0001445546-09-001618.txt : 20110510
0001445546-09-001618.hdr.sgml : 20110510
20090625121922
ACCESSION NUMBER: 0001445546-09-001618
CONFORMED SUBMISSION TYPE: 485APOS
PUBLIC DOCUMENT COUNT: 14
FILED AS OF DATE: 20090625
DATE AS OF CHANGE: 20090625
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: FIRST TRUST EXCHANGE-TRADED FUND
CENTRAL INDEX KEY: 0001329377
IRS NUMBER: 000000000
FILING VALUES:
FORM TYPE: 485APOS
SEC ACT: 1933 Act
SEC FILE NUMBER: 333-125751
FILM NUMBER: 09908986
BUSINESS ADDRESS:
STREET 1: 120 EAST LIBERTY DRIVE, SUITE 400
CITY: WHEATON
STATE: IL
ZIP: 60187
BUSINESS PHONE: 630-765-8000
MAIL ADDRESS:
STREET 1: 120 EAST LIBERTY DRIVE, SUITE 400
CITY: WHEATON
STATE: IL
ZIP: 60187
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: FIRST TRUST EXCHANGE-TRADED FUND
CENTRAL INDEX KEY: 0001329377
IRS NUMBER: 000000000
FILING VALUES:
FORM TYPE: 485APOS
SEC ACT: 1940 Act
SEC FILE NUMBER: 811-21774
FILM NUMBER: 09908987
BUSINESS ADDRESS:
STREET 1: 120 EAST LIBERTY DRIVE, SUITE 400
CITY: WHEATON
STATE: IL
ZIP: 60187
BUSINESS PHONE: 630-765-8000
MAIL ADDRESS:
STREET 1: 120 EAST LIBERTY DRIVE, SUITE 400
CITY: WHEATON
STATE: IL
ZIP: 60187
0001329377
S000026211
First Trust NASDAQ ABA Community Bank Index Fund
C000078718
First Trust NASDAQ ABA Community Bank Index Fund
485APOS
1
etf_485a.txt
PRE-EFFECTIVE AMENDMENT
As filed with the Securities and Exchange Commission on June 25, 2009
==============================================================================
1933 Act Registration No. 333-125751
1940 Act Registration No. 811-21774
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]
Pre-Effective Amendment No. __ [ ]
Post-Effective Amendment No. 47 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]
Amendment No. 47 [X]
FIRST TRUST EXCHANGE-TRADED FUND
(Exact name of registrant as specified in charter)
120 East Liberty Drive, Suite 400
Wheaton, Illinois 60187
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (800) 621-1675
W. Scott Jardine, Esq., Secretary
First Trust Exchange-Traded Fund
First Trust Advisors L.P.
120 East Liberty Drive, Suite 400
Wheaton, Illinois 60187
(Name and Address of Agent for Service)
Copy to:
Eric F. Fess, Esq.
Chapman and Cutler LLP
111 West Monroe Street
Chicago, Illinois 60603
It is proposed that this filing will become effective (check appropriate box):
[ ] Immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[X] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
CONTENTS OF POST-EFFECTIVE AMENDMENT NO. 47
This Post-Effective Amendment to the Registration Statement comprises
the following papers and contents:
The Facing Sheet
Part A - Prospectus for First Trust NASDAQ(R) ABA(R) Community Bank Index Fund
Part B - Statement of Additional Information for First Trust NASDAQ(R)
ABA(R) Community Bank Index Fund
Part C - Other Information
Signatures
Index to Exhibits
[LOGO OMITTED] First Trust First Trust
Exchange-Traded Fund
--------------------------------------------------------------------------
First Trust NASDAQ(R) ABA(R) Community Bank Index Fund
Ticker Symbol: QABA
Exchange: NASDAQ(R)
First Trust Exchange-Traded Fund (the "Trust") is a registered management
investment company that consists of separate exchange-traded funds. First Trust
NASDAQ(R) ABA(R) Community Bank Index Fund (the "Fund") is a series of the Trust
that is offering its shares (the "Shares") through this Prospectus. First Trust
Advisors L.P. ("First Trust") is the investment adviser to the Fund.
The Shares are listed on The NASDAQ(R) Stock Market ("NASDAQ(R)"). Market prices
may differ to some degree from the net asset value ("NAV") of the Shares. Unlike
conventional mutual funds, the Fund issues and redeems Shares on a continuous
basis, at NAV, only in large specified blocks each consisting of 50,000 Shares
(each block of Shares issued and redeemed, called a "Creation Unit" and
collectively, the "Creation Units"). The Fund's Creation Units are issued and
redeemed principally in-kind for securities included in the Fund.
EXCEPT WHEN AGGREGATED IN CREATION UNITS, THE SHARES ARE NOT REDEEMABLE
SECURITIES OF THE FUND.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
----------------
June 25, 2009
----------------
Front Cover
TABLE OF CONTENTS
Summary Information......................................................... 1
Fund Investment Strategies.................................................. 5
Additional Risks of Investing in the Fund................................... 6
Fund Organization........................................................... 8
Management of the Fund...................................................... 8
How to Buy and Sell Shares.................................................. 9
Dividends, Distributions and Taxes.......................................... 11
Federal Tax Matters......................................................... 11
Distribution Plan........................................................... 13
Net Asset Value............................................................. 13
Fund Service Providers...................................................... 14
Intra-Day Portfolio Calculator.............................................. 15
Index Provider.............................................................. 15
Disclaimers................................................................. 15
Index Information........................................................... 16
Premium/Discount Information................................................ 19
Other Information........................................................... 19
SUMMARY INFORMATION
-----------------------------------------------
Fund Ticker Listing
QABA NASDAQ(R)
-----------------------------------------------
INVESTMENT OBJECTIVE
The Fund seeks investment results that correspond generally to the price and
yield (before the Fund's fees and expenses) of an equity index called the NASDAQ
OMX(R) ABA (R) Community Bank Indexsm (the "Index").
FEES AND EXPENSES OF THE FUND
The following table describes the fees and expenses you may pay if you buy and
hold Shares of the Fund. Investors purchasing Shares may be subject to costs
(including customary brokerage commissions) charged by their broker.
SHAREHOLDER FEES (fees paid directly from your investment)
Maximum Sales Charges (Loads) Imposed on Purchases (as a percentage of the offering price) None
ANNUAL FUND OPERATING EXPENSES (expenses that you pay each year as a percentage
of the value of your investment)
Management Fees 0.40%
Distribution and Service (12b-1) Fees 0.00%
Other Expenses(1) 0.31%
---------
Total Annual Fund Operating Expenses 0.71%
Fee Waivers and Expense Reimbursement(2) 0.11%
---------
Total Annual Fund Operating Expenses 0.60%
EXAMPLE
The example below is intended to help you compare the cost of investing in the
Fund with the cost of investing in other funds. This example does not take into
account customary brokerage commissions that you pay when purchasing or selling
shares of the Fund in the secondary market.
The example assumes that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your Shares at the end of those periods. The
example also assumes that your investment has a 5% return each year and that the
Fund's operating expenses remain at current levels until June 30, 2011.
Following such date, the example assumes that the Fund imposes a 12b-1 fee of up
to 0.25% per annum of the Fund's average daily net assets and First Trust's
agreement to waive fees and/or pay the Fund's expenses to the extent necessary
to prevent the operating expenses of the Fund (excluding interest expense,
brokerage commissions and other trading expenses, taxes, and extraordinary
expenses) from exceeding 0.60% of average daily net assets per year has
terminated. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
1 YEAR 3 YEARS
$61 $212
----------------
(1) The "Other Expenses" listed in the table are estimates based on the
expenses the Fund expects to incur for the current fiscal year.
1
(2) First Trust has agreed to waive fees and/or pay Fund expenses to the extent
necessary to prevent the operating expenses of the Fund (excluding interest
expense, brokerage commissions and other trading expenses, taxes, and
extraordinary expenses) from exceeding 0.60% of average daily net assets
per year, at least until June 30, 2011. Expenses borne by First Trust are
subject to reimbursement by the Fund up to three years from the date the
fee or expense was incurred, but no reimbursement payment will be made by
the Fund at any time if it would result in the Fund's expenses exceeding
0.60% of average daily net assets per year. First Trust may not terminate
this arrangement unless the Trust is terminated or ceases operations.
PORTFOLIO TURNOVER
The Fund pays transaction costs, such as commissions, when it buys and sells
securities (or "turns over" its portfolio). A higher portfolio turnover rate may
indicate higher transaction costs and may result in higher taxes when fund
shares are held in a taxable account. These costs, which are not reflected in
annual fund operating expenses or in the example, affect the Fund's performance.
PRINCIPAL INVESTMENT STRATEGIES
The Fund will normally invest at least 90% of its assets in common stocks that
comprise the Index. The Fund, using an "indexing" investment approach, attempts
to replicate, before expenses, the performance of the Index. First Trust seeks a
correlation of 0.95 or better (before fees and expenses) between the Fund's
performance and the performance of the Index; a figure of 1.00 would represent
perfect correlation. First Trust will regularly monitor the Fund's tracking
accuracy and will use the investment techniques described below in seeking to
maintain an appropriate correlation.
For the purposes of the Index, a "community bank" is considered to be all U.S.
banks and thrifts or their holding companies listed on NASDAQ(R), excluding the
50 largest U.S. banks by asset size. Also excluded are banks that have an
international specialization and those banks that have a credit-card
specialization, as screened by the American Bankers Association (the "ABA")
based on the most recent data from the Federal Deposit Insurance Corporation
(the "FDIC"). Securities in the Index have a market capitalization of at least
$200 million and as of June 8, 2009, there were 96 securities that comprised the
Index.
PRINCIPAL RISKS
You could lose money by investing in the Fund.
MARKET RISK. Market risk is the risk that a particular stock owned by the Fund,
shares of the Fund or stocks in general may fall in value. Shares are subject to
market fluctuations caused by such factors as economic, political, regulatory or
market developments, changes in interest rates and perceived trends in stock
prices. Overall stock values could decline generally or could underperform other
investments. In 2008 and early 2009, securities markets were significantly
negatively affected by the financial crisis that initially resulted from the
downturn in the subprime mortgage market in the United States. The impact of the
financial crisis on securities markets has proven to be significant and may be
long-lasting and may have a substantial impact on the value of the Fund.
NON-CORRELATION RISK. The Fund's return may not match the return of the Index
for a number of reasons. For example, the Fund incurs operating expenses not
applicable to the Index, and may incur costs in buying and selling securities,
especially when rebalancing the Fund's portfolio holdings to reflect changes in
the composition of the Index. In addition, the Fund's portfolio holdings may not
exactly replicate the securities included in the Index or the ratios between the
securities included in the Index.
REPLICATION MANAGEMENT RISK. The Fund is exposed to additional market risk due
to its policy of investing principally in the securities included in the Index.
As a result of this policy, securities held by the Fund will generally not be
2
bought or sold in response to market fluctuations and the securities will be
issued by companies concentrated in the banking industry. Therefore, the Fund
will generally not sell a stock because the stock's issuer is in financial
trouble, unless that stock is removed or is anticipated to be removed from the
Index.
NON-DIVERSIFICATION RISK. The Fund is classified as "non-diversified" under the
Investment Company Act of 1940, as amended (the "1940 Act"). As a result, the
Fund is only limited as to the percentage of its assets which may be invested in
the securities of any one issuer by the diversification requirements imposed by
the Internal Revenue Code of 1986, as amended (the "Code"). Because the Fund may
invest a relatively high percentage of its assets in a limited number of
issuers, the Fund may be more susceptible to any single economic, political or
regulatory occurrence and to the financial conditions of the issuers in which it
invests.
COMMUNITY BANK RISK. The Fund invests in the securities of community banks. Such
companies have been significantly affected by the downturn in the U.S. and world
economies that began with a significant decline in the subprime mortgage lending
market in the United States. These conditions have brought about legislative and
regulatory changes, short-term and long-term interest rates, inflation and
changes in government monetary and fiscal policies, all of which have had a
significant impact on the banking business.
Business activity across a wide range of industries and regions has been greatly
reduced, and local governments and many businesses are experiencing serious
difficulty due to the lack of consumer spending and the lack of liquidity in the
credit markets. Unlike larger national or other regional banks that are more
geographically diversified, a community bank's financial performance may be
highly dependent upon the business environment in certain geographic regions of
the United States and may be adversely impacted by any downturn or unfavorable
economic or employment developments in its local market and the United States as
a whole. In particular, this environment impacts the ability of borrowers to pay
interest on and repay principal of outstanding loans and the value of collateral
securing those loans.
ANNUAL TOTAL RETURN
The Fund has not yet commenced operations and, therefore, does not have a
performance history. Once available, the Fund's performance information will be
accessible on the Fund's website at www.ftportfolios.com.
MANAGEMENT
INVESTMENT ADVISER
First Trust Advisors L.P. ("First Trust")
PORTFOLIO MANAGERS
There is no one individual primarily responsible for portfolio management
decisions for the Funds. Investments are made under the direction of a committee
consisting of: Daniel J. Lindquist, Chairman of the Investment Committee; Robert
F. Carey, Chief Investment Officer and a Senior Vice President of First Trust
and First Trust Portfolios L.P. ("FTP"); Jon C. Erickson, Senior Vice President
of First Trust and FTP; David G. McGarel, Senior Vice President of First Trust
and FTP; Roger F. Testin, Senior Vice President of First Trust and FTP; and Stan
Ueland, Vice President of First Trust and FTP. Each investment committee member
has served as a part of the portfolio management team of the Fund since
inception.
PURCHASE AND SALE OF FUND SHARES
Unlike conventional mutual funds, the Fund issues and redeems Shares on a
continuous basis, at NAV, only in Creation Units consisting of 50,000 Shares.
The Fund's Creation Units are issued and redeemed principally in-kind for
securities included in the Fund. Individual Shares may only be purchased and
sold on NASDAQ(R) through a broker-dealer. Shares of the Fund will trade at
3
market prices rather than NAV. As such, Shares may trade at a price greater than
NAV (premium) or less than NAV (discount).
TAX INFORMATION
The Fund's distributions are taxable and will generally be taxed as ordinary
income or capital gains.
FINANCIAL INTERMEDIARY COMPENSATION
If you purchase the Fund through a broker-dealer or other financial intermediary
(such as a bank), First Trust and FTP may pay the intermediary for the sale of
Fund shares and related services. These payments may influence the broker-dealer
or other intermediary and your salesperson to recommend the Fund over another
investment. Ask your salesperson or visit your financial intermediary's website
for more information.
4
FUND INVESTMENT STRATEGIES
The Fund will normally invest at least 90% of its assets in common stocks that
comprise the Index. The Fund's investment objective, the 90% investment
strategy, and each of the policies described herein are non-fundamental policies
that may be changed by the Board of Trustees of the Trust (the "Board") without
shareholder approval. As non-fundamental policies, the Fund's investment
objective, the 90% investment strategy and each of the policies described herein
require 60 days' prior written notice to shareholders before they can be
changed. Certain fundamental policies of the Fund are set forth in the Statement
of Additional Information ("SAI") under "Investment Objectives and Policies."
In seeking to achieve the Fund's investment objective, the Fund generally will
invest in all of the stocks comprising the Index in proportion to their
weightings in the Index. However, under various circumstances, it may not be
possible or practicable to purchase all of those stocks in those weightings. In
those circumstances, the Fund may purchase a sample of stocks in the Index.
There may also be instances in which First Trust may choose to overweight
certain stocks in the Index, purchase securities not in the Index which First
Trust believes are appropriate to substitute for certain securities in the
Index, use futures or derivative instruments, or utilize various combinations of
the above techniques in seeking to track the Index. The Fund may sell stocks
that are represented in the Index in anticipation of their removal from the
Index or purchase stocks not represented in the Index in anticipation of their
addition to the Index.
EQUITY SECURITIES
The Fund invests primarily in equity securities of U.S. issuers. Eligible
securities include common stocks and warrants to purchase common stocks.
SHORT-TERM INVESTMENTS
The Fund may invest in cash equivalents or other short-term investments,
including U.S. government securities, commercial paper, repurchase agreements,
money-market funds or similar fixed-income securities with remaining maturities
of one year or less. The use of short-term investments is not part of a
principal investment strategy of the Fund.
FUTURES AND OPTIONS
The Fund may use various investment strategies designed to hedge against changes
in the values of securities the Fund owns or expects to purchase or to hedge
against interest rate or currency exchange rate changes. The instruments used to
implement these strategies include financial futures contracts, options, forward
contracts, options on financial futures and stock index options. The use of
futures and options is not part of a principal investment strategy of the Fund.
DELAYED DELIVERY SECURITIES
The Fund may buy or sell securities on a when-issued or delayed-delivery basis,
paying for or taking delivery of the securities at a later date, normally within
15 to 45 days of the trade. Such transactions involve an element of risk because
the value of the securities to be purchased may decline before the settlement
date.
DISCLOSURE OF PORTFOLIO HOLDINGS
A description of the policies and procedures with respect to the disclosure of
the Fund's portfolio securities is included in the Fund's SAI and on the Fund's
website at www.ftportfolios.com.
5
ADDITIONAL RISKS OF INVESTING IN THE FUND
Risk is inherent in all investing. Investing in the Fund involves risk,
including the risk that you may lose all or part of your investment. There can
be no assurance that the Fund will meet its stated objective. Before you invest,
you should consider the following risks:
COMMUNITY BANK RISK. The Fund invests in the securities of community banks,
thrifts and holding companies. Such companies have been significantly affected
by the downturn in the U.S. and world economies that began with a significant
decline in the subprime mortgage lending market in the United States. These
conditions have brought about legislative and regulatory changes, short-term and
long-term interest rates, inflation and changes in government monetary and
fiscal policies, all of which have had a significant impact on the banking
business.
Business activity across a wide range of industries and regions has been greatly
reduced, and local governments and many businesses are experiencing serious
difficulty due to the lack of consumer spending and the lack of liquidity in the
credit markets. In addition, unemployment has increased significantly and
continues to grow. Consequently, the financial services industry and the
securities markets generally have been materially and adversely affected by
significant declines in the values of nearly all asset classes and by a serious
lack of liquidity. Some banks and other lenders have suffered significant losses
and have become reluctant to lend, even on a secured basis, due to the increased
risk of default and the impact of declining asset values on the value of
collateral. The foregoing has significantly weakened the strength and the
liquidity of some financial institutions worldwide. In 2008, the U.S.
government, the Federal Reserve and other regulators have taken numerous steps
to increase liquidity and to restore investor confidence, including investing
approximately $200 billion in the equity of other banking organizations. In
spite of this, asset values have continued to decline, and access to liquidity
continues to be very limited.
Unlike larger national or other regional banks that are more geographically
diversified, a community bank's financial performance may be highly dependent
upon the business environment in certain geographic regions of the United States
and may be adversely impacted by any downturn or unfavorable economic or
employment developments in its local market and the United States as a whole. In
particular, this environment impacts the ability of borrowers to pay interest on
and repay principal of outstanding loans and the value of collateral securing
those loans.
Banks may be subject to interest rate risks because their earnings and cash
flows are largely dependent upon their net interest income. Net interest income
is the difference between interest income earned on interest-earning assets such
as loans and securities and interest expense paid on interest-bearing
liabilities such as deposits and borrowed funds. Interest rates are highly
sensitive to many factors that are beyond a bank's control, including general
economic conditions and policies of various governmental and regulatory
agencies, in particular, the Board of Governors of the Federal Reserve System.
Changes in monetary policy, including changes in interest rates, could influence
the amount of interest a bank receives on loans and securities and the amount of
interest it pays on deposits and borrowings. A negative interest rate
environment for banks will likely negatively impact the Fund.
Banks may also be subject to lending risks, which include the impact of changes
in interest rates and changes in the economic conditions in the markets where
the bank operates as well as those across the United States. Increases in
interest rates and/or continuing weakening economic conditions could adversely
impact the ability of borrowers to repay outstanding loans or the value of the
collateral securing those loans. Continuing economic weakness on real estate and
related markets could further increase a bank's lending risk as it relates to
its commercial real estate loan portfolio and the value of the underlying
collateral. Banks are also subject to various laws and regulations that affect
their lending activities. Failure to comply with applicable laws and regulations
6
could subject a bank to regulatory enforcement action that could result in the
assessment of significant civil monetary penalties against such bank.
INDEX TRACKING RISK. You should anticipate that the value of the Shares will
decline, more or less, in correlation with any decline in the value of the
Index.
ISSUER SPECIFIC CHANGES RISK. The value of an individual security or particular
type of security can be more volatile than the market as a whole and can perform
differently from the value of the market as a whole.
CONCENTRATION RISK. The Fund will be concentrated in the securities of a given
industry if the Index is concentrated in such industry. Accordingly, the
Fund will be concentrated in the banking industry. A concentration makes the
Fund more susceptible to any single occurrence affecting the industry and may
subject the Fund to greater market risk than less concentrated funds.
PASSIVE INVESTMENT RISK. The Fund is not actively managed. The Fund may be
affected by a general decline in community banks and the financial sector, on
the whole. The Fund invests in securities included in or representative of its
Index regardless of their investment merit. The Fund generally will not attempt
to take defensive positions in declining markets.
SMALLER COMPANY RISK. The Fund may invest in small and/or mid capitalization
companies. Such companies may be more vulnerable to adverse general market or
economic developments, and their securities may be less liquid and may
experience greater price volatility than larger, more established companies as a
result of several factors, including limited trading volumes, products or
financial resources, management inexperience and less publicly available
information. Accordingly, such companies are generally subject to greater market
risk than larger, more established companies.
INTELLECTUAL PROPERTY RISK. The Fund relies on a license with NASDAQ OMX Group,
Inc. and American Bankers Association (collectively, the "Index Provider") that
permits the Fund to use the Index and associated trade names, trademarks and
service marks (the "Intellectual Property") in connection with the name and
investment strategies of the Fund. Such license may be terminated by the Index
Provider and, as a result, the Fund may lose its ability to use the Intellectual
Property. There is also no guarantee that the Index Provider has all rights to
license the Intellectual Property to First Trust and the Trust, on behalf of the
Fund. Accordingly in the event the license is terminated or the Index Provider
does not have rights to license the Intellectual Property, it may have a
significant effect on the operation of the Fund.
TRADING ISSUES
Although the Fund has applied to list and trade its Shares on NASDAQ(R), subject
to notice of issuance, there can be no assurance that an active trading market
for such Shares will develop or be maintained. Shares trading on NASDAQ(R) may
be halted due to market conditions or for reasons that, in the view of
NASDAQ(R), make trading in Shares inadvisable. In addition, trading in Shares on
NASDAQ(R) is subject to trading halts caused by extraordinary market volatility
pursuant to NASDAQ(R) "circuit breaker" rules. There can be no assurance that
the requirements of NASDAQ(R) necessary to maintain the listing of the Fund will
continue to be met or will remain unchanged. Due to the small asset size of the
Fund, the Fund is more likely to have difficulty maintaining its listing on
NASDAQ(R).
FLUCTUATION OF NET ASSET VALUE
The NAV of Shares of the Fund will generally fluctuate with changes in the
market value of the Fund's holdings. The market prices of Shares will generally
fluctuate in accordance with changes in NAV as well as the relative supply of
and demand for Shares on NASDAQ(R). First Trust cannot predict whether Shares
will trade below, at or above their NAV. Price differences may be due, in large
part, to the fact that supply and demand forces at work in the secondary trading
market for Shares will be closely related to, but not identical to, the same
7
forces influencing the prices of the stocks of the Fund trading individually or
in the aggregate at any point in time. However, given that Shares can only be
purchased and redeemed in Creation Units (unlike shares of many closed-end
funds, which frequently trade at appreciable discounts from, and sometimes at
premiums to, their NAV), First Trust believes that large discounts or premiums
to the NAV of Shares should not be sustained.
INFLATION
Inflation risk is the risk that the value of assets or income from investments
will be less in the future as inflation decreases the value of money. As
inflation increases, the value of the Fund's assets can decline as can the value
of the Fund's distributions. Common stock prices may be particularly sensitive
to rising interest rates, as the cost of capital rises and borrowing costs
increase.
FUND ORGANIZATION
The Fund is a series of the Trust, an investment company registered under the
1940 Act. The Fund is treated as a separate fund with its own investment
objective and policies. The Trust is organized as a Massachusetts business
trust. Its Board is responsible for its overall management and direction. The
Board elects the Trust's officers and approves all significant agreements,
including those with the investment adviser, custodian and fund administrative
and accounting agent.
MANAGEMENT OF THE FUND
First Trust Advisors L.P. ("First Trust"), 120 East Liberty Drive, Wheaton,
Illinois 60187, is the investment adviser to the Fund. In this capacity, First
Trust is responsible for the selection and ongoing monitoring of the securities
in the Fund's portfolio and certain other services necessary for the management
of the portfolios. First Trust is a limited partnership with one limited
partner, Grace Partners of DuPage L.P., and one general partner, The Charger
Corporation. Grace Partners of DuPage L.P. is a limited partnership with one
general partner, The Charger Corporation, and a number of limited partners. The
Charger Corporation is an Illinois corporation controlled by the Robert Donald
Van Kampen family. First Trust discharges its responsibilities subject to the
policies of the Board of the Trust.
First Trust serves as adviser or sub-adviser for 25 mutual fund portfolios, 39
exchange-traded fund portfolios and 14 closed-end funds and is also the
portfolio supervisor of certain unit investment trusts sponsored by First Trust
Portfolios L.P. ("FTP"), 120 East Liberty Drive, Wheaton, Illinois 60187. FTP
specializes in the underwriting, trading and distribution of unit investment
trusts and other securities. FTP is the principal underwriter of the Shares of
the Fund.
There is no one individual primarily responsible for portfolio management
decisions for the Fund. Investments are made under the direction of a committee
(the "Investment Committee"). The Investment Committee consists of Daniel J.
Lindquist, Robert F. Carey, Jon C. Erickson, David G. McGarel, Roger F. Testin
and Stan Ueland. Mr. Lindquist joined First Trust as a Vice President in April
2004 and has been a Senior Vice President of First Trust and FTP since September
2005. Mr. Lindquist is Chairman of the Investment Committee and presides over
Investment Committee meetings. Mr. Lindquist is responsible for overseeing the
implementation of the Fund's investment strategies. Mr. Carey is the Chief
Investment Officer and a Senior Vice President of First Trust and FTP. As First
Trust's Chief Investment Officer, Mr. Carey consults with the other members of
the Investment Committee on market conditions and First Trust's general
investment philosophy. Mr. Erickson is a Senior Vice President of First Trust
and FTP. As the head of First Trust's Equity Research Group, Mr. Erickson is
8
responsible for determining the securities to be purchased and sold by funds
that do not utilize quantitative investment strategies. Mr. McGarel is a Senior
Vice President of First Trust and FTP. As the head of First Trust's Strategy
Research Group, Mr. McGarel is responsible for developing and implementing
quantitative investment strategies for those funds that have investment policies
that require them to follow such strategies. Mr. Testin is a Senior Vice
President of First Trust and FTP. Mr. Testin is the head of First Trust's
Portfolio Management Group. Mr. Ueland has been a Vice President of First Trust
and FTP since August 2005. At First Trust, he plays an important role in
executing the investment strategies of each portfolio of exchange-traded funds
advised by First Trust. Before joining First Trust, Mr. Ueland was Vice
President at BondWave LLC from May 2004 through August 2005, and an account
executive for Mina Capital Management LLC and Samaritan Asset Management
Services, Inc. from January 2003 through May 2004. For additional information
concerning First Trust, including a description of the services provided to the
Fund, see the Fund's SAI. In addition, the SAI provides additional information
about the compensation of Investment Committee members, other accounts managed
by members of the Investment Committee and ownership by members of the
Investment Committee of Shares of the Fund.
First Trust receives an annual management fee from the Fund equal to 0.40% of
the Fund's average daily net assets. A discussion regarding the approval of the
Investment Management Agreement will be available in the Fund's Annual Report to
Shareholders for the period ending December 31, 2009.
The Fund is responsible for all of its expenses, including the investment
advisory fees, costs of transfer agency, custody, fund administration, legal,
audit and other services, interest, taxes, brokerage commissions and other
expenses connected with the execution of portfolio transactions, any
distribution fees or expenses, and extraordinary expenses. First Trust has
agreed to waive fees and/or pay Fund expenses to the extent necessary to prevent
the annual operating expenses of the Fund (excluding interest expense, brokerage
commissions and other trading expenses, taxes and extraordinary expenses) from
exceeding 0.60% of average daily net assets per year, at least until June 30,
2011. Expenses borne by First Trust are subject to reimbursement by the Fund up
to three years from the date the fee or expense was incurred, but no
reimbursement payment will be made by the Fund at any time if it would result in
the Fund's expenses exceeding 0.60% of average daily net assets per year.
HOW TO BUY AND SELL SHARES
Most investors will buy and sell Shares of the Fund at market prices in
secondary market transactions through brokers. Shares of the Fund are listed for
trading on the secondary market on NASDAQ(R). Shares can be bought and sold
throughout the trading day like other publicly traded shares. There is no
minimum investment. Although Shares are generally purchased and sold in "round
lots" of 100 Shares, brokerage firms typically permit investors to purchase or
sell Shares in smaller "odd lots," at no per-Share price differential. When
buying or selling Shares through a broker, investors should expect to incur
customary brokerage commissions, investors may receive less than the NAV of the
Shares, and investors may pay some or all of the spread between the bid and the
offer price in the secondary market on each leg of a round trip (purchase and
sale) transaction. Share prices are reported in dollars and cents per Share.
For purposes of the 1940 Act, the Fund is treated as a registered investment
company, and the acquisition of Shares by other registered investment companies
is subject to the restrictions of Section 12(d)(1) of the 1940 Act. The Trust,
on behalf of the Fund, has received an exemptive order from the Securities and
Exchange Commission that permits certain registered investment companies to
invest in the Fund beyond the limits set forth in Section 12(d)(1), subject to
certain terms and conditions, including that any such investment companies enter
into agreements with the Fund regarding the terms of any investment.
9
BOOK ENTRY
Shares are held in book-entry form, which means that no Share certificates are
issued. The Depository Trust Company ("DTC") or its nominee is the record owner
of all outstanding Shares of the Fund and is recognized as the owner of all
Shares for all purposes.
Investors owning Shares are beneficial owners as shown on the records of DTC or
its participants. DTC serves as the securities depository for all Shares.
Participants in DTC include securities brokers and dealers, banks, trust
companies, clearing corporations and other institutions that directly or
indirectly maintain a custodial relationship with DTC. As a beneficial owner of
Shares, you are not entitled to receive physical delivery of Share certificates
or to have Shares registered in your name, and you are not considered a
registered owner of Shares. Therefore, to exercise any right as an owner of
Shares, you must rely upon the procedures of DTC and its participants.
SHARE TRADING PRICES
The trading prices of Shares of the Fund on NASDAQ(R) may differ from the Fund's
daily NAV and can be affected by market forces of supply and demand, economic
conditions and other factors.
NASDAQ(R) intends to disseminate the approximate value of Shares of the Fund
every 15 seconds. This approximate value should not be viewed as a "real-time"
update of the NAV per Share of the Fund because the approximate value may not be
calculated in the same manner as the NAV, which is computed once a day,
generally at the end of the business day. The Fund is not involved in, or
responsible for, the calculation or dissemination of the approximate value of
Shares of the Fund and the Fund does not make any warranty as to its accuracy.
FREQUENT PURCHASES AND REDEMPTIONS OF THE FUND'S SHARES
The Fund imposes no restrictions on the frequency of purchases and redemptions
("market timing"). In determining not to approve a written, established policy,
the Board evaluated the risks of market timing activities by the Fund's
shareholders. The Board considered that, unlike traditional mutual funds, the
Fund issues and redeems its Shares at NAV per Share generally for a basket of
securities intended to mirror the Fund's portfolio, plus a small amount of cash,
and the Shares may be purchased and sold on NASDAQ(R) at prevailing market
prices. The Board noted that the Fund's Shares can only be purchased and
redeemed directly from the Fund in Creation Units by broker-dealers and large
institutional investors that have entered into participation agreements ("APs")
and that the vast majority of trading in Shares occurs on the secondary market.
Because the secondary market trades do not involve the Fund directly, it is
unlikely those trades would cause many of the harmful effects of market timing,
including: dilution, disruption of portfolio management, increases in the Fund's
trading costs and the realization of capital gains. With respect to trades
directly with the Fund, to the extent effected in-kind (i.e., for securities),
those trades do not cause any of the harmful effects (as noted above) that may
result from frequent cash trades. To the extent trades are effected in whole or
in part in cash, the Board noted that those trades could result in dilution to
the Fund and increased transaction costs, which could negatively impact the
Fund's ability to achieve its investment objective. However, the Board noted
that direct trading by APs is critical to ensuring that the Shares trade at or
close to NAV. The Fund also employs fair valuation pricing to minimize potential
dilution from market timing. The Fund imposes transaction fees on in-kind
purchases and redemptions of Shares to cover the custodial and other costs
incurred by the Fund in executing in-kind trades, and with respect to the
redemption fees, these fees increase if an investor substitutes cash in part or
in whole for securities, reflecting the fact that the Fund's trading costs
increase in those circumstances. Given this structure, the Board determined that
(a) it is unlikely that market timing would be attempted by the Fund's
shareholders and (b) any attempts to market time the Fund by shareholders would
not be expected to negatively impact the Fund or its shareholders.
10
DIVIDENDS, DISTRIBUTIONS AND TAXES
Dividends from net investment income, if any, are declared and paid
semi-annually by the Fund. The Fund distributes its net realized capital gains,
if any, to shareholders annually.
Distributions in cash may be reinvested automatically in additional whole Shares
only if the broker through whom you purchased Shares makes such option
available. Such Shares will generally be reinvested by the broker based upon the
market price of those Shares and investors may be subject to customary brokerage
commissions charged by the broker.
FEDERAL TAX MATTERS
This section summarizes some of the main U.S. federal income tax consequences of
owning Shares of the Fund. This section is current as of the date of this
Prospectus. Tax laws and interpretations change frequently, and these summaries
do not describe all of the tax consequences to all taxpayers. For example, these
summaries generally do not describe your situation if you are a corporation, a
non-U.S. person, a broker-dealer, or other investor with special circumstances.
In addition, this section does not describe your state, local or non-U.S. tax
consequences.
This federal income tax summary is based in part on the advice of counsel to the
Fund. The Internal Revenue Service could disagree with any conclusions set forth
in this section. In addition, counsel to the Fund was not asked to review, and
has not reached a conclusion with respect to, the federal income tax treatment
of the assets to be included in the Fund. This may not be sufficient for you to
use for the purpose of avoiding penalties under federal tax law.
As with any investment, you should seek advice based on your individual
circumstances from your own tax adviser.
FUND STATUS
The Fund intends to continue to qualify as a "regulated investment company"
under the federal tax laws. If the Fund qualifies as a regulated investment
company and distributes its income as required by the tax law, the Fund
generally will not pay federal income taxes.
DISTRIBUTIONS
The Fund's distributions are generally taxable. After the end of each year, you
will receive a tax statement that separates the distributions of the Fund into
two categories, ordinary income distributions and capital gains dividends.
Ordinary income distributions are generally taxed at your ordinary tax rate,
however, as further discussed below, certain ordinary income distributions
received from the Fund may be taxed at the capital gains tax rates. Generally,
you will treat all capital gains dividends as long-term capital gains regardless
of how long you have owned your Shares. To determine your actual tax liability
for your capital gains dividends, you must calculate your total net capital gain
or loss for the tax year after considering all of your other taxable
transactions, as described below. In addition, the Fund may make distributions
that represent a return of capital for tax purposes and thus will generally not
be taxable to you. The tax status of your distributions from the Fund is not
affected by whether you reinvest your distributions in additional Shares or
receive them in cash. The income from the Fund that you must take into account
for federal income tax purposes is not reduced by amounts used to pay a deferred
11
sales fee, if any. The tax laws may require you to treat distributions made to
you in January as if you had received them on December 31 of the previous year.
DIVIDENDS RECEIVED DEDUCTION
A corporation that owns Shares generally will not be entitled to the dividends
received deduction with respect to many dividends received from the Fund because
the dividends received deduction is generally not available for distributions
from regulated investment companies. However, certain ordinary income dividends
on Shares that are attributable to qualifying dividends received by the Fund
from certain corporations may be designated by the Fund as being eligible for
the dividends received deduction.
CAPITAL GAINS AND LOSSES AND CERTAIN ORDINARY INCOME DIVIDENDS
If you are an individual, the maximum marginal federal tax rate for net capital
gain is generally 15% (generally 5% for certain taxpayers in the 10% and 15% tax
brackets). These capital gains rates are generally effective for taxable years
beginning before January 1, 2011. For later periods, if you are an individual,
the maximum marginal federal tax rate for net capital gain is generally 20% (10%
for certain taxpayers in the 10% and 15% tax brackets). The 20% rate is reduced
to 18% and the 10% rate is reduced to 8% for long-term capital gains from most
property acquired after December 31, 2000 with a holding period of more than
five years.
Net capital gain equals net long-term capital gain minus net short-term capital
loss for the taxable year. Capital gain or loss is long-term if the holding
period for the asset is more than one year and is short-term if the holding
period for the asset is one year or less. You must exclude the date you purchase
your Shares to determine your holding period. However, if you receive a capital
gain dividend from the Fund and sell your Shares at a loss after holding it for
six months or less, the loss will be recharacterized as long-term capital loss
to the extent of the capital gain dividend received. The tax rates for capital
gains realized from assets held for one year or less are generally the same as
for ordinary income. The Code treats certain capital gains as ordinary income in
special situations.
Ordinary income dividends received by an individual shareholder from a regulated
investment company such as the Fund are generally taxed at the same rates that
apply to net capital gain (as discussed above), provided certain holding period
requirements are satisfied and provided the dividends are attributable to
qualifying dividends received by the Fund itself. These special rules relating
to the taxation of ordinary income dividends from regulated investment companies
generally apply to taxable years beginning before January 1, 2011. The Fund will
provide notice to its shareholders of the amount of any distribution which may
be taken into account as a dividend which is eligible for the capital gains tax
rates.
SALE OF SHARES
If you sell or redeem your Shares, you will generally recognize a taxable gain
or loss. To determine the amount of this gain or loss, you must subtract your
tax basis in your Shares from the amount you receive in the transaction. Your
tax basis in your Shares is generally equal to the cost of your Shares,
generally including sales charges. In some cases, however, you may have to
adjust your tax basis after you purchase your Shares.
DEDUCTIBILITY OF FUND EXPENSES
Expenses incurred and deducted by the Fund will generally not be treated as
income taxable to you. In some cases, however, you may be required to treat your
portion of these Fund expenses as income. In these cases you may be able to take
a deduction for these expenses. However, certain miscellaneous itemized
12
deductions, such as investment expenses, may be deducted by individuals only to
the extent that all of these deductions exceed 2% of the individual's adjusted
gross income.
NON-U.S. INVESTORS
If you are a non-U.S. investor (i.e., an investor other than a U.S. citizen or
resident or a U.S. corporation, partnership, estate or trust), you should be
aware that, generally, subject to applicable tax treaties, distributions from
the Fund will be characterized as dividends for federal income tax purposes
(other than dividends which the Fund designates as capital gain dividends) and
will be subject to U.S. federal income taxes, including withholding taxes,
subject to certain exceptions described below. However, distributions received
by a non-U.S. investor from the Fund that are properly designated by the Fund as
capital gain dividends may not be subject to U.S. federal income taxes,
including withholding taxes, provided that the Fund makes certain elections and
certain other conditions are met. In the case of dividends with respect to
taxable years of the Fund beginning prior to 2010, distributions from the Fund
that are properly designated by the Fund as an interest-related dividend
attributable to certain interest income received by the Fund or as a short-term
capital gain dividend attributable to certain net short-term capital gain income
received by the Fund may not be subject to U.S. federal income taxes, including
withholding taxes when received by certain foreign investors, provided that the
Fund makes certain elections and certain other conditions are met.
DISTRIBUTION PLAN
FTP serves as the distributor of Creation Units for the Fund on an agency basis.
FTP does not maintain a secondary market in Shares.
The Board has adopted a Distribution and Service Plan pursuant to Rule 12b-1
under the 1940 Act. In accordance with its Rule 12b-1 plan, the Fund is
authorized to pay an amount up to 0.25% of their average daily net assets each
year to reimburse FTP for amounts expended to finance activities primarily
intended to result in the sale of Creation Units or the provision of investor
services. FTP may also use this amount to compensate securities dealers or other
persons that are APs for providing distribution assistance, including
broker-dealer and shareholder support and educational and promotional services.
Pursuant to a contractual arrangement, the Fund will not pay 12b-1 fees any time
before June 30, 2011. However, in the event 12b-1 fees are charged in the
future, because these fees are paid out of the Fund's assets, over time these
fees will increase the cost of your investment and may cost you more than
certain other types of sales charges.
NET ASSET VALUE
The Fund's NAV is determined as of the close of trading (normally 4:00 p.m.,
Eastern time) on each day the New York Stock Exchange is open for business. NAV
is calculated for the Fund by taking the market price of the Fund's total
assets, including interest or dividends accrued but not yet collected, less all
liabilities, and dividing such amount by the total number of Shares outstanding.
The result, rounded to the nearest cent, is the NAV per Share. All valuations
are subject to review by the Board or its delegate.
The Fund's investments are valued at market value or, in the absence of market
value with respect to any portfolio securities, at fair value in accordance with
valuation procedures adopted by the Trust's Board of Trustees and in accordance
with the 1940 Act. Portfolio securities listed on any exchange other than
NASDAQ(R) are valued at the last sale price on the business day as of which such
value is being determined. Securities listed on the NASDAQ(R) are valued at the
13
official closing price on the business day as of which such value is being
determined. If there has been no sale on such day, or no official closing price
in the case of securities traded on NASDAQ(R), the securities are valued at the
mean of the most recent bid and ask prices on such day. Portfolio securities
traded on more than one securities exchange are valued at the last sale price or
official closing price, as applicable, on the business day as of which such
value is being determined at the close of the exchange representing the
principal market for such securities. Portfolio securities traded in the
over-the-counter market, but excluding securities trading on NASDAQ(R) and the
AIM, are valued at the closing bid prices. Short-term investments that mature in
less than 60 days when purchased are valued at amortized cost.
Certain securities may not be able to be priced by pre-established pricing
methods. Such securities may be valued by the Board or its delegate at fair
value. The use of fair value pricing by the Fund is governed by valuation
procedures adopted by the Board and in accordance with the provisions of the
1940 Act. These securities generally include, but are not limited to, restricted
securities (securities which may not be publicly sold without registration under
the Securities Act of 1933, as amended (the "Securities Act")) for which a
pricing service is unable to provide a market price; securities whose trading
has been formally suspended; a security whose market price is not available from
a pre-established pricing source; a security with respect to which an event has
occurred that is likely to materially affect the value of the security after the
market has closed but before the calculation of the Fund's NAV or make it
difficult or impossible to obtain a reliable market quotation; and a security
whose price, as provided by the 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. The use of fair value prices by the Fund
generally results in prices used by the Fund that may differ from current market
quotations or official closing prices on the applicable exchange and fair value
pricing may not reflect the actual value of a security. A variety of factors may
be considered in determining the fair value of such securities. See the Fund's
SAI for details.
Valuing the Fund's securities using fair value pricing will result in using
prices for those securities that may differ from current market valuations. Use
of fair value prices and certain current market valuations could result in a
difference between the prices used to calculate the Fund's NAV and the prices
used by the Index, which, in turn, could result in a difference between the
Fund's performance and the performance of the Index.
FUND SERVICE PROVIDERS
The Bank of New York Mellon Corporation is the administrator, custodian and fund
accounting and transfer agent for the Fund. Chapman and Cutler LLP, 111 West
Monroe Street, Chicago, Illinois 60603, serves as legal counsel to the Fund.
The Trust, on behalf of the Fund, has entered into an agreement with PNC Global
Investment Servicing (U.S.) Inc. ("PNC"), 301 Bellevue Parkway, Wilmington,
Delaware 19809, whereby PNC provides certain administrative services to the
Trust in connection with the Board's meetings and other related matters.
14
INTRA-DAY PORTFOLIO CALCULATOR
First Trust has entered into an agreement with NASDAQ(R) pursuant to which
NASDAQ(R) or its designee will be responsible for calculating and disseminating
the intra-day portfolio values for the Fund's Shares. The Fund will reimburse
First Trust for some or all of the fees payable under such agreement.
INDEX PROVIDER
The Index that the Fund seeks to track is compiled by the Index Provider. The
Index Provider is not affiliated with the Fund or First Trust. The Fund is
entitled to use the Index pursuant to a sublicensing arrangement with First
Trust, which in turn has a licensing agreement with the Index Provider. The
Index Provider or its agent also serves as calculation agent for the Index (the
"Index Calculation Agent"). The Index Calculation Agent is responsible for the
management of the day-to-day operations of the Index, including calculating the
value of the Index every 15 seconds, widely disseminating the Index values every
15 seconds and tracking corporate actions resulting in Index adjustments.
DISCLAIMERS
First Trust does not guarantee the accuracy and/or the completeness of the Index
or any data included therein, and First Trust shall have no liability for any
errors, omissions or interruptions therein. First Trust makes no warranty,
express or implied, as to results to be obtained by the Fund, owners of the
Shares of the Fund or any other person or entity from the use of the Index or
any data included therein. First Trust makes no express or implied warranties,
and expressly disclaims all warranties of merchantability or fitness for a
particular purpose or use with respect to the Index or any data included
therein. Without limiting any of the foregoing, in no event shall First Trust
have any liability for any special, punitive, direct, indirect or consequential
damages (including lost profits) arising out of matters relating to the use of
the Index, even if notified of the possibility of such damages.
The Fund is not sponsored, endorsed, sold or promoted by The NASDAQ OMX Group,
Inc. ("NASDAQ OMX"), American Bankers Association ("ABA") or their affiliates
(NASDAQ OMX and ABA, collectively with their affiliates, are referred to as the
"Corporations"). The Corporations have not passed on the legality or suitability
of, or the accuracy or adequacy of descriptions and disclosures relating to, the
Fund. The Corporations make no representation or warranty, express or implied to
the owners of the Fund or any member of the public regarding the advisability of
investing in securities generally or in the Fund particularly, or the ability of
the NASDAQ OMX(R) ABA(R) Community Bank IndexSM to track general stock market
performance. The Corporations' only relationship to First Trust Advisors L.P.
("Licensee") is in the licensing of the NASDAQ(R), OMX(R), NASDAQ OMX(R),
American Bankers Association(R), ABA(R), and NASDAQ OMX(R) ABA(R) Community Bank
IndexSM trademarks, and certain trade names and service marks of the
Corporations and the use of the NASDAQ OMX ABA Community Bank Index which is
determined and composed by the Corporations without regard to Licensee or the
Fund. The Corporations have no obligation to take the needs of the Licensee or
the owners of the Fund into consideration in determining, composing or
calculating the NASDAQ OMX ABA Community Bank Index. The Corporations are not
responsible for and have not participated in the determination of the timing of,
prices at, or quantities of the Fund to be issued or in the determination or
calculation of the equation by which the Fund is to be converted into cash. The
Corporations have no liability in connection with the administration, marketing
or trading of the Fund.
15
THE CORPORATIONS DO NOT GUARANTEE THE ACCURACY AND/OR UNINTERRUPTED CALCULATION
OF THE NASDAQ OMX ABA COMMUNITY BANK INDEX OR ANY DATA INCLUDED THEREIN. THE
CORPORATIONS MAKE NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE RESULTS TO BE
OBTAINED BY FIRST TRUST OR THE FUND, OWNERS OF THE FUND, OR ANY OTHER PERSON OR
ENTITY FROM THE USE OF THE NASDAQ OMX ABA COMMUNITY BANK INDEX OR ANY DATA
INCLUDED THEREIN. THE CORPORATIONS MAKE NO EXPRESS OR IMPLIED WARRANTIES OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE
NASDAQ OMX ABA COMMUNITY BANK INDEX OR ANY DATA INCLUDED THEREIN. WITHOUT
LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL THE CORPORATIONS HAVE ANY
LIABILITY FOR ANY LOST PROFITS OR SPECIAL, INCIDENTAL, PUNITIVE, INDIRECT, OR
CONSEQUENTIAL DAMAGES, EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
All price history data for the NASDAQ OMX(R) ABA(R) Community Bank IndexSM prior
to its dissemination date, June 28, 2009 is indicative and NASDAQ OMX(R) makes
no guarantee of the accuracy of back-tested data.
INDEX INFORMATION
INDEX DESCRIPTION
The Index includes a subset of banks and thrifts or their holding companies
listed on NASDAQ(R).
For the purposes of the Index, a "community bank" is considered to be all U.S.
banks and thrifts or their holding companies listed on NASDAQ(R), excluding the
50 largest U.S. banks by asset size. Also excluded are banks that have an
international specialization and those banks that have a credit-card
specialization, as screened by the ABA based on the most recent data from the
FDIC. Banks with an international specialization are those institutions with
assets greater than $10 billion and more than 25% of total assets in foreign
offices. Banks with a credit-card specialization are those institutions with
credit-card loans plus securitized receivables in excess of 50% of total assets
plus securitized receivables. Securities in the Index have a market
capitalization of at least $200 million and as of June 8, 2009, there were
96 securities that comprised the Index.
INDEX CONSTRUCTION
To be eligible for inclusion in the Index, the security's U.S. listing must be
exclusively on NASDAQ(R) (unless the security was dually listed on another U.S.
market prior to January 1, 2004 and has continuously maintained such listing).
The Index includes all NASDAQ(R) listed banks and thrifts or their holding
companies (HCs) with an ICB (Industry Classification Benchmark) Code of 8355 (or
that the ABA determines should be classified as such), excluding:
1. Any of the 50 largest banks or thrifts based on asset size (and
their HCs), as determined by the most recently available call
report data as compiled by the FDIC.
2. Any banks or thrifts classified as having an international
specialization, as determined by the most recently available call
report data as compiled by the FDIC, provided that such
institutions constitute the majority of assets if in a holding
company.
16
3. Any banks or thrifts classified as having a credit-card
specialization, as determined by the most recently available call
report data as complied by the FDIC, provided that such
institutions constitute the majority of assets if in a holding
company.
In addition, a security must meet the following:
o a market capitalization of at least $200 million;
o a three-month average daily dollar trading volume of at least $500
thousand;
o the issuer of the security may not have entered into a definitive
agreement or other arrangement which would likely result in the
security no longer being Index eligible;
o the security may not be issued by an issuer currently in bankruptcy
proceedings;
o the issuer of the security may not have annual financial statements
with an audit opinion that is currently withdrawn; and
o the issuer of the security must have "seasoned" on a recognized
market (generally, a company is considered to be seasoned if it has
been listed on a market for at least six months; in the case of
spin-offs, the operating history of the spin-off will be
considered).
INDEX CALCULATION
The Index is a market capitalization-weighted index. The value of the Index
equals the aggregate value of the Index share weights, also known as the "Index
Shares," of each of the securities included in the Index ("Index Securities")
multiplied by each such security's Last Sale Price(1), and divided by the
divisor of the Index. The divisor serves the purpose of scaling such aggregate
value to a lower order of magnitude which is more desirable for Index reporting
purposes. If trading in an Index Security is halted on its primary listing
market, the most recent Last Sale Price for that security is used for all index
computations until trading on such market resumes. Likewise, the most recent
Last Sale Price is used if trading in a security is halted on its primary
listing market before the market is open. The Index began on June 28, 2009 at a
Base Value of 1000.00.
The formula for index value is as follows:
o Aggregate Adjusted Market Value/Divisor
The formula for the divisor is as follows:
o (Market Value after Adjustments/Market Value before Adjustments) X
Divisor before Adjustments
Two versions of the Index are calculated - a price return index and a total
return index. The price return index (NASDAQ: ABQI) is ordinarily calculated
without regard to cash dividends on Index Securities. The total return index
(NASDAQ: ABQX) reinvests cash dividends on the ex-date. Both Indexes reinvest
extraordinary cash distributions.
------------------
(1) For purposes of this document Last Sale Price refers to the last sale price
on NASDAQ, which may be the NASDAQ Official Closing Price (NOCP).
17
The Index is calculated during the trading day and is disseminated once per
second from 09:30:01 to 17:16:00 ET. The closing value of the Index may change
up until 17:15:00 ET due to corrections to the Last Sale Price of the Index
Securities.
ELIGIBILITY
Index eligibility is limited to a specific security type only. The security type
eligible for inclusion in the Index is common stocks. Security types not
included in the Index are ADRs, closed-end funds, convertible debentures,
exchange traded funds, limited partnership interests, ordinary shares, preferred
stocks, rights, shares of beneficial interest, warrants, units and other
derivative securities.
Additionally, if at any time during the year other than the Evaluation, an Index
Security no longer meets the Eligibility Criteria, or is otherwise determined to
have become ineligible for inclusion in the Index, the security is removed from
the Index and is not replaced. In all cases, a security is removed from the
Index at its Last Sale Price.
INDEX MAINTENANCE
Changes in the price and/or Index Shares driven by corporate events such as
stock dividends, stock splits, and certain spin-offs and rights issuances are
adjusted on the ex-date. If the change in total shares outstanding arising from
other corporate actions is greater than or equal to 5.0%, the change is made as
soon as practicable. Otherwise, if the change in total shares outstanding is
less than 5%, then all such changes are accumulated and made effective at one
time on a quarterly basis after the close of trading on the third Friday in each
of March, June, September and December.
In the case of a special cash dividend, a determination is made on an individual
basis whether to make a change to the price of an Index Security in accordance
with its Index dividend policy. If it is determined that a change will be made,
it will become effective on the ex-date.
Ordinarily, whenever there is a change in Index Shares, a change in an Index
Security, or a change to the price of an Index Security due to spin-offs, rights
issuances or special cash dividends, the divisor is adjusted to ensure that
there is no discontinuity in the value of the Index which might otherwise be
caused by any such change. All changes are announced in advance and are
reflected in the Index prior to market open on the Index effective date.
INDEX REBALANCING
On a quarterly basis coinciding with the scheduled quarterly Index Share
adjustment procedures, the Index will be rebalanced if it is determined that:
(1) the current weight of the single largest market capitalization Index
Security is greater than 25.0% and (2) the "collective weight" of those Index
Securities whose individual current weights are in excess of 5%, when added
together, exceed 50.0% of the Index.
If either threshold is broken, the Index would be rebalanced using a modified
market capitalization-weighting such that the maximum weight of any Index
Security will not exceed 8% and no more than 5 securities are at that cap. The
excess weight of any capped security would be distributed proportionally across
the remaining Index Securities. If after redistribution, any of the 5 highest
ranked Index Securities were weighted below 8%, these securities would not be
capped. Next, any remaining Index Securities in excess of 4% would be capped at
4% and the excess weight would be redistributed proportionally across the
remaining Index Securities. The process would be repeated, if necessary, to
derive the final weights.
18
The above modified market capitalization-weighting methodology would be applied
to the capitalization of each Index Security, using the Last Sale Price of the
security at the close of trading on the last trading day in February, May,
August and November and after applying quarterly changes to the total shares
outstanding. Index Shares would then be calculated by multiplying the weight of
the security derived above by the new market value of the Index and dividing the
modified market capitalization for each Index Security by its corresponding Last
Sale Price.
In addition, a special rebalancing of the Index may be conducted at any time if
it is determined necessary to maintain the integrity of the Index.
In administering the Index, NASDAQ OMX(R) will exercise reasonable discretion as
it deems appropriate to ensure Index integrity.
PREMIUM/DISCOUNT INFORMATION
The Fund has not yet commenced operations and, therefore, does not have
information about the differences between the Fund's daily market price on
NASDAQ(R) and its NAV.
OTHER INFORMATION
CONTINUOUS OFFERING
The Fund will issue, on a continuous offering basis, its Shares in one or more
groups of a fixed number of Fund Shares (each such group of such specified
number of individual Fund Shares, a "Creation Unit Aggregation"). The method by
which Creation Unit Aggregations of Fund Shares are created and traded may raise
certain issues under applicable securities laws. Because new Creation Unit
Aggregations of Shares are issued and sold by the Fund on an ongoing basis, a
"distribution," as such term is used in the Securities Act, may occur at any
point. Broker-dealers and other persons are cautioned that some activities on
their part may, depending on the circumstances, result in their being deemed
participants in a distribution in a manner which could render them statutory
underwriters and subject them to the prospectus delivery requirement and
liability provisions of the Securities Act.
For example, a broker-dealer firm or its client may be deemed a statutory
underwriter if it takes Creation Unit Aggregations after placing an order with
FTP, breaks them down into constituent Shares and sells such Shares directly to
customers, or if it chooses to couple the creation of a supply of new Shares
with an active selling effort involving solicitation of secondary market demand
for Shares. A determination of whether one is an underwriter for purposes of the
Securities Act must take into account all the facts and circumstances pertaining
to the activities of the broker-dealer or its client in the particular case, and
the examples mentioned above should not be considered a complete description of
all the activities that could lead to a characterization as an underwriter.
Broker-dealer firms should also note that dealers who are not "underwriters" but
are effecting transactions in Shares, whether or not participating in the
distribution of Shares, are generally required to deliver a Prospectus. This is
because the prospectus delivery exemption in Section 4(3) of the Securities Act
is not available in respect of such transactions as a result of Section 24(d) of
the 1940 Act. The Trust, on behalf of the Fund, however, has received from the
Securities and Exchange Commission an exemption from the prospectus delivery
19
obligation in ordinary secondary market transactions under certain
circumstances, on the condition that purchasers are provided with a product
description of the Shares. As a result, broker-dealer firms should note that
dealers who are not underwriters but are participating in a distribution (as
contrasted with ordinary secondary market transactions) and thus dealing with
the Shares that are part of an overallotment within the meaning of Section
4(3)(a) of the Securities Act would be unable to take advantage of the
prospectus delivery exemption provided by Section 4(3) of the Securities Act.
Firms that incur a prospectus delivery obligation with respect to Shares are
reminded that, under the Securities Act Rule 153, a prospectus delivery
obligation under Section 5(b)(2) of the Securities Act owed to a broker-dealer
in connection with a sale on NASDAQ(R) is satisfied by the fact that the
Prospectus is available from NASDAQ(R) upon request. The prospectus delivery
mechanism provided in Rule 153 is available with respect to transactions on a
national securities exchange, a trading facility or an alternative trading
system.
20
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21
[LOGO OMITTED] First Trust First Trust
Exchange-Traded Fund
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First Trust NASDAQ(R) ABA(R) Community Bank Index Fund
FOR MORE INFORMATION
For more detailed information on the Fund, several additional sources of
information are available to you. The SAI, incorporated by reference into this
Prospectus, contains detailed information on the Fund's policies and operation.
Additional information about the Fund's investments is available in the annual
and semi-annual reports to Shareholders. In the Fund's annual reports, you will
find a discussion of the market conditions and investment strategies that
significantly impacted the Fund's performance during the last fiscal year. The
Fund's most recent SAI, annual or semi-annual reports and certain other
information are available free of charge by calling the Fund at (800) 621-1675,
on the Fund's website at www.ftportfolios.com or through your financial adviser.
Shareholders may call the toll-free number above with any inquiries.
You may obtain this and other information regarding the Fund, including the
Codes of Ethics adopted by First Trust, FTP and the Trust, directly from the
Securities and Exchange Commission (the "SEC"). Information on the SEC's website
is free of charge. Visit the SEC's on-line EDGAR database at http://www.sec.gov
or in person at the SEC's Public Reference Room in Washington, D.C., or call the
SEC at (202) 551-8090 for information on the Public Reference Room. You may also
request information regarding the Fund by sending a request (along with a
duplication fee) to the SEC's Public Reference Section, 100 F Street, N.E.,
Washington, D.C. 20549-1520 or by sending an electronic request to
publicinfo@sec.gov.
First Trust Advisors L.P.
120 East Liberty Drive
Suite 400
Wheaton, Illinois 60187
(800) 621-1675
www.ftportfolios.com SEC File #: 811-21774
Back Cover
STATEMENT OF ADDITIONAL INFORMATION
INVESTMENT COMPANY ACT FILE NO. 811-21774
FIRST TRUST EXCHANGE-TRADED FUND
FIRST TRUST NASDAQ(R) ABA(R) COMMUNITY BANK INDEX FUND
Ticker Symbol: QABA
Exchange: NASDAQ(R)
DATED JUNE 25, 2009
This Statement of Additional Information is not a Prospectus. It should
be read in conjunction with the Prospectus dated June 25, 2009 (the
"Prospectus") for First Trust NASDAQ(R) ABA(R) Community Bank Index Fund (the
"Fund"), a series of First Trust Exchange-Traded Fund (the "Trust"), as it may
be revised from time to time. Capitalized terms used herein that are not defined
have the same meaning as in the Prospectus, unless otherwise noted. A copy of
the Fund's Prospectus may be obtained without charge by writing to the Trust's
distributor, First Trust Portfolios L.P., 120 East Liberty Drive, Suite 400,
Wheaton, Illinois 60187, or by calling toll free at (800) 621-1675.
TABLE OF CONTENTS
GENERAL DESCRIPTION OF THE TRUST AND THE FUND.................................1
EXCHANGE LISTING AND TRADING..................................................2
INVESTMENT OBJECTIVE AND POLICIES.............................................3
INVESTMENT STRATEGIES.........................................................4
SUBLICENSE AGREEMENTS........................................................14
INVESTMENT RISKS.............................................................15
MANAGEMENT OF THE FUND.......................................................18
ACCOUNTS MANAGED BY INVESTMENT COMMITTEE.....................................27
BROKERAGE ALLOCATIONS........................................................27
CUSTODIAN, DISTRIBUTOR, TRANSFER AGENT, FUND ACCOUNTING AGENT, INDEX
PROVIDER AND EXCHANGE...................................................29
ADDITIONAL INFORMATION.......................................................31
PROXY VOTING POLICIES AND PROCEDURES.........................................32
CREATION AND REDEMPTION OF CREATION UNIT AGGREGATIONS........................33
FEDERAL TAX MATTERS..........................................................44
DETERMINATION OF NAV.........................................................50
DIVIDENDS AND DISTRIBUTIONS..................................................51
MISCELLANEOUS INFORMATION....................................................52
- ii -
GENERAL DESCRIPTION OF THE TRUST AND THE FUND
The Trust was organized as a Massachusetts business trust on August 8,
2003 and is authorized to issue an unlimited number of shares in one or more
series or "funds." The Trust is an open-end management investment company,
registered under the Investment Company Act of 1940, as amended (the "1940
Act"). The Trust currently offers shares in 18 separate series, including the
First Trust NASDAQ(R) ABA(R) Community Bank Index Fund (the "Fund"), a
non-diversified series. This Statement of Additional Information relates only to
the Fund. The shares of the Fund are referred to herein as "Shares" or "Fund
Shares." Each series of the Trust represents a beneficial interest in a separate
portfolio of securities and other assets, with its own objective and policies.
The Board of Trustees of the Trust (the "Board of Trustees" or the
"Trustees") has the right to establish additional series in the future, to
determine the preferences, voting powers, rights and privileges thereof and to
modify such preferences, voting powers, rights and privileges without
shareholder approval. Shares of any series may also be divided into one or more
classes at the discretion of the Trustees.
The Trust or any series or class thereof may be terminated at any time
by the Board of Trustees upon written notice to the shareholders.
Each Share has one vote with respect to matters upon which a
shareholder vote is required consistent with the requirements of the 1940 Act
and the rules promulgated thereunder. Shares of all series of the Trust vote
together as a single class except as otherwise required by the 1940 Act, or if
the matter being voted on affects only a particular series, and, if a matter
affects a particular series differently from other series, the shares of that
series will vote separately on such matter.
The Trust's Declaration of Trust (the "Declaration") provides that by
becoming a shareholder of the Fund, each shareholder shall be expressly held to
have agreed to be bound by the provisions of the Declaration. The Declaration
may, except in limited circumstances, be amended or supplemented by the Trustees
without a shareholder vote. The holders of Fund Shares are required to disclose
information on direct or indirect ownership of Fund Shares as may be required to
comply with various laws applicable to the Fund, and ownership of Fund Shares
may be disclosed by the Fund if so required by law or regulation. In addition,
pursuant to the Declaration, the Trustees may, in their discretion, require the
Trust to redeem Shares held by any shareholder for any reason under terms set by
the Trustees. The Declaration also provides that shareholders may not bring suit
on behalf of the Fund without first requesting that the Trustees bring such suit
unless there would be irreparable injury to the Fund, or if a majority of the
Trustees have a personal financial interest in the action. Trustees are not
considered to have a personal financial interest by virtue of being compensated
for their services as Trustees.
The Trust is not required to and does not intend to hold annual
meetings of shareholders.
Under Massachusetts law applicable to Massachusetts business trusts,
shareholders of such a trust may, under certain circumstances, be held
personally liable as partners for its obligations. However, the Declaration
contains an express disclaimer of shareholder liability for acts or obligations
of the Trust and requires that notice of this disclaimer be given in each
agreement, obligation or instrument entered into or executed by the Trust or the
Trustees. The Declaration further provides for indemnification out of the assets
and property of the Trust for all losses and expenses of any shareholder held
personally liable for the obligations of the Trust. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which both inadequate insurance existed and the
Trust or the Fund itself was unable to meet its obligations.
The Fund is advised by First Trust Advisors L.P. (the "Adviser" or
"First Trust").
The Fund has applied to list and trade its Shares on The NASDAQ(R)
Stock Market ("NASDAQ(R)"), subject to notice of issuance. The Shares will trade
on NASDAQ(R) at market prices that may be below, at or above net asset value
("NAV"). The Fund offers and issues Shares at NAV only in aggregations of a
specified number of Shares (each a "Creation Unit" or a "Creation Unit
Aggregation"), generally in exchange for a basket of equity securities (the
"Deposit Securities") included in the Fund's Index (as hereinafter defined),
together with the deposit of a specified cash payment (the "Cash Component").
Creation Units are aggregations of 50,000 Shares of a Fund.
The Trust reserves the right to offer a "cash" option for creations and
redemptions of Fund Shares. Fund Shares may be issued in advance of receipt of
Deposit Securities subject to various conditions including a requirement to
maintain on deposit with the applicable Fund cash at least equal to 115% of the
market value of the missing Deposit Securities. See the "Creation and Redemption
of Creation Unit Aggregations" section. In each instance of such cash creations
or redemptions, transaction fees may be imposed that will be higher than the
transaction fees associated with in-kind creations or redemptions. In all cases,
such fees will be limited in accordance with the requirements of the SEC
applicable to management investment companies offering redeemable securities.
EXCHANGE LISTING AND TRADING
There can be no assurance that the requirements of NASDAQ(R) necessary
to maintain the listing of Shares of the Fund will continue to be met. NASDAQ(R)
may, but is not required to, remove the Shares of the Fund from listing if (i)
following the initial 12-month period beginning at the commencement of trading
of the Fund, there are fewer than 50 beneficial owners of the Shares of the Fund
for 30 or more consecutive trading days; (ii) the value of the Fund's Index (as
defined below) is no longer calculated or available; or (iii) such other event
shall occur or condition exist that, in the opinion of NASDAQ(R), makes further
dealings on NASDAQ(R) inadvisable. NASDAQ(R) will remove the Shares of the Fund
from listing and trading upon termination of the Fund.
As in the case of other stocks traded on NASDAQ(R), broker's
commissions on transactions will be based on negotiated commission rates at
customary levels.
- 2 -
The Fund reserves the right to adjust the price levels of Shares in the
future to help maintain convenient trading ranges for investors. Any adjustments
would be accomplished through stock splits or reverse stock splits, which would
have no effect on the net assets of the Fund.
INVESTMENT OBJECTIVE AND POLICIES
The Prospectus describes the investment objective and policies of the
Fund. The following supplements the information contained in the Prospectus
concerning the investment objective and policies of the Fund.
The Fund is subject to the following fundamental policies, which may
not be changed without approval of the holders of a majority of the outstanding
voting securities of the Fund:
(1) The Fund may not issue senior securities, except as
permitted under the 1940 Act.
(2) The Fund may not borrow money, except that the Fund may
(i) borrow money from banks for temporary or emergency purposes (but
not for leverage or the purchase of investments) and (ii) engage in
other transactions permissible under the 1940 Act that may involve a
borrowing (such as obtaining short-term credits as are necessary for
the clearance of transactions, engaging in delayed-delivery
transactions, or purchasing certain futures, forward contracts and
options), provided that the combination of (i) and (ii) shall not
exceed 33-1/3% of the value of the Fund's total assets (including the
amount borrowed), less the Fund's liabilities (other than borrowings).
(3) The Fund will not underwrite the securities of other
issuers except to the extent the Fund may be considered an underwriter
under the Securities Act of 1933, as amended (the "1933 Act"), in
connection with the purchase and sale of portfolio securities.
(4) The Fund will not purchase or sell real estate or
interests therein, unless acquired as a result of ownership of
securities or other instruments (but this shall not prohibit the Fund
from purchasing or selling securities or other instruments backed by
real estate or of issuers engaged in real estate activities).
(5) The Fund may not make loans to other persons, except
through (i) the purchase of debt securities permissible under the
Fund's investment policies, (ii) repurchase agreements, or (iii) the
lending of portfolio securities, provided that no such loan of
portfolio securities may be made by the Fund if, as a result, the
aggregate of such loans would exceed 33-1/3% of the value of the Fund's
total assets.
(6) The Fund may not purchase or sell physical commodities
unless acquired as a result of ownership of securities or other
instruments (but this shall not prevent the Fund from purchasing or
- 3 -
selling options, futures contracts, forward contracts or other
derivative instruments, or from investing in securities or other
instruments backed by physical commodities).
(7) The Fund may not invest 25% or more of the value of its
total assets in securities of issuers in any one industry or group of
industries, except to the extent that the Index that the Fund is based
upon, concentrates in an industry or group of industries. This
restriction does not apply to obligations issued or guaranteed by the
U.S. Government, its agencies or instrumentalities.
Except for restriction (2), if a percentage restriction is adhered to
at the time of investment, a later increase in percentage resulting from a
change in market value of the investment or the total assets will not constitute
a violation of that restriction.
The foregoing fundamental policies of the Fund may not be changed
without the affirmative vote of the majority of the outstanding voting
securities of the Fund. The 1940 Act defines a majority vote as the vote of the
lesser of (i) 67% or more of the voting securities represented at a meeting at
which more than 50% of the outstanding securities are represented; or (ii) more
than 50% of the outstanding voting securities. With respect to the submission of
a change in an investment policy to the holders of outstanding voting securities
of the Fund, such matter shall be deemed to have been effectively acted upon
with respect to the Fund if a majority of the outstanding voting securities of
the Fund vote for the approval of such matter, notwithstanding that (1) such
matter has not been approved by the holders of a majority of the outstanding
voting securities of any other series of the Trust affected by such matter, and
(2) such matter has not been approved by the vote of a majority of the
outstanding voting securities.
In addition to the foregoing fundamental policies, the Fund is also
subject to strategies and policies discussed herein which, unless otherwise
noted, are non-fundamental restrictions and policies and may be changed by the
Board of Trustees.
INVESTMENT STRATEGIES
Under normal circumstances, the Fund will invest at least 90% of its
assets in common stocks that comprise the NASDAQ OMX(R) ABA(R) Community Bank
Index(SM) (the "Index"). Fund Shareholders are entitled to 60 days' notice prior
to any change in this non-fundamental investment policy.
TYPES OF INVESTMENTS
Warrants: The Fund may invest in warrants. Warrants acquired by the
Fund entitle it to buy common stock from the issuer at a specified price and
time. They do not represent ownership of the securities but only the right to
buy them. Warrants are subject to the same market risks as stocks, but may be
more volatile in price. The Fund's investment in warrants will not entitle it to
receive dividends or exercise voting rights and will become worthless if the
warrants cannot be profitably exercised before their expiration date.
- 4 -
Delayed-Delivery Transactions: The Fund may from time to time purchase
securities on a "when-issued" or other delayed-delivery basis. The price of
securities purchased in such transactions is fixed at the time the commitment to
purchase is made, but delivery and payment for the securities take place at a
later date. Normally, the settlement date occurs within 45 days of the purchase.
During the period between the purchase and settlement, the Fund does not remit
payment to the issuer, no interest is accrued on debt securities and dividend
income is not earned on equity securities. Delayed-delivery commitments involve
a risk of loss if the value of the security to be purchased declines prior to
the settlement date, which risk is in addition to the risk of a decline in value
of the Fund's other assets. While securities purchased in delayed-delivery
transactions may be sold prior to the settlement date, the Fund intends to
purchase such securities with the purpose of actually acquiring them. At the
time the Fund makes the commitment to purchase a security in a delayed-delivery
transaction, it will record the transaction and reflect the value of the
security in determining its NAV. The Fund does not believe that NAV will be
adversely affected by purchases of securities in delayed-delivery transactions.
The Fund will earmark or maintain in a segregated account cash, U.S.
Government securities, and high-grade liquid debt securities equal in value to
commitments for delayed-delivery securities. Such earmarked or segregated
securities will mature or, if necessary, be sold on or before the settlement
date. When the time comes to pay for delayed-delivery securities, a Fund will
meet its obligations from then-available cash flow, sale of the securities
earmarked or held in the segregated account described above, sale of other
securities, or, although it would not normally expect to do so, from the sale of
the delayed-delivery securities themselves (which may have a market value
greater or less than a Fund's payment obligation).
Illiquid Securities: The Fund may invest in illiquid securities (i.e.,
securities that are not readily marketable). For purposes of this restriction,
illiquid securities include, but are not limited to, restricted securities
(securities the disposition of which is restricted under the federal securities
laws), securities that may only be resold pursuant to Rule 144A under the 1933
Act but that are deemed to be illiquid; and repurchase agreements with
maturities in excess of seven days. However, the Fund will not acquire illiquid
securities if, as a result, such securities would comprise more than 15% of the
value of the Fund's net assets. The Board of Trustees or its delegate has the
ultimate authority to determine, to the extent permissible under the federal
securities laws, which securities are liquid or illiquid for purposes of this
15% limitation. The Board of Trustees has delegated to First Trust the
day-to-day determination of the illiquidity of any equity or fixed-income
security, although it has retained oversight and ultimate responsibility for
such determinations. Although no definitive liquidity criteria are used, the
Board of Trustees has directed First Trust to look to factors such as (i) the
nature of the market for a security (including the institutional private resale
market; the frequency of trades and quotes for the security; the number of
dealers willing to purchase or sell the security; and the amount of time
normally needed to dispose of the security, the method of soliciting offers and
the mechanics of transfer), (ii) the terms of certain securities or other
instruments allowing for the disposition to a third party or the issuer thereof
(e.g., certain repurchase obligations and demand instruments), and (iii) other
permissible relevant factors.
Restricted securities may be sold only in privately negotiated
transactions or in a public offering with respect to which a registration
statement is in effect under the 1933 Act. Where registration is required, the
- 5 -
Fund may be obligated to pay all or part of the registration expenses and a
considerable period may elapse between the time of the decision to sell and the
time the Fund may be permitted to sell a security under an effective
registration statement. If, during such a period, adverse market conditions were
to develop, the Fund might obtain a less favorable price than that which
prevailed when it decided to sell. Illiquid securities will be priced at fair
value as determined in good faith under procedures adopted by the Board of
Trustees. If, through the appreciation of illiquid securities or the
depreciation of liquid securities, the Fund should be in a position where more
than 15% of the value of its net assets are invested in illiquid securities,
including restricted securities which are not readily marketable, the Fund will
take such steps as is deemed advisable, if any, to protect liquidity.
Money Market Funds: The Fund may invest in shares of money market funds
to the extent permitted by the 1940 Act.
Temporary Investments: The Fund may, without limit as to percentage of
assets, purchase U.S. Government securities or short-term debt securities to
keep cash on hand fully invested or for temporary defensive purposes. Short-term
debt securities are securities from issuers having a long-term debt rating of at
least A by Standard & Poor's Ratings Group ("S&P Ratings"), Moody's Investors
Service, Inc. ("Moody's") or Fitch, Inc. ("Fitch") and having a maturity of one
year or less.
Short-term debt securities are defined to include, without limitation,
the following:
(1) U.S. Government securities, including bills, notes and
bonds differing as to maturity and rates of interest, which are either
issued or guaranteed by the U.S. Treasury or by U.S. Government
agencies or instrumentalities. U.S. Government agency securities
include securities issued by (a) the Federal Housing Administration,
Farmers Home Administration, Export-Import Bank of United States, Small
Business Administration, and the Government National Mortgage
Association, whose securities are supported by the full faith and
credit of the United States; (b) the Federal Home Loan Banks, Federal
Intermediate Credit Banks, and the Tennessee Valley Authority, whose
securities are supported by the right of the agency to borrow from the
U.S. Treasury; (c) Federal National Mortgage Association ("FNMA" or
"Fannie Mae") which is a government-sponsored organization owned
entirely by private stockholders and whose securities are guaranteed as
to principal and interest by FNMA; and (d) the Student Loan Marketing
Association, whose securities are supported only by its credit. In
September 2008, FNMA was placed into conservatorship overseen by
Federal Housing Finance Agency ("FHFA"). As conservator, FHFA will
succeed to the rights, titles, powers and privileges of FNMA and any
stockholder, officer or director of the company with respect to FNMA
and its assets and title to all books, records and company assets held
by any other custodian or third party. FHFA is charged with operating
FNMA. While the U.S. Government provides financial support to such U.S.
Government-sponsored agencies or instrumentalities, no assurance can be
given that it always will do so since it is not so obligated by law.
The U.S. Government, its agencies, and instrumentalities do not
guarantee the market value of their securities, and consequently, the
value of such securities may fluctuate.
- 6 -
(2) Certificates of deposit issued against funds deposited in
a bank or savings and loan association. Such certificates are for a
definite period of time, earn a specified rate of return, and are
normally negotiable. If such certificates of deposit are
non-negotiable, they will be considered illiquid securities and be
subject to the Fund's 15% restriction on investments in illiquid
securities. Pursuant to the certificate of deposit, the issuer agrees
to pay the amount deposited plus interest to the bearer of the
certificate on the date specified thereon. On October 3, 2008, the
Emergency Economic Stabilization Act of 2008 increased the maximum
amount of federal deposit insurance coverage payable as to any
certificate of deposit from $100,000 to $250,000 per depositor until
December 31, 2009. The maximum coverage limit will return to $100,000
per certificate of deposit on January 1, 2010, absent further
legislation. Therefore, certificates of deposit purchased by the Fund
may not be fully insured.
(3) Bankers' acceptances which are short-term credit
instruments used to finance commercial transactions. Generally, an
acceptance is a time draft drawn on a bank by an exporter or an
importer to obtain a stated amount of funds to pay for specific
merchandise. The draft is then "accepted" by a bank that, in effect,
unconditionally guarantees to pay the face value of the instrument on
its maturity date. The acceptance may then be held by the accepting
bank as an asset or it may be sold in the secondary market at the going
rate of interest for a specific maturity.
(4) Repurchase agreements, which involve purchases of debt
securities. In such an action, at the time the Fund purchases the
security, it simultaneously agrees to resell and redeliver the security
to the seller, who also simultaneously agrees to buy back the security
at a fixed price and time. This assures a predetermined yield for the
Fund during its holding period since the resale price is always greater
than the purchase price and reflects an agreed upon market rate. The
period of these repurchase agreements will usually be short, from
overnight to one week. Such actions afford an opportunity for the Fund
to invest temporarily available cash. The Fund may enter into
repurchase agreements only with respect to obligations of the U.S.
Government, its agencies or instrumentalities; certificates of deposit;
or bankers' acceptances in which the Fund may invest. In addition, the
Fund may only enter into repurchase agreements where the market value
of the purchased securities/collateral equals at least 100% of
principal including accrued interest and is marked-to-market daily. The
risk to the Fund is limited to the ability of the seller to pay the
agreed-upon sum on the repurchase date; in the event of default, the
repurchase agreement provides that the Fund is entitled to sell the
underlying collateral. If the value of the collateral declines after
the agreement is entered into, however, and if the seller defaults
under a repurchase agreement when the value of the underlying
collateral is less than the repurchase price, the Fund could incur a
loss of both principal and interest. The Fund, however, intends to
enter into repurchase agreements only with financial institutions and
dealers believed by First Trust to present minimal credit risks in
accordance with criteria established by the Board of Trustees. First
Trust will review and monitor the creditworthiness of such
institutions. First Trust monitors the value of the collateral at the
time the action is entered into and at all times during the term of the
repurchase agreement. First Trust does so in an effort to determine
that the value of the collateral always equals or exceeds the
- 7 -
agreed-upon repurchase price to be paid to the Fund. If the seller were
to be subject to a federal bankruptcy proceeding, the ability of the
Fund to liquidate the collateral could be delayed or impaired because
of certain provisions of the bankruptcy laws.
(5) Bank time deposits, which are monies kept on deposit with
banks or savings and loan associations for a stated period of time at a
fixed rate of interest. There may be penalties for the early withdrawal
of such time deposits, in which case the yields of these investments
will be reduced.
(6) Commercial paper, which are short-term unsecured
promissory notes, including variable rate master demand notes issued by
corporations to finance their current operations. Master demand notes
are direct lending arrangements between the Fund and a corporation.
There is no secondary market for the notes. However, they are
redeemable by the Fund at any time. The Fund's portfolio managers will
consider the financial condition of the corporation (e.g., earning
power, cash flow, and other liquidity ratios) and will continuously
monitor the corporation's ability to meet all of its financial
obligations, because the Fund's liquidity might be impaired if the
corporation were unable to pay principal and interest on demand. The
Fund may only invest in commercial paper rated A-1 or better by S&P
Ratings, Prime-1 or higher by Moody's or F2 or higher by Fitch.
PORTFOLIO TURNOVER
The Fund buys and sells portfolio securities in the normal course of
their investment activities. The proportion of the Fund's investment portfolio
that is bought and sold during a year is known as the Fund's portfolio turnover
rate. A turnover rate of 100% would occur, for example, if the Fund bought and
sold securities valued at 100% of its net assets within one year. A high
portfolio turnover rate could result in the payment by the Fund of increased
brokerage costs, expenses and taxes.
HEDGING STRATEGIES
General Description of Hedging Strategies
The Fund may engage in hedging activities. First Trust may cause the
Fund to utilize a variety of financial instruments, including options, forward
contracts, futures contracts (hereinafter referred to as "Futures" or "Futures
Contracts"), and options on Futures Contracts to attempt to hedge the Fund's
holdings.
Hedging or derivative instruments on securities generally are used to
hedge against price movements in one or more particular securities positions
that the Fund owns or intends to acquire. Such instruments may also be used to
"lock-in" realized but unrecognized gains in the value of portfolio securities.
Hedging instruments on stock indices, in contrast, generally are used to hedge
against price movements in broad equity market sectors in which the Fund has
invested or expects to invest. Hedging strategies, if successful, can reduce the
- 8 -
risk of loss by wholly or partially offsetting the negative effect of
unfavorable price movements in the investments being hedged. However, hedging
strategies can also reduce the opportunity for gain by offsetting the positive
effect of favorable price movements in the hedged investments. The use of
hedging instruments is subject to applicable regulations of the SEC, the several
options and Futures exchanges upon which they are traded, the Commodity Futures
Trading Commission (the "CFTC") and various state regulatory authorities. In
addition, the Fund's ability to use hedging instruments may be limited by tax
considerations.
General Limitations on Futures and Options Transactions
The Trust has filed a notice of eligibility for exclusion from the
definition of the term "commodity pool operator" with the National Futures
Association, the Futures industry's self-regulatory organization. The Fund will
not enter into Futures and options transactions if the sum of the initial margin
deposits and premiums paid for unexpired options exceeds 5% of the Fund's total
assets. In addition, the Fund will not enter into Futures Contracts and options
transactions if more than 30% of its net assets would be committed to such
instruments.
The foregoing limitations are not fundamental policies of the Fund and
may be changed without shareholder approval as regulatory agencies permit.
Asset Coverage for Futures and Options Positions
The Fund will comply with the regulatory requirements of the SEC and
the CFTC with respect to coverage of options and Futures positions by registered
investment companies and, if the guidelines so require, will earmark or set
aside cash, U.S. Government securities, high grade liquid debt securities and/or
other liquid assets permitted by the SEC and CFTC in a segregated custodial
account in the amount prescribed. Securities earmarked or held in a segregated
account cannot be sold while the Futures or options position is outstanding,
unless replaced with other permissible assets, and will be marked-to-market
daily.
Stock Index Options
The Fund may purchase stock index options, sell stock index options in
order to close out existing positions, and/or write covered options on stock
indices for hedging purposes. Stock index options are put options and call
options on various stock indices. In most respects, they are identical to listed
options on common stocks. The primary difference between stock options and index
options occurs when index options are exercised. In the case of stock options,
the underlying security, common stock, is delivered. However, upon the exercise
of an index option, settlement does not occur by delivery of the securities
comprising the stock index. The option holder who exercises the index option
receives an amount of cash if the closing level of the stock index upon which
the option is based is greater than, in the case of a call, or less than, in the
case of a put, the exercise price of the option. This amount of cash is equal to
the difference between the closing price of the stock index and the exercise
price of the option expressed in dollars times a specified multiple.
- 9 -
A stock index fluctuates with changes in the market values of the
stocks included in the index. For example, some stock index options are based on
a broad market index, such as the S&P 500 Index or the Value Line(R) Composite
Index or a more narrow market index, such as the S&P 100 Index. Indices may also
be based on an industry or market segment. Options on stock indices are
currently traded on the following exchanges: the Chicago Board Options Exchange,
NASDAQ(R) and the Philadelphia Stock Exchange.
The Fund's use of stock index options is subject to certain risks.
Successful use by the Fund of options on stock indices will be subject to the
ability of First Trust to correctly predict movements in the directions of the
stock market. This requires different skills and techniques than predicting
changes in the prices of individual securities. In addition, the Fund's ability
to effectively hedge all or a portion of the securities in its portfolio, in
anticipation of or during a market decline through transactions in put options
on stock indices, depends on the degree to which price movements in the
underlying index correlate with the price movements of the securities held by
the Fund. Inasmuch as the Fund's securities will not duplicate the components of
an index, the correlation will not be perfect. Consequently, the Fund will bear
the risk that the prices of its securities being hedged will not move in the
same amount as the prices of its put options on the stock indices. It is also
possible that there may be a negative correlation between the index and the
Fund's securities, which would result in a loss on both such securities and the
options on stock indices acquired by the Fund.
The hours of trading for options may not conform to the hours during
which the underlying securities are traded. To the extent that the options
markets close before the markets for the underlying securities, significant
price and rate movements can take place in the underlying markets that cannot be
reflected in the options markets. The purchase of options is a highly
specialized activity which involves investment techniques and risks different
from those associated with ordinary portfolio securities transactions. The
purchase of stock index options involves the risk that the premium and
transaction costs paid by the Fund in purchasing an option will be lost as a
result of unanticipated movements in prices of the securities comprising the
stock index on which the option is based.
Certain Considerations Regarding Options
There is no assurance that a liquid secondary market on an options
exchange will exist for any particular option, or at any particular time, and
for some options no secondary market on an exchange or elsewhere may exist. If
the Fund is unable to close out a call option on securities that it has written
before the option is exercised, the Fund may be required to purchase the
optioned securities in order to satisfy its obligation under the option to
deliver such securities. If the Fund is unable to effect a closing sale
transaction with respect to options on securities that it has purchased, it
would have to exercise the option in order to realize any profit and would incur
transaction costs upon the purchase and sale of the underlying securities.
The writing and purchasing of options is a highly specialized activity,
which involves investment techniques and risks different from those associated
with ordinary portfolio securities transactions. Imperfect correlation between
- 10 -
the options and securities markets may detract from the effectiveness of
attempted hedging. Options transactions may result in significantly higher
transaction costs and portfolio turnover for the Fund.
Futures Contracts
The Fund may enter into Futures Contracts, including index Futures as a
hedge against movements in the equity markets, in order to hedge against changes
on securities held or intended to be acquired by the Fund or for other purposes
permissible under the Commodity Exchange Act (the "CEA"). The Fund's hedging may
include sales of Futures as an offset against the effect of expected declines in
stock prices and purchases of Futures as an offset against the effect of
expected increases in stock prices. The Fund will not enter into Futures
Contracts which are prohibited under the CEA and will, to the extent required by
regulatory authorities, enter only into Futures Contracts that are traded on
national Futures exchanges and are standardized as to maturity date and
underlying financial instrument. The principal interest rate Futures exchanges
in the United States are the Chicago Board of Trade and the Chicago Mercantile
Exchange. Futures exchanges and trading are regulated under the CEA by the CFTC.
An interest rate Futures Contract provides for the future sale by one
party and purchase by another party of a specified amount of a specific
financial instrument (e.g., a debt security) or currency for a specified price
at a designated date, time and place. An index Futures Contract is an agreement
pursuant to which the parties agree to take or make delivery of an amount of
cash equal to the difference between the value of the index at the close of the
last trading day of the contract and the price at which the index Futures
Contract was originally written. Transaction costs are incurred when a Futures
Contract is bought or sold and margin deposits must be maintained. A Futures
Contract may be satisfied by delivery or purchase, as the case may be, of the
instrument or by payment of the change in the cash value of the index. More
commonly, Futures Contracts are closed out prior to delivery by entering into an
offsetting transaction in a matching Futures Contract. Although the value of an
index might be a function of the value of certain specified securities, no
physical delivery of those securities is made. If the offsetting purchase price
is less than the original sale price, a gain will be realized. Conversely, if
the offsetting sale price is more than the original purchase price, a gain will
be realized; if it is less, a loss will be realized. The transaction costs must
also be included in these calculations. There can be no assurance, however, that
the Fund will be able to enter into an offsetting transaction with respect to a
particular Futures Contract at a particular time. If the Fund is not able to
enter into an offsetting transaction, the Fund will continue to be required to
maintain the margin deposits on the Futures Contract.
Margin is the amount of funds that must be deposited by the Fund with
its custodian in a segregated account in the name of the Futures commission
merchant in order to initiate Futures trading and to maintain the Fund's open
positions in Futures Contracts. A margin deposit is intended to ensure the
Fund's performance of the Futures Contract.
The margin required for a particular Futures Contract is set by the
exchange on which the Futures Contract is traded and may be significantly
modified from time to time by the exchange during the term of the Futures
Contract. Futures Contracts are customarily purchased and sold on margins that
- 11 -
may range upward from less than 5% of the value of the Futures Contract being
traded.
If the price of an open Futures Contract changes (by increase in the
case of a sale or by decrease in the case of a purchase) so that the loss on the
Futures Contract reaches a point at which the margin on deposit does not satisfy
margin requirements, the broker will require an increase in the margin. However,
if the value of a position increases because of favorable price changes in the
Futures Contract so that the margin deposit exceeds the required margin, the
broker will pay the excess to the Fund. In computing daily NAV, the Fund will
mark to market the current value of its open Futures Contracts. The Fund expects
to earn interest income on their margin deposits.
Because of the low margin deposits required, Futures trading involves
an extremely high degree of leverage. As a result, a relatively small price
movement in a Futures Contract may result in immediate and substantial loss, as
well as gain, to the investor. For example, if at the time of purchase, 10% of
the value of the Futures Contract is deposited as margin, a subsequent 10%
decrease in the value of the Futures Contract would result in a total loss of
the margin deposit, before any deduction for the transaction costs, if the
account were then closed out. A 15% decrease would result in a loss equal to
150% of the original margin deposit, if the Future Contracts were closed out.
Thus, a purchase or sale of a Futures Contract may result in losses in excess of
the amount initially invested in the Futures Contract. However, the Fund would
presumably have sustained comparable losses if, instead of the Futures Contract,
it had invested in the underlying financial instrument and sold it after the
decline.
Most U.S. Futures exchanges limit the amount of fluctuation permitted
in Futures Contract prices during a single trading day. The day limit
establishes the maximum amount that the price of a Futures Contract may vary
either up or down from the previous day's settlement price at the end of a
trading session. Once the daily limit has been reached in a particular type of
Futures Contract, no trades may be made on that day at a price beyond that
limit. The daily limit governs only price movement during a particular trading
day and therefore does not limit potential losses, because the limit may prevent
the liquidation of unfavorable positions. Futures Contract prices have
occasionally moved to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of Futures positions
and subjecting some investors to substantial losses.
There can be no assurance that a liquid market will exist at a time
when the Fund seeks to close out a Futures position. The Fund would continue to
be required to meet margin requirements until the position is closed, possibly
resulting in a decline in the Fund's NAV. In addition, many of the contracts
discussed above are relatively new instruments without a significant trading
history. As a result, there can be no assurance that an active secondary market
will develop or continue to exist.
A public market exists in Futures Contracts covering a number of
indices, including, but not limited to, the S&P 500 Index, the S&P 100 Index,
the NASDAQ-100 Index(R), the Value Line(R) Composite Index and the NYSE
Composite Index.
- 12 -
Options on Futures
The Fund may also purchase or write put and call options on Futures
Contracts and enter into closing transactions with respect to such options to
terminate an existing position. A Futures option gives the holder the right, in
return for the premium paid, to assume a long position (call) or short position
(put) in a Futures Contract at a specified exercise price prior to the
expiration of the option. Upon exercise of a call option, the holder acquires a
long position in the Futures Contract and the writer is assigned the opposite
short position. In the case of a put option, the opposite is true. Prior to
exercise or expiration, a Futures option may be closed out by an offsetting
purchase or sale of a Futures option of the same series.
The Fund may use options on Futures Contracts in connection with
hedging strategies. Generally, these strategies would be applied under the same
market and market sector conditions in which the Fund uses put and call options
on securities or indices. The purchase of put options on Futures Contracts is
analogous to the purchase of puts on securities or indices so as to hedge the
Fund's securities holdings against the risk of declining market prices. The
writing of a call option or the purchasing of a put option on a Futures Contract
constitutes a partial hedge against declining prices of securities which are
deliverable upon exercise of the Futures Contract. If the price at expiration of
a written call option is below the exercise price, the Fund will retain the full
amount of the option premium which provides a partial hedge against any decline
that may have occurred in the Fund's holdings of securities. If the price when
the option is exercised is above the exercise price, however, the Fund will
incur a loss, which may be offset, in whole or in part, by the increase in the
value of the securities held by the Fund that were being hedged. Writing a put
option or purchasing a call option on a Futures Contract serves as a partial
hedge against an increase in the value of the securities a Fund intends to
acquire.
As with investments in Futures Contracts, the Fund is required to
deposit and maintain margin with respect to put and call options on Futures
Contracts written by them. Such margin deposits will vary depending on the
nature of the underlying Futures Contract (and the related initial margin
requirements), the current market value of the option, and other Futures
positions held by the Fund. The Fund will earmark or set aside in a segregated
account at the Fund's custodian, liquid assets, such as cash, U.S. Government
securities or other high-grade liquid debt obligations equal in value to the
amount due on the underlying obligation. Such segregated assets will be
marked-to-market daily, and additional assets will be earmarked or placed in the
segregated account whenever the total value of the earmarked or segregated
assets falls below the amount due on the underlying obligation.
The risks associated with the use of options on Futures Contracts
include the risk that the Fund may close out its position as a writer of an
option only if a liquid secondary market exists for such options, which cannot
be assured. The Fund's successful use of options on Futures Contracts depends on
First Trust's ability to correctly predict the movement in prices of Futures
Contracts and the underlying instruments, which may prove to be incorrect. In
addition, there may be imperfect correlation between the instruments being
hedged and the Futures Contract subject to the option. For additional
information, see "Futures Contracts." Certain characteristics of the Futures
market might increase the risk that movements in the prices of Futures Contracts
or options on Futures Contracts might not correlate perfectly with movements in
- 13 -
the prices of the investments being hedged. For example, all participants in the
Futures and options on Futures Contracts markets are subject to daily variation
margin calls and might be compelled to liquidate Futures or options on Futures
Contracts positions whose prices are moving unfavorably to avoid being subject
to further calls. These liquidations could increase the price volatility of the
instruments and distort the normal price relationship between the Futures or
options and the investments being hedged. Also, because of initial margin
deposit requirements, there might be increased participation by speculators in
the Futures markets. This participation also might cause temporary price
distortions. In addition, activities of large traders in both the Futures and
securities markets involving arbitrage, "program trading," and other investment
strategies might result in temporary price distortions.
SUBLICENSE AGREEMENTS
The Fund relies on a product license agreement (the "Product License
Agreement") by and among NASDAQ OMX Group, Inc., American Bankers Association
(collectively, the "Index Provider") and First Trust and a related sublicense
agreement (the "Sublicense Agreement") with First Trust that grants the Fund a
non-exclusive and non-transferable sublicense to use certain intellectual
property of the Index Provider in connection with the issuance, distribution,
marketing and/or promotion of the Fund. Pursuant to the Sublicense Agreement,
each Fund has agreed to be bound by certain provisions of the Product License
Agreement. Pursuant to the Product License Agreement, First Trust will pay the
Index Provider an annual license fee of 0.09% of the average daily NAV of the
Fund. The Fund will reimburse First Trust for its costs associated with the
Product License Agreement
Index Provider Disclaimer
NASDAQ OMX GROUP, INC. AND ITS AFFILIATES (THE "CORPORATIONS") DO NOT
GUARANTEE THE ACCURACY AND/OR UNINTERRUPTED CALCULATION OF THE NASDAQ OMX ABA
COMMUNITY BANK INDEX OR ANY DATA INCLUDED THEREIN. THE CORPORATIONS MAKE NO
WARRANTY, EXPRESS OR IMPLIED, AS TO THE RESULTS TO BE OBTAINED BY FIRST TRUST OR
THE FUND, OWNERS OF THE FUND, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE
NASDAQ OMX ABA COMMUNITY BANK INDEX OR ANY DATA INCLUDED THEREIN. THE
CORPORATIONS MAKE NO EXPRESS OR IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS
FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE NASDAQ OMX ABA COMMUNITY
BANK INDEX OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING,
IN NO EVENT SHALL THE CORPORATIONS HAVE ANY LIABILITY FOR ANY LOST PROFITS OR
SPECIAL, INCIDENTAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES, EVEN IF
NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
- 14 -
INVESTMENT RISKS
Overview
An investment in the Fund should be made with an understanding of the
risks which an investment in common stocks entails, including the risk that the
financial condition of the issuers of the equity securities or the general
condition of the common stock market may worsen and the value of the equity
securities and therefore the value of the Fund may decline. The Fund may not be
an appropriate investment for those who are unable or unwilling to assume the
risks involved generally with an equity investment. The past market and earnings
performance of any of the equity securities included in the Fund is not
predictive of their future performance. Common stocks are especially susceptible
to general stock market movements and to volatile increases and decreases of
value as market confidence in and perceptions of the issuers change. These
perceptions are based on unpredictable factors including expectations regarding
government, economic, monetary and fiscal policies, inflation and interest
rates, economic expansion or contraction, and global or regional political,
economic or banking crises. First Trust cannot predict the direction or scope of
any of these factors. Shareholders of common stocks have rights to receive
payments from the issuers of those common stocks that are generally subordinate
to those of creditors of, or holders of debt obligations or preferred stocks of,
such issuers.
Shareholders of common stocks of the type held by the Fund have a right
to receive dividends only when and if, and in the amounts, declared by the
issuer's board of directors and have a right to participate in amounts available
for distribution by the issuer only after all other claims on the issuer have
been paid. Common stocks do not represent an obligation of the issuer and,
therefore, do not offer any assurance of income or provide the same degree of
protection of capital as do debt securities. The issuance of additional debt
securities or preferred stock will create prior claims for payment of principal,
interest and dividends which could adversely affect the ability and inclination
of the issuer to declare or pay dividends on its common stock or the rights of
holders of common stock with respect to assets of the issuer upon liquidation or
bankruptcy. The value of common stocks is subject to market fluctuations for as
long as the common stocks remain outstanding, and thus the value of the equity
securities in the Fund will fluctuate over the life of the Fund and may be more
or less than the price at which they were purchased by the Fund. The equity
securities held in the Fund may appreciate or depreciate in value (or pay
dividends) depending on the full range of economic and market influences
affecting these securities, including the impact of the Fund's purchase and sale
of the equity securities and other factors.
Holders of common stocks incur more risk than holders of preferred
stocks and debt obligations because common stockholders, as owners of the
entity, have generally inferior rights to receive payments from the issuer in
comparison with the rights of creditors of, or holders of debt obligations or
preferred stocks issued by, the issuer. Cumulative preferred stock dividends
must be paid before common stock dividends and any cumulative preferred stock
dividend omitted is added to future dividends payable to the holders of
cumulative preferred stock. Preferred stockholders are also generally entitled
to rights on liquidation which are senior to those of common stockholders.
- 15 -
ADDITIONAL RISK OF INVESTING IN THE FUND
Liquidity Risk
Whether or not the equity securities in the Fund are listed on a
securities exchange, the principal trading market for certain of the equity
securities in certain of the Fund may be in the over-the-counter market. As a
result, the existence of a liquid trading market for the equity securities may
depend on whether dealers will make a market in the equity securities. There can
be no assurance that a market will be made for any of the equity securities,
that any market for the equity securities will be maintained or that there will
be sufficient liquidity of the equity securities in any markets made. The price
at which the equity securities are held in the Fund will be adversely affected
if trading markets for the equity securities are limited or absent.
RISKS AND SPECIAL CONSIDERATIONS CONCERNING DERIVATIVES
In addition to the foregoing, the use of derivative instruments
involves certain general risks and considerations as described below.
(1) Market Risk. Market risk is the risk that the value of
the underlying assets may go up or down. Adverse movements in the value
of an underlying asset can expose the Fund to losses. Market risk is
the primary risk associated with derivative transactions. In 2008 and
early 2009, securities markets were significantly negatively affected
by the financial crisis that initially resulted from the downturn in
the subprime mortgage market in the United States. The impact of the
financial crisis on securities markets has proven to be significant and
may be long-lasting and may have a substantial impact on the value of
derivatives and their underlying assets. Furthermore, the war and
political instability in certain regions of the world, such as the
Middle East and Afghanistan, and terrorist attacks in the United States
and around the world have resulted in market volatility, which may have
long term effects on the United States and worldwide financial markets
and may cause further economic uncertainties in the United States and
worldwide. The Fund does not know how long the securities markets will
continue to be affected by these events and cannot predict the effects
of similar events in the future on the U.S. economy and worldwide
securities markets. Derivative instruments may include elements of
leverage and, accordingly, fluctuations in the value of the derivative
instrument in relation to the underlying asset may be magnified. The
successful use of derivative instruments depends upon a variety of
factors, particularly the portfolio manager's ability to predict
movements of the securities, currencies, and commodities markets, which
may require different skills than predicting changes in the prices of
individual securities. There can be no assurance that any particular
strategy adopted will succeed. A decision to engage in a derivative
transaction will reflect the portfolio manager's judgment that the
derivative transaction will provide value to the Fund and its
shareholders and is consistent with the Fund's objective, investment
limitations, and operating policies. In making such a judgment, the
portfolio managers will analyze the benefits and risks of the
derivative transactions and weigh them in the context of the Fund's
overall investments and investment objective.
- 16 -
(2) Credit Risk. Credit risk is the risk that a loss may be
sustained as a result of the failure of a counterparty to comply with
the terms of a derivative instrument. The counterparty risk for
exchange-traded derivatives is generally less than for
privately-negotiated or over-the-counter ("OTC") derivatives, since
generally a clearing agency, which is the issuer or counterparty to
each exchange-traded instrument, provides a guarantee of performance.
For privately-negotiated instruments, there is no similar clearing
agency guarantee. In all transactions, the Fund will bear the risk that
the counterparty will default, and this could result in a loss of the
expected benefit of the derivative transactions and possibly other
losses to the Fund. The Fund will enter into transactions in derivative
instruments only with counterparties that First Trust reasonably
believes are capable of performing under the contract.
(3) Correlation Risk. Correlation risk is the risk that there
might be an imperfect correlation, or even no correlation, between
price movements of a derivative instrument and price movements of
investments being hedged. When a derivative transaction is used to
completely hedge another position, changes in the market value of the
combined position (the derivative instrument plus the position being
hedged) result from an imperfect correlation between the price
movements of the two instruments. With a perfect hedge, the value of
the combined position remains unchanged with any change in the price of
the underlying asset. With an imperfect hedge, the value of the
derivative instrument and its hedge are not perfectly correlated. For
example, if the value of a derivative instrument used in a short hedge
(such as writing a call option, buying a put option or selling a
Futures Contract) increased by less than the decline in value of the
hedged investments, the hedge would not be perfectly correlated. This
might occur due to factors unrelated to the value of the investments
being hedged, such as speculative or other pressures on the markets in
which these instruments are traded. The effectiveness of hedges using
instruments on indices will depend, in part, on the degree of
correlation between price movements in the index and the price
movements in the investments being hedged.
(4) Liquidity Risk. Liquidity risk is the risk that a
derivative instrument cannot be sold, closed out, or replaced quickly
at or very close to its fundamental value. Generally, exchange
contracts are very liquid because the exchange clearinghouse is the
counterparty of every contract. OTC transactions are less liquid than
exchange-traded derivatives since they often can only be closed out
with the other party to the transaction. The Fund might be required by
applicable regulatory requirements to maintain assets as "cover,"
maintain segregated accounts, and/or make margin payments when they
take positions in derivative instruments involving obligations to third
parties (i.e., instruments other than purchase options). If the Fund is
unable to close out its positions in such instruments, it might be
required to continue to maintain such assets or accounts or make such
payments until the position expires, matures, or is closed out. These
requirements might impair the Fund's ability to sell a security or make
an investment at a time when it would otherwise be favorable to do so,
or require that the Fund sell a portfolio security at a disadvantageous
time. The Fund's ability to sell or close out a position in an
instrument prior to expiration or maturity depends upon the existence
of a liquid secondary market or, in the absence of such a market, the
ability and willingness of the counterparty to enter into a transaction
- 17 -
closing out the position. Due to liquidity risk, there is no assurance
that any derivatives position can be sold or closed out at a time and
price that is favorable to the Fund.
(5) Legal Risk. Legal risk is the risk of loss caused by the
unenforceability of a party's obligations under the derivative. While a
party seeking price certainty agrees to surrender the potential upside
in exchange for downside protection, the party taking the risk is
looking for a positive payoff. Despite this voluntary assumption of
risk, a counterparty that has lost money in a derivative transaction
may try to avoid payment by exploiting various legal uncertainties
about certain derivative products.
(6) Systemic or "Interconnection" Risk. Systemic or
interconnection risk is the risk that a disruption in the financial
markets will cause difficulties for all market participants. In other
words, a disruption in one market will spill over into other markets,
perhaps creating a chain reaction. Much of the OTC derivatives market
takes place among the OTC dealers themselves, thus creating a large
interconnected web of financial obligations. This interconnectedness
raises the possibility that a default by one large dealer could create
losses for other dealers and destabilize the entire market for OTC
derivative instruments.
MANAGEMENT OF THE FUND
The general supervision of the duties performed for the Fund under the
investment management agreement is the responsibility of the Board of Trustees.
There are five Trustees of the Trust, one of whom is an "interested person" (as
the term is defined in the 1940 Act) and four of whom are Trustees who are not
officers or employees of First Trust or any of its affiliates ("Independent
Trustees"). The Trustees set broad policies for the Fund, choose the Trust's
officers and hire the Trust's investment adviser. The officers of the Trust
manage its day to day operations and are responsible to the Trust's Board of
Trustees. The following is a list of the Trustees and officers of the Trust and
a statement of their present positions and principal occupations during the past
five years, the number of portfolios each Trustee oversees and the other
directorships they hold, if applicable.
NUMBER OF
PORTFOLIOS IN
THE FIRST OTHER
TERM OF OFFICE TRUST FUND TRUSTEESHIPS
AND YEAR FIRST COMPLEX OR
NAME, ADDRESS POSITION AND ELECTED OR PRINCIPAL OCCUPATIONS OVERSEEN BY DIRECTORSHIPS
AND DATE OF BIRTH OFFICES WITH TRUST APPOINTED DURING PAST 5 YEARS TRUSTEE HELD BY TRUSTEE
Trustee who is an
Interested Person of the
Trust
------------------------
James A. Bowen(1) President, o Indefinite President, First 60 Portfolios Trustee of
120 East Liberty Drive, Chairman of the term Trust Advisors L.P. Wheaton
Suite 400 Board, Chief and First Trust College
Wheaton, IL 60187 Executive Officer Portfolios L.P.;
D.O.B.: 09/55 and Trustee o 2003 Chairman of the Board
of Directors, BondWave LLC
(Software Development
Company/Broker-Dealer/Investment
Adviser) and Stonebridge
Advisors LLC (Investment
Adviser)
- 18 -
NUMBER OF
PORTFOLIOS IN
THE FIRST OTHER
TERM OF OFFICE TRUST FUND TRUSTEESHIPS
AND YEAR FIRST COMPLEX OR
NAME, ADDRESS POSITION AND ELECTED OR PRINCIPAL OCCUPATIONS OVERSEEN BY DIRECTORSHIPS
AND DATE OF BIRTH OFFICES WITH TRUST APPOINTED DURING PAST 5 YEARS TRUSTEE HELD BY TRUSTEE
Independent Trustees
------------------------
Richard E. Erickson Trustee o Indefinite Physician; President, 60 Portfolios None
c/o First Trust Advisors term Wheaton Orthopedics;
L.P. Co-owner and
120 East Liberty Drive, Co-Director (January
Suite 400 o 2005 1996 to May 2007),
Wheaton, IL 60187 Sports Med Center for
D.O.B.: 04/51 Fitness; Limited
Partner, Gundersen
Real Estate Limited
Partnership; Member,
Sportsmed LLC
Thomas R. Kadlec Trustee o Indefinite Senior Vice President 60 Portfolios Director of
c/o First Trust Advisors term and Chief Financial ADM Investor
L.P. Officer (May 2007 to Services,
120 East Liberty Drive, o 2005 Present), Vice Inc., and
Suite 400 President and Chief Director of
Wheaton, IL 60187 Financial Officer Archer
D.O.B.: 11/57 (1990 to May 2007), Financial
ADM Investor Services,
Services, Inc. Inc.
(Futures Commission
Merchant); President
(May 2005 to
Present), ADM
Derivatives, Inc.;
Registered
Representative (2000
to Present),
Segerdahl & Company,
Inc., a FINRA member
(Broker-Dealer)
Robert F. Keith Trustee o Indefinite President (2003 to 60 Portfolios None
c/o First Trust Advisors term Present), Hibs
L.P. Enterprises
120 East Liberty Drive, o 2006 (Financial and
Suite 400 Management Consulting)
Wheaton, IL 60187
D.O.B.: 11/56
Niel B. Nielson Trustee o Indefinite President (June 2002 60 Portfolios Director of
c/o First Trust Advisors term to Present), Covenant Covenant
L.P. College Transport Inc.
120 East Liberty Drive, o 2005
Suite 400
Wheaton, IL 60187
D.O.B.: 03/54
Officers of the Trust
------------------------
Mark R. Bradley Treasurer, o Indefinite Chief Financial N/A N/A
120 East Liberty Drive, Controller, Chief term Officer, First Trust
Suite 400 Financial Officer Advisors L.P. and
Wheaton, IL 60187 and Chief First Trust
D.O.B.: 11/57 Accounting Officer o 2005 Portfolios L.P.;
Chief Financial
Officer, BondWave LLC
(Software Development
Company/Broker-Dealer/Investment
Adviser) and
Stonebridge Advisors
LLC (Investment
Adviser)
- 19 -
NUMBER OF
PORTFOLIOS IN
THE FIRST OTHER
TERM OF OFFICE TRUST FUND TRUSTEESHIPS
AND YEAR FIRST COMPLEX OR
NAME, ADDRESS POSITION AND ELECTED OR PRINCIPAL OCCUPATIONS OVERSEEN BY DIRECTORSHIPS
AND DATE OF BIRTH OFFICES WITH TRUST APPOINTED DURING PAST 5 YEARS TRUSTEE HELD BY TRUSTEE
James M. Dykas Assistant o Indefinite Senior Vice President N/A N/A
120 East Liberty Drive, Treasurer term (April 2007 to
Suite 400 Present), Vice
Wheaton, IL 60187 o 2005 President (January
D.O.B.: 01/66 2005 to April 2007),
First Trust Advisors
L.P. and First Trust
Portfolios L.P.;
Executive Director
(December 2002 to
January 2005), Vice
President (December
2000 to December
2002), Van Kampen
Asset Management and
Morgan Stanley
Investment Management
W. Scott Jardine Secretary and o Indefinite General Counsel, N/A N/A
120 East Liberty Drive, Chief Compliance term First Trust Advisors
Suite 400 Officer L.P. and First Trust
Wheaton, IL 60187 o 2005 Portfolios L.P.;
D.O.B.: 05/60 Secretary, BondWave
LLC (Software
Development Company/
Broker-Dealer/Investment
Adviser) and
Stonebridge Advisors
LLC (Investment
Adviser)
Daniel J. Lindquist Vice President o Indefinite Senior Vice President N/A N/A
120 East Liberty Drive, term (September 2005 to
Suite 400 Present), Vice
Wheaton, IL 60187 o 2005 President (April 2004
D.O.B.: 02/70 to September 2005),
First Trust Advisors
L.P. and First Trust
Portfolios L.P.
Coleen D. Lynch Assistant Vice o Indefinite Assistant Vice N/A N/A
120 East Liberty Drive President term President (January
Suite 400 o 2008 2008 to Present),
Wheaton, IL 60187 First Trust Advisors
D.O.B.: 07/58 L.P. and First Trust
Portfolios L.P.; Vice
President (May 1998
to January 2008), Van
Kampen Asset
Management and Morgan
Stanley Investment
Management
Kristi A. Maher Assistant o Indefinite Deputy General N/A N/A
120 East Liberty Drive, Secretary term Counsel (May 2007 to
Suite 400 Present), Assistant
Wheaton, IL 60187 o 2005 General Counsel
D.O.B.: 12/66 (March 2004 to May
2007), First Trust
Advisors L.P. and
First Trust
Portfolios L.P.
Roger F. Testin Vice President o Indefinite Senior Vice N/A N/A
120 East Liberty Drive, term President, First
Suite 400 Trust Advisors L.P.
Wheaton, IL 60187 o 2005 and First Trust
D.O.B.: 06/66 Portfolios L.P.
- 20 -
NUMBER OF
PORTFOLIOS IN
THE FIRST OTHER
TERM OF OFFICE TRUST FUND TRUSTEESHIPS
AND YEAR FIRST COMPLEX OR
NAME, ADDRESS POSITION AND ELECTED OR PRINCIPAL OCCUPATIONS OVERSEEN BY DIRECTORSHIPS
AND DATE OF BIRTH OFFICES WITH TRUST APPOINTED DURING PAST 5 YEARS TRUSTEE HELD BY TRUSTEE
Stan Ueland Vice President o Indefinite Vice President N/A N/A
120 East Liberty Drive, term (August 2005 to
Suite 400 Present), First Trust
Wheaton, IL 60187 o 2006 Advisors L.P. and
D.O.B.: 11/70 First Trust Portfolios
L.P; Vice President (May
2004 to August 2005),
BondWave LLC (Software
Development Company/
Broker-Dealer/Investment
Adviser); Account
Executive (January 2003
to May 2004), Mina Capital,
LLC and Samaritan
Asset Management
Services, Inc.
--------------------
(1) Mr. Bowen is deemed an "interested person" of the Trust
due to his position as President of First Trust, investment
adviser of the Fund.
The Board of Trustees has four standing committees: the Executive
Committee (Pricing and Dividend Committee), the Nominating and Governance
Committee, the Valuation Committee and the Audit Committee. The Executive
Committee, which meets between Board meetings, is authorized to exercise all
powers of and to act in the place of the Board of Trustees to the extent
permitted by the Trust's Declaration and By-laws. The members of the Executive
Committee shall also serve as a special committee of the Board known as the
Pricing and Dividend Committee, which is authorized to exercise all of the
powers and authority of the Board in respect of the declaration and setting of
dividends. Messrs. Bowen and Erickson are members of the Executive Committee.
During the last fiscal year, the Executive Committee held four meetings.
The Nominating and Governance Committee is responsible for appointing
and nominating non-interested persons to the Board. Messrs. Erickson, Kadlec,
Keith and Nielson are members of the Nominating and Governance Committee. If
there is no vacancy on the Board of Trustees, the Board will not actively seek
recommendations from other parties, including Shareholders. When a vacancy on
the Board occurs and nominations are sought to fill such vacancy, the Nominating
and Governance Committee may seek nominations from those sources it deems
appropriate in its discretion, including Shareholders of the Fund. To submit a
recommendation for nomination as a candidate for a position on the Board,
Shareholders of the Fund shall mail such recommendation to W. Scott Jardine at
the Fund's address, 120 East Liberty Drive, Suite 400, Wheaton, Illinois 60187.
Such recommendation shall include the following information: (a) evidence of
Fund ownership of the person or entity recommending the candidate (if a Fund
Shareholder); (b) a full description of the proposed candidate's background,
including his or her education, experience, current employment and date of
birth; (c) names and addresses of at least three professional references for the
candidate; (d) information as to whether the candidate is an "interested person"
in relation to the Fund, as such term is defined in the 1940 Act, and such other
information that may be considered to impair the candidate's independence; and
(e) any other information that may be helpful to the Nominating and Governance
- 21 -
Committee in evaluating the candidate. If a recommendation is received with
satisfactorily completed information regarding a candidate during a time when a
vacancy exists on the Board or during such other time as the Nominating and
Governance Committee is accepting recommendations, the recommendation will be
forwarded to the chairman of the Nominating and Governance Committee and the
outside counsel to the Independent Trustees. Recommendations received at any
other time will be kept on file until such time as the Nominating and Governance
Committee is accepting recommendations, at which point they may be considered
for nomination. During the last fiscal year, the Nominating and Governance
Committee held four meetings.
The Valuation Committee is responsible for the oversight of the pricing
procedures of the Fund. Messrs. Erickson, Kadlec, Keith and Nielson are members
of the Valuation Committee. During the last fiscal year, the Valuation Committee
held four meetings.
The Audit Committee is responsible for overseeing the Fund's accounting
and financial reporting process, the system of internal controls, audit process
and evaluating and appointing independent auditors (subject also to approval by
the Board of Trustees). Messrs. Erickson, Kadlec, Keith and Nielson serve on the
Audit Committee. During the last fiscal year, the Audit Committee held nine
meetings.
Messrs. Bowen, Erickson, Kadlec, Keith and Nielson are trustees of
First Defined Portfolio Fund, LLC, an open-end fund with eight portfolios, 14
closed-end funds and three exchange-traded fund trusts (including the Trust)
with 39 portfolios (collectively, the "First Trust Fund Complex"). None of the
Independent Trustees, nor any of their immediate family members, has ever been a
director, officer or employee of, or consultant to, First Trust, First Trust
Portfolios L.P. ("First Trust Portfolios") or their affiliates. In addition, Mr.
Bowen and the other officers of the Trust (other than Roger Testin and Stan
Ueland) hold the same positions with the other funds and trusts of the First
Trust Fund Complex as they hold with the Trust. Mr. Ueland, Vice President of
the Trust, serves in the same position for the other exchange-traded fund trusts
of the First Trust Fund Complex. Mr. Testin, Vice President of the Trust, serves
in the same position for the other exchange-traded fund trusts and the open-end
fund of the First Trust Fund Complex.
Under the Trustees' compensation plan, each Independent Trustee is paid
an annual retainer of $10,000 per trust for the first 14 trusts in the First
Trust Fund Complex and an annual retainer of $7,500 per trust for each
additional trust of the First Trust Fund Complex. The annual retainer is
allocated equally among each of the trusts. Trustees are also reimbursed by the
funds in the First Trust Fund Complex for travel and out-of-pocket expenses in
connection with all meetings. No additional meeting fees are paid in connection
with board or committee meetings.
Additionally, for all the trusts in the First Trust Fund Complex,
effective January 1, 2008, Dr. Erickson is paid annual compensation of $10,000
to serve as the Lead Trustee, Mr. Keith is paid annual compensation of $5,000 to
serve as the chairman of the Audit Committee, Mr. Kadlec is paid annual
compensation of $2,500 to serve as chairman of the Valuation Committee and Mr.
Nielson is paid annual compensation of $2,500 to serve as the chairman of the
Nominating and Governance Committee. The chairmen and the Lead Trustee will
serve two years before rotating to serve as a chairman of another committee or
- 22 -
as Lead Trustee. The additional compensation is allocated equally among each of
the trusts in the First Trust Fund Complex.
The following table sets forth the estimated compensation (including
reimbursement for travel and out-of-pocket expenses) to be paid by the Trust
projected during a full fiscal year to each of the Trustees and the total
compensation paid to each of the Trustees by the First Trust Fund Complex for
the fiscal year ended December 31, 2008. The Trust has no retirement or pension
plans. The officers and Trustee who is an "interested person" as designated
above serve without any compensation from the Trust. The Trust has no employees.
Its officers are compensated by First Trust.
TOTAL COMPENSATION
ESTIMATED AGGREGATE TOTAL FROM THE
NAME OF TRUSTEE COMPENSATION FROM THE TRUST (1) FIRST TRUST FUND COMPLEX(2)
Richard E. Erickson $10,000 $180,000
Thomas R. Kadlec $9,584 $172,500
Robert F. Keith $9,722 $175,000
Niel B. Nielson $9,584 $177,297
--------------------
(1) The compensation estimated to be paid by the Trust to the Trustees for a
full fiscal year for services to the Trust.
(2) The total compensation paid to the Independent Trustees for the calendar
year ended December 31, 2008 for services to the eight portfolios of First
Defined Portfolio Fund, LLC, an open-end fund, 14 closed-end funds and 38
series of the Trust, the First Trust Exchange-Traded Fund II and First Trust
Exchange-Traded AlphaDEX(R) Fund, all advised by First Trust.
The following table sets forth the dollar range of equity securities
beneficially owned by the Trustees in the Fund and in other funds overseen by
the Trustees in the First Trust Fund Complex as of December 31, 2008:
DOLLAR RANGE OF EQUITY SECURITIES IN A FUND
AGGREGATE DOLLAR RANGE OF
EQUITY SECURITIES IN ALL
DOLLAR RANGE OF EQUITY REGISTERED INVESTMENT
SECURITIES IN THE FUND COMPANIES OVERSEEN BY TRUSTEE
(NUMBER OF SHARES HELD) IN FIRST TRUST FUND COMPLEX
INTERESTED TRUSTEE
James A. Bowen None Over $100,000
INDEPENDENT TRUSTEES
Richard E. Erickson None Over $100,000
Thomas R. Kadlec None Over $100,000
Robert F. Keith None Over $100,000
Niel B. Nielson None $50,001-$100,000
As of June 25, 2009, the Independent Trustees of the Trust and
immediate family members did not own beneficially or of record any class of
- 23 -
securities of an investment adviser or principal underwriter of the Fund or any
person directly or indirectly controlling, controlled by, or under common
control with an investment adviser or principal underwriter of the Fund.
As of June 25, 2009, the officers and Trustees, in the aggregate, owned
less than 1% of the Shares of the Fund.
As of June 25, 2009, First Trust Portfolios was the sole shareholder
of the Fund. As sole shareholder, First Trust Portfolios has the ability to
control the outcome of any item presented to shareholders for approval.
Investment Adviser. First Trust, 120 East Liberty Drive, Suite 400,
Wheaton, Illinois 60187, is the investment adviser to the Fund. First Trust is a
limited partnership with one limited partner, Grace Partners of DuPage L.P., and
one general partner, The Charger Corporation. Grace Partners of DuPage L.P. is a
limited partnership with one general partner, The Charger Corporation, and a
number of limited partners. The Charger Corporation is an Illinois corporation
controlled by the Robert Donald Van Kampen family. First Trust discharges its
responsibilities subject to the policies of the Board of the Trust.
First Trust provides investment tools and portfolios for advisers and
investors. First Trust is committed to theoretically sound portfolio
construction and empirically verifiable investment management approaches. Its
asset management philosophy and investment discipline is deeply rooted in the
application of intuitive factor analysis and model implementation to enhance
investment decisions.
First Trust acts as investment adviser for and manages the investment
and reinvestment of the assets of the Fund. First Trust also administers the
Trust's business affairs, provides office facilities and equipment and certain
clerical, bookkeeping and administrative services, and permits any of its
officers or employees to serve without compensation as Trustees or officers of
the Trust if elected to such positions.
Pursuant to an Investment Management Agreement (the "Investment
Management Agreement") between First Trust and the Trust, the Fund has agreed to
pay an annual management fee equal to 0.40% of its average daily net assets.
The Fund is responsible for all its expenses, including the investment
advisory fees, costs of transfer agency, custody, fund administration, legal,
audit and other services, interest, taxes, sublicensing fees, brokerage
commissions and other expenses connected with executions of portfolio
transactions, any distribution fees or expenses and extraordinary expenses that
are both unusual in nature and infrequent in their occurrence. First Trust has
agreed to waive fees and/or pay Fund expenses to the extent necessary to prevent
the operating expenses of the Fund (excluding interest expense, brokerage
commissions and other trading expenses, taxes and extraordinary expenses) from
exceeding 0.60% of average daily net assets until June 30, 2011. Expenses borne
by First Trust are subject to reimbursement by the Fund up to three years from
the date the fee or expense was incurred, but no reimbursement payment will be
made by the Fund at any time if it would result in a Fund's expenses exceeding
0.60% of average daily net assets.
- 24 -
Under the Investment Management Agreement, First Trust shall not be
liable for any loss sustained by reason of the purchase, sale or retention of
any security, whether or not such purchase, sale or retention shall have been
based upon the investigation and research made by any other individual, firm or
corporation, if such recommendation shall have been selected with due care and
in good faith, except loss resulting from willful misfeasance, bad faith, or
gross negligence on the part of First Trust in the performance of its
obligations and duties, or by reason of its reckless disregard of its
obligations and duties. The Investment Management Agreement continues until two
years after the initial issuance of Fund Shares and thereafter only if approved
annually by the Board of Trustees, including a majority of the Independent
Trustees. The Investment Management Agreement terminates automatically upon
assignment and is terminable at any time without penalty as to the Fund by the
Board of Trustees, including a majority of the Independent Trustees, or by vote
of the holders of a majority of the Fund's outstanding voting securities on 60
days' written notice to First Trust, or by First Trust on 60 days' written
notice to the Fund.
Investment Committee. The Investment Committee of First Trust is
primarily responsible for the day-to-day management of the Fund. There are
currently six members of the Investment Committee, as follows:
POSITION WITH LENGTH OF SERVICE PRINCIPAL OCCUPATION
NAME FIRST TRUST WITH FIRST TRUST DURING PAST FIVE YEARS
Daniel J. Lindquist Senior Vice President Since 2004 Senior Vice President
(September 2005 to Present),
Vice President (April 2004 to
September 2005), First Trust
Advisors L.P. and First Trust
Portfolios L.P.
Robert F. Carey Chief Investment Officer Since 1991 Chief Investment Officer and
and Senior Vice President Senior Vice President, First
Trust Advisors L.P. and First
Trust Portfolios L.P.
Jon C. Erickson Senior Vice President Since 1994 Senior Vice President, First
Trust Advisors L.P. and First
Trust Portfolios L.P.
David G. McGarel Senior Vice President Since 1997 Senior Vice President, First
Trust Advisors L.P. and First
Trust Portfolios L.P.
Roger F. Testin Senior Vice President Since 2001 Senior Vice President, First
Trust Portfolios L.P. and
First Trust Advisors L.P.
Stan Ueland Vice President Since 2005 Vice President (August 2005 to
Present), First Trust Advisors
L.P. and First Trust
Portfolios L.P.; Vice
President (May 2004 to August
2005), BondWave LLC (Software
- 25 -
POSITION WITH LENGTH OF SERVICE PRINCIPAL OCCUPATION
NAME FIRST TRUST WITH FIRST TRUST DURING PAST FIVE YEARS
Development Company/
Broker-Dealer); Account
Executive (January 2003 to May
2004), Mina Capital
Management, LLC and Samaritan
Asset Management Services, Inc.
Daniel J. Lindquist: Mr. Lindquist is Chairman of the Investment
Committee and presides over Investment Committee meetings. Mr. Lindquist is also
responsible for overseeing the implementation of the Fund's investment
strategies.
David G. McGarel: As the head of First Trust's Strategy Research Group,
Mr. McGarel is responsible for developing and implementing quantitative
investment strategies for those funds that have investment policies that require
them to follow such strategies.
Jon C. Erickson: As the head of First Trust's Equity Research Group,
Mr. Erickson is responsible for determining the securities to be purchased and
sold by Fund that do not utilize quantitative investment strategies.
Roger F. Testin: As head of First Trust's Portfolio Management Group,
Mr. Testin is responsible for executing the instructions of the Strategy
Research Group and Equity Research Group in the Fund's portfolios.
Robert F. Carey: As First Trust's Chief Investment Officer, Mr. Carey
consults with the Investment Committee on market conditions and First Trust's
general investment philosophy.
Stan Ueland: Mr. Ueland plays an important role in executing the
investment strategies of the Fund advised by First Trust.
No member of the Investment Committee beneficially owns any Shares of
the Fund.
Compensation. The compensation structure for each member of the
Investment Committee is based upon a fixed salary as well as a discretionary
bonus determined by the management of First Trust. Salaries are determined by
management and are based upon an individual's position and overall value to the
firm. Bonuses are also determined by management and are based upon an
individual's overall contribution to the success of the firm and the
profitability of the firm. Salaries and bonuses for members of the Investment
Committee are not based upon criteria such as performance of the Fund or the
value of assets included in the Fund's portfolios. In addition, Mr. Carey, Mr.
Erickson, Mr. Lindquist and Mr. McGarel also have an indirect ownership stake in
the firm and will therefore receive their allocable share of ownership-related
distributions.
The Investment Committee manages the other investment vehicles with the
number of accounts and assets, as of December 31, 2008, set forth in the table
below:
- 26 -
ACCOUNTS MANAGED BY INVESTMENT COMMITTEE
REGISTERED INVESTMENT OTHER POOLED
COMPANIES INVESTMENT VEHICLES OTHER ACCOUNTS
NUMBER OF ACCOUNTS NUMBER OF ACCOUNTS NUMBER OF ACCOUNTS
INVESTMENT COMMITTEE MEMBER ($ ASSETS) ($ ASSETS) ($ ASSETS)
Robert F. Carey 47 ($2,114,608,061) 6 ($304,110,565) 4,631 ($750,232,382)
Roger F. Testin 47 ($2,114,608,061) 6 ($304,110,565) 4,631 ($750,232,382)
Jon C. Erickson 47 ($2,114,608,061) 6 ($304,110,565) 4,631 ($750,232,382)
David G. McGarel 47 ($2,114,608,061) 6 ($304,110,565) 4,631 ($750,232,382)
Daniel J. Lindquist 47 ($2,114,608,061) 6 ($304,110,565) 4,631 ($750,232,382)
Stan Ueland 21 ($203,913,346) N/A N/A
None of the accounts managed by the Investment Committee pay an
advisory fee that is based upon the performance of the account. In addition,
First Trust believes that there are no material conflicts of interest that may
arise in connection with the Investment Committee's management of the Fund's
investments and the investments of the other accounts managed by the Investment
Committee. However, because the investment strategy of the Fund and the
investment strategies of many of the other accounts managed by the Investment
Committee are based on fairly mechanical investment processes, the Investment
Committee may recommend that certain clients sell and other clients buy a given
security at the same time. In addition, because the investment strategies of the
Fund and other accounts managed by the Investment Committee generally result in
the clients investing in readily available securities, First Trust believes that
there should not be material conflicts in the allocation of investment
opportunities between the Fund and other accounts managed by the Investment
Committee.
BROKERAGE ALLOCATIONS
First Trust is responsible for decisions to buy and sell securities for
the Fund and for the placement of the Fund's securities business, the
negotiation of the commissions to be paid on brokered transactions, the prices
for principal trades in securities, and the allocation of portfolio brokerage
and principal business. It is the policy of First Trust to seek the best
execution at the best security price available with respect to each transaction,
and with respect to brokered transactions in light of the overall quality of
brokerage and research services provided to First Trust and its clients. The
best price to the Fund means the best net price without regard to the mix
between purchase or sale price and commission, if any. Purchases may be made
from underwriters, dealers, and, on occasion, the issuers. Commissions will be
paid on the Fund's Futures and options transactions, if any. The purchase price
of portfolio securities purchased from an underwriter or dealer may include
underwriting commissions and dealer spreads. The Fund may pay mark-ups on
principal transactions. In selecting broker/dealers and in negotiating
commissions, First Trust considers, among other things, the firm's reliability,
the quality of its execution services on a continuing basis and its financial
condition. Fund portfolio transactions may be effected with broker/dealers who
have assisted investors in the purchase of Shares.
- 27 -
Section 28(e) of the 1934 Act, permits an investment adviser, under
certain circumstances, to cause an account to pay a broker or dealer who
supplies brokerage and research services a commission for effecting a
transaction in excess of the amount of commission another broker or dealer would
have charged for effecting the transaction. Brokerage and research services
include (a) furnishing advice as to the value of securities, the advisability of
investing, purchasing or selling securities, and the availability of securities
or purchasers or sellers of securities; (b) furnishing analyses and reports
concerning issuers, industries, securities, economic factors and trends,
portfolio strategy, and the performance of accounts; and (c) effecting
securities transactions and performing functions incidental thereto (such as
clearance, settlement, and custody).
In light of the above, in selecting brokers, First Trust may consider
investment and market information and other research, such as economic,
securities and performance measurement research, provided by such brokers, and
the quality and reliability of brokerage services, including execution
capability, performance, and financial responsibility. Accordingly, the
commissions charged by any such broker may be greater than the amount another
firm might charge if First Trust determines in good faith that the amount of
such commissions is reasonable in relation to the value of the research
information and brokerage services provided by such broker to First Trust or the
Trust. First Trust believes that the research information received in this
manner provides the Fund with benefits by supplementing the research otherwise
available to the Fund. The Investment Management Agreement provides that such
higher commissions will not be paid by the Fund unless the adviser determines in
good faith that the amount is reasonable in relation to the services provided.
The investment advisory fees paid by the Fund to First Trust under the
Investment Management Agreement are not reduced as a result of receipt by First
Trust of research services. First Trust has advised the Board of Trustees that
it does not use soft dollars.
First Trust places portfolio transactions for other advisory accounts
advised by it, and research services furnished by firms through which the Fund
effects their securities transactions may be used by First Trust in servicing
all of its accounts; not all of such services may be used by First Trust in
connection with the Fund. First Trust believes it is not possible to measure
separately the benefits from research services to each of the accounts
(including the Fund) advised by it. Because the volume and nature of the trading
activities of the accounts are not uniform, the amount of commissions in excess
of those charged by another broker paid by each account for brokerage and
research services will vary. However, First Trust believes such costs to the
Fund will not be disproportionate to the benefits received by the Fund on a
continuing basis. First Trust seeks to allocate portfolio transactions equitably
whenever concurrent decisions are made to purchase or sell securities by the
Fund and another advisory account. In some cases, this procedure could have an
adverse effect on the price or the amount of securities available to the Fund.
In making such allocations between the Fund and other advisory accounts, the
main factors considered by First Trust are the respective investment objectives,
the relative size of portfolio holding of the same or comparable securities, the
availability of cash for investment and the size of investment commitments
generally held.
Administrator. The Bank of New York Mellon Corporation ("BONY") serves
as Administrator for the Fund. Its principal address is 101 Barclay St., New
York, NY 10286.
- 28 -
BONY serves as Administrator for the Trust pursuant to a Fund
Administration and Accounting Agreement. Under such agreement, BONY is obligated
on a continuous basis, to provide such administrative services as the Board
reasonably deems necessary for the proper administration of the Trust and the
Fund. BONY will generally assist in all aspects of the Trust's and the Fund's
operations; supply and maintain office facilities (which may be in BONY's own
offices), statistical and research data, data processing services, clerical,
accounting, bookkeeping and record keeping services (including, without
limitation, the maintenance of such books and records as are required under the
1940 Act and the rules thereunder, except as maintained by other agency agents),
internal auditing, executive and administrative services, and stationery and
office supplies; prepare reports to shareholders or investors; prepare and file
tax returns; supply financial information and supporting data for reports to and
filings with the SEC and various state Blue Sky authorities; supply supporting
documentation for meetings of the Board of Trustees; and provide monitoring
reports and assistance regarding compliance with federal and state securities
laws.
Pursuant to the Fund Administration and Accounting Agreement, the Trust
on behalf of the Fund has agreed to indemnify the Administrator for certain
liabilities, including certain liabilities arising under the federal securities
laws, unless such loss or liability results from negligence or willful
misconduct in the performance of its duties.
Pursuant to the Fund Administration and Accounting Agreement between
BONY and the Trust, the Fund has agreed to pay such compensation as is mutually
agreed from time to time and such out-of-pocket expenses as incurred by BONY in
the performance of its duties. This fee is subject to reduction for assets over
$1 billion.
The Trust, on behalf of the Fund, has entered into an agreement with
PNC Global Investment Servicing (U.S.) Inc. ("PNC"), Inc., 301 Bellevue Parkway,
Wilmington, Delaware 19809, whereby PNC provides certain board administrative
services to the Trust in connection with the Board's meetings and other related
matters.
CUSTODIAN, DISTRIBUTOR, TRANSFER AGENT, FUND ACCOUNTING AGENT,
INDEX PROVIDER AND EXCHANGE
Custodian. BONY, as custodian for the Fund pursuant to a Custody
Agreement, holds the Fund's assets. BONY also serves as transfer agent of the
Fund pursuant to a Transfer Agency and Service Agreement. As the Fund's
accounting agent, BONY calculates the NAV of Shares and calculates net income
and realized capital gains or losses. BONY may be reimbursed by the Fund for its
out-of-pocket expenses.
Distributor. First Trust Portfolios is the distributor (the
"Distributor") and principal underwriter of the Shares of the Fund. Its
principal address is 120 East Liberty Drive, Suite 400, Wheaton, Illinois 60187.
The Distributor has entered into a Distribution Agreement with the Trust
pursuant to which it distributes Fund Shares. Shares are continuously offered
for sale by the Fund through the Distributor only in Creation Unit Aggregations,
as described in the Prospectus and below under the heading "Creation and
Redemption of Creation Units."
- 29 -
The Adviser may, from time to time and from its own resources, pay,
defray or absorb costs relating to distribution, including payments out of its
own resources to the Distributor, or to otherwise promote the sale of shares.
The Adviser's available resources to make these payments include profits from
advisory fees received from the Fund. The services the Adviser may pay for
include, but are not limited to, advertising and attaining access to certain
conferences and seminars, as well as being presented with the opportunity to
address investors and industry professionals through speeches and written
marketing materials.
12b-1 Plan. The Trust has adopted a Plan of Distribution pursuant to
Rule 12b-1 under the 1940 Act (the "Plan") pursuant to which the Fund may
reimburse the Distributor up to a maximum annual rate of 0.25% its average daily
net assets.
Under the Plan and as required by Rule 12b-1, the Trustees will receive
and review after the end of each calendar quarter a written report provided by
the Distributor of the amounts expended under the Plan and the purpose for which
such expenditures were made.
The Plan was adopted in order to permit the implementation of the
Fund's method of distribution. However, pursuant to a contractual agreement, the
Fund will not pay 12b-1 fees any time before June 30, 2011.
Aggregations. Fund Shares in less than Creation Unit Aggregations are
not distributed by the Distributor. The Distributor will deliver the Prospectus
and, upon request, this SAI to persons purchasing Creation Unit Aggregations and
will maintain records of both orders placed with it and confirmations of
acceptance furnished by it. The Distributor is a broker-dealer registered under
the 1934 Act and a member of the Financial Industry Regulatory Authority
("FINRA").
The Distribution Agreement provides that it may be terminated at any
time, without the payment of any penalty, on at least 60 days' written notice by
the Trust to the Distributor (i) by vote of a majority of the Independent
Trustees or (ii) by vote of a majority of the outstanding voting securities (as
defined in the 1940 Act) of the Fund. The Distribution Agreement will terminate
automatically in the event of its assignment (as defined in the 1940 Act).
The Distributor may also enter into agreements with securities dealers
("Soliciting Dealers") who will solicit purchases of Creation Unit Aggregations
of Fund Shares. Such Soliciting Dealers may also be Participating Parties (as
defined in "Procedures for Creation of Creation Unit Aggregations" below) and
DTC Participants (as defined in "DTC Acts as Securities Depository for Fund
Shares" below).
Index Provider. The Index is maintained by the Index Provider. The
Index began on June __, 2009 at a base value of 1000.00.
The Index Provider is not affiliated with the Fund or with First Trust.
The Fund is entitled to use the applicable Index pursuant to a sublicensing
arrangement with First Trust, which in turn has a Product License Agreement with
the Index Provider.
- 30 -
Exchange. The only relationship that NASDAQ(R) has with First Trust or
the Distributor of the Fund in connection with the Fund is that NASDAQ(R) lists
the Shares of the Fund and disseminates the intra-day portfolio values that are
calculated by the Intra-Day Portfolio Calculator pursuant to its listing
agreement with the Trust. NASDAQ(R) is not responsible for and has not
participated in the determination of pricing or the timing of the issuance or
sale of the Shares of the Fund or in the determination or calculation of the
asset value of the Fund. NASDAQ(R) has no obligation or liability in connection
with the administration, marketing or trading of the Fund.
ADDITIONAL INFORMATION
Book Entry Only System. The following information supplements and
should be read in conjunction with the section in the Prospectus entitled "Book
Entry."
DTC Acts as Securities Depository for Fund Shares. Shares of the Fund
are represented by securities registered in the name of DTC or its nominee, Cede
& Co., and deposited with, or on behalf of, DTC.
DTC, a limited-purpose trust company, was created to hold securities of
its participants (the "DTC Participants") and to facilitate the clearance and
settlement of securities transactions among the DTC Participants in such
securities through electronic book-entry changes in accounts of the DTC
Participants, thereby eliminating the need for physical movement of securities,
certificates. DTC Participants include securities brokers and dealers, banks,
trust companies, clearing corporations and certain other organizations, some of
whom (and/or their representatives) own DTC. More specifically, DTC is owned by
a number of its DTC Participants and by the New York Stock Exchange (the "NYSE")
and FINRA. Access to the DTC system is also available to others such as banks,
brokers, dealers and trust companies that clear through or maintain a custodial
relationship with a DTC Participant, either directly or indirectly (the
"Indirect Participants").
Beneficial ownership of Shares is limited to DTC Participants, Indirect
Participants and persons holding interests through DTC Participants and Indirect
Participants. Ownership of beneficial interests in Shares (owners of such
beneficial interests are referred to herein as "Beneficial Owners") is shown on,
and the transfer of ownership is effected only through, records maintained by
DTC (with respect to DTC Participants) and on the records of DTC Participants
(with respect to Indirect Participants and Beneficial Owners that are not DTC
Participants). Beneficial Owners will receive from or through the DTC
Participant a written confirmation relating to their purchase and sale of
Shares.
Conveyance of all notices, statements and other communications to
Beneficial Owners is effected as follows. Pursuant to a letter agreement between
DTC and the Trust, DTC is required to make available to the Trust upon request
and for a fee to be charged to the Trust a listing of the Shares of the Fund
held by each DTC Participant. The Trust shall inquire of each such DTC
Participant as to the number of Beneficial Owners holding Shares, directly or
indirectly, through such DTC Participant. The Trust shall provide each such DTC
Participant with copies of such notice, statement or other communication, in
such form, number and at such place as such DTC Participant may reasonably
- 31 -
request, in order that such notice, statement or communication may be
transmitted by such DTC Participant, directly or indirectly, to such Beneficial
Owners. In addition, the Trust shall pay to each such DTC Participants a fair
and reasonable amount as reimbursement for the expenses attendant to such
transmittal, all subject to applicable statutory and regulatory requirements.
Fund distributions shall be made to DTC or its nominee, as the
registered holder of all Fund Shares. DTC or its nominee, upon receipt of any
such distributions, shall immediately credit DTC Participants' accounts with
payments in amounts proportionate to their respective beneficial interests in
Shares of the Fund as shown on the records of DTC or its nominee. Payments by
DTC Participants to Indirect Participants and Beneficial owners of Shares held
through such DTC Participants will be governed by standing instructions and
customary practices, as is now the case with securities held for the accounts of
customers in bearer form or registered in a "street name," and will be the
responsibility of such DTC Participants.
The Trust has no responsibility or liability for any aspect of the
records relating to or notices to Beneficial Owners, or payments made on account
of beneficial ownership interests in such Shares, or for maintaining,
supervising or reviewing any records relating to such beneficial ownership
interests, or for any other aspect of the relationship between DTC and the DTC
Participants or the relationship between such DTC Participants and the Indirect
Participants and Beneficial Owners owning through such DTC Participants.
DTC may decide to discontinue providing its service with respect to
Shares at any time by giving reasonable notice to the Trust and discharging its
responsibilities with respect thereto under applicable law. Under such
circumstances, the Trust shall take action to find a replacement for DTC to
perform its functions at a comparable cost.
PROXY VOTING POLICIES AND PROCEDURES
The Trust has adopted a proxy voting policy that seeks to ensure that
proxies for securities held by the Fund are voted consistently and solely in the
best economic interests of the Fund.
A senior member of First Trust is responsible for oversight of the
Fund's proxy voting process. First Trust has engaged the services of ISS
Governance Services, a division of Risk Metrics Group, Inc. ("ISS"), to make
recommendations to First Trust on the voting of proxies relating to securities
held by the Fund. ISS provides voting recommendations based upon established
guidelines and practices. First Trust reviews ISS recommendations and frequently
follows the ISS recommendations. However, on selected issues, First Trust may
not vote in accordance with the ISS recommendations when First Trust believes
that specific ISS recommendations are not in the best interests of the Fund. If
First Trust manages the assets of a company or its pension plan and any of First
Trust's clients hold any securities of that company, First Trust will vote
proxies relating to such company's securities in accordance with the ISS
recommendations to avoid any conflict of interest.
- 32 -
First Trust has adopted the ISS Proxy Voting Guidelines. While these
guidelines are not intended to be all-inclusive, they do provide guidance on
First Trust's general voting policies.
Information regarding how the Fund voted proxies relating to portfolio
securities during the most recent 12-month period ended June 30, will be
available upon request and without charge on the Fund's website at
http://www.ftportfolios.com, by calling (800) 621-1675 or by accessing the SEC's
website at http://www.sec.gov.
Quarterly Portfolio Schedule. The Trust is required to disclose, after
its first and third fiscal quarters, the complete schedule of the Fund's
portfolio holdings with the SEC on Form N-Q. Form N-Q for the Trust is available
on the SEC's website at http://www.sec.gov. The Fund's Form N-Q may also be
reviewed and copied at the SEC's Public Reference Room in Washington, D.C. and
information on the operation of the Public Reference Room may be obtained by
calling 1-800-SEC-0330. The Trust's Form N-Q is available without charge, upon
request, by calling (800) 621-1675 or (800) 983-0903 or by writing to First
Trust Portfolios L.P., 120 East Liberty Drive, Suite 400, Wheaton, Illinois
60187.
Policy Regarding Disclosure of Portfolio Holdings. The Trust has
adopted a policy regarding the disclosure of information about the Fund's
portfolio holdings. The Board of Trustees of the Trust must approve all material
amendments to this policy. The Fund's portfolio holdings are publicly
disseminated each day the Fund is open for business through financial reporting
and news services, including publicly accessible Internet web sites. In
addition, a basket composition file, which includes the security names and share
quantities to deliver in exchange for Fund Shares, together with estimates and
actual cash components, is publicly disseminated daily each day the NYSE is open
for trading via the National Securities Clearing Corporation ("NSCC"). The
basket represents one Creation Unit of the Fund. The Fund's portfolio holdings
are also available on the Fund's website at http://www.ftportfolios.com. The
Trust, First Trust and BONY will not disseminate non-public information
concerning the Trust.
Codes of Ethics. In order to mitigate the possibility that the Fund
will be adversely affected by personal trading, the Trust, First Trust and the
Distributor have adopted Codes of Ethics under Rule 17j-1 of the 1940 Act. These
Codes of Ethics contain policies restricting securities trading in personal
accounts of the officers, Trustees and others who normally come into possession
of information on portfolio transactions. These Codes of Ethics are on public
file with, and are available from, the SEC.
CREATION AND REDEMPTION OF CREATION UNIT AGGREGATIONS
Creation. The Trust issues and sells Shares of the Fund only in
Creation Unit Aggregations on a continuous basis through the Distributor,
without a sales load, at their NAVs next determined after receipt, on any
Business Day (as defined below), of an order in proper form.
A "Business Day" is any day on which the NYSE is open for business. As
of the date of this SAI, the NYSE observes the following holidays: New Year's
- 33 -
Day, Martin Luther King, Jr. Day, President's Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
Deposit of Securities and Deposit or Delivery of Cash. The
consideration for purchase of Creation Unit Aggregations of the Fund may consist
of (i) cash in lieu of all or a portion of the Deposit Securities, as defined
below, and/or (ii) a designated portfolio of equity securities determined by
First Trust--the "Deposit Securities"--per each Creation Unit Aggregation
constituting a substantial replication of the stocks included in the underlying
index ("Fund Securities") and generally an amount of cash--the "Cash
Component"--computed as described below. Together, the Deposit Securities and
the Cash Component (including the cash in lieu amount) constitute the "Fund
Deposit," which represents the minimum initial and subsequent investment amount
for a Creation Unit Aggregation of the Fund.
The Cash Component is sometimes also referred to as the Balancing
Amount. The Cash Component serves the function of compensating for any
differences between the NAV per Creation Unit Aggregation and the Deposit Amount
(as defined below). The Cash Component is an amount equal to the difference
between the NAV of Fund Shares (per Creation Unit Aggregation) and the "Deposit
Amount"--an amount equal to the market value 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 creator 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 creator will receive the Cash Component.
The Custodian, through the National Securities Clearing Corporation
("NSCC") (discussed below), makes available on each Business Day, prior to the
opening of business on NYSE (currently 9:30 a.m., Eastern time), the list of the
names and the required number of shares of each Deposit Security to be included
in the current Fund Deposit (based on information at the end of the previous
Business Day) for the Fund.
Such Fund Deposit is applicable, subject to any adjustments as
described below, in order to effect creations of Creation Unit Aggregations of
the Fund until such time as the next-announced composition of the Deposit
Securities is made available.
The identity and number of shares of the Deposit Securities required
for a Fund Deposit for the Fund changes as rebalancing adjustments and corporate
action events are reflected within the Fund from time to time by First Trust
with a view to the investment objective of the Fund. The composition of the
Deposit Securities may also change in response to adjustments to the weighting
or composition of the component stocks of the underlying index. In addition, the
Trust reserves the right to permit or require the substitution of an amount of
cash--i.e., a "cash in lieu" amount--to be added to the Cash Component to
replace any Deposit Security that may not be available in sufficient quantity
for delivery or that may not be eligible for transfer through the systems of DTC
or the Clearing Process (discussed below), or which might not be eligible for
trading by an Authorized Participant (as defined below) or the investor for
which it is acting or other relevant reason. Brokerage commissions incurred in
connection with the acquisition of Deposit Securities not eligible for transfer
through the systems of DTC and hence not eligible for transfer through the
Clearing Process (discussed below) will at the expense of the Fund and will
- 34 -
affect the value of all Shares; but First Trust, subject to the approval of the
Board of Trustees, may adjust the transaction fee within the parameters
described above to protect ongoing shareholders. The adjustments described above
will reflect changes known to First Trust on the date of announcement to be in
effect by the time of delivery of the Fund Deposit, in the composition of the
underlying index or resulting from certain corporate actions.
In addition to the list of names and numbers of securities constituting
the current Deposit Securities of a Fund Deposit, the Custodian, through the
NSCC, also makes available on each Business Day, the estimated Cash Component,
effective through and including the previous Business Day, per outstanding
Creation Unit Aggregation of the Fund.
Procedures for Creation of Creation Unit Aggregations. In order to be
eligible to place orders with the Distributor and to create a Creation Unit
Aggregation of the Fund, an entity must be (i) a "Participating Party," i.e., a
broker-dealer or other participant in the clearing process through the
Continuous Net Settlement System of the NSCC (the "Clearing Process"), a
clearing agency that is registered with the SEC; or (ii) a DTC Participant (see
the Book Entry Only System section), and, in each case, must have executed an
agreement with the Distributor and transfer agent, with respect to creations and
redemptions of Creation Unit Aggregations ("Participant Agreement") (discussed
below). A Participating Party and DTC Participant are collectively referred to
as an "Authorized Participant." Investors should contact the Distributor for the
names of Authorized Participants that have signed a Participant Agreement. All
Fund Shares, however created, will be entered on the records of DTC in the name
of Cede & Co. for the account of a DTC Participant.
All orders to create Creation Unit Aggregations, whether through the
Clearing Process (through a Participating Party) or outside the Clearing Process
(through a DTC Participant), must be received by the Distributor no later than
the closing time of the regular trading session on the NYSE ("Closing Time")
(ordinarily 4:00 p.m., Eastern time) in each case on the date such order is
placed in order for creation of Creation Unit Aggregations to be effected based
on the NAV of Shares of the Fund as next determined on such date after receipt
of the order in proper form. In the case of custom orders, the order must be
received by the Distributor no later than 3:00 p.m. Eastern time on the trade
date. A custom order may be placed by an Authorized Participant in the event
that the Trust permits or requires the substitution of an amount of cash to be
added to the Cash Component to replace any Deposit Security which may not be
available in sufficient quantity for delivery or which may not be eligible for
trading by such Authorized Participant or the investor for which it is acting or
other relevant reason. The date on which an order to create Creation Unit
Aggregations (or an order to redeem Creation Unit Aggregations, as discussed
below) is placed is referred to as the "Transmittal Date." Orders must be
transmitted by an Authorized Participant by telephone or other transmission
method acceptable to the Distributor pursuant to procedures set forth in the
Participant Agreement, as described below (see the Placement of Creation Orders
Using Clearing Process and the Placement of Creation Orders Outside Clearing
Process sections). Severe economic or market disruptions or changes, or
telephone or other communication failure may impede the ability to reach the
Distributor or an Authorized Participant.
- 35 -
All orders from investors who are not Authorized Participants to create
Creation Unit Aggregations shall be placed with an Authorized Participant in the
form required by such Authorized Participant. In addition, the Authorized
Participant may request the investor to make certain representations or enter
into agreements with respect to the order, e.g., to provide for payments of
cash, when required. Investors should be aware that their particular broker may
not have executed a Participant Agreement and that, therefore, orders to create
Creation Unit Aggregations of the Fund have to be placed by the investor's
broker through an Authorized Participant that has executed a Participant
Agreement. In such cases there may be additional charges to such investor. At
any given time, there may be only a limited number of broker-dealers that have
executed a Participant Agreement. Those placing orders for Creation Unit
Aggregations through the Clearing Process should afford sufficient time in order
to permit proper submission of the order to the Distributor prior to the Closing
Time on the Transmittal Date. Orders for Creation Unit Aggregations that are
effected outside the Clearing Process are likely to require transmittal by the
DTC Participant earlier on the Transmittal Date than orders effected using the
Clearing Process. Those persons placing orders outside the Clearing Process
should ascertain the deadlines applicable to DTC and the Federal Reserve Bank
wire system by contacting the operations department of the broker or depository
institution effectuating such transfer of Deposit Securities and Cash Component.
Placement of Creation Orders Using Clearing Process. The Clearing
Process is the process of creating or redeeming Creation Unit Aggregations
through the Continuous Net Settlement System of the NSCC. Fund Deposits made
through the Clearing Process must be delivered through a Participating Party
that has executed a Participant Agreement. The Participant Agreement authorizes
the Distributor to transmit through the Custodian to NSCC, on behalf of the
Participating Party, such trade instructions as are necessary to effect the
Participating Party's creation order. Pursuant to such trade instructions to
NSCC, the Participating Party agrees to deliver the requisite Deposit Securities
and the Cash Component to the Trust, together with such additional information
as may be required by the Distributor. An order to create Creation Unit
Aggregations through the Clearing Process is deemed received by the Distributor
on the Transmittal Date if (i) such order is received by the Distributor not
later than the Closing Time on such Transmittal Date and (ii) all other
procedures set forth in the Participant Agreement are properly followed.
Placement of Creation Orders Outside Clearing Process. Fund Deposits
made outside the Clearing Process must be delivered through a DTC Participant
that has executed a Participant Agreement pre-approved by First Trust and the
Distributor. A DTC Participant who wishes to place an order creating Creation
Unit Aggregations to be effected outside the Clearing Process does not need to
be a Participating Party, but such orders must state that the DTC Participant is
not using the Clearing Process and that the creation of Creation Unit
Aggregations will instead be effected through a transfer of securities and cash
directly through DTC. The Fund Deposit transfer must be ordered by the DTC
Participant on the Transmittal Date in a timely fashion so as to ensure the
delivery of the requisite number of Deposit Securities through DTC to the
account of the Fund by no later than 11:00 a.m., Eastern time, of the next
Business Day immediately following the Transmittal Date.
- 36 -
All questions as to the number of Deposit Securities to be delivered,
and the validity, form and eligibility (including time of receipt) for the
deposit of any tendered securities, will be determined by the Trust, whose
determination shall be final and binding. The amount of cash equal to the Cash
Component must be transferred directly to the Custodian through the Federal
Reserve Bank wire transfer system in a timely manner so as to be received by the
Custodian no later than 2:00 p.m., Eastern time, on the next Business Day
immediately following such Transmittal Date. An order to create Creation Unit
Aggregations outside the Clearing Process is deemed received by the Distributor
on the Transmittal Date if (i) such order is received by the Distributor not
later than the Closing Time on such Transmittal Date; and (ii) all other
procedures set forth in the Participant Agreement are properly followed.
However, if the Custodian does not receive both the required Deposit Securities
and the Cash Component by 11:00 a.m. and 2:00 p.m., respectively on the next
Business Day immediately following the Transmittal Date, such order will be
canceled. Upon written notice to the Distributor, such canceled order may be
resubmitted the following Business Day using a Fund Deposit as newly constituted
in order to reflect the then current Deposit Securities and Cash Component. The
delivery of Creation Unit Aggregations so created will occur no later than the
third (3rd) Business Day following the day on which the purchase order is deemed
received by the Distributor.
Additional transaction fees may be imposed with respect to transactions
effected outside the Clearing Process (through a DTC participant) and in the
limited circumstances in which any cash can be used in lieu of Deposit
Securities to create Creation Units. (See "Creation Transaction Fee" section
below).
Creation Unit Aggregations may be created in advance of receipt by the
Trust of all or a portion of the applicable Deposit Securities as described
below. In these circumstances, the initial deposit will have a value greater
than the NAV of the Fund Shares on the date the order is placed in proper form
since, in addition to available Deposit Securities, cash must be deposited in an
amount equal to the sum of (i) the Cash Component, plus (ii) 115% of the market
value of the undelivered Deposit Securities (the "Additional Cash Deposit"). The
order shall be deemed to be received on the Business Day on which the order is
placed provided that the order is placed in proper form prior to 4:00 p.m.,
Eastern time, on such date, and federal funds in the appropriate amount are
deposited with the Custodian by 11:00 a.m., Eastern time, the following Business
Day. If the order is not placed in proper form by 4:00 p.m. or federal funds in
the appropriate amount are not received by 11:00 a.m. the next Business Day,
then the order may be deemed to be canceled and the Authorized Participant shall
be liable to the Fund for losses, if any, resulting therefrom. An additional
amount of cash shall be required to be deposited with the Trust, pending
delivery of the missing Deposit Securities to the extent necessary to maintain
the Additional Cash Deposit with the Trust in an amount at least equal to 115%
of the daily marked-to-market value of the missing Deposit Securities. To the
extent that missing Deposit Securities are not received by 1:00 p.m., Eastern
time, on the third Business Day following the day on which the purchase order is
deemed received by the Distributor or in the event a marked-to-market payment is
not made within one Business Day following notification by the Distributor that
such a payment is required, the Trust may use the cash on deposit to purchase
the missing Deposit Securities. Authorized Participants will be liable to the
Trust and the Fund for the costs incurred by the Trust in connection with any
such purchases. These costs will be deemed to include the amount by which the
- 37 -
actual purchase price of the Deposit Securities exceeds the market value of such
Deposit Securities on the day the purchase order was deemed received by the
Distributor plus the brokerage and related transaction costs associated with
such purchases. The Trust will return any unused portion of the Additional Cash
Deposit once all of the missing Deposit Securities have been properly received
by the Custodian or purchased by the Trust and deposited into the Trust. In
addition, a transaction fee, as listed below, will be charged in all cases. The
delivery of Creation Unit Aggregations so created will occur no later than the
third Business Day following the day on which the purchase order is deemed
received by the Distributor.
Acceptance of Orders for Creation Unit Aggregations. The Trust reserves
the absolute right to reject a creation order transmitted to it by the
Distributor with respect to the Fund if: (i) the order is not in proper form;
(ii) the investor(s), upon obtaining the Fund Shares ordered, would own 80% or
more of the currently outstanding shares of the Fund; (iii) the Deposit
Securities delivered are not as disseminated for that date by the Custodian, as
described above; (iv) acceptance of the Deposit Securities would have certain
adverse tax consequences to the Fund; (v) acceptance of the Fund Deposit would,
in the opinion of counsel, be unlawful; (vi) acceptance of the Fund Deposit
would otherwise, in the discretion of the Trust or First Trust, have an adverse
effect on the Trust or the rights of beneficial owners; or (vii) in the event
that circumstances outside the control of the Trust, the Custodian, the
Distributor and First Trust make it for all practical purposes impossible to
process creation orders. Examples of such circumstances include acts of God;
public service or utility problems such as fires, floods, extreme weather
conditions and power outages resulting in telephone, telecopy and computer
failures; market conditions or activities causing trading halts; systems
failures involving computer or other information systems affecting the Trust,
First Trust, the Distributor, DTC, NSCC, the Custodian or sub-custodian or any
other participant in the creation process, and similar extraordinary events. The
Distributor shall notify a prospective creator of a Creation Unit and/or the
Authorized Participant acting on behalf of such prospective creator of its
rejection of the order of such person. The Trust, the Custodian, any
sub-custodian and the Distributor are under no duty, however, to give
notification of any defects or irregularities in the delivery of Fund Deposits
nor shall any of them incur any liability for the failure to give any such
notification.
All questions as to the number of shares of each security in the
Deposit Securities and the validity, form, eligibility, and acceptance for
deposit of any securities to be delivered shall be determined by the Trust, and
the Trust's determination shall be final and binding.
Creation Transaction Fee. Purchasers of Creation Units will be required
to pay a standard creation transaction fee (the "Creation Transaction Fee"),
described below, payable to BONY regardless of the number of Creation Units. An
additional variable fee of up to three times the Creation Transaction Fee may be
charged to approximate additional expenses incurred by the Fund with respect to
transactions effected outside of the Clearing Process (i.e., through a DTC
Participant) or to the extent that cash is used in lieu of securities to
purchase Creation Units. Investors are responsible for the costs of transferring
the securities constituting the Deposit Securities to the account of the Trust.
- 38 -
The standard creation transaction fee is based on the number of
different securities in a Creation Unit according to the fee schedule set forth
below:
Number of Securities Creation
in a Creation Unit Transaction Fee
1-100 $500
101-200 $1,000
201-300 $1,500
301-400 $2,000
401-500 $2,500
501-600 $3,000
601-700 $3,500
Redemption of Fund Shares In Creation Units Aggregations. Fund Shares
may be redeemed only in Creation Unit Aggregations at their NAV next determined
after receipt of a redemption request in proper form by the Fund through the
Transfer Agent and only on a Business Day. The Fund will not redeem Shares in
amounts less than Creation Unit Aggregations. Beneficial owners must accumulate
enough Shares in the secondary market to constitute a Creation Unit Aggregation
in order to have such Shares redeemed by the Trust. There can be no assurance,
however, that there will be sufficient liquidity in the public trading market at
any time to permit assembly of a Creation Unit Aggregation. Investors should
expect to incur brokerage and other costs in connection with assembling a
sufficient number of Fund Shares to constitute a redeemable Creation Unit
Aggregation.
With respect to the Fund, the Custodian, through the NSCC, makes
available prior to the opening of business on the NYSE (currently 9:30 a.m.,
Eastern time) on each Business Day, the identity of the Fund Securities that
will be applicable (subject to possible amendment or correction) to redemption
requests received in proper form (as described below) on that day. Fund
Securities received on redemption may not be identical to Deposit Securities
that are applicable to creations of Creation Unit Aggregations.
Unless cash redemptions are available or specified for the Fund, the
redemption proceeds for a Creation Unit Aggregation generally consist of Fund
Securities--as announced on the Business Day of the request for redemption
received in proper form--plus or minus cash in an amount equal to the difference
between the NAV of the Fund Shares being redeemed, as next determined after a
receipt of a request in proper form, and the value of the Fund Securities (the
"Cash Redemption Amount"), less a redemption transaction fee as listed below. In
the event that the Fund Securities have a value greater than the NAV of the Fund
Shares, a compensating cash payment equal to the difference is required to be
made by or through an Authorized Participant by the redeeming shareholder.
The right of redemption may be suspended or the date of payment
postponed (i) for any period during which the NYSE is closed (other than
customary weekend and holiday closings); (ii) for any period during which
trading on the NYSE is suspended or restricted; (iii) for any period during
which an emergency exists as a result of which disposal of the Shares of the
- 39 -
Fund or determination of the Fund's NAV is not reasonably practicable; or (iv)
in such other circumstances as is permitted by the SEC.
Redemption Transaction Fee. A redemption transaction fee (the
"Redemption Transaction Fee") is imposed to offset transfer and other
transaction costs that may be incurred by the Fund. An additional variable fee
of up to three times the Redemption Transaction Fee may be charged to
approximate additional expenses incurred by the Fund with respect to redemptions
effected outside of the Clearing Process or to the extent that redemptions are
for cash. The Fund reserves the right to effect redemptions in cash. A
shareholder may request a cash redemption in lieu of securities; however, the
Fund may, in its discretion, reject any such request. Investors will also bear
the costs of transferring the Fund Securities from the Trust to their account or
on their order. Investors who use the services of a broker or other such
intermediary in addition to an Authorized Participant to effect a redemption of
a Creation Unit Aggregation may be charged an additional fee for such services.
The standard redemption transaction fee is based on the number of
different securities in a Creation Unit according to the fee schedule set forth
below:
Number of Securities Redemption
in a Creation Unit Transaction Fee
1-100 $500
101-200 $1,000
201-300 $1,500
301-400 $2,000
401-500 $2,500
501-600 $3,000
601-700 $3,500
Placement of Redemption Orders Using Clearing Process. Orders to redeem
Creation Unit Aggregations through the Clearing Process must be delivered
through a Participating Party that has executed the Participant Agreement. An
order to redeem Creation Unit Aggregations using the Clearing Process is deemed
received by the Trust on the Transmittal Date if (i) such order is received by
the Transfer Agent not later than 4:00 p.m., Eastern time, on such Transmittal
Date, and (ii) all other procedures set forth in the Participant Agreement are
properly followed; such order will be effected based on the NAV of the Fund as
next determined. An order to redeem Creation Unit Aggregations using the
Clearing Process made in proper form but received by the Trust after 4:00 p.m.,
Eastern time, will be deemed received on the next Business Day immediately
following the Transmittal Date and will be effected at the NAV next determined
on such next Business Day. The requisite Fund Securities and the Cash Redemption
Amount will be transferred by the third NSCC Business Day following the date on
which such request for redemption is deemed received.
Placement of Redemption Orders Outside Clearing Process. Orders to
redeem Creation Unit Aggregations outside the Clearing Process must be delivered
through a DTC Participant that has executed the Participant Agreement. A DTC
Participant who wishes to place an order for redemption of Creation Unit
Aggregations to be effected outside the Clearing Process does not need to be a
- 40 -
Participating Party, but such orders must state that the DTC Participant is not
using the Clearing Process and that redemption of Creation Unit Aggregations
will instead be effected through transfer of Fund Shares directly through DTC.
An order to redeem Creation Unit Aggregations outside the Clearing Process is
deemed received by the Trust on the Transmittal Date if (i) such order is
received by the Transfer Agent not later than 4:00 p.m., Eastern time on such
Transmittal Date; (ii) such order is accompanied or followed by the requisite
number of Shares of the Fund, which delivery must be made through DTC to the
Custodian no later than 11:00 a.m., Eastern time, (for the Fund Shares) on the
next Business Day immediately following such Transmittal Date (the "DTC
Cut-Off-Time") and 2:00 p.m., Eastern Time for any Cash Component, if any owed
to the Fund; and (iii) all other procedures set forth in the Participant
Agreement are properly followed. After the Trust has deemed an order for
redemption outside the Clearing Process received, the Trust will initiate
procedures to transfer the requisite Fund Securities which are expected to be
delivered within three Business Days and the Cash Redemption Amount, if any owed
to the redeeming Beneficial Owner to the Authorized Participant on behalf of the
redeeming Beneficial Owner by the third Business Day following the Transmittal
Date on which such redemption order is deemed received by the Trust.
The calculation of the value of the Fund Securities and the Cash
Redemption Amount to be delivered/received upon redemption will be made by the
Custodian according to the procedures set forth in this SAI under "Determination
of NAV" computed on the Business Day on which a redemption order is deemed
received by the Trust. Therefore, if a redemption order in proper form is
submitted to the Transfer Agent by a DTC Participant not later than Closing Time
on the Transmittal Date, and the requisite number of Shares of the Fund are
delivered to the Custodian prior to the DTC Cut-Off-Time, then the value of the
Fund Securities and the Cash Redemption Amount to be delivered/received will be
determined by the Custodian on such Transmittal Date. If, however, either (i)
the requisite number of Shares of the Fund are not delivered by the DTC
Cut-Off-Time, as described above, or (ii) the redemption order is not submitted
in proper form, then the redemption order will not be deemed received as of the
Transmittal Date. In such case, the value of the Fund Securities and the Cash
Redemption Amount to be delivered/received will be computed on the Business Day
following the Transmittal Date provided that the Fund Shares of the Fund are
delivered through DTC to the Custodian by 11:00 a.m. the following Business Day
pursuant to a properly submitted redemption order.
If it is not possible to effect deliveries of the Fund Securities, the
Trust may in its discretion exercise its option to redeem such Fund Shares in
cash, and the redeeming Beneficial Owner will be required to receive its
redemption proceeds in cash. In addition, an investor may request a redemption
in cash that the Fund may, in its sole discretion, permit. In either case, the
investor will receive a cash payment equal to the NAV of its Fund Shares based
on the NAV of Shares of the Fund next determined after the redemption request is
received in proper form (minus a redemption transaction fee and additional
charge for requested cash redemptions specified above, to offset the Fund's
brokerage and other transaction costs associated with the disposition of Fund
Securities). The Fund may also, in its sole discretion, upon request of a
shareholder, provide such redeemer a portfolio of securities that differs from
the exact composition of the Fund Securities, or cash lieu of some securities
added to the Cash Component, but in no event will the total value of the
- 41 -
securities delivered and the cash transmitted differ from the NAV. Redemptions
of Fund Shares for Fund Securities will be subject to compliance with applicable
federal and state securities laws and the Fund (whether or not it otherwise
permits cash redemptions) reserves the right to redeem Creation Unit
Aggregations for cash to the extent that the Trust could not lawfully deliver
specific Fund Securities upon redemptions or could not do so without first
registering the Fund Securities under such laws. An Authorized Participant or an
investor for which it is acting subject to a legal restriction with respect to a
particular stock included in the Fund Securities applicable to the redemption of
a Creation Unit Aggregation may be paid an equivalent amount of cash. The
Authorized Participant may request the redeeming Beneficial Owner of the Fund
Shares to complete an order form or to enter into agreements with respect to
such matters as compensating cash payment, beneficial ownership of shares or
delivery instructions.
The chart below describes in further detail the placement of redemption
orders outside the clearing process.
TRANSMITTAL NEXT BUSINESS SECOND BUSINESS THIRD BUSINESS
DATE (T) DAY (T+1) DAY (T+2) DAY (T+3)
CREATION THROUGH NSCC
STANDARD ORDERS 4:00 p.m. No action. No action. Creation Unit
Aggregations will be
Order must be delivered.
received by the
Distributor.
CUSTOM ORDERS 3:00 p.m. No action. No action. Creation Unit
Aggregations will be
Order must be delivered.
received by the
Distributor.
Orders received
after 3:00 p.m.
will be treated as
standard orders.
CREATION OUTSIDE NSCC
STANDARD ORDERS 4:00 p.m. (ET) 11:00 a.m. (ET) No action. Creation Unit
Aggregations will be
Order in proper Deposit Securities must delivered.
form must be be received by the
received by the Fund's account through
Distributor. DTC.
2:00 p.m. (ET)
Cash Component must be
received by the Custodian.
STANDARD ORDERS CREATED 4:00 p.m. (ET) 11:00 a.m. (ET) No action. 1:00 p.m.
IN ADVANCE OF RECEIPT
BY THE TRUST OF ALL OR Order in proper Available Deposit Missing Deposit
A PORTION OF THE form must be Securities. Securities are due to
DEPOSIT SECURITIES received by the the Trust or the Trust
Distributor. Cash in an amount equal may use cash on deposit
to the sum of (i) the to purchase missing
Cash Component, plus Deposit Securities.
(ii) 115% of the market
value of the Creation Unit
undelivered Deposit Aggregations will be
Securities. delivered.
- 42 -
TRANSMITTAL NEXT BUSINESS SECOND BUSINESS THIRD BUSINESS
DATE (T) DAY (T+1) DAY (T+2) DAY (T+3)
CUSTOM ORDERS 3:00 p.m. 11:00 a.m. (ET) No action. Creation Unit
Aggregations will be
Order in proper Deposit Securities must delivered.
form must be be received by the
received by the Fund's account through
Distributor. DTC.
Order received 2:00 p.m. (ET)
after 3:00 p.m.
will be treated as Cash Component must be
standard orders. received by the Orders
Custodian.
REDEMPTION THROUGH NSCC
STANDARD ORDERS 4:00 p.m. (ET) No action. No action. Fund Securities and Cash
Redemption Amount will
Order must be be transferred.
received by the
Transfer Agent.
Orders received
after 4:00 p.m.
(ET) will be deemed
received on the
next business day
(T+1)
CUSTOM ORDERS 3:00 p.m. (ET) No action. No action. Fund Securities and Cash
Redemption Amount will
Order must be be transferred.
received by the
Transfer Agent
Order received
after 3:00 p.m.
will be treated as
standard orders.
REDEMPTION OUTSIDE NSCC
STANDARD ORDERS 4:00 p.m. (ET) 11:00 a.m. (ET) No action. Fund Securities and Cash
Redemption Amount is
Order must be Fund Shares must be delivered to the
received by the delivered through DTC redeeming beneficial
Transfer Agent. to the Custodian. owner.
Order received 2:00 p.m.
after 4:00 p.m.
(ET) will be deemed Cash Component, if any,
received on the is due.
next business day
(T+1).
*If the order is not in proper
form or the Fund Shares are
not delivered, then the order
will not be deemed received as
of T.
- 43 -
TRANSMITTAL NEXT BUSINESS SECOND BUSINESS THIRD BUSINESS
DATE (T) DAY (T+1) DAY (T+2) DAY (T+3)
CUSTOM ORDERS 3:00 p.m. (ET) 11:00 a.m. (ET) No action. Fund Securities and Cash
Redemption Amount is
Order must be Fund Shares must be delivered to the
received by the delivered through DTC redeeming beneficial
Transfer Agent. to the Custodian. owner.
Order received 2:00 p.m.
after 3:00 p.m.
will be treated as Cash Component, if any,
standard orders. is due.
*If the order is not in proper
form or the Fund Shares are
not delivered, then the order
will not be deemed received as
of T.
FEDERAL TAX MATTERS
This section summarizes some of the main U.S. federal income tax
consequences of owning Shares of the Fund. This section is current as of the
date of the Prospectus. Tax laws and interpretations change frequently, and
these summaries do not describe all of the tax consequences to all taxpayers.
For example, these summaries generally do not describe your situation if you are
a corporation, a non-U.S. person, a broker-dealer, or other investor with
special circumstances. In addition, this section does not describe your state,
local or foreign tax consequences.
This federal income tax summary is based in part on the advice of
counsel to the Fund. The Internal Revenue Service could disagree with any
conclusions set forth in this section. In addition, our counsel was not asked to
review, and has not reached a conclusion with respect to the federal income tax
treatment of the assets to be deposited in the Fund. This may not be sufficient
for prospective investors to use for the purpose of avoiding penalties under
federal tax law.
As with any investment, prospective investors should seek advice based
on their individual circumstances from their own tax advisor.
The Fund intends to qualify annually and to elect to be treated as a
regulated investment company under the Internal Revenue Code of 1986, as amended
(the "Code").
To qualify for the favorable U.S. federal income tax treatment
generally accorded to regulated investment companies, the Fund must, among other
things, (a) derive in each taxable year at least 90% of its gross income from
dividends, interest, payments with respect to securities loans and gains from
the sale or other disposition of stock, securities or foreign currencies or
other income derived with respect to its business of investing in such stock,
securities or currencies, or net income derived from interests in certain
publicly traded partnerships; (b) diversify its holdings so that, at the end of
each quarter of the taxable year, (i) at least 50% of the market value of the
Fund's assets is represented by cash and cash items (including receivables),
- 44 -
U.S. Government securities, the securities of other regulated investment
companies and other securities, with such other securities of any one issuer
generally limited for the purposes of this calculation to an amount not greater
than 5% of the value of the Fund's total assets and not greater than 10% of the
outstanding voting securities of such issuer, and (ii) not more than 25% of the
value of its total assets is invested in the securities (other than U.S.
Government securities or the securities of other regulated investment companies)
of any one issuer, or two or more issuers which the Fund controls which are
engaged in the same, similar or related trades or businesses, or the securities
of one or more of certain publicly traded partnerships; and (c) distribute at
least 90% of its investment company taxable income (which includes, among other
items, dividends, interest and net short-term capital gains in excess of net
long-term capital losses) and at least 90% of its net tax-exempt interest income
each taxable year.
As a regulated investment company, the Fund generally will not be
subject to U.S. federal income tax on their investment company taxable income
(as that term is defined in the Code, but without regard to the deduction for
dividends paid) and net capital gain (the excess of net long-term capital gain
over net short-term capital loss), if any, that they distribute to shareholders.
The Fund intends to distribute to its shareholders, at least annually,
substantially all of its investment company taxable income and net capital gain.
If the Fund retains any net capital gain or investment company taxable income,
it will generally be subject to federal income tax at regular corporate rates on
the amount retained. In addition, amounts not distributed on a timely basis in
accordance with a calendar year distribution requirement are subject to a
nondeductible 4% excise tax unless, generally, the Fund distributes during each
calendar year an amount equal to the sum of (1) at least 98% of its ordinary
income (not taking into account any capital gains or losses) for the calendar
year, (2) at least 98% of its capital gains in excess of its capital losses
(adjusted for certain ordinary losses) for the one-year period ending October 31
of the calendar year, and (3) any ordinary income and capital gains for previous
years that were not distributed during those years. In order to prevent
application of the excise tax, the Fund intends to make its distributions in
accordance with the calendar year distribution requirement. A distribution will
be treated as paid on December 31 of the current calendar year if it is declared
by the Fund in October, November or December with a record date in such a month
and paid by the Fund during January of the following calendar year. Such
distributions will be taxable to shareholders in the calendar year in which the
distributions are declared, rather than the calendar year in which the
distributions are received.
If the Fund failed to qualify as a regulated investment company or
failed to satisfy the 90% distribution requirement in any taxable year, the Fund
would be taxed as an ordinary corporation on its taxable income (even if such
income were distributed to its shareholders) and all distributions out of
earnings and profits would be taxed to shareholders as ordinary income.
DISTRIBUTIONS
Dividends paid out of the Fund's investment company taxable income are
generally taxable to a shareholder as ordinary income to the extent of the
Fund's earnings and profits, whether paid in cash or reinvested in additional
shares. However, certain ordinary income distributions received from the Fund
may be taxed at capital gains tax rates. In particular, ordinary income
dividends received by an individual shareholder from regulated investment
- 45 -
companies such as the Fund is generally taxed at the same rates that apply to
net capital gain, provided that certain holding period requirements are
satisfied and provided the dividends are attributable to qualifying dividends
received by the Fund itself. Dividends received by the Fund from REITs and
foreign corporations are qualifying dividends eligible for this lower tax rate
only in certain circumstances.
These special rules relating to the taxation of ordinary income
dividends from regulated investment companies generally apply to taxable years
beginning before January 1, 2011. The Fund will provide notice to its
shareholders of the amount of any distributions which may be taken into account
as a dividend which is eligible for the capital gains tax rates. The Fund can
not make any guarantees as to the amount of any distribution which will be
regarded as a qualifying dividend.
A corporation that owns Shares generally will not be entitled to the
dividends received deduction with respect to many dividends received from the
Fund because the dividends received deduction is generally not available for
distributions from regulated investment companies. However, certain ordinary
income dividends on Shares that are attributable to qualifying dividends
received by the Fund from certain domestic corporations may be designated by the
Fund as being eligible for the dividends received deduction.
Distributions of net capital gain (the excess of net long-term capital
gain over net short-term capital loss), if any, properly designated as capital
gain dividends are taxable to a shareholder as long-term capital gains,
regardless of how long the shareholder has held Fund Shares. Shareholders
receiving distributions in the form of additional Shares, rather than cash,
generally will have a cost basis in each such Share equal to the value of a
Share of the Fund on the reinvestment date. A distribution of an amount in
excess of the Fund's current and accumulated earnings and profits will be
treated by a shareholder as a return of capital which is applied against and
reduces the shareholder's basis in his or her Shares. To the extent that the
amount of any such distribution exceeds the shareholder's basis in his or her
Shares, the excess will be treated by the shareholder as gain from a sale or
exchange of the Shares.
Shareholders will be notified annually as to the U.S. federal income
tax status of distributions, and shareholders receiving distributions in the
form of additional Shares will receive a report as to the value of those Shares.
SALE OR EXCHANGE OF FUND SHARES
Upon the sale or other disposition of Shares of the Fund, which a
shareholder holds as a capital asset, such a shareholder may realize a capital
gain or loss which will be long-term or short-term, depending upon the
shareholder's holding period for the Shares. Generally, a shareholder's gain or
loss will be a long-term gain or loss if the Shares have been held for more than
one year.
Any loss realized on a sale or exchange will be disallowed to the
extent that Shares disposed of are replaced (including through reinvestment of
dividends) within a period of 61 days beginning 30 days before and ending 30
days after disposition of Shares or to the extent that the shareholder, during
- 46 -
such period, acquires or enters into an option or contract to acquire,
substantially identical stock or securities. In such a case, the basis of the
Shares acquired will be adjusted to reflect the disallowed loss. Any loss
realized by a shareholder on a disposition of Fund Shares held by the
shareholder for six months or less will be treated as a long-term capital loss
to the extent of any distributions of long-term capital gain received by the
shareholder with respect to such Shares.
TAXES ON PURCHASE AND REDEMPTION OF CREATION UNITS
If a shareholder exchanges equity securities for Creation Units the
shareholder will generally recognize a gain or a loss. The gain or loss will be
equal to the difference between the market value of the Creation Units at the
time and the shareholder's aggregate basis in the securities surrendered and the
Cash Component paid. If a shareholder exchanges Creation Units for equity
securities, then the shareholder will generally recognize a gain or loss equal
to the difference between the shareholder's basis in the Creation Units and the
aggregate market value of the securities received and the Cash Redemption
Amount. The Internal Revenue Service, however, may assert that a loss realized
upon an exchange of securities for Creation Units or Creation Units for
securities cannot be deducted currently under the rules governing "wash sales,"
or on the basis that there has been no significant change in economic position.
NATURE OF FUND INVESTMENTS
Certain of the Fund's investment practices are subject to special and
complex federal income tax provisions that may, among other things, (i)
disallow, suspend or otherwise limit the allowance of certain losses or
deductions, (ii) convert lower taxed long-term capital gain into higher taxed
short-term capital gain or ordinary income, (iii) convert an ordinary loss or a
deduction into a capital loss (the deductibility of which is more limited), (iv)
cause the Fund to recognize income or gain without a corresponding receipt of
cash, (v) adversely affect the time as to when a purchase or sale of stock or
securities is deemed to occur and (vi) adversely alter the characterization of
certain complex financial transactions.
FUTURES CONTRACTS AND OPTIONS
The Fund's transactions in Futures Contracts and options will be
subject to special provisions of the Code that, among other things, may affect
the character of gains and losses realized by the Fund (i.e., may affect whether
gains or losses are ordinary or capital, or short-term or long-term), may
accelerate recognition of income to the Fund and may defer Fund losses. These
rules could, therefore, affect the character, amount and timing of distributions
to shareholders. These provisions also (a) will require the Fund to
mark-to-market certain types of the positions in its portfolio (i.e., treat them
as if they were closed out), and (b) may cause the Fund to recognize income
without receiving cash with which to make distributions in amounts necessary to
satisfy the 90% distribution requirement for qualifying to be taxed as a
regulated investment company and the 98% distribution requirement for avoiding
excise taxes.
- 47 -
INVESTMENTS IN CERTAIN FOREIGN CORPORATIONS
If the Fund holds an equity interest in any "passive foreign investment
companies" ("PFICs"), which are generally certain foreign corporations that
receive at least 75% of their annual gross income from passive sources (such as
interest, dividends, certain rents and royalties or capital gains) or that hold
at least 50% of their assets in investments producing such passive income, the
Fund could be subject to U.S. federal income tax and additional interest charges
on gains and certain distributions with respect to those equity interests, even
if all the income or gain is timely distributed to its Unitholders. The Fund
will not be able to pass through to its Unitholders any credit or deduction for
such taxes. The Fund may be able to make an election that could ameliorate these
adverse tax consequences. In this case, the Fund would recognize as ordinary
income any increase in the value of such PFIC shares, and as ordinary loss any
decrease in such value to the extent it did not exceed prior increases included
in income. Under this election, the Fund might be required to recognize in a
year income in excess of its distributions from PFICs and its proceeds from
dispositions of PFIC stock during that year, and such income would nevertheless
be subject to the distributions requirement and would be taken into account for
purposes of the 4% excise tax (described above). Dividends paid by PFICs will
not be treated as qualified dividend income.
BACKUP WITHHOLDING
The Fund may be required to withhold U.S. federal income tax from all
taxable distributions and sale proceeds payable to shareholders who fail to
provide the Fund with their correct taxpayer identification number or to make
required certifications, or who have been notified by the Internal Revenue
Service that they are subject to backup withholding. The withholding percentage
is 28% until 2011, when the percentage will revert to 31% unless amended by
Congress. Corporate shareholders and certain other shareholders specified in the
Code generally are exempt from such backup withholding. This withholding is not
an additional tax. Any amounts withheld may be credited against the
shareholder's U.S. federal income tax liability.
NON-U.S. SHAREHOLDERS
U.S. taxation of a shareholder who, as to the United States, is a
nonresident alien individual, a foreign trust or estate, a foreign corporation
or foreign partnership ("non-U.S. shareholder") depends on whether the income of
the Fund is "effectively connected" with a U.S. trade or business carried on by
the shareholder.
Income Not Effectively Connected. If the income from the Fund is not
"effectively connected" with a U.S. trade or business carried on by the non-U.S.
shareholder, distributions of investment company taxable income will generally
be subject to a U.S. tax of 30% (or lower treaty rate), which tax is generally
withheld from such distributions.
Distributions of capital gain dividends and any amounts retained by the
Fund which are designated as undistributed capital gains will not be subject to
U.S. tax at the rate of 30% (or lower treaty rate) unless the non-U.S.
shareholder is a nonresident alien individual and is physically present in the
- 48 -
United States for more than 182 days during the taxable year and meets certain
other requirements. However, this 30% tax on capital gains of nonresident alien
individuals who are physically present in the United States for more than the
182 day period only applies in exceptional cases because any individual present
in the United States for more than 182 days during the taxable year is generally
treated as a resident for U.S. income tax purposes; in that case, he or she
would be subject to U.S. income tax on his or her worldwide income at the
graduated rates applicable to U.S. citizens, rather than the 30% U.S. tax. In
the case of a non-U.S. shareholder who is a nonresident alien individual, the
Fund may be required to withhold U.S. income tax from distributions of net
capital gain unless the non-U.S. shareholder certifies his or her non-U.S.
status under penalties of perjury or otherwise establishes an exemption. If a
non-U.S. shareholder is a nonresident alien individual, any gain such
shareholder realizes upon the sale or exchange of such shareholder's shares of
the Fund in the United States will ordinarily be exempt from U.S. tax unless the
gain is U.S. source income and such shareholder is physically present in the
United States for more than 182 days during the taxable year and meets certain
other requirements.
Dividends paid by the Fund to shareholders who are nonresident aliens
or foreign entities and that are derived from short-term capital gains and
qualifying net interest income (including income from original issue discount
and market discount), and that are properly designated by the Fund as
"interest-related dividends" or "short-term capital gain dividends," will
generally not be subject to United States withholding tax, provided that the
income would not be subject to federal income tax if earned directly by the
foreign shareholder. In addition, capital gains distributions attributable to
gains from U.S. real property interests (including certain U.S. real property
holding corporations) will generally be subject to United States withholding tax
and will give rise to an obligation on the part of the foreign shareholder to
file a United States tax return. The provisions contained in the legislation
relating to distributions to shareholders who are nonresident aliens or foreign
entities generally would apply to distributions with respect to taxable years of
the Fund beginning after December 31, 2004 and before January 1, 2010.
Income Effectively Connected. If the income from a Fund is "effectively
connected" with a U.S. trade or business carried on by a non-U.S. shareholder,
then distributions of investment company taxable income and capital gain
dividends, any amounts retained by the Fund which are designated as
undistributed capital gains and any gains realized upon the sale or exchange of
shares of the Fund will be subject to U.S. income tax at the graduated rates
applicable to U.S. citizens, residents and domestic corporations. Non-U.S.
corporate shareholders may also be subject to the branch profits tax imposed by
the Code. The tax consequences to a non-U.S. shareholder entitled to claim the
benefits of an applicable tax treaty may differ from those described herein.
Non-U.S. shareholders are advised to consult their own tax advisors with respect
to the particular tax consequences to them of an investment in the Fund.
OTHER TAXATION
Fund shareholders may be subject to state, local and foreign taxes on
their Fund distributions. Shareholders are advised to consult their own tax
advisors with respect to the particular tax consequences to them of an
investment in the Fund.
- 49 -
DETERMINATION OF NAV
The following information supplements and should be read in conjunction
with the section in the Prospectus entitled "Net Asset Value."
The per share NAV of the Fund is determined by dividing the total value
of the securities and other assets, less liabilities, by the total number of
Shares outstanding. The Fund's NAV may not be calculated on days during which
the Fund receives no orders to purchase shares and no shares are tendered for
redemption. In determining NAV, portfolio securities for the Fund for which
accurate market quotations are readily available will be valued by the Fund
accounting agent as follows:
(1) Common stocks and other equity securities listed on any
exchange other than NASDAQ(R) and the London Stock Exchange Alternative
Investment Market ("AIM") are valued at the last sale price on the
business day as of which such value is being determined. Securities
listed on the NASDAQ(R) or the AIM are valued at the official closing
price on the business day as of which such value is being determined.
If there has been no sale on such day, or no official closing price in
the case of securities traded on NASDAQ(R) or the AIM, the securities
are valued at the mean of the most recent bid and ask prices on such
day. Portfolio securities traded on more than one securities exchange
are valued at the last sale price or official closing price, as
applicable, on the business day as of which such value is being
determined at the close of the exchange representing the principal
market for such securities. Portfolio securities traded in the
over-the-counter market, but excluding securities trading on NASDAQ(R)
and the AIM, are valued at the closing bid prices. Short-term
investments that mature in less than 60 days when purchased are valued
at amortized cost.
(2) Securities traded in the over-the-counter market are
valued at their closing bid prices.
(3) Exchange traded options and Futures Contracts will be
valued at the closing price in the market where such contracts are
principally traded. Over-the-counter options and Futures Contracts will
be valued at their closing bid prices.
(4) Forward foreign currency exchange contracts which are
traded in the United States on regulated exchanges will be valued by
calculating the mean between the last bid and asked quotations supplied
to a pricing service by certain independent dealers in such contracts.
In addition, the following types of securities will be valued as
follows:
(1) Fixed income securities with a remaining maturity of 60
days or more will be valued by the fund accounting agent using a
pricing service. When price quotes are not available, fair market value
is based on prices of comparable securities.
- 50 -
(2) Fixed income securities maturing within 60 days are
valued by the fund accounting agent on an amortized cost basis.
(3) Repurchase agreements will be valued as follows.
Overnight repurchase agreements will be valued at cost. Term repurchase
agreements (i.e., those whose maturity exceeds seven days) will be
valued by First Trust at the average of the bid quotations obtained
daily from at least two recognized dealers.
The value of any portfolio security held by the Fund for which market
quotations are not readily available will be determined by First Trust in a
manner that most fairly reflects fair market value of the security on the
valuation date, based on a consideration of all available information.
Certain securities may not be able to be priced by pre-established
pricing methods. Such securities may be valued by the Board of Trustees or its
delegate 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 1933 Act) for which a pricing service is unable to
provide a market price; securities whose trading has been formally suspended; a
security whose market 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 Fund NAV (as may be the case in foreign markets on
which the security is primarily traded) or make it difficult or impossible to
obtain a reliable market quotation; and a security whose price, as provided by
the pricing service, does not reflect the security's "fair value." As a general
principle, the current "fair value" of an issue of securities would appear to be
the amount which the owner might reasonably expect to receive for them upon
their current sale. A variety of factors may be considered in determining the
fair value of such securities.
The Fund may suspend the right of redemption for the Fund only under
the following unusual circumstances: (a) when the NYSE is closed (other than
weekends and holidays) or trading is restricted; (b) when trading in the markets
normally utilized is restricted, or when an emergency exists as determined by
the SEC so that disposal of the Fund's investments or determination of its net
assets is not reasonably practicable; or (c) during any period when the SEC may
permit.
DIVIDENDS AND DISTRIBUTIONS
The following information supplements and should be read in conjunction
with the section in the Prospectus entitled "Dividends, Distributions and
Taxes."
General Policies. Dividends from net investment income, if any, are
declared and paid semi-annually. Distributions of net realized securities gains,
if any, generally are declared and paid once a year, but the Trust may make
distributions on a more frequent basis. The Trust reserves the right to declare
special distributions if, in its reasonable discretion, such action is necessary
or advisable to preserve the status of the Fund as a RIC or to avoid imposition
of income or excise taxes on undistributed income.
- 51 -
Dividends and other distributions of Fund Shares are distributed, as
described below, on a pro rata basis to Beneficial Owners of such Shares.
Dividend payments are made through DTC Participants and Indirect Participants to
Beneficial Owners then of record with proceeds received from the Fund.
Dividend Reinvestment Service. No reinvestment service is provided by
the Trust. Broker-dealers may make available the DTC book-entry Dividend
Reinvestment Service for use by Beneficial Owners of the Fund for reinvestment
of their dividend distributions. Beneficial Owners should contact their brokers
in order to determine the availability and costs of the service and the details
of participation therein. Brokers may require Beneficial Owners to adhere to
specific procedures and timetables. If this service is available and used,
dividend distributions of both income and realized gains will be automatically
reinvested in additional whole Shares of the Fund purchased in the secondary
market.
MISCELLANEOUS INFORMATION
Counsel. Chapman and Cutler LLP, 111 West Monroe Street, Chicago,
Illinois 60603, is counsel to the Trust.
Independent Registered Public Accounting Firm. Deloitte & Touche LLP,
111 South Wacker Drive, Chicago, Illinois 60606, serves as the Fund's
independent registered public accounting firm. The firm audits the Fund's
financial statements and performs other related audit services.
- 52 -
FIRST TRUST EXCHANGE-TRADED FUND
PART C - OTHER INFORMATION
ITEM 28. EXHIBITS
EXHIBIT NO. DESCRIPTION
(a) Declaration of Trust of the Registrant. (1)
(b) By-Laws of the Registrant. (2)
(c) (1) Establishment and Designation of Series dated June 10, 2005. (1)
(2) Amended and Restated Establishment and Designation of
Series dated January 23, 2006. (6)
(3) Amended and Restated Establishment and Designation of
Series dated March 13, 2006. (11)
(4) Amended and Restated Establishment and Designation of
Series dated July 26, 2006. (18)
(5) Amended and Restated Establishment and Designation of
Series dated January 17, 2007. (24)
(6) Amended and Restated Establishment and Designation of
Series dated January 20, 2009. (33)
(7) Amended and Restated Establishment and Designation of
Series dated May 11, 2009. (34)
(d) (1) Investment Management Agreement dated September 24, 2005,
as amended. (6)
(2) Excess Expense Agreement, as amended. (6)
(3) Amendment to Schedule A of the Investment Management
Agreement. (10)
(4) Amendment to Appendix I of the Excess Expense Agreement. (10)
(5) Amendment to Schedule A of the Investment Management
Agreement. (11)
(6) Amendment to Appendix I of the Excess Expense Agreement. (11)
(7) Amendment to Schedule A of the Investment Management
Agreement. (14)
(8) Amendment to Appendix I of the Excess Expense Agreement. (14)
(9) Amendment to Schedule A of the Investment Management
Agreement. (15)
(10) Amendment to Appendix I of the Excess Expense Agreement. (15)
(11) Amendment to Schedule A of the Investment Management
Agreement. (18)
(12) Expense Reimbursement, Fee Waiver and Recovery Agreement
dated July 26, 2006. (22)
(13) Amendment to Schedule A of the Investment Management
Agreement. (26)
(14) Amendment to Appendix I of the Excess Expense Agreement. (26)
(15) Amendment to Schedule A of the Investment Management
Agreement. (27)
(16) Amended and Restated Expense Reimbursement, Fee Waiver
and Recovery Agreement. (27)
(17) Amendment to Schedule A of the Investment Management
Agreement. (28)
(18) Amendment to Exhibit A of the Amended and Restated Expense
Reimbursement Agreement, Fee Waiver and Recovery Agreement. (28)
(19) Amendment to Exhibit A of the Amended and Restated Expense
Reimbursement Agreement, Fee Waiver and Recovery Agreement. (32)
(20) Letter Agreement regarding the Expense Cap Term, dated
April 8, 2009. (33)
(21) Amendment to Schedule A of the Investment Management
Agreement. (34)
(22) Letter Agreement regarding the Expense Cap Term, dated
June 16, 2009. (34)
(e) (1) Distribution Agreement dated September 24, 2005, as amended. (6)
(2) Amendment to Exhibit A of the Distribution Agreement. (10)
(3) Amendment to Exhibit A of the Distribution Agreement. (11)
(4) Amendment to Exhibit A of the Distribution Agreement. (14)
(5) Amendment to Exhibit A of the Distribution Agreement. (15)
(6) Amendment to Exhibit A of the Distribution Agreement. (18)
(7) Amendment to Exhibit A of the Distribution Agreement. (26)
(8) Amendment to Exhibit A of the Distribution Agreement. (27)
(9) Amendment to Exhibit A of the Distribution Agreement. (28)
(10) Amendment to Exhibit A of the Distribution Agreement. (34)
(f) Not Applicable.
(g) (1) Custody Agreement between the Registrant and The Bank of
New York. (2)
(2) Amendment to Schedule II of the Custody Agreement. (6)
(3) Amendment to Schedule II of the Custody Agreement. (10)
(4) Amendment to Schedule II of the Custody Agreement. (11)
(5) Amendment to Schedule II of the Custody Agreement. (14)
(6) Amendment to Schedule II of the Custody Agreement. (11)
(7) Amendment to Schedule II of the Custody Agreement. (15)
(8) Amendment to Schedule II of the Custody Agreement. (26)
(9) Amendment to Schedule II of the Custody Agreement. (34)
(h) (1) Transfer Agency Agreement between the Registrant and The
Bank of New York. (2)
(2) Administration and Accounting Agreement between the
Registrant and The Bank of New York. (2)
(3) Subscription Agreement. (2)
(4) Participant Agreement. (2)
(5) Amendment to Exhibit A of the Transfer Agency Agreement. (6)
(6) Amendment to Exhibit A of the Administration and
Accounting Agreement. (6)
(7) Amendment to Schedule I of the Participant Agreement. (6)
(8) Sublicense Agreement by and among the First Trust Morningstar(R)
Dividend Leaders(SM) Index Fund, Morningstar, Inc. and First
Trust Advisors L.P. dated March 14, 2006. (6)
(9) Amendment to Exhibit A of the Transfer Agency Agreement. (10)
(10) Amendment to Exhibit A of the Administration and
Accounting Agreement. (10)
(11) Amendment to Schedule I of the Participant Agreement. (10)
(12) Sublicense Agreement by and among the First Trust IPOX-100
Index Fund, IPOX Schuster LLC and First Trust Advisors L.P.
dated April 5, 2006. (10)
(13) Amendment to Exhibit A of the Transfer Agency Agreement. (11)
(14) Amendment to Exhibit A of the Administration and
Accounting Agreement. (11)
(15) Amendment to Schedule I of the Participant Agreement. (11)
(16) Sublicense Agreement by and between the First Trust
NASDAQ-100 Equal Weighted Index(SM) Fund and First Trust
Advisors L.P. dated April 24, 2006. (11)
(17) Sublicense Agreement by and between the First Trust
NASDAQ-100-Technology Sector Index(SM) Fund and First Trust
Advisors L.P. dated April 24, 2006. (11)
(18) Amendment to Exhibit A of the Transfer Agency Agreement. (14)
(19) Amendment to Exhibit A of the Administration and
Accounting Agreement. (14)
(20) Amendment to Schedule I of the Participant Agreement. (14)
(21) Sublicense Agreement by and among the First Trust Amex(R)
Biotechnology Index Fund, the American Stock Exchange LLC and
First Trust Advisors L.P. dated June 22, 2006. (14)
(22) Sublicense Agreement by and among First Trust Dow Jones
Internet Index(SM) Fund, Dow Jones & Company, Inc. and
First Trust Advisors L.P. dated June 22, 2006. (14)
(23) Amendment to Exhibit A of the Transfer Agency Agreement. (15)
(24) Amendment to Exhibit A of the Administration and
Accounting Agreement. (15)
(25) Form of Participant Agreement with Amendment to Schedule
I attached thereto. (15)
(26) Sublicense Agreement by and among First Trust DB Strategic
Value Index Fund, Deutsche Bank AG, London Branch and First
Trust Advisors L.P. dated July 11, 2006. (15)
(27) Amendment to Exhibit A of the Transfer Agency Agreement. (18)
(28) Amendment to Exhibit A of the Administration and
Accounting Agreement. (18)
(29) Amendment to Schedule I of the Participant Agreement. (18)
(30) Sublicense Agreement by and between First Trust Value
Line(R) Equity Allocation Index Fund and First Trust
Advisors L.P. dated October 4, 2006. (18)
(31) Sublicense Agreement by and between First Trust Value
Line(R) Dividend Index Fund and First Trust Advisors L.P.
dated October 4, 2006. (18)
(32) Amendment to Exhibit A of the Transfer Agency Agreement. (26)
(33) Amendment to Exhibit A of the Administration and
Accounting Agreement. (26)
(34) Amendment to Schedule I of the Participant Agreement. (26)
(35) Sublicense Agreement by and between First Trust
NASDAQ(R) Clean Edge(R) U.S. Liquid Series Index Fund and
First Trust Advisors L.P. dated February 7, 2007. (26)
(36) Sublicense Agreement by and between First Trust
NASDAQ-100 Ex-Technology Sector Index(SM) Fund and First
Trust Advisors L.P. dated February 7, 2007. (26)
(37) Board Administration Services Agreement among PFPC, Inc.,
First Trust Exchange-Traded Fund and First Trust Exchange-
Traded AlphaDEX(TM) Fund dated as of February 15, 2007. (28)
(38) Sublicense Agreement by and between First Trust Value Line(R)
100 Exchange-Traded Fund and First Trust Advisors L.P. dated
February 4, 2007. (27)
(39) Sublicense Agreement by and between First Trust S&P REIT Index
Fund and First Trust Advisors L.P. dated April 26, 2007. (28)
(40) Sublicense Agreement by and between First Trust ISE Chindia
Index Fund, International Securities Exchange, LLC and First
Trust Advisors L.P. dated April 25, 2007. (30)
(41) Sublicense Agreement by and between First Trust ISE-Revere
Natural Gas Index Fund, International Securities Exchange, LLC
and First Trust Advisors L.P. dated April 25, 2007. (30)
(42) Sublicense Agreement by and between First Trust ISE Water Index
Fund, International Securities Exchange, LLC and First Trust
Advisors L.P. dated April 25, 2007. (30)
(43) Amendment to Exhibit A of the Transfer Agency Agreement. (34)
(44) Amendment to Exhibit A of the Administration and
Accounting Agreement. (34)
(45) Amendment to Schedule I of the Participant Agreement. (34)
(46) Sublicense Agreement by and between First Trust NASDAQ(R)
ABA(R) Community Bank Index Fund, _______________ and First
Trust Advisors L.P. dated ___________. (35)
(i) (1) Opinion and Consent of Chapman and Cutler LLP dated
September 26, 2005. (6)
(2) Opinion and Consent of Bingham McCutchen LLP dated
September 26, 2005. (6)
(3) Opinion and Consent of Chapman and Cutler LLP dated March
15, 2006. (6)
(4) Opinion and Consent of Bingham McCutchen LLP dated March
15, 2006. (6)
(5) Opinion and Consent of Chapman and Cutler LLP dated April
13, 2006. (10)
(6) Opinion and Consent of Bingham McCutchen LLP dated April
13, 2006. (10)
(7) Opinion and Consent of Chapman and Cutler LLP dated April
25, 2006. (11)
(8) Opinion and Consent of Bingham McCutchen LLP dated April
25, 2006. (11)
(9) Opinion and Consent of Chapman and Cutler LLP dated April
28, 2006. (12)
(10) Opinion and Consent of Deloitte & Touche LLP dated April
27, 2006. (12)
(11) Opinion and Consent of Chapman and Cutler LLP dated June
23, 2006. (14)
(12) Opinion and Consent of Bingham McCutchen LLP dated June
23, 2006. (14)
(13) Opinion and Consent of Chapman and Cutler LLP dated July
11, 2006. (15)
(14) Opinion and Consent of Bingham McCutchen LLP dated July
11, 2006. (15)
(15) Opinion and Consent of Chapman and Cutler LLP dated
October 13, 2006. (18)
(16) Opinion and Consent of Bingham McCutchen LLP dated
October 13, 2006. (18)
(17) Opinion and Consent of Bingham McCutchen LLP dated
October 13, 2006. (18)
(18) Opinion and Consent of Chapman and Cutler LLP dated
December 5, 2006. (20)
(19) Opinion and Consent of Chapman and Cutler LLP dated
December 18, 2006. (21)
(20) Opinion and Consent of Chapman and Cutler LLP dated
February 14, 2007. (26)
(21) Opinion and Consent of Bingham McCutchen LLP dated
February 14, 2007. (26)
(22) Opinion and Consent of Chapman and Cutler LLP dated
March 21, 2007. (27)
(23) Opinion and Consent of Bingham McCutchen LLP dated March
21, 2007. (27)
(24) Opinion and Consent of Chapman and Cutler LLP dated
April 27, 2007. (28)
(25) Opinion and Consent of Bingham McCutchen LLP dated April
27, 2007. (28)
(26) Opinion and Consent of Chapman and Cutler LLP dated
April 30, 2007. (29)
(27) Opinion and Consent of Chapman and Cutler LLP dated May
11, 2007. (30)
(28) Opinion and Consent of Bingham McCutchen LLP dated May
11, 2007. (30)
(29) Opinion and Consent of Chapman and Cutler LLP dated June
18, 2007. (31)
(30) Opinion and Consent of Chapman and Cutler LLP dated
April 29, 2008. (32)
(31) Opinion and Consent of Chapman and Cutler LLP dated
April 30, 2009. (33)
(32) Opinion and Consent of Bingham McCutchen LLP dated June
25, 2009. (34)
(33) Opinion and Consent of Chapman and Cutler LLP dated June
25, 2009. (34)
(j) Not Applicable.
(k) Not Applicable.
(l) Not Applicable.
(m) (1) 12b-1 Service Plan. (2)
(2) Amendment to Exhibit A of the 12b-1 Service Plan. (6)
(3) Amendment to Exhibit A of the 12b-1 Service Plan. (10)
(4) Amendment to Exhibit A of the 12b-1 Service Plan. (11)
(5) Amendment to Exhibit A of the 12b-1 Service Plan. (14)
(6) Amendment to Exhibit A of the 12b-1 Service Plan. (15)
(7) Amendment to Exhibit A of the 12b-1 Service Plan. (18)
(8) Amendment to Exhibit A of the 12b-1 Service Plan. (26)
(9) Amendment to Exhibit A of the 12b-1 Service Plan. (27)
(10) Amendment to Exhibit A of the 12b-1 Service Plan. (28)
(11) Letter Agreement regarding 12b-1 fees, dated May 1, 2007. (31)
(12) Letter Agreement regarding 12b-1 fees, dated November
13, 2007. (32)
(13) Letter Agreement regarding 12b-1 fees, dated April 8, 2009. (33)
(14) Letter Agreement regarding 12b-1 fees, dated June 16, 2009. (34)
(n) Not Applicable.
(o) Not Applicable.
(p) (1) Code of Ethics of First Trust Advisors L.P. (2)
(2) Code of Ethics of First Trust Portfolios L.P. (2)
(3) Code of Ethics of First Trust Exchange-Traded Fund. (2)
(4) First Trust Advisors L.P. Investment Adviser Code of
Ethics, amended on May 31, 2006. (13)
(5) First Trust Portfolios L.P. Code of Ethics, amended on
May 31, 2006. (13)
(6) First Trust Funds Code of Ethics, amended on May 31, 2006. (13)
(7) First Trust Portfolios L.P. Code of Ethics, amended on
May 31, 2006. (13)
(8) First Trust Funds Code of Ethics, amended on January 1,
2009. (33)
(9) First Trust Advisors L.P., First Trust Portfolios L.P.
Code of Ethics, amended on January 1, 2009. (33)
(q) (1) Powers of Attorney for Messrs. Bowen, Erickson, Kadlec
and Nielson, among others, authorizing James A. Bowen, W.
Scott Jardine and Eric F. Fess to execute the Registration
Statement. (2)
(2) Powers of Attorney for Messrs. Bowen, Erickson, Kadlec
and Nielson, among others, authorizing James A. Bowen, W.
Scott Jardine and Eric F. Fess to execute the
Registration Statement. (3)
(3) Powers of Attorney for Messrs. Bowen, Erickson, Kadlec
and Nielson, among others, authorizing James A. Bowen, W.
Scott Jardine and Eric F. Fess to execute the
Registration Statement. (4)
(4) Powers of Attorney for Messrs. Bowen, Erickson, Kadlec
and Nielson, among others, authorizing James A. Bowen, W.
Scott Jardine and Eric F. Fess to execute the
Registration Statement. (5)
(5) Powers of Attorney for Messrs. Bowen, Erickson, Kadlec
and Nielson, authorizing James A. Bowen, W. Scott Jardine
and Eric F. Fess to execute the Registration Statement. (7)
(6) Powers of Attorney for Messrs. Bowen, Erickson, Kadlec,
Keith and Nielson, authorizing James A. Bowen, W. Scott
Jardine and Eric F. Fess to execute the Registration
Statement. (13)
(7) Powers of Attorney for Mr. Keith authorizing James A.
Bowen, W. Scott Jardine and Eric F. Fess to execute the
Registration Statement. (14)
(8) Power of Attorney for Mr. Keith authorizing James A.
Bowen, W. Scott Jardine and Eric F. Fess to execute the
Registration Statement. (15)
(9) Powers of Attorney for Messrs. Bowen, Erickson, Kadlec,
Keith and Nielson, authorizing James A. Bowen, W. Scott
Jardine and Eric F. Fess to execute the Registration
Statement. (17)
(10) Powers of Attorney for Messrs. Bowen, Erickson, Kadlec,
Keith and Nielson, authorizing James A. Bowen, W. Scott
Jardine and Eric F. Fess to execute the Registration
Statement. (19)
(11) Powers of Attorney for Messrs. Bowen, Erickson, Kadlec,
Keith and Nielson, authorizing James A. Bowen, W. Scott
Jardine and Eric F. Fess to execute the Registration
Statement. (22)
(12) Powers of Attorney for Messrs. Bowen, Erickson, Kadlec,
Keith and Nielson, authorizing James A. Bowen, W. Scott
Jardine and Eric F. Fess to execute the Registration
Statement. (23)
(13) Powers of Attorney for Messrs. Bowen, Erickson, Kadlec,
Keith and Nielson, authorizing James A. Bowen, W. Scott
Jardine and Eric F. Fess to execute the Registration
Statement. (24)
(14) Power of Attorney for Mr. Keith authorizing James A.
Bowen, W. Scott Jardine and Eric F. Fess to execute the
Registration Statement. (33)
(15) Powers of Attorney for Messrs. Bowen, Kadlec and Nielson
authorizing James A. Bowen, W. Scott Jardine and Eric F.
Fess to execute the Registration Statement. (34)
__________________
(1) Incorporated by reference to the Registrant's Registration Statement
on Form N-1A (File No. 333-125751) filed on June 13, 2005.
(2) Incorporated by reference to the Registrant's Registration Statement
on Form N-1A (File No. 333-125751) filed on September 26, 2005.
(3) Incorporated by reference to the Registrant's Registration Statement
on Form N-1A (File No. 333-125751) filed on December 23, 2005.
(4) Incorporated by reference to the Registrant's Registration Statement
on Form N-1A (File No. 333-125751) filed on January 27, 2006.
(5) Incorporated by reference to the Registrant's Registration Statement
on Form N-1A (File No. 333-125751) filed on February 3, 2006.
(6) Incorporated by reference to the Registrant's Registration Statement
on Form N-1A (File No. 333-125751) filed on March 15, 2006.
(7) Incorporated by reference to the Registrant's Registration Statement
on Form N-1A (File No. 333-125751) filed on March 24, 2006.
(8) Incorporated by reference to the Registrant's Registration Statement
on Form N-1A (File No. 333-125751) filed on April 7, 2006.
(9) Incorporated by reference to the Registrant's Registration Statement
on Form N-1A (File No. 333-125751) filed on April 17, 2006.
(10) Incorporated by reference to the Registrant's Registration Statement
on Form N-1A (File No. 333-125751) filed on April 13, 2006.
(11) Incorporated by reference to the Registrant's Registration Statement
on Form N-1A (File No. 333-125751) filed on April 25, 2006.
(12) Incorporated by reference to the Registrant's Registration Statement
on Form N-1A (File No. 333-125751) filed on April 28, 2006.
(13) Incorporated by reference to the Registrant's Registration Statement
on Form N-1A (File No. 333-125751) filed on June 21, 2006.
(14) Incorporated by reference to the Registrant's Registration Statement
on Form N-1A (File No. 333-125751) filed on June 23, 2006.
(15) Incorporated by reference to the Registrant's Registration Statement
on Form N-1A (File No. 333-125751) filed on July 11, 2006.
(16) Incorporated by reference to the Registrant's Registration Statement
on Form N-1A (File No. 333-125751) filed on August 4, 2006.
(17) Incorporated by reference to the Registrant's Registration Statement
on Form N-1A (File No. 333-125751) filed on August 10, 2006.
(18) Incorporated by reference to the Registrant's Registration Statement
on Form N-1A (File No. 333-125751) filed on October 13, 2006.
(19) Incorporated by reference to the Registrant's Registration Statement
on Form N-1A (File No. 333-125751) filed on October 31, 2006.
(20) Incorporated by reference to the Registrant's Registration Statement
on Form N-1A (File No. 333-125751) filed on December 5, 2006.
(21) Incorporated by reference to the Registrant's Registration Statement
on Form N-1A (File No. 333-125751) filed on December 18, 2006.
(22) Incorporated by reference to the Registrant's Registration Statement
on Form N-1A (File No. 333-125751) filed on February 6, 2007.
(23) Incorporated by reference to the Registrant's Registration Statement
on Form N-1A (File No. 333-125751) filed on February 7, 2007.
(24) Incorporated by reference to the Registrant's Registration Statement
on Form N-1A (File No. 333-125751) filed on February 9, 2007.
(25) Incorporated by reference to the Registrant's Registration Statement
on Form N-1A (File No. 333-125751) filed on February 9, 2007.
(26) Incorporated by reference to the Registrant's Registration Statement
on Form N-1A (File No. 333-125751) filed on February 14, 2007.
(27) Incorporated by reference to the Registrant's Registration Statement
on Form N-1A (File No. 333-125751) filed on March 21, 2007.
(28) Incorporated by reference to the Registrant's Registration Statement
on Form N-1A (File No. 333-125751) filed on April 27, 2007.
(29) Incorporated by reference to the Registrant's Registration Statement
on Form N-1A (File No. 333-125751) filed on April 30, 2007.
(30) Incorporated by reference to the Registrant's Registration Statement
on Form N-1A (File No. 333-125751) filed on May 11, 2007.
(31) Incorporated by reference to the Registrant's Registration Statement
on Form N-1A (File No. 333-125751) filed on June 18, 2007.
(32) Incorporated by reference to the Registrant's Registration Statement
on Form N-1A (File No. 333-125751) filed on April 29, 2008.
(33) Incorporated by reference to the Registrant's Registration Statement
on Form N-1A (File No. 333-125751) filed on May 1, 2009.
(34) Filed herewith.
(35) To be filed by amendment.
ITEM 29. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Not applicable.
ITEM 30. INDEMNIFICATION
Section 5.3 of the Registrant's Declaration of Trust provides as
follows:
Section 5.3. Mandatory Indemnification. (a) Subject to the exceptions
and limitations contained in paragraph (b) below:
(i) every person who is or has been a Trustee or officer of
the Trust (hereinafter referred to as a "Covered Person") shall be
indemnified by the Trust against all liability and against all expenses
reasonably incurred or paid by him or her in connection with any claim,
action, suit or proceeding in which that individual becomes involved as
a party or otherwise by virtue of being or having been a Trustee or
officer and against amounts paid or incurred by that individual in the
settlement thereof;
(ii) the words "claim," "action," "suit" or "proceeding" shall
apply to all claims, actions, suits or proceedings (civil, criminal,
administrative or other, including appeals), actual or threatened; and
the words "liability" and "expenses" shall include, without limitation,
attorneys' fees, costs, judgments, amounts paid in settlement or
compromise, fines, penalties and other liabilities.
(b) No indemnification shall be provided hereunder to a Covered Person:
(i) against any liability to the Trust or the Shareholders by
reason of a final adjudication by the court or other body before which
the proceeding was brought that the Covered Person engaged in willful
misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of that individual's office;
(ii) with respect to any matter as to which the Covered Person
shall have been finally adjudicated not to have acted in good faith in
the reasonable belief that that individual's action was in the best
interest of the Trust; or
(iii) in the event of a settlement involving a payment by a
Trustee or officer or other disposition not involving a final
adjudication as provided in paragraph (b)(i) or (b)(ii) above resulting
in a payment by a Covered Person, unless there has been either a
determination that such Covered Person did not engage in willful
misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of that individual's office by the court
or other body approving the settlement or other disposition or by a
reasonable determination, based upon a review of readily available
facts (as opposed to a full trial-type inquiry) that that individual
did not engage in such conduct:
(A) by vote of a majority of the Disinterested
Trustees (as defined below) acting on the matter (provided
that a majority of the Disinterested Trustees then in office
act on the matter); or
(B) by written opinion of (i) the then-current legal
counsel to the Trustees who are not Interested Persons of the
Trust or (ii) other legal counsel chosen by a majority of the
Disinterested Trustees (or if there are no Disinterested
Trustees with respect to the matter in question, by a majority
of the Trustees who are not Interested Persons of the Trust)
and determined by them in their reasonable judgment to be
independent.
(c) The rights of indemnification herein provided may be insured
against by policies maintained by the Trust, shall be severable, shall not
affect any other rights to which any Covered Person may now or hereafter be
entitled, shall continue as to a person who has ceased to be a Covered Person
and shall inure to the benefit of the heirs, executors and administrators of
such person. Nothing contained herein shall limit the Trust from entering into
other insurance arrangements or affect any rights to indemnification to which
Trust personnel, including Covered Persons, may be entitled by contract or
otherwise under law.
(d) Expenses of preparation and presentation of a defense to any claim,
action, suit, or proceeding of the character described in paragraph (a) of this
Section 5.3 shall be advanced by the Trust prior to final disposition thereof
upon receipt of an undertaking by or on behalf of the Covered Person to repay
such amount if it is ultimately determined that the Covered Person is not
entitled to indemnification under this Section 5.3, provided that either:
(i) such undertaking is secured by a surety bond or some
other appropriate security or the Trust shall be insured against losses
arising out of any such advances; or
(ii) a majority of the Disinterested Trustees acting on the
matter (provided that a majority of the Disinterested Trustees then in
office act on the matter) or legal counsel meeting the requirement in
Section 5.3(b)(iii)(B) above in a written opinion, shall determine,
based upon a review of readily available facts (as opposed to a full
trial-type inquiry), that there is reason to believe that the Covered
Person ultimately will be found entitled to indemnification.
As used in this Section 5.3 a "Disinterested Trustee" is one (i) who is
not an "Interested Person" of the Trust (including anyone who has been exempted
from being an "Interested Person" by any rule, regulation or order of the
Commission), and (ii) against whom none of such actions, suits or other
proceedings or another action, suit or other proceeding on the same or similar
grounds is then or had been pending.
(e) With respect to any such determination or opinion referred to in
clause (b)(iii) above or clause (d)(ii) above, a rebuttable presumption shall be
afforded that the Covered Person has not engaged in willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of such Covered Person's office in accordance with pronouncements of the
Commission.
ITEM 31. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISER
First Trust Advisors L.P. ("First Trust") serves as investment adviser
to the Registrant, serves as adviser or sub-adviser to 26 mutual funds, 38
exchange-traded funds and 14 closed-end funds and is the portfolio supervisor of
certain unit investment trusts. Its principal address is 120 East Liberty Drive,
Suite 400, Wheaton, Illinois 60187.
The principal business of certain of First Trust's principal executive
officers involves various activities in connection with the family of unit
investment trusts sponsored by First Trust Portfolios L.P. ("FTP"). FTP's
principal address is 120 East Liberty Drive, Suite 400, Wheaton, Illinois 60187.
Information as to other business, profession, vocation or employment
during the past two years of the officers and directors of First Trust is as
follows:
NAME AND POSITION WITH FIRST TRUST EMPLOYMENT DURING PAST TWO YEARS
James A. Bowen, President Managing Director/President, FTP; Chairman of the Board
of Directors, BondWave LLC and Stonebridge Advisors LLC
Ronald D. McAlister, Managing Director Managing Director, FTP
Mark R. Bradley, Chief Financial Officer and Managing Chief Financial Officer and Managing Director, FTP; Chief
Director Financial Officer, BondWave LLC and Stonebridge Advisors LLC
NAME AND POSITION WITH FIRST TRUST EMPLOYMENT DURING PAST TWO YEARS
Robert F. Carey, Chief Investment Officer and Senior Vice Senior Vice President, FTP
President
R. Scott Hall, Managing Director Managing Director, FTP
Andrew S. Roggensack, Managing Director Managing Director, FTP
Elizabeth H. Bull, Senior Vice President Senior Vice President, FTP
Kathleen Brown, Senior Vice President and Chief Compliance Senior Vice President and CCO, FTP since February 2008;
Officer CCO, William Blair & Company
Christopher L. Dixon, Senior Vice President Senior Vice President, FTP
Jane Doyle, Senior Vice President Senior Vice President, FTP
James M. Dykas, Senior Vice President Senior Vice President, FTP since April 2007; Vice
President, FTP from January 2005 to April 2007
Jon C. Erickson, Senior Vice President Senior Vice President, FTP
Ken Fincher, Senior Vice President Senior Vice President, FTP
Kenneth N. Hass, Senior Vice President Senior Vice President, FTP
Jason T. Henry, Senior Vice President Senior Vice President, FTP
Daniel J. Lindquist, Senior Vice President Senior Vice President, FTP
David G. McGarel, Senior Vice President Senior Vice President, FTP
Mitchell Mohr, Senior Vice President Senior Vice President, FTP
Robert M. Porcellino, Senior Vice President Senior Vice President, FTP
Alan M. Rooney, Senior Vice President Senior Vice President, FTP
Roger F. Testin, Senior Vice President Senior Vice President, FTP
Kyle Baker, Vice President Vice President, FTP
Christina Knierim, Vice President Vice President, FTP
James P. Koeneman, Vice President Vice President, FTP
Todd Larson, Vice President Vice President, FTP
Ronda L. Saeli, Vice President Vice President, FTP
NAME AND POSITION WITH FIRST TRUST EMPLOYMENT DURING PAST TWO YEARS
Stan Ueland, Vice President Vice President, FTP
Katherine Urevig, Vice President Vice President, FTP
Brad Bradley, Assistant Vice President Assistant Vice President, FTP
Katie D. Collins, Assistant Vice President Assistant Vice President, FTP
Chris Fallow, Assistant Vice President Assistant Vice President, FTP
Kristen Johanneson, Assistant Vice President Assistant Vice President, FTP
Coleen D. Lynch, Assistant Vice President Assistant Vice President, FTP since January 2008; Vice
President, Van Kampen Asset Management and Morgan Stanley
Investment Management
Lynae Peays, Assistant Vice President Assistant Vice President, FTP
Omar Sepulveda, Assistant Vice President Assistant Vice President, FTP
John H. Sherren, Assistant Vice President Assistant Vice President, FTP
Michael S. Stange, Assistant Vice President Assistant Vice President, FTP
W. Scott Jardine, General Counsel General Counsel, FTP; Secretary of BondWave LLC and
Stonebridge Advisors LLC
Kristi A. Maher, Deputy General Counsel Deputy General Counsel, FTP since May 2007; Assistant
General Counsel, FTP, March 2004 to May 2007
Erin Chapman, Assistant General Counsel Assistant General Counsel, FTP
Michelle Quintos, Assistant General Counsel Assistant General Counsel, FTP
John Vasko, Assistant General Counsel Assistant General Counsel, FTP since May 2007; Senior
Counsel, Michaels and May, October 2006 to May 2007;
Assistant General Counsel, ARAMARK Corporation
Pamela Wirt, Assistant General Counsel Assistant General Counsel, FTP
Brian Wesbury, Chief Economist Chief Economist, FTP
Rob Stein, Senior Economist Senior Economist, FTP
ITEM 32. PRINCIPAL UNDERWRITER
(a) FTP serves as principal underwriter of the shares of the
Registrant, First Trust Exchange-Traded Fund II, First Trust Exchange-Traded
AlphaDEX(R) Fund and the First Defined Portfolio Fund, LLC. FTP serves as
principal underwriter and depositor of the following investment companies
registered as unit investment trusts: the First Trust Combined Series, FT Series
(formerly known as the First Trust Special Situations Trust), the First Trust
Insured Corporate Trust, the First Trust of Insured Municipal Bonds and the
First Trust GNMA. The name of each director, officer and partner of FTP is
provided below.
(b) Positions and Offices with Underwriter.
NAME AND PRINCIPAL POSITIONS AND OFFICES POSITIONS AND
BUSINESS ADDRESS* WITH UNDERWRITER OFFICES WITH FUND
The Charger Corporation General Partner None
Grace Partners of DuPage L.P. Limited Partner None
James A. Bowen Managing Director/President President, Chairman of the Board,
Trustee, Chief Executive Officer
Mark R. Bradley Chief Financial Officer; Managing Treasurer, Chief Financial Officer
Director and Chief Accounting Officer
Frank L. Fichera Managing Director None
Russell J. Graham Managing Director None
R. Scott Hall Managing Director None
Ronald D. McAlister Managing Director None
Richard A. Olson Managing Director None
Andrew S. Roggensack Managing Director None
Dan Affeto Senior Vice President None
Bob Bartel Senior Vice President None
Elizabeth H. Bull Senior Vice President None
Robert F. Carey Senior Vice President None
Patricia L. Costello Senior Vice President None
Christopher L. Dixon Senior Vice President None
NAME AND PRINCIPAL POSITIONS AND OFFICES POSITIONS AND
BUSINESS ADDRESS* WITH UNDERWRITER OFFICES WITH FUND
Jane Doyle Senior Vice President None
James M. Dykas Senior Vice President Assistant Treasurer
Jon C. Erickson Senior Vice President None
Ken Fincher Senior Vice President None
Wendy Flaherty Senior Vice President None
Kenneth N. Hass Senior Vice President None
Jason T. Henry Senior Vice President None
Rich Jaeger Senior Vice President None
Christian D. Jeppesen Senior Vice President None
Christopher A. Lagioia Senior Vice President None
Daniel J. Lindquist Senior Vice President Vice President
David G. McGarel Senior Vice President None
Mark R. McHenney Senior Vice President None
Mitchell Mohr Senior Vice President None
Paul E. Nelson Senior Vice President None
Steve R. Nelson Senior Vice President None
Robert M. Porcellino Senior Vice President None
Steven R. Ritter Senior Vice President None
Alan Rooney Senior Vice President None
Francine Russell Senior Vice President None
Brad A. Shaffer Senior Vice President None
Brian Sheehan Senior Vice President None
Andrew C. Subramanian Senior Vice President None
Mark P. Sullivan Senior Vice President None
Roger F. Testin Senior Vice President Vice President
NAME AND PRINCIPAL POSITIONS AND OFFICES POSITIONS AND
BUSINESS ADDRESS* WITH UNDERWRITER OFFICES WITH FUND
Gregory E. Wearsch Senior Vice President None
Patrick Woelfel Senior Vice President None
Kathleen Brown Senior Vice President None
Jonathan Ackerhalt Vice President None
Dan Affetto Vice President None
Lance Allen Vice President None
Jeff Ambrose Vice President None
Kyle Baker Vice President None
Carlos Barbosa Vice President None
Andrew Barnum Vice President None
Michael Bean Vice President None
Rob Biddinger Vice President None
Dan Blong Vice President None
Bill Braasch Vice President None
Cory Bringle Vice President None
Mike Britt Vice President None
Alex Brozyna Vice President None
Nathan S. Cassel Vice President None
Joshua Crosley Vice President None
Michael Dawson Vice President None
Michael Darr Vice President None
Albert K. Davis Vice President None
Daren J. Davis Vice President None
Michael DeBella Vice President None
Sean Degnan Vice President None
NAME AND PRINCIPAL POSITIONS AND OFFICES POSITIONS AND
BUSINESS ADDRESS* WITH UNDERWRITER OFFICES WITH FUND
Joel D. Donley Vice President None
Thomas Egan Vice President None
Brett Egner Vice President None
Stacy Eppen Vice President None
Ben Ferwerdo Vice President None
Edward Foley Vice President None
Don Fuller Vice President None
John Gillis Vice President None
Joann Godbout Vice President None
Matt D. Graham Vice President None
William M. Hannold Vice President None
Mary Jane Hansen Vice President None
Gaby Harman Vice President None
Vance Hicks Vice President None
Nate Ibarra Vice President None
Ryan Issakainen Vice President None
Rich Jacquemart Vice President None
Rick Johnson Vice President None
Greg Keefer Vice President None
Tom Knickerbocker Vice President None
Christina Knierim Vice President None
James P. Koeneman Vice President None
Thomas E. Kotcher Vice President None
Todd Larson Vice President None
Daniel Lavin Vice President None
NAME AND PRINCIPAL POSITIONS AND OFFICES POSITIONS AND
BUSINESS ADDRESS* WITH UNDERWRITER OFFICES WITH FUND
Luke Lavin Vice President None
Michael P. Leyden Vice President None
Keith L. Litavsky Vice President None
Eric Maisel Vice President None
Grant Markgraf Vice President None
Bob Markovich Vice President None
Stephanie L. Martin Vice President None
Marty McFadden Vice President None
Nate Memmott Vice President None
Sean Moriarty Vice President None
Tom Myhre Vice President None
John O'Sullivan Vice President None
David Pagano Vice President None
Scott Patton Vice President None
Brian K. Penney Vice President None
Blair R. Peterson Vice President None
Jason Peterson Vice President None
Craig Pierce Vice President None
Marisa Prestigiacomo Vice President None
Craig Prichard Vice President None
David A. Rieger Vice President None
James Rowlette Vice President None
Ronda L. Saeli Vice President None
Rikka Salrin Vice President None
Jeffrey M. Samuel Vice President None
NAME AND PRINCIPAL POSITIONS AND OFFICES POSITIONS AND
BUSINESS ADDRESS* WITH UNDERWRITER OFFICES WITH FUND
Peter H. Sandford Vice President None
Debra K. Scherbring Vice President None
Timothy Schival Vice President None
Nim Short Vice President None
Edward J. Sistowicz Vice President None
Cal Smith Vice President None
Eric Stoiber Vice President None
Terry Swagerty Vice President None
Brian Taylor Vice President None
Kerry Tazakine Vice President None
Timothy Trudo Vice President None
Stanley Ueland Vice President Assistant Vice President
Bryan Ulmer Vice President None
Katherine Urevig Vice President None
Barbara E. Vinson Vice President None
Dan Waldron Vice President None
Jeff Westergaard Vice President None
Lewin M. Williams Vice President None
Jeffrey S. Barnum Assistant Vice President None
Toby A. Bohl Assistant Vice President None
Brad Bradley Assistant Vice President None
Steve Claiborne Assistant Vice President None
Katie D. Collins Assistant Vice President None
Ann Marie Giudice Assistant Vice President None
Debbie Del Giudice Assistant Vice President None
NAME AND PRINCIPAL POSITIONS AND OFFICES POSITIONS AND
BUSINESS ADDRESS* WITH UNDERWRITER OFFICES WITH FUND
Chris Fallow Assistant Vice President None
Ken Harrison Assistant Vice President None
Anita K. Henderson Assistant Vice President None
James V. Huber Assistant Vice President None
Kristen Johanneson Assistant Vice President None
Daniel C. Keller Assistant Vice President None
Coleen D. Lynch Assistant Vice President Assistant Vice President
Robert J. Madeja Assistant Vice President None
David M. McCammond-Watts Assistant Vice President None
Michelle Parker Assistant Vice President None
Lynae Peays Assistant Vice President None
Steve Schwarting Assistant Vice President None
Omar Sepulveda Assistant Vice President None
John H. Sherren Assistant Vice President None
Michael S. Stange Assistant Vice President None
Lee Sussman Assistant Vice President None
Christopher J. Thill Assistant Vice President None
Dave Tweeten Assistant Vice President None
Thomas G. Wisnowski Assistant Vice President None
W. Scott Jardine General Counsel Chief Compliance Officer
and Secretary
Kristi A. Maher Deputy General Counsel Assistant Secretary
Erin Chapman Assistant General Counsel Assistant Secretary
Michelle Quintos Assistant General Counsel None
John Vasko Assistant General Counsel None
Pamela Wirt Assistant General Counsel None
* All addresses are
120 East Liberty Drive,
Wheaton, IL 60187
unless otherwise noted.
(c) Not Applicable.
ITEM 33. LOCATION OF ACCOUNTS AND RECORDS
First Trust Advisors L.P., 120 East Liberty Drive, Suite 400, Wheaton,
Illinois 60187, maintains the Registrant's organizational documents, minutes of
meetings, contracts of the Registrant and all advisory material of the
investment adviser.
The Bank of New York Mellon ("BONY"), 101 Barclay Street, New York, New
York 10286, maintains all general and subsidiary ledgers, journals, trial
balances, records of all portfolio purchases and sales, and all other
requirement records not maintained by First Trust.
BONY also maintains all the required records in its capacity as
transfer, accounting, dividend payment and interest holder service agent for the
Registrant.
ITEM 34. MANAGEMENT SERVICES
Not Applicable.
ITEM 35. UNDERTAKINGS
Not Applicable.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Registration
Statement on Form N-1A to be signed on its behalf by the undersigned, thereunto
duly authorized in the City of Wheaton, in the State of Illinois, on the 25th
day of June, 2009.
FIRST TRUST EXCHANGE-TRADED FUND
By: /s/ James A. Bowen
---------------------------------
James A. Bowen, President
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed below by
the following persons in the capacities and on the date indicated:
SIGNATURE DATE
Treasurer, Controller and Chief June 25, 2009
/s/ Mark R. Bradley Financial and Accounting Officer
----------------------------------------
Mark R. Bradley
President, Chief Executive Officer, June 25, 2009
/s/ James A. Bowen Chairman and Trustee
----------------------------------------
James A. Bowen
)
Trustee )
---------------------------------------- )
Richard E. Erickson )
)
)
*/s/ Thomas R. Kadlec Trustee ) BY: /s/ James A. Bowen
---------------------------------------- ) ---------------------
Thomas R. Kadlec ) James A. Bowen
) Attorney-In-Fact
) June 25, 2009
*/s/ Robert F. Keith Trustee )
---------------------------------------- )
Robert F. Keith )
)
)
*/s/ Niel B. Nielson Trustee )
---------------------------------------- )
Niel B. Nielson )
* Original powers of attorney authorizing James A. Bowen, W. Scott Jardine
and Eric F. Fess, to execute Registrant's Registration Statement, and
Amendments thereto, for each of the trustees of the Registrant on whose
behalf this Post-Effective Amendment is filed, were previously executed and
are filed herewith or are incorporated by reference herein.
INDEX TO EXHIBITS
(c)(7) Amended and Restated Establishment and Designation of Series dated
May 11, 2009.
(d)(21) Amendment to Schedule A of the Investment Management Agreement.
(d)(22) Letter Agreement regarding the Expense Cap Term.
(e)(10) Amendment to Exhibit A of the Distribution Agreement.
(g)(9) Amendment to Schedule II of the Custody Agreement.
(h)(43) Amendment to Exhibit A of the Transfer Agency Agreement.
(h)(44) Amendment to Exhibit A of the Administration and Accounting Agreement.
(h)(45) Amendment to Schedule I of the Participant Agreement.
(i)(32) Opinion and Consent of Bingham McCutchen LLP.
(i)(33) Opinion and Consent of Chapman and Cutler LLP.
(m)(14) Letter Agreement regarding 12b-1 fees.
(q)(15) Powers of Attorney for Messrs. Bowen, Kadlec and Nielson authorizing
James A. Bowen, W. Scott Jardine and Eric F. Fess to execute the
Registration Statement.
EX-99.C7
2
exhibit_c7.txt
AMENDED & RESTATED ESTABLISHMENT AND DESIGNATION OF SERIES
FIRST TRUST EXCHANGE-TRADED FUND
AMENDED AND RESTATED
ESTABLISHMENT AND DESIGNATION OF SERIES OF SHARES OF BENEFICIAL INTEREST
(EFFECTIVE AS OF MAY 11, 2009)
WHEREAS, pursuant to Section 6.2 of Article VI of the Declaration of
Trust dated as of August 8, 2003 (the "Declaration"), of First Trust
Exchange-Traded Fund, a Massachusetts business trust (the "Trust"), the Initial
Trustee of the Trust, on the 10th day of June, 2005, established and designated
one series of Shares (as defined in the Declaration), First Trust Dow Jones
Select MicroCap Index(SM) Fund, to have the special and relative rights
described in such Establishment and Designation of Series;
WHEREAS, pursuant to Section 6.2 of Article VI of the Declaration, the
Trustees of the Trust, on the 12th day of December, 2005, by a majority vote,
designated two additional series to be named: First Trust Value Line(R)
Arithmetic Index Fund and First Trust Morningstar(R) Dividend Leaders(SM) Index
Fund, and on January 23, 2006, by a majority vote, designated three additional
series to be named: First Trust NASDAQ-100 Equal Weighted Index(SM) Fund, First
Trust NASDAQ-100-Technology Sector Index(SM) Fund and First Trust IPOX-100 Index
Fund, and the Trustees amended and restated the Establishment and Designation of
Series of Shares of Beneficial Interest (the "Establishment and Designation of
Series") in order to reflect the designation of such additional series as of
January 23, 2006;
WHEREAS, pursuant to Section 6.2 of Article VI of the Declaration, the
Trustees of the Trust, on the 13th day of March, 2006, by a majority vote,
designated four additional series to be named: First Trust Ibbotson Core U.S.
Equity Allocation Index Fund, First Trust AMEX(R) Biotechnology Index Fund,
First Trust DB Strategic Value Index Fund and First Trust Dow Jones Internet
Index(SM) Fund, and the Trustees amended and restated the Establishment and
Designation of Series in order to reflect the designation of such additional
series as of March 13, 2006;
WHEREAS, pursuant to Section 6.2 of Article VI of the Declaration, the
Trustees of the Trust, on the 12th day of June, 2006, by a majority vote,
designated one additional series to be named: First Trust NASDAQ-100
Ex-Technology Sector Index(SM) Fund, and the Trustees amended and restated the
Establishment and Designation of Series in order to reflect the designation of
such additional series as of June 12, 2006;
WHEREAS, pursuant to Section 6.2 of Article VI of the Declaration, the
Trustees of the Trust, on the 26th day of July, 2006, by a majority vote,
designated three additional series to be named: First Trust NASDAQ(R) Clean
Edge(R) U.S. Liquid Series Index Fund, First Trust Value Line(R) Equity
Allocation Index Fund and First Trust Value Line(R) Dividend Index Fund, and the
Trustees amended and restated the Establishment and Designation of Series in
order to reflect the designation of such additional series as of July 26, 2006;
WHEREAS, pursuant to Section 6.2 of Article VI of the Declaration, the
Trustees of the Trust, on the 11th day of December, 2006, by a majority vote,
designated one additional series to be named: First Trust S&P REIT Index Fund,
and the Trustees amended and restated the Establishment and Designation of
Series in order to reflect the designation of such additional series as of
December 11, 2006;
WHEREAS, pursuant to Section 6.2 of Article VI of the Declaration, the
Trustees of the Trust, on the 17th day of January, 2007, by a majority vote,
designated four additional series to be named: First Trust ISE-Revere Natural
Gas Index Fund, First Trust ISE Water Index Fund, First Trust ISE Chindia Index
Fund and First Trust Value Line(R) 100 Exchange-Traded Fund, and the Trustees
amended and restated the Establishment and Designation of Series in order to
reflect the designation of such additional series as of January 17, 2007;
WHEREAS, pursuant to Section 6.2 of Article VI of the Declaration, the
Trustees of the Trust, on the 15th day of December, 2008, by a majority vote,
amended and restated the Establishment and Designation of Series in order to
rename the series First Trust IPOX-100 Index Fund as First Trust US IPO Index
Fund effective March 2, 2009;
WHEREAS, pursuant to Section 6.2 of Article VI of the Declaration, the
Trustees of the Trust, on the 20th day of January, 2009, by a majority vote,
amended and restated the Establishment and Designation of Series in order to
rename the series First Trust NASDAQ(R) Clean Edge(R) U.S. Liquid Series Index
Fund as First Trust NASDAQ(R) Clean Edge(R) Green Energy Index Fund; and
WHEREAS, pursuant to Section 6.2 of Article VI of the Declaration, the
Trustees of the Trust, now desire to amend and restate the Establishment and
Designation of Series in order to designate one additional series to be named
First Trust NASDAQ(R) ABA(R) Community Bank Index Fund.
NOW THEREFORE, by vote of at least a majority of the Trustees of the
Trust on May 11, 2009, the Establishment and Designation of Series is amended
and restated in its entirety as follows:
1. The Trust consists of the following 20 series of Shares (each, a
"Fund" and collectively, the "Funds") that have been established and designated
by the Board of Trustees:
First Trust Dow Jones Select MicroCap Index(SM) Fund
First Trust Value Line(R) Arithmetic Index Fund
First Trust Morningstar(R) Dividend Leaders(SM) Index Fund
First Trust NASDAQ-100 Equal Weighted Index(SM) Fund
First Trust NASDAQ-100-Technology Sector Index(SM) Fund
First Trust US IPO Index Fund
First Trust Ibbotson Core U.S. Equity Allocation Index Fund
First Trust AMEX(R) Biotechnology Index Fund
First Trust DB Strategic Value Index Fund
First Trust Dow Jones Internet Index(SM) Fund
First Trust NASDAQ-100 Ex-Technology Sector Index(SM) Fund
First Trust NASDAQ(R) Clean Edge(R) Green Energy Index Fund
First Trust Value Line(R) Equity Allocation Index Fund
First Trust Value Line(R) Dividend Index Fund
-2-
First Trust S&P REIT Index Fund
First Trust ISE-Revere Natural Gas Index Fund
First Trust ISE Water Index Fund
First Trust ISE Chindia Index Fund
First Trust Value Line(R) 100 Exchange-Traded Fund
First Trust NASDAQ(R) ABA(R) Community Bank Index Fund
2. Each Fund shall be authorized to hold cash, invest in securities,
instruments and other property and use investment techniques as from time to
time described in the Trust's then currently effective registration statement
under the Securities Act of 1933 to the extent pertaining to the offering of
Shares of the respective Fund (the "Registration Statement"). Each Share of each
Fund shall be entitled to one vote (or fraction thereof in respect of a
fractional share) on matters on which shareholders of that Fund may vote in
accordance with the Declaration, shall represent a pro rata beneficial interest
in the assets allocated or belonging to the respective Fund, and shall be
entitled to receive its pro rata share of the net assets of such Fund upon
liquidation of the applicable Fund, all as provided in the Declaration. The
Shares of each Fund shall be offered to the public in aggregations of Shares
("Creation Units") in amounts as described in the Trust's Registration Statement
pertaining to the respective Fund and such Creation Units shall be redeemable.
3. Shareholders of each Fund shall vote either separately as a series
on any matter to the extent required by, and any matter shall be deemed to have
been effectively acted upon with respect to such Fund as provided in, Rule
18f-2, as from time to time in effect, under the Investment Company Act of 1940,
as amended (the "1940 Act"), or any successor rules, and by the Declaration.
4. Unless otherwise provided in the Declaration or a resolution of the
Trustees, the assets and liabilities of the Trust shall be allocated among each
Fund and any other series of Shares that may be established from time to time as
set forth below:
(a) All consideration received by the Trust for the issue or sale of
Shares of a particular series, together with all assets in which such
consideration is invested or reinvested, all income, earnings, profits and
proceeds thereof, including any proceeds derived from the sale, exchange or
liquidation of such assets, and any funds or payments derived from any
reinvestment of such proceeds in whatever form the sale may be, shall
irrevocably belong to that series for all purposes, subject only to the rights
of creditors, and shall be so recorded upon the books of the Trust. Such
consideration, assets, income, earnings, profits and proceeds, including any
proceeds derived from the sale, exchange or liquidation of such assets and any
funds or payments derived from any reinvestment of such proceeds, in whatever
form the same may be, together with any General Items (as hereinafter defined)
-3-
allocated to that series as provided in the following sentence, are herein
referred to as "assets belonging to" that series. In the event that there are
any assets, income, earnings, profits or proceeds thereof, funds or payments
which are not readily identifiable as belonging to any particular series
(collectively "General Items"), the Trustees shall allocate such General Items
to and among any one or more of the series created from time to time in such
manner and on such basis as they, in their sole discretion, deem fair and
equitable; and any General Items allocated to a particular series shall belong
to that series. Each such allocation by the Trustees shall be conclusive and
binding upon the Shareholders of all series for all purposes.
(b) The assets belonging to a particular series shall be charged with
the liabilities of the Trust in respect of that series and with all expenses,
costs, charges and reserves attributable to that series and shall be so recorded
upon the books of the Trust. Liabilities, expenses, costs, charges and reserves
charged to a particular series, together with any General Liabilities (as
hereinafter defined) allocated to that series as provided in the following
sentence, are herein referred to as "liabilities belonging to" that series. In
the event there are any general liabilities, expenses, costs, charges or
reserves of the Trust which are not readily identifiable as belonging to any
particular series (collectively "General Liabilities"), the Trustees shall
allocate and charge such General Liabilities to and among any one or more of the
series created from time to time in such manner and on such basis as the
Trustees in their sole discretion deem fair and equitable; and any General
Liabilities so allocated and charges to a particular series shall belong to that
series. Each such allocation by the Trustees shall be conclusive and binding
upon the Shareholders of all series for all purposes.
5. The designation of each Fund hereby shall not impair the power of
the Trustees from time to time to designate additional series of Shares of the
Trust.
6. Subject to the applicable provisions of the 1940 Act and the
Declaration, the Trustees shall have the right at any time and from time to time
to reallocate assets and expenses or to change the designation of each Fund now
or hereafter created, or to otherwise change the special relative rights of each
Fund designated hereby without any action or consent of the shareholders.
7. Each Fund may be terminated by the Trustees at any time by written
notice to shareholders of the respective Fund.
-4-
IN WITNESS WHEREOF, the undersigned, being the Secretary of the Trust,
has executed this instrument as of this 11th day of May, 2009.
/s/ W. Scott Jardine
-------------------------------------
W. Scott Jardine, Secretary
STATE OF ILLINOIS )
) SS.
COUNTY OF DUPAGE )
Then personally appeared the above-named person(s) who are known to me to
be the Secretary of the Trust whose name and signature are affixed to the
foregoing Amended and Restated Establishment and Designation of Series of Shares
of Beneficial Interest and who acknowledged the same to be his free act and
deed, before me this 11th day of May, 2009.
/s/ Sandra Kim Streit
"OFFICIAL SEAL" ---------------------------------------
Notary Public
My Commission Expires: 05/24/2011
EX-99.D21
3
exhibit_d21.txt
AMENDMENT TO SCHEDULE A - INVESTMENT MANAGEMENT AGREEMENT
Schedule A
Funds
------------------------------------------------------------ -------------------------------- ---------------------------
Name of Fund Annual Rate of Average Daily Effective Date
Net Assets
------------------------------------------------------------ -------------------------------- ---------------------------
First Trust Dow Jones Select MicroCap Index(SM) Fund 0.50% September 24, 2005
------------------------------------------------------------ -------------------------------- ---------------------------
First Trust Value Line(R) Arithmetic Index Fund [0.50%]
------------------------------------------------------------ -------------------------------- ---------------------------
First Trust Morningstar(R) Dividend Leaders(SM) Index Fund 0.30% March 15, 2006
------------------------------------------------------------ -------------------------------- ---------------------------
First Trust NASDAQ-100 Equal Weighted Index(SM) Fund 0.40% April 25, 2006
------------------------------------------------------------ -------------------------------- ---------------------------
First Trust NASDAQ-100-Technology Sector Index(SM) Fund 0.40% April 25, 2006
------------------------------------------------------------ -------------------------------- ---------------------------
First Trust US IPO Index Fund 0.40% April 13, 2006
------------------------------------------------------------ -------------------------------- ---------------------------
First Trust Ibbotson Core U.S. Equity Allocation Index Fund [0.50%]
------------------------------------------------------------ -------------------------------- ---------------------------
First Trust AMEX(R) Biotechnology Index Fund 0.40% June 23, 2006
------------------------------------------------------------ -------------------------------- ---------------------------
First Trust DB Strategic Value Index Fund 0.50% July 11, 2006
------------------------------------------------------------ -------------------------------- ---------------------------
First Trust Dow Jones Internet Index(SM) Fund 0.40% June 23, 2006
------------------------------------------------------------ -------------------------------- ---------------------------
First Trust NASDAQ-100 Ex-Technology Sector Index(SM) Fund 0.40% February 14, 2007
------------------------------------------------------------ -------------------------------- ---------------------------
First Trust NASDAQ(R) Clean Edge(R) Green Energy Index Fund 0.40% February 14, 2007
------------------------------------------------------------ -------------------------------- ---------------------------
First Trust Value Line(R) Equity Allocation Index Fund 0.50% October 13, 2006
------------------------------------------------------------ -------------------------------- ---------------------------
First Trust Value Line(R) Dividend Index Fund 0.50% October 13, 2006
------------------------------------------------------------ -------------------------------- ---------------------------
First Trust S&P REIT Index Fund 0.30% May 4, 2007
------------------------------------------------------------ -------------------------------- ---------------------------
First Trust ISE-Revere Natural Gas Index Fund 0.40% May 7, 2007
------------------------------------------------------------ -------------------------------- ---------------------------
First Trust ISE Water Index Fund 0.40% May 7, 2007
------------------------------------------------------------ -------------------------------- ---------------------------
First Trust ISE Chindia Index Fund 0.40% May 7, 2007
------------------------------------------------------------ -------------------------------- ---------------------------
First Trust Value Line(R) 100 Exchange-Traded Fund 0.50% March 21, 2007
------------------------------------------------------------ -------------------------------- ---------------------------
First Trust NASDAQ(R) ABA(R) Community Bank Index Fund 0.40% June 25, 2009
------------------------------------------------------------ -------------------------------- ---------------------------
EX-99.D22
4
exhibit_d22.txt
LETTER AGREEMENT REGARDING EXPENSE CAP TERM
FIRST TRUST ADVISORS L.P.
120 EAST LIBERTY DRIVE, SUITE 400
WHEATON, ILLINOIS 60187
June 16, 2009
First Trust Exchange-Traded Fund
120 East Liberty Drive
Wheaton, Illinois 60187
Ladies and Gentlemen:
This letter amends and restates that certain letter dated May 15, 2009.
It is hereby acknowledged that First Trust Advisors L.P. ("First Trust") serves
as the investment advisor of each series of First Trust Exchange-Traded Fund
("Trust"). The Trust is an open-end management investment company registered
under the Investment Company Act of 1940, as amended (the "1940 Act"), comprised
of various exchange-traded funds (each, a "Fund," and, collectively, the
"Funds") set forth on Exhibit A attached hereto, which may be amended from time
to time.
It is further acknowledged that First Trust and the Trust, on behalf of
the Funds, have entered into the Expense Reimbursement, Fee Waiver and Recovery
Agreement ("Agreement") whereby First Trust has agreed to waive management fees
payable to it by a Fund and reimburse a Fund for other expenses borne by such
Fund in order to prevent a Fund's Expense Ratio from exceeding a particular
Expense Cap for the Expense Cap Term, provided, however, that First Trust has
the right to seek restitution of any fees waived and expenses reimbursed within
three years to the extent that such restitution would not cause a Fund to exceed
the current Expense Cap. Capitalized terms used herein but not otherwise defined
shall have the meanings assigned to them in the Agreement.
The purpose of this letter agreement is to agree and acknowledge that
the Expense Cap Term shall be extended to the date set forth on Exhibit A
attached hereto for each Fund, subject to approval by the Trust's Board of
Trustees.
Very Truly Yours,
FIRST TRUST ADVISORS L.P.
/s/ James A. Bowen
-------------------------
James A. Bowen
President
Agreed and Acknowledged:
FIRST TRUST EXCHANGE-TRADED FUND
/s/ James A. Bowen
-------------------------
James A. Bowen
President
EXHIBIT A
-------------------------------------------------------------- ----------------
FUNDS DATE
-------------------------------------------------------------- ----------------
FIRST TRUST DOW JONES SELECT MICROCAP INDEX(SM) FUND MAY 15, 2010
-------------------------------------------------------------- ----------------
FIRST TRUST MORNINGSTAR(R) DIVIDEND LEADERS(SM) INDEX FUND MAY 15, 2010
-------------------------------------------------------------- ----------------
FIRST TRUST NASDAQ-100 EQUAL WEIGHTED INDEX(SM) FUND MAY 15, 2010
-------------------------------------------------------------- ----------------
FIRST TRUST NASDAQ-100-TECHNOLOGY SECTOR INDEX(SM) FUND MAY 15, 2010
-------------------------------------------------------------- ----------------
FIRST TRUST US IPO INDEX FUND MAY 15, 2010
-------------------------------------------------------------- ----------------
FIRST TRUST AMEX(R) BIOTECHNOLOGY INDEX FUND MAY 15, 2010
-------------------------------------------------------------- ----------------
FIRST TRUST DB STRATEGIC VALUE INDEX FUND MAY 15, 2010
-------------------------------------------------------------- ----------------
FIRST TRUST DOW JONES INTERNET INDEX(SM) FUND MAY 15, 2010
-------------------------------------------------------------- ----------------
FIRST TRUST NASDAQ-100 EX-TECHNOLOGY SECTOR INDEX(SM) FUND MAY 15, 2010
-------------------------------------------------------------- ----------------
FIRST TRUST NASDAQ(R) CLEAN EDGE(R) GREEN ENERGY INDEX FUND MAY 15, 2010
-------------------------------------------------------------- ----------------
FIRST TRUST VALUE LINE(R) EQUITY ALLOCATION INDEX FUND MAY 15, 2010
-------------------------------------------------------------- ----------------
FIRST TRUST VALUE LINE(R) DIVIDEND INDEX FUND MAY 15, 2010
-------------------------------------------------------------- ----------------
FIRST TRUST S&P REIT INDEX FUND MAY 15, 2010
-------------------------------------------------------------- ----------------
FIRST TRUST ISE-REVERE NATURAL GAS INDEX FUND MAY 15, 2010
-------------------------------------------------------------- ----------------
FIRST TRUST ISE WATER INDEX FUND MAY 15, 2010
-------------------------------------------------------------- ----------------
FIRST TRUST ISE CHINDIA INDEX FUND MAY 15, 2010
-------------------------------------------------------------- ----------------
FIRST TRUST VALUE LINE(R) 100 EXCHANGE-TRADED FUND MAY 15, 2010
-------------------------------------------------------------- ----------------
FIRST TRUST NASDAQ(R) ABA(R) COMMUNITY BANK INDEX FUND JUNE 30, 2011
-------------------------------------------------------------- ----------------
EX-99.E10
5
exhibit_e10.txt
AMENDMENT TO EXHIBIT A - DISTRIBUTION AGREEMENT
Exhibit A
Index Series of the Fund
------------------------------------------------------------ -------------------
Name of Fund Effective Date
------------------------------------------------------------ -------------------
First Trust Dow Jones Select MicroCap Index(SM) Fund September 24, 2005
------------------------------------------------------------ -------------------
First Trust Value Line(R) Arithmetic Index Fund
------------------------------------------------------------ -------------------
First Trust Morningstar(R) Dividend Leaders(SM) Index Fund March 15, 2006
------------------------------------------------------------ -------------------
First Trust NASDAQ-100 Equal Weighted Index(SM) Fund April 25, 2006
------------------------------------------------------------ -------------------
First Trust NASDAQ-100-Technology Sector Index(SM) Fund April 25, 2006
------------------------------------------------------------ -------------------
First Trust US IPO Index Fund April 13, 2006
------------------------------------------------------------ -------------------
First Trust Ibbotson Core U.S. Equity Allocation Index Fund
------------------------------------------------------------ -------------------
First Trust AMEX(R) Biotechnology Index Fund June 23, 2006
------------------------------------------------------------ -------------------
First Trust DB Strategic Value Index Fund July 11, 2006
------------------------------------------------------------ -------------------
First Trust Dow Jones Internet Index(SM) Fund June 23, 2006
------------------------------------------------------------ -------------------
First Trust NASDAQ-100 Ex-Technology Sector Index(SM) Fund February 14, 2007
------------------------------------------------------------ -------------------
First Trust NASDAQ(R) Clean Edge(R) Green Energy Index Fund February 14, 2007
------------------------------------------------------------ -------------------
First Trust Value Line(R) Equity Allocation Index Fund October 13, 2006
------------------------------------------------------------ -------------------
First Trust Value Line(R) Dividend Index Fund October 13, 2006
------------------------------------------------------------ -------------------
First Trust S&P REIT Index Fund May 4, 2007
------------------------------------------------------------ -------------------
First Trust ISE-Revere Natural Gas Index Fund May 7, 2007
------------------------------------------------------------ -------------------
First Trust ISE Water Index Fund May 7, 2007
------------------------------------------------------------ -------------------
First Trust ISE Chindia Index Fund May 7, 2007
------------------------------------------------------------ -------------------
First Trust Value Line(R) 100 Exchange-Traded Fund March 21, 2007
------------------------------------------------------------ -------------------
First Trust NASDAQ(R) ABA(R) Community Bank Index Fund June 25, 2009
------------------------------------------------------------ -------------------
EX-99.G9
6
exhibit_g9.txt
AMENDMENT TO SCHEDULE II - CUSTODY AGREEMENT
SCHEDULE II
First Trust Dow Jones Select MicroCap Index(SM) Fund
First Trust Value Line(R) Line Arithmetic Index Fund
First Trust Morningstar(R) Dividend Leaders(SM) Index Fund
First Trust NASDAQ-100 Equal Weighted Index(SM) Fund
First Trust NASDAQ-100-Technology Sector Index(SM) Fund
First Trust Ibbotson Core U.S. Equity Allocation Index Fund
First Trust US IPO Index Fund
First Trust AMEX(R) Biotechnology Index Fund
First Trust DB Strategic Value Index Fund
First Trust Dow Jones Internet Index(SM) Fund
First Trust NASDAQ-100 Ex-Technology Sector Index(SM) Fund
First Trust NASDAQ(R) Clean Edge(R) Green Energy Index Fund
First Trust Value Line(R) Equity Allocation Index Fund
First Trust Value Line(R) Dividend Fund
First Trust S&P REIT Index Fund
First Trust ISE-Revere Natural Gas Index Fund
First Trust ISE Water Index Fund
First Trust ISE Chindia Index Fund
First Trust Value Line(R) 100 Exchange-Traded Fund
First Trust NASDAQ(R) ABA(R) Community Bank Index Fund
EX-99.H43
7
exhibit_h43.txt
AMENDMENT TO EXHIBIT A - TRANSFER AGENCY AGREEMENT
Schedule A
Funds
-------------------------------------------------------------------------------
Name of Fund
-------------------------------------------------------------------------------
First Trust Dow Jones Select MicroCap Index(SM) Fund
-------------------------------------------------------------------------------
First Trust Value Line(R) Arithmetic Index Fund
-------------------------------------------------------------------------------
First Trust Morningstar(R) Dividend Leaders(SM) Index Fund
-------------------------------------------------------------------------------
First Trust NASDAQ-100 Equal Weighted Index(SM) Fund
-------------------------------------------------------------------------------
First Trust NASDAQ-100-Technology Sector Index(SM) Fund
-------------------------------------------------------------------------------
First Trust US IPO Index Fund
-------------------------------------------------------------------------------
First Trust Ibbotson Core U.S. Equity Allocation Index Fund
-------------------------------------------------------------------------------
First Trust AMEX(R) Biotechnology Index Fund
-------------------------------------------------------------------------------
First Trust DB Strategic Value Index Fund
-------------------------------------------------------------------------------
First Trust Dow Jones Internet Index(SM) Fund
-------------------------------------------------------------------------------
First Trust NASDAQ-100 Ex-Technology Sector Index(SM) Fund
-------------------------------------------------------------------------------
First Trust NASDAQ(R) Clean Edge(R) Green Energy Index Fund
-------------------------------------------------------------------------------
First Trust Value Line(R) Equity Allocation Index Fund
-------------------------------------------------------------------------------
First Trust Value Line(R) Dividend Index Fund
-------------------------------------------------------------------------------
First Trust S&P REIT Index Fund
-------------------------------------------------------------------------------
First Trust ISE-Revere Natural Gas Index Fund
-------------------------------------------------------------------------------
First Trust ISE Water Index Fund
-------------------------------------------------------------------------------
First Trust ISE Chindia Index Fund
-------------------------------------------------------------------------------
First Trust Value Line(R) 100 Exchange-Traded Fund
-------------------------------------------------------------------------------
First Trust NASDAQ(R) ABA(R) Community Bank Index Fund
-------------------------------------------------------------------------------
EX-99.H44
8
exhibit_h44.txt
AMENDMENT TO EXHIBIT A - ADMINISTRATION AND ACCOUNTING AGREEMENT
EXHIBIT A
First Trust Dow Jones Select MicroCap Index(SM) Fund
First Trust Value Line(R) Line Arithmetic Index Fund
First Trust Morningstar(R) Dividend Leaders(SM) Index Fund
First Trust NASDAQ-100 Equal Weighted Index(SM) Fund
First Trust NASDAQ-100-Technology Sector Index(SM) Fund
First Trust Ibbotson Core U.S. Equity Allocation Index Fund
First Trust US IPO Index Fund
First Trust AMEX(R) Biotechnology Index Fund
First Trust DB Strategic Value Index Fund
First Trust Dow Jones Internet Index(SM) Fund
First Trust NASDAQ-100 Ex-Technology Sector Index(SM) Fund
First Trust NASDAQ(R) Clean Edge(R) Green Energy Index Fund
First Trust Value Line(R) Equity Allocation Index Fund
First Trust Value Line(R) Dividend Fund
First Trust S&P REIT Index Fund
First Trust ISE-Revere Natural Gas Index Fund
First Trust ISE Water Index Fund
First Trust ISE Chindia Index Fund
First Trust Value Line(R) 100 Exchange-Traded Fund
First Trust NASDAQ(R) ABA(R) Community Bank Index Fund
EX-99.H45
9
exhibit_h45.txt
AMENDMENT TO SCHEDULE I - PARTICIPANT AGREEMENT
SCHEDULE I
First Trust Dow Jones Select MicroCap Index(SM) Fund
First Trust Value Line(R) Line Arithmetic Index Fund
First Trust Morningstar(R) Dividend Leaders(SM) Index Fund
First Trust NASDAQ-100 Equal Weighted Index(SM) Fund
First Trust NASDAQ-100-Technology Sector Index(SM) Fund
First Trust Ibbotson Core U.S. Equity Allocation Index Fund
First Trust US IPO Index Fund
First Trust AMEX(R) Biotechnology Index Fund
First Trust DB Strategic Value Index Fund
First Trust Dow Jones Internet Index(SM) Fund
First Trust NASDAQ-100 Ex-Technology Sector Index(SM) Fund
First Trust NASDAQ(R) Clean Edge(R) Green Energy Index Fund
First Trust Value Line(R) Equity Allocation Index Fund
First Trust Value Line(R) Dividend Fund
First Trust S&P REIT Index Fund
First Trust ISE-Revere Natural Gas Index Fund
First Trust ISE Water Index Fund
First Trust ISE Chindia Index Fund
First Trust Value Line(R) 100 Exchange-Traded Fund
First Trust NASDAQ(R) ABA(R) Community Bank Index Fund
EX-99.I32
10
exhibit_i32.txt
OPINION AND CONSENT OF BINGHAM MCCUTCHEN LLP
June 25, 2009
First Trust Exchange-Traded Fund
1001 Warrenville Road, Suite 300
Lisle, Illinois 60532
Chapman and Cutler LLP
111 West Monroe Street
Chicago, IL 60603
Re: First Trust Exchange-Traded Fund
Ladies and Gentlemen:
We have acted as special Massachusetts counsel to First Trust
Exchange-Traded Fund (the "Trust") on behalf of its series First Trust NASDAQ(R)
ABA(R) Community Bank Index Fund (the "Fund") in connection with the Trust's
Post-Effective Amendment to its Registration Statement on Form N-1A to be filed
with the Securities and Exchange Commission on or about June 25, 2009 (as so
amended, the "Registration Statement") with respect to the Fund's shares of
beneficial interest, par value $.01 per share (the "Shares"). You have requested
that we deliver this opinion to you in connection with the Trust's filing of
such Registration Statement.
In connection with the furnishing of this opinion, we have examined the
following documents:
(a) a certificate of the Secretary of the Commonwealth of
Massachusetts as to the existence of the Trust;
(b) a copy, stamped as filed with the Secretary of the
Commonwealth of Massachusetts, of the Trust's Declaration of Trust dated
as of August 8, 2003 (the "Declaration");
(c) a copy of the Trust's Amended and Restated Establishment and
Designation of Series effective as of May 11, 2009 as executed by the
Secretary of the Trust (the "Designation");
(d) a certificate executed by an appropriate officer of the
Trust, certifying as to, and attaching copies of, the Trust's
Declaration, Designation, By-Laws, and the minutes of a meeting of the
Trustees of the Trust held on May 11, 2009 at which certain resolutions
relating to the Trust were adopted (the "Resolutions"); and
(e) a printer's proof received on June 16, 2009 of the
Registration Statement.
In such examination, we have assumed the genuineness of all signatures,
the conformity to the originals of all of the documents reviewed by us as
copies, the authenticity and completeness of all original documents reviewed by
us in original or copy form and the legal competence of each individual
executing any document. We note that the minutes of the meeting of the Trustees
referred to in paragraph (d) above, as reviewed by us in connection with this
opinion, are in draft form, and we have assumed that when finalized and approved
by the Trust's Trustees, will be in substantially the form reviewed by us. ,We
have also assumed that the Designation will be duly filed with the Secretary of
the Commonwealth of Massachusetts and with the Clerk of the City of Boston, and
that the Registration Statement, as filed with the Securities and Exchange
Commission, will be in substantially the form of the printer's proof referred to
in paragraph (e) above. We have further assumed that the Trust's Declaration,
Designation, By-Laws and the Resolutions will not have been amended, modified or
withdrawn with respect to matters relating to the Shares and will be in full
force and effect on the date of the issuance of such Shares.
This opinion is based entirely on our review of the documents listed
above and such investigation of law as we have deemed necessary or appropriate.
We have made no other review or investigation of any kind whatsoever, and we
have assumed, without independent inquiry, the accuracy of the information set
forth in such documents.
As to any opinion below relating to the due formation or existence of
the Trust under the laws of the Commonwealth of Massachusetts, our opinion
relies entirely upon and is limited by the certificate of public officials
referred to in (a) above.
This opinion is limited solely to the internal substantive laws of the
Commonwealth of Massachusetts, as applied by courts located in Massachusetts
(other than Massachusetts securities laws, as to which we express no opinion),
to the extent that the same may apply to or govern the transactions referred to
herein. No opinion is given herein as to the choice of law or internal
substantive rules of law, which any tribunal may apply to such transaction. In
addition, to the extent that the Trust's Declaration, Designation or By-Laws
refer to, incorporate or require compliance with the Investment Company Act of
1940, as amended, or any other law or regulation applicable to the Trust, except
for the internal substantive laws of the Commonwealth of Massachusetts, as
aforesaid, we have assumed compliance by the Trust with such Act and such other
laws and regulations.
We understand that all of the foregoing assumptions and limitations are
acceptable to you.
Based upon and subject to the foregoing, please be advised that it is
our opinion that:
1. The Trust has been duly formed and is existing under the Trust's
Declaration of Trust and the laws of the Commonwealth of Massachusetts as a
voluntary association with transferable shares of beneficial interest commonly
referred to as a "Massachusetts business trust."
2. The Shares, when issued and sold in accordance with the Trust's
Declaration, Designation and By-Laws and for the consideration described in the
Registration Statement, will be validly issued, fully paid and nonassessable,
except that, as set forth in the Registration Statement, shareholders of the
Trust may under certain circumstances be held personally liable for its
obligations.
This opinion is given as of the date hereof and we assume no obligation
to update this opinion to reflect any changes in law or any other facts or
circumstances which may hereafter come to our attention. We hereby consent to
your reliance on this opinion in connection with your opinion to the Trust with
respect to the Shares and to the filing of this opinion as an exhibit to the
Registration Statement.
Very truly yours,
BINGHAM McCUTCHEN LLP
EX-99.I33
11
exhibit_i33.txt
OPINION OF CHAPMAN AND CUTLER LLP
CHAPMAN AND CUTLER LLP
111 WEST MONROE STREET
CHICAGO, ILLINOIS 60603
June 25, 2009
First Trust Exchange-Traded Fund
120 East Liberty Drive, Suite 400
Wheaton, Illinois 60187
Re: First Trust Exchange-Traded Fund
----------------------------------------
Ladies and Gentlemen:
We have served as counsel for the First Trust Exchange-Traded Fund (the
"Trust"), which proposes to offer and sell shares of series (the "Shares"),
First Trust NASDAQ(R) ABA(R) Community Bank Index Fund (the "Fund"), in the
manner and on the terms set forth in Post-Effective Amendment No. 47 to its
Registration Statement on Form N-1A filed on June 25, 2009 (the "Amendment")
with the Securities and Exchange Commission under the Investment Company Act of
1940, as amended, and the Securities Act of 1933, as amended.
In connection therewith, we have examined such pertinent records and
documents and matters of law, including the opinion of Bingham McCutchen LLP
issued to the Trust or Trust's counsel upon which we have relied as they relate
to the laws of the Commonwealth of Massachusetts, as we have deemed necessary in
order to enable us to express the opinion hereinafter set forth.
Based upon the foregoing, we are of the opinion that:
The Shares of the Fund may be issued from time to time in accordance
with the Trust's Declaration of Trust dated August 8, 2003 and the Trust's
By-Laws, and subject to compliance with the Securities Act of 1933, as amended,
the Investment Company Act of 1940, as amended, and applicable state laws
regulating the sale of securities and the receipt by the Fund of the purchase
price of not less than the net asset value per Share, and such Shares, when so
issued and sold by the Fund, will be legally issued, fully paid and
non-assessable, except that, as set forth in the Amendment, shareholders of the
Fund may under certain circumstances be held personally liable for its
obligations.
June 25, 2009
Page 2
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement (File No. 333-125751) relating to the Shares referred to
above, to the use of our name and to the reference to our firm in said
Registration Statement.
Respectfully submitted,
CHAPMAN AND CUTLER LLP
EX-99.M14
12
exhibit_m14.txt
LETTER AGREEMENT REGARDING 12B-1 FEES
FIRST TRUST PORTFOLIOS L.P.
120 EAST LIBERTY DRIVE, SUITE 400
WHEATON, ILLINOIS 60187
June 16, 2009
First Trust Exchange-Traded Fund
120 East Liberty Drive
Wheaton, Illinois 60187
Ladies and Gentlemen:
This letter amends and restates that certain letter dated May 15, 2009
and supercedes that certain letter agreement by and among First Trust Portfolios
L.P. and the Trust, dated as of June 18, 2008 with respect to the Trust only. It
is hereby acknowledged that First Trust Portfolios L.P. serves as the
distributor of the Shares of each series of First Trust Exchange-Traded Fund
("Trust"). The Trust is an open-end management investment company registered
under the Investment Company Act of 1940, as amended (the "1940 Act"), comprised
of various exchange-traded funds (each, a "Fund," and, collectively, the
"Funds") set forth on Exhibit A attached hereto, which may be amended from time
to time.
It is further acknowledged that the Trust has adopted a Distribution
and Service Plan (the "Plan") pursuant to Rule l2b-1 under the 1940 Act with
respect to the shares of beneficial interest ("Shares") of the Funds. Pursuant
to the Plan, each Fund may bear a fee not to exceed 0.25% per annum of such
Fund's average daily net assets. Capitalized terms used herein but not otherwise
defined shall have the meanings assigned to them in the Plan.
The purpose of this letter agreement is to agree and acknowledge that
the Funds shall not pay, and we shall not collect, any fees pursuant to the Plan
any time before the date set forth on Exhibit A attached hereto for each Fund.
Very Truly Yours,
FIRST TRUST PORTFOLIOS L.P.
/s/ James A. Bowen
-------------------------
James A. Bowen
President
Agreed and Acknowledged:
FIRST TRUST EXCHANGE-TRADED FUND
/s/ James A. Bowen
-------------------------
James A. Bowen
President
EXHIBIT A
------------------------------------------------------------- -----------------
FUNDS DATE
------------------------------------------------------------- -----------------
FIRST TRUST DOW JONES SELECT MICROCAP INDEX(SM) FUND MAY 15, 2010
------------------------------------------------------------- -----------------
FIRST TRUST MORNINGSTAR(R) DIVIDEND LEADERS(SM) INDEX FUND MAY 15, 2010
------------------------------------------------------------- -----------------
FIRST TRUST NASDAQ-100 EQUAL WEIGHTED INDEX(SM) FUND MAY 15, 2010
------------------------------------------------------------- -----------------
FIRST TRUST NASDAQ-100-TECHNOLOGY SECTOR INDEX(SM) FUND MAY 15, 2010
------------------------------------------------------------- -----------------
FIRST TRUST US IPO INDEX FUND MAY 15, 2010
------------------------------------------------------------- -----------------
FIRST TRUST AMEX(R) BIOTECHNOLOGY INDEX FUND MAY 15, 2010
------------------------------------------------------------- -----------------
FIRST TRUST DB STRATEGIC VALUE INDEX FUND MAY 15, 2010
------------------------------------------------------------- -----------------
FIRST TRUST DOW JONES INTERNET INDEX(SM) FUND MAY 15, 2010
------------------------------------------------------------- -----------------
FIRST TRUST NASDAQ-100 EX-TECHNOLOGY SECTOR INDEX(SM) FUND MAY 15, 2010
------------------------------------------------------------- -----------------
FIRST TRUST NASDAQ(R) CLEAN EDGE(R) GREEN ENERGY INDEX FUND MAY 15, 2010
------------------------------------------------------------- -----------------
FIRST TRUST VALUE LINE(R) EQUITY ALLOCATION INDEX FUND MAY 15, 2010
------------------------------------------------------------- -----------------
FIRST TRUST VALUE LINE(R) DIVIDEND INDEX FUND MAY 15, 2010
------------------------------------------------------------- -----------------
FIRST TRUST S&P REIT INDEX FUND MAY 15, 2010
------------------------------------------------------------- -----------------
FIRST TRUST ISE-REVERE NATURAL GAS INDEX FUND MAY 15, 2010
------------------------------------------------------------- -----------------
FIRST TRUST ISE WATER INDEX FUND MAY 15, 2010
------------------------------------------------------------- -----------------
FIRST TRUST ISE CHINDIA INDEX FUND MAY 15, 2010
------------------------------------------------------------- -----------------
FIRST TRUST VALUE LINE(R) 100 EXCHANGE-TRADED FUND MAY 15, 2010
------------------------------------------------------------- -----------------
FIRST TRUST NASDAQ(R) ABA(R) COMMUNITY BANK INDEX FUND JUNE 30, 2011
------------------------------------------------------------- -----------------
EX-99.Q15
13
exhibit_q15.txt
POWERS OF ATTORNEY
FIRST TRUST EXCHANGE-TRADED FUND
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a trustee of the
above-referenced organization, hereby constitutes and appoints JAMES A. BOWEN,
W. SCOTT JARDINE and ERIC F. FESS and each of them (with full power to each of
them to act alone) his true and lawful attorney-in-fact and agent, for him on
his behalf and in his name, place and stead, in any and all capacities, to sign
and file one or more Registration Statements on Form N-1A under the Securities
Act of l933 and the Investment Company Act of l940, including any amendment or
amendments thereto, with all exhibits, and any and all other documents required
to be filed with any regulatory authority, federal or state, relating to the
registration thereof, or the issuance of securities thereof, without limitation,
granting unto said attorneys, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises in order to effectuate the same as fully to all intents
and purposes as he might or could do if personally present, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, may
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned trustee of the above-referenced
organization has hereunto set his hand this 15th day of May, 2009.
/s/ James A. Bowen
-----------------------------------------------
James A. Bowen
STATE OF ILLINOIS )
) SS
COUNTY OF COOK )
On this 15th day of May, 2009, personally appeared before me, a Notary
Public in and for said County and State, the person named above who is known to
me to be the person whose name and signature is affixed to the foregoing Power
of Attorney and who acknowledged the same to be his voluntary act and deed for
the intent and purposes therein set forth.
"OFFICIAL SEAL"
/s/ Erica R. Navarro
------------------------- ----------------------------------
Notary Public, State of Illinois Notary Public
My Commission Expires: October 16, 2011
FIRST TRUST EXCHANGE-TRADED FUND
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a trustee of the
above-referenced organization, hereby constitutes and appoints JAMES A. BOWEN,
W. SCOTT JARDINE and ERIC F. FESS and each of them (with full power to each of
them to act alone) his true and lawful attorney-in-fact and agent, for him on
his behalf and in his name, place and stead, in any and all capacities, to sign
and file one or more Registration Statements on Form N-1A under the Securities
Act of l933 and the Investment Company Act of l940, including any amendment or
amendments thereto, with all exhibits, and any and all other documents required
to be filed with any regulatory authority, federal or state, relating to the
registration thereof, or the issuance of securities thereof, without limitation,
granting unto said attorneys, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises in order to effectuate the same as fully to all intents
and purposes as he might or could do if personally present, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, may
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned trustee of the above-referenced
organization has hereunto set his hand this 15th day of May, 2009.
/s/ Niel B. Nielson
-----------------------------------------------
Niel B. Nielson
STATE OF ILLINOIS )
) SS
COUNTY OF DUPAGE )
On this 15th day of May, 2009, personally appeared before me, a Notary
Public in and for said County and State, the person named above who is known to
me to be the person whose name and signature is affixed to the foregoing Power
of Attorney and who acknowledged the same to be his voluntary act and deed for
the intent and purposes therein set forth.
/s/ Sandra Kim Streit
"OFFICIAL SEAL" ---------------------------------------
Notary Public
My Commission Expires: 05/24/2011
FIRST TRUST EXCHANGE-TRADED FUND
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a trustee of the
above-referenced organization, hereby constitutes and appoints JAMES A. BOWEN,
W. SCOTT JARDINE and ERIC F. FESS and each of them (with full power to each of
them to act alone) his true and lawful attorney-in-fact and agent, for him on
his behalf and in his name, place and stead, in any and all capacities, to sign
and file one or more Registration Statements on Form N-1A under the Securities
Act of l933 and the Investment Company Act of l940, including any amendment or
amendments thereto, with all exhibits, and any and all other documents required
to be filed with any regulatory authority, federal or state, relating to the
registration thereof, or the issuance of securities thereof, without limitation,
granting unto said attorneys, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises in order to effectuate the same as fully to all intents
and purposes as he might or could do if personally present, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, may
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned trustee of the above-referenced
organization has hereunto set his hand this 15th day of May, 2009.
/s/ Thomas R. Kadlec
--------------------------------------------------
Thomas R. Kadlec
STATE OF ILLINOIS )
) SS
COUNTY OF DUPAGE )
On this 15th day of May, 2009, personally appeared before me, a Notary
Public in and for said County and State, the person named above who is known to
me to be the person whose name and signature is affixed to the foregoing Power
of Attorney and who acknowledged the same to be his voluntary act and deed for
the intent and purposes therein set forth.
/s/ Sandra Kim Streit
"OFFICIAL SEAL" ---------------------------------------
Notary Public
My Commission Expires: 05/24/2011
COVER
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filename14.txt
CHAPMAN AND CUTLER LLP
111 WEST MONROE STREET
CHICAGO, ILLINOIS 60603
June 25, 2009
Securities and Exchange Commission
100 F Street, N.E.
Washington, DC 20549
Re: First Trust Exchange-Traded Fund
(File Nos. 333-125751 and 811-21774)
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Ladies and Gentlemen:
On behalf of First Trust Exchange-Traded Fund (the "Registrant"), we
are transmitting for electronic filing under the Securities Act of 1933, as
amended (the "1933 Act"), Post-Effective Amendment No. 47 and under the
Investment Company Act of 1940, as amended, Amendment No. 47 to the Registrant's
registration statement on Form N-1A (the "Amendment"). The Amendment relates to
First Trust NASDAQ(R) ABA(R) Community Bank Index Fund, a series of the
Registrant. This Amendment is being filed pursuant to Rule 485(a) of the 1933
Act.
If we may cooperate with you in any way in the processing of this
registration statement, please telephone the undersigned at (312) 845-3484.
Very truly yours,
CHAPMAN AND CUTLER LLP
By: /s/ Morrison C. Warren
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Morrison C. Warren
Enclosures
cc: W. Scott Jardine
Eric F. Fess