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First
Trust
Exchange-Traded
Fund VI |
Prospectus
Emerging Markets Equity Select
ETF
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Ticker
Symbol: |
RNEM |
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Exchange: |
Nasdaq |
Emerging Markets Equity Select 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 VI (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.
August 1,
2025
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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$ |
$ |
$ |
$ |
3
Principal
Risks
4
5
6
7
8
9
10
Calendar Year Total Returns as of 12/31 (1)
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1
Year |
5
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 Fund Shares |
- |
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Nasdaq
Riskalyze Emerging MarketsTM Index
(reflects no
deduction
for fees, expenses or taxes) |
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MSCI Emerging
Markets Index (reflects no deduction for fees,
expenses or
taxes) |
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Nasdaq
Emerging Large Mid CapTM Index
(reflects no deduction
for fees,
expenses or taxes) |
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Management
Investment
Advisor
First Trust Advisors
L.P. (“First
Trust”
or the “Advisor”)
11
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 2017, except for Erik
Russo, who has served as a part of the portfolio management team 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 VI 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 its Index. In seeking to achieve this objective,
the Fund will normally
invest at least 90% of its net
assets (plus any borrowings for investment purposes) in the securities that
comprise its Index. Nitrogen Wealth, Inc. serves as the index provider for the
index tracked by the
Fund. Nitrogen Wealth, Inc. may be referred to throughout this prospectus as the
“Index
Provider.”
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.”
Nasdaq
Riskalyze Emerging MarketsTM
Index
According to the
Index Provider, Nasdaq Riskalyze Emerging MarketsTM Index seeks to create a diversified
portfolio of low volatility and liquid securities. The Index is rebalanced and
reconstituted semi-annually in April and October.
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, depositary receipts and preferred securities. 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. Preferred securities, which generally pay fixed or adjustable-rate
dividends or interest to investors, have preference over common stock in the
payment of dividends or interest and the liquidation of a company’s assets,
which means that a company typically must pay dividends or interest on its
preferred securities before paying any dividends on its common stock. Preferred
securities are generally
junior to all forms of the company’s debt, including both senior and
subordinated debt.
Real
Estate Investment Trusts
The Fund may invest in real estate
investment trusts ("REITs"). 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 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.
13
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 portfolio managers believe 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.
Investment
Companies
The Fund may invest in the securities
of other investment companies, including exchange-traded funds ("ETFs"). ETFs are managed registered
investment companies which invest in various types of securities. ETFs issue
shares of common stock that are traded on a securities exchange. ETFs trade on a
securities exchange and their shares may, at times, trade at a premium or
discount to their net asset value. The Fund's ability to invest in other
investment companies is limited by the 1940 Act and the related rules and
interpretations.
As a shareholder in
a pooled investment vehicle, the Fund will bear its ratable share
of that vehicle’s expenses, and would remain subject to
payment of the fund’s advisory and administrative fees with respect to assets so
invested. Shareholders would therefore be subject to duplicative expenses to the
extent the Fund invests
in other pooled investment vehicles. In addition,
the Fund will incur
brokerage costs when purchasing and selling shares of money market funds and
ETFs. Securities of other pooled
investment vehicles may be leveraged, in which case the value and/or yield of
such securities will tend to be more volatile than securities of
unleveraged vehicles.
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., securities that
cannot be disposed of by the Fund within seven days in the
ordinary course of business at approximately the amount at which the Fund has
valued the securities).
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
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
14
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 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.
Although 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.
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, which remains at elevated levels, the Federal Reserve and certain
foreign central banks have raised interest rates; however, the Federal Reserve has
recently lowered 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. Recent and 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 rising
interest rates, declining valuations and increasing 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
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,
15
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 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 typically are not 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 data or causing
operational disruption. 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). 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, 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. Substantial costs may be
incurred by the Fund in
order to resolve or prevent cyber incidents in the future. While the
Fund has established
business continuity plans in the event of, and risk management systems to
prevent, such cyber attacks, there are
inherent limitations in such plans and systems, including the possibility that
certain risks have not been identified 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.
16
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. The Fund invests in securities issued
by companies operating in emerging market countries. 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 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.
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
17
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.
FINANCIAL
COMPANIES RISK. The Fund invests significantly in
financial companies. Financial companies are subject to extensive
governmental regulation and intervention, which may adversely affect the scope
of their activities, the prices they can charge, the amount and types of capital
they must maintain and, potentially, their size. Governmental regulation may
change frequently and may have significant adverse consequences for financial
companies, including effects not intended by such regulation. The impact of more
stringent capital requirements, or recent or future regulation in various
countries, on any individual financial company or on financial companies as a
whole cannot be predicted. Certain risks may impact the value of investments in
financial companies more severely than those of investments in other issuers,
including the risks associated with companies that operate with substantial
financial leverage. Financial companies may also be adversely affected by
volatility in interest rates, loan losses and other customer defaults, decreases
in the availability of money or asset valuations, credit rating downgrades and
adverse conditions in other related markets. Insurance companies in particular
may be subject to severe price competition and/or rate regulation, which may
have an adverse impact on their profitability. Financial companies are
also a target for cyber
attacks and may experience technology malfunctions and disruptions as a
result.
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 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 in the Index or
undertake other measures which could cause the Index
18
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.
INDIA
RISK. The Fund invests significantly in the
securities of Indian issuers. Investment in Indian securities involves risks in
addition to those
associated with investments in securities of issuers in more developed
countries, which may adversely affect the value of the Fund’s assets. Such heightened
risks include, among others, political and legal uncertainty, greater government
control
over the economy, currency fluctuations or blockage and the risk of
nationalization or expropriation of assets. In addition, religious and border
disputes persist in India. Moreover, India has experienced civil unrest and
hostilities with neighboring countries, including Pakistan, and the Indian
government has confronted separatist movements in several Indian states. In
addition, inflation in India remains at very high levels. High inflation may
lead to the adoption of corrective measures designed to moderate growth,
regulate prices of staples and other commodities and otherwise contain
inflation. Such measures could inhibit economic activity in India. The
securities market of India is characterized by a large number of listed companies that
have
significantly smaller market capitalizations, greater price volatility, greater
delays and possibility of disruptions in settlement transactions, greater
political uncertainties and greater dependence on international trade or
development assistance and substantially less liquidity than companies in more
developed markets. The securities industry in India is also subject less
governmental regulation than in other countries. Indian issuers are subject to
less regulation and scrutiny with regard to financial reporting, accounting and
auditing than U.S. companies. Therefore, information regarding Indian
corporations may be less reliable and all material information may not be
available. Certain restrictions on foreign investment may decrease the liquidity
of the Fund’s portfolio
or subject the Fund to higher transaction costs. Investments in Indian
securities may also be limited
or prevented, at times, due to the limits on foreign ownership imposed by the
RBI or SEBI. The Indian
government has
exercised, and continues to exercise, significant influence over many aspects of
the Indian economy, and the number of public sector enterprises in India is
substantial. Accordingly, Indian government actions in the future could have a
significant effect on the Indian economy, which could affect the prices and
yields of securities in the Fund’s portfolio. In addition, the
economy of India may differ favorably or unfavorably from the U.S. economy in
such respects as the rate of growth of gross domestic product, the rate of
inflation, capital reinvestment, resource self-sufficiency and balance of
payments position. Agriculture occupies a more prominent position in the Indian
economy than in the U.S. economy, and therefore the Indian economy is more
susceptible to adverse changes in weather. Furthermore, monsoons and other
natural disasters in India and surrounding regions also
can affect the value of the Fund’s investments.
LARGE
CAPITALIZATION COMPANIES RISK. The Fund may invest in the securities
of large capitalization companies. 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 have
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 may be 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 value and 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.
LOW
VOLATILITY RISK. The Fund utilizes a low volatility
style of investing. Although subject to the risks of common stocks, low volatility
stocks are seen as having a lower risk profile than the overall markets.
However, a portfolio comprised of low volatility stocks may not produce
investment exposure that has lower variability to changes in such stocks’ price
levels. Low volatility stocks are likely to underperform the broader market
during periods of rapidly rising stock prices and may reduce the Fund’s participation in market
gains when market volatility is high. Low volatility stocks also may not protect
against market
19
declines. A low
volatility strategy may also increase portfolio transaction costs, which could
result in losses or reduce gains, and may not be
successful.
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 markers. 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. The Fund may invest in securities of
mid capitalization companies. 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. Additionally, in order to comply with its
investment strategies and policies, the Fund portfolio may deviate from
the composition of 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. 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. The Fund relies on third-parties for
a range of services, including custody. 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.
20
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.
PREFERRED
SECURITIES RISK. The Fund may invest in preferred
securities. Preferred securities combine some of the characteristics of
both common stocks and bonds. Preferred securities are typically subordinated to
bonds and other debt securities in a company’s capital structure in terms of
priority to corporate income, subjecting them to greater credit risk than those
debt securities. Preferred securities often include provisions that permit the
issuer, at its discretion, to defer distributions for a stated period without
any adverse consequences to the issuer. If the Fund owns a preferred security
that is deferring its distributions,
the Fund may be required
to report income for federal income tax purposes although it has not yet
received such income in cash.
Generally, holders of preferred securities have no voting rights with respect to
the issuing company unless preferred dividends have been in arrears for a
specified number of periods, at which time the preferred security holders may
elect a number of directors to the issuer’s board of director. Generally, once
the issuer pays all the arrearages, the preferred security holders no longer
have voting rights. In certain circumstances, an issuer of preferred securities
may redeem the securities prior to a specified date. For instance, for certain
types of preferred securities, a redemption may be triggered by a change in
federal income tax or securities laws or a change in regulatory trademark. As
with redemption provisions of debt securities, a special redemption by the
issuer may negatively impact the return of the preferred security held by
the Fund. Preferred
securities may also be substantially less liquid than other securities,
including common stock.
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 may
invest 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 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.
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.
21
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 NYSE 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.
VARIABLE
INTEREST ENTITIES RISK.
In China, direct ownership of companies in certain sectors by foreign
individuals and entities is
prohibited. In order to allow for foreign investment in these businesses, many
Chinese companies have created VIE structures to enable indirect foreign
ownership. In such an arrangement, a Chinese operating company typically
establishes an offshore shell company in another jurisdiction, such as the
Cayman Islands. That shell company enters into service and other contracts with
the Chinese issuer or operating company to obtain economic exposure to the
Chinese company, then issues shares on an exchange outside of mainland China,
and U.S. investors hold stock in the non-Chinese shell company rather than
directly in the Chinese issuer or operating company. This arrangement allows
U.S. investors, such as the Fund, to obtain economic exposure to
the Chinese issuer or operating company through contractual means rather than
through formal equity ownership. Because neither the shell company nor the Fund
owns actual equity interests in the Chinese operating company, they do not have
the voting rights or other types of control that an equity holder would expect
to benefit from. Although VIEs are a longstanding industry practice and well
known to officials and regulators in China, VIEs are not formally recognized
under Chinese law. Intervention by the Chinese government with respect to VIEs
could significantly affect the Chinese company’s performance and the
enforceability of the VIE’s contractual arrangements that establish the links
between the Chinese company and the shell company in which the Fund invests. This could
considerably impact the financial condition of the shell company in
which the Fund invests
by limiting its ability to consolidate the financial results of the Chinese
operating company into its own
financial statements, as well as make the value of the shares held by the Fund
effectively worthless. Further, if Chinese officials prohibit the existence of
VIEs, the market value of the Fund’s associated holdings would
likely suffer significant,
and possibly permanent effects, which could negatively impact the Fund’s net
asset value and could result in substantial losses. Further, it is uncertain
whether any new laws, rules or regulations relating to VIE structures will be
adopted or, if adopted,
what impact they would have on the value of the Fund’s shares.
VIEs are also
subject to the investment risks associated with the underlying Chinese issuer or
operating company. Chinese companies are not subject to the same degree of
regulatory requirements or accounting standards and oversight as companies in
more developed countries. As a result, information about the Chinese securities
and VIEs in which the
Fund invests may be less reliable and
incomplete. There also may be significant obstacles to obtaining information
necessary for investigations into or litigation against Chinese companies and
VIEs, and shareholders may have limited legal remedies, which could negatively
impact the Fund.
Additionally, U.S.-listed VIEs may be delisted if they do not meet U.S.
accounting standards and auditor oversight
requirements. Delisting would significantly decrease the liquidity and value of
the securities, decrease the ability of the Fund to invest in such securities
and may increase the cost of the Fund if required to seek alternative markets in
which to invest in such securities.
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 effect a portion of
creations and redemptions for cash, rather than in-kind securities. As a
result, an investment in the Fund may be less tax-efficient
than an investment in an ETF that effects its creations and 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
22
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 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
in-kind, will be passed on to those purchasing and redeeming
Creation Units in the form of creation and redemption transaction fees. In
addition, 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 days when the net asset
value of the Fund could be significantly affected by events in the relevant
foreign markets.
INVESTMENT
COMPANIES RISK. The Fund may invest in securities of
other investment companies. As a shareholder in another investment company,
the Fund will bear its
ratable share of that investment company’s expenses, and would remain subject
to
payment of the Fund’s
advisory and administrative fees with respect to assets so invested.
Shareholders would therefore be subject to
duplicative expenses to the extent the Fund invests in other investment
companies. In addition, the Fund will incur brokerage costs when purchasing and
selling shares of exchange-traded investment companies.
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. The Fund may enter into repurchase
agreements. 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.
23
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. The Fund may invest in restricted
securities. 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.
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.
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 295 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.
24
●
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 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 Fund's
assets. First Trust is paid an annual unitary management fee by the Fund equal to
0.75% 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, license fees, legal, audit and other services. The
annual unitary management fee does not cover fee payments under the Investment
Management Agreement, interest, taxes, acquired fund fees and expenses,
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
period ended September 30, 2024.
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
25
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, 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 from the Fund, 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.
26
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.
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 the 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
27
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.
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 RICs 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. Distributions with
respect to shares in real estate investment
trusts 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
28
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. 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 July
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.
29
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.
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.
30
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.
Fund
Service Providers
The Bank of New York
Mellon, 240 Greenwich Street, New York, New York 10286, acts as the
administrator, fund accounting agent, transfer agent and custodian for the
Fund. Chapman and Cutler
LLP, 320 South Canal Street, Chicago, Illinois 60606, serves as legal
counsel to the Fund.
Brown Brothers Harriman & Co. located at 50 Post Office Square, Boston,
Massachusetts, 02110 shall remain custodian for certain identified assets of the
Fund that are currently subject to transfer restrictions.
Index
Provider
The Index is compiled by the Index
Provider. The Index Provider is not affiliated with the Fund, First Trust or
FTP. The Fund is entitled to use the
Index pursuant to a
sublicensing arrangement with First Trust, which in turn has a licensing
agreement with the Index Provider.
First Trust also licenses from the Index Provider the Index Provider’s
intellectual property to create ETF-based model portfolios that may be available
on the Index Provider’s platform and to provide risk-based scores to ETFs
advised by First Trust. Nasdaq, Inc. will serve as the calculation agent for the
Index (the “Index
Calculation Agent”). The
Index Calculation Agent is responsible
for the management of the day-to-day operations of the Index, including calculating the
value of the Index every 15
seconds, widely disseminating the Index values every 15 seconds and tracking
corporate actions, some of which result in Index
adjustments.
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 Product is not sponsored, endorsed,
sold or promoted by Nasdaq, Inc., Nitrogen Wealth, Inc. or their affiliates
(Nasdaq, Nitrogen Wealth with
their respective affiliates, are referred to as the “Corporations”). The Corporations have not passed
on the
legality or suitability of, or the accuracy or adequacy of descriptions and
disclosures relating to, the Product. The Corporations make no
representation or warranty, express or implied to the owners of the Product or any member of the
public
regarding the advisability of investing in securities generally or in the
Product particularly, or
the ability of the Nasdaq Riskalyze Emerging
MarketsTM Index to track general stock market
performance. The Corporations' only relationship to Emerging Markets Equity
Select ETF (“Licensee”) is in the licensing of the
Nasdaq®, and certain trade names of the
Corporations and the use of the
Nasdaq Riskalyze Emerging MarketsTM Index which is determined, composed
and calculated by Nasdaq without regard to Licensee
or the Product. Nasdaq
has no obligation to take the needs of the Licensee or the owners of the
Product into consideration
in determining, composing or calculating the Nasdaq Riskalyze Emerging
MarketsTM Index. The Corporations are not responsible
for and have not participated in the determination of the timing of, prices at,
or quantities of the Product to be issued or in
the determination or calculation of the equation by which the Product is to be converted into cash.
The Corporations have no liability in connection with the administration,
marketing or trading of the Product.
The
Corporations do not guarantee the accuracy and/or uninterrupted calculation of
the Nasdaq Riskalyze Emerging MarketsTM Index or any data
included therein. The Corporations make no warranty, express or implied, as to
results to be
obtained by Licensee, owners of the Product, or any
other person or entity from the use of the Nasdaq Riskalyze Emerging
MarketsTM Index or any data
included therein. The Corporations make no express or implied warranties, and
expressly
disclaim all warranties of merchantability or fitness for a particular purpose
or use with respect to the Nasdaq Riskalyze Emerging MarketsTM Index or any data
included therein. Without limiting any of the foregoing, in no event
shall
the Corporations have any liability for any lost profits or special, incidental,
punitive, indirect, or consequential damages, even if
notified of the possibility of such damages.
31
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.
32
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 March 31, 2025 and is incorporated by
reference in the Fund's SAI, which is available upon request.
First
Trust Exchange-Traded Fund VI
Financial
Highlights
For a share outstanding throughout each period
For a share outstanding throughout each period
Emerging
Markets Equity Select ETF (RNEM)
|
|
Year
Ended March 31, | ||||
|
|
2025 |
2024 |
2023 |
2022 |
2021 |
|
Net
asset value, beginning of period |
$51.76 |
$44.78 |
$48.61 |
$49.21 |
$37.80 |
|
Income
from investment operations: |
|
|
|
|
|
|
Net
investment income (loss) |
1.21
(a) |
1.12
(a) |
1.57 |
1.61 |
1.15 |
|
Net
realized and unrealized gain (loss) |
0.23 |
6.70 |
(4.13
) |
(0.67
) |
11.64 |
|
Total
from investment operations |
1.44 |
7.82 |
(2.56
) |
0.94 |
12.79 |
|
Distributions
paid to shareholders from: |
|
|
|
|
|
|
Net
investment income |
(1.45
) |
(0.84
) |
(1.27
) |
(1.20
) |
(1.38
) |
|
Net
realized gain |
(0.25
) |
— |
— |
— |
— |
|
Return of
capital |
— |
— |
— |
(0.34
) |
— |
|
Total
distributions |
(1.70
) |
(0.84
) |
(1.27
) |
(1.54
) |
(1.38
) |
|
Net
asset value, end of period |
$51.50 |
$51.76 |
$44.78 |
$48.61 |
$49.21 |
|
Total
Return(b) |
2.80
% |
17.61
% |
(4.97
)% |
1.91
% |
34.44
% |
|
Ratios
to average net assets/supplemental data: |
|
|
|
|
|
|
Net
assets, end of period (in 000’s) |
$18,026 |
$18,115 |
$8,956 |
$7,292 |
$7,381 |
|
Ratio of
total expenses to average net assets |
0.76
%(c) |
0.75
% |
0.75
% |
0.75
% |
0.75
% |
|
Ratio of
net investment income (loss) to average net assets |
2.34
% |
2.29
% |
3.61
% |
3.30
% |
2.94
% |
|
Portfolio
turnover rate(d) |
60
% |
104
% |
65
% |
72
% |
75
% |
(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 other
expenses.
If
these other expenses were not included,
the expense
ratio would have been 0.75%.
(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.
33
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 of
1933.
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.
34
|
First
Trust
Exchange-Traded
Fund VI |
Emerging Markets Equity Select
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 report, 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 #: 333-182308
811-22717