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First
Trust
Exchange-Traded
Fund II |
Prospectus
First Trust Indxx
NextG ETF
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Ticker
Symbol: |
NXTG |
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Exchange: |
Nasdaq |
First
Trust Indxx NextG ETF (the “Fund”) lists and
principally trades its shares on Nasdaq, Inc. ("Nasdaq" or the
“Exchange”). Market prices may
differ to some degree from the net asset value of the shares. Unlike mutual
funds,
the Fund issues and redeems shares at net asset value, only in large blocks of
shares called "Creation
Units."
The
Fund is a series of First Trust Exchange-Traded Fund II (the “Trust”) and an
exchange-traded index fund organized as a separate series of a registered
management investment company.
Except
when aggregated in Creation Units, the shares are not redeemable securities of
the Fund.
The
Securities and Exchange Commission has not approved or disapproved of these
securities or passed upon the adequacy or accuracy of this prospectus. Any
representation to the contrary is a criminal offense.
February 2,
2026
NOT
FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
Summary
Information
(fees paid directly from your investment)
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Maximum
Sales Charge (Load) Imposed on Purchases (as a percentage of offering
price) |
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(expenses that you pay each year as a percentage of the value of your investment)
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Management
Fees |
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Distribution
and Service (12b-1) Fees |
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Other
Expenses |
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Total
Annual Fund Operating Expenses |
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1
Year |
3
Years |
5
Years |
10
Years |
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$ |
$ |
$ |
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3
4
Principal
Risks
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6
7
8
9
10
Calendar Year Total Returns as of 12/31
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1
Year |
5
Years |
10
Years |
Since
Inception |
Inception
Date |
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Return Before
Taxes |
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Return After
Taxes on Distributions |
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Return After
Taxes on Distributions and Sale of
Shares |
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Indxx 5G
& NextG Thematic IndexSM(1),(2) (reflects
no deduction
for fees, expenses or taxes) |
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MSCI ACWI
Information Technology Index (reflects
no deduction
for fees, expenses or taxes) |
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MSCI ACWI
Index (reflects no deduction for fees,
expenses or
taxes) |
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11
(1)
(2)
Management
Investment
Advisor
First Trust Advisors
L.P. (“First
Trust”
or the “Advisor”)
Portfolio
Managers
The Fund’s portfolio
is managed by a team (the “Investment
Committee”) consisting of:
●
Daniel J. Lindquist,
Chairman of the Investment Committee and Managing Director of First Trust
●
David G. McGarel,
Chief Investment Officer, Chief Operating Officer and Managing Director of First
Trust
●
Jon C. Erickson,
Senior Vice President of First Trust
●
Roger F. Testin,
Senior Vice President of First Trust
●
Stan Ueland, Senior
Vice President of First Trust
●
Chris A. Peterson,
Senior Vice President of First Trust
●
Erik Russo, Senior
Vice President of First Trust
The
Investment Committee members are primarily and jointly responsible for the
day-to-day management of the Fund. Each Investment Committee member has served
as a part of the portfolio management team of the Fund since 2011, except for
Chris A.
Peterson, who has served as a part of the portfolio management team of the Fund
since 2016, and Erik Russo, who has served as a part of the portfolio management
team of the Fund since 2020.
Purchase
and Sale of Fund Shares
The
Fund issues and redeems shares on a continuous basis, at net asset value, only
in large blocks of shares called “Creation Units.” Individual shares of the Fund
may only be purchased and sold on the secondary market through a broker-dealer.
Since shares of the Fund trade on securities exchanges in the secondary market
at their market price rather than their net asset value, the Fund’s shares may
trade at a price greater than (premium) or less than (discount) the Fund’s net
asset value. An investor may incur costs attributable to the difference between
the highest price a buyer is willing to pay to purchase shares of the Fund (bid)
and the lowest price a seller is willing to accept for shares of the Fund (ask)
when buying or selling shares in the secondary market (the “bid-ask
spread”). Recent
information, including the Fund’s net asset value, market price, premiums
and
discounts, bid-ask spreads and the median bid-ask spread for the Fund’s most
recent fiscal year,is available online
at http://www.ftportfolios.com/Retail/etf/home.aspx.
Tax
Information
The
Fund’s distributions are taxable and will generally be taxed as ordinary income
or capital gains. Distributions on shares held in a tax-deferred account, while
not immediately taxable, will be subject to tax when the shares are no longer
held in a tax-deferred
account.
Payments
to Broker-Dealers and Other Financial Intermediaries
If
you purchase shares of the Fund through a broker-dealer, registered investment
adviser, bank or other financial intermediary (collectively, “intermediaries”),
First Trust and First Trust Portfolios L.P., the Fund’s distributor, may pay the
intermediary for the sale of Fund shares and related services. These payments
may create a conflict of interest by influencing the broker-dealer or other
intermediary and your salesperson to recommend the Fund over another investment.
Ask your salesperson or visit your financial
intermediary’s website for more information.
12
Additional
Information on the Fund's Investment Objective and Strategies
The Fund is a series
of First Trust Exchange-Traded Fund II and is regulated as an “investment
company” under the Investment Company Act of
1940, as amended (the "1940
Act"). The Fund operates
as an index fund and is not actively managed by First Trust. As such, the
Fund’s investment objective is to provide investment results that correspond
generally to the price and yield (before the Fund’s fees and expenses) of the
Index. In seeking to achieve this objective, the Fund will normally invest at
least 90% of its net assets (including investment borrowings) in the securities
that comprise the Index. The Fund will generally employ a full replication
strategy, meaning that it will normally invest in all of the securities
comprising the Index in proportion to their weightings in the Index. However,
under various circumstances, full replication of the Index may not be possible
or practicable. In those circumstances, the Fund may purchase a sample of
securities in the Index. There may also be instances in which First Trust may
choose to overweight certain securities in the Index, purchase securities not in
the Index which First Trust believes are appropriate to substitute for certain
securities in the Index, use futures or derivative instruments or utilize
various combinations of the above techniques in seeking to track the Index. The
Fund may sell securities that are represented in the Index in anticipation of
their removal from the Index or purchase securities not represented in the Index
in anticipation of their addition to the Index. During the Fund’s initial invest-up
period and during periods of high in-flows and out-flows, the Fund may not be
fully invested pursuant to its principal investment strategy.
The
Fund’s investment objective, its 90% investment strategy and each of the
policies described herein are non-fundamental policies that may be changed by
the Board of Trustees of the Trust (the “Board”) without shareholder
approval upon 60 days’ prior
written notice to shareholders. Certain fundamental policies of the Fund are set
forth in the Statement of Additional Information
(“SAI”) under “Investment
Objective and Policies.”
While
it is not expected that the Fund will invest in the securities of other
investment companies, any such investments would be subject to limitations
imposed by the 1940 Act and the related rules and interpretations. The Fund has
adopted a policy that it will not invest in other investment companies in excess
of 1940 Act limits in reliance on Sections 12(d)(1)(F) or 12(d)(1)(G) of the
1940 Act.
Indxx
5G & NextG Thematic IndexSM
The
Indxx 5G & NextG Thematic IndexSM is designed to track
the performance of companies that are at the core of the research and
development of the new 5G cellular technology and next generation technologies
as they emerge. The Index seeks to include only companies that have devoted
material resources or made material commitments to the use of 5G technology. The
Index is composed of common stock and depositary receipts. It is rebalanced and
reconstituted semi-annually in June and December. More information regarding the
Index, including additional detail on the Index methodology, may be found on the
Index Provider’s website. Neither the Fund, the Board, First Trust, or any of
their affiliates, are responsible for the information set forth on the Index
Provider’s website. Information from the Index Provider’s website and any other
information not expressly included in this prospectus is not incorporated by
reference in, and should not be considered part of this prospectus.
Fund
Investments
Principal
Investments
Equity
Securities
The
Fund invests in equity securities, including common stocks and depositary
receipts. Common stock represents an equity ownership interest in issuers.
Holders of common stock are entitled to the income and increase in the value of
the assets and business of the issuers after all debt obligations and
obligations to preferred stockholders are satisfied. Depositary receipts are
certificates typically issued by a bank or trust company that represent
ownership interests in securities of non-U.S. companies. Depositary
receipts may or may not be jointly sponsored by the underlying
issuer.
Real
Estate Investment Trusts
REITs
are financial vehicles that pool investors’ capital to purchase or finance real
estate. REITs are generally classified as equity REITs, mortgage REITs or a
combination of equity and mortgage REITs. Equity REITs invest the majority of
their assets directly in real property and derive income primarily from the
collection of rents. Equity REITs can also realize capital gains by selling
properties that have appreciated in value. Mortgage REITs invest the majority of
their assets in real estate mortgages and
13
derive
income from the collection of interest payments. REITs are not taxed on income
distributed to shareholders provided they comply with the
applicable tax requirements.
Non-Principal
Investments
Cash Equivalents
and Short-Term Investments/Temporary Defensive Positions
Normally, the Fund
invests substantially all of its assets to meet its investment objective. The
Fund may invest the remainder of its assets in securities with maturities of
less than one year or cash equivalents, or it may hold cash. The percentage of
the Fund invested in such holdings varies and depends on several factors,
including market conditions. For temporary defensive purposes, the Fund may depart from its
principal investment strategies and invest part or all of its assets in these
securities, or it may hold cash.
During such periods, the Fund may not be able to achieve its investment
objective. The Fund may adopt a temporary defensive strategy when the
Advisor believes securities in which the Fund normally invests have elevated
risks due to political or
economic factors and in other extraordinary circumstances. For more information
on eligible short-term investments, see the
SAI.
Illiquid
Investments
The
Fund may invest up to 15% of its net assets in investments and other instruments
that are, at the time of investment, illiquid (determined using the Securities
and Exchange Commission's standard applicable to investment companies,
i.e., any investment
that the Fund reasonably expects cannot be sold or disposed of in current market
conditions in seven calendar days or less without the sale or disposition
significantly changing the market value of the investment). For this purpose,
illiquid investments may include, but are not limited to, restricted securities
(securities the disposition of which is restricted under the federal securities
laws), securities that may only be resold pursuant to Rule 144A under the
Securities Act of 1933, as amended (the
“Securities
Act”),
that are deemed to be illiquid, and certain repurchase
agreements.
Disclosure
of Portfolio Holdings
The
Fund’s portfolio holdings are available on the Fund's website at http://www.ftportfolios.com.
A description of the
policies and
procedures with respect to the disclosure of the Fund's portfolio securities is
included in the Fund's SAI, which is also available on the
Fund's website.
Risks
of Investing in the Fund
Risk
is inherent in all investing. Investing in the Fund involves risk, including the
risk that you may lose all or part of your investment. There can be no assurance
that the Fund will meet its stated objective. Before you invest, you should
consider the following disclosure pertaining to the Principal Risks set forth
above as well as additional Non-Principal Risks set forth below in this
prospectus. The order of the below risk factors does not indicate the
significance of any particular risk factor.
Principal
Risks
ASIA
RISK.
The Fund invests significantly in the securities of Asian issuers. Such
investments subject the Fund to certain risks associated
specifically with investments in securities of Asian issuers, including distinct
legal, regulatory, political and economic risks. Many Asian economies have
experienced rapid growth and industrialization, and there is no assurance that
this growth rate will be maintained. Some Asian economies are highly dependent
on trade, and economic conditions in other countries within and outside Asia can
impact these economies. Certain of these economies may be adversely affected by
trade or policy disputes with its major trade partners. There is also a high
concentration of market capitalization and trading volume in a small number of
issuers representing a limited number of industries, as well as a high
concentration of investors and financial intermediaries. Certain Asian countries
have experienced and may in the future experience expropriation and
nationalization of assets, confiscatory taxation, currency manipulation,
political instability, armed conflict and social instability as a result of
religious, ethnic, socio-economic and/or political unrest. In particular,
escalated tensions involving North Korea and any outbreak of hostilities
involving North Korea could have a severe adverse effect on Asian economies.
Governments of certain Asian countries have exercised, and continue to exercise,
substantial influence over many aspects of the private sector. In certain cases,
the government owns or controls many companies, including the largest in the
country. Accordingly, government actions could have a significant effect on the
issuers of the Fund's securities or on economic conditions generally. Issuers in
Asia may not be subject to the same accounting, auditing and financial reporting
standards as U.S. companies and if their securities are not listed on a U.S.
exchange, they may not be subject to the same corporate governance standards as
U.S. issuers. In addition, satisfactory custodial services for investment
securities may not be available in some Asia countries, which may result in the
Fund incurring additional costs and delays in providing transportation and
custody services for such securities outside such
14
countries.
Recent developments in relations between the U.S. and China have heightened
concerns of increased tariffs and restrictions on trade between the two
countries. An increase in tariffs or trade restrictions, or even the threat of
such developments, could lead to a significant reduction in international trade,
which could have a negative impact on the economy of Asian countries
and a commensurately negative impact on the Fund.
AUTHORIZED
PARTICIPANT CONCENTRATION RISK. Only an authorized
participant may engage in creation or redemption transactions
directly with the Fund. A limited number of institutions act as authorized
participants for the Fund. However, participants are not obligated to make a
market in the Fund’s shares or submit purchase and redemption orders for
creation units. To the extent that these institutions exit the business, reduce
their role or are unable to proceed with creation and/or redemption orders and
no other authorized participant steps forward to create or redeem, the Fund’s
shares may trade at a premium or discount to the Fund’s net asset value and
possibly face delisting and the bid/ask spread on the Fund’s shares may
widen.
COMMUNICATION
SERVICES COMPANIES RISK. The Fund invests
significantly in communication services companies. Communication
services companies may be subject to specific risks associated with legislative
or regulatory changes, adverse market conditions, and/or increased competition.
Communication services companies are particularly vulnerable to rapid
advancements in technology, the innovation of competitors, rapid product
obsolescence and government regulation and competition, both domestically and
internationally. Communication services companies also rely on the use of
intellectual property such as patents, copyrights and trademarks owned
internationally or licensed through third-parties. Legal check-ups or claims
regarding infringement of intellectual property could cause an adverse effect on
the reputation of the company. Additionally, fluctuating domestic and
international demand, shifting demographics and often unpredictable changes in
consumer tastes can drastically affect a communication services company’s
profitability. While all companies may be susceptible to network security
breaches, certain communication services companies may be particular targets of
hacking and potential theft of proprietary or consumer information or
disruptions in service, which could have a material adverse effect on their
businesses.
CURRENCY
RISK.
The Fund invests in securities denominated in a non-U.S. currency. Changes in
currency exchange rates affect
the value of investments denominated in a foreign currency, the value of
dividends and interest earned from such securities and gains and losses realized
on the sale of such securities. The Fund’s net asset value could decline if a
currency to which the Fund has exposure depreciates against the U.S. dollar or
if there are delays or limits on repatriation of such currency. Currency
exchange rates can be very volatile and can change quickly and unpredictably.
Changes in currency exchange rates may affect the Fund's net asset value, the
value of dividends and interest earned, and gains and losses realized on the
sale of securities. An increase in the strength of the U.S. dollar relative to
other currencies may cause the value of the Fund to decline. Certain non-U.S.
currencies may be particularly volatile, and non-U.S. governments may intervene
in the currency markets, causing a decline in value or liquidity in the Fund's
non-U.S. holdings whose value is tied to the affected non-U.S. currency.
Additionally, the prices of non-U.S. securities that are traded in U.S. dollars
are often indirectly influenced by currency fluctuations.
CURRENT
MARKET CONDITIONS RISK. Current market
conditions risk is the risk that a particular investment, or shares of the Fund
in general, may fall in value due to current market conditions.
As a means to fight
inflation, the Federal
Reserve and certain foreign central banks have raised interest rates; however,
the Federal Reserve has
begun to lower interest
rates and may continue to do so. U.S. regulators have proposed several changes
to
market and issuer regulations which would directly impact the Fund. While it is
hard to predict whether any of these regulations will be adopted, due to the
current scope of proposed regulations, any regulatory changes could adversely
impact the Fund’s ability to achieve its investment strategies or make certain
investments. Regulatory changes may also increase Fund operational costs, which
could impact overall performance. Certain market factors may result in central
banks changing their approach in the future. Potential future bank failures could
result in disruption to the broader banking industry or markets generally and reduce
confidence in financial institutions and the economy as a whole, which may also
heighten market volatility and reduce liquidity. Additionally, challenges in
commercial real estate markets, including high interest rates, declining
valuations and elevated vacancies, could have a broader impact on financial
markets.
The
ongoing adversarial political climate in the United States, as well as political
and diplomatic events both domestic and abroad, such as presidential,
congressional and gubernatorial elections in the U.S., global elections and
governmental changes and the U.S. government’s failure to agree on a long-term
budget and deficit reduction plan, have and may continue to have an adverse
impact on the U.S. regulatory landscape, markets and investor behavior, which
could have a negative impact on the Fund’s investments and operations. The
potential result of a U.S. federal government shutdown may also significantly
impact investor and consumer behavior, which may adversely impact the markets
and global economy. The change in
15
administration
resulting from the 2024 United States national elections could result in
significant impacts to international trade relations, tax and immigration
policies, and other aspects of the national and international political and
financial landscape, which could affect, among other things, inflation and the
securities markets generally. Global and domestic authorities and regulators
have previously responded to serious economic disruptions with ranging fiscal
and monetary policy changes, including but not limited to, direct capital
infusions into companies, new monetary programs and dramatically lower interest
rates. Any change in these policies, or the ineffectiveness of these policies,
could increase volatility in securities markets, which may adversely impact the
Fund’s investments and performance. Any market disruptions could also delay the
Fund from making sound investment decisions in a timely manner. If the Fund
concentrates its investments in a region enduring geopolitical market
disruption, it may face higher risk of loss, although the increasing
interconnectivity between global economies and financial markets can lead to
events or conditions in one country, region or financial market adversely
impacting a different country, region or
financial market.
Other unexpected
political, regulatory and diplomatic events within the U.S. and abroad may
affect investor and consumer confidence and may adversely impact financial
markets and the broader economy. For example, ongoing armed conflicts between
Russia and Ukraine in Europe and among Israel, Iran, Hamas and other militant
groups in the Middle East, have caused and could continue to cause significant
market disruptions and volatility within the markets in Russia, Europe, the
Middle East and the United States. The hostilities and sanctions resulting from
those hostilities have and could continue to have a significant impact on
certain Fund investments as well as Fund performance and liquidity. The
economies of the United States and its trading partners, as well as the
financial markets generally, may be adversely impacted by trade
disputes, including the imposition of
tariffs, and other
matters. For example, the United States has imposed trade barriers and
restrictions on China. In addition, the
Chinese government is engaged in a longstanding dispute with Taiwan, continually
threatening an invasion. If the political climate between the United States and
China does not improve or continues to deteriorate, if China were to attempt
invading Taiwan, or if other geopolitical conflicts develop or worsen,
economies, markets and individual securities may be adversely affected, and the
value of the Fund’s assets may go down. A public health crisis and the ensuing
policies enacted by governments and central banks may cause significant
volatility and uncertainty in global financial markets, negatively impacting
global growth prospects. As the COVID-19 global pandemic illustrated, such
events may affect certain geographic regions, countries, sectors and
industries more significantly than others.
Advancements
in technology may also adversely impact markets and the overall performance of
the Fund. For instance, the economy may be significantly impacted by the
advanced development and increased regulation of artificial intelligence. As the
use of technology grows, liquidity and market movements may be affected. As
artificial intelligence is used more widely, the profitability and growth of
Fund holdings may be impacted, which could significantly impact the overall
performance of the Fund. Additionally, cyber security breaches of both
government and non-government entities could have negative impacts on infrastructure and
the ability of such entities, including the Fund, to operate
properly.
These
events, and any other future events, may adversely affect the prices and
liquidity of the Fund’s portfolio investments and could result in
disruptions in the trading markets.
CYBER
SECURITY RISK. The Fund
is susceptible to operational, information security and related
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. These risks
may not be fully covered
by insurance. In general, cyber incidents can result from deliberate attacks or
unintentional events. Cyber
incidents include, but are not limited to, gaining unauthorized access to
digital systems (e.g., through “hacking” or malicious
software coding) for purposes of misappropriating assets or sensitive
information, corrupting or destroying data, or causing
operational disruption (e.g., through denial-of-service attacks to
make network services unavailable to intended users). Cyber attacks may also be carried
out in a manner that does not require gaining unauthorized access, such as
causing denial-of-service
attacks on websites (i.e., efforts to make network services
unavailable to intended users). Emerging threats like ransomware or
zero-day exploits could
also cause disruptions to Fund operations. The use of cloud-based software or data storage by the
Fund, the Advisor, or
any of the Fund’s service providers may
exacerbate these risks. Additionally, geopolitical tension may increase
the scale and sophistication of deliberate attacks, particularly those from nation states or from entities with nation state
backing. Unintentional events, such as power outages, natural disasters,
equipment malfunctions,
processing errors or market
events that occur at a pace that overloads the information
and technology systems relied upon by the Fund or its service
providers, may also
disrupt the Fund’s business operations or impact critical data.
Cyber security incidents may also trigger
Fund obligations under data privacy laws, potentially increasing notification
and compliance burdens.
16
Cyber security
failures by or breaches of the systems of the Advisor, distributor and other
service providers (including, but not limited to, sub-advisors, index providers,
fund accountants, custodians, transfer agents and administrators), market
makers, authorized participants or the issuers of securities in which the Fund
invests, governmental and other regulatory authorities, exchanges and other
financial market operators, banks, brokers, dealers, insurance companies, other
financial institutions or other parties, have the ability to cause disruptions
and impact business operations, potentially resulting in: financial losses;
interference with the Fund’s ability to calculate its net asset value;
disclosure of confidential trading information; impediments to trading;
submission of erroneous trades or erroneous creation or redemption orders; the
inability of the Fund or its service providers to transact business; violations
of applicable privacy and other laws; regulatory fines penalties, reputational
damage, reimbursement or other compensation costs; or additional compliance
costs. Further, errors, misconduct, or compromise of accounts of employees of
the Fund or its third-party service providers can also create material
cybersecurity risks. Cyber incidents may render records of the Fund, including
records relating to its assets and transactions, shareholder ownership of Fund
shares, and other data integral to the Fund’s functioning, inaccessible,
inaccurate or incomplete. Artificial intelligence (“AI”) and machine learning technologies
used by the Fund, the Advisor or third-party service providers may allow the
unintended
introduction of vulnerabilities into infrastructures and applications, which
could exacerbate these risks or result in cyber incidents that implicate
personal data. The Fund and its shareholders could be negatively impacted as a
result of these cyber risks associated with AI technologies. Substantial costs
may be incurred by the Fund in order to resolve or prevent cyber incidents in the
future.
The regulatory
climate governing cyber security and data protection is developing quickly and
may vary considerably across jurisdictions. Regulators continue to develop new
rules and standards related to cyber security and data protection. Compliance
with evolving regulations can be demanding and costly, requiring substantial
resources to monitor and implement required changes.
While the Fund has
established business continuity plans in the event of, and risk management
systems to prevent, such cyber incidents, there are inherent limitations in such
plans and systems, including the possibility that certain risks have not been
identified, that such plans and systems may not completely eliminate the
occurrence or mitigate the effects of cyber incidents, and that prevention and
remediation efforts will not be successful. Furthermore, the Fund cannot control
the cyber security plans and systems put in place by service providers to the
Fund, issuers in which the Fund invests, market makers or authorized
participants. However, there is no guarantee that such efforts will succeed, and
the Fund and its shareholders could be negatively impacted as a
result.
DEPOSITARY
RECEIPTS RISK. The Fund invests in
depositary receipts. Depositary receipts are securities issued by a bank
or
trust company reflecting ownership of underlying securities issued by a foreign
company. An investment in depositary receipts involves further risks due to
certain unique features. 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 pursuant to a deposit
agreement between the underlying issuer and the depositary. In certain cases,
the depositary will vote the shares deposited with it as directed by the
underlying issuer’s board of directors. Furthermore, investment restrictions in
certain countries may adversely impact the value of depositary receipts because
such restrictions may limit the ability to convert shares into depositary
receipts and vice versa. Such restrictions may cause shares of the underlying
issuer to trade at a discount or premium to the market price of the depositary
receipt. Moreover, if depositary receipts are converted into shares, the laws in
certain countries may limit the ability of a non-resident to trade the shares
and to reconvert the shares to depositary receipts. Depositary receipts may be
“sponsored” or “unsponsored.” Sponsored depositary receipts are established
jointly by a depositary and the underlying issuer, whereas unsponsored
depositary receipts may be established by a depositary without participation by
the underlying issuer. Holders of unsponsored depositary receipts generally bear
all the costs associated with establishing the unsponsored depositary receipts.
In addition, the issuers of the securities underlying unsponsored depositary
receipts are not obligated to disclose material information in the U.S. and,
therefore, there may be less information available regarding such issuers and
there may not be a correlation between such information and the market value of
the depositary receipts.
EMERGING
MARKETS RISK. Investments in
securities issued by governments and companies operating in emerging market
countries
involve additional risks relating to political, economic, or regulatory
conditions not associated with investments in securities and instruments issued
by U.S. companies or by companies operating in other developed market countries.
This is due to, among other things, the potential for greater market volatility,
lower trading volume, a lack of liquidity, potential for market manipulation,
higher levels of inflation, political and economic instability, greater risk of
a market shutdown and more governmental limitations on foreign investments in
emerging market countries than are typically found in more developed market
countries. Also, certain regions, countries or asset types may suffer periods of
relative illiquidity. Moreover, emerging market countries often have less
uniformity in accounting and reporting requirements, unsettled securities laws,
less reliable securities valuations and greater risks associated with custody of
securities than developed markets. In addition, the Public
17
Company
Accounting Oversight Board, which regulates auditors of U.S. public companies,
may be unable to inspect audit work papers in certain emerging market countries.
Emerging market countries often have greater risk of capital controls through
such measures as taxes or interest rate control than developed markets. Certain
emerging market countries may also lack the infrastructure necessary to attract
large amounts of foreign trade and investment. Local securities markets in
emerging market countries may trade a small number of securities and may be
unable to respond effectively to increases in trading volume, potentially making
prompt liquidation of holdings difficult or impossible. Settlement procedures in
emerging market countries are frequently less developed and reliable than those
in the U.S. and other developed market countries. In addition, significant
delays may occur in registering the transfer of securities. Settlement or
registration problems may make it more difficult for the Fund to value its
portfolio securities and could cause the Fund to miss attractive investment
opportunities. Investing in emerging market countries involves a higher risk of
expropriation, nationalization, confiscation of assets and property or the
imposition of restrictions on foreign investments and on repatriation of capital
invested by certain emerging market countries. Enforcing legal rights may be
made difficult, costly and slow in emerging markets as there may be additional
problems enforcing claims against non-U.S. governments. As such, the rights and
remedies associated with emerging market investment securities may be different
than those available for investments in more developed markets. For example, it
may be more difficult for shareholders to bring derivative litigation or for
U.S. regulators to bring enforcement actions against issuers in emerging
markets.
In
addition, due to the differences in regulatory, accounting, audit and financial
recordkeeping standards, including financial disclosures, less information about
emerging market companies is publicly available and information that is
available may be unreliable or outdated. This may affect the Index Provider’s
ability to compute and construct the Index and may further impede the Advisor’s
ability to accurately evaluate the index data provided. This potential for error
in index construction and index data could affect the
overall performance of the Fund.
EMERGING
TECHNOLOGIES RISK. The Fund invests in
certain companies because of their exposure to emerging technologies.
All
of the risks associated with such technology may not fully emerge until the
technology is more widely used. The regulatory environment surrounding new
technologies is often unclear. There is often uncertainty regarding the
application of existing regulation and there can be no guarantee that new
regulations will not be enacted that inhibit a technology’s widespread adoption
or prevent a company from realizing all of its potential benefits. Companies
that initially develop or adopt a novel technology may not be able to capitalize
on it and there is no assurance that a company will derive any significant
revenue from it in the future. An emerging technology may constitute a small
portion of a company’s overall business and the success of a technology may not
significantly affect the value of the equity securities issued by the company.
In addition, a company’s stock price may be overvalued by market participants
that value the company’s securities based upon expectations of a technology that are
never realized.
EQUITY
SECURITIES RISK. The value of the
Fund’s shares will fluctuate with changes in the value of the equity securities
in which
it invests.
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 equity market, such as
market volatility, or when political or economic events affecting the issuers
occur. Common stock prices may be particularly sensitive to rising interest
rates, as the cost of capital rises and borrowing costs increase. Equity
securities may decline significantly in price over short or extended periods of
time, and such declines may occur in the equity market as a whole, or they may
occur in only a particular country, company, industry or sector of the market.
Additionally, holders of an issuer's common stock may be subject to greater
risks than holders of its preferred stock and debt securities because common
stockholders' claims are subordinated to those of holders of preferred
stocks and debt securities upon the bankruptcy of an issuer.
INDEX
CONCENTRATION RISK. The Fund will be
concentrated in an industry or a group of industries to the extent that the
Index
is so concentrated. To the extent that the Fund invests a significant percentage
of its assets in a single asset class or the securities of issuers within the
same country, state, region, industry or sector, an adverse economic, business
or political development may affect the value of the Fund’s investments more
than if the Fund were more broadly diversified. A significant exposure makes the
Fund more susceptible to any single occurrence and may subject the Fund to
greater market risk than a fund that is more broadly diversified. There may be
instances in which the Index, for a variety of reasons including changes in the
prices of individual securities held by the Fund, has a larger exposure to a
small number of stocks or a single stock relative to the rest of the stocks in
the Index. Under such circumstances, the Fund will not deviate from the Index
except in rare circumstances or in an immaterial way and therefore the Fund’s
returns would be more greatly influenced by the returns of the stock(s) with the
larger exposure.
INDEX
OR MODEL CONSTITUENT RISK. The Fund may be a
constituent of one or more indices or ETF models. As a result, the
Fund may be included in one or more index-tracking ETFs or mutual funds. Being a
component security of such a vehicle could greatly affect the trading activity
involving the Fund's shares, the size of the Fund and the market volatility of
the Fund’s
18
shares. Inclusion in
an index could increase demand for the Fund and removal from an index could
result in outsized selling activity in a relatively short period of time. As a
result, the Fund’s net asset value could be negatively impacted and the Fund’s
market price may be below the Fund's net asset value during certain
periods. In addition, index rebalances may potentially result in increased
trading activity. To the extent buying or selling activity increases, the Fund
can be exposed to increased brokerage costs and adverse tax
consequences and the market price of the Fund can be negatively
affected.
INDEX
PROVIDER RISK. There is no
assurance that the Index Provider, or any agents that act on its behalf, will
compile the Index
accurately, or that the Index will be determined, maintained, constructed,
reconstituted, rebalanced, composed, calculated or disseminated accurately. The
Index Provider and its agents do not provide any representation or warranty in
relation to the quality, accuracy or completeness of data in the Index, and do
not guarantee that the Index will be calculated in accordance with its stated
methodology. The Advisor’s mandate as described in this prospectus is to manage
the Fund consistently with the Index provided by the Index Provider. The Advisor
relies upon the Index provider and its agents to accurately compile, maintain,
construct, reconstitute, rebalance, compose, calculate and disseminate the Index
accurately. Therefore, losses or costs associated with any Index Provider or
agent errors generally will be borne by the Fund and its shareholders. To
correct any such error, the Index Provider or its agents may carry out an
unscheduled rebalance of the Index or other modification of Index constituents
or weightings. When the Fund in turn rebalances its portfolio, any transaction
costs and market exposure arising from such portfolio rebalancing will be borne
by the Fund and its shareholders. Unscheduled rebalances also expose the Fund to
additional tracking error risk. Errors in respect of the quality, accuracy and
completeness of the data used to compile the Index may occur from time to time
and may not be identified and corrected by the Index Provider for a period of
time or at all, particularly where the Index is less commonly used as a
benchmark by funds or advisors. For example, during a period where the Index
contains incorrect constituents, the Fund tracking the Index would have market
exposure to such constituents and would be underexposed to the Index’s other
constituents. Such errors may negatively impact the Fund and its shareholders.
The Index Provider and its agents rely on various sources of information to
assess the criteria of issuers included in the Index, including information that
may be based on assumptions and estimates. Neither the Fund nor the Advisor can
offer assurances that the Index’s calculation methodology or sources of
information will provide an accurate assessment of included issuers. Unusual
market conditions or issuer-specific events may cause the Index Provider to
postpone a scheduled rebalance, exclude or substitute a security from the Index
or undertake other measures which could cause the Index to vary from its normal
or expected composition. The postponement of a scheduled rebalance in a time of
market volatility could mean that constituents that would otherwise be removed
at rebalance due to changes in market capitalizations, issuer credit ratings, or
other reasons may remain, causing the performance and constituents of the Index
to vary from those expected under normal conditions. Apart from scheduled
rebalances, the Index Provider or its agents may carry out additional ad hoc
rebalances to the Index due to unusual market conditions or in order, for
example, to correct an error in the selection of index constituents.
INFORMATION
TECHNOLOGY COMPANIES RISK. The Fund invests
significantly in information technology companies. Information
technology companies produce and provide hardware, software and information
technology systems and services. Information technology companies are generally
subject to the following risks: rapidly changing technologies and existing
product obsolescence; short product life cycles; fierce competition; aggressive
pricing and reduced profit margins; the loss of patent, copyright and trademark
protections; cyclical market patterns; evolving industry standards; and frequent
new product introductions and new market entrants. Information technology
companies may be smaller and less experienced companies, with limited product
lines, markets or financial resources and fewer experienced management or
marketing personnel. Information technology company stocks, particularly those
involved with the internet, have experienced extreme price and volume
fluctuations that are often unrelated to their operating performance. In
addition, information technology companies are particularly vulnerable to
federal, state and local government regulation, and competition and
consolidation, both domestically and internationally, including competition from
foreign competitors with lower production costs. Information technology
companies also face competition for services of qualified personnel and heavily
rely on patents and intellectual property rights and
the ability to enforce such rights to maintain a competitive
advantage.
IPO
RISK.
The Fund may invest in shares recently issued by companies undergoing an IPO.
Shares issued by such companies are
often subject to extreme price volatility and speculative trading due to factors
such as the absence of a prior public market, unseasoned trading, the small
number of shares available for trading and limited information about the
issuer’s business model, quality of management, earnings growth potential and
other criteria used to evaluate its investment prospects. Such stocks may have
exhibited price appreciation in connection with the IPO that is not sustained,
and it is not uncommon for stocks to decline in value in the period following
the IPO. In addition, the market for IPO shares can be speculative and/or
inactive for extended periods of time. The limited number of shares available
for trading in some IPOs may make it more difficult for the Fund to buy or sell
significant amounts of shares without an unfavorable impact on prevailing
prices. Investors in IPO shares
19
can
be affected by substantial dilution in the value of their shares, by sales of
additional shares and by concentration of control in existing
management and principal shareholders.
LARGE
CAPITALIZATION COMPANIES RISK. Large capitalization
companies may grow at a slower rate and be less able to adapt
to changing market conditions than smaller capitalization companies. Thus, the
return on investment in securities of large capitalization companies may be less
than the return on investment in securities of small and/or mid capitalization
companies. The performance of large capitalization companies also tends to trail
the overall market during different market cycles.
LIQUIDITY
RISK. The Fund may hold
certain investments that it may not be able to dispose of or close out readily
at a favorable time or price (or at
all), or at a price approximating the Fund’s valuation of the investment. For
example, certain investments maybe subject to restrictions on resale, may trade
over-the-counter or in limited volume, or may not have an active trading market.
Certain investments held by the Fund that trade on non-U.S. exchanges may be
further subject to liquidity risk due to foreign market closures or unexpected
impediments to trading in local markets. Illiquid securities may trade at a
discount from comparable, more liquid investments and may be subject to wide
fluctuations in market valueand the bid/ask spread on the Fund's shares may
widen. It may be difficult for the Fund to value illiquid securities accurately.
The market for certain investments may become illiquid under adverse market or
economic conditions independent of any specific adverse changes in the
conditions of a particular issuer. If the Fund needed to sell a large block of
illiquid securities to meet shareholder redemption request or to raise cash,
these sales could further reduce the securities’ prices and adversely affect
performance of the Fund. Disposal of illiquid securities may entail registration
expenses and other transaction costs that are higher than those for liquid
securities.
MARKET
MAKER RISK. The Fund
faces numerous market trading risks, including the potential lack of an active
market for Fund shares due to a
limited number of market makers. 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. The Fund
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 the Exchange, which could result in a decrease in value of
the Fund’s shares. 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 investment, or shares of the Fund in
general, may fall in value. Securities are
subject to market fluctuations caused by real or perceived adverse economic,
political, and regulatory factors or market developments, changes in interest
rates and perceived trends in securities prices. Shares of the Fund could
decline in value or underperform other investments. In addition, local, regional
or global events such as war, acts of terrorism, market manipulation, government
defaults, government shutdowns, regulatory actions, political changes,
diplomatic developments, the imposition of sanctions and other similar measures,
spread of infectious diseases or other public health issues, recessions, natural
disasters, or other events could have a significant negative impact on the Fund
and its investments. Any of such circumstances could have a materially negative
impact on the value of the Fund’s shares, the liquidity of an investment, and
may result in increased market volatility. During any such events, the Fund’s
shares may trade at increased premiums or discounts to their net asset value,
the bid/ask spread on the Fund’s shares may widen and the returns on investment
may fluctuate.
MID
CAPITALIZATION COMPANIES RISK. Mid capitalization
companies may be more vulnerable to adverse general market or
economic developments and thus may experience greater price volatility than more
established large capitalization companies. Securities of mid capitalization
companies may also be less liquid than securities of large capitalization
companies and may have more limited trading volumes. Accordingly, such companies
are generally subject to greater market risk than larger, more
established companies.
NON-CORRELATION
RISK.
The Fund’s return may not match the return of its Index for a number of reasons.
The Fund incurs operating
expenses not applicable to its Index and may incur costs in buying and selling
securities, especially when rebalancing the Fund’s portfolio holdings to reflect
changes in the composition of the Index. In addition, the Fund’s portfolio
holdings may not exactly replicate the securities included in its Index or the
ratios between the securities included in the Index. Accordingly, the Fund's return may
underperform the return of the Index.
NON-U.S.
SECURITIES RISK. The Fund invests in
non-U.S. securities. An investment in securities of non-U.S. companies involves
risks
not associated with domestic issuers. Investment in non-U.S. securities may
involve higher costs than investment in U.S.
20
securities,
including higher transaction and custody costs as well as the imposition of
additional taxes by non-U.S. governments. Non-U.S. investments may also involve
risks associated with the level of currency exchange rates, less complete
financial information about the issuers, less market liquidity, more market
volatility and political instability. Future political and economic
developments, the possible imposition of withholding taxes on dividend income,
the possible seizure or nationalization of non-U.S. holdings, the imposition of
sanctions by foreign governments, the possible establishment of capital
controls, exchange controls or freezes on the convertibility of currency or the
adoption of other governmental restrictions might adversely affect an investment
in non-U.S. securities. Additionally, non-U.S. issuers may be subject to less
stringent regulation, and to different accounting, auditing and recordkeeping
requirements. The U.S. and non-U.S. markets often rise and fall at different
times or by different amounts
due to economic or other regional developments particular to a given country or
region.
OPERATIONAL
RISK. The Fund is
subject to risks arising from various operational factors, including, but not
limited to, human error, processing
and communication errors, errors of the Fund’s service providers, counterparties
or other third-parties, failed or inadequate processes and technology or systems
failures. These errors
or failures may adversely affect the Fund’s operations, including its
ability to execute its investment process, calculate or disseminate its NAV or
intraday indicative optimized portfolio value in a timely manner, and process
creations or redemptions. The Fund relies on third-parties for
a range of services, including custody, valuation, administration, transfer
services, securities lending and accounting, among many others. Any delay or
failure relating to engaging
or maintaining such service providers may affect the Fund’s ability to meet its
investment objective. Although the Fund and the Fund’s investment advisor seek
to reduce these operational risks through controls and procedures, there is no way to completely protect
against such risks.
The Fund, the
Advisor and the Fund’s service providers may utilize AI technologies, including
machine learning models and generative AI, to improve operational efficiency and
in connection with research, among other purposes. The Fund and the Advisor have
little control over the use of AI in third-party products or services. The use
of AI introduces numerous potential challenges and the use of AI can lead to
reputational damage, legal liabilities, and competitive disadvantages, as well
as negatively impact business operations, which may occur with or without
mismanagement in the use of the AI. AI requires the collection and processing of
substantial amounts of data, which poses risks of data inaccuracies,
incompleteness, and inherent biases, and which can degrade the technology’s
effectiveness and reliability. Such data can include proprietary information,
the use of which by AI may be unauthorized and subject to potential liability.
AI also presents the risk of “misalignment.” This is the scenario where AI’s behavior
becomes purposefully adversarial to the goals of the user.
PASSIVE
INVESTMENT RISK. The Fund is not
actively managed. The Fund invests in securities included in or representative
of
its Index regardless of investment merit. The Fund generally will not attempt to
take defensive positions in declining markets. In the event that the Index is no
longer calculated, the Index license is terminated or the identity or character
of the Index is materially changed,
the Fund will seek to engage a replacement index.
PREMIUM/DISCOUNT
RISK.
The market price of the Fund’s shares will generally fluctuate in accordance
with changes in the Fund’s
net asset value as well as the relative supply of and demand for shares on the
Exchange. First Trust cannot predict whether shares will trade below, at or
above their net asset value because the shares trade on the Exchange 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, 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 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), First Trust believes that large discounts or premiums to the net asset
value of shares should not be sustained absent disruptions to the creation and
redemption mechanism, extreme market volatility or potential lack of authorized
participants. During stressed market conditions, the market for the Fund’s
shares may become less liquid in response to deteriorating liquidity in the
market for the Fund’s underlying portfolio holdings, which could in turn lead to
differences between the market price of the Fund’s shares and their net asset
value and the bid/ask spread on the Fund’s shares may
widen.
REIT
RISK. The Fund invests in
REITs. REITs typically own and operate income-producing real estate, such as
residential or commercial
buildings, or real-estate related assets, including mortgages. As a result,
investments in REITs are subject to the risks associated with investing in real
estate, which may include, but are not limited to: fluctuations in the value of
underlying properties; defaults by borrowers or tenants; market saturation;
changes in general and local operating expenses; and other economic, political
or regulatory occurrences affecting companies in the real estate sector.
Additionally, investing in REITs involves certain other risks related to their
structure and focus, which include, but are not limited to, dependency upon
management skills, limited diversification, the risks of locating and managing
financing for projects, heavy cash flow
21
dependency,
possible default by borrowers, the costs and potential losses of
self-liquidation of one or more holdings, the risk of a possible lack of
mortgage funds and associated interest rate risks, overbuilding, property
vacancies, increases in property taxes and operating expenses, changes in zoning
laws, losses due to environmental damages, changes in neighborhood values and
appeal to purchasers, the possibility of failing to maintain exemptions from
registration under the 1940 Act, failure to satisfy the requirements of the
Internal Revenue Code of 1986 for maintaining REIT status and, in many cases,
relatively small market capitalization, which may result in less market
liquidity and greater price volatility for a REIT’s shares. REITs are also
subject to the risk that the real estate market may experience an economic
downturn generally, which may have a material effect on the real
estate in which the REITs invest and their underlying portfolio
securities.
SMALL
CAPITALIZATION COMPANIES RISK. Small 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 large and mid capitalization companies
as a result of several factors, including limited trading volumes, fewer
products or financial resources, management inexperience and less publicly
available information. Accordingly, such companies are generally subject to
greater market risk than large and mid capitalization
companies.
TRADING
ISSUES RISK. Trading in Fund
shares on the Exchange may be halted due to market conditions or for reasons
that, in
the view of the Exchange, make trading in shares inadvisable. In addition,
trading in Fund shares on the Exchange is subject to trading halts caused by
extraordinary market volatility pursuant to the Exchange’s “circuit breaker”
rules. There can be no assurance that the requirements of the Exchange necessary
to maintain the listing of the Fund will continue to be met or will remain
unchanged. The Fund may have difficulty maintaining its listing on the Exchange
in the event the Fund’s assets are small, the Fund does
not have enough shareholders, or if the Fund is unable to proceed with creation
and/or redemption orders.
VALUATION
RISK. The Fund may hold
securities or other assets that may be valued on the basis of factors other than
market quotations. This may
occur because the asset or security does not trade on a centralized exchange, or
in times of market turmoil or reduced liquidity. There are multiple methods that
can be used to value a portfolio holding when market quotations are not readily
available. Fund investments that trade on non-U.S. exchanges that close prior to
the close of the Nasdaq may be fair valued using a systematic fair valuation
model. If these foreign investments meet certain criteria in relation to the
valuation model, their valuation is systematically adjusted to reflect the
impact of movement in the U.S. market after the close of certain foreign
markets. The value established for any portfolio holding at a point in time
might differ from what would be produced using a different methodology or if it
had been priced using market quotations. In addition, there is no assurance that
the Fund could sell or close out a portfolio position for the value established
for it at any time, and it is possible that the Fund would incur a loss because
a portfolio position is sold or closed out at a discount to the valuation
established by the Fund at that time. The Fund’s ability to value investments
may be impacted by technological issues or errors by pricing services or
other third-party
service providers.
Non-Principal
Risks
BORROWING
AND LEVERAGE RISK. If the Fund borrows
money, it must pay interest and other fees, which may reduce the Fund’s
returns. Any such borrowings are intended to be temporary. However, under
certain market conditions, including periods of decreased liquidity, such
borrowings might be outstanding for longer periods of time. As prescribed by the
1940 Act, the Fund will be required to maintain specified asset coverage of at
least 300% with respect to any bank borrowing immediately following such
borrowing and at all times thereafter. The Fund may be required to dispose of
assets on unfavorable terms if market fluctuations
or other factors reduce the Fund’s asset coverage to less than the prescribed
amount.
CASH
TRANSACTIONS RISK. The Fund may, under
certain circumstances, effect a portion of its creations and redemptions
for
cash rather than in-kind. As a result, an investment in the Fund may be less
tax-efficient than an investment in an ETF that effects its creations and
redemptions only in-kind. ETFs are able to make in-kind redemptions and avoid
being taxed on gains on the distributed portfolio securities at the fund level.
A Fund that effects redemptions for cash may be required to sell portfolio
securities in order to obtain the cash needed to distribute redemption proceeds.
Any recognized gain on these sales by the Fund will generally cause the Fund to
recognize a gain it might not otherwise have recognized, or to recognize such
gain sooner than would otherwise be required if it were to distribute portfolio
securities only in-kind. The Fund generally intends to distribute these gains to
shareholders to avoid being taxed on this gain at the fund level and otherwise
comply with the special tax rules that apply to it. This strategy may cause
shareholders to be subject to tax on gains they would not otherwise be subject
to, or at an earlier date than if they had made an investment in a different
ETF. Moreover, cash transactions may have to be carried out over several days if
the securities market is relatively illiquid and may involve considerable
brokerage fees and taxes. These brokerage fees and taxes, which will be higher
than if the Fund sold and redeemed its shares entirely in-kind, will be passed
on to those purchasing and redeeming Creation Units in the form of creation and
redemption transaction fees. In addition,
22
these
factors may result in wider spreads between the bid and the offered prices of
the Fund’s shares than for ETFs that distribute portfolio
securities in-kind.
FAILURE
TO QUALIFY AS A REGULATED INVESTMENT COMPANY RISK. If, in any year, the
Fund fails to qualify as a regulated investment
company under the applicable tax laws, the Fund would be taxed as an ordinary
corporation. In such circumstances, the Fund's taxable income would be subject
to tax at the Fund level and to a further tax at the shareholder level when such
income is distributed and the Fund could be required to recognize unrealized
gains, pay substantial taxes and interest and make substantial distributions
before requalifying as a regulated investment company that is accorded special
tax treatment. This would cause investors to incur higher tax liabilities than
they otherwise would have incurred and would have a negative impact on Fund
returns. If the Fund fails to qualify as a regulated investment company,
distributions to the Fund's shareholders generally would be eligible (i) for
treatment as qualified dividend income in the case of individual shareholders
and (ii) for the dividends received
deduction in the case of corporate shareholders. See "Federal Tax
Matters."
INTELLECTUAL
PROPERTY RISK. The Fund relies on a
license and related sublicense that permits the Fund to use its Index
and
associated trade names, trademarks and service marks (the “Intellectual
Property”) in connection with
the Fund’s name and
investment strategies. Such license and related sublicense may be terminated by
the Index Provider, and, as a result, the Fund may lose its ability to use the
Intellectual Property. There is also no guarantee that the Index Provider has
all rights to license the Intellectual Property for use by the Fund.
Accordingly, in the event the license is terminated or the Index Provider
does not
have rights to license the Intellectual Property, it may have a significant
effect on the operation of the Fund.
INTERNATIONAL
CLOSED MARKET TRADING RISK. Because securities held by the Fund
trade on non-U.S. exchanges that are closed when the
Fund’s primary listing exchange is open, there are likely to be deviations
between the current price of an underlying security and the last quoted price
for the underlying security (i.e., the Fund’s quote from the closed
foreign market) used for purposes of
calculating the Fund's net asset value, resulting in premiums or discounts to
the Fund’s net asset value that may be greater than those experienced by other
exchange-traded funds. In addition, shareholders may not be able to purchase and
sell shares of the Fund on the listing exchange for the Fund on
days when the net asset value of the Fund could be significantly affected by
events in the relevant foreign markets.
ISSUER
SPECIFIC CHANGES RISK. The value of an
individual security or particular type of security can be more volatile than the
market as a whole and can perform differently from the value of the market as a
whole.
LEGISLATION/LITIGATION
RISK. From time to time,
various legislative initiatives are proposed and/or enacted in the United
States
and abroad, which may have a negative impact on certain companies in which the
Fund invests. In addition, litigation regarding any of the issuers of the
securities owned by the Fund, or industries represented by these issuers, may
negatively impact the value of the securities. Such legislation or litigation
may cause the Fund to lose value or may result in higher portfolio turnover if the Advisor determines to
sell such a holding.
REPURCHASE
AGREEMENT RISK. If the Fund engages in securities
lending, it may enter into repurchase agreements in connection with the
lent securities. A
repurchase agreement is an agreement to purchase a security from a party at one
price and a simultaneous
agreement to sell it back to the original party at an agreed-upon price,
typically representing the purchase price plus interest. Repurchase agreements
may be viewed as loans made by the Fund which are collateralized by the
securities subject to repurchase. The Fund's investment return on such
transactions will depend on the counterparty's willingness and ability to
perform its obligations under a repurchase agreement. If the Fund's counterparty
should default on its obligations and the Fund is delayed or prevented from
recovering the collateral, or if the value of the collateral is insufficient,
the Fund may have to
borrow cash, subject to certain legal limits, or realize a
loss.
RESTRICTED
SECURITIES RISK. Restricted
securities are securities that cannot be offered for public resale unless
registered under
the applicable securities laws or that have a contractual restriction that
prohibits or limits their resale. Restricted securities include private
placement securities that have not been registered under the applicable
securities laws, such as Rule 144A securities, and securities of U.S. and
non-U.S. issuers that are issued pursuant to Regulation S. Private placements
are generally subject to strict restrictions on resale. Restricted securities
may be illiquid as they generally are not listed on an exchange and may have no
active trading market. The Fund may be unable to sell a restricted security on
short notice or may be able to sell them only at a price below current value. It
may be more difficult to determine a market value for a restricted security.
Also, the Fund may get limited information about the issuer of a restricted
security, so it may be less able to predict a loss. In addition, if Fund
management receives material non-public information about the issuer, the Fund
may as a result be unable to sell the securities. Certain restricted securities
may involve a high degree of business and financial risk and may result in
substantial losses.
23
SECURITIES
LENDING RISK. The Fund
may engage in securities lending. Securities lending involves exposure to
certain risks, including
counterparty risk, collateral risk and operational risk. Counterparty risk is
the risk that the borrower may fail to return the securities in a timely manner
or at all. As a result, to the extent the Fund engages in securities lending, in
such transactions it may suffer a loss and experience delays in recovering the
lent securities. Any delay in the return of securities on loan may restrict the
ability of the Fund to meet delivery or payment obligations. Collateral risk is
the risk that the collateral received may be realized at a value lower than the
value of the securities lent, whether due to inaccurate pricing of the
collateral, adverse market movements in the value of the collateral, intra-day
increases in the value of the securities lent, a deterioration in the credit
rating of the collateral issuer, or the illiquidity of the market in which the
collateral is traded. Securities lending also entails operational risks, such as
settlement failures or delays in the settlement of instructions. Such failures
or delays may restrict the ability of the Fund to meet delivery or payment
obligations. Lastly, securities lending activities may result in adverse tax
consequences for the Fund and its shareholders. For instance, substitute
payments for dividends received by the Fund for securities loaned out by the
Fund will not be considered qualified dividend income. The Fund could lose money
if its short-term
investment of the collateral declines in value over the period of the
loan.
WARRANTS
AND RIGHTS RISK.
Warrants and rights do not carry with them the right to dividends or voting
rights with respect to the securities
that they entitle their holder to purchase, and they do not represent any rights
in the assets of the issuer. As a result, warrants and rights may be considered
more speculative than certain other types of investments. In addition, the value
of a warrant or right does not necessarily change with the value of the
underlying securities. The Fund could lose the value of a warrant or right if
the right to subscribe to additional shares is not exercised prior to the
warrant’s or right’s expiration date. The market for warrants and rights may be
very limited and there may at times not be a liquid secondary market for
warrants and
rights.
Fund
Organization
The
Fund is a series of the Trust, an investment company registered under the 1940
Act. The Fund is treated as a separate fund with its own investment objective
and policies. The Trust is organized as a Massachusetts business trust. The
Board is responsible for the overall management and direction of the Trust. The
Board elects the Trust’s officers and approves all significant
agreements, including those with the Advisor, distributor, custodian and fund
administrative and accounting agent.
Management
of the Fund
First
Trust Advisors L.P., 120 East Liberty Drive, Wheaton, Illinois 60187, is the
investment advisor to the Fund. In this capacity, 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.
First
Trust is a limited partnership with one limited partner, Grace Partners of
DuPage L.P., and one general partner, The Charger Corporation. Grace Partners of
DuPage L.P. is a limited partnership with one general partner, The Charger
Corporation, and a number of limited partners. The Charger Corporation is an
Illinois corporation controlled by James A. Bowen, the Chief Executive Officer of
First Trust. First Trust discharges its responsibilities subject to the policies
of the Fund.
First Trust serves
as advisor or sub-advisor for 12 mutual fund portfolios, 10 exchange-traded
funds consisting of 307
series and 5 closed-end funds. It is also the
portfolio supervisor of certain unit investment trusts sponsored by First Trust
Portfolios L.P. (“FTP”), an affiliate of First Trust, 120
East Liberty Drive, Wheaton, Illinois 60187. FTP specializes in the
underwriting, trading and
distribution of unit investment trusts and other securities. FTP is the
principal underwriter of the shares of the Fund.
There
is no one individual primarily responsible for portfolio management decisions
for the Fund. Investments are made under the direction of the Investment
Committee. The Investment Committee consists of Daniel J. Lindquist,
David G.
McGarel, Jon C. Erickson, Roger F. Testin, Stan Ueland, Chris A. Peterson and
Erik Russo.
●
Mr. Lindquist is
Chairman of the Investment Committee and presides over Investment Committee
meetings. Mr. Lindquist is responsible for overseeing the implementation of the
Fund’s investment strategy. Mr. Lindquist was a Senior Vice President of First
Trust and FTP from September 2005 to July 2012 and is now a Managing Director of
First Trust and FTP. Mr. Lindquist is a recipient of the Chartered Financial
Analyst designation.
●
Mr. McGarel is the
Chief Investment Officer, Chief Operating Officer and a Managing Director of
First Trust and FTP. As First Trust’s Chief Investment Officer, Mr. McGarel
consults with the other members of the Investment
24
Committee
on market conditions and First Trust’s general investment philosophy. Mr.
McGarel was a Senior Vice President of First Trust and FTP from January 2004 to
July 2012. Mr. McGarel is a recipient of the Chartered Financial Analyst
designation.
●
Mr. Erickson joined
First Trust in 1994 and is a Senior Vice President of First Trust and FTP. As
the head of First Trust’s Equity Research Group, Mr. Erickson is responsible for
determining the securities to be purchased and sold by funds that do not utilize
quantitative investment strategies. Mr. Erickson is a recipient of the Chartered
Financial Analyst designation.
●
Mr. Testin is a
Senior Vice President of First Trust and FTP. Mr. Testin is the head of First
Trust’s Portfolio Management Group. Mr. Testin has been a Senior Vice President
of First Trust and FTP since November 2003. Mr. Testin is a recipient of the
Chartered Financial Analyst designation.
●
Mr. Ueland joined
First Trust as a Vice President in August 2005 and has been a Senior Vice
President of First Trust and FTP since September 2012. At First Trust, he plays
an important role in executing the investment strategies of each portfolio of
exchange-traded funds advised by First Trust.
●
Mr. Peterson is a
Senior Vice President and head of First Trust’s strategy research group. He
joined First Trust in January of 2000. Mr. Peterson is responsible for
developing and implementing quantitative equity investment strategies. Mr.
Peterson received his B.S. in Finance from Bradley University in 1997 and his
M.B.A. from the University of Chicago Booth School of Business in 2005. He has
over 26 years of financial services industry experience and is a recipient of
the Chartered Financial Analyst designation.
●
Mr. Russo is a Senior
Vice President of First Trust. He is responsible for implementing the investment
strategies of each portfolio of exchange-traded funds advised by First Trust in
his role as a Portfolio Manager. Mr. Russo joined First Trust in January of
2010.
For
additional information concerning First Trust, including a description of the
services provided to the Fund, see the Fund's SAI. Additional information about
the compensation of Investment Committee members, other accounts managed by
members of the Investment Committee and ownership by members of the Investment
Committee of shares of the Fund is provided in the
SAI.
Management
Fee
Pursuant
to an investment management agreement between First Trust and the Trust, on
behalf of the Fund (the “Investment
Management
Agreement”), First Trust
manages the investment of the Fund's assets. 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 Fund's expenses, including the cost of transfer agency, custody, fund
administration, legal, audit and other services, but excluding fee payments
under the Investment Management Agreement, interest, taxes, acquired fund fees
and expenses, 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.
As
approved by the Trust’s Board of Trustees, the management fee paid to First
Trust will be reduced at certain levels of Fund net assets
(“breakpoints”). See the Fund's
Statement of Additional Information for more information on the
breakpoints.
A discussion
regarding the Board’s approval of the continuation of the Investment Management
Agreement is available in the Fund's Form N-CSR for the fiscal year
ended September 30, 2025.
How
to Buy and Sell Shares
Most
investors buy and sell shares of the Fund in secondary market transactions
through brokers. Shares of the Fund are listed for trading on the secondary
market on one or more national securities exchanges. Shares can be bought and
sold throughout the trading day like other publicly traded shares. There is no
minimum investment when buying shares on the Exchange. Although shares are
generally purchased and sold in “round lots” of 100 shares, brokerage firms
typically permit investors to purchase or sell shares in smaller “odd lots,” at
no per-share price differential. When buying or selling shares through a broker,
investors should expect to pay brokerage commissions, investors may receive less
than the net asset value of the shares because shares are bought and sold at
market prices rather than at net asset value, and investors may pay some or all
of the bid-ask spread for each
transaction (purchase or sale) of Fund shares. Share prices are reported in
dollars and cents per share.
Under
normal circumstances, the Fund will pay out redemption proceeds to a redeeming
authorized participant within one day after the authorized participant’s
redemption request is received, in accordance with the process set forth in the
Fund’s SAI and in the agreement between the authorized participant and the
Fund’s distributor. However, the Fund reserves the right,
25
including
under stressed market conditions, to take up to seven days after the receipt of
a redemption request to pay an authorized participant, all as permitted by the
1940 Act. If the Fund has foreign investments in a country where a local market
holiday, or series of consecutive holidays, or the extended delivery cycles for
transferring foreign investments to redeeming authorized participants prevents
the Fund from delivering such foreign investments to an authorized participant
in response to a redemption request, the Fund may take up to 15 days after the
receipt of the redemption request to deliver such investments to the
authorized participant.
For
purposes of the 1940 Act, the Fund is treated as a registered investment
company, and the acquisition of shares by other registered investment companies
and companies relying on Sections 3(c)(1) or 3(c)(7) of the 1940 Act is subject
to the restrictions of
Section 12(d)(1) of the 1940 Act and the related rules and
interpretations.
Book
Entry
Shares
are held in book-entry form, which means that no share certificates are issued.
The Depository Trust Company (“DTC”) or
its nominee is the record owner of all outstanding shares of the Fund and is
recognized as the owner of all shares for all purposes.
Investors
owning shares are beneficial owners as shown on the records of DTC or its
participants. DTC serves as the securities depository for all shares.
Participants in DTC include securities brokers and dealers, banks, trust
companies, clearing corporations and other institutions that directly or
indirectly maintain a custodial relationship with DTC. As a beneficial owner of
shares, you are not entitled to receive physical delivery of share certificates
or to have shares registered in your name, and you are not considered a
registered owner of shares. Therefore, to exercise any right as an owner of
shares, you must rely upon the procedures of DTC and its participants. These
procedures are the same as those that apply to any other stocks that
you hold
in book-entry or “street name” form.
Share
Trading Prices
The
trading price of shares of the Fund on the secondary market is based on market
price and may differ from the Fund’s daily net asset value and
can be affected by market forces of supply and demand, economic conditions and
other factors.
Frequent
Purchases and Redemptions of the Fund's Shares
The
Fund imposes no restrictions on the frequency of purchases and redemptions
(“market
timing”). In determining not
to approve
a written, established policy, the Board evaluated the risks of market timing
activities by the Fund's shareholders. The Board considered that the Fund's
shares can only be purchased and redeemed directly from the Fund in Creation
Units by broker-dealers and large institutional investors that have entered into
participation agreements (i.e., authorized
participants (“APs”)) and that the vast
majority of trading in the Fund's shares occurs on the secondary market. Because
the secondary market
trades do not involve the Fund directly, it is unlikely those trades would cause
many of the harmful effects of market timing, including dilution, disruption of
portfolio management, increases in the Fund's trading costs and the realization
of capital gains. With respect to trades directly with the Fund, to the extent
effected in-kind (i.e., for securities),
those trades do
not cause any of the harmful effects that may result from frequent cash trades.
To the extent that the Fund may effect the purchase or redemption of Creation
Units in exchange wholly or partially for cash, the Board noted that such trades
could result in dilution to the Fund and increased transaction costs, which
could negatively impact the Fund’s ability to achieve its investment objective.
However, the Board noted that direct trading by APs is critical to ensuring that
the shares trade at or close to net asset value. In addition, the Fund imposes
fixed and variable transaction fees on purchases and redemptions of Creation
Units to cover the custodial and other costs incurred by the Fund in effecting
trades. Finally, the Advisor monitors purchase and redemption orders from APs
for patterns of abusive trading and the Fund reserves the right to not accept
orders from APs that the
Advisor has determined may be disruptive to the management of the
Fund.
Dividends,
Distributions and Taxes
Dividends
from net investment income, if any, are declared and paid quarterly by the Fund.
The Fund distributes its net realized capital gains, if
any, to shareholders at least annually.
Distributions
in cash may be reinvested automatically in additional whole shares only if the
broker through whom you purchased shares makes such option available. Such
shares will generally be reinvested by the broker based upon the market price of
those
shares and investors may be subject to customary brokerage commissions charged
by the broker.
26
Federal
Tax Matters
This
section summarizes some of the main U.S. federal income tax consequences of
owning shares of the Fund. This section is current as of the date of this
prospectus. Tax laws and interpretations change frequently, and these summaries
do not describe all of the tax consequences to all taxpayers. For example, these
summaries generally do not describe your situation if you are a corporation, a
non-U.S. person, a broker-dealer, or other investor with special circumstances.
In addition, this section does not describe your
state, local or non-U.S. tax consequences.
This federal income
tax summary is based in part on the advice of counsel to the Fund. The Internal
Revenue Service (“IRS”) could disagree with
any conclusions set forth in this section. The following disclosure may not be
sufficient for you to use for the purpose of avoiding penalties
under federal tax law.
As with any
investment, you should seek advice based on your individual circumstances from
your own tax advisor.
Fund
Status
The
Fund intends to continue to qualify as a “regulated investment company” (a
“RIC”) under the federal
tax laws. If the Fund qualifies as a RIC and distributes its income as required
by the tax law, the Fund generally will not pay federal income
taxes.
Distributions
The
Fund’s distributions are generally taxable. After the end of each year, you will
receive a tax statement that separates the distributions of the Fund into two
categories, ordinary income distributions and capital gain dividends. Ordinary
income distributions are generally taxed at your ordinary tax rate, however, as
further discussed below, certain ordinary income distributions received from the
Fund may be taxed at the capital gains tax rates. Some portion of the ordinary
income distributions that are attributable to dividends received by the Fund
from shares in certain real estate investment trusts may be designated by the
Fund as eligible for a deduction for qualified business income, provided certain
holding period requirements are satisfied. Generally, you will treat all capital
gain dividends as long-term capital gains regardless of how long you have owned your
shares.
To
determine your actual tax liability for your capital gain dividends, you must
calculate your total net capital gain or loss for the tax year after considering
all of your other taxable transactions, as described below. In addition, the
Fund may make distributions that represent a return of capital for tax purposes
and thus will generally not be taxable to you; however, such distributions may
reduce your tax basis in your shares, which could result in you having to pay
higher taxes in the future when shares are sold, even if you sell the shares at
a loss from your original investment. A "return of capital" is a return, in
whole or in part, of the funds that you previously invested in the Fund. A
return of capital distribution should not be considered part of a Fund’s
dividend yield or total return of an investment in Fund shares. The tax status
of your distributions from the Fund is not affected by whether you reinvest your
distributions in additional shares or receive them in cash. The tax laws may
require you to treat
distributions made to you in January as if you had received them on December 31
of the previous year.
Income
from the Fund may also be subject to a 3.8% “Medicare tax.” This tax generally
applies to your net investment income if your adjusted gross income exceeds
certain threshold amounts, which are $250,000 in the case of married couples
filing joint returns and
$200,000 in the case of single individuals.
Dividends
Received Deduction
A
corporation that owns shares generally will not be entitled to the dividends
received deduction with respect to many dividends received from the Fund because
the dividends received deduction is generally not available for distributions
from RICs. However, certain ordinary income dividends on shares that are
attributable to qualifying dividends received by the Fund from certain
corporations may be
reported by the Fund as being eligible for the dividends received
deduction.
Capital
Gains and Losses and Certain Ordinary Income Dividends
If
you are an individual, the maximum marginal stated federal tax rate for net
capital gain is generally 20% (15% or 0% for taxpayers with taxable incomes
below certain thresholds). Some capital gains, including some portion of your
capital gain dividends may be taxed at a higher maximum stated tax rate. Capital
gain received from assets held for more than one year that is considered
“unrecaptured section 1250 gain” (which may be the case, for example, with some
capital gains attributable to equity interests in real estate investment trusts
that constitute interests in entities treated as real estate investment trusts
for federal income tax purposes) is taxed at a maximum marginal stated federal
tax rate of 25%. In the case of capital gain dividends, the determination of
which portion of the capital gain dividend, if any, is subject to the 25% tax
rate, will be made based on rules prescribed by the United States Treasury.
Capital gains may also be subject to the Medicare tax described above.
27
Net
capital gain equals net long-term capital gain minus net short-term capital loss
for the taxable year. Capital gain or loss is long-term if the holding period
for the asset is more than one year and is short-term if the holding period for
the asset is one year or less. You must exclude the date you purchase your
shares to determine your holding period. However, if you receive a capital gain
dividend from the Fund and sell your share at a loss after holding it for six
months or less, the loss will be recharacterized as long-term capital loss to
the extent of the capital gain dividend received. The tax rates for capital
gains realized from assets held for one year or less are generally the same as
for ordinary income. The Internal Revenue Code of 1986, as amended,
treats certain capital gains as ordinary income in special
situations.
An
election may be available to you to defer recognition of the gain attributable
to a capital gain dividend if you make certain qualifying investments within a
limited time. You should talk to your tax advisor about the availability of this
deferral election and its
requirements.
Ordinary
income dividends received by an individual shareholder from a RIC such as the
Fund are generally taxed at the same rates that apply to net capital gain (as
discussed above), provided certain holding period requirements are satisfied and
provided the dividends are attributable to qualifying dividends received by the
Fund itself. Dividends from REITs and foreign corporations are qualifying
dividends only in limited circumstances. The Fund will provide notice to its
shareholders of the amount of any distribution which
may be taken into account as a dividend which is eligible for the capital gains
tax rates.
Sale
of Shares
If
you sell or redeem your shares, you will generally recognize a taxable gain or
loss. To determine the amount of this gain or loss, you must subtract your tax
basis in your shares from the amount you receive in the transaction. Your tax
basis in your shares is generally equal to the cost of your shares, generally
including brokerage fees, if any. In some cases, however, you may have to adjust
your tax basis after you purchase your shares. An election may be available to
you to defer recognition of capital gain if you make certain qualifying
investments within a limited time. You should talk to your tax advisor about the
availability of this
deferral election and its requirements.
Taxes
on Purchase and Redemption of Creation Units
If
you exchange securities for Creation Units, you will generally recognize a gain
or a loss. The gain or loss will be equal to the difference between the market
value of the Creation Units at the time and your aggregate basis in the
securities surrendered and the cash component paid. If you exchange Creation
Units for securities, you will generally recognize a gain or loss equal to the
difference between your basis in the Creation Units and the aggregate market
value of the securities received and the cash redemption amount. The IRS,
however, may assert that a loss realized upon an exchange of securities for
Creation Units or Creation Units for securities cannot be deducted currently
under the rules governing “wash sales,” or on the basis that there has been no
significant change in economic position.
Treatment
of Fund Expenses
Expenses incurred and
deducted by the Fund will generally not be treated as income taxable to
you.
Non-U.S.
Tax Credit
If
the Fund invests in non-U.S. securities, the tax statement that you receive may
include an item showing non-U.S. taxes the Fund paid to other countries. In this
case, dividends taxed to you will include your share of the taxes the Fund paid
to other countries. You may be
able to deduct or receive a tax credit for your share of these
taxes.
Non-U.S.
Investors
If
you are a non-U.S. investor (i.e., an investor other
than a U.S. citizen or resident or a U.S. corporation, partnership, estate
or
trust), you should be aware that, generally, subject to applicable tax treaties,
distributions from the Fund will be characterized as dividends for federal
income tax purposes (other than dividends which the Fund properly reports as
capital gain dividends) and will be subject to U.S. federal income taxes,
including withholding taxes, subject to certain exceptions described below.
However, distributions received by a non-U.S. investor from the Fund that are
properly reported by the Fund as capital gain dividends may not be subject to
U.S. federal income taxes, including withholding taxes, provided that the Fund
makes certain elections and certain other conditions are met. Distributions from
the Fund that are properly reported by the Fund as an interest-related dividend
attributable to certain interest income received by the Fund or as a short-term
capital gain dividend attributable to certain net short-term capital gain income
received by the Fund may not be subject to U.S. federal income taxes, including
withholding taxes when received by certain non-U.S. investors, provided that the
Fund makes certain elections and certain other conditions are met. For tax years
after December 31, 2022, amounts paid to or recognized by a non-U.S.
28
affiliate
that are excluded from tax under the portfolio interest, capital gain dividends,
short-term capital gains or tax-exempt interest dividend exceptions or
applicable treaties, may be taken into consideration in determining whether a
corporation is an “applicable
corporation” subject to a 15% minimum tax on adjusted financial statement
income.
Distributions
may be subject to a U.S. withholding tax of 30% in the case of distributions to
(i) certain non-U.S. financial institutions that have not entered into an
agreement with the U.S. Treasury to collect and disclose certain information and
are not resident in a jurisdiction that has entered into such an agreement with
the U.S. Treasury and (ii) certain other non-U.S. entities that do not provide
certain certifications and information about the entity’s U.S. owners. This
withholding tax is also currently scheduled to apply to the gross proceeds from
the disposition of securities that produce U.S. source interest or
dividends.
However, proposed regulations may eliminate the requirement to withhold on
payments of gross proceeds from dispositions.
It is the
responsibility of the entity through which you hold your shares to determine the
applicable withholding.
Investments
in Certain Non-U.S. Corporations
If
the Fund holds an equity interest in any “passive foreign investment companies”
(“PFICs”), which are
generally certain non-U.S. corporations
that receive at least 75% of their annual gross income from passive sources
(such as interest, dividends, certain rents and royalties or capital gains) or
that hold at least 50% of their assets in investments producing such passive
income, the Fund could be subject to U.S. federal income tax and additional
interest charges on gains and certain distributions with respect to those equity
interests, even if all the income or gain is timely distributed to its
shareholders. The Fund will not be able to pass through to its shareholders any
credit or deduction for such taxes. The Fund may be able to make an election
that could ameliorate these adverse tax consequences. In this case, the Fund
would recognize as ordinary income any increase in the value of such PFIC
shares, and as ordinary loss any decrease in such value to the extent it did not
exceed prior increases included in income. Under this election, the Fund might
be required to recognize in a year income in excess of its distributions from
PFICs and its proceeds from dispositions of PFIC stock during that year, and
such income would nevertheless be subject to the distribution requirement and
would be taken into account for purposes of the 4% excise tax. Dividends paid by
PFICs are not treated as
qualified dividend income.
Distribution
Plan
FTP
serves as the distributor of Creation Units for the Fund on an agency basis. FTP
does not maintain a secondary market in shares.
The
Board has 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
FTP 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 APs
for providing distribution
assistance, including broker-dealer and shareholder support and educational and
promotional services.
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 January 31, 2027. However, in the event 12b-1
fees are charged in the future, because these fees are paid out of the Fund's
assets, over time these fees will increase the cost of your investment and may
cost you more than certain other types of sales
charges.
Net
Asset Value
The
Fund’s net asset value (“NAV”) is determined as of
the close of regular trading (normally 4:00 p.m., Eastern Time) on each
day
the New York Stock Exchange (“NYSE”) is open for
trading. If the NYSE closes early on a valuation day, the Fund’s NAV
will
be determined as of that time. The Fund’s NAV is calculated by dividing the
value of the net assets of the Fund (i.e., the value
of its total assets less total liabilities) by the total number of outstanding
shares of the Fund, generally rounded to the nearest
cent.
Section
2(a)(41) of the 1940 Act provides that when a market quotation is readily
available for a fund’s portfolio investment, it must be valued at the market
value. Rule 2a-5 under the 1940 Act (“Rule
2a-5”)
defines a readily available market quotation as
“a quoted price (unadjusted) in active markets for identical investments that
the fund can access at the measurement date, provided that a quotation will not
be readily available if it is not reliable.” If a market quotation is not
“readily available,” then the portfolio
investment must be fair valued as determined in good faith by a fund’s board of
trustees.
29
Rule
2a-5 permits a fund’s board of trustees to designate the fund’s investment
adviser as its “valuation designee” to perform fair value determinations,
subject to certain conditions. Accordingly, the Fund’s Board has designated
First Trust as its valuation designee (the “Valuation
Designee”) pursuant to Rule
2a-5 and has directed the Valuation Designee to perform the functions
required
in Rule 2a-5(a) subject to the requirements of Rule 2a-5(b) on behalf of all
portfolio investments of the Fund, subject to the Board’s oversight. First Trust
has established a pricing committee (the “Pricing
Committee”) to assist in the
administration of
the duties of the Valuation Designee. The Valuation Designee has adopted
valuation procedures for the First Trust Funds (the “Valuation
Procedures”), a brief summary of
which is set forth below.
The
Pricing Committee has identified certain portfolio investments that are
routinely categorized as having a readily available market quotation. The market
value of an investment with a readily available market quotation is typically
determined on the basis of official closing prices or last reported sale prices
or equivalent price, although this can vary based on investment type
and/or
the availability of such prices.
The
Pricing Committee has also identified certain portfolio investments that are
routinely categorized as fair valued investments. In general, for such
investments, the Fund’s accounting agent will obtain all pricing data for use in
valuing such investments from a pricing service provider approved by the Pricing
Committee (each, a “Pricing
Service Provider”), subject to the
oversight of
the Pricing Committee. Pricing Service Providers typically value
non-exchange-traded instruments utilizing a range of market-based inputs and
assumptions. For example, when available, Pricing Service Providers may utilize
inputs such as benchmark yields, reported trades, broker-dealer quotes, spreads,
and transactions for comparable instruments. In pricing certain instruments, a
Pricing Service Provider may consider information about an instrument’s issuer
or market activity. Pricing Service Provider valuations of non-exchange-traded
instruments generally represent the service’s good faith opinion as to what the
holder of an instrument would receive in an orderly transaction for an
institutional round lot position under current market conditions. Certain
exchange-traded options, such as FLEX Options, are typically valued using a
model-based price provided by a Pricing
Service Provider.
Portfolio
investments trading on foreign exchanges or over-the-counter markets that close
prior to the close of the NYSE may be fair valued using a systematic fair
valuation model provided by a Pricing Service Provider. If these foreign
securities meet certain criteria in relation to the valuation model, their
valuation is systematically adjusted to reflect the impact of movement
in the
U.S. market after the close of certain foreign markets.
If
no price is available from a Pricing Service Provider or if the Pricing
Committee has reason to question the accuracy or the reliability of a price
supplied for a portfolio investment or the use of amortized cost, the Pricing
Committee will determine the fair value of such portfolio investment in a manner
that it believes most appropriately reflects the fair value of the portfolio
investment on the valuation date (a “Special
Fair Value Pricing Situation”). In a Special Fair
Value Pricing Situation, the Pricing Committee
will determine a fair value price subject to the process outlined in the
Valuation Procedures and based on a consideration of all
available information to the Pricing Committee at the time of the
determination.
Additionally,
for foreign securities, if an extraordinary market event occurs between the time
the last “current” market quotation is available for a security in the Fund’s
portfolio and the time the Fund’s NAV is determined that calls into doubt
whether that earlier market quotation represents fair value at the time the
Fund’s NAV is determined, the Pricing Committee will determine the fair valuation as
set forth in the Valuation Procedures.
Fair
value represents a good faith approximation of the value of a portfolio
investment and is the amount the Fund might reasonably expect to receive from
the current sale of that investment in an arm’s-length transaction. Valuing the
Fund’s investments using fair value pricing will result in prices that may
differ from current market valuations, if any, and that may not be the prices at
which those investments could have been sold during the period in which the
particular fair values were used. While the Valuation Procedures and Valuation
Designee’s processes are intended to result in the Fund’s NAV calculation that
fairly reflects the values as of the time of pricing, the fair value determined
for a portfolio instrument may be materially different from the
value that could be realized upon the sale of that instrument.
Foreign
currencies are translated into U.S. dollars at the exchange rate of such
currencies against the U.S. dollar as provided by a Pricing Service Provider.
All assets denominated in foreign currencies will be converted into U.S. dollars
at the exchange rates in effect at
the time of valuation.
30
Fund
Service Providers
The Bank of New York
Mellon, 240 Greenwich Street, New York, New York 10286, acts as the
administrator, custodian and fund accounting and transfer agent for the Fund.
Chapman and Cutler LLP, 320 South Canal Street, Chicago, Illinois 60606,
serves as legal counsel to the Fund. First Trust serves as the fund reporting
agent for the Fund.
Index
Provider
The
Index is compiled by the Index Provider. The Index Provider is not affiliated
with the Fund, FTP or First Trust. The Fund is entitled to use the Index
pursuant to a sublicensing arrangement by and among the Fund, Index Provider,
First Trust and FTP, which in turn has a license agreement with the Index
Provider. The Index Provider, or its agent, also serves as the index calculation
agent for the Index. The index calculation agent intends to calculate and
disseminate the values of the Index at least once every 15
seconds.
Disclaimers
First
Trust does not guarantee the accuracy and/or the completeness of the Index or
any data included therein, and First Trust shall have no liability for any
errors, omissions or interruptions therein. First Trust makes no warranty,
express or implied, as to results to be obtained by the Fund, owners of the
shares of the Fund or any other person or entity from the use of the Index or
any data included therein. First Trust makes no express or implied warranties,
and expressly disclaims all warranties of merchantability or fitness for a
particular purpose or use with respect to the Index or any data included
therein. Without limiting any of the foregoing, in no event shall First Trust
have any liability for any special, punitive, direct, indirect or consequential
damages (including lost profits) arising out of matters relating to the use of
the Index, even if notified of the possibility of such
damages.
The First Trust
Indxx NextG ETF is not sponsored, endorsed, sold or promoted by Indxx, Inc.
Indxx, Inc. makes no representation or warranty, express or implied, to the
owners of the Fund or any member of the public regarding the advisability of
trading in the Fund. Indxx, Inc.’s only relationship to First Trust is the
licensing of certain trademarks and trade names of Indxx, Inc. and of the Indxx
5G & NextG Thematic IndexSM, which is determined, composed and
calculated by Indxx, Inc. without regard to First Trust or
the Fund. Indxx, Inc.
has no obligation to take the needs of First Trust or the owners of the Fund
into consideration in determining,
composing or calculating the Indxx 5G & NextG Thematic IndexSM. Indxx, Inc. is not responsible for
and has not participated in
the determination of the timing of, prices at, or quantities of the Fund to be
listed or in the determination or calculation of the equation by which the Fund
is to be converted into cash. Indxx, Inc. has no obligation or liability in
connection with the
administration, marketing or trading of the Fund.
INDXX, INC. DOES NOT
GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE INDXX 5G & NEXTG
THEMATIC INDEXSM OR ANY DATA INCLUDED THEREIN AND
INDXX, INC. SHALL HAVE NO LIABILITY FOR ANY ERRORS, OMISSIONS, OR INTERRUPTIONS
THEREIN. INDXX, INC. MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE
OBTAINED BY FIRST TRUST, OWNERS OF THE FIRST TRUST INDXX NEXTG ETF, OR ANY OTHER
PERSON OR ENTITY FROM THE USE OF THE INDXX 5G & NEXTG THEMATIC
INDEXSM OR ANY DATA INCLUDED THEREIN. INDXX,
INC. MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND
EXPRESSLY DISCLAIMS ALL WARRANTIES, OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE OR USE WITH RESPECT TO THE INDXX 5G & NEXTG THEMATIC
INDEXSM OR ANY DATA INCLUDED THEREIN.
WITHOUT
LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL INDXX, INC. HAVE ANY LIABILITY
FOR ANY LOST PROFITS OR INDIRECT, PUNITIVE, SPECIAL OR CONSEQUENTIAL DAMAGES
(INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
THERE ARE NO THIRD PARTY BENEFICIARIES OF ANY AGREEMENTS OR ARRANGEMENTS
BETWEEN INDXX, INC. AND
FIRST TRUST.
Premium/Discount
Information
Information
showing the number of days the market price of the Fund's shares was greater (at
a premium) and less (at a discount) than the Fund's net asset value for the most
recently completed year, and the most recently completed calendar quarters
since
that year (or life of the Fund, if
shorter), is available at
http://www.ftportfolios.com/Retail/etf/home.aspx.
31
Financial
Highlights
The financial
highlights table is intended to help you understand the Fund's financial
performance for the periods shown. Certain information reflects financial
results for a single share of the Fund. The total returns represent the rate
that an investor would have earned (or lost) on an investment in the Fund
(assuming reinvestment of all dividends and distributions). The information for
the periods indicated has been derived from financial statements audited by
Deloitte & Touche LLP, whose report, along with the Fund's financial
statements, is included in the Fund's Form N-CSR dated September 30, 2025 and is
incorporated by reference in the Fund's SAI, which is available upon
request.
First
Trust Exchange-Traded Fund II
Financial
Highlights
For a share outstanding throughout each period
For a share outstanding throughout each period
First
Trust Indxx NextG ETF (NXTG)
|
|
Year
Ended September 30, | ||||
|
|
2025 |
2024 |
2023 |
2022 |
2021 |
|
Net
asset value, beginning of period |
$87.65 |
$68.02 |
$55.75 |
$76.44 |
$59.05 |
|
Income
from investment operations: |
|
|
|
|
|
|
Net
investment income (loss) |
1.65
(a) |
1.59
(a) |
1.23
(a) |
1.72 |
0.95 |
|
Net
realized and unrealized gain (loss) |
16.04 |
19.65 |
12.14 |
(20.13
) |
17.10 |
|
Total
from investment operations |
17.69 |
21.24 |
13.37 |
(18.41
) |
18.05 |
|
Distributions
paid to shareholders from: |
|
|
|
|
|
|
Net
investment income |
(1.58
) |
(1.61
) |
(1.10
) |
(1.88
) |
(0.62
) |
|
Net
realized gain |
— |
— |
— |
(0.40
) |
(0.04
) |
|
Total
distributions |
(1.58
) |
(1.61
) |
(1.10
) |
(2.28
) |
(0.66
) |
|
Net
asset value, end of period |
$103.76 |
$87.65 |
$68.02 |
$55.75 |
$76.44 |
|
Total
Return(b) |
20.36
% |
31.44
% |
24.01
% |
(24.71
)% |
30.62
% |
|
Ratios
to average net assets/supplemental data: |
|
|
|
|
|
|
Net
assets, end of period (in 000’s) |
$409,844 |
$385,646 |
$380,930 |
$471,056 |
$1,081,610 |
|
Ratio of
total expenses to average net assets |
0.71
%(c) |
0.70
% |
0.70
% |
0.70
% |
0.70
% |
|
Ratio of
net investment income (loss) to average net assets |
1.82
% |
2.05
% |
1.86
% |
2.12
% |
1.42
% |
|
Portfolio
turnover rate(d) |
18
% |
17
% |
14
% |
21
% |
27
% |
(a)
Based
on average shares outstanding.
(b)
Total
return is calculated assuming an initial investment made at the net asset value
at the beginning of the period, reinvestment of all distributions at net asset
value during the period, and redemption at net asset value on the last day of
the period. The returns presented do not reflect the deduction of taxes that a
shareholder would pay on Fund distributions or the redemption or sale of Fund
shares. Total return is calculated for the time period presented and is not
annualized for periods of less than a year.
(c)
Includes
extraordinary expenses. If these extraordinary expenses were not included, the
expense ratio would have been 0.70%.
(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.
32
Other
Information
Continuous
Offering
The
Fund issues, on a continuous offering basis, its shares in one or more groups of
a fixed number of Fund shares (each such group of such specified number of
individual Fund shares, a “Creation
Unit Aggregation”). The method by
which Creation Unit Aggregations
of Fund shares are created and traded may raise certain issues under applicable
securities laws. Because new Creation Unit Aggregations of shares are issued and
sold by the Fund on an ongoing basis, a “distribution,” as such term is used in
the Securities Act, may occur at any point. Broker-dealers and other persons are
cautioned that some activities on their part may, depending on the
circumstances, result in their being deemed participants in a distribution in a
manner which could render them statutory underwriters and subject them to the
prospectus delivery requirement and liability provisions of the Securities
Act.
For
example, a broker-dealer firm or its client may be deemed a statutory
underwriter if it takes Creation Unit Aggregations after placing an order with
FTP, breaks them down into constituent shares and sells such shares directly to
customers, or if it chooses to couple the creation of a supply of new shares
with an active selling effort involving solicitation of secondary market demand
for shares. A determination of whether one is an underwriter for purposes of the
Securities Act must take into account all the facts and circumstances pertaining
to the activities of the broker-dealer or its client in the particular case, and
the examples mentioned above should not be considered a complete description of
all the activities that could lead to a characterization as
an underwriter.
Broker-dealer
firms should also note that dealers who are not “underwriters” but are effecting
transactions in shares, whether or not participating in the distribution of
shares, are generally required to deliver a prospectus. This is because the
prospectus delivery exemption in Section 4(a)(3) of the Securities Act is not
available in respect of such transactions as a result of Section
24(d) of
the 1940 Act. As a result, broker-dealer firms should note that dealers who are
not underwriters but are participating
in a distribution (as contrasted with ordinary secondary market transactions)
and thus dealing with the shares that are part of an overallotment within the
meaning of Section 4(a)(3)(C) of
the Securities Act would be unable to take advantage
of the prospectus delivery exemption provided by Section 4(a)(3) of
the Securities Act. Firms that incur a prospectus delivery
obligation with respect to shares are reminded that, under the Securities Act
Rule 153, a prospectus delivery obligation under Section 5(b)(2) of
the Securities Act owed to a broker-dealer in connection with a sale on the
Exchange is satisfied by the
fact that the prospectus is available from the Exchange upon request. The
prospectus delivery mechanism provided in Rule 153 is available with respect to
transactions on a national securities exchange, a trading facility or an
alternative trading system.
FTP,
or its affiliates, or a fund or unit investment trust for which FTP or an
affiliate serves as sponsor or investment advisor, may purchase shares of the
Fund through a broker-dealer or other investors, including in secondary market
transactions, and because FTP or its affiliates may be deemed affiliates of the
Fund, the shares are being registered to permit the resale of these shares from
time to time after any such purchase. The Fund will not receive any of the
proceeds from the resale of such shares.
33
|
First
Trust
Exchange-Traded
Fund II |
First Trust Indxx
NextG ETF
For
More Information
For
more detailed information on the Fund, several additional sources of information
are available to you. The SAI, incorporated by reference into this prospectus,
contains detailed information on the Fund's policies and operation. Additional
information about the Fund's investments is available in the annual and
semi-annual reports to shareholders and in Form N-CSR. In the Fund’s annual
reports, you will find a discussion of the market conditions and investment
strategies that significantly impacted the Fund's performance during the last
fiscal year. In Form N-CSR, you will find the Fund’s annual and semi-annual
financial statements. The Fund's most recent SAI, annual and semi-annual reports
and certain other information such as Fund financial statements are available
free of charge by calling the Fund at (800) 621-1675, on the Fund's website at
http://www.ftportfolios.com or through your
financial advisor. Shareholders may call the toll-free number above with any
inquiries.
You may obtain
this and other information regarding the Fund, including the SAI and the Codes
of Ethics adopted by First Trust, FTP and the Trust, directly from the
Securities and Exchange Commission (the “SEC”). Information on the SEC’s website
is free of charge. Visit the SEC’s online EDGAR database at http://www.sec.gov. You may also request information
regarding the Fund by sending a request (along with a duplication fee) to the
SEC by sending an electronic request to
[email protected].
First Trust
Advisors L.P.
120 East Liberty Drive, Suite 400
Wheaton, Illinois 60187
(800) 621-1675
120 East Liberty Drive, Suite 400
Wheaton, Illinois 60187
(800) 621-1675
http://www.ftportfolios.com
SEC
File #: 333-143964
811-21944