FIRST TRUST EXCHANGE-TRADED FUNDS
May 12, 2015
Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549
Re: Filings for First Trust Exchange-Traded Funds with 10/31/14 and
12/31/14 Year-Ends
Ladies/Gentlemen:
On March 23, 2015, First Trust Advisors L.P. ("FTA") received oral
comments from Ms. Christina DiAngelo Fettig of the Division of Investment
Management Office of Disclosure and Review of the Securities and Exchange
Commission (the "Commission") with respect to the Commission's review of the
Trust filings listed above. In connection with the Commission's comments, we
hereby provide the following responses:
1. The Commission noted the Form N-CSR filings for First Trust
Exchange-Traded Fund ("ETF I"), First Trust Exchange-Traded Fund V ("ETF V") and
First Trust Exchange-Traded Fund VII ("ETF VII") were missing the attachment for
the Code of Ethics and requested that in the future it be included.
The Form N-CSRs were inadvertently missing the attachment. The Code of
Ethics will be included in future annual report filings on Form N-CSR.
2. The Commission noted that First Trust Value Line Equity Allocation
Index Fund ("FVI") had a shareholder meeting on 12/08/14 and requested that the
results of the meeting be included in the Form N-SAR and Form N-CSR.
FVI effective 1/9/15 changed its name First Trust Total U.S. Market
AlphaDEX ETF ("TUSA"). TUSA will include the applicable shareholder meeting
disclosure in its 6/30/15 semi-annual Form N-SAR and Form N-CSR filings.
3. The Commission noted that for First Trust Capital Strength ETF
("FTCS"), First Trust S&P REIT Index Fund ("FRI") and First Trust Value Line(R)
100 Exchange-Traded Fund ("FVL") in the MDFP the Growth of $10,000 chart did not
include the tracking index. The Commission asked for an explanation.
For FTCS it is footnoted under the Performance Table on page 15 of the
ETF I - Book 1 12/31/14 annual report that on 6/4/13 the Fund's tracking index
changed from the Credit Suisse U.S. Value Index, Powered by HOLT(TM) to The
Capital Strength Index(TM). Since the Fund's new tracking index had an inception
date of 3/20/13, it was not in existence for any of the periods disclosed, other
than for the one-year period. Since the $10,000 chart starts on the Fund's
inception date of 7/6/06, it is not possible to include the new tracking index
in the chart since it did not exist at that time.
For FRI it is footnoted under the Performance Table on page 12 of the
ETF I - Book 2 12/31/14 annual report that on 11/6/08, the Fund's tracking
index changed from the S&P REIT Composite Index to the S&P United States REIT
Index. Effective 12/31/08, the S&P REIT Composite Index was discontinued. The
inception date of the new tracking index was 6/30/08. Since the $10,000 chart
starts on the Fund's inception date of 5/8/07, it is not possible to include the
new tracking index in the chart since it did not exist at that time.
For FVL it is footnoted under the Performance Table on page 20 of the
ETF I - Book 1 12/31/14 annual report that on 6/15/07, the Fund acquired the
assets and adopted the financial and performance history of First Trust Value
Line(R) 100 Fund (the "Predecessor FVL Fund," a closed-end fund), which had an
inception date of 6/12/03. The inception date of the Value Line(R) 100 Index,
the new tracking index, was 1/16/07. Since the $10,000 chart starts on 12/31/04,
it is not possible to include the new tracking index in the chart since it did
not exist at that time.
In all three instances referenced above FTA is comfortable that it met the
Form N-1A disclosure requirements for fund and index performance.
4. The Commission noted in the 12/31/14 Schedule of Investments for First
Trust Value Line(R) Equity Allocation Index Fund ("FVI") there is a BDC but in
the Fund's 5/1/14 prospectus there are no acquired fund fees and expenses shown.
In fiscal year 2013, the Fund held a money market fund and the acquired
fund fee and expense ratio was 0.0002%. Since the ratio was below 0.01%, per the
Form N-1A instructions, the amount was included in "Other Expense" and not as a
separate line item.
5. The Commission noted that in the Statement of Operations First Trust US
IPO Index Fund ("FPX") shows an amount for foreign tax withholding. The
Commission asked what percentage can be invested in foreign securities and is it
disclosed in the prospectus.
The prospectus discloses that the Fund's investment objective is to
replicate as closely as possible, before fees and expenses, the price and yield
of the IPOX(R)-100 U.S. Index. It does not state what percentage of the index
can be invested in foreign securities. The foreign withholding taxes shown on
the Statement of Operations for FPX relate to two securities. Withholding taxes
of $27,400 are for dividends from Nielsen NV, a U.S. company that is
incorporated in the Netherlands so is subject to that country's 15% withholding
tax on dividends, and $878 for dividends from Franks International NV, another
company incorporated in the Netherlands.
6. The Commission noted that on page 55 in ETF I - Book 2, on the facing
page of the Statement of Assets and Liabilities, the amount on the lines for
"Audit and tax fees" and "Printing fees" appear to be switched for FRI, FIW,
FCG, FNI and QABA.
The Commission is correct that the amounts are switched. Due to the
immaterial differences in the line items and the fact that total expenses are
reflected correctly, FTA does not intend to refile, reprint or redistribute the
report in question.
7. The Commission stated that in the First Trust North American Energy
Infrastructure Fund ("EMLP") Note 2B the Fund discloses the dollar amount of
distributions that were received from MLPs and reclassified as return of
capital. The Commission noted that in the Tortoise Energy reports on the
statement of operations the dividend income is grossed up for this amount with a
corresponding line showing the deduction for return of capital. The Commission
asked us to consider this presentation.
Since the return of capital distributions received from MLPs are not
income, FTA is comfortable with our current presentation which discloses the
amount in the Notes to Financial Statements.
8. The Commission noted that certain funds have PIK interest and commented
that if the amount becomes material (>5%) then it should be broken out and
stated separately on the Statement of Operations.
FTA will monitor PIK interest and if the amount becomes material (>5%) it
will be disclosed as a separate line item on the Statement of Operations.
9. The Commission noted that several funds invest in senior floating rate
loan interests and suggested that a description of the rate (Libor + % or Libor
floors) be included in the description of each loan on the Schedule of
Investments.
FTA has reviewed a number of other firms' senior loan fund filings and has
noted that our current presentation of listing the rate in effect at the report
date is consistent with industry disclosure. Additionally, FTA includes the
following footnote disclosure after the portfolio to explain the types of rates:
"Senior Floating-Rate Loan Interests ("Senior Loans") in which the Fund
invests generally pay interest at rates which are periodically predetermined by
reference to a base lending rate plus a premium. These base lending rates are
generally (i) the lending rate offered by one or more major European banks, such
as the London Interbank Offered Rate ("LIBOR"), (ii) the prime rate offered by
one or more United States banks or (iii) the certificate of deposit rate.
Certain Senior Loans are subject to a LIBOR floor that establishes a minimum
LIBOR rate. The interest rate shown reflects the rate in effect at 10/31/14.
When a range of rates is disclosed, the Fund holds more than one contract within
the same tranche at varying rates."
10. The Commission noted that at 10/31/14 First Trust Tactical High Yield
ETF ("HYLS") had 15% of its net assets in foreign corporate bonds but that the
prospectus states that there is a 10% limit.
Per the prospectus, the Fund may invest up to 10% of its net assets (plus
the amount of any borrowing for investment purposes) in non-U.S. securities
denominated in non-U.S. currencies. All the foreign corporate bonds held at
10/31/14 are U.S. denominated so the Fund is in compliance with the prospectus
limitation.
11. The Commission noted that on the Schedule of Investments for First
Trust ISE Chindia Index Fund ("FNI"), First Trust China AlphaDEX(R) Fund ("FCA")
and First Trust Hong Kong AlphaDEX(R) Fund ("FHK") the Country Allocation tables
shows a large percentage in either the Cayman Islands or Bermuda and asked how
that correlated to the applicable indices.
The Country Allocation table categorizes the securities based on the
country of incorporation and can therefore be different than the country which
the index classifies them into. It is sometimes difficult to identify where a
company is primarily headquartered or where it conducts the majority of its
business, but the country of incorporation is determinable without subjectivity,
which is why it is used for financial reporting purposes. Where applicable FTA
footnotes both the Portfolio of Investments and the Country Allocation table
that the portfolio securities are categorized based on their country of
incorporation, so that it is clear to the reader.
12. The Commission commented that in the 12/31/14 annual report for First
Trust Exchange-Traded AlphaDEX(R) II there were several funds that had a
footnote on the Financial Highlights page that disclosed that the fund received
a reimbursement from the advisor during the years ended 12/31/13 or 12/31/12.
The Commission asked for the reason for the reimbursement.
FTA reimbursed the funds for trade errors. The reimbursements were noted
as trade errors in the respective 12/31/13 and 12/31/12 annual reports.
Additionally, controls were established and/or reinforced to prevent the
reoccurrence of similar errors.
13. The Commission noted that First Trust Strategic Income ETF ("FDIV")
invests in MLPs and asked if there is disclosure in the FDIV prospectus that
there is a 25% restriction in MLP investments.
On page 12 of the FDIV prospectus under the heading Equity Securities of
Energy Infrastructure Companies the last paragraph states, "If the Fund's
investment in qualifying MLPs exceeds 25% of the value of the Fund's total
assets at the end of any quarter in which the Fund is required to test its
diversification, the Fund may not qualify as a regulated investment company for
federal income tax purposes unless the Fund takes corrective measures within 30
days of the end of the quarter."
14. The Commission noted that both First Trust Brazil AlphaDEX(R) Fund
("FBZ") and First Trust Latin America AlphaDEX(R) Fund ("FLN") had excise tax
expense disclosed in their 2013 annual reports, but excise tax is not disclosed
in their 5/1/14 prospectus fee table.
FBZ and FLN incurred excise tax of $852 or 0.01% and $892 or 0.01%,
respectively, in 2013 but it was not included in the 2014 prospectus fee table
as it was not an anticipated expense for the following fiscal year. Since the
ratio shown in the fee table differed from the expense ratio shown in the 2013
annual report, the fee table should have included a footnote that stated
"Expenses have been restated to reflect the current fiscal year."
15. The Commission noted that the fee table in the 5/1/14 prospectus for
First Trust NYSE Arca Biotechnology Index Fund ("FBT"), First Trust ISE Water
Index Fund ("FIW") and FRI did not include a line item for "Fees Previously
Waived or Expenses Reimbursed by First Trust."
Since the ratio for "Fees Previously Waived or Expenses Reimbursed by
First Trust" for each FBT, FIW and FRI did not exceed 0.01%, they were included
in "Other Expenses" in the fee table.
In addition, we acknowledge that:
1. The Funds are responsible for the adequacy and accuracy of the
disclosure in all filings with the Commission;
2. Staff comments or changes to disclosure in response to staff
comments in such filings reviewed by the staff do not foreclose the
Commission from taking any action with respect to such filings; and
3. The Fund may not assert staff comments as a defense in any
proceeding initiated by the Commission or any person under the
federal securities laws of the United States.
Should you have any questions, or if we have incorrectly characterized the
Commission's comments, please do not hesitate to contact the undersigned
directly at (630) 517-7665.
Sincerely,
FIRST TRUST EXCHANGE-TRADED FUNDS
By /s/ James M. Dykas
-----------------------------
James M. Dykas
Chief Financial Officer