First Trust AlphaDEX TM European Dividend Index ETF (CAD-Hedged)

Transcription

1 First Trust AlphaDEX TM European Dividend Index ETF (CAD-Hedged) Interim June 30, 2015

2 INTERIM MANAGEMENT REPORT OF FUND PERFORMANCE June 30, 2015 First Trust AlphaDEX TM European Dividend Index ETF (CAD-Hedged) (the First Trust ETF ) This interim management report of fund performance contains financial highlights, but does not contain the complete unaudited interim financial report 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

3 Investment Objective and Strategy The fundamental investment objective of First Trust AlphaDEX European Dividend Index ETF (CAD-Hedged) (the First Trust ETF ) is to replicate, to the extent possible, the performance of the AlphaDEX European Dividend Index, net of expenses. The investment strategy of the First Trust ETF is to invest in and hold the constituent securities of the AlphaDEX European Dividend Index in the same proportion as they are reflected in the AlphaDEX European Dividend Index or securities intended to replicate the performance of the AlphaDEX European Dividend Index. The AlphaDEX European Dividend Index results from applying the AlphaDEX methodology to a universe of ADRs of European companies that are listed on the NYSE, NYSE Market and NASDAQ exchanges. The First Trust ETF will generally seek to hedge substantially all of its U.S. dollar, British pounds sterling, euros and Swiss francs currency exposure associated with its portfolio investments back to the Canadian dollar. The Manager may change the AlphaDEX European Dividend Index to a currency hedged version of the index to provide investors with substantially the same exposure to the asset class to which the First Trust ETF is currently exposed. If the Manager changes the AlphaDEX European Dividend Index, or any index replacing such index, the Manager will issue a press release identifying the new index, describing its constituent securities and specifying the reasons for the change in the index. There are two classes of units offered by the First Trust ETF: Common Class (TSX symbol: EUR) Advisor Class (TSX symbol: EUR.A) The inception date of the First Trust ETF was February 4, Risk The portfolio held 39 equity securities at the end of the reporting period. The top ten equity holdings accounted for 44.14% of the portfolio. Energy, Health Care, and Telecommunication Services were the top three sector weightings at the beginning of the reporting period. At the end of the period, Health Care, Energy, and Materials were the top three sector weightings. The sector weighting changes were a result of the AlphaDEX stock selection process, and not a material change in benchmark composition. The AlphaDEX stock selection process is a rules-based process and can result in sector weightings that differ from that of the benchmark. The First Trust ETF uses a base universe of stocks that pay dividends. The ability of the company to pay a dividend in the future is dependent on factors that are not controlled by fund management. A company held in the First Trust ETF may, at any time, decide to cut or eliminate its dividend payment. The First Trust ETF added 7 stocks and removed 9 stocks during the period. The decrease in holdings was a result of the reduction in the number of eligible stocks in the starting universe. At the end of the period Energy, Information Technology, and Telecommunication Services holdings were the most overweight positions relative to the benchmark. Financials, Consumer Staples, and Industrials were the most underweight sectors relative to the benchmark at the end of the period. At the beginning of the period, the top three overweight sectors were Energy, Telecommunication Services, and Information Technology. The most underweight sectors at the beginning of the period were Financials, Consumer Staples, and Industrials. Given the First Trust ETF employs a currency hedging strategy to minimize the impact of changes in the exchange rates of hedged currencies, and considering that the portfolio continues to seek to replicate the AlphaDEX European Dividend Index, we conclude there was no material change to the risk profile of the First Trust ETF. Results of Operations The First Trust ETF s total net asset value as of June 30, 2015 was $41,332,903 or $21.20 per Common Class unit and $21.19 per Advisor Class unit. The First Trust ETF s total net asset value as of December 31, 2014 was $25,767,540 or $19.82 per Common Class unit and $19.82 per Advisor Class unit. 1

4 The First Trust ETF paid cash distributions per unit as follows: Jan 12 th Feb 6 th Payment Dates Mar Apr 6 th 8 th May 7 th Jun 5 th EUR EUR.A Investment Performance The First Trust ETF s Common Class units returned 8.09% and the Advisor Class units returned 7.48%, net of fees and expenses, from the date of December 31, 2014 to June 30, This compares with the Bank of New York ADR Index (the benchmark ) net total return (CAD) of 12.03% and (USD) 4.27%. A CAD hedged version of the benchmark does not currently exist. CAD return was converted by applying fx rates via Bloomberg for the time period. The First Trust ETF employs a hedging strategy to limit exposure to various currencies. Stock selection in the Information Technology sector was the largest positive contributor to relative performance. Telecommunication Services and Utilities holdings also contributed to relative return versus the benchmark during the period. An overweight position in Energy stocks detracted from relative performance versus the benchmark. Stock selection in Heath Care and Financials was also a drag on relative performance during the first half of The top five stocks by contribution to return were NICE Systems Ltd. Sponsored ADR, Mobile TeleSystems PJSC Sponsored ADR, Novartis AG Sponsored ADR, Prudential plc Sponsored ADR, and Anheuser-Busch InBev SA Sponsored ADR. The bottom five stocks by contribution to return were Royal Dutch Shell Plc Sponsored ADR Class A, ABB Ltd. Sponsored ADR, Fresenius Medical Care AG & Co. KGaA Sponsored ADR, ARM Holdings plc Sponsored ADR, and Tenaris S.A. Sponsored ADR The First Trust ETF s currency hedging strategy was beneficial with regard to the Euro given a -1.03% depreciation against the Canadian dollar. British pounds and Swiss Franc exposure was detrimental relative to an unhedged strategy given a 8.42%, and 14.28% appreciation of these currencies, respectively, against the Canadian dollar. Recent Developments In June, the First Trust ETF added 7 positions and removed 9 during its semi-annual rebalance. The changes were made by applying the quantitative AlphaDEX selection methodology to a universe of European market dividend paying stocks. The fund lost some performance during the month of June as unrest in Europe due to the crisis in Greece negatively impacted returns. European equity markets could continue to experience heightened volatility until there is a resolution to the Greece situation. The dividend yield on the MSCI Europe was relatively steady during the first half of the year, while the First Trust ETF dividend yield decreased after the rebalance in June. The MSCI Europe is made up of European stocks that may or may not pay a dividend. The First Trust ETF only includes stocks that pay a dividend. International Financial Reporting Standards The financial statements of the First Trust ETF have been prepared in compliance with International Financial Reporting Standards (IFRS) as published by the International Accounting Standards Board (IASB). The First Trust ETF adopted this basis of accounting in 2014 as required by Canadian securities legislation and the Canadian Accounting Standards Board. 2

5 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. 3

6 Financial Highlights The following tables show selected key financial information about the First Trust ETF and are intended to help you understand the First Trust ETF s financial performance for the past year. The date of inception of the First Trust ETF was February 4, The information are derived from the First Trust ETF s interim unaudited financial statements for the six-month period ending June 30 and from the annual financial statements for the period from since inception to December 31. Net Asset Value per Unit EUR June 30, 2015 December 31, 2014 Net asset value, beginning of period (1) $19.82 $20.00 (a) Increase (Decrease) from operations: Total revenue Total expenses (0.13) (0.22) Realized gains (losses) for the period (0.56) 0.58 Unrealized gains (losses) for the period 1.03 (2.02) Total increase (decrease) from operations (2) $0.86 $(0.78) Distributions: From income (excluding dividends) (0.24) (0.50) From dividends - - From capital gains - (0.80) Return of capital - (0.01) Total annual distributions (3) $(0.24) $(1.31) Net asset value, end of period (4) $21.20 $19.82 (a) Initial offering price (1) This information is provided as at June 30 and from February 4, 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. (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 EUR June 30, 2015 December 31, 2014 Net asset value (000 s) $39,637 $24,182 Number of units outstanding 1,870,000 1,220,000 Management expense ratio (1) 0.67% 0.66% Management expense ratio before waivers or absorption 0.68% 0.69% Trading expense ratio (2) 0.07% 0.07% Portfolio turnover rate (3) 45.53% % Net asset value per unit $21.20 $19.82 (1) Management expense ratio is based on total expenses for the stated period and is expressed as an annualized percentage of daily average net asset value during the period. (2) The trading expense ratio represents total commissions and other portfolio transaction costs expressed as an annualized percentage of daily average net asset value during the period. (3) The First Trust ETF s portfolio turnover rate indicates how actively the First Trust ETF s portfolio advisor manages its portfolio investments. A portfolio turnover rate of 100% is equivalent to the First Trust ETF buying and selling all of the securities in its portfolio once in the course of the period. The higher a First Trust ETF s s portfolio turnover rate in a period, the greater the trading cost payable by the First Trust ETF in the period, and the greater the chance of an investor receiving taxable capital gains in the period. There is not necessarily a relationship between high turnover rate and the performance of a First Trust ETF. 4

7 Net Asset Value per Unit EUR.A June 30, 2015 December 31, 2014 Net asset value, beginning of period (1) $19.82 $20.00 (a) Increase (Decrease) from operations: Total revenue Total expenses (0.25) (0.44) Realized gains (losses) for the period (0.56) 0.58 Unrealized gains (losses) for the period 1.74 (1.39) Total increase (decrease) from operations (2) $1.48 $(0.30) Distributions: From income (excluding dividends) (0.11) (0.30) From dividends - - From capital gains - (0.80) Return of capital - - Total annual distributions (3) $(0.11) $(1.10) Net asset value, end of period (4) $21.19 $19.82 (a) Initial offering price (1) This information is provided as at June 30 and from February 4, 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. (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 EUR.A June 30, 2015 December 31, 2014 Net asset value (000 s) $1,696 $1,586 Number of units outstanding 80,000 80,000 Management expense ratio (1) 1.80% 1.80% Management expense ratio before waivers or absorption 1.81% 1.82% Trading expense ratio (2) 0.07% 0.07% Portfolio turnover rate (3) 45.53% % Net asset value per unit $21.19 $19.82 (1) Management expense ratio is based on total expenses for the stated period and is expressed as an annualized percentage of daily average net asset value during the period. (2) The trading expense ratio represents total commissions and other portfolio transaction costs expressed as an annualized percentage of daily average net asset value during the period. (3) The First Trust ETF s portfolio turnover rate indicates how actively the First Trust ETF s portfolio advisor manages its portfolio investments. A portfolio turnover rate of 100% is equivalent to the First Trust ETF buying and selling all of the securities in its portfolio once in the course of the period. The higher a First Trust ETF s s portfolio turnover rate in a period, the greater the trading cost payable by the First Trust ETF in the period, and the greater the chance of an investor receiving taxable capital gains in the period. There is not necessarily a relationship between high turnover rate and the performance of a First Trust ETF. 5

8 Management Fees The First Trust ETF will pay the Manager a management fee equal to up to 0.80% and, in respect of the EUR.A, an additional amount for a service fee (see EUR.A Service Fee below) based on the average daily NAV of the First Trust ETF. The management fee, plus applicable taxes including HST, will be accrued daily and paid quarterly in arrears. The Manager may, from time to time in its discretion, waive all or a portion of the management fee charged at any given time. EUR.A Service Fee The Manager pays registered dealers a service fee equal to 1.00% per annum of the NAV of the Units held by clients of the registered dealer, plus any applicable taxes. The service fee will be calculated and accrued daily and paid quarterly at the end of each calendar quarter. Past Performance General The past performance information shown assumes that all distributions made by the First Trust ETF in the periods shown were reinvested in additional securities of the First Trust ETF. The performance information does not take into account sales, redemption, distribution or other optional charges that would have reduced returns or performance. How the First Trust ETF has performed in the past does not necessarily indicate how it will perform in the future. Year by Year Returns The bar charts below show the First Trust ETF s performance, per class, for the six-month period ended June 30, 2015 and for the period from February 4, 2014 to December 31, 2014 and illustrate how the investment fund s performance has changed from year to year. The charts also show, 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 % First Trust AlphaDEX TM European Dividend Index ETF (CAD-Hedged) - EUR 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 5.13% 8.09% 0.00% *Feb 4/14 to Dec 31/14 Jan 1/15 to Jun 30/15 EUR 5.13% 8.09% *Date of Inception 6

9 14.00% First Trust AlphaDEX TM European Dividend Index ETF (CAD-Hedged) - EUR.A 12.00% 10.00% 8.00% 7.48% 6.00% 4.00% 4.06% 2.00% 0.00% *Feb 4/14 to Dec 31/14 Jan 1/15 to Jun 30/15 EUR.A 4.06% 7.48% *Date of Inception 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 June 30, 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 Carnival PLC, ADR 5.24% NICE Systems Ltd., ADR 4.99% Eni SPA, ADR 4.87% Fresenius Medical Care AG & Co. KGaA, ADR 4.79% Royal Dutch Shell PLC, ADR, Class A 4.70% BHP Billiton PLC, ADR 4.60% Shire PLC, ADR 4.57% BT Group PLC, ADR 3.57% CRH PLC, ADR 3.45% Orange SA, ADR 3.36% Prudential PLC, ADR 3.35% WPP PLC, Sponsored ADR 3.28% Rio Tinto PLC, ADR 3.24% Tenaris SA, ADR 3.24% Vodafone Group PLC, ADR 3.22% Teva Pharmaceutical Industries Ltd., ADR 2.54% Total SA, ADR 2.52% Novo Nordisk AS, ADR 2.51% InterContinental Hotels Group PLC 2.50% BP PLC, ADR 2.49% STMicroelectronics NV 2.47% GlaxoSmithKline PLC, ADR 2.43% ARM Holdings PLC 2.39% Telefónica SA, ADR 1.73% Anheuser-Busch InBev NV, ADR 1.72% 7

10 Portfolio Breakdown The table sets out the percentage (based on total net asset value) of the First Trust ETF s portfolio as at June 30, Sector Weightings % of ETF Total Net Asset Value Health Care 19.34% Energy 18.64% Materials 13.64% Telecommunication Services 12.56% Information Technology 12.27% Consumer Discretionary 11.02% Financials 8.40% Consumer Staples 1.72% Industrials 1.65% Utilities 0.78% Cash and Cash Equivalents 0.85% The table sets out the percentage (based on total net asset value) of the First Trust ETF s portfolio excluding cash, by country, as at June 30, Country Weightings % of ETF Total Net Asset Value United Kingdom 38.70% The Netherlands 10.29% Ireland 8.02% Israel 7.53% France 6.74% Germany 5.60% Switzerland 4.97% Italy 4.87% Luxembourg 4.80% Spain 3.43% Denmark 2.51% Belgium 1.72% Norway 0.83% 8

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