First Trust Exchange-Traded AlphaDEX Fund

Transcription

1 First Trust Exchange-Traded AlphaDEX Fund Annual Report July 31, 2016 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 July 31, 2016 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 This report contains information that may help you evaluate your investment in each Fund. 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, 2016 Dear Shareholders: Thank you for your investment in the Sector Funds of First Trust Exchange-Traded AlphaDEX Fund. 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, 2016, including a market overview and a performance analysis for the period. We encourage you to read this report and discuss it with your financial advisor. While markets were up and down during 2015, we believe there are three important things to remember. First, the U.S. economy grew, despite the massive decline in oil prices. Second, the tapering that began in 2014 by the Federal Reserve (the Fed ) did not stop growth in the U.S. economy. Finally, the long-anticipated rate hike by the Fed in December 2015 had little effect on the money supply, and the stock market was not shocked by the hike. Early in 2016, many investors were concerned that the volatility we saw in the market in 2015 would continue, and it did. From December 31, 2015 through February 11, 2016, the S&P 500 Index declined by 10.27%. Since then, the market has made a steady comeback, and from February 11, 2016 to July 31, 2016, the S&P 500 Index was up 19.99%. First Trust believes that having a long-term investment horizon and investing in quality products can help you reach your goals, regardless of how the market behaves. We have always maintained perspective about the markets and believe investors should as well. We will continue to strive to provide quality investment opportunities each and every day, which has been one of the hallmarks of our firm since its inception 25 years ago. Thank you for giving First Trust the opportunity to be a part of your investment plan. We value our relationship with you and will continue to focus on helping investors like 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, 2016 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 One of the reasons cited by the Federal Reserve for not raising interest rates beyond the initial 0.25% hike in the federal funds target rate on December 16, 2015 is the slowdown in global growth. The International Monetary Fund reduced its global growth estimate for 2016 from 3.3% in April to 3.2% in July. It also shaved its 2017 estimate by 0.1% to 3.5%, according to its own release. To help put this concern into perspective, the rate was 5.4% in The rebound in the price of crude oil is boosting Mergers & Acquisitions ( M&A ) activity in the energy sector, according to Bloomberg. From February 11, 2016 (multi-year low) through August 25, 2016, the price of a barrel of crude oil rose 80.6%, from $26.21 to $ Wood Mackenzie, a consulting firm, reported that more than $11 billion worth of oil and gas transactions were announced globally in July. It was the highest monthly total so far this year. Since May, deal volume has totaled $32 billion. Wood Mackenzie believes that M&A activity will continue to accelerate as oil prices stabilize. Higher energy prices, if sustained, could help boost global economic growth moving forward. Many nations around the globe rely fairly heavily on the sale of crude oil to help fund their economies, in our opinion. ETFGI, an industry research group, reported that total assets invested in exchange-traded funds (ETFs) and other exchange-traded products (ETPs) reached a record high of $3.34 trillion globally in July 2016, according to its own release. Total assets invested in U.S. ETFs/ETPs reached a record high of $2.37 trillion in July Sector Investing One barometer for gauging investors appetites for equities is tracking money flows in and out of open-end mutual funds and ETFs. For the 12-month period ended July 31, 2016, U.S. Equity funds/etfs reported net outflows totaling over $47 billion, according to data from Morningstar. Investors continue to favor passive funds over actively managed funds. Passive U.S. Equity funds/etfs reported net inflows totaling $163.6 billion, compared to net outflows totaling $211.0 billion for actively managed U.S. Equity funds/etfs. For the 12-month period ended July 2016, investors pulled capital from sector funds/etfs, which reported net outflows totaling $18.1 billion. Passive Sector Equity funds/etfs reported net inflows totaling $3.1 billion, compared to net outflows totaling $21.2 billion for actively managed Sector Equity funds/etfs. Using Morningstar fund categories, some of the major sectors reporting the highest net inflows over the past 12 months were Real Estate ($7.3 billion), Equity Energy ($5.6 billion), Utilities ($2.8 billion), Consumer Defensive ($2.3 billion) and Communications ($1.3 billion). Slow and steady appears to be winning the race, in our opinion. Despite the moderate pace of economic growth since the previous recession ended in 2009, the current bull market in stocks is the second-longest in U.S. history at 2,701 days through July, as measured by the S&P 500 Index, according to Bespoke Investment Group. From March 9, 2009 to July 29, 2016, the S&P 500 Index posted a cumulative total return of %, according Bloomberg. From 2009 to 2015, the S&P 500 Index increased its annual earnings from $58.15 to $109.32, according to Bloomberg. As of August 5, 2016, Bloomberg s consensus estimates for 2016 and 2017 are $ and $133.11, 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 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 screening 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 Cumulative Total Returns Total Returns 1 Year 5 Years Inception 5 Years Inception Ended Ended (5/8/07) Ended (5/8/07) 7/31/16 7/31/16 to 7/31/16 7/31/16 to 7/31/16 Fund Performance NAV -2.34% 12.00% 7.36% 76.26% 92.58% Market Price -2.39% 12.00% 7.35% 76.21% 92.52% Index Performance StrataQuant Consumer Discretionary Index -1.74% 12.77% 8.15% 82.36% % Russell 1000 Index 4.84% 13.22% 6.41% 86.03% 77.45% S&P 500 Consumer Discretionary Index 3.53% 17.50% 10.05% % % Russell 1000 Consumer Discretionary Index (1) 2.81% 16.74% NA % NA (See Notes to Fund Performance Overview on page 22.) Performance Review FXD s one-year net asset value ( NAV ) return of -2.34% underperformed the benchmark S&P 500 Consumer Discretionary Index return of 3.53% by -5.87%. The Auto Components industry was the best contributing and best performing industry during the period, with a 0.97% contribution and 17.4% return. The Textiles Apparel & Luxury Goods industry was the worst contributing and second worst performing industry during the period, with a -1.7% contribution and -17.1% return. The highest weighted industry during the period was Specialty Retail at an average 23.2% weighting. This industry had an average return of -0.7%. On a relative basis, the Fund underperformed the benchmark primarily because the Fund was underweight Amazon.com, Inc. within the Internet & Catalog Retail industry. Amazon.com, Inc. was held at an average weighting of 1.3% during the period versus the benchmark weighting of 10.4%. Amazon.com, Inc. s return of 41.5% caused -2.9% of relative underperformance. The Fund s underweighting of Walt Disney Co. by 6.5%, relative to the benchmark, reversed 1.6% of underperformance. Walt Disney Co. had a return of -18.6% during the period. % of Total Sector Classification Long-Term Investments Consumer Discretionary 92.37% Industrials 3.57 Information Technology 1.44 Consumer Staples 1.33 Financials 1.29 Total % % of Total Top Ten Holdings Long-Term Investments Penske Automotive Group, Inc. 1.64% Gap (The), Inc GameStop Corp., Class A 1.51 Burlington Stores, Inc Gentex Corp BorgWarner, Inc Dillard s, Inc., Class A 1.45 Lear Corp General Motors Co Best Buy Co., Inc Total 14.95% (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) $25,000 $20,000 $15,000 $10,000 $5,000 $0 5/8/07 Performance of a $10,000 Initial Investment May 8, July 31, /31/07 1/31/08 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 First Trust Consumer Discretionary AlphaDEX Fund StrataQuant Consumer Discretionary Index Russell 1000 Index S&P 500 Consumer Discretionary Index 7/31/15 1/31/16 7/31/16 $24,200 $20,608 $19,259 $17,745 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, 2016 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, 2011 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% 8/1/11-7/31/ /1/12-7/31/ /1/13-7/31/ /1/14-7/31/ /1/15-7/31/ 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% 8/1/11-7/31/ /1/12-7/31/ /1/13-7/31/ /1/14-7/31/ /1/15-7/31/ 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 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 screening 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 Cumulative Total Returns Total Returns 1 Year 5 Years Inception 5 Years Inception Ended Ended (5/8/07) Ended (5/8/07) 7/31/16 7/31/16 to 7/31/16 7/31/16 to 7/31/16 Fund Performance NAV 9.19% 16.64% 11.69% % % Market Price 9.14% 16.65% 11.68% % % Index Performance StrataQuant Consumer Staples Index 9.85% 17.54% 12.53% % % Russell 1000 Index 4.84% 13.22% 6.41% 86.03% 77.45% S&P 500 Consumer Staples Index 11.67% 15.22% 10.89% % % Russell 1000 Consumer Staples Index (1) 11.46% 15.60% NA % NA (See Notes to Fund Performance Overview on page 22.) Performance Review FXG s one-year NAV return of 9.19% underperformed the benchmark S&P 500 Consumer Staples Index return of 11.67% by -2.48%. With a return of 7.8% and average weighting of 44.9%, Food Products was the top performing and highest weighted industry during the period, contributing 7.8% to the Fund s return. Within the industry, Tyson Foods, Inc. was the top returning security with a 67.6% return. The Food & Staples Retailing was the only industry to have a negative return during the period, with a -9.6% return. The Fund held this industry at an average 21.9% weighting, leading to a contribution of -2.0% during the period. Rite Aid Corp. was the worst performing security with a -21.4% return. On a relative basis, the Fund underperformed the benchmark primarily due to the Fund overweighting Rite Aid Corp. by 3.8%, creating -1.5% of drag, and due to the Fund underweighting the Tobacco industry by 9.7%, creating -1.2% of drag. The Tobacco industry had a return of 22.7% during the period. The well-performing Food Products industry reversed 2.3% of drag by being overweight 27.8% in the well performing industry. Tyson Foods, Inc., as mentioned above, created 1.8% of relative outperformance. % of Total Sector Classification Long-Term Investments Consumer Staples % Total % % of Total Top Ten Holdings Long-Term Investments Spectrum Brands Holdings, Inc. 5.08% Post Holdings, Inc Ingredion, Inc Sysco Corp TreeHouse Foods, Inc Energizer Holdings, Inc Mondelez International, Inc., Class A 4.55 WhiteWave Foods (The) Co Bunge Ltd Tyson Foods, Inc., Class A 3.63 Total 44.83% (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) $30,000 $25,000 $20,000 $15,000 $10,000 $5,000 $0 5/8/07 Performance of a $10,000 Initial Investment May 8, July 31, /31/07 1/31/08 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 $29,721 $27,737 $25,973 $17,745 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, 2016 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, 2011 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% 8/1/11-7/31/ /1/12-7/31/ /1/13-7/31/ /1/14-7/31/ /1/15-7/31/ 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% 8/1/11-7/31/ /1/12-7/31/ /1/13-7/31/ /1/14-7/31/ /1/15-7/31/ 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 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 screening 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 Cumulative Total Returns Total Returns 1 Year 5 Years Inception 5 Years Inception Ended Ended (5/8/07) Ended (5/8/07) 7/31/16 7/31/16 to 7/31/16 7/31/16 to 7/31/16 Fund Performance NAV % -8.20% -2.56% % % Market Price % -8.21% -2.56% % % Index Performance StrataQuant Energy Index % -7.73% -1.98% % % Russell 1000 Index 4.84% 13.22% 6.41% 86.03% 77.45% S&P 500 Energy Index 2.03% 0.23% 2.35% 1.17% 23.89% Russell 1000 Energy Index (1) -0.66% -0.71% NA -3.51% NA (See Notes to Fund Performance Overview on page 22.) Performance Review FXN s one-year NAV return of % underperformed the benchmark S&P 500 Energy Index return of 2.03% by %. The Energy Equipment & Services and Oil Gas & Consumable Fuels industries each contributed about -5.75% during the period. California Resources Corp. stands out as the worst performing security with a -69.6% return during the period, contributing -2.3% to the Fund s return. Exxon Mobil Corp. and Chevron Co., the two largest energy conglomerates held within the Fund, posted solid returns of 16.4% and 21.5%, respectively, during the period. On a relative basis, the Fund underperformed the benchmark. Exxon Mobil Corp. and Chevron Co. were two of the leading contributors to the underperformance as the Fund was underweight the benchmark -25.4% and -11.3%, respectively, causing in total -5.1% of relative underperformance. Because the benchmark is market cap weighted, these two securities take the lion s share of the weighting at 41.6%. The Fund reversed 1.7% of the relative underperformance by holding Kinder Morgan, Inc., which returned -38.9% during the period, at a 2% smaller weighting. % of Total Sector Classification Long-Term Investments Energy 96.71% Information Technology 3.29 Total % % of Total Top Ten Holdings Long-Term Investments HollyFrontier Corp. 3.65% Marathon Petroleum Corp Valero Energy Corp Tesoro Corp Antero Resources Corp First Solar, Inc Phillips Dril-Quip, Inc Transocean Ltd Noble Corp. PLC 3.06 Total 33.55% (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) $20,000 $15,000 $10,000 $5,000 $0 5/8/07 Performance of a $10,000 Initial Investment May 8, July 31, /31/07 1/31/08 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 First Trust Energy AlphaDEX Fund StrataQuant Energy Index Russell 1000 Index S&P 500 Energy Index 1/31/13 7/31/13 1/31/14 7/31/14 1/31/15 7/31/15 1/31/16 7/31/16 $17,745 $12,392 $8,316 $7,871 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, 2016 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, 2011 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% 8/1/11-7/31/ /1/12-7/31/ /1/13-7/31/ /1/14-7/31/ /1/15-7/31/ 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% 8/1/11-7/31/ /1/12-7/31/ /1/13-7/31/ /1/14-7/31/ /1/15-7/31/ 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 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 screening 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 Cumulative Total Returns Total Returns 1 Year 5 Years Inception 5 Years Inception Ended Ended (5/8/07) Ended (5/8/07) 7/31/16 7/31/16 to 7/31/16 7/31/16 to 7/31/16 Fund Performance NAV 0.22% 13.15% 3.73% 85.48% 40.18% Market Price 0.18% 13.17% 3.73% 85.61% 40.17% Index Performance StrataQuant Financials Index 0.87% 13.99% 4.61% 92.49% 51.64% Russell 1000 Index 4.84% 13.22% 6.41% 86.03% 77.45% S&P 500 Financials Index -3.77% 12.05% -2.85% 76.62% % Russell 1000 Financial Services Index (1) -1.39% 12.97% NA 83.96% NA (See Notes to Fund Performance Overview on page 22.) Performance Review FXO s one-year NAV return of 0.22% outperformed the benchmark S&P 500 Financials Index return of -3.77% by 3.99%. It was the Real Estate Investment Trust ( REIT ) industry that contributed the most to the Fund s return during the period. This industry had a return of 19.9%, an average weighting of 20.8%, and contribution of 4.4%. Digital Realty Trust, Inc. also stood out as the top performing security within the REIT industry with a 69.9% return. The Capital Market industry was the worst contributing industry with a -2.2% contribution. Notably, Waddell & Reed Financial, Inc. returned -60.9% during the period creating -0.8% contribution. On a relative basis, the Fund outperformed the benchmark primarily due to the Fund s holdings within the Banking industry. The Fund underweighted this poor performing industry (-10.3% return) by 18.6%, creating 2.5% of relative outperformance. Amongst the Diversified Financial Services industry, the Fund lost -1.2% of relative performance by having a 7.4% lower allocation and -7.3% lower return. % of Total Sector Classification Long-Term Investments Financials 90.27% Information Technology 6.55 Industrials 2.61 Consumer Discretionary 0.57 Total % % of Total Top Ten Holdings Long-Term Investments Lazard Ltd., Class A 1.10% Popular, Inc Jones Lang LaSalle, Inc MarketAxess Holdings, Inc Franklin Resources, Inc CIT Group, Inc Fidelity National Information Services, Inc Fifth Third Bancorp 0.99 Senior Housing Properties Trust 0.97 Santander Consumer USA Holdings, Inc Total 10.09% (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) $20,000 $15,000 $10,000 $5,000 $0 5/8/07 7/31/07 Performance of a $10,000 Initial Investment May 8, 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 Financials AlphaDEX Fund StrataQuant Financials Index Russell 1000 Index S&P 500 Financials Index 1/31/14 7/31/14 1/31/15 7/31/15 1/31/16 7/31/16 $17,745 $15,165 $14,018 $7,659 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, 2016 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, 2011 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% 8/1/11-7/31/ /1/12-7/31/ /1/13-7/31/ /1/14-7/31/ /1/15-7/31/ 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% 8/1/11-7/31/ /1/12-7/31/ /1/13-7/31/ /1/14-7/31/ /1/15-7/31/ 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 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 screening 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 Cumulative Total Returns Total Returns 1 Year 5 Years Inception 5 Years Inception Ended Ended (5/8/07) Ended (5/8/07) 7/31/16 7/31/16 to 7/31/16 7/31/16 to 7/31/16 Fund Performance NAV % 16.72% 13.03% % % Market Price % 16.71% 13.03% % % Index Performance StrataQuant Health Care Index % 17.50% 13.87% % % Russell 1000 Index 4.84% 13.22% 6.41% 86.03% 77.45% S&P 500 Health Care Index 0.01% 19.37% 10.23% % % Russell 1000 Health Care Index (1) -1.42% 19.63% NA % NA (See Notes to Fund Performance Overview on page 22.) Performance Review FXH s one-year NAV return of % underperformed the benchmark S&P 500 Health Care Index return of 0.01% by %. The Health Care Equipment & Supplies industry, held at an average weighting of 24.5%, had the best return of 18.8%, resulting in a contribution of 5.8%. Intuitive Surgical, Inc. was the best performing security at 48.4%. Biotechnology was the worst performing industry during the period with a return of -35.8%. This industry was held at an average weighting of 11.4%, resulting in a contribution of -9.3%. Intrexon Co. was the worst performing security with a -68.9% return. On a relative basis, the Fund underperformed the benchmark. The relative underperformance can almost all be attributed to the Health Care Providers & Services industry. In this industry, the Fund underperformed the benchmark by -11.8% and overweighted the benchmark by 23.8% in this industry during the period, creating -6.0% of relative underperformance. The Fund had a 1.4% position in Community Health Systems, Inc., a security that returned -75.2% during the period which contributed -2.4% of the drag. Relative to the benchmark, the Fund overweighted the Health Care Equipment & Supplies industry and outperformed, which reversed 1.3% of underperformance. Align Technology, Inc. led the industry in this regard with a 42.2% return, and 1.8% overweighting. % of Total Sector Classification Long-Term Investments Health Care % Total % % of Total Top Ten Holdings Long-Term Investments Edwards Lifesciences Corp. 2.44% United Therapeutics Corp Veeva Systems, Inc., Class A 2.37 Zimmer Biomet Holdings, Inc ABIOMED, Inc Laboratory Corp. of America Holdings 2.28 Baxter International, Inc VCA, Inc Boston Scientific Corp Becton, Dickinson and Co Total 23.06% (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 5/8/07 7/31/07 Performance of a $10,000 Initial Investment May 8, 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 Health Care AlphaDEX Fund StrataQuant Health Care Index Russell 1000 Index S&P 500 Health Care Index 1/31/14 7/31/14 1/31/15 7/31/15 1/31/16 7/31/16 $33,161 $30,984 $24,575 $17,745 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, 2016 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, 2011 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% 8/1/11-7/31/ /1/12-7/31/ /1/13-7/31/ /1/14-7/31/ /1/15-7/31/ 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% 8/1/11-7/31/ /1/12-7/31/ /1/13-7/31/ /1/14-7/31/ /1/15-7/31/ 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 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 screening 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 Cumulative Total Returns Total Returns 1 Year 5 Years Inception 5 Years Inception Ended Ended (5/8/07) Ended (5/8/07) 7/31/16 7/31/16 to 7/31/16 7/31/16 to 7/31/16 Fund Performance NAV -0.82% 10.99% 4.91% 68.43% 55.69% Market Price -0.86% 11.03% 4.91% 68.71% 55.70% Index Performance StrataQuant Industrials Index -0.18% 11.78% 5.68% 74.51% 66.52% Russell 1000 Index 4.84% 13.22% 6.41% 86.03% 77.45% S&P 500 Industrials Index 10.46% 13.60% 6.70% 89.15% 81.91% Russell 1000 Producer Durables Index (1) 8.69% 13.61% NA 89.24% NA (See Notes to Fund Performance Overview on page 22.) Performance Review FXR s one-year NAV return of -0.82% underperformed the benchmark S&P 500 Industrials Index return of 10.46% by %. The Commercial Services & Supplies industry led the Fund in contribution with a 1.4% contribution. This industry had a 20.8% return and was held at an average weighting of 5.6%. Tyco International PLC also led the industry with a 36.8% return. The Machinery industry was given the highest allocation during the period at 25.7%. With a relatively flat return of -0.1%, the Machinery industry contributed -1.0% to the Fund s return because of the high allocation. On a relative basis, the Fund underperformed the benchmark. The Machinery industry created -3.0% of relative underperformance by overweighting the industry by 13.2% and underperforming by -7.8%. Joy Global, Inc., in particular, was the cause of -1.1% of the relative underperformance as the Fund was overweight the -58.8% performing security by 0.6%. American Airlines Group, Inc., held within the Airlines industry, reversed 0.64% of underperformance as the Fund held the name at a 21.9% return versus the benchmarks 1.4% return. % of Total Sector Classification Long-Term Investments Industrials 90.55% Information Technology 7.23 Health Care 1.12 Materials 1.10 Total % % of Total Top Ten Holdings Long-Term Investments American Airlines Group, Inc. 2.20% Trinity Industries, Inc Alaska Air Group, Inc United Continental Holdings, Inc JetBlue Airways Corp WESCO International, Inc Air Lease Corp Delta Air Lines, Inc KBR, Inc Copart, Inc Total 19.64% (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