicorp Mortgage Securities Trust
18,244 Series 2006-3, Class 1A2................................... 6.25% 06/25/36 18,513
Citigroup Mortgage Loan Trust
11,526 Series 2009-11, Class 6A1 (a) (c).......................... 1.78% 10/25/35 11,551
10,635 Series 2010-8, Class 5A6 (c)............................... 4.00% 11/25/36 10,706
21,603 Series 2010-8, Class 6A6 (c)............................... 4.50% 12/25/36 21,829
Credit Suisse Mortgage Capital Certificates
331,030 Series 2009-12R, Class 24A1 (a) (c)........................ 2.83% 10/27/36 325,141
89,128 Series 2009-3R, Class 28A1 (a) (c)......................... 2.86% 08/27/37 89,057
CSFB Mortgage-Backed Trust
6,352 Series 2004-7, Class 6A1................................... 5.25% 10/25/19 6,427
Deutsche Alt-A Securities, Inc. Mortgage Loan Trust
17,494 Series 2005-3, Class 1A1 (a)............................... 5.00% 06/25/20 17,511
GMACM Mortgage Loan Trust
13,235 Series 2003-J10, Class A1.................................. 4.75% 01/25/19 13,217
78,109 Series 2004-J6, Class 1A1.................................. 5.00% 01/25/20 79,941
Jefferies Resecuritization Trust
128,479 Series 2009-R2, Class 2A (a) (c)........................... 2.77% 12/26/37 127,506
JP Morgan Resecuritization Trust
63,223 Series 2009-7, Class 5A1 (a) (c)........................... 6.00% 02/27/37 63,652
242,698 Series 2009-8, Class A1 (a) (c)............................ 3.26% 04/20/36 243,401
200,936 Series 2010-4, Class 4A2 (a) (c)........................... 2.18% 09/26/35 199,088
MASTR Alternative Loan Trust
4,670 Series 2004-8, Class 7A1................................... 5.00% 09/25/19 4,744
113,742 Series 2004-13, Class 10A2................................. 5.50% 01/25/35 114,105
MASTR Asset Securitization Trust
13,131 Series 2003-2, Class 1A1................................... 5.00% 03/25/18 13,158
20,882 Series 2003-5, Class 2A1................................... 5.00% 06/25/18 21,427
Merrill Lynch Mortgage Investors Trust MLCC
9,466 Series 2003-H, Class A3A (a)............................... 2.13% 01/25/29 9,347
Morgan Stanley Mortgage Loan Trust
2,155 Series 2004-1, Class 1A5................................... 5.00% 11/25/18 2,176
National Mortgage Securities, Inc.
19,864 Series 1998-2, Class B4 (a) (d)............................ 6.75% 06/25/28 19,922
Prime Mortgage Trust
57,186 Series 2004-1, Class 2A1................................... 4.50% 08/25/34 57,908
See Notes to Financial Statements Page 13
FIRST TRUST LOW DURATION OPPORTUNITIES ETF (LMBS)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2016 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- -------------------------------------------------------------- ----------- -------------- ---------------
MORTGAGE-BACKED SECURITIES (CONTINUED)
COLLATERALIZED MORTGAGE OBLIGATIONS (CONTINUED)
RBSSP Resecuritization Trust
$ 43,323 Series 2010-3, Class 9A1 (c)............................... 5.50% 02/26/35 $ 44,036
Residential Accredit Loans, Inc.
96,780 Series 2003-QS20, Class CB................................. 5.00% 11/25/18 97,810
55,633 Series 2004-QS5, Class A1.................................. 4.60% 04/25/34 56,274
WaMu Mortgage Pass-Through Certificates Trust
49,758 Series 2003-S6, Class 2A1.................................. 5.00% 07/25/18 50,175
36,999 Series 2003-S7, Class A1................................... 4.50% 08/25/18 37,329
37,058 Series 2004-CB2, Class 5A.................................. 5.00% 07/25/19 37,572
16,133 Series 2004-CB3, Class 3A.................................. 5.50% 10/25/19 16,441
Washington Mutual MSC Mortgage Pass-Through Certificates Trust
7,556 Series 2003-MS1, Class CB4 (a) (c)......................... 5.15% 02/25/18 7,296
23,981 Series 2003-MS3, Class 2A1................................. 5.25% 03/25/18 24,066
Wells Fargo Alternative Loan Trust
15,312 Series 2007-PA5, Class 2A1................................. 6.00% 11/25/22 15,524
Wells Fargo Mortgage Loan Trust
4,629 Series 2012-RR1, Class A1 (a) (c).......................... 2.85% 08/27/37 4,583
---------------
2,553,626
---------------
COMMERCIAL MORTGAGE-BACKED SECURITIES -- 0.9%
Morgan Stanley Re-REMIC Trust
273,000 Series 2010-GG10, Class A4B (a) (c)........................ 5.99% 08/15/45 279,402
Wachovia Bank Commercial Mortgage Trust
28,582 Series 2006-C27, Class A3 (a).............................. 5.77% 07/15/45 28,541
---------------
307,943
---------------
TOTAL MORTGAGE-BACKED SECURITIES............................................................ 2,861,569
(Cost $2,836,110) ---------------
ASSET-BACKED SECURITIES -- 3.9%
AFC Trust Series
28,248 Series 1999-4, Class 3A (a) (c)............................ 1.39% 12/26/29 27,906
Asset Backed Securities Corp. Home Equity Loan Trust
148,885 Series 2003-HE7, Class M4 (a).............................. 4.58% 12/15/33 146,319
Bear Stearns Asset-Backed Securities Trust
41,096 Series 2002-1, Class 1A5 (e)............................... 6.89% 12/25/34 41,562
BNC Mortgage Loan Trust
47,427 Series 2007-2, Class A2 (a)................................ 0.54% 05/25/37 46,429
CIT Home Equity Loan Trust
53,253 Series 2003-1, Class A6 (e)................................ 4.06% 10/20/32 54,731
Conseco Financial Corp.
5,626 Series 1993-3, Class A7.................................... 6.40% 10/15/18 5,640
CWABS Revolving Home Equity Loan Trust
47,766 Series 2004-E, Class 2A (a)................................ 0.69% 06/15/29 45,035
CWHEQ Home Equity Loan Trust
250,375 Series 2007-S2, Class A3 (a)............................... 5.81% 05/25/37 248,786
246,046 Series 2007-S2, Class A6 (a)............................... 5.78% 05/25/37 245,280
Equity One Mortgage Pass-Through Trust
4,446 Series 2004-1, Class AF4 (a)............................... 4.15% 04/25/34 4,483
First Alliance Mortgage Loan Trust
91,617 Series 1999-1, Class A1 (e)................................ 7.18% 06/20/30 92,211
Page 14 See Notes to Financial Statements
FIRST TRUST LOW DURATION OPPORTUNITIES ETF (LMBS)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2016 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- -------------------------------------------------------------- ----------- -------------- ---------------
ASSET-BACKED SECURITIES (CONTINUED)
GSAA Home Equity Trust
$ 138,147 Series 2004-8, Class A3A (a)............................... 1.17% 09/25/34 $ 136,166
Morgan Stanley ABS Capital I, Inc. Trust
2,993 Series 2004-SD3, Class A (a) (c)........................... 0.90% 06/25/34 3,003
Nationstar Home Equity Loan Trust
114,659 Series 2007-A, Class AV3 (a)............................... 0.59% 03/25/37 113,127
New Century Home Equity Loan Trust
8,836 Series 2001-NC1, Class M2 (a).............................. 2.09% 06/20/31 8,807
1,555 Series 2003-5, Class AI7 (a)............................... 5.15% 11/25/33 1,597
Park Place Securities, Inc. Asset-Backed Pass-Through
Certificates
30,771 Series 2005-WCH1, Class M2 (a)............................. 1.22% 01/25/36 30,680
Popular ABS Mortgage Pass-Through Trust
201 Series 2007-A, Class A1 (a)................................ 0.53% 06/25/47 201
Residential Asset Mortgage Products, Inc. Trust
20,704 Series 2003-RZ3, Class A6 (e).............................. 3.90% 03/25/33 21,134
6,833 Series 2003-RZ4, Class A7 (e).............................. 5.29% 06/25/33 6,995
10,149 Series 2003-RZ5, Class A7 (e).............................. 5.47% 09/25/33 10,489
Structured Asset Securities Corp. Mortgage Loan Trust
35,873 Series 2005-S3, Class M3 (e)............................... 5.73% 06/25/35 36,451
UCFC Home Equity Loan Trust
58,119 Series 1998-D, Class MF1................................... 6.91% 04/15/30 59,393
---------------
TOTAL ASSET-BACKED SECURITIES............................................................... 1,386,425
(Cost $1,363,652) ---------------
SHARES DESCRIPTION VALUE
---------------- -------------------------------------------------------------------------------------------- ---------------
EXCHANGE-TRADED FUNDS -- 3.4%
CAPITAL MARKETS -- 3.4%
2,821 iShares 20+ Year Treasury Bond ETF.......................................................... 364,981
7,880 iShares 7-10 Year Treasury Bond ETF......................................................... 866,800
---------------
TOTAL EXCHANGE-TRADED FUNDS................................................................. 1,231,781
(Cost $1,228,916) ---------------
MONEY MARKET FUNDS -- 13.5%
4,855,842 Morgan Stanley Institutional Liquidity Fund - Treasury
Portfolio - Institutional Class - 0.22% (f).............................................. 4,855,842
(Cost $4,855,842) ---------------
NUMBER OF
CONTRACTS DESCRIPTION VALUE
---------------- -------------------------------------------------------------------------------------------- ---------------
CALL OPTIONS PURCHASED -- 0.0%
2 U.S. Treasury Long Bond Futures Call
@ $162.00 due May 2016...................................................................... 4,531
---------------
TOTAL CALL OPTIONS PURCHASED................................................................ 4,531
(Cost $2,977) ---------------
See Notes to Financial Statements Page 15
FIRST TRUST LOW DURATION OPPORTUNITIES ETF (LMBS)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2016 (UNAUDITED)
NUMBER OF
CONTRACTS DESCRIPTION VALUE
---------------- -------------------------------------------------------------------------------------------- ---------------
PUT OPTIONS PURCHASED -- 0.1%
1 10- Year U.S. Treasury Note Futures Put
@ $130.00 due May 2016...................................................................... $ 547
1 10- Year U.S. Treasury Note Futures Put
@ $130.50 due May 2016...................................................................... 828
12 U.S. Treasury Long Bond Futures Put
@ $164.00 due May 2016...................................................................... 23,063
---------------
TOTAL PUT OPTIONS PURCHASED................................................................. 24,438
(Cost $19,482) ---------------
TOTAL INVESTMENTS -- 104.5%................................................................. 37,524,780
(Cost $36,869,988) (g) ---------------
CALL OPTIONS WRITTEN -- (0.0%)
1 U.S. Treasury Long Bond Futures Call
@ $164.00 due May 2016...................................................................... (1,235)
---------------
TOTAL CALL OPTIONS WRITTEN.................................................................. (1,235)
(Premiums received $1,324) ---------------
PUT OPTIONS WRITTEN -- (0.0%)
2 U.S. Treasury Long Bond Futures Put
@ $161.00 due May 2016...................................................................... (1,281)
---------------
TOTAL PUT OPTIONS WRITTEN................................................................... (1,281)
(Premiums received $2,663) ---------------
NET OTHER ASSETS AND LIABILITIES -- (4.5%).................................................. (1,609,499)
---------------
NET ASSETS -- 100.0%........................................................................ $ 35,912,765
===============
-----------------------------
(a) Floating or variable rate security. The interest rate shown reflects the
rate in effect at April 30, 2016.
(b) Zero coupon security.
(c) This security, sold within the terms of a private placement memorandum, is
exempt from registration upon resale under Rule 144A under the Securities
Act of 1933, as amended, and may be resold in transactions exempt from
registration, normally to qualified institutional buyers. Pursuant to
procedures adopted by the Trust's Board of Trustees, this security has
been determined to be liquid by First Trust Advisors L.P., the Fund's
advisor (the "Advisor"). Although market instability can result in periods
of increased overall market illiquidity, liquidity for each security is
determined based on security specific factors and assumptions, which
require subjective judgment. At April 30, 2016, securities noted as such
amounted to $1,537,728 or 4.3% of net assets.
(d) Pursuant to procedures adopted by the Trust's Board of Trustees, this
security has been determined to be illiquid by the Advisor.
(e) Step-up security. A security where the coupon increases or steps up at a
predetermined date. The interest rate shown reflects the rate in effect at
April 30, 2016.
(f) Interest rate shown reflects yield as of April 30, 2016.
(g) Aggregate cost for financial reporting purposes, which approximates the
aggregate cost for federal income tax purposes. As of April 30, 2016, the
aggregate gross unrealized appreciation for all securities in which there
was an excess of value over tax cost was $688,357 and the aggregate gross
unrealized depreciation for all securities in which there was an excess of
tax cost over value was $33,565.
IO - Interest-Only Security - Principal amount shown represents par value on
which interest payments are based.
PO - Principal-Only Security
STRIPS - Separate Trading of Registered Interest and Principal of Securities.
Page 16 See Notes to Financial Statements
FIRST TRUST LOW DURATION OPPORTUNITIES ETF (LMBS)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2016 (UNAUDITED)
-----------------------------
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of April 30,
2016 is as follows (see Note 2A - Portfolio Valuation in the Notes to Financial
Statements):
ASSETS TABLE
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
4/30/2016 PRICES INPUTS INPUTS
--------------- --------------- --------------- ---------------
U.S. Government Agency Mortgage-Backed Securities..... $ 27,160,194 $ -- $ 27,160,194 $ --
Money Market Funds.................................... 4,855,842 4,855,842 -- --
Mortgage-Backed Securities............................ 2,861,569 -- 2,861,569 --
Asset-Backed Securities............................... 1,386,425 -- 1,386,425 --
Exchange-Traded Funds*................................ 1,231,781 1,231,781 -- --
Call Options Purchased................................ 4,531 4,531 -- --
Put Options Purchased................................. 24,438 24,438 -- --
--------------- --------------- --------------- ---------------
Total Investments..................................... $ 37,524,780 $ 6,116,592 $ 31,408,188 $ --
=============== =============== =============== ===============
LIABILITIES TABLE
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
4/30/2016 PRICES INPUTS INPUTS
--------------- --------------- --------------- ---------------
Call Options Written.................................. $ (1,235) $ (1,235) $ -- $ --
Put Options Written................................... (1,281) (1,281) -- --
Futures Contracts**................................... (16,881) (16,881) -- --
--------------- --------------- --------------- ---------------
Total................................................. $ (19,397) $ (19,397) $ -- $ --
=============== =============== =============== ===============
* See Portfolio of Investments for industry breakout.
** Includes cumulative depreciation on futures contracts as presented on the
Statement of Operations. Only the current day's variation margin is presented
on the Statement of Assets and Liabilities.
All transfers in and out of the Levels during the period are assumed to be
transferred on the last day of the period at their current value. There were no
transfers between Levels at April 30, 2016.
OPEN FUTURES CONTRACTS AT APRIL 30, 2016 (see Note 2C - Futures Contracts in the
Notes to Financial Statements):
UNREALIZED
NUMBER OF EXPIRATION NOTIONAL APPRECIATION/
SHORT FUTURES CONTRACTS CONTRACTS MONTH VALUE (DEPRECIATION)
------------------------------------------------------------- --------------- --------------- -------------- ---------------
U.S. 5-Year Treasury Notes 31 Jun-2016 $ (3,742,949) $ (5,386)
U.S. 10-Year Treasury Notes 27 Jun-2016 (3,504,976) (6,712)
U.S. Treasury Long Bond Futures 4 Jun-2016 (648,467) (4,783)
------------ --------
$ (7,896,392) $(16,881)
============ ========
See Notes to Financial Statements Page 17
FIRST TRUST LOW DURATION OPPORTUNITIES ETF (LMBS)
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 2016 (UNAUDITED)
ASSETS:
Investments, at value..................................................... $ 37,524,780
Cash segregated as collateral for open futures contracts.................. 119,608
Receivables:
Interest............................................................... 159,780
Investment securities sold............................................. 78,920
--------------
Total Assets........................................................... 37,883,088
--------------
LIABILITIES:
Options written, at value................................................. 2,516
Due to custodian.......................................................... 418,700
Payables:
Investment securities purchased........................................ 1,525,932
Investment advisory fees............................................... 15,066
Variation margin....................................................... 8,109
--------------
Total Liabilities...................................................... 1,970,323
--------------
NET ASSETS................................................................ $ 35,912,765
==============
NET ASSETS CONSIST OF:
Paid-in capital........................................................... $ 35,448,338
Par value................................................................. 7,000
Accumulated net investment income (loss).................................. (48,569)
Accumulated net realized gain (loss) on investments, futures and
written options........................................................ (133,386)
Net unrealized appreciation (depreciation) on investments, futures and
written options........................................................ 639,382
--------------
NET ASSETS................................................................ $ 35,912,765
==============
NET ASSET VALUE, per share................................................ $ 51.30
==============
Number of shares outstanding (unlimited number of shares authorized,
par value $0.01 per share)............................................. 700,002
==============
Investments, at cost...................................................... $ 36,869,988
==============
Premiums received on options written...................................... $ 3,987
==============
Page 18 See Notes to Financial Statements
FIRST TRUST LOW DURATION OPPORTUNITIES ETF (LMBS)
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED APRIL 30, 2016 (UNAUDITED)
INVESTMENT INCOME:
Interest.................................................................. $ 253,053
Dividends................................................................. 4,816
--------------
Total investment income................................................ 257,869
--------------
EXPENSES:
Investment advisory fees.................................................. 53,376
Excise tax................................................................ 614
--------------
Total expenses......................................................... 53,990
--------------
NET INVESTMENT INCOME (LOSS).............................................. 203,879
--------------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments............................................................ (8,648)
Futures................................................................ (40,198)
Written Options........................................................ 4,528
--------------
Net realized gain (loss)............................................... (44,318)
--------------
Net change in unrealized appreciation (depreciation) on:
Investments............................................................ 534,447
Futures................................................................ (22,091)
Written Options........................................................ 1,471
--------------
Net change in unrealized appreciation (depreciation)...................... 513,827
--------------
NET REALIZED AND UNREALIZED GAIN (LOSS)................................... 469,509
--------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS........................................................ $ 673,388
==============
See Notes to Financial Statements Page 19
FIRST TRUST LOW DURATION OPPORTUNITIES ETF (LMBS)
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE
SIX MONTHS FOR THE PERIOD
ENDED 11/4/2014 (a)
4/30/2016 THROUGH
(UNAUDITED) 10/31/2015
-------------- --------------
OPERATIONS:
Net investment income (loss)........................................... $ 203,879 $ 138,759
Net realized gain (loss)............................................... (44,318) (53,658)
Net change in unrealized appreciation (depreciation)................... 513,827 125,555
-------------- --------------
Net increase (decrease) in net assets resulting from operations........ 673,388 210,656
-------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income.................................................. (267,752) (159,003)
-------------- --------------
SHAREHOLDER TRANSACTIONS:
Proceeds from shares sold.............................................. 25,442,449 10,013,027
Cost of shares redeemed................................................ -- --
-------------- --------------
Net increase (decrease) in net assets resulting from
shareholder transactions............................................ 25,442,449 10,013,027
-------------- --------------
Total increase (decrease) in net assets................................ 25,848,085 10,064,680
NET ASSETS:
Beginning of period.................................................... 10,064,680 --
-------------- --------------
End of period.......................................................... $ 35,912,765 $ 10,064,680
============== ==============
Accumulated net investment income (loss) at end of period.............. $ (48,569) $ 15,304
============== ==============
CHANGES IN SHARES OUTSTANDING:
Shares outstanding, beginning of period................................ 200,002 --
Shares sold............................................................ 500,000 200,002
Shares redeemed........................................................ -- --
-------------- --------------
Shares outstanding, end of period...................................... 700,002 200,002
============== ==============
(a) Inception date is consistent with the commencement of investment
operations and is the date the initial creation units were established.
Page 20 See Notes to Financial Statements
FIRST TRUST LOW DURATION OPPORTUNITIES ETF (LMBS)
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
SIX MONTHS FOR THE PERIOD
ENDED 11/4/2014 (a)
4/30/2016 THROUGH
(UNAUDITED) 10/31/2015
-------------- --------------
Net asset value, beginning of period ....................... $ 50.32 $ 50.00
---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) ............................... 0.62 1.23 (b)
Net realized and unrealized gain (loss) .................... 1.13 0.55
---------- ----------
Total from investment operations ........................... 1.75 1.78
---------- ----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income....................................... (0.77) (1.46)
---------- ----------
Net asset value, end of period ............................. $ 51.30 $ 50.32
========== ==========
TOTAL RETURN (c)............................................ 3.50% 3.62%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's)........................ $ 35,913 $ 10,065
RATIOS TO AVERAGE NET ASSETS:
Ratio of total expenses to average net assets .............. 0.65% (d) 0.65% (d)
Ratio of net investment income (loss) to average net assets 2.49% (d) 2.55% (d)
Portfolio turnover rate (e)................................. 65% 157%
(a) Inception date is consistent with the commencement of investment
operations and is the date the initial creation units were established.
(b) Based on average shares outstanding.
(c) Total return is calculated assuming an initial investment made at the net
asset value at the beginning of the period, reinvestment of all
distributions at net asset value during the period, and redemption at net
asset value on the last day of the period. The returns presented do not
reflect the deduction of taxes that a shareholder would pay on Fund
distributions or the redemption or sale of Fund shares. Total return is
calculated for the time period presented and is not annualized for periods
of less than a year.
(d) Annualized.
(e) Portfolio turnover is calculated for the time period presented and is not
annualized for periods of less than a year and does not include securities
received or delivered from processing creations or redemptions and in-kind
transactions.
See Notes to Financial Statements Page 21
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FIRST TRUST LOW DURATION OPPORTUNITIES ETF (LMBS)
APRIL 30, 2016 (UNAUDITED)
1. ORGANIZATION
First Trust Exchange-Traded Fund IV (the "Trust") is an open-end management
investment company organized as a Massachusetts business trust on September 15,
2010, and is registered with the Securities and Exchange Commission under the
Investment Company Act of 1940, as amended (the "1940 Act").
The Trust currently consists of eight funds that are offering shares. This
report covers the First Trust Low Duration Opportunities ETF (the "Fund"), which
trades under the ticker "LMBS" on The Nasdaq Stock Market LLC ("Nasdaq"). Unlike
conventional mutual funds, the Fund issues and redeems shares on a continuous
basis, at net asset value ("NAV"), only in large specified blocks consisting of
50,000 shares called a "Creation Unit." Creation Units are generally issued and
redeemed for cash, and in certain circumstances, in-kind for securities in which
the Fund invests. Except when aggregated in Creation Units, the Fund's shares
are not redeemable securities.
The Fund is an actively managed exchange-traded fund ("ETF"). The Fund's primary
investment objective is to generate current income. The Fund's secondary
investment objective is capital appreciation. The Fund seeks to achieve its
investment objectives by investing, under normal market conditions, at least 80%
of its net assets (including investment borrowings) in mortgage-related debt
securities and other mortgage-related instruments (collectively,
"Mortgage-Related Investments"). The Fund normally expects to invest in
Mortgage-Related Investments tied to residential and commercial mortgages.
Mortgage-Related Investments include residential mortgage-backed securities,
commercial mortgage-backed securities, stripped mortgage-backed securities,
collateralized mortgage obligations and real estate mortgage investment
conduits. The Fund may also invest in investment companies, such as ETFs, that
invest primarily in Mortgage-Related Investments. The Fund will limit its
investments in Mortgage-Related Investments that are not issued or guaranteed by
Government Entities to 20% of its net assets (including investment borrowings).
The Fund may invest, without limitation, in mortgage dollar rolls. The Fund
intends to enter into mortgage dollar rolls only with high quality securities
dealers and banks, as determined by the Fund's investment advisor, First Trust
Advisors L.P. ("First Trust" or the "Advisor"). The Fund may also invest in
to-be-announced transactions ("TBA Transactions"). Further, the Fund may enter
into short sales as part of its overall portfolio management strategies or to
offset a potential decline in the value of a security; however, the Fund does
not expect, under normal market conditions, to engage in short sales with
respect to more than 30% of the value of its net assets (including investment
borrowings). Although the Fund intends to invest primarily in investment grade
securities, the Fund may invest up to 20% of its net assets (including
investment borrowings) in securities of any credit quality, including securities
that are below investment grade, which are also known as high yield securities,
or commonly referred to as "junk" bonds, or unrated securities that have not
been judged by the Advisor to be of comparable quality to rated investment grade
securities. In the case of a split rating between one or more of the nationally
recognized statistical rating organizations, the Fund will consider the highest
rating. Under normal market conditions, the Fund targets an estimated effective
duration of three years or less.
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 following is a summary
of significant accounting policies consistently followed by the Fund in the
preparation of the financial statements. The preparation of the financial
statements in accordance with accounting principles generally accepted in the
United States of America ("U.S. GAAP") requires management to make estimates and
assumptions that affect the reported amounts and disclosures in the financial
statements. Actual results could differ from those estimates.
A. PORTFOLIO VALUATION
The Fund's NAV is determined daily as of the close of regular trading on the New
York Stock Exchange ("NYSE"), normally 4:00 p.m. Eastern time, on each day the
NYSE is open for trading. If the NYSE closes early on a valuation day, the NAV
is determined as of that time. Domestic debt securities and foreign securities
are priced using data reflecting the earlier closing of the principal markets
for those securities. The Fund's NAV is calculated by dividing the value of all
assets of the Fund (including accrued interest and dividends), less all
liabilities (including accrued expenses and dividends declared but unpaid) by
the total number of shares outstanding.
The Fund's investments are valued daily at market value or, in the absence of
market value with respect to any portfolio securities, at fair value. Market
value prices represent last sale or official closing prices from a national or
foreign exchange (i.e., a regulated market) and are primarily obtained from
third-party pricing services. Fair value prices represent any prices not
considered market value prices and are either obtained from a third-party
pricing service or are determined by the Advisor's Pricing Committee, in
accordance with valuation procedures adopted by the Trust's Board of Trustees,
and in accordance with provisions of the 1940 Act. Investments valued by the
Advisor's Pricing Committee, if any, are footnoted as such in the footnotes to
the Portfolio of Investments. The Fund's investments are valued as follows:
Page 22
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST LOW DURATION OPPORTUNITIES ETF (LMBS)
APRIL 30, 2016 (UNAUDITED)
Corporate bonds, corporate notes, U.S. government securities,
mortgage-backed securities, asset-backed securities and other debt
securities are fair valued on the basis of valuations provided by dealers
who make markets in such securities or by an independent pricing service
approved by the Trust's Board of Trustees, which may use the following
valuation inputs when available:
1) benchmark yields;
2) reported trades;
3) broker/dealer quotes;
4) issuer spreads;
5) benchmark securities;
6) bids and offers; and
7) reference data including market research publications.
Securities traded in an over-the-counter market are fair valued at the
mean of their most recent bid and asked price, if available, and otherwise
at their closing bid price.
Common stocks and other equity securities listed on any national or
foreign exchange (excluding Nasdaq and the London Stock Exchange
Alternative Investment Market ("AIM")) are valued at the last sale price
on the exchange on which they are principally traded or, for Nasdaq and
AIM securities, the official closing price. Securities traded on more than
one securities exchange are valued at the last sale price or official
closing price, as applicable, at the close of the securities exchange
representing the principal market for such securities.
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.
Exchange-traded options contracts are valued at the closing price in the
market where such contracts are principally traded. If no closing price is
available, exchange-traded options contracts are fair valued at the mean
of their most recent bid and asked price, if available, and otherwise at
their closing bid price.
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
5) any other market-based data the Advisor's Pricing Committee
considers relevant. In this regard, the Advisor's Pricing
Committee may use last-obtained market-based data to assist it
when valuing portfolio securities using amortized cost.
Certain securities may not be able to be priced by pre-established pricing
methods. Such securities may be valued by the Trust's Board of Trustees or its
delegate, the Advisor's Pricing Committee, at fair value. These securities
generally include, but are not limited to, restricted securities (securities
which may not be publicly sold without registration under the Securities Act of
1933, as amended) for which a pricing service is unable to provide a market
price; securities whose trading has been formally suspended; a security whose
market or fair value price is not available from a pre-established pricing
source; a security with respect to which an event has occurred that is likely to
materially affect the value of the security after the market has closed but
before the calculation of the Fund's NAV or make it difficult or impossible to
obtain a reliable market quotation; and a security whose price, as provided by
the pricing service, does not reflect the security's fair value. As a general
principle, the current fair value of a security would appear to be the amount
which the owner might reasonably expect to receive for the security upon its
current sale. When fair value prices are used, generally they will differ from
market quotations or official closing prices on the applicable exchanges. A
variety of factors may be considered in determining the fair value of such
securities, including, but not limited to, the following:
1) the fundamental business data relating to the issuer;
2) an evaluation of the forces which influence the market in
which these securities are purchased and sold;
3) the type, size and cost of a security;
4) the financial statements of the issuer;
Page 23
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST LOW DURATION OPPORTUNITIES ETF (LMBS)
APRIL 30, 2016 (UNAUDITED)
5) the credit quality and cash flow of the issuer, based on the
Advisor's or external analysis;
6) the information as to any transactions in or offers for the
security;
7) the price and extent of public trading in similar securities
of the issuer/borrower, or comparable companies;
8) the coupon payments;
9) the quality, value and salability of collateral, if any,
securing the security;
10) the business prospects of the issuer, including any ability to
obtain money or resources from a parent or affiliate and an
assessment of the issuer's management (for corporate debt
only);
11) the prospects for the issuer's industry, and multiples (of
earnings and/or cash flows) being paid for similar businesses
in that industry (for corporate debt only); and
12) other relevant factors.
The Fund is subject to fair value accounting standards that define fair value,
establish the framework for measuring fair value and provide a three-level
hierarchy for fair valuation based upon the inputs to the valuation as of the
measurement date. The three levels of the fair value hierarchy are as follows:
o Level 1 - Level 1 inputs are quoted prices in active markets for
identical investments. An active market is a market in which
transactions for the investment occur with sufficient frequency and
volume to provide pricing information on an ongoing basis.
o Level 2 - Level 2 inputs are observable inputs, either directly or
indirectly, and include the following:
o Quoted prices for similar investments in active markets.
o Quoted prices for identical or similar investments in markets
that are non-active. A non-active market is a market where
there are few transactions for the investment, the prices are
not current, or price quotations vary substantially either
over time or among market makers, or in which little
information is released publicly.
o Inputs other than quoted prices that are observable for the
investment (for example, interest rates and yield curves
observable at commonly quoted intervals, volatilities,
prepayment speeds, loss severities, credit risks, and default
rates).
o Inputs that are derived principally from or corroborated by
observable market data by correlation or other means.
o Level 3 - Level 3 inputs are unobservable inputs. Unobservable
inputs may reflect the reporting entity's own assumptions about the
assumptions that market participants would use in pricing the
investment.
The inputs or methodologies used for valuing investments are not necessarily an
indication of the risk associated with investing in those investments. A summary
of the inputs used to value the Fund's investments as of April 30, 2016, is
included with the Fund's Portfolio of Investments.
B. SECURITIES TRANSACTIONS AND INVESTMENT INCOME
Securities transactions are recorded as of the trade date. Realized gains and
losses from securities transactions are recorded on the identified cost basis.
Dividend income is recorded on the ex-dividend date. Interest income is recorded
daily on the accrual basis. Amortization of premiums and accretion of discounts
are recorded using the effective interest method.
The Fund invests in interest-only securities. For these securities, if there is
a change in the estimated cash flows, based on an evaluation of current
information, then the estimated yield is adjusted. Additionally, if the
evaluation of current information indicates a permanent impairment of the
security, the cost basis of the security is written down and a loss is
recognized. Debt obligations may be placed on non-accrual status and the related
interest income may be reduced by ceasing current accruals and writing off
interest receivables when the collection of all or a portion of interest has
become doubtful based on consistently applied procedures. A debt obligation is
removed from non-accrual status when the issuer resumes interest payments or
when collectability of interest is reasonably assured.
Securities purchased or sold on a when-issued, delayed-delivery or forward
purchase commitment basis may have extended settlement periods. The value of the
security so purchased is subject to market fluctuations during this period. The
Fund maintains liquid assets with a current value at least equal to the amount
of its when-issued, delayed-delivery or forward purchase commitments until
payment is made. At April 30, 2016, the Fund had no when-issued,
delayed-delivery or forward purchase commitments.
C. FUTURES CONTRACTS
The Fund purchases or sells (i.e., is long or short) exchange-listed futures
contracts to hedge against changes in interest rates (interest rate risk).
Futures contracts are agreements between the Fund and a counterparty to buy or
sell a specific quantity of an underlying instrument at a specified price and at
a specified date. Depending on the terms of the contract, futures contracts are
settled either through physical delivery of the underlying instrument on the
settlement date or by payment of a cash settlement amount on the settlement
date. Open futures contracts can also be closed out prior to settlement by
entering into an offsetting transaction in a matching futures contract. If the
Page 24
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST LOW DURATION OPPORTUNITIES ETF (LMBS)
APRIL 30, 2016 (UNAUDITED)
Fund is not able to enter into an offsetting transaction, the Fund will continue
to be required to maintain margin deposits on the futures contract. When the
contract is closed or expires, the Fund records a realized gain or loss equal to
the difference between the value of the contract at the time it was opened and
the value at the time it was closed or expired. This gain or loss is included in
"Net realized gain (loss) on futures" on the Statement of Operations.
Upon entering into a futures contract, the Fund 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 contacts
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
Statement of Operations. Pursuant to the contract, the Fund agrees to receive
from or pay to the broker an amount of cash equal to the daily fluctuation in
value of the contract. Such receipts or payments are known as variation margin
and are included in "Variation margin payable or receivable" on the Statement of
Assets and Liabilities. If market conditions change unexpectedly, the Fund may
not achieve the anticipated benefits of the futures contract and may realize a
loss. The use of futures contracts involves the risk of imperfect correlation in
movements in the price of the futures contracts, interest rates and the
underlying instruments.
D. OPTIONS CONTRACTS
In the normal course of pursuing its investment objective, the Fund may invest
up to 20% of its net assets in derivative instruments in connection with hedging
strategies. The Fund may invest in exchange-listed options on U.S. Treasury
securities, exchange-listed options on U.S. Treasury futures contracts and
exchange-listed U.S. Treasury futures contracts. The Fund uses derivative
instruments primarily to hedge interest rate risk, actively manage interest rate
exposure, hedge foreign currency risk and actively manage foreign currency
exposure. The primary risk exposure is interest rate risk.
The Fund may purchase (buy) or write (sell) put and call options on futures
contracts and enter into closing transactions with respect to such options to
terminate an existing position. A futures option gives the holder the right, in
return for the premium paid, to assume a long position (call) or short position
(put) in a futures contract at a specified exercise price prior to the
expiration of the option. Upon exercise of a call option, the holder acquires a
long position in the futures contract and the writer is assigned the opposite
short position. In the case of a put option, the opposite is true. Prior to
exercise or expiration, a futures option contract may be closed out by an
offsetting purchase or sale of a futures option of the same series. Options are
marked-to-market daily and their value is affected by changes in the value of
the underlying security, changes in interest rates, changes in the actual or
perceived volatility of the securities markets and the underlying securities,
and the remaining time to the option's expiration. The value of options may also
be adversely affected if the market for the options becomes less liquid or the
trading volume diminishes.
The Fund uses options on futures contracts in connection with hedging
strategies. Generally, these strategies are applied under the same market and
market sector conditions in which the Fund uses put and call options on
securities or indices. The purchase of put options on futures contracts is
analogous to the purchase of puts on securities or indices so as to hedge the
Fund's securities holdings against the risk of declining market prices. The
writing of a call option or the purchasing of a put option on a futures contract
constitutes a partial hedge against declining prices of securities which are
deliverable upon exercise of the futures contract. If the price at expiration of
a written call option is below the exercise price, the Fund will retain the full
amount of the option premium which provides a partial hedge against any decline
that may have occurred in the Fund's holdings of securities. If the price when
the option is exercised is above the exercise price, however, the Fund will
incur a loss, which may be offset, in whole or in part, by the increase in the
value of the securities held by the Fund that were being hedged. Writing a put
option or purchasing a call option on a futures contract serves as a partial
hedge against an increase in the value of the securities the Fund intends to
acquire.
The Fund is required to deposit and maintain margin with respect to put and call
options on futures contracts written by it. Such margin deposits will vary
depending on the nature of the underlying futures contract (and the related
initial margin requirements), the current market value of the option and other
futures positions held by the Fund. The Fund will pledge in a segregated account
at the Fund's custodian, liquid assets, such as cash, U.S. government securities
or other high-grade liquid debt obligations equal in value to the amount due on
the underlying obligation. Such segregated assets will be marked-to-market
daily, and additional assets will be pledged in the segregated account whenever
the total value of the pledged assets falls below the amount due on the
underlying obligation.
The risks associated with the use of options on future contracts include the
risk that the Fund may close out its position as a writer of an option only if a
liquid secondary market exists for such options, which cannot be assured. The
Fund's successful use of options on futures contracts depends on the Advisor's
ability to correctly predict the movement in prices on futures contracts and the
underlying instruments, which may prove to be incorrect. In addition, there may
be imperfect correlation between the instruments being hedged and the futures
contract subject to option.
Page 25
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST LOW DURATION OPPORTUNITIES ETF (LMBS)
APRIL 30, 2016 (UNAUDITED)
E. INTEREST-ONLY SECURITIES
An interest-only security ("IO Security") is the interest-only portion of a
mortgage-backed security that receives some or all of the interest portion of
the underlying mortgage-backed security and little or no principal. A reference
principal value called a notional value is used to calculate the amount of
interest due to the IO Security. IO Securities are sold at a deep discount to
their notional principal amount. Generally speaking, when interest rates are
falling and prepayment rates are increasing, the value of an IO Security will
fall. Conversely, when interest rates are rising and prepayment rates are
decreasing, generally the value of an IO Security will rise. These securities,
if any, are identified on the Portfolio of Investments.
F. PRINCIPAL-ONLY SECURITIES
A principal-only security ("PO Security") is the principal-only portion of a
mortgage-backed security that does not receive any interest, is priced at a deep
discount to its redemption value and ultimately receives the redemption value.
Generally speaking, when interest rates are falling and prepayment rates are
increasing, the value of a PO Security will rise. Conversely, when interest
rates are rising and prepayment rates are decreasing, generally the value of a
PO Security will fall. These securities, if any, are identified on the Portfolio
of Investments.
G. STRIPPED MORTGAGE-BACKED SECURITIES
Stripped Mortgage-Backed Securities are created by segregating the cash flows
from underlying mortgage loans or mortgage securities to create two or more new
securities, each with a specified percentage of the underlying security's
principal or interest payments. Mortgage-backed securities may be partially
stripped so that each investor class receives some interest and some principal.
When securities are completely stripped, however, all of the interest is
distributed to holders of one type of security known as an IO Security and all
of the principal is distributed to holders of another type of security known as
a PO Security. These securities, if any, are identified on the Portfolio of
Investments.
H. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
Dividends from net investment income, if any, are declared and paid monthly 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 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 during the fiscal period ended October
31, 2015, was as follows:
Distributions paid from:
Ordinary income....................................... $ 159,003
Capital gain.......................................... --
Return of capital..................................... --
As of October 31, 2015, the components of distributable earnings and net assets
on a tax basis for the Fund were as follows:
Undistributed ordinary income......................... $ 15,304
Accumulated capital and other losses.................. (74,009)
Net unrealized appreciation (depreciation)............ 110,496
I. INCOME TAXES
The Fund intends to qualify as a regulated investment company by complying with
the requirements under Subchapter M of the Internal Revenue Code of 1986, as
amended, which includes distributing substantially all of its net investment
income and net realized gains to shareholders. Accordingly, no provision has
been made for federal and state income taxes. However, due to the timing and
amount of distributions, the Fund may be subject to an excise tax of 4% of the
amount by which approximately 98% of the Fund's taxable income exceeds the
distributions from such taxable income for the calendar year.
Page 26
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST LOW DURATION OPPORTUNITIES ETF (LMBS)
APRIL 30, 2016 (UNAUDITED)
The Fund intends to utilize provisions of the federal income tax laws, which
allow it to carry a realized capital loss forward indefinitely following the
year of the loss and offset such loss against any future realized capital gains.
The Fund is subject to certain limitations under U.S. tax rules on the use of
capital loss carryforwards and net unrealized built-in losses. These limitations
apply when there has been a 50% change in ownership. At October 31, 2015, the
Fund had $66,589 of non-expiring capital loss carryforwards for federal income
tax purposes.
Certain losses realized during the current fiscal year may be deferred and
treated as occurring on the first day of the following fiscal year for federal
income tax purposes. For the fiscal period ended October 31, 2015, the Fund had
no net ordinary losses.
The Fund is subject to accounting standards that establish a minimum threshold
for recognizing, and a system for measuring, the benefits of a tax position
taken or expected to be taken in a tax return. The taxable year ended 2015
remains open to federal and state audit. As of April 30, 2016, management has
evaluated the application of these standards to the Fund and has determined that
no provision for income tax is required in the Fund's financial statements for
uncertain tax positions.
J. EXPENSES
Expenses, other than the investment advisory fee and other excluded expenses,
are paid by the Advisor (see Note 3).
3. INVESTMENT ADVISORY FEE, AFFILIATED TRANSACTIONS AND OTHER FEE ARRANGEMENTS
First Trust, the investment advisor to the Fund, is a limited partnership with
one limited partner, Grace Partners of DuPage L.P., and one general partner, The
Charger Corporation. The Charger Corporation is an Illinois corporation
controlled by James A. Bowen, Chief Executive Officer of First Trust. First
Trust is responsible for supervising the selection and ongoing monitoring of the
securities in the Fund's portfolio, managing the Fund's business affairs and
providing certain administrative services necessary for the management of the
Fund.
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, acquired
fund fees and expenses, brokerage commissions and other expenses connected with
the execution of portfolio transactions, distribution and service fees pursuant
to a 12b-1 plan, if any, and extraordinary expenses. The Fund has agreed to pay
First Trust an annual unitary management fee equal to 0.65% of its average daily
net assets.
The Trust has multiple service agreements with The Bank of New York Mellon
("BNYM"). Under the service agreements, BNYM performs custodial, fund
accounting, certain administrative services, and transfer agency services for
the Fund. As custodian, BNYM is responsible for custody of the Fund's assets. As
fund accountant and administrator, BNYM is responsible for maintaining the books
and records of the Fund's securities and cash. As transfer agent, BNYM is
responsible for maintaining shareholder records for the Fund. BNYM is a
subsidiary of The Bank of New York Mellon Corporation, a financial holding
company.
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 equally among each fund in the First Trust Fund
Complex. Prior to January 1, 2016, the fixed annual retainer was allocated pro
rata based on each Fund's 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 will rotate
every three years. The officers and "Interested" Trustee receive no compensation
from the Trust for acting in such capacities.
4. PURCHASES AND SALES OF SECURITIES
The cost of purchases of U.S. Government securities and non-U.S. Government
securities, excluding short-term investments, for the six months ended April 30,
2016, were $21,576,510 and $11,804,475, respectively. The proceeds from sales
and paydowns of U.S. Government securities and non-U.S. Government securities,
excluding short-term investments, for the six months ended April 30, 2016 were
$1,887,882 and $8,612,341, respectively.
For the six months ended April 30, 2016, the Fund had no in-kind transactions.
Page 27
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST LOW DURATION OPPORTUNITIES ETF (LMBS)
APRIL 30, 2016 (UNAUDITED)
5. DERIVATIVE TRANSACTIONS
The following table presents the types of derivatives held by the Fund at April
30, 2016, the primary underlying risk exposure and the location of these
instruments as presented on the Statement of Assets and Liabilities.
ASSET DERIVATIVES LIABILITY DERIVATIVES
---------------------------------- ----------------------------------
DERIVATIVE RISK STATEMENT OF ASSET AND STATEMENT OF ASSET AND
INSTRUMENT EXPOSURE LIABILITIES LOCATION VALUE LIABILITIES LOCATION VALUE
---------- --------- ---------------------- --------- ---------------------- ---------
Futures Interest Variation margin Variation margin
Rate Risk receivable $ -- payable $ 8,109
Options Interest Investments, Options
Rate Risk at value 28,969* Written, at value 2,516
* Represents call and put options purchased, included in Investments, at value.
The following table presents the amount of net realized gain (loss) and change
in net unrealized appreciation (depreciation) recognized for the six months
ended April 30, 2016, on derivative instruments, as well as the primary
underlying risk exposure associated with the instruments.
STATEMENT OF OPERATIONS LOCATION INTEREST RATE RISK
----------------------------------------------------------------------------------
Net realized gain (loss) on:
Investments** $ (18,038)
Futures (40,198)
Written Options 4,528
Net change in unrealized appreciation (depreciation) on:
Investments** 4,300
Futures (22,091)
Written Options 1,471
** Represents call and put options purchased.
For the six months ended April 30, 2016, the notional value of futures contracts
opened and closed were $22,361,095 and $16,816,835, respectively.
The Fund does not have the right to offset financial assets and financial
liabilities related to futures and options contracts on the Statement of Assets
and Liabilities.
Written options activity for the Fund for the six months ended April 30, 2016
was as follows:
NUMBER OF
WRITTEN OPTIONS CONTRACTS PREMIUMS
----------------------------------------------------------------------------
Options outstanding at October 31, 2015 -- $ --
Options Written 23 23,744
Options Expired (2) (1,241)
Options Exercised -- --
Options Closed (18) (18,516)
----- ---------
Options outstanding at April 30, 2016 3 $ 3,987
===== =========
The purchased options outstanding as of April 30, 2016 are reflective of the
purchased options outstanding during the period.
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
Aggregation) and the market value of the
Page 28
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST LOW DURATION OPPORTUNITIES ETF (LMBS)
APRIL 30, 2016 (UNAUDITED)
Deposit Securities, and/or (ii) cash in lieu of all or a portion of the Deposit
Securities. The Fund's Creation Units are generally issued and redeemed for
cash. 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. Authorized Participants
purchasing Creation Units must pay to BNYM, as transfer agent, a creation
transaction fee (the "Creation Transaction Fee") regardless of the number of
Creation Units purchased in the transaction. The Creation Transaction Fee is
based on the composition of the securities included in the Fund's portfolio and
the countries in which the transactions are settled. The Creation Transaction
Fee is currently $500. The 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 BNYM, 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. BORROWINGS
The Trust on behalf of the Fund, along with First Trust Series Fund and First
Trust Variable Insurance Trust, has a $135 million Credit Agreement (the "BNYM
Line of Credit") with BNYM to be a liquidity backstop during periods of high
redemption volume. A commitment fee of 0.15% of the daily amount of the excess
of the commitment amount over the outstanding principal balance of the loan is
charged to BNYM, which First Trust will allocate amongst the funds that have
access to the BNYM Line of Credit. These fees are reflected on the Statement of
Operations in the Commitment Fees line item. To the extent that the Fund
accesses the credit line, there would also be an interest fee charged. The Fund
did not have any borrowings during the six months ended April 30, 2016.
8. DISTRIBUTION PLAN
The Board of Trustees adopted a Distribution and Service Plan pursuant to Rule
12b-1 under the 1940 Act. In accordance with the Rule 12b-1 plan, the Fund is
authorized to pay an amount up to 0.25% of its average daily net assets each
year to reimburse First Trust Portfolios L.P. ("FTP"), the distributor of the
Fund, for amounts expended to finance activities primarily intended to result in
the sale of Creation Units or 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 March 31, 2017.
9. INDEMNIFICATION
The Trust, on behalf of the Fund, has a variety of indemnification obligations
under contracts with its service providers. The Trust's maximum exposure under
these arrangements is unknown. However, the Trust has not had prior claims or
losses pursuant to these contracts and expects the risk of loss to be remote.
10. SUBSEQUENT EVENTS
Management has evaluated the impact of all subsequent events on the Fund through
the date the financial statements were issued, and has determined there was the
following subsequent event:
On May 19, 2016, the Fund declared a distribution of $0.1275 per share to
shareholders of record on May 24, 2016, payable May 31, 2016.
Page 29
--------------------------------------------------------------------------------
ADDITIONAL INFORMATION
--------------------------------------------------------------------------------
FIRST TRUST LOW DURATION OPPORTUNITIES ETF (LMBS)
APRIL 30, 2016 (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
its portfolio securities 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 at http://www.sec.gov.
PORTFOLIO HOLDINGS
The Trust files its complete schedule of the Fund's portfolio holdings with the
SEC for the first and third quarters of each fiscal year on Form N-Q. The
Trust's Forms N-Q are available (1) by calling (800) 988-5891; (2) on the Fund's
website located at http://www.ftportfolios.com; (3) on the SEC's website at
http://www.sec.gov; and (4) for review and copying at the SEC's Public Reference
Room ("PRR") in Washington, DC. Information regarding the operation of the PRR
may be obtained by calling (800) SEC-0330.
RISK CONSIDERATIONS
You could lose money by investing in the Fund. An investment in the Fund is not
a deposit of a bank and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other governmental agency. There can be no
assurance that the Fund's investment objectives will be achieved.
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.
COUNTERPARTY RISK. The Fund bears the risk that the counterparty to a mortgage
dollar roll, TBA Transaction, derivative or other contract with a third-party
may default on its obligations or otherwise fail to honor its obligations. If a
counterparty defaults on its payment obligations the Fund will lose money and
the value of an investment in Fund shares may decrease. In addition, the Fund
may engage in such investment transactions with a limited number of
counterparties.
CREDIT RISK. Credit risk is the risk that an issuer of a security will be unable
or unwilling to make dividend, interest and/or principal payments when due and
the related risk that the value of a security may decline because of concerns
about the issuer's ability to make such payments.
HIGH YIELD SECURITIES RISK. High yield securities, or "junk" bonds, are subject
to greater market fluctuations and risk of loss than securities with higher
ratings, and therefore, are considered to be highly speculative. If the economy
slows down or dips into recession, the issuers of high yield securities may not
have sufficient resources to continue making timely payment of periodic interest
and principal at maturity. The market for high yield securities is generally
smaller and less liquid than that for investment grade securities. High yield
securities are generally not listed on a national securities exchange but trade
in the over-the-counter markets. Due to the smaller, less liquid market for high
yield securities, the bid-offer spread on such securities is generally greater
than it is for investment grade securities and the purchase or sale of such
securities may take longer to complete. In general, high yield securities may
have a greater risk of default than other types of securities.
ILLIQUID SECURITIES RISK. Some of the securities held by the Fund may be
illiquid. Illiquid securities involve the risk that the securities will not be
able to be sold at the time desired by the Fund or at prices approximately the
value at which the Fund is carrying the securities on its books.
INCOME RISK. Income from the Fund's fixed income investments could decline
during periods of falling interest rates.
INTEREST RATE RISK. Interest rate risk is the risk that the value of the fixed
income securities in the Fund will decline because of rising market interest
rates. Interest rate risk is generally lower for shorter term investments, which
generally have shorter durations, and higher for longer term investments.
Mortgage-Related Investments are particularly subject to the risk that interest
rate volatility may adversely impact the valuation and price of such securities.
LIQUIDITY RISK. The Fund invests a substantial portion of its assets in
lower-quality debt issued by companies that are highly leveraged. Lower-quality
debt tends to be less liquid than higher-quality debt. Moreover, smaller debt
issues tend to be less liquid than larger debt issues. If the economy
experiences a sudden downturn, or if the debt markets for such companies become
Page 30
--------------------------------------------------------------------------------
ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST LOW DURATION OPPORTUNITIES ETF (LMBS)
APRIL 30, 2016 (UNAUDITED)
distressed, the Fund may have particular difficulty selling its assets in
sufficient amounts, at reasonable prices and in a sufficiently timely manner to
raise the cash necessary to meet any potentially heavy redemption requests by
Fund shareholders. As of the fourth quarter of 2015, the market for high yield
debt has experienced decreased liquidity, and investor perception of increased
risk has caused yield spreads to widen. Decreased liquidity may negatively
affect the Fund's ability to mitigate risk and meet redemptions.
MANAGEMENT RISK. The Fund is subject to management risk because it is an
actively managed portfolio. In managing the Fund's investment portfolio, the
Fund's investment advisor will apply investment techniques and risk analyses
that may not have the desired result. There can be no guarantee that the Fund
will meet its investment objective.
MARKET RISK. Market risk is the risk that a particular security owned by the
Fund or shares of the Fund in general may fall in value. Securities are subject
to market fluctuations caused by such factors as economic, political, regulatory
or market developments, changes in interest rates and perceived trends in
securities prices. Overall securities values could decline generally or could
underperform other investments.
MORTGAGE-RELATED INVESTMENTS RISK. The Fund invests in Mortgage-Related
Investments, including mortgage-backed securities, which may make the Fund more
susceptible to adverse economic, political or regulatory events that affect the
value of real estate. Changes in local, state and federal policies could
negatively impact the Mortgage-Related Investments market, which include various
government initiated and sponsored homeowner assistance programs and eminent
domain issues. Mortgage-Related Investments are subject to the risk that the
rate of mortgage prepayments decreases, which extends the average life of a
security and increases the interest rate exposure. Mortgage-Related Investments
may also face liquidity issues when the Fund seeks to sell such securities, but
is unable to find buyers at a bid-ask spread to make the transaction feasible.
These securities are also subject to the risk that the underlying borrowers may
default on their mortgages, resulting in a non-payment of principal and
interest. Finally, the Mortgage-Related Investments market may be negatively
impacted by regulatory changes including those that are related to the mandate
or existence of the government-sponsored enterprises, FNMA, FHLMC and GNMA.
NON-DIVERSIFICATION RISK. The Fund is classified as "non-diversified" under the
Investment Company Act of 1940, as amended (the "1940 Act"). As a result, the
Fund is only limited as to the percentage of its assets that may be invested in
the securities of any one issuer by the diversification requirements imposed by
the Internal Revenue Code of 1986, as amended. The Fund may invest a relatively
high percentage of its assets in a limited number of issuers. As a result, the
Fund may be more susceptible to a single adverse economic or regulatory
occurrence affecting one or more of these issuers, experience increased
volatility and be highly invested in certain issuers.
PORTFOLIO TURNOVER RISK. The Fund's strategy may frequently involve buying and
selling portfolio securities to rebalance the Fund's exposure to various market
sectors. High 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.
PREPAYMENT RISK. Mortgage-Related Investments are subject to pre-payment risk.
The degree to which borrowers prepay loans, whether as a contractual requirement
or at their election, may be affected by general business conditions, the
financial condition of the borrower and competitive conditions among loan
investors, among others. As such, prepayments cannot be predicted with accuracy.
Upon a prepayment, either in part or in full, the actual outstanding debt on
which the Fund derives interest income will be reduced. The Fund may not be able
to reinvest the proceeds received on terms as favorable as the prepaid loan.
REPURCHASE AGREEMENT RISK. The Fund's investment in repurchase agreements,
including mortgage dollar rolls and TBA Transactions, may be subject to market
and credit risk with respect to the collateral securing the agreements.
Investments in mortgage dollar rolls also may be subject to the risk that the
market value of the underlying obligations may decline prior to the expiration
of the agreement term.
SHORT SALES RISK. The Fund will incur a loss as a result of a short sale if the
price of the security sold short increases in value between the date of the
short sale and the date on which the Fund purchases the security to replace the
borrowed security. In addition, a lender may request, or market conditions may
dictate, that securities sold short be returned to the lender on short notice,
which may result in the Fund having to buy the securities sold short at an
unfavorable price. If this occurs, any anticipated gain to the Fund may be
reduced or eliminated or the short sale may result in a loss. In a rising stock
market, the Fund's short positions may significantly impact the Fund's overall
performance and cause the Fund to underperform traditional long-only equity
funds or to sustain losses, particularly in a sharply rising market. The use of
short sales may also cause the Fund to have higher expenses than other funds.
Because losses on short sales arise from increases in the value of the security
sold short, such losses are theoretically unlimited. By contrast, a loss on a
long position arises from decreases in the value of the security and is limited
by the fact that a security's value cannot go below zero. The Fund's investment
Page 31
--------------------------------------------------------------------------------
ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST LOW DURATION OPPORTUNITIES ETF (LMBS)
APRIL 30, 2016 (UNAUDITED)
advisor's use of short sales in combination with long positions in the Fund's
portfolio in an attempt to improve performance or reduce overall portfolio risk
may not be successful and may result in greater losses or lower positive returns
than if the Fund held only long positions. It is possible that the Fund's long
securities positions will decline in value at the same time that the value of
its short securities positions increase, thereby increasing potential losses to
the Fund. In addition, the Fund's short selling strategies may limit its ability
to fully benefit from increases in the equity markets. To the extent the Fund
invests the proceeds received from selling securities short in additional long
positions, the Fund is engaging in a form of leverage. The use of leverage may
increase the Fund's exposure to long positions and make any change in the Fund's
net asset value greater than it would be without the use of leverage. This could
result in increased volatility of returns.
SMALL FUND RISK. The Fund currently has fewer assets than larger funds, and like
other relatively smaller funds, large inflows and outflows may impact the Fund's
market exposure for limited periods of time. This impact may be positive or
negative, depending on the direction of market movement during the period
affected.
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.
Page 32
FIRST TRUST
First Trust Exchange-Traded Fund IV
INVESTMENT ADVISOR
First Trust Advisors L.P.
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
ADMINISTRATOR, CUSTODIAN,
FUND ACCOUNTANT &
TRANSFER AGENT
The Bank of New York Mellon
101 Barclay Street
New York, NY 10286
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
111 S. Wacker Drive
Chicago, IL 60606
LEGAL COUNSEL
Chapman and Cutler LLP
111 W. Monroe Street
Chicago, IL 60603
[BLANK BACK COVER]
FIRST TRUST
First Trust Exchange-Traded Fund IV
--------------------------------------------------------------------------------
First Trust SSI Strategic Convertible Securities ETF (FCVT)
Semi-Annual Report
For the Period
November 3, 2015
(Commencement of Operations)
through April 30, 2016
--------------------------------------------------------------------------------
TABLE OF CONTENTS
--------------------------------------------------------------------------------
FIRST TRUST SSI STRATEGIC CONVERTIBLE SECURITIES ETF (FCVT)
SEMI-ANNUAL REPORT
APRIL 30, 2016
Shareholder Letter........................................................... 1
Fund Performance Overview.................................................... 2
Portfolio Management......................................................... 4
Understanding Your Fund Expenses............................................. 5
Portfolio of Investments..................................................... 6
Statement of Assets and Liabilities.......................................... 11
Statement of Operations...................................................... 12
Statement of Changes in Net Assets........................................... 13
Financial Highlights......................................................... 14
Notes to Financial Statements................................................ 15
Additional Information....................................................... 20
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning of
the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934,
as amended. Forward-looking statements include statements regarding the goals,
beliefs, plans or current expectations of First Trust Advisors L.P. ("First
Trust" or the "Advisor") and/or SSI Investment Management Inc. ("SSI" or the
"Sub-Advisor") and their respective representatives, taking into account the
information currently available to them. Forward-looking statements include all
statements that do not relate solely to current or historical fact. For example,
forward-looking statements include the use of words such as "anticipate,"
"estimate," "intend," "expect," "believe," "plan," "may," "should," "would" or
other words that convey uncertainty of future events or outcomes.
Forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
the series of First Trust Exchange-Traded Fund IV (the "Trust") described in
this report for the First Trust SSI Strategic Convertible Securities ETF
(hereinafter referred to as the "Fund") to be materially different from any
future results, performance or achievements expressed or implied by the
forward-looking statements. When evaluating the information included in this
report, you are cautioned not to place undue reliance on these forward-looking
statements, which reflect the judgment of the Advisor and/or Sub-Advisor and
their respective representatives only as of the date hereof. We undertake no
obligation to publicly revise or update these forward-looking statements to
reflect events and circumstances that arise after the date hereof.
PERFORMANCE AND RISK DISCLOSURE
There is no assurance that the Fund will achieve its investment objective. The
Fund is subject to market risk, which is the possibility that the market values
of securities owned by the Fund will decline and that the value of the Fund
shares may therefore be less than what you paid for them. Accordingly, you can
lose money by investing in the Fund. See "Risk Considerations" in the Additional
Information section of this report for a discussion of certain other risks of
investing in the Fund.
Performance data quoted represents past performance, which is no guarantee of
future results, and current performance may be lower or higher than the figures
shown. For the most recent month-end performance figures, please visit
http://www.ftportfolios.com or speak with your financial advisor. Investment
returns, net asset value and share price will fluctuate and Fund shares, when
sold, may be worth more or less than their original cost.
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 and/or Sub-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.
--------------------------------------------------------------------------------
SHAREHOLDER LETTER
--------------------------------------------------------------------------------
FIRST TRUST SSI STRATEGIC CONVERTIBLE SECURITIES ETF (FCVT)
SEMI-ANNUAL LETTER FROM THE CHAIRMAN AND CEO
APRIL 30, 2016
Dear Shareholders:
Thank you for your investment in First Trust SSI Strategic Convertible
Securities ETF (the "Fund").
First Trust Advisors L.P. ("First Trust") is pleased to provide you with the
semi-annual report which contains detailed information about your investment
since the Fund's inception date of November 3, 2015. Additionally, First Trust
compiled the Fund's financial statements for you to review. We encourage you to
read this report and discuss it with your financial advisor.
While markets were up and down during 2015, we believe there are three important
things to remember. First, the U.S. economy grew, despite the massive decline in
oil prices. Second, the tapering that began in 2014 by the Federal Reserve (the
"Fed") did not stop growth in the U.S. economy. Finally, the long-anticipated
rate hike by the Fed in December had little effect on the money supply, and the
stock market was not shocked by the hike. Early in 2016, many investors were
concerned that the volatility we saw in the market in 2015 would continue, and
it did. From December 31, 2015 through February 11, 2016, the S&P 500(R) Index
declined by 10.27%. Since then, the market has made a steady comeback, and as of
April 30, 2016, the S&P 500(R) Index was up 13.39%.
First Trust believes that having a long-term investment horizon and being
invested in quality products can help you reach your goals, despite how the
market behaves. We have always maintained perspective about the markets and
believe investors should as well. We will continue to strive to provide quality
investments each and every day, which has been one of the hallmarks of our firm
since its inception 25 years ago.
Thank you for giving First Trust the opportunity to be a part of your investment
plan. We value our relationship with you and will continue to focus on helping
investors like you reach your financial goals.
Sincerely,
/s/ James A. Bowen
James A. Bowen
Chairman of the Board of Trustees
Chief Executive Officer of First Trust Advisors L.P.
Page 1
--------------------------------------------------------------------------------
FUND PERFORMANCE OVERVIEW (UNAUDITED)
--------------------------------------------------------------------------------
FIRST TRUST SSI STRATEGIC CONVERTIBLE SECURITIES ETF (FCVT)
The First Trust SSI Strategic Convertible Securities ETF (the "Fund") is an
actively managed exchange-traded fund that seeks to deliver total return by
investing, under normal market conditions, at least 80% of its net assets
(including investment borrowings) in a diversified portfolio of U.S. and
non-U.S. convertible securities. The shares of the Fund are listed and traded on
the Nasdaq Stock Market LLC under the ticker symbol "FCVT."
--------------------------------------------------------------------------------
PERFORMANCE
--------------------------------------------------------------------------------
CUMULATIVE
TOTAL RETURNS
Inception (11/3/15)
to 4/30/16
FUND PERFORMANCE
NAV -1.93%
Market Price -1.61%
INDEX PERFORMANCE
BofA Merrill Lynch All US Convertible Index -3.88%
--------------------------------------------------------------------------------
Total returns for the period since inception are calculated from the inception
date of the Fund. "Cumulative Total Returns" represent the total change in value
of an investment over the period indicated.
The Fund's per share net asset value ("NAV") is the value of one share of the
Fund and is computed by dividing the value of all assets of the Fund (including
accrued interest and dividends), less all liabilities (including accrued
expenses and dividends declared but unpaid), by the total number of outstanding
shares. The price used to calculate market return ("Market Price") is determined
by using the midpoint between the highest bid and the lowest offer on the stock
exchange on which shares of the Fund are listed for trading as of the time that
the Fund's NAV is calculated. Since shares of the Fund did not trade in the
secondary market until after its inception, for the period from inception to the
first day of secondary market trading in shares of the Fund, the NAV of the Fund
is used as a proxy for the secondary market trading price to calculate market
returns. NAV and market price returns assume that all distributions have been
reinvested in the Fund at NAV and Market Price, respectively.
An index is a statistical composite that tracks a specified financial market or
sector. Unlike the Fund, the index does not actually hold a portfolio of
securities and therefore does not incur the expenses incurred by the Fund. These
expenses negatively impact the performance of the Fund. Also, market returns do
not include brokerage commissions that may be payable on secondary market
transactions. If brokerage commissions were included, market returns would be
lower. The total returns presented reflect the reinvestment of dividends on
securities in the index. The returns presented do not reflect the deduction of
taxes that a shareholder would pay on Fund distributions or the redemption or
sale of Fund shares. The investment return and principal value of shares of the
Fund will vary with changes in market conditions. Shares of the Fund may be
worth more or less than their original cost when they are redeemed or sold in
the market. The Fund's past performance is no guarantee of future performance.
-----------------------------------------------------------
% OF TOTAL
SECTOR ALLOCATION INVESTMENTS
-----------------------------------------------------------
Information Technology 34.8%
Health Care 19.1
Financials 16.6
Consumer Discretionary 9.9
Utilities 4.9
Consumer Staples 3.7
Materials 3.5
Industrials 3.0
Energy 2.4
Telecommunication Services 2.1
------
Total 100.0%
======
-----------------------------------------------------------
% OF TOTAL
TOP TEN HOLDINGS INVESTMENTS
-----------------------------------------------------------
Wells Fargo & Co., Series L 3.3%
Allergan PLC, Series A 3.1
Bank of American Corp., Series L 2.6
Hologic, Inc. 2.6
Priceline Group, Inc./The 2.5
VeriSign, Inc. 2.1
NVIDIA Corp. 2.1
Tesla Motors, Inc. 2.0
Intel Corp. 2.0
Citrix Systems, Inc. 1.9
------
Total 24.2%
======
Page 2
--------------------------------------------------------------------------------
FUND PERFORMANCE OVERVIEW (UNAUDITED) (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST SSI STRATEGIC CONVERTIBLE SECURITIES ETF (FCVT)
PERFORMANCE OF A $10,000 INITIAL INVESTMENT
NOVEMBER 3, 2015 - APRIL 30, 2016
First Trust SSI BofA Merrill
Strategic Convertible Lynch All US
Securities ETF Convertible Index
11/3/15 $10,000 $10,000
4/30/16 9,807 9,612
Performance figures assume reinvestment of all distributions and do not reflect
the deduction of taxes that a shareholder would pay on Fund distributions or the
redemption or sale of Fund shares. An index is a statistical composite that
tracks a specified financial market or sector. Unlike the Fund, the index does
not actually hold a portfolio of securities and therefore does not incur the
expenses incurred by the Fund. These expenses negatively impact the performance
of the Fund. The Fund's past performance does not predict future performance.
FREQUENCY DISTRIBUTION OF DISCOUNTS AND PREMIUMS
BID/ASK MIDPOINT VS. NAV THROUGH APRIL 30, 2016
The following Frequency Distribution of Discounts and Premiums charts are
provided to show the frequency at which the bid/ask midpoint price for the Fund
was at a discount or premium to the daily NAV. The following tables are for
comparative purposes only and represent the period November 4, 2015
(commencement of trading) through April 30, 2016. Shareholders may pay more than
NAV when they buy Fund shares and receive less than NAV when they sell those
shares because shares are bought and sold at current market price. Data
presented represents past performance and cannot be used to predict future
results.
--------------------------------------------------------------------------------
NUMBER OF DAYS BID/ASK MIDPOINT AT/ABOVE NAV
--------------------------------------------------------------------------------
FOR THE PERIOD 0.00%-0.49% 0.50%-0.99% 1.00%-1.99% >=2.00%
11/4/15 - 4/30/16 32 15 8 10
--------------------------------------------------------------------------------
NUMBER OF DAYS BID/ASK MIDPOINT BELOW NAV
--------------------------------------------------------------------------------
FOR THE PERIOD 0.00%-0.49% 0.50%-0.99% 1.00%-1.99% >=2.00%
11/4/15 - 4/30/16 36 13 5 3
Page 3
--------------------------------------------------------------------------------
PORTFOLIO MANAGEMENT
--------------------------------------------------------------------------------
FIRST TRUST SSI STRATEGIC CONVERTIBLE SECURITIES ETF (FCVT)
SEMI-ANNUAL REPORT
APRIL 30, 2016
INVESTMENT MANAGER
SSI INVESTMENT MANAGEMENT INC.
SSI Investment Management Inc. ("SSI" or the "Sub-Advisor") is the sub-advisor
to First Trust SSI Strategic Convertible Securities (the "Fund") and is a
registered investment advisor based in Los Angeles, California. SSI is an
innovative investment management firm specializing in alternative investment
solutions utilizing convertible assets, equity securities and hedging
strategies.
PORTFOLIO MANAGEMENT TEAM
GEORGE M. DOUGLAS - CFA, CHIEF INVESTMENT OFFICER, PRINCIPAL
RAVI MALIK - CFA, PORTFOLIO MANAGER, PRINCIPAL
MICHAEL J. OPRE - CFA, PORTFOLIO MANAGER
FLORIAN EITNER - CFA, PORTFOLIO MANAGER
ETHAN GANZ - ASSOCIATE PORTFOLIO MANAGER
Page 4
FIRST TRUST SSI STRATEGIC CONVERTIBLE SECURITIES ETF (FCVT)
UNDERSTANDING YOUR FUND EXPENSES
APRIL 30, 2016 (UNAUDITED)
As a shareholder of First Trust SSI Strategic Convertible Securities ETF (the
"Fund") you incur two types of costs: (1) transaction costs; and (2) ongoing
costs, including management fees, distribution and/or service fees, if any, and
other Fund expenses. This Example is intended to help you understand your
ongoing costs of investing in the Fund and to compare these costs with the
ongoing costs of investing in other funds.
The Example is based on an investment of $1,000 invested at the beginning of the
period (or since inception) and held through the six-month (or shorter) period
ended April 30, 2016.
ACTUAL EXPENSES
The first line in the following table provides information about actual account
values and actual expenses. You may use the information in this line, together
with the amount you invested, to estimate the expenses that you paid over the
period. Simply divide your account value by $1,000 (for example, an $8,600
account value divided by $1,000 = 8.6), then multiply the result by the number
in the first line under the heading entitled "Expenses Paid During the Period"
to estimate the expenses you paid on your account during this six-month period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second line in the following table provides information about hypothetical
account values and hypothetical expenses based on the Fund's actual expense
ratio and an assumed rate of return of 5% per year before expenses, which is not
the Fund's actual return. The hypothetical account values and expenses may not
be used to estimate the actual ending account balance or expenses you paid for
the period. You may use this information to compare the ongoing costs of
investing in the Fund and other funds. To do so, compare this 5% hypothetical
example with the 5% hypothetical examples that appear in the shareholder reports
of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs such as brokerage
commissions. Therefore, the second line in the table is useful in comparing
ongoing costs only, and will not help you determine the relative total costs of
owning different funds. In addition, if these transactional costs were included,
your costs would have been higher.
----------------------------------------------------------------------------------------------------------------------------------
ANNUALIZED EXPENSES PAID
EXPENSE RATIO DURING THE PERIOD
BEGINNING ENDING BASED ON THE NOVEMBER 3, 2015 (a)
ACCOUNT VALUE ACCOUNT VALUE NUMBER OF DAYS TO
NOVEMBER 3, 2015 (a) APRIL 30, 2016 IN THE PERIOD APRIL 30, 2016 (b)
----------------------------------------------------------------------------------------------------------------------------------
FIRST TRUST SSI STRATEGIC CONVERTIBLE SECURITIES ETF (FCVT)
Actual $1,000.00 $ 980.70 0.95% $4.63
Hypothetical (5% return before expenses) $1,000.00 $1,020.14 0.95% $4.77
(a) Inception date.
(b) Actual expenses are equal to the annualized expense ratio as indicated in
the table, multiplied by the average account value over the period
(November 3, 2015 through April 30, 2016), and multiplied by 180/366.
Hypothetical expenses are assumed for the most recent one-half year
period.
Page 5
FIRST TRUST SSI STRATEGIC CONVERTIBLE SECURITIES ETF (FCVT)
PORTFOLIO OF INVESTMENTS
APRIL 30, 2016 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
--------------- ---------------------------------------------------------------- ----------- -------------- -------------
CONVERTIBLE CORPORATE BONDS - 69.5%
AIR FREIGHT & LOGISTICS - 0.5%
$ 24,000 Echo Global Logistics, Inc...................................... 2.50% 05/01/20 $ 23,085
-------------
AUTOMOBILES - 2.3%
8,000 Tesla Motors, Inc............................................... 1.50% 06/01/18 15,440
100,000 Tesla Motors, Inc............................................... 0.25% 03/01/19 94,438
-------------
109,877
-------------
BIOTECHNOLOGY - 1.3%
19,000 BioMarin Pharmaceutical, Inc.................................... 1.50% 10/15/20 23,132
14,000 Incyte Corp..................................................... 0.38% 11/15/18 21,569
22,000 Ionis Pharmaceuticals, Inc...................................... 1.00% 11/15/21 20,419
-------------
65,120
-------------
CAPITAL MARKETS - 1.0%
47,000 BGC Partners, Inc............................................... 4.50% 07/15/16 47,587
-------------
CHEMICALS - 0.7%
30,000 RPM International, Inc.......................................... 2.25% 12/15/20 35,756
-------------
COMMUNICATIONS EQUIPMENT - 2.0%
26,000 Brocade Communications Systems, Inc............................. 1.38% 01/01/20 25,301
18,000 Ciena Corp. (a)................................................. 3.75% 10/15/18 20,295
28,000 Interdigital, Inc............................................... 1.50% 03/01/20 29,418
15,000 Palo Alto Networks, Inc......................................... (b) 07/01/19 22,125
-------------
97,139
-------------
CONSTRUCTION & ENGINEERING - 1.0%
49,000 Dycom Industries, Inc. (a)...................................... 0.75% 09/15/21 50,592
-------------
HEALTH CARE EQUIPMENT & SUPPLIES - 5.0%
99,000 Hologic, Inc.................................................... (b) 12/15/43 122,327
48,000 Integra LifeSciences Holdings Corp.............................. 1.63% 12/15/16 65,310
31,000 NuVasive, Inc................................................... 2.75% 07/01/17 41,307
6,000 Teleflex, Inc................................................... 3.88% 08/01/17 15,233
-------------
244,177
-------------
HEALTH CARE PROVIDERS & SERVICES - 1.2%
9,000 Anthem, Inc..................................................... 2.75% 10/15/42 17,522
35,000 Molina Healthcare, Inc.......................................... 1.63% 08/15/44 39,244
-------------
56,766
-------------
HEALTH CARE TECHNOLOGY - 0.7%
32,000 Allscripts Healthcare Solutions, Inc............................ 1.25% 07/01/20 33,080
-------------
HOUSEHOLD DURABLES - 0.4%
10,000 Lennar Corp..................................................... 3.25% 11/15/21 19,375
-------------
INSURANCE - 1.5%
58,000 Old Republic International Corp................................. 3.75% 03/15/18 72,500
-------------
INTERNET & CATALOG RETAIL - 3.7%
38,000 Ctrip.com International Ltd. (a)................................ 1.00% 07/01/20 41,705
12,000 Priceline Group, Inc./The....................................... 1.00% 03/15/18 17,843
98,000 Priceline Group, Inc./The....................................... 0.35% 06/15/20 120,172
-------------
179,720
-------------
INTERNET SOFTWARE & SERVICES - 5.9%
18,000 Akamai Technologies, Inc........................................ (b) 02/15/19 17,415
41,000 j2 Global, Inc.................................................. 3.25% 06/15/29 45,177
27,000 MercadoLibre, Inc............................................... 2.25% 07/01/19 31,776
Page 6 See Notes to Financial Statements
FIRST TRUST SSI STRATEGIC CONVERTIBLE SECURITIES ETF (FCVT)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2016 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
--------------- ---------------------------------------------------------------- ----------- -------------- -------------
CONVERTIBLE CORPORATE BONDS (CONTINUED)
INTERNET SOFTWARE & SERVICES (CONTINUED)
$ 40,000 VeriSign, Inc. (c).............................................. 4.34% 08/15/37 $ 101,175
56,000 WebMD Health Corp............................................... 2.50% 01/31/18 64,330
25,000 Yahoo!, Inc..................................................... (b) 12/01/18 25,250
-------------
285,123
-------------
IT SERVICES - 1.4%
55,000 Euronet Worldwide, Inc.......................................... 1.50% 10/01/44 67,409
-------------
LIFE SCIENCES TOOLS & SERVICES - 1.3%
63,000 Illumina, Inc................................................... (b) 06/15/19 63,079
-------------
MACHINERY - 0.5%
19,000 Wabash National Corp............................................ 3.38% 05/01/18 25,377
-------------
MEDIA - 2.4%
38,000 Liberty Interactive LLC......................................... 0.75% 03/30/43 65,669
50,000 Liberty Media Corp.............................................. 1.38% 10/15/23 50,500
-------------
116,169
-------------
METALS & MINING - 2.0%
34,000 Newmont Mining Corp., Series B.................................. 1.63% 07/15/17 37,039
30,000 RTI International Metals, Inc................................... 1.63% 10/15/19 34,500
21,000 Stillwater Mining Co............................................ 1.75% 10/15/32 24,504
-------------
96,043
-------------
MULTI-UTILITIES - 0.5%
375 CenterPoint Energy, Inc......................................... 4.18% 09/15/29 24,539
-------------
PERSONAL PRODUCTS - 0.6%
29,000 Herbalife Ltd................................................... 2.00% 08/15/19 27,641
-------------
PHARMACEUTICALS - 3.7%
16,000 ALZA Corp....................................................... (b) 07/28/20 24,690
26,000 Impax Laboratories, Inc. (a).................................... 2.00% 06/15/22 24,196
50,000 Jazz Investments I Ltd.......................................... 1.88% 08/15/21 55,875
40,000 Medicines Co./The............................................... 1.38% 06/01/17 55,075
14,000 Teva Pharmaceutical Finance Co., LLC, Series C.................. 0.25% 02/01/26 18,489
-------------
178,325
-------------
REAL ESTATE INVESTMENT TRUSTS - 4.4%
25,000 Empire State Realty OP LP (a)................................... 2.63% 08/15/19 27,125
55,000 Extra Space Storage LP (a)...................................... 3.13% 10/01/35 60,706
46,000 National Health Investors, Inc.................................. 3.25% 04/01/21 48,300
36,000 Spirit Realty Capital, Inc...................................... 2.88% 05/15/19 37,845
39,000 Starwood Property Trust, Inc.................................... 4.55% 03/01/18 39,878
-------------
213,854
-------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT - 12.7%
31,000 Inphi Corp. (a)................................................. 1.13% 12/01/20 32,182
47,000 Integrated Device Technology, Inc. (a).......................... 0.88% 11/15/22 44,033
23,000 Intel Corp...................................................... 2.95% 12/15/35 28,534
61,000 Intel Corp...................................................... 3.25% 08/01/39 92,873
15,000 Lam Research Corp............................................... 0.50% 05/15/16 19,153
28,000 Lam Research Corp............................................... 1.25% 05/15/18 39,095
70,000 Microchip Technology, Inc....................................... 1.63% 02/15/25 72,931
15,000 Microchip Technology, Inc....................................... 2.13% 12/15/37 30,075
See Notes to Financial Statements Page 7
FIRST TRUST SSI STRATEGIC CONVERTIBLE SECURITIES ETF (FCVT)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2016 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
--------------- ---------------------------------------------------------------- ----------- -------------- -------------
CONVERTIBLE CORPORATE BONDS (CONTINUED)
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT (CONTINUED)
$ 22,000 Micron Technology, Inc., Series E............................... 1.63% 02/15/33 $ 26,359
7,000 Novellus Systems, Inc........................................... 2.63% 05/15/41 15,956
55,000 NVIDIA Corp..................................................... 1.00% 12/01/18 98,278
24,000 NXP Semiconductors NV........................................... 1.00% 12/01/19 27,300
42,000 ON Semiconductor Corp., Series B................................ 2.63% 12/15/26 44,809
21,000 SunPower Corp. (a).............................................. 4.00% 01/15/23 20,396
15,000 Xilinx, Inc..................................................... 2.63% 06/15/17 22,556
-------------
614,530
-------------
SOFTWARE - 9.1%
23,000 Bottomline Technologies de Inc.................................. 1.50% 12/01/17 23,978
25,000 BroadSoft, Inc.................................................. 1.50% 07/01/18 28,219
79,000 Citrix Systems, Inc............................................. 0.50% 04/15/19 89,616
75,000 Nuance Communications, Inc. (a)................................. 1.00% 12/15/35 68,156
42,000 Red Hat, Inc.................................................... 0.25% 10/01/19 51,949
28,000 Rovi Corp....................................................... 0.50% 03/01/20 26,687
70,000 salesforce.com, Inc............................................. 0.25% 04/01/18 88,462
34,000 ServiceNow, Inc................................................. (b) 11/01/18 39,546
15,000 Take-Two Interactive Software, Inc.............................. 1.00% 07/01/18 24,628
-------------
441,241
-------------
TECHNOLOGY HARDWARE, STORAGE & PERIPHERALS - 3.1%
61,000 Electronics For Imaging, Inc.................................... 0.75% 09/01/19 62,640
16,000 SanDisk Corp.................................................... 1.50% 08/15/17 25,090
61,000 SanDisk Corp.................................................... 0.50% 10/15/20 63,478
-------------
151,208
-------------
TOBACCO - 0.7%
30,000 Vector Group Ltd................................................ 1.75% 04/15/20 32,062
-------------
TOTAL CONVERTIBLE CORPORATE BONDS........................................................... 3,371,375
(Cost $3,373,774) -------------
STATED STATED
SHARES DESCRIPTION RATE MATURITY VALUE
--------------- ---------------------------------------------------------------- ----------- -------------- -------------
CONVERTIBLE PREFERRED SECURITIES - 28.7%
AUTOMOBILES - 1.0%
660 Fiat Chrysler Automobiles NV.................................... 7.88% 12/15/16 $ 48,056
-------------
BANKS - 6.2%
105 Bank of America Corp., Series L................................. 7.25% (d) 123,721
15 Huntington Bancshares, Inc./OH, Series A........................ 8.50% (d) 20,423
126 Wells Fargo & Co., Series L..................................... 7.50% (d) 156,996
-------------
301,140
-------------
COMMERCIAL SERVICES & SUPPLIES - 0.4%
250 Stericycle, Inc................................................. 5.25% 09/15/18 19,415
-------------
DIVERSIFIED TELECOMMUNICATION SERVICES - 1.0%
460 Frontier Communications Corp., Series A......................... 11.13% 06/29/18 47,978
-------------
ELECTRIC UTILITIES - 2.0%
760 Exelon Corp..................................................... 6.50% 06/01/17 36,829
975 NextEra Energy, Inc............................................. 5.80% 09/01/16 58,939
-------------
95,768
-------------
Page 8 See Notes to Financial Statements
FIRST TRUST SSI STRATEGIC CONVERTIBLE SECURITIES ETF (FCVT)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2016 (UNAUDITED)
STATED STATED
SHARES DESCRIPTION RATE MATURITY VALUE
--------------- ---------------------------------------------------------------- ----------- -------------- -------------
CONVERTIBLE PREFERRED SECURITIES (CONTINUED)
FOOD PRODUCTS - 2.4%
230 Post Holdings, Inc.............................................. 5.25% 06/01/17 $ 30,065
1,195 Tyson Foods, Inc................................................ 4.75% 07/15/17 87,164
-------------
117,229
-------------
HEALTH CARE PROVIDERS & SERVICES - 0.7%
795 Anthem, Inc..................................................... 5.25% 05/01/18 36,848
-------------
MACHINERY - 0.5%
210 Stanley Black & Decker, Inc..................................... 6.25% 11/17/16 24,872
-------------
METALS & MINING - 0.7%
855 Alcoa Inc., Series 1............................................ 5.38% 10/01/17 32,558
-------------
MULTI-UTILITIES - 2.4%
440 Black Hills Corp................................................ 7.75% 11/01/18 29,841
1,720 Dominion Resources, Inc......................................... 6.38% 07/01/17 84,848
-------------
114,689
-------------
OIL, GAS & CONSUMABLE FUELS - 2.3%
560 Anadarko Petroleum Corp......................................... 7.50% 06/07/18 21,258
320 Hess Corp....................................................... 8.00% 02/01/19 24,326
875 Kinder Morgan, Inc./DE, Series A................................ 9.75% 10/26/18 38,640
945 Southwestern Energy Co., Series B............................... 6.25% 01/15/18 29,947
-------------
114,171
-------------
PHARMACEUTICALS - 4.8%
180 Allergan PLC, Series A.......................................... 5.50% 03/01/18 146,068
97 Teva Pharmaceutical Industries Ltd.............................. 7.00% 12/15/18 87,397
-------------
233,465
-------------
REAL ESTATE INVESTMENT TRUSTS - 3.2%
770 American Tower Corp., Series A.................................. 5.25% 05/15/17 81,728
455 Crown Castle International Corp., Series A...................... 4.50% 11/01/16 48,176
380 Welltower, Inc., Series I....................................... 6.50% (d) 23,457
-------------
153,361
-------------
WIRELESS TELECOMMUNICATION SERVICES - 1.1%
760 T-Mobile US, Inc................................................ 5.50% 12/15/17 51,536
-------------
TOTAL CONVERTIBLE PREFERRED SECURITIES..................................................... 1,391,086
(Cost $1,402,093) -------------
TOTAL INVESTMENTS - 98.2%.................................................................. 4,762,461
(Cost $4,775,867) (e)
NET OTHER ASSETS AND LIABILITIES - 1.8%.................................................... 87,260
-------------
NET ASSETS - 100.0%........................................................................ $ 4,849,721
=============
See Notes to Financial Statements Page 9
FIRST TRUST SSI STRATEGIC CONVERTIBLE SECURITIES ETF (FCVT)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2016 (UNAUDITED)
-----------------------------
(a) This security, sold within the terms of a private placement memorandum, is
exempt from registration upon resale under Rule 144A under the Securities
Act of 1933, as amended, and may be resold in transactions exempt from
registration, normally to qualified institutional buyers. Pursuant to
procedures adopted by the Trust's Board of Trustees, this security has
been determined to be liquid by SSI Investment Management Inc., the
sub-advisor. Although market instability can result in periods of
increased overall market illiquidity, liquidity for each security is
determined based on security-specific factors and assumptions, which
require subjective judgment. At April 30, 2016, securities noted as such
amounted to $389,386 or 8.0% of net assets.
(b) Zero coupon security.
(c) Multi-Step Coupon Bond - Coupon steps up or down at predetermined dates.
The interest rate shown reflects the rate in effect at April 30, 2016.
(d) Perpetual maturity.
(e) Aggregate cost for financial reporting purposes, which approximates the
aggregate cost for federal income tax purposes. As of April 30, 2016, the
aggregate gross unrealized appreciation for all securities in which there
was an excess of value over tax cost was $175,745 and the aggregate gross
unrealized depreciation for all securities in which there was an excess of
tax cost over value was $189,151.
-----------------------------
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of April 30,
2016 is as follows (see Note 2A - Portfolio Valuation in the Notes to Financial
Statements):
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
4/30/2016 PRICES INPUTS INPUTS
--------------- --------------- --------------- ---------------
Convertible Corporate Bonds*....................... $ 3,371,375 $ -- $ 3,371,375 $ --
--------------- --------------- --------------- ---------------
Convertible Preferred Securities:
Automobiles..................................... 48,056 -- 48,056 --
Food Products .................................. 117,229 87,164 30,065 --
Pharmaceuticals ................................ 233,465 146,068 87,397 --
Other industry categories*...................... 992,336 992,336 -- --
--------------- --------------- --------------- ---------------
Total Convertible Preferred Securities............. 1,391,086 1,225,568 165,518 --
--------------- --------------- --------------- ---------------
Total Investments.................................. $ 4,762,461 $ 1,225,568 $ 3,536,893 $ --
=============== =============== =============== ===============
* See Portfolio of Investments for industry breakout.
All transfers in and out of the Levels during the period are assumed to be
transferred on the last day of the period at their current value. There were no
transfers between Levels at April 30, 2016.
Page 10 See Notes to Financial Statements
FIRST TRUST SSI STRATEGIC CONVERTIBLE SECURITIES ETF (FCVT)
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 2016 (UNAUDITED)
ASSETS:
Investments, at value.................................................. $ 4,762,461
Cash................................................................... 77,799
Receivables:
Investment securities sold.......................................... 38,277
Interest............................................................ 13,067
Dividends........................................................... 4,235
--------------
Total Assets........................................................ 4,895,839
--------------
LIABILITIES:
Payables:
Investment securities purchased..................................... 42,332
Investment advisory fees............................................ 3,786
--------------
Total Liabilities................................................... 46,118
--------------
NET ASSETS............................................................. $ 4,849,721
==============
NET ASSETS CONSIST OF:
Paid-in capital........................................................ $ 5,023,050
Par value.............................................................. 2,000
Accumulated net investment income (loss)............................... (131,971)
Accumulated net realized gain (loss) on investments.................... (29,952)
Net unrealized appreciation (depreciation) on investments.............. (13,406)
--------------
NET ASSETS............................................................. $ 4,849,721
==============
NET ASSET VALUE, per share............................................. $ 24.25
==============
Number of shares outstanding (unlimited number of shares
authorized, par value $0.01 per share).............................. 200,002
==============
Investments, at cost................................................... $ 4,775,867
==============
See Notes to Financial Statements Page 11
FIRST TRUST SSI STRATEGIC CONVERTIBLE SECURITIES ETF (FCVT)
STATEMENT OF OPERATIONS
FOR THE PERIOD NOVEMBER 3, 2015 (A) THROUGH APRIL 30, 2016 (UNAUDITED)
INVESTMENT INCOME:
Dividends................................................................ $ 32,878
Foreign tax withholding.................................................. (277)
Interest................................................................. (89,302)
Other.................................................................... 26
--------------
Total investment income............................................... (56,675)
--------------
EXPENSES:
Investment advisory fees................................................. 22,256
--------------
Total expenses........................................................ 22,256
--------------
NET INVESTMENT INCOME (LOSS)............................................. (78,931)
--------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on investments............................... (29,952)
Net change in unrealized appreciation (depreciation) on investments... (13,406)
--------------
NET REALIZED AND UNREALIZED GAIN (LOSS).................................. (43,358)
--------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS....................................................... $ (122,289)
==============
(a) Inception date is consistent with the commencement of investment operations
and is the date the creation units were established.
Page 12 See Notes to Financial Statements
FIRST TRUST SSI STRATEGIC CONVERTIBLE SECURITIES ETF (FCVT)
STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD NOVEMBER 3, 2015 (A) THROUGH APRIL 30, 2016 (UNAUDITED)
OPERATIONS:
Net investment income (loss)........................................... $ (78,931)
Net realized gain (loss)............................................... (29,952)
Net change in unrealized appreciation (depreciation)................... (13,406)
--------------
Net increase (decrease) in net assets resulting from operations........ (122,289)
--------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income.................................................. (53,040)
--------------
Total distributions to shareholders.................................... (53,040)
--------------
SHAREHOLDER TRANSACTIONS:
Proceeds from shares sold.............................................. 5,025,050
Cost of shares redeemed................................................ --
--------------
Net increase (decrease) in net assets resulting from shareholder
transactions........................................................ 5,025,050
--------------
Total increase (decrease) in net assets................................ 4,849,721
NET ASSETS:
Beginning of period.................................................... --
--------------
End of period.......................................................... $ 4,849,721
==============
Accumulated net investment income (loss) at end of period.............. $ (131,971)
==============
CHANGES IN SHARES OUTSTANDING:
Shares outstanding, beginning of period................................ --
Shares sold............................................................ 200,002
Shares redemmed........................................................ --
--------------
Shares outstanding, end of period...................................... 200,002
==============
(a) Inception date is consistent with the commencement of investment
operations and is the date the initial creation units were established.
See Notes to Financial Statements Page 13
FIRST TRUST SSI STRATEGIC CONVERTIBLE SECURITIES ETF (FCVT)
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD
FOR THE PERIOD
11/3/2015 (a)
THROUGH
4/30/2016
(UNAUDITED)
----------------
Net asset value, beginning of period $ 25.00
----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) (0.39)
Net realized and unrealized gain (loss) (0.09)
----------
Total from investment operations (0.48)
----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income (0.27)
----------
Total distributions (0.27)
----------
Net asset value, end of period $ 24.25
==========
TOTAL RETURN (b) (1.93)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) $ 4,850
RATIOS TO AVERAGE NET ASSETS:
Ratio of total expenses to average net assets 0.95% (c)
Ratio of net investment income (loss) to
average net assets (3.37)% (c)
Portfolio turnover rate (d) 27%
(a) Inception date is consistent with the commencement of investment
operations and is the date the initial creation units were established.
(b) Total return is calculated assuming an initial investment made at the net
asset value at the beginning of the period, reinvestment of all dividend
distributions at net asset value during the period, and redemption at net
asset value on the last day of the period. The return presented does not
reflect the deduction of taxes that a shareholder would pay on Fund
distributions or the redemption or sale of Fund shares. Total return is
calculated for the time period presented and is not annualized for periods
of less than a year.
(c) Annualized.
(d) Portfolio turnover is calculated for the time period presented and is not
annualized for periods of less than a year and does not include securities
received or delivered from processing creations or redemptions and in-kind
transactions.
Page 14 See Notes to Financial Statements
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FIRST TRUST SSI STRATEGIC CONVERTIBLE SECURITIES ETF (FCVT)
APRIL 30, 2016 (UNAUDITED)
1. ORGANIZATION
First Trust Exchange-Traded Fund IV (the "Trust") is an open-end management
investment company organized as a Massachusetts business trust on September 15,
2010, and is registered with the Securities and Exchange Commission under the
Investment Company Act of 1940, as amended (the "1940 Act").
The Trust currently consists of eight funds that are offering shares. This
report covers the First Trust SSI Strategic Convertible Securities ETF (the
"Fund"), which trades under the ticker "FCVT" on The Nasdaq Stock Market LLC
("Nasdaq"). Unlike conventional mutual funds, the Fund issues and redeems shares
on a continuous basis, at net asset value ("NAV"), only in large specified
blocks consisting of 50,000 shares called a "Creation Unit." Creation Units are
issued and redeemed for cash and, in certain circumstances, in-kind for
securities in which the Fund invests. Except when aggregated in Creation Units,
the Fund's shares are not redeemable securities.
The Fund is an actively managed exchange-traded fund. The investment objective
of the Fund is to seek total return. Under normal market conditions, the Fund
seeks to achieve its investment objective by investing at least 80% of its net
assets (including investment borrowings) in a diversified portfolio U.S. and
non-U.S. convertible securities.
2. VALUATION AND INVESTMENT PRACTICES
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 following is a summary
of significant accounting policies consistently followed by the Fund in the
preparation of the financial statements. The preparation of the financial
statements in accordance with accounting principles generally accepted in the
United States of America ("U.S. GAAP") requires management to make estimates and
assumptions that affect the reported amounts and disclosures in the financial
statements. Actual results could differ from those estimates.
A. PORTFOLIO VALUATION
The Fund's net asset value ("NAV") is determined daily as of the close of
regular trading on the New York Stock Exchange ("NYSE"), normally 4:00 p.m.
Eastern time, on each day the NYSE is open for trading. If the NYSE closes early
on a valuation day, the NAV is determined as of that time. Domestic debt
securities are priced using data reflecting the earlier closing of the principal
markets for those securities. The Fund's NAV is calculated by dividing the value
of all assets of the Fund (including accrued interest and dividends), less all
liabilities (including accrued expenses and dividends declared but unpaid), by
the total number of shares outstanding.
The Fund's investments are valued daily at market value or, in the absence of
market value with respect to any portfolio securities, at fair value. Market
value prices represent last sale or official closing prices from a national or
foreign exchange (i.e., a regulated market) and are primarily obtained from
third-party pricing services. Fair value prices represent any prices not
considered market value prices and are either obtained from a third-party
pricing service or are determined by the Pricing Committee of the Fund's
investment advisor, First Trust Advisors L.P. ("First Trust" or the "Advisor"),
in accordance with valuation procedures adopted by the Trust's Board of
Trustees, and in accordance with provisions of the 1940 Act. Investments valued
by the Advisor's Pricing Committee, if any, are footnoted as such in the
footnotes to the Portfolio of Investments. The Fund's investments are valued as
follows:
Convertible preferred stocks and other equity securities listed on any
national or foreign exchange (excluding Nasdaq and the London Stock
Exchange Alternative Investment Market ("AIM")) are valued at the last
sale price on the exchange on which they are principally traded or, for
Nasdaq and AIM securities, the official closing price. Securities traded
on more than one securities exchange are valued at the last sale price or
official closing price, as applicable, at the close of the securities
exchange representing the principal market for such securities.
Convertible corporate bonds, notes and other debt securities are valued on
the basis of valuations provided by dealers who make markets in such
securities or by an independent pricing service approved by the Trust's
Board of Trustees, which may use the following valuation inputs when
available:
1) benchmark yields;
2) reported trades;
3) broker/dealer quotes;
4) issuer spreads;
5) benchmark securities;
6) bids and offers; and
7) reference data including market research publications.
Page 15
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST SSI STRATEGIC CONVERTIBLE SECURITIES ETF (FCVT)
APRIL 30, 2016 (UNAUDITED)
Securities traded in an over-the-counter market are fair valued at the
mean of their most recent bid and asked price, if available, and otherwise
at their closing bid price.
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
5) any other market-based data the Advisor's Pricing Committee
considers relevant. In this regard, the Advisor's Pricing
Committee may use last-obtained market-based data to assist it
when valuing portfolio securities using amortized cost.
Certain securities may not be able to be priced by pre-established pricing
methods. Such securities may be valued by the Trust's Board of Trustees or its
delegate, the Advisor's Pricing Committee, at fair value. These securities
generally include, but are not limited to, restricted securities (securities
which may not be publicly sold without registration under the Securities Act of
1933, as amended) for which a pricing service is unable to provide a market
price; securities whose trading has been formally suspended; a security whose
market or fair value price is not available from a pre-established pricing
source; a security with respect to which an event has occurred that is likely to
materially affect the value of the security after the market has closed but
before the calculation of the Fund's NAV or make it difficult or impossible to
obtain a reliable market quotation; and a security whose price, as provided by
the pricing service, does not reflect the security's fair value. As a general
principle, the current fair value of a security would appear to be the amount
which the owner might reasonably expect to receive for the security upon its
current sale. When fair value prices are used, generally they will differ from
market quotations or official closing prices on the applicable exchanges. A
variety of factors may be considered in determining the fair value of such
securities.
Fair valuation of a debt security will be based on the consideration of all
available information, including, but not limited to, the following:
1) the fundamental business data relating to the issuer;
2) an evaluation of the forces which influence the market in
which these securities are purchased and sold;
3) the type, size and cost of security;
4) the financial statements of the issuer;
5) the credit quality and cash flow of the issuer, based on the
sub-advisor's or external analysis;
6) the information as to any transactions in or offers for the
security;
7) the price and extent of public trading in similar securities
(or equity securities) of the issuer/borrower, or comparable
companies;
8) the coupon payments;
9) the quality, value and salability of collateral, if any,
securing the security;
10) the business prospects of the issuer, including any ability to
obtain money or resources from a parent or affiliate and an
assessment of the issuer's management (for corporate debt
only);
11) the prospects for the issuer's industry, and multiples (of
earnings and/or cash flows) being paid for similar businesses
in that industry (for corporate debt only); and
12) other relevant factors.
Fair valuation of an equity security will be based on the consideration of all
available information, including, but not limited to, the following:
1) the type of security;
2) the size of the holding;
3) the initial cost of the security;
4) transactions in comparable securities;
5) price quotes from dealers and/or pricing services;
6) relationships among various securities;
7) information obtained by contacting the issuer, analysts, or
the appropriate stock exchange;
8) an analysis of the issuer's financial statements; and
9) the existence of merger proposals or tender offers that might
affect the value of the security.
Page 16
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST SSI STRATEGIC CONVERTIBLE SECURITIES ETF (FCVT)
APRIL 30, 2016 (UNAUDITED)
The Fund is subject to fair value accounting standards that define fair value,
establish the framework for measuring fair value and provide a three-level
hierarchy for fair valuation based upon the inputs to the valuation as of the
measurement date. The three levels of the fair value hierarchy are as follows:
o Level 1 - Level 1 inputs are quoted prices in active markets for
identical investments. An active market is a market in which
transactions for the investment occur with sufficient frequency and
volume to provide pricing information on an ongoing basis.
o Level 2 - Level 2 inputs are observable inputs, either directly or
indirectly, and include the following:
o Quoted prices for similar investments in active markets.
o Quoted prices for identical or similar investments in markets
that are non-active. A non-active market is a market where
there are few transactions for the investment, the prices are
not current, or price quotations vary substantially either
over time or among market makers, or in which little
information is released publicly.
o Inputs other than quoted prices that are observable for the
investment (for example, interest rates and yield curves
observable at commonly quoted intervals, volatilities,
prepayment speeds, loss severities, credit risks, and default
rates).
o Inputs that are derived principally from or corroborated by
observable market data by correlation or other means.
o Level 3 - Level 3 inputs are unobservable inputs. Unobservable
inputs may reflect the reporting entity's own assumptions about the
assumptions that market participants would use in pricing the
investment.
The inputs or methodologies used for valuing investments are not necessarily an
indication of the risk associated with investing in those investments. A summary
of the inputs used to value the Fund's investments as of April 30, 2016, is
included with the Fund's Portfolio of Investments.
B. SECURITIES TRANSACTIONS AND INVESTMENT INCOME
Securities transactions are recorded as of the trade date. Realized gains and
losses from securities transactions are recorded on the identified cost basis.
Dividend income is recorded on the ex-dividend date. Interest income, is
recorded daily on the accrual basis. Amortization of premiums and accretion of
discounts are recorded using the effective interest method.
C. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
Dividends from net investment income, if any, are declared and paid monthly, or
as the Board of Trustees may determine from time to time. Distributions of net
realized capital gains earned by the Fund, if any, will be distributed at least
annually.
Distributions from income and capital gains are determined in accordance with
income tax regulations, which may differ from U.S. GAAP. Certain capital
accounts in the financial statements are periodically adjusted for permanent
differences in order to reflect their tax character. These permanent differences
are primarily due to the varying treatment of income and gain/loss on portfolio
securities held by the Fund and has no impact on net assets or net asset value
per share. Temporary differences, which arise from recognizing certain items of
income, expense and gain/loss in different periods for financial statement and
tax purposes, will reverse at some time in the future.
D. INCOME TAXES
The Fund intends to qualify as a regulated investment company by complying with
the requirements under Subchapter M of the Internal Revenue Code of 1986, as
amended, which includes distributing substantially all of its net investment
income and net realized gains to shareholders. Accordingly, no provision has
been made for federal and state income taxes. However, due to the timing and
amount of distributions, the Fund may be subject to an excise tax of 4% of the
amount by which approximately 98% of the Fund's taxable income exceeds the
distributions from such taxable income for the calendar year.
The Fund is subject to accounting standards that establish a minimum threshold
for recognizing, and a system for measuring, the benefits of a tax position
taken or expected to be taken in a tax return. As of April 30, 2016, management
has evaluated the application of these standards to the Fund, and has determined
that no provision for income tax is required in the Fund's financial statements
for uncertain tax positions.
E. EXPENSES
Expenses, other than the investment advisory fee and other excluded expenses,
are paid by the Advisor (See Note 3).
3. INVESTMENT ADVISORY FEE, AFFILIATED TRANSACTIONS AND OTHER FEE ARRANGEMENTS
First Trust, the investment advisor to the Fund, is a limited partnership with
one limited partner, Grace Partners of DuPage L.P., and one general partner, The
Charger Corporation. The Charger Corporation is an Illinois corporation
controlled by James A. Bowen, Chief Executive Officer of First Trust. First
Trust is responsible for supervising the selection and ongoing monitoring of the
securities in the Fund's portfolio, managing the Fund's business affairs and
providing certain administrative services necessary for the management of the
Fund.
Page 17
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST SSI STRATEGIC CONVERTIBLE SECURITIES ETF (FCVT)
APRIL 30, 2016 (UNAUDITED)
The Fund and First Trust have retained SSI Investment Management Inc. ("SSI" or
the "Sub-Advisor"), to serve as its investment sub-advisor. In this capacity,
SSI is responsible for the selection and on-going monitoring of the securities
in the Fund's investment portfolio. Pursuant to the Investment Management
Agreement between the Trust and the Advisor, First Trust will supervise SSI and
its management of the investment of the Fund's assets and will pay SSI for its
services as the Fund's sub-advisor. First Trust will also be 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. SSI
receives a sub-advisory fee from First Trust.
The Trust has multiple service agreements with Brown Brothers Harriman & Co.
("BBH"). Under the service agreements, BBH performs custodial, fund accounting,
certain administrative services, and transfer agency services for the Fund. As
custodian, BBH is responsible for custody of the Fund's assets. As fund
accountant and administrator, BBH is responsible for maintaining the books and
records of the Fund's securities and cash. As transfer agent, BBH is responsible
for maintaining shareholder records for the Fund.
Each Trustee who is not an officer or employee of First Trust, any sub-advisor
or any of their affiliates ("Independent Trustees") is paid a fixed annual
retainer that is allocated equally among each fund in the First Trust Fund
Complex. Prior to January 1, 2016, the fixed annual retainer was allocated pro
rata based on each fund's 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.
At a meeting on December 7, 2015, the Board of Trustees accepted Mr. Mark
Bradley's resignation from his position as the President and Chief Executive
Officer of the Fund, effective December 31, 2015. At the same meeting, the Board
of Trustees elected Mr. James Dykas, formerly Chief Financial Officer and
Treasurer of the Trust, to serve as the President and Chief Executive Officer
and Mr. Donald Swade, formerly an Assistant Treasurer of the Trust, to serve as
the Treasurer, Chief Financial Officer and Chief Accounting Officer of the
Trust.
4. PURCHASES AND SALES OF SECURITIES
For the period ended April 30, 2016, the cost of purchases and proceeds from
sales of investments, excluding short-term investments and in-kind transactions,
for the Fund were $6,226,665 and $1,256,457, respectively. For the period ended
April 30, 2016, the Fund had no in-kind transactions.
5. CREATIONS, REDEMPTIONS AND TRANSACTION FEES
Shares are created and redeemed by the Fund only in Creation Unit size
aggregations of 50,000 shares in transactions with broker-dealers or large
institutional investors that have entered into a participation agreement (an
"Authorized Participant"). In order to purchase Creation Units of the Fund, an
Authorized Participant must deposit (i) a designated portfolio of securities
determined by First Trust (the "Deposit Securities") and generally make or
receive a cash payment referred to as the "Cash Component," which is an amount
equal to the difference between the NAV of the Fund shares (per Creation Unit
aggregations) and the market value of the Deposit Securities, and/or (ii) cash
in lieu of all or a portion of the Deposit Securities. If the Cash Component is
a positive number (i.e., the NAV per Creation Unit Aggregation exceeds the
Deposit Amount), the creator will deliver the Cash Component. If the Cash
Component is a negative number (i.e., the NAV per Creation Unit Aggregation is
less than the Deposit Amount), the Authorized Participant will receive the Cash
Component. Authorized Participants purchasing Creation Units must pay to BBH, as
transfer agent, a creation transaction fee (the "Creation Transaction Fee")
regardless of the number of Creation Units purchased in the transaction. The
Creation Transaction Fee may vary and is based on the composition of the
securities included in the Fund's portfolio and the countries in which the
transactions are settled. The Creation Transaction fee is currently $500. The
price for each Creation Unit will equal the daily NAV per share times the number
of shares in a Creation Unit plus the fees described above and, if applicable,
any operational processing and brokerage costs, transfer fees or stamp taxes.
When the Fund permits an Authorized Participant to substitute cash or a
different security in lieu of depositing one or more of the requisite Deposit
Securities, the Authorized Participant may also be assessed an amount to cover
the cost of purchasing the Deposit Securities and/or disposing of the
substituted securities, including operational processing and brokerage costs,
transfer fees, stamp taxes, and part or all of the spread between the expected
bid and offer side of the market related to such Deposit Securities and/or
substitute securities.
Page 18
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST SSI STRATEGIC CONVERTIBLE SECURITIES ETF (FCVT)
APRIL 30, 2016 (UNAUDITED)
Authorized Participants redeeming Creation Units must pay to BBH, as transfer
agent, a redemption transaction fee (the "Redemption Transaction Fee"),
regardless of the number of Creation Units redeemed in the transaction. The
Redemption Transaction Fee may vary and is based on the composition of the
securities included in the Fund's portfolio and the countries in which the
transactions are settled. The Redemption Transaction Fee is currently $500. The
Fund reserves the right to affect redemptions in cash. An Authorized Participant
may request cash redemption in lieu of securities; however, the Fund may, in its
discretion, reject any such request.
6. DISTRIBUTION PLAN
The Board of Trustees adopted a Distribution and Service Plan pursuant to Rule
12b-1 under the 1940 Act. In accordance with the Rule 12b-1 plan, the Fund is
authorized to pay an amount up to 0.25% of its average daily net assets each
year to reimburse 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 March 31, 2017.
7. INDEMNIFICATION
The Trust, on behalf of the Fund, has a variety of indemnification obligations
under contracts with its service providers. The Trust's maximum exposure under
these arrangements is unknown. However, the Trust has not had prior claims or
losses pursuant to these contracts and expects the risk of loss to be remote.
8. SUBSEQUENT EVENTS
Management has evaluated the impact of all subsequent events to the Fund through
the date the financial statements were issued, and has determined there was the
following subsequent event:
On May 19, 2016, the Fund declared a distribution of $0.03 per share to
shareholders of record on May 24, 2016, payable May 31, 2016.
Page 19
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ADDITIONAL INFORMATION
--------------------------------------------------------------------------------
FIRST TRUST SSI STRATEGIC CONVERTIBLE SECURITIES ETF (FCVT)
APRIL 30, 2016 (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 will
be available (1) without charge, upon request, by calling (800) 988-5891; (2) on
the Fund's website located at http://www.ftportfolios.com; and (3) on the
Securities and Exchange Commission's ("SEC") website located at
http://www.sec.gov.
PORTFOLIO HOLDINGS
The Trust files its complete schedule of portfolio holdings with the SEC for the
first and third quarters of each fiscal year on Form N-Q. The Trust's 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
You could lose money by investing in the Fund. An investment in the Fund is not
a deposit of a bank and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other governmental agency. There can be no
assurance that the Fund's investment objective will be achieved.
BDC RISK. The Fund may invest in BDCs which may carry risks similar to those of
a private equity or venture capital fund. Investments in BDCs may be subject to
price volatility and lack of liquidity. Debt securities and preferred securities
issued by BDCs may be rated below investment grade (referred to as "junk"
bonds), including in the lowest possible rating category, or unrated. Shares of
BDCs are not redeemable at the option of the shareholder and they may trade in
the market at a discount to their net asset value. Moreover, a shareholder of a
BDC will indirectly bear its pro rata share of the fees and expenses incurred by
the BDC in which it invests, including advisory fees. The BDCs held by the Fund
may employ the use of leverage through borrowings or the issuance of preferred
stock. This leverage also subjects a BDC to increased risks, including the
likelihood of increased volatility and the possibility that a BDC's common share
income will fall if the dividend rate of the preferred shares or the interest
rate on any borrowings rises. The loss on a leveraged investment may far exceed
the principal amount invested. Moreover, the use of leverage may result in a BDC
having to liquidate holdings when it may not be advantageous to do so.
Investments in BDCs include risks associated with their holdings of smaller
issuers and private companies. A BDC may make investments with a larger amount
of risk of volatility and loss of principal than other investment options and
may also be highly speculative and aggressive. For example, BDCs may invest in
the debt of a company, which involves risk that the company may default on its
payments or declare bankruptcy, and many of the debt instruments in which a BDC
may invest will not be rated by a credit rating agency and may be below
investment grade quality (referred to as "junk" bonds). A BDC's investments are
generally less liquid than publicly traded securities and are subject to
restrictions on their resale. The illiquidity of a BDC's holdings may make it
difficult for the BDC to sell such investments if the need arises, and thus the
BDC may be unable to take advantage of market opportunities or it may be forced
to sell illiquid securities at a loss if it is required to raise cash for
operations. Some BDCs are listed and trade on an exchange and other BDCs are not
traded on an exchange and trade only in private transactions. BDCs that are not
traded on an exchange may be less liquid than those that are traded on an
exchange. An investment in BDCs may result in a complete loss of the investment.
CASH TRANSACTIONS RISK. The Fund will, under most circumstances, effect a
significant portion of creations and redemptions for cash, rather than in-kind
securities. As a result, an investment in the Fund may be less tax-efficient
than an investment in an ETF that effects its creations and redemptions 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.
CONVERTIBLE SECURITIES RISK. Convertible securities have characteristics of both
equity and debt securities and, as a result, are exposed to certain additional
risks. If a convertible security held by the Fund is called for redemption or
conversion, the Fund could be required to tender it for redemption, convert it
into the underlying equity security or sell it to a third party, which may have
an adverse effect on the Fund's ability to achieve its investment objective. The
market values of convertible securities tend to decline as interest rates
increase. However, a convertible security's market value also tends to reflect
the market price of the equity security of the issuing company, particularly
when the price of the equity security is greater than the convertible security's
conversion price (i.e., the predetermined price or exchange ratio at which the
convertible security can be converted or exchanged for the underlying equity
security). Convertible securities are also exposed to the risk that an issuer is
unable to meet its obligation to make dividend or principal payments when due as
a result of changing financial or market conditions. Convertible securities
generally offer lower interest or dividend yields than non-convertible debt
securities of similar credit quality because of their potential for capital
appreciation. Moreover, there can be no assurance that convertible securities
will provide current income prior to conversion because the issuers of the
convertible securities may default on their obligations.
Page 20
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ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST SSI STRATEGIC CONVERTIBLE SECURITIES ETF (FCVT)
APRIL 30, 2016 (UNAUDITED)
Mandatory convertible securities are a subset of convertible securities. The
conversion of such securities is not optional, and the conversion price at
maturity is based solely upon the market price of the underlying equity
security, which may be significantly less than par or the price (above or below
par) paid. Mandatory convertible securities generally are subject to a greater
risk of loss of value than securities convertible at the option of the holder.
Contingent convertible securities (which generally provide for conversion under
certain circumstances) are also a subset of convertible securities. They may
have some of the characteristics of high yield bonds (referred to as "junk"
bonds), while providing exposure to equity-like losses and volatility. Similar
to mandatory convertible securities (and unlike traditional convertible
securities), some contingent convertible securities provide for mandatory
conversion under certain circumstances. The mandatory conversion might be
automatically triggered, for instance, if a company fails to meet the minimum
amount of capital described in the security, the company's regulator makes a
determination that the security should convert or the company receives specified
levels of extraordinary public support. Additionally, contingent convertible
securities may contain features that limit an investor's ability to convert the
security into the underlying equity security unless certain conditions are met.
A typical feature may require that a security be convertible only when the sale
price of the underlying common stock exceeds the conversion price by a specified
percentage (e.g., the sale price of the common stock is greater than or equal to
130% of the conversion price) for a certain specified period of time (e.g., for
at least 20 days during a span of 30 consecutive days in a month), or upon the
occurrence of certain other specified conditions. Also, since the common stock
of the issuer may not pay a dividend, investors in these instruments could
experience a reduced income rate, potentially to zero, and conversion would
deepen the subordination of the investor, hence worsening standing in a
bankruptcy. Further, some contingent convertible securities have a set stock
conversion rate that would cause a reduction in value of the security if the
price of the stock is below the conversion price on the conversion date.
Additionally, some contingent convertible securities have characteristics
designed to absorb losses, where the liquidation value of the security may be
adjusted downward to below the original par value or written off entirely under
certain circumstances. The write-down of the security's par value may occur
automatically and would not entitle holders to institute bankruptcy proceedings
against the issuer. In addition, an automatic write-down could result in a
reduced income rate if the dividend or interest payment associated with the
security is based on the security's par value. Moreover, various contingent
convertible securities may contain features that limit an investor's ability to
convert the security unless certain conditions are met.
The values of certain synthetic convertible securities will respond differently
to market fluctuations than a traditional convertible security because such
synthetic convertibles are composed of two or more separate securities or
instruments, each with its own market value. In addition, if the value of the
underlying equity security or the level of the index involved in the convertible
component falls below the exercise price of the warrant or option, the warrant
or option may lose all value. Synthetic convertible securities created by other
parties generally have economic characteristics similar to those of a
traditional convertible security; however, the issuer of the synthetic
convertible security assumes the credit risk associated with the investment,
rather than the issuer of the underlying equity security into which the
instrument is convertible. Therefore, the Fund is subject to the credit risk
associated with the counterparty creating the synthetic convertible instrument.
Synthetic convertible securities may also be subject to additional liquidity
risk and to the risks associated with derivatives.
CREDIT RISK. An issuer of a security will be unable or unwilling to make
dividend, interest and/or principal payments when due and the related risk that
the value of a security may decline because of concerns about the issuer's
ability to make such payments. Credit risk may be heightened if the Fund invests
in "high yield" or "junk" securities; such securities involve greater risks than
investment grade debt securities with similar maturities, including the
possibility of dividend or interest deferral, default or bankruptcy, and are
regarded as predominantly speculative with respect to the issuer's capacity to
pay dividends or interest and repay principal.
CURRENCY RISK. The Fund may hold 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 investments 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.
DEBT SECURITIES RISK. An investment in the Fund involves risk associated with an
investment in debt securities including the risk that certain of the securities
in the Fund may not have the benefit of covenants that would prevent the issuer
from engaging in capital restructurings or borrowing transactions in connection
with corporate acquisitions, leveraged buyouts or restructurings. This
limitation could reduce the ability of the issuer to meet its payment
obligations and might result in increased credit risk. In addition, certain of
the securities may be redeemed or prepaid by the issuer, resulting in lower
interest payments received by the Fund and reduced distributions to
shareholders.
Page 21
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST SSI STRATEGIC CONVERTIBLE SECURITIES ETF (FCVT)
APRIL 30, 2016 (UNAUDITED)
DEPOSITARY RECEIPTS RISK. Depositary receipts may be less liquid than the
underlying shares in their primary trading market. Any distributions paid to the
holders of depositary receipts are usually subject to a fee charged by the
depositary. Holders of depositary receipts may have limited voting rights, and
investment restrictions in certain countries may adversely impact the value of
depositary receipts because such restrictions may limit the ability to convert
shares into depositary receipts and vice versa. Such restrictions may cause
shares of the underlying issuer to trade at a discount or premium to the market
price of the depositary receipts.
DERIVATIVES RISK. The use of swaps, options, futures contracts, forward
contracts and other derivatives can lead to losses because of adverse movements
in the price or value of the underlying asset, index or rate, which may be
magnified by certain features of the derivatives. These risks are heightened
when the Fund's portfolio managers use derivatives to enhance the Fund's return,
rather than solely to hedge (or offset) the risk of a position or security held
by the Fund.
EQUITY SECURITIES RISK. The Fund may hold equity securities in its portfolio
through direct investments in equity securities or upon conversion of a
convertible security. The value of the Fund's shares will fluctuate with changes
in the value of these equity securities. Equity securities prices fluctuate for
several reasons, including changes in investors' perceptions of the financial
condition of an issuer or the general condition of the relevant stock market,
such as the current market volatility, or when political or economic events
affecting the issuers occur. In addition, common stock prices may be
particularly sensitive to rising interest rates, as the cost of the capital
rises and borrowing costs increase.
ETNS RISK. ETNs are senior, unsecured, unsubordinated debt securities whose
returns are linked to the performance of a particular market benchmark or
strategy minus applicable fees. ETNs are subject to credit risk, and the value
of the ETN may drop due to a downgrade in the issuer's credit rating, despite
the underlying market benchmark or strategy remaining unchanged. The value of an
ETN may also be influenced by time to maturity, level of supply and demand for
the ETN, volatility and lack of liquidity in underlying assets, changes in the
applicable interest rates, changes in the issuer's credit rating and economic,
legal, political or geographic events that affect the referenced underlying
asset.
HIGH YIELD SECURITIES RISK. High yield securities, or "junk" bonds, are subject
to greater market fluctuations and risk of loss than securities with higher
ratings and, therefore, may be highly speculative. These securities are issued
by companies that may have limited operating history, narrowly focused
operations, and/or other impediments to the timely payment of periodic interest
and principal at maturity. If the economy slows down or dips into recession, the
issuers of high yield securities may not have sufficient resources to continue
making timely payment of periodic interest and principal at maturity. The market
for high yield securities is generally smaller and less liquid than that for
investment grade securities. High yield securities are generally not listed on a
national securities exchange but trade in the over-the-counter markets. Due to
the smaller, less liquid market for high yield securities, the bid-offer spread
on such securities is generally greater than it is for investment grade
securities and the purchase or sale of such securities may take longer to
complete. In general, high yield securities may have a greater risk of default
than other types of securities.
ILLIQUID SECURITIES RISK. Some of the securities held by the Fund may be
illiquid. Illiquid securities involve the risk that the securities will not be
able to be sold at the time desired by the Fund or at prices approximately the
value at which the Fund is carrying the securities on its books.
INCOME RISK. Income from the Fund's fixed income investments could decline
during periods of falling interest rates.
INTEREST RATE RISK. Interest rate risk is the risk that the value of the fixed
income securities in the Fund will decline because of rising market interest
rates. Interest rate risk is generally lower for shorter term investments and
higher for longer term investments.
MANAGEMENT RISK. The Fund is subject to management risk because it is an
actively managed portfolio. In managing the Fund's investment portfolio, the
sub-advisor of the Fund will apply investment techniques and risk analyses that
may not have the desired result. There can be no guarantee that the Fund will
meet its investment objective.
MARKET RISK. Market risk is the risk that a particular security owned by the
Fund or shares of the Fund in general, may fall in value. Securities are subject
to market fluctuations caused by such factors as economic, political, regulatory
or market developments, changes in interest rates and perceived trends in
securities prices. Overall securities values could decline generally or could
underperform other investments.
NEW FUND RISK. The Fund currently has fewer assets than larger funds, and like
other relatively new funds, large inflows and outflows may impact the Fund's
market exposure for limited periods of time. This impact may be positive or
negative, depending on the direction of market movement during the period
affected. Also, during the initial invest-up period, the Fund may depart from
its principal investment strategies and invest a larger amount or all of its
assets in cash equivalents or it may hold cash.
Page 22
--------------------------------------------------------------------------------
ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST SSI STRATEGIC CONVERTIBLE SECURITIES ETF (FCVT)
APRIL 30, 2016 (UNAUDITED)
NON-DIVERSIFICATION RISK. The Fund is classified as "non-diversified" under the
1940 Act. As a result, the Fund is only limited as to the percentage of its
assets which may be invested in the securities of any one issuer by the
diversification requirements imposed by the Internal Revenue Code of 1986, as
amended. The Fund may invest a relatively high percentage of its assets in a
limited number of issuers. As a result, the Fund may be more susceptible to a
single adverse economic or regulatory occurrence affecting one or more of these
issuers, experience increased volatility and be highly concentrated in certain
issuers.
NON-U.S. SECURITIES RISK. Non-U.S. securities are subject to higher volatility
than securities of domestic issuers due to possible adverse political, social or
economic developments, restrictions on foreign investment or exchange of
securities, lack of liquidity, currency exchange rates, excessive taxation,
government seizure of assets, different legal or accounting standards, and less
government supervision and regulation of exchanges in foreign countries.
PREFERRED SECURITIES RISK. Preferred securities combine some of the
characteristics of both common stocks and bonds. Preferred securities are
typically subordinated to bonds and other debt instruments in a company's
capital structure in terms of priority to corporate income and therefore will be
subject to greater credit risk than those debt instruments. Preferred securities
are also subject to credit risk, interest rate risk and income risk.
RESTRICTED SECURITIES RISK. Investments in restricted securities could have the
effect of increasing the amount of the Fund's assets invested in illiquid
securities if qualified institutional buyers are unwilling to purchase these
securities. Illiquid and restricted securities may be difficult to dispose of at
the price at which the Fund has valued the securities and at the times when the
Fund believes it is desirable to do so. The market price of illiquid and
restricted securities generally is more volatile than that of more liquid
securities, which may adversely affect the price that the Fund recovers upon the
sale of such securities. Investment of the Fund's assets in illiquid and
restricted securities may restrict the Fund's ability to take advantage of
market opportunities.
WARRANTS RISK. The prices of warrants, which entitle the holder to purchase
equity securities at specific prices for a certain period of time, do not
necessarily move parallel to the prices of the underlying securities and likely
fluctuate more than the prices of the underlying securities. Warrants have no
voting rights, receive no dividends, and have no rights with respect to the
assets of the issuer.
ADVISORY AND SUB-ADVISORY AGREEMENTS
BOARD CONSIDERATIONS REGARDING APPROVAL OF INVESTMENT MANAGEMENT AND INVESTMENT
SUB-ADVISORY AGREEMENTS
The Board of Trustees of the First Trust Exchange-Traded Fund IV (the "Trust"),
including the Independent Trustees, unanimously approved the Investment
Management Agreement (the "Advisory Agreement") with First Trust Advisors L.P.
("First Trust" or the "Advisor") on behalf of the First Trust SSI Strategic
Convertible Securities ETF (the "Fund") and the Investment Sub-Advisory
Agreement (the "Sub-Advisory Agreement" and together with the Advisory
Agreement, the "Agreements") among the Trust, on behalf of the Fund, the Advisor
and SSI Investment Management Inc. (the "Sub-Advisor"), for an initial two-year
term at a meeting held on January 21, 2015. The Board of Trustees determined
that the Agreements are in the best interests of the Fund in light of the extent
and quality of services expected to be provided and such other matters as the
Board considered to be relevant in the exercise of its reasonable business
judgment.
To reach this determination, the Board considered its duties under the
Investment Company Act of 1940, as amended (the "1940 Act"), as well as under
the general principles of state law in reviewing and approving advisory
contracts; the requirements of the 1940 Act in such matters; the fiduciary duty
of investment advisors with respect to advisory agreements and compensation; the
standards used by courts in determining whether investment company boards have
fulfilled their duties; and the factors to be considered by the Board in voting
on such agreements. To assist the Board in its evaluation of the Agreements, the
Independent Trustees received a separate report from each of the Advisor and the
Sub-Advisor in advance of the Board meeting responding to a request for
information provided on behalf of the Independent Trustees that, among other
things, outlined the services to be provided by the Advisor and the Sub-Advisor
to the Fund (including the relevant personnel responsible for these services and
their experience); the proposed unitary fee structure for the Fund as compared
to fees charged by advisors to other comparable exchange-traded funds ("ETFs"),
and as compared to fees charged to other ETFs managed by First Trust; the
estimated expenses to be incurred in providing services to the Fund and the
potential for economies of scale, if any; financial data on the Advisor and the
Sub-Advisor; fall out benefits to First Trust and its affiliate, First Trust
Portfolios L.P. ("FTP"); and a summary of the Advisor's compliance program. The
Independent Trustees also met separately with their independent legal counsel to
discuss the information provided by the Advisor and the Sub-Advisor. The Board
applied its business judgment to determine whether the arrangements between the
Trust and First Trust and among the Trust, the Advisor and the Sub-Advisor are
reasonable business arrangements from the Fund's perspective as well as from the
perspective of shareholders.
In evaluating whether to approve the Agreements for the Fund, the Board
considered the nature, extent and quality of services to be provided by the
Advisor and the Sub-Advisor under the Agreements and considered that the
Advisor's employees provide management services to other ETFs and to other
investment companies in the First Trust fund complex with diligence and care.
Page 23
--------------------------------------------------------------------------------
ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST SSI STRATEGIC CONVERTIBLE SECURITIES ETF (FCVT)
APRIL 30, 2016 (UNAUDITED)
The Board considered that the Fund is not designed to track the performance of
an index and will employ an advisor/sub-advisor management structure. With
respect to the Advisory Agreement, the Board considered that First Trust will be
responsible for the overall management and administration of the Fund and
reviewed the services to be provided by First Trust to the Fund, including the
oversight of the Sub-Advisor. The Board considered the compliance program that
had been developed by First Trust and considered it includes a robust program
for monitoring the Sub-Advisor's compliance with the 1940 Act and the Fund's
investment objective and policies. It also considered the efforts expended by
First Trust in organizing the Trust and in arranging for other entities to
provide services to the Fund. With respect to the Sub-Advisory Agreement, the
Board noted the background and experience of the Sub-Advisor's portfolio
management team and the Sub-Advisor's investment style. At the meeting, the
Trustees received a presentation from five representatives of the Sub-Advisor,
including the Chief Executive Officer, the President, the Chief Investment
Officer and a portfolio manager, and were able to ask questions about the
Sub-Advisor and the Sub-Advisor's proposed investment strategies for the Fund.
The Sub-Advisor's representatives stated that the Sub-Advisor provides
sub-advisory services to a registered investment company and thus has
familiarity with the requirements of the 1940 Act. Since the Fund had yet to
commence investment operations, the Board could not consider the historical
investment performance of the Fund. In light of the information presented and
the considerations made, the Board concluded that the nature, extent and quality
of services to be provided to the Fund by the Advisor and the Sub-Advisor under
the Agreements are expected to be satisfactory.
The Board reviewed information regarding the proposed unitary fee structure for
the Fund. The Board noted that under the Fund's unitary fee arrangement, the
Fund would pay First Trust a fee equal to an annual rate of 0.95% of its average
daily net assets. The Board also noted that, from the unitary fee, First Trust
would pay the Sub-Advisor a sub-advisory fee equal to one half of any remaining
monthly unitary fee paid to the Advisor after the Fund's average expenses
accrued during the most recent twelve months are subtracted from the unitary fee
for that month. The Board also noted that First Trust would be responsible for
the Fund's ordinary operating expenses, including the cost of transfer agency,
custody, fund administration, legal, audit and other services, and license fees,
if any, but excluding the fee payments under the Advisory Agreement, interest,
taxes, brokerage commissions and other expenses connected with the execution of
portfolio transactions such as dividend and distribution expenses from
securities sold short and/or other investment-related costs, distribution and
service fees pursuant to a Rule 12b-1 plan, if any, and extraordinary expenses.
The Board reviewed information provided by Management Practice Inc. ("MPI"), an
independent source, as well as by First Trust, for the Fund on the advisory fees
and expense ratios of other comparable ETFs, but also noted First Trust's
statements about the limitations on the comparability of the peer groups with
the Fund, including that not all of the ETFs in the MPI peer group are actively
managed. The Board also considered supplemental information provided by First
Trust on advisory fees and expense ratios of all actively managed ETFs as of a
recent date. The Board noted that the Fund's expense ratio under its proposed
unitary fee was above the median expense ratio of its MPI peer group. The Board
compared the Fund's unitary fee to the total expense ratios (after fee waivers
and/or expense reimbursements, if any) of other First Trust ETFs, including
First Trust ETFs that pay a unitary fee, and to the advisory fees charged by
First Trust to other advisory clients, noting the Advisor's statement that it
provides services to First Trust Tactical High Yield ETF and First Trust Senior
Loan Fund, both of which are actively managed ETFs that invest in below grade
securities, the former of which also pays an annual unitary fee of 0.95%. In
light of the information considered and the nature, extent and quality of
services expected to be provided to the Fund under the Agreements, the Board
determined that the proposed unitary fee for the Fund was fair and reasonable.
The Board noted that the proposed unitary fee for the Fund was not structured to
pass the benefits of any economies of scale on to shareholders as the Fund's
assets grow. The Board noted that any reduction in fixed costs associated with
the management of the Fund would benefit the Advisor and the Sub-Advisor, but
that a unitary fee structure provides a level of certainty in expenses for the
Fund. The Board noted that First Trust has continued to invest in personnel and
infrastructure for the First Trust fund complex. The Board took the costs to be
borne by First Trust in connection with its services to be performed for the
Fund under the Advisory Agreement into consideration and noted that First Trust
was unable to estimate the profitability of the Advisory Agreement to First
Trust. The Board also considered that the Sub-Advisor was unable to estimate the
profitability of the Sub-Advisory Agreement to the Sub-Advisor and that the
Sub-Advisor would be paid by the Advisor from the unitary fee. The Board
considered that the sub-advisory fee rate was negotiated at arm's length between
the Advisor and the Sub-Advisor, an unaffiliated third party, and the fee is a
net fee payable after the Fund's ordinary operating expenses are paid. The Board
considered fall-out benefits described by the Advisor that may be realized from
its and FTP's relationship with the Fund. The Board considered fall out benefits
described by the Sub-Adviser that may be realized from its relationship with the
Fund, including from soft-dollar arrangements, and the Advisor's proposal that
the Sub-Advisor also serve as sub-advisor to a new closed-end fund being
organized by the Advisor. The Board also considered the Advisor's statement that
it or an affiliate may make an investment in the Sub-Advisor.
Based on all the information considered and the conclusions reached, the Board,
including the Independent Trustees, unanimously determined that the terms of the
Agreements are fair and reasonable and that the approval of the Agreements are
in the best interests of the Fund. No single factor was determinative in the
Board's analysis.
Page 24
FIRST TRUST
First Trust Exchange-Traded Fund IV
INVESTMENT ADVISOR
First Trust Advisors L.P.
120 E. Liberty Drive, Suite 400
Wheaton, IL 60187
INVESTMENT SUB-ADVISOR
SSI Investment Management Inc.
9440 Santa Monica Blvd, 8th Floor
Beverly Hills, California 90210
ADMINISTRATOR, CUSTODIAN
FUND ACCOUNTANT &
TRANSFER AGENT
Brown Brothers Harriman & Co.
50 Post Office Square
Boston, MA 02110
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
111 S. Wacker Drive
Chicago, IL 60606
LEGAL COUNSEL
Chapman and Cutler LLP
111 W. Monroe Street
Chicago, IL 60603
[BLANK BACK COVER]
FIRST TRUST
First Trust Exchange-Traded Fund IV
--------------------------------------------------------------------------------
First Trust Heitman Global Prime Real Estate ETF (PRME)
Semi-Annual Report
For the Period
November 11, 2015
(Commencement of Operations)
through April 30, 2016
--------------------------------------------------------------------------------
TABLE OF CONTENTS
--------------------------------------------------------------------------------
FIRST TRUST HEITMAN GLOBAL PRIME REAL ESTATE ETF (PRME)
SEMI-ANNUAL REPORT
APRIL 30, 2016
Shareholder Letter........................................................... 1
Fund Performance Overview.................................................... 2
Portfolio Management......................................................... 4
Understanding Your Fund Expenses............................................. 5
Portfolio of Investments..................................................... 6
Statement of Assets and Liabilities.......................................... 8
Statement of Operations...................................................... 9
Statement of Changes in Net Assets........................................... 10
Financial Highlights......................................................... 11
Notes to Financial Statements................................................ 12
Additional Information....................................................... 17
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning of
the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934,
as amended. Forward-looking statements include statements regarding the goals,
beliefs, plans or current expectations of First Trust Advisors L.P. ("First
Trust" or the "Advisor") and/or Heitman Real Estate Securities LLC ("Heitman" or
the "Sub-Advisor") and their respective representatives, taking into account the
information currently available to them. Forward-looking statements include all
statements that do not relate solely to current or historical fact. For example,
forward-looking statements include the use of words such as "anticipate,"
"estimate," "intend," "expect," "believe," "plan," "may," "should," "would" or
other words that convey uncertainty of future events or outcomes.
Forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
the series of First Trust Exchange-Traded Fund IV (the "Trust") described in
this report (First Trust Heitman Global Prime Real Estate ETF; hereinafter
referred to as the "Fund") to be materially different from any future results,
performance or achievements expressed or implied by the forward-looking
statements. When evaluating the information included in this report, you are
cautioned not to place undue reliance on these forward-looking statements, which
reflect the judgment of the Advisor and/or Sub-Advisor and their respective
representatives only as of the date hereof. We undertake no obligation to
publicly revise or update these forward-looking statements to reflect events and
circumstances that arise after the date hereof.
PERFORMANCE AND RISK DISCLOSURE
There is no assurance that the Fund will achieve its investment objective. The
Fund is subject to market risk, which is the possibility that the market values
of securities owned by the Fund will decline and that the value of the Fund
shares may therefore be less than what you paid for them. Accordingly, you can
lose money investing in the Fund. See "Risk Considerations" in the Additional
Information section of this report for a discussion of certain other risks of
investing in the Fund.
Performance data quoted represents past performance, which is no guarantee of
future results, and current performance may be lower or higher than the figures
shown. For the most recent month-end performance figures, please visit
http://www.ftportfolios.com or speak with your financial advisor. Investment
returns, net asset value and share price will fluctuate and Fund shares, when
sold, may be worth more or less than their original cost.
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. 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 the personnel of
the Advisor and/or Sub-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.
--------------------------------------------------------------------------------
SHAREHOLDER LETTER
--------------------------------------------------------------------------------
FIRST TRUST HEITMAN GLOBAL PRIME REAL ESTATE ETF (PRME)
SEMI-ANNUAL LETTER FROM THE CHAIRMAN AND CEO
APRIL 30, 2016
Dear Shareholders:
Thank you for your investment in First Trust Heitman Global Prime Real Estate
ETF (the "Fund").
First Trust Advisors L.P. ("First Trust") is pleased to provide you with the
semi-annual report which contains detailed information about your investment
since the Fund's inception date of November 11, 2015. Additionally, First Trust
compiled the Fund's financial statements for you to review. We encourage you to
read this report and discuss it with your financial advisor.
While markets were up and down during 2015, we believe there are three important
things to remember. First, the U.S. economy grew, despite the massive decline in
oil prices, and second, the tapering that began in 2014 by the Federal Reserve
(the "Fed") did not stop growth in the U.S. economy. Finally, the
long-anticipated rate hike by the Fed in December had little effect on the money
supply, and the stock market was not shocked by the hike. Early in 2016, many
investors were concerned that the volatility we saw in the market in 2015 would
continue, and it did. From December 31, 2015 through February 11, 2016, the S&P
500(R) Index declined by 10.27%. Since then, the market has made a steady
comeback, and as of April 30, 2016, the S&P 500(R) Index was up 13.39%.
First Trust believes that having a long-term investment horizon and being
invested in quality products can help you reach your goals, despite how the
market behaves. We have always maintained perspective about the markets and
believe investors should as well. We will continue to strive to provide quality
investments each and every day, which has been one of the hallmarks of our firm
since its inception 25 years ago.
Thank you for giving First Trust the opportunity to be a part of your investment
plan. We value our relationship with you and will continue to focus on helping
investors like you reach your financial goals.
Sincerely,
/s/ James A. Bowen
James A. Bowen
Chairman of the Board of Trustees
Chief Executive Officer of First Trust Advisors L.P.
Page 1
--------------------------------------------------------------------------------
FUND PERFORMANCE OVERVIEW (UNAUDITED)
--------------------------------------------------------------------------------
FIRST TRUST HEITMAN GLOBAL PRIME REAL ESTATE ETF (PRME)
First Trust Heitman Global Prime Real Estate ETF (the "Fund") is an actively
managed exchange-traded fund that seeks to deliver long-term total return by
investing, under normal market conditions, at least 80% of its assets in U.S.
and non-U.S. exchange-traded real estate securities, which includes real estate
investment trusts ("REITs"), real estate operating companies ("REOCs") and
common stocks or depositary receipts of companies primarily engaged in the real
estate industry. Accordingly, the Fund is concentrated in REITs and/or real
estate management and development companies (including REOCs), sub-industries of
the real estate industry group. The Fund will not invest directly in real
estate. Shares of the Fund are listed on the NYSE Arca, Inc. under the ticker
symbol "PRME."
--------------------------------------------------------------------------------
PERFORMANCE
--------------------------------------------------------------------------------
CUMULATIVE
TOTAL RETURNS
Inception (11/11/15)
to 4/30/16
FUND PERFORMANCE
NAV 4.74%
Market Price 4.74%
INDEX PERFORMANCE
FTSE EPRA/NAREIT Developed Index 7.94%
--------------------------------------------------------------------------------
Total returns for the period since inception are calculated from the inception
date of the Fund. "Cumulative Total Returns" represent the total change in value
of an investment over the period indicated.
The Fund's per share net asset value ("NAV") is the value of one share of the
Fund and is computed by dividing the value of all assets of the Fund (including
accrued interest and dividends), less all liabilities (including accrued
expenses and dividends declared but unpaid), by the total number of outstanding
shares. The price used to calculate market return ("Market Price") is determined
by using the midpoint between the highest bid and the lowest offer on the stock
exchange on which shares of the Fund are listed for trading as of the time that
the Fund's NAV is calculated. Since shares of the Fund did not trade in the
secondary market until after its inception, for the period from inception to the
first day of secondary market trading in shares of the Fund, the NAV of the Fund
is used as a proxy for the secondary market trading price to calculate market
returns. NAV and market price returns assume that all distributions have been
reinvested in the Fund at NAV and Market Price, respectively.
An index is a statistical composite that tracks a specified financial market or
sector. Unlike the Fund, the index does not actually hold a portfolio of
securities and therefore does not incur the expenses incurred by the Fund. These
expenses negatively impact the performance of the Fund. Also, market returns do
not include brokerage commissions that may be payable on secondary market
transactions. If brokerage commissions were included, market returns would be
lower. The total returns presented reflect the reinvestment of dividends on
securities in the index. The returns presented do not reflect the deduction of
taxes that a shareholder would pay on Fund distributions or the redemption or
sale of Fund shares. The investment return and principal value of shares of the
Fund will vary with changes in market conditions. Shares of the Fund may be
worth more or less than their original cost when they are redeemed or sold in
the market. The Fund's past performance is no guarantee of future performance.
Page 2
--------------------------------------------------------------------------------
FUND PERFORMANCE OVERVIEW (UNAUDITED)
--------------------------------------------------------------------------------
FIRST TRUST HEITMAN GLOBAL PRIME REAL ESTATE ETF (PRME)
-----------------------------------------------------------
% OF TOTAL
SUB-INDUSTRY CLASSIFICATION INVESTMENTS
-----------------------------------------------------------
Retail REITs 27.0%
Office REITs 23.8
Diversified REITs 14.5
Real Estate Operating Companies 12.9
Industrial REITs 9.3
Diversified Real Estate Activities 5.5
Residential REITs 4.9
Hotel & Resort REITs 2.1
------
Total 100.0%
======
-----------------------------------------------------------
% OF TOTAL
TOP 10 HOLDINGS INVESTMENTS
-----------------------------------------------------------
Rexford Industrial Realty, Inc. 5.2%
AvalonBay Communities, Inc. 4.9
SL Green Realty Corp. 4.6
Unibail-Rodamco SE 4.6
Federal Realty Investment Trust 4.3
General Growth Properties, Inc. 4.1
Mitsui Fudosan Co. Ltd. 3.7
Gecina S.A. 3.4
Vornado Realty Trust 3.4
Derwent London PLC 3.2
------
Total 41.4%
======
PERFORMANCE OF A $10,000 INITIAL INVESTMENT
NOVEMBER 11, 2015 - APRIL 30, 2016
First Trust
Heitman Global Prime FTSE EPRA/NAREIT
Real Estate ETF Developed Index
11/11/15 $10,000 $10,000
4/30/16 10,474 10,794
Performance figures assume reinvestment of all distributions and do not reflect
the deduction of taxes that a shareholder would pay on Fund distributions or the
redemption or sale of Fund shares. An index is a statistical composite that
tracks a specified financial market or sector. Unlike the Fund, the index does
not actually hold a portfolio of securities and therefore does not incur the
expenses incurred by the Fund. These expenses negatively impact the performance
of the Fund. The Fund's past performance does not predict future performance.
FREQUENCY DISTRIBUTION OF DISCOUNTS AND PREMIUMS
BID/ASK MIDPOINT VS. NAV THROUGH APRIL 30, 2016
The following Frequency Distribution of Discounts and Premiums charts are
provided to show the frequency at which the bid/ask midpoint price for the Fund
was at a discount or premium to the daily NAV. The following tables are for
comparative purposes only and represent the period November 12, 2015
(commencement of trading) through April 30, 2016. Shareholders may pay more than
NAV when they buy Fund shares and receive less than NAV when they sell those
shares because shares are bought and sold at current market price. Data
presented represents past performance and cannot be used to predict future
results.
--------------------------------------------------------------------------------
NUMBER OF DAYS BID/ASK MIDPOINT AT/ABOVE NAV
--------------------------------------------------------------------------------
FOR THE PERIOD 0.00%-0.49% 0.50%-0.99% 1.00%-1.99% >=2.00%
11/12/15 - 4/30/16 46 3 0 0
--------------------------------------------------------------------------------
NUMBER OF DAYS BID/ASK MIDPOINT BELOW NAV
--------------------------------------------------------------------------------
FOR THE PERIOD 0.00%-0.49% 0.50%-0.99% 1.00%-1.99% >=2.00%
11/12/15 - 4/30/16 81 6 1 0
Page 3
--------------------------------------------------------------------------------
PORTFOLIO MANAGEMENT
--------------------------------------------------------------------------------
FIRST TRUST HEITMAN GLOBAL PRIME REAL ESTATE ETF (PRME)
APRIL 30, 2016 (UNAUDITED)
INVESTMENT MANAGER
First Trust Advisors L.P., 120 E. Liberty Drive, Wheaton, Illinois 60187, is the
investment advisor to the First Trust Heitman Global Prime Real Estate ETF (the
"Fund") Heitman Real Estate Securities LLC, a registered investment advisor (the
"Sub-Advisor") located in Chicago, Illinois, serves as the sub-advisor to the
Fund with responsibility for North America. Heitman International Real Estate
Securities HK Limited and Heitman International Real Estate Securities GmbH,
each a registered investment advisor located in Hong Kong and Germany,
respectively, and each an affiliate of the Sub-Advisor, serve as sub-sub
advisors to the Fund with responsibility for investments in the Asia-Pacific
region and Europe.
PORTFOLIO MANAGEMENT TEAM
JERRY EHLINGER - MANAGING DIRECTOR AND LEAD PORTFOLIO MANAGER FOR NORTH AMERICAN
PUBLIC REAL ESTATE SECURITIES
MARK ABRAMSON - MANAGING DIRECTOR AND LEAD PORTFOLIO MANAGER FOR EUROPEAN PUBLIC
REAL ESTATE SECURITIES
JOHN WHITE - MANAGING DIRECTOR AND LEAD PORTFOLIO MANAGER FOR ASIA-PACIFIC
PUBLIC REAL ESTATE SECURITIES
Page 4
FIRST TRUST HEITMAN GLOBAL PRIME REAL ESTATE ETF (PRME)
UNDERSTANDING YOUR FUND EXPENSES
APRIL 30, 2016 (UNAUDITED)
As a shareholder of First Trust Heitman Global Prime Real Estate ETF (the
"Fund") you incur two types of costs: (1) transaction costs; and (2) ongoing
costs, including management fees, distribution and/or service fees, if any, and
other Fund expenses. This Example is intended to help you understand your
ongoing costs of investing in the Fund and to compare these costs with the
ongoing costs of investing in other funds.
The Example is based on an investment of $1,000 invested at the beginning of the
period (or since inception) and held through the six-month (or shorter) period
ended April 30, 2016.
ACTUAL EXPENSES
The first line in the following table provides information about actual account
values and actual expenses. You may use the information in this line, together
with the amount you invested, to estimate the expenses that you paid over the
period. Simply divide your account value by $1,000 (for example, an $8,600
account value divided by $1,000 = 8.6), then multiply the result by the number
in the first line under the heading entitled "Expenses Paid During the Period"
to estimate the expenses you paid on your account during this six-month period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second line in the following table provides information about hypothetical
account values and hypothetical expenses based on the Fund's actual expense
ratio and an assumed rate of return of 5% per year before expenses, which is not
the Fund's actual return. The hypothetical account values and expenses may not
be used to estimate the actual ending account balance or expenses you paid for
the period. You may use this information to compare the ongoing costs of
investing in the Fund and other funds. To do so, compare this 5% hypothetical
example with the 5% hypothetical examples that appear in the shareholder reports
of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs such as brokerage
commissions. Therefore, the second line in the table is useful in comparing
ongoing costs only, and will not help you determine the relative total costs of
owning different funds. In addition, if these transactional costs were included,
your costs would have been higher.
----------------------------------------------------------------------------------------------------------------------------------
ANNUALIZED EXPENSES PAID
EXPENSE RATIO DURING THE PERIOD
BEGINNING ENDING BASED ON THE NOVEMBER 11, 2015 (a)
ACCOUNT VALUE ACCOUNT VALUE NUMBER OF DAYS TO
NOVEMBER 11, 2015 (a) APRIL 30, 2016 IN THE PERIOD APRIL 30, 2016 (b)
----------------------------------------------------------------------------------------------------------------------------------
FIRST TRUST HEITMAN GLOBAL PRIME REAL ESTATE ETF (PRME)
Actual $1,000.00 $1,047.40 0.95% $4.57
Hypothetical (5% return before expenses) $1,000.00 $1,020.14 0.95% $4.77
(a) Inception date.
(b) Actual expenses are equal to the annualized expense ratio as indicated in
the table, multiplied by the average account value over the period
(November 11, 2015 through April 30, 2016), and multiplied by 172/366.
Hypothetical expenses are assumed for the most recent one-half year
period.
Page 5
FIRST TRUST HEITMAN GLOBAL PRIME REAL ESTATE ETF (PRME)
PORTFOLIO OF INVESTMENTS
APRIL 30, 2016 (UNAUDITED)
SHARES DESCRIPTION VALUE
---------------- --------------------------------------------------------------------------------------------- ---------------
REAL ESTATE INVESTMENT TRUSTS (a) - 77.7%
AUSTRALIA - 4.1%
8,153 Goodman Group................................................................................ $ 42,712
10,747 GPT Group.................................................................................... 41,102
17,413 Vicinity Centres............................................................................. 43,957
---------------
127,771
---------------
FRANCE - 7.0%
535 Fonciere Des Regions......................................................................... 50,625
360 Unibail-Rodamco SE........................................................................... 96,459
---------------
147,084
---------------
GERMANY - 3.1%
4,679 alstria office REIT-AG....................................................................... 65,632
---------------
JAPAN - 11.7%
10 Global One Real Estate Investment Corp....................................................... 42,199
36 GLP J-Reit................................................................................... 44,459
29 Hulic Reit Inc............................................................................... 50,723
33 Mori Hills REIT Investment Corp.............................................................. 50,120
9 Nippon Building Fund, Inc.................................................................... 58,027
---------------
245,528
---------------
SINGAPORE - 7.0%
38,057 CapitaLand Mall Trust........................................................................ 58,577
38,193 Mapletree Commercial Trust................................................................... 42,599
59,553 Mapletree Greater China Commercial Trust..................................................... 45,611
---------------
146,787
---------------
SPAIN - 2.0%
3,705 Merlin Properties Socimi S.A................................................................. 43,060
---------------
UNITED KINGDOM - 30.5%
4,613 British Land (The) Co., PLC.................................................................. 48,462
1,410 Derwent London PLC........................................................................... 67,658
5,793 Hammerson PLC................................................................................ 49,475
3,744 Shaftesbury PLC.............................................................................. 49,782
---------------
215,377
---------------
UNITED STATES - 25.9%
573 AvalonBay Communities, Inc................................................................... 101,301
1,740 Chesapeake Lodging Trust..................................................................... 42,856
586 Federal Realty Investment Trust.............................................................. 89,119
3,066 General Growth Properties, Inc............................................................... 85,940
4,623 New York REIT, Inc........................................................................... 45,444
5,743 Rexford Industrial Realty, Inc............................................................... 107,796
921 SL Green Realty Corp......................................................................... 96,778
737 Vornado Realty Trust......................................................................... 70,553
---------------
639,787
---------------
TOTAL REAL ESTATE INVESTMENT TRUSTS.......................................................... 1,631,026
(Cost $1,522,785) ---------------
Page 6 See Notes to Financial Statements
FIRST TRUST HEITMAN GLOBAL PRIME REAL ESTATE ETF (PRME)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2016 (UNAUDITED)
SHARES DESCRIPTION VALUE
---------------- --------------------------------------------------------------------------------------------- ---------------
COMMON STOCKS (a) - 21.7%
CANADA - 1.9%
2,436 First Capital Realty, Inc.................................................................... $ 39,432
---------------
FRANCE - 3.4%
497 Gecina S.A................................................................................... 71,876
---------------
GERMANY - 2.6%
1,169 Deutsche EuroShop AG......................................................................... 54,473
---------------
HONG KONG - 4.5%
2,918 Sun Hung Kai Properties Ltd.................................................................. 36,866
21,866 Swire Properties Ltd......................................................................... 57,083
---------------
93,949
---------------
JAPAN - 3.7%
3,035 Mitsui Fudosan Co., Ltd...................................................................... 77,729
---------------
SPAIN - 2.8%
75,554 Inmobiliaria Colonial S.A. (b)............................................................... 57,964
---------------
SWEDEN - 2.9%
3,650 Fabege AB.................................................................................... 60,906
---------------
TOTAL COMMON STOCKS.......................................................................... 456,329
---------------
(Cost $436,216)
TOTAL INVESTMENTS - 99.4%.................................................................... 2,087,355
(Cost $1,959,001) (c)
NET OTHER ASSETS AND LIABILITIES - 0.6%...................................................... 12,509
---------------
NET ASSETS - 100.0%.......................................................................... $ 2,099,864
===============
-----------------------------
(a) Portfolio securities are categorized based upon their country of
incorporation.
(b) Non-income producing security.
(c) Aggregate cost for financial reporting purposes, which approximates the
aggregate cost for federal income tax purposes. As of April 30, 2016, the
aggregate gross unrealized appreciation for all securities in which there
was an excess of value over tax cost was $156,470 and the aggregate gross
unrealized depreciation for all securities in which there was an excess of
tax cost over value was $28,116.
-----------------------------
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of April 30,
2016 is as follows (see Note 2A - Portfolio Valuation in the Notes to Financial
Statements):
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
4/30/2016 PRICES INPUTS INPUTS
--------------- --------------- --------------- ---------------
Real Estate Investment Trusts*..................... $ 1,631,026 $ 1,631,026 $ -- $ --
Common Stocks*..................................... 456,329 456,329 -- --
--------------- --------------- --------------- ---------------
Total Investments.................................. $ 2,087,355 $ 2,087,355 $ -- $ --
=============== =============== =============== ===============
* See Portfolio of Investments for country breakout.
All transfers in and out of the Levels during the period are assumed to be
transferred on the last day of the period at their current value. There were no
transfers between levels at April 30, 2016.
See Notes to Financial Statements Page 7
FIRST TRUST HEITMAN GLOBAL PRIME REAL ESTATE ETF (PRME)
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 2016 (UNAUDITED)
ASSETS:
Investments, at value...................................................... $ 2,087,355
Cash....................................................................... 7,417
Foreign currency........................................................... 975
Receivables:
Dividends............................................................... 4,790
Dividend reclaims....................................................... 939
--------------
Total Assets............................................................ 2,101,476
--------------
LIABILITIES:
Payables:
Investment advisory fees................................................ 1,612
--------------
Total Liabilities....................................................... 1,612
--------------
NET ASSETS................................................................. $ 2,099,864
==============
NET ASSETS CONSIST OF:
Paid-in capital............................................................ $ 2,015,020
Par value.................................................................. 1,000
Accumulated net investment income (loss)................................... 10,517
Accumulated net realized gain (loss) on investments........................ (55,203)
Net unrealized appreciation (depreciation) on investments.................. 128,530
--------------
NET ASSETS................................................................. $ 2,099,864
==============
NET ASSET VALUE, per share................................................. $ 21.00
==============
Number of shares outstanding (unlimited number of shares
authorized, par value $0.01 per share).................................. 100,002
==============
Investments, at cost....................................................... $ 1,959,001
==============
Foreign currency, at cost (proceeds)....................................... $ 978
==============
Page 8 See Notes to Financial Statements
FIRST TRUST HEITMAN GLOBAL PRIME REAL ESTATE ETF (PRME)
STATEMENT OF OPERATIONS
FOR THE PERIOD NOVEMBER 11, 2015 (a) THROUGH APRIL 30, 2016 (UNAUDITED)
INVESTMENT INCOME:
Dividends.................................................................. $ 32,428
Foreign tax withholding.................................................... (2,015)
Other...................................................................... 51
--------------
Total investment income................................................. 30,464
--------------
EXPENSES:
Investment advisory fees................................................... 8,827
--------------
Total expenses.......................................................... 8,827
--------------
NET INVESTMENT INCOME (LOSS)............................................... 21,637
--------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments............................................................. (54,701)
Foreign currency transactions........................................... (502)
--------------
Net realized gain (loss)................................................... (55,203)
--------------
Net change in unrealized appreciation (depreciation) on:
Investments............................................................. 128,354
Foreign currency translation............................................ 176
--------------
Net change in unrealized appreciation (depreciation)....................... 128,530
--------------
NET REALIZED AND UNREALIZED GAIN (LOSS).................................... 73,327
--------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS......................................................... $ 94,964
==============
(a) Inception date is consistent with the commencement of investment
operations and is the date the creation units were established.
See Notes to Financial Statements Page 9
FIRST TRUST HEITMAN GLOBAL PRIME REAL ESTATE ETF (PRME)
STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD
11/11/15 (a)
THROUGH
4/30/2016
(UNAUDITED)
--------------
OPERATIONS:
Net investment income (loss)............................................... $ 21,637
Net realized gain (loss)................................................... (55,203)
Net change in unrealized appreciation (depreciation)....................... 128,530
--------------
Net increase (decrease) in net assets resulting from operations............ 94,964
--------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income...................................................... (11,120)
--------------
Total distributions to shareholders........................................ (11,120)
--------------
SHAREHOLDER TRANSACTIONS:
Proceeds from shares sold.................................................. 2,016,020
Cost of shares redeemed.................................................... --
--------------
Net increase (decrease) in net assets resulting from shareholder
transactions ........................................................... 2,016,020
--------------
Total increase (decrease) in net assets.................................... 2,099,864
NET ASSETS:
Beginning of period........................................................ --
--------------
End of period.............................................................. $ 2,099,864
==============
Accumulated net investment income (loss) at end of period.................. $ 10,517
==============
CHANGES IN SHARES OUTSTANDING:
Shares outstanding, beginning of period.................................... --
Shares sold................................................................ 100,002
--------------
Shares outstanding, end of period.......................................... 100,002
==============
(a) Inception date is consistent with the commencement of investment
operations and is the date the creation units were established.
Page 10 See Notes to Financial Statements
FIRST TRUST HEITMAN GLOBAL PRIME REAL ESTATE ETF (PRME)
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD
FOR THE PERIOD
11/11/2015 (a)
THROUGH
APRIL 30, 2016
(UNAUDITED)
--------------
Net asset value, beginning of period.......... $ 20.16
----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) ................. 0.22
Net realized and unrealized gain (loss) ...... 0.73
----------
Total from investment operations ............. 0.95
----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income ........................ (0.11)
----------
Total distributions .......................... (0.11)
----------
Net asset value, end of period ............... $ 21.00
==========
TOTAL RETURN (b).............................. 4.74%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) ......... $ 2,100
RATIOS TO AVERAGE NET ASSETS:
Ratio of total expenses to average net
assets .................................... 0.95% (c)
Ratio of net investment income (loss) to
average net assets ........................ 2.33% (c)
Portfolio turnover rate (d)................... 36%
(a) Inception date is consistent with the commencement of investment
operations and is the date the initial creation units were established.
(b) Total return is calculated assuming an initial investment made at the net
asset value at the beginning of the period, reinvestment of all dividend
distributions at net asset value during the period, and redemption at net
asset value on the last day of the period. The return presented does not
reflect the deduction of taxes that a shareholder would pay on Fund
distributions or the redemption or sale of Fund shares. Total return is
calculated for the time period presented and is not annualized for periods
of less than a year.
(c) Annualized.
(d) Portfolio turnover is calculated for the time period presented and is not
annualized for periods of less than a year and does not include securities
received or delivered from processing creations or redemptions and in-kind
transactions.
See Notes to Financial Statements Page 11
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FIRST TRUST HEITMAN GLOBAL PRIME REAL ESTATE ETF (PRME)
APRIL 30, 2016 (UNAUDITED)
1. ORGANIZATION
First Trust Exchange-Traded Fund IV (the "Trust") is an open-end management
investment company organized as a Massachusetts business trust on September 15,
2010, and is registered with the Securities and Exchange Commission under the
Investment Company Act of 1940, as amended (the "1940 Act").
The Trust currently consists of eight funds that are offering shares. This
report covers the First Trust Heitman Global Prime Real Estate ETF (the "Fund"),
which trades under the ticker "PRME" on the NYSE Arca, Inc. ("NYSE Arca").
Unlike conventional mutual funds, the fund issues and redeems shares on a
continuous basis, as net asset value ("NAV"), only in large specified blocks
consisting of 50,000 shares called a "Creation Unit." Creation Units are issued
and redeemed principally in-kind for securities in which the Fund invests or for
cash or, in certain circumstances, a combination of both. Except when aggregated
in Creation Units, the Fund's shares are not redeemable securities.
The Fund is an actively managed exchange-traded fund. The investment objective
of the Fund is to provide long-term total return. Under normal market
conditions, the Fund will seek to achieve its investment objective by investing
at least 80% of its net assets (including investment borrowings) in U.S. and
non-U.S. exchange-traded real estate securities, which includes real estate
investment trusts ("REITs"), real estate operating companies ("REOCs") and
common stocks or depositary receipts of companies primarily engaged in the real
estate industry (collectively, "Real Estate Securities"). There can be no
assurance that the Fund will achieve its investment objective. The Fund may not
be appropriate for all investors.
2. SIGNIFICANT ACCOUNTING POLICIES
The 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 following is a summary
of significant accounting policies consistently followed by the Fund in the
preparation of the financial statements. The preparation of the financial
statements in accordance with accounting principles generally accepted in the
United States of America ("U.S. GAAP") requires management to make estimates and
assumptions that affect the reported amounts and disclosures in the financial
statements. Actual results could differ from those estimates.
A. PORTFOLIO VALUATION
The Fund's net asset value ("NAV") is determined daily as of the close of
regular trading on the New York Stock Exchange ("NYSE"), normally 4:00 p.m.
Eastern time, on each day the NYSE is open for trading. If the NYSE closes early
on a valuation day, the NAV is determined as of that time. Foreign securities
are priced using data reflecting the earlier closing of the principal markets
for those securities. The Fund's NAV is calculated by dividing the value of all
assets of the Fund (including accrued interest and dividends), less all
liabilities (including accrued expenses and dividends declared but unpaid), by
the total number of shares outstanding.
The Fund's investments are valued daily at market value or, in the absence of
market value with respect to any portfolio securities, at fair value. Market
value prices represent last sale or official closing prices from a national or
foreign exchange (i.e., a regulated market) and are primarily obtained from
third-party pricing services. Fair value prices represent any prices not
considered market value prices and are either obtained from a third-party
pricing service or are determined by the Pricing Committee of the Fund's
investment advisor, First Trust Advisors L.P. (the "Advisor"), in accordance
with valuation procedures adopted by the Trust's Board of Trustees, and in
accordance with provisions of the 1940 Act. Investments valued by the Advisor's
Pricing Committee, if any, are footnoted as such in the footnotes to the
Portfolio of Investments. The Fund's investments are valued as follows:
Common stocks, real estate investment trusts ("REITs") and other equity
securities listed on any national or foreign exchange (excluding The
Nasdaq Stock Market LLC ("Nasdaq") and the London Stock Exchange
Alternative Investment Market ("AIM")) are valued at the last sale price
on the exchange on which they are principally traded or, for Nasdaq and
AIM securities, the official closing price. Securities traded on more than
one securities exchange are valued at the last sale price or official
closing price, as applicable, at the close of the securities exchange
representing the principal market for such securities.
Securities traded in an over-the-counter market are fair valued at the
mean of their most recent bid and asked price, if available, and otherwise
at their closing bid price.
Certain securities may not be able to be priced by pre-established pricing
methods. Such securities may be valued by the Trust's Board of Trustees or its
delegate, the Advisor's Pricing Committee, at fair value. These securities
generally include, but are not limited to, restricted securities (securities
which may not be publicly sold without registration under the Securities Act of
1933, as amended (the "1933 Act")) for which a pricing service is unable to
provide a market price; securities whose trading has been formally suspended; a
Page 12
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST HEITMAN GLOBAL PRIME REAL ESTATE ETF (PRME)
APRIL 30, 2016 (UNAUDITED)
security whose market or fair value price is not available from a
pre-established pricing source; a security with respect to which an event has
occurred that is likely to materially affect the value of the security after the
market has closed but before the calculation of the Fund's NAV or make it
difficult or impossible to obtain a reliable market quotation; and a security
whose price, as provided by the pricing service, does not reflect the security's
fair value. As a general principle, the current fair value of a security would
appear to be the amount which the owner might reasonably expect to receive for
the security upon its current sale. When fair value prices are used, generally
they will differ from market quotations or official closing prices on the
applicable exchanges. A variety of factors may be considered in determining the
fair value of such securities, including, but not limited to, the following:
1) the type of security;
2) the size of the holding;
3) the initial cost of the security;
4) transactions in comparable securities;
5) price quotes from dealers and/or pricing services;
6) relationships among various securities;
7) information obtained by contacting the issuer, analysts, or
the appropriate stock exchange;
8) an analysis of the issuer's financial statements; and
9) the existence of merger proposals or tender offers that might
affect the value of the security.
If the securities in question are foreign securities, the following additional
information may be considered:
1) the value of similar foreign securities traded on other
foreign markets;
2) ADR trading of similar securities;
3) closed-end fund trading of similar securities;
4) foreign currency exchange activity;
5) the trading prices of financial products that are tied to
baskets of foreign securities;
6) factors relating to the event that precipitated the pricing
problem;
7) whether the event is likely to recur; and
8) whether the effects of the event are isolated or whether they
affect entire markets, countries or regions.
Because foreign markets may be open on different days than the days during which
investors may transact in the shares of a Fund, the value of the Fund's
securities may change on the days when investors are not able to transact in the
shares of the Fund. The value of securities denominated in foreign currencies is
converted into U.S. dollars using exchange rates determined daily as of the
close of regular trading on the NYSE.
The Fund is subject to fair value accounting standards that define fair value,
establish the framework for measuring fair value and provide a three-level
hierarchy for fair valuation based upon the inputs to the valuation as of the
measurement date. The three levels of the fair value hierarchy are as follows:
o Level 1 - Level 1 inputs are quoted prices in active markets for
identical investments. An active market is a market in which
transactions for the investment occur with sufficient frequency and
volume to provide pricing information on an ongoing basis.
o Level 2 - Level 2 inputs are observable inputs, either directly or
indirectly, and include the following:
o Quoted prices for similar investments in active markets.
o Quoted prices for identical or similar investments in markets
that are non-active. A non-active market is a market where
there are few transactions for the investment, the prices are
not current, or price quotations vary substantially either
over time or among market makers, or in which little
information is released publicly.
o Inputs other than quoted prices that are observable for the
investment (for example, interest rates and yield curves
observable at commonly quoted intervals, volatilities,
prepayment speeds, loss severities, credit risks, and default
rates).
o Inputs that are derived principally from or corroborated by
observable market data by correlation or other means.
o Level 3 - Level 3 inputs are unobservable inputs. Unobservable
inputs may reflect the reporting entity's own assumptions about the
assumptions that market participants would use in pricing the
investment.
The inputs or methodologies used for valuing investments are not necessarily an
indication of the risk associated with investing in those investments. A summary
of the inputs used to value the Fund's investments as of April 30, 2016, is
included with the Fund's Portfolio of Investments.
Page 13
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST HEITMAN GLOBAL PRIME REAL ESTATE ETF (PRME)
APRIL 30, 2016 (UNAUDITED)
B. SECURITIES TRANSACTIONS AND INVESTMENT INCOME
Securities transactions are recorded as of the trade date. Realized gains and
losses from securities transactions are recorded on the identified cost basis.
Dividend income is recorded on the ex-dividend date. Interest income, if any, is
recorded on the accrual basis.
Distributions received from a Fund's investments in REITs may be comprised of
return of capital, capital gains and income. The actual character of the amounts
received during the year is not known until after the REITs' fiscal year end. A
Fund records the character of distributions received from the REITs during the
year based on estimates available. The characterization of distributions
received by a Fund may be subsequently revised based on information received
from the REITs after their tax reporting periods conclude.
C. FOREIGN CURRENCY
The books and records of the Fund are maintained in U.S. dollars. Foreign
currencies, investments and other assets and liabilities are translated into
U.S. dollars at the exchange rates prevailing at the end of the period.
Purchases and sales of investments and items of income and expense are
translated on the respective dates of such transactions. Unrealized gains and
losses on assets and liabilities, other than investments in securities, which
result from changes in foreign currency exchange rates have been included in
"Net change in unrealized appreciation (depreciation) on foreign currency
translation" on the Statement of Operations. Unrealized gains and losses on
investments in securities which result from changes in foreign exchange rates
are included with fluctuations arising from changes in market price and are
shown in "Net change in unrealized appreciation (depreciation) on investments"
on the Statement of Operations. Net realized foreign currency gains and losses
include the effect of changes in exchange rates between trade date and
settlement date on investment security transactions, foreign currency
transactions and interest and dividend received and is included in "Net realized
gain (loss) on foreign currency transactions" on the Statement of Operations.
The portion of foreign currency gains and losses related to fluctuations in
exchange rates between the initial purchase settlement date and subsequent sale
trade date is included in "Net realized gain (loss) on investments" on the
Statement of Operations.
D. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
Dividends from net investment income, if any, are declared and paid quarterly,
or as the Board of Trustees may determine from time to time. Distributions of
net realized capital gains earned by the Fund, if any, will be distributed at
least annually.
Distributions from income and capital gains are determined in accordance with
income tax regulations, which may differ from U.S. GAAP. Certain capital
accounts in the financial statements are periodically adjusted for permanent
differences in order to reflect their tax character. These permanent differences
are primarily due to the varying treatment of income and gain/loss on portfolio
securities held by the Fund and has no impact on net assets or net asset value
per share. Temporary differences, which arise from recognizing certain items of
income, expense and gain/loss in different periods for financial statement and
tax purposes, will reverse at some time in the future.
E. INCOME TAXES
The Fund intends to qualify as a regulated investment company by complying with
the requirements under Subchapter M of the Internal Revenue Code of 1986, as
amended, which includes distributing substantially all of its net investment
income and net realized gains to shareholders. Accordingly, no provision has
been made for federal and state income taxes. However, due to the timing and
amount of distributions, the Fund may be subject to an excise tax of 4% of the
amount by which approximately 98% of the Fund's taxable income exceeds the
distributions from such taxable income for the calendar year.
The Fund is subject to accounting standards that establish a minimum threshold
for recognizing, and a system for measuring, the benefits of a tax position
taken or expected to be taken in a tax return. As of April 30, 2016, management
has evaluated the application of these standards to the Fund, and has determined
that no provision for income tax is required in the Fund's financial statements
for uncertain tax positions.
F. EXPENSES
Expenses, other than the investment advisory fee and other excluded expenses,
are paid by the Advisor (See Note 3).
3. INVESTMENT ADVISORY FEE, AFFILIATED TRANSACTIONS AND OTHER FEE ARRANGEMENTS
First Trust, the investment advisor to the Fund, is a limited partnership with
one limited partner, Grace Partners of DuPage L.P., and one general partner, The
Charger Corporation. The Charger Corporation is an Illinois corporation
controlled by James A. Bowen, Chief Executive Officer of First Trust. First
Trust is responsible for supervising the selection and ongoing monitoring of the
securities in the Fund's portfolio, managing the Fund's business affairs and
providing certain administrative services necessary for the management of the
Fund.
Page 14
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST HEITMAN GLOBAL PRIME REAL ESTATE ETF (PRME)
APRIL 30, 2016 (UNAUDITED)
The Fund and First Trust have retained Heitman Real Estate Securities LLC
("Heitman" or the "Sub-Advisor"), an affiliate of First Trust, to serve as its
investment sub-advisor and Heitman International Real Estate Securities HK
Limited and Heitman International Real Estate Securities GmbH (the
"Sub-Sub-Advisors") to serve as the investment sub-sub-advisors. In this
capacity, the Sub-Advisor is responsible for the selection and on-going
monitoring of the securities in the Fund's investment portfolio and overseeing
the Sub-Sub-Advisors. Pursuant to the Investment Management Agreement between
the Trust and the Advisor, First Trust will supervise Heitman and its management
of the investment of the Fund's assets and will pay Heitman for its services as
the Fund's sub-advisor. The Sub-Sub-Advisors' fees are paid by the Sub-Advisor
out of the Sub-Advisor management fee. First Trust will also be 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.
The Trust has multiple service agreements with Brown Brothers Harriman & Co.
("BBH"). Under the service agreements, BBH performs custodial, fund accounting,
certain administrative services, and transfer agency services for the Fund. As
custodian, BBH is responsible for custody of the Fund's assets. As fund
accountant and administrator, BBH is responsible for maintaining the books and
records of the Fund's securities and cash. As transfer agent, BBH is responsible
for maintaining shareholder records for the Fund.
At a meeting held on December 7, 2015, the Board of Trustees accepted Mr. Mark
Bradley's resignation from his position as the President and Chief Executive
Officer of the Trust, effective December 31, 2015. At the same meeting, the
Board of Trustees elected Mr. James Dykas, formerly Chief Financial Officer and
Treasurer of the Trust, to serve as the President and Chief Executive Officer,
and Mr. Donald Swade, formerly an Assistant Treasurer of the Trust, to serve as
the Treasurer, Chief Financial Officer and Chief Accounting Officer of the
Trust.
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 equally among each fund in the First Trust Fund
Complex based on net assets. Prior to January 1, 2016, the fixed annual retainer
was allocated pro rata based on each fund's net assets. Each Independent Trustee
is also paid an annual per fund fee that varies based on whether the fund is a
closed-end or other actively managed fund, or is an index fund.
Additionally, the Lead Independent Trustee and the Chairmen of the Audit
Committee, Nominating and Governance Committee and Valuation Committee are paid
annual fees to serve in such capacities, with such compensation allocated pro
rata among each fund in the First Trust Fund Complex based on net assets.
Trustees are reimbursed for travel and out-of-pocket expenses in connection with
all meetings. The Lead Independent Trustee and Committee Chairmen rotate every
three years. The officers and "Interested" Trustee receive no compensation from
the Trust for acting in such capacities.
4. PURCHASES AND SALES OF SECURITIES
For the six months ended April 30, 2016, the cost of purchases and proceeds from
sales of investments, excluding short-term investments and in-kind transactions,
were $734,927 and $719,297, respectively.
For the six months ended April 30, 2016, the cost of in-kind purchases was
$1,996,815.
5. CREATIONS, REDEMPTIONS AND TRANSACTION FEES
Shares are created and redeemed by the Fund only in Creation Unit size
aggregations of 50,000 shares in transactions with broker-dealers or large
institutional investors that have entered into a participation agreement (an
"Authorized Participant"). In order to purchase Creation Units of the Fund, an
Authorized Participant must deposit (i) a designated portfolio of equity
securities determined by First Trust (the "Deposit Securities") and generally
make or receive a cash payment referred to as the "Cash Component," which is an
amount equal to the difference between the NAV of the Fund shares (per Creation
Unit aggregations) and the market value of the Deposit Securities, and/or (ii)
cash in lieu of all or a portion of the Deposit Securities. If the Cash
Component is a positive number (i.e., the NAV per Creation Unit Aggregation
exceeds the Deposit Amount), the creator will deliver the Cash Component. If the
Cash Component is a negative number (i.e., the NAV per Creation Unit Aggregation
is less than the Deposit Amount), the Authorized Participant will receive the
Cash Component. Authorized Participants purchasing Creation Units must pay to
BBH, as transfer agent, a creation transaction fee (the "Creation Transaction
Fee") regardless of the number of Creation Units purchased in the transaction.
The Creation Transaction Fee may vary and is based on the composition of the
securities included in the Fund's portfolio and the countries in which the
transactions are settled. The Creation Transaction fee is currently $700. 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,
Page 15
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST HEITMAN GLOBAL PRIME REAL ESTATE ETF (PRME)
APRIL 30, 2016 (UNAUDITED)
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 $700. The
Fund reserves the right to affect redemptions in cash. An Authorized Participant
may request cash redemption in lieu of securities; however, the Fund may, in its
discretion, reject any such request
6. DISTRIBUTION PLAN
The Board of Trustees adopted a Distribution and Service Plan pursuant to Rule
12b-1 under the 1940 Act. In accordance with the Rule 12b-1 plan, the Fund is
authorized to pay an amount up to 0.25% of its average daily net assets each
year to reimburse 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 March 31, 2017.
7. INDEMNIFICATION
The Trust, on behalf of the Fund, has a variety of indemnification obligations
under contracts with its service providers. The Fund's maximum exposure under
these arrangements is unknown. However, the Fund has not had prior claims or
losses pursuant to these contracts and expects the risk of loss to be remote.
8. SUBSEQUENT EVENTS
Management has evaluated the impact of all subsequent events to the Fund through
the date the financial statements were issued, and has determined there were no
subsequent events requiting recognition or disclosure in the financial
statements.
Page 16
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ADDITIONAL INFORMATION
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FIRST TRUST HEITMAN GLOBAL PRIME REAL ESTATE ETF (PRME)
APRIL 30, 2016 (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 will
be available (1) without charge, upon request, by calling (800) 988-5891; (2) on
the Fund's website located at http://www.ftportfolios.com; and (3) on the
Securities and Exchange Commission's ("SEC") website located at
http://www.sec.gov.
PORTFOLIO HOLDINGS
The Trust files its complete schedule of portfolio holdings with the SEC for the
first and third quarters of each fiscal year on Form N-Q. The Trust's 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
You could lose money by investing in the Fund. An investment in the Fund is not
a deposit of a bank and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other governmental agency. There can be no
assurance that the Fund's investment objective will be achieved.
ASIA INVESTMENT RISK. The Fund invests, in part, in securities issued by
companies operating in Asia, and is therefore subject to certain risks
associated specifically with Asia. For example, some of the currencies of these
countries, including China, have experienced devaluations relative to the U.S.
dollar, and adjustments have been made periodically in certain of such
currencies. Certain countries, such as Indonesia, face serious exchange
constraints. Jurisdictional disputes also exist, for example, between South
Korea and North Korea. The Tokyo stock market, as measured by the Tokyo Stock
Price Index, has been volatile. Declines in the Tokyo stock market have made the
country's banks and financial institutions vulnerable. Furthermore, the natural
disasters that have impacted Japan and the ongoing recovery efforts have had a
negative effect on Japan's economy, and may continue to do so.
CONCENTRATION RISK. The Fund is concentrated in REITs and/or real estate
management and development companies. A fund concentrated in a single sector,
industry or group of industries is likely to present more risks than a fund that
is broadly diversified over several industries or sectors. Compared to the broad
market, an individual industry or sector may be more strongly affected by
changes in the economic climate, broad market shifts, moves in a particular
dominant stock, or regulatory changes.
CURRENCY RISK. The Fund may hold 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 investments 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.
DEPOSITARY RECEIPTS RISK. Depositary receipts may be less liquid than the
underlying shares in their primary trading market. Any distributions paid to the
holders of depositary receipts are usually subject to a fee charged by the
depositary. Holders of depositary receipts may have limited voting rights, and
investment restrictions in certain countries may adversely impact the value of
depositary receipts because such restrictions may limit the ability to convert
shares into depositary receipts and vice versa. Such restrictions may cause
shares of the underlying issuer to trade at a discount or premium to the market
price of the depositary receipts.
EMERGING MARKETS RISK. Investments in securities of issuers located in emerging
market countries are considered speculative. Heightened risks of investing in
emerging markets securities include: (i) smaller market capitalization of
securities markets, which may suffer periods of relative illiquidity; (ii)
significant price volatility; (iii) restrictions on foreign investment; and (iv)
possible repatriation of investment income and capital. Furthermore, foreign
investors may be required to register the proceeds of sales and future economic
or political crises could lead to price controls, forced mergers, expropriation
or confiscatory taxation, seizure, nationalization or creation of government
monopolies. The currencies of emerging market countries may experience
significant declines against the U.S. dollar, and devaluation may occur
subsequent to investments in these currencies by the Fund. Inflation and rapid
fluctuations in inflation rates have had, and may continue to have, negative
effects on the economies and securities markets of certain emerging market
countries.
Page 17
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST HEITMAN GLOBAL PRIME REAL ESTATE ETF (PRME)
APRIL 30, 2016 (UNAUDITED)
EQUITY SECURITIES RISK. Because the Fund invests in equity securities, the value
of the Fund's shares will fluctuate with changes in the value of these equity
securities. Equity securities prices fluctuate for several reasons, including
changes in investors' perceptions of the financial condition of an issuer or the
general condition of the relevant stock market, such as current market
volatility, or when political or economic events affecting the issuers occur. In
addition, common stock prices may be particularly sensitive to rising interest
rates, as the cost of capital rises and borrowing costs increase.
EUROPE INVESTMENT RISK. The Fund invests in securities issued by companies
operating in Europe. The Fund is therefore subject to certain risks associated
specifically with Europe. A significant number of countries in Europe are member
states in the European Union, and the member states no longer control their own
monetary policies by directing independent interest rates for their currencies.
In these member states, the authority to direct monetary policies, including
money supply and official interest rates for the Euro, is exercised by the
European Central Bank. Furthermore, the European sovereign debt crisis and the
related austerity measures in certain countries have had, and continue to have,
a significant negative impact on the economies of certain European countries and
their future economic outlooks.
INTEREST RATE RISK. The Fund is subject to interest rate risk. Increases in
interest rates typically coincide with higher investor required returns and can
lower the present value of a REIT's future earnings stream if not met with a
commensurate increase in growth.
MANAGEMENT RISK. The Fund is subject to management risk because it is an
actively managed portfolio. In managing the Fund's investment portfolio, the
portfolio managers of the Fund will apply investment techniques and risk
analyses that may not have the desired result. There can be no guarantee that
the Fund will meet its investment objective.
MARKET RISK. Market risk is the risk that a particular security owned by the
Fund or shares of the Fund in general may fall in value. Shares are subject to
market fluctuations caused by such factors as economic, political, regulatory or
market developments, changes in interest rates and perceived trends in
securities prices. Overall Fund share values could decline generally or could
underperform other investments.
NEW FUND RISK. The Fund currently has fewer assets than larger funds, and like
other relatively new funds, large inflows and outflows may impact the Fund's
market exposure for limited periods of time. This impact may be positive or
negative, depending on the direction of market movement during the period
affected.
NON-DIVERSIFICATION RISK. The Fund is classified as "non-diversified" under the
1940 Act. As a result, the Fund is only limited as to the percentage of its
assets which may be invested in the securities of any one issuer by the
diversification requirements imposed by the Internal Revenue Code of 1986, as
amended. The Fund may invest a relatively high percentage of its assets in a
limited number of issuers. As a result, the Fund may be more susceptible to a
single adverse economic or regulatory occurrence affecting one or more of these
issuers, experience increased volatility and be highly concentrated in certain
issuers.
NON-U.S. SECURITIES RISK. The Fund may invest in securities of non-U.S. issuers.
Non-U.S. securities are subject to higher volatility than securities of domestic
issuers due to possible adverse political, social or economic developments,
restrictions on foreign investment or exchange of securities, lack of liquidity,
currency exchange rates, excessive taxation, government seizure of assets,
different legal or accounting standards, and less government supervision and
regulation of exchanges in foreign countries.
REAL ESTATE INVESTMENT RISK. The Fund invests in companies in the real estate
industry, including REITs and REOCs. Therefore, the Fund is subject to the risks
associated with investing in real estate, which may include, but are not limited
to, fluctuations in the value of underlying properties; defaults by borrowers or
tenants; market saturation; changes in general and local economic conditions;
decreases in market rates for rents; increases in competition, property taxes,
capital expenditures or operating expenses; and other economic, political or
regulatory occurrences affecting companies in the real estate industry.
REIT INVESTMENT RISK. In addition to risks related to investments in real estate
generally, investing in REITs involves certain other risks related to their
structure and focus, which include, but are not limited to, dependency upon
management skills, limited diversification, the risks of locating and managing
financing for projects, heavy cash flow dependency, possible default by
borrowers, the costs and potential losses of self-liquidation of one or more
holdings, the risk of a possible lack of mortgage funds and associated interest
rate risks, overbuilding, property vacancies, increases in property taxes and
operating expenses, changes in zoning laws, losses due to environmental damages,
changes in neighborhood values and appeal to purchases, the possibility of
failing to maintain exemptions from registration under the 1940 Act and, in many
cases, relatively small market capitalization, which may result in less market
liquidity and greater price volatility. REITs are also subject to the risk that
the real estate market may experience an economic downturn generally, which may
have a material effect on the real estate in which the REITs invest and their
underlying portfolio securities.
Page 18
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST HEITMAN GLOBAL PRIME REAL ESTATE ETF (PRME)
APRIL 30, 2016 (UNAUDITED)
ADVISORY, SUB-ADVISORY AND SUB-SUB-ADVISORY AGREEMENTS
BOARD CONSIDERATIONS REGARDING APPROVAL OF INVESTMENT MANAGEMENT AGREEMENT,
INVESTMENT SUB-ADVISORY AGREEMENT AND INVESTMENT SUB-SUB-ADVISORY AGREEMENTS
The Board of Trustees of the First Trust Exchange-Traded Fund IV (the "Trust"),
including the Independent Trustees, unanimously approved the Investment
Management Agreement (the "Advisory Agreement") with First Trust Advisors L.P.
("First Trust" or the "Advisor") on behalf of the First Trust Heitman Global
Prime Real Estate ETF (the "Fund"), the Investment Sub-Advisory Agreement (the
"Sub-Advisory Agreement") among the Trust, on behalf of the Fund, the Advisor
and Heitman Real Estate Securities LLC (the "Sub-Advisor"), and the Investment
Sub-Sub-Advisory Agreements (the "Sub-Sub-Advisory Agreements") among the Trust,
on behalf of the Fund, the Advisor, the Sub-Advisor and each of Heitman
International Real Estate Securities HK Limited ("Heitman HK") and Heitman
International Real Estate Securities GmbH ("Heitman GmbH" and together with
Heitman HK, the "Sub-Sub-Advisors"). The Sub-Sub-Advisory Agreements, the
Sub-Advisory Agreement and the Advisory Agreement are collectively referred to
as the "Agreements." The Agreements were approved for an initial two-year term
at a meeting held on March 8-9, 2015. The Board of Trustees determined that the
Agreements are in the best interests of the Fund in light of the extent and
quality of services expected to be provided and such other matters as the Board
considered to be relevant in the exercise of its reasonable business judgment.
To reach this determination, the Board considered its duties under the
Investment Company Act of 1940, as amended (the "1940 Act"), as well as under
the general principles of state law in reviewing and approving advisory
contracts; the requirements of the 1940 Act in such matters; the fiduciary duty
of investment advisors with respect to advisory agreements and compensation; the
standards used by courts in determining whether investment company boards have
fulfilled their duties; and the factors to be considered by the Board in voting
on such agreements. To assist the Board in its evaluation of the Agreements, the
Independent Trustees received a separate report from each of the Advisor and the
Sub-Advisor (including information on the Sub-Sub-Advisors) in advance of the
Board meeting responding to a request for information provided on behalf of the
Independent Trustees that, among other things, outlined the services to be
provided by the Advisor, the Sub-Advisor and the Sub-Sub-Advisors to the Fund
(including the relevant personnel responsible for these services and their
experience); the proposed unitary fee structure for the Fund as compared to fees
charged by advisors to other comparable exchange-traded funds ("ETFs") and
global REIT mutual funds, and as compared to fees charged to other ETFs managed
by First Trust; the estimated expenses to be incurred in providing services to
the Fund and the potential for economies of scale, if any; financial data on the
Advisor, the Sub-Advisor and the Sub-Sub-Advisors; fall out benefits to First
Trust and its affiliate, First Trust Portfolios L.P. ("FTP") and to the
Sub-Advisor and Sub-Sub-Advisors; and a summary of the Advisor's and the
Sub-Advisor's compliance program (which included the Sub-Sub-Advisors). The
Independent Trustees also met separately with their independent legal counsel to
discuss the information provided by the Advisor, the Sub-Advisor and the
Sub-Sub-Advisors. The Board applied its business judgment to determine whether
the arrangements between the Trust and First Trust; among the Trust, the Advisor
and the Sub-Advisor; and among the Trust, the Advisor, the Sub-Advisor and each
of Heitman HK and Heitman GmbH are reasonable business arrangements from the
Fund's perspective as well as from the perspective of shareholders.
In evaluating whether to approve the Agreements for the Fund, the Board
considered the nature, extent and quality of services to be provided by the
Advisor, the Sub-Advisor and the Sub-Sub-Advisors under the Agreements and
considered that the Advisor's employees provide management services to other
ETFs and to other investment companies in the First Trust fund complex with
diligence and care. The Board considered that the Fund is not designed to track
the performance of an index and will employ an
advisor/sub-advisor/sub-sub-advisor management structure. With respect to the
Advisory Agreement, the Board considered that First Trust will be responsible
for the overall management and administration of the Fund and reviewed the
services to be provided by First Trust to the Fund, including the oversight of
the Sub-Advisor and the Sub-Sub-Advisors. The Board considered the compliance
program that had been developed by First Trust and considered that it includes a
robust program for monitoring the Sub-Advisor's and Sub-Sub-Advisors' compliance
with the 1940 Act and the Fund's investment objective and policies. It also
considered the efforts expended by First Trust in organizing the Trust and in
arranging for other entities to provide services to the Fund. With respect to
the Sub-Advisory Agreement and Sub-Sub-Advisory Agreements, the Board noted the
background and experience of the Sub-Advisor's and Sub-Sub-Advisors' portfolio
management teams and the Sub-Advisor's and Sub-Sub-Advisors' investment style.
At the meeting, the Trustees received a presentation from representatives of the
Sub-Advisor and were able to ask questions about the Sub-Advisor and the
Sub-Sub-Advisors and their proposed investment strategies for the Fund. The
Sub-Advisor's representatives explained the reason for structuring the
sub-advisory relationship with two sub-sub-advisors, noting that both
Sub-Sub-Advisors are U.S. registered investment advisors that use the same Chief
Compliance Officer as the Sub-Advisor, and that the structure was created so
that the Sub-Advisor could achieve best execution by using its affiliates to
execute certain portfolio transactions. Since the Fund had yet to commence
investment operations, the Board could not consider the historical investment
performance of the Fund. In light of the information presented and the
considerations made, the Board concluded that the nature, extent and quality of
services to be provided to the Fund by the Advisor, Sub-Advisor and
Sub-Sub-Advisors under the Agreements are expected to be satisfactory.
Page 19
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST HEITMAN GLOBAL PRIME REAL ESTATE ETF (PRME)
APRIL 30, 2016 (UNAUDITED)
The Board reviewed information regarding the proposed unitary fee structure for
the Fund. The Board noted that under the Fund's unitary fee arrangement, the
Fund would pay First Trust a fee equal to an annual rate of 0.95% of its average
daily net assets. The Board also noted that, from the unitary fee, First Trust
would pay the Sub-Advisor a sub-advisory fee equal to one-half of any remaining
monthly unitary fee paid to the Advisor after the Fund's average expenses
accrued during the most recent twelve months are subtracted from the unitary fee
for that month, and that the Sub-Advisor would pay each of Heitman HK and
Heitman GmbH a pro-rata portion of the sub-advisory fee received from the
Advisor based on the proportion of assets managed by each. The Board also noted
that First Trust would be responsible for the Fund's ordinary operating
expenses, including the cost of transfer agency, custody, fund administration,
legal, audit and other services, and license fees, if any, but excluding the fee
payment under the Advisory Agreement, interest, taxes, brokerage commissions and
other expenses connected with the execution of portfolio transactions such as
dividend and distribution expenses from securities sold short and/or other
investment-related costs, distribution and service fees payable pursuant to a
Rule 12b-1 plan, if any, and extraordinary expenses. The Board reviewed
information provided by Management Practice Inc. ("MPI"), an independent source,
as well as by First Trust, for the Fund on the advisory fees and expense ratios
of other comparable ETFs, as well as data provided by First Trust on advisory
fees and expense ratios of global REIT mutual funds. The Board noted that four
of the five funds in First Trust's and MPI's peer group overlapped, and that
most of the ETFs in the peer groups are not actively managed. The Board noted
that the Fund's expense ratio under its proposed unitary fee was above the
median expense ratio of its MPI peer group and within the range of the expense
ratios of the group of global REIT mutual funds provided by First Trust. The
Board compared the Fund's unitary fee to the total expense ratios (after fee
waivers and/or expense reimbursements, if any) of other First Trust ETFs,
including First Trust ETFs that pay a unitary fee, and to the advisory fees
charged by First Trust to other advisory clients, noting the Advisor's statement
that it provides services to First Trust FTSE EPRA/NAREIT Developed Markets Real
Estate Index Fund ("FFR"), an index ETF that seeks investment results that
correspond generally to the price and yield, before fees and expenses, of the
FTSE EPRA/NAREIT Developed Index. The Board noted that FFR pays a lower annual
unitary fee but considered that it is an index ETF and is not sub-advised. In
light of the information considered and the nature, extent and quality of
services expected to be provided to the Fund under the Agreements, the Board
determined that the proposed unitary fee for the Fund was fair and reasonable.
The Board noted that the proposed unitary fee for the Fund was not structured to
pass the benefits of any economies of scale on to shareholders as the Fund's
assets grow. The Board noted that any reduction in fixed costs associated with
the management of the Fund would benefit the Advisor, the Sub-Advisor and the
Sub-Sub-Advisors, but that a unitary fee structure provides a level of certainty
in expenses for the Fund. The Board noted that First Trust has continued to
invest in personnel and infrastructure for the First Trust fund complex. The
Board took the costs to be borne by First Trust in connection with its services
to be performed for the Fund under the Advisory Agreement into consideration and
noted that First Trust was unable to estimate the profitability of the Advisory
Agreement to First Trust. The Board considered estimated profitability
information provided for the Sub-Advisor and Sub-Sub-Advisors. The Board noted
that the Sub-Advisor would be paid by the Advisor from the unitary fee and the
Sub-Sub-Advisors would be paid from the sub-advisory fee. The Board considered
that the sub-advisory fee rate was negotiated at arm's length between the
Advisor and the Sub-Advisor, an unaffiliated third party, and the fee is a net
fee payable after the Fund's ordinary operating expenses are paid. The Board
considered fall-out benefits described by the Advisor that may be realized from
its and FTP's relationship with the Fund. The Board considered fall out benefits
described by the Sub-Advisor and Sub-Sub-Advisors that may be realized from
their relationship with the Fund, including from soft-dollar arrangements.
Based on all the information considered and the conclusions reached, the Board,
including the Independent Trustees, unanimously determined that the terms of the
Agreements are fair and reasonable and that the approval of the Agreements are
in the best interests of the Fund. No single factor was determinative in the
Board's analysis.
Page 20
FIRST TRUST
First Trust Exchange-Traded Fund IV
INVESTMENT ADVISOR
First Trust Advisors L.P.
120 E. Liberty Drive, Suite 400
Wheaton, IL 60187
INVESTMENT SUB-ADVISOR
Heitman Real Estate Securities LLC
191 North Wacker Drive, Suite 2500
Chicago, IL 60606
ADMINISTRATOR, CUSTODIAN
FUND ACCOUNTANT &
TRANSFER AGENT
Brown Brothers Harriman & Co.
50 Post Office Square
Boston, MA 02110
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
111 S. Wacker Drive
Chicago, IL 60606
LEGAL COUNSEL
Chapman and Cutler LLP
111 W. Monroe Street
Chicago, IL 60603
[BLANK BACK COVER]
ITEM 2. CODE OF ETHICS.
Not applicable.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Not applicable.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Not applicable.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable.
ITEMS 6. INVESTMENTS.
(a) Schedules of Investments in securities of unaffiliated issuers as of the
close of the reporting period are included as part of the report to
shareholders filed under Item 1 of this form.
(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
that have materially affected, or are reasonably likely to materially
affect, the registrant's internal control over financial reporting.
ITEM 12. EXHIBITS.
(a)(1) Not applicable.
(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 IV
------------------------------------------------------
By (Signature and Title)* /s/ James M. Dykas
----------------------------------------
James M. Dykas, President and
Chief Executive Officer
(principal executive officer)
Date: June 20, 2016
---------------
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/ James M. Dykas
----------------------------------------
James M. Dykas, President and
Chief Executive Officer
(principal executive officer)
Date: June 20, 2016
---------------
By (Signature and Title)* /s/ Donald P. Swade
----------------------------------------
Donald P. Swade, Treasurer,
Chief Financial Officer and
Chief Accounting Officer
(principal financial officer)
Date: June 20, 2016
---------------
* Print the name and title of each signing officer under his or her signature.