First Trust Exchange-Traded Fund III

Annual Report

July 31, 2020

Shareholder Letter	2
Fund Performance Overview
First Trust Horizon Managed Volatility Domestic ETF (HUSV)	3
First Trust Horizon Managed Volatility Developed International ETF (HDMV)	5
First Trust Horizon Managed Volatility Small/Mid ETF (HSMV)	7
Notes to Fund Performance Overview	9
Portfolio Commentary	10
Understanding Your Fund Expenses	14
Portfolio of Investments
First Trust Horizon Managed Volatility Domestic ETF (HUSV)	15
First Trust Horizon Managed Volatility Developed International ETF (HDMV)	17
First Trust Horizon Managed Volatility Small/Mid ETF (HSMV)	20
Statements of Assets and Liabilities	24
Statements of Operations	25
Statements of Changes in Net Assets	26
Financial Highlights	28
Notes to Financial Statements	31
Report of Independent Registered Public Accounting Firm	38
Additional Information	39
Board of Trustees and Officers	47
Privacy Policy	49

Caution Regarding Forward-Looking Statements

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

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

Performance and Risk Disclosure

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

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

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

How to Read This Report

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

By reading the portfolio commentary by the portfolio management team of each Fund, you may obtain an understanding of how the market environment affected each Fund. 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, 2020

Dear Shareholders,

First Trust is pleased to provide you with the annual report for the Managed Volatility Funds of First Trust Exchange-Traded Fund III (the “Funds”), which contains detailed information about the Funds for the 12-month period ended July 31, 2020. Please note that the First Trust Horizon Managed Volatility Small/Mid ETF (“HSMV”) was incepted on April 6, 2020, and so the information contained in this letter and the annual report prior to that date will not apply to this Fund.

When I think back to the direction the U.S. economy was headed midway through 2018, the first thought that comes to mind is normalization. At that time, it was a welcome notion. If you recall, the Trump Administration signed the Tax Cuts & Jobs Act of 2017 on December 22, 2017. Perhaps the most exciting part of the new tax law was the slashing of the federal corporate tax rate from 35%, which was among the highest of any country in the world, to 21%. This was well received, in our opinion. U.S. economic activity was rising even before the ink was dry on the tax bill. Real U.S. gross domestic product grew at an annualized rate of 3.9% in the fourth quarter of 2017, and then rose an annualized 3.8% in the first quarter of 2018, according to the Bureau of Economic Analysis. The last time U.S. economic growth had exceeded the 3.0% mark was in the first quarter of 2015. Over the two terms of the Obama Administration (2009-2016), U.S. economic growth averaged just 2.0%, which was modest by historical standards. Brian Wesbury, Chief Economist at First Trust Advisors L.P., referred to it as the “Plow Horse Economy.” The main takeaway here is that the Trump Administration’s tax cuts were helping to drive economic growth to more normalized levels. The process had begun.

As economic growth was normalizing in 2018, so were interest rates and bond yields. The Federal Reserve (the “Fed”) raised the federal funds target rate (upper bound) from 1.50% at the start of 2018 to 2.50% at year-end, or an increase of 100 basis points (“bps”). The yield on the 10-Year Treasury Note (“T-Note”), which the Fed does not control, rose 83 bps from the start of 2018 to its calendar year peak of 3.24% on November 8, 2018. The point here is that while interest rates and bond yields were well into the process of normalizing, they were still below their historical norms. For the 30-year period ended December 31, 2018, the federal funds target rate (upper bound) averaged 3.18%, while the 10-Year T-Note’s average yield was 4.71%, according to Bloomberg. If you recall, industry pundits had been characterizing the persistent low-rate, low-growth climate as the “new normal.” While the concept of getting back to normal in the economy and markets looked achievable, in the end, it was not meant to be. What derailed the momentum? In a word: tariffs. In March 2018, less than three months after enacting its tax reform legislation, the Trump Administration initiated a tariff program targeting imported goods and services from the major trading partners of the U.S. In February 2020, the White House acknowledged that the Trump Administration’s trade policies “depressed economic growth and business investment,” according to Bloomberg. President Trump was pressuring the Fed to lower interest rates months before the coronavirus (“COVID-19”) showed itself. The tariffs are still in play today.

Let us fast forward to today’s climate. For all intents and purposes, from a monetary policy standpoint, we are back to where we were following the 2008-2009 financial crisis. The federal funds target rate (upper bound) stood at 0.25% on July 31, 2020. That is where it sat from December 2008 to December 2015. That puts us farther away from normalcy than we were leading up to 2018. While the COVID-19 pandemic was what drove the U.S. economy into a recession and what pushed the stock market into bear market territory, at least for a few months, we know that there are other headwinds to be navigated, such as government trade policies and elections. There are always going to be headwinds to be navigated. As of July 31, 2020, the yield on the 10-Year T-Note was 0.53%, which was about 150 bps below where it stood at the close of December 2008. The Fed has stated that it is in no rush to raise interest rates. Inflation levels are subdued. By keeping interest rates artificially low, the Fed is incentivizing investors to assume more risk to potentially earn a higher return on their capital. With the help of the Fed, the stock and bond markets have proved their resiliency once again, despite how destructive COVID-19 has been to date. Investors should take solace in that fact. Maybe the new normal will work as well for investors as what we deemed normal in the past. Stay the course!

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

Sincerely,

James A. Bowen

Chairman of the Board of Trustees

Chief Executive Officer of First Trust Advisors L.P.

Page 2

First Trust Horizon Managed Volatility Domestic ETF (HUSV)

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

Performance
		Average Annual Total Returns	Cumulative Total Returns
	1 Year Ended 7/31/20	Inception (8/24/16) to 7/31/20	Inception (8/24/16) to 7/31/20
Fund Performance
NAV	3.41%	9.63%	43.57%
Market Price	3.45%	9.64%	43.62%
Index Performance
S&P 500® Index	11.96%	13.15%	62.60%

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

Page 3

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

Sector Allocation	% of Total Investments
Consumer Staples	19.5%
Information Technology	15.7
Health Care	13.1
Industrials	11.7
Utilities	9.8
Financials	9.0
Consumer Discretionary	8.6
Real Estate	6.0
Communication Services	5.4
Materials	1.2
Total	100.0%

Top Ten Holdings	% of Total Investments
Procter & Gamble (The) Co.	2.6%
Broadridge Financial Solutions, Inc.	2.5
Costco Wholesale Corp.	2.4
Alliant Energy Corp.	2.4
Johnson & Johnson	2.4
Kimberly-Clark Corp.	2.3
Motorola Solutions, Inc.	2.3
Accenture PLC, Class A	2.3
Merck & Co., Inc.	2.3
Xcel Energy, Inc.	2.3
Total	23.8%

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 7/31/20	Inception (8/24/16) to 7/31/20	Inception (8/24/16) to 7/31/20
Fund Performance
NAV	-12.37%	1.09%	4.37%
Market Price	-12.83%	1.06%	4.22%
Index Performance
MSCI EAFE Index	-1.67%	4.37%	18.31%

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

Page 5

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

Sector Allocation	% of Total Investments
Consumer Staples	18.5%
Industrials	14.6
Utilities	13.7
Communication Services	13.1
Financials	12.4
Real Estate	11.1
Health Care	6.9
Consumer Discretionary	3.4
Materials	2.5
Energy	1.9
Information Technology	1.9
Total	100.0%

Top Ten Holdings	% of Total Investments
Nestle S.A.	1.9%
PCCW Ltd.	1.9
Banque Cantonale Vaudoise	1.8
Swisscom AG	1.8
CLP Holdings, Ltd.	1.8
Hong Kong & China Gas Co., Ltd.	1.7
Japan Tobacco, Inc.	1.7
Power Assets Holdings Ltd.	1.6
NTT DOCOMO, Inc.	1.6
Swiss Prime Site AG	1.6
Total	17.4%

Page 6

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

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

Performance
		Cumulative Total Returns
		Inception (4/6/20) to 7/31/20
Fund Performance
NAV		18.67%
Market Value		18.62%
Index Performance
S&P 1000® Index		29.44%

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

Page 7

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

Sector Allocation	% of Total Investments
Industrials	18.5%
Financials	13.8
Health Care	13.7
Information Technology	13.0
Consumer Staples	12.4
Materials	8.9
Consumer Discretionary	8.2
Real Estate	4.7
Utilities	4.0
Communication Services	2.8
Total	100.0%

Top Ten Holdings	% of Total Investments
Shutterstock, Inc.	1.1%
Watsco, Inc.	1.0
West Pharmaceutical Services, Inc.	1.0
FactSet Research Systems, Inc.	0.9
Silgan Holdings, Inc.	0.9
CoreLogic, Inc.	0.9
Penumbra, Inc.	0.9
Chemed Corp.	0.8
Pool Corp.	0.8
Cogent Communications Holdings, Inc.	0.8
Total	9.1%

Page 8

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

Each Fund’s per share net asset value (“NAV”) is the value of one share of the Fund and is computed by dividing the value of all assets of the Fund (including accrued interest and dividends), less all liabilities (including accrued expenses and dividends declared but unpaid), by the total number of outstanding shares. The price used to calculate market return (“Market Price”) is determined by using the midpoint 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 9

Portfolio Commentary

First Trust Exchange-Traded Fund III

First Trust Horizon Funds

July 31, 2020 (Unaudited)

Advisor

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

Sub-Advisor

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

Portfolio Management Team

The following persons serve as portfolio managers of the Funds:

Michael Dickson, PhD, 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 each Fund’s inception.

Commentary

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

Market Recap

For the 12-month period ended July 31, 2020, the S&P 500^® Index gained 11.96%. During this period, low volatility as a factor lagged the S&P 500^® Index, as the S&P 500^® Low Volatility Index lost -1.36% during the period.

We believe the following key developments were some of the biggest drivers of the market during the period covered in this report. During the period, the S&P 500^® Index experienced some of the highest volatility since the Great Recession, hit new all-time highs, and saw both a historic drawdown and recovery. From August 2019 until mid-February 2020, the overall market seemingly only had one direction: up and to the right. Tailwinds from falling interest rates resulted in money flowing into the equity markets as investors searched for yield in either capital appreciation, dividends, or both. The real economy also was particularly strong over this period, highlighted by the historically low unemployment rate of 3.5%. A strong economy coupled with roaring financial markets came to a screeching halt as the coronavirus (“COVID-19”) emerged from Wuhan, China in late December 2019 and early January 2020. The market response was initially muted, but as countries in Europe, such as Italy, began enforcing draconian lockdowns, global markets tumbled from late February until mid-March. The sell-off intensified as the Northeast region of the United States became the epicenter of a global pandemic. By March 23, 2020, which was the peak of the market meltdown, the S&P 500^® Index was down -33.79% from its all-time high in February 2020. At the precipice of panic, the Federal Reserve (the “Fed”) intervened, announcing a wave of quantitative easing, which was historic in both its size and speed, that flushed the financial markets with much-needed liquidity. Accommodative Fiscal Policy also emerged as Congress passed an unprecedented stimulus bill to help businesses and citizens alike weather the economic storm which had frozen the American economy. The markets reacted in a very positive manner to the fiscal and monetary policies implemented which would help shepherd the American economy back to normal. By July 31, 2020, the S&P 500^® Index was almost totally recovered from its March lows.

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

Page 10

Portfolio Commentary (Continued)

First Trust Exchange-Traded Fund III

Annual Report

July 31, 2020 (Unaudited)

Performance Analysis

On a net asset value (“NAV”) basis for the 12-month period ended July 31, 2020, the Fund provided a total return of 3.41%, including the reinvestment of dividends. The S&P 500^® Index returned 11.96% and the S&P 500^® Low Volatility Index returned -1.36% over the same period.

Stocks selected within the health care, consumer staples, and consumer discretionary sectors contributed the most to the Fund’s return, while stocks selected within the utilities, financials, and real estate sectors detracted from the Fund’s return for the same period.

Single stock positions in Ebay, Inc, Amazon.com, Inc., and Garmin Ltd. contributed the most to the Fund’s return for the 12-month period ended July 31, 2020. Single stock positions in Apartment Investment and Management Co., Hartford Financial Services Group, and Darden Restaurants, Inc. contributed the least to the Fund’s return for the same period.

For the 12-month period ended July 31, 2020, the Fund realized lower volatility than the S&P 500^® Index and similar volatility to the S&P 500^® Low Volatility Index. As a part of the Fund’s portfolio allocation process, Horizon overweights or underweights common stocks of domestic companies based on future expected volatility. An overweight allocation indicates that Horizon expects those stocks to be relatively low risk, while an underweight allocation indicates that Horizon expects those stocks to be relatively high risk. This long-term defensive tilt in the Fund contributed largely to the relative performance for the same period.

Market and Fund Outlook

At the end of the 12-month period ended July 31, 2020, Horizon believes that overall corporate and economic fundamentals have rebounded sufficiently and that financial markets will remain healthy over the course of the next year. Despite this, we do believe that there are significant risks that could generate high volatility in late 2020 and early 2021. Some of the risks we are looking at include: the possibility that the 2020 U.S. Presidential election will be contested or otherwise drawn-out; the material resurgence of COVID-19 cases in the near-term; and an escalation in Sino-American trade tensions. Horizon also believes that additional key risk factors for equity markets are related to trade policy, central bank policy, and global currency stability.

During time periods that contain bouts of volatility, Horizon believes it is important to continue to be responsive to current market conditions when picking stocks to create a portfolio of expected lower volatility stocks. The Fund continues to use a quantitative and rules-based investment process to mitigate volatility through enhanced security selection of targeted exposure to stocks that Horizon estimates will have forecasted future low volatility. Horizon also continues to use 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” or the “Fund”)

Market Recap

For the 12-month period ended July 31, 2020, the MSCI EAFE Index lost 1.67%. During the same period, low volatility underperformed the broad MSCI EAFE Index as the MSCI EAFE Minimum Volatility Index lost 3.51%.

We believe the following key developments were some of the biggest drivers of global markets during the period covered in this report. U.S. markets led Developed International markets broadly as the S&P 500^® Index gained 11.96% over the 12-month period ended July 31, 2020. During the same period, the S&P 500^® Index had some bouts of heightened volatility, hit multiple new all-time highs and had multiple periods of sell-offs, primarily driven by the COVID-19 pandemic and subsequent lockdowns. Corporate earnings and economic fundamentals were strong, and the Fed lowered rates, which fueled the equity rally up until the breakout of COVID-19. Developed markets were generally exposed to more risk factors than the U.S. markets over the period as trade tariffs loomed and uncertainty around Brexit weighed down European markets. Switzerland and Sweden were the best performing regions in developed markets broadly, each outpacing the Eurozone. Within the Eurozone, the Netherlands posted modest gains while Spain posted the largest 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 Horizon may exercise discretion (including, but not limited to, the number of holdings and the weightings of particular holdings) in connection with its active management of the Fund.

Page 11

Portfolio Commentary (Continued)

First Trust Exchange-Traded Fund III

Annual Report

July 31, 2020 (Unaudited)

Performance Analysis

On an NAV basis for the 12-month period ended July 31, 2020, the Fund provided a total return of -12.37%, including the reinvestment of dividends. The MSCI EAFE Index lost 1.67% and the MSCI EAFE Minimum Volatility Index lost 3.51% over the same period.

For countries with an average allocation greater than 1%, stocks selected within Denmark, Switzerland and Sweden contributed the most to the Fund’s return, while stocks selected within Australia, Singapore, and Japan contributed the least to the Fund’s return.

Single stock positions in Hong Kong Exchanges and Clearing Ltd., EMS-Chemie Holding AG, Lonza Group AG and Koninklijke DSM N.V. contributed the most to the Fund’s return for the 12-month period ended July 31, 2020. Single stock positions in Scentre Group, Kyushu Railway Co. and National Australia Bank Ltd. contributed the least to the Fund’s return for the same period.

For the 12-month period ended July 31, 2020, the Fund realized lower volatility than the MSCI EAFE Index. As a part of the Fund’s portfolio allocation process, Horizon overweights or underweights common stocks and depositary receipts of large and mid-cap securities across developed markets based on future expected volatility. An overweight allocation indicates that Horizon expects those stocks to be relatively low risk, while an underweight allocation indicates that Horizon expects those stocks to be relatively high risk. This long-term defensive tilt in the Fund contributed largely to the relative performance for the fiscal year.

Market and Fund Outlook

At the end of the 12-month period ended July 31, 2020, Horizon believes 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 United Kingdom; the continuation of accommodative global monetary policy; and lack of inflation in Japan.

Horizon believes 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 Horizon estimates will have forecasted future low volatility. Horizon also continues 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.

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

Market Recap

Since the Fund’s inception on April 6, 2020 through July 31, 2020, which marked the end of the fiscal period for the Fund, the S&P 1000^® Index gained 29.44%. During the same period, low volatility as a factor lagged the S&P 1000^® Index, as the S&P 400^® Low Volatility Index gained 7.33% and the S&P 600^® Low Volatility Index gained 7.81%.

We believe the following key developments were some of the biggest drivers of the market during the fiscal period. Over the period, the S&P 500^® Index experienced some of the highest volatility since the Great Recession, hit new all-time highs, and saw both a historic drawdown and recovery. From August 2019 until mid-February 2020, the overall market seemingly only had one direction: up and to the right. Tailwinds from falling interest rates resulted in money flowing into the equity markets as investors searched for yield in either capital appreciation, dividends, or both. The real economy also was particularly strong over this period, highlighted by the historically low unemployment rate of 3.5%. A strong economy coupled with roaring financial markets came to a screeching halt as COVID-19 emerged from Wuhan, China in late December 2019 and early January 2020. The market response was initially muted, but as countries in Europe, such as Italy, began enforcing draconian lockdowns, global markets tumbled from late February until mid-March. The sell-off intensified as the Northeast region of the U.S. became the epicenter of a global pandemic. By March 23, 2020, which was the peak of the market meltdown, the S&P 500^® Index was down 33.79% from its all-time high in February 2020. At the precipice of panic, the Fed intervened, announcing a wave of quantitative easing, which was historic in both its size and speed, that flushed the financial markets with much-needed liquidity. Accommodative Fiscal Policy also emerged as Congress passed an unprecedented stimulus bill to help businesses and citizens alike weather the economic storm which had frozen the American economy. The markets reacted in a very positive manner to the fiscal and monetary policies implemented which would help shepherd the American economy back to normal. By July 31, 2020 the S&P 500^® Index was almost totally recovered from its March lows.

The investment objective of the Fund is to seek to provide investors with capital appreciation. Under normal market conditions, the Fund seeks to achieve its investment objective by investing at least 80% of its net assets (including investment borrowings) in small- and/or mid-capitalization common stocks listed and traded on U.S. national securities exchanges that Horizon believes exhibit low

Page 12

Portfolio Commentary (Continued)

First Trust Exchange-Traded Fund III

Annual Report

July 31, 2020 (Unaudited)

future expected volatility. The goal of this strategy is to capture upside price movements in rising markets and reduce downside risk when markets decline. To implement this strategy, Horizon employs volatility forecasting models to forecast future expected volatility. The strategy is largely quantitative and rules-based, but also includes multiple parameters over which Horizon may exercise discretion (including, but not limited to, the number of holdings and the weightings of particular holdings) in connection with its active management of the Fund.

Performance Analysis

On an NAV basis since the Fund’s inception on April 6, 2020 through July 31, 2020, the Fund provided a total return of 18.67%, including the reinvestment of dividends. The S&P 1000^® Index gained 29.44% over the same period. Over this period, low volatility as a factor lagged the S&P 1000^® Index, as the S&P 400^® Low Volatility Index gained 7.33% and the S&P 600^® Low Volatility Index gained 7.81%.

From the Fund’s inception on April 6, 2020 through July 31, 2020, stocks selected within the industrials, health care, and information technology sectors contributed the most to the Fund’s return, while stocks selected within the utilities, real estate, and communication services sectors detracted from the Fund’s return.

Single stock positions in West Pharmaceutical Services, Inc. and Shutterstock, Inc. contributed the most to the Fund’s return for the period from the Fund’s inception on April 6, 2020 through July 31, 2020. Single stock positions in Tootsie Roll Industries, Inc. and J2 Global, Inc. contributed the least to the Fund’s return for the same period.

Since the Fund’s inception on April 6, 2020 through July 31, 2020, the Fund realized lower volatility than the S&P 1000^® Index and also had lower volatility than both the S&P 400^® Low Volatility Index and S&P 600^® Low Volatility Index. As a part of the Fund’s portfolio allocation process, Horizon overweights or underweights common stocks of small and mid-cap domestic companies based on future expected volatility. An overweight allocation indicates that Horizon expects those stocks to be relatively low risk, while an underweight allocation indicates that Horizon expects those stocks to be relatively high risk. This long-term defensive tilt in the Fund contributed largely to the relative performance for the fiscal period.

Market and Fund Outlook

As of July 31, 2020, which is the end of the Fund’s fiscal period, Horizon believes that overall corporate and economic fundamentals have rebounded sufficiently and that financial markets will remain healthy over the course of the next period. Despite this, we do believe that there are significant risks that could generate high volatility in late 2020 and early 2021. Some of the risks we are looking at include: the possibility that the 2020 U.S. Presidential election is contested or otherwise drawn-out; the material resurgence of COVID-19 cases in the near-term; and an escalation in Sino-American trade tensions. Horizon also believes that additional key risk factors for equity markets are related to trade policy, central bank policy, and global currency stability.

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

Page 13

First Trust Exchange-Traded Fund III

Understanding Your Fund Expenses

July 31, 2020 (Unaudited)

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

The Example is based on an investment of $1,000 invested at the beginning of the period (or since inception) and held through the six-month (or shorter) period ended July 31, 2020.

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, 2020	Ending Account Value July 31, 2020	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	$970.20	0.70%	$3.43
Hypothetical (5% return before expenses)	$1,000.00	$1,021.38	0.70%	$3.52
First Trust Horizon Managed Volatility Developed International ETF (HDMV)
Actual	$1,000.00	$842.90	0.80%	$3.67
Hypothetical (5% return before expenses)	$1,000.00	$1,020.89	0.80%	$4.02
	Beginning Account Value April 6, 2020 (b)	Ending Account Value July 31, 2020	Annualized Expense Ratio Based on the Number of Days In the Period	Expenses Paid During the Period April 6, 2020 (b) to July 31, 2020 (c)
First Trust Horizon Managed Volatility Small/Mid ETF (HSMV)
Actual	$1,000.00	$1,186.70	0.80%	$2.80
Hypothetical (5% return before expenses)	$1,000.00	$1,020.89	0.80%	$4.02

    

(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, 2020 through July 31, 2020), multiplied by 182/366 (to reflect the six-month period).
(b)	Inception date.
(c)	Actual expenses are equal to the annualized expense ratios as indicated in the table multiplied by the average account value over the period (April 6, 2020 through July 31, 2020), multiplied by 117/366. Hypothetical expenses are assumed for the most recent six-month period.

Page 14

First Trust Horizon Managed Volatility Domestic ETF (HUSV)

Portfolio of Investments

July 31, 2020

First Trust Horizon Managed Volatility Domestic ETF (HUSV)

Portfolio of Investments (Continued)

July 31, 2020

---

First Trust Horizon Managed Volatility Developed International ETF (HDMV)

Portfolio of Investments

July 31, 2020

First Trust Horizon Managed Volatility Developed International ETF (HDMV)

Portfolio of Investments (Continued)

July 31, 2020

First Trust Horizon Managed Volatility Developed International ETF (HDMV)

Portfolio of Investments (Continued)

July 31, 2020

(e)

Aggregate cost for federal income tax purposes was $121,509,301. As of July 31, 2020, the aggregate gross unrealized appreciation for all investments in which there was an excess of value over tax cost was $6,092,274 and the aggregate gross unrealized depreciation for all investments in which there was an excess of tax cost over value was $4,202,930. The net unrealized appreciation was $1,889,344.

Valuation Inputs

A summary of the inputs used to value the Fund’s investments as of July 31, 2020 is as follows (see Note 2A - Portfolio Valuation in the Notes to Financial Statements):

	Total Value at 7/31/2020	Level 1 Quoted Prices	Level 2 Significant Observable Inputs	Level 3 Significant Unobservable Inputs
Common Stocks*	$ 116,268,825	$ 116,268,825	$ —	$ —
Real Estate Investment Trusts*	7,129,820	7,129,820	—	—
Total Investments	$ 123,398,645	$ 123,398,645	$—	$—

    

*	See Portfolio of Investments for country breakout.

    

Currency Exposure Diversification	% of Total Investments
Japanese Yen	26.3%
Euro	21.2
Swiss Franc	14.0
Hong Kong Dollar	13.1
Singapore Dollar	8.8
British Pound Sterling	8.1
Australian Dollar	3.3
Swedish Krona	2.0
Danish Krone	1.8
Israeli Shekel	0.8
Norwegian Krone	0.6
Total	100.0%

See Notes to Financial Statements

Page 19

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

Portfolio of Investments

July 31, 2020

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

Portfolio of Investments (Continued)

July 31, 2020

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

Portfolio of Investments (Continued)

July 31, 2020

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

Portfolio of Investments (Continued)

July 31, 2020

Valuation Inputs

A summary of the inputs used to value the Fund’s investments as of July 31, 2020 is as follows (see Note 2A - Portfolio Valuation in the Notes to Financial Statements):

	Total Value at 7/31/2020	Level 1 Quoted Prices	Level 2 Significant Observable Inputs	Level 3 Significant Unobservable Inputs
Common Stocks*	$ 18,796,880	$ 18,796,880	$ —	$ —
Real Estate Investment Trusts*	827,648	827,648	—	—
Total Investments	$ 19,624,528	$ 19,624,528	$—	$—

    

*	See Portfolio of Investments for industry breakout.

See Notes to Financial Statements

Page 23

First Trust Exchange-Traded Fund III

Statements of Assets and Liabilities

July 31, 2020

	First Trust Horizon Managed Volatility Domestic ETF (HUSV)		First Trust Horizon Managed Volatility Developed International ETF (HDMV)		First Trust Horizon Managed Volatility Small/Mid ETF (HSMV)
ASSETS:
Investments, at value	$ 214,378,156		$ 123,398,645		$ 19,624,528
Cash	244,400		—		251,227
Foreign currency	—		2,382,696		—
Receivables:
Dividends	324,434		179,302		7,047
Dividend reclaims	1,790		210,130		—
Investment securities sold	—		379,267		152,948
Total Assets	214,948,780		126,550,040		20,035,750
LIABILITIES:
Due to custodian	—		403,240		—
Payables:
Investment advisory fees	126,666		96,408		13,054
Investment securities purchased	—		2,336,874		—
Total Liabilities	126,666		2,836,522		13,054
NET ASSETS	$214,822,114		$123,713,518		$20,022,696
NET ASSETS consist of:
Paid-in capital	$ 251,379,232		$ 156,637,984		$ 18,938,103
Par value	79,000		44,000		8,000
Accumulated distributable earnings (loss)	(36,636,118)		(32,968,466)		1,076,593
NET ASSETS	$214,822,114		$123,713,518		$20,022,696
NET ASSET VALUE, per share	$27.19		$28.12		$25.03
Number of shares outstanding (unlimited number of shares authorized, par value $0.01 per share)	7,900,002		4,400,002		800,002
Investments, at cost	$195,291,628		$121,306,403		$18,547,559
Foreign currency, at cost (proceeds)	$—		$2,382,826		$—

Page 24

See Notes to Financial Statements

First Trust Exchange-Traded Fund III

Statements of Operations

		First Trust Horizon Managed Volatility Domestic ETF (HUSV)		First Trust Horizon Managed Volatility Developed International ETF (HDMV)		First Trust Horizon Managed Volatility Small/Mid ETF (HSMV)
		Year Ended 7/31/2020		Year Ended 7/31/2020		Period Ended 7/31/2020 (a)
INVESTMENT INCOME:
Dividends		$ 4,889,003		$ 4,490,865		$ 33,831
Interest		5,325		2,832		—
Foreign withholding tax		—		(345,017)		—
Other		49		27		—
Total investment income		4,894,377		4,148,707		33,831
EXPENSES:
Investment advisory fees		1,641,966		1,152,258		19,325
Total expenses		1,641,966		1,152,258		19,325
NET INVESTMENT INCOME (LOSS)		3,252,411		2,996,449		14,506
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments		(50,278,718)		(30,276,901)		(8,657)
In-kind redemptions		45,682,469		5,575,263		221,695
Foreign currency transactions		—		(25,776)		—
Net realized gain (loss)		(4,596,249)		(24,727,414)		213,038
Net change in unrealized appreciation (depreciation) on:
Investments		1,915,698		949,848		1,076,969
Foreign currency translation		—		6,205		—
Net change in unrealized appreciation (depreciation)		1,915,698		956,053		1,076,969
NET REALIZED AND UNREALIZED GAIN (LOSS)		(2,680,551)		(23,771,361)		1,290,007
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS		$ 571,860		$(20,774,912)		$ 1,304,513

    

(a)	Inception date is April 6, 2020, which is consistent with the commencement of investment operations and is the date the initial creation units were established.

See Notes to Financial Statements

Page 25

First Trust Exchange-Traded Fund III

Statements of Changes in Net Assets

	First Trust Horizon Managed Volatility Domestic ETF (HUSV)				First Trust Horizon Managed Volatility Developed International ETF (HDMV)
	Year Ended 7/31/2020		Year Ended 7/31/2019		Year Ended 7/31/2020		Year Ended 7/31/2019
OPERATIONS:
Net investment income (loss)	$ 3,252,411		$ 2,758,090		$ 2,996,449		$ 2,133,177
Net realized gain (loss)	(4,596,249)		14,126,223		(24,727,414)		(2,036,243)
Net change in unrealized appreciation (depreciation)	1,915,698		10,268,998		956,053		599,720
Net increase (decrease) in net assets resulting from operations	571,860		27,153,311		(20,774,912)		696,654
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Investment operations	(3,582,296)		(2,290,936)		(3,755,422)		(2,045,252)
SHAREHOLDER TRANSACTIONS:
Proceeds from shares sold	355,667,495		220,067,195		87,535,588		97,182,899
Cost of shares redeemed	(362,223,485)		(154,429,427)		(67,686,203)		(26,449,839)
Net increase (decrease) in net assets resulting from shareholder transactions	(6,555,990)		65,637,768		19,849,385		70,733,060
Total increase (decrease) in net assets	(9,566,426)		90,500,143		(4,680,949)		69,384,462
NET ASSETS:
Beginning of period	224,388,540		133,888,397		128,394,467		59,010,005
End of period	$214,822,114		$224,388,540		$123,713,518		$128,394,467
CHANGES IN SHARES OUTSTANDING:
Shares outstanding, beginning of period	8,400,002		5,700,002		3,900,002		1,750,002
Shares sold	13,500,000		8,900,000		2,750,000		2,950,000
Shares redeemed	(14,000,000)		(6,200,000)		(2,250,000)		(800,000)
Shares outstanding, end of period	7,900,002		8,400,002		4,400,002		3,900,002

    

(a)	Inception date is April 6, 2020, which is consistent with the commencement of investment operations and is the date the initial creation units were established.

Page 26

See Notes to Financial Statements

First Trust Horizon Managed Volatility Small/Mid ETF (HSMV)
Period Ended 7/31/2020 (a)
$ 14,506
213,038
1,076,969
1,304,513
(6,225)
19,986,223
(1,261,815)
18,724,408
20,022,696
—
$20,022,696
—
850,002
(50,000)
800,002

See Notes to Financial Statements

Page 27

First Trust Exchange-Traded Fund III

Financial Highlights

For a share outstanding throughout each period

First Trust Horizon Managed Volatility Domestic ETF (HUSV)  

	Year Ended July 31,						Period Ended 7/31/2017 (a)
	2020		2019		2018
Net asset value, beginning of period	$ 26.71		$ 23.49		$ 22.03		$ 19.96
Income from investment operations:
Net investment income (loss)	0.37		0.37		0.30		0.24
Net realized and unrealized gain (loss)	0.52		3.17		1.46		2.05
Total from investment operations	0.89		3.54		1.76		2.29
Distributions paid to shareholders from:
Net investment income	(0.41)		(0.32)		(0.30)		(0.22)
Net asset value, end of period	$27.19		$26.71		$23.49		$22.03
Total return (b)	3.41%		15.24%		8.04%		11.51%
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000’s)	$ 214,822		$ 224,389		$ 133,888		$ 62,799
Ratio of total expenses to average net assets	0.70%		0.70%		0.70%		0.70% (c)
Ratio of net investment income (loss) to average net assets	1.39%		1.58%		1.37%		1.50% (c)
Portfolio turnover rate (d)	211%		147%		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.

Page 28

See Notes to Financial Statements

First Trust Exchange-Traded Fund III

Financial Highlights (Continued)

For a share outstanding throughout each period

First Trust Horizon Managed Volatility Developed International ETF (HDMV)  

	Year Ended July 31,						Period Ended 7/31/2017 (a)
	2020		2019		2018
Net asset value, beginning of period	$ 32.92		$ 33.72		$ 33.05		$ 29.89
Income from investment operations:
Net investment income (loss)	0.65		0.86		0.91		0.63
Net realized and unrealized gain (loss)	(4.61)		(0.79)		0.87		3.13
Total from investment operations	(3.96)		0.07		1.78		3.76
Distributions paid to shareholders from:
Net investment income	(0.84)		(0.87)		(1.11)		(0.60)
Net asset value, end of period	$28.12		$32.92		$33.72		$33.05
Total return (b)	(12.37)%		0.21%		5.48%		12.68%
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000’s)	$ 123,714		$ 128,394		$ 59,010		$ 29,745
Ratio of total expenses to average net assets	0.80%		0.80%		0.80%		0.80% (c)
Ratio of net investment income (loss) to average net assets	2.08%		2.74%		2.73%		2.74% (c)
Portfolio turnover rate (d)	196%		99%		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.

See Notes to Financial Statements

Page 29

First Trust Exchange-Traded Fund III

Financial Highlights (Continued)

For a share outstanding throughout the period

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

	Period Ended 7/31/2020 (a)
Net asset value, beginning of period	$ 21.10
Income from investment operations:
Net investment income (loss)	0.02
Net realized and unrealized gain (loss)	3.92
Total from investment operations	3.94
Distributions paid to shareholders from:
Net investment income	(0.01)
Net asset value, end of period	$25.03
Total return (b)	18.67%
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000’s)	$ 20,023
Ratio of total expenses to average net assets	0.80% (c)
Ratio of net investment income (loss) to average net assets	0.60% (c)
Portfolio turnover rate (d)	5%

    

(a)	Inception date is April 6, 2020, which is consistent with the commencement of investment operations and is the date the initial creation units were established.
(b)	Total return is calculated assuming an initial investment made at the net asset value at the beginning of the period, reinvestment of all distributions at net asset value during the period, and redemption at net asset value on the last day of the period. The return presented does not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. Total return is calculated for the time period presented and is not annualized for periods of less than a year.
(c)	Annualized.
(d)	Portfolio turnover is calculated for the time period presented and is not annualized for periods of less than a year and does not include securities received or delivered from processing creations or redemptions and in-kind transactions.

Page 30

See Notes to Financial Statements

Notes to Financial Statements

First Trust Exchange-Traded Fund III

July 31, 2020

1. Organization

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

The Trust currently consists of seventeen funds that are offering shares. This report covers the following funds, each a 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”)

First Trust Horizon Managed Volatility Small/Mid ETF – (NYSE Arca ticker “HSMV”)⁽¹⁾

(1)	Commenced investment operations on April 6, 2020.

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.

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

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

2. Significant Accounting Policies

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

A. Portfolio Valuation

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

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

Page 31

Notes to Financial Statements (Continued)

First Trust Exchange-Traded Fund III

July 31, 2020

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.

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 or exchange-traded fund trading of similar securities;
4)	foreign currency exchange activity;
5)	the trading prices of financial products that are tied to baskets of foreign securities;
6)	factors relating to the event that precipitated the pricing problem;
7)	whether the event is likely to recur; 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.

Page 32

Notes to Financial Statements (Continued)

First Trust Exchange-Traded Fund III

July 31, 2020

•	Level 2 – Level 2 inputs are observable inputs, either directly or indirectly, and include the following:

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

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

The inputs or methodologies used for valuing investments are not necessarily an indication of the risk associated with investing in those investments. A summary of the inputs used to value each Fund’s investments as of July 31, 2020, 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 in accordance with each Fund’s understanding of the applicable country’s tax rules and rates.

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

C. Foreign Currency

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

D. Dividends and Distributions to Shareholders

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

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

The tax character of distributions paid by each Fund during the fiscal period ended July 31, 2020, was as follows:

Page 33

Notes to Financial Statements (Continued)

First Trust Exchange-Traded Fund III

July 31, 2020

	Distributions paid from Ordinary Income		Distributions paid from Capital Gains		Distributions paid from Return of Capital
First Trust Horizon Managed Volatility Domestic ETF	$ 3,582,296		$ —		$ —
First Trust Horizon Managed Volatility Developed International ETF	3,755,422		—		—
First Trust Horizon Managed Volatility Small/Mid ETF	6,225		—		—

The tax character of distributions paid by each Fund during the fiscal year ended July 31, 2019, 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	$ 2,290,936		$ —		$ —
First Trust Horizon Managed Volatility Developed International ETF	2,045,252		—		—

As of July 31, 2020, 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	$ 180,784		$ (55,601,206)		$ 18,784,304
First Trust Horizon Managed Volatility Developed International ETF	31,560		(34,892,318)		1,892,292
First Trust Horizon Managed Volatility Small/Mid ETF	8,281		(769)		1,069,081

E. Income Taxes

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

The Funds are subject to accounting standards that establish a minimum threshold for recognizing, and a system for measuring, the benefits of a tax position taken or expected to be taken in a tax return. For HUSV and HDMV, taxable years ended 2017, 2018, 2019, and 2020 remain open to federal and state audit. For HSMV, the taxable year ended 2020 remains open to federal and state audit. As of July 31, 2020, 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, 2020, for federal income tax purposes, each applicable Fund had a capital loss carryforward available that is shown in the table below, to the extent provided by regulations, to offset future capital gains.

	Non-Expiring Capital Loss Carryforward
First Trust Horizon Managed Volatility Domestic ETF	$ 55,601,206
First Trust Horizon Managed Volatility Developed International ETF	34,892,318
First Trust Horizon Managed Volatility Small/Mid ETF	769

In order to present paid-in capital and accumulated distributable earnings (loss) (which consists of accumulated net investment income (loss), accumulated net realized gain (loss) on investments and net unrealized appreciation (depreciation) on investments) on the Statements of Assets and Liabilities that more closely represent their tax character, certain adjustments have been made to paid-in

Page 34

Notes to Financial Statements (Continued)

First Trust Exchange-Traded Fund III

July 31, 2020

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 period ended July 31, 2020, 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	$ —		$ (43,755,604)		$ 43,755,604
First Trust Horizon Managed Volatility Developed International ETF	307,086		(5,592,716)		5,285,630
First Trust Horizon Managed Volatility Small/Mid ETF	—		(221,695)		221,695

F. Expenses

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

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

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

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

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

Page 35

Notes to Financial Statements (Continued)

First Trust Exchange-Traded Fund III

July 31, 2020

4. Purchases and Sales of Securities

For the fiscal period ended July 31, 2020, 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	$ 487,847,962		$ 487,688,555
First Trust Horizon Managed Volatility Developed International ETF	291,888,345		279,662,174
First Trust Horizon Managed Volatility Small/Mid ETF	564,116		719,441

For the fiscal period ended July 31, 2020, 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	$ 352,991,450		$ 359,560,987
First Trust Horizon Managed Volatility Developed International ETF	73,801,893		66,719,567
First Trust Horizon Managed Volatility Small/Mid ETF	19,748,295		1,258,449

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 Creation Transaction Fee may increase or decrease with changes in each Fund’s portfolio. 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. The Redemption Transaction Fee may increase or decrease with changes in each Fund’s portfolio. 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.

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.

Page 36

Notes to Financial Statements (Continued)

First Trust Exchange-Traded Fund III

July 31, 2020

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, 2021 for HUSV and HDMV and March 14, 2022 for HSMV.

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 37

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

Opinion on the Financial Statements and Financial Highlights

We have audited the accompanying statements of assets and liabilities of First Trust Horizon Managed Volatility Domestic ETF, First Trust Horizon Managed Volatility Developed International ETF, and First Trust Horizon Managed Volatility Small/Mid ETF (the “Funds”), each a series of the First Trust Exchange-Traded Fund III, including the portfolios of investments, as of July 31, 2020, the related statements of operations, the statements of changes in net assets and the financial highlights for the periods indicated in the table below, and the related notes. In our opinion, the financial statements and financial highlights present fairly, in all material respects, the financial position of each of the Funds as of as of July 31, 2020, and the results of their operations, the changes in their net assets, and the financial highlights for the periods listed in the table below in conformity with accounting principles generally accepted in the United States of America.

Individual Funds Included in the Trust	Statements of Operations	Statements of Changes in Net Assets	Financial Highlights
First Trust Horizon Managed Volatility Domestic ETF (HUSV) First Trust Horizon Managed Volatility Developed International ETF (HDMV)	For the year ended July 31, 2020	For the years ended July 31, 2020 and 2019	For the years ended July 31, 2020, 2019, 2018, and for the period from August 24, 2016 (commencement of operations) through July 31, 2017.
First Trust Horizon Managed Volatility Small/Mid ETF (HSMV)	For the period from April 6, 2020 (commencement of operations) through July 31, 2020

Basis for Opinion

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

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement, whether due to error or fraud. The Funds are not required to have, nor were we engaged to perform, an audit of 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, 2020, by correspondence with the custodian and brokers; when replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.

Chicago, Illinois

September 22, 2020

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

Page 38

Additional Information

First Trust Exchange-Traded Fund III

July 31, 2020 (Unaudited)

Proxy Voting Policies and Procedures

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

Portfolio Holdings

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

Federal Tax Information

For the taxable year ended July 31, 2020, 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%
First Trust Horizon Managed Volatility Small/Mid ETF	70.12%

For the taxable year ended July 31, 2020, the following percentages of income dividend paid by the Funds are hereby designated as qualified dividend income:

	Qualified Dividend Income
First Trust Horizon Managed Volatility Domestic ETF	100.00%
First Trust Horizon Managed Volatility Developed International ETF	80.00%
First Trust Horizon Managed Volatility Small/Mid ETF	55.31%

A portion of the ordinary dividends (including short-term capital gains) that HUSV and HSMV paid to shareholders during the taxable year ended July 31, 2020, may be eligible for the Qualified Business Income (QBI) Deduction under the Internal Revenue Code of 1986, as amended, section 199A for the aggregate dividends the Funds received from the Underlying Real Estate Investment Trusts (REITs) they invest in.

The following Fund met the requirements of Section 853 of the Internal Revenue Code of 1986, as amended, 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	$ 4,490,850		$ 1.02		$ 319,578		$ 0.07

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 a Fund are identified below, but not all of the material risks relevant to each Fund are included in this report and not all of the risks below apply to each Fund. The material risks of investing in each Fund are spelled out in its prospectus, statement of additional information and other regulatory filings. Before investing, you should consider each Fund’s investment objective, risks, charges and expenses, and read each Fund’s prospectus and statement of additional information carefully. You can download each Fund’s prospectus at

Page 39

Additional Information (Continued)

First Trust Exchange-Traded Fund III

July 31, 2020 (Unaudited)

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.

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.

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.

Page 40

Additional Information (Continued)

First Trust Exchange-Traded Fund III

July 31, 2020 (Unaudited)

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

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

LIBOR Risk. To the extent a fund invests in floating or variable rate obligations that use the London Interbank Offered Rate (“LIBOR”) as a reference interest rate, it is subject to LIBOR Risk. In 2017, the United Kingdom’s Financial Conduct Authority announced that LIBOR will cease to be available for use after 2021. The unavailability or replacement of LIBOR may affect the value, liquidity or return on certain fund investments and may result in costs incurred in connection with closing out positions and entering into new trades. Any potential effects of the transition away from LIBOR on the fund or on certain instruments in which the fund invests can be difficult to ascertain, and they may vary depending on a variety of factors. Any such effects of the transition away from LIBOR, as well as other unforeseen effects, could result in losses to the fund.

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

Market Risk. Securities held by a fund, as well as shares of a fund itself, are subject to market fluctuations caused by factors such as general economic conditions, political events, regulatory or market developments, changes in interest rates and perceived trends in securities prices. Shares of a fund could decline in value or underperform other investments as a result of the risk of loss associated with these market fluctuations. In addition, local, regional or global events such as war, acts of terrorism, spread of infectious diseases or other public health issues, recessions, or other events could have a significant negative impact on a fund and its investments. Such events may affect certain geographic regions, countries, sectors and industries more significantly than others. The outbreak of the respiratory disease designated as COVID-19 in December 2019 has caused significant volatility and declines in global financial markets, which have caused losses for investors. The COVID-19 pandemic may last for an extended period of time and will continue to impact the economy for the foreseeable future.

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, or Approval of, Investment Management and Investment Sub-Advisory Agreements

First Trust Horizon Managed Volatility Domestic ETF (HUSV)
First Trust Horizon Managed Volatility Developed International ETF (HDMV)

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,

Page 41

Additional Information (Continued)

First Trust Exchange-Traded Fund III

July 31, 2020 (Unaudited)

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, 2021 at a meeting held on June 8, 2020. 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 May 11, 2020 and June 8, 2020, the Board, including the Independent Trustees, reviewed materials provided by the Advisor and the Sub-Advisor responding to requests for information from counsel to the Independent Trustees, submitted on behalf of the Independent Trustees, that, among other things, outlined: the services provided by the Advisor and the Sub-Advisor to each Fund (including the relevant personnel responsible for these services and their experience); the unitary fee rate payable by each Fund as compared to fees charged to a peer group of funds (the “Expense Group”) and a broad peer universe of funds (the “Expense Universe”), each assembled by Broadridge Financial Solutions, Inc. (“Broadridge”), an independent source, and as compared to fees charged to other clients of the Advisor, including other exchange-traded funds (“ETFs”) managed by the Advisor; the sub-advisory fee rate as compared to fees charged to other clients of the Sub-Advisor; the expense ratio of each Fund as compared to expense ratios of the funds in the Fund’s Expense Group and Expense Universe; performance information for each Fund, including comparisons of each Fund’s performance to that of one or more relevant benchmark indexes and to that of a performance group of funds and a broad performance universe of funds (the “Performance Universe”), each assembled by Broadridge; the nature of expenses incurred in providing services to each Fund and the potential for the Advisor and the Sub-Advisor to realize economies of scale, if any; profitability and other financial data for the Advisor; financial data for the Sub-Advisor; any 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 May 11, 2020, 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 May meeting, counsel to the Independent Trustees, on behalf of the Independent Trustees, requested certain clarifications and supplements to the materials provided, and the information provided in response to those requests was considered at an executive session of the Independent Trustees and their counsel held prior to the June 8, 2020 meeting, as well as at the meeting held that day. The Board considered supplemental information provided by the Advisor and the Sub-Advisor on the operations of the Advisor and the Sub-Advisor, respectively, and the performance of the Funds since the onset of the COVID-19 pandemic. The Board applied its business judgment to determine whether the arrangements between the Trust and the Advisor and among the Trust, the Advisor and the Sub-Advisor continue to be reasonable business arrangements from each Fund’s perspective. The Board determined that, given the totality of the information provided with respect to the Agreements, the Board had received sufficient information to renew the Agreements. The Board considered that shareholders chose to invest or remain invested in a Fund knowing that the Advisor and the Sub-Advisor manage the Fund and knowing the Fund’s unitary fee.

In reviewing the 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 May 11, 2020 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

Page 42

Additional Information (Continued)

First Trust Exchange-Traded Fund III

July 31, 2020 (Unaudited)

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, including 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 its 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 the fee payment under the Advisory Agreement and interest, taxes, brokerage commissions and other expenses connected with the execution of portfolio transactions, distribution and service fees pursuant to a Rule 12b-1 plan, if any, and extraordinary expenses, if any. The Board received and reviewed information showing the advisory fee rates and expense ratios of the peer funds in the Expense Groups, as well as advisory and unitary fee rates charged by the Advisor and the Sub-Advisor to other fund (including ETFs) and non-fund clients, as applicable. Because each Fund pays a unitary fee, the Board determined that expense ratios were the most relevant comparative data point. Based on the information provided, the Board noted that the unitary fee rate for HUSV was above the median total (net) expense ratio of the peer funds in its Expense Group and that the unitary fee rate for HDMV was below the median total (net) expense ratio of the peer funds in its Expense Group. With respect to the Expense Groups, the Board, at the May 11, 2020 meeting, discussed with Broadridge its methodology for assembling peer groups and discussed with the Advisor limitations in creating peer groups for actively-managed ETFs, including that the Expense Group for HUSV contained both actively-managed ETFs and open-end mutual funds and there were no other actively-managed ETFs in the Expense Group for HDMV, and different business models that may affect the pricing of services among ETF sponsors. The Board also noted that, for each Fund, not all peer funds employ an advisor/sub-advisor management structure. The Board took these limitations and differences into account in considering the peer data. With respect to fees charged to other non-ETF clients, the Board considered differences between the Funds and other non-ETF clients that limited their comparability. In considering the unitary fee 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 demonstrated long-term commitment to each Fund and the other funds in the First Trust Fund Complex.

The Board considered performance information for each Fund. The Board noted the process it has established for monitoring each Fund’s performance and portfolio risk on an ongoing basis, which includes quarterly performance reporting from the Advisor and 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 periods ended December 31, 2019 to the performance of the funds in its Performance Universe and to that of a broad-based benchmark index. Based on the information provided, the Board noted that HUSV underperformed its Performance Universe median and benchmark index for the one-year period ended December 31, 2019 and underperformed the benchmark index for the three-year period ended December 31, 2019 but outperformed its Performance Universe median for the three-year period ended December 31, 2019. The Board noted that HDMV underperformed its Performance Universe median and benchmark index for the one-year period ended December 31, 2019 but outperformed its Performance Universe median and benchmark index for the three-year period ended December 31, 2019.

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 hire personnel and build infrastructure, including technology, to improve the services to the Funds. 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, 2019 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

Page 43

Additional Information (Continued)

First Trust Exchange-Traded Fund III

July 31, 2020 (Unaudited)

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 unitary 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.

First Trust Horizon Managed Volatility Small/Mid ETF

The Board of Trustees of First Trust Exchange-Traded Fund III (the “Trust”), including the Independent Trustees, unanimously approved the Investment Management Agreement (the “Advisory Agreement”) with First Trust Advisors L.P. (the “Advisor”), on behalf of First Trust Horizon Managed Volatility Small/Mid ETF (the “Fund”), and the Investment Sub-Advisory Agreement (the “Sub-Advisory Agreement” and together with the Advisory Agreement, the “Agreements”) among the Trust, on behalf of the Fund, the Advisor and Horizon Investments, LLC (the “Sub-Advisor”), for an initial two-year term at a meeting held on March 9, 2020. The Board determined that the Agreements are in the best interests of the Fund in light of the nature, extent and quality of the services expected to be provided and such other matters as the Board considered to be relevant in the exercise of its reasonable business judgment.

To reach this determination, the Board considered its duties under the Investment Company Act of 1940, as amended (the “1940 Act”), as well as under the general principles of state law, in reviewing and approving advisory contracts; the requirements of the 1940 Act in such matters; the fiduciary duty of investment advisors with respect to advisory agreements and compensation; the standards used by courts in determining whether investment company boards have fulfilled their duties; and the factors to be considered by the Board in voting on such agreements. To assist the Board in its evaluation of the Agreements for the Fund, the Independent Trustees received a separate report from each of the Advisor and the Sub-Advisor in advance of the Board meeting responding to requests for information from counsel to the Independent Trustees, submitted on behalf of the Independent Trustees, that, among other things, outlined: the services to be provided by the Advisor and the Sub-Advisor to the Fund (including the relevant personnel responsible for these services and their experience); the proposed unitary fee rate payable by the Fund as compared to fees charged to a peer group of funds (the “Expense Group”) and a broad peer universe of funds (the “Expense Universe”), each assembled by Broadridge Financial Solutions, Inc. (“Broadridge”), an independent source, and as compared to fees charged to other clients of the Advisor, including other exchange-traded funds (“ETFs”) managed by the Advisor; the proposed sub-advisory fee rate as compared to fees charged to other clients of the Sub-Advisor; the estimated expense ratio of the Fund as compared to expense ratios of the funds in the Fund’s Expense Group and Expense Universe; the nature of expenses to be incurred in providing services to the Fund and the potential for economies of scale, if any; financial data on the Advisor and the Sub-Advisor; 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 Independent Trustees and their counsel also met separately to discuss the information provided by the Advisor and the Sub-Advisor. The Board applied its business judgment to determine whether the arrangements between the Trust and the Advisor and among the Trust, the Advisor and the Sub-Advisor are reasonable business arrangements from the Fund’s perspective.

In evaluating whether to approve the Agreements for the Fund, the Board considered the nature, extent and quality of the services to be provided by the Advisor and the Sub-Advisor under the Agreements. With respect to the Advisory Agreement, the Board considered that the Advisor will be responsible for the overall management and administration of the Fund and reviewed all of the services to be provided by the Advisor to the Fund, including the oversight of the Sub-Advisor, as well as the background and experience of the persons responsible for such services. The Board considered that the Fund will be an actively-managed ETF and will employ an advisor/sub-advisor management structure and considered that the Advisor manages other ETFs with a similar structure in the First Trust Fund Complex. The Board noted that the Advisor will oversee the Sub-Advisor’s day-to-day management of the Fund’s investments, including portfolio risk monitoring and performance review. In reviewing the services to be provided, the Board noted the compliance program that had been developed by the Advisor and considered that it includes a robust program for monitoring the Advisor’s, the Sub-Advisor’s and the Fund’s compliance with the 1940 Act, as well as the Fund’s compliance with its investment objective, policies and restrictions. The Board noted that employees of the Advisor provide management services to other ETFs and to other funds in the First Trust Fund Complex with diligence and care. With respect to the Sub-Advisory Agreement, the Board reviewed

Page 44

Additional Information (Continued)

First Trust Exchange-Traded Fund III

July 31, 2020 (Unaudited)

the materials provided by the Sub-Advisor and noted the background and experience of the Sub-Advisor’s portfolio management team and the Sub-Advisor’s investment style. The Board considered the investment model to be used in implementing the Fund’s investment strategy, including the process for reviewing and testing the model and the personnel responsible for developing the model and their experience. The Board noted that the Sub-Advisor manages two other ETFs in the First Trust Fund Complex using a similar investment model to implement their respective investment strategies. At the meeting, the Trustees received a presentation from representatives of the Sub-Advisor, and were able to ask questions about the Sub-Advisor and the operation of the investment model and proposed investment strategy for the Fund. Because the Fund had yet to commence investment operations, the Board could not consider the historical investment performance of the Fund; however, the Board considered forecasted investment performance of the Sub-Advisor’s model that will be used for the Fund. The Board also considered the historical investment performance of another similar ETF in the First Trust Fund Complex managed by the Sub-Advisor compared to the forecasted performance of the investment model used to implement the investment strategy for that fund, noting that the forecasted model returns served as a good proxy for actual performance of the similar ETF. In light of the information presented and the considerations made, the Board concluded that the nature, extent and quality of the services to be provided to the Fund by the Advisor and the Sub-Advisor under the Agreements are expected to be satisfactory.

The Board considered the proposed unitary fee rate payable by the Fund under the Advisory Agreement for the services to be provided. The Board noted that, under the unitary fee arrangement, the Fund would pay the Advisor a unitary fee equal to an annual rate of 0.80% of its average daily net assets. The Board considered that, from the unitary fee for the Fund, the Advisor would pay the Sub-Advisor a sub-advisory fee equal to 50% of the Fund’s unitary fee remaining after the Fund’s expenses are paid. The Board noted that the Advisor would be responsible for the Fund’s expenses, including the cost of sub-advisory, transfer agency, custody, fund administration, legal, audit and other services and license fees, if any, but excluding the fee payment under the Advisory Agreement and interest, taxes, brokerage commissions and other expenses connected with the execution of portfolio transactions, distribution and service fees pursuant to a Rule 12b-1 plan, if any, and extraordinary expenses, if any. The Board received and reviewed information showing the advisory or unitary fee rates and expense ratios of the peer funds in the Expense Group, as well as advisory and unitary fee rates charged by the Advisor and the Sub-Advisor to other fund (including ETF) and non-fund clients, as applicable. Because the Fund will pay a unitary fee, the Board determined that expense ratios were the most relevant comparative data point. Based on the information provided, the Board noted that the unitary fee for the Fund was above the median total (net) expense ratio of the peer funds in its Expense Group. With respect to the Expense Group, the Board discussed with representatives of the Advisor how the Expense Group was assembled and how the Fund compared and differed from the peer funds. The Board took this information into account in considering the peer data. With respect to fees charged to other clients, the Board considered differences between the Fund and other clients that limited their comparability; however, the Board considered the Advisor’s statement that, although the investment strategy for the Fund will be distinct, the Fund will be most similar to two other ETFs in the First Trust Fund Complex managed by the Advisor and the Sub-Advisor that employ specialty equity strategies and pay unitary fees equal to annual rates of 0.80% and 0.70% of their respective average daily net assets. In light of the information considered and the nature, extent and quality of the services expected to be provided to the Fund under the Agreements, the Board determined that the proposed unitary fee, including the sub-advisory fee to be paid by the Advisor to the Sub-Advisor from the unitary fee, was fair and reasonable.

The Board noted that the proposed unitary fee for the Fund was not structured to pass on to shareholders the benefits of any economies of scale as the Fund’s assets grow. The Board noted that any reduction in fixed costs associated with the management of the Fund would benefit the Advisor and the Sub-Advisor, but that the unitary fee structure provides a level of certainty in expenses for the Fund. The Board noted that the Advisor has continued to hire personnel and build infrastructure, including technology, to improve the services to the funds in the First Trust Fund Complex. The Board took into consideration the types of costs to be borne by the Advisor in connection with its services to be performed for the Fund under the Advisory Agreement. The Board considered the Advisor’s estimate of the asset level for the Fund at which the Advisor expects the Advisory Agreement to be profitable to the Advisor and the Advisor’s estimate of the profitability of the Advisory Agreement if the Fund’s assets reach $100 million. The Board noted the inherent limitations in the profitability analysis and concluded that, based on the information provided, the Advisor’s estimated profitability level for the Fund was not unreasonable. The Board reviewed financial information provided by the Sub-Advisor, but did not review any potential profitability of the Sub-Advisory Agreement for the Fund to the Sub-Advisor. The Board considered that the Sub-Advisor would be paid by the Advisor from the Fund’s unitary fee and its understanding that the sub-advisory fee rate was the product of an arm’s length negotiation. In addition, the Board considered fall-out benefits described by the Advisor that may be realized from its relationship with the Fund. The Board considered that the Advisor had identified as a fall-out benefit to the Advisor and FTP their exposure to investors and brokers who, absent their exposure to the Fund, may have had no dealings with the Advisor or FTP. The Board also considered the Advisor’s compensation for fund reporting services to be provided to the Fund pursuant to a separate Fund Reporting Services Agreement, which would be paid from the unitary fee. The Board also noted that the Advisor will be responsible for trade execution for the Fund and will not utilize soft dollars in connection with the Fund. The Board also considered fall-out benefits described by the Sub-Advisor that may be realized from its relationship with the Fund, noting the Sub-Advisor’s statement that the only fall-out benefit the Sub-Advisor anticipates receiving from managing the Fund is publicity related to managing

Page 45

Additional Information (Continued)

First Trust Exchange-Traded Fund III

July 31, 2020 (Unaudited)

an ETF in a closely monitored sector of the ETF universe. The Board concluded that the character and amount of potential fall-out benefits to the Advisor and 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 are fair and reasonable and that the approval of the Agreements is in the best interests of the Fund. No single factor was determinative in the Board’s analysis.

Liquidity Risk Management Program

In accordance with Rule 22e-4 under the Investment Company Act of 1940, as amended (the “1940 Act”), the Funds and each other fund in the First Trust Fund Complex, other than the closed-end funds, have adopted and implemented a liquidity risk management program (the “Program”) reasonably designed to assess and manage the funds’ liquidity risk, i.e., the risk that a fund could not meet requests to redeem shares issued by the fund without significant dilution of remaining investors’ interests in the fund. The Board of Trustees of the First Trust Funds has appointed First Trust Advisors, L.P. (the “Advisor”) as the person designated to administer the Program, and in this capacity the Advisor performs its duties primarily through the activities and efforts of the First Trust Liquidity Committee.

Pursuant to the Program, the Liquidity Committee classifies the liquidity of each fund’s portfolio investments into one of the four liquidity categories specified by Rule 22e-4: highly liquid investments, moderately liquid investments, less liquid investments and illiquid investments. The Liquidity Committee determines certain of the inputs for this classification process, including reasonably anticipated trade sizes and significant investor dilution thresholds. The Liquidity Committee also determines and periodically reviews a highly liquid investment minimum for certain funds, monitors the funds’ holdings of assets classified as illiquid investments to seek to ensure they do not exceed 15% of a fund’s net assets and establishes policies and procedures regarding redemptions in kind.

At the May 11, 2020 meeting of the Board of Trustees, as required by Rule 22e-4 and the Program, the Advisor provided the Board with a written report prepared by the Advisor that addressed the operation of the Program during the period from June 1, 2019 (the initial compliance date for certain requirements of Rule 22e-4) through the Liquidity Committee’s annual meeting held on March 20, 2020 and assessed the Program’s adequacy and effectiveness of implementation during this period, including the operation of the highly liquid investment minimum for each fund that is required under the Program to have one, and any material changes to the Program. Note that because the Funds primarily hold assets that are highly liquid investments, the Funds have not adopted a highly liquid investment minimum.

As stated in the written report, during the review period, no fund breached the 15% limitation on illiquid investments, no fund with a highly liquid investment minimum breached that minimum and no fund filed a Form N-LIQUID. The Advisor concluded that each fund’s investment strategy is appropriate for an open-end fund; that the Program operated effectively in all material respects during the review period; and that the Program is reasonably designed to assess and manage the liquidity risk of each fund and to maintain compliance with Rule 22e-4.

Page 46

Board of Trustees and Officers

First Trust Exchange-Traded Fund III

July 31, 2020 (Unaudited)

The following tables identify the Trustees and Officers of the Trust. Unless otherwise indicated, the address of all persons is 120 East 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)	184	None
Thomas R. Kadlec, Trustee (1957)	• Indefinite Term   • Since Inception	President, ADM Investor Services, Inc. (Futures Commission Merchant)	184	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)	184	Director of Trust Company of Illinois
Niel B. Nielson, Trustee (1954)	• Indefinite Term   • Since Inception	Senior Advisor (August 2018 to Present), Managing Director and Chief Operating Officer (January 2015 to August 2018), 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)	184	None
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)	184	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 47

Board of Trustees and Officers (Continued)

First Trust Exchange-Traded Fund III

July 31, 2020 (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 48

Privacy Policy

First Trust Exchange-Traded Fund III

July 31, 2020 (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 Website 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).

March 2019

Page 49

This page intentionally left blank

This page intentionally left blank

This page intentionally left blank

First Trust Exchange-Traded Fund III

INVESTMENT ADVISOR

First Trust Advisors L.P.

120 East 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
For the Year Ended
July 31, 2020

Table of Contents

Shareholder Letter

Fund Performance Overview (Unaudited)

Fund Performance Overview (Unaudited) (Continued)