UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-22767
First Trust Exchange-Traded Fund
VII
(Exact name of registrant as specified in charter)
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
(Address of principal executive offices) (Zip code)
W. Scott Jardine, Esq.
First Trust Portfolios L.P.
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
(Name and address of agent for service)
Registrant’s telephone number,
including area code: (630) 765-8000
Date of fiscal year end: December
31
Date of reporting period: December
31, 2020
Form N-CSR is to be used by management
investment companies to file reports with the Commission not later than 10 days after the transmission to stockholders of any report
that is required to be transmitted to stockholders under Rule 30e-1 under the Investment Company Act of 1940 (17 CFR 270.30e-1).
The Commission may use the information provided on Form N-CSR in its regulatory, disclosure review, inspection, and policymaking
roles.
A registrant is required to disclose
the information specified by Form N-CSR, and the Commission will make this information public. A registrant is not required to
respond to the collection of information contained in Form N-CSR unless the Form displays a currently valid Office of Management
and Budget (“OMB”) control number. Please direct comments concerning the accuracy of the information collection burden
estimate and any suggestions for reducing the burden to Secretary, Securities and Exchange Commission, 450 Fifth Street, NW, Washington,
DC 20549-0609. The OMB has reviewed this collection of information under the clearance requirements of 44 U.S.C. § 3507.
Item 1. Report to Stockholders.
(a) The registrant’s annual report transmitted to shareholders
pursuant to Rule 30e-1 under the Investment Company Act of 1940 is as follows:
First Trust Exchange-Traded Fund VII
First Trust Global Tactical Commodity Strategy
Fund (FTGC)
Annual
Report
For the Year Ended
December 31, 2020
First Trust Global Tactical
Commodity Strategy Fund (FTGC)
Annual Report
December 31, 2020
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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 the series of First Trust Exchange-Traded Fund VII (the
“Trust”) described in this report (First Trust Global Tactical Commodity Strategy Fund; hereinafter referred to as the “Fund”) 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 forward-looking statements to reflect events and circumstances that
arise after the date hereof.
Performance and Risk
Disclosure
There is no assurance
that the Fund will achieve its investment objective. The 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’s shares may therefore be less than what you paid for them. Accordingly, you can lose money by investing in the Fund. See “Risk Considerations” in the Additional Information section of this
report for a discussion of certain other risks of investing in the Fund.
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 www.ftportfolios.com 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 the Fund’s web page at www.ftportfolios.com.
How to Read This
Report
This report contains
information that may help you evaluate your investment in the Fund. It includes details about the Fund and presents data and analysis that provide insight into the Fund’s performance and investment approach.
By reading the portfolio
commentary by the portfolio management team of the Fund, you may obtain an understanding of how the market environment affected the Fund’s performance. The statistical information that follows may help you
understand the 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 the Fund are spelled out in the prospectus, the statement of additional information, and other Fund regulatory filings.
First Trust Global Tactical
Commodity Strategy Fund (FTGC)
Annual Letter from the Chairman and
CEO
December 31, 2020
Dear Shareholders,
First Trust is pleased
to provide you with the annual report for the First Trust Global Tactical Commodity Strategy Fund (the “Fund”), which contains detailed information about the Fund for the twelve months ended December 31,
2020.
This past year has been
a whirlwind of challenges for the U.S. and the coronavirus (“COVID-19”) pandemic tops the list. It has been a nasty, stubborn virus since it arrived early in 2020. Mistakes have been made, but talented
people are working the problem. The U.S. appears to be on the cusp of turning the corner on this virus over the next few months thanks to a couple of vaccines that proved effective in clinical testing and garnered
approval from the Food and Drug Administration in record time. Hopefully, more vaccines will be gaining approval soon. Speed is key when it comes to distributing the vaccines to the most vulnerable of our population.
This is not the time for bottlenecks or logistical problems.
The COVID-19 pandemic
not only derailed the bull market in stocks in the first quarter of 2020, but it also threw the U.S. economy into a recession (the first and second quarters of 2020 reflected negative real gross domestic product
growth). In response to the negative fallout from the virus, the federal government has stepped up with trillions of dollars of stimulus to help backstop the millions of people who have lost their jobs, in many cases,
through no fault of their own, or have seen their incomes slashed due to the curtailed business activity in certain sectors of the economy, such as leisure and entertainment. In addition to putting money in
people’s pockets, the government’s efforts instilled some much needed confidence in the securities markets, in my opinion. After factoring in the 33.79% decline in the S&P 500® Index (the “Index”) from February 19, 2020 through March 23, 2020, as measured by total return performance,
the Index managed to stage a dramatic rally to end 2020 up 18.40%, according to Bloomberg. I think that is incredible when you consider that, from 1926 through 2019, the average annual total return on the Index was
10.20%, according to Morningstar/Ibbotson Associates.
We now know that the
Democratic party completed its blue wave by winning the two Senate runoff elections in Georgia on January 5, 2021. That means the Democrats have voting control, albeit by a slender margin, in the House of
Representatives and Senate (by way of Vice President Kamala Harris being the deciding vote in 50-50 split votes) for the next two years once they take office. With President Biden in the White House and the results of
the Georgia Senate races, the Democrats now have control of both the Executive and Legislative branches of the government. In addition to focusing on expediting the COVID-19 vaccinations (the President is calling for
100 million doses in his first 100 days in office), we expect President Biden to attempt to make some changes to the individual and corporate tax codes, distribute more financial stimulus to those Americans in need
and perhaps push for some form of an infrastructure spending bill, which may receive bipartisan support, in our opinion. I believe the most important fight right now is not between the politicians, it is against the
virus. We need to reopen the economy. As always, stay tuned and stay the course!
Thank you for giving
First Trust the opportunity to play a role in your financial future. We value our relationship with you and will report on the Fund again in six months.
Sincerely,
James A. Bowen
Chairman of the Board of Trustees
Chief Executive Officer of First Trust
Advisors L.P.
Fund Performance
Overview (Unaudited)
First Trust Global Tactical Commodity
Strategy Fund (FTGC)
First Trust Global
Tactical Commodity Strategy Fund’s (the “Fund”) investment objective is to seek to provide total return by providing investors with commodity exposure while seeking a relatively stable risk profile.
The Fund is an actively managed exchange-traded fund (“ETF”) that seeks to achieve attractive risk-adjusted return by investing in commodity futures contracts and exchange-traded commodity linked
instruments (collectively, “Commodities Instruments”) through a wholly-owned subsidiary of the Fund organized under the laws of the Cayman Islands (the “Subsidiary”). The Fund will not invest
directly in Commodities instruments. The Fund expects to gain exposure to these investments exclusively by investing in the Subsidiary. The Subsidiary is advised by First Trust Advisors L.P., the Fund’s
investment advisor (the “Advisor”).
The Fund’s
investment in the Subsidiary is intended to provide the Fund with exposure to commodity markets within the limits of current federal income tax laws applicable to investment companies such as the Fund, which limit the
ability of investment companies to invest directly in Commodities Instruments. The Subsidiary has the same investment objective as the Fund, but unlike the Fund, it may invest without limitation in Commodities
Instruments. Except as otherwise noted, references to the Fund’s investments include the Fund’s indirect investments through the Subsidiary. The Fund may invest up to 25% of its total assets in the
Subsidiary.
The Subsidiary seeks
to make investments generally in Commodities Instruments while managing volatility. Investment weightings of the underlying Commodities Instruments held by the Subsidiary are rebalanced in an attempt to stabilize risk
levels. The dynamic weighting process is designed to result in a disciplined, systematic investment process, which is keyed off of the Advisor’s volatility forecasting process. The Subsidiary may have both long
and short positions in Commodities Instruments. However, for a given Commodity Instrument the Subsidiary will provide a net long exposure.
The remainder of the
Fund’s assets will primarily be invested in: (1) short-term investment grade fixed income securities that include U.S. government and agency securities, sovereign debt obligations of non-U.S. countries, and
repurchase agreements; (2) money market instruments; (3) ETFs and other investment companies registered under the Investment Company Act of 1940, as amended; and (4) cash and other cash equivalents. The Fund uses such
instruments as investments and to collateralize the Subsidiary’s Commodities Instruments exposure on a day-to-day basis.
Performance
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Average Annual Total Returns
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Cumulative Total Returns
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1 Year
Ended
12/31/20
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5 Years
Ended
12/31/20
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Inception
(10/22/13)
to 12/31/20
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5 Years
Ended
12/31/20
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Inception
(10/22/13)
to 12/31/20
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Fund Performance
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NAV
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1.74%
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-0.50%
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-5.60%
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-2.48%
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-33.92%
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Market Price
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2.17%
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-0.42%
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-5.56%
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-2.07%
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-33.71%
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Index Performance
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Bloomberg Commodity Index
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-3.12%
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1.03%
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-5.89%
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5.25%
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-35.39%
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S&P GSCI® Total Return Index
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-23.72%
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-1.85%
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-11.74%
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-8.92%
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-59.26%
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S&P 500® Index
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18.40%
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15.22%
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13.44%
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103.04%
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147.59%
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Total returns for the
period since inception are calculated from the inception date of the Fund. “Average Annual Total Returns” represent the average annual change in value of an investment over the periods indicated.
“Cumulative Total Returns” represent the total change in value of an investment over the periods indicated.
The Fund’s per
share net asset value (“NAV”) is the value of one share of the Fund and is computed by dividing the value of all assets of the Fund (including accrued interest and dividends), less all liabilities
(including accrued expenses and dividends declared but unpaid), by the total number of outstanding shares. The price used to calculate market return (“Market Price”) is determined by using the midpoint of
the national best bid and offer price (“NBBO”) as of the time that the Fund’s NAV is calculated. Under SEC rules, the NBBO consists of the highest displayed buy and lowest sell prices among the
various exchanges trading the Fund at the time the Fund’s NAV is calculated. Prior to January 1, 2019, the price used was the midpoint between the highest bid and the lowest offer on the stock exchange on which
shares of the Fund were listed for trading as of the time that the Fund’s NAV was calculated. Since shares of the Fund did not trade in the secondary market until after its inception, for the period from
inception to the first day of secondary market trading in shares of the Fund, the NAV of the Fund is used as a proxy for the secondary market trading price to calculate market returns. NAV and market returns assume
that all distributions have been reinvested in the Fund at NAV and Market Price, respectively.
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. Also, market returns do not include brokerage commissions that may be payable on secondary market transactions. If brokerage commissions were included, market
returns would be lower. The total returns presented reflect the reinvestment of dividends on securities in the indices. The returns presented do not reflect the deduction of taxes that a shareholder would pay on Fund
distributions or the redemption or sale of Fund shares. The investment return and principal value of shares of the Fund will vary with changes in market conditions. Shares of the Fund may be worth more or less than
their original cost when they are redeemed or sold in the market. The Fund’s past performance is no guarantee of future performance.
Fund Performance
Overview (Unaudited) (Continued)
First Trust Global Tactical Commodity
Strategy Fund (FTGC)
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
Information showing the
number of days the market price of the Fund’s shares was greater (at a premium) and less (at a discount) than the Fund’s net asset value for the most recently completed year, and the most recently
completed calendar quarters since that year (or life of the Fund, if shorter), is available at https://www.ftportfolios.com/Retail/etf/home.aspx.
Portfolio Commentary
First Trust Global
Tactical Commodity Strategy Fund (FTGC)
Annual Report
December 31, 2020
(Unaudited)
Advisor
First Trust Advisors L.P.
(“First Trust” or the “Advisor”) serves as the investment advisor, commodity pool operator and commodity trading advisor to the First Trust Global Tactical Commodity Strategy Fund (the
“Fund”). First Trust is responsible for the selection and ongoing monitoring of the Fund’s investment portfolio, managing the Fund’s business affairs and providing certain administrative
services necessary for the management of the Fund.
Portfolio Management
Team
John Gambla – CFA,
FRM, PRM, Senior Portfolio Manager
Rob A. Guttschow –
CFA, Senior Portfolio Manager
Commentary
The Fund is an actively
managed exchange-traded fund (“ETF”). The Fund’s investment objective is to seek to provide total return by providing investors with commodity exposure while seeking a relatively stable risk profile.
For performance measurement, the Fund is benchmarked against the unmanaged Bloomberg Commodity Index (the “Benchmark”). This commentary discusses the 12-month market and Fund performance ended December 31,
2020.
Overall Market Recap
U.S. economic growth
declined precipitously during the fiscal year from January 1, 2020 to December 31, 2020. To battle the scourge of the coronavirus (“COVID-19”), economic lockdowns and travel restrictions were imposed
resulting in an expected year over year decline in the gross domestic product (“GDP”) of -8.89%. The majority of the GDP decline occurred during the first and second quarters of 2020 as economic lockdowns
implemented in late March to “flatten the curve” resulted in a -0.5% decline in annualized GDP in the first quarter and a record -31.4% decline in annualized GDP in the second quarter. Third quarter GDP
rebounded sharply, up an annualized 33.4% quarter over quarter. With the large rebound in the third quarter GDP, year over year GDP growth is substantially better than many of the dire predictions made in March and
April. However, with fourth quarter GDP expected to be up 4.8% on an annualized basis, the final expected year over year decline of -8.89% is one of the largest yearly contractions on record. Despite multiple fiscal
and monetary relief packages including the Paycheck Protection Program, which was designed to mitigate small business lay-offs, the U.S. unemployment rate surged during the pandemic reaching a high in April of 14.7%.
As the economy reopened, the unemployment rate fell concurrently, registering 6.7% in December. Year over year, there were 9.37 million more unemployed workers in December of 2020 versus December of 2019.
The Federal Reserve Open
Market Committee (“FOMC”) acted quickly as the impact of the COVID-19 pandemic began to make itself clear. In early March 2020, the FOMC cut its overnight borrowing rate by 50 basis points
(“bps”), following up with an even more aggressive 100 bps rate cut on Sunday, March 15. On a longer-term basis, the FOMC announced an important policy change at its annual Jackson Hole Symposium. The
change affects how the FOMC manages monetary policy in relationship to its dual mandates of stable prices and full employment. Going forward, the FOMC has indicated that it will define stable prices as an
“average” price level through time and will view unemployment at the bottom of the social economic ladder rather than as a single aggregate number. Both changes effectively reduce the FOMC’s
propensity to increase rates as economic growth picks up, allowing the economy to run “hotter” for longer, especially in situations such as we have now where inflation has been consistently below 2% for
years.
The U.S. equity market,
as represented by the S&P 500® Index (the “Index”), initially rallied during the fiscal period as record low unemployment rates and low
inflation indicated an economy running at peak efficiency. Within approximately 20 trading days starting in mid-February 2020, the Index declined by -33% as the pandemic shut down global economic activity. Many
workers suddenly found themselves “Zooming” at home instead of traveling to the office. Technology stocks blossomed upward as Apple, Microsoft, Amazon, Facebook, and, yes, Zoom became the new normal for
all things work and all things school related. Corporate bonds sold off as the virus spread globally, only to rebound sharply as fiscal and monetary stimulus boosted investor confidence. The Bloomberg Barclays 5-10
Corp Bond Index was up 9.75% for the fiscal period.
Commodities, as measured
by the Bloomberg Commodity Index (the “Benchmark”), finished the year down -3.12%, a substantial rebound from the March lows of -26.25%. Commodities, like other risk assets, sold off on the initial news of
the pandemic. Oil and oil related contracts were particularly hard hit during the early stages of the pandemic as the demand for gasoline and airplane fuel evaporated faster than oil production could be cut. The
inelasticity of oil production was on display in April, as storage tanks filled up in Cushing, Oklahoma contributing to the rare event of WTI crude oil prices trading at a negative price on April 20, 2020 ($-37.63/
barrel). As the year progressed, commodity prices recovered as oil output slowed, agricultural prices rallied on low supplies and poor weather forecasts, and the dollar fell, providing a tail wind to all
commodities.
Portfolio Commentary (Continued)
First Trust Global
Tactical Commodity Strategy Fund (FTGC)
Annual Report
December 31, 2020
(Unaudited)
Fund Performance
The Fund’s
performance for the 12-month period ended December 31, 2020 was positive 1.74% on a net asset value (“NAV”) basis and 2.17% on a market price basis. The Fund’s Benchmark returned -3.12% during the
same period.
The global commodity
market is made up of several separate markets including agriculture, oil, industrial metals, and precious metals. These commodities are the building blocks of every economy in the world. Holding a physical commodity
is not practical for most investors, but the futures market provides an alternative way to seek exposure to commodities. Individual commodity futures contracts and the unmanaged benchmarks that measure their
performance offer attractive opportunities for investors to potentially diversify their portfolios and protect themselves against unforeseen rises in inflation; however, commodities and their benchmarks can be
volatile. The Fund employs an investment style that seeks to control the Fund’s risk profile to a relatively stable band, thus providing investors broadly diversified commodity exposure with more risk stability
than traditional unmanaged commodity benchmarks.
During the performance
period, the Fund held allocations in 26 different commodities at various points in time. The Fund’s average sector allocation was 22.4% energy, 17.5% industrial metals, 18.3% precious metals, 33.9% agricultural,
and 7.9% livestock. As of December 31, 2020, the Fund held 26.2% in energy related futures contracts, 17.0% in industrial metal futures, 15.1% in precious metal futures, 36.2% in agricultural futures, and 5.5% in
livestock futures.
During the performance
period, the Fund was slightly underweight energy-related contracts on average during the period, which boosted relative performance versus the Benchmark. Within energy, the biggest relative outperformers were the
Fund’s underweight position in natural gas, WTI crude, and Brent oil futures contracts. Soft commodities provided an additional boost to the Fund’s relative performance as the Fund had overweight positions
in cocoa and cotton, which proved to be value added positions during the period. Hurting relative performance during the period was the Fund’s underweight position to gold, which was up 20.95% during the year.
Within the industrial metals sector, the Fund had positive total returns from copper, nickel, and tin, while aluminum and lead were slightly negative. Relative to the Benchmark, the Fund’s allocation to
industrial metals was a slight drag on performance. Finally, within the agricultural sector excluding the softs, the bean complex was the stellar performer with the Bloomberg Commodity Soybean and Soymeal total return
indices up 32.16% and 32.30% year to date, respectively. Wheat, Kansas Wheat, and Corn also rallied as supply concern developed in the second half of the period. On a relative basis, the Fund was up slightly in the
agricultural sector versus the Benchmark.
Please see the
Consolidated Portfolio of Investments for a complete list of all positions within the portfolio as of December 31, 2020.
Market and Fund Outlook
Today, we believe the
Fund is well positioned to achieve its investment objective of seeking to provide total return by providing investors with commodity exposure while seeking a relatively stable risk profile. We believe that the Fund is
currently broadly diversified across commodity futures and commodity sectors and that the risk control portfolio construction process is working well. Additionally, we believe that commodities are and will continue to
be a valuable component of any well diversified portfolio. Because commodities are not highly correlated with traditional asset classes, they can potentially decrease portfolio volatility, enhance overall return, and
provide meaningful diversification to an asset allocation strategy.
First Trust Global Tactical Commodity
Strategy Fund (FTGC)
Understanding Your Fund
Expenses
December 31, 2020
(Unaudited)
As a shareholder of the
First Trust Global Tactical Commodity Strategy Fund (the “Fund”), you incur two types of costs: (1) transaction costs; and (2) ongoing costs, including management fees, distribution and/or service (12b-1)
fees, if any, and other Fund expenses. This Example is intended to help you understand your ongoing costs of investing in the Fund and to compare these costs with the ongoing costs of investing in other funds.
The Example is based on
an investment of $1,000 invested at the beginning of the period and held through the six-month period ended December 31, 2020.
Actual Expenses
The first line in the
following table provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the
period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses
Paid During the Six-Month Period” to estimate the expenses you paid on your account during this six-month period.
Hypothetical Example for
Comparison Purposes
The second line in the
following table provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is
not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to
compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the
expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs such as brokerage commissions. Therefore, the second line in the table is useful in comparing
ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
|
Beginning
Account Value
July 1, 2020
|
Ending
Account Value
December 31, 2020
|
Annualized
Expense Ratio
Based on the
Six-Month
Period
|
Expenses Paid
During the
Six-Month
Period (a)
|
First Trust Global Tactical Commodity Strategy Fund (FTGC)
|
Actual
|
$1,000.00
|
$1,236.00
|
0.95%
|
$5.34
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Hypothetical (5% return before expenses)
|
$1,000.00
|
$1,020.36
|
0.95%
|
$4.82
|
(a)
|
Expenses are equal to the annualized expense ratios as indicated in the table multiplied by the average account value over the period (July 1, 2020 through
December 31, 2020), multiplied by 184/366 (to reflect the six-month period).
|
First Trust Global Tactical Commodity
Strategy Fund (FTGC)
Consolidated Portfolio of
Investments
December 31, 2020
Shares
|
|
Description
|
|
Value
|
MONEY MARKET FUNDS – 2.3%
|
5,500,000
|
|
Morgan Stanley Institutional Liquidity Funds - Treasury Portfolio - Institutional Class - 0.01% (a)
|
|
$5,500,000
|
|
|
(Cost $5,500,000)
|
|
|
|
Total Investments – 2.3%
|
|
5,500,000
|
|
(Cost $5,500,000) (b)
|
|
|
|
Net Other Assets and Liabilities – 97.7%
|
|
232,539,430
|
|
Net Assets – 100.0%
|
|
$238,039,430
|
The following futures
contracts of the Fund’s wholly-owned subsidiary were open at December 31, 2020 (see Note 2B - Futures Contracts in the Notes to Consolidated Financial Statements):
Futures Contracts Long:
|
|
Number
of
Contracts
|
|
Notional
Value
|
|
Expiration
Date
|
|
Unrealized
Appreciation
(Depreciation)/
Value
|
Brent Crude Oil Futures
|
|
64
|
|
$3,315,200
|
|
Jan–21
|
|
$419,265
|
Brent Crude Oil Futures
|
|
52
|
|
2,694,640
|
|
Feb–21
|
|
406,089
|
Brent Crude Oil Futures
|
|
46
|
|
2,381,880
|
|
Mar–21
|
|
59,570
|
Cattle Feeder Futures
|
|
19
|
|
1,332,138
|
|
Mar–21
|
|
(18,342)
|
Cocoa Futures
|
|
205
|
|
5,336,150
|
|
Mar–21
|
|
469,549
|
Coffee “C” Futures
|
|
121
|
|
5,819,343
|
|
Mar–21
|
|
912,811
|
Copper Futures
|
|
223
|
|
19,618,425
|
|
Mar–21
|
|
1,707,759
|
Corn Futures
|
|
278
|
|
6,727,600
|
|
Mar–21
|
|
911,226
|
Cotton No. 2 Futures
|
|
152
|
|
5,937,120
|
|
Mar–21
|
|
554,270
|
Gasoline RBOB Futures
|
|
80
|
|
4,737,936
|
|
Jan–21
|
|
775,942
|
Gasoline RBOB Futures
|
|
102
|
|
6,063,573
|
|
Feb–21
|
|
947,826
|
Gasoline RBOB Futures
|
|
84
|
|
5,391,842
|
|
Mar–21
|
|
37,234
|
Gold 100 Oz. Futures
|
|
97
|
|
18,382,470
|
|
Feb–21
|
|
236,987
|
Kansas City Hard Red Winter Wheat Futures
|
|
295
|
|
8,901,625
|
|
Mar–21
|
|
604,138
|
Lean Hogs Futures
|
|
218
|
|
6,127,980
|
|
Feb–21
|
|
397,307
|
Live Cattle Futures
|
|
120
|
|
5,521,200
|
|
Feb–21
|
|
243,584
|
LME Aluminum Futures
|
|
122
|
|
6,031,375
|
|
Mar–21
|
|
(57,506)
|
LME Lead Futures
|
|
51
|
|
2,543,306
|
|
Mar–21
|
|
12,252
|
LME Nickel Futures
|
|
65
|
|
6,477,120
|
|
Mar–21
|
|
149,552
|
LME Zinc Futures
|
|
69
|
|
4,742,594
|
|
Mar–21
|
|
(36,060)
|
Low Sulphur Gasoil “G” Futures
|
|
73
|
|
3,087,900
|
|
Feb–21
|
|
618,500
|
Low Sulphur Gasoil “G” Futures
|
|
58
|
|
2,465,000
|
|
Mar–21
|
|
317,350
|
Low Sulphur Gasoil “G” Futures
|
|
67
|
|
2,855,875
|
|
Apr–21
|
|
(49,925)
|
Natural Gas Futures
|
|
188
|
|
4,773,320
|
|
Jan–21
|
|
(976,642)
|
Natural Gas Futures
|
|
165
|
|
4,187,700
|
|
Mar–21
|
|
(125,196)
|
NY Harbor ULSD Futures
|
|
162
|
|
10,097,136
|
|
Jan–21
|
|
1,191,279
|
Platinum Futures
|
|
38
|
|
2,050,480
|
|
Apr–21
|
|
57,205
|
Silver Futures
|
|
111
|
|
14,658,660
|
|
Mar–21
|
|
1,092,665
|
Soybean Futures
|
|
215
|
|
14,093,250
|
|
Mar–21
|
|
1,009,970
|
Soybean Meal Futures
|
|
239
|
|
10,262,660
|
|
Mar–21
|
|
705,830
|
Soybean Oil Futures
|
|
546
|
|
13,890,240
|
|
Mar–21
|
|
1,081,623
|
Sugar #11 (World) Futures
|
|
801
|
|
13,896,389
|
|
Feb–21
|
|
1,516,665
|
WTI Crude Futures
|
|
67
|
|
3,250,840
|
|
Jan–21
|
|
312,897
|
WTI Crude Futures
|
|
61
|
|
2,966,430
|
|
Feb–21
|
|
517,441
|
WTI Crude Futures
|
|
60
|
|
2,921,400
|
|
Mar–21
|
|
192,162
|
|
|
Total
|
|
$233,540,797
|
|
|
|
$16,195,277
|
See Notes to
Consolidated Financial Statements
Page 7
First Trust Global Tactical Commodity
Strategy Fund (FTGC)
Consolidated Portfolio of
Investments (Continued)
December 31, 2020
|
(a)
|
Rate shown reflects yield as of December 31, 2020.
|
(b)
|
Aggregate cost for federal income tax purposes was $5,500,000. As of December 31, 2020, the aggregate gross unrealized appreciation for all investments in which
there was an excess of value over tax cost was $10,222,876 and the aggregate gross unrealized depreciation for all investments in which there was an excess of tax cost over value was $1,267,874. The net unrealized
appreciation was $8,955,002. The unrealized amounts presented are inclusive of derivative contracts.
|
Valuation Inputs
A summary of the inputs
used to value the Fund’s investments as of December 31, 2020 is as follows (see Note 2A - Portfolio Valuation in the Notes to Consolidated Financial Statements):
ASSETS TABLE
|
|
Total
Value at
12/31/2020
|
Level 1
Quoted
Prices
|
Level 2
Significant
Observable
Inputs
|
Level 3
Significant
Unobservable
Inputs
|
Money Market Funds
|
$ 5,500,000
|
$ 5,500,000
|
$ —
|
$ —
|
Futures Contracts*
|
17,458,948
|
17,458,948
|
—
|
—
|
Total
|
$ 22,958,948
|
$ 22,958,948
|
$—
|
$—
|
LIABILITIES TABLE
|
|
Total
Value at
12/31/2020
|
Level 1
Quoted
Prices
|
Level 2
Significant
Observable
Inputs
|
Level 3
Significant
Unobservable
Inputs
|
Futures Contracts*
|
$ (1,263,671)
|
$ (1,263,671)
|
$ —
|
$ —
|
* Includes cumulative
appreciation/depreciation on futures contracts as reported in the Futures Contracts table. Only the current day’s variation margin is presented on the Consolidated Statement of Assets and Liabilities.
Page 8
See Notes to Consolidated Financial
Statements
First Trust Global Tactical Commodity
Strategy Fund (FTGC)
Consolidated Statement of
Assets and Liabilities
December 31, 2020
ASSETS:
|
|
Investments, at value
(Cost $5,500,000)
|
$ 5,500,000
|
Cash
|
215,765,574
|
Cash segregated as collateral for open futures contracts
|
15,904,282
|
Receivables:
|
|
Variation margin
|
1,046,179
|
Dividends
|
56
|
Total Assets
|
238,216,091
|
LIABILITIES:
|
|
Investment advisory fees payable
|
176,661
|
Total Liabilities
|
176,661
|
NET ASSETS
|
$238,039,430
|
NET ASSETS consist of:
|
|
Paid-in capital
|
$ 223,826,384
|
Par value
|
123,533
|
Accumulated distributable earnings (loss)
|
14,089,513
|
NET ASSETS
|
$238,039,430
|
NET ASSET VALUE, per share
|
$19.27
|
Number of shares outstanding (unlimited number of shares authorized, par value $0.01 per share)
|
12,353,334
|
See Notes to Consolidated Financial
Statements
Page 9
First Trust Global Tactical Commodity
Strategy Fund (FTGC)
Consolidated Statement of
Operations
For the Year Ended December
31, 2020
INVESTMENT INCOME:
|
|
Interest
|
$ 497,802
|
Dividends (net of foreign withholding taxes $3,471)
|
23,863
|
Total investment income
|
521,665
|
EXPENSES:
|
|
Investment advisory fees
|
1,223,855
|
Total expenses
|
1,223,855
|
NET INVESTMENT INCOME (LOSS)
|
(702,190)
|
NET REALIZED AND UNREALIZED GAIN (LOSS):
|
|
Net realized gain (loss) on:
|
|
Investments
|
36,084
|
Futures contracts
|
(7,020,038)
|
Net realized gain (loss)
|
(6,983,954)
|
Net change in unrealized appreciation (depreciation) on:
|
|
Investments
|
(12,491)
|
Futures contracts
|
11,239,681
|
Net change in unrealized appreciation (depreciation)
|
11,227,190
|
NET REALIZED AND UNREALIZED GAIN (LOSS)
|
4,243,236
|
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS
|
$ 3,541,046
|
Page 10
See Notes to Consolidated Financial
Statements
First Trust Global Tactical Commodity
Strategy Fund (FTGC)
Consolidated Statements of
Changes in Net Assets
|
Year
Ended
12/31/2020
|
|
Year
Ended
12/31/2019
|
OPERATIONS:
|
|
|
|
Net investment income (loss)
|
$ (702,190)
|
|
$ 1,865,925
|
Net realized gain (loss)
|
(6,983,954)
|
|
(7,051,639)
|
Net change in unrealized appreciation (depreciation)
|
11,227,190
|
|
15,693,563
|
Net increase (decrease) in net assets resulting from operations
|
3,541,046
|
|
10,507,849
|
DISTRIBUTIONS TO SHAREHOLDERS FROM:
|
|
|
|
Investment operations
|
—
|
|
(1,346,263)
|
SHAREHOLDER TRANSACTIONS:
|
|
|
|
Proceeds from shares sold
|
138,000,895
|
|
18,367,607
|
Cost of shares redeemed
|
(67,378,935)
|
|
(32,172,385)
|
Net increase (decrease) in net assets resulting from shareholder transactions
|
70,621,960
|
|
(13,804,778)
|
Total increase (decrease) in net assets
|
74,163,006
|
|
(4,643,192)
|
NET ASSETS:
|
|
|
|
Beginning of period
|
163,876,424
|
|
168,519,616
|
End of period
|
$238,039,430
|
|
$163,876,424
|
CHANGES IN SHARES OUTSTANDING:
|
|
|
|
Shares outstanding, beginning of period
|
8,653,334
|
|
9,403,334
|
Shares sold
|
8,050,000
|
|
1,000,000
|
Shares redeemed
|
(4,350,000)
|
|
(1,750,000)
|
Shares outstanding, end of period
|
12,353,334
|
|
8,653,334
|
See Notes to Consolidated Financial
Statements
Page 11
First Trust Global Tactical Commodity
Strategy Fund (FTGC)
Consolidated Financial
Highlights
For a share outstanding
throughout each period
|
Year Ended December 31,
|
2020
|
|
2019
|
|
2018
|
|
2017
|
|
2016
|
Net asset value, beginning of period
|
$ 18.94
|
|
$ 17.92
|
|
$ 20.77
|
|
$ 20.43
|
|
$ 20.32
|
Income from investment operations:
|
|
|
|
|
|
|
|
|
|
Net investment income (loss)
|
(0.14)
|
|
0.26
|
|
0.18
|
|
(0.03)
|
|
(0.20)
|
Net realized and unrealized gain (loss)
|
0.47
|
|
0.91
|
|
(2.89)
|
|
0.62
|
|
0.31
|
Total from investment operations
|
0.33
|
|
1.17
|
|
(2.71)
|
|
0.59
|
|
0.11
|
Distributions paid to shareholders from:
|
|
|
|
|
|
|
|
|
|
Net investment income
|
—
|
|
(0.15)
|
|
(0.11)
|
|
(0.25)
|
|
—
|
Return of capital
|
—
|
|
—
|
|
(0.03)
|
|
—
|
|
—
|
Total distributions
|
—
|
|
(0.15)
|
|
(0.14)
|
|
(0.25)
|
|
—
|
Net asset value, end of period
|
$19.27
|
|
$18.94
|
|
$17.92
|
|
$20.77
|
|
$20.43
|
Total return (a)
|
1.74%
|
|
6.55%
|
|
(13.04)%
|
|
2.89%
|
|
0.54%
|
Ratios to average net assets/supplemental data:
|
|
|
|
|
|
|
|
|
|
Net assets, end of period (in 000’s)
|
$ 238,039
|
|
$ 163,876
|
|
$ 168,520
|
|
$ 188,005
|
|
$ 199,297
|
Ratio of total expenses to average net assets
|
0.95%
|
|
0.95%
|
|
0.95%
|
|
0.95%
|
|
0.95%
|
Ratio of net investment income (loss) to average net assets
|
(0.54)%
|
|
1.13%
|
|
0.75%
|
|
(0.33)%
|
|
(0.81)%
|
Portfolio turnover rate (b)
|
0%
|
|
0%
|
|
0%
|
|
0%
|
|
0%
|
(a)
|
Total return is calculated assuming an initial investment made at the net asset value at the beginning of the period, reinvestment of all distributions at net asset value during the
period, and redemption at net asset value on the last day of the period. The returns presented do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund
shares. Total return is calculated for the time period presented and is not annualized for periods of less than a year.
|
(b)
|
Portfolio turnover is calculated for the time period presented and is not annualized for periods of less than a year and does not include securities received or
delivered from processing creations or redemptions, derivatives and in-kind transactions.
|
Page 12
See Notes to Consolidated Financial
Statements
Notes to Consolidated Financial Statements
First Trust Global
Tactical Commodity Strategy Fund (FTGC)
December 31, 2020
1. Organization
First Trust
Exchange-Traded Fund VII (the “Trust”) is an open-end management investment company organized as a Massachusetts business trust on November 6, 2012, and is registered with the Securities and Exchange
Commission (“SEC”) under the Investment Company Act of 1940, as amended (the “1940 Act”).
The Trust consists of two
funds that are currently offering shares. This report covers the First Trust Global Tactical Commodity Strategy Fund (the “Fund”), a diversified series of the Trust, which trades under the ticker
“FTGC” on The Nasdaq Stock Market LLC (“Nasdaq”) and commenced operations on October 22, 2013. Unlike conventional mutual funds, the Fund issues and redeems shares on a continuous basis, at net
asset value (“NAV”), only in large specified blocks consisting of 50,000 shares called a “Creation Unit.” The Fund’s Creation Units are generally issued and redeemed for cash, and in
certain circumstances, in-kind for securities in which the Fund invests. Except when aggregated in Creation Units, the shares are not redeemable securities of the Fund.
The Fund is an actively
managed exchange-traded fund. The investment objective of the Fund is to seek to provide total return by providing investors with commodity exposure while seeking a relatively stable risk profile. Under normal market
conditions, the Fund, through a wholly-owned subsidiary of the Fund, FT Cayman Subsidiary II (the “Subsidiary”), organized under the laws of the Cayman Islands, invests in a portfolio of commodity futures
contracts and exchange-traded commodity linked instruments (collectively, “Commodities Instruments”). The Fund will not invest directly in Commodities Instruments. The Fund seeks to gain exposure to these
investments exclusively by investing in the Subsidiary. The Fund’s investment in the Subsidiary may not exceed 25% of the Fund’s total assets at the end of each fiscal quarter. As of December 31, 2020, the
Fund invested 22.71% of the Fund’s total assets in the Subsidiary. There can be no assurance that the Fund will achieve its investment objective. The Fund may not be appropriate for all investors.
2. Significant
Accounting Policies
The Fund is considered an
investment company and follows accounting and reporting guidance under Financial Accounting Standards Board Accounting Standards Codification Topic 946, “Financial Services-Investment Companies.” The
consolidated financial statements include the accounts on a consolidated basis of the Subsidiary. All intercompany accounts and transactions have been eliminated in consolidation. The following is a summary of
significant accounting policies consistently followed by the Fund in the preparation of the consolidated financial statements. The preparation of the consolidated financial statements in accordance with accounting
principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts and disclosures in the consolidated
financial statements. Actual results could differ from those estimates.
A. Portfolio
Valuation
The Fund’s NAV is
determined daily as of the close of regular trading on the New York Stock Exchange (“NYSE”), normally 4:00 p.m. Eastern time, on each day the NYSE is open for trading. If the NYSE closes early on a
valuation day, the NAV is determined as of that time. The Fund’s NAV is calculated by dividing the value of all assets of the Fund (including accrued interest and dividends), less all liabilities (including
accrued expenses and dividends declared but unpaid), by the total number of shares outstanding.
The Fund’s
investments are valued daily at market value or, in the absence of market value with respect to any portfolio securities, at fair value. Market value prices represent last sale or official closing prices from a
national or foreign exchange (i.e., a regulated market) and are primarily obtained from third-party pricing services. Fair value prices represent any prices not considered market value prices and are either obtained
from a third-party pricing service or are determined by the Pricing Committee of the Fund’s investment advisor, First Trust Advisors L.P. (“First Trust” or the “Advisor”), in accordance
with valuation procedures adopted by the Trust’s Board of Trustees, and in accordance with provisions of the 1940 Act. Investments valued by the Advisor’s Pricing Committee, if any, are footnoted as such
in the footnotes to the Consolidated Portfolio of Investments. The Fund’s investments are valued as follows:
Exchange-traded futures contracts are valued at the closing price in the market where such contracts are principally traded. If no closing price is available, exchange-traded futures contracts are fair valued at the
mean of their most recent bid and asked price, if available, and otherwise at their closing bid price.
U.S.
Treasuries are fair valued on the basis of valuations provided by a third-party pricing service approved by the Trust’s Board of Trustees.
Shares
of open-end funds are valued at fair value which is based on NAV per share.
Notes to Consolidated Financial Statements (Continued)
First Trust Global
Tactical Commodity Strategy Fund (FTGC)
December 31, 2020
If the Fund’s
investments are not able to be priced by their pre-established pricing methods, such investments may be valued by the Trust’s Board of Trustees or its delegate, the Advisor’s Pricing Committee, at fair
value. A variety of factors may be considered in determining the fair value of such investments.
Valuing the Fund’s
holdings using fair value pricing will result in using prices for those holdings that may differ from current market valuations. The Subsidiary’s holdings will be valued in the same manner as the Fund’s
holdings.
The Fund is subject to
fair value accounting standards that define fair value, establish the framework for measuring fair value and provide a three-level hierarchy for fair valuation based upon the inputs to the valuation as of the
measurement date. The three levels of the fair value hierarchy are as follows:
•
|
Level 1 – Level 1 inputs are quoted prices in active markets for identical investments. An active market is a market in which transactions for the investment occur with sufficient frequency and
volume to provide pricing information on an ongoing basis.
|
•
|
Level 2 – Level 2 inputs are observable inputs, either directly or indirectly, and include the following:
|
o
|
Quoted prices for similar investments in active markets.
|
o
|
Quoted prices for identical or similar investments in markets that are non-active. A non-active market is a market where there are few transactions for the investment, the prices are not current, or
price quotations vary substantially either over time or among market makers, or in which little information is released publicly.
|
o
|
Inputs other than quoted prices that are observable for the investment (for example, interest rates and yield curves observable at commonly quoted intervals, volatilities, prepayment speeds, loss
severities, credit risks, and default rates).
|
o
|
Inputs that are derived principally from or corroborated by observable market data by correlation or other means.
|
•
|
Level 3 – Level 3 inputs are unobservable inputs. Unobservable inputs may reflect the reporting entity’s own assumptions about the assumptions that market participants would use in pricing
the investment.
|
The inputs or
methodologies used for valuing investments are not necessarily an indication of the risk associated with investing in those investments. A summary of the inputs used to value the Fund’s investments as of
December 31, 2020, is included with the Fund’s Consolidated Portfolio of Investments.
B. Futures
Contracts
The Fund, through the
Subsidiary, may purchase and sell exchange-listed commodity contracts. When the Subsidiary purchases a listed futures contract, it agrees to purchase a specified reference asset (e.g., commodity) at a specified future
date. When the Subsidiary sells or shorts a listed futures contract, it agrees to sell a specified reference asset (e.g., commodity) at a specified future date. The price at which the purchase and sale will take place
is fixed when the Subsidiary enters into the contract. The exchange clearing corporation is the ultimate counterparty for all exchange-listed contracts, so credit risk is limited to the creditworthiness of the
exchange’s clearing corporation. Margin deposits are posted as collateral with the clearing broker and, in turn, with the exchange clearing corporation. Open futures contracts can be closed out prior to
settlement by entering into an offsetting transaction in a matching futures contract. If the Subsidiary is not able to enter into an offsetting transaction, the Subsidiary will continue to be required to maintain
margin deposits on the futures contract. When the contract is closed or expires, the Subsidiary records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and
the value at the time it was closed or expired. This gain or loss is included in “Net realized gain (loss) on futures contracts” on the Consolidated Statement of Operations.
Exchange-listed commodity
futures contracts are generally based upon commodities within the six principal commodity groups: energy, industrial metals, agriculture, precious metals, foods and fibers, and livestock. The price of a commodity
futures contract will reflect the storage costs of purchasing the physical commodity. These storage costs include the time value of money invested in the physical commodity plus the actual costs of storing the
commodity less any benefits from ownership of the physical commodity that are not obtained by the holder of a futures contract (this is sometimes referred to as the “convenience yield”). To the extent that
these storage costs change for an underlying commodity while the Subsidiary is in a long position on that commodity, the value of the futures contract may change proportionately.
Upon entering into a
futures contract, the Subsidiary must deposit funds, called margin, with its custodian in the name of the clearing broker equal to a specified percentage of the current value of the contract. Open futures contracts
are marked-to-market daily with the change in value recognized as a component of “Net change in unrealized appreciation (depreciation) on futures contracts” on the Consolidated Statement of Operations.
This daily fluctuation in value of the contracts is also known as variation margin and is included as “Variation margin” payable or receivable on the Consolidated Statement of Assets and Liabilities.
Notes to Consolidated Financial Statements (Continued)
First Trust Global
Tactical Commodity Strategy Fund (FTGC)
December 31, 2020
When the Subsidiary
purchases or sells a futures contract, the Subsidiary is required to collateralize its position in order to limit the risk associated with the use of leverage and other related risks. To collateralize its position,
the Subsidiary segregates assets consisting of cash or liquid securities that, when added to any amounts deposited with a futures commission merchant as margin, are equal to the unrealized depreciation of the futures
contract or otherwise collateralize its position in a manner consistent with the 1940 Act or the 1940 Act Rules and SEC interpretations thereunder. As the Subsidiary continues to engage in the described securities
trading practices and properly segregates assets, the segregated assets will function as a practical limit on the amount of leverage which the Subsidiary may undertake and on the potential increase in the speculative
character of the Subsidiary’s outstanding portfolio investments. Additionally, such segregated assets generally ensure the availability of adequate funds to meet the obligations of the Subsidiary arising from
such investment activities.
C. Cash
The Fund holds assets
equal to or greater than the full notional exposure of the futures contracts. These assets may consist of cash and other short-term securities to comply with SEC guidance with respect to coverage of futures contracts
by registered investment companies. At December 31, 2020, the Fund had restricted cash held of $15,904,282, which is included in “Cash segregated as collateral for open futures contracts” on the
Consolidated Statement of Assets and Liabilities.
D. Investment
Transactions and Investment Income
Investment transactions
are recorded as of the trade date. Realized gains and losses from investment transactions are recorded on the identified cost basis. Dividend income is recorded on the ex-dividend date. Interest income, if any, is
recorded on the accrual basis. Amortization of premiums and accretion of discounts are recorded using the effective interest method.
E. Dividends and
Distributions to Shareholders
Dividends from net
investment income, if any, are declared and paid quarterly by the Fund. The Fund distributes its net realized capital gains, if any, to shareholders at least annually.
Distributions in cash may
be reinvested automatically in additional whole shares only if the broker through whom the shares were purchased makes such option available. Such shares will generally be reinvested by the broker based upon the
market price of those shares and investors may be subject to customary brokerage commissions charged by the broker.
Distributions from net
investment income and realized capital gains are determined in accordance with income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the consolidated financial statements are
periodically adjusted for permanent differences in order to reflect their tax character. These permanent differences are primarily due to the varying treatment of income and gain/loss on portfolio securities held by
the Fund and have no impact on net assets or NAV per share. Temporary differences, which arise from recognizing certain items of income, expense and gain/loss in different periods for consolidated financial statement
and tax purposes, will reverse at some time in the future.
The tax character of
distributions paid by the Fund during the fiscal years ended December 31, 2020 and 2019, was as follows:
Distributions paid from:
|
2020
|
2019
|
Ordinary income
|
$—
|
$1,346,263
|
Capital gains
|
—
|
—
|
Return of capital
|
—
|
—
|
As of December 31, 2020,
the components of distributable earnings on a tax basis for the Fund were as follows:
Undistributed ordinary income
|
$—
|
Accumulated capital and other gain (loss)
|
7,240,275
|
Net unrealized appreciation (depreciation)
|
8,955,002
|
F. Income Taxes
The Fund intends to
continue to qualify as a regulated investment company by complying with the requirements under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”), which includes distributing
substantially all of its net investment income and net realized gains to shareholders. Accordingly, no provision has been made for federal and state income taxes. However, due to the timing and amount of
distributions, the Fund may be subject to an excise tax of 4% of the amount by which approximately 98% of the Fund’s taxable income exceeds the distributions from such taxable income for the calendar year.
Notes to Consolidated Financial Statements (Continued)
First Trust Global
Tactical Commodity Strategy Fund (FTGC)
December 31, 2020
The Subsidiary is
classified as a controlled foreign corporation under Subchapter N of the Code. Therefore, the Fund is required to increase its taxable income by its share of the Subsidiary’s income, whether or not such earnings
are distributed by the Subsidiary to the Fund. Net investment losses of the Subsidiary cannot be deducted by the Fund in the current period nor carried forward to offset taxable income in future periods.
The Fund intends to
utilize provisions of the federal income tax laws, which allow it to carry a realized capital loss forward indefinitely following the year of the loss and offset such loss against any future realized capital gains.
The Fund is subject to certain limitations under U.S. tax rules on the use of capital loss carryforwards and net unrealized built-in losses. These limitations apply when there has been a 50% change in ownership. At
December 31, 2020, for federal income tax purposes, the Fund had no non-expiring capital loss carryforwards.
The Fund is subject to
accounting standards that establish a minimum threshold for recognizing, and a system for measuring, the benefits of a tax position taken or expected to be taken in a tax return. Taxable years ended 2017, 2018, 2019,
and 2020 remain open to federal and state audit. As of December 31, 2020, management has evaluated the application of these standards to the Fund and has determined that no provision for income tax is required in the
Fund’s consolidated financial statements for uncertain tax positions.
In order to present
paid-in capital and accumulated distributable earnings (loss) (which consists of accumulated net investment income (loss), accumulated net realized gain (loss) and net unrealized appreciation (depreciation)) on the
Consolidated Statement of Assets and Liabilities that more closely represent their tax character, certain adjustments have been made to paid-in capital, accumulated net investment income (loss) and accumulated net
realized gain (loss). These adjustments are primarily due to the difference between book and tax treatment of net investment income from the Subsidiary. The results of operations and net assets were not affected by
these adjustments. For the fiscal year ended December 31, 2020, the adjustments for the Fund were as follows:
Accumulated
Net Investment
Income (Loss)
|
|
Accumulated
Net Realized
Gain (Loss)
|
|
Paid-in
Capital
|
$(3,735,500)
|
|
$6,983,954
|
|
$(3,248,454)
|
G. Expenses
Expenses, other than the
investment advisory fee and other excluded expenses, are paid by the Advisor (See Note 3).
3. Investment
Advisory Fee, Affiliated Transactions and Other Fee Arrangements
First Trust, the
investment advisor to the Fund, is a limited partnership with one limited partner, Grace Partners of DuPage L.P., and one general partner, The Charger Corporation. The Charger Corporation is an Illinois corporation
controlled by James A. Bowen, Chief Executive Officer of First Trust. First Trust is responsible for the selection and ongoing monitoring of the Fund’s and the Subsidiary’s investment portfolios, managing
the Fund’s business affairs and providing certain administrative services necessary for the management of the Fund.
Pursuant to the
Investment Management Agreement between the Trust and the Advisor, First Trust manages the investment of the Fund’s assets and is responsible for the Fund’s and the Subsidiary’s expenses, including
the cost of transfer agency, custody, fund administration, legal, audit and other services, but excluding fee payments under the Investment Management Agreement, interest, taxes, brokerage commissions and other
expenses connected with the execution of portfolio transactions, distribution and service fees pursuant to a Rule 12b-1 plan, if any, and extraordinary expenses. The Fund has agreed to pay First Trust an annual
unitary management fee equal to 0.95% of its average daily net assets. First Trust also provides fund reporting services to the Fund for a flat annual fee in the amount of $9,250, which is covered under the annual
unitary management fee. The Subsidiary does not pay First Trust a separate management fee.
The Trust has multiple
service agreements with Brown Brothers Harriman & Co. (“BBH”). Under the service agreements, BBH performs custodial, fund accounting, certain administrative services, and transfer agency services for
the Fund. As custodian, BBH is responsible for custody of the Fund’s assets. As fund accountant and administrator, BBH is responsible for maintaining the books and records of the Fund’s investments and
cash. As transfer agent, BBH is responsible for maintaining shareholder records for the Fund.
Each Trustee who is not
an officer or employee of First Trust, any sub-advisor or any of their affiliates (“Independent Trustees”) is paid a fixed annual retainer that is allocated equally among each fund in the First Trust Fund
Complex. Each Independent Trustee is also paid an annual per fund fee that varies based on whether the fund is a closed-end or other actively managed fund, a defined-outcome fund or an index fund.
Notes to Consolidated Financial Statements (Continued)
First Trust Global
Tactical Commodity Strategy Fund (FTGC)
December 31, 2020
Additionally, the Lead
Independent Trustee and the Chairmen of the Audit Committee, Nominating and Governance Committee and Valuation Committee are paid annual fees to serve in such capacities, with such compensation allocated pro rata
among each fund in the First Trust Fund Complex based on net assets. Independent Trustees are reimbursed for travel and out-of-pocket expenses in connection with all meetings. The Lead Independent Trustee and
Committee Chairmen rotate every three years. The officers and “Interested” Trustee receive no compensation from the Trust for acting in such capacities.
4. Purchases and
Sales of Securities
The cost of purchases and
proceeds from sales of securities, excluding short-term investments, derivatives, and in-kind transactions, for the fiscal year ended December 31, 2020, were $0 and $0, respectively.
For the fiscal year ended
December 31, 2020, the Fund did not have any in-kind purchases or sales.
5. Derivative
Transactions
The following table
presents the types of derivatives held by the Subsidiary at December 31, 2020, the primary underlying risk exposure and the location of these instruments as presented on the Consolidated Statement of Assets and
Liabilities.
|
|
|
|
Asset Derivatives
|
|
Liability Derivatives
|
Derivative
Instrument
|
|
Risk
Exposure
|
|
Consolidated
Statement of Assets and
Liabilities Location
|
|
Value
|
|
Consolidated
Statement of Assets and
Liabilities Location
|
|
Value
|
Futures
|
|
Commodity Risk
|
|
Unrealized appreciation
on futures contracts*
|
|
$ 17,458,948
|
|
Unrealized depreciation
on futures contracts*
|
|
$ 1,263,671
|
* Includes cumulative
appreciation/depreciation on futures contracts as reported in the Consolidated Portfolio of Investments. Only the current day’s variation margin is reported within the Consolidated Statement of Assets and
Liabilities.
The following table
presents the amount of net realized gain (loss) and change in net unrealized appreciation (depreciation) recognized for the fiscal year ended December 31, 2020, on derivative instruments, as well as the primary
underlying risk exposure associated with each instrument.
Consolidated Statement of Operations Location
|
|
Commodity Risk Exposure
|
|
Net realized gain (loss) on futures contracts
|
$(7,020,038)
|
Net change in unrealized appreciation (depreciation) on futures contracts
|
11,239,681
|
During the fiscal year
ended December 31, 2020, the notional value of futures contracts opened and closed were $784,768,553 and $723,963,754, respectively.
The Fund does not have
the right to offset financial assets and liabilities related to futures contracts on the Consolidated Statement of Assets and Liabilities.
6. Creations,
Redemptions and Transaction Fees
Shares are created and
redeemed by the Fund only in Creation Unit size aggregations of 50,000 shares in transactions with broker-dealers or large institutional investors that have entered into a participation agreement (an “Authorized
Participant”). In order to purchase Creation Units of the Fund, an Authorized Participant must deposit (i) a designated portfolio of securities determined by First Trust (the “Deposit Securities”)
and generally make or receive a cash payment referred to as the “Cash Component,” which is an amount equal to the difference between the NAV of the Fund shares (per Creation Unit Aggregation) and the
market value of the Deposit Securities, and/or (ii) cash in lieu of all or a portion of the Deposit Securities. If the Cash Component is a positive number (i.e., the NAV per Creation Unit Aggregation exceeds the
Deposit Amount), the Authorized Participant will deliver the Cash Component. If the Cash Component is a negative number (i.e., the NAV per Creation Unit Aggregation is less than the Deposit Amount), the Authorized
Participant will receive the Cash Component. Authorized Participants purchasing Creation Units must pay to BBH, as transfer agent, a creation transaction fee (the “Creation Transaction Fee”) regardless of
the number of Creation Units purchased in the transaction. The Creation Transaction Fee based on the composition of the securities included in the Fund’s portfolio and the countries in which the transactions are
settled. The Creation Transaction Fee may increase or decrease with changes in the Fund’s portfolio. The price for each Creation Unit will equal the daily NAV per share times the number of shares in a Creation
Unit plus the fees described above and, if applicable, any operational processing and brokerage costs, transfer fees or stamp taxes. When the
Notes to Consolidated Financial Statements (Continued)
First Trust Global
Tactical Commodity Strategy Fund (FTGC)
December 31, 2020
Fund permits an Authorized Participant
to substitute cash or a different security in lieu of depositing one or more of the requisite Deposit Securities, the Authorized Participant may also be assessed an amount to cover the cost of purchasing the Deposit
Securities and/or disposing of the substituted securities, including operational processing and brokerage costs, transfer fees, stamp taxes, and part or all of the spread between the expected bid and offer side of the
market related to such Deposit Securities and/or substitute securities.
Authorized Participants
redeeming Creation Units must pay to BBH, as transfer agent, a redemption transaction fee (the “Redemption Transaction Fee”), regardless of the number of Creation Units redeemed in the transaction. The
Redemption Transaction Fee may vary and is based on the composition of the securities included in the Fund’s portfolio and the countries in which the transactions are settled. The Redemption Transaction Fee may
increase or decrease with changes in the Fund’s portfolio. The Fund reserves the right to effect redemptions in cash. An Authorized Participant may request cash redemption in lieu of securities; however, the
Fund may, in its discretion, reject any such request.
7. Distribution
Plan
The Board of Trustees
adopted a Distribution and Service Plan pursuant to Rule 12b-1 under the 1940 Act. In accordance with the Rule 12b-1 plan, the Fund is authorized to pay an amount up to 0.25% of its average daily net assets each year
to reimburse First Trust Portfolios L.P. (“FTP”), the distributor of the Fund, for amounts expended to finance activities primarily intended to result in the sale of Creation Units or to provide investor
services. FTP may also use this amount to compensate securities dealers or other persons that are Authorized Participants for providing distribution assistance, including broker-dealer and shareholder support and
educational and promotional services.
No 12b-1 fees are
currently paid by the Fund, and pursuant to a contractual arrangement, no 12b-1 fees will be paid any time before April 30, 2022.
8. Indemnification
The Trust, on behalf of
the Fund, has a variety of indemnification obligations under contracts with its service providers. The Trust’s maximum exposure under these arrangements is unknown. However, the Trust has not had prior claims or
losses pursuant to these contracts and expects the risk of loss to be remote.
9. Subsequent
Events
Management has evaluated
the impact of all subsequent events to the Fund through the date the consolidated financial statements were issued, and has determined that there were no subsequent events requiring recognition or disclosure in the
consolidated financial statements that have not already been disclosed.
Report of Independent
Registered Public Accounting Firm
To the Shareholders and the
Board of Trustees of First Trust Exchange-Traded Fund VII:
Opinion on the Financial
Statements and Financial Highlights
We have audited the
accompanying consolidated statement of assets and liabilities of First Trust Global Tactical Commodity Strategy Fund (the “Fund”), a series of the First Trust Exchange-Traded Fund VII, including the
consolidated portfolio of investments, as of December 31, 2020, the related consolidated statement of operations for the year then ended, the consolidated statements of changes in net assets for each of the two years
in the period then ended, the consolidated financial highlights for each of the five years in the period then ended, and the related notes. In our opinion, the financial statements and financial highlights present
fairly, in all material respects, the financial position of the Fund as of December 31, 2020, and the results of its operations for the year then ended, the changes in its net assets for each of the two years in the
period then ended, and the financial highlights for each of the five years in the period then ended in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial
statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on the Fund’s financial statements and financial highlights based on our
audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Fund in accordance with the U.S.
federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits
in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of
material misstatement, whether due to error or fraud. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required
to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly,
we express no such opinion.
Our audits included
performing procedures to assess the risks of material misstatement of the financial statements and financial highlights, whether due to error or fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements and financial highlights. Our audits also included evaluating the accounting principles used
and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and financial highlights. Our procedures included confirmation of securities owned as of
December 31, 2020, by correspondence with the custodian and brokers. We believe that our audits provide a reasonable basis for our opinion.
Chicago, Illinois
February 23, 2021
We have served as the
auditor of one or more First Trust investment companies since 2001.
Additional Information
First Trust Global
Tactical Commodity Strategy Fund (FTGC)
December 31, 2020
(Unaudited)
Proxy Voting Policies
and Procedures
A description of the
policies and procedures that the Trust uses to determine how to vote proxies and information on how the Fund voted proxies relating to portfolio investments during the most recent 12-month period ended June 30 is
available (1) without charge, upon request, by calling (800) 988-5891; (2) on the Fund’s website at www.ftportfolios.com; and (3) on the Securities and Exchange Commission’s (“SEC”) website at www.sec.gov.
Portfolio Holdings
The Fund files portfolio
holdings information for each month in a fiscal quarter within 60 days after the end of the relevant fiscal quarter on Form N-PORT. Portfolio holdings information for the third month of each fiscal quarter will be
publicly available on the SEC’s website at www.sec.gov. The Fund’s complete schedule of portfolio holdings for the second and fourth quarters of each fiscal year is included in the semi-annual and
annual reports to shareholders, respectively, and is filed with the SEC on Form N-CSR. The semi-annual and annual report for the Fund is available to investors within 60 days after the period to which it relates. The
Fund’s Forms N-PORT and Forms N-CSR are available on the SEC’s website listed above.
Federal Tax
Information
For the taxable year
ended December 31, 2020, the following percentages of income dividend paid by the Fund is qualifies for the dividends received deduction available to corporations is hereby designated as qualified dividend income:
Dividends Received Deduction
|
|
Qualified Dividend Income
|
0.00%
|
|
0.00%
|
Distributions paid to
foreign shareholders during the Fund’s fiscal year ended December 31, 2020 that were properly designated by the Fund as “interest-related dividends” or “short-term capital gain
dividends,” may not be subject to federal income tax provided that the income was earned directly by such foreign shareholders.
Risk Considerations
Risks are inherent in all
investing. Certain general risks that may be applicable to a Fund are identified below, but not all of the material risks relevant to each Fund are included in this report and not all of the risks below apply to each
Fund. The material risks of investing in each Fund are spelled out in its prospectus, statement of additional information and other regulatory filings. Before investing, you should consider each Fund’s
investment objective, risks, charges and expenses, and read each Fund’s prospectus and statement of additional information carefully. You can download each Fund’s prospectus at www.ftportfolios.com or
contact First Trust Portfolios L.P. at (800) 621-1675 to request a prospectus, which contains this and other information about each Fund.
Concentration Risk. To the extent that a fund is able to invest a large percentage of its assets in a single asset class or the securities of issuers within the same country, state, region, industry or
sector, an adverse economic, business or political development may affect the value of the fund’s investments more than if the fund were more broadly diversified. A fund that tracks an index will be concentrated
to the extent the fund’s corresponding index is concentrated. A concentration makes a fund more susceptible to any single occurrence and may subject the fund to greater market risk than a fund that is not
concentrated.
Credit Risk. Credit risk is the risk that an issuer of a security will be unable or unwilling to make dividend, interest and/or principal payments when due and the related risk that the value of a
security may decline because of concerns about the issuer’s ability to make such payments.
Cyber Security Risk. The funds are susceptible to potential operational risks through breaches in cyber security. A breach in cyber security refers to both intentional and unintentional events that may cause a
fund to lose proprietary information, suffer data corruption or lose operational capacity. Such events could cause a fund to incur regulatory penalties, reputational damage, additional compliance costs associated with
corrective measures and/or financial loss. In addition, cyber security breaches of a fund’s third-party service providers, such as its administrator, transfer agent, custodian, or sub-advisor, as applicable, or
issuers in which the fund invests, can also subject a fund to many of the same risks associated with direct cyber security breaches.
Derivatives Risk. To the extent a fund uses derivative instruments such as futures contracts, options contracts and swaps, the fund may experience losses because of adverse movements in the price or value
of the underlying asset, index or rate, which may be magnified by certain features of the derivative. These risks are heightened when a fund’s portfolio managers use derivatives to enhance the fund’s
return or as a substitute for a position or security, rather than solely to hedge (or offset) the risk of a position or security held by the fund.
Additional Information (Continued)
First Trust Global
Tactical Commodity Strategy Fund (FTGC)
December 31, 2020
(Unaudited)
Equity Securities
Risk. To the extent a fund invests in equity securities, the value of the fund’s shares will fluctuate with changes in the value of the equity securities. Equity securities prices
fluctuate for several reasons, including changes in investors’ perceptions of the financial condition of an issuer or the general condition of the relevant stock market, such as market volatility, or when
political or economic events affecting the issuers occur. In addition, common stock prices may be particularly sensitive to rising interest rates, as the cost of capital rises and borrowing costs increase. Equity
securities may decline significantly in price over short or extended periods of time, and such declines may occur in the equity market as a whole, or they may occur in only a particular country, company, industry or
sector of the market.
ETF Risk. The shares of an ETF trade like common stock and represent an interest in a portfolio of securities. The risks of owning an ETF generally reflect the risks of owning the underlying
securities, although lack of liquidity in an ETF could result in it being more volatile and ETFs have management fees that increase their costs. Shares of an ETF trade on an exchange at market prices rather than net
asset value, which may cause the shares to trade at a price greater than net asset value (premium) or less than net asset value (discount). In times of market stress, decisions by market makers to reduce or step away
from their role of providing a market for an ETF’s shares, or decisions by an ETF’s authorized participants that they are unable or unwilling to proceed with creation and/or redemption orders of an
ETF’s shares, could result in shares of the ETF trading at a discount to net asset value and in greater than normal intraday bid-ask spreads.
Fixed Income
Securities Risk. To the extent a fund invests in fixed income securities, the fund will be subject to credit risk, income risk, interest rate risk, liquidity risk and prepayment risk. Income risk is the
risk that income from a fund’s fixed income investments could decline during periods of falling interest rates. Interest rate risk is the risk that the value of a fund’s fixed income securities will
decline because of rising interest rates. Liquidity risk is the risk that a security cannot be purchased or sold at the time desired, or cannot be purchased or sold without adversely affecting the price. Prepayment
risk is the risk that the securities will be redeemed or prepaid by the issuer, resulting in lower interest payments received by the fund. In addition to these risks, high yield securities, or “junk”
bonds, are subject to greater market fluctuations and risk of loss than securities with higher ratings, and the market for high yield securities is generally smaller and less liquid than that for investment grade
securities.
Index Constituent
Risk. Certain funds may be a constituent of one or more indices. As a result, such a fund may be included in one or more index-tracking exchange-traded funds or mutual funds. Being a component
security of such a vehicle could greatly affect the trading activity involving a fund, the size of the fund and the market volatility of the fund. Inclusion in an index could significantly increase demand for the fund
and removal from an index could result in outsized selling activity in a relatively short period of time. As a result, a fund’s net asset value could be negatively impacted and the fund’s market price may
be significantly below its net asset value during certain periods.
Index Provider Risk. To the extent a fund seeks to track an index, it is subject to Index Provider Risk. There is no assurance that the Index Provider will compile the Index accurately, or that the Index will
be determined, maintained, constructed, reconstituted, rebalanced, composed, calculated or disseminated accurately. To correct any such error, the Index Provider may carry out an unscheduled rebalance or other
modification of the Index constituents or weightings, which may increase the fund’s costs. The Index Provider does not provide any representation or warranty in relation to the quality, accuracy or completeness
of data in the Index, and it does not guarantee that the Index will be calculated in accordance with its stated methodology. Losses or costs associated with any Index Provider errors generally will be borne by the
fund and its shareholders.
Investment Companies
Risk. To the extent a fund invests in the securities of other investment vehicles, the fund will incur additional fees and expenses that would not be present in a direct investment in those
investment vehicles. Furthermore, the fund’s investment performance and risks are directly related to the investment performance and risks of the investment vehicles in which the fund invests.
LIBOR Risk. To the extent a fund invests in floating or variable rate obligations that use the London Interbank Offered Rate (“LIBOR”) as a reference interest rate, it is subject to LIBOR
Risk. The United Kingdom’s Financial Conduct Authority, which regulates LIBOR, intends to cease making LIBOR available as a reference rate over a phase-out period that is currently expected to begin after the
end of 2021, although the specific timing of the phase out of LIBOR continues to be discussed and negotiated across the industry and in various jurisdictions. The unavailability or replacement of LIBOR may affect the
value, liquidity or return on certain fund investments and may result in costs incurred in connection with closing out positions and entering into new trades. Any potential effects of the transition away from LIBOR on
the fund or on certain instruments in which the fund invests can be difficult to ascertain, and they may vary depending on a variety of factors. Any such effects of the transition away from LIBOR, as well as other
unforeseen effects, could result in losses to the fund.
Management Risk. To the extent that a fund is actively managed, it is subject to management risk. In managing an actively-managed fund’s investment portfolio, the fund’s portfolio managers will
apply investment techniques and risk analyses that may not have the desired result. There can be no guarantee that a fund will meet its investment objective.
Additional Information (Continued)
First Trust Global
Tactical Commodity Strategy Fund (FTGC)
December 31, 2020
(Unaudited)
Market Risk. Securities held by a fund, as well as shares of a fund itself, are subject to market fluctuations caused by factors such as general economic conditions, political events, regulatory or
market developments, changes in interest rates and perceived trends in securities prices. Shares of a fund could decline in value or underperform other investments as a result of the risk of loss associated with these
market fluctuations. In addition, local, regional or global events such as war, acts of terrorism, spread of infectious diseases or other public health issues, recessions, or other events could have a significant
negative impact on a fund and its investments. Such events may affect certain geographic regions, countries, sectors and industries more significantly than others. The outbreak of the respiratory disease designated as
COVID-19 in December 2019 has caused significant volatility and declines in global financial markets, which have caused losses for investors. The COVID-19 pandemic may last for an extended period of time and will
continue to impact the economy for the foreseeable future.
Non-U.S. Securities
Risk. To the extent a fund invests in non-U.S. securities, it is subject to additional risks not associated with securities of domestic issuers. Non-U.S. securities are subject to higher
volatility than securities of domestic issuers due to: possible adverse political, social or economic developments; restrictions on foreign investment or exchange of securities; lack of liquidity; currency exchange
rates; excessive taxation; government seizure of assets; different legal or accounting standards; and less government supervision and regulation of exchanges in foreign countries. Investments in non-U.S. securities
may involve higher costs than investments in U.S. securities, including higher transaction and custody costs, as well as additional taxes imposed by non-U.S. governments. These risks may be heightened for securities
of companies located, or with significant operations, in emerging market countries.
Operational Risk. Each fund is subject to risks arising from various operational factors, including, but not limited to, human error, processing and communication errors, errors of a fund’s service
providers, counterparties or other third-parties, failed or inadequate processes and technology or systems failures. Although the funds and the Advisor seek to reduce these operational risks through controls and
procedures, there is no way to completely protect against such risks.
Passive Investment
Risk. To the extent a fund seeks to track an index, the fund will invest in the securities included in, or representative of, the index regardless of their investment merit. A fund generally
will not attempt to take defensive positions in declining markets.
NOT FDIC INSURED
|
NOT BANK GUARANTEED
|
MAY LOSE VALUE
|
Remuneration
First Trust Advisors L.P.
(“First Trust”) is authorized and regulated by the U.S. Securities and Exchange Commission and is entitled to market shares of certain funds it manages, including First Trust Global Tactical Commodity
Strategy Fund (the “Fund”), in certain member states in the European Economic Area in accordance with the cooperation arrangements in Article 42 of the Alternative Investment Fund Managers Directive (the
“Directive”). First Trust is required under the Directive to make disclosures in respect of remuneration. The following disclosures are made in line with First Trust’s interpretation of currently
available regulatory guidance on remuneration disclosures.
During the year ended
December 31, 2020, the amount of remuneration paid (or to be paid) by First Trust Advisors L.P. in respect of the Fund is $462,874. This figure is comprised of $73,958 paid (or to be paid) in fixed compensation and
$388,916 paid (or to be paid) in variable compensation. There were a total of 26 beneficiaries of the remuneration described above. Those amounts include $34,847 paid (or to be paid) to senior management of First
Trust Advisors L.P. and $428,027 paid (or to be paid) to other employees whose professional activities have a material impact on the risk profiles of First Trust Advisors L.P. or the Fund (collectively, “Code
Staff”).
Code Staff included in
the aggregated figures disclosed above are rewarded in line with First Trust’s remuneration policy (the “Remuneration Policy”) which is determined and implemented by First Trust’s senior
management. The Remuneration Policy reflects First Trust’s ethos of good governance and encapsulates the following principal objectives:
i. to
provide a clear link between remuneration and performance of First Trust and to avoid rewarding for failure;
ii.
to promote sound and effective risk management consistent with the risk profiles of the funds managed by First Trust; and
iii. to remunerate staff in line with the business strategy, objectives, values and interests of First Trust and the funds managed by First Trust in a manner that avoids conflicts of interest.
First Trust assesses
various risk factors which it is exposed to when considering and implementing remuneration for Code Staff and considers whether any potential award to such person(s) would give rise to a conflict of interest. First
Trust does not reward failure, or consider the taking of risk or failure to take risk in its remuneration of Code Staff.
First Trust assesses
performance for the purposes of determining payments in respect of performance-related remuneration of Code Staff by reference to a broad range of measures including (i) individual performance (using financial and
non-financial criteria), and (ii) the overall performance of First Trust. Remuneration is not based upon the performance of the Fund.
Additional Information (Continued)
First Trust Global
Tactical Commodity Strategy Fund (FTGC)
December 31, 2020
(Unaudited)
The elements of
remuneration are balanced between fixed and variable and the senior management sets fixed salaries at a level sufficient to ensure that variable remuneration incentivises and rewards strong individual performance but
does not encourage excessive risk taking.
No individual is
involved in setting his or her own remuneration.
Board of Trustees and Officers
First Trust Global
Tactical Commodity Strategy Fund (FTGC)
December 31, 2020
(Unaudited)
The following tables
identify the Trustees and Officers of the Trust. Unless otherwise indicated, the address of all persons is 120 East Liberty Drive, Suite 400, Wheaton, IL 60187.
The Trust’s
statement of additional information includes additional information about the Trustees and is available, without charge, upon request, by calling (800) 988-5891.
Name, Year of Birth and Position with the Trust
|
Term of Office and Year First Elected or Appointed
|
Principal Occupations
During Past 5 Years
|
Number of Portfolios in the First Trust Fund Complex Overseen by Trustee
|
Other Trusteeships or Directorships Held by Trustee During Past 5 Years
|
INDEPENDENT TRUSTEES
|
Richard E. Erickson, Trustee
(1951)
|
• Indefinite Term
• Since Inception
|
Physician; Officer, Wheaton Orthopedics; Limited Partner, Gundersen Real Estate Limited Partnership (June 1992 to December 2016)
|
190
|
None
|
Thomas R. Kadlec, Trustee
(1957)
|
• Indefinite Term
• Since Inception
|
President, ADM Investor Services, Inc. (Futures Commission Merchant)
|
190
|
Director of ADM Investor Services, Inc., ADM Investor Services International, Futures Industry Association, and National Futures Association
|
Robert F. Keith, Trustee
(1956)
|
• Indefinite Term
• Since Inception
|
President, Hibs Enterprises (Financial and Management Consulting)
|
190
|
Director of Trust Company of Illinois
|
Niel B. Nielson, Trustee
(1954)
|
• Indefinite Term
• Since Inception
|
Senior Advisor (August 2018 to Present), Managing Director and Chief Operating Officer (January 2015 to August 2018), Pelita Harapan Educational Foundation
(Educational Products and Services)
|
190
|
None
|
INTERESTED TRUSTEE
|
James A. Bowen(1), Trustee and
Chairman of the Board
(1955)
|
• Indefinite Term
• Since Inception
|
Chief Executive Officer, First Trust Advisors L.P. and First Trust Portfolios L.P.; Chairman of the Board of Directors, BondWave LLC (Software
Development Company) and Stonebridge Advisors LLC (Investment Advisor)
|
190
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None
|
(1)
|
Mr. Bowen is deemed an “interested person” of the Trust due to his position as CEO of First Trust Advisors L.P., investment advisor of the Trust.
|
Board of Trustees and Officers (Continued)
First Trust Global
Tactical Commodity Strategy Fund (FTGC)
December 31, 2020
(Unaudited)
Name and Year of Birth
|
Position and Offices with Trust
|
Term of Office and Length of Service
|
Principal Occupations
During Past 5 Years
|
OFFICERS(2)
|
James M. Dykas
(1966)
|
President and Chief Executive Officer
|
• Indefinite Term
• Since January 2016
|
Managing Director and Chief Financial Officer (January 2016 to Present), Controller (January 2011 to January 2016), Senior Vice President (April 2007 to January 2016), First Trust
Advisors L.P. and First Trust Portfolios L.P.; Chief Financial Officer (January 2016 to Present), BondWave LLC (Software Development Company) and Stonebridge Advisors LLC (Investment Advisor)
|
Donald P. Swade
(1972)
|
Treasurer, Chief Financial Officer and Chief Accounting Officer
|
• Indefinite Term
• Since January 2016
|
Senior Vice President (July 2016 to Present), Vice President (April 2012 to July 2016), First Trust Advisors L.P. and First Trust Portfolios L.P.
|
W. Scott Jardine
(1960)
|
Secretary and Chief Legal Officer
|
• Indefinite Term
• Since Inception
|
General Counsel, First Trust Advisors L.P. and First Trust Portfolios L.P.; Secretary and General Counsel, BondWave LLC; Secretary, Stonebridge Advisors LLC
|
Daniel J. Lindquist
(1970)
|
Vice President
|
• Indefinite Term
• Since Inception
|
Managing Director, First Trust Advisors L.P. and First Trust Portfolios L.P.
|
Kristi A. Maher
(1966)
|
Chief Compliance Officer and Assistant Secretary
|
• Indefinite Term
• Since Inception
|
Deputy General Counsel, First Trust Advisors L.P. and First Trust Portfolios L.P.
|
Roger F. Testin
(1966)
|
Vice President
|
• Indefinite Term
• Since Inception
|
Senior Vice President, First Trust Advisors L.P. and First Trust Portfolios L.P.
|
Stan Ueland
(1970)
|
Vice President
|
• Indefinite Term
• Since Inception
|
Senior Vice President, First Trust Advisors L.P. and First Trust Portfolios L.P
|
(2)
|
The term “officer” means the president, vice president, secretary, treasurer, controller or any other officer who performs a policy making function.
|
Privacy Policy
First Trust Global
Tactical Commodity Strategy Fund (FTGC)
December 31, 2020
(Unaudited)
Privacy Policy
First Trust values our
relationship with you and considers your privacy an important priority in maintaining that relationship. We are committed to protecting the security and confidentiality of your personal information.
Sources of Information
We collect nonpublic
personal information about you from the following sources:
•
|
Information we receive from you and your broker-dealer, investment professional or financial representative through interviews, applications, agreements or other forms;
|
•
|
Information about your transactions with us, our affiliates or others;
|
•
|
Information we receive from your inquiries by mail, e-mail or telephone; and
|
•
|
Information we collect on our website through the use of “cookies”. For example, we may identify the pages on our website that your browser requests or visits.
|
Information Collected
The type of data we
collect may include your name, address, social security number, age, financial status, assets, income, tax information, retirement and estate plan information, transaction history, account balance, payment history,
investment objectives, marital status, family relationships and other personal information.
Disclosure of
Information
We do not disclose any
nonpublic personal information about our customers or former customers to anyone, except as permitted by law. In addition to using this information to verify your identity (as required under law), the permitted uses
may also include the disclosure of such information to unaffiliated companies for the following reasons:
•
|
In order to provide you with products and services and to effect transactions that you request or authorize, we may disclose your personal information as described above to unaffiliated financial
service providers and other companies that perform administrative or other services on our behalf, such as transfer agents, custodians and trustees, or that assist us in the distribution of investor materials such as
trustees, banks, financial representatives, proxy services, solicitors and printers.
|
•
|
We may release information we have about you if you direct us to do so, if we are compelled by law to do so, or in other legally limited circumstances (for example to protect your
account from fraud).
|
In addition, in order to
alert you to our other financial products and services, we may share your personal information within First Trust.
Use of Website
Analytics
We currently use third
party analytics tools, Google Analytics and AddThis, to gather information for purposes of improving First Trust’s website and marketing our products and services to you. These tools employ cookies, which are
small pieces of text stored in a file by your web browser and sent to websites that you visit, to collect information, track website usage and viewing trends such as the number of hits, pages visited, videos and PDFs
viewed and the length of user sessions in order to evaluate website performance and enhance navigation of the website. We may also collect other anonymous information, which is generally limited to technical and web
navigation information such as the IP address of your device, internet browser type and operating system for purposes of analyzing the data to make First Trust’s website better and more useful to our users. The
information collected does not include any personal identifiable information such as your name, address, phone number or email address unless you provide that information through the website for us to contact you in
order to answer your questions or respond to your requests. To find out how to opt-out of these services click on: Google Analytics and AddThis.
Confidentiality and
Security
With regard to our
internal security procedures, First Trust restricts access to your nonpublic personal information to those First Trust employees who need to know that information to provide products or services to you. We maintain
physical, electronic and procedural safeguards to protect your nonpublic personal information.
Policy Updates and
Inquiries
As required by federal
law, we will notify you of our privacy policy annually. We reserve the right to modify this policy at any time, however, if we do change it, we will tell you promptly. For questions about our policy, or for additional
copies of this notice, please go to www.ftportfolios.com, or contact us at 1-800-621-1675 (First Trust Portfolios) or 1-800-222-6822 (First Trust Advisors).
March 2020
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INVESTMENT ADVISOR
First Trust Advisors L.P.
120 East Liberty Drive, Suite
400
Wheaton, IL 60187
ADMINISTRATOR, CUSTODIAN,
FUND ACCOUNTANT &
TRANSFER AGENT
Brown Brothers Harriman &
Co.
50 Post Office Square
Boston, MA 02110
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
111 S. Wacker Drive
Chicago, IL 60606
LEGAL COUNSEL
Chapman and Cutler LLP
111 W. Monroe Street
Chicago, IL 60603
First Trust Exchange-Traded Fund VII
First Trust Alternative Absolute Return
Strategy ETF (FAAR)
Annual
Report
For the Year Ended
December 31, 2020
First Trust Alternative Absolute
Return Strategy ETF (FAAR)
Annual Report
December 31, 2020
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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 the series of First Trust Exchange-Traded Fund VII (the
“Trust”) described in this report (First Trust Alternative Absolute Return Strategy ETF; hereinafter referred to as the “Fund”) 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 forward-looking statements to reflect events and circumstances that
arise after the date hereof.
Performance and Risk
Disclosure
There is no assurance
that the Fund will achieve its investment objective. The 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’s shares may therefore be less than what you paid for them. Accordingly, you can lose money by investing in the Fund. See “Risk Considerations” in the Additional Information section of this
report for a discussion of certain other risks of investing in the Fund.
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 www.ftportfolios.com 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 the Fund’s web page at www.ftportfolios.com.
How to Read This
Report
This report contains
information that may help you evaluate your investment in the Fund. It includes details about the Fund and presents data and analysis that provide insight into the Fund’s performance and investment approach.
By reading the portfolio
commentary by the portfolio management team of the Fund, you may obtain an understanding of how the market environment affected the Fund’s performance. The statistical information that follows may help you
understand the 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 the Fund are spelled out in the prospectus, the statement of additional information, and other Fund regulatory filings.
First Trust Alternative Absolute
Return Strategy ETF (FAAR)
Annual Letter from the Chairman and
CEO
December 31, 2020
Dear Shareholders,
First Trust is pleased
to provide you with the annual report for the First Trust Alternative Absolute Return Strategy ETF (the “Fund”), which contains detailed information about the Fund for the twelve months ended December 31,
2020.
This past year has been
a whirlwind of challenges for the U.S. and the coronavirus (“COVID-19”) pandemic tops the list. It has been a nasty, stubborn virus since it arrived early in 2020. Mistakes have been made, but talented
people are working the problem. The U.S. appears to be on the cusp of turning the corner on this virus over the next few months thanks to a couple of vaccines that proved effective in clinical testing and garnered
approval from the Food and Drug Administration in record time. Hopefully, more vaccines will be gaining approval soon. Speed is key when it comes to distributing the vaccines to the most vulnerable of our population.
This is not the time for bottlenecks or logistical problems.
The COVID-19 pandemic
not only derailed the bull market in stocks in the first quarter of 2020, but it also threw the U.S. economy into a recession (the first and second quarters of 2020 reflected negative real gross domestic product
growth). In response to the negative fallout from the virus, the federal government has stepped up with trillions of dollars of stimulus to help backstop the millions of people who have lost their jobs, in many cases,
through no fault of their own, or have seen their incomes slashed due to the curtailed business activity in certain sectors of the economy, such as leisure and entertainment. In addition to putting money in
people’s pockets, the government’s efforts instilled some much needed confidence in the securities markets, in my opinion. After factoring in the 33.79% decline in the S&P 500® Index (the “Index”) from February 19, 2020 through March 23, 2020, as measured by total return performance,
the Index managed to stage a dramatic rally to end 2020 up 18.40%, according to Bloomberg. I think that is incredible when you consider that, from 1926 through 2019, the average annual total return on the Index was
10.20%, according to Morningstar/Ibbotson Associates.
We now know that the
Democratic party completed its blue wave by winning the two Senate runoff elections in Georgia on January 5, 2021. That means the Democrats have voting control, albeit by a slender margin, in the House of
Representatives and Senate (by way of Vice President Kamala Harris being the deciding vote in 50-50 split votes) for the next two years once they take office. With President Biden in the White House and the results of
the Georgia Senate races, the Democrats now have control of both the Executive and Legislative branches of the government. In addition to focusing on expediting the COVID-19 vaccinations (the President is calling for
100 million doses in his first 100 days in office), we expect President Biden to attempt to make some changes to the individual and corporate tax codes, distribute more financial stimulus to those Americans in need
and perhaps push for some form of an infrastructure spending bill, which may receive bipartisan support, in our opinion. I believe the most important fight right now is not between the politicians, it is against the
virus. We need to reopen the economy. As always, stay tuned and stay the course!
Thank you for giving
First Trust the opportunity to play a role in your financial future. We value our relationship with you and will report on the Fund again in six months.
Sincerely,
James A. Bowen
Chairman of the Board of Trustees
Chief Executive Officer of First Trust
Advisors L.P.
Fund Performance
Overview (Unaudited)
First Trust Alternative Absolute Return
Strategy ETF (FAAR)
The First Trust
Alternative Absolute Return Strategy ETF (the “Fund”) seeks to provide investors with long-term total return. The shares of the Fund are listed and trade on The Nasdaq Stock Market LLC under the ticker
symbol “FAAR.” The Fund is an actively managed exchange-traded fund that seeks to achieve long-term total return through long and short investments in exchange-traded commodity futures contracts
(“Commodity Futures”) through a wholly-owned subsidiary of the Fund organized under the laws of the Cayman Islands (the “Subsidiary”). The Fund does not invest directly in Commodity Futures.
The Fund gains exposure to these investments exclusively by investing in the Subsidiary. The Subsidiary is advised by First Trust Advisors L.P., the Fund’s investment advisor.
The Fund’s
investment in the Subsidiary is intended to provide the Fund with exposure to commodity markets within the limits of current federal income tax laws applicable to investment companies such as the Fund, which limit the
ability of investment companies to invest directly in Commodity Futures. The Subsidiary has the same investment objective as the Fund, but unlike the Fund, it may invest without limitation in Commodity Futures. The
Fund will invest up to 25% of its total assets in the Subsidiary.
The Subsidiary’s
holdings primarily consist of Commodity Futures, which are contractual agreements to buy or sell a particular commodity or financial instrument at a pre-determined price at a settlement date in the future. The Fund,
through the Subsidiary, engages in trading on commodity markets both inside and outside of the United States on behalf of the Fund. The Fund, through the Subsidiary, may invest in a range of Commodity Futures and
markets as determined by the Fund’s investment advisor from time to time. The remainder of the Fund’s assets will primarily be invested in: (1) U.S. government and agency securities with maturities of five
years or less; (2) short-term repurchase agreements; (3) money market instruments; and (4) cash. The Fund uses such instruments as investments and to collateralize the Subsidiary’s Commodity Futures exposure on
a day-to-day basis.
Performance
|
|
|
|
|
|
Average Annual
Total Returns
|
Cumulative
Total Returns
|
|
1 Year Ended
12/31/20
|
Inception (5/18/16)
to 12/31/20
|
Inception (5/18/16)
to 12/31/20
|
Fund Performance
|
|
|
|
NAV
|
7.35%
|
-0.71%
|
-3.25%
|
Market Price
|
8.54%
|
-0.46%
|
-2.10%
|
Index Performance
|
|
|
|
3 Month U.S. Treasury Bills + 3%
|
3.74%
|
4.36%
|
21.82%
|
Bloomberg Commodity Index
|
-3.12%
|
-0.72%
|
-3.28%
|
S&P 500® Index
|
18.40%
|
16.29%
|
100.90%
|
Total returns for the
period since inception are calculated from the inception date of the Fund. “Average Annual Total Returns” represent the average annual change in value of an investment over the period indicated.
“Cumulative Total Returns” represent the total change in value of an investment over the period indicated.
The Fund’s per
share net asset value (“NAV”) is the value of one share of the Fund and is computed by dividing the value of all assets of the Fund (including accrued interest and dividends), less all liabilities
(including accrued expenses and dividends declared but unpaid), by the total number of outstanding shares. The price used to calculate market return (“Market Price”) is determined by using the midpoint of
the national best bid and offer price (“NBBO”) as of the time that the Fund’s NAV is calculated. Under SEC rules, the NBBO consists of the highest displayed buy and lowest sell prices among the
various exchanges trading the Fund at the time the Fund’s NAV is calculated. Prior to January 1, 2019, the price used was the midpoint between the highest bid and the lowest offer on the stock exchange on which
shares of the Fund were listed for trading as of the time that the Fund’s NAV was calculated. Since shares of the Fund did not trade in the secondary market until after its inception, for the period from
inception to the first day of secondary market trading in shares of the Fund, the NAV of the Fund is used as a proxy for the secondary market trading price to calculate market returns. NAV and market returns assume
that all distributions have been reinvested in the Fund at NAV and Market Price, respectively.
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. Also, market returns do not include brokerage commissions that may be payable on secondary market transactions. If brokerage commissions were included, market returns
would be lower. The total returns presented reflect the reinvestment of dividends on securities in the indices. The returns presented do not reflect the deduction of taxes that a shareholder would pay on Fund
distributions or the redemption or sale of Fund shares. The investment return and principal value of shares of the Fund will vary with changes in market conditions. Shares of the Fund may be worth more or less than
their original cost when they are redeemed or sold in the market. The Fund’s past performance is no guarantee of future performance.
Fund Performance
Overview (Unaudited) (Continued)
First Trust Alternative Absolute Return
Strategy ETF (FAAR)
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
Information showing the
number of days the market price of the Fund’s shares was greater (at a premium) and less (at a discount) than the Fund’s net asset value for the most recently completed year, and the most recently
completed calendar quarters since that year (or life of the Fund, if shorter), is available at https://www.ftportfolios.com/Retail/etf/home.aspx.
Portfolio Commentary
First Trust Alternative
Absolute Return Strategy ETF (FAAR)
Annual Report
December 31, 2020
(Unaudited)
Advisor
First Trust Advisors L.P.
(“First Trust” or the “Advisor”) serves as the investment advisor, commodity pool operator and commodity trading advisor to the First Trust Alternative Absolute Return Strategy ETF (the
“Fund”). First Trust is responsible for the selection and ongoing monitoring of the Fund’s investment portfolio, managing the Fund’s business affairs and providing certain administrative
services necessary for the management of the Fund.
Portfolio Management
Team
John Gambla – CFA,
FRM, PRM, Senior Portfolio Manager
Rob A. Guttschow –
CFA, Senior Portfolio Manager
Commentary
The Fund is an actively
managed exchange-traded fund (“ETF”). The Fund’s investment objective is to seek to provide investors with long-term total return. For performance measurement, the Fund is benchmarked to the
unmanaged Bloomberg Commodity Index (the “Benchmark”), the 3 Month U.S. Treasury Bills + 3% annually, and the S&P 500® Index. This commentary discusses the 12-month market and Fund performance ended December 31, 2020.
Overall Market Recap
U.S. economic growth
declined precipitously during the fiscal year from January 1, 2020 to December 31, 2020. To battle the scourge of the coronavirus (“COVID-19”), economic lockdowns and travel restrictions were imposed
resulting in an expected year over year decline in the gross domestic product (“GDP”) of -8.89%. The majority of the GDP decline occurred during the first and second quarters of 2020 as economic lockdowns
implemented in late March to “flatten the curve” resulted in a -0.5% decline in annualized GDP in the first quarter and a record -31.4% decline in annualized GDP in the second quarter. Third quarter GDP
rebounded sharply, up an annualized 33.4% quarter over quarter. With the large rebound in the third quarter GDP, year over year GDP growth is substantially better than many of the dire predictions made in March and
April. However, with fourth quarter GDP expected to be up 4.8% on an annualized basis, the final expected year over year decline of -8.89% is one of the largest yearly contractions on record. Despite multiple fiscal
and monetary relief packages including the Paycheck Protection Program, which was designed to mitigate small business lay-offs, the U.S. unemployment rate surged during the pandemic reaching a high in April of 14.7%.
As the economy reopened, the unemployment rate fell concurrently, registering 6.7% in December. Year over year, there were 9.37 million more unemployed workers in December of 2020 versus December of 2019.
The Federal Reserve Open
Market Committee (“FOMC”) acted quickly as the impact of the COVID-19 pandemic began to make itself clear. In early March 2020, the FOMC cut its overnight borrowing rate by 50 basis points
(“bps”), following up with an even more aggressive 100 bps rate cut on Sunday, March 15. On a longer-term basis, the FOMC announced an important policy change at its annual Jackson Hole Symposium. The
change affects how the FOMC manages monetary policy in relationship to its dual mandates of stable prices and full employment. Going forward, the FOMC will define stable prices as an “average” price level
through time and will view unemployment at the bottom of the social economic ladder rather than as a single aggregate number. Both changes effectively reduce the FOMC’s propensity to increase rates as economic
growth picks up, allowing the economy to run “hotter” for longer, especially in situations such as we have now where inflation has been consistently below 2% for years.
The U.S. equity market,
as represented by the S&P 500® Index (the “Index”), initially rallied during the fiscal period as record low unemployment rates and low
inflation indicated an economy running at peak efficiency. Within approximately 20 trading days starting in mid-February 2020, the Index declined by -33% as the pandemic shut down global economic activity. Many
workers suddenly found themselves “Zooming” at home instead of traveling to the office. Technology stocks blossomed upward as Apple, Microsoft, Amazon, Facebook, and, yes, Zoom became the new normal for
all things work and all things school related. Corporate bonds sold off as the virus spread globally, only to rebound sharply as fiscal and monetary stimulus boosted investor confidence. The Bloomberg Barclays 5-10
Corp Bond Index was up 9.75% for the fiscal period.
Commodities, as measured
by the Benchmark, finished the year down -3.12%, a substantial rebound from the March lows of -26.25%. Commodities, like other risk assets, sold off on the initial news of the pandemic. Oil and oil related contracts
were particularly hard hit during the early stages of the pandemic as the demand for gasoline and airplane fuel evaporated faster than oil production could be cut. The inelasticity of oil production was on display in
April, as storage tanks filled up in Cushing, Oklahoma contributing to the rare event of WTI crude oil prices trading at a negative price on April 20, 2020 ($-37.63/ barrel). As the year progressed, commodity prices
recovered as oil output slowed, agricultural prices rallied on low supplies and poor weather forecasts, and the dollar fell, providing a tail wind to all commodities.
Portfolio Commentary (Continued)
First Trust Alternative
Absolute Return Strategy ETF (FAAR)
Annual Report
December 31, 2020
(Unaudited)
Fund Performance
The Fund’s
performance for the 12-month fiscal period ended on December 31, 2020 was 7.35% on a net asset value (“NAV”) basis and 8.54% on a market price basis. The returns of the Benchmark, 3 Month U.S. Treasury
Bills + 3%, and the S&P 500® Index for the period were -3.12%, 3.74%, and 18.40%, respectively.
The global commodity
market is made up of several separate markets including agriculture, livestock, energy, industrial metals, and precious metals. These commodities are the building blocks of every economy in the world. Holding a
physical commodity is not practical for most investors, but the futures market provides an alternative way to seek exposure to commodities. The Fund employs an investment style that seeks to profit from rising and
falling commodity prices by purchasing futures contracts in commodities that are anticipated to rise in price and shorting or selling futures contracts in commodities that are anticipated to fall in price. Commodities
and their respective futures contracts can be very volatile in price and there is no guarantee that the Fund managers will correctly anticipate which commodity futures contracts will rise or fall in price.
During the performance
period, the Fund held allocations in 27 different commodities contracts. The Fund’s average long and short exposure during the period was 41.7% and -19.0%, respectively. The average gross exposure (long
positions + absolute value of short positions) was 60.7% and the average net exposure was positive 22.7%. The average gross sector allocations were 13.3% energy, 8.8% industrial metals, 8.1% precious metals, 24.9%
agricultural, and 5.6% livestock. As of December 31, 2020, the Fund’s gross exposure was 66.4%, comprised of 56.3% long positions and 10.1% short positions. The Fund’s largest exposure was a 6.19% long
position in gasoline with the second largest exposure a -5.79% short position in natural gas.
The Fund’s long
positions during the year added value overall with the Fund profiting from positions in copper, soybeans, bean oil, silver, and cotton. Agriculture, as a sector, was particularly strong during the year as supply
constraints and poor weather forecasts for the South American growing season helped spark a rally in corn, wheat, soybeans, soy meal, and soybean oil. Long positions in Brent oil, platinum, and cocoa were negative
trades for the year. Short positions in the Fund were also a net positive for the year, adding value particularly in the first four months of the year as commodities traded off due to the impact of the global pandemic
and the resulting lockdowns. For the year, the Fund profited from short positions in WTI oil, heating oil, natural gas, gasoil, and bean oil. During the strong rally in the second half of the year, the Fund’s
short positions were a drag on overall performance. The largest negative contributors to total return for the year on the short side were coffee, sugar, Kansas wheat, corn, and feeder cattle.
Please see the
Consolidated Portfolio of Investments for a complete list of all positions within the portfolio as of December 31, 2020.
Market and Fund
Outlook
Today, we believe the
Fund is well positioned to achieve its investment objective of seeking to provide investors with long-term total return. We believe that the Fund is currently broadly diversified across commodity futures and commodity
sectors with a variety of long and short positions in anticipation of rising and falling prices. Additionally, we believe that the investment strategy employed by the Fund results in long / short commodity exposures
that are not highly correlated to long positions in stock, bonds, or commodities; therefore we believe the Fund could potentially decrease portfolio volatility, enhance overall return, and provide meaningful
diversification to an asset allocation strategy.
First Trust Alternative Absolute Return
Strategy ETF (FAAR)
Understanding Your Fund
Expenses
December 31, 2020
(Unaudited)
As a shareholder of the
First Trust Alternative Absolute Return Strategy ETF (the “Fund”), you incur two types of costs: (1) transaction costs; and (2) ongoing costs, including management fees, distribution and/or service (12b-1)
fees, if any, and other Fund expenses. This Example is intended to help you understand your ongoing costs of investing in the Fund and to compare these costs with the ongoing costs of investing in other funds.
The Example is based on
an investment of $1,000 invested at the beginning of the period and held through the six-month period ended December 31, 2020.
Actual Expenses
The first line in the
following table provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the
period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses
Paid During the Six-Month Period” to estimate the expenses you paid on your account during this six-month period.
Hypothetical Example for
Comparison Purposes
The second line in the
following table provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is
not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to
compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the
expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs such as brokerage commissions. Therefore, the second line in the table is useful in comparing
ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
|
Beginning
Account Value
July 1, 2020
|
Ending
Account Value
December 31, 2020
|
Annualized
Expense Ratio
Based on the
Six-Month
Period
|
Expenses Paid
During the
Six-Month
Period (a)
|
First Trust Alternative Absolute Return Strategy ETF (FAAR)
|
Actual
|
$1,000.00
|
$1,064.90
|
0.95%
|
$4.93
|
Hypothetical (5% return before expenses)
|
$1,000.00
|
$1,020.36
|
0.95%
|
$4.82
|
(a)
|
Expenses are equal to the annualized expense ratios as indicated in the table multiplied by the average account value over the period (July 1, 2020 through
December 31, 2020), multiplied by 184/366 (to reflect the six-month period).
|
First Trust Alternative Absolute Return
Strategy ETF (FAAR)
Consolidated Portfolio of
Investments
December 31, 2020
Besides the following
listed futures contracts of the Fund’s wholly-owned subsidiary, there were no investments held by the Fund at December 31, 2020. Aggregate cost for federal income tax purposes was $0. As of December 31, 2020,
the aggregate gross unrealized appreciation for all futures contracts in which there was an excess of value over tax cost was $1,907,243 and the aggregate gross unrealized depreciation for all futures contracts in
which there was an excess of tax cost over value was $268,546. The net unrealized appreciation was $1,638,697.
The following futures
contracts of the Fund’s wholly-owned subsidiary were open at December 31, 2020 (see Note 2B - Futures Contracts in the Notes to Consolidated Financial Statements):
Futures Contracts Long:
|
|
Number
of
Contracts
|
|
Notional
Value
|
|
Expiration
Date
|
|
Unrealized
Appreciation
(Depreciation)/
Value
|
Brent Crude Futures
|
|
6
|
|
$310,800
|
|
Jan–21
|
|
$24,790
|
Cattle Feeder Futures
|
|
17
|
|
1,191,912
|
|
Mar–21
|
|
(16,634)
|
Cocoa Futures
|
|
80
|
|
2,082,400
|
|
Mar–21
|
|
25,125
|
Copper Futures
|
|
38
|
|
3,343,050
|
|
Mar–21
|
|
300,843
|
Corn Futures
|
|
67
|
|
1,621,400
|
|
Mar–21
|
|
178,023
|
Cotton No. 2 Futures
|
|
43
|
|
1,679,580
|
|
Mar–21
|
|
152,865
|
Gasoline RBOB Futures
|
|
21
|
|
1,243,708
|
|
Jan–21
|
|
221,563
|
Gasoline RBOB Futures
|
|
16
|
|
951,149
|
|
Feb–21
|
|
169,630
|
Gasoline RBOB Futures
|
|
25
|
|
1,604,715
|
|
Mar–21
|
|
34,005
|
Gold 100 Oz. Futures
|
|
12
|
|
2,274,120
|
|
Feb–21
|
|
36,568
|
KC HRW Wheat Futures
|
|
25
|
|
754,375
|
|
Mar–21
|
|
53,759
|
Lean Hogs Futures
|
|
43
|
|
1,208,730
|
|
Feb–21
|
|
72,403
|
Live Cattle Futures
|
|
12
|
|
552,120
|
|
Feb–21
|
|
17,281
|
LME Lead Futures
|
|
12
|
|
598,425
|
|
Mar–21
|
|
(14,819)
|
LME Nickel Futures
|
|
6
|
|
597,888
|
|
Mar–21
|
|
15,930
|
LME Zinc Futures
|
|
19
|
|
1,305,932
|
|
Mar–21
|
|
(3,700)
|
Low Sulphur Gasoil “G” Futures
|
|
7
|
|
297,500
|
|
Mar–21
|
|
(4,825)
|
NY Harbor ULSD Futures
|
|
5
|
|
311,640
|
|
Jan–21
|
|
25,288
|
Platinum Futures
|
|
23
|
|
1,241,080
|
|
Apr–21
|
|
53,815
|
Silver Futures
|
|
10
|
|
1,320,600
|
|
Mar–21
|
|
102,809
|
Soybean Futures
|
|
38
|
|
2,490,900
|
|
Mar–21
|
|
178,101
|
Soybean Meal Futures
|
|
57
|
|
2,447,580
|
|
Mar–21
|
|
177,479
|
Soybean Oil Futures
|
|
96
|
|
2,442,240
|
|
Mar–21
|
|
188,985
|
Sugar #11 (World) Futures
|
|
139
|
|
2,411,483
|
|
Feb–21
|
|
250,421
|
WTI Crude Futures
|
|
6
|
|
291,120
|
|
Jan–21
|
|
21,090
|
|
|
|
|
$34,574,447
|
|
|
|
$2,260,795
|
Futures Contracts Short:
|
|
|
|
|
|
|
|
|
Coffee “C” Futures
|
|
36
|
|
$(1,731,375)
|
|
Mar–21
|
|
$(141,043)
|
Natural Gas Futures
|
|
40
|
|
(1,015,600)
|
|
Jan–21
|
|
234,762
|
Natural Gas Futures
|
|
42
|
|
(1,060,920)
|
|
Feb–21
|
|
200,698
|
Natural Gas Futures
|
|
36
|
|
(913,680)
|
|
Mar–21
|
|
85,660
|
Natural Gas Futures
|
|
27
|
|
(689,850)
|
|
Apr–21
|
|
29,025
|
Wheat (CBT) Futures
|
|
30
|
|
(960,750)
|
|
Mar–21
|
|
(67,561)
|
|
|
|
|
$(6,372,175)
|
|
|
|
$341,541
|
|
|
Total
|
|
$28,202,272
|
|
|
|
$2,602,336
|
See Notes to Consolidated Financial
Statements
Page 7
First Trust Alternative Absolute Return
Strategy ETF (FAAR)
Consolidated Portfolio of
Investments (Continued)
December 31, 2020
Valuation Inputs
A summary of the inputs
used to value the Fund’s investments as of December 31, 2020 is as follows (see Note 2A - Portfolio Valuation in the Notes to Consolidated Financial Statements):
ASSETS TABLE
|
|
Total
Value at
12/31/2020
|
Level 1
Quoted
Prices
|
Level 2
Significant
Observable
Inputs
|
Level 3
Significant
Unobservable
Inputs
|
Futures Contracts*
|
$ 2,850,918
|
$ 2,850,918
|
$ —
|
$ —
|
LIABILITIES TABLE
|
|
Total
Value at
12/31/2020
|
Level 1
Quoted
Prices
|
Level 2
Significant
Observable
Inputs
|
Level 3
Significant
Unobservable
Inputs
|
Futures Contracts*
|
$ (248,582)
|
$ (248,582)
|
$ —
|
$ —
|
* Includes cumulative apprecition/depreciation on futures contracts as reported in the Futures Contracts table. Only the current day’s variation margin is
presented on the Consolidated Statement of Assets and Liabilities.
|
Page 8
See Notes to Consolidated Financial
Statements
First Trust Alternative Absolute Return
Strategy ETF (FAAR)
Consolidated Statement of
Assets and Liabilities
December 31, 2020
ASSETS:
|
|
Cash
|
$ 53,982,097
|
Cash segregated as collateral for open futures contracts
|
2,697,042
|
Receivables:
|
|
Fund shares sold receivable
|
2,696,638
|
Total Assets
|
59,375,777
|
LIABILITIES:
|
|
Payables:
|
|
Investment advisory fees
|
44,886
|
Variation margin
|
32,736
|
Total Liabilities
|
77,622
|
NET ASSETS
|
$59,298,155
|
NET ASSETS consist of:
|
|
Paid-in capital
|
$ 57,190,754
|
Par value
|
22,000
|
Accumulated distributable earnings (loss)
|
2,085,401
|
NET ASSETS
|
$59,298,155
|
NET ASSET VALUE, per share
|
$26.95
|
Number of shares outstanding (unlimited number of shares authorized, par value $0.01 per share)
|
2,200,002
|
See Notes to Consolidated Financial
Statements
Page 9
First Trust Alternative Absolute Return
Strategy ETF (FAAR)
Consolidated Statement of
Operations
For the Year Ended December
31, 2020
INVESTMENT INCOME:
|
|
Interest
|
$ 105,353
|
Total investment income
|
105,353
|
EXPENSES:
|
|
Investment advisory fees
|
367,228
|
Excise tax expense
|
278
|
Total expenses
|
367,506
|
NET INVESTMENT INCOME (LOSS)
|
(262,153)
|
NET REALIZED AND UNREALIZED GAIN (LOSS):
|
|
Net realized gain (loss) on:
|
|
Investments
|
1,896
|
Futures contracts
|
1,720,911
|
Net realized gain (loss)
|
1,722,807
|
Net change in unrealized appreciation (depreciation) on:
|
|
Investments
|
(2,150)
|
Futures contracts
|
2,364,648
|
Net change in unrealized appreciation (depreciation)
|
2,362,498
|
NET REALIZED AND UNREALIZED GAIN (LOSS)
|
4,085,305
|
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS
|
$ 3,823,152
|
Page 10
See Notes to Consolidated Financial
Statements
First Trust Alternative Absolute Return
Strategy ETF (FAAR)
Consolidated Statements of
Changes in Net Assets
|
Year
Ended
12/31/2020
|
|
Year
Ended
12/31/2019
|
OPERATIONS:
|
|
|
|
Net investment income (loss)
|
$ (262,153)
|
|
$ 324,644
|
Net realized gain (loss)
|
1,722,807
|
|
(1,618,011)
|
Net change in unrealized appreciation (depreciation)
|
2,362,498
|
|
163,239
|
Net increase (decrease) in net assets resulting from operations
|
3,823,152
|
|
(1,130,128)
|
DISTRIBUTIONS TO SHAREHOLDERS FROM:
|
|
|
|
Investment operations
|
(1,738,282)
|
|
(264,701)
|
SHAREHOLDER TRANSACTIONS:
|
|
|
|
Proceeds from shares sold
|
35,167,877
|
|
29,572,780
|
Cost of shares redeemed
|
(3,833,815)
|
|
(20,832,525)
|
Net increase (decrease) in net assets resulting from shareholder transactions
|
31,334,062
|
|
8,740,255
|
Total increase (decrease) in net assets
|
33,418,932
|
|
7,345,426
|
NET ASSETS:
|
|
|
|
Beginning of period
|
25,879,223
|
|
18,533,797
|
End of period
|
$59,298,155
|
|
$25,879,223
|
CHANGES IN SHARES OUTSTANDING:
|
|
|
|
Shares outstanding, beginning of period
|
1,000,002
|
|
700,002
|
Shares sold
|
1,350,000
|
|
1,100,000
|
Shares redeemed
|
(150,000)
|
|
(800,000)
|
Shares outstanding, end of period
|
2,200,002
|
|
1,000,002
|
See Notes to Consolidated Financial
Statements
Page 11
First Trust Alternative Absolute Return
Strategy ETF (FAAR)
Consolidated Financial
Highlights
For a share outstanding
throughout each period
|
Year Ended December 31,
|
|
Period
Ended
12/31/2016 (a)
|
2020
|
|
2019
|
|
2018
|
|
2017
|
|
Net asset value, beginning of period
|
$ 25.88
|
|
$ 26.48
|
|
$ 29.35
|
|
$ 28.45
|
|
$ 30.00
|
Income from investment operations:
|
|
|
|
|
|
|
|
|
|
Net investment income (loss)
|
(0.18) (b)
|
|
0.36
|
|
0.14
|
|
(0.10) (b)
|
|
(0.15)
|
Net realized and unrealized gain (loss)
|
2.08
|
|
(0.70)
|
|
(2.86)
|
|
1.83
|
|
(1.40)
|
Total from investment operations
|
1.90
|
|
(0.34)
|
|
(2.72)
|
|
1.73
|
|
(1.55)
|
Distributions paid to shareholders from:
|
|
|
|
|
|
|
|
|
|
Net investment income
|
(0.83)
|
|
(0.26)
|
|
(0.11)
|
|
(0.83)
|
|
—
|
Return of capital
|
—
|
|
—
|
|
(0.04)
|
|
—
|
|
—
|
Total distributions
|
(0.83)
|
|
(0.26)
|
|
(0.15)
|
|
(0.83)
|
|
—
|
Net asset value, end of period
|
$26.95
|
|
$25.88
|
|
$26.48
|
|
$29.35
|
|
$28.45
|
Total return (c)
|
7.35%
|
|
(1.27)%
|
|
(9.23)%
|
|
6.08%
|
|
(5.17)%
|
Ratios to average net assets/supplemental data:
|
|
|
|
|
|
|
|
|
|
Net assets, end of period (in 000’s)
|
$ 59,298
|
|
$ 25,879
|
|
$ 18,534
|
|
$ 7,338
|
|
$ 2,845
|
Ratio of total expenses to average net assets
|
0.95%
|
|
0.95%
|
|
0.95%
|
|
0.95%
|
|
0.95% (d)
|
Ratio of net investment income (loss) to average net assets
|
(0.68)%
|
|
0.88%
|
|
0.65%
|
|
(0.33)%
|
|
(0.82)% (d)
|
Portfolio turnover rate (e)
|
0%
|
|
0%
|
|
0%
|
|
0%
|
|
0%
|
(a)
|
Inception date is May 18, 2016, which is consistent with the commencement of investment operations and is the date the initial creation unit was established. First Trust Portfolios
L.P. seeded the Fund on May 9, 2016 in order to provide initial capital required by SEC rules.
|
(b)
|
Based on average shares outstanding.
|
(c)
|
Total return is calculated assuming an initial investment made at the net asset value at the beginning of the period, reinvestment of all distributions at net asset value during the
period, and redemption at net asset value on the last day of the period. The returns presented do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund
shares. Total return is calculated for the time period presented and is not annualized for periods of less than a year.
|
(d)
|
Annualized.
|
(e)
|
Portfolio turnover is calculated for the time period presented and is not annualized for periods of less than a year and does not include securities received or
delivered from processing creations or redemptions, derivatives and in-kind transactions.
|
Page 12
See Notes to Consolidated Financial
Statements
Notes to Consolidated Financial Statements
First Trust Alternative
Absolute Return Strategy ETF (FAAR)
December 31, 2020
1. Organization
First Trust
Exchange-Traded Fund VII (the “Trust”) is an open-end management investment company organized as a Massachusetts business trust on November 6, 2012, and is registered with the Securities and Exchange
Commission (“SEC”) under the Investment Company Act of 1940, as amended (the “1940 Act”).
The Trust consists of two
funds that are offering shares. This report covers the First Trust Alternative Absolute Return Strategy ETF (the “Fund”), a diversified series of the Trust, which trades under the ticker “FAAR”
on The Nasdaq Stock Market LLC (“Nasdaq”) and commenced operations on May 18, 2016. Unlike conventional mutual funds, the Fund issues and redeems shares on a continuous basis, at net asset value
(“NAV”), only in large specified blocks consisting of 50,000 shares called a “Creation Unit.” The Fund’s Creation Units are generally issued and redeemed for cash or, in certain
circumstances, in-kind for securities in which the Fund invests. Except when aggregated in Creation Units, the shares are not redeemable securities of the Fund.
The Fund is an actively
managed exchange-traded fund. The investment objective of the Fund is to seek to provide investors with long-term total return. Under normal market conditions, the Fund, through a wholly-owned subsidiary of the Fund,
FT Cayman Subsidiary III (the “Subsidiary”), organized under the laws of the Cayman Islands, invests in a portfolio of commodity futures contracts (“Commodities Futures”). The Fund does not
invest directly in Commodities Futures. The Fund gains exposure to these investments exclusively by investing in the Subsidiary. The Fund’s investment in the Subsidiary may not exceed 25% of the Fund’s
total assets at the end of each fiscal quarter. As of December 31, 2020, the Fund invested 22.80% of the Fund’s total assets in the Subsidiary. There can be no assurance that the Fund will achieve its investment
objective. The Fund may not be appropriate for all investors.
2. Significant
Accounting Policies
The Fund is considered an
investment company and follows accounting and reporting guidance under Financial Accounting Standards Board Accounting Standards Codification Topic 946, “Financial Services-Investment Companies.” The
consolidated financial statements include the accounts on a consolidated basis of the Subsidiary. All intercompany accounts and transactions have been eliminated in consolidation. The following is a summary of
significant accounting policies consistently followed by the Fund in the preparation of the consolidated financial statements. The preparation of the consolidated financial statements in accordance with accounting
principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts and disclosures in the consolidated
financial statements. Actual results could differ from those estimates.
A. Portfolio
Valuation
The Fund’s NAV is
determined daily as of the close of regular trading on the New York Stock Exchange (“NYSE”), normally 4:00 p.m. Eastern time, on each day the NYSE is open for trading. If the NYSE closes early on a
valuation day, the NAV is determined as of that time. The Fund’s NAV is calculated by dividing the value of all assets of the Fund (including accrued interest and dividends), less all liabilities (including
accrued expenses and dividends declared but unpaid), by the total number of shares outstanding.
The Fund’s
investments are valued daily at market value or, in the absence of market value with respect to any portfolio securities, at fair value. Market value prices represent last sale or official closing prices from a
national or foreign exchange (i.e., a regulated market) and are primarily obtained from third-party pricing services. Fair value prices represent any prices not considered market value prices and are either obtained
from a third-party pricing service or are determined by the Pricing Committee of the Fund’s investment advisor, First Trust Advisors L.P. (“First Trust” or the “Advisor”), in accordance
with valuation procedures adopted by the Trust’s Board of Trustees, and in accordance with provisions of the 1940 Act. Investments valued by the Advisor’s Pricing Committee, if any, are footnoted as such
in the footnotes to the Consolidated Portfolio of Investments. The Fund’s investments are valued as follows:
Exchange-traded futures contracts are valued at the closing price in the market where such contracts are principally traded. If no closing price is available, exchange-traded futures contracts are fair valued at the
mean of their most recent bid and asked price, if available, and otherwise at their closing bid price.
U.S.
Treasuries are fair valued on the basis of valuations provided by a third-party pricing service approved by the Trust’s Board of Trustees.
If the Fund’s
investments are not able to be priced by their pre-established pricing methods, such investments may be valued by the Trust’s Board of Trustees or its delegate, the Advisor’s Pricing Committee, at fair
value. A variety of factors may be considered in determining the fair value of such investments.
Notes to Consolidated Financial Statements (Continued)
First Trust Alternative
Absolute Return Strategy ETF (FAAR)
December 31, 2020
Valuing the Fund’s
holdings using fair value pricing will result in using prices for those holdings that may differ from current market valuations. The Subsidiary’s holdings will be valued in the same manner as the Fund’s
holdings.
The Fund is subject to
fair value accounting standards that define fair value, establish the framework for measuring fair value and provide a three-level hierarchy for fair valuation based upon the inputs to the valuation as of the
measurement date. The three levels of the fair value hierarchy are as follows:
•
|
Level 1 – Level 1 inputs are quoted prices in active markets for identical investments. An active market is a market in which transactions for the investment occur with sufficient frequency and
volume to provide pricing information on an ongoing basis.
|
•
|
Level 2 – Level 2 inputs are observable inputs, either directly or indirectly, and include the following:
|
o
|
Quoted prices for similar investments in active markets.
|
o
|
Quoted prices for identical or similar investments in markets that are non-active. A non-active market is a market where there are few transactions for the investment, the prices are not current, or
price quotations vary substantially either over time or among market makers, or in which little information is released publicly.
|
o
|
Inputs other than quoted prices that are observable for the investment (for example, interest rates and yield curves observable at commonly quoted intervals, volatilities, prepayment speeds, loss
severities, credit risks, and default rates).
|
o
|
Inputs that are derived principally from or corroborated by observable market data by correlation or other means.
|
•
|
Level 3 – Level 3 inputs are unobservable inputs. Unobservable inputs may reflect the reporting entity’s own assumptions about the assumptions that market participants would use in pricing
the investment.
|
The inputs or
methodologies used for valuing investments are not necessarily an indication of the risk associated with investing in those investments. A summary of the inputs used to value the Fund’s investments as of
December 31, 2020, is included with the Fund’s Consolidated Portfolio of Investments.
B. Futures
Contracts
The Fund, through the
Subsidiary, may purchase and sell exchange-listed commodity contracts. When the Subsidiary purchases a listed futures contract, it agrees to purchase a specified reference asset (e.g., commodity) at a specified future
date. When the Subsidiary sells or shorts a listed futures contract, it agrees to sell a specified reference asset (e.g., commodity) at a specified future date. The price at which the purchase and sale will take place
is fixed when the Subsidiary enters into the contract. The exchange clearing corporation is the ultimate counterparty for all exchange-listed contracts, so credit risk is limited to the creditworthiness of the
exchange’s clearing corporation. Margin deposits are posted as collateral with the clearing broker and, in turn, with the exchange clearing corporation. Open futures contracts can be closed out prior to
settlement by entering into an offsetting transaction in a matching futures contract. If the Subsidiary is not able to enter into an offsetting transaction, the Subsidiary will continue to be required to maintain
margin deposits on the futures contract. When the contract is closed or expires, the Subsidiary records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and
the value at the time it was closed or expired. This gain or loss is included in “Net realized gain (loss) on futures contracts” on the Consolidated Statement of Operations.
Exchange-listed commodity
futures contracts are generally based upon commodities within the five principal commodity groups: energy, industrial metals, agriculture, precious metals, and livestock. The price of a commodity futures contract will
reflect the storage costs of purchasing the physical commodity. These storage costs include the time value of money invested in the physical commodity plus the actual costs of storing the commodity less any benefits
from ownership of the physical commodity that are not obtained by the holder of a futures contract (this is sometimes referred to as the “convenience yield”). To the extent that these storage costs change
for an underlying commodity while the Subsidiary is in a long position on that commodity, the value of the futures contract may change proportionately.
Upon entering into a
futures contract, the Subsidiary must deposit funds, called margin, with its custodian in the name of the clearing broker equal to a specified percentage of the current value of the contract. Open futures contracts
are marked-to-market daily with the change in value recognized as a component of “Net change in unrealized appreciation (depreciation) on futures contracts” on the Consolidated Statement of Operations.
This daily fluctuation in value of the contracts is also known as variation margin and is included as “Variation margin” payable or receivable on the Consolidated Statement of Assets and Liabilities.
When the Subsidiary
purchases or sells a futures contract, the Subsidiary is required to collateralize its position in order to limit the risk associated with the use of leverage and other related risks. To collateralize its position,
the Subsidiary segregates assets consisting of cash or liquid securities that, when added to any amounts deposited with a futures commission merchant as margin, are equal to the unrealized depreciation of the futures
contract or otherwise collateralize its position in a manner consistent with the 1940 Act or the
Notes to Consolidated Financial Statements (Continued)
First Trust Alternative
Absolute Return Strategy ETF (FAAR)
December 31, 2020
1940 Act Rules and SEC interpretations
thereunder. As the Subsidiary continues to engage in the described securities trading practices and properly segregates assets, the segregated assets will function as a practical limit on the amount of leverage which
the Subsidiary may undertake and on the potential increase in the speculative character of the Subsidiary’s outstanding portfolio investments. Additionally, such segregated assets generally ensure the
availability of adequate funds to meet the obligations of the Subsidiary arising from such investment activities.
C. Investment
Transactions and Investment Income
Investment transactions
are recorded as of the trade date. Realized gains and losses from investment transactions are recorded on the identified cost basis. Dividend income is recorded on the ex-dividend date. Interest income, if any, is
recorded on the accrual basis. Amortization of premiums and accretion of discounts are recorded using the effective interest method.
D. Cash
The Fund holds assets
equal to or greater than the full notional exposure of the futures contracts. These assets may consist of cash and other short-term securities to comply with SEC guidance with respect to coverage of futures contracts
by registered investment companies. At December 31, 2020, the Fund had restricted cash held of $2,697,042, which is included in “Cash segregated as collateral for open futures contracts” on the
Consolidated Statement of Assets and Liabilities.
E. Dividends and
Distributions to Shareholders
Dividends from net
investment income, if any, are declared and paid quarterly by the Fund. The Fund distributes its net realized capital gains, if any, to shareholders at least annually.
Distributions in cash may
be reinvested automatically in additional whole shares only if the broker through whom the shares were purchased makes such option available. Such shares will generally be reinvested by the broker based upon the
market price of those shares and investors may be subject to customary brokerage commissions charged by the broker.
Distributions from net
investment income and realized capital gains are determined in accordance with income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the consolidated financial statements are
periodically adjusted for permanent differences in order to reflect their tax character. These permanent differences are primarily due to the varying treatment of income and gain/loss on portfolio securities held by
the Fund and have no impact on net assets or NAV per share. Temporary differences, which arise from recognizing certain items of income, expense and gain/loss in different periods for consolidated financial statement
and tax purposes, will reverse at some time in the future.
The tax character of
distributions paid by the Fund during the fiscal years ended December 31, 2020 and 2019, was as follows:
Distributions paid from:
|
2020
|
2019
|
Ordinary income
|
$1,738,282
|
$264,701
|
Capital gains
|
—
|
—
|
Return of capital
|
—
|
—
|
As of December 31, 2020,
the components of distributable earnings on a tax basis for the Fund were as follows:
Undistributed ordinary income
|
$19,414
|
Accumulated capital and other gain (loss)
|
963,639
|
Net unrealized appreciation (depreciation)
|
1,638,697
|
F. Income Taxes
The Fund intends to
continue to qualify as a regulated investment company by complying with the requirements under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”), which includes distributing
substantially all of its net investment income and net realized gains to shareholders. Accordingly, no provision has been made for federal and state income taxes. However, due to the timing and amount of
distributions, the Fund may be subject to an excise tax of 4% of the amount by which approximately 98% of the Fund’s taxable income exceeds the distributions from such taxable income for the calendar year.
The Subsidiary is
classified as a controlled foreign corporation under Subchapter N of the Code. Therefore, the Fund is required to increase its taxable income by its share of the Subsidiary’s income, whether or not such earnings
are distributed by the Subsidiary to the Fund. Net investment losses of the Subsidiary cannot be deducted by the Fund in the current period nor carried forward to offset taxable income in future periods.
Notes to Consolidated Financial Statements (Continued)
First Trust Alternative
Absolute Return Strategy ETF (FAAR)
December 31, 2020
The Fund intends to
utilize provisions of the federal income tax laws, which allow it to carry a realized capital loss forward indefinitely following the year of the loss and offset such loss against any future realized capital gains.
The Fund is subject to certain limitations under U.S. tax rules on the use of capital loss carryforwards and net unrealized built-in losses. These limitations apply when there has been a 50% change in ownership. At
December 31, 2020, for federal income tax purposes, the Fund had no non-expiring capital loss carryforwards that may be carried forward indefinitely.
The Fund is subject to
accounting standards that establish a minimum threshold for recognizing, and a system for measuring, the benefits of a tax position taken or expected to be taken in a tax return. Taxable years ended 2017, 2018, 2019,
and 2020 remain open to federal and state audit. As of December 31, 2020, management has evaluated the application of these standards to the Fund and has determined that no provision for income tax is required in the
Fund’s consolidated financial statements for uncertain tax positions.
In order to present
paid-in capital and accumulated distributable earnings (loss) (which consists of accumulated net investment income (loss), accumulated net realized gain (loss) and net unrealized appreciation (depreciation)) on the
Consolidated Statement of Assets and Liabilities that more closely represent their tax character, certain adjustments have been made to paid-in capital, accumulated net investment income (loss) and accumulated net
realized gain (loss). These adjustments are primarily due to the difference between book and tax treatment of net investment income from the Subsidiary. The results of operations and net assets were not affected by
these adjustments. For the fiscal year ended December 31, 2020, the adjustments for the Fund were as follows:
Accumulated
Net Investment
Income (Loss)
|
|
Accumulated
Net Realized
Gain (Loss)
|
|
Paid-in
Capital
|
$1,723,085
|
|
$(1,722,807)
|
|
$(278)
|
G. Expenses
Expenses, other than the
investment advisory fee and other excluded expenses, are paid by the Advisor (See Note 3).
3. Investment
Advisory Fee, Affiliated Transactions and Other Fee Arrangements
First Trust, the
investment advisor to the Fund, is a limited partnership with one limited partner, Grace Partners of DuPage L.P., and one general partner, The Charger Corporation. The Charger Corporation is an Illinois corporation
controlled by James A. Bowen, Chief Executive Officer of First Trust. First Trust is responsible for the selection and ongoing monitoring of the Fund’s and the Subsidiary’s investment portfolios, managing
the Fund’s business affairs and providing certain administrative services necessary for the management of the Fund.
Pursuant to the
Investment Management Agreement between the Trust and the Advisor, First Trust manages the investment of the Fund’s assets and is responsible for the Fund’s and the Subsidiary’s expenses, including
the cost of transfer agency, custody, fund administration, legal, audit and other services, but excluding fee payments under the Investment Management Agreement, interest, taxes, brokerage commissions and other
expenses connected with the execution of portfolio transactions, distribution and service fees pursuant to a Rule 12b-1 plan, if any, and extraordinary expenses. The Fund has agreed to pay First Trust an annual
unitary management fee equal to 0.95% of its average daily net assets. First Trust also provides fund reporting services to the Fund for a flat annual fee in the amount of $9,250, which is covered under the annual
unitary management fee. The Subsidiary does not pay First Trust a separate management fee.
The Trust has multiple
service agreements with Brown Brothers Harriman & Co. (“BBH”). Under the service agreements, BBH performs custodial, fund accounting, certain administrative services, and transfer agency services for
the Fund. As custodian, BBH is responsible for custody of the Fund’s assets. As fund accountant and administrator, BBH is responsible for maintaining the books and records of the Fund’s investments and
cash. As transfer agent, BBH is responsible for maintaining shareholder records for the Fund.
Each Trustee who is not
an officer or employee of First Trust, any sub-advisor or any of their affiliates (“Independent Trustees”) is paid a fixed annual retainer that is allocated equally among each fund in the First Trust Fund
Complex. Each Independent Trustee is also paid an annual per fund fee that varies based on whether the fund is a closed-end or other actively managed fund, a defined-outcome fund or an index fund.
Additionally, the Lead
Independent Trustee and the Chairmen of the Audit Committee, Nominating and Governance Committee and Valuation Committee are paid annual fees to serve in such capacities, with such compensation allocated pro rata
among each fund in the First Trust Fund Complex based on net assets. Independent Trustees are reimbursed for travel and out-of-pocket expenses in connection with all meetings. The Lead Independent Trustee and
Committee Chairmen rotate every three years. The officers and “Interested” Trustee receive no compensation from the Trust for acting in such capacities.
Notes to Consolidated Financial Statements (Continued)
First Trust Alternative
Absolute Return Strategy ETF (FAAR)
December 31, 2020
4. Purchases and
Sales of Securities
The cost of purchases and
proceeds from sales of securities, excluding short-term investments, derivatives, and in-kind transactions, for the fiscal year ended December 31, 2020, were $0 and $0, respectively.
For the fiscal year ended
December 31, 2020, the Fund did not have any in-kind purchases or sales.
5. Derivative
Transactions
The following table
presents the types of derivatives held by the Subsidiary at December 31, 2020, the primary underlying risk exposure and the location of these instruments as presented on the Consolidated Statement of Assets and
Liabilities.
|
|
|
|
Asset Derivatives
|
|
Liability Derivatives
|
Derivative
Instrument
|
|
Risk
Exposure
|
|
Consolidated
Statement of Assets and
Liabilities Location
|
|
Value
|
|
Consolidated
Statement of Assets and
Liabilities Location
|
|
Value
|
Futures
|
|
Commodity Risk
|
|
Unrealized
appreciation
on futures contracts*
|
|
$ 2,850,918
|
|
Unrealized depreciation
on futures contracts*
|
|
$ 248,582
|
* Includes cumulative
appreciation/depreciation on futures contracts as reported in the Futures Contracts table. Only the current day’s variation margin is presented on the Consolidated Statement of Assets and Liabilities.
The following table
presents the amount of net realized gain (loss) and change in net unrealized appreciation (depreciation) recognized for the fiscal year ended December 31, 2020, on derivative instruments, as well as the primary
underlying risk exposure associated with each instrument.
Consolidated Statement of Operations Location
|
|
Commodity Risk Exposure
|
|
Net realized gain (loss) on futures contracts
|
$1,720,911
|
Net change in unrealized appreciation (depreciation) on futures contracts
|
2,364,648
|
During the fiscal year
ended December 31, 2020, the notional value of futures contracts opened and closed were $261,380,418 and $237,993,184, respectively.
The Fund does not have
the right to offset financial assets and liabilities related to futures contracts on the Consolidated Statement of Assets and Liabilities.
6. Creations,
Redemptions and Transaction Fees
Shares are created and
redeemed by the Fund only in Creation Unit size aggregations of 50,000 shares in transactions with broker-dealers or large institutional investors that have entered into a participation agreement (an “Authorized
Participant”). In order to purchase Creation Units of the Fund, an Authorized Participant must deposit (i) a designated portfolio of securities and other instruments determined by First Trust (the “Deposit
Securities”) and generally make or receive a cash payment referred to as the “Cash Component,” which is an amount equal to the difference between the NAV of the Fund shares (per Creation Unit
Aggregation) and the market value of the Deposit Securities, and/or (ii) cash in lieu of all or a portion of the Deposit Securities. If the Cash Component is a positive number (i.e., the NAV per Creation Unit
Aggregation exceeds the Deposit Amount), the Authorized Participant will deliver the Cash Component. If the Cash Component is a negative number (i.e., the NAV per Creation Unit Aggregation is less than the Deposit
Amount), the Authorized Participant will receive the Cash Component. Authorized Participants purchasing Creation Units must pay to BBH, as transfer agent, a creation transaction fee (the “Creation Transaction
Fee”) regardless of the number of Creation Units purchased in the transaction. The Creation Transaction Fee may vary and is based on the composition of the securities included in the Fund’s portfolio and
the countries in which the transactions are settled. The Creation Transaction Fee may increase or decrease with changes in the Fund’s portfolio. The price for each Creation Unit will equal the daily NAV per
share times the number of shares in a Creation Unit plus the fees described above and, if applicable, any operational processing and brokerage costs, transfer fees or stamp taxes. When the Fund permits an Authorized
Participant to substitute cash or a different security in lieu of depositing one or more of the requisite Deposit Securities, the Authorized Participant may also be assessed an amount to cover the cost of purchasing
the Deposit Securities and/or disposing of the substituted securities, including operational processing and brokerage costs, transfer fees, stamp taxes, and part or all of the spread between the expected bid and offer
side of the market related to such Deposit Securities and/or substitute securities.
Notes to Consolidated Financial Statements (Continued)
First Trust Alternative
Absolute Return Strategy ETF (FAAR)
December 31, 2020
Authorized Participants
redeeming Creation Units must pay to BBH, as transfer agent, a redemption transaction fee (the “Redemption Transaction Fee”), regardless of the number of Creation Units redeemed in the transaction. The
Redemption Transaction Fee may vary and is based on the composition of the securities included in the Fund’s portfolio and the countries in which the transactions are settled. The Redemption Transaction Fee may
increase or decrease with changes in the Fund’s portfolio. The Fund reserves the right to effect redemptions in cash. An Authorized Participant may request cash redemption in lieu of securities; however, the
Fund may, in its discretion, reject any such request.
7. Distribution
Plan
The Board of Trustees
adopted a Distribution and Service Plan pursuant to Rule 12b-1 under the 1940 Act. In accordance with the Rule 12b-1 plan, the Fund is authorized to pay an amount up to 0.25% of its average daily net assets each year
to reimburse First Trust Portfolios L.P. (“FTP”), the distributor of the Fund, for amounts expended to finance activities primarily intended to result in the sale of Creation Units or to provide investor
services. FTP may also use this amount to compensate securities dealers or other persons that are Authorized Participants for providing distribution assistance, including broker-dealer and shareholder support and
educational and promotional services.
No 12b-1 fees are
currently paid by the Fund, and pursuant to a contractual arrangement, no 12b-1 fees will be paid any time before April 30, 2022.
8. Indemnification
The Trust, on behalf of
the Fund, has a variety of indemnification obligations under contracts with its service providers. The Trust’s maximum exposure under these arrangements is unknown. However, the Trust has not had prior claims or
losses pursuant to these contracts and expects the risk of loss to be remote.
9. Other
Matters
By operation of law, the
Fund now operates as a diversified open-end management investment company as defined in Section 5(b) of the 1940 Act.
10. Subsequent
Events
Management has evaluated
the impact of all subsequent events to the Fund through the date the consolidated financial statements were issued, and has determined that there were no subsequent events requiring recognition or disclosure in the
consolidated financial statements that have not already been disclosed.
Report of Independent
Registered Public Accounting Firm
To the Shareholders and the
Board of Trustees of First Trust Exchange-Traded Fund VII:
Opinion on the Financial
Statements and Financial Highlights
We have audited the
accompanying consolidated statement of assets and liabilities of First Trust Alternative Absolute Return Strategy ETF (the “Fund”), a series of the First Trust Exchange-Traded Fund VII, including the
consolidated portfolio of investments, as of December 31, 2020, the related consolidated statement of operations for the year then ended, the consolidated statements of changes in net assets for each of the two years
in the period then ended, the consolidated financial highlights for the years ended December 31, 2020, 2019, 2018, 2017, and the period from May 18, 2016 (commencement of operations) through December 31, 2016, and the
related notes. In our opinion, the financial statements and financial highlights present fairly, in all material respects, the financial position of the Fund as of December 31, 2020, and the results of its operations
for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for the years ended December 31, 2020, 2019, 2018, 2017, and for the period from
May 18, 2016 (commencement of operations) through December 31, 2016 in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial
statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on the Fund’s financial statements and financial highlights based on our
audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Fund in accordance with the U.S.
federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits
in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of
material misstatement, whether due to error or fraud. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required
to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly,
we express no such opinion.
Our audits included
performing procedures to assess the risks of material misstatement of the financial statements and financial highlights, whether due to error or fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements and financial highlights. Our audits also included evaluating the accounting principles used
and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and financial highlights. Our procedures included confirmation of securities owned as of
December 31, 2020, by correspondence with the custodian and brokers. We believe that our audits provide a reasonable basis for our opinion.
Chicago, Illinois
February 23, 2021
We have served as the
auditor of one or more First Trust investment companies since 2001.
Additional Information
First Trust Alternative
Absolute Return Strategy ETF (FAAR)
December 31, 2020
(Unaudited)
Proxy Voting Policies
and Procedures
A description of the
policies and procedures that the Trust uses to determine how to vote proxies and information on how the Fund voted proxies relating to portfolio investments during the most recent 12-month period ended June 30 is
available (1) without charge, upon request, by calling (800) 988-5891; (2) on the Fund’s website at www.ftportfolios.com; and (3) on the Securities and Exchange Commission’s (“SEC”) website at www.sec.gov.
Portfolio Holdings
The Fund files portfolio
holdings information for each month in a fiscal quarter within 60 days after the end of the relevant fiscal quarter on Form N-PORT. Portfolio holdings information for the third month of each fiscal quarter will be
publicly available on the SEC’s website at www.sec.gov. The Fund’s complete schedule of portfolio holdings for the second and fourth quarters of each fiscal year is included in the semi-annual and
annual reports to shareholders, respectively, and is filed with the SEC on Form N-CSR. The semi-annual and annual report for the Fund is available to investors within 60 days after the period to which it relates. The
Fund’s Forms N-PORT and Forms N-CSR are available on the SEC’s website listed above.
Federal Tax
Information
For the taxable year
ended December 31, 2020, the following percentages of income dividend paid by the Fund is qualifies for the dividends received deduction available to corporations is hereby designated as qualified dividend income:
Dividends Received Deduction
|
|
Qualified Dividend Income
|
0.00%
|
|
0.00%
|
Distributions paid to
foreign shareholders during the Fund’s fiscal year ended December 31, 2020 that were properly designated by the Fund as “interest-related dividends” or “short-term capital gain
dividends,” may not be subject to federal income tax provided that the income was earned directly by such foreign shareholders.
Risk Considerations
Risks are inherent in all
investing. Certain general risks that may be applicable to a Fund are identified below, but not all of the material risks relevant to each Fund are included in this report and not all of the risks below apply to each
Fund. The material risks of investing in each Fund are spelled out in its prospectus, statement of additional information and other regulatory filings. Before investing, you should consider each Fund’s
investment objective, risks, charges and expenses, and read each Fund’s prospectus and statement of additional information carefully. You can download each Fund’s prospectus at www.ftportfolios.com or
contact First Trust Portfolios L.P. at (800) 621-1675 to request a prospectus, which contains this and other information about each Fund.
Concentration Risk. To the extent that a fund is able to invest a large percentage of its assets in a single asset class or the securities of issuers within the same country, state, region, industry or
sector, an adverse economic, business or political development may affect the value of the fund’s investments more than if the fund were more broadly diversified. A fund that tracks an index will be concentrated
to the extent the fund’s corresponding index is concentrated. A concentration makes a fund more susceptible to any single occurrence and may subject the fund to greater market risk than a fund that is not
concentrated.
Credit Risk. Credit risk is the risk that an issuer of a security will be unable or unwilling to make dividend, interest and/or principal payments when due and the related risk that the value of a
security may decline because of concerns about the issuer’s ability to make such payments.
Cyber Security Risk. The funds are susceptible to potential operational risks through breaches in cyber security. A breach in cyber security refers to both intentional and unintentional events that may cause a
fund to lose proprietary information, suffer data corruption or lose operational capacity. Such events could cause a fund to incur regulatory penalties, reputational damage, additional compliance costs associated with
corrective measures and/or financial loss. In addition, cyber security breaches of a fund’s third-party service providers, such as its administrator, transfer agent, custodian, or sub-advisor, as applicable, or
issuers in which the fund invests, can also subject a fund to many of the same risks associated with direct cyber security breaches.
Derivatives Risk. To the extent a fund uses derivative instruments such as futures contracts, options contracts and swaps, the fund may experience losses because of adverse movements in the price or value
of the underlying asset, index or rate, which may be magnified by certain features of the derivative. These risks are heightened when a fund’s portfolio managers use derivatives to enhance the fund’s
return or as a substitute for a position or security, rather than solely to hedge (or offset) the risk of a position or security held by the fund.
Additional Information (Continued)
First Trust Alternative
Absolute Return Strategy ETF (FAAR)
December 31, 2020
(Unaudited)
Equity Securities
Risk. To the extent a fund invests in equity securities, the value of the fund’s shares will fluctuate with changes in the value of the equity securities. Equity securities prices
fluctuate for several reasons, including changes in investors’ perceptions of the financial condition of an issuer or the general condition of the relevant stock market, such as market volatility, or when
political or economic events affecting the issuers occur. In addition, common stock prices may be particularly sensitive to rising interest rates, as the cost of capital rises and borrowing costs increase. Equity
securities may decline significantly in price over short or extended periods of time, and such declines may occur in the equity market as a whole, or they may occur in only a particular country, company, industry or
sector of the market.
ETF Risk. The shares of an ETF trade like common stock and represent an interest in a portfolio of securities. The risks of owning an ETF generally reflect the risks of owning the underlying
securities, although lack of liquidity in an ETF could result in it being more volatile and ETFs have management fees that increase their costs. Shares of an ETF trade on an exchange at market prices rather than net
asset value, which may cause the shares to trade at a price greater than net asset value (premium) or less than net asset value (discount). In times of market stress, decisions by market makers to reduce or step away
from their role of providing a market for an ETF’s shares, or decisions by an ETF’s authorized participants that they are unable or unwilling to proceed with creation and/or redemption orders of an
ETF’s shares, could result in shares of the ETF trading at a discount to net asset value and in greater than normal intraday bid-ask spreads.
Fixed Income
Securities Risk. To the extent a fund invests in fixed income securities, the fund will be subject to credit risk, income risk, interest rate risk, liquidity risk and prepayment risk. Income risk is the
risk that income from a fund’s fixed income investments could decline during periods of falling interest rates. Interest rate risk is the risk that the value of a fund’s fixed income securities will
decline because of rising interest rates. Liquidity risk is the risk that a security cannot be purchased or sold at the time desired, or cannot be purchased or sold without adversely affecting the price. Prepayment
risk is the risk that the securities will be redeemed or prepaid by the issuer, resulting in lower interest payments received by the fund. In addition to these risks, high yield securities, or “junk”
bonds, are subject to greater market fluctuations and risk of loss than securities with higher ratings, and the market for high yield securities is generally smaller and less liquid than that for investment grade
securities.
Index Constituent
Risk. Certain funds may be a constituent of one or more indices. As a result, such a fund may be included in one or more index-tracking exchange-traded funds or mutual funds. Being a component
security of such a vehicle could greatly affect the trading activity involving a fund, the size of the fund and the market volatility of the fund. Inclusion in an index could significantly increase demand for the fund
and removal from an index could result in outsized selling activity in a relatively short period of time. As a result, a fund’s net asset value could be negatively impacted and the fund’s market price may
be significantly below its net asset value during certain periods.
Index Provider Risk. To the extent a fund seeks to track an index, it is subject to Index Provider Risk. There is no assurance that the Index Provider will compile the Index accurately, or that the Index will
be determined, maintained, constructed, reconstituted, rebalanced, composed, calculated or disseminated accurately. To correct any such error, the Index Provider may carry out an unscheduled rebalance or other
modification of the Index constituents or weightings, which may increase the fund’s costs. The Index Provider does not provide any representation or warranty in relation to the quality, accuracy or completeness
of data in the Index, and it does not guarantee that the Index will be calculated in accordance with its stated methodology. Losses or costs associated with any Index Provider errors generally will be borne by the
fund and its shareholders.
Investment Companies
Risk. To the extent a fund invests in the securities of other investment vehicles, the fund will incur additional fees and expenses that would not be present in a direct investment in those
investment vehicles. Furthermore, the fund’s investment performance and risks are directly related to the investment performance and risks of the investment vehicles in which the fund invests.
LIBOR Risk. To the extent a fund invests in floating or variable rate obligations that use the London Interbank Offered Rate (“LIBOR”) as a reference interest rate, it is subject to LIBOR
Risk. The United Kingdom’s Financial Conduct Authority, which regulates LIBOR, intends to cease making LIBOR available as a reference rate over a phase-out period that is currently expected to begin after the
end of 2021, although the specific timing of the phase out of LIBOR continues to be discussed and negotiated across the industry and in various jurisdictions. The unavailability or replacement of LIBOR may affect the
value, liquidity or return on certain fund investments and may result in costs incurred in connection with closing out positions and entering into new trades. Any potential effects of the transition away from LIBOR on
the fund or on certain instruments in which the fund invests can be difficult to ascertain, and they may vary depending on a variety of factors. Any such effects of the transition away from LIBOR, as well as other
unforeseen effects, could result in losses to the fund.
Management Risk. To the extent that a fund is actively managed, it is subject to management risk. In managing an actively-managed fund’s investment portfolio, the fund’s portfolio managers will
apply investment techniques and risk analyses that may not have the desired result. There can be no guarantee that a fund will meet its investment objective.
Additional Information (Continued)
First Trust Alternative
Absolute Return Strategy ETF (FAAR)
December 31, 2020
(Unaudited)
Market Risk. Securities held by a fund, as well as shares of a fund itself, are subject to market fluctuations caused by factors such as general economic conditions, political events, regulatory or
market developments, changes in interest rates and perceived trends in securities prices. Shares of a fund could decline in value or underperform other investments as a result of the risk of loss associated with these
market fluctuations. In addition, local, regional or global events such as war, acts of terrorism, spread of infectious diseases or other public health issues, recessions, or other events could have a significant
negative impact on a fund and its investments. Such events may affect certain geographic regions, countries, sectors and industries more significantly than others. The outbreak of the respiratory disease designated as
COVID-19 in December 2019 has caused significant volatility and declines in global financial markets, which have caused losses for investors. The COVID-19 pandemic may last for an extended period of time and will
continue to impact the economy for the foreseeable future.
Non-U.S. Securities
Risk. To the extent a fund invests in non-U.S. securities, it is subject to additional risks not associated with securities of domestic issuers. Non-U.S. securities are subject to higher
volatility than securities of domestic issuers due to: possible adverse political, social or economic developments; restrictions on foreign investment or exchange of securities; lack of liquidity; currency exchange
rates; excessive taxation; government seizure of assets; different legal or accounting standards; and less government supervision and regulation of exchanges in foreign countries. Investments in non-U.S. securities
may involve higher costs than investments in U.S. securities, including higher transaction and custody costs, as well as additional taxes imposed by non-U.S. governments. These risks may be heightened for securities
of companies located, or with significant operations, in emerging market countries.
Operational Risk. Each fund is subject to risks arising from various operational factors, including, but not limited to, human error, processing and communication errors, errors of a fund’s service
providers, counterparties or other third-parties, failed or inadequate processes and technology or systems failures. Although the funds and the Advisor seek to reduce these operational risks through controls and
procedures, there is no way to completely protect against such risks.
Passive Investment
Risk. To the extent a fund seeks to track an index, the fund will invest in the securities included in, or representative of, the index regardless of their investment merit. A fund generally
will not attempt to take defensive positions in declining markets.
NOT FDIC INSURED
|
NOT BANK GUARANTEED
|
MAY LOSE VALUE
|
Board of Trustees and Officers
First Trust Alternative
Absolute Return Strategy ETF (FAAR)
December 31, 2020
(Unaudited)
The following tables
identify the Trustees and Officers of the Trust. Unless otherwise indicated, the address of all persons is 120 East Liberty Drive, Suite 400, Wheaton, IL 60187.
The Trust’s
statement of additional information includes additional information about the Trustees and is available, without charge, upon request, by calling (800) 988-5891.
Name, Year of Birth and Position with the Trust
|
Term of Office and Year First Elected or Appointed
|
Principal Occupations
During Past 5 Years
|
Number of Portfolios in the First Trust Fund Complex Overseen by Trustee
|
Other Trusteeships or Directorships Held by Trustee During Past 5 Years
|
INDEPENDENT TRUSTEES
|
Richard E. Erickson, Trustee
(1951)
|
• Indefinite Term
• Since Inception
|
Physician; Officer, Wheaton Orthopedics; Limited Partner, Gundersen Real Estate Limited Partnership (June 1992 to December 2016)
|
190
|
None
|
Thomas R. Kadlec, Trustee
(1957)
|
• Indefinite Term
• Since Inception
|
President, ADM Investor Services, Inc. (Futures Commission Merchant)
|
190
|
Director of ADM Investor Services, Inc., ADM Investor Services International, Futures Industry Association, and National Futures Association
|
Robert F. Keith, Trustee
(1956)
|
• Indefinite Term
• Since Inception
|
President, Hibs Enterprises (Financial and Management Consulting)
|
190
|
Director of Trust Company of Illinois
|
Niel B. Nielson, Trustee
(1954)
|
• Indefinite Term
• Since Inception
|
Senior Advisor (August 2018 to Present), Managing Director and Chief Operating Officer (January 2015 to August 2018), Pelita Harapan Educational Foundation
(Educational Products and Services)
|
190
|
None
|
INTERESTED TRUSTEE
|
James A. Bowen(1), Trustee and
Chairman of the Board
(1955)
|
• Indefinite Term
• Since Inception
|
Chief Executive Officer, First Trust Advisors L.P. and First Trust Portfolios L.P.; Chairman of the Board of Directors, BondWave LLC (Software
Development Company) and Stonebridge Advisors LLC (Investment Advisor)
|
190
|
None
|
(1)
|
Mr. Bowen is deemed an “interested person” of the Trust due to his position as CEO of First Trust Advisors L.P., investment advisor of the Trust.
|
Board of Trustees and Officers (Continued)
First Trust Alternative
Absolute Return Strategy ETF (FAAR)
December 31, 2020
(Unaudited)
Name and Year of Birth
|
Position and Offices with Trust
|
Term of Office and Length of Service
|
Principal Occupations
During Past 5 Years
|
OFFICERS(2)
|
James M. Dykas
(1966)
|
President and Chief Executive Officer
|
• Indefinite Term
• Since January 2016
|
Managing Director and Chief Financial Officer (January 2016 to Present), Controller (January 2011 to January 2016), Senior Vice President (April 2007 to January 2016), First Trust
Advisors L.P. and First Trust Portfolios L.P.; Chief Financial Officer (January 2016 to Present), BondWave LLC (Software Development Company) and Stonebridge Advisors LLC (Investment Advisor)
|
Donald P. Swade
(1972)
|
Treasurer, Chief Financial Officer and Chief Accounting Officer
|
• Indefinite Term
• Since January 2016
|
Senior Vice President (July 2016 to Present), Vice President (April 2012 to July 2016), First Trust Advisors L.P. and First Trust Portfolios L.P.
|
W. Scott Jardine
(1960)
|
Secretary and Chief Legal Officer
|
• Indefinite Term
• Since Inception
|
General Counsel, First Trust Advisors L.P. and First Trust Portfolios L.P.; Secretary and General Counsel, BondWave LLC; Secretary, Stonebridge Advisors LLC
|
Daniel J. Lindquist
(1970)
|
Vice President
|
• Indefinite Term
• Since Inception
|
Managing Director, First Trust Advisors L.P. and First Trust Portfolios L.P.
|
Kristi A. Maher
(1966)
|
Chief Compliance Officer and Assistant Secretary
|
• Indefinite Term
• Since Inception
|
Deputy General Counsel, First Trust Advisors L.P. and First Trust Portfolios L.P.
|
Roger F. Testin
(1966)
|
Vice President
|
• Indefinite Term
• Since Inception
|
Senior Vice President, First Trust Advisors L.P. and First Trust Portfolios L.P.
|
Stan Ueland
(1970)
|
Vice President
|
• Indefinite Term
• Since Inception
|
Senior Vice President, First Trust Advisors L.P. and First Trust Portfolios L.P
|
(2)
|
The term “officer” means the president, vice president, secretary, treasurer, controller or any other officer who performs a policy making function.
|
Privacy Policy
First Trust Alternative
Absolute Return Strategy ETF (FAAR)
December 31, 2020
(Unaudited)
Privacy Policy
First Trust values our
relationship with you and considers your privacy an important priority in maintaining that relationship. We are committed to protecting the security and confidentiality of your personal information.
Sources of Information
We collect nonpublic
personal information about you from the following sources:
•
|
Information we receive from you and your broker-dealer, investment professional or financial representative through interviews, applications, agreements or other forms;
|
•
|
Information about your transactions with us, our affiliates or others;
|
•
|
Information we receive from your inquiries by mail, e-mail or telephone; and
|
•
|
Information we collect on our website through the use of “cookies”. For example, we may identify the pages on our website that your browser requests or visits.
|
Information Collected
The type of data we
collect may include your name, address, social security number, age, financial status, assets, income, tax information, retirement and estate plan information, transaction history, account balance, payment history,
investment objectives, marital status, family relationships and other personal information.
Disclosure of
Information
We do not disclose any
nonpublic personal information about our customers or former customers to anyone, except as permitted by law. In addition to using this information to verify your identity (as required under law), the permitted uses
may also include the disclosure of such information to unaffiliated companies for the following reasons:
•
|
In order to provide you with products and services and to effect transactions that you request or authorize, we may disclose your personal information as described above to unaffiliated financial
service providers and other companies that perform administrative or other services on our behalf, such as transfer agents, custodians and trustees, or that assist us in the distribution of investor materials such as
trustees, banks, financial representatives, proxy services, solicitors and printers.
|
•
|
We may release information we have about you if you direct us to do so, if we are compelled by law to do so, or in other legally limited circumstances (for example to protect your
account from fraud).
|
In addition, in order to
alert you to our other financial products and services, we may share your personal information within First Trust.
Use of Website
Analytics
We currently use third
party analytics tools, Google Analytics and AddThis, to gather information for purposes of improving First Trust’s website and marketing our products and services to you. These tools employ cookies, which are
small pieces of text stored in a file by your web browser and sent to websites that you visit, to collect information, track website usage and viewing trends such as the number of hits, pages visited, videos and PDFs
viewed and the length of user sessions in order to evaluate website performance and enhance navigation of the website. We may also collect other anonymous information, which is generally limited to technical and web
navigation information such as the IP address of your device, internet browser type and operating system for purposes of analyzing the data to make First Trust’s website better and more useful to our users. The
information collected does not include any personal identifiable information such as your name, address, phone number or email address unless you provide that information through the website for us to contact you in
order to answer your questions or respond to your requests. To find out how to opt-out of these services click on: Google Analytics and AddThis.
Confidentiality and
Security
With regard to our
internal security procedures, First Trust restricts access to your nonpublic personal information to those First Trust employees who need to know that information to provide products or services to you. We maintain
physical, electronic and procedural safeguards to protect your nonpublic personal information.
Policy Updates and
Inquiries
As required by federal
law, we will notify you of our privacy policy annually. We reserve the right to modify this policy at any time, however, if we do change it, we will tell you promptly. For questions about our policy, or for additional
copies of this notice, please go to www.ftportfolios.com, or contact us at 1-800-621-1675 (First Trust Portfolios) or 1-800-222-6822 (First Trust Advisors).
March 2020
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INVESTMENT ADVISOR
First Trust Advisors L.P.
120 East Liberty Drive, Suite
400
Wheaton, IL 60187
ADMINISTRATOR, CUSTODIAN,
FUND ACCOUNTANT &
TRANSFER AGENT
Brown Brothers Harriman &
Co.
50 Post Office Square
Boston, MA 02110
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
111 S. Wacker Drive
Chicago, IL 60606
LEGAL COUNSEL
Chapman and Cutler LLP
111 W. Monroe Street
Chicago, IL 60603
(b) Not applicable.
Item 2. Code of Ethics.
|
(a)
|
The registrant, as of the end of the period covered by this report, has adopted a code of ethics
that applies to the registrant’s principal executive officer, principal financial officer, principal accounting officer or
controller, or persons performing similar functions, regardless of whether these individuals are employed by the registrant or
a third party.
|
|
(c)
|
There have been no amendments, during the period covered by this report, to a provision of the
code of ethics that applies to the registrant’s principal executive officer, principal financial officer, principal accounting
officer or controller, or persons performing similar functions, regardless of whether these individuals are employed by the registrant
or a third party, and that relates to any element of the code of ethics description.
|
|
(d)
|
The registrant, during the period covered by this report, has not granted any waivers, including
an implicit waiver, from a provision of the code of ethics that applies to the registrant’s principal executive officer,
principal financial officer, principal accounting officer or controller, or persons performing similar functions, regardless of
whether these individuals are employed by the registrant or a third party, that relates to one or more of the items set forth in
paragraph (b) of this item’s instructions.
|
|
(f)
|
A copy of the code of ethics that applies to the registrant’s principal executive officer,
principal financial officer, principal accounting officer or controller is filed as an exhibit pursuant to Item 13(a)(1).
|
Item 3. Audit Committee Financial
Expert.
As of the end of the period covered by the
report, the registrant’s board of trustees has determined that Thomas R. Kadlec and Robert F. Keith are qualified to serve
as audit committee financial experts serving on its audit committee and that each of them is “independent,” as defined
by Item 3 of Form N-CSR.
Item 4. Principal Accountant Fees and Services.
(a) Audit Fees (Registrant)
— The aggregate fees billed for each of the last two fiscal years for professional services rendered by the principal
accountant for the audit of the registrant’s annual financial statements or services that are normally provided by the accountant
in connection with statutory and regulatory filings or engagements were $50,000 for the fiscal year ended December 31, 2019 and
$50,000 for fiscal year ended December 31, 2020.
(b) Audit-Related
Fees (Registrant) — The aggregate fees billed in each of the last two fiscal years for assurance and related services
by the principal accountant that are reasonably related to the performance of the audit of the registrant’s financial statements
and are not reported under paragraph (a) of this Item were $0 for the fiscal year ended December 31, 2019, and $0 for the fiscal
year ended December 31, 2020.
Audit-Related
Fees (Investment Adviser and Distributor) — The aggregate fees billed in
each of the last two fiscal years for assurance and related services by the principal accountant that are reasonably related to
the performance of the audit of the registrant’s financial statements and are not reported under paragraph (a) of this Item
were $0 for the fiscal year ended December 31, 2019, and $0 for the fiscal year ended December 31, 2020.
(c) Tax Fees (Registrant)
— The aggregate fees billed in each of the last two fiscal years for professional services rendered by the principal
accountant for tax compliance, tax advice, and tax planning to the registrant were $12,000 for the fiscal year ended December 31,
2019 and $31,000 for fiscal year ended December 31, 2020. These fees were for tax consultation and/or tax return preparation.
Tax
Fees (Investment Adviser and Distributor) — The aggregate fees billed in
each of the last two fiscal years for professional services rendered by the principal accountant for tax compliance, tax advice,
and tax planning to the registrant’s adviser and distributor were $0 for the fiscal year ended December 31, 2019, and $0
for the fiscal year ended December 31, 2020.
(d) All
Other Fees (Registrant) — The aggregate fees billed in each of the last two fiscal years for products and
services provided by the principal accountant to the registrant, other than the services reported in paragraphs (a) through (c)
of this Item were $0 for the fiscal year ended December 31, 2019, and $0 for the fiscal year ended December 31, 2020.
All
Other Fees (Investment Adviser and Distributor) — The aggregate fees billed in each
of the last two fiscal years for products and services provided by the principal accountant to the registrant’s investment
adviser and distributor, other than the services reported in paragraphs (a) through (c) of this Item were $0 for the fiscal year
ended December 31, 2019, and $0 for the fiscal year ended December 31, 2020.
|
(e)(1)
|
Disclose the audit committee’s pre-approval policies and procedures described in paragraph
(c)(7) of Rule 2-01 of Regulation S-X.
|
Pursuant to
its charter and its Audit and Non-Audit Services Pre-Approval Policy, the Audit Committee (the “Committee”)
is responsible for the pre-approval of all audit services and permitted non-audit services (including the fees and terms thereof)
to be performed for the registrant by its independent auditors. The Chairman of the Committee is authorized to give such pre-approvals
on behalf of the Committee up to $25,000 and report any such pre-approval to the full Committee.
The Committee
is also responsible for the pre-approval of the independent auditor’s engagements for non-audit services with the registrant’s
adviser (not including a sub-adviser whose role is primarily portfolio management and is sub-contracted or overseen by another
investment adviser) and any entity controlling, controlled by or under common control with the investment adviser that provides
ongoing services to the registrant, if the engagement relates directly to the operations and financial reporting of the registrant,
subject to the de minimis exceptions for non-audit services described in Rule 2-01 of Regulation S-X. If the independent
auditor has provided non-audit services to the registrant’s adviser (other than any sub-adviser whose role is primarily portfolio
management and is sub-contracted with or overseen by another investment adviser) and any entity controlling, controlled by or under
common control with the investment adviser that provides ongoing services to the registrant that were not pre-approved pursuant
to its policies, the Committee will consider whether the provision of such non-audit services is compatible with the auditor’s
independence.
|
(e)(2)
|
The percentage of services described in each of paragraphs (b) through (d) for the registrant and
the registrant’s investment adviser of this Item that were approved by the audit committee pursuant to the pre-approval exceptions
included in paragraph (c)(7)(i)(c) or paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X are as follows:
|
(b) 0%
(c) 0%
(d) 0%
|
(f)
|
The percentage of hours expended on the principal accountant’s engagement to audit the registrant’s
financial statements for the most recent fiscal year that were attributed to work performed by persons other than the principal
accountant’s full-time, permanent employees was less than fifty percent.
|
|
(g)
|
The aggregate non-audit fees billed by the registrant’s accountant for services rendered
to the registrant, and rendered to the registrant’s investment adviser (not including any sub-adviser whose role is primarily
portfolio management and is subcontracted with or overseen by another investment adviser), and any entity controlling, controlled
by, or under common control with the adviser that provides ongoing services to the registrant for fiscal year ended December 31,
2019 were $12,000 for the registrant, $75,670 for the registrant’s investment adviser and $104,730 for the registrant’s
distributor and for the registrant’s fiscal year ended December 31, 2020 were $31,000 for the registrant, $23,200 for the
registrant’s investment adviser and $29,500 for the registrant’s distributor.
|
|
(h)
|
The registrant’s audit committee of its Board of Trustees has determined that the provision
of non-audit services that were rendered to the registrant’s investment adviser (not including any sub-adviser whose role
is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and any entity controlling,
controlled by, or under common control with the investment adviser that provides ongoing services to the registrant that were not
pre-approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X is compatible with maintaining the principal accountant’s
independence.
|
Items 5. Audit Committee of Listed
Registrants.
The registrant has a separately designated
standing audit committee established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934 consisting of
all the independent directors of the registrant. The audit committee of the registrant is comprised of: Richard E. Erickson, Thomas
R. Kadlec, Robert F. Keith and Niel B. Nielson.
Item 6. Investments.
(a)
|
|
Schedule of Investments in securities of unaffiliated issuers as of the close of the
reporting period is included as part of the report to shareholders filed under Item 1 of this form.
|
Item 7. Disclosure of Proxy Voting
Policies and Procedures for Closed-End Management Investment Companies.
Not applicable.
Item 8. Portfolio Managers of Closed-End
Management Investment Companies.
Not applicable.
Item 9. Purchases of Equity Securities
by Closed-End Management Investment Company and Affiliated Purchasers.
Not applicable.
Item 10. Submission of Matters to
a Vote of Security Holders.
There have been no material changes
to the procedures by which the shareholders may recommend nominees to the registrant’s board of directors, where those changes
were implemented after the registrant last provided disclosure in response to the requirements of Item 407(c)(2)(iv) of Regulation
S-K (17 CFR 229.407) (as required by Item 22(b)(15) of Schedule 14A (17 CFR 240.14a-101)), or this Item.
Item 11. Controls and Procedures.
|
(a)
|
The registrant’s principal executive and principal financial officers, or persons performing
similar functions, have concluded that the registrant’s disclosure controls and procedures (as defined in Rule 30a-3(c) under
the Investment Company Act of 1940, as amended (the “1940 Act”) (17 CFR 270.30a-3 (c))) are effective, as of a date
within 90 days of the filing date of the report that includes the disclosure required by this paragraph, based on their evaluation
of these controls and procedures required by Rule 30a-3(b) under the 1940 Act (17 CFR 270.30a-3(b)) and Rules 13a-15(b) or 15d-15(b)
under the Securities Exchange Act of 1934, as amended (17 CFR 240.13a-15(b) or 240.15d-15 (b)).
|
|
(b)
|
There were no changes in the registrant’s internal control over financial reporting (as defined
in Rule 30a-3(d) under the 1940 Act (17 CFR 270.30a-3(d)) that occurred during the period covered by this report that have materially
affected, or are reasonably likely to materially affect, the registrant’s internal control over financial reporting.
|
Item 12. Disclosure of Securities Lending Activities for
Closed-End Management Investment Companies.
Not applicable.
Item 13. Exhibits.
SIGNATURES
Pursuant to the requirements of the Securities
Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
(registrant)
|
|
First Trust Exchange-Traded Fund VII
|
|
|
By (Signature and Title)*
|
|
/s/
James M. Dykas
|
|
|
|
|
James M. Dykas, President and Chief Executive Officer
(principal executive officer)
|
|
|
Pursuant to the requirements of the Securities
Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated.
By (Signature and Title)*
|
|
/s/
James M. Dykas
|
|
|
|
|
James M. Dykas, President and Chief Executive Officer
(principal executive officer)
|
|
|
By (Signature and Title)*
|
|
/s/
Donald P. Swade
|
|
|
|
|
Donald P. Swade, Treasurer, Chief Financial Officer
and Chief Accounting Officer
(principal financial officer)
|
|
|
* Print the name and title of each signing officer under his or
her signature.
SENIOR FINANCIAL OFFICER
CODE OF CONDUCT
I. Introduction
This code of conduct is being
adopted by the investment companies advised by First Trust Advisors L.P., from time to time, (the "FUNDS"). The reputation and
integrity of the Funds are valuable assets that are vital to the Funds' success. Each officer of the Funds, and officers and employees
of the investment adviser to the Funds who work on Fund matters, including each of the Funds' senior financial officers ("SFOS"),
is responsible for conducting each Fund's business in a manner that demonstrates a commitment to the highest standards of integrity.
SFOs include the Principal Executive Officer (who is the President), the Controller (who is the principal accounting officer),
and the Treasurer (who is the principal financial officer), and any person who performs a similar function.
The Funds, First Trust Advisors
L.P. and First Trust Portfolios have adopted Codes of Ethics under Rule 17j-1 under the Investment Company Act of 1940 (the "RULE
17J-1 CODE"). These Codes of Ethics are designed to prevent certain conflicts of interest that may arise when officers, employees,
or directors of the Funds and the foregoing entities know about present or future Fund transactions and/or have the power to influence
those transactions, and engage in transactions with respect to those same securities in their personal account(s) or otherwise
take advantage of their position and knowledge with respect to those securities. In an effort to prevent these conflicts and in
accordance with Rule 17j-1, the Funds adopted their Rule 17j-1 Code to prohibit transactions and conduct that create conflicts
of interest, and to establish compliance procedures.
The Sarbanes-Oxley Act of
2002 was designed to address corporate malfeasance and to help assure investors that the companies in which they invest are accurately
and completely disclosing financial information. Under Section 406 of the Act, all public companies (including the Funds) must
either have a code of ethics for their SFOs, or disclose why they do not. The Act was intended to prevent future situations (such
as occurred in well-reported situations involving such companies as Enron and WorldCom) where a company creates an environment
in which employees are afraid to express their opinions or to question unethical and potentially illegal business practices.
The Funds have chosen to
adopt a senior financial officer Code of Conduct to encourage their SFOs, and other Fund officers and employees of First Trust
Advisors or First Trust Portfolios to act ethically and to question potentially unethical or illegal practices, and to strive
to ensure that the Funds' financial disclosures are complete, accurate, and understandable.
II. Purposes of This Code of Conduct
The purposes of this Code
are:
A. To promote honest and
ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional
relationships;
B. To promote full, fair,
accurate, timely, and understandable disclosure in reports and documents that the Funds file with, or submits to, the SEC and
in other public communications the Funds make;
C. To promote compliance
with applicable governmental laws, rules and regulations;
D. To encourage the prompt
internal reporting to an appropriate person of violations of the Code; and
E. To establish accountability
for adherence to the Code.
III. Questions About This Code
The Funds' Boards of Trustees
have designated W. Scott Jardine or other appropriate officer designated by the President of the respective Funds to be the Compliance
Coordinator for the implementation and administration of the Code.
IV. Handling of Financial Information
The Funds have adopted guidelines
under which its SFOs perform their duties. However, the Funds expect that all officers or employees of the adviser or distributor
who participate in the preparation of any part of any Fund's financial statements follow these guidelines with respect to each
Fund:
A. Act with honesty and
integrity and avoid violations of this Code, including actual or apparent conflicts of interest with the Fund in personal and
professional relationships.
B. Disclose to the Fund's
Compliance Coordinator any material transaction or relationship that reasonably could be expected to give rise to any violations
of the Code, including actual or apparent conflicts of interest with the Fund. You should disclose these transactions or relationships
whether you are involved or have only observed the transaction or relationship. If it is not possible to disclose the matter to
the Compliance Coordinator, it should be disclosed to the Fund's Principal Financial Officer or Principal Executive Officer.
C. Provide information
to the Fund's other officers and appropriate employees of service providers (adviser, administrator, outside auditor, outside
counsel, custodian, etc.) that is accurate, complete, objective, relevant, timely, and understandable.
D. Endeavor to ensure
full, fair, timely, accurate, and understandable disclosure in the Fund's periodic reports.
E. Comply with the federal
securities laws and other applicable laws and rules, such as the Internal Revenue Code.
F. Act in good faith,
responsibly, and with due care, competence and diligence, without misrepresenting material facts or allowing your independent
judgment to be subordinated.
G. Respect the confidentiality
of information acquired in the course of your work except when you have Fund approval to disclose it or where disclosure is otherwise
legally mandated. You may not use confidential information acquired in the course of your work for personal advantage.
H. Share and maintain
skills important and relevant to the Fund's needs.
I. Proactively promote
ethical behavior among peers in your work environment.
J. Responsibly use and
control all assets and resources employed or entrusted to you.
K. Record or participate
in the recording of entries in the Fund's books and records that are accurate to the best of your knowledge.
V. Waivers of This Code
SFOs and other parties subject
to this Code may request a waiver of a provision of this Code (or certain provisions of the Fund's Rule 17j-1 Code) by submitting
their request in writing to the Compliance Coordinator for appropriate review. An executive officer of the Fund or the Audit Committee
will decide whether to grant a waiver. All waivers of this Code must be disclosed to the Fund's shareholders to the extent required
by SEC rules. A good faith interpretation of the provisions of this Code, however, shall not constitute a waiver.
VI. Annual Certification
Each SFO will be asked to
certify on an annual basis that he/she is in full compliance with the Code and any related policy statements.
VII. Reporting Suspected Violations
A. SFOs or other officers
of the Funds or employees of the First Trust group who work on Fund matters who observe, learn of, or, in good faith, suspect
a violation of the Code MUST immediately report the violation to the Compliance Coordinator, another member of the Funds' or First
Trust's senior management, or to the Audit Committee of the Fund Board. An example of a possible Code violation is the preparation
and filing of financial disclosure that omits material facts, or that is accurate but is written in a way that obscures its meaning.
B. Because service providers
such as an administrator, outside accounting firm, and custodian provide much of the work relating to the Funds' financial statements,
you should be alert for actions by service providers that may be illegal, or that could be viewed as dishonest or unethical conduct.
You should report these actions to the Compliance Coordinator even if you know, or think, that the service provider has its own
code of ethics for its SFOs or employees.
C. SFOs or other officers
or employees who report violations or suspected violations in good faith will not be subject to retaliation of any kind. Reported
violations will be investigated and addressed promptly and will be treated confidentially to the extent possible.
VIII. Violations of The Code
A. Dishonest, unethical or
illegal conduct will constitute a violation of this Code, regardless of whether this Code specifically refers to that particular
conduct. A violation of this Code may result in disciplinary action, up to and including termination of employment. A variety
of laws apply to the Funds and their operations, including the Securities Act of 1933, the Investment Company Act of 1940, state
laws relating to duties owed by Fund directors and officers, and criminal laws. The federal securities laws generally prohibit
the Funds from making material misstatements in its prospectus and other documents filed with the SEC, or from omitting to state
a material fact. These material misstatements and omissions include financial statements that are misleading or omit materials
facts.
B. Examples of criminal violations
of the law include stealing, embezzling, misapplying corporate or bank funds, making a payment for an expressed purpose on a Fund's
behalf to an individual who intends to use it for a different purpose; or making payments, whether corporate or personal, of cash
or other items of value that are intended to influence the judgment or actions of political candidates, government officials or
businesses in connection with any of the Funds' activities. The Funds must and will report all suspected criminal violations to
the appropriate authorities for possible prosecution, and will investigate, address and report, as appropriate, non-criminal violations.
Amended: June 1, 2009