First Trust AlphaDEX TM U.S. Health Care Sector Index ETF Interim June 30, 2015
INTERIM MANAGEMENT REPORT OF FUND PERFORMANCE June 30, 2015 (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 1-877-622-5552, 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 www.firsttrust.ca or SEDAR at www.sedar.com. 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
Investment Objective and Strategy The fundamental investment objective of First Trust AlphaDEX U.S. Health Care Sector Index ETF (the First Trust ETF ) is to replicate, to the extent possible, the performance of the StrataQuant Health Care Index ("Index"), net of expenses. The investment strategy of the First Trust ETF is to invest in and hold the constituent securities of the applicable 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 capitalization segment of the U.S. equity universe, and then selecting the constituent securities for the Index from those qualifying stocks included in the Health Care Sector. The First Trust ETF may also hold cash and cash equivalents or other money market instruments to fund current liabilities. The First Trust ETF offers one class of units on the TSX with the symbol: FHH The inception date of the First Trust ETF was October 30, 2014. Risk The risks associated with an investment in the First Trust ETF remain as discussed in the First Trust ETF s most recent prospectus. During the period, there were no changes to the First Trust ETF that materially affected the overall risk level associated with an investment in the First Trust ETF. Results of Operations The First Trust ETF s net asset value as of June 30, 2015 was $8,355,290 or $23.87 per unit. The First Trust ETF s net asset value as of December 31, 2014 was $3,154,152 or $21.03 per unit. The First Trust ETF did not declare quarterly cash distributions during the period. Investment Performance The First Trust ETF returned 13.53%, net of fees and expenses, from January 1, 2015 to June 30, 2015. This compares with the Russell 1000 Health Care Index (the benchmark ) total return of 19.05%. The First Trust ETF underperformed the benchmark. The portfolio held 73 equity securities as of June 30, 2015. The top ten equity holdings accounted for 25.52% 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. Currency movements significantly detracted from returns and were the major cause of underperformance during the period. Effective January 30, 2015, the First Trust ETF discontinued hedging its exposure against the U.S. Dollar. During the month of January, the U.S. Dollar appreciated 8.78% 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. In the subsequent five months of the period, the U.S. Dollar depreciated 1.96% against the Canadian Dollar further detracting from returns. During the period, the First Trust ETF benefitted from positive stock selection within Biotechnology companies and a significant underweight position in Pharmaceuticals. Positions in Biotechnology companies, BioMarin Pharmaceutical, Inc. and Pharmacylics, Inc. significantly contributed to the portfolio s performance during the period. During the period, Pharmaceuticals were a significant underweight compared to the Russell 1000 Health Care Benchmark. Pharmaceuticals were significant laggards during the period. In addition, the First Trust ETF benefitted from its positions in several managed care providers. Centene Corporation, Cigna Corporation, and Aetna all contributed significantly to total returns. 1
The top five stocks by contribution to portfolio return were Centene Corporation, BioMarin Pharmaceutical Inc., Cigna Corporation, Aetna Inc., and Incyte Corporation. The bottom five stocks by contribution to return were Health Net, Inc., Varian Medical Systems, Inc., athenahealth, Inc., Endo International Plc, and ResMed Inc. Recent Developments As of June 30th, 2015, Health Care accounted for 14.98% of the weight of the Russell 1000. The Russell 1000 Health Care Benchmark returned 19.05% outperforming the broad Russell 1000 Index which returned 9.31%, as investors continued to favor Health Care, Consumer Discretionary and Telecoms over Utilities, Energy and Industrials. During the period, benchmark levels were consistently shifting as broad investor sentiment was focused on two areas of concern, interest rates and turmoil in Greece. Initially, investors enjoyed a drop in interest rates when the yield on the US Government 10 Year Treasury bottomed at 1.64% at the end of January, before peaking at 2.48% on June 10th. As of the end June, the yield on the US 10 Year Treasury stood at 2.35%. Additional worry came at the end of the period, when Greece s Prime Minister announced his government s decision to hold a referendum on whether to accept further austerity measures to resolve negotiations with the EU and the IMF. During the last week of June, the Russell 1000 Index fell 2.86%. The Russell 1000 Index finished June trading at a price/earnings multiple of 19.06 and a dividend yield of 1.96%. Effective after the close of business on January 30, 2015, the First Trust ETF no longer hedged its exposure to the U.S. dollar. The First Trust ETF will provide the same exposure to various segments of the U.S. equity market but in a non-us currency hedged manner. 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. 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
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, 2014. 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 June 30, 2015 December 31, 2014 Net asset value, beginning of period (1) $21.03 $20.00 (a) Increase (Decrease) from operations: Total revenue 0.05 0.02 Total expenses (0.10) (0.03) Realized gains (losses) for the period 0.04 (0.61) Unrealized gains (losses) for the period 2.87 1.68 Total increase (decrease) from operations (2) $2.86 $1.06 Distributions: From income (excluding dividends) - - From dividends - - From capital gains - - Return of capital - (0.03) Total annual distributions (3) - $(0.03) Net asset value, end of period (4) $23.87 $21.03 (a) Initial offering price (1) This information is provided as at June 30 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. (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 June 30, 2015 December 31, 2014 Net asset value (000 s) $8,355 $3,154 Number of units outstanding 350,000 150,000 Management expense ratio (1) 0.77% 0.79% Management expense ratio before waivers or absorption 0.78% 0.82% Trading expense ratio (2) 0.03% 0.00% Portfolio turnover rate (3) 53.61% 3.81% Net asset value per unit $23.87 $21.03 (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. 3
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 period 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 six-month period ended June 30, 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. 16.00% 14.00% 13.53% 12.00% 10.00% 8.00% 6.00% 4.41% 4.00% 2.00% 0.00% *Oct 30/14 to Dec 31/14 Jan 1/15 to Jun 30/15 FHH 4.41% 13.53% *Date of Inception 4
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, 2015. This summary of portfolio holdings may change due to ongoing portfolio transactions of the First Trust ETF. A quarterly update is available at www.firsttrust.ca. Top 25 Holdings % of ETF Total Net Asset Value Cigna Corp. 2.95% Aetna Inc. 2.83% Centene Corp. 2.69% Incyte Corp. 2.69% BioMarin Pharmaceutical Inc. 2.59% Catamaran Corp. 2.42% Allergan PLC 2.41% United Therapeutics Corp. 2.38% McKesson Corp. 2.35% AmerisourceBergen Corp. 2.21% Mallinckrodt PLC 2.20% Universal Health Services Inc., Class 'B' 2.13% Charles River Laboratories International Inc. 2.10% Medivation Inc. 2.09% Hologic Inc. 2.03% Regeneron Pharmaceuticals Inc. 1.99% Quintiles Transnational Holdings Inc. 1.91% Envision Healthcare Holdings Inc. 1.82% MEDNAX Inc. 1.80% Boston Scientific Corp. 1.76% Edwards Lifesciences Corp. 1.76% Merck & Co. Inc. 1.75% Community Health Systems Inc. 1.71% HCA Holdings Inc. 1.71% Laboratory Corp. of America Holdings 1.70% 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 June 30, 2015. Industry Weightings % of ETF Total Net Asset Value Health Care Providers & Services 39.80% Biotechnology 19.64% Health Care Equipment & Supplies 16.86% Pharmaceuticals 13.67% Life Sciences Tools & Services 8.16% Health Care Technology 1.64% Cash and Cash Equivalents 0.32% 5
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