First Trust Exchange-Traded AlphaDEX Fund

Transcription

1 First Trust Exchange-Traded AlphaDEX Fund Annual Report July 31, 2017 AlphaDEX Sector Funds First Trust Consumer Discretionary AlphaDEX Fund (FXD) First Trust Consumer Staples AlphaDEX Fund (FXG) First Trust Energy AlphaDEX Fund (FXN) First Trust Financials AlphaDEX Fund (FXO) First Trust Health Care AlphaDEX Fund (FXH) First Trust Industrials/Producer Durables AlphaDEX Fund (FXR) First Trust Materials AlphaDEX Fund (FXZ) First Trust Technology AlphaDEX Fund (FXL) First Trust Utilities AlphaDEX Fund (FXU) AlphaDEX is a registered trademark of First Trust Portfolios L.P.

2 Table of Contents First Trust Exchange-Traded AlphaDEX Fund Sector Funds Annual Report July 31, 2017 Shareholder Letter Market Overview Fund Performance Overview First Trust Consumer Discretionary AlphaDEX Fund (FXD) First Trust Consumer Staples AlphaDEX Fund (FXG) First Trust Energy AlphaDEX Fund (FXN) First Trust Financials AlphaDEX Fund (FXO) First Trust Health Care AlphaDEX Fund (FXH) First Trust Industrials/Producer Durables AlphaDEX Fund (FXR) First Trust Materials AlphaDEX Fund (FXZ) First Trust Technology AlphaDEX Fund (FXL) First Trust Utilities AlphaDEX Fund (FXU) Notes to Fund Performance Overview Understanding Your Fund Expenses Portfolio of Investments First Trust Consumer Discretionary AlphaDEX Fund (FXD) First Trust Consumer Staples AlphaDEX Fund (FXG) First Trust Energy AlphaDEX Fund (FXN) First Trust Financials AlphaDEX Fund (FXO) First Trust Health Care AlphaDEX Fund (FXH) First Trust Industrials/Producer Durables AlphaDEX Fund (FXR) First Trust Materials AlphaDEX Fund (FXZ) First Trust Technology AlphaDEX Fund (FXL) First Trust Utilities AlphaDEX Fund (FXU) Statements of Assets and Liabilities Statements of Operations Statements of Changes in Net Assets Financial Highlights Notes to Financial Statements Report of Independent Registered Public Accounting Firm Additional Information Board of Trustees and Officers Privacy Policy

3 Caution Regarding Forward-Looking Statements This report contains certain forward-looking statements within the meaning of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended. Forward-looking statements include statements regarding the goals, beliefs, plans or current expectations of First Trust Advisors L.P. ( First Trust or the Advisor ) and its representatives, taking into account the information currently available to them. Forward-looking statements include all statements that do not relate solely to current or historical fact. For example, forward-looking statements include the use of words such as anticipate, estimate, intend, expect, believe, plan, may, should, would or other words that convey uncertainty of future events or outcomes. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of any series of First Trust Exchange-Traded AlphaDEX Fund (the Trust ) described in this report (each such series is referred to as a Fund and collectively, as the Funds ) to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. When evaluating the information included in this report, you are cautioned not to place undue reliance on these forward-looking statements, which reflect the judgment of the Advisor and its representatives only as of the date hereof. We undertake no obligation to publicly revise or update these forwardlooking statements to reflect events and circumstances that arise after the date hereof. Performance and Risk Disclosure There is no assurance that any Fund described in this report will achieve its investment objective. Each Fund is subject to market risk, which is the possibility that the market values of securities owned by the Fund will decline and that the value of the Fund shares may therefore be less than what you paid for them. Accordingly, you can lose money investing in a Fund. See Risk Considerations in the Additional Information section of this report for a discussion of other risks of investing in the Funds. Performance data quoted represents past performance, which is no guarantee of future results, and current performance may be lower or higher than the figures shown. For the most recent month-end performance figures, please visit or speak with your financial advisor. Investment returns, net asset value and share price will fluctuate and Fund shares, when sold, may be worth more or less than their original cost. The Advisor may also periodically provide additional information on Fund performance on each Fund s webpage at How to Read This Report This report contains information that may help you evaluate your investment. It includes details about each Fund s portfolio and presents data and analysis that provide insight into each Fund s performance and investment approach. By reading the market overview by Robert F. Carey, Chief Market Strategist of the Advisor, you may obtain an understanding of how the market environment affected the performance of each Fund. The statistical information that follows may help you understand each Fund s performance compared to that of relevant market benchmarks. It is important to keep in mind that the opinions expressed by personnel of the Advisor are just that: informed opinions. They should not be considered to be promises or advice. The opinions, like the statistics, cover the period through the date on the cover of this report. The material risks of investing in each Fund are spelled out in its prospectus, statement of additional information, this report and other Fund regulatory filings. Page 1

4 Shareholder Letter First Trust Exchange-Traded AlphaDEX Fund Annual Letter from the Chairman and CEO July 31, 2017 Dear Shareholders: First Trust Advisors L.P. ( First Trust ) is pleased to provide you with the annual report which contains detailed information about your investment for the 12 months ended July 31, 2017, including a market overview and a performance analysis for the period. We encourage you to read it carefully and discuss it with your financial advisor. The past year has seen the election of Donald Trump as the 45 th President of the U.S. and the continued U.S. bull market. In the first seven months of 2017, the S&P 500 Index closed its trading sessions at all-time highs 29 times. The NASDAQ Composite Index, as of July 31, 2017, closed its trading sessions at all-time highs 44 times this year. The current bull market (measuring from March 9, 2009 through July 31, 2017) is the second longest in history. While we are optimistic about the U.S. economy, we are also well aware that no one can predict the future or know how markets will perform in different economic environments. This is why we advocate maintaining a long-term perspective, as we have done since our inception over 25 years ago. We also believe it is a good practice to speak with your financial advisor and make sure your financial plan is still on track with your investment goals. Thank you for giving First Trust the opportunity to be a part of your investment plan through the First Trust Exchange-Traded AlphaDEX Fund. We value our relationship with you and will continue to focus on bringing the types of investments that we believe can help you reach your financial goals. Sincerely, James A. Bowen Chairman of the Board of Trustees Chief Executive Officer of First Trust Advisors L.P. Page 2

5 Market Overview First Trust Exchange-Traded AlphaDEX Fund Annual Report July 31, 2017 Robert F. Carey, CFA Senior Vice President and Chief Market Strategist First Trust Advisors L.P. Mr. Carey is responsible for the overall management of research and analysis of the First Trust product line. Mr. Carey has over 25 years of experience as an Equity and Fixed-Income Analyst and is a recipient of the Chartered Financial Analyst ( CFA ) designation. He is a graduate of the University of Illinois at Champaign- Urbana with a B.S. in Physics. He is also a member of the Investment Analysts Society of Chicago and the CFA Institute. Mr. Carey has appeared as a guest on such programs as Bloomberg TV, CNBC, and WBBM Radio, and has been quoted by several publications, including The Wall Street Journal, The Wall Street Reporter, Bloomberg News Service, and Registered Rep. State of the U.S. Economy Investors still have some good reasons to be optimistic about the markets. Interest rates and inflation remain low by historical measures. Brian Wesbury, Chief Economist at First Trust Advisors L.P., often notes that the Federal Reserve s ( Fed ) current approach to interest rate hikes has not made monetary policy tighter, just less loose. The Fed has only increased the federal funds target rate (upper bound) by one percentage point, from 0.25% to 1.25%, since December The average target rate for the 30-year period ended July 31, 2017 was 3.45%, according to Bloomberg. Job growth has been one of the silver linings in the current economic recovery. Nonfarm payrolls averaged 180,000 per month for the 12-month period ended July 31, 2017, according to data from the Bureau of Labor Statistics. The U.S. has registered 82 months of positive job growth through July The 82-month average was 198,000. The last half of 2016 was dominated by the election process, in our opinion. There seemed to be a lot of optimism about what President Donald J. Trump might be able to do to boost the U.S. economy after he won the election in November. While the stock and bond markets have performed well so far in 2017, we have not seen much in the way of legislative achievements. Now that we have moved into the second-half of 2017, one of the more interesting questions looming, in our opinion, is the following: Will any of the major fiscal/economic policies that President Trump campaigned on become legislation by year-end? The effort to repeal and replace the Affordable Care Act ( Obamacare ) was unsuccessful. Tax reform is likely up next for the Trump administration and Congress. House Speaker Paul Ryan wants to pass a tax overhaul by the end of this year, according to CNBC. Ryan believes that the U.S. cannot achieve a 3% GDP growth rate without tax reform. The International Monetary Fund ( IMF ) updates its forecasts for global economic growth throughout the year. In its latest report (July 2017), the IMF set its year-over-year global growth rate estimates for 2017 and 2018 at 3.5% and 3.6%, respectively, up from 3.2% in 2016, according to its own release. Its 2017 and 2018 estimates for U.S. growth project 2.1% growth for both years, up from 1.6% in The U.S. growth rate estimates could be adjusted higher if Congress enacts individual and corporate tax reform legislation, in our opinion. While not robust growth, these growth projections suggest that we are not heading for a recession anytime soon. ETFGI, an industry research group, reported that total assets invested in the U.S. exchange-traded funds ( ETFs ) and other exchange-traded products ( ETPs ) industry stood at a record high $3.06 trillion at the end of July 2017, according to its own release. July marked the 17 th consecutive month of positive net inflows. Year-to-date through July, equity ETFs/ETPs reported net inflows totaling $ billion, well above the $30.27 billion of net inflows at the same point a year ago. Sector Investing For the 12-month period ended July 31, 2017, nine of the 11 major sector indices that comprise the S&P 500 Index generated positive total returns, according to Bloomberg. The S&P 500 Index posted a total return of 16.04% over the period. Three of the 11 sector indices outperformed the S&P 500 Index. The three sectors were Financials, up 32.99%, Information Technology, up 29.48%, and Industrials, up 18.31%, according to Bloomberg. As of July 31, 2017, Information Technology and Financials were the most heavily weighted sectors in the S&P 500 Index at 22.8% and 14.5%, respectively, according to S&P Dow Jones Indices. The three sector indices with the poorest showing in the period were Telecommunication Services, down 7.03%, Real Estate, down 2.60%, and Energy, up 0.19%. The consensus estimated earnings growth rates for 2017 for the S&P 500, S&P MidCap 400 and S&P SmallCap 600 Indices are 12.49%, 17.83% and 18.01%, respectively, as of July 31, 2017, according to Bloomberg. The consensus estimated earnings growth rates for 2018 for the S&P 500, S&P MidCap 400 and S&P SmallCap 600 Indices are 11.44%, 13.64% and 18.84%, respectively. Page 3

6 Fund Performance Overview (Unaudited) First Trust Consumer Discretionary AlphaDEX Fund (FXD) The First Trust Consumer Discretionary AlphaDEX Fund (the Fund ) seeks investment results that correspond generally to the price and yield (before the Fund s fees and expenses) of an equity index called the StrataQuant Consumer Discretionary Index (the Consumer Discretionary Index ). The Fund will normally invest at least 90% of its net assets (including investment borrowings) in common stocks that comprise the Consumer Discretionary Index. The shares of the Fund are listed and trade on the NYSE Arca, Inc. (the NYSE Arca or the Exchange ) under the ticker symbol FXD. The Consumer Discretionary Index is a modified equal-dollar weighted index designed by NYSE Group, Inc. or its affiliates ( NYSE ) to objectively identify and select stocks from the Russell 1000 Index in the consumer discretionary sector that may generate positive alpha relative to traditional passive-style indices through the use of the AlphaDEX selection methodology. Alpha is an indication of how much an investment outperforms or underperforms on a risk-adjusted basis relative to its benchmark. The NYSE constructs the Consumer Discretionary Index using the Russell Global Sectors (the RGS ) sector scheme to determine a stock s sector membership. Performance Average Annual Total Returns Cumulative Total Returns 1 Year 5 Years 10 Years Inception 5 Years 10 Years Inception Ended Ended Ended (5/8/07) Ended Ended (5/8/07) 7/31/17 7/31/17 7/31/17 to 7/31/17 7/31/17 7/31/17 to 7/31/17 Fund Performance NAV 5.10% 13.83% 7.95% 7.14% 91.10% % % Market Price 5.13% 13.85% 7.95% 7.13% 91.28% % % Index Performance StrataQuant Consumer Discretionary Index 5.78% 14.61% 8.73% 7.92% 97.76% % % Russell 1000 Index 15.95% 14.85% 7.84% 7.31% 99.80% % % S&P 500 Consumer Discretionary Index 13.90% 17.92% 11.34% 10.42% % % % Russell 1000 Consumer Discretionary Index (1) 13.82% 17.01% N/A N/A % N/A N/A (See Notes to Fund Performance Overview on page 22.) Performance Review FXD s one-year net asset value ( NAV ) return of 5.10% underperformed the benchmark S&P 500 Consumer Discretionary Index s return of 13.90% by 8.80%. Although the Technology Hardware & Equipment industry (represented solely by Fitbit, Inc.) had the worst return over the period at -58.2%, it was the Retailing industry which had the worst contribution at -1.9%, stemming from its large 34.1% average allocation and -5.6% return. The Diversified Consumer Services industry, with securities such as H&R Block and ServiceMaster Global Holdings, Inc., was the Fund s top contributing industry with a 4.6% contribution, stemming from its 14.5% allocation and high 32.9% return. On a relative basis, the Fund underperformed the benchmark. The majority of the relative underperformance is attributable to the Retailing industry, where the Fund had a -17.5% lower return causing -5.8% of relative drag. The Fund saw 1.2% of the relative underperformance reversed due to the Fund s 8.6% better return amongst the Diversified Consumer Services industry. % of Total Sector Classification Long-Term Investments Consumer Discretionary 94.90% Industrials 2.42 Information Technology 1.48 Consumer Staples 1.20 Total % % of Total Top Ten Holdings Long-Term Investments Liberty Ventures, Series A 1.68% NVR, Inc Live Nation Entertainment, Inc Kohl s Corp Urban Outfitters, Inc Expedia, Inc Lear Corp Delphi Automotive PLC 1.49 General Motors Co TEGNA, Inc Total 15.38% (1) On or about September 18, 2008, Russell Investment Group ( Russell ) began calculating its Russell U.S. Indices using an enhanced Russell sector scheme, the RGS. The RGS and the former U.S. sector scheme ran in tandem until June 30, 2009, when Russell officially transitioned to the RGS and ceased calculating its indices using the U.S. sector scheme. In addition to the implementation of the RGS, Russell changed the name of the Russell 1000 Consumer Discretionary and Services Index to the Russell 1000 Consumer Discretionary Index. Consequently, performance data is not available for all the periods shown in the table for the Russell 1000 Consumer Discretionary Index because performance data does not exist for each of the entire periods using solely the U.S. sector scheme, or alternatively, using solely the RGS. The StrataQuant Consumer Discretionary Index is a registered trademark of the NYSE and has been licensed for use by First Trust Portfolios L.P., which has sub-licensed the Index for use by the Fund. The First Trust Consumer Discretionary AlphaDEX Fund is not sponsored, endorsed, sold or promoted by the NYSE, and the NYSE makes no representation or warranty regarding the advisability of investing in the Fund or as to the result to be obtained by any person from use of the StrataQuant Consumer Discretionary Index in connection with the trading of the Fund. Page 4

7 Fund Performance Overview (Unaudited) (Continued) First Trust Consumer Discretionary AlphaDEX Fund (FXD) (Continued) $30,000 $25,000 $20,000 $15,000 $10,000 $5,000 $0 7/31/07 Performance of a $10,000 Initial Investment July 31, July 31, /31/08 7/31/08 1/31/09 7/31/09 1/31/10 7/31/10 1/31/11 7/31/11 1/31/12 7/31/12 1/31/13 7/31/13 1/31/14 7/31/14 1/31/15 7/31/15 1/31/16 7/31/16 131/17 7/31/17 First Trust Consumer Discretionary AlphaDEX Fund StrataQuant Consumer Discretionary Index Russell 1000 Index S&P 500 Consumer Discretionary Index $29,268 $23,094 $21,497 $21,269 Performance figures assume reinvestment of all distributions and do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. An index is a statistical composite that tracks a specified financial market or sector. Unlike the Fund, the indices do not actually hold a portfolio of securities and therefore do not incur the expenses incurred by the Fund. These expenses negatively impact the performance of the Fund. The Fund s past performance does not predict future performance. Frequency Distribution of Discounts and Premiums Bid/Ask Midpoint vs. NAV as of July 31, 2017 The following Frequency Distribution of Discounts and Premiums charts are provided to show the frequency at which the bid/ask midpoint price for the Fund was at a discount or premium to the daily NAV. The following tables are for comparative purposes only and represent the period August 1, 2012 through July 31, Shareholders may pay more than NAV when they buy Fund shares and receive less than NAV when they sell those shares because shares are bought and sold at current market price. Data presented represents past performance and cannot be used to predict future results. Number of Days Bid/Ask Midpoint At/Above NAV For the Period 0.00%-0.49% 0.50%-0.99% 1.00%-1.99% >=2.00% 8/1/12-7/31/ /1/13-7/31/ /1/14-7/31/ /1/15-7/31/ /1/16-7/31/ Number of Days Bid/Ask Midpoint Below NAV For the Period 0.00%-0.49% 0.50%-0.99% 1.00%-1.99% >=2.00% 8/1/12-7/31/ /1/13-7/31/ /1/14-7/31/ /1/15-7/31/ /1/16-7/31/ Page 5

8 Fund Performance Overview (Unaudited) (Continued) First Trust Consumer Staples AlphaDEX Fund (FXG) The First Trust Consumer Staples AlphaDEX Fund (the Fund ) seeks investment results that correspond generally to the price and yield (before the Fund s fees and expenses) of an equity index called the StrataQuant Consumer Staples Index (the Consumer Staples Index ). The Fund will normally invest at least 90% of its net assets (including investment borrowings) in common stocks that comprise the Consumer Staples Index. The shares of the Fund are listed and trade on the NYSE Arca under the ticker symbol FXG. The Consumer Staples Index is a modified equal-dollar weighted index designed by the NYSE to objectively identify and select stocks from the Russell 1000 Index in the consumer staples sector that may generate positive alpha relative to traditional passive-style indices through the use of the AlphaDEX selection methodology. Alpha is an indication of how much an investment outperforms or underperforms on a risk-adjusted basis relative to its benchmark. The NYSE constructs the Consumer Staples Index using the RGS sector scheme to determine a stock s sector membership. Performance Average Annual Total Returns Cumulative Total Returns 1 Year 5 Years 10 Years Inception 5 Years 10 Years Inception Ended Ended Ended (5/8/07) Ended Ended (5/8/07) 7/31/17 7/31/17 7/31/17 to 7/31/17 7/31/17 7/31/17 to 7/31/17 Fund Performance NAV -3.31% 16.58% 10.87% 10.12% % % % Market Price -3.31% 16.61% 10.87% 10.12% % % % Index Performance StrataQuant Consumer Staples Index -2.68% 17.37% 11.69% 10.94% % % % Russell 1000 Index 15.95% 14.85% 7.84% 7.31% 99.80% % % S&P 500 Consumer Staples Index 4.39% 12.12% 10.77% 10.24% 77.16% % % Russell 1000 Consumer Staples Index (1) 3.66% 12.90% N/A N/A 83.41% N/A N/A (See Notes to Fund Performance Overview on page 22.) Performance Review FXG s one-year NAV return of -3.31% underperformed the benchmark S&P 500 Consumer Staples Index s return of 4.39% by 7.70%. Over the period, the Food Products industry was the heaviest weighted industry at 47.6% and the worst contributing industry at -1.9%, stemming from its -3.2% return. The Personal Products industry was the top performing industry at 8.3%. Nu Skin Enterprises, Inc. within the Personal Products industry had a particularly good return of 21.4%. The Beverages industry was the worst performing industry with a -6.6% return. Dr Pepper Snapple Group, Inc. was the worst performer within the Beverages industry at -13.2%. On a relative basis, the Fund underperformed the benchmark. The primary cause of the relative underperformance can be attributed to the Fund having a 31.6% greater allocation to the negative returning Food Products industry, creating -1.9% of relative drag. No industry created positive relative performance over the period. The least impacting industry was the Personal Products industry with a -0.6% relative contribution. % of Total Sector Classification Long-Term Investments Consumer Staples % Total % % of Total Top Ten Holdings Long-Term Investments Pilgrim s Pride Corp. 5.29% Bunge Ltd Molson Coors Brewing Co., Class B 4.92 Archer-Daniels-Midland Co Tyson Foods, Inc., Class A 4.83 Nu Skin Enterprises, Inc., Class A 4.82 Whole Foods Market, Inc Kroger (The) Co Ingredion, Inc US Foods Holding Corp Total 44.93% (1) On or about September 18, 2008, Russell began calculating its Russell U.S. Indices using an enhanced Russell sector scheme, the RGS. The RGS and the former U.S. sector scheme ran in tandem until June 30, 2009, when Russell officially transitioned to the RGS and ceased calculating its indices using the U.S. sector scheme. Consequently, performance data is not available for all the periods shown in the table for the Russell 1000 Consumer Staples Index because performance data does not exist for each of the entire periods using solely the U.S. sector scheme, or alternatively, using solely the RGS. The StrataQuant Consumer Staples Index is a registered trademark of the NYSE and has been licensed for use by First Trust Portfolios L.P., which has sub-licensed the Index for use by the Fund. The First Trust Consumer Staples AlphaDEX Fund is not sponsored, endorsed, sold or promoted by the NYSE, and the NYSE makes no representation or warranty regarding the advisability of investing in the Fund or as to the result to be obtained by any person from use of the StrataQuant Consumer Staples Index in connection with the trading of the Fund. Page 6

9 Fund Performance Overview (Unaudited) (Continued) First Trust Consumer Staples AlphaDEX Fund (FXG) (Continued) $35,000 $30,000 $25,000 $20,000 $15,000 $10,000 $5,000 $0 7/31/07 Performance of a $10,000 Initial Investment July 31, July 31, /31/08 7/31/08 1/31/09 7/31/09 1/31/10 7/31/10 1/31/11 7/31/11 1/31/12 7/31/12 1/31/13 7/31/13 1/31/14 7/31/14 First Trust Consumer Staples AlphaDEX Fund StrataQuant Consumer Staples Index Russell 1000 Index S&P 500 Consumer Staples Index 1/31/15 7/31/15 1/31/16 7/31/16 1/31/17 7/31/17 $30,211 $28,068 $27,820 $21,269 Performance figures assume reinvestment of all distributions and do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. An index is a statistical composite that tracks a specified financial market or sector. Unlike the Fund, the indices do not actually hold a portfolio of securities and therefore do not incur the expenses incurred by the Fund. These expenses negatively impact the performance of the Fund. The Fund s past performance does not predict future performance. Frequency Distribution of Discounts and Premiums Bid/Ask Midpoint vs. NAV as of July 31, 2017 The following Frequency Distribution of Discounts and Premiums charts are provided to show the frequency at which the bid/ask midpoint price for the Fund was at a discount or premium to the daily NAV. The following tables are for comparative purposes only and represent the period August 1, 2012 through July 31, Shareholders may pay more than NAV when they buy Fund shares and receive less than NAV when they sell those shares because shares are bought and sold at current market price. Data presented represents past performance and cannot be used to predict future results. Number of Days Bid/Ask Midpoint At/Above NAV For the Period 0.00%-0.49% 0.50%-0.99% 1.00%-1.99% >=2.00% 8/1/12-7/31/ /1/13-7/31/ /1/14-7/31/ /1/15-7/31/ /1/16-7/31/ Number of Days Bid/Ask Midpoint Below NAV For the Period 0.00%-0.49% 0.50%-0.99% 1.00%-1.99% >=2.00% 8/1/12-7/31/ /1/13-7/31/ /1/14-7/31/ /1/15-7/31/ /1/16-7/31/ Page 7

10 Fund Performance Overview (Unaudited) (Continued) First Trust Energy AlphaDEX Fund (FXN) The First Trust Energy AlphaDEX Fund (the Fund ) seeks investment results that correspond generally to the price and yield (before the Fund s fees and expenses) of an equity index called the StrataQuant Energy Index (the Energy Index ). The Fund will normally invest at least 90% of its net assets (including investment borrowings) in common stocks that comprise the Energy Index. The shares of the Fund are listed and trade on the NYSE Arca under the ticker symbol FXN. The Energy Index is a modified equal-dollar weighted index designed by the NYSE to objectively identify and select stocks from the Russell 1000 Index in the energy sector that may generate positive alpha relative to traditional passive-style indices through the use of the AlphaDEX selection methodology. Alpha is an indication of how much an investment outperforms or underperforms on a risk-adjusted basis relative to its benchmark. The NYSE constructs the Energy Index using the RGS sector scheme to determine a stock s sector membership. Performance Average Annual Total Returns Cumulative Total Returns 1 Year 5 Years 10 Years Inception 5 Years 10 Years Inception Ended Ended Ended (5/8/07) Ended Ended (5/8/07) 7/31/17 7/31/17 7/31/17 to 7/31/17 7/31/17 7/31/17 to 7/31/17 Fund Performance NAV -4.99% -4.63% -3.21% -2.80% % % % Market Price -4.99% -4.61% -3.22% -2.80% % % % Index Performance StrataQuant Energy Index -4.26% -4.14% -2.63% -2.20% % % % Russell 1000 Index 15.95% 14.85% 7.84% 7.31% 99.80% % % S&P 500 Energy Index 0.19% 1.31% 1.46% 2.14% 6.73% 15.54% 24.13% Russell 1000 Energy Index (1) -0.46% 0.57% N/A N/A 2.89% N/A N/A (See Notes to Fund Performance Overview on page 22.) Performance Review FXN s one-year NAV return of -4.99% underperformed the benchmark S&P 500 Energy Index s return of 0.19% by 5.18%. The Energy Equipment & Services industry was the lead contributor to the Fund s negative return over the period. With an average 23.8% allocation and -23.3% return, the Energy Equipment & Services industry contributed -5.9% to the Fund s return. Securities such as Diamond Offshore Drilling, Inc. and Noble Corp. PLC were the worst performers within the Energy Equipment & Services industry with -53.6% and -52.3% returns, respectively. The Oil, Gas & Consumable Fuels industry, which was given an average 71.4% allocation, had a 2.5% return and contributed 2.3% to the Fund s return. Securities such as Marathon Petroleum Corp. and Valero Energy Corp. were the top performers within the Oil, Gas & Consumable Fuels industry with 47.9% and 37.3% returns, respectively. On a relative basis, the Fund underperformed the benchmark. The primary cause of the relative underperformance is attributable to the Fund s poorer performance amongst the Energy Equipment & Services industry, where the Fund underperformed the benchmark by -16.9% creating -4.7% of relative drag. The Oil, Gas & Consumable Fuels industry created 0.9% of relative outperformance. % of Total Sector Classification Long-Term Investments Energy 99.19% Information Technology 0.81 Total % % of Total Top Ten Holdings Long-Term Investments Andeavor 3.86% SM Energy Co Transocean Ltd Rice Energy, Inc Chevron Corp Murphy Oil Corp PBF Energy, Inc., Class A 3.71 Valero Energy Corp Oceaneering International, Inc Energen Corp Total 36.68% (1) On or about September 18, 2008, Russell began calculating its Russell U.S. Indices using an enhanced Russell sector scheme, the RGS. The RGS and the former U.S. sector scheme ran in tandem until June 30, 2009, when Russell officially transitioned to the RGS and ceased calculating its indices using the U.S. sector scheme. In addition to the implementation of the RGS, Russell combined the Russell 1000 Integrated Oils Index and the Russell 1000 Other Energy Index into one index, the Russell 1000 Energy Index. Consequently, performance data is not available for all the periods shown in the table for the Russell 1000 Energy Index because this index did not exist until on or about September 18, The StrataQuant Energy Index is a registered trademark of the NYSE and has been licensed for use by First Trust Portfolios L.P., which has sub-licensed the Index for use by the Fund. The First Trust Energy AlphaDEX Fund is not sponsored, endorsed, sold or promoted by the NYSE, and the NYSE makes no representation or warranty regarding the advisability of investing in the Fund or as to the result to be obtained by any person from use of the StrataQuant Energy Index in connection with the trading of the Fund. Page 8

11 Fund Performance Overview (Unaudited) (Continued) First Trust Energy AlphaDEX Fund (FXN) (Continued) $25,000 $20,000 $15,000 $10,000 $5,000 $0 7/31/07 Performance of a $10,000 Initial Investment July 31, July 31, /31/08 7/31/08 1/31/09 7/31/09 1/31/10 7/31/10 1/31/11 7/31/11 1/31/12 7/31/12 1/31/13 7/31/13 First Trust Energy AlphaDEX Fund StrataQuant Energy Index Russell 1000 Index S&P 500 Energy Index 1/31/14 7/31/14 1/31/15 7/31/15 1/31/16 7/31/16 1/31/17 7/31/17 $21,269 $11,556 $7,665 $7,212 Performance figures assume reinvestment of all distributions and do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. An index is a statistical composite that tracks a specified financial market or sector. Unlike the Fund, the indices do not actually hold a portfolio of securities and therefore do not incur the expenses incurred by the Fund. These expenses negatively impact the performance of the Fund. The Fund s past performance does not predict future performance. Frequency Distribution of Discounts and Premiums Bid/Ask Midpoint vs. NAV as of July 31, 2017 The following Frequency Distribution of Discounts and Premiums charts are provided to show the frequency at which the bid/ask midpoint price for the Fund was at a discount or premium to the daily NAV. The following tables are for comparative purposes only and represent the period August 1, 2012 through July 31, Shareholders may pay more than NAV when they buy Fund shares and receive less than NAV when they sell those shares because shares are bought and sold at current market price. Data presented represents past performance and cannot be used to predict future results. Number of Days Bid/Ask Midpoint At/Above NAV For the Period 0.00%-0.49% 0.50%-0.99% 1.00%-1.99% >=2.00% 8/1/12-7/31/ /1/13-7/31/ /1/14-7/31/ /1/15-7/31/ /1/16-7/31/ Number of Days Bid/Ask Midpoint Below NAV For the Period 0.00%-0.49% 0.50%-0.99% 1.00%-1.99% >=2.00% 8/1/12-7/31/ /1/13-7/31/ /1/14-7/31/ /1/15-7/31/ /1/16-7/31/ Page 9

12 Fund Performance Overview (Unaudited) (Continued) First Trust Financials AlphaDEX Fund (FXO) The First Trust Financials AlphaDEX Fund (the Fund ) seeks investment results that correspond generally to the price and yield (before the Fund s fees and expenses) of an equity index called the StrataQuant Financials Index (the Financials Index ). The Fund will normally invest at least 90% of its net assets (including investment borrowings) in common stocks that comprise the Financials Index. The shares of the Fund are listed and trade on the NYSE Arca under the ticker symbol FXO. The Financials Index is a modified equal-dollar weighted index designed by the NYSE to objectively identify and select stocks from the Russell 1000 Index in the financial services sector that may generate positive alpha relative to traditional passive-style indices through the use of the AlphaDEX selection methodology. Alpha is an indication of how much an investment outperforms or underperforms on a risk-adjusted basis relative to its benchmark. The NYSE constructs the Financials Index using the RGS sector scheme to determine a stock s sector membership. Performance Average Annual Total Returns Cumulative Total Returns 1 Year 5 Years 10 Years Inception 5 Years 10 Years Inception Ended Ended Ended (5/8/07) Ended Ended (5/8/07) 7/31/17 7/31/17 7/31/17 to 7/31/17 7/31/17 7/31/17 to 7/31/17 Fund Performance NAV 24.00% 17.07% 6.86% 5.55% % 94.10% 73.82% Market Price 24.00% 17.07% 6.84% 5.55% % 93.87% 73.81% Index Performance StrataQuant Financials Index 24.79% 17.90% 7.73% 6.43% % % 89.24% Russell 1000 Index 15.95% 14.85% 7.84% 7.31% 99.80% % % S&P 500 Financials Index 32.99% 18.36% 1.38% 0.18% % 14.66% 1.85% Russell 1000 Financial Services Index (1) 25.58% 17.36% N/A N/A % N/A N/A (See Notes to Fund Performance Overview on page 22.) Performance Review FXO s one-year NAV return of 24.00% underperformed the benchmark S&P 500 Financials Index s return of 32.99% by 8.99%. Only one financial industry had a negative impact to the Fund s performance over the period, which was the Real Estate Investment Trust industry with a -0.8% contribution. Securities such as Macerich (The) Co. and Kimco Realty Corp. were the worst performers within the Real Estate Investment Trust industry with -33.5% and -32.7% returns, respectively. The top contributing industry was the Banks industry. The Banks industry had an average 18.5% allocation and a 43.3% return, leading to an 8.9% contribution to the Fund s return. Securities such as SVB Financial Group and East West Bancorp, Inc. were the top performers within the Banks industry with 82.62% and 72.2% returns, respectively. On a relative basis, the Fund underperformed the benchmark. The Fund s holdings within the Real Estate Investment Trust industry were the primary cause of the relative underperformance as the Fund lagged the benchmarks return by -5.3% which created -4.8% of relative drag. The Fund s holdings amongst the Diversified Financial Services industry reversed 1.3% of underperformance due to the Fund s relative outperformance of 10.1%. % of Total Sector Classification Long-Term Investments Financials 69.16% Real Estate Information Technology Industrials 1.14 Total % % of Total Top Ten Holdings Long-Term Investments Square, Inc., Class A 1.02% T. Rowe Price Group, Inc New Residential Investment Corp PayPal Holdings, Inc FNF Group 0.99 OneMain Holdings, Inc Ally Financial, Inc First American Financial Corp Assured Guaranty Ltd Progressive (The) Corp Total 9.89% (1) On or about September 18, 2008, Russell began calculating its Russell U.S. Indices using an enhanced Russell sector scheme, the RGS. The RGS and the former U.S. sector scheme ran in tandem until June 30, 2009, when Russell officially transitioned to the RGS and ceased calculating its indices using the U.S. sector scheme. Consequently, performance data is not available for all the periods shown in the table for the Russell 1000 Financial Services Index because performance data does not exist for each of the entire periods using solely the U.S. sector scheme, or alternatively, using solely the RGS. The StrataQuant Financials Index is a registered trademark of the NYSE and has been licensed for use by First Trust Portfolios L.P., which has sub-licensed the Index for use by the Fund. The First Trust Financials AlphaDEX Fund is not sponsored, endorsed, sold or promoted by the NYSE, and the NYSE makes no representation or warranty regarding the advisability of investing in the Fund or as to the result to be obtained by any person from use of the StrataQuant Financials Index in connection with the trading of the Fund. Page 10

13 Fund Performance Overview (Unaudited) (Continued) First Trust Financials AlphaDEX Fund (FXO) (Continued) $25,000 $20,000 $15,000 $10,000 $5,000 $0 7/31/07 1/31/08 Performance of a $10,000 Initial Investment July 31, July 31, /31/08 1/31/09 7/31/09 1/31/10 7/31/10 1/31/11 7/31/11 1/31/12 7/31/12 1/31/13 7/31/13 1/31/14 7/31/14 First Trust Financials AlphaDEX Fund StrataQuant Financials Index Russell 1000 Index S&P 500 Financials Index 1/31/15 7/31/15 1/31/16 7/31/16 1/31/17 7/31/17 $21,269 $21,061 $19,410 $11,466 Performance figures assume reinvestment of all distributions and do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. An index is a statistical composite that tracks a specified financial market or sector. Unlike the Fund, the indices do not actually hold a portfolio of securities and therefore do not incur the expenses incurred by the Fund. These expenses negatively impact the performance of the Fund. The Fund s past performance does not predict future performance. Frequency Distribution of Discounts and Premiums Bid/Ask Midpoint vs. NAV as of July 31, 2017 The following Frequency Distribution of Discounts and Premiums charts are provided to show the frequency at which the bid/ask midpoint price for the Fund was at a discount or premium to the daily NAV. The following tables are for comparative purposes only and represent the period August 1, 2012 through July 31, Shareholders may pay more than NAV when they buy Fund shares and receive less than NAV when they sell those shares because shares are bought and sold at current market price. Data presented represents past performance and cannot be used to predict future results. Number of Days Bid/Ask Midpoint At/Above NAV For the Period 0.00%-0.49% 0.50%-0.99% 1.00%-1.99% >=2.00% 8/1/12-7/31/ /1/13-7/31/ /1/14-7/31/ /1/15-7/31/ /1/16-7/31/ Number of Days Bid/Ask Midpoint Below NAV For the Period 0.00%-0.49% 0.50%-0.99% 1.00%-1.99% >=2.00% 8/1/12-7/31/ /1/13-7/31/ /1/14-7/31/ /1/15-7/31/ /1/16-7/31/ Page 11

14 Fund Performance Overview (Unaudited) (Continued) First Trust Health Care AlphaDEX Fund (FXH) The First Trust Health Care AlphaDEX Fund (the Fund ) seeks investment results that correspond generally to the price and yield (before the Fund s fees and expenses) of an equity index called the StrataQuant Health Care Index (the Health Care Index ). The Fund will normally invest at least 90% of its net assets (including investment borrowings) in common stocks that comprise the Health Care Index. The shares of the Fund are listed and trade on the NYSE Arca under the ticker symbol FXH. The Health Care Index is a modified equal-dollar weighted index designed by the NYSE to objectively identify and select stocks from the Russell 1000 Index in the health care sector that may generate positive alpha relative to traditional passive-style indices through the use of the AlphaDEX selection methodology. Alpha is an indication of how much an investment outperforms or underperforms on a riskadjusted basis relative to its benchmark. The NYSE constructs the Health Care Index using the RGS sector scheme to determine a stock s sector membership. Performance Average Annual Total Returns Cumulative Total Returns 1 Year 5 Years 10 Years Inception 5 Years 10 Years Inception Ended Ended Ended (5/8/07) Ended Ended (5/8/07) 7/31/17 7/31/17 7/31/17 to 7/31/17 7/31/17 7/31/17 to 7/31/17 Fund Performance NAV 8.72% 17.50% 13.21% 12.60% % % % Market Price 8.74% 17.51% 13.20% 12.61% % % % Index Performance StrataQuant Health Care Index 9.39% 18.28% 14.02% 13.42% % % % Russell 1000 Index 15.95% 14.85% 7.84% 7.31% 99.80% % % S&P 500 Health Care Index 8.00% 17.79% 11.15% 10.01% % % % Russell 1000 Health Care Index (1) 8.43% 18.19% N/A N/A % N/A N/A (See Notes to Fund Performance Overview on page 22.) Performance Review FXH s one-year NAV return of 8.72% outperformed the benchmark S&P 500 Health Care Index s return of 8.00% by 0.72%. The Health Care Equipment & Supplies industry was the top contributor to the Fund s return over the period with a 5.2% contribution, resulting from its 29.1% average allocation and 20.8% return. Securities such as Align Technology, Inc. and IDEXX Laboratories, Inc. were the top performers within the Health Care Equipment & Supplies industry with 90.1% and 64.9% returns, respectively. The Pharmaceuticals industry was the worst contributor to the Fund s return over the period with a -2.5% contribution, resulting from its 8.6% average allocation and -18.2% return. Securities such as Endo International PLC and Mallinckrodt PLC were the worst performers within the Pharmaceuticals industry with -36.9% and -33.9% returns, respectively. On a relative basis, the Fund outperformed the benchmark. The Fund s holdings amongst the Health Care Equipment & Supplies industry were the primary cause of the relative outperformance as the Fund had a 9.9% higher return than the benchmark. Relative outperformance was reversed by 1.9% due to the Fund underperforming the benchmark in the Health Care Providers & Services industry by 9.6%. % of Total Sector Classification Long-Term Investments Health Care % Total % % of Total Top Ten Holdings Long-Term Investments Vertex Pharmaceuticals, Inc. 2.61% Align Technology, Inc Exelixis, Inc Gilead Sciences, Inc Veeva Systems, Inc., Class A 2.31 Alnylam Pharmaceuticals, Inc UnitedHealth Group, Inc Mallinckrodt PLC 2.27 DaVita, Inc Centene Corp Total 23.52% (1) On or about September 18, 2008, Russell began calculating its Russell U.S. Indices using an enhanced Russell sector scheme, the RGS. The RGS and the former U.S. sector scheme ran in tandem until June 30, 2009, when Russell officially transitioned to the RGS and ceased calculating its indices using the U.S. sector scheme. Consequently, performance data is not available for all the periods shown in the table for the Russell 1000 Health Care Index because performance data does not exist for each of the entire periods using solely the U.S. sector scheme, or alternatively, using solely the RGS. The StrataQuant Health Care Index is a registered trademark of the NYSE and has been licensed for use by First Trust Portfolios L.P., which has sub-licensed the Index for use by the Fund. The First Trust Health Care AlphaDEX Fund is not sponsored, endorsed, sold or promoted by the NYSE, and the NYSE makes no representation or warranty regarding the advisability of investing in the Fund or as to the result to be obtained by any person from use of the StrataQuant Health Care Index in connection with the trading of the Fund. Page 12

15 Fund Performance Overview (Unaudited) (Continued) First Trust Health Care AlphaDEX Fund (FXH) (Continued) $40,000 $30,000 $20,000 $10,000 $0 7/31/07 1/31/08 Performance of a $10,000 Initial Investment July 31, July 31, /31/08 1/31/09 7/31/09 1/31/10 7/31/10 1/31/11 7/31/11 1/31/12 7/31/12 1/31/13 7/31/13 1/31/14 7/31/14 First Trust Health Care AlphaDEX Fund StrataQuant Health Care Index Russell 1000 Index S&P 500 Health Care Index 1/31/15 7/31/15 1/31/16 7/31/16 1/31/17 7/31/17 $37,153 $34,586 $28,781 $21,269 Performance figures assume reinvestment of all distributions and do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. An index is a statistical composite that tracks a specified financial market or sector. Unlike the Fund, the indices do not actually hold a portfolio of securities and therefore do not incur the expenses incurred by the Fund. These expenses negatively impact the performance of the Fund. The Fund s past performance does not predict future performance. Frequency Distribution of Discounts and Premiums Bid/Ask Midpoint vs. NAV as of July 31, 2017 The following Frequency Distribution of Discounts and Premiums charts are provided to show the frequency at which the bid/ask midpoint price for the Fund was at a discount or premium to the daily NAV. The following tables are for comparative purposes only and represent the period August 1, 2012 through July 31, Shareholders may pay more than NAV when they buy Fund shares and receive less than NAV when they sell those shares because shares are bought and sold at current market price. Data presented represents past performance and cannot be used to predict future results. Number of Days Bid/Ask Midpoint At/Above NAV For the Period 0.00%-0.49% 0.50%-0.99% 1.00%-1.99% >=2.00% 8/1/12-7/31/ /1/13-7/31/ /1/14-7/31/ /1/15-7/31/ /1/16-7/31/ Number of Days Bid/Ask Midpoint Below NAV For the Period 0.00%-0.49% 0.50%-0.99% 1.00%-1.99% >=2.00% 8/1/12-7/31/ /1/13-7/31/ /1/14-7/31/ /1/15-7/31/ /1/16-7/31/ Page 13

16 Fund Performance Overview (Unaudited) (Continued) First Trust Industrials/Producer Durables AlphaDEX Fund (FXR) The First Trust Industrials/Producer Durables AlphaDEX Fund (the Fund ) seeks investment results that correspond generally to the price and yield (before the Fund s fees and expenses) of an equity index called the StrataQuant Industrials Index (the Industrials Index ). The Fund will normally invest at least 90% of its net assets (including investment borrowings) in common stocks that comprise the Industrials Index. The shares of the Fund are listed and trade on the NYSE Arca under the ticker symbol FXR. The Industrials Index is a modified equal-dollar weighted index designed by the NYSE to objectively identify and select stocks from the Russell 1000 Index in the industrials and producer durables sector that may generate positive alpha relative to traditional passive-style indices through the use of the AlphaDEX selection methodology. Alpha is an indication of how much an investment outperforms or underperforms on a risk-adjusted basis relative to its benchmark. The NYSE constructs the Industrials Index using the RGS sector scheme to determine a stock s sector membership. Performance Average Annual Total Returns Cumulative Total Returns 1 Year 5 Years 10 Years Inception 5 Years 10 Years Inception Ended Ended Ended (5/8/07) Ended Ended (5/8/07) 7/31/17 7/31/17 7/31/17 to 7/31/17 7/31/17 7/31/17 to 7/31/17 Fund Performance NAV 22.81% 15.81% 7.32% 6.54% % % 91.21% Market Price 22.81% 15.81% 7.29% 6.54% % % 91.22% Index Performance StrataQuant Industrials Index 23.90% 16.65% 8.11% 7.34% % % % Russell 1000 Index 15.95% 14.85% 7.84% 7.31% 99.80% % % S&P 500 Industrials Index 18.31% 15.98% 7.54% 7.78% % % % Russell 1000 Producer Durables Index (1) 19.84% 16.56% N/A N/A % N/A N/A (See Notes to Fund Performance Overview on page 22.) Performance Review FXR s one-year NAV return of 22.81% outperformed the benchmark S&P 500 Industrials Index s return of 18.31% by 4.50%. The majority of the Fund s return was created by the Machinery industry where the Fund allocated 21.1% and had a 30.7% return, leading to a 6.4% contribution. Securities such as Deere & Co. and Toro (The) Co. were the top performers within the Machinery industry with 69.9% and 58.5% returns, respectively. Industrial Conglomerates were the worst contributing securities over the period with a 0.1% contribution to the Fund s return. Securities such as Carlisle Cos., Inc. and 3M Co. were the worst performers within the Industrial Conglomerates industry with -3.8% and -2.7% returns, respectively. On a relative basis, the Fund outperformed the benchmark. The primary cause of the Fund s relative outperformance is attributable to the Fund s holdings within the Industrial Conglomerates industry where the Fund allocated 22.9% less to the poor performing industry creating 4.6% of relative outperformance. Relative outperformance was reversed by 1.7% due to the Fund under allocating the benchmark within the well performing Aerospace & Defense industry by 7.8%. % of Total Sector Classification Long-Term Investments Industrials 85.71% Information Technology 9.53 Health Care 3.20 Materials 1.56 Total % % of Total Top Ten Holdings Long-Term Investments Copa Holdings S.A., Class A 1.99% Air Lease Corp Textron, Inc Quanta Services, Inc Regal Beloit Corp Ryder System, Inc Eaton Corp. PLC 1.86 American Airlines Group, Inc Boeing (The) Co Trinity Industries, Inc Total 18.89% (1) On or about September 18, 2008, Russell began calculating its Russell U.S. Indices using an enhanced Russell sector scheme, the RGS. The RGS and the former U.S. sector scheme ran in tandem until June 30, 2009, when Russell officially transitioned to the RGS and ceased calculating its indices using the U.S. sector scheme. Consequently, performance data is not available for all the periods shown in the table for the Russell 1000 Producer Durables Index because performance data does not exist for each of the entire periods using solely the U.S. sector scheme, or alternatively, using solely the RGS. The StrataQuant Industrials Index is a registered trademark of the NYSE and has been licensed for use by First Trust Portfolios L.P., which has sub-licensed the Index for use by the Fund. The First Trust Industrials/Producer Durables AlphaDEX Fund is not sponsored, endorsed, sold or promoted by the NYSE, and the NYSE makes no representation or warranty regarding the advisability of investing in the Fund or as to the result to be obtained by any person from use of the StrataQuant Industrials Index in connection with the trading of the Fund. Page 14