Annual December 31, 2016
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ANNUAL MANAGEMENT REPORT OF FUND PERFORMANCE December 31, 2016 First Trust AlphaDEX TM U.S. Energy 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 1-877-622-5552, by writing to us at FT Portfolios Canada Co., 40 King Street West, Suite 3001, Scotia Plaza, Box 312, Toronto, Ontario M5H 3Y2 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. Energy Sector Index ETF (the First Trust ETF ) is to replicate, to the extent possible, the performance of the StrataQuant Energy 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 Energy Sector. The First Trust ETF offers one class of units on the TSX with the symbol: FHE 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. The First Trust ETF provides exposure to various segments of the U.S. equity market in a non- U.S. currency hedged manner. Results of Operations The First Trust ETF s net asset value as of December 31, 2016 was $2,942,975 or $14.71 per unit. The First Trust ETF s net asset value as of December 31, 2015 was $1,911,061 or $12.74 per unit. The First Trust ETF paid quarterly cash distributions per unit as follows: Jan 8 th 2016 Payment Dates Apr Jul FHE - - 0.0626-7 th 8 th Investment Performance The First Trust ETF returned 16.08% for the year ended December 31, 2016. This compares with the Russell 1000 Energy Index (the benchmark ) total return of 21.55%. The First Trust ETF underperformed the benchmark due to industry allocation. The portfolio held 52 equity securities as of December 31, 2016. The top ten equity holdings accounted for 35.08% 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. The First Trust ETF underperformed during the period due to overweight positions in the energy equipment and offshore drilling & other services industries relative to the benchmark. Stock selection within oil well equipment & services also negatively impacted performance. Stock selection overall partially offset the underperformance, especially within the oil (crude producers) and oil (integrated) industries. The top five stocks by contribution to return were Targa Resources Corp., WPX Energy, Inc. Class A, SM Energy Company, CONSOL Energy Inc., and Exxon Mobil Corporation. The bottom five stocks by contribution to return were First Solar, Inc., Noble Corporation plc, CVR Energy, Inc., Oceaneering International, Inc., and California Resources Corp. Oct 7 th 1
Recent Developments As of December 31, 2016, the energy sector accounted for 7.30% of the weight of the Russell 1000 Index. The Russell 1000 Energy Index returned 21.55% for the period, outperforming the broad Russell 1000 Index which returned 8.18%, as investors favored the energy, utilities, and materials & processing sectors over health care, consumer staples, and consumer discretionary. During the period, benchmark levels were consistently shifting as broad investor sentiment focused on oil prices early in the year and political events such as the U.K. European Union membership referendum, commonly known as the Brexit, in June and the U.S. presidential election in November. The price of oil declined 28.61% to start the year, bottoming on February 11 th at C$36.56 per barrel. However, oil nearly doubled during the remainder of the period, rallying 97.61% and finishing near its 52-week high at C$72.25 per barrel. In June, the vote in Britain to leave the E.U. started a rout in global asset prices, with the Russell 1000 returning -2.28% on June 24 th. The financial services sector was hit particularly hard on June 24 th, returning -3.59%. After June 24 th, the Russell 1000 subsequently rallied 15.37% for the remainder of the period. Following the U.S. presidential election on November 8 th, the financials and industrials sectors finished the year strong by rallying 12.55% and 8.87%, respectively. Both sectors outperformed the 6.09% return for the broader Russell 1000 Index over the same time period, as the market presumably forecast higher infrastructure spending, capital investment, and less stringent regulations on banks in the United States. The U.S. dollar depreciated 9.46% against the Canadian dollar through May 2 nd when the exchange rate bottomed for the period. However, the U.S. dollar rallied 7.27% against the Canadian dollar for the remainder of the period, depreciating only 2.88% for the entire period. The depreciation of the U.S. dollar versus the Canadian dollar contributed negatively to the First Trust ETF s performance during the period. The Russell 1000 Index finished December trading at a P/E multiple of 22 with a dividend yield of 2.04%. 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 two years. The date of inception of the First Trust ETF was October 30, 2014. The information are derived from the First Trust ETF s annual financial statements for the years ending December 31 and for the period from since inception to December 31, 2014. Net Asset Value per Unit Dec. 31, 2016 Dec. 31, 2015 Dec. 31, 2014 (a) Net asset value, beginning of period/year (1) $12.74 $17.50 $20.00 (b) Increase (Decrease) from operations: Total revenue 0.23 0.29 0.10 Total expenses (0.15) (0.19) (0.04) Realized gains (losses) for the period/year (3.13) (3.58) (0.66) Unrealized gains (losses) for the period/year 4.96 (1.04) (2.00) Total increase (decrease) from operations (2) $1.91 $(4.52) $(2.60) Distributions: From income (excluding dividends) - - - From dividends - - - From capital gains - - - Return of capital (0.06) (0.13) (0.11) Total annual distributions (3) $(0.06) $(0.13) $(0.11) Net asset value, end of period/year (4) $14.71 $12.74 $17.50 (a) December 31, 2014 does not relate to the full year as the date of inception of the First Trust ETF was October 30, 2014. (b) Initial offering price (1) This information is provided as at December 31 of the years/period shown 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 Dec. 31, 2016 Dec, 31, 2015 Dec. 31, 2014 Net asset value (000 s) $2,943 $1,911 $3,501 Number of units outstanding 200,000 150,000 200,000 Management expense ratio (1) 0.78% 0.79% 0.78% Management expense ratio before waivers or absorption 0.80% 0.81% 0.82% Trading expense ratio (2) 0.14% 0.13% 0.02% Portfolio turnover rate (3) 133.14% 109.55% 7.36% Net asset value per unit $14.71 $12.74 $17.50 (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
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 monthly 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 years ended December 31, 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. First Trust AlphaDEX TM U.S. Energy Sector Index ETF 20.00% 15.00% 16.08% 10.00% 5.00% 0.00% -5.00% -10.00% -15.00% -12.25% -20.00% -25.00% -30.00% -26.59% *Oct 30/14 to Dec 31/14 Jan 1/15 to Dec 31/15 Jan 1/16 to Dec 31/16 FHE -12.25% -26.59% 16.08% *Date of Inception 4
Annual Compound Returns The First Trust ETF underperformed its benchmark during the period due to industry allocation. However, the First Trust ETF outperformed the broader Russell 1000 Index. 1 year Since Inception First Trust AlphaDEX U.S. Energy Sector Index ETF 16.08% -12.52% Russell 1000 Energy Index 21.55% 3.98% Russell 1000 Index 8.18% 16.92% S&P 500 Energy Index 22.95% 5.78% The Russell 1000 Energy Index - is an unmanaged index which includes the stocks in the energy 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 Energy Index - is an unmanaged index which includes the stocks in the energy sector of the S&P 500 Index. 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, 2016. 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 Transocean Ltd. 4.30% Valero Energy Corp. 4.00% Rowan Companies PLC, Class 'A' 3.87% Marathon Petroleum Corp. 3.86% Tesoro Corp. 3.42% Dril-Quip Inc. 3.35% Phillips 66 3.34% Oceaneering International Inc. 3.19% Noble Corp. PLC 2.90% Chesapeake Energy Corp. 2.78% ONEOK Inc. 2.78% Marathon Oil Corp. 2.72% Parsley Energy Inc., Class 'A' 2.62% Devon Energy Corp. 2.58% First Solar Inc. 2.52% Apache Corp. 2.48% World Fuel Services Corp. 2.47% Spectra Energy Corp. 2.39% CONSOL Energy Inc. 2.36% Antero Resources Corp. 2.18% PBF Energy Inc. 2.09% Patterson-UTI Energy Inc. 2.04% ConocoPhillips 1.96% Helmerich & Payne Inc. 1.95% Chevron Corp. 1.93% 5
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, 2016. Industry Weightings % of ETF Total Net Asset Value Oil, Gas & Consumable Fuels 68.85% Energy Equipment & Services 28.01% Semiconductors & Semiconductor Equipment 2.94% Cash and Cash Equivalents 0.25% 6
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