First Trust AlphaDEX TM U.S. Consumer Discretionary Sector Index ETF

Transcription

1 First Trust AlphaDEX TM U.S. Consumer Discretionary Sector Index ETF Annual Management Report of Fund Performance December 31, 2015

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3 ANNUAL MANAGEMENT REPORT OF FUND PERFORMANCE December 31, 2015 First Trust AlphaDEX TM U.S. Consumer Discretionary Sector Index ETF (the First Trust ETF ) This annual management report of fund performance contains financial highlights, but does not contain the complete annual financial statements of the First Trust ETF. All references to dollars contained herein are to Canadian dollars. Securityholders may also contact us to request a copy of the First Trust ETF s proxy voting policies and procedures, proxy voting disclosure record, or quarterly portfolio disclosures relating to the First Trust ETF by calling , by writing to us at FT Portfolios Canada Co., 330 Bay Street, Suite 1300, Toronto, Ontario M5H 2S8 or by visiting our web site at or SEDAR at Forward Looking Statements This document may contain forward-looking statements relating to anticipated future events, results, circumstances, performance or expectations that are not historical facts but instead represent beliefs regarding future events. By their nature, forward-looking statements are based on assumptions and are subject to inherent risks and uncertainties. There is significant risk that forward-looking statements will not prove to be accurate. Readers of this document should not place undue reliance on forward-looking statements as a number of factors could cause actual future results, conditions, actions or events to differ materially from the expectations, estimates or intentions expressed or implied in the forward-looking statements. These factors include but are not limited to market and general economic conditions, interest rates, foreign currency exchange rates, the extent of industry sector exposure, the performance of the securities of the issuers held in the portfolio and regulatory developments and the risks detailed in the First Trust ETF s prospectus. The Manager does not undertake and specifically disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. i

4 First Trust AlphaDEX TM U.S. Consumer Discretionary Sector Index ETF Management Report of Fund Performance For the year ended December 31, 2015 Investment Objective and Strategy The fundamental investment objective of First Trust AlphaDEX U.S. Consumer Discretionary Sector Index ETF (the First Trust ETF ) is to replicate, to the extent possible, the performance of the StrataQuant Consumer Discretionary Index ("Index"), net of expenses. The investment strategy of the First Trust ETF is to invest in and hold the constituent securities of the Index in the same proportion as they are reflected in the Index or securities intended to replicate the performance of such Index. The Index results from applying the AlphaDEX methodology to the Russell 1000 Index, a market index representing the large and mid-capitalization segment of the U.S. equity universe, and then selecting the constituent securities for the Index from those qualifying stocks included in the Consumer Discretionary Sector. The First Trust ETF offers one class of units on the TSX with the symbol: FHD The inception date of the First Trust ETF was October 30, Risk The risks associated with an investment in the First Trust ETF remain as discussed in the First Trust ETF s most recent prospectus. Effective after the close of business on January 30, 2015, the First Trust ETF no longer hedged its exposure to the U.S. dollar, which affected the risks associated with foreign currency exposure. The First Trust ETF provides the same exposure to various segments of the U.S. equity market but in a non-u.s. currency hedged manner. Results of Operations The First Trust ETF s net asset value as of December 31, 2015 was $3,443,080 or $22.95 per unit. The First Trust ETF s net asset value as of December 31, 2014 was $2,198,434 or $21.98 per unit. The First Trust ETF paid quarterly cash distributions per unit as follows: 2015 Payment Dates Jan 12 th Apr 8 th Jul 8 th Oct 7 th FHD Additionally, the First Trust ETF made distributions of per unit to Unitholders of record on December 31, These amounts were reinvested in the First Trust ETF and not paid in cash to Unitholders. Investment Performance The First Trust ETF returned 5.17% for the year ended December 31, This compares with the Russell 1000 Consumer Discretionary and Services Index (the benchmark ) total return of 27.60%. The First Trust ETF underperformed the benchmark due to both currency effects and stock selection and allocation. The portfolio held 128 equity securities as of December 31, The top ten equity holdings accounted for 15.13% of the portfolio. The AlphaDEX stock selection process is a rules-based process and can result in industry weightings that differ from that of the benchmark. Effective January 30, 2015, the First Trust ETF discontinued hedging its exposure to the U.S. Dollar. During the month of January, the U.S. Dollar appreciated 9.56% against the Canadian Dollar. Since the First Trust ETF was still hedged against the U.S. Dollar at this time, the portfolio did not participate in these gains in the U.S. Dollar. This was responsible for a significant part of the underperformance for the period as the benchmark was not hedged. However, in the subsequent eleven months of the period the U.S. Dollar appreciated 8.69% against the Canadian Dollar, which contributed positively to absolute returns during the period. 1

5 First Trust AlphaDEX TM U.S. Consumer Discretionary Sector Index ETF Management Report of Fund Performance For the year ended December 31, 2015 The First Trust ETF underperformed during the period due to negative stock selection within Diversified Retail. Specifically, the First Trust ETF held an underweight position in Amazon.com, Inc., which significantly outperformed the benchmark. Negative stock selection within Specialty Retail also detracted from the First Trust ETF s performance. Partially offsetting the underperformance was an underweight position within Diversified Media. An underweight position in Wal-Mart Stores, Inc., which significantly underperformed the benchmark, contributed positively to the First Trust ETF s performance during the period. The top five stocks by contribution to portfolio return were Amazon.com, Inc., Ulta Salon, Cosmetics & Fragrance, Inc., Netflix, Inc., Cablevision Systems Corporation, and O Reilly Automotive, Inc. The bottom five stocks by contribution to return were Fossil Group, Inc., Apollo Education Group, Inc., Dillard s, Inc., DeVry Education Group Inc., and Tribune Media Co. Recent Developments As of December 31, 2015, the Consumer Discretionary sector accounted for 14.78% of the weight of the Russell 1000 Index. The Russell 1000 Consumer Discretionary Index returned 27.60% in 2015, outperforming the broad Russell 1000 Index which returned 21.03%, as investors continued to favor the Consumer Staples, Health Care, and Consumer Discretionary sectors over Industrials, Materials, and Energy. During the period, benchmark levels were consistently shifting as broad investor sentiment was focused on two areas of concern: interest rates and global growth. Initially, investors enjoyed a drop in interest rates when the yield on the U.S. Government 10 Year Treasury bottomed at 1.64% at the end of January, before peaking at 2.48% in June. In mid-december, the U.S. Federal Reserve announced its decision to raise interest rates 25bps for the first time since At the end of December, the yield on the U.S. 10 Year Treasury stood at 2.27%. Volatility returned to the market in August after China devalued its currency, the yuan, which raised concerns over slowing growth for the world s second-largest economy. Investors also focused on a rout in commodity prices that continued throughout 2015, which hurt the Energy, Materials, and Industrials sectors in particular. The Russell 1000 Index finished December trading at a P/E multiple of 19 and a dividend yield of 2.1%. Related Party Transactions FT Portfolios Canada Co. is the Manager of the First Trust ETF and is a Canadian affiliate of First Trust Advisors L.P., the investment advisor (the Advisor ) of the First Trust ETF. Pursuant to terms of the declaration of trust of the First Trust ETF, the Manager provides or arranges for all management, administrative and other services required by the First Trust ETF. The Manager receives a management fee from the First Trust ETF. For further details, please see Management Fees. The Manager has retained the Advisor to provide certain services to the First Trust ETF pursuant to an investment advisory agreement. The Advisor receives advisory fees from the Manager out of the management fee. 2

6 First Trust AlphaDEX TM U.S. Consumer Discretionary Sector Index ETF Management Report of Fund Performance For the year ended December 31, 2015 Financial Highlights The following tables show selected key financial information about the First Trust ETF and are intended to help you understand the First Trust ETF s financial performance for the past year. The date of inception of the First Trust ETF was October 30, The information are derived from the First Trust ETF s annual financial statements for the year ending December 31, 2015 and for the period from since inception to December 31, Net Asset Value per Unit December 31, 2015 December 31, 2014 Net asset value, beginning of period/year (1) $21.98 $20.00 (a) Increase (Decrease) from operations: Total revenue Total expenses (0.23) (0.04) Realized gains (losses) for the period/year 0.85 (0.58) Unrealized gains (losses) for the period/year Total increase (decrease) from operations (2) $1.19 $2.11 Distributions: From income (excluding dividends) (0.20) (0.13) From dividends - - From capital gains - (0.02) Return of capital (0.01) - Total annual distributions (3) $(0.21) $(0.15) Net asset value, end of period/year (4) $22.95 $21.98 (a) Initial offering price (1) This information is provided as at December 31, 2015 and from October 30, 2014 (the date of inception) to the period ended December 31, 2014 and is prepared under IFRS. (2) Net asset value and distributions are based on the actual number of units outstanding at the relevant time. The increase/decrease from operations is based on the weighted average number of units outstanding over the period/year. (3) Distributions were either paid in cash or reinvested in additional units of the First Trust ETF. (4) This table is not intended to be a reconciliation of beginning to ending net asset value per unit. Ratios and Supplemental Data December 31, 2015 December 31, 2014 Net asset value (000 s) $3,443 $2,198 Number of units outstanding 150, ,000 Management expense ratio (1) 0.74% 0.79% Management expense ratio before waivers or absorption 0.76% 0.82% Trading expense ratio (2) 0.05% 0.01% Portfolio turnover rate (3) % 6.65% Net asset value per unit $22.95 $21.98 (1) Management expense ratio is based on total expenses for the stated period/year and is expressed as an annualized percentage of daily average net asset value during the period/year. (2) The trading expense ratio represents total commissions and other portfolio transaction costs expressed as an annualized percentage of daily average net asset value during the period/year. (3) The First Trust ETF s portfolio turnover rate indicates how actively the First Trust ETF s portfolio advisor manages its portfolio investments. A portfolio turnover rate of 100% is equivalent to the First Trust ETF buying and selling all of the securities in its portfolio once in the course of the period/year. The higher a First Trust ETF s portfolio turnover rate in a period/year, the greater the trading cost payable by the First Trust ETF in the period/year, and the greater the chance of an investor receiving taxable capital gains in the period/year. There is not necessarily a relationship between high turnover rate and the performance of a First Trust ETF. 3

7 First Trust AlphaDEX TM U.S. Consumer Discretionary Sector Index ETF Management Report of Fund Performance For the year ended December 31, 2015 Management Fees The First Trust ETF will pay the Manager a management fee equal to up to 0.70% based on the average daily NAV of the First Trust ETF. The management fee, plus applicable taxes including HST, will be accrued daily and paid quarterly in arrears. The Manager may, from time to time in its discretion, waive all or a portion of the management fee charged at any given time. Past Performance General The past performance information shown assumes that all distributions made by the First Trust ETF in the periods shown were reinvested in additional securities of the First Trust ETF. The performance information does not take into account sales, redemption, distribution or other optional charges that would have reduced returns or performance. How the First Trust ETF has performed in the past does not necessarily indicate how it will perform in the future. Year by Year Returns The bar chart below shows the First Trust ETF s performance for the year ended December 31, 2015 and for the period from October 30, 2014 to December 31, 2014 and illustrate how the investment fund s performance has changed from year to year. The chart also shows, in percentage terms, how much an investment made on the first day of each financial year would have grown or decreased by the last day of each financial year % 10.00% 8.00% 6.00% First Trust AlphaDEX TM U.S. Consumer Discretionary Sector Index ETF 9.55% 5.17% *Date of Inception 4.00% 2.00% 0.00% *Oct 30/14 to Dec 31/14 Jan 1/15 to Dec 31/15 FHD 9.55% 5.17% Annual Compound Returns The First Trust ETF underperformed its benchmark during the period due mainly to currency effects and negative stock selection within Diversified Retail. In addition, the First Trust ETF underperformed the broader Russell 1000 Index. 1 year Since Inception First Trust AlphaDEX U.S. Consumer Discretionary Sector Index ETF 5.17% 12.83% Russell 1000 Consumer Discretionary and Services Index 27.60% 34.88% Russell 1000 Index 21.03% 24.94% S&P 500 Consumer Discretionary Index 32.05% 38.93% The Russell 1000 Consumer Discretionary and Services Index - is an unmanaged index which includes the stocks in the consumer discretionary sector of the Russell 1000 Index. The Russell 1000 Index consists of the largest 1000 companies in the Russell 3000 Index. It represents the universe of large capitalization stocks from which most active money managers typically select. The S&P 500 Consumer Discretionary Index - is an unmanaged index which includes the stocks in the consumer discretionary sector of the S&P 500 Index. 4

8 First Trust AlphaDEX TM U.S. Consumer Discretionary Sector Index ETF Management Report of Fund Performance For the year ended December 31, 2015 Summary of Investment Portfolio The table sets out the percentage (based on total net asset value) of the First Trust ETF s top 25 holdings as at December 31, This summary of portfolio holdings may change due to ongoing portfolio transactions of the First Trust ETF. A quarterly update is available at Top 25 Holdings % of ETF Total Net Asset Value Amazon.com, Inc. 1.77% TEGNA Inc. 1.52% Ulta Salon, Cosmetics & Fragrance, Inc. 1.51% Visteon Corporation 1.50% The Goodyear Tire & Rubber Company 1.49% Netflix, Inc. 1.48% Gannett Co., Inc. 1.47% NVR, Inc. 1.46% D.R. Horton, Inc. 1.45% Expedia, Inc. 1.40% NIKE, Inc. (Class B) 1.36% O'Reilly Automotive, Inc. 1.35% Twenty-First Century Fox, Inc. (Class A) 1.34% AMERCO 1.32% Tempur Sealy International, Inc. 1.31% Cablevision Systems Corporation (Class A) 1.31% Tribune Media Company (Class A) 1.26% Signet Jewelers Limited 1.22% Foot Locker, Inc. 1.20% Fortune Brands Home & Security, Inc. 1.20% The Home Depot, Inc. 1.17% General Motors Company 1.16% Lear Corporation 1.16% Costco Wholesale Corporation 1.15% Murphy USA Inc. 1.13% Portfolio Breakdown The table sets out the percentage (based on total net asset value) of the First Trust ETF s portfolio, by industry, as at December 31, Industry Weightings % of ETF Total Net Asset Value Specialty Retail 23.09% Media 15.62% Other 10.88% Hotels, Restaurants & Leisure 10.07% Household Durables 9.85% Textiles, Apparel & Luxury Goods 6.72% Auto Components 5.74% Internet & Catalog Retail 5.74% Multiline Retail 5.09% Diversified Consumer Services 3.54% Automobiles 3.02% Cash and Cash Equivalents 1.14% 5

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