First Trust Exchange-Traded Fund III

Annual Report

July 31, 2023

Shareholder Letter	2
Fund Performance Overview
First Trust Horizon Managed Volatility Domestic ETF (HUSV)	3
First Trust Horizon Managed Volatility Developed International ETF (HDMV)	5
First Trust Horizon Managed Volatility Small/Mid ETF (HSMV)	7
Notes to Fund Performance Overview	9
Portfolio Commentary	10
Understanding Your Fund Expenses	14
Portfolio of Investments
First Trust Horizon Managed Volatility Domestic ETF (HUSV)	15
First Trust Horizon Managed Volatility Developed International ETF (HDMV)	17
First Trust Horizon Managed Volatility Small/Mid ETF (HSMV)	20
Statements of Assets and Liabilities	24
Statements of Operations	25
Statements of Changes in Net Assets	26
Financial Highlights	28
Notes to Financial Statements	31
Report of Independent Registered Public Accounting Firm	39
Additional Information	40
Board of Trustees and Officers	48
Privacy Policy	50

Caution Regarding Forward-Looking Statements

This report contains certain forward-looking statements within the meaning of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended. Forward-looking statements include statements regarding the goals, beliefs, plans or current expectations of First Trust Advisors L.P. (“First Trust” or the “Advisor”) and/or Horizon Investments, LLC (“Horizon” or the “Sub-Advisor”) and their respective representatives, taking into account the information currently available to them. Forward-looking statements include all statements that do not relate solely to current or historical fact. For example, forward-looking statements include the use of words such as “anticipate,” “estimate,” “intend,” “expect,” “believe,” “plan,” “may,” “should,” “would” or other words that convey uncertainty of future events or outcomes.

Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of any series of First Trust Exchange-Traded Fund III (the “Trust”) described in this report (each such series is referred to as a “Fund” and collectively, the “Funds”) to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. When evaluating the information included in this report, you are cautioned not to place undue reliance on these forward-looking statements, which reflect the judgment of the Advisor and/or Sub-Advisor and their respective representatives only as of the date hereof. We undertake no obligation to publicly revise or update these forward-looking statements to reflect events and circumstances that arise after the date hereof.

Performance and Risk Disclosure

There is no assurance that any Fund described in this report will achieve its investment objective. Each Fund is subject to market risk, which is the possibility that the market values of securities owned by the Fund will decline and that the value of the Fund’s shares may therefore be less than what you paid for them. Accordingly, you can lose money by investing in a Fund. See “Risk Considerations” in the Additional Information section of this report for a discussion of certain other risks of investing in the Funds.

Performance data quoted represents past performance, which is no guarantee of future results, and current performance may be lower or higher than the figures shown. For the most recent month-end performance figures, please visit www.ftportfolios.com or speak with your financial advisor. Investment returns, net asset value and share price will fluctuate and Fund shares, when sold, may be worth more or less than their original cost.

The Advisor may also periodically provide additional information on Fund performance on each Fund’s web page at www.ftportfolios.com.

How to Read This Report

This report contains information that may help you evaluate your investment. It includes details about each Fund and presents data and analysis that provide insight into each Fund’s performance and investment approach.

By reading the portfolio commentary by the portfolio management team of each Fund, you may obtain an understanding of how the market environment affected each Fund’s performance. The statistical information that follows may help you understand each Fund’s performance compared to that of a relevant market benchmark.

It is important to keep in mind that the opinions expressed by personnel of the Advisor and/or Sub-Advisor are just that: informed opinions. They should not be considered to be promises or advice. The opinions, like the statistics, cover the period through the date on the cover of this report. The material risks of investing in each Fund are spelled out in the prospectus, the statement of additional information, and other Fund regulatory filings.

Page 1

First Trust Exchange-Traded Fund III

Annual Letter from the Chairman and CEO

July 31, 2023

Dear Shareholders,

First Trust is pleased to provide you with the annual report for the Managed Volatility Funds of First Trust Exchange-Traded Fund III (the “Funds”), which contains detailed information about the Funds for the 12-month period ended July 31, 2023.

In a widely unexpected announcement, Fitch Ratings (“Fitch”), a provider of credit ratings, commentary, and research, downgraded the credit rating of the United States government from its highest rating of AAA to its second-highest rating of AA+ on August 1, 2023. The move marks the first time the U.S. government’s credit rating has been downgraded since 2011. Fitch cited the heightened potential of a near-term economic recession in the U.S. as well as the rising interest burden of government debt as two factors that contributed to their decision to implement the downgrade. We will leave it to the pundits to debate whether the downgrade was warranted or not. What we would like to see is a reduction in government spending. As of June 30, 2023, the U.S. government’s deficit stood at $1.39 trillion, already above the 2022 full year deficit of $1.37 trillion, according to Brian Wesbury, Chief Economist at First Trust. As Fitch noted in the press release of its downgrade, the interest burden on U.S. government debt, among other factors, is expected to catapult the general government deficit to 6.3% of gross domestic product (“GDP”) in 2023, up from 3.7% in 2022.

The Federal Reserve (the “Fed”) has made significant progress in its battle with rising prices. Inflation, as measured by the twelve-month trailing rate on the Consumer Price Index (“CPI”), stood at 3.2% on July 31, 2023, down significantly from its most recent high of 9.1% set on June 30, 2022, but up from 3.0% on June 30, 2023. While a reduction in the CPI is welcome, the metric remains well-above the Fed’s goal of 2.0%. Should the CPI remain stubbornly high, it may prompt further increases to the Federal Funds target rate over the coming months, which could hamper economic growth, in our opinion. That said, U.S. GDP has remained resilient, growing over each of the last four quarters (through June 30, 2023).

Whether the U.S. can avoid an economic recession over the coming months remains to be seen. As mentioned above, despite tighter monetary policy, the U.S. economy posted positive changes to GDP over each of the last four quarters. We continue to hope for a “soft landing,” but also keep our eyes fixated on the data.

Thank you for giving First Trust the opportunity to play a role in your financial future. We value our relationship with you and will report on the Funds again in six months.

Sincerely,

James A. Bowen

Chairman of the Board of Trustees

Chief Executive Officer of First Trust Advisors L.P.

Page 2

First Trust Horizon Managed Volatility Domestic ETF (HUSV)

The investment objective of First Trust Horizon Managed Volatility Domestic ETF (the “Fund”) is to provide capital appreciation. Under normal market conditions, the Fund seeks to achieve its investment objective by investing at least 80% of its net assets (including investment borrowings) in common stocks of domestic companies listed and traded on U.S. national securities exchanges that Horizon Investments, LLC (“Horizon” or the “Sub-Advisor”) believes exhibit low future expected volatility. The goal of this strategy is to capture upside price movements in rising markets and reduce downside risk when markets decline. To implement this strategy, the Sub-Advisor employs volatility forecasting models to forecast future expected volatility. The strategy is largely quantitative and rules-based, but also includes multiple parameters over which the Sub-Advisor may exercise discretion (including, but not limited to, the number of holdings and the weightings of particular holdings) in connection with its active management of the Fund. Shares of the Fund are listed and trade on the NYSE Arca, Inc. under the ticker symbol “HUSV.” The first day of secondary market trading in shares of the Fund was August 25, 2016.

Performance
		Average Annual Total Returns			Cumulative Total Returns
	1 Year Ended 7/31/23	5 Years Ended 7/31/23	Inception (8/24/16) to 7/31/23		5 Years Ended 7/31/23	Inception (8/24/16) to 7/31/23
Fund Performance
NAV	0.88%	8.61%	9.03%		51.14%	82.09%
Market Price	0.85%	8.57%	9.02%		50.84%	82.03%
Index Performance
S&P 500® Index	13.02%	12.20%	13.40%		77.78%	139.10%

(See Notes to Fund Performance Overview on page 9.)

Page 3

First Trust Horizon Managed Volatility Domestic ETF (HUSV) (Continued)

Sector Allocation	% of Total Long-Term Investments
Information Technology	17.6%
Consumer Staples	16.8
Health Care	13.5
Industrials	13.1
Financials	12.1
Consumer Discretionary	10.3
Utilities	5.5
Real Estate	3.8
Communication Services	3.5
Materials	2.3
Energy	1.5
Total	100.0%

Top Ten Holdings	% of Total Long-Term Investments
International Business Machines Corp.	2.7%
Roper Technologies, Inc.	2.6
Cisco Systems, Inc.	2.5
Coca-Cola (The) Co.	2.5
McDonald’s Corp.	2.4
Johnson & Johnson	2.4
Yum! Brands, Inc.	2.3
PepsiCo, Inc.	2.0
Motorola Solutions, Inc.	1.8
Amphenol Corp., Class A	1.8
Total	23.0%

Page 4

First Trust Horizon Managed Volatility Developed International ETF (HDMV)

The investment objective of First Trust Horizon Managed Volatility Developed International ETF (the “Fund”) is to provide capital appreciation. Under normal market conditions, the Fund seeks to achieve its investment objective by investing at least 80% of its net assets (including investment borrowings) in common stocks and depositary receipts of developed market companies listed and traded on non-U.S. exchanges that Horizon Investments, LLC (“Horizon” or the “Sub-Advisor”) believes exhibit low future expected volatility. The term “developed market companies” means those companies (i) whose securities are traded principally on a stock exchange in a developed market country, (ii) with a primary business office in a developed market country, or (iii) that have at least 50% of their assets in, or derive at least 50% of their revenues or profits from, a developed market country. The Sub-Advisor considers Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, Luxembourg, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the United Kingdom and the United States to be developed market countries. However, this list may change in response to market and geopolitical events. Under normal market conditions, the Fund will invest in at least three countries and at least 40% of its net assets in countries other than the United States. Shares of the Fund are listed and trade on the NYSE Arca, Inc. under the ticker symbol  “HDMV.” The first day of secondary market trading in shares of the Fund was August 25, 2016.

Performance
		Average Annual Total Returns			Cumulative Total Returns
	1 Year Ended 7/31/23	5 Years Ended 7/31/23	Inception (8/24/16) to 7/31/23		5 Years Ended 7/31/23	Inception (8/24/16) to 7/31/23
Fund Performance
NAV	5.22%	-0.04%	2.49%		-0.22%	18.59%
Market Price	5.16%	-0.18%	2.47%		-0.91%	18.41%
Index Performance
MSCI EAFE Index	16.79%	4.55%	6.45%		24.89%	54.28%

(See Notes to Fund Performance Overview on page 9.)

Page 5

First Trust Horizon Managed Volatility Developed International ETF (HDMV) (Continued)

Sector Allocation	% of Total Long-Term Investments
Consumer Staples	21.2%
Industrials	19.1
Financials	14.5
Communication Services	11.4
Utilities	8.3
Real Estate	7.3
Consumer Discretionary	6.4
Health Care	5.7
Information Technology	3.8
Materials	1.8
Energy	0.5
Total	100.0%

Top Ten Holdings	% of Total Long-Term Investments
Oversea-Chinese Banking Corp., Ltd.	2.0%
Singapore Exchange Ltd.	1.9
MTR Corp., Ltd.	1.7
SoftBank Corp.	1.6
Henkel AG & Co., KGaA	1.6
Power Assets Holdings Ltd.	1.5
United Overseas Bank Ltd.	1.5
Unilever PLC	1.5
Iberdrola S.A.	1.4
Koninklijke KPN N.V.	1.4
Total	16.1%

Page 6

First Trust Horizon Managed Volatility Small/Mid ETF (HSMV)

The investment objective of First Trust Horizon Managed Volatility Small/Mid ETF (the “Fund”) is to seek to provide investors with capital appreciation. Under normal market conditions, the Fund seeks to achieve its investment objective by investing at least 80% of its net assets (including investment borrowings) in small- and/or mid-capitalization common stocks listed and traded on U.S. national securities exchanges that Horizon Investments, LLC (“Horizon” or the “Sub-Advisor”) believes exhibit low future expected volatility. The goal of this strategy is to capture upside price movements in rising markets and reduce downside risk when markets decline. To implement this strategy, the Sub-Advisor employs volatility forecasting models to forecast future expected volatility. The strategy is largely quantitative and rules-based, but also includes multiple parameters over which the Sub-Advisor may exercise discretion (including, but not limited to, the number of holdings and the weightings of particular holdings) in connection with its active management of the Fund. Shares of the Fund are listed and trade on the NYSE Arca, Inc. under the ticker symbol “HSMV.” The first day of secondary market trading in shares of the Fund was April 7, 2020.

Performance
		Average Annual Total Returns	Cumulative Total Returns
	1 Year Ended 7/31/23	Inception (4/6/20) to 7/31/23	Inception (4/6/20) to 7/31/23
Fund Performance
NAV	0.57%	14.39%	56.22%
Market Price	0.54%	14.37%	56.12%
Index Performance
S&P 1000® Index	8.89%	23.01%	98.82%

(See Notes to Fund Performance Overview on page 9.)

Page 7

First Trust Horizon Managed Volatility Small/Mid ETF (HSMV) (Continued)

Sector Allocation	% of Total Long-Term Investments
Industrials	21.5%
Real Estate	15.9
Financials	15.1
Utilities	10.7
Consumer Discretionary	8.0
Information Technology	7.5
Health Care	6.7
Materials	6.3
Consumer Staples	6.2
Communication Services	1.4
Energy	0.7
Total	100.0%

Top Ten Holdings	% of Total Long-Term Investments
Retail Opportunity Investments Corp.	0.9%
Corporate Office Properties Trust	0.8
Carlisle Cos., Inc.	0.8
RPM International, Inc.	0.8
EMCOR Group, Inc.	0.8
Gentex Corp.	0.8
Jabil, Inc.	0.8
New York Times (The) Co., Class A	0.8
Commerce Bancshares, Inc.	0.8
CommVault Systems, Inc.	0.8
Total	8.1%

Page 8

Total returns for the periods since inception are calculated from the inception date of each Fund. “Average Annual Total Returns” represent the average annual change in value of an investment over the periods indicated. “Cumulative Total Returns” represent the total change in value of an investment over the periods indicated.

Each Fund’s per share net asset value (“NAV”) is the value of one share of the Fund and is computed by dividing the value of all assets of the Fund (including accrued interest and dividends), less all liabilities (including accrued expenses and dividends declared but unpaid), by the total number of outstanding shares. The price used to calculate market return (“Market Price”) is determined by using the midpoint of the national best bid and offer price (“NBBO”) as of the time that the Fund’s NAV is calculated. Under SEC rules, the NBBO consists of the highest displayed buy and lowest sell prices among the various exchanges trading the Fund at the time the Fund’s NAV is calculated. Prior to January 1, 2019, the price used was the midpoint between the highest bid and the lowest offer on the stock exchange on which shares of the Fund were listed for trading as of the time that the Fund’s NAV was calculated. Since shares of each Fund did not trade in the secondary market until after the Fund’s inception, for the period from inception to the first day of secondary market trading in shares of the Fund, the NAV of each Fund is used as a proxy for the secondary market trading price to calculate market returns. NAV and market returns assume that all distributions have been reinvested in each Fund at NAV and Market Price, respectively.

An index is a statistical composite that tracks a specified financial market or sector. Unlike each Fund, the indices do not actually hold a portfolio of securities and therefore do not incur the expenses incurred by each Fund. These expenses negatively impact the performance of each Fund. Also, market returns do not include brokerage commissions that may be payable on secondary market transactions. If brokerage commissions were included, market returns would be lower. The total returns presented reflect the reinvestment of dividends on securities in the indices. The returns presented do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. The investment return and principal value of shares of each Fund will vary with changes in market conditions. Shares of each Fund may be worth more or less than their original cost when they are redeemed or sold in the market. Each Fund’s past performance is no guarantee of future performance.

Page 9

Portfolio Commentary

First Trust Exchange-Traded Fund III

Annual Report

July 31, 2023 (Unaudited)

Advisor

First Trust Advisors L.P. (“First Trust” or the “Advisor”) serves as the investment advisor to the First Trust Horizon Managed Volatility Domestic ETF (“HUSV”), the First Trust Horizon Managed Volatility Developed International ETF (“HDMV”), and the First Trust Horizon Managed Volatility Small/Mid ETF (“HSMV”) (each a “Fund” and collectively, the “Funds”). First Trust is responsible for the ongoing monitoring of each Fund’s investment portfolio, managing each Fund’s business affairs and providing certain administrative services necessary for the management of each Fund.

Sub-Advisor

Horizon Investments, LLC (“Horizon” or the “Sub-Advisor”) serves as the investment sub-advisor to the Funds.

Portfolio Management Team

The following persons serve as portfolio managers of the Funds:

Michael Dickson, PhD, Head of Research and Product Development and Portfolio Manager of Horizon

Scott Ladner, Chief Investment Officer and Portfolio Manager of Horizon

Steven Clark, PhD, Portfolio Manager of Horizon

The portfolio managers are primarily and jointly responsible for the day-to-day management of the Funds. Each portfolio manager has served as part of the portfolio management team of the Funds since each Fund’s inception.

Commentary 

First Trust Horizon Managed Volatility Domestic ETF (“HUSV” or the “Fund”)

Market Recap

For the 12-month period ended July 31, 2023, the S&P 500^® Index gained 13.02%. During the period, low volatility as a factor lagged the S&P 500^® Index, as the S&P 500^® Low Volatility Index returned 0.63%.

This period began with the continuation of high levels of inflation not seen since the early 1980s, and the Federal Reserve (the “Fed”) beginning an aggressive interest rate hiking cycle raising the target rate 75 basis points (“bps”) at a time. Markets were split on whether the Fed would be able to get inflation under control and if the economy would experience a “soft landing” scenario or a recession. This materialized in elevated interest rate volatility and an S&P 500^® Index that largely went nowhere until year-over-year Consumer Price Index (“CPI”) was well on its way down. Earnings did not disappoint, and the labor market remained strong, both providing a boost to growth making a recession appear less likely. Throughout the period, the Fed continued to reiterate its commitment to bringing inflation under control as well as a data driven approach. As a result, economic data releases drove price action causing event risk and volatility. As inflation came down, rate hikes slowed from 75 bps to a pause followed by a 25 bps hike.

As 2023 began, advances in artificial intelligence (“AI”) gained the limelight and both AI enabled and AI enabling stocks climbed higher. Large cap tech stocks, which are some of the largest holdings of the S&P 500^® Index, led a narrow rally leaving more defensive stocks behind. The top 10 names in the S&P 500^® Index were responsible for a large part of its returns over the second half of the 12-month period ended July 31, 2023.

The investment objective of the Fund is to provide capital appreciation. Under normal market conditions, the Fund seeks to achieve its investment objective by investing at least 80% of its net assets (including investment borrowings) in common stocks of domestic companies listed and traded on U.S. national securities exchanges that Horizon believes exhibit low future expected volatility. The goal of this strategy is to capture upside price movements in rising markets and reduce downside risk when markets decline. To implement this strategy, Horizon employs volatility forecasting models to forecast future expected volatility. The strategy is largely quantitative and rules-based, but also includes multiple parameters over which Horizon may exercise discretion (including, but not limited to, the number of holdings and the weightings of particular holdings) in connection with its active management of the Fund.

Performance Analysis

On a net asset value (“NAV”) basis for the 12-month period ended July 31, 2023, the Fund provided a total return of 0.88%, including the reinvestment of dividends. The S&P 500^® Index returned 13.02% and the S&P 500^® Low Volatility Index returned 0.63% over the same period.

Page 10

Portfolio Commentary (Continued)

First Trust Exchange-Traded Fund III

Annual Report

July 31, 2023 (Unaudited)

Stocks selected within the Health Care, Consumer Discretionary, and Information Technology sectors contributed the most to the Fund’s return, while stocks selected within the Utilities, Real Estate, and Industrials sectors contributed the least to the Fund’s return.

Single stock positions in Gilead Sciences, Inc, Merck & Co., Inc, and International Business Machines Corp. contributed the most to the Fund’s return for the period. Single stock positions in Jack Henry & Associates, Inc., Assurant, Inc., and Broadridge Financial Solutions, Inc. contributed the least to the Fund’s return for the same period.

During the same period, the Fund realized lower volatility than the S&P 500^® Index and had volatility in line with the S&P 500^® Low Volatility Index. As a part of the Fund’s portfolio allocation process, Horizon overweights or underweights common stocks of domestic companies based on future expected volatility. An overweight allocation indicates that Horizon expects those stocks to be relatively low risk, while an underweight allocation indicates that Horizon expects those stocks to be relatively higher risk. Due to the long-term defensive tilt of the strategy, it is expected that the Fund will underperform in strong positive markets and outperform in strong negative markets. For the period this was the case and these tilts contributed largely to the relative performance over the fiscal year.

Market and Fund Outlook

At the end of the 12-month period ended July 31, 2023, Horizon believes that overall corporate and economic fundamentals are satisfactory and that financial markets will remain healthy over the course of the next year. Despite this, we do believe that there are risks that could generate high volatility in late 2023 and early 2024. Some of the risks include: the Fed having a policy misstep, a rise in unemployment, and new regulation around AI slowing the current rally. Horizon also believes that additional key risk factors for equity markets are related to trade policy, central bank policy, and global currency stability.

During time periods of persistent volatility, Horizon believes it is important to continue to be responsive to current market conditions when creating a portfolio of expected lower volatility stocks. The Fund continues to use a quantitative and rules-based investment process to mitigate volatility through targeted exposure to stocks that Horizon estimates will have forecasted future low volatility. Horizon also continues to use an active management approach when managing the Fund that provides the flexibility to limit sector concentration and business risk, without being limited by static rebalance requirements.

First Trust Horizon Managed Volatility Developed International ETF (“HDMV” or the “Fund”)

Market Recap

For the 12-month period ended July 31, 2023, the MSCI EAFE Index gained 16.79%. During the period, low volatility underperformed the broad MSCI EAFE Index as the MSCI EAFE Minimum Volatility Index gained 7.93%.

Horizon believes the following key developments were some of the biggest drivers of global markets during the period. U.S. markets lagged Developed International markets broadly as the S&P 500^® Index gained 13.02% over this time. The period began with the continuation of high levels of inflation not seen since the early 1980s, and the Fed beginning an aggressive rate hiking cycle raising the target rate 75 bps at a time. The European Central Bank (“ECB”) was slightly behind the U.S. in its tightening cycle but raised its policy rate aggressively as well. Markets were split on whether the Fed would be able to get inflation under control and if the U.S. economy would experience a “soft landing” scenario or a recession. This materialized in elevated interest rate volatility. U.S. earnings did not disappoint, and the U.S. labor market remained strong, both providing a boost to global growth. Throughout this period, both the Fed and the ECB continued to reiterate their commitment to bringing inflation under control as well as a data driven approach. As a result, economic data releases drove price action causing event risk and volatility. Eventually inflation came down and interest rate hikes slowed.

The investment objective of the Fund is to provide capital appreciation. Under normal market conditions, the Fund seeks to achieve its investment objective by investing at least 80% of its net assets (including investment borrowings) in common stocks and depositary receipts of developed market companies listed and traded on non-U.S. exchanges that Horizon believes exhibit low future expected volatility. The goal of this strategy is to capture upside price movements in rising markets and reduce downside risk when markets decline. To implement this strategy, Horizon employs volatility forecasting models to forecast future expected volatility. The strategy is largely quantitative and rules-based, but also includes multiple parameters over which Horizon may exercise discretion (including, but not limited to, the number of holdings and the weightings of particular holdings) in connection with its active management of the Fund.

Performance Analysis

On a NAV basis for the 12-month period ended July 31, 2023, the Fund provided a total return of 5.22%, including the reinvestment of dividends. The MSCI EAFE Index gained 16.79% and the MSCI EAFE Minimum Volatility Index gained 7.93% over the same period.

Page 11

Portfolio Commentary (Continued)

First Trust Exchange-Traded Fund III

Annual Report

July 31, 2023 (Unaudited)

Stocks selected within Japan, Singapore, and Germany contributed the most to the Fund’s return, while stocks selected within Hong Kong, Australia, and Sweden contributed the least to the Fund’s return.

Single stock positions in Singapore Airlines Ltd., Keppel Corp., Ltd., and Oversea-Chinese Banking Corp., Ltd. contributed the most to the Fund’s return for the fiscal year. Single stock positions in Power Assets Holdings, Ltd., Link REIT, and New World Development Co., Ltd. contributed the least to the Fund’s return for the same period.

For the 12-month period ended July 31, 2023, the Fund realized lower volatility than the MSCI EAFE Index. As a part of the Fund’s portfolio allocation process, Horizon overweights or underweights common stocks and depositary receipts of large and mid-cap securities across developed markets based on future expected volatility. An overweight allocation indicates that Horizon expects those stocks to be relatively low risk, while an underweight allocation indicates that Horizon expects those stocks to be relatively higher risk. Due to the long-term defensive tilt of the strategy, it is expected that the Fund will underperform in strong positive markets. For the fiscal year this was the case and these tilts contributed largely to the relative performance for the period.

Market and Fund Outlook

At the end of the 12-month period ended July 31, 2023, Horizon believes that overall corporate and economic fundamentals are satisfactory and that financial markets will remain healthy over the course of the next year. Key risk factors to watch in international markets are the policies of the Fed and the ECB, trade restrictions with China, and commodity prices.

Horizon believes it is important to continue to be more responsive to current market conditions when creating a portfolio of expected lower volatility stocks when exposed to these risk factors. The Fund continues to use a quantitative and rules-based investment process to mitigate volatility through enhanced security selection of targeted exposure to stocks that Horizon estimates will have forecasted future low volatility. Horizon also continues to use an active management approach when managing the Fund that provides the flexibility to limit sector and country concentration and business risk, without being limited to static rebalance requirements.

First Trust Horizon Managed Volatility Small/Mid ETF (“HSMV” or the “Fund”)

Market Recap

For the 12-month period ended July 31, 2023, the S&P 1000^® Index gained 8.89%. During the same period, low volatility as a factor lagged the S&P 1000^® Index, as the S&P 400^® Low Volatility Index gained 0.22% and the S&P 600^® Low Volatility Index lost -7.73%.

Over the same period, the S&P 1000^® Index expanded, but not as much as the S&P 500^® Index. The period began with the continuation of high levels of inflation not seen since the early 1980s, and the Fed beginning an aggressive rate hiking cycle raising the target rate 75 bps at a time. Markets were split on whether the Fed would be able to get inflation under control and if the economy would experience a “soft landing” scenario or a recession. This materialized in elevated interest rate volatility and an S&P 1000^® Index that largely went nowhere until year-over-year CPI was well on its way down. Earnings did not disappoint, and the labor market remained strong, both providing a boost to growth making a recession appear less likely. Throughout this period, the Fed continued to reiterate its commitment to bringing inflation under control as well as a data driven approach. As a result, economic data releases drove price action causing event risk and volatility. As inflation came down, rate hikes slowed from 75 bps to a pause followed by a 25 bps hike.

In the second half of the period, advances in artificial intelligence gained the limelight and both AI enabled and AI enabling stocks climbed. Large cap tech stocks, which are some of the largest holdings of the S&P 500^® Index, led the narrow rally. The top 10 names in the S&P 500^® Index were responsible for a large part of its returns over the second half of this fiscal year. This narrow large cap-led rally left small market cap stocks behind. Fears of a banking crisis also caused the S&P 1000^® Index to sell off in March 2023 as Silicon Valley Bank collapsed.

The investment objective of the Fund is to provide capital appreciation. Under normal market conditions, the Fund seeks to achieve its investment objective by investing at least 80% of its net assets (including investment borrowings) in small- and/or mid-capitalization common stocks listed and traded on U.S. national securities exchanges that Horizon believes exhibit low future expected volatility. The goal of this strategy is to capture upside price movements in rising markets and reduce downside risk when markets decline. To implement this strategy, Horizon employs volatility forecasting models to forecast future expected volatility. The strategy is largely quantitative and rules-based, but also includes multiple parameters over which Horizon may exercise discretion (including, but not limited to, the number of holdings and the weightings of particular holdings) in connection with its active management of the Fund.

Page 12

Portfolio Commentary (Continued)

First Trust Exchange-Traded Fund III

Annual Report

July 31, 2023 (Unaudited)

Performance Analysis

On a NAV basis for the 12-month period ended July 31, 2023, the Fund provided a total return of 0.57%, including the reinvestment of dividends. The S&P 1000^® Index gained 8.89%. Over the period, low volatility as a factor lagged the S&P 1000^® Index, as the S&P 400^® Low Volatility Index gained 0.22% and the S&P 600^® Low Volatility Index lost -7.73%.

Stocks selected within the Industrials, Information Technology, and Consumer Staples sectors contributed the most to the Fund’s return, while stocks selected within the Financials, Real Estate, and Utilities sectors contributed the least to the Fund’s return.

Single stock positions in EMCOR Group, Inc. and Jabil, Inc. contributed the most to the Fund’s return for the fiscal year. Single stock positions in PRA Group, Inc. and Brandywine Realty Trust contributed the least to the Fund’s return since inception.

Since inception, the Fund realized lower volatility than the S&P 1000^® Index, higher volatility than the S&P 400^® Low Volatility Index, and lower volatility than the S&P 600^® Low Volatility Index. As a part of the Fund’s portfolio allocation process, Horizon overweights or underweights common stocks of small and mid-cap domestic companies based on future expected volatility. An overweight allocation indicates that Horizon expects those stocks to be relatively low risk, while an underweight allocation indicates that Horizon expects those stocks to be relatively higher risk. Due to the long-term defensive tilt of the strategy, it is expected that the Fund will underperform in strong positive markets. For the 12-month period ended July 31, 2023, this was the case and these tilts contributed largely to the relative performance for the period.

Market and Fund Outlook

At the end of the 12-month period ended July 31, 2023, Horizon believes that overall corporate and economic fundamentals are satisfactory in developed markets and that financial markets will remain healthy over the course of the next year. Despite this, we do believe that there are risks that could generate high volatility in late 2023 and early 2024. Some of the risks include: the Fed having a policy misstep, a rise in unemployment, and new regulation around AI slowing the current rally. Horizon also believes that additional key risk factors for equity markets are related to trade policy, central bank policy, and global currency stability.

During time periods that contain bouts of volatility, Horizon believes it is important to continue to be responsive to current market conditions when creating a portfolio of expected lower volatility stocks. The Fund continues to use a quantitative and rules-based investment process to mitigate volatility through targeted exposure to stocks that Horizon estimates will have forecasted future low volatility. Horizon also continues to use an active management approach when managing the Fund that provides the flexibility to limit sector concentration and business risk, without being limited to static rebalance requirements.

Page 13

First Trust Exchange-Traded Fund III

Understanding Your Fund Expenses

July 31, 2023 (Unaudited)

As a shareholder of First Trust Horizon Managed Volatility Domestic ETF, First Trust Horizon Managed Volatility Developed International ETF or First Trust Horizon Managed Volatility Small/Mid ETF (each a “Fund” and collectively, the “Funds”), you incur two types of costs: (1) transaction costs; and (2) ongoing costs, including management fees, distribution and/or service (12b-1) fees, if any, and other Fund expenses. This Example is intended to help you understand your ongoing costs (in U.S. dollars) of investing in the Funds and to compare these costs with the ongoing costs of investing in other funds.

The Example is based on an investment of $1,000 invested at the beginning of the period and held through the six-month period ended July 31, 2023.

Actual Expenses

The first line in the following table provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During the Six-Month Period” to estimate the expenses you paid on your account during this six-month period.

Hypothetical Example for Comparison Purposes

The second line in the following table provides information about hypothetical account values and hypothetical expenses based on each Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not each Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Funds and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.

Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs such as brokerage commissions. Therefore, the second line in the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.

	Beginning Account Value February 1, 2023	Ending Account Value July 31, 2023	Annualized Expense Ratio Based on the Six-Month Period	Expenses Paid During the Six-Month Period (a)
First Trust Horizon Managed Volatility Domestic ETF (HUSV)
Actual	$1,000.00	$1,008.80	0.70%	$3.49
Hypothetical (5% return before expenses)	$1,000.00	$1,021.32	0.70%	$3.51
First Trust Horizon Managed Volatility Developed International ETF (HDMV)
Actual	$1,000.00	$1,029.20	0.80%	$4.03
Hypothetical (5% return before expenses)	$1,000.00	$1,020.83	0.80%	$4.01
First Trust Horizon Managed Volatility Small/Mid ETF (HSMV)
Actual	$1,000.00	$975.20	0.80%	$3.92
Hypothetical (5% return before expenses)	$1,000.00	$1,020.83	0.80%	$4.01

    

(a)	Expenses are equal to the annualized expense ratios as indicated in the table multiplied by the average account value over the period (February 1, 2023 through July 31, 2023), multiplied by 181/365 (to reflect the six-month period).

Page 14

First Trust Horizon Managed Volatility Domestic ETF (HUSV)

Portfolio of Investments

July 31, 2023

First Trust Horizon Managed Volatility Domestic ETF (HUSV)

Portfolio of Investments (Continued)

July 31, 2023

---

First Trust Horizon Managed Volatility Developed International ETF (HDMV)

Portfolio of Investments

July 31, 2023

First Trust Horizon Managed Volatility Developed International ETF (HDMV)

Portfolio of Investments (Continued)

July 31, 2023

First Trust Horizon Managed Volatility Developed International ETF (HDMV)

Portfolio of Investments (Continued)

July 31, 2023

---

First Trust Horizon Managed Volatility Small/Mid ETF (HSMV)

Portfolio of Investments

July 31, 2023

First Trust Horizon Managed Volatility Small/Mid ETF (HSMV)

Portfolio of Investments (Continued)

July 31, 2023

First Trust Horizon Managed Volatility Small/Mid ETF (HSMV)

Portfolio of Investments (Continued)

July 31, 2023

First Trust Horizon Managed Volatility Small/Mid ETF (HSMV)

Portfolio of Investments (Continued)

July 31, 2023

Valuation Inputs

A summary of the inputs used to value the Fund’s investments as of July 31, 2023 is as follows (see Note 2A - Portfolio Valuation in the Notes to Financial Statements):

	Total Value at 7/31/2023	Level 1 Quoted Prices	Level 2 Significant Observable Inputs	Level 3 Significant Unobservable Inputs
Common Stocks*	$ 15,893,957	$ 15,893,957	$ —	$ —
Real Estate Investment Trusts*	3,114,259	3,114,259	—	—
Total Investments	$ 19,008,216	$ 19,008,216	$—	$—

    

*	See Portfolio of Investments for industry breakout.

See Notes to Financial Statements

Page 23

First Trust Exchange-Traded Fund III

Statements of Assets and Liabilities

July 31, 2023

	First Trust Horizon Managed Volatility Domestic ETF (HUSV)		First Trust Horizon Managed Volatility Developed International ETF (HDMV)		First Trust Horizon Managed Volatility Small/Mid ETF (HSMV)
ASSETS:
Investments, at value	$ 91,782,740		$ 40,368,997		$ 19,008,216
Cash	217,316		121,612		85,995
Foreign currency	—		344		—
Receivables:
Investment securities sold	3,277,556		—		—
Dividends	102,731		48,227		9,809
Dividend reclaims	495		175,407		—
Total Assets	95,380,838		40,714,587		19,104,020
LIABILITIES:
Payables:
Capital shares redeemed	3,287,000		—		—
Investment advisory fees	57,091		27,308		12,803
Total Liabilities	3,344,091		27,308		12,803
NET ASSETS	$92,036,747		$40,687,279		$19,091,217
NET ASSETS consist of:
Paid-in capital	$ 132,471,629		$ 70,728,909		$ 19,971,998
Par value	28,000		14,000		6,000
Accumulated distributable earnings (loss)	(40,462,882)		(30,055,630)		(886,781)
NET ASSETS	$92,036,747		$40,687,279		$19,091,217
NET ASSET VALUE, per share	$32.87		$29.06		$31.82
Number of shares outstanding (unlimited number of shares authorized, par value $0.01 per share)	2,800,002		1,400,002		600,002
Investments, at cost	$88,462,168		$39,781,513		$17,642,835
Foreign currency, at cost (proceeds)	$—		$342		$—

Page 24

See Notes to Financial Statements

First Trust Exchange-Traded Fund III

Statements of Operations

For the Year Ended July 31, 2023

		First Trust Horizon Managed Volatility Domestic ETF (HUSV)		First Trust Horizon Managed Volatility Developed International ETF (HDMV)		First Trust Horizon Managed Volatility Small/Mid ETF (HSMV)
INVESTMENT INCOME:
Dividends		$ 2,403,768		$ 1,687,269		$ 383,278
Interest		8,197		2,408		—
Foreign withholding tax		—		(114,079)		(143)
Other		—		220		36
Total investment income		2,411,965		1,575,818		383,171
EXPENSES:
Investment advisory fees		679,395		316,404		137,329
Total expenses		679,395		316,404		137,329
NET INVESTMENT INCOME (LOSS)		1,732,570		1,259,414		245,842
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments		(2,312,918)		(2,319,491)		(1,432,164)
In-kind redemptions		2,831,121		(22,091)		—
Foreign currency transactions		—		(3,660)		—
Net realized gain (loss)		518,203		(2,345,242)		(1,432,164)
Net change in unrealized appreciation (depreciation) on:
Investments		(811,009)		3,009,563		1,284,546
Foreign currency translation		—		17,186		—
Net change in unrealized appreciation (depreciation)		(811,009)		3,026,749		1,284,546
NET REALIZED AND UNREALIZED GAIN (LOSS)		(292,806)		681,507		(147,618)
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS		$ 1,439,764		$ 1,940,921		$ 98,224

See Notes to Financial Statements

Page 25

First Trust Exchange-Traded Fund III

Statements of Changes in Net Assets

	First Trust Horizon Managed Volatility Domestic ETF (HUSV)				First Trust Horizon Managed Volatility Developed International ETF (HDMV)
	Year Ended 7/31/2023		Year Ended 7/31/2022		Year Ended 7/31/2023		Year Ended 7/31/2022
OPERATIONS:
Net investment income (loss)	$ 1,732,570		$ 1,753,621		$ 1,259,414		$ 1,837,495
Net realized gain (loss)	518,203		10,719,961		(2,345,242)		(571,567)
Net change in unrealized appreciation (depreciation)	(811,009)		(10,221,164)		3,026,749		(8,141,611)
Net increase (decrease) in net assets resulting from operations	1,439,764		2,252,418		1,940,921		(6,875,683)
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Investment operations	(1,810,516)		(1,660,766)		(1,333,862)		(1,931,942)
SHAREHOLDER TRANSACTIONS:
Proceeds from shares sold	26,951,541		20,067,842		—		1,508,580
Cost of shares redeemed	(34,208,623)		(41,752,654)		(5,676,683)		(33,905,829)
Net increase (decrease) in net assets resulting from shareholder transactions	(7,257,082)		(21,684,812)		(5,676,683)		(32,397,249)
Total increase (decrease) in net assets	(7,627,834)		(21,093,160)		(5,069,624)		(41,204,874)
NET ASSETS:
Beginning of period	99,664,581		120,757,741		45,756,903		86,961,777
End of period	$92,036,747		$99,664,581		$40,687,279		$45,756,903
CHANGES IN SHARES OUTSTANDING:
Shares outstanding, beginning of period	3,000,002		3,650,002		1,600,002		2,700,002
Shares sold	850,000		600,000		—		50,000
Shares redeemed	(1,050,000)		(1,250,000)		(200,000)		(1,150,000)
Shares outstanding, end of period	2,800,002		3,000,002		1,400,002		1,600,002

Page 26

See Notes to Financial Statements

First Trust Horizon Managed Volatility Small/Mid ETF (HSMV)
Year Ended 7/31/2023		Year Ended 7/31/2022
$ 245,842		$ 167,247
(1,432,164)		366,910
1,284,546		(864,174)
98,224		(330,017)
(255,451)		(133,705)
3,180,198		6,741,624
—		(5,115,847)
3,180,198		1,625,777
3,022,971		1,162,055
16,068,246		14,906,191
$19,091,217		$16,068,246
500,002		450,002
100,000		200,000
—		(150,000)
600,002		500,002

See Notes to Financial Statements

Page 27

First Trust Exchange-Traded Fund III

Financial Highlights

For a share outstanding throughout each period

First Trust Horizon Managed Volatility Domestic ETF (HUSV)  

	Year Ended July 31,
	2023		2022		2021		2020		2019
Net asset value, beginning of period	$ 33.22		$ 33.08		$ 27.19		$ 26.71		$ 23.49
Income from investment operations:
Net investment income (loss)	0.58 (a)		0.51		0.46		0.37		0.37
Net realized and unrealized gain (loss)	(0.31)		0.10		5.87		0.52		3.17
Total from investment operations	0.27		0.61		6.33		0.89		3.54
Distributions paid to shareholders from:
Net investment income	(0.62)		(0.47)		(0.44)		(0.41)		(0.32)
Net asset value, end of period	$32.87		$33.22		$33.08		$27.19		$26.71
Total return (b)	0.88%		1.82%		23.48%		3.41%		15.24%
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000’s)	$ 92,037		$ 99,665		$ 120,758		$ 214,822		$ 224,389
Ratio of total expenses to average net assets	0.70%		0.70%		0.70%		0.70%		0.70%
Ratio of net investment income (loss) to average net assets	1.79%		1.46%		1.42%		1.39%		1.58%
Portfolio turnover rate (c)	122%		76%		152%		211%		147%

    

(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)	Portfolio turnover is calculated for the time period presented and is not annualized for periods of less than a year and does not include securities received or delivered from processing creations or redemptions and in-kind transactions.

Page 28

See Notes to Financial Statements

First Trust Exchange-Traded Fund III

Financial Highlights (Continued)

For a share outstanding throughout each period

First Trust Horizon Managed Volatility Developed International ETF (HDMV)  

	Year Ended July 31,
	2023		2022		2021		2020		2019
Net asset value, beginning of period	$ 28.60		$ 32.21		$ 28.12		$ 32.92		$ 33.72
Income from investment operations:
Net investment income (loss)	0.88 (a)		0.90		0.89		0.65		0.86
Net realized and unrealized gain (loss)	0.52		(3.62)		4.13		(4.61)		(0.79)
Total from investment operations	1.40		(2.72)		5.02		(3.96)		0.07
Distributions paid to shareholders from:
Net investment income	(0.94)		(0.89)		(0.93)		(0.84)		(0.87)
Net asset value, end of period	$29.06		$28.60		$32.21		$28.12		$32.92
Total return (b)	5.22%		(8.50)%		18.01% (c)		(12.37)%		0.21%
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000’s)	$ 40,687		$ 45,757		$ 86,962		$ 123,714		$ 128,394
Ratio of total expenses to average net assets	0.80%		0.80%		0.80%		0.80%		0.80%
Ratio of net investment income (loss) to average net assets	3.19%		2.53%		2.68%		2.08%		2.74%
Portfolio turnover rate (d)	80%		65%		127%		196%		99%

    

(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)	The Fund received a reimbursement from the advisor in the amount of $6,254, which represents less than $0.01 per share. Since the advisor reimbursed the Fund, there was no effect on the Fund’s total return.
(d)	Portfolio turnover is calculated for the time period presented and is not annualized for periods of less than a year and does not include securities received or delivered from processing creations or redemptions and in-kind transactions.

See Notes to Financial Statements

Page 29

First Trust Exchange-Traded Fund III

Financial Highlights (Continued)

For a share outstanding throughout each period

First Trust Horizon Managed Volatility Small/Mid ETF (HSMV)  

	Year Ended July 31,						Period Ended 7/31/2020 (a)
	2023		2022		2021
Net asset value, beginning of period	$ 32.14		$ 33.12		$ 25.03		$ 21.10
Income from investment operations:
Net investment income (loss)	0.44 (b)		0.36		0.29		0.02
Net realized and unrealized gain (loss)	(0.29)		(1.05)		8.09		3.92
Total from investment operations	0.15		(0.69)		8.38		3.94
Distributions paid to shareholders from:
Net investment income	(0.47)		(0.29)		(0.29)		(0.01)
Net realized gain	—		—		(0.00) (c)		—
Total distributions	(0.47)		(0.29)		(0.29)		(0.01)
Net asset value, end of period	$31.82		$32.14		$33.12		$25.03
Total return (d)	0.57%		(2.11)%		33.72%		18.67%
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000’s)	$ 19,091		$ 16,068		$ 14,906		$ 20,023
Ratio of total expenses to average net assets	0.80%		0.80%		0.80%		0.80% (e)
Ratio of net investment income (loss) to average net assets	1.43%		1.09%		1.02%		0.60% (e)
Portfolio turnover rate (f)	70%		71%		118%		5%

    

(a)	Inception date is April 6, 2020, which is consistent with the commencement of investment operations and is the date the initial creation units were established.
(b)	Based on average shares outstanding.
(c)	Amount represents less than $0.01 per share.
(d)	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.
(e)	Annualized.
(f)	Portfolio turnover is calculated for the time period presented and is not annualized for periods of less than a year and does not include securities received or delivered from processing creations or redemptions and in-kind transactions.

Page 30

See Notes to Financial Statements

Notes to Financial Statements

First Trust Exchange-Traded Fund III

July 31, 2023

1. Organization

First Trust Exchange-Traded Fund III (the “Trust”) is an open-end management investment company organized as a Massachusetts business trust on January 9, 2008, and is registered with the Securities and Exchange Commission under the Investment Company Act of 1940, as amended (the “1940 Act”).

The Trust currently consists of seventeen funds that are offering shares. This report covers the following funds (each a “Fund” and collectively, the “Funds”) listed below, each a diversified series of the Trust and listed and traded on the NYSE Arca, Inc.

First Trust Horizon Managed Volatility Domestic ETF – (ticker “HUSV”)

First Trust Horizon Managed Volatility Developed International ETF – (ticker “HDMV”)

First Trust Horizon Managed Volatility Small/Mid ETF – (ticker “HSMV”)

Each Fund represents a separate series of shares of beneficial interest in the Trust. Unlike conventional mutual funds, each Fund issues and redeems shares on a continuous basis, at net asset value (“NAV”), only in large blocks of shares known as “Creation Units.”

Each Fund is an actively managed exchange-traded fund. The investment objective of each Fund is to provide capital appreciation.

Under normal market conditions, HUSV seeks to achieve its investment objective by investing at least 80% of its net assets (including investment borrowings) in common stocks of domestic companies listed and traded on U.S. national securities exchanges that Horizon Investments, LLC (“Horizon” or the “Sub-Advisor”) believes exhibit low future expected volatility.

Under normal market conditions, HDMV seeks to achieve its investment objective by investing at least 80% of its net assets (including investment borrowings) in common stocks and depositary receipts of developed market companies listed and traded on non-U.S. exchanges that Horizon believes exhibit low future expected volatility.

Under normal market conditions, HSMV seeks to achieve its investment objective by investing at least 80% of its net assets (including investment borrowings) in small- and/or mid-capitalization common stocks listed and traded on U.S. national securities exchanges that Horizon believes exhibit low future expected volatility.

There can be no assurance that a Fund will achieve its investment objective. The Funds may not be appropriate for all investors.

2. Significant Accounting Policies

The Funds are each considered an investment company and follow accounting and reporting guidance under Financial Accounting Standards Board Accounting Standards Codification Topic 946, “Financial Services-Investment Companies.” The following is a summary of significant accounting policies consistently followed by the Funds in the preparation of the financial statements. The preparation of the financial statements in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates.

A. Portfolio Valuation

Each Fund’s NAV is determined daily as of the close of regular trading on the New York Stock Exchange (“NYSE”), normally 4:00 p.m. Eastern time, on each day the NYSE is open for trading. If the NYSE closes early on a valuation day, the NAV is determined as of that time. Foreign securities are priced using data reflecting the earlier closing of the principal markets for those securities. Each Fund’s NAV is calculated by dividing the value of all assets of each Fund (including accrued interest and dividends), less all liabilities (including accrued expenses and dividends declared but unpaid), by the total number of shares outstanding.

Each Fund’s investments are valued daily at market value or, in the absence of market value with respect to any portfolio securities, at fair value. Market value prices represent readily available market quotations such as last sale or official closing prices from a national or foreign exchange (i.e., a regulated market) and are primarily obtained from third-party pricing services. Fair value prices represent any prices not considered market value prices and are either obtained from a third-party pricing service or are determined by the Pricing Committee of the Funds’ investment advisor, First Trust Advisors L.P. (“First Trust” or the “Advisor”), in accordance with valuation procedures approved by the Trust’s Board of Trustees, and in accordance with provisions of the 1940 Act and rules thereunder. Investments valued by the Advisor’s Pricing Committee, if any, are footnoted as such in the footnotes to the Portfolio of Investments. Each Fund’s investments are valued as follows:

Common stocks, real estate investment trusts (“REITs”) and other equity securities listed on any national or foreign exchange (excluding The Nasdaq Stock Market LLC (“Nasdaq”) and the London Stock Exchange Alternative Investment Market (“AIM”)) are valued at the last sale price on the exchange on which they are principally traded or, for Nasdaq and AIM securities, the

Page 31

Notes to Financial Statements (Continued)

First Trust Exchange-Traded Fund III

July 31, 2023

official closing price. Securities traded on more than one securities exchange are valued at the last sale price or official closing price, as applicable, at the close of the securities exchange representing the primary exchange for such securities.

Securities trading on foreign exchanges or over-the-counter markets that close prior to the NYSE close may be valued using a systematic fair valuation model provided by a third-party pricing service. 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 the foreign markets.

Equity securities traded in an over-the-counter market are valued at the close price or the last trade price.

Certain securities may not be able to be priced by pre-established pricing methods. Such securities may be valued by the Advisor’s Pricing Committee at fair value. These securities generally include, but are not limited to, restricted securities (securities which may not be publicly sold without registration under the Securities Act of 1933, as amended) for which a third-party pricing service is unable to provide a market price; securities whose trading has been formally suspended; a security whose market or fair value price is not available from a pre-established pricing source; a security with respect to which an event has occurred that is likely to materially affect the value of the security after the market has closed but before the calculation of a Fund’s NAV or make it difficult or impossible to obtain a reliable market quotation; and a security whose price, as provided by the third-party pricing service, does not reflect the security’s fair value. As a general principle, the current fair value of a security would appear to be the amount which the owner might reasonably expect to receive for the security upon its current sale. When fair value prices are used, generally they will differ from market quotations or official closing prices on the applicable exchanges. A variety of factors may be considered in determining the fair value of such securities, including, but not limited to, the following:

1)	the last sale price on the exchange on which they are principally traded or, for Nasdaq and AIM securities, the official closing price;
2)	the type of security;
3)	the size of the holding;
4)	the initial cost of the security;
5)	transactions in comparable securities;
6)	price quotes from dealers and/or third-party pricing services;
7)	relationships among various securities;
8)	information obtained by contacting the issuer, analysts, or the appropriate stock exchange;
9)	an analysis of the issuer’s financial statements;
10)	the existence of merger proposals or tender offers that might affect the value of the security; and
11)	other relevant factors.

If the securities in question are foreign securities, the following additional information may be considered:

1)	the value of similar foreign securities traded on other foreign markets;
2)	ADR trading of similar securities;
3)	closed-end fund or exchange-traded fund trading of similar securities;
4)	foreign currency exchange activity;
5)	the trading prices of financial products that are tied to baskets of foreign securities;
6)	factors relating to the event that precipitated the pricing problem;
7)	whether the event is likely to recur;
8)	whether the effects of the event are isolated or whether they affect entire markets, countries or regions; and
9)	other relevant factors.

Because foreign markets may be open on different days than the days during which investors may transact in the shares of a Fund, the value of the Fund’s securities may change on the days when investors are not able to transact in the shares of the Fund. The value of securities denominated in foreign currencies is converted into U.S. dollars using exchange rates determined daily as of the close of regular trading on the NYSE.

Page 32

Notes to Financial Statements (Continued)

First Trust Exchange-Traded Fund III

July 31, 2023

The Funds are subject to fair value accounting standards that define fair value, establish the framework for measuring fair value and provide a three-level hierarchy for fair valuation based upon the inputs to the valuation as of the measurement date. The three levels of the fair value hierarchy are as follows:

•	Level 1 – Level 1 inputs are quoted prices in active markets for identical investments. An active market is a market in which transactions for the investment occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
•	Level 2 – Level 2 inputs are observable inputs, either directly or indirectly, and include the following:

o	Quoted prices for similar investments in active markets.
o	Quoted prices for identical or similar investments in markets that are non-active. A non-active market is a market where there are few transactions for the investment, the prices are not current, or price quotations vary substantially either over time or among market makers, or in which little information is released publicly.
o	Inputs other than quoted prices that are observable for the investment (for example, interest rates and yield curves observable at commonly quoted intervals, volatilities, prepayment speeds, loss severities, credit risks, and default rates).
o	Inputs that are derived principally from or corroborated by observable market data by correlation or other means.

•	Level 3 – Level 3 inputs are unobservable inputs. Unobservable inputs may reflect the reporting entity’s own assumptions about the assumptions that market participants would use in pricing the investment.

The inputs or methodologies used for valuing investments are not necessarily an indication of the risk associated with investing in those investments. A summary of the inputs used to value each Fund’s investments as of July 31, 2023, is included with each Fund’s Portfolio of Investments.

B. Securities Transactions and Investment Income

Securities transactions are recorded as of the trade date. Realized gains and losses from securities transactions are recorded on the identified cost basis. Dividend income is recorded on the ex-dividend date. Interest income, if any, is recorded daily on the accrual basis.

Withholding taxes and tax reclaims on foreign dividends have been provided for in accordance with each Fund’s understanding of the applicable country’s tax rules and rates.

Distributions received from a Fund’s investments in REITs may be comprised of return of capital, capital gains, and income. The actual character of the amounts received during the year are not known until after the REITs’ fiscal year end. A Fund records the character of distributions received from the REITs during the year based on estimates available. The characterization of distributions received by a Fund may be subsequently revised based on information received from the REITs after their tax reporting periods conclude.

C. Foreign Currency

The books and records of the Funds are maintained in U.S. dollars. Foreign currencies, investments and other assets and liabilities are translated into U.S. dollars at the exchange rates prevailing at the end of the period. Purchases and sales of investments and items of income and expense are translated on the respective dates of such transactions. Unrealized gains and losses on assets and liabilities, other than investments in securities, which result from changes in foreign currency exchange rates have been included in “Net change in unrealized appreciation (depreciation) on foreign currency translation” on the Statements of Operations. Unrealized gains and losses on investments in securities which result from changes in foreign exchange rates are included with fluctuations arising from changes in market price and are included in “Net change in unrealized appreciation (depreciation) on investments” on the Statements of Operations. Net realized foreign currency gains and losses include the effect of changes in exchange rates between trade date and settlement date on investment security transactions, foreign currency transactions and interest and dividends received and are included in “Net realized gain (loss) on foreign currency transactions” on the Statements of Operations. The portion of foreign currency gains and losses related to fluctuations in exchange rates between the initial purchase settlement date and subsequent sale trade date is included in “Net realized gain (loss) on investments” on the Statements of Operations.

D. Dividends and Distributions to Shareholders

Dividends from net investment income, if any, are declared and paid quarterly by each Fund, or as the Board of Trustees may determine from time to time. Distributions of net realized capital gains earned by each Fund, if any, are distributed at least annually.

Page 33

Notes to Financial Statements (Continued)

First Trust Exchange-Traded Fund III

July 31, 2023

Distributions from net investment income and realized capital gains are determined in accordance with federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These permanent differences are primarily due to the varying treatment of income and gain/loss on portfolio securities held by the Funds and have no impact on net assets or NAV per share. Temporary differences, which arise from recognizing certain items of income, expense and gain/loss in different periods for financial statement and tax purposes, will reverse at some time in the future.

The tax character of distributions paid by each Fund during the fiscal year ended July 31, 2023, was as follows:

	Distributions paid from Ordinary Income		Distributions paid from Capital Gains		Distributions paid from Return of Capital
First Trust Horizon Managed Volatility Domestic ETF	$ 1,810,516		$ —		$ —
First Trust Horizon Managed Volatility Developed International ETF	1,333,862		—		—
First Trust Horizon Managed Volatility Small/Mid ETF	255,451		—		—

The tax character of distributions paid by each Fund during the fiscal year ended July 31, 2022, was as follows:

	Distributions paid from Ordinary Income		Distributions paid from Capital Gains		Distributions paid from Return of Capital
First Trust Horizon Managed Volatility Domestic ETF	$ 1,660,766		$ —		$ —
First Trust Horizon Managed Volatility Developed International ETF	1,931,942		—		—
First Trust Horizon Managed Volatility Small/Mid ETF	133,705		—		—

As of July 31, 2023, the components of distributable earnings on a tax basis for each Fund were as follows:

	Undistributed Ordinary Income		Accumulated Capital and Other Gain (Loss)		Net Unrealized Appreciation (Depreciation)
First Trust Horizon Managed Volatility Domestic ETF	$ 178,012		$ (43,898,526)		$ 3,257,632
First Trust Horizon Managed Volatility Developed International ETF	235,830		(30,830,145)		538,685
First Trust Horizon Managed Volatility Small/Mid ETF	28,610		(2,152,557)		1,237,166

E. Income Taxes

Each Fund intends to continue to qualify as a regulated investment company by complying with the requirements under Subchapter M of the Internal Revenue Code of 1986, as amended, which includes distributing substantially all of its net investment income and net realized gains to shareholders. Accordingly, no provision has been made for federal and state income taxes. However, due to the timing and amount of distributions, each Fund may be subject to an excise tax of 4% of the amount by which approximately 98% of each Fund’s taxable income exceeds the distributions from such taxable income for the calendar year.

The Funds are subject to accounting standards that establish a minimum threshold for recognizing, and a system for measuring, the benefits of a tax position taken or expected to be taken in a tax return. For HUSV and HDMV, taxable years ended 2020, 2021, 2022, and 2023 remain open to federal and state audit. For HSMV, the taxable period ended 2020 and taxable years ended 2021, 2022, and 2023 remain open to federal and state audit. As of July 31, 2023, management has evaluated the application of these standards to the Funds and has determined that no provision for income tax is required in the Funds’ financial statements for uncertain tax positions.

The Funds intend to utilize provisions of the federal income tax laws, which allow them to carry a realized capital loss forward indefinitely following the year of the loss and offset such loss against any future realized capital gains. The Funds are subject to certain limitations under U.S. tax rules on the use of capital loss carryforwards and net unrealized built-in losses. These limitations apply when there has been a 50% change in ownership. At July 31, 2023, for federal income tax purposes, each applicable Fund had a capital loss carryforward available that is shown in the following table, to the extent provided by regulations, to offset future capital gains.

Page 34

Notes to Financial Statements (Continued)

First Trust Exchange-Traded Fund III

July 31, 2023

	Non-Expiring Capital Loss Carryforwards
First Trust Horizon Managed Volatility Domestic ETF	$ 43,898,526
First Trust Horizon Managed Volatility Developed International ETF	30,830,145
First Trust Horizon Managed Volatility Small/Mid ETF	2,152,557

In order to present paid-in capital and accumulated distributable earnings (loss) (which consists of accumulated net investment income (loss), accumulated net realized gain (loss) on investments and net unrealized appreciation (depreciation) on investments) on the Statements of Assets and Liabilities that more closely represent their tax character, certain adjustments have been made to paid-in capital, accumulated net investment income (loss) and accumulated net realized gain (loss) on investments. These adjustments are primarily due to the difference between book and tax treatments of income and gains on various investment securities held by the Funds and in-kind transactions. The results of operations and net assets were not affected by these adjustments. For the fiscal year ended July 31, 2023, the adjustments for each Fund were as follows:

	Accumulated Net Investment Income (Loss)		Accumulated Net Realized Gain (Loss) on Investments		Paid-in Capital
First Trust Horizon Managed Volatility Domestic ETF	$ —		$ (2,721,381)		$ 2,721,381
First Trust Horizon Managed Volatility Developed International ETF	38,862		(1,637)		(37,225)
First Trust Horizon Managed Volatility Small/Mid ETF	—		—		—

As of July 31, 2023, the aggregate cost, gross unrealized appreciation, gross unrealized depreciation, and net unrealized appreciation/(depreciation) on investments (including short positions and derivatives, if any) for federal income tax purposes were as follows:

	Tax Cost		Gross Unrealized Appreciation		Gross Unrealized (Depreciation)		Net Unrealized Appreciation (Depreciation)
First Trust Horizon Managed Volatility Domestic ETF	$ 88,525,108		$ 5,576,108		$ (2,318,476)		$ 3,257,632
First Trust Horizon Managed Volatility Developed International ETF	39,833,701		2,540,724		(2,005,428)		535,296
First Trust Horizon Managed Volatility Small/Mid ETF	17,771,050		1,847,882		(610,716)		1,237,166

F. Expenses

Expenses, other than the investment advisory fee and other excluded expenses, are paid by the Advisor (See Note 3).

3. Investment Advisory Fee, Affiliated Transactions and Other Fee Arrangements

First Trust, the investment advisor to the Funds, is a limited partnership with one limited partner, Grace Partners of DuPage L.P., and one general partner, The Charger Corporation. The Charger Corporation is an Illinois corporation controlled by James A. Bowen, Chief Executive Officer of First Trust. First Trust is responsible for supervising the selection and ongoing monitoring of the securities in each Fund’s portfolio, managing the Funds’ business affairs and providing certain administrative services necessary for the management of the Funds.

First Trust is paid an annual unitary management fee for each Fund. Pursuant to the Investment Management Agreement between First Trust and the Trust, First Trust manages the investment of the Funds’ assets and is responsible for the expenses of each Fund, including the cost of transfer agency, sub-advisory, custody, fund administration, legal, audit and other services, but excluding fee payments under the Investment Management Agreement, interest, taxes, brokerage commissions and other expenses connected with the execution of portfolio transactions, distribution and service fees payable pursuant to a Rule 12b-1 plan, if any, and extraordinary expenses, which are paid by each respective Fund. First Trust also provides fund reporting services to the Funds for a flat annual fee in the amount of $9,250 per Fund, which is covered under the annual unitary management fee. Effective November 1, 2022, the annual

Page 35

Notes to Financial Statements (Continued)

First Trust Exchange-Traded Fund III

July 31, 2023

unitary management fee payable by each Fund to First Trust for these services will be reduced at certain levels of each Fund’s net assets (“breakpoints”) and calculated pursuant to the following schedules:

Breakpoints		HUSV		HSMV
Fund net assets up to and including $2.5 billion		0.7000%		0.80%
Fund net assets greater than $2.5 billion up to and including $5 billion		0.6825%		0.78%
Fund net assets greater than $5 billion up to and including $7.5 billion		0.6650%		0.76%
Fund net assets greater than $7.5 billion up to and including $10 billion		0.6475%		0.74%
Fund net assets greater than $10 billion up to and including $15 billion		0.6300%		0.72%
Fund net assets greater than $15 billion		0.5950%		0.68%

    

Breakpoints		HDMV
Fund net assets up to and including $2.5 billion		0.80%
Fund net assets greater than $2.5 billion up to and including $5 billion		0.78%
Fund net assets greater than $5 billion up to and including $7.5 billion		0.76%
Fund net assets greater than $7.5 billion up to and including $10 billion		0.74%
Fund net assets greater than $10 billion		0.72%

Prior to November 1, 2022, HUSV paid First Trust an annual unitary management fee equal to 0.70% of the Fund’s average daily net assets and HDMV and HSMV each paid First Trust an annual unitary management fee of 0.80% of their average daily net assets.

Horizon serves as the Funds’ sub-advisor and manages each Fund’s portfolio subject to First Trust’s supervision. The Sub-Advisor receives a sub-advisory fee from First Trust equal to 50% of any remaining monthly unitary management fee paid to the Advisor after the average Fund’s expenses accrued during the most recent twelve months are subtracted from the unitary management fee for that month. During any period in which First Trust’s management fee is reduced in accordance with the breakpoints described above, the sub-advisory fee will be reduced to reflect the reduction in First Trust’s management fee.

The Trust has multiple service agreements with Brown Brothers Harriman & Co. (“BBH”). Under the service agreements, BBH performs custodial, fund accounting, certain administrative services, and transfer agency services for the Funds. As custodian, BBH is responsible for custody of each Fund’s assets. As fund accountant and administrator, BBH is responsible for maintaining the books and records of each Fund’s securities and cash. As transfer agent, BBH is responsible for maintaining shareholder records for each Fund.

Each Trustee who is not an officer or employee of First Trust, any sub-advisor or any of their affiliates (“Independent Trustees”) is paid a fixed annual retainer that is allocated equally among each fund in the First Trust Fund Complex. Each Independent Trustee is also paid an annual per fund fee that varies based on whether the fund is a closed-end or other actively managed fund, a target outcome fund or an index fund.

Additionally, the Lead Independent Trustee and the Chairs of the Audit Committee, Nominating and Governance Committee and Valuation Committee are paid annual fees to serve in such capacities, with such compensation allocated pro rata among each fund in the First Trust Fund Complex based on net assets. Independent Trustees are reimbursed for travel and out-of-pocket expenses in connection with all meetings. The Lead Independent Trustee and Committee Chairs rotate every three years. The officers and “Interested” Trustee receive no compensation from the Trust for acting in such capacities.

4. Purchases and Sales of Securities

For the fiscal year ended July 31, 2023, the cost of purchases and proceeds from sales of investment securities for each Fund, excluding short-term investments and in-kind transactions, were as follows:

	Purchases		Sales
First Trust Horizon Managed Volatility Domestic ETF	$ 118,008,007		$ 118,096,818
First Trust Horizon Managed Volatility Developed International ETF	31,483,862		31,530,358
First Trust Horizon Managed Volatility Small/Mid ETF	12,056,481		11,961,771

Page 36

Notes to Financial Statements (Continued)

First Trust Exchange-Traded Fund III

July 31, 2023

For the fiscal year ended July 31, 2023, the cost of in-kind purchases and proceeds from in-kind sales for each Fund were as follows:

	Purchases		Sales
First Trust Horizon Managed Volatility Domestic ETF	$ 26,887,784		$ 34,091,566
First Trust Horizon Managed Volatility Developed International ETF	—		5,602,890
First Trust Horizon Managed Volatility Small/Mid ETF	3,172,586		—

5. Creations, Redemptions and Transaction Fees

Each Fund generally issues and redeems its shares in primary market transactions through a creation and redemption mechanism and does not sell or redeem individual shares. Instead, financial entities known as “Authorized Participants” have contractual arrangements with a Fund or one of the Fund’s service providers to purchase and redeem Fund shares directly with the Fund in large blocks of shares known as “Creation Units.” Prior to the start of trading on every business day, a Fund publishes through the National Securities Clearing Corporation (“NSCC”) the “basket” of securities, cash or other assets that it will accept in exchange for a Creation Unit of the Fund’s shares. An Authorized Participant that wishes to effectuate a creation of a Fund’s shares deposits with the Fund the “basket” of securities, cash or other assets identified by the Fund that day, and then receives the Creation Unit of the Fund’s shares in return for those assets. After purchasing a Creation Unit, the Authorized Participant may continue to hold the Fund’s shares or sell them in the secondary market. The redemption process is the reverse of the purchase process: the Authorized Participant redeems a Creation Unit of a Fund’s shares for a basket of securities, cash or other assets. The combination of the creation and redemption process with secondary market trading in a Fund’s shares and underlying securities provides arbitrage opportunities that are designed to help keep the market price of a Fund’s shares at or close to the NAV per share of the Fund.

Each Fund imposes fees in connection with the purchase of Creation Units. These fees may vary based upon various fact-based circumstances, including, but not limited to, the composition of the securities included in the Creation Unit or the countries in which the transactions are settled. The price for each Creation Unit will equal the daily NAV per share of a Fund times the number of shares in a Creation Unit, plus the fees described above and, if applicable, any operational processing and brokerage costs, transfer fees, stamp taxes and part or all of the spread between the expected bid and offer side of the market related to the securities comprising the creation basket.

Each Fund also imposes fees in connection with the redemption of Creation Units. These fees may vary based upon various fact-based circumstances, including, but not limited to, the composition of the securities included in the Creation Unit or the countries in which the transactions are settled. The price received for each Creation Unit will equal the daily NAV per share of a Fund times the number of shares in a Creation Unit, minus the fees described above and, if applicable, any operational processing and brokerage costs, transfer fees, stamp taxes and part or all of the spread between the expected bid and offer side of the market related to the securities comprising the redemption basket. Investors who use the services of a broker or other such intermediary in addition to an Authorized Participant to effect a redemption of a Creation Unit may also be assessed an amount to cover the cost of such services. The redemption fee charged by a Fund will comply with Rule 22c-2 of the 1940 Act which limits redemption fees to no more than 2% of the value of the shares redeemed.

6. Distribution Plan

The Board of Trustees adopted a Distribution and Service Plan pursuant to Rule 12b-1 under the 1940 Act. In accordance with the Rule 12b-1 plan, each Fund is authorized to pay an amount up to 0.25% of its average daily net assets each year to reimburse First Trust Portfolios L.P. (“FTP”), the distributor of the Funds, for amounts expended to finance activities primarily intended to result in the sale of Creation Units or to provide investor services. FTP may also use this amount to compensate securities dealers or other persons that are Authorized Participants for providing distribution assistance, including broker-dealer and shareholder support and educational and promotional services.

No 12b-1 fees are currently paid by the Funds, and pursuant to a contractual arrangement, no 12b-1 fees will be paid any time before November 30, 2024.

7. Indemnification

The Trust, on behalf of the Funds, has a variety of indemnification obligations under contracts with its service providers. The Trust’s maximum exposure under these arrangements is unknown. However, the Trust has not had prior claims or losses pursuant to these contracts and expects the risk of loss to be remote.

Page 37

Notes to Financial Statements (Continued)

First Trust Exchange-Traded Fund III

July 31, 2023

8. Other Matters

By operation of law, HSMV now operates as a diversified open-end management investment company as defined in Section 5(b) of the 1940 Act.

9. Subsequent Events

Management has evaluated the impact of all subsequent events on the Funds through the date the financial statements were issued and has determined that there were no subsequent events requiring recognition or disclosure in the financial statements that have not already been disclosed.

Page 38

To the Shareholders and the Board of Trustees of First Trust Exchange-Traded Fund III:

Opinion on the Financial Statements and Financial Highlights

We have audited the accompanying statements of assets and liabilities of First Trust Horizon Managed Volatility Domestic ETF, First Trust Horizon Managed Volatility Developed International ETF, and First Trust Horizon Managed Volatility Small/Mid ETF (the “Funds”), each a series of the First Trust Exchange-Traded Fund III, including the portfolios of investments, as of July 31, 2023, the related statements of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for the periods indicated in the table below, and the related notes. In our opinion, the financial statements and financial highlights present fairly, in all material respects, the financial position of each of the Funds as of July 31, 2023, and the results of their operations for the year then ended, the changes in their net assets for each of the two years in the period then ended, and the financial highlights for the periods listed in the table below in conformity with accounting principles generally accepted in the United States of America.

Individual Funds Included in the Trust	Financial Highlights
First Trust Horizon Managed Volatility Domestic ETF (HUSV) First Trust Horizon Managed Volatility Developed International ETF (HDMV)	For the years ended July 31, 2023, 2022, 2021, 2020, and 2019
First Trust Horizon Managed Volatility Small/Mid ETF (HSMV)	For the years ended July 31, 2023, 2022, and 2021, and for the period from April 6, 2020 (commencement of investment operations) through July 31, 2020

Basis for Opinion

These financial statements and financial highlights are the responsibility of the Funds’ management. Our responsibility is to express an opinion on the Funds’ financial statements and financial highlights based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Funds in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement, whether due to error or fraud. The Funds are not required to have, nor were we engaged to perform, an audit of their internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Funds’ internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements and financial highlights, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements and financial highlights. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and financial highlights. Our procedures included confirmation of securities owned as of July 31, 2023, by correspondence with the custodian and brokers; when replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.

Chicago, Illinois

September 22, 2023

We have served as the auditor of one or more First Trust investment companies since 2001.

Page 39

Additional Information

First Trust Exchange-Traded Fund III

July 31, 2023 (Unaudited)

Proxy Voting Policies and Procedures

A description of the policies and procedures that the Trust uses to determine how to vote proxies and information on how each Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available (1) without charge, upon request, by calling (800) 988-5891; (2) on each Fund’s website at www.ftportfolios.com; and (3) on the Securities and Exchange Commission’s (“SEC”) website at www.sec.gov.

Portfolio Holdings

Each Fund files portfolio holdings information for each month in a fiscal quarter within 60 days after the end of the relevant fiscal quarter on Form N-PORT. Portfolio holdings information for the third month of each fiscal quarter will be publicly available on the SEC’s website at www.sec.gov. Each Fund’s complete schedule of portfolio holdings for the second and fourth quarters of each fiscal year is included in the semi-annual and annual reports to shareholders, respectively, and is filed with the SEC on Form N-CSR. The semi-annual and annual report for each Fund is available to investors within 60 days after the period to which it relates. Each Fund’s Forms N-PORT and Forms N-CSR are available on the SEC’s website listed above.

Federal Tax Information

For the taxable year  ended July 31, 2023, the following percentages of income dividends paid by the Funds qualify for the dividends received deduction available to corporations: 

	Dividends Received Deduction
First Trust Horizon Managed Volatility Domestic ETF	100.00%
First Trust Horizon Managed Volatility Developed International ETF	0.00%
First Trust Horizon Managed Volatility Small/Mid ETF	100.00%

For the taxable year ended July 31, 2023, the following percentages of income dividend paid by the Funds are hereby designated as qualified dividend income:

	Qualified Dividend Income
First Trust Horizon Managed Volatility Domestic ETF	100.00%
First Trust Horizon Managed Volatility Developed International ETF	70.20%
First Trust Horizon Managed Volatility Small/Mid ETF	100.00%

A portion of the ordinary dividends (including short-term capital gains) that HUSV and HSMV paid to shareholders during the taxable year ended July 31, 2023, may be eligible for the Qualified Business Income (QBI) Deduction under the Internal Revenue Code of 1986, as amended (the “Code”), section 199A for the aggregate dividends the Funds received from the underlying Real Estate Investment Trusts (REITs) they invest in.

The following Fund met the requirements of Section 853 of the Code and elects to pass through to its shareholders credit for foreign taxes paid. For the taxable year ended July 31, 2023, the total amounts of income received by the Fund from sources within foreign countries and possessions of the United States and of taxes paid to such countries are as follows:

	Gross Foreign Income				Foreign Taxes Paid
	Amount		Per Share		Amount		Per Share
First Trust Horizon Managed Volatility Developed International ETF	$1,687,269		$1.21		$108,385		$0.08

The foreign taxes paid will be reported to shareholders on Form 1099-DIV which will be sent to shareholders shortly after the calendar year end. Gross foreign income and foreign taxes paid will be posted on the Fund’s website and disclosed in the tax letter.

Risk Considerations

Risks are inherent in all investing. Certain general risks that may be applicable to a Fund are identified below, but not all of the material risks relevant to each Fund are included in this report and not all of the risks below apply to each Fund. The material risks of investing in each Fund are spelled out in its prospectus, statement of additional information and other regulatory filings. Before investing, you should consider each Fund’s investment objective, risks, charges and expenses, and read each

Page 40

Additional Information (Continued)

First Trust Exchange-Traded Fund III

July 31, 2023 (Unaudited)

Fund’s prospectus and statement of additional information carefully. You can download each Fund’s prospectus at www.ftportfolios.com or contact First Trust Portfolios L.P. at (800) 621-1675 to request a prospectus, which contains this and other information about each Fund.

Concentration Risk. To the extent that a fund is able to invest 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 fund that tracks an index will be concentrated to the extent the fund’s corresponding index is concentrated. A concentration makes a fund more susceptible to any single occurrence and may subject the fund to greater market risk than a fund that is more broadly diversified.

Credit Risk. Credit risk is the risk that an issuer of a security will be unable or unwilling to make dividend, interest and/or principal payments when due and the related risk that the value of a security may decline because of concerns about the issuer’s ability to make such payments.

Cyber Security Risk. The funds are susceptible to potential operational risks through breaches in cyber security. A breach in cyber security refers to both intentional and unintentional events that may cause a fund to lose proprietary information, suffer data corruption or lose operational capacity. Such events could cause a fund to incur regulatory penalties, reputational damage, additional compliance costs associated with corrective measures and/or financial loss. In addition, cyber security breaches of a fund’s third-party service providers, such as its administrator, transfer agent, custodian, or sub-advisor, as applicable, or issuers in which the fund invests, can also subject a fund to many of the same risks associated with direct cyber security breaches.

Defined Outcome Funds Risk. To the extent a fund’s investment strategy is designed to deliver returns tied to the price performance of an underlying ETF, an investor may not realize the returns the fund seeks to achieve if that investor does not hold shares for the entire target outcome period. In the event an investor purchases shares after the first day of the target outcome period or sells shares prior to the end of the target outcome period, the buffer that the fund seeks to provide against a decline in the value of the underlying ETF may not be available, the enhanced returns that the fund seeks to provide (if any) may not be available and the investor may not participate in a gain in the value of the underlying ETF up to the cap for the investor’s investment period. Additionally, the fund will not participate in gains of the underlying ETF above the cap and a shareholder may lose their entire investment. If the fund seeks enhanced returns, there are certain time periods when the value of the fund may fall faster than the value of the underlying ETF, and it is very unlikely that, on any given day during which the underlying ETF share price increases in value, the fund’s share price will increase at the same rate as the enhanced returns sought by the fund, which is designed for an entire target outcome period. Trading flexible exchange options involves risks different from, or possibly greater than, the risks associated with investing directly in securities, such as less liquidity and correlation and valuation risks. A fund may experience substantial downside from specific flexible exchange option positions and certain positions may expire worthless.

Derivatives Risk. To the extent a fund uses derivative instruments such as futures contracts, options contracts and swaps, the fund may experience losses because of adverse movements in the price or value of the underlying asset, index or rate, which may be magnified by certain features of the derivative. These risks are heightened when a fund’s portfolio managers use derivatives to enhance the fund’s return or as a substitute for a position or security, rather than solely to hedge (or offset) the risk of a position or security held by the fund.

Equity Securities Risk. To the extent a fund invests in equity securities, the value of the fund’s shares will fluctuate with changes in the value of the equity securities. Equity securities prices fluctuate for several reasons, including changes in investors’ perceptions of the financial condition of an issuer or the general condition of the relevant stock market, such as market volatility, or when political or economic events affecting the issuers occur. In addition, common stock prices may be particularly sensitive to rising interest rates, as the cost of capital rises and borrowing costs increase. 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.

ETF Risk. The shares of an ETF trade like common stock and represent an interest in a portfolio of securities. The risks of owning an ETF generally reflect the risks of owning the underlying securities, although lack of liquidity in an ETF could result in it being more volatile and ETFs have management fees that increase their costs. Shares of an ETF trade on an exchange at market prices rather than net asset value, which may cause the shares to trade at a price greater than net asset value (premium) or less than net asset value (discount). In times of market stress, decisions by market makers to reduce or step away from their role of providing a market for an ETF’s shares, or decisions by an ETF’s authorized participants that they are unable or unwilling to proceed with creation and/or redemption orders of an ETF’s shares, could result in shares of the ETF trading at a discount to net asset value and in greater than normal intraday bid-ask spreads.

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Fixed Income Securities Risk. To the extent a fund invests in fixed income securities, the fund will be subject to credit risk, income risk, interest rate risk, liquidity risk and prepayment risk. Income risk is the risk that income from a fund’s fixed income investments could decline during periods of falling interest rates. Interest rate risk is the risk that the value of a fund’s fixed income securities will decline because of rising interest rates. Liquidity risk is the risk that a security cannot be purchased or sold at the time desired, or cannot be purchased or sold without adversely affecting the price. Prepayment risk is the risk that the securities will be redeemed or prepaid by the issuer, resulting in lower interest payments received by the fund. In addition to these risks, high yield securities, or “junk” bonds, are subject to greater market fluctuations and risk of loss than securities with higher ratings, and the market for high yield securities is generally smaller and less liquid than that for investment grade securities.

Index or Model Constituent Risk. Certain funds may be a constituent of one or more indices or ETF models. As a result, such a fund may be included in one or more index-tracking exchange-traded funds or mutual funds. Being a component security of such a vehicle could greatly affect the trading activity involving a fund, the size of the fund and the market volatility of the fund. 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, a fund’s net asset value could be negatively impacted and the fund’s market price may be significantly below its net asset value during certain periods. In addition, index rebalances may potentially result in increased trading activity in a fund’s shares.

Index Provider Risk. To the extent a fund seeks to track an index, it is subject to Index Provider Risk. There is no assurance that the Index Provider will compile the Index accurately, or that the Index will be determined, maintained, constructed, reconstituted, rebalanced, composed, calculated or disseminated accurately. To correct any such error, the Index Provider may carry out an unscheduled rebalance or other modification of the Index constituents or weightings, which may increase the fund’s costs. The Index Provider does not provide any representation or warranty in relation to the quality, accuracy or completeness of data in the Index, and it does not guarantee that the Index will be calculated in accordance with its stated methodology. Losses or costs associated with any Index Provider errors generally will be borne by the fund and its shareholders.

Investment Companies Risk. To the extent a fund invests in the securities of other investment vehicles, the fund will incur additional fees and expenses that would not be present in a direct investment in those investment vehicles. Furthermore, the fund’s investment performance and risks are directly related to the investment performance and risks of the investment vehicles in which the fund invests.

LIBOR Risk. To the extent a fund invests in floating or variable rate obligations that use the London Interbank Offered Rate (“LIBOR”) as a reference interest rate, it is subject to LIBOR Risk. The United Kingdom’s Financial Conduct Authority, which regulates LIBOR has ceased making LIBOR available as a reference rate over a phase-out period that began December 31, 2021. There is no assurance that any alternative reference rate, including the Secured Overnight Financing Rate (“SOFR”) will be similar to or produce the same value or economic equivalence as LIBOR or that instruments using an alternative rate will have the same volume or liquidity. The unavailability or replacement of LIBOR may affect the value, liquidity or return on certain fund investments and may result in costs incurred in connection with closing out positions and entering into new trades. Any potential effects of the transition away from LIBOR on the fund or on certain instruments in which the fund invests can be difficult to ascertain, and they may vary depending on a variety of factors, and they could result in losses to the fund.

Management Risk. To the extent that a fund is actively managed, it is subject to management risk. In managing an actively-managed fund’s investment portfolio, the fund’s portfolio managers will apply investment techniques and risk analyses that may not have the desired result. There can be no guarantee that a fund will meet its investment objective.

Market Risk. Market risk is the risk that a particular security, or shares of a fund in general, may fall in value. Securities held by a fund, as well as shares of a fund itself, are subject to market fluctuations caused by factors such as general economic conditions, political events, regulatory or market developments, changes in interest rates and perceived trends in securities prices. Shares of a fund could decline in value or underperform other investments as a result of the risk of loss associated with these market fluctuations. In addition, local, regional or global events such as war, acts of terrorism, spread of infectious diseases or other public health issues, recessions, or other events could have a significant negative impact on a fund and its investments. Such events may affect certain geographic regions, countries, sectors and industries more significantly than others. In February 2022, Russia invaded Ukraine which has caused and could continue to cause significant market disruptions and volatility within the markets in Russia, Europe, and the United States. The hostilities and sanctions resulting from those hostilities could have a significant impact on certain fund investments as well as fund performance. The COVID-19 global pandemic and the ensuing policies enacted by governments and central banks have caused and may continue to cause significant volatility and uncertainty in global financial markets. While the U.S. has resumed “reasonably” normal business activity, many countries continue to impose lockdown measures. Additionally, there is no guarantee that vaccines will be effective against emerging variants of the disease. These events also adversely affect the prices and liquidity of a fund’s portfolio securities or other instruments and could result in disruptions in the trading markets. Any of such circumstances could have a materially negative impact on the value of a fund’s shares and result in increased market volatility. During any such events, a fund’s shares may trade at increased premiums or discounts to their net asset value and the bid/ask spread on a fund’s shares may widen.

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Non-U.S. Securities Risk. To the extent a fund invests in non-U.S. securities, it is subject to additional risks not associated with securities of domestic issuers. Non-U.S. securities are subject to higher volatility than securities of domestic issuers due to: possible adverse political, social or economic developments; restrictions on foreign investment or exchange of securities; capital controls; lack of liquidity; currency exchange rates; excessive taxation; government seizure of assets; the imposition of sanctions by foreign governments; different legal or accounting standards; and less government supervision and regulation of exchanges in foreign countries. Investments in non-U.S. securities may involve higher costs than investments in U.S. securities, including higher transaction and custody costs, as well as additional taxes imposed by non-U.S. governments. These risks may be heightened for securities of companies located, or with significant operations, in emerging market countries.

Operational Risk. Each fund is subject to risks arising from various operational factors, including, but not limited to, human error, processing and communication errors, errors of a fund’s service providers, counterparties or other third-parties, failed or inadequate processes and technology or systems failures. Each 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 a fund’s ability to meet its investment objective. Although the funds and the funds’ investment advisor seek to reduce these operational risks through controls and procedures, there is no way to completely protect against such risks.

Passive Investment Risk. To the extent a fund seeks to track an index, the fund will invest in the securities included in, or representative of, the index regardless of their investment merit. A fund generally will not attempt to take defensive positions in declining markets.

Preferred Securities Risk. 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. 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 obtain limited rights. In certain circumstances, an issuer of preferred securities may defer payment on the securities and, in some cases, redeem the securities prior to a specified date. Preferred securities may also be substantially less liquid than other securities, including common stock.

Valuation Risk. The valuation of certain securities may carry more risk than that of common stock. Uncertainties in the conditions of the financial markets, unreliable reference data, lack of transparency and inconsistency of valuation models and processes may lead to inaccurate asset pricing. A fund may hold investments in sizes smaller than institutionally sized round lot positions (sometimes referred to as odd lots). However, third-party pricing services generally provide evaluations on the basis of institutionally-sized round lots. If a fund sells certain of its investments in an odd lot transaction, the sale price may be less than the value at which such securities have been held by the fund. Odd lots often trade at lower prices than institutional round lots. There is no assurance that the fund will be able to sell a portfolio security at the price established by the pricing service, which could result in a loss to the fund.

NOT FDIC INSURED

NOT BANK GUARANTEED

MAY LOSE VALUE

Advisory and Sub-Advisory Agreements

Board Considerations Regarding Approval of the Continuation of the Investment Management and Investment Sub-Advisory Agreements

FIRST TRUST HORIZON MANAGED VOLATILITY DOMESTIC ETF
FIRST TRUST HORIZON MANAGED VOLATILITY DEVELOPED INTERNATIONAL ETF
FIRST TRUST HORIZON MANAGED VOLATILITY SMALL/MID ETF

The Board of Trustees of First Trust Exchange-Traded Fund III (the “Trust”), including the Independent Trustees, unanimously approved the continuation of the Investment Management Agreements (as applicable to a specific Fund, the “Advisory Agreement” and collectively, the “Advisory Agreements”) with First Trust Advisors L.P. (the “Advisor”) and the Investment Sub-Advisory Agreement (the “Sub-Advisory Agreement” and together with the Advisory Agreements, the “Agreements”) among the Trust, the Advisor and Horizon Investments, LLC (the “Sub-Advisor”) on behalf of the following series of the Trust (each a “Fund” and collectively, the “Funds”):

First Trust Horizon Managed Volatility Domestic ETF (HUSV)
First Trust Horizon Managed Volatility Developed International ETF (HDMV)
First Trust Horizon Managed Volatility Small/Mid ETF (HSMV)

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The Board approved the continuation of the applicable Agreements for each Fund for a one-year period ending June 30, 2024 at a meeting held on June 4–5, 2023.  The Board determined for each Fund that the continuation of the applicable Agreements is in the best interests of the Fund in light of the nature, extent and quality of the services provided and such other matters as the Board considered to be relevant in the exercise of its business judgment.

To reach this determination for each Fund, the Board considered its duties under the Investment Company Act of 1940, as amended (the “1940 Act”), as well as under the general principles of state law, in reviewing and approving advisory contracts; the requirements of the 1940 Act in such matters; the fiduciary duty of investment advisors with respect to advisory agreements and compensation; the standards used by courts in determining whether investment company boards have fulfilled their duties; and the factors to be considered by the Board in voting on such agreements.  At meetings held on April 17, 2023 and June 4–5, 2023, the Board, including the Independent Trustees, reviewed materials provided by the Advisor and the Sub-Advisor responding to requests for information from counsel to the Independent Trustees, submitted on behalf of the Independent Trustees, that, among other things, outlined: the services provided by the Advisor and the Sub-Advisor to each Fund (including the relevant personnel responsible for these services and their experience); the unitary fee rate schedule payable by each Fund as compared to fees charged to a peer group of funds (the “Expense Group”) and a broad peer universe of funds (the “Expense Universe”), each assembled by Broadridge Financial Solutions, Inc. (“Broadridge”), an independent source, and as compared to fees charged to other clients of the Advisor, including other exchange-traded funds (“ETFs”) managed by the Advisor; the sub-advisory fee as compared to fees charged to other clients of the Sub-Advisor; the expense ratio of each Fund as compared to expense ratios of the funds in the Fund’s Expense Group and Expense Universe; performance information for each Fund, including comparisons of each Fund’s performance to that of one or more relevant benchmark indexes and to that of a performance group of funds and a broad performance universe of funds (the “Performance Universe”), each assembled by Broadridge; the nature of expenses incurred in providing services to each Fund and the potential for the Advisor and the Sub-Advisor to realize economies of scale, if any; profitability and other financial data for the Advisor; financial data for the Sub-Advisor; any indirect benefits to the Advisor and its affiliate, First Trust Portfolios L.P. (“FTP”), and the Sub-Advisor; and information on the Advisor’s and the Sub-Advisor’s compliance programs.  The Board reviewed initial materials with the Advisor at the meeting held on April 17, 2023, prior to which the Independent Trustees and their counsel met separately to discuss the information provided by the Advisor and the Sub-Advisor.  Following the April meeting, counsel to the Independent Trustees, on behalf of the Independent Trustees, requested certain clarifications and supplements to the materials provided, and the information provided in response to those requests was considered at an executive session of the Independent Trustees and their counsel held prior to the June 4–5, 2023 meeting, as well as at the June meeting.  The Board applied its business judgment to determine whether the arrangements between the Trust and the Advisor and among the Trust, the Advisor and the Sub-Advisor continue to be reasonable business arrangements from each Fund’s perspective.  The Board determined that, given the totality of the information provided with respect to the Agreements, the Board had received sufficient information to renew the Agreements.  The Board considered that shareholders chose to invest or remain invested in a Fund knowing that the Advisor and the Sub-Advisor manage the Fund and knowing the Fund’s unitary fee.

In reviewing the applicable Agreements for each Fund, the Board considered the nature, extent and quality of the services provided by the Advisor and the Sub-Advisor under the applicable Agreements.  With respect to the Advisory Agreements, the Board considered that the Advisor is responsible for the overall management and administration of the Trust and each Fund and reviewed all of the services provided by the Advisor to the Funds, including the oversight of the Sub-Advisor, as well as the background and experience of the persons responsible for such services.  The Board noted that the Advisor oversees the Sub-Advisor’s day-to-day management of each Fund’s investments, including portfolio risk monitoring and performance review.  The Board considered that the Sub-Advisor is responsible for the selection and ongoing monitoring of the securities in the Funds’ investment portfolios, but that the Advisor executes each Fund’s portfolio trades.  In reviewing the services provided, the Board noted the compliance program that had been developed by the Advisor and considered that it includes a robust program for monitoring the Advisor’s, the Sub-Advisor’s and each Fund’s compliance with the 1940 Act, as well as each Fund’s compliance with its investment objective, policies and restrictions.  The Board also considered a report from the Advisor with respect to its risk management functions related to the operation of the Funds.  Finally, as part of the Board’s consideration of the Advisor’s services, the Advisor, in its written materials and at the April 17, 2023 meeting, described to the Board the scope of its ongoing investment in additional personnel and infrastructure to maintain and improve the quality of services provided to the Funds and the other funds in the First Trust Fund Complex.  With respect to the Sub-Advisory Agreement, the Board noted that each Fund is an actively-managed ETF and the Sub-Advisor actively manages the Fund’s investments.  In addition to the written materials provided by the Sub-Advisor, at the June 4–5, 2023 meeting, the Board also received a presentation from representatives of the Sub-Advisor, who discussed the services that the Sub-Advisor provides to each Fund, including the Sub-Advisor’s day-to-day management of the Funds’ investments.  In considering the Sub-Advisor’s management of the Funds, the Board noted the background and experience of the Sub-Advisor’s portfolio management team.  In light of the information presented and the considerations made, the Board concluded that the nature, extent and quality of the services provided to the Trust

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and each Fund by the Advisor and the Sub-Advisor under the Agreements have been and are expected to remain satisfactory and that the Sub-Advisor, under the oversight of the Advisor, has managed each Fund consistent with its investment objective, policies and restrictions.

The Board considered the unitary fee rate schedule payable by each Fund under the applicable Advisory Agreement for the services provided.  The Board noted that the sub-advisory fee for each Fund is paid by the Advisor from the Fund’s unitary fee.  The Board considered that as part of the unitary fee the Advisor is responsible for each Fund’s expenses, including the cost of sub-advisory, transfer agency, custody, fund administration, legal, audit and other services and license fees, if any, but excluding the fee payment under the applicable Advisory Agreement and interest, taxes, brokerage commissions and other expenses connected with the execution of portfolio transactions, distribution and service fees pursuant to a Rule 12b-1 plan, if any, and extraordinary expenses, if any.  The Board received and reviewed information showing the fee rates and expense ratios of the peer funds in the Expense Groups, as well as advisory and unitary fee rates charged by the Advisor and the Sub-Advisor to other fund (including ETFs) and non-fund clients, as applicable.  Because each Fund pays a unitary fee, the Board determined that expense ratios were the most relevant comparative data point.  Based on the information provided, the Board noted that the total (net) expense ratio for HDMV was below the median total (net) expense ratio of the peer funds in its Expense Group and that the total (net) expense ratio for each of HUSV and HSMV was above the median total (net) expense ratio of the peer funds in its respective Expense Group.  With respect to the Expense Groups, the Board, at the April 17, 2023 meeting, discussed with Broadridge its methodology for assembling peer groups and discussed with the Advisor limitations in creating peer groups for actively-managed ETFs, including that HDMV’s Expense Group did not include any other actively-managed ETFs, and different business models that may affect the pricing of services among ETF sponsors.  The Board also noted that, for each Fund, not all peer funds employ an advisor/sub-advisor management structure.  The Board took these limitations and differences into account in considering the peer data.  With respect to fees charged to other non-ETF clients, the Board considered differences between the Funds and other non-ETF clients that limited their comparability.  In considering the unitary fee rate schedules overall, the Board also considered the Advisor’s statement that it seeks to meet investor needs through innovative and value-added investment solutions and the Advisor’s demonstrated long-term commitment to each Fund and the other funds in the First Trust Fund Complex.

The Board considered performance information for each Fund.  The Board noted the process it has established for monitoring each Fund’s performance and portfolio risk on an ongoing basis, which includes quarterly performance reporting from the Advisor and the Sub-Advisor for the Funds.  The Board determined that this process continues to be effective for reviewing each Fund’s performance.  The Board received and reviewed information comparing each Fund’s performance for one or more periods ended December 31, 2022 to the performance of the funds in its Performance Universe and to that of a benchmark index.  Based on the information provided, the Board noted that HDMV underperformed its Performance Universe median for the one-, three- and five-year periods ended December 31, 2022, outperformed its benchmark index for the one-year period ended December 31, 2022 and underperformed its benchmark index for the three- and five-year periods ended December 31, 2022.  The Board noted that HUSV underperformed its Performance Universe median for the one-year period ended December 31, 2022 and outperformed its Performance Universe median for the three- and five-year periods ended December 31, 2022.  The Board also noted that HUSV outperformed its benchmark index for the one-year period ended December 31, 2022 and underperformed its benchmark index for the three- and five-year periods ended December 31, 2022.  The Board noted that HSMV outperformed its Performance Universe median and benchmark index for the one-year period ended December 31, 2022.  The Board noted the Advisor’s and the Sub-Advisor’s discussions of HDMV’s performance at the April 17, 2023 and June 4-5, 2023 meetings, respectively.

On the basis of all the information provided on the unitary fee and performance of each Fund and the ongoing oversight by the Board, the Board concluded that the unitary fee for each Fund (out of which the Sub-Advisor is compensated) continues to be reasonable and appropriate in light of the nature, extent and quality of the services provided by the Advisor and the Sub-Advisor to each Fund under the Agreements.

The Board considered information and discussed with the Advisor whether there were any economies of scale in connection with providing advisory services to the Funds at current asset levels and whether the Funds may benefit from any economies of scale.  The Board noted that the unitary fee rate schedule for each Fund includes breakpoints pursuant to which the unitary fee rate will be reduced as assets of the Fund meet certain thresholds.  The Board considered the Advisor’s statement that it believes that its expenses relating to providing advisory services to the Funds will increase during the next twelve months as the Advisor continues to build infrastructure and add new staff.  The Board also noted that under the unitary fee structure, any reduction in expenses associated with the management and operations of the Funds would benefit the Advisor, but that the unitary fee structure provides a level of certainty in expenses for shareholders of the Funds.  The Board concluded that the unitary fee rate schedule for each Fund reflects an appropriate level of sharing of any economies of scale that may be realized in the management of the Fund at current asset levels.  The Board considered the revenues and allocated costs (including the allocation methodology) of the Advisor in serving as investment advisor to each Fund for the twelve months ended December 31, 2022 and the estimated profitability level for each Fund calculated by the Advisor based on such data, as well as complex-wide and product-line profitability data, for the same period.  The Board noted the

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