CHAPMAN AND CUTLER LLP 111 WEST MONROE STREET
CHICAGO, ILLINOIS 60603
May 23, 2019
VIA EDGAR CORRESPONDENCE
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Elena Stojic
United States Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549
Re: First Trust Exchange-Traded Fund II
File Nos. 333-143964; 811-21944
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Dear Ms.Stojic:
This letter responds to your comments, provided by telephone on April 25,
2019, regarding the registration statement filed on Form N-1A for First Trust
Exchange-Traded Fund II (the "Trust") with the staff of the Securities and
Exchange Commission (the "Staff") on March 13, 2019 (the "Registration
Statement"). The Registration Statement relates to the First Trust Indxx NextG
ETF (formerly First Trust Nasdaq Smartphone Index Fund) (the "Fund"), a series
of the Trust. Capitalized terms used herein, but not otherwise defined, have the
meanings ascribed to them in the Registration Statement.
COMMENT 1 - GENERAL
Please file the response letter to the Staff's comments at least five days
prior to the effective date of the Registration Statement in order to give the
Staff enough time to adequately review the Fund's responses.
RESPONSE TO COMMENT 1
Pursuant to the Staff's request, the Fund confirms it has filed this
response letter at least five days prior to effectiveness of the Registration
Statement.
COMMENT 2 - GENERAL
Please ensure that the ticker symbol and new Fund name are updated on
EDGAR.
RESPONSE TO COMMENT 2
Pursuant to the Staff's request, the Fund confirms that the ticker symbol
and Fund name will be updated on EDGAR upon effectiveness of the Registration
Statement.
COMMENT 3 - FEES AND EXPENSES OF THE FUND
The Staff notes that certain service providers, including the transfer
agent and custodian, are engaged by the Fund and/or the Trust. However, the Fund
pays a unitary fee to the investment advisor to cover these services. Please
explain in correspondence whether the Fund could be held liable for these
expenses in the event of a default of the investment adviser. If so, please
explain the accounting for those services.
RESPONSE TO COMMENT 3
The Trust, on behalf of the Fund, pays the compensation of the Fund's
service providers by way of payment of a unitary fee to the Fund's Advisor. The
Advisor, on behalf of the Fund, pays the Fund's ordinary operating expenses,
including amounts due to the Fund's service providers (such as the
administrator, custodian and auditor). In essence, the Advisor facilitates
payment of the Fund's ordinary operating expenses, while the Fund accrues and
bears those expenses in an amount equal to the unitary fee. The Advisor would
only directly bear the Fund's ordinary operating expenses if the assets of the
Fund, and therefore the amount of the unitary fee, were too small to cover the
aggregate amount of the Fund's ordinary operating expenses in a year. In this
way, the unitary fee arrangement is economically equivalent to an expense cap,
which involves an advisor agreeing to waive all or a portion of its advisory fee
and/or reimburse a fund for ordinary operating expenses that exceed an
agreed-upon level. In both instances, a fund bears its own ordinary operating
expenses, but only to the extent of a specified amount.
COMMENT 4 - FEES AND EXPENSES OF THE FUND
Please include a footnote to the "Annual Fund Operating Expenses" table
explaining that the management fee is a unitary fee and that Fund other expenses
are paid by the investment advisor under the management fee. Please also
describe the expenses that are not covered by the unitary management fee.
RESPONSE TO COMMENT 4
The Fund respectfully declines to revise the referenced disclosure. Other
funds advised by First Trust have previously included footnotes similar to the
one requested by the Staff in this comment and the Staff requested that those
funds delete the footnote for not being compliant with the requirements of Form
N-1A.
COMMENT 5 - FEES AND EXPENSES OF THE FUND
The Staff notes that the compensation paid to the Independent Trustees is
paid out of the proceeds from the unitary management fee collected by the
investment advisor. As trustee fees are required to be paid by a fund,
independent of the investment advisor, please explain in correspondence why the
Independent Trustee fees are not accrued and/or paid by the Fund.
RESPONSE TO COMMENT 5
The Trust, on behalf of the Fund, pays the compensation of the independent
Trustees by way of payment of a unitary fee to the Fund's Advisor. The Advisor,
on behalf of the Fund, pays the Fund's ordinary operating expenses, including
the compensation of the Trustees. In essence, the Advisor facilitates payment of
the Fund's ordinary operating expenses, while the Fund accrues and bears those
expenses in an amount equal to the unitary fee. The Advisor would only directly
bear the Fund's ordinary operating expenses if the assets of the Fund, and
therefore the amount of the unitary fee, were too small to cover the aggregate
amount of the Fund's ordinary operating expenses in a year. In this way, the
unitary fee arrangement is economically equivalent to an expense cap, which
involves an advisor agreeing to waive all or a portion of its advisory fee
and/or reimburse a fund for ordinary operating expenses that exceed an
agreed-upon level. In both instances, a fund bears its own ordinary operating
expenses, but only to the extent of a specified amount.
COMMENT 6 - EXAMPLE
Please consider revising the narrative disclosure to clarify that the
costs to a shareholder of investing in the Fund would be the same whether the
shareholder redeems before, or holds its shares for the entirety of, the listed
periods.
RESPONSE TO COMMENT 6
The Fund respectfully declines to revise the disclosure as it believes its
current disclosure is compliant with the requirements of Form N-1A.
COMMENT 7 - PORTFOLIO TURNOVER
Please disclose the portfolio turnover the Fund expects to experience as a
result of the Index change. If turnover is expected to be significant, please
disclose in the prospectus and statement of additional information as
appropriate.
RESPONSE TO COMMENT 7
Pursuant to the Staff's request, the following disclosure has been added
as the last sentence of the section in both the prospectus and statement of
additional information entitled "Portfolio Turnover":
On May 29, 2019, the Fund began tracking a different index.
This change may cause the Fund to experience an abnormally
high level of portfolio turnover for the current fiscal
period.
COMMENT 8 - GENERAL
The Staff notes that the information included pursuant to the requirements
of Item 4 of Form N-1A is intended to be a summary of the information included
pursuant to the requirements of Item 9 of Form N-1A. Please consider revising
the disclosure accordingly.
RESPONSE TO COMMENT 8
The Fund respectfully declines to revise the disclosure as it believes its
current disclosure is compliant with the requirements of Form N-1A.
COMMENT 9 - PRINCIPAL INVESTMENT STRATEGIES
Please revise the disclosure to include an explanation of "free float" in
plain English.
RESPONSE TO COMMENT 9
Pursuant to the Staff's request, the referenced disclosure has been
revised as follows:
To be eligible for inclusion in the Index, a security must
have: ... (iv) at least 10% its outstanding shares publicly
available for trading.
COMMENT 10 - PRINCIPAL INVESTMENT STRATEGIES
Please confirm whether a company is required to derive a certain portion
of its revenues or profits from one of the identified sub-themes to be eligible
for inclusion in the Index.
RESPONSE TO COMMENT 10
Pursuant to the Staff's request, the Fund confirms that companies are not
required to derive a certain portion of its revenues or profits from one of the
identified sub-themes to be eligible for inclusion in the Index.
COMMENT 11 - PRINCIPAL INVESTMENT STRATEGIES
Please confirm that the final sentence of the section entitled "Principal
Investment Strategies" will be revised to disclose whether the Fund has
significant exposure to any industry or group of industries. Please include
corresponding risk disclosure as well.
RESPONSE TO COMMENT 11
Pursuant to the Staff's request, the Fund confirms that the final sentence
of the section entitled "Principal Investment Strategies" will be revised to
disclose whether the Fund has significant exposure to any industry or group of
industries and that corresponding risk disclosure will be included.
COMMENT 12 - PRINCIPAL RISKS
Please consider re-ordering the principal risks in order of importance
rather than alphabetically. Please see the transcript of a speech delivered by
Director, Division of Investment Management, Dalia Blass at the ICI Securities
Law Developments Conference on October 25, 2018.
RESPONSE TO COMMENT 12
The Fund has considered the Commission's request and determined that the
risks as presented are appropriate for investor comprehension. In addition, the
following disclosure has been added to the lead-in paragraph to each set of risk
factors in the prospectus:
The order of the below risk factors does not indicate the
significance of any particular risk factor.
COMMENT 13 - PRINCIPAL RISKS
Please confirm that the removal of "Asia Risk" is appropriate. If the Fund
does still have significant exposure to Asia, please consider whether the Fund
should include risk disclosure regarding trade disputes affecting certain
countries within Asia.
RESPONSE TO COMMENT 13
The prospectus has been revised to include Asia Risk as a principal risk,
including language regarding trade disputes affecting certain countries within
Asia.
COMMENT 14 - PRINCIPAL RISKS
Please consider adding "REIT Risk," given that the Index may contains
REITs.
RESPONSE TO COMMENT 14
Pursuant to the Staff's request, "REIT Risk" has been included in the
section entitled "Principal Risks."
COMMENT 15 - PRINCIPAL RISKS
Please revise "Concentration Risk" to remove the reference to securities
of issuers within the same country, state or region.
RESPONSE TO COMMENT 15
In accordance with the Staff's comment, the prospectus has been revised to
rename this risk "Significant Exposure Risk."
COMMENT 16 - PRINCIPAL RISKS
Please consider deleting the following disclosure from "Index Provider
Risk":
The Index Provider does not provide any representation or
warranty in relation to the quality, accuracy or completeness
of data in the Index, and it does not guarantee that the Index
will be calculated in accordance with its stated methodology.
RESPONSE TO COMMENT 16
The Fund respectfully declines to revise the disclosure as it believes
that this is material information of which shareholders should be made aware.
COMMENT 17 - PRINCIPAL RISKS
Please consider adding a large capitalization companies risk.
RESPONSE TO COMMENT 17
The Fund respectfully declines to revise the disclosure as it believes
that, in and of itself, a company having a large capitalization does not pose a
specific, principal risk to the Fund.
COMMENT 18 - ADDITIONAL RISKS OF INVESTING IN THE FUND
Please consider revising the disclosure set forth in the section entitled
"Additional Risks of Investing in the Fund" so that the disclosure expands upon,
rather than repeats, the disclosure set forth in the section entitled "Principal
Risks."
RESPONSE TO COMMENT 18
The Fund respectfully declines to revise the disclosure as it believes its
current disclosure is compliant with the requirements of Form N-1A.
COMMENT 19 - MANAGEMENT FEE
For the sake of clarity, please revise the sentence set forth below so
that Fund expenses that are covered by the unitary management fee are disclosed
in a separate sentence from those expenses that are not covered by the unitary
management fee.
First Trust is paid an annual unitary management fee equal to
0.70% of the Fund's average daily net assets and is
responsible for the expenses of the Fund including the cost of
transfer agency, custody, fund administration, legal, audit
and other services, and excluding fee payments under the
Investment Management Agreement, interest, taxes, acquired
fund fees and expenses (if any), brokerage commissions and
other expenses connected with the execution of portfolio
transactions, distribution and service fees payable pursuant
to a Rule 12b-1 plan, if any, and extraordinary expenses.
RESPONSE TO COMMENT 19
Pursuant to the Staff's request, the referenced disclosure has been
revised as follows:
First Trust is paid an annual unitary management fee equal to
0.70% of the Fund's average daily net assets and is
responsible for the expenses of the Fund including the cost of
transfer agency, custody, fund administration, legal, audit
and other services. The annual unitary management fee does not
cover fee payments under the Investment Management Agreement,
interest, taxes, acquired fund fees and expenses (if any),
brokerage commissions and other expenses connected with the
execution of portfolio transactions, distribution and service
fees payable pursuant to a Rule 12b-1 plan, if any, and
extraordinary expenses.
COMMENT 20 - SHARE TRADING PRICES
Please consider revising the disclosure to specify what is and is not
included in the Fund's calculation of its IOPV.
RESPONSE TO COMMENT 20
The Fund respectfully declines to revise the disclosure as it believes its
current disclosure, which for the Staff's convenience is reproduced below, is
compliant with the requirements of Form N-1A.
The IOPV is based on the current market value of the
securities or other assets and/or cash required to be
deposited in exchange for a Creation Unit and includes any
expenses of the Fund.
COMMENT 21 - DIVIDENDS, DISTRIBUTIONS AND TAXES
Please remove the brackets around "quarterly" in the first sentence of the
section entitled "Dividends, Distributions and Taxes."
RESPONSE TO COMMENT 21
Pursuant to the Staff's request, the disclosure has been revised
accordingly.
COMMENT 22 - DISTRIBUTION PLAN
Please complete the sentence set forth below:
The Fund does not currently pay 12b-1 fees, and pursuant to a
contractual arrangement, the Fund will not pay 12b-1 fees any
time before ___________.
RESPONSE TO COMMENT 22
Pursuant to the Staff's request, the disclosure will be revised in a
subsequent amendment to the Registration Statement that will be filed with the
Staff after 5:30 p.m. EST on May 28, 2019 (the "Subsequent Amendment").
COMMENT 23 - TOTAL RETURN INFORMATION
Please disclose that the performance disclosed in the table set forth in
the section entitled "Total Return Information" is based upon the Fund's
performance while it was seeking to track its previous index and that its
performance tracking the new index may vary.
RESPONSE TO COMMENT 23
The Fund respectfully declines to revise the disclosure as it believes the
footnote to the table, reproduced for the Staff's convenience below, adequately
addresses the Staff's concern.
(1) On _________, 2019, the Fund's underlying index changed
from the Nasdaq CTA Smartphone Index(SM) to the Indxx 5G &
NextG Thematic Index. Therefore, the Fund's performance and
historical returns shown for the periods prior to _________,
2019, are not necessarily indicative of the performance that
the Fund, based on its current index, would have generated.
Because the Fund's new underlying index had an inception date
of _________, 2019, performance information is not included
above.
COMMENT 24 - TOTAL RETURN INFORMATION
Given that the Fund has a unitary management fee, please consider the
applicability of the following disclosure set forth as the third sentence of the
section entitled "Total Return Information."
The total returns would have been lower if certain fees had
not been waived and expenses reimbursed by First Trust.
RESPONSE TO COMMENT 24
Pursuant to the Staff's request, the referenced disclosure has been
deleted.
COMMENT 25 - STATEMENT OF ADDITIONAL INFORMATION
The sub-section entitled "Lending of Portfolio Securities" contains the
following disclosure:
In these loan arrangements, the Fund will receive collateral
in the form of cash, U.S. government securities or other
high-grade debt obligations ... (emphasis added)
Please delete the referenced language. Staff guidance permits the use of
cash, U.S. government securities and bank letters of credit for collateral.
RESPONSE TO COMMENT 25
Pursuant to the Staff's request, the underlined disclosure has been
revised to read "bank letters of credit" pursuant to The Adams Express Company
no-action letter (File No. 811-2624, Oct. 20, 1979).
COMMENT 26 - STATEMENT OF ADDITIONAL INFORMATION
Please consider revising the disclosure set forth in the section entitled
"Creation and Redemption of Creation Unit Aggregations" to remove references to
the Fund's ability to effectuate creations in cash, rather than in-kind.
RESPONSE TO COMMENT 26
The Fund respectfully declines to revise the disclosure. Pursuant to the
Fund's exemptive relief, it has the ability to conduct creations and redemptions
in cash and thus believes that the referenced disclosure is applicable.
COMMENT 27 - EXHIBITS
Please file the amended schedule A to the Fund's investment management
agreement as an exhibit to the Registration Statement. In addition, please file
the Subscription Agreement and Authorized Participant Agreements utilized by the
Fund as an exhibit to the Registration Statement, pursuant to Securities Act
Rule 483.
RESPONSE TO COMMENT 27
Pursuant to the Staff's request, the Fund confirms that it will file the
amended schedule to the Fund's investment management agreement as an exhibit to
the Subsequent Amendment. With regard the Authorized Participant Agreements
and Subscription Agreement, as a courtesy to the Staff, the Trust has previously
filed a "Form Of" Authorized Participant Agreement and Subscription Agreement
that the Fund has incorporated by reference. It respectfully declines to file
any additional agreements as neither the Fund nor the Trust are a party to such
agreements. Additionally, Item 28(h) of Form N-1A requires material contracts
not made in the ordinary course of business to be filed. Given that such
agreements are made in the ordinary course of business, Form N-1A does not
require them to be filed.
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Please call me at (312) 845-3484 if you have any questions or issues you
would like to discuss regarding these matters.
Sincerely yours,
CHAPMAN AND CUTLER LLP
By: /s/Morrison C. Warren
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Morrison C. Warren