N-CSR 1 etf3_ncsr.txt ANNUAL REPORT TO SHAREHOLDERS UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSR CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number 811-22245 ----------- First Trust Exchange-Traded Fund III --------------------------------------------------------- (Exact name of registrant as specified in charter) 120 East Liberty Drive, Suite 400 Wheaton, IL 60187 --------------------------------------------------------- (Address of principal executive offices) (Zip code) W. Scott Jardine, Esq. First Trust Portfolios L.P. 120 East Liberty Drive, Suite 400 --------------------------------------------------------- Wheaton, IL 60187 (Name and address of agent for service) registrant's telephone number, including area code: (630) 765-8000 ---------------- Date of fiscal year end: October 31 ------------ Date of reporting period: October 31, 2016 ------------------ Form N-CSR is to be used by management investment companies to file reports with the Commission not later than 10 days after the transmission to stockholders of any report that is required to be transmitted to stockholders under Rule 30e-1 under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may use the information provided on Form N-CSR in its regulatory, disclosure review, inspection, and policymaking roles. A registrant is required to disclose the information specified by Form N-CSR, and the Commission will make this information public. A registrant is not required to respond to the collection of information contained in Form N-CSR unless the Form displays a currently valid Office of Management and Budget ("OMB") control number. Please direct comments concerning the accuracy of the information collection burden estimate and any suggestions for reducing the burden to Secretary, Securities and Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-0609. The OMB has reviewed this collection of information under the clearance requirements of 44 U.S.C. ss. 3507. ITEM 1. REPORT TO STOCKHOLDERS. The registrant's annual report transmitted to shareholders pursuant to Rule 30e-1 under the Investment Company Act of 1940 is as follows: FIRST TRUST First Trust Exchange-Traded Fund III -------------------------------------------------------------------------------- First Trust Preferred Securities and Income ETF (FPE) Annual Report For the Year Ended October 31, 2016 -------------------------------------------------------------------------------- TABLE OF CONTENTS -------------------------------------------------------------------------------- FIRST TRUST PREFERRED SECURITIES AND INCOME ETF (FPE) ANNUAL REPORT OCTOBER 31, 2016 Shareholder Letter........................................................... 1 Fund Performance Overview.................................................... 2 Portfolio Commentary......................................................... 5 Understanding Your Fund Expenses............................................. 6 Portfolio of Investments..................................................... 7 Statement of Assets and Liabilities.......................................... 13 Statement of Operations...................................................... 14 Statements of Changes in Net Assets.......................................... 15 Financial Highlights......................................................... 16 Notes to Financial Statements................................................ 17 Report of Independent Registered Public Accounting Firm...................... 23 Additional Information....................................................... 24 Board of Trustees and Officers............................................... 29 Privacy Policy............................................................... 31 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 Stonebridge Advisors LLC ("Stonebridge" 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 the series of First Trust Exchange-Traded Fund III (the "Trust") described in this report for the First Trust Preferred Securities and Income ETF (hereinafter referred to as the "Fund") to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. When evaluating the information included in this report, you are cautioned not to place undue reliance on these forward-looking statements, which reflect the judgment of the Advisor and/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 the Fund will achieve its investment objective. The Fund is subject to market risk, which is the possibility that the market values of securities owned by the Fund will decline and that the value of the Fund shares may therefore be less than what you paid for them. Accordingly, you can lose money by investing in the Fund. See "Risk Considerations" in the Additional Information section of this report for a discussion of certain other risks of investing in the Fund. Performance data quoted represents past performance, which is no guarantee of future results, and current performance may be lower or higher than the figures shown. For the most recent month-end performance figures, please visit http://www.ftportfolios.com or speak with your financial advisor. Investment returns, net asset value and share price will fluctuate and Fund shares, when sold, may be worth more or less than their original cost. The Advisor may also periodically provide additional information on Fund performance on the Fund's webpage at http://www.ftportfolios.com. HOW TO READ THIS REPORT This report contains information that may help you evaluate your investment in the Fund. It includes details about the Fund's portfolio and presents data and analysis that provide insight into the Fund's performance and investment approach. By reading the portfolio commentary from the portfolio management team of the Fund, you may obtain an understanding of how the market environment affected the Fund's performance. The statistical information that follows may help you understand the Fund's performance compared to that of relevant market benchmarks. It is important to keep in mind that the opinions expressed by personnel of the Advisor 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 the Fund are spelled out in its prospectus, statement of additional information, this report and other Fund regulatory filings. -------------------------------------------------------------------------------- SHAREHOLDER LETTER -------------------------------------------------------------------------------- FIRST TRUST PREFERRED SECURITIES AND INCOME ETF (FPE) ANNUAL LETTER FROM THE CHAIRMAN AND CEO OCTOBER 31, 2016 Dear Shareholders: Thank you for your investment in First Trust Preferred Securities and Income ETF. First Trust Advisors L.P. ("First Trust") is pleased to provide you with the annual report which contains detailed information about your investment for the 12 months ended October 31, 2016, including a market overview and a performance analysis for the period. We encourage you to read this report and discuss it with your financial advisor. Early in 2016, many investors were concerned that the volatility witnessed in the stock market in 2015 would continue, and it did. During the first six months of the year, one of the events that affected the global markets was the "Brexit" vote (where citizens in the UK voted to leave the European Union). Just a few days after the historic vote, the global equity markets rebounded to close June 30, 2016 at a combined market capitalization of $62 trillion. As of October 31, 2016, the S&P 500(R) Index was up 5.87% calendar year-to-date, according to Bloomberg. From October 30, 2015 through October 31, 2016, the S&P 500(R) Index was also in positive territory at 4.51%. The last few months have had investors keenly watching the presidential election in anticipation of the outcome of the vote and its effect on the stock market and economy. I will discuss that more in my next letter. The current bull market (measuring from March 9, 2009 through October 31, 2016) is the second longest in history. First Trust believes that having a long-term investment horizon and investing in quality products can help you reach your goals, regardless of ups and downs in the market. We strive to provide quality investment products, which has been one of the hallmarks of our firm since its inception more than 25 years ago. Thank you for giving First Trust the opportunity to be a part of your investment plan. We value our relationship with you and will continue to focus on helping investors like you reach your financial goals. Sincerely, /s/ James A. Bowen James A. Bowen Chairman of the Board of Trustees Chief Executive Officer of First Trust Advisors L.P. Page 1 -------------------------------------------------------------------------------- FUND PERFORMANCE OVERVIEW (UNAUDITED) -------------------------------------------------------------------------------- FIRST TRUST PREFERRED SECURITIES AND INCOME ETF (FPE) First Trust Preferred Securities and Income ETF's (the "Fund") investment objective is to seek total return and to provide current income. Under normal market conditions, the Fund invests at least 80% of its net assets (including investment borrowings) in preferred securities ("Preferred Securities") and income-producing debt securities ("Income Securities"). The Fund invests in securities that are traded over-the-counter or listed on an exchange. For purposes of the 80% test set forth above, securities of open-end funds, closed-end funds or other exchange-traded funds ("ETFs") registered under the Investment Company Act of 1940, as amended, that invest primarily in Preferred Securities or Income Securities are deemed to be Preferred Securities or Income Securities. Preferred Securities held by the Fund generally pay fixed or adjustable-rate distributions to investors and have preference over common stock in the payment of distributions and the liquidation of a company's assets, but are generally junior to all forms of the company's debt, including both senior and subordinated debt. Certain of the Preferred Securities may be issued by trusts or other special purpose entities created by companies specifically for the purpose of issuing such securities. Income Securities that may be held by the Fund include corporate bonds, high yield securities (commonly referred to as "junk" bonds) and convertible securities. The broad category of corporate debt securities includes debt issued by U.S. and non-U.S. companies of all kinds, including those with small, mid and large capitalizations. Corporate debt may carry fixed or floating rates of interest.

------------------------------------------------------------------------------------------------------------------------- PERFORMANCE ------------------------------------------------------------------------------------------------------------------------- AVERAGE ANNUAL CUMULATIVE TOTAL RETURNS TOTAL RETURNS 1 Year Ended Inception (2/11/13) Inception (2/11/13) 10/31/16 to 10/31/16 to 10/31/16 FUND PERFORMANCE NAV 8.97% 5.01% 19.93% Market Price 8.89% 5.06% 20.16% INDEX PERFORMANCE BofA Merrill Lynch Fixed Rate Preferred Securities Index 7.23% 6.18% 24.95% BofA Merrill Lynch U.S. Capital Securities Index 7.31% 5.93% 23.88% Blended Index(1) 7.28% 6.07% 24.49% -------------------------------------------------------------------------------------------------------------------------

Total returns for the period since inception are calculated from the inception date of the 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. The Fund's per share net asset value ("NAV") is the value of one share of the Fund and is computed by dividing the value of all assets of the Fund (including accrued interest and dividends), less all liabilities (including accrued expenses and dividends declared but unpaid), by the total number of outstanding shares. The price used to calculate market return ("Market Price") is determined by using the midpoint between the highest bid and the lowest offer on the stock exchange on which shares of the Fund are listed for trading as of the time that the Fund's NAV is calculated. Since shares of the Fund did not trade in the secondary market until after its inception, for the period from inception to the first day of secondary market trading in shares of the Fund, the NAV of the Fund is used as a proxy for the secondary market trading price to calculate market returns. NAV and market returns assume that all distributions have been reinvested in the Fund at NAV and Market Price, respectively. An index is a statistical composite that tracks a specified financial market or sector. Unlike the Fund, the index does not actually hold a portfolio of securities and therefore does not incur the expenses incurred by the Fund. These expenses negatively impact the performance of the Fund. Also, market returns do not include brokerage commissions that may be payable on secondary market transactions. If brokerage commissions were included, market returns would be lower. The total returns presented reflect the reinvestment of dividends on securities in the index. The returns presented do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. The investment return and principal value of shares of the Fund will vary with changes in market conditions. Shares of the Fund may be worth more or less than their original cost when they are redeemed or sold in the market. The Fund's past performance is no guarantee of future performance. (1) The Blended Index consists of a 50/50 blend of the BofA Merrill Lynch Fixed Rate Preferred Securities Index and the BofA Merrill Lynch U.S. Capital Securities Index. The Blended Index was added to reflect the diverse allocation of institutional preferred and hybrid securities in the Fund's portfolio. The indexes do not charge management fees or brokerage expenses, and no such fees or expenses were deducted from the performance shown. Indexes are unmanaged and an investor cannot invest directly in an index. Page 2 -------------------------------------------------------------------------------- FUND PERFORMANCE OVERVIEW (UNAUDITED) (CONTINUED) -------------------------------------------------------------------------------- FIRST TRUST PREFERRED SECURITIES AND INCOME ETF (FPE) (CONTINUED) ----------------------------------------------------- % OF TOTAL PORTFOLIO SECTOR ALLOCATION INVESTMENTS ----------------------------------------------------- Financials 74.7% Utilities 6.8 Telecommunication Services 4.2 Real Estate 3.9 Consumer Staples 3.8 Energy 3.6 Industrials 1.7 Information Technology 0.7 Materials 0.6 ------ Total 100.0% ====== ----------------------------------------------------- % OF TOTAL CREDIT RATING(2) INVESTMENTS ----------------------------------------------------- A 0.4% A- 2.2 BBB+ 9.0 BBB 14.9 BBB- 21.9 BB+ 23.3 BB 7.5 BB- 6.7 B+ 4.3 B 0.1 B- 0.1 NR 9.6 ------ Total 100.0% ====== NR - Not Rated ----------------------------------------------------- % OF TOTAL TOP TEN HOLDINGS INVESTMENTS ----------------------------------------------------- Emera, Inc., Series 16-A 3.0% GMAC Capital Trust I, Series 2 2.7 Morgan Stanley, Series F 2.3 Goldman Sachs Group, Inc., Series K 2.3 Enel S.p.A. 1.9 VEREIT, Inc., Series F 1.8 La Mondiale SAM 1.7 Aquarius & Investments PLC for Swiss Reinsurance Co., Ltd. 1.6 Farm Credit Bank Of Texas, Series 1 1.6 Transcanda Trust, Series 16-A 1.6 ------ Total 20.5% ====== ----------------------------------------------------- % OF TOTAL COUNTRY EXPOSURE INVESTMENTS ----------------------------------------------------- United States 61.8% France 7.1 United Kingdom 6.6 Canada 4.6 Bermuda 3.5 Netherlands 2.9 Australia 2.8 Italy 2.6 Ireland 2.6 Switzerland 1.4 Jersey 1.2 Spain 0.8 Mexico 0.7 Cayman Islands 0.5 Japan 0.4 Belgium 0.2 Chile 0.2 Brazil 0.1 ------ Total 100.0% ====== (2) The credit quality and ratings information presented above reflects the ratings assigned by one or more nationally recognized statistical rating organizations (NRSROs), including Standard & Poor's Ratings Group, a division of the McGraw-Hill Companies, Inc., Moody's Investors Service, Inc., Fitch Ratings or a comparably rated NRSRO. For situations in which a security is rated by more than one NRSRO and the ratings are not equivalent, the highest ratings are used. Sub-investment grade ratings are those rated BB+/Ba1 or lower. Investment grade ratings are those rated BBB-/Baa3 or higher. The credit ratings shown relate to the creditworthiness of the issuers of the underlying securities in the Fund, and not to the Fund or its shares. Credit ratings are subject to change. Page 3 -------------------------------------------------------------------------------- FUND PERFORMANCE OVERVIEW (UNAUDITED) (CONTINUED) -------------------------------------------------------------------------------- FIRST TRUST PREFERRED SECURITIES AND INCOME ETF (FPE) (CONTINUED)

PERFORMANCE OF A $10,000 INITIAL INVESTMENT FEBRUARY 11, 2013 - OCTOBER 31, 2016 First Trust BofA Merrill Lynch BofA Merrill Lynch Preferred Securities Fixed Rate Preferred U.S. Capital Blended and Income ETF Securities Index Securities Index Index(1) 2/11/13 $10,000 $10,000 $10,000 $10,000 4/30/13 10,330 10,253 10,342 10,297 10/31/13 9,426 9,640 10,392 10,010 4/30/14 10,084 10,418 10,992 10,704 10/31/14 10,409 10,841 11,364 11,102 4/30/15 10,810 11,326 11,766 11,547 10/31/15 11,007 11,653 11,546 11,604 4/30/16 11,276 12,083 11,743 11,917 10/31/16 11,994 12,496 12,390 12,448

Performance figures assume reinvestment of all distributions and do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. An index is a statistical composite that tracks a specified financial market or sector. Unlike the Fund, the indices do not actually hold a portfolio of securities and therefore do not incur the expenses incurred by the Fund. These expenses negatively impact the performance of the Fund. The Fund's past performance does not predict future performance. FREQUENCY DISTRIBUTION OF DISCOUNTS AND PREMIUMS BID/ASK MIDPOINT VS. NAV THROUGH OCTOBER 31, 2016 The following Frequency Distribution of Discounts and Premiums charts are provided to show the frequency at which the bid/ask midpoint price for the Fund was at a discount or premium to the daily NAV. The following tables are for comparative purposes only and represent the period February 12, 2013 (commencement of trading) through October 31, 2016. Shareholders may pay more than NAV when they buy Fund shares and receive less than NAV when they sell those shares because shares are bought and sold at current market price. Data presented represents past performance and cannot be used to predict future results. -------------------------------------------------------------------------------- NUMBER OF DAYS BID/ASK MIDPOINT AT/ABOVE NAV -------------------------------------------------------------------------------- FOR THE PERIOD 0.00%-0.49% 0.50%-0.99% 1.00%-1.99% >=2.00% 2/12/13 - 10/31/13 96 7 0 0 11/1/13 - 10/31/14 140 2 0 0 11/1/14 - 10/31/15 214 16 0 0 11/1/15 - 10/31/16 212 13 0 0 -------------------------------------------------------------------------------- NUMBER OF DAYS BID/ASK MIDPOINT BELOW NAV -------------------------------------------------------------------------------- FOR THE PERIOD 0.00%-0.49% 0.50%-0.99% 1.00%-1.99% >=2.00% 2/12/13 - 10/31/13 73 7 0 0 11/1/13 - 10/31/14 101 9 0 0 11/1/14 - 10/31/15 21 0 0 0 11/1/15 - 10/31/16 26 1 0 0 (1) The Blended Index consists of a 50/50 blend of the BofA Merrill Lynch Fixed Rate Preferred Securities Index and the BofA Merrill Lynch U.S. Capital Securities Index. The Blended Index was added to reflect the diverse allocation of institutional preferred and hybrid securities in the Fund's portfolio. The indexes do not charge management fees or brokerage expenses, and no such fees or expenses were deducted from the performance shown. Indexes are unmanaged and an investor cannot invest directly in an index. Page 4 -------------------------------------------------------------------------------- PORTFOLIO COMMENTARY -------------------------------------------------------------------------------- FIRST TRUST PREFERRED SECURITIES AND INCOME ETF (FPE) ANNUAL REPORT OCTOBER 31, 2016 (UNAUDITED) SUB-ADVISOR STONEBRIDGE ADVISORS LLC Stonebridge Advisors LLC ("Stonebridge" or the "Sub-Advisor") is the investment sub-advisor to First Trust Preferred Securities and Income ETF (the "Fund") and is a registered investment advisor based in Wilton, Connecticut. Stonebridge specializes in the management of preferred securities and North American equity income securities. PORTFOLIO MANAGEMENT TEAM SCOTT T. FLEMING - PRESIDENT AND CHIEF INVESTMENT OFFICER OF STONEBRIDGE ADVISORS LLC ROBERT WOLF - SENIOR VICE PRESIDENT, SENIOR PORTFOLIO MANAGER DANIELLE SALTERS, CFA - PORTFOLIO MANAGER AND CREDIT ANALYST COMMENTARY MARKET RECAP The fiscal year ended October 31, 2016 was a period of solid returns for the preferred and hybrid markets. Risk assets were initially weak during the period in response to the Federal Reserve raising rates in December 2015 and the dramatic sell-off in commodities in the first part of 2016. However, risk assets recovered and performed well throughout the last three quarters of the period due to the extended low rate environment and continued quantitative easing around the globe. Positive performance in the preferred and hybrid markets was also driven by continued investor demand for high income producing securities coupled with a positive market technical factor resulting from limited new issuance supply. The retail preferred market was pushed higher by inflows into the passive preferred ETFs, while institutional hybrids lagged retail until the last quarter of the period. For the fiscal year, the retail market earned 7.23% while the institutional market earned 7.31%, according to The BofA Merrill Lynch Fixed Rate Preferred Securities Index (P0P1) and The BofA Merrill Lynch U.S. Capital Securities Index (C0CS), respectively. PERFORMANCE ANALYSIS For the fiscal year through October 31, 2016, the net asset value ("NAV") and market price total return for the First Trust Preferred Securities and Income ETF (the "Fund") were 8.97% and 8.89%, respectively. This compares to a total return of 7.28% for the Fund's blended benchmark, which is a 50/50 blend of The BofA Merrill Lynch Fixed Rate Preferred Securities Index (P0P1) and The BofA Merrill Lynch U.S. Capital Securities Index (C0CS). This outperformance was achieved in spite of maintaining a conservative stance on interest rates relative to the benchmark. The primary factor that contributed to outperformance of the Fund relative to the blended benchmark was better overall security selection than the blended benchmark. Security selection combined with a modest overweight within fixed-to-float securities, which are an important part of the strategy for managing interest rate risk in the Fund, were significant contributors to the outperformance. Additionally, security selection within U.S. banks contributed to outperformance, but was partially offset by foreign bank exposure during the period. Long duration securities within the blended benchmark outperformed shorter duration securities during the period, given the favorable low interest rate environment. As a result, the Fund's strategy to maintain a shorter duration than the blended benchmark was a moderate drag to relative performance from an allocation standpoint, but the superior security selection across all duration bands more than offset this detractor. MARKET AND FUND OUTLOOK Recent economic data in the U.S. shows modest strength and low inflation while the rest of the world continues to show weak growth with markets supported by accommodative monetary policies. Although U.S. interest rates moved higher recently, they still remain low by historical standards. In this overall low rate environment, credit spreads generally remain fairly wide, supported by stable credit fundamentals within financials. We expect historically wide yield spreads of preferred and hybrid securities relative to both U.S. Treasuries and other credit spread products to drive positive performance in the asset class. Furthermore, we expect issuance in the preferred and hybrid market over the next year to be subdued relative to the first part of the Fund's fiscal year which should be a positive market technical factor in preferred and hybrid securities. We will continue to actively manage the Fund to protect against the downside risks in the market while aiming to outperform in all market environments on a risk adjusted basis. With the potential for rate volatility, we believe it is prudent to maintain durations shorter than the benchmark, particularly if we can do so while paying dividends comparable to the benchmark yield. We also continue to favor structures with good rate protection and high current yields. Despite our expectation that the Federal Reserve will soon raise interest rates, we believe that a slowly growing U.S. economy, stable-to-improving corporate credit, and limited supply will continue to be supportive of the preferred and hybrid markets. Page 5 FIRST TRUST PREFERRED SECURITIES AND INCOME ETF (FPE) UNDERSTANDING YOUR FUND EXPENSES OCTOBER 31, 2016 (UNAUDITED) As a shareholder of First Trust Preferred Securities and Income ETF (the "Fund") you incur two types of costs: (1) transaction costs; and (2) ongoing costs, including management fees, distribution and/or service fees, if any, and other Fund expenses. This Example is intended to help you understand your ongoing costs of investing in the Fund and to compare these costs with the ongoing costs of investing in other funds. The Example is based on an investment of $1,000 invested at the beginning of the period and held through the six-month period ended October 31, 2016. ACTUAL EXPENSES The first line in the following table provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled "Expenses Paid During the Six-Month Period" to estimate the expenses you paid on your account during this six-month period. HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES The second line in the following table provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs such as brokerage commissions. Therefore, the second line in the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.

------------------------------------------------------------------------------------------------------------------------- ANNUALIZED EXPENSE RATIO EXPENSES PAID BEGINNING ENDING BASED ON THE DURING THE ACCOUNT VALUE ACCOUNT VALUE SIX-MONTH SIX-MONTH MAY 1, 2016 OCTOBER 31, 2016 PERIOD PERIOD (a) ------------------------------------------------------------------------------------------------------------------------- FIRST TRUST PREFERRED SECURITIES AND INCOME ETF Actual $1,000.00 $1,063.70 0.85% $4.41 Hypothetical (5% return before expenses) $1,000.00 $1,020.86 0.85% $4.32

(a) Expenses are equal to the annualized expense ratio as indicated in the table multiplied by the average account value over the period (May 1, 2016 through October 31, 2016), multiplied by 184/366 (to reflect the one-half year period). Page 6 FIRST TRUST PREFERRED SECURITIES AND INCOME ETF (FPE) PORTFOLIO OF INVESTMENTS OCTOBER 31, 2016

STATED STATED SHARES DESCRIPTION RATE MATURITY VALUE ------------- ---------------------------------------------------------------- ------------- ---------- -------------- $25 PAR PREFERRED SECURITIES - 43.1% BANKS - 13.9% 170,360 Banc Of California, Inc., Series E.............................. 7.00% (a) $ 4,241,964 122,565 Bank of America Corp., Series CC................................ 6.20% (a) 3,191,593 759,155 Citigroup Capital XIII (b)...................................... 7.26% 10/30/40 19,745,621 152,715 Citigroup, Inc., Series S....................................... 6.30% (a) 4,048,475 474,611 Fifth Third Bancorp, Series I (c)............................... 6.63% (a) 14,243,076 223,651 FNB Corp. (c)................................................... 7.25% (a) 6,662,563 1,437,247 GMAC Capital Trust I, Series 2 (b).............................. 6.67% 02/15/40 36,692,916 452,475 Huntington Bancshares, Inc., Series D........................... 6.25% (a) 12,108,231 680,363 KeyCorp, Series C (c)........................................... 8.63% (a) 17,757,474 444,500 People's United Financial, Inc., Series A (c)................... 5.63% (a) 11,601,450 105,718 PNC Financial Services Group, Inc., Series P (c)................ 6.13% (a) 2,981,248 793,128 Royal Bank of Scotland Group PLC, Series S...................... 6.60% (a) 20,169,245 351,434 Synovus Financial Corp., Series C (c)........................... 7.88% (a) 9,987,754 135,636 Valley National Bancorp, Series A (c)........................... 6.25% (a) 3,910,386 53,541 Wells Fargo & Co., Series W..................................... 5.70% (a) 1,378,681 95,273 Western Allliance Bancorp....................................... 6.25% 07/01/56 2,444,705 377,677 Wintrust Financial Corp., Series D (c).......................... 6.50% (a) 10,654,268 195,420 Zions Bancorporation, Series F.................................. 7.90% (a) 5,100,462 157,427 Zions Bancorporation, Series G (c).............................. 6.30% (a) 4,927,465 -------------- 191,847,577 -------------- CAPITAL MARKETS - 10.1% 540,594 Apollo Investment Corp.......................................... 6.63% 10/15/42 13,871,642 518,861 Apollo Investment Corp.......................................... 6.88% 07/15/43 13,677,176 202,404 BGC Partners, Inc............................................... 8.13% 06/15/42 5,282,744 49,223 Charles Schwab Corp., Series D.................................. 5.95% (a) 1,332,467 1,086,995 Goldman Sachs Group, Inc., Series K (c)......................... 6.38% (a) 31,011,967 648,945 Morgan Stanley, Series E (c).................................... 7.13% (a) 18,936,215 1,092,430 Morgan Stanley, Series F (c).................................... 6.88% (a) 31,746,016 228,510 Morgan Stanley, Series I (c).................................... 6.38% (a) 6,306,876 37,869 Raymond James Financial, Inc.................................... 6.90% 03/15/42 977,399 125,246 Solar Capital Ltd............................................... 6.75% 11/15/42 3,202,540 14,562 State Street Corp., Series D (c)................................ 5.90% (a) 408,464 257,806 State Street Corp., Series G (c)................................ 5.35% (a) 6,901,467 172,563 Stifel Financial Corp., Series A................................ 6.25% (a) 4,638,494 -------------- 138,293,467 -------------- CONSUMER FINANCE - 0.1% 54,767 Capital One Financial Corp., Series D........................... 6.70% (a) 1,538,405 -------------- DIVERSIFIED FINANCIAL SERVICES - 1.6% 354,750 KKR Financial Holdings LLC...................................... 8.38% 11/15/41 9,049,672 497,033 KKR Financial Holdings LLC, Series A............................ 7.38% (a) 12,917,888 -------------- 21,967,560 -------------- DIVERSIFIED TELECOMMUNICATION SERVICES - 1.2% 652,231 Qwest Corp...................................................... 6.88% 10/01/54 16,827,560 -------------- ELECTRIC UTILITIES - 0.2% 83,716 SCE Trust V, Series K (c)....................................... 5.45% (a) 2,360,791 -------------- EQUITY REAL ESTATE INVESTMENT TRUSTS - 3.4% 161,545 American Homes 4 Rent, Series D................................. 6.50% (a) 4,272,865 430,818 American Homes 4 Rent, Series E................................. 6.35% (a) 11,278,815 199,075 EPR Properties, Series F........................................ 6.63% (a) 5,175,950 66,276 National Retail Properties, Inc., Series D...................... 6.63% (a) 1,693,352 891,911 VEREIT, Inc., Series F.......................................... 6.70% (a) 23,921,053 -------------- 46,342,035 --------------

See Notes to Financial Statements Page 7 FIRST TRUST PREFERRED SECURITIES AND INCOME ETF (FPE) PORTFOLIO OF INVESTMENTS (CONTINUED) OCTOBER 31, 2016

STATED STATED SHARES DESCRIPTION RATE MATURITY VALUE ------------- ---------------------------------------------------------------- ------------- ---------- -------------- $25 PAR PREFERRED SECURITIES (CONTINUED) FOOD PRODUCTS - 2.1% 477,078 CHS, Inc., Series 2 (c)......................................... 7.10% (a) $ 14,121,509 408,954 CHS, Inc., Series 3 (c)......................................... 6.75% (a) 11,491,607 124,992 CHS, Inc., Series 4............................................. 7.50% (a) 3,656,016 -------------- 29,269,132 -------------- INSURANCE - 7.3% 549,710 Aegon N.V....................................................... 8.00% 02/15/42 14,611,292 19,176 Amtrust Financial Services, Inc................................. 7.25% 06/15/55 494,357 178,181 Amtrust Financial Services, Inc................................. 7.50% 09/15/55 4,753,869 50,000 Amtrust Financial Services, Inc., Series F...................... 6.95% (a) 1,262,500 42,700 Aspen Insurance Holdings Ltd.................................... 5.63% (a) 1,091,839 383,404 Aspen Insurance Holdings Ltd. (c)............................... 5.95% (a) 10,911,678 51,737 Aspen Insurance Holdings Ltd.................................... 7.25% (a) 1,334,815 112,042 Aviva PLC....................................................... 8.25% 12/01/41 2,871,637 170,131 Berkley (WR) Corp............................................... 5.75% 06/01/56 4,379,172 97,685 Endurance Specialty Holdings Ltd., Series C..................... 6.35% (a) 2,602,328 477,392 Global Indemnity PLC............................................ 7.75% 08/15/45 12,149,626 32,391 Maiden Holdings North America Ltd............................... 8.00% 03/27/42 834,068 253,740 National General Holdings Corp.................................. 7.63% 09/15/55 6,533,805 36,242 National General Holdings Corp., Series C....................... 7.50% (a) 929,245 476,692 PartnerRe Ltd., Series H........................................ 7.25% (a) 14,205,422 130,871 Phoenix Companies, Inc.......................................... 7.45% 01/15/32 2,490,645 586,550 Reinsurance Group of America, Inc. (c).......................... 5.75% 06/15/56 16,822,254 65,988 Torchmark Corp.................................................. 6.13% 06/15/56 1,783,656 -------------- 100,062,208 -------------- INTERNET SOFTWARE & SERVICES - 0.7% 351,578 EBay, Inc....................................................... 6.00% 02/01/56 9,334,396 -------------- MORTGAGE REAL ESTATE INVESTMENT TRUSTS - 0.4% 220,990 MFA Financial, Inc.............................................. 8.00% 04/15/42 5,677,233 -------------- MULTI-UTILITIES - 0.2% 40,911 Dominion Resources, Inc., Series A.............................. 5.25% 07/30/76 1,019,911 85,187 Integrys Holding, Inc. (c)...................................... 6.00% 08/01/73 2,321,559 -------------- 3,341,470 -------------- OIL, GAS & CONSUMABLE FUELS - 0.4% 236,124 NuStar Logistics, L.P. (c)...................................... 7.63% 01/15/43 6,047,136 -------------- WIRELESS TELECOMMUNICATION SERVICES - 1.5% 123,522 United States Cellular Corp..................................... 7.25% 12/01/63 3,232,571 635,032 United States Cellular Corp..................................... 7.25% 12/01/64 16,834,698 -------------- 20,067,269 -------------- TOTAL $25 PAR PREFERRED SECURITIES......................................................... 592,976,239 (Cost $578,905,597) -------------- $50 PAR PREFERRED SECURITIES - 0.4% CONSUMER FINANCE - 0.4% 115,628 SLM Corp., Series A............................................. 6.97% (a) 5,811,463 (Cost $5,503,795) --------------

Page 8 See Notes to Financial Statements FIRST TRUST PREFERRED SECURITIES AND INCOME ETF (FPE) PORTFOLIO OF INVESTMENTS (CONTINUED) OCTOBER 31, 2016

STATED STATED SHARES DESCRIPTION RATE MATURITY VALUE ------------- ---------------------------------------------------------------- ------------- ---------- -------------- $100 PAR PREFERRED SECURITIES - 1.3% BANKS - 0.5% 1,600 Agribank FCB (c) (d)............................................ 6.88% (a) $ 172,200 11,500 CoBank ACB, Series F (c)........................................ 6.25% (a) 1,231,579 11,180 CoBank ACB, Series G............................................ 6.13% (a) 1,126,385 12,205 Cobank ACB, Series H (c)........................................ 6.20% (a) 1,282,670 33,340 Farm Credit Bank Of Texas (c) (d)............................... 6.75% (a) 3,610,098 -------------- 7,422,932 -------------- CONSUMER FINANCE - 0.8% 211,646 SLM Corp., Series B (b)......................................... 2.55% (a) 10,469,874 -------------- TOTAL $100 PAR PREFERRED SECURITIES........................................................ 17,892,806 (Cost $16,298,494) -------------- $1,000 PAR PREFERRED SECURITIES - 3.6% BANKS - 3.2% 2,500 AgStar Financial Services ACA (c) (e)........................... 6.75% (a) 2,652,187 18,000 Farm Credit Bank Of Texas, Series 1 (d)......................... 10.00% (a) 22,005,000 19,100 First Tennessee Bank (b) (e).................................... 3.75% (a) 13,370,598 4,556 Sovereign Real Estate Investment Trust (e)...................... 12.00% (a) 5,854,460 -------------- 43,882,245 -------------- DIVERSIFIED TELECOMMUNICATION SERVICES - 0.2% 2,242 Centaur Funding Corp. (e)....................................... 9.08% 04/21/20 2,656,770 -------------- INSURANCE - 0.2% 3,320 XLIT Ltd., Series D (b)......................................... 4.00% (a) 2,631,100 -------------- TOTAL $1,000 PAR PREFERRED SECURITIES...................................................... 49,170,115 (Cost $48,744,270) -------------- PAR STATED STATED AMOUNT DESCRIPTION RATE MATURITY VALUE ------------- ---------------------------------------------------------------- ------------- ---------- -------------- CAPITAL PREFERRED SECURITIES - 49.8% BANKS - 21.4% $ 7,500,000 Australia & New Zealand Banking Group Ltd. (c) (f) (g).......... 6.75% (a) 8,246,565 11,200,000 Banco Bilbao Vizcaya Argentaria S.A. (c) (g).................... 9.00% (a) 11,669,000 1,000,000 Banco do Brasil S.A. (c) (f) (g)................................ 9.00% (a) 931,000 10,600,000 Banco Mercantil Del Norte S.A. (c) (f) (g)...................... 5.75% 10/04/31 10,268,750 17,000,000 Bank of America Corp., Series DD (c)............................ 6.30% (a) 18,592,050 15,500,000 Bank of America Corp., Series Z (c)............................. 6.50% (a) 16,836,875 566 Barclays PLC (c) (g)............................................ 6.63% (a) 521 5,000,000 Barclays PLC (c) (g)............................................ 8.25% (a) 5,076,875 1,024,990 BBVA Global Finance Ltd......................................... 7.00% 12/01/25 1,143,914 8,000,000 BNP Paribas S.A. (c) (f) (g).................................... 7.63% (a) 8,380,000 1,007,000 BPCE S.A. (c)................................................... 12.50% (a) 1,274,681 500,000 BPCE S.A. (c) (f)............................................... 12.50% (a) 632,910 10,000,000 Citigroup, Inc., Series R (c)................................... 6.13% (a) 10,466,500 4,000,000 Citigroup, Inc., Series T (c)................................... 6.25% (a) 4,311,600 2,616,000 Citizens Financial Group, Inc. (c).............................. 5.50% (a) 2,583,300 13,200,000 CoBank ACB, Series I (c)........................................ 6.25% (a) 14,293,396 1,500,000 Cooperatieve Rabobank UA (c).................................... 11.00% (a) 1,812,975 1,621,000 Cooperatieve Rabobank UA (c) (f)................................ 11.00% (a) 1,959,222 15,500,000 Credit Agricole S.A. (c) (f) (g)................................ 8.13% (a) 16,692,260 6,000,000 Credit Agricole S.A. (c)........................................ 8.38% (a) 6,784,680 9,901,000 Credit Agricole S.A. (c) (f).................................... 8.38% (a) 11,195,853 5,000,000 Dresdner Funding Trust I........................................ 8.15% 06/30/31 5,960,450

See Notes to Financial Statements Page 9 FIRST TRUST PREFERRED SECURITIES AND INCOME ETF (FPE) PORTFOLIO OF INVESTMENTS (CONTINUED) OCTOBER 31, 2016

PAR STATED STATED AMOUNT DESCRIPTION RATE MATURITY VALUE ------------- ---------------------------------------------------------------- ------------- ---------- -------------- CAPITAL PREFERRED SECURITIES (CONTINUED) BANKS (CONTINUED) $ 10,025,000 Intesa Sanpaolo S.p.A. (c) (f) (g).............................. 7.70% (a) $ 9,197,937 7,663,000 JPMorgan Chase & Co., Series S (c).............................. 6.75% (a) 8,515,509 2,800,000 KeyCorp, Series D (c)........................................... 5.00% (a) 2,755,900 8,088,000 Lloyds Bank PLC (c)............................................. 12.00% (a) 11,050,230 3,000,000 Lloyds Banking Group PLC (c) (g)................................ 7.50% (a) 3,097,500 9,498,000 Macquarie Bank Ltd. (c) (g)..................................... 10.25% 06/20/57 9,967,676 3,000,000 Natixis S.A. (c) (f)............................................ 10.00% (a) 3,337,500 1,000,000 Natixis S.A. (c)................................................ 10.00% (a) 1,112,500 3,785,000 NIBC Bank N.V................................................... 7.63% (a) 3,851,502 6,000,000 PNC Financial Services Group, Inc. (c).......................... 6.75% (a) 6,667,500 1,000,000 Royal Bank Of Scotland Group PLC (c)............................ 7.65% (a) 1,187,500 3,000,000 Royal Bank Of Scotland Group PLC (c) (g)........................ 8.00% (a) 2,857,500 20,000,000 Royal Bank of Scotland Group PLC (c) (g)........................ 8.63% (a) 19,950,000 17,200,000 Societe Generale S.A. (c) (f) (g)............................... 7.38% (a) 17,096,800 8,210,000 Standard Chartered PLC (c) (f) (g).............................. 7.50% (a) 8,286,969 12,375,000 Wells Fargo & Co., Series K (c)................................. 7.98% (a) 12,916,406 6,000,000 Wells Fargo & Co., Series U (c)................................. 5.88% (a) 6,453,750 6,000,000 Zions Bancorporation, Series J (c).............................. 7.20% (a) 6,427,500 -------------- 293,843,556 -------------- CAPITAL MARKETS - 2.6% 6,879,000 Aberdeen Asset Management PLC................................... 7.00% (a) 7,137,279 10,000,000 Credit Suisse Group AG (c) (f) (g).............................. 7.50% (a) 10,375,000 2,000,000 E*Trade Financial Corp., Series A (c)........................... 5.88% (a) 2,077,500 7,500,000 Goldman Sachs Group, Inc., Series L (c)......................... 5.70% (a) 7,603,125 1,000,000 UBS Group AG (c) (g)............................................ 6.88% (a) 1,005,818 7,000,000 UBS Group AG (c) (g)............................................ 7.13% (a) 7,183,750 -------------- 35,382,472 -------------- DIVERSIFIED FINANCIAL SERVICES - 0.2% 4,000,000 Glen Meadow Pass-Through Trust (c) (f).......................... 6.51% 02/12/67 3,160,000 -------------- DIVERSIFIED TELECOMMUNICATION SERVICES - 1.2% 3,900,000 Koninklijke KPN N.V. (c)........................................ 7.00% 03/28/73 4,271,475 11,882,000 Koninklijke KPN N.V. (c) (f).................................... 7.00% 03/28/73 13,013,761 -------------- 17,285,236 -------------- ELECTRIC UTILITIES - 6.2% 37,000,000 Emera, Inc., Series 16-A (c).................................... 6.75% 06/15/76 40,959,666 22,000,000 Enel S.p.A. (c) (f)............................................. 8.75% 09/24/73 25,729,000 3,375,000 Nextera Energy Capital Holdings, Inc., Series D (c)............. 7.30% 09/01/67 3,400,313 14,993,000 PPL Capital Funding, Inc., Series A (c)......................... 6.70% 03/30/67 13,453,309 1,359,000 Southern California Edison Co., Series E (c).................... 6.25% (a) 1,520,381 -------------- 85,062,669 -------------- ENERGY EQUIPMENT & SERVICES - 1.5% 19,897,000 Transcanda Trust, Series 16-A (c)............................... 5.88% 08/15/76 21,339,533 -------------- FOOD PRODUCTS - 2.4% 6,200,000 Dairy Farmers of America (e).................................... 7.13% (a) 6,479,000 3,000,000 Land O'Lakes Capital Trust I (f)................................ 7.45% 03/15/28 3,450,000 12,000,000 Land O'Lakes, Inc. (e).......................................... 8.00% (a) 12,720,000 10,000,000 Land O'Lakes, Inc. (e).......................................... 8.00% (a) 10,600,000 -------------- 33,249,000 -------------- INDEPENDENT POWER AND RENEWABLE ELECTRICITY PRODUCERS - 0.2% 1,250,000 AES Gener S.A. (c).............................................. 8.38% 12/18/73 1,331,250 1,500,000 AES Gener S.A. (c) (f).......................................... 8.38% 12/18/73 1,597,500 -------------- 2,928,750 --------------

Page 10 See Notes to Financial Statements FIRST TRUST PREFERRED SECURITIES AND INCOME ETF (FPE) PORTFOLIO OF INVESTMENTS (CONTINUED) OCTOBER 31, 2016

PAR STATED STATED AMOUNT DESCRIPTION RATE MATURITY VALUE ------------- ---------------------------------------------------------------- ------------- ---------- -------------- CAPITAL PREFERRED SECURITIES (CONTINUED) INDUSTRIAL CONGLOMERATES - 0.4% $ 5,000,000 General Electric Co., Series D (c).............................. 5.00% (a) $ 5,303,250 -------------- INSURANCE - 10.4% 2,800,000 AG Insurance S.A. N.V. (c)...................................... 6.75% (a) 2,982,000 20,470,000 Aquarius & Investments PLC for Swiss Reinsurance Co., Ltd. (c).. 8.25% (a) 22,041,523 10,019,000 Assured Guaranty Municipal Holdings, Inc. (c) (f)............... 6.40% 12/15/66 8,255,656 1,000,000 Aviva PLC....................................................... 8.25% (a) 1,059,290 10,552,000 Catlin Insurance Co., Ltd. (c) (f).............................. 7.25% (a) 8,520,740 500,000 Catlin Insurance Co., Ltd. (c).................................. 7.25% (a) 403,750 500,000 Cloverie PLC for Zurich Insurance Co., Ltd. (c)................. 8.25% (a) 534,917 4,200,000 CNP Assurances (c).............................................. 6.88% (a) 4,523,056 1,100,000 CNP Assurances (c).............................................. 7.50% (a) 1,179,394 5,000,000 Dai-ichi Life Insurance Co., Ltd. (c) (f)....................... 4.00% (a) 5,018,750 6,201,000 Friends Life Holdings PLC (c)................................... 7.88% (a) 6,705,761 1,000,000 Hartford Financial Services Group, Inc. (c)..................... 8.13% 06/15/38 1,095,000 21,702,000 La Mondiale SAM (c)............................................. 7.63% (a) 23,356,777 5,260,000 Liberty Mutual Group, Inc. (c) (f).............................. 7.00% 03/15/37 4,589,350 6,128,000 Liberty Mutual Group, Inc. (f).................................. 7.80% 03/15/37 7,215,720 465,000 Liberty Mutual Group, Inc. (c) (f).............................. 10.75% 06/15/58 704,475 5,000,000 Metlife Capital Trust X (c) (f)................................. 9.25% 04/08/38 7,295,000 1,100,000 Nationwide Financial Services, Inc.............................. 6.75% 05/15/37 1,160,500 14,000,000 QBE Capital Funding III Ltd. (c) (f)............................ 7.25% 05/24/41 15,820,000 10,506,000 QBE Insurance Group Ltd. (c).................................... 6.75% 12/02/44 11,498,817 8,600,000 Sirius International Group Ltd. (c) (e)......................... 7.51% (a) 8,675,250 -------------- 142,635,726 -------------- METALS & MINING - 0.6% 7,500,000 BHP Billiton Finance USA Ltd. (c) (f)........................... 6.75% 10/19/75 8,512,500 -------------- OIL, GAS & CONSUMABLE FUELS - 1.6% 8,737,841 Enbridge Energy Partners L.P. (c)............................... 8.05% 10/01/37 7,964,105 2,581,594 Enterprise Products Operating LLC, Series A (b)................. 4.59% 08/01/66 2,458,968 10,500,000 Enterprise Products Operating LLC, Series B (c)................. 7.03% 01/15/68 11,085,375 -------------- 21,508,448 -------------- TRANSPORTATION INFRASTRUCTURE - 1.1% 15,000,000 AerCap Global Aviation Trust (c) (f)............................ 6.50% 06/15/45 15,525,000 -------------- TOTAL CAPITAL PREFERRED SECURITIES......................................................... 685,736,140 (Cost $674,727,241) -------------- SHARES DESCRIPTION VALUE ------------- ------------------------------------------------------------------------------------------- -------------- CLOSED-END FUNDS - 0.1% CAPITAL MARKETS - 0.1% 40,540 Flaherty & Crumrine Dynamic Preferred and Income Fund, Inc................................. 994,446 (Cost $914,560) -------------- TOTAL INVESTMENTS - 98.3%.................................................................. 1,352,581,209 (Cost $1,325,093,957) (h) NET OTHER ASSETS AND LIABILITIES - 1.7%.................................................... 22,816,849 -------------- NET ASSETS - 100.0%........................................................................ $1,375,398,058 ==============

See Notes to Financial Statements Page 11 FIRST TRUST PREFERRED SECURITIES AND INCOME ETF (FPE) PORTFOLIO OF INVESTMENTS (CONTINUED) OCTOBER 31, 2016 ----------------------------- (a) Perpetual maturity. (b) Floating rate security. The interest rate shown reflects the rate in effect at October 31, 2016. (c) Fixed-to-floating or fixed-to-variable rate security. The interest rate shown reflects the fixed rate in effect at October 31, 2016. At a predetermined date, the fixed rate will change to a floating rate or a variable rate. (d) Pursuant to procedures adopted by the Trust's Board of Trustees, this security has been determined to be illiquid by Stonebridge Advisors LLC, the Fund's sub-advisor (the "Sub-Advisor"). (e) This security, sold within the terms of a private placement memorandum, is exempt from registration upon resale under Rule 144A under the Securities Act of 1933, as amended (the "1933 Act"), and may be resold in transactions exempt from registration, normally to qualified institutional buyers (see Note 2C - Restricted Securities in the Notes to Financial Statements). (f) This security, sold within the terms of a private placement memorandum, is exempt from registration upon resale under Rule 144A under the 1933 Act, and may be resold in transactions exempt from registration, normally to qualified institutional buyers. Pursuant to procedures adopted by the Trust's Board of Trustees, this security has been determined to be liquid by the Sub-Advisor. Although market instability can result in periods of increased overall market illiquidity, liquidity for each security is determined based on security-specific factors and assumptions, which require subjective judgment. At October 31, 2016, securities noted as such amounted to $235,008,218 or 17.1% of net assets. (g) This security is a contingent convertible capital security which may be subject to conversion into common stock of the issuer under certain circumstances. At October 31, 2016, securities noted as such amounted to $150,283,921 or 10.9% of net assets. Of these securities, 7.5% originated in emerging markets, and 92.5% originated in foreign markets. (h) Aggregate cost for federal income tax purposes is $1,325,228,751. As of October 31, 2016, the aggregate gross unrealized appreciation for all securities in which there was an excess of value over tax cost was $36,975,789 and the aggregate gross unrealized depreciation for all securities in which there was an excess of tax cost over value was $9,623,331. ----------------------------- VALUATION INPUTS A summary of the inputs used to value the Fund's investments as of October 31, 2016 is as follows (see Note 2A - Portfolio Valuation in the Notes to Financial Statements):

LEVEL 2 LEVEL 3 TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT VALUE AT QUOTED OBSERVABLE UNOBSERVABLE 10/31/2016 PRICES INPUTS INPUTS -------------- ------------- ------------- ------------- $25 Par Preferred Securities: Insurance....................................... $ 100,062,208 $ 97,571,563 $ 2,490,645 $ -- Multi-Utilities................................. 3,341,470 1,019,911 2,321,559 -- Other Industry Categories*...................... 489,572,561 489,572,561 -- -- $50 Par Preferred Securities*...................... 5,811,463 5,811,463 -- -- $100 Par Preferred Securities: Banks........................................... 7,422,932 -- 7,422,932 -- Consumer Finance................................ 10,469,874 10,469,874 -- -- $1,000 Par Preferred Securities*................... 49,170,115 -- 49,170,115 -- Capital Preferred Securities*...................... 685,736,140 -- 685,736,140 -- Closed-End Funds*.................................. 994,446 994,446 -- -- -------------- ------------- ------------- ------------- Total Investments.................................. $1,352,581,209 $ 605,439,818 $ 747,141,391 $ -- ============== ============= ============= =============

* See the Portfolio of Investments for industry breakout All transfers in and out of the levels during the period are assumed to be transferred on the last day of the period at their current value. There were no transfers between levels at October 31, 2016. Page 12 See Notes to Financial Statements FIRST TRUST PREFERRED SECURITIES AND INCOME ETF (FPE) STATEMENT OF ASSETS AND LIABILITIES OCTOBER 31, 2016

ASSETS: Investments, at value..................................................... $1,352,581,209 Cash...................................................................... 23,219,663 Receivables: Interest............................................................... 9,742,408 Investment securities sold............................................. 8,905,332 Capital shares sold.................................................... 8,763,849 Dividends.............................................................. 1,597,688 Tax reclaims........................................................... 284,935 Other assets.............................................................. 44,595 -------------- Total Assets........................................................... 1,405,139,679 -------------- LIABILITIES: Payables: Investment securities purchased........................................ 28,794,624 Investment advisory fees............................................... 946,997 -------------- Total Liabilities...................................................... 29,741,621 -------------- NET ASSETS................................................................ $1,375,398,058 ============== NET ASSETS CONSIST OF: Paid-in capital........................................................... $1,354,505,543 Par value................................................................. 706,550 Accumulated net investment income (loss).................................. 483,198 Accumulated net realized gain (loss) on investments....................... (7,784,485) Net unrealized appreciation (depreciation) on investments................. 27,487,252 -------------- NET ASSETS................................................................ $1,375,398,058 ============== NET ASSET VALUE, per share................................................ $ 19.47 ============== Number of shares outstanding (unlimited number of shares authorized, par value $0.01 per share).......................... 70,655,000 ============== Investments, at cost...................................................... $1,325,093,957 ==============

See Notes to Financial Statements Page 13 FIRST TRUST PREFERRED SECURITIES AND INCOME ETF (FPE) STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2016

INVESTMENT INCOME: Dividends................................................................. $ 30,038,379 Interest.................................................................. 27,424,817 Foreign tax withholding................................................... (7,462) Other..................................................................... 1,111 -------------- Total investment income................................................ 57,456,845 -------------- EXPENSES: Investment advisory fees.................................................. 7,161,290 -------------- Total expenses......................................................... 7,161,290 -------------- NET INVESTMENT INCOME (LOSS).............................................. 50,295,555 -------------- NET REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments............................................................ (1,711,799) In-kind redemptions.................................................... 443,662 -------------- Net realized gain (loss).................................................. (1,268,137) -------------- Net change in unrealized appreciation (depreciation)...................... 28,313,723 -------------- NET REALIZED AND UNREALIZED GAIN (LOSS)................................... 27,045,586 -------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS........................................................ $ 77,341,141 ==============

Page 14 See Notes to Financial Statements FIRST TRUST PREFERRED SECURITIES AND INCOME ETF (FPE) STATEMENTS OF CHANGES IN NET ASSETS

FOR THE YEAR FOR THE YEAR ENDED ENDED 10/31/2016 10/31/2015 -------------- -------------- OPERATIONS: Net investment income (loss)......................................................... $ 50,295,555 $ 13,308,045 Net realized gain (loss)............................................................. (1,268,137) (255,994) Net change in unrealized appreciation (depreciation)................................. 28,313,723 (1,274,548) -------------- -------------- Net increase (decrease) in net assets resulting from operations...................... 77,341,141 11,777,503 -------------- -------------- DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income................................................................ (50,469,633) (13,052,254) Return of capital.................................................................... (440,159) -- -------------- -------------- Total distributions to shareholders.................................................. (50,909,792) (13,052,254) -------------- -------------- SHAREHOLDER TRANSACTIONS: Proceeds from shares sold............................................................ 955,735,609 333,925,194 Cost of shares redeemed.............................................................. (20,474,196) (5,663,344) -------------- -------------- Net increase (decrease) in net assets resulting from shareholder transactions........ 935,261,413 328,261,850 -------------- -------------- Total increase (decrease) in net assets.............................................. 961,692,762 326,987,099 NET ASSETS: Beginning of period.................................................................. 413,705,296 86,718,197 -------------- -------------- End of period........................................................................ $1,375,398,058 $ 413,705,296 ============== ============== Accumulated net investment income (loss) at end of year.............................. $ 483,198 $ 521,422 ============== ============== CHANGES IN SHARES OUTSTANDING: Shares outstanding, beginning of period.............................................. 21,805,000 4,555,000 Shares sold.......................................................................... 49,950,000 17,550,000 Shares redeemed...................................................................... (1,100,000) (300,000) -------------- -------------- Shares outstanding, end of period.................................................... 70,655,000 21,805,000 ============== ==============

See Notes to Financial Statements Page 15 FIRST TRUST PREFERRED SECURITIES AND INCOME ETF (FPE) FINANCIAL HIGHLIGHTS FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD

FOR THE PERIOD YEAR ENDED OCTOBER 31, 2/11/2013 (a) ---------------------------------------------------- THROUGH 2016 2015 2014 10/31/2013 -------------- -------------- -------------- -------------- Net asset value, beginning of period $ 18.97 $ 19.04 $ 18.21 $ 19.99 ---------- ---------- ---------- ---------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) 1.12 1.16 (b) 1.10 0.65 Net realized and unrealized gain (loss) 0.52 (0.10) 0.76 (1.78) ---------- ---------- ---------- ---------- Total from investment operations 1.64 1.06 1.86 (1.13) ---------- ---------- ---------- ---------- DISTRIBUTIONS PAID TO SHAREHOLDERS FROM: Net investment income (1.13) (1.13) (1.03) (0.62) Return of capital (0.01) -- -- (0.03) ---------- ---------- ---------- ---------- Total distributions (1.14) (1.13) (1.03) (0.65) ---------- ---------- ---------- ---------- Net asset value, end of period $ 19.47 $ 18.97 $ 19.04 $ 18.21 ========== ========== ========== ========== TOTAL RETURN (c) 8.97% 5.75% 10.42% (5.74)% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (in 000's) $1,375,398 $ 413,705 $ 86,718 $ 64,722 RATIOS TO AVERAGE NET ASSETS: Ratio of total expenses to average net assets 0.85% 0.85% 0.85% 0.85% (d) Ratio of net investment income (loss) to average net assets 5.97% 6.15% 6.06% 5.44% (d) Portfolio turnover rate (e) 32% 50% 91% 45%

(a) Inception date is consistent with the commencement of investment operations and is the date the initial creation units were established. First Trust Portfolios L.P. seeded the First Trust Preferred Securities and Income ETF on January 29, 2013 in order to provide initial capital required by SEC rules. (b) Based on average shares outstanding. (c) Total return is calculated assuming an initial investment made at the net asset value at the beginning of the period, reinvestment of all distributions at net asset value during the period, and redemption at net asset value on the last day of the period. The 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. (d) Annualized. (e) Portfolio turnover is calculated for the time period presented and is not annualized for periods of less than a year and does not include securities received or delivered from processing creations or redemptions and in-kind transactions. Page 16 See Notes to Financial Statements -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS -------------------------------------------------------------------------------- FIRST TRUST PREFERRED SECURITIES AND INCOME ETF (FPE) OCTOBER 31, 2016 1. ORGANIZATION First Trust Exchange-Traded Fund III (the "Trust") is a non-diversified open-end management investment company organized as a Massachusetts business trust on January 9, 2008, and is registered with the Securities and Exchange Commission (the "SEC") under the Investment Company Act of 1940, as amended (the "1940 Act"). The Trust currently consists of ten funds that are offering shares. This report covers the First Trust Preferred Securities and Income ETF (the "Fund"), which trades under the ticker FPE on the NYSE Arca, Inc. Unlike conventional mutual funds, the Fund issues and redeems shares on a continuous basis, at net asset value ("NAV"), only in large specified blocks consisting of 50,000 shares called a "Creation Unit." Creation Units are issued and redeemed for securities in which the Fund invests or for cash or, in certain circumstances, a combination of both. Except when aggregated in Creation Units, the shares are not redeemable securities of the Fund. The Fund is an actively managed exchange-traded fund. The investment objective of the Fund is to seek total return and to provide current income. Under normal market conditions, the Fund invests at least 80% of its net assets (including investment borrowings) in preferred securities and income-producing debt securities, including corporate bonds, high-yield securities (commonly referred to as "junk" bonds) and convertible securities. There can be no assurance that the Fund will achieve its investment objective. The Fund may not be appropriate for all investors. 2. SIGNIFICANT ACCOUNTING POLICIES The Fund is considered an investment company and follows accounting and reporting guidance under Financial Accounting Standards Board Accounting Standards Codification Topic 946, "Financial Services-Investment Companies." The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of the financial statements. The preparation of the financial statements in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. A. PORTFOLIO VALUATION The Fund's NAV is determined daily as of the close of regular trading on the New York Stock Exchange ("NYSE"), normally 4:00 p.m. Eastern time, on each day the NYSE is open for trading. If the NYSE closes early on a valuation day, the NAV is determined as of that time. Domestic debt securities and foreign securities are priced using data reflecting the earlier closing of the principal markets for those securities. The NAV is calculated by dividing the value of all assets of the Fund (including accrued interest and dividends), less all liabilities (including accrued expenses and dividends declared but unpaid), by the total number of shares outstanding. The Fund's investments are valued daily at market value or, in absence of market value with respect to any portfolio securities, at fair value. Market value prices represent last sale or official closing prices from a national or foreign exchange (i.e., a regulated market) and are primarily obtained from third-party pricing services. Fair value prices represent any prices not considered market value prices and are either obtained from a third-party pricing service or are determined by the Pricing Committee of the Fund's investment advisor, First Trust Advisors L.P. ("First Trust" or the "Advisor"), in accordance with valuation procedures adopted by the Trust's Board of Trustees, and in accordance with provisions of the 1940 Act. Investments valued by the Advisor's Pricing Committee, if any, are footnoted as such in the footnotes to the Portfolio of Investments. The Fund's investments are valued as follows: Preferred stocks, real estate investment trust ("REITs") and other equity securities listed on any national or foreign exchange (excluding The Nasdaq Stock Market LLC ("Nasdaq") and the London Stock Exchange Alternative Investment Market ("AIM")) are valued at the last sale price on the exchange on which they are principally traded or, for Nasdaq and AIM securities, the official closing price. Securities traded on more than one securities exchange are valued at the last sale price or official closing price, as applicable, at the close of the securities exchange representing the principal market for such securities. Bonds, notes and other debt securities are valued on the basis of valuations provided by dealers who make markets in such securities or by a third-party pricing service approved by the Trust's Board of Trustees, which may use the following valuation inputs when available: 1) benchmark yields; 2) reported trades; 3) broker/dealer quotes; 4) issuer spreads; 5) benchmark securities; 6) bids and offers; and 7) reference data including market research publications. Page 17 -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (CONTINUED) -------------------------------------------------------------------------------- FIRST TRUST PREFERRED SECURITIES AND INCOME ETF (FPE) OCTOBER 31, 2016 Securities traded in an over-the-counter market are fair valued at the mean of their most recent bid and asked price, if available, and otherwise at their closing bid price. Fixed income and other debt securities having a remaining maturity of 60 days or less when purchased are fair valued at cost adjusted for amortization of premiums and accretion of discounts (amortized cost), provided the Advisor's Pricing Committee has determined that the use of amortized cost is an appropriate reflection of fair value given market and issuer-specific conditions existing at the time of the determination. Factors that may be considered in determining the appropriateness of the use of amortized cost include, but are not limited to, the following: 1) the credit conditions in the relevant market and changes thereto; 2) the liquidity conditions in the relevant market and changes thereto; 3) the interest rate conditions in the relevant market and changes thereto (such as significant changes in interest rates); 4) issuer-specific conditions (such as significant credit deterioration); and 5) any other market-based data the Advisor's Pricing Committee considers relevant. In this regard the Advisor's Pricing Committee may use last-obtained market-based data to assist in when valuing portfolio securities using amortized cost. Certain securities may not be able to be priced by pre-established pricing methods. Such securities may be valued by the Trust's Board of Trustees or its delegate, the Advisor's Pricing Committee, at fair value. These securities generally include, but are not limited to, restricted securities (securities which may not be publicly sold without registration under the Securities Act of 1933, as amended (the "1933 Act")) for which a third-party pricing service is unable to provide a market price; securities whose trading has been formally suspended; a security whose market or fair value price is not available from a pre-established pricing source; a security with respect to which an event has occurred that is likely to materially affect the value of the security after the market has closed but before the calculation of the Fund's NAV or make it difficult or impossible to obtain a reliable market quotation; and a security whose price, as provided by the third-party pricing service, does not reflect the security's fair value. As a general principle, the current fair value of a security would appear to be the amount which the owner might reasonably expect to receive for the security upon its current sale. When fair value prices are used, generally they will differ from market quotations or official closing prices on the applicable exchanges. A variety of factors may be considered in determining the fair value of such securities, including, but not limited to, the following: 1) the type of security; 2) the size of the holding; 3) the initial cost of the security; 4) transactions in comparable securities; 5) price quotes from dealers and/or third-party pricing services; 6) relationships among various securities; 7) information obtained by contacting the issuer, analysts, or the appropriate stock exchange; 8) an analysis of the issuer's financial statements; and 9) the existence of merger proposals or tender offers that might affect the value of the security. If the securities in question are foreign securities, the following additional information may be considered: 1) the value of similar foreign securities traded on other foreign markets; 2) ADR trading of similar securities; 3) closed-end fund trading of similar securities; 4) foreign currency exchange activity; 5) the trading prices of financial products that are tied to baskets of foreign securities; 6) factors relating to the event that precipitated the pricing problem; 7) whether the event is likely to recur; and 8) whether the effects of the event are isolated or whether they affect entire markets, countries or regions. The Fund is subject to fair value accounting standards that define fair value, establish the framework for measuring fair value and provide a three-level hierarchy for fair valuation based upon the inputs to the valuation as of the measurement date. The three levels of the fair value hierarchy are as follows: o Level 1 - Level 1 inputs are quoted prices in active markets for identical investments. An active market is a market in which transactions for the investment occur with sufficient frequency and volume to provide pricing information on an ongoing basis. o Level 2 - Level 2 inputs are observable inputs, either directly or indirectly, and include the following: o Quoted prices for similar investments in active markets. Page 18 -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (CONTINUED) -------------------------------------------------------------------------------- FIRST TRUST PREFERRED SECURITIES AND INCOME ETF (FPE) OCTOBER 31, 2016 o Quoted prices for identical or similar investments in markets that are non-active. A non-active market is a market where there are few transactions for the investment, the prices are not current, or price quotations vary substantially either over time or among market makers, or in which little information is released publicly. o Inputs other than quoted prices that are observable for the investment (for example, interest rates and yield curves observable at commonly quoted intervals, volatilities, prepayment speeds, loss severities, credit risks, and default rates). o Inputs that are derived principally from or corroborated by observable market data by correlation or other means. o Level 3 - Level 3 inputs are unobservable inputs. Unobservable inputs may reflect the reporting entity's own assumptions about the assumptions that market participants would use in pricing the investment. The inputs or methodologies used for valuing investments are not necessarily an indication of the risk associated with investing in those investments. A summary of the inputs used to value the Fund's investments as of October 31, 2016, is included with the Fund's Portfolio of Investments. B. SECURITIES TRANSACTIONS AND INVESTMENT INCOME Securities transactions are recorded as of the trade date. Realized gains and losses from securities transactions are recorded on the identified cost basis. Dividend income is recorded on the ex-dividend date. Interest income, if any, is recorded on the accrual basis. Amortization of premiums and accretion of discounts are recorded using the effective interest method. Distributions received from the Fund's investments in REITs may be comprised of return of capital, capital gains and income. The actual character of the amounts received during the year are not known until after the REIT's fiscal year end. The Fund records the character of distributions received from the REITs during the year based on estimates available. The characterization of distributions received by the Fund may be subsequently revised based on information received from the REITs after their tax reporting periods conclude. C. RESTRICTED SECURITIES The Fund invests in restricted securities, which are securities that may not be offered for public sale without first being registered under the 1933 Act. Prior to registration, restricted securities may only be resold in transactions exempt from registration under Rule 144A under the 1933 Act, normally to qualified institutional buyers. As of October 31, 2016, the Fund held restricted securities as shown in the following table that Stonebridge Advisors LLC ("Stonebridge" or the "Sub-Advisor") has deemed illiquid pursuant to procedures adopted by the Trust's Board of Trustees. Although market instability can result in periods of increased overall market illiquidity, liquidity for each security is determined based on security-specific factors and assumptions, which require subjective judgment. The Fund does not have the right to demand that such securities be registered. These securities are valued according to the valuation procedures as stated in the Portfolio Valuation note (Note 2A) and are not expressed as a discount to the carrying value of a comparable unrestricted security. There are no unrestricted securities with the same maturity dates and yields for these issuers.

SHARES/ % OF ACQUISITION PAR CURRENT CARRYING NET SECURITY DATE AMOUNT PRICE COST VALUE ASSETS ------------------------------------------------------------------------------------------------------------------------------ AgStar Financial Services ACA, 6.75% 7/31/15 2,500 $ 1,060.88 $ 2,631,250 $ 2,652,187 0.19% Centaur Funding Corp., 9.08%, 4/21/20 9/27/16 2,242 1,185.00 2,645,560 2,656,770 0.19 Dairy Farmers of America, 7.13% 9/15/16 - 10/4/16 $ 6,200,000 1.05 6,233,750 6,479,000 0.47 First Tennessee Bank, 3.75% 6/8/16 -10/5/16 19,100 700.03 13,009,500 13,370,598 0.97 Land O'Lakes, Inc., 8.00% 7/9/15 - 8/10/16 $ 12,000,000 1.06 12,293,875 12,720,000 0.93 Land O'Lakes, Inc., 8.00% 4/11/16 - 8/30/16 $ 10,000,000 1.06 10,300,000 10,600,000 0.77 Sirius International Group Ltd., 7.51% 8/6/14 - 6/1/16 $ 8,600,000 1.01 8,913,250 8,675,250 0.63 Sovereign Real Estate Investment Trust, 12.00% 5/12/14 - 3/22/16 4,556 1,285.00 5,906,010 5,854,460 0.43 ------------- ------------- --------- $ 61,933,195 $ 63,008,265 4.58% ============= ============= =========

D. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS Dividends from net investment income, if any, are declared and paid monthly, or as the Board of Trustees may determine from time to time. Distributions of net realized capital gains earned by the Fund, if any, will be distributed at least annually. Distributions from income and capital gains are determined in accordance with income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These permanent differences are primarily due to the varying treatment of income and gain/loss on portfolio Page 19 -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (CONTINUED) -------------------------------------------------------------------------------- FIRST TRUST PREFERRED SECURITIES AND INCOME ETF (FPE) OCTOBER 31, 2016 securities held by the Fund and have no impact on net assets or net asset value per share. Temporary differences, which arise from recognizing certain items of income, expense and gain/loss in different periods for financial statement and tax purposes, will reverse at some time in the future. The tax character of distributions paid during the fiscal years ended October 31, 2016 and October 31, 2015 was as follows: Distributions paid from: 2016 2015 Ordinary income............................. $ 50,469,633 $ 13,052,254 Capital gain................................ $ -- -- Return of capital........................... $ 440,159 -- As of October 31, 2016, the components of distributable earnings on a tax basis were as follows: Undistributed ordinary income............... $ -- Accumulated capital and other losses........ $ (7,166,493) Net unrealized appreciation (depreciation).. $ 27,352,458 E. INCOME TAXES The 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, the Fund may be subject to an excise tax of 4% of the amount by which approximately 98% of the Fund's taxable income exceeds the distributions from such taxable income for the calendar year. The Fund is subject to accounting standards that establish a minimum threshold for recognizing, and a system for measuring, the benefits of a tax position taken or expected to be taken in a tax return. The taxable years ended 2013, 2014, 2015 and 2016 remain open to federal and state audit. As of October 31, 2016, management has evaluated the application of these standards to the Fund, and has determined that no provision for income tax is required in the Fund's financial statements for uncertain tax positions. The Fund intends to utilize provisions of the federal income tax laws, which allow it to carry a realized capital loss forward indefinitely following the year of the loss and offset such loss against any future realized capital gains. The Fund is subject to certain limitations under U.S. tax rules on the use of capital carryforwards and net unrealized built-in losses. These limitations apply when there has been a 50% change in ownership. At October 31, 2016, the Fund had non-expiring capital loss carryforwards for federal income tax purposes of $7,166,493. Certain losses realized during the current fiscal year may be deferred and treated as occurring on the first day of the following fiscal year for federal income tax purposes. For the fiscal year ended October 31, 2016, the Fund had no net ordinary losses. In order to present paid-in capital, accumulated net investment income (loss) and accumulated net realized gain (loss) on investments on the Statement of Assets and Liabilities that more closely represent their tax character, certain adjustments have been made to paid-in capital, accumulated net investment income (loss) and accumulated net realized gain (loss) on investments. These adjustments are primarily due to the difference between book and tax treatments of income and gains on various investment securities held by the Fund and in-kind transactions. The results of operations and net assets were not affected by these adjustments. For the fiscal year ended October 31, 2016, the adjustments for the Fund were as follows: ACCUMULATED ACCUMULATED NET REALIZED NET INVESTMENT GAIN (LOSS) INCOME (LOSS) ON INVESTMENTS PAID-IN CAPITAL -------------- -------------- --------------- $ 135,854 $ (556,086) $ 420,232 F. EXPENSES Expenses, other than the investment advisory fee and other excluded expenses, are paid by the Advisor (See Note 3). G. NEW AND AMENDED FINANCIAL REPORTING RULES AND FORMS On October 13, 2016, the SEC adopted new rules and forms, and amended existing rules and forms. The new and amended rules and forms are intended to modernize the reporting of information provided by funds and to improve the quality and type of information that funds provide to the SEC and investors. The new and amended rules and forms will be effective for the First Trust funds, including the Fund, for reporting periods beginning on and after June 1, 2018. Management is evaluating the new and amended rules and forms to determine the impact to the Fund. Page 20 -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (CONTINUED) -------------------------------------------------------------------------------- FIRST TRUST PREFERRED SECURITIES AND INCOME ETF (FPE) OCTOBER 31, 2016 3. INVESTMENT ADVISORY FEE, AFFILIATED TRANSACTIONS AND OTHER FEE ARRANGEMENTS First Trust, the investment advisor to the Fund, is a limited partnership with one limited partner, Grace Partners of DuPage L.P., and one general partner, The Charger Corporation. The Charger Corporation is an Illinois corporation controlled by James A. Bowen, Chief Executive Officer of First Trust. First Trust is responsible for the ongoing monitoring of the securities in the Fund's portfolio, managing the Fund's business affairs and providing certain administrative services necessary for the management of the Fund. Stonebridge, an affiliate of First Trust, serves as the Fund's sub-advisor and manages the Fund's portfolio subject to First Trust's supervision. Pursuant to the Investment Management Agreement between the Trust and the Advisor, First Trust will supervise Stonebridge and its management of the investment of the Fund's assets and will pay Stonebridge for its services as the Fund's sub-advisor. First Trust and Stonebridge are equally responsible for the Fund's expenses, including the cost of transfer agency, custody, fund administration, legal, audit and other services, but excluding fee payments under the Investment Management Agreement, interest, taxes, acquired fund fees and expenses, brokerage commissions and other expenses connected with the execution of portfolio transactions, distribution and service fees pursuant to a 12b-1 plan, if any, and extraordinary expenses. The Fund has agreed to pay First Trust an annual unitary management fee equal to 0.85% of its average daily net assets. Stonebridge receives a sub-advisory fee equal to 0.425% of the average daily net assets of the Fund less Stonebridge's share of the Fund's expenses. The Sub-Advisor's fee is paid by the Advisor out of the Advisor's management fee. First Trust also provides fund reporting services to the Fund for a flat annual fee in the amount of $9,250, which is covered under the annual unitary management fee. The Trust has multiple service agreements with Brown Brothers Harriman & Co. ("BBH"). Under the service agreements, BBH performs custodial, fund accounting, certain administrative services, and transfer agency services for the Fund. As custodian, BBH is responsible for custody of the Fund's assets. As fund accountant and administrator, BBH is responsible for maintaining the books and records of the Fund's securities and cash. As transfer agent, BBH is responsible for maintaining shareholder records for the Fund. 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. Prior to January 1, 2016, the fixed annual retainer was allocated pro rata based on each fund's net assets. Each Independent Trustee is also paid an annual per fund fee that varies based on whether the fund is a closed-end or other actively managed fund, or is an index fund. Additionally, the Lead Independent Trustee and the Chairmen of the Audit Committee, Nominating and Governance Committee and Valuation Committee are paid annual fees to serve in such capacities, with such compensation allocated pro rata among each fund in the First Trust Fund Complex based on net assets. Independent Trustees are reimbursed for travel and out-of-pocket expenses in connection with all meetings. The Lead Independent Trustee and Committee Chairmen rotate every three years. The officers and "Interested" Trustee receive no compensation from the Trust for acting in such capacities. 4. PURCHASES AND SALES OF SECURITIES For the year ended October 31, 2016, the cost of purchases and proceeds from sales of investments, excluding short-term investments and in-kind transactions, for the Fund were $811,906,195 and $262,740,088, respectively. For the year ended October 31, 2016, the cost of in-kind purchases and proceeds from in-kind sales for the Fund was $376,770,492 and $9,170,517, respectively. 5. CREATIONS, REDEMPTIONS AND TRANSACTION FEES Shares are created and redeemed by the Fund only in Creation Unit size aggregations of 50,000 shares in transactions with broker-dealers or large institutional investors that have entered into a participation agreement (an "Authorized Participant"). In order to purchase Creation Units of the Fund, an Authorized Participant must deposit (i) a designated portfolio of securities and other instruments determined by First Trust (the "Deposit Securities") and generally make or receive a cash payment referred to as the "Cash Component," which is an amount equal to the difference between the NAV of the Fund shares (per Creation Unit aggregations) and the market value of the Deposit Securities, and/or (ii) cash in lieu of all or a portion of the Deposit Securities. If the Cash Component is a positive number (i.e., the NAV per Creation Unit Aggregation exceeds the Deposit Amount), the Authorized Participant will deliver the Cash Component. If the Cash Component is a negative number (i.e., the NAV per Creation Unit Aggregation is less than the Deposit Amount), the Authorized Participant will receive the Cash Component. Authorized Participants purchasing Creation Units must pay to BBH, as transfer agent, a creation transaction fee (the "Creation Transaction Fee") regardless of the number of Creation Units purchased in the transaction. The Creation Transaction Fee may vary and is based on the composition of the securities included in the Fund's portfolio and the countries in which the transactions are settled. The Creation Transaction Fee may increase or decrease as the Fund's portfolio is adjusted to conform to changes in the composition of the securities included in the Fund's portfolio and the countries in which the transaction are settled. The Creation Transaction Fee is currently $500. The price for each Creation Unit will equal the daily NAV per share times the number of shares in a Creation Unit plus the fees described Page 21 -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (CONTINUED) -------------------------------------------------------------------------------- FIRST TRUST PREFERRED SECURITIES AND INCOME ETF (FPE) OCTOBER 31, 2016 above and, if applicable, any operational processing and brokerage costs, transfer fees or stamp taxes. When the Fund permits an Authorized Participant to substitute cash or a different security in lieu of depositing one or more of the requisite Deposit Securities, the Authorized Participant may also be assessed an amount to cover the cost of purchasing the Deposit Securities and/or disposing of the substituted securities, including operational processing and brokerage costs, transfer fees, stamp taxes, and part or all of the spread between the expected bid and offer side of the market related to such Deposit Securities and/or substitute securities. Authorized Participants redeeming Creation Units must pay to BBH, as transfer agent, a redemption transaction fee (the "Redemption Transaction Fee"), regardless of the number of Creation Units redeemed in the transaction. The Redemption Transaction Fee may vary and is based on the composition of the securities included in the Fund's portfolio and the countries in which the transactions are settled. The Redemption Transaction Fee is currently $500. The Fund reserves the right to effect redemptions in cash. An Authorized Participant may request cash redemption in lieu of securities; however, the Fund may, in its discretion, reject any such request. 6. LINE OF CREDIT The Trust, First Trust Series Fund and First Trust Exchange-Traded Fund IV entered into a $140 million Credit Agreement with The Bank of Nova Scotia ("Scotia") as administrative agent for a group of lenders. Scotia charges a commitment fee of 0.25% of the daily amount of the excess of the commitment amount over the outstanding principal balance of the loans. Prior to March 9, 2016, the commitment was $80 million and the commitment fee was 0.15%. First Trust allocates the commitment fee amongst the funds that have access to the credit line. To the extent that the Fund accesses the credit line, there would also be an interest fee charged. The Fund did not have any borrowings outstanding during the year ended October 31, 2016. 7. DISTRIBUTION PLAN The Board of Trustees adopted a Distribution and Service Plan pursuant to Rule 12b-1 under the 1940 Act. In accordance with the Rule 12b-1 plan, the Fund is authorized to pay an amount up to 0.25% of its average daily net assets each year to reimburse First Trust Portfolios L.P. ("FTP"), the distributor of the 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 Fund, and pursuant to a contractual arrangement, no 12b-1 fees will be paid any time before February 28, 2018. 8. INDEMNIFICATION The Trust, on behalf of the Fund, has a variety of indemnification obligations under contracts with its service providers. The Trust's maximum exposure under these arrangements is unknown. However, the Trust has not had prior claims or losses pursuant to these contracts and expects the risk of loss to be remote. 9. SUBSEQUENT EVENTS Management has evaluated the impact of all subsequent events to the Fund through the date the financial statements were issued and has determined that there were the following subsequent events: On November 21, 2016, the Fund declared a distribution of $0.0971 per share to Common Shareholders of record on November 25, 2016, payable November 30, 2016. On December 16, 2016, the commitment amount under the Credit Agreement with Scotia was increased to $180 million. Page 22 -------------------------------------------------------------------------------- REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM -------------------------------------------------------------------------------- TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF FIRST TRUST PREFERRED SECURITIES AND INCOME ETF: We have audited the accompanying statement of assets and liabilities of First Trust Preferred Securities and Income ETF (the "Fund"), a series of the First Trust Exchange-Traded Fund III, including the portfolio of investments, as of October 31, 2016, and the related statement 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 each of the periods presented. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of October 31, 2016, by correspondence with the Fund's custodian and brokers; where replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of First Trust Preferred Securities and Income ETF as of October 31, 2016, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the periods presented, in conformity with accounting principles generally accepted in the United States of America. /s/ Deloitte & Touche LLP Chicago, Illinois December 21, 2016 Page 23 -------------------------------------------------------------------------------- ADDITIONAL INFORMATION -------------------------------------------------------------------------------- FIRST TRUST PREFERRED SECURITIES AND INCOME ETF (FPE) OCTOBER 31, 2016 (UNAUDITED) PROXY VOTING POLICIES AND PROCEDURES A description of the policies and procedures that the Trust uses to determine how to vote proxies and information on how the Fund voted proxies relating to portfolio investments during the most recent 12-month period ended June 30 will be available (1) without charge, upon request, by calling (800) 988-5891; (2) on the Fund's website located at http://www.ftportfolios.com; and (3) on the Securities and Exchange Commission's ("SEC") website located at http://www.sec.gov. PORTFOLIO HOLDINGS The Trust files its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The Trust's Form N-Qs are available (1) by calling (800) 988-5891; (2) on the Fund's website located at http://www.ftportfolios.com; (3) on the SEC's website at http://www.sec.gov; and (4) for review and copying at the SEC's Public Reference Room ("PRR") in Washington, DC. Information regarding the operation of the PRR may be obtained by calling (800) SEC-0330. FEDERAL TAX INFORMATION For the taxable year ended October 31, 2016, the following percentages of income dividend paid by the Fund qualify for the dividends received deduction available to corporations and is hereby designated as qualified dividend income: Dividends Received Deduction Qualified Dividend Income ---------------------------- ----------------------------- 33.84% 56.46% CHANGE TO INVESTMENT STRATEGY On June 13, 2016 the Board of Trustees approved a change in the Fund's investment strategy. Prior to the change, the investment strategy provided that at least 80% of the Fund's net assets are issued by issuers that have long-term credit ratings of investment grade at the time of purchase. The strategy was changed to provide that at leasat 80% of the Fund's net assets are issued by issuers that have long-term credit ratings of investment grade, or unrated issuers judged to be of comparable quality by the fund's sub-advisors, at the time of purchase. The change in strategy was implemented on September 5, 2016. RISK CONSIDERATIONS You could lose money by investing in the Fund. An investment in the Fund is not a deposit of a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other governmental agency. There can be no assurance that the Fund's investment objective will be achieved. CASH TRANSACTIONS RISK. The Fund may under certain circumstances effect a portion of creations and redemptions for cash, rather than in-kind securities. As a result, an investment in the Fund may be less tax-efficient than an investment in an ETF that effects its creations and redemption for in-kind securities. Because the Fund may effect a portion of redemptions for cash, it may be required to sell portfolio securities in order to obtain the cash needed to distribute redemption proceeds. A sale of shares may result in capital gains or losses, and may also result in higher brokerage costs. CONCENTRATION RISK. A fund concentrated in a single industry or sector is likely to present more risks than a fund that is broadly diversified over several industries or sectors. Compared to the broad market, an individual industry or sector may be more strongly affected by changes in the economic climate, broad market shifts, moves in a particular dominant stock, or regulatory changes. CONVERTIBLE SECURITIES/CONTINGENT CONVERTIBLE SECURITIES RISK. The market value of convertible securities tends to decline as interest rates increase and, conversely, tends to increase as interest rates decline. In addition, because of the conversion feature, the market value of convertible securities tends to vary with fluctuations in the market value of the underlying common stock. Contingent convertible securities ("CoCos") may provide for mandatory conversion into common stock of the issuer under certain circumstances. Since the common stock of the issuer may not pay a dividend, investors in these instruments could experience a reduced income rate, potentially to zero; and conversion would deepen the subordination of the investor, hence worsening standing in a bankruptcy. In addition, some such instruments have a set stock conversion rate that would cause a reduction in value of the security if the price of the stock is below the conversion price on the conversion date. CoCos may be considered to be high-yield securities (a.k.a. "junk" bonds) and, to the extent a CoCo held by the Fund undergoes a write down, the Fund may lose some or all of its original investment in the CoCo. Performance of a CoCo issuer may, in general, be correlated with the performance of other CoCo issuers. As a result, negative information regarding one CoCo issuer may cause a decline in value of other CoCo Page 24 -------------------------------------------------------------------------------- ADDITIONAL INFORMATION (CONTINUED) -------------------------------------------------------------------------------- FIRST TRUST PREFERRED SECURITIES AND INCOME ETF (FPE) OCTOBER 31, 2016 (UNAUDITED) issuers. Subordinate securities such as CoCos are more likely to experience credit loss than non-subordinate securities of the same issuer - even if the CoCos do not convert to equity securities. Any losses incurred by subordinate securities, such as CoCos, are likely to be proportionately greater than non-subordinate securities and any recovery of principal and interest of subordinate securities may take more time. As a result, any perceived decline in creditworthiness of a CoCo issuer is likely to have a greater impact on the CoCo, as a subordinate security. 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. Credit risk may be heightened if the Fund invests in "high yield" or "junk" debt; such securities, while generally offering higher yields than investment grade debt with similar maturities, involve greater risks, including the possibility of dividend or interest deferral, default or bankruptcy, and are regarded as predominantly speculative with respect to the issuer's capacity to pay dividends or interest and repay principal. DEPOSITARY RECEIPTS RISK. Depositary receipts may be less liquid than the underlying securities in their primary trading market. Any distributions paid to the holders of depositary receipts are usually subject to a fee charged by the depositary. Holders of depositary receipts may have limited voting rights, and investment restrictions in certain countries may adversely impact the value of depositary receipts because such restrictions may limit the ability to convert the securities into depositary receipts and vice versa. Such restrictions may cause the securities of the underlying issuer to trade at a discount or premium to the market price of the depositary receipts. CURRENCY EXCHANGE RATE RISK. The Fund may hold investments that are denominated in non-U.S. currencies, or in securities that provide exposure to such currencies, currency exchange rates or interest rates denominated by such currencies. Changes in currency exchange rates and the relative value of non-U.S. currencies will affect the value of the Fund's investment and the value of your Fund shares. Currency exchange rates can be very volatile and can change quickly and unpredictably. As a result, the value of an investment in the Fund may change quickly and without warning and you may lose money. FINANCIAL COMPANY RISK. Financial companies are especially subject to the adverse effects of economic recession, currency exchange rates, government regulation, decreases in the availability of capital, volatile interest rates, portfolio concentrations in geographic markets and in commercial and residential real estate loans, and competition from new entrants in their fields of business. HIGH YIELD SECURITIES RISK. High yield securities are subject to greater market fluctuations and risk of loss than securities with higher ratings. These securities are issued by companies that may have limited operating history, narrowly focused operations, and/or other impediments to the timely payment of periodic interest and principal at maturity. If the economy slows down or dips into recession, the issuers of high yield securities may not have sufficient resources to continue making timely payment of periodic interest and principal at maturity. The market for high yield securities is smaller and less liquid than that for investment grade securities. High yield securities are generally not listed on a national securities exchange but trade in the over-the-counter markets. Due to the smaller, less liquid market for high yield securities, the bid-offer spread on such securities is generally greater than it is for investment grade securities and the purchase or sale of such securities may take longer to complete. ILLIQUID SECURITIES RISK. Illiquid securities involve the risk that the securities will not be able to be sold at the time desired by the Fund or at prices approximately the value at which the Fund is carrying the securities on its books. INCOME RISK. If interest rates fall, the income from the Fund's portfolio will decline as the Fund invests the proceeds from new share sales, or from matured or called debt securities, at interest rates that are below the portfolio's current earnings rate. INTEREST RATE RISK. If interest rates rise, the prices of the fixed-rate instruments held by the Fund may fall. MANAGEMENT RISK. The Fund is subject to management risk because it is an actively managed portfolio. In managing the Fund's investment portfolio, the sub-advisor will apply investment techniques and risk analyses that may not have the desired result. There can be no guarantee that the Fund will meet its investment objective. MARKET RISK. Market risk is the risk that a particular security owned by the Fund or shares of the Fund in general may fall in value. Securities are subject to market fluctuations caused by such factors as economic, political, regulatory or market developments, changes in interest rates and perceived trends in securities prices. Overall securities values could decline generally or could underperform other investments. Page 25 -------------------------------------------------------------------------------- ADDITIONAL INFORMATION (CONTINUED) -------------------------------------------------------------------------------- FIRST TRUST PREFERRED SECURITIES AND INCOME ETF (FPE) OCTOBER 31, 2016 (UNAUDITED) NON-DIVERSIFICATION RISK. The Fund is classified as "non-diversified" under the 1940 Act. As a result, the Fund is only limited as to the percentage of its assets which may be invested in the securities of any one issuer by the diversification requirements imposed by the Internal Revenue Code of 1986, as amended. The Fund may invest a relatively high percentage of its assets in a limited number of issuers. As a result, the Fund may be more susceptible to a single adverse economic or regulatory occurrence affecting one or more of these issuers, experience increased volatility and be highly concentrated in certain issuers. NON-U.S. SECURITIES RISK. The Fund may invest in securities of non-U.S. issuers. Such securities are subject to higher volatility than securities of domestic issuers due to possible adverse political, social or economic developments, restrictions on foreign investment or exchange of securities, lack of liquidity, currency exchange rates, excessive taxation, government seizure of assets, different legal or accounting standards, and less government supervision and regulation of exchanges in foreign countries. 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 instruments in a company's capital structure, in terms of priority to corporate income, and therefore will be subject to greater credit risk than those debt instruments. Preferred Securities are also subject to credit risk, interest rate risk and income risk. REIT RISK. Investing in REITs involves risks related to their structure and focus, which include, but are not limited to, dependency upon management skills, limited diversification, the risks of locating and managing financing for projects, heavy cash flow dependency, possible default by borrowers, the costs and potential losses of self-liquidation of one or more holdings, the risk of a possible lack of mortgage funds and associated interest rate risks, overbuilding, property vacancies, increases in property taxes and operating expenses, changes in zoning laws, losses due to environmental damages, changes in neighborhood values and appeal to purchases, the possibility of failing to maintain exemptions from registration under the 1940 Act and, in many cases, relatively small market capitalization, which may result in less market liquidity and greater price volatility. Fund shareholders indirectly pay REIT fees and expenses. ADVISORY AND SUB-ADVISORY AGREEMENTS BOARD CONSIDERATIONS REGARDING APPROVAL OF INVESTMENT MANAGEMENT AGREEMENT AND INVESTMENT SUB-ADVISORY AGREEMENT The Board of Trustees (the "Board") of the First Trust Series Fund (the "Trust"), including the Independent Trustees, unanimously approved the continuation of the Investment Management Agreement (the "Advisory Agreement") between the Trust, on behalf of the First Trust Preferred Securities and Income Fund (the "Fund"), and First Trust Advisors L.P. (the "Advisor" or "First Trust") and the Investment Sub-Advisory Agreement (the "Sub-Advisory Agreement" and together with the Advisory Agreement, the "Agreements") among the Trust, on behalf of the Fund, the Advisor and Stonebridge Advisors LLC (the "Sub-Advisor"), at a meeting held on June 16, 2015. The Board determined that the continuation of the Agreements is in the best interests of the Fund in light of the extent and quality of the services provided and such other matters as the Board considered to be relevant in the exercise of its reasonable business judgment. To reach this determination, the Board considered its duties under the Investment Company Act of 1940, as amended (the "1940 Act"), as well as under the general principles of state law in reviewing and approving advisory contracts; the requirements of the 1940 Act in such matters; the fiduciary duty of investment advisors with respect to advisory agreements and compensation; the standards used by courts in determining whether investment company boards have fulfilled their duties; and the factors to be considered by the Board in voting on such agreements. At meetings held on April 20, 2015 and June 16, 2015, 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 that, among other things, outlined the services provided by the Advisor and the Sub-Advisor (including the relevant personnel responsible for these services and their experience); the advisory and sub-advisory fees for the Fund as compared to fees charged to other clients of the Advisor and the Sub-Advisor and as compared to fees charged to a peer group of funds selected by Management Practice, Inc. ("MPI"), an independent source (the "MPI Peer Group"); expenses of the Fund as compared to expense ratios of the Funds in the MPI Peer Group; performance information for the Fund; the nature of expenses incurred in providing services to the Fund and the potential for economies of scale, if any; financial data on the Advisor and the Sub-Advisor; any fall out benefits to the Advisor and its affiliates, 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 a special meeting held on April 20, 2015, at 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, independent legal counsel on behalf of the Independent Trustees requested certain clarifications and supplements to the materials provided, and those were considered at an executive session of the Independent Trustees and independent legal counsel held prior to the June 16, 2015 meeting, as well as at the meeting. The Board applied its business judgment to determine whether the arrangements between the Trust and the Advisor and among the Trust, the Advisor Page 26 -------------------------------------------------------------------------------- ADDITIONAL INFORMATION (CONTINUED) -------------------------------------------------------------------------------- FIRST TRUST PREFERRED SECURITIES AND INCOME ETF (FPE) OCTOBER 31, 2016 (UNAUDITED) and the Sub-Advisor are reasonable business arrangements from the Fund's perspective as well as from the perspective of shareholders. The Board considered that shareholders chose to invest or remain invested in the Fund knowing that the Advisor and the Sub-Advisor manage the Fund. In reviewing the Agreements, the Board considered the nature, extent and quality of services provided by the Advisor and the Sub-Advisor under the Agreements. With respect to the Advisory Agreement, the Board considered that the Advisor is responsible for the overall management and administration of the Fund and reviewed the services provided by the Advisor to the Fund, including the oversight of the Sub-Advisor. The Board noted the compliance program that had been developed by the Advisor and considered that it includes a robust program for monitoring the Sub-Advisor's compliance with the 1940 Act and the Fund's investment objective and policies. The Board considered the significant asset growth of the First Trust Fund Complex and the Advisor's concomitant investment in infrastructure and personnel dedicated to the First Trust funds. With respect to the Sub-Advisory Agreement, the Board noted the background and experience of the Sub-Advisor's portfolio management team and recent additions to the Sub-Advisor's staff. The Board considered the services that the Sub-Advisor provides to the Fund, including the Sub Advisor's day-to-day management of the Fund's investments. In light of the information presented and the considerations made, the Board concluded that the nature, extent and quality of services provided to the 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 the Fund consistent with its investment objective and policies. The Board considered the advisory and sub-advisory fees paid under the Agreements. The Board considered the advisory fees charged by the Advisor to similar funds and other non-fund clients, noting that the Advisor provides advisory services to a closed-end fund and an open-end fund sub-advised by the Sub-Advisor and to certain separately managed accounts that may have investment objectives and policies similar to the Fund's. The Board noted that the Advisor charges similar advisory fee rates to the Fund and the closed-end and open-end funds and a lower fee rate to the separately managed accounts. The Board noted the Advisor's statement that the nature of the services provided to the separately managed accounts is not comparable to those provided to the Fund. The Board considered the sub-advisory fee and how it relates to the Fund's overall advisory fee structure and noted that the sub-advisory fee is paid by the Advisor from its advisory fee. The Board noted that the Sub-Advisor provides sub-advisory services to the closed-end and the open-end funds referred to above and that the sub-advisory fee rates charged for the closed-end and open-end funds are similar to the sub-advisory fee rate for the Fund. In addition, the Board reviewed data prepared by MPI showing the advisory fee and expense ratio (Class A shares) of the Fund as compared to the advisory fees and expense ratios of the MPI Peer Group. The Board discussed with representatives of the Advisor the limitations in creating a relevant peer group for the Fund, including that (i) the Fund is unique in its composition, which makes assembling peers with similar strategies and asset mix difficult; (ii) most of the peer funds are larger than the Fund, which causes the Fund's fixed expenses to be higher on a percentage basis as compared to the larger peer funds; and (iii) some of the peer funds do not employ an advisor/sub advisor management structure. The Board took these limitations into account in considering the peer data. In reviewing the peer data, the Board noted that the Fund's contractual advisory fee was above the median of the MPI Peer Group. The Board considered that the Advisor and Sub-Advisor agreed to waive fees and/or pay Fund expenses through February 28, 2017 to the extent necessary to prevent the annual operating expenses of the Fund (excluding taxes, interest, all brokerage commissions, other normal charges incident to the purchase and sale of portfolio securities, distribution and service fees payable pursuant to a Rule 12b 1 plan, if any, and extraordinary expenses) from exceeding 1.15% of a class' average daily net assets, and from March 1, 2017 through February 28, 2026 to the extent necessary to prevent annual operating expenses (with the same exclusions) from exceeding 1.50% of a class' average daily net assets. The Board noted that fees waived or expenses borne by the Advisor and Sub-Advisor are subject to reimbursement by the Fund for up to three years from the date the fees were waived or expense was incurred, but no reimbursement payment would be made by the Fund if it would result in the Fund exceeding an expense ratio equal to the expense cap in place at the time the fees were waived or the expenses were borne by the Advisor and Sub-Advisor. The Board also considered performance information for the Fund, noting that the performance information included the Fund's quarterly performance report, which is part of the process that the Board has established for monitoring the Fund's performance and portfolio risk on an ongoing basis. The Board determined that this process continues to be effective for reviewing the Fund's performance. In addition to the Board's ongoing review of performance, the Board also reviewed data prepared by MPI comparing the Fund's performance (based on Class A shares) for the one-year, three year and since-inception periods ended December 31, 2014 to the performance of the MPI Peer Group and to two benchmark indexes, one of which is a blended benchmark index. In reviewing the Fund's performance as compared to the performance of the MPI Peer Group, the Board took into account the limitations described above with respect to creating a relevant peer group for the Fund. Based on the information presented, the Board noted that the Fund's performance was above the average performance for the MPI Peer Group for the one-year period ended December 31, 2014 and below the average performance of the MPI Peer Group for the three year and since inception periods ended December 31, 2014. Page 27 -------------------------------------------------------------------------------- ADDITIONAL INFORMATION (CONTINUED) -------------------------------------------------------------------------------- FIRST TRUST PREFERRED SECURITIES AND INCOME ETF (FPE) OCTOBER 31, 2016 (UNAUDITED) On the basis of all the information provided on the fees, expenses and performance of the Fund, the Board concluded that the advisory and sub-advisory fees were reasonable and appropriate in light of the nature, extent and quality of services provided by the Advisor and the Sub-Advisor under the Agreements. The Board noted that the Advisor has made and continues to make significant investments in personnel and infrastructure and considered whether fee levels reflect any economies of scale for the benefit of shareholders. The Board noted the Advisor's statement that economies of scale in providing services to the Fund are not available at current asset levels. The Board also considered the costs of the services provided and any profits realized by the Advisor from serving as investment advisor to the Fund for the twelve months ended December 31, 2014, as well as product-line profitability data for the same period, as set forth in the materials provided to the Board. The Board noted the inherent limitations in the profitability analysis, and considered that the Advisor estimated that the Fund was not profitable for the Advisor. In addition, the Board considered fall-out benefits described by the Advisor that may be realized from its relationship with the Fund. The Board noted that in addition to the advisory fees paid by the Fund, FTP is compensated for services provided to the Fund through 12b 1 fees and that First Trust also is compensated for providing fund reporting services to the Fund. The Board considered FTP's ownership interest in the Sub-Advisor and potential fall-out benefits to the Advisor from such ownership interest. The Board considered that the sub-advisory fee rate was negotiated at arm's length between the Advisor and the Sub-Advisor. The Board did not receive information from the Sub-Advisor as to the profitability of the Sub-Advisory Agreement to the Sub-Advisor, and concluded that the profitability analysis for the Advisor was more relevant. The Board considered the fall-out benefits realized by Sub-Advisor from its relationship with the Fund, including potential fall-out benefits to the Sub-Advisor from the ownership interest of FTP in the Sub-Advisor. The Board noted that the Sub-Advisor does not maintain any soft-dollar arrangements. Based on all of the information considered and the conclusions reached, the Board, including the Independent Trustees, unanimously determined that the terms of the Agreements continue to be fair and reasonable and that the continuation of the Agreements is in the best interests of the Fund. No single factor was determinative in the Board's analysis. Page 28 -------------------------------------------------------------------------------- BOARD OF TRUSTEES AND OFFICERS -------------------------------------------------------------------------------- FIRST TRUST PREFERRED SECURITIES AND INCOME ETF (FPE) OCTOBER 31, 2016 (UNAUDITED) The Trust's statement of additional information includes additional information about the Trustees and is available, without charge, upon request, by calling (800) 988-5891.

NUMBER OF OTHER PORTFOLIOS IN TRUSTEESHIPS OR TERM OF OFFICE THE FIRST TRUST DIRECTORSHIPS NAME, ADDRESS, AND YEAR FIRST FUND COMPLEX HELD BY TRUSTEE DATE OF BIRTH AND ELECTED OR PRINCIPAL OCCUPATIONS OVERSEEN BY DURING PAST POSITION WITH THE TRUST APPOINTED DURING PAST 5 YEARS TRUSTEE 5 YEARS ------------------------------------------------------------------------------------------------------------------------------------ INDEPENDENT TRUSTEES ------------------------------------------------------------------------------------------------------------------------------------ Richard E. Erickson, Trustee o Indefinite Term Physician; President, Wheaton Orthopedics; 137 None c/o First Trust Advisors L.P. Limited Partner, Gundersen Real Estate 120 E. Liberty Drive, o Since Inception Limited Partnership; Member, Sportsmed Suite 400 LLC (April 2007 to November 2015) Wheaton, IL 60187 D.O.B.: 04/51 Thomas R. Kadlec, Trustee o Indefinite Term President, ADM Investor Services, Inc. 137 Director of ADM c/o First Trust Advisors L.P. (Futures Commission Merchant) Investor Services, 120 E. Liberty Drive, o Since Inception Inc., ADM Suite 400 Investor Services Wheaton, IL 60187 International and D.O.B.: 11/57 Futures Industry Association Robert F. Keith, Trustee o Indefinite Term President, Hibs Enterprises (Financial and 137 Director of Trust c/o First Trust Advisors L.P. Management Consulting) Company of 120 E. Liberty Drive, o Since Inception Illinois Suite 400 Wheaton, IL 60187 D.O.B.: 11/56 Niel B. Nielson, Trustee o Indefinite Term Managing Director and Chief Operating 137 Director of c/o First Trust Advisors L.P. Officer (January 2015 to Present), Pelita Covenant 120 E. Liberty Drive, o Since Inception Harapan Educational Foundation Transport, Inc. Suite 400 (Educational Products and Services); (May 2003 to Wheaton, IL 60187 President and Chief Executive Officer May 2014) D.O.B.: 03/54 (June 2012 to September 2014), Servant Interactive LLC (Educational Products and Services); President and Chief Executive Officer (June 2012 to September 2014), Dew Learning LLC (Educational Products and Services); President (June 2002 to June 2012), Covenant College ------------------------------------------------------------------------------------------------------------------------------------ INTERESTED TRUSTEE ------------------------------------------------------------------------------------------------------------------------------------ James A. Bowen(1), Trustee, o Indefinite Term Chief Executive Officer, First Trust 137 None Chairman of the Board Advisors L.P. and First Trust Portfolios 120 E. Liberty Drive, o Since Inception L.P.; Chairman of the Board of Directors, Suite 400 BondWave LLC (Software Development Wheaton, IL 60187 Company) and Stonebridge Advisors LLC D.O.B.: 09/55 (Investment Advisor)

----------------------------- (1) Mr. Bowen is deemed an "interested person" of the Trust due to his position as Chief Executive Officer of First Trust Advisors L.P., investment advisor of the Trust. Page 29 -------------------------------------------------------------------------------- BOARD OF TRUSTEES AND OFFICERS (CONTINUED) -------------------------------------------------------------------------------- FIRST TRUST PREFERRED SECURITIES AND INCOME ETF (FPE) OCTOBER 31, 2016 (UNAUDITED)

POSITION AND TERM OF OFFICE NAME, ADDRESS OFFICES AND LENGTH OF PRINCIPAL OCCUPATIONS AND DATE OF BIRTH WITH TRUST SERVICE DURING PAST 5 YEARS ------------------------------------------------------------------------------------------------------------------------------------ OFFICERS WHO ARE NOT TRUSTEES(2) ------------------------------------------------------------------------------------------------------------------------------------ James M. Dykas President and Chief o Indefinite Term Managing Director and Chief Financial Officer 120 E. Liberty Drive, Executive Officer (January 2016 to Present), Controller (January 2011 Suite 400 o Since January 2016 to January 2016), Senior Vice President (April 2007 Wheaton, IL 60187 to January 2016), First Trust Advisors L.P. and D.O.B.: 01/66 First Trust Portfolios L.P.; Chief Financial Officer, BondWave LLC (Software Development Company) (January 2016 to Present) and Stonebridge Advisors LLC (Investment Advisor) (January 2016 to Present) Donald P. Swade Treasurer, Chief Financial o Indefinite Term Senior Vice President (July 2016 to Present), Vice 120 E. Liberty Drive, Officer and Chief President (April 2012 to July 2016), First Trust Suite 400 Accounting Officer o Since January 2016 Advisors L.P. and First Trust Portfolios L.P.; Vice Wheaton, IL 60187 President (September 2006 to April 2012), D.O.B.: 08/72 Guggenheim Funds Investment Advisors, LLC/ Claymore Securities, Inc. W. Scott Jardine Secretary and Chief o Indefinite term General Counsel, First Trust Advisors L.P., First 120 E. Liberty Drive, Legal Officer Trust Portfolios L.P.; Secretary and General Suite 400 o Since Inception Counsel, BondWave LLC; Secretary of Stonebridge Wheaton, IL 60187 Advisors LLC D.O.B.: 05/60 Daniel J. Lindquist Vice President o Indefinite term Managing Director (July 2012 to Present), Senior 120 E. Liberty Drive, Vice President (September 2005 to July 2012), First Suite 400 o Since Inception Trust Advisors L.P. and First Trust Portfolios L.P. Wheaton, IL 60187 D.O.B: 02/70 Kristi A. Maher Chief Compliance Officer o Indefinite term Deputy General Counsel, First Trust Advisors L.P. 120 E. Liberty Drive, and Assistant Secretary and First Trust Portfolios L.P. Suite 400 o Since Inception Wheaton, IL 60187 D.O.B.: 12/66 Roger F. Testin Vice President o Indefinite term Senior Vice President, First Trust Advisors L.P. 120 E. Liberty Drive, and First Trust Portfolios L.P. Suite 400 o Since Inception Wheaton, IL 60187 D.O.B.: 06/66 Stan Ueland Vice President o Indefinite term Senior Vice President (September 2012 to Present), 120 E. Liberty Drive, Vice President (August 2005 to September 2012), Suite 400 o Since Inception First Trust Advisors L.P. and First Trust Portfolios Wheaton, IL 60187 L.P. D.O.B.: 11/70

----------------------------- (2) The term "officer" means the president, vice president, secretary, treasurer, controller or any other officer who performs a policy making function. Page 30 -------------------------------------------------------------------------------- PRIVACY POLICY -------------------------------------------------------------------------------- FIRST TRUST PREFERRED SECURITIES AND INCOME ETF (FPE) OCTOBER 31, 2016 (UNAUDITED) PRIVACY POLICY First Trust values our relationship with you and considers your privacy an important priority in maintaining that relationship. We are committed to protecting the security and confidentiality of your personal information. SOURCES OF INFORMATION We collect nonpublic personal information about you from the following sources: o Information we receive from you and your broker-dealer, investment advisor or financial representative through interviews, applications, agreements or other forms; o Information about your transactions with us, our affiliates or others; o Information we receive from your inquiries by mail, e-mail or telephone; and o Information we collect on our website through the use of "cookies". For example, we may identify the pages on our website that your browser requests or visits. INFORMATION COLLECTED The type of data we collect may include your name, address, social security number, age, financial status, assets, income, tax information, retirement and estate plan information, transaction history, account balance, payment history, investment objectives, marital status, family relationships and other personal information. DISCLOSURE OF INFORMATION We do not disclose any nonpublic personal information about our customers or former customers to anyone, except as permitted by law. In addition to using this information to verify your identity (as required under law), the permitted uses may also include the disclosure of such information to unaffiliated companies for the following reasons: o In order to provide you with products and services and to effect transactions that you request or authorize, we may disclose your personal information as described above to unaffiliated financial service providers and other companies that perform administrative or other services on our behalf, such as transfer agents, custodians and trustees, or that assist us in the distribution of investor materials such as trustees, banks, financial representatives, proxy services, solicitors and printers. o We may release information we have about you if you direct us to do so, if we are compelled by law to do so, or in other legally limited circumstances (for example to protect your account from fraud). In addition, in order to alert you to our other financial products and services, we may share your personal information within First Trust. PRIVACY ONLINE We allow third-party companies, including AddThis (a social media sharing service), to collect certain anonymous information when you visit our website. These companies may use non-personally identifiable information during your visits to this and other websites in order to provide advertisements about goods and services likely to be of greater interest to you. These companies typically use a cookie, third party web beacon or pixel tags, to collect this information. To learn more about this behavioral advertising practice, you can visit www.networkadvertising.org. CONFIDENTIALITY AND SECURITY With regard to our internal security procedures, First Trust restricts access to your nonpublic personal information to those First Trust employees who need to know that information to provide products or services to you. We maintain physical, electronic and procedural safeguards to protect your nonpublic personal information. POLICY UPDATES AND INQUIRIES As required by federal law, we will notify you of our privacy policy annually. We reserve the right to modify this policy at any time, however, if we do change it, we will tell you promptly. For questions about our policy, or for additional copies of this notice, please go to www.ftportfolios.com, or contact us at 1-800-621-1675 (First Trust Portfolios) or 1-800-222-6822 (First Trust Advisors). March 2016 Page 31 This page intentionally left blank. FIRST TRUST First Trust Exchange-Traded Fund III INVESTMENT ADVISOR First Trust Advisors L.P. 120 E. Liberty Drive, Suite 400 Wheaton, IL 60187 INVESTMENT SUB-ADVISOR Stonebridge Advisors LLC 10 Westport Road, Suite C101 Wilton, CT 06897 ADMINISTRATOR, CUSTODIAN FUND ACCOUNTANT & TRANSFER AGENT Brown Brothers Harriman & Co. 50 Post Office Square Boston, MA 02110 INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Deloitte & Touche LLP 111 S. Wacker Drive Chicago, IL 60606 LEGAL COUNSEL Chapman and Cutler LLP 111 W. Monroe Street Chicago, IL 60603 [BLANK BACK COVER] FIRST TRUST First Trust Exchange-Traded Fund III -------------------------------------------------------------------------------- First Trust Managed Municipal ETF (FMB) Annual Report For the Year Ended October 31, 2016 -------------------------------------------------------------------------------- TABLE OF CONTENTS -------------------------------------------------------------------------------- FIRST TRUST MANAGED MUNICIPAL ETF (FMB) ANNUAL REPORT OCTOBER 31, 2016 Shareholder Letter........................................................... 1 Fund Performance Overview.................................................... 2 Portfolio Commentary......................................................... 5 Understanding Your Fund Expenses............................................. 8 Portfolio of Investments..................................................... 9 Statement of Assets and Liabilities.......................................... 16 Statement of Operations...................................................... 17 Statements of Changes in Net Assets.......................................... 18 Financial Highlights......................................................... 19 Notes to Financial Statements................................................ 20 Report of Independent Registered Public Accounting Firm...................... 26 Additional Information....................................................... 27 Board of Trustees and Officers............................................... 31 Privacy Policy............................................................... 33 CAUTION REGARDING FORWARD-LOOKING STATEMENTS This report contains certain forward-looking statements within the meaning of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended. Forward-looking statements include statements regarding the goals, beliefs, plans or current expectations of First Trust Advisors L.P. ("First Trust" or the "Advisor") and its representatives, taking into account the information currently available to them. Forward-looking statements include all statements that do not relate solely to current or historical fact. For example, forward-looking statements include the use of words such as "anticipate," "estimate," "intend," "expect," "believe," "plan," "may," "should," "would" or other words that convey uncertainty of future events or outcomes. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the series of First Trust Exchange-Traded Fund III (the "Trust") described in this report (First Trust Managed Municipal ETF; hereinafter referred to as the "Fund") to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. When evaluating the information included in this report, you are cautioned not to place undue reliance on these forward-looking statements, which reflect the judgment of the Advisor and its representatives only as of the date hereof. We undertake no obligation to publicly revise or update these forward-looking statements to reflect events and circumstances that arise after the date hereof. PERFORMANCE AND RISK DISCLOSURE There is no assurance that the Fund will achieve its investment objectives. The Fund is subject to market risk, which is the possibility that the market values of securities owned by the Fund will decline and that the value of the Fund shares may therefore be less than what you paid for them. Accordingly, you can lose money by investing in the Fund. See "Risk Considerations" in the Additional Information section of this report for a discussion of certain other risks of investing in the Fund. Performance data quoted represents past performance, which is no guarantee of future results, and current performance may be lower or higher than the figures shown. For the most recent month-end performance figures, please visit http://www.ftportfolios.com or speak with your financial advisor. Investment returns, net asset value and share price will fluctuate and Fund shares, when sold, may be worth more or less than their original cost. The Advisor may also periodically provide additional information on Fund performance on the Fund's webpage at http://www.ftportfolios.com. HOW TO READ THIS REPORT This report contains information that may help you evaluate your investment in the Fund. It includes details about the Fund's portfolio and presents data and analysis that provide insight into the Fund's performance and investment approach. By reading the portfolio commentary by the portfolio management team of the Fund, you may obtain an understanding of how the market environment affected the Fund's performance. The statistical information that follows may help you understand the Fund's performance compared to that of relevant market benchmarks. It is important to keep in mind that the opinions expressed by personnel of the Advisor are just that: informed opinions. They should not be considered to be promises or advice. The opinions, like the statistics, cover the period through the date on the cover of this report. The material risks of investing in the Fund are spelled out in its prospectus, statement of additional information, this report and other Fund regulatory filings. -------------------------------------------------------------------------------- SHAREHOLDER LETTER -------------------------------------------------------------------------------- FIRST TRUST MANAGED MUNICIPAL ETF (FMB) ANNUAL LETTER FROM THE CHAIRMAN AND CEO OCTOBER 31, 2016 Dear Shareholders: Thank you for your investment in First Trust Managed Municipal ETF. First Trust Advisors L.P. ("First Trust") is pleased to provide you with the annual report which contains detailed information about your investment for the 12 months ended October 31, 2016, including a market overview and a performance analysis for the period. We encourage you to read this report and discuss it with your financial advisor. Early in 2016, many investors were concerned that the volatility witnessed in the stock market in 2015 would continue, and it did. During the first six months of the year, one of the events that affected the global markets was the "Brexit" vote (where citizens in the UK voted to leave the European Union). Just a few days after the historic vote, the global equity markets rebounded to close June 30, 2016 at a combined market capitalization of $62 trillion. As of October 31, 2016, the S&P 500(R) Index was up 5.87% calendar year-to-date, according to Bloomberg. From October 30, 2015 through October 31, 2016, the S&P 500(R) Index was also in positive territory at 4.51%. The last few months have had investors keenly watching the presidential election in anticipation of the outcome of the vote and its effect on the stock market and economy. I will discuss that more in my next letter. The current bull market (measuring from March 9, 2009 through October 31, 2016) is the second longest in history. First Trust believes that having a long-term investment horizon and investing in quality products can help you reach your goals, regardless of ups and downs in the market. We strive to provide quality investment products, which has been one of the hallmarks of our firm since its inception more than 25 years ago. Thank you for giving First Trust the opportunity to be a part of your investment plan. We value our relationship with you and will continue to focus on helping investors like you reach your financial goals. Sincerely, /s/ James A. Bowen James A. Bowen Chairman of the Board of Trustees Chief Executive Officer of First Trust Advisors L.P. Page 1 -------------------------------------------------------------------------------- FUND PERFORMANCE OVERVIEW (UNAUDITED) -------------------------------------------------------------------------------- FIRST TRUST MANAGED MUNICIPAL ETF (FMB) The primary investment objective of First Trust Managed Municipal ETF (the "Fund") is to generate current income that is exempt from regular federal income taxes, and its secondary objective is long-term capital appreciation. The Fund lists and principally trades its shares on The Nasdaq Stock Market, LLC under the ticker symbol "FMB". Under normal market conditions, the Fund seeks to achieve its investment objectives by investing at least 80% of its net assets (including investment borrowings) in municipal debt securities that pay interest that is exempt from regular federal income taxes.

------------------------------------------------------------------------------------------------------------- PERFORMANCE ------------------------------------------------------------------------------------------------------------- AVERAGE ANNUAL CUMULATIVE TOTAL RETURNS TOTAL RETURNS 1 Year Ended Inception (5/13/14) Inception (5/13/14) 10/31/16 to 10/31/16 to 10/31/16 FUND PERFORMANCE NAV 6.47% 5.56% 14.27% Market Price 6.24% 5.57% 14.31% INDEX PERFORMANCE Barclays Municipal 10-Year Revenue Index 4.48% 4.36% 11.10% -------------------------------------------------------------------------------------------------------------

Total returns for the periods since inception are calculated from the inception date of the 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. The Fund's per share net asset value ("NAV") is the value of one share of the Fund and is computed by dividing the value of all assets of the Fund (including accrued interest and dividends), less all liabilities (including accrued expenses and dividends declared but unpaid), by the total number of outstanding shares. The price used to calculate market return ("Market Price") is determined by using the midpoint between the highest bid and the lowest offer on the stock exchange on which shares of the Fund are listed for trading as of the time that the Fund's NAV is calculated. Since shares of the Fund did not trade in the secondary market until after its inception, for the period from inception to the first day of secondary market trading in shares of the Fund, the NAV of the Fund is used as a proxy for the secondary market trading price to calculate market returns. NAV and market returns assume that all distributions have been reinvested in the Fund at NAV and Market Price, respectively. An index is a statistical composite that tracks a specified financial market or sector. Unlike the Fund, the index does not actually hold a portfolio of securities and therefore does not incur the expenses incurred by the Fund. These expenses negatively impact the performance of the Fund. Also, market returns do not include brokerage commissions that may be payable on secondary market transactions. If brokerage commissions were included, market returns would be lower. The total returns presented reflect the reinvestment of dividends on securities in the index. The returns presented do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. The investment return and principal value of shares of the Fund will vary with changes in market conditions. Shares of the Fund may be worth more or less than their original cost when they are redeemed or sold in the market. The Fund's past performance is no guarantee of future performance. Page 2 -------------------------------------------------------------------------------- FUND PERFORMANCE OVERVIEW (UNAUDITED) (CONTINUED) -------------------------------------------------------------------------------- FIRST TRUST MANAGED MUNICIPAL ETF (FMB) ----------------------------------------------------------- % OF TOTAL INVESTMENTS SECTOR (INCLUDING CASH) ----------------------------------------------------------- Hospital 14.5% Continuing Care Retirement Communities 12.2 Cash 10.5 Insured 6.9 Education 6.4 Government Obligation Bond - Unlimited Tax 5.6 Utility 5.0 Higher Education 4.0 Special Assessment 3.9 Gas 3.5 Dedicated Tax 3.4 Industrial Development Bond 3.3 Government Obligation Bond - Limited Tax 2.9 Airport 2.0 Water & Sewer 1.9 Skilled Nursing 1.9 Student Housing 1.8 Tax Increment 1.8 Certificates of Participation 1.8 Pre-refunded/Escrowed-to-maturity 1.7 Hotel 1.4 Tobacco 1.3 Toll Road 1.1 Mass Transit 0.8 Port 0.3 Stadium 0.1 ------- Total 100.0% ======= ----------------------------------------------------------- % OF TOTAL INVESTMENTS CREDIT RATING(1) (INCLUDING CASH) ----------------------------------------------------------- AA 15.0% A 26.7 BBB 25.6 BB 7.7 B 1.0 NR 13.5 Cash 10.5 ------- Total 100.0% ======= (1) The credit quality information presented reflects the ratings assigned by one or more nationally recognized statistical rating organizations (NRSROs), including Standard & Poor's Ratings Group, a division of The McGraw-Hill Companies, Inc., Moody's Investors Service, Inc., Fitch Ratings or a comparably rated NRSRO. For situations in which a security is rated by more than one NRSRO and ratings are not equivalent, the highest ratings are used. Sub-investment grade ratings are those rated BB+/Ba1 or lower. Investment grade ratings are those rated BBB-/Baa3 or higher. The credit ratings shown relate to the creditworthiness of the issuers of the underlying securities in the Fund, and not to the Fund or its shares. Credit ratings are subject to change. Page 3 -------------------------------------------------------------------------------- FUND PERFORMANCE OVERVIEW (UNAUDITED) (CONTINUED) -------------------------------------------------------------------------------- FIRST TRUST MANAGED MUNICIPAL ETF (FMB)

PERFORMANCE OF A $10,000 INITIAL INVESTMENT MAY 13, 2014 - OCTOBER 31, 2016 First Trust Barclays Managed Municipal 10-Year Municipal ETF Revenue Index 5/13/14 $10,000 $10,000 10/31/14 10,353 10,297 4/30/15 10,585 10,436 10/31/15 10,732 10,633 4/30/16 11,222 11,065 10/31/16 11,427 11,109

Performance figures assume reinvestment of all distributions and do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. An index is a statistical composite that tracks a specified financial market or sector. Unlike the Fund, the index does not actually hold a portfolio of securities and therefore does not incur the expenses incurred by the Fund. These expenses negatively impact the performance of the Fund. The Fund's past performance does not predict future performance. FREQUENCY DISTRIBUTION OF DISCOUNTS AND PREMIUMS BID/ASK MIDPOINT VS. NAV THROUGH OCTOBER 31, 2016 The following Frequency Distribution of Discounts and Premiums charts are provided to show the frequency at which the bid/ask midpoint price for the Fund was at a discount or premium to the daily NAV. The following tables are for comparative purposes only and represent the period May 14, 2014 (commencement of trading) through October 31, 2016. Shareholders may pay more than NAV when they buy Fund shares and receive less than NAV when they sell those shares because shares are bought and sold at current market price. Data presented represents past performance and cannot be used to predict future results. -------------------------------------------------------------------------------- NUMBER OF DAYS BID/ASK MIDPOINT AT/ABOVE NAV -------------------------------------------------------------------------------- FOR THE PERIOD 0.00%-0.49% 0.50%-0.99% 1.00%-1.99% >=2.00% 5/14/14 - 10/31/14 2 10 0 0 11/1/14 - 10/31/15 178 16 0 0 11/1/15 - 10/31/16 200 0 0 0 -------------------------------------------------------------------------------- NUMBER OF DAYS BID/ASK MIDPOINT BELOW NAV -------------------------------------------------------------------------------- FOR THE PERIOD 0.00%-0.49% 0.50%-0.99% 1.00%-1.99% >=2.00% 5/14/14 - 10/31/14 64 43 0 0 11/1/14 - 10/31/15 57 0 0 0 11/1/15 - 10/31/16 51 1 0 0 Page 4 -------------------------------------------------------------------------------- PORTFOLIO COMMENTARY -------------------------------------------------------------------------------- FIRST TRUST MANAGED MUNICIPAL ETF (FMB) ANNUAL REPORT OCTOBER 31, 2016 (UNAUDITED) INVESTMENT MANAGER The First Trust Advisors L.P. ("First Trust") Municipal Securities Team was formed in September of 2013 and is headed by Tom Futrell, CFA and Johnathan Wilhelm who serve as senior portfolio managers of the First Trust Managed Municipal ETF (the "Fund"). Messrs. Futrell and Wilhelm have a combined 50+ years of investment experience and prior to joining First Trust, served as portfolio managers of municipal bonds at Nuveen Investments and Performance Trust Investment Advisors. In addition to the Fund, the team manages/consults for a variety of investment portfolios and separately managed accounts. PORTFOLIO MANAGEMENT TEAM TOM FUTRELL, CFA, SENIOR VICE PRESIDENT, SENIOR PORTFOLIO MANAGER JOHNATHAN N. WILHELM, SENIOR VICE PRESIDENT, SENIOR PORTFOLIO MANAGER COMMENTARY The Fund is an actively managed exchange-traded fund. The Fund's primary investment objective seeks to generate current income that is exempt from regular federal income taxes by investing in a diversified portfolio of municipal bonds. The Fund's secondary investment objective is to provide long-term capital appreciation. Under normal market conditions, the Fund seeks to achieve its investment objectives by investing at least 80% of its net assets (including investment borrowings) in municipal debt securities that pay interest that is exempt from regular federal income taxes. The Fund invests at least 65% of its net assets in municipal bonds that are investment grade rated at the time of purchase or that are unrated but deemed by the Fund's advisor to be of comparable quality. This commentary discusses the 12-month market performance and the Fund's performance ended October 31, 2016. MARKET RECAP For the 12-month period from October 31, 2015 through October 31, 2016, municipal bonds generated a total return of 4.06% as measured by the Barclay's Municipal Bond Index (BMBI). During the same period, the Bloomberg Barclays Municipal 10-Year Revenue Index and Non-Investment Grade Index produced returns of 4.48% and 8.61%, respectively. By comparison, the Barclays U.S. Treasury Index returned 3.22% during the 12-month period. The following have been major factors in explaining the municipal bond market's performance: o In the face of global macroeconomic uncertainty and geopolitical tensions, the U.S. economy continued to grow at a moderate pace, led primarily by consumer spending. With the labor market tightening and inflation gradually rising, we believe there is a general market consensus that the Federal Reserve (the "Fed") will increase the federal funds rate for the first time in a year at their December 14, 2016 FOMC Meeting. With this as a backdrop, U.S. Treasury yields have increased since their mid-summer lows. As of October 31, 2016, the 10-year U.S. Treasury yield stood at a 1.87%, down 27 basis points ("bps") for the trailing 12 months, but up 48 bps from the post-Brexit level on July 8, 2016 of 1.39%. Ten year municipal yields outperformed 10-year U.S. Treasuries as measured by 10-year, "AAA" rated general obligation bonds. According to data prepared by Municipal Market Data, 10-year "AAA" municipal yields fell 31 bps from a 2.04% on October 31, 2015 to a 1.73% as of October 31, 2016, but increased 44 bps from its low on July 6, 2016 of 1.29%. o The pace of new issue supply has been healthy and growing during the year. Through the end of October 2016, primary market new issue supply totaled $392.7 billion versus $353.4 billion during the same period of the prior year, representing an 11.1% increase. Approximately 61% of new issue supply consisted of refinancing outstanding debt. o Retail demand as measured by mutual fund and exchange-traded fund flows have been strong over the past year until diminishing in recent weeks. Year-to-date fund flows through October 31, 2016 totaled $51.8 billion compared to $6.5 billion year-to-date through October 31, 2015 - an almost eightfold increase. (Source: Barclays, Investment Company Institute). o During the past year, credit fundamentals remained healthy and continued to provide stabilizing support for municipal market performance. Although the par amount of first-time municipal bond defaults spiked during the first ten months of 2016 due to Puerto Rico-related defaults, the number of defaults, 53, only marginally increased from the 48 reported for the same period in 2015. There are several select state and local governments that continue to make headlines because of severe spending and budget imbalances, subpar pension funding, and politics around taxation. In spite of the negative headlines regarding these troubled credits and the ongoing struggles of the Commonwealth of Puerto Rico, we expect credit fundamentals to remain broadly stable. Page 5 -------------------------------------------------------------------------------- PORTFOLIO COMMENTARY (CONTINUED) -------------------------------------------------------------------------------- FIRST TRUST MANAGED MUNICIPAL ETF (FMB) ANNUAL REPORT OCTOBER 31, 2016 (UNAUDITED) PERFORMANCE ANALYSIS The Fund's net asset value ("NAV") and market performance for the 12-month period from October 31, 2015 through October 31, 2016 were 6.47% and 6.24%, respectively, versus the Bloomberg Barclays Municipal 10-Year Revenue Index (the "benchmark") return of 4.48% during the same time period. The Fund's monthly distribution of $0.11 on October 31, 2016 represented a tax-exempt annualized distribution rate of 2.48% (4.37% taxable equivalent yield) based on the Fund's closing market price of $53.26. The Fund's distribution rate is not constant and is subject to change over time based on the performance of the Fund and general market conditions. From a portfolio construction perspective, the Fund maintains an underweight position in the highest quality issuers ("AA" rated and higher) versus the benchmark and is generally overweight the benchmark in terms of "BBB", as well as below investment grade and non-rated bonds. The Fund may allocate up to 35% of its net assets to credits that are either rated below investment grade or are non-rated and deemed to be of comparable quality at the time of purchase. We believe these bonds tend to carry higher income cushions than their higher quality counterparts which can help insulate the investment against interest rate risk without materially increasing default potential. As of October 31, 2016, the Fund's weighted-average credit quality was approximately "BBB/Baa", which is lower than the benchmark with a stated average credit rating of "AA3/A1". The Fund's investments in "BBB" rated bonds as well as sub-investment grade and non-rated municipal securities generated strong performance for the trailing 12 months as investors increasingly searched for yield lower on the credit rating spectrum given the low nominal rates environment. As a result, lower investment grade strategies generally benefited from credit spread compression throughout most of the trailing 12-month period, positively contributing to the Fund's NAV outperformance relative to the benchmark. Given the fact that investment grade municipal credit spreads are near their lowest level since the onset of the financial crisis, we currently favor "A" rated bonds over "BBB" rated bonds. High yield municipal risk premiums are still above the long-term historical average, however, and we continue to find value in select high yield bonds after rigorous credit research and selection. We continued to see value in revenue bonds issued by essential service providers. Our focus is on issuers that meet basic infrastructure needs and provide needed essential services within their communities. Beyond the borrower's essentiality, we also look for issuers who have a growing market share and increasing utilization as this provides added insulation against credit erosion and the potential for credit rating improvement over time. Revenue bond sectors that positively contributed to the Fund's performance over the past 12 months included hospitals, senior living facilities, education (charter schools), municipal utilities, utilities, industrial development bonds and special assessment districts. We continue to underweight general obligation bonds. The Fund's modified duration was 5.42 years as of October 31, 2016, which was shorter than the benchmark's at 5.69 years. The Fund was overweight the benchmark in bonds with modified durations of three to five years and underweight the benchmark six years and longer. Because we believe that the very short end of the municipal yield curve could be the most vulnerable to the volatility associated with a Fed rate hike, we have limited the Fund's exposure to bonds that mature in one to four years. The Fund's underweight in longer duration bonds relative to the benchmark is the result of our view that in rising rate environments, longer duration strategies, which are more interest rate sensitive, generally see the heaviest fund outflows resulting in their respective bond valuations being hardest hit. MARKET OUTLOOK As we look forward to the remainder of 2016, our focus shifts to the Fed meeting to be held on December 14, 2016. As of November 15, 2016, the futures market indicated a 96% probability of a federal funds rate hike at the December 14 meeting. We expect the Fed to increase the federal funds rate by 25 bps at this meeting. For 2017, we believe additional upward action on U.S. rates is expected to be highly data dependent. When considering the entirety of 2017, we expect U.S. treasury yields to rise modestly as the economy gains strength and U.S. unemployment continues to decline. In our view, additional factors that could weigh on interest rates are the current U.S. budget deficit and the possibility of new infrastructure spending coupled with the potential for corporate and/or individual tax reform. According to the Congressional Budget Office, in the fiscal year ended September 30, 2016, the federal budget deficit totaled $587 billion, which was $148 billion more than the shortfall recorded in 2015. To the extent that any Congressional legislation enacted for infrastructure spending or tax reform is not paid for through tax increases or spending cuts, additional debt issuance could be required, which we believe could push interest rates higher. Finally, if enacted, a flatter tax rate structure for individuals and couples could have a negative impact on municipal bond prices. Following a year of robust municipal bond issuance, we expect issuance in the year ahead to be similar to 2016, even if the pace of refunding activity is apt to slow down. Through the ten months ended October 31, 2016, new issue supply totaled $392.7 billion, representing an 11.1% increase from the same period in 2015 according to the Securities Industry and Financial Markets Association Page 6 -------------------------------------------------------------------------------- PORTFOLIO COMMENTARY (CONTINUED) -------------------------------------------------------------------------------- FIRST TRUST MANAGED MUNICIPAL ETF (FMB) ANNUAL REPORT OCTOBER 31, 2016 (UNAUDITED) ("SIFMA") and Barclay's research. Due to persistently low interest rates coupled with the growing need to repair and expand U.S. infrastructure such as airports, bridges, electric utilities, roads and water systems, we expect new issue municipal bond supply to be between $425 billion and $450 billion in 2017. Given our expectation for gradually rising rates, we will continue to position the Fund defensively by being modestly below its benchmark duration. Because we believe yield curve positioning could be an important source of total return in 2017, our current intention is to underweight bonds in the short end of the municipal yield curve as they could be the most vulnerable to volatility associated with Fed tightening, and underweight long-duration bonds that could be negatively impacted in a rising-rate environment. We currently favor bonds with five-to-12-year maturities, and bonds maturing in 15 to 20 years, but priced to a shorter five-to-nine-year call. We also favor 5% coupon bonds, versus 3% and 4% coupon structures, that together with our preferred yield curve positioning serves to reduce overall portfolio duration. On the credit side, we continue to overweight "A" rated and select "BBB" rated and high yield municipal securities, given a healthy fundamental credit environment, which we believe supports reaching lower on the credit spectrum. Regarding industries, we continue to find investment opportunities in the essential service revenue bond sectors such as health care, senior living, charter schools, higher education, transportation, and utilities, where, in our view, there is additional default-risk insulation because of the borrower's essentiality to their local communities. What are the risks to our outlook and forecast of a gradual rise in interest rates? Among many factors, stronger than expected GDP growth and an uptick in inflation could alter our forecast, along with a substantive change in Fed commentary regarding 2017 monetary policy, higher than forecast municipal bond new issue supply, and large mutual fund net outflows. With this as a backdrop, we will continue to practice the discipline of our investment process where we perform fundamental credit analysis and quantitative total return scenario analysis on individual bonds and the portfolio as a whole, looking for bonds that can provide both high income and attractive total return potential over time. Page 7 FIRST TRUST MANAGED MUNICIPAL ETF (FMB) UNDERSTANDING YOUR FUND EXPENSES OCTOBER 31, 2016 (UNAUDITED) As a shareholder of First Trust Managed Municipal ETF (the "Fund") you incur two types of costs: (1) transaction costs; and (2) ongoing costs, including management fees, distribution and/or service fees, if any, and other Fund expenses. This Example is intended to help you understand your ongoing costs of investing in the Fund and to compare these costs with the ongoing costs of investing in other funds. The Example is based on an investment of $1,000 invested at the beginning of the period and held through the six-month period ended October 31, 2016. ACTUAL EXPENSES The first line in the following table provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled "Expenses Paid During the Six-Month Period" to estimate the expenses you paid on your account during this six-month period. HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES The second line in the following table provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs such as brokerage commissions. Therefore, the second line in the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.

------------------------------------------------------------------------------------------------------------------------- ANNUALIZED EXPENSE RATIO EXPENSES PAID BEGINNING ENDING BASED ON THE DURING THE ACCOUNT VALUE ACCOUNT VALUE SIX-MONTH SIX-MONTH MAY 1, 2016 OCTOBER 31, 2016 PERIOD (a) PERIOD (b) ------------------------------------------------------------------------------------------------------------------------- FIRST TRUST MANAGED MUNICIPAL ETF Actual $1,000.00 $1,018.30 0.50% $2.54 Hypothetical (5% return before expenses) $1,000.00 $1,022.62 0.50% $2.54

(a) These expense ratios reflect an expense waiver. See Note 3 in the Notes to Financial Statements. (b) Expenses are equal to the annualized expense ratio as indicated in the table, multiplied by the average account value over the period (May 1, 2016 through October 31, 2016), multiplied by 184/366 (to reflect the one-half year period). Page 8 FIRST TRUST MANAGED MUNICIPAL ETF (FMB) PORTFOLIO OF INVESTMENTS OCTOBER 31, 2016

PRINCIPAL STATED STATED VALUE DESCRIPTION COUPON MATURITY VALUE --------------- ---------------------------------------------------------------- ------------- ------------ -------------- MUNICIPAL BONDS - 93.1% ARIZONA - 3.8% $ 250,000 Glendale AZ Indl Dev Auth Sr Living Facs Rev Ref Royal Oaks Life Care Cmnty.............................................. 4.00% 05/15/28 $ 277,010 500,000 Maricopa Cnty AZ Indl Dev Auth Ed Rev Ref Horizon Cmnty Learning Ctr Proj............................................ 5.00% 07/01/35 549,385 500,000 Maricopa Cnty AZ Indl Dev Auth Ed Rev Ref Paradise Schs Projs Paragon Mgmt Inc (a)......................................... 4.00% 07/01/26 515,765 500,000 Phoenix AZ Indl Dev Auth Ed Rev Fac Legacy Traditional Schs Projs, Ser A................................................. 4.00% 07/01/26 501,170 500,000 Phoenix AZ Indl Dev Auth Ed Rev Ref Fac Great Hearts Academics, Ser A............................................. 5.00% 07/01/36 565,165 500,000 Pima Cnty AZ Indl Dev Auth Ed Rev Ref Fac American Leadership Academy Proj (a).................................. 4.60% 06/15/25 516,505 200,000 Student & Academic Svcs LLC AZ Lease Rev Northern AZ Capital Facs Fin Corp, BAM................................... 5.00% 06/01/21 230,664 -------------- 3,155,664 -------------- CALIFORNIA - 5.1% 320,000 Abag CA Fin Auth For Nonprofit Corps Ref Episcopal Sr Cmntys, Ser B................................................ 5.00% 07/01/23 364,877 1,000,000 CA St Muni Fin Auth Chrt Sch Rev Palmdale Aeroscope Academy Proj (a)............................................. 5.00% 07/01/36 1,084,440 500,000 CA St Ref Bid Grp C............................................. 5.00% 08/01/30 613,315 500,000 CA Stwd Cmntys Dev Auth Rev Beverly Cmnty Hosp Assoc............ 4.00% 02/01/23 539,790 300,000 CA Stwd Cmntys Dev Auth Rev Loma Linda Univ Med Ctr, Ser A (a).................................................... 5.00% 12/01/36 337,644 810,000 Golden St Tobacco Securitization Corp CA Tobacco Settlement Asset-Backed Sr, Ser A-1..................................... 4.50% 06/01/27 813,831 210,000 La Verne CA Ref Brethren Hillcrest Homes, COPS.................. 5.00% 05/15/22 239,066 200,000 Pomona CA Pub Fing Auth Lease Rev Ref, Ser BC, AGM.............. 4.00% 06/01/29 225,954 -------------- 4,218,917 -------------- COLORADO - 8.7% 605,000 CO St Hlth Facs Auth Rev Ref Covenant Retirement Cmntys, Ser A........................................................ 5.00% 12/01/27 680,698 500,000 CO St Hlth Facs Auth Rev Ref Covenant Retirement Cmntys, Ser A........................................................ 5.00% 12/01/33 549,050 120,000 CO St Hlth Facs Auth Rev Vail Valley Med Ctr Proj............... 5.00% 01/15/24 145,278 500,000 Copperleaf CO Met Dist #2 Ref (b)............................... 5.25% 12/01/30 525,590 1,000,000 Denver City & Cnty CO Arpt Rev Sys, Ser B....................... 4.00% 11/15/31 1,081,770 1,000,000 Denver CO Convention Ctr Hotel Auth Rev Ref Sr.................. 5.00% 12/01/28 1,164,100 55,000 E-470 CO Pub Highway Auth Capital Appreciation Sr, Ser B, NATL-RE...................................................... (c) 09/01/22 47,999 250,000 Harvest Junction CO Met Dist Ref & Impt......................... 5.00% 12/01/30 269,655 60,000 Harvest Junction CO Met Dist Ref & Impt......................... 5.38% 12/01/37 64,712 500,000 Leyden Rock Met Dist #10, Ser A (b)............................. 4.00% 12/01/25 496,605 130,000 Lorson Ranch Met Dist #2 CO..................................... 4.00% 12/01/24 142,684 225,000 Park 70 CO Met Dist............................................. 5.00% 12/01/22 259,547 160,000 Pub Auth For CO St Energy Nat Gas Purchase Rev.................. 6.13% 11/15/23 195,462 500,000 Sierra Ridge Met Dist No 2 CO Sr, Ser A (b)..................... 5.50% 12/01/46 523,185 500,000 Southglenn CO Met Dist Spl Rev Ref (b).......................... 5.00% 12/01/30 531,725 500,000 Sterling Ranch Cmnty Auth Brd CO Supported Rev, Ser A (b)....... 5.50% 12/01/35 503,470 -------------- 7,181,530 --------------

See Notes to Financial Statements Page 9 FIRST TRUST MANAGED MUNICIPAL ETF (FMB) PORTFOLIO OF INVESTMENTS (CONTINUED) OCTOBER 31, 2016

PRINCIPAL STATED STATED VALUE DESCRIPTION COUPON MATURITY VALUE --------------- ---------------------------------------------------------------- ------------- ------------ -------------- MUNICIPAL BONDS (CONTINUED) CONNECTICUT - 0.6% $ 500,000 CT St Hlth & Edl Facs Auth Rev Temps Church Home of Hartford Inc Proj, Ser B1 (a)................................ 3.25% 09/01/21 $ 505,380 -------------- FLORIDA - 6.0% 80,000 Alachua Cnty FL Hlth Facs Auth Shands Teaching Hosp & Clinics, Ser A............................................... 5.00% 12/01/26 94,481 200,000 Belle Isle FL Chrt Sch Lease Rev Cornerstone Chrt Academy & Cornerstone Chrt High Sch.................................... 5.50% 10/01/22 213,008 500,000 Bexley CDD FL Spl Assmnt Rev.................................... 4.10% 05/01/26 497,280 605,000 Broward Cnty FL Fuel Sys Rev Ft Lauderdale Fuel Facs, Ser A, AGM, AMT..................................................... 5.00% 04/01/22 701,673 250,000 Citizens Property Insurance Corp. FL, Ser A-1................... 5.00% 06/01/22 291,957 25,000 Escambia Cnty FL Hlth Facs Auth Baptist Hosp Inc Proj, Ser A.... 5.00% 08/15/19 27,155 280,000 Escambia Cnty FL Hlth Facs Auth Baptist Hosp Inc Proj, Ser A.... 5.50% 08/15/24 316,730 600,000 Harmony FL CDD Capital Impt Rev Ref, Ser 2015................... 4.75% 05/01/25 607,704 50,000 Hollywood FL Cmnty Redev Agy Redev Rev Ref...................... 5.00% 03/01/23 58,420 500,000 Manatee Cnty FL Sch Brd Ref, Ser A, BAM, COPS................... 5.00% 07/01/27 602,395 220,000 Palm Beach Cnty FL Hlth Facs Auth Acts Retirement Life Cmntys....................................................... 5.50% 11/15/33 257,517 120,000 Sarasota Cnty FL Hlth Facs Auth Retirement Fac Rev Ref Vlg Of Isle Proj................................................. 5.00% 01/01/26 141,050 235,000 Seven Oaks FL Cmnty Dev Dist Spl Assmnt Rev Ref Sr, Ser A-1..... 4.00% 05/01/24 258,112 230,000 Seven Oaks FL Cmnty Dev Dist Spl Assmnt Rev Ref Sr, Ser B-1..... 4.00% 05/01/24 252,620 195,000 Tampa FL Hosp Rev Ref H Lee Moffitt Cancer Ctr Proj, Ser B...... 5.00% 07/01/29 226,781 100,000 UCF Stadium Corp FL Rev Ref, Ser A.............................. 5.00% 03/01/24 120,351 300,000 Vlg FL CDD #12 Spl Assmnt Rev................................... 2.88% 05/01/21 299,058 -------------- 4,966,292 -------------- GEORGIA - 1.2% 315,000 East Point GA Tax Allocation Ref................................ 5.00% 08/01/21 354,520 560,000 Priv Clgs & Univs Auth GA Mercer Univ Proj, Ser C............... 5.25% 10/01/27 649,460 -------------- 1,003,980 -------------- GUAM - 0.4% 325,000 Guam Pwr Auth Rev Ref, Ser A, AGM............................... 5.00% 10/01/20 368,475 -------------- HAWAII - 0.4% 170,000 HI St Dept of Budget & Fin Spl Purpose Rev Ref HI Pacific Hlth Oblig Group, Ser B........................................... 5.00% 07/01/30 194,801 110,000 HI St Pacific Hlth Spl Purpose Rev, Ser B....................... 5.63% 07/01/30 125,091 -------------- 319,892 -------------- IDAHO - 0.7% 500,000 ID St Hlth Facs Auth Rev Trinity Hlth Ref, Ser D................ 5.00% 12/01/33 570,845 -------------- ILLINOIS - 3.2% 200,000 Chicago IL Ref Projs, Ser A..................................... 5.00% 01/01/24 206,412 25,000 Chicago IL Ref, Ser C........................................... 4.00% 01/01/22 25,208 500,000 Chicago IL Ref, Ser C........................................... 5.00% 01/01/25 533,780 285,000 Chicago IL Ref, Ser C, CABS..................................... (c) 01/01/22 225,831 100,000 IL St Fin Auth Rev Centegra Hlth Sys............................ 5.00% 09/01/18 106,024 145,000 IL St Fin Auth Rev Centegra Hlth Sys, Ser A..................... 5.00% 09/01/22 169,160 25,000 IL St Fin Auth Rev Central DuPage Hlth.......................... 5.00% 11/01/27 27,638 1,000,000 IL St Fin Auth Rev Ref Christian Homes Inc...................... 5.00% 05/15/36 1,101,930 15,000 IL St Fin Auth Rev Ref Lutheran Hillside Vlg.................... 5.13% 02/01/26 15,161 200,000 Springfield IL Elec Rev Ref Sr Lien............................. 5.00% 03/01/23 238,242 -------------- 2,649,386 --------------

Page 10 See Notes to Financial Statements FIRST TRUST MANAGED MUNICIPAL ETF (FMB) PORTFOLIO OF INVESTMENTS (CONTINUED) OCTOBER 31, 2016

PRINCIPAL STATED STATED VALUE DESCRIPTION COUPON MATURITY VALUE --------------- ---------------------------------------------------------------- ------------- ------------ -------------- MUNICIPAL BONDS (CONTINUED) INDIANA - 1.5% $ 450,000 IN St Fin Auth Rev BHI Sr Living................................ 5.50% 11/15/26 $ 516,915 110,000 IN St Fin Auth Rev BHI Sr Living................................ 5.50% 11/15/31 123,907 460,000 IN St Fin Auth Rev Greencroft Oblig Group, Ser A................ 5.75% 11/15/28 525,260 40,000 IN St Fin Auth Rev Greencroft Oblig Group, Ser A................ 6.00% 11/15/28 46,295 -------------- 1,212,377 -------------- IOWA - 0.4% 275,000 Coralville IA, Ser E, COPS...................................... 4.00% 06/01/23 296,753 -------------- KANSAS - 0.6% 500,000 Wichita KS Hlth Care Facs Rev KS Masonic Home, Ser II-A......... 4.25% 12/01/24 504,415 -------------- KENTUCKY - 0.5% 300,000 KY St Muni Pwr Agy Pwr Sys Rev Ref, Ser A, NATL-RE.............. 5.00% 09/01/22 349,986 50,000 Russell KY Rev Bon Secours Hlth Sys............................. 5.00% 11/01/22 59,648 -------------- 409,634 -------------- LOUISIANA - 4.5% 1,000,000 LA St Pub Facs Auth Hosp Rev Ref Lafayette General Hlth Sys Proj, Ser A.................................................. 5.00% 11/01/35 1,154,930 390,000 LA Stadium & Exposition Dist LA Ref Sr, Ser A................... 5.00% 07/01/30 451,285 380,000 LA Stadium & Exposition Dist LA Ref Sr, Ser A................... 5.00% 07/01/31 438,957 1,000,000 Monroe LA Spl Sch Dist.......................................... 4.00% 03/01/34 1,068,710 100,000 New Orleans LA Ref.............................................. 5.00% 12/01/24 123,617 400,000 New Orleans LA Sewage Svc Rev Ref............................... 5.00% 06/01/22 467,404 -------------- 3,704,903 -------------- MAINE - 0.9% 690,000 ME St Hlth & Hgr Edl Facs Auth Rev Estrn ME Med Ctr Oblig Grp.................................................... 5.00% 07/01/33 757,565 -------------- MARYLAND - 1.2% 200,000 Howard Cnty MD Retirement Cmnty Rev Ref Vantage House Fac.......................................................... 5.00% 04/01/21 212,158 500,000 Howard Cnty MD Retirement Cmnty Rev Ref Vantage House Fac.......................................................... 5.00% 04/01/26 539,690 220,000 MD St Econ Dev Corp Econ Dev Rev Transn Facs Proj, Ser A........ 5.38% 06/01/25 244,464 -------------- 996,312 -------------- MICHIGAN - 4.2% 1,000,000 Great Lakes MI Wtr Auth Wtr Sply Sys Rev Ref Sr Lien, Ser C..... 5.00% 07/01/30 1,176,720 890,000 MI St Fin Auth Ltd Oblig Rev Ref College for Creative Studies Proj......................................................... 5.00% 12/01/25 1,049,301 100,000 MI St Fin Auth Rev Detroit Sch Dist............................. 5.50% 06/01/21 105,653 400,000 MI St Fin Auth Rev Ref Holland Cmnty Hosp, Ser A................ 4.00% 01/01/28 439,556 500,000 MI St Fin Auth Rev Ref Local Govt Loan Program, Ser F1.......... 3.80% 10/01/22 539,215 125,000 MI St Fin Auth Rev Ref Local Govt Loan Program, Ser F1.......... 3.88% 10/01/23 135,514 -------------- 3,445,959 -------------- MINNESOTA - 2.2% 175,000 Baytown Twp MN Lease Ref, Ser A................................. 3.00% 08/01/22 175,455 150,000 Deephaven MN Chrt Sch Lease Rev Eagle Ridge Academy Proj, Ser A........................................................ 4.00% 07/01/23 155,682 150,000 Deephaven MN Chrt Sch Lease Rev Eagle Ridge Academy Proj, Ser A........................................................ 4.00% 07/01/24 154,996 250,000 Minneapolis MN Student Hsg Rev Riverton Cmnty Hsg Proj Ref...... 3.50% 08/01/20 252,970 1,000,000 North Oaks MN Sr Hsg Rev Ref Waverly Gardens Proj............... 5.00% 10/01/28 1,104,840 -------------- 1,843,943 --------------

See Notes to Financial Statements Page 11 FIRST TRUST MANAGED MUNICIPAL ETF (FMB) PORTFOLIO OF INVESTMENTS (CONTINUED) OCTOBER 31, 2016

PRINCIPAL STATED STATED VALUE DESCRIPTION COUPON MATURITY VALUE --------------- ---------------------------------------------------------------- ------------- ------------ -------------- MUNICIPAL BONDS (CONTINUED) MISSISSIPPI - 2.0% $ 545,000 D'lberville MS Tax Increment Ltd Oblig Ref Gulf Coast Promenade Proj............................................... 5.00% 04/01/33 $ 597,631 60,000 MS St Dev Bank Spl Oblig Magnolia Regl Hlth Ctr Proj, Ser A..... 5.00% 10/01/20 66,786 615,000 MS St Dev Bank Spl Oblig Magnolia Regl Hlth Ctr Proj, Ser A..... 6.00% 10/01/24 720,399 10,000 MS St Dev Bank Spl Oblig Magnolia Regl Hlth Ctr Proj, Ser A..... 6.25% 10/01/26 11,773 250,000 MS St Dev Bank Spl Oblig Ref Muni Energy Agy of MS Pwr Sply, Ser A, AGM............................................. 5.00% 03/01/22 287,717 -------------- 1,684,306 -------------- MISSOURI - 3.4% 500,000 Kansas City MO Indl Dev Auth Sales Tax Rev Ref, Ser A (a)....... 4.25% 04/01/26 491,230 500,000 MO St Dev Fin Brd Infrastructure Facs Rev Ref Independence MO Centerpoint Proj, Ser B...................................... 5.00% 04/01/28 576,650 200,000 MO St Hlth & Edl Facs Auth Edl Facs Rev St Louis Clg Pharmacy, Ser B.............................................. 5.00% 05/01/30 225,338 250,000 MO St Hlth & Edl Facs Auth Hlth Facs Rev Ref The Children's Mercy Hospital............................................... 5.00% 05/15/28 302,958 10,000 MO St Hlth & Edl Facs Auth Lutheran Sr Svcs..................... 5.00% 02/01/23 11,505 600,000 MO St Hlth & Edl Facs Auth Sr Living Facs Lutheran Sr........... 5.38% 02/01/35 643,716 525,000 St Louis Cnty MO Indl Dev Auth Ref Nazareth Living Ctr Proj, Ser A........................................................ 4.00% 08/15/20 533,458 -------------- 2,784,855 -------------- NEBRASKA - 2.9% 1,245,000 Central Plains Energy Proj NE Gas Proj Rev Proj #3.............. 5.00% 09/01/27 1,424,404 810,000 Pub Pwr Generation Agy NE Rev Ref............................... 5.00% 01/01/34 942,014 -------------- 2,366,418 -------------- NEVADA - 0.6% 480,000 Las Vegas NV Spl Impt Dist #808 & #810 Ref...................... 5.00% 06/01/22 527,405 -------------- NEW JERSEY - 4.2% 500,000 NJ St Econ Dev Auth Ref, Ser A, BAM............................. 5.00% 06/15/23 591,160 125,000 NJ St Hlth Care Facs Fing Auth Rev Ref Barnabas Hlth, Ser A..... 4.63% 07/01/23 144,349 1,000,000 NJ St Hlth Care Facs Fing Auth Rev Ref RWJ Barnabas Hlth Oblig Grp, Ser A............................................. 5.00% 07/01/29 1,192,530 600,000 NJ St Transit Corp, Ser A, GANS................................. 5.00% 09/15/21 669,480 525,000 NJ St Transprtn Trust Fund Auth Transn Sys, Ser D............... 5.25% 12/15/23 604,895 230,000 NJ St Turnpike Auth, Ser A...................................... 5.00% 01/01/32 273,028 -------------- 3,475,442 -------------- NEW YORK - 0.6% 100,000 Buffalo & Erie Cnty NY Indl Land Dev Corp Rev Ref Orchard Park................................................. 5.00% 11/15/22 115,007 115,000 Buffalo & Erie Cnty NY Indl Land Dev Corp Rev Ref Orchard Park................................................. 5.00% 11/15/24 134,076 85,000 NY St Dorm Auth Revs Non St Supported Debt Unrefunded Pace Univ, Ser A............................................. 5.00% 05/01/23 97,941 15,000 Suffolk Cnty NY Econ Dev Corp Rev Prerefunded Catholic Hlth Svcs Long Island Oblig Grp Proj.............................. 5.00% 07/01/28 17,561 85,000 Suffolk Cnty NY Econ Dev Corp Rev Unrefunded Catholic Hlth Svcs Long Island Oblig Grp Proj.............................. 5.00% 07/01/28 95,286 -------------- 459,871 --------------

Page 12 See Notes to Financial Statements FIRST TRUST MANAGED MUNICIPAL ETF (FMB) PORTFOLIO OF INVESTMENTS (CONTINUED) OCTOBER 31, 2016

PRINCIPAL STATED STATED VALUE DESCRIPTION COUPON MATURITY VALUE --------------- ---------------------------------------------------------------- ------------- ------------ -------------- MUNICIPAL BONDS (CONTINUED) NORTH CAROLINA - 2.3% $ 55,000 NC St Capital Facs Fin Agy Edl Facs Rev Ref Meredith College.... 5.00% 06/01/23 $ 64,382 750,000 NC St Capital Facs Fin Agy Edl Facs Rev Ref Meredith College.... 4.00% 06/01/33 799,785 900,000 NC St Capital Facs Fin Agy Student Rev Ref Hsg NC A&T Univ Fndtn Proj, Ser A, AGM.................................. 5.00% 06/01/26 1,062,063 -------------- 1,926,230 -------------- NORTH DAKOTA - 0.3% 225,000 Burleigh Cnty ND Hlth Care Rev St Alexius Med Ctr Proj, Ser A... 5.00% 07/01/22 262,530 -------------- OHIO - 1.3% 700,000 Hamilton Cnty OH Hlth Care Facs Rev Christ Hosp Proj............ 5.25% 06/01/27 816,683 230,000 Southeastern OH Port Auth Hosp Facs Rev Ref Mem Hlth Sys........ 5.00% 12/01/23 257,575 -------------- 1,074,258 -------------- OKLAHOMA - 0.1% 100,000 Tulsa OK Arpts Impt Trust Ref, Ser D, BAM....................... 5.00% 06/01/28 111,739 -------------- OREGON - 0.7% 275,000 Multnomah Cnty OR Hosp Facs Auth Rev Ref Terwilliger Plaza...... 5.00% 12/01/20 309,446 200,000 Multnomah Cnty OR Hosp Facs Auth Rev Ref Terwilliger Plaza Inc.......................................................... 5.00% 12/01/24 237,328 -------------- 546,774 -------------- PENNSYLVANIA - 4.3% 500,000 Chester Cnty PA Indl Dev Auth Renaissance Academy Chrt Sch...... 5.00% 10/01/34 546,005 500,000 Middletown PA Sch Dist, Ser A................................... 5.00% 03/01/28 581,200 625,000 Montgomery Cnty PA Indl Dev Auth Acts Retirement Life Cmntys Ref................................................... 5.00% 11/15/25 717,806 50,000 Montgomery Cnty PA Indl Dev Auth Acts Retirement Life Cmntys Ref................................................... 5.00% 11/15/29 56,311 500,000 Philadelphia PA Ref, Ser A...................................... 5.25% 07/15/28 598,075 500,000 Philadelphia PA, Ser B.......................................... 5.00% 08/01/23 591,415 405,000 Southcentral PA General Auth Rev Ref Hanover Hosp Inc........... 5.00% 12/01/23 476,329 -------------- 3,567,141 -------------- RHODE ISLAND - 0.1% 45,000 Tobacco Settlement Fing Corp RI Ref, Ser A...................... 5.00% 06/01/24 51,485 -------------- SOUTH CAROLINA - 3.4% 250,000 Lancaster Cnty SC Assmnt Rev Ref Walnut Creek Impt Dist, Ser A-1...................................................... 3.13% 12/01/22 251,720 745,000 Piedmont SC Muni Pwr Agy Elec Rev Ref, Ser A-3.................. 5.00% 01/01/23 842,066 30,000 SC St Jobs Econ Dev Auth Hosp Rev Ref Palmetto Hlth, Ser A...... 5.00% 08/01/23 35,755 150,000 SC St Jobs Econ Dev Auth Hosp Rev Ref Palmetto Hlth, Ser A, AGM.......................................................... 5.50% 08/01/24 176,772 1,285,000 SC St Pub Svc Auth Rev Ref Obligs, Ser B........................ 5.00% 12/01/32 1,512,278 -------------- 2,818,591 -------------- SOUTH DAKOTA - 0.0% 30,000 SD St Hlth & Edl Facs Auth Avera Hlth, Ser B.................... 5.50% 07/01/35 31,951 -------------- TENNESSEE - 1.9% 335,000 Chattanooga TN Hlth Edl & Hsg Fac Brd Rev Ref-Student Hsg Cdfi Phase I................................................. 5.00% 10/01/23 400,998 600,000 Memphis Shelby Cnty TN Arpt Auth Arpt Rev Ref, Ser B, AMT....... 5.75% 07/01/23 679,488 250,000 Met Govt Nashville & Davidson Cnty TN Hlth & Edl Facs Brd Vanderbilt Univ Med Ctr, Ser A............................... 5.00% 07/01/40 291,315

See Notes to Financial Statements Page 13 FIRST TRUST MANAGED MUNICIPAL ETF (FMB) PORTFOLIO OF INVESTMENTS (CONTINUED) OCTOBER 31, 2016

PRINCIPAL STATED STATED VALUE DESCRIPTION COUPON MATURITY VALUE --------------- ---------------------------------------------------------------- ------------- ------------ -------------- MUNICIPAL BONDS (CONTINUED) TENNESSEE (CONTINUED) $ 25,000 TN St Energy Acquisition Corp Gas Rev, Ser A.................... 5.25% 09/01/21 $ 28,983 120,000 TN St Energy Acquisition Corp Gas Rev, Ser A.................... 5.25% 09/01/22 141,712 -------------- 1,542,496 -------------- TEXAS - 12.0% 600,000 Brd of Managers TX Joint Guadalupe Cnty City of Seguin Hosp Mtg Ref...................................................... 5.00% 12/01/24 674,508 600,000 Central TX Regl Mobility Auth Rev Ref Sub Lien.................. 5.00% 01/01/33 674,922 500,000 Cinco Southwest TX Muni Utility Dist #1 Contract Rev Ref, BAM.......................................................... 4.00% 12/01/30 532,320 600,000 Flower Mound TX Spl Assmnt Rev River Walk Pub Impt Dist #1...... 6.13% 09/01/28 625,890 500,000 Houston TX Arpt Sys Rev Ref United Airls Inc Terminal E Proj, AMT.................................................... 4.50% 07/01/20 540,320 530,000 Love Field TX Arpt Modernization Corp Spl Facs Rev Southwest Airls Co Proj................................................ 5.00% 11/01/28 602,228 500,000 Lower Colorado River TX Auth Rev Unrefunded Ref, Ser B.......... 5.00% 05/15/32 579,335 500,000 Mission TX Econ Dev Corp Rev Senior Lien Nat Gasoline Proj, Ser B, AMT (d)............................................... 5.75% 10/01/31 530,600 250,000 New Hope Cultural Ed Facs Fin Corp TX Retirement Fac Rev Temps 50 Mrc Sr Living The Langford Proj, Ser B2............. 3.00% 11/15/21 249,998 290,000 New Hope Cultural Ed Facs Fin Corp TX Retirement Fac Rev Wesleyan Homes Inc Proj...................................... 5.00% 01/01/24 311,011 1,000,000 New Hope Cultural Ed Facs Fin Corp TX Sr Living Rev Cardinal Bay Inc Vlg On The Park Carriage Inn Proj, Ser A-1........... 5.00% 07/01/46 1,157,540 135,000 New Hope Cultural Ed Facs Fin Corp TX Student Hsg Rev Chf Collegiate Hsg Corpus Christi II A&M Univ, Ser A............. 5.00% 04/01/36 148,724 100,000 New Hope Cultural Ed Facs Fin Corp TX Student Hsg Rev Chf Collegiate Hsg Corpus Christii LLC TX A&M Univ............... 5.00% 04/01/39 110,677 500,000 New Hope Cultural Ed Facs Fin Corp TX Student Hsg Rev Chf Collegiate Hsg Galveston I LLC TX A&M Univ Galveston......... 5.00% 04/01/22 571,590 25,000 New Hope Cultural Ed Facs Fin Corp TX Student Hsg Rev Chf Stephenville-Tarleton St Univ Proj, Ser A.................... 4.25% 04/01/22 27,560 495,000 Red River TX Hlth Facs Dev Corp Retirement Fac Rev MRC Crestview, Ser A............................................. 7.75% 11/15/31 650,915 600,000 TX St Muni Gas Acquisition & Sply Corp III Gas Sply Rev......... 5.00% 12/15/24 692,298 500,000 TX St Muni Gas Acquisition & Sply Corp lII Gas Sply Rev......... 5.00% 12/15/30 558,745 500,000 Viridian TX Muni Mgmt Dist Ref Util Impt, BAM................... 6.00% 12/01/26 644,605 -------------- 9,883,786 -------------- UTAH - 0.6% 500,000 UT St Chrt Sch Fin Auth Chrt Sch Rev Spectrum Academy Proj (a)..................................................... 6.00% 04/15/45 524,355 -------------- VERMONT - 0.8% 550,000 Burlington VT Ref Lakeview Garage Project, Ser A, COPS.......... 5.00% 12/01/24 632,203 -------------- WASHINGTON - 1.3% 155,000 Mason Cnty WA Pub Utility Dist #1 Sys........................... 3.50% 12/01/21 165,552 270,000 Skagit Cnty WA Pub Hosp Dist #1 Ref & Impt Skagit Regl Hlth..... 4.00% 12/01/24 291,854 110,000 Skagit Cnty WA Pub Hosp Dist #1 Ref & Impt, Ser A............... 5.00% 12/01/22 125,614 165,000 Skagit Cnty WA Pub Hosp Dist #1 Skagit Valley Hosp.............. 5.00% 12/01/20 183,604 250,000 Tobacco Settlement Auth WA Tobacco Settlement Rev Ref........... 5.00% 06/01/23 296,177 35,000 WA St Hsg Fin Commission Ref Emerald Heights Proj............... 5.00% 07/01/22 40,654 -------------- 1,103,455 --------------

Page 14 See Notes to Financial Statements FIRST TRUST MANAGED MUNICIPAL ETF (FMB) PORTFOLIO OF INVESTMENTS (CONTINUED) OCTOBER 31, 2016

PRINCIPAL STATED STATED VALUE DESCRIPTION COUPON MATURITY VALUE --------------- ---------------------------------------------------------------- ------------- ------------ -------------- MUNICIPAL BONDS (CONTINUED) WISCONSIN - 4.1% $ 1,000,000 Pub Fin Auth WI Exempt Facs Rev Ref Celanese Proj, Ser B, AMT... 5.00% 12/01/25 $ 1,163,060 500,000 WI St Hlth & Edl Facs Auth Rev Ref Marquette Univ............... 5.00% 10/01/28 583,835 1,175,000 WI St Hlth & Edl Facs Auth Rev Ref Prohealth Care Oblig Group........................................................ 5.00% 08/15/31 1,357,278 175,000 WI St Hlth & Edl Facs Auth Rev Ref Prohealth Care Oblig Group........................................................ 5.00% 08/15/33 200,564 100,000 WI St Hlth & Edl Facs Auth Rev Ref St Johns Cmntys Inc, Ser B... 4.00% 09/15/23 109,048 -------------- 3,413,785 -------------- WYOMING - 0.1% 50,000 WY Cmnty Dev Auth Student Hsg Rev Chf Wyoming LLC............... 6.25% 07/01/31 56,599 -------------- TOTAL INVESTMENTS - 93.1%.................................................................... 76,957,897 (Cost $74,967,206) (e) NET OTHER ASSETS AND LIABILITIES - 6.9%...................................................... 5,692,582 -------------- NET ASSETS - 100.0%.......................................................................... $ 82,650,479 ==============

----------------------------- (a) This security, sold within the terms of a private placement memorandum, is exempt from registration upon resale under Rule 144A under the Securities Act of 1933, as amended (the "1933 Act"), and may be resold in transactions exempt from registration, normally to qualified institutional buyers. Pursuant to procedures adopted by the Trust's Board of Trustees, this security has been determined to be liquid by First Trust Advisors L.P. ("First Trust"), the Fund's advisor. Although market instability can result in periods of increased overall market illiquidity, liquidity for each security is determined based on security-specific factors and assumptions, which require subjective judgment. At October 31, 2016, securities noted as such amounted to $3,975,319 or 4.8% of net assets. (b) Pursuant to procedures adopted by the Trust's Board of Trustees, this security has been determined to be illiquid by First Trust. (c) Zero coupon bond. (d) This security, sold within the terms of a private placement memorandum, is exempt from registration upon resale under Rule 144A under the 1933 Act, and may be resold in transactions exempt from registration, normally to qualified institutional buyers (see Note 2C - Restricted Securities in the Notes to Financial Statements). (e) Aggregate cost for federal income tax purposes is $74,947,598. As of October 31, 2016, the aggregate gross unrealized appreciation for all securities in which there was an excess of value over tax cost was $2,140,829 and the aggregate gross unrealized depreciation for all securities in which there was an excess of tax cost over value was $130,530. AGM Assured Guaranty Municipal Corp. AMT Alternative Minimum Tax BAM Building America Mutual CABS Capital Appreciation Bonds COPS Certificates of Participation GANS Grant Anticipation Notes NATL-RE National Public Finance Guarantee Corp. ----------------------------- VALUATION INPUTS A summary of the inputs used to value the Fund's investments as of October 31, 2016 is as follows (see Note 2A - Portfolio Valuation in the Notes to Financial Statements):

LEVEL 2 LEVEL 3 TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT VALUE AT QUOTED OBSERVABLE UNOBSERVABLE 10/31/2016 PRICES INPUTS INPUTS ------------- ------------- -------------- -------------- Municipal Bonds*................................... $ 76,957,897 $ -- $ 76,957,897 $ -- ============= ============= ============== ==============

*See Portfolio of Investments for state breakout. All transfers in and out of the Levels during the period are assumed to be transferred on the last day of the period at their current value. There were no transfers between Levels at October 31, 2016. See Notes to Financial Statements Page 15 FIRST TRUST MANAGED MUNICIPAL ETF (FMB) STATEMENT OF ASSETS AND LIABILITIES OCTOBER 31, 2016

ASSETS: Investments, at value.................................................. $ 76,957,897 Cash................................................................... 8,993,690 Receivables: Interest............................................................ 945,779 Investment securities sold.......................................... 452,426 Other assets........................................................... 5,750 -------------- Total Assets........................................................ 87,355,542 -------------- LIABILITIES: Payables: Investment securities purchased..................................... 4,670,560 Investment advisory fees............................................ 34,503 -------------- Total Liabilities................................................... 4,705,063 -------------- NET ASSETS............................................................. $ 82,650,479 ============== NET ASSETS CONSIST OF: Paid-in capital........................................................ $ 80,364,883 Par value.............................................................. 15,500 Accumulated net investment income (loss)............................... 19,608 Accumulated net realized gain (loss) on investments.................... 259,797 Net unrealized appreciation (depreciation) on investments.............. 1,990,691 -------------- NET ASSETS............................................................. $ 82,650,479 ============== NET ASSET VALUE, per share............................................. $ 53.32 ============== Number of shares outstanding (unlimited number of shares authorized, par value $0.01 per share).............................. 1,550,002 ============== Investments, at cost................................................... $ 74,967,206 ==============

Page 16 See Notes to Financial Statements FIRST TRUST MANAGED MUNICIPAL ETF (FMB) STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2016

INVESTMENT INCOME: Interest............................................................... $ 1,965,347 -------------- Total investment income............................................. 1,965,347 -------------- EXPENSES: Investment advisory fees............................................... 419,434 -------------- Total expenses...................................................... 419,434 Less fees waived by the investment advisor.......................... (81,517) -------------- Net expenses........................................................ 337,917 -------------- NET INVESTMENT INCOME (LOSS)........................................... 1,627,430 -------------- NET REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on investments............................. 310,495 Net change in unrealized appreciation (depreciation) on investments. 1,504,202 -------------- NET REALIZED AND UNREALIZED GAIN (LOSS)................................ 1,814,697 -------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS..................................................... $ 3,442,127 ==============

See Notes to Financial Statements Page 17 FIRST TRUST MANAGED MUNICIPAL ETF (FMB) STATEMENTS OF CHANGES IN NET ASSETS

FOR THE FOR THE YEAR YEAR ENDED ENDED 10/31/2016 10/31/2015 -------------- -------------- OPERATIONS: Net investment income (loss)........................................... $ 1,627,430 $ 626,851 Net realized gain (loss)............................................... 310,495 179,530 Net change in unrealized appreciation (depreciation)................... 1,504,202 32,171 -------------- -------------- Net increase (decrease) in net assets resulting from operations........ 3,442,127 838,552 -------------- -------------- DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income.................................................. (1,664,003) (638,253) Net realized gain...................................................... (172,240) -- -------------- -------------- Total distributions to shareholders.................................... (1,836,243) (638,253) -------------- -------------- SHAREHOLDER TRANSACTIONS: Proceeds from shares sold.............................................. 47,515,355 15,444,063 Cost of shares redeemed................................................ -- (2,559,895) -------------- -------------- Net increase (decrease) in net assets resulting from shareholder transactions............................................ 47,515,355 12,884,168 -------------- -------------- Total increase (decrease) in net assets................................ 49,121,239 13,084,467 NET ASSETS: Beginning of year...................................................... 33,529,240 20,444,773 -------------- -------------- End of year............................................................ $ 82,650,479 $ 33,529,240 ============== ============== Accumulated net investment income (loss) at end of year................ $ 19,608 $ 5,519 ============== ============== CHANGES IN SHARES OUTSTANDING: Shares outstanding, beginning of period................................ 650,002 400,002 Shares sold............................................................ 900,000 300,000 Shares redeemed........................................................ -- (50,000) -------------- -------------- Shares outstanding, end of period...................................... 1,550,002 650,002 ============== ==============

Page 18 See Notes to Financial Statements FIRST TRUST MANAGED MUNICIPAL ETF (FMB) FINANCIAL HIGHLIGHTS FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD

FOR THE PERIOD YEAR ENDED OCTOBER 31, 5/13/2014 (a) ------------------------------- THROUGH 2016 2015 10/31/2014 -------------- -------------- -------------- Net asset value, beginning of period $ 51.58 $ 51.11 $ 50.00 ---------- ---------- ---------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) 1.32 1.35 0.56 Net realized and unrealized gain (loss) 1.99 0.50 1.20 ---------- ---------- ---------- Total from investment operations 3.31 1.85 1.76 ---------- ---------- ---------- DISTRIBUTIONS PAID TO SHAREHOLDERS FROM: Net investment income (1.35) (1.38) (0.55) Net realized gain (0.22) -- -- Return of capital -- -- (0.10) ---------- ---------- ---------- Total distributions (1.57) (1.38) (0.65) ---------- ---------- ---------- Net asset value, end of period $ 53.32 $ 51.58 $ 51.11 ========== ========== ========== TOTAL RETURN (b) 6.47% 3.66% 3.53% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (in 000's) $ 82,650 $ 33,529 $ 20,445 RATIOS TO AVERAGE NET ASSETS: Ratio of total expenses to average net assets 0.65% 0.65% 0.65% (c) Ratio of net expenses to average net assets 0.52% 0.65% 0.65% (c) Ratio of net investment income (loss) to average net assets 2.52% 2.63% 2.40% (c) Portfolio turnover rate (d) 85% 109% 69%

(a) Inception date is consistent with the commencement of investment operations and is the date the initial creation units were established. (b) Total return is calculated assuming an initial investment made at the net asset value at the beginning of the period, reinvestment of all distributions at net asset value during the period, and redemption at net asset value on the last day of the period. The 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. For some periods, the total returns would have been lower if certain fees had not been waived by the advisor. (c) Annualized. (d) Portfolio turnover is calculated for the time period presented and is not annualized for periods of less than a year and does not include securities received or delivered from processing creations or redemptions and in-kind transactions. See Notes to Financial Statements Page 19 -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS -------------------------------------------------------------------------------- FIRST TRUST MANAGED MUNICIPAL ETF (FMB) OCTOBER 31, 2016 1. ORGANIZATION First Trust Exchange-Traded Fund III (the "Trust") is an open-end management investment company organized as a Massachusetts business trust on January 9, 2008, and is registered with the Securities and Exchange Commission (the "SEC") under the Investment Company Act of 1940, as amended (the "1940 Act"). The Trust consists of ten funds that are currently offering shares. This report covers the First Trust Managed Municipal ETF (the "Fund"), a non-diversified series of the Trust, which trades under the ticker FMB on The Nasdaq Stock Market, LLC ("Nasdaq"). Unlike conventional mutual funds, the Fund issues and redeems shares on a continuous basis, at net asset value ("NAV"), only in large specified blocks consisting of 50,000 shares called a "Creation Unit." Creation Units are issued and redeemed for cash and, in certain circumstances, in-kind for securities in which the Fund invests. Except when aggregated in Creation Units, the Fund's shares are not redeemable securities. The primary investment objective of the Fund is to generate current income that is exempt from regular federal income taxes, and its secondary objective is long-term capital appreciation. Under normal market conditions, the Fund seeks to achieve its investment objectives by investing at least 80% of its net assets (including investment borrowings) in municipal debt securities that pay interest that is exempt from regular federal income taxes. There can be no assurance that the Fund will achieve its investment objectives. The Fund may not be appropriate for all investors. 2. SIGNIFICANT ACCOUNTING POLICIES The Fund is considered an investment company and follows accounting and reporting guidance under Financial Accounting Standards Board Accounting Standards Codification Topic 946, "Financial Services-Investment Companies." The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of the financial statements. The preparation of the financial statements in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. A. PORTFOLIO VALUATION The Fund's NAV is determined daily as of the close of regular trading on the New York Stock Exchange ("NYSE"), normally 4:00 p.m. Eastern time, on each day the NYSE is open for trading. If the NYSE closes early on a valuation day, the NAV is determined as of that time. Domestic debt securities are priced using data reflecting the earlier closing of the principal markets for those securities. The Fund's NAV is calculated by dividing the value of all assets of the Fund (including accrued interest and dividends), less all liabilities (including accrued expenses and dividends declared but unpaid), by the total number of shares outstanding. The Fund's investments are valued daily at market value or, in the absence of market value with respect to any portfolio securities, at fair value. Market value prices represent last sale or official closing prices from a national or foreign exchange (i.e., a regulated market) and are primarily obtained from third-party pricing services. Fair value prices represent any prices not considered market value prices and are either obtained from a third-party pricing service or are determined by the Pricing Committee of the Fund's investment advisor, First Trust Advisors L.P. ("First Trust" or the "Advisor"), in accordance with valuation procedures adopted by the Trust's Board of Trustees, and in accordance with provisions of the 1940 Act. Investments valued by the Advisor's Pricing Committee, if any, are footnoted as such in the footnotes to the Portfolio of Investments. The Fund's investments are valued as follows: Municipal securities and other debt securities are fair valued on the basis of fair valuations provided by dealers who make markets in such securities or by a third-party pricing service approved by the Trust's Board of Trustees, which may use the following valuation inputs when available: 1) benchmark yields; 2) reported trades; 3) broker/dealer quotes; 4) issuer spreads; 5) benchmark securities; 6) bids and offers; and 7) reference data including market research publications. Fixed income and other debt securities having a remaining maturity of 60 days or less when purchased are fair valued at cost adjusted for amortization of premiums and accretion of discounts (amortized cost), provided the Advisor's Pricing Committee has determined that the use of amortized cost is an appropriate reflection of fair value given market and issuer-specific conditions existing at the time of the determination. Factors that may be considered in determining the appropriateness of the use of amortized cost include, but are not limited to, the following: Page 20 -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (CONTINUED) -------------------------------------------------------------------------------- FIRST TRUST MANAGED MUNICIPAL ETF (FMB) OCTOBER 31, 2016 1) the credit conditions in the relevant market and changes thereto; 2) the liquidity conditions in the relevant market and changes thereto; 3) the interest rate conditions in the relevant market and changes thereto (such as significant changes in interest rates); 4) issuer-specific conditions (such as significant credit deterioration); and 5) any other market-based data the Advisor's Pricing Committee considers relevant. In this regard, the Advisor's Pricing Committee may use last-obtained market-based data to assist it when valuing portfolio securities using amortized cost. Certain securities may not be able to be priced by pre-established pricing methods. Such securities may be valued by the Trust's Board of Trustees or its delegate, the Advisor's Pricing Committee, at fair value. These securities generally include, but are not limited to, restricted securities (securities which may not be publicly sold without registration under the Securities Act of 1933, as amended (the "1933 Act")) for which a third-party pricing service is unable to provide a market price; securities whose trading has been formally suspended; a security whose market or fair value price is not available from a pre-established pricing source; a security with respect to which an event has occurred that is likely to materially affect the value of the security after the market has closed but before the calculation of the Fund's NAV or make it difficult or impossible to obtain a reliable market quotation; and a security whose price, as provided by the third-party pricing service, does not reflect the security's fair value. As a general principle, the current fair value of a security would appear to be the amount which the owner might reasonably expect to receive for the security upon its current sale. When fair value prices are used, generally they will differ from market quotations or official closing prices on the applicable exchanges. A variety of factors may be considered in determining the fair value of such securities, including, but not limited to, the following: 1) the fundamental business data relating to the issuer; 2) an evaluation of the forces which influence the market in which these securities are purchased and sold; 3) the type, size and cost of security; 4) the financial statements of the issuer; 5) the credit quality and cash flow of the issuer, based on the Advisor's or external analysis; 6) the information as to any transactions in or offers for the security; 7) the price and extent of public trading in similar securities (or equity securities) of the issuer/borrower, or comparable companies; 8) the coupon payments; 9) the quality, value and salability of collateral, if any, securing the security; and 10) other relevant factors. The Fund is subject to fair value accounting standards that define fair value, establish the framework for measuring fair value and provide a three-level hierarchy for fair valuation based upon the inputs to the valuation as of the measurement date. The three levels of the fair value hierarchy are as follows: o Level 1 - Level 1 inputs are quoted prices in active markets for identical investments. An active market is a market in which transactions for the investment occur with sufficient frequency and volume to provide pricing information on an ongoing basis. o Level 2 - Level 2 inputs are observable inputs, either directly or indirectly, and include the following: o Quoted prices for similar investments in active markets. o Quoted prices for identical or similar investments in markets that are non-active. A non-active market is a market where there are few transactions for the investment, the prices are not current, or price quotations vary substantially either over time or among market makers, or in which little information is released publicly. o Inputs other than quoted prices that are observable for the investment (for example, interest rates and yield curves observable at commonly quoted intervals, volatilities, prepayment speeds, loss severities, credit risks, and default rates). o Inputs that are derived principally from or corroborated by observable market data by correlation or other means. o Level 3 - Level 3 inputs are unobservable inputs. Unobservable inputs may reflect the reporting entity's own assumptions about the assumptions that market participants would use in pricing the investment. The inputs or methodologies used for valuing investments are not necessarily an indication of the risk associated with investing in those investments. A summary of the inputs used to value the Fund's investments as of October 31, 2016, is included with the Fund's Portfolio of Investments. B. SECURITIES TRANSACTIONS AND INVESTMENT INCOME Securities transactions are recorded as of the trade date. Realized gains and losses from securities transactions are recorded on the identified cost basis. Interest income is recorded daily on the accrual basis. Amortization of premiums and accretion of discounts are recorded using the effective interest method. Page 21 -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (CONTINUED) -------------------------------------------------------------------------------- FIRST TRUST MANAGED MUNICIPAL ETF (FMB) OCTOBER 31, 2016 C. RESTRICTED SECURITIES The Fund invests in restricted securities, which are securities that may not be offered for public sale without first being registered under the 1933 Act. Prior to registration, restricted securities may only be resold in transactions exempt from registration under Rule 144A under the 1933 Act, normally to qualified institutional buyers. As of October 31, 2016, the Fund held restricted securities as shown in the following table that the Advisor has deemed illiquid pursuant to procedures adopted by the Fund's Board of Trustees. Although market instability can result in periods of increased overall market illiquidity, liquidity for each security is determined based on security-specific factors and assumptions, which require subjective judgment. The Fund does not have the right to demand that such securities be registered. These securities are valued according to the valuation procedures as stated in the Portfolio Valuation note (Note 2A) and are not expressed as a discount to the carrying value of a comparable unrestricted security. There are no unrestricted securities with the same maturity dates and yields for these issuers.

ACQUISITION PRINCIPAL CURRENT CARRYING % OF NET SECURITY DATE VALUE/SHARES PRICE COST VALUE ASSETS ------------------------------------------------------------------------------------------------------------------------------ Mission TX Econ Dev Corp Rev Senior Lien Nat Gasoline Proj, Ser B 04/28/16 $ 500,000 $ 106 $ 478,243 $ 530,600 0.64%

D. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS Dividends from net investment income, if any, are declared and paid monthly, or as the Board of Trustees may determine from time to time. Distributions of net realized capital gains earned by the Fund, if any, will be distributed at least annually. Distributions from income and capital gains are determined in accordance with income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These permanent differences are primarily due to the varying treatment of income and gain/loss on portfolio securities held by the Fund and have no impact on net assets or net asset value per share. Temporary differences, which arise from recognizing certain items of income, expense and gain/loss in different periods for financial statement and tax purposes, will reverse at some time in the future. The tax character of distributions paid during the fiscal years ended October 31, 2016 and 2015, was as follows: Distributions paid from: 2016 2015 Ordinary income.............................. $ 171,141 $ 25,837 Long-term capital gains...................... 53,893 -- Tax-exempt income............................ 1,611,209 612,416 Return of capital............................ -- -- As of October 31, 2016, the components of distributable earnings on a tax basis were as follows: Undistributed ordinary income................ $ 259,797 Accumulated capital and other gains.......... 19,608 Net unrealized appreciation (depreciation)... 1,990,691 E. INCOME TAXES The 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, the Fund may be subject to an excise tax of 4% of the amount by which approximately 98% of the Fund's taxable income exceeds the distributions from such taxable income for the calendar year. In addition, the Fund intends to invest in such municipal securities to allow it to pay shareholders "exempt dividends" as defined in the Internal Revenue Code. The Fund is subject to accounting standards that establish a minimum threshold for recognizing, and a system for measuring, the benefits of a tax position taken or expected to be taken in a tax return. The taxable years ended 2014, 2015 and 2016 remain open to federal and state audit. As of October 31, 2016, management has evaluated the application of these standards to the Fund, and has determined that no provision for income tax is required in the Fund's financial statements for uncertain tax positions. Page 22 -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (CONTINUED) -------------------------------------------------------------------------------- FIRST TRUST MANAGED MUNICIPAL ETF (FMB) OCTOBER 31, 2016 The Fund intends to utilize provisions of the federal income tax laws, which allow it to carry a realized capital loss forward indefinitely following the year of the loss and offset such loss against any future realized capital gains. The Fund is subject to certain limitations under U.S. tax rules on the use of capital carryforwards and net unrealized built-in losses. These limitations apply when there has been a 50% change in ownership. At October 31, 2016, the Fund had no non-expiring capital loss carryforwards for federal income tax purposes. Certain losses realized during the current fiscal year may be deferred and treated as occurring on the first day of the following fiscal year for federal income tax purposes. For the fiscal year ended October 31, 2016, the Fund had no net ordinary losses. In order to present paid-in capital, accumulated net investment income (loss) and accumulated net realized gain (loss) on investments on the Statement of Assets and Liabilities that more closely represent their tax character, certain adjustments have been made to paid-in capital, accumulated net investment income (loss) and accumulated net realized gain (loss) on investments. These adjustments are primarily due to the difference between book and tax treatments of income and gains on various investment securities held by the Fund and in-kind transactions. The results of operations and net assets were not affected by these adjustments. For the fiscal year ended October 31, 2016, the adjustments for the Fund were as follows: Accumulated Accumulated Net Realized Net Investment Gain (Loss) Income (Loss) on Investments Paid-in Capital -------------- -------------- --------------- $ 50,662 $ (50,662) $ -- F. EXPENSES Expenses, other than the investment advisory fee and other excluded expenses, are paid by the Advisor (see Note 3). G. NEW AND AMENDED FINANCIAL REPORTING RULES AND FORMS On October 13, 2016, the SEC adopted new rules and forms, and amended existing rules and forms. The new and amended rules and forms are intended to modernize the reporting of information provided by funds and to improve the quality and type of information that funds provide to the SEC and investors. The new and amended rules and forms will be effective for the First Trust funds, including the Fund, for reporting periods beginning on and after June 1, 2018. Management is evaluating the new and amended rules and forms to determine the impact to the Fund. 3. INVESTMENT ADVISORY FEE, AFFILIATED TRANSACTIONS AND OTHER FEE ARRANGEMENTS First Trust, the investment advisor to the Fund, is a limited partnership with one limited partner, Grace Partners of DuPage L.P., and one general partner, The Charger Corporation. The Charger Corporation is an Illinois corporation controlled by James A. Bowen, Chief Executive Officer of First Trust. First Trust is responsible for the selection and ongoing monitoring of the securities in the Fund's portfolio, managing the Fund's business affairs and providing certain administrative services necessary for the management of the Fund. Pursuant to the Investment Management Agreement between the Trust and the Advisor, First Trust manages the investment of the Fund's assets and is responsible for the Fund's expenses, including the cost of transfer agency, custody, fund administration, legal, audit and other services, but excluding fee payments under the Investment Management Agreement, interest, taxes, brokerage commissions and other expenses connected with the execution of portfolio transactions, distribution and service fees pursuant to a 12b-1 plan, if any, and extraordinary expenses. The Fund has agreed to pay First Trust an annual unitary management fee equal to 0.65% of its average daily net assets. First Trust also provides fund reporting services to the Fund for a flat annual fee in the amount of $9,250, which is covered under the annual unitary management fee. The Trust's Board of Trustees and the Advisor have entered into a Fee Waiver Agreement for the Fund pursuant to which the Advisor contractually agreed to waive management fees of 0.15% of average daily net assets until March 1, 2018. The waiver agreement may be terminated by action of the Trust's Board of Trustees at any time upon 60 days' written notice by the Trust on behalf of the Fund or by the Fund's investment advisor only after March 1, 2018. First Trust does not have the right to recover the fees waived. During the year ended October 31, 2016, the Advisor waived fees of $81,517. The Trust has multiple service agreements with Brown Brothers Harriman & Co. ("BBH"). Under the service agreements, BBH performs custodial, fund accounting, certain administrative services, and transfer agency services for the Fund. As custodian, BBH is responsible for custody of the Fund's assets. As fund accountant and administrator, BBH is responsible for maintaining the books and records of the Fund's securities and cash. As transfer agent, BBH is responsible for maintaining shareholder records for the Fund. Page 23 -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (CONTINUED) -------------------------------------------------------------------------------- FIRST TRUST MANAGED MUNICIPAL ETF (FMB) OCTOBER 31, 2016 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. Prior to January 1, 2016, the fixed annual retainer was allocated pro rata based on each fund's net assets. Each Independent Trustee is also paid an annual per fund fee that varies based on whether the fund is a closed-end or other actively managed fund, or is an index fund. Additionally, the Lead Independent Trustee and the Chairmen of the Audit Committee, Nominating and Governance Committee and Valuation Committee are paid annual fees to serve in such capacities, with such compensation allocated pro rata among each fund in the First Trust Fund Complex based on net assets. Independent Trustees are reimbursed for travel and out-of-pocket expenses in connection with all meetings. The Lead Independent Trustee and Committee Chairmen rotate every three years. The officers and "Interested" Trustee receive no compensation from the Trust for acting in such capacities. 4. PURCHASES AND SALES OF SECURITIES For the year ended October 31, 2016, the cost of purchases and proceeds from sales of investments, excluding short-term investments and in-kind transactions, were $95,517,243 and $51,644,010, respectively. For the year ended October 31, 2016, the Fund had no in-kind transactions. 5. BORROWINGS The Trust, First Trust Series Fund and First Trust Exchange-Traded Fund IV have a $140 million Credit Agreement with The Bank of Nova Scotia ("Scotia") as administrative agent for a group of lenders. Scotia charges a commitment fee of 0.25% of the daily amount of excess of the commitment amount over the outstanding principal balance of the loans. Prior to March 9, 2016, the commitment was $80 million and the commitment fee was 0.15%. First Trust allocates the commitment fee amongst the funds that have access to the credit line. To the extent that the Fund accesses the credit line, there would also be an interest fee charged. The Fund did not have any borrowings outstanding during the year ended October 31, 2016. 6. CREATIONS, REDEMPTIONS AND TRANSACTION FEES Shares are created and redeemed by the Fund only in Creation Unit size aggregations of 50,000 shares in transactions with broker-dealers or large institutional investors that have entered into a participation agreement (an "Authorized Participant"). In order to purchase Creation Units of the Fund, an Authorized Participant must deposit (i) a designated portfolio of securities determined by First Trust (the "Deposit Securities") and generally make or receive a cash payment referred to as the "Cash Component," which is an amount equal to the difference between the NAV of the Fund shares (per Creation Unit Aggregation) and the market value of the Deposit Securities, and/or (ii) cash in lieu of all or a portion of the Deposit Securities. If the Cash Component is a positive number (i.e., the NAV per Creation Unit Aggregation exceeds the Deposit Amount), the Authorized Participant will deliver the Cash Component. If the Cash Component is a negative number (i.e., the NAV per Creation Unit Aggregation is less than the Deposit Amount), the Authorized Participant will receive the Cash Component. Authorized Participants purchasing Creation Units must pay to BBH, as transfer agent, a creation transaction fee (the "Creation Transaction Fee") regardless of the number of Creation Units purchased in the transaction. The Creation Transaction Fee may vary and is based on the composition of the securities included in the Fund's portfolio and the countries in which the transactions are settled. The Creation Transaction Fee is currently $500. The price for each Creation Unit will equal the daily NAV per share times the number of shares in a Creation Unit plus the fees described above and, if applicable, any operational processing and brokerage costs, transfer fees or stamp taxes. When the Fund permits an Authorized Participant to substitute cash or a different security in lieu of depositing one or more of the requisite Deposit Securities, the Authorized Participant may also be assessed an amount to cover the cost of purchasing the Deposit Securities and/or disposing of the substituted securities, including operational processing and brokerage costs, transfer fees, stamp taxes, and part or all of the spread between the expected bid and offer side of the market related to such Deposit Securities and/or substitute securities. Authorized Participants redeeming Creation Units must pay to BBH, as transfer agent, a redemption transaction fee (the "Redemption Transaction Fee"), regardless of the number of Creation Units redeemed in the transaction. The Redemption Transaction Fee may vary and is based on the composition of the securities included in the Fund's portfolio and the countries in which the transactions are settled. The Redemption Transaction Fee is currently $500. The Fund reserves the right to effect redemptions in cash. An Authorized Participant may request cash redemption in lieu of securities; however, the Fund may, in its discretion, reject any such request. 7. DISTRIBUTION PLAN The Board of Trustees adopted a Distribution and Service Plan pursuant to Rule 12b-1 under the 1940 Act. In accordance with the Rule 12b-1 plan, the Fund is authorized to pay an amount up to 0.25% of its average daily net assets each year to reimburse First Trust Portfolios L.P. ("FTP"), the distributor of the Fund, for amounts expended to finance activities primarily intended to result in Page 24 -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (CONTINUED) -------------------------------------------------------------------------------- FIRST TRUST MANAGED MUNICIPAL ETF (FMB) OCTOBER 31, 2016 the sale of Creation Units or the provision of investor services. FTP may also use this amount to compensate securities dealers or other persons that are Authorized Participants for providing distribution assistance, including broker-dealer and shareholder support and educational and promotional services. No 12b-1 fees are currently paid by the Fund, and pursuant to a contractual arrangement, no 12b-1 fees will be paid any time before February 28, 2018. 8. INDEMNIFICATION The Trust, on behalf of the Fund, has a variety of indemnification obligations under contracts with its service providers. The Trust's maximum exposure under these arrangements is unknown. However, the Trust has not had prior claims or losses pursuant to these contracts and expects the risk of loss to be remote. 9. SUBSEQUENT EVENT Management has evaluated the impact of all subsequent events to the Fund through the date the financial statements were issued and has determined that there were the following subsequent events: On November 21, 2016, the Fund declared a distribution of $0.11 per share to shareholders of record on November 25, 2016, payable November 30, 2016. On December 16, 2016, the commitment amount under the Credit Agreement with Scotia was increased to $180 million. Page 25 -------------------------------------------------------------------------------- REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM -------------------------------------------------------------------------------- TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF FIRST TRUST MANAGED MUNICIPAL ETF: We have audited the accompanying statement of assets and liabilities of First Trust Managed Municipal ETF (the "Fund"), a series of the First Trust Exchange-Traded Fund III, including the portfolio of investments, as of October 31, 2016, and the related statement 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 each of the periods presented. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of October 31, 2016, by correspondence with the Fund's custodian and brokers; where replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of First Trust Managed Municipal ETF as of October 31, 2016, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the periods presented, in conformity with accounting principles generally accepted in the United States of America. /s/ Deloitte & Touche LLP Chicago, Illinois December 21, 2016 Page 26 -------------------------------------------------------------------------------- ADDITIONAL INFORMATION -------------------------------------------------------------------------------- FIRST TRUST MANAGED MUNICIPAL ETF (FMB) OCTOBER 31, 2016 (UNAUDITED) PROXY VOTING POLICIES AND PROCEDURES A description of the policies and procedures that the Trust uses to determine how to vote proxies and information on how the Fund voted proxies relating to portfolio investments during the most recent 12-month period ended June 30 is available (1) without charge, upon request, by calling (800) 988-5891; (2) on the Fund's website located at http://www.ftportfolios.com; and (3) on the Securities and Exchange Commission's ("SEC") website located at http://www.sec.gov. PORTFOLIO HOLDINGS The Trust files its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The Trust's Form N-Qs are available (1) by calling (800) 988-5891; (2) on the Fund's website located at http://www.ftportfolios.com; (3) on the SEC's website at http://www.sec.gov; and (4) for review and copying at the SEC's Public Reference Room ("PRR") in Washington, DC. Information regarding the operation of the PRR may be obtained by calling (800) SEC-0330. FEDERAL TAX INFORMATION For the taxable year ended October 31, 2016, the following distribution information is being provided as required by the Internal Revenue Code or to meet a specific state's requirement. The Fund designates the following amounts or, if subsequently determined to be different, the maximum amount allowable for its fiscal year ended October 31, 2016: Federal and State Income Tax Percentages -------------------------------- ------------- Tax-Exempt Interest Dividends 99.95% Alternative minimum tax (AMT) 8.74% For the year ended October 31, 2016, the amount of long-term capital gain distributions designated by the Fund was $53,893 which is taxable at the applicable capital gain tax rates for federal income tax purposes. RISK CONSIDERATIONS You could lose money by investing in the Fund. An investment in the Fund is not a deposit of a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other governmental agency. There can be no assurance that the Fund's investment objective will be achieved. ALTERNATIVE MINIMUM TAX RISK. The Fund has no limit as to the amount that can be invested in alternative minimum tax bonds. Therefore, all or a portion of the Fund's otherwise exempt-interest dividends may be taxable to those shareholders subject to the federal alternative minimum tax. CALL RISK. If an issuer calls higher-yielding debt instruments held by the Fund, performance could be adversely impacted. CASH TRANSACTIONS RISK. The Fund will, under most circumstances, effect a significant portion of creations and redemptions for cash, rather than in-kind securities. As a result, an investment in the Fund may be less tax-efficient than an investment in an exchange-traded fund that effects its creations and redemption for in-kind securities. Because the Fund may effect a portion of redemptions for cash, it may be required to sell portfolio securities in order to obtain the cash needed to distribute redemption proceeds. A sale of shares may result in capital gains or losses and may also result in higher brokerage costs. CREDIT RISK. Credit risk is the risk that an issuer of a security 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. HIGH YIELD SECURITIES RISK. High yield securities, or "junk" bonds, are subject to greater market fluctuations and risk of loss than securities with higher ratings, and therefore, are considered to be highly speculative. These securities are issued by issuers that may have narrowly focused operations and/or other impediments to the timely payment of periodic interest and principal at maturity. If the economy slows down or dips into recession, the issuers of high yield securities may not have sufficient resources to continue making timely payment of periodic interest and principal at maturity. The market for high yield securities is smaller and less liquid than that for investment grade securities. High yield securities are generally not listed on a national securities exchange but trade in the over-the-counter markets. Due to the smaller, less liquid market for high yield securities, the bid-offer spread on such securities is generally greater than it is for investment grade securities and the purchase or sale of such securities may take longer to complete. In general, high yield securities may have a greater risk of default than other types of securities. INCOME RISK. Income from the Fund's fixed income investments could decline during periods of falling interest rates. Page 27 -------------------------------------------------------------------------------- ADDITIONAL INFORMATION (CONTINUED) -------------------------------------------------------------------------------- FIRST TRUST MANAGED MUNICIPAL ETF (FMB) OCTOBER 31, 2016 (UNAUDITED) INTEREST RATE RISK. Interest rate risk is the risk that the value of the debt securities in the Fund's portfolio will decline because of rising market interest rates. Interest rate risk is generally lower for shorter term debt securities and higher for longer term debt securities. Duration is a measure of the expected price volatility of a debt security as a result of changes in market rates of interest, based on, among other factors, the weighted average timing of the debt security's expected principal and interest payments. In general, duration represents the expected percentage change in the value of a security for an immediate 1% change in interest rates. Therefore, prices of debt securities with shorter durations tend to be less sensitive to interest rate changes than debt securities with longer durations. As the value of a debt security changes over time, so will its duration. LIQUIDITY RISK. The Fund invests a substantial portion of its assets in lower-quality debt issued by companies that are highly leveraged. Lower-quality debt tends to be less liquid than higher-quality debt. Moreover, smaller debt issues tend to be less liquid than larger debt issues. If the economy experiences a sudden downturn, or if the debt markets for such companies become distressed, the Fund may have particular difficulty selling its assets in sufficient amounts, at reasonable prices and in a sufficiently timely manner to raise the cash necessary to meet any potentially heavy redemption requests by Fund shareholders. As of the fourth quarter of 2015, the market for high yield debt has experienced decreased liquidity, and investor perception of increased risk has caused yield spreads to widen. Decreased liquidity may negatively affect the Fund's ability to mitigate risk and to meet redemptions. MANAGEMENT RISK. The Fund is subject to management risk because it is an actively managed portfolio. In managing the Fund's investment portfolio, the advisor will apply investment techniques and risk analyses that may not have the desired result. There can be no guarantee that the Fund will meet its investment objectives. MARKET RISK. Market risk is the risk that a particular security owned by the Fund or shares of the Fund in general may fall in value. Securities are subject to market fluctuations caused by such factors as economic, political, regulatory or market developments, changes in interest rates and perceived trends in securities prices. Shares of the Fund could decline in value or underperform other investments. MUNICIPAL LEASE OBLIGATIONS RISK. Participation interests in municipal leases pose special risks because many leases and contracts contain "non-appropriation" clauses that provide that the governmental issuer has no obligation to make future payments under the lease or contract unless money is appropriated for this purpose by the appropriate legislative body. MUNICIPAL SECURITIES MARKET LIQUIDITY RISK. Inventories of Municipal Securities held by brokers and dealers have decreased in recent years, lessening their ability to make a market in these securities. This reduction in market making capacity has the potential to decrease the Fund's ability to buy or sell Municipal Securities, and increase price volatility and trading costs, particularly during periods of economic or market stress. In addition, as of the fourth quarter of 2015, the market for high yield debt has experienced decreased liquidity, and investor perception of increased risk has caused yield spreads to widen. As a result, the Fund may be forced to accept a lower price to sell a Municipal Security, to sell other securities to raise cash, or to give up an investment opportunity, any of which could have a negative effect on performance. NON-DIVERSIFICATION RISK. The Fund is classified as "non-diversified" under the Investment Company Act of 1940 Act, as amended (the "1940 Act"). As a result, the Fund is only limited as to the percentage of its assets that may be invested in the securities of any one issuer by the diversification requirements imposed by the Internal Revenue Code of 1986, as amended (the "Code"). The Fund may invest a relatively high percentage of its assets in a limited number of issuers. As a result, the Fund may be more susceptible to a single adverse economic or regulatory occurrence affecting one or more of these issuers, experience increased volatility and be highly concentrated in certain issuers. POLITICAL AND ECONOMIC RISKS. The values of Municipal Securities held by the Fund may be adversely affected by local political and economic conditions and developments. Adverse conditions in an industry significant to a local economy could have a correspondingly adverse effect on the financial condition of local issuers. PORTFOLIO TURNOVER RISK. The Fund's strategy may frequently involve buying and selling portfolio securities to rebalance the Fund's exposure to various market sectors. High portfolio turnover may result in the Fund paying higher levels of transaction costs and generating greater tax liabilities for shareholders. Portfolio turnover risk may cause the Fund's performance to be less than you expect. SMALL FUND RISK. The Fund currently has fewer assets than larger funds, and like other relatively smaller funds, large inflows and outflows may impact the Fund's market exposure for limited periods of time. This impact may be positive or negative, depending on the direction of market movement during the period affected. Page 28 -------------------------------------------------------------------------------- ADDITIONAL INFORMATION (CONTINUED) -------------------------------------------------------------------------------- FIRST TRUST MANAGED MUNICIPAL ETF (FMB) OCTOBER 31, 2016 (UNAUDITED) TAX RISK. Interest income from Municipal Securities is normally not subject to regular federal income tax, but income from Municipal Securities held by the Fund could be declared taxable because of, among other things, unfavorable changes in tax laws, adverse interpretations by the Internal Revenue Service or state tax authorities or noncompliant conduct of a bond issuer. Consequently, the attractiveness of Municipal Securities in relation to other investment alternatives is affected by changes in federal income tax rates or changes in the tax-exempt status of interest income from Municipal Securities. ZERO COUPON BONDS RISK. Zero coupon bonds do not pay interest on a current basis and may be highly volatile as interest rates rise or fall. In addition, while such bonds generate income for purposes of generally accepted accounting standards, they do not generate cash flow and thus could cause the Fund to be forced to liquidate securities at an inopportune time in order to distribute cash, as required by tax laws. INVESTMENT MANAGEMENT AGREEMENT BOARD CONSIDERATIONS REGARDING CONTINUATION OF INVESTMENT MANAGEMENT AGREEMENT The Board of Trustees (the "Board") of the First Trust Exchange-Traded Fund III (the "Trust"), including the Independent Trustees, unanimously approved the continuation of the Investment Management Agreement (the "Agreement") with First Trust Advisors L.P. (the "Advisor" or "First Trust") on behalf of the First Trust Managed Municipal ETF (the "Fund"). The Board approved the continuation of the Agreement for a one-year period ending June 30, 2017 at a meeting held on June 13, 2016. The Board determined that the continuation of the Agreement is in the best interests of the Fund in light of the extent and quality of the services provided and such other matters as the Board considered to be relevant in the exercise of its reasonable business judgment. To reach this determination, the Board considered its duties under the Investment Company Act of 1940, as amended (the "1940 Act"), as well as under the general principles of state law in reviewing and approving advisory contracts; the requirements of the 1940 Act in such matters; the fiduciary duty of investment advisors with respect to advisory agreements and compensation; the standards used by courts in determining whether investment company boards have fulfilled their duties; and the factors to be considered by the Board in voting on such agreements. At meetings held on April 22, 2016 and June 13, 2016, the Board, including the Independent Trustees, reviewed materials provided by the Advisor responding to requests for information from counsel to the Independent Trustees that, among other things, outlined the services provided by the Advisor to the Fund (including the relevant personnel responsible for these services and their experience); the unitary fee rate payable by the Fund as compared to fees charged to a peer group of funds (most of which were exchange-traded funds ("ETFs")) compiled by Management Practice, Inc. ("MPI"), an independent source (the "MPI Peer Group"), and as compared to fees charged to other clients of the Advisor, including other ETFs managed by the Advisor; expenses of the Fund as compared to expense ratios of the funds in the MPI Peer Group; performance information for the Fund; the nature of expenses incurred in providing services to the Fund and the potential for economies of scale, if any; financial data on the Advisor; any fall-out benefits to the Advisor and its affiliate, First Trust Portfolios L.P. ("FTP"); and information on the Advisor's compliance program. The Board reviewed initial materials with the Advisor at a special meeting held on April 22, 2016, prior to which the Independent Trustees and their counsel met separately to discuss the information provided by the Advisor. Following the April meeting, independent legal counsel 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 independent legal counsel held prior to the June 13, 2016 meeting, as well as at the meeting held that day. The Board applied its business judgment to determine whether the arrangement between the Trust and the Advisor continues to be a reasonable business arrangement from the Fund's perspective as well as from the perspective of the Fund's shareholders. The Board determined that, given the totality of the information provided with respect to the Agreement, the Board had received sufficient information to renew the Agreement. The Board considered that shareholders chose to invest or remain invested in the Fund knowing that the Advisor manages the Fund and knowing the Fund's unitary fee. In reviewing the Agreement, the Board considered the nature, extent and quality of the services provided by the Advisor under the Agreement. The Board considered that the Advisor is responsible for the overall management and administration of the Trust and the Fund and reviewed all of the services provided by the Advisor to the Fund, as well as the background and experience of the persons responsible for such services. The Board noted that the Fund is an actively-managed ETF and noted that the Advisor's Municipal Securities Team is responsible for the day-to-day management of the Fund's investments. The Board considered the background and experience of the members of the Municipal Securities Team. The Board considered the Advisor's statement that it applies the same oversight model internally with its Municipal Securities Team as it uses for overseeing external sub-advisors. 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 and the Fund's compliance with the 1940 Act, as well as the Fund's compliance with its investment objectives and policies. In addition, as part of the Board's consideration of the Advisor's services, the Advisor, in its written materials and at the April 22, 2016 meeting, described to the Board the scope of its ongoing investment in additional infrastructure and personnel to maintain and improve the quality of services provided to the Fund and the other funds in the Page 29 -------------------------------------------------------------------------------- ADDITIONAL INFORMATION (CONTINUED) -------------------------------------------------------------------------------- FIRST TRUST MANAGED MUNICIPAL ETF (FMB) OCTOBER 31, 2016 (UNAUDITED) First Trust Fund Complex. 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 and the Fund by the Advisor under the Agreement have been and are expected to remain satisfactory and that the Advisor has managed the Fund consistent with the Fund's investment objectives and policies. The Board considered the unitary fee rate payable by the Fund under the Agreement for the services provided. The Board considered that as part of the unitary fee the Advisor is responsible for the Fund's expenses, including the cost of transfer agency, custody, fund administration, legal, audit and other services and license fees (if any), but excluding 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. The Board received and reviewed information showing the advisory or unitary fee rates and expense ratios of the peer funds in the MPI Peer Group, as well as advisory fee rates charged by the Advisor to other fund (including ETFs) and non-fund clients. Because the Fund's MPI Peer Group included peer funds that pay a unitary fee and because the 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 unitary fee for the Fund was above the median total (net) expense ratio of the peer funds in the MPI Peer Group. With respect to the MPI Peer Group, the Board discussed with representatives of the Advisor limitations in creating peer groups for actively-managed ETFs and different business models that may affect the pricing of services among ETF sponsors. The Board took these limitations and differences into account in considering the peer data. With respect to fees charged to other clients, the Board considered differences between the Fund and other clients that limited their comparability. In considering the unitary fee rate 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 description of its long-term commitment to the Fund. The Board considered performance information for the Fund. The Board noted the process it has established for monitoring the Fund's performance and portfolio risk on an ongoing basis, which includes quarterly performance reporting from the Advisor for the Fund. The Board determined that this process continues to be effective for reviewing the Fund's performance. The Board received and reviewed information comparing the Fund's performance for periods ended December 31, 2015 to the performance of the MPI Peer Group and to a benchmark index. Based on the information provided, the Board noted that the Fund outperformed the MPI Peer Group average for the one-year period and slightly underperformed the benchmark index for the one-year period ended December 31, 2015. On the basis of all the information provided on the unitary fee and performance of the Fund and the ongoing oversight by the Board, the Board concluded that the unitary fee for the Fund continues to be reasonable and appropriate in light of the nature, extent and quality of the services provided by the Advisor to the Fund under the Agreement. The Board considered information and discussed with the Advisor whether there were any economies of scale in connection with providing advisory services to the Fund and noted the Advisor's statement that it expects its expenses to increase over the next twelve months as the Advisor continues to make investments in personnel and infrastructure. The Board noted that any reduction in fixed costs associated with the management of the Fund would benefit the Advisor, but that the unitary fee structure provides a level of certainty in expenses for the Fund. The Board considered the revenues and allocated costs (including the allocation methodology) of the Advisor in serving as investment advisor to the Fund for the twelve months ended December 31, 2015 and the estimated profitability level for the 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 inherent limitations in the profitability analysis, and concluded that, based on the information provided, the Advisor's profitability level for the Fund was not unreasonable. In addition, the Board considered fall-out benefits described by the Advisor that may be realized from its relationship with the Fund. The Board considered that the Advisor had identified as a fall-out benefit to the Advisor and FTP their exposure to investors and brokers who, absent their exposure to the Fund, may have had no dealings with the Advisor or FTP, and noted that the Advisor does not utilize soft dollars in connection with its management of the Fund's portfolio. The Board also considered the Advisor's compensation for fund reporting services provided to the Fund pursuant to a separate Fund Reporting Services Agreement, which is paid from the unitary fee. Based on all of the information considered and the conclusions reached, the Board, including the Independent Trustees, unanimously determined that the terms of the Agreement continue to be fair and reasonable and that the continuation of the Agreement is in the best interests of the Trust and the Fund. No single factor was determinative in the Board's analysis. Page 30 -------------------------------------------------------------------------------- BOARD OF TRUSTEES AND OFFICERS -------------------------------------------------------------------------------- FIRST TRUST MANAGED MUNICIPAL ETF (FMB) OCTOBER 31, 2016 (UNAUDITED) The Trust's statement of additional information includes additional information about the Trustees and is available, without charge, upon request, by calling (800) 988-5891.

NUMBER OF OTHER PORTFOLIOS IN TRUSTEESHIPS OR TERM OF OFFICE THE FIRST TRUST DIRECTORSHIPS NAME, ADDRESS, AND YEAR FIRST FUND COMPLEX HELD BY TRUSTEE DATE OF BIRTH AND ELECTED OR PRINCIPAL OCCUPATIONS OVERSEEN BY DURING PAST POSITION WITH THE TRUST APPOINTED DURING PAST 5 YEARS TRUSTEE 5 YEARS ------------------------------------------------------------------------------------------------------------------------------------ INDEPENDENT TRUSTEES ------------------------------------------------------------------------------------------------------------------------------------ Richard E. Erickson, Trustee o Indefinite Term Physician; President, Wheaton Orthopedics; 137 None c/o First Trust Advisors L.P. Limited Partner, Gundersen Real Estate 120 E. Liberty Drive, o Since Inception Limited Partnership; Member, Sportsmed Suite 400 LLC (April 2007 to November 2015) Wheaton, IL 60187 D.O.B.: 04/51 Thomas R. Kadlec, Trustee o Indefinite Term President, ADM Investor Services, Inc. 137 Director of ADM c/o First Trust Advisors L.P. (Futures Commission Merchant) Investor Services, 120 E. Liberty Drive, o Since Inception Inc., ADM Suite 400 Investor Services Wheaton, IL 60187 International and D.O.B.: 11/57 Futures Industry Association Robert F. Keith, Trustee o Indefinite Term President, Hibs Enterprises (Financial and 137 Director of Trust c/o First Trust Advisors L.P. Management Consulting) Company of 120 E. Liberty Drive, o Since Inception Illinois Suite 400 Wheaton, IL 60187 D.O.B.: 11/56 Niel B. Nielson, Trustee o Indefinite Term Managing Director and Chief Operating 137 Director of c/o First Trust Advisors L.P. Officer (January 2015 to Present), Pelita Covenant 120 E. Liberty Drive, o Since Inception Harapan Educational Foundation Transport, Inc. Suite 400 (Educational Products and Services); (May 2003 to Wheaton, IL 60187 President and Chief Executive Officer May 2014) D.O.B.: 03/54 (June 2012 to September 2014), Servant Interactive LLC (Educational Products and Services); President and Chief Executive Officer (June 2012 to September 2014), Dew Learning LLC (Educational Products and Services); President (June 2002 to June 2012), Covenant College ------------------------------------------------------------------------------------------------------------------------------------ INTERESTED TRUSTEE ------------------------------------------------------------------------------------------------------------------------------------ James A. Bowen(1), Trustee, o Indefinite Term Chief Executive Officer, First Trust 137 None Chairman of the Board Advisors L.P. and First Trust Portfolios 120 E. Liberty Drive, o Since Inception L.P.; Chairman of the Board of Directors, Suite 400 BondWave LLC (Software Development Wheaton, IL 60187 Company) and Stonebridge Advisors LLC D.O.B.: 09/55 (Investment Advisor)

----------------------------- (1) Mr. Bowen is deemed an "interested person" of the Trust due to his position as Chief Executive Officer of First Trust Advisors L.P., investment advisor of the Trust. Page 31 -------------------------------------------------------------------------------- BOARD OF TRUSTEES AND OFFICERS (CONTINUED) -------------------------------------------------------------------------------- FIRST TRUST MANAGED MUNICIPAL ETF (FMB) OCTOBER 31, 2016 (UNAUDITED)

POSITION AND TERM OF OFFICE NAME, ADDRESS OFFICES AND LENGTH OF PRINCIPAL OCCUPATIONS AND DATE OF BIRTH WITH TRUST SERVICE DURING PAST 5 YEARS ------------------------------------------------------------------------------------------------------------------------------------ OFFICERS WHO ARE NOT TRUSTEES(2) ------------------------------------------------------------------------------------------------------------------------------------ James M. Dykas President and Chief o Indefinite Term Managing Director and Chief Financial Officer 120 E. Liberty Drive, Executive Officer (January 2016 to Present), Controller (January 2011 Suite 400 o Since January 2016 to January 2016), Senior Vice President (April 2007 Wheaton, IL 60187 to January 2016), First Trust Advisors L.P. and D.O.B.: 01/66 First Trust Portfolios L.P.; Chief Financial Officer, BondWave LLC (Software Development Company) (January 2016 to Present) and Stonebridge Advisors LLC (Investment Advisor) (January 2016 to Present) Donald P. Swade Treasurer, Chief Financial o Indefinite Term Senior Vice President (July 2016 to Present), Vice 120 E. Liberty Drive, Officer and Chief President (April 2012 to July 2016), First Trust Suite 400 Accounting Officer o Since January 2016 Advisors L.P. and First Trust Portfolios L.P.; Vice Wheaton, IL 60187 President (September 2006 to April 2012), D.O.B.: 08/72 Guggenheim Funds Investment Advisors, LLC/ Claymore Securities, Inc. W. Scott Jardine Secretary and Chief o Indefinite Term General Counsel, First Trust Advisors L.P., First 120 E. Liberty Drive, Legal Officer Trust Portfolios L.P.; Secretary and General Suite 400 o Since Inception Counsel, BondWave LLC; Secretary of Stonebridge Wheaton, IL 60187 Advisors LLC D.O.B.: 05/60 Daniel J. Lindquist Vice President o Indefinite Term Managing Director (July 2012 to Present), Senior 120 E. Liberty Drive, Vice President (September 2005 to July 2012), First Suite 400 o Since Inception Trust Advisors L.P. and First Trust Portfolios L.P. Wheaton, IL 60187 D.O.B: 02/70 Kristi A. Maher Chief Compliance Officer o Indefinite Term Deputy General Counsel, First Trust Advisors L.P. 120 E. Liberty Drive, and Assistant Secretary and First Trust Portfolios L.P. Suite 400 o Since Inception Wheaton, IL 60187 D.O.B.: 12/66 Roger F. Testin Vice President o Indefinite Term Senior Vice President, First Trust Advisors L.P. 120 E. Liberty Drive, and First Trust Portfolios L.P. Suite 400 o Since Inception Wheaton, IL 60187 D.O.B.: 06/66 Stan Ueland Vice President o Indefinite Term Senior Vice President (September 2012 to Present), 120 E. Liberty Drive, Vice President (August 2005 to September 2012), Suite 400 o Since Inception First Trust Advisors L.P. and First Trust Portfolios Wheaton, IL 60187 L.P. D.O.B.: 11/70

----------------------------- (2) The term "officer" means the president, vice president, secretary, treasurer, controller or any other officer who performs a policy making function. Page 32 -------------------------------------------------------------------------------- PRIVACY POLICY -------------------------------------------------------------------------------- FIRST TRUST MANAGED MUNICIPAL ETF (FMB) OCTOBER 31, 2016 (UNAUDITED) PRIVACY POLICY First Trust values our relationship with you and considers your privacy an important priority in maintaining that relationship. We are committed to protecting the security and confidentiality of your personal information. SOURCES OF INFORMATION We collect nonpublic personal information about you from the following sources: o Information we receive from you and your broker-dealer, investment advisor or financial representative through interviews, applications, agreements or other forms; o Information about your transactions with us, our affiliates or others; o Information we receive from your inquiries by mail, e-mail or telephone; and o Information we collect on our website through the use of "cookies". For example, we may identify the pages on our website that your browser requests or visits. INFORMATION COLLECTED The type of data we collect may include your name, address, social security number, age, financial status, assets, income, tax information, retirement and estate plan information, transaction history, account balance, payment history, investment objectives, marital status, family relationships and other personal information. DISCLOSURE OF INFORMATION We do not disclose any nonpublic personal information about our customers or former customers to anyone, except as permitted by law. In addition to using this information to verify your identity (as required under law), the permitted uses may also include the disclosure of such information to unaffiliated companies for the following reasons: o In order to provide you with products and services and to effect transactions that you request or authorize, we may disclose your personal information as described above to unaffiliated financial service providers and other companies that perform administrative or other services on our behalf, such as transfer agents, custodians and trustees, or that assist us in the distribution of investor materials such as trustees, banks, financial representatives, proxy services, solicitors and printers. o We may release information we have about you if you direct us to do so, if we are compelled by law to do so, or in other legally limited circumstances (for example to protect your account from fraud). In addition, in order to alert you to our other financial products and services, we may share your personal information within First Trust. PRIVACY ONLINE We allow third-party companies, including AddThis (a social media sharing service), to collect certain anonymous information when you visit our website. These companies may use non-personally identifiable information during your visits to this and other websites in order to provide advertisements about goods and services likely to be of greater interest to you. These companies typically use a cookie, third party web beacon or pixel tags, to collect this information. To learn more about this behavioral advertising practice, you can visit www.networkadvertising.org. CONFIDENTIALITY AND SECURITY With regard to our internal security procedures, First Trust restricts access to your nonpublic personal information to those First Trust employees who need to know that information to provide products or services to you. We maintain physical, electronic and procedural safeguards to protect your nonpublic personal information. POLICY UPDATES AND INQUIRIES As required by federal law, we will notify you of our privacy policy annually. We reserve the right to modify this policy at any time, however, if we do change it, we will tell you promptly. For questions about our policy, or for additional copies of this notice, please go to www.ftportfolios.com, or contact us at 1-800-621-1675 (First Trust Portfolios) or 1-800-222-6822 (First Trust Advisors). March 2016 Page 33 This page intentionally left blank. This page intentionally left blank. This page intentionally left blank. FIRST TRUST First Trust Exchange-Traded Fund III INVESTMENT ADVISOR First Trust Advisors L.P. 120 East Liberty Drive, Suite 400 Wheaton, IL 60187 ADMINISTRATOR, CUSTODIAN, FUND ACCOUNTANT & TRANSFER AGENT Brown Brothers Harriman & Co. 50 Post Office Square Boston, MA 02110 INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Deloitte & Touche LLP 111 S. Wacker Drive Chicago, IL 60606 LEGAL COUNSEL Chapman and Cutler LLP 111 W. Monroe Street Chicago, IL 60603 [BLANK BACK COVER] FIRST TRUST First Trust Exchange-Traded Fund III -------------------------------------------------------------------------------- First Trust Long/Short Equity ETF (FTLS) Annual Report For the Year Ended October 31, 2016 -------------------------------------------------------------------------------- TABLE OF CONTENTS -------------------------------------------------------------------------------- FIRST TRUST LONG/SHORT EQUITY ETF (FTLS) ANNUAL REPORT OCTOBER 31, 2016 Shareholder Letter........................................................... 1 Fund Performance Overview.................................................... 2 Portfolio Commentary......................................................... 5 Understanding Your Fund Expenses............................................. 7 Portfolio of Investments..................................................... 8 Statement of Assets and Liabilities.......................................... 17 Statement of Operations...................................................... 18 Statements of Changes in Net Assets.......................................... 19 Financial Highlights......................................................... 20 Notes to Financial Statements................................................ 21 Report of Independent Registered Public Accounting Firm...................... 26 Additional Information....................................................... 27 Board of Trustees and Officers............................................... 31 Privacy Policy............................................................... 33 CAUTION REGARDING FORWARD-LOOKING STATEMENTS This report contains certain forward-looking statements within the meaning of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended. Forward-looking statements include statements regarding the goals, beliefs, plans or current expectations of First Trust Advisors L.P. ("First Trust" or the "Advisor") and its representatives, taking into account the information currently available to them. Forward-looking statements include all statements that do not relate solely to current or historical fact. For example, forward-looking statements include the use of words such as "anticipate," "estimate," "intend," "expect," "believe," "plan," "may," "should," "would" or other words that convey uncertainty of future events or outcomes. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the series of First Trust Exchange-Traded Fund III (the "Trust") described in this report for the First Trust Long/Short Equity ETF (hereinafter referred to as the "Fund") to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. When evaluating the information included in this report, you are cautioned not to place undue reliance on these forward-looking statements, which reflect the judgment of the Advisor and its representatives only as of the date hereof. We undertake no obligation to publicly revise or update these forward-looking statements to reflect events and circumstances that arise after the date hereof. PERFORMANCE AND RISK DISCLOSURE There is no assurance that the Fund will achieve its investment objective. The Fund is subject to market risk, which is the possibility that the market values of securities owned by the Fund will decline and that the value of the Fund shares may therefore be less than what you paid for them. Accordingly, you can lose money by investing in the Fund. See "Risk Considerations" in the Additional Information section of this report for a discussion of certain other risks of investing in the Fund. Performance data quoted represents past performance, which is no guarantee of future results, and current performance may be lower or higher than the figures shown. For the most recent month-end performance figures, please visit http://www.ftportfolios.com or speak with your financial advisor. Investment returns, net asset value and share price will fluctuate and Fund shares, when sold, may be worth more or less than their original cost. The Advisor may also periodically provide additional information on Fund performance on the Fund's webpage at http://www.ftportfolios.com. HOW TO READ THIS REPORT This report contains information that may help you evaluate your investment in the Fund. It includes details about the Fund's portfolio and presents data and analysis that provide insight into the Fund's performance and investment approach. By reading the portfolio commentary by the portfolio management team of the Fund, you may obtain an understanding of how the market environment affected the Fund's performance. The statistical information that follows may help you understand the Fund's performance compared to that of a relevant market benchmark. It is important to keep in mind that the opinions expressed by personnel of the Advisor are just that: informed opinions. They should not be considered to be promises or advice. The opinions, like the statistics, cover the period through the date on the cover of this report. The material risks of investing in the Fund are spelled out in its prospectus, statement of additional information, this report and other Fund regulatory filings. -------------------------------------------------------------------------------- SHAREHOLDER LETTER -------------------------------------------------------------------------------- FIRST TRUST LONG/SHORT EQUITY ETF (FTLS) ANNUAL LETTER FROM THE CHAIRMAN AND CEO OCTOBER 31, 2016 Dear Shareholders: Thank you for your investment in First Trust Long/Short Equity ETF. First Trust Advisors L.P. ("First Trust") is pleased to provide you with the annual report which contains detailed information about your investment for the 12 months ended October 31, 2016, including a market overview and a performance analysis for the period. We encourage you to read this report and discuss it with your financial advisor. Early in 2016, many investors were concerned that the volatility witnessed in the stock market in 2015 would continue, and it did. During the first six months of the year, one of the events that affected the global markets was the "Brexit" vote (where citizens in the UK voted to leave the European Union). Just a few days after the historic vote, the global equity markets rebounded to close June 30, 2016 at a combined market capitalization of $62 trillion. As of October 31, 2016, the S&P 500(R) Index was up 5.87% calendar year-to-date, according to Bloomberg. From October 30, 2015 through October 31, 2016, the S&P 500(R) Index was also in positive territory at 4.51%. The last few months have had investors keenly watching the presidential election in anticipation of the outcome of the vote and its effect on the stock market and economy. I will discuss that more in my next letter. The current bull market (measuring from March 9, 2009 through October 31, 2016) is the second longest in history. First Trust believes that having a long-term investment horizon and investing in quality products can help you reach your goals, regardless of ups and downs in the market. We strive to provide quality investment products, which has been one of the hallmarks of our firm since its inception more than 25 years ago. Thank you for giving First Trust the opportunity to be a part of your investment plan. We value our relationship with you and will continue to focus on helping investors like you reach your financial goals. Sincerely, /s/ James A. Bowen James A. Bowen Chairman of the Board of Trustees Chief Executive Officer of First Trust Advisors L.P. Page 1 -------------------------------------------------------------------------------- FUND PERFORMANCE OVERVIEW (UNAUDITED) -------------------------------------------------------------------------------- FIRST TRUST LONG/SHORT EQUITY ETF (FTLS) The investment objective of First Trust Long/Short Equity ETF (the "Fund") is to seek to provide investors with long-term total return. The Fund pursues its objective by establishing long and short positions in a portfolio of Equity Securities (as defined below). Under normal circumstances, at least 80% of the Fund's net assets (including investment borrowings) will be exposed to U.S. exchange-listed equity securities of U.S. and foreign companies by investing in such securities directly and/or in U.S. exchange-traded funds ("ETFs") that provide exposure to such securities. The securities of the companies and ETFs in which the Fund will invest are referred to collectively as "Equity Securities." The Equity Securities held by the Fund may include U.S. exchange-listed equity securities of foreign issuers, as well as investments in the equity securities of foreign issuers that are in the form of depositary receipts. The Fund takes long and short positions in Equity Securities. As opposed to taking long positions in which an investor seeks to profit from increases in the price of a security, short selling is a technique that will be used by the Fund to try and profit from the falling price of a security. Short selling involves selling a security that has been borrowed from a third party with the intention of buying an identical security back at a later date to return to that third party. Having both long and short positions in an equity security portfolio is a common way to create returns that are independent of market moves. One advantage of a long and short portfolio is that the long and short positions may offset one another in a manner that results in a lower net exposure to the direction of the market. In addition, cash balances arising from the use of short selling typically will be held in money market instruments.

--------------------------------------------------------------------------------------------------- PERFORMANCE --------------------------------------------------------------------------------------------------- AVERAGE ANNUAL CUMULATIVE TOTAL RETURNS TOTAL RETURNS 1 Year Ended Inception (9/8/14) Inception (9/8/14) 10/31/16 to 10/31/16 to 10/31/16 FUND PERFORMANCE NAV 0.45% 4.59% 10.10% Market Price 0.39% 4.62% 10.16% INDEX PERFORMANCE S&P 500 Index 4.51% 5.03% 11.10% ---------------------------------------------------------------------------------------------------

Total returns for the periods since inception are calculated from the inception date of the 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 period indicated. The Fund's per share net asset value ("NAV") is the value of one share of the Fund and is computed by dividing the value of all assets of the Fund (including accrued interest and dividends), less all liabilities (including accrued expenses and dividends declared but unpaid), by the total number of outstanding shares. The price used to calculate market return ("Market Price") is determined by using the midpoint between the highest bid and the lowest offer on the stock exchange on which shares of the Fund are listed for trading as of the time that the Fund's NAV is calculated. Since shares of the Fund did not trade in the secondary market until after its inception, for the period from inception to the first day of secondary market trading in shares of the Fund, the NAV of the Fund is used as a proxy for the secondary market trading price to calculate market returns. NAV and market price returns assume that all distributions have been reinvested in the Fund at NAV and Market Price, respectively. An index is a statistical composite that tracks a specified financial market or sector. Unlike the Fund, the index does not actually hold a portfolio of securities and therefore does not incur the expenses incurred by the Fund. These expenses negatively impact the performance of the Fund. Also, market returns do not include brokerage commissions that may be payable on secondary market transactions. If brokerage commissions were included, market returns would be lower. The total returns presented reflect the reinvestment of dividends on securities in the index. The returns presented do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. The investment return and principal value of shares of the Fund will vary with changes in market conditions. Shares of the Fund may be worth more or less than their original cost when they are redeemed or sold in the market. The Fund's past performance is no guarantee of future performance. Page 2 -------------------------------------------------------------------------------- FUND PERFORMANCE OVERVIEW (UNAUDITED) (CONTINUED) -------------------------------------------------------------------------------- FIRST TRUST LONG/SHORT EQUITY ETF (FTLS) ----------------------------------------------------------- % OF LONG-TERM PORTFOLIO SECTOR ALLOCATION INVESTMENTS ----------------------------------------------------------- Information Technology 22.0% Health Care 15.6 Industrials 15.6 Financials 12.0 Consumer Discretionary 11.0 Consumer Staples 8.4 Energy 5.0 Materials 4.2 Telecommunication Services 3.3 Real Estate 2.5 Utilities 0.4 ------- Total 100.0% ======= ----------------------------------------------------------- % OF INVESTMENTS PORTFOLIO SECTOR ALLOCATION SOLD SHORT ----------------------------------------------------------- Information Technology 15.0% Health Care 14.9 Financials 12.6 Industrials 12.0 Consumer Discretionary 11.7 Energy 9.5 Consumer Staples 8.2 Materials 7.0 Real Estate 6.3 Telecommunication Services 2.8 ------- Total 100.0% ======= ----------------------------------------------------------- TOP TEN LONG-TERM INVESTMENTS % OF NET ASSETS ----------------------------------------------------------- QUALCOMM, Inc. 2.2% Apple, Inc. 2.1 Waste Management, Inc. 2.0 United Parcel Service, Inc., Class B 2.0 Johnson & Johnson 2.0 Alphabet, Inc., Class C 2.0 Wal-Mart Stores, Inc. 2.0 Texas Entrustments, Inc. 2.0 RE/MAX Holdings, Inc., Class A 1.9 TJX (The) Cos., Inc. 1.9 ------- Total 20.1% ======= ----------------------------------------------------------- TOP TEN INVESTMENTS SOLD SHORT % OF NET ASSETS ----------------------------------------------------------- SPDR S&P 500 ETF Trust -2.0% ServiceNow, Inc. -0.5 Teradyne, Inc. -0.4 Silgan Holdings, Inc. -0.4 Chevron Corp. -0.4 Ultimate Software Group, Inc. -0.4 Coca-Cola European Partners PL -0.4 Orbital ATK, Inc. -0.4 Vista Outdoor, Inc. -0.4 McDonald's Corp. -0.4 ------- Total -5.7% ======= Page 3 -------------------------------------------------------------------------------- FUND PERFORMANCE OVERVIEW (UNAUDITED) (CONTINUED) -------------------------------------------------------------------------------- FIRST TRUST LONG/SHORT EQUITY ETF (FTLS)

PERFORMANCE OF A $10,000 INITIAL INVESTMENT SEPTEMBER 8, 2014 - OCTOBER 31, 2016 First Trust Long/Short S&P 500 Equity ETF Index 9/8/14 $10,000 $10,000 10/31/14 10,186 10,105 4/30/15 10,895 10,550 10/31/15 10,960 10,631 4/30/16 10,701 10,676 10/31/16 11,009 11,109

Performance figures assume reinvestment of all distributions and do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. An index is a statistical composite that tracks a specified financial market or sector. Unlike the Fund, the index does not actually hold a portfolio of securities and therefore does not incur the expenses incurred by the Fund. These expenses negatively impact the performance of the Fund. The Fund's past performance does not predict future performance. FREQUENCY DISTRIBUTION OF DISCOUNTS AND PREMIUMS BID/ASK MIDPOINT VS. NAV THROUGH OCTOBER 31, 2016 The following Frequency Distribution of Discounts and Premiums charts are provided to show the frequency at which the bid/ask midpoint price for the Fund was at a discount or premium to the daily NAV. The following tables are for comparative purposes only and represent the period September 9, 2014 (commencement of trading) through October 31, 2016. Shareholders may pay more than NAV when they buy Fund shares and receive less than NAV when they sell those shares because shares are bought and sold at current market price. Data presented represents past performance and cannot be used to predict future results. -------------------------------------------------------------------------------- NUMBER OF DAYS BID/ASK MIDPOINT AT/ABOVE NAV -------------------------------------------------------------------------------- FOR THE PERIOD 0.00%-0.49% 0.50%-0.99% 1.00%-1.99 >=2.00% 9/9/14 - 10/31/14 23 3 0 0 11/1/14 - 10/31/15 190 7 0 1 11/1/15 - 10/31/16 170 0 0 0 -------------------------------------------------------------------------------- NUMBER OF DAYS BID/ASK MIDPOINT BELOW NAV -------------------------------------------------------------------------------- FOR THE PERIOD 0.00%-0.49% 0.50%-0.99% 1.00%-1.99% >=2.00% 9/9/14 - 10/31/14 9 4 0 0 11/1/14 - 10/31/15 41 12 0 0 11/1/15 - 10/31/16 81 1 0 0 Page 4 -------------------------------------------------------------------------------- PORTFOLIO COMMENTARY -------------------------------------------------------------------------------- FIRST TRUST LONG/SHORT EQUITY ETF (FTLS) ANNUAL REPORT OCTOBER 31, 2016 (UNAUDITED) INVESTMENT MANAGER The First Trust Advisors L.P. ("First Trust") Alternatives & Active Management Team was formed in July of 2011 and is headed by John Gambla, CFA, FRM, PRM and Rob Guttschow, CFA. Prior to joining First Trust, Messrs. Gambla and Guttschow were Co-Chief Investment Officers at Nuveen Hyde Park, a quantitative money manager. The team focuses on systematic and disciplined strategies using a variety of statistical techniques along with a fundamental overlay based upon their combined 40+ years of investment experience. Currently the team manages/consults for a variety of portfolios structured as exchanged-traded funds and separately managed accounts in the United States. PORTFOLIO MANAGEMENT TEAM JOHN GAMBLA - CFA, FRM, PRM, SENIOR PORTFOLIO MANAGER OF FIRST TRUST, FTA-ALTERNATIVES & ACTIVE MANAGEMENT TEAM ROB GUTTSCHOW - CFA, SENIOR PORTFOLIO MANAGER OF FIRST TRUST, FTA-ALTERNATIVES & ACTIVE MANAGEMENT TEAM COMMENTARY FIRST TRUST LONG/SHORT EQUITY ETF The First Trust Long/Short Equity ETF (the "Fund" or "FTLS") is an actively managed exchange-traded fund. The Fund's primary investment objective is to seek to provide investors with long-term total return. The Fund intends to pursue its investment objective by establishing long and short positions in a portfolio of equity securities. Under normal circumstances, at least 80% of the Fund's net assets (including investment borrowings) will be exposed to U.S. exchange-listed equity securities of U.S. and non-U.S. companies. This exposure is achieved by investing in such securities directly and/or in U.S. exchange-traded funds ("ETFs") that provide exposure to such securities. OVERALL MARKET RECAP U.S. economic growth remained positive but uninspiring during the year ended October 31, 2016. During the period, U.S. GDP grew by an estimated 1.1% with the headline U.S. unemployment rate remaining steady at approximately 5.0%. The total number of non-farm payroll jobs added to the U.S. economy during the fiscal period, as measured by the Bureau of Labor Statistics, was approximately 2.45 million. We believe the overall steady performance of the U.S. economy and the relatively unchanged unemployment rate, combined with a patient, wait-and-see dovish approach by the Federal Reserve Open Market Committee ("FOMC") boosted investor confidence, thereby lifting U.S. equity markets (S&P 500(R) Index, the "Benchmark") to a total return of 4.51% for the fiscal period. The FOMC raised rates once during the fiscal period, increasing the Fed Funds rate from 0.25% to 0.50% in December 2015. At the time of the increase, the market was projecting the possibility of two to three increases in 2016. As economic growth slowed slightly from the 2.0% range of 2015 to the 1.1% growth rate reported above, the FOMC slowly walked back their December 2015 hawkish tone, providing a confidence boost to U.S. markets after each FOMC meeting. The market's performance for the fiscal period did not come without challenges. Revenue growth for the Index started the fiscal period in negative territory and only gradually improved to positive year-over-year numbers by the end of the fiscal period. Operating earnings, as measured by Standard & Poor's, were in double-digit negative territory after the Q1 2016 reporting period, before also improving through Q2 and Q3. Finally, the unexpected outcome of the Republican primary process and the Brexit vote of June 2016, when voters opted to leave the European Union, both created large uncertainties going forward. Despite the uncertainties, risk assets rallied during the period with the Benchmark up 4.51%. Bond investors also benefitted from the dovish FOMC non-actions, as ten year treasury yields declined by 0.32%, ending the year at 1.83%. FUND PERFORMANCE - FTLS The Fund returned 0.39% on a market price basis and 0.45% on a net asset value ("NAV") basis for the period from October 31, 2015 through October 31, 2016. The Benchmark returned 4.51% during the fiscal period. The Fund's investment process involves constructing both a long and short portfolio consisting of at least 80% in U.S. exchange-listed equity securities of U.S. and foreign companies such as common stocks and ETFs. The portfolio management team follows a systematic portfolio construction process designed to balance the drivers of risk and return that exist between the long and short positions. The investment process uses Sabrient/Gradient's EQR model ranking as an input in determining holdings, both long and short. Additional proprietary research is used to build the portfolios and to tactically manage both the overall percentage and composition of the long and short exposures in the portfolio. Page 5 -------------------------------------------------------------------------------- PORTFOLIO COMMENTARY (CONTINUED) -------------------------------------------------------------------------------- FIRST TRUST LONG/SHORT EQUITY ETF (FTLS) ANNUAL REPORT OCTOBER 31, 2016 (UNAUDITED) For the fiscal period, the Fund returned 0.45% on an NAV basis. The Fund's net equity exposure varied between 60% and 80% with the long positions being held at a fully invested position of approximately 98-100% and short positions varying between 20% and 40%. During the period, the Fund underperformed the Benchmark as the Fund's short positions and the Fund's relative underweights in Energy and Health Care were drags on relative performance. Offsetting some of the relative underperformance was positive performance from the Consumer Discretionary sector and Real Estate sectors, as the Fund's allocation to those sectors along with the Fund's stock picks in those sectors added significant relative performance. Inclusive of all fees, the Fund unperformed the Benchmark by 4.06% during the fiscal period. MARKET AND FUND OUTLOOK Today, we believe the Fund is well positioned to achieve its objective of seeking to provide investors with long term total return. The Fund is invested in a broad array of U.S. equity securities with a net market exposure of approximately 80% versus its unmanaged Benchmark's exposure of 100%. We believe the Fund's combination of a broadly diversified portfolio that is long high-quality stocks and short low-quality stocks (as measured by an earnings quality model) positions the Fund well to continue to achieve its investment objective of seeking to provide investors with long term total return. Page 6 FIRST TRUST LONG/SHORT EQUITY ETF (FTLS) UNDERSTANDING YOUR FUND EXPENSES OCTOBER 31, 2016 (UNAUDITED) As a shareholder of First Trust Long/Short Equity ETF (the "Fund") you incur two types of costs: (1) transaction costs; and (2) ongoing costs, including management fees, distribution and/or service fees, if any, and other Fund expenses. This Example is intended to help you understand your ongoing costs of investing in the Fund and to compare these costs with the ongoing costs of investing in other funds. The Example is based on an investment of $1,000 invested at the beginning of the period and held through the six-month period ended October 31, 2016. ACTUAL EXPENSES The first line in the following table provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled "Expenses Paid During the Six-Month Period" to estimate the expenses you paid on your account during this six-month period. HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES The second line in the following table provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs such as brokerage commissions. Therefore, the second line in the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.

---------------------------------------------------------------------------------------------------------------------------- ANNUALIZED EXPENSES PAID BEGINNING ENDING EXPENSE RATIO DURING THE ACCOUNT VALUE ACCOUNT VALUE BASED ON THE SIX-MONTH MAY 1, 2016 OCTOBER 31, 2016 SIX-MONTH PERIOD PERIOD (a) ---------------------------------------------------------------------------------------------------------------------------- FIRST TRUST LONG/SHORT EQUITY ETF Actual $1,000.00 $1,028.80 1.33% $6.78 Hypothetical (5% return before expenses) $1,000.00 $1,018.45 1.33% $6.75

(a) Expenses are equal to the annualized expense ratio as indicated in the table, multiplied by the average account value over the period (May 1, 2016 through October 31, 2016), and multiplied by 184/366 (to reflect the one-half year period). Page 7 FIRST TRUST LONG/SHORT EQUITY ETF (FTLS) PORTFOLIO OF INVESTMENTS OCTOBER 31, 2016

SHARES DESCRIPTION VALUE ------------ ------------------------------------------------------------------------------------------------ ------------- COMMON STOCKS - 85.6% AEROSPACE & DEFENSE - 1.0% 13,979 DigitalGlobe, Inc. (a).......................................................................... $ 350,873 5,339 Huntington Ingalls Industries, Inc. (b)......................................................... 861,501 ------------- 1,212,374 ------------- AIR FREIGHT & LOGISTICS - 2.0% 22,365 United Parcel Service, Inc., Class B............................................................ 2,410,052 ------------- AIRLINES - 0.9% 19,238 United Continental Holdings, Inc. (a)........................................................... 1,081,753 ------------- AUTO COMPONENTS - 0.3% 21,184 Gentex Corp..................................................................................... 358,221 ------------- AUTOMOBILES - 0.6% 58,662 Ford Motor Co................................................................................... 688,692 ------------- BANKS - 2.6% 20,098 CIT Group, Inc.................................................................................. 730,161 31,997 HSBC Holdings PLC, ADR.......................................................................... 1,204,047 17,032 JPMorgan Chase & Co............................................................................. 1,179,636 ------------- 3,113,844 ------------- BIOTECHNOLOGY - 5.2% 14,269 AbbVie, Inc..................................................................................... 795,925 14,088 Amgen, Inc. (b)................................................................................. 1,988,662 3,325 Biogen, Inc. (a)................................................................................ 931,598 33,405 Exelixis, Inc. (a).............................................................................. 353,759 20,819 Gilead Sciences, Inc. (b)....................................................................... 1,532,903 4,960 TESARO, Inc. (a)................................................................................ 599,565 ------------- 6,202,412 ------------- CHEMICALS - 1.3% 15,827 Dow Chemical (The) Co. (b)...................................................................... 851,651 7,991 Scotts Miracle-Gro (The) Co., Class A........................................................... 703,927 ------------- 1,555,578 ------------- COMMERCIAL SERVICES & SUPPLIES - 4.1% 9,685 Deluxe Corp..................................................................................... 592,722 37,255 Republic Services, Inc. (b)..................................................................... 1,960,730 37,068 Waste Management, Inc........................................................................... 2,433,885 ------------- 4,987,337 ------------- COMMUNICATIONS EQUIPMENT - 0.3% 37,541 Brocade Communications Systems, Inc............................................................. 397,935 ------------- CONSTRUCTION & ENGINEERING - 1.2% 26,189 Argan, Inc...................................................................................... 1,488,845 ------------- CONSUMER FINANCE - 0.3% 5,564 Capital One Financial Corp. (b)................................................................. 411,959 ------------- CONTAINERS & PACKAGING - 1.9% 23,912 International Paper Co.......................................................................... 1,076,757 14,264 Packaging Corp. of America...................................................................... 1,176,780 ------------- 2,253,537 ------------- DIVERSIFIED CONSUMER SERVICES - 0.8% 7,621 Capella Education Co............................................................................ 557,095 19,019 H&R Block, Inc.................................................................................. 436,867 ------------- 993,962 -------------

Page 8 See Notes to Financial Statements FIRST TRUST LONG/SHORT EQUITY ETF (FTLS) PORTFOLIO OF INVESTMENTS (CONTINUED) OCTOBER 31, 2016

SHARES DESCRIPTION VALUE ------------ ------------------------------------------------------------------------------------------------ ------------- COMMON STOCKS (CONTINUED) DIVERSIFIED TELECOMMUNICATION SERVICES - 2.7% 84,910 Centurylink, Inc. (b)........................................................................... $ 2,256,908 20,768 Verizon Communications, Inc..................................................................... 998,941 ------------- 3,255,849 ------------- ELECTRICAL EQUIPMENT - 0.7% 16,671 Emerson Electric Co............................................................................. 844,886 ------------- ELECTRONIC EQUIPMENT, INSTRUMENTS & COMPONENTS - 2.6% 18,261 Jabil Circuit, Inc.............................................................................. 389,690 6,098 SYNNEX Corp..................................................................................... 625,289 5,551 Tech Data Corp. (a)............................................................................. 427,538 128,555 TTM Technologies, Inc. (a)...................................................................... 1,690,498 ------------- 3,133,015 ------------- ENERGY EQUIPMENT & SERVICES - 0.3% 6,109 Helmerich & Payne, Inc.......................................................................... 385,539 ------------- FOOD & STAPLES RETAILING - 3.1% 11,490 United Natural Foods, Inc. (a).................................................................. 479,593 33,792 Wal-Mart Stores, Inc. (b)....................................................................... 2,366,116 10,487 Walgreens Boots Alliance, Inc................................................................... 867,589 ------------- 3,713,298 ------------- FOOD PRODUCTS - 0.9% 2,446 JM Smucker (The) Co............................................................................. 321,184 15,600 Omega Protein Corp. (a)......................................................................... 347,880 5,054 Tyson Foods, Inc., Class A...................................................................... 358,076 ------------- 1,027,140 ------------- HEALTH CARE EQUIPMENT & SUPPLIES - 0.3% 9,468 Insulet Corp. (a)............................................................................... 351,452 ------------- HEALTH CARE PROVIDERS & SERVICES - 4.8% 9,084 Aetna, Inc...................................................................................... 975,167 18,799 American Renal Associates Holdings, Inc. (a).................................................... 331,990 16,960 Express Scripts Holding Co. (a) (b)............................................................. 1,143,104 16,055 Healthways, Inc. (a)............................................................................ 398,164 3,004 McKesson Corp................................................................................... 382,019 11,989 Molina Healthcare, Inc. (a)..................................................................... 652,322 22,453 Quest Diagnostics, Inc. (b)..................................................................... 1,828,572 ------------- 5,711,338 ------------- HOTELS, RESTAURANTS & LEISURE - 0.3% 8,147 Carnival Corp................................................................................... 400,018 ------------- HOUSEHOLD PRODUCTS - 1.6% 22,001 Procter & Gamble (The) Co. (b).................................................................. 1,909,687 ------------- INTERNET SOFTWARE & SERVICES - 3.4% 3,045 Alphabet, Inc., Class C (c)..................................................................... 2,388,924 43,585 eBay, Inc. (a) (b).............................................................................. 1,242,608 12,180 Sohu.com, Inc. (a).............................................................................. 455,898 ------------- 4,087,430 ------------- IT SERVICES - 1.6% 3,358 Accenture PLC, Class A.......................................................................... 390,334 8,353 Cardtronics PLC, Class A (a).................................................................... 417,650 8,272 Syntel, Inc..................................................................................... 166,267 47,870 Western Union Co................................................................................ 960,751 ------------- 1,935,002 -------------

See Notes to Financial Statements Page 9 FIRST TRUST LONG/SHORT EQUITY ETF (FTLS) PORTFOLIO OF INVESTMENTS (CONTINUED) OCTOBER 31, 2016

SHARES DESCRIPTION VALUE ------------ ------------------------------------------------------------------------------------------------ ------------- COMMON STOCKS (CONTINUED) MACHINERY - 2.0% 17,764 Barnes Group, Inc............................................................................... $ 707,718 8,753 Cummins, Inc. (b)............................................................................... 1,118,808 25,799 Trinity Industries, Inc......................................................................... 550,809 ------------- 2,377,335 ------------- MEDIA - 0.3% 27,656 News Corp., Class A............................................................................. 335,191 ------------- METALS & MINING - 0.6% 10,750 Newmont Mining Corp............................................................................. 398,180 7,598 Nucor Corp...................................................................................... 371,162 ------------- 769,342 ------------- MULTILINE RETAIL - 2.5% 24,654 Kohl's Corp. (b)................................................................................ 1,078,613 27,148 Target Corp. (b)................................................................................ 1,865,882 ------------- 2,944,495 ------------- OIL, GAS & CONSUMABLE FUELS - 2.6% 21,715 Exxon Mobil Corp. (b)........................................................................... 1,809,294 13,965 Marathon Petroleum Corp......................................................................... 608,734 12,869 Valero Energy Corp. (b)......................................................................... 762,360 ------------- 3,180,388 ------------- PERSONAL PRODUCTS - 1.1% 6,552 Nu Skin Enterprises, Inc., Class A.............................................................. 403,931 21,391 Unilever NV..................................................................................... 894,571 ------------- 1,298,502 ------------- PHARMACEUTICALS - 5.0% 16,955 Horizon Pharma PLC (a).......................................................................... 283,488 20,622 Johnson & Johnson (b)........................................................................... 2,391,946 4,689 Mallinckrodt PLC (a)............................................................................ 277,870 30,068 Merck & Co., Inc. (b)........................................................................... 1,765,593 31,320 Pfizer, Inc..................................................................................... 993,157 2,883 Taro Pharmaceutical Industries Ltd. (a)......................................................... 292,653 ------------- 6,004,707 ------------- PROFESSIONAL SERVICES - 1.0% 50,039 Navigant Consulting, Inc. (a)................................................................... 1,170,913 ------------- REAL ESTATE MANAGEMENT & DEVELOPMENT - 1.9% 53,003 RE/MAX Holdings, Inc., Class A (b).............................................................. 2,302,980 ------------- ROAD & RAIL - 2.2% 9,778 Norfolk Southern Corp........................................................................... 909,354 20,046 Union Pacific Corp. (b)......................................................................... 1,767,656 ------------- 2,677,010 ------------- SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT - 8.2% 18,930 Applied Materials, Inc.......................................................................... 550,484 54,040 Intel Corp. (b)................................................................................. 1,884,375 39,096 QUALCOMM, Inc................................................................................... 2,686,677 22,296 SolarEdge Technologies, Inc. (a)................................................................ 305,455 67,284 Taiwan Semiconductor Manufacturing Co., Ltd., ADR............................................... 2,092,533 33,286 Texas Instruments, Inc. (b)..................................................................... 2,358,313 ------------- 9,877,837 ------------- SOFTWARE - 1.4% 53,814 CA, Inc. (b).................................................................................... 1,654,242 -------------

Page 10 See Notes to Financial Statements FIRST TRUST LONG/SHORT EQUITY ETF (FTLS) PORTFOLIO OF INVESTMENTS (CONTINUED) OCTOBER 31, 2016

SHARES/ UNITS DESCRIPTION VALUE ------------ ------------------------------------------------------------------------------------------------ ------------- COMMON STOCKS (CONTINUED) SPECIALTY RETAIL - 4.2% 906 AutoZone, Inc. (a) (b).......................................................................... $ 672,397 10,377 Home Depot (The), Inc. (b)...................................................................... 1,266,098 13,037 Lowe's Cos., Inc................................................................................ 868,916 31,058 TJX (The) Cos., Inc. (b)........................................................................ 2,290,527 ------------- 5,097,938 ------------- TECHNOLOGY HARDWARE, STORAGE & PERIPHERALS - 3.9% 22,639 Apple, Inc. (b)................................................................................. 2,570,432 96,550 HP, Inc......................................................................................... 1,399,010 21,067 NetApp, Inc..................................................................................... 715,014 ------------- 4,684,456 ------------- TEXTILES, APPAREL & LUXURY GOODS - 1.7% 41,158 Michael Kors Holdings Ltd. (a).................................................................. 2,090,003 ------------- TOBACCO - 1.6% 28,769 Altria Group, Inc............................................................................... 1,902,206 ------------- WIRELESS TELECOMMUNICATION SERVICES - 0.6% 109,054 Sprint Corp. (a)................................................................................ 671,773 ------------- TOTAL COMMON STOCKS............................................................................. 102,950,473 (Cost $100,371,754) ------------- REAL ESTATE INVESTMENT TRUSTS - 0.6% EQUITY REAL ESTATE INVESTMENT TRUSTS - 0.6% 55,793 Ashford Hospitality Trust, Inc.................................................................. 324,157 12,452 Hospitality Properties Trust.................................................................... 340,687 ------------- TOTAL REAL ESTATE INVESTMENT TRUSTS............................................................. 664,844 (Cost $755,135) ------------- MASTER LIMITED PARTNERSHIPS - 2.6% CHEMICALS - 0.3% 3,833 Terra Nitrogen Co, L.P.......................................................................... 397,636 ------------- GAS UTILITIES - 0.4% 9,747 AmeriGas Partners, L.P.......................................................................... 465,419 ------------- OIL, GAS & CONSUMABLE FUELS - 1.9% 43,484 Alliance Resource Partners, L.P................................................................. 1,087,100 5,486 Buckeye Partners, L.P. (b)...................................................................... 354,066 14,367 Enterprise Products Partners, L.P............................................................... 362,623 11,689 ONEOK Partners, L.P............................................................................. 464,521 ------------- 2,268,310 ------------- TOTAL MASTER LIMITED PARTNERSHIPS............................................................... 3,131,365 (Cost $2,960,609) ------------- EXCHANGE-TRADED FUNDS - 8.7% CAPITAL MARKETS - 8.7% 17,706 iShares Core S&P Small-Cap ETF.................................................................. 2,101,171 17,720 iShares Russell 2000 ETF........................................................................ 2,099,820 14,801 iShares Russell 2000 Growth ETF................................................................. 2,070,216 20,997 iShares Russell 2000 Value ETF.................................................................. 2,130,775 17,846 Vanguard Small-Cap ETF.......................................................................... 2,091,908 ------------- TOTAL EXCHANGE-TRADED FUNDS..................................................................... 10,493,890 (Cost $9,887,869) ------------- TOTAL INVESTMENTS - 97.5%....................................................................... 117,240,572 (Cost $113,975,367) (d) -------------

See Notes to Financial Statements Page 11 FIRST TRUST LONG/SHORT EQUITY ETF (FTLS) PORTFOLIO OF INVESTMENTS (CONTINUED) OCTOBER 31, 2016

SHARES DESCRIPTION VALUE ------------ ------------------------------------------------------------------------------------------------ ------------- COMMON STOCKS SOLD SHORT - (16.9%) AEROSPACE & DEFENSE - (0.5%) (6,019) Orbital ATK, Inc................................................................................ $ (447,573) (1,024) Rockwell Collins, Inc........................................................................... (86,343) (804) United Technologies Corp........................................................................ (82,169) ------------- (616,085) ------------- AIR FREIGHT & LOGISTICS - (0.2%) (5,743) Atlas Air Worldwide Holdings, Inc. (a).......................................................... (240,345) ------------- AUTOMOBILES - (0.1%) (2,735) General Motors Co............................................................................... (86,426) ------------- BANKS - (0.1%) (2,010) U.S. Bancorp.................................................................................... (89,968) ------------- BEVERAGES - (1.2%) (10,251) Coca-Cola (The) Co.............................................................................. (434,643) (11,721) Coca-Cola European Partners PLC................................................................. (450,555) (1,202) Constellation Brands, Inc., Class A............................................................. (200,878) (2,373) Molson Coors Brewing Co., Class B............................................................... (246,341) (1,038) PepsiCo, Inc.................................................................................... (111,274) ------------- (1,443,691) ------------- BIOTECHNOLOGY - (0.6%) (2,540) ACADIA Pharmaceuticals, Inc. (a)................................................................ (59,208) (3,644) Acceleron Pharma, Inc. (a)...................................................................... (102,141) (5,207) Dynavax Technologies Corp. (a).................................................................. (48,165) (9,419) Emergent BioSolutions, Inc. (a)................................................................. (251,676) (1,367) Incyte Corp. (a)................................................................................ (118,888) (4,535) Portola Pharmaceuticals, Inc. (a)............................................................... (82,446) (1,280) Ultragenyx Pharmaceutical, Inc. (a)............................................................. (75,507) ------------- (738,031) ------------- BUILDING PRODUCTS - (0.1%) (3,106) Armstrong World Industries, Inc. (a)............................................................ (116,475) ------------- CHEMICALS - (0.6%) (2,005) Cabot Corp...................................................................................... (104,541) (3,158) Ecolab, Inc..................................................................................... (360,549) (828) PPG Industries, Inc............................................................................. (77,111) (2,035) Praxair, Inc.................................................................................... (238,217) ------------- (780,418) ------------- COMMERCIAL SERVICES & SUPPLIES - (0.4%) (9,244) Covanta Holding Corp............................................................................ (138,660) (20,999) Essendant, Inc.................................................................................. (322,335) ------------- (460,995) ------------- COMMUNICATIONS EQUIPMENT - (0.3%) (3,906) EchoStar Corp., Class A (a)..................................................................... (182,567) (3,158) ViaSat, Inc. (a)................................................................................ (223,144) ------------- (405,711) ------------- CONSTRUCTION & ENGINEERING - (0.1%) (7,836) Aegion Corp. (a)................................................................................ (145,044) ------------- CONTAINERS & PACKAGING - (0.5%) (1,130) AptarGroup, Inc................................................................................. (80,727) (1,860) Sealed Air Corp................................................................................. (84,872) (9,321) Silgan Holdings, Inc............................................................................ (474,905) ------------- (640,504) -------------

Page 12 See Notes to Financial Statements FIRST TRUST LONG/SHORT EQUITY ETF (FTLS) PORTFOLIO OF INVESTMENTS (CONTINUED) OCTOBER 31, 2016

SHARES DESCRIPTION VALUE ------------ ------------------------------------------------------------------------------------------------ ------------- COMMON STOCKS SOLD SHORT (CONTINUED) DIVERSIFIED CONSUMER SERVICES - (0.2%) (21,276) Houghton Mifflin Harcourt Co. (a)............................................................... $ (269,141) ------------- DIVERSIFIED TELECOMMUNICATION SERVICES - (0.3%) (5,176) AT&T, Inc....................................................................................... (190,425) (3,297) ATN International, Inc.......................................................................... (223,009) ------------- (413,434) ------------- ELECTRONIC EQUIPMENT, INSTRUMENTS & COMPONENTS - (0.2%) (3,960) National Instruments Corp....................................................................... (111,236) (5,787) VeriFone Systems, Inc........................................................................... (89,583) ------------- (200,819) ------------- ENERGY EQUIPMENT & SERVICES - (0.3%) (5,249) Halliburton Co.................................................................................. (241,454) (1,531) SEACOR Holdings, Inc. (a)....................................................................... (75,494) ------------- (316,948) ------------- FOOD & STAPLES RETAILING - (0.1%) (4,170) Kroger (The) Co................................................................................. (129,187) ------------- FOOD PRODUCTS - (0.3%) (19,524) Flowers Foods, Inc.............................................................................. (303,012) ------------- HEALTH CARE EQUIPMENT & SUPPLIES - (0.6%) (5,451) Baxter International, Inc....................................................................... (259,413) (2,148) CONMED Corp..................................................................................... (85,920) (473) Cooper Cos, Inc./The............................................................................ (83,267) (873) Stryker Corp.................................................................................... (100,701) (1,456) Zimmer Biomet Holdings, Inc..................................................................... (153,462) ------------- (682,763) ------------- HEALTH CARE PROVIDERS & SERVICES - (0.6%) (2,576) Air Methods Corp. (a)........................................................................... (68,135) (4,189) LifePoint Health, Inc. (a)...................................................................... (250,712) (2,149) Magellan Health, Inc. (a)....................................................................... (110,566) (4,994) PharMerica Corp. (a)............................................................................ (118,857) (3,124) Providence Service Corp./The (a)................................................................ (126,413) ------------- (674,683) ------------- HEALTH CARE TECHNOLOGY - (0.2%) (6,876) Allscripts Healthcare Solution (a).............................................................. (82,581) (13,803) Quality Systems, Inc............................................................................ (177,920) ------------- (260,501) ------------- HOTELS, RESTAURANTS & LEISURE - (1.2%) (6,630) Bob Evans Farms, Inc............................................................................ (273,289) (1,144) DineEquity, Inc................................................................................. (90,490) (3,885) McDonald's Corp................................................................................. (437,334) (9,586) Norwegian Cruise Line Holdings Ltd. (a)......................................................... (372,608) (15,177) SeaWorld Entertainment, Inc..................................................................... (212,630) (10,075) Wendy's Co./The................................................................................. (109,213) ------------- (1,495,564) ------------- HOUSEHOLD DURABLES - (0.1%) (2,775) Newell Brands, Inc.............................................................................. (133,256) ------------- INDUSTRIAL CONGLOMERATES - (0.3%) (14,316) General Electric Co............................................................................. (416,596) -------------

See Notes to Financial Statements Page 13 FIRST TRUST LONG/SHORT EQUITY ETF (FTLS) PORTFOLIO OF INVESTMENTS (CONTINUED) OCTOBER 31, 2016

SHARES DESCRIPTION VALUE ------------ ------------------------------------------------------------------------------------------------ ------------- COMMON STOCKS SOLD SHORT (CONTINUED) INTERNET & DIRECT MARKETING RETAIL - (0.1%) (1,438) Netflix, Inc. (a)............................................................................... $ (179,563) ------------- INTERNET SOFTWARE & SERVICES - (0.1%) (4,067) Q2 Holdings, Inc. (a)........................................................................... (114,283) ------------- IT SERVICES - (0.8%) (1,453) Fiserv, Inc. (a)................................................................................ (143,091) (1,156) Global Payments, Inc............................................................................ (83,833) (9,805) PayPal Holdings, Inc. (a)....................................................................... (408,476) (3,195) Sabre Corp...................................................................................... (82,527) (12,189) Virtusa Corp. (a)............................................................................... (230,860) ------------- (948,787) ------------- LEISURE PRODUCTS - (0.4%) (11,462) Vista Outdoor, Inc. (a)......................................................................... (443,236) ------------- LIFE SCIENCES TOOLS & SERVICES - (0.2%) (7,366) Bruker Corp..................................................................................... (150,930) (13,521) NeoGenomics, Inc. (a)........................................................................... (108,979) ------------- (259,909) ------------- MACHINERY - (0.4%) (2,690) Deere & Co...................................................................................... (237,527) (3,950) PACCAR, Inc..................................................................................... (216,934) ------------- (454,461) ------------- MEDIA - (0.1%) (6,059) Time, Inc....................................................................................... (78,767) ------------- METALS & MINING - (0.2%) (10,419) Southern Copper Corp............................................................................ (295,795) ------------- OIL, GAS & CONSUMABLE FUELS - (1.7%) (4,399) Chevron Corp.................................................................................... (460,795) (3,365) Concho Resources, Inc. (a)...................................................................... (427,153) (2,609) EQT Corp........................................................................................ (172,194) (14,531) Kosmos Energy Ltd. (a).......................................................................... (75,707) (12,605) Noble Energy, Inc............................................................................... (434,494) (5,871) Occidental Petroleum Corp....................................................................... (428,055) ------------- (1,998,398) ------------- PERSONAL PRODUCTS - (0.1%) (1,363) Estee Lauder (The) Cos., Inc., Class A.......................................................... (118,758) ------------- PHARMACEUTICALS - (0.8%) (3,393) Dermira, Inc. (a)............................................................................... (106,371) (5,654) Eli Lilly & Co.................................................................................. (417,491) (8,300) Impax Laboratories, Inc. (a).................................................................... (166,830) (7,450) Medicines (The) Co. (a)......................................................................... (245,477) (12,473) TherapeuticsMD, Inc. (a)........................................................................ (71,595) ------------- (1,007,764) ------------- PROFESSIONAL SERVICES - (0.3%) (8,386) Nielsen Holdings PLC............................................................................ (377,538) ------------- ROAD & RAIL - (0.1%) (3,649) Werner Enterprises, Inc......................................................................... (87,758) ------------- SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT - (0.5%) (1,580) Cavium, Inc. (a)................................................................................ (89,191) (21,505) Teradyne, Inc................................................................................... (500,851) ------------- (590,042) -------------

Page 14 See Notes to Financial Statements FIRST TRUST LONG/SHORT EQUITY ETF (FTLS) PORTFOLIO OF INVESTMENTS (CONTINUED) OCTOBER 31, 2016

SHARES DESCRIPTION VALUE ------------ ------------------------------------------------------------------------------------------------ ------------- COMMON STOCKS SOLD SHORT (CONTINUED) SOFTWARE - (1.0%) (11,051) Bottomline Technologies de Inc. (a)............................................................. $ (250,747) (6,281) ServiceNow, Inc. (a)............................................................................ (552,163) (2,163) Ultimate Software Group, Inc. (a)............................................................... (456,371) ------------- (1,259,281) ------------- SPECIALTY RETAIL - (0.1%) (5,596) Guess?, Inc..................................................................................... (75,546) ------------- TECHNOLOGY HARDWARE, STORAGE & PERIPHERALS - (0.1%) (6,057) Cray, Inc. (a).................................................................................. (125,986) ------------- TEXTILES, APPAREL & LUXURY GOODS - (0.1%) (883) Carter's, Inc................................................................................... (76,238) ------------- THRIFTS & MORTGAGE FINANCE - (0.5%) (7,785) New York Community Bancorp, Inc................................................................. (111,792) (24,302) TFS Financial Corp.............................................................................. (433,062) ------------- (544,854) ------------- WIRELESS TELECOMMUNICATION SERVICES - (0.2%) (6,383) Shenandoah Telecommunications Co................................................................ (168,511) (1,866) T-Mobile US, Inc. (a)........................................................................... (92,796) ------------- (261,307) ------------- TOTAL COMMON STOCKS SOLD SHORT.................................................................. (20,357,868) (Proceeds $(20,983,101)) ------------- REAL ESTATE INVESTMENT TRUSTS SOLD SHORT - (1.3%) EQUITY REAL ESTATE INVESTMENT TRUSTS SOLD SHORT - (1.3%) (853) Vornado Realty Trust............................................................................ (79,141) (16,240) Mack-Cali Realty Corp........................................................................... (417,043) (2,499) Gaming and Leisure Properties, Inc.............................................................. (82,042) (2,445) Federal Realty Investment Trust................................................................. (355,087) (441) Equinix, Inc.................................................................................... (157,561) (2,548) AvalonBay Communities, Inc...................................................................... (436,167) ------------- TOTAL REAL ESTATE INVESTMENT TRUSTS SOLD SHORT.................................................. (1,527,041) (Proceeds $(1,612,946)) ------------- EXCHANGE-TRADED FUNDS SOLD SHORT - (2.0%) CAPITAL MARKETS - (2.0%) (11,399) SPDR S&P 500 ETF Trust.......................................................................... (2,422,857) (Proceeds $(2,484,208)) ------------- TOTAL INVESTMENTS SOLD SHORT - (20.2%).......................................................... (24,307,766) (Proceeds $(25,080,255)) NET OTHER ASSETS AND LIABILITIES - 22.7%........................................................ 27,298,405 ------------- NET ASSETS - 100.0%............................................................................. $ 120,231,211 =============

----------------------------- (a) Non-income producing security. (b) All or a portion of this security serves as collateral for the investments sold short. (c) Non-income producing security which makes in-kind distributions. There were no in-kind distributions received for the fiscal year ended October 31, 2016. (d) Aggregate cost for federal income tax purposes is $114,558,826. As of October 31, 2016, the aggregate gross unrealized appreciation for all securities in which there was an excess of value over tax cost was $7,500,959 and the aggregate gross unrealized depreciation for all securities in which there was an excess of tax cost over value was $4,819,213. ADR American Depositary Receipt See Notes to Financial Statements Page 15 FIRST TRUST LONG/SHORT EQUITY ETF (FTLS) PORTFOLIO OF INVESTMENTS (CONTINUED) OCTOBER 31, 2016 ----------------------------- VALUATION INPUTS A summary of the inputs used to value the Fund's investments as of October 31, 2016 is as follows (see Note 2A - Portfolio Valuation in the Notes to Financial Statements):

ASSETS TABLE LEVEL 2 LEVEL 3 TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT VALUE AT QUOTED OBSERVABLE UNOBSERVABLE 10/31/2016 PRICES INPUTS INPUTS ------------- ------------- -------------- -------------- Common Stocks*..................................... $ 102,950,473 $ 102,950,473 $ -- $ -- Real Estate Investment Trusts*..................... 664,844 664,844 -- -- Master Limited Partnerships*....................... 3,131,365 3,131,365 -- -- Exchange-Traded Funds*............................. 10,493,890 10,493,890 -- -- ------------- ------------- -------------- -------------- Total Investments.................................. $ 117,240,572 $ 117,240,572 $ -- $ -- ============= ============= ============== ============== LIABILITIES TABLE LEVEL 2 LEVEL 3 TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT VALUE AT QUOTED OBSERVABLE UNOBSERVABLE 10/31/2016 PRICES INPUTS INPUTS ------------- ------------- -------------- -------------- Common Stocks Sold Short*.......................... $ (20,357,868) $ (20,357,868) $ -- $ -- Real Estate Investment Trusts Sold Short*.......... (1,527,041) (1,527,041) -- -- Exchange-Traded Funds Sold Short*.................. (2,422,857) (2,422,857) -- -- ------------- ------------- -------------- -------------- Total Investments Sold Short....................... $ (24,307,766) $ (24,307,766) $ -- $ -- ============= ============= ============== ==============

* See Portfolio of Investments for industry breakout. All transfers in and out of the Levels during the period are assumed to be transferred on the last day of the period at their current value. There were no transfers between Levels at October 31, 2016. Page 16 See Notes to Financial Statements FIRST TRUST LONG/SHORT EQUITY ETF (FTLS) STATEMENT OF ASSETS AND LIABILITIES OCTOBER 31, 2016

ASSETS: Investments, at value (Cost $113,975,367).................................. $ 117,240,572 Cash....................................................................... 8,233,220 Restricted cash............................................................ 19,104,019 Receivables: Investment securities sold.............................................. 1,582,211 Dividends............................................................... 92,493 Dividend reclaims....................................................... 1,422 Other assets............................................................... 5,897 -------------- Total Assets............................................................ 146,259,834 -------------- LIABILITIES: Investments sold short, at value (proceeds $25,080,255).................... 24,307,766 Payables: Capital shares redeemed................................................. 1,622,757 Investment advisory fees................................................ 95,297 Dividends payable on investments sold short............................. 2,647 Other liabilities.......................................................... 156 -------------- Total Liabilities....................................................... 26,028,623 -------------- NET ASSETS................................................................. $ 120,231,211 ============== NET ASSETS CONSIST OF: Paid-in capital............................................................ $ 126,591,897 Par value.................................................................. 37,000 Accumulated net investment income (loss)................................... 225,271 Accumulated net realized gain (loss) on investments and investments sold short.................................................. (10,660,651) Net unrealized appreciation (depreciation) on investments and investments sold short.............................................................. 4,037,694 -------------- NET ASSETS................................................................. $ 120,231,211 ============== NET ASSET VALUE, per share................................................. $ 32.49 ============== Number of shares outstanding (unlimited number of shares authorized, par value $0.01 per share)........................... 3,700,002 ==============

See Notes to Financial Statements Page 17 FIRST TRUST LONG/SHORT EQUITY ETF (FTLS) STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2016

INVESTMENT INCOME: Dividends.................................................................. $ 2,490,821 Interest................................................................... 2,878 Foreign tax withholding.................................................... (24,924) Other...................................................................... 62 -------------- Total investment income................................................. 2,468,837 -------------- EXPENSES: Investment advisory fees................................................... 975,929 Dividend expense on investments sold short................................. 461,821 -------------- Total expenses.......................................................... 1,437,750 -------------- NET INVESTMENT INCOME (LOSS)............................................... 1,031,087 -------------- NET REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments............................................................. (7,076,819) In-kind redemptions..................................................... 8,876,729 Investments sold short.................................................. (3,854,946) -------------- Net realized gain (loss)................................................... (2,055,036) -------------- Net change in unrealized appreciation (depreciation) on: Investments............................................................. 2,803,700 Investments sold short.................................................. 643,135 -------------- Net change in unrealized appreciation (depreciation)....................... 3,446,835 -------------- NET REALIZED AND UNREALIZED GAIN (LOSS).................................... 1,391,799 -------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS......................................................... $ 2,422,886 ==============

Page 18 See Notes to Financial Statements FIRST TRUST LONG/SHORT EQUITY ETF (FTLS) STATEMENTS OF CHANGES IN NET ASSETS

FOR THE FOR THE YEAR YEAR ENDED ENDED 10/31/2016 10/31/2015 -------------- -------------- OPERATIONS: Net investment income (loss)............................................... $ 1,031,087 $ 53,545 Net realized gain (loss)................................................... (2,055,036) 173,274 Net change in unrealized appreciation (depreciation)....................... 3,446,835 541,760 -------------- -------------- Net increase (decrease) in net assets resulting from operations............ 2,422,886 768,579 -------------- -------------- DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income...................................................... (859,016) (62,116) Net realized gain.......................................................... -- (2,000) -------------- -------------- Total distributions to shareholders........................................ (859,016) (64,116) -------------- -------------- SHAREHOLDER TRANSACTIONS: Proceeds from shares sold.................................................. 160,917,356 33,730,801 Cost of shares redeemed.................................................... (74,857,579) (4,881,579) -------------- -------------- Net increase (decrease) in net assets resulting from shareholder transactions................................................ 86,059,777 28,849,222 -------------- -------------- Total increase (decrease) in net assets.................................... 87,623,647 29,553,685 NET ASSETS: Beginning of year.......................................................... 32,607,564 3,053,879 -------------- -------------- End of year................................................................ $ 120,231,211 $ 32,607,564 ============== ============== Accumulated net investment income (loss) at end of year.................... $ 225,271 $ (8,788) ============== ============== CHANGES IN SHARES OUTSTANDING: Shares outstanding, beginning of period.................................... 1,000,002 100,002 Shares sold................................................................ 5,000,000 1,050,000 Shares redeemed............................................................ (2,300,000) (150,000) -------------- -------------- Shares outstanding, end of period.......................................... 3,700,002 1,000,002 ============== ==============

See Notes to Financial Statements Page 19 FIRST TRUST LONG/SHORT EQUITY ETF (FTLS) FINANCIAL HIGHLIGHTS FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD

FOR THE PERIOD YEAR ENDED OCTOBER 31, 9/8/2014 (a) ------------------------------- THROUGH 2016 2015 10/31/2014 -------------- -------------- -------------- Net asset value, beginning of period............ $ 32.61 $ 30.54 $ 30.00 ---------- ---------- ---------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss).................... 0.32 0.19 0.05 Net realized and unrealized gain (loss)......... (0.17) 2.12 0.51 ---------- ---------- ---------- Total from investment operations................ 0.15 2.31 0.56 ---------- ---------- ---------- DISTRIBUTIONS PAID TO SHAREHOLDERS FROM: Net investment income........................... (0.27) (0.22) (0.02) Net realized gain............................... -- (0.02) -- ---------- ---------- ---------- Total distributions............................. (0.27) (0.24) (0.02) ---------- ---------- ---------- Net asset value, end of period.................. $ 32.49 $ 32.61 $ 30.54 ========== ========== ========== TOTAL RETURN (b)................................ 0.45% 7.60% 1.86% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (in 000's)............ $ 120,231 $ 32,608 $ 3,054 RATIOS TO AVERAGE NET ASSETS: Ratio of total expenses to average net assets... 1.40% 1.47% 1.17% (c) Ratio of total expenses to average net assets excluding dividend expense................... 0.95% 0.95% 0.95% (c) Ratio of net investment income (loss) to average net assets................................... 1.00% 0.39% 1.08% (c) Portfolio turnover rate (d)..................... 201% 267% 1%

(a) Inception date is consistent with the commencement of investment operations and is the date the initial creation units were established. (b) Total return is calculated assuming an initial investment made at the net asset value at the beginning of the period, reinvestment of all distributions at net asset value during the period, and redemption at net asset value on the last day of the period. The 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) Annualized. (d) Portfolio turnover is calculated for the time period presented and is not annualized for periods of less than a year and does not include securities received or delivered from processing creations or redemptions and in-kind transactions. Page 20 See Notes to Financial Statements -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS -------------------------------------------------------------------------------- FIRST TRUST LONG/SHORT EQUITY ETF (FTLS) OCTOBER 31, 2016 1. ORGANIZATION First Trust Exchange-Traded Fund III (the "Trust") is a non-diversified open-end management investment company organized as a Massachusetts business trust on January 9, 2008, and is registered with the Securities and Exchange Commission (the "SEC") under the Investment Company Act of 1940, as amended (the "1940 Act"). The Trust currently consists of ten funds that are offering shares. This report covers the First Trust Long/Short Equity ETF (the "Fund"), which trades under the ticker "FTLS" on the NYSE Arca, Inc. Unlike conventional mutual funds, the Fund issues and redeems shares on a continuous basis, at net asset value ("NAV"), only in large specified blocks consisting of 50,000 shares called a "Creation Unit." Creation Units are issued and redeemed in-kind for securities in which the Fund invests or for cash or, in certain circumstances, a combination of both. Except when aggregated in Creation Units, the shares are not redeemable securities of the Fund. The investment objective of the Fund is to seek to provide investors with long-term total return. The Fund pursues its investment objective by establishing long and short positions in a portfolio of equity securities. Under normal circumstances, at least 80% of the Fund's net assets (including investment borrowings) will be exposed to U.S. exchange-listed equity securities of U.S. and foreign companies by investing in such securities directly and/or in U.S. exchange-traded funds ("ETFs") that provide exposure to such securities. The equity securities held by the Fund may include U.S. exchange-listed equity securities of foreign issuers, as well as investments in the equity securities of foreign issuers that are in the form of depositary receipts. There can be no assurance that the Fund will achieve its investment objective. The Fund may not be appropriate for all investors. 2. SIGNIFICANT ACCOUNTING POLICIES The Fund is considered an investment company and follows accounting and reporting guidance under Financial Accounting Standards Board Accounting Standards Codification Topic 946, "Financial Services-Investment Companies." The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of the financial statements. The preparation of the financial statements in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. A. PORTFOLIO VALUATION The Fund's NAV is determined daily as of the close of regular trading on the New York Stock Exchange ("NYSE"), normally 4:00 p.m. Eastern time, on each day the NYSE is open for trading. If the NYSE closes early on a valuation day, the NAV is determined as of that time. Domestic debt securities and foreign securities are priced using data reflecting the earlier closing of the principal markets for those securities. The Fund's NAV is calculated by dividing the value of all assets of the Fund (including accrued interest and dividends), less all liabilities (including accrued expenses and dividends declared but unpaid), by the total number of shares outstanding. The Fund's investments are valued daily at market value or, in the absence of market value with respect to any portfolio securities, at fair value. Market value prices represent last sale or official closing prices from a national or foreign exchange (i.e., a regulated market) and are primarily obtained from third-party pricing services. Fair value prices represent any prices not considered market value prices and are either obtained from a third-party pricing service or are determined by the Pricing Committee of the Fund's investment advisor, First Trust Advisors L.P. ("First Trust" or the "Advisor"), in accordance with valuation procedures adopted by the Trust's Board of Trustees, and in accordance with provisions of the 1940 Act. Investments valued by the Advisor's Pricing Committee, if any, are footnoted as such in the footnotes to the Portfolio of Investments. The Fund's investments are valued as follows: Common stocks, real estate investment trusts ("REITs") and other equity securities listed on any national or foreign exchange (excluding The Nasdaq Stock Market LLC ("Nasdaq") and the London Stock Exchange Alternative Investment Market ("AIM")) are valued at the last sale price on the exchange on which they are principally traded or, for Nasdaq and AIM securities, the official closing price. Securities traded on more than one securities exchange are valued at the last sale price or official closing price, as applicable, at the close of the securities exchange representing the principal market for such securities. Securities traded in an over-the-counter market are fair valued at the mean of their most recent bid and asked price, if available, and otherwise at their closing bid price. Certain securities may not be able to be priced by pre-established pricing methods. Such securities may be valued by the Trust's Board of Trustees or its delegate, the Advisor's Pricing Committee, at fair value. These securities generally include, but are not limited to, restricted securities (securities which may not be publicly sold without registration under the Securities Act of 1933, as amended, for which a third-party pricing service is unable to provide a market price; securities whose trading has been formally suspended; a security whose market or fair value price is not available from a pre-established pricing source; a security with respect to which an event has occurred that is likely Page 21 -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (CONTINUED) -------------------------------------------------------------------------------- FIRST TRUST LONG/SHORT EQUITY ETF (FTLS) OCTOBER 31, 2016 to materially affect the value of the security after the market has closed but before the calculation of the Fund's NAV or make it difficult or impossible to obtain a reliable market quotation; and a security whose price, as provided by the third-party pricing service, does not reflect the security's fair value. As a general principle, the current fair value of a security would appear to be the amount which the owner might reasonably expect to receive for the security upon its current sale. When fair value prices are used, generally they will differ from market quotations or official closing prices on the applicable exchanges. A variety of factors may be considered in determining the fair value of such securities, including, but not limited to, the following: 1) the type of security; 2) the size of the holding; 3) the initial cost of the security; 4) transactions in comparable securities; 5) price quotes from dealers and/or third-party pricing services; 6) relationships among various securities; 7) information obtained by contacting the issuer, analysts, or the appropriate stock exchange; 8) an analysis of the issuer's financial statements; and 9) the existence of merger proposals or tender offers that might affect the value of the security. The Fund is subject to fair value accounting standards that define fair value, establish the framework for measuring fair value and provide a three-level hierarchy for fair valuation based upon the inputs to the valuation as of the measurement date. The three levels of the fair value hierarchy are as follows: o Level 1 - Level 1 inputs are quoted prices in active markets for identical investments. An active market is a market in which transactions for the investment occur with sufficient frequency and volume to provide pricing information on an ongoing basis. o Level 2 - Level 2 inputs are observable inputs, either directly or indirectly, and include the following: o Quoted prices for similar investments in active markets. o Quoted prices for identical or similar investments in markets that are non-active. A non-active market is a market where there are few transactions for the investment, the prices are not current, or price quotations vary substantially either over time or among market makers, or in which little information is released publicly. o Inputs other than quoted prices that are observable for the investment (for example, interest rates and yield curves observable at commonly quoted intervals, volatilities, prepayment speeds, loss severities, credit risks, and default rates). o Inputs that are derived principally from or corroborated by observable market data by correlation or other means. o Level 3 - Level 3 inputs are unobservable inputs. Unobservable inputs may reflect the reporting entity's own assumptions about the assumptions that market participants would use in pricing the investment. The inputs or methodologies used for valuing investments are not necessarily an indication of the risk associated with investing in those investments. A summary of the inputs used to value the Fund's investments as of October 31, 2016, is included with the Fund's Portfolio of Investments. B. SECURITIES TRANSACTIONS AND INVESTMENT INCOME Securities transactions are recorded as of the trade date. Realized gains and losses from securities transactions are recorded on the identified cost basis. Dividend income is recorded on the ex-dividend date. Interest income, if any, is recorded on the accrual basis. Distributions received from the Fund's investments in REITs may be comprised of return of capital, capital gains and income. The actual character of the amounts received during the year are not known until after the REIT's fiscal year end. The Fund records the character of distributions received from the REITs during the year based on estimates available. The characterization of distributions received by the Fund may be subsequently revised based on information received from the REITs after their tax reporting periods conclude. C. SHORT SALES Short sales are utilized for investment and risk management purposes and are transactions in which securities or other instruments (such as options, forwards, futures or other derivative contracts) are sold that are not currently owned in the Fund's portfolio. When the Fund engages in a short sale, the Fund must borrow the security sold short and deliver the security to the counterparty. Short selling allows the Fund to profit from a decline in a market price to the extent such decline exceeds the transaction costs and the costs of borrowing the securities. The Fund will pay a fee or premium to borrow the securities sold short and is obligated to repay the lenders of the securities. Any dividends or interest that accrues on the securities during the period of the loan are due to the lenders. A gain, limited to the price at which the security was sold short, or a loss, unlimited in size, will be recognized upon Page 22 -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (CONTINUED) -------------------------------------------------------------------------------- FIRST TRUST LONG/SHORT EQUITY ETF (FTLS) OCTOBER 31, 2016 the termination of the short sale; which is effected by the Fund purchasing the security sold short in the market and delivering the security to the lender. Any such gain or loss may be offset, completely or in part, by the change in the value of the long portion of the Fund's portfolio. The Fund is subject to the risk that it may be unable to reacquire a security to terminate a short position except at a price substantially in excess of the last quoted price. Also, there is the risk that the counterparty to a short sale may fail to honor its contractual terms, causing a loss to the Fund. The Fund has established an account with Pershing, LLC for the purpose of purchasing securities on margin. The Fund pays interest on any margin balance, which is calculated as the daily margin account balance times the broker's margin interest rate. Restricted cash in the amount of $19,104,019, as shown on the Statement of Assets and Liabilities, is associated with collateral at the broker as of October 31, 2016. D. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS Dividends from net investment income, if any, are declared and paid quarterly, or as the Board of Trustees may determine from time to time. Distributions of net realized capital gains earned by the Fund, if any, will be distributed at least annually. Distributions from income and capital gains are determined in accordance with income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These permanent differences are primarily due to the varying treatment of income and gain/loss on portfolio securities held by the Fund and have no impact on net assets or net asset value per share. Temporary differences, which arise from recognizing certain items of income, expense and gain/loss in different periods for financial statement and tax purposes, will reverse at some time in the future. The tax character of distributions paid during the fiscal years ended October 31, 2016 and October 31, 2015 was as follows: Distributions paid from: 2016 2015 Ordinary income.............................. $ 859,016 $ 64,116 As of October 31, 2016, the components of distributable earnings on a tax basis to the Fund were as follows: Undistributed ordinary income................ $ 223,468 Accumulated capital and other losses......... (10,075,389) Net unrealized appreciation (depreciation)... 3,454,235 E. INCOME TAXES The 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, the Fund may be subject to an excise tax of 4% of the amount by which approximately 98% of the Fund's taxable income exceeds the distributions from such taxable income for the calendar year. The Fund is subject to accounting standards that establish a minimum threshold for recognizing, and a system for measuring, the benefits of a tax position taken or expected to be taken in a tax return. The taxable years ended 2014, 2015 and 2016 remain open to federal and state audit. As of October 31, 2016, management has evaluated the application of these standards to the Fund, and has determined that no provision for income tax is required in the Fund's financial statements for uncertain tax positions. The Fund intends to utilize provisions of the federal income tax laws, which allow it to carry a realized capital loss forward indefinitely following the year of the loss and offset such loss against any future realized capital gains. The Fund is subject to certain limitations under U.S. tax rules on the use of capital loss carryforwards and net unrealized built-in-losses. These limitations apply when there has been a 50% change in ownership. At October 31, 2016, the Fund had non-expiring capital loss carryforwards for federal income tax purposes of $10,075,389. Certain losses realized during the current fiscal year may be deferred and treated as occurring on the first day of the following fiscal year for federal income tax purposes. For the fiscal year ended October 31, 2016, the Fund had no net ordinary losses. In order to present paid-in capital, accumulated net investment income (loss) and accumulated net realized gain (loss) on investments on the Statement of Assets and Liabilities that more closely represent their tax character, certain adjustments have been made to paid-in capital, accumulated net investment income (loss) and accumulated net realized gain (loss) on investments. These Page 23 -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (CONTINUED) -------------------------------------------------------------------------------- FIRST TRUST LONG/SHORT EQUITY ETF (FTLS) OCTOBER 31, 2016 adjustments are primarily due to the difference between book and tax treatments of income and gains on various investment securities held by the Fund and in-kind transactions. The results of operations and net assets were not affected by these adjustments. For the fiscal year ended October 31, 2016, the adjustments for the Fund were as follows: Accumulated Accumulated Net Realized Net Investment Gain (Loss) Income (Loss) on Investments Paid-in Capital -------------- -------------- --------------- $ 61,988 $ (8,402,332) $ 8,340,344 F. EXPENSES Expenses, other than the investment advisory fee, dividend expenses on investments sold short and other excluded expenses, are paid by the Advisor (See Note 3). G. NEW AND AMENDED FINANCIAL REPORTING RULES AND FORMS On October 13, 2016, the SEC adopted new rules and forms, and amended existing rules and forms. The new and amended rules and forms are intended to modernize the reporting of information provided by funds, including the Fund, and to improve the quality and type of information that funds provide to the SEC and investors. The new and amended rules and forms will be effective for the First Trust funds, including the Fund, for reporting periods beginning on and after June 1, 2018. Management is evaluating the new and amended rules and forms to determine the impact to the Fund. 3. INVESTMENT ADVISORY FEE, AFFILIATED TRANSACTIONS AND OTHER FEE ARRANGEMENTS First Trust, the investment advisor to the Fund, is a limited partnership with one limited partner, Grace Partners of DuPage L.P., and one general partner, The Charger Corporation. The Charger Corporation is an Illinois corporation controlled by James A. Bowen, Chief Executive Officer of First Trust. First Trust is responsible for the selection and ongoing monitoring of the securities in the Fund's portfolio, managing the Fund's business affairs and providing certain administrative services necessary for the management of the Fund. Pursuant to the Investment Management Agreement, First Trust manages the investment of the Fund's assets and is responsible for the Fund's expenses, including the cost of transfer agency, custody, fund administration, legal, audit and other services, but excluding fee payments under the Investment Management Agreement, interest, taxes, brokerage commissions and other expenses connected with the execution of portfolio transactions, distribution and service fees pursuant to a 12b-1 plan, if any, acquired fund fees and expenses, dividend expenses on investments sold short, and extraordinary expenses. The Fund has agreed to pay First Trust an annual unitary management fee equal to 0.95% of its average daily net assets. First Trust also provides fund reporting services to the Fund for a flat annual fee in the amount of $9,250, which is covered under the annual unitary management fee. The Fund has multiple service agreements with Brown Brothers Harriman & Co. ("BBH"). Under the service agreements, BBH performs custodial, fund accounting, certain administrative services, and transfer agency services for the Fund. As custodian, BBH is responsible for custody of the Fund's assets. As fund accountant and administrator, BBH is responsible for maintaining the books and records of the Fund's securities and cash. As transfer agent, BBH is responsible for maintaining shareholder records for the Fund. 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. Prior to January 1, 2016, the fixed annual retainer was allocated pro rata based on each Fund's net assets. Each Independent Trustee is also paid an annual per fund fee that varies based on whether the fund is a closed-end or other actively managed fund, or is an index fund. Additionally, the Lead Independent Trustee and the Chairmen of the Audit Committee, Nominating and Governance Committee and Valuation Committee are paid annual fees to serve in such capacities, with such compensation allocated pro rata among each fund in the First Trust Fund Complex based on net assets. Independent Trustees are reimbursed for travel and out-of-pocket expenses in connection with all meetings. The Lead Independent Trustee and Committee Chairmen rotate every three years. The officers and "Interested" Trustee receive no compensation from the Trust for acting in such capacities. Page 24 -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (CONTINUED) -------------------------------------------------------------------------------- FIRST TRUST LONG/SHORT EQUITY ETF (FTLS) OCTOBER 31, 2016 4. PURCHASES AND SALES OF SECURITIES For the year ended October 31, 2016, the cost of purchases and proceeds from sales of investments, excluding short-term investments, investments sold short and in-kind transactions, for the Fund were $150,985,988 and $150,144,310, respectively. The cost of purchases to cover short sales and the proceeds of short sales were $96,723,094 and $108,678,352, respectively. For the year ended October 31, 2016, the cost of in-kind purchases and proceeds from in-kind sales for the Fund was $156,004,448 and $76,005,764, respectively. 5. CREATIONS, REDEMPTIONS AND TRANSACTION FEES Shares are created and redeemed by the Fund only in Creation Unit size aggregations of 50,000 shares in transactions with broker-dealers or large institutional investors that have entered into a participation agreement (an "Authorized Participant"). In order to purchase Creation Units of the Fund, an Authorized Participant must deposit (i) a designated portfolio of securities determined by First Trust (the "Deposit Securities") and generally make or receive a cash payment referred to as the "Cash Component," which is an amount equal to the difference between the NAV of the Fund shares (per Creation Unit aggregations) and the market value of the Deposit Securities, and/or (ii) cash in lieu of all or a portion of the Deposit Securities. If the Cash Component is a positive number (i.e., the NAV per Creation Unit Aggregation exceeds the Deposit Amount), the Authorized Participant will deliver the Cash Component. If the Cash Component is a negative number (i.e., the NAV per Creation Unit Aggregation is less than the Deposit Amount), the Authorized Participant will receive the Cash Component. Authorized Participants purchasing Creation Units must pay to BBH, as transfer agent, a creation transaction fee (the "Creation Transaction Fee") regardless of the number of Creation Units purchased in the transaction. The Creation Transaction Fee may vary and is based on the composition of the securities included in the Fund's portfolio and the countries in which the transactions are settled. The Creation Transaction Fee may increase or decrease as the Fund's portfolio is adjusted to conform to changes in the composition of the securities included in the Fund's portfolio and the countries in which the transaction are settled. The Creation Transaction fee is currently $550. The price for each Creation Unit will equal the daily NAV per share times the number of shares in a Creation Unit plus the fees described above and, if applicable, any operational processing and brokerage costs, transfer fees or stamp taxes. When the Fund permits an Authorized Participant to substitute cash or a different security in lieu of depositing one or more of the requisite Deposit Securities, the Authorized Participant may also be assessed an amount to cover the cost of purchasing the Deposit Securities and/or disposing of the substituted securities, including operational processing and brokerage costs, transfer fees, stamp taxes, and part or all of the spread between the expected bid and offer side of the market related to such Deposit Securities and/or substitute securities. Authorized Participants redeeming Creation Units must pay to BBH, as transfer agent, a redemption transaction fee (the "Redemption Transaction Fee"), regardless of the number of Creation Units redeemed in the transaction. The Redemption Transaction Fee may vary and is based on the composition of the securities included in the Fund's portfolio and the countries in which the transactions are settled. The Redemption Transaction Fee is currently $550. The Fund reserves the right to effect redemptions in cash. An Authorized Participant may request cash redemption in lieu of securities; however, the Fund may, in its discretion, reject any such request. 6. DISTRIBUTION PLAN The Board of Trustees adopted a Distribution and Service Plan pursuant to Rule 12b-1 under the 1940 Act. In accordance with the Rule 12b-1 plan, the Fund is authorized to pay an amount up to 0.25% of its average daily net assets each year to reimburse First Trust Portfolios L.P. ("FTP"), the distributor of the Fund, for amounts expended to finance activities primarily intended to result in the sale of Creation Units or the provision of investor services. FTP may also use this amount to compensate securities dealers or other persons that are Authorized Participants for providing distribution assistance, including broker-dealer and shareholder support and educational and promotional services. No 12b-1 fees are currently paid by the Fund, and pursuant to a contractual arrangement, no 12b-1 fees will be paid any time before February 28, 2018. 7. INDEMNIFICATION The Trust, on behalf of the Fund, has a variety of indemnification obligations under contracts with its service providers. The Trust's maximum exposure under these arrangements is unknown. However, the Trust has not had prior claims or losses pursuant to these contracts and expects the risk of loss to be remote. 8. SUBSEQUENT EVENTS Management has evaluated the impact of all subsequent events to the Fund through the date the financial statements were issued, and has determined there were no subsequent events requiring recognition or disclosure in the financial statements. Page 25 -------------------------------------------------------------------------------- REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM -------------------------------------------------------------------------------- TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF FIRST TRUST LONG/SHORT EQUITY ETF: We have audited the accompanying statement of assets and liabilities of First Trust Long/Short Equity ETF (the "Fund"), a series of the First Trust Exchange-Traded Fund III, including the portfolio of investments, as of October 31, 2016, and the related statement 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 each of the periods presented. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of October 31, 2016, by correspondence with the Fund's custodian and brokers; where replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of First Trust Long/Short Equity ETF as of October 31, 2016, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the periods presented, in conformity with accounting principles generally accepted in the United States of America. /s/ Deloitte & Touche LLP Chicago, Illinois December 21, 2016 Page 26 -------------------------------------------------------------------------------- ADDITIONAL INFORMATION -------------------------------------------------------------------------------- FIRST TRUST LONG/SHORT EQUITY ETF (FTLS) OCTOBER 31, 2016 (UNAUDITED) PROXY VOTING POLICIES AND PROCEDURES A description of the policies and procedures that the Trust uses to determine how to vote proxies and information on how the Fund voted proxies relating to portfolio investments during the most recent 12-month period ended June 30 is available (1) without charge, upon request, by calling (800) 988-5891; (2) on the Fund's website located at http://www.ftportfolios.com; and (3) on the Securities and Exchange Commission's ("SEC") website located at http://www.sec.gov. PORTFOLIO HOLDINGS The Trust files its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The Trust's Forms N-Q are available (1) by calling (800) 988-5891; (2) on the Fund's website located at http://www.ftportfolios.com; (3) on the SEC's website at http://www.sec.gov; and (4) for review and copying at the SEC's Public Reference Room ("PRR") in Washington, DC. Information regarding the operation of the PRR may be obtained by calling (800) SEC-0330. FEDERAL TAX INFORMATION For the taxable year ended October 31, 2016, the following percentages of income dividend paid by the Fund qualify for the dividends received deduction available to corporations and is hereby designated as qualified dividend income: Dividends Received Deduction Qualified Dividend Income ---------------------------- ------------------------- 100% 100% RISK CONSIDERATIONS You could lose money by investing in the Fund. An investment in the Fund is not a deposit of a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other governmental agency. There can be no assurance that the Fund's investment objective will be achieved. DEPOSITARY RECEIPTS RISK. Depositary receipts may be less liquid than the underlying shares in their primary trading market. Any distributions paid to the holders of depositary receipts are usually subject to a fee charged by the depositary. Holders of depositary receipts may have limited voting rights, and investment restrictions in certain countries may adversely impact the value of depositary receipts because such restrictions may limit the ability to convert the equity shares into depositary receipts and vice versa. Such restrictions may cause the equity shares of the underlying issuer to trade at a discount or premium to the market price of the depositary receipts. DERIVATIVES RISK. The use of futures and other derivatives can lead to 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 derivatives. These risks are heightened when the 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. The Fund invests in Equity Securities. The value of the shares will fluctuate with changes in the value of these Equity Securities. Equity Securities prices fluctuate for several reasons, including changes in investors' perceptions of the financial condition of an issuer or the general condition of the relevant stock market, such as the current 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 the capital rises and borrowing costs increase. ETF RISK. The Fund may invest in the shares of other ETFs, and therefore, the Fund's investment performance and risks may be related to the investment performance and risks of the underlying ETFs. In general, as a shareholder in other ETFs, the Fund bears its ratable share of the underlying ETF's expenses, and would be subject to duplicative expenses to the extent the Fund invests in other ETFs. FINANCIAL COMPANIES RISK. Financial companies are especially subject to the adverse effects of economic recession, currency exchange rates, government regulation, decreases in the availability of capital, volatile interest rates, portfolio concentrations in geographic markets and in commercial and residential real estate loans, and competition from new entrants in their fields of business. Page 27 -------------------------------------------------------------------------------- ADDITIONAL INFORMATION (CONTINUED) -------------------------------------------------------------------------------- FIRST TRUST LONG/SHORT EQUITY ETF (FTLS) OCTOBER 31, 2016 (UNAUDITED) INFORMATION TECHNOLOGY COMPANIES RISK. Information technology companies are generally subject to the following risks: rapidly changing technologies; short product life cycles; fierce competition; aggressive pricing and reduced profit margins; the loss of patent, copyright and trademark protections; cyclical market patterns; evolving industry standards; and frequent new product introductions. Information technology companies may be smaller and less experienced companies, with limited product lines, markets or financial resources and fewer experienced management or marketing personnel. Information technology company stocks, especially those which are Internet related, have experienced extreme price and volume fluctuations that are often unrelated to their operating performance. MANAGEMENT RISK. The Fund is subject to management risk because it is an actively managed portfolio. In managing the Fund's investment portfolio, the Fund's investment advisor will apply investment techniques and risk analyses that may not have the desired result. There can be no guarantee that the Fund will meet its investment objective. MARKET RISK. Market risk is the risk that a particular security owned by the Fund or shares of the Fund in general may fall in value. Securities are subject to market fluctuations caused by such factors as economic, political, regulatory or market developments, changes in interest rates and perceived trends in securities prices. Overall securities values could decline generally or could underperform other investments. NON-DIVERSIFICATION RISK. The Fund is classified as "non-diversified" under the Investment Company Act of 1940, as amended (the "1940 Act"). As a result, the Fund is only limited as to the percentage of its assets that may be invested in the securities of any one issuer by the diversification requirements imposed by the Internal Revenue Code of 1986, as amended (the "Code"). The Fund may invest a relatively high percentage of its assets in a limited number of issuers. As a result, the Fund may be more susceptible to a single adverse economic or regulatory occurrence affecting one or more of these issuers, experience increased volatility and be highly invested in certain issuers. NON-U.S. SECURITIES RISK. The Fund holds non-U.S. securities that are either directly listed on a U.S. securities exchange or in the form of depositary receipts. Non-U.S. securities are subject to higher volatility than securities of domestic issuers due to possible adverse political, social or economic developments; restrictions on foreign investment or exchange of securities; lack of liquidity; currency exchange rates; excessive taxation; government seizure of assets; different legal or accounting standards; and less government supervision and regulation of exchanges in foreign countries. PORTFOLIO TURNOVER RISK. The Fund's strategy may frequently involve buying and selling portfolio securities to rebalance the Fund's exposure to various market sectors. High portfolio turnover may result in the Fund paying higher levels of transaction costs and generating greater tax liabilities for shareholders. Portfolio turnover risk may cause the Fund's performance to be less than you expect. SHORT SALES RISK. The Fund will incur a loss as a result of a short sale if the price of the security sold short increases in value between the date of the short sale and the date on which the Fund purchases the security to replace the borrowed security. In addition, a lender of a security may request, or market conditions may dictate, that securities sold short be returned to the lender on short notice, which may result in the Fund having to buy the securities sold short at an unfavorable price. If this occurs, any anticipated gain to the Fund may be reduced or eliminated or the short sale may result in a loss. In a rising stock market, the Fund's short positions may significantly impact the Fund's overall performance and cause the Fund to underperform traditional long-only equity funds or to sustain losses, particularly in a sharply rising market. The use of short sales may also cause the Fund to have higher expenses than other funds. Page 28 -------------------------------------------------------------------------------- ADDITIONAL INFORMATION (CONTINUED) -------------------------------------------------------------------------------- FIRST TRUST LONG/SHORT EQUITY ETF (FTLS) OCTOBER 31, 2016 (UNAUDITED) BOARD CONSIDERATIONS REGARDING CONTINUATION OF INVESTMENT MANAGEMENT AGREEMENT The Board of Trustees (the "Board") of the First Trust Exchange-Traded Fund III (the "Trust"), including the Independent Trustees, unanimously approved the continuation of the Investment Management Agreement (the "Agreement") with First Trust Advisors L.P. (the "Advisor" or "First Trust") on behalf of the First Trust Long/Short Equity ETF (the "Fund"). The Board approved the continuation of the Agreement for a one-year period ending June 30, 2017 at a meeting held on June 13, 2016. The Board determined that the continuation of the Agreement is in the best interests of the Fund in light of the extent and quality of the services provided and such other matters as the Board considered to be relevant in the exercise of its reasonable business judgment. To reach this determination, the Board considered its duties under the Investment Company Act of 1940, as amended (the "1940 Act"), as well as under the general principles of state law in reviewing and approving advisory contracts; the requirements of the 1940 Act in such matters; the fiduciary duty of investment advisors with respect to advisory agreements and compensation; the standards used by courts in determining whether investment company boards have fulfilled their duties; and the factors to be considered by the Board in voting on such agreements. At meetings held on April 22, 2016 and June 13, 2016, the Board, including the Independent Trustees, reviewed materials provided by the Advisor responding to requests for information from counsel to the Independent Trustees that, among other things, outlined the services provided by the Advisor to the Fund (including the relevant personnel responsible for these services and their experience); the unitary fee rate payable by the Fund as compared to fees charged to a peer group of funds which were either mutual funds or exchange-traded funds ("ETFs") compiled by Management Practice, Inc. ("MPI"), an independent source (the "MPI Peer Group"), and as compared to fees charged to other clients of the Advisor, including other ETFs managed by the Advisor; expenses of the Fund as compared to expense ratios of the funds in the MPI Peer Group; performance information for the Fund; the nature of expenses incurred in providing services to the Fund and the potential for economies of scale, if any; financial data on the Advisor; any fall-out benefits to the Advisor and its affiliate, First Trust Portfolios L.P. ("FTP"); and information on the Advisor's compliance program. The Board reviewed initial materials with the Advisor at a special meeting held on April 22, 2016, prior to which the Independent Trustees and their counsel met separately to discuss the information provided by the Advisor. Following the April meeting, independent legal counsel 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 independent legal counsel held prior to the June 13, 2016 meeting, as well as at the meeting held that day. The Board applied its business judgment to determine whether the arrangement between the Trust and the Advisor continues to be a reasonable business arrangement from the Fund's perspective as well as from the perspective of the Fund's shareholders. The Board determined that, given the totality of the information provided with respect to the Agreement, the Board had received sufficient information to renew the Agreement. The Board considered that shareholders chose to invest or remain invested in the Fund knowing that the Advisor manages the Fund and knowing the Fund's unitary fee. In reviewing the Agreement, the Board considered the nature, extent and quality of the services provided by the Advisor under the Agreement. The Board considered that the Advisor is responsible for the overall management and administration of the Trust and the Fund and reviewed all of the services provided by the Advisor to the Fund, as well as the background and experience of the persons responsible for such services. The Board noted that the Fund is an actively-managed ETF and considered the background and experience of the persons responsible for the day-to-day management of the Fund's investments. 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 and the Fund's compliance with the 1940 Act, as well as the Fund's compliance with its investment objective and policies. In addition, as part of the Board's consideration of the Advisor's services, the Advisor, in its written materials and at the April 22, 2016 meeting, described to the Board the scope of its ongoing investment in additional infrastructure and personnel to maintain and improve the quality of services provided to the Fund and the other funds in the First Trust fund complex. 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 and the Fund by the Advisor under the Agreement have been and are expected to remain satisfactory and that the Advisor has managed the Fund consistent with the Fund's investment objective and policies. The Board considered the unitary fee rate payable by the Fund under the Agreement for the services provided. The Board considered that as part of the unitary fee the Advisor is responsible for the Fund's expenses, including the cost of transfer agency, custody, fund administration, legal, audit and other services and license fees (if any), but excluding 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. The Board received and reviewed information showing the advisory or unitary fee rates and expense ratios of the peer funds in the MPI Peer Group, as well as advisory fee rates charged by the Advisor to other fund (including ETFs) and non-fund clients. Because the 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 Fund's total (net) expense ratio (including expenses associated with short sales) was equal to the median total (net) expense ratio of the peer funds in the MPI Peer Group. With respect to the MPI Peer Group, the Board discussed with representatives of the Advisor limitations in creating peer groups for Page 29 -------------------------------------------------------------------------------- ADDITIONAL INFORMATION (CONTINUED) -------------------------------------------------------------------------------- FIRST TRUST LONG/SHORT EQUITY ETF (FTLS) OCTOBER 31, 2016 (UNAUDITED) actively-managed ETFs and noted that most of the peer funds were open-end mutual funds. The Board took these limitations and differences into account in considering the peer data. With respect to fees charged to other clients, the Board considered differences between the Fund and other clients that limited their comparability. In considering the unitary fee rate 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 description of its long-term commitment to the Fund. The Board considered performance information for the Fund. The Board noted the process it has established for monitoring the Fund's performance and portfolio risk on an ongoing basis, which includes quarterly performance reporting from the Advisor for the Fund. The Board determined that this process continues to be effective for reviewing the Fund's performance. The Board received and reviewed information comparing the Fund's performance for periods ended December 31, 2015 to the performance of the MPI Peer Group and to a benchmark index. Based on the information provided, the Board noted that the Fund outperformed the MPI Peer Group average and the benchmark index for the one-year period ended December 31, 2015. On the basis of all the information provided on the unitary fee and performance of the Fund and the ongoing oversight by the Board, the Board concluded that the unitary fee for the Fund continues to be reasonable and appropriate in light of the nature, extent and quality of the services provided by the Advisor to the Fund under the Agreement. The Board considered information and discussed with the Advisor whether there were any economies of scale in connection with providing advisory services to the Fund and noted the Advisor's statement that it expects its expenses to increase over the next twelve months as the Advisor continues to make investments in personnel and infrastructure. The Board noted that any reduction in fixed costs associated with the management of the Fund would benefit the Advisor, but that the unitary fee structure provides a level of certainty in expenses for the Fund. The Board considered the revenues and allocated costs (including the allocation methodology) of the Advisor in serving as investment advisor to the Fund for the twelve months ended December 31, 2015 and the estimated profitability level for the 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 inherent limitations in the profitability analysis, and concluded that, based on the information provided, the Advisor's profitability level for the Fund was not unreasonable. In addition, the Board considered fall-out benefits described by the Advisor that may be realized from its relationship with the Fund. The Board considered that the Advisor had identified as a fall-out benefit to the Advisor and FTP their exposure to investors and brokers who, absent their exposure to the Fund, may have had no dealings with the Advisor or FTP, and noted that the Advisor does not utilize soft dollars in connection with its management of the Fund's portfolio. The Board also considered the Advisor's compensation for fund reporting services provided to the Fund pursuant to a separate Fund Reporting Services Agreement, which is paid from the unitary fee. Based on all of the information considered and the conclusions reached, the Board, including the Independent Trustees, unanimously determined that the terms of the Agreement continue to be fair and reasonable and that the continuation of the Agreement is in the best interests of the Trust and the Fund. No single factor was determinative in the Board's analysis. Page 30 -------------------------------------------------------------------------------- BOARD OF TRUSTEES AND OFFICERS -------------------------------------------------------------------------------- FIRST TRUST LONG/SHORT EQUITY ETF (FTLS) OCTOBER 31, 2016 (UNAUDITED) The Trust's statement of additional information includes additional information about the Trustees and is available, without charge, upon request, by calling (800) 988-5891.

NUMBER OF OTHER PORTFOLIOS IN TRUSTEESHIPS OR TERM OF OFFICE THE FIRST TRUST DIRECTORSHIPS NAME, ADDRESS, AND YEAR FIRST FUND COMPLEX HELD BY TRUSTEE DATE OF BIRTH AND ELECTED OR PRINCIPAL OCCUPATIONS OVERSEEN BY DURING PAST POSITION WITH THE TRUST APPOINTED DURING PAST 5 YEARS TRUSTEE 5 YEARS ------------------------------------------------------------------------------------------------------------------------------------ INDEPENDENT TRUSTEES ------------------------------------------------------------------------------------------------------------------------------------ Richard E. Erickson, Trustee o Indefinite Term Physician; President, Wheaton Orthopedics; 137 None c/o First Trust Advisors L.P. Limited Partner, Gundersen Real Estate 120 E. Liberty Drive, o Since Inception Limited Partnership; Member, Sportsmed Suite 400 LLC (April 2007 to November 2015) Wheaton, IL 60187 D.O.B.: 04/51 Thomas R. Kadlec, Trustee o Indefinite Term President, ADM Investor Services, Inc. 137 Director of ADM c/o First Trust Advisors L.P. (Futures Commission Merchant) Investor 120 E. Liberty Drive, o Since Inception Services, Inc., Suite 400 ADM Investor Wheaton, IL 60187 Services D.O.B.: 11/57 International and Futures Industry Association Robert F. Keith, Trustee o Indefinite Term President, Hibs Enterprises (Financial and 137 Director of Trust c/o First Trust Advisors L.P. Management Consulting) Company of 120 E. Liberty Drive, o Since Inception Illinois Suite 400 Wheaton, IL 60187 D.O.B.: 11/56 Niel B. Nielson, Trustee o Indefinite Term Managing Director and Chief Operating 137 Director of c/o First Trust Advisors L.P. Officer ( January 2015 to Present), Pelita Covenant 120 E. Liberty Drive, o Since Inception Harapan Educational Foundation Transport Inc. Suite 400 (Educational Products and Services); (May 2003 to Wheaton, IL 60187 President and Chief Executive Officer May 2014) D.O.B.: 03/54 (June 2012 to September 2014), Servant Interactive LLC (Educational Products and Services); President and Chief Executive Officer (June 2012 to September 2014), Dew Learning LLC (Educational Products and Services); President (June 2002 to June 2012), Covenant College ------------------------------------------------------------------------------------------------------------------------------------ INTERESTED TRUSTEE ------------------------------------------------------------------------------------------------------------------------------------ James A. Bowen,(1) Trustee, o Indefinite Term Chief Executive Officer, First Trust 137 None Chairman of the Board Advisors L.P. and First Trust Portfolios 120 E. Liberty Drive, o Since Inception L.P.; Chairman of the Board of Directors, Suite 400 BondWave LLC (Software Development Wheaton, IL 60187 Company) and Stonebridge Advisors LLC D.O.B.: 09/55 (Investment Advisor)

----------------------------- (1) Mr. Bowen is deemed an "interested person" of the Trust due to his position as Chief Executive Officer of First Trust Advisors L.P., investment advisor of the Trust. Page 31 -------------------------------------------------------------------------------- BOARD OF TRUSTEES AND OFFICERS -------------------------------------------------------------------------------- FIRST TRUST LONG/SHORT EQUITY ETF (FTLS) OCTOBER 31, 2016 (UNAUDITED)

POSITION AND TERM OF OFFICE NAME, ADDRESS OFFICES AND LENGTH OF PRINCIPAL OCCUPATIONS AND DATE OF BIRTH WITH TRUST SERVICE DURING PAST 5 YEARS ------------------------------------------------------------------------------------------------------------------------------------ OFFICERS WHO ARE NOT TRUSTEES(2) ------------------------------------------------------------------------------------------------------------------------------------ James M. Dykas President and Chief o Indefinite term Managing Director and Chief Financial Officer 120 E. Liberty Drive, Executive Officer (January 2016 to Present), Controller (January 2011 Suite 400 o Since January 2016 to January 2016), Senior Vice President (April 2007 Wheaton, IL 60187 to January 2016), First Trust Advisors L.P. and First D.O.B.: 01/66 Trust Portfolios L.P.; Chief Financial Officer, BondWave LLC (Software Development Company) (January 2016 to Present) and Stonebridge Advisors LLC (Investment Advisor) (January 2016 to Present) Donald P. Swade Treasurer, Chief Financial o Indefinite Term Senior Vice President (July 2016 to Present), Vice 120 E. Liberty Drive, Officer and Chief President (April 2012 to July 2016), First Trust Suite 400 Accounting Officer o Since January 2016 Advisors L.P. and First Trust Portfolios L.P., Vice Wheaton, IL 60187 President (September 2006 to April 2012), D.O.B.: 08/72 Guggenheim Funds Investment Advisors, LLC/Claymore Securities, Inc. W. Scott Jardine Secretary and Chief o Indefinite Term General Counsel, First Trust Advisors L.P. and First 120 E. Liberty Drive, Legal Officer Trust Portfolios L.P.; Secretary and General Suite 400 o Since Inception Counsel, BondWave LLC; Secretary of Stonebridge Wheaton, IL 60187 Advisors LLC D.O.B.: 05/60 Daniel J. Lindquist Vice President o Indefinite Term Managing Director (July 2012 to Present), Senior 120 E. Liberty Drive, Vice President (September 2005 to July 2012), First Suite 400 o Since Inception Trust Advisors L.P. and First Trust Portfolios L.P. Wheaton, IL 60187 D.O.B: 02/70 Kristi A. Maher Chief Compliance Officer o Indefinite Term Deputy General Counsel, First Trust Advisors L.P. 120 E. Liberty Drive, and Assistant Secretary and First Trust Portfolios L.P. Suite 400 o Since Inception Wheaton, IL 60187 D.O.B.: 12/66 Roger F. Testin Vice President o Indefinite Term Senior Vice President, First Trust Advisors L.P. 120 E. Liberty Drive, and First Trust Portfolios L.P. Suite 400 o Since Inception Wheaton, IL 60187 D.O.B.: 06/66 Stan Ueland Vice President o Indefinite Term Senior Vice President (September 2012 to Present), 120 E. Liberty Drive, Vice President (August 2005 to September 2012), Suite 400 o Since Inception First Trust Advisors L.P. and First Trust Portfolios Wheaton, IL 60187 L.P. D.O.B.: 11/70

----------------------------- (2) The term "officer" means the president, vice president, secretary, treasurer, controller or any other officer who performs a policy making function. Page 32 -------------------------------------------------------------------------------- PRIVACY POLICY -------------------------------------------------------------------------------- FIRST TRUST LONG/SHORT EQUITY ETF (FTLS) OCTOBER 31, 2016 (UNAUDITED) PRIVACY POLICY First Trust values our relationship with you and considers your privacy an important priority in maintaining that relationship. We are committed to protecting the security and confidentiality of your personal information. SOURCES OF INFORMATION We collect nonpublic personal information about you from the following sources: o Information we receive from you and your broker-dealer, investment advisor or financial representative through interviews, applications, agreements or other forms; o Information about your transactions with us, our affiliates or others; o Information we receive from your inquiries by mail, e-mail or telephone; and o Information we collect on our website through the use of "cookies". For example, we may identify the pages on our website that your browser requests or visits. INFORMATION COLLECTED The type of data we collect may include your name, address, social security number, age, financial status, assets, income, tax information, retirement and estate plan information, transaction history, account balance, payment history, investment objectives, marital status, family relationships and other personal information. DISCLOSURE OF INFORMATION We do not disclose any nonpublic personal information about our customers or former customers to anyone, except as permitted by law. In addition to using this information to verify your identity (as required under law), the permitted uses may also include the disclosure of such information to unaffiliated companies for the following reasons: o In order to provide you with products and services and to effect transactions that you request or authorize, we may disclose your personal information as described above to unaffiliated financial service providers and other companies that perform administrative or other services on our behalf, such as transfer agents, custodians and trustees, or that assist us in the distribution of investor materials such as trustees, banks, financial representatives, proxy services, solicitors and printers. o We may release information we have about you if you direct us to do so, if we are compelled by law to do so, or in other legally limited circumstances (for example to protect your account from fraud). In addition, in order to alert you to our other financial products and services, we may share your personal information with affiliates of the Fund. PRIVACY ONLINE We allow third-party companies, including AddThis (a social media sharing service), to collect certain anonymous information when you visit our website. These companies may use non-personally identifiable information during your visits to this and other websites in order to provide advertisements about goods and services likely to be of greater interest to you. These companies typically use a cookie, third party web beacon or pixel tags, to collect this information. To learn more about this behavioral advertising practice, you can visit www.networkadvertising.org. CONFIDENTIALITY AND SECURITY With regard to our internal security procedures, we restrict access to your nonpublic personal information to those individuals who need to know that information to provide products or services to you. We maintain physical, electronic and procedural safeguards to protect your nonpublic personal information. POLICY UPDATES AND INQUIRIES As required by federal law, we will notify you of our privacy policy annually. We reserve the right to modify this policy at any time, however, if we do change it, we will tell you promptly. For questions about our policy, or for additional copies of this notice, please go to www.ftportfolios.com, or contact us at 1-800-621-1675 (First Trust Portfolios) or 1-800-222-6822 (First Trust Advisors). March 2016 Page 33 This page intentionally left blank. This page intentionally left blank. This page intentionally left blank. FIRST TRUST First Trust Exchange-Traded Fund III INVESTMENT ADVISOR First Trust Advisors L.P. 120 East Liberty Drive, Suite 400 Wheaton, IL 60187 ADMINISTRATOR, CUSTODIAN, FUND ACCOUNTANT & TRANSFER AGENT Brown Brothers Harriman & Co. 50 Post Office Square Boston, MA 02110 INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Deloitte & Touche LLP 111 S. Wacker Drive Chicago, IL 60606 LEGAL COUNSEL Chapman and Cutler LLP 111 W. Monroe Street Chicago, IL 60603 [BLANK BACK COVER] FIRST TRUST First Trust Exchange-Traded Fund III -------------------------------------------------------------------------------- First Trust Emerging Markets Local Currency Bond ETF (FEMB) Annual Report For the Year Ended October 31, 2016 -------------------------------------------------------------------------------- TABLE OF CONTENTS -------------------------------------------------------------------------------- FIRST TRUST EMERGING MARKETS LOCAL CURRENCY BOND ETF (FEMB) ANNUAL REPORT OCTOBER 31, 2016 Shareholder Letter........................................................... 1 Fund Performance Overview.................................................... 2 Portfolio Commentary......................................................... 5 Understanding Your Fund Expenses............................................. 7 Portfolio of Investments..................................................... 8 Statement of Assets and Liabilities.......................................... 12 Statement of Operations...................................................... 13 Statements of Changes in Net Assets.......................................... 14 Financial Highlights......................................................... 15 Notes to Financial Statements................................................ 16 Report of Independent Registered Public Accounting Firm...................... 23 Additional Information....................................................... 24 Board of Trustees and Officers............................................... 28 Privacy Policy............................................................... 30 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") or First Trust Global Portfolios Ltd. (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 the series of First Trust Exchange-Traded Fund III (the "Trust") described in this report for the First Trust Emerging Markets Local Currency Bond ETF (hereinafter referred to as the "Fund") to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. When evaluating the information included in this report, you are cautioned not to place undue reliance on these forward-looking statements, which reflect the judgment of the Advisor and/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 the Fund will achieve its investment objective. The Fund is subject to market risk, which is the possibility that the market values of securities owned by the Fund will decline and that the value of the Fund shares may therefore be less than what you paid for them. Accordingly, you can lose money by investing in the Fund. See "Risk Considerations" in the Additional Information section of this report for a discussion of certain other risks of investing in the Fund. Performance data quoted represents past performance, which is no guarantee of future results, and current performance may be lower or higher than the figures shown. For the most recent month-end performance figures, please visit http://www.ftportfolios.com or speak with your financial advisor. Investment returns, net asset value and share price will fluctuate and Fund shares, when sold, may be worth more or less than their original cost. HOW TO READ THIS REPORT This report contains information that may help you evaluate your investment in the Fund. It includes details about the Fund's portfolio and presents data and analysis that provide insight into the Fund's performance and investment approach. By reading the portfolio commentary by the portfolio management team of the Fund, you may obtain an understanding of how the market environment affected the Fund's performance. The statistical information that follows may help you understand the Fund's performance compared to that of relevant market benchmarks. It is important to keep in mind that the opinions expressed by personnel of the Advisor are just that: informed opinions. They should not be considered to be promises or advice. The opinions, like the statistics, cover the period through the date on the cover of this report. The material risks of investing in the Fund are spelled out in its prospectus, statement of additional information, this report and other Fund regulatory filings. -------------------------------------------------------------------------------- SHAREHOLDER LETTER -------------------------------------------------------------------------------- FIRST TRUST EMERGING MARKETS LOCAL CURRENCY BOND ETF (FEMB) ANNUAL LETTER FROM THE CHAIRMAN AND CEO OCTOBER 31, 2016 Dear Shareholders: Thank you for your investment in First Trust Emerging Markets Local Currency Bond ETF. First Trust Advisors L.P. ("First Trust") is pleased to provide you with the annual report which contains detailed information about your investment for the 12 months ended October 31, 2016, including a market overview and a performance analysis for the period. We encourage you to read this report and discuss it with your financial advisor. Early in 2016, many investors were concerned that the volatility witnessed in the stock market in 2015 would continue, and it did. During the first six months of the year, one of the events that affected the global markets was the "Brexit" vote (where citizens in the UK voted to leave the European Union). Just a few days after the historic vote, the global equity markets rebounded to close June 30, 2016 at a combined market capitalization of $62 trillion. As of October 31, 2016, the S&P 500(R) Index was up 5.87% calendar year-to-date, according to Bloomberg. From October 30, 2015 through October 31, 2016, the S&P 500(R) Index was also in positive territory at 4.51%. The last few months have had investors keenly watching the presidential election in anticipation of the outcome of the vote and its effect on the stock market and economy. I will discuss that more in my next letter. The current bull market (measuring from March 9, 2009 through October 31, 2016) is the second longest in history. First Trust believes that having a long-term investment horizon and investing in quality products can help you reach your goals, regardless of ups and downs in the market. We strive to provide quality investment products, which has been one of the hallmarks of our firm since its inception more than 25 years ago. Thank you for giving First Trust the opportunity to be a part of your investment plan. We value our relationship with you and will continue to focus on helping investors like you reach your financial goals. Sincerely, /s/ James A. Bowen James A. Bowen Chairman of the Board of Trustees Chief Executive Officer of First Trust Advisors L.P. Page 1 -------------------------------------------------------------------------------- FUND PERFORMANCE OVERVIEW (UNAUDITED) -------------------------------------------------------------------------------- FIRST TRUST EMERGING MARKETS LOCAL CURRENCY BOND ETF (FEMB) First Trust Emerging Markets Local Currency Bond ETF (the "Fund") seeks maximum total return and current income. The Fund lists and principally trades its shares on The Nasdaq Stock Market LLC ("Nasdaq") under the ticker symbol "FEMB." 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 bonds, notes and bills issued or guaranteed by entities in emerging market countries (collectively, "Bonds") that are denominated in the local currency of the issuer. In implementing the Fund's investment strategy, First Trust Global Portfolios Ltd. (the "Sub-Advisor") will seek to provide current income and enhance capital, while minimizing volatility.

---------------------------------------------------------------------------------------------------------- PERFORMANCE ---------------------------------------------------------------------------------------------------------- AVERAGE ANNUAL CUMULATIVE TOTAL RETURNS TOTAL RETURNS 1 Year Ended Inception (11/4/14) Inception (11/4/14) 10/31/2016 to 10/31/2016 to 10/31/2016 FUND PERFORMANCE NAV 9.66% -3.37% -6.60% Market Price 8.84% -3.52% -6.88% INDEX PERFORMANCE Barclays Emerging Markets Local Currency Government - 10% Country Capped Index 10.04% -2.54% -4.99% ----------------------------------------------------------------------------------------------------------

Total returns for the periods since inception are calculated from the inception date of the 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. The Fund's per share net asset value ("NAV") is the value of one share of the Fund and is computed by dividing the value of all assets of the Fund (including accrued interest and dividends), less all liabilities (including accrued expenses and dividends declared but unpaid), by the total number of outstanding shares. The price used to calculate market return ("Market Price") is determined by using the midpoint between the highest bid and the lowest offer on the stock exchange on which shares of the Fund are listed for trading as of the time that the Fund's NAV is calculated. Since shares of the Fund did not trade in the secondary market until after its inception, for the period from inception to the first day of secondary market trading in shares of the Fund, the NAV of the Fund is used as a proxy for the secondary market trading price to calculate market returns. NAV and market returns assume that all distributions have been reinvested in the Fund at NAV and Market Price, respectively. An index is a statistical composite that tracks a specified financial market or sector. Unlike the Fund, the index does not actually hold a portfolio of securities and therefore does not incur the expenses incurred by the Fund. These expenses negatively impact the performance of the Fund. Also, market returns do not include brokerage commissions that may be payable on secondary market transactions. If brokerage commissions were included, market returns would be lower. The total returns presented reflect the reinvestment of dividends on securities in the index. The returns presented do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. The investment return and principal value of shares of the Fund will vary with changes in market conditions. Shares of the Fund may be worth more or less than their original cost when they are redeemed or sold in the market. The Fund's past performance is no guarantee of future performance. Page 2 -------------------------------------------------------------------------------- FUND PERFORMANCE OVERVIEW (UNAUDITED) (CONTINUED) -------------------------------------------------------------------------------- FIRST TRUST EMERGING MARKETS LOCAL CURRENCY BOND ETF (FEMB) ---------------------------------------------------------- % OF TOTAL SECTOR ALLOCATION INVESTMENTS ---------------------------------------------------------- Sovereigns 95.5% Supranationals 3.0 Central Bank 1.5 ------- Total 100.0% ======= ---------------------------------------------------------- % OF TOTAL INVESTMENTS CREDIT RATING(1) (INCLUDING CASH) ---------------------------------------------------------- AAA 2.8% AA 6.2 A+ 1.4 A 18.7 A- 9.8 BBB+ 9.6 BBB 4.8 BBB- 29.0 BB 10.6 Cash 7.1 ------- Total 100.0% ======= ---------------------------------------------------------- % OF TOTAL TOP 10 HOLDINGS INVESTMENTS ---------------------------------------------------------- Indonesia Treasury Bond, 8.38%, 3/15/24 6.5% Turkey Government Bond, 8.00%, 3/12/25 6.0 Mexican Bonos, 10.00%, 12/5/24 5.9 Brazil Notas do Tesouro Nacional, Series F, 10.00%, 1/1/21 5.8 Brazil Notas do Tesouro Nacional, Series F, 10.00%, 1/1/25 5.6 Thailand Government Bond, 3.63%, 6/16/23 5.3 Czech Republic Government Bond, 2.40%, 9/17/25 5.3 Hungary Government Bond, 6.50%, 6/24/19 5.2 Peru Government Bond, 7.84%, 8/12/20 5.2 Malaysia Government, 4.16%, 7/15/21 5.2 ------- Total 56.0% ======= (1) The credit quality and ratings information presented above reflect the ratings assigned by one or more nationally recognized statistical rating organizations ("NRSROs"), including Standard & Poor's Ratings Group, a division of the McGraw-Hill Companies, Inc., Moody's Investors Service, Inc., Fitch Ratings or a comparably rated NRSRO. For situations in which a security is rated by more than one NRSRO and the ratings are not equivalent, the highest ratings are used. Sub-investment grade ratings are those rated BB+/Ba1 or lower. Investment grade ratings are those rated BBB-/Baa3 or higher. The credit ratings shown relate to the creditworthiness of the issuers of the underlying securities in the Fund, and not to the Fund or its shares. Credit ratings are subject to change. Page 3 -------------------------------------------------------------------------------- FUND PERFORMANCE OVERVIEW (UNAUDITED) (CONTINUED) -------------------------------------------------------------------------------- FIRST TRUST EMERGING MARKETS LOCAL CURRENCY BOND ETF (FEMB)

PERFORMANCE OF A $10,000 INITIAL INVESTMENT NOVEMBER 4, 2014 - OCTOBER 31, 2016 First Trust Barclays Emerging Emerging Markets Markets Local Currency Local Currency Government - 10% Bond ETF Country Capped Index 11/4/14 $10,000 $10,000 4/30/15 9,340 9,450 10/31/15 8,517 8,634 4/30/16 9,209 9,390 10/31/16 9,340 9,501

Performance figures assume reinvestment of all distributions and do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. An index is a statistical composite that tracks a specified financial market or sector. Unlike the Fund, the index does not actually hold a portfolio of securities and therefore does not incur the expenses incurred by the Fund. These expenses negatively impact the performance of the Fund. The Fund's past performance does not predict future performance. FREQUENCY DISTRIBUTION OF DISCOUNTS AND PREMIUMS BID/ASK MIDPOINT VS. NAV THROUGH OCTOBER 31, 2016 The following Frequency Distribution of Discounts and Premiums charts are provided to show the frequency at which the bid/ask midpoint price for the Fund was at a discount or premium to the daily NAV. The following tables are for comparative purposes only and represent the period November 5, 2014 (commencement of trading) through October 31, 2016. Shareholders may pay more than NAV when they buy Fund shares and receive less than NAV when they sell those shares because shares are bought and sold at current market price. Data presented represents past performance and cannot be used to predict future results. -------------------------------------------------------------------------------- NUMBER OF DAYS BID/ASK MIDPOINT AT/ABOVE NAV -------------------------------------------------------------------------------- FOR THE PERIOD 0.00%-0.49% 0.50%-0.99% 1.00%-1.99% >=2.00% 11/5/14 - 10/31/15 116 110 7 1 11/1/15 - 10/31/16 80 64 38 3 -------------------------------------------------------------------------------- NUMBER OF DAYS BID/ASK MIDPOINT BELOW NAV -------------------------------------------------------------------------------- FOR THE PERIOD 0.00%-0.49% 0.50%-0.99% 1.00%-1.99% >=2.00% 11/5/14 - 10/31/15 15 0 0 1 11/1/15 - 10/31/16 60 7 0 0 Page 4 -------------------------------------------------------------------------------- PORTFOLIO COMMENTARY -------------------------------------------------------------------------------- FIRST TRUST EMERGING MARKETS LOCAL CURRENCY BOND ETF (FEMB) ANNUAL REPORT OCTOBER 31, 2016 (UNAUDITED) INVESTMENT ADVISOR First Trust Advisors L.P. ("First Trust" or the "Advisor"), 120 East Liberty Drive, Wheaton, Illinois 60187, is the investment advisor to the First Trust Emerging Markets Local Currency Bond ETF (the "Fund"). First Trust Global Portfolios Ltd. ("FTGP"), an affiliate of First Trust, serves as investment sub-advisor to the Fund. INVESTMENT SUB-ADVISOR FTGP acts as a sub-advisor of the Fund and is headed by Derek Fulton, Director, Chief Executive Officer and Chief Investment Officer of FTGP. Established in December 2011, FTGP is an SEC-registered investment advisor based in London. FTGP was established as a United Kingdom-based distributor, advisor and affiliate of First Trust and First Trust Portfolios L.P. and advises on global fixed income and currency portfolios. The global fixed income team at FTGP has experience in managing developing and emerging market fixed income portfolios for high profile European institutions. PORTFOLIO MANAGEMENT TEAM The following portfolio managers are primarily responsible for the day-to-day management of the Fund. Each portfolio manager has managed the Fund since 2014. DEREK FULTON, DIRECTOR, CHIEF EXECUTIVE OFFICER AND CHIEF INVESTMENT OFFICER, FTGP LEONARDO DA COSTA, DIRECTOR, FTGP MARKET RECAP Emerging market bonds posted strong returns for the year ended October 31, 2016 with positive returns coming from both lower local bond yields and stronger emerging market currencies. The Bloomberg Barclays Emerging Markets Local Currency Government -10% Country Capped Index (the "Index") returned 10.04% for the 12 months ending October 31, 2016. Over that same period, the yield to worst on the Index (the lowest yield received when taking into account a bond's maturity, call or refunding dates) declined 68 basis points to 5.18%. The medium term macro-economic trends which supported the emerging market rally came from stronger growth in these markets, the strength in commodity prices, and the more dovish outlook for U.S. monetary policy with the U.S. Federal Reserve only managing to raise the Federal Funds rate by 25 basis points over the period. At the same time, we have witnessed a marked improvement in the underlying fundamentals in our view of these emerging markets economies. Driving these improving fundamentals are, in our opinion, the supportive demographic profiles, relatively low debt levels and competitive currencies we find in many emerging markets. Younger populations allow for a larger and more stable workforce, the lower debt levels enable the economies more flexibility and the competitive currencies are helping to improve net exports helping to support GDP growth. These encouraging longer-term fundamentals in our view underpin the positive outlook for economic growth across emerging markets. This outlook for positive economic growth can be evidenced by the superior forward-looking growth expectations for emerging markets versus their developed market counterparts. According to the International Monetary Fund (the "IMF"), economic growth rates in emerging markets will average almost double those of developed economies. Emerging economies' GDPs are set to grow at 4.17% in 2016, accelerating to 5.08% by 2021 while the advanced economies' economic growth is expected to reach 1.57% in 2016 and will remain low into 2021 at 1.68%. The spread between advanced and developing country's economic growth is expected to increase substantially into 2021. Looking at the Fund's positive performance over the period, it is important to point out the differentiation that occurred across the country constituents. Generally, the higher yielding countries that performed poorly over the previous year bounced back aggressively. Notable outperformance came from countries like Brazil, which started its recovery from a political crisis, as well as Indonesia and South Africa. On the opposite end, countries like Mexico lagged most other emerging markets as the economic reform efforts slowed and uncertainty increased over the relationship between itself and the United States. We expect this differentiation to continue going forward as some countries will be able to capitalize on their strong fundamentals and competitive currencies more than others. Page 5 -------------------------------------------------------------------------------- PORTFOLIO COMMENTARY (CONTINUED) -------------------------------------------------------------------------------- FIRST TRUST EMERGING MARKETS LOCAL CURRENCY BOND ETF (FEMB) ANNUAL REPORT OCTOBER 31, 2016 (UNAUDITED) PERFORMANCE ANALYSIS The Fund returned 9.66% on a net asset value ("NAV") basis for the 12 months ending October 31, 2016; the market price return was 8.84% over the same period. The Fund return was marginally lower than the Index's return of 10.04% for the period. The Fund's most recent distribution was $0.1816 per share and the 12-month distribution rate was 5.39% as of October 31, 2016. We have seen the distribution rate increase over the last 12 months as the Fund's positions shifted to a more constructive stance from the more defensive positioning in the previous annual period. We have a positive outlook for the asset class. The main drivers contributing to the Fund's positive returns over the period were the significant exposures to Brazil, Indonesia and South Africa. As of October 31, 2016, Brazil and Indonesia remained the two largest country exposures on the Fund. The negative contribution to performance was led by the Fund's exposure to Mexico over the period. The active management of the underlying emerging market currency exposures remains a focus, particularly as the volatility of emerging market currency returns is a large driver of the asset class volatility. We continue to believe that the active management of the Fund's currency exposures will lead to lower overall volatility and superior risk adjusted returns going forward. MARKET AND FUND OUTLOOK Our outlook for emerging market local currency debt remains positive for the rest of the year given the historically attractive valuations and strong technical drivers from portfolio flows. The asset class yield and spread over similar duration five-year maturity U.S. Treasuries remain attractive at 5.18% and 388 basis points. We continue to see value in the higher-yielding emerging market credits as long as the volatility derived from the underlying currency exposure of the credits is adequately managed. Having said that, we note that emerging market currencies are also trading at historically cheap levels which may provide an attractive entry point for global investors. Investor fund flows into the asset class have been positive since the beginning of 2016, which is a stark departure from prior years. This is partly a consequence of emerging market local currency bonds being one of the highest yielding segments of the global fixed income universe, despite the majority of the asset class being investment grade rated. The positive performance of the asset class year-to-date and bond yields that are compelling relative to other fixed income asset classes are likely to continue to attract inflows in the quarters ahead. In summary, we view an allocation to emerging markets as an attractive opportunity today as the cheap valuations, exposure to global assets and may diversify investors' portfolios. The increasing robustness of the fundamentals underlying emerging markets allows us ample opportunity to select the exposures that offer the best risk and reward balance for the Fund, something we remain committed to do. Page 6 FIRST TRUST EMERGING MARKETS LOCAL CURRENCY BOND ETF (FEMB) UNDERSTANDING YOUR FUND EXPENSES OCTOBER 31, 2016 (UNAUDITED) As a shareholder of First Trust Emerging Markets Local Currency Bond ETF (the "Fund") you incur two types of costs: (1) transaction costs; and (2) ongoing costs, including management fees, distribution and/or service fees, if any, and other Fund expenses. This Example is intended to help you understand your ongoing costs of investing in the Fund and to compare these costs with the ongoing costs of investing in other funds. The Example is based on an investment of $1,000 invested at the beginning of the period and held through the six-month period ended October 31, 2016. ACTUAL EXPENSES The first line in the following table provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled "Expenses Paid During the Six-Month Period" to estimate the expenses you paid on your account during this six-month period. HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES The second line in the following table provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs such as brokerage commissions. Therefore, the second line in the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.

------------------------------------------------------------------------------------------------------------------------- ANNUALIZED EXPENSE RATIO EXPENSES PAID BEGINNING ENDING BASED ON THE DURING THE ACCOUNT VALUE ACCOUNT VALUE SIX-MONTH SIX-MONTH MAY 1, 2016 OCTOBER 31, 2016 PERIOD PERIOD (a) ------------------------------------------------------------------------------------------------------------------------- FIRST TRUST EMERGING MARKETS LOCAL CURRENCY BOND ETF (FEMB) Actual $1,000.00 $1,014.30 0.85% $4.30 Hypothetical (5% return before expenses) $1,000.00 $1,020.86 0.85% $4.32

(a) Expenses are equal to the annualized expense ratio as indicated in the table multiplied by the average account value over the period (May 1, 2016 through October 31, 2016), multiplied by 184/366. Page 7 FIRST TRUST EMERGING MARKETS LOCAL CURRENCY BOND ETF (FEMB) PORTFOLIO OF INVESTMENTS OCTOBER 31, 2016

PRINCIPAL VALUE (LOCAL STATED STATED VALUE CURRENCY) DESCRIPTION COUPON MATURITY (US DOLLARS) --------------- ---------------------------------------------------------------- ------------ ------------ -------------- FOREIGN SOVEREIGN BONDS AND NOTES - 88.7% BRAZIL - 10.4% 2,600,000 Brazil Notas do Tesouro Nacional, Series F (BRL)................ 10.00% 01/01/21 $ 782,307 2,600,000 Brazil Notas do Tesouro Nacional, Series F (BRL)................ 10.00% 01/01/25 761,211 -------------- 1,543,518 -------------- CHILE - 1.3% 120,000,000 Bonos del Banco Central de Chile en Pesos (CLP)................. 6.00% 02/01/21 198,605 -------------- COLOMBIA - 1.0% 457,000,000 Colombian TES (COP)............................................. 7.00% 05/04/22 153,441 -------------- CZECH REPUBLIC - 4.8% 14,870,000 Czech Republic Government Bond (CZK)............................ 2.40% 09/17/25 714,046 -------------- HUNGARY - 4.8% 174,800,000 Hungary Government Bond (HUF)................................... 6.50% 06/24/19 708,683 -------------- INDONESIA - 9.7% 1,500,000,000 Indonesia Treasury Bond (IDR)................................... 7.88% 04/15/19 118,279 10,759,000,000 Indonesia Treasury Bond (IDR)................................... 8.38% 03/15/24 878,168 5,430,000,000 Indonesia Treasury Bond (IDR)................................... 8.38% 03/15/34 437,171 -------------- 1,433,618 -------------- ISRAEL - 1.4% 570,000 Israel Government Bond - Fixed (ILS)............................ 6.25% 10/30/26 208,077 -------------- MALAYSIA - 4.8% 2,850,000 Malaysia Government (MYR)....................................... 4.16% 07/15/21 703,673 -------------- MEXICO - 9.1% 12,180,000 Mexican Bonos (MXN)............................................. 10.00% 12/05/24 802,568 9,290,000 Mexican Bonos (MXN)............................................. 7.75% 05/29/31 543,780 -------------- 1,346,348 -------------- PERU - 4.8% 2,135,000 Peru Government Bond (PEN)...................................... 7.84% 08/12/20 703,791 -------------- PHILIPPINES - 4.7% 23,000,000 Philippine Government International Bond (PHP).................. 4.95% 01/15/21 490,423 10,000,000 Philippine Government International Bond (PHP).................. 3.90% 11/26/22 204,967 -------------- 695,390 -------------- POLAND - 4.5% 1,755,000 Republic of Poland Government Bond (PLN)........................ 4.00% 10/25/23 477,944 615,000 Republic of Poland Government Bond (PLN)........................ 5.75% 04/25/29 194,991 -------------- 672,935 -------------- ROMANIA - 4.7% 2,390,000 Romania Government Bond (RON)................................... 5.85% 04/26/23 688,728 -------------- SOUTH AFRICA - 8.4% 8,105,000 Republic of South Africa Government Bond (ZAR).................. 10.50% 12/21/26 666,331 10,780,000 Republic of South Africa Government Bond (ZAR).................. 6.25% 03/31/36 582,481 -------------- 1,248,812 -------------- THAILAND - 4.9% 22,880,000 Thailand Government Bond (THB).................................. 3.63% 06/16/23 721,051 --------------

Page 8 See Notes to Financial Statements FIRST TRUST EMERGING MARKETS LOCAL CURRENCY BOND ETF (FEMB) PORTFOLIO OF INVESTMENTS (CONTINUED) OCTOBER 31, 2016

PRINCIPAL VALUE (LOCAL STATED STATED VALUE CURRENCY) DESCRIPTION COUPON MATURITY (US DOLLARS) --------------- ---------------------------------------------------------------- ------------ ------------ -------------- FOREIGN SOVEREIGN BONDS AND NOTES (CONTINUED) TURKEY - 9.4% 1,740,000 Turkey Government Bond (TRY).................................... 10.50% 01/15/20 $ 581,171 2,800,000 Turkey Government Bond (TRY).................................... 8.00% 03/12/25 814,414 -------------- 1,395,585 -------------- TOTAL FOREIGN SOVEREIGN BONDS AND NOTES..................................................... 13,136,301 (Cost $13,504,575) -------------- FOREIGN CORPORATE BONDS AND NOTES - 2.7% SUPRANATIONALS - 2.7% 3,030,000 European Investment Bank (ZAR).................................. 6.00% 10/21/19 213,064 630,000 International Finance Corp. (BRL)............................... 10.00% 06/12/17 195,888 -------------- TOTAL FOREIGN CORPORATE BONDS AND NOTES..................................................... 408,952 (Cost $446,042) -------------- TOTAL INVESTMENTS - 91.4%................................................................... 13,545,253 (Cost $13,950,617) (a) NET OTHER ASSETS AND LIABILITIES - 8.6%..................................................... 1,266,807 -------------- NET ASSETS - 100.0%......................................................................... $ 14,812,060 ==============

----------------------------- (a) Aggregate cost for federal income tax purposes is $14,007,103. As of October 31, 2016, the aggregate gross unrealized appreciation for all securities in which there was an excess of value over tax cost was $122,589 and the aggregate gross unrealized depreciation for all securities in which there was an excess of tax cost over value was $584,439. Currency Abbreviations: BRL Brazilian Real CLP Chilean Peso COP Colombian Peso CZK Czech Republic Koruna HUF Hungarian Forint IDR Indonesian Rupiah ILS Israel Shekel INR Indian Rupee MXN Mexican Peso MYR Malaysian Ringgit PEN Peruvian New Sol PHP Philippines Peso PLN Polish Zloty RON Romanian Lev RUB Russian Ruble THB Thailand Baht TRY Turkish Lira USD United States Dollar ZAR South African Rand See Notes to Financial Statements Page 9 FIRST TRUST EMERGING MARKETS LOCAL CURRENCY BOND ETF (FEMB) PORTFOLIO OF INVESTMENTS (CONTINUED) OCTOBER 31, 2016 ----------------------------- VALUATION INPUTS A summary of the inputs used to value the Fund's investments as of October 31, 2016 is as follows (see Note 2A - Portfolio Valuation in the Notes to Financial Statements):

ASSETS TABLE LEVEL 2 LEVEL 3 TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT VALUE AT QUOTED OBSERVABLE UNOBSERVABLE 10/31/2016 PRICES INPUTS INPUTS ------------- ------------- -------------- -------------- Foreign Sovereign Bonds and Notes*................. $ 13,136,301 $ -- $ 13,136,301 $ -- Foreign Corporate Bonds and Notes*................. 408,952 -- 408,952 -- ------------- ------------- -------------- -------------- Total Investments.................................. $ 13,545,253 $ -- $ 13,545,253 $ -- ============= ============= ============== ============== LIABILITIES TABLE LEVEL 2 LEVEL 3 TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT VALUE AT QUOTED OBSERVABLE UNOBSERVABLE 10/31/2016 PRICES INPUTS INPUTS ------------- ------------- -------------- -------------- Forward Foreign Currency Contracts**............... $ (12,752) $ -- $ (12,752) $ -- ============= ============= ============== ==============

* See the Portfolio of Investments for country breakout. ** See the Schedule of Forward Foreign Currency Contracts for contract and currency detail. All transfers in and out of the Levels during the period are assumed to be transferred on the last day of the period at their current value. There were no transfers between Levels at October 31, 2016. Page 10 See Notes to Financial Statements FIRST TRUST EMERGING MARKETS LOCAL CURRENCY BOND ETF (FEMB) PORTFOLIO OF INVESTMENTS (CONTINUED) OCTOBER 31, 2016 -------------------------------------------- % OF TOTAL CURRENCY EXPOSURE INVESTMENTS DIVERSIFICATION (INCLUDING CASH)+ -------------------------------------------- BRL 11.9% ZAR 10.3 IDR 9.8 MXN 9.2 TRY 7.0 INR 5.1 RUB 5.1 THB 5.0 CZK 4.9 HUF 4.9 PEN 4.8 MYR 4.8 PHP 4.8 PLN 4.7 RON 2.2 USD 1.5 ILS 1.5 CLP 1.4 COP 1.1 ------- Total 100.0% ======= + The weightings include the impact of currency forwards. FORWARD FOREIGN CURRENCY CONTRACTS (see Note 2C - Forward Foreign Currency Contracts in the Notes to Financial Statements):

FORWARD FOREIGN CURRENCY CONTRACTS --------------------------------------------------- PURCHASE SALE UNREALIZED SETTLEMENT AMOUNT AMOUNT VALUE AS OF VALUE AS OF APPRECIATION/ DATE COUNTERPARTY PURCHASED (1) SOLD (1) OCTOBER 31, 2016 OCTOBER 31, 2016 (DEPRECIATION) -------------- -------------- -------------- -------------- ----------------- ---------------- -------------- 11/30/16 BNS INR 50,300,000 USD 750,075 $ 749,997 $ 750,075 $ (78) 11/30/16 BNS RUB 47,000,000 USD 742,731 736,143 742,731 (6,588) 12/02/16 BBH USD 372,911 RON 1,540,000 372,911 375,338 (2,427) 11/30/16 BBH USD 369,010 TRY 1,160,000 369,010 372,669 (3,659) -------------- Net Unrealized Appreciation (Depreciation)................................................................ $ (12,752) ==============

(1) Please see Portfolio of Investments for currency descriptions. Counterparty Abbreviations: BBH Brown Brothers Harriman & Co. BNS Bank of Nova Scotia See Notes to Financial Statements Page 11 FIRST TRUST EMERGING MARKETS LOCAL CURRENCY BOND ETF (FEMB) STATEMENT OF ASSETS AND LIABILITIES OCTOBER 31, 2016

ASSETS: Investments, at value.................................................. $ 13,545,253 Cash................................................................... 975,149 Foreign currency....................................................... 66,534 Interest receivable.................................................... 251,927 -------------- Total Assets........................................................ 14,838,863 -------------- LIABILITIES: Unrealized depreciation on forward foreign currency contracts.......... 12,752 Due to broker.......................................................... 480 Payables: Investment advisory fees............................................ 10,731 Deferred Indonesian capital gains tax............................... 2,840 -------------- Total Liabilities................................................... 26,803 -------------- NET ASSETS............................................................. $ 14,812,060 ============== NET ASSETS CONSIST OF: Paid-in capital........................................................ $ 15,394,984 Par value.............................................................. 3,500 Accumulated net investment income (loss)............................... (77,186) Accumulated net realized gain (loss) on investments, forward foreign currency contracts and foreign currency transactions................ (89,862) Net unrealized appreciation (depreciation) on investments, forward foreign currency contracts and foreign currency translation......... (419,376) -------------- NET ASSETS............................................................. $ 14,812,060 ============== NET ASSET VALUE, per share............................................. $ 42.32 ============== Number of shares outstanding (unlimited number of shares authorized, par value $0.01 per share).......................................... 350,002 ============== Investments, at cost................................................... $ 13,950,617 ============== Foreign currency, at cost (proceeds)................................... $ 65,629 ==============

Page 12 See Notes to Financial Statements FIRST TRUST EMERGING MARKETS LOCAL CURRENCY BOND ETF (FEMB) STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2016

INVESTMENT INCOME: Interest............................................................... $ 313,203 Foreign tax withholding................................................ (6,261) -------------- Total investment income............................................. 306,942 -------------- EXPENSES: Investment advisory fees............................................... 47,023 -------------- Total expenses...................................................... 47,023 -------------- NET INVESTMENT INCOME (LOSS)........................................... 259,919 -------------- NET REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments......................................................... (133,975) Forward foreign currency contracts.................................. 27,532 Foreign currency transactions....................................... (14,636) -------------- Net realized gain (loss)............................................... (121,079) -------------- Net change in unrealized appreciation (depreciation) on: Investments......................................................... 233,007 Forward foreign currency contracts.................................. (15,018) Foreign currency translation........................................ 3,107 Net change in deferred Indonesian capital gains tax.................... (2,840) -------------- Net change in unrealized appreciation (depreciation)................... 218,256 -------------- NET REALIZED AND UNREALIZED GAIN (LOSS)................................ 97,177 -------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS..................................................... $ 357,096 ==============

See Notes to Financial Statements Page 13 FIRST TRUST EMERGING MARKETS LOCAL CURRENCY BOND ETF (FEMB) STATEMENTS OF CHANGES IN NET ASSETS

FOR THE FOR THE PERIOD YEAR 11/4/2014 (a) ENDED THROUGH 10/31/2016 10/31/2015 -------------- -------------- OPERATIONS: Net investment income (loss)........................................... $ 259,919 $ 193,855 Net realized gain (loss)............................................... (121,079) (292,447) Net change in unrealized appreciation (depreciation)................... 218,256 (637,632) -------------- -------------- Net increase (decrease) in net assets resulting from operations........ 357,096 (736,224) -------------- -------------- DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income.................................................. (208,381) -- Return of capital...................................................... (95,214) (194,434) -------------- -------------- Total distributions to shareholders.................................... (303,595) (194,434) -------------- -------------- SHAREHOLDER TRANSACTIONS: Proceeds from shares sold.............................................. 10,681,117 5,008,100 Cost of shares redeemed................................................ -- -- -------------- -------------- Net increase (decrease) in net assets resulting from shareholder transactions........................................................ 10,681,117 5,008,100 -------------- -------------- Total increase (decrease) in net assets................................ 10,734,618 4,077,442 NET ASSETS: Beginning of year...................................................... 4,077,442 -- -------------- -------------- End of year............................................................ $ 14,812,060 $ 4,077,442 ============== ============== Accumulated net investment income (loss) at end of year................ $ (77,186) $ (4,151) ============== ============== CHANGES IN SHARES OUTSTANDING: Shares outstanding, beginning of period................................ 100,002 -- Shares sold............................................................ 250,000 100,002 -------------- -------------- Shares outstanding, end of period...................................... 350,002 100,002 ============== ==============

(a) Inception date is November 4, 2014, which is consistent with the commencement of investment operations and is the date the initial creation units were established. Page 14 See Notes to Financial Statements FIRST TRUST EMERGING MARKETS LOCAL CURRENCY BOND ETF (FEMB) FINANCIAL HIGHLIGHTS FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD

FOR THE PERIOD YEAR 11/4/2014 (a) ENDED THROUGH 10/31/2016 10/31/2015 -------------- -------------- Net asset value, beginning of period $ 40.77 $ 50.00 ---------- ---------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) 1.74 1.94 Net realized and unrealized gain (loss) 2.09 (9.23) ---------- ---------- Total from investment operations 3.83 (7.29) ---------- ---------- DISTRIBUTIONS PAID TO SHAREHOLDERS FROM: Net investment income (1.56) -- Return of capital (0.72) (1.94) ---------- ---------- Total distributions (2.28) (1.94) ---------- ---------- Net asset value, end of period $ 42.32 $ 40.77 ========== ========== TOTAL RETURN (b) 9.66% (14.83)% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (in 000's) $ 14,812 $ 4,077 RATIOS TO AVERAGE NET ASSETS: Ratio of total expenses to average net assets 0.85% 0.85% (c) Ratio of net investment income (loss) to average net assets 4.70% 4.36% (c) Portfolio turnover rate (d) 23% 49%

(a) Inception date is consistent with the commencement of investment operations and is the date the initial creation units were established. (b) Total return is calculated assuming an initial investment made at the net asset value at the beginning of the period, reinvestment of all distributions at net asset value during the period, and redemption at net asset value on the last day of the period. The 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) Annualized. (d) Portfolio turnover is calculated for the time period presented and is not annualized for periods of less than a year and does not include securities received or delivered from processing creations or redemptions and in-kind transactions. See Notes to Financial Statements Page 15 -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS -------------------------------------------------------------------------------- FIRST TRUST EMERGING MARKETS LOCAL CURRENCY BOND ETF (FEMB) OCTOBER 31, 2016 1. ORGANIZATION First Trust Exchange-Traded Fund III (the "Trust") is an open-end management investment company organized as a Massachusetts business trust on January 9, 2008, and is registered with the Securities and Exchange Commission ("SEC") under the Investment Company Act of 1940, as amended (the "1940 Act"). The Trust currently consists of ten funds that are currently offering shares. This report covers the First Trust Emerging Markets Local Currency Bond ETF (the "Fund"), a non-diversified series of the Trust, which trades under the ticker FEMB on The Nasdaq Stock Market LLC ("Nasdaq"). Unlike conventional mutual funds, the Fund issues and redeems shares on a continuous basis, at net asset value ("NAV"), only in large specified blocks consisting of 50,000 shares called a "Creation Unit." Creation Units are issued and redeemed in cash and, in certain circumstances, in-kind for securities in which the Fund invests. Except when aggregated in Creation Units, the shares are not redeemable securities of the Fund. The Fund is an actively managed exchange-traded fund. The investment objective of the Fund is to seek maximum total return and current income. 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 bonds, notes and bills issued or guaranteed by issuers in emerging market countries that are denominated in the local currency of the issuer. The Fund may not be appropriate for all investors. 2. SIGNIFICANT ACCOUNTING POLICIES The Fund is considered an investment company and follows accounting and reporting guidance under Financial Accounting Standards Board Accounting Standards Codification Topic 946, "Financial Services-Investment Companies." The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of the financial statements. The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. A. PORTFOLIO VALUATION The Fund's NAV is determined daily as of the close of regular trading on The New York Stock Exchange ("NYSE"), normally 4:00 p.m. Eastern time, on each day the NYSE is open for trading. If the NYSE closes early on a valuation day, the Fund's NAV is determined as of that time. Domestic debt securities and foreign securities are priced using data reflecting the earlier closing of the principal markets for those securities. The NAV is calculated by dividing the value of all assets of the Fund (including accrued interest and dividends), less all liabilities (including accrued expenses and dividends declared but unpaid), by the total number of shares outstanding. The Fund's investments are valued daily at market value or, in the absence of market value with respect to any portfolio securities, at fair value. Market value prices represent last sale or official closing prices from a national or foreign exchange (i.e., a regulated market) and are primarily obtained from third-party pricing services. Fair value prices represent any prices not considered market value prices and are either obtained from a third-party pricing service or are determined by the Pricing Committee of the Fund's investment advisor, First Trust Advisors L.P. ("First Trust" or the "Advisor"), in accordance with valuation procedures adopted by the Trust's Board of Trustees, and in accordance with provisions of the 1940 Act. Investments valued by the Advisor's Pricing Committee, if any, are footnoted as such in the footnotes to the Portfolio of Investments. The Fund's investments are valued as follows: Bonds, notes and other debt securities are fair valued on the basis of valuations provided by dealers who make markets in such securities or by a third-party pricing service approved by the Trust's Board of Trustees, which may use the following valuation inputs when available: 1) benchmark yields; 2) reported trades; 3) broker/dealer quotes; 4) issuer spreads; 5) benchmark securities; 6) bids and offers; and 7) reference data including market research publications. Fixed income and other debt securities having a remaining maturity of 60 days or less when purchased are fair valued at cost adjusted for amortization of premiums and accretion of discounts (amortized cost), provided the Advisor's Pricing Committee has determined that the use of amortized cost is an appropriate reflection of fair value given market and issuer-specific conditions existing at the time of the determination. Factors that may be considered in determining the appropriateness of the use of amortized cost include, but are not limited to, the following: Page 16 -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (CONTINUED) -------------------------------------------------------------------------------- FIRST TRUST EMERGING MARKETS LOCAL CURRENCY BOND ETF (FEMB) OCTOBER 31, 2016 1) the credit conditions in the relevant market and changes thereto; 2) the liquidity conditions in the relevant market and changes thereto; 3) the interest rate conditions in the relevant market and changes thereto (such as significant changes in interest rates); 4) issuer-specific conditions (such as significant credit deterioration); and 5) any other market-based data the Advisor's Pricing Committee considers relevant. In this regard, the Advisor's Pricing Committee may use last-obtained market-based data to assist it when valuing portfolio securities using amortized cost. Forward foreign currency contracts are fair valued at the current day's interpolated foreign exchange rate, as calculated using the current day's spot rate, and the thirty, sixty, ninety, and one-hundred eighty day forward rates provided by a third-party pricing service. Certain securities may not be able to be priced by pre-established pricing methods. Such securities may be valued by the Trust's Board of Trustees or its delegate, the Advisor's Pricing Committee, at fair value. These securities generally include, but are not limited to, restricted securities (securities which may not be publicly sold without registration under the Securities Act of 1933, as amended) for which a third-party pricing service is unable to provide a market price; securities whose trading has been formally suspended; a security whose market or fair value price is not available from a pre-established pricing source; a security with respect to which an event has occurred that is likely to materially affect the value of the security after the market has closed but before the calculation of the Fund's NAV or make it difficult or impossible to obtain a reliable market quotation; and a security whose price, as provided by the third-party pricing service, does not reflect the security's fair value. As a general principle, the current fair value of a security would appear to be the amount which the owner might reasonably expect to receive for the security upon its current sale. When fair value prices are used, generally they will differ from market quotations or official closing prices on the applicable exchanges. A variety of factors may be considered in determining the fair value of such securities, including, but not limited to, the following: 1) the fundamental business data relating to the issuer, or economic data relating to the country of issue; 2) an evaluation of the forces which influence the market in which these securities are purchased and sold; 3) the type, size and cost of security; 4) the financial statements of the issuer, or the financial condition of the country of issue; 5) the credit quality and cash flow of the issuer, or country of issue, based on the Advisor's or external analysis; 6) the information as to any transactions in or offers for the security; 7) the price and extent of public trading in similar securities (or equity securities) of the issuer/borrower, or comparable companies; 8) the coupon payments; 9) the quality, value and salability of collateral, if any, securing the security; 10) the business prospects of the issuer, including any ability to obtain money or resources from a parent or affiliate and an assessment of the issuer's management (for corporate debt only); 11) the economic, political and social prospects/developments of the country of issue and the assessment of the country's governmental leaders/officials (for sovereign debt only); 12) the prospects for the issuer's industry, and multiples (of earnings and/or cash flows) being paid for similar businesses in that industry (for corporate debt only); and 13) other relevant factors. The Fund is subject to fair value accounting standards that define fair value, establish the framework for measuring fair value and provide a three-level hierarchy for fair valuation based upon the inputs to the valuation as of the measurement date. The three levels of the fair value hierarchy are as follows: o Level 1 - Level 1 inputs are quoted prices in active markets for identical investments. An active market is a market in which transactions for the investment occur with sufficient frequency and volume to provide pricing information on an ongoing basis. o Level 2 - Level 2 inputs are observable inputs, either directly or indirectly, and include the following: o Quoted prices for similar investments in active markets. o Quoted prices for identical or similar investments in markets that are non-active. A non-active market is a market where there are few transactions for the investment, the prices are not current, or price quotations vary substantially either over time or among market makers, or in which little information is released publicly. o Inputs other than quoted prices that are observable for the investment (for example, interest rates and yield curves observable at commonly quoted intervals, volatilities, prepayment speeds, loss severities, credit risks, and default rates). o Inputs that are derived principally from or corroborated by observable market data by correlation or other means. o Level 3 - Level 3 inputs are unobservable inputs. Unobservable inputs may reflect the reporting entity's own assumptions about the assumptions that market participants would use in pricing the investment. Page 17 -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (CONTINUED) -------------------------------------------------------------------------------- FIRST TRUST EMERGING MARKETS LOCAL CURRENCY BOND ETF (FEMB) OCTOBER 31, 2016 The inputs or methodologies used for valuing investments are not necessarily an indication of the risk associated with investing in those investments. A summary of the inputs used to value the Fund's investments as of October 31, 2016, is included with the Fund's Portfolio of Investments. B. SECURITIES TRANSACTIONS AND INVESTMENT INCOME Securities transactions are recorded as of the trade date. Realized gains and losses from securities transactions are recorded on the identified cost basis. Dividend income is recorded on the ex-dividend date. Interest income is recorded on the accrual basis. Amortization of premiums and accretion of discounts are recorded using the effective interest method. C. FORWARD FOREIGN CURRENCY CONTRACTS The Fund is subject to foreign currency risk in the normal course of pursuing its investment objective. Forward foreign currency contracts are agreements between two parties ("Counterparties") to exchange one currency for another at a future date and at a specified price. The Fund uses forward foreign currency contracts to facilitate transactions in foreign securities and to manage the Fund's foreign currency exposure. These contracts are valued daily, and the Fund's net equity therein, representing unrealized gain or loss on the contracts as measured by the difference between the forward foreign exchange rates at the dates of entry into the contracts and the forward rates at the reporting date, is included in "Unrealized appreciation (depreciation) on forward foreign currency contracts" on the Statement of Assets and Liabilities. The change in unrealized appreciation (depreciation) is included in "Net change in unrealized appreciation (depreciation) on forward foreign currency contracts" on the Statement of Operations. When the forward contract is closed, the Fund records a realized gain or loss equal to the difference between the proceeds from (or the cost of) the closing transaction and the Fund's basis in the contract. This realized gain or loss is included in "Net realized gain (loss) on forward foreign currency contracts" on the Statement of Operations. Risks arise from the possible inability of counterparties to meet the terms of their contracts and from movement in currency, securities values and interest rates. Due to the risks, the Fund could incur losses in excess of the net unrealized value shown on the Forward Foreign Currency Contracts table in the Portfolio of Investments. In the event of default by the Counterparty, the Fund will provide notice to the Counterparty of the Fund's intent to convert the currency held by the Fund into the currency that the Counterparty agreed to exchange with the Fund. If a Counterparty becomes bankrupt or otherwise fails to perform its obligations due to financial difficulties, the Fund may experience significant delays in obtaining any recovery in a bankruptcy or other reorganization proceeding. The Fund may obtain only limited recovery or may obtain no recovery in such circumstances. D. OFFSETTING ON THE STATEMENT OF ASSETS AND LIABILITIES Offsetting assets and liabilities requires entities to disclose both gross and net information about instruments and transactions eligible for offset on the Statement of Assets and Liabilities, and disclose instruments and transactions subject to master netting or similar agreements. These disclosure requirements are intended to help investors and other financial statement users better assess the effect or potential effect of offsetting arrangements on a fund's financial position. The transactions subject to offsetting disclosures are derivative instruments, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions. For financial reporting purposes, the Fund does not offset financial assets and financial liabilities that are subject to master netting arrangements ("MNAs") or similar agreements on the Statement of Assets and Liabilities. MNAs provide the right, in the event of default (including bankruptcy and insolvency), for the non-defaulting Counterparty to liquidate the collateral and calculate the net exposure to the defaulting party or request additional collateral. At October 31, 2016, derivative assets and liabilities (by type) on a gross basis are as follows:

Gross Amounts not Offset in the Statement of Assets Net Amounts of and Liabilities Gross Amounts Liabilities ----------------------- Offset in the Presented in the Collateral Gross Amounts of Statement of Assets Statement of Assets Financial Amounts Recognized Liabilities and Liabilities and Liabilities Instruments Received Net Amount ------------------------------------------------------------------------------------------------------------------------------- Forward Foreign Currency Contracts* $ (12,752) $ -- $ (12,752) $ -- $ -- $ (12,752)

* The respective counterparties for each contract are disclosed on the Forward Foreign Currency Contracts table in the Portfolio of Investments. Page 18 -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (CONTINUED) -------------------------------------------------------------------------------- FIRST TRUST EMERGING MARKETS LOCAL CURRENCY BOND ETF (FEMB) OCTOBER 31, 2016 E. FOREIGN CURRENCY The books and records of the Fund 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 Statement of Operations. Unrealized gains and losses on investments in securities which result from changes in foreign exchange rates are included with fluctuations arising from changes in market price and are shown in "Net change in unrealized appreciation (depreciation) on investments" on the Statement of Operations. Net realized foreign currency gains and losses include the effect of changes in exchange rates between trade date and settlement date on investment security transactions, foreign currency transactions and interest and dividends received and are shown in "Net realized gain (loss) on foreign currency transactions" on the Statement 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 Statement of Operations. F. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS Dividends from net investment income, if any, are declared and paid monthly, or as the Board of Trustees may determine from time to time. Distributions of net realized capital gains earned by the Fund, if any, will be distributed at least annually. Distributions from income and capital gains are determined in accordance with 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 Fund and have no impact on net assets or net asset value per share. Temporary differences, which arise from recognizing certain items of income, expense and gain/loss in different periods for financial statement and tax purposes, will reverse at some time in the future. The tax character of distributions paid during the fiscal year ended October 31, 2016 and the period ended October 31, 2015 was as follows: Distributions paid from: 2016 2015 Ordinary income............................... $ 208,381 $ -- Capital gain.................................. -- -- Return of capital............................. 95,214 194,434 As of October 31, 2016, the components of distributable earnings on a tax basis were as follows: Undistributed ordinary income................. $ -- Accumulated capital and other losses.......... (88,751) Net unrealized appreciation (depreciation).... (497,673) G. INCOME TAXES The 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, the Fund may be subject to an excise tax of 4% of the amount by which approximately 98% of the Fund's taxable income exceeds the distributions from such taxable income for the calendar year. The Fund is subject to accounting standards that establish a minimum threshold for recognizing, and a system for measuring, the benefits of a tax position taken or expected to be taken in a tax return. The taxable years ended 2015 and 2016 remain open to federal and state audit. As of October 31, 2016, management has evaluated the application of these standards to the Fund, and has determined that no provision for income tax is required in the Fund's financial statements for uncertain tax positions. The Fund intends to utilize provisions of the federal income tax laws, which allow it to carry a realized capital loss forward indefinitely following the year of the loss and offset such loss against any future realized capital gains. The Fund is subject to certain limitations under U.S. tax rules on the use of capital carryforwards and net unrealized built-in losses. These limitations apply when there has been a 50% change in ownership. At October 31, 2016, the Fund had non-expiring capital loss carryforwards for federal income tax purposes of $88,751. Certain losses realized during the current fiscal year may be deferred and treated as occurring on the first day of the following fiscal year for federal income tax purposes. For the fiscal year ended October 31, 2016, the Fund had no net ordinary losses. Page 19 -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (CONTINUED) -------------------------------------------------------------------------------- FIRST TRUST EMERGING MARKETS LOCAL CURRENCY BOND ETF (FEMB) OCTOBER 31, 2016 In order to present paid-in capital, accumulated net investment income (loss) and accumulated net realized gain (loss) on investments on the Statement of Assets and Liabilities that more closely represent their tax character, certain adjustments have been made to paid-in capital, accumulated net investment income (loss) and accumulated net realized gain (loss) on investments. These adjustments are primarily due to the difference between book and tax treatments of income and gains on various investment securities held by the Fund and in-kind transactions. The results of operations and net assets were not affected by these adjustments. For the fiscal year ended October 31, 2016, the adjustments for the Fund were as follows: Accumulated Accumulated Net Realized Net Investment Gain (Loss) Income (Loss) on Investments Paid-in Capital -------------- -------------- --------------- $ (124,573) $ 81,280 $ 43,293 H. EXPENSES Expenses, other than the investment advisory fee and other excluded expenses, are paid by the Advisor (See Note 3). I. NEW AND AMENDED FINANCIAL REPORTING RULES AND FORMS On October 13, 2016 the SEC adopted new rules and forms, and amended existing rules and forms. The new and amended rules and forms are intended to modernize the reporting of information provided by funds and to improve the quality and type of information that funds provide to the SEC and investors. The new and amended rules and forms will be effective for the First Trust Funds, including the Fund, for reporting periods beginning on and after June 1, 2018. Management is evaluating the new and amended rules and forms to determine the impact to the Fund. 3. INVESTMENT ADVISORY FEE, AFFILIATED TRANSACTIONS AND OTHER FEE ARRANGEMENTS First Trust, the investment advisor to the Fund, is a limited partnership with one limited partner, Grace Partners of DuPage L.P., and one general partner, The Charger Corporation. The Charger Corporation is an Illinois corporation controlled by James A. Bowen, Chief Executive Officer of First Trust. First Trust is responsible for the selection and ongoing monitoring of the securities in the Fund's portfolio, managing the Fund's business affairs and providing certain administrative services necessary for the management of the Fund. The Trust, on behalf of the Fund, and First Trust have retained First Trust Global Portfolios Ltd. ("First Trust Global" or the "Sub- Advisor"), an affiliate of First Trust, to serve as investment sub-advisor. In this capacity, First Trust Global is responsible for the selection and ongoing monitoring of the securities in the Fund's investment portfolio. First Trust is paid an annual unitary management fee of 0.85% of the Fund's average daily net assets. First Trust Global receives a sub-advisory fee equal to 40% of any remaining monthly unitary fee paid to the Advisor after the Fund's average expenses accrued during the most recent twelve months are subtracted from the unitary fee for that month. First Trust is responsible for the expenses of the Fund including the cost of transfer agency, custody, fund administration, legal, audit and other services, and excluding Rule 12b-1 distribution and service fees, if any, brokerage expenses, taxes, interest, acquired fund fees and expenses, and extraordinary expenses. First Trust also provides fund reporting services to the Fund for a flat annual fee in the amount of $9,250, which is covered under the annual unitary management fee. The Trust has multiple service agreements with Brown Brothers Harriman & Co. ("BBH"). Under the service agreements, BBH performs custodial, fund accounting, certain administrative services, and transfer agency services for the Fund. As custodian, BBH is responsible for custody of the Fund's assets. As fund accountant and administrator, BBH is responsible for maintaining the books and records of the Fund's securities and cash. As transfer agent, BBH is responsible for maintaining shareholder records for the Fund. 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. Prior to January 1, 2016, the fixed annual retainer was allocated pro rata based on each fund's net assets. Each Independent Trustee is also paid an annual per fund fee that varies based on whether the fund is a closed-end or other actively managed fund, or is an index fund. Additionally, the Lead Independent Trustee and the Chairmen of the Audit Committee, Nominating and Governance Committee and Valuation Committee are paid annual fees to serve in such capacities, with such compensation allocated pro rata among each fund in the First Trust Fund Complex based on net assets. Independent Trustees are reimbursed for travel and out-of-pocket expenses in connection with all meetings. The Lead Independent Trustee and Committee Chairmen rotate every three years. The officers and "Interested" Trustee receive no compensation from the Trust for acting in such capacities. Page 20 -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (CONTINUED) -------------------------------------------------------------------------------- FIRST TRUST EMERGING MARKETS LOCAL CURRENCY BOND ETF (FEMB) OCTOBER 31, 2016 4. PURCHASES AND SALES OF SECURITIES For the year ended October 31, 2016, the cost of purchases and proceeds from sales of investments, excluding short-term investments and in-kind transactions, for the Fund were $10,887,501 and $1,237,929, respectively. For the year ended October 31, 2016, the Fund had no in-kind transactions. 5. DERIVATIVE TRANSACTIONS The following table presents the type of derivatives held by the Fund at October 31, 2016, the primary underlying risk exposure and location of these instruments as presented on the Statement of Assets and Liabilities.

ASSET DERIVATIVES LIABILITY DERIVATIVES ------------------------------------------ ------------------------------------------ DERIVATIVE STATEMENT OF ASSETS AND STATEMENT OF ASSETS AND INSTRUMENT RISK EXPOSURE LIABILITIES LOCATION VALUE LIABILITIES LOCATION VALUE ------------------ ------------- ------------------------ ---------------- ------------------------ ---------------- Unrealized appreciation Unrealized depreciation Forward foreign on forward foreign on forward foreign currency contracts Currency Risk currency contracts $ -- currency contracts $ 12,752

The following table presents the amount of net realized gain (loss) and change in net unrealized appreciation (depreciation) recognized for the year ended October 31, 2016, on derivative instruments, as well as the primary underlying risk exposure associated with each instrument. STATEMENT OF OPERATIONS LOCATION -------------------------------------------------------------------------------- CURRENCY RISK Net realized gain (loss) on forward foreign currency contracts $ 27,532 Net change in unrealized appreciation (depreciation) on forward foreign currency contracts (15,018) During the year ended October 31, 2016, the notional values of forward foreign currency contracts opened and closed were $9,512,704 and $6,912,887, respectively. 6. CREATIONS, REDEMPTIONS AND TRANSACTION FEES Shares are created and redeemed by the Fund only in Creation Unit size aggregations of 50,000 shares in transactions with broker-dealers or large institutional investors that have entered into a participation agreement (an "Authorized Participant"). In order to purchase Creation Units of the Fund, an Authorized Participant must deposit (i) a designated portfolio of securities and other instruments determined by First Trust (the "Deposit Securities") and generally make or receive a cash payment referred to as the "Cash Component," which is an amount equal to the difference between the NAV of the Fund shares (per Creation Unit aggregations) and the market value of the Deposit Securities, and/or (ii) cash in lieu of all or a portion of the Deposit Securities. If the Cash Component is a positive number (i.e., the NAV per Creation Unit Aggregation exceeds the Deposit Amount), the Authorized Participant will deliver the Cash Component. If the Cash Component is a negative number (i.e., the NAV per Creation Unit Aggregation is less than the Deposit Amount), the Authorized Participant will receive the Cash Component. Authorized Participants purchasing Creation Units must pay to BBH, as transfer agent, a creation transaction fee (the "Creation Transaction Fee") regardless of the number of Creation Units purchased in the transaction. The Creation Transaction Fee may vary and is based on the composition of the securities included in the Fund's portfolio and the countries in which the transactions are settled. The Creation Transaction Fee may increase or decrease as the Fund's portfolio is adjusted to conform to changes in the composition of the securities included in the Fund's portfolio and the countries in which the transaction settled. The Creation Transaction Fee is currently $500. The price for each Creation Unit will equal the daily NAV per share times the number of shares in a Creation Unit plus the fees described above and, if applicable, any operational processing and brokerage costs, transfer fees or stamp taxes. When the Fund permits an Authorized Participant to substitute cash or a different security in lieu of depositing one or more of the requisite Deposit Securities, the Authorized Participant may also be assessed an amount to cover the cost of purchasing the Deposit Securities and/or disposing of the substituted securities, including operational processing and brokerage costs, transfer fees, stamp taxes, and part or all of the spread between the expected bid and offer side of the market related to such Deposit Securities and/or substitute securities. Authorized Participants redeeming Creation Units must pay to BBH, as transfer agent, a redemption transaction fee (the "Redemption Transaction Fee"), regardless of the number of Creation Units redeemed in the transaction. The Redemption Transaction Fee may vary and is based on the composition of the securities included in the Fund's portfolio and the countries in which the transactions are settled. The Redemption Transaction Fee is currently $500. The Fund reserves the right to effect redemptions in cash. An Authorized Participant may request cash redemption in lieu of securities; however, the Fund may, in its discretion, reject any such request. Page 21 -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (CONTINUED) -------------------------------------------------------------------------------- FIRST TRUST EMERGING MARKETS LOCAL CURRENCY BOND ETF (FEMB) OCTOBER 31, 2016 7. LINE OF CREDIT The Trust, First Trust Series Fund and First Trust Exchange-Traded Fund IV entered into a $140 million Credit Agreement with The Bank of Nova Scotia ("Scotia") as administrative agent for a group of lenders. Scotia charges a commitment fee of 0.25% of the daily amount of the excess of the commitment amount over the outstanding principal balance of the loans. Prior to March 9, 2016, the commitment was $80 million and the commitment fee was 0.15%. First Trust allocates the commitment fee amongst the funds that have access to the credit line. To the extent that the Fund accesses the credit line, there would also be an interest fee charged. The Fund did not have any borrowings outstanding during the year ended October 31, 2016. 8. DISTRIBUTION PLAN The Board of Trustees adopted a Distribution and Service Plan pursuant to Rule 12b-1 under the 1940 Act. In accordance with the Rule 12b-1 plan, the Fund is authorized to pay an amount up to 0.25% of its average daily net assets each year to reimburse First Trust Portfolios L.P. ("FTP"), the distributor of the Fund, for amounts expended to finance activities primarily intended to result in the sale of Creation Units or 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 Fund, and pursuant to a contractual arrangement, no 12b-1 fees will be paid any time before February 28, 2018. 9. INDEMNIFICATION The Trust, on behalf of the Fund, has a variety of indemnification obligations under contracts with its service providers. The Trust's maximum exposure under these arrangements is unknown. However, the Trust has not had prior claims or losses pursuant to these contracts and expects the risk of loss to be remote. 10. SUBSEQUENT EVENTS Management has evaluated the impact of all subsequent events to the Fund through the date the financial statements were issued and has determined that there were the following subsequent events: On November 21, 2016, the Fund declared a distribution of $0.1866 per share to shareholders of record on November 25, 2016, payable November 30, 2016. On December 16, 2016, the commitment amount under the Credit Agreement with Scotia was increased to $180 million. Page 22 -------------------------------------------------------------------------------- REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM -------------------------------------------------------------------------------- TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF FIRST TRUST EMERGING MARKETS LOCAL CURRENCY BOND ETF: We have audited the accompanying statement of assets and liabilities of First Trust Emerging Markets Local Currency Bond ETF (the "Fund"), a series of the First Trust Exchange-Traded Fund III, including the portfolio of investments, as of October 31, 2016, the related statement of operations for the year then ended and the statements of changes in net assets and the financial highlights for the periods presented. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of October 31, 2016, by correspondence with the Fund's custodian and brokers; where replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of First Trust Emerging Markets Local Currency Bond ETF as of October 31, 2016, the results of its operations for the year then ended and the changes in its net assets and the financial highlights for the periods presented, in conformity with accounting principles generally accepted in the United States of America. /s/ Deloitte & Touche LLP Chicago, Illinois December 21, 2016 Page 23 -------------------------------------------------------------------------------- ADDITIONAL INFORMATION -------------------------------------------------------------------------------- FIRST TRUST EMERGING MARKETS LOCAL CURRENCY BOND ETF (FEMB) OCTOBER 31, 2016 (UNAUDITED) PROXY VOTING POLICIES AND PROCEDURES A description of the policies and procedures that the Trust uses to determine how to vote proxies and information on how the Fund voted proxies relating to portfolio investments during the most recent period ended June 30 will be available (1) without charge, upon request, by calling (800) 988-5891; (2) on the Fund's website located at http://www.ftportfolios.com; and (3) on the Securities and Exchange Commission's ("SEC") website located at http://www.sec.gov. PORTFOLIO HOLDINGS The Trust files its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The Trust's Form N-Qs are available (1) by calling (800) 988-5891; (2) on the Fund's website located at http://www.ftportfolios.com; (3) on the SEC's website at http://www.sec.gov; and (4) for review and copying at the SEC's Public Reference Room ("PRR") in Washington, DC. Information regarding the operation of the PRR may be obtained by calling (800) SEC-0330. RISK CONSIDERATIONS RISKS ARE INHERENT IN ALL INVESTING. YOU SHOULD CONSIDER THE FUND'S INVESTMENT OBJECTIVE, RISKS, CHARGES AND EXPENSES CAREFULLY BEFORE INVESTING. YOU CAN DOWNLOAD THE FUND'S PROSPECTUS AT HTTP://WWW.FTPORTFOLIOS.COM OR CONTACT FIRST TRUST PORTFOLIOS L.P. AT (800) 621-1675 TO REQUEST A PROSPECTUS, WHICH CONTAINS THIS AND OTHER INFORMATION ABOUT THE FUND. FOR ADDITIONAL INFORMATION ABOUT THE RISKS ASSOCIATED WITH INVESTING IN THE FUND, PLEASE SEE THE FUND'S STATEMENT OF ADDITIONAL INFORMATION, AS WELL AS OTHER REGULATORY FILINGS. READ THESE DOCUMENTS CAREFULLY BEFORE YOU INVEST. FIRST TRUST PORTFOLIOS L.P. IS THE DISTRIBUTOR OF THE FIRST TRUST EXCHANGE-TRADED FUND III. The following summarizes some of the risks that should be considered for the Fund. CALL RISK. If an issuer calls higher-yielding debt instruments held by the Fund, performance could be adversely impacted. CASH TRANSACTIONS RISK. The Fund will, under most circumstances, effect a portion of creations and redemptions for cash, rather than in-kind securities. As a result, an investment in the Fund may be less tax-efficient than an investment in an exchange-traded fund that effects its creations and redemption for in-kind securities. Because the Fund may effect a portion of redemptions for cash, it may be required to sell portfolio securities in order to obtain the cash needed to distribute redemption proceeds. A sale of shares may result in capital gains or losses and may also result in higher brokerage costs. CREDIT RISK. Credit risk is the risk that an issuer of a security 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. CURRENCY EXCHANGE RATE RISK. The Fund holds investments that are denominated in non-U.S. currencies, or in securities that provide exposure to such currencies, currency exchange rates or interest rates denominated in such currencies. Changes in currency exchange rates and the relative value of non-U.S. currencies will affect the value of the Fund's investment and the value of your Fund shares. Currency exchange rates can be very volatile and can change quickly and unpredictably. As a result, the value of an investment in the Fund may change quickly and without warning and you may lose money. CURRENCY RISK. Because the Fund's net asset value is determined on the basis of U.S. dollars and the Fund invests in non-U.S. dollar-denominated securities, you may lose money if the local currency of a foreign market depreciates against the U.S. dollar, even if the local currency value of the Fund's holdings goes up. The Fund may hedge certain of its non-U.S. dollar holdings. DERIVATIVES RISK. The use of options, futures contracts, forward contracts and other derivative instruments can lead to 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 derivatives. These risks are heightened when the 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. EMERGING MARKETS RISK. Investments in securities and instruments traded in developing or emerging markets or that provide exposure to such securities or markets, can involve additional risks relating to political, economic, or regulatory conditions not associated with investments in U.S. securities and instruments or investments in more developed international markets. Emerging market governments may, without prior warning, impose capital controls on the ability to transfer currency, securities or other assets. The Fund's ability to access certain developing or emerging markets also may be limited due to a variety of factors, including currency convertibility issues. Such conditions may impact the ability of the Fund to buy, sell or otherwise transfer securities, cause the Fund's returns to differ from those available to domestic investors, adversely affect the trading market and price for Fund shares, and cause the Fund to decline in value. Page 24 -------------------------------------------------------------------------------- ADDITIONAL INFORMATION (CONTINUED) -------------------------------------------------------------------------------- FIRST TRUST EMERGING MARKETS LOCAL CURRENCY BOND ETF (FEMB) OCTOBER 31, 2016 (UNAUDITED) GLOBAL DEPOSITARY NOTES RISK. Any distributions paid to the holders of GDNs are usually subject to a fee charged by the depositary bank. Holders of GDNs may have limited rights, and investment restrictions in certain countries may adversely impact the value of GDNs because such restrictions may limit the ability to convert the Bonds into GDNs and vice versa. HIGH YIELD SECURITIES RISK. High yield securities, or "junk" bonds, are subject to greater market fluctuations and risk of loss than securities with higher ratings, and therefore, are considered to be highly speculative. These securities are issued by issuers that may have narrowly focused operations and/or other impediments to the timely payment of periodic interest and principal at maturity. If the global or local economy slows down or dips into recession, the issuers of high yield securities may not have sufficient resources to continue making timely payment of periodic interest and principal at maturity. The market for high yield securities is generally smaller and less liquid than that for investment grade securities. High yield securities are generally not listed on a national securities exchange but trade in the over-the-counter markets. Due to the smaller, less liquid market for high yield securities, the bid-offer spread on such securities is generally greater than it is for investment grade securities and the purchase or sale of such securities may take longer to complete. In general, high yield securities may have a greater risk of default than other types of securities. ILLIQUID SECURITIES RISK. Some of the securities held by the Fund may be illiquid. Illiquid securities involve the risk that the securities will not be able to be sold at the time desired by the Fund or at prices approximately the value at which the Fund is carrying the securities on its books. INCOME RISK. Income from the Fund's fixed income investments could decline during periods of falling interest rates. INTEREST RATE RISK. Interest rate risk is the risk that the value of the fixed income securities in the Fund will decline because of rising market interest rates. Interest rate risk is generally lower for shorter term investments and higher for longer term investments. LIQUIDITY RISK. The Fund invests a substantial portion of its assets in lower-quality debt issued by companies that are highly leveraged. Lower-quality debt tends to be less liquid than higher-quality debt. Moreover, smaller debt issues tend to be less liquid than larger debt issues. If the economy experiences a sudden downturn, or if the debt markets for such companies become distressed, the Fund may have particular difficulty selling its assets in sufficient amounts, at reasonable prices and in a sufficiently timely manner to raise the cash necessary to meet any potentially heavy redemption requests by Fund shareholders. As of the fourth quarter of 2015, the market for high yield debt has experienced decreased liquidity, and investor perception of increased risk has caused yield spreads to widen. Decreased liquidity may negatively affect the Fund's ability to mitigate risk and to meet redemptions. MANAGEMENT RISK. The Fund is subject to management risk because it is an actively managed portfolio. In managing the Fund's investment portfolio, the Fund's investment advisor will apply investment techniques and risk analyses that may not have the desired result. There can be no guarantee that the Fund will meet its investment objective. MARKET RISK. Market risk is the risk that a particular security owned by the Fund or shares of the Fund in general may fall in value. Securities are subject to market fluctuations caused by such factors as economic, political, regulatory or market developments, changes in interest rates and perceived trends in bond prices. Also, certain of these factors may affect the liquidity of the Bonds in the Fund's portfolio and make it more difficult for the Fund to sell them. Overall securities values could decline generally or could underperform other investments. NON-DIVERSIFICATION RISK. The Fund is classified as "non-diversified" under the Investment Company Act of 1940, as amended (the "1940 Act"). As a result, the Fund is only limited as to the percentage of its assets that may be invested in the securities of any one issuer by the diversification requirements imposed by the Internal Revenue Code of 1986, as amended. The Fund may invest a relatively high percentage of its assets in a limited number of issuers. As a result, the Fund may be more susceptible to a single adverse economic or regulatory occurrence affecting one or more of these issuers, experience increased volatility and be highly invested in certain issuers. NON-U.S. SECURITIES RISK. Non-U.S. securities are subject to higher volatility than securities of domestic issuers due to possible adverse political, social or economic developments; restrictions on foreign investment or exchange of securities; lack of liquidity; currency exchange rates; excessive taxation; government seizure of assets; different legal or accounting standards and less government supervision and regulation of exchanges in foreign countries. SMALL FUND RISK. The Fund currently has fewer assets than larger funds, and like other relatively new funds, large inflows and outflows may impact the Fund's market exposure for limited periods of time. This impact may be positive or negative, depending on the direction of market movement during the period affected. SOVEREIGN DEBT RISK. Investments in sovereign bonds involve special risks because the governmental authority that controls the repayment of the debt may be unwilling or unable to repay the principal and/or interest when due in accordance with the terms of such securities; the availability of sufficient foreign exchange on the date a payment is due; the relative size of the debt Page 25 -------------------------------------------------------------------------------- ADDITIONAL INFORMATION (CONTINUED) -------------------------------------------------------------------------------- FIRST TRUST EMERGING MARKETS LOCAL CURRENCY BOND ETF (FEMB) OCTOBER 31, 2016 (UNAUDITED) service burden to the economy as a whole; or the government debtor's policy towards the international monetary fund and the political constraints to which a government debtor may be subject. If an issuer of sovereign bonds defaults on payments of principal and/or interest, the Fund may have limited legal recourse against the issuer and/or guarantor. In certain cases, remedies must be pursued in the courts of the defaulting party itself, and the Fund's ability to obtain recourse may be limited. In times of economic uncertainty, the prices of these securities may be more volatile than those of corporate debt obligations or of other government debt obligations. ADVISORY AGREEMENTS BOARD CONSIDERATIONS REGARDING CONTINUATION OF INVESTMENT MANAGEMENT AND SUB-ADVISORY AGREEMENTS The Board of Trustees of the First Trust Exchange-Traded Fund III (the "Trust"), including the Independent Trustees, unanimously approved the continuation of the Investment Management Agreement (the "Advisory Agreement") with First Trust Advisors L.P. (the "Advisor" or "First Trust") on behalf of the First Trust Emerging Markets Local Currency Bond ETF (the "Fund") and the Investment Sub-Advisory Agreement (the "Sub-Advisory Agreement" and together with the Advisory Agreement, the "Agreements") among the Trust, on behalf of the Fund, the Advisor and First Trust Global Portfolios Ltd. (the "Sub-Advisor"). The Board approved the continuation of the Agreements for a one-year period ending June 30, 2017 at a meeting held on June 13, 2016. The Board determined that the continuation of the Agreements is in the best interests of the Fund in light of the extent and quality of the services provided and such other matters as the Board considered to be relevant in the exercise of its reasonable business judgment. To reach this determination, the Board considered its duties under the Investment Company Act of 1940, as amended (the "1940 Act"), as well as under the general principles of state law in reviewing and approving advisory contracts; the requirements of the 1940 Act in such matters; the fiduciary duty of investment advisors with respect to advisory agreements and compensation; the standards used by courts in determining whether investment company boards have fulfilled their duties; and the factors to be considered by the Board in voting on such agreements. At meetings held on April 22, 2016 and June 13, 2016, 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 that, among other things, outlined the services provided by the Advisor and the Sub-Advisor to the Fund (including the relevant personnel responsible for these services and their experience); the unitary fee rate payable by the Fund as compared to fees charged to a peer group of funds which were either mutual funds or exchange-traded funds ("ETFs") compiled by Management Practice, Inc. ("MPI"), an independent source (the "MPI Peer Group"), and as compared to fees charged to other clients of the Advisor, including other ETFs managed by the Advisor; the sub-advisory fee as compared to fees charged to other clients of the Sub-Advisor; expenses of the Fund as compared to expense ratios of the funds in the MPI Peer Group; performance information for the Fund; the nature of expenses incurred in providing services to the Fund and the potential for economies of scale, if any; financial data on the Advisor and the Sub-Advisor; any fall-out benefits to the Advisor and its affiliate, First Trust Portfolios L.P. ("FTP"), and the Sub-Advisor (also an affiliate of the Advisor); and information on the Advisor's and the Sub-Advisor's compliance programs. The Board reviewed initial materials with the Advisor at a special meeting held on April 22, 2016, 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, independent legal counsel 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 independent legal counsel held prior to the June 13, 2016 meeting, as well as at the meeting held that day. 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 the Fund's perspective as well as from the perspective of the Fund's shareholders. 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 the Fund knowing that the Advisor and the Sub-Advisor manage the Fund and knowing the Fund's unitary fee. In reviewing the Agreements, the Board considered the nature, extent and quality of the services provided by the Advisor and the Sub-Advisor under the Agreements. With respect to the Advisory Agreement, the Board considered that the Advisor is responsible for the overall management and administration of the Trust and the Fund and reviewed all of the services provided by the Advisor to the Fund, including the oversight of the Sub-Advisor, as well as the background and experience of the persons responsible for such services. 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 the Fund's compliance with the 1940 Act, as well as the Fund's compliance with its investment objective and policies. In addition, as part of the Board's consideration of the Advisor's services, the Advisor, in its written materials and at the April 22, 2016 meeting, described to the Board the scope of its ongoing investment in additional infrastructure and personnel to maintain and improve the quality of services provided to the Fund and the other funds in the First Trust Fund Complex. With respect to the Sub-Advisory Agreement, the Board noted that the Fund is an actively-managed ETF and the Sub-Advisor actively manages the Fund's investments. The Board reviewed the materials provided by the Sub-Advisor and considered the services that the Sub-Advisor provides to the Fund, including the Sub-Advisor's day-to-day management of the Fund's investments. In considering the Sub-Advisor's management of the Fund, the Board noted the background and experience of the Sub-Advisor's portfolio management team. In light of the Page 26 -------------------------------------------------------------------------------- ADDITIONAL INFORMATION (CONTINUED) -------------------------------------------------------------------------------- FIRST TRUST EMERGING MARKETS LOCAL CURRENCY BOND ETF (FEMB) OCTOBER 31, 2016 (UNAUDITED) information presented and the considerations made, the Board concluded that the nature, extent and quality of the services provided to the Trust and the 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 the Fund consistent with the Fund's investment objective and policies. The Board considered the unitary fee rate payable by the Fund under the Advisory Agreement for the services provided. The Board noted that the sub-advisory fee is paid by the Advisor from the unitary fee. The Board considered that as part of the unitary fee the Advisor is responsible for the 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 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. The Board received and reviewed information showing the advisory or unitary fee rates and expense ratios of the peer funds in the MPI Peer Group, as well as advisory fee rates charged by the Advisor to other fund (including ETFs) and non-fund clients. Because the Fund's MPI Peer Group included peer funds that pay a unitary fee and because the 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 unitary fee for the Fund was above the median total (net) expense ratio of the peer funds in the MPI Peer Group. With respect to the MPI Peer Group, the Board discussed with representatives of the Advisor limitations in creating peer groups for actively-managed ETFs and different business models that may affect the pricing of services among ETF sponsors. The Board also noted that some of the peer funds were open-end mutual funds. The Board took these limitations and differences into account in considering the peer data. With respect to fees charged to other clients, the Board considered differences between the Fund and other clients that limited their comparability. In considering the unitary fee rate 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 description of its long-term commitment to the Fund. The Board considered performance information for the Fund. The Board noted the process that it has established for monitoring the Fund's performance and portfolio risk on an ongoing basis, which includes quarterly performance reporting from the Advisor and Sub-Advisor for the Fund. The Board determined that this process continues to be effective for reviewing the Fund's performance. The Board received and reviewed information comparing the Fund's performance for periods ended December 31, 2015 to the performance of the MPI Peer Group and to a benchmark index. Based on the information provided the Board noted that the Fund underperformed the MPI Peer Group average and the benchmark index for the one-year period ended December 31, 2015. On the basis of all the information provided on the unitary fee and performance of the Fund and the ongoing oversight by the Board, the Board concluded that the unitary fee for the 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 the 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 Fund and noted the Advisor's statement that it expects its expenses to increase over the next twelve months as the Advisor continues to make investments in personnel and infrastructure. The Board noted that any reduction in fixed costs associated with the management of the Fund would benefit the Advisor, but that the unitary fee structure provides a level of certainty in expenses for the Fund. The Board considered the revenues and allocated costs (including the allocation methodology) of the Advisor in serving as investment advisor to the Fund for the twelve months ended December 31, 2015 and the estimated profitability level for the 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 inherent limitations in the profitability analysis, and concluded that, based on the information provided, the Advisor's profitability level for the Fund was not unreasonable. In addition, the Board considered fall-out benefits described by the Advisor that may be realized from its relationship with the Fund. The Board considered that the Advisor had identified as a fall-out benefit to the Advisor and FTP their exposure to investors and brokers who, absent their exposure to the Fund, may have had no dealings with the Advisor or FTP. The Board also considered the Advisor's compensation for fund reporting services provided to the Fund pursuant to a separate Fund Reporting Services Agreement, which is paid from the unitary fee. The Board also considered information on the affiliations between the Advisor and the Sub-Advisor and noted the services provided by the Sub-Advisor to certain First Trust products in Europe. The Board considered the Sub-Advisor's statements that expenses incurred in providing services to the Fund are of a fixed nature and that, at this time, no economies of scale have been identified in providing services to the Fund. The Board considered that the Sub-Advisor waived its entire sub-advisory fee under the Sub-Advisory Agreement in 2015. The Board considered the Advisor's confirmation that it is committed to supporting the Sub-Advisor. The Board considered the potential fall-out benefits to the Sub-Advisor from being associated with the Advisor and the Fund. The Board noted that the Sub-Advisor does not utilize soft dollars in connection with its management of the Fund's portfolio. Based on all of the information considered and the conclusions reached, the Board, including the Independent Trustees, unanimously determined that the terms of the Agreements continue to be fair and reasonable and that the continuation of the Agreements is in the best interests of the Trust and the Fund. No single factor was determinative in the Board's analysis. Page 27 -------------------------------------------------------------------------------- BOARD OF TRUSTEES AND OFFICERS -------------------------------------------------------------------------------- FIRST TRUST EMERGING MARKETS LOCAL CURRENCY BOND ETF (FEMB) OCTOBER 31, 2016 (UNAUDITED) The Trust's statement of additional information includes additional information about the Trustees and is available, without charge, upon request, by calling (800) 988-5891.

NUMBER OF OTHER PORTFOLIOS IN TRUSTEESHIPS OR TERM OF OFFICE THE FIRST TRUST DIRECTORSHIPS NAME, ADDRESS, AND YEAR FIRST FUND COMPLEX HELD BY TRUSTEE DATE OF BIRTH AND ELECTED OR PRINCIPAL OCCUPATIONS OVERSEEN BY DURING PAST POSITION WITH THE TRUST APPOINTED DURING PAST 5 YEARS TRUSTEE 5 YEARS ------------------------------------------------------------------------------------------------------------------------------------ INDEPENDENT TRUSTEES ------------------------------------------------------------------------------------------------------------------------------------ Richard E. Erickson, Trustee o Indefinite Term Physician; President, Wheaton Orthopedics; 137 None c/o First Trust Advisors L.P. Limited Partner, Gundersen Real Estate 120 E. Liberty Drive, o Since Inception Limited Partnership; Member, Sportsmed Suite 400 LLC (April 2007 to November 2015) Wheaton, IL 60187 D.O.B.: 04/51 Thomas R. Kadlec, Trustee o Indefinite Term President, ADM Investor Services, Inc. 137 Director of ADM c/o First Trust Advisors L.P. (Futures Commission Merchant) Investor Services, 120 E. Liberty Drive, o Since Inception Inc., ADM Suite 400 Investor Services Wheaton, IL 60187 International and D.O.B.: 11/57 Futures Industry Association Robert F. Keith, Trustee o Indefinite Term President, Hibs Enterprises (Financial and 137 Director of Trust c/o First Trust Advisors L.P. Management Consulting) Company of 120 E. Liberty Drive, o Since Inception Illinois Suite 400 Wheaton, IL 60187 D.O.B.: 11/56 Niel B. Nielson, Trustee o Indefinite Term Managing Director and Chief Operating 137 Director of c/o First Trust Advisors L.P. Officer (January 2015 to Present), Pelita Covenant 120 E. Liberty Drive, o Since Inception Harapan Educational Foundation Transport, Inc. Suite 400 (Educational Products and Services); (May 2003 to Wheaton, IL 60187 President and Chief Executive Officer May 2014) D.O.B.: 03/54 (June 2012 to September 2014), Servant Interactive LLC (Educational Products and Services); President and Chief Executive Officer (June 2012 to September 2014), Dew Learning LLC (Educational Products and Services); President (June 2002 to June 2012), Covenant College ------------------------------------------------------------------------------------------------------------------------------------ INTERESTED TRUSTEE ------------------------------------------------------------------------------------------------------------------------------------ James A. Bowen(1), Trustee, o Indefinite Term Chief Executive Officer, First Trust 137 None Chairman of the Board Advisors L.P. and First Trust Portfolios 120 E. Liberty Drive, o Since Inception L.P.; Chairman of the Board of Directors, Suite 400 BondWave LLC (Software Development Wheaton, IL 60187 Company) and Stonebridge Advisors LLC D.O.B.: 09/55 (Investment Advisor)

----------------------------- (1) Mr. Bowen is deemed an "interested person" of the Trust due to his position as Chief Executive Officer of First Trust Advisors L.P., investment advisor of the Trust. Page 28 -------------------------------------------------------------------------------- BOARD OF TRUSTEES AND OFFICERS (CONTINUED) -------------------------------------------------------------------------------- FIRST TRUST EMERGING MARKETS LOCAL CURRENCY BOND ETF (FEMB) OCTOBER 31, 2016 (UNAUDITED)

POSITION AND TERM OF OFFICE NAME, ADDRESS OFFICES AND LENGTH OF PRINCIPAL OCCUPATIONS AND DATE OF BIRTH WITH TRUST SERVICE DURING PAST 5 YEARS ------------------------------------------------------------------------------------------------------------------------------------ OFFICERS WHO ARE NOT TRUSTEES(2) ------------------------------------------------------------------------------------------------------------------------------------ James M. Dykas President and Chief o Indefinite Term Managing Director and Chief Financial Officer 120 E. Liberty Drive, Executive Officer (January 2016 to Present), Controller (January Suite 400 o Since January 2016 2011 to January 2016), Senior Vice President Wheaton, IL 60187 (April 2007 to January 2016), First Trust Advisors D.O.B.: 01/66 L.P. and First Trust Portfolios L.P. ; Chief Financial Officer, BondWave LLC (Software Development Company) (January 2016 to Present) and Stonebridge Advisors LLC (Investment Advisor) (January 2016 to Present) Donald P. Swade Treasurer, Chief Financial o Indefinite Term Senior Vice President (July 2016 to Present), 120 E. Liberty Drive, Officer and Chief Vice President (April 2012 to July 2016), First Suite 400 Accounting Officer o Since January 2016 Trust Advisors L.P. and First Trust Portfolios Wheaton, IL 60187 L.P., Vice President (September 2006 to April D.O.B.: 08/72 2012), Guggenheim Funds Investment Advisors, LLC/Claymore Securities, Inc. W. Scott Jardine Secretary and Chief o Indefinite Term General Counsel, First Trust Advisors L.P., 120 E. Liberty Drive, Legal Officer First Trust Portfolios L.P.; Secretary and General Suite 400 o Since Inception Counsel, BondWave LLC; Secretary, Stonebridge Wheaton, IL 60187 Advisors LLC D.O.B.: 05/60 Daniel J. Lindquist Vice President o Indefinite Term Managing Director (July 2012 to Present), 120 E. Liberty Drive, Senior Vice President (September 2005 to July Suite 400 o Since Inception 2012), First Trust Advisors L.P. and First Trust Wheaton, IL 60187 Portfolios L.P. D.O.B: 02/70 Kristi A. Maher Chief Compliance Officer o Indefinite Term Deputy General Counsel, First Trust Advisors 120 E. Liberty Drive, and Assistant Secretary L.P. and First Trust Portfolios L.P. Suite 400 o Since Inception Wheaton, IL 60187 D.O.B.: 12/66 Roger F. Testin Vice President o Indefinite Term Senior Vice President, First Trust Advisors L.P. 120 E. Liberty Drive, and First Trust Portfolios L.P. Suite 400 o Since Inception Wheaton, IL 60187 D.O.B.: 06/66 Stan Ueland Vice President o Indefinite Term Senior Vice President (September 2012 to 120 E. Liberty Drive, Present), Vice President (August 2005 to Suite 400 o Since Inception September 2012), First Trust Advisors L.P. and Wheaton, IL 60187 First Trust Portfolios L.P. D.O.B.: 11/70

----------------------------- (2) The term "officer" means the president, vice president, secretary, treasurer, controller or any other officer who performs a policy making function. Page 29 -------------------------------------------------------------------------------- PRIVACY POLICY -------------------------------------------------------------------------------- FIRST TRUST EMERGING MARKETS LOCAL CURRENCY BOND ETF (FEMB) OCTOBER 31, 2016 (UNAUDITED) PRIVACY POLICY First Trust values our relationship with you and considers your privacy an important priority in maintaining that relationship. We are committed to protecting the security and confidentiality of your personal information. SOURCES OF INFORMATION We collect nonpublic personal information about you from the following sources: o Information we receive from you and your broker-dealer, investment advisor or financial representative through interviews, applications, agreements or other forms; o Information about your transactions with us, our affiliates or others; o Information we receive from your inquiries by mail, e-mail or telephone; and o Information we collect on our website through the use of "cookies". For example, we may identify the pages on our website that your browser requests or visits. INFORMATION COLLECTED The type of data we collect may include your name, address, social security number, age, financial status, assets, income, tax information, retirement and estate plan information, transaction history, account balance, payment history, investment objectives, marital status, family relationships and other personal information. DISCLOSURE OF INFORMATION We do not disclose any nonpublic personal information about our customers or former customers to anyone, except as permitted by law. In addition to using this information to verify your identity (as required under law), the permitted uses may also include the disclosure of such information to unaffiliated companies for the following reasons: o In order to provide you with products and services and to effect transactions that you request or authorize, we may disclose your personal information as described above to unaffiliated financial service providers and other companies that perform administrative or other services on our behalf, such as transfer agents, custodians and trustees, or that assist us in the distribution of investor materials such as trustees, banks, financial representatives, proxy services, solicitors and printers. o We may release information we have about you if you direct us to do so, if we are compelled by law to do so, or in other legally limited circumstances (for example to protect your account from fraud). In addition, in order to alert you to our other financial products and services, we may share your personal information within First Trust. PRIVACY ONLINE We allow third-party companies, including AddThis (a social media sharing service), to collect certain anonymous information when you visit our website. These companies may use non-personally identifiable information during your visits to this and other websites in order to provide advertisements about goods and services likely to be of greater interest to you. These companies typically use a cookie, third party web beacon or pixel tags, to collect this information. To learn more about this behavioral advertising practice, you can visit www.networkadvertising.org. CONFIDENTIALITY AND SECURITY With regard to our internal security procedures, First Trust restricts access to your nonpublic personal information to those First Trust employees who need to know that information to provide products or services to you. We maintain physical, electronic and procedural safeguards to protect your nonpublic personal information. POLICY UPDATES AND INQUIRIES As required by federal law, we will notify you of our privacy policy annually. We reserve the right to modify this policy at any time, however, if we do change it, we will tell you promptly. For questions about our policy, or for additional copies of this notice, please go to www.ftportfolios.com, or contact us at 1-800-621-1675 (First Trust Portfolios) or 1-800-222-6822 (First Trust Advisors). March 2016 Page 30 This page intentionally left blank. This page intentionally left blank. FIRST TRUST First Trust Exchange-Traded Fund III INVESTMENT ADVISOR First Trust Advisors L.P. 120 E. Liberty Drive, Suite 400 Wheaton, IL 60187 INVESTMENT SUB-ADVISOR First Trust Global Portfolios Ltd. Floor 2 8 Angel Court London EC2R 7HJ England ADMINISTRATOR, CUSTODIAN FUND ACCOUNTANT & TRANSFER AGENT Brown Brothers Harriman & Co. 50 Post Office Square Boston, MA 02110 INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Deloitte & Touche LLP 111 S. Wacker Drive Chicago, IL 60606 LEGAL COUNSEL Chapman and Cutler LLP 111 W. Monroe Street Chicago, IL 60603 [BLANK BACK COVER] FIRST TRUST First Trust Exchange-Traded Fund III -------------------------------------------------------------------------------- First Trust RiverFront Dynamic Asia Pacific ETF (RFAP) First Trust RiverFront Dynamic Developed International ETF (RFDI) First Trust RiverFront Dynamic Europe ETF (RFEU) First Trust RiverFront Dynamic Emerging Markets ETF (RFEM) Annual Report For the Period Ended October 31, 2016 -------------------------------------------------------------------------------- TABLE OF CONTENTS -------------------------------------------------------------------------------- FIRST TRUST EXCHANGE-TRADED FUND III ANNUAL REPORT OCTOBER 31, 2016 Shareholder Letter........................................................... 2 Fund Performance Overview First Trust RiverFront Dynamic Asia Pacific ETF (RFAP).................... 3 First Trust RiverFront Dynamic Developed International ETF (RFDI)......... 5 First Trust RiverFront Dynamic Europe ETF (RFEU).......................... 7 First Trust RiverFront Dynamic Emerging Markets ETF (RFEM)................ 9 Notes to Fund Performance Overview........................................... 11 Portfolio Commentary......................................................... 12 Understanding Your Fund Expenses............................................. 16 Portfolio of Investments First Trust RiverFront Dynamic Asia Pacific ETF (RFAP).................... 17 First Trust RiverFront Dynamic Developed International ETF (RFDI)......... 19 First Trust RiverFront Dynamic Europe ETF (RFEU).......................... 24 First Trust RiverFront Dynamic Emerging Markets ETF (RFEM)................ 28 Statements of Assets and Liabilities......................................... 31 Statements of Operations..................................................... 32 Statements of Changes in Net Assets.......................................... 33 Financial Highlights......................................................... 34 Notes to Financial Statements................................................ 38 Report of Independent Registered Public Accounting Firm...................... 46 Additional Information....................................................... 47 Board of Trustees and Officers............................................... 53 Privacy Policy............................................................... 55 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- 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 RiverFront Investment Group LLC ("RiverFront" or the "Sub-Advisor") and their respective representatives, taking into account the information currently available to them. Forward-looking statements include all statements that do not relate solely to current or historical fact. For example, forward-looking statements include the use of words such as "anticipate," "estimate," "intend," "expect," "believe," "plan," "may," "should," "would" or other words that convey uncertainty of future events or outcomes. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of any series of First Trust Exchange-Traded Fund III (the "Trust") described in this report (each such series is referred to as a "Fund" and collectively, the "Funds") to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. When evaluating the information included in this report, you are cautioned not to place undue reliance on these forward-looking statements, which reflect the judgment of the Advisor and/or Sub-Advisor and their respective representatives only as of the date hereof. We undertake no obligation to publicly revise or update these forward-looking statements to reflect events and circumstances that arise after the date hereof. PERFORMANCE AND RISK DISCLOSURE There is no assurance that any Fund described in this report will achieve its investment objective. Each Fund is subject to market risk, which is the possibility that the market values of securities owned by the Fund will decline and that the value of the Fund shares may therefore be less than what you paid for them. Accordingly, you can lose money by investing in a Fund. See "Risk Considerations" in the Additional Information section of this report for a discussion of other risks of investing in the Funds. Performance data quoted represents past performance, which is no guarantee of future results, and current performance may be lower or higher than the figures shown. For the most recent month-end performance figures, please visit http://www.ftportfolios.com or speak with your financial advisor. Investment returns, net asset value and share price will fluctuate and Fund shares, when sold, may be worth more or less than their original cost. The Advisor may also periodically provide additional information on Fund performance on each Fund's webpage at http://www.ftportfolios.com. HOW TO READ THIS REPORT This report contains information that may help you evaluate your investment. It includes details about each Fund's portfolio and presents data and analysis that provide insight into each Fund's performance and investment approach. By reading the portfolio commentary by the portfolio management team of each Fund, you may obtain an understanding of how the market environment affected each Fund'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 opinions expressed by personnel of the Advisor and/or Sub-Advisor are just that: informed opinions. They should not be considered to be promises or advice. The opinions, like the statistics, cover the period through the date on the cover of this report. The material risks of investing in each Fund are spelled out in its prospectus, statement of additional information, this report and other Fund regulatory filings. Page 1 -------------------------------------------------------------------------------- SHAREHOLDER LETTER -------------------------------------------------------------------------------- FIRST TRUST EXCHANGE-TRADED FUND III ANNUAL LETTER FROM THE CHAIRMAN AND CEO OCTOBER 31, 2016 Dear Shareholders: Thank you for your investment in First Trust RiverFront Dynamic International ETFs (the "Funds"). First Trust Advisors L.P. ("First Trust") is pleased to provide you with the annual report which contains detailed information about your investment for the period from each Fund's inception date through October 31, 2016, including a market overview and a performance analysis for the period. We encourage you to read this report and discuss it with your financial advisor. Early in 2016, many investors were concerned that the volatility witnessed in the stock market in 2015 would continue, and it did. During the first six months of the year, one of the events that affected the global markets was the "Brexit" vote (where citizens in the UK voted to leave the European Union). Just a few days after the historic vote, the global equity markets rebounded to close June 30, 2016 at a combined market capitalization of $62 trillion. As of October 31, 2016, the S&P 500(R) Index was up 5.87% calendar year-to-date, according to Bloomberg. From October 30, 2015 through October 31, 2016, the S&P 500(R) Index was also in positive territory at 4.51%. The last few months have had investors keenly watching the presidential election in anticipation of the outcome of the vote and its effect on the stock market and economy. I will discuss that more in my next letter. The current bull market (measuring from March 9, 2009 through October 31, 2016) is the second longest in history. First Trust believes that having a long-term investment horizon and investing in quality products can help you reach your goals, regardless of ups and downs in the market. We strive to provide quality investment products, which has been one of the hallmarks of our firm since its inception more than 25 years ago. Thank you for giving First Trust the opportunity to be a part of your investment plan. We value our relationship with you and will continue to focus on helping investors like you reach your financial goals. Sincerely, /s/ James A. Bowen James A. Bowen Chairman of the Board of Trustees Chief Executive Officer of First Trust Advisors L.P. Page 2 -------------------------------------------------------------------------------- FUND PERFORMANCE OVERVIEW (UNAUDITED) -------------------------------------------------------------------------------- FIRST TRUST RIVERFRONT DYNAMIC ASIA PACIFIC ETF (RFAP) The investment objective of First Trust RiverFront Dynamic Asia Pacific ETF (the "Fund") is to provide capital appreciation. Under normal market conditions, the Fund will seek to achieve its investment objective by investing at least 80% of its net assets (including investment borrowings) in a portfolio of equity securities of Asian Pacific companies, including through investments in common stock, depositary receipts, and common and preferred shares of real estate investment trusts ("REITs"), and forward foreign currency exchange contracts and currency spot transactions used to hedge the Fund's exposure to the currencies in which the equity securities of such Asian Pacific companies are denominated (each, an "Asian Pacific currency" and, collectively, the "Asian Pacific currencies"). Asian Pacific companies are those companies (i) whose securities are traded principally on a stock exchange in an Asian Pacific country, (ii) that have a primary business office in an Asian Pacific country, or (iii) that have at least 50% of their assets in, or derive at least 50% of their revenues or profits from, an Asian Pacific country. Asian Pacific countries include the countries located in Asia and the Pacific Islands as well as Australia and New Zealand. The Fund will generally focus its Asian Pacific company investments in Australia, Hong Kong, Japan, New Zealand and/or Singapore. The Fund will utilize a dynamic currency hedging strategy through the use of forward foreign currency exchange contracts and currency spot transactions to hedge up to 100% of the Fund's currency exposure. As a result of such dynamic currency hedging strategy, the portion of the Fund's portfolio securities which are subject to currency hedging transactions may vary widely, from 0% to 100% of the portfolio securities. A forward contract on foreign currency is an obligation to purchase or sell a specific currency at a future date, which may be any fixed number of days agreed upon by the parties from the date of the contract, at a price set on the date of the contract. A forward foreign currency exchange contract may reduce the Fund's exposure to changes in the value of the currency it will deliver and increase its exposure to changes in the value of the currency it will receive for the duration of the contract. The effect on the value of the Fund is similar to selling securities denominated in one currency and purchasing securities denominated in another currency. The Fund also may enter into currency spot transactions as part of its dynamic currency hedging strategy. A currency spot transaction is an agreement between two parties to buy or sell a specific currency for delivery on a date that is typically two business days from the date of the agreement, as opposed to a date set in the future. The underlying currencies of the forward foreign currency exchange contracts and currency spot transactions included in the Fund's policy relating to the investment of at least 80% of its net assets (including investment borrowings) will be limited to Asian Pacific currencies. -------------------------------------------------------------------------------- PERFORMANCE -------------------------------------------------------------------------------- CUMULATIVE TOTAL RETURNS Inception (4/13/16) to 10/31/16 FUND PERFORMANCE NAV 2.26% Market Price 2.48% INDEX PERFORMANCE MSCI Pacific Index 8.38% -------------------------------------------------------------------------------- (See Notes to Fund Performance Overview on Page 11.) Page 3 -------------------------------------------------------------------------------- FUND PERFORMANCE OVERVIEW (UNAUDITED) (CONTINUED) -------------------------------------------------------------------------------- FIRST TRUST RIVERFRONT DYNAMIC ASIA PACIFIC ETF (RFAP) (CONTINUED) ----------------------------------------------------------- % OF TOTAL SECTOR ALLOCATION INVESTMENTS ----------------------------------------------------------- Financials 31.1% Consumer Discretionary 17.1 Industrials 12.1 Information Technology 9.0 Consumer Staples 6.6 Utilities 6.4 Health Care 5.7 Materials 5.1 Real Estate 2.9 Energy 2.4 Telecommunication Services 1.6 ------- Total 100.0% ======= ----------------------------------------------------------- % OF TOTAL TOP TEN HOLDINGS INVESTMENTS ----------------------------------------------------------- Commonwealth Bank of Australia 4.7% Westpac Banking Corp. 4.6 BHP Billiton Ltd. 2.9 Mitsui Fudosan Co., Ltd. 2.6 Mitsubishi Estate Co., Ltd. 2.5 Toyota Motor Corp. 2.3 Daiwa House Industry Co., Ltd. 2.1 Sumitomo Realty & Development Co., Ltd. 1.6 Honda Motor Co., Ltd. 1.5 CLP Holdings Ltd. 1.3 ------- Total 26.1% ======= PERFORMANCE OF A $10,000 INITIAL INVESTMENT APRIL 13, 2016 - OCTOBER 31, 2016 First Trust RiverFront Dynamic Asia Pacific ETF MSCI Pacific Index 4/13/16 $10,000 $10,000 4/30/16 10,107 10,262 10/31/16 10,226 10,839 Performance figures assume reinvestment of all distributions and do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. An index is a statistical composite that tracks a specified financial market or sector. Unlike the Fund, the index does not actually hold a portfolio of securities and therefore does not incur the expenses incurred by the Fund. These expenses negatively impact the performance of the Fund. The Fund's past performance does not predict future performance. FREQUENCY DISTRIBUTION OF DISCOUNTS AND PREMIUMS BID/ASK MIDPOINT VS. NAV THROUGH OCTOBER 31, 2016 The following Frequency Distribution of Discounts and Premiums charts are provided to show the frequency at which the bid/ask midpoint price for the Fund was at a discount or premium to the daily NAV. The following tables are for comparative purposes only and represent the period April 14, 2016 (commencement of trading) through October 31, 2016. Shareholders may pay more than NAV when they buy Fund shares and receive less than NAV when they sell those shares because shares are bought and sold at current market price. Data presented represents past performance and cannot be used to predict future results. -------------------------------------------------------------------------------- NUMBER OF DAYS BID/ASK MIDPOINT AT/ABOVE NAV -------------------------------------------------------------------------------- FOR THE PERIOD 0.00%-0.49% 0.50%-0.99% 1.00%-1.99% >=2.00% 4/14/16 - 10/31/16 65 29 12 2 -------------------------------------------------------------------------------- NUMBER OF DAYS BID/ASK MIDPOINT BELOW NAV -------------------------------------------------------------------------------- FOR THE PERIOD 0.00%-0.49% 0.50%-0.99% 1.00%-1.99% >=2.00% 4/14/16 - 10/31/16 21 8 2 1 Page 4 -------------------------------------------------------------------------------- FUND PERFORMANCE OVERVIEW (UNAUDITED) (CONTINUED) -------------------------------------------------------------------------------- FIRST TRUST RIVERFRONT DYNAMIC DEVELOPED INTERNATIONAL ETF (RFDI) The investment objective of First Trust RiverFront Dynamic Developed International ETF (the "Fund") is to provide capital appreciation. Under normal market conditions, the Fund will seek to achieve its investment objective by investing at least 80% of its net assets (including investment borrowings) in a portfolio of equity securities of developed market companies, including through investments in common stock, depositary receipts, and common and preferred shares of real estate investment trusts ("REITs"), and forward foreign currency exchange contracts and currency spot transactions used to hedge the Fund's exposure to the currencies in which the equity securities of such developed market companies are denominated (each, a "Developed Market currency" and, collectively, the "Developed Market currencies"). Developed market companies are those companies (i) whose securities are traded principally on a stock exchange in a developed market country, (ii) that have 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. Developed market countries currently include the countries comprising the Morgan Stanley Capital International World Index or countries considered to be developed by the World Bank, the International Finance Corporation or the United Nations. 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. The Fund will utilize a dynamic currency hedging strategy through the use of forward foreign currency exchange contracts and currency spot transactions to hedge up to 100% of the Fund's currency exposure. As a result of such dynamic currency hedging strategy, the portion of the Fund's portfolio securities which are subject to currency hedging transactions may vary widely, from 0% to 100% of the portfolio securities. A forward contract on foreign currency is an obligation to purchase or sell a specific currency at a future date, which may be any fixed number of days agreed upon by the parties from the date of the contract, at a price set on the date of the contract. A forward foreign currency exchange contract may reduce the Fund's exposure to changes in the value of the currency it will deliver and increase its exposure to changes in the value of the currency it will receive for the duration of the contract. The effect on the value of the Fund is similar to selling securities denominated in one currency and purchasing securities denominated in another currency. The Fund also may enter into currency spot transactions as part of its dynamic currency hedging strategy. A currency spot transaction is an agreement between two parties to buy or sell a specific currency for delivery on a date that is typically two business days from the date of the agreement, as opposed to a date set in the future. The underlying currencies of the forward foreign currency exchange contracts and currency spot transactions included in the Fund's policy relating to the investment of at least 80% of its net assets (including investment borrowings) will be limited to Developed Market currencies. -------------------------------------------------------------------------------- PERFORMANCE -------------------------------------------------------------------------------- CUMULATIVE TOTAL RETURNS Inception (4/13/16) to 10/31/16 FUND PERFORMANCE NAV 2.68% Market Price 2.73% INDEX PERFORMANCE MSCI EAFE Index 1.67% -------------------------------------------------------------------------------- (See Notes to Fund Performance Overview on Page 11.) Page 5 -------------------------------------------------------------------------------- FUND PERFORMANCE OVERVIEW (UNAUDITED) (CONTINUED) -------------------------------------------------------------------------------- FIRST TRUST RIVERFRONT DYNAMIC DEVELOPED INTERNATIONAL ETF (RFDI) (CONTINUED) ----------------------------------------------------------- % OF TOTAL SECTOR ALLOCATION INVESTMENTS ----------------------------------------------------------- Financials 18.8% Industrials 14.7 Consumer Staples 14.2 Consumer Discretionary 11.1 Health Care 10.7 Materials 7.7 Information Technology 6.3 Real Estate 5.3 Energy 4.1 Utilities 3.8 Telecommunication Services 3.3 ------- Total 100.0% ======= ----------------------------------------------------------- % OF TOTAL TOP TEN HOLDINGS INVESTMENTS ----------------------------------------------------------- Unilever N.V. 2.1% Banco Santander S.A. 2.0 British American Tobacco PLC 1.8 Sanofi 1.8 Banco Bilbao Vizcaya Argentaria S.A. 1.8 Bayer AG 1.5 SAP SE 1.5 Commonwealth Bank of Australia 1.5 Westpac Banking Corp. 1.4 Roche Holding AG 1.4 ------- Total 16.8% ======= PERFORMANCE OF A $10,000 INITIAL INVESTMENT APRIL 13, 2016 - OCTOBER 31, 2016 First Trust RiverFront Dynamic Developed International ETF MSCI EAFE Index 4/13/16 $10,000 $10,000 4/30/16 10,047 10,183 10/31/16 10,267 10,167 Performance figures assume reinvestment of all distributions and do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. An index is a statistical composite that tracks a specified financial market or sector. Unlike the Fund, the index does not actually hold a portfolio of securities and therefore does not incur the expenses incurred by the Fund. These expenses negatively impact the performance of the Fund. The Fund's past performance does not predict future performance. FREQUENCY DISTRIBUTION OF DISCOUNTS AND PREMIUMS BID/ASK MIDPOINT VS. NAV THROUGH OCTOBER 31, 2016 The following Frequency Distribution of Discounts and Premiums charts are provided to show the frequency at which the bid/ask midpoint price for the Fund was at a discount or premium to the daily NAV. The following tables are for comparative purposes only and represent the period April 14, 2016 (commencement of trading) through October 31, 2016. Shareholders may pay more than NAV when they buy Fund shares and receive less than NAV when they sell those shares because shares are bought and sold at current market price. Data presented represents past performance and cannot be used to predict future results. -------------------------------------------------------------------------------- NUMBER OF DAYS BID/ASK MIDPOINT AT/ABOVE NAV -------------------------------------------------------------------------------- FOR THE PERIOD 0.00%-0.49% 0.50%-0.99% 1.00%-1.99% >=2.00% 4/14/16 - 10/31/16 46 70 18 2 -------------------------------------------------------------------------------- NUMBER OF DAYS BID/ASK MIDPOINT BELOW NAV -------------------------------------------------------------------------------- FOR THE PERIOD 0.00%-0.49% 0.50%-0.99% 1.00%-1.99% >=2.00% 4/14/16 - 10/31/16 4 0 0 0 Page 6 -------------------------------------------------------------------------------- FUND PERFORMANCE OVERVIEW (UNAUDITED) (CONTINUED) -------------------------------------------------------------------------------- FIRST TRUST RIVERFRONT DYNAMIC EUROPE ETF (RFEU) The investment objective of First Trust RiverFront Dynamic Europe ETF (the "Fund") is to provide capital appreciation. Under normal market conditions, the Fund will seek to achieve its investment objective by investing at least 80% of its net assets (including investment borrowings) in a portfolio of equity securities of European companies, including through investments in common stock, depositary receipts, and common and preferred shares of real estate investment trusts ("REITs"), and forward foreign currency exchange contracts and currency spot transactions used to hedge the Fund's exposure to the currencies in which the equity securities of such European companies are denominated (each, a "European currency" and, collectively, the "European currencies"). European companies are those companies (i) whose securities are traded principally on a stock exchange in a European country, (ii) that have a primary business office in a European country, or (iii) that have at least 50% of their assets in, or derive at least 50% of their revenues or profits from, a European country. The Fund considers a European country to be any member country of the European Union or any country included in the FTSE Developed Europe Index or the FTSE Emerging Europe All Cap Index. The Fund will generally focus its European company investments in Austria, Belgium, Denmark, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and/or the United Kingdom. The Fund will utilize a dynamic currency hedging strategy through the use of forward foreign currency exchange contracts and currency spot transactions to hedge up to 100% of the Fund's currency exposure. As a result of such dynamic currency hedging strategy, the portion of the Fund's portfolio securities which are subject to currency hedging transactions may vary widely, from 0% to 100% of the portfolio securities. A forward contract on foreign currency is an obligation to purchase or sell a specific currency at a future date, which may be any fixed number of days agreed upon by the parties from the date of the contract, at a price set on the date of the contract. A forward foreign currency exchange contract may reduce the Fund's exposure to changes in the value of the currency it will deliver and increase its exposure to changes in the value of the currency it will receive for the duration of the contract. The effect on the value of the Fund is similar to selling securities denominated in one currency and purchasing securities denominated in another currency. The Fund also may enter into currency spot transactions as part of its dynamic currency hedging strategy. A currency spot transaction is an agreement between two parties to buy or sell a specific currency for delivery on a date that is typically two business days from the date of the agreement, as opposed to a date set in the future. The underlying currencies of the forward foreign currency exchange contracts and currency spot transactions included in the Fund's policy relating to the investment of at least 80% of its net assets (including investment borrowings) will be limited to European currencies. -------------------------------------------------------------------------------- PERFORMANCE -------------------------------------------------------------------------------- CUMULATIVE TOTAL RETURNS Inception (4/13/16) to 10/31/16 FUND PERFORMANCE NAV 2.66% Market Price 3.43% INDEX PERFORMANCE MSCI Europe Index -1.77% -------------------------------------------------------------------------------- (See Notes to Fund Performance Overview on Page 11.) Page 7 -------------------------------------------------------------------------------- FUND PERFORMANCE OVERVIEW (UNAUDITED) (CONTINUED) -------------------------------------------------------------------------------- FIRST TRUST RIVERFRONT DYNAMIC EUROPE ETF (RFEU) (CONTINUED) ----------------------------------------------------------- % OF TOTAL SECTOR ALLOCATION INVESTMENTS ----------------------------------------------------------- Industrials 21.0% Financials 15.6 Consumer Discretionary 13.9 Consumer Staples 12.1 Health Care 8.3 Materials 7.6 Information Technology 7.5 Utilities 5.7 Telecommunication Services 4.9 Energy 3.1 Real Estate 0.3 ------- Total 100.0% ======= ----------------------------------------------------------- % OF TOTAL TOP TEN HOLDINGS INVESTMENTS ----------------------------------------------------------- Unilever N.V. 3.0% Banco Santander S.A. 2.9 British American Tobacco PLC 2.6 Sanofi 2.6 Banco Bilbao Vizcaya Argentaria S.A. 2.6 Bayer AG 2.2 SAP SE 2.2 Roche Holding AG 2.1 Reckitt Benckiser Group PLC 1.9 HSBC Holdings PLC 1.8 ------- Total 23.9% ======= PERFORMANCE OF A $10,000 INITIAL INVESTMENT APRIL 13, 2016 - OCTOBER 31, 2016 First Trust RiverFront Dynamic Europe ETF MSCI Europe Index 4/13/16 $10,000 $10,000 4/30/16 10,028 10,141 10/31/16 10,267 9,823 Performance figures assume reinvestment of all distributions and do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. An index is a statistical composite that tracks a specified financial market or sector. Unlike the Fund, the index does not actually hold a portfolio of securities and therefore does not incur the expenses incurred by the Fund. These expenses negatively impact the performance of the Fund. The Fund's past performance does not predict future performance. FREQUENCY DISTRIBUTION OF DISCOUNTS AND PREMIUMS BID/ASK MIDPOINT VS. NAV THROUGH OCTOBER 31, 2016 The following Frequency Distribution of Discounts and Premiums charts are provided to show the frequency at which the bid/ask midpoint price for the Fund was at a discount or premium to the daily NAV. The following tables are for comparative purposes only and represent the period April 14, 2016 (commencement of trading) through October 31, 2016. Shareholders may pay more than NAV when they buy Fund shares and receive less than NAV when they sell those shares because shares are bought and sold at current market price. Data presented represents past performance and cannot be used to predict future results. -------------------------------------------------------------------------------- NUMBER OF DAYS BID/ASK MIDPOINT AT/ABOVE NAV -------------------------------------------------------------------------------- FOR THE PERIOD 0.00%-0.49% 0.50%-0.99% 1.00%-1.99% >=2.00% 4/14/16 - 10/31/16 39 35 2 0 -------------------------------------------------------------------------------- NUMBER OF DAYS BID/ASK MIDPOINT BELOW NAV -------------------------------------------------------------------------------- FOR THE PERIOD 0.00%-0.49% 0.50%-0.99% 1.00%-1.99% >=2.00% 4/14/16 - 10/31/16 56 8 0 0 Page 8 -------------------------------------------------------------------------------- FUND PERFORMANCE OVERVIEW (UNAUDITED) (CONTINUED) -------------------------------------------------------------------------------- FIRST TRUST RIVERFRONT DYNAMIC EMERGING MARKETS ETF (RFEM) The investment objective of First Trust RiverFront Dynamic Emerging Markets ETF (the "Fund") is to provide capital appreciation. Under normal market conditions, the Fund will seek to achieve its investment objective by investing at least 80% of its net assets (including investment borrowings) in a portfolio of equity securities of emerging market companies, including through investments in common stock, depositary receipts, and common and preferred shares of real estate investment trusts ("REITs"), and forward foreign currency exchange contracts and currency spot transactions used to hedge the Fund's exposure to the currencies in which the equity securities of such emerging market companies are denominated (each, an "Emerging Market currency" and, collectively, the "Emerging Market currencies"). The Fund considers an emerging market company to be one (i) domiciled or with a principal place of business or primary securities trading market in an emerging market country, or (ii) that derives a substantial portion of its total revenues or profits from emerging market countries. The Fund considers an emerging market country to be any country whose issuers are included in the Morgan Stanley Capital International Emerging Markets Index and/or those countries considered to be developing by the World Bank, the International Finance Corporation or the United Nations. The Fund will generally focus its emerging market company investments in Brazil, Chile, China, Colombia, the Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Malaysia, Mexico, Morocco, Nigeria, Peru, the Philippines, Poland, Qatar, Russia, South Africa, South Korea, Taiwan, Thailand, Turkey and/or the United Arab Emirates. The Fund will utilize a dynamic currency hedging strategy through the use of forward foreign currency exchange contracts and currency spot transactions to hedge up to 100% of the Fund's currency exposure. As a result of such dynamic currency hedging strategy, the portion of the Fund's portfolio securities which are subject to currency hedging transactions may vary widely, from 0% to 100% of the portfolio securities. A forward contract on foreign currency is an obligation to purchase or sell a specific currency at a future date, which may be any fixed number of days agreed upon by the parties from the date of the contract, at a price set on the date of the contract. A forward foreign currency exchange contract may reduce the Fund's exposure to changes in the value of the currency it will deliver and increase its exposure to changes in the value of the currency it will receive for the duration of the contract. The effect on the value of the Fund is similar to selling securities denominated in one currency and purchasing securities denominated in another currency. The Fund also may enter into currency spot transactions as part of its dynamic currency hedging strategy. A currency spot transaction is an agreement between two parties to buy or sell a specific currency for delivery on a date that is typically two business days from the date of the agreement, as opposed to a date set in the future. The underlying currencies of the forward foreign currency exchange contracts and currency spot transactions included in the Fund's policy relating to the investment of at least 80% of its net assets (including investment borrowings) will be limited to Emerging Market currencies. -------------------------------------------------------------------------------- PERFORMANCE -------------------------------------------------------------------------------- CUMULATIVE TOTAL RETURNS Inception (6/14/16) to 10/31/16 FUND PERFORMANCE NAV 14.52% Market Price 15.11% INDEX PERFORMANCE MSCI Emerging Markets Index 14.09% -------------------------------------------------------------------------------- (See Notes to Fund Performance Overview on Page 11.) Page 9 -------------------------------------------------------------------------------- FUND PERFORMANCE OVERVIEW (UNAUDITED) (CONTINUED) -------------------------------------------------------------------------------- FIRST TRUST RIVERFRONT DYNAMIC EMERGING MARKETS ETF (RFEM) (CONTINUED) ----------------------------------------------------------- % OF TOTAL SECTOR ALLOCATION INVESTMENTS ----------------------------------------------------------- Information Technology 26.4% Financials 24.0 Consumer Discretionary 13.8 Materials 12.3 Energy 6.1 Telecommunication Services 5.3 Consumer Staples 4.7 Industrials 3.9 Utilities 1.7 Health Care 1.4 Real Estate 0.4 ------- Total 100.0% ======= ----------------------------------------------------------- % OF TOTAL TOP TEN HOLDINGS INVESTMENTS ----------------------------------------------------------- Taiwan Semiconductor Manufacturing Co., Ltd. 4.3% Samsung Electronics Co., Ltd. 4.3 Tencent Holdings Ltd. 3.8 China Construction Bank Corp., Class H 3.1 Hanjaya Mandala Sampoerna Tbk PT 2.3 Bank of China Ltd., Class H 1.9 Reliance Industries Ltd. 1.5 Hyundai Mobis Co., Ltd. 1.5 Shinhan Financial Group Co., Ltd. 1.4 KB Financial Group, Inc. 1.4 ------- Total 25.5% ======= PERFORMANCE OF A $10,000 INITIAL INVESTMENT JUNE 14, 2016 - OCTOBER 31, 2016 First Trust RiverFront Dynamic Europe ETF MSCI Europe Index 6/14/16 $10,000 $10,000 10/31/16 11,452 11,409 Performance figures assume reinvestment of all distributions and do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. An index is a statistical composite that tracks a specified financial market or sector. Unlike the Fund, the index does not actually hold a portfolio of securities and therefore does not incur the expenses incurred by the Fund. These expenses negatively impact the performance of the Fund. The Fund's past performance does not predict future performance. FREQUENCY DISTRIBUTION OF DISCOUNTS AND PREMIUMS BID/ASK MIDPOINT VS. NAV THROUGH OCTOBER 31, 2016 The following Frequency Distribution of Discounts and Premiums charts are provided to show the frequency at which the bid/ask midpoint price for the Fund was at a discount or premium to the daily NAV. The following tables are for comparative purposes only and represent the period June 15, 2016 (commencement of trading) through October 31, 2016. Shareholders may pay more than NAV when they buy Fund shares and receive less than NAV when they sell those shares because shares are bought and sold at current market price. Data presented represents past performance and cannot be used to predict future results. -------------------------------------------------------------------------------- NUMBER OF DAYS BID/ASK MIDPOINT AT/ABOVE NAV -------------------------------------------------------------------------------- FOR THE PERIOD 0.00%-0.49% 0.50%-0.99% 1.00%-1.99% >=2.00% 6/15/16 - 10/31/16 31 40 16 1 -------------------------------------------------------------------------------- NUMBER OF DAYS BID/ASK MIDPOINT BELOW NAV -------------------------------------------------------------------------------- FOR THE PERIOD 0.00%-0.49% 0.50%-0.99% 1.00%-1.99% >=2.00% 6/15/16 - 10/31/16 7 2 0 0 Page 10 -------------------------------------------------------------------------------- NOTES TO FUND PERFORMANCE OVERVIEW -------------------------------------------------------------------------------- Total returns for the periods since inception are calculated from the inception date of each Fund. "Cumulative total returns" represent the total change in value of an investment over the periods indicated. Each Fund's per share net asset value ("NAV") is the value of one share of the Fund and is computed by dividing the value of all assets of the Fund (including accrued interest and dividends), less all liabilities (including accrued expenses and dividends declared but unpaid), by the total number of outstanding shares. The price used to calculate market return ("Market Price") is determined by using the midpoint between the highest bid and the lowest offer on the stock exchange on which shares of the Fund are listed for trading as of the time that the Fund's NAV is calculated. Since shares of each Fund did not trade in the secondary market until after the Fund's inception, for the period from inception to the first day of secondary market trading in shares of the Fund, the NAV of each Fund is used as a proxy for the secondary market trading price to calculate market returns. NAV and market returns assume that all distributions have been reinvested in each Fund at NAV and Market Price, respectively. An index is a statistical composite that tracks a specified financial market or sector. Unlike each Fund, the index does not actually hold a portfolio of securities and therefore does not incur the expenses incurred by each Fund. These expenses negatively impact the performance of each Fund. Also, market returns do not include brokerage commissions that may be payable on secondary market transactions. If brokerage commissions were included, market returns would be lower. The total returns presented reflect the reinvestment of dividends on securities in the index. The returns presented do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. The investment return and principal value of shares of the Fund will vary with changes in market conditions. Shares of each Fund may be worth more or less than their original cost when they are redeemed or sold in the market. Each Fund's past performance is no guarantee of future performance. Page 11 -------------------------------------------------------------------------------- PORTFOLIO COMMENTARY -------------------------------------------------------------------------------- FIRST TRUST EXCHANGE-TRADED FUND III FIRST TRUST RIVERFRONT DYNAMIC INTERNATIONAL ETFS ANNUAL REPORT OCTOBER 31, 2016 (UNAUDITED) SUB-ADVISOR RIVERFRONT INVESTMENT GROUP, LLC RiverFront Investment Group, LLC is an SEC-registered investment advisor located in Richmond, Virginia. It is majority owned by its employees, and Baird Financial Corporation is a minority owner of RiverFront Investment Holding Group, LLC. The firm provides asset management services to a series of global tactical asset allocation portfolios and registered investment companies, including mutual funds and exchange-traded products. PORTFOLIO MANAGEMENT TEAM MICHAEL JONES, CFA - CHAIRMAN AND CHIEF INVESTMENT OFFICER DOUG SANDLER, CFA - CHIEF US EQUITY OFFICER ADAM GROSSMAN, CFA - CHIEF GLOBAL EQUITY OFFICER CHRIS KONSTANTINOS, CFA - DIRECTOR OF INTERNATIONAL PORTFOLIO MANAGEMENT SAM TURNER, CMT - DIRECTOR OF US EQUITY SCOTT HAYS - QUANTITATIVE PORTFOLIO MANAGER COMMENTARY MARKET UPDATE Uncertainty continued to dominate international headlines in 2016, as global investors have been forced to contend with the implications of the Brexit referendum (where UK citizens voted to leave the European Union), a protectionist U.S. Presidential campaign and shifting monetary policies of most of the major central banks in the developed world. Despite these sustained headwinds, international markets started to find their feet in the second half of 2016 after disappointing investors for multiple quarters. We attribute this newfound resilience to three factors that we call the "3 C's" - Condition, Catalyst, and Confirmation. 1. CONDITION: Our Price Matters(R) valuation tool indicates that international equity markets are attractively valued across the board. By our measure, stocks in the developed international markets are roughly 35-40% below their long-term trend line as of October 31, 2016, and stocks in the emerging markets are 15-20% below their trend line (which has a shorter history). We believe this undervalued condition serves as a shock absorber that can buffer the impact of negative news. In our view, when stocks are this undervalued, the news only has to get less bad for markets to rise. We believe "less bad" has been the predominant news theme since the Brexit vote in late June, at least until Donald Trump's election raised the possibility of trade restrictions against major emerging economies like China and Mexico. 2. CATALYST: International equities appear to be facing a number of the same catalysts that positively impacted the performance of U.S. stocks over the last seven years. Some of the leading catalysts include easier monetary policy, stabilized/improving corporate earnings, and favorable energy prices. If Trump's actual policy proposals prove less aggressive than his campaign rhetoric, we believe these catalysts will allow international stocks to remain resilient and ultimately outperform the U.S. in coming years. 3. CONFIRMATION: International stocks (developed and emerging) soundly beat the S&P 500(R) Index in the most recent quarter for the first time in over a year. We believe positive relative performance can become its own catalyst, as it is one of the important signs trend-following asset allocators look for as an indicator of improved conditions. FIRST TRUST RIVERFRONT DYNAMIC ASIA PACIFIC ETF (RFAP) 2016 ATTRIBUTION RFAP PERFORMANCE RFAP posted net asset value ("NAV") and market price returns (2.26% and 2.48%, respectively) that underperformed its benchmark return of 8.38%, for the period April 13, 2016 (the inception date) through October 31, 2016. There were three main contributors to the underperformance of RFAP: 1. COUNTRY ALLOCATION: Country allocation was a slightly negative contributor to portfolio performance in 2016. The portfolio was positively impacted by an overweight to Australia and negatively impacted by an overweight (but small) position in China. Page 12 -------------------------------------------------------------------------------- PORTFOLIO COMMENTARY (CONTINUED) -------------------------------------------------------------------------------- FIRST TRUST EXCHANGE-TRADED FUND III FIRST TRUST RIVERFRONT DYNAMIC INTERNATIONAL ETFS ANNUAL REPORT OCTOBER 31, 2016 (UNAUDITED) 2. SECTOR AND SECURITY SELECTION: Security selection in 2016 had an overall negative impact. The investment selection process behind RFAP is built on making a number of small bets in the portfolio and avoiding the large bets that many smart beta products rely on. This means that there are rarely just one or two things contributing to the returns in RFAP. In 2016, equity selection posted negative results in aggregate and was diversified across many areas. A few of the top themes that contributed most to performance in the year were: a. SECTOR ALLOCATION: The major negative sector contributors to RFAP performance came from our overweight to Japanese real estate and underweight to Japanese financials. On the other hand, the Fund benefitted from overweights to Australian real estate and financials and Japanese telecommunications and healthcare. The biggest negative contributor, Japanese real estate, significantly underperformed its benchmark in the second half of 2016. We believe this was a give-back from its significant outperformance in the first and second quarters relative to the rest of Japan. b. SECURITY SELECTION: Within security selection, Australian financials, real estate, healthcare and telecommunications, and Japanese industrials, real estate, consumer staples and materials had the greatest negative impact. Our underperformance in Japanese industrials was due to the fact that we had favored export-oriented industrials at a time that the yen was strengthening. Additionally, we believe the underperformance of our Australian financials is due to our quality bias, which tends to hold back returns when the market is strong. Some of the negative security selection was offset by positive selection within Japanese consumer discretionary, healthcare and telecommunications and Hong Kong telecommunications and technology. 3. CURRENCY HEDGING: RiverFront significantly decreased its degree of yen hedging from nearly 80% in the second quarter, to 40% at the start of the third quarter, to 0% by the end of the third quarter. Unfortunately, any degree of yen hedging we had in the portfolio was a negative contributor to performance, as the yen strengthened throughout this period. We believe the yen strength was a function of underwhelming monetary guidance and poor communication by the Bank of Japan. We think it will take time for the market to once again trust the Bank of Japan. FIRST TRUST RIVERFRONT DYNAMIC DEVELOPED INTERNATIONAL ETF (RFDI) 2016 ATTRIBUTION RFDI PERFORMANCE RFDI posted NAV and market price returns (2.68% and 2.73%, respectively) that exceeded its benchmark return of 1.67%, for the period April 13, 2016 (the inception date) through October 31, 2016. RFDI's aggregate performance, when broken into two parts, Europe and Asia/Pacific, tell two different stories. Europe: The performance of the European portion of RFDI exceeded its benchmark. Europe makes up roughly 70% of RFDI. European performance came from 3 main drivers: 1. COUNTRY ALLOCATION: Overweights to Germany, Netherlands, and Austria and underweights to Denmark and Israel contributed to RFDI's performance. RiverFront had been anticipating outperformance from countries like Germany, Austria and Netherlands given that their export-oriented economies stand to benefit the most from the decline in the euro. The Fund's underweight to the UK and overweight to France were detractors in 2016, but they were offset by the positive contributors. 2. SECTOR AND SECURITY SELECTION: The investment selection process behind RFDI is built on making a number of small bets in the portfolio and avoiding the large bets that many smart beta products rely on. This means that there are rarely just one or two things contributing to the returns in RFDI. In 2016, our equity selection posted positive results in aggregate and was diversified across many areas. A few of the top themes that contributed most to performance in the year were: a. Overall, our sector allocation decisions were additive to performance. Overweights to economically sensitive sectors like technology and industrials in Germany and Finland, which benefit from improving economic activity, added value. Additionally, RFDI's underweights to Banks in Germany and Spain, which we believe are three to four years behind their US peers, were also additive. The detractors for the year were our overweight to German healthcare companies. b. In aggregate security selection in Europe was slightly positive. This was led by selection within Spanish financials, and French consumer discretionary. The biggest detractors in Europe from a security selection perspective were UK consumer staples and UK industrials. Page 13 -------------------------------------------------------------------------------- PORTFOLIO COMMENTARY (CONTINUED) -------------------------------------------------------------------------------- FIRST TRUST EXCHANGE-TRADED FUND III FIRST TRUST RIVERFRONT DYNAMIC INTERNATIONAL ETFS ANNUAL REPORT OCTOBER 31, 2016 (UNAUDITED) 3 CURRENCY: Post-Brexit, central banks throughout Europe remained stimulative, placing pressure on their currencies relative to the dollar. The British pound in particular felt the effect of increased stimulus, and fell significantly in 2016. During this period, RFDI benefitted from the pound's collapse, as it was 30-60% hedged the pound. ASIA/PACIFIC: The Asia/Pacific portion of RFDI underperformed its portion of the benchmark. Although the Asia/Pacific portion of RFDI only accounts for 30% of the portfolio, its degree of underperformance was enough to offset some of the positive contributions from the European portion of the portfolio. There were two main contributors to the underperformance of Asia/Pacific: 1. SECURITY SELECTION: The major negative contributors to RFDI performance came from our overweight to Japanese real estate and security selection within Australian financials and Japanese industrials. Japanese real estate significantly underperformed its benchmark in the second half of 2016. We believe this was a give-back from its significant outperformance in the first and second quarters, relative to the rest of Japan. We believe the Fund's underperformance in Japanese industrials was due to the fact that we had favored export-oriented Industrials at a time that the yen was strengthening. Lastly, we think the underperformance of our Australian financials is due to our quality bias, which tends to hold back returns when the market is strong. 2. CURRENCY HEDGING: RiverFront significantly decreased its degree of yen hedging from nearly 80% in the second quarter to 40% at the start of third quarter to 0% by the end of third quarter. Unfortunately, any degree of yen hedging we had in the portfolio was a negative contributor to performance as the yen strengthened throughout this period. We believe the yen strength was a function of underwhelming monetary guidance and poor communication by the Bank of Japan. We think it will take time for the market to once again trust the Bank of Japan. FIRST TRUST RIVERFRONT DYNAMIC DEVELOPED EUROPE ETF (RFEU) 2016 ATTRIBUTION RFEU PERFORMANCE RFEU posted NAV and market price returns (2.66% and 3.43%, respecively) that exceeded its benchmark return of -1.77%, for the period April 13, 2016 (the inception date) through October 31, 2016. The sources of RFEU performance came from 3 main drivers. 1. COUNTRY ALLOCATION: Country allocation in RFEU was generally negative, led by underweights in the UK and overweights in France. The negative contributions from these country weights were offset slightly by positive contributions from overweights in the Netherlands and Austria and underweights to Denmark and Switzerland. 2. SECTOR AND SECURITY SELECTION: Security selection in 2016 had an overall positive effect. The investment selection process behind RFEU is built on making a number of small bets in the portfolio and avoiding the large bets that many smart beta products rely on. This means that there are rarely just one or two things contributing to the returns in RFEU. In 2016, equity selection posted positive results in aggregate and was diversified across many areas. A few of the top themes that contributed most to performance in the year were: a. Overweights to economically sensitive sectors like German technology and industrials, which benefit from improving economic activity, added value. Additionally, RFEU's underweights to French and German banks, which we believe are three to four years behind their US peers, were also additive. On the negative side, underweights to energy companies in UK and the Netherlands, an underweight to Swiss financials and an overweight to German healthcare hurt the portfolio. b. Positive security selection within Spanish financials and British and French consumer discretionary companies helped the portfolio, while negative security selection in British consumer staples and industrials offset some of the positive impact. 3. CURRENCY: Post-Brexit, central banks throughout Europe remained stimulative, placing pressure on their currencies relative to the dollar. The British pound in particular felt the effect of increased stimulus, and fell significantly in 2016. During this period, RFEU benefitted from the pound's collapse, as it was 30-60% hedged against the pound. Page 14 -------------------------------------------------------------------------------- PORTFOLIO COMMENTARY (CONTINUED) -------------------------------------------------------------------------------- FIRST TRUST EXCHANGE-TRADED FUND III FIRST TRUST RIVERFRONT DYNAMIC INTERNATIONAL ETFS ANNUAL REPORT OCTOBER 31, 2016 (UNAUDITED) FIRST TRUST RIVERFRONT DYNAMIC EMERGING MARKETS ETF (RFEM) 2016 ATTRIBUTION RFEM PERFORMANCE RFEM posted NAV returns and market price returns (14.52% and 15.11%, respectively) that slightly exceeded its benchmark return of 14.09%, for the period June 14, 2016 (the inception date) through October 31, 2016. There were two primary drivers to RFEM returns: country allocation (negative) and security selection (positive). Fortunately, the security selection outperformance was more than enough to offset the negative contribution from country allocation. 1. COUNTRY ALLOCATION: The country allocations in RFEM are determined through a bottom-up process that ranks stocks on three fundamental cornerstones: value, quality and momentum/sentiment. If a country produces more highly ranked stocks relative to another country, that country's allocation is allowed to exceed its benchmark by a tolerable level, and vice versa. The country allocation for RFEM in 2016 produced slightly positive returns due to an underweight to Thailand and overweights to Poland and Netherlands. These positives offset the negative returns from the Fund's underweights to China and Brazil and the Fund's overweights to South Africa, Israel and South Korea. 2. SECTOR AND SECURITY SELECTION: The investment selection process behind RFEM is built on making a number of small bets in the portfolio and avoiding the large bets that many smart beta products rely on. This means that there are rarely just one or two things contributing to the returns in RFEM. In this quarter, equity selection posted positive results in aggregate and was diversified across many areas. A few of the top themes that most contributed to the positive security selection included: a. SECTOR ALLOCATION: Overweights to economically sensitive sectors like South African banks, Indian energy and Brazilian materials helped the portfolio. The portfolio was hurt by overweights to Thai healthcare and consumer discretionary and Indian technology and an underweight to tech companies in China. b. SECURITY SELECTION: i. Positive security selection within financials in China, Brazil and South Africa. ii. Positive security selection in consumer discretionary in China. iii. Positive security selection in materials in Turkey iv. Positive security selection in energy in India. v. Stand-out negatives came from Brazilian materials and consumer staples. While the portfolio benefitted from the overweight allocation to Brazilian materials, our stock selection underperformed Brazilian materials overall, offsetting that positive. MARKET OUTLOOK: If 2016 was the "year of uncertainty", we believe 2017 could be the "year of greater clarity", with the U.S. presidential race now behind us, a likely clearer timeline and better understanding of the implications of Brexit, another potential Federal Reserve rate hike, and further information to come on Trump's policy priorities. We believe that the market values clarity over uncertainty, even when clarity comes with some disappointments. With clarity, the market can better assess the news, adjust valuations and take the necessary steps to move on, something that is impossible when there are many unknowns. In fact, if one could simply set aside the current distractions caused by today's unknowns, we believe one would see that today we have a stronger economic environment, better corporate earnings, and a slowly improving employment picture around the world. Entering 2017, we remain constructive on international markets, both developed and emerging. In our view, the "3 C's" that helped international markets remain resilient in the face of this year's tailwinds will fuel their continued performance as the market gets greater clarity and enable greater focus on the improving macro-economic environment in 2017 and beyond. Page 15 FIRST TRUST EXCHANGE-TRADED FUND III UNDERSTANDING YOUR FUND EXPENSES OCTOBER 31, 2016 (UNAUDITED) As a shareholder of First Trust RiverFront Dynamic Asia Pacific ETF, First Trust RiverFront Dynamic Developed International ETF, First Trust RiverFront Dynamic Europe ETF and First Trust RiverFront Dynamic Emerging Markets ETF (each a "Fund" and collectively, the "Funds"), you incur two types of costs: (1) transaction costs; and (2) ongoing costs, including management fees, distribution and/or service fees, if any, and other Fund expenses. This Example is intended to help you understand your ongoing costs of investing in the Funds and to compare these costs with the ongoing costs of investing in other funds. The Example is based on an investment of $1,000 invested at the beginning of the period (or since inception) and held through the six-month (or shorter) period ended October 31, 2016. 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 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.

------------------------------------------------------------------------------------------------------------------------------ ANNUALIZED EXPENSE RATIO EXPENSES PAID BEGINNING ENDING BASED ON THE DURING ACCOUNT VALUE ACCOUNT VALUE SIX-MONTH THE SIX-MONTH MAY 1, 2016 OCTOBER 31, 2016 PERIOD PERIOD (a) ------------------------------------------------------------------------------------------------------------------------------ FIRST TRUST RIVERFRONT DYNAMIC ASIA PACIFIC ETF (RFAP) Actual $1,000.00 $1,011.80 0.83% $4.20 Hypothetical (5% return before expenses) $1,000.00 $1,020.96 0.83% $4.22 FIRST TRUST RIVERFRONT DYNAMIC DEVELOPED INTERNATIONAL ETF (RFDI) Actual $1,000.00 $1,021.90 0.83% $4.22 Hypothetical (5% return before expenses) $1,000.00 $1,020.96 0.83% $4.22 FIRST TRUST RIVERFRONT DYNAMIC EUROPE ETF (RFEU) Actual $1,000.00 $1,023.80 0.83% $4.22 Hypothetical (5% return before expenses) $1,000.00 $1,020.96 0.83% $4.22 ------------------------------------------------------------------------------------------------------------------------------ ANNUALIZED EXPENSES PAID EXPENSE RATIO DURING THE PERIOD BEGINNING ENDING BASED ON THE JUNE 14, 2016 (b) ACCOUNT VALUE ACCOUNT VALUE NUMBER OF DAYS TO JUNE 14, 2016 (b) OCTOBER 31, 2016 IN THE PERIOD OCTOBER 31, 2016 (c) ------------------------------------------------------------------------------------------------------------------------------ FIRST TRUST RIVERFRONT DYNAMIC EMERGING MARKETS ETF (RFEM) Actual $1,000.00 $1,145.20 0.95% $3.90 Hypothetical (5% return before expenses) $1,000.00 $1,020.36 0.95% $4.82

(a) Expenses are equal to the annualized expense ratio as indicated in the table, multiplied by the average account value over the period (May 1, 2016 through October 31, 2016), multiplied by 184/366 (to reflect the one-half year period). (b) Inception Date. (c) Actual expenses are equal to the annualized expense ratio as indicated in the table multiplied by the average account value over the period (June 14, 2016 through October 31, 2016), multiplied by 140/366. Hypothetical expenses are assumed for the most recent half-year period. Page 16 FIRST TRUST RIVERFRONT DYNAMIC ASIA PACIFIC ETF (RFAP) PORTFOLIO OF INVESTMENTS OCTOBER 31, 2016 SHARES DESCRIPTION VALUE ------------- ------------------------------ ---------------- COMMON STOCKS (a) -- 98.1% AUSTRALIA -- 23.2% 14,947 Australia & New Zealand Banking Group Ltd. $ 316,660 31,881 Bank of Queensland Ltd. 253,675 31,548 Bendigo and Adelaide Bank Ltd. 267,104 42,394 BHP Billiton Ltd. 743,987 27,933 Brambles Ltd. 244,997 21,604 Commonwealth Bank of Australia 1,206,103 3,368 CSL Ltd. 257,510 28,448 Insurance Australia Group Ltd. 119,238 14,646 National Australia Bank Ltd. 311,954 38,894 Platinum Asset Management Ltd. 147,637 12,365 QBE Insurance Group Ltd. 93,966 12,881 Suncorp Group Ltd. 117,289 19,711 TPG Telecom Ltd. 113,356 11,012 Wesfarmers Ltd. 343,534 51,840 Westpac Banking Corp. 1,201,575 14,666 Woodside Petroleum Ltd. 316,508 ---------------- 6,055,093 ---------------- BERMUDA -- 1.0% 40,100 Hongkong Land Holdings Ltd. 268,670 ---------------- CANADA -- 1.0% 3,336 Canadian Imperial Bank of Commerce 249,958 1,374 Crescent Point Energy Corp. 16,359 ---------------- 266,317 ---------------- CAYMAN ISLANDS -- 2.2% 27,000 AAC Technologies Holdings, Inc. 257,622 32,500 ASM Pacific Technology Ltd. 313,662 ---------------- 571,284 ---------------- HONG KONG -- 4.7% 27,400 AIA Group Ltd. 172,938 38,000 BOC Hong Kong Holdings Ltd. 135,722 34,000 CLP Holdings Ltd. 345,894 18,100 Hang Seng Bank Ltd. 326,967 17,500 Swire Pacific Ltd., Class A 181,983 14,100 Television Broadcasts Ltd. 51,088 ---------------- 1,214,592 ---------------- JAPAN -- 62.3% 15,400 Alfresa Holdings Corp. 326,297 18,200 Amada Holdings Co., Ltd. 207,911 18,000 Asahi Glass Co., Ltd. 126,156 2,800 Asahi Group Holdings Ltd. 100,151 4,400 Calbee, Inc. 159,855 13,400 Casio Computer Co., Ltd. 187,321 16,900 Chubu Electric Power Co., Inc. 248,899 21,000 Dai Nippon Printing Co., Ltd. 211,061 3,200 Daicel Corp. 42,231 19,800 Daiwa House Industry Co., Ltd. 544,892 23,000 Daiwa Securities Group, Inc. 137,667 2,100 East Japan Railway Co. 185,370 7,800 Electric Power Development Co., Ltd. 182,002 3,400 Fuji Heavy Industries Ltd. 132,732 SHARES DESCRIPTION VALUE ------------- ------------------------------ ---------------- JAPAN (CONTINUED) 1,100 FUJIFILM Holdings Corp. $ 41,694 35,000 Fujitsu Ltd. 207,957 8,600 Haseko Corp. 83,892 20,000 Hitachi Ltd. 106,646 13,200 Honda Motor Co., Ltd. 395,736 4,000 Hoya Corp. 167,255 23,400 Inpex Corp. 219,920 5,400 ITOCHU Corp. 68,408 8,000 Itochu Techno-Solutions Corp. 197,807 6,400 Japan Airlines Co., Ltd. 188,943 1,700 Japan Airport Terminal Co., Ltd. 65,410 8,600 Japan Tobacco, Inc. 327,533 14,100 JFE Holdings, Inc. 202,552 15,000 JX Holdings, Inc. 59,488 35,000 Kajima Corp. 236,626 24,400 Kansai Electric Power Co., Inc. (b) 233,716 3,900 Kao Corp. 201,006 9,900 KDDI Corp. 301,333 2,100 Kose Corp. 192,038 5,300 Kyocera Corp. 258,253 3,900 Mazda Motor Corp. 64,244 11,600 Medipal Holdings Corp. 198,551 900 MEIJI Holdings Co., Ltd. 89,940 3,800 Miraca Holdings, Inc. 184,076 7,300 Mitsubishi Chemical Holdings Corp. 48,101 32,000 Mitsubishi Estate Co., Ltd. 635,148 18,000 Mitsubishi Heavy Industries Ltd. 77,136 9,000 Mitsubishi Logistics Corp. 122,208 40,800 Mitsubishi Motors Corp. 227,596 13,700 Mitsubishi UFJ Financial Group, Inc. 71,145 4,700 Mitsui & Co., Ltd. 65,344 29,000 Mitsui Fudosan Co., Ltd. 661,052 19,700 NHK Spring Co., Ltd. 185,973 700 Nintendo Co., Ltd. 169,810 3,100 Nippon Steel & Sumitomo Metal Corp. 61,441 9,700 NOK Corp. 218,012 5,800 NTT Data Corp. 299,762 6,900 Omron Corp. 265,157 4,000 Oracle Corp. 218,175 10,400 Panasonic Corp. 108,790 1,000 Ryohin Keikaku Co., Ltd. 213,979 11,300 Sanrio Co., Ltd. 212,165 1,900 Shimano, Inc. 325,393 28,000 Shimizu Corp. 249,375 9,100 Shiseido Co., Ltd. 234,984 11,000 Sumitomo Chemical Co., Ltd. 52,236 15,500 Sumitomo Electric Industries Ltd. 229,758 37,000 Sumitomo Heavy Industries Ltd. 195,461 4,800 Sumitomo Mitsui Financial Group, Inc. 167,201 1,000 Sumitomo Mitsui Trust Holdings, Inc. 33,851 See Notes to Financial Statements Page 17 FIRST TRUST RIVERFRONT DYNAMIC ASIA PACIFIC ETF (RFAP) PORTFOLIO OF INVESTMENTS (CONTINUED) OCTOBER 31, 2016 SHARES DESCRIPTION VALUE ------------- ------------------------------ ---------------- COMMON STOCKS (a) (CONTINUED) JAPAN (CONTINUED) 19,000 Sumitomo Osaka Cement Co., Ltd. $ 78,812 16,000 Sumitomo Realty & Development Co., Ltd. 421,550 1,100 Suntory Beverage & Food Ltd. 48,198 6,500 Suzuken Co., Ltd. 209,188 8,000 Suzuki Motor Corp. 284,543 3,100 Takeda Pharmaceutical Co., Ltd. 138,934 23,000 Toho Gas Co., Ltd. 213,398 8,100 Tohoku Electric Power Co., Inc. 99,251 28,300 Tokyo Electric Power Co., Holdings, Inc. (b) 110,102 52,000 Tokyo Gas Co., Ltd. 236,125 12,000 Tokyu Corp. 90,054 23,000 Toppan Printing Co., Ltd. 216,687 9,000 Toray Industries, Inc. 84,001 5,500 TOTO Ltd. 220,273 9,400 Toyoda Gosei Co., Ltd. 215,213 6,200 Toyota Industries Corp. 284,667 10,100 Toyota Motor Corp. 585,467 1,100 West Japan Railway Co. 67,886 11,800 Yokohama Rubber (The) Co., Ltd. 205,237 ---------------- 16,244,408 ---------------- NEW ZEALAND -- 0.8% 66,061 SKY Network Television Ltd. 218,250 ---------------- SINGAPORE -- 2.9% 15,000 DBS Group Holdings Ltd 161,725 78,800 Keppel Corp., Ltd. 299,058 21,500 United Overseas Bank Ltd. 290,221 ---------------- 751,004 ---------------- TOTAL COMMON STOCKS 25,589,618 (Cost $24,971,112) ---------------- REAL ESTATE INVESTMENT TRUSTS (a) -- 1.2% AUSTRALIA -- 1.2% 45,710 Westfield Corp. 309,467 (Cost $355,987) ---------------- TOTAL INVESTMENTS - 99.3% 25,899,085 (Cost $25,327,099) (c) NET OTHER ASSETS AND LIABILITIES - 0.7% 171,749 ---------------- NET ASSETS - 100.0% $ 26,070,834 ================ ----------------------------- (a) Portfolio securities are categorized based upon their country of incorporation. For a breakdown of the portfolio securities by sector, please see the Fund Performance Overview. (b) Non-income producing security. (c) Aggregate cost for federal income tax purposes is $25,351,943. As of October 31, 2016, the aggregate gross unrealized appreciation for all securities in which there was an excess of value over tax cost was $1,558,811 and the aggregate gross unrealized depreciation for all securities in which there was an excess of tax cost over value was $1,011,669. ----------------------------- VALUATION INPUTS A summary of the inputs used to value the Fund's investments as of October 31, 2016 is as follows (see Note 2A -- Portfolio Valuation in the Notes to Financial Statements): LEVEL 2 LEVEL 3 TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT VALUE AT QUOTED OBSERVABLE UNOBSERVABLE 10/31/2016 PRICES INPUT INPUT --------------------------------------------------------- Common Stocks* $ 25,589,618 $ 25,589,618 $ -- $ -- Real Estate Investment Trusts* 309,467 309,467 -- -- --------------------------------------------------------- Total Investments $ 25,899,085 $ 25,899,085 $ -- $ -- ========================================================= * See Portfolio of Investments for country breakout. All transfers in and out of the Levels during the period are assumed to be transferred on the last day of the period at their current value. There were no transfers between Levels at October 31, 2016. ----------------------------------------------- CURRENCY EXPOSURE % OF TOTAL DIVERSIFICATION INVESTMENTS ----------------------------------------------- JPY 62.7% AUD 24.6 HKD 6.9 SGD 2.9 USD 2.0 NZD 0.8 CAD 0.1 ------- Total 100.0% ======= Currency Abbreviations AUD Australian Dollar CAD Canadian Dollar HKD Hong Kong Dollar JPY Japanese Yen NZD New Zealand Dollar SGD Singapore Dollar USD United States Dollar Page 18 See Notes to Financial Statements FIRST TRUST RIVERFRONT DYNAMIC DEVELOPED INTERNATIONAL ETF (RFDI) PORTFOLIO OF INVESTMENTS OCTOBER 31, 2016 SHARES DESCRIPTION VALUE ------------- ------------------------------ ---------------- COMMON STOCKS (a) -- 98.9% AUSTRALIA -- 7.3% 4,606 Australia & New Zealand Banking Group Ltd. $ 97,580 9,825 Bank of Queensland Ltd. 78,177 9,721 Bendigo and Adelaide Bank Ltd. 82,304 13,064 BHP Billiton Ltd. 229,265 8,608 Brambles Ltd. 75,500 6,657 Commonwealth Bank of Australia 371,645 1,038 CSL Ltd. 79,363 8,767 Insurance Australia Group Ltd. 36,746 4,514 National Australia Bank Ltd. 96,146 11,986 Platinum Asset Management Ltd. 45,498 3,810 QBE Insurance Group Ltd. 28,954 3,969 Suncorp Group Ltd. 36,140 6,075 TPG Telecom Ltd. 34,937 3,394 Wesfarmers Ltd. 105,880 15,976 Westpac Banking Corp. 370,300 4,519 Woodside Petroleum Ltd. 97,525 ---------------- 1,865,960 ---------------- AUSTRIA -- 2.0% 648 ANDRITZ AG 33,895 9,078 RHI AG 228,606 22,970 Telekom Austria AG 131,977 3,406 voestalpine AG 120,506 ---------------- 514,984 ---------------- BELGIUM -- 0.9% 552 Anheuser-Busch InBev SA/NV 63,353 958 Bekaert S.A. 42,613 2,103 Colruyt S.A. 113,039 530 Proximus S.A., DP 15,173 ---------------- 234,178 ---------------- BERMUDA -- 0.3% 12,400 Hongkong Land Holdings Ltd. 83,080 ---------------- CANADA -- 0.3% 991 Canadian Imperial Bank of Commerce 74,253 393 Crescent Point Energy Corp. 4,679 ---------------- 78,932 ---------------- CAYMAN ISLANDS -- 0.7% 8,500 AAC Technologies Holdings, Inc. 81,103 10,000 ASM Pacific Technology Ltd. 96,512 ---------------- 177,615 ---------------- DENMARK -- 1.0% 811 Danske Bank A/S 25,039 277 Dfds A/S 13,389 664 Genmab A/S (b) 109,559 1,985 Novo Nordisk A/S., Class B 71,012 162 Pandora A/S 21,087 177 Vestas Wind Systems A/S 14,198 ---------------- 254,284 ---------------- SHARES DESCRIPTION VALUE ------------- ------------------------------ ---------------- FINLAND -- 2.6% 712 Elisa OYJ $ 23,995 3,736 Kemira OYJ 44,539 3,248 Kone OYJ, Class B 149,501 1,734 Metso OYJ 45,494 608 Nokian Renkaat OYJ 20,403 606 Sampo OYJ, Class A 27,787 1,102 Tieto OYJ 30,231 9,576 UPM-Kymmene OYJ 222,855 1,804 Valmet OYJ 26,794 1,634 Wartsila OYJ Abp 70,673 ---------------- 662,272 ---------------- FRANCE -- 9.0% 259 Alten S.A. 18,512 2,064 AXA S.A. 46,527 942 BNP Paribas S.A. 54,641 2,415 Bureau Veritas S.A. 45,625 3,304 Casino Guichard Perrachon S.A. 164,410 489 Christian Dior SE 94,343 823 Cie Generale des Etablissements Michelin 89,107 16,450 Credit Agricole S.A. 177,546 420 Dassault Systemes S.A. 33,261 1,662 Edenred 38,505 581 Essilor International S.A. 65,310 118 Hermes International 47,811 382 Imerys S.A. 26,569 1,649 L'Oreal S.A. 295,151 2,004 Orange S.A. 31,568 807 Publicis Groupe S.A. 55,368 1,616 Safran S.A. 111,103 5,841 Sanofi 454,993 2,190 SCOR SE 70,896 681 Societe Generale S.A. 26,584 516 Sodexo S.A. 59,929 843 Technip S.A. 55,913 177 Thales S.A. 16,665 2,088 TOTAL S.A. 100,211 1,155 Valeo S.A. 66,565 379 Vinci S.A. 27,451 1,597 Vivendi S.A. 32,292 ---------------- 2,306,856 ---------------- GERMANY -- 7.6% 1,323 adidas AG 216,977 444 Allianz SE 69,211 744 BASF SE 65,583 3,964 Bayer AG 392,895 453 Carl Zeiss Meditec AG 16,288 162 Continental AG 31,041 720 Deutsche Post AG 22,312 4,752 Deutsche Telekom AG 77,439 583 Deutsche Wohnen AG 19,021 845 Fresenius Medical Care AG & Co., KGaA 68,837 1,282 Fresenius SE & Co., KGaA 94,628 828 GEA Group AG 32,017 934 Hannover Rueck SE 104,119 See Notes to Financial Statements Page 19 FIRST TRUST RIVERFRONT DYNAMIC DEVELOPED INTERNATIONAL ETF (RFDI) PORTFOLIO OF INVESTMENTS (CONTINUED) OCTOBER 31, 2016 SHARES DESCRIPTION VALUE ------------- ------------------------------ ---------------- COMMON STOCKS (a) (CONTINUED) GERMANY (CONTINUED) 575 HeidelbergCement AG $ 54,385 309 HOCHTIEF AG 42,180 3,835 Infineon Technologies AG 68,853 161 Muenchener Rueckversicherungs- Gesellschaft AG in Muenchen 31,212 722 ProSiebenSat.1 Media SE 31,117 4,339 SAP SE 382,194 3,456 Software AG 125,576 ---------------- 1,945,885 ---------------- HONG KONG -- 1.4% 8,400 AIA Group Ltd. 53,017 11,500 BOC Hong Kong Holdings Ltd. 41,074 10,000 CLP Holdings Ltd. 101,734 5,600 Hang Seng Bank Ltd. 101,161 5,500 Swire Pacific Ltd., Class A 57,194 4,300 Television Broadcasts Ltd. 15,580 ---------------- 369,760 ---------------- IRELAND -- 0.1% 161 Paddy Power Betfair PLC 16,666 ---------------- ITALY -- 0.6% 7,989 Enel S.p.A. 34,378 2,219 ERG S.p.A. 24,652 254 Industria Macchine Automatiche S.p.A. 15,712 18,808 Iren S.p.A 33,778 3,619 Snam S.p.A. 19,077 3,101 Terna Rete Elettrica Nazionale S.p.A 15,189 ---------------- 142,786 ---------------- JAPAN -- 19.4% 4,700 Alfresa Holdings Corp. 99,584 5,600 Amada Holdings Co., Ltd. 63,973 6,000 Asahi Glass Co., Ltd. 42,052 900 Asahi Group Holdings Ltd. 32,191 1,400 Calbee, Inc. 50,863 4,100 Casio Computer Co., Ltd. 57,315 5,300 Chubu Electric Power Co., Inc. 78,057 6,000 Dai Nippon Printing Co., Ltd. 60,303 1,000 Daicel Corp. 13,197 6,200 Daiwa House Industry Co., Ltd. 170,623 7,000 Daiwa Securities Group, Inc. 41,899 600 East Japan Railway Co. 52,963 2,300 Electric Power Development Co., Ltd. 53,667 1,100 Fuji Heavy Industries Ltd. 42,943 300 FUJIFILM Holdings Corp. 11,371 11,000 Fujitsu Ltd. 65,358 2,600 Haseko Corp. 25,363 6,000 Hitachi Ltd. 31,994 4,000 Honda Motor Co., Ltd. 119,920 1,300 Hoya Corp. 54,358 7,300 Inpex Corp. 68,608 1,700 ITOCHU Corp. 21,536 SHARES DESCRIPTION VALUE ------------- ------------------------------ ---------------- JAPAN (CONTINUED) 2,400 Itochu Techno-Solutions Corp. $ 59,342 1,900 Japan Airlines Co., Ltd. 56,092 500 Japan Airport Terminal Co., Ltd. 19,238 2,600 Japan Tobacco, Inc. 99,022 4,300 JFE Holdings, Inc. 61,771 4,600 JX Holdings, Inc. 18,243 11,000 Kajima Corp. 74,368 7,600 Kansai Electric Power Co., Inc. (b) 72,797 1,200 Kao Corp. 61,848 3,000 KDDI Corp. 91,313 600 Kose Corp. 54,868 1,600 Kyocera Corp. 77,963 1,200 Mazda Motor Corp. 19,767 3,500 Medipal Holdings Corp. 59,907 300 MEIJI Holdings Co., Ltd. 29,980 1,200 Miraca Holdings, Inc. 58,129 2,100 Mitsubishi Chemical Holdings Corp. 13,837 10,000 Mitsubishi Estate Co., Ltd. 198,484 5,000 Mitsubishi Heavy Industries Ltd. 21,427 3,000 Mitsubishi Logistics Corp. 40,736 12,600 Mitsubishi Motors Corp. 70,287 4,200 Mitsubishi UFJ Financial Group, Inc. 21,811 1,400 Mitsui & Co., Ltd. 19,464 9,000 Mitsui Fudosan Co., Ltd. 205,154 6,100 NHK Spring Co., Ltd. 57,586 200 Nintendo Co., Ltd. 48,517 1,000 Nippon Steel & Sumitomo Metal Corp. 19,820 2,900 NOK Corp. 65,179 1,800 NTT Data Corp. 93,029 2,000 Omron Corp. 76,857 1,300 Oracle Corp. 70,907 3,100 Panasonic Corp. 32,428 300 Ryohin Keikaku Co., Ltd. 64,194 3,400 Sanrio Co., Ltd. 63,837 600 Shimano, Inc. 102,756 9,000 Shimizu Corp. 80,156 2,700 Shiseido Co., Ltd. 69,721 3,000 Sumitomo Chemical Co., Ltd. 14,246 4,700 Sumitomo Electric Industries Ltd. 69,669 12,000 Sumitomo Heavy Industries Ltd. 63,393 1,500 Sumitomo Mitsui Financial Group, Inc. 52,250 300 Sumitomo Mitsui Trust Holdings, Inc. 10,155 6,000 Sumitomo Osaka Cement Co., Ltd. 24,888 5,000 Sumitomo Realty & Development Co., Ltd. 131,735 300 Suntory Beverage & Food Ltd. 13,145 1,900 Suzuken Co., Ltd. 61,147 2,400 Suzuki Motor Corp. 85,363 1,000 Takeda Pharmaceutical Co., Ltd. 44,817 7,000 Toho Gas Co., Ltd. 64,947 Page 20 See Notes to Financial Statements FIRST TRUST RIVERFRONT DYNAMIC DEVELOPED INTERNATIONAL ETF (RFDI) PORTFOLIO OF INVESTMENTS (CONTINUED) OCTOBER 31, 2016 SHARES DESCRIPTION VALUE ------------- ------------------------------ ---------------- COMMON STOCKS (a) (CONTINUED) JAPAN (CONTINUED) 2,400 Tohoku Electric Power Co., Inc. $ 29,408 8,800 Tokyo Electric Power Co., Holdings, Inc. (b) 34,237 16,000 Tokyo Gas Co., Ltd. 72,654 4,000 Tokyu Corp. 30,018 7,000 Toppan Printing Co., Ltd. 65,948 3,000 Toray Industries, Inc. 28,000 1,700 TOTO Ltd. 68,084 2,800 Toyoda Gosei Co., Ltd. 64,106 1,800 Toyota Industries Corp. 82,645 3,100 Toyota Motor Corp. 179,698 300 West Japan Railway Co. 18,514 3,600 Yokohama Rubber (The) Co., Ltd. 62,615 ---------------- 4,980,655 ---------------- JERSEY -- 0.4% 1,263 Experian PLC 24,317 446 Wolseley PLC 23,207 2,342 WPP PLC 50,968 ---------------- 98,492 ---------------- NETHERLANDS -- 7.6% 4,524 Aegon N.V. 19,507 1,435 Akzo Nobel N.V. 92,752 1,024 ASML Holding N.V. 108,475 1,526 BE Semiconductor Industries N.V. 49,694 1,294 Boskalis Westminster 41,755 2,225 Heineken N.V. 183,309 3,453 ING Groep N.V. 45,468 5,659 Koninklijke Ahold Delhaize N.V. 129,182 6,960 Koninklijke Philips N.V. 209,804 706 Koninklijke Vopak N.V. 35,654 5,037 NN Group N.V. 151,781 11,637 RELX N.V. 196,408 12,518 Unilever N.V. 524,656 4,514 Wolters Kluwer N.V. 174,697 ---------------- 1,963,142 ---------------- NEW ZEALAND -- 0.3% 20,358 SKY Network Television Ltd. 67,258 ---------------- NORWAY -- 1.8% 4,966 DNB ASA 71,824 13,567 Entra ASA (c) 145,319 980 Leroey Seafood Group ASA 51,821 1,842 Marine Harvest ASA 33,418 6,727 Norsk Hydro ASA 30,084 3,715 Orkla ASA 35,094 5,485 Statoil ASA 89,886 ---------------- 457,446 ---------------- PORTUGAL -- 0.4% 6,325 EDP -- Energias de Portugal S.A. 20,906 5,169 Galp Energia SGPS S.A. 70,078 7,082 REN-Redes Energeticas Nacionais SGPS S.A. 20,695 ---------------- 111,679 ---------------- SHARES DESCRIPTION VALUE ------------- ------------------------------ ---------------- SINGAPORE -- 0.9% 4,600 DBS Group Holdings Ltd $ 49,596 24,200 Keppel Corp., Ltd. 91,842 6,700 United Overseas Bank Ltd. 90,441 ---------------- 231,879 ---------------- SPAIN -- 6.1% 2,087 Acerinox S.A. 25,705 3,971 ACS Actividades de Construccion y Servicios S.A. 121,751 1,104 Aena S.A. (c) 162,094 598 Amadeus IT Group S.A., Class A 28,227 62,951 Banco Bilbao Vizcaya Argentaria S.A. 454,569 102,596 Banco Santander S.A. 504,221 3,597 Endesa S.A. 76,465 1,281 Gas Natural SDG S.A. 25,277 2,432 Grifols S.A. 48,082 5,614 Iberdrola S.A. 38,265 2,099 Indra Sistemas S.A. (b) 26,003 1,430 Industria de Diseno Textil S.A. 49,990 2,413 Prosegur Cia de Seguridad S.A. 17,535 ---------------- 1,578,184 ---------------- SWEDEN -- 4.7% 8,854 Alfa Laval AB 127,240 1,006 Assa Abloy AB, Class B 18,300 7,949 Boliden AB 184,200 1,170 Hennes & Mauritz AB, Class B 32,915 687 Holmen AB, Class B 23,518 1,970 Indutrade AB 36,621 7,834 Lundin Petroleum AB (b) 140,944 2,741 Nordea Bank AB 28,815 2,881 Peab AB 24,449 4,260 Ratos AB, Class B 17,507 17,830 Sandvik AB 202,736 1,783 Skandinaviska Enskilda Banken AB, Class A 17,993 1,314 Swedbank AB, Class A 30,784 4,069 Swedish Match AB 141,593 47,794 Telia Co., AB 191,025 ---------------- 1,218,640 ---------------- SWITZERLAND -- 8.1% 396 Cembra Money Bank AG 30,274 151 Galenica AG 151,374 4,079 Nestle S.A. 295,759 1,308 Novartis AG 93,056 1,583 Roche Holding AG 363,936 724 Schindler Holding AG 133,891 65 SGS S.A. 131,767 41 Sika AG 197,055 1,037 Sonova Holding AG 139,063 1,977 Swiss Prime Site AG 163,926 3,024 Swiss Re AG 280,840 45 Swisscom AG 20,587 3,740 UBS Group AG 52,913 86 Zurich Insurance Group AG 22,500 ---------------- 2,076,941 ---------------- See Notes to Financial Statements Page 21 FIRST TRUST RIVERFRONT DYNAMIC DEVELOPED INTERNATIONAL ETF (RFDI) PORTFOLIO OF INVESTMENTS (CONTINUED) OCTOBER 31, 2016 SHARES DESCRIPTION VALUE ------------- ------------------------------ ---------------- COMMON STOCKS (a) (CONTINUED) UNITED KINGDOM -- 15.4% 13,355 Aggreko PLC $ 131,017 24,441 Antofagasta PLC 162,443 1,866 Associated British Foods PLC 56,232 4,052 Aviva PLC 21,961 3,624 BAE Systems PLC 24,064 16,592 Barclays PLC 38,647 33,463 Barratt Developments PLC 185,830 2,022 Bodycote PLC 14,664 14,226 BP PLC 84,225 8,072 British American Tobacco PLC 463,526 49,559 BT Group PLC 228,052 735 Bunzl PLC 19,783 14,756 Compass Group PLC 267,489 3,996 Diageo PLC 106,602 3,382 GlaxoSmithKline PLC 66,999 42,062 HSBC Holdings PLC 317,244 2,750 Imperial Brands PLC 133,142 5,175 Intertek Group PLC 216,503 8,783 ITV PLC 18,329 363 Johnson Matthey PLC 15,151 10,719 Legal & General Group PLC 27,473 11,601 National Grid PLC 151,226 4,736 Persimmon PLC 98,199 4,366 Prudential PLC 71,315 3,696 Reckitt Benckiser Group PLC 330,833 1,728 RELX PLC 30,901 1,082 Rio Tinto PLC 37,605 7,411 Royal Dutch Shell PLC, Class A 184,914 3,111 Royal Dutch Shell PLC, Class B 80,536 1,860 Sage Group (The) PLC 16,426 9,868 Smith & Nephew PLC 142,888 47,549 Standard Life PLC 196,600 2,006 United Utilities Group PLC 23,080 ---------------- 3,963,899 ---------------- TOTAL COMMON STOCKS 25,401,473 (Cost $25,758,100) ---------------- REAL ESTATE INVESTMENT TRUSTS (a) -- 0.7% AUSTRALIA -- 0.4% 14,087 Westfield Corp. 95,372 ---------------- BELGIUM -- 0.3% 478 Cofinimmo S.A. 56,015 241 Warehouses De Pauw CVA 22,191 ---------------- 78,206 ---------------- TOTAL REAL ESTATE INVESTMENT TRUSTS 173,578 (Cost $190,976) ---------------- TOTAL INVESTMENTS- 99.6% 25,575,051 (Cost $25,949,076) (d) NET OTHER ASSETS AND LIABILITIES - 0.4% 104,368 ---------------- NET ASSETS - 100.0% $ 25,679,419 ================ ----------------------------- (a) Portfolio securities are categorized based upon their country of incorporation. For a breakdown of the portfolio securities by sector, please see the Fund Performance Overview. (b) Non-income producing security. (c) This security is restricted in the U.S. and cannot be offered for public sale without first being registered uner the Securities Act of 1933, as amended. This security is not restricted on the foreign exchange where it trades freely without any additional registration. As such it does not require the additional disclosure required of restricted securities. (d) Aggregate cost for federal income tax purposes is $26,010,482. As of October 31, 2016, the aggregate gross unrealized appreciation for all securities in which there was an excess of value over tax cost was $1,321,924 and the aggregate gross unrealized depreciation for all securities in which there was an excess of tax cost over value was $1,757,355. ----------------------------- VALUATION INPUTS A summary of the inputs used to value the Fund's investments as of October 31, 2016 is as follows (see Note 2A -- Portfolio Valuation in the Notes to Financial Statements): ASSETS TABLE LEVEL 2 LEVEL 3 TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT VALUE AT QUOTED OBSERVABLE UNOBSERVABLE 10/31/2016 PRICES INPUT INPUT --------------------------------------------------------- Common Stocks* $ 25,401,473 $ 25,401,473 $ -- $ -- Real Estate Investment Trusts* 173,578 173,578 -- -- --------------------------------------------------------- Total Investments $ 25,575,051 $ 25,575,051 $ -- $ -- ========================================================= LIABILITIES TABLE LEVEL 2 LEVEL 3 TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT VALUE AT QUOTED OBSERVABLE UNOBSERVABLE 10/31/2016 PRICES INPUT INPUT --------------------------------------------------------- Forward Foreign Currency Contracts** $ (40,087) $ -- $ (40,087) $ -- ========================================================= * See Portfolio of Investments for country breakout. ** See the table of Forward Foreign Currency Contracts for contract and currency detail. All transfers in and out of the Levels during the period are assumed to be transferred on the last day of the period at their current value. There were no transfers between Levels at October 31, 2016. Page 22 See Notes to Financial Statements FIRST TRUST RIVERFRONT DYNAMIC DEVELOPED INTERNATIONAL ETF (RFDI) PORTFOLIO OF INVESTMENTS (CONTINUED) OCTOBER 31, 2016

FORWARD FOREIGN CURRENCY CONTRACTS PURCHASE SALE VALUE AS OF VALUE AS OF UNREALIZED SETTLEMENT AMOUNT AMOUNT OCTOBER 31, OCTOBER 31, APPRECIATION/ DATE COUNTERPARTY PURCHASED (a) SOLD (a) 2016 2016 (DEPRECIATION) -------------- -------------- ------------------ ------------------- --------------- --------------- -------------- 11/30/16 BBH USD 5,675,000 EUR 5,199,458 $ 5,675,000 $ 5,714,079 $ (39,079) 11/30/16 BBH USD 1,225,000 GBP 1,001,103 1,225,000 1,226,008 (1,008) ------------ Net unrealized appreciation (depreciation)................................................................ $ (40,087) ============

(a) Please see Currency Exposure Diversification Table for currency descriptions. Counterparty Abbreviations: BBH Brown Brothers Harriman and Co. ------------------------------------------------ CURRENCY EXPOSURE % OF TOTAL DIVERSIFICATION INVESTMENTS + ------------------------------------------------ USD 27.6% JPY 19.5 EUR 15.1 GBP 11.1 CHF 8.1 AUD 7.7 SEK 4.8 HKD 2.1 NOK 1.8 DKK 1.0 SGD 0.9 NZD 0.3 CAD 0.0* ------- Total 100.0% ======= + The weightings include the impact of currency forwards. * Amount is less than 0.1%. Currency Abbreviations AUD Australian Dollar CAD Canadian Dollar CHF Swiss Franc DKK Danish Krone EUR Euro GBP British Pound Sterling HKD Hong Kong Dollar JPY Japanese Yen NOK Norwegian Krone NZD New Zealand Dollar SEK Swedish Krona SGD Singapore Dollar USD United States Dollar See Notes to Financial Statements Page 23 FIRST TRUST RIVERFRONT DYNAMIC EUROPE ETF (RFEU) PORTFOLIO OF INVESTMENTS OCTOBER 31, 2016 SHARES DESCRIPTION VALUE ------------- ------------------------------ ---------------- COMMON STOCKS (a) -- 99.2% AUSTRIA -- 2.9% 936 ANDRITZ AG $ 48,960 13,116 RHI AG 330,292 33,187 Telekom Austria AG 190,680 4,923 voestalpine AG 174,178 ---------------- 744,110 ---------------- BELGIUM -- 1.3% 797 Anheuser-Busch InBev SA/NV 91,471 1,386 Bekaert S.A. 61,650 3,038 Colruyt S.A. 163,297 772 Proximus S.A. DP 22,102 ---------------- 338,520 ---------------- DENMARK -- 1.4% 1,172 Danske Bank A/S 36,185 403 Dfds A/S 19,478 959 Genmab A/S (b) 158,234 2,868 Novo Nordisk A/S., Class B 102,601 235 Pandora A/S 30,590 258 Vestas Wind Systems A/S 20,695 ---------------- 367,783 ---------------- FINLAND -- 3.8% 1,029 Elisa OYJ 34,678 5,399 Kemira OYJ 64,365 4,692 Kone OYJ, Class B 215,966 2,506 Metso OYJ 65,748 888 Nokian Renkaat OYJ 29,800 876 Sampo OYJ, Class A 40,167 1,594 Tieto OYJ 43,728 13,836 UPM-Kymmene OYJ 321,996 2,608 Valmet OYJ 38,735 2,362 Wartsila OYJ Abp 102,160 ---------------- 957,343 ---------------- FRANCE -- 13.0% 367 Alten S.A. 26,231 2,982 AXA S.A. 67,221 1,362 BNP Paribas S.A. 79,003 3,489 Bureau Veritas S.A. 65,915 4,776 Casino Guichard Perrachon S.A. 237,659 706 Christian Dior SE 136,208 1,189 Cie Generale des Etablissements Michelin 128,734 23,768 Credit Agricole S.A. 256,530 606 Dassault Systemes S.A. 47,990 2,403 Edenred 55,673 839 Essilor International S.A. 94,312 171 Hermes International 69,286 552 Imerys S.A. 38,393 2,383 L'Oreal S.A. 426,529 2,895 Orange S.A. 45,604 1,166 Publicis Groupe S.A. 79,998 2,335 Safran S.A. 160,536 8,439 Sanofi 657,367 3,163 SCOR SE 102,395 983 Societe Generale S.A. 38,372 SHARES DESCRIPTION VALUE ------------- ------------------------------ ---------------- FRANCE (CONTINUED) 747 Sodexo S.A. $ 86,758 1,218 Technip S.A. 80,785 258 Thales S.A. 24,292 3,017 TOTAL S.A. 144,797 1,670 Valeo S.A. 96,245 546 Vinci S.A. 39,547 2,306 Vivendi S.A. 46,629 ---------------- 3,333,009 ---------------- GERMANY -- 11.0% 1,913 adidas AG 313,739 641 Allianz SE 99,919 1,076 BASF SE 94,849 5,727 Bayer AG 567,636 661 Carl Zeiss Meditec AG 23,767 233 Continental AG 44,646 1,049 Deutsche Post AG 32,508 6,864 Deutsche Telekom AG 111,856 849 Deutsche Wohnen AG 27,699 1,222 Fresenius Medical Care AG & Co., KGaA 99,549 1,852 Fresenius SE & Co., KGaA 136,701 1,197 GEA Group AG 46,286 1,350 Hannover Rueck SE 150,493 829 HeidelbergCement AG 78,409 445 HOCHTIEF AG 60,745 5,540 Infineon Technologies AG 99,464 233 Muenchener Rueckversicherungs- Gesellschaft AG in Muenchen 45,170 1,042 ProSiebenSat.1 Media SE 44,908 6,268 SAP SE 552,107 4,993 Software AG 181,423 ---------------- 2,811,874 ---------------- IRELAND -- 0.1% 234 Paddy Power Betfair PLC 24,223 ---------------- ITALY -- 0.8% 11,544 Enel S.p.A. 49,676 3,207 ERG S.p.A. 35,627 371 Industria Macchine Automatiche S.p.A. 22,950 27,175 Iren S.p.A 48,804 5,274 Snam S.p.A. 27,801 4,520 Terna Rete Elettrica Nazionale S.p.A 22,140 ---------------- 206,998 ---------------- JERSEY -- 0.6% 1,826 Experian PLC 35,157 645 Wolseley PLC 33,561 3,384 WPP PLC 73,645 ---------------- 142,363 ---------------- NETHERLANDS -- 11.1% 6,595 Aegon N.V. 28,437 2,074 Akzo Nobel N.V. 134,054 1,480 ASML Holding N.V. 156,781 2,205 BE Semiconductor Industries N.V. 71,805 Page 24 See Notes to Financial Statements FIRST TRUST RIVERFRONT DYNAMIC EUROPE ETF (RFEU) PORTFOLIO OF INVESTMENTS (CONTINUED) OCTOBER 31, 2016 SHARES DESCRIPTION VALUE ------------- ------------------------------ ---------------- COMMON STOCKS (a) (CONTINUED) NETHERLANDS (CONTINUED) 1,870 Boskalis Westminster $ 60,342 3,215 Heineken N.V. 264,872 4,988 ING Groep N.V. 65,680 8,177 Koninklijke Ahold Delhaize N.V. 186,662 10,055 Koninklijke Philips N.V. 303,100 1,020 Koninklijke Vopak N.V. 51,512 7,279 NN Group N.V. 219,340 16,812 RELX N.V. 283,751 18,087 Unilever N.V. 758,064 6,522 Wolters Kluwer N.V. 252,409 ---------------- 2,836,809 ---------------- NORWAY -- 2.6% 7,175 DNB ASA 103,773 19,602 Entra ASA (c) 209,962 1,416 Leroey Seafood Group ASA 74,876 2,661 Marine Harvest ASA 48,277 9,719 Norsk Hydro ASA 43,464 5,368 Orkla ASA 50,709 7,926 Statoil ASA 129,888 ---------------- 660,949 ---------------- PORTUGAL -- 0.6% 9,218 EDP -- Energias de Portugal S.A. 30,468 7,467 Galp Energia SGPS S.A. 101,232 10,323 Redes Energeticas Nacionais SGPS S.A. 30,166 ---------------- 161,866 ---------------- SPAIN -- 8.9% 3,015 Acerinox S.A. 37,135 5,737 ACS Actividades de Construccion y Servicios S.A. 175,897 1,595 Aena S.A. (c) 234,184 864 Amadeus IT Group S.A., Class A 40,784 90,953 Banco Bilbao Vizcaya Argentaria S.A. 656,771 148,232 Banco Santander S.A. 728,505 5,198 Endesa S.A. 110,499 1,849 Gas Natural SDG S.A. 36,484 3,513 Grifols S.A. 69,454 8,112 Iberdrola S.A. 55,291 3,032 Indra Sistemas S.A. (b) 37,561 2,066 Industria de Diseno Textil S.A. 72,223 3,515 Prosegur Cia de Seguridad S.A. 25,544 ---------------- 2,280,332 ---------------- SWEDEN -- 6.9% 12,792 Alfa Laval AB 183,833 1,466 Assa Abloy AB, Class B 26,667 11,485 Boliden AB 266,139 1,692 Hennes & Mauritz AB, Class B 47,601 992 Holmen AB, Class B 33,960 2,847 Indutrade AB 52,923 11,319 Lundin Petroleum AB (b) 203,643 3,960 Nordea Bank AB 41,629 4,162 Peab AB 35,320 SHARES DESCRIPTION VALUE ------------- ------------------------------ ---------------- SWEDEN (CONTINUED) 6,209 Ratos AB, Class B $ 25,518 25,760 Sandvik AB 292,904 2,598 Skandinaviska Enskilda Banken AB, Class A 26,218 1,899 Swedbank AB, Class A 44,489 5,880 Swedish Match AB 204,612 69,055 Telia Co., AB 276,001 ---------------- 1,761,457 ---------------- SWITZERLAND -- 11.8% 573 Cembra Money Bank AG 43,805 219 Galenica AG 219,542 5,894 Nestle S.A. 427,360 1,890 Novartis AG 134,461 2,287 Roche Holding AG 525,787 1,047 Schindler Holding AG 193,624 94 SGS S.A. 190,555 61 Sika AG 293,180 1,498 Sonova Holding AG 200,884 2,856 Swiss Prime Site AG 236,810 4,367 Swiss Re AG 405,566 66 Swisscom AG 30,194 5,404 UBS Group AG 76,455 123 Zurich Insurance Group AG 32,181 ---------------- 3,010,404 ---------------- UNITED KINGDOM -- 22.4% 19,295 Aggreko PLC 189,291 35,312 Antofagasta PLC 234,695 2,697 Associated British Foods PLC 81,274 5,853 Aviva PLC 31,722 5,237 BAE Systems PLC 34,775 23,973 Barclays PLC 55,840 48,348 Barratt Developments PLC 268,490 2,946 Bodycote PLC 21,365 20,555 BP PLC 121,696 11,663 British American Tobacco PLC 669,736 71,603 BT Group PLC 329,490 1,073 Bunzl PLC 28,881 21,319 Compass Group PLC 386,459 5,774 Diageo PLC 154,033 4,887 GlaxoSmithKline PLC 96,814 60,772 HSBC Holdings PLC 458,360 3,974 Imperial Brands PLC 192,402 7,477 Intertek Group PLC 312,810 12,800 ITV PLC 26,712 528 Johnson Matthey PLC 22,038 15,488 Legal & General Group PLC 39,697 16,761 National Grid PLC 218,490 6,842 Persimmon PLC 141,866 6,310 Prudential PLC 103,069 5,338 Reckitt Benckiser Group PLC 477,810 2,496 RELX PLC 44,635 1,563 Rio Tinto PLC 54,323 10,708 Royal Dutch Shell PLC, Class A 267,178 4,494 Royal Dutch Shell PLC, Class B 116,339 2,711 Sage Group (The) PLC 23,941 14,257 Smith & Nephew PLC 206,440 See Notes to Financial Statements Page 25 FIRST TRUST RIVERFRONT DYNAMIC EUROPE ETF (RFEU) PORTFOLIO OF INVESTMENTS (CONTINUED) OCTOBER 31, 2016 SHARES DESCRIPTION VALUE ------------- ------------------------------ ---------------- COMMON STOCKS (a) (CONTINUED) UNITED KINGDOM (CONTINUED) 68,700 Standard Life PLC $ 284,052 2,898 United Utilities Group PLC 33,343 ---------------- 5,728,066 ---------------- TOTAL COMMON STOCKS 25,366,106 (Cost $26,150,273) ---------------- REAL ESTATE INVESTMENT TRUSTS (a) -- 0.4% BELGIUM -- 0.4% 342 Warehouses De Pauw CVA 31,491 691 Cofinimmo S.A. 80,975 ---------------- TOTAL REAL ESTATE INVESTMENT TRUSTS 112,466 (Cost $117,054) ---------------- TOTAL INVESTMENTS - 99.6% 25,478,572 (Cost $26,267,327) (d) NET OTHER ASSETS AND LIABILITIES - 0.4% 106,347 ---------------- NET ASSETS - 100.0% $ 25,584,919 ================ ----------------------------- (a) Portfolio securities are categorized based upon their country of incorporation. For a breakdown of the portfolio securities by sector, please see the Fund Performance Overview. (b) Non-income producing security. (c) This security is restricted in the U.S. and cannot be offered for public sale without first being registered under the Securities Act of 1933, as amended. This security is not restricted on the foreign exchange where it trades freely without any additional registration. As such, it does not require the additional disclosure required of restricted securities. (d) Aggregate cost for federal income tax purposes is $26,303,974. As of October 31, 2016, the aggregate gross unrealized appreciation for all securities in which there was an excess of value over tax cost was $1,219,270 and the aggregate gross unrealized depreciation for all securities in which there was an excess of tax cost over value was $2,044,672. ----------------------------- VALUATION INPUTS A summary of the inputs used to value the Fund's investments as of October 31, 2016 is as follows (see Note 2A -- Portfolio Valuation in the Notes to Financial Statements): ASSETS TABLE LEVEL 2 LEVEL 3 TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT VALUE AT QUOTED OBSERVABLE UNOBSERVABLE 10/31/2016 PRICES INPUT INPUT --------------------------------------------------------- Common Stocks* $ 25,366,106 $ 25,366,106 $ -- $ -- Real Estate Investment Trusts* 112,466 112,466 -- -- --------------------------------------------------------- Total Investments $ 25,478,572 $ 25,478,572 $ -- $ -- ========================================================= LIABILITIES TABLE LEVEL 2 LEVEL 3 TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT VALUE AT QUOTED OBSERVABLE UNOBSERVABLE 10/31/2016 PRICES INPUT INPUT --------------------------------------------------------- Forward Foreign Currancy Contracts** $ (57,751) $ -- $ (57,751) $ -- ========================================================= * See the Portfolio of Investments for country breakout. ** See the Forward Foreign Currency Contracts table for contract and currency detail. All transfers in and out of the Levels during the period are assumed to be transferred on the last day of the period at their current value. There were no transfers between Levels at October 31, 2016. Page 26 See Notes to Financial Statements FIRST TRUST RIVERFRONT DYNAMIC EUROPE ETF (RFEU) PORTFOLIO OF INVESTMENTS (CONTINUED) OCTOBER 31, 2016

FORWARD FOREIGN CURRENCY CONTRACTS PURCHASE SALE VALUE AS OF VALUE AS OF UNREALIZED SETTLEMENT AMOUNT AMOUNT OCTOBER 31, OCTOBER 31, APPRECIATION/ DATE COUNTERPARTY PURCHASED (a) SOLD (a) 2016 2016 (DEPRECIATION) -------------- -------------- ------------------ ------------------- --------------- --------------- -------------- 11/30/16 BBH USD 8,175,000 EUR 7,489,968 $ 8,175,000 $ 8,231,294 $ (56,294) 11/30/16 BBH USD 1,770,000 GBP 1,446,492 1,770,000 1,771,457 (1,457) ------------ Net Unrealized Appreciation (Depreciation)................................................................ $ (57,751) ============

Counterparty Abbreviations: BBH Brown Brothers Harriman & Co. ------------------------------------------------ CURRENCY EXPOSURE % OF TOTAL DIVERSIFICATION INVESTMENTS + ------------------------------------------------ USD 39.1% EUR 21.9 GBP 16.1 CHF 11.9 SEK 6.9 NOK 2.6 DKK 1.5 ------- Total 100.0% ======= + The weightings include the impact of currency forwards. Currency Abbreviations: CHF Swiss Franc DKK Danish Krone EUR Euro GBP British Pound Sterling NOK Norwegian Krone SEK Swedish Krona USD Unites States Dollar See Notes to Financial Statements Page 27 FIRST TRUST RIVERFRONT DYNAMIC EMERGING MARKETS ETF (RFEM) PORTFOLIO OF INVESTMENTS OCTOBER 31, 2016 SHARES DESCRIPTION VALUE ------------- ------------------------------ ---------------- COMMON STOCKS (a) -- 99.2% BRAZIL -- 9.4% 13,065 Banco do Estado do Rio Grande do Sul S.A. (Preference Shares) $ 55,665 6,158 BB Seguridade Participacoes S.A. 62,004 7,111 BM&FBovespa S.A. -- Bolsa de Valores Mercadorias e Futuros 41,882 13,529 Bradespar S.A. (Preference Shares) 55,015 6,583 Cielo S.A. 66,820 11,127 Embraer S.A. 59,783 10,008 Kroton Educacional S.A. 49,852 3,269 Lojas Renner S.A. 27,651 4,908 Petroleo Brasileiro S.A. (b) 28,661 3,904 Telefonica Brasil S.A. (Preference Shares) 56,481 3,255 Vale S.A. (b) 22,516 ---------------- 526,330 ---------------- CAYMAN ISLANDS -- 8.4% 50,000 Geely Automobile Holdings Ltd. 51,576 295 Netease, Inc. 75,812 1,180 New Oriental Education & Technology Group, Inc. (b) 59,153 885 TAL Education Group (b) 72,075 8,100 Tencent Holdings Ltd. 214,940 ---------------- 473,556 ---------------- CHILE -- 0.3% 114,252 Enersis Americas S.A. 19,327 ---------------- CHINA -- 13.8% 295 Baidu, Inc., ADR (b) 52,174 236,000 Bank of China Ltd., Class H 105,896 9,500 BYD Co., Ltd., Class H 62,471 11,000 China Communications Construction Co., Ltd., Class H 12,113 238,000 China Construction Bank Corp., Class H 174,306 21,000 China Life Insurance Co., Ltd., Class H 52,151 14,000 China Merchants Bank Co., Ltd., Class H 34,154 14,400 China Pacific Insurance Group Co., Ltd., Class H 52,081 96,000 China Petroleum & Chemical Corp., Class H 69,937 48,000 China Telecom Corp., Ltd., Class H 24,818 114,000 Industrial & Commercial Bank of China Ltd., Class H 68,645 13,200 Sinopharm Group Co., Ltd., Class H 64,251 ---------------- 772,997 ---------------- SHARES DESCRIPTION VALUE ------------- ------------------------------ ---------------- COLOMBIA -- 0.9% 9,890 Almacenes Exito S.A. $ 49,339 ---------------- CZECH REPUBLIC -- 0.8% 4,854 O2 Czech Republic A.S. 44,539 ---------------- EGYPT -- 1.0% 8,278 ElSwedy Electric Co. 58,263 ---------------- INDIA -- 9.8% 13,195 Bharti Airtel Ltd. 62,966 11,829 Century Enka Ltd 58,387 7,775 Hindustan Petroleum Corp., Ltd. 54,395 1,714 Housing Development Finance Corp., Ltd. 35,352 569 Maruti Suzuki India Ltd. 50,233 14,028 Oil & Natural Gas Corp., Ltd. 60,744 5,436 Reliance Industries Ltd. 85,561 21,017 Sterlite Technologies Ltd. 33,137 9,371 Tata Motors Ltd. 48,527 8,829 Wipro Ltd. 61,392 ---------------- 550,694 ---------------- INDONESIA -- 3.9% 35,102 Bank Central Asia Tbk PT 41,766 415,814 Hanjaya Mandala Sampoerna Tbk PT 125,879 168,921 Telekomunikasi Indonesia Persero Tbk PT 54,632 ---------------- 222,277 ---------------- ISRAEL -- 1.8% 10,521 AudioCodes Ltd. (b) 54,920 12,704 Harel Insurance Investments & Financial Services Ltd. 49,143 ---------------- 104,063 ---------------- LUXEMBOURG -- 0.9% 3,051 Kernel Holding SA 48,884 ---------------- MALAYSIA -- 1.3% 21,900 Tenaga Nasional Bhd 74,862 ---------------- MEXICO -- 4.3% 82,894 America Movil S.A.B. de C.V., Series L 54,909 32,891 Cemex S.A.B. de C.V. (b) 28,452 9,792 Grupo Mexico S.A.B. de C.V., Series B 24,038 15,837 Grupo Simec S.A.B. de C.V., Series B (b) 55,368 5,423 Grupo Televisa S.A.B. 26,643 16,741 Vitro S.A.B. de C.V. 55,136 ---------------- 244,546 ---------------- PHILIPPINES -- 0.4% 36,900 SM Prime Holdings, Inc. 20,499 ---------------- POLAND -- 0.9% 2,535 Bank Handlowy w Warszawie SA 50,212 ---------------- Page 28 See Notes to Financial Statements FIRST TRUST RIVERFRONT DYNAMIC EMERGING MARKETS ETF (RFEM) PORTFOLIO OF INVESTMENTS (CONTINUED) OCTOBER 31, 2016 SHARES DESCRIPTION VALUE ------------- ------------------------------ ---------------- COMMON STOCKS (a) (CONTINUED) RUSSIA -- 2.1% 9,906 Gazprom PJSC, ADR $ 42,794 11,701 Mechel PJSC (b) 57,803 130 MMC Norilsk Nickel PJSC (c) 19,159 ---------------- 119,756 ---------------- SOUTH AFRICA -- 5.9% 1,498 Bidvest Group (The) Ltd. 18,599 9,006 Coronation Fund Managers Ltd. 48,444 20,651 FirstRand Ltd. 74,004 222 Naspers Ltd. 37,208 2,979 Nedbank Group Ltd 48,716 13,832 Sanlam Ltd. 67,048 3,738 Standard Bank Group Ltd. 39,659 ---------------- 333,678 ---------------- SOUTH KOREA -- 15.8% 128 Celltrion, Inc. 11,880 534 Coway Co., Ltd. 41,815 8,391 Daeduck Electronics Co. 55,219 7,738 Dongkuk Steel Mill Co., Ltd. 55,317 356 Hyundai Mobis Co., Ltd. 85,247 2,157 KB Financial Group, Inc. 79,739 90 LG Household & Health Care Ltd. 37,439 253 Lotte Chemical Corp. 63,789 346 POSCO 71,664 166 Samsung Electronics Co., Ltd. 237,775 2,083 Shinhan Financial Group Co., Ltd. 79,825 343 SK Holdings Co., Ltd. 66,996 ---------------- 886,705 ---------------- TAIWAN -- 14.1% 1,966 Advantech Co., Ltd. 16,011 22,615 Cathay Financial Holding Co., Ltd. 29,346 23,598 China Steel Corp. 17,049 1,966 Eclat Textile Co., Ltd. 22,365 8,849 Formosa Chemicals & Fibre Corp. 26,330 10,816 Formosa Plastics Corp. 29,270 18,682 Foxconn Technology Co., Ltd. 54,227 24,581 Hon Hai Precision Industry Co., Ltd. 66,443 1,966 Hotai Motor Co., Ltd. 22,895 9,832 MediaTek, Inc. 74,774 1,966 Nien Made Enterprise Co Ltd 22,801 14,749 Novatek Microelectronics Corp. 55,383 16,715 Realtek Semiconductor Corp. 56,675 18,682 Simplo Technology Co., Ltd. 57,720 40,313 Taiwan Semiconductor Manufacturing Co., Ltd. 240,799 ---------------- 792,088 ---------------- TURKEY -- 3.4% 9,659 Akbank TAS 25,815 6,607 Cimsa Cimento Sanayi ve Ticaret A.S. 32,819 SHARES DESCRIPTION VALUE ------------- ------------------------------ ---------------- TURKEY (CONTINUED) 9,720 Dogus Otomotiv Servis ve Ticaret A.S. $ 31,319 13,174 Koza Altin Isletmeleri A.S. (b) 74,848 10,173 Turkiye Garanti Bankasi A.S. 27,650 ---------------- 192,451 ---------------- TOTAL INVESTMENTS - 99.2% 5,585,066 (Cost $5,114,483) (d) NET OTHER ASSETS AND LIABILITIES - 0.8% 42,517 ---------------- NET ASSETS - 100.0% $ 5,627,583 ================ ----------------------------- (a) Portfolio securities are categorized based upon their country of incorporation. For a breakdown of the portfolio securities by sector, please see the Fund Performance Overview. (b) Non-income producing security. (c) This security is fair valued by the Advisor's Pricing Committee in accordance with procedures adopted by the Trust's Board of Trustees and in accordance with provisions of the Investment Company Act of 1940, as amended. At October 31, 2016, securities noted as such are valued at $19,159 or 0.3% of net assets. (d) Aggregate cost for federal income tax purposes is $5,132,486. As of October 31, 2016, the aggregate gross unrealized appreciation for all securities in which there was an excess of value over tax cost was $504,026 and the aggregate gross unrealized depreciation for all securities in which there was an excess of tax cost over value was $51,446. ----------------------------- VALUATION INPUTS A summary of the inputs used to value the Fund's investments as of October 31, 2016 is as follows (see Note 2A -- Portfolio Valuation in the Notes to Financial Statements): LEVEL 2 LEVEL 3 TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT VALUE AT QUOTED OBSERVABLE UNOBSERVABLE 10/31/2016 PRICES INPUT INPUT --------------------------------------------------------- Russia $ 119,756 $ 100,597 $ 19,159 $ -- Other country categories* 5,465,310 5,465,310 -- -- --------------------------------------------------------- Total Investments $ 5,585,066 $ 5,565,907 $ 19,159 $ -- ========================================================= * See Portfolio of Investments for country breakout. All transfers in and out of the Levels during the period are assumed to be transferred on the last day of the period at their current value. There were no transfers between Levels at October 31, 2016. See Notes to Financial Statements Page 29 FIRST TRUST RIVERFRONT DYNAMIC EMERGING MARKETS ETF (RFEM) PORTFOLIO OF INVESTMENTS (CONTINUED) OCTOBER 31, 2016 ------------------------------------------------------------ CURRENCY EXPOSURE % OF TOTAL DIVERSIFICATION INVESTMENTS ------------------------------------------------------------ HKD 17.7% KRW 15.9 TWD 14.2 INR 9.8 BRL 9.4 USD 7.8 ZAR 6.0 MXN 4.4 IDR 4.0 TRY 3.4 PLN 1.8 MYR 1.3 EGP 1.0 COP 0.9 ILS 0.9 CZK 0.8 PHP 0.4 CLP 0.3 ------- Total 100.0% ======= Currency Abbreviations: BRL Brazilian Real CLP Chilean Peso COP Colombian Peso CZK Czech Koruna EGP Egyptian Pound HKD Hong Kong Dollar IDR Indonesian Rupiah ILS Israeli Shekel INR Indian Rupee KRW South Korean Won MXN Mexican Peso MYR Malaysian Ringgit PHP Philippine Peso PLN Polish Zloty TRY Turkish Lira TWD New Taiwan Dollar USD United States Dollar ZAR South African Rand Page 30 See Notes to Financial Statements FIRST TRUST EXCHANGE-TRADED FUND III STATEMENTS OF ASSETS AND LIABILITIES OCTOBER 31, 2016

FIRST TRUST FIRST TRUST FIRST TRUST RIVERFRONT FIRST TRUST RIVERFRONT RIVERFRONT DYNAMIC RIVERFRONT DYNAMIC DYNAMIC DEVELOPED DYNAMIC EMERGING ASIA PACIFIC INTERNATIONAL EUROPE MARKETS ETF ETF ETF ETF (RFAP) (RFDI) (RFEU) (RFEM) -------------- -------------- -------------- -------------- ASSETS: Investments, at value..................................... $ 25,899,085 $ 25,575,051 $ 25,478,572 $ 5,585,066 Cash...................................................... 61,519 78,975 460,426 42,975 Foreign currency.......................................... 1,994 12,905 9,627 18,343 Receivables: Investment securities sold............................. -- -- -- 1,774,961 Dividends.............................................. 125,123 60,079 31,845 619 Dividend reclaims...................................... 1,283 28,750 37,859 -- -------------- -------------- -------------- -------------- Total Assets........................................... 26,089,004 25,755,760 26,018,329 7,421,964 -------------- -------------- -------------- -------------- LIABILITIES: Unrealized depreciation on forward foreign currency contracts.............................................. -- 40,087 57,751 -- Payables: Investment securities purchased........................ -- 18,093 357,570 1,789,843 Investment advisory fees............................... 18,170 18,073 18,089 4,538 Other liabilities......................................... -- 88 -- -- -------------- -------------- -------------- -------------- Total Liabilities...................................... 18,170 76,341 433,410 1,794,381 -------------- -------------- -------------- -------------- NET ASSETS................................................ $ 26,070,834 $ 25,679,419 $ 25,584,919 $ 5,627,583 ============== ============== ============== ============== NET ASSETS CONSIST OF: Paid-in capital........................................... $ 25,651,850 $ 25,910,315 $ 26,001,062 $ 4,960,180 Par value................................................. 5,000 5,000 5,000 1,000 Accumulated net investment income (loss).................. 58,773 (6,707) -- 6,171 Accumulated net realized gain (loss) on investments, forward foreign currency contracts and foreign currency transactions ................................. (212,141) 187,322 428,168 189,844 Net unrealized appreciation (depreciation) on investments, forward foreign currency contracts and foreign currency translation................................... 567,352 (416,511) (849,311) 470,388 -------------- -------------- -------------- -------------- NET ASSETS................................................ $ 26,070,834 $ 25,679,419 $ 25,584,919 $ 5,627,583 ============== ============== ============== ============== NET ASSET VALUE, per share................................ $ 52.14 $ 51.36 $ 51.17 $ 56.27 ============== ============== ============== ============== Number of shares outstanding (unlimited number of shares authorized, par value $0.01 per share)................. 500,002 500,002 500,002 100,002 ============== ============== ============== ============== Investments, at cost...................................... $ 25,327,099 $ 25,949,076 $ 26,267,327 $ 5,114,483 ============== ============== ============== ============== Foreign currency, at cost (proceeds)...................... $ 2,003 $ 12,907 $ 9,616 $ 18,343 ============== ============== ============== ==============

See Notes to Financial Statements Page 31 FIRST TRUST EXCHANGE-TRADED FUND III STATEMENTS OF OPERATIONS FOR THE PERIOD ENDED OCTOBER 31, 2016

FIRST TRUST FIRST TRUST FIRST TRUST RIVERFRONT FIRST TRUST RIVERFRONT RIVERFRONT DYNAMIC RIVERFRONT DYNAMIC DYNAMIC DEVELOPED DYNAMIC EMERGING ASIA PACIFIC INTERNATIONAL EUROPE MARKETS ETF ETF ETF ETF (RFAP) (a) (RFDI) (a) (RFEU) (a) (RFEM) (b) -------------- -------------- -------------- -------------- INVESTMENT INCOME: Dividends................................................. $ 411,491 $ 590,474 $ 641,230 $ 89,547 Interest.................................................. 64 93 82 46 Foreign tax withholding................................... (19,760) (59,651) (72,219) (14,201) Other..................................................... -- 27 25 -- -------------- -------------- -------------- -------------- Total investment income................................ 391,795 530,943 569,118 75,392 -------------- -------------- -------------- -------------- EXPENSES: Investment advisory fees.................................. 116,415 116,073 116,276 19,851 Other..................................................... -- -- -- -- -------------- -------------- -------------- -------------- Total expenses......................................... 116,415 116,073 116,276 19,851 -------------- -------------- -------------- -------------- NET INVESTMENT INCOME (LOSS).............................. 275,380 414,870 452,842 55,541 -------------- -------------- -------------- -------------- NET REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments............................................ 490,719 (195,610) (266,150) 194,191 In-kind redemptions.................................... -- 555,929 577,652 -- Forward foreign currency contracts..................... (696,976) 427,032 844,297 -- Foreign currency transactions.......................... (60,040) (117,260) (195,275) 894 -------------- -------------- -------------- -------------- Net realized gain (loss).................................. (266,297) 670,091 960,524 195,085 -------------- -------------- -------------- -------------- Net change in unrealized appreciation (depreciation) on: Investments............................................ 571,986 (374,025) (788,755) 470,583 Forward foreign currency contracts..................... -- (40,087) (57,751) -- Foreign currency translation........................... (4,634) (2,399) (2,805) (195) -------------- -------------- -------------- -------------- Net change in unrealized appreciation (depreciation)...... 567,352 (416,511) (849,311) 470,388 -------------- -------------- -------------- -------------- NET REALIZED AND UNREALIZED GAIN (LOSS)................... 301,055 253,580 111,213 665,473 -------------- -------------- -------------- -------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS.............................. $ 576,435 $ 668,450 $ 564,055 $ 721,014 ============== ============== ============== ==============

(a) Inception date is April 13, 2016, which is consistent with the commencement of investment operations and is the date the initial creation units were established. (b) Inception date is June 14, 2016, which is consistent with the commencement of investment operations and is the date the initial creation units were established. Page 32 See Notes to Financial Statements FIRST TRUST EXCHANGE-TRADED FUND III STATEMENTS OF CHANGES IN NET ASSETS

FIRST TRUST FIRST TRUST FIRST TRUST RIVERFRONT FIRST TRUST RIVERFRONT RIVERFRONT DYNAMIC RIVERFRONT DYNAMIC DYNAMIC DEVELOPED DYNAMIC EMERGING ASIA PACIFIC INTERNATIONAL EUROPE MARKETS ETF ETF ETF ETF (RFAP) (RFDI) (RFEU) (RFEM) -------------- -------------- -------------- -------------- FOR THE PERIOD FOR THE PERIOD FOR THE PERIOD FOR THE PERIOD 4/13/2016 (a) 4/13/2016 (a) 4/13/2016 (a) 6/14/2016 (a) THROUGH THROUGH THROUGH THROUGH 10/31/2016 10/31/2016 10/31/2016 10/31/2016 -------------- -------------- -------------- -------------- OPERATIONS: Net investment income (loss).............................. $ 275,380 $ 414,870 $ 452,842 $ 55,541 Net realized gain (loss).................................. (266,297) 670,091 960,524 195,085 Net change in unrealized appreciation (depreciation)...... 567,352 (416,511) (849,311) 470,388 -------------- -------------- -------------- -------------- Net increase (decrease) in net assets resulting from operations............................................. 576,435 668,450 564,055 721,014 -------------- -------------- -------------- -------------- DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income..................................... (162,451) (351,001) (409,752) (54,611) -------------- -------------- -------------- -------------- Total distributions to shareholders....................... (162,451) (351,001) (409,752) (54,611) -------------- -------------- -------------- -------------- SHAREHOLDER TRANSACTIONS: Proceeds from shares sold................................. 25,656,850 30,564,880 30,664,176 4,961,180 Cost of shares redeemed................................... -- (5,202,910) (5,233,560) -- -------------- -------------- -------------- -------------- Net increase (decrease) in net assets resulting from shareholder transactions............................... 25,656,850 25,361,970 25,430,616 4,961,180 -------------- -------------- -------------- -------------- Total increase (decrease) in net assets................... 26,070,834 25,679,419 25,584,919 5,627,583 NET ASSETS: Beginning of period....................................... -- -- -- -- -------------- -------------- -------------- -------------- End of period............................................. $ 26,070,834 $ 25,679,419 $ 25,584,919 $ 5,627,583 ============== ============== ============== ============== Accumulated net investment income (loss) at end of period................................................. $ 58,773 $ (6,707) $ -- $ 6,171 ============== ============== ============== ============== CHANGES IN SHARES OUTSTANDING: Shares outstanding, beginning of period................... -- -- -- -- Shares sold............................................... 500,002 600,002 600,002 100,002 Shares redeemed........................................... -- (100,000) (100,000) -- -------------- -------------- -------------- -------------- Shares outstanding, end of period......................... 500,002 500,002 500,002 100,002 ============== ============== ============== ==============

(a) Inception date is consistent with the commencement of investment operations and is the date the initial creation units were established. See Notes to Financial Statements Page 33 FIRST TRUST EXCHANGE-TRADED FUND III FINANCIAL HIGHLIGHTS FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD FIRST TRUST RIVERFRONT DYNAMIC ASIA PACIFIC ETF (RFAP)

FOR THE PERIOD 4/13/2016 (a) THROUGH 10/31/2016 -------------- Net asset value, beginning of period ............ $ 51.31 ---------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .................... 0.55 Net realized and unrealized gain (loss) ......... 0.60 ---------- Total from investment operations ................ 1.15 ---------- DISTRIBUTIONS PAID TO SHAREHOLDERS FROM: Net investment income ........................... (0.32) ---------- Total distributions ............................. (0.32) ---------- Net asset value, end of period .................. $ 52.14 ========== TOTAL RETURN (b)................................. 2.26% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (in 000's) ............ $ 26,071 RATIOS TO AVERAGE NET ASSETS: Ratio of total expenses to average net assets.... 0.83% (c) Ratio of net investment income (loss) to average net assets ........................... 1.96% (c) Portfolio turnover rate (d)...................... 49%

(a) Inception date is consistent with the commencement of investment operations and is the date the initial creation units were established. (b) Total return is calculated assuming an initial investment made at the net asset value at the beginning of the period, reinvestment of all distributions at net asset value during the period, and redemption at net asset value on the last day of the period. The return presented does not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. Total return is calculated for the time period presented and is not annualized for periods of less than a year. (c) Annualized. (d) Portfolio turnover is calculated for the time period presented and is not annualized for periods of less than a year and does not include securities received or delivered from processing creations or redemptions and in-kind transactions. Page 34 See Notes to Financial Statements FIRST TRUST EXCHANGE-TRADED FUND III FINANCIAL HIGHLIGHTS (CONTINUED) FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD FIRST TRUST RIVERFRONT DYNAMIC DEVELOPED INTERNATIONAL ETF (RFDI)

FOR THE PERIOD 4/13/2016 (a) THROUGH 10/31/2016 -------------- Net asset value, beginning of period ............ $ 50.73 ---------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .................... 0.83 Net realized and unrealized gain (loss) ......... 0.50 ---------- Total from investment operations ................ 1.33 ---------- DISTRIBUTIONS PAID TO SHAREHOLDERS FROM: Net investment income ........................... (0.70) ---------- Total distributions ............................. (0.70) ---------- Net asset value, end of period .................. $ 51.36 ========== TOTAL RETURN (b)................................. 2.68% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (in 000's) ............ $ 25,679 RATIOS TO AVERAGE NET ASSETS: Ratio of total expenses to average net assets.... 0.83% (c) Ratio of net investment income (loss) to average net assets ........................... 2.97% (c) Portfolio turnover rate (d)...................... 44%

(a) Inception date is consistent with the commencement of investment operations and is the date the initial creation units were established. (b) Total return is calculated assuming an initial investment made at the net asset value at the beginning of the period, reinvestment of all distributions at net asset value during the period, and redemption at net asset value on the last day of the period. The return presented does not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. Total return is calculated for the time period presented and is not annualized for periods of less than a year. (c) Annualized. (d) Portfolio turnover is calculated for the time period presented and is not annualized for periods of less than a year and does not include securities received or delivered from processing creations or redemptions and in-kind transactions. See Notes to Financial Statements Page 35 FIRST TRUST EXCHANGE-TRADED FUND III FINANCIAL HIGHLIGHTS (CONTINUED) FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD FIRST TRUST RIVERFRONT DYNAMIC EUROPE ETF (RFEU)

FOR THE PERIOD 4/13/2016 (a) THROUGH 10/31/2016 -------------- Net asset value, beginning of period ............ $ 50.67 ---------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .................... 0.91 Net realized and unrealized gain (loss) ......... 0.41 ---------- Total from investment operations ................ 1.32 ---------- DISTRIBUTIONS PAID TO SHAREHOLDERS FROM: Net investment income ........................... (0.82) ---------- Total distributions ............................. (0.82) ---------- Net asset value, end of period .................. $ 51.17 ========== TOTAL RETURN (b)................................. 2.66% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (in 000's) ............ $ 25,585 RATIOS TO AVERAGE NET ASSETS: Ratio of total expenses to average net assets.... 0.83% (c) Ratio of net investment income (loss) to average net assets ........................... 3.23% (c) Portfolio turnover rate (d)...................... 41%

(a) Inception date is consistent with the commencement of investment operations and is the date the initial creation units were established. (b) Total return is calculated assuming an initial investment made at the net asset value at the beginning of the period, reinvestment of all distributions at net asset value during the period, and redemption at net asset value on the last day of the period. The return presented does not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. Total return is calculated for the time period presented and is not annualized for periods of less than a year. (c) Annualized. (d) Portfolio turnover is calculated for the time period presented and is not annualized for periods of less than a year and does not include securities received or delivered from processing creations or redemptions and in-kind transactions. Page 36 See Notes to Financial Statements FIRST TRUST EXCHANGE-TRADED FUND III FINANCIAL HIGHLIGHTS (CONTINUED) FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD FIRST TRUST RIVERFRONT DYNAMIC EMERGING MARKETS ETF (RFEM)

FOR THE PERIOD 6/14/2016 (a) THROUGH 10/31/2016 -------------- Net asset value, beginning of period ............ $ 49.61 ---------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .................... 0.55 Net realized and unrealized gain (loss) ......... 6.66 ---------- Total from investment operations ................ 7.21 ---------- DISTRIBUTIONS PAID TO SHAREHOLDERS FROM: Net investment income ........................... (0.55) ---------- Total distributions ............................. (0.55) ---------- Net asset value, end of period .................. $ 56.27 ========== TOTAL RETURN (b)................................. 14.52% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (in 000's) ............ $ 5,628 RATIOS TO AVERAGE NET ASSETS: Ratio of total expenses to average net assets.... 0.95% (c) Ratio of net investment income (loss) to average net assets ........................... 2.66% (c) Portfolio turnover rate (d)...................... 81%

(a) Inception date is consistent with the commencement of investment operations and is the date the initial creation units were established. (b) Total return is calculated assuming an initial investment made at the net asset value at the beginning of the period, reinvestment of all distributions at net asset value during the period, and redemption at net asset value on the last day of the period. The return presented does not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. Total return is calculated for the time period presented and is not annualized for periods of less than a year. (c) Annualized. (d) Portfolio turnover is calculated for the time period presented and is not annualized for periods of less than a year and does not include securities received or delivered from processing creations or redemptions and in-kind transactions. See Notes to Financial Statements Page 37 -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS -------------------------------------------------------------------------------- FIRST TRUST EXCHANGE-TRADED FUND III OCTOBER 31, 2016 1. ORGANIZATION First Trust Exchange-Traded Fund III (the "Trust") is an open-end management investment company organized as a Massachusetts business trust on January 9, 2008, and is registered with the Securities and Exchange Commission (the "SEC") under the Investment Company Act of 1940, as amended (the "1940 Act"). The Trust currently consists of ten funds. This report covers the following funds, each a non-diversified series of the Trust: First Trust RiverFront Dynamic Asia Pacific ETF - (The Nasdaq Stock Market LLC ("Nasdaq") ticker "RFAP") First Trust RiverFront Dynamic Developed International ETF - (Nasdaq ticker "RFDI") First Trust RiverFront Dynamic Europe ETF - (Nasdaq ticker "RFEU") First Trust RiverFront Dynamic Emerging Markets ETF - (Nasdaq ticker "RFEM") Each fund represents a separate series of shares of beneficial interest in the Trust (each a "Fund" and collectively, the "Funds"). Each Fund's shares are currently listed and traded on Nasdaq. Unlike conventional mutual funds, each Fund issues and redeems shares on a continuous basis, at net asset value ("NAV"), only in large specified blocks consisting of 50,000 shares called a "Creation Unit." Creation Units are generally issued and redeemed in-kind for securities in which a Fund invests and, in certain circumstances, for cash. Except when aggregated in Creation Units, the shares are not redeemable securities of a Fund. Each Fund is an actively managed exchange-traded fund. The investment objective of each Fund is to provide capital appreciation. Under normal market conditions, RFAP seeks to achieve its investment objective by investing at least 80% of its net assets (including investment borrowings) in a portfolio of equity securities of Asian Pacific companies through investments in common stocks, depositary receipts, real estate investment trusts ("REITs"), and forward foreign currency contracts and currency spot transactions used to hedge the Fund's exposure to the currencies in which the equity securities of the Asian Pacific companies are denominated. Under normal market conditions, RFDI seeks to achieve its investment objective by investing at least 80% of its net assets (including investment borrowings) in a portfolio of equity securities of developed market companies through investments in common stocks, depositary receipts, REITs, and forward foreign currency contracts and currency spot transactions used to hedge the Fund's exposure to the currencies in which the equity securities of the developed market companies are denominated. Under normal market conditions, RFEU seeks to achieve its investment objective by investing at least 80% of its net assets (including investment borrowings) in a portfolio of equity securities of European companies through investments in common stocks, depositary receipts, REITs, and forward foreign currency contracts and currency spot transactions used to hedge the Fund's exposure to the currencies in which the equity securities of the European companies are denominated. Under normal market conditions, RFEM seeks to achieve its investment objective by investing at least 80% of its net assets (including investment borrowings) in a portfolio of equity securities of emerging market companies through investments in common stocks, depositary receipts, REITs, and forward foreign currency contracts and currency spot transactions used to hedge the Fund's exposure to the currencies in which the equity securities of the emerging market companies are denominated. 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 Serices-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. Page 38 -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (CONTINUED) -------------------------------------------------------------------------------- FIRST TRUST EXCHANGE-TRADED FUND III OCTOBER 31, 2016 Each Fund's investments are valued daily at market value or, in the absence of market value with respect to any portfolio securities, at fair value. Market value prices represent last sale or official closing prices from a national or foreign exchange (i.e., a regulated market) and are primarily obtained from third-party pricing services. Fair value prices represent any prices not considered market value prices and are either obtained from a third-party pricing service or are determined by the Pricing Committee of the Funds' investment advisor, First Trust Advisors L.P. ("First Trust" or the "Advisor"), in accordance with valuation procedures adopted by the Trust's Board of Trustees, and in accordance with provisions of the 1940 Act. Investments valued by the Advisor's Pricing Committee, if any, are footnoted as such in the footnotes to the Portfolio of Investments. Each Fund's investments are valued as follows: Common stocks, REITS, and other equity securities listed on any national or foreign exchange (excluding Nasdaq and the London Stock Exchange Alternative Investment Market ("AIM")) are valued at the last sale price on the exchange on which they are principally traded or, for Nasdaq and AIM securities, the official closing price. Securities traded on more than one securities exchange are valued at the last sale price or official closing price, as applicable, at the close of the securities exchange representing the principal market for such securities. Securities traded in an over-the-counter market are fair valued at the mean of their most recent bid and asked price, if available, and otherwise at their closing bid price. Forward foreign currency contracts are valued at the current day's interpolated foreign exchange rate, as calculated using the current day's spot rate, and the thirty, sixty, ninety and one-hundred eighty day forward rates provided by a third-party pricing service. Certain securities may not be able to be priced by pre-established pricing methods. Such securities may be valued by the Trust's Board of Trustees or its delegate, the Advisor's Pricing Committee, at fair value. These securities generally include, but are not limited to, restricted securities (securities which may not be publicly sold without registration under the Securities Act of 1933, as amended), for which a third-party pricing service is unable to provide a market price; securities whose trading has been formally suspended; a security whose market or fair value price is not available from a pre-established pricing source; a security with respect to which an event has occurred that is likely to materially affect the value of the security after the market has closed but before the calculation of a Fund's NAV or make it difficult or impossible to obtain a reliable market quotation; and a security whose price, as provided by the third-party pricing service, does not reflect the security's fair value. As a general principle, the current fair value of a security would appear to be the amount which the owner might reasonably expect to receive for the security upon its current sale. When fair value prices are used, generally they will differ from market quotations or official closing prices on the applicable exchanges. A variety of factors may be considered in determining the fair value of such securities, including, but not limited to, the following: 1) the type of security; 2) the size of the holding; 3) the initial cost of the security; 4) transactions in comparable securities; 5) price quotes from dealers and/or third-party pricing services; 6) relationships among various securities; 7) information obtained by contacting the issuer, analysts, or the appropriate stock exchange; 8) an analysis of the issuer's financial statements; and 9) the existence of merger proposals or tender offers that might affect the value of the security. If the securities in question are foreign securities, the following additional information may be considered: 1) the value of similar foreign securities traded on other foreign markets; 2) ADR trading of similar securities; 3) closed-end fund trading of similar securities; 4) foreign currency exchange activity; 5) the trading prices of financial products that are tied to baskets of foreign securities; 6) factors relating to the event that precipitated the pricing problem; 7) whether the event is likely to recur; and 8) whether the effects of the event are isolated or whether they affect entire markets, countries or regions. Page 39 -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (CONTINUED) -------------------------------------------------------------------------------- FIRST TRUST EXCHANGE-TRADED FUND III OCTOBER 31, 2016 Because foreign markets may be open on different days than the days during which investors may transact in the shares of a Fund, the value of the Fund's securities may change on the days when investors are not able to transact in the shares of the Fund. The value of securities denominated in foreign currencies is converted into U.S. dollars using exchange rates determined daily as of the close of regular trading on the NYSE. The Funds are subject to fair value accounting standards that define fair value, establish the framework for measuring fair value and provide a three-level hierarchy for fair valuation based upon the inputs to the valuation as of the measurement date. The three levels of the fair value hierarchy are as follows: o Level 1 - Level 1 inputs are quoted prices in active markets for identical investments. An active market is a market in which transactions for the investment occur with sufficient frequency and volume to provide pricing information on an ongoing basis. o Level 2 - Level 2 inputs are observable inputs, either directly or indirectly, and include the following: o Quoted prices for similar investments in active markets. o Quoted prices for identical or similar investments in markets that are non-active. A non-active market is a market where there are few transactions for the investment, the prices are not current, or price quotations vary substantially either over time or among market makers, or in which little information is released publicly. o Inputs other than quoted prices that are observable for the investment (for example, interest rates and yield curves observable at commonly quoted intervals, volatilities, prepayment speeds, loss severities, credit risks, and default rates). o Inputs that are derived principally from or corroborated by observable market data by correlation or other means. o Level 3 - Level 3 inputs are unobservable inputs. Unobservable inputs may reflect the reporting entity's own assumptions about the assumptions that market participants would use in pricing the investment. The inputs or methodologies used for valuing investments are not necessarily an indication of the risk associated with investing in those investments. A summary of the inputs used to value each Fund's investments as of October 31, 2016, 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 on the accrual basis. Distributions received from each Fund's investments in REITs may be comprised of return of capital, capital gains and income. The actual character of the amounts received during the year are not known until after the REIT's fiscal year end. A Fund records the character of distributions received from the REITs during the year based on estimates available. The characterization of distributions received by each Fund may be subsequently revised based on information received from the REITs after their tax reporting periods conclude. C. FORWARD FOREIGN CURRENCY CONTRACTS The Funds are subject to foreign currency risk in the normal course of pursuing their investment objectives. Forward foreign currency contracts are agreements between two parties ("Counterparties") to exchange one currency for another at a future date and at a specified price. The Funds use forward foreign currency contracts to facilitate transactions in foreign securities and to manage foreign currency exposure. These contracts are valued daily, and each Fund's net equity therein, representing unrealized gain or loss on the contracts as measured by the difference between the forward foreign exchange rates at the dates of entry into the contracts and the forward rates at the reporting date, is included in "Unrealized appreciation/depreciation on forward foreign currency contracts" on the Statements of Assets and Liabilities. The change in unrealized appreciation (depreciation) is included in "Net change in unrealized appreciation (depreciation) on forward foreign currency contracts" on the Statements of Operations. When the forward contract is closed, a Fund records a realized gain or loss equal to the difference between the proceeds from (or the cost of) the closing transaction and the Fund's basis in the contract. This realized gain or loss is included in "Net realized gain (loss) on forward foreign currency contracts" on the Statements of Operations. Risks arise from the possible inability of counterparties to meet the terms of their contracts and from movement in currency, securities values and interest rates. Due to the risks, the Funds could incur losses in excess of the net unrealized value shown on the Forward Foreign Currency Contracts table in each Fund's Portfolio of Investments. In the event of default by the Counterparty, a Fund will provide notice to the Counterparty of the Fund's intent to convert the currency held by the Fund into the currency that the Counterparty agreed to exchange with that Fund. If a Counterparty becomes bankrupt or otherwise fails to perform its obligations due to financial difficulties, the Funds may experience significant delays in obtaining any recovery in a bankruptcy or other reorganization proceeding. The Funds may obtain only limited recovery or may obtain no recovery in such circumstances. Page 40 -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (CONTINUED) -------------------------------------------------------------------------------- FIRST TRUST EXCHANGE-TRADED FUND III OCTOBER 31, 2016 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. Distributions from income and capital gains are determined in accordance with income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These permanent differences are primarily due to the varying treatment of income and gain/loss on portfolio securities held by the Funds and have no impact on net assets or net asset value per share. Temporary differences, which arise from recognizing certain items of income, expense and gain/loss in different periods for financial statement and tax purposes, will reverse at some time in the future. The tax character of distributions paid by each Fund during the period ended October 31, 2016 was as follows:

Distributions Distributions Distributions paid from paid from paid from Ordinary Capital Return of Income Gains Capital ------------- ------------- ------------- First Trust RiverFront Dynamic Asia Pacific ETF $ 162,451 $ -- $ -- First Trust RiverFront Dynamic Developed International ETF 320,767 30,234 -- First Trust RiverFront Dynamic Europe ETF 344,889 64,863 -- First Trust RiverFront Dynamic Emerging Markets ETF 54,611 -- --

As of October 31, 2016, the components of distributable earnings on a tax basis for each Fund were as follows:

Accumulated Net Undistributed Capital and Unrealized Ordinary Other Appreciation Income Gain (Loss) (Depreciation) ------------- ------------- ------------- First Trust RiverFront Dynamic Asia Pacific ETF $ 81,895 $ (210,419) $ 542,508 First Trust RiverFront Dynamic Developed International ETF -- 201,934 (437,830) First Trust RiverFront Dynamic Europe ETF -- 407,064 (828,207) First Trust RiverFront Dynamic Emerging Markets ETF 213,518 -- 452,885

E. INCOME TAXES Each Fund intends to qualify as a regulated investment company by complying with the requirements under Subchapter M of the Internal Revenue Code of 1986, as amended, which includes distributing substantially all of its net investment income and net realized gains to shareholders. Accordingly, no provision has been made for federal and state income taxes. However, due to the timing and amount of distributions, each Fund may be subject to an excise tax of 4% of the amount by which approximately 98% of the Fund's taxable income exceeds the distributions from such taxable income for the calendar year. The Funds are subject to accounting standards that establish a minimum threshold for recognizing, and a system for measuring, the benefits of a tax position taken or expected to be taken in a tax return. Taxable year ended 2016 remains open to federal and state audit. As of October 31, 2016, management has evaluated the application of these standards to the Funds and has determined that no provision for income tax is required in the Funds' financial statements for uncertain tax positions. The Funds intend to utilize provisions of the federal income tax laws, which allow it to carry a realized capital loss forward indefinitely following the year of the loss and offset such loss against any future realized capital gains. The Funds are subject to certain limitations under U.S. tax rules on the use of capital loss carryforwards and net unrealized built-in losses. These limitations apply when there has been a 50% change in ownership. At October 31, 2016, the Funds had non-expiring capital loss carryforwards for federal income tax purposes as follows: Capital Loss Available -------------- First Trust RiverFront Dynamic Asia Pacific ETF $ 210,419 First Trust RiverFront Dynamic Developed International ETF -- First Trust RiverFront Dynamic Europe ETF -- First Trust RiverFront Dynamic Emerging Markets ETF -- Page 41 -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (CONTINUED) -------------------------------------------------------------------------------- FIRST TRUST EXCHANGE-TRADED FUND III OCTOBER 31, 2016 In order to present paid-in capital, accumulated net investment income (loss) and accumulated net realized gain (loss) on investments on the Statements of Assets and Liabilities that more closely represent their tax character, certain adjustments have been made to paid-in capital, accumulated net investment income (loss) and accumulated net realized gain (loss) on investments. These adjustments are primarily due to the difference between book and tax treatments of income and gains on various investment securities held by the Funds and in-kind transactions. The results of operations and net assets were not affected by these adjustments. For the period ended October 31, 2016, the adjustments for each Fund were as follows:

Accumulated Accumulated Net Net Realized Investment Gain (Loss) Paid-in Income (Loss) on Investments Capital ------------- ------------- ------------- First Trust RiverFront Dynamic Asia Pacific ETF $ (54,156) $ 54,156 $ -- First Trust RiverFront Dynamic Developed International ETF (70,576) (482,769) 553,345 First Trust RiverFront Dynamic Europe ETF (43,090) (532,356) 575,446 First Trust RiverFront Dynamic Emerging Markets ETF 5,241 (5,241) --

G. FOREIGN CURRENCY The books and records of the Funds are maintained in U.S. dollars. Foreign currencies, investments and other assets and liabilities are translated into U.S. dollars at the exchange rates prevailing at the end of the period. Purchases and sales of investments and items of income and expense are translated on the respective dates of such transactions. Unrealized gains and losses on assets and liabilities, other than investments in securities, which result from changes in foreign currency exchange rates have been included in "Net change in unrealized appreciation (depreciation) on foreign currency translation" on the Statements of Operations. Unrealized gains and losses on investments in securities which result from changes in foreign exchange rates are included with fluctuations arising from changes in market price and are shown in "Net change in unrealized appreciation (depreciation) on investments" on the Statements of Operations. Net realized foreign currency gains and losses include the effect of changes in exchange rates between trade date and settlement date on investment security transactions, foreign currency transactions and interest and dividends received and are shown in "Net realized gain (loss) on foreign currency transactions" on the Statements of Operations. The portion of foreign currency gains and losses related to fluctuations in exchange rates between the initial purchase settlement date and subsequent sale trade date is included in "Net realized gain (loss) on investments" on the Statements of Operations. H. EXPENSES Expenses, other than the investment advisory fee and other excluded expenses, are paid by the Advisor (See Note 3). I. NEW AND AMENDED FINANCIAL REPORTING RULES AND FORMS On October 13, 2016, the SEC adopted new rules and forms, and amended existing rules and forms. The new and amended rules and forms are intended to modernize the reporting of information provided by funds and to improve the quality and type of information that funds provide to the SEC and investors. The new and amended rules and forms will be effective for the First Trust funds, including the Funds, for reporting periods beginning on and after June 1, 2018. Management is evaluating the new and amended rules and forms to determine the impact to the Funds. 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. Pursuant to the Investment Management Agreement between First Trust and the Trust, First Trust supervises the investment of the Funds' assets and is responsible for the expenses of each Fund including the cost of transfer agency, sub-advisory, custody, fund administration, legal, audit and other services, including any compensation to Trustees, and excluding fee payments under the Investment Management Agreement, interest, taxes, brokerage commissions, acquired fund fees, if any, distribution and service fees payable pursuant to Rule 12b-1 plan, if any, expenses associated with the execution of portfolio transactions, and extraordinary expenses, which are paid by each respective Fund. RFAP, RFDI and RFEU have each agreed to pay First Trust an annual unitary management fee equal to 0.83% its average daily net assets. RFEM has agreed to pay First Trust an annual unitary management fee equal to 0.95% its average daily net assets. First Trust also provides fund reporting services to each Fund for a flat annual fee in the amount of $9,250, which is covered under the annual unitary management fee. Page 42 -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (CONTINUED) -------------------------------------------------------------------------------- FIRST TRUST EXCHANGE-TRADED FUND III OCTOBER 31, 2016 RiverFront Investment Group, LLC ("RiverFront" or the "Sub-Advisor") serves as each Fund's sub-advisor and manages each Fund's portfolio subject to First Trust's supervision. The Sub-Advisor receives a monthly portfolio management fee calculated at an annual rate of 0.35% of each Fund's Managed Assets that is paid by First Trust out of its investment advisory 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 the Funds securities and cash. As transfer agent, BBH is responsible for maintaining shareholder records for each Fund. Each Trustee who is not an officer or employee of First Trust, any sub-advisor or any of their affiliates ("Independent Trustees") is paid a fixed annual retainer that is allocated equally among each fund in the First Trust Fund Complex. Each Independent Trustee is also paid an annual per fund fee that varies based on whether the fund is a closed-end or other actively managed fund, or is an index fund. Additionally, the Lead Independent Trustee and the Chairmen of the Audit Committee, Nominating and Governance Committee and Valuation Committee are paid annual fees to serve in such capacities, with such compensation allocated pro rata among each fund in the First Trust Fund Complex based on net assets. Independent Trustees are reimbursed for travel and out-of-pocket expenses in connection with all meetings. The Lead Independent Trustee and Committee Chairmen rotate every three years. The officers and "Interested" Trustee receive no compensation from the Trust for acting in such capacities. 4. PURCHASES AND SALES OF SECURITIES For the period ended October 31, 2016, the cost of purchases and proceeds from sales of investments for each Fund, excluding short-term investments and in-kind transactions, were as follows:

PURCHASES SALES ----------- ----------- First Trust RiverFront Dynamic Asia Pacific ETF $12,658,933 $13,479,302 First Trust RiverFront Dynamic Developed International ETF 12,189,783 11,260,194 First Trust RiverFront Dynamic Europe ETF 36,487,942 10,530,421 First Trust RiverFront Dynamic Emerging Markets ETF 8,026,913 4,445,339

For the period ended October 31, 2016, the cost of in-kind purchases and proceeds from in-kind sales for each Fund were as follows:

PURCHASES SALES ----------- ----------- First Trust RiverFront Dynamic Asia Pacific ETF $25,656,749 $ -- First Trust RiverFront Dynamic Developed International ETF 29,852,678 5,184,678 First Trust RiverFront Dynamic Europe ETF 5,234,879 5,225,677 First Trust RiverFront Dynamic Emerging Markets ETF 1,338,582 --

Page 43 -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (CONTINUED) -------------------------------------------------------------------------------- FIRST TRUST EXCHANGE-TRADED FUND III OCTOBER 31, 2016 5. DERIVATIVE TRANSACTIONS The following table presents the type of derivatives held by each Fund at October 31, 2016, the primary underlying risk exposure and location of these instruments as presented on the Statements of Assets and Liabilities.

ASSET DERIVATIVES LIABILITY DERIVATIVES ---------------------------- ---------------------------- STATEMENTS STATEMENTS OF ASSETS AND OF ASSETS AND DERIVATIVE RISK LIABILITIES LIABILITIES INSTRUMENT EXPOSURE LOCATION VALUE LOCATION VALUE ------------ ------------ --------------- ----------- --------------- ----------- RFAP Forward Currency Unrealized $ -- Unrealized $ -- foreign Risk appreciation depreciation currency on forward on forward contracts foreign foreign currency currency contracts contracts RFDI Forward Currency Unrealized $ -- Unrealized $ 40,087 foreign Risk appreciation depreciation currency on forward on forward contracts foreign foreign currency currency contracts contracts RFEU Forward Currency Unrealized $ -- Unrealized $ 57,751 foreign Risk appreciation depreciation currency on forward on forward contracts foreign foreign currency currency contracts contracts

The following table presents the amount of net realized gain (loss) and change in net unrealized appreciation (depreciation) recognized for the period ended October 31, 2016, on derivative instruments, as well as the primary underlying risk exposure associated with each instrument.

STATEMENTS OF OPERATIONS LOCATION RFAP RFDI RFEU ------------------------------------------------------------------------------------------- CURRENCY RISK EXPOSURE Net realized gain (loss) on forward foreign currency contracts $(696,976) $ 427,032 $ 844,297 Net change in unrealized appreciation (depreciation) on forward foreign currency contracts -- (40,087) (57,751)

During the period ended October 31, 2016, the notional values of forward foreign currency contracts opened and closed were as follows: Opened Closed -------------- -------------- RFAP $ 76,714,819 $ 76,714,819 RFDI 140,087,381 133,187,381 RFEU 165,723,315 155,778,315 The Funds do not have the right to offset financial assets and liabilities related to forward foreign currency contracts on the Statements of Assets and Liabilities. 6. CREATIONS, REDEMPTIONS AND TRANSACTION FEES Shares are created and redeemed by the Funds only in Creation Unit size aggregations of 50,000 shares in transactions with broker-dealers or large institutional investors that have entered into a participation agreement (an "Authorized Participant"). In order to purchase Creation Units of each Fund, an Authorized Participant must deposit (i) a designated portfolio of securities and Page 44 -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (CONTINUED) -------------------------------------------------------------------------------- FIRST TRUST EXCHANGE-TRADED FUND III OCTOBER 31, 2016 other instruments determined by First Trust (the "Deposit Securities") and generally make or receive a cash payment referred to as the "Cash Component," which is an amount equal to the difference between the NAV of the Fund shares (per Creation Unit aggregations) and the market value of the Deposit Securities, and/or (ii) cash in lieu of all or a portion of the Deposit Securities. If the Cash Component is a positive number (i.e., the NAV per Creation Unit Aggregation exceeds the Deposit Amount), the Authorized Participant will deliver the Cash Component. If the Cash Component is a negative number (i.e., the NAV per Creation Unit Aggregation is less than the Deposit Amount), the Authorized Participant will receive the Cash Component. Authorized Participants purchasing Creation Units must pay to BBH, as transfer agent, a creation transaction fee (the "Creation Transaction Fee") regardless of the number of Creation Units purchased in the transaction. The Creation Transaction Fee may vary and is based on the composition of the securities included in the respective Fund's portfolio and the countries in which the transactions are settled. The Creation Transaction Fee may increase or decrease as each Fund's portfolio is adjusted to conform to changes in the composition of the securities included in the Fund's portfolio and the countries in which the transaction settled. The price for each Creation Unit will equal the daily NAV per share times the number of shares in a Creation Unit plus the fees described above and, if applicable, any operational processing and brokerage costs, transfer fees or stamp taxes. When a Fund permits an Authorized Participant to substitute cash or a different security in lieu of depositing one or more of the requisite Deposit Securities, the Authorized Participant may also be assessed an amount to cover the cost of purchasing the Deposit Securities and/or disposing of the substituted securities, including operational processing and brokerage costs, transfer fees, stamp taxes, and part or all of the spread between the expected bid and offer side of the market related to such Deposit Securities and/or substitute securities. Authorized Participants redeeming Creation Units must pay to BBH, as transfer agent, a redemption transaction fee (the "Redemption Transaction Fee"), regardless of the number of Creation Units redeemed in the transaction. The Redemption Transaction Fee may vary and is based on the composition of the securities included in the respective Fund's portfolio and the countries in which the transactions are settled. Each Fund reserves the right to effect redemptions in cash. An Authorized Participant may request cash redemption in lieu of securities; however, a Fund may, in its discretion, reject any such request. The standard Creation Transaction Fees and the Redemption Transaction Fees for each Fund are as follows:

Creation Redemption Transaction Fees Transaction Fees ------------------ ------------------ First Trust RiverFront Dynamic Asia Pacific ETF $ 2,000 $ 2,000 First Trust RiverFront Dynamic Developed International ETF 6,200 6,200 First Trust RiverFront Dynamic Europe ETF 4,100 4,100 First Trust RiverFront Dynamic Emerging Markets ETF 5,000 5,000

7. 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 February 28, 2018. 8. 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. 9. SUBSEQUENT EVENTS Management has evaluated the impact of all subsequent events to the Funds through the date the financial statements were issued, and has determined there were no subsequent events requiring recognition or disclosure in the financial statements. Page 45 -------------------------------------------------------------------------------- REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM -------------------------------------------------------------------------------- TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF FIRST TRUST RIVERFRONT DYNAMIC ASIA PACIFIC ETF, FIRST TRUST RIVERFRONT DYNAMIC DEVELOPED INTERNATIONAL ETF, FIRST TRUST RIVERFRONT DYNAMIC EUROPE ETF, AND FIRST TRUST RIVERFRONT DYNAMIC EMERGING MARKETS ETF: We have audited the accompanying statements of assets and liabilities, including the portfolio of investments, of First Trust RiverFront Dynamic Asia Pacific ETF, First Trust RiverFront Dynamic Developed International ETF, First Trust RiverFront Dynamic Europe ETF, and First Trust RiverFront Dynamic Emerging Markets ETF (the "Funds"), each a series of the First Trust Exchange-Traded Fund III, as of October 31, 2016, and the related statements of operations and changes in net assets and the financial highlights for each of the periods presented. These financial statements and financial highlights are the responsibility of the Funds' management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Funds are not required to have, nor were we engaged to perform, an audit of their internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Funds' internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of October 31, 2016, by correspondence with the Funds' custodian and brokers; where replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of each of the funds listed above included in First Trust Exchange-Traded Fund III as of October 31, 2016, the results of their operations, changes in their net assets, and the financial highlights for each of the periods presented, in conformity with accounting principles generally accepted in the United States of America. /s/ Deloitte & Touche LLP Chicago, Illinois December 22, 2016 Page 46 -------------------------------------------------------------------------------- ADDITIONAL INFORMATION -------------------------------------------------------------------------------- FIRST TRUST EXCHANGE-TRADED FUND III OCTOBER 31, 2016 (UNAUDITED) PROXY VOTING POLICIES AND PROCEDURES A description of the policies and procedures that the Trust uses to determine how to vote proxies and information on how each Fund voted proxies relating to portfolio investments during the most recent 12-month period ended June 30 is available (1) without charge, upon request, by calling (800) 988-5891; (2) on the Funds' website located at http://www.ftportfolios.com; and (3) on the Securities and Exchange Commission's ("SEC") website located at http://www.sec.gov. PORTFOLIO HOLDINGS The Trust files its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The Trust's Form N-Qs are available (1) by calling (800) 988-5891; (2) on the Funds' website located at http://www.ftportfolios.com; (3) on the SEC's website at http://www.sec.gov; and (4) for review and copying at the SEC's Public Reference Room ("PRR") in Washington, DC. Information regarding the operation of the PRR may be obtained by calling (800) SEC-0330. FEDERAL TAX INFORMATION For the taxable year ended October 31, 2016, the following percentages of income dividend paid by the Funds qualify for the dividends received deduction available to corporations: Dividends Received Deduction ---------------- First Trust RiverFront Dynamic Asia Pacific ETF 0.00% First Trust RiverFront Dynamic Developed International ETF 0.00% First Trust RiverFront Dynamic Europe ETF 0.00% First Trust RiverFront Dynamic Emerging Markets ETF 0.00% For the taxable year ended October 31, 2016, the following percentages of income dividend paid by the Funds is hereby designated as qualified dividend income: Qualified Dividend Income ---------------- First Trust RiverFront Dynamic Asia Pacific ETF 100.00% First Trust RiverFront Dynamic Developed International ETF 100.00% First Trust RiverFront Dynamic Europe ETF 19.27% First Trust RiverFront Dynamic Emerging Markets ETF 100.00% The following Funds met the requirements of Section 853 of the Internal Revenue Code and elects to pass through to it's shareholders credit for foreign taxes paid. The total amount 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 RiverFront Dynamic Asia Pacific ETF $411,491 $0.82 $18,985 $0.04 First Trust RiverFront Dynamic Developed International ETF 590,474 1.18 58,276 0.12 First Trust RiverFront Dynamic Europe ETF 641,230 1.28 71,321 0.14 First Trust RiverFront Dynamic Emerging Markets ETF 89,547 0.90 12,016 0.12

The foreign taxes paid will be reported to shareholders on Form 1099-DIV which will be sent to shareholders a shortly after calendar year end. Gross foreign income and foreign taxes paid will be posted on the FTP website and disclosed in the tax letter. Page 47 -------------------------------------------------------------------------------- ADDITIONAL INFORMATION (CONTINUED) -------------------------------------------------------------------------------- FIRST TRUST EXCHANGE-TRADED FUND III OCTOBER 31, 2016 (UNAUDITED) RISK CONSIDERATIONS You could lose money by investing in the Funds. An investment in one of the Funds is not a deposit of a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other governmental agency. There can be no assurance that the Fund's investment objective will be achieved. The First Trust RiverFront Dynamic Asia Pacific ETF is more susceptible to the economic, market, regulatory, political, natural disasters and local risks of the Asia Pacific region than a fund that is more geographically diversified. The region has historically been highly dependent on the global trade, with nations taking strong roles in both the importing and exporting of goods; such a relationship created a risk with this dependence on global growth. The respective stock markets tend to have a larger prevalence of smaller companies that are inherently more volatile and less liquid than larger companies. Varying levels of accounting and disclosure standards, restrictions on foreign ownership, minority ownership rights and corporate governance standards are also common for the region. The Funds may invest in BDCs. Investments in BDCs may be subject to a high degree of risk. A BDC's portfolio typically will include a substantial amount of securities purchased in private placements and, as a result, its portfolio may carry risks similar to those of a private equity or private debt fund. Securities that are not publicly registered may be difficult to value and may be difficult to sell at a price representative of their intrinsic value. In addition, investments in BDCs are subject to various other risks, including management's ability to meet the BDC's investment objective and to manage the BDC's portfolio when the underlying securities are redeemed or sold during periods of market turmoil and as investors' perceptions regarding a BDC or its underlying investments change. BDC shares are not redeemable at the option of the BDC shareholder and they may trade in the secondary market at a discount to their net asset value. BDCs may also employ the use of leverage in their portfolios through borrowings or the issuance of preferred stock. Such use of leverage may subject the BDC to increased risks, including the likelihood of increased volatility and the possibility that the BDC's common share income may fall if the interest rate on any borrowings rises. The Fund will indirectly bear its proportionate share of any management and other operating expenses, and of any performance based or incentive fees, charged by the BDCs in which it invests, in addition to the expenses paid by the Fund. The Funds may, under certain circumstances, effect creations and redemptions, in whole or in part, for cash, rather than in-kind, because of the nature of such Fund's underlying investments. As a result, an investment in such Fund may be less tax efficient than it would be through more frequent creations and redemptions in-kind. Each Fund bears the risk that the counterparty to the Fund's forward foreign currency exchange contracts and currency spot transactions may default on its obligations or otherwise fail to honor its obligations. If a counterparty defaults on its payment obligations, the Fund will lose money and the value of an investment in Fund shares may decrease. In addition, each Fund may engage in such investment transactions with a limited number of counterparties. Credit risk is the risk that an issuer of a security will be unable or unwilling to make dividend 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. Each Fund will hold investments that are denominated in non-U.S. currencies, or in securities that provide exposure to such currencies, currency exchange rates or interest rates denominated in such currencies. Changes in currency exchange rates and the relative value of non-U.S. currencies will affect the value of the Fund's investments and the value of Fund shares. Changes in currency exchange rates also may affect the value of interest earned and gains and losses realized on the sale of securities. Currency exchange rates can be very volatile and can change quickly and unpredictably. As a result, the value of an investment in the Fund may change quickly and without warning and you may lose money. Because each Fund's net asset value is determined on the basis of U.S. dollars and the Fund invests in non-U.S. dollar-denominated securities, you may lose money if the local currency of a foreign market depreciates against the U.S. dollar, even if the local currency value of the Fund's holdings goes up. Each Fund may hedge certain of its non-U.S. dollar holdings. Depositary receipts may be less liquid than the underlying shares in their primary trading market. Any distributions paid to the holders of depositary receipts are usually subject to a fee charged by the depositary. Holders of depositary receipts may have limited voting rights, and investment restrictions in certain countries may adversely impact the value of depositary receipts because such restrictions may limit the ability to convert shares into depositary receipts and vice versa. Such restrictions may cause shares of the underlying issuer to trade at a discount or premium to the market price of the depositary receipts. Page 48 -------------------------------------------------------------------------------- ADDITIONAL INFORMATION (CONTINUED) -------------------------------------------------------------------------------- FIRST TRUST EXCHANGE-TRADED FUND III OCTOBER 31, 2016 (UNAUDITED) The use of forward contracts and currency spot transactions can lead to 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 derivatives. In addition to the above risks, each Fund is "deemed" to have entered into an ISDA Master Agreement (the "ISDA Master Agreement"), a standard umbrella relationship-framework agreement between two parties under which one or more individual derivatives transactions are entered. While most ISDA Master Agreements are highly customized and heavily negotiated, a "deemed" ISDA Master Agreement has predetermined elections. Therefore, the Fund may forego certain protections they would have been afforded had they negotiated the ISDA Master Agreements, such as terms related to choice of law, events of default, termination events, payments on early termination, and calculation agents. Each Fund will utilize a dynamic currency hedging strategy and therefore may have lower returns than an equivalent non-currency hedged investment when the component currencies are rising relative to the U.S. dollar. As such, contracts to sell foreign currency will generally be expected to limit any potential gain that might be realized by the Fund if the value of the hedged currency increases. In addition, the use of currency hedging will not necessarily eliminate exposure to all currency fluctuations. Hedging against a decline in the value of a currency does not eliminate fluctuations in the value of a portfolio security traded in that currency or prevent a loss if the value of the security declines. Moreover, it may not be possible for a Fund to hedge against a devaluation that is so generally anticipated that the Fund is not able to contract to sell the currency at a price above the devaluation level it anticipates. Investments in securities and instruments traded in developing or emerging markets or that provide exposure to such securities or markets can involve additional risks relating to political, economic or regulatory conditions not associated with investments in U.S. securities and instruments or investments in more developed international markets. Emerging market governments may, without prior warning, impose capital controls on the ability to transfer currency, securities or other assets. Each Fund's ability to access certain developing or emerging markets also may be limited due to a variety of factors, including currency convertibility issues. Such conditions may impact the ability of each Fund to buy, sell or otherwise transfer securities, cause each Fund's returns to differ from those available to domestic investors, adversely affect the trading market and price for Fund shares, and cause the Fund to decline in value. Because the Funds invest in equity securities, the value of each Fund's shares will fluctuate with changes in the value of its 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 issuer occur. In addition, common stock prices may be particularly sensitive to rising interest rates, as the cost of the capital rises and borrowing costs increase. Investments in a single region, even though representing a number of different countries within the region, may be affected by common economic forces and other factors. The First Trust RiverFront Dynamic Europe ETF is subject to greater risks of adverse events which occur in the European region and may experience greater volatility than a fund that is more broadly diversified geographically. Political or economic disruptions in European countries, even in countries in which the Fund is not invested, may adversely affect security values and thus the Fund's holdings. A significant number of countries in Europe are member states in the European Union (the "EU"), and the member states no longer control their own monetary policies by directing independent interest rates for their currencies. In these member states, the authority to direct monetary policies, including money supply and official interest rates for the Euro, is exercised by the European Central Bank. Furthermore, the European sovereign debt crisis has had, and continues to have, a significant negative impact on the economies of certain European countries and their future economic outlooks. Forward foreign currency exchange contracts involve certain risks, including the risk of failure of the counterparty to perform its obligations under the contract and the risk that the use of forward contracts may not serve as a complete hedge because of an imperfect correlation between movements in the prices of the contracts and the prices of the currencies hedged. Forward foreign currency exchange contracts may limit any potential gain that might result should the value of the underlying currencies increase. In addition, because forward currency exchange contracts are privately negotiated transactions, there can be no assurance that the Fund will have flexibility to roll-over a forward currency exchange contract upon its expiration if it desires to do so. Hedging against a decline in the value of a currency does not eliminate fluctuations in the value of a portfolio security traded in that currency or prevent a loss if the value of the security declines. Each Fund invests in equity securities that may have limited liquidity despite being listed on a securities exchange. Equity securities that are less liquid or that trade less can be more difficult or more costly to buy, or to sell, compared to other more liquid or active investments. This liquidity risk is a factor of the trading volume of a particular security, as well as the size and liquidity of the market for such security. The prices at which the equity securities are held in the Funds will be adversely affected if trading markets for the equity securities are limited or absent. Page 49 -------------------------------------------------------------------------------- ADDITIONAL INFORMATION (CONTINUED) -------------------------------------------------------------------------------- FIRST TRUST EXCHANGE-TRADED FUND III OCTOBER 31, 2016 (UNAUDITED) The Funds are subject to management risk because it is an actively managed portfolio. In managing each Fund's investment portfolio, the Sub-Advisor will apply investment techniques and risk analyses that may not have the desired result. There can be no guarantee that each Fund will meet its investment objective. Market risk is the risk that a particular security owned by the Fund or shares of the Fund in general, may fall in value. Securities are subject to market fluctuations caused by such factors as economic, political, regulatory or market developments, changes in interest rates and perceived trends in securities prices. Overall securities values could decline generally or could underperform other investments. The Funds currently have fewer assets than larger funds, and like other relatively new funds, large inflows and outflows may impact each Fund's market exposure for limited periods of time. This impact may be positive or negative, depending on the direction of market movement during the period affected. Also, during the initial invest-up period, the Fund may depart from its principal investment strategies and invest a larger amount or all of its assets in cash equivalents or it may hold cash. Each Fund is classified as "non-diversified" under the 1940 Act. As a result, each Fund is only limited as to the percentage of its assets which may be invested in the securities of any one issuer by the diversification requirements imposed by the Internal Revenue Code of 1986, as amended. Each Fund may invest a relatively high percentage of its assets in a limited number of issuers. As a result, each Fund may be more susceptible to a single adverse economic or regulatory occurrence affecting one or more of these issuers, experience increased volatility and be highly concentrated in certain 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, lack of liquidity, currency exchange rates, excessive taxation, government seizure of assets, different legal or accounting standards, and less government supervision and regulation of exchanges in foreign countries. High portfolio turnover may result in each Fund paying higher levels of transaction costs and generating greater tax liabilities for shareholders. Portfolio turnover risk may cause each Fund's performance to be less than expected. Preferred stocks combine some of the characteristics of both common stocks and bonds. Preferred stocks are typically subordinated to bonds and other debt instruments in a company's capital structure in terms of priority to corporate income and therefore will be subject to greater credit risk than those debt instruments. Preferred stocks are also subject to credit risk, interest rate risk and income risk. In addition to risks related to investments in real estate generally, investing in REITs involves certain other risks related to their structure and focus, which include, but are not limited to, dependency upon management skills, limited diversification, the risks of locating and managing financing for projects, heavy cash flow dependency, possible default by borrowers, the costs and potential losses of self-liquidation of one or more holdings, the risk of a possible lack of mortgage funds and associated interest rate risks, overbuilding, property vacancies, increases in property taxes and operating expenses, changes in zoning laws, losses due to environmental damages, changes in neighborhood values and appeal to purchases, the possibility of failing to maintain exemptions from registration under the 1940 Act and, in many cases, relatively small market capitalization, which may result in less market liquidity and greater price volatility. REITs are also subject to the risk that the real estate market may experience an economic downturn generally, which may have a material effect on the real estate in which the REITs invest and their underlying portfolio securities. Each Fund may invest in small- and mid-capitalization companies. Such companies may be more vulnerable to adverse general market or economic developments, and their securities may be less liquid and may experience greater price volatility than larger, more established companies as a result of several factors, including limited trading volumes, products or financial resources, management inexperience and less publicly available information. Accordingly, such companies are generally subject to greater market risk than larger, more established companies. NOT FDIC INSURED NOT BANK GUARANTEED MAY LOSE VALUE Page 50 -------------------------------------------------------------------------------- ADDITIONAL INFORMATION (CONTINUED) -------------------------------------------------------------------------------- FIRST TRUST EXCHANGE-TRADED FUND III OCTOBER 31, 2016 (UNAUDITED) ADVISORY AND SUB-ADVISORY AGREEMENTS BOARD CONSIDERATIONS REGARDING APPROVAL OF INVESTMENT MANAGEMENT AND INVESTMENT SUB-ADVISORY AGREEMENTS The Board of Trustees (the "Board") of First Trust Exchange-Traded Fund III (the "Trust"), including the Independent Trustees, unanimously approved the Investment Management Agreement (the "Advisory Agreement") with First Trust Advisors L.P. ("First Trust" or the "Advisor") on behalf of First Trust RiverFront Dynamic Emerging Markets ETF (the "Fund") and the Investment Sub-Advisory Agreement (the "Sub-Advisory Agreement" and together with the Advisory Agreement, the "Agreements") among the Trust, on behalf of the Fund, the Advisor and RiverFront Investment Group, LLC (the "Sub-Advisor"), for an initial two-year term at a meeting held on February 1, 2016. The Board of Trustees determined that the Agreements are in the best interests of the Fund in light of the extent and quality of services expected to be provided and such other matters as the Board considered to be relevant in the exercise of its reasonable business judgment. To reach this determination, the Board considered its duties under the Investment Company Act of 1940, as amended (the "1940 Act"), as well as under the general principles of state law in reviewing and approving advisory contracts; the requirements of the 1940 Act in such matters; the fiduciary duty of investment advisors with respect to advisory agreements and compensation; the standards used by courts in determining whether investment company boards have fulfilled their duties; and the factors to be considered by the Board in voting on such agreements. To assist the Board in its evaluation of the Agreements, the Independent Trustees received a separate report from each of the Advisor and the Sub-Advisor in advance of the Board meeting responding to a request for information provided on behalf of the Independent Trustees that, among other things, outlined the services to be provided by the Advisor and the Sub-Advisor to the Fund (including the relevant personnel responsible for these services and their experience); the proposed unitary fee structure for the Fund as compared to fees charged by advisors to other comparable exchange-traded funds ("ETFs"), and as compared to fees charged to other ETFs managed by First Trust; the estimated expenses to be incurred in providing services to the Fund and the potential for economies of scale, if any; financial data on the Advisor and the Sub-Advisor; fall out benefits to First Trust and its affiliates, First Trust Portfolios L.P. ("FTP") and the Sub-Advisor; and a summary of the Advisor's and Sub-Advisor's compliance programs. The Independent Trustees also met separately with their independent legal counsel to discuss the information provided by the Advisor and the Sub-Advisor. The Board applied its business judgment to determine whether the arrangements between the Trust and First Trust and among the Trust, the Advisor and the Sub-Advisor are reasonable business arrangements from the Fund's perspective as well as from the perspective of shareholders. In evaluating whether to approve the Agreements for the Fund, the Board considered the nature, extent and quality of services to be provided by the Advisor and the Sub-Advisor under the Agreements and considered that the Advisor's employees provide management services to other ETFs and to other investment companies in the First Trust fund complex with diligence and care. The Board considered that the Fund is not designed to track the performance of an index and will employ an advisor/sub-advisor management structure. With respect to the Advisory Agreement, the Board considered that First Trust will be responsible for the overall management and administration of the Fund and reviewed the services to be provided by First Trust to the Fund, including trade execution and oversight of the Sub-Advisor. The Board considered the compliance program that had been developed by First Trust and considered that it includes a robust program for monitoring the Sub-Advisor's compliance with the 1940 Act and the Fund's investment objective and policies. It also considered the efforts expended by First Trust in organizing the Trust and in arranging for other entities to provide services to the Fund. With respect to the Sub-Advisory Agreement, the Board noted the background and experience of the Sub-Advisor's portfolio management team and the Sub-Advisor's investment style. At the meeting, the Trustees received a presentation from representatives of the Sub-Advisor, and were able to ask questions about the Sub-Advisor and the Sub-Advisor's proposed investment strategies for the Fund. Since the Fund had yet to commence investment operations, the Board could not consider the historical investment performance of the Fund. In light of the information presented and the considerations made, the Board concluded that the nature, extent and quality of services to be provided to the Fund by the Advisor and the Sub-Advisor under the Agreements are expected to be satisfactory. The Board reviewed information regarding the proposed unitary fee structure for the Fund. The Board noted, that under the unitary fee arrangement, the Fund would pay First Trust a unitary fee equal to an annual rate of 0.95% of its average daily net assets. The Board also noted that, from the unitary fee for the Fund, First Trust would pay the Sub-Advisor a sub-advisory fee equal to 0.35% of the Fund's average daily net assets. The Board also noted that First Trust would be responsible for the Fund's ordinary operating expenses, including the cost of transfer agency, sub-advisory, custody, fund administration, legal, audit and other services and licenses, if any, but excluding the fee payments under the Advisory Agreement, interest, taxes, brokerage commissions and other expenses connected with the execution of portfolio transactions (such as dividend and distribution expenses from securities sold short and/or other investment-related costs), distribution and service fees payable pursuant to a Rule 12b-1 plan, if any, and extraordinary expenses. The Board reviewed information provided by Management Practice, Inc. ("MPI"), an independent source, as well as by First Trust, for the Fund on the advisory fees and expense ratios of other comparable ETFs. The Board noted that the Fund's expense ratio under its proposed unitary fee was above the median net expense ratio of its MPI peer group and above the total net expense ratios of three of the four ETFs in Page 51 -------------------------------------------------------------------------------- ADDITIONAL INFORMATION (CONTINUED) -------------------------------------------------------------------------------- FIRST TRUST EXCHANGE-TRADED FUND III OCTOBER 31, 2016 (UNAUDITED) the First Trust peer group. The Board also noted that none of the MPI peer funds for the Fund were actively managed and considered the Advisor's statement about the limitations in creating a relevant peer group for the Fund because there are currently no other actively managed currency hedged international ETFs. The Board compared the Fund's unitary fee to the total expense ratios (after fee waivers and/or expense reimbursements, if any) of other First Trust ETFs, including First Trust ETFs that pay a unitary fee, and to the advisory fees charged by First Trust to other advisory clients, noting the Advisor's statement that it does not manage any other products with similar investment objectives and policies to the Fund. The Board also considered information provided by the Advisor on the advisory fees and sub-advisory fees (if any) charged by all actively-managed ETFs. In light of the information considered and the nature, extent and quality of services expected to be provided to the Fund under the Agreements, the Board determined that the proposed unitary fee for the Fund was fair and reasonable. The Board noted that the proposed unitary fee for the Fund was not structured to pass the benefits of any economies of scale on to shareholders as the Fund's assets grow. The Board noted that any reduction in fixed costs associated with the management of the Fund would benefit the Advisor and the Sub-Advisor, but that a unitary fee structure provides a level of certainty in expenses for the Fund. The Board noted that First Trust has continued to invest in personnel and infrastructure for the First Trust fund complex. The Board took the costs to be borne by First Trust in connection with its services to be performed for the Fund under the Advisory Agreement into consideration and noted that First Trust was unable to estimate the profitability of the Advisory Agreement to First Trust. The Board also considered the Sub-Advisor's statement about estimated profitability and that the Sub-Advisor would be paid by the Advisor from the Fund's unitary fee. The Board considered that the sub-advisory fee rate was negotiated at arm's length between the Advisor and the Sub-Advisor, an unaffiliated third party. The Board considered fall-out benefits described by the Advisor that may be realized from its and FTP's relationship with the Fund and First Trust's compensation for fund reporting services pursuant to a separate Fund Reporting Services Agreement, which would be included under the unitary fee for the Fund. The Board also noted that the Advisor will not utilize soft dollars in connection with its management of the Fund's portfolio. The Board also considered fall-out benefits described by the Sub-Advisor. Based on all the information considered and the conclusions reached, the Board, including the Independent Trustees, unanimously determined that the terms of the Agreements are fair and reasonable and that the approval of the Agreements is in the best interests of the Fund. No single factor was determinative in the Board's analysis. Page 52 -------------------------------------------------------------------------------- BOARD OF TRUSTEES AND OFFICERS -------------------------------------------------------------------------------- FIRST TRUST EXCHANGE-TRADED FUND III OCTOBER 31, 2016 (UNAUDITED) The Trust's respective statement of additional information includes additional information about the Trustees and is available, without charge, upon request, by calling (800) 988-5891.

NUMBER OF OTHER PORTFOLIOS IN TRUSTEESHIPS OR TERM OF OFFICE THE FIRST TRUST DIRECTORSHIPS NAME, ADDRESS, AND YEAR FIRST FUND COMPLEX HELD BY TRUSTEE DATE OF BIRTH AND ELECTED OR PRINCIPAL OCCUPATIONS OVERSEEN BY DURING PAST POSITION WITH THE TRUST APPOINTED DURING PAST 5 YEARS TRUSTEE 5 YEARS ------------------------------------------------------------------------------------------------------------------------------------ INDEPENDENT TRUSTEES ------------------------------------------------------------------------------------------------------------------------------------ Richard E. Erickson, Trustee o Indefinite Term Physician; President, Wheaton Orthopedics; 137 None c/o First Trust Advisors L.P. Limited Partner, Gundersen Real Estate 120 E. Liberty Drive, o Since Inception Limited Partnership; Member, Sportsmed Suite 400 LLC (April 2007 to November 2015) Wheaton, IL 60187 D.O.B.: 04/51 Thomas R. Kadlec, Trustee o Indefinite Term President ADM Investor Services, Inc. 137 Director of ADM c/o First Trust Advisors L.P. (Futures Commission Merchant) Investor Services, 120 E. Liberty Drive, o Since Inception Inc., ADM Investor Suite 400 Services Wheaton, IL 60187 International and D.O.B.: 11/57 Futures Industry Association Robert F. Keith, Trustee o Indefinite Term President Hibs Enterprises (Financial and 137 Director of Trust c/o First Trust Advisors L.P. Management Consulting) Company of 120 E. Liberty Drive, o Since Inception Illinois Suite 400 Wheaton, IL 60187 D.O.B.: 11/56 Niel B. Nielson, Trustee o Indefinite Term Managing Director and Chief Operating 137 Director of c/o First Trust Advisors L.P. Officer (January 2015 to Present), Pelita Covenant 120 E. Liberty Drive, o Since Inception Harapan Educational Foundation (Educational Transport, Inc. Suite 400 Products and Services); President and Chief (May 2003 to Wheaton, IL 60187 Executive Officer (June 2012 to September May 2014) D.O.B.: 03/54 2014), Servant Interactive LLC (Educational Products and Services); President and Chief Executive Officer (June 2012 to September 2014), Dew Learning LLC (Educational Products and Services); President (June 2002 to June 2012), Covenant College ------------------------------------------------------------------------------------------------------------------------------------ INTERESTED TRUSTEE ------------------------------------------------------------------------------------------------------------------------------------ James A. Bowen(1), Trustee and o Indefinite Term Chief Executive Officer First Trust Advisors 137 None Chairman of the Board L.P. and First Trust Portfolios L.P.; 120 E. Liberty Drive, o Since Inception Chairman of the Board of Directors, BondWave Suite 400 LLC (Software Development Company) and Wheaton, IL 60187 Stonebridge Advisors LLC (Investment D.O.B.: 09/55 Advisor)

----------------------------- (1) Mr. Bowen is deemed an "interested person" of the Trust due to his position as CEO of First Trust Advisors L.P., investment advisor of the Trust. Page 53 -------------------------------------------------------------------------------- BOARD OF TRUSTEES AND OFFICERS (CONTINUED) -------------------------------------------------------------------------------- FIRST TRUST EXCHANGE-TRADED FUND III OCTOBER 31, 2016 (UNAUDITED)

POSITION AND TERM OF OFFICE NAME, ADDRESS OFFICES AND LENGTH OF PRINCIPAL OCCUPATIONS AND DATE OF BIRTH WITH TRUST SERVICE DURING PAST 5 YEARS ------------------------------------------------------------------------------------------------------------------------------------ OFFICERS(2) ------------------------------------------------------------------------------------------------------------------------------------ James M. Dykas President and Chief o Indefinite Term Managing Director and Chief Financial Officer 120 E. Liberty Drive, Executive Officer (January 2016 to Present), Controller (January 2011 Suite 400 o Since January 2016 to January 2016), Senior Vice President (April 2007 Wheaton, IL 60187 to January 2016), First Trust Advisors L.P. and First D.O.B.: 01/66 Trust Portfolios L.P.; Chief Financial Officer, BondWave LLC (Software Development Company) (January 2016 to Present); and Stonebridge Advisors LLC (Investment Advisor) (January 2016 to Present) Donald P. Swade Treasurer, Chief Financial o Indefinite Term Senior Vice President (July 2016 to Present), Vice 120 E. Liberty Drive, Officer and Chief President (April 2012 to July 2016), First Trust Suite 400 Accounting Officer o Since January 2016 Advisors L.P. and First Trust Portfolios L.P., Vice Wheaton, IL 60187 President (September 2006 to April 2012), D.O.B.: 08/72 Guggenheim Funds Investment Advisors, LLC/Claymore Securities, Inc. W. Scott Jardine Secretary and Chief o Indefinite Term General Counsel, First Trust Advisors L.P. and First 120 E. Liberty Drive, Legal Officer Trust Portfolios L.P.; Secretary and General Counsel, Suite 400 o Since Inception BondWave LLC; and Secretary of Stonebridge Wheaton, IL 60187 Advisors LLC D.O.B.: 05/60 Daniel J. Lindquist Vice President o Indefinite Term Managing Director (July 2012 to Present), Senior 120 E. Liberty Drive, Vice President (September 2005 to July 2012), First Suite 400 o Since Inception Trust Advisors L.P. and First Trust Portfolios L.P. Wheaton, IL 60187 D.O.B: 02/70 Kristi A. Maher Chief Compliance Officer o Indefinite Term Deputy General Counsel, First Trust Advisors L.P. 120 E. Liberty Drive, and Assistant Secretary and First Trust Portfolios L.P. Suite 400 o Since Inception Wheaton, IL 60187 D.O.B.: 12/66 Roger F. Testin Vice President o Indefinite Term Senior Vice President, First Trust Advisors L.P. 120 E. Liberty Drive, and First Trust Portfolios L.P. Suite 400 o Since Inception Wheaton, IL 60187 D.O.B.: 06/66 Stan Ueland Vice President o Indefinite Term Senior Vice President (September 2012 to Present), 120 E. Liberty Drive, Vice President (August 2005 to September 2012), Suite 400 o Since Inception First Trust Advisors L.P. and First Trust Wheaton, IL 60187 Portfolios L.P. D.O.B.: 11/70

----------------------------- (2) The term "officer" means the president, vice president, secretary, treasurer, controller or any other officer who performs a policy making function. Page 54 -------------------------------------------------------------------------------- PRIVACY POLICY -------------------------------------------------------------------------------- FIRST TRUST EXCHANGE-TRADED FUND III OCTOBER 31, 2016 (UNAUDITED) PRIVACY POLICY First Trust values our relationship with you and considers your privacy an important priority in maintaining that relationship. We are committed to protecting the security and confidentiality of your personal information. SOURCES OF INFORMATION We collect nonpublic personal information about you from the following sources: o Information we receive from you and your broker-dealer, investment advisor or financial representative through interviews, applications, agreements or other forms; o Information about your transactions with us, our affiliates or others; o Information we receive from your inquiries by mail, e-mail or telephone; and o Information we collect on our website through the use of "cookies". For example, we may identify the pages on our website that your browser requests or visits. INFORMATION COLLECTED The type of data we collect may include your name, address, social security number, age, financial status, assets, income, tax information, retirement and estate plan information, transaction history, account balance, payment history, investment objectives, marital status, family relationships and other personal information. DISCLOSURE OF INFORMATION We do not disclose any nonpublic personal information about our customers or former customers to anyone, except as permitted by law. In addition to using this information to verify your identity (as required under law), the permitted uses may also include the disclosure of such information to unaffiliated companies for the following reasons: o In order to provide you with products and services and to effect transactions that you request or authorize, we may disclose your personal information as described above to unaffiliated financial service providers and other companies that perform administrative or other services on our behalf, such as transfer agents, custodians and trustees, or that assist us in the distribution of investor materials such as trustees, banks, financial representatives, proxy services, solicitors and printers. o We may release information we have about you if you direct us to do so, if we are compelled by law to do so, or in other legally limited circumstances (for example to protect your account from fraud). In addition, in order to alert you to our other financial products and services, we may share your personal information within First Trust. PRIVACY ONLINE We allow third-party companies, including AddThis (a social media sharing service), to collect certain anonymous information when you visit our website. These companies may use non-personally identifiable information during your visits to this and other websites in order to provide advertisements about goods and services likely to be of greater interest to you. These companies typically use a cookie, third party web beacon or pixel tags, to collect this information. To learn more about this behavioral advertising practice, you can visit www.networkadvertising.org. CONFIDENTIALITY AND SECURITY With regard to our internal security procedures, First Trust restricts access to your nonpublic personal information to those First Trust employees who need to know that information to provide products or services to you. We maintain physical, electronic and procedural safeguards to protect your nonpublic personal information. POLICY UPDATES AND INQUIRIES As required by federal law, we will notify you of our privacy policy annually. We reserve the right to modify this policy at any time, however, if we do change it, we will tell you promptly. For questions about our policy, or for additional copies of this notice, please go to www.ftportfolios.com, or contact us at 1-800-621-1675 (First Trust Portfolios) or 1-800-222-6822 (First Trust Advisors). March 2016 Page 55 This page intentionally left blank. FIRST TRUST First Trust Exchange-Traded Fund III INVESTMENT ADVISOR First Trust Advisors L.P. 120 E. Liberty Drive, Suite 400 Wheaton, IL 60187 INVESTMENT SUB-ADVISOR RiverFront Investment Group LLC 1214 E. Cary Street Richmond, VA 23219 ADMINISTRATOR, CUSTODIAN FUND ACCOUNTANT & TRANSFER AGENT Brown Brothers Harriman & Co. 50 Post Office Square Boston, MA 02110 INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Deloitte & Touche LLP 111 S. Wacker Drive Chicago, IL 60606 LEGAL COUNSEL Chapman and Cutler LLP 111 W. Monroe Street Chicago, IL 60603 [BLANK BACK COVER] ITEM 2. CODE OF ETHICS. (a) The registrant, as of the end of the period covered by this report, has adopted a code of ethics that applies to the registrant's principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, regardless of whether these individuals are employed by the registrant or a third party. (c) There have been no amendments, during the period covered by this report, to a provision of the code of ethics that applies to the registrant's principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, regardless of whether these individuals are employed by the registrant or a third party, and that relates to any element of the code of ethics description. (d) The registrant, during the period covered by this report, has not granted any waivers, including an implicit waiver, from a provision of the code of ethics that applies to the registrant's principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, regardless of whether these individuals are employed by the registrant or a third party, that relates to one or more of the items set forth in paragraph (b) of this item's instructions. (e) Not applicable. ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT. As of the end of the period covered by the report, the registrant's Board of Trustees has determined that Thomas R. Kadlec and Robert F. Keith are qualified to serve as audit committee financial experts serving on its audit committee and that each of them is "independent," as defined by Item 3 of Form N-CSR. ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES. (a) Audit Fees (Registrant) -- The aggregate fees billed for each of the last two fiscal years for professional services rendered by the principal accountant for the audit of the registrant's annual financial statements or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements were $114,500 for the fiscal year ended October 31, 2015 and $204,500 for fiscal year ended October 31, 2016. (b) Audit-Related Fees (Registrant) -- The aggregate fees billed in each of the last two fiscal years for assurance and related services by the principal accountant that are reasonably related to the performance of the audit of the registrant's financial statements and are not reported under paragraph (a) of this Item were $0 for the fiscal year ended October 31, 2015, and $0 for the fiscal year ended October 31, 2016. Audit-Related Fees (Investment Adviser) -- The aggregate fees billed in each of the last two fiscal years for assurance and related services by the principal accountant that are reasonably related to the performance of the audit of the registrant's financial statements and are not reported under paragraph (a) of this Item were $0 for the fiscal year ended October 31, 2015, and $0 for the fiscal year ended October 31, 2016. (c) Tax Fees (Registrant) -- The aggregate fees billed in each of the last two fiscal years for professional services rendered by the principal accountant for tax compliance, tax advice, and tax planning to the registrant were $12,675 for the fiscal year ended October 31, 2015 and $15,075 for fiscal year ended October 31, 2016. Tax Fees (Investment Adviser and Distributor) -- The aggregate fees billed in each of the last two fiscal years for professional services rendered by the principal accountant for tax compliance, tax advice, and tax planning to the registrant's adviser and distributor were $0 for the fiscal year ended October 31, 2015, and $0 for the fiscal year ended October 31, 2016. (d) All Other Fees (Registrant) -- The aggregate fees billed in each of the last two fiscal years for products and services provided by the principal accountant to the registrant, other than the services reported in paragraphs (a) through (c) of this Item were $0 for the fiscal year ended October 31, 2015, and $0 for the fiscal year ended October 31, 2016. All Other Fees (Investment Adviser and Distributor) -- The aggregate fees billed in each of the last two fiscal years for products and services provided by the principal accountant to the registrant's investment adviser and distributor, other than the services reported in paragraphs (a) through (c) of this Item were $0 for the fiscal year ended October 31, 2015, and $0 for the fiscal year ended October 31, 2016. (e)(1) Disclose the audit committee's pre-approval policies and procedures described in paragraph (c) (7) of Rule 2-01 of Regulation S-X. Pursuant to its charter and its Audit and Non-Audit Services Pre-Approval Policy, the Audit Committee (the "Committee") is responsible for the pre-approval of all audit services and permitted non-audit services (including the fees and terms thereof) to be performed for the registrant by its independent auditors. The Chairman of the Committee is authorized to give such pre-approvals on behalf of the Committee up to $25,000 and report any such pre-approval to the full Committee. The Committee is also responsible for the pre-approval of the independent auditor's engagements for non-audit services with the registrant's adviser (not including a sub-adviser whose role is primarily portfolio management and is sub-contracted or overseen by another investment adviser) and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the registrant, if the engagement relates directly to the operations and financial reporting of the registrant, subject to the de minimis exceptions for non-audit services described in Rule 2-01 of Regulation S-X. If the independent auditor has provided non-audit services to the registrant's adviser (other than any sub-adviser whose role is primarily portfolio management and is sub-contracted with or overseen by another investment adviser) and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the registrant that were not pre-approved pursuant to its policies, the Committee will consider whether the provision of such non-audit services is compatible with the auditor's independence. (e)(2) The percentage of services described in each of paragraphs (b) through (d) for the registrant and the registrant's investment adviser and distributor of this Item that were approved by the audit committee pursuant to the pre-approval exceptions included in paragraph (c)(7)(i)(C) or paragraph(C)(7)(ii) of Rule 2-01 of Regulation S-X are as follows: Registrant: Adviser and Distributor: ----------- ------------------------ (b) 0% (b) 0% (c) 0% (c) 0% (d) 0% (d) 0% (f) The percentage of hours expended on the principal accountant's engagement to audit the registrant's financial statements for the most recent fiscal year that were attributed to work performed by persons other than the principal accountant's full-time, permanent employees was less than fifty percent. (g) The aggregate non-audit fees billed by the registrant's accountant for services rendered to the registrant, and rendered to the registrant's investment adviser (not including any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and any entity controlling, controlled by, or under common control with the adviser that provides ongoing services to the registrant for fiscal year end 2015 were $12,675 for the registrant, $12,500 for the registrant's investment adviser, $3,000 for the registrant's investment sub-adviser and $36,500 for the registrant's distributor and for the registrant's fiscal year ended October 31, 2016 were $15,075 for the registrant, $13,000 for the registrant's investment adviser, $3,000 for the registrant's investment sub-adviser and $31,500 for the registrant's distributor. (h) The registrant's audit committee of its Board of Trustees has determined that the provision of non-audit services that were rendered to the registrant's investment adviser (not including any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the registrant that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X is compatible with maintaining the principal accountant's independence. ITEMS 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. The registrant has a separately designated standing audit committee established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934. The audit committee of the registrant is comprised of: Richard E. Erickson, Thomas R. Kadlec, Robert F. Keith and Niel B. Nielson. ITEM 6. INVESTMENTS. (a) Schedule of Investments in securities of unaffiliated issuers as of the close of the reporting period is included as part of the report to shareholders filed under Item 1 of this form. (b) Not applicable. ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. Not applicable. ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES. Not applicable. ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS. Not applicable. ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. There have been no material changes to the procedures by which the shareholders may recommend nominees to the registrant's board of directors, where those changes were implemented after the registrant last provided disclosure in response to the requirements of Item 407(c)(2)(iv) of Regulation S-K (17 CFR 229.407) (as required by Item 22(b)(15) of Schedule 14A (17 CFR 240.14a-101)), or this Item. ITEM 11. CONTROLS AND PROCEDURES. (a) The registrant's principal executive and principal financial officers, or persons performing similar functions, have concluded that the registrant's disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940, as amended (the "1940 Act") (17 CFR 270.30a-3 (c))) are effective, as of a date within 90 days of the filing date of the report that includes the disclosure required by this paragraph, based on their evaluation of these controls and procedures required by Rule 30a-3(b) under the 1940 Act (17 CFR 270.30a-3(b)) and Rules 13a-15(b) or 15d-15(b) under the Securities Exchange Act of 1934, as amended (17 CFR 240.13a-15(b) or 240.15d-15 (b)). (b) There were no changes in the registrant's internal control over financial reporting (as defined in Rule 30a-3(d) under the 1940 Act (17 CFR 270.30a-3(d)) that occurred during the registrant's last fiscal quarter of the period covered by this report that have materially affected, or are reasonably likely to materially affect, the registrant's internal control over financial reporting. ITEM 12. EXHIBITS. (a) (1) Code of ethics, or any amendment thereto, that is the subject of disclosure required by Item 2 is attached hereto. (a) (2) Certifications pursuant to Rule 30a-2(a) under the 1940 Act and Section 302 of the Sarbanes-Oxley Act of 2002 are attached hereto. (a) (3) Not Applicable (b) Certifications pursuant to Rule 30a-2(b) under the 1940 Act and Section 906 of the Sarbanes-Oxley Act of 2002 are attached hereto. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. (registrant) First Trust Exchange-Traded Fund III ------------------------------------------------- By (Signature and Title)* /s/ James M. Dykas ---------------------------------------- James M. Dykas, President and Chief Executive Officer (principal executive officer) Date: December 22, 2016 ------------------- Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By (Signature and Title)* /s/ James M. Dykas ---------------------------------------- James M. Dykas, President and Chief Executive Officer (principal executive officer) Date: December 22, 2016 ------------------- By (Signature and Title)* /s/ Donald P. Swade ---------------------------------------- Donald P. Swade, Treasurer, Chief Financial Officer and Chief Accounting Officer (principal financial officer) Date: December 22, 2016 ------------------- * Print the name and title of each signing officer under his or her signature.