UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT
COMPANIES
Investment Company Act file number 811-22245
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First Trust Exchange-Traded Fund III
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(Exact name of registrant as specified in charter)
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
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(Address of principal executive offices) (Zip code)
W. Scott Jardine, Esq.
First Trust Portfolios L.P.
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
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(Name and address of agent for service)
Registrant's telephone number, including area code: (630) 765-8000
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Date of fiscal year end: July 31
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Date of reporting period: July 31, 2017
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Form N-CSR is to be used by management investment companies to file reports with
the Commission not later than 10 days after the transmission to stockholders of
any report that is required to be transmitted to stockholders under Rule 30e-1
under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may
use the information provided on Form N-CSR in its regulatory, disclosure review,
inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR,
and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the
burden to Secretary, Securities and Exchange Commission, 100 F Street, NE,
Washington, DC 20549. The OMB has reviewed this collection of information under
the clearance requirements of 44 U.S.C. ss. 3507.
ITEM 1. REPORT TO STOCKHOLDERS.
The registrant's annual report transmitted to shareholders pursuant to Rule
30e-1 under the Investment Company Act of 1940 is as follows:
FIRST TRUST
FIRST TRUST EXCHANGE-TRADED FUND III
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First Trust Horizon Managed Volatility Domestic ETF (HUSV)
First Trust Horizon Managed Volatility Developed
International ETF (HDMV)
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Annual Report
For the Period
August 24, 2016
(Commencement of Operations)
through July 31, 2017
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TABLE OF CONTENTS
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FIRST TRUST EXCHANGE-TRADED FUND III
ANNUAL REPORT
JULY 31, 2017
Shareholder Letter. ......................................................... 1
Fund Performance Overview
First Trust Horizon Managed Volatility Domestic ETF (HUSV)................ 2
First Trust Horizon Managed Volatility Developed International ETF
(HDMV)................................................................. 4
Notes to Fund Performance Overview........................................... 6
Portfolio Commentary......................................................... 7
Understanding Your Fund Expenses............................................. 10
Portfolio of Investments
First Trust Horizon Managed Volatility Domestic ETF (HUSV)................ 11
First Trust Horizon Managed Volatility Developed International ETF
(HDMV)................................................................. 13
Statements of Assets and Liabilities......................................... 16
Statements of Operations..................................................... 17
Statements of Changes in Net Assets.......................................... 18
Financial Highlights......................................................... 19
Notes to Financial Statements................................................ 21
Report of Independent Registered Public Accounting Firm...................... 28
Additional Information....................................................... 29
Board of Trustees and Officers............................................... 32
Privacy Policy............................................................... 34
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 Horizon Investments, LLC ("Horizon" or the
"Sub-Advisor") and their respective representatives, taking into account the
information currently available to them. Forward-looking statements include all
statements that do not relate solely to current or historical fact. For example,
forward-looking statements include the use of words such as "anticipate,"
"estimate," "intend," "expect," "believe," "plan," "may," "should," "would" or
other words that convey uncertainty of future events or outcomes.
Forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
any series of First Trust Exchange-Traded Fund III (the "Trust") described in
this report (each such series is referred to as a "Fund" and collectively, the
"Funds") to be materially different from any future results, performance or
achievements expressed or implied by the forward-looking statements. When
evaluating the information included in this report, you are cautioned not to
place undue reliance on these forward-looking statements, which reflect the
judgment of the Advisor and/or Sub-Advisor and their respective representatives
only as of the date hereof. We undertake no obligation to publicly revise or
update these forward-looking statements to reflect events and circumstances that
arise after the date hereof.
PERFORMANCE AND RISK DISCLOSURE
There is no assurance that any Fund described in this report will achieve its
investment objective. Each Fund is subject to market risk, which is the
possibility that the market values of securities owned by the Fund will decline
and that the value of the Fund shares may therefore be less than what you paid
for them. Accordingly, you can lose money by investing in a Fund. See "Risk
Considerations" in the Additional Information section of this report for a
discussion of other risks of investing in the Funds.
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 each Fund's webpage at http://www.ftportfolios.com.
HOW TO READ THIS REPORT
This report contains information that may help you evaluate your investment. It
includes details about each Fund's portfolio and presents data and analysis that
provide insight into each Fund's performance and investment approach.
By reading the portfolio commentary by the portfolio management team of each
Fund, you may obtain an understanding of how the market environment affected
each Fund. The statistical information that follows may help you understand each
Fund's performance compared to that of relevant market benchmarks.
It is important to keep in mind that the opinions expressed by personnel of the
Advisor and/or Sub-Advisor are just that: informed opinions. They should not be
considered to be promises or advice. The opinions, like the statistics, cover
the period through the date on the cover of this report. The material risks of
investing in each 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 EXCHANGE-TRADED FUND III - HORIZON FUNDS
ANNUAL LETTER FROM THE CHAIRMAN AND CEO
JULY 31, 2017
Dear Shareholders:
First Trust Advisors L.P. ("First Trust") is pleased to provide you with the
annual report which contains detailed information about your investment for the
period from August 24, 2016 (the Horizon Funds' inception) through July 31,
2017, including a market overview and a performance analysis for the period. We
encourage you to read it carefully and discuss it with your financial advisor.
The past year has seen the election of Donald Trump as the 45th President of the
U.S. and the continued U.S. bull market. In the first seven months of 2017, the
S&P 500(R) Index closed its trading sessions at all-time highs 29 times. The
NASDAQ Composite Index, as of July 31, 2017, closed its trading sessions at
all-time highs 44 times this year.
The current bull market (measuring from March 9, 2009 through July 31, 2017) is
the second longest in history. While we are optimistic about the U.S. economy,
we are also well aware that no one can predict the future or know how markets
will perform in different economic environments. This is why we advocate
maintaining a long-term perspective, as we have done since our inception over 25
years ago. We also believe it is a good practice to speak with your financial
advisor and make sure your financial plan is still on track with your investment
goals.
Thank you for giving First Trust the opportunity to be a part of your investment
plan through the First Trust Exchange-Traded Fund III - Horizon Funds. We value
our relationship with you and will continue to focus on bringing the types of
investments that we believe can 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 HORIZON MANAGED VOLATILITY DOMESTIC ETF (HUSV)
The investment objective of First Trust Horizon Managed Volatility Domestic ETF
(the "Fund") is to provide capital appreciation. Under normal market conditions,
the Fund seeks to achieve its investment objective by investing at least 80% of
its net assets (including investment borrowings) in common stocks of domestic
companies listed and traded on U.S. national securities exchanges that Horizon
Investments, LLC ("Horizon" or the "Sub-Advisor") believes exhibit low future
expected volatility. The goal of this strategy is to capture upside price
movements in rising markets and reduce downside risk when markets decline. To
implement this strategy, the Sub-Advisor employs volatility forecasting models
to forecast future expected volatility. The strategy is largely quantitative and
rules-based, but also includes multiple parameters over which the Sub-Advisor
may exercise discretion (including, but not limited to, the number of holdings
and the weightings of particular holdings) in connection with its active
management of the Fund.
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PERFORMANCE
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CUMULATIVE
TOTAL RETURNS
Inception (8/24/16)
to 7/31/17
FUND PERFORMANCE
NAV 11.51%
Market Price 11.61%
INDEX PERFORMANCE
S&P 500(R) Index 15.70%
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(See Notes to Fund Performance Overview on Page 6.)
Page 2
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FUND PERFORMANCE OVERVIEW (UNAUDITED) (CONTINUED)
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FIRST TRUST HORIZON MANAGED VOLATILITY DOMESTIC ETF (HUSV) (CONTINUED)
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% OF TOTAL
LONG-TERM
SECTOR ALLOCATION INVESTMENTS
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Industrials 19.2%
Financials 18.7
Consumer Staples 14.9
Information Technology 13.1
Utilities 13.1
Health Care 10.1
Consumer Discretionary 6.2
Materials 1.7
Telecommunication Services 1.2
Real Estate 1.0
Energy 0.8
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Total 100.0%
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% OF TOTAL
LONG-TERM
TOP TEN HOLDINGS INVESTMENTS
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Coca-Cola (The) Co. 3.6%
Waste Management, Inc. 3.3
PepsiCo, Inc. 3.2
Fiserv, Inc. 3.0
United Technologies Corp. 3.0
Travelers (The) Cos., Inc. 2.6
3M Co. 2.6
Honeywell International, Inc. 2.5
Republic Services, Inc. 2.3
Procter & Gamble (The) Co. 2.2
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Total 28.3%
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PERFORMANCE OF A $10,000 INITIAL INVESTMENT
AUGUST 24, 2016 - JULY 31, 2017
First Trust Horizon Managed S&P 500(R)
Volatility Domestic ETF Index
8/24/16 $10,000 $10,000
1/31/17 10,201 10,565
7/31/17 11,151 11,570
Performance figures assume reinvestment of all distributions and do not reflect
the deduction of taxes that a shareholder would pay on Fund distributions or the
redemption or sale of Fund shares. An index is a statistical composite that
tracks a specified financial market or sector. Unlike the Fund, the index does
not actually hold a portfolio of securities and therefore does not incur the
expenses incurred by the Fund. These expenses negatively impact the performance
of the Fund. The Fund's past performance does not predict future performance.
FREQUENCY DISTRIBUTION OF DISCOUNTS AND PREMIUMS
BID/ASK MIDPOINT VS. NAV THROUGH JULY 31, 2017
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 25, 2016 (commencement
of trading) through July 31, 2017. 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%
8/25/16 - 7/31/17 125 1 0 0
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NUMBER OF DAYS BID/ASK MIDPOINT BELOW NAV
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FOR THE PERIOD 0.00%-0.49% 0.50%-0.99% 1.00%-1.99% >=2.00%
8/25/16 - 7/31/17 108 0 0 0
Page 3
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FUND PERFORMANCE OVERVIEW (UNAUDITED) (CONTINUED)
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FIRST TRUST HORIZON MANAGED VOLATILITY DEVELOPED INTERNATIONAL ETF (HDMV)
The investment objective of First Trust Horizon Managed Volatility Developed
International ETF (the "Fund") is to provide capital appreciation. Under normal
market conditions, the Fund seeks to achieve its investment objective by
investing at least 80% of its net assets (including investment borrowings) in
common stocks and depositary receipts of developed market companies listed and
traded on non-U.S. exchanges that Horizon Investments, LLC ("Horizon" or the
"Sub-Advisor") believes exhibit low future expected volatility. The term
"developed market companies" means those companies (i) whose securities are
traded principally on a stock exchange in a developed market country, (ii) with
a primary business office in a developed market country, or (iii) that have at
least 50% of their assets in, or derive at least 50% of their revenues or
profits from, a developed market country. The Sub-Advisor considers Australia,
Austria, Belgium, Canada, Denmark, Finland, France, Germany, Hong Kong, Ireland,
Israel, Italy, Japan, Luxembourg, the Netherlands, New Zealand, Norway,
Portugal, Singapore, Spain, Sweden, Switzerland, the United Kingdom and the
United States to be developed market countries. However, this list may change in
response to market and geopolitical events. Under normal market conditions, the
Fund will invest in at least three countries and at least 40% of its net assets
in countries other than the United States.
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PERFORMANCE
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CUMULATIVE
TOTAL RETURNS
Inception (8/24/16)
to 7/31/17
FUND PERFORMANCE
NAV 12.68%
Market Price 13.04%
INDEX PERFORMANCE
MSCI EAFE Index 16.10%
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(See Notes to Fund Performance Overview on Page 6.)
Page 4
FUND PERFORMANCE OVERVIEW (UNAUDITED) (CONTINUED)
FIRST TRUST HORIZON MANAGED VOLATILITY DEVELOPED INTERNATIONAL ETF (HDMV)
(CONTINUED)
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% OF TOTAL
LONG-TERM
SECTOR ALLOCATION INVESTMENTS
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Financials 21.9%
Industrials 21.4
Consumer Staples 12.5
Real Estate 11.4
Consumer Discretionary 6.9
Utilities 6.8
Health Care 6.6
Telecommunication Services 6.3
Materials 2.6
Information Technology 1.9
Energy 1.7
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Total 100.0%
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% OF TOTAL
LONG-TERM
TOP TEN HOLDINGS INVESTMENTS
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Singapore Telecommunications Ltd. 1.6%
MAN SE 1.6
Singapore Exchange Ltd. 1.6
CapitaLand Mall Trust 1.6
RELX PLC 1.4
CLP Holdings Ltd. 1.4
Swisscom AG 1.4
RELX N.V. 1.3
Hong Kong & China Gas Co., Ltd. 1.2
Muenchener Rueckversicherungs-Gesellschaft
AG in Muenchen 1.2
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Total 14.3%
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PERFORMANCE OF A $10,000 INITIAL INVESTMENT
AUGUST 24, 2016 - JULY 31, 2017
First Trust Horizon Managed Volatility MSCI EAFE
Developed International ETF Index
8/24/16 $10,000 $10,000
1/31/17 9,629 10,203
7/31/17 11,268 11,610
Performance figures assume reinvestment of all distributions and do not reflect
the deduction of taxes that a shareholder would pay on Fund distributions or the
redemption or sale of Fund shares. An index is a statistical composite that
tracks a specified financial market or sector. Unlike the Fund, the index does
not actually hold a portfolio of securities and therefore does not incur the
expenses incurred by the Fund. These expenses negatively impact the performance
of the Fund. The Fund's past performance does not predict future performance.
FREQUENCY DISTRIBUTION OF DISCOUNTS AND PREMIUMS
BID/ASK MIDPOINT VS. NAV THROUGH JULY 31, 2017
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 25, 2016 (commencement
of trading) through July 31, 2017. 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%
8/25/16 - 7/31/17 128 99 1 0
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NUMBER OF DAYS BID/ASK MIDPOINT BELOW NAV
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FOR THE PERIOD 0.00%-0.49% 0.50%-0.99% 1.00%-1.99% >=2.00%
8/25/16 - 7/31/17 6 0 0 0
Page 5
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NOTES TO FUND PERFORMANCE OVERVIEW
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Total returns for the periods since inception are calculated from the inception
date of each Fund. "Cumulative total returns" represent the total change in
value of an investment over the periods indicated.
Each 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 each Fund did not trade in the
secondary market until after the Fund's inception, for the period from inception
to the first day of secondary market trading in shares of the Fund, the NAV of
each Fund is used as a proxy for the secondary market trading price to calculate
market returns. NAV and market returns assume that all distributions have been
reinvested in each Fund at NAV and Market Price, respectively.
An index is a statistical composite that tracks a specified financial market or
sector. Unlike each Fund, the index does not actually hold a portfolio of
securities and therefore does not incur the expenses incurred by each Fund.
These expenses negatively impact the performance of each Fund. Also, market
returns do not include brokerage commissions that may be payable on secondary
market transactions. If brokerage commissions were included, market returns
would be lower. The total returns presented reflect the reinvestment of
dividends on securities in the index. The returns presented do not reflect the
deduction of taxes that a shareholder would pay on Fund distributions or the
redemption or sale of Fund shares. The investment return and principal value of
shares of the Fund will vary with changes in market conditions. Shares of each
Fund may be worth more or less than their original cost when they are redeemed
or sold in the market. Each Fund's past performance is no guarantee of future
performance.
Page 6
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PORTFOLIO COMMENTARY
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FIRST TRUST EXCHANGE-TRADED FUND III
ANNUAL REPORT
JULY 31, 2017 (UNAUDITED)
INVESTMENT ADVISOR
First Trust Advisors L.P. ("First Trust" or the "Advisor"), 120 East Liberty
Drive, Wheaton, Illinois 60187, is the investment advisor to the Funds.
SUB-ADVISOR
Horizon Investments, LLC ("Horizon" or the "Sub-Advisor") serves as the
investment sub-advisor to the Funds.
PORTFOLIO MANAGEMENT TEAM
The following persons serve as portfolio managers of the Funds:
MICHAEL DICKSON, PHD, PORTFOLIO MANAGER OF HORIZON
SCOTT LADNER, PORTFOLIO MANAGER OF HORIZON
STEVEN CLARK, PHD, PORTFOLIO MANAGER OF HORIZON
The portfolio managers are primarily and jointly responsible for the day-to-day
management of the Funds. Each portfolio manager has served as part of the
portfolio management team of the Funds since 2016.
COMMENTARY
FIRST TRUST HORIZON MANAGED VOLATILITY DOMESTIC ETF (HUSV)
MARKET RECAP
From the Fund's inception date on August 24, 2016 through the end of the Fund's
fiscal period on July 31, 2017, the S&P 500(R) Index gained 15.70%. Over this
time period, low volatility as a factor trailed the S&P 500(R) Index, as the S&P
500(R) Low Volatility Index gained 9.72%.
With the U.S. presidential election on November 8, 2016, speculation of policy
reforms and the timing of these changes was likely one of the largest headlines
affecting the market's views on the business risk of investment opportunities.
The Federal Reserve (the "Fed") also raised its target rate three times over the
Fund's fiscal year, once in each of the months of December, March, and June. The
U.S. 10 year yield increased by 73 basis points according to the USGG10YR Index
from Bloomberg L.P. Horizon believes that this rise in rates contributed, in
part, to the strong performance of financial stocks over the period.
PERFORMANCE ANALYSIS
From the Fund's inception date on August 24, 2016 through the end of the Fund's
fiscal period on July 31, 2017, financial stocks posted the largest gains of the
S&P 500 sectors, with the S&P 500(R) Financials Index up 31.02%, followed by the
S&P 500(R) Information Technology Index up 27.04% over this same time period.
Energy stocks posted the worst returns, with the S&P 500 Energy Index down
2.68%, followed by the S&P 500(R) Telecom Services Index down 1.69%. Of the
eleven S&P 500 GICS sectors, only energy and telecom posted negative returns
over the Fund's fiscal year reporting period.
With the Fed raising interest rates three times over the reporting period,
Horizon believes these activities contributed to the volatility of rate
sensitive sectors such as financials, utilities, and real estate. As the Fed
continues to monitor the U.S. economy and U.S. rates climb higher, Horizon
expects interest rate sensitivity to be less of a factor contributing to day to
day price fluctuations.
Realized volatility (as measured by the annualized standard deviation of daily
returns from Bloomberg L.P.) of the S&P 500(R) Index during the fiscal year was
8.2, compared to the realized volatility of the S&P 500(R) Low Volatility Index
of 8.1. Horizon believes these numbers were a reflection of extremely low
realized volatility during the period, in part due to how similar the realized
volatility of the S&P 500(R) Index was to the S&P 500(R) Low Volatility Index.
These numbers were unusually low as the three years prior to July 31, 2017, the
S&P 500(R) Index realized volatility was 12.9 compared to the S&P 500(R) Low
Volatility Index of 11.1.
During the period, among all relevant sectors, stocks in the consumer staples
sector realized the lowest levels of volatility while stocks in the energy
sector realized the highest levels of volatility.
Page 7
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PORTFOLIO COMMENTARY (CONTINUED)
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FIRST TRUST EXCHANGE-TRADED FUND III
ANNUAL REPORT
JULY 31, 2017 (UNAUDITED)
On a net asset value ("NAV") basis for the fiscal period ended July 31, 2017,
the Fund provided a total return of 11.51%, including the reinvestment of
dividends. The S&P 500(R) Index returned 15.70% and the S&P 500(R) Low
Volatility Index returned 9.72% over this same time period.
The Fund's NAV total return of 11.51% underperformed the S&P 500(R) Index by
4.19% but outperformed the S&P 500(R) Low Volatility Index by 1.79%.
Due to the defensive nature of low volatility investing, low volatility stocks
in general are expected to trail the broad market in strong bull markets, but
outperform in flat or declining markets.
Stocks selected within the technology, financial and consumer discretionary
sectors provided the three largest excess returns relative to the S&P 500(R)
Index, while stocks selected within the materials, energy and real estate
sectors provided the three smallest excess returns relative to the S&P 500(R)
Index.
Stocks selected within the cyclical sectors of financials, industrials, and
consumer discretionary provided the largest contribution to total return, while
stocks selected within the typically defensive sectors of utilities and consumer
staples only marginally contributed to positive excess returns.
Positions that contributed the most to the Fund's total return were McDonald's
Corp., a Consumer Discretionary company with an average weight of 1.98% and
Allstate Corp., an insurance company that is part of the Financials sector with
an average weight of 2.22%. Positions that detracted the most from the Fund's
total return were Medtronic PLC, a Healthcare company with an average weight of
0.45% and General Mills Inc., a Consumer Staples company with an average weight
of 0.4%.
MARKET AND FUND OUTLOOK
During time periods of extremely low realized volatility, Horizon believes it is
important to continue to be more responsive to current market conditions when
picking stocks to create a portfolio of expected lower volatility stocks. Due to
the current volatility environment, Horizon expects risk to remain low in the
near term, but to eventually rise in the long term due to the mean reverting
properties of realized volatility.
The Fund continues to use a quantitative and rules-based investment process to
mitigate volatility through enhanced security selection of targeted exposure to
stocks that Horizon estimates will have forecasted future low volatility.
Horizon also continues to use an active management approach when managing the
Fund that provides the flexibility to limit sector concentration and business
risk, without being limited to static rebalance requirements.
FIRST TRUST HORIZON MANAGED VOLATILITY DEVELOPED INTERNATIONAL ETF (HDMV)
MARKET RECAP
From the Fund's inception date on August 24, 2016 through the end of the Fund's
fiscal period on July 31, 2017, the MSCI EAFE Index gained 16.10%. Over this
time period, low volatility as a factor trailed the MSCI EAFE Index, as the MSCI
EAFE Minimum Volatility Index gained 8.19%.
Within the European region, the French presidential election on May 7, 2017, was
likely the most newsworthy event within the period. Throughout the election, the
eventual winner Emmanuel Macron was seen as one of the most politically friendly
towards the current structure of the European Union and his win likely
contributed to the strong performance of the Eurozone region over the period.
Additionally, the euro rallied hard against the U.S. dollar from its lows around
the end of 2016 all the way through the end of the Fund's fiscal period. Horizon
believes this relative strength in the euro was driven at least in part, by
improving economic prospects in the region. All else equal, a rising euro
relative to the U.S. dollar provided positive return for U.S. investors
converting euro denominated stock investments from euros to U.S. dollars over
the period.
PERFORMANCE ANALYSIS
Of the broad regions within the MSCI EAFE developed market universe, European
stocks posted the largest gains, with the MSCI EMU Index up 23.37%. Japanese
stocks and UK stocks posted some of the worst gains, with the MSCI Japan Net
Total Return Index up 12.75% and the MSCI UK Net Total Return Index up 10.73%.
The developed market regions of Singapore, Sweden, Hong Kong, Australia and
Switzerland all also saw double digit gains for the time period.
Page 8
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PORTFOLIO COMMENTARY (CONTINUED)
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FIRST TRUST EXCHANGE-TRADED FUND III
ANNUAL REPORT
JULY 31, 2017 (UNAUDITED)
Realized volatility (as measured by the annualized standard deviation of daily
returns from Bloomberg L.P.) of the MSCI EAFE Index during the period was 8.7,
compared to the realized volatility of the MSCI EAFE Minimum Volatility Index of
8.9. Horizon believes the numbers were a reflection of the extremely low
realized volatility during the period, in part due to how similar the realized
volatility of the MSCI EAFE Index was to the MSCI EAFE Minimum Volatility Index.
Of the major regions and countries of the investable universe of the Fund, Hong
Kong stocks realized the lowest levels of volatility, while Australian stocks
realized the highest levels of volatility over the Fund's fiscal year. This
resulted in Hong Kong stocks having a much larger average weight of 13.1% in the
Fund compared to Australian stocks with an average weight of 5.6% in the Fund.
On a net asset value ("NAV") basis for the fiscal period ended July 31, 2017,
the Fund provided a total return of 12.68%, including the reinvestment of
dividends. The MSCI EAFE Index returned 16.10% and the MSCI EAFE Minimum
Volatility Index returned 8.19% over this same time period.
The Fund's NAV total return of 12.68% underperformed the MSCI EAFE Index by
3.42%, but outperformed the MSCI EAFE Minimum Volatility Index by 4.49%.
Stocks selected within the countries and regions of the Eurozone, Switzerland
and Singapore provided the largest contribution to total return, while stocks
selected within the countries and regions of Norway, Australia and New Zealand
provided the smallest contributions to total return.
Positions that contributed to the Fund's total return were McDonald's Holdings
Co. Japan, a Consumer Discretionary company in Japan with an average weight of
0.54%, and Hang Seng Bank Ltd., a Financials company in Hong Kong with an
average weight of 1.42%. Positions that detracted the most from the Fund's total
return were Singapore Press Holdings Ltd., a Consumer Discretionary company in
Singapore with an average weight of 1.02%, and Societe BIC SA, an Industrials
company in France with an average weight of 0.55%.
MARKET AND FUND OUTLOOK
Horizon expects risk to remain low in the near term, but to eventually rise in
the long term due to the mean reverting properties of realized volatility.
The Fund continues to use a quantitative and rules-based investment process to
mitigate volatility through enhanced security selection of targeted exposure to
stocks that Horizon estimates will have forecasted future low volatility.
Horizon also continues to use an active management approach when managing the
Fund that provides the flexibility to limit sector concentration and business
risk, without being limited to static rebalance requirements.
Page 9
FIRST TRUST EXCHANGE-TRADED FUND III
UNDERSTANDING YOUR FUND EXPENSES
JULY 31, 2017 (UNAUDITED)
As a shareholder of First Trust Horizon Managed Volatility Domestic ETF or First
Trust Horizon Managed Volatility Developed International ETF (each a "Fund" and
collectively, the "Funds"), you incur two types of costs: (1) transaction costs;
and (2) ongoing costs, including management fees, distribution and/or service
fees, if any, and other Fund expenses. This Example is intended to help you
understand your ongoing costs of investing in the Funds 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 July 31, 2017.
ACTUAL EXPENSES
The first line in the following table provides information about actual account
values and actual expenses. You may use the information in this line, together
with the amount you invested, to estimate the expenses that you paid over the
period. Simply divide your account value by $1,000 (for example, an $8,600
account value divided by $1,000 = 8.6), then multiply the result by the number
in the first line under the heading entitled "Expenses Paid During the Six-Month
Period" to estimate the expenses you paid on your account during this six-month
period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second line in the following table provides information about hypothetical
account values and hypothetical expenses based on the Fund's actual expense
ratio and an assumed rate of return of 5% per year before expenses, which is not
the Fund's actual return. The hypothetical account values and expenses may not
be used to estimate the actual ending account balance or expenses you paid for
the period. You may use this information to compare the ongoing costs of
investing in the Fund and other funds. To do so, compare this 5% hypothetical
example with the 5% hypothetical examples that appear in the shareholder reports
of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs such as brokerage
commissions. Therefore, the second line in the table is useful in comparing
ongoing costs only, and will not help you determine the relative total costs of
owning different funds. In addition, if these transactional costs were included,
your costs would have been higher.
---------------------------------------------------------------------------------------------------------------------------
ANNUALIZED
EXPENSE RATIO EXPENSES PAID
BEGINNING ENDING BASED ON THE DURING THE
ACCOUNT VALUE ACCOUNT VALUE SIX-MONTH SIX-MONTH
FEBRUARY 1, 2017 JULY 31, 2017 IN THE PERIOD PERIOD (A)
---------------------------------------------------------------------------------------------------------------------------
FIRST TRUST HORIZON MANAGED VOLATILITY DOMESTIC ETF (HUSV)
Actual $1,000.00 $1,093.10 0.70% $3.63
Hypothetical (5% return before expenses) $1,000.00 $1,021.32 0.70% $3.51
FIRST TRUST HORIZON MANAGED VOLATILITY DEVELOPED INTERNATIONAL ETF (HDMV)
Actual $1,000.00 $1,170.20 0.80% $4.30
Hypothetical (5% return before expenses) $1,000.00 $1,020.83 0.80% $4.01
(a) Expenses are equal to the annualized expense ratio as indicated in the
table multiplied by the average account value over the period (February 1,
2017 through July 31, 2017), multiplied by 181/365 (to reflect the
one-half year period).
Page 10
FIRST TRUST HORIZON MANAGED VOLATILITY DOMESTIC ETF (HUSV)
PORTFOLIO OF INVESTMENTS
JULY 31, 2017
SHARES DESCRIPTION VALUE
------------- ----------------------------------- -------------
COMMON STOCKS -- 98.9%
AEROSPACE & DEFENSE -- 7.1%
3,031 Lockheed Martin Corp. $ 885,446
3,879 Northrop Grumman Corp. 1,020,682
3,822 Raytheon Co. 656,505
15,739 United Technologies Corp. 1,866,173
-------------
4,428,806
-------------
BEVERAGES -- 6.8%
48,942 Coca-Cola (The) Co. 2,243,501
17,332 PepsiCo, Inc. 2,021,085
-------------
4,264,586
-------------
BIOTECHNOLOGY -- 1.0%
9,375 AbbVie, Inc. 655,406
-------------
CAPITAL MARKETS -- 1.3%
11,122 Nasdaq, Inc. 827,143
-------------
CHEMICALS -- 1.7%
7,975 Ecolab, Inc. 1,050,068
-------------
COMMERCIAL SERVICES & SUPPLIES
-- 5.6%
22,439 Republic Services, Inc. 1,441,032
27,445 Waste Management, Inc. 2,062,492
-------------
3,503,524
-------------
DIVERSIFIED FINANCIAL SERVICES
-- 1.4%
4,883 Berkshire Hathaway, Inc., Class B (a) 854,379
-------------
DIVERSIFIED TELECOMMUNICATION
SERVICES -- 1.2%
19,964 AT&T, Inc. 778,596
-------------
ELECTRIC UTILITIES -- 8.5%
7,358 Alliant Energy Corp. 298,220
8,110 American Electric Power Co., Inc. 572,079
5,071 Duke Energy Corp. 431,644
5,337 Edison International 419,915
3,660 Entergy Corp. 280,795
8,652 Eversource Energy 525,955
2,553 NextEra Energy, Inc. 372,968
3,779 PG&E Corp. 255,800
5,466 Pinnacle West Capital Corp. 474,066
21,023 PPL Corp. 805,812
7,777 Southern (The) Co. 372,752
10,550 Xcel Energy, Inc. 499,120
-------------
5,309,126
-------------
ELECTRONIC EQUIPMENT, INSTRUMENTS
& COMPONENTS -- 1.7%
14,129 Amphenol Corp., Class A 1,082,564
-------------
FOOD PRODUCTS -- 2.5%
9,520 Hershey (The) Co. 1,002,551
4,551 JM Smucker (The) Co. 554,767
-------------
1,557,318
-------------
SHARES DESCRIPTION VALUE
------------- ----------------------------------- -------------
HEALTH CARE EQUIPMENT & SUPPLIES
-- 4.2%
9,854 Abbott Laboratories $ 484,620
6,860 Danaher Corp. 559,021
8,753 Medtronic PLC 734,989
6,018 Stryker Corp. 885,248
-------------
2,663,878
-------------
HEALTH CARE PROVIDERS & SERVICES
-- 1.5%
2,566 Henry Schein, Inc. (a) 467,551
4,600 Quest Diagnostics, Inc. 498,226
-------------
965,777
-------------
HOTELS, RESTAURANTS & LEISURE
-- 2.5%
5,406 McDonald's Corp. 838,687
10,002 Yum! Brands, Inc. 754,951
-------------
1,593,638
-------------
HOUSEHOLD DURABLES -- 0.8%
2,087 Mohawk Industries, Inc. (a) 519,642
-------------
HOUSEHOLD PRODUCTS -- 4.1%
13,237 Church & Dwight Co., Inc. 706,194
3,667 Clorox (The) Co. 489,508
14,904 Procter & Gamble (The) Co. 1,353,581
-------------
2,549,283
-------------
INDUSTRIAL CONGLOMERATES -- 5.9%
7,976 3M Co. 1,604,532
11,369 Honeywell International, Inc. 1,547,548
2,249 Roper Technologies, Inc. 522,803
-------------
3,674,883
-------------
INSURANCE -- 16.0%
9,638 AFLAC, Inc. 768,630
10,905 Allstate (The) Corp. 992,355
8,727 Aon PLC 1,205,810
10,830 Arthur J. Gallagher & Co. 636,696
8,517 Chubb, Ltd. 1,247,400
11,926 Hartford Financial Services (The)
Group, Inc. 655,930
16,799 Loews Corp. 817,775
9,709 Marsh & McLennan Cos., Inc. 757,011
12,614 Progressive (The) Corp. 594,498
9,336 Torchmark Corp. 737,264
12,649 Travelers (The) Cos., Inc. 1,620,210
-------------
10,033,579
-------------
INTERNET SOFTWARE & SERVICES
-- 1.8%
11,322 VeriSign, Inc. (a) 1,145,447
-------------
IT SERVICES -- 9.6%
14,186 Fidelity National Information
Services, Inc. 1,294,047
14,711 Fiserv, Inc. (a) 1,890,364
6,163 International Business Machines
Corp. 891,601
See Notes to Financial Statements Page 11
FIRST TRUST HORIZON MANAGED VOLATILITY DOMESTIC ETF (HUSV)
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 2017
SHARES DESCRIPTION VALUE
------------- ----------------------------------- -------------
COMMON STOCKS (CONTINUED)
IT SERVICES (CONTINUED)
6,366 MasterCard, Inc., Class A $ 813,575
11,156 Visa, Inc., Class A 1,110,691
-------------
6,000,278
-------------
MACHINERY -- 0.7%
3,174 Stanley Black & Decker, Inc. 446,550
-------------
MEDIA -- 1.5%
8,626 Walt Disney (The) Co. 948,256
-------------
MULTI-UTILITIES -- 4.6%
7,331 Ameren Corp. 411,269
9,588 Centerpoint Energy, Inc. 270,286
10,804 CMS Energy Corp. 499,577
4,593 Consolidated Edison, Inc. 380,576
5,071 DTE Energy Co. 542,901
3,729 Sempra Energy 421,414
5,915 WEC Energy Group, Inc. 372,468
-------------
2,898,491
-------------
OIL, GAS & CONSUMABLE FUELS
-- 0.8%
6,629 Exxon Mobil Corp. 530,585
-------------
PHARMACEUTICALS -- 3.3%
6,827 Johnson & Johnson 906,079
34,373 Pfizer, Inc. 1,139,809
-------------
2,045,888
-------------
SPECIALTY RETAIL -- 1.3%
5,490 Home Depot (The), Inc. 821,304
-------------
TOBACCO -- 1.5%
14,518 Altria Group, Inc. 943,234
-------------
TOTAL COMMON STOCKS 62,092,229
(Cost $58,788,904) -------------
REAL ESTATE INVESTMENT TRUSTS -- 1.0%
EQUITY REAL ESTATE INVESTMENT
TRUSTS -- 1.0%
9,037 Equity Residential 615,058
(Cost $590,188) -------------
TOTAL INVESTMENTS -- 99.9% 62,707,287
(Cost $59,379,092) (b)
NET OTHER ASSETS AND
LIABILITIES -- 0.1% 92,058
-------------
NET ASSETS -- 100.0% $ 62,799,345
=============
(a) Non-income producing security.
(b) Aggregate cost for federal income tax purposes is $59,474,089. As of July
31, 2017, the aggregate gross unrealized appreciation for all securities
in which there was an excess of value over tax cost was $3,553,077 and the
aggregate gross unrealized depreciation for all securities in which there
was an excess of tax cost over value was $319,879.
-----------------------------
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of July 31, 2017
is as follows (see Note 2A -- Portfolio Valuation in the Notes to Financial
Statements):
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
7/31/2017 PRICES INPUT INPUT
---------------------------------------------------------------------
Common Stocks* $62,092,229 $62,092,229 $ -- $ --
Real Estate
Investment
Trusts* 615,058 615,058 -- --
---------------------------------------------------
Total Investments $62,707,287 $62,707,287 $ -- $ --
===================================================
* See Portfolio of Investments for industry breakout.
All transfers in and out of the Levels during the period are assumed to occur on
the last day of the period at their current value. There were no transfers
between Levels at July 31, 2017.
Page 12 See Notes to Financial Statements
FIRST TRUST HORIZON MANAGED VOLATILITY DEVELOPED INTERNATIONAL ETF (HDMV)
PORTFOLIO OF INVESTMENTS
JULY 31, 2017
SHARES DESCRIPTION VALUE
------------- ----------------------------------- -------------
COMMON STOCKS (a) -- 92.6%
AUSTRALIA -- 0.7%
2,825 ASX Ltd. $ 118,198
27,637 Tabcorp Holdings Ltd. 92,418
-------------
210,616
-------------
BELGIUM -- 2.1%
962 Anheuser-Busch InBev S.A./N.V. 115,932
1,934 Groupe Bruxelles Lambert S.A. 198,428
2,834 Proximus S.A.D.P. 99,623
690 Solvay S.A. 99,081
1,545 Telenet Group Holding N.V. (b) 107,891
-------------
620,955
-------------
BERMUDA -- 0.9%
28,344 CK Infrastructure Holdings Ltd. 264,360
-------------
CAYMAN ISLANDS -- 1.7%
18,500 Cheung Kong Property Holdings Ltd.. 149,809
26,745 CK Hutchison Holdings Ltd. 352,340
-------------
502,149
-------------
DENMARK -- 1.3%
1,545 Carlsberg A.S., Class B 171,783
2,255 Danske Bank A.S. 91,352
2,776 ISS A.S. 113,872
-------------
377,007
-------------
FRANCE -- 5.9%
820 Air Liquide S.A. 100,663
1,351 Danone S.A. 100,901
1,008 Dassault Systemes SE 98,910
1,349 Eurazeo S.A. 110,109
283 Hermes International 143,387
1,060 Imerys S.A. 91,866
592 L'Oreal S.A. 122,712
1,733 Legrand S.A. 119,809
1,402 Pernod Ricard S.A. 194,598
1,228 Publicis Groupe S.A. 92,906
983 Sanofi 93,932
2,152 SCOR SE 90,730
827 Sodexo S.A. 97,734
1,496 Thales S.A. 165,745
2,585 TOTAL S.A. 131,463
-------------
1,755,465
-------------
GERMANY -- 10.6%
1,023 Allianz SE 217,985
1,507 BASF SE 143,772
1,588 Bayerische Motoren Werke AG 146,085
1,926 Beiersdorf AG 211,356
2,465 Daimler AG 173,012
8,186 Deutsche Telekom AG 149,671
1,559 Fresenius Medical Care AG & Co.,
KGaA 147,256
1,933 Fresenius SE & Co., KGaA 163,452
1,648 Hannover Rueck SE 208,161
1,397 Henkel AG & Co., KGaA 175,961
623 HOCHTIEF AG 111,364
4,184 MAN SE 463,702
SHARES DESCRIPTION VALUE
------------- ----------------------------------- -------------
GERMANY (CONTINUED)
1,715 Muenchener Rueckversicherungs-
Gesellschaft AG in Muenchen $ 368,484
2,392 SAP SE 253,942
5,402 Vonovia SE 219,057
-------------
3,153,260
-------------
HONG KONG -- 8.7%
22,400 Bank of East Asia (The) Ltd. 95,929
39,277 CLP Holdings Ltd. 418,627
15,309 Hang Seng Bank Ltd. 333,196
43,508 Henderson Land Development Co.,
Ltd. 251,774
195,288 Hong Kong & China Gas Co., Ltd. 369,534
4,409 Hong Kong Exchanges & Clearing
Ltd. 125,765
35,624 MTR Corp., Ltd. 205,923
30,131 Power Assets Holdings Ltd. 298,579
10,000 Sun Hung Kai Properties Ltd. 154,914
34,541 Swire Pacific Ltd., Class A 344,490
-------------
2,598,731
-------------
ISRAEL -- 0.7%
12,980 Bank Hapoalim BM 89,917
808 Elbit Systems Ltd. 102,144
-------------
192,061
-------------
JAPAN -- 14.8%
7,800 Aeon Co., Ltd. 117,625
42,000 Aozora Bank Ltd. 161,531
3,100 Canon, Inc. 107,893
800 Central Japan Railway Co. 128,804
5,000 Credit Saison Co., Ltd. 96,331
7,300 Daiichi Sankyo Co., Ltd. 159,449
1,500 East Japan Railway Co. 140,823
2,400 Eisai Co., Ltd. 128,855
3,100 Hamamatsu Photonics K.K. 98,698
2,900 Hankyu Hanshin Holdings, Inc. 103,511
9,700 ITOCHU Corp. 152,260
2,700 Japan Tobacco, Inc. 93,898
1,400 Kao Corp. 85,261
5,300 KDDI Corp. 140,378
23,000 Keihan Holdings Co., Ltd. 148,959
12,000 Keio Corp. 100,576
44,000 Kintetsu Group Holdings Co., Ltd. 168,824
39,000 Nagoya Railroad Co., Ltd. 179,001
3,000 NH Foods Ltd. 88,848
2,400 Nippon Telegraph & Telephone Corp. 117,339
9,500 Nissan Motor Co., Ltd. 94,444
1,800 Nissin Foods Holdings Co., Ltd. 113,148
8,900 NTT DOCOMO, Inc. 206,909
6,400 ORIX Corp. 101,679
3,700 Sankyo Co., Ltd. 121,493
2,100 Secom Co., Ltd. 157,664
7,300 Sekisui House Ltd. 126,572
2,400 Seven & i Holdings Co., Ltd. 96,766
7,700 Sumitomo Corp. 104,173
1,800 Takeda Pharmaceutical Co., Ltd. 95,221
See Notes to Financial Statements Page 13
FIRST TRUST HORIZON MANAGED VOLATILITY DEVELOPED INTERNATIONAL ETF (HDMV)
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 2017
SHARES DESCRIPTION VALUE
------------- ----------------------------------- -------------
COMMON STOCKS (a) (CONTINUED)
JAPAN (CONTINUED)
2,400 Terumo Corp. $ 90,889
25,000 Tobu Railway Co., Ltd. 132,432
2,700 Toho Co., Ltd. 97,351
12,900 Toray Industries, Inc. 116,661
3,200 Toyo Suisan Kaisha Ltd. 116,395
1,700 West Japan Railway Co. 122,097
-------------
4,412,758
-------------
JERSEY -- 1.1%
11,230 Experian PLC 223,290
1,951 Wolseley PLC 116,532
-------------
339,822
-------------
NETHERLANDS -- 4.2%
2,124 Heineken Holding N.V. 208,720
1,799 Heineken N.V. 187,772
1,426 Koninklijke DSM N.V. 105,303
2,555 Koninklijke Philips N.V. 97,937
3,180 QIAGEN N.V. 104,431
18,678 RELX N.V. 393,134
3,661 Wolters Kluwer N.V. 163,019
-------------
1,260,316
-------------
NORWAY -- 0.3%
9,087 Orkla ASA 93,611
-------------
SINGAPORE -- 7.0%
85,500 ComfortDelGro Corp., Ltd. 145,744
8,800 DBS Group Holdings Ltd. 140,395
33,800 Oversea-Chinese Banking Corp., Ltd. 283,340
24,400 Singapore Airlines Ltd. 187,076
82,600 Singapore Exchange Ltd. 461,411
103,500 Singapore Press Holdings Ltd. 222,252
158,600 Singapore Telecommunications Ltd. 464,629
9,800 United Overseas Bank Ltd. 173,488
-------------
2,078,335
-------------
SPAIN -- 1.3%
3,668 Enagas S.A. 103,713
4,202 Industria de Diseno Textil S.A. 167,088
5,104 Red Electrica Corp. S.A. 109,483
-------------
380,284
-------------
SWEDEN -- 3.8%
5,696 ICA Gruppen AB 228,297
3,930 Industrivarden AB, Class C 95,405
2,353 Investor AB, Class B 111,620
3,201 Kinnevik AB, Class B 98,324
1,740 L E Lundbergforetagen AB, Class B 136,958
7,817 Skandinaviska Enskilda Banken AB,
Class A 99,046
4,487 Swedbank AB, Class A 117,152
3,658 Swedish Match AB 128,672
26,970 Telia Co., AB 126,769
-------------
1,142,243
-------------
SHARES DESCRIPTION VALUE
------------- ----------------------------------- -------------
SWITZERLAND -- 13.2%
6,934 ABB Ltd. $ 162,782
1,588 Adecco Group AG 121,200
1,518 Baloise Holding AG 243,960
3,273 Coca-Cola HBC AG 98,978
460 Geberit AG 221,306
1,779 Julius Baer Group Ltd. 100,637
1,276 Kuehne + Nagel International AG 222,223
1,565 Nestle S.A. 132,231
2,054 Novartis AG 175,034
4,417 Pargesa Holding S.A. 352,647
466 Partners Group Holding AG 302,651
438 Roche Holding AG 110,933
807 Schindler Holding AG 174,094
767 Sonova Holding AG 124,456
585 Swiss Life Holding AG 213,563
2,464 Swiss Prime Site AG 222,332
2,984 Swiss Re AG 287,769
845 Swisscom AG 413,084
838 Zurich Insurance Group AG 255,486
-------------
3,935,366
-------------
UNITED KINGDOM -- 14.3%
14,366 Aviva PLC 102,165
18,265 BAE Systems PLC 144,954
2,134 British American Tobacco PLC 132,713
4,646 Bunzl PLC 140,253
2,903 Coca-Cola European Partners PLC 125,497
10,885 Compass Group PLC 232,228
2,058 Croda International PLC 100,494
9,813 Diageo PLC 317,014
13,318 GlaxoSmithKline PLC 266,124
12,910 HSBC Holdings PLC 128,943
3,390 Imperial Brands PLC 139,550
2,232 InterContinental Hotels Group PLC 126,366
2,349 Intertek Group PLC 133,300
37,916 Legal & General Group PLC 134,271
21,744 National Grid PLC 268,759
1,067 Reckitt Benckiser Group PLC 103,741
19,489 RELX PLC 424,792
5,968 Royal Dutch Shell PLC, Class A 167,956
3,572 Royal Dutch Shell PLC, Class B 101,421
10,647 RSA Insurance Group PLC 91,661
2,892 Schroders PLC 131,451
4,045 Severn Trent PLC 119,548
17,615 Smith & Nephew PLC 306,784
8,928 SSE PLC 162,441
49,588 Vodafone Group PLC 145,247
-------------
4,247,673
-------------
TOTAL COMMON STOCKS 27,565,012
(Cost $25,711,412) -------------
Page 14 See Notes to Financial Statements
FIRST TRUST HORIZON MANAGED VOLATILITY DEVELOPED INTERNATIONAL ETF (HDMV)
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 2017
SHARES DESCRIPTION VALUE
------------- ----------------------------------- -------------
REAL ESTATE INVESTMENT TRUSTS (a) -- 6.9%
FRANCE -- 2.0%
1,978 Fonciere Des Regions $ 191,141
607 Gecina S.A. 91,689
1,438 ICADE 123,536
2,173 Klepierre 88,426
391 Unibail-Rodamco SE 97,827
-------------
592,619
-------------
HONG KONG -- 0.5%
18,183 Link REIT 147,824
-------------
SINGAPORE -- 4.4%
135,100 Ascendas Real Estate Investment
Trust 269,173
166,000 CapitaLand Commercial Trust 210,693
310,900 CapitaLand Mall Trust 461,136
257,800 Suntec Real Estate Investment Trust 361,451
-------------
1,302,453
-------------
TOTAL REAL ESTATE
INVESTMENT TRUSTS 2,042,896
(Cost $1,885,738) -------------
TOTAL INVESTMENTS -- 99.5% 29,607,908
(Cost $27,597,150) (c)
NET OTHER ASSETS AND
LIABILITIES -- 0.5% 137,004
-------------
NET ASSETS -- 100.0% $ 29,744,912
=============
(a) Portfolio securities are categorized based upon their country of
incorporation. For a breakdown of the portfolio securities by sector,
please see the Fund Performance Overview.
(b) Non-income producing security.
(c) Aggregate cost for federal income tax purposes is $27,953,844. As of July
31, 2017, the aggregate gross unrealized appreciation for all securities
in which there was an excess of value over tax cost was $1,867,965 and the
aggregate gross unrealized depreciation for all securities in which there
was an excess of tax cost over value was $213,901.
-----------------------------
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of July 31, 2017
is as follows (see Note 2A -- Portfolio Valuation in the Notes to Financial
Statements):
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
7/31/2017 PRICES INPUT INPUT
---------------------------------------------------------------------
Common Stocks* $27,565,012 $27,565,012 $ -- $ --
Real Estate
Investment
Trusts* 2,042,896 2,042,896 -- --
---------------------------------------------------
Total Investments $29,607,908 $29,607,908 $ -- $ --
===================================================
* See Portfolio of Investments for country breakout.
All transfers in and out of the Levels during the period are assumed to occur on
the last day of the period at their current value. There were no transfers
between Levels at July 31, 2017.
----------------------------------------------------------
CURRENCY EXPOSURE % OF TOTAL
DIVERSIFICATION INVESTMENTS
----------------------------------------------------------
Euro 25.9%
British Pound Sterling 15.4
Japanese Yen 14.9
Swiss Franc 12.9
Hong Kong Dollar 11.9
Singapore Dollar 11.4
Swedish Krona 3.9
Danish Krone 1.3
US Dollar 0.8
Australian Dollar 0.7
Israeli Shekel 0.6
Norwegian Krone 0.3
------
Total 100.0%
======
See Notes to Financial Statements Page 15
FIRST TRUST EXCHANGE-TRADED FUND III
STATEMENTS OF ASSETS AND LIABILITIES
JULY 31, 2017
FIRST TRUST
FIRST TRUST HORIZON
HORIZON MANAGED
MANAGED VOLATILITY
VOLATILITY DEVELOPED
DOMESTIC INTERNATIONAL
ETF ETF
(HUSV) (HDMV)
-------------- --------------
ASSETS:
Investments, at value........................................................................ $ 62,707,287 $ 29,607,908
Cash......................................................................................... 85,432 60,796
Receivables:
Capital shares sold....................................................................... 1,101,742 --
Investment securities sold................................................................ -- 287,000
Dividends................................................................................. 42,226 48,700
Dividend reclaims......................................................................... -- 48,548
-------------- --------------
Total Assets.............................................................................. 63,936,687 30,052,952
-------------- --------------
LIABILITIES:
Due to authorized participant................................................................ -- 242,100
Due to custodian foreign currency............................................................ -- 604
Payables:
Investment securities purchased........................................................... 1,100,043 44,900
Investment advisory fees.................................................................. 37,299 20,278
Other liabilities............................................................................ -- 158
-------------- --------------
Total Liabilities......................................................................... 1,137,342 308,040
-------------- --------------
NET ASSETS................................................................................... $ 62,799,345 $ 29,744,912
============== ==============
NET ASSETS CONSIST OF:
Paid-in capital.............................................................................. $ 60,600,396 $ 28,293,997
Par value.................................................................................... 28,500 9,000
Accumulated net investment income (loss)..................................................... 63,593 70,881
Accumulated net realized gain (loss) on investments and foreign currency transactions........ (1,221,339) (643,524)
Net unrealized appreciation (depreciation) on investments and foreign currency translation... 3,328,195 2,014,558
-------------- --------------
NET ASSETS................................................................................... $ 62,799,345 $ 29,744,912
============== ==============
NET ASSET VALUE, per share................................................................... $ 22.03 $ 33.05
============== ==============
Number of shares outstanding (unlimited number of shares authorized,
par value $0.01 per share)................................................................ 2,850,002 900,002
============== ==============
Investments, at cost......................................................................... $ 59,379,092 $ 27,597,150
============== ==============
Foreign currency, at cost (proceeds)......................................................... $ -- $ (643)
============== ==============
Page 16 See Notes to Financial Statements
FIRST TRUST EXCHANGE-TRADED FUND III
STATEMENTS OF OPERATIONS
FOR THE PERIOD AUGUST 24, 2016 (a) THROUGH JULY 31, 2017
FIRST TRUST
FIRST TRUST HORIZON
HORIZON MANAGED
MANAGED VOLATILITY
VOLATILITY DEVELOPED
DOMESTIC INTERNATIONAL
ETF ETF
(HUSV) (HDMV)
-------------- --------------
INVESTMENT INCOME:
Dividends.................................................................................... $ 982,705 $ 798,735
Interest..................................................................................... 372 274
Foreign tax withholding...................................................................... -- (61,940)
Other........................................................................................ 7 50
-------------- --------------
Total investment income................................................................... 983,084 737,119
-------------- --------------
EXPENSES:
Investment advisory fees..................................................................... 312,536 166,464
Excise tax expense........................................................................... 725 --
-------------- --------------
Total expenses............................................................................ 313,261 166,464
-------------- --------------
NET INVESTMENT INCOME (LOSS)................................................................. 669,823 570,655
-------------- --------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments............................................................................... (1,388,509) (814,944)
In-kind redemptions....................................................................... 4,734,011 2,762,955
Foreign currency transactions............................................................. -- 35,877
-------------- --------------
Net realized gain (loss)..................................................................... 3,345,502 1,983,888
-------------- --------------
Net change in unrealized appreciation (depreciation) on:
Investments............................................................................... 3,328,195 2,010,758
Foreign currency translation.............................................................. -- 3,800
-------------- --------------
Net change in unrealized appreciation (depreciation)......................................... 3,328,195 2,014,558
-------------- --------------
NET REALIZED AND UNREALIZED GAIN (LOSS)...................................................... 6,673,697 3,998,446
-------------- --------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS........................................................................... $ 7,343,520 $ 4,569,101
============== ==============
(a) Inception date is consistent with the commencement of investment
operations and is the date the initial creation units were established.
See Notes to Financial Statements Page 17
FIRST TRUST EXCHANGE-TRADED FUND III
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE PERIOD AUGUST 24, 2016 (a) THROUGH JULY 31, 2017
FIRST TRUST
FIRST TRUST HORIZON
HORIZON MANAGED
MANAGED VOLATILITY
VOLATILITY DEVELOPED
DOMESTIC INTERNATIONAL
ETF ETF
(HUSV) (HDMV)
-------------- --------------
OPERATIONS:
Net investment income (loss)................................................................. $ 669,823 $ 570,655
Net realized gain (loss)..................................................................... 3,345,502 1,983,888
Net change in unrealized appreciation (depreciation)......................................... 3,328,195 2,014,558
-------------- --------------
Net increase (decrease) in net assets resulting from operations.............................. 7,343,520 4,569,101
-------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income........................................................................ (606,955) (540,901)
-------------- --------------
Total distributions to shareholders.......................................................... (606,955) (540,901)
-------------- --------------
SHAREHOLDER TRANSACTIONS:
Proceeds from shares sold.................................................................... 115,380,446 51,798,537
Cost of shares redeemed...................................................................... (59,317,666) (26,081,825)
-------------- --------------
Net increase (decrease) in net assets resulting from shareholder transactions................ 56,062,780 25,716,712
-------------- --------------
Total increase (decrease) in net assets...................................................... 62,799,345 29,744,912
NET ASSETS:
Beginning of period.......................................................................... -- --
-------------- --------------
End of period................................................................................ $ 62,799,345 $ 29,744,912
============== ==============
Accumulated net investment income (loss) at end of period.................................... $ 63,593 $ 70,881
============== ==============
CHANGES IN SHARES OUTSTANDING:
Shares outstanding, beginning of period...................................................... -- --
Shares sold.................................................................................. 5,650,002 1,750,002
Shares redeemed.............................................................................. (2,800,000) (850,000)
-------------- --------------
Shares outstanding, end of period............................................................ 2,850,002 900,002
============== ==============
(a) Inception date is consistent with the commencement of investment
operations and is the date the initial creation units were established.
Page 18 See Notes to Financial Statements
FIRST TRUST EXCHANGE-TRADED FUND III
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD
FIRST TRUST HORIZON MANAGED VOLATILITY DOMESTIC ETF (HUSV)
FOR THE PERIOD
8/24/2016 (a)
THROUGH
7/31/2017
--------------
Net asset value, beginning of period ........... $ 19.96
----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) ................... 0.24
Net realized and unrealized gain (loss) ........ 2.05
----------
Total from investment operations ............... 2.29
----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income .......................... (0.22)
----------
Net asset value, end of period ................. $ 22.03
==========
TOTAL RETURN (b)................................ 11.51%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) ........... $ 62,799
RATIOS TO AVERAGE NET ASSETS:
Ratio of total expenses to average net assets... 0.70% (c)
Ratio of net investment income (loss) to
average net assets .......................... 1.50% (c)
Portfolio turnover rate (d)..................... 149%
(a) Inception date is consistent with the commencement of investment
operations and is the date the initial creation units were established.
(b) Total return is calculated assuming an initial investment made at the net
asset value at the beginning of the period, reinvestment of all
distributions at net asset value during the period, and redemption at net
asset value on the last day of the period. The return presented does not
reflect the deduction of taxes that a shareholder would pay on Fund
distributions or the redemption or sale of Fund shares. Total return is
calculated for the time period presented and is not annualized for periods
of less than a year.
(c) Annualized.
(d) Portfolio turnover is calculated for the time period presented and is not
annualized for periods of less than a year and does not include securities
received or delivered from processing creations or redemptions and in-kind
transactions.
See Notes to Financial Statements Page 19
FIRST TRUST EXCHANGE-TRADED FUND III
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD
FIRST TRUST HORIZON MANAGED VOLATILITY DEVELOPED INTERNATIONAL ETF (HDMV)
FOR THE PERIOD
8/24/2016 (a)
THROUGH
7/31/2017
--------------
Net asset value, beginning of period ......... $ 29.89
----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) ................. 0.63
Net realized and unrealized gain (loss) ...... 3.13
----------
Total from investment operations ............. 3.76
----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income ........................ (0.60)
----------
Net asset value, end of period ............... $ 33.05
==========
TOTAL RETURN (b).............................. 12.68%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) ......... $ 29,745
RATIOS TO AVERAGE NET ASSETS:
Ratio of total expenses to average net assets 0.80% (c)
Ratio of net investment income (loss) to
average net assets ........................ 2.74% (c)
Portfolio turnover rate (d)................... 150%
(a) Inception date is consistent with the commencement of investment
operations and is the date the initial creation units were established.
(b) Total return is calculated assuming an initial investment made at the net
asset value at the beginning of the period, reinvestment of all
distributions at net asset value during the period, and redemption at net
asset value on the last day of the period. The return presented does not
reflect the deduction of taxes that a shareholder would pay on Fund
distributions or the redemption or sale of Fund shares. Total return is
calculated for the time period presented and is not annualized for periods
of less than a year.
(c) Annualized.
(d) Portfolio turnover is calculated for the time period presented and is not
annualized for periods of less than a year and does not include securities
received or delivered from processing creations or redemptions and in-kind
transactions.
Page 20 See Notes to Financial Statements
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FIRST TRUST EXCHANGE-TRADED FUND III
JULY 31, 2017
1. ORGANIZATION
First Trust Exchange-Traded Fund III (the "Trust") is an open-end management
investment company organized as a Massachusetts business trust on January 9,
2008, and is registered with the Securities and Exchange Commission ("SEC")
under the Investment Company Act of 1940, as amended (the "1940 Act").
The Trust consists of eleven funds that are currently offering shares. This
report covers the following funds, each a non-diversified series of the Trust:
First Trust Horizon Managed Volatility Domestic ETF - (NYSE Arca, Inc.
("NYSE Arca") ticker "HUSV") (1)
First Trust Horizon Managed Volatility Developed International ETF - (NYSE
Arca ticker "HDMV") (1)
(1) Commenced investment operations on August 24, 2016.
Each fund represents a separate series of shares of beneficial interest in the
Trust (each a "Fund" and collectively, the "Funds"). Unlike conventional mutual
funds, each Fund issues and redeems shares on a continuous basis, at net asset
value ("NAV"), only in large specified blocks consisting of 50,000 shares called
a "Creation Unit." Creation Units are issued and redeemed in-kind for securities
in which a Fund invests and, in certain circumstances, for cash. Except when
aggregated in Creation Units, the shares are not redeemable securities of a
Fund.
Each Fund is an actively managed exhcange-traded fund. The investment objective
of each Fund is to provide capital appreciation.
Under normal market conditions, HUSV seeks to achieve its investment objective
by investing at least 80% of its net assets in common stocks of domestic
companies listed and traded on U.S. national securities exchanges that Horizon
Investments, LLC ("Horizon" or the "Sub-Advisor") believes exhibit low future
expected volatility.
Under normal market conditions, HDMV seeks to achieve its investment objective
by investing at least 80% of its net assets in common stocks and depositary
receipts of developed market companies listed and traded on non-U.S. exchanges
that Horizon believes exhibit low future expected volatility.
There can be no assurance that a Fund will achieve its investment objective. The
Funds may not be appropriate for all investors.
2. SIGNIFICANT ACCOUNTING POLICIES
The Funds are each considered an investment company and follow accounting and
reporting guidance under Financial Accounting Standards Board ("FASB")
Accounting Standards Codification ("ASC") Topic 946, "Financial
Services-Investment Companies." The following is a summary of significant
accounting policies consistently followed by the Funds in the preparation of the
financial statements. The preparation of financial statements in accordance with
accounting principles generally accepted in the United States of America ("U.S.
GAAP") requires management to make estimates and assumptions that affect the
reported amounts and disclosures in the financial statements. Actual results
could differ from those estimates.
A. PORTFOLIO VALUATION
Each Fund's net asset value ("NAV") is determined daily as of the close of
regular trading on the New York Stock Exchange ("NYSE"), normally 4:00 p.m.
Eastern time, on each day the NYSE is open for trading. If the NYSE closes early
on a valuation day, the NAV is determined as of that time. Foreign securities
are priced using data reflecting the earlier closing of the principal markets
for those securities. Each 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.
Each 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 Funds'
investment advisor, First Trust Advisors L.P. ("First Trust" or the "Advisor"),
in accordance with valuation procedures adopted by the Trust's Board of
Trustees, and in accordance with provisions of the 1940 Act. Investments valued
by the Advisor's Pricing Committee, if any, are footnoted as such in the
footnotes to the Portfolio of Investments. Each Fund's investments are valued as
follows:
Page 21
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST EXCHANGE-TRADED FUND III
JULY 31, 2017
Common stocks, real estate investment trusts ("REITs") and other equity
securities listed on any national or foreign exchange (excluding The
Nasdaq Stock Market LLC ("Nasdaq") and the London Stock Exchange
Alternative Investment Market ("AIM")) are valued at the last sale price
on the exchange on which they are principally traded or, for Nasdaq and
AIM securities, the official closing price. Securities traded on more than
one securities exchange are valued at the last sale price or official
closing price, as applicable, at the close of the securities exchange
representing the principal market for such securities.
Securities traded in an over-the-counter market are fair valued at the
mean of their most recent bid and asked price, if available, and otherwise
at their closing bid price.
Certain securities may not be able to be priced by pre-established pricing
methods. Such securities may be valued by the Trust's Board of Trustees or its
delegate, the Advisor's Pricing Committee, at fair value. These securities
generally include, but are not limited to, restricted securities (securities
which may not be publicly sold without registration under the Securities Act of
1933, as amended), for which a third-party pricing service is unable to provide
a market price; securities whose trading has been formally suspended; a security
whose market or fair value price is not available from a pre-established pricing
source; a security with respect to which an event has occurred that is likely to
materially affect the value of the security after the market has closed but
before the calculation of a Fund's NAV or make it difficult or impossible to
obtain a reliable market quotation; and a security whose price, as provided by
the third-party pricing service, does not reflect the security's fair value. As
a general principle, the current fair value of a security would appear to be the
amount which the owner might reasonably expect to receive for the security upon
its current sale. When fair value prices are used, generally they will differ
from market quotations or official closing prices on the applicable exchanges. A
variety of factors may be considered in determining the fair value of such
securities, including, but not limited to, the following:
1) the type of security;
2) the size of the holding;
3) the initial cost of the security;
4) transactions in comparable securities;
5) price quotes from dealers and/or third-party pricing services;
6) relationships among various securities;
7) information obtained by contacting the issuer, analysts, or the
appropriate stock exchange;
8) an analysis of the issuer's financial statements; and
9) the existence of merger proposals or tender offers that might affect
the value of the security.
If the securities in question are foreign securities, the following additional
information may be considered:
1) the value of similar foreign securities traded on other foreign
markets;
2) ADR trading of similar securities;
3) closed-end fund trading of similar securities;
4) foreign currency exchange activity;
5) the trading prices of financial products that are tied to baskets of
foreign securities;
6) factors relating to the event that precipitated the pricing problem;
7) whether the event is likely to recur; and
8) whether the effects of the event are isolated or whether they affect
entire markets, countries or regions.
Because foreign markets may be open on different days than the days during which
investors may transact in the shares of a Fund, the value of the Fund's
securities may change on the days when investors are not able to transact in the
shares of the Fund. The value of securities denominated in foreign currencies is
converted into U.S. dollars using exchange rates determined daily as of the
close of regular trading on the NYSE.
The Funds are subject to fair value accounting standards that define fair value,
establish the framework for measuring fair value and provide a three-level
hierarchy for fair valuation based upon the inputs to the valuation as of the
measurement date. The three levels of the fair value hierarchy are as follows:
o Level 1 - Level 1 inputs are quoted prices in active markets for
identical investments. An active market is a market in which
transactions for the investment occur with sufficient frequency and
volume to provide pricing information on an ongoing basis.
o Level 2 - Level 2 inputs are observable inputs, either directly or
indirectly, and include the following:
o Quoted prices for similar investments in active markets.
Page 22
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST EXCHANGE-TRADED FUND III
JULY 31, 2017
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 each Fund's investments as of July 31, 2017, is
included with each Fund's Portfolio of Investments.
B. SECURITIES TRANSACTIONS AND INVESTMENT INCOME
Securities transactions are recorded as of the trade date. Realized gains and
losses from securities transactions are recorded on the identified cost basis.
Dividend income is recorded on the ex-dividend date. Interest income is recorded
on the accrual basis.
Distributions received from a Fund's investments in REITs may be comprised of
return of capital, capital gains and income. The actual character of the amounts
received during the year are not known until after the REIT's fiscal year end. A
Fund records the character of distributions received from the REITs during the
year based on estimates and historical information available. The
characterization of distributions received by a Fund may be subsequently revised
based on information received from the REITs after their tax reporting periods
conclude.
C. FOREIGN CURRENCY
The books and records of the Funds are maintained in U.S. dollars. Foreign
currencies, investments and other assets and liabilities are translated into
U.S. dollars at the exchange rates prevailing at the end of the period.
Purchases and sales of investments and items of income and expense are
translated on the respective dates of such transactions. Unrealized gains and
losses on assets and liabilities, other than investments in securities, which
result from changes in foreign currency exchange rates have been included in
"Net change in unrealized appreciation (depreciation) on foreign currency
translation" on the Statements of Operations. Unrealized gains and losses on
investments in securities which result from changes in foreign exchange rates
are included with fluctuations arising from changes in market price and are
shown in "Net change in unrealized appreciation (depreciation) on investments"
on the Statements of Operations. Net realized foreign currency gains and losses
include the effect of changes in exchange rates between trade date and
settlement date on investment security transactions, foreign currency
transactions and interest and dividends received and are shown in "Net realized
gain (loss) on foreign currency transactions" on the Statements of Operations.
The portion of foreign currency gains and losses related to fluctuations in
exchange rates between the initial purchase settlement date and subsequent sale
trade date is included in "Net realized gain (loss) on investments" on the
Statements of Operations.
D. DIVIDENDS AND DISTRIBUTION TO SHAREHOLDERS
Dividends from net investment income of each Fund, if any, are declared and paid
quarterly, or as the Board of Trustees may determine from time to time.
Distributions of net realized capital gains earned by each Fund, if any, are
distributed at least annually.
Distributions from income and capital gains are determined in accordance with
income tax regulations, which may differ from U.S. GAAP. Certain capital
accounts in the financial statements are periodically adjusted for permanent
differences in order to reflect their tax character. These permanent differences
are primarily due to the varying treatment of income and gain/loss on portfolio
securities held by the Funds and have no impact on net assets or NAV per share.
Temporary differences, which arise from recognizing certain items of income,
expense and gain/loss in different periods for financial statement and tax
purposes, will reverse at some time in the future.
The tax character of distributions paid by each Fund during the fiscal period
ended July 31, 2017, was as follows:
Distributions Distributions Distributions
paid from paid from paid from
Ordinary Capital Return of
Income Gains Capital
--------------- --------------- ---------------
First Trust Horizon Managed Volatility Domestic ETF $ 606,955 $ -- $ --
First Trust Horizon Managed Volatility Developed International ETF 540,901 -- --
Page 23
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST EXCHANGE-TRADED FUND III
JULY 31, 2017
As of July 31, 2017, the components of distributable earnings on a tax basis for
each Fund were as follows:
Accumulated Net
Undistributed Capital and Unrealized
Ordinary Other Appreciation
Income Gain (Loss) (Depreciation)
--------------- --------------- ---------------
First Trust Horizon Managed Volatility Domestic ETF $ 63,593 $ (1,126,342) $ 3,233,198
First Trust Horizon Managed Volatility Developed International ETF 322,585 (538,534) 1,657,864
E. INCOME TAXES
Each Fund intends to qualify as a regulated investment company by complying with
the requirements under Subchapter M of the Internal Revenue Code of 1986, as
amended, which includes distributing substantially all of its net investment
income and net realized gains to shareholders. Accordingly, no provision has
been made for federal and state income taxes. However, due to the timing and
amount of distributions, each Fund may be subject to an excise tax of 4% of the
amount by which approximately 98% of each Fund's taxable income exceeds the
distributions from such taxable income for the calendar year.
The Funds are 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 year ended 2017 remains
open to federal and state audit. As of July 31, 2017, management has evaluated
the application of these standards to the Funds, and has determined that no
provision for income tax is required in the Funds' financial statements for
uncertain tax positions.
The Funds intend to utilize provisions of the federal income tax laws, which
allow it to carry a realized capital loss forward indefinitely following the
year of the loss and offset such loss against any future realized capital gains.
The Funds are subject to certain limitations under U.S. tax rules on the use of
capital loss carryforwards and net unrealized built-in losses. These limitations
apply when there has been a 50% change in ownership. At July 31, 2017, the Funds
had non-expiring capital loss carryforwards for federal income tax purposes as
follows:
Non-Expiring
Capital Loss
Available
---------------
First Trust Horizon Managed Volatility Domestic ETF $ 1,126,342
First Trust Horizon Managed Volatility Developed International ETF 538,534
In order to present paid-in capital, accumulated net investment income (loss)
and accumulated net realized gain (loss) on investments on the Statements of
Assets and Liabilities that more closely represent their tax character, certain
adjustments have been made to paid-in capital, accumulated net investment income
(loss) and accumulated net realized gain (loss) on investments. These
adjustments are primarily due to the difference between book and tax treatments
of income and gains on various investment securities held by the Funds and
in-kind transactions. The results of operations and net assets were not affected
by these adjustments. For the fiscal period ended July 31, 2017, the adjustents
for each Fund were as follows:
Accumulated Accumulated
Net Net Realized
Investment Gain (Loss) Paid-in
Income (Loss) on Investments Capital
--------------- --------------- ---------------
First Trust Horizon Managed Volatility Domestic ETF $ 725 $ (4,566,841) $ 4,566,116
First Trust Horizon Managed Volatility Developed International ETF 41,127 (2,627,412) 2,586,285
F. EXPENSES
Expenses, other than the investment advisory fee and other excluded expenses,
are paid by the Advisor (see Note 3).
G. 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 intedned to modernize
the reporting of information provided by funds and to improve the quality and
type of information that fund s provide to the SEC and investors. In part, the
new and amended rules and forms amend Regulation S-X and require standardized,
enhanced disclosures about derivatives in a fund's financial statements, as well
as other amendments. The compliance date for the amendments of Regulation S-X is
Page 24
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST EXCHANGE-TRADED FUND III
JULY 31, 2017
August 1, 2017, while the compliance date for the new types and other rule
amendments is on or after June 1, 2018. Managment is evaluating the new and
amended rules and forms to determine the impact to the Funds.
H. 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 financial
statements and disclosures.
3. INVESTMENT ADVISORY FEE, AFFILIATED TRANSACTIONS AND OTHER FEE ARRANGEMENTS
First Trust, the investment advisor to the Funds, is a limited partnership with
one limited partner, Grace Partners of DuPage L.P., and one general partner, The
Charger Corporation. The Charger Corporation is an Illinois corporation
controlled by James A. Bowen, Chief Executive Officer of First Trust. First
Trust is responsible for supervising the selection and ongoing monitoring of the
securities in each Fund's portfolio, managing the Funds' business affairs and
providing certain administrative services necessary for the management of the
Funds.
HUSV and HDMV have agreed to pay First Trust an annual unitary management fee of
0.70% and 0.80% of HUSV and HDMV's average daily net assets, respectively.
Pursuant to the Investment Management Agreement between First Trust and the
Trust, First Trust manages the investment of the Funds' assets and is
responsible for the expenses of each Fund including the cost of transfer agency,
sub-advisory, custody, fund administration, legal, audit and other services,
including any compensation to Trustees, and excluding fee payments under the
Investment Management Agreement, interest, taxes, brokerage commissions,
acquired fund fees, if any, distribution and service fees payable pursuant to
Rule 12b-1 plan, if any, expenses associated with the execution of portfolio
transactions, and extraordinary expenses, which are paid by each respective
Fund. First Trust also provides fund reporting services to each Fund for a flat
annual fee in the amount of $9,250, which is covered under the annual unitary
management fee.
Horizon serves as the Funds' sub-advisor and manages each Fund's portfolio
subject to First Trust's supervision. The Sub-Advisor receives a sub-advisory
fee from First Trust equal to 50% of any remaining monthly unitary management
fee paid to the Advisor after the average Fund's expenses accrued during the
most recent twelve months are subtracted from the unitary management fee for
that month.
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 each Fund. As
custodian, BBH is responsible for custody of each Fund's assets. As fund
accountant and administrator, BBH is responsible for maintaining the books and
records of each Fund's securities and cash. As transfer agent, BBH is
responsible for maintaining shareholder records for each 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.
Page 25
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST EXCHANGE-TRADED FUND III
JULY 31, 2017
4. PURCHASES AND SALES OF SECURITIES
For the period ended July 31, 2017, the cost of purchases and proceeds from
sales of investments for each Fund, excluding short-term investments and in-kind
transactions, were as follows:
PURCHASES SALES
--------------- ---------------
First Trust Horizon Managed Volatility Domestic ETF $ 69,391,373 $ 69,037,359
First Trust Horizon Managed Volatility Developed International ETF 40,525,863 32,349,703
For the period ended July 31, 2017, the cost of in-kind purchases and proceeds
from in-kind sales for each Fund were as follows:
PURCHASES SALES
--------------- ---------------
First Trust Horizon Managed Volatility Domestic ETF $ 114,986,929 $ 59,303,530
First Trust Horizon Managed Volatility Developed International ETF 43,434,092 25,961,114
5. CREATIONS, REDEMPTIONS AND TRANSACTION FEES
Shares are created and redeemed by each 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 a Fund, an
Authorized Participant must deposit (i) a designated portfolio of equity
securities determined by First Trust (the "Deposit Securities") and generally
make or receive a cash payment referred to as the "Cash Component," which is an
amount equal to the difference between the NAV of the Fund shares (per Creation
Unit aggregations) and the market value of the Deposit Securities, and/or (ii)
cash in lieu of all or a portion of the Deposit Securities. If the Cash
Component is a positive number (i.e., the NAV per Creation Unit Aggregation
exceeds the Deposit Amount), the Authorized Participant will deliver the Cash
Component. If the Cash Component is a negative number (i.e., the NAV per
Creation Unit Aggregation is less than the Deposit Amount), the Authorized
Participant will receive the Cash Component. Authorized Participants purchasing
Creation Units must pay to BBH, as transfer agent, a creation transaction fee
(the "Creation Transaction Fee") regardless of the number of Creation Units
purchased in the transaction. The Creation Transaction Fee may vary and is based
on the composition of the securities included in each Fund's portfolio and the
countries in which the transactions are settled. The Creation Transaction Fee
may increase or decrease as each Fund's portfolio is adjusted to conform to
changes in the composition of its corresponding index. The price for each
Creation Unit will equal the daily NAV per share times the number of shares in a
Creation Unit plus the fees described above and, if applicable, any operational
processing and brokerage costs, transfer fees or stamp taxes. When a 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 each Fund's portfolio and the countries in which the
transactions are settled. Each Fund reserves the right to effect redemptions in
cash. An Authorized Participant may request a cash redemption in lieu of
securities; however, each Fund may, in its discretion, reject any such request.
The standard Creation Transaction Fees and the Redemption Transaction Fees for
each Fund are as follows:
Creation Redemption
Transaction Fees Transaction Fees
---------------- ----------------
First Trust Horizon Managed Volatility Domestic ETF $ 500 $ 500
First Trust Horizon Managed Volatility Developed International ETF 4,300 4,300
Page 26
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST EXCHANGE-TRADED FUND III
JULY 31, 2017
6. DISTRIBUTION PLAN
The Board of Trustees adopted a Distribution and Service Plan pursuant to Rule
12b-1 under the 1940 Act. In accordance with the Rule 12b-1 plan, the Funds are
authorized to pay an amount up to 0.25% of their average daily net assets each
year to reimburse First Trust Portfolios L.P. ("FTP"), the distributor of the
Funds, for amounts expended to finance activities primarily intended to result
in the sale of Creation Units or to provide investor services. FTP may also use
this amount to compensate securities dealers or other persons that are
Authorized Participants for providing distribution assistance, including
broker-dealer and shareholder support and educational and promotional services.
No 12b-1 fees are currently paid by the Funds, and pursuant to a contractual
arrangement, no 12b-1 fees will be paid any time before August 22, 2018.
7. INDEMNIFICATION
The Trust, on behalf of the Funds, has a variety of indemnification obligations
under contracts with its service providers. The Trust's maximum exposure under
these arrangements is unknown. However, the Trust has not had prior claims or
losses pursuant to these contracts and expects the risk of loss to be remote.
8. SUBSEQUENT EVENTS
Management has evaluated the impact of all subsequent events on the Funds
through the date the financial statements were issued, and has determined there
was the following subsequent event:
On August 23, 2017, First Trust Institutional Preferred Securities and Income
ETF, an additional series of the Trust, began trading under the symbol "FPEI" on
NYSE Arca.
Page 27
--------------------------------------------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
--------------------------------------------------------------------------------
TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF FIRST TRUST EXCHANGE-TRADED FUND
III:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of First Trust Horizon Managed Volatility Domestic
ETF and First Trust Horizon Managed Volatility Developed International ETF, each
a series of the First Trust Exchange-Traded Fund III (the "Trust"), as of July
31, 2017, and the related statements of operations and changes in net assets and
the financial highlights for the period August 24, 2016 (commencement of
operations) through July 31, 2017. These financial statements and financial
highlights are the responsibility of the Trust'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 Trust
is not required to have, nor were we engaged to perform, an audit of their
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 Trust'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 July 31, 2017 by correspondence with the Trust's
custodian and brokers; where replies were not received from brokers, we
performed other auditing procedures. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
funds listed above included in First Trust Exchange-Traded Fund III as of July
31, 2017, and the results of their operations, changes in their net assets, and
the financial highlights for the period August 24, 2016 (commencement of
operations) through July 31, 2017, in conformity with accounting principles
generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
Chicago, Illinois
September 25, 2017
Page 28
--------------------------------------------------------------------------------
ADDITIONAL INFORMATION
--------------------------------------------------------------------------------
FIRST TRUST EXCHANGE-TRADED FUND III
JULY 31, 2017 (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 each Fund voted proxies relating to
portfolio investments during the most recent 12-month period ended June 30 will
be available (1) without charge, upon request, by calling (800) 988-5891; (2) on
the Fund's website located at http://www.ftportfolios.com; and (3) on the
Securities and Exchange Commission's ("SEC") website located at
http://www.sec.gov.
PORTFOLIO HOLDINGS
The Trust files its complete schedule of portfolio holdings with the SEC for the
first and third quarters of each fiscal year on Form N-Q. The Trust's Form N-Qs
are available (1) by calling (800) 988-5891; (2) on the Funds' 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 July 31, 2017, the following percentages of income
dividend paid by the Funds qualify for the dividends received deduction
available to corporations:
Dividends Received
Deduction
------------------
First Trust Horizon Managed Volatility Domestic ETF 100.00%
First Trust Horizon Managed Volatility Developed International ETF 0.00%
For the taxable year ended July 31, 2017, the following percentages of income
dividend paid by the Funds is hereby designated as qualified dividend income:
Qualified
Dividend Income
------------------
First Trust Horizon Managed Volatility Domestic ETF 100.00%
First Trust Horizon Managed Volatility Developed International ETF 56.20%
The following Fund meets the requirements of Section 853 of the Internal Revenue
Code and elects to pass through to its shareholders credit for foreign taxes
paid. For the taxable year ended July 31, 2017, the total amounts of income
received by the Fund from sources within foreign countries and possessions of
the United States and of taxes paid to such countries are as follows:
GROSS FOREIGN GROSS FOREIGN
INCOME TAXES
------------------- -------------------
AMOUNT PER SHARE AMOUNT PER SHARE
------------------- -------------------
First Trust Horizon Managed Volatility Developed International ETF $798,735 $0.89 $59,605 $0.07
The foreign taxes paid will be reported to shareholders on Form 1099-DIV which
will be sent to shareholders shortly after calendar year end. Gross foreign
income and foreign taxes paid will be posted on the FTP website and disclosed in
the tax letter.
RISK CONSIDERATIONS
RISKS ARE INHERENT IN ALL INVESTING. YOU SHOULD CONSIDER EACH FUND'S INVESTMENT
OBJECTIVE, RISKS, CHARGES AND EXPENSES CAREFULLY BEFORE INVESTING. YOU CAN
DOWNLOAD EACH 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 EACH FUND, PLEASE SEE THE FUNDS' STATEMENT OF
ADDITIONAL INFORMATION, AS WELL AS OTHER REGULATORY FILINGS. READ THESE
DOCUMENTS CAREFULLY BEFORE YOU INVEST. FIRST TRUST PORTFOLIOS L.P. IS THE
DISTRIBUTOR OF THE FIRST TRUST EXCHANGE-TRADED FUND III.
The following summarizes some of the risks that should be considered for the
Funds.
Page 29
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ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST EXCHANGE-TRADED FUND III
JULY 31, 2017 (UNAUDITED)
AUTHORIZED PARTICIPANT CONCENTRATION RISK. Only an authorized participant (as
defined in the "Creation, Redemption, and Transaction Fees" Section) may engage
in creation or redemption transactions directly with each Fund. Each Fund has a
limited number of institutions that act as authorized participants. To the
extent that these institutions exit the business or are unable to proceed with
creation and/or redemption orders with respect to each Fund and no other
authorized participant is able to step forward to create or redeem, in either of
these cases, Fund shares may trade at a discount to each Fund's net asset value
and possibly face delisting.
CURRENCY EXCHANGE RATE RISK. Changes in currency exchange rates and the relative
value of non-U.S. currencies will affect the value of HDMV's investment and the
value of 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.
CYBER SECURITY RISK. As the use of Internet technology has become more prevalent
in the course of business, each Fund has become more susceptible to potential
operational risks through breaches in cyber security. A breach in cyber security
refers to both intentional and unintentional events that may cause each Fund to
lose proprietary information, suffer data corruption or lose operational
capacity. Such events could cause each Fund to incur regulatory penalties,
reputational damage, additional compliance costs associated with corrective
measures and/or financial loss. Cyber security breaches may involve unauthorized
access to each Fund's digital information systems through "hacking" or malicious
software coding, but may also result from outside attacks such as
denial-of-service attacks through efforts to make network services unavailable
to intended users. In addition, cyber security breaches of each Fund's third
party service providers, such as its administrator, transfer agent, custodian,
or sub-advisor, as applicable, or issuers in which each Fund invests, can also
subject each Fund to many of the same risks associated with direct cyber
security breaches. The Funds have established risk management systems designed
to reduce the risks associated with cyber security. However, there is no
guarantee that such efforts will succeed, especially because the Funds do not
directly control the cyber security systems of issuers or third party service
provider.
DEPOSITARY RECEIPTS RISK. Depositary receipts may be less liquid than the
underlying shares in their primary trading market. Any distributions paid to the
holders of depositary receipts are usually subject to a fee charged by the
depositary. Holders of depositary receipts may have limited voting rights, and
investment restrictions in certain countries may adversely impact the value of
depositary receipts because such restrictions may limit the ability to convert
the equity shares into depositary receipts and vice versa. Such restrictions may
cause the equity shares of the underlying issuer to trade at a discount or
premium to the market price of the depositary receipts.
EQUITY SECURITIES RISK. Because each Fund invests in equity securities, the
value of each Fund's shares will fluctuate with changes in the value of these
equity securities. Equity securities prices fluctuate for several reasons,
including changes in investors' perceptions of the financial condition of an
issuer or the general condition of the relevant stock market, such as market
volatility, or when political or economic events affecting the issuers occur. In
addition, common stock prices may be particularly sensitive to rising interest
rates, as the cost of capital rises and borrowing costs increase.
EUROPE INVESTMENT RISK. Investments in a single region, even though representing
a number of different countries within the region, may be affected by common
economic forces and other factors. HDMV is subject to greater risks of adverse
events which occur in the European region and may experience greater volatility
than a fund that is more broadly diversified geographically. Political or
economic disruptions in European countries, even in countries in which the Fund
is not invested, may adversely affect security values and thus the Fund's
holdings. Continuing uncertainty as to the status of the Euro and the European
Monetary Union and the potential for certain countries to withdraw from the
institution has created significant volatility in currency and financial markets
generally. Any partial or complete dissolution of the European Union could have
significant adverse effects on currency and financial markets, and on the values
of a Fund's portfolio investments.
MANAGEMENT RISK. Each Fund is subject to management risk because they are
actively managed portfolios. In managing each Fund's investment portfolios, the
Sub-Advisor will apply investment techniques and risk analyses that may not have
the desired result. There can be no guarantee that the Funds will meet their
investment objectives.
MARKET MAKER RISK. If either Fund has lower average daily trading volumes, it
may rely on a small number of third-party market makers to provide a market for
the purchase and sale of shares. Any trading halt or other problem relating to
the trading activity of these market makers could result in a dramatic change in
the spread between each Fund's net asset value and the price at which each
Fund's shares are trading on NYSE Arca which could result in a decrease in value
of each Fund's shares. In addition, decisions by market makers or authorized
participants to reduce their role or step away from these activities in times of
Page 30
--------------------------------------------------------------------------------
ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST EXCHANGE-TRADED FUND III
JULY 31, 2017 (UNAUDITED)
market stress could inhibit the effectiveness of the arbitrage process in
maintaining the relationship between the underlying values of each Fund's
portfolio securities and the respective Fund's market price. This reduced
effectiveness could result in Fund shares trading at a discount to net asset
value and also in greater than normal intraday bid-ask spreads for Fund shares.
MARKET RISK. Market risk is the risk that a particular security owned by the
Funds or shares of each Fund in general may fall in value. Securities are
subject to market fluctuations caused by such factors as economic, political,
regulatory or market developments, changes in interest rates and perceived
trends in securities prices. Shares of the Funds could decline in value or
underperform other investments.
NEW FUND RISK. Each Fund currently has fewer assets than larger funds, and like
other new funds, large inflows and outflows may impact the Funds' market
exposure for limited periods of time. This impact may be positive or negative,
depending on the direction of market movement during the period affected.
NON-DIVERSIFICATION RISK. Each Fund is classified as "non-diversified" under the
1940 Act. As a result, each Fund is only limited as to the percentage of its
assets which may be invested in the securities of any one issuer by the
diversification requirements imposed by the Internal Revenue Code of 1986, as
amended. Each Fund may invest a relatively high percentage of their assets in a
limited number of issuers. As a result, each Fund may be more susceptible to a
single adverse economic or regulatory occurrence affecting one or more of these
issuers, experience increased volatility and be highly invested in certain
issuers.
NON-U.S. SECURITIES RISK. Non-U.S. securities are subject to higher volatility
than securities of domestic issuers due to possible adverse political, social or
economic developments, restrictions on foreign investment or exchange of
securities, lack of liquidity, currency exchange rates, excessive taxation,
government seizure of assets, different legal or accounting standards, and less
government supervision and regulation of exchanges in foreign countries.
PORTFOLIO TURNOVER RISK. High portfolio turnover may result in each Fund paying
higher levels of transaction costs and generating greater tax liabilities for
shareholders. As a result, high portfolio turnover may lower a Fund's
performance returns.
SMALLER COMPANIES RISK. Mid capitalization companies may be more vulnerable to
adverse general market or economic developments, and their securities may be
less liquid and may experience greater price volatility than larger, more
established companies as a result of several factors, including limited trading
volumes, products or financial resources, management inexperience and less
publicly available information. Accordingly, such companies are generally
subject to greater market risk than larger, more established companies.
NOT FDIC INSURED NOT BANK GUARANTEED MAY LOSE VALUE
Page 31
--------------------------------------------------------------------------------
BOARD OF TRUSTEES AND OFFICERS
--------------------------------------------------------------------------------
FIRST TRUST EXCHANGE-TRADED FUND III
JULY 31, 2017 (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
PORTFOLIOS IN
TERM OF OFFICE THE FIRST TRUST OTHER
NAME, ADDRESS, AND YEAR FIRST FUND COMPLEX TRUSTEESHIPS OR
DATE OF BIRTH AND ELECTED OR PRINCIPAL OCCUPATIONS OVERSEEN BY DIRECTORSHIPS
POSITION WITH THE TRUST APPOINTED DURING PAST 5 YEARS TRUSTEE HELD BY TRUSTEE
-----------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
-----------------------------------------------------------------------------------------------------------------------------------
Richard E. Erickson, Trustee o Indefinite Term Physician; Officer, Wheaton Orthopedics; 148 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 December
Suite 400 2016); Member, Sportsmed LLC (April 2007
Wheaton, IL 60187 to November 2015)
D.O.B.: 04/51
Thomas R. Kadlec, Trustee o Indefinite Term President, ADM Investor Services, Inc. 148 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, Hibs Enterprises (Financial and 148 Director of Trust
c/o First Trust Advisors L.P. Management Consulting) Company of
120 E. Liberty Drive, o Since Inception Illinois
Suite 400
Wheaton, IL 60187
D.O.B.: 11/56
Niel B. Nielson, Trustee o Indefinite Term Managing Director and Chief Operating 148 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 (Educational Transport Inc.
Suite 400 Products and Services); President and Chief (May 2003 to
Wheaton, IL 60187 Executive Officer (June 2012 to September May 2014)
D.O.B.: 03/54 2014), Servant Interactive LLC (Educational
Products and Services); President and Chief
Executive Officer (June 2012 to September
2014), Dew Learning LLC (Educational
Products and Services); President (June 2002
to June 2012), Covenant College
-----------------------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEE
-----------------------------------------------------------------------------------------------------------------------------------
James A. Bowen(1), Trustee, o Indefinite Term Chief Executive Officer, First Trust 148 None
Chairman of the Board L.P. Advisors and First Trust Portfolios L.P.;
120 E. Liberty Drive, o Since Inception Chairman of the Board of Directors, BondWave
Suite 400 LLC (Software Development Company) and
Wheaton, IL 60187 Stonebridge Advisors LLC (Investment
D.O.B.: 09/55 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 32
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BOARD OF TRUSTEES AND OFFICERS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST EXCHANGE-TRADED FUND III
JULY 31, 2017 (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
D.O.B.: 01/66 First Trust Portfolios L.P.; Chief Financial
Officer (January 2016 to Present), BondWave LLC
(Software Development Company) and Stonebridge
Advisors LLC
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
Wheaton, IL 60187 Portfolios 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 33
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PRIVACY POLICY
--------------------------------------------------------------------------------
FIRST TRUST EXCHANGE-TRADED FUND III
JULY 31, 2017 (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.
USE OF WEBSITE ANALYTICS
We currently use third party analytics tools, Google Analytics and AddThis, to
gather information for purposes of improving First Trust's website and marketing
our products and services to you. These tools employ cookies, which are small
pieces of text stored in a file by your web browser and sent to websites that
you visit, to collect information, track website usage and viewing trends such
as the number of hits, pages visited, videos and PDFs viewed and the length of
user sessions in order to evaluate website performance and enhance navigation of
the website. We may also collect other anonymous information, which is generally
limited to technical and web navigation information such as the IP address of
your device, internet browser type and operating system for purposes of
analyzing the data to make First Trust's website better and more useful to our
users. The information collected does not include any personal identifiable
information such as your name, address, phone number or email address unless you
provide that information through the website for us to contact you in order to
answer your questions or respond to your requests. To find out how to opt-out of
these services click on: Google Analytics and AddThis.
CONFIDENTIALITY AND SECURITY
With regard to our internal security procedures, First Trust restricts access to
your nonpublic personal information to those First Trust employees 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).
May 2017
Page 34
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FIRST TRUST
First Trust Exchange-Traded Fund III
INVESTMENT ADVISOR
First Trust Advisors L.P.
120 E. Liberty Drive, Suite 400
Wheaton, IL 60187
INVESTMENT SUB-ADVISOR
Horizon Investments, LLC
13024 Ballantyne Corporate Place Suite 225
Charlotte, NC 28277
ADMINISTRATOR, CUSTODIAN
FUND ACCOUNTANT &
TRANSFER AGENT
Brown Brothers Harriman & Co.
50 Post Office Square
Boston, MA 02110
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
111 S. Wacker Drive
Chicago, IL 60606
LEGAL COUNSEL
Chapman and Cutler LLP
111 W. Monroe Street
Chicago, IL 60603
[BLANK BACK COVER]
FIRST TRUST
FIRST TRUST EXCHANGE-TRADED FUND III
--------------------------------------------------------------------------------
First Trust California Municipal High Income ETF (FCAL)
----------------------------
Annual Report
For the Period
June 20, 2017
(Commencement of Operations)
Through July 31, 2017
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TABLE OF CONTENTS
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FIRST TRUST CALIFORNIA MUNICIPAL HIGH INCOME ETF (FCAL)
ANNUAL REPORT
JULY 31, 2017
Shareholder Letter. ......................................................... 1
Fund Performance Overview.................................................... 2
Portfolio Commentary......................................................... 4
Understanding Your Fund Expenses............................................. 6
Portfolio of Investments..................................................... 7
Statement of Assets and Liabilities.......................................... 10
Statement of Operations...................................................... 11
Statement of Changes in Net Assets........................................... 12
Financial Highlights......................................................... 13
Notes to Financial Statements................................................ 14
Report of Independent Registered Public Accounting Firm...................... 20
Additional Information....................................................... 21
Board of Trustees and Officers............................................... 27
Privacy Policy............................................................... 29
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning of
the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934,
as amended. Forward-looking statements include statements regarding the goals,
beliefs, plans or current expectations of First Trust Advisors L.P. ("First
Trust" or the "Advisor") and its representatives, taking into account the
information currently available to them. Forward-looking statements include all
statements that do not relate solely to current or historical fact. For example,
forward-looking statements include the use of words such as "anticipate,"
"estimate," "intend," "expect," "believe," "plan," "may," "should," "would," or
other words that convey uncertainty of future events or outcomes.
Forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
the series of First Trust Exchange-Traded Fund III (the "Trust") described in
this report (First Trust California Municipal High Income ETF; hereinafter
referred to as the "Fund") to be materially different from any future results,
performance or achievements expressed or implied by the forward-looking
statements. When evaluating the information included in this report, you are
cautioned not to place undue reliance on these forward-looking statements, which
reflect the judgment of the Advisor and its representatives only as of the date
hereof. We undertake no obligation to publicly revise or update these
forward-looking statements to reflect events and circumstances that arise after
the date hereof.
PERFORMANCE AND RISK DISCLOSURE
There is no assurance that the Fund will achieve its investment objectives. The
Fund is subject to market risk, which is the possibility that the market values
of securities owned by the Fund will decline and that the value of the Fund
shares may therefore be less than what you paid for them. Accordingly, you can
lose money by investing in the Fund. See "Risk Considerations" in the Additional
Information section of this report for a discussion of certain other risks of
investing in the Fund.
Performance data quoted represents past performance, which is no guarantee of
future results, and current performance may be lower or higher than the figures
shown. For the most recent month-end performance figures, please visit
http://www.ftportfolios.com or speak with your financial advisor. Investment
returns, net asset value, and share price will fluctuate and Fund shares, when
sold, may be worth more or less than their original cost.
The Advisor may also periodically provide additional information on Fund
performance on the Fund's webpage at http://www.ftportfolios.com.
HOW TO READ THIS REPORT
This report contains information that may help you evaluate your investment in
the Fund. It includes details about the Fund's portfolio and presents data and
analysis that provide insight into the Fund's performance and investment
approach.
By reading the portfolio commentary by 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 CALIFORNIA MUNICIPAL HIGH INCOME ETF (FCAL)
ANNUAL LETTER FROM THE CHAIRMAN AND CEO
JULY 31, 2017
Dear Shareholders:
First Trust Advisors L.P. ("First Trust") is pleased to provide you with the
annual report which contains detailed information about your investment for the
period June 20, 2017 (the Fund's inception) through July 31, 2017, including a
market overview and a performance analysis for the period. We encourage you to
read it carefully and discuss it with your financial advisor.
The past year has seen the election of Donald Trump as the 45th President of the
U.S. and the continued U.S. bull market. In the first seven months of 2017, the
S&P 500(R) Index closed its trading sessions at all-time highs 29 times. The
NASDAQ Composite Index, as of July 31, 2017, closed its trading sessions at
all-time highs 44 times this year.
The current bull market (measuring from March 9, 2009 through July 31, 2017) is
the second longest in history. While we are optimistic about the U.S. economy,
we are also well aware that no one can predict the future or know how markets
will perform in different economic environments. This is why we advocate
maintaining a long-term perspective, as we have done since our inception over 25
years ago. We also believe it is a good practice to speak with your financial
advisor and make sure your financial plan is still on track with your investment
goals.
Thank you for giving First Trust the opportunity to be a part of your investment
plan through the First Trust California Municipal High Income ETF. We value our
relationship with you and will continue to focus on bringing the types of
investments that we believe can 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)
FIRST TRUST CALIFORNIA MUNICIPAL HIGH INCOME ETF (FCAL)
The primary investment objective of First Trust California Municipal High Income
ETF (the "Fund") is to seek to provide current income that is exempt from
regular federal income taxes and California income taxes, and its secondary
objective is long-term capital appreciation. The Fund lists and principally
trades its shares on The Nasdaq Stock Market, LLC under the ticker symbol
"FCAL." Under normal market conditions, the Fund seeks to achieve its investment
objectives by investing at least 80% of its net assets (including investment
borrowings) in municipal debt securities that pay interest that is exempt from
regular federal income taxes and California income taxes.
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PERFORMANCE
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CUMULATIVE
TOTAL RETURNS
Inception (6/20/17)
to 7/31/17
FUND PERFORMANCE
NAV 0.50%
Market Price 0.58%
INDEX PERFORMANCE
Bloomberg Barclays 10 Year California Exempt Index 0.28%
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Total returns for the period since inception are calculated from the inception
date of the Fund. "Cumulative Total Returns" represent the total change in value
of an investment over the periods indicated.
The Fund's per share net asset value ("NAV") is the value of one share of the
Fund and is computed by dividing the value of all assets of the Fund (including
accrued interest and dividends), less all liabilities (including accrued
expenses and dividends declared but unpaid), by the total number of outstanding
shares. The price used to calculate market return ("Market Price") is determined
by using the midpoint between the highest bid and the lowest offer on the stock
exchange on which shares of the Fund are listed for trading as of the time that
the Fund's NAV is calculated. Since shares of the Fund did not trade in the
secondary market until after its inception, for the period from inception to the
first day of secondary market trading in shares of the Fund, the NAV of the Fund
is used as a proxy for the secondary market trading price to calculate market
returns. NAV and market returns assume that all distributions have been
reinvested in the Fund at NAV and Market Price, respectively.
An index is a statistical composite that tracks a specified financial market or
sector. Unlike the Fund, the index does not actually hold a portfolio of
securities and therefore does not incur the expenses incurred by the Fund. These
expenses negatively impact the performance of the Fund. Also, market returns do
not include brokerage commissions that may be payable on secondary market
transactions. If brokerage commissions were included, market returns would be
lower. The total returns presented reflect the reinvestment of dividends on
securities in the index. The returns presented do not reflect the deduction of
taxes that a shareholder would pay on Fund distributions or the redemption or
sale of Fund shares. The investment return and principal value of shares of the
Fund will vary with changes in market conditions. Shares of the Fund may be
worth more or less than their original cost when they are redeemed or sold in
the market. The Fund's past performance is no guarantee of future performance.
------------------------------------------------------------
% OF TOTAL
INVESTMENTS
SECTOR ALLOCATION (INCLUDING CASH)
------------------------------------------------------------
Hospital 14.0%
Special Assessment 12.5
Government Obligation Bond - Unlimited Tax 11.2
Education 10.3
Insured 7.9
Cash 6.1
Higher Education 5.2
Water & Sewer 5.0
Gas 4.1
Continuing Care Retirement Communities 3.9
Tobacco 3.5
Tax Increment 3.4
Student Housing 2.7
Certificate of Publication 2.2
Port 2.1
Government Obligation Bond - Limited Tax 2.0
Toll Road 1.7
Dedicated Tax 1.1
Local Housing 1.0
Other Health 0.1
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Total 100.0%
======
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% OF TOTAL
INVESTMENTS
CREDIT RATING(1) (INCLUDING CASH)
------------------------------------------------------------
AAA 4.7%
AA 18.6
A 16.9
BBB 32.8
BB 7.9
B 0.5
NR 10.5
SP-1+ (short term) 2.0
Cash 6.1
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Total 100.0%
======
(1) The credit quality information presented reflects the ratings assigned by
one or more nationally recognized statistical rating organizations
(NRSROs), including Standard & Poor's Ratings Group, a division of The
McGraw-Hill Companies, Inc., Moody's Investors Service, Inc., Fitch
Ratings or a comparably rated NRSRO. For situations in which a security is
rated by more than one NRSRO and ratings are not equivalent, the highest
ratings are used. Sub-investment grade ratings are those rated BB+/Ba1 or
lower. Investment grade ratings are those rated BBB-/Baa3 or higher. The
credit ratings shown relate to the creditworthiness of the issuers of the
underlying securities in the Fund, and not to the Fund or its shares.
Credit ratings are subject to change.
Page 2
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FUND PERFORMANCE OVERVIEW (UNAUDITED) (CONTINUED)
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FIRST TRUST CALIFORNIA MUNICIPAL HIGH INCOME ETF (FCAL) (CONTINUED)
PERFORMANCE OF A $10,000 INITIAL INVESTMENT
JUNE 20, 2017 - JULY 31, 2017
First Trust Bloomberg Barclays
California Municipal 10 Year California
High Income ETF Exempt Index
6/20/17 $10,000 $10,000
7/31/17 10,050 10,028
Performance figures assume reinvestment of all distributions and do not reflect
the deduction of taxes that a shareholder would pay on Fund distributions or the
redemption or sale of Fund shares. An index is a statistical composite that
tracks a specified financial market or sector. Unlike the Fund, the index does
not actually hold a portfolio of securities and therefore does not incur the
expenses incurred by the Fund. These expenses negatively impact the performance
of the Fund. The Fund's past performance does not predict future performance.
FREQUENCY DISTRIBUTION OF DISCOUNTS AND PREMIUMS
BID/ASK MIDPOINT VS. NAV THROUGH JULY 31, 2017
The following Frequency Distribution of Discounts and Premiums charts are
provided to show the frequency at which the bid/ask midpoint price for the Fund
was at a discount or premium to the daily NAV. The following tables are for
comparative purposes only and represent the period June 21, 2017 (commencement
of trading) through July 31, 2017. 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%
6/21/17 - 7/31/17 14 0 0 0
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NUMBER OF DAYS BID/ASK MIDPOINT BELOW NAV
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FOR THE PERIOD 0.00%-0.49% 0.50%-0.99% 1.00%-1.99% >=2.00%
6/21/17 - 7/31/17 14 0 0 0
Page 3
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PORTFOLIO COMMENTARY
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FIRST TRUST CALIFORNIA MUNICIPAL HIGH INCOME ETF (FCAL)
ANNUAL REPORT
JULY 31, 2017 (UNAUDITED)
ADVISOR
First Trust Advisors L.P. ("First Trust") was established in 1991 and is located
in Wheaton, Illinois. First Trust is responsible for the selection and ongoing
monitoring of the securities in the Fund's portfolio and certain other services
necessary for the management of the portfolio. As of July 31, 2017, First Trust
managed or supervised $109.138 billion in assets.
PORTFOLIO MANAGEMENT TEAM
Tom Futrell, CFA, Senior Vice President, Senior Portfolio Manager Johnathan N.
Wilhelm, Senior Vice President, Senior Portfolio Manager
The First Trust Municipal Securities Team was formed in September of 2013 and is
headed by Tom Futrell, CFA and Johnathan Wilhelm who serve as senior portfolio
managers of the First Trust California Municipal High Income ETF (the "Fund").
Messrs. Futrell and Wilhelm have a combined 50+ years of investment experience
and prior to joining First Trust, served as portfolio managers of municipal
bonds at Nuveen Investments and Performance Trust Investment Advisors. In
addition to the Fund, the team manages/consults for a variety of investment
portfolios and separately managed accounts.
COMMENTARY
The First Trust California Municipal High Income ETF (the "Fund") is an actively
managed exchange-traded fund. The Fund's primary investment objective is to seek
to provide income exempt from regular federal income taxes and California income
taxes. The Fund's secondary investment objective is long-term capital
appreciation. Under normal market conditions, the Fund seeks to achieve its
investment objectives by investing at least 80% of its net assets (including
investment borrowings) in municipal debt securities that pay interest that is
exempt from regular federal income taxes and California income taxes
(collectively, "Municipal Securities"). In addition, under normal market
conditions, the Fund will invest as least 50% of its net assets in Municipal
Securities that are investment grade at the time of purchase and up to 50% of
its net assets in Municipal Securities that at the time of purchase are
non-investment grade. This commentary discusses the 12-month market performance
ended July 31, 2017, and the Fund's performance for the period from the Fund's
inception date, June 20, 2017 to July 31, 2017.
MARKET RECAP
For the 12-month period from July 31, 2016 through July 31, 2017, municipal
bonds generated a total return of 0.26% as measured by the Bloomberg Barclays
Municipal Bond Index (BMBI). During the same period, the Bloomberg Barclays 10
Year California Exempt Index and Non-Investment Grade Index produced returns of
0.37% and 1.22%, respectively. By comparison, the Bloomberg Barclays U.S.
Treasury Index generated a negative return of -2.55% during the 12-month period.
The following have been major factors in explaining the municipal bond market's
performance:
o The past year was marked by politically significant events, both in
the U.S. and globally, which caused a great deal of volatility in
the U.S. rates markets as expressed by treasury yields. U.S treasury
yields dropped precipitously after Britain's vote to depart from the
European Union, with the 10 year treasury yielding 1.45% on July 31,
2016. After the election of Donald Trump, the markets began
anticipating reduced regulation and increased fiscal stimulus with
the goal of stronger U.S. growth. Interest rates moved higher, with
the 10 year Treasury bond yielding 2.44% by December 31, 2016.
Year-to-date 2017 has witnessed fixed income markets reassessing
their employment and inflation outlooks after the U.S. posted
lackluster first half 2017 GDP growth, lower inflation readings, and
a lack of legislative achievements. The result has been
stabilization in bond prices and a flattening of the yield curve,
with 10 year treasuries yielding 2.30% on July 31, 2017.
o After a record setting year in 2016 in which new issue supply
totaled $446 billion, through the end of July 2017, primary market
issuance decreased by 12.4% year-over-year. The decline in primary
market issuance was due to an approximately 25% decline in refunding
activity, only partially offset by an increase in new capital
issuance.
o Municipals experienced consistently strong retail demand, with one
significant exception. After the first ten months in 2016 with
inflows totaling $51 billion, the last two months saw dramatic
outflows from municipal mutual funds. In comparison, through the
first seven months of 2017, municipal fund flows were positive
during each month, ranging from a positive $757 million to $3.3
billion. Year-to-date, fund flows through July 31, 2017 totaled
$13.6 billion.
Page 4
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PORTFOLIO COMMENTARY (CONTINUED)
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FIRST TRUST CALIFORNIA MUNICIPAL HIGH INCOME ETF (FCAL)
ANNUAL REPORT
JULY 31, 2017 (UNAUDITED)
o Municipal bond credit quality fundamentals have continued to be
stable. Through July 31, 2017, data prepared by Municipal Market
Advisors (MMA) showed total year-to-date defaults of 31 borrowers
representing $35.42 billion in par value, compared with 38 defaults
totaling $23.07 billion in par value for the same period a year ago,
with Puerto Rico and its corporate affiliates representing a large
percentage of the par value.
PERFORMANCE ANALYSIS
For the period from the Fund's inception on June 20, 2017 through July 31, 2017,
the Fund provided a total return based on market price of 0.58% and a total
return based on net asset value (NAV) of 0.50%, versus the total return for the
Bloomberg Barclays 10 Year California Exempt Index of 0.28%. As of July 31,
2017, the Fund's market price of $50.29 represented a premium of 0.30% to its
NAV of $50.14. The market value of the Fund's shares fluctuates from time to
time and may be higher or lower than the Fund's NAV. The distribution paid on
July 31, 2017 of $0.10 represents a tax-exempt annualized distribution rate of
2.39% based on the Fund's closing market price of $50.29 on July 31, 2017. The
Fund's distribution rate is not constant and is subject to change over time
based on the performance of the Fund.
Sectors within the municipal market that positively contributed to fund
performance during the Fund's initial reporting period included special
assessment, education, dedicated tax, general obligation, power, and water and
sewer. The Fund's modified duration at July 31, 2017 was 6.63 versus 5.82 years
for the Bloomberg Barclays 10 Year California Exempt Index, which was a
contributing factor to its outperformance relative to the index. The Fund's
allocation to municipal securities with longer modified durations (6 years and
longer) generally did well during the initial reporting period. As of July 31,
2017, the Fund's weighted-average credit quality (approximately BBB/Baa) is
lower than the Bloomberg Barclays 10 Year California Exempt Index, which has a
stated average credit rating of AA2/AA3. The Fund's investments in "BBB" rated,
sub-investment grade and non-rated municipal securities generated strong
performance for the period. Investors have increasingly reached for yield lower
on the credit spectrum and further out on the yield curve in this environment of
low nominal rates, lower new issue supply and strong retail demand. As a result,
lower investment grade strategies have generally benefited from credit spread
compression, which helps to explain the Fund's outperformance relative to the
Bloomberg Barclays 10 Year California Exempt Index for the period since its
inception.
MARKET OUTLOOK
Technical factors will continue to be positive for the municipal market. With
our expectation for gradually higher interest rates, we believe flows into
municipal bond funds will likely be positive, but somewhat volatile during the
remainder of 2017. Given the relative attractiveness of risk-adjusted municipal
yields versus other asset classes, we believe any sustained outflows which lead
to higher yields will ultimately be viewed by investors as an attractive buying
opportunity. Regarding supply, through the end of July 2017, primary market
issuance decreased by 12.4% year-over-year, totaling $222.8 billion according to
Barclays. We think total new issue volume for the year of between $350 and $375
billion is still within reason. With our expectation for higher rates, we
believe refunding volume, which is down approximately 25% year-to-date, will
continue this trend.
We expect municipal credit quality to remain stable. Through the end of July,
data prepared by Municipal Market Advisors (MMA) showed total year-to-date
defaults of 31 borrowers representing $35.42 billion in par value, compared with
38 defaults totaling $23.07 billion in par value for the same period a year ago,
with Puerto Rico and its corporate affiliates representing a large percentage of
the par value. As the U.S. economy continues to grow at a modest pace, we expect
credit metrics will improve and the total number of defaults in 2017 to be
similar to that in 2016, but because of Puerto Rico, the total par value to be
substantially higher. An exception to this trend will be weaker states and
territories with structural budgetary imbalances and pension funding shortfalls.
We have positive sector outlooks for senior living, toll roads, airports and
special tax districts, and continue to be cautious on hospitals until we see
what is ultimately decided regarding the Affordable Care Act.
Given our expectation for higher yields, our focus for FCAL will be on the
intermediate portion of the yield curve. Bonds in this area of the curve are
typically less interest-rate sensitive, benefit from the steeper yield curve
slope, and are less sensitive to Fed rate hikes than shorter dated bonds. We
currently favor bonds with maturities of 8-14 years, as well as bonds maturing
in 15-20 years, but priced to a 6-9 year call. With a focus of investing in
higher yielding municipal securities, the Fund's goal will be to increase its
exposure in "BBB" rated bonds to 45%-50% and below investment grade and
non-rated securities to approximately 45%. We favor essential service revenue
bond sectors such as special tax districts, senior living, hospitals, charter
schools, toll roads and utilities. With this as a backdrop, we will continue to
practice the discipline of our investment process where we perform fundamental
credit analysis and quantitative total return scenario analysis on individual
bonds and the portfolio as a whole, looking for bonds that can provide both high
income and attractive total return potential over time.
Page 5
FIRST TRUST CALIFORNIA MUNICIPAL HIGH INCOME ETF (FCAL)
UNDERSTANDING YOUR FUND EXPENSES
JULY 31, 2017 (UNAUDITED)
As a shareholder of First Trust California Municipal High Income ETF (the
"Fund") you incur two types of costs: (1) transaction costs; and (2) ongoing
costs, including management fees, distribution and/or service fees, if any, and
other Fund expenses. This Example is intended to help you understand your
ongoing costs of investing in the Fund and to compare these costs with the
ongoing costs of investing in other funds.
The Example is based on an investment of $1,000 invested at the beginning of the
period (or since inception) and held through the six-month (or shorter) period
ended July 31, 2017.
ACTUAL EXPENSES
The first line in the following table provides information about actual account
values and actual expenses. You may use the information in this line, together
with the amount you invested, to estimate the expenses that you paid over the
period. Simply divide your account value by $1,000 (for example, an $8,600
account value divided by $1,000 = 8.6), then multiply the result by the number
in the first line under the heading entitled "Expenses Paid During the Period"
to estimate the expenses you paid on your account during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second line in the following table provides information about hypothetical
account values and hypothetical expenses based on the Fund's actual expense
ratio and an assumed rate of return of 5% per year before expenses, which is not
the Fund's actual return. The hypothetical account values and expenses may not
be used to estimate the actual ending account balance or expenses you paid for
the period. You may use this information to compare the ongoing costs of
investing in the Fund and other funds. To do so, compare this 5% hypothetical
example with the 5% hypothetical examples that appear in the shareholder reports
of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs such as brokerage
commissions. Therefore, the second line in the table is useful in comparing
ongoing costs only, and will not help you determine the relative total costs of
owning different funds. In addition, if these transactional costs were included,
your costs would have been higher.
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ANNUALIZED EXPENSES PAID
EXPENSE RATIO DURING THE PERIOD
BEGINNING ENDING BASED ON THE JUNE 20, 2017 (a)
ACCOUNT VALUE ACCOUNT VALUE NUMBER OF DAYS TO
JUNE 20, 2017 (a) JULY 31, 2017 IN THE PERIOD JULY 31, 2017 (b)
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FIRST TRUST CALIFORNIA MUNICIPAL HIGH INCOME ETF (FCAL)
Actual $1,000.00 $1,005.00 0.50% $0.56
Hypothetical (5% return before expenses) $1,000.00 $1,022.32 0.50% $2.51
(a) Inception Date.
(b) Actual expenses are equal to the annualized expense ratio as indicated in
the table, multiplied by the average account value over the period (June
20, 2017 through July 31, 2017), multiplied by 41/365. Hypothetical
expenses are assumed for the most recent half-year period.
Page 6
FIRST TRUST CALIFORNIA MUNICIPAL HIGH INCOME ETF (FCAL)
PORTFOLIO OF INVESTMENTS
JULY 31, 2017
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
------------- ----------------------------------------------------------------------- ---------- ------------ -------------
MUNICIPAL BONDS - 96.9%
CALIFORNIA - 84.7%
$ 200,000 Abag CA Fin Auth For Nonprofit Corps Ref Eskaton Properties, Inc....... 4.00% 11/15/17 $ 201,500
150,000 Alameda CA Corridor Transprtn Auth Ref Subordinate Lien, Ser A......... 5.00% 10/01/25 179,481
300,000 Antelope Vly E Kern CA Wtr Agy Wtr Rev Ref............................. 5.00% 06/01/35 350,526
200,000 California Sch Fin Auth Sch Fac Rev Ref Hth Learning Proj, Ser A (a)... 4.00% 07/01/25 213,262
200,000 California Sch Fin Auth Sch Fac Rev Ref Hth Learning Proj, Ser A (a)... 5.00% 07/01/32 219,486
200,000 California St Hlth Facs Fing Auth Rev Adventist Hlth Sys West, Ser A... 4.00% 03/01/33 208,942
150,000 California St Hlth Facs Fing Auth Rev Ref Childrens Hosp, Ser A........ 5.00% 08/15/33 173,573
300,000 California St Muni Fin Auth Charter Sch Rev Palmdale Aerospace
Academy Proj (a).................................................... 4.00% 07/01/26 303,360
75,000 California St Muni Fin Auth Eductnl Rev Ref American Heritage Edu,
Ser A............................................................... 4.00% 06/01/26 80,897
100,000 California St Muni Fin Auth Mobile Home Park Rev Ref Windsor
Mobile Country Club, Ser A.......................................... 3.13% 11/15/30 99,052
255,000 California St Muni Fin Auth Rev Ref Biola Univ......................... 5.00% 10/01/37 289,560
250,000 California St Muni Fin Auth Rev Ref Eisenhower Med Ctr, Ser A.......... 5.00% 07/01/29 292,587
15,000 California St Pub Wks Brd Lease Rev Judicial Council CA, Ser B......... 5.00% 06/01/34 17,248
300,000 California St Ref...................................................... 4.00% 08/01/33 325,467
250,000 California St Stwd Cmntys Dev Auth Student Hsg Rev Ref Chf
Irvine LLC.......................................................... 5.00% 05/15/35 282,165
250,000 California Stwd Cmntys Dev Auth Rev Loma Linda Univ Med Ctr,
Ser A (a)........................................................... 5.00% 12/01/36 273,093
100,000 Chino CA Cmnty Facs Dist Spl Tax 2016-2................................ 4.00% 09/01/29 105,861
140,000 El Dorado CA Irr Dist Rev Ref, Ser C................................... 5.00% 03/01/30 169,393
250,000 Fresno CA Jt Pwrs Fing Auth Lease Rev Ref Master Lease Proj,
Ser A, AGM.......................................................... 5.00% 04/01/31 295,335
90,000 Fresno CA Jt Pwrs Fing Auth Lease Rev Ref Master Lease Proj,
Ser A, AGM.......................................................... 5.00% 04/01/32 105,491
85,000 Golden St Tobacco Securitization Corp CA Tobacco Settlement Asset
Backed Ref, Ser A................................................... 5.00% 06/01/19 91,125
50,000 Golden St Tobacco Securitization Corp CA Tobacco Settlement Asset
Backed Sr, Ser A-1.................................................. 5.00% 06/01/33 50,000
265,000 Golden St Tobacco Securitization Corp CA Tobacco Settlement Ref,
Ser A-1............................................................. 5.00% 06/01/26 315,331
200,000 Kaweah CA Delta Hlth Care Dist Rev, Ser B.............................. 5.00% 06/01/40 221,676
100,000 Long Beach CA Bond Fin Auth Nat Gas Purchase Rev, Ser A................ 5.25% 11/15/23 117,419
25,000 Long Beach CA Bond Fin Auth Nat Gas Purchase Rev, Ser A................ 5.50% 11/15/30 31,181
200,000 Los Angeles CA Trans................................................... 5.00% 06/28/18 207,570
190,000 Ontario CA Cmnty Facs Dist #24 Spl Tax Park Pl Facs Phase I............ 5.00% 09/01/34 213,725
250,000 Palomar Hlth CA Rev Ref................................................ 5.00% 11/01/31 280,015
100,000 Port Of Oakland CA AMT Ref Inter Lien, Ser D........................... 5.00% 11/01/25 121,592
80,000 Port Of Oakland CA AMT Ref Inter Lien, Ser D........................... 5.00% 11/01/29 96,527
200,000 Rancho Cordova CA Cmnty Facs Dist Spl Tax Ref #2004-1 Sunridge
Park Area........................................................... 5.00% 09/01/25 237,166
185,000 Riverside CA Unif Sch Dist Fing Auth Spl Tax Ref, BAM.................. 5.00% 09/01/34 211,797
100,000 Roseville CA Fin Auth Spl Tax Rev Ref, Ser A........................... 5.00% 09/01/25 119,880
250,000 Roseville CA Fin Auth Spl Tax Rev Ref, Ser A........................... 5.00% 09/01/29 297,272
100,000 Roseville CA Fin Auth Spl Tax Rev Ref, Ser B........................... 3.00% 09/01/21 104,376
200,000 Sacramento CA Spl Tax Natomas Meadows Cmnty Facs Dist
#2007-01 (a)........................................................ 5.00% 09/01/32 217,660
100,000 San Diego CA Pub Facs Fingauth Lease Rev Ref Ballpark.................. 5.00% 10/15/28 120,069
See Notes to Financial Statements Page 7
FIRST TRUST CALIFORNIA MUNICIPAL HIGH INCOME ETF (FCAL)
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 2017
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
------------- ----------------------------------------------------------------------- ---------- ------------ -------------
MUNICIPAL BONDS (CONTINUED)
CALIFORNIA (CONTINUED)
$ 10,000 San Diego Cnty CA Limited Rev Obligs Ref Sanford Burnham Prebys
Med Discovery Institute, Ser A...................................... 5.00% 11/01/28 $ 11,787
300,000 San Francisco City & Cnty CA Redev Agy Successor Agy Tax Ref
Mission Bay N Redev Proj, Ser A..................................... 5.00% 08/01/35 350,598
250,000 South San Francisco CA Unif Sch Dist Cib Measure J, Ser C.............. 4.00% 09/01/30 275,925
230,000 Sthrn CA Public Pwr Auth Natural Gas Proj Rev Proj No 1, Ser A......... 5.00% 11/01/29 273,199
175,000 Sweetwater CA Union High Sch Dist Ref.................................. 5.00% 08/01/30 207,561
100,000 W Contra Costa CA Unif Sch Dist Ref, Ser A............................. 5.00% 08/01/31 119,695
15,000 Washington Twp CA Hlth Care Dist Ref, Ser Dt........................... 4.00% 08/01/29 16,473
-------------
8,495,898
-------------
GEORGIA - 2.5%
225,000 Marietta Ga Dev Auth Ref Univ Facs Life Univ, Ser A (a)................ 5.00% 11/01/27 247,000
-------------
GUAM - 1.1%
100,000 Guam Govt Business Priv Tax Rev Ref, Ser D............................. 5.00% 11/15/32 109,122
-------------
ILLINOIS - 2.1%
35,000 Chicago IL Ref, Ser C, CABS............................................ (b) 01/01/22 28,417
85,000 Chicago IL Ref, Ser C, CABS............................................ (b) 01/01/24 61,739
120,000 Illinois St, Ser A..................................................... 4.00% 01/01/25 121,645
-------------
211,801
-------------
NEW YORK - 2.4%
225,000 Buffalo & Erie Cnty NY Indl Land Dev Corp Rev Ref Chrt Sch For
Applied Technologies Proj, Ser A.................................... 5.00% 06/01/35 243,124
-------------
PUERTO RICO - 2.1%
200,000 Puerto Rico Cmwlth Ref Pub Impt, Ser A, AGM............................ 5.00% 07/01/35 208,896
-------------
TEXAS - 2.0%
200,000 New Hope Cultural Edu Facs Fin Corp TX Retirement Fac Rev Ref
Carillon Lifecare Cmnty Proj........................................ 5.00% 07/01/36 205,344
-------------
TOTAL INVESTMENTS - 96.9%........................................................................ 9,721,185
(Cost $9,684,499) (c)
NET OTHER ASSETS AND LIABILITIES - 3.1%.......................................................... 307,664
-------------
NET ASSETS - 100.0%.............................................................................. $ 10,028,849
=============
(a) This security, sold within the terms of a private placement memorandum, is
exempt from registration upon resale under Rule 144A under the Securities
Act of 1933, as amended (the "1933 Act"), and may be resold in
transactions exempt from registration, normally to qualified institutional
buyers. Pursuant to procedures adopted by the Fund's Board of Trustees,
this security has been determined to be liquid by First Trust Advisors
L.P. ("First Trust"), the Fund's Advisor. Although market instability can
result in periods of increased overall market illiquidity, liquidity for
each security is determined based on security specific factors and
assumptions, which require subjective judgment. At July 31, 2017,
securities noted as such amounted to $1,473,861 or 14.7% of net assets.
(b) Zero coupon bond.
(c) Aggregate cost for federal income tax purposes is $9,684,087. As of July
31, 2017, the aggregate gross unrealized appreciation for all securities
in which there was an excess of value over tax cost was $47,977 and the
aggregate gross unrealized depreciation for all securities in which there
was an excess of tax cost over value was $10,879.
AGM Assured Guaranty Municipal Corp.
AMT Alternative Minimum Tax
BAM Building America Mutual
CABS Capital Appreciation Bonds
Page 8 See Notes to Financial Statements
FIRST TRUST CALIFORNIA MUNICIPAL HIGH INCOME ETF (FCAL)
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 2017
-----------------------------
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of July 31, 2017
is as follows (see Note 2A - Portfolio Valuation in the Notes to Financial
Statements):
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
7/31/2017 PRICES INPUTS INPUTS
------------- ------------- ------------- -------------
Municipal Bonds* $ 9,721,185 $ -- $ 9,721,185 $ --
============= ============= ============= =============
* See Portfolio of Investments for state breakout.
All transfers in and out of the Levels during the period are assumed to occur on
the last day of the period at their current value. There were no transfers
between Levels at July 31, 2017.
See Notes to Financial Statements Page 9
FIRST TRUST CALIFORNIA MUNICIPAL HIGH INCOME ETF (FCAL)
STATEMENT OF ASSETS AND LIABILITIES
JULY 31, 2017
ASSETS:
Investments, at value....................................................................................... $ 9,721,185
Cash........................................................................................................ 635,269
Receivables:
Investment securities sold............................................................................... 276,750
Interest................................................................................................. 81,538
----------------
Total Assets............................................................................................. 10,714,742
----------------
LIABILITIES:
Payables:
Investment securities purchased.......................................................................... 681,645
Investment advisory fees................................................................................. 4,248
----------------
Total Liabilities........................................................................................ 685,893
----------------
NET ASSETS.................................................................................................. $ 10,028,849
================
NET ASSETS CONSIST OF:
Paid-in capital............................................................................................. $ 10,007,250
Par value................................................................................................... 2,000
Accumulated net investment income (loss).................................................................... 412
Accumulated net realized gain (loss) on investments......................................................... (17,499)
Net unrealized appreciation (depreciation) on investments................................................... 36,686
----------------
NET ASSETS.................................................................................................. $ 10,028,849
================
NET ASSET VALUE, per share.................................................................................. $ 50.14
================
Number of shares outstanding (unlimited number of shares authorized, par value $0.01 per share)............. 200,002
================
Investments, at cost........................................................................................ $ 9,684,499
================
Page 10 See Notes to Financial Statements
FIRST TRUST CALIFORNIA MUNICIPAL HIGH INCOME ETF (FCAL)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JULY 31, 2017
INVESTMENT INCOME:
Interest.................................................................................................... $ 25,182
----------------
Total investment income.................................................................................. 25,182
----------------
EXPENSES:
Investment advisory fees.................................................................................... 7,304
----------------
Total expenses........................................................................................... 7,304
Fees waived by the investment advisor.................................................................... (1,686)
----------------
Net expenses............................................................................................. 5,618
----------------
NET INVESTMENT INCOME (LOSS)................................................................................ 19,564
----------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on investments..................................................................... (17,501)
Net change in unrealized appreciation (depreciation) on investments......................................... 36,686
----------------
NET REALIZED AND UNREALIZED GAIN (LOSS)..................................................................... 19,185
----------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS............................................. $ 38,749
================
(a) Inception date is consistent with the commencement of investment
operations and is the date the initial creation units were established.
See Notes to Financial Statements Page 11
FIRST TRUST CALIFORNIA MUNICIPAL HIGH INCOME ETF (FCAL)
STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD
6/20/17 (a)
THROUGH
7/31/2017
----------------
OPERATIONS:
Net investment income (loss)................................................................................ $ 19,564
Net realized gain (loss).................................................................................... (17,501)
Net change in unrealized appreciation (depreciation)........................................................ 36,686
----------------
Net increase (decrease) in net assets resulting from operations............................................. 38,749
----------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income....................................................................................... (19,150)
Return of capital........................................................................................... (850)
----------------
Total distributions to shareholders......................................................................... (20,000)
----------------
SHAREHOLDER TRANSACTIONS:
Proceeds from shares sold................................................................................... 10,010,100
Cost of shares redeemed..................................................................................... --
----------------
Net increase (decrease) in net assets resulting from shareholder transactions............................... 10,010,100
----------------
Total increase (decrease) in net assets..................................................................... 10,028,849
NET ASSETS:
Beginning of period......................................................................................... --
----------------
End of period............................................................................................... $ 10,028,849
================
Accumulated net investment income (loss) at end of year..................................................... $ 412
================
CHANGES IN SHARES OUTSTANDING:
Shares outstanding, beginning of period..................................................................... --
Shares sold................................................................................................. 200,002
----------------
Shares outstanding, end of period........................................................................... 200,002
================
(a) Inception date is consistent with the commencement of investment
operations and is the date the initial creation units were established.
Page 12 See Notes to Financial Statements
FIRST TRUST CALIFORNIA MUNICIPAL HIGH INCOME ETF (FCAL)
FINANCIAL HIGHLIGHTS
FOR A COMMON SHARE OUTSTANDING THROUGHOUT THE PERIOD
FOR THE PERIOD
6/20/17 (a)
THROUGH
7/31/2017
--------------
Net asset value, beginning of period ........... $ 50.00
----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) ................... 0.10
Net realized and unrealized gain (loss) ........ 0.14
----------
Total from investment operations ............... 0.24
----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income .......................... (0.10)
Return of capital............................... (0.00) (b)
----------
Total distributions............................. (0.10)
----------
Net asset value, end of period ................. $ 50.14
==========
TOTAL RETURN (c)................................ 0.50%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) ........... $ 10,029
RATIOS TO AVERAGE NET ASSETS:
Ratio of total expenses to average net assets... 0.65% (d)
Ratio of net expenses to average net assets..... 0.50% (d)
Ratio of net investment income (loss) to
average net assets .......................... 1.74% (d)
Portfolio turnover rate (e)..................... 22%
(a) Inception date is consistent with the commencement of investment
operations and is the date the initial creation units were established.
(b) Amount is less than $0.01.
(c) Total return is calculated assuming an initial investment made at the net
asset value at the beginning of the period, reinvestment of all
distributions at net asset value during the period, and redemption at net
asset value on the last day of the period. The return presented does not
reflect the deduction of taxes that a shareholder would pay on Fund
distributions or the redemption or sale of Fund shares. Total return is
calculated for the time period presented and is not annualized for periods
of less than a year. The total return would have been lower if certain
fees had not been waived by the investment advisor.
(d) Annualized.
(e) Portfolio turnover is calculated for the time period presented and is not
annualized for periods of less than a year and does not include securities
received or delivered from processing creations or redemptions and in-kind
transactions.
See Notes to Financial Statements Page 13
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FIRST TRUST CALIFORNIA MUNICIPAL HIGH INCOME ETF (FCAL)
JULY 31, 2017
1. ORGANIZATION
First Trust Exchange-Traded Fund III (the "Trust") is an open-end management
investment company organized as a Massachusetts business trust on January 9,
2008, and is registered with the Securities and Exchange Commission (the "SEC")
under the Investment Company Act of 1940, as amended (the "1940 Act").
The Trust consists of eleven funds that are currently offering shares. This
report covers the First Trust California Municipal High Income ETF (the "Fund"),
a non-diversified series of the Trust, which trades under the ticker "FCAL" on
The Nasdaq Stock Market LLC ("Nasdaq"). Unlike conventional mutual funds, the
Fund issues and redeems shares on a continuous basis, at net asset value
("NAV"), only in large specified blocks consisting of 50,000 shares called a
"Creation Unit." Creation Units are issued and redeemed for cash and, in certain
circumstances, in-kind for securities in which the Fund invests. Except when
aggregated in Creation Units, the Fund's shares are not redeemable securities.
The primary investment objective of the Fund is to seek to provide current
income that is exempt from regular federal income taxes and California income
taxes, and its secondary objective is long-term capital appreciation. Under
normal market conditions, the Fund seeks to achieve its investment objectives by
investing at least 80% of its net assets (including investment borrowings) in
municipal debt securities that pay interest that is exempt from regular federal
income taxes and California income taxes. There can be no assurance that the
Fund will achieve its investment objectives. The Fund may not be appropriate for
all investors.
2. SIGNIFICANT ACCOUNTING POLICIES
The Fund is considered an investment company and follows accounting and
reporting guidance under Financial Accounting Standards Board Accounting
Standards Codification Topic 946, "Financial Services-Investment Companies." The
following is a summary of significant accounting policies consistently followed
by the Fund in the preparation of the financial statements. The preparation of
the financial statements in accordance with accounting principles generally
accepted in the United States of America ("U.S. GAAP") requires management to
make estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those estimates.
A. PORTFOLIO VALUATION
The Fund's NAV is determined daily as of the close of regular trading on the New
York Stock Exchange ("NYSE"), normally 4:00 p.m. Eastern time, on each day the
NYSE is open for trading. If the NYSE closes early on a valuation day, the NAV
is determined as of that time. Domestic debt securities are priced using data
reflecting the earlier closing of the principal markets for those securities.
The Fund's NAV is calculated by dividing the value of all assets of the Fund
(including accrued interest and dividends), less all liabilities (including
accrued expenses and dividends declared but unpaid), by the total number of
shares outstanding.
The Fund's investments are valued daily at market value or, in the absence of
market value with respect to any portfolio securities, at fair value. Market
value prices represent last sale or official closing prices from a national or
foreign exchange (i.e., a regulated market) and are primarily obtained from
third-party pricing services. Fair value prices represent any prices not
considered market value prices and are either obtained from a third-party
pricing service or are determined by the Pricing Committee of the Fund's
investment advisor, First Trust Advisors L.P. ("First Trust" or the "Advisor"),
in accordance with valuation procedures adopted by the Trust's Board of
Trustees, and in accordance with provisions of the 1940 Act. Investments valued
by the Advisor's Pricing Committee, if any, are footnoted as such in the
footnotes to the Portfolio of Investments. The Fund's investments are valued as
follows:
Municipal securities and other debt securities are fair valued on the
basis of fair valuations provided by dealers who make markets in such
securities or by a third-party pricing service approved by the Trust's
Board of Trustees, which may use the following valuation inputs when
available:
1) benchmark yields;
2) reported trades;
3) broker/dealer quotes;
4) issuer spreads;
5) benchmark securities;
6) bids and offers; and
7) reference data including market research publications.
Page 14
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST CALIFORNIA MUNICIPAL HIGH INCOME ETF (FCAL)
JULY 31, 2017
Fixed income and other debt securities having a remaining maturity of 60
days or less when purchased are fair valued at cost adjusted for
amortization of premiums and accretion of discounts (amortized cost),
provided the Advisor's Pricing Committee has determined that the use of
amortized cost is an appropriate reflection of fair value given market and
issuer-specific conditions existing at the time of the determination.
Factors that may be considered in determining the appropriateness of the
use of amortized cost include, but are not limited to, the following:
1) the credit conditions in the relevant market and changes thereto;
2) the liquidity conditions in the relevant market and changes thereto;
3) the interest rate conditions in the relevant market and changes
thereto (such as significant changes in interest rates);
4) issuer-specific conditions (such as significant credit
deterioration); and
5) any other market-based data the Advisor's Pricing Committee
considers relevant. In this regard, the Advisor's Pricing Committee
may use last-obtained market-based data to assist it when valuing
portfolio securities using amortized cost.
Certain securities may not be able to be priced by pre-established pricing
methods. Such securities may be valued by the Trust's Board of Trustees or its
delegate, the Advisor's Pricing Committee, at fair value. These securities
generally include, but are not limited to, restricted securities (securities
which may not be publicly sold without registration under the Securities Act of
1933, as amended (the "1933 Act")) for which a third-party pricing service is
unable to provide a market price; securities whose trading has been formally
suspended; a security whose market or fair value price is not available from a
pre-established pricing source; a security with respect to which an event has
occurred that is likely to materially affect the value of the security after the
market has closed but before the calculation of the Fund's NAV or make it
difficult or impossible to obtain a reliable market quotation; and a security
whose price, as provided by the third-party pricing service, does not reflect
the security's fair value. As a general principle, the current fair value of a
security would appear to be the amount which the owner might reasonably expect
to receive for the security upon its current sale. When fair value prices are
used, generally they will differ from market quotations or official closing
prices on the applicable exchanges. A variety of factors may be considered in
determining the fair value of such securities, including, but not limited to,
the following:
1) the fundamental business data relating to the issuer;
2) an evaluation of the forces which influence the market in which
these securities are purchased and sold;
3) the type, size and cost of security;
4) the financial statements of the issuer;
5) the credit quality and cash flow of the issuer, based on the
Advisor's or external analysis;
6) the information as to any transactions in or offers for the
security;
7) the price and extent of public trading in similar securities (or
equity securities) of the issuer/borrower, or comparable companies;
8) the coupon payments;
9) the quality, value and salability of collateral, if any, securing
the security; and
10) other relevant factors.
The Fund is subject to fair value accounting standards that define fair value,
establish the framework for measuring fair value and provide a three-level
hierarchy for fair valuation based upon the inputs to the valuation as of the
measurement date. The three levels of the fair value hierarchy are as follows:
o Level 1 - Level 1 inputs are quoted prices in active markets for
identical investments. An active market is a market in which
transactions for the investment occur with sufficient frequency and
volume to provide pricing information on an ongoing basis.
o Level 2 - Level 2 inputs are observable inputs, either directly or
indirectly, and include the following:
o Quoted prices for similar investments in active markets.
o Quoted prices for identical or similar investments in markets
that are non-active. A non-active market is a market where
there are few transactions for the investment, the prices are
not current, or price quotations vary substantially either
over time or among market makers, or in which little
information is released publicly.
o Inputs other than quoted prices that are observable for the
investment (for example, interest rates and yield curves
observable at commonly quoted intervals, volatilities,
prepayment speeds, loss severities, credit risks, and default
rates).
o Inputs that are derived principally from or corroborated by
observable market data by correlation or other means.
o Level 3 - Level 3 inputs are unobservable inputs. Unobservable
inputs may reflect the reporting entity's own assumptions about the
assumptions that market participants would use in pricing the
investment.
Page 15
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST CALIFORNIA MUNICIPAL HIGH INCOME ETF (FCAL)
JULY 31, 2017
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 July 31, 2017, is
included with the Fund's Portfolio of Investments.
B. SECURITIES TRANSACTIONS AND INVESTMENT INCOME
Securities transactions are recorded as of the trade date. Realized gains and
losses from securities transactions are recorded on the identified cost basis.
Interest income is recorded daily on the accrual basis. Amortization of premiums
and accretion of discounts are recorded using the effective interest method.
C. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
Dividends from net investment income, if any, are declared and paid monthly, or
as the Board of Trustees may determine from time to time. Distributions of net
realized capital gains earned by the Fund, if any, will be distributed at least
annually.
Distributions from income and capital gains are determined in accordance with
income tax regulations, which may differ from U.S. GAAP. Certain capital
accounts in the financial statements are periodically adjusted for permanent
differences in order to reflect their tax character. These permanent differences
are primarily due to the varying treatment of income and gain/loss on portfolio
securities held by the Fund and have no impact on net assets or net asset value
per share. Temporary differences, which arise from recognizing certain items of
income, expense, and gain/loss in different periods for financial statement and
tax purposes, will reverse at some time in the future.
The tax character of distributions paid during the fiscal period ended July 31,
2017, was as follows:
Distributions paid from:
Ordinary income.................................... $ --
Long-term capital gains............................ --
Tax-exempt income.................................. 19,150
Return of capital.................................. 850
As of July 31, 2017, the components of distributable earnings on a tax basis
were as follows:
Undistributed ordinary income...................... $ 412
Accumulated capital and other losses............... (17,499)
Net unrealized appreciation (depreciation)......... 36,686
D. INCOME TAXES
The Fund intends to qualify as a regulated investment company by complying with
the requirements under Subchapter M of the Internal Revenue Code of 1986, as
amended, which includes distributing substantially all of its net investment
income and net realized gains to shareholders. Accordingly, no provision has
been made for federal and state income taxes. However, due to the timing and
amount of distributions, the Fund may be subject to an excise tax of 4% of the
amount by which approximately 98% of the Fund's taxable income exceeds the
distributions from such taxable income for the calendar year.
In addition, the Fund intends to invest in municipal securities to allow it to
pay shareholders "exempt dividends" as defined in the Internal Revenue Code.
The Fund is subject to accounting standards that establish a minimum threshold
for recognizing, and a system for measuring, the benefits of a tax position
taken or expected to be taken in a tax return. The taxable period ended 2017
remains open to federal and state audit. As of July 31, 2017, management has
evaluated the application of these standards to the Fund, and has determined
that no provision for income tax is required in the Fund's financial statements
for uncertain tax positions.
The Fund intends to utilize provisions of the federal income tax laws, which
allow it to carry a realized capital loss forward indefinitely following the
year of the loss and offset such loss against any future realized capital gains.
The Fund is subject to certain limitations under U.S. tax rules on the use of
capital carryforwards and net unrealized built-in losses. These limitations
apply when there has been a 50% change in ownership. At July 31, 2017, the Fund
had $17,499 of non-expiring capital loss carryforwards for federal income tax
purposes.
Page 16
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST CALIFORNIA MUNICIPAL HIGH INCOME ETF (FCAL)
JULY 31, 2017
Certain losses realized during the current fiscal period may be deferred and
treated as occurring on the first day of the following fiscal year for federal
income tax purposes. For the fiscal period ended July 31, 2017, the Fund had no
net ordinary losses.
In order to present paid-in capital, accumulated net investment income (loss)
and accumulated net realized gain (loss) on investments on the Statement of
Assets and Liabilities that more closely represent their tax character, certain
adjustments have been made to paid-in capital, accumulated net investment income
(loss) and accumulated net realized gain (loss) on investments. These
adjustments are primarily due to the difference between book and tax treatments
of income and gains on various investment securities held by the Fund. The
results of operations and net assets were not affected by these adjustments. For
the fiscal period ended July 31, 2017, the adjustments for the Fund were as
follows:
Accumulated Accumulated
Net Net Realized
Investment Gain (Loss) Paid-in
Income (Loss) on Investments Capital
---------------- ---------------- ----------------
$ (2) $ 2 $ --
E. EXPENSES
Expenses, other than the investment advisory fee and other excluded expenses,
are paid by the Advisor (see Note 3).
F. 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. In part, the
new and amended rules and forms amend Regulation S-X and require standardized,
enhanced disclosures about derivatives in a Fund's financial statements, as well
as other amendments. The compliance date for the amendments of Regulation S-X is
August 1, 2017, while the compliance date for the new form types and other rule
amendments is on or after June 1, 2018. Management is evaluating the new and
amended rules and forms to determine the impact to the Fund.
3. INVESTMENT ADVISORY FEE, AFFILIATED TRANSACTIONS AND OTHER FEE ARRANGEMENTS
First Trust, the investment advisor to the Fund, is a limited partnership with
one limited partner, Grace Partners of DuPage L.P., and one general partner, The
Charger Corporation. The Charger Corporation is an Illinois corporation
controlled by James A. Bowen, Chief Executive Officer of First Trust. First
Trust is responsible for the selection and ongoing monitoring of the securities
in the Fund's portfolio, managing the Fund's business affairs and providing
certain administrative services necessary for the management of the Fund.
Pursuant to the Investment Management Agreement between the Trust and the
Advisor, First Trust manages the investment of the Fund's assets and is
responsible for the Fund's expenses, including the cost of transfer agency,
custody, fund administration, legal, audit, and other services, but excluding
fee payments under the Investment Management Agreement, interest, taxes,
brokerage commissions, and other expenses connected with the execution of
portfolio transactions, distribution and service fees pursuant to a 12b-1 plan,
if any, and extraordinary expenses. The Fund has agreed to pay First Trust an
annual unitary management fee equal to 0.65% of its average daily net assets.
First Trust also provides fund reporting services to the Fund for a flat annual
fee in the amount of $9,250, which is covered under the annual unitary
management fee.
The Trust's Board of Trustees and the Advisor have entered into a Fee Waiver
Agreement for the Fund pursuant to which the Advisor contractually agreed to
waive management fees of 0.15% of average daily net assets until June 16, 2019.
The waiver agreement may be terminated by action of the Trust's Board of
Trustees at any time upon 60 days' written notice by the Trust on behalf of the
Fund or by the Fund's investment advisor only after June 16, 2019. First Trust
does not have the right to recover the fees waived. During the period ended July
31, 2017, the Advisor waived fees of $1,686.
The Trust has multiple service agreements with Brown Brothers Harriman & Co.
("BBH"). Under the service agreements, BBH performs custodial, fund accounting,
certain administrative services, and transfer agency services for the Fund. As
custodian, BBH is responsible for custody of the Fund's assets. As fund
accountant and administrator, BBH is responsible for maintaining the books and
records of the Fund's securities and cash. As transfer agent, BBH is responsible
for maintaining shareholder records for the Fund.
Page 17
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST CALIFORNIA MUNICIPAL HIGH INCOME ETF (FCAL)
JULY 31, 2017
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 SECURITIES
For the period June 20, 2017 through July 31, 2017, the cost of purchases and
proceeds from sales of investments, excluding short-term investments and in-kind
transactions, were $11,570,935 and $2,071,132, respectively.
For the period June 20, 2017 through July 31, 2017, the Fund had no in-kind
transactions.
5. CREATIONS, REDEMPTIONS AND TRANSACTION FEES
Shares are created and redeemed by the Fund only in Creation Unit size
aggregations of 50,000 shares in transactions with broker-dealers or large
institutional investors that have entered into a participation agreement (an
"Authorized Participant"). In order to purchase Creation Units of the Fund, an
Authorized Participant must deposit (i) a designated portfolio of securities
determined by First Trust (the "Deposit Securities") and generally make or
receive a cash payment referred to as the "Cash Component," which is an amount
equal to the difference between the NAV of the Fund shares (per Creation Unit
Aggregation) and the market value of the Deposit Securities, and/or (ii) cash in
lieu of all or a portion of the Deposit Securities. If the Cash Component is a
positive number (i.e., the NAV per Creation Unit Aggregation exceeds the Deposit
Amount), the Authorized Participant will deliver the Cash Component. If the Cash
Component is a negative number (i.e., the NAV per Creation Unit Aggregation is
less than the Deposit Amount), the Authorized Participant will receive the Cash
Component. Authorized Participants purchasing Creation Units must pay to BBH, as
transfer agent, a creation transaction fee (the "Creation Transaction Fee")
regardless of the number of Creation Units purchased in the transaction. The
Creation Transaction Fee may vary and is based on the composition of the
securities included in the Fund's portfolio and the countries in which the
transactions are settled. The Creation Transaction Fee is currently $500 plus
ten basis points. 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 plus
ten basis points. The Fund reserves the right to effect redemptions in cash. An
Authorized Participant may request cash redemption in lieu of securities;
however, the Fund may, in its discretion, reject any such request.
6. DISTRIBUTION PLAN
The Board of Trustees adopted a Distribution and Service Plan pursuant to Rule
12b-1 under the 1940 Act. In accordance with the Rule 12b-1 plan, the Fund is
authorized to pay an amount up to 0.25% of its average daily net assets each
year to reimburse First Trust Portfolios L.P. ("FTP"), the distributor of the
Fund, for amounts expended to finance activities primarily intended to result in
the sale of Creation Units or the provision of investor services. FTP may also
use this amount to compensate securities dealers or other persons that are
Authorized Participants for providing distribution assistance, including
broker-dealer and shareholder support and educational and promotional services.
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 June 16, 2019.
Page 18
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST CALIFORNIA MUNICIPAL HIGH INCOME ETF (FCAL)
JULY 31, 2017
7. INDEMNIFICATION
The Trust, on behalf of the Fund, has a variety of indemnification obligations
under contracts with its service providers. The Trust's maximum exposure under
these arrangements is unknown. However, the Trust has not had prior claims or
losses pursuant to these contracts and expects the risk of loss to be remote.
8. SUBSEQUENT EVENT
Management has evaluated the impact of all subsequent events to the Fund through
the date the financial statements were issued and has determined that there was
the following subsequent event:
On August 21, 2017, the Fund declared a distribution of $0.10 per share to
shareholders of record on August 24, 2017, payable August 31, 2017.
Page 19
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF FIRST TRUST EXCHANGE-TRADED FUND
III:
We have audited the accompanying statement of assets and liabilities of First
Trust California Municipal High Income ETF, a series of the First Trust
Exchange-Traded Fund III (the "Trust"), including the portfolio of investments,
as of July 31, 2017, and the related statements of operations and changes in net
assets and the financial highlights for the period June 20, 2017 (commencement
of operations) through July 31, 2017. These financial statements and financial
highlights are the responsibility of the Trust's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audit.
We conducted our audit 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 Trust
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit 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 Trust'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 July 31, 2017 by correspondence with the Trust's
custodian and brokers; where replies were not received from brokers, we
performed other auditing procedures. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of First
Trust California Municipal High Income ETF as of July 31, 2017, and the results
of its operations, changes in its net assets, and the financial highlights for
the period June 20, 2017 (commencement of operations) through July 31, 2017, in
conformity with accounting principles generally accepted in the United States of
America.
/s/ Deloitte & Touche LLP
Chicago, Illinois
September 25, 2017
Page 20
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ADDITIONAL INFORMATION
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FIRST TRUST CALIFORNIA MUNICIPAL HIGH INCOME ETF (FCAL)
JULY 31, 2017 (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 July 31, 2017, the following distribution information
is being provided as required by the Internal Revenue Code or to meet a specific
state's requirement. The Fund designates the following amounts or, if
subsequently determined to be different, the maximum amount allowable for its
fiscal year ended July 31, 2017:
Federal and State Income Tax Percentages
------------------------------ --------------
Tax-Exempt Interest Dividends 95.75%
Alternative minimum tax (AMT) 0.00%
RISK CONSIDERATIONS
You could lose money by investing in the Fund. An investment in the Fund is not
a deposit of a bank and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other governmental agency. There can be no
assurance that the Fund's investment objective will be achieved.
ALTERNATIVE MINIMUM TAX RISK. The Fund has no limit as to the amount that can be
invested in alternative minimum tax bonds. Therefore, all or a portion of the
Fund's otherwise exempt-interest dividends may be taxable to those shareholders
subject to the federal and state alternative minimum tax.
AUTHORIZED PARTICIPANT CONCENTRATION RISK. Only an authorized participant (as
defined in the "Frequent Purchases and Redemptions" Section) may engage in
creation or redemption transactions directly with the Fund. The Fund has a
limited number of institutions that act as authorized participants. To the
extent that these institutions exit the business or are unable to proceed with
creation and/or redemption orders with respect to the Fund and no other
authorized participant is able to step forward to create or redeem, in either of
these cases, Fund shares may trade at a discount to the Fund's net asset value
and possibly face delisting.
CALIFORNIA MUNICIPAL SECURITIES RISK. Because the Fund invests predominantly in
California municipal securities, events in California are likely to affect the
Fund's investments and its performance. These events may include economic or
political policy changes, tax base erosion, budget deficits and other financial
difficulties, and changes in the credit ratings assigned to municipal issuers of
California. A negative change in any one of these or other areas could affect
the ability of California municipal issuers to meet their obligations. Moreover,
certain risks specific to California threaten the state's fiscal condition.
Specifically, provisions of the California Constitution and state statutes limit
the taxing and spending authority of California governmental entities, which may
impair the ability of California issuers to pay principal and/or interest on
their obligations. California has major concentrations in high technology,
trade, entertainment, manufacturing, government, tourism, construction and
services, and may be sensitive to economic problems affecting those industries.
California's economy may also be affected by natural disasters, such as
earthquakes or fires.
CALL RISK. If an issuer calls higher-yielding debt instruments held by the Fund,
performance could be adversely impacted.
Page 21
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST CALIFORNIA MUNICIPAL HIGH INCOME ETF (FCAL)
JULY 31, 2017 (UNAUDITED)
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 ("ETF") that effects its creations and
redemptions for in-kind securities. Because the Fund may effect a portion of
redemptions for cash, it may be required to sell portfolio securities in order
to obtain the cash needed to distribute redemption proceeds. A sale of shares
may result in capital gains or losses and may also result in higher brokerage
costs.
CREDIT RISK. Credit risk is the risk that an issuer of a security held by the
Fund will be unable or unwilling to make dividend, interest and/or principal
payments when due and the related risk that the value of such security may
decline because of concerns about the issuer's ability to make such payments.
CUSTODIAL RECEIPT TRUSTS RISK. Custodial receipts are financial instruments
similar to TOBs sold through private placements that represent the right to
receive future principal and interest payments on underlying municipal
obligations. Custodial receipt trusts may issue inverse floater securities and
if the Fund was to hold inverse floaters issued by custodial receipt trusts, the
Fund would be subject to the risks of inverse floaters described herein. In
particular, because the instruments may be leveraged, their market values may be
more volatile than other types of fixed-income instruments.
CYBER SECURITY RISK. As the use of Internet technology has become more prevalent
in the course of business, the Fund has become more susceptible to potential
operational risks through breaches in cyber security. A breach in cyber security
refers to both intentional and unintentional events that may cause the Fund to
lose proprietary information, suffer data corruption or lose operational
capacity. Such events could cause the Fund to incur regulatory penalties,
reputational damage, additional compliance costs associated with corrective
measures and/or financial loss. Cyber security breaches may involve unauthorized
access to the Fund's digital information systems through "hacking" or malicious
software coding, but may also result from outside attacks such as
denial-of-service attacks through efforts to make network services unavailable
to intended users. In addition, cyber security breaches of the Fund's third
party service providers, such as its administrator, transfer agent, custodian,
or sub-advisor, as applicable, or issuers in which the Fund invests, can also
subject the Fund to many of the same risks associated with direct cyber security
breaches. The Fund has established risk management systems designed to reduce
the risks associated with cyber security. However, there is no guarantee that
such efforts will succeed, especially because the Fund does not directly control
the cyber security systems of issuers or third party service providers.
DISTRESSED SECURITIES RISK. Distressed municipal securities are speculative and
involve substantial risks in addition to the risks of investing in high yield
securities that are not in default. Generally, the Fund will not receive
interest payments from the Distressed Municipal Securities it holds, and there
is a substantial risk that the principal will not be repaid. In any
reorganization or liquidation proceeding related to a Distressed Municipal
Security, the Fund may lose its entire investment in such Distressed Municipal
Security.
FLUCTUATION OF NET ASSET VALUE RISK. The net asset value of shares of the Fund
will generally fluctuate with changes in the market value of the Fund's
holdings. The market prices of shares will generally fluctuate in accordance
with changes in net asset value as well as the relative supply of and demand for
shares on Nasdaq. The Fund's investment advisor cannot predict whether shares
will trade below, at or above their net asset value because the shares trade on
Nasdaq at market prices and not at net asset value. Price differences may be
due, in large part, to the fact that supply and demand forces at work in the
secondary trading market for shares will be closely related to, but not
identical to, the same forces influencing the prices of the holdings of the Fund
trading individually or in the aggregate at any point in time. However, given
that shares can only be purchased and redeemed for cash, or in certain
circumstances, in-kind, in Creation Units, and only to and from broker-dealers
and large institutional investors that have entered into participation
agreements (unlike shares of closed-end funds, which frequently trade at
appreciable discounts from, and sometimes at premiums to, their net asset
value), the Fund's investment advisor believes that large discounts or premiums
to the net asset value of shares should not be sustained.
HIGH YIELD SECURITIES RISK. High yield securities, or "junk" bonds, are subject
to greater market fluctuations and risk of loss than securities with higher
ratings, and therefore, are considered to be highly speculative. These
securities are issued by issuers that may have narrowly focused operations
and/or other impediments to the timely payment of periodic interest and
principal at maturity. If the economy slows down or dips into recession, the
issuers of high yield securities may not have sufficient resources to continue
making timely payment of periodic interest and principal at maturity. The market
for high yield securities is smaller and less liquid than that for investment
grade securities. High yield securities are generally not listed on a national
securities exchange but trade in the over-the-counter markets. Due to the
smaller, less liquid market for high yield securities, the bid-offer spread on
such securities is generally greater than it is for investment grade securities
and the purchase or sale of such securities may take longer to complete. In
general, high yield securities may have a greater risk of default than other
types of securities.
INCOME RISK. Income from the Fund's fixed income investments could decline
during periods of falling interest rates.
Page 22
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST CALIFORNIA MUNICIPAL HIGH INCOME ETF (FCAL)
JULY 31, 2017 (UNAUDITED)
INDUSTRIAL DEVELOPMENT BOND RISK. These revenue bonds are issued by or on behalf
of public authorities to obtain funds to finance various public and/or privately
operated facilities, including those for business and manufacturing, housing,
sports, pollution control, airport, mass transit, port and parking facilities.
To the extent that the industrial development sector continues to represent a
significant portion of the Fund, the Fund will be sensitive to changes in, and
its performance may depend to a greater extent on, the overall condition of the
industrial development sector. These bonds are normally secured only by the
revenues from the project and not by state or local government tax payments.
Consequently, the credit quality of these securities is dependent upon the
ability of the user of the facilities financed by the bonds and any guarantor to
meet its financial obligations. Payment of interest on and repayment of
principal on such bonds are the responsibility of the user and/or any guarantor.
These bonds are subject to a wide variety of risks, many of which relate to the
nature of the specific project. Generally, the value and credit quality of these
bonds are sensitive to the risks related to an economic slowdown.
INTEREST RATE RISK. Interest rate risk is the risk that the value of the debt
securities in the Fund's portfolio will decline because of rising market
interest rates. Interest rate risk is generally lower for shorter term debt
securities and higher for longer term debt securities. Duration is a measure of
the expected price volatility of a debt security as a result of changes in
market rates of interest, based on, among other factors, the weighted average
timing of the debt security's expected principal and interest payments. In
general, duration represents the expected percentage change in the value of a
security for an immediate 1% change in interest rates. Therefore, prices of debt
securities with shorter durations tend to be less sensitive to interest rate
changes than debt securities with longer durations. As the value of a debt
security changes over time, so will its duration.
INVERSE FLOATERS RISK. Investments in inverse floating rate securities issued by
TOB trusts create effective leverage. Due to the leveraged nature of these
investments, the value of an inverse floater will increase and decrease to a
significantly greater extent than the values of the TOB trust's underlying
municipal bonds in response to changes in market interest rates or credit
quality. In addition, distributions paid to the Fund on its inverse floaters
will be reduced or even eliminated as short-term municipal interest rates rise
and will increase when short-term municipal interest rates fall. An investment
in inverse floaters typically will involve greater risk than an investment in a
fixed rate municipal bond.
MANAGEMENT RISK. The Fund is subject to management risk because it is an
actively managed portfolio. In managing the Fund's investment portfolio, the
Fund's investment advisor will apply investment techniques and risk analyses
that may not have the desired result. There can be no guarantee that the Fund
will meet its investment objectives.
MARKET MAKER RISK. If the Fund has lower average daily trading volumes, it may
rely on a small number of third-party market makers to provide a market for the
purchase and sale of shares. Any trading halt or other problem relating to the
trading activity of these market makers could result in a dramatic change in the
spread between the Fund's net asset value and the price at which the Fund's
shares are trading on its exchange, which could result in a decrease in value of
the Fund's shares. In addition, decisions by market makers or authorized
participants to reduce their role or step away from these activities in times of
market stress could inhibit the effectiveness of the arbitrage process in
maintaining the relationship between the underlying values of the Fund's
portfolio securities and the Fund's market price. This reduced effectiveness
could result in Fund shares trading at a discount to net asset value and also in
greater than normal intraday bidask spreads for Fund shares.
MARKET RISK. Market risk is the risk that a particular security owned by the
Fund or shares of the Fund in general may fall in value. Securities are subject
to market fluctuations caused by such factors as economic, political, regulatory
or market developments, changes in interest rates and perceived trends in bond
prices. Also, certain of these factors may affect the liquidity of the bonds in
the Fund's portfolio and make it more difficult for the Fund to sell them.
Shares of the Fund could decline in value or underperform other investments.
MUNICIPAL LEASE OBLIGATIONS RISK. Participation interests in municipal leases
pose special risks because many leases and contracts contain "non-appropriation"
clauses that provide that the governmental issuer has no obligation to make
future payments under the lease or contract unless money is appropriated for
this purpose by the appropriate legislative body.
MUNICIPAL SECURITIES MARKET LIQUIDITY RISK. Inventories of Municipal Securities
held by brokers and dealers have decreased in recent years, lessening their
ability to make a market in these securities. This reduction in market making
capacity has the potential to decrease the Fund's ability to buy or sell
Municipal Securities, and increase price volatility and trading costs,
particularly during periods of economic or market stress. As a result, the Fund
may be forced to accept a lower price to sell a Municipal Security, to sell
other securities to raise cash, or to give up an investment opportunity, any of
which could have a negative effect on performance.
Page 23
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST CALIFORNIA MUNICIPAL HIGH INCOME ETF (FCAL)
JULY 31, 2017 (UNAUDITED)
NEW FUND RISK. The Fund currently has fewer assets than larger funds, and like
other new funds, large inflows and outflows may impact the Fund's market
exposure for limited periods of time. This impact may be positive or negative,
depending on the direction of market movement during the period affected. Also,
during the initial invest-up period, the Fund may depart from its principal
investment strategies and invest a larger amount or all of its assets in cash
equivalents or it may hold cash.
NON-DIVERSIFICATION RISK. The Fund is classified as "non-diversified" under the
1940 Act. As a result, the Fund is only limited as to the percentage of its
assets which may be invested in the securities of any one issuer by the
diversification requirements imposed by the Internal Revenue Code of 1986, as
amended. The Fund may invest a relatively high percentage of its assets in a
limited number of issuers. As a result, the Fund may be more susceptible to a
single adverse economic or regulatory occurrence affecting one or more of these
issuers, experience increased volatility and be highly invested in certain
issuers.
POLITICAL AND ECONOMIC RISK. The values of Municipal Securities held by the Fund
may be adversely affected by local political and economic conditions and
developments. Adverse conditions in an industry significant to a local economy
could have a correspondingly adverse effect on the financial condition of local
issuers. Because the Fund primarily purchases municipal bonds from California or
U.S. territories, such as Puerto Rico, the Fund is more susceptible to adverse
economic, political or regulatory changes affecting municipal bond issuers in
those locations.
PRE-REFUNDED BONDS RISK. Pre-refunded bonds are bonds that have been refunded to
a call date prior to the final maturity of principal, or, in the case of
pre-refunded bonds commonly referred to as "escrowed-to-maturity bonds," to the
final maturity of principal, and remain outstanding in the municipal market. The
payment of principal and interest of the pre-refunded bonds held by the Fund is
funded from securities held in a designated escrow account where such securities
are obligations of and carry the full faith and credit of the U.S. Treasury. The
securities held in the escrow fund pledged to pay the principal and interest of
the pre-refunded bond do not guarantee the price of the bond. Investment in
pre-refunded municipal bonds held by the Fund may subject the Fund to interest
rate risk, market risk and credit risk. In addition, while a secondary market
exists for pre-refunded municipal bonds, if the Fund sells pre-refunded
municipal bonds prior to maturity, the price received may be more or less than
the original cost, depending on market conditions at the time of sale.
PRIVATE ACTIVITY BONDS RISK. Municipalities and other public authorities issue
private activity bonds to finance development of industrial facilities for use
by a private enterprise. The private enterprise pays the principal and interest
on the bond and the issuing authority ordinarily does not pledge its full faith,
credit and taxing power for repayment. The private enterprise can have a
substantially different credit profile than the municipality or public
authority. The private activity bonds in which the Fund may invest may be
negatively impacted by conditions affecting either the general credit of the use
of the private activity project or the project itself. The Fund's private
activity bond holdings also may pay interest subject to the alternative minimum
tax.
PUERTO RICAN MUNICIPAL SECURITIES RISK. The Fund may invest in bonds of
municipal issuers located in Puerto Rico. Adverse market, political, economic or
other conditions or developments within Puerto Rico may negatively affect the
value of the Fund's holdings in Puerto Rican municipal obligations. The Puerto
Rican economy is reliant on manufacturing, services and tourism, and its economy
and financial operations parallel the economic cycles of the United States.
Economic difficulties in the United States are likely to have an adverse impact
on the overall economy of Puerto Rico. Moreover, like many other U.S. states and
municipalities, Puerto Rico experienced a significant downturn during the recent
recession. Puerto Rico continues to face significant fiscal challenges,
including persistent government deficits, underfunded public pension benefit
obligations, underfunded government retirement systems, sizable debt service
obligations and a high unemployment rate. Puerto Rican financial difficulties
potentially could lead to less liquidity, wider yield spreads over benchmark
U.S. government securities, and greater risk of default for Puerto Rican
municipal securities, and consequently may adversely affect the value of the
Fund's investments in Puerto Rico and the Fund's investment performance.
STATE-SPECIFIC AND U.S. TERRITORIES' CONCENTRATION RISK. The Fund will be less
diversified geographically than a fund investing across many states and
therefore has greater exposure to adverse economic and political changes in
California and Puerto Rico.
TAX RISK. Interest income from Municipal Securities is normally not subject to
regular federal income tax and California income tax, but income from Municipal
Securities held by the Fund could be declared taxable because of, among other
things, unfavorable changes in tax laws, adverse interpretations by the Internal
Revenue Service or state tax authorities or noncompliant conduct of a bond
issuer. Consequently, the attractiveness of Municipal Securities in relation to
other investment alternatives is affected by changes in federal and state income
tax rates or changes in the tax-exempt status of interest income from Municipal
Securities.
Page 24
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST CALIFORNIA MUNICIPAL HIGH INCOME ETF (FCAL)
JULY 31, 2017 (UNAUDITED)
TRADING ISSUES RISK. Although the shares of the Fund are listed for trading on
Nasdaq, there can be no assurance that an active trading market for such shares
will develop or be maintained. Trading in shares on Nasdaq may be halted due to
market conditions or for reasons that, in the view of Nasdaq, make trading in
shares inadvisable. In addition, trading in shares on Nasdaq is subject to
trading halts caused by extraordinary market volatility pursuant to Nasdaq
"circuit breaker" rules. Market makers are under no obligation to make a market
in the Fund's shares, and authorized participants are not obligated to submit
purchase or redemption orders for Creation Units. There can be no assurance that
the requirements of Nasdaq necessary to maintain the listing of the Fund will
continue to be met or will remain unchanged. In particular, if the Fund does not
comply with any provision of the Nasdaq rule change pursuant to Rule 19b-4 under
the Securities Exchange Act of 1934, as amended (the "1934 Act"), approved by
the SEC, and cannot bring itself into compliance within a reasonable period
after discovering the matter, Nasdaq may remove the shares of the Fund from
listing. The Fund may have difficulty maintaining its listing on Nasdaq in the
event the Fund's assets are small or the Fund does not have enough shareholders.
INVESTMENT MANAGEMENT AGREEMENT
BOARD CONSIDERATIONS REGARDING CONTINUATION OF INVESTMENT MANAGEMENT AGREEMENT
The Board of Trustees of First Trust Exchange-Traded Fund III (the "Trust"),
including the Independent Trustees, unanimously approved the Investment
Management Agreement (the "Agreement") with First Trust Advisors L.P. (the
"Advisor"), on behalf of the First Trust California Municipal High Income ETF
(the "Fund"), for an initial two-year term at a meeting held on June 11-12,
2017. The Board determined that the Agreement is in the best interests of the
Fund in light of the extent and quality of the services expected to be provided
and such other matters as the Board considered to be relevant in the exercise of
its reasonable business judgment.
To reach this determination, the Board considered its duties under the
Investment Company Act of 1940, as amended (the "1940 Act"), as well as under
the general principles of state law in reviewing and approving advisory
contracts; the requirements of the 1940 Act in such matters; the fiduciary duty
of investment advisors with respect to advisory agreements and compensation; the
standards used by courts in determining whether investment company boards have
fulfilled their duties; and the factors to be considered by the Board in voting
on such agreements. To assist the Board in its evaluation of the Agreement, the
Independent Trustees received a report from the Advisor in advance of the Board
meeting responding to a request for information provided on behalf of the
Independent Trustees that, among other things, outlined the services to be
provided by the Advisor to the Fund (including the relevant personnel
responsible for these services and their experience); the proposed unitary fee
rate payable by the Fund as compared to fees charged to a peer group of funds
(all of which were exchange-traded funds ("ETFs")) compiled by Management
Practice, Inc. ("MPI"), an independent source (the "MPI Peer Group"), and as
compared to fees charged to other clients of the Advisor, including other ETFs
managed by the Advisor; the estimated expenses of the Fund as compared to
expense ratios of the funds in the MPI Peer Group; the nature of the expenses to
be incurred in providing services to the Fund and the potential for economies of
scale, if any; financial data on the Advisor; any fall-out benefits to the
Advisor and its affiliate, First Trust Portfolios L.P. ("FTP"); and information
on the Advisor's compliance program. The Independent Trustees also met
separately with their independent legal counsel to discuss the information
provided by the Advisor. The Board applied its business judgment to determine
whether the arrangement between the Trust and the Advisor is a reasonable
business arrangement from the Fund's perspective as well as from the perspective
of the Fund's shareholders.
In evaluating whether to approve the Agreement for the Fund, the Board
considered the nature, extent and quality of the services to be provided by the
Advisor under the Agreement and considered that employees of the Advisor provide
management services to other ETFs and to other investment companies in the First
Trust fund complex with diligence and care. The Board considered that the
Advisor will be responsible for the overall management and administration of the
Fund and reviewed all of the services to be provided by the Advisor to the Fund,
as well as the background and experience of the persons responsible for such
services. The Board considered that the Fund will be an actively-managed ETF not
designed to track the performance of an index, and that investment decisions
will be the primary responsibility of the Advisor's Municipal Securities Team.
At the meeting, the Board received a presentation from one of the portfolio
managers and was able to ask questions about the proposed investment strategy
for the Fund and the Advisor's liquidity management techniques. The Board
considered the background and experience of the members of the Municipal
Securities Team. The Board considered the Advisor's statement that it applies
the same oversight model internally with its Municipal Securities Team as it
uses for overseeing external sub-advisors, including portfolio risk monitoring
and performance review. In reviewing the services to be provided, the Board
considered the compliance program that had been developed by the Advisor and
considered that it includes a robust program for monitoring the Advisor's and
the Fund's compliance with the 1940 Act, as well as the Fund's compliance with
its investment objectives and policies. Since the Fund had yet to commence
investment operations, the Board could not consider the historical investment
performance of the Fund. In light of the information presented and the
considerations made, the Board concluded that the nature, extent and quality of
the services to be provided to the Fund by the Advisor under the Agreement are
expected to be satisfactory.
Page 25
--------------------------------------------------------------------------------
ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST CALIFORNIA MUNICIPAL HIGH INCOME ETF (FCAL)
JULY 31, 2017 (UNAUDITED)
The Board considered the proposed unitary fee rate payable by the Fund under the
Agreement for the services to be provided. The Board noted that, under the
unitary fee arrangement, the Fund would pay the Advisor a unitary fee equal to
an annual rate of 0.65% of its average daily net assets. The Board noted that
the Advisor would be responsible for the Fund's expenses, including the cost of
transfer agency, custody, fund administration, legal, audit and other services
and license fees (if any), but excluding the fee payments under the Agreement,
interest, taxes, brokerage commissions and other expenses connected with the
execution of portfolio transactions (such as dividend and distribution expenses
from securities sold short and/or other investment related costs), distribution
and service fees pursuant to a Rule 12b-1 plan, if any, and extraordinary
expenses. The Board noted that the Advisor had agreed to waive a portion of its
unitary fee in an amount equal to 0.15% of the Fund's average daily net assets
for an initial period of two years. The Board received and reviewed information
for the Fund showing the advisory or unitary fee rates and expense ratios of the
peer funds in the MPI Peer Group, as well as advisory fee rates charged by the
Advisor to other fund (including ETFs) and non-fund clients, as applicable.
Because the Fund's MPI Peer Group included peer funds that pay a unitary fee and
because the Fund will pay a unitary fee, the Board determined that expense
ratios were the most relevant comparative data point. Based on the information
provided, the Board noted that the unitary fee for the Fund (after fee waivers)
was above the median total (net) expense ratio of the peer funds in its MPI Peer
Group. With respect to the MPI Peer Group, the Board discussed with
representatives of the Advisor how the MPI Peer Group was assembled and the
limitations in creating peer groups for actively-managed ETFs, including the
limited number of actively-managed ETFs investing in municipal securities, that
there are no actively-managed ETFs investing in high yield municipal securities
and that two of the four peer funds in the Fund's MPI Peer Group were
index-based ETFs. The Board took these limitations and differences into account
in considering the peer data. With respect to fees charged to other clients, the
Board considered differences between the Fund and other clients that limited
their comparability. The Board noted that the Advisor manages another
actively-managed municipal ETF in the First Trust fund complex that pays a
unitary fee equal to an annual rate of 0.65% of its average daily net assets of
which the Advisor currently waives 0.15%. In light of the information considered
and the nature, extent and quality of the services expected to be provided to
the Fund under the Agreement, the Board determined that the proposed unitary fee
for the Fund was fair and reasonable.
The Board noted that the proposed unitary fee for the Fund was not structured to
pass the benefits of any economies of scale on to shareholders as the Fund's
assets grow. The Board noted that any reduction in fixed costs associated with
the management of the Fund would benefit the Advisor, but that the unitary fee
structure provides a level of certainty in expenses for the Fund. The Board
noted that the Advisor has continued to invest in personnel and infrastructure
for the First Trust fund complex. The Board took the types of costs to be borne
by the Advisor in connection with its services to be performed for the Fund
under the Agreement into consideration and noted that the Advisor was unable to
estimate the profitability of the Agreement for the Fund to the Advisor. The
Board considered fall-out benefits described by the Advisor that may be realized
from its and FTP's relationship with the Fund and the Advisor's compensation for
fund reporting services to be provided to the Fund pursuant to a separate Fund
Reporting Services Agreement, which would be paid from the unitary fee. The
Board also noted that the Advisor would not utilize soft dollars in connection
with its management of the Fund's portfolio. The Board concluded that the
character and amount of potential fall-out benefits to the Advisor were not
unreasonable.
Based on all of the information considered and the conclusions reached, the
Board, including the Independent Trustees, unanimously determined that the terms
of the Agreement are fair and reasonable and that the approval of the Agreement
is in the best interests of the Fund. No single factor was determinative in the
Board's analysis.
Page 26
--------------------------------------------------------------------------------
BOARD OF TRUSTEES AND OFFICERS
--------------------------------------------------------------------------------
FIRST TRUST CALIFORNIA MUNICIPAL HIGH INCOME ETF (FCAL)
JULY 31, 2017 (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; 148 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 December
Suite 400 2016); Member, Sportsmed LLC (April 2007
Wheaton, IL 60187 to November 2015)
D.O.B.: 04/51
Thomas R. Kadlec, Trustee o Indefinite Term President, ADM Investor Services, Inc. 148 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, Hibs Enterprises (Financial and 148 Director of Trust
c/o First Trust Advisors L.P. Management Consulting) Company of
120 E. Liberty Drive, o Since Inception Illinois
Suite 400
Wheaton, IL 60187
D.O.B.: 11/56
Niel B. Nielson, Trustee o Indefinite Term Managing Director and Chief Operating 148 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 (Educational Transport, Inc.
Suite 400 Products and Services); President and Chief (May 2003 to
Wheaton, IL 60187 Executive Officer (June 2012 to September May 2014)
D.O.B.: 03/54 2014), Servant Interactive LLC (Educational
Products and Services); President and Chief
Executive Officer (June 2012 to September
2014), Dew Learning LLC (Educational
Products and Services); President (June 2002
to June 2012), Covenant College
-----------------------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEE
-----------------------------------------------------------------------------------------------------------------------------------
James A. Bowen(1), Trustee, o Indefinite Term Chief Executive Officer, First Trust 148 None
Chairman of the Board L.P. Advisors and First Trust Portfolios L.P.;
120 E. Liberty Drive, o Since Inception Chairman of the Board of Directors, BondWave
Suite 400 LLC (Software Development Company) and
Wheaton, IL 60187 Stonebridge Advisors LLC
D.O.B.: 09/55
-----------------------------
(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 27
--------------------------------------------------------------------------------
BOARD OF TRUSTEES AND OFFICERS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST CALIFORNIA MUNICIPAL HIGH INCOME ETF (FCAL)
JULY 31, 2017 (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
D.O.B.: 01/66 First Trust Portfolios L.P.; Chief Financial
Officer (January 2016 to Present), BondWave LLC
(Software Development Company) and Stonebridge
Advisors LLC
Donald P. Swade Treasurer, Chief o Indefinite Term Senior Vice President (July 2016 to Present), Vice
120 E. Liberty Drive, Financial Officer and President (April 2012 to July 2016), First Trust
Suite 400 Chief 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 First
120 E. Liberty Drive, Legal Officer 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. and
120 E. Liberty Drive, 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 28
--------------------------------------------------------------------------------
PRIVACY POLICY
--------------------------------------------------------------------------------
FIRST TRUST CALIFORNIA MUNICIPAL HIGH INCOME ETF (FCAL)
JULY 31, 2017 (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.
USE OF WEBSITE ANALYTICS
We currently use third party analytics tools, Google Analytics and AddThis, to
gather information for purposes of improving First Trust's website and marketing
our products and services to you. These tools employ cookies, which are small
pieces of text stored in a file by your web browser and sent to websites that
you visit, to collect information, track website usage and viewing trends such
as the number of hits, pages visited, videos and PDFs viewed and the length of
user sessions in order to evaluate website performance and enhance navigation of
the website. We may also collect other anonymous information, which is generally
limited to technical and web navigation information such as the IP address of
your device, internet browser type and operating system for purposes of
analyzing the data to make First Trust's website better and more useful to our
users. The information collected does not include any personal identifiable
information such as your name, address, phone number or email address unless you
provide that information through the website for us to contact you in order to
answer your questions or respond to your requests. To find out how to opt-out of
these services click on: Google Analytics and AddThis.
CONFIDENTIALITY AND SECURITY
With regard to our internal security procedures, First Trust restricts access to
your nonpublic personal information to those First Trust employees 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).
May 2017
Page 29
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FIRST TRUST
First Trust Exchange-Traded Fund III
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 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 $82,500 for the fiscal period August 24, 2016 through July 31, 2017.
(b) Audit-Related Fees (Registrant) -- The aggregate fees billed 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
period August 24, 2016 through July 31, 2017.
Audit-Related Fees (Investment Adviser and Distributor) -- The aggregate
fees billed 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 period August 24, 2016 through July 31, 2017.
(c) Tax Fees (Registrant) -- The aggregate fees billed for professional
services rendered by the principal accountant for tax compliance, tax advice,
and tax planning to the registrant were $0 for the fiscal period August 24, 2016
through July 31, 2017.
Tax Fees (Investment Adviser and Distributor) -- The aggregate fees billed
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 period August 24, 2016 through July 31, 2017.
(d) All Other Fees (Registrant) -- The aggregate fees billed 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 period August 24, 2016 through July 31, 2017.
All Other Fees (Investment Adviser and Distributor) -- The aggregate fees
billed 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
period August 24, 2016 through July 31, 2017 for the Adviser and the
Distributor.
(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 and
distributor 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:
Registrant: Adviser and Distributor:
------------ ------------------------
(b) 0% (b) 0%
(c) 0% (c) 0%
(d) 0% (d) 0%
(f) The percentage of hours expended on the principal accountant's
engagement to audit the registrant's financial statements for the most recent
fiscal year that were attributed to work performed by persons other than the
principal accountant's full-time, permanent employees was less than fifty
percent.
(g) The aggregate non-audit fees billed by the registrant's accountant for
services rendered to the registrant, and rendered to the registrant's investment
adviser (not including any sub-adviser whose role is primarily portfolio
management and is subcontracted with or overseen by another investment adviser),
and any entity controlling, controlled by, or under common control with the
adviser that provides ongoing services to the registrant for the fiscal period
August 24, 2016 through July 31, 2017 were $0 for the registrant, $44,000 for
the registrant's investment adviser and $65,150 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.
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 III
------------------------------------------
By (Signature and Title)* /s/ James M. Dykas
----------------------------------------
James M. Dykas, President and
Chief Executive Officer
(principal executive officer)
Date: September 25, 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: September 25, 2017
--------------------
By (Signature and Title)* /s/ Donald P. Swade
----------------------------------------
Donald P. Swade, Treasurer,
Chief Financial Officer and
Chief Accounting Officer
(principal financial officer)
Date: September 25, 2017
--------------------
* Print the name and title of each signing officer under his or her signature.