First Trust Exchange-Traded Fund III

Annual Report

July 31, 2018

Shareholder Letter	2
Fund Performance Overview
First Trust Horizon Managed Volatility Domestic ETF (HUSV)	3
First Trust Horizon Managed Volatility Developed International ETF (HDMV)	5
Notes to Fund Performance Overview	7
Portfolio Commentary	8
Understanding Your Fund Expenses	11
Portfolio of Investments
First Trust Horizon Managed Volatility Domestic ETF (HUSV)	12
First Trust Horizon Managed Volatility Developed International ETF (HDMV)	14
Statements of Assets and Liabilities	18
Statements of Operations	19
Statements of Changes in Net Assets	20
Financial Highlights	21
Notes to Financial Statements	23
Report of Independent Registered Public Accounting Firm	29
Additional Information	30
Board of Trustees and Officers	35
Privacy Policy	37

Caution Regarding Forward-Looking Statements

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

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

Performance and Risk Disclosure

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

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

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

How to Read This Report

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

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

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

Page 1

First Trust Exchange-Traded Fund III

Annual Letter from the Chairman and CEO

July 31, 2018

Dear Shareholders,

First Trust is pleased to provide you with the annual report for the Managed Volatility Funds of First Trust Exchange-Traded Fund III (the “Funds”), which contains detailed information about the Funds for the twelve months ended July 31, 2018, including a market overview and a performance analysis for the period. We encourage you to read this report carefully and discuss it with your financial advisor.

As I mentioned in my January 2018 letter, 2017 was a very strong year for U.S. markets. Investors were rewarded with rising markets and very little volatility. As 2018 began, there was much enthusiasm for the “Tax Cuts and Jobs Act of 2017” tax reform bill, which President Trump had signed into law on December 22, 2017, and the potential increase in take-home pay for many Americans, as well as the reduction in the federal corporate tax rate from 35% to 21% that the new tax package would bring. Early in the new year, many investors were watching the Federal Reserve (the “Fed”) and its signaled intention to continue raising interest rates at a gradual pace (it had raised rates three times in 2017). Based on strong job growth and the economic outlook in the U.S., the Fed did, in fact, raise interest rates this year, on March 21 and June 13 and indicated at their June 2018 meeting that two additional rates hikes are expected before year-end.

For the entire first quarter of 2018, increased market volatility was the norm for U.S. markets. The Dow Jones Industrial Average (“DJIA”) was off to a strong start in January continuing its very strong performance displayed throughout 2017. However, February was a different story. Early in the month, the DJIA plunged 567 points and sank into “correction” territory (defined as a drop of 10% from the index’s high) and in just two weeks during February, was down more than 3,200 points. However, as February came to a close, the DJIA was back on track and up from its lows earlier in the month. The market continued its volatility during the second quarter of 2018. The DJIA closed out both April and May slightly down, but ended both June and July slightly up.

Increasing trade tensions have had an impact on markets around the world and could continue to do so in the future. The talk from President Trump on tariffs and trade agreements gave many investors pause about the U.S. stock market and its long-standing economic growth and what the future might hold. Despite market volatility, we continue to believe that the combination of low interest rates, low inflation and strong corporate earnings still point to a positive economic environment and further growth, though we understand that past performance can never guarantee future performance.

Globally, markets were volatile in the first seven months of 2018, but the MSCI AC World Index, which captures 23 developed markets and 24 emerging markets, ended July slightly up. Analysts believe European companies are set up for growing earnings and credit upswings, which seems to bode well for global market performance. In addition, we believe the longer-term drivers of positive demographics, lower debt levels and improving productivity may lead to a multi-year cyclical upswing in emerging market economic fundamentals.

We continue to believe that you should invest for the long term and be prepared for market movements, which can happen at any time. You can do this by keeping current on your portfolio and investment goals and by speaking regularly with your investment professional. Markets go up and they also go down, but savvy investors are prepared for either through careful attention to investment goals.

Thank you for giving First Trust the opportunity to be a part of your financial plan. We value our relationship with you and will report on the Funds again in six months.

Sincerely,

James A. Bowen

Chairman of the Board of Trustees

Chief Executive Officer of First Trust Advisors L.P.

Page 2

First Trust Horizon Managed Volatility Domestic ETF (HUSV)

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

 

Performance
		Average Annual Total Returns	Cumulative Total Returns
	1 Year Ended 7/31/18	Inception (8/24/16) to 7/31/18	Inception (8/24/16) to 7/31/18
Fund Performance
NAV	8.04%	10.11%	20.47%
Market Price	8.13%	10.20%	20.68%
Index Performance
S&P 500® Index	16.24%	16.56%	34.49%

(See Notes to Fund Performance Overview Page 7.)

Page 3

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

Sector Allocation	% of Total Investments
Information Technology	15.5%
Financials	15.2
Utilities	13.7
Industrials	13.0
Health Care	10.2
Consumer Discretionary	9.5
Consumer Staples	7.8
Real Estate	6.8
Materials	4.8
Energy	3.5
Total	100.0%

Top Ten Holdings	% of Total Investments
Coca-Cola (The) Co.	2.3%
Procter & Gamble (The) Co.	2.1
Ecolab, Inc.	2.1
PepsiCo, Inc.	2.1
Citrix Systems, Inc.	2.1
Marsh & McLennan Cos., Inc.	2.0
Amphenol Corp., Class A	1.9
AvalonBay Communities, Inc.	1.9
Cognizant Technology Solutions Corp., Class A	1.9
Weyerhaeuser Co.	1.9
Total	20.3%

Page 4

First Trust Horizon Managed Volatility Developed International ETF (HDMV)

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

Performance
		Average Annual Total Returns	Cumulative Total Returns
	1 Year Ended 7/31/18	Inception (8/24/16) to 7/31/18	Inception (8/24/16) to 7/31/18
Fund Performance
NAV	5.48%	9.34%	18.85%
Market Price	5.71%	9.65%	19.49%
Index Performance
MSCI EAFE Index	6.40%	11.55%	23.54%

(See Notes to Fund Performance Overview Page 7.)

Page 5

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

Sector Allocation	% of Total Investments
Financials	29.5%
Industrials	18.7
Consumer Staples	13.6
Real Estate	11.2
Consumer Discretionary	7.1
Utilities	6.1
Telecommunication Services	4.4
Health Care	3.6
Materials	2.5
Information Technology	2.0
Energy	1.3
Total	100.0%

Top Ten Holdings	% of Total Investments
Hong Kong & China Gas Co., Ltd.	1.5%
CLP Holdings Ltd.	1.4
Nestle S.A.	1.0
MTR Corp., Ltd.	1.0
Woolworths Group Ltd.	1.0
Hongkong Land Holdings Ltd.	1.0
National Australia Bank Ltd.	0.9
RELX N.V.	0.9
Heineken N.V.	0.9
Diageo PLC	0.9
Total	10.5%

Page 6

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

Each Fund’s per share net asset value (“NAV”) is the value of one share of the Fund and is computed by dividing the value of all assets of the Fund (including accrued interest and dividends), less all liabilities (including accrued expenses and dividends declared but unpaid), by the total number of outstanding shares. The price used to calculate market return (“Market Price”) is determined by using the midpoint 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 indices do not actually hold a portfolio of securities and therefore do not incur the expenses incurred by each Fund. These expenses negatively impact the performance of each Fund. Also, market returns do not include brokerage commissions that may be payable on secondary market transactions. If brokerage commissions were included, market returns would be lower. The total returns presented reflect the reinvestment of dividends on securities in the indices. The returns presented do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. The investment return and principal value of shares of each Fund will vary with changes in market conditions. Shares of each Fund may be worth more or less than their original cost when they are redeemed or sold in the market. Each Fund’s past performance is no guarantee of future performance.

Page 7

Portfolio Commentary

First Trust Exchange-Traded Fund III

First Trust Horizon Funds

July 31, 2018 (Unaudited)

First Trust Advisors L.P. (“First Trust” or the “Advisor”) serves as the investment advisor to the Funds. First Trust is responsible for the ongoing monitoring of each Fund’s investment portfolio, managing each Fund’s business affairs and providing certain administrative services necessary for the management of each Fund.

Sub-Advisor

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

Portfolio Management Team

The following persons serve as portfolio managers of the Funds:

Michael Dickson, PhD, Portfolio Manager of Horizon

Scott Ladner, Portfolio Manager of Horizon

Steven Clark, PhD, Portfolio Manager of Horizon

The portfolio managers are primarily and jointly responsible for the day-to-day management of the Funds. Each portfolio manager has served as part of the portfolio management team of the Funds since 2016.

Commentary

First Trust Horizon Managed Volatility Domestic ETF (HUSV)

Market Recap

For the 12-month period ended July 31, 2018, the S&P 500^® Index gained 16.24%. Over this period, low volatility as a factor trailed the S&P 500^® Index, as the S&P 500^® Low Volatility Index gained 10.91%.

We believe the following key developments were some of the biggest drivers of the market during the period. Over this 12-month period ended July 31, 2018, the S&P 500^® realized some of the lowest volatility on record, hit multiple new all-time highs, digested large tax cuts, and sold off in February 2018 on inflation fears (among other risks). Additionally, corporate earnings and economic fundamentals were strong, and the Federal Reserve Board raised rates three times during the 12-month period ended July 31, 2018, contributing to the rise of the U.S. 10-year yield by over 65 basis points (“bps”) over this same period. The strong markets were led by technology and discretionary stocks, while sectors traditionally thought of as more defensive were among the worst performers.

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

Performance Analysis

On a net asset value (“NAV”) basis for the 12-month period ended July 31, 2018, the Fund provided a total return of 8.04%, including the reinvestment of dividends. The S&P 500^® Index returned 16.24% and the S&P 500^® Low Volatility Index returned 10.91% over this same period.

Stocks selected within the industrial, technology and financial sectors contributed the most to the Fund’s return for the 12-month period ended July 31, 2018, while stocks selected within the consumer staples, real estate, and consumer discretionary sectors contributed the least to the Fund’s return for the same period.

Single stock positions in Waste Management, Inc., Northrop Grumman Corporation, and Pfizer Inc. contributed the most to the Fund’s return for the 12-month period ended July 31, 2018. Single stock positions in The Kraft Heinz Company, International Flavors & Fragrances, Inc., and Proctor & Gamble Co. contributed the least to the Fund’s return for the same period.

For the same period, the Fund realized lower volatility than both the S&P 500^® and the S&P 500^® Low Volatility Index. As a part of the Fund’s portfolio allocation process, the portfolio managers overweight or underweight common stocks of domestic companies based on future expected volatility. An overweight allocation indicates that we expect those stocks to be relatively low risk, while an

Page 8

Portfolio Commentary (Continued)

First Trust Exchange-Traded Fund III

Annual Report

July 31, 2018 (Unaudited)

underweight allocation indicates that we expect those stocks to be relatively high risk. This long-term defensive tilt in the Fund contributed largely to the relative performance for the 12-month period ended July 31, 2018.

Market and Fund Outlook

At the end of the 12-month period ending July 31, 2018, we believe that overall corporate and economic fundamentals remain strong in the U.S., fiscal stimulus is in full effect as corporate tax cuts flow through to corporate earnings, and monetary policy remains transparent and pragmatic. These factors in aggregate have contributed to a strong U.S. stock market and low realized volatility. We believe that key risk factors for equity markets are related to trade policy, divergent central bank policies globally, and global currency instability.

During time periods of low realized volatility, we believe it is important to continue to be more responsive to current market conditions when picking stocks to create a portfolio of expected lower volatility stocks. Due to the current volatility environment, we expect risk to remain low in the near term, but to eventually rise in the long term due to the mean reverting properties of realized volatility.

The Fund continues to use a quantitative and rules-based investment process to mitigate volatility through enhanced security selection of targeted exposure to stocks that we estimate will have forecasted future low volatility. We also continue to use active management approach when managing the Fund that provides the flexibility to limit sector concentration and business risk, without being limited to static rebalance requirements.

First Trust Horizon Managed Volatility Developed International ETF (HDMV)

Market Recap

For the 12-month period ended July 31, 2018, the MSCI EAFE Index gained 6.40%. Over this same period, low volatility fell in line with this broad MSCI EAFE Index as the MSCI EAFE Minimum Volatility Index gained 6.38%.

We believe the following key developments were some of the biggest drivers of global markets during the 12-month period ended July 31, 2018. U.S. markets led Developed International markets broadly as the S&P 500^® gained 16.24% over the same period. The S&P 500^® realized some of the lowest volatility on record, hit multiple new all-time highs, digested large tax cuts, and sold off in February 2018 on inflation fears (among other risks). Additionally, corporate earnings and economic fundamentals were strong in the U.S., and the Federal Reserve Board raised rates three times during the 12-month period ended July 31, 2018, contributing to the rise of the U.S.10-year yield by over 65 bps over this same period. Developed markets were generally exposed to more risk factors than the U.S. over the period as trade tariffs loomed and an Italian credit crisis weighed down European markets. Japan and the United Kingdom were the best performing regions in developed markets broadly, each outpacing the Eurozone for the 12-month period ended July 31, 2018. Within the Eurozone, France posted strong gains while Spain posted losses for the same period.

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

Performance Analysis

On a net asset value (“NAV”) basis for the 12-month period ended July 31, 2018, the Fund provided a total return of 5.48%, including the reinvestment of dividends. The MSCI EAFE Index gained 6.40% and the MSCI EAFE Minimum Volatility Index gained 6.38% over this same period.

For countries with an average allocation greater than 1%, stocks selected within Japan, France, and Hong Kong contributed the most to the Fund’s return for the 12-month period ended July 31, 2018, while stocks selected within Spain, Sweden, and Denmark contributed the least to the Fund’s return during the same period.

Single stock positions in Hong Kong China and Gas Co Ltd., Hermes International S.A., and Aeon Co., Ltd. contributed the most to the Fund’s return for the 12-month period ended July 31, 2018. Single stock positions in Singapore Telecommunications Limited, CK Hutchison Holdings Ltd., and Mediobanca S.p.A. contributed the least to the Fund’s return for the same period.

Page 9

Portfolio Commentary (Continued)

First Trust Exchange-Traded Fund III

Annual Report

July 31, 2018 (Unaudited)

For the same period the Fund realized lower volatility than the MSCI EAFE Index. As a part of the Fund’s portfolio allocation process, we overweight or underweight common stocks and depositary receipts of large and mid-cap securities across developed markets based on future expected volatility. An overweight allocation indicates that we expect those stocks to be relatively low risk, while an underweight allocation indicates that we expect those stocks to be relatively high risk. This long-term defensive tilt in the Fund contributed largely to the relative performance for the 12-month period ended July 31, 2018.

Market and Fund Outlook

At the end of the 12-month period ending July 31, 2018, we believe that risks in international markets generally outweigh risks in U.S. markets, as volatility has been persistently higher. Key risk factors to watch in international markets are related to trade policy specifically in China and the Eurozone, formal details related to “Brexit” in the U.K., the end of quantitative easing in the Eurozone, the continued accommodative monetary policy and lack of inflation in Japan, and divergent central bank policies globally potentially leading to global currency instability.

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

Page 10

First Trust Exchange-Traded Fund III

Understanding Your Fund Expenses

July 31, 2018 (Unaudited)

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

The Example is based on an investment of $1,000 invested at the beginning of the period and held through the six-month period ended July 31, 2018.

Actual Expenses

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

Hypothetical Example for Comparison Purposes

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

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

	Beginning Account Value February 1, 2018	Ending Account Value July 31, 2018	Annualized Expense Ratio Based on the Six-Month Period	Expenses Paid During the Six-Month Period (a)
First Trust Horizon Managed Volatility Domestic ETF (HUSV)
Actual	$1,000.00	$1,005.00	0.70%	$3.48
Hypothetical (5% return before expenses)	$1,000.00	$1,021.32	0.70%	$3.51
First Trust Horizon Managed Volatility Developed International ETF (HDMV)
Actual	$1,000.00	$963.20	0.80%	$3.89
Hypothetical (5% return before expenses)	$1,000.00	$1,020.83	0.80%	$4.01

    

(a)	Expenses are equal to the annualized expense ratios as indicated in the table multiplied by the average account value over the period (February 1, 2018 through July 31, 2018), multiplied by 181/365 (to reflect the six-month period).

Page 11

First Trust Horizon Managed Volatility Domestic ETF (HUSV)

Portfolio of Investments

July 31, 2018

 

First Trust Horizon Managed Volatility Domestic ETF (HUSV)

Portfolio of Investments (Continued)

July 31, 2018

---

 

First Trust Horizon Managed Volatility Developed International ETF (HDMV)

Portfolio of Investments

July 31, 2018

 

First Trust Horizon Managed Volatility Developed International ETF (HDMV)

Portfolio of Investments (Continued)

July 31, 2018

 

First Trust Horizon Managed Volatility Developed International ETF (HDMV)

Portfolio of Investments (Continued)

July 31, 2018

 

---

 

First Trust Horizon Managed Volatility Developed International ETF (HDMV)

Portfolio of Investments (Continued)

July 31, 2018

Currency Exposure Diversification	% of Total Investments
EUR	28.4%
JPY	21.2
AUD	11.4
CHF	10.7
GBP	9.5
HKD	8.2
SGD	3.6
USD	2.5
SEK	2.5
DKK	1.6
NOK	0.4
Total	100.0%

    

Currency Abbreviations
AUD	Australian Dollar
CHF	Swiss Franc
DKK	Danish Krone
EUR	Euro
GBP	British Pound Sterling
HKD	Hong Kong Dollar
JPY	Japanese Yen
NOK	Norwegian Krone
SEK	Swedish Krona
SGD	Singapore Dollar
USD	United States Dollar

See Notes to Financial Statements

Page 17

First Trust Exchange-Traded Fund III

Statements of Assets and Liabilities

July 31, 2018

	First Trust Horizon Managed Volatility Domestic ETF (HUSV)		First Trust Horizon Managed Volatility Developed International ETF (HDMV)
ASSETS:
Investments, at value	$ 133,692,876		$ 58,761,579
Cash	154,664		126,810
Receivables:
Dividends	116,515		69,396
Dividend reclaims	—		91,002
Due from authorized participant	—		26,721
Total Assets	133,964,055		59,075,508
LIABILITIES:
Payables:
Investment advisory fees payable	75,658		38,782
Investment securities purchased	—		26,721
Total Liabilities	75,658		65,503
NET ASSETS	$133,888,397		$59,010,005
NET ASSETS consist of:
Paid-in capital	$ 131,623,782		$ 58,929,531
Par value	57,000		17,500
Accumulated net investment income (loss)	91,894		89,401
Accumulated net realized gain (loss) on investments and foreign currency transactions	(4,786,111)		(565,844)
Net unrealized appreciation (depreciation) on investments and foreign currency translation	6,901,832		539,417
NET ASSETS	$133,888,397		$59,010,005
NET ASSET VALUE, per share	$23.49		$33.72
Number of shares outstanding (unlimited number of shares authorized, par value $0.01 per share)	5,700,002		1,750,002
Investments, at cost	$126,791,044		$58,222,392

Page 18

See Notes to Financial Statements

First Trust Exchange-Traded Fund III

Statements of Operations

For the Year Ended July 31, 2018

		First Trust Horizon Managed Volatility Domestic ETF (HUSV)		First Trust Horizon Managed Volatility Developed International ETF (HDMV)
INVESTMENT INCOME:
Dividends		$ 1,982,221		$ 1,721,245
Interest		1,639		1,654
Foreign withholding tax		—		(149,218)
Total investment income		1,983,860		1,573,681
EXPENSES:
Investment advisory fees		669,486		356,144
Total expenses		669,486		356,144
NET INVESTMENT INCOME (LOSS)		1,314,374		1,217,537
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments		(3,763,428)		97,308
In-kind redemptions		7,176,404		2,204,615
Foreign currency transactions		—		46,668
Net realized gain (loss)		3,412,976		2,348,591
Net change in unrealized appreciation (depreciation) on:
Investments		3,573,637		(1,471,571)
Foreign currency translation		—		(3,570)
Net change in unrealized appreciation (depreciation)		3,573,637		(1,475,141)
NET REALIZED AND UNREALIZED GAIN (LOSS)		6,986,613		873,450
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS		$ 8,300,987		$ 2,090,987

See Notes to Financial Statements

Page 19

First Trust Exchange-Traded Fund III

Statements of Changes in Net Assets

	First Trust Horizon Managed Volatility Domestic ETF (HUSV)				First Trust Horizon Managed Volatility Developed International ETF (HDMV)
	Year Ended 7/31/2018		Period Ended 7/31/2017 (a)		Year Ended 7/31/2018		Period Ended 7/31/2017 (a)
OPERATIONS:
Net investment income (loss)	$ 1,314,374		$ 669,823		$ 1,217,537		$ 570,655
Net realized gain (loss)	3,412,976		3,345,502		2,348,591		1,983,888
Net change in unrealized appreciation (depreciation)	3,573,637		3,328,195		(1,475,141)		2,014,558
Net increase (decrease) in net assets resulting from operations	8,300,987		7,343,520		2,090,987		4,569,101
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income	(1,277,206)		(606,955)		(1,506,227)		(540,901)
SHAREHOLDER TRANSACTIONS:
Proceeds from shares sold	130,891,234		115,380,446		50,664,100		51,798,537
Cost of shares redeemed	(66,825,963)		(59,317,666)		(21,983,767)		(26,081,825)
Net increase (decrease) in net assets resulting from shareholder transactions	64,065,271		56,062,780		28,680,333		25,716,712
Total increase (decrease) in net assets	71,089,052		62,799,345		29,265,093		29,744,912
NET ASSETS:
Beginning of period	62,799,345		—		29,744,912		—
End of period	$133,888,397		$62,799,345		$59,010,005		$29,744,912
Accumulated net investment income (loss) at end of period	$91,894		$63,593		$89,401		$70,881
CHANGES IN SHARES OUTSTANDING:
Shares outstanding, beginning of period	2,850,002		—		900,002		—
Shares sold	5,800,000		5,650,002		1,500,000		1,750,002
Shares redeemed	(2,950,000)		(2,800,000)		(650,000)		(850,000)
Shares outstanding, end of period	5,700,002		2,850,002		1,750,002		900,002

    

(a)	Inception date is August 24, 2016, which is consistent with the commencement of investment operations and is the date the initial creation units were established.

Page 20

See Notes to Financial Statements

First Trust Exchange-Traded Fund III

Financial Highlights

For a share outstanding throughout each period

First Trust Horizon Managed Volatility Domestic ETF (HUSV)  

	Year Ended 7/31/2018		Period Ended 7/31/2017 (a)
Net asset value, beginning of period	$ 22.03		$ 19.96
Income from investment operations:
Net investment income (loss)	0.30		0.24
Net realized and unrealized gain (loss)	1.46		2.05
Total from investment operations	1.76		2.29
Distributions paid to shareholders from:
Net investment income	(0.30)		(0.22)
Net asset value, end of period	$23.49		$22.03
Total return (b)	8.04%		11.51%
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000’s)	$ 133,888		$ 62,799
Ratio of total expenses to average net assets	0.70%		0.70% (c)
Ratio of net investment income (loss) to average net assets	1.37%		1.50% (c)
Portfolio turnover rate (d)	157%		149%

    

(a)	Inception date is August 24, 2016, which 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 21

First Trust Exchange-Traded Fund III

Financial Highlights (Continued)

For a share outstanding throughout each period

First Trust Horizon Managed Volatility Developed International ETF (HDMV)  

	Year Ended 7/31/2018		Period Ended 7/31/2017 (a)
Net asset value, beginning of period	$ 33.05		$ 29.89
Income from investment operations:
Net investment income (loss)	0.91		0.63
Net realized and unrealized gain (loss)	0.87		3.13
Total from investment operations	1.78		3.76
Distributions paid to shareholders from:
Net investment income	(1.11)		(0.60)
Net asset value, end of period	$33.72		$33.05
Total return (b)	5.48%		12.68%
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000’s)	$ 59,010		$ 29,745
Ratio of total expenses to average net assets	0.80%		0.80% (c)
Ratio of net investment income (loss) to average net assets	2.73%		2.74% (c)
Portfolio turnover rate (d)	133%		150%

    

(a)	Inception date is August 24, 2016, which 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 22

See Notes to Financial Statements

Notes to Financial Statements

First Trust Exchange-Traded Fund III

July 31, 2018

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 consists of thirteen funds that are currently offering shares. This report covers the following funds, each a non-diversified series of the Trust:

First Trust Horizon Managed Volatility Domestic ETF – (NYSE Arca, Inc. (“NYSE Arca”) ticker “HUSV”)

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

Each fund represents a separate series of shares of beneficial interest in the Trust (each a “Fund” and collectively, the “Funds”). 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 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, HUSV seeks to achieve its investment objective by investing at least 80% of its net assets (including investment borrowings) in common stocks of domestic companies listed and traded on U.S. national securities exchanges that Horizon Investments, LLC (“Horizon” or the “Sub-Advisor”) believes exhibit low future expected volatility.

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

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

2. Significant Accounting Policies

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

A. Portfolio Valuation

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

Each Fund’s investments are valued daily at market value or, in the absence of market value with respect to any portfolio securities, at fair value. Market value prices represent 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, 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.

Page 23

Notes to Financial Statements (Continued)

First Trust Exchange-Traded Fund III

July 31, 2018

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 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.

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:

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

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

Page 24

Notes to Financial Statements (Continued)

First Trust Exchange-Traded Fund III

July 31, 2018

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

The inputs or methodologies used for valuing investments are not necessarily an indication of the risk associated with investing in those investments. A summary of the inputs used to value each Fund’s investments as of July 31, 2018, 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 is recorded daily on the accrual basis.

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

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

C. Foreign Currency

The books and records of the Funds are maintained in U.S. dollars. Foreign currencies, investments and other assets and liabilities are translated into U.S. dollars at the exchange rates prevailing at the end of the period. Purchases and sales of investments and items of income and expense are translated on the respective dates of such transactions. Unrealized gains and losses on assets and liabilities, other than investments in securities, which result from changes in foreign currency exchange rates have been included in “Net change in unrealized appreciation (depreciation) on foreign currency translation” on the Statements of Operations. Unrealized gains and losses on investments in securities which result from changes in foreign exchange rates are included with fluctuations arising from changes in market price and are 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.

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

The tax character of distributions paid by each Fund during the fiscal year ended July 31, 2018, was as follows:

	Distributions paid from Ordinary Income		Distributions paid from Capital Gains		Distributions paid from Return of Capital
First Trust Horizon Managed Volatility Domestic ETF	$ 1,277,206		$ —		$ —
First Trust Horizon Managed Volatility Developed International ETF	1,506,227		—		—

Page 25

Notes to Financial Statements (Continued)

First Trust Exchange-Traded Fund III

July 31, 2018

The tax character of distributions paid by each Fund during the fiscal period ended July 31, 2017, was as follows:

	Distributions paid from Ordinary Income		Distributions paid from Capital Gains		Distributions paid from Return of Capital
First Trust Horizon Managed Volatility Domestic ETF	$ 606,955		$ —		$ —
First Trust Horizon Managed Volatility Developed International ETF	540,901		—		—

As of July 31, 2018, the components of distributable earnings on a tax basis for each Fund were as follows:

	Undistributed Ordinary Income		Accumulated Capital and Other Gain (Loss)		Net Unrealized Appreciation (Depreciation)
First Trust Horizon Managed Volatility Domestic ETF	$ 91,894		$ (3,898,725)		$ 6,014,446
First Trust Horizon Managed Volatility Developed International ETF	260,437		(109,668)		(87,795)

E. Income Taxes

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

The Funds are subject to accounting standards that establish a minimum threshold for recognizing, and a system for measuring, the benefits of a tax position taken or expected to be taken in a tax return. Taxable years ended 2017 and 2018 remain open to federal and state audit. As of July 31, 2018, management has evaluated the application of these standards to the Funds and has determined that no provision for income tax is required in the Funds’ financial statements for uncertain tax positions.

The Funds intend to utilize provisions of the federal income tax laws, which allow them to carry a realized capital loss forward indefinitely following the year of the loss and offset such loss against any future realized capital gains. The Funds are subject to certain limitations under U.S. tax rules on the use of capital loss carryforwards and net unrealized built-in losses. These limitations apply when there has been a 50% change in ownership. At July 31, 2018, the Funds had non-expiring capital loss carryforward for federal income tax purposes as follows:

	Capital Loss Available
First Trust Horizon Managed Volatility Domestic ETF	$ 3,898,725
First Trust Horizon Managed Volatility Developed International ETF	109,668

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 fiscal year ended July 31, 2018, the adjustments for each Fund were as follows:

	Accumulated Net Investment Income (Loss)		Accumulated Net Realized Gain (Loss) on Investments		Paid-in Capital
First Trust Horizon Managed Volatility Domestic ETF	$ (8,867)		$ (6,977,748)		$ 6,986,615
First Trust Horizon Managed Volatility Developed International ETF	307,210		(2,270,911)		1,963,701

F. Expenses

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

Page 26

Notes to Financial Statements (Continued)

First Trust Exchange-Traded Fund III

July 31, 2018

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.

HUSV and HDMV have agreed to pay First Trust an annual unitary management fee of 0.70% and 0.80% of HUSV’s and HDMV’s average daily net assets, respectively. Pursuant to the Investment Management Agreement between First Trust and the Trust, First Trust manages the investment of the Funds’ assets and is responsible for the expenses of each Fund, including the cost of transfer agency, sub-advisory, custody, fund administration, legal, audit and other services, but excluding fee payments under the Investment Management Agreement, interest, taxes, brokerage commissions and other expenses connected with the execution of portfolio transactions, distribution and service fees payable pursuant to Rule 12b-1 plan, if any, and extraordinary expenses, which are paid by each respective Fund. 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.

Horizon serves as the Funds’ sub-advisor and manages each Fund’s portfolio subject to First Trust’s supervision. The Sub-Advisor receives a sub-advisory fee from First Trust equal to 50% of any remaining monthly unitary management fee paid to the Advisor after the average Fund’s expenses accrued during the most recent twelve months are subtracted from the unitary management fee for that month.

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

Each Trustee who is not an officer or employee of First Trust, any sub-advisor or any of their affiliates (“Independent Trustees”) is paid a fixed annual retainer that is allocated equally among each fund in the First Trust Fund Complex. Each Independent Trustee is also paid an annual per fund fee that varies based on whether the fund is a closed-end or other actively managed fund, 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 fiscal year ended July 31, 2018, the cost of purchases and proceeds from sales of investment securities for each Fund, excluding short-term investments and in-kind transactions, were as follows:

	Purchases		Sales
First Trust Horizon Managed Volatility Domestic ETF	$ 151,349,332		$ 150,822,784
First Trust Horizon Managed Volatility Developed International ETF	62,142,040		59,132,717

For the fiscal year ended July 31, 2018, the cost of in-kind purchases and proceeds from in-kind sales for each Fund were as follows:

	Purchases		Sales
First Trust Horizon Managed Volatility Domestic ETF	$ 130,618,079		$ 67,051,429
First Trust Horizon Managed Volatility Developed International ETF	47,252,837		21,938,840

Page 27

Notes to Financial Statements (Continued)

First Trust Exchange-Traded Fund III

July 31, 2018

5. Creations, Redemptions and Transaction Fees

Shares are created and redeemed by each 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 a Fund, an Authorized Participant must deposit (i) a designated portfolio of equity 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 respective Fund’s portfolio and the countries in which the transactions are 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 Transaction Fees		Redemption Transaction Fees
First Trust Horizon Managed Volatility Domestic ETF	$ 500		$ 500
First Trust Horizon Managed Volatility Developed International ETF	4,200		4,200

6. Distribution Plan

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

No 12b-1 fees are currently paid by the Funds, and pursuant to a contractual arrangement, no 12b-1 fees will be paid any time before November 30, 2019.

7. Indemnification

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

8. 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 that there were no subsequent events requiring recognition or disclosure in the financial statements that have not already been disclosed.

Page 28

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

Opinion on the Financial Statements and Financial Highlights

We have audited the accompanying statements of assets and liabilities of First Trust Horizon Managed Volatility Domestic ETF and First Trust Horizon Managed Volatility Developed International ETF (the “Funds”), each a series of the First Trust Exchange-Traded Fund III (the “Trust”), including the portfolios of investments, as of July 31, 2018, the related statements of operations for the year ended July 31, 2018, and the statements of changes in net assets and the financial highlights for the year ended July 31, 2018, and the period from August 24, 2016 (commencement of operations) through July 31, 2017, and the related notes. In our opinion, the financial statements and financial highlights present fairly, in all material respects, the financial position of each of the two portfolios included within the First Trust Exchange-Traded Fund III as of July 31, 2018, and the results of their operations for the year ended July 31, 2018, and the changes in their net assets and the financial highlights for the year ended July 31, 2018, and for the period August 24, 2016 (commencement of operations) through July 31, 2017, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

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

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

Our audits included performing procedures to assess the risks of material misstatement of the financial statements and financial highlights, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements and financial highlights. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and financial highlights. Our procedures included confirmation of securities owned as of July 31, 2018, by correspondence with the custodian and brokers. We believe that our audits provide a reasonable basis for our opinion.

Chicago, Illinois

September 20, 2018

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

Page 29

Additional Information

First Trust Exchange-Traded Fund III

July 31, 2018 (Unaudited)

Proxy Voting Policies and Procedures

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

Portfolio Holdings

The Trust files its complete schedule of the Funds’ 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 each Fund’s website at www.ftportfolios.com; (3) on the SEC’s website at 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 July 31, 2018, the following percentages of income dividend paid by the Funds qualify for the dividends received deduction available to corporations:

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

For the taxable year ended July 31, 2018, the following percentages of income dividend paid by the Funds is hereby designated as qualified dividend income:

	Qualified Dividend Income
First Trust Horizon Managed Volatility Domestic ETF	100.00%
First Trust Horizon Managed Volatility Developed International ETF	64.48%

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

	Gross Foreign Income				Foreign Taxes Paid
	Amount		Per Share		Amount		Per Share
First Trust Horizon Managed Volatility Developed International ETF	$ 1,721,148		$ 0.98		$ 139,183		$ 0.08

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

Risk Considerations

Risks are inherent in all investing. Certain general risks that may be applicable to some or all of the Funds are identified below, but not all of the material risks relevant to each Fund are included in this report. The material risks of investing in each Fund are spelled out in its prospectus, statement of additional information and other regulatory filings. Before investing, you should consider each Fund’s investment objective, risks, charges and expenses, and read each Fund’s prospectus and statement of additional information carefully. You can download each Fund’s prospectus at www.ftportfolios.com or contact First Trust Portfolios L.P. at (800) 621-1675 to request a prospectus, which contains this and other information about each Fund.

Concentration Risk. To the extent that a Fund is able to invest a large percentage of its assets in a single asset class or the securities of issuers within the same country, state, region, industry or sector, an adverse economic, business or political development may affect the value of the Fund’s investments more than if the Fund were more broadly diversified. A Fund that tracks an index will be concentrated to the extent the Fund’s corresponding index is concentrated. A concentration makes a Fund more susceptible to any single occurrence and may subject the Fund to greater market risk than a fund that is not concentrated.

Page 30

Additional Information (Continued)

First Trust Exchange-Traded Fund III

July 31, 2018 (Unaudited)

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

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

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

Equity Securities Risk. To the extent a Fund invests in equity securities, the value of the Fund’s shares will fluctuate with changes in the value of the equity securities. Equity securities prices fluctuate for several reasons, including changes in investors’ perceptions of the financial condition of an issuer or the general condition of the relevant stock market, such as market volatility, or when political or economic events affecting the issuers occur. In addition, common stock prices may be particularly sensitive to rising interest rates, as the cost of capital rises and borrowing costs increase. Equity securities may decline significantly in price over short or extended periods of time, and such declines may occur in the equity market as a whole, or they may occur in only a particular country, company, industry or sector of the market.

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

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

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

Index Constituent Risk. Certain Funds may be a constituent of one or more indices. As a result, such a Fund may be included in one or more index-tracking exchange-traded funds or mutual funds. Being a component security of such a vehicle could greatly affect the trading activity involving a Fund, the size of the Fund and the market volatility of the Fund. Inclusion in an index could significantly increase demand for the Fund and removal from an index could result in outsized selling activity in a relatively short period of time. As a result, a Fund’s net asset value could be negatively impacted and the Fund’s market price may be significantly below its net asset value during certain periods.

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

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Additional Information (Continued)

First Trust Exchange-Traded Fund III

July 31, 2018 (Unaudited)

Market Risk. Securities held by a Fund, as well as shares of a Fund itself, are subject to market fluctuations caused by factors such as general economic conditions, political events, regulatory or market developments, changes in interest rates and perceived trends in securities prices. Shares of a Fund could decline in value or underperform other investments as a result of the risk of loss associated with these market fluctuations.

Non-U.S. Securities Risk. To the extent a Fund invests in non-U.S. securities, it is subject to additional risks not associated with securities of domestic issuers. Non-U.S. securities are subject to higher volatility than securities of domestic issuers due to: possible adverse political, social or economic developments; restrictions on foreign investment or exchange of securities; 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. Investments in non-U.S. securities may involve higher costs than investments in U.S. securities, including higher transaction and custody costs, as well as additional taxes imposed by non-U.S. governments. These risks may be heightened for securities of companies located, or with significant operations, in emerging market countries.

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

NOT FDIC INSURED

NOT BANK GUARANTEED

MAY LOSE VALUE

Advisory and Sub-Advisory Agreements

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

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

First Trust Horizon Managed Volatility Domestic ETF (HUSV)

First Trust Horizon Managed Volatility Developed International ETF (HDMV)

The Board approved the continuation of the Agreements for each Fund for a one-year period ending June 30, 2019 at a meeting held on June 11, 2018. The Board determined for each Fund that the continuation of the Agreements is in the best interests of the Fund in light of the nature, extent and quality of the services provided and such other matters as the Board considered to be relevant in the exercise of its reasonable business judgment.

To reach this determination for each Fund, the Board considered its duties under the Investment Company Act of 1940, as amended (the “1940 Act”), as well as under the general principles of state law, in reviewing and approving advisory contracts; the requirements of the 1940 Act in such matters; the fiduciary duty of investment advisors with respect to advisory agreements and compensation; the standards used by courts in determining whether investment company boards have fulfilled their duties; and the factors to be considered by the Board in voting on such agreements. At meetings held on April 23, 2018 and June 11, 2018, 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 each Fund (including the relevant personnel responsible for these services and their experience); the unitary fee rate payable by each 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 “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 rate as compared to fees charged to other clients of the Sub-Advisor; expenses of each Fund as compared to expense ratios of the funds in the Fund’s Peer Group; performance information for each Fund; the nature of expenses incurred in providing services to each 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; and information on the Advisor’s and the Sub-Advisor’s compliance programs. The Board reviewed initial materials with the Advisor at the meeting held on April 23, 2018, 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 11, 2018 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

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Additional Information (Continued)

First Trust Exchange-Traded Fund III

July 31, 2018 (Unaudited)

Advisor and the Sub-Advisor continue to be reasonable business arrangements from each Fund’s perspective. The Board determined that, given the totality of the information provided with respect to the Agreements, the Board had received sufficient information to renew the Agreements. The Board considered that shareholders chose to invest or remain invested in a Fund knowing that the Advisor and the Sub-Advisor manage the Fund and knowing the Fund’s unitary fee.

In reviewing the Agreements for each Fund, the Board considered the nature, extent and quality of the services provided by the Advisor and the Sub-Advisor under the 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 each Fund and reviewed all of the services provided by the Advisor to the Funds, including the oversight of the Sub-Advisor, as well as the background and experience of the persons responsible for such services. The Board noted that the Advisor oversees the Sub-Advisor’s day-to-day management of each Fund’s investments, including portfolio risk monitoring and performance review. The Board considered that the Sub-Advisor is responsible for the selection and ongoing monitoring of the securities in the Funds’ investment portfolios, but that the Advisor executes each Fund’s portfolio trades. In reviewing the services provided, the Board noted the compliance program that had been developed by the Advisor and considered that it includes a robust program for monitoring the Advisor’s, the Sub-Advisor’s and each Fund’s compliance with the 1940 Act, as well as each Fund’s compliance with its investment objective, policies and restrictions. The Board also considered a report from the Advisor with respect to its risk management functions related to the operation of the Funds. Finally, as part of the Board’s consideration of the Advisor’s services, the Advisor, in its written materials and at the April 23, 2018 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 Funds and the other funds in the First Trust Fund Complex. With respect to the Sub-Advisory Agreement, the Board noted that each Fund is an actively-managed ETF and the Sub-Advisor actively manages the Fund’s investments. The Board reviewed the materials provided by the Sub-Advisor and considered the services that the Sub-Advisor provides to each Fund, including the Sub-Advisor’s day-to-day management of the Funds’ investments. In considering the Sub-Advisor’s management of the Funds, the Board noted the background and experience of the Sub-Advisor’s portfolio management team and the Board’s prior meetings with members of the portfolio management team. In light of the information presented and the considerations made, the Board concluded that the nature, extent and quality of the services provided to the Trust and each Fund by the Advisor and the Sub-Advisor under the Agreements have been and are expected to remain satisfactory and that the Sub-Advisor, under the oversight of the Advisor, has managed each Fund consistent with the Fund’s investment objective, policies and restrictions.

The Board considered the unitary fee rate payable by each Fund under the Advisory Agreement for the services provided. The Board noted that the sub-advisory fee for each Fund is paid by the Advisor from the Fund’s unitary fee. The Board considered that as part of the unitary fee the Advisor is responsible for each Fund’s expenses, including the cost of sub-advisory, transfer agency, custody, fund administration, legal, audit and other services and license fees (if any), but excluding 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 Peer Groups, as well as advisory and unitary fee rates charged by the Advisor and the Sub-Advisor to other fund (including ETFs) and non-fund clients, as applicable. Because each Fund’s Peer Group included peer funds that pay a unitary fee and because each Fund pays a unitary fee, the Board determined that expense ratios were the most relevant comparative data point. Based on the information provided, the Board noted that the unitary fee for each Fund was above the median total (net) expense ratio of the peer funds in its respective Peer Group. With respect to the Peer Groups, the Board noted its prior discussions with the Advisor and MPI regarding the assembly of the Peer Group and, at the April 23, 2018 meeting, discussed with the Advisor limitations in creating peer groups for actively-managed ETFs, including that there were no other actively-managed ETFs comparable to the Funds and that the peer funds were either index-based ETFs or open-end mutual funds, and different business models that may affect the pricing of services among ETF sponsors. The Board also noted that, for each Fund, most of the peer funds did not employ an advisor/sub-advisor management structure and only one peer fund in each Fund’s respective Peer Group employed an advisor/sub-advisor management structure with an unaffiliated sub-advisor. The Board took these limitations and differences into account in considering the peer data. With respect to fees charged to other non-ETF clients, the Board considered differences between the Funds and other non-ETF clients that limited their comparability. In considering the unitary fee rates 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 each Fund.

The Board considered performance information for each Fund. The Board noted the process it has established for monitoring each Fund’s performance and portfolio risk on an ongoing basis, which includes quarterly performance reporting from the Advisor and Sub-Advisor for the Funds. The Board determined that this process continues to be effective for reviewing each Fund’s performance. The Board received and reviewed information comparing each Fund’s performance for the one-year period ended December 31, 2017 to the performance of the peer funds in a Peer Group and to that of a broad-based index. Based on the information provided, the Board noted that HDMV outperformed its Peer Group average and benchmark index for the one-year period ended December 31, 2017 and that HUSV underperformed its Peer Group average and benchmark index for the one-year period ended December 31, 2017. The Board noted information provided by the Sub-Advisor on reasons for HUSV’s underperformance.

Page 33

Additional Information (Continued)

First Trust Exchange-Traded Fund III

July 31, 2018 (Unaudited)

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

The Board considered information and discussed with the Advisor whether there were any economies of scale in connection with providing advisory services to the Funds and noted the Advisor’s statement that it believes its expenses will likely increase over the next twelve months as the Advisor continues to make investments in infrastructure and personnel. The Board noted that any reduction in fixed costs associated with the management of the Funds would benefit the Advisor, but that the unitary fee structure provides a level of certainty in expenses for the Funds. The Board considered the revenues and allocated costs (including the allocation methodology) of the Advisor in serving as investment advisor to each Fund for the twelve months ended December 31, 2017 and the estimated profitability level for each Fund calculated by the Advisor based on such data, as well as complex-wide and product-line profitability data, for the same period. The Board noted the inherent limitations in the profitability analysis and concluded that, based on the information provided, the Advisor’s profitability level for each 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 Funds. 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 Funds, may have had no dealings with the Advisor or FTP, and noted that the Advisor does not utilize soft dollars in connection with the Funds. The Board also considered the Advisor’s compensation for fund reporting services provided to the Funds pursuant to a separate Fund Reporting Services Agreement, which is paid from the unitary fee. The Board concluded that the character and amount of potential fall-out benefits to the Advisor were not unreasonable.

The Board considered the Sub-Advisor’s statements to the effect that it is difficult to know if or precisely when measurable economies of scale will be achieved for the Sub-Advisor and that the Sub-Advisor presumes expenses related to providing services will remain approximately the same over the next twelve months. The Board did not review the profitability of the Sub-Advisor with respect to each Fund. The Board noted that the Advisor pays the Sub-Advisor for each Fund from its advisory fee, and its understanding that each Fund’s sub-advisory fee rate was the product of an arm’s length negotiation. The Board concluded that the profitability analysis for the Advisor was more relevant. The Board considered the potential fall-out benefits to the Sub-Advisor from being associated with the Advisor and the Funds. The Board concluded that the character and amount of potential fall-out benefits to the Sub-Advisor were not unreasonable.

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 each Fund. No single factor was determinative in the Board’s analysis.

Page 34

Board of Trustees and Officers

First Trust Exchange-Traded Fund III

July 31, 2018 (Unaudited)

The following tables identify the Trustees and Officers of the Trust. Unless otherwise indicated, the address of all persons is 120 E. Liberty Drive, Suite 400, Wheaton, IL 60187.

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.

Name, Year of Birth and Position with the Trust	Term of Office and Year First Elected or Appointed	Principal Occupations During Past 5 Years	Number of Portfolios in the First Trust Fund Complex Overseen by Trustee	Other Trusteeships or Directorships Held by Trustee During Past 5 Years
INDEPENDENT TRUSTEES
Richard E. Erickson, Trustee (1951)	• Indefinite Term   • Since Inception	Physician; Officer, Wheaton Orthopedics; Limited Partner, Gundersen Real Estate Limited Partnership (June 1992 to December 2016); Member, Sportsmed LLC (April 2007 to November 2015)	155	None
Thomas R. Kadlec, Trustee (1957)	• Indefinite Term   • Since Inception	President, ADM Investor Services, Inc. (Futures Commission Merchant)	155	Director of ADM Investor Services, Inc., ADM Investor Services International, Futures Industry Association, and National Futures Association
Robert F. Keith, Trustee (1956)	• Indefinite Term   • Since Inception	President, Hibs Enterprises (Financial and Management Consulting)	155	Director of Trust Company of Illinois
Niel B. Nielson, Trustee (1954)	• Indefinite Term   • Since Inception	Managing Director and Chief Operating Officer (January 2015 to Present), Pelita Harapan Educational Foundation (Educational Products and Services); President and Chief Executive Officer (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)	155	Director of Covenant Transport, Inc. (May 2003 to May 2014)
INTERESTED TRUSTEE
James A. Bowen(1), Trustee and Chairman of the Board (1955)	• Indefinite Term   • Since Inception	Chief Executive Officer, First Trust Advisors L.P. and First Trust Portfolios L.P.; Chairman of the Board of Directors, BondWave LLC (Software Development Company) and Stonebridge Advisors LLC (Investment Advisor)	155	None

    

(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 35

Board of Trustees and Officers (Continued)

First Trust Exchange-Traded Fund III

July 31, 2018 (Unaudited)

Name and Year of Birth	Position and Offices with Trust	Term of Office and Length of Service	Principal Occupations During Past 5 Years
OFFICERS(2)
James M. Dykas (1966)	President and Chief Executive Officer	• Indefinite Term   • Since January 2016	Managing Director and Chief Financial Officer (January 2016 to Present), Controller (January 2011 to January 2016), Senior Vice President (April 2007 to January 2016), First Trust Advisors L.P. and First Trust Portfolios L.P.; Chief Financial Officer (January 2016 to Present), BondWave LLC (Software Development Company) and Stonebridge Advisors LLC (Investment Advisor)
Donald P. Swade (1972)	Treasurer, Chief Financial Officer and Chief Accounting Officer	• Indefinite Term   • Since January 2016	Senior Vice President (July 2016 to Present), Vice President (April 2012 to July 2016), First Trust Advisors L.P. and First Trust Portfolios L.P.
W. Scott Jardine (1960)	Secretary and Chief Legal Officer	• Indefinite Term   • Since Inception	General Counsel, First Trust Advisors L.P. and First Trust Portfolios L.P.; Secretary and General Counsel, BondWave LLC; Secretary, Stonebridge Advisors LLC
Daniel J. Lindquist (1970)	Vice President	• Indefinite Term   • Since Inception	Managing Director, First Trust Advisors L.P. and First Trust Portfolios L.P.
Kristi A. Maher (1966)	Chief Compliance Officer and Assistant Secretary	• Indefinite Term   • Since Inception	Deputy General Counsel, First Trust Advisors L.P. and First Trust Portfolios L.P.

    

Roger F. Testin (1966)	Vice President	• Indefinite Term   • Since Inception	Senior Vice President, First Trust Advisors L.P. and First Trust Portfolios L.P.
Stan Ueland (1970)	Vice President	• Indefinite Term   • Since Inception	Senior Vice President, First Trust Advisors L.P. and First Trust Portfolios L.P

(2)	The term “officer” means the president, vice president, secretary, treasurer, controller or any other officer who performs a policy making function.

Page 36

Privacy Policy

First Trust Exchange-Traded Fund III

July 31, 2018 (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:

•	Information we receive from you and your broker-dealer, investment advisor or financial representative through interviews, applications, agreements or other forms;
•	Information about your transactions with us, our affiliates or others;
•	Information we receive from your inquiries by mail, e-mail or telephone; and
•	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:

•

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.

•

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.

Use of Web Analytics

We currently use third party analytics tools, Google Analytics and AddThis, to gather information for purposes of improving First Trust’s website and marketing our products and services to you. These tools employ cookies, which are small pieces of text stored in a file by your web browser and sent to websites that you visit, to collect information, track website usage and viewing trends such as the number of hits, pages visited, videos and PDFs viewed and the length of user sessions in order to evaluate website performance and enhance navigation of the website. We may also collect other anonymous information, which is generally limited to technical and web navigation information such as the IP address of your device, internet browser type and operating system for purposes of analyzing the data to make First Trust’s website better and more useful to our users. The information collected does not include any personal identifiable information such as your name, address, phone number or email address unless you provide that information through the website for us to contact you in order to answer your questions or respond to your requests. To find out how to opt-out of these services click on: Google Analytics and AddThis.

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).

May 2017

Page 37

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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

Horizon Investments, LLC

6210 Ardrey Kell Road, Suite 300

Charlotte, NC 28277

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

First Trust California Municipal High Income ETF (FCAL)

Annual Report

July 31, 2018

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”) 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 California Municipal High 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 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 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 web page at 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 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 the prospectus, the statement of additional information, and other Fund regulatory filings.

First Trust California Municipal High Income ETF (FCAL)

Annual Letter from the Chairman and CEO

July 31, 2018

Dear Shareholders,

First Trust is pleased to provide you with the annual report for the First Trust California Municipal High Income ETF (the “Fund”) which contains detailed information about the Fund for the twelve months ended July 31, 2018, including a market overview and a performance analysis for the period. We encourage you to read this report carefully and discuss it with your financial advisor.

As I mentioned in my January 2018 letter, 2017 was a very strong year for U.S. markets. Investors were rewarded with rising markets and very little volatility. As 2018 began, there was much enthusiasm for the “Tax Cuts and Jobs Act of 2017” tax reform bill, which President Trump had signed into law on December 22, 2017, and the potential increase in take-home pay for many Americans, as well as the reduction in the federal corporate tax rate from 35% to 21% that the new tax package would bring. Early in the new year, many investors were watching the Federal Reserve (the “Fed”) and its signaled intention to continue raising interest rates at a gradual pace (it had raised rates three times in 2017). Based on strong job growth and the economic outlook in the U.S., the Fed did, in fact, raise interest rates this year, on March 21 and June 13 and indicated at their June 2018 meeting that two additional rates hikes are expected before year-end.

For the entire first quarter of 2018, increased market volatility was the norm for U.S. markets. The Dow Jones Industrial Average (“DJIA”) was off to a strong start in January continuing its very strong performance displayed throughout 2017. However, February was a different story. Early in the month, the DJIA plunged 567 points and sank into “correction” territory (defined as a drop of 10% from the index’s high) and in just two weeks during February, was down more than 3,200 points. However, as February came to a close, the DJIA was back on track and up from its lows earlier in the month. The market continued its volatility during the second quarter of 2018. The DJIA closed out both April and May slightly down, but ended both June and July slightly up.

Increasing trade tensions have had an impact on markets around the world and could continue to do so in the future. The talk from President Trump on tariffs and trade agreements gave many investors pause about the U.S. stock market and its long-standing economic growth and what the future might hold. Despite market volatility, we continue to believe that the combination of low interest rates, low inflation and strong corporate earnings still point to a positive economic environment and further growth, though we understand that past performance can never guarantee future performance.

Globally, markets were volatile in the first seven months of 2018, but the MSCI AC World Index, which captures 23 developed markets and 24 emerging markets, ended July slightly up. Analysts believe European companies are set up for growing earnings and credit upswings, which seems to bode well for global market performance. In addition, we believe the longer-term drivers of positive demographics, lower debt levels and improving productivity may lead to a multi-year cyclical upswing in emerging market economic fundamentals.

We continue to believe that you should invest for the long term and be prepared for market movements, which can happen at any time. You can do this by keeping current on your portfolio and investment goals and by speaking regularly with your investment professional. Markets go up and they also go down, but savvy investors are prepared for either through careful attention to investment goals.

Thank you for giving First Trust the opportunity to be a part of your financial plan. We value our relationship with you and will report on the Fund again in six months.

Sincerely,

James A. Bowen

Chairman of the Board of Trustees

Chief Executive Officer of First Trust Advisors L.P.

Page 1

First Trust California Municipal High Income ETF (FCAL)

The primary investment objective of First Trust California Municipal High Income ETF (the “Fund”) is to seek to provide current income that is exempt from regular federal income taxes and California 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 and California income taxes (“Municipal Securities”). The types of Municipal Securities in which the Fund may invest include municipal lease obligations (and certificates of participation in such obligations), municipal general obligation bonds, municipal revenue bonds, municipal notes, municipal cash equivalents, private activity bonds (including without limitation industrial development bonds), and pre-refunded and escrowed to maturity bonds. The Fund lists and principally trades its shares on The Nasdaq Stock Market LLC under the ticker symbol “FCAL.”

 

Performance
		Average Annual Total Returns	Cumulative Total Returns
	1 Year Ended 7/31/18	Inception (6/20/17) to 7/31/18	Inception (6/20/17) to 7/31/18
Fund Performance
NAV	2.83%	3.00%	3.34%
Market Price	2.92%	3.16%	3.52%
Index Performance
Bloomberg Barclays 10 Year California Exempt Index	0.49%	0.69%	0.76%

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 period 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 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

First Trust California Municipal High Income ETF (FCAL) (Continued)

Sector Allocation	% of Total Investments (including cash)
Education	13.6%
Hospital	13.0
Special Assessment	10.6
Continuing Care Retirement Communities	8.5
Insured	8.4
Higher Education	6.5
Government Obligation Bond - Unlimited Tax	5.6
Tobacco	4.2
Water & Sewer	4.2
Airport	3.3
Government Obligation Bond - Limited Tax	2.8
Tax Increment	2.7
Industrial Development Bond	1.7
Student Housing	1.5
Skilled Nursing	1.3
Dedicated Tax	1.2
Toll Road	1.0
Gas	0.8
Port	0.6
Certificates of Participation	0.1
Other Health	0.1
Cash	8.3
Total	100.0%

Credit Rating(1)	% of Total Investments (including cash)
AAA	1.8%
AA	20.2
A	14.0
BBB	19.9
BB	10.6
B	0.9
Not Rated	21.5
MIG1/SP-1+	2.8
Cash	8.3
Total	100.0%

(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 rating is 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

First Trust California Municipal High Income ETF (FCAL) (Continued)

Frequency Distribution of Discounts and Premiums

Bid/Ask Midpoint vs. NAV through July 31, 2018

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 21, 2017 (commencement of trading) through July 31, 2018. 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%
6/21/17 – 7/31/17	14	0	0	0
8/1/17 – 7/31/18	204	10	1	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%
6/21/17 – 7/31/17	14	0	0	0
8/1/17 – 7/31/18	37	0	0	0

Page 4

Portfolio Commentary

First Trust California Municipal High Income ETF (FCAL)

Annual Report

July 31, 2018 (Unaudited)

Advisor

First Trust Advisors L.P. (“First Trust” or the “Advisor”) is the investment advisor to the First Trust California Municipal High Income ETF (the “Fund”). First Trust is responsible for the ongoing monitoring of the Fund’s investment portfolio, managing the Fund’s business affairs and providing certain administrative services necessary for the management of the Fund.

Portfolio Management Team

Tom Futrell, CFA, Senior Vice President, Senior Portfolio Manager

Johnathan N. Wilhelm, Senior Vice President, Senior Portfolio Manager

The 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 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 First Trust investment portfolios and separately managed accounts.

Commentary

The Fund is an actively managed exchange-traded fund. The Fund’s primary investment objective seeks to provide income exempt from regular federal income taxes and California income taxes. 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 and California income taxes (“Municipal Securities”). In addition, under normal market conditions, the Fund invests at least 50% of its net assets in Municipal Securities that are rated investment grade at the time of purchase and up to 50% of its net assets in Municipal Securities that at the time of purchase are rated non-investment grade. This commentary discusses the 12-month market performance and the Fund’s performance for the 12-month period ended July 31, 2018.

Market Recap

For the 12-month period ended July 31, 2018, municipal bonds generated a total return of 0.99% as measured by the Bloomberg Barclays Municipal Bond Index (BMBI). During the same period, the Bloomberg Barclays 10 Year California Exempt Index and Non-Investment Grade Index produced returns of 0.49% and 6.82%, respectively. By comparison, the Bloomberg Barclays U.S. Treasury Index generated a negative return of -1.23% during the 12-month period.

The following were major factors in explaining the municipal bond market’s performance:

•	Healthy U.S. economic fundamentals, including strong non-farm payroll growth, positive average hourly earnings trends, and higher core inflation statistics, were contributing factors in higher U.S. Treasury bond rates. Over the past 12 months, 10-year Treasury yields increased 65 basis points (bps) from 2.31% on July 31, 2017 to 2.96% on July 31, 2018. This compares to a peak end of day 10-year Treasury yield of 3.11% on May 17, 2018. Additional influences were the passage of federal tax reform and U.S. Federal Reserve (the “Fed”) activity, including the continuation of rate normalization to the upside and the process of balance sheet downsizing. The Federal Open Market Committee has increased short-term interest rates by 25 bps twice this year in March and June and has indicated that it will continue to tighten monetary policy at a gradual pace, supported by future economic data, with its “dot plot” indicating two additional Fed rate hikes by year-end.
•	Because of a record setting December 2017 in which municipal bond new issue supply was over $64 billion as a result of issuers rushing to market in the face of tax reform that ultimately eliminated the advance refunding of municipal bonds on a tax-exempt basis, new issue supply in 2017 totaled $448 billion. Through the end of July 2018, primary market issuance was down 15.8% year-over-year, with refunding activity down over 50%.
•	Municipals experienced positive, but volatile retail demand over the reporting period. Over the past twelve months, the market has seen $22.4 billion of net inflows into municipal bond funds and municipal exchange-traded funds (Source: ICI). Year-to-date through July 31, 2018, inflows have totaled $13.7 billion. In spite of these strong inflows, the market experienced outflows of $1.2 billion in December 2017, $1.1 billion in February 2018, and $1.9 billion in April 2018.
•	Municipal bond credit quality fundamentals have continued to be stable over the past 12 months. Through July 31, 2018, data prepared by Municipal Market Analytics, Inc. (“MMA”) showed total year-to-date defaults of 14 borrowers representing just $2.74 billion in par value, compared with defaults of 31 borrowers representing $33.28 billion in par value for the same

Page 5

Portfolio Commentary (Continued)

First Trust California Municipal High Income ETF (FCAL)

Annual Report

July 31, 2018 (Unaudited)

period a year ago. The par value of defaults is extremely low when compared to a $3.7 trillion municipal market. Despite the broadly healthy market, we believe large municipal borrowers, such as the States of Illinois and New Jersey, will continue to grapple with growing pension and healthcare liabilities that outpace revenue growth.

Performance Analysis

The Fund’s net asset value (“NAV”) and market performance for the 12-month period ended July 31, 2018 was 2.83% and 2.92%, respectively, versus the Bloomberg Barclays 10 Year California Exempt Index (the “Benchmark”) return of 0.49% during the same period.

As of July 31, 2018, the Fund’s market price of $50.23 represented a premium of 0.24% to its NAV of $50.11. The market price of the Fund’s shares fluctuates from time to time and may be higher or lower than the Fund’s NAV. The distribution paid on July 31, 2018 of $0.125 represents a tax-exempt annualized distribution rate of 2.99% based on the Fund’s closing market price of $50.23 on July 31, 2018. The Fund’s distribution rate is not constant and is subject to change over time based on the performance of the Fund.

Sectors within the municipal market that positively contributed to the Fund’s performance over the 12-month period ended July 31, 2018 included charter schools, senior living, hospitals, special assessment, tobacco, dedicated tax, general obligation, and water and sewer. The Fund’s modified duration at July 31, 2018 was 5.47 years versus 5.59 years for the Benchmark. The Fund’s effective duration at July 31, 2018 was 6.62 years. The Fund’s allocation to municipal securities with longer modified durations (6 years and longer) generally did well during the trailing 12-month period. As of July 31, 2018, the Fund’s weighted-average credit quality (approximately BBB/Baa) is lower than the Benchmark, which has a stated average credit rating of AA2/AA3. The Fund’s investments in “BBB” rated, sub-investment grade and non-rated municipal securities generated strong performance for the period. Retail demand continues to be strong and investors have increasingly reached for yield lower on the credit spectrum in this environment of low nominal rates and lower new issue supply. As a result, lower investment grade strategies have generally benefited from credit spread compression, which helps to explain the Fund’s outperformance relative to the Benchmark over the 12-month period ended July 31, 2018.

Market Outlook

We believe technical factors will continue to be positive for the municipal market. Despite our expectation for higher rates in the remainder of 2018, we believe flows into municipal bond funds will remain positive, but volatile. Given the relative attractiveness of risk-adjusted municipal yields versus other asset classes, we believe any sustained outflows which lead to higher yields will ultimately be viewed by investors as an attractive buying opportunity. Regarding supply, through the end of July 2018, primary market issuance decreased by 15.8% year-over-year, totaling $191 billion according to Barclays. We believe issuance will decline to $290-$330 billion in 2018 from $448 billion in 2017. With issuers having rushed to market in November-December of 2017, new issue supply could decline over $100 billion in 2018, in our view.

We expect municipal credit quality to remain broadly stable in 2018. Through the end of July 2018, data prepared by MMA showed total year-to-date defaults of 14 representing just $2.74 billion in par value, compared with 31 defaults totaling $33.28 billion in par value for the same period a year ago, with Puerto Rico and its corporate affiliates representing a large percentage of the par value. We maintain positive sector outlooks for senior living, toll roads, airports and special tax districts backed by residential real estate assets. We believe senior living projects, tax increment projects, and special assessment districts should all benefit from a continued recovery and growth in the U.S. residential real estate markets, especially in growing demographic areas such as California, Colorado, Texas and Florida. We continue to exercise caution on hospitals, especially those located in states that adopted the Affordable Care Act and possess high exposures to Medicaid coupled with weak operating cash flow and debt service coverage.

Given our expectation for higher yields, our focus for the Fund will be on the intermediate portion of the yield curve. Bonds in this area of the curve are typically less interest-rate sensitive, benefit from the steeper yield curve slope, and are less sensitive to Fed rate hikes than shorter dated bonds. We currently favor bonds with maturities of 7-12 years, as well as bonds maturing in 13-20 years, but priced to a 6-9 year call. We continue to favor essential service revenue bond sectors such as charter schools, special assessment bonds, senior living, and electric and gas utilities. We will predominantly invest in projects in which we receive a first mortgage or tax lien, as well as a gross revenue pledge. With this as a backdrop, we 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 6

First Trust California Municipal High Income ETF (FCAL)

Understanding Your Fund Expenses

July 31, 2018 (Unaudited)

As a shareholder of the First Trust California Municipal High Income ETF (the “Fund”), you incur two types of costs: (1) transaction costs; and (2) ongoing costs, including management fees, distribution and/or service (12b-1) fees, if any, and other Fund expenses. This Example is intended to help you understand your ongoing costs 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 July 31, 2018.

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.

	Beginning Account Value February 1, 2018	Ending Account Value July 31, 2018	Annualized Expense Ratio Based on the Six-Month Period (a)	Expenses Paid During the Six-Month Period (b)
First Trust California Municipal High Income ETF (FCAL)
Actual	$1,000.00	$1,012.90	0.50%	$2.50
Hypothetical (5% return before expenses)	$1,000.00	$1,022.32	0.50%	$2.51

    

(a)	These expense ratios reflect expense waivers. See Note 3 in the Notes to Financial Statements.
(b)	Expenses are equal to the annualized expense ratios as indicated in the table multiplied by the average account value over the period (February 1, 2018 through July 31, 2018), multiplied by 181/365 (to reflect the six-month period).

Page 7

First Trust California Municipal High Income ETF (FCAL)

Portfolio of Investments

July 31, 2018

Principal Value		Description		Stated Coupon		Stated Maturity		Value
MUNICIPAL BONDS – 95.1%
		California – 85.7%
$150,000		Alameda CA Corridor Transprtn Auth Ref Subordinate Lien, Ser A		5.00%		10/01/25		$173,175
300,000		Antelope Vly CA Hlthcare Dist Ref, Ser A		5.25%		03/01/36		325,734
200,000		Antelope Vly E Kern CA Wtr Agy Wtr Rev Ref		5.00%		06/01/35		229,226
200,000		CA Sch Fin Auth Sch Fac Rev Alliance Clg Ready Pub Schs Proj, Ser C		4.50%		07/01/26		217,874
200,000		CA Sch Fin Auth Sch Fac Rev Ref Hlth Learning Proj, Ser A (a)		4.00%		07/01/25		212,016
200,000		CA Sch Fin Auth Sch Fac Rev Ref Hlth Learning Proj, Ser A (a)		5.00%		07/01/32		221,826
515,000		CA St Hlth Facs Fing Auth Rev Adventist Hlth Sys West, Ser A		4.00%		03/01/33		535,085
250,000		CA St Hlth Facs Fing Auth Rev Sutter Health, Ser A		5.00%		11/15/30		296,262
250,000		CA St Muni Fin Auth Chrt Sch Lease Rev Sycamore Academy Proj (b)		5.38%		07/01/34		255,123
250,000		CA St Muni Fin Auth Chrt Sch Lease Rev Vista Chrt Middle Sch Proj (c)		5.38%		07/01/34		254,738
300,000		CA St Muni Fin Auth Chrt Sch Rev Palmdale Aerospace Academy Proj (a)		4.00%		07/01/26		304,341
250,000		CA St Muni Fin Auth Chrt Sch Rev, Ser A (a)		5.50%		06/01/38		258,652
75,000		CA St Muni Fin Auth Eductnl Rev Ref American Heritage Edu, Ser A		4.00%		06/01/26		79,604
150,000		CA St Muni Fin Auth Rev Channing House Proj, Ser B		5.00%		05/15/32		176,318
155,000		CA St Muni Fin Auth Rev Ref Biola Univ		5.00%		10/01/37		175,685
200,000		CA St Muni Fin Auth Rev Ref Eisenhower Med Ctr, Ser A		5.00%		07/01/32		224,260
155,000		CA St Muni Fin Auth Rev Ref Eisenhower Med Ctr, Ser A		5.00%		07/01/37		170,920
250,000		CA St Muni Fin Auth Rev Ref Emerson Clg, Ser B		5.00%		01/01/33		285,447
155,000		CA St Muni Fin Auth Rev Ref Retmnt Hsg Fdtn Oblig Grp, Ser A		5.00%		11/15/26		179,806
435,000		CA St Muni Fin Auth Rev Ref Retmnt Hsg Fdtn Oblig Grp, Ser A		5.00%		11/15/27		508,110
305,000		CA St Poll Control Fin Auth Sol Wst Disp Rev Ref-Amt-Ser B-2-Waste Mgmt Inc		3.13%		11/01/40		308,254
15,000		CA St Pub Wks Brd Lease Rev Judicial Council CA, Ser B		5.00%		06/01/34		17,138
300,000		CA St Sch Fin Auth Chrt Sch Rev Rocketship Pub Schs, Ser G (a)		5.00%		06/01/37		315,051
100,000		CA St Sch Fin Auth Chrt Sch Rev Summit Pub Schs (a)		5.00%		06/01/25		112,069
210,000		CA St Sch Fin Auth Chrt Sch Rev Summit Pub Schs (a)		5.00%		06/01/31		233,741
250,000		CA St Stwd Cmntys Dev Auth Student Hsg Rev Ref Chf Irvine LLC		5.00%		05/15/35		280,052
400,000		CA St Various Purpose		5.00%		10/01/35		462,392
500,000		CA Stwd Cmntys Dev Auth Rev Loma Linda Univ Med Ctr, Ser A (a)		5.00%		12/01/30		542,400
200,000		CA Stwd Cmntys Dev Auth Rev Ref CA Baptist Univ, Ser A (a)		3.00%		11/01/22		200,540
250,000		CA Stwd Cmntys Dev Auth Rev Ref CA Baptist Univ, Ser A (a)		5.00%		11/01/32		274,625
190,000		CA Stwd Cmntys Dev Auth Rev Ref Front Porch Cmntys & Svcs, Ser A		5.00%		04/01/27		222,591
100,000		CA Stwd Cmntys Dev Auth Rev Ref Front Porch Cmntys & Svcs, Ser A		5.00%		04/01/31		114,663
50,000		CA Stwd Cmntys Dev Auth Rev Ref Front Porch Cmntys & Svcs, Ser A		4.00%		04/01/32		51,967
50,000		CA Stwd Cmntys Dev Auth Rev Ref Insd Enloe Med Ctr		5.00%		08/15/33		57,390
500,000		El Dorado CA Irr Dist Rev Ref, Ser C		4.00%		03/01/34		527,760
155,000		Fontana CA Spl Tax Cmnty Facs Dist #80 Bella Strada		5.00%		09/01/29		176,308
140,000		Fresno CA Jt Pwrs Fing Auth Lease Rev Ref Master Lease Proj, Ser A, AGM		5.00%		04/01/32		160,873
220,000		Golden St Tobacco Securitization Corp CA Tobacco Settlement Ref, Ser A-1		5.00%		06/01/26		252,978
350,000		Golden St Tobacco Securitization Corp CA Tobacco Settlement Ref, Ser A-1		5.00%		06/01/47		359,667
250,000		La Verne CA Cops Ref Brethren Hillcrest Homes		5.00%		05/15/36		262,370

Page 8

See Notes to Financial Statements

First Trust California Municipal High Income ETF (FCAL)

Portfolio of Investments (Continued)

July 31, 2018

Principal Value		Description		Stated Coupon		Stated Maturity		Value
MUNICIPAL BONDS (Continued)
		California (Continued)
$200,000		Lammersville CA Jt Unif Sch Dist Spl Tax Cmnty Facs Dist #2014-1 Impt Area #1 Mountain House Sch Facs		5.00%		09/01/42		$221,030
100,000		Long Beach CA Bond Fin Auth Nat Gas Purchase Rev, Ser A		5.25%		11/15/23		113,164
25,000		Long Beach CA Bond Fin Auth Nat Gas Purchase Rev, Ser A		5.50%		11/15/30		30,917
500,000		Los Angeles CA Dept of Arpts Arpt Rev Amt Sub Los Angeles Intl Arpt, Ser A		5.00%		05/15/29		591,220
10,000		Los Angeles CA Dept of Arpts, Ser E		5.00%		05/15/28		11,605
500,000		Los Angeles CA Trans		4.00%		06/27/19		511,015
100,000		Marina CA Redev Agy Successor Agy Tax Allocation Hsg, Ser B		5.00%		09/01/27		111,169
250,000		Marina CA Redev Agy Successor Agy Tax Allocation Hsg, Ser B		5.00%		09/01/33		273,222
100,000		Modesto CA Spl Tax Ref-Cmnty Facs Dist # 2004-1 Vlg 1 #2		5.00%		09/01/27		112,637
190,000		Ontario CA Cmnty Facs Dist #24 Spl Tax Park Pl Facs Phase I		5.00%		09/01/34		210,186
250,000		Palomar Hlth CA Rev Ref		5.00%		11/01/31		276,085
100,000		Port Of Oakland CA AMT Ref Inter Lien, Ser D		5.00%		11/01/25		116,546
200,000		Rancho Cordova CA Cmnty Facs Dist Spl Tax Ref #2004-1 Sunridge Park Area		5.00%		09/01/25		229,046
300,000		River Islands CA Pub Fing Auth Spl Tax Ref Cmnty Facs Dist #2003-1		5.38%		09/01/31		321,189
185,000		Riverside CA Unif Sch Dist Fing Auth Spl Tax Ref, BAM		5.00%		09/01/34		207,999
100,000		Roseville CA Fin Auth Spl Tax Rev Ref, Ser A		5.00%		09/01/25		117,762
100,000		Roseville CA Fin Auth Spl Tax Rev Ref, Ser B		3.00%		09/01/21		102,249
200,000		Sacramento CA Spl Tax Natomas Meadows Cmnty Facs Dist #2007-01 (a)		5.00%		09/01/32		213,682
10,000		San Diego Cnty CA Limited Rev Obligs Ref Sanford Burnham Prebys Med Discovery Institute, Ser A		5.00%		11/01/28		11,462
100,000		San Francisco City & Cnty CA Redev Agy Successor Agy Tax Ref Mission Bay N Redev Proj, Ser A		5.00%		08/01/35		114,663
165,000		San Joaquin Hills CA Transprtn Corridor Agy Toll Road Rev Cap Apprec Ref, Ser A, NATL-RE		(d)		01/15/29		111,441
175,000		Sweetwater CA Union High Sch Dist Ref		5.00%		08/01/30		201,640
400,000		Temecula Vly Unif Sch Dist Fing Auth CA Spl Tax Rev, BAM		5.00%		09/01/34		448,204
200,000		Victor CA Elem Sch Dist Cmnty Facs Dist Spl Tax Ref 2005-1, BAM		5.00%		09/01/46		222,552
100,000		W Contra Costa CA Unif Sch Dist Ref, Ser A		5.00%		08/01/31		116,446
15,000		Washington Twp CA Hlth Care Dist Ref, Ser Dt		4.00%		08/01/29		16,159
								15,030,321
		Georgia – 1.4%
225,000		Marietta GA Dev Auth Ref Univ Facs Life Univ, Ser A (a)		5.00%		11/01/27		249,390
		Guam – 1.2%
100,000		Guam Govt Business Privilage Tax Rev Ref, Ser D		5.00%		11/15/32		109,548
100,000		Guam Govt Business Privilage Tax Rev, Ser B-1		5.00%		01/01/37		104,186
								213,734
		Illinois – 1.3%
35,000		Chicago IL Ref, Ser C, CABS		(d)		01/01/22		30,934
85,000		Chicago IL Ref, Ser C, CABS		(d)		01/01/24		68,998
120,000		IL St, Ser A		4.00%		01/01/25		120,415
								220,347
		Kansas – 1.2%
200,000		KS St Dev Fin Auth Rev Vlg Shalom Proj, Ser A		5.25%		11/15/33		205,424

See Notes to Financial Statements

Page 9

First Trust California Municipal High Income ETF (FCAL)

Portfolio of Investments (Continued)

July 31, 2018

Principal Value		Description		Stated Coupon		Stated Maturity		Value
MUNICIPAL BONDS (Continued)
		North Dakota – 1.3%
$220,000		Grand Forks ND Sr Hsg & Nur Fac Rev Ref Vly Homes Oblig Grp, Ser A		5.00%		12/01/23		$231,319
		Ohio – 0.9%
160,000		Buckeye OH Tobacco Settlement Fing Auth Asset Bkd Sr Turbo, Ser A-2		5.38%		06/01/24		160,003
		Puerto Rico – 0.9%
140,000		Puerto Rico Cmwlth Ref Pub Impt, Ser A, AGM		5.00%		07/01/35		151,501
		Texas – 1.2%
215,000		Oak Point TX Spl Assmnt Rev Wildridge Pub Impt Dist #1 Impt Area #2 Proj-Accd Inv (a)		3.50%		09/01/23		214,897

    

	Total Investments – 95.1%		16,676,936
	(Cost $16,665,987) (e)
	Net Other Assets and Liabilities – 4.9%		862,524
	Net Assets – 100.0%		$17,539,460

Futures Contracts (See Note 2D - Futures Contracts in the Notes to Financial Statements):

Futures Contracts		Position		Number of Contracts		Expiration Date		Notional Value		Unrealized Appreciation (Depreciation)/ Value
U.S. Treasury Ultra 10-Year Futures		Short		4		Sep 2018		$ (508,437)		$(937)

    

(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. (the “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 July 31, 2018, securities noted as such amounted to $3,353,230 or 19.1% of net assets.
(b)	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).
(c)	Pursuant to procedures adopted by the Trust’s Board of Trustees, this security has been determined to be illiquid by the Advisor.
(d)	Zero coupon bond.
(e)	Aggregate cost for federal income tax purposes was $16,657,833. As of July 31, 2018, the aggregate gross unrealized appreciation for all investments in which there was an excess of value over tax cost was $75,550 and the aggregate gross unrealized depreciation for all investments in which there was an excess of tax cost over value was $57,384. The net unrealized appreciation was $18,166. The amounts presented are inclusive of derivative contracts.

    

AGM	Assured Guaranty Municipal Corp.
AMT	Alternative Minimum Tax
BAM	Building America Mutual
CABS	Capital Appreciation Bonds
NATL-RE	National Public Finance Guarantee Corp.

Page 10

See Notes to Financial Statements

First Trust California Municipal High Income ETF (FCAL)

Portfolio of Investments (Continued)

July 31, 2018

Valuation Inputs

A summary of the inputs used to value the Fund’s investments as of July 31, 2018 is as follows (see Note 2A - Portfolio Valuation in the Notes to Financial Statements):

ASSETS TABLE
	Total Value at 7/31/2018	Level 1 Quoted Prices	Level 2 Significant Observable Inputs	Level 3 Significant Unobservable Inputs
Municipal Bonds*	$ 16,676,936	$ —	$ 16,676,936	$ —
LIABILITIES TABLE
	Total Value at 7/31/2018	Level 1 Quoted Prices	Level 2 Significant Observable Inputs	Level 3 Significant Unobservable Inputs
Futures	$ (937)	$ (937)	$ —	$ —

    

*	See Portfolio of Investments for state and territory breakout.

All transfers in and out of the Levels during the period are assumed to occur on the last day of the period at their current value. There were no transfers between Levels at July 31, 2018.

See Notes to Financial Statements

Page 11

First Trust California Municipal High Income ETF (FCAL)

Statement of Assets and Liabilities

July 31, 2018

ASSETS:
Investments, at value (Cost $16,665,987)	$ 16,676,936
Cash	1,504,239
Cash segregated as collateral for open futures contracts	6,253
Interest receivable	172,880
Total Assets	18,360,308
LIABILITIES:
Payables:
Investment securities purchased	813,344
Investment advisory fees	6,567
Variation margin	937
Total Liabilities	820,848
NET ASSETS	$17,539,460
NET ASSETS consist of:
Paid-in capital	$ 17,522,927
Par value	3,500
Accumulated net investment income (loss)	16,960
Accumulated net realized gain (loss) on investments and futures	(13,939)
Net unrealized appreciation (depreciation) on investments and futures	10,012
NET ASSETS	$17,539,460
NET ASSET VALUE, per share	$50.11
Number of shares outstanding (unlimited number of shares authorized, par value $0.01 per share)	350,002

Page 12

See Notes to Financial Statements

First Trust California Municipal High Income ETF (FCAL)

Statement of Operations

For the Year Ended July 31, 2018

INVESTMENT INCOME:
Interest		$ 404,854
Total investment income		404,854
EXPENSES:
Investment advisory fees		75,738
Total expenses		75,738
Fees waived by the investment advisor		(17,478)
Net expenses		58,260
NET INVESTMENT INCOME (LOSS)		346,594
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments		18,018
Futures		(5,561)
Net realized gain (loss)		12,457
Net change in unrealized appreciation (depreciation) on:
Investments		(25,737)
Futures		(937)
Net change in unrealized appreciation (depreciation)		(26,674)
NET REALIZED AND UNREALIZED GAIN (LOSS)		(14,217)
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS		$ 332,377

See Notes to Financial Statements

Page 13

First Trust California Municipal High Income ETF (FCAL)

Statements of Changes in Net Assets

	Year Ended 7/31/2018		Period Ended 7/31/2017 (a)
OPERATIONS:
Net investment income (loss)	$ 346,594		$ 19,564
Net realized gain (loss)	12,457		(17,501)
Net change in unrealized appreciation (depreciation)	(26,674)		36,686
Net increase (decrease) in net assets resulting from operations	332,377		38,749
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income	(330,003)		(19,150)
Net realized gain	(8,940)		—
Return of capital	—		(850)
Total distributions to shareholders	(338,943)		(20,000)
SHAREHOLDER TRANSACTIONS:
Proceeds from shares sold	7,517,177		10,010,100
Cost of shares redeemed	—		—
Net increase (decrease) in net assets resulting from shareholder transactions	7,517,177		10,010,100
Total increase (decrease) in net assets	7,510,611		10,028,849
NET ASSETS:
Beginning of period	10,028,849		—
End of period	$ 17,539,460		$ 10,028,849
Accumulated net investment income (loss) at end of period	$16,960		$412
CHANGES IN SHARES OUTSTANDING:
Shares outstanding, beginning of period	200,002		—
Shares sold	150,000		200,002
Shares outstanding, end of period	350,002		200,002

    

(a)	Inception date is June 20, 2017, 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 California Municipal High Income ETF (FCAL)

Financial Highlights

For a Common Share outstanding throughout each period

	Year Ended 7/31/2018		Period Ended 7/31/2017 (a)
Net asset value, beginning of period	$ 50.14		$ 50.00
Income from investment operations:
Net investment income (loss)	1.45		0.10
Net realized and unrealized gain (loss)	(0.04)		0.14
Total from investment operations	1.41		0.24
Distributions paid to shareholders from:
Net investment income	(1.40)		(0.10)
Net realized gain	(0.04)		—
Return of capital	—		(0.00) (b)
Total distributions	(1.44)		(0.10)
Net asset value, end of period	$50.11		$50.14
Total return (c)	2.83%		0.50%
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000’s)	$ 17,539		$ 10,029
Ratio of total expenses to average net assets	0.65%		0.65% (d)
Ratio of net expenses to average net assets	0.50%		0.50% (d)
Ratio of net investment income (loss) to average net assets	2.97%		1.74% (d)
Portfolio turnover rate (e)	91%		22%

    

(a)	Inception date is June 20, 2017, which is consistent with the commencement of investment operations and is the date the initial creation units were established.
(b)	Amount is less than $0.01.
(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. The total return would have been lower if certain fees had not been waived by the investment advisor.
(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.

See Notes to Financial Statements

Page 15

Notes to Financial Statements

First Trust California Municipal High Income ETF (FCAL)

July 31, 2018

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 thirteen funds that are currently offering shares. This report covers the First Trust California Municipal High Income ETF (the “Fund”), a non-diversified series of the Trust, which trades under the ticker FCAL 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 seek to provide current income that is exempt from regular federal income taxes and California 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 and California 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.