UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT
COMPANIES
Investment Company Act file number 811-22709
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First Trust Exchange-Traded Fund V
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(Exact name of registrant as specified in charter)
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
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(Address of principal executive offices) (Zip code)
W. Scott Jardine, Esq.
First Trust Portfolios L.P.
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
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(Name and address of agent for service)
Registrant's telephone number, including area code: (630) 765-8000
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Date of fiscal year end: December 31
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Date of reporting period: December 31, 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, 450 Fifth Street, NW,
Washington, DC 20549-0609. The OMB has reviewed this collection of information
under the clearance requirements of 44 U.S.C. ss. 3507.
ITEM 1. REPORT TO STOCKHOLDERS.
The registrant's annual report transmitted to shareholders pursuant to Rule
30e-1 under the Investment Company Act of 1940 is as follows:
FIRST TRUST
First Trust Exchange-Traded Fund V
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First Trust Morningstar Managed Futures Strategy
Fund (FMF)
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Annual Report
For the Year Ended
December 31, 2016
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TABLE OF CONTENTS
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FIRST TRUST MORNINGSTAR MANAGED FUTURES STRATEGY FUND (FMF)
ANNUAL REPORT
DECEMBER 31, 2016
Shareholder Letter......................................................... 1
Fund Performance Overview.................................................. 2
Portfolio Commentary....................................................... 4
Understanding Your Fund Expenses........................................... 6
Consolidated Portfolio of Investments...................................... 7
Consolidated Statement of Assets and Liabilities........................... 9
Consolidated Statement of Operations....................................... 10
Consolidated Statements of Changes in Net Assets........................... 11
Consolidated Financial Highlights.......................................... 12
Notes to Consolidated Financial Statements................................. 13
Report of Independent Registered Public Accounting Firm.................... 20
Additional Information..................................................... 21
Board of Trustees and Officers............................................. 25
Privacy Policy............................................................. 27
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning of
the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934,
as amended. Forward-looking statements include statements regarding the goals,
beliefs, plans or current expectations of First Trust Advisors L.P. ("First
Trust" or the "Advisor") and its representatives, taking into account the
information currently available to them. Forward-looking statements include all
statements that do not relate solely to current or historical fact. For example,
forward-looking statements include the use of words such as "anticipate,"
"estimate," "intend," "expect," "believe," "plan," "may," "should," "would" or
other words that convey uncertainty of future events or outcomes.
Forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
First Trust Morningstar Managed Futures Strategy Fund (the "Fund") to be
materially different from any future results, performance or achievements
expressed or implied by the forward-looking statements. When evaluating the
information included in this report, you are cautioned not to place undue
reliance on these forward-looking statements, which reflect the judgment of the
Advisor and its representatives only as of the date hereof. We undertake no
obligation to publicly revise or update these forward-looking statements to
reflect events and circumstances that arise after the date hereof.
PERFORMANCE AND RISK DISCLOSURE
There is no assurance that the Fund will achieve its investment objective. The
Fund is subject to market risk, which is the possibility that the market values
of investments owned by the Fund will decline and that the value of the Fund
shares may therefore be less than what you paid for them. Accordingly, you can
lose money investing in the Fund. See "Risk Considerations" in the Additional
Information section of this report for a discussion of other risks of investing
in the Fund.
Performance data quoted represents past performance, which is no guarantee of
future results, and current performance may be lower or higher than the figures
shown. For the most recent month-end performance figures, please visit
http://www.ftportfolios.com or speak with your financial advisor. Investment
returns, net asset value and share price will fluctuate and Fund shares, when
sold, may be worth more or less than their original cost.
The Advisor may also periodically provide additional information on Fund
performance on the Fund's webpage at http://www.ftportfolios.com.
HOW TO READ THIS REPORT
This report contains information that may help you evaluate your investment in
the Fund. It includes details about the Fund's portfolio and presents data and
analysis that provide insight into the Fund's performance and investment
approach.
By reading the portfolio commentary from the portfolio management team of the
Fund, you may obtain an understanding of how the market environment affected the
Fund's performance. The statistical information that follows may help you
understand the Fund's performance compared to that of relevant market
benchmarks.
It is important to keep in mind that the opinions expressed by personnel of the
Advisor are just that: informed opinions. They should not be considered to be
promises or advice. The opinions, like the statistics, cover the period through
the date on the cover of this report. The material risks of investing in the
Fund are spelled out in its prospectus, statement of additional information,
this report and other Fund regulatory filings.
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SHAREHOLDER LETTER
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FIRST TRUST MORNINGSTAR MANAGED FUTURES STRATEGY FUND (FMF)
ANNUAL LETTER FROM THE CHAIRMAN AND CEO
DECEMBER 31, 2016
Dear Shareholders:
Now that 2016 is over, many will remember some of the historic events that
occurred during the year: from the Brexit vote in the UK to leave the European
Union, to the results of the U.S. Presidential Election which seemed unlikely at
the beginning of the year, to the first World Series Championship for the
Chicago Cubs in 108 years!
First Trust Advisors L.P. ("First Trust") is pleased to provide you with this
annual report which contains detailed information about your investment for the
12 months ended December 31, 2016, including a performance analysis and the
financial statements for you to review. We encourage you to read this report and
discuss it with your financial advisor.
On November 8, Donald J. Trump was elected to become the 45th president in our
country's history. While no one has a crystal ball and the ability to predict
how his presidency will shape the United States (and the world), there is no
doubt that his populist message resonated for many Americans. And his message of
improving lives for the "average" American, while reducing the size and scope of
the federal government, also won him millions of votes. Many of his supporters
believe that with his background in business, President Trump will make policy
changes that will continue to grow the economy and spur stock markets even
higher. Many analysts predicted the Dow Jones Industrial Average would hit a new
benchmark, 20,000, in the first days of the New Year. As with all change and a
new administration, only time will tell.
As of December 31, 2016, the S&P 500(R) Index was up 11.96% calendar
year-to-date, on a total return basis, as measured by Bloomberg. The current
bull market (measuring from March 9, 2009 through December 31, 2016) is the
second longest in history. We remain bullish on the economy, but continue to
have a long-term perspective. We believe investors should think long-term as
well, since no one can predict volatility and the inevitable ups and downs that
occur in the market.
Thank you for your investment in First Trust Morningstar Managed Futures
Strategy Fund and for giving First Trust the opportunity to be a part of your
investment plan. We value our relationship with you and will continue our
relentless focus on bringing the types of investments that we believe could help
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 MORNINGSTAR MANAGED FUTURES STRATEGY FUND (FMF)
First Trust Morningstar Managed Futures Strategy Fund's (the "Fund") investment
objective is to seek to provide investors with positive returns. The Fund is an
actively managed exchange-traded fund ("ETF") that seeks to achieve positive
returns that are not directly correlated to broad market equity or fixed income
returns. The Fund uses as a benchmark, the Morningstar(R) Diversified Futures
Index(SM) (the "Benchmark"), which is developed, maintained and sponsored by
Morningstar, Inc. ("Morningstar"). The Fund seeks to exceed the performance of
the Benchmark by actively selecting investments for the Fund with varying
maturities from the underlying components of the Benchmark. The Fund is not an
"index tracking" ETF and is not required to invest in all of the components of
the Benchmark. However, the Fund will generally seek to hold similar instruments
to those included in the Benchmark and seek exposure to commodities, currencies
and equity indices included in the Benchmark.
The Fund is not sponsored, endorsed, sold or promoted by Morningstar.
Morningstar's only relationship to the Fund is the licensing of certain service
marks and service names of Morningstar and of the Benchmark, which is
determined, composed and calculated by Morningstar without regard to the Fund's
advisor or the Fund. The Fund is not obligated to invest in the same instruments
included in the Benchmark. There can be no assurance that the Fund's performance
will exceed the performance of the Benchmark at any time.
Under normal market conditions, the Fund, through a wholly-owned subsidiary of
the Fund organized under the laws of the Cayman Islands (the "Subsidiary"),
invests in a portfolio of exchange-listed commodity futures, currency futures
and equity index futures (collectively, "Futures Instruments").
The Fund does not invest directly in Futures Instruments. The Fund gains
exposure to these investments exclusively by investing in the Subsidiary. The
Subsidiary is advised by First Trust Advisors L.P., the Fund's advisor.
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PERFORMANCE
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AVERAGE ANNUAL CUMULATIVE
TOTAL RETURNS TOTAL RETURNS
Inception Inception
1 Year Ended (8/1/13) (8/1/13)
12/31/16 to 12/31/16 to 12/31/16
FUND PERFORMANCE
NAV -4.33% -1.06% -3.56%
Market Price -3.22% -1.02% -3.43%
INDEX PERFORMANCE
Morningstar(R) Diversified Futures Index(SM) -2.80% 0.03% 0.09%
Bank of America Merrill Lynch 0-3 Month US T-Bill Index 0.33% 0.13% 0.44%
S&P 500(R) Index 11.96% 10.59% 41.04%
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Total returns for the period since inception are calculated from the inception
date of the Fund. "Average annual total returns" represent the average annual
change in value of an investment over the period indicated. "Cumulative total
returns" represent the total change in value of an investment over the period
indicated.
The Fund's per share net asset value ("NAV") is the value of one share of the
Fund and is computed by dividing the value of all assets of the Fund (including
accrued interest and dividends), less all liabilities (including accrued
expenses and dividends declared but unpaid), by the total number of outstanding
shares. The price used to calculate market return ("Market Price") is determined
by using the midpoint between the highest bid and the lowest offer on the stock
exchange on which shares of the Fund are listed for trading as of the time that
the Fund's NAV is calculated. Since shares of the Fund did not trade in the
secondary market until after its inception, for the period from inception to the
first day of secondary market trading in shares of the Fund, the NAV of the Fund
is used as a proxy for the secondary market trading price to calculate market
returns. NAV and market returns assume that all dividend distributions have been
reinvested in the Fund at NAV and Market Price, respectively.
An index is a statistical composite that tracks a specified financial market or
sector. Unlike the Fund, the indices do not actually hold a portfolio of
securities and therefore do not incur the expenses incurred by the Fund. These
expenses negatively impact the performance of the Fund. Also, index returns do
not include brokerage commissions that may be payable on secondary market
transactions. If brokerage commissions were included, index returns would be
lower. The total returns presented reflect the reinvestment of dividends on
securities in the indices. The returns presented do not reflect the deduction of
taxes that a shareholder would pay on Fund distributions or the redemption or
sale of Fund shares. The investment return and principal value of shares of the
Fund will vary with changes in market conditions. Shares of the Fund may be
worth more or less than their original cost when they are redeemed or sold in
the market. The Fund's past performance is no guarantee of future performance.
Page 2
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FUND PERFORMANCE OVERVIEW (UNAUDITED) (CONTINUED)
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FIRST TRUST MORNINGSTAR MANAGED FUTURES STRATEGY FUND (FMF)
PERFORMANCE OF A $10,000 INITIAL INVESTMENT
AUGUST 1, 2013 - DECEMBER 31, 2016
First Trust Morningstar Morningstar(R) Bank of America
Managed Futures Strategy Diversified Futures Merrill Lynch 0-3 Month S&P 500(R)
Fund (FMF) Index(SM) US T-Bill Index Index
8/1/13 $10,000 $10,000 $10,000 $10,000
12/31/13 10,387 10,352 10,001 10,929
6/30/14 10,231 10,276 10,003 11,709
12/31/14 10,127 10,235 10,004 12,425
6/30/15 10,289 10,416 10,005 12,578
12/31/15 10,076 10,298 10,010 12,597
6/30/16 9,840 10,155 10,025 13,081
12/31/16 9,644 10,009 10,044 14,104
Performance figures assume reinvestment of all distributions and do not reflect
the deduction of taxes that a shareholder would pay on Fund distributions or the
redemption or sale of Fund shares. An index is a statistical composite that
tracks a specified financial market or sector. Unlike the Fund, the indices do
not actually hold a portfolio of investments and therefore do not incur the
expenses incurred by the Fund. These expenses negatively impact the performance
of the Fund. The Fund's past performance does not predict future performance.
FREQUENCY DISTRIBUTION OF DISCOUNTS AND PREMIUMS
BID/ASK MIDPOINT VS. NAV THROUGH DECEMBER 31, 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 2, 2013 (commencement of trading) through December
31, 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.
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NUMBER OF DAYS BID/ASK MIDPOINT AT/ABOVE NAV
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FOR THE PERIOD 0.00%-0.49% 0.50%-0.99% 1.00%-1.99% >=2.00%
8/2/13 - 12/31/13 46 0 1 1
1/1/14 - 12/31/14 67 16 28 40
1/1/15 - 12/31/15 27 13 39 1
1/1/16 - 12/31/16 54 1 0 1
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NUMBER OF DAYS BID/ASK MIDPOINT BELOW NAV
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FOR THE PERIOD 0.00%-0.49% 0.50%-0.99% 1.00%-1.99% >=2.00%
8/2/13 - 12/31/13 55 2 0 0
1/1/14 - 12/31/14 66 33 0 2
1/1/15 - 12/31/15 58 94 17 3
1/1/16 - 12/31/16 37 116 43 0
Page 3
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PORTFOLIO COMMENTARY
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FIRST TRUST MORNINGSTAR MANAGED FUTURES STRATEGY FUND (FMF)
DECEMBER 31, 2016 (UNAUDITED)
INVESTMENT ADVISOR
First Trust Advisors L.P. ("First Trust"), located in Wheaton, Illinois, is the
investment advisor, commodity pool operator and commodity trading advisor to the
First Trust Morningstar Managed Futures Strategy Fund (the "Fund" or "FMF"). In
this capacity, First Trust is responsible for the selection and ongoing
monitoring of the investments in the Fund's portfolio and certain other services
necessary for the management of the portfolio. First Trust serves as advisor for
four mutual fund portfolios, 10 exchange-traded funds consisting of 114 series,
16 closed-end funds, a variable insurance trust consisting of three series and
is also the portfolio supervisor of certain unit investment trusts sponsored by
First Trust Portfolios L.P. ("FTP"), also located in Wheaton, Illinois.
PORTFOLIO MANAGEMENT TEAM
JOHN GAMBLA - CFA, FRM, PRM, SENIOR PORTFOLIO MANAGER
ROB A. GUTTSCHOW - CFA, SENIOR PORTFOLIO MANAGER
COMMENTARY
FIRST TRUST MORNINGSTAR MANAGED FUTURES STRATEGY FUND
The First Trust Morningstar Managed Futures Strategy Fund (the "Fund" or "FMF")
is an actively managed exchange-traded fund. The Fund's investment objective is
to seek to achieve positive total returns that are not directly correlated to
the broad market equity or fixed income returns. The Fund seeks to provide
returns that exceed the performance of the Morningstar(R) Diversified Futures
IndexSM (the "Benchmark"). The Benchmark seeks to reflect trends (in either
direction) in the commodity futures, currency futures, and equity index futures
markets. The Benchmark is a fully collateralized futures index that includes
highly-liquid, exchange-listed futures contracts in commodities, currencies, and
equity indexes. The Fund will generally seek to hold similar instruments to
those included in the Benchmark. This commentary discusses the 12-month market
and Fund performance ended December 31, 2016.
OVERALL MARKET RECAP
U.S. economic growth was modest during the fiscal 12-month period ended December
31, 2016, with U.S. GDP growth estimated to be 2.0% annualized. The U.S.
unemployment rate declined throughout the year, falling from 5.0% to 4.7% during
the fiscal period. The total number of non-farm payroll jobs added to the U.S.
economy during the fiscal period, as measured by the Bureau of Labor Statistics,
was approximately 2.16 million. The overall steady performance of the U.S.
economy and the slight improvement in the unemployment rate, combined with a
patient, wait and see approach by the Federal Reserve Open Market Committee
("FOMC"), boosted equity markets throughout the year. These factors thereby
lifted U.S. equity markets (S&P 500(R), the "Index") to a total return of 11.96%
for the fiscal period.
While negative for the first two months of 2016, equities were up the remainder
of the year on improving earnings forecasts. The surprise Brexit vote in late
June, where voters in the UK chose to leave the European Union, created a short
bout of downward volatility which was quickly erased in July. Equity markets
drifted sideways to downward from July to November, as the results of the U.S.
election were eagerly awaited. Perhaps as shocking as the Brexit vote, Donald
Trump won a clear majority in the Electoral College, sparking a two month rally
that added 5.0% to the Index's total return for the year.
Throughout the year, bond prices rallied as the FOMC pushed potential rate hikes
further into the future. Rates on the 10-year U.S. Treasury reached a fiscal
period low in early July at 1.35%. Similar to equities, bond yields then drifted
higher from late July to early November awaiting the outcome of the U.S.
election. Bond market reaction was swift and negative to the election results as
President-Elect Trump's proposed policies of lower taxes and stimulus spending
were perceived to be pro-growth/inflationary and therefore bad for bonds.
Ten-year Treasury yields rose 0.40% in the week after the election and finished
the year 0.59% higher than on election night. For the year, the 10-year Treasury
yield was up 0.17%.
Trump's election and the range of expected policy changes, including the
potential for a more aggressive FOMC, helped boost the U.S. Dollar Index by 3.6%
for the fiscal period. Commodities, as measured by the Bloomberg Commodity
Index, posted their first positive year since 2010, rising in price by 11.77%.
Page 4
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PORTFOLIO COMMENTARY (CONTINUED)
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FIRST TRUST MORNINGSTAR MANAGED FUTURES STRATEGY FUND (FMF)
DECEMBER 31, 2016 (UNAUDITED)
FUND PERFORMANCE
The Fund's performance for the 12-month period ended December 31, 2016 was
-4.33% on a net asset value ("NAV") basis and -3.22% on a market price basis.
The Benchmark returned -2.80% over the same period.
The Fund generally will seek to hold similar instruments to those included in
the Benchmark. The Benchmark determines its holdings once a year in December on
the "reconstitution date." On the reconstitution date, 50% of the Benchmark
exposure is allocated to commodity futures and the other 50% is allocated
equally to global currencies and global equity index futures. The benchmark is
rebalanced on a quarterly basis (March, June, September, and December) to its
strategic allocation of 50%/25%/25% to commodity futures, equity index futures,
and currency futures, respectively. Once a month, a one-year moving average rule
is used to determine whether the Benchmark and the Fund are long or short on
their exposure to each of the individual futures contracts representing
commodities, equity indices, or currencies. If the current price is above the
moving average, the Fund is long while if the current price is below the one
year moving average, the Fund is short. For energy futures contracts (natural
gas, WTI crude, Brent crude, heating oil, gas oil, and gasoline), the Fund goes
flat rather than short if the current price is below the one year moving average
price.
During this performance period, the Fund entered the period short 20% global
equity futures, short 25% global currencies (long dollar), and short 20%
commodities. Long positions were limited to a 4% long position in global equity
futures and a 4.5% long position in commodities. During the year, equity and
commodity markets rallied and the dollar traded in a broad range before rallying
after the surprise result of the U.S. election.
Throughout the year, the Fund gradually decreased its short equity exposure and
increased its long equity exposure as global equity markets rallied. At year
end, the Fund was long all nine global equity index futures contained within the
Benchmark, with approximate total equity notional exposure of 25% of Fund NAV.
The top performing markets for the Fund were the DAX futures contracts and S&P
500(R) Index futures contracts while the NKY 225 futures contracts were the
bottom performers. The positive contribution to returns from the equity futures
contracts was primarily driven by the Fund being long equity markets during the
post-election rally.
Currency futures detracted slightly from Fund performance as the dollar weakened
throughout the first nine months of the year only to rally post-election. The
best performing currency exposure for the year was the British pound, which the
Fund was short throughout the year. The pound fell dramatically post Brexit
vote, which benefitted the Fund's short position. The two worst performing
currency positions were the euro and Australian dollar futures contracts. The
euro and Australian dollar positions switched from long to short several times
throughout the year, resulting in trading losses. At year end, the Fund was long
the Australian and Canadian dollar and short the euro, the British pound, the
Japanese yen and the Swiss franc.
Commodities exposure detracted from Fund performance as commodity markets
transitioned from a long-term down trend to a more positive trending market. The
resultant up and down volatility resulted in trading losses in many of the
agricultural contracts such as corn, soymeal, wheat, and lean hogs. Corn was the
worst performing position in the Fund for the year, as the Fund was short corn
into the sharp rally in May and June, only to switch to a long position as corn
turned and fell sharply in late June and July. At year end, the Fund was long
33% commodities and short 14%. Of particular note, the Fund at year end was long
all six energy-related contracts with a total long exposure of 23% of Fund NAV.
Please see the Consolidated Portfolio of Investments for a complete list of all
positions within the portfolio as of December 31, 2016.
MARKET AND FUND OUTLOOK
Today, we believe the Fund is well positioned to achieve its investment
objective. The Fund's broad palette of investments, combined with its long/short
trend following system, provide the Fund with the potential to profit in a
variety of economic environments and to do so in such a manner as to be
uncorrelated with traditional long-only stock and bond market indexes. We
believe that the Benchmark's methodology and the active management of the Fund
around that Benchmark will continue to produce strong risk-adjusted returns that
are uncorrelated with traditional long-only equity and bond markets.
Page 5
FIRST TRUST MORNINGSTAR MANAGED FUTURES STRATEGY FUND (FMF)
UNDERSTANDING YOUR FUND EXPENSES
DECEMBER 31, 2016 (UNAUDITED)
As a shareholder of First Trust Morningstar Managed Futures Strategy Fund (the
"Fund"), you incur two types of costs: (1) transaction costs; and (2) ongoing
costs, including management fees, distribution and/or service fees, if any, and
other Fund expenses. This Example is intended to help you understand your
ongoing costs (in U.S. dollars) of investing in the Fund and to compare these
costs with the ongoing costs of investing in other funds.
The Example is based on an investment of $1,000 invested at the beginning of the
period and held through the six-month period ended December 31, 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 six-month
period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second line in the following table provides information about hypothetical
account values and hypothetical expenses based on the Fund's actual expense
ratio and an assumed rate of return of 5% per year before expenses, which is not
the Fund's actual return. The hypothetical account values and expenses may not
be used to estimate the actual ending account balance or expenses you paid for
the period. You may use this information to compare the ongoing costs of
investing in the Fund and other funds. To do so, compare this 5% hypothetical
example with the 5% hypothetical examples that appear in the shareholder reports
of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs such as brokerage
commissions. Therefore, the second line in the table is useful in comparing
ongoing costs only, and will not help you determine the relative total costs of
owning different funds. In addition, if these transactional costs were included,
your costs would have been higher.
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ANNUALIZED
EXPENSE RATIO EXPENSES PAID
BEGINNING ENDING BASED ON THE DURING THE
ACCOUNT VALUE ACCOUNT VALUE SIX-MONTH SIX-MONTH
JULY 1, 2016 DECEMBER 31, 2016 PERIOD PERIOD (a)
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FIRST TRUST MORNINGSTAR MANAGED FUTURES STRATEGY FUND (FMF)
Actual $1,000.00 $ 980.00 0.99% $4.93
Hypothetical (5% return before expenses) $1,000.00 $1,020.16 0.99% $5.03
(a) Expenses are equal to the annualized expense ratio as indicated in the
table, multiplied by the average account value over the period (July 1,
2016 through December 31, 2016), multiplied by 184/366 (to reflect the
one-half year period).
Page 6
FIRST TRUST MORNINGSTAR MANAGED FUTURES STRATEGY FUND (FMF)
CONSOLIDATED PORTFOLIO OF INVESTMENTS
DECEMBER 31, 2016
Besides the following listed futures contracts of the Fund's wholly-owned
subsidiary, there were no investments held by the Fund at December 31, 2016.
The following futures contracts of the Fund's wholly-owned subsidiary were open
at December 31, 2016 (see Note 2B - Futures Contracts in the Notes to
Consolidated Financial Statements):
UNREALIZED
NUMBER NOTIONAL EXPIRATION APPRECIATION/
OF CONTRACTS VALUE DATE (DEPRECIATION)
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FUTURES CONTRACTS LONG:
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Australian Dollar Currency Futures 2 $ 149,430 Mar-17 $ (5,390)
Brent Crude Oil Futures 8 448,160 Jan-17 6,400
Canadian Dollar Currency Futures 1 74,990 Mar-17 (575)
CAC 40(R) 10 Euro Index Futures 3 151,439 Mar-17 2,005
Copper Futures 2 130,087 Mar-17 (4,812)
Cotton No. 2 Futures 2 71,131 Mar-17 (481)
DAX MINI Index Futures 4 237,752 Mar-17 3,621
FTSE 100 Index Futures 2 170,441 Mar-17 3,327
FTSE MIB Index Futures 1 99,660 Mar-17 1,421
IBEX 35 Index Futures 1 98,465 Jan-17 (427)
Low Sulphur Gasoil "G" Futures 8 395,200 Feb-17 8,600
Natural Gas Futures 9 307,720 Feb-17 23,840
NIKKEI 225 (OSE) Futures 1 158,032 Mar-17 5,390
NY Harbor ULSD Futures 4 283,718 Jan-17 6,619
RBOB Gasoline Futures 4 268,850 Feb-17 14,465
S&P 500 E-mini Futures 11 1,237,858 Mar-17 (7,947)
S&P TSX 60 IX Futures 1 133,646 Mar-17 (45)
Soybean Futures 8 416,250 May-17 (11,250)
Soybean (Meal) Futures 3 97,615 Mar-17 (2,635)
Soybean Oil Futures 4 85,382 Mar-17 (2,198)
SPI 200 Index Futures 1 99,570 Mar-17 2,021
Sugar #11 (World) Futures 9 207,770 Feb-17 (11,110)
WTI Crude Futures 8 423,600 Jan-17 6,160
----------- --------------
$ 5,746,766 $ 36,999
----------- --------------
-------------------------------------------------------------------------------------------------------------------------
FUTURES CONTRACTS SHORT:
-------------------------------------------------------------------------------------------------------------------------
British Pound Currency Futures 7 $ (555,625) Mar-17 $ 14,963
Cocoa Futures 3 (68,780) Mar-17 5,000
Coffee "C" Futures 2 (107,363) Mar-17 4,575
Corn Futures 17 (309,212) May-17 5,337
Euro FX Currency Futures 8 (1,067,900) Mar-17 10,500
Gold 100 oz Futures 3 (354,640) Feb-17 9,130
Japanese Yen Currency Futures 3 (319,013) Mar-17 (3,375)
Lean Hogs Futures 3 (68,382) Feb-17 (10,998)
Live Cattle Futures 3 (132,840) Feb-17 (6,420)
Silver Futures 2 (162,150) Mar-17 2,260
Swiss Franc Currency Futures 1 (123,937) Mar-17 613
Wheat Futures 7 (152,003) May-17 4,828
----------- --------------
$(3,421,845) $ 36,413
----------- --------------
TOTAL $ 2,324,921 $ 73,412
=========== ==============
See Notes to Consolidated Financial Statements Page 7
FIRST TRUST MORNINGSTAR MANAGED FUTURES STRATEGY FUND (FMF)
CONSOLIDATED PORTFOLIO OF INVESTMENTS
DECEMBER 31, 2016
-----------------------------
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of December 31,
2016 is as follows (see Note 2A - Portfolio Valuation in the Notes to
Consolidated Financial Statements):
ASSETS TABLE
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
12/31/2016 PRICES INPUTS INPUTS
------------ ------------ ------------ ------------
Futures Contracts.................................... $ 141,075 $ 141,075 $ -- $ --
============ ============ ============ ============
LIABILITIES TABLE
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
12/31/2016 PRICES INPUTS INPUTS
------------ ------------ ------------ ------------
Futures Contracts.................................... $ (67,663) $ (67,663) $ -- $ --
============ ============ ============ ============
All transfers in and out of the Levels during the period are assumed to be
transferred on the last day of the period at their current value. There were no
transfers between Levels at December 31, 2016.
Page 8 See Notes to Consolidated Financial Statements
FIRST TRUST MORNINGSTAR MANAGED FUTURES STRATEGY FUND (FMF)
CONSOLIDATED STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 2016
ASSETS:
Cash................................................................... $ 9,060,248
Cash segregated as collateral for open futures contracts............... 385,195
Receivables:
Variation margin.................................................... 141,075
--------------
Total Assets..................................................... 9,586,518
--------------
LIABILITIES:
Payables:
Variation margin.................................................... 67,663
Investment advisory fees............................................ 6,896
--------------
Total Liabilities................................................ 74,559
--------------
NET ASSETS............................................................. $ 9,511,959
==============
NET ASSETS CONSIST OF:
Paid-in capital........................................................ $ 9,440,490
Par value.............................................................. 2,020
Accumulated net investment income (loss)............................... (3,880)
Accumulated net realized gain (loss) on futures contracts and foreign
currency transactions............................................... --
Net unrealized appreciation (depreciation) on futures contracts and
foreign currency translation........................................ 73,329
--------------
NET ASSETS............................................................. $ 9,511,959
==============
NET ASSET VALUE, per share............................................. $ 47.09
==============
Number of shares outstanding (unlimited number of shares
authorized, par value $0.01 per share).............................. 202,000
==============
See Notes to Consolidated Financial Statements Page 9
FIRST TRUST MORNINGSTAR MANAGED FUTURES STRATEGY FUND (FMF)
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2016
INVESTMENT INCOME:
Interest............................................................... $ 12,555
--------------
Total investment income............................................. 12,555
--------------
EXPENSES:
Investment advisory fees............................................... 81,857
Interest expense on margin account..................................... 5,701
--------------
Total expenses...................................................... 87,558
--------------
NET INVESTMENT INCOME (LOSS)........................................... (75,003)
--------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Futures............................................................. (465,607)
Foreign currency transactions ...................................... 9,801
--------------
Net realized gain (loss)............................................... (455,806)
--------------
Net change in unrealized appreciation (depreciation) on:
Futures............................................................. 99,083
Foreign currency translation........................................ (10,975)
--------------
Net change in unrealized appreciation (depreciation)................... 88,108
--------------
NET REALIZED AND UNREALIZED GAIN (LOSS)................................ (367,698)
--------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS..................................................... $ (442,701)
==============
Page 10 See Notes to Consolidated Financial Statements
FIRST TRUST MORNINGSTAR MANAGED FUTURES STRATEGY FUND (FMF)
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
YEAR YEAR
ENDED ENDED
12/31/2016 12/31/2015
-------------- --------------
OPERATIONS:
Net investment income (loss)............................................ $ (75,003) $ (122,323)
Net realized gain (loss)................................................ (455,806) 121,724
Net change in unrealized appreciation (depreciation).................... 88,108 (64,514)
-------------- --------------
Net increase (decrease) in net assets resulting from operations......... (442,701) (65,113)
-------------- --------------
SHAREHOLDER TRANSACTIONS:
Proceeds from shares sold............................................... 2,350,623 2,585,913
Cost of shares redeemed................................................. (4,798,667) (2,583,328)
-------------- --------------
Net increase (decrease) in net assets resulting from shareholder
transactions.......................................................... (2,448,044) 2,585
-------------- --------------
Total increase (decrease) in net assets................................. (2,890,745) (62,528)
NET ASSETS:
Beginning of period..................................................... 12,402,704 12,465,232
-------------- --------------
End of period........................................................... $ 9,511,959 $ 12,402,704
============== ==============
Accumulated net investment income (loss) at end of period............... $ (3,880) $ 13,284
============== ==============
CHANGES IN SHARES OUTSTANDING:
Shares outstanding, beginning of period................................. 252,000 252,000
Shares sold............................................................. 50,000 50,000
Shares redeemed......................................................... (100,000) (50,000)
-------------- --------------
Shares outstanding, end of period....................................... 202,000 252,000
============== ==============
See Notes to Consolidated Financial Statements Page 11
FIRST TRUST MORNINGSTAR MANAGED FUTURES STRATEGY FUND (FMF)
CONSOLIDATED FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
FOR THE PERIOD
YEAR ENDED DECEMBER 31, 8/1/2013 (a)
---------------------------------------------------- THROUGH
2016 2015 2014 12/31/2013
-------------- -------------- -------------- --------------
Net asset value, beginning of period.................. $ 49.22 $ 49.47 $ 50.73 $ 50.00
---------- ---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss).......................... (0.36) (0.49) (0.55) (0.19)
Net realized and unrealized gain (loss)............... (1.77) 0.24 (0.71) 2.13
---------- ---------- ---------- ----------
Total from investment operations...................... (2.13) (0.25) (1.26) 1.94
---------- ---------- ---------- ----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net realized gain..................................... -- -- -- (1.21)
---------- ---------- ---------- ----------
Net asset value, end of period........................ $ 47.09 $ 49.22 $ 49.47 $ 50.73
========== ========== ========== ==========
TOTAL RETURN (b)...................................... (4.33)% (0.51)% (2.50)% 3.87%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's).................. $ 9,512 $ 12,403 $ 12,465 $ 5,174
RATIOS TO AVERAGE NET ASSETS:
Ratio of total expenses to average net assets......... 1.02% (c) 1.00% (c) 0.95% 0.95% (d)
Ratio of total expenses to average net assets
excluding interest expense......................... 0.95% 0.95% 0.95% 0.95% (d)
Ratio of net investment income (loss) to average net
assets............................................. (0.87)% (0.97)% (0.94)% (0.92)% (d)
Portfolio turnover rate (e)........................... 0% 0% 0% 0%
(a) Inception date is consistent with the commencement of investment
operations and is the date the initial creation unit was established.
First Trust Portfolios L.P. seeded the Fund on June 12, 2013, in order to
provide initial capital required by SEC rules.
(b) Total return is calculated assuming an initial investment made at the net
asset value at the beginning of the period, reinvestment of all
distributions at net asset value during the period, and redemption at net
asset value on the last day of the period. The returns presented do not
reflect the deduction of taxes that a shareholder would pay on Fund
distributions or the redemption or sale of Fund shares. Total return is
calculated for the time period presented and is not annualized for periods
of less than a year.
(c) Ratios reflect interest expenses of 0.07% and 0.05% for the years ended
December 31, 2016 and 2015, respectively, paid on futures margin accounts
which are not covered under the annual unitary management fee.
(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,
derivatives and in-kind transactions.
Page 12 See Notes to Consolidated Financial Statements
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FIRST TRUST MORNINGSTAR MANAGED FUTURES STRATEGY FUND (FMF)
DECEMBER 31, 2016
1. ORGANIZATION
First Trust Exchange-Traded Fund V (the "Trust") is an open-end management
investment company organized as a Massachusetts business trust on April 10,
2012, and is registered with the Securities and Exchange Commission ("SEC")
under the Investment Company Act of 1940, as amended (the "1940 Act").
The Trust currently consists of one fund, the First Trust Morningstar Managed
Futures Strategy Fund (the "Fund"), a non-diversified series of the Trust, which
trades under the ticker FMF on the NYSE Arca, Inc. and commenced operations on
August 1, 2013. Unlike conventional mutual funds, the Fund issues and redeems
shares on a continuous basis, at net asset value ("NAV"), only in large
specified blocks consisting of 50,000 shares called a "Creation Unit." The
Fund's 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 is an actively managed exchange-traded fund. The investment objective
of the Fund is to seek to provide investors with positive returns. Under normal
market conditions, the Fund, through a wholly-owned subsidiary of the Fund, FT
Cayman Subsidiary (the "Subsidiary"), organized under the laws of the Cayman
Islands, invests in a portfolio of exchange-listed commodity futures, currency
futures and equity index futures (collectively, "Futures Instruments"). The Fund
will not invest directly in Futures Instruments. The Fund seeks to gain exposure
to these investments exclusively by investing in the Subsidiary. The Fund's
investment in the Subsidiary may not exceed 25% of the Fund's total assets at
the end of each fiscal quarter.
2. SIGNIFICANT ACCOUNTING POLICIES
The Fund is considered an investment company and follows accounting and
reporting guidance under Financial Accounting Standards Board ("FASB")
Accounting Standards Codification ("ASC") Topic 946, "Financial
Services-Investment Companies." The consolidated financial statements include
the accounts on a consolidated basis of the Subsidiary. All intercompany
accounts and transactions have been eliminated in consolidation. The following
is a summary of significant accounting policies consistently followed by the
Fund in the preparation of the consolidated financial statements. The
preparation of the consolidated financial statements in accordance with
accounting principles generally accepted in the United States of America ("U.S.
GAAP") requires management to make estimates and assumptions that affect the
reported amounts and disclosures in the consolidated financial statements.
Actual results could differ from those estimates.
A. PORTFOLIO VALUATION
The Fund's NAV is determined daily as of the close of regular trading on the New
York Stock Exchange ("NYSE"), normally 4:00 p.m. Eastern time, on each day the
NYSE is open for trading. The Fund's NAV is calculated by dividing the value of
all assets of the Fund (including accrued interest and dividends), less all
liabilities (including accrued expenses and dividends declared but unpaid), by
the total number of shares outstanding.
The Fund's investments are valued daily at market value or, in the absence of
market value with respect to any portfolio securities, at fair value. Market
value prices represent last sale or official closing prices from a national or
foreign exchange (i.e., a regulated market) and are primarily obtained from
third-party pricing services. Fair value prices represent any prices not
considered market value prices and are either obtained from a third-party
pricing service or are determined by the Pricing Committee of the Fund's
investment advisor, First Trust Advisors L.P. ("First Trust" or the "Advisor"),
in accordance with valuation procedures adopted by the Trust's Board of
Trustees, and in accordance with provisions of the 1940 Act. Investments valued
by the Advisor's Pricing Committee, if any, are footnoted as such in the
footnotes to the Consolidated Portfolio of Investments. The Fund's investments
are valued as follows:
Exchange-traded futures contracts are valued at the closing price in the
market where such contracts are principally traded. If no closing price is
available, exchange-traded futures contracts are fair valued at the mean
of their most recent bid and asked price, if available, and otherwise at
their closing bid price.
If the Fund's investments are not able to be priced by their pre-established
pricing methods, such investments may be valued by the Trust's Board of Trustees
or its delegate, the Advisor's Pricing Committee, at fair value. A variety of
factors may be considered in determining the fair value of such investments.
Valuing the Fund's holdings using fair value pricing will result in using prices
for those holdings that may differ from current market valuations. The
Subsidiary's holdings will be valued in the same manner as the Fund's holdings.
The Fund is subject to fair value accounting standards that define fair value,
establish the framework for measuring fair value and provide a three-level
hierarchy for fair valuation based upon the inputs to the valuation as of the
measurement date. The three levels of the fair value hierarchy are as follows:
Page 13
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST MORNINGSTAR MANAGED FUTURES STRATEGY FUND (FMF)
DECEMBER 31, 2016
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 December 31, 2016, is
included with the Fund's Consolidated Portfolio of Investments.
B. FUTURES CONTRACTS
The Fund, through the Subsidiary, may purchase and sell exchange-listed
commodity, currency and equity index futures contracts. When the Subsidiary
purchases a listed futures contract, it agrees to purchase a specified reference
asset (e.g., commodity, currency or equity index) at a specified future date.
When the Subsidiary sells or shorts a listed futures contract, it agrees to sell
a specified reference asset (e.g., commodity, currency or equity index) at a
specified future date. The price at which the purchase and sale will take place
is fixed when the Subsidiary enters into the contract. The exchange clearing
corporation is the ultimate counterparty for all exchange-listed contracts, so
credit risk is limited to the creditworthiness of the exchange's clearing
corporation. Margin deposits are posted as collateral with the clearing broker
and, in turn, with the exchange clearing corporation.
1. EXCHANGE-LISTED COMMODITY FUTURES CONTRACTS -- Commodity futures
contracts are generally based upon commodities within the six
principal commodity groups: energy, industrial metals, agriculture,
precious metals, foods and fibers, and livestock. The price of a
commodity futures contract will reflect the storage costs of
purchasing the physical commodity. These storage costs include the
time value of money invested in the physical commodity plus the
actual costs of storing the commodity less any benefits from
ownership of the physical commodity that are not obtained by the
holder of a futures contract (this is sometimes referred to as the
"convenience yield"). To the extent that these storage costs change
for an underlying commodity while the Fund is in a long position on
that commodity, the value of the futures contract may change
proportionately.
2. INDEX FUTURES CONTRACTS -- An index futures contract is a bilateral
agreement pursuant to which two parties agree to take or make
delivery of an amount of cash equal to a specified dollar amount
multiplied by the difference between the index value at the close of
trading of the contract and the price at which the futures contract
was originally struck. No physical delivery of the securities
comprising the index is made. Instead, settlement in cash must occur
upon the termination of the contract, with the settlement being the
difference between the contract price and the actual level of the
index at the expiration of the contract.
3. CURRENCY FUTURES CONTRACTS -- Currency futures contracts are
transferable futures contracts that specify a price at which a
currency can be bought or sold at a future date. Currency future
contracts allow investors to hedge against foreign currency exchange
risk. Because currency futures contracts are marked-to-market daily,
investors can exit their obligation to buy or sell the currency
prior to the contract's delivery date by closing out the position.
With currency futures contracts, the price is determined when the
contract is signed, just as it is in the foreign currency exchange
market, and the currency pair is exchanged on the delivery date,
which is usually sometime in the distant future.
Upon entering into a futures contract, the Subsidiary must deposit funds, called
margin, with its custodian in the name of the clearing broker equal to a
specified percentage of the current value of the contract. Open futures
contracts are marked-to-market daily with the change in value recognized as a
component of "Net change in unrealized appreciation (depreciation) on futures"
on the Consolidated Statement of Operations. This daily fluctuation in value of
the contract is also known as variation margin and is included as "Variation
margin" payable or receivable on the Consolidated Statement of Assets and
Liabilities.
When the Subsidiary purchases or sells a futures contract, the Subsidiary is
required to collateralize its position in order to limit the risk associated
with the use of leverage and other related risks. To collateralize its position,
the Subsidiary segregates assets consisting of cash or liquid securities that,
when added to any amounts deposited with a futures commission merchant as
margin, are equal to the unrealized depreciation of the futures contract or
otherwise collateralize its position in a manner consistent with the 1940 Act or
the 1940 Act Rules and SEC interpretations thereunder. As the Subsidiary
Page 14
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST MORNINGSTAR MANAGED FUTURES STRATEGY FUND (FMF)
DECEMBER 31, 2016
continues to engage in the described securities trading practices and properly
segregates assets, the segregated assets will function as a practical limit on
the amount of leverage which the Subsidiary may undertake and on the potential
increase in the speculative character of the Subsidiary's outstanding portfolio
investments. Additionally, such segregated assets generally ensure the
availability of adequate funds to meet the obligations of the Subsidiary arising
from such investment activities.
C. INVESTMENT TRANSACTIONS AND INVESTMENT INCOME
Investment transactions are recorded as of the trade date. Realized gains and
losses from investment transactions are recorded on the identified cost basis.
Interest income, if any, is recorded on the accrual basis.
D. CASH AND FOREIGN CURRENCY
The Fund holds assets equal to or greater than the full notional exposure of the
future contracts. These assets may consist of cash and other short-term
securities to comply with SEC guidance with respect to coverage of futures
contracts by registered investment companies. The Fund also has restricted
foreign currency held for margin requirements. At December 31, 2016, the Fund
had restricted foreign currency of $15,920, proceeds of $16,003, in addition to
restricted cash held of $369,275 which is included in "Cash segregated as
collateral for open futures contracts" on the Consolidated Statement of Assets
and Liabilities. The books and records of the Fund are maintained in U.S.
dollars. Foreign currencies, futures contracts and other assets and liabilities
are translated into U.S. dollars at the exchange rates prevailing at the end of
the period.
Purchases and sales of futures contracts and items of income and expense are
translated on the respective dates of such transactions. Unrealized gains and
losses on assets and liabilities which result from changes in foreign currency
exchange rates have been included in "Net change in unrealized appreciation
(depreciation) on foreign currency translation" on the Consolidated Statement of
Operations. Unrealized gains and losses on futures contracts which result from
changes in foreign exchange rates are included with fluctuations arising from
changes in market price and are shown in "Net change in unrealized appreciation
(depreciation) on futures" on the Consolidated Statement of Operations. Net
realized foreign currency gains and losses include the effect of changes in
exchange rates between trade date and settlement date on foreign currency
transactions and interest and dividends received as shown in "Net realized gain
(loss) on foreign currency transactions." The portion of foreign currency gains
and losses related to fluctuation in exchange rates between the initial purchase
trade date and subsequent sale trade date is included in "Net realized gain
(loss) on futures" on the Consolidated Statement of Operations.
E. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
Dividends from net investment income, if any, are declared and paid quarterly by
the Fund. The Fund distributes its net realized capital gains, if any, to
shareholders at least annually.
Distributions in cash may be reinvested automatically in additional whole shares
only if the broker through whom the shares were purchased makes such option
available. Such shares will generally be reinvested by the broker based upon the
market price of those shares and investors may be subject to customary brokerage
commissions charged by the broker.
Distributions from net investment income and realized capital gains are
determined in accordance with income tax regulations, which may differ from U.S.
GAAP. Certain capital accounts in the consolidated financial statements are
periodically adjusted for permanent differences in order to reflect their tax
character. These permanent differences are primarily due to the varying
treatment of income and gain/loss on portfolio securities held by the Fund and
have no impact on net assets or NAV per share. Temporary differences, which
arise from recognizing certain items of income, expense and gain/loss in
different periods for financial statement and tax purposes, will reverse at some
time in the future.
The Fund paid no distributions during the tax periods ended December 31, 2016
and December 31, 2015.
As of December 31, 2016, the components of distributable earnings on a tax basis
for the Fund were as follows:
Accumulated Net
Undistributed Capital and Unrealized
Ordinary Other Appreciation
Income Gains (Depreciation)
----------------- ----------------- -----------------
$ -- $ 67,287 $ 6,042
Page 15
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST MORNINGSTAR MANAGED FUTURES STRATEGY FUND (FMF)
DECEMBER 31, 2016
F. INCOME TAXES
The Fund intends to continue to qualify as a regulated investment company by
complying with the requirements under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "Code"), which includes distributing substantially all
of its net investment income and net realized gains to shareholders.
Accordingly, no provision has been made for federal and state income taxes.
However, due to the timing and amount of distributions, the Fund may be subject
to an excise tax of 4% of the amount by which approximately 98% of the Fund's
taxable income exceeds the distributions from such taxable income for the
calendar year.
The Subsidiary is classified as a controlled foreign corporation under
Subchapter N of the Code. Therefore, the Fund is required to increase its
taxable income by its share of the Subsidiary's income, whether or not such
earnings are distributed by the Subsidiary to the Fund. Net investment losses of
the Subsidiary cannot be deducted by the Fund in the current period nor carried
forward to offset taxable income in future periods.
The Fund intends to utilize provisions of the federal income tax laws, which
allow it to carry a realized capital loss forward indefinitely following the
year of the loss and offset such loss against any future realized capital gains.
At December 31, 2016, the Fund had no capital loss carryforwards outstanding for
federal income tax purposes. The Fund is subject to certain limitations under
U.S. tax rules on the use of capital loss carryforwards and net unrealized
built-in losses. These limitations apply when there has been a 50% change in
ownership.
The Fund is subject to accounting standards that establish a minimum threshold
for recognizing, and a system for measuring, the benefits of a tax position
taken or expected to be taken in a tax return. Taxable years ended 2013, 2014,
2015 and 2016 remain open to federal and state audit. As of December 31, 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
consolidated financial statements for uncertain tax positions.
In order to present paid-in capital, accumulated net investment income (loss)
and accumulated net realized gain (loss) on futures on the Consolidated
Statement of Assets and Liabilities that more closely represent their tax
character, certain adjustments have been made to paid-in capital, accumulated
net investment income (loss) and accumulated net realized gain (loss) on
futures. These adjustments are primarily due to the difference between book and
tax treatment of net investment income from the Subsidiary. The results of
operations and net assets were not affected by these adjustments. For the year
ended December 31, 2016, the adjustments for the Fund were as follows:
Accumulated
Accumulated Net Realized
Net Investment Gain (Loss) Paid-in
Income (Loss) on Futures Capital
----------------- ----------------- -----------------
$ 57,839 $ 455,806 $ (513,645)
G. EXPENSES
Expenses, other than the investment advisory fee and other excluded expenses,
are paid by First Trust (See Note 3).
H. NEW AND AMENDED FINANCIAL REPORTING RULES AND FORMS
On October 13, 2016, the SEC adopted new rules and forms, and amended existing
rules and forms. The new and amended rules and forms are intended to modernize
the reporting of information provided by funds and to improve the quality and
type of information that funds provide to the SEC and investors. The new and
amended rules and forms will be effective for the First Trust funds, including
the Fund, for reporting periods beginning on and after June 1, 2018. Management
is evaluating the new and amended rules and forms to determine the impact to the
Funds.
I. NEW ACCOUNTING PRONOUNCEMENT
In December 2016, FASB released Accounting Standards Update ("ASU") 2016-19 that
makes technical changes to various sections of the ASC, including Topic 820,
Fair Value Measurement. The changes to Topic 820 are intended to clarify the
difference between a valuation approach and a valuation technique. The changes
to ASC 820-10-50-2 require a reporting entity to disclose, for Level 2 and Level
3 fair value measurements, a change in either or both a valuation approach and a
valuation technique and the reason(s) for the change. The changes to Topic 820
are effective for fiscal years, and interim periods within those fiscal years,
beginning after December 15, 2016. At this time, management is evaluating the
implications of the ASU and has not yet determined its impact on the
consolidated financial statements and disclosures.
Page 16
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST MORNINGSTAR MANAGED FUTURES STRATEGY FUND (FMF)
DECEMBER 31, 2016
3. INVESTMENT ADVISORY FEE, AFFILIATED TRANSACTIONS AND OTHER FEE ARRANGEMENTS
First Trust, the investment advisor to the Fund, is a limited partnership with
one limited partner, Grace Partners of DuPage L.P., and one general partner, The
Charger Corporation. The Charger Corporation is an Illinois corporation
controlled by James A. Bowen, Chief Executive Officer of First Trust. First
Trust is responsible for the selection and ongoing monitoring of the investments
in the Fund's and the Subsidiary's portfolios, managing the Fund's business
affairs and providing certain administrative services necessary for the
management of the Fund.
Pursuant to the Investment Management Agreement between the Trust and the
Advisor, First Trust manages the investment of the Fund's assets and is
responsible for the Fund's expenses, including the cost of transfer agency,
custody, fund administration, legal, audit and other services, but excluding fee
payments under the Investment Management Agreement, interest, taxes, brokerage
commissions and other expenses connected with the execution of portfolio
transactions, distribution and service fees pursuant to a 12b-1 plan, if any,
and extraordinary expenses. The Fund has agreed to pay First Trust an annual
unitary management fee equal to 0.95% of its average daily net assets. First
Trust also provides fund reporting services to the Fund for a flat annual fee in
the amount of $9,250, which is covered under the annual unitary management fee.
The Subsidiary does not pay First Trust a separate management fee.
The Trust has multiple service agreements with Brown Brothers Harriman & Co.
("BBH"). Under the service agreements, BBH performs custodial, fund accounting,
certain administrative services, and transfer agency services for the Fund. As
custodian, BBH is responsible for custody of the Fund's assets. As fund
accountant and administrator, BBH is responsible for maintaining the books and
records of the Fund's investments and cash. As transfer agent, BBH is
responsible for maintaining shareholder records for the Fund.
Each Trustee who is not an officer or employee of First Trust, any sub-advisor
or any of their affiliates ("Independent Trustees") is paid a fixed annual
retainer that is allocated equally among each fund in the First Trust Fund
Complex. 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.
Independent Trustees are reimbursed for travel and out-of-pocket expenses in
connection with all meetings. The Lead Independent Trustee and Committee
Chairmen rotate every three years. The officers and "Interested" Trustee receive
no compensation from the Trust for acting in such capacities.
4. PURCHASES AND SALES OF INVESTMENTS
For the year ended December 31, 2016, the cost of purchases and proceeds from
sales of investment securities for the Fund, excluding short-term investments,
derivatives, and in-kind transactions, were $0 and $0, respectively.
For the year ended December 31, 2016, the Fund did not have any in-kind
purchases or sales.
5. DERIVATIVE TRANSACTIONS
The following table presents the types of derivatives held by the Subsidiary at
December 31, 2016, the primary underlying risk exposure and the location of
these instruments as presented on the Consolidated Statement of Assets and
Liabilities.
ASSET DERIVATIVES LIABILITY DERIVATIVES
-------------------------------------------- --------------------------------------------
CONSOLIDATED CONSOLIDATED
DERIVATIVES STATEMENT OF ASSETS AND STATEMENT OF ASSETS AND
INSTRUMENT RISK EXPOSURE LIABILITIES LOCATION VALUE LIABILITIES LOCATION VALUE
-------------- ---------------- ------------------------------ ----------- ------------------------------ -----------
Futures Commodity Risk Variation Margin Receivable $ 97,214 Variation Margin Payable $ 49,904
Futures Equity Risk Variation Margin Receivable 17,785 Variation Margin Payable 8,419
Futures Currency Risk Variation Margin Receivable 26,076 Variation Margin Payable 9,340
Page 17
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST MORNINGSTAR MANAGED FUTURES STRATEGY FUND (FMF)
DECEMBER 31, 2016
The following table presents the amount of net realized gain (loss) and change
in net unrealized appreciation (depreciation) recognized for the year ended
December 31, 2016, on derivative instruments, as well as the primary underlying
risk exposure associated with each instrument.
CONSOLIDATED STATEMENT OF OPERATIONS LOCATION COMMODITY RISK EQUITY RISK CURRENCY RISK
------------------------------------------------------------------ ----------------- ----------------- -----------------
Net realized gain (loss) on futures $ (415,339) $ (14,624) $ (35,644)
Net change in unrealized appreciation (depreciation) on futures 31,363 57,213 10,507
During the year ended December 31, 2016, the amounts of notional values of
futures contracts opened and closed were as follows:
Notional Amount*
----------------------------
Total Commodity Risk $ 37,691,648
Futures contracts Opened $ 19,530,277
Futures contracts Closed 18,161,371
Total Equity Risk 27,752,300
Futures contracts Opened 13,636,025
Futures contracts Closed 14,116,275
Total Currency Risk 31,588,919
Futures contracts Opened 15,377,576
Futures contracts Closed 16,211,343
*Amounts based on activity levels during the period.
The Fund does not have the right to offset financial assets and financial
liabilities related to futures contracts on the Consolidated Statement of Assets
and Liabilities.
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. If the Cash Component is a
positive number (i.e., the NAV per Creation Unit Aggregation exceeds the Deposit
Amount), the Authorized Participant will deliver the Cash Component. If the Cash
Component is a negative number (i.e., the NAV per Creation Unit Aggregation is
less than the Deposit Amount), the Authorized Participant will receive the Cash
Component. Purchasers of Creation Units must pay to BBH, as transfer agent, a
creation fee (the "Creation Transaction Fee") regardless of the number of
Creation Units purchased in the transaction. The Creation Transaction Fee 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 BBH, as transfer
agent, a redemption transaction fee (the "Redemption Transaction Fee"),
regardless of the number of Creation Units redeemed in the transaction. The
Redemption Transaction Fee may vary and is based on the composition of the
securities included in the Fund's portfolio and the countries in which the
transactions are settled. The Redemption Transaction Fee is currently $500. The
Fund reserves the right to effect redemptions in cash. An Authorized Participant
may request cash redemption in lieu of securities; however, the Fund may, in its
discretion, reject any such request.
7. DISTRIBUTION PLAN
The Board of Trustees adopted a Distribution and Service Plan pursuant to Rule
12b-1 under the 1940 Act. In accordance with the Rule 12b-1 plan, the Fund is
authorized to pay an amount up to 0.25% of its average daily net assets each
year to reimburse First Trust Portfolios L.P. ("FTP"), the distributor of the
Fund, for amounts expended to finance activities primarily intended to result in
Page 18
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST MORNINGSTAR MANAGED FUTURES STRATEGY FUND (FMF)
DECEMBER 31, 2016
the sale of Creation Units or the provision of investor services. FTP may also
use this amount to compensate securities dealers or other persons that are
Authorized Participants for providing distribution assistance, including
broker-dealer and shareholder support and educational and promotional services.
No 12b-1 fees are currently paid by the Fund, and pursuant to a contractual
arrangement, no 12b-1 fees will be paid any time before April 30, 2018.
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 to the Fund through
the date the consolidated financial statements were issued, and has determined
that there was the following subsequent event:
Effective January 3, 2017, the Chicago Mercantile Exchange ("CME") and
LCH.Clearnet Limited ("LCH") amended their respective rulebooks to legally
characterize variation margin payments -- for derivative contracts that are
referred to as settled-to-market (STM) -- as settlements of the derivative's
mark-to-market exposure and not collateral. These rulebook changes affect the
entities that have derivatives cleared through the CME or LCH. Management is
currently evaluating the impact, if any, of these rulebook changes to the Fund's
consolidated financial statements and related disclosures.
Page 19
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
--------------------------------------------------------------------------------
TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF FIRST TRUST EXCHANGE-TRADED FUND V:
We have audited the accompanying consolidated statement of assets and
liabilities of First Trust Morningstar Managed Futures Strategy Fund and
Subsidiary (the "Fund"), a series of the First Trust Exchange-Traded Fund V,
including the consolidated portfolio of investments, as of December 31, 2016,
and the related consolidated statement of operations for the year then ended,
the consolidated statements of changes in net assets for each of the two years
in the period then ended, and the consolidated financial highlights for each of
the periods presented. These consolidated financial statements and consolidated
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. The Fund
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Fund's internal control over
financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. Our procedures included confirmation
of securities owned as of December 31, 2016 by correspondence with the Fund's
custodian and brokers. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the consolidated financial statements and consolidated financial
highlights referred to above present fairly, in all material respects, the
financial position of First Trust Morningstar Managed Futures Strategy Fund and
Subsidiary as of December 31, 2016, the results of its operations for the year
then ended, the changes in its net assets for each of the two years in the
period then ended and the financial highlights for each of the periods
presented, in conformity with accounting principles generally accepted in the
United States of America.
/s/ Deloitte & Touche LLP
Chicago, Illinois
February 23, 2017
Page 20
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ADDITIONAL INFORMATION
--------------------------------------------------------------------------------
FIRST TRUST MORNINGSTAR MANAGED FUTURES STRATEGY FUND (FMF)
DECEMBER 31, 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 is
available (1) without charge, upon request, by calling (800) 988-5891; (2) on
the Fund's website located at http://www.ftportfolios.com; and (3) on the
Securities and Exchange Commission's ("SEC") website located at
http://www.sec.gov.
PORTFOLIO HOLDINGS
The Trust files its complete schedule of portfolio holdings with the SEC for the
first and third quarters of each fiscal year on Form N-Q. The Trust's 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.
FEDERAL TAX INFORMATION
For the taxable year ended December 31, 2016, the following percentages of
ordinary income (including the short-term capital gain) distribution made by the
Fund qualify for the dividends received deduction available to corporations and
are hereby designated as qualified dividend income:
Dividends Received Deduction Qualified Dividend Income
---------------------------- -------------------------
0.00% 0.00%
RISK CONSIDERATIONS
RISKS ARE INHERENT IN ALL INVESTING. YOU SHOULD CONSIDER THE FUND'S INVESTMENT
OBJECTIVE, RISKS, CHARGES AND EXPENSES CAREFULLY BEFORE INVESTING. YOU CAN
DOWNLOAD THE FUND'S PROSPECTUS AT HTTP://WWW.FTPORTFOLIOS.COM OR CONTACT FIRST
TRUST PORTFOLIOS L.P. AT (800) 621-1675 TO REQUEST A PROSPECTUS, WHICH CONTAINS
THIS AND OTHER INFORMATION ABOUT THE FUND. FOR ADDITIONAL INFORMATION ABOUT THE
RISKS ASSOCIATED WITH INVESTING IN THE FUND, PLEASE SEE THE FUND'S STATEMENT OF
ADDITIONAL INFORMATION, AS WELL AS OTHER REGULATORY FILINGS. READ THESE
DOCUMENTS CAREFULLY BEFORE YOU INVEST. FIRST TRUST PORTFOLIOS L.P. IS THE
DISTRIBUTOR OF FIRST TRUST EXCHANGE-TRADED FUND V.
The following summarizes some of the risks that should be considered for the
Fund.
BENCHMARK RISK. The Fund seeks to exceed the performance of the Morningstar(R)
Diversified Futures Index(SM) (the "Benchmark") by actively selecting
investments for the Fund with varying maturities from the underlying components
of the Benchmark. The Benchmark is entirely model-based. As market dynamics
shift over time, the model may become outdated or inaccurate. The Benchmark and
the Fund will take both long and short positions and should not be used as
proxies for taking long-only positions. The Benchmark and the Fund could lose
significant value during periods when long-only indexes rise. Similarly, the
Benchmark and the Fund are not a substitute for short-only positions. The
Benchmark is based on historical price trends. There can be no assurance that
such trends will be reflected in future market movements. In markets without
sustained price trends, or markets with significant price movements that quickly
reverse, the Benchmark and the Fund may suffer significant losses. The Benchmark
is based on the price of futures contracts. Futures contracts reflect the
expected future value of a commodity, currency or equity index. The Benchmark
and the Fund do not reflect "spot" prices. Spot prices reflect immediate
delivery value, not expected future value.
CASH TRANSACTIONS RISK. The Fund will, under most circumstances, effect a
portion of creations and redemptions for cash, rather than in-kind securities.
As a result, an investment in the Fund may be less tax-efficient than an
investment in an exchange traded fund that effects its creations and redemption
for in-kind securities. Because the Fund may effect a portion of redemptions for
cash, it may be required to sell portfolio securities in order to obtain the
cash needed to distribute redemption proceeds. A sale of shares may result in
capital gains or losses and may also result in higher brokerage costs.
CLEARING BROKER RISK. The failure or bankruptcy of the Fund's and the
Subsidiary's clearing broker could result in a substantial loss of Fund assets.
Under current Commodity Futures Trading Commission ("CFTC") regulations, a
clearing broker maintains customers' assets in a bulk segregated account. If a
clearing broker fails to do so, or is unable to satisfy a substantial deficit in
a customer account, its other customers may be subject to risk of loss of their
funds in the event of that clearing broker's bankruptcy. In that event, the
clearing broker's customers, such as the Fund and the Subsidiary, are entitled
to recover, even in respect of property specifically traceable to them, only a
proportional share of all property available for distribution to all of that
clearing broker's customers.
Page 21
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ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST MORNINGSTAR MANAGED FUTURES STRATEGY FUND (FMF)
DECEMBER 31, 2016 (UNAUDITED)
COMMODITY RISK. The value of Futures Instruments typically is based upon the
price movements of a physical commodity or an economic variable linked to such
price movements. The prices of Futures Instruments may fluctuate quickly and
dramatically and may not correlate to price movements in other asset classes. An
active trading market may not exist for certain commodities. Each of these
factors and events could have a significant negative impact on the Fund.
COUNTERPARTY RISK. The Fund bears the risk that the counterparty to a commodity
derivative or other contract with a third party may default on its obligations
or otherwise fail to honor its obligations. If a counterparty defaults on its
payment obligations, the Fund will lose money and the value of an investment in
Fund shares may decrease. In addition, the Fund may engage in such investment
transactions with a limited number of counterparties.
CREDIT RISK. Credit risk is the risk that an issuer of a security will be unable
or unwilling to make dividend, interest and/or principal payments when due and
the related risk that the value of a security may decline because of concerns
about the issuer's ability to make such payments.
CURRENCY EXCHANGE RISK. The Fund holds investments that are denominated in
non-U.S. currencies, or in securities that provide exposure to such currencies,
currency exchange rates or interest rates denominated in such currencies.
Changes in currency exchange rates and the relative value of non-U.S. currencies
will affect the value of the Fund's investment and the value of your Fund
shares. Currency exchange rates can be very volatile and can change quickly and
unpredictably. As a result, the value of an investment in the Fund may change
quickly and without warning and you may lose money.
DERIVATIVES INVESTMENT RISK. The Fund, through the Subsidiary, invests in
products generally referred to as "derivatives." Derivatives are financial
instruments whose value depends upon, or is derived from, an underlying
reference asset, such as a commodity, an index, or an interest or a currency
exchange rate. Derivatives are subject to a number of risks described elsewhere
in this prospectus, such as credit risk, interest rate risk and market risk. In
addition, they involve the risk that changes in the value of the derivative may
not correlate perfectly or substantially with the underlying asset, rate or
index. Fund losses are likely to occur if the values do not correlate as
expected. Derivatives can be volatile and may be less liquid than other
securities. A lack of liquidity could result in the Fund being unable to close
out a derivatives transaction in a cost-efficient manner. Moreover, unlike a
publicly traded security for which the value is readily ascertainable,
derivatives may at times be difficult to value.
The use of 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. Derivative instruments also involve the
risk that the other party to the derivative transaction will not meet its
obligations. These risks are heightened when derivatives are used 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.
The Fund's use of certain derivatives may create investment leverage. This means
that the derivative position may provide the Fund with investment exposure
greater than the value of the Fund's investment in the derivative. As a result,
these derivatives may magnify losses to the Fund, and even a small market
movement may result in significant losses to the Fund. The risk of loss from
certain short derivative positions is theoretically unlimited. The Fund may at
times be required to liquidate portfolio positions, including when it is not
advantageous to do so, in order to comply with the guidance from the Securities
and Exchange Commission regarding asset segregation requirements to cover
certain derivative positions. The success of the Fund's derivatives strategies
will depend on the Advisor's ability to manage these sophisticated instruments.
The U.S. government has recently enacted legislation which includes new
regulation of derivatives markets. Because the legislation leaves much to rule
making, and many rules are not yet final, the ultimate impact remains unclear.
Regulatory changes could restrict the ability of the Fund and Subsidiary to
engage in derivative transactions or increase the cost of these transactions,
which may make it difficult or impossible for the Fund to pursue its investment
strategy.
ETF RISK. An ETF trades like common stock and represents a portfolio of
securities. The risks of owning an ETF generally reflect the risks of owning the
underlying securities, although lack of liquidity in an ETF could result in it
being more volatile and ETFs have management fees that increase their costs.
FOREIGN COMMODITIES MARKETS RISK. The Fund, through the Subsidiary, engages in
trading on commodity markets outside the United States on behalf of the Fund.
Trading on such markets is not regulated by any United States government agency
and may involve certain risks not applicable to trading on United States
exchanges. The Fund may not have the same access to certain trades as do various
other participants in foreign markets. Furthermore, as the Fund will determine
its net assets in United States dollars, with respect to trading in foreign
markets the Fund will be subject to the risk of fluctuations in the exchange
rate between the local currency and dollars as well as the possibility of
exchange controls. Certain futures contracts traded on foreign exchanges are
treated differently for federal income tax purposes than are domestic contracts.
Page 22
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST MORNINGSTAR MANAGED FUTURES STRATEGY FUND (FMF)
DECEMBER 31, 2016 (UNAUDITED)
FREQUENT TRADING RISK. The Fund regularly purchases and subsequently sells,
i.e., "rolls," individual commodity futures contracts throughout the year so as
to maintain a fully invested position. As the commodity contracts near their
expiration dates, the Fund rolls them over into new contracts. This frequent
trading of contracts may increase the amount of commissions or mark-ups to
broker-dealers that the Fund pays when it buys and sells contracts, which may
detract from the Fund's performance.
FUTURES RISK. The Fund invests in futures through the Subsidiary. All futures
and futures-related products are highly volatile. Price movements are influenced
by, among other things, changing supply and demand relationships; climate;
government agricultural, trade, fiscal, monetary and exchange control programs
and policies; national and international political and economic events; crop
diseases; the purchasing and marketing programs of different nations; and
changes in interest rates. In addition, governments from time to time intervene,
directly and by regulation, in certain markets, particularly those in
currencies.
GAP RISK. The Fund is subject to the risk that a commodity price will change
from one level to another with no trading in between. Usually such movements
occur when there are adverse news announcements, which can cause a commodity
price to drop substantially from the previous day's closing price.
INCOME RISK. Income from the Fund's fixed income investments could decline
during periods of falling interest rates.
INTEREST RATE RISK. Interest rate risk is the risk that the value of the
securities in the Fund will decline because of rising market interest rates. The
Fund may be subject to a greater risk of rising interest rates than would
normally be the case due to the recent period of historically low rates and the
effect of potential government fiscal policy initiatives and resulting market
reaction to those initiatives. Interest rate risk is generally lower for
shorter-term investments and higher for longer-term investments.
INVESTMENT COMPANIES RISK. The Fund may invest in securities of other investment
companies, including ETFs. As a shareholder in other investment companies, the
Fund will bear its ratable share of that investment company's expenses, and
would remain subject to payment of the Fund's advisory and administrative fees
with respect to assets so invested. Shareholders would therefore be subject to
duplicative expenses to the extent the Fund invests in other investment
companies. In addition, the Fund will incur brokerage costs when purchasing and
selling shares of ETFs or other exchange-traded investment companies.
LIQUIDITY RISK. The Fund invests in Futures Instruments, which may be less
liquid than other types of investments. The illiquidity of Futures Instruments
could have a negative effect on the Fund's ability to achieve its investment
objective and may result in losses to Fund shareholders.
MANAGEMENT RISK. The Fund is subject to management risk because it is an
actively managed portfolio. The Advisor will apply investment techniques and
risk analyses in making investment decisions for the Fund, but there can be no
guarantee that the Fund will meet its investment objective.
MARKET RISK. The trading prices of commodities futures, fixed income securities
and other instruments fluctuate in response to a variety of factors. The Fund's
net asset value and market price may fluctuate significantly in response to
these factors. As a result, an investor could lose money over short or long
periods of time.
NON-CORRELATION RISK. The Fund's return may not correlate the return of the
Benchmark for a number of reasons. For example, the Advisor may elect not to
have the Fund's portfolio holdings exactly replicate the securities included in
the Benchmark or the ratios between the securities included in the Benchmark. In
addition, the Fund incurs operating expenses not applicable to the Benchmark,
and may incur costs in buying and selling securities, especially when
rebalancing the Fund's portfolio holdings to reflect changes in the composition
of the Benchmark.
NON-DIVERSIFICATION RISK. The Fund is classified as "non-diversified" under the
Investment Company Act of 1940, as amended (the "1940 Act"). As a result, the
Fund is only limited as to the percentage of its assets that may be invested in
the securities of any one issuer by the diversification requirements imposed by
the Internal Revenue Code of 1986, as amended (the "Code"). The Fund may invest
a relatively high percentage of its assets in a limited number of issuers. As a
result, the Fund may be more susceptible to a single adverse economic or
regulatory occurrence affecting one or more of these issuers, experience
increased volatility and be highly invested in certain issuers.
NON-U.S. INVESTMENT RISK. The Fund may invest in commodity futures contracts
traded on non-U.S. exchanges or enter into over-the-counter derivative contracts
with non-U.S. counterparties. Transactions on non-U.S. exchanges or with
non-U.S. counterparties present risks because they may not be subject to the
same degree of regulation as their U.S. counterparts.
REGULATORY RISK. The Fund's investment decisions may need to be modified, and
commodity contract positions held by the Fund may have to be liquidated at
disadvantageous times or prices, to avoid exceeding any applicable position
limits established by the CFTC, potentially subjecting the Fund to substantial
losses. The regulation of commodity transactions in the United States is a
Page 23
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ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST MORNINGSTAR MANAGED FUTURES STRATEGY FUND (FMF)
DECEMBER 31, 2016 (UNAUDITED)
rapidly changing area of law and is subject to ongoing modification by
government, self-regulatory and judicial action. The effect of any future
regulatory change with respect to any aspect of the Fund is impossible to
predict, but could be substantial and adverse to the Fund.
REPURCHASE AGREEMENT RISK. The Fund's investment in repurchase agreements may be
subject to market and credit risk with respect to the collateral securing the
repurchase agreements. Investments in repurchase agreements also may be subject
to the risk that the market value of the underlying obligations may decline
prior to the expiration of the repurchase agreement term.
SHORT SALES RISK. The Fund may engage in "short sale" transactions. The Fund
will lose value if the security or instrument that is the subject of a short
sale increases in value. The Fund also may enter into a short derivative
position through futures contracts, or short positions on currency futures. If
the price of the security or derivative that is the subject of a short sale
increases, then the Fund will incur a loss equal to the increase in price from
the time that the short sale was entered into plus any premiums and interest
paid to a third party in connection with the short sale. Therefore, short sales
involve the risk that losses may be exaggerated, potentially losing more money
than the actual cost of the investment. Also, there is the risk that the third
party to the short sale may fail to honor its contract terms, causing a loss to
the Fund.
SUBSIDIARY INVESTMENT RISK. Changes in the laws of the United States and/or the
Cayman Islands, under which the Fund and the Subsidiary are organized,
respectively, could result in the inability of the Fund to operate as intended
and could negatively affect the Fund and its shareholders. The Subsidiary is not
registered under the 1940 Act and is not subject to all the investor protections
of the 1940 Act. Thus, the Fund, as an investor in the Subsidiary, will not have
all the protections offered to investors in registered investment companies.
TAX RISK. The Fund intends to treat any income it may derive from Futures
Instruments (other than derivatives described in Revenue Rulings 2006 1 and 2006
31) received by the Subsidiary as "qualifying income" under the provisions of
the Internal Revenue Code of 1986, as amended, applicable to "regulated
investment companies" ("RICs"), based on a tax opinion received from special
counsel which was based, in part, on numerous private letter rulings ("PLRs")
provided to third parties not associated with the Fund or its affiliates (which
only those parties may rely on as precedent). Shareholders and potential
investors should be aware, however, that in September 2016 the Internal Revenue
Service released proposed Regulations that, if finalized in the form proposed,
would limit the qualifying income from the Subsidiary to the income distributed
in the same year in which the income is required to be included in the income of
the Fund under the controlled foreign corporation rules. The Fund intends to
distribute the income in the same year as the income is required to be included,
but a failure to do so could cause the Fund to have non-qualifying income and
potentially lose RIC status. If the Fund did not qualify as a RIC for any
taxable year and certain relief provisions were not available, the Fund's
taxable income would be subject to tax at the Fund level and to a further tax at
the shareholder level when such income is distributed. In such event, in order
to re-qualify for taxation as a RIC, the Fund might be required to recognize
unrealized gains, pay substantial taxes and interest and make certain
distributions. This would cause investors to incur higher tax liabilities than
they otherwise would have incurred and would have a negative impact on Fund
returns. In such event, the Fund's Board of Trustees may determine to reorganize
or close the Fund or materially change the Fund's investment objective and
strategies.
In the event that the Fund fails to qualify as a RIC, the Fund will promptly
notify shareholders of the implications of that failure.
The Fund may invest a portion of its assets in equity repurchase agreements.
Recent changes in the law have the potential of changing the character and
source of such instruments potentially subjecting them to unexpected U.S.
taxation. Depending upon the terms of the contracts, the Fund may be required to
indemnify the counterparty for such increased tax.
U.S. GOVERNMENT AND AGENCY SECURITIES RISK. The Fund may invest in U.S.
government obligations. U.S. government obligations include U.S. Treasury
obligations and securities issued or guaranteed by various agencies of the U.S.
government or by various instrumentalities which have been established or
sponsored by the U.S. government. U.S. Treasury obligations are backed by the
"full faith and credit" of the U.S. government. Securities issued or guaranteed
by federal agencies and U.S. government sponsored instrumentalities may or may
not be backed by the full faith and credit of the U.S. government.
VOLATILITY RISK. The Fund seeks to exceed the performance of the Benchmark. The
Fund and the Benchmark are designed to capture the long-term economic benefits
of rising or declining market trends. Frequent or significant short-term price
movements could adversely impact the performance of the Benchmark and the Fund.
In addition, the net asset value of the Fund over short-term periods may be more
volatile than other investment options because of the Fund's significant use of
financial instruments that have a leveraging effect. For example, because of the
low margin deposits required, futures trading involves an extremely high degree
of leverage and as a result, a relatively small price movement in a Futures
Instrument may result in immediate and substantial losses to the Fund.
WHIPSAW MARKETS RISK. The Fund may be subject to the forces of "whipsaw" markets
(as opposed to choppy or stable markets), in which significant price movements
develop but then repeatedly reverse. Such market conditions could cause
substantial losses to the Benchmark and the Fund.
Page 24
--------------------------------------------------------------------------------
BOARD OF TRUSTEES AND OFFICERS
--------------------------------------------------------------------------------
FIRST TRUST MORNINGSTAR MANAGED FUTURES STRATEGY FUND (FMF)
DECEMBER 31, 2016 (UNAUDITED)
The Trust's statement of additional information includes additional information
about the Trustees and is available, without charge, upon request, by calling
(800) 988-5891.
NUMBER OF OTHER
PORTFOLIOS IN TRUSTEESHIPS OR
TERM OF OFFICE THE FIRST TRUST DIRECTORSHIPS
NAME, ADDRESS, AND YEAR FIRST FUND COMPLEX HELD BY TRUSTEE
DATE OF BIRTH AND ELECTED OR PRINCIPAL OCCUPATIONS OVERSEEN BY DURING PAST
POSITION WITH THE TRUST APPOINTED DURING PAST 5 YEARS TRUSTEE 5 YEARS
------------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
------------------------------------------------------------------------------------------------------------------------------------
Richard E. Erickson, Trustee o Indefinite Term Physician, Officer, Wheaton Orthopedics; 138 None
c/o First Trust Advisors L.P. Limited Partner, Gundersen Real Estate
120 E. Liberty Drive, o Since Inception Limited Partnership (June 1992 to
Suite 400 December 2016); Member, Sportsmed LLC
Wheaton, IL 60187 (April 2007 to November 2015)
D.O.B.: 04/51
Thomas R. Kadlec, Trustee o Indefinite Term President, ADM Investor Services, Inc. 138 Director of ADM
c/o First Trust Advisors L.P. (Futures Commission Merchant) Investor Services,
120 E. Liberty Drive, o Since Inception Inc., ADM
Suite 400 Investor Services
Wheaton, IL 60187 International, and
D.O.B.: 11/57 Futures Industry
Association
Robert F. Keith, Trustee o Indefinite Term President (2003 to Present), Hibs 138 Director of Trust
c/o First Trust Advisors L.P. Enterprises (Financial and Management Company of
120 E. Liberty Drive, o Since Inception Consulting) Illinois
Suite 400
Wheaton, IL 60187
D.O.B.: 11/56
Niel B. Nielson, Trustee o Indefinite Term Managing Director and Chief Operating 138 Director of
c/o First Trust Advisors L.P. Officer (January 2015 to Present), Pelita Covenant
120 E. Liberty Drive, o Since Inception Harapan Educational Foundation Transport, Inc.
Suite 400 (Educational Products and Services); (May 2003 to
Wheaton, IL 60187 President and Chief Executive Officer May 2014)
D.O.B.: 03/54 (June 2012 to September 2014), Servant
Interactive LLC (Educational Products and
Services); President and Chief Executive
Officer (June 2012 to September 2014),
Dew Learning LLC (Educational Products
and Services); President (June 2002
to June 2012), Covenant College
------------------------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEE
------------------------------------------------------------------------------------------------------------------------------------
James A. Bowen(1), Trustee o Indefinite Term Chief Executive Officer, First Trust 138 None
and Chairman of the Board Advisors L.P. and First Trust Portfolios
120 E. Liberty Drive, o Since Inception L.P.; Chairman of the Board of Directors,
Suite 400 BondWave LLC (Software Development
Wheaton, IL 60187 Company) and Stonebridge Advisors LLC
D.O.B.: 09/55 (Investment Advisor)
-----------------------------
(1) Mr. Bowen is deemed an "interested person" of the Trust due to his
position as Chief Executive Officer of First Trust Advisors L.P.,
investment advisor of the Trust.
Page 25
--------------------------------------------------------------------------------
BOARD OF TRUSTEES AND OFFICERS
--------------------------------------------------------------------------------
FIRST TRUST MORNINGSTAR MANAGED FUTURES STRATEGY FUND (FMF)
DECEMBER 31, 2016 (UNAUDITED)
POSITION AND TERM OF OFFICE
NAME, ADDRESS OFFICES AND LENGTH OF PRINCIPAL OCCUPATIONS
AND DATE OF BIRTH WITH TRUST SERVICE DURING PAST 5 YEARS
------------------------------------------------------------------------------------------------------------------------------------
OFFICERS(2)
------------------------------------------------------------------------------------------------------------------------------------
James M. Dykas President and Chief o Indefinite Term Managing Director and Chief Financial Officer
120 E. Liberty Drive, Executive Officer (January 2016 to Present), Controller (January 2011
Suite 400 o Since January 2016 to January 2016), Senior Vice President (April 2007
Wheaton, IL 60187 to January 2016), First Trust Advisors L.P. and First
D.O.B.: 01/66 Trust Portfolios L.P.; Chief Financial Officer
(January 2016 to Present), BondWave LLC
(Software Development Company) and Stonebridge
Advisors LLC (Investment Advisor)
Donald P. Swade Treasurer, Chief Financial o Indefinite Term Senior Vice President (July 2016 to Present), Vice
120 E. Liberty Drive, Officer and Chief President (April 2012 to July 2016), First Trust
Suite 400 Accounting Officer o Since January 2016 Advisors L.P. and First Trust Portfolios L.P.; Vice
Wheaton, IL 60187 President (September 2006 to April 2012),
D.O.B.: 08/72 Guggenheim Funds Investment Advisors,
LLC and Claymore Securities, Inc.
W. Scott Jardine Secretary and Chief o Indefinite Term General Counsel, First Trust Advisors L.P. and
120 E. Liberty Drive, Legal Officer First Trust Portfolios L.P.; Secretary and General
Suite 400 o Since Inception Counsel, BondWave LLC; Secretary, Stonebridge
Wheaton, IL 60187 Advisors LLC
D.O.B.: 05/60
Daniel J. Lindquist Vice President o Indefinite Term Managing Director (July 2012 to Present) Senior
120 E. Liberty Drive, Vice President (September 2005 to July 2012), First
Suite 400 o Since Inception Trust Advisors L.P. and First Trust Portfolios L.P.
Wheaton, IL 60187
D.O.B: 02/70
Kristi A. Maher Chief Compliance Officer o Indefinite Term Deputy General Counsel, First Trust Advisors L.P.
120 E. Liberty Drive, and Assistant Secretary and First Trust Portfolios L.P.
Suite 400 o Since Inception
Wheaton, IL 60187
D.O.B.: 12/66
Roger F. Testin Vice President o Indefinite Term Senior Vice President, First Trust Advisors L.P.
120 E. Liberty Drive, and First Trust Portfolios L.P.
Suite 400 o Since Inception
Wheaton, IL 60187
D.O.B.: 06/66
Stan Ueland Vice President o Indefinite Term Senior Vice President (September 2012 to Present),
120 E. Liberty Drive, Vice President (August 2005 to September 2012),
Suite 400 o Since Inception First Trust Advisors L.P. and First Trust Portfolios
Wheaton, IL 60187 L.P.
D.O.B.: 11/70
-----------------------------
(2) The term "officer" means the president, vice president, secretary,
treasurer, controller or any other officer who performs a policy making
function.
Page 26
--------------------------------------------------------------------------------
PRIVACY POLICY
--------------------------------------------------------------------------------
FIRST TRUST MORNINGSTAR MANAGED FUTURES STRATEGY FUND (FMF)
DECEMBER 31, 2016 (UNAUDITED)
PRIVACY POLICY
First Trust values our relationship with you and considers your privacy an
important priority in maintaining that relationship. We are committed to
protecting the security and confidentiality of your personal information.
SOURCES OF INFORMATION
We collect nonpublic personal information about you from the following sources:
o Information we receive from you and your broker-dealer, investment
advisor or financial representative through interviews,
applications, agreements or other forms;
o Information about your transactions with us, our affiliates or
others;
o Information we receive from your inquiries by mail, e-mail or
telephone; and
o Information we collect on our website through the use of "cookies".
For example, we may identify the pages on our website that your
browser requests or visits.
INFORMATION COLLECTED
The type of data we collect may include your name, address, social security
number, age, financial status, assets, income, tax information, retirement and
estate plan information, transaction history, account balance, payment history,
investment objectives, marital status, family relationships and other personal
information.
DISCLOSURE OF INFORMATION
We do not disclose any nonpublic personal information about our customers or
former customers to anyone, except as permitted by law. In addition to using
this information to verify your identity (as required under law), the permitted
uses may also include the disclosure of such information to unaffiliated
companies for the following reasons:
o In order to provide you with products and services and to effect
transactions that you request or authorize, we may disclose your
personal information as described above to unaffiliated financial
service providers and other companies that perform administrative or
other services on our behalf, such as transfer agents, custodians
and trustees, or that assist us in the distribution of investor
materials such as trustees, banks, financial representatives, proxy
services, solicitors and printers.
o We may release information we have about you if you direct us to do
so, if we are compelled by law to do so, or in other legally limited
circumstances (for example to protect your account from fraud).
In addition, in order to alert you to our other financial products and services,
we may share your personal information within First Trust.
PRIVACY ONLINE
We allow third-party companies, including AddThis (a social media sharing
service), to collect certain anonymous information when you visit our website.
These companies may use non-personally identifiable information during your
visits to this and other websites in order to provide advertisements about goods
and services likely to be of greater interest to you. These companies typically
use a cookie, third party web beacon or pixel tags to collect this information.
To learn more about this behavioral advertising practice, you can visit
www.networkadvertising.org.
CONFIDENTIALITY AND SECURITY
With regard to our internal security procedures, we restrict access to your
nonpublic personal information to those individuals who need to know that
information to provide products or services to you. We maintain physical,
electronic and procedural safeguards to protect your nonpublic personal
information.
POLICY UPDATES AND INQUIRIES
As required by federal law, we will notify you of our privacy policy annually.
We reserve the right to modify this policy at any time, however, if we do change
it, we will tell you promptly. For questions about our policy, or for additional
copies of this notice, please go to www.ftportfolios.com, or contact us at
1-800-621-1675 (First Trust Portfolios) or 1-800-222-6822 (First Trust
Advisors).
March 2016
Page 27
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FIRST TRUST
INVESTMENT ADVISOR
First Trust Advisors L.P.
120 E. Liberty Drive, Suite 400
Wheaton, IL 60187
ADMINISTRATOR, CUSTODIAN
FUND ACCOUNTANT &
TRANSFER AGENT
Brown Brothers Harriman & Co.
50 Post Office Square
Boston, MA 02110
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
111 S. Wacker Drive
Chicago, IL 60606
LEGAL COUNSEL
Chapman and Cutler LLP
111 W. Monroe Street
Chicago, IL 60603
[BLANK BACK COVER]
ITEM 2. CODE OF ETHICS.
(a) The registrant, as of the end of the period covered by this report, has
adopted a code of ethics that applies to the registrant's principal
executive officer, principal financial officer, principal accounting
officer or controller, or persons performing similar functions, regardless
of whether these individuals are employed by the registrant or a third
party.
(c) There have been no amendments, during the period covered by this report,
to a provision of the code of ethics that applies to the registrant's
principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar functions,
regardless of whether these individuals are employed by the registrant or
a third party, and that relates to any element of the code of ethics
description.
(d) The registrant, during the period covered by this report, has not granted
any waivers, including an implicit waiver, from a provision of the code of
ethics that applies to the registrant's principal executive officer,
principal financial officer, principal accounting officer or controller,
or persons performing similar functions, regardless of whether these
individuals are employed by the registrant or a third party, that relates
to one or more of the items set forth in paragraph (b) of this item's
instructions.
(e) Not applicable.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
As of the end of the period covered by the report, the registrant's board of
trustees has determined that Thomas R. Kadlec and Robert F. Keith are qualified
to serve as audit committee financial experts serving on its audit committee and
that each of them is "independent," as defined by Item 3 of Form N-CSR.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(a) Audit Fees (Registrant) -- The aggregate fees billed for each of the
last two fiscal years for professional services rendered by the principal
accountant for the audit of the registrant's annual financial statements or
services that are normally provided by the accountant in connection with
statutory and regulatory filings or engagements were $30,000 for the fiscal year
ended December 31, 2015 and $28,000 for fiscal year ended December 31, 2016.
(b) Audit-Related Fees (Registrant) -- The aggregate fees billed in each
of the last two fiscal years for assurance and related services by the principal
accountant that are reasonably related to the performance of the audit of the
registrant's financial statements and are not reported under paragraph (a) of
this Item were $0 for the fiscal year ended December 31, 2015, and $91.91 for
the fiscal year ended December 31, 2016.
Audit-Related Fees (Investment Adviser and Distributor) -- The aggregate
fees billed in each of the last two fiscal years for assurance and related
services by the principal accountant that are reasonably related to the
performance of the audit of the registrant's financial statements and are not
reported under paragraph (a) of this Item were $0 for the fiscal year ended
December 31, 2015, and $0 for the fiscal year ended December 31, 2016.
(c) Tax Fees (Registrant) -- The aggregate fees billed in each of the last
two fiscal years for professional services rendered by the principal accountant
for tax compliance, tax advice, and tax planning to the registrant were $6,000
for the fiscal year ended December 31, 2015 and $6,000 for fiscal year ended
December 31, 2016.
Tax Fees (Investment Adviser and Distributor) -- The aggregate fees billed
in each of the last two fiscal years for professional services rendered by the
principal accountant for tax compliance, tax advice, and tax planning to the
registrant's adviser and distributor were $0 for the fiscal year ended December
31, 2015, and $0 for the fiscal year ended December 31, 2016.
(d) All Other Fees (Registrant) -- The aggregate fees billed in each of
the last two fiscal years for products and services provided by the principal
accountant to the registrant, other than the services reported in paragraphs (a)
through (c) of this Item were $0 for the fiscal year ended December 31, 2015,
and $0 for the fiscal year ended December 31, 2016.
All Other Fees (Investment Adviser and Distributor) -- The aggregate fees
billed in each of the last two fiscal years for products and services provided
by the principal accountant to the registrant's investment adviser and
distributor, other than the services reported in paragraphs (a) through (c) of
this Item were $0 for the fiscal year ended December 31, 2015, and $0 for the
fiscal year ended December 31, 2016.
(e)(1) Disclose the audit committee's pre-approval policies and procedures
described in paragraph (c)(7) of Rule 2-01 of Regulation S-X.
Pursuant to its charter and its Audit and Non-Audit Services Pre-Approval
Policy, the Audit Committee (the "Committee") is responsible for the
pre-approval of all audit services and permitted non-audit services (including
the fees and terms thereof) to be performed for the registrant by its
independent auditors. The Chairman of the Committee is authorized to give such
pre-approvals on behalf of the Committee up to $25,000 and report any such
pre-approval to the full Committee.
The Committee is also responsible for the pre-approval of the independent
auditor's engagements for non-audit services with the registrant's adviser (not
including a sub-adviser whose role is primarily portfolio management and is
sub-contracted or overseen by another investment adviser) and any entity
controlling, controlled by or under common control with the investment adviser
that provides ongoing services to the registrant, if the engagement relates
directly to the operations and financial reporting of the registrant, subject to
the de minimis exceptions for non-audit services described in Rule 2-01 of
Regulation S-X. If the independent auditor has provided non-audit services to
the registrant's adviser (other than any sub-adviser whose role is primarily
portfolio management and is sub-contracted with or overseen by another
investment adviser) and any entity controlling, controlled by or under common
control with the investment adviser that provides ongoing services to the
registrant that were not pre-approved pursuant to its policies, the Committee
will consider whether the provision of such non-audit services is compatible
with the auditor's independence.
(e)(2) The percentage of services described in each of paragraphs (b)
through (d) for the registrant and the registrant's investment adviser of this
Item that were approved by the audit committee pursuant to the pre-approval
exceptions included in paragraph (c)(7)(i)(c) or paragraph (c)(7)(ii) of Rule
2-01 of Regulation S-X are as follows:
(b) 0%
(c) 0%
(d) 0%
(f) The percentage of hours expended on the principal accountant's
engagement to audit the registrant's financial statements for the most recent
fiscal year that were attributed to work performed by persons other than the
principal accountant's full-time, permanent employees was less than fifty
percent.
(g) The aggregate non-audit fees billed by the registrant's accountant for
services rendered to the registrant, and rendered to the registrant's investment
adviser (not including any sub-adviser whose role is primarily portfolio
management and is subcontracted with or overseen by another investment adviser),
and any entity controlling, controlled by, or under common control with the
adviser that provides ongoing services to the registrant for fiscal year ended
December 31, 2015 were $6,000 for the registrant, $12,500 for the registrant's
investment adviser and $29,000 for the registrant's distributor and for the
registrant's fiscal year ended December 31, 2016 were $6,000 for the registrant,
$13,000 for the registrant's investment adviser and $32,500 for the registrant's
distributor.
(h) The registrant's audit committee of its Board of Trustees has
determined that the provision of non-audit services that were rendered to the
registrant's investment adviser (not including any sub-adviser whose role is
primarily portfolio management and is subcontracted with or overseen by another
investment adviser), and any entity controlling, controlled by, or under common
control with the investment adviser that provides ongoing services to the
registrant that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule
2-01 of Regulation S-X is compatible with maintaining the principal accountant's
independence.
ITEMS 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
The registrant has a separately designated standing audit committee established
in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934
consisting of all the independent directors of the registrant. The audit
committee of the registrant is comprised of: Richard E. Erickson, Thomas R.
Kadlec, Robert F. Keith and Niel B. Nielson.
ITEM 6. INVESTMENTS.
(a) Schedule of Investments in securities of unaffiliated issuers as of the
close of the reporting period is included as part of the report to
shareholders filed under Item 1 of this form.
(b) Not applicable.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There have been no material changes to the procedures by which the shareholders
may recommend nominees to the registrant's board of directors, where those
changes were implemented after the registrant last provided disclosure in
response to the requirements of Item 407(c)(2)(iv) of Regulation S-K (17 CFR
229.407) (as required by Item 22(b)(15) of Schedule 14A (17 CFR 240.14a-101)),
or this Item.
ITEM 11. CONTROLS AND PROCEDURES.
(a) The registrant's principal executive and principal financial officers, or
persons performing similar functions, have concluded that the registrant's
disclosure controls and procedures (as defined in Rule 30a-3(c) under the
Investment Company Act of 1940, as amended (the "1940 Act") (17 CFR
270.30a-3 (c))) are effective, as of a date within 90 days of the filing
date of the report that includes the disclosure required by this
paragraph, based on their evaluation of these controls and procedures
required by Rule 30a-3(b) under the 1940 Act (17 CFR 270.30a-3(b)) and
Rules 13a-15(b) or 15d-15(b) under the Securities Exchange Act of 1934, as
amended (17 CFR 240.13a-15(b) or 240.15d-15 (b)).
(b) There were no changes in the registrant's internal control over financial
reporting (as defined in Rule 30a-3(d) under the 1940 Act (17 CFR
270.30a-3(d)) that occurred during the registrant's last fiscal quarter of
the period covered by this report that have materially affected, or are
reasonably likely to materially affect, the registrant's internal control
over financial reporting.
ITEM 12. EXHIBITS.
(a)(1) Code of ethics, or any amendment thereto, that is the subject of
disclosure required by Item 2 is attached hereto.
(a)(2) Certifications pursuant to Rule 30a-2(a) under the 1940 Act and
Section 302 of the Sarbanes-Oxley Act of 2002 are attached hereto.
(a)(3) Not Applicable
(b) Certifications pursuant to Rule 30a-2(b) under the 1940 Act and Section
906 of the Sarbanes-Oxley Act of 2002 are attached hereto.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
(registrant) First Trust Exchange-Traded Fund V
----------------------------------------------------
By (Signature and Title)* /s/ James M. Dykas
----------------------------------------
James M. Dykas, President and
Chief Executive Officer
(principal executive officer)
Date: February __, 2017
-------------------
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: February 23, 2017
-------------------
By (Signature and Title)* /s/ Donald P. Swade
----------------------------------------
Donald P. Swade, Treasurer,
Chief Financial Officer and
Chief Accounting Officer
(principal financial officer)
Date: February 23, 2017
-------------------
* Print the name and title of each signing officer under his or her signature.