First Trust AlphaDEX TM Emerging Market Dividend ETF (CAD-Hedged) Annual Management Report of Fund Performance December 31, 2013

Transcription

1 First Trust AlphaDEX TM Emerging Market Dividend ETF (CAD-Hedged) Annual December 31, 2013

2 ANNUAL MANAGEMENT REPORT OF FUND PERFORMANCE December 31, 2013 First Trust AlphaDEX TM Emerging Market Dividend ETF (CAD-Hedged) (the First Trust ETF ) This annual management report of fund performance contains financial highlights, but does not contain the complete annual financial statements of the First Trust ETF. All references to dollars contained herein are to Canadian dollars. Securityholders may also contact us to request a copy of the First Trust ETF s proxy voting policies and procedures, proxy voting disclosure record, or quarterly portfolio disclosures relating to the First Trust ETF by calling , by writing to us at FT Portfolios Canada Co., 330 Bay Street, Suite 1300, Toronto, Ontario M5H 2S8 or by visiting our web site at or SEDAR at Forward Looking Statements This document may contain forward-looking statements relating to anticipated future events, results, circumstances, performance or expectations that are not historical facts but instead represent beliefs regarding future events. By their nature, forward-looking statements are based on assumptions and are subject to inherent risks and uncertainties. There is significant risk that forward-looking statements will not prove to be accurate. Readers of this document should not place undue reliance on forward-looking statements as a number of factors could cause actual future results, conditions, actions or events to differ materially from the expectations, estimates or intentions expressed or implied in the forward-looking statements. These factors include but are not limited to market and general economic conditions, interest rates, foreign currency exchange rates, the extent of industry sector exposure, the performance of the securities of the issuers held in the portfolio and regulatory developments and the risks detailed in the First Trust ETF s prospectus. The Manager does not undertake and specifically disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

3 Investment Objective and Strategy The fundamental investment objective of First Trust AlphaDEX Emerging Market Dividend ETF (CAD-Hedged) (the First Trust ETF ) is to provide Unitholders with exposure to the performance of a portfolio of dividend paying equity securities domiciled in emerging markets and selected from the countries represented by the S&P Emerging Markets BMI Index as well as providing unitholders with monthly distributions. To achieve its investment objectives, the First Trust ETF will primarily invest in common shares, GDRs, ADRs or other depository receipts of dividend paying companies in emerging countries as defined by the S&P Emerging Markets BMI Index. Securities will also be subject to an initial screening process to ensure sufficient liquidity (minimum three month average daily trading volume of $2.5 million) and market capitalization (minimum of $1 billion). Eligible companies will then be assigned a score and ranked based on the AlphaDEX selection methodology which is a rules based methodology that analyzes companies based on five growth factors consisting of three, six and twelve month price appreciation, one year sales growth and sales-price ratio and three value factors consisting of book value-to-price ratio, cash flow-to-price ratio and return on assets. The bottom scoring 25% of dividend paying stocks in the universe are left out of the selection. The top scoring 75% of dividend paying stocks, based on selection score, are eligible for inclusion in the portfolio. The resulting stocks are weighted based on potential investment merit by equally dividing them into quintiles based on their AlphaDEX methodology scores; the higher scoring quintiles are given a greater weight than lower scoring quintiles. The First Trust ETF will generally seek to hedge substantially all of its U.S. dollar currency exposure back to the Canadian dollar. There are two classes of units offered by the First Trust ETF: Common Class (TSX symbol: FDE) Advisor Class (TSX symbol: FDE.A) The inception date of the First Trust ETF was May 15, Risk The portfolio held 47 equity securities at the end of the reporting period. The top ten equity holdings accounted for 40.72% of the portfolio. Information Technology, Energy, and Materials were the top three sector weightings at the beginning of the reporting period. At the end of the period, Telecommunication Services, Information Technology, and Financials were the top three sector weightings. The sector weighting changes were a result of the AlphaDEX stock selection process, and not a material change in benchmark composition. The AlphaDEX stock selection process is a rules-based process and can result in sector weightings that differ from that of the benchmark. The fund uses a base universe of stocks that pay dividends. The ability of the company to pay a dividend in the future is dependent of factors that are not controlled by fund management. A company held in the fund may, at any time, decide to cut or eliminate its dividend payment. The First Trust ETF added 13 stocks and removed 14 stocks at the portfolio s semi-annual rebalance at the beginning of December. The changes were made by applying the AlphaDEX selection methodology to a universe of emerging market dividend paying stocks. The decrease in holdings was a result of the reduction in the number of eligible stocks in the starting universe. Additionally, three stocks were removed prior to the rebalance due to dividend eliminations and one due to being acquired. The three stocks that eliminated their dividends were Gold Fields Ltd., Harmony Gold Mining and AngloGold Ashanti Ltd while Sterlite Industries Ltd was acquired during the period. At the end of the period, Telecommunication Services, Utilities, and Energy holdings were the most overweight positions relative to the benchmark. Financials, Consumer Staples, and Industrials were the most underweight sectors relative to the benchmark at the end of the period. At inception, the top three overweight sectors were Utilities, Materials, and Telecommunication Services. The most underweight sectors at inception were Financials, Consumer Discretionary, and Industrials. Given the First Trust ETF employs a currency hedging strategy to minimize the impact of changes in the USD-CAD exchange rate, and considering that the portfolio remains consistent in its application of the AlphaDEX stock selection methodology to pick stocks for the portfolio, we conclude there was no material change to the risk profile of the First Trust ETF. 1

4 Results of Operations The First Trust ETF s net asset value as of December 31, 2013 for Common Class units was $19.93 and for the Advisor Class units was $ The First Trust ETF s initial net asset value of Common Class units was $20.00 on May 15, 2013 and $20.00 for the Advisor Class units. The First Trust ETF paid income distributions per unit as follows: First Trust ETF Payment Date Class July 15 th Aug 15 th Sep 13 th Oct 15 th Nov 15 th Dec 6 th Common Class FDE Advisor Class FDE.A Investment Performance The First Trust ETF Common Class units returned 1.66%, net of fees and expenses, from the date of inception to December 31 st, This compares with the benchmark, MSCI Emerging Market Index (CAD-Hedged), total return of 1.93%. The First Trust ETF slightly underperformed the benchmark. BRIC (Brazil, Russia, India, and China) countries made up the majority of the holdings during the period. Stock selection in China and Russia boosted relative performance against the benchmark. Taiwan also had significant relative outperformance during the period. Stocks from Brazil, South Korea, and Peru were a drag on performance during the period. Lower dividend yield stocks outperformed higher yielding stocks during the period. The universe selection methodology benefitted performance, as dividend paying stocks outperformed non-payers over the period. Stock selection and an overweight position caused Information Technology stocks to lead the portfolio during the period. An underweight position in Financials stocks also boosted relative performance against the benchmark. An overweight position in Consumer Staples and an overweight position in Utilities, combined with a negative selection effect, caused the two sectors to underperform the benchmark on a relative basis. The top five stocks by contribution to return were SouFun Holdings Ltd. Sponsored ADR Class A, Himax Technologies, Inc. Sponsored ADR, Spreadtrum Communications, Inc. Sponsored ADR, Giant Interactive Group, Inc. Sponsored ADR, and E-House (China) Holdings Ltd. Sponsored ADR. The bottom five stocks by contribution to return were Compania de Minas Buenaventura SAA Sponsored ADR, Cosan Limited Class A, Companhia Energetica de Minas Gerais SA Sponsored ADR Pfd, AngloGold Ashanti Limited Sponsored ADR, and Companhia Paranaense de Energia Sponsored ADR Pfd Class B. The First Trust ETF s currency hedge strategy was slightly detrimental relative to an unhedged strategy, given a 4.59% appreciation of the USD against the CAD over the period. Recent Developments In December 2013, the First Trust ETF added 13 positions and removed 14 during its semi-annual rebalance. The changes were made by applying our quantitative AlphaDEX selection methodology to a universe of emerging market dividend paying stocks. The net decrease in portfolio positions was largely due to having fewer companies meet our minimum market capitalization threshold of CAD$1 billion. Over the reporting period, emerging market equities continued to lag their developed market peers. China continues to battle slowing growth (though it remains well above the developed markets), while Brazil is battling a depreciating currency and sluggish export demand tied largely to China and natural resources. Should such trends continue it could have a negative impact on fund performance. 2

5 Net Assets and Net Asset Value National Instrument Investment Fund Continuous Disclosure ( NI ) requires that net asset value for transactional pricing purposes ( Net Asset Value ), be calculated based on the fair value of investments using the close or last trade price. The Chartered Professional Accountants, CPA Canada Handbook section 3855 Financial Instruments Recognition and Measurement requires that net assets for financial reporting purposes ( Net Assets ), be calculated using the close or last bid price of an investment. The net assets per unit for financial reporting purposes ( Net Assets ) and Net Asset Value per unit could be different due to the use of different valuation techniques. As at December 31, 2013, the First Trust ETF s net asset value was $19.93 per Common Class unit and $19.92 per Advisor Class unit. The difference between the net asset value per unit for unitholder transactions and the net assets per unit as shown on the Statement of Net Assets is due to the use of different pricing methodologies discussed above. International Financial Reporting Standards The Canadian Accounting Standards Board confirmed that International Financial Reporting Standards ( IFRS ) will replace current Canadian standards and interpretations as Canadian GAAP for publicly accountable enterprises effective January 1, 2014, which includes investment funds. The First Trust ETF will adopt IFRS on January 1, Related Party Transactions FT Portfolios Canada Co. is the Manager of the First Trust ETF and is a Canadian affiliate of First Trust Advisors L.P., the investment advisor (the Advisor ) of the Trust. Pursuant to terms of the declaration of trust of the First Trust ETF, the Manager provides or arranges for all management, administrative and other services required by the First Trust ETF. The Manager receives a management fee from the First Trust ETF. For further details, please see Management Fees. The Manager has retained the Advisor to provide certain services to the First Trust ETF pursuant to an investment advisory agreement. The Advisor receives advisory fees from the Manager out of the management fee. 3

6 Financial Highlights The following tables show selected key financial information about the First Trust ETF and are intended to help you understand the First Trust ETF s financial performance from date of inception to the period ended December 31, The date of inception of the First Trust ETF was May 15, This information is derived from the First Trust ETF s audited annual financial statements for the period ending December 31. The Trust s Net Assets per Unit Dec. 31, 2013 FDE FDE.A Net assets, at the beginning of the period (1) $ $ Increase (decrease) from operations: Total revenue Total expenses (0.09) (0.22) Realized gains (losses) for the period (1.08) (1.17) Unrealized gains (losses) for the period Total increase (decrease) from operations (2) $ 0.20 $ (0.02) Distributions: From income (excluding dividends) (0.33) (0.23) From dividends - - From capital gains - - Return of capital (0.06) (0.04) Total Annual distributions (3) $ (0.39) $ (0.27) Net assets, at the end of the period (4) $ $ (1) This information is provided as at December 31 of the period shown. The net assets per unit presented in the financial statements differs from the net asset value calculated for trust pricing purposes. An explanation of these differences can be found in the notes to the financial statements. (2) Net assets and distributions are based on the actual number of units outstanding at the relevant time. The increase/decrease from operations is based on the weighted average number of units outstanding over the period. (3) Distributions were either paid in cash or reinvested in additional units of the First Trust ETF. (4) This table is not intended to be a reconciliation of beginning to ending net assets per unit. Ratios and Supplemental Data Dec. 31, 2013 FDE FDE.A Net asset value (000's) $ 4,982 $ 996 Number of units outstanding 250,000 50,000 Management expense ratio (1) 0.70% 1.81% Management expense ratio before waivers or absorption 0.70% 1.81% Trading expense ratio (2) 0.21% 0.21% Portfolio turnover rate (3) 84.13% 84.13% Net asset value per unit $ $ (1) Management expense ratio is based on total expenses for the stated period and is expressed as an annualized percentage of daily average net asset value during the period. (2) The trading expense ratio represents total commissions and other portfolio transaction costs expressed as an annualized percentage of daily average net asset value during the period. (3) The First Trust ETF s portfolio turnover rate indicates how actively the First Trust ETF s portfolio advisor manages its portfolio investments. A portfolio turnover rate of 100% is equivalent to the First Trust ETF buying and selling all of the securities in its portfolio once in the course of the period. The higher a First Trust ETF s s portfolio turnover rate in a period, the greater the trading cost payable by the First Trust ETF in the period, and the greater the chance of an investor receiving taxable capital gains in the period. There is not necessarily a relationship between high turnover rate and the performance of a First Trust ETF. 4

7 Management Fees The First Trust ETF will pay the Manager a management fee equal to 0.65% and, in respect of the FDE.A, an additional amount for a service fee (see FDE.A Service Fee below) based on the average daily NAV of the First Trust ETF. The management fee, plus applicable taxes including HST, will be accrued daily and paid quarterly in arrears. The Manager may, from time to time in its discretion, waive all or a portion of the management fee charged at any given time. FDE.A Service Fee The Manager pays registered dealers a service fee equal to 1.00% per annum of the NAV of the Units held by clients of the registered dealer, plus any applicable taxes. The service fee will be calculated and accrued daily and paid quarterly at the end of each calendar quarter. Past Performance General The past performance information shown assumes that all distributions made by the First Trust ETF in the periods shown were reinvested in additional securities of the First Trust ETF. The performance information does not take into account sales, redemption, distribution or other optional charges that would have reduced returns or performance. How the First Trust ETF has performed in the past does not necessarily indicate how it will perform in the future. Year by Year Returns The bar chart below shows the First Trust ETF s performance for the period ended December 31, and illustrates how the investment fund s performance has changed from the inception date to the period ended December 31, The chart also shows, in percentage terms, how much an investment made on the first day of each financial year would have grown or decreased by the last day of each financial year. 5.00% First Trust AlphaDEX TM Emerging Market Dividend ETF (CAD-Hedged) 4.00% 3.00% 2.00% 1.00% 1.66% 1.05% 0.00% *May 15/13 to Dec. 31/13 FDE 1.66% FDE.A 1.05% *Date of Inception 5

8 Annual Compound Returns The First Trust ETF underperformed over the period due mainly to overweight positions in Consumer Staples and Utilities stocks. Emerging market stocks underperformed developed market stock by a wide margin over the period. Since Inception First Trust AlphaDEX TM Emerging Market Dividend ETF (CAD-Hedged) FDE 1.66% First Trust AlphaDEX TM Emerging Market Dividend ETF (CAD-Hedged) FDE.A 1.05% MSCI Emerging Market Index (CAD-Hedged) 1.93% MSCI Emerging Markets Index is a free float-adjusted market capitalization weighted index provided by MSCI that is designed to measure the equity market performance of emerging markets. Summary of Investment Portfolio The table sets out the percentage (based on net asset value) of the First Trust ETF s top 25 holdings as at December 31, This summary of portfolio holdings may change due to ongoing portfolio transactions of the First Trust ETF. A quarterly update is available at Issuers % of ETF Net Asset Value * E-House China Holding Ltd. ADR 5.07% SouFun Holdings Ltd. 4.55% Himax Technologies Inc., ADR 4.22% TAL Education Group, ADR 4.00% VimpelCom Ltd., ADR 3.78% Companhia Paranaense de Energia-Copel, ADR 3.49% Compania de Minas Buenaventura SA, ADR, Series B 3.41% China Telecom Corp. Ltd., ADR 3.37% Companhia Energetica de Minas Gerais SA, ADR 3.35% Sesa Sterlite Ltd., ADR 3.27% Noah Holdings Ltd., Sponsored ADR 3.21% Oi SA, ADR, Preferred 2.89% Bancolombia SA, ADR, Preferred 2.80% Enersis SA, ADR 2.75% China Petroleum and Chemical Corp. (Sinopec), ADR 2.73% Advanced Semiconductor Engineering Inc., ADR 2.73% Tata Motors Ltd., ADR 2.72% PetroChina Co. Ltd., ADR 2.65% CTC Media Inc. 2.36% Tim Participacoes SA, ADR 2.28% Infosys Technologies Ltd., ADR 2.26% Mobile TeleSystems OJSC, ADR 2.21% America Movil SA de CV, Series L, ADR 2.16% SASOL Ltd., ADR 2.15% China Life Insurance Co. Ltd., ADR 2.11% * Based on transactional NAV in which securities are priced at market closing prices on December 31,

9 Portfolio Breakdown The table sets out the percentage (based on net asset value) of the First Trust ETF s portfolio as at December 31, Sector Weightings % of ETF Net Asset Value * Telecommunication Services 19.37% Information Technology 15.81% Financials 14.44% Energy 13.26% Consumer Discretionary 10.38% Utilities 9.59% Materials 9.59% Consumer Staples 3.27% Industrials 2.72% Healthcare 1.30% Cash and Cash Equivalents 0.52% Country Weightings % of ETF Net Asset Value * China 29.50% Brazil 17.10% India 10.32% Taiwan 9.51% Russia 8.35% Mexico 7.04% Chile 6.11% Colombia 4.82% Peru 3.41% South Africa 2.15% Indonesia 0.71% Philippines 0.69% * Based on transactional NAV in which securities are priced at market closing prices on December 31,

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