First Trust Dow Jones Global Select Dividend Index Fund (the "Fund") is a series
of a registered management investment company that is offering its shares (the
"Shares") through this Prospectus.
The Fund lists and trades its Shares on the American Stock Exchange LLC (the
"AMEX") under the ticker symbol "FGD," at market prices that 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 consisting of 100,000 Shares called a "Creation
Unit." The Fund's Creation Units are issued and redeemed for securities, cash or
both securities and cash.
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 OR ACCURACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
NOT FDIC INSURED. MAY LOSE VALUE.
The Fund is a series of the First Trust Exchange-Traded Fund II (the "Trust"),
an investment company and an exchange-traded "index fund." The investment
objective of the Fund is to seek investment results that correspond generally to
the price and yield (before the Fund's fees and expenses) of an equity index
called the Dow Jones Global Select Dividend IndexSM (the "Index") (Symbol:
DJGSD). First Trust Advisors L.P. ("First Trust") is the investment adviser for
the Fund.
PRINCIPAL RISKS OF INVESTING IN THE FUND
Risk is inherent in all investing. The Shares of the Fund will change in value,
and loss of money is a risk of investing in the Fund. The Fund may not achieve
its objective. An investment in the Fund is not a deposit with a bank and is not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. An investment in the Fund involves risks similar to those of
investing in any fund of equity securities traded on exchanges. The following
specific risk factors have been identified as the principal risks of investing
in the Fund.
MARKET RISK. One of the principal risks of investing in the Fund is market risk.
Market risk is the risk that a particular security owned by the Fund, the Shares
of the Fund or securities 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
securities prices. Overall securities values could decline generally or could
underperform other investments.
NON-U.S. SECURITIES RISK. The Fund invests in securities of non-U.S. issuers,
including, but not limited to, securities issued by companies headquartered in
Europe. Investing in securities of non-U.S. issuers, which are generally
denominated in non-U.S. currencies, may involve certain risks not typically
associated with investing in securities of U.S. issuers. Some of these risks may
include, but are not limited to, the following: (i) there may be less publicly
available information about non-U.S. issuers or markets due to less rigorous
disclosure or accounting standards or regulatory practices; (ii) non-U.S.
markets may be smaller, less liquid and more volatile than the U.S. market;
(iii) potential adverse effects of fluctuations in currency exchange rates or
controls on the value of the Fund's investments; (iv) the economies of non-U.S.
countries may grow at slower rates than expected or may experience a downturn or
recession; (v) the impact of economic, political, social or diplomatic events;
4
(vi) certain non-U.S. countries may impose restrictions on the ability of
non-U.S. issuers to make payments of principal and interest to investors located
in the United States due to blockage of non-U.S. currency exchanges or
otherwise; and (vii) withholding and other non-U.S. taxes may decrease the
Fund's return. These risks may be more pronounced to the extent that the Fund
invests a significant amount of its assets in companies located in one region.
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.
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.
The Fund may not be fully invested at times, either as a result of cash flows
into the Fund or reserves of cash held by the Fund to meet redemptions and
expenses. If the Fund utilizes a sampling approach or purchases futures or other
derivative positions, its return may not correlate as well with the return of
the Index, as would be the case if it purchased all of the stocks in the Index
with the same weightings as the Index. While First Trust seeks to have a
correlation of 0.95 or better, before fees and expenses, between the Fund's
performance and the performance of the Index, there can be no assurance that the
Fund will be able to achieve such a correlation. Accordingly, the Fund's
performance may correlate to a lesser extent and may possibly vary substantially
from the performance of the Index.
REPLICATION MANAGEMENT RISK. The Fund is also 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 bought or sold in response to market fluctuations and the securities may
be issued by companies concentrated in a particular industry. As a result of
this policy, 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.
INTELLECTUAL PROPERTY RISK. The Fund relies on a license and related sublicense
that permits the Fund to use the Index Provider's Index and associated trade
names and trademarks ("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, 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.
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. The value of securities of
smaller issuers can be more volatile than that of larger issuers.
CURRENCY RISK. Because the Fund's NAV is determined on the basis of U.S.
dollars, you may lose money if the local currency of a foreign market
depreciates against the U.S. dollar, even if the local currency value of the
Fund's holdings goes up.
5
PASSIVE INVESTMENT RISK. The Fund is not actively managed. The Fund may be
affected by a general decline in certain market segments relating to its Index.
The Fund invests in securities included in, or representative of, its Index
regardless of their investment merit. The Fund does not attempt to take
defensive positions in declining markets.
CONCENTRATION RISK. The Fund will be concentrated in the securities of a given
industry if the Index is concentrated in such 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 more diversified funds.
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. 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.
DEPOSITARY RECEIPTS RISK. The Fund may hold securities of certain non-U.S. and
non-Canadian companies in the form of Depositary Receipts. Depositary Receipts
may not necessarily be denominated in the same currency as the underlying
securities into which they may be converted. ADRs are receipts typically issued
by an American bank or trust company that evidence ownership of underlying
securities issued by a foreign corporation. EDRs are receipts issued by a
European bank or trust company evidencing ownership of securities issued by a
foreign corporation. New York shares are typically issued by a company
incorporated in the Netherlands and represent a direct interest in the company.
Unlike traditional depositary receipts, New York share programs do not involve
custody of the Dutch shares of the company. GDRs are receipts issued throughout
the world that evidence a similar arrangement. ADRs, EDRs and GDRs may trade in
foreign currencies that differ from the currency the underlying security for
each ADR, EDR or GDR principally trades in. Global shares are the actual
(ordinary) shares of a non-U.S. company which trade both in the home market and
the United States. Generally, ADRs and New York shares, in registered form, are
designed for use in the U.S. securities markets. EDRs, in registered form, are
used to access European markets. GDRs, in registered form, are tradable both in
the United States and in Europe and are designed for use throughout the world.
Global shares are represented by the same share certificate in the United States
and the home market. Separate registrars in the United States and the home
country are maintained. In most cases, purchases occurring on a U.S. exchange
would be reflected on the U.S. registrar. Global shares may also be eligible to
list on exchanges in addition to the United States and the home country. The
Fund may hold unsponsored Depositary Receipts. The issuers of unsponsored
Depositary Receipts are not obligated to disclose material information in the
United States; therefore, there may be less information available regarding such
issuers and there may not be a correlation between such information and the
market value of the Depositary Receipts.
SMALL CAP AND MID CAP COMPANY RISK. The Fund may invest in small capitalization
and mid capitalization companies. Such companies may be more vulnerable to
adverse general market or economic developments, and their securities may be
less liquid and may experience greater price volatility than larger, more
established companies as a result of several factors, including limited trading
volumes, products or financial resources, management inexperience and less
publicly available information. Accordingly, such companies are generally
subject to greater market risk than larger, more established companies.
6
PASSIVE FOREIGN INVESTMENT COMPANIES RISK. The Fund may invest in companies that
are considered to be "passive foreign investment companies" ("PFICs"), which are
generally certain non-U.S. 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. Therefore, 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 distributed to its shareholders in a timely manner. The Fund
will not be able to pass through to its shareholders any credit or deduction for
such taxes.
EUROPEAN ISSUER RISK. The Fund invests in securities issued by companies
headquartered in Europe. The Fund is therefore subject to certain risks
associated specifically with Europe. A significant number of countries in Europe
are member states in the European Union (the "EU"), and the member states no
longer control their own monetary policies by directing independent interest
rates for their currencies. In these member states, the authority to direct
monetary policies, including money supply and official interest rates for the
Euro, is exercised by the European Central Bank.
In addition, European corporations, and other entities with significant markets
or operations in Europe (whether or not in the participating countries), face
strategic challenges as these entities adapt to, and continue to operate under,
a single transnational currency. Use of the Euro may have a material impact
on revenues, expenses or income from operations; increase competition due to the
increased price transparency of EU markets; affect issuers' currency exchange
rate risk and derivatives exposure; disrupt current contracts; cause issuers to
increase spending on information technology updates required for the conversion;
and result in potential adverse tax consequences.
The Fund has a significant portion of its investment in securities issued by
companies headquartered in the United Kingdom. The Fund may therefore be more
susceptible to adverse economic, political or social occurrences in the United
Kingdom and may subject the Fund to greater risk than funds that are not
significantly invested in issuers headquartered in the United Kingdom.
FINANCIALS SECTOR RISK. The Fund invests in the securities of companies in the
financials sector. Banks, thrifts and their holding companies are especially
subject to the adverse effects of economic recession; volatile interest rates;
portfolio concentrations in geographic markets and in commercial and residential
real estate loans; and competition from new entrants in their fields of
business. These industries are generally extensively regulated and may be
adversely affected by increased regulations.
Banks and thrifts face increased competition from nontraditional lending sources
as regulatory changes permit new entrants to offer various financial products.
Technological advances such as the Internet allow these nontraditional lending
sources to cut overhead and permit the more efficient use of customer data.
Brokerage firms, broker/dealers, investment banks, finance companies and mutual
fund companies are also financial services providers. These companies compete
with banks and thrifts to provide traditional financial service products, in
addition to their traditional services, such as brokerage and investment advice.
In addition, all financial service companies face shrinking profit margins due
to new competitors, the cost of new technology and the pressure to compete
globally.
Companies involved in the insurance industry are engaged in underwriting,
selling, distributing or placing of property and casualty, life or health
insurance. Insurance company profits are affected by many factors, including
interest rate movements, the imposition of premium rate caps, competition and
7
pressure to compete globally. Property and casualty insurance profits may also
be affected by weather catastrophes, such as hurricanes and earthquakes, acts of
terrorism and other disasters. Life and health insurance profits may be affected
by mortality rates. Already extensively regulated, insurance companies' profits
may also be adversely affected by increased government regulations or tax law
changes.
The Fund may invest in companies that may be affected by the downturn in the
subprime mortgage lending market in the United States. Subprime loans have
higher defaults and losses than prime loans. Subprime loans also have higher
serious delinquency rates than prime loans. The downturn in the subprime
mortgage lending market may have far-reaching consequences into various aspects
of the financials sector, and consequently, the value of the Fund may decline in
response to such developments.
See "Additional Risks of Investing in the Fund" for additional information
regarding risks.
HOW THE FUND HAS PERFORMED
The Fund has not yet commenced operations and, therefore, does not have a
performance history.
WHAT ARE THE COSTS OF INVESTING?
The following table describes the estimated fees and expenses you may pay when
you buy or sell Creation Units of the Fund. Annual Fund operating expenses are
estimates. Investors purchasing Shares in the secondary market will not pay the
shareholder fees shown below, but may be subject to costs (including customary
brokerage commissions) charged by their broker.
SHAREHOLDER FEES (PAID DIRECTLY BY AUTHORIZED PARTICIPANTS)
Sales charges (loads) None
Transaction fee per order(1) $1,000
ANNUAL FUND OPERATING EXPENSES(2)(3)
(Expenses that are deducted from the Fund's assets)
Management Fees 0.40%
Distribution and Service (12b-1) Fees(4) 0.00%
Other Expenses(2) 0.34%
Total Annual Fund Operating Expenses 0.74%
Fee Waivers and Expense Reimbursement(5) 0.14%
Total Net Annual Fund Operating Expenses 0.60%
|
EXAMPLE
This example 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
8
account transaction fees on purchases and redemptions of Creation Units of the
Fund or 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 you retain the Shares or sell 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 the same. Although your
actual costs may be higher or lower, your costs, based on these assumptions,
would be:
1 YEAR 3 YEARS
$61 $235
--------------------
|
(1) Purchasers of Creation Units and parties redeeming Creation Units must pay
to the transfer agent, as applicable, a creation or redemption transaction
fee, each of which is currently $1,000. Such fees may be adjusted from time
to time based on the composition of the securities included in the Fund's
portfolio and the countries in which the transactions are settled. See
"Creation Transaction Fees and Redemption Transaction Fees" below.
(2) The Fund had not fully commenced operations as of the date of this
Prospectus. The "Other Expenses" listed in the table are estimates based on
the expenses the Fund expects to incur for the current fiscal year.
(3) Expressed as a percentage of average daily net assets.
(4) The Fund has adopted a distribution and service (12b-1) plan pursuant to
which the Fund may bear a 12b-1 fee not to exceed 0.25% per annum of the
Fund's average daily net assets. However, no such fee is currently paid by
the Fund and pursuant to a contractual arrangement, the Fund will not pay
12b-1 fees any time before April 30, 2009.
(5) 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 November 27, 2009. 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.
CREATION TRANSACTION FEES AND REDEMPTION TRANSACTION FEES
The Fund issues and redeems Shares at NAV only in large blocks of 100,000 Shares
(each block of 100,000 Shares called a "Creation Unit") or multiples thereof. As
a practical matter, only broker-dealers or large institutional investors that
have entered into authorized participant agreements with respect to purchases
and redemptions of Creation Units, called "Authorized Participants" ("APs"), can
purchase or redeem these Creation Units. Purchasers of Creation Units at NAV
must pay a Creation Transaction Fee (as defined below) that is currently $1,000
for each purchase transaction, regardless of the number of Creation Units
involved. The Creation Transaction Fee may vary and is based on the composition
of the securities included in the Fund's portfolio and the countries in which
the transactions are settled. The Creation Transaction Fee may increase or
decrease as the Fund's portfolio is adjusted to conform to changes in the
composition of the Index. The value of a Creation Unit as of the first creation
of such Creation Unit was approximately $3,000,000. An AP who holds Creation
Units and wishes to redeem at NAV would also pay a Redemption Transaction Fee
(as defined below) that is currently $1,000 for each redemption transaction,
regardless of the number of Creation Units involved. The Redemption Transaction
Fee may vary and is based on the composition of the securities included in the
Fund's portfolio and the countries in which the transactions are settled. The
Redemption Transaction Fee may increase or decrease as the Fund's portfolio is
adjusted to conform to changes in the composition of the Index. See "Creations,
Redemptions and Transaction Fees" later in the Prospectus. APs who hold Creation
Units in inventory will also indirectly pay Fund expenses. Assuming an
investment in a Creation Unit of $3,000,000 and a 5% return each year, assuming
that the Fund's operating expenses remain the same, and assuming brokerage costs
are not included, the total costs would be $20,396 if the Creation Unit is
redeemed after one year and $72,622 if the Creation Unit is redeemed after three
years.
The Creation Transaction Fee and Redemption Transaction Fee are not expenses of
the Fund and do not impact the Fund's expense ratio.
9
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.
In determining NAV, expenses are accrued and applied daily and securities and
other assets are generally valued as set forth below. Common stocks and other
equity securities listed on any national or non-U.S. exchange will be valued at
the last sale price for all exchanges other than The Nasdaq Stock Market, Inc.
("NASDAQ") (and the official closing price for NASDAQ) on the exchange or system
in which they are principally traded on the valuation date. If there are no
transactions on the valuation date, securities traded principally on an exchange
will be valued at the mean between the most recent bid and ask prices. Equity
securities traded in the over-the-counter market are valued at their closing bid
prices. 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. Fixed income securities maturing within 60 days are valued by the
Fund accounting agent on an amortized cost basis. The value of any portfolio
security held by the Fund for which market quotations are not readily available
or securities for which market quotations are deemed unreliable will be
determined by the Board or its designee in a manner that most fairly reflects
the market value of the security on the valuation date.
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. These securities generally include, but are not limited to, restricted
20
securities (securities which may not be publicly sold without registration under
the Securities Act of 1933) 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 the
prices used by the Fund differing from the closing sale prices on the applicable
exchange and fair value prices 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 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.
Because foreign markets may be open on different days than the days during which
a shareholder may purchase the Shares of the Fund, the value of the Fund's
securities may change on the days when shareholders are not able to purchase the
Shares of the Fund.
The value of securities denominated in foreign currencies is converted into U.S.
dollars at exchange rates in effect at the time of valuation. Any use of a
different rate from the rates used by the Index may adversely affect the Fund's
ability to track 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 has entered into an agreement with PFPC, Inc. ("PFPC"), 301 Bellevue
Parkway, Wilmington, Delaware 19809, whereby PFPC will provide certain
administrative services to the Trust in connection with the Board's meetings and
other related matters.
INTRA-DAY PORTFOLIO CALCULATOR
First Trust has entered into an agreement with Telekurs (USA) Inc. ("Telekurs"),
River Bend Center, One Omega Drive, Building 3, Stamford, Connecticut 06907, on
behalf of the Fund, pursuant to which Telekurs or its designee will be
responsible for calculating 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.
21
INDEX PROVIDER
The Index that the Fund seeks to track is developed 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 by and among
the Trust on behalf of the Fund, the Index Provider and First Trust, which in
turn has a licensing agreement with the Index Provider.
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 Dow Jones. Dow Jones
makes no representation or warranty, express or implied, to the owners of the
Fund or any member of the public regarding the advisability of trading in the
Fund. Dow Jones' only relationship to First Trust is the licensing of certain
trademarks and trade names of Dow Jones and of the Dow Jones Global Select
Dividend IndexSM, which is determined, composed and calculated by Dow Jones
without regard to First Trust or the Fund. Dow Jones has no obligation to take
the needs of First Trust or the owners of the Fund into consideration in
determining, composing or calculating the Dow Jones Global Select Dividend
IndexSM. Dow Jones is not responsible for and has not participated in the
determination of the timing of, prices at, or quantities of the Fund to be
listed or in the determination or calculation of the equation by which the Fund
is to be converted into cash. Dow Jones has no obligation or liability in
connection with the administration, marketing or trading of the Fund.
DOW JONES DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE DOW
JONES GLOBAL SELECT DIVIDEND INDEXSM OR ANY DATA INCLUDED THEREIN AND DOW JONES
SHALL HAVE NO LIABILITY FOR ANY ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN. DOW
JONES MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY
FIRST TRUST, OWNERS OF THE FUND, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF
THE DOW JONES GLOBAL SELECT DIVIDEND INDEXSM OR ANY DATA INCLUDED THEREIN. DOW
JONES 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 DOW JONES GLOBAL SELECT DIVIDEND INDEXSM OR ANY DATA INCLUDED
THEREIN, WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL DOW JONES HAVE
ANY LIABILITY FOR ANY LOST PROFITS OR INDIRECT, PUNITIVE, SPECIAL OR
CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE
POSSIBILITY OF SUCH DAMAGES. THERE ARE NO THIRD PARTY BENEFICIARIES OF ANY
AGREEMENTS OR ARRANGEMENTS BETWEEN DOW JONES AND FIRST TRUST.
The Index was launched on October 17, 2007. Estimated daily historical closing
prices based on back-testing (i.e., calculations of how the Index might have
performed in the past if it had existed) are available back to December 31,
22
1998, the date at which the base value of the Index was set. Backtested
performance information is purely hypothetical and is solely for informational
purposes. Backtested performance does not represent actual performance, and
should not be interpreted as an indication of actual performance. Past
performance is not indicative of future results.
ADDITIONAL INDEX INFORMATION
INDEX METHODOLOGY
Universe
The Index universe is defined as all component companies of the 24
developed-market country indexes in the Dow Jones Global Indexes family. These
indexes cover approximately 95% of each underlying country's market
capitalization.
Eligibility Screens
To be further considered for the Index, companies in the Index universe must
pass screens for dividend quality and liquidity. To be included on the quarterly
selection list, a company must:
o Pay a current dividend.
o Have a current-year dividend-per-share ratio that is greater than
or equal to its five-year average annual dividend-per-share ratio.
o Have a five-year average payout ratio of less than or equal to 60%
for U.S. and European companies; or less than or equal to 80% for
all other countries.
o Have a minimum three-month daily average trading volume of $3
million.
Selection Process
1. Stocks meeting all eligibility requirements are ranked by dividend
yield.
2. The top 100 highest-yielding stocks are selected to the Index, subject
to buffers designed to limit turnover by favoring current Index
components:
o Stocks in the Index universe are ranked in descending order by
indicated annual dividend yield, defined as a stock's unadjusted
indicated annual dividend (not including any special dividends)
divided by its unadjusted price.
o All current component stocks that are among the top 150 stocks are
included in the Index.
o Noncomponent stocks are added to the Index based on their rankings
until the component count reaches 100.
Review Frequency
o The scheduled Index composition review occurs annually in December.
23
o Any company that discontinues its dividend is immediately removed from
the Index and replaced by the highest ranking non-component on the most
recent quarterly selection list. Advance notice of at least two
business days is provided whenever possible.
o Composition and weighting adjustments required as the result of
extraordinary events such as delistings, bankruptcies, mergers or
takeovers involving index components are implemented as soon as the
events are effective, with advance notice of at least two business days
whenever possible.
Weighting
1. A company's weight in the Index is based on its indicated annual
dividend yield.
2. Each component's weight is capped at 10%.
The Fund will make changes to its portfolio shortly after changes to the Index
are released to the public. Investors are able to access the holdings of the
Fund and the composition and compilation methodology of the Index through the
Fund's website at www.ftportfolios.com.
In the event that the Index Provider no longer calculates the Index, the Index
license is terminated or the identity or character of the Index is materially
changed, the Board will seek to engage a replacement index. However, if that
proves to be impracticable, the Board will take whatever action it deems to be
in the best interests of the Fund. The Board will also take whatever actions it
deems to be in the best interests of the Fund if the Shares are delisted.
OTHER INFORMATION
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.
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 of 1933, as amended
(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
24
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
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 the AMEX is satisfied by the fact that the
Prospectus is available from the AMEX 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.
25
[LOGO OMITTED] FIRST TRUST FIRST TRUST
ADVISORS L.P. EXCHANGE-TRADED FUND II
FIRST TRUST DOW JONES GLOBAL SELECT
DIVIDEND 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 affect the Fund's performance during the last fiscal year. The
Fund's most recent SAI 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 writing to the SEC's Public Reference
Section, 100 F Street, N.E., Washington, D.C. 20549 or by sending an electronic
request, along with a duplication fee to publicinfo@sec.gov.
1001 Warrenville Road
Suite 300
Lisle, Illinois 60532
(800) 621-1675 SEC File #: 333-143964
www.ftportfolios.com 811-21944
Back Cover
|
STATEMENT OF ADDITIONAL INFORMATION
INVESTMENT COMPANY ACT FILE NO. 811-21944
FIRST TRUST EXCHANGE-TRADED FUND II
FIRST TRUST DOW JONES GLOBAL SELECT DIVIDEND INDEX FUND
DATED NOVEMBER 20, 2007
This Statement of Additional Information is not a Prospectus. It should
be read in conjunction with the Prospectus dated November 20, 2007 (the
"Prospectus") for the First Trust Dow Jones Global Select Dividend Index Fund, a
series of the First Trust Exchange-Traded Fund II (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 Prospectus may be obtained without charge by writing to the Trust's
Distributor, First Trust Portfolios L.P., 1001 Warrenville Road, Lisle, Illinois
60532, 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..................................................3
INVESTMENT OBJECTIVE AND POLICIES.............................................4
INVESTMENT STRATEGIES.........................................................5
SUBLICENSE AGREEMENT.........................................................15
INVESTMENT RISKS.............................................................15
FUND MANAGEMENT..............................................................18
ACCOUNTS MANAGED BY INVESTMENT COMMITTEE.....................................27
BROKERAGE ALLOCATIONS........................................................28
CUSTODIAN, DISTRIBUTOR, TRANSFER AGENT, FUND ACCOUNTING AGENT, INDEX
PROVIDER, ADDITIONAL SERVICE PROVIDER AND EXCHANGE...........................30
ADDITIONAL INFORMATION.......................................................32
PROXY VOTING POLICIES AND PROCEDURES.........................................34
CREATION AND REDEMPTION OF CREATION UNIT AGGREGATIONS........................35
REGULAR HOLIDAYS.............................................................44
FEDERAL TAX MATTERS..........................................................49
DETERMINATION OF NAV.........................................................55
|
DIVIDENDS AND DISTRIBUTIONS..................................................57
MISCELLANEOUS INFORMATION....................................................58
- ii -
GENERAL DESCRIPTION OF THE TRUST AND THE FUND
The Trust was organized as a Massachusetts business trust on July 20,
2006 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 (as defined below) in three series,
including the First Trust Dow Jones Global Select Dividend 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.
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") requires a shareholder vote only on those matters where the
1940 Act requires a vote of shareholders and otherwise permits the Trustees to
take actions without seeking the consent of shareholders. For example, the
Declaration gives the Trustees broad authority to approve reorganizations
between the Fund and another entity, such as another exchange-traded fund, or
the sale of all or substantially all of the Fund's assets, or the termination of
the Trust or any Fund without shareholder approval if the 1940 Act would not
require such approval.
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 be amended or supplemented by
the Trustees in any respect without shareholder vote. The Declaration provides
that the Trustees may establish the number of Trustees and that vacancies on the
Board of Trustees may be filled by the remaining Trustees, except when election
of Trustees by the shareholders is required under the 1940 Act. Trustees are
then elected by a plurality of votes cast by shareholders at a meeting at which
a quorum is present. The Declaration also provides that Trustees may be removed,
with or without cause, by a vote of shareholders holding at least two-thirds of
the voting power of the Trust, or by a vote of two thirds of the remaining
Trustees. The provisions of the Declaration relating to the election and removal
of Trustees may not be amended without the approval of two-thirds of the
Trustees.
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 or as the Trustees may determine, 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 provides a detailed
process for the bringing of derivative actions by shareholders in order to
permit legitimate inquiries and claims while avoiding the time, expense,
distraction and other harm that can be caused to the Fund or its shareholders as
a result of spurious shareholder demands and derivative actions. Prior to
bringing a derivative action, a demand must first be made on the Trustees. The
Declaration details various information, certifications, undertakings and
acknowledgements that must be included in the demand. Following receipt of the
demand, the Trustees have a period of 90 days, which may be extended by an
additional 60 days, to consider the demand. If a majority of the Trustees who
are considered independent for the purposes of considering the demand determine
that maintaining the suit would not be in the best interests of the Fund, the
Trustees are required to reject the demand and the complaining shareholder may
not proceed with the derivative action unless the shareholder is able to sustain
the burden of proof to a court that the decision of the Trustees not to pursue
the requested action was not a good faith exercise of their business judgment on
behalf of the Fund. In making such a determination, a Trustee is not considered
to have a personal financial interest by virtue of being compensated for his or
her services as a Trustee. If a demand is rejected, the complaining shareholder
will be responsible for the costs and expenses (including attorneys' fees)
incurred by the Fund in connection with the consideration of the demand under a
number of circumstances. If a derivative action is brought in violation of the
Declaration, the shareholder bringing the action may be responsible for the
Fund's costs, including attorneys' fees. The Declaration also provides that any
shareholder bringing an action against the Fund waives the right to trial by
jury to the fullest extent permitted by law.
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 Declaration further provides that a Trustee acting in his or her
capacity as Trustee is not personally liable to any person other than the Trust
or its shareholders, for any act, omission, or obligation of the Trust. The
Declaration requires the Trust to indemnify any persons who are or who have been
Trustees, officers or employees of the Trust for any liability for actions or
failure to act except to the extent prohibited by applicable federal law. In
making any determination as to whether any person is entitled to the advancement
of expenses in connection with a claim for which indemnification is sought, such
person is entitled to a rebuttable presumption that he or she did not engage in
conduct for which indemnification is not available. The Declaration provides
- 2 -
that any Trustee who serves as chair of the Board of Trustees or of a committee
of the Board of Trustees, lead independent Trustee, or audit committee financial
expert, or in any other similar capacity will not be subject to any greater
standard of care or liability because of such position.
The Fund is advised by First Trust Advisors L.P. (the "Adviser" or
"First Trust").
The Shares are listed and trade on the American Stock Exchange LLC (the
"AMEX"). The Shares will trade on the AMEX 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"). In order to purchase Creation Units of the Fund,
an investor must deposit (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") and generally
make a cash payment (the "Cash Component"). To the extent Deposit Securities are
delivered, the list of the names and numbers of shares of the Deposit Securities
is made available by the Fund's custodian through the facilities of the National
Securities Clearing Corporation (the "NSCC"), each day the New York Stock
Exchange is open for trading. The Cash Component (including any cash in lieu
amount) represents the difference between the NAV of a Creation Unit and the
market value of the Deposit Securities. Shares are redeemable only in Creation
Unit Aggregations and, generally, in exchange for portfolio securities and a
specified cash payment. Creation Units are aggregations of 100,000 Shares.
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 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 Securities
and Exchange Commission (the "SEC") applicable to management investment
companies offering redeemable securities.
EXCHANGE LISTING AND TRADING
There can be no assurance that the requirements of the AMEX necessary
to maintain the listing of Shares of the Fund will continue to be met. The AMEX
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 the AMEX, makes further
dealings on the AMEX inadvisable. The AMEX will remove the Shares of the Fund
from listing and trading upon termination of the Fund.
- 3 -
As in the case of other stocks traded on the AMEX, broker's commissions
on transactions will be based on negotiated commission rates at customary
levels.
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 (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
- 4 -
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 which may be changed by the
Board of Trustees.
INVESTMENT STRATEGIES
Under normal circumstances, the Fund will invest at least 90% of its
total assets in common stocks that comprise the Dow Jones Global Select Dividend
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
- 5 -
receive dividends or exercise voting rights and will become worthless if the
warrants cannot be profitably exercised before their expiration date.
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 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, the 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 the 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, as amended, 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
delegates 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.
- 6 -
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
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"), 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) Fannie Mae, whose securities are supported by the
discretionary authority of the U.S. Government to purchase certain
obligations of the agency or instrumentality; and (d) the Student Loan
Marketing Association, whose securities are supported only by its
credit. 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.
(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
- 7 -
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. Under current Federal
Deposit Insurance Corporation regulations, the maximum insurance
payable as to any one certificate of deposit is $100,000; 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 affected 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
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.
- 8 -
(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 portfolio manager 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, Prime-1 or higher by
Moody's or Fitch 2 or higher by Fitch.
PORTFOLIO TURNOVER
The Fund buys and sells portfolio securities in the normal course of
its investment activities. The proportion of the Fund's investment portfolio
that is sold and replaced with new securities during a year is known as the
Fund's portfolio turnover rate. A turnover rate of 100% would occur, for
example, if the Fund sold and replaced securities valued at 100% of its net
assets within one year. Active trading would result in the payment by the Fund
of increased brokerage costs and expenses.
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
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
- 9 -
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 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.
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 Standard & Poor's 500 or the Value Line(R)
Composite Indices or a more narrow market index, such as the Standard & Poor's
100. 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, the AMEX, NYSE Arca, Inc. and the Philadelphia Stock Exchange.
- 10 -
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
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
- 11 -
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
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
- 12 -
mark to market the current value of its open Futures Contracts. The Fund expects
to earn interest income on its 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 United States 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(R).
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
- 13 -
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 the 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 it. 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
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
- 14 -
securities markets involving arbitrage, "program trading," and other investment
strategies might result in temporary price distortions.
SUBLICENSE AGREEMENT
The Trust on behalf of the Fund has entered into a sublicense agreement
(the "Sublicense Agreement") with First Trust and Dow Jones & Company, Inc.
("Dow Jones" or the "Index Provider"), 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, the Fund has agreed
to be bound by certain provisions of a product license agreement by and between
the Index Provider and First Trust (the "Product License Agreement"). Pursuant
to the Product License Agreement, First Trust will pay the Index Provider a
license fee in an amount equal to the greater of: (i) one quarter of .05% of the
average net assets in the Fund (at any quarter end) or (ii) 10% of the
percentage of fund assets paid for fund operating expenses and management fees,
including 12b-1 fees, administrative fees, and all other asset-based costs of
the Fund (excluding brokerage costs), provided, that, this fee does not exceed
.08% of the average net assets (at any quarter end), and further, provided,
that, the minimum annual payment paid to the Index Provider under the Product
License Agreement shall be $25,000. The Fund will reimburse First Trust for the
costs associated with the Product License Agreement.
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
- 15 -
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.
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. 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 manager 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.
(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
- 16 -
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 it takes
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
closing out the position. Due to liquidity risk, there is no assurance
- 17 -
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.
FUND MANAGEMENT
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 58 Trustee of
1001 Warrenville Road, Chairman of the term Trust Advisors L.P. Portfolios Wheaton
Suite 300 Board, Chief and First Trust College
Lisle, IL 60532 Executive Officer o 2006 Portfolios L.P.;
D.O.B.: 09/55 and Trustee Chairman of the
Board, BondWave LLC
(Software Development
Company/Broker-Dealer)
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
Trustees who are not
Interested Persons of the
Trust
-------------------------
Richard E. Erickson Trustee o Indefinite Physician; President, 58 None
c/o First Trust Advisors term Wheaton Orthopedics; Portfolios
L.P. Co-Owner and
1001 Warrenville Road o 2006 Co-Director (January
Suite 300 1996 to May 2007),
Lisle, IL 60532 Sports Med Center for
D.O.B.: 04/51 Fitness; Limited
Partner, Gundersen
Real Estate
Partnership; Limited
Partner, Sportsmed LLC
Thomas R. Kadlec Trustee o Indefinite Senior Vice President 58 None
c/o First Trust Advisors term (May 2007 to Portfolios
L.P. Present), Vice
1001 Warrenville Road o 2006 President and Chief
Suite 300 Financial Officer
Lisle, IL 60532 (1990 to May 2007),
D.O.B.: 11/57 ADM Investor
Services, Inc.
(Futures Commission
Merchant); Vice
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 58 None
c/o First Trust Advisors term Present), Hibs Portfolios
L.P. Enterprises
1001 Warrenville Road o 2006 (Financial and
Suite 300 Management
Lisle, IL 60532 Consulting);
D.O.B.: 11/56 President (2001 to
2003), Aramark
Service Master
Management; President
and Chief Operating
Officer (1998 to
2003), Service Master
Management Services
Niel B. Nielson Trustee o Indefinite President (June 2002 58 Director of
c/o First Trust Advisors term to Present), Covenant Portfolios Covenant
L.P. College Transport Inc.
1001 Warrenville Road o 2006
Suite 300
Lisle, IL 60532
D.O.B.: 03/54
Officers of the Trust
---------------------
Mark R. Bradley Treasurer, o Indefinite Chief Financial N/A N/A
1001 Warrenville Road, Controller, Chief term Officer, First Trust
Suite 300 Financial Officer Advisors L.P. and
Lisle, IL 60532 and Chief o 2006 First Trust
D.O.B.: 11/57 Accounting Officer Portfolios L.P.;
Chief Fsinancial
Officer, BondWave LLC
(Software Development
Company/Broker-Dealer)
and Stonebridge
Advisors LLC
(Investment Adviser)
Kelley Christensen Vice President o Indefinite Assistant Vice N/A N/A
1001 Warrenville Road, term President, First
Suite 300 Trust Advisors L.P.
Lisle, IL 60532 o 2006 and First Trust
D.O.B.: 09/70 Portfolios L.P.
- 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
1001 Warrenville Road, Treasurer term (April 2007 to
Suite 300 Present), Vice
Lisle, IL 60532 o 2006 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, First N/A N/A
1001 Warrenville Road, Chief Compliance term Trust Advisors L.P. and
Suite 300 Officer First Trust Portfolios
Lisle, IL 60532 o 2006 L.P.; Secretary, BondWave
D.O.B.: 05/60 LLC (Software Development
Company/Broker-Dealer)
and Stonebridge
Advisors LLC
(Investment Adviser)
Daniel J. Lindquist Vice President o Indefinite Senior Vice President
1001 Warrenville Road, term (September 2005 to N/A N/A
Suite 300 Present), Vice
Lisle, IL 60532 o 2006 President (April 2004
D.O.B.: 02/70 to September 2005),
First Trust Advisors
L.P. and First Trust
Portfolios L.P.; Chief
Operating Officer
(January 2004 to April
2004), Mina Capital
Management, LLC; Chief
Operating Officer (April
2000 to January 2004),
Samaritan Asset Management
Services, Inc.
Kristi A. Maher Assistant o Indefinite Deputy General
1001 Warrenville Road, Secretary term Counsel (May 2007 to N/A N/A
Suite 300 Present), Assistant
Lisle, IL 60532 o 2006 General Counsel
D.O.B.: 12/66 (March 2004 to May
2007), First Trust
Advisors L.P. and
First Trust Portfolios
L.P.; Associate (December
1995 to March 2004),
Chapman and Cutler LLP
Roger F. Testin Vice President o Indefinite Senior Vice President
1001 Warrenville Road, term (November 2003 to N/A N/A
Suite 300 Present), Vice
Lisle, IL 60532 o 2006 President (August
D.O.B.: 06/66 2001 to November
2003), First Trust
Advisors L.P. and
First Trust Portfolios
L.P.; Analyst (1998
to 2001), Dolan
Capital Management
- 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
1001 Warrenville Road, term (August 2005 to
Suite 300 Present), First
Lisle, IL 60532 o 2006 Trust Advisors L.P.
D.O.B.: 11/70 and First Trust
Portfolios L.P.; Vice
President (May 2004
to August 2005),
BondWave LLC
(Software Development
Company/Broker-Dealer);
Account Executive
(January 2003 to May
2004), Mina Capital
Management, LLC and
Samaritan Asset
Management Services,
Inc.; Sales
Consultant (January
1997 to January
2003), Oracle Corporation
--------------------
(1) Mr. Bowen is deemed an "interested person" of the Trust due to his position
of 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 of Trust 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. Kadlec and Bowen are members of the Executive Committee.
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, 1001 Warrenville Road, Suite 300, Lisle, Illinois 60532.
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.
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.
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 Board
approval). Messrs. Erickson, Kadlec, Keith and Nielson serve on the Audit
Committee.
Messrs. Erickson, Nielson, Kadlec, Keith and Bowen are trustees of one
open-end mutual fund with eight portfolios, 14 closed-end funds and three
exchange-traded fund trusts with 36 portfolios (collectively, the "First Trust
Fund Complex"). None of the Trustees who are not "interested persons" of the
Trust, 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 Stan Ueland and Roger Testin) 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 exchange-traded fund trusts of the First
Trust Fund Complex. Mr. Testin, Vice President of the Trust, serves in the same
position for the exchange-traded fund trusts and open-end mutual fund of the
First Trust Fund Complex.
The Independent Trustees are paid an annual retainer of $10,000 for
each investment company in the First Trust Fund Complex up to a total of 14
investment companies (the "Trustee Compensation I") and an annual retainer of
$7,500 for each subsequent investment company added to the First Trust Fund
Complex (the "Trustee Compensation II," and together with Trustee Compensation
I, the "Aggregate Trustee Compensation"). The Aggregate Trustee Compensation is
divided equally among each of the investment companies in the First Trust Fund
Complex. No additional meeting fees are paid in connection with board or
committee meetings. Trustees are also reimbursed for travel and out-of-pocket
expenses in connection with all meetings.
Additionally, Mr. Kadlec is paid annual compensation of $10,000 to
serve as the Lead Trustee and Mr. Nielson is paid annual compensation of $5,000
to serve as the chairman of the Audit Committee of each of the investment
companies in the First Trust Fund Complex. Such additional compensation to
Messrs. Kadlec and Nielson is paid by the investment companies in the First
Trust Fund Complex and divided among those investment companies.
The following table sets forth the estimated compensation 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
- 22 -
for the calendar year ended December 31, 2006. The Trust has no retirement or
pension plans. The officers and Trustee who are "interested persons" as
designated above serve without any compensation from the Trust.
ESTIMATED AGGREGATE TOTAL TOTAL COMPENSATION FROM
NAME OF TRUSTEE COMPENSATION FROM THE TRUST(1) THE FIRST TRUST FUND COMPLEX(2)
James A. Bowen $0 $0
Richard E. Erickson $9,444 $148,538
Thomas R. Kadlec $10,000 $153,538
Robert F. Keith(3) $9,444 $105,000
Niel B. Nielson $9,722 $148,538
--------------------
(1) The compensation estimated to be paid by the Trust to the Trustees for a
full fiscal year for services to the Trust.
(2) This information is based on compensation paid to the Independent Trustees
for the fiscal year ended December 31, 2006 for services to the eight
portfolios of First Defined Portfolio Fund, LLC, an open-end fund, four
portfolios of First Defined Portfolio Fund, LLC that were liquidated on
March 16, 2007, fourteen closed-end funds and ten series of the First Trust
Exchange-Traded Fund, all advised by First Trust.
(3) Mr. Keith joined the Board of Trustees of certain funds in the First Trust
Fund Complex on June 12, 2006 and First Defined Portfolio Fund on April 30,
2007.
|
The Trust has no employees. Its officers are compensated 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, 2006:
AGGREGATE DOLLAR RANGE OF
DOLLAR RANGE OF EQUITY SECURITIES IN
EQUITY SECURITIES ALL REGISTERED INVESTMENT COMPANIES
IN THE FUND OVERSEEN BY TRUSTEE IN THE FIRST TRUST
TRUSTEE (NUMBER OF SHARES HELD) FUND COMPLEX
Mr. Bowen None Over $100,000
Dr. Erickson None Over $100,000
Mr. Kadlec None Over $100,000
Mr. Keith None Over $100,000
Mr. Nielson None $50,001-$100,000
|
As of November 20, 2007, the Trustees who are not "interested persons"
of the Trust and immediate family members do not own beneficially or of record
any class of 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 November 20, 2007, the officers and Trustees, in the aggregate,
owned less than 1% of the Fund Shares.
- 23 -
As of November 20, 2007, no person owned of record, or is known by the
Trust to own of record, beneficially 5% or more of the Shares of the Fund.
The Board of Trustees of the Trust, including the Independent Trustees,
approved the Investment Management Agreement (the "Investment Management
Agreement") for the Fund for an initial two-year term at a meeting held on July
18, 2007. The Board of Trustees determined that the Investment Management
Agreement is in the best interests of the Fund in light of the services,
expenses and such other matters as the Board considered to be relevant in the
exercise of its reasonable business judgment.
Investment Adviser. 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 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.
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
November 27, 2009. 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.
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
- 24 -
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.
First Trust is located at 1001 Warrenville Road, Lisle, Illinois 60532.
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, First
Trust and First Trust
Portfolios L.P.
(September 2005 to Present);
Vice President, First Trust
and First Trust Portfolios
L.P. (April 2004 to September
2005); Chief Operating
Officer, Mina Capital
Management, LLC (January 2004
to April 2004); Chief
Operating Officer, Samaritan
Asset Management Services,
Inc. (April 2000 to January
2004)
Robert F. Carey Chief Investment Officer Since 1991 Chief Investment Officer and
and Senior Vice President Senior Vice President, First
Trust; Senior Vice President,
First Trust Portfolios L.P.
Jon C. Erickson Senior Vice President Since 1994 Senior Vice President, First
Trust and First Trust
Portfolios L.P. (August 2002
to Present); Vice President,
First Trust and First Trust
Portfolios L.P. (March 1994 to
August 2002)
David G. McGarel Senior Vice President Since 1997 Senior Vice President, First
Trust and First Trust
Portfolios L.P. (August 2002
to present); Vice President,
First Trust and First Trust
Portfolios L.P. (August 1997
to August 2002)
- 25 -
|
POSITION WITH LENGTH OF SERVICE PRINCIPAL OCCUPATION
NAME FIRST TRUST WITH FIRST TRUST DURING PAST FIVE YEARS
Roger F. Testin Senior Vice President Since 2001 Senior Vice President, First
Trust and First Trust
Portfolios L.P. (November 2003
to Present); Vice President,
First Trust and First Trust
Portfolios L.P. (August 2001
to November 2003); Analyst,
Dolan Capital Management (1998
to 2001)
Stan Ueland Vice President Since 2005 Vice President, First Trust
and First Trust Portfolios
L.P. (August 2005 to Present);
Vice President; BondWave LLC
(May 2004 to August 2005);
Account Executive, Mina
Capital Management, LLC and
Samaritan Asset Management
Services, Inc. (January 2003
to May 2004); Sales
Consultant, Oracle Corporation
(January 1997 to January 2003)
|
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 funds 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 each portfolio of exchange-traded funds advised by
First Trust.
No member of the Investment Committee beneficially owned any Shares of
the Fund.
- 26 -
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 investment vehicles with the
number of accounts and assets, as of December 31, 2006, set forth in the table
below:
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 37 ($2,680,560,650) 2 ($73,595,630) 0($0)
Roger F. Testin 37 ($2,680,560,650) 2 ($73,595,630) 3,547($816,900,185)
Jon C. Erickson 37 ($2,680,560,650) 2 ($73,595,630) 3,547($816,900,185)
David G. McGarel 37 ($2,680,560,650) 2 ($73,595,630) 3,547($816,900,185)
Daniel J. Lindquist 37 ($2,680,560,650) 2 ($73,595,630) 0($0)
Stan Ueland 10 ($709,673,350) 0 ($0) 0($0)
--------------------
|
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
- 27 -
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.
Section 28(e) of the Securities Exchange Act of 1934 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
- 28 -
Trust of research services. First Trust has advised the Board 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.
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 certain 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
domestic 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; 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.
- 29 -
The Trust, on behalf of the Fund, has entered into an agreement with
PFPC, Inc. ("PFPC"), 301 Bellevue Parkway, Wilmington, Delaware 19809, whereby
PFPC will provide 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, ADDITIONAL SERVICE PROVIDER AND EXCHANGE
Custodian. BONY, as custodian for the Fund pursuant to a Custody
Agreement, holds the Fund's assets which may be held through U.S. and non-U.S.
subcustodians and depositories. BONY also serves as transfer agent of the Fund
pursuant to a Transfer Agency and Service Agreement. As Fund accounting agent,
BONY calculates net income and realized capital gains or losses. For services in
such capacities BONY receives such compensation as is mutually agreed between
BONY and the Trust, and BONY may be reimbursed by the Fund for its out-of-pocket
expenses.
Distributor. First Trust Portfolios is the Distributor and principal
underwriter of the Shares of the Fund. Its principal address is 1001 Warrenville
Road, Lisle, Illinois 60532. 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."
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, no such fee is currently paid by the
Fund, and pursuant to a contractual agreement, the Fund will not pay 12b-1 fees
any time before April 30, 2009.
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 Securities Exchange Act of 1934 (the "Exchange Act") and a member of the
Financial Industry Regulatory Authority ("FINRA").
The Distribution Agreement provides that it may be terminated as to the
Fund 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
- 30 -
will terminate automatically in the event of its assignment (as defined in the
1940 Act).
The Distributor shall enter into agreements with participants that
utilize the facilities of the Depository Trust Company (the "DTC Participants"),
which have international operational capabilities and place orders for Creation
Unit Aggregations of Fund Shares. Participating Parties (as defined in
"Procedures for Creation of Creation Unit Aggregations" below) shall be DTC
Participants (as defined in "DTC Acts as Securities Depository for Fund
Shares").
Index Provider. The Index that the Fund seeks to track is compiled by
Dow Jones.
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 by and
among the Trust on behalf of the Fund, the Index Provider and First Trust, which
in turn has a license agreement with the Index Provider.
The Fund is not sponsored, endorsed, sold or promoted by Dow Jones. Dow
Jones makes no representation or warranty, express or implied, to the owners of
the Fund or any member of the public regarding the advisability of trading in
the Fund. Dow Jones' only relationship to First Trust is the licensing of
certain trademarks and trade names of Dow Jones and of the Dow Jones Global
Select Dividend IndexSM, which is determined, composed and calculated by Dow
Jones without regard to First Trust or the Fund. Dow Jones has no obligation to
take the needs of First Trust or the owners of the Fund into consideration in
determining, composing or calculating the Dow Jones Global Select Dividend
IndexSM. Dow Jones is not responsible for and has not participated in the
determination of the timing of, prices at, or quantities of the Fund to be
listed or in the determination or calculation of the equation by which the Fund
is to be converted into cash. Dow Jones has no obligation or liability in
connection with the administration, marketing or trading of the Fund.
DOW JONES DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF
THE DOW JONES GLOBAL SELECT DIVIDEND INDEXSM OR ANY DATA INCLUDED THEREIN AND
DOW JONES SHALL HAVE NO LIABILITY FOR ANY ERRORS, OMISSIONS, OR INTERRUPTION
THEREIN. DOW JONES MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE
OBTAINED BY FIRST TRUST, OWNERS OF THE FUND, OR ANY OTHER PERSON OR ENTITY FROM
THE USE OF THE DOW JONES GLOBAL SELECT DIVIDEND INDEXSM OR ANY DATA INCLUDED
THEREIN. DOW JONES 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 DOW JONES GLOBAL SELECT DIVIDEND INDEXSM OR ANY DATA
INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL DOW
JONES HAVE ANY LIABILITY FOR ANY LOST PROFITS OR INDIRECT, PUNITIVE, SPECIAL OR
CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE
POSSIBILITY OF SUCH DAMAGES. THERE ARE NO THIRD PARTY BENEFICIARIES OF ANY
AGREEMENTS OR ARRANGEMENTS BETWEEN DOW JONES AND FIRST TRUST.
- 31 -
The Index was launched on October 17, 2007. Estimated daily historical
closing prices based on back-testing (i.e., calculations of how the Index might
have performed in the past if it had existed) are available back to December 31,
1998, the date at which the base value of the Index was set. Backtested
performance information is purely hypothetical and is solely for informational
purposes. Backtested performance does not represent actual performance, and
should not be interpreted as an indication of actual performance. Past
performance is not indicative of future results.
Additional Service Provider. First Trust has engaged Telekurs (USA),
Inc. ("Telekurs"), River Bend Center, One Omega Drive, Building 3, Stamford,
Connecticut 06907, on behalf of the Fund, pursuant to which Telekurs or its
designee will be responsible for calculating 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.
AMEX. The only relationship that the AMEX has with First Trust or the
Distributor of the Fund in connection with the Fund is that the AMEX lists the
Shares of the Fund and disseminates the intra-day portfolio values that are
calculated by Telekurs pursuant to its Listing Agreement with the Trust. The
AMEX 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. The AMEX 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"), the AMEX 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,
- 32 -
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
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.
Intra-Day Portfolio Value. The price of a non-U.S. security that is
primarily traded on a non-U.S. exchange shall be updated every 15 seconds
throughout its trading day, provided, that upon the closing of non-U.S.
exchange, the closing price of the security will be used throughout the
remainder of the business day where the markets remain open. These exchange
rates may differ from those used by First Trust and consequently result in
intra-day portfolio values that may vary. Furthermore, in calculating the
- 33 -
intra-day portfolio values of the Fund's Shares, Telekurs shall use the exchange
rates throughout the day (9:00 a.m. to 4:15 p.m. Eastern Time) that it deems to
be most appropriate.
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 RiskMetrics
Group, Inc. ("RMG"), to make recommendations to First Trust on the voting of
proxies relating to securities held by the Fund. RMG provides voting
recommendations based upon established guidelines and practices. First Trust
reviews RMG recommendations and frequently follows the RMG recommendations.
However, on selected issues, First Trust may not vote in accordance with the RMG
recommendations when First Trust believes that specific RMG 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 RMG recommendations to avoid any conflict of
interest. If a client requests First Trust to follow specific voting guidelines
or additional guidelines, First Trust will review the request and inform the
client only if First Trust is not able to follow the client's request.
First Trust has adopted the RMG 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 votes future 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
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 Trust'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., 1001 Warrenville Road, Lisle, Illinois 60532.
Policy Regarding Disclosure of Portfolio Holdings. The Trust has
adopted a policy regarding the disclosure of information about the Fund's
portfolio holdings. 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
- 34 -
deliver in exchange for Fund Shares, together with estimates and actual cash
components, is publicly disseminated daily prior to the opening of the AMEX via
the NSCC. The basket represents one Creation Unit of the Fund. The Trust, First
Trust and BONY will not disseminate non-public information concerning the Trust.
Code 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 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 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
Day, Martin Luther King, Jr. Day, Washington's Birthday, 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 ("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 and/or
cash in lieu of all or a portion of the Deposit Securities. If the Cash
Component is a positive number (i.e., the NAV per Creation Unit Aggregation
exceeds the Deposit Amount), the 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 NSCC (discussed below), makes available on each
Business Day, the list of the names and the required number of shares of each
- 35 -
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, may not be available in
sufficient quantity for delivery 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. 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 a DTC Participant (see the Book Entry
Only System section), and 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), and have international
operational capabilities. A DTC Participant is also 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 must be received by the
transfer agent no later than the closing time of the regular trading session on
The New York Stock Exchange ("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 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 transfer agent no later
than 3:00 p.m. Eastern time on the trade date. A custom order 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, 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
- 36 -
(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 transfer agent pursuant to procedures set forth in the Participant
Agreement, as described below. Severe economic or market disruptions or changes,
or telephone or other communication failure may impede the ability to reach the
transfer agent or an Authorized Participant.
For non-U.S. Securities, Deposit Securities must be delivered to an
account maintained at the applicable local subcustodian of the Trust on or
before the International Contractual Settlement Date (as defined below). If a
Deposit Security is an ADR or similar domestic instrument, it may be delivered
to the Custodian. The Authorized Participant must also pay on or before the
International Contractual Settlement Date immediately available or same-day
funds estimated by Trust to be sufficient to pay the Cash Component next
determined after acceptance of the Creation Order, together with the applicable
Creation Transaction Fee (as defined below) and additional variable amounts, as
described below. Orders must be transmitted by an Authorized Participant by
telephone or other transmission method acceptable to the transfer agent pursuant
to procedures set forth in the Participant Agreement (as described below).
Severe economic or market disruptions or changes, or telephone or other
communication failure may impede the ability to reach the transfer agent or an
Authorized Participant.
All orders from investors who are not Authorized Participants to create
Creation Unit Aggregations shall be placed with an Authorized Participant, as
applicable, 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 persons placing
orders 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. In order to redeem Creation Units of the
Fund, an Authorized Participant must submit an order to redeem for one or more
Whole Creation Units. All such orders must be received by the Fund's transfer
agent in proper form no later than the close of regular trading on the New York
Stock Exchange (ordinary 4:00 p.m. Eastern time) in order to receive that day's
closing NAV per share. Orders must be placed in proper form by or through an
Authorized Participant, which is a DTC Participant, i.e., a subcustodian of the
Trust. Deposit Securities must be delivered to the Trust through DTC or NSCC,
and Deposit Securities which are non-U.S. securities must be delivered to an
account maintained at the applicable local subcustodian of the Trust on or
before the International Contractual Settlement Date, as defined below. If a
Deposit Security is an ADR or similar domestic instrument, it may be delivered
to the Custodian. The Authorized Participant must also pay on or before the
- 37 -
International Contractual Settlement Date immediately available or same-day
funds estimated by Trust to be sufficient to pay the Cash Component next
determined after acceptance of the Creation Order, together with the applicable
Creation Transaction Fee and additional variable amounts, as described below.
The "International Contractual Settlement Date" is the earlier of (i) the date
upon which all of the required Deposit Securities, the Cash Component and any
other cash amounts which may be due are delivered to the Fund or (ii) the latest
day for settlement on the customary settlement cycle in the jurisdiction(s)
where any of the securities of such Fund are customarily traded. A custom order
may be placed by an AP in the event that the Fund permits or requires the
substitution of an amount of cash to be added to the Cash Component (if
applicable) 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 AP or the investor for which it is acting or any other relevant reason.
The Authorized Participant must also make available no later than 2:00
p.m., Eastern time, on the International Contractual Settlement Date, by means
satisfactory to the Trust, immediately-available or same-day funds estimated by
the Trust to be sufficient to pay the Cash Component next determined after
acceptance of the purchase order, together with the applicable purchase
transaction fee. Any excess funds will be returned following settlement of the
issue of the Creation Unit Aggregation.
A Creation Unit Aggregation will not be issued until the transfer of
good title to the Trust of the portfolio of Deposit Securities, the payment of
the Cash Component, the payment of any other cash amounts and the Creation
Transaction Fee (as defined below) have been completed. When the required
Deposit Securities which are U.S. securities must be delivered to the Trust
through DTC or NSCC, and Deposit Securities which are non-U.S. securities have
been delivered to the Custodian and each relevant subcustodian confirms to
Custodian that the required Deposit Securities which are non-U.S. securities
(or, when permitted in the sole discretion of Trust, the cash in lieu thereof)
have been delivered to the account of the relevant subcustodian, the Custodian
shall notify Distributor and the transfer agent which, acting on behalf of the
Trust, will issue and cause the delivery of the Creation Unit Aggregations. The
Trust may in its sole discretion 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 which may not be available in sufficient quantity
for delivery or for other similar reasons. If the Distributor, acting on behalf
of the Trust, determines that a "cash in lieu" amount will be accepted,
Distributor will notify the Authorized Participant and the transfer agent, and
the Authorized Participant shall deliver, on behalf of itself or the party on
whose behalf it is acting, the "cash in lieu" amount, with any appropriate
adjustments as advised by the Trust as discussed below.
In the event that an order for a Creation Unit is incomplete on the
International Contractual Settlement Date because certain or all of the Deposit
Securities are missing, the Trust may issue a Creation Unit notwithstanding such
deficiency in reliance on the undertaking of the Authorized Participant to
deliver the missing Deposit Securities as soon as possible, which undertaking
shall be secured by an Additional Cash Deposit with respect undelivered Deposit
Securities. The Trust may permit, in its discretion, the Authorized Participant
to substitute a different security in lieu of depositing some or all of the
Deposit Securities. Substitution of cash or a different security might be
- 38 -
permitted or required, for example, because one or more Deposit Securities may
be unavailable in the quantity needed or may not be eligible for trading by the
Authorized Participant due to local trading restrictions or other restrictions.
To the extent contemplated by the applicable Participant Agreement,
Creation Unit Aggregations of the Fund will be issued to such Authorized
Participant notwithstanding the fact that the corresponding Fund Deposits have
not been received in part or in whole, in reliance on the undertaking of the
Authorized Participant to deliver the missing Deposit Securities as soon as
possible, which undertaking shall be secured by such Authorized Participant's
delivery and maintenance of collateral consisting of cash in the form of U.S.
dollars in immediately available funds having a value (marked to market daily)
at least equal to 115%, which First Trust may change from time to time of the
value of the missing Deposit Securities. Such cash collateral must be delivered
no later than 2:00 p.m., Eastern time, on the contractual settlement date. The
Participant Agreement will permit the Fund to buy the missing Deposit Securities
at any time and will subject the Authorized Participant to liability for any
shortfall between the cost to the Trust of purchasing such securities and the
value of the collateral.
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, the Fund 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. In
addition, an order may be rejected for practical reasons such as the imposition
by a foreign government or a regulatory body of controls, or other monetary,
currency or trading restrictions that directly affect the portfolio securities
held or systems failures involving computer or other information systems
affecting any relevant sub-custodian.
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.
- 39 -
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 must pay a
creation transaction fee (the "Creation Transaction Fee") that is currently
$1,000. The Creation Transaction Fee is applicable to each purchase transaction
regardless of the number of Creation Units purchased in the transaction. The
Creation Transaction Fee may vary and is based on the composition of the
securities included in the Fund's portfolio and the countries in which the
transactions are settled. The Creation Transaction Fee may increase or decrease
as the Fund's portfolio is adjusted to conform to changes in the composition of
the Index. The price for each Creation Unit will equal the daily NAV per Share
times the number of Shares in a Creation Unit plus the fees described above and,
if applicable, any operational processing and brokerage costs, transfer fees or
stamp taxes. When the Fund permits an Authorized Participant to substitute cash
or a different security in lieu of depositing one or more of the requisite
Deposit Securities, the Authorized Participant may also be assessed an amount to
cover the cost of purchasing the Deposit Securities and/or disposing of the
substituted securities, including operational processing and brokerage costs,
transfer fees, stamp taxes, and part or all of the spread between the expected
bid and offer side of the market related to such Deposit Securities and/or
substitute securities.
Shares of the Fund may be issued in advance of receipt of all Deposit
Securities subject to various conditions including a requirement to maintain on
deposit with the Fund cash at least equal to 115% of the market value of the
missing Deposit Securities.
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. A redeeming beneficial owner
must maintain appropriate security arrangements with a broker-dealer, bank or
other custody provider in each jurisdiction in which any of the portfolio
securities are customarily traded. If such arrangements cannot be made, or it is
not possible to effect deliveries of the portfolio securities in a particular
jurisdiction or under certain other circumstances (for example, holders may
incur unfavorable tax treatment in some countries if they are entitled to
receive "in-kind" redemption proceeds), Fund Shares may be redeemed for cash at
the discretion of First 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
customary 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 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
- 40 -
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 the applicable Redemption Transaction Fee as
listed below and, if applicable, any operational processing and brokerage costs,
transfer fees or stamp taxes. 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 plus, the applicable Redemption Transaction Fee and, if
applicable, any operational processing and brokerage costs, transfer fees or
stamp taxes 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
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. Parties redeeming Creation Units must pay a
redemption transaction fee (the "Redemption Transaction Fee") that is currently
$1,000. The Redemption Transaction Fee is applicable to each redemption
transaction regardless of the number of Creation Units redeemed in the
transaction. The Redemption Transaction Fee may vary and is based on the
composition of the securities included in the Fund's portfolio and the countries
in which the transactions are settled. The Redemption Transaction Fee may
increase or decrease as the Fund's portfolio is adjusted to conform to changes
in the composition of the Index. 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.
Placement of Redemption Orders. Orders to redeem Creation Unit
Aggregations must be delivered through an Authorized Participant that has
executed a Participant Agreement. Investors other than Authorized Participants
are responsible for making arrangements for a redemption request to be made
through an Authorized Participant. An order to redeem Creation Unit Aggregations
of the Fund is deemed received by the Trust on the Transmittal Date if: (i) such
order is received by BONY (in its capacity as Transfer Agent) not later than the
Closing Time on the Transmittal Date; (ii) such order is accompanied or followed
by the requisite number of shares of the Fund specified in such order, which
- 41 -
delivery must be made through DTC to BONY; and (iii) all other procedures set
forth in the Participant Agreement are properly followed.
Generally, under the 1940 Act, the Fund would generally be required to
make payment of redemption proceeds within seven days after a security is
tendered is redemption. However, because the settlement of redemptions of Fund
Shares is contingent not only on the settlement cycle of the United States
securities markets, but also on delivery cycles of foreign markets, the Fund's
redemption proceeds must be paid within the maximum number of calendar days
required for such payment or satisfaction in the principal foreign local foreign
markets where transactions in portfolio securities customarily clear and settle,
but no later than 12 calendar days following tender of a Creation Unit
Aggregation. Due to the schedule of holidays in certain countries, however, the
delivery of in-kind redemption proceeds for the Fund may take longer than three
Business Days after the day on which the redemption request is received in
proper form. In such cases, the local market settlement procedures will not
commence until the end of the local holiday periods. See below for a list of the
local holidays in the foreign countries relevant to the Fund.
In connection with taking delivery of shares of Fund Securities upon
redemption of shares of the Fund, a redeeming Beneficial Owner, or Authorized
Participant action on behalf of such Beneficial Owner must maintain appropriate
security arrangements with a qualified broker-dealer, bank or other custody
provider in each jurisdiction in which any of the Fund Securities are
customarily traded, to which account such Fund Securities will be delivered.
To the extent contemplated by an Authorized Participant's agreement, in
the event the Authorized Participant has submitted a redemption request in
proper form but is unable to transfer all or part of the Creation Unit
Aggregation to be redeemed to the Fund's Transfer Agent, the Transfer Agent will
nonetheless accept the redemption request in reliance on the undertaking by the
Authorized Participant to deliver the missing shares as soon as possible. Such
undertaking shall be secured by the Authorized Participant's delivery and
maintenance of collateral consisting of cash having a value (marked to market
daily) at least equal to 115%, which First Trust may change from time to time,
of the value of the missing shares.
The current procedures for collateralization of missing shares require,
among other things, that any cash collateral shall be in the form of U.S.
dollars in immediately available funds and shall be held by BONY and marked to
market daily, and that the fees of BONY and any sub-custodians in respect of the
delivery, maintenance and redelivery of the cash collateral shall be payable by
the Authorized Participant. The Authorized Participant's agreement will permit
the Trust, on behalf of the affected Fund, to purchase the missing shares or
acquire the Deposit Securities and the Cash Component underlying such shares at
any time and will subject the Authorized Participant to liability for any
shortfall between the cost to the Trust of purchasing such shares, Deposit
Securities or Cash Component and the value of the collateral.
The calculation of the value of the Fund Securities and the Cash
Redemption Amount to be delivered upon redemption will be made by BONY 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 BONY by a DTC
- 42 -
Participant not later than Closing Time on the Transmittal Date, and the
requisite number of shares of the relevant Fund are delivered to BONY prior to
the DTC Cut-Off-Time, then the value of the Fund Securities and the Cash
Redemption Amount to be delivered will be determined by BONY on such Transmittal
Date. If, however, a redemption order is submitted to BONY by a DTC Participant
not later than the Closing Time on the Transmittal Date but either (i) the
requisite number of shares of the relevant Fund are not delivered by the DTC
Cut-Off-Time, as described above, on such Transmittal Date, 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 will be
computed on the Business Day that such order is deemed received by the Trust,
i.e., the Business Day on which the shares of the relevant Fund are delivered
through DTC to BONY by the DTC Cut-Off-Time on such 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 relevant 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
Trust'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 but does not differ in NAV.
Redemptions of shares for Fund Shares 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.
Because the Portfolio Securities of the Fund may trade on the relevant
exchange(s) on days that the listing exchange for the Fund is closed or are
otherwise not Business Days for such Fund, stockholders may not be able to
redeem their shares of such Fund, or the purchase and sell shares of such Fund
on the Listing exchange for the Fund, on days when the NAV of such Fund could be
significantly affected by events in the relevant foreign markets.
- 43 -
REGULAR HOLIDAYS
The Fund generally intends to effect deliveries of Creation Units and
securities in its portfolio ("Portfolio Securities") on a basis of "T" plus
three Business Days (i.e., days on which the New York Stock Exchange is open).
The Fund may effect deliveries of Creation Units and Portfolio Securities on a
basis other than T plus three in order to accommodate local holiday schedules,
to account for different treatment among non-U.S. and U.S. markets of dividend
record dates and ex-dividend dates, or under certain other circumstances. The
ability of the Trust to effect in-kind creations and redemptions within three
Business Days of receipt of an order in good form is subject, among other
things, to the condition that, within the time period from the date of the order
to the date of delivery of the securities, there are no days that are holidays
in the applicable foreign market. For every occurrence of one or more
intervening holidays in the applicable non-U.S. market that are not holidays
observed in the U.S. equity market, the redemption settlement cycle will be
extended by the number of such intervening holidays. In addition to holidays,
other unforeseeable closings in a non-U.S. market due to emergencies may also
prevent the Trust from delivering securities within normal settlement period.
The securities delivery cycles currently practicable for transferring
Portfolio Securities to redeeming investors, coupled with non-U.S. market
holiday schedules, will require a delivery process longer than seven calendar
days for some Funds in certain circumstances. The holidays applicable to the
Fund during such periods are listed below, as are instances where more than
seven days will be needed to deliver redemption proceeds. Although certain
holidays may occur on different dates in subsequent years, the number of days
required to deliver redemption proceeds in any given year is not expected to
exceed the maximum number of days listed below for the Fund. The proclamation of
new holidays, the treatment by market participants of certain days as "informal
holidays" (e.g., days on which no or limited securities transactions occur, as a
result of substantially shortened trading hours), the elimination of existing
holidays, or changes in local securities delivery practices, could affect the
information set forth herein at some time in the future.
The dates of the regular holidays affecting the relevant securities
markets from November 20, 2007 through November 20, 2008 of the below-listed
countries are as follows:
ARGENTINA
December 25 March 21 July 9
January 1 May 1 August 18
April 2 May 25 October 13
March 20 June 16 November 6
AUSTRALIA
December 25 March 21
December 26 March 24
January 1 April 25
January 28 June 9
|
- 44 -
AUSTRIA
December 24 March 21 August 15
December 25 March 24 October 26
December 26 May 1 November 1
December 31 May 12
January 1 May 22
BELGIUM
December 25 March 21
December 26 March 24
January 1 May 1
BRAZIL
December 24 February 4 May 1
December 25 February 5 May 22
December 31 March 21 July 9
January 1 April 21 November 20
January 25
CANADA
December 25 March 21 September 1
December 26 May 19 October 13
January 1 July 1
February 18 August 4
CHILE
December 8 May 1 August 15
December 25 May 21 September 18
January 1 June 29 September 19
March 21 July 16 October 12
November 1
CHINA
January 1 February 12 May 7
January 2 February 13 October 1
January 3 May 1 October 2
February 7 May 2 October 3
February 8 May 3 October 4
February 9 May 4 October 5
February 10 May 5 October 6
February 11 May 6 October 7
DENMARK
December 24 January 1 April 18
December 25 March 20 May 1
December 26 March 21 May 12
December 31 March 24 June 5
|
- 45 -
FINLAND
December 6 December 31 May 1
December 24 January 1 June 20
December 25 March 21
December 26 March 24
FRANCE
December 25 March 21
December 26 March 24
January 1 May 1
GERMANY
December 24 January 1 May 12
December 25 March 21
December 26 March 24
December 31 May 1
GREECE
December 25 March 24 May 1
December 26 March 25 June 16
January 1 April 25 August 15
March 10 April 28 October 28
March 21
HONG KONG
December 25 March 21 June 9
December 26 March 22 July 1
January 1 March 24 September 15
February 7 April 4 October 1
February 8 May 1 October 7
February 9 May 12
INDIA
December 21 April 14 August 15
December 25 April 18 October 2
March 6 May 1 October 9
March 21 May 20 October 28
November 13
IRELAND
December 25 March 24
December 26 May 5
January 1 June 2
March 21
|
- 46 -
ISRAEL
March 21 August 10 October 13
April 20 September 29 October 14
May 7 September 30 October 20
May 8 October 1 October 21
June 8 October 8
June 9 October 9
ITALY
December 25 March 21
December 26 March 24
January 1 May 1
JAPAN
December 24 February 11 September 15
December 31 March 20 September 23
January 1 April 29 October 13
January 2 May 5 November 3
January 3 May 6 November 24
January 14 July 21
MALAYSIA
December 20 February 7 June 7
December 25 February 8 September 1
January 1 March 20 October 1
January 10 May 1 October 2
February 1 May 19 October 27
MEXICO
December 12 March 17 September 16
December 25 March 20 November 2
January 1 March 21 November 17
February 4 May 1
NEW ZEALAND
December 25 February 6 June 2
December 26 March 21 October 27
January 1 March 24
January 2 April 25
NETHERLANDS
December 25 March 21
December 26 March 24
January 1 May 1
|
- 47 -
NORWAY
December 24 January 1 May 1
December 25 March 20 May 12
December 26 March 21
December 31 March 24
PORTUGAL
December 25 March 21
December 26 March 24
January 1 May 1
SINGAPORE
December 20 February 8 August 9
December 25 March 21 October 1
January 1 May 1 October 28
February 7 May 19
SOUTH AFRICA
December 17 March 21 June 16
December 25 March 24 September 24
December 26 April 28
January 1 May 1
SOUTH KOREA
December 25 February 8 August 15
December 31 May 1 September 15
January 1 May 12 October 3
February 6 June 6
February 7 July 17
SPAIN
December 24 January 1
December 25 March 21
December 26 March 24
December 31 May 1
SWEDEN
December 24 January 1 June 6
December 25 March 21 June 20
December 26 March 24
December 31 May 1
SWITZERLAND
December 24 January 1 May 1
December 25 January 2 May 12
December 26 March 21 August 1
December 31 March 24
|
- 48 -
TAIWAN
January 1 February 11 October 10
February 6 February 28
February 7 April 4
February 8 May 1
THAILAND
December 5 April 7 May 19
December 10 April 14 July 1
December 31 April 15 July 17
January 1 May 1 August 12
February 21 May 5 October 23
UNITED KINGDOM
December 25 March 24 August 25
December 26 May 1
January 1 May 5
March 21 May 26
UNITED STATES
December 25 March 21 November 27
January 1 May 26
January 21 July 4
February 18 September 1
|
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.
- 49 -
The Fund intends to qualify annually and to elect to be treated as a
regulated investment company under the Internal Revenue Code (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 no 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),
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 its 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 it distributes 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.
- 50 -
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 a regulated investment
company such as the Fund are 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 that 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.
- 51 -
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
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'S 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.
- 52 -
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.
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 distribution 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.
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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
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.
Under the provisions of the American Jobs Creation Act of 2004 (the
"2004 Tax Act"), 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, pursuant to the 2004 Tax Act, 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, 2008.
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Income Effectively Connected. If the income from the 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.
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. Under normal circumstances, daily calculation of the NAV
will utilize the last closing price of each security held by the Fund at the
close of the market on which such security is principally listed. 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
national or foreign exchange will be valued at the last sale price on
the exchange or system in which they are principally traded on the
valuation date and at the official closing price for securities listed
on NASDAQ(R). If there are nO transactions on the valuation day,
securities traded principally on an exchange will be valued at the mean
between the most recent bid and ask prices.
(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
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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.
(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 purchase
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.
(4) Structured Products, including currency-linked notes,
credit-linked notes and other similar instruments, will be valued by
the Fund Accounting Agent using a pricing service or quotes provided by
the selling dealer or financial institution. When price quotes are not
available, fair market value is based on prices of comparable
securities. Absent a material difference between the exit price for a
particular structured product and the market rates for similar
transactions, the structured product will be valued at its exit price.
(5) Interest rate swaps and credit default swaps will be
valued by the Fund Accounting Agent using a pricing service or quotes
provided by the selling dealer or financial institution. When price
quotes are not available, fair market value is based on prices of
comparable securities. Absent a material difference between the exit
price for a particular swap and the market rates for similar
transactions, the swap will be valued at its exit price.
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 Securities Act of 1933) 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
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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.
Valuing the Fund's investments using fair value pricing will result in
using prices for those investments 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 net asset
value 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.
Because foreign markets may be open on different days than the days
during which a shareholder may purchase the Shares of the Fund, the value of the
Fund's investments may change on the days when shareholders are not able to
purchase the Shares of the Fund.
The value of assets denominated in foreign currencies is converted into
U.S. dollars using exchange rates in effect at the time of valuation. Any use of
a different rate from the rates used by the Index may adversely affect the
Fund's ability to track the Index.
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 quarterly. 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.
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
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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 60601, serves as the Fund's
independent registered public accounting firm. The firm audits the Fund's
financial statements and performs other related audit services.
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