-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TrBH1UYp9G7GVaANTecDeyYa//wv6SQtD0hRnXgIaXOGLcQUKW+N3xSN3+VD0LYJ CCeXN5u2s/LATm++VnuGjw== 0000875626-07-001016.txt : 20070427 0000875626-07-001016.hdr.sgml : 20070427 20070427123556 ACCESSION NUMBER: 0000875626-07-001016 CONFORMED SUBMISSION TYPE: N-1A/A PUBLIC DOCUMENT COUNT: 31 FILED AS OF DATE: 20070427 DATE AS OF CHANGE: 20070427 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST TRUST EXCHANGE-TRADED ALPHADEX FUND CENTRAL INDEX KEY: 0001383496 IRS NUMBER: 000000000 STATE OF INCORPORATION: MA FILING VALUES: FORM TYPE: N-1A/A SEC ACT: 1940 Act SEC FILE NUMBER: 811-22019 FILM NUMBER: 07794389 BUSINESS ADDRESS: STREET 1: 1001 WARRENVILLE ROAD, SUITE 300 CITY: LISLE STATE: IL ZIP: 60532 BUSINESS PHONE: 630-241-4141 MAIL ADDRESS: STREET 1: 1001 WARRENVILLE ROAD, SUITE 300 CITY: LISLE STATE: IL ZIP: 60532 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST TRUST EXCHANGE-TRADED ALPHADEX FUND CENTRAL INDEX KEY: 0001383496 IRS NUMBER: 000000000 STATE OF INCORPORATION: MA FILING VALUES: FORM TYPE: N-1A/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-140895 FILM NUMBER: 07794390 BUSINESS ADDRESS: STREET 1: 1001 WARRENVILLE ROAD, SUITE 300 CITY: LISLE STATE: IL ZIP: 60532 BUSINESS PHONE: 630-241-4141 MAIL ADDRESS: STREET 1: 1001 WARRENVILLE ROAD, SUITE 300 CITY: LISLE STATE: IL ZIP: 60532 0001383496 S000017337 First Trust Large Cap Core AlphaDEX Fund C000047995 First Trust Large Cap Core AlphaDEX Fund 0001383496 S000017338 First Trust Mid Cap Core AlphaDEX Fund C000047996 First Trust Mid Cap Core AlphaDEX Fund 0001383496 S000017339 First Trust Small Cap Core AlphaDEX Fund C000047997 First Trust Small Cap Core AlphaDEX Fund 0001383496 S000017340 First Trust Large Cap Value Opportunities AlphaDEX Fund C000047998 First Trust Large Cap Value Opportunities AlphaDEX Fund 0001383496 S000017341 First Trust Large Cap Growth Opportunities AlphaDEX Fund C000047999 First Trust Large Cap Growth Opportunities AlphaDEX Fund 0001383496 S000017342 First Trust Multi Cap Value AlphaDEX Fund C000048000 First Trust Multi Cap Value AlphaDEX Fund 0001383496 S000017343 First Trust Multi Cap Growth AlphaDEX Fund C000048001 First Trust Multi Cap Growth AlphaDEX Fund 0001383496 S000017696 First Trust Consumer Discretionary AlphaDEX Fund C000048896 First Trust Consumer Discretionary AlphaDEX Fund 0001383496 S000017697 First Trust Consumer Staples AlphaDEX Fund C000048897 First Trust Consumer Staples AlphaDEX Fund 0001383496 S000017698 First Trust Energy AlphaDEX Fund C000048898 First Trust Energy AlphaDEX Fund 0001383496 S000017699 First Trust Financial AlphaDEX Fund C000048899 First Trust Financial AlphaDEX Fund 0001383496 S000017700 First Trust Health Care AlphaDEX Fund C000048900 First Trust Health Care AlphaDEX Fund 0001383496 S000017701 First Trust Industrials AlphaDEX Fund C000048901 First Trust Industrials AlphaDEX Fund 0001383496 S000017702 First Trust Materials AlphaDEX Fund C000048902 First Trust Materials AlphaDEX Fund 0001383496 S000017703 First Trust Technology AlphaDEX Fund C000048903 First Trust Technology AlphaDEX Fund 0001383496 S000017704 First Trust Utilities AlphaDEX Fund C000048904 First Trust Utilities AlphaDEX Fund N-1A/A 1 adex_n1a-a.txt PRE-EFFECTIVE AMENDMENT As filed with the Securities and Exchange Commission on or about April 27, 2007 ================================================================================ 1933 Act Registration No. 333-140895 1940 Act Registration No. 811-22019 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM N-1A REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ] Pre-Effective Amendment No. 3 [X] Post-Effective Amendment No. __ [ ] and/or REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ] Amendment No. 3 [X] FIRST TRUST EXCHANGE-TRADED ALPHADEX(TM) FUND (Exact name of registrant as specified in charter) 1001 Warrenville Road, Suite 300 Lisle, Illinois 60532 (Address of Principal Executive Offices) (Zip Code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (630) 241-4141 W. Scott Jardine, Esq., Secretary First Trust Exchange-Traded AlphaDEX(TM) Fund First Trust Advisors L.P. 1001 Warrenville Road, Suite 300 Lisle, Illinois 60532 (Name and Address of Agent for Service) Copy to: Eric F. Fess, Esq. Chapman and Cutler LLP 111 West Monroe Street Chicago, Illinois 60603 It is proposed that this filing will become effective (check appropriate box): [ ] immediately upon filing pursuant to paragraph (b) [ ] on (date) pursuant to paragraph (b) [ ] 60 days after filing pursuant to paragraph (a)(1) [ ] on (date) pursuant to paragraph (a)(1) [ ] 75 days after filing pursuant to paragraph (a)(2) [ ] on (date) pursuant to paragraph (a)(2) of Rule 485. If appropriate, check the following box: [ ] this post-effective amendment designates a new effective date for a previously filed post-effective amendment. [LOGO OMITTED] FIRST TRUST ADVISORS L.P. First Trust Consumer Discretionary AlphaDEX(TM) Fund First Trust Consumer Staples AlphaDEX(TM) Fund First Trust Energy AlphaDEX(TM) Fund First Trust Financials AlphaDEX(TM) Fund First Trust Health Care AlphaDEX(TM) Fund First Trust Industrials AlphaDEX(TM) Fund First Trust Materials AlphaDEX(TM) Fund First Trust Technology AlphaDEX(TM) Fund First Trust Utilities AlphaDEX(TM) Fund April 27, 2007 Front Cover First Trust Consumer Discretionary AlphaDEX(TM) Fund First Trust Consumer Staples AlphaDEX(TM) Fund First Trust Energy AlphaDEX(TM) Fund First Trust Financials AlphaDEX(TM) Fund First Trust Health Care AlphaDEX(TM) Fund First Trust Industrials AlphaDEX(TM) Fund First Trust Materials AlphaDEX(TM) Fund First Trust Technology AlphaDEX(TM) Fund First Trust Utilities AlphaDEX(TM) Fund PROSPECTUS April 27, 2007 First Trust Consumer Discretionary AlphaDEX(TM) Fund, First Trust Consumer Staples AlphaDEX(TM) Fund, First Trust Energy AlphaDEX(TM) Fund, First Trust Financials AlphaDEX(TM) Fund, First Trust Health Care AlphaDEX(TM) Fund, First Trust Industrials AlphaDEX(TM) Fund, First Trust Materials AlphaDEX(TM) Fund, First Trust Technology AlphaDEX(TM) Fund and First Trust Utilities AlphaDEX(TM) Fund (each, a "Fund," and collectively, the "Funds") each is a series of a registered management investment company that is offering its shares (the "Shares") through this Prospectus. The Funds have applied to list and trade on the American Stock Exchange (the "AMEX"), subject to notice of issuance, at market prices that may differ to some degree from the net asset value ("NAV") of the Shares. Unlike conventional mutual funds, the Funds normally issue and redeem Shares on a continuous basis, at NAV, only in large specified blocks consisting of 50,000 Shares called a "Creation Unit." Each Fund's Creation Units are issued and redeemed principally in-kind for securities included in such Fund's corresponding equity index in the StrataQuant(TM) Series (as hereinafter defined). Except when aggregated in Creation Units, the Shares are not redeemable securities of the Funds. The Securities and Exchange Commission has not approved or disapproved these securities or passed upon the adequacy or accuracy of this Prospectus. Any representation to the contrary is a criminal offense. NOT FDIC INSURED. MAY LOSE VALUE. NO BANK GUARANTEE.
Table of Contents Introduction ..................................................................................... 3 Who Should Invest in the Funds ................................................................... 3 Tax Efficient Product Structure .................................................................. 3 First Trust Consumer Discretionary AlphaDEX(TM) Fund Investment Objective, Strategies and Risks... 4 First Trust Consumer Staples AlphaDEX(TM) Fund Investment Objective, Strategies and Risks......... 8 First Trust Energy AlphaDEX(TM) Fund Investment Objective, Strategies and Risks .................. 12 First Trust Financials AlphaDEX(TM) Fund Investment Objective, Strategies and Risks .............. 16 First Trust Health Care AlphaDEX(TM) Fund Investment Objective, Strategies and Risks ............. 20 First Trust Industrials AlphaDEX(TM) Fund Investment Objective, Strategies and Risks ............. 24 First Trust Materials AlphaDEX(TM) Fund Investment Objective, Strategies and Risks ............... 28 First Trust Technology AlphaDEX(TM) Fund Investment Objective, Strategies and Risks .............. 32 First Trust Utilities AlphaDEX(TM) Fund Investment Objective, Strategies and Risks ............... 36 Additional Investment Strategies ................................................................. 41 Additional Risks of Investing in the Funds ....................................................... 42 Fund Organization ................................................................................ 43 Management of the Funds .......................................................................... 43 How to Buy and Sell Shares ....................................................................... 45 Creations, Redemptions and Transaction Fees ...................................................... 46 Dividends, Distributions and Taxes ............................................................... 48 Federal Tax Matters .............................................................................. 48 Distribution Plan ................................................................................ 50 Net Asset Value .................................................................................. 50 Fund Service Providers ........................................................................... 51 Index Provider ................................................................................... 51 Disclaimers ...................................................................................... 52 Additional Index Information ..................................................................... 53 Other Information ................................................................................ 53
Introduction-- First Trust Consumer Discretionary AlphaDEX(TM) Fund First Trust Consumer Staples AlphaDEX(TM) Fund First Trust Energy AlphaDEX(TM) Fund First Trust Financials AlphaDEX(TM) Fund First Trust Health Care AlphaDEX(TM) Fund First Trust Industrials AlphaDEX(TM) Fund First Trust Materials AlphaDEX(TM) Fund First Trust Technology AlphaDEX(TM) Fund First Trust Utilities AlphaDEX(TM) Fund The Funds are series of the First Trust Exchange-Traded AlphaDEX(TM) Fund (the "Trust"), a registered management investment company and an exchange-traded "index fund." The investment objective of each Fund is to seek investment results that correspond generally to the price and yield (before the Fund's fees and expenses) of such Fund's corresponding equity index in a family of custom "enhanced" indices created and administered by the AMEX (the "StrataQuant(TM) Series") comprised of the StrataQuant(TM) Consumer Discretionary Index, StrataQuant(TM) Consumer Staples Index, StrataQuant(TM) Energy Index, StrataQuant(TM) Financials Index, StrataQuant(TM) Health Care Index, StrataQuant(TM) Industrials Index, StrataQuant(TM) Materials Index, StrataQuant(TM) Technology Index and StrataQuant(TM) Utilities Index. First Trust Advisors L.P. ("First Trust") is the investment adviser for the Funds. Who Should Invest in the Funds The Funds are designed for investors who seek a relatively low-cost approach for investing in a portfolio of equity securities of companies in one or more of the StrataQuant(TM) Series. The Funds may be suitable for long-term investment in the markets represented by the StrataQuant(TM) Series and may also be used as an asset allocation tool or as a speculative trading instrument. Tax Efficient Product Structure Unlike many conventional mutual funds, the Shares are traded throughout the day on the AMEX whereas mutual funds are typically only bought and sold at closing NAVs. The Shares have been designed to be tradable in the secondary market on the AMEX on an intra-day basis, and to be created and redeemed principally in-kind in Creation Units at each day's next calculated NAV. These arrangements are designed to protect ongoing shareholders from adverse effects on the Funds that could arise from frequent cash creation and redemption transactions. In a conventional mutual fund, redemptions can have an adverse tax impact on taxable shareholders because of the mutual fund's need to sell portfolio securities to obtain cash to meet fund redemptions. These sales may generate taxable gains for the shareholders of the mutual fund, whereas the Shares' in-kind redemption mechanism generally will not lead to a tax event for the Funds or their ongoing shareholders. First Trust Consumer Discretionary AlphaDEX(TM) Fund Investment Objective, Strategies and Risks Investment Objective The First Trust Consumer Discretionary AlphaDEX(TM) Fund (the "Consumer Discretionary AlphaDEX(TM) Fund") seeks investment results that correspond generally to the price and yield (before the Consumer Discretionary AlphaDEX(TM) Fund's fees and expenses) of an equity index called the StrataQuant(TM) Consumer Discretionary Index (Symbol: STRQCD) (the "Consumer Discretionary Index"). Principal Investment Strategies The Consumer Discretionary AlphaDEX(TM) Fund will normally invest at least 90% of its total assets in common stocks that comprise the Consumer Discretionary Index. First Trust will seek investment results that correspond generally to the performance of the Consumer Discretionary Index. The investment objective and the 90% investment strategy, both noted above, are non-fundamental and require 60 days' prior written notice to shareholders before they can be changed. As non-fundamental policies, such policies may be changed by the Board of Trustees without receiving shareholder approval. The Consumer Discretionary AlphaDEX(TM) Fund, using an "indexing" investment approach, attempts to replicate, before expenses, the performance of the Consumer Discretionary Index. First Trust seeks a correlation of 0.95 or better (before expenses) between the Consumer Discretionary AlphaDEX(TM) Fund's performance and the performance of the Consumer Discretionary Index; a figure of 1.00 would represent perfect correlation. First Trust will regularly monitor the Consumer Discretionary AlphaDEX(TM) Fund's tracking accuracy and will use the investment techniques described below in seeking to maintain an appropriate correlation. In seeking to achieve the Consumer Discretionary AlphaDEX(TM) Fund's investment objective, the Consumer Discretionary AlphaDEX(TM) Fund generally will invest in all of the stocks comprising the Consumer Discretionary Index in proportion to their weightings in the Consumer Discretionary Index. However, under various circumstances, it may not be possible or practicable to purchase all of those stocks in those weightings. In those circumstances, the Consumer Discretionary AlphaDEX(TM) Fund may purchase a sample of stocks in the Consumer Discretionary Index. There may also be instances in which First Trust may choose to overweight certain stocks in the Consumer Discretionary Index, purchase securities not in the Consumer Discretionary Index which First Trust believes are appropriate to substitute for certain securities in the Consumer Discretionary Index, use futures or other derivative instruments, or utilize various combinations of the above techniques in seeking to track the Consumer Discretionary Index. The Consumer Discretionary AlphaDEX(TM) Fund may sell stocks that are represented in the Consumer Discretionary Index in anticipation of their removal from the Consumer Discretionary Index or purchase stocks not represented in the Consumer Discretionary Index in anticipation of their addition to the Consumer Discretionary Index. Index Construction The Consumer Discretionary Index is a modified equal-dollar weighted index designed by the AMEX to objectively identify and select stocks from the Russell 1000(R) Index that may have greater capital appreciation potential through the use of the AlphaDEX(TM) screening methodology. Alpha is a measure of the portion of a return arising from non-market risk. Accordingly, alpha is an indication of how much an investment outperforms or underperforms relative to its benchmark. The initial divisor was created to set a benchmark value of 1000.00 on July 3, -4- 2003. The Consumer Discretionary Index was created and trademarked by the AMEX on April 11, 2007. As of April 11, 2007, the Russell 1000(R) Index consisted of 974 stocks and the Consumer Discretionary Index consisted of 136 stocks. The Consumer Discretionary Index is constructed by the AMEX in the following manner: 1. Begin with the universe of stocks in the Russell 1000(R) Index. 2a.The AMEX ranks all stocks in the above universe using the following growth and value factors: three, six and 12-month price appreciation, sales to price and one year sales growth (growth factors) and book value to price, cash flow to price and return on assets (value factors). All stocks are ranked on the sum of ranks for the growth factors and, separately, all stocks are ranked on the sum of ranks for the value factors. 2b.For stocks Russell has classified solely as growth or value, the stock receives the rank for that style from step 2a as its selection score. For stocks Russell allocates between growth and value, the stock receives the best rank from step 2a as its selection score. 3. AMEX then ranks those stocks contained in the consumer discretionary sector (the members of the Russell 1000(R) Consumer Discretionary and Services Index) according to their selection score from step 2b. The bottom 25% in such sector is eliminated. 4. The top 75% of the stocks contained in the consumer discretionary sector is then split into quintiles based on their score from step 3. The top ranked quintile receives 5/15 (33.3%) of the portfolio weight with successive quintiles receiving 4/15 (26.7%), 3/15 (20.0%), 2/15 (13.3%) and 1/15 (6.7%), respectively. Stocks are equally weighted within each quintile. The Consumer Discretionary Index is rebalanced and reconstituted on the last business day of each calendar quarter. Changes will be effective at the open on the fourth business day of the following month. Acquired companies are deleted at the close on the day the merger closes for both cash and stock deals. The acquired company's weight in the Consumer Discretionary Index is reallocated pro-rata among the remaining index constituents. Spin-offs are not included in the Consumer Discretionary Index. The value of the spin-off is reallocated to the parent company. See "Additional Index Information" for additional information regarding the Consumer Discretionary Index. Principal Risks of Investing in the Fund Risk is inherent in all investing. The Consumer Discretionary AlphaDEX(TM) Fund's Shares will change in value, and loss of money is a risk of investing in the Consumer Discretionary AlphaDEX(TM) Fund. The Consumer Discretionary AlphaDEX(TM) Fund may not achieve its objective. An investment in the Consumer Discretionary AlphaDEX(TM) Fund is not a deposit with a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. An investment in the Consumer Discretionary AlphaDEX(TM) Fund involves risks similar to those of investing in any fund of equity securities traded on an exchange. The following specific risk factors have been identified as the principal risks of investing in the Consumer Discretionary AlphaDEX(TM) Fund. Market Risk. One of the principal risks of investing in the Consumer Discretionary AlphaDEX(TM) Fund is market risk. Market risk is the risk that a particular stock owned by the Consumer Discretionary AlphaDEX(TM) Fund, Consumer Discretionary AlphaDEX(TM) Fund Shares or stocks in general may fall in value. Shares are subject to market fluctuations caused by such factors as economic, political, regulatory or market developments, changes in interest rates and perceived trends in stock prices. Overall stock values could decline generally or could underperform other investments. -5- Index Tracking Risk. You should anticipate that the value of the Shares will decline, more or less, in correlation with any decline in the value of the Consumer Discretionary Index. Non-Diversification Risk. Because the Consumer Discretionary AlphaDEX(TM) Fund is non-diversified, the Consumer Discretionary AlphaDEX(TM) Fund is exposed to additional market risk. A non-diversified fund may invest a relatively high percentage of its assets in a limited number of issuers. Non-diversified funds are more susceptible to any single political, regulatory or economic occurrence and to the financial condition of individual issuers in which it invests. Non-Correlation Risk. The Consumer Discretionary AlphaDEX(TM) Fund's return may not match the return of the Consumer Discretionary Index for a number of reasons. For example, the Consumer Discretionary AlphaDEX(TM) Fund incurs operating expenses not applicable to the Consumer Discretionary Index, and may incur costs in buying and selling securities, especially when rebalancing the Consumer Discretionary AlphaDEX(TM) Fund's portfolio holdings to reflect changes in the composition of the Consumer Discretionary Index. In addition, the Consumer Discretionary AlphaDEX(TM) Fund's portfolio holdings may not exactly replicate the securities included in the Consumer Discretionary Index or the ratios between the securities included in the Consumer Discretionary Index. The Consumer Discretionary AlphaDEX(TM) Fund may not be fully invested at times, either as a result of cash flows into the Consumer Discretionary AlphaDEX(TM) Fund or reserves of cash held by the Consumer Discretionary AlphaDEX(TM) Fund to meet redemptions and expenses. If the Consumer Discretionary AlphaDEX(TM) Fund utilizes a sampling approach or invests in futures or other derivative positions, its return may not correlate as well with the return of the Consumer Discretionary Index, as would be the case if it purchased all of the stocks in the Consumer Discretionary Index with the same weightings as the Consumer Discretionary Index. While First Trust seeks to have a correlation of 0.95 or better, before expenses, between the Consumer Discretionary AlphaDEX(TM) Fund's performance and the performance of the Consumer Discretionary Index, there can be no assurance that the Consumer Discretionary AlphaDEX(TM) Fund will be able to achieve such a correlation. Accordingly, the Consumer Discretionary AlphaDEX(TM) Fund's performance may correlate to a lesser extent and may possibly vary substantially from the performance of the Consumer Discretionary Index. Replication Management Risk. The Consumer Discretionary AlphaDEX(TM) Fund is also exposed to additional market risk due to its policy of investing principally in the securities included in the Consumer Discretionary Index. As a result of this policy, securities held by the Consumer Discretionary Index will generally not be bought or sold in response to market fluctuations and the securities will be issued by companies concentrated in the consumer discretionary sector. As a result of this policy, the Consumer Discretionary AlphaDEX(TM) Fund would generally not sell a stock because the stock's issuer was in financial trouble, unless that stock is removed or is anticipated to be removed from the Consumer Discretionary Index. Small-Cap and Mid-Cap Company Risk. The Consumer Discretionary AlphaDEX(TM) Fund may invest in small-capitalization and mid-capitalization companies. Such companies may be more vulnerable to adverse general market or economic developments, and their securities may be less liquid and may experience greater price volatility than larger, more established companies as a result of several factors, including limited trading volumes, products or financial resources, management inexperience and less publicly available information. Accordingly, such companies are generally subject to greater market risk than larger, more established companies. Concentration Risk. The Consumer Discretionary AlphaDEX(TM) Fund will be concentrated in the securities of issuers in the consumer discretionary sector. -6- A concentration makes the Consumer Discretionary AlphaDEX(TM) Fund more susceptible to any single occurrence affecting the sector and may subject the Consumer Discretionary AlphaDEX(TM) Fund to greater risk than more diversified funds. Consumer Discretionary Sector Risk. The Consumer Discretionary AlphaDEX(TM) Fund invests in the securities of companies in the consumer discretionary sector. The success of consumer product manufacturers and retailers is tied closely to the performance of the overall domestic and international economy, interest rates, competitive and consumer confidence. Success depends heavily on disposable household income and consumer spending. Changes in demographics and consumer tastes can also affect the demand for, and success of, consumer products in the marketplace. Issuer Specific Changes Risk. The value of an individual security or particular type of security can be more volatile than the market as a whole and can perform differently from the value of the market as a whole. Intellectual Property Risk. The Consumer Discretionary AlphaDEX(TM) Fund relies on a license and related sublicense that permits the Consumer Discretionary AlphaDEX(TM) Fund to use its corresponding equity index and the associated trade names and trademarks ("Intellectual Property") in connection with the name and investment strategies of the Consumer Discretionary AlphaDEX(TM) Fund. Such license and related sublicense may be terminated by the index provider and, as a result, the Consumer Discretionary AlphaDEX(TM) Fund may lose its ability to use the Intellectual Property. There is also no guarantee that the index provider has all rights to license the Intellectual Property to First Trust Portfolios L.P. ("FTP"), on behalf of First Trust and the Consumer Discretionary AlphaDEX(TM) Fund. Accordingly, in the event the license is terminated or the index provider does not have rights to license the Intellectual Property, it may have a significant effect on the operation of the Consumer Discretionary AlphaDEX(TM) Fund. See "Additional Risks of Investing in the Funds" for additional information regarding risks. -7- First Trust Consumer Staples AlphaDEX(TM) Fund Investment Objective, Strategies and Risks Investment Objective The First Trust Consumer Staples AlphaDEX(TM) Fund (the "Consumer Staples AlphaDEX(TM) Fund") seeks investment results that correspond generally to the price and yield (before the Consumer Staples AlphaDEX(TM) Fund's fees and expenses) of an equity index called the StrataQuant(TM) Consumer Staples Index (Symbol: STRQCS) (the "Consumer Staples Index"). Principal Investment Strategies The Consumer Staples AlphaDEX(TM) Fund will normally invest at least 90% of its total assets in common stocks that comprise the Consumer Staples Index. First Trust will seek investment results that correspond generally to the performance of the Consumer Staples Index. The investment objective and the 90% investment strategy, both noted above, are non-fundamental and require 60 days' prior written notice to shareholders before they can be changed. As non-fundamental policies, such policies may be changed by the Board of Trustees without receiving shareholder approval. The Consumer Staples AlphaDEX(TM) Fund, using an "indexing" investment approach, attempts to replicate, before expenses, the performance of the Consumer Staples Index. First Trust seeks a correlation of 0.95 or better (before expenses) between the Consumer Staples AlphaDEX(TM) Fund's performance and the performance of the Consumer Staples Index; a figure of 1.00 would represent perfect correlation. First Trust will regularly monitor the Consumer Staples AlphaDEX(TM) Fund's tracking accuracy and will use the investment techniques described below in seeking to maintain an appropriate correlation. In seeking to achieve the Consumer Staples AlphaDEX(TM) Fund's investment objective, the Consumer Staples AlphaDEX(TM) Fund generally will invest in all of the stocks comprising the Consumer Staples Index in proportion to their weightings in the Consumer Staples Index. However, under various circumstances, it may not be possible or practicable to purchase all of those stocks in those weightings. In those circumstances, the Consumer Staples AlphaDEX(TM) Fund may purchase a sample of stocks in the Consumer Staples Index. There may also be instances in which First Trust may choose to overweight certain stocks in the Consumer Staples Index, purchase securities not in the Consumer Staples Index which First Trust believes are appropriate to substitute for certain securities in the Consumer Staples Index, use futures or other derivative instruments, or utilize various combinations of the above techniques in seeking to track the Consumer Staples Index. The Consumer Staples AlphaDEX(TM) Fund may sell stocks that are represented in the Consumer Staples Index in anticipation of their removal from the Consumer Staples Index or purchase stocks not represented in the Consumer Staples Index in anticipation of their addition to the Consumer Staples Index. Index Construction The Consumer Staples Index is a modified equal-dollar weighted index designed by the AMEX to objectively identify and select stocks from the Russell 1000(R) Index that may have greater capital appreciation potential through the use of the AlphaDEX(TM) screening methodology. Alpha is a measure of the portion of a return arising from non-market risk. Accordingly, alpha is an indication of how much an investment outperforms or underperforms relative to its benchmark. The initial divisor was created to set a benchmark value of 1000.00 on July 3, 2003. The Consumer Staples Index was created and trademarked by the AMEX on April 11, 2007. As of April 11, 2007, the Russell 1000(R) consisted of 974 stocks and the Consumer Staples Index consisted of 31 stocks. -8- The Consumer Staples Index is constructed by the AMEX in the following manner: 1. Begin with the universe of stocks in the Russell 1000(R) Index. 2a.The AMEX ranks all stocks in the above universe using the following growth and value factors: three, six and 12-month price appreciation, sales to price and one year sales growth (growth factors) and book value to price, cash flow to price and return on assets (value factors). All stocks are ranked on the sum of ranks for the growth factors and, separately, all stocks are ranked on the sum of ranks for the value factors. 2b.For stocks Russell has classified solely as growth or value, the stock receives the rank for that style from step 2a as its selection score. For stocks Russell allocates between growth and value, the stock receives the best rank from step 2a as its selection score. 3. AMEX then ranks those stocks contained in the consumer staples sector (the members of the Russell 1000(R) Consumer Staples Index) according to their selection score from step 2b. The bottom 25% in such sector is eliminated. 4. The top 75% of the stocks contained in the consumer staples sector is then split into quintiles based on their score from step 3. The top ranked quintile receives 5/15 (33.3%) of the portfolio weight with successive quintiles receiving 4/15 (26.7%), 3/15 (20.0%), 2/15 (13.3%) and 1/15 (6.7%), respectively. Stocks are equally weighted within each quintile. The Consumer Staples Index is rebalanced and reconstituted on the last business day of each calendar quarter. Changes will be effective at the open on the fourth business day of the following month. Acquired companies are deleted at the close on the day the merger closes for both cash and stock deals. The acquired company's weight in the Consumer Staples Index is reallocated pro-rata among the remaining index constituents. Spin-offs are not included in the Consumer Staples Index. The value of the spin-off is reallocated to the parent company. See "Additional Index Information" for additional information regarding the Consumer Staples Index. Principal Risks of Investing in the Fund Risk is inherent in all investing. The Consumer Staples AlphaDEX(TM) Fund's Shares will change in value, and loss of money is a risk of investing in the Consumer Staples AlphaDEX(TM) Fund. The Consumer Staples AlphaDEX(TM) Fund may not achieve its objective. An investment in the Consumer Staples AlphaDEX(TM) Fund is not a deposit with a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. An investment in the Consumer Staples AlphaDEX(TM) Fund involves risks similar to those of investing in any fund of equity securities traded on an exchange. The following specific risk factors have been identified as the principal risks of investing in the Consumer Staples AlphaDEX(TM) Fund. Market Risk. One of the principal risks of investing in the Consumer Staples AlphaDEX(TM) Fund is market risk. Market risk is the risk that a particular stock owned by the Consumer Staples AlphaDEX(TM) Fund, Consumer Staples AlphaDEX(TM) Fund Shares or stocks in general may fall in value. Shares are subject to market fluctuations caused by such factors as economic, political, regulatory or market developments, changes in interest rates and perceived trends in stock prices. Overall stock values could decline generally or could underperform other investments. Index Tracking Risk. You should anticipate that the value of the Shares will decline, more or less, in correlation with any decline in the value of the Consumer Staples Index. -9- Non-Diversification Risk. Because the Consumer Staples AlphaDEX(TM) Fund is non-diversified, the Consumer Staples AlphaDEX(TM) Fund is exposed to additional market risk. A non-diversified fund may invest a relatively high percentage of its assets in a limited number of issuers. Non-diversified funds are more susceptible to any single political, regulatory or economic occurrence and to the financial condition of individual issuers in which it invests. Non-Correlation Risk. The Consumer Staples AlphaDEX(TM) Fund's return may not match the return of the Consumer Staples Index for a number of reasons. For example, the Consumer Staples AlphaDEX(TM) Fund incurs operating expenses not applicable to the Consumer Staples Index, and may incur costs in buying and selling securities, especially when rebalancing the Consumer Staples AlphaDEX(TM) Fund's portfolio holdings to reflect changes in the composition of the Consumer Staples Index. In addition, the Consumer Staples AlphaDEX(TM) Fund's portfolio holdings may not exactly replicate the securities included in the Consumer Staples Index or the ratios between the securities included in the Consumer Staples Index. The Consumer Staples AlphaDEX(TM) Fund may not be fully invested at times, either as a result of cash flows into the Consumer Staples AlphaDEX(TM) Fund or reserves of cash held by the Consumer Staples AlphaDEX(TM) Fund to meet redemptions and expenses. If the Consumer Staples AlphaDEX(TM) Fund utilizes a sampling approach or invests in futures or other derivative positions, its return may not correlate as well with the return of the Consumer Staples Index, as would be the case if it purchased all of the stocks in the Consumer Staples Index with the same weightings as the Consumer Staples Index. While First Trust seeks to have a correlation of 0.95 or better, before expenses, between the Consumer Staples AlphaDEX(TM) Fund's performance and the performance of the Consumer Staples Index, there can be no assurance that the Consumer Staples AlphaDEX(TM) Fund will be able to achieve such a correlation. Accordingly, the Consumer Staples AlphaDEX(TM) Fund's performance may correlate to a lesser extent and may possibly vary substantially from the performance of the Consumer Staples Index. Replication Management Risk. The Consumer Staples AlphaDEX(TM) Fund is also exposed to additional market risk due to its policy of investing principally in the securities included in the Consumer Staples Index. As a result of this policy, securities held by the Consumer Staples Index will generally not be bought or sold in response to market fluctuations and the securities will be issued by companies concentrated in the consumer staples sector. As a result of this policy, the Consumer Staples AlphaDEX(TM) Fund would generally not sell a stock because the stock's issuer was in financial trouble, unless that stock is removed or is anticipated to be removed from the Consumer Staples Index. Small-Cap and Mid-Cap Company Risk. The Consumer Staples AlphaDEX(TM) Fund may invest in small-capitalization and mid-capitalization companies. Such companies may be more vulnerable to adverse general market or economic developments, and their securities may be less liquid and may experience greater price volatility than larger, more established companies as a result of several factors, including limited trading volumes, products or financial resources, management inexperience and less publicly available information. Accordingly, such companies are generally subject to greater market risk than larger, more established companies. Concentration Risk. The Consumer Staples AlphaDEX(TM) Fund will be concentrated in the securities of the consumer staples sector. A concentration makes the Consumer Staples AlphaDEX(TM) Fund more susceptible to any single occurrence affecting the sector and may subject the Consumer Staples AlphaDEX(TM) Fund to greater risk than more diversified funds. Consumer Staples Sector Risk. The Consumer Staples AlphaDEX(TM) Fund invests in the securities of companies in the consumer staples sector. Companies in the consumer staples sector are subject to government regulation affecting the permissibility of using various food additives and production methods, which -10 regulations could affect company profitability. Tobacco companies may be adversely affected by the adoption of proposed legislation and/or by litigation. Also, the success of foods and soft drinks may be strongly affected by fads, marketing campaigns and other factors affecting supply and demand. Issuer Specific Changes Risk. The value of an individual security or particular type of security can be more volatile than the market as a whole and can perform differently from the value of the market as a whole. Intellectual Property Risk. The Consumer Staples AlphaDEX(TM) Fund relies on a license and related sublicense that permits the Consumer Staples AlphaDEX(TM) Fund to use its corresponding equity index and the associated trade names and trademarks ("Intellectual Property") in connection with the name and investment strategies of the Consumer Staples AlphaDEX(TM) Fund. Such license and related sublicense may be terminated by the index provider and, as a result, the Consumer Staples AlphaDEX(TM) Fund may lose its ability to use the Intellectual Property. There is also no guarantee that the index provider has all rights to license the Intellectual Property to FTP, on behalf of First Trust and the Consumer Staples AlphaDEX(TM) Fund. Accordingly, in the event the license is terminated or the index provider does not have rights to license the Intellectual Property, it may have a significant effect on the operation of the Consumer Staples AlphaDEX(TM) Fund. See "Additional Risks of Investing in the Funds" for additional information regarding risks. -11- First Trust Energy AlphaDEX(TM) Fund Investment Objective, Strategies and Risks Investment Objective The First Trust Energy AlphaDEX(TM) Fund (the "Energy AlphaDEX(TM) Fund") seeks investment results that correspond generally to the price and yield (before the Energy AlphaDEX(TM) Fund's fees and expenses) of an equity index called the StrataQuant(TM) Energy Index (Symbol: STRQEN) (the "Energy Index"). Principal Investment Strategies The Energy AlphaDEX(TM) Fund will normally invest at least 90% of its total assets in common stocks that comprise the Energy Index. First Trust will seek investment results that correspond generally to the performance of the Energy Index. The investment objective and the 90% investment strategy, both noted above, are non-fundamental and require 60 days' prior written notice to shareholders before they can be changed. As non-fundamental policies, such policies may be changed by the Board of Trustees without receiving shareholder approval. The Energy AlphaDEX(TM) Fund, using an "indexing" investment approach, attempts to replicate, before expenses, the performance of the Energy Index. First Trust seeks a correlation of 0.95 or better (before expenses) between the Energy AlphaDEX(TM) Fund's performance and the performance of the Energy Index; a figure of 1.00 would represent perfect correlation. First Trust will regularly monitor the Energy AlphaDEX(TM) Fund's tracking accuracy and will use the investment techniques described below in seeking to maintain an appropriate correlation. In seeking to achieve the Energy AlphaDEX(TM) Fund's investment objective, the Energy AlphaDEX(TM) Fund generally will invest in all of the stocks comprising the Energy Index in proportion to their weightings in the Energy Index. However, under various circumstances, it may not be possible or practicable to purchase all of those stocks in those weightings. In those circumstances, the Energy AlphaDEX(TM) Fund may purchase a sample of stocks in the Energy Index. There may also be instances in which First Trust may choose to overweight certain stocks in the Energy Index, purchase securities not in the Energy Index which First Trust believes are appropriate to substitute for certain securities in the Energy Index, use futures or other derivative instruments, or utilize various combinations of the above techniques in seeking to track the Energy Index. The Energy AlphaDEX(TM) Fund may sell stocks that are represented in the Energy Index in anticipation of their removal from the Energy Index or purchase stocks not represented in the Energy Index in anticipation of their addition to the Energy Index. Index Construction The Energy Index is a modified equal-dollar weighted index designed by the AMEX to objectively identify and select stocks from the Russell 1000(R) Index that may have greater capital appreciation potential through the use of the AlphaDEX(TM) screening methodology. Alpha is a measure of the portion of a return arising from non-market risk. Accordingly, alpha is an indication of how much an investment outperforms or underperforms relative to its benchmark. The initial divisor was created to set a benchmark value of 1000.00 on July 3, 2003. The Energy Index was created and trademarked by the AMEX on April 11, 2007. As of April 11, 2007, the Russell 1000(R) Index consisted of 974 stocks and the Energy Index consisted of 51 stocks. The Energy Index is constructed by the AMEX in the following manner: 1. Begin with the universe of stocks in the Russell 1000(R) Index. -12- 2a.The AMEX ranks all stocks in the above universe using the following growth and value factors: three, six and 12-month price appreciation, sales to price and one year sales growth (growth factors) and book value to price, cash flow to price and return on assets (value factors). All stocks are ranked on the sum of ranks for the growth factors and, separately, all stocks are ranked on the sum of ranks for the value factors. 2b.For stocks Russell has classified solely as growth or value, the stock receives the rank for that style from step 2a as its selection score. For stocks Russell allocates between growth and value, the stock receives the best rank from step 2a as its selection score. 3. AMEX then ranks those stocks contained in the energy sector (the members of the Russell 1000(R) Integrated Oils Index and Russell 1000(R) Other Energy Index) according to their selection score from step 2b. The bottom 25% in such sector is eliminated. 4. The top 75% of the stocks contained in the energy sector is then split into quintiles based on their score from step 3. The top ranked quintile receives 5/15 (33.3%) of the portfolio weight with successive quintiles receiving 4/15 (26.7%), 3/15 (20.0%), 2/15 (13.3%) and 1/15 (6.7%), respectively. Stocks are equally weighted within each quintile. The Energy Index is rebalanced and reconstituted on the last business day of each calendar quarter. Changes will be effective at the open on the fourth business day of the following month. Acquired companies are deleted at the close on the day the merger closes for both cash and stock deals. The acquired company's weight in the Energy Index is reallocated pro-rata among the remaining index constituents. Spin-offs are not included in the Energy Index. The value of the spin-off is reallocated to the parent company. See "Additional Index Information" for additional information regarding the Energy Index. Principal Risks of Investing in the Fund Risk is inherent in all investing. The Energy AlphaDEX(TM) Fund's Shares will change in value, and loss of money is a risk of investing in the Energy AlphaDEX(TM) Fund. The Energy AlphaDEX(TM) Fund may not achieve its objective. An investment in the Energy AlphaDEX(TM) Fund is not a deposit with a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. An investment in the Energy AlphaDEX(TM) Fund involves risks similar to those of investing in any fund of equity securities traded on an exchange. The following specific risk factors have been identified as the principal risks of investing in the Energy AlphaDEX(TM) Fund. Market Risk. One of the principal risks of investing in the Energy AlphaDEX(TM) Fund is market risk. Market risk is the risk that a particular stock owned by the Energy AlphaDEX(TM) Fund, Energy AlphaDEX(TM) Fund Shares or stocks in general may fall in value. Shares are subject to market fluctuations caused by such factors as economic, political, regulatory or market developments, changes in interest rates and perceived trends in stock prices. Overall stock values could decline generally or could underperform other investments. Index Tracking Risk. You should anticipate that the value of the Shares will decline, more or less, in correlation with any decline in the value of the Energy Index. Non-Diversification Risk. Because the Energy AlphaDEX(TM) Fund is non-diversified, the Energy AlphaDEX(TM) Fund is exposed to additional market risk. A non-diversified fund may invest a relatively high percentage of its assets in a limited number of issuers. Non-diversified funds are more susceptible to any single political, regulatory or economic occurrence and to the financial condition of individual issuers in which it invests. -13- Non-Correlation Risk. The Energy AlphaDEX(TM) Fund's return may not match the return of the Energy Index for a number of reasons. For example, the Energy AlphaDEX(TM) Fund incurs operating expenses not applicable to the Energy Index, and may incur costs in buying and selling securities, especially when rebalancing the Energy AlphaDEX(TM) Fund's portfolio holdings to reflect changes in the composition of the Energy Index. In addition, the Energy AlphaDEX(TM) Fund's portfolio holdings may not exactly replicate the securities included in the Energy Index or the ratios between the securities included in the Energy Index. The Energy AlphaDEX(TM) Fund may not be fully invested at times, either as a result of cash flows into the Energy AlphaDEX(TM) Fund or reserves of cash held by the Energy AlphaDEX(TM) Fund to meet redemptions and expenses. If the Energy AlphaDEX(TM) Fund utilizes a sampling approach or invests in futures or other derivative positions, its return may not correlate as well with the return of the Energy Index, as would be the case if it purchased all of the stocks in the Energy Index with the same weightings as the Energy Index. While First Trust seeks to have a correlation of 0.95 or better, before expenses, between the Energy AlphaDEX(TM) Fund's performance and the performance of the Energy Index, there can be no assurance that the Energy AlphaDEX(TM) Fund will be able to achieve such a correlation. Accordingly, the Energy AlphaDEX(TM) Fund's performance may correlate to a lesser extent and may possibly vary substantially from the performance of the Energy Index. Replication Management Risk. The Energy AlphaDEX(TM) Fund is also exposed to additional market risk due to its policy of investing principally in the securities included in the Energy Index. As a result of this policy, securities held by the Energy Index will generally not be bought or sold in response to market fluctuations and the securities will be issued by companies concentrated in the energy sector. As a result of this policy, the Energy AlphaDEX(TM) Fund would generally not sell a stock because the stock's issuer was in financial trouble, unless that stock is removed or is anticipated to be removed from the Energy Index. Small-Cap and Mid-Cap Company Risk. The Energy AlphaDEX(TM) Fund may invest in small-capitalization and mid-capitalization companies. Such companies may be more vulnerable to adverse general market or economic developments, and their securities may be less liquid and may experience greater price volatility than larger, more established companies as a result of several factors, including limited trading volumes, products or financial resources, management inexperience and less publicly available information. Accordingly, such companies are generally subject to greater market risk than larger, more established companies. Concentration Risk. The Energy AlphaDEX(TM) Fund will be concentrated in the securities of the energy sector. A concentration makes the Energy AlphaDEX(TM) Fund more susceptible to any single occurrence affecting the industry and may subject the Energy AlphaDEX(TM) Fund to greater risk than more diversified funds. Energy Sector Risk. The Energy AlphaDEX(TM) Fund invests in the securities of companies in the energy sector. The companies in the energy sector explore for, produce, refine, distribute or sell petroleum or gas products, or provide parts or services to petroleum or gas companies. General problems of issuers in the energy sector include volatile fluctuations in price and supply of energy fuels, international politics, terrorist attacks, reduced demand as a result of increases in energy efficiency and energy conservation, the success of exploration projects, clean-up and litigation costs relating to oil spills and environmental damage, and tax and other regulatory policies of various governments. Natural disasters such as hurricanes in the Gulf of Mexico will also impact the petroleum industry. Oil production and refining companies are subject to extensive federal, state and local environmental laws and regulations regarding air emissions and the disposal of hazardous materials. In addition, declines in U.S. and Russian crude oil production will likely lead to a greater world dependence on oil from OPEC nations, which may result in more volatile oil prices. -14- Issuer Specific Changes Risk. The value of an individual security or particular type of security can be more volatile than the market as a whole and can perform differently from the value of the market as a whole. Intellectual Property Risk. The Energy AlphaDEX(TM) Fund relies on a license and related sublicense that permits the Energy AlphaDEX(TM) Fund to use its corresponding equity index and the associated trade names and trademarks ("Intellectual Property") in connection with the name and investment strategies of the Energy AlphaDEX(TM) Fund. Such license and related sublicense may be terminated by the index provider and, as a result, the Energy AlphaDEX(TM) Fund may lose its ability to use the Intellectual Property. There is also no guarantee that the index provider has all rights to license the Intellectual Property to FTP, on behalf of First Trust and the Energy AlphaDEX(TM) Fund. Accordingly, in the event the license is terminated or the index provider does not have rights to license the Intellectual Property, it may have a significant effect on the operation of the Energy AlphaDEX(TM) Fund. See "Additional Risks of Investing in the Funds" for additional information regarding risks. -15- First Trust Financials AlphaDEX(TM) Fund Investment Objective, Strategies and Risks Investment Objective The First Trust Financials AlphaDEX(TM) Fund (the "Financials AlphaDEX(TM) Fund") seeks investment results that correspond generally to the price and yield (before the Financials AlphaDEX(TM) Fund's fees and expenses) of an equity index called the StrataQuant(TM) Financials Index (Symbol: STRQFN) (the "Financials Index"). Principal Investment Strategies The Financials AlphaDEX(TM) Fund will normally invest at least 90% of its total assets in common stocks that comprise the Financials Index. First Trust will seek investment results that correspond generally to the performance of the Financials Index. The investment objective and the 90% investment strategy, both noted above, are non-fundamental and require 60 days' prior written notice to shareholders before they can be changed. As non-fundamental policies, such policies may be changed by the Board of Trustees without receiving shareholder approval. The Financials AlphaDEX(TM) Fund, using an "indexing" investment approach, attempts to replicate, before expenses, the performance of the Financials Index. First Trust seeks a correlation of 0.95 or better (before expenses) between the Financials AlphaDEX(TM) Fund's performance and the performance of the Financials Index; a figure of 1.00 would represent perfect correlation. First Trust will regularly monitor the Financials AlphaDEX(TM) Fund's tracking accuracy and will use the investment techniques described below in seeking to maintain an appropriate correlation. In seeking to achieve the Financials AlphaDEX(TM) Fund's investment objective, the Financials AlphaDEX(TM) Fund generally will invest in all of the stocks comprising the Financials Index in proportion to their weightings in the Financials Index. However, under various circumstances, it may not be possible or practicable to purchase all of those stocks in those weightings. In those circumstances, the Financials AlphaDEX(TM) Fund may purchase a sample of stocks in the Financials Index. There may also be instances in which First Trust may choose to overweight certain stocks in the Financials Index, purchase securities not in the Financials Index which First Trust believes are appropriate to substitute for certain securities in the Financials Index, use futures or other derivative instruments, or utilize various combinations of the above techniques in seeking to track the Financials Index. The Financials AlphaDEX(TM) Fund may sell stocks that are represented in the Financials Index in anticipation of their removal from the Financials Index or purchase stocks not represented in the Financials Index in anticipation of their addition to the Financials Index. Index Construction The Financials Index is a modified equal-dollar weighted index designed by the AMEX to objectively identify and select stocks from the Russell 1000(R) Index that may have greater capital appreciation potential through the use of the AlphaDEX(TM) screening methodology. Alpha is a measure of the portion of a return arising from non-market risk. Accordingly, alpha is an indication of how much an investment outperforms or underperforms relative to its benchmark. The initial divisor was created to set a benchmark value of 1000.00 on July 3, 2003. The Financials Index was created and trademarked by the AMEX on April 11, 2007. As of April 11, 2007, the Russell 1000(R) Index consisted of 974 stocks and the Financials Index consisted of 164 stocks. The Financials Index is constructed by the AMEX in the following manner: 1. Begin with the universe of stocks in the Russell 1000(R) Index. -16- 2a.The AMEX ranks all stocks in the above universe using the following growth and value factors: three, six and 12-month price appreciation, sales to price and one year sales growth (growth factors) and book value to price, cash flow to price and return on assets (value factors). All stocks are ranked on the sum of ranks for the growth factors and, separately, all stocks are ranked on the sum of ranks for the value factors. 2b.For stocks Russell has classified solely as growth or value, the stock receives the rank for that style from step 2a as its selection score. For stocks Russell allocates between growth and value, the stock receives the best rank from step 2a as its selection score. 3. AMEX then ranks those stocks contained in the financials sector (the members of the Russell 1000(R) Financials Services Index) according to their selection score from step 2b. The bottom 25% in such sector is eliminated. 4. The top 75% of the stocks contained in the financials sector is then split into quintiles based on their score from step 3. The top ranked quintile receives 5/15 (33.3%) of the portfolio weight with successive quintiles receiving 4/15 (26.7%), 3/15 (20.0%), 2/15 (13.3%) and 1/15 (6.7%), respectively. Stocks are equally weighted within each quintile. The Financials Index is rebalanced and reconstituted on the last business day of each calendar quarter. Changes will be effective at the open on the fourth business day of the following month. Acquired companies are deleted at the close on the day the merger closes for both cash and stock deals. The acquired company's weight in the Financials Index is reallocated pro-rata among the remaining index constituents. Spin-offs are not included in the Financials Index. The value of the spin-off is reallocated to the parent company. See "Additional Index Information" for additional information regarding the Financials Index. Principal Risks of Investing in the Fund Risk is inherent in all investing. The Financials AlphaDEX(TM) Fund's Shares will change in value, and loss of money is a risk of investing in the Financials AlphaDEX(TM) Fund. The Financials AlphaDEX(TM) Fund may not achieve its objective. An investment in the Financials AlphaDEX(TM) Fund is not a deposit with a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. An investment in the Financials AlphaDEX(TM) Fund involves risks similar to those of investing in any fund of equity securities traded on an exchange. The following specific risk factors have been identified as the principal risks of investing in the Financials AlphaDEX(TM) Fund. Market Risk. One of the principal risks of investing in the Financials AlphaDEX(TM) Fund is market risk. Market risk is the risk that a particular stock owned by the Financials AlphaDEX(TM) Fund, Financials AlphaDEX(TM) Fund Shares or stocks in general may fall in value. Shares are subject to market fluctuations caused by such factors as economic, political, regulatory or market developments, changes in interest rates and perceived trends in stock prices. Overall stock values could decline generally or could underperform other investments. Index Tracking Risk. You should anticipate that the value of the Shares will decline, more or less, in correlation with any decline in the value of the Financials Index. Non-Diversification Risk. Because the Financials AlphaDEX(TM) Fund is non-diversified, the Financials AlphaDEX(TM) Fund is exposed to additional market risk. A non-diversified fund may invest a relatively high percentage of its assets in a limited number of issuers. Non-diversified funds are more susceptible to any single political, regulatory or economic occurrence and to the financial condition of individual issuers in which it invests. -17- Non-Correlation Risk. The Financials AlphaDEX(TM) Fund's return may not match the return of the Financials Index for a number of reasons. For example, the Financials AlphaDEX(TM) Fund incurs operating expenses not applicable to the Financials Index, and may incur costs in buying and selling securities, especially when rebalancing the Financials AlphaDEX(TM) Fund's portfolio holdings to reflect changes in the composition of the Financials Index. In addition, the Financials AlphaDEX(TM) Fund's portfolio holdings may not exactly replicate the securities included in the Financials Index or the ratios between the securities included in the Financials Index. The Financials AlphaDEX(TM) Fund may not be fully invested at times, either as a result of cash flows into the Financials AlphaDEX(TM) Fund or reserves of cash held by the Financials AlphaDEX(TM) Fund to meet redemptions and expenses. If the Financials AlphaDEX(TM) Fund utilizes a sampling approach or invests in futures or other derivative positions, its return may not correlate as well with the return of the Financials Index, as would be the case if it purchased all of the stocks in the Financials Index with the same weightings as the Financials Index. While First Trust seeks to have a correlation of 0.95 or better, before expenses, between the Financials AlphaDEX(TM) Fund's performance and the performance of the Financials Index, there can be no assurance that the Financials AlphaDEX(TM) Fund will be able to achieve such a correlation. Accordingly, the Financials AlphaDEX(TM) Fund's performance may correlate to a lesser extent and may possibly vary substantially from the performance of the Financials Index. Replication Management Risk. The Financials AlphaDEX(TM) Fund is also exposed to additional market risk due to its policy of investing principally in the securities included in the Financials Index. As a result of this policy, securities held by the Financials Index will generally not be bought or sold in response to market fluctuations and the securities will be issued by companies concentrated in the financials sector. As a result of this policy, the Financials AlphaDEX(TM) Fund would generally not sell a stock because the stock's issuer was in financial trouble, unless that stock is removed or is anticipated to be removed from the Financials Index. Small-Cap and Mid-Cap Company Risk. The Financials AlphaDEX(TM) Fund may invest in small-capitalization and mid-capitalization companies. Such companies may be more vulnerable to adverse general market or economic developments, and their securities may be less liquid and may experience greater price volatility than larger, more established companies as a result of several factors, including limited trading volumes, products or financial resources, management inexperience and less publicly available information. Accordingly, such companies are generally subject to greater market risk than larger, more established companies. Concentration Risk. The Financials AlphaDEX(TM) Fund will be concentrated in the securities of the financials sector. A concentration makes the Financials AlphaDEX(TM) Fund more susceptible to any single occurrence affecting the industry and may subject the Financials AlphaDEX(TM) Fund to greater risk than more diversified funds. Financials Sector Risk. The Financials AlphaDEX(TM) Fund invests in the securities of companies in the financials sector. Banks, thrifts and their holding companies are especially subject to the adverse effects of economic recession; volatile interest rates; portfolio concentrations in geographic markets and in commercial and residential real estate loans; and competition from new entrants in their fields of business. Although the barriers which separated the banking, insurance and securities industries were eliminated by legislation, these industries are still extensively regulated at both the federal and state level and may be adversely affected by increased regulations. Banks and thrifts face increased competition from nontraditional lending sources as regulatory changes permit new entrants to offer various financial products. Technological advances such as the Internet allow these nontraditional lending sources to cut overhead and permit the more efficient use of customer data. -18- Brokerage firms, broker/dealers, investment banks, finance companies and mutual fund companies are also financial services providers. These companies compete with banks and thrifts to provide traditional financial service products, in addition to their traditional services, such as brokerage and investment advice. In addition, all financial service companies face shrinking profit margins due to new competitors, the cost of new technology and the pressure to compete globally. Companies involved in the insurance industry are engaged in underwriting, selling, distributing or placing of property and casualty, life or health insurance. Insurance company profits are affected by many factors, including interest rate movements, the imposition of premium rate caps, competition and pressure to compete globally. Property and casualty insurance profits may also be affected by weather catastrophes, such as hurricanes and earthquakes, acts of terrorism and other disasters. Life and health insurance profits may be affected by mortality rates. Already extensively regulated, insurance companies' profits may also be adversely affected by increased government regulations or tax law changes. Issuer Specific Changes Risk. The value of an individual security or particular type of security can be more volatile than the market as a whole and can perform differently from the value of the market as a whole. Intellectual Property Risk. The Financials AlphaDEX(TM) Fund relies on a license and related sublicense that permits the Financials AlphaDEX(TM) Fund to use its corresponding equity index and the associated trade names and trademarks ("Intellectual Property") in connection with the name and investment strategies of the Financials AlphaDEX(TM) Fund. Such license and related sublicense may be terminated by the index provider and, as a result, the Financials AlphaDEX(TM) Fund may lose its ability to use the Intellectual Property. There is also no guarantee that the index provider has all rights to license the Intellectual Property to FTP, on behalf of First Trust and the Financials AlphaDEX(TM) Fund. Accordingly, in the event the license is terminated or the index provider does not have rights to license the Intellectual Property, it may have a significant effect on the operation of the Financials AlphaDEX(TM) Fund. See "Additional Risks of Investing in the Funds" for additional information regarding risks. -19- First Trust Health Care AlphaDEX(TM) Fund Investment Objective, Strategies and Risks Investment Objective The First Trust Health Care AlphaDEX(TM) Fund (the "Health Care AlphaDEX(TM) Fund") seeks investment results that correspond generally to the price and yield (before the Health Care AlphaDEX(TM) Fund's fees and expenses) of an equity index called the StrataQuant(TM) Health Care Index (Symbol: STRQHC) (the "Health Care Index"). Principal Investment Strategies The Health Care AlphaDEX(TM) Fund will normally invest at least 90% of its total assets in common stocks that comprise the Health Care Index. First Trust will seek investment results that correspond generally to the performance of the Health Care Index. The investment objective and the 90% investment strategy, both noted above, are non-fundamental and require 60 days' prior written notice to shareholders before they can be changed. As non-fundamental policies, such policies may be changed by the Board of Trustees without receiving shareholder approval. The Health Care AlphaDEX(TM) Fund, using an "indexing" investment approach, attempts to replicate, before expenses, the performance of the Health Care Index. First Trust seeks a correlation of 0.95 or better (before expenses) between the Health Care AlphaDEX(TM) Fund's performance and the performance of the Health Care Index; a figure of 1.00 would represent perfect correlation. First Trust will regularly monitor the Health Care AlphaDEX(TM) Fund's tracking accuracy and will use the investment techniques described below in seeking to maintain an appropriate correlation. In seeking to achieve the Health Care AlphaDEX(TM) Fund's investment objective, the Health Care AlphaDEX(TM) Fund generally will invest in all of the stocks comprising the Health Care Index in proportion to their weightings in the Health Care Index. However, under various circumstances, it may not be possible or practicable to purchase all of those stocks in those weightings. In those circumstances, the Health Care AlphaDEX(TM) Fund may purchase a sample of stocks in the Health Care Index. There may also be instances in which First Trust may choose to overweight certain stocks in the Health Care Index, purchase securities not in the Health Care Index which First Trust believes are appropriate to substitute for certain securities in the Health Care Index, use futures or other derivative instruments, or utilize various combinations of the above techniques in seeking to track the Health Care Index. The Health Care AlphaDEX(TM) Fund may sell stocks that are represented in the Health Care Index in anticipation of their removal from the Health Care Index or purchase stocks not represented in the Health Care Index in anticipation of their addition to the Health Care Index. Index Construction The Health Care Index is a modified equal-dollar weighted index designed by AMEX to objectively identify and select stocks from the Russell 1000(R) Index that may have greater capital appreciation potential through the use of the AlphaDEX(TM) screening methodology. Alpha is a measure of the portion of a return arising from non-market risk. Accordingly, alpha is an indication of how much an investment outperforms or underperforms relative to its benchmark. The initial divisor was created to set a benchmark value of 1000.00 on July 3, 2003. The Health Care Index was created and trademarked by the AMEX on April 11, 2007. As of April 11, 2007, the Russell 1000(R) Index consisted of 974 stocks and the Health Care Index consisted of 73 stocks. The Health Care Index is constructed by the AMEX in the following manner: 1. Begin with the universe of stocks in the Russell 1000(R) Index. -20- 2a.The AMEX ranks all stocks in the above universe using the following growth and value factors: three, six and 12-month price appreciation, sales to price and one year sales growth (growth factors) and book value to price, cash flow to price and return on assets (value factors). All stocks are ranked on the sum of ranks for the growth factors and, separately, all stocks are ranked on the sum of ranks for the value factors. 2b.For stocks Russell has classified solely as growth or value, the stock receives the rank for that style from step 2a as its selection score. For stocks Russell allocates between growth and value, the stock receives the best rank from step 2a as its selection score. 3. AMEX then ranks those stocks contained in the health care sector (the members of the Russell 1000(R) Health Care Index) according to their selection score from step 2b. The bottom 25% in such sector is eliminated. 4. The top 75% of the stocks contained in the health care sector is then split into quintiles based on their score from step 3. The top ranked quintile receives 5/15 (33.3%) of the portfolio weight with successive quintiles receiving 4/15 (26.7%), 3/15 (20.0%), 2/15 (13.3%) and 1/15 (6.7%), respectively. Stocks are equally weighted within each quintile. The Health Care Index is rebalanced and reconstituted on the last business day of each calendar quarter. Changes will be effective at the open on the fourth business day of the following month. Acquired companies are deleted at the close on the day the merger closes for both cash and stock deals. The acquired company's weight in the Health Care Index is reallocated pro-rata among the remaining index constituents. Spin-offs are not included in the Health Care Index. The value of the spin-off is reallocated to the parent company. See "Additional Index Information" for additional information regarding the Health Care Index. Principal Risks of Investing in the Fund Risk is inherent in all investing. The Health Care AlphaDEX(TM) Fund's Shares will change in value, and loss of money is a risk of investing in the Health Care AlphaDEX(TM) Fund. The Health Care AlphaDEX(TM) Fund may not achieve its objective. An investment in the Health Care AlphaDEX(TM) Fund is not a deposit with a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. An investment in the Health Care AlphaDEX(TM) Fund involves risks similar to those of investing in any fund of equity securities traded on an exchange. The following specific risk factors have been identified as the principal risks of investing in the Health Care AlphaDEX(TM) Fund. Market Risk. One of the principal risks of investing in the Health Care AlphaDEX(TM) Fund is market risk. Market risk is the risk that a particular stock owned by the Health Care AlphaDEX(TM) Fund, Health Care AlphaDEX(TM) Fund Shares or stocks in general may fall in value. Shares are subject to market fluctuations caused by such factors as economic, political, regulatory or market developments, changes in interest rates and perceived trends in stock prices. Overall stock values could decline generally or could underperform other investments. Index Tracking Risk. You should anticipate that the value of the Shares will decline, more or less, in correlation with any decline in the value of the Health Care Index. Non-Diversification Risk. Because the Health Care AlphaDEX(TM) Fund is non-diversified, the Health Care AlphaDEX(TM) Fund is exposed to additional market risk. A non-diversified fund may invest a relatively high percentage of -21- its assets in a limited number of issuers. Non-diversified funds are more susceptible to any single political, regulatory or economic occurrence and to the financial condition of individual issuers in which it invests. Non-Correlation Risk. The Health Care AlphaDEX(TM) Fund's return may not match the return of the Health Care Index for a number of reasons. For example, the Health Care AlphaDEX(TM) Fund incurs operating expenses not applicable to the Health Care Index, and may incur costs in buying and selling securities, especially when rebalancing the Health Care AlphaDEX(TM) Fund's portfolio holdings to reflect changes in the composition of the Health Care Index. In addition, the Health Care AlphaDEX(TM) Fund's portfolio holdings may not exactly replicate the securities included in the Health Care Index or the ratios between the securities included in the Health Care Index. The Health Care AlphaDEX(TM) Fund may not be fully invested at times, either as a result of cash flows into the Health Care AlphaDEX(TM) Fund or reserves of cash held by the Health Care AlphaDEX(TM) Fund to meet redemptions and expenses. If the Health Care AlphaDEX(TM) Fund utilizes a sampling approach or invests in futures or other derivative positions, its return may not correlate as well with the return of the Health Care Index, as would be the case if it purchased all of the stocks in the Health Care Index with the same weightings as the Health Care Index. While First Trust seeks to have a correlation of 0.95 or better, before expenses, between the Health Care AlphaDEX(TM) Fund's performance and the performance of the Health Care Index, there can be no assurance that the Health Care AlphaDEX(TM) Fund will be able to achieve such a correlation. Accordingly, the Health Care AlphaDEX(TM) Fund's performance may correlate to a lesser extent and may possibly vary substantially from the performance of the Health Care Index. Replication Management Risk. The Health Care AlphaDEX(TM) Fund is also exposed to additional market risk due to its policy of investing principally in the securities included in the Health Care Index. As a result of this policy, securities held by the Health Care Index will generally not be bought or sold in response to market fluctuations and the securities will be issued by companies concentrated in the health care sector. As a result of this policy, the Health Care AlphaDEX(TM) Fund would generally not sell a stock because the stock's issuer was in financial trouble, unless that stock is removed or is anticipated to be removed from the Health Care Index. Small-Cap and Mid-Cap Company Risk. The Health Care AlphaDEX(TM) Fund may invest in small-capitalization and mid-capitalization companies. Such companies may be more vulnerable to adverse general market or economic developments, and their securities may be less liquid and may experience greater price volatility than larger, more established companies as a result of several factors, including limited trading volumes, products or financial resources, management inexperience and less publicly available information. Accordingly, such companies are generally subject to greater market risk than larger, more established companies. Concentration Risk. The Health Care AlphaDEX(TM) Fund will be concentrated in the securities of the health care sector. A concentration makes the Health Care AlphaDEX(TM) Fund more susceptible to any single occurrence affecting the industry and may subject the Health Care AlphaDEX(TM) Fund to greater risk than more diversified funds. Health Care Sector Risk. The Health Care AlphaDEX(TM) Fund invests in the securities of companies in the health care sector. General problems of issuers in the health care sector include extensive competition, generic drug sales or the loss of patent protection, product liability litigation and increased government regulation. Research and development costs of bringing new drugs to market are substantial, and there is no guarantee that the product will ever come to market. Health care facility operators may be affected by the demand for services, efforts by government or insurers to limit rates, restriction of government financial assistance and competition from other providers. -22- Issuer Specific Changes Risk. The value of an individual security or particular type of security can be more volatile than the market as a whole and can perform differently from the value of the market as a whole. Intellectual Property Risk. The Health Care AlphaDEX(TM) Fund relies on a license and related sublicense that permits the Health Care AlphaDEX(TM) Fund to use its corresponding equity index and the associated trade names and trademarks ("Intellectual Property") in connection with the name and investment strategies of the Health Care AlphaDEX(TM) Fund. Such license and related sublicense may be terminated by the index provider and, as a result, the Health Care AlphaDEX(TM) Fund may lose its ability to use the Intellectual Property. There is also no guarantee that the index provider has all rights to license the Intellectual Property to FTP, on behalf of First Trust and the Health Care AlphaDEX(TM) Fund. Accordingly, in the event the license is terminated or the index provider does not have rights to license the Intellectual Property, it may have a significant effect on the operation of the Fund. See "Additional Risks of Investing in the Funds" for additional information regarding risks. -23- First Trust Industrials AlphaDEX(TM) Fund Investment Objective, Strategies and Risks Investment Objective The First Trust Industrials AlphaDEX(TM) Fund (the "Industrials AlphaDEX(TM) Fund") seeks investment results that correspond generally to the price and yield (before the Industrials AlphaDEX(TM) Fund's fees and expenses) of an equity index called the StrataQuant(TM) Industrials Index (Symbol: STRQIN) (the "Industrials Index"). Principal Investment Strategies The Industrials AlphaDEX(TM) Fund will normally invest at least 90% of its total assets in common stocks that comprise the Industrials Index. First Trust will seek investment results that correspond generally to the performance of the Industrials Index. The investment objective and the 90% investment strategy, both noted above, are non-fundamental and require 60 days' prior written notice to shareholders before they can be changed. As non-fundamental policies, such policies may be changed by the Board of Trustees without receiving shareholder approval. The Industrials AlphaDEX(TM) Fund, using an "indexing" investment approach, attempts to replicate, before expenses, the performance of the Industrials Index. First Trust seeks a correlation of 0.95 or better (before expenses) between the Industrials AlphaDEX(TM) Fund's performance and the performance of the Industrials Index; a figure of 1.00 would represent perfect correlation. First Trust will regularly monitor the Industrials AlphaDEX(TM) Fund's tracking accuracy and will use the investment techniques described below in seeking to maintain an appropriate correlation. In seeking to achieve the Industrials AlphaDEX(TM) Fund's investment objective, the Industrials AlphaDEX(TM) Fund generally will invest in all of the stocks comprising the Industrials Index in proportion to their weightings in the Industrials Index. However, under various circumstances, it may not be possible or practicable to purchase all of those stocks in those weightings. In those circumstances, the Industrials AlphaDEX(TM) Fund may purchase a sample of stocks in the Industrials Index. There may also be instances in which First Trust may choose to overweight certain stocks in the Industrials Index, purchase securities not in the Industrials Index which First Trust believes are appropriate to substitute for certain securities in the Industrials Index, use futures or other derivative instruments, or utilize various combinations of the above techniques in seeking to track the Industrials Index. The Industrials AlphaDEX(TM) Fund may sell stocks that are represented in the Industrials Index in anticipation of their removal from the Industrials Index or purchase stocks not represented in the Industrials Index in anticipation of their addition to the Industrials Index. Index Construction The Industrials Index is a modified equal-dollar weighted index designed by the AMEX to objectively identify and select stocks from the Russell 1000(R) Index that may have greater capital appreciation potential through the use of the AlphaDEX(TM) screening methodology. Alpha is a measure of the portion of a return arising from non-market risk. Accordingly, alpha is an indication of how much an investment outperforms or underperforms relative to its benchmark. The initial divisor was created to set a benchmark value of 1000.00 on July 3, 2003. The Industrials Index was created and trademarked by the AMEX on April 11, 2007. As of April 11, 2007, the Russell 1000(R) Index consisted of 974 stocks and the Industrials Index consisted of 49 stocks. The Industrials Index is constructed by the AMEX in the following manner: 1. Begin with the universe of stocks in the Russell 1000(R) Index. -24- 2a.The AMEX ranks all stocks in the above universe using the following growth and value factors: three, six and 12-month price appreciation, sales to price and one year sales growth (growth factors) and book value to price, cash flow to price and return on assets (value factors). All stocks are ranked on the sum of ranks for the growth factors and, separately, all stocks are ranked on the sum of ranks for the value factors. 2b.For stocks Russell has classified solely as growth or value, the stock receives the rank for that style from step 2a as its selection score. For stocks Russell allocates between growth and value, the stock receives the best rank from step 2a as its selection score. 3. AMEX then ranks those stocks contained in the industrials sector (the members of the Russell 1000(R) Producer Durables Index) according to their selection score from step 2b. The bottom 25% in such sector is eliminated. 4. The top 75% of the stocks contained in the industrials sector is then split into quintiles based on their score from step 3. The top ranked quintile receives 5/15 (33.3%) of the portfolio weight with successive quintiles receiving 4/15 (26.7%), 3/15 (20.0%), 2/15 (13.3%) and 1/15 (6.7%), respectively. Stocks are equally weighted within each quintile. The Industrials Index is rebalanced and reconstituted on the last business day of each calendar quarter. Changes will be effective at the open on the fourth business day of the following month. Acquired companies are deleted at the close on the day the merger closes for both cash and stock deals. The acquired company's weight in the Industrials Index is reallocated pro-rata among the remaining index constituents. Spin-offs are not included in the Industrials Index. The value of the spin-off is reallocated to the parent company. See "Additional Index Information" for additional information regarding the Industrials Index. Principal Risks of Investing in the Fund Risk is inherent in all investing. The Industrials AlphaDEX(TM) Fund's Shares will change in value, and loss of money is a risk of investing in the Industrials AlphaDEX(TM) Fund. The Industrials AlphaDEX(TM) Fund may not achieve its objective. An investment in the Industrials AlphaDEX(TM) Fund is not a deposit with a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. An investment in the Industrials AlphaDEX(TM) Fund involves risks similar to those of investing in any fund of equity securities traded on an exchange. The following specific risk factors have been identified as the principal risks of investing in the Industrials AlphaDEX(TM) Fund. Market Risk. One of the principal risks of investing in the Industrials AlphaDEX(TM) Fund is market risk. Market risk is the risk that a particular stock owned by the Industrials AlphaDEX(TM) Fund, Industrials AlphaDEX(TM) Fund Shares or stocks in general may fall in value. Shares are subject to market fluctuations caused by such factors as economic, political, regulatory or market developments, changes in interest rates and perceived trends in stock prices. Overall stock values could decline generally or could underperform other investments. Index Tracking Risk. You should anticipate that the value of the Shares will decline, more or less, in correlation with any decline in the value of the Industrials Index. Non-Diversification Risk. Because the Industrials AlphaDEX(TM) Fund is non-diversified, the Industrials AlphaDEX(TM) Fund is exposed to additional -25- market risk. A non-diversified fund may invest a relatively high percentage of its assets in a limited number of issuers. Non-diversified funds are more susceptible to any single political, regulatory or economic occurrence and to the financial condition of individual issuers in which it invests. Non-Correlation Risk. The Industrials AlphaDEX(TM) Fund's return may not match the return of the Industrials Index for a number of reasons. For example, the Industrials AlphaDEX(TM) Fund incurs operating expenses not applicable to the Industrials Index, and may incur costs in buying and selling securities, especially when rebalancing the Industrials AlphaDEX(TM) Fund's portfolio holdings to reflect changes in the composition of the Industrials Index. In addition, the Industrials AlphaDEX(TM) Fund's portfolio holdings may not exactly replicate the securities included in the Industrials Index or the ratios between the securities included in the Industrials Index. The Industrials AlphaDEX(TM) Fund may not be fully invested at times, either as a result of cash flows into the Industrials AlphaDEX(TM) Fund or reserves of cash held by the Industrials AlphaDEX(TM) Fund to meet redemptions and expenses. If the Industrials AlphaDEX(TM) Fund utilizes a sampling approach or invests in futures or other derivative positions, its return may not correlate as well with the return of the Industrials Index, as would be the case if it purchased all of the stocks in the Industrials Index with the same weightings as the Industrials Index. While First Trust seeks to have a correlation of 0.95 or better, before expenses, between the Industrials AlphaDEX(TM) Fund's performance and the performance of the Industrials Index, there can be no assurance that the Industrials AlphaDEX(TM) Fund will be able to achieve such a correlation. Accordingly, the Industrials AlphaDEX(TM) Fund's performance may correlate to a lesser extent and may possibly vary substantially from the performance of the Industrials Index. Replication Management Risk. The Industrials AlphaDEX(TM) Fund is also exposed to additional market risk due to its policy of investing principally in the securities included in the Industrials Index. As a result of this policy, securities held by the Industrials Index will generally not be bought or sold in response to market fluctuations and the securities will be issued by companies concentrated in the industrials sector. As a result of this policy, the Industrials AlphaDEX(TM) Fund would generally not sell a stock because the stock's issuer was in financial trouble, unless that stock is removed or is anticipated to be removed from the Industrials Index. Small-Cap and Mid-Cap Company Risk. The Industrials AlphaDEX(TM) Fund may invest in small-capitalization and mid-capitalization companies. Such companies may be more vulnerable to adverse general market or economic developments, and their securities may be less liquid and may experience greater price volatility than larger, more established companies as a result of several factors, including limited trading volumes, products or financial resources, management inexperience and less publicly available information. Accordingly, such companies are generally subject to greater market risk than larger, more established companies. Concentration Risk. The Industrials AlphaDEX(TM) Fund will be concentrated in the securities of the industrials sector. A concentration makes the Industrials AlphaDEX(TM) Fund more susceptible to any single occurrence affecting the industry and may subject the Industrials AlphaDEX(TM) Fund to greater risk than more diversified funds. Industrials Sector Risk. The Industrials AlphaDEX(TM) Fund invests in the securities of companies in the industrials sector. General risks of industrial companies include the general state of the economy, intense competition, consolidation, domestic and international politics, excess capacity and consumer spending trends. In addition, they may also be significantly affected by overall capital spending levels, economic cycles, technical obsolescence, delays in modernization, labor relations, government regulations and e-commerce initiatives. Industrial companies may also be affected by factors more specific to their individual industries. Industrial machinery manufacturers may be subject to -26- declines in consumer demand and the need for modernization. Aerospace and defense companies may be influenced by decreased demand for new equipment, aircraft order cancellations, changes in aircraft-leasing contracts and cutbacks in profitable business travel. Agricultural equipment businesses may be influenced by fluctuations in farm income, farm commodity prices, government subsidies and weather conditions. The number of housing starts, levels of public and non-residential construction including weakening demand for new office and retail space, and overall construction spending may adversely affect construction equipment manufacturers, while overproduction, consolidation and weakening global economies may lead to deteriorating sales for auto and truck makers and their suppliers. Issuer Specific Changes Risk. The value of an individual security or particular type of security can be more volatile than the market as a whole and can perform differently from the value of the market as a whole. Intellectual Property Risk. The Industrials AlphaDEX(TM) Fund relies on a license and related sublicense that permits the Industrials AlphaDEX(TM) Fund to use its corresponding equity index and the associated trade names and trademarks ("Intellectual Property") in connection with the name and investment strategies of the Industrials AlphaDEX(TM) Fund. Such license and related sublicense may be terminated by the index provider and, as a result, the Industrials AlphaDEX(TM) Fund may lose its ability to use the Intellectual Property. There is also no guarantee that the index provider has all rights to license the Intellectual Property to FTP, on behalf of First Trust and the Industrials AlphaDEX(TM) Fund. Accordingly, in the event the license is terminated or the index provider does not have rights to license the Intellectual Property, it may have a significant effect on the operation of the Industrials AlphaDEX(TM) Fund. See "Additional Risks of Investing in the Funds" for additional information regarding risks. -27- First Trust Materials AlphaDEX(TM) Fund Investment Objective, Strategies and Risks Investment Objective The First Trust Materials AlphaDEX(TM) Fund (the "Materials AlphaDEX(TM) Fund") seeks investment results that correspond generally to the price and yield (before the Materials AlphaDEX(TM) Fund's fees and expenses) of an equity index called the StrataQuant(TM) Materials Index (Symbol: STRQMT) (the "Materials Index"). Principal Investment Strategies The Materials AlphaDEX(TM) Fund will normally invest at least 90% of its total assets in common stocks that comprise the Materials Index. First Trust will seek investment results that correspond generally to the performance of the Materials Index. The investment objective and the 90% investment strategy, both noted above, are non-fundamental and require 60 days' prior written notice to shareholders before they can be changed. As non-fundamental policies, such policies may be changed by the Board of Trustees without receiving shareholder approval. The Materials AlphaDEX(TM) Fund, using an "indexing" investment approach, attempts to replicate, before expenses, the performance of the Materials Index. First Trust seeks a correlation of 0.95 or better (before expenses) between the Materials AlphaDEX(TM) Fund's performance and the performance of the Materials Index; a figure of 1.00 would represent perfect correlation. First Trust will regularly monitor the Materials AlphaDEX(TM) Fund's tracking accuracy and will use the investment techniques described below in seeking to maintain an appropriate correlation. In seeking to achieve the Materials AlphaDEX(TM) Fund's investment objective, the Materials AlphaDEX(TM) Fund generally will invest in all of the stocks comprising the Materials Index in proportion to their weightings in the Materials Index. However, under various circumstances, it may not be possible or practicable to purchase all of those stocks in those weightings. In those circumstances, the Materials AlphaDEX(TM) Fund may purchase a sample of stocks in the Materials Index. There may also be instances in which First Trust may choose to overweight certain stocks in the Materials Index, purchase securities not in the Materials Index which First Trust believes are appropriate to substitute for certain securities in the Materials Index, use futures or other derivative instruments, or utilize various combinations of the above techniques in seeking to track the Materials Index. The Materials AlphaDEX(TM) Fund may sell stocks that are represented in the Materials Index in anticipation of their removal from the Materials Index or purchase stocks not represented in the Materials Index in anticipation of their addition to the Materials Index. Index Construction The Materials Index is a modified equal-dollar weighted index designed by the AMEX to objectively identify and select stocks from the Russell 1000(R) Index that may have greater capital appreciation potential through the use of the AlphaDEX(TM) screening methodology. Alpha is a measure of the portion of a return arising from non-market risk. Accordingly, alpha is an indication of how much an investment outperforms or underperforms relative to its benchmark. The initial divisor was created to set a benchmark value of 1000.00 on July 3, 2003. The Materials Index was created and trademarked by the AMEX on April 11, 2007. As of April 11, 2007, the Russell 1000(R) Index consisted of 974 stocks and the Materials Index consisted of 60 stocks. The Materials Index is constructed by the AMEX in the following manner: 1. Begin with the universe of stocks in the Russell 1000(R) Index. -28- 2a.The AMEX ranks all stocks in the above universe using the following growth and value factors: three, six and 12-month price appreciation, sales to price and one year sales growth (growth factors) and book value to price, cash flow to price and return on assets (value factors). All stocks are ranked on the sum of ranks for the growth factors and, separately, all stocks are ranked on the sum of ranks for the value factors. 2b.For stocks Russell has classified solely as growth or value, the stock receives the rank for that style from step 2a as its selection score. For stocks Russell allocates between growth and value, the stock receives the best rank from step 2a as its selection score. 3. AMEX then ranks those stocks contained in the materials sector (the members of the Russell 1000(R) Materials and Processing Index) according to their selection score from step 2b. The bottom 25% in such sector is eliminated. 4. The top 75% of the stocks contained in the materials sector is then split into quintiles based on their score from step 3. The top ranked quintile receives 5/15 (33.3%) of the portfolio weight with successive quintiles receiving 4/15 (26.7%), 3/15 (20.0%), 2/15 (13.3%) and 1/15 (6.7%), respectively. Stocks are equally weighted within each quintile. The Materials Index is rebalanced and reconstituted on the last business day of each calendar quarter. Changes will be effective at the open on the fourth business day of the following month. Acquired companies are deleted at the close on the day the merger closes for both cash and stock deals. The acquired company's weight in the Materials Index is reallocated pro-rata among the remaining index constituents. Spin-offs are not included in the Materials Index. The value of the spin-off is reallocated to the parent company. See "Additional Index Information" for additional information regarding the Materials Index. Principal Risks of Investing in the Fund Risk is inherent in all investing. The Materials AlphaDEX(TM) Fund's Shares will change in value, and loss of money is a risk by investing in the Materials AlphaDEX(TM) Fund. The Materials AlphaDEX(TM) Fund may not achieve its objective. An investment in the Materials AlphaDEX(TM) Fund is not a deposit with a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. An investment in the Materials AlphaDEX(TM) Fund involves risks similar to those of investing in any fund of equity securities traded on an exchange. The following specific risk factors have been identified as the principal risks of investing in the Materials AlphaDEX(TM) Fund. Market Risk. One of the principal risks of investing in the Materials AlphaDEX(TM) Fund is market risk. Market risk is the risk that a particular stock owned by the Materials AlphaDEX(TM) Fund, Materials AlphaDEX(TM) Fund Shares or stocks in general may fall in value. Shares are subject to market fluctuations caused by such factors as economic, political, regulatory or market developments, changes in interest rates and perceived trends in stock prices. Overall stock values could decline generally or could underperform other investments. Index Tracking Risk. You should anticipate that the value of the Shares will decline, more or less, in correlation with any decline in the value of the Materials Index. Non-Diversification Risk. Because the Materials AlphaDEX(TM) Fund is non-diversified, the Materials AlphaDEX(TM) Fund is exposed to additional market risk. A non-diversified fund may invest a relatively high percentage of its assets in a limited number of issuers. Non-diversified funds are more susceptible to any single political, regulatory or economic occurrence and to the financial condition of individual issuers in which it invests. -29- Non-Correlation Risk. The Materials AlphaDEX(TM) Fund's return may not match the return of the Materials Index for a number of reasons. For example, the Materials AlphaDEX(TM) Fund incurs operating expenses not applicable to the Materials Index, and may incur costs in buying and selling securities, especially when rebalancing the Materials AlphaDEX(TM) Fund's portfolios holdings to reflect changes in the composition of the Materials Index. In addition, the Materials AlphaDEX(TM) Fund's portfolio holdings may not exactly replicate the securities included in the Materials Index or the ratios between the securities included in the Materials Index. The Materials AlphaDEX(TM) Fund may not be fully invested at times, either as a result of cash flows into the Materials AlphaDEX(TM) Fund or reserves of cash held by the Materials AlphaDEX(TM) Fund to meet redemptions and expenses. If the Materials AlphaDEX(TM) Fund utilizes a sampling approach or invests in futures or other derivative positions, its return may not correlate as well with the return of the Materials Index, as would be the case if it purchased all of the stocks in the Materials Index with the same weightings as the Materials Index. While First Trust seeks to have a correlation of 0.95 or better, before expenses, between the Materials AlphaDEX(TM) Fund's performance and the performance of the Materials Index, there can be no assurance that the Materials AlphaDEX(TM) Fund will be able to achieve such a correlation. Accordingly, the Materials AlphaDEX(TM) Fund's performance may correlate to a lesser extent and may possibly vary substantially from the performance of the Materials Index. Replication Management Risk. The Materials AlphaDEX(TM) Fund is also exposed to additional market risk due to its policy of investing principally in the securities included in the Materials Index. As a result of this policy, securities held by the Materials Index will generally not be bought or sold in response to market fluctuations and the securities will be issued by companies concentrated in the materials sector. As a result of this policy, the Materials AlphaDEX(TM) Fund would generally not sell a stock because the stock's issuer was in financial trouble, unless that stock is removed or is anticipated to be removed from the Materials Index. Small-Cap and Mid-Cap Company Risk. The Materials AlphaDEX(TM) Fund may invest in small-capitalization and mid-capitalization companies. Such companies may be more vulnerable to adverse general market or economic developments, and their securities may be less liquid and may experience greater price volatility than larger, more established companies as a result of several factors, including limited trading volumes, products or financial resources, management inexperience and less publicly available information. Accordingly, such companies are generally subject to greater market risk than larger, more established companies. Concentration Risk. The Materials AlphaDEX(TM) Fund will be concentrated in the securities of the materials sector. A concentration makes the Materials AlphaDEX(TM) Fund more susceptible to any single occurrence affecting the industry and may subject the Materials AlphaDEX(TM) Fund to greater risk than more diversified funds. Materials Sector Risk. The Materials AlphaDEX(TM) Fund invests in the securities of companies in the materials sector. General risks of the materials sector include the general state of the economy, consolidation, domestic and international politics and excess capacity. In addition, materials companies may also be significantly affected by volatility of commodity prices, import controls, worldwide competition, liability for environmental damage, depletion of resources, and mandated expenditures for safety and pollution control devices. Issuer Specific Changes Risk. The value of an individual security or particular type of security can be more volatile than the market as a whole and can perform differently from the value of the market as a whole. Intellectual Property Risk. The Materials AlphaDEX(TM) Fund relies on a license and related sublicense that permits the Materials AlphaDEX(TM) Fund to use its corresponding equity index and the associated trade names and trademarks -30- ("Intellectual Property") in connection with the name and investment strategies of the Materials AlphaDEX(TM) Fund. Such license and related sublicense may be terminated by the index provider and, as a result, the Materials AlphaDEX(TM) Fund may lose its ability to use the Intellectual Property. There is also no guarantee that the index provider has all rights to license the Intellectual Property to FTP, on behalf of First Trust and the Materials AlphaDEX(TM) Fund. Accordingly, in the event the license is terminated or the index provider does not have rights to license the Intellectual Property, it may have a significant effect on the operation of the Materials AlphaDEX(TM) Fund. See "Additional Risks of Investing in the Funds" for additional information regarding risks. -31- First Trust Technology AlphaDEX(TM) Fund Investment Objective, Strategies and Risks Investment Objective The First Trust Technology AlphaDEX(TM) Fund (the "Technology AlphaDEX(TM) Fund") seeks investment results that correspond generally to the price and yield (before the Technology AlphaDEX(TM) Fund's fees and expenses) of an equity index called the StrataQuant(TM) Technology Index (Symbol: STRQTC) (the "Technology Index"). Principal Investment Strategies The Technology AlphaDEX(TM) Fund will normally invest at least 90% of its total assets in common stocks that comprise the Technology Index. First Trust will seek investment results that correspond generally to the performance of the Technology Index. The investment objective and the 90% investment strategy, both noted above, are non-fundamental and require 60 days' prior written notice to shareholders before they can be changed. As non-fundamental policies, such policies may be changed by the Board of Trustees without receiving shareholder approval. The Technology AlphaDEX(TM) Fund, using an "indexing" investment approach, attempts to replicate, before expenses, the performance of the Technology Index. First Trust seeks a correlation of 0.95 or better (before expenses) between the Technology AlphaDEX(TM) Fund's performance and the performance of the Technology Index; a figure of 1.00 would represent perfect correlation. First Trust will regularly monitor the Technology AlphaDEX(TM) Fund's tracking accuracy and will use the investment techniques described below in seeking to maintain an appropriate correlation. In seeking to achieve the Technology AlphaDEX(TM) Fund's investment objective, the Technology AlphaDEX(TM) Fund generally will invest in all of the stocks comprising the Technology Index in proportion to their weightings in the Technology Index. However, under various circumstances, it may not be possible or practicable to purchase all of those stocks in those weightings. In those circumstances, the Technology AlphaDEX(TM) Fund may purchase a sample of stocks in the Technology Index. There may also be instances in which First Trust may choose to overweight certain stocks in the Technology Index, purchase securities not in the Technology Index which First Trust believes are appropriate to substitute for certain securities in the Technology Index, use futures or other derivative instruments, or utilize various combinations of the above techniques in seeking to track the Technology Index. The Technology AlphaDEX(TM) Fund may sell stocks that are represented in the Technology Index in anticipation of their removal from the Technology Index or purchase stocks not represented in the Technology Index in anticipation of their addition to the Technology Index. Index Construction The Technology Index is a modified equal-dollar weighted index designed by the AMEX to objectively identify and select stocks from the Russell 1000(R) Index that may have greater capital appreciation potential through the use of the AlphaDEX(TM) screening methodology. Alpha is a measure of the portion of a return arising from non-market risk. Accordingly, alpha is an indication of how much an investment outperforms or underperforms relative to its benchmark. The initial divisor was created to set a benchmark value of 1000.00 on July 3, 2003. The Technology Index was created and trademarked by the AMEX on April 11, 2007. As of April 11, 2007, the Russell 1000(R) Index consisted of 974 stocks and the Technology Index consisted of 73 stocks. The Technology Index is constructed by the AMEX in the following manner: 1. Begin with the universe of stocks in the Russell 1000(R) Index. -32- 2a.The AMEX ranks all stocks in the above universe using the following growth and value factors: three, six and 12-month price appreciation, sales to price and one year sales growth (growth factors) and book value to price, cash flow to price and return on assets (value factors). All stocks are ranked on the sum of ranks for the growth factors and, separately, all stocks are ranked on the sum of ranks for the value factors. 2b.For stocks Russell has classified solely as growth or value, the stock receives the rank for that style from step 2a as its selection score. For stocks Russell allocates between growth and value, the stock receives the best rank from step 2a as its selection score. 3. AMEX then ranks those stocks contained in the technology sector (the members of the Russell 1000(R) Technology Index) according to their selection score from step 2b. The bottom 25% in such sector is eliminated. 4. The top 75% of the stocks contained in the technology sector is then split into quintiles based on their score from step 3. The top ranked quintile receives 5/15 (33.3%) of the portfolio weight with successive quintiles receiving 4/15 (26.7%), 3/15 (20.0%), 2/15 (13.3%) and 1/15 (6.7%), respectively. Stocks are equally weighted within each quintile. The Technology Index is rebalanced and reconstituted on the last business day of each calendar quarter. Changes will be effective at the open on the fourth business day of the following month. Acquired companies are deleted at the close on the day the merger closes for both cash and stock deals. The acquired company's weight in the Technology Index is reallocated pro-rata among the remaining index constituents. Spin-offs are not included in the Technology Index. The value of the spin-off is reallocated to the parent company. See "Additional Index Information" for additional information regarding the Technology Index. Principal Risks of Investing in the Fund Risk is inherent in all investing. The Technology AlphaDEX(TM) Fund's Shares will change in value, and loss of money is a risk of investing in the Technology AlphaDEX(TM) Fund. The Technology AlphaDEX(TM) Fund may not achieve its objective. An investment in the Technology AlphaDEX(TM) Fund is not a deposit with a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. An investment in the Technology AlphaDEX(TM) Fund involves risks similar to those of investing in any fund of equity securities traded on an exchange. The following specific risk factors have been identified as the principal risks of investing in the Technology AlphaDEX(TM) Fund. Market Risk. One of the principal risks of investing in the Technology AlphaDEX(TM) Fund is market risk. Market risk is the risk that a particular stock owned by the Technology AlphaDEX(TM) Fund, Technology AlphaDEX(TM) Fund Shares or stocks in general may fall in value. Shares are subject to market fluctuations caused by such factors as economic, political, regulatory or market developments, changes in interest rates and perceived trends in stock prices. Overall stock values could decline generally or could underperform other investments. Index Tracking Risk. You should anticipate that the value of the Shares will decline, more or less, in correlation with any decline in the value of the Technology Index. Non-Diversification Risk. Because the Technology AlphaDEX(TM) Fund is non-diversified, the Technology AlphaDEX(TM) Fund is exposed to additional market risk. A non-diversified fund may invest a relatively high percentage of its assets in a limited number of issuers. Non-diversified funds are more -33- susceptible to any single political, regulatory or economic occurrence and to the financial condition of individual issuers in which it invests. Non-Correlation Risk. The Technology AlphaDEX(TM) Fund's return may not match the return of the Technology Index for a number of reasons. For example, the Technology AlphaDEX(TM) Fund incurs operating expenses not applicable to the Technology Index, and may incur costs in buying and selling securities, especially when rebalancing the Technology AlphaDEX(TM) Fund's portfolio holdings to reflect changes in the composition of the Technology Index. In addition, the Technology AlphaDEX(TM) Fund's portfolio holdings may not exactly replicate the securities included in the Technology Index or the ratios between the securities included in the Technology Index. The Technology AlphaDEX(TM) Fund may not be fully invested at times, either as a result of cash flows into the Technology AlphaDEX(TM) Fund or reserves of cash held by the Technology AlphaDEX(TM) Fund to meet redemptions and expenses. If the Technology AlphaDEX(TM) Fund utilizes a sampling approach or invests in futures or other derivative positions, its return may not correlate as well with the return of the Technology Index, as would be the case if it purchased all of the stocks in the Technology Index with the same weightings as the Technology Index. While First Trust seeks to have a correlation of 0.95 or better, before expenses, between the Technology AlphaDEX(TM) Fund's performance and the performance of the Technology Index, there can be no assurance that the Technology AlphaDEX(TM) Fund will be able to achieve such a correlation. Accordingly, the Technology AlphaDEX(TM) Fund's performance may correlate to a lesser extent and may possibly vary substantially from the performance of the Technology Index. Replication Management Risk. The Technology AlphaDEX(TM) Fund is also exposed to additional market risk due to its policy of investing principally in the securities included in the Technology Index. As a result of this policy, securities held by the Technology Index will generally not be bought or sold in response to market fluctuations and the securities will be issued by companies concentrated in the technology sector. As a result of this policy, the Technology AlphaDEX(TM) Fund would generally not sell a stock because the stock's issuer was in financial trouble, unless that stock is removed or is anticipated to be removed from the Technology Index. Small-Cap and Mid-Cap Company Risk. The Technology AlphaDEX(TM) Fund may invest in small-capitalization and mid-capitalization companies. Such companies may be more vulnerable to adverse general market or economic developments, and their securities may be less liquid and may experience greater price volatility than larger, more established companies as a result of several factors, including limited trading volumes, products or financial resources, management inexperience and less publicly available information. Accordingly, such companies are generally subject to greater market risk than larger, more established companies. Concentration Risk. The Technology AlphaDEX(TM) Fund will be concentrated in the securities of the technology sector. A concentration makes the Technology AlphaDEX(TM) Fund more susceptible to any single occurrence affecting the industry and may subject the Technology AlphaDEX(TM) Fund to greater risk than more diversified funds. Technology Sector Risk. The Technology AlphaDEX(TM) Fund invests in the securities of companies in the technology sector. Companies involved in the technology sector must contend with the risks of rapidly changing technologies, short product life cycles, fierce competition, aggressive pricing and reduced profit margins, loss of patent, copyright and trademark protections, cyclical market patterns, evolving industry standards, and frequent new product introductions. Technology companies may be smaller and less experienced companies, with limited product lines, markets or financial resources and fewer experienced management or marketing personnel. Technology company stocks, particularly those involved with the Internet, have experienced extreme price and volume fluctuations that often have been unrelated to their operating performance. Also, the stocks of many technology companies have exceptionally high price-to-earning ratios with little or no earnings histories. -34- Issuer Specific Changes Risk. The value of an individual security or particular type of security can be more volatile than the market as a whole and can perform differently from the value of the market as a whole. Intellectual Property Risk. The Fund relies on a license and related sublicense that permits the Technology AlphaDEX(TM) Fund to use its corresponding equity index and the associated trade names and trademarks ("Intellectual Property") in connection with the name and investment strategies of the Technology AlphaDEX(TM) Fund. Such license and related sublicense may be terminated by the index provider and, as a result, the Technology AlphaDEX(TM) Fund may lose its ability to use the Intellectual Property. There is also no guarantee that the index provider has all rights to license the Intellectual Property to FTP, on behalf of First Trust and the Technology AlphaDEX(TM) Fund. Accordingly, in the event the license is terminated or the index provider does not have rights to license the Intellectual Property, it may have a significant effect on the operation of the Technology AlphaDEX(TM) Fund. See "Additional Risks of Investing in the Funds" for additional information regarding risks. -35- First Trust Utilities AlphaDEX(TM) Fund Investment Objective, Strategies and Risks Investment Objective The First Trust Utilities AlphaDEX(TM) Fund (the "Utilities AlphaDEX(TM) Fund") seeks investment results that correspond generally to the price and yield (before the Utilities AlphaDEX(TM) Fund's fees and expenses) of an equity index called the StrataQuant(TM) Utilities Index (Symbol: STRQUT) (the "Utilities Index"). Principal Investment Strategies The Utilities AlphaDEX(TM) Fund will normally invest at least 90% of its total assets in common stocks that comprise the Utilities Index. First Trust will seek investment results that correspond generally to the performance of the Utilities Index. The investment objective and the 90% investment strategy, both noted above, are non-fundamental and require 60 days' prior written notice to shareholders before they can be changed. As non-fundamental policies, such policies may be changed by the Board of Trustees without receiving shareholder approval. The Utilities AlphaDEX(TM) Fund, using an "indexing" investment approach, attempts to replicate, before expenses, the performance of the Utilities Index. First Trust seeks a correlation of 0.95 or better (before expenses) between the Utilities AlphaDEX(TM) Fund's performance and the performance of the Utilities Index; a figure of 1.00 would represent perfect correlation. First Trust will regularly monitor the Utilities AlphaDEX(TM) Fund's tracking accuracy and will use the investment techniques described below in seeking to maintain an appropriate correlation. In seeking to achieve the Utilities AlphaDEX(TM) Fund's investment objective, the Utilities AlphaDEX(TM) Fund generally will invest in all of the stocks comprising the Utilities Index in proportion to their weightings in the Utilities Index. However, under various circumstances, it may not be possible or practicable to purchase all of those stocks in those weightings. In those circumstances, the Utilities AlphaDEX(TM) Fund may purchase a sample of stocks in the Utilities Index. There may also be instances in which First Trust may choose to overweight certain stocks in the Utilities Index, purchase securities not in the Utilities Index which First Trust believes are appropriate to substitute for certain securities in the Utilities Index, use futures or other derivative instruments, or utilize various combinations of the above techniques in seeking to track the Utilities Index. The Utilities AlphaDEX(TM) Fund may sell stocks that are represented in the Utilities Index in anticipation of their removal from the Utilities Index or purchase stocks not represented in the Utilities Index in anticipation of their addition to the Utilities Index. Index Construction The Utilities Index is a modified equal-dollar weighted index designed by the AMEX to objectively identify and select stocks from the Russell 1000(R) Index that may have greater capital appreciation potential through the use of the AlphaDEX(TM) screening methodology. Alpha is a measure of the portion of a return arising from non-market risk. Accordingly, alpha is an indication of how much an investment outperforms or underperforms relative to its benchmark. The initial divisor was created to set a benchmark value of 1000.00 on July 3, 2003. The Utilities Index was created and trademarked by the AMEX on April 11, 2007. As of April 11, 2007, the Russell 1000(R) Index consisted of 974 stocks and the Utilities Index consisted of 55 stocks. The Utilities Index is constructed by the AMEX in the following manner: 1. Begin with the universe of stocks in the Russell 1000(R) Index. -36- 2a.The AMEX ranks all stocks in the above universe using the following growth and value factors: three, six and 12-month price appreciation, sales to price and one year sales growth (growth factors) and book value to price, cash flow to price and return on assets (value factors). All stocks are ranked on the sum of ranks for the growth factors and, separately, all stocks are ranked on the sum of ranks for the value factors. 2b.For stocks Russell has classified solely as growth or value, the stock receives the rank for that style from step 2a as its selection score. For stocks Russell allocates between growth and value, the stock receives the best rank from step 2a as its selection score. 3. AMEX then ranks those stocks contained in the utilities sector (the members of the Russell 1000(R) Utilities Index) according to their selection score from step 2b. The bottom 25% in such sector is eliminated. 4. The top 75% of the stocks contained in the utilities sector is then split into quintiles based on their score from step 3. The top ranked quintile receives 5/15 (33.3%) of the portfolio weight with successive quintiles receiving 4/15 (26.7%), 3/15 (20.0%), 2/15 (13.3%) and 1/15 (6.7%), respectively. Stocks are equally weighted within each quintile. The Utilities Index is rebalanced and reconstituted on the last business day of each calendar quarter. Changes will be effective at the open on the fourth business day of the following month. Acquired companies are deleted at the close on the day the merger closes for both cash and stock deals. The acquired company's weight in the Utilities Index is reallocated pro-rata among the remaining index constituents. Spin-offs are not included in the Utilities Index. The value of the spin-off is reallocated to the parent company. See "Additional Index Information" for additional information regarding the Utilities Index. Principal Risks of Investing in the Fund Risk is inherent in all investing. The Utilities AlphaDEX(TM) Fund's Shares will change in value, and loss of money is a risk of investing in the Utilities AlphaDEX(TM) Fund. The Utilities AlphaDEX(TM) Fund may not achieve its objective. An investment in the Utilities AlphaDEX(TM) Fund is not a deposit with a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. An investment in the Utilities AlphaDEX(TM) Fund involves risks similar to those of investing in any fund of equity securities traded on an exchange. The following specific risk factors have been identified as the principal risks of investing in the Utilities AlphaDEX(TM) Fund. Market Risk. One of the principal risks of investing in the Utilities AlphaDEX(TM) Fund is market risk. Market risk is the risk that a particular stock owned by the Utilities AlphaDEX(TM) Fund, Utilities AlphaDEX(TM) Fund Shares or stocks in general may fall in value. Shares are subject to market fluctuations caused by such factors as economic, political, regulatory or market developments, changes in interest rates and perceived trends in stock prices. Overall stock values could decline generally or could underperform other investments. Index Tracking Risk. You should anticipate that the value of the Shares will decline, more or less, in correlation with any decline in the value of the Utilities Index. Non-Diversification Risk. Because the Utilities AlphaDEX(TM) Fund is non-diversified, the Utilities AlphaDEX(TM) Fund is exposed to additional market risk. A non-diversified fund may invest a relatively high percentage of its assets in a limited number of issuers. Non-diversified funds are more susceptible to any single political, regulatory or economic occurrence and to the financial condition of individual issuers in which it invests. -37- Non-Correlation Risk The Utilities AlphaDEX(TM) Fund's return may not match the return of the Utilities Index for a number of reasons. For example, the Utilities AlphaDEX(TM) Fund incurs operating expenses not applicable to the Utilities Index, and may incur costs in buying and selling securities, especially when rebalancing the Utilities AlphaDEX(TM) Fund's portfolio holdings to reflect changes in the composition of the Utilities Index. In addition, the Utilities AlphaDEX(TM) Fund's portfolio holdings may not exactly replicate the securities included in the Utilities Index or the ratios between the securities included in the Utilities Index. The Utilities AlphaDEX(TM) Fund may not be fully invested at times, either as a result of cash flows into the Utilities AlphaDEX(TM) Fund or reserves of cash held by the Utilities AlphaDEX(TM) Fund to meet redemptions and expenses. If the Utilities AlphaDEX(TM) Fund utilizes a sampling approach or invests in futures or other derivative positions, its return may not correlate as well with the return of the Utilities Index, as would be the case if it purchased all of the stocks in the Utilities Index with the same weightings as the Utilities Index. While First Trust seeks to have a correlation of 0.95 or better, before expenses, between the Utilities AlphaDEX(TM) Fund's performance and the performance of the Utilities Index, there can be no assurance that the Utilities AlphaDEX(TM) Fund will be able to achieve such a correlation. Accordingly, the Utilities AlphaDEX(TM) Fund's performance may correlate to a lesser extent and may possibly vary substantially from the performance of the Utilities Index. Replication Management Risk. The Utilities AlphaDEX(TM) Fund is also exposed to additional market risk due to its policy of investing principally in the securities included in the Utilities Index. As a result of this policy, securities held by the Utilities Index will generally not be bought or sold in response to market fluctuations and the securities will be issued by companies concentrated in the utilities sector. As a result of this policy, the Utilities AlphaDEX(TM) Fund would generally not sell a stock because the stock's issuer was in financial trouble, unless that stock is removed or is anticipated to be removed from the Utilities Index. Small-Cap and Mid-Cap Company Risk. The Utilities AlphaDEX(TM) Fund may invest in small-capitalization and mid-capitalization companies. Such companies may be more vulnerable to adverse general market or economic developments, and their securities may be less liquid and may experience greater price volatility than larger, more established companies as a result of several factors, including limited trading volumes, products or financial resources, management inexperience and less publicly available information. Accordingly, such companies are generally subject to greater market risk than larger, more established companies. Concentration Risk. The Utilities AlphaDEX(TM) Fund will be concentrated in the securities of the utilities sector. A concentration makes the Utilities AlphaDEX(TM) Fund more susceptible to any single occurrence affecting the industry and may subject the Utilities AlphaDEX(TM) Fund to greater risk than more diversified funds. Utilities Sector Risk. The Utilities AlphaDEX(TM) Fund invests in the securities of companies in the utilities sector. General problems of issuers in the utilities sector include the imposition of rate caps, increased competition due to deregulation, the difficulty in obtaining an adequate return on invested capital or in financing large construction projects, the limitations on operations and increased costs and delays attributable to environmental considerations, and the capital market's ability to absorb utility debt. In addition, taxes, government regulation, international politics, price and supply fluctuations, volatile interest rates and energy conservation may cause difficulties for utilities. All of such issuers have been experiencing certain of these problems in varying degrees. Issuer Specific Changes Risk. The value of an individual security or particular type of security can be more volatile than the market as a whole and can perform differently from the value of the market as a whole. -38- Intellectual Property Risk. The Utilities AlphaDEX(TM) Fund relies on a license and related sublicense that permits the Utilities AlphaDEX(TM) Fund to use its corresponding equity index and the associated trade names and trademarks ("Intellectual Property") in connection with the name and investment strategies of the Utilities AlphaDEX(TM) Fund. Such license and related sublicense may be terminated by the index provider and, as a result, the Utilities AlphaDEX(TM) Fund may lose its ability to use the Intellectual Property. There is also no guarantee that the index provider has all rights to license the Intellectual Property to FTP, on behalf of First Trust and the Utilities AlphaDEX(TM) Fund. Accordingly, in the event the license is terminated or the index provider does not have rights to license the Intellectual Property, it may have a significant effect on the operation of the Utilities AlphaDEX(TM) Fund. See "Additional Risks of Investing in the Funds" for additional information regarding risks. -39- How the Funds Have Performed The Funds have not commenced operations and, therefore, do not have performance histories. What Are the Costs of Investing? This table describes the fees and expenses that you may pay if you buy and hold Shares of each of the Funds.(1)
First Trust First Trust Consumer Consumer First Trust First Trust First Trust First Trust First Trust First Trust First Trust DiscretionaryStaples Energy Financials Health Care Industrials Materials Technology Utilities AlphaDEX(TM) AlphaDEX(TM) AlphaDEX(TM) AlphaDEX(TM)AlphaDEX(TM) AlphaDEX(TM) AlphaDEX(TM)AlphaDEX(TM) AlphaDEX(TM) Fund Fund Fund Fund Fund Fund Fund Fund Fund Shareholder Transaction Expenses(2)(3) (Fees paid directly from your investments) None None None None None None None None None Annual Fund Operating Expenses(4) (Expenses that are deducted from the Fund's assets) Management Fees 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% Distribution and 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Service (12b-1) Fees(5) Other Expenses(1) 0.39% 0.39% 0.39% 0.39% 0.39% 0.39% 0.39% 0.39% 0.39% Total Annual Fund 0.89% 0.89% 0.89% 0.89% 0.89% 0.89% 0.89% 0.89% 0.89% Operating Expenses Fee Waivers and 0.19% 0.19% 0.19% 0.19% 0.19% 0.19% 0.19% 0.19% 0.19% Expense Reimbursement(6) Net Annual Fund 0.70% 0.70% 0.70% 0.70% 0.70% 0.70% 0.70% 0.70% 0.70% Operating Expenses
- ----------------------------------------------------------------------------- (1)The Funds have not commenced operations as of the date of this Prospectus. The "Other Expenses" listed in the table are estimates based on the expenses the Funds expect to incur for the current fiscal year. (2)When buying or selling exchange-traded Shares through a broker, you will incur customary brokerage commissions. (3)Purchasers of Creation Units and parties redeeming Creation Units must pay a standard creation or redemption transaction fee of $500, as applicable. However, if a Creation Unit is purchased or redeemed outside the usual process through the National Securities Clearing Corporation or for cash, a variable fee of up to four times the standard creation or redemption transaction fee (i.e., up to $2,000) will be charged. See "Creation Transaction Fees and Redemption Transaction Fees" below. (4)Expressed as a percentage of average daily net assets. (5)The Funds have adopted a distribution and service (12b-1) plan pursuant to which each Fund may bear a 12b-1 fee not to exceed 0.25% per annum of such Fund's average daily net assets. However, no such fee is currently paid by the Funds and the Funds do not currently anticipate paying 12b-1 fees. (6)First Trust has agreed to waive fees and/or pay each Fund's expenses to the extent necessary to prevent the operating expenses of each Fund (excluding interest expense, brokerage commissions and other trading expenses, taxes, and extraordinary expenses) from exceeding 0.70% of average net assets per year (the "Expense Cap"), at least until two years after the initial public issuance of Fund Shares. Expenses borne by First Trust are subject to reimbursement by each Fund up to three years from the date the fee or expense was incurred, but no reimbursement payment will be made by a Fund at any time if it would result in such Fund's expenses exceeding 0.70% of average daily net assets per year. -40- Example This example is intended to help you compare the cost of investing in the Funds with the cost of investing in other funds. This example does not take into account customary brokerage commissions that you pay when purchasing or selling Shares of the Funds. The example assumes that you invest $10,000 in a Fund for the time periods indicated and then you retain the Shares or sell all of your Shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund's operating expenses remain the same. Although your actual costs may be higher or lower, your costs, based on these assumptions, would be: 1 Year 3 Years $72 $245 Creation Transaction Fees and Redemption Transaction Fees The Funds normally issue and redeem Shares at NAV only in large blocks of 50,000 Shares (each block of 50,000 Shares called a "Creation Unit") or multiples thereof. As a practical matter, only broker-dealers or large institutional investors that have entered into authorized participant agreements with respect to purchases and redemptions of Creation Units, called "Authorized Participants" ("APs"), can purchase or redeem these Creation Units. Purchasers of Creation Units at NAV must pay a standard Creation Transaction Fee of $500 per transaction (regardless of the number of Creation Units involved). Normally, the value of a Creation Unit as of the first creation of such Creation Unit was approximately $1,000,000. An AP who holds Creation Units and wishes to redeem at NAV would also pay a standard Redemption Transaction Fee (as defined below) of $500 for each redemption transaction (regardless of the number of Creation Units involved). See "Creations, Redemptions and Transaction Fees" later in the Prospectus. APs who hold Creation Units in inventory will also indirectly pay Fund expenses. Assuming an investment in a Creation Unit of $1,000,000 and a 5% return each year, assuming that a Fund's operating expenses remain the same, and assuming brokerage costs are not included, the total costs would be $8,151 if the Creation Unit is redeemed after one year and $25,489 if the Creation Unit is redeemed after three years. If a Creation Unit is purchased or redeemed outside the usual process through the National Securities Clearing Corporation or for cash, a variable fee of up to four times the standard Creation or Redemption Transaction Fee (i.e., up to $2,000) may be charged to the AP making the transaction. The Creation Transaction Fee (as defined below), Redemption Transaction Fee and variable fee are not expenses of a Fund and do not impact a Fund's expense ratio. Additional Investment Strategies The investment objective of each Fund is a fundamental policy that may be changed only with shareholder approval. Each of the other policies described herein is a non-fundamental policy that may be changed by the Board of Trustees of the Trust without shareholder approval. Certain other fundamental policies of the Funds are set forth in the Statement of Additional Information ("SAI") under "Investment Objective and Policies." Equity Securities The Funds invest primarily in equity securities of U.S. issuers. Eligible equity securities include common stocks and warrants to purchase common stocks. In addition, the Funds may invest in equity securities of non-U.S. issuers listed on any national exchange, including depositary receipts that represent non-U.S. common stocks deposited with a custodian. -41- Short-Term Investments The Funds may invest in cash equivalents or other short-term investments, including U.S. government securities, commercial paper, repurchase agreements, money-market funds or similar fixed-income securities with remaining maturities of one year or less. For more information on short-term investments, see the SAI. Futures and Options The Funds may use various investment strategies designed to hedge against changes in the values of securities the Funds own or expect to purchase or to hedge against interest rate or currency exchange rate changes. The securities used to implement these strategies include financial futures contracts, options, forward contracts, options on financial futures and stock index options. Delayed Delivery Securities The Funds may buy or sell securities on a when-issued or delayed-delivery basis, paying for or taking delivery of the securities at a later date, normally within 15 to 45 days of the trade. Such transactions involve an element of risk because the value of the securities to be purchased may decline before the settlement date. Disclosure of Portfolio Holdings A description of the policies and procedures with respect to the disclosure of each Fund's portfolio securities is included in the Funds' SAI. Additional Risks of Investing in the Funds Risk is inherent in all investing. Investing in the Funds involves risk, including the risk that you may lose all or part of your investment. There can be no assurance that the Funds will meet their stated objectives. Before you invest, you should consider the following risks. Trading Issues Trading in Shares on the AMEX may be halted due to market conditions or for reasons that, in the view of the AMEX, make trading in Shares inadvisable. In addition, trading in Shares on the AMEX is subject to trading halts caused by extraordinary market volatility pursuant to the AMEX "circuit breaker" rules. There can be no assurance that the requirements of the AMEX necessary to maintain the listing of the Funds will continue to be met or will remain unchanged. Fluctuation of Net Asset Value The net asset value of a Fund's Shares will generally fluctuate with changes in the market value of the Fund's holdings. The market prices of Shares will generally fluctuate in accordance with changes in net asset value as well as the relative supply of and demand for Shares on the AMEX. First Trust cannot predict whether Shares will trade below, at or above their net asset value. Price differences may be due, in large part, to the fact that supply and demand forces at work in the secondary trading market for Shares will be closely related to, but not identical to, the same forces influencing the prices of the stocks of the Funds trading individually or in the aggregate at any point in time. However, given that Shares can be purchased and redeemed in Creation Units (unlike shares of many closed-end funds, which frequently trade at appreciable discounts from, and sometimes at premiums to, their net asset value), First Trust believes that large discounts or premiums to the net asset value of Shares should not be sustained. -42- Inflation Inflation risk is the risk that the value of assets or income from investments will be less in the future as inflation decreases the value of money. As inflation increases, the value of a Fund's assets can decline as can the value of a Fund's distributions. Common stock prices may be particularly sensitive to rising interest rates, as the cost of capital rises and borrowing costs increase. Non-U.S. Investment The Funds may invest in non-U.S. securities publicly traded in the United States. Securities issued by non-U.S. companies present risks beyond those of securities of U.S. issuers. Risks of investing in non-U.S. securities include: different accounting standards; expropriation, nationalization or other adverse political or economic developments; currency devaluation, blockages or transfer restrictions; changes in non-U.S. currency exchange rates; taxes; restrictions on non-U.S. investments and exchange of securities; and less government supervision and regulation of issuers in non-U.S. countries. Prices of non-U.S. securities also may be more volatile. Investment Strategy Each Fund is exposed to additional market risk due to its policy of investing principally in the securities included in each Fund's corresponding equity index in the StrataQuant(TM) Series. As a result of this policy, securities held by a Fund will generally not be bought or sold in response to market fluctuations. This policy may subject investors to greater market risk than other mutual funds. Fund Organization The Funds are series of the Trust, an investment company registered under the Investment Company Act of 1940, as amended (the "1940 Act"). Each Fund is treated as a separate fund with its own investment objective and policies. The Trust is organized as a Massachusetts business trust. Its Board of Trustees (the "Board") is responsible for its overall management and direction. The Board elects the Trust's officers and approves all significant agreements, including those with the investment adviser, custodian and fund administrative and accounting agent. Management of the Funds First Trust Advisors L.P. ("First Trust"), 1001 Warrenville Road, Lisle, Illinois 60532, is the investment adviser to the Funds. In this capacity, First Trust is responsible for the selection and ongoing monitoring of the securities in each Fund's portfolio and certain other services necessary for the management of the portfolios. First Trust is a limited partnership with one limited partner, Grace Partners of DuPage L.P., and one general partner, The Charger Corporation. Grace Partners of DuPage L.P. is a limited partnership with one general partner, The Charger Corporation, and a number of limited partners. The Charger Corporation is an Illinois corporation controlled by the Robert Donald Van Kampen family. First Trust discharges its responsibilities subject to the policies of the Board of Trustees of the Trust. First Trust serves as adviser or sub adviser for 22 mutual fund portfolios, 12 exchange-traded fund portfolios and 13 closed-end funds and is also the portfolio supervisor of certain unit investment trusts sponsored by FTP, 1001 Warrenville Road, Lisle, Illinois 60532. FTP specializes in the underwriting, trading and distribution of unit investment trusts and other securities. FTP is the principal underwriter of the Funds' Shares. -43- There is no one individual primarily responsible for portfolio management decisions for the Funds. Investments are made under the direction of a committee (the "Investment Committee"). The Investment Committee consists of Daniel J. Lindquist, Robert F. Carey, Jon C. Erickson, David G. McGarel, Roger F. Testin and Stan Ueland. Mr. Lindquist rejoined First Trust in April 2004 after serving as Chief Operating Officer of Mina Capital Management LLC from January 2004 to April 2004 and Samaritan Asset Management Services, Inc. from April 2000 to January 2004 and has been a Senior Vice President of First Trust and FTP since September 2005. Mr. Lindquist is Chairman of the Investment Committee and presides over Investment Committee meetings. Mr. Lindquist is responsible for overseeing the implementation of the Fund's investment strategies. Mr. Carey is the Chief Investment Officer and Senior Vice President of First Trust and Senior Vice President of FTP. As First Trust's Chief Investment Officer, Mr. Carey consults with the Investment Committee on market conditions and First Trust's general investment philosophy. Mr. Erickson is a Senior Vice President of First Trust and FTP. As the head of First Trust's Equity Research Group, Mr. Erickson is responsible for determining the securities to be purchased and sold by funds that do not utilize quantitative investment strategies. Mr. McGarel is a Senior Vice President of First Trust and FTP. As the head of First Trust's Strategy Research Group, Mr. McGarel is responsible for developing and implementing quantitative investment strategies for those funds that have investment policies that require them to follow such strategies. Since November 2003, Mr. Testin has been a Senior Vice President of First Trust and FTP. From August 2001 to November 2003, Mr. Testin was a Vice President of First Trust and FTP. Prior to joining First Trust, Mr. Testin was an analyst for Dolan Capital Management. Mr. Testin has been the head of First Trust's Portfolio Management Group. Mr. Ueland has been a Vice President of First Trust and FTP since August 2005. At First Trust, he plays an important role in executing the investment strategies of each portfolio of exchange-traded funds advised by First Trust. Before joining First Trust, Mr. Ueland was vice president of sales at BondWave LLC from May 2004 through August 2005, an account executive for Mina Capital Management LLC and Samaritan Asset Management Services, Inc. from January 2003 through May 2004, and a sales consultant at Oracle Corporation from January 1997 through January 2003. For additional information concerning First Trust, including a description of the services provided to the Funds, see the Funds' SAI. In addition, the SAI provides additional information about the compensation of Investment Committee members, other accounts managed by members of the Investment Committee and ownership by members of the Investment Committee of Shares of the Funds. First Trust will receive annual fees from each Fund equal to 0.50% of such Fund's average daily net assets. A discussion regarding the approval of the Investment Management Agreement will be available in the Funds' semi-annual report to Shareholders for the period ending June 30, 2007. Each Fund is responsible for all of its expenses, including the investment advisory fees, costs of transfer agency, custody, fund administration, legal, audit and other services, interest, taxes, brokerage commissions and other expenses connected with the execution of portfolio transactions, paying for its sublicensing fees related to each Fund's corresponding equity index in the StrataQuant(TM) Series, any distribution fees or expenses, and extraordinary expenses. First Trust has agreed to waive fees and/or pay Fund expenses to the extent necessary to prevent the operating expenses of each Fund (excluding interest expense, brokerage commissions and other trading expenses, taxes and extraordinary expenses) from exceeding 0.70% of average daily net assets per year, at least until two years after the initial issuance of Fund Shares. Expenses borne by First Trust are subject to reimbursement by each Fund up to three years from the date the fee or expense was incurred, but no reimbursement payment will be made by a Fund if it would result in such Fund exceeding its Expense Cap. How to Buy and Sell Shares Shares will be issued or redeemed by the Funds at net asset value per Share only in Creation Unit size. See "Creations, Redemptions and Transaction Fees." -44- Most investors will buy and sell Shares of the Funds in secondary market transactions through brokers. Shares of the Funds will be listed for trading on the secondary market on the AMEX. Shares can be bought and sold throughout the trading day like other publicly traded shares. There is no minimum investment. Although Shares are generally purchased and sold in "round lots" of 100 Shares, brokerage firms typically permit investors to purchase or sell Shares in smaller "odd lots," at no per-Share price differential. When buying or selling Shares through a broker, you should expect to incur customary brokerage commissions, you may receive less than the net asset value of the Shares, and you may pay some or all of the spread between the bid and the offer price in the secondary market on each leg of a round trip (purchase and sale) transaction. The Consumer Discretionary AlphaDEX(TM) Fund will trade under the AMEX symbol "FXD," subject to notice of issuance. The Consumer Staples AlphaDEX(TM) Fund will trade under the AMEX symbol "FXG," subject to notice of issuance. The Energy AlphaDEX(TM) Fund will trade under the AMEX symbol "FXN," subject to notice of issuance. The Financials AlphaDEX(TM) Fund will trade under the AMEX symbol "FXO," subject to notice of issuance. The Health Care AlphaDEX(TM) Fund will trade under the AMEX symbol "FXH," subject to notice of issuance. The Industrials AlphaDEX(TM) Fund will trade under the AMEX symbol "FXR," subject to notice of issuance. The Materials AlphaDEX(TM) Fund will trade under the AMEX symbol "FXZ," subject to notice of issuance. The Technology AlphaDEX(TM) Fund will trade under the AMEX symbol "FXL," subject to notice of issuance. The Utilities AlphaDEX(TM) Fund will trade under the AMEX symbol "FXU," subject to notice of issuance. Share prices are reported in dollars and cents per Share. Investors may acquire Shares directly from a Fund, and shareholders may tender their Shares for redemption directly to such Fund, only in Creation Units of 50,000 Shares, as discussed in the "Creations, Redemptions and Transaction Fees" section below. Section 12(d)(1) of the 1940 Act restricts investments by registered investment companies in the securities of other investment companies, including shares of each Fund. The Trust has applied for an exemptive order from the Securities and Exchange Commission that, subject to certain terms and conditions, would permit registered investment companies to invest in a Fund beyond the limits set forth in Section 12(d)(1). Book Entry Shares are held in book-entry form, which means that no Share certificates are issued. The Depository Trust Company ("DTC") or its nominee is the record owner of all outstanding Shares of the Funds and is recognized as the owner of all Shares for all purposes. Investors owning Shares are beneficial owners as shown on the records of DTC or its participants. DTC serves as the securities depository for all Shares. Participants in DTC include securities brokers and dealers, banks, trust companies, clearing corporations and other institutions that directly or indirectly maintain a custodial relationship with DTC. As a beneficial owner of Shares, you are not entitled to receive physical delivery of Share certificates or to have Shares registered in your name, and you are not considered a registered owner of Shares. Therefore, to exercise any right as an owner of Shares, you must rely upon the procedures of DTC and its participants. These procedures are the same as those that apply to any other stocks that you hold in book-entry or "street name" form. Fund Share Trading Prices The trading prices of Shares of a Fund on the AMEX may differ from such Fund's daily NAV and can be affected by market forces of supply and demand, economic conditions and other factors. The AMEX intends to disseminate the approximate value of Shares of the Funds every 15 seconds. This approximate value should not be viewed as a "real-time" update of the NAV per Share of the Funds because the approximate value may not -45- be calculated in the same manner as the NAV, which is computed once a day, generally at the end of the business day. The Funds are not involved in, or responsible for, the calculation or dissemination of the approximate value and the Funds do not make any warranty as to its accuracy. Frequent Purchases and Redemptions of the Funds' Shares The Funds impose no restrictions on the frequency of purchases and redemptions. In determining not to approve a written, established policy, the Board evaluated the risks of market timing activities by the Funds' shareholders. The Board considered that, unlike traditional mutual funds, the Funds issue and redeem their Shares at net asset value per Share for a basket of securities intended to mirror a Fund's portfolio, plus a small amount of cash, and the Shares may be purchased and sold on the AMEX at prevailing market prices. Given this structure, the Board determined that (a) it is unlikely that market timing would be attempted by the Funds' shareholders and (b) any attempts to market time the Funds by shareholders would not be expected to negatively impact the Funds or their shareholders. Creations, Redemptions and Transaction Fees Investors such as market makers, large investors and institutions who wish to deal in Creation Units directly with the Funds must have entered into an authorized participant agreement with a Fund's distributor and a Fund's transfer agent, or purchase through a dealer that has entered into such an agreement. Set forth below is a brief description of the procedures applicable to purchases and redemptions of Creation Units. For more detailed information, see "Creation and Redemption of Creation Unit Aggregations" in the SAI. Purchase In order to purchase Creation Units of a Fund, an investor must generally deposit a designated portfolio of equity securities constituting a substantial replication, or a representation, of the stocks included in the Fund's corresponding equity index in the StrataQuant(TM) Series (the "Deposit Securities") and generally make a small cash payment referred to as the "Cash Component." The list of the names and the numbers of shares of the Deposit Securities is made available by the Funds' custodian through the facilities of the National Securities Clearing Corporation ("NSCC"), immediately prior to the opening of business each day of the AMEX. The Cash Component represents the difference between the NAV of a Creation Unit and the market value of the Deposit Securities. Orders must be placed in proper form by or through an AP which is either (i) a "Participating Party," i.e., a broker-dealer or other participant in the Clearing Process of the Continuous Net Settlement System of the NSCC (the "Clearing Process"), or (ii) a participant of DTC ("DTC Participant") that has entered into an AP agreement with each Fund's distributor and each Fund's transfer agent, with respect to purchases and redemptions of Creation Units. All orders must be placed for one or more whole Creation Units of Shares of the Funds and must be received by each Fund's transfer agent in proper form no later than the close of regular trading on the AMEX (ordinarily 4:00 p.m., Eastern time) ("Closing Time") in order to receive that day's closing NAV per Share. In the case of custom orders, as further described in the SAI, the order must be received by each Fund's transfer agent no later than 3:00 p.m., Eastern time. A custom order may be placed by an AP in the event that a Fund permits or requires the substitution of an amount of cash to be added to the Cash Component to replace any Deposit Security which may not be available in sufficient quantity for delivery or which may not be eligible for trading by such AP or the investor for which it is acting or any other relevant reason. See "Creation and Redemption of Creation Unit Aggregations" in the SAI. A fixed creation transaction fee of $500 (the "Creation Transaction Fee") is applicable to each transaction regardless of the number of Creation Units purchased in the transaction. An additional charge of up to four times the Creation Transaction Fee (i.e., up to $2,000) may be imposed with respect to -46- transactions effected outside of the Clearing Process (i.e., through a DTC Participant) or to the extent that cash is used in lieu of securities to purchase Creation Units. See "Creation and Redemption of Creation Unit Aggregations" in the SAI. 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 transfer taxes. Shares of each Fund may be issued in advance of receipt of all Deposit Securities subject to various conditions, including a requirement to maintain on deposit with a Fund cash at least equal to 115% of the market value of the missing Deposit Securities. See "Creation and Redemption of Creation Unit Aggregations" in the SAI. Legal Restrictions on Transactions in Certain Stocks An investor subject to a legal restriction with respect to a particular stock required to be deposited in connection with the purchase of a Creation Unit may, at a Fund's discretion, be permitted to deposit an equivalent amount of cash in substitution for any stock which would otherwise be included in the Deposit Securities applicable to the purchase of a Creation Unit. For more details, see "Creation and Redemption of Creation Unit Aggregations" in the SAI. Redemption The Funds' custodian makes available immediately prior to the opening of business each day of the AMEX, through the facilities of the NSCC, the list of the names and the numbers of shares of each Fund's portfolio securities that will be applicable that day to redemption requests in proper form ("Fund Securities"). Fund Securities received on redemption may not be identical to Deposit Securities, which are applicable to purchases of Creation Units. Unless cash redemptions are available or specified for the Fund, the redemption proceeds consist of the Fund Securities, plus cash in an amount equal to the difference between the net asset value of Shares being redeemed as next determined after receipt by the transfer agent of a redemption request in proper form, and the value of the Fund Securities (the "Cash Redemption Amount"), less the applicable redemption fee and, if applicable, any transfer taxes. Should a Fund Securities have a value greater than the net asset value of Shares being redeemed, a compensating cash payment to the Funds equal to the differential, plus the applicable redemption fee and, if applicable, any transfer taxes will be required to be arranged for by or on behalf of the redeeming AP. Investors should expect to incur customary brokerage commissions in connection with assembling a sufficient number of Fund Shares to constitute a redeemable Creation Unit. For more details, see "Creation and Redemption of Creation Unit Aggregations" in the SAI. An order to redeem Creation Units of a Fund may only be effected by or through an AP. An order to redeem must be placed for one or more whole Creation Units and must be received by the transfer agent in proper form no later than the close of regular trading on the AMEX (ordinarily 4:00 p.m., Eastern time) in order to receive that day's closing net asset value per Share. In the case of custom orders, as further described in the SAI, the order must be received by the transfer agent no later than 3:00 p.m., Eastern time. A fixed redemption transaction fee of $500 (the "Redemption Transaction Fee") is applicable to each redemption transaction regardless of the number of Creation Units redeemed in the transaction. A variable charge of up to four times the Redemption Transaction Fee (i.e., up to $2,000) may be charged to approximate additional expenses incurred by the Funds with respect to redemptions effected outside of the Clearing Process or to the extent that redemptions are for cash. The Funds reserve the right to effect redemptions in cash. A shareholder may request a cash redemption in lieu of securities, however, a Fund may, in its discretion, reject any such request. See "Creation and Redemption of Creation Unit Aggregations" in the SAI. -47- Dividends, Distributions and Taxes Dividends from net investment income, if any, are declared and paid semi-annually. Each Fund distributes its net realized capital gains, if any, to shareholders annually. Distributions in cash may be reinvested automatically in additional whole Shares only if the broker through whom you purchased Shares 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. Federal Tax Matters This section summarizes some of the main U.S. federal income tax consequences of owning Shares of the Funds. This section is current as of the date of this Prospectus. Tax laws and interpretations change frequently, and these summaries do not describe all of the tax consequences to all taxpayers. For example, these summaries generally do not describe your situation if you are a corporation, a non-U.S. person, a broker-dealer, or other investor with special circumstances. In addition, this section does not describe your state, local or non-U.S. tax consequences. This federal income tax summary is based in part on the advice of counsel to the Funds. The Internal Revenue Service could disagree with any conclusions set forth in this section. In addition, the counsel to the Funds was not asked to review, and has not reached a conclusion with respect to the federal income tax treatment of the assets to be included in the Funds. This may not be sufficient for you to use for the purpose of avoiding penalties under federal tax law. As with any investment, you should seek advice based on your individual circumstances from your own tax adviser. Fund Status Each Fund intends to qualify as a "regulated investment company" under the federal tax laws. If a Fund qualifies as a regulated investment company and distributes its income as required by the tax law, the Fund generally will not pay federal income taxes. Distributions The Fund's distributions are generally taxable. After the end of each year, you will receive a tax statement that separates each of your Fund's distributions into two categories, ordinary income distributions and capital gains dividends. Ordinary income distributions are generally taxed at your ordinary tax rate, however, as further discussed below, certain ordinary income distributions received from a Fund may be taxed at the capital gains tax rates. Generally, you will treat all capital gains dividends as long-term capital gains regardless of how long you have owned your Shares. To determine your actual tax liability for your capital gains dividends, you must calculate your total net capital gain or loss for the tax year after considering all of your other taxable transactions, as described below. In addition, the Funds may make distributions that represent a return of capital for tax purposes and thus will generally not be taxable to you. The tax status of your distributions from a Fund is not affected by whether you reinvest your distributions in additional Shares or receive them in cash. The income from a Fund that you must take into account for federal income tax purposes is not reduced by amounts used to pay a deferred sales fee, if any. The tax laws may require you to treat distributions made to you in January as if you had received them on December 31 of the previous year. Dividends Received Deduction A corporation that owns Shares generally will not be entitled to the dividends received deduction with respect to many dividends received from a Fund because the dividends received deduction is generally not available for distributions -48- from regulated investment companies. However, certain ordinary income dividends on shares that are attributable to qualifying dividends received by a Fund from certain corporations may be designated by a Fund as being eligible for the dividends received deduction. Capital Gains and Losses and Certain Ordinary Income Dividends If you are an individual, the maximum marginal federal tax rate for net capital gain is generally 15% (generally 5% for certain taxpayers in the 10% and 15% tax brackets). These capital gains rates are generally effective for taxable years beginning before January 1, 2011. For later periods, if you are an individual, the maximum marginal federal tax rate for net capital gain is generally 20% (10% for certain taxpayers in the 10% and 15% tax brackets). The 20% rate is reduced to 18% and the 10% rate is reduced to 8% for long-term capital gains from most property acquired after December 31, 2000 with a holding period of more than five years. Net capital gain equals net long-term capital gain minus net short-term capital loss for the taxable year. Capital gain or loss is long-term if the holding period for the asset is more than one year and is short-term if the holding period for the asset is one year or less. You must exclude the date you purchase your Shares to determine your holding period. However, if you receive a capital gain dividend from a Fund and sell your Shares at a loss after holding it for six months or less, the loss will be recharacterized as long-term capital loss to the extent of the capital gain dividend received. The tax rates for capital gains realized from assets held for one year or less are generally the same as for ordinary income. The Internal Revenue Code treats certain capital gains as ordinary income in special situations. Ordinary income dividends received by an individual shareholder from regulated investment companies such as the Funds are generally taxed at the same rates that apply to net capital gain (as discussed above), provided certain holding period requirements are satisfied and provided the dividends are attributable to qualifying dividends received by the Funds themselves. These special rules relating to the taxation of ordinary income dividends from regulated investment companies generally apply to taxable years beginning before January 1, 2011. Each Fund will provide notice to its shareholders of the amount of any distribution which may be taken into account as a dividend which is eligible for the capital gains tax rates. Sale of Shares If you sell your Shares, you will generally recognize a taxable gain or loss. To determine the amount of this gain or loss, you must subtract your tax basis in your Shares from the amount you receive in the transaction. Your tax basis in your Shares is generally equal to the cost of your Shares, generally including sales charges. In some cases, however, you may have to adjust your tax basis after you purchase your Shares. Taxes on Purchase and Redemption of Creation Units If you exchange equity securities for Creation Units you will generally recognize a gain or a loss. The gain or loss will be equal to the difference between the market value of the Creation Units at the time and your aggregate basis in the securities surrendered and the Cash Component paid. If you exchange Creation Units for equity securities, you will generally recognize a gain or loss equal to the difference between your basis in the Creation Units and the aggregate market value of the securities received and the Cash Redemption Amount. The Internal Revenue Service, however, may assert that a loss realized upon an exchange of securities for Creation Units cannot be deducted currently under the rules governing "wash sales," or on the basis that there has been no significant change in economic position. Deductibility of Fund Expenses Expenses incurred and deducted by the Funds will generally not be treated as income taxable to you. -49- Non-U.S. Tax Credit If your Fund invests in any non-U.S. securities, the tax statement that you receive may include an item showing non-U.S. taxes your Fund paid to other countries. In this case, dividends taxed to you will include your share of the taxes your Fund paid to other countries. You may be able to deduct or receive a tax credit for your share of these taxes. Non-U.S. Investors If you are a non-U.S. investor (i.e., an investor other than a U.S. citizen or resident or a U.S. corporation, partnership, estate or trust), you should be aware that, generally, subject to applicable tax treaties, distributions from the Funds will be characterized as dividends for federal income tax purposes (other than dividends which the Funds designate as capital gain dividends) and will be subject to U.S. federal income taxes, including withholding taxes, subject to certain exceptions described below. However, distributions received by a non-U.S. investor from the Funds that are properly designated by the Funds as capital gain dividends may not be subject to U.S. federal income taxes, including withholding taxes, provided that the Funds makes certain elections and certain other conditions are met. In the case of dividends with respect to taxable years of the Funds beginning prior to 2008, distributions from the Funds that are properly designated by the Funds as an interest-related dividend attributable to certain interest income received by the Funds or as a short-term capital gain dividend attributable to certain net short-term capital gain income received by the Funds may not be subject to U.S. federal income taxes, including withholding taxes when received by certain non-U.S. investors, provided that the Funds make certain elections and certain other conditions are met. Distribution Plan FTP serves as the distributor of Creation Units for the Funds on an agency basis. FTP does not maintain a secondary market in Shares. The Board has adopted a Distribution and Service Plan pursuant to Rule 12b-1 under the 1940 Act. In accordance with the Rule 12b-1 plan, the Funds are authorized to pay an amount up to 0.25% of their average daily net assets each year to reimburse FTP for amounts expended to finance activities primarily intended to result in the sale of Creation Units or the provision of investor services. FTP may also use this amount to compensate securities dealers or other persons that are APs for providing distribution assistance, including broker-dealer and shareholder support and educational and promotional services. No 12b-1 fees are currently paid by the Funds, and there are no plans to impose these fees. However, in the event 12b-1 fees are charged in the future, because these fees are paid out of the Funds' assets, over time these fees will increase the cost of your investment and may cost you more than certain other types of sales charges. Net Asset Value Each Fund's NAV is determined as of the close of trading (normally 4:00 p.m., Eastern time) on each day the New York Stock Exchange is open for business. NAV is calculated for each Fund by taking the market price of a Fund's total assets, including interest or dividends accrued but not yet collected, less all liabilities, and dividing such amount by the total number of Shares outstanding. The result, rounded to the nearest cent, is the net asset value per Share. All valuations are subject to review by the Board or its delegate. -50- In determining NAV, expenses are accrued and applied daily and securities and other assets are generally valued as set forth below. Common stocks and other equity securities listed on any national or non-U.S. exchange or on NASDAQ will be valued at the last sale price for all exchanges other than NASDAQ and the official closing price for NASDAQ on the exchange or system in which they are principally traded on the valuation date. If there are no transactions on the valuation date, securities traded principally on an exchange or on NASDAQ will be valued at the mean between the most recent bid and ask prices. Equity securities traded in the over-the- counter market are valued at their closing bid prices. Fixed income securities with a remaining maturity of 60 days or more will be valued by the Fund accounting agent using a pricing service. When price quotes are not available, fair market value is based on prices of comparable securities. Fixed income securities maturing within 60 days are valued by the Fund accounting agent on an amortized cost basis. The value of any portfolio security held by a Fund for which reliable market quotations are not readily available or if a valuation is deemed inappropriate will be determined by the Board or its designee in a manner that most fairly reflects the fair market value of the security on the valuation date. Certain securities may not be able to be priced by pre-established pricing methods. Such securities may be valued by the Board or its delegate at fair value. These securities generally include, but are not limited to, restricted securities (securities which may not be publicly sold without registration under the Securities Act of 1933) for which a pricing service is unable to provide a market price; securities whose trading has been formally suspended; a security whose market price is not available from a pre-established pricing source; a security with respect to which an event has occurred that is likely to materially affect the value of the security after the market has closed but before the calculation of Fund NAV or make it difficult or impossible to obtain a reliable market quotation; and a security whose price, as provided by the pricing service, does not reflect the security's "fair value." As a general principal, the current "fair value" of a security would appear to be the amount which the owner might reasonably expect to receive for the security upon its current sale. The use of fair value prices by the Funds generally results in the prices used by the Funds differing from the closing sale prices on the applicable exchange and fair value prices may not reflect the actual value of a security. A variety of factors may be considered in determining the fair value of such securities. See the SAI for details. Fund Service Providers The Bank of New York is the administrator, custodian and fund accounting and transfer agent for the Funds. Chapman and Cutler LLP, 111 West Monroe Street, Chicago, Illinois 60603, serves as legal counsel to the Funds. The Trust, on behalf of the Funds, has entered into an agreement with PFPC, Inc. ("PFPC"), 301 Bellevue Parkway, Wilmington, Delaware 19809, whereby PFPC will provide certain administrative services to the Trust in connection with the Board's meetings and other related matters. Index Provider Each equity index in the StrataQuant(TM) Series that each respective Fund seeks to track is compiled by the AMEX. The AMEX is not affiliated with the Funds, First Trust or FTP. The Funds are entitled to use each equity index in the StrataQuant(TM) Series pursuant to sublicensing arrangements by and among each Fund, the AMEX, First Trust and FTP, which in turn has a licensing agreement with the AMEX. -51- Disclaimers First Trust does not guarantee the accuracy and/or the completeness of the StrataQuant(TM) Series or any data included therein, and First Trust shall have no liability for any errors, omissions or interruptions therein. First Trust makes no warranty, express or implied, as to results to be obtained by the Funds, owners of the Shares of the Funds or any other person or entity from the use of the StrataQuant(TM) Series or any data included therein. First Trust makes no express or implied warranties, and expressly disclaims all warranties of merchantability or fitness for a particular purpose or use with respect to the StrataQuant(TM) Series or any data included therein. Without limiting any of the foregoing, in no event shall First Trust have any liability for any special, punitive, direct, indirect or consequential damages (including lost profits) arising out of matters relating to the use of the StrataQuant(TM) Series, even if notified of the possibility of such damages. Each of the StrataQuant(TM) Series indices is a trademark of the American Stock Exchange LLC and is licensed for use by FTP. FTP sublicenses the StrataQuant(TM) Series indices to the Funds and to First Trust. The Funds are not sponsored, endorsed, sold or promoted by the American Stock Exchange LLC and the American Stock Exchange LLC makes no representation or warranty regarding the advisability of investing in the Funds or as to the result to be obtained by any person from the use of the StrataQuant(TM) Series in connection with the trading of the Funds. FTP has licensed to AMEX, free of charge, the right to use certain Intellectual Property owned by FTP, including the AlphaDEX(TM) trademark and the AlphaDEX(TM) stock selection method, in connection with AMEX's creation of the StrataQuant(TM) Series indices. A patent application with respect to the AlphaDEX(TM) stock selection method is pending at the United States Patent and Trademark Office. Notwithstanding such license, AMEX is solely responsible for the creation, compilation and administration of the StrataQuant(TM) Series indices and has the exclusive right to determine the stocks included in the indices and the indices' methodologies. The Funds are not sponsored, endorsed, sold or promoted by Frank Russell Company ("Underlying Index Provider") or by the American Stock Exchange LLC ("Index Provider"). Neither Underlying Index Provider nor Index Provider makes any representation or warranty, express or implied, to the owners of the Funds or any member of the public regarding the advisability of investing in securities generally or in the Funds particularly or the ability of any of the StrataQuant(TM) Series to track general stock market performance or a segment of the same. Index Provider's publication of the StrataQuant(TM) Series in no way suggests or implies an opinion by the Underlying Index Provider or by Index Provider as to the advisability of investment in any or all of the securities upon which the StrataQuant(TM) Series is based. Index Provider's only relationship to FTP is the licensing of certain trade marks and trade names of Index Provider and of the StrataQuant(TM) Series which is determined, composed and calculated by Index Provider without regard to FTP, First Trust or the Funds. Underlying Index Provider and Index Provider are not responsible for and have not reviewed the Funds nor any associated literature or publications and make no representation or warranty express or implied as to their accuracy or completeness, or otherwise. Underlying Index Provider reserves the right, at any time and without notice, to alter, amend, terminate or in any way change the StrataQuant(TM) Series. Underlying Index Provider and Index Provider have no obligation or liability in connection with the administration, marketing or trading of the Funds. INDEX PROVIDER DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF ANY OF THE STRATAQUANT(TM) SERIES OR ANY DATA INCLUDED THEREIN. INDEX PROVIDER SHALL HAVE NO LIABILITY FOR ANY ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN. INDEX PROVIDER MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY FTP, FIRST TRUST, INVESTORS, OWNERS OF THE FUNDS, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE STRATAQUANT(TM) SERIES OR ANY DATA INCLUDED THEREIN. INDEX -52- PROVIDER MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND HEREBY EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE WITH RESPECT TO THE STRATAQUANT(TM) SERIES OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL INDEX PROVIDER HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES. "AlphaDEX(TM)" is a trademark of FTP. The Funds and First Trust on behalf of the Funds have been granted the right by FTP to use the name "AlphaDEX(TM)" for certain purposes. Additional Index Information The StrataQuant(TM) Series was created and trademarked by the AMEX. The Funds expect to make changes to their portfolios shortly after changes to the StrataQuant(TM) Series are released to the public. Investors will be able to access the holdings of each Fund and the composition and compilation methodology of the StrataQuant(TM) Series through the Funds' website at www.ftportfolios.com. In the event that AMEX no longer calculates the StrataQuant(TM) Series, if the StrataQuant(TM) Series license is terminated or if the identity or character of any equity index of the StrataQuant(TM) Series is materially changed, the Board will seek to engage a replacement index. However, if that proves to be impracticable, the Board will take whatever action it deems to be in the best interests of the Funds. The Board will also take whatever actions it deems to be in the best interests of the Funds if the Funds' Shares are delisted. Other Information For purposes of the 1940 Act, each Fund is treated as a registered investment company and the acquisition of Shares by other investment companies is subject to the restrictions of Section 12(d)(1) of the 1940 Act. Continuous Offering Each Fund will issue, on a continuous offering basis, its Shares in one or more groups of a fixed number of Fund Shares (each such group of such specified number of individual Fund Shares, a "Creation Unit Aggregation"). The method by which Creation Unit Aggregations of Fund Shares are created and traded may raise certain issues under applicable securities laws. Because new Creation Unit Aggregations of Shares are issued and sold by a Fund on an ongoing basis, a "distribution," as such term is used in the Securities Act of 1933, as amended (the "Securities Act"), may occur at any point. Broker-dealers and other persons are cautioned that some activities on their part may, depending on the circumstances, result in their being deemed participants in a distribution in a manner which could render them statutory underwriters and subject them to the prospectus delivery requirement and liability provisions of the Securities Act. For example, a broker-dealer firm or its client may be deemed a statutory underwriter if it takes Creation Unit Aggregations after placing an order with FTP, breaks them down into constituent Shares and sells such Shares directly to customers, or if it chooses to couple the creation of a supply of new Shares with an active selling effort involving solicitation of secondary market demand for Shares. A determination of whether one is an underwriter for purposes of the Securities Act must take into account all the facts and circumstances pertaining to the activities of the broker-dealer or its client in the particular case, and the examples mentioned above should not be considered a complete description of all the activities that could lead to a characterization as an underwriter. -53- Broker-dealer firms should also note that dealers who are not "underwriters" but are effecting transactions in Shares, whether or not participating in the distribution of Shares, are generally required to deliver a prospectus. This is because the prospectus delivery exemption in Section 4(3) of the Securities Act is not available in respect of such transactions as a result of Section 24(d) of the 1940 Act. The Trust, on behalf of each Fund, however, has received from the Securities and Exchange Commission an exemption from the prospectus delivery obligation in ordinary secondary market transactions under certain circumstances, on the condition that purchasers are provided with a product description of the Shares. As a result, broker-dealer firms should note that dealers who are not underwriters but are participating in a distribution (as contrasted with ordinary secondary market transactions) and thus dealing with the Shares that are part of an overallotment within the meaning of Section 4(3)(a) of the Securities Act would be unable to take advantage of the prospectus delivery exemption provided by Section 4(3) of the Securities Act. Firms that incur a prospectus delivery obligation with respect to Shares are reminded that, under the Securities Act Rule 153, a prospectus delivery obligation under Section 5(b)(2) of the Securities Act owed to a broker-dealer in connection with a sale on the AMEX is satisfied by the fact that the prospectus is available from the AMEX upon request. The prospectus delivery mechanism provided in Rule 153 is available with respect to transactions on a national securities exchange, a trading facility or an alternative trading system. For More Information For more detailed information on the Funds, several additional sources of information are available to you. The SAI, incorporated by reference into this Prospectus, contains detailed information on the Funds' policies and operation. The Funds' most recent SAI and certain other information are available free of charge by calling the Funds at (800) 621-1675, on the Funds' website at www.ftportfolios.com or through your financial adviser. Shareholders may call the toll-free number above with any inquiries. You may obtain this and other information regarding the Funds, including the Codes of Ethics adopted by First Trust, FTP and the Trust, directly from the Securities and Exchange Commission (the "SEC"). Information on the SEC's website is free of charge. Visit the SEC's on-line EDGAR database at http://www.sec.gov or in person at the SEC's Public Reference Room in Washington, D.C., or call the SEC at (202) 551-5850 for information on the Public Reference Room. You may also request information regarding the Funds by writing to the SEC's Public Reference Section, 100 F Street, N.E., Washington, D.C. 20549 or by sending an electronic request, along with a duplication fee to publicinfo@sec.gov. -54- First Trust Consumer Discretionary AlphaDEX(TM) Fund First Trust Consumer Staples AlphaDEX(TM) Fund First Trust Energy AlphaDEX(TM) Fund First Trust Financials AlphaDEX(TM) Fund First Trust Health Care AlphaDEX(TM) Fund First Trust Industrials AlphaDEX(TM) Fund First Trust Materials AlphaDEX(TM) Fund First Trust Technology AlphaDEX(TM) Fund First Trust Utilities AlphaDEX(TM) Fund 1001 Warrenville Road Suite 300 Lisle, Illinois 60532 (800) 621-1675 www.ftportfolios.com SEC File #: 333-140895 811-22019 Back Cover Statement of Additional Information Investment Company Act File No. 811-22019 First Trust Exchange-Traded AlphaDEX(TM) Fund First Trust Consumer Discretionary AlphaDEX(TM) Fund First Trust Consumer Staples AlphaDEX(TM) Fund First Trust Energy AlphaDEX(TM) Fund First Trust Financials AlphaDEX(TM) Fund First Trust Health Care AlphaDEX(TM) Fund First Trust Industrials AlphaDEX(TM) Fund First Trust Materials AlphaDEX(TM) Fund First Trust Technology AlphaDEX(TM) Fund First Trust Utilities AlphaDEX(TM) Fund Dated April 27, 2007 This Statement of Additional Information is not a Prospectus. It should be read in conjunction with the Prospectus dated April 27, 2007 (the "Prospectus") for the First Trust Consumer Discretionary AlphaDEX(TM) Fund, First Trust Consumer Staples AlphaDEX(TM) Fund, First Trust Energy AlphaDEX(TM) Fund, First Trust Financials AlphaDEX(TM) Fund, First Trust Health Care AlphaDEX(TM) Fund, First Trust Industrials AlphaDEX(TM) Fund, First Trust Materials AlphaDEX(TM) Fund, First Trust Technology AlphaDEX(TM) Fund and First Trust Utilities AlphaDEX(TM) Fund, each a series of the First Trust Exchange-Traded AlphaDEX(TM) Fund (the "Trust"), as it may be revised from time to time. Capitalized terms used herein that are not defined have the same meaning as in the Prospectus, unless otherwise noted. A copy of the Prospectus may be obtained without charge by writing to the Trust's Distributor, First Trust Portfolios L.P., 1001 Warrenville Road, Lisle, Illinois 60532, or by calling toll free at (800) 621-1675. Table of Contents General Description of the Trust and the Funds................................1 Exchange Listing and Trading..................................................2 Investment Objective and Policies.............................................3 Investment Strategies.........................................................4 Sublicense Agreement.........................................................14 Investment Risks.............................................................14 Funds Management.............................................................19 Accounts Managed by Investment Committee.....................................28 Brokerage Allocations........................................................28 Custodian, Distributor, Transfer Agent, Fund Accounting Agent, Index Provider and Exchange....................................................31 Additional Information.......................................................33 Proxy Voting Policies and Procedures.........................................35 Creation and Redemption of Creation Unit Aggregations........................36 Federal Tax Matters..........................................................46 Determination of NAV.........................................................51 Dividends and Distributions..................................................53 Miscellaneous Information....................................................53 -ii- General Description of the Trust and the Funds The Trust was organized as a Massachusetts business trust on December 6, 2006 and is authorized to issue an unlimited number of shares in one or more series or "Funds." The Trust is an open-end management investment company, registered under the Investment Company Act of 1940, as amended (the "1940 Act"). The Trust currently offers Shares in 16 series, including the First Trust Consumer Discretionary AlphaDEX(TM) Fund, First Trust Consumer Staples AlphaDEX(TM) Fund, First Trust Energy AlphaDEX(TM) Fund, First Trust Financials AlphaDEX(TM) Fund, First Trust Health Care AlphaDEX(TM) Fund, First Trust Industrials AlphaDEX(TM) Fund, First Trust Materials AlphaDEX(TM) Fund, First Trust Technology AlphaDEX(TM) Fund and First Trust Utilities AlphaDEX(TM) Fund (each, a "Fund," and collectively, the "Funds"), each a non-diversified series. This Statement of Additional Information relates only to the Funds. The shares of the Funds are referred to herein as "Shares" or "Fund Shares." Each series of the Trust represents a beneficial interest in a separate portfolio of securities and other assets, with its own objective and policies. The Board of Trustees of the Trust (the "Board of Trustees" or the "Trustees") has the right to establish additional series in the future, to determine the preferences, voting powers, rights and privileges thereof and to modify such preferences, voting powers, rights and privileges without shareholder approval. Shares of any series may also be divided into one or more classes at the discretion of the Trustees. The Trust or any series or class thereof may be terminated at any time by the Board of Trustees upon written notice to the shareholders. Each Share has one vote with respect to matters upon which a shareholder vote is required consistent with the requirements of the 1940 Act and the rules promulgated thereunder. Shares of all series of the Trust vote together as a single class except as otherwise required by the 1940 Act, or if the matter being voted on affects only a particular series, and, if a matter affects a particular series differently from other series, the shares of that series will vote separately on such matter. The Trust's Declaration of Trust (the "Declaration") provides that by becoming a shareholder of a Fund, each shareholder shall be expressly held to have agreed to be bound by the provisions of the Declaration. The Declaration may, except in limited circumstances, be amended or supplemented by the Trustees without shareholder vote. The holders of Fund Shares are required to disclose information on direct or indirect ownership of Fund Shares as may be required to comply with various laws applicable to the Funds, and ownership of Fund Shares may be disclosed by the Funds if so required by law or regulation. In addition, pursuant to the Declaration, the Trustees may, in their discretion, require the Trust to redeem Shares held by any shareholder for any reason under terms set by the Trustees. The Trust's Declaration also provides that shareholders may not bring suit on behalf of a Fund without first requesting that the Trustees bring such suit unless there would be irreparable injury to the Fund, or if a majority of the Trustees have a personal financial interest in the action. Trustees are not considered to have a personal financial interest by virtue of being compensated for their services as Trustees. The Trust is not required and does not intend to hold annual meetings of shareholders. Under Massachusetts law applicable to Massachusetts business trusts, shareholders of such a trust may, under certain circumstances, be held personally liable as partners for its obligations. However, the Declaration contains an express disclaimer of shareholder liability for acts or obligations of the Trust and requires that notice of this disclaimer be given in each agreement, obligation or instrument entered into or executed by the Trust or the Trustees. The Trust's Declaration of Trust further provides for indemnification out of the assets and property of the Trust for all losses and expenses of any shareholder held personally liable for the obligations of the Trust. Thus, the risk of a shareholder incurring financial loss on account of shareholder liability is limited to circumstances in which both inadequate insurance existed and the Trust or a Fund itself was unable to meet its obligations. The Funds are managed by First Trust Advisors L.P. (the "Adviser" or "First Trust"). Each Fund offers and issues Shares at net asset value ("NAV") only in aggregations of a specified number of Shares (each a "Creation Unit" or a "Creation Unit Aggregation"), generally in exchange for a basket of equity securities (the "Deposit Securities") included in the applicable Index (as hereinafter defined), together with the deposit of a specified cash payment (the "Cash Component"). The Shares have been approved for listing and secondary trading on the American Stock Exchange (the "AMEX"), subject to notice of issuance. Fund Shares will trade on the AMEX at market prices that may be below, at or above NAV. Shares are redeemable only in Creation Unit Aggregations and, generally, in exchange for portfolio securities and a specified cash payment. Creation Units are aggregations of 50,000 Shares. The Trust reserves the right to offer a "cash" option for creations and redemptions of Fund Shares, although it has no current intention of doing so. Fund Shares may be issued in advance of receipt of Deposit Securities subject to various conditions including a requirement to maintain on deposit with the Trust cash at least equal to 115% of the market value of the missing Deposit Securities. See the "Creation and Redemption of Creation Unit Aggregations" section. In each instance of such cash creations or redemptions, transaction fees may be imposed that will be higher than the transaction fees associated with in-kind creations or redemptions. In all cases, such fees will be limited in accordance with the requirements of the Securities and Exchange Commission (the "SEC") applicable to management investment companies offering redeemable securities. Exchange Listing and Trading There can be no assurance that the requirements of the AMEX necessary to maintain the listing of Shares of a Fund will continue to be met. The AMEX may, but is not required to, remove the Shares of a Fund from listing if (i) following the initial 12-month period beginning at the commencement of trading of a Fund, there are fewer than 50 beneficial owners of the Shares of a Fund for 30 or more consecutive trading days; (ii) the value of the Index is no longer calculated or available; or (iii) such other event shall occur or condition exist that, in the opinion of the AMEX, makes further dealings on the AMEX inadvisable. The AMEX will remove the Shares of a Fund from listing and trading upon -2- termination of a Fund. The AMEX may have a conflict of interests with respect to a Fund because the Shares are listed on the AMEX and the AMEX is also the Index provider. As in the case of other stocks traded on the AMEX, broker's commissions on transactions will be based on negotiated commission rates at customary levels. The Funds reserve the right to adjust the price levels of Shares in the future to help maintain convenient trading ranges for investors. Any adjustments would be accomplished through stock splits or reverse stock splits, which would have no effect on the net assets of a Fund. Investment Objective and Policies The Prospectus describes the investment objective and policies of the Funds. The following supplements the information contained in the Prospectus concerning the investment objective and policies of the Funds. Each Fund is subject to the following fundamental policies, which may not be changed without approval of the holders of a majority of the outstanding voting securities of the Fund: (1) A Fund may not issue senior securities, except as permitted under the 1940 Act. (2) A Fund may not borrow money, except that a Fund may (i) borrow money from banks for temporary or emergency purposes (but not for leverage or the purchase of investments) and (ii) engage in other transactions permissible under the 1940 Act that may involve a borrowing (such as obtaining short-term credits as are necessary for the clearance of transactions, engaging in delayed-delivery transactions, or purchasing certain futures, forward contracts and options), provided that the combination of (i) and (ii) shall not exceed 33-1/3% of the value of a Fund's total assets (including the amount borrowed), less a Fund's liabilities (other than borrowings). (3) A Fund will not underwrite the securities of other issuers except to the extent the Fund may be considered an underwriter under the Securities Act of 1933 (the "1933 Act") in connection with the purchase and sale of portfolio securities. (4) A Fund will not purchase or sell real estate or interests therein, unless acquired as a result of ownership of securities or other instruments (but this shall not prohibit a Fund from purchasing or selling securities or other instruments backed by real estate or of issuers engaged in real estate activities). (5) A Fund may not make loans to other persons, except through (i) the purchase of debt securities permissible under the Fund's investment policies, (ii) repurchase agreements, or (iii) the lending of portfolio securities, provided that no such loan of portfolio securities may be made by a Fund if, as a result, the aggregate of such loans would exceed 33-1/3% of the value of the Fund's total assets. -3- (6) A Fund may not purchase or sell physical commodities unless acquired as a result of ownership of securities or other instruments (but this shall not prevent the Fund from purchasing or selling options, futures contracts, forward contracts or other derivative instruments, or from investing in securities or other instruments backed by physical commodities). (7) A Fund may not invest 25% or more of the value of its total assets in securities of issuers in any one industry or group of industries, except to the extent that the index that the Fund replicates, concentrates in an industry or a group of industries. This restriction does not apply to obligations issued or guaranteed by the U.S. Government, its agencies or instrumentalities. Except for restriction (2), if a percentage restriction is adhered to at the time of investment, a later increase in percentage resulting from a change in market value of the investment or the total assets will not constitute a violation of that restriction. The foregoing fundamental policies of the Funds may not be changed without the affirmative vote of the majority of the outstanding voting securities of the respective Fund. The 1940 Act defines a majority vote as the vote of the lesser of (i) 67% or more of the voting securities represented at a meeting at which more than 50% of the outstanding securities are represented; or (ii) more than 50% of the outstanding voting securities. With respect to the submission of a change in an investment policy to the holders of outstanding voting securities of a Fund, such matter shall be deemed to have been effectively acted upon with respect to the Fund if a majority of the outstanding voting securities of the Fund vote for the approval of such matter, notwithstanding that (1) such matter has not been approved by the holders of a majority of the outstanding voting securities of any other series of the Trust affected by such matter, and (2) such matter has not been approved by the vote of a majority of the outstanding voting securities. In addition to the foregoing fundamental policies, the Funds are also subject to strategies and policies discussed herein which, unless otherwise noted, are non-fundamental restrictions and policies which may be changed by the Board of Trustees. Investment Strategies Under normal circumstances, each Fund will invest at least 90% of its total assets in common stocks that comprise such Fund's corresponding equity index (the "Index") in a family of custom "enhanced" indices created and administered by the AMEX (the "StrataQuant(TM) Series") comprised of the StrataQuant(TM) Consumer Discretionary Index, StrataQuant(TM) Consumer Staples Index, StrataQuant(TM) Energy Index, StrataQuant(TM) Financials Index, StrataQuant(TM) Health Care Index, StrataQuant(TM) Industrial Index, StrataQuant(TM) Materials Index, StrataQuant(TM) Technology Index and StrataQuant(TM) Utilities Index. A Fund's Shareholders are entitled to 60 days' notice prior to any change in this non-fundamental investment policy. -4- Types of Investments Warrants: The Funds may invest in warrants. Warrants acquired by a Fund entitles it to buy common stock from the issuer at a specified price and time. They do not represent ownership of the securities but only the right to buy them. Warrants are subject to the same market risks as stocks, but may be more volatile in price. A Fund's investment in warrants will not entitle it to receive dividends or exercise voting rights and will become worthless if the warrants cannot be profitably exercised before their expiration date. Delayed-Delivery Transactions: The Funds may from time to time purchase securities on a "when-issued" or other delayed-delivery basis. The price of securities purchased in such transactions is fixed at the time the commitment to purchase is made, but delivery and payment for the securities take place at a later date. Normally, the settlement date occurs within 45 days of the purchase. During the period between the purchase and settlement, no payment is made by the Funds to the issuer and no interest is accrued on debt securities or dividend income is earned on equity securities. Delayed-delivery commitments involve a risk of loss if the value of the security to be purchased declines prior to the settlement date, which risk is in addition to the risk of decline in value of a Fund's other assets. While securities purchased in delayed-delivery transactions may be sold prior to the settlement date, the Funds intend to purchase such securities with the purpose of actually acquiring them. At the time a Fund makes the commitment to purchase a security in a delayed-delivery transaction, it will record the transaction and reflect the value of the security in determining its net asset value. The Funds do not believe that net asset value will be adversely affected by purchases of securities in delayed-delivery transactions. The Funds will earmark or maintain in a segregated account cash, U.S. Government securities, and high-grade liquid debt securities equal in value to commitments for delayed-delivery securities. Such earmarked or segregated securities will mature or, if necessary, be sold on or before the settlement date. When the time comes to pay for delayed-delivery securities, a Fund will meet its obligations from then-available cash flow, sale of the securities earmarked or held in the segregated account described above, sale of other securities, or, although it would not normally expect to do so, from the sale of the delayed-delivery securities themselves (which may have a market value greater or less than the Fund's payment obligation). Illiquid Securities: The Funds may invest in illiquid securities (i.e., securities that are not readily marketable). For purposes of this restriction, illiquid securities include, but are not limited to, restricted securities (securities the disposition of which is restricted under the federal securities laws), securities that may only be resold pursuant to Rule 144A under the 1933 Act, as amended, but that are deemed to be illiquid; and repurchase agreements with maturities in excess of seven days. However, a Fund will not acquire illiquid securities if, as a result, such securities would comprise more than 15% of the value of the Fund's net assets. The Board of Trustees or its delegates has the ultimate authority to determine, to the extent permissible under the federal securities laws, which securities are liquid or illiquid for purposes of this 15% limitation. The Board of Trustees has delegated to First Trust the day-to-day determination of the illiquidity of any equity or fixed-income security, although it has retained oversight and ultimate responsibility for such determinations. Although no definitive liquidity criteria are used, the Board of Trustees has directed First Trust to look to factors such as (i) the -5- nature of the market for a security (including the institutional private resale market; the frequency of trades and quotes for the security; the number of dealers willing to purchase or sell the security; and the amount of time normally needed to dispose of the security, the method of soliciting offers and the mechanics of transfer), (ii) the terms of certain securities or other instruments allowing for the disposition to a third party or the issuer thereof (e.g., certain repurchase obligations and demand instruments), and (iii) other permissible relevant factors. Restricted securities may be sold only in privately negotiated transactions or in a public offering with respect to which a registration statement is in effect under the 1933 Act. Where registration is required, a Fund may be obligated to pay all or part of the registration expenses and a considerable period may elapse between the time of the decision to sell and the time the Fund may be permitted to sell a security under an effective registration statement. If, during such a period, adverse market conditions were to develop, a Fund might obtain a less favorable price than that which prevailed when it decided to sell. Illiquid securities will be priced at fair value as determined in good faith under procedures adopted by the Board of Trustees. If, through the appreciation of illiquid securities or the depreciation of liquid securities, a Fund should be in a position where more than 15% of the value of its net assets are invested in illiquid securities, including restricted securities which are not readily marketable, the Fund will take such steps as is deemed advisable, if any, to protect liquidity. Temporary Investments: The Funds may, without limit as to percentage of assets, purchase U.S. Government securities or short-term debt securities to keep cash on hand fully invested or for temporary defensive purposes. Short-term debt securities are securities from issuers having a long-term debt rating of at least A or higher by Standard & Poor's Ratings Group ("S&P"), Moody's Investors Service, Inc. ("Moody's") or Fitch, Inc. ("Fitch") and having a maturity of one year or less.Money Market Funds: The Funds may invest in shares of money market funds to the extent permitted by the 1940 Act. Short-term debt securities are defined to include, without limitation, the following: (1) U.S. Government securities, including bills, notes and bonds differing as to maturity and rates of interest, which are either issued or guaranteed by the U.S. Treasury or by U.S. Government agencies or instrumentalities. U.S. Government agency securities include securities issued by (a) the Federal Housing Administration, Farmers Home Administration, Export-Import Bank of United States, Small Business Administration, and the Government National Mortgage Association, whose securities are supported by the full faith and credit of the United States; (b) the Federal Home Loan Banks, Federal Intermediate Credit Banks, and the Tennessee Valley Authority, whose securities are supported by the right of the agency to borrow from the U.S. Treasury; (c) Fannie Mae, whose securities are supported by the discretionary authority of the U.S. Government to purchase certain obligations of the agency or instrumentality; and (d) the Student Loan Marketing Association, whose securities are supported only by its credit. While the U.S. Government provides financial support to such U.S. Government- sponsored agencies or instrumentalities, no assurance can be given that -6- it always will do so since it is not so obligated by law. The U.S. Government, its agencies, and instrumentalities do not guarantee the market value of their securities, and consequently, the value of such securities may fluctuate. (2) Certificates of deposit issued against funds deposited in a bank or savings and loan association. Such certificates are for a definite period of time, earn a specified rate of return, and are normally negotiable. If such certificates of deposit are non- negotiable, they will be considered illiquid securities and be subject to the Fund's 15% restriction on investments in illiquid securities. Pursuant to the certificate of deposit, the issuer agrees to pay the amount deposited plus interest to the bearer of the certificate on the date specified thereon. Under current FDIC regulations, the maximum insurance payable as to any one certificate of deposit is $100,000; therefore certificates of deposit purchased by the Funds may not be fully insured. (3) Bankers' acceptances which are short-term credit instruments used to finance commercial transactions. Generally, an acceptance is a time draft drawn on a bank by an exporter or an importer to obtain a stated amount of funds to pay for specific merchandise. The draft is then "accepted" by a bank that, in effect, unconditionally guarantees to pay the face value of the instrument on its maturity date. The acceptance may then be held by the accepting bank as an asset or it may be sold in the secondary market at the going rate of interest for a specific maturity. (4) Repurchase agreements, which involve purchases of debt securities. In such an action, at the time the Fund purchases the security, it simultaneously agrees to resell and redeliver the security to the seller, who also simultaneously agrees to buy back the security at a fixed price and time. This assures a predetermined yield for a Fund during its holding period since the resale price is always greater than the purchase price and reflects an agreed upon market rate. The period of these repurchase agreements will usually be short, from overnight to one week. Such actions afford an opportunity for a Fund to invest temporarily available cash. The Funds may enter into repurchase agreements only with respect to obligations of the U.S. Government, its agencies or instrumentalities; certificates of deposit; or bankers acceptances in which the Funds may invest. In addition, the Funds may only enter into repurchase agreements where the market value of the purchased securities/collateral equals at least 100% of principal including accrued interest and is marked-to-market daily. The risk to the Funds is limited to the ability of the seller to pay the agreed-upon sum on the repurchase date; in the event of default, the repurchase agreement provides that the affected Fund is entitled to sell the underlying collateral. If the value of the collateral declines after the agreement is entered into, however, and if the seller defaults under a repurchase agreement when the value of the underlying collateral is less than the repurchase price, the Fund could incur a loss of both principal and interest. The Funds, however, intend to enter into repurchase agreements only with financial institutions and dealers believed by First Trust to present minimal credit risks in accordance with criteria established by the Board of Trustees. First Trust will review and monitor the creditworthiness of such institutions. First Trust monitors the value of the collateral at the time the action is entered into and at all times during the term of the repurchase -7- agreement. First Trust does so in an effort to determine that the value of the collateral always equals or exceeds the agreed-upon repurchase price to be paid to the Fund. If the seller were to be subject to a federal bankruptcy proceeding, the ability of the Fund to liquidate the collateral could be delayed or impaired because of certain provisions of the bankruptcy laws. (5) Bank time deposits, which are monies kept on deposit with banks or savings and loan associations for a stated period of time at a fixed rate of interest. There may be penalties for the early withdrawal of such time deposits, in which case the yields of these investments will be reduced. (6) Commercial paper, which are short-term unsecured promissory notes, including variable rate master demand notes issued by corporations to finance their current operations. Master demand notes are direct lending arrangements between the Fund and a corporation. There is no secondary market for the notes. However, they are redeemable by a Fund at any time. A Fund's portfolio manager will consider the financial condition of the corporation (e.g., earning power, cash flow, and other liquidity ratios) and will continuously monitor the corporation's ability to meet all of its financial obligations, because the Fund's liquidity might be impaired if the corporation were unable to pay principal and interest on demand. The Funds may only invest in commercial paper rated A-1 or higher by S&P, Prime-1 or higher by Moody's or Fitch 2 or higher by Fitch. Portfolio Turnover The Funds buy and sell portfolio securities in the normal course of their investment activities. The proportion of a Fund's investment portfolio that is sold and replaced with new securities during a year is known as the Fund's portfolio turnover rate. A turnover rate of 100% would occur, for example, if a Fund sold and replaced securities valued at 100% of its net assets within one year. Active trading would result in the payment by the Fund of increased brokerage costs and expenses. Hedging Strategies General Description of Hedging Strategies The Funds may engage in hedging activities. First Trust may cause the Funds to utilize a variety of financial instruments, including options, forward contracts, futures contracts (hereinafter referred to as "Futures" or "Futures Contracts"), and options on Futures Contracts to attempt to hedge each Fund's holdings. Hedging or derivative instruments on securities generally are used to hedge against price movements in one or more particular securities positions that a Fund owns or intends to acquire. Such instruments may also be used to "lock-in" realized but unrecognized gains in the value of portfolio securities. Hedging instruments on stock indices, in contrast, generally are used to hedge against price movements in broad equity market sectors in which a Fund has invested or expects to invest. -8- Hedging strategies, if successful, can reduce the risk of loss by wholly or partially offsetting the negative effect of unfavorable price movements in the investments being hedged. However, hedging strategies can also reduce the opportunity for gain by offsetting the positive effect of favorable price movements in the hedged investments. The use of hedging instruments is subject to applicable regulations of the SEC, the several options and Futures exchanges upon which they are traded, the Commodity Futures Trading Commission (the "CFTC") and various state regulatory authorities. In addition, a Fund's ability to use hedging instruments may be limited by tax considerations. General Limitations on Futures and Options Transactions The Trust has filed a notice of eligibility for exclusion from the definition of the term "commodity pool operator" with the National Futures Association, the Futures industry's self-regulatory organization. A Fund will not enter into Futures and options transactions if the sum of the initial margin deposits and premiums paid for unexpired options exceeds 5% of the Fund's total assets. In addition, a Fund will not enter into Futures Contracts and options transactions if more than 30% of its net assets would be committed to such instruments. The foregoing limitations are not fundamental policies of the Funds and may be changed without shareholder approval as regulatory agencies permit. Various exchanges and regulatory authorities have undertaken reviews of options and Futures trading in light of market volatility. Among the possible actions that have been presented are proposals to adopt new or more stringent daily price fluctuation limits for Futures and options transactions and proposals to increase the margin requirements for various types of Futures transactions. Asset Coverage for Futures and Options Positions The Funds will comply with the regulatory requirements of the SEC and the CFTC with respect to coverage of options and Futures positions by registered investment companies and, if the guidelines so require, will earmark or set aside cash, U.S. Government securities, high grade liquid debt securities and/or other liquid assets permitted by the SEC and CFTC in a segregated custodial account in the amount prescribed. Securities earmarked or held in a segregated account cannot be sold while the Futures or options position is outstanding, unless replaced with other permissible assets, and will be marked-to-market daily. Stock Index Options The Funds may purchase stock index options, sell stock index options in order to close out existing positions and/or write covered options on stock indices for hedging purposes. Stock index options are put options and call options on various stock indices. In most respects, they are identical to listed options on common stocks. The primary difference between stock options and index options occurs when index options are exercised. In the case of stock options, the underlying security, common stock, is delivered. However, upon the exercise of an index option, settlement does not occur by delivery of the securities comprising the stock index. The option holder who exercises the index option receives an amount of cash if the closing level of the stock -9- index upon which the option is based is greater than, in the case of a call, or less than, in the case of a put, the exercise price of the option. This amount of cash is equal to the difference between the closing price of the stock index and the exercise price of the option expressed in dollars times a specified multiple. A stock index fluctuates with changes in the market values of the stocks included in the index. For example, some stock index options are based on a broad market index, such as the Standard & Poor's 500 or the Value Line(R) Composite Indices or a more narrow market index, such as the Standard & Poor's 100. Indices may also be based on an industry or market segment. Options on stock indices are currently traded on the following exchanges: the Chicago Board Options Exchange, the New York Stock Exchange ("NYSE"), the AMEX, the NYSE Arca, Inc. and the Philadelphia Stock Exchange. The Funds' use of stock index options is subject to certain risks. Successful use by a Fund of options on stock indices will be subject to the ability of First Trust to correctly predict movements in the directions of the stock market. This requires different skills and techniques than predicting changes in the prices of individual securities. In addition, a Fund's ability to effectively hedge all or a portion of the securities in its portfolio, in anticipation of or during a market decline through transactions in put options on stock indices, depends on the degree to which price movements in the underlying index correlate with the price movements of the securities held by the Fund. Inasmuch as the Funds' securities will not duplicate the components of an index, the correlation will not be perfect. Consequently, a Fund will bear the risk that the prices of its securities being hedged will not move in the same amount as the prices of its put options on the stock indices. It is also possible that there may be a negative correlation between the index and a Fund's securities, which would result in a loss on both such securities and the options on stock indices acquired by the Fund. The hours of trading for options may not conform to the hours during which the underlying securities are traded. To the extent that the options markets close before the markets for the underlying securities, significant price and rate movements can take place in the underlying markets that cannot be reflected in the options markets. The purchase of options is a highly specialized activity which involves investment techniques and risks different from those associated with ordinary portfolio securities transactions. The purchase of stock index options involves the risk that the premium and transaction costs paid by a Fund in purchasing an option will be lost as a result of unanticipated movements in prices of the securities comprising the stock index on which the option is based. Certain Considerations Regarding Options There is no assurance that a liquid secondary market on an options exchange will exist for any particular option, or at any particular time, and for some options no secondary market on an exchange or elsewhere may exist. If a Fund is unable to close out a call option on securities that it has written before the option is exercised, the Fund may be required to purchase the optioned securities in order to satisfy its obligation under the option to deliver such securities. If a Fund is unable to effect a closing sale transaction with respect to options -10- on securities that it has purchased, it would have to exercise the option in order to realize any profit and would incur transaction costs upon the purchase and sale of the underlying securities. The writing and purchasing of options is a highly specialized activity which involves investment techniques and risks different from those associated with ordinary portfolio securities transactions. Imperfect correlation between the options and securities markets may detract from the effectiveness of attempted hedging. Options transactions may result in significantly higher transaction costs and portfolio turnover for the Funds. Futures Contracts The Funds may enter into Futures Contracts, including index Futures as a hedge against movements in the equity markets, in order to hedge against changes on securities held or intended to be acquired by a Fund or for other purposes permissible under the Commodity Exchange Act (the "CEA"). A Fund's hedging may include sales of Futures as an offset against the effect of expected declines in stock prices and purchases of Futures as an offset against the effect of expected increases in stock prices. The Funds will not enter into Futures Contracts which are prohibited under the CEA and will, to the extent required by regulatory authorities, enter only into Futures Contracts that are traded on national Futures exchanges and are standardized as to maturity date and underlying financial instrument. The principal interest rate Futures exchanges in the United States are the Chicago Board of Trade and the Chicago Mercantile Exchange. Futures exchanges and trading are regulated under the CEA by the CFTC. An interest rate Futures Contract provides for the future sale by one party and purchase by another party of a specified amount of a specific financial instrument (e.g., a debt security) or currency for a specified price at a designated date, time and place. An index Futures Contract is an agreement pursuant to which the parties agree to take or make delivery of an amount of cash equal to the difference between the value of the index at the close of the last trading day of the contract and the price at which the index Futures Contract was originally written. Transaction costs are incurred when a Futures Contract is bought or sold and margin deposits must be maintained. A Futures Contract may be satisfied by delivery or purchase, as the case may be, of the instrument or by payment of the change in the cash value of the index. More commonly, Futures Contracts are closed out prior to delivery by entering into an offsetting transaction in a matching Futures Contract. Although the value of an index might be a function of the value of certain specified securities, no physical delivery of those securities is made. If the offsetting purchase price is less than the original sale price, a gain will be realized. Conversely, if the offsetting sale price is more than the original purchase price, a gain will be realized; if it is less, a loss will be realized. The transaction costs must also be included in these calculations. There can be no assurance, however, that a Fund will be able to enter into an offsetting transaction with respect to a particular Futures Contract at a particular time. If a Fund is not able to enter into an offsetting transaction, the Fund will continue to be required to maintain the margin deposits on the Futures Contract. Margin is the amount of funds that must be deposited by a Fund with its custodian in a segregated account in the name of the Futures commission merchant in order to initiate Futures trading and to maintain the Fund's -11- open positions in Futures Contracts. A margin deposit is intended to ensure a Fund's performance of the Futures Contract. The margin required for a particular Futures Contract is set by the exchange on which the Futures Contract is traded and may be significantly modified from time to time by the exchange during the term of the Futures Contract. Futures Contracts are customarily purchased and sold on margins that may range upward from less than 5% of the value of the Futures Contract being traded. If the price of an open Futures Contract changes (by increase in the case of a sale or by decrease in the case of a purchase) so that the loss on the Futures Contract reaches a point at which the margin on deposit does not satisfy margin requirements, the broker will require an increase in the margin. However, if the value of a position increases because of favorable price changes in the Futures Contract so that the margin deposit exceeds the required margin, the broker will pay the excess to the Fund. In computing daily net asset value, a Fund will mark to market the current value of its open Futures Contracts. The Funds expect to earn interest income on their margin deposits. Most United States Futures exchanges limit the amount of fluctuation permitted in Futures Contract prices during a single trading day. The day limit establishes the maximum amount that the price of a Futures Contract may vary either up or down from the previous day's settlement price at the end of a trading session. Once the daily limit has been reached in a particular type of Futures Contract, no trades may be made on that day at a price beyond that limit. The daily limit governs only price movement during a particular trading day and therefore does not limit potential losses, because the limit may prevent the liquidation of unfavorable positions. Futures Contract prices have occasionally moved to the daily limit for several consecutive trading days with little or no trading, thereby preventing prompt liquidation of Futures positions and subjecting some investors to substantial losses.Because of the low margin deposits required, Futures trading involves an extremely high degree of leverage. As a result, a relatively small price movement in a Futures Contract may result in immediate and substantial loss, as well as gain, to the investor. For example, if at the time of purchase, 10% of the value of the Futures Contract is deposited as margin, a subsequent 10% decrease in the value of the Futures Contract would result in a total loss of the margin deposit, before any deduction for the transaction costs, if the account were then closed out. A 15% decrease would result in a loss equal to 150% of the original margin deposit, if the Future Contracts were closed out. Thus, a purchase or sale of a Futures Contract may result in losses in excess of the amount initially invested in the Futures Contract. However, a Fund would presumably have sustained comparable losses if, instead of the Futures Contract, it had invested in the underlying financial instrument and sold it after the decline. There can be no assurance that a liquid market will exist at a time when a Fund seeks to close out a Futures position. The Fund would continue to be required to meet margin requirements until the position is closed, possibly resulting in a decline in a Fund's net asset value. In addition, many of the contracts discussed above are relatively new -12- instruments without a significant trading history. As a result, there can be no assurance that an active secondary market will develop or continue to exist. A public market exists in Futures Contracts covering a number of indices, including but not limited to, the S&P 500 Index, the S&P 100 Index, the NASDAQ-100 Index(R), the Value Line(R) Composite Index and the New York Stock Exchange Composite Index. Options on Futures The Funds may also purchase or write put and call options on Futures Contracts and enter into closing transactions with respect to such options to terminate an existing position. A Futures option gives the holder the right, in return for the premium paid, to assume a long position (call) or short position (put) in a Futures Contract at a specified exercise price prior to the expiration of the option. Upon exercise of a call option, the holder acquires a long position in the Futures Contract and the writer is assigned the opposite short position. In the case of a put option, the opposite is true. Prior to exercise or expiration, a Futures option may be closed out by an offsetting purchase or sale of a Futures option of the same series. The Funds may use options on Futures Contracts in connection with hedging strategies. Generally, these strategies would be applied under the same market and market sector conditions in which the Funds use put and call options on securities or indices. The purchase of put options on Futures Contracts is analogous to the purchase of puts on securities or indices so as to hedge a Fund's securities holdings against the risk of declining market prices. The writing of a call option or the purchasing of a put option on a Futures Contract constitutes a partial hedge against declining prices of securities which are deliverable upon exercise of the Futures Contract. If the price at expiration of a written call option is below the exercise price, a Fund will retain the full amount of the option premium which provides a partial hedge against any decline that may have occurred in the Fund's holdings of securities. If the price when the option is exercised is above the exercise price, however, a Fund will incur a loss, which may be offset, in whole or in part, by the increase in the value of the securities held by the Fund that were being hedged. Writing a put option or purchasing a call option on a Futures Contract serves as a partial hedge against an increase in the value of the securities the Fund intends to acquire. As with investments in Futures Contracts, the Funds are required to deposit and maintain margin with respect to put and call options on Futures Contracts written by them. Such margin deposits will vary depending on the nature of the underlying Futures Contract (and the related initial margin requirements), the current market value of the option, and other Futures positions held by a Fund. A Fund will earmark or set aside in a segregated account at such Fund's custodian, liquid assets, such as cash, U.S. Government securities or other high-grade liquid debt obligations equal in value to the amount due on the underlying obligation. Such segregated assets will be marked-to-market daily, and additional assets will be earmarked or placed in the segregated account whenever the total value of the earmarked or segregated assets falls below the amount due on the underlying obligation. The risks associated with the use of options on Futures Contracts include the risk that the Funds may close out its position as a writer of an option only if a liquid secondary market exists for such options, -13- which cannot be assured. A Fund's successful use of options on Futures Contracts depends on First Trust's ability to correctly predict the movement in prices of Futures Contracts and the underlying instruments, which may prove to be incorrect. In addition, there may be imperfect correlation between the instruments being hedged and the Futures Contract subject to the option. For additional information, see "Futures Contracts." Certain characteristics of the Futures market might increase the risk that movements in the prices of Futures Contracts or options on Futures Contracts might not correlate perfectly with movements in the prices of the investments being hedged. For example, all participants in the Futures and options on Futures Contracts markets are subject to daily variation margin calls and might be compelled to liquidate Futures or options on Futures Contracts positions whose prices are moving unfavorably to avoid being subject to further calls. These liquidations could increase the price volatility of the instruments and distort the normal price relationship between the Futures or options and the investments being hedged. Also, because of initial margin deposit requirements, there might be increased participation by speculators in the Futures markets. This participation also might cause temporary price distortions. In addition, activities of large traders in both the Futures and securities markets involving arbitrage, "program trading," and other investment strategies might result in temporary price distortions. Sublicense Agreement The Funds have entered into a sublicense agreement (the "Sublicense Agreement") with First Trust Portfolios L.P. ("First Trust Portfolios") and First Trust that grants the Funds a non-exclusive and non- transferable sublicense to use certain intellectual property of AMEX and First Trust Portfolios in connection with the issuance, distribution, marketing and/or promotion of the Funds. Pursuant to the Sublicense Agreement, the Funds have agreed to be bound by certain provisions of a product license agreement between the AMEX and First Trust Portfolios (the "Product License Agreement"). Pursuant to the Product License Agreement, First Trust Portfolios will pay the AMEX an annual fee of 0.10% of the average daily net assets of each Fund, provided, that, the minimum annual payment shall be $50,000. First Trust shall reimburse First Trust Portfolios for its costs associated with the Product Licensing Agreement and each Fund shall reimburse First Trust for the reimbursement payments made to First Trust Portfolios. Investment Risks Overview An investment in a Fund should be made with an understanding of the risks which an investment in common stocks entails, including the risk that the financial condition of the issuers of the equity securities or the general condition of the common stock market may worsen and the value of the equity securities and therefore the value of a Fund may decline. The Funds may not be an appropriate investment for those who are unable or unwilling to assume the risks involved generally with an equity investment. The past market and earnings performance of any of the equity securities included in a Fund is not predictive of their future performance. Common stocks are especially susceptible to general stock market movements and to volatile increases and decreases of value as market confidence in and perceptions of the issuers change. These -14- perceptions are based on unpredictable factors including expectations regarding government, economic, monetary and fiscal policies, inflation and interest rates, economic expansion or contraction, and global or regional political, economic or banking crises. First Trust cannot predict the direction or scope of any of these factors. Shareholders of common stocks have rights to receive payments from the issuers of those common stocks that are generally subordinate to those of creditors of, or holders of debt obligations or preferred stocks of, such issuers. Shareholders of common stocks of the type held by the Funds have a right to receive dividends only when and if, and in the amounts, declared by the issuer's board of directors and have a right to participate in amounts available for distribution by the issuer only after all other claims on the issuer have been paid. Common stocks do not represent an obligation of the issuer and, therefore, do not offer any assurance of income or provide the same degree of protection of capital as do debt securities. The issuance of additional debt securities or preferred stock will create prior claims for payment of principal, interest and dividends which could adversely affect the ability and inclination of the issuer to declare or pay dividends on its common stock or the rights of holders of common stock with respect to assets of the issuer upon liquidation or bankruptcy. The value of common stocks is subject to market fluctuations for as long as the common stocks remain outstanding, and thus the value of the equity securities in the Funds will fluctuate over the life of the Funds and may be more or less than the price at which they were purchased by the Funds. The equity securities held by the Funds may appreciate or depreciate in value (or pay dividends) depending on the full range of economic and market influences affecting these securities, including the impact of a Fund's purchase and sale of the equity securities and other factors. Holders of common stocks incur more risk than holders of preferred stocks and debt obligations because common stockholders, as owners of the entity, have generally inferior rights to receive payments from the issuer in comparison with the rights of creditors of, or holders of debt obligations or preferred stocks issued by, the issuer. Cumulative preferred stock dividends must be paid before common stock dividends and any cumulative preferred stock dividend omitted is added to future dividends payable to the holders of cumulative preferred stock. Preferred stockholders are also generally entitled to rights on liquidation which are senior to those of common stockholders. Additional Risks of Investing in the Funds Liquidity Whether or not the equity securities held by the Funds are listed on a securities exchange, the principal trading market for the equity securities may be in the over-the-counter market. As a result, the existence of a liquid trading market for the equity securities may depend on whether dealers will make a market in the equity securities. There can be no assurance that a market will be made for any of the equity securities, that any market for the equity securities will be maintained or that there will be sufficient liquidity of the equity securities in any markets made. The price at which the equity securities are held by the Funds will be adversely affected if trading markets for the equity securities are limited or absent. -15- Small Capitalization and Mid Capitalization Companies The equity securities held by the Funds may include small cap and mid cap company stocks. Small cap and mid cap company stocks have customarily involved more investment risk than large capitalization stocks. Small cap and mid cap companies may have limited product lines, markets or financial resources; may lack management depth or experience; and may be more vulnerable to adverse general market or economic developments than large cap companies. Some of these companies may distribute, sell or produce products that have recently been brought to market and may be dependent on key personnel. The prices of small cap and mid cap company securities are often more volatile than prices associated with large cap company issues, and can display abrupt or erratic movements at times, due to limited trading volumes and less publicly available information. Also, because small cap and mid cap companies normally have fewer shares outstanding and these shares trade less frequently than large cap companies, it may be more difficult for a Fund which contains these equity securities to buy and sell significant amounts of such shares without an unfavorable impact on prevailing market prices. The securities of small cap and mid cap companies are often traded over-the-counter and may not be traded in the volumes typical of a national securities exchange. Non-Diversification Each Fund is classified as "non-diversified" under the 1940 Act. As a result, each Fund is limited as to the percentage of its assets which may be invested in the securities of any one issuer only by the diversification requirements imposed by the Internal Revenue Code of 1986, as amended. Because each Fund may invest a relatively high percentage of its assets in a limited number of issuers, each Fund may be more susceptible to any single economic, political or regulatory occurrence and to the financial conditions of the issuers in which it invests. Intellectual Property Risk Each Fund relies on a license that permits Fund to use its corresponding equity index and the associated trade names and trademarks ("Intellectual Property") in connection with the name and investment strategies of the Fund. Such license may be terminated by the index provider and, as a result, a Fund may lose its ability to use the Intellectual Property. There is also no guarantee that the index provider has all rights to license the Intellectual Property to First Trust Portfolios on behalf of First Trust and such Funds. Accordingly, in the event the license is terminated or the index provider does not have rights to license the Intellectual Property, it may have a significant effect on the operation of the Funds. Non-U.S. Securities Risk A Fund may invest in the securities of issuers domiciled in jurisdictions other than the United States and such stocks may be denominated in currencies other than the U.S. dollar. These securities are either in the form of American Depositary Receipts ("ADRs") or are -16- directly listed on a U.S. securities exchange. Investments in securities of non-U.S. issuers involve special risks not presented by investments in securities of U.S. issuers, including: (i) there may be less publicly available information about non-U.S. issuers or markets due to less rigorous disclosure or accounting standards or regulatory practices; (ii) many non-U.S. markets are smaller, less liquid and more volatile than the U.S. market; (iii) potential adverse effects of fluctuations in currency exchange rates or controls on the value of a Fund's investments; (iv) the economies of non-U.S. countries may grow at slower rates than expected or may experience a downturn or recession; (v) the impact of economic, political, social or diplomatic events; (vi) certain non-U.S. countries may impose restrictions on the ability of non- U.S. issuers to make payments of principal and interest to investors located in the U.S. due to blockage of non-U.S. currency exchanges or otherwise; and (vii) withholding and other non-U.S. taxes may decrease a Fund's return. Risks and Special Considerations Concerning Derivatives In addition to the foregoing, the use of derivative instruments involves certain general risks and considerations as described below. (1) Market Risk. Market risk is the risk that the value of the underlying assets may go up or down. Adverse movements in the value of an underlying asset can expose the Funds to losses. Market risk is the primary risk associated with derivative transactions. Derivative instruments may include elements of leverage and, accordingly, fluctuations in the value of the derivative instrument in relation to the underlying asset may be magnified. The successful use of derivative instruments depends upon a variety of factors, particularly the portfolio manager's ability to predict movements of the securities, currencies, and commodities markets, which may require different skills than predicting changes in the prices of individual securities. There can be no assurance that any particular strategy adopted will succeed. A decision to engage in a derivative transaction will reflect the portfolio manager's judgment that the derivative transaction will provide value to a Fund and its shareholders and is consistent with a Fund's objective, investment limitations, and operating policies. In making such a judgment, the portfolio manager will analyze the benefits and risks of the derivative transactions and weigh them in the context of the Fund's overall investments and investment objective. (2) Credit Risk. Credit risk is the risk that a loss may be sustained as a result of the failure of a counterparty to comply with the terms of a derivative instrument. The counterparty risk for exchange-traded derivatives is generally less than for privately- negotiated or over-the-counter ("OTC") derivatives, since generally a clearing agency, which is the issuer or counterparty to each exchange- traded instrument, provides a guarantee of performance. For privately- negotiated instruments, there is no similar clearing agency guarantee. In all transactions, the Funds will bear the risk that the counterparty will default, and this could result in a loss of the expected benefit of the derivative transactions and possibly other losses to the Funds. The Funds will enter into transactions in derivative instruments only with counterparties that First Trust reasonably believes are capable of performing under the contract. -17- (3) Correlation Risk. Correlation risk is the risk that there might be an imperfect correlation, or even no correlation, between price movements of a derivative instrument and price movements of investments being hedged. When a derivative transaction is used to completely hedge another position, changes in the market value of the combined position (the derivative instrument plus the position being hedged) result from an imperfect correlation between the price movements of the two instruments. With a perfect hedge, the value of the combined position remains unchanged with any change in the price of the underlying asset. With an imperfect hedge, the value of the derivative instrument and its hedge are not perfectly correlated. For example, if the value of a derivative instrument used in a short hedge (such as writing a call option, buying a put option or selling a Futures Contract) increased by less than the decline in value of the hedged investments, the hedge would not be perfectly correlated. This might occur due to factors unrelated to the value of the investments being hedged, such as speculative or other pressures on the markets in which these instruments are traded. The effectiveness of hedges using instruments on indices will depend, in part, on the degree of correlation between price movements in the index and the price movements in the investments being hedged. (4) Liquidity Risk. Liquidity risk is the risk that a derivative instrument cannot be sold, closed out, or replaced quickly at or very close to its fundamental value. Generally, exchange contracts are very liquid because the exchange clearinghouse is the counterparty of every contract. OTC transactions are less liquid than exchange-traded derivatives since they often can only be closed out with the other party to the transaction. The Funds might be required by applicable regulatory requirements to maintain assets as "cover," maintain segregated accounts, and/or make margin payments when they take positions in derivative instruments involving obligations to third parties (i.e., instruments other than purchase options). If a Fund is unable to close out its positions in such instruments, it might be required to continue to maintain such assets or accounts or make such payments until the position expires, matures, or is closed out. These requirements might impair the Fund's ability to sell a security or make an investment at a time when it would otherwise be favorable to do so, or require that the Fund sell a portfolio security at a disadvantageous time. A Fund's ability to sell or close out a position in an instrument prior to expiration or maturity depends upon the existence of a liquid secondary market or, in the absence of such a market, the ability and willingness of the counterparty to enter into a transaction closing out the position. Due to liquidity risk, there is no assurance that any derivatives position can be sold or closed out at a time and price that is favorable to the Fund. (5) Legal Risk. Legal risk is the risk of loss caused by the unenforceability of a party's obligations under the derivative. While a party seeking price certainty agrees to surrender the potential upside in exchange for downside protection, the party taking the risk is looking for a positive payoff. Despite this voluntary assumption of risk, a counterparty that has lost money in a derivative transaction may try to avoid payment by exploiting various legal uncertainties about certain derivative products. -18- (6) Systemic or "Interconnection" Risk. Systemic or interconnection risk is the risk that a disruption in the financial markets will cause difficulties for all market participants. In other words, a disruption in one market will spill over into other markets, perhaps creating a chain reaction. Much of the OTC derivatives market takes place among the OTC dealers themselves, thus creating a large interconnected web of financial obligations. This interconnectedness raises the possibility that a default by one large dealer could create losses for other dealers and destabilize the entire market for OTC derivative instruments. Funds Management The general supervision of the duties performed for the Funds under the investment management agreement is the responsibility of the Board of Trustees. There are five Trustees of the Trust, one of whom is an "interested person" (as the term is defined in the 1940 Act) and four of whom are Trustees who are not officers or employees of First Trust or any of its affiliates ("Independent Trustees"). The Trustees set broad policies for the Funds, choose the Trust's officers and hire the Trust's investment adviser. The officers of the Trust manage its day to day operations and are responsible to the Trust's Board of Trustees. The following is a list of the Trustees and officers of the Trust and a statement of their present positions and principal occupations during the past five years, the number of portfolios each Trustee oversees and the other directorships they hold, if applicable.
Name, Address Position and Offices Term of Office Principal Occupations Number of Other and Date of Birth with Trust and Year First During Past 5 Years Portfolios in Trusteeships or Elected or the First Directorships Appointed Trust Fund Held by Trustee Complex Overseen by Trustee Trustee who is an Interested Person of the Trust - ---------------------------- James A. Bowen(1) President, Chairman oIndefinite term President, First Trust 49 Portfolios Trustee of 1001 Warrenville Road, of the Board, Chief o2006 Portfolios and First Wheaton College Suite 300 Executive Officer Trust Advisors; Chairman Lisle, IL 60532 and Trustee of the Board of D.O.B.: 09/55 Directors, Bond Wave, LLC and Stonebridge Advisors LLC Trustees who are not Interested Persons of the Trust - ------------------------------- Richard E. Erickson Trustee oIndefinite term Physician, President 49 Portfolios None c/o First Trust Advisors L.P. o2006 Wheaton Orthopedics; Co- 1001 Warrenville Road, Owner, Co-Director Sports Suite 300 Med Center for Fitness; Lisle, IL 60532 Limited Partner Gundersen D.O.B.: 04/51 Real Estate Partnership -19- Name, Address Position and Offices Term of Office Principal Occupations Number of Other and Date of Birth with Trust and Year First During Past 5 Years Portfolios in Trusteeships or Elected or the First Directorships Appointed Trust Fund Held by Trustee Complex Overseen by Trustee Thomas R. Kadlec Trustee oIndefinite term President, ADM 49 Portfolios None c/o First Trust Advisors L.P. o2006 Derivatives, Inc. (May 1001 Warrenville Road, 2005 to Present); Vice Suite 300 President, Chief Lisle, IL 60532 Financial Officer (1990 D.O.B.: 11/57 to Present), ADM Investor Services, Inc. (Futures Commission Merchant); Registered Representative (2000 to Present), Segerdahl & Company, Inc., an NASD member (Broker-Dealer) Robert F. Keith Trustee oIndefinite term President Hibs 49 Portfolios None c/o First Trust Advisors L.P. o2006 Enterprises Financial and 1001 Warrenville Road, Management Consulting Suite 300 (2003 to Present); Lisle, IL 60532 Aramark Service Master D.O.B.: 11/56 Management Services (2001 to 2003); President and Chief Operating Officer, Service Master Management Services (1998 to 2003) Niel B. Nielson Trustee oIndefinite term President (2002 to 49 Portfolios Director of c/o First Trust Advisors L.P. o2006 Present), Covenant Covenant 1001 Warrenville Road, College; Associate Pastor Transport Inc. Suite 300 (1997 to 2002), College Lisle, IL 60532 Church in Wheaton D.O.B.: 03/54 Officers of the Trust - -------------------- Mark R. Bradley Treasurer, oIndefinite term Chief Financial Officer, N/A N/A 1001 Warrenville Road, Controller, Chief o2006 Managing Director, First Suite 300 Financial Officer Trust Portfolios and Lisle, IL 60532 and Chief Accounting First Trust Advisors; D.O.B.: 11/57 Officer Chief Financial Officer, Bond Wave LLC and Stonebridge Advisors LLC Kelley Christensen Vice President oIndefinite term Assistant Vice President N/A N/A 1001 Warrenville Road, o2006 of First Trust Portfolios Suite 300 and First Trust Advisors Lisle, IL 60532 D.O.B.: 09/70 James M. Dykas Assistant Treasurer oIndefinite term Vice President, First N/A N/A 1001 Warrenville Road, o2006 Trust Portfolios L.P. Suite 300 (January 2005 to Lisle, IL 60532 present); Executive D.O.B.: 01/66 Director of Van Kampen Asset Management and Morgan Stanley Investment Management (December 2002 to January 2005); Vice President, Van Kampen Asset Management and Morgan Stanley Investment Management (December 2000 to December 2002) -20- Name, Address Position and Offices Term of Office Principal Occupations Number of Other and Date of Birth with Trust and Year First During Past 5 Years Portfolios in Trusteeships or Elected or the First Directorships Appointed Trust Fund Held by Trustee Complex Overseen by Trustee W. Scott Jardine Secretary and Chief oIndefinite term General Counsel, First N/A N/A 1001 Warrenville Road, Compliance Officer o2006 Trust Portfolios and Suite 300 First Trust Advisors; Lisle, IL 60532 Secretary, Bond Wave, LLC D.O.B.: 05/60 and Stonebridge Advisors LLC Daniel J. Lindquist Vice President oIndefinite term Senior Vice President, N/A N/A 1001 Warrenville Road, o2006 First Trust Advisors, Suite 300 L.P.; Senior Vice Lisle, IL 60532 President, First Trust D.O.B.: 02/70 Portfolios L.P. (April 2004 to present); Chief Operating Officer, Mina Capital Management, LLC (January 2004 to April 2004); Chief Operating Officer, Samaritan Asset Management Service, Inc. Kristi A. Maher Assistant Secretary oIndefinite term Assistant General Counsel N/A N/A 1001 Warrenville Road, o2006 (March 2004 to Present), Suite 300 First Trust Portfolios Lisle, IL 60532 and First Trust Advisors D.O.B.: 12/66 L.P.; Associate (1995 to March 2004), Chapman and Cutler LLP Roger Testin Vice President oIndefinite term Senior Vice President, N/A N/A 1001 Warrenville Road, o2006 First Trust Advisors L.P. Suite 300 (August 2001 to Present), Lisle, IL 60532 Senior Vice President, D.O.B.: 06/66 First Trust Portfolios L.P. (August 2004 to Present); Analyst (1998 to 2001), Dolan Capital Management Stan Ueland Assistant Vice oIndefinite term Vice President of First N/A N/A 1001 Warrenville Road, President o2006 Trust and First Trust Suite 300 Portfolios (August 2005 Lisle, IL 60532 to present); Vice D.O.B.: 11/70 President; BondWave LLC (May 2004 - August 2005); Account Executive, Mina Capital Management LLC and Samaritan Asset Management LLC (January 2003 through May 2004); Sales Consultant, Oracle Corporation (January 1997 through January 2003) ____________________ (1) Mr. Bowen is deemed an "interested person" of the Trust due to his position of President of First Trust, investment adviser of the Funds.
The Board of Trustees of the Trust has four standing committees: the Executive Committee (and Pricing and Dividend Committee), the Nominating and Governance Committee, the Valuation Committee and the Audit Committee. The Executive Committee, which meets between Board meetings, is authorized to exercise all powers of and to act in the place of the Board of Trustees to the extent permitted by the Trust's Declaration of Trust and By-laws. The members of the Executive Committee shall also serve as a special committee of the Board known as the Pricing and -21- Dividend Committee which is authorized to exercise all of the powers and authority of the Board in respect of the declaration and setting of dividends. Messrs. Kadlec and Bowen are members of the Executive Committee. The Nominating and Governance Committee is responsible for appointing and nominating non-interested persons to the Trust's Board of Trustees. Messrs. Erickson, Nielson, Kadlec and Keith are members of the Nominating and Governance Committee. If there is no vacancy on the Board of Trustees, the Board will not actively seek recommendations from other parties, including Shareholders. When a vacancy on the Board occurs and nominations are sought to fill such vacancy, the Nominating and Governance Committee may seek nominations from those sources it deems appropriate in its discretion, including Shareholders of the Funds. To submit a recommendation for nomination as a candidate for a position on the Board, Shareholders of the Funds shall mail such recommendation to W. Scott Jardine at the Funds' address, 1001 Warrenville Road, Suite 300, Lisle, Illinois 60532. Such recommendation shall include the following information: (a) evidence of Fund ownership of the person or entity recommending the candidate (if a Fund Shareholder); (b) a full description of the proposed candidate's background, including his or her education, experience, current employment and date of birth; (c) names and addresses of at least three professional references for the candidate; (d) information as to whether the candidate is an "interested person" in relation to the Funds, as such term is defined in the 1940 Act, and such other information that may be considered to impair the candidate's independence; and (e) any other information that may be helpful to the Nominating and Governance Committee in evaluating the candidate. If a recommendation is received with satisfactorily completed information regarding a candidate during a time when a vacancy exists on the Board or during such other time as the Nominating and Governance Committee is accepting recommendations, the recommendation will be forwarded to the chairman of the Nominating and Governance Committee and the outside counsel to the Independent Trustees. Recommendations received at any other time will be kept on file until such time as the Nominating and Governance Committee is accepting recommendations, at which point they may be considered for nomination. The Valuation Committee is responsible for the oversight of the pricing procedures of the Funds. Messrs. Erickson, Kadlec, Nielson and Keith are members of the Valuation Committee. The Audit Committee is responsible for overseeing the Funds' accounting and financial reporting process, the system of internal controls, audit process and evaluating and appointing independent auditors (subject also to Board approval). Messrs. Erickson, Nielson, Kadlec and Keith serve on the Audit Committee. Messrs. Erickson, Kadlec, Keith, Nielson and Bowen are also trustees of First Defined Portfolio Fund, LLC, an open-end fund advised by First Trust with 8 portfolios, First Trust Value Line(R) 100 Fund, First Trust/Four Corners Senior Floating Rate Income Fund, First Trust/Four Corners Senior Floating Rate Income Fund II, Macquarie/First Trust Global Infrastructure/Utilities Dividend & Income Fund, Energy Income and Growth Fund, First Trust/Fiduciary Asset Management Covered Call Fund, First Trust/Aberdeen Global Opportunity Income Fund, First Trust/FIDAC Mortgage Income Fund, First Trust Strategic High Income Fund, First Trust Strategic High Income Fund II, First Trust Strategic -22- High Income Fund III, First Trust Tax-Advantaged Preferred Income Fund and First Trust/Aberdeen Emerging Opportunity Fund, closed-end funds advised by First Trust, and First Trust Exchange-Traded Fund, an exchange-traded fund advised by First Trust with 12 portfolios. None of the Trustees who are not "interested persons" of the Trust, nor any of their immediate family members, has ever been a director, officer or employee of, or consultant to, First Trust, First Trust Portfolios or their affiliates. In addition, Mr. Bowen and the other officers of the Trust (other than Stan Ueland and Roger Testin) hold the same positions with the First Defined Portfolio Fund, LLC, First Trust Value Line(R) 100 Fund, First Trust/Four Corners Senior Floating Rate Income Fund, First Trust/Four Corners Senior Floating Rate Income Fund II, Macquarie/First Trust Global Infrastructure/Utilities Dividend & Income Fund, Energy Income and Growth Fund, First Trust/Fiduciary Asset Management Covered Call Fund, First Trust/Aberdeen Global Opportunity Income Fund, First Trust/FIDAC Mortgage Income Fund, First Trust Strategic High Income Fund, First Trust Strategic High Income Fund II, First Trust Strategic High Income Fund III, First Trust Tax-Advantaged Preferred Income Fund, First Trust/Aberdeen Emerging Opportunity Fund and First Trust Exchange-Traded Fund (collectively with the Trust, the "First Trust Fund Complex") as they hold with the Trust. Mr. Ueland, Assistant Vice President of the Trust, serves in the same position for the First Trust Exchange-Traded Fund. Mr. Testin, Vice President of the Trust, serves in the same position for First Trust Value Line(R) 100 Fund and First Defined Portfolio Fund, LLC. The Independent Trustees are paid an annual retainer of $10,000 for each investment company in the First Trust Fund Complex up to a total of 14 investment companies (the "Trustee Compensation I") and an annual retainer of $7,500 for each subsequent investment company added to the First Trust Fund Complex (the "Trustee Compensation II," and together with Trustee Compensation I, the "Aggregate Trustee Compensation"). The Aggregate Trustee Compensation is divided equally among each of the investment companies in the First Trust Fund Complex. No additional meeting fees are paid in connection with board or committee meetings. Trustees are also reimbursed for travel and out-of-pocket expenses in connection with all meetings. Additionally, Mr. Kadlec is paid annual compensation of $10,000 to serve as the Lead Trustee and Niel B. Nielson is paid annual compensation of $5,000 to serve as the chairman of the Audit Committee of each of the investment companies in the First Trust Fund Complex. Such additional compensation to Messrs. Kadlec and Nielson is paid by the investment companies in the First Trust Fund Complex and equally divided among those investment companies. The following table sets forth the estimated compensation to be paid by each Fund projected during each Fund's full fiscal year to each of the Trustees and the estimated total compensation to be paid to each of the Trustees by the First Trust Fund Complex for a full calendar year. The Trust has no retirement or pension plans. The officers and Trustees who are "interested persons" as designated above serve without any compensation from the Fund. -23-
Name of Trustee Estimated Aggregate Estimated Total Compensation Compensation from a Fund(1) from the First Trust Fund Complex(2) James A. Bowen $0 $0 Richard E. Erickson $________ $140,000 Thomas R. Kadlec $________ $150,000 Robert F. Keith $________ $130,000 Niel B. Nielson $________ $145,000 ____________________ (1) The compensation estimated to be paid by each Fund to the Trustees for the full fiscal year for services to each Fund. (2) The total estimated compensation to be paid to Messrs. Erickson, Kadlec, Keith and Nielson, Independent Trustees, from the Fund and the investment companies in the First Trust Fund Complex for a full calendar year is based on estimated compensation to be paid to these Trustees for a full calendar year for services as Trustees to the Trust and the First Defined Portfolio Fund, LLC, an open-end fund (with 8 portfolios) advised by First Trust, plus estimated compensation to be paid to these Trustees by the First Value Line(R) 100 Fund, the First Trust/Four Corners Senior Floating Rate Income Fund, the First Trust/Four Corners Senior Floating Rate Income Fund II, the Macquarie/First Trust Global Infrastructure/Utilities Dividend & Income Fund, the Energy Income and Growth Fund, the First Trust/Fiduciary Asset Management Covered Call Fund, the First Trust/Aberdeen Global Opportunity Income Fund, the First Trust/FIDAC Mortgage Income Fund, the First Trust Strategic High Income Fund, the First Trust Strategic High Income Fund II, the First Trust Strategic High Income Fund III, the First Trust Tax-Advantaged Preferred Income Fund, the First Trust/Aberdeen Emerging Opportunity Fund and the First Trust Exchange- Traded Fund.
The Trust has no employees. Its officers are compensated by First Trust. The following table sets forth the dollar range of equity securities beneficially owned by the Trustees in the Funds and in other funds overseen by the Trustees in the First Trust Fund Complex as of December 31, 2006: Aggregate Dollar Range of Equity Securities in Dollar Range of All Registered Investment Companies Equity Securities Overseen by Trustee in First Trust Trustee in the Funds Fund Complex Mr. Bowen None Over $100,000 Mr. Erickson None $50,001-$100,000 Mr. Kadlec None Over $100,000 Mr. Keith None Over $100,000 Mr. Nielson None $50,001-$100,000 As of the date of this SAI, the Trustees of the Trust who are not "interested persons" of the Trust and immediate family members do not own beneficially or of record any class of securities of an investment adviser or principal underwriter of the Funds or any person directly or indirectly controlling, controlled by, or under common control with an investment adviser or principal underwriter of the Funds. As of the date of this SAI, the officers and Trustees of the Trust, in the aggregate, owned less than 1% of the Shares of each Fund. -24- As of the date of this SAI, no person owned of record, or is known by the Trust to own of record, beneficially 5% or more of the Shares of each Fund. The Board of Trustees of the Trust, including the Independent Trustees, approved the Investment Management Agreement (the "Agreement") for each Fund for an initial two-year term at a meeting held on December 11, 2006. The Board of Trustees determined that the Agreement is in the best interests of each Fund in light of the services, expenses and such other matters as the Board considered to be relevant in the exercise of its reasonable business judgment. Investment Adviser. First Trust provides investment tools and portfolios for advisers and investors. First Trust is committed to theoretically sound portfolio construction and empirically verifiable investment management approaches. Its asset management philosophy and investment discipline is deeply rooted in the application of intuitive factor analysis and model implementation to enhance investment decisions. First Trust acts as investment adviser for and manages the investment and reinvestment of the assets of the Funds. First Trust also administers the Trust's business affairs, provides office facilities and equipment and certain clerical, bookkeeping and administrative services, and permits any of its officers or employees to serve without compensation as Trustees or officers of the Trust if elected to such positions. Pursuant to the Agreement between First Trust and the Trust, each Fund has agreed to pay an annual management fee equal to 0.50% of its average daily net assets. Each Fund is responsible for all its expenses, including the investment advisory fees, costs of transfer agency, custody, fund administration, legal, audit and other services, interest, taxes, sublicensing fees, brokerage commissions and other expenses connected with executions of portfolio transactions, any distribution fees or expenses and extraordinary expenses. Until two years after the initial public issuance of Fund Shares, First Trust has agreed to waive fees and/or pay Fund expenses to the extent necessary to prevent the operating expenses of each Fund (excluding interest expense, brokerage commissions and other trading expenses, taxes and extraordinary expenses) from exceeding 0.70% of average daily net assets until two years after the issuance of Fund Shares. Expenses borne by First Trust are subject to reimbursement by the Funds up to three years from the date the fee or expense was incurred, but no reimbursement payment will be made by the Funds at any time if it would result in a Fund's expenses exceeding 0.70% of average daily net assets. Under the Agreement, First Trust shall not be liable for any loss sustained by reason of the purchase, sale or retention of any security, whether or not such purchase, sale or retention shall have been based upon the investigation and research made by any other individual, firm or corporation, if such recommendation shall have been selected with due care and in good faith, except loss resulting from willful misfeasance, bad faith, or gross negligence on the part of First Trust in the performance of its obligations and duties, or by reason of its reckless disregard of its obligations and duties. The Agreement continues until two years after the initial public issuance of Fund Shares and thereafter only if approved annually by the Board, including a majority -25- of the Independent Trustees. The Agreement terminates automatically upon assignment and is terminable at any time without penalty as to the Funds by the Board, including a majority of the Independent Trustees, or by vote of the holders of a majority of a Fund's outstanding voting securities on 60 days' written notice to First Trust, or by First Trust on 60 days' written notice to the Funds. First Trust is located at 1001 Warrenville Road, Lisle, Illinois 60532. Investment Committee. The Investment Committee of First Trust is primarily responsible for the day-to-day management of the Funds. There are currently six members of the Investment Committee, as follows:
Position with Length of Service Principal Occupation Name First Trust with First Trust During Past Five Years Daniel J. Lindquist Senior Vice President Since 2004 Senior Vice President, First Trust and First Trust Portfolios L.P. (April 2004 to present); Chief Operating Officer, Mina Capital Management, LLC (January 2004 to April 2004); Chief Operating Officer, Samaritan Asset Management Service, Inc. (April 2000 to January 2004) Robert F. Carey Chief Investment Officer and Since 1991 Chief Investment Officer and Senior Vice President Senior Vice President of First Trust; Senior Vice President of First Trust Portfolios L.P. Jon C. Erickson Senior Vice President Since 1994 Senior Vice President of First Trust and First Trust Portfolios L.P. (August 2002 to present); Vice President of First Trust and First Trust Portfolios L.P. (March 1994 to August 2002) David G. McGarel Senior Vice President Since 1997 Senior Vice President of First Trust and First Trust Portfolios L.P. (August 2002 to present); Vice President of First Trust and First Trust Portfolios L.P. (August 1997 to August 2002) -26- Position with Length of Service Principal Occupation Name First Trust with First Trust During Past Five Years Roger F. Testin Senior Vice President Since 2001 Senior Vice President of First Trust and First Trust Portfolios L.P. (August 2001 to present); Analyst, Dolan Capital Management (1998 to 2001) Stan Ueland Vice President Since 2005 Vice President of First Trust and First Trust Portfolios (August 2005 to present); Vice President; BondWave LLC (May 2004 - August 2005); Account Executive, Mina Capital Management LLC and Samaritan Asset Management LLC (January 2003 - May 2004); Sales Consultant, Oracle Corporation (January 1997 - January 2003) Daniel J. Lindquist: As Senior Vice President of First Trust, Mr. Lindquist is Chairman of the Investment Committee and presides over Investment Committee meetings. Mr. Lindquist is also responsible for overseeing the implementation of the Funds' investment strategies. David G. McGarel: As the head of First Trust's Strategy Research Group, Mr. McGarel is responsible for developing and implementing quantitative investment strategies for those funds that have investment policies that require them to follow such strategies. Jon C. Erickson: As the head of First Trust's Equity Research Group, Mr. Erickson is responsible for determining the securities to be purchased and sold by funds that do not utilize quantitative investment strategies. Roger F. Testin: Mr. Testin is the head of First Trust's Portfolio Management Group. Robert F. Carey: As First Trust's Chief Investment Officer, Mr. Carey consults with the Investment Committee on market conditions and First Trust's general investment philosophy. Stan Ueland: Mr. Ueland plays an important role in executing the investment strategies of each portfolio of exchange-traded funds advised by First Trust.
Compensation. The compensation structure for each member of the Investment Committee is based upon a fixed salary as well as a discretionary bonus determined by the management of First Trust. Salaries are determined by management and are based upon an individual's position and overall value to the firm. Bonuses are also determined by management and are based upon an individual's overall contribution to the success of the firm and the profitability of the firm. Salaries and bonuses for members of the Investment Committee are not based upon -27- criteria such as performance of the Funds or the value of assets included in the Funds' portfolios. In addition, Mr. Carey, Mr. Erickson, Mr. Lindquist and Mr. McGarel also have an indirect ownership stake in the firm and will therefore receive their allocable share of ownership-related distributions. The Investment Committee manages the investment vehicles with the number of accounts and assets, as of December 31, 2006, set forth in the table below:
Accounts Managed by Investment Committee Registered Investment Companies Other Pooled Investment Vehicles Number of Accounts Number of Accounts Investment Committee Member ($ assets) ($ assets) Robert F. Carey 37 ($2,680,560,650) 2 ($73,595,630) Roger F. Testin 37 ($2,680,560,650) 2 ($73,595,630) Jon C. Erickson 37 ($2,680,560,650) 2 ($73,595,630) David G. McGarel 37 ($2,680,560,650) 2 ($73,595,630) Daniel J. Lindquist 37 ($2,680,560,650) 2 ($73,595,630) Stan Ueland 10 ($709,673,350) 0 ($0) ____________________ None of the accounts managed by the Investment Committee pay an advisory fee that is based upon the performance of the account. In addition, First Trust believes that there are no material conflicts of interest that may arise in connection with the Investment Committee's management of the Funds' investments and the investments of the other accounts managed by the Investment Committee. However, because the investment strategy of the Funds and the investment strategies of many of the other accounts managed by the Investment Committee are based on fairly mechanical investment processes, the Investment Committee may recommend that certain clients sell and other clients buy a given security at the same time. In addition, because the investment strategies of the Funds and other accounts managed by the Investment Committee generally result in the clients investing in readily available securities, First Trust believes that there should not be material conflicts in the allocation of investment opportunities between the Funds and other accounts managed by the Investment Committee.
Brokerage Allocations First Trust is responsible for decisions to buy and sell securities for the Funds and for the placement of the Funds' securities business, the negotiation of the commissions to be paid on brokered transactions, the -28- prices for principal trades in securities, and the allocation of portfolio brokerage and principal business. It is the policy of First Trust to seek the best execution at the best security price available with respect to each transaction, and with respect to brokered transactions in light of the overall quality of brokerage and research services provided to First Trust and its clients. The best price to a Fund means the best net price without regard to the mix between purchase or sale price and commission, if any. Purchases may be made from underwriters, dealers, and, on occasion, the issuers. Commissions will be paid on a Fund's Futures and options transactions, if any. The purchase price of portfolio securities purchased from an underwriter or dealer may include underwriting commissions and dealer spreads. A Fund may pay mark-ups on principal transactions. In selecting broker/dealers and in negotiating commissions, First Trust considers, among other things, the firm's reliability, the quality of its execution services on a continuing basis and its financial condition. Fund portfolio transactions may be effected with broker/dealers who have assisted investors in the purchase of Shares. Section 28(e) of the Securities Exchange Act of 1934 ("Section 28(e)") permits an investment adviser, under certain circumstances, to cause an account to pay a broker or dealer who supplies brokerage and research services a commission for effecting a transaction in excess of the amount of commission another broker or dealer would have charged for effecting the transaction. Brokerage and research services include (a) furnishing advice as to the value of securities, the advisability of investing, purchasing or selling securities, and the availability of securities or purchasers or sellers of securities, (b) furnishing analyses and reports concerning issuers, industries, securities, economic factors and trends, portfolio strategy, and the performance of accounts; and (c) effecting securities transactions and performing functions incidental thereto (such as clearance, settlement, and custody). In light of the above, in selecting brokers, First Trust may consider investment and market information and other research, such as economic, securities and performance measurement research, provided by such brokers, and the quality and reliability of brokerage services, including execution capability, performance, and financial responsibility. Accordingly, the commissions charged by any such broker may be greater than the amount another firm might charge if First Trust determines in good faith that the amount of such commissions is reasonable in relation to the value of the research information and brokerage services provided by such broker to First Trust or the Trust. First Trust believes that the research information received in this manner provides a Fund with benefits by supplementing the research otherwise available to a Fund. The Investment Management Agreement provides that such higher commissions will not be paid by the Funds unless the adviser determines in good faith that the amount is reasonable in relation to the services provided. The investment advisory fees paid by the Funds to First Trust under the Investment Management Agreement are not reduced as a result of receipt by First Trust of research services. First Trust has advised the Board that it does not use soft dollars. First Trust places portfolio transactions for other advisory accounts advised by it, and research services furnished by firms through which a Fund effects their securities transactions may be used by First Trust in servicing all of its accounts; not all of such services may be used by First Trust in connection with the Funds. First Trust believes it is not possible to measure separately the benefits from research services to each of the accounts (including the Funds) advised by it. Because -29- the volume and nature of the trading activities of the accounts are not uniform, the amount of commissions in excess of those charged by another broker paid by each account for brokerage and research services will vary. However, First Trust believes such costs to the Funds will not be disproportionate to the benefits received by the Funds on a continuing basis. First Trust seeks to allocate portfolio transactions equitably whenever concurrent decisions are made to purchase or sell securities by the Funds and another advisory account. In some cases, this procedure could have an adverse effect on the price or the amount of securities available to the Funds. In making such allocations between a Fund and other advisory accounts, the main factors considered by First Trust are the respective investment objectives, the relative size of portfolio holding of the same or comparable securities, the availability of cash for investment and the size of investment commitments generally held. Administrator. The Bank of New York ("BONY") serves as Administrator for the Funds. Its principal address is 101 Barclay St., New York, NY 10286. The Trustees approved an agreement with PFPC, Inc., 301 Bellevue Parkway, Wilmington, Delaware 19809, whereby PFPC, Inc. will provide certain administrative services to the Trust in connection with the Board's meetings and other related matters. BONY serves as Administrator for the Trust pursuant to a Fund Administration and Accounting Agreement. Under such agreement, BONY is obligated on a continuous basis, to provide such administrative services as the Board reasonably deems necessary for the proper administration of the Trust and the Funds. BONY will generally assist in all aspects of the Trust's and the Funds; operations; supply and maintain office facilities (which may be in BONY's own offices), statistical and research data, data processing services, clerical, accounting, bookkeeping and record keeping services (including, without limitation, the maintenance of such books and records as are required under the 1940 Act and the rules thereunder, except as maintained by other agency agents), internal auditing, executive and administrative services, and stationery and office supplies; prepare reports to shareholders or investors; prepare and file tax returns; supply financial information and supporting data for reports to and filings with the SEC and various state Blue Sky authorities; supply supporting documentation for meetings of the Board; provide monitoring reports and assistance regarding compliance with the Declaration of Trust, by-laws, investment objectives and policies and with federal and state securities laws; and negotiate arrangements with, and supervise and coordinate the activities of, agents and others to supply services. Pursuant to the Fund Administration and Accounting Agreement, the Trust has agreed to indemnify the Administrator for certain liabilities, including certain liabilities arising under the federal securities laws, unless such loss or liability results from negligence or willful misconduct in the performance of its duties. Pursuant to the Fund Administration and Accounting Agreement between BONY and the Trust, the Funds have agreed to pay such compensation as is mutually agreed from time to time and such out-of-pocket expenses as incurred by BONY in the performance of its duties. This fee is subject to reduction for assets over $1 billion. -30- Custodian, Distributor, Transfer Agent, Fund Accounting Agent, Index Provider and Exchange Custodian. BONY, as custodian for the Funds pursuant to a Custody Agreement, holds each Fund's assets. BONY also serves as transfer agent of the Funds pursuant to a Transfer Agency and Service Agreement. As the Funds' accounting agent, BONY calculates the net asset value of Shares and calculates net income and realized capital gains or losses. BONY may be reimbursed by the Funds for its out-of-pocket expenses. Distributor. First Trust Portfolios L.P. is the Distributor of the Shares of the Funds. Its principal address is 1001 Warrenville Road, Lisle, Illinois 60532. The Distributor has entered into a Distribution Agreement with the Trust pursuant to which it distributes Fund Shares. Shares are continuously offered for sale by the Funds through the Distributor only in Creation Unit Aggregations, as described in the Prospectus and below under the heading "Creation and Redemption of Creation Units." 12b-1 Plan. The Trust has adopted a Plan of Distribution pursuant to Rule 12b-1 under the 1940 Act (the "Plan") pursuant to which the Funds may reimburse the Distributor up to a maximum annual rate of 0.25% its average daily net assets. Under the Plan and as required by Rule 12b-1, the Trustees will receive and review after the end of each calendar quarter a written report provided by the Distributor of the amounts expended under the Plan and the purpose for which such expenditures were made. The Plan was adopted in order to permit the implementation of the Funds' method of distribution. However, no such fee is currently charged to the Funds, and there are no plans in place to impose such a fee. Aggregations. Fund Shares in less than Creation Unit Aggregations are not distributed by the Distributor. The Distributor will deliver the Prospectus and, upon request, this SAI to persons purchasing Creation Unit Aggregations and will maintain records of both orders placed with it and confirmations of acceptance furnished by it. The Distributor is a broker-dealer registered under the Securities Exchange Act of 1934 (the "Exchange Act") and a member of the National Association of Securities Dealers, Inc. ("NASD"). The Distribution Agreement provides that it may be terminated as to the Funds at any time, without the payment of any penalty, on at least 60 days' written notice by the Trust to the Distributor (i) by vote of a majority of the Independent Trustees or (ii) by vote of a majority of the outstanding voting securities (as defined in the 1940 Act) of the Funds. The Distribution Agreement will terminate automatically in the event of its assignment (as defined in the 1940 Act). The Distributor may also enter into agreements with securities dealers ("Soliciting Dealers") who will solicit purchases of Creation Unit Aggregations of Fund Shares. Such Soliciting Dealers may also be Participating Parties (as defined in "Procedures for Creation of -31- Creation Unit Aggregations" below) and DTC Participants (as defined in "DTC Acts as Securities Depository for Fund Shares" below). Index Provider. The Index that each respective Fund seeks to track is compiled by the AMEX. The AMEX is not affiliated with the Funds, First Trust or First Trust Portfolios. The Funds are entitled to use each Index pursuant to a sublicensing arrangement by and among the Funds, First Trust and First Trust Portfolios. First Trust Portfolios has a licensing agreement with the AMEX. Each of the StrataQuant(TM) Series indices is a trademark of the American Stock Exchange LLC and is licensed for use by First Trust Portfolios L.P. ("FTP"). FTP sublicenses the StrataQuant(TM) Series indices to the Funds and to First Trust. The Funds are not sponsored, endorsed, sold or promoted by the American Stock Exchange LLC and the American Stock Exchange LLC makes no representation or warranty regarding the advisability of investing in the Funds or as to the result to be obtained by any person from the use of the StrataQuant(TM) Series in connection with the trading of the Funds. First Trust Portfolios L.P. has licensed to AMEX, free of charge, the right to use certain intellectual property owned by First Trust, including the AlphaDEX(TM) trademark and the AlphaDEX(TM) stock selection method, in connection with AMEX's creation of the StrataQuant(TM) Series indices. A patent application with respect to the AlphaDEX(TM) stock selection method is pending at the United States Patent and Trademark Office. Notwithstanding such license, AMEX is solely responsible for the creation, compilation and administration of the StrataQuant(TM) Series indices and has the exclusive right to determine the stocks included in the indices and the indices' methodologies. The Funds are not sponsored, endorsed, sold or promoted by Frank Russell Company ("Underlying Index Provider") or by the American Stock Exchange ("Index Provider"). Neither Underlying Index Provider nor Index Provider makes any representation or warranty, express or implied, to the owners of the Funds or in the Funds particularly or the ability of any of the StrataQuant(TM) Series to track general stock market performance or a segment of the same. Index Provider's publication of the StrataQuant(TM) Series in no way suggests or implies an opinion by the Underlying Index Provider or by Index Provider as to the advisability of investment in any or all of the securities upon which any of the StrataQuant(TM) Series is based. Index Providers only relationship to First Trust is the licensing of certain trade marks and trade names of Index Provider and of the StrataQuant(TM) Series which is determined, composed and calculated by Index Provider without regard to First Trust or the Funds. Underlying Index Provider and Index Provider are not responsible for and have not reviewed the Funds nor any associated literature or publications and make no representation or warranty express or implied as to their accuracy or completeness, or otherwise. Underlying Index Provider reserves the right, at any time and without notice, to alter, amend, terminate or in any way change the StrataQuant(TM) Series. Underlying Index Provider and Index Provider have no obligation or liability in connection with the administration, marketing or trading of the Funds. -32- INDEX PROVIDER DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF ANY OF THE STRATAQUANT(TM) SERIES OR ANY DATA INCLUDED THEREIN. INDEX PROVIDER MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY FIRST TRUST, INVESTORS, OWNERS OF THE FUNDS, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE STRATAQUANT(TM) SERIES OR ANY DATA INCLUDED THEREIN. INDEX PROVIDER MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND HEREBY EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE WITH RESPECT TO THE STRATAQUANT(TM) SERIES OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL INDEX PROVIDER HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES. "AlphaDEX(TM)" is a trademark of First Trust Portfolio L.P. and First Trust on behalf of the Funds has been granted certain rights to use the trademark. Exchange. The only relationship that the AMEX has with First Trust or the Distributor of the Funds in connection with the Funds is that the AMEX is the Index Provider and lists the Shares of the Funds pursuant to its Listing Agreement with the Trust. The AMEX is not responsible for and has not participated in the determination of pricing or the timing of the issuance or sale of the Shares of the Funds or in the determination or calculation of the asset value of the Funds. The AMEX has no obligation or liability in connection with the administration, marketing or trading of the Funds. Additional Information Book Entry Only System. The following information supplements and should be read in conjunction with the section in the Prospectus entitled "Book Entry." DTC Acts as Securities Depository for Fund Shares. Shares of the Funds are represented by securities registered in the name of DTC or its nominee, Cede & Co., and deposited with, or on behalf of, DTC. DTC, a limited-purpose trust company, was created to hold securities of its participants (the "DTC Participants") and to facilitate the clearance and settlement of securities transactions among the DTC Participants in such securities through electronic book-entry changes in accounts of the DTC Participants, thereby eliminating the need for physical movement of securities, certificates. DTC Participants include securities brokers and dealers, banks, trust companies, clearing corporations and certain other organizations, some of whom (and/or their representatives) own DTC. More specifically, DTC is owned by a number of its DTC Participants and by the NYSE, the AMEX and the NASD. Access to the DTC system is also available to others such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a DTC Participant, either directly or indirectly (the "Indirect Participants"). -33- Beneficial ownership of Shares is limited to DTC Participants, Indirect Participants and persons holding interests through DTC Participants and Indirect Participants. Ownership of beneficial interests in Shares (owners of such beneficial interests are referred to herein as "Beneficial Owners") is shown on, and the transfer of ownership is effected only through, records maintained by DTC (with respect to DTC Participants) and on the records of DTC Participants (with respect to Indirect Participants and Beneficial Owners that are not DTC Participants). Beneficial Owners will receive from or through the DTC Participant a written confirmation relating to their purchase and sale of Shares. Conveyance of all notices, statements and other communications to Beneficial Owners is effected as follows. Pursuant to a letter agreement between DTC and the Trust, DTC is required to make available to the Trust upon request and for a fee to be charged to the Trust a listing of the Shares of the Funds held by each DTC Participant. The Trust shall inquire of each such DTC Participant as to the number of Beneficial Owners holding Shares, directly or indirectly, through such DTC Participant. The Trust shall provide each such DTC Participant with copies of such notice, statement or other communication, in such form, number and at such place as such DTC Participant may reasonably request, in order that such notice, statement or communication may be transmitted by such DTC Participant, directly or indirectly, to such Beneficial Owners. In addition, the Trust shall pay to each such DTC Participants a fair and reasonable amount as reimbursement for the expenses attendant to such transmittal, all subject to applicable statutory and regulatory requirements. Fund distributions shall be made to DTC or its nominee, as the registered holder of all Fund Shares. DTC or its nominee, upon receipt of any such distributions, shall immediately credit DTC Participants' accounts with payments in amounts proportionate to their respective beneficial interests in Shares of the Funds as shown on the records of DTC or its nominee. Payments by DTC Participants to Indirect Participants and Beneficial owners of Shares held through such DTC Participants will be governed by standing instructions and customary practices, as is now the case with securities held for the accounts of customers in bearer form or registered in a "street name," and will be the responsibility of such DTC Participants. The Trust has no responsibility or liability for any aspect of the records relating to or notices to Beneficial Owners, or payments made on account of beneficial ownership interests in such Shares, or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests, or for any other aspect of the relationship between DTC and the DTC Participants or the relationship between such DTC Participants and the Indirect Participants and Beneficial Owners owning through such DTC Participants. DTC may decide to discontinue providing its service with respect to Shares at any time by giving reasonable notice to the Trust and discharging its responsibilities with respect thereto under applicable law. Under such circumstances, the Trust shall take action to find a replacement for DTC to perform its functions at a comparable cost. -30- Proxy Voting Policies and Procedures The Trust has adopted a proxy voting policy that seeks to ensure that proxies for securities held by the Funds are voted consistently and solely in the best economic interests of the Funds. A senior member of First Trust is responsible for oversight of the Funds' proxy voting process. First Trust has engaged the services of Institutional Shareholder Services, Inc. ("ISS"), to make recommendations to First Trust on the voting of proxies relating to securities held by the Funds. ISS provides voting recommendations based upon established guidelines and practices. First Trust reviews ISS recommendations and frequently follows the ISS recommendations. However, on selected issues, First Trust may not vote in accordance with the ISS recommendations when First Trust believes that specific ISS recommendations are not in the best interests of the Funds. If First Trust manages the assets of a company or its pension plan and any of First Trust's clients hold any securities of that company, First Trust will vote proxies relating to such company's securities in accordance with the ISS recommendations to avoid any conflict of interest. If a client requests First Trust to follow specific voting guidelines or additional guidelines, First Trust will review the request and inform the client only if First Trust is not able to follow the client's request. First Trust has adopted the ISS Proxy Voting Guidelines. While these guidelines are not intended to be all-inclusive, they do provide guidance on First Trust's general voting policies. Information regarding how the Funds vote future proxies relating to portfolio securities during the most recent 12-month period ended June 30, will be available upon request and without charge on the Funds' website at www.ftportfolios.com, by calling (800) 621-1675 or by accessing the SEC's website at http://www.sec.gov. Quarterly Portfolio Schedule. The Trust is required to disclose, after its first and third fiscal quarters, the complete schedule of the Funds' portfolio holdings with the SEC on Form N-Q. Form N-Q for the Trust is available on the SEC's website at http://www.sec.gov. Each Fund's Form N-Q may also be reviewed and copied at the SEC's Public Reference Room in Washington, D.C. and information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Trust's Form N-Q is available without charge, upon request, by calling (800) 621- 1675 or (800) 983-0903 or by writing to First Trust Portfolios L.P., 1001 Warrenville Road, Lisle, Illinois 60532. Policy Regarding Disclosure of Portfolio Holdings. The Trust has adopted a policy regarding the disclosure of information about each Fund's portfolio holdings. The Board of Trustees of the Trust must approve all material amendments to this policy. Each Fund's portfolio holdings are publicly disseminated each day the Fund is open for business through financial reporting and news services, including publicly accessible Internet web sites. In addition, a basket composition file, which includes the security names and share quantities to deliver in exchange for Fund Shares, together with estimates and actual cash components, is publicly disseminated daily prior to the opening of the AMEX via the National Securities Clearing Corporation -35- (NSCC). The basket represents one Creation Unit of a Fund. The Trust, First Trust and BONY will not disseminate non-public information concerning the Trust. Code of Ethics. In order to mitigate the possibility that the Funds will be adversely affected by personal trading, the Trust, First Trust and the Distributor have adopted Codes of Ethics under Rule 17j-1 of the 1940 Act. These Codes contain policies restricting securities trading in personal accounts of the officers, Trustees and others who normally come into possession of information on portfolio transactions. These Codes are on public file with, and are available from, the SEC. Creation and Redemption of Creation Unit Aggregations Creation. The Trust issues and sells Shares of the Funds only in Creation Unit Aggregations on a continuous basis through the Distributor, without a sales load, at their NAVs next determined after receipt, on any Business Day (as defined below), of an order in proper form. A "Business Day" is any day on which the NYSE is open for business. As of the date of this SAI, the NYSE observes the following holidays: New Year's Day, Martin Luther King, Jr. Day, Washington's Birthday, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. Deposit of Securities and Deposit or Delivery of Cash. The consideration for purchase of Creation Unit Aggregations of a Fund generally consists of the in-kind deposit of a designated portfolio of equity securities-the "Deposit Securities"-per each Creation Unit Aggregation constituting a substantial replication of the stocks included in the Underlying Index ("Fund Securities") and an amount of cash-the "Cash Component"-computed as described below. Together, the Deposit Securities and the Cash Component constitute the "Fund Deposit," which represents the minimum initial and subsequent investment amount for a Creation Unit Aggregation of the Fund. The Cash Component is sometimes also referred to as the Balancing Amount. The Cash Component serves the function of compensating for any differences between the NAV per Creation Unit Aggregation and the Deposit Amount (as defined below). The Cash Component is an amount equal to the difference between the NAV of the Fund Shares (per Creation Unit Aggregation) and the "Deposit Amount"-an amount equal to the market value 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 creator 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 creator will receive the Cash Component. The Custodian, through the National Securities Clearing Corporation ("NSCC") (discussed below), makes available on each Business Day, prior to the opening of business on the AMEX (currently 9:30 a.m., Eastern time), the list of the names and the required number of shares of each Deposit Security to be included in the current Fund Deposit (based on information at the end of the previous Business Day) for a Fund. -36- Such Fund Deposit is applicable, subject to any adjustments as described below, in order to effect creations of Creation Unit Aggregations of a Fund until such time as the next-announced composition of the Deposit Securities is made available. The identity and number of shares of the Deposit Securities required for a Fund Deposit for a Fund changes as rebalancing adjustments and corporate action events are reflected within a Fund from time to time by First Trust with a view to the investment objective of the Fund. The composition of the Deposit Securities may also change in response to adjustments to the weighting or composition of the Component Stocks of the Underlying Index. In addition, the Trust reserves the right to permit or require the substitution of an amount of cash-i.e., a "cash in lieu" amount-to be added to the Cash Component to replace any Deposit Security that may not be available in sufficient quantity for delivery or that may not be eligible for transfer through the systems of DTC or the Clearing Process (discussed below), or which might not be eligible for trading by an Authorized Participant (as defined below) or the investor for which it is acting or other relevant reason. Brokerage commissions incurred in connection with the acquisition of Deposit Securities not eligible for transfer through the systems of DTC and hence not eligible for transfer through the Clearing Process (discussed below) will at the expense of the Fund and will affect the value of all Shares; but First Trust, subject to the approval of the Board of Trustees, may adjust the transaction fee within the parameters described above to protect ongoing shareholders. The adjustments described above will reflect changes known to First Trust on the date of announcement to be in effect by the time of delivery of the Fund Deposit, in the composition of the Underlying Index or resulting from certain corporate actions. In addition to the list of names and numbers of securities constituting the current Deposit Securities of a Fund Deposit, the Custodian, through the NSCC, also makes available on each Business Day, the estimated Cash Component, effective through and including the previous Business Day, per outstanding Creation Unit Aggregation of the Fund. Procedures for Creation of Creation Unit Aggregations. In order to be eligible to place orders with the Distributor and to create a Creation Unit Aggregation of a Fund, an entity must be (i) a "Participating Party," i.e., a broker-dealer or other participant in the clearing process through the Continuous Net Settlement System of the NSCC (the "Clearing Process"), a clearing agency that is registered with the SEC; or (ii) a DTC Participant (see the Book Entry Only System section), and, in each case, must have executed an agreement with the Distributor, with respect to creations and redemptions of Creation Unit Aggregations ("Participant Agreement") (discussed below). A Participating Party and DTC Participant are collectively referred to as an "Authorized Participant." Investors should contact the Distributor for the names of Authorized Participants that have signed a Participant Agreement. All Fund Shares, however created, will be entered on the records of DTC in the name of Cede & Co. for the account of a DTC Participant. All orders to create Creation Unit Aggregations, whether through the Clearing Process (through a Participating Party) or outside the Clearing Process (through a DTC Participant), must be received by the Distributor no later than the closing time of the regular trading session on the AMEX ("Closing Time") (ordinarily 4:00 p.m., Eastern time) in each case on the date such order is placed in order for creation of Creation Unit Aggregations to be effected based on the NAV of Shares of the Funds as -37- next determined on such date after receipt of the order in proper form. In the case of custom orders, the order must be received by the Distributor no later than 3:00 p.m. Eastern time on the trade date. A custom order may be placed by an Authorized Participant in the event that the Trust permits or requires the substitution of an amount of cash to be added to the Cash Component to replace any Deposit Security which may not be available in sufficient quantity for delivery or which may not be eligible for trading by such Authorized Participant or the investor for which it is acting or other relevant reason. The date on which an order to create Creation Unit Aggregations (or an order to redeem Creation Unit Aggregations, as discussed below) is placed is referred to as the "Transmittal Date." Orders must be transmitted by an Authorized Participant by telephone or other transmission method acceptable to the Distributor pursuant to procedures set forth in the Participant Agreement, as described below (see the Placement of Creation Orders Using Clearing Process and the Placement of Creation Orders Outside Clearing Process sections). Severe economic or market disruptions or changes, or telephone or other communication failure may impede the ability to reach the Distributor or an Authorized Participant. All orders from investors who are not Authorized Participants to create Creation Unit Aggregations shall be placed with an Authorized Participant, as applicable, in the form required by such Authorized Participant. In addition, the Authorized Participant may request the investor to make certain representations or enter into agreements with respect to the order, e.g., to provide for payments of cash, when required. Investors should be aware that their particular broker may not have executed a Participant Agreement and that, therefore, orders to create Creation Unit Aggregations of a Fund have to be placed by the investor's broker through an Authorized Participant that has executed a Participant Agreement. In such cases there may be additional charges to such investor. At any given time, there may be only a limited number of broker-dealers that have executed a Participant Agreement. Those placing orders for Creation Unit Aggregations through the Clearing Process should afford sufficient time in order to permit proper submission of the order to the Distributor prior to the Closing Time on the Transmittal Date. Orders for Creation Unit Aggregations that are effected outside the Clearing Process are likely to require transmittal by the DTC Participant earlier on the Transmittal Date than orders effected using the Clearing Process. Those persons placing orders outside the Clearing Process should ascertain the deadlines applicable to DTC and the Federal Reserve Bank wire system by contacting the operations department of the broker or depository institution effectuating such transfer of Deposit Securities and Cash Component. Placement of Creation Orders Using Clearing Process. The Clearing Process is the process of creating or redeeming Creation Unit Aggregations through the Continuous Net Settlement System of the NSCC. Fund Deposits made through the Clearing Process must be delivered through a Participating Party that has executed a Participant Agreement. The Participant Agreement authorizes the Distributor to transmit through the Custodian to NSCC, on behalf of the Participating Party, such trade instructions as are necessary to effect the Participating Party's creation order. Pursuant to such trade instructions to NSCC, the Participating Party agrees to deliver the requisite Deposit Securities and the Cash Component to the Trust, together with such additional information as may be required by the Distributor. An order to create Creation Unit Aggregations through the Clearing Process is deemed received by the Distributor on the Transmittal Date if (i) such order is received by the Distributor not later than the Closing Time on -38- such Transmittal Date and (ii) all other procedures set forth in the Participant Agreement are properly followed. Placement of Creation Orders Outside Clearing Process. Fund Deposits made outside the Clearing Process must be delivered through a DTC Participant that has executed a Participant Agreement pre-approved by First Trust and the Distributor. A DTC Participant who wishes to place an order creating Creation Unit Aggregations to be effected outside the Clearing Process does not need to be a Participating Party, but such orders must state that the DTC Participant is not using the Clearing Process and that the creation of Creation Unit Aggregations will instead be effected through a transfer of securities and cash directly through DTC. The Fund Deposit transfer must be ordered by the DTC Participant on the Transmittal Date in a timely fashion so as to ensure the delivery of the requisite number of Deposit Securities through DTC to the account of a Fund by no later than 11:00 a.m., Eastern time, of the next Business Day immediately following the Transmittal Date. All questions as to the number of Deposit Securities to be delivered, and the validity, form and eligibility (including time of receipt) for the deposit of any tendered securities, will be determined by the Trust, whose determination shall be final and binding. The amount of cash equal to the Cash Component must be transferred directly to the Custodian through the Federal Reserve Bank wire transfer system in a timely manner so as to be received by the Custodian no later than 2:00 p.m., Eastern time, on the next Business Day immediately following such Transmittal Date. An order to create Creation Unit Aggregations outside the Clearing Process is deemed received by the Distributor on the Transmittal Date if (i) such order is received by the Distributor not later than the Closing Time on such Transmittal Date; and (ii) all other procedures set forth in the Participant Agreement are properly followed. However, if the Custodian does not receive both the required Deposit Securities and the Cash Component by 11:00 a.m. and 2:00 p.m., respectively on the next Business Day immediately following the Transmittal Date, such order will be canceled. Upon written notice to the Distributor, such canceled order may be resubmitted the following Business Day using a Fund Deposit as newly constituted in order to reflect the then current Deposit Securities and Cash Component. The delivery of Creation Unit Aggregations so created will occur no later than the third (3rd) Business Day following the day on which the purchase order is deemed received by the Distributor. Additional transaction fees may be imposed with respect to transactions effected outside the Clearing Process (through a DTC participant) and in the limited circumstances in which any cash can be used in lieu of Deposit Securities to create Creation Units. (See "Creation Transaction Fee" section below.) Creation Unit Aggregations may be created in advance of receipt by the Trust of all or a portion of the applicable Deposit Securities as described below. In these circumstances, the initial deposit will have a value greater than the NAV of the Fund Shares on the date the order is placed in proper form since, in addition to available Deposit Securities, cash must be deposited in an amount equal to the sum of (i) the Cash Component, plus (ii) 115% of the market value of the undelivered Deposit Securities (the "Additional Cash Deposit"). The order shall be deemed to be received on the Business Day on which the order is placed provided that the order is placed in proper form prior -39- to 4:00 p.m., Eastern time, on such date, and federal funds in the appropriate amount are deposited with the Custodian by 11:00 a.m., Eastern time, the following Business Day. If the order is not placed in proper form by 4:00 p.m. or federal funds in the appropriate amount are not received by 11:00 a.m. the next Business Day, then the order may be deemed to be canceled and the Authorized Participant shall be liable to the Funds for losses, if any, resulting therefrom. An additional amount of cash shall be required to be deposited with the Trust, pending delivery of the missing Deposit Securities to the extent necessary to maintain the Additional Cash Deposit with the Trust in an amount at least equal to 115% of the daily marked-to-market value of the missing Deposit Securities. To the extent that missing Deposit Securities are not received by 1:00 p.m., Eastern time, on the third Business Day following the day on which the purchase order is deemed received by the Distributor or in the event a marked-to-market payment is not made within one Business Day following notification by the Distributor that such a payment is required, the Trust may use the cash on deposit to purchase the missing Deposit Securities. Authorized Participants will be liable to the Trust and the Funds for the costs incurred by the Trust in connection with any such purchases. These costs will be deemed to include the amount by which the actual purchase price of the Deposit Securities exceeds the market value of such Deposit Securities on the day the purchase order was deemed received by the Distributor plus the brokerage and related transaction costs associated with such purchases. The Trust will return any unused portion of the Additional Cash Deposit once all of the missing Deposit Securities have been properly received by the Custodian or purchased by the Trust and deposited into the Trust. In addition, a transaction fee, as listed below, will be charged in all cases. The delivery of Creation Unit Aggregations so created will occur no later than the third Business Day following the day on which the purchase order is deemed received by the Distributor. Acceptance of Orders for Creation Unit Aggregations. The Trust reserves the absolute right to reject a creation order transmitted to it by the Distributor with respect to a Fund if: (i) the order is not in proper form; (ii) the investor(s), upon obtaining the Fund Shares ordered, would own 80% or more of the currently outstanding shares of the Fund; (iii) the Deposit Securities delivered are not as disseminated for that date by the Custodian, as described above; (iv) acceptance of the Deposit Securities would have certain adverse tax consequences to the Fund; (v) acceptance of the Fund Deposit would, in the opinion of counsel, be unlawful; (vi) acceptance of the Fund Deposit would otherwise, in the discretion of the Trust or First Trust, have an adverse effect on the Trust or the rights of beneficial owners; or (vii) in the event that circumstances outside the control of the Trust, the Custodian, the Distributor and First Trust make it for all practical purposes impossible to process creation orders. Examples of such circumstances include acts of God; public service or utility problems such as fires, floods, extreme weather conditions and power outages resulting in telephone, telecopy and computer failures; market conditions or activities causing trading halts; systems failures involving computer or other information systems affecting the Trust, First Trust, the Distributor, DTC, NSCC, the Custodian or sub-custodian or any other participant in the creation process, and similar extraordinary events. The Distributor shall notify a prospective creator of a Creation Unit and/or the Authorized Participant acting on behalf of such prospective creator of its rejection of the order of such person. The Trust, the Custodian, any sub-custodian and the Distributor are under no duty, however, to give notification of any defects or -40- irregularities in the delivery of Fund Deposits, nor shall any of them incur any liability for the failure to give any such notification. All questions as to the number of shares of each security in the Deposit Securities and the validity, form, eligibility, and acceptance for deposit of any securities to be delivered shall be determined by the Trust, and the Trust's determination shall be final and binding. Creation Transaction Fee. Investors will be required to pay a fixed creation transaction fee, described below, payable to BONY regardless of the number of creations made each day. An additional charge of up to four times the fixed transaction fee (expressed as a percentage of the value of the Deposit Securities) may be imposed for (i) creations effected outside the Clearing Process; and (ii) cash creations (to offset the Trust's brokerage and other transaction costs associated with using cash to purchase the requisite Deposit Securities). Investors are responsible for the costs of transferring the securities constituting the Deposit Securities to the account of the Trust. The Standard Creation/Redemption Transaction Fee for the Funds will be $500. The Maximum Creation/Redemption Transaction Fee for the Funds will be $2,000. Redemption of Fund Shares in Creation Units Aggregations. Fund Shares may be redeemed only in Creation Unit Aggregations at their NAV next determined after receipt of a redemption request in proper form by the Fund through the Transfer Agent and only on a Business Day. A Fund will not redeem Shares in amounts less than Creation Unit Aggregations. Beneficial owners must accumulate enough Shares in the secondary market to constitute a Creation Unit Aggregation in order to have such Shares redeemed by the Trust. There can be no assurance, however, that there will be sufficient liquidity in the public trading market at any time to permit assembly of a Creation Unit Aggregation. Investors should expect to incur brokerage and other costs in connection with assembling a sufficient number of Fund Shares to constitute a redeemable Creation Unit Aggregation. With respect to the Funds, the Custodian, through the NSCC, makes available prior to the opening of business on the AMEX (currently 9:30 a.m., Eastern time) on each Business Day, the identity of the Fund Securities that will be applicable (subject to possible amendment or correction) to redemption requests received in proper form (as described below) on that day. Fund Securities received on redemption may not be identical to Deposit Securities that are applicable to creations of Creation Unit Aggregations. Unless cash redemptions are available or specified for a Fund, the redemption proceeds for a Creation Unit Aggregation generally consist of Fund Securities-as announced on the Business Day of the request for redemption received in proper form-plus or minus cash in an amount equal to the difference between the NAV of the Fund Shares being redeemed, as next determined after a receipt of a request in proper form, and the value of the Fund Securities (the "Cash Redemption Amount"), less a redemption transaction fee as listed below. In the event that the Fund Securities have a value greater than the NAV of the Fund Shares, a compensating cash payment equal to the difference is required to be made by or through an Authorized Participant by the redeeming shareholder. -41- The right of redemption may be suspended or the date of payment postponed (i) for any period during which the NYSE is closed (other than customary weekend and holiday closings); (ii) for any period during which trading on the NYSE is suspended or restricted; (iii) for any period during which an emergency exists as a result of which disposal of the Shares of the Funds or determination of a Fund's NAV is not reasonably practicable; or (iv) in such other circumstances as is permitted by the SEC. Redemption Transaction Fee. A redemption transaction fee is imposed to offset transfer and other transaction costs that may he incurred by a Fund. An additional variable charge for cash redemptions (when cash redemptions are available or specified) for a Fund may be imposed. Investors will also bear the costs of transferring the Fund Securities from the Trust to their account or on their order. Investors who use the services of a broker or other such intermediary in addition to an Authorized Participant to effect a redemption of a Creation Unit Aggregation may be charged an additional fee for such services. The redemption transaction fees for a Fund are the same as the creation fees set forth above. Placement of Redemption Orders Using Clearing Process. Orders to redeem Creation Unit Aggregations through the Clearing Process must be delivered through a Participating Party that has executed the Participant Agreement. An order to redeem Creation Unit Aggregations using the Clearing Process is deemed received by the Trust on the Transmittal Date if (i) such order is received by the Transfer Agent not later than 4:00 p.m., Eastern time, on such Transmittal Date, and (ii) all other procedures set forth in the Participant Agreement are properly followed; such order will be effected based on the NAV of a Fund as next determined. An order to redeem Creation Unit Aggregations using the Clearing Process made in proper form but received by the Trust after 4:00 p.m., Eastern time, will be deemed received on the next Business Day immediately following the Transmittal Date and will be effected at the NAV next determined on such next Business Day. The requisite Fund Securities and the Cash Redemption Amount will be transferred by the third NSCC Business Day following the date on which such request for redemption is deemed received. Placement of Redemption Orders Outside Clearing Process. Orders to redeem Creation Unit Aggregations outside the Clearing Process must be delivered through a DTC Participant that has executed the Participant Agreement. A DTC Participant who wishes to place an order for redemption of Creation Unit Aggregations to be effected outside the Clearing Process does not need to be a Participating Party, but such orders must state that the DTC Participant is not using the Clearing Process and that redemption of Creation Unit Aggregations will instead be effected through transfer of Fund Shares directly through DTC. An order to redeem Creation Unit Aggregations outside the Clearing Process is deemed received by the Trust on the Transmittal Date if (i) such order is received by the Transfer Agent not later than 4:00 p.m., Eastern time on such Transmittal Date; (ii) such order is accompanied or followed by the requisite number of Shares of the Fund, which delivery must be made through DTC to the Custodian no later than 11:00 a.m., Eastern time, (for the Fund Shares) on the next Business Day immediately following such Transmittal Date (the "DTC Cut-Off-Time") and 2:00 p.m., Eastern Time for any Cash Component, if any owed to a Fund; and (iii) all other procedures set forth in the Participant Agreement are properly followed. After the Trust has deemed an order for redemption outside the Clearing Process received, the Trust will initiate procedures to -42- transfer the requisite Fund Securities which are expected to be delivered within three Business Days and the Cash Redemption Amount, if any owed to the redeeming Beneficial Owner to the Authorized Participant on behalf of the redeeming Beneficial Owner by the third Business Day following the Transmittal Date on which such redemption order is deemed received by the Trust. The calculation of the value of the Fund Securities and the Cash Redemption Amount to be delivered/received upon redemption will be made by the Custodian according to the procedures set forth in this SAI under "Determination of NAV" computed on the Business Day on which a redemption order is deemed received by the Trust. Therefore, if a redemption order in proper form is submitted to the Transfer Agent by a DTC Participant not later than Closing Time on the Transmittal Date, and the requisite number of Shares of the Fund are delivered to the Custodian prior to the DTC Cut-Off-Time, then the value of the Fund Securities and the Cash Redemption Amount to be delivered/received will be determined by the Custodian on such Transmittal Date. If, however, either (i) the requisite number of Shares of the Fund are not delivered by the DTC Cut-Off-Time, as described above, or (ii) the redemption order is not submitted in proper form, then the redemption order will not be deemed received as of the Transmittal Date. In such case, the value of the Fund Securities and the Cash Redemption Amount to be delivered/received will be computed on the Business Day following the Transmittal Date provided that the Fund Shares of a Fund are delivered through DTC to the Custodian by 11:00 a.m. the following Business Day pursuant to a properly submitted redemption order. If it is not possible to effect deliveries of the Fund Securities, the Trust may in its discretion exercise its option to redeem such Fund Shares in cash, and the redeeming Beneficial Owner will be required to receive its redemption proceeds in cash. In addition, an investor may request a redemption in cash that the Fund may, in its sole discretion, permit. In either case, the investor will receive a cash payment equal to the NAV of its Fund Shares based on the NAV of Shares of a Fund next determined after the redemption request is received in proper form (minus a redemption transaction fee and additional charge for requested cash redemptions specified above, to offset a Fund's brokerage and other transaction costs associated with the disposition of Fund Securities). A Fund may also, in its sole discretion, upon request of a shareholder, provide such redeemer a portfolio of securities that differs from the exact composition of the Fund Securities, or cash lieu of some securities added to the Cash Component, but in no event will the total value of the securities delivered and the cash transmitted differ from the NAV. Redemptions of Fund Shares for Fund Securities will be subject to compliance with applicable federal and state securities laws and a Fund (whether or not it otherwise permits cash redemptions) reserves the right to redeem Creation Unit Aggregations for cash to the extent that the Trust could not lawfully deliver specific Fund Securities upon redemptions or could not do so without first registering the Fund Securities under such laws. An Authorized Participant or an investor for which it is acting subject to a legal restriction with respect to a particular stock included in the Fund Securities applicable to the redemption of a Creation Unit Aggregation may be paid an equivalent amount of cash. The Authorized Participant may request the redeeming Beneficial Owner of the Fund Shares to complete an order form or to enter into agreements with respect to such matters as compensating cash payment, beneficial ownership of shares or delivery instructions. -43- The chart below describes in further detail the placement of redemption orders outside the clearing process.
Transmittal Next Business Second Business Third Business Date (T) Day (T+1) Day (T+2) Day (T+3) Creation Through NSCC Standard Orders 4:00 p.m. No action. No action. Creation Unit Aggregations will be delivered. Order must be received by the Distributor. Custom Orders 3:00 p.m. No action. No action. Creation Unit Aggregations will be delivered. Order must be received by the Distributor. Orders received after 3:00 p.m. will be treated as standard orders. Creation Outside NSCC Standard Orders 4:00 p.m. (ET) 11:00 a.m. (ET) No action. Creation Unit Aggregations will be delivered. Order in proper form Deposit Securities must must be received by the be received by the Fund's Distributor. account through DTC. 2:00 p.m. (ET) Cash Component must be received by the Custodian. Standard Orders Created 4:00 p.m. (ET) 11:00 a.m. (ET) No action. 1:00 p.m. in Advance of Receipt by the Trust of all or a Order in proper form Available Deposit Missing Deposit Securities portion of the Deposit must be received by the Securities. are due to the Trust or th Securities Distributor. Trust may use cash on Cash in an amount equal deposit to purchase missin to the sum of (i) the Deposit Securities. Cash Component, plus (ii) 115% of the market value Creation Unit Aggregations of the undelivered will be delivered. Deposit Securities. Custom Orders 3:00 p.m. 11:00 a.m. (ET) No action. Creation Unit Aggregations will be delivered. Order in proper form Deposit Securities must must be received by the be received by the Fund's Distributor. account through DTC. Order received after 2:00 p.m. (ET) 3:00 p.m. will be treated as standard Cash Component must be orders. received by the Orders Custodian. -44- Transmittal Next Business Second Business Third Business Date (T) Day (T+1) Day (T+2) Day (T+3) Redemption Through NSCC Standard Orders 4:00 p.m. (ET) No action. No action. Fund Securities and Cash Redemption Amount will be Order must be received transferred. by the Transfer Agent. Orders received after 4:00 p.m. (ET) will be deemed received on the next business day (T+1) Custom Orders 3:00 p.m. (ET) No action. No action. Fund Securities and Cash Redemption Amount will be Order must be received transferred. by the Transfer Agent Order received after 3:00 p.m. will be treated as standard orders. Redemption Outside NSCC Standard Orders 4:00 p.m. (ET) 11:00 a.m. (ET) No action. Fund Securities and Cash Redemption Amount is Order must be received Fund Shares must be delivered to the redeemin by the Transfer Agent. delivered through DTC to beneficial owner. the Custodian. Order received after 2:00 p.m. 4:00 p.m. (ET) will be deemed received on the Cash Component, if any, next business day (T+1). is due. *If the order is not in proper form or the Fund Shares are not delivered, then the order will not be deemed received as of T. Custom Orders 3:00 p.m. (ET) 11:00 a.m. (ET) No action. Fund Securities and Cash Redemption Amount is Order must be received Fund Shares must be delivered to the redeemin by the Transfer Agent. delivered through DTC to beneficial owner. the Custodian. Order received after 3:00 p.m. will be 2:00 p.m. treated as standard orders. Cash Component, if any, is due. *If the order is not in proper form or the Fund Shares are not delivered, then the order will not be deemed received as of T.
-45- Federal Tax Matters This section summarizes some of the main U.S. federal income tax consequences of owning Shares of a Fund. This section is current as of the date of each Prospectus. Tax laws and interpretations change frequently, and these summaries do not describe all of the tax consequences to all taxpayers. For example, these summaries generally do not describe your situation if you are a corporation, a non-U.S. person, a broker-dealer, or other investor with special circumstances. In addition, this section does not describe your state or foreign tax consequences. This federal income tax summary is based in part on the advice of counsel to the Funds. The Internal Revenue Service could disagree with any conclusions set forth in this section. In addition, our counsel was not asked to review, and has not reached a conclusion with respect to the federal income tax treatment of the assets to be deposited in the Funds. This may not be sufficient for prospective investors to use for the purpose of avoiding penalties under federal tax law. As with any investment, prospective investors should seek advice based on their individual circumstances from their own tax advisor. The Funds intend to qualify annually and to elect to be treated as regulated investment companies under the Internal Revenue Code (the "Code"). To qualify for the favorable U.S. federal income tax treatment generally accorded to regulated investment companies, each Fund must, among other things, (a) derive in each taxable year at least 90% of its gross income from dividends, interest, payments with respect to securities loans and gains from the sale or other disposition of stock, securities or foreign currencies or other income derived with respect to its business of investing in such stock, securities or currencies; (b) diversify its holdings so that, at the end of each quarter of the taxable year, (i) at least 50% of the market value of each Fund's assets is represented by cash and cash items (including receivables), U.S. Government securities, the securities of other regulated investment companies and other securities, with such other securities of any one issuer generally limited for the purposes of this calculation to an amount not greater than 5% of the value of each Fund's total assets and not greater than 10% of the outstanding voting securities of such issuer, and (ii) not more than 25% of the value of its total assets is invested in the securities (other than U.S. Government securities or the securities of other regulated investment companies) of any one issuer, or two or more issuers which a Fund controls which are engaged in the same, similar or related trades or businesses; and (c) distribute at least 90% of its investment company taxable income (which includes, among other items, dividends, interest and net short-term capital gains in excess of net long-term capital losses) and at least 90% of its net tax-exempt interest income each taxable year. As regulated investment companies, the Funds generally will not be subject to U.S. federal income tax on their investment company taxable income (as that term is defined in the Code, but without regard to the deduction for dividends paid) and net capital gain (the excess of net long-term capital gain over net short-term capital loss), if any, that -46- they distribute to shareholders. The Funds intend to distribute to its shareholders, at least annually, substantially all of its investment company taxable income and net capital gain. If a Fund retains any net capital gain or investment company taxable income, it will generally be subject to federal income tax at regular corporate rates on the amount retained. In addition, amounts not distributed on a timely basis in accordance with a calendar year distribution requirement are subject to a nondeductible 4% excise tax unless, generally, each Fund distributes during each calendar year an amount equal to the sum of (1) at least 98% of its ordinary income (not taking into account any capital gains or losses) for the calendar year, (2) at least 98% of its capital gains in excess of its capital losses (adjusted for certain ordinary losses) for the one-year period ending October 31 of the calendar year, and (3) any ordinary income and capital gains for previous years that were not distributed during those years. In order to prevent application of the excise tax, each Fund intends to make its distributions in accordance with the calendar year distribution requirement. A distribution will be treated as paid on December 31 of the current calendar year if it is declared by a Fund in October, November or December with a record date in such a month and paid by the Fund during January of the following calendar year. Such distributions will be taxable to shareholders in the calendar year in which the distributions are declared, rather than the calendar year in which the distributions are received. If a Fund failed to qualify as a regulated investment company or failed to satisfy the 90% distribution requirement in any taxable year, the Fund would be taxed as an ordinary corporation on its taxable income (even if such income were distributed to its shareholders) and all distributions out of earnings and profits would be taxed to shareholders as ordinary income. Distributions Dividends paid out of the Funds' investment company taxable income are generally taxable to a shareholder as ordinary income to the extent of the Fund's earnings and profits, whether paid in cash or reinvested in additional shares. However, certain ordinary income distributions received from a Fund may be taxed at capital gains tax rates. In particular, ordinary income dividends received by an individual shareholder from regulated investment companies such as the Funds are generally taxed at the same rates that apply to net capital gain, provided that certain holding period requirements are satisfied and provided the dividends are attributable to qualifying dividends received by each Fund itself. Dividends received by the Funds from REITs and foreign corporations are qualifying dividends eligible for this lower tax rate only in certain circumstances. These special rules relating to the taxation of ordinary income dividends from regulated investment companies generally apply to taxable years beginning before January 1, 2011. Each Fund will provide notice to its shareholders of the amount of any distributions which may be taken into account as a dividend which is eligible for the capital gains tax rates. The Funds can not make any guarantees as to the amount of any distribution which will be regarded as a qualifying dividend. A corporation that owns Shares generally will not be entitled to the dividends received deduction with respect to many dividends received from the Funds because the dividends received deduction is generally not available for distributions from regulated investment companies. -47- However, certain ordinary income dividends on Shares that are attributable to qualifying dividends received by the Funds from certain domestic corporations may be designated by the Funds as being eligible for the dividends received deduction. Distributions of net capital gain (the excess of net long-term capital gain over net short-term capital loss), if any, properly designated as capital gain dividends are taxable to a shareholder as long-term capital gains, regardless of how long the shareholder has held Fund Shares. Shareholders receiving distributions in the form of additional Shares, rather than cash, generally will have a cost basis in each such Share equal to the value of a Share of the Fund on the reinvestment date. A distribution of an amount in excess of a Fund's current and accumulated earnings and profits will be treated by a shareholder as a return of capital which is applied against and reduces the shareholder's basis in his or her Shares. To the extent that the amount of any such distribution exceeds the shareholder's basis in his or her Shares, the excess will be treated by the shareholder as gain from a sale or exchange of the Shares. Shareholders will be notified annually as to the U.S. federal income tax status of distributions, and shareholders receiving distributions in the form of additional Shares will receive a report as to the value of those Shares. Sale or Exchange of Fund Shares Upon the sale or other disposition of Shares of a Fund, which a shareholder holds as a capital asset, such a shareholder may realize a capital gain or loss which will be long-term or short-term, depending upon the shareholder's holding period for the Shares. Generally, a shareholder's gain or loss will be a long-term gain or loss if the Shares have been held for more than one year. Any loss realized on a sale or exchange will be disallowed to the extent that Shares disposed of are replaced (including through reinvestment of dividends) within a period of 61 days beginning 30 days before and ending 30 days after disposition of Shares or to the extent that the shareholder, during such period, acquires or enters into an option or contract to acquire, substantially identical stock or securities. In such a case, the basis of the Shares acquired will be adjusted to reflect the disallowed loss. Any loss realized by a shareholder on a disposition of Fund Shares held by the shareholder for six months or less will be treated as a long-term capital loss to the extent of any distributions of long-term capital gain received by the shareholder with respect to such Shares. Taxes on Purchase and Redemption of Creation Units If a shareholder exchanges equity securities for Creation Units the shareholder will generally recognize a gain or a loss. The gain or loss will be equal to the difference between the market value of the Creation Units at the time and the shareholder's aggregate basis in the securities surrendered and the Cash Component paid. If a shareholder exchanges Creation Units for equity securities, then the shareholder will generally recognize a gain or loss equal to the difference between the shareholder's basis in the Creation Units and the aggregate market value of the securities received and the Cash Redemption Amount. The -48- Internal Revenue Service, however, may assert that a loss realized upon an exchange of securities for Creation Units or Creation Units for securities cannot be deducted currently under the rules governing "wash sales," or on the basis that there has been no significant change in economic position. Nature of Fund Investments Certain of the Funds' investment practices are subject to special and complex federal income tax provisions that may, among other things, (i) disallow, suspend or otherwise limit the allowance of certain losses or deductions, (ii) convert lower taxed long-term capital gain into higher taxed short-term capital gain or ordinary income, (iii) convert an ordinary loss or a deduction into a capital loss (the deductibility of which is more limited), (iv) cause the Funds to recognize income or gain without a corresponding receipt of cash, (v) adversely affect the time as to when a purchase or sale of stock or securities is deemed to occur and (vi) adversely alter the characterization of certain complex financial transactions. Futures Contracts and Options The Funds' transactions in Futures Contracts and options will be subject to special provisions of the Code that, among other things, may affect the character of gains and losses realized by the Funds (i.e., may affect whether gains or losses are ordinary or capital, or short-term or long-term), may accelerate recognition of income to the Funds and may defer Fund losses. These rules could, therefore, affect the character, amount and timing of distributions to shareholders. These provisions also (a) will require the Funds to mark-to-market certain types of the positions in its portfolio (i.e., treat them as if they were closed out), and (b) may cause the Funds to recognize income without receiving cash with which to make distributions in amounts necessary to satisfy the 90% distribution requirement for qualifying to be taxed as a regulated investment company and the 98% distribution requirement for avoiding excise taxes. Backup Withholding The Funds may be required to withhold U.S. federal income tax from all taxable distributions and sale proceeds payable to shareholders who fail to provide the Funds with their correct taxpayer identification number or to make required certifications, or who have been notified by the Internal Revenue Service that they are subject to backup withholding. The withholding percentage is 28% until 2011, when the percentage will revert to 31% unless amended by Congress. Corporate shareholders and certain other shareholders specified in the Code generally are exempt from such backup withholding. This withholding is not an additional tax. Any amounts withheld may be credited against the shareholder's U.S. federal income tax liability. Non-U.S. Shareholders U.S. taxation of a shareholder who, as to the United States, is a nonresident alien individual, a foreign trust or estate, a foreign corporation or foreign partnership ("non-U.S. shareholder") depends on -49- whether the income of the Fund is "effectively connected" with a U.S. trade or business carried on by the shareholder. Income Not Effectively Connected. If the income from a Fund is not "effectively connected" with a U.S. trade or business carried on by the non-U.S. shareholder, distributions of investment company taxable income will generally be subject to a U.S. tax of 30% (or lower treaty rate), which tax is generally withheld from such distributions. Distributions of capital gain dividends and any amounts retained by a Fund which are designated as undistributed capital gains will not be subject to U.S. tax at the rate of 30% (or lower treaty rate) unless the non-U.S. shareholder is a nonresident alien individual and is physically present in the United States for more than 182 days during the taxable year and meets certain other requirements. However, this 30% tax on capital gains of nonresident alien individuals who are physically present in the United States for more than the 182 day period only applies in exceptional cases because any individual present in the United States for more than 182 days during the taxable year is generally treated as a resident for U.S. income tax purposes; in that case, he or she would be subject to U.S. income tax on his or her worldwide income at the, graduated rates applicable to U.S. citizens, rather than the 30% U.S. tax. In the case of a non-U.S. shareholder who is a nonresident alien individual, the Funds may be required to withhold U.S. income tax from distributions of net capital gain unless the non- U.S. shareholder certifies his or her non-U.S. status under penalties of perjury or otherwise establishes an exemption. If a non-U.S. shareholder is a nonresident alien individual, any gain such shareholder realizes upon the sale or exchange of such shareholder's shares of the Funds in the United States will ordinarily be exempt from U.S. tax unless the gain is U.S. source income and such shareholder is physically present in the United States for more than 182 days during the taxable year and meets certain other requirements. Under the provisions of the American Jobs Creation Act of 2004 (the "2004 Tax Act"), dividends paid by the Funds to shareholders who are nonresident aliens or foreign entities and that are derived from short- term capital gains and qualifying net interest income (including income from original issue discount and market discount), and that are properly designated by the Funds as "interest-related dividends" or "short-term capital gain dividends," will generally not be subject to United States withholding tax, provided that the income would not be subject to federal income tax if earned directly by the foreign shareholder. In addition, pursuant to the 2004 Tax Act, capital gains distributions attributable to gains from U.S. real property interests (including certain U.S. real property holding corporations) will generally be subject to United States withholding tax and will give rise to an obligation on the part of the foreign shareholder to file a United States tax return. The provisions contained in the legislation relating to distributions to shareholders who are nonresident aliens or foreign entities generally would apply to distributions with respect to taxable years of the Funds beginning after December 31, 2004 and before January 1, 2008. Income Effectively Connected. If the income from a Fund is "effectively connected" with a U.S. trade or business carried on by a non-U.S. shareholder, then distributions of investment company taxable income and capital gain dividends, any amounts retained by the Funds which are designated as undistributed capital gains and any gains realized upon -50- the sale or exchange of shares of the Funds will be subject to U.S. income tax at the graduated rates applicable to U.S. citizens, residents and domestic corporations. Non-U.S. corporate shareholders may also be subject to the branch profits tax imposed by the Code. The tax consequences to a non-U.S. shareholder entitled to claim the benefits of an applicable tax treaty may differ from those described herein. Non- U.S. shareholders are advised to consult their own tax advisors with respect to the particular tax consequences to them of an investment in the Funds. Other Taxation Fund shareholders may be subject to state, local and foreign taxes on their Fund distributions. Shareholders are advised to consult their own tax advisors with respect to the particular tax consequences to them of an investment in the Funds. Determination of NAV The following information supplements and should be read in conjunction with the section in the Prospectus entitled "Net Asset Value." The per share NAV of a Fund is determined by dividing the total value of the securities and other assets, less liabilities, by the total number of Shares outstanding. A Fund's NAV may not be calculated on days during which a Fund receives no orders to purchase shares and no shares are tendered for redemption. In determining NAV, portfolio securities for a Fund for which accurate market quotations are readily available will be valued by a Fund accounting agent as follows: (1) Common stocks and other equity securities listed on any national or foreign exchange will be valued at the last sale price on the exchange or system in which they are principally traded on the valuation date and at the official closing price for securities listed on the AMEX. If there are no transactions on the valuation day, securities traded principally on an exchange will be valued at the mean between the most recent bid and ask prices. (2) Securities traded in the over-the-counter market are valued at their closing bid prices. (3) Exchange traded options and Futures Contracts will be valued at the closing price in the market where such contracts are principally traded. Over-the-counter options and Futures Contracts will be valued at their closing bid prices. (4) Forward foreign currency exchange contracts which are traded in the United States on regulated exchanges will be valued by calculating the mean between the last bid and asked quotations supplied to a pricing service by certain independent dealers in such contracts. -51- In addition, the following types of securities will be valued as follows: (1) Fixed income securities with a remaining maturity of 60 days or more will be valued by the fund accounting agent using a pricing service. When price quotes are not available, fair market value is based on prices of comparable securities. (2) Fixed income securities maturing within 60 days are valued by the fund accounting agent on an amortized cost basis. (3) Repurchase agreements will be valued as follows. Overnight repurchase agreements will be valued at cost. Term purchase agreements (i.e., those whose maturity exceeds seven days) will be valued by First Trust at the average of the bid quotations obtained daily from at least two recognized dealers. (4) Structured Products, including currency-linked notes, credit-linked notes and other similar instruments, will be valued by the Fund Accounting Agent using a pricing service or quotes provided by the selling dealer or financial institution. When price quotes are not available, fair market value is based on prices of comparable securities. Absent a material difference between the exit price for a particular structured product and the market rates for similar transactions, the structured product will be valued at its exit price. (5) Interest rate swaps and credit default swaps will be valued by the Fund Accounting Agent using a pricing service or quotes provided by the selling dealer or financial institution. When price quotes are not available, fair market value is based on prices of comparable securities. Absent a material difference between the exit price for a particular swap and the market rates for similar transactions, the swap will be valued at its exit price. The value of any portfolio security held by a Fund for which market quotations are not readily available will be determined by First Trust in a manner that most fairly reflects fair market value of the security on the valuation date, based on a consideration of all available information. Certain securities may not be able to be priced by pre-established pricing methods. Such securities may be valued by the Board of Trustees or its delegate at fair value. These securities generally include but are not limited to, restricted securities (securities which may not be publicly sold without registration under the Securities Act of 1933) for which a pricing service is unable to provide a market price; securities whose trading has been formally suspended; a security whose market price is not available from a pre-established pricing source; a security with respect to which an event has occurred that is likely to materially affect the value of the security after the market has closed but before the calculation of Fund NAV (as may be the case in foreign markets on which the security is primarily traded) or make it difficult or impossible to obtain a reliable market quotation; and a security whose price, as provided by the pricing service, does not reflect the security's "fair value." As a general principle, the current "fair value" of an issue of securities would appear to be the amount which the -52- owner might reasonably expect to receive for them upon their current sale. A variety of factors may be considered in determining the fair value of such securities. A Fund may suspend the right of redemption for the Fund only under the following unusual circumstances: (a) when the NYSE is closed (other than weekends and holidays) or trading is restricted; (b) when trading in the markets normally utilized is restricted, or when an emergency exists as determined by the SEC so that disposal of a Fund's investments or determination of its net assets is not reasonably practicable; or (c) during any period when the SEC may permit. Dividends and Distributions The following information supplements and should be read in conjunction with the section in the Prospectus entitled "Dividends, Distributions and Taxes." General Policies. Dividends from net investment income, if any, are declared and paid semi-annually. Distributions of net realized securities gains, if any, generally are declared and paid once a year, but the Trust may make distributions on a more frequent basis. The Trust reserves the right to declare special distributions if, in its reasonable discretion, such action is necessary or advisable to preserve the status of the Funds as a RIC or to avoid imposition of income or excise taxes on undistributed income. Dividends and other distributions of Fund Shares are distributed, as described below, on a pro rata basis to Beneficial Owners of such Shares. Dividend payments are made through DTC Participants and Indirect Participants to Beneficial Owners then of record with proceeds received from the Funds. Dividend Reinvestment Service. No reinvestment service is provided by the Trust. Broker-dealers may make available the DTC book-entry Dividend Reinvestment Service for use by Beneficial Owners of the Funds for reinvestment of their dividend distributions. Beneficial Owners should contact their brokers in order to determine the availability and costs of the service and the details of participation therein. Brokers may require Beneficial Owners to adhere to specific procedures and timetables. If this service is available and used, dividend distributions of both income and realized gains will be automatically reinvested in additional whole Shares of each Fund purchased in the secondary market. Miscellaneous Information Counsel. Chapman and Cutler LLP, 111 West Monroe Street, Chicago, Illinois 60603, is counsel to the Trust. Independent Registered Public Accounting Firm. Deloitte & Touche LLP, 111 South Wacker Drive, Chicago, Illinois 60601, serves as the Funds' independent registered public accounting firm. The firm audits each Fund's financial statements and performs other related audit services. -53- Report of Independent Registered Public Accounting Firm To the Board of Trustees and Shareholder of First Trust Technology AlphaDEXTM Fund: We have audited the accompanying statement of assets and liabilities of First Trust Technology AlphaDEXTM Fund (the "Fund"), a series of First Trust Exchange-Traded AlphaDEXTM Fund, as of April 20, 2007. This statement of assets and liabilities is the responsibility of the Fund's management. Our responsibility is to express an opinion on this statement of assets and liabilities based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the statement of assets and liabilities is free of material misstatement. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, 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. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the statement of assets and liabilities referred to above presents fairly, in all material respects, the financial position of First Trust Technology AlphaDEXTM Fund as of April 20, 2007, in conformity with accounting principles generally accepted in the United States of America. DELOITTE & TOUCHE LLP Chicago, Illinois April 25, 2007 FIRST TRUST TECHNOLOGY ALPHADEXTM FUND STATEMENT OF ASSETS AND LIABILITIES APRIL 20, 2007 Assets: Cash $ 100,000 Total Assets $ 100,000 Paid in Capital $ 100,000 Net Assets $ 100,000 Shares outstanding (unlimited amount authorized, $0.01 par value) $ 5,000 -54- Net asset value, offering price, and redemption price per share $ 20,000 The accompanying notes are an integral part of the Financial Statements. Note 1: Organization First Trust Exchange-Traded AlphaDEXTM Fund (the "Trust") is a registered open-end investment company under the Investment Company Act of 1940, as amended (the "1940 Act") that was organized as a Massachusetts business trust on December 12, 2006. First Trust Technology AlphaDEXTM Fund (the "Fund") is a series of the Trust. The Fund has had no operations to date other than matters relating to organization and registration and the sale of its shares to First Trust Portfolios L.P., the sole shareholder of the Fund. Note 2: Accounting Policies The preparation of the financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from these estimates. The Fund intends to comply in its initial fiscal year and thereafter with provisions of the Internal Revenue Code applicable to regulated investment companies and as such, will not be subject to federal income taxes on otherwise taxable income (including net realized capital gains) distributed to shareholders. Note 3: Fees and Expenses First Trust Advisors L.P. ("First Trust"), the Fund's Adviser, has agreed to bear the organization and offering costs of the Fund. First Trust is responsible for determining the composition of the portfolio of securities that must be delivered in exchange for the issuance of Creation Units and for periodically adjusting the composition of the portfolios of the Fund to conform to changes in the composition of the Technology AlphaDEXTM Index. For these services, First Trust receives an advisory fee at the annual rate of 0.50% of the average daily net assets of the Fund. First Trust has agreed to waive fees and/or pay Fund expenses to the extent necessary to prevent the operating expenses of the Fund (excluding interest expense, brokerage commissions, trading expenses, taxes and extraordinary expenses) from exceeding 0.70% of average daily net assets per year (the "Expense Cap"), at least until two years after the initial public issuance of Fund Shares. Expenses borne by First Trust are subject to reimbursement by the Fund up to three years from the date the fee or expense was incurred, but no reimbursement payment will be made by the Fund if it would result in the Fund exceeding its Expense Cap. Note 4: Capital -55- Subsequent to the Fund's organization, shares will be created and redeemed by the Fund only in large blocks consisting of 50,000 Shares. Each block of 50,000 Shares is called a "Creation Unit". As a practical matter, only broker-dealers or large institutional investors with creation and redemption agreements, called "Authorized Participants" ("APs"), can purchase or redeem these Creation Units. Transaction fees at scheduled amounts ranging from $500 to $2,000 per Creation Unit are charged to those persons creating or redeeming Creation Units. Such transactions are generally permitted on an in-kind basis, with a balancing cash component to equate the transaction to the net asset value per unit of the Fund on the transaction date. Except when aggregated in Creation Units, shares are not redeemable securities of the Fund. -56- [LOGO OMITTED] FIRST TRUST ADVISORS L.P. First Trust Large Cap Core AlphaDEX(TM) Fund First Trust Mid Cap Core AlphaDEX(TM) Fund First Trust Small Cap Core AlphaDEX(TM) Fund First Trust Large Cap Value Opportunities AlphaDEX(TM) Fund First Trust Large Cap Growth Opportunities AlphaDEX(TM) Fund First Trust Multi Cap Value AlphaDEX(TM) Fund First Trust Multi Cap Growth AlphaDEX(TM) Fund April 27, 2007 Front Cover First Trust Large Cap Core AlphaDEX(TM) Fund First Trust Mid Cap Core AlphaDEX(TM) Fund First Trust Small Cap Core AlphaDEX(TM) Fund First Trust Large Cap Value Opportunities AlphaDEX(TM) Fund First Trust Large Cap Growth Opportunities AlphaDEX(TM) Fund First Trust Multi Cap Value AlphaDEX(TM) Fund First Trust Multi Cap Growth AlphaDEX(TM) Fund PROSPECTUS April 27, 2007 Each of First Trust Large Cap Core AlphaDEX(TM) Fund, First Trust Mid Cap Core AlphaDEX(TM) Fund, First Trust Small Cap Core AlphaDEX(TM) Fund, First Trust Large Cap Value Opportunities AlphaDEX(TM) Fund, First Trust Large Cap Growth Opportunities AlphaDEX(TM) Fund, First Trust Multi Cap Value AlphaDEX(TM) Fund and First Trust Multi Cap Growth AlphaDEX(TM) Fund (each, a "Fund" and collectively, the "Funds") is a series of a registered management investment company that is offering its shares (the "Shares") through this Prospectus. The Funds have applied to list and trade their Shares on the American Stock Exchange (the "AMEX"), subject to notice of issuance, at market prices that may differ to some degree from the net asset value ("NAV") of the Shares. Unlike conventional mutual funds, the Funds normally issue and redeem Shares on a continuous basis, at NAV, only in large specified blocks consisting of 50,000 Shares called a "Creation Unit." Each Fund's Creation Units are issued and redeemed principally in-kind for securities included in such Fund's corresponding equity index in the Defined Index Series (as hereinafter defined). EXCEPT WHEN AGGREGATED IN CREATION UNITS, THE SHARES ARE NOT REDEEMABLE SECURITIES OF THE FUNDS. THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. NOT FDIC INSURED. MAY LOSE VALUE. NO BANK GUARANTEE. Page 1 Table of Contents Introduction .............................................................. 3 Who Should Invest in the Funds ............................................ 3 Tax Efficient Product Structure ........................................... 3 First Trust Large Cap Core AlphaDEX(TM) Fund Investment Objective, Strategies and Risks ...................................................... 4 First Trust Mid Cap Core AlphaDEX(TM) Fund Investment Objective, Strategies and Risks ...................................................... 7 First Trust Small Cap Core AlphaDEX(TM) Fund Investment Objective, Strategies and Risks ...................................................... 11 First Trust Large Cap Value Opportunities AlphaDEX(TM) Fund Investment Objective, Strategies and Risks ........................................... 15 First Trust Large Cap Growth Opportunities AlphaDEX(TM) Fund Investment Objective, Strategies and Risks ........................................... 19 First Trust Multi Cap Value AlphaDEX(TM) Fund Investment Objective, Strategies and Risks ...................................................... 23 First Trust Multi Cap Growth AlphaDEX(TM) Fund Investment Objective, Strategies and Risks ...................................................... 28 Additional Investment Strategies .......................................... 34 Additional Risks of Investing in the Funds ................................ 35 Fund Organization ......................................................... 36 Management of the Funds ................................................... 36 How to Buy and Sell Shares ................................................ 38 Creations, Redemptions and Transaction Fees ............................... 39 Dividends, Distributions and Taxes ........................................ 41 Federal Tax Matters ....................................................... 41 Distribution Plan ......................................................... 43 Net Asset Value ........................................................... 43 Fund Service Providers .................................................... 44 Index Provider ............................................................ 44 Disclaimers ............................................................... 45 Additional Index Information .............................................. 46 Other Information ......................................................... 46 Page 2 Introduction-- First Trust Large Cap Core AlphaDEX(TM) Fund First Trust Mid Cap Core AlphaDEX(TM) Fund First Trust Small Cap Core AlphaDEX(TM) Fund First Trust Large Cap Value Opportunities AlphaDEX(TM) Fund First Trust Large Cap Growth Opportunities AlphaDEX(TM) Fund First Trust Multi Cap Value AlphaDEX(TM) Fund First Trust Multi Cap Growth AlphaDEX(TM) Fund The Funds are series of the First Trust Exchange-Traded AlphaDEX(TM) Fund (the "Trust"), a registered management investment company and an exchange-traded "index fund." The investment objective of each Fund is to seek investment results that correspond generally to the price and yield (before each Fund's fees and expenses) of such Fund's corresponding equity index in a family of custom "enhanced" indices created and administered by Standard & Poor's, a division of The McGraw-Hill Companies, Inc. ("S&P") (the "Defined Index Series"), which is comprised of the Defined Large Cap Core Index, the Defined Mid Cap Core Index, the Defined Small Cap Core Index, the Defined Large Cap Value Opportunities Index, the Defined Large Cap Growth Opportunities Index, the Defined Multi Cap Value Index and the Defined Multi Cap Growth Index. First Trust Advisors L.P. ("First Trust") is the investment adviser for the Funds. Who Should Invest in the Funds The Funds are designed for investors who seek a relatively low-cost approach for investing in a portfolio of equity securities of companies in one or more of the Defined Index Series. The Funds may be suitable for long-term investment in the markets represented by the Defined Index Series and may also be used as an asset allocation tool or as a speculative trading instrument. Tax Efficient Product Structure Unlike many conventional mutual funds, the Shares are traded throughout the day on the AMEX whereas mutual funds are typically only bought and sold at closing NAVs. The Shares have been designed to be tradable in the secondary market on the AMEX on an intra-day basis, and to be created and redeemed principally in-kind in Creation Units at each day's next calculated NAV. These arrangements are designed to protect ongoing shareholders from adverse effects on the Funds that could arise from frequent cash creation and redemption transactions. In a conventional mutual fund, redemptions can have an adverse tax impact on taxable shareholders because of the mutual fund's need to sell portfolio securities to obtain cash to meet fund redemptions. These sales may generate taxable gains for the shareholders of the mutual fund, whereas the Shares' in-kind redemption mechanism generally will not lead to a tax event for the Funds or their ongoing shareholders. Page 3 First Trust Large Cap Core AlphaDEX(TM) Fund Investment Objective, Strategies and Risks INVESTMENT OBJECTIVE The First Trust Large Cap Core AlphaDEX(TM) Fund (the "Large Cap Core AlphaDEX(TM) Fund") seeks investment results that correspond generally to the price and yield (before the Large Cap Core AlphaDEX(TM) Fund's fees and expenses) of an equity index called the Defined Large Cap Core Index (Symbol: DEFILCCI) (the "Large Cap Core Index"). PRINCIPAL INVESTMENT STRATEGIES The Large Cap Core AlphaDEX(TM) Fund will normally invest at least 90% of its total assets in common stocks that comprise the Large Cap Core Index. First Trust will seek investment results that correspond generally to the performance of the Large Cap Core Index. The investment objective and the 90% investment strategy, both noted above, are non-fundamental and require 60 days' prior written notice to shareholders before they can be changed. As non-fundamental policies, such policies may be changed by the Board of Trustees without receiving shareholder approval. The Large Cap Core AlphaDEX(TM) Fund, using an "indexing" investment approach, attempts to replicate, before expenses, the performance of the Large Cap Core Index. First Trust seeks a correlation of 0.95 or better (before fees and expenses) between the Large Cap Core AlphaDEX(TM) Fund's performance and the performance of the Large Cap Core Index; a figure of 1.00 would represent perfect correlation. First Trust will regularly monitor the Large Cap Core AlphaDEX(TM) Fund's tracking accuracy and will use the investment techniques described below in seeking to maintain an appropriate correlation. In seeking to achieve the Large Cap Core AlphaDEX(TM) Fund's investment objective, the Large Cap Core AlphaDEX(TM) Fund generally will invest in all of the stocks comprising the Large Cap Core Index in proportion to their weightings in the Large Cap Core Index. However, under various circumstances, it may not be possible or practicable to purchase all of those stocks in those weightings. In those circumstances, the Large Cap Core AlphaDEX(TM) Fund may purchase a sample of stocks in the Large Cap Core Index. There may also be instances in which First Trust may choose to overweight certain stocks in the Large Cap Core Index, purchase securities not in the Large Cap Core Index which First Trust believes are appropriate to substitute for certain securities in the Large Cap Core Index, use futures or other derivative instruments, or utilize various combinations of the above techniques in seeking to track the Large Cap Core Index. The Large Cap Core AlphaDEX(TM) Fund may sell stocks that are represented in the Large Cap Core Index in anticipation of their removal from the Large Cap Core Index or purchase stocks not represented in the Large Cap Core Index in anticipation of their addition to the Large Cap Core Index. INDEX CONSTRUCTION The Large Cap Core Index is a modified equal-dollar weighted index designed by S&P to objectively identify and select stocks from the S&P 500 Index that may generate positive alpha relative to traditional passive style indexes through the use of the AlphaDEX(TM) screening methodology. Alpha is a measure of the portion of a return arising from non-market risk. Accordingly, alpha is an indication of how much an investment outperforms or underperforms relative to its benchmark. The inception date of the Large Cap Core Index was April 9, 2007. The initial divisor was created to set a benchmark value of 100.00 on January 8, 1996. The Large Cap Core Index was created and trademarked by S&P. As of April 9, 2007, the S&P 500 consisted of 500 stocks and the Large Cap Core Index consisted of 374 stocks. The Large Cap Core Index is constructed by S&P in the following manner: 1. S& P begins with the universe of stocks in the S&P 500 Index. 2a. S&P ranks all stocks in the above universe on the following growth and value factors: three, six and 12-month price appreciation, sales to price and one year sales growth (growth factors) and book value to price, cash flow to price and return on assets (value factors). All stocks are ranked on the sum of ranks for the growth factors and, separately, all stocks are ranked on the sum of ranks for the value factors. Page 4 2b. For stocks that S&P classified solely as growth or value, the stock receives the rank for that style from step 2a as its selection score. For stocks that S&P allocates between growth and value, the stock receives the best rank from step 2a as its selection score. 3. For the Large Cap Core Index, stocks are then ranked according to their selection score from step 2b. The bottom 25% of such stocks is then eliminated and the top 75% of such stocks is selected for the Large Cap Core Index. 4. The selected stocks are then split into quintiles based on their score from step 3. The top ranked quintile receives 5/15 (33.3%) of the portfolio weight with successive quintiles receiving 4/15 (26.7%), 3/15 (20.0%), 2/15 (13.3%) and 1/15 (6.7%), respectively. Stocks are equally weighted within each quintile. The Large Cap Core Index is rebalanced and reconstituted on the last business day of each calendar quarter. Changes will be effective at the open on the fourth business day of the following month. Acquired companies are deleted at the close on the day the merger closes for both cash and stock deals. The acquired company's weight in the Large Cap Core Index is reallocated pro-rata among the remaining index constituents. Spin-offs are not included in the Large Cap Core Index. The value of the spin-off is reallocated to the parent company. See "Additional Index Information" for additional information regarding the Large Cap Core Index. PRINCIPAL RISKS OF INVESTING IN THE FUND Risk is inherent in all investing. Shares of the Large Cap Core AlphaDEX(TM) Fund will change in value, and loss of money is a risk of investing in the Fund. The Large Cap Core AlphaDEX(TM) Fund may not achieve its objective. An investment in the Large Cap Core AlphaDEX(TM) Fund is not a deposit with a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. An investment in the Large Cap Core AlphaDEX(TM) Fund involves risks similar to those of investing in any fund of equity securities traded on an exchange. The following specific risk factors have been identified as the principal risks of investing in the Large Cap Core AlphaDEX(TM) Fund. MARKET RISK One of the principal risks of investing in the Large Cap Core AlphaDEX(TM) Fund is market risk. Market risk is the risk that a particular stock owned by the Large Cap Core AlphaDEX(TM) Fund, Shares of the Large Cap Core AlphaDEX(TM) Fund or stocks in general may fall in value. Shares are subject to market fluctuations caused by such factors as economic, political, regulatory or market developments, changes in interest rates and perceived trends in stock prices. Overall stock values could decline generally or could underperform other investments. INDEX TRACKING RISK. You should anticipate that the value of the Shares will decline, more or less, in correlation with any decline in the value of the Defined Large Cap Core Index. NON-DIVERSIFICATION RISK. Because the Large Cap Core AlphaDEX(TM) Fund is considered to be non-diversified, the Large Cap Core AlphaDEX(TM) Fund is exposed to additional market risk. A non-diversified fund may invest a relatively high percentage of its assets in a limited number of issuers. As a result, changes in the market value of a single portfolio security could cause greater fluctuation in Share price than would occur in a diversified fund. Furthermore, non-diversified funds are more susceptible to any single political, regulatory or economic occurrence and to the financial condition of individual issuers in which it invests. NON-CORRELATION RISK. The Large Cap Core AlphaDEX(TM) Fund's return may not match the return of the Large Cap Core Index for a number of reasons. For example, the Large Cap Core AlphaDEX(TM) Fund incurs operating expenses not applicable to the Large Cap Core Index, and may incur costs in buying and selling securities, especially when rebalancing the Large Cap Core AlphaDEX(TM) Fund's portfolio holdings to reflect changes in the composition of the Large Cap Core Index. In addition, the Large Cap Core AlphaDEX(TM) Fund's portfolio holdings may not exactly replicate the securities included in the Large Cap Core Index or the ratios between the securities included in the Large Cap Core Index. Page 5 The Large Cap Core AlphaDEX(TM) Fund may not be fully invested at times, either as a result of cash flows into the Large Cap Core AlphaDEX(TM) Fund or reserves of cash held by the Large Cap Core AlphaDEX(TM) Fund to meet redemptions and expenses. If the Large Cap Core AlphaDEX(TM) Fund utilizes a sampling approach or invests in futures or other derivative positions, its return may not correlate as well with the return of the Large Cap Core Index, as would be the case if it purchased all of the stocks in the Large Cap Core Index with the same weightings as the Large Cap Core Index. While First Trust seeks to have a correlation of 0.95 or better, before expenses, between the Large Cap Core AlphaDEX(TM) Fund's performance and the performance of the Large Cap Core Index, there can be no assurance that the Large Cap Core AlphaDEX(TM) Fund will be able to achieve such a correlation. Accordingly, the Large Cap Core AlphaDEX(TM) Fund's performance may correlate to a lesser extent and may possibly vary substantially from the performance of the Large Cap Core Index. REPLICATION MANAGEMENT RISK. The Large Cap Core AlphaDEX(TM) Fund is also exposed to additional market risk due to its policy of investing principally in the securities included in the Large Cap Core Index. As a result of this policy, securities held by the Large Cap Core Index will generally not be bought or sold in response to market fluctuations and the securities may be issued by companies concentrated in a particular industry. As a result of this policy, the Large Cap Core AlphaDEX(TM) Fund would generally not sell a stock because the stock's issuer was in financial trouble, unless that stock is removed or is anticipated to be removed from the Large Cap Core Index. CONCENTRATION RISK. The Large Cap Core AlphaDEX(TM) Fund will be concentrated in the securities of a given industry if the Large Cap Core Index is concentrated in such industry. A concentration makes the Large Cap Core AlphaDEX(TM) Fund more susceptible to any single occurrence affecting the industry or sector and may subject the Large Cap Core AlphaDEX(TM) Fund to greater market risk than more diversified funds. INTELLECTUAL PROPERTY RISK. The Large Cap Core AlphaDEX(TM) Fund relies on a license and related sublicense from S&P that permits such Fund to use its corresponding equity index in the Defined Index Series and the associated trade names and trademarks ("Intellectual Property") in connection with the name and investment strategies of the Large Cap Core AlphaDEX(TM) Fund. Such license and related sublicense may be terminated by S&P and, as a result, the Large Cap Core AlphaDEX(TM) Fund may lose its ability to use the Intellectual Property. There is also no guarantee that S&P has all rights to license the Intellectual Property to First Trust Portfolios L.P. ("FTP"), on behalf of First Trust and the Large Cap Core AlphaDEX(TM) Fund. Accordingly, in the event the license is terminated or S&P does not have rights to license the Intellectual Property, it may have a significant effect on the operation of the Large Cap Core AlphaDEX(TM) Fund. ISSUER SPECIFIC CHANGES RISK. The value of an individual security or particular type of security can be more volatile than the market as a whole and can perform differently from the value of the market as a whole. See "Additional Risks of Investing in the Funds" for additional information regarding risks. Page 6 First Trust Mid Cap Core AlphaDEX(TM) Fund Investment Objective, Strategies and Risks INVESTMENT OBJECTIVE The First Trust Mid Cap Core AlphaDEX(TM) Fund (the "Mid Cap Core AlphaDEX(TM) Fund") seeks investment results that correspond generally to the price and yield (before the Mid Cap Core AlphaDEX(TM) Fund's fees and expenses) of an equity index called the Defined Mid Cap Core Index (Symbol: DEFIMCCI) (the "Mid Cap Core Index"). PRINCIPAL INVESTMENT STRATEGIES The Mid Cap Core AlphaDEX(TM) Fund will normally invest at least 90% of its total assets in common stocks that comprise the Mid Cap Core Index. First Trust will seek investment results that correspond generally to the performance of the Mid Cap Core Index. The investment objective and the 90% investment strategy, both noted above, are non-fundamental and require 60 days' prior written notice to shareholders before they can be changed. As non-fundamental policies, such policies may be changed by the Board of Trustees without receiving shareholder approval. The Mid Cap Core AlphaDEX(TM) Fund, using an "indexing" investment approach, attempts to replicate, before expenses, the performance of the Mid Cap Core Index. First Trust seeks a correlation of 0.95 or better (before fees and expenses) between the Mid Cap Core AlphaDEX(TM) Fund's performance and the performance of the Mid Cap Core Index; a figure of 1.00 would represent perfect correlation. First Trust will regularly monitor the Mid Cap Core AlphaDEX(TM) Fund's tracking accuracy and will use the investment techniques described below in seeking to maintain an appropriate correlation. In seeking to achieve the Mid Cap Core AlphaDEX(TM) Fund's investment objective, the Mid Cap Core AlphaDEX(TM) Fund generally will invest in all of the stocks comprising the Mid Cap Core Index in proportion to their weightings in the Mid Cap Core Index. However, under various circumstances, it may not be possible or practicable to purchase all of those stocks in those weightings. In those circumstances, the Mid Cap Core AlphaDEX(TM) Fund may purchase a sample of stocks in the Mid Cap Core Index. There may also be instances in which First Trust may choose to overweight certain stocks in the Mid Cap Core Index, purchase securities not in the Mid Cap Core Index which First Trust believes are appropriate to substitute for certain securities in the Mid Cap Core Index, use futures or other derivative instruments, or utilize various combinations of the above techniques in seeking to track the Mid Cap Core Index. The Mid Cap Core AlphaDEX(TM) Fund may sell stocks that are represented in the Mid Cap Core Index in anticipation of their removal from the Mid Cap Core Index or purchase stocks not represented in the Mid Cap Core Index in anticipation of their addition to the Mid Cap Core Index. INDEX CONSTRUCTION The Mid Cap Core Index is a modified equal-dollar weighted index designed by S&P to objectively identify and select stocks from the S&P MidCap 400 Index that may generate positive alpha relative to traditional passive style indexes through the use of the AlphaDEX(TM) screening methodology. Alpha is a measure of the portion of a return arising from non-market risk. Accordingly, alpha is an indication of how much an investment outperforms or underperforms relative to its benchmark. The inception date of the Mid Cap Core Index was April 9, 2007. The initial divisor was created to set a benchmark value of 100.00 on January 8, 1996. The Mid Cap Core Index was created and trademarked by S&P. As of April 9, 2007, the S&P MidCap 400 Index consisted of 400 stocks and the Mid Cap Core Index consisted of 299 stocks. The Mid Cap Core Index is constructed by S&P in the following manner: 1. S& P begins with the universe of stocks in the S&P MidCap 400 Index. 2a. S&P ranks all stocks in the above universe on the following growth and value factors: three, six and 12-month price Page 7 appreciation, sales to price and one year sales growth (growth factors) and book value to price, cash flow to price and return on assets (value factors). All stocks are ranked on the sum of ranks for the growth factors and, separately, all stocks are ranked on the sum of ranks for the value factors. 2b. For stocks that S&P classified solely as growth or value, the stock receives the rank for that style from step 2a as its selection score. For stocks that S&P allocates between growth and value, the stock receives the best rank from step 2a as its selection score. 3. For the Mid Cap Core Index, stocks are ranked according to their selection score from step 2b. The bottom 25% of such stocks is then eliminated and the top 75% of such stocks is selected for the Mid Cap Core Index. 4. The selected stocks are then split into quintiles based on their score from step 3. The top ranked quintile receives 5/15 (33.3%) of the portfolio weight with successive quintiles receiving 4/15 (26.7%), 3/15 (20.0%), 2/15 (13.3%) and 1/15 (6.7%), respectively. Stocks are equally weighted within each quintile. The Mid Cap Core Index is rebalanced and reconstituted on the last business day of each calendar quarter. Changes will be effective at the open on the fourth business day of the following month. Acquired companies are deleted at the close on the day the merger closes for both cash and stock deals. The acquired company's weight in the Mid Cap Core Index is reallocated pro-rata among the remaining index constituents. Spin-offs are not included in the Mid Cap Core Index. The value of the spin-off is reallocated to the parent company. See "Additional Index Information" for additional information regarding the Mid Cap Core Index. PRINCIPAL RISKS OF INVESTING IN THE FUND Risk is inherent in all investing. Shares of the Mid Cap Core AlphaDEX(TM) Fund will change in value, and loss of money is a risk of investing in the Mid Cap Core AlphaDEX(TM) Fund. The Mid Cap Core AlphaDEX(TM) Fund may not achieve its objective. An investment in the Mid Cap Core AlphaDEX(TM) Fund is not a deposit with a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. An investment in the Mid Cap Core AlphaDEX(TM) Fund involves risks similar to those of investing in any fund of equity securities traded on an exchange. The following specific risk factors have been identified as the principal risks of investing in the Mid Cap Core AlphaDEX(TM) Fund. MARKET RISK. One of the principal risks of investing in the Mid Cap Core AlphaDEX(TM) Fund is market risk. Market risk is the risk that a particular stock owned by the Mid Cap Core AlphaDEX(TM) Fund, Shares of the Mid Cap Core AlphaDEX(TM) Fund or stocks in general may fall in value. Shares are subject to market fluctuations caused by such factors as economic, political, regulatory or market developments, changes in interest rates and perceived trends in stock prices. Overall stock values could decline generally or could underperform other investments. INDEX TRACKING RISK You should anticipate that the value of the Shares will decline, more or less, in correlation with any decline in the value of the Mid Cap Core Index. NON-DIVERSIFICATION RISK. Because the Mid Cap Core AlphaDEX(TM) Fund is considered to be non-diversified, the Mid Cap Core AlphaDEX(TM) Fund is exposed to additional market risk. A non-diversified fund may invest a relatively high percentage of its assets in a limited number of issuers. As a result, changes in the market value of a single portfolio security could cause greater fluctuation in Share price than would occur in a diversified fund. Furthermore, non-diversified funds are more susceptible to any single political, regulatory or economic occurrence and to the financial condition of individual issuers in which it invests. NON-CORRELATION RISK. The Mid Cap Core AlphaDEX(TM) Fund's return may not match the return of the Mid Cap Core Index for a number of reasons. For example, the Mid Cap Core AlphaDEX(TM) Fund incurs operating expenses not applicable to the Mid Cap Core Index, and may incur costs in buying and selling securities, especially when rebalancing the Mid Cap Core AlphaDEX(TM) Fund's portfolio holdings to reflect changes in the composition of the Mid Cap Page 8 Core Index. In addition, the Mid Cap Core AlphaDEX(TM) Fund's portfolio holdings may not exactly replicate the securities included in the Mid Cap Core Index or the ratios between the securities included in the Mid Cap Core Index. The Mid Cap Core AlphaDEX(TM) Fund may not be fully invested at times, either as a result of cash flows into the Mid Cap Core AlphaDEX(TM) Fund or reserves of cash held by the Mid Cap Core AlphaDEX(TM) Fund to meet redemptions and expenses. If the Mid Cap Core AlphaDEX(TM) Fund utilizes a sampling approach or invests in futures or other derivative positions, its return may not correlate as well with the return of the Mid Cap Core Index, as would be the case if it purchased all of the stocks in the Mid Cap Core Index with the same weightings as the Mid Cap Core Index. While First Trust seeks to have a correlation of 0.95 or better, before expenses, between the Mid Cap Core AlphaDEX(TM) Fund's performance and the performance of the Mid Cap Core Index, there can be no assurance that the Mid Cap Core AlphaDEX(TM) Fund will be able to achieve such a correlation. Accordingly, the Mid Cap Core AlphaDEX(TM) Fund's performance may correlate to a lesser extent and may possibly vary substantially from the performance of the Mid Cap Core Index. REPLICATION MANAGEMENT RISK. The Mid Cap Core AlphaDEX(TM) Fund is also exposed to additional market risk due to its policy of investing principally in the securities included in the Mid Cap Core Index. As a result of this policy, securities held by the Mid Cap Core Index will generally not be bought or sold in response to market fluctuations and the securities may be issued by companies concentrated in a particular industry. As a result of this policy, the Mid Cap Core AlphaDEX(TM) Fund would generally not sell a stock because the stock's issuer was in financial trouble, unless that stock is removed or is anticipated to be removed from the Mid Cap Core Index. MID CAP COMPANY RISK. The Mid Cap Core AlphaDEX(TM) Fund invests in mid-capitalization companies. Such companies may be more vulnerable to adverse general market or economic developments, and their securities may be less liquid and may experience greater price volatility than larger, more established companies as a result of several factors, including limited trading volumes, products or financial resources, management inexperience and less publicly available information. Accordingly, such companies are generally subject to greater market risk than larger, more established companies. CONCENTRATION RISK. The Mid Cap Core AlphaDEX(TM) Fund will be concentrated in the securities of a given industry if the Mid Cap Core Index is concentrated in such industry. A concentration makes the Mid Cap Core AlphaDEX(TM) Fund more susceptible to any single occurrence affecting the industry and may subject the Mid Cap Core AlphaDEX(TM) Fund to greater market risk than more diversified funds. INTELLECTUAL PROPERTY RISK. The Mid Cap Core AlphaDEX(TM) Fund relies on a license and related sublicense from S&P that permits such Fund to use its corresponding equity index in the Defined Index Series and the associated trade names and trademarks ("Intellectual Property") in connection with the name and investment strategies of the Mid Cap Core AlphaDEX(TM) Fund. Such license and related sublicense may be terminated by S&P and, as a result, the Mid Cap Core AlphaDEX(TM) Fund may lose its ability to use the Intellectual Property. There is also no guarantee that S&P has all rights to license the Intellectual Property to FTP, on behalf of First Trust and the Mid Cap Core AlphaDEX(TM) Fund. Accordingly, in the event the license is terminated or S&P does not have rights to license the Intellectual Property, it may have a significant effect on the operation of the Mid Cap Core AlphaDEX(TM) Fund. ISSUER SPECIFIC CHANGES RISK. The value of an individual security or particular type of security can be more volatile than the market as a whole and can perform differently from the value of the market as a whole. See "Additional Risks of Investing in the Funds" for additional information regarding risks. Page 9 First Trust Small Cap Core AlphaDEX(TM) Fund Investment Objective, Strategies and Risks INVESTMENT OBJECTIVE The First Trust Small Cap Core AlphaDEX(TM) Fund (the "Small Cap Core AlphaDEX(TM) Fund") seeks investment results that correspond generally to the price and yield (before the Small Cap Core AlphaDEX(TM) Fund's fees and expenses) of an equity index called the Defined Small Cap Core Index (Symbol: DEFISCCI) (the "Small Cap Core Index"). PRINCIPAL INVESTMENT STRATEGIES The Small Cap Core AlphaDEX(TM) Fund will normally invest at least 90% of its total assets in common stocks that comprise the Small Cap Core Index. First Trust will seek investment results that correspond generally to the performance of the Small Cap Core Index. The investment objective and the 90% investment strategy, both noted above, are non-fundamental and require 60 days' prior written notice to shareholders before they can be changed. As non-fundamental policies, such policies may be changed by the Board of Trustees without receiving shareholder approval. The Small Cap Core AlphaDEX(TM) Fund, using an "indexing" investment approach, attempts to replicate, before expenses, the performance of the Small Cap Core Index. First Trust seeks a correlation of 0.95 or better (before fees and expenses) between the Small Cap Core AlphaDEX(TM) Fund's performance and the performance of the Small Cap Core Index; a figure of 1.00 would represent perfect correlation. First Trust will regularly monitor the Small Cap Core AlphaDEX(TM) Fund's tracking accuracy and will use the investment techniques described below in seeking to maintain an appropriate correlation. In seeking to achieve the Small Cap Core AlphaDEX(TM) Fund's investment objective, the Small Cap Core AlphaDEX(TM) Fund generally will invest in all of the stocks comprising the Small Cap Core Index in proportion to their weightings in the Small Cap Core Index. However, under various circumstances, it may not be possible or practicable to purchase all of those stocks in those weightings. In those circumstances, the Small Cap Core AlphaDEX(TM) Fund may purchase a sample of stocks in the Small Cap Core Index. There may also be instances in which First Trust may choose to overweight certain stocks in the Small Cap Core Index, purchase securities not in the Small Cap Core Index which First Trust believes are appropriate to substitute for certain securities in the Small Cap Core Index, use futures or other derivative instruments, or utilize various combinations of the above techniques in seeking to track the Small Cap Core Index. The Small Cap Core AlphaDEX(TM) Fund may sell stocks that are represented in the Small Cap Core Index in anticipation of their removal from the Small Cap Core Index or purchase stocks not represented in the Small Cap Core Index in anticipation of their addition to the Small Cap Core Index. INDEX CONSTRUCTION The Small Cap Core Index is a modified equal-dollar weighted index designed by S&P to objectively identify and select stocks from the S&P SmallCap 600 Index that may generate positive alpha relative to traditional passive style indexes through the use of the AlphaDEX(TM) screening methodology. Alpha is a measure of the portion of a return arising from non-market risk. Accordingly, alpha is an indication of how much an investment outperforms or underperforms relative to its benchmark. The inception date of the Small Cap Core Index was April 9, 2007. The initial divisor was created to set a benchmark value of 100.00 on January 8, 1996. The Small Cap Core Index was created and trademarked by S&P. As of April 9, 2007, the S&P SmallCap 600 Index consisted of 600 stocks and the Small Cap Core Index consisted of 449 stocks. The Small Cap Core Index is constructed by S&P in the following manner: 1. S& P begins with the universe of stocks in the S&P SmallCap Index 600. Page 10 2a. S&P ranks all stocks in the above universe on the following growth and value factors: three, six and 12-month price appreciation, sales to price and one year sales growth (growth factors) and book value to price, cash flow to price and return on assets (value factors). All stocks are ranked on the sum of ranks for the growth factors and, separately, all stocks are ranked on the sum of ranks for the value factors. 2b. For stocks that S&P classified solely as growth or value, the stock receives the rank for that style from step 2a as its selection score. For stocks that S&P allocates between growth and value, the stock receives the best rank from step 2a as its selection score. 3. For the Small Cap Core Index, stocks are then ranked according to their selection score from step 2b. The bottom 25% of such stocks is then eliminated and the top 75% of such stocks is selected for the Small Cap Core Index. 4. The selected stocks are then split into quintiles based on their score from step 3. The top ranked quintile receives 5/15 (33.3%) of the portfolio weight with successive quintiles receiving 4/15 (26.7%), 3/15 (20.0%), 2/15 (13.3%) and 1/15 (6.7%), respectively. Stocks are equally weighted within each quintile. The Small Cap Core Index is rebalanced and reconstituted on the last business day of each calendar quarter. Changes will be effective at the open on the fourth business day of the following month. Acquired companies are deleted at the close on the day the merger closes for both cash and stock deals. The acquired company's weight in the Small Cap Core Index is reallocated pro-rata among the remaining index constituents. Spin-offs are not included in the Small Cap Core Index. The value of the spin-off is reallocated to the parent company. See "Additional Index Information" for additional information regarding the Small Cap Core Index. PRINCIPAL RISKS OF INVESTING IN THE FUND Risk is inherent in all investing. Shares of the Small Cap Core AlphaDEX(TM) Fund will change in value, and loss of money is a risk of investing in the Small Cap Core AlphaDEX(TM) Fund. The Small Cap Core AlphaDEX(TM) Fund may not achieve its objective. An investment in the Small Cap Core AlphaDEX(TM) Fund is not a deposit with a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. An investment in the Small Cap Core AlphaDEX(TM) Fund involves risks similar to those of investing in any fund of equity securities traded on an exchange. The following specific risk factors have been identified as the principal risks of investing in the Small Cap Core AlphaDEX(TM) Fund. MARKET RISK. One of the principal risks of investing in the Small Cap Core AlphaDEX(TM) Fund is market risk. Market risk is the risk that a particular stock owned by the Small Cap Core AlphaDEX(TM) Fund, Shares of the Small Cap Core AlphaDEX(TM) Fund or stocks in general may fall in value. Shares are subject to market fluctuations caused by such factors as economic, political, regulatory or market developments, changes in interest rates and perceived trends in stock prices. Overall stock values could decline generally or could underperform other investments. INDEX TRACKING RISK. You should anticipate that the value of the Shares will decline, more or less, in correlation with any decline in the value of the Small Cap Core Index. NON-DIVERSIFICATION RISK. Because the Small Cap Core AlphaDEX(TM) Fund is considered to be non-diversified, the Small Cap Core AlphaDEX(TM) Fund is exposed to additional market risk. A non-diversified fund may invest a relatively high percentage of its assets in a limited number of issuers. As a result, changes in the market value of a single portfolio security could cause greater fluctuation in Share price than would occur in a diversified fund. Furthermore, non-diversified funds are more susceptible to any single political, regulatory or economic occurrence and to the financial condition of individual issuers in which it invests. Page 11 NON-CORRELATION RISK. The Small Cap Core AlphaDEX(TM) Fund's return may not match the return of the Small Cap Core Index for a number of reasons. For example, the Small Cap Core AlphaDEX(TM) Fund incurs operating expenses not applicable to the Small Cap Core Index, and may incur costs in buying and selling securities, especially when rebalancing the Small Cap Core AlphaDEX(TM) Fund's portfolio holdings to reflect changes in the composition of the Small Cap Core Index. In addition, the Small Cap Core AlphaDEX(TM) Fund's portfolio holdings may not exactly replicate the securities included in the Small Cap Core Index or the ratios between the securities included in the Small Cap Core Index. The Small Cap Core AlphaDEX(TM) Fund may not be fully invested at times, either as a result of cash flows into the Small Cap Core AlphaDEX(TM) Fund or reserves of cash held by the Small Cap Core AlphaDEX(TM) Fund to meet redemptions and expenses. If the Small Cap Core AlphaDEX(TM) Fund utilizes a sampling approach or invests in futures or other derivative positions, its return may not correlate as well with the return of the Small Cap Core Index, as would be the case if it purchased all of the stocks in the Small Cap Core Index with the same weightings as the Small Cap Core Index. While First Trust seeks to have a correlation of 0.95 or better, before expenses, between the Small Cap Core AlphaDEX(TM) Fund's performance and the performance of the Small Cap Core Index, there can be no assurance that the Small Cap Core AlphaDEX(TM) Fund will be able to achieve such a correlation. Accordingly, the Small Cap Core AlphaDEX(TM) Fund's performance may correlate to a lesser extent and may possibly vary substantially from the performance of the Small Cap Core Index. REPLICATION MANAGEMENT RISK. The Small Cap Core AlphaDEX(TM) Fund is also exposed to additional market risk due to its policy of investing principally in the securities included in the Small Cap Core Index. As a result of this policy, securities held by the Small Cap Core Index will generally not be bought or sold in response to market fluctuations and the securities may be issued by companies concentrated in a particular industry. As a result of this policy, the Small Cap Core AlphaDEX(TM) Fund would generally not sell a stock because the stock's issuer was in financial trouble, unless that stock is removed or is anticipated to be removed from the Small Cap Core Index. SMALL CAP COMPANY RISK. The Small Cap Core AlphaDEX(TM) Fund invests in small capitalization companies. Such companies may be more vulnerable to adverse general market or economic developments, and their securities may be less liquid and may experience greater price volatility than larger, more established companies as a result of several factors, including limited trading volumes, products or financial resources, management inexperience and less publicly available information. Accordingly, such companies are generally subject to greater market risk than larger, more established companies. CONCENTRATION RISK. The Small Cap Core AlphaDEX(TM) Fund will be concentrated in the securities of a given industry if the Small Cap Core Index is concentrated in such industry. A concentration makes the Small Cap Core AlphaDEX(TM) Fund more susceptible to any single occurrence affecting the industry and may subject the Small Cap Core AlphaDEX(TM) Fund to greater market risk than more diversified funds. INTELLECTUAL PROPERTY RISK. The Small Cap Core AlphaDEX(TM) Fund relies on a license and related sublicense from S&P that permits such Fund to use its corresponding equity index in the Defined Index Series and the associated trade names and trademarks ("Intellectual Property") in connection with the name and investment strategies of the Small Cap Core AlphaDEX(TM) Fund. Such license and related sublicense may be terminated by S&P and, as a result, the Small Cap Core AlphaDEX(TM) Fund may lose its ability to use the Intellectual Property. There is also no guarantee that S&P has all rights to license the Intellectual Property to FTP, on behalf of First Trust and the Small Cap Core AlphaDEX(TM) Fund. Accordingly, in the event the license is terminated or S&P does not have rights to license the Intellectual Property, it may have a significant effect on the operation of the Small Cap Core AlphaDEX(TM) Fund. ISSUER SPECIFIC CHANGES RISK. The value of an individual security or particular type of security can be more volatile than the market as a whole and can perform differently from the value of the market as a whole. See "Additional Risks of Investing in the Funds" for additional information regarding risks. Page 12 First Trust Large Cap Value Opportunities AlphaDEX(TM) Fund Investment Objective, Strategies and Risks INVESTMENT OBJECTIVE The First Trust Large Cap Value Opportunities AlphaDEX(TM) Fund (the "Large Cap Value Opportunities AlphaDEX(TM) Fund") seeks investment results that correspond generally to the price and yield (before the Large Cap Value Opportunities AlphaDEX(TM) Fund's fees and expenses) of an equity index called the Defined Large Cap Value Opportunities Index (Symbol: DEFILVOI) (the "Large Cap Value Index"). PRINCIPAL INVESTMENT STRATEGIES The Large Cap Value Opportunities AlphaDEX(TM) Fund will normally invest at least 90% of its total assets in common stocks that comprise the Large Cap Value Opportunities Index. First Trust will seek investment results that correspond generally to the performance of the Large Cap Value Opportunities Index. The investment objective and the 90% investment strategy, both noted above, are non-fundamental and require 60 days' prior written notice to shareholders before they can be changed. As non-fundamental policies, such policies may be changed by the Board of Trustees without receiving shareholder approval. The Large Cap Value Opportunities AlphaDEX(TM) Fund, using an "indexing" investment approach, attempts to replicate, before expenses, the performance of the Large Cap Value Opportunities Index. First Trust seeks a correlation of 0.95 or better (before fees and expenses) between the Large Cap Value Opportunities AlphaDEX(TM) Fund's performance and the performance of the Large Cap Value Opportunities Index; a figure of 1.00 would represent perfect correlation. First Trust will regularly monitor the Large Cap Value Opportunities AlphaDEX(TM) Fund's tracking accuracy and will use the investment techniques described below in seeking to maintain an appropriate correlation. In seeking to achieve the Large Cap Value Opportunities AlphaDEX(TM) Fund's investment objective, the Large Cap Value Opportunities AlphaDEX(TM) Fund generally will invest in all of the stocks comprising the Large Cap Value Opportunities Index in proportion to their weightings in the Large Cap Value Opportunities Index. However, under various circumstances, it may not be possible or practicable to purchase all of those stocks in those weightings. In those circumstances, the Large Cap Value Opportunities AlphaDEX(TM) Fund may purchase a sample of stocks in the Large Cap Value Opportunities Index. There may also be instances in which First Trust may choose to overweight certain stocks in the Large Cap Value Opportunities Index, purchase securities not in the Large Cap Value Opportunities Index which First Trust believes are appropriate to substitute for certain securities in the Large Cap Value Opportunities Index, use futures or other derivative instruments, or utilize various combinations of the above techniques in seeking to track the Large Cap Value Opportunities Index. The Large Cap Value Opportunities AlphaDEX(TM) Fund may sell stocks that are represented in the Large Cap Value Opportunities Index in anticipation of their removal from the Large Cap Value Opportunities Index or purchase stocks not represented in the Large Cap Value Opportunities Index in anticipation of their addition to the Large Cap Value Opportunities Index. INDEX CONSTRUCTION The Large Cap Value Index is a modified equal-dollar weighted index designed by S&P to objectively identify and select stocks from the S&P 500/Citigroup Value Index that may generate positive alpha relative to traditional passive style indexes through the use of the AlphaDEX(TM) screening methodology. Alpha is a measure of the portion of a return arising from non-market risk. Accordingly, alpha is an indication of how much an investment outperforms or underperforms relative to its benchmark. The inception date of the Large Cap Value Index was April 9, 2007. The initial divisor was created to set a benchmark value of 100.00 on January 8, 1996. The Large Cap Value Index was created and trademarked by S&P. As of April 9, 2007, the S&P 500/Citigroup Value Index consisted of 349 stocks and the Large Cap Value Index consisted of 199 stocks. Page 13 The Large Cap Value Index is constructed by S&P in the following manner: 1. S& P begins with the universe of stocks in the S&P 500/Citigroup Value Index. 2a. S&P ranks all stocks in the above universe against all the stocks in the S&P 500 Index on the following growth and value factors: three, six and 12-month price appreciation, sales to price and one year sales growth (growth factors) and book value to price, cash flow to price and return on assets (value factors). All stocks are ranked on the sum of ranks for the growth factors and, separately, all stocks are ranked on the sum of ranks for the value factors. 2b. For stocks that S&P classified solely as growth or value, the stock receives the rank for that style from step 2a as its selection score. Stocks that S&P classified solely as growth are not eligible for inclusion in the Large Cap Value Index. For stocks that S&P allocates between growth and value, the stock receives the best rank from step 2a as its selection score and is treated as belonging solely to the style of its best rank henceforth in the selection process. Stocks that S&P allocates between growth and value are not eligible for inclusion in the Large Cap Value Index if their growth scores are better than their value scores. 3. For the Large Cap Value Index, remaining stocks are then ranked according to their selection score from step 2b. The bottom 25% of such remaining stocks is then eliminated and the top 75% of such stocks is selected for the Large Cap Value Index. 4. The selected stocks are then split into quintiles based on their score from step 3. The top ranked quintile receives 5/15 (33.3%) of the portfolio weight with successive quintiles receiving 4/15 (26.7%), 3/15 (20.0%), 2/15 (13.3%) and 1/15 (6.7%), respectively. Stocks are equally weighted within each quintile. The Large Cap Value Index is rebalanced and reconstituted on the last business day of each calendar quarter. Changes will be effective at the open on the fourth business day of the following month. Acquired companies are deleted at the close on the day the merger closes for both cash and stock deals. The acquired company's weight in the Large Cap Value Index is reallocated pro-rata among the remaining index constituents. Spin-offs are not included in the Large Cap Value Index. The value of the spin-off is reallocated to the parent company. See "Additional Index Information" for additional information regarding the Large Cap Value Index. PRINCIPAL RISKS OF INVESTING IN THE FUND Risk is inherent in all investing. Shares of the Large Cap Value Opportunities AlphaDEX(TM) Fund will change in value, and loss of money is a risk of investing in the Large Cap Value Opportunities AlphaDEX(TM) Fund. The Large Cap Value Opportunities AlphaDEX(TM) Fund may not achieve its objective. An investment in the Large Cap Value Opportunities AlphaDEX(TM) Fund is not a deposit with a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. An investment in the Large Cap Value Opportunities AlphaDEX(TM) Fund involves risks similar to those of investing in any fund of equity securities traded on an exchange. The following specific risk factors have been identified as the principal risks of investing in the Large Cap Value Opportunities AlphaDEX(TM) Fund. MARKET RISK One of the principal risks of investing in the Large Cap Value Opportunities AlphaDEX(TM) Fund is market risk. Market risk is the risk that a particular stock owned by the Large Cap Value Opportunities AlphaDEX(TM) Fund, Shares of the Large Cap Value Opportunities AlphaDEX(TM) Fund or stocks in general may fall in value. Shares are subject to market fluctuations caused by such factors as economic, political, regulatory or market developments, changes in interest rates and perceived trends in stock prices. Overall stock values could decline generally or could underperform other investments. INDEX TRACKING RISK You should anticipate that the value of the Shares will decline, more or less, in correlation with any decline in the value of the Large Cap Value Opportunities Index. Page 14 NON-DIVERSIFICATION RISK. Because the Large Cap Value Opportunities AlphaDEX(TM) Fund is considered to be non-diversified, the Large Cap Value Opportunities AlphaDEX(TM) Fund is exposed to additional market risk. A non-diversified fund may invest a relatively high percentage of its assets in a limited number of issuers. As a result, changes in the market value of a single portfolio security could cause greater fluctuation in Share price than would occur in a diversified fund. Furthermore, non-diversified funds are more susceptible to any single political, regulatory or economic occurrence and to the financial condition of individual issuers in which it invests. NON-CORRELATION RISK The Large Cap Value Opportunities AlphaDEX(TM) Fund's return may not match the return of the Large Cap Value Opportunities Index for a number of reasons. For example, the Large Cap Value Opportunities AlphaDEX(TM) Fund incurs operating expenses not applicable to the Large Cap Value Opportunities Index, and may incur costs in buying and selling securities, especially when rebalancing the Large Cap Value Opportunities AlphaDEX(TM) Fund's portfolio holdings to reflect changes in the composition of the Large Cap Value Opportunities Index. In addition, the Large Cap Value Opportunities AlphaDEX(TM) Fund's portfolio holdings may not exactly replicate the securities included in the Large Cap Value Opportunities Index or the ratios between the securities included in the Large Cap Value Opportunities Index. The Large Cap Value Opportunities AlphaDEX(TM) Fund may not be fully invested at times, either as a result of cash flows into the Large Cap Value Opportunities AlphaDEX(TM) Fund or reserves of cash held by the Large Cap Value Opportunities AlphaDEX(TM) Fund to meet redemptions and expenses. If the Large Cap Value Opportunities AlphaDEX(TM) Fund utilizes a sampling approach or invests in futures or other derivative positions, its return may not correlate as well with the return of the Large Cap Value Opportunities Index, as would be the case if it purchased all of the stocks in the Large Cap Value Opportunities Index with the same weightings as the Large Cap Value Opportunities Index. While First Trust seeks to have a correlation of 0.95 or better, before expenses, between the Large Cap Value Opportunities AlphaDEX(TM) Fund's performance and the performance of the Large Cap Value Opportunities Index, there can be no assurance that the Large Cap Value Opportunities AlphaDEX(TM) Fund will be able to achieve such a correlation. Accordingly, the Large Cap Value Opportunities AlphaDEX(TM) Fund's performance may correlate to a lesser extent and may possibly vary substantially from the performance of the Large Cap Value Opportunities Index. REPLICATION MANAGEMENT RISK The Large Cap Value Opportunities AlphaDEX(TM) Fund is also exposed to additional market risk due to its policy of investing principally in the securities included in the Large Cap Value Opportunities Index. As a result of this policy, securities held by the Large Cap Value Opportunities Index will generally not be bought or sold in response to market fluctuations and the securities may be issued by companies concentrated in a particular industry. As a result of this policy, the Large Cap Value Opportunities AlphaDEX(TM) Fund would generally not sell a stock because the stock's issuer was in financial trouble, unless that stock is removed or is anticipated to be removed from the Large Cap Value Opportunities Index. CONCENTRATION RISK. The Large Cap Value Opportunities AlphaDEX(TM) Fund will be concentrated in the securities of a given industry if the Large Cap Value Opportunities Index is concentrated in such industry. A concentration makes the Large Cap Value Opportunities AlphaDEX(TM) Fund more susceptible to any single occurrence affecting the industry and may subject the Large Cap Value Opportunities AlphaDEX(TM) Fund to greater market risk than more diversified funds. INTELLECTUAL PROPERTY RISK. The Large Cap Value Opportunities AlphaDEX(TM) Fund relies on a license and related sublicense from S&P that permits such Fund to use its corresponding equity index in the Defined Index Series and the associated trade names and trademarks ("Intellectual Property") in connection with the name and investment strategies of the Large Cap Value Opportunities AlphaDEX(TM) Fund. Such license and related sublicense may be terminated by S&P and, as a result, the Large Cap Value Opportunities AlphaDEX(TM) Fund may lose its ability to use the Intellectual Property. There is also no guarantee that S&P has all rights to license the Intellectual Property to FTP, on behalf of First Trust and the Large Cap Value Opportunities AlphaDEX(TM) Fund. Accordingly, in the event the license is terminated or S&P does not have rights to license the Intellectual Property, it may have a significant effect on the operation of the Large Cap Value Opportunities AlphaDEX(TM) Fund. Page 15 ISSUER SPECIFIC CHANGES RISK. The value of an individual security or particular type of security can be more volatile than the market as a whole and can perform differently from the value of the market as a whole. VALUE INVESTMENT STYLE RISK. The Large Cap Value Opportunities AlphaDEX(TM) Fund's value-oriented investment style may not be successful in realizing the Large Cap Value Opportunities AlphaDEX(TM) Fund's investment objectives. Value companies may have experienced adverse business developments or may be subject to special risks that cause their securities to be out of favor, may never reach what may be their full value or may go down in price. See "Additional Risks of Investing in the Funds" for additional information regarding risks. Page 16 First Trust Large Cap Growth Opportunities AlphaDEX(TM) Fund Investment Objective, Strategies and Risks INVESTMENT OBJECTIVE The First Trust Large Cap Growth Opportunities AlphaDEX(TM) Fund (the "Large Cap Growth Opportunities AlphaDEX(TM) Fund") seeks investment results that correspond generally to the price and yield (before the Large Cap Growth Opportunities AlphaDEX(TM) Fund's fees and expenses) of an equity index called the Defined Large Cap Growth Opportunities Index (Symbol: DEFILGOI) (the "Large Cap Growth Index"). PRINCIPAL INVESTMENT STRATEGIES The Large Cap Growth Opportunities AlphaDEX(TM) Fund will normally invest at least 90% of its total assets in common stocks that comprise the Large Cap Growth Opportunities Index. First Trust will seek investment results that correspond generally to the performance of the Large Cap Growth Opportunities Index. The investment objective and the 90% investment strategy, both noted above, are non-fundamental and require 60 days' prior written notice to shareholders before they can be changed. As non-fundamental policies, such policies may be changed by the Board of Trustees without receiving shareholder approval. The Large Cap Growth Opportunities AlphaDEX(TM) Fund, using an "indexing" investment approach, attempts to replicate, before expenses, the performance of the Large Cap Growth Opportunities Index. First Trust seeks a correlation of 0.95 or better (before fees and expenses) between the Large Cap Growth Opportunities AlphaDEX(TM) Fund's performance and the performance of the Large Cap Growth Opportunities Index; a figure of 1.00 would represent perfect correlation. First Trust will regularly monitor the Large Cap Growth Opportunities AlphaDEX(TM) Fund's tracking accuracy and will use the investment techniques described below in seeking to maintain an appropriate correlation. In seeking to achieve the Large Cap Growth Opportunities AlphaDEX(TM) Fund's investment objective, the Large Cap Growth Opportunities AlphaDEX(TM) Fund generally will invest in all of the stocks comprising the Large Cap Growth Opportunities Index in proportion to their weightings in the Large Cap Growth Opportunities Index. However, under various circumstances, it may not be possible or practicable to purchase all of those stocks in those weightings. In those circumstances, the Large Cap Growth Opportunities AlphaDEX(TM) Fund may purchase a sample of stocks in the Large Cap Growth Opportunities Index. There may also be instances in which First Trust may choose to overweight certain stocks in the Large Cap Growth Opportunities Index, purchase securities not in the Large Cap Growth Opportunities Index which First Trust believes are appropriate to substitute for certain securities in the Large Cap Growth Opportunities Index, use futures or other derivative instruments, or utilize various combinations of the above techniques in seeking to track the Large Cap Growth Opportunities Index. The Large Cap Growth Opportunities AlphaDEX(TM) Fund may sell stocks that are represented in the Large Cap Growth Opportunities Index in anticipation of their removal from the Large Cap Growth Opportunities Index or purchase stocks not represented in the Large Cap Growth Opportunities Index in anticipation of their addition to the Large Cap Growth Opportunities Index. INDEX CONSTRUCTION The Large Cap Growth Index is a modified equal-dollar weighted index designed by S&P to objectively identify and select stocks from the S&P 500/Citigroup Growth Index that may generate positive alpha relative to traditional passive style indexes through the use of the AlphaDEX(TM) screening methodology. Alpha is a measure of the portion of a return arising from non-market risk. Accordingly, alpha is an indication of how much an investment outperforms or underperforms relative to its benchmark. The inception date of the Large Cap Growth Index was April 9, 2007. The initial divisor was created to set a benchmark value of 100.00 on January 8, 1996. The Large Cap Growth Index was created and trademarked by S&P. As of April 9, 2007, the S&P 500/Citigroup Growth Index consisted of 310 stocks and the Large Cap Growth Index consisted of 175 stocks. Page 17 The Large Cap Growth Index is constructed by S&P in the following manner: 1. S& P begins with the universe of stocks in the S&P 500/Citigroup Growth Index. 2a. S&P ranks all stocks in the above universe against all stocks in the S&P 500 Index on the following growth and value factors: three, six and 12-month price appreciation, sales to price and one year sales growth (growth factors) and book value to price, cash flow to price and return on assets (value factors). All stocks are ranked on the sum of ranks for the growth factors and, separately, all stocks are ranked on the sum of ranks for the value factors. 2b. For stocks that S&P classified solely as growth or value, the stock receives the rank for that style from step 2a as its selection score. Stocks that S&P classified solely as value are not eligible for inclusion in the Large Cap Growth Index. For stocks that S&P allocates between growth and value, the stock receives the best rank from step 2a as its selection score and is treated as belonging solely to the style of its best rank henceforth in the selection process. Stocks that S&P allocates between growth and value are not eligible for inclusion in the Large Cap Growth Index if their value scores are better than their growth scores. 3. For the Large Cap Growth Index, remaining stocks are then ranked according to their selection score from step 2b. The bottom 25% of such remaining stocks is then eliminated and the top 75% of such stocks is selected for the Large Cap Growth Index. 4. The selected stocks are then split into quintiles based on their score from step 3. The top ranked quintile receives 5/15 (33.3%) of the portfolio weight with successive quintiles receiving 4/15 (26.7%), 3/15 (20.0%), 2/15 (13.3%) and 1/15 (6.7%), respectively. Stocks are equally weighted within each quintile. The Large Cap Growth Index is rebalanced and reconstituted on the last business day of each calendar quarter. Changes will be effective at the open on the fourth business day of the following month. Acquired companies are deleted at the close on the day the merger closes for both cash and stock deals. The acquired company's weight in the Large Cap Growth Index is reallocated pro-rata among the remaining index constituents. Spin-offs are not included in the Large Cap Growth Index. The value of the spin-off is reallocated to the parent company. See "Additional Index Information" for additional information regarding the Large Cap Growth Index. PRINCIPAL RISKS OF INVESTING IN THE FUND Risk is inherent in all investing. Shares of the Large Cap Growth Opportunities AlphaDEX(TM) Fund will change in value, and loss of money is a risk of investing in the Large Cap Growth Opportunities AlphaDEX(TM) Fund. The Large Cap Growth Opportunities AlphaDEX(TM) Fund may not achieve its objective. An investment in the Large Cap Growth Opportunities AlphaDEX(TM) Fund is not a deposit with a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. An investment in the Large Cap Growth Opportunities AlphaDEX(TM) Fund involves risks similar to those of investing in any fund of equity securities traded on an exchange. The following specific risk factors have been identified as the principal risks of investing in the Large Cap Growth Opportunities AlphaDEX(TM) Fund. MARKET RISK One of the principal risks of investing in the Large Cap Growth Opportunities AlphaDEX(TM) Fund is market risk. Market risk is the risk that a particular stock owned by the Large Cap Growth Opportunities AlphaDEX(TM) Fund, Shares of the Large Cap Growth Opportunities AlphaDEX(TM) Fund or stocks in general may fall in value. Shares are subject to market fluctuations caused by such factors as economic, political, regulatory or market developments, changes in interest rates and perceived trends in stock prices. Overall stock values could decline generally or could underperform other investments. INDEX TRACKING RISK You should anticipate that the value of the Shares will decline, more or less, in correlation with any decline in the value of the Large Cap Growth Opportunities Index. Page 18 NON-DIVERSIFICATION RISK. Because the Large Cap Growth Opportunities AlphaDEX(TM) Fund is considered to be non-diversified, the Large Cap Growth Opportunities AlphaDEX(TM) Fund is exposed to additional market risk. A non-diversified fund may invest a relatively high percentage of its assets in a limited number of issuers. As a result, changes in the market value of a single portfolio security could cause greater fluctuation in Share price than would occur in a diversified fund. Furthermore, non-diversified funds are more susceptible to any single political, regulatory or economic occurrence and to the financial condition of individual issuers in which it invests. NON-CORRELATION RISK The Large Cap Growth Opportunities AlphaDEX(TM) Fund's return may not match the return of the Large Cap Growth Opportunities Index for a number of reasons. For example, the Large Cap Growth Opportunities AlphaDEX(TM) Fund incurs operating expenses not applicable to the Large Cap Growth Opportunities Index, and may incur costs in buying and selling securities, especially when rebalancing the Large Cap Growth Opportunities AlphaDEX(TM) Fund's portfolio holdings to reflect changes in the composition of the Large Cap Growth Opportunities Index. In addition, the Large Cap Growth Opportunities AlphaDEX(TM) Fund's portfolio holdings may not exactly replicate the securities included in the Large Cap Growth Opportunities Index or the ratios between the securities included in the Large Cap Growth Opportunities Index. The Large Cap Growth Opportunities AlphaDEX(TM) Fund may not be fully invested at times, either as a result of cash flows into the Large Cap Growth Opportunities AlphaDEX(TM) Fund or reserves of cash held by the Large Cap Growth Opportunities AlphaDEX(TM) Fund to meet redemptions and expenses. If the Large Cap Growth Opportunities AlphaDEX(TM) Fund utilizes a sampling approach or invests in futures or other derivative positions, its return may not correlate as well with the return of the Large Cap Growth Opportunities Index, as would be the case if it purchased all of the stocks in the Large Cap Growth Opportunities Index with the same weightings as the Defined Large Cap Growth Opportunities Index. While First Trust seeks to have a correlation of 0.95 or better, before expenses, between the Large Cap Growth Opportunities AlphaDEX(TM) Fund's performance and the performance of the Large Cap Growth Opportunities Index, there can be no assurance that the Large Cap Growth Opportunities AlphaDEX(TM) Fund will be able to achieve such a correlation. Accordingly, the Large Cap Growth Opportunities AlphaDEX(TM) Fund's performance may correlate to a lesser extent and may possibly vary substantially from the performance of the Large Cap Growth Opportunities Index. REPLICATION MANAGEMENT RISK The Large Cap Growth Opportunities AlphaDEX(TM) Fund is also exposed to additional market risk due to its policy of investing principally in the securities included in the Large Cap Growth Opportunities Index. As a result of this policy, securities held by the Large Cap Growth Opportunities Index will generally not be bought or sold in response to market fluctuations and the securities may be issued by companies concentrated in a particular industry. As a result of this policy, the Large Cap Growth Opportunities AlphaDEX(TM) Fund would generally not sell a stock because the stock's issuer was in financial trouble, unless that stock is removed or is anticipated to be removed from the Large Cap Growth Opportunities Index. CONCENTRATION RISK. The Large Cap Growth Opportunities AlphaDEX(TM) Fund will be concentrated in the securities of a given industry if the Large Cap Growth Opportunities Index is concentrated in such industry. A concentration makes the Large Cap Growth Opportunities AlphaDEX(TM) Fund more susceptible to any single occurrence affecting the industry and may subject the Large Cap Growth Opportunities AlphaDEX(TM) Fund to greater market risk than more diversified funds. INTELLECTUAL PROPERTY RISK. The Large Cap Growth Opportunities AlphaDEX(TM) Fund relies on a license and related sublicense from S&P that permits such Fund to use its corresponding equity index in the Defined Index Series and the associated trade names and trademarks ("Intellectual Property") in connection with the name and investment strategies of the Large Cap Growth Opportunities AlphaDEX(TM) Fund. Such license and related sublicense may be terminated by S&P and, as a result, the Large Cap Growth Opportunities AlphaDEX(TM) Fund may lose its ability to use the Intellectual Property. There is also no guarantee that S&P has all rights to license the Intellectual Property to FTP, on behalf of First Trust and the Large Cap Growth Opportunities AlphaDEX(TM) Fund. Accordingly, in the event the license is terminated or S&P does not have rights to license the Intellectual Property, it may have a significant effect on the operation of the Large Cap Growth Opportunities AlphaDEX(TM) Fund. Page 19 ISSUER SPECIFIC CHANGES RISK. The value of an individual security or particular type of security can be more volatile than the market as a whole and can perform differently from the value of the market as a whole. GROWTH INVESTMENT STYLE RISK. The Large Cap Growth Opportunities AlphaDEX(TM) Fund's growth-oriented investment style may not be successful in realizing the Large Cap Growth Opportunities AlphaDEX(TM) Fund's investment objectives. Growth companies may have experienced adverse business developments or may be subject to special risks that cause their securities to be out of favor, may never reach what may be their full value or may go down in price. See "Additional Risks of Investing in the Funds" for additional information regarding risks. Page 20 First Trust Multi Cap Value AlphaDEX(TM) Fund Investment Objective, Strategies and Risks INVESTMENT OBJECTIVE The First Trust Multi Cap Value AlphaDEX(TM) Fund (the "Multi Cap Value AlphaDEX(TM) Fund") seeks investment results that correspond generally to the price and yield (before the Multi Cap Value AlphaDEX(TM) Fund's fees and expenses) of an equity index called the Defined Multi Cap Value Index (Symbol: DEFIMCVI) (the "Multi Cap Value Index"). PRINCIPAL INVESTMENT STRATEGIES The Multi Cap Value AlphaDEX(TM) Fund will normally invest at least 90% of its total assets in common stocks that comprise the Multi Cap Value Index. First Trust will seek investment results that correspond generally to the performance of the Multi Cap Value Index. The investment objective and the 90% investment strategy, both noted above, are non-fundamental and require 60 days' prior written notice to shareholders before they can be changed. As non-fundamental policies, such policies may be changed by the Board of Trustees without receiving shareholder approval. The Multi Cap Value AlphaDEX(TM) Fund, using an "indexing" investment approach, attempts to replicate, before expenses, the performance of the Multi Cap Value Index. First Trust seeks a correlation of 0.95 or better (before fees and expenses) between the Multi Cap Value AlphaDEX(TM) Fund's performance and the performance of the Multi Cap Value Index; a figure of 1.00 would represent perfect correlation. First Trust will regularly monitor the Multi Cap Value AlphaDEX(TM) Fund's tracking accuracy and will use the investment techniques described below in seeking to maintain an appropriate correlation. In seeking to achieve the Multi Cap Value AlphaDEX(TM) Fund's investment objective, the Multi Cap Value AlphaDEX(TM) Fund generally will invest in all of the stocks comprising the Multi Cap Value Index in proportion to their weightings in the Multi Cap Value Index. However, under various circumstances, it may not be possible or practicable to purchase all of those stocks in those weightings. In those circumstances, the Multi Cap Value AlphaDEX(TM) Fund may purchase a sample of stocks in the Multi Cap Value Index. There may also be instances in which First Trust may choose to overweight certain stocks in the Multi Cap Value Index, purchase securities not in the Multi Cap Value Index which First Trust believes are appropriate to substitute for certain securities in the Multi Cap Value Index, use futures or other derivative instruments, or utilize various combinations of the above techniques in seeking to track the Multi Cap Value Index. The Multi Cap Value AlphaDEX(TM) Fund may sell stocks that are represented in the Multi Cap Value Index in anticipation of their removal from the Multi Cap Value Index or purchase stocks not represented in the Multi Cap Value Index in anticipation of their addition to the Multi Cap Value Index. INDEX CONSTRUCTION The Multi Cap Value Index is a modified equal-dollar weighted index designed by S&P to objectively identify and select stocks from the S&P 1500/Citigroup Value Index that may generate positive alpha relative to traditional passive style indexes through the use of the AlphaDEX(TM) screening methodology. Alpha is a measure of the portion of a return arising from non-market risk. Accordingly, alpha is an indication of how much an investment outperforms or underperforms relative to its benchmark. The inception date of the Multi Cap Value Index was April 9, 2007. The initial divisor was created to set a benchmark value of 100.00 on January 8, 1996. The Multi Cap Value Index was created and trademarked by S&P. As of April 9, 2007, the S&P 1500/Citigroup Value Index consisted of 1082 stocks and the Multi Cap Value Index consisted of 606 stocks. The stocks of the S&P 1500/Citigroup Value Index (i) that are members of the S&P 500/Citigroup Value Index will comprise 50% of the Multi Cap Value Index, (ii) that are members of the S&P/Citigroup MidCap 400 Value Index will comprise 30% of the Multi Cap Value Index and (iii) that are members of the S&P/Citigroup SmallCap 600 Value Index will comprise 20% of the Multi Cap Value Index. The Multi Cap Value Index is constructed in the following manner: Page 21 For the stocks selected from the S&P 500/Citigroup Value Index: 1. S&P ranks all stocks in the S&P 500/Citigroup Value Index against all the stocks in the S&P 500 Index on the following growth and value factors: three, six and 12-month price appreciation, sales to price and one year sales growth (growth factors) and book value to price, cash flow to price and return on assets (value factors). All stocks are ranked on the sum of ranks for the growth factors and, separately, all stocks are ranked on the sum of ranks for the value factors. 2. For stocks that S&P/Citigroup classified solely as growth or value, the stock receives the rank for that style from step 1 as its selection score. Stocks that S&P/Citigroup classified solely as growth are not eligible for inclusion in the Multi Cap Value Index. For stocks that S&P/Citigroup allocates between growth and value, the stock receives the best rank from step 1 as its selection score and is treated as belonging solely to the style of its best rank henceforth in the selection process. Stocks that S&P/Citigroup allocates between growth and value are not eligible for inclusion in the Multi Cap Value Index if their growth scores are better than their value scores. 3. For the Multi Cap Value Index, remaining stocks are then ranked according to their selection score from step 2. The bottom 25% of such remaining stocks is then eliminated and the top 75% of such stocks is selected for the Multi Cap Value Index. 4. The selected stocks are then split into quintiles based on their score from step 3. The top ranked quintile receives 5/15 (33.3%) of the portfolio weight with successive quintiles receiving 4/15 (26.7%), 3/15 (20.0%), 2/15 (13.3%) and 1/15 (6.7%), respectively. Stocks are equally weighted within each quintile. For the stocks selected from the S&P/Citigroup MidCap 400 Value Index: 1. S&P ranks all stocks in the S&P/Citigroup MidCap 400 Value Index against all the stocks in the S&P 400 Index on the following growth and value factors: three, six and 12-month price appreciation, sales to price and one year sales growth (growth factors) and book value to price, cash flow to price and return on assets (value factors). All stocks are ranked on the sum of ranks for the growth factors and, separately, all stocks are ranked on the sum of ranks for the value factors. 2. For stocks that S&P/Citigroup classified solely as growth or value, the stock receives the rank for that style from step 1 as its selection score. Stocks that S&P/Citigroup classified solely as growth are not eligible for inclusion in the Multi Cap Value Index. For stocks that S&P/Citigroup allocates between growth and value, the stock receives the best rank from step 1 as its selection score and is treated as belonging solely to the style of its best rank henceforth in the selection process. Stocks that S&P/Citigroup allocates between growth and value are not eligible for inclusion in the Multi Cap Value Index if their growth scores are better than their value scores. 3. For the Multi Cap Value Index, remaining stocks are then ranked according to their selection score from step 2. The bottom 25% of such remaining stocks is then eliminated and the top 75% of such stocks is selected for the Multi Cap Value Index. 4. The selected stocks are then split into quintiles based on their score from step 3. The top ranked quintile receives 5/15 (33.3%) of the portfolio weight with successive quintiles receiving 4/15 (26.7%), 3/15 (20.0%), 2/15 (13.3%) and 1/15 (6.7%), respectively. Stocks are equally weighted within each quintile. For the stocks selected from the S&P/Citigroup SmallCap 600 Value Index: 1. S&P ranks all stocks in the S&P/Citigroup SmallCap 600 Value Index against all the stocks in the S&P 600 Index on the following growth and value factors: three, six and 12-month price appreciation, sales to price and one year sales growth (growth factors) and book value to price, cash flow to price and return on assets (value factors). All stocks are ranked on the sum of ranks for the growth factors and, separately, all stocks are ranked on the sum of ranks for the value factors. Page 22 2. For stocks that S&P/Citigroup classified solely as growth or value, the stock receives the rank for that style from step 1 as its selection score. Stocks that S&P/Citigroup classified solely as growth are not eligible for inclusion in the Multi Cap Value Index. For stocks that S&P/Citigroup allocates between growth and value, the stock receives the best rank from step 1 as its selection score and is treated as belonging solely to the style of its best rank henceforth in the selection process. Stocks that S&P/Citigroup allocates between growth and value are not eligible for inclusion in a value index if their growth scores are better than their value scores, and stocks that S&P/Citigroup allocates between growth and value are not eligible for inclusion in the Multi Cap Value Index if their growth scores are better than their value scores. 3. For the Multi Cap Value Index, remaining stocks are then ranked according to their selection score from step 2. The bottom 25% of such remaining stocks is then eliminated and the top 75% of such stocks is selected for the Multi Cap Value Index. 4. The selected stocks are then split into quintiles based on their score from step 3. The top ranked quintile receives 5/15 (33.3%) of the portfolio weight with successive quintiles receiving 4/15 (26.7%), 3/15 (20.0%), 2/15 (13.3%) and 1/15 (6.7%), respectively. Stocks are equally weighted within each quintile. The Multi Cap Value Index is rebalanced and reconstituted on the last business day of each calendar quarter. Changes will be effective at the open on the fourth business day of the following month. Acquired companies are deleted at the close on the day the merger closes for both cash and stock deals. The acquired company's weight in the Multi Cap Value Index is reallocated pro-rata among the remaining index constituents. Spin-offs are not included in the Multi Cap Value Index. The value of the spin-off is reallocated to the parent company. See "Additional Index Information" for additional information regarding the Multi Cap Value Index. PRINCIPAL RISKS OF INVESTING IN THE FUND Risk is inherent in all investing. Shares of the Multi Cap Value AlphaDEX(TM) Fund will change in value, and loss of money is a risk of investing in the Multi Cap Value AlphaDEX(TM) Fund. The Multi Cap Value AlphaDEX(TM) Fund may not achieve its objective. An investment in the Multi Cap Value AlphaDEX(TM) Fund is not a deposit with a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. An investment in the Multi Cap Value AlphaDEX(TM) Fund involves risks similar to those of investing in any fund of equity securities traded on an exchange. The following specific risk factors have been identified as the principal risks of investing in the Multi Cap Value AlphaDEX(TM) Fund. MARKET RISK One of the principal risks of investing in the Multi Cap Value AlphaDEX(TM) Fund is market risk. Market risk is the risk that a particular stock owned by the Multi Cap Value AlphaDEX(TM) Fund, Shares of the Multi Cap Value AlphaDEX(TM) Fund or stocks in general may fall in value. Shares are subject to market fluctuations caused by such factors as economic, political, regulatory or market developments, changes in interest rates and perceived trends in stock prices. Overall stock values could decline generally or could underperform other investments. INDEX TRACKING RISK You should anticipate that the value of the Shares will decline, more or less, in correlation with any decline in the value of the Multi Cap Value Index. NON-DIVERSIFICATION RISK. Because the Multi Cap Value AlphaDEX(TM) Fund is considered to be non-diversified, the Multi Cap Value AlphaDEX(TM) Fund is exposed to additional market risk. A non-diversified fund may invest a relatively high percentage of its assets in a limited number of issuers. As a result, changes in the market value of a single portfolio security could cause greater fluctuation in Share price than would occur in a diversified fund. Furthermore, non-diversified funds are more susceptible to any single political, regulatory or economic occurrence and to the financial condition of individual issuers in which it invests. Page 23 NON-CORRELATION RISK The Multi Cap Value AlphaDEX(TM) Fund's return may not match the return of the Multi Cap Value Index for a number of reasons. For example, the Multi Cap Value AlphaDEX(TM) Fund incurs operating expenses not applicable to the Multi Cap Value Index, and may incur costs in buying and selling securities, especially when rebalancing the Multi Cap Value AlphaDEX(TM) Fund's portfolio holdings to reflect changes in the composition of the Multi Cap Value Index. In addition, the Multi Cap Value AlphaDEX(TM) Fund's portfolio holdings may not exactly replicate the securities included in the Multi Cap Value Index or the ratios between the securities included in the Multi Cap Value Index. The Multi Cap Value AlphaDEX(TM) Fund may not be fully invested at times, either as a result of cash flows into the Multi Cap Value AlphaDEX(TM) Fund or reserves of cash held by the Multi Cap Value AlphaDEX(TM) Fund to meet redemptions and expenses. If the Multi Cap Value AlphaDEX(TM) Fund utilizes a sampling approach or invests in futures or other derivative positions, its return may not correlate as well with the return of the Multi Cap Value Index, as would be the case if it purchased all of the stocks in the Multi Cap Value Index with the same weightings as the Multi Cap Value Index. While First Trust seeks to have a correlation of 0.95 or better, before expenses, between the Multi Cap Value AlphaDEX(TM) Fund's performance and the performance of the Multi Cap Value Index, there can be no assurance that the Multi Cap Value AlphaDEX(TM) Fund will be able to achieve such a correlation. Accordingly, the Multi Cap Value AlphaDEX(TM) Fund's performance may correlate to a lesser extent and may possibly vary substantially from the performance of the Multi Cap Value Index. REPLICATION MANAGEMENT RISK The Multi Cap Value AlphaDEX(TM) Fund is also exposed to additional market risk due to its policy of investing principally in the securities included in the Multi Cap Value Index. As a result of this policy, securities held by the Multi Cap Value Index will generally not be bought or sold in response to market fluctuations and the securities may be issued by companies concentrated in a particular industry. As a result of this policy, the Multi Cap Value AlphaDEX(TM) Fund would generally not sell a stock because the stock's issuer was in financial trouble, unless that stock is removed or is anticipated to be removed from the Multi Cap Value Index. SMALL CAP AND MID CAP COMPANY RISK The Multi Cap Value AlphaDEX(TM) Fund may invest in small capitalization and mid capitalization companies. Such companies may be more vulnerable to adverse general market or economic developments, and their securities may be less liquid and may experience greater price volatility than larger, more established companies as a result of several factors, including limited trading volumes, products or financial resources, management inexperience and less publicly available information. Accordingly, such companies are generally subject to greater market risk than larger, more established companies. CONCENTRATION RISK. The Multi Cap Value AlphaDEX(TM) Fund will be concentrated in the securities of a given industry if the Multi Cap Value Index is concentrated in such industry. A concentration makes the Multi Cap Value AlphaDEX(TM) Fund more susceptible to any single occurrence affecting the industry and may subject the Multi Cap Value AlphaDEX(TM) Fund to greater market risk than more diversified funds. INTELLECTUAL PROPERTY RISK. The Multi Cap Value AlphaDEX(TM) Fund relies on a license and related sublicense from S&P that permits such Fund to use its corresponding equity index in the Defined Index Series and the associated trade names and trademarks ("Intellectual Property") in connection with the name and investment strategies of the Multi Cap Value AlphaDEX(TM) Fund. Such license and related sublicense may be terminated by S&P and, as a result, the Multi Cap Value AlphaDEX(TM) Fund may lose its ability to use the Intellectual Property. There is also no guarantee that S&P has all rights to license the Intellectual Property to FTP, on behalf of First Trust and the Multi Cap Value AlphaDEX(TM) Fund. Accordingly, in the event the license is terminated or S&P does not have rights to license the Intellectual Property, it may have a significant effect on the operation of the Multi Cap Value AlphaDEX(TM) Fund. ISSUER SPECIFIC CHANGES RISK. The value of an individual security or particular type of security can be more volatile than the market as a whole and can perform differently from the value of the market as a whole. Page 24 VALUE INVESTMENT STYLE RISK. The Multi Cap Value AlphaDEX(TM) Fund's value-oriented investment style may not be successful in realizing the Multi Cap Value AlphaDEX(TM) Fund's investment objectives. Value companies may have experienced adverse business developments or may be subject to special risks that cause their securities to be out of favor, may never reach what may be their full value or may go down in price. See "Additional Risks of Investing in the Funds" for additional information regarding risks. Page 25 First Trust Multi Cap Growth AlphaDEX(TM) Fund Investment Objective, Strategies and Risks INVESTMENT OBJECTIVE The First Trust Multi Cap Growth AlphaDEX(TM) Fund (the "Multi Cap Growth AlphaDEX(TM) Fund") seeks investment results that correspond generally to the price and yield (before the Multi Cap Growth AlphaDEX(TM) Fund's fees and expenses) of an equity index called the Defined Multi Cap Growth Index (Symbol: DEFIMCGI) (the "Multi Cap Growth Index"). PRINCIPAL INVESTMENT STRATEGIES The Multi Cap Growth AlphaDEX(TM) Fund will normally invest at least 90% of its total assets in common stocks that comprise the Multi Cap Growth Index. First Trust will seek investment results that correspond generally to the performance of the Multi Cap Growth Index. The investment objective and the 90% investment strategy, both noted above, are non-fundamental and require 60 days' prior written notice to shareholders before they can be changed. As non-fundamental policies, such policies may be changed by the Board of Trustees without receiving shareholder approval. The Multi Cap Growth AlphaDEX(TM) Fund, using an "indexing" investment approach, attempts to replicate, before expenses, the performance of the Multi Cap Growth Index. First Trust seeks a correlation of 0.95 or better (before fees and expenses) between the Multi Cap Growth AlphaDEX(TM) Fund's performance and the performance of the Multi Cap Growth Index; a figure of 1.00 would represent perfect correlation. First Trust will regularly monitor the Multi Cap Growth AlphaDEX(TM) Fund's tracking accuracy and will use the investment techniques described below in seeking to maintain an appropriate correlation. In seeking to achieve the Multi Cap Growth AlphaDEX(TM) Fund's investment objective, the Multi Cap Growth AlphaDEX(TM) Fund generally will invest in all of the stocks comprising the Multi Cap Growth Index in proportion to their weightings in the Multi Cap Growth Index. However, under various circumstances, it may not be possible or practicable to purchase all of those stocks in those weightings. In those circumstances, the Multi Cap Growth AlphaDEX(TM) Fund may purchase a sample of stocks in the Multi Cap Growth Index. There may also be instances in which First Trust may choose to overweight certain stocks in the Multi Cap Growth Index, purchase securities not in the Multi Cap Growth Index which First Trust believes are appropriate to substitute for certain securities in the Multi Cap Growth Index, use futures or other derivative instruments, or utilize various combinations of the above techniques in seeking to track the Multi Cap Growth Index. The Multi Cap Growth AlphaDEX(TM) Fund may sell stocks that are represented in the Multi Cap Growth Index in anticipation of their removal from the Multi Cap Growth Index or purchase stocks not represented in the Multi Cap Growth Index in anticipation of their addition to the Multi Cap Growth Index. INDEX CONSTRUCTION The Multi Cap Growth Index is a modified equal-dollar weighted index designed by S&P to objectively identify and select stocks from the S&P 1500/Citigroup Growth Index that may generate positive alpha relative to traditional passive style indexes through the use of the AlphaDEX(TM) screening methodology. Alpha is a measure of the portion of a return arising from non-market risk. Accordingly, alpha is an indication of how much an investment outperforms or underperforms relative to its benchmark. The inception date of the Multi Cap Growth Index was April 9, 2007. The initial divisor was created to set a benchmark value of 100.00 on January 8, 1996. The Multi Cap Growth Index was created and trademarked by S&P. As of April 9, 2007, the S&P 1500/Citigroup Growth Index consisted of 917 stocks and the Multi Cap Growth Index consisted of 516 stocks. The stocks of the S&P 1500/Citigroup Growth Index (i) that are members of the S&P 500/Citigroup Growth Index will comprise 50% of the Multi Cap Growth Index, (ii) that are members of the S&P/Citigroup MidCap 400 Page 26 Growth Index will comprise 30% of the Multi Cap Growth Index and (iii) that are members of the S&P/Citigroup SmallCap 600 Growth Index will comprise 20% of the Multi Cap Growth Index. The Multi Cap Growth Index is constructed in the following manner: For the stocks selected from the S&P 500/Citigroup Growth Index: 1. S&P ranks all stocks in the S&P 500/Citigroup Growth Index against all the stocks in the S&P 500 Index on the following growth and value factors: three, six and 12-month price appreciation, sales to price and one year sales growth (growth factors) and book value to price, cash flow to price and return on assets (value factors). All stocks are ranked on the sum of ranks for the growth factors and, separately, all stocks are ranked on the sum of ranks for the value factors. 2. For stocks that S&P/Citigroup classified solely as growth or value, the stock receives the rank for that style from step 1 as its selection score. Stocks that S&P/Citigroup classified solely as value are not eligible for inclusion in the Multi Cap Growth Index. For stocks that S&P/Citigroup allocates between growth and value, the stock receives the best rank from step 1 as its selection score and is treated as belonging solely to the style of its best rank henceforth in the selection process. Stocks that S&P/Citigroup allocates between growth and value are not eligible for inclusion in the Multi Cap Growth Index if their value scores are better than their growth scores. 3. For the Multi Cap Growth Index, remaining stocks are then ranked according to their selection score from step 2. The bottom 25% of such remaining stocks is then eliminated and the top 75% of such stocks is selected for the Multi Cap Growth Index. 4. The selected stocks are then split into quintiles based on their score from step 3. The top ranked quintile receives 5/15 (33.3%) of the portfolio weight with successive quintiles receiving 4/15 (26.7%), 3/15 (20.0%), 2/15 (13.3%) and 1/15 (6.7%), respectively. Stocks are equally weighted within each quintile. For the stocks selected from the S&P/Citigroup MidCap 400 Growth Index: 1. S&P ranks all stocks in the S&P/Citigroup MidCap 400 Growth Index against all the stocks in the S&P 400 Index on the following growth and value factors: three, six and 12-month price appreciation, sales to price and one year sales growth (growth factors) and book value to price, cash flow to price and return on assets (value factors). All stocks are ranked on the sum of ranks for the growth factors and, separately, all stocks are ranked on the sum of ranks for the value factors. 2. For stocks that S&P/Citigroup classified solely as growth or value, the stock receives the rank for that style from step 1 as its selection score. Stocks that S&P/Citigroup classified solely as value are not eligible for inclusion in the Multi Cap Growth Index. For stocks that S&P/Citigroup allocates between growth and value, the stock receives the best rank from step 1 as its selection score and is treated as belonging solely to the style of its best rank henceforth in the selection process. Stocks that S&P/Citigroup allocates between growth and value are not eligible for inclusion in the Multi Cap Growth Index if their value scores are better than their growth scores. 3. For the Multi Cap Growth Index, remaining stocks are then ranked according to their selection score from step 2. The bottom 25% of such remaining stocks is then eliminated and the top 75% of such stocks is selected for the Multi Cap Growth Index. 4. The selected stocks are then split into quintiles based on their score from step 3. The top ranked quintile receives 5/15 (33.3%) of the portfolio weight with successive quintiles receiving 4/15 (26.7%), 3/15 (20.0%), 2/15 (13.3%) and 1/15 (6.7%), respectively. Stocks are equally weighted within each quintile. For the stocks selected from the S&P/Citigroup SmallCap 600 Growth Index: 1. S&P ranks all stocks in the S&P/Citigroup SmallCap 600 Growth Index against all the stocks in the S&P 600 Index on the following growth and value factors: three, six and 12-month price appreciation, sales to price and one year sales growth (growth factors) and book value to price, cash flow to price and return on assets (value factors). All stocks are ranked on the sum of ranks Page 27 for the growth factors and, separately, all stocks are ranked on the sum of ranks for the value factors. 2. For stocks that S&P/Citigroup classified solely as growth or value, the stock receives the rank for that style from step 21a as its selection score. Stocks that S&P/Citigroup classified solely as value are not eligible for inclusion in the Multi Cap Growth Index. For stocks that S&P/Citigroup allocates between growth and value, the stock receives the best rank from step 1 as its selection score and is treated as belonging solely to the style of its best rank henceforth in the selection process. Stocks that S&P/Citigroup allocates between growth and value are not eligible for inclusion in the Multi Cap Growth Index if their value scores are better than their growth scores. 3. For the Multi Cap Growth Index, remaining stocks are then ranked according to their selection score from step 2. The bottom 25% of such remaining stocks is then eliminated and the top 75% of such stocks is selected for the Multi Cap Growth Index. 4. The selected stocks are then split into quintiles based on their score from step 3. The top ranked quintile receives 5/15 (33.3%) of the portfolio weight with successive quintiles receiving 4/15 (26.7%), 3/15 (20.0%), 2/15 (13.3%) and 1/15 (6.7%), respectively. Stocks are equally weighted within each quintile. The Multi Cap Growth Index is rebalanced and reconstituted on the last business day of each calendar quarter. Changes will be effective at the open on the fourth business day of the following month. Acquired companies are deleted at the close on the day the merger closes for both cash and stock deals. The acquired company's weight in the Multi Cap Growth Index is reallocated pro-rata among the remaining index constituents. Spin-offs are not included in the Multi Cap Growth Index. The value of the spin-off is reallocated to the parent company. See "Additional Index Information" for additional information regarding the Multi Cap Growth Index. PRINCIPAL RISKS OF INVESTING IN THE FUND Risk is inherent in all investing. Shares of the Multi Cap Growth AlphaDEX(TM) Fund will change in value, and loss of money is a risk of investing in the Multi Cap Growth AlphaDEX(TM) Fund. The Multi Cap Growth AlphaDEX(TM) Fund may not achieve its objective. An investment in the Multi Cap Growth AlphaDEX(TM) Fund is not a deposit with a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. An investment in the Multi Cap Growth AlphaDEX(TM) Fund involves risks similar to those of investing in any fund of equity securities traded on an exchange. The following specific risk factors have been identified as the principal risks of investing in the Multi Cap Growth AlphaDEX(TM) Fund. MARKET RISK One of the principal risks of investing in the Multi Cap Growth AlphaDEX(TM) Fund is market risk. Market risk is the risk that a particular stock owned by the Multi Cap Growth AlphaDEX(TM) Fund, Shares of the Multi Cap Growth AlphaDEX(TM) Fund or stocks in general may fall in value. Shares are subject to market fluctuations caused by such factors as economic, political, regulatory or market developments, changes in interest rates and perceived trends in stock prices. Overall stock values could decline generally or could underperform other investments. INDEX TRACKING RISK You should anticipate that the value of the Shares will decline, more or less, in correlation with any decline in the value of the Multi Cap Growth Index. NON-DIVERSIFICATION RISK. Because the Multi Cap Growth AlphaDEX(TM) Fund is considered to be non-diversified, the Multi Cap Growth AlphaDEX(TM) Fund is exposed to additional market risk. A non-diversified fund may invest a relatively high percentage of its assets in a limited number of issuers. As a result, changes in the market value of a single portfolio security could cause greater fluctuation in Share price than would occur in a diversified fund. Furthermore, non-diversified funds are more susceptible to any single political, regulatory or economic occurrence and to the financial condition of individual issuers in which it invests. Page 28 NON-CORRELATION RISK The Multi Cap Growth AlphaDEX(TM) Fund's return may not match the return of the Multi Cap Growth Index for a number of reasons. For example, the Multi Cap Growth AlphaDEX(TM) Fund incurs operating expenses not applicable to the Multi Cap Growth Index, and may incur costs in buying and selling securities, especially when rebalancing the Multi Cap Growth AlphaDEX(TM) Fund's portfolio holdings to reflect changes in the composition of the Multi Cap Growth Index. In addition, the Multi Cap Growth AlphaDEX(TM) Fund's portfolio holdings may not exactly replicate the securities included in the Multi Cap Growth Index or the ratios between the securities included in the Multi Cap Growth Index. The Multi Cap Growth AlphaDEX(TM) Fund may not be fully invested at times, either as a result of cash flows into the Multi Cap Growth AlphaDEX(TM) Fund or reserves of cash held by the Multi Cap Growth AlphaDEX(TM) Fund to meet redemptions and expenses. If the Multi Cap Growth AlphaDEX(TM) Fund utilizes a sampling approach or invests in futures or other derivative positions, its return may not correlate as well with the return of the Multi Cap Growth Index, as would be the case if it purchased all of the stocks in the Multi Cap Growth Index with the same weightings as the Multi Cap Growth Index. While First Trust seeks to have a correlation of 0.95 or better, before expenses, between the Multi Cap Growth AlphaDEX(TM) Fund's performance and the performance of the Multi Cap Growth Index, there can be no assurance that the Multi Cap Growth AlphaDEX(TM) Fund will be able to achieve such a correlation. Accordingly, the Multi Cap Growth AlphaDEX(TM) Fund's performance may correlate to a lesser extent and may possibly vary substantially from the performance of the Multi Cap Growth Index. REPLICATION MANAGEMENT RISK The Multi Cap Growth AlphaDEX(TM) Fund is also exposed to additional market risk due to its policy of investing principally in the securities included in the Multi Cap Growth Index. As a result of this policy, securities held by the Multi Cap Growth Index will generally not be bought or sold in response to market fluctuations and the securities may be issued by companies concentrated in a particular industry. As a result of this policy, the Multi Cap Growth AlphaDEX(TM) Fund would generally not sell a stock because the stock's issuer was in financial trouble, unless that stock is removed or is anticipated to be removed from the Multi Cap Growth Index. SMALL CAP AND MID CAP COMPANY RISK The Multi Cap Growth AlphaDEX(TM) Fund may invest in small capitalization and mid capitalization companies. Such companies may be more vulnerable to adverse general market or economic developments, and their securities may be less liquid and may experience greater price volatility than larger, more established companies as a result of several factors, including limited trading volumes, products or financial resources, management inexperience and less publicly available information. Accordingly, such companies are generally subject to greater market risk than larger, more established companies. CONCENTRATION RISK. The Multi Cap Growth AlphaDEX(TM) Fund will be concentrated in the securities of a given industry if the Multi Cap Growth Index is concentrated in such industry. A concentration makes the Multi Cap Growth AlphaDEX(TM) Fund more susceptible to any single occurrence affecting the industry and may subject the Multi Cap Growth AlphaDEX(TM) Fund to greater market risk than more diversified funds. INTELLECTUAL PROPERTY RISK. The Multi Cap Growth AlphaDEX(TM) Fund relies on a license and related sublicense from S&P that permits such Fund to use its corresponding equity index in the Defined Index Series and the associated trade names and trademarks ("Intellectual Property") in connection with the name and investment strategies of the Multi Cap Growth AlphaDEX(TM) Fund. Such license and related sublicense may be terminated by S&P and, as a result, the Multi Cap Growth AlphaDEX(TM) Fund may lose its ability to use the Intellectual Property. There is also no guarantee that S&P has all rights to license the Intellectual Property to FTP, on behalf of First Trust and the Multi Cap Growth AlphaDEX(TM) Fund. Accordingly, in the event the license is terminated or S&P does not have rights to license the Intellectual Property, it may have a significant effect on the operation of the Multi Cap Growth AlphaDEX(TM) Fund. ISSUER SPECIFIC CHANGES RISK. The value of an individual security or particular type of security can be more volatile than the market as a whole and can perform differently from the value of the market as a whole. Page 29 GROWTH INVESTMENT STYLE RISK. The Multi Cap Growth AlphaDEX(TM) Fund's growth-oriented investment style may not be successful in realizing the Multi Cap Growth AlphaDEX(TM) Fund's investment objectives. Growth companies may have experienced adverse business developments or may be subject to special risks that cause their securities to be out of favor, may never reach what may be their full value or may go down in price. See "Additional Risks of Investing in the Funds" for additional information regarding risks. Page 30 HOW THE FUNDS HAVE PERFORMED The Funds have not commenced operations and, therefore, do not have performance histories. WHAT ARE THE COSTS OF INVESTING? This table describes the fees and expenses that you may pay if you buy and hold Shares of each of the Funds.(1)
First Trust First Trust First Trust First Trust First Trust First Trust First Trust Large Cap Mid Cap Core Small Cap Large Cap Large Cap Multi Cap Multi Cap Core AlphaDEX(TM) Core Value Growth Value Growth AlphaDEX(TM) Fund AlphaDEX(TM) Opportunities Opportunities AlphaDEX(TM) AlphaDEX(TM) Fund Fund AlphaDEX(TM) AlphaDEX(TM) Fund Fund Fund Fund Shareholder None None None None None None None Transaction Expenses(2)(3) (Fees paid directly from your investments) Annual Fund Operating Expenses(4) (Expenses that are deducted from the Fund's assets) Management Fees 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% Distribution and 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Service (12b-1) Fees(5) Other Expenses(1) 0.39% 0.39% 0.39% 0.39% 0.39% 0.39% 0.39% Total Annual Fund 0.89% 0.89% 0.89% 0.89% 0.89% 0.89% 0.89% Operating Expenses Fee Waivers and 0.19% 0.19% 0.19% 0.19% 0.19% 0.19% 0.19% Expense Reimbursement(6) Net Annual Fund 0.70% 0.70% 0.70% 0.70% 0.70% 0.70% 0.70% Operating Expenses - ----------------------- (1)The Funds had not fully commenced operations as of the date of this Prospectus. The "Other Expenses" listed in the table are estimates based on the expenses the Funds expect to incur for an the current fiscal year. (2)When buying or selling exchange-traded Shares through a broker, you will incur customary brokerage commissions. (3)Purchasers of Creation Units and parties redeeming Creation Units must pay a standard creation or redemption transaction fee of $500, as applicable. However, if a Creation Unit is purchased or redeemed outside the usual process through the National Securities Clearing Corporation or for cash, a variable fee of up to four times the standard creation or redemption transaction fee (i.e., up to $2,000) will be charged. See "Creation Transaction Fees and Redemption Transaction Fees" below. (4)Expressed as a percentage of average daily net assets. (5)The Funds have adopted a distribution and service (12b-1) plan pursuant to which each Fund may bear a 12b-1 fee not to exceed 0.25% per annum of such Fund's average daily net assets. However, no such fee is currently paid by the Funds and the Funds do not currently anticipate paying 12b-1 fees. (6)First Trust has agreed to waive fees and/or pay each Fund's expenses to the extent necessary to prevent the operating expenses of each Fund (excluding interest expense, brokerage commissions and other trading expenses, taxes, and extraordinary expenses) from exceeding 0.70% of average net assets per year (the "Expense Cap"), at least until two years after the initial public issuance of Fund Shares. Expenses borne by First Trust are subject to reimbursement by each Fund up to three years from the date the fee or expense was incurred, but no reimbursement payment will be made by a Fund at any time if it would result in such Fund's expenses exceeding 0.70% of average daily net assets per year.
Page 31 EXAMPLE This example is intended to help you compare the cost of investing in the Funds with the cost of investing in other funds. This example does not take into account brokerage commissions that you pay when purchasing or selling Shares of the Funds. The example assumes that you invest $10,000 in a Fund for the time periods indicated and then you retain the Shares or sell all of your Shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund's operating expenses remain the same. Although your actual costs may be higher or lower, your costs, based on these assumptions, would be: 1 YEAR 3 YEARS $72 $245 CREATION TRANSACTION FEES AND REDEMPTION TRANSACTION FEES The Funds normally issue and redeem Shares at NAV only in large blocks of 50,000 Shares (each block of 50,000 Shares called a "Creation Unit") or multiples thereof. As a practical matter, only broker-dealers or large institutional investors that have entered into authorized participant agreements with respect to purchases and redemptions of Creation Units, called "Authorized Participants" ("APs"), can purchase or redeem these Creation Units. Purchasers of Creation Units at NAV must pay a standard Creation Transaction Fee of $500 per transaction (regardless of the number of Creation Units involved). Normally, the value of a Creation Unit as of the first creation of such Creation Unit was approximately $1,000,000. An AP who holds Creation Units and wishes to redeem at NAV would also pay a standard Redemption Transaction Fee (as defined below) of $500 for each redemption transaction (regardless of the number of Creation Units involved). See "Creations, Redemptions and Transaction Fees" later in the Prospectus. APs who hold Creation Units in inventory will also indirectly pay Fund expenses. Assuming an investment in a Creation Unit of $1,000,000 and a 5% return each year, assuming that a Fund's operating expenses remain the same, and assuming brokerage costs are not included, the total costs would be $8,151 if the Creation Unit is redeemed after one year and $25,489 if the Creation Unit is redeemed after three years. If a Creation Unit is purchased or redeemed outside the usual process through the National Securities Clearing Corporation or for cash, a variable fee of up to four times the standard Creation or Redemption Transaction Fee (i.e., up to $2,000) may be charged to the AP making the transaction. The Creation Transaction Fee (as defined below), Redemption Transaction Fee and variable fee are not expenses of a Fund and do not impact a Fund's expense ratio. Additional Investment Strategies The investment objective of each Fund is a fundamental policy that may be changed only with shareholder approval. Each of the other policies described herein is a non-fundamental policy that may be changed by the Board of Trustees of the Trust without shareholder approval. Certain other fundamental policies of the Funds are set forth in the Statement of Additional Information ("SAI") under "Investment Objective and Policies." EQUITY SECURITIES The Funds invest primarily in equity securities of U.S. issuers. Eligible equity securities include common stocks and warrants to purchase common stocks. In addition, the Funds may invest in equity securities of non-U.S. issuers listed on any national exchange, including depositary receipts that represent non-U.S. common stocks deposited with a custodian. Page 32 SHORT-TERM INVESTMENTS The Funds may invest in cash equivalents or other short-term investments, including U.S. government securities, commercial paper, repurchase agreements, money-market funds or similar fixed-income securities with remaining maturities of one year or less. For more information on short-term investments, see the SAI. FUTURES AND OPTIONS The Funds may use various investment strategies designed to hedge against changes in the values of securities the Funds own or expect to purchase or to hedge against interest rate or currency exchange rate changes. The securities used to implement these strategies include financial futures contracts, options, forward contracts, options on financial futures and stock index options. DELAYED DELIVERY SECURITIES The Funds may buy or sell securities on a when-issued or delayed-delivery basis, paying for or taking delivery of the securities at a later date, normally within 15 to 45 days of the trade. Such transactions involve an element of risk because the value of the securities to be purchased may decline before the settlement date. DISCLOSURE OF PORTFOLIO HOLDINGS A description of the policies and procedures with respect to the disclosure of each Fund's portfolio securities is included in the Funds' SAI. Additional Risks of Investing in the Funds Risk is inherent in all investing. Investing in the Funds involves risk, including the risk that you may lose all or part of your investment. There can be no assurance that the Funds will meet their stated objectives. Before you invest, you should consider the following risks. TRADING ISSUES Trading in Shares on the AMEX may be halted due to market conditions or for reasons that, in the view of the AMEX, make trading in Shares inadvisable. In addition, trading in Shares on the AMEX is subject to trading halts caused by extraordinary market volatility pursuant to the AMEX "circuit breaker" rules. There can be no assurance that the requirements of the AMEX necessary to maintain the listing of the Funds will continue to be met or will remain unchanged. FLUCTUATION OF NET ASSET VALUE The net asset value of a Fund's Shares will generally fluctuate with changes in the market value of the Fund's holdings. The market prices of Shares will generally fluctuate in accordance with changes in net asset value as well as the relative supply of and demand for Shares on the AMEX. First Trust cannot predict whether Shares will trade below, at or above their net asset value. Price differences may be due, in large part, to the fact that supply and demand forces at work in the secondary trading market for Shares will be closely related to, but not identical to, the same forces influencing the prices of the stocks of the Funds trading individually or in the aggregate at any point in time. However, given that Shares can be purchased and redeemed in Creation Units (unlike shares of many closed-end funds, which frequently trade at appreciable discounts from, and sometimes at premiums to, their net asset value), First Trust believes that large discounts or premiums to the net asset value of Shares should not be sustained. Page 33 INFLATION Inflation risk is the risk that the value of assets or income from investments will be less in the future as inflation decreases the value of money. As inflation increases, the value of a Fund's assets can decline as can the value of a Fund's distributions. Common stock prices may be particularly sensitive to rising interest rates, as the cost of capital rises and borrowing costs increase. NON-U.S. INVESTMENT The Funds may invest in non-U.S. securities publicly traded in the United States. Securities issued by non-U.S. companies present risks beyond those of securities of U.S. issuers. Risks of investing in non-U.S. securities include: different accounting standards; expropriation, nationalization or other adverse political or economic developments; currency devaluation, blockages or transfer restrictions; changes in non-U.S. currency exchange rates; taxes; restrictions on non-U.S. investments and exchange of securities; and less government supervision and regulation of issuers in non-U.S. countries. Prices of non-U.S. securities also may be more volatile. INVESTMENT STRATEGY Each Fund is exposed to additional market risk due to its policy of investing principally in the securities included in each Fund's corresponding equity index in the Defined Index Series. As a result of this policy, securities held by a Fund will generally not be bought or sold in response to market fluctuations. This policy may subject investors to greater market risk than other mutual funds. Fund Organization The Funds are series of the Trust, an investment company registered under the Investment Company Act of 1940, as amended (the "1940 Act"). Each Fund is treated as a separate fund with its own investment objective and policies. The Trust is organized as a Massachusetts business trust. Its Board of Trustees (the "Board") is responsible for its overall management and direction. The Board elects the Trust's officers and approves all significant agreements, including those with the investment adviser, custodian and fund administrative and accounting agent. Management of the Funds First Trust Advisors L.P. ("First Trust"), 1001 Warrenville Road, Lisle, Illinois 60532, is the investment adviser to the Funds. In this capacity, First Trust is responsible for the selection and ongoing monitoring of the securities in each Fund's portfolio and certain other services necessary for the management of the portfolios. First Trust is a limited partnership with one limited partner, Grace Partners of DuPage L.P., and one general partner, The Charger Corporation. Grace Partners of DuPage L.P. is a limited partnership with one general partner, The Charger Corporation, and a number of limited partners. The Charger Corporation is an Illinois corporation controlled by the Robert Donald Van Kampen family. First Trust discharges its responsibilities subject to the policies of the Board of Trustees of the Trust. First Trust serves as adviser or sub adviser for 22 mutual fund portfolios, 12 exchange-traded fund portfolios and 13 closed-end funds and is also the portfolio supervisor of certain unit investment trusts sponsored by FTP, 1001 Warrenville Road, Lisle, Illinois 60532. FTP specializes in the underwriting, trading and distribution of unit investment trusts and other securities. FTP is the principal underwriter of the Funds' Shares. There is no one individual primarily responsible for portfolio management decisions for the Funds. Investments are made under the direction of a committee (the "Investment Committee"). The Investment Committee consists of Daniel J. Lindquist, Robert F. Carey, Jon C. Erickson, David G. McGarel, Roger F. Testin and Stan Ueland. Mr. Lindquist rejoined First Trust in April 2004 after serving as Chief Operating Officer of Mina Capital Management LLC from January 2004 to April 2004 and Samaritan Page 34 Asset Management Services, Inc. from April 2000 to January 2004 and has been a Senior Vice President of First Trust and FTP since September 2005. Mr. Lindquist is Chairman of the Investment Committee and presides over Investment Committee meetings. Mr. Lindquist is responsible for overseeing the implementation of the Fund's investment strategies. Mr. Carey is the Chief Investment Officer and Senior Vice President of First Trust and Senior Vice President of FTP. As First Trust's Chief Investment Officer, Mr. Carey consults with the Investment Committee on market conditions and First Trust's general investment philosophy. Mr. Erickson is a Senior Vice President of First Trust and FTP. As the head of First Trust's Equity Research Group, Mr. Erickson is responsible for determining the securities to be purchased and sold by funds that do not utilize quantitative investment strategies. Mr. McGarel is a Senior Vice President of First Trust and FTP. As the head of First Trust's Strategy Research Group, Mr. McGarel is responsible for developing and implementing quantitative investment strategies for those funds that have investment policies that require them to follow such strategies. Since November 2003, Mr. Testin has been a Senior Vice President of First Trust and FTP. From August 2001 to November 2003, Mr. Testin was a Vice President of First Trust and FTP. Prior to joining First Trust, Mr. Testin was an analyst for Dolan Capital Management. Mr. Testin has been the head of First Trust's Portfolio Management Group. Mr. Ueland has been a Vice President of First Trust and FTP since August 2005. At First Trust, he plays an important role in executing the investment strategies of each portfolio of exchange-traded funds advised by First Trust. Before joining First Trust, Mr. Ueland was vice president of sales at BondWave LLC from May 2004 through August 2005, an account executive for Mina Capital Management LLC and Samaritan Asset Management Services, Inc. from January 2003 through May 2004, and a sales consultant at Oracle Corporation from January 1997 through January 2003. For additional information concerning First Trust, including a description of the services provided to the Funds, see the Funds' SAI. In addition, the SAI provides additional information about the compensation of Investment Committee members, other accounts managed by members of the Investment Committee and ownership by members of the Investment Committee of Shares of the Fund.s First Trust will receive annual fees from each Fund equal to 0.50% of such Fund's average daily net assets. A discussion regarding the approval of the Investment Management Agreement will be available in the Funds' semi-annual report to Shareholders for the period ending June 30, 2007. Each Fund is responsible for all of its expenses, including the investment advisory fees, costs of transfer agency, custody, fund administration, legal, audit and other services, interest, taxes, brokerage commissions and other expenses connected with the execution of portfolio transactions, paying for its sublicensing fees related to each Fund's corresponding equity index in the Defined Index Series, any distribution fees or expenses, and extraordinary expenses. First Trust has agreed to waive fees and/or pay Fund expenses to the extent necessary to prevent the operating expenses of each Fund (excluding interest expense, brokerage commissions and other trading expenses, taxes and extraordinary expenses) from exceeding 0.70% of average daily net assets per year, at least until two years after the initial issuance of Fund Shares. Expenses borne by First Trust are subject to reimbursement by each Fund up to three years from the date the fee or expense was incurred, but no reimbursement payment will be made by a Fund if it would result in such Fund exceeding its Expense Cap. How to Buy and Sell Shares Shares will be issued or redeemed by the Funds at net asset value per Share only in Creation Unit size. See "Creations, Redemptions and Transaction Fees." Most investors will buy and sell Shares of the Funds in secondary market transactions through brokers. Shares of the Funds will be listed for trading on the secondary market on the AMEX. Shares can be bought and sold throughout the trading day like other publicly traded shares. There is no minimum investment. Although Shares are generally purchased and sold in "round lots" of 100 Shares, brokerage firms typically permit investors to purchase or sell Shares in smaller "odd lots," at no per-Share price differential. When buying or selling Shares through a broker, you should expect to incur customary brokerage commissions, you may receive less than the net asset value of the Shares, and you may pay some or all of the spread between the bid and the offer price in the secondary market on each leg of a round trip (purchase and sale) transaction. The Large Cap Core AlphaDEX(TM) Fund will trade under the AMEX symbol "FEX," subject to notice of issuance. The Mid Cap Core AlphaDEX(TM) Fund will trade under the AMEX symbol "FNX," subject to Page 35 notice of issuance. The Small Cap Core AlphaDEX(TM) Fund will trade under the AMEX symbol "FYX," subject to notice of issuance. The Large Cap Value Opportunities AlphaDEX(TM) Fund will trade under the AMEX symbol "FTA," subject to notice of issuance. The Large Cap Growth Opportunities AlphaDEX(TM) Fund will trade under the AMEX symbol "FTC," subject to notice of issuance. The Multi Cap Value AlphaDEX(TM) Fund will trade under the AMEX symbol "FAB," subject to notice of issuance. The Multi Cap Growth AlphaDEX(TM) Fund will trade under the AMEX symbol "FAD," subject to notice of issuance. Share prices are reported in dollars and cents per Share. Investors may acquire Shares directly from a Fund, and shareholders may tender their Shares for redemption directly to such Fund, only in Creation Units of 50,000 Shares, as discussed in the "Creations, Redemptions and Transaction Fees" section below. Section 12(d)(1) of the 1940 Act restricts investments by registered investment companies in the securities of other investment companies, including shares of each Fund. The Trust has applied for an exemptive order from the Securities and Exchange Commission that, subject to certain terms and conditions, would permit registered investment companies to invest in a Fund beyond the limits set forth in Section 12(d)(1). BOOK ENTRY Shares are held in book-entry form, which means that no Share certificates are issued. The Depository Trust Company ("DTC") or its nominee is the record owner of all outstanding Shares of the Funds and is recognized as the owner of all Shares for all purposes. Investors owning Shares are beneficial owners as shown on the records of DTC or its participants. DTC serves as the securities depository for all Shares. Participants in DTC include securities brokers and dealers, banks, trust companies, clearing corporations and other institutions that directly or indirectly maintain a custodial relationship with DTC. As a beneficial owner of Shares, you are not entitled to receive physical delivery of Share certificates or to have Shares registered in your name, and you are not considered a registered owner of Shares. Therefore, to exercise any right as an owner of Shares, you must rely upon the procedures of DTC and its participants. These procedures are the same as those that apply to any other stocks that you hold in book-entry or "street name" form. FUND SHARE TRADING PRICES The trading prices of Shares of a Fund on the AMEX may differ from such Fund's daily NAV and can be affected by market forces of supply and demand, economic conditions and other factors. The AMEX intends to disseminate the approximate value of Shares of the Funds every 15 seconds. This approximate value should not be viewed as a "real-time" update of the NAV per Share of the Funds because the approximate value may not be calculated in the same manner as the NAV, which is computed once a day, generally at the end of the business day. The Funds are not involved in, or responsible for, the calculation or dissemination of the approximate value and the Funds do not make any warranty as to its accuracy. FREQUENT PURCHASES AND REDEMPTIONS OF THE FUNDS' SHARES The Funds impose no restrictions on the frequency of purchases and redemptions. In determining not to approve a written, established policy, the Board evaluated the risks of market timing activities by the Funds' shareholders. The Board considered that, unlike traditional mutual funds, the Funds issue and redeem their Shares at net asset value per Share for a basket of securities intended to mirror a Fund's portfolio, plus a small amount of cash, and the Shares may be purchased and sold on the AMEX at prevailing market prices. Given this structure, the Board determined that (a) it is unlikely that market timing would be attempted by the Funds' shareholders and (b) any attempts to market time the Funds by shareholders would not be expected to negatively impact the Funds or their shareholders. Page 36 Creations, Redemptions and Transaction Fees Investors such as market makers, large investors and institutions who wish to deal in Creation Units directly with the Funds must have entered into an authorized participant agreement with a Fund's distributor and a Fund's transfer agent, or purchase through a dealer that has entered into such an agreement. Set forth below is a brief description of the procedures applicable to purchases and redemptions of Creation Units. For more detailed information, see "Creation and Redemption of Creation Unit Aggregations" in the SAI. PURCHASE In order to purchase Creation Units of Fund, an investor must generally deposit a designated portfolio of equity securities constituting a substantial replication, or a representation, of the stocks included in the Fund's corresponding equity index in the Defined Index Series (the "Deposit Securities") and generally make a small cash payment referred to as the "Cash Component." The list of the names and the numbers of shares of the Deposit Securities is made available by the Funds' custodian through the facilities of the National Securities Clearing Corporation ("NSCC"), immediately prior to the opening of business each day of the AMEX. The Cash Component represents the difference between the NAV of a Creation Unit and the market value of the Deposit Securities. Orders must be placed in proper form by or through an AP which is either (i) a "Participating Party," i.e., a broker-dealer or other participant in the Clearing Process of the Continuous Net Settlement System of the NSCC (the "Clearing Process"), or (ii) a participant of DTC ("DTC Participant") that has entered into an AP agreement with each Fund's distributor and each Fund's transfer agent, with respect to purchases and redemptions of Creation Units. All orders must be placed for one or more whole Creation Units of Shares of the Funds and must be received by each Fund's transfer agent in proper form no later than the close of regular trading on the AMEX (ordinarily 4:00 p.m., Eastern time) ("Closing Time") in order to receive that day's closing NAV per Share. In the case of custom orders, as further described in the SAI, the order must be received by each Fund's transfer agent no later than 3:00 p.m., Eastern time. A custom order may be placed by an AP in the event that a Fund permits or requires the substitution of an amount of cash to be added to the Cash Component to replace any Deposit Security which may not be available in sufficient quantity for delivery or which may not be eligible for trading by such AP or the investor for which it is acting or any other relevant reason. See "Creation and Redemption of Creation Unit Aggregations" in the SAI. A fixed creation transaction fee of $500 (the "Creation Transaction Fee") is applicable to each transaction regardless of the number of Creation Units purchased in the transaction. An additional charge of up to four times the Creation Transaction Fee (i.e., up to $2,000) may be imposed with respect to transactions effected outside of the Clearing Process (i.e., through a DTC Participant) or to the extent that cash is used in lieu of securities to purchase Creation Units. See "Creation and Redemption of Creation Unit Aggregations" in the SAI. 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 transfer taxes. Shares of each Fund may be issued in advance of receipt of all Deposit Securities subject to various conditions, including a requirement to maintain on deposit with a Fund cash at least equal to 115% of the market value of the missing Deposit Securities. See "Creation and Redemption of Creation Unit Aggregations" in the SAI. LEGAL RESTRICTIONS ON TRANSACTIONS IN CERTAIN STOCKS An investor subject to a legal restriction with respect to a particular stock required to be deposited in connection with the purchase of a Creation Unit may, at a Fund's discretion, be permitted to deposit an equivalent amount of cash in substitution for any stock which would otherwise be included in the Deposit Securities applicable to the purchase of a Creation Unit. For more details, see "Creation and Redemption of Creation Unit Aggregations" in the SAI. REDEMPTION The Funds' custodian makes available immediately prior to the opening of business each day of the AMEX, through the facilities of the NSCC, the list of the names and the numbers of shares of each Fund's portfolio securities that will be applicable that day to redemption requests in Page 37 proper form ("Fund Securities"). Fund Securities received on redemption may not be identical to Deposit Securities, which are applicable to purchases of Creation Units. Unless cash redemptions are available or specified for the Fund, the redemption proceeds consist of the Fund Securities, plus cash in an amount equal to the difference between the NAV of Shares being redeemed as next determined after receipt by the Fund's transfer agent of a redemption request in proper form, and the value of the Fund Securities (the "Cash Redemption Amount"), less the applicable redemption fee and, if applicable, any transfer taxes. Should the Fund Securities have a value greater than the net asset value of Shares being redeemed, a compensating cash payment to a Fund equal to the differential, plus the applicable redemption fee and, if applicable, any transfer taxes will be required to be arranged for by or on behalf of the redeeming AP. Investors should expect to incur brokerage commissions in connection with assembling a sufficient number of Fund Shares to constitute a redeemable Creation Unit. For more details, see "Creation and Redemption of Creation Unit Aggregations" in the SAI. An order to redeem Creation Units of a Fund may only be effected by or through an AP. An order to redeem must be placed for one or more whole Creation Units and must be received by the transfer agent in proper form no later than the close of regular trading on the AMEX (ordinarily 4:00 p.m., Eastern time) in order to receive that day's closing net asset value per Share. In the case of custom orders, as further described in the SAI, the order must be received by the transfer agent no later than 3:00 p.m., Eastern time. A fixed redemption transaction fee of $500 (the "Redemption Transaction Fee") is applicable to each redemption transaction regardless of the number of Creation Units redeemed in the transaction. A variable charge of up to four times the Redemption Transaction Fee (i.e., up to $2,000) may be charged to approximate additional expenses incurred by the Funds with respect to redemptions effected outside of the Clearing Process or to the extent that redemptions are for cash. The Funds reserve the right to effect redemptions in cash. A shareholder may request a cash redemption in lieu of securities, however, a Fund may, in its discretion, reject any such request. See "Creation and Redemption of Creation Unit Aggregations" in the SAI. Dividends, Distributions and Taxes Dividends from net investment income, if any, are declared and paid semi-annually. The Funds distribute their net realized capital gains, if any, to shareholders annually. Distributions in cash may be reinvested automatically in additional whole Shares only if the broker through whom you purchased Shares 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 brokerage commissions. Federal Tax Matters This section summarizes some of the main U.S. federal income tax consequences of owning Shares of the Funds. This section is current as of the date of this Prospectus. Tax laws and interpretations change frequently, and these summaries do not describe all of the tax consequences to all taxpayers. For example, these summaries generally do not describe your situation if you are a corporation, a non-U.S. person, a broker-dealer, or other investor with special circumstances. In addition, this section does not describe your state, local or non-U.S. tax consequences. This federal income tax summary is based in part on the advice of counsel to the Funds. The Internal Revenue Service could disagree with any conclusions set forth in this section. In addition, the counsel to the Funds was not asked to review, and has not reached a conclusion with respect to the federal income tax treatment of the assets to be included in the Funds. This may not be sufficient for you to use for the purpose of avoiding penalties under federal tax law. As with any investment, you should seek advice based on your individual circumstances from your own tax adviser. Page 38 FUND STATUS Each Fund intends to qualify as a "regulated investment company" under the federal tax laws. If a Fund qualifies as a regulated investment company and distributes its income as required by the tax law, the Fund generally will not pay federal income taxes. DISTRIBUTIONS The Funds' distributions are generally taxable. After the end of each year, you will receive a tax statement that separates each of your Fund's distributions into two categories, ordinary income distributions and capital gains dividends. Ordinary income distributions are generally taxed at your ordinary tax rate, however, as further discussed below, certain ordinary income distributions received from a Fund may be taxed at the capital gains tax rates. Generally, you will treat all capital gains dividends as long-term capital gains regardless of how long you have owned your Shares. To determine your actual tax liability for your capital gains dividends, you must calculate your total net capital gain or loss for the tax year after considering all of your other taxable transactions, as described below. In addition, the Funds may make distributions that represent a return of capital for tax purposes and thus will generally not be taxable to you. The tax status of your distributions from a Fund is not affected by whether you reinvest your distributions in additional Shares or receive them in cash. The income from a Fund that you must take into account for federal income tax purposes is not reduced by amounts used to pay a deferred sales fee, if any. The tax laws may require you to treat distributions made to you in January as if you had received them on December 31 of the previous year. DIVIDENDS RECEIVED DEDUCTION A corporation that owns Shares generally will not be entitled to the dividends received deduction with respect to many dividends received from a Fund because the dividends received deduction is generally not available for distributions from regulated investment companies. However, certain ordinary income dividends on shares that are attributable to qualifying dividends received by a Fund from certain corporations may be designated by a Fund as being eligible for the dividends received deduction. CAPITAL GAINS AND LOSSES AND CERTAIN ORDINARY INCOME DIVIDENDS If you are an individual, the maximum marginal federal tax rate for net capital gain is generally 15% (generally 5% for certain taxpayers in the 10% and 15% tax brackets). These capital gains rates are generally effective for taxable years beginning before January 1, 2011. For later periods, if you are an individual, the maximum marginal federal tax rate for net capital gain is generally 20% (10% for certain taxpayers in the 10% and 15% tax brackets). The 20% rate is reduced to 18% and the 10% rate is reduced to 8% for long-term capital gains from most property acquired after December 31, 2000 with a holding period of more than five years. Net capital gain equals net long-term capital gain minus net short-term capital loss for the taxable year. Capital gain or loss is long-term if the holding period for the asset is more than one year and is short-term if the holding period for the asset is one year or less. You must exclude the date you purchase your Shares to determine your holding period. However, if you receive a capital gain dividend from a Fund and sell your Shares at a loss after holding it for six months or less, the loss will be recharacterized as long-term capital loss to the extent of the capital gain dividend received. The tax rates for capital gains realized from assets held for one year or less are generally the same as for ordinary income. The Internal Revenue Code treats certain capital gains as ordinary income in special situations. Ordinary income dividends received by an individual shareholder from regulated investment companies such as the Funds are generally taxed at the same rates that apply to net capital gain (as discussed above), provided certain holding period requirements are satisfied and provided the dividends are attributable to qualifying dividends received by the Funds themselves. These special rules relating to the taxation of ordinary income dividends from regulated investment companies generally apply to taxable years beginning before January 1, 2011. Each Fund will provide notice to its shareholders of the amount of any distribution which may be taken into account as a dividend which is eligible for the capital gains tax rates. Page 39 SALE OF SHARES If you sell your Shares, you will generally recognize a taxable gain or loss. To determine the amount of this gain or loss, you must subtract your tax basis in your Shares from the amount you receive in the transaction. Your tax basis in your Shares is generally equal to the cost of your Shares, generally including sales charges. In some cases, however, you may have to adjust your tax basis after you purchase your Shares. TAXES ON PURCHASE AND REDEMPTION OF CREATION UNITS If you exchange equity securities for Creation Units you will generally recognize a gain or a loss. The gain or loss will be equal to the difference between the market value of the Creation Units at the time and your aggregate basis in the securities surrendered and the Cash Component paid. If you exchange Creation Units for equity securities, you will generally recognize a gain or loss equal to the difference between your basis in the Creation Units and the aggregate market value of the securities received and the Cash Redemption Amount. The Internal Revenue Service, however, may assert that a loss realized upon an exchange of securities for Creation Units cannot be deducted currently under the rules governing "wash sales," or on the basis that there has been no significant change in economic position. DEDUCTIBILITY OF FUND EXPENSES Expenses incurred and deducted by the Funds will generally not be treated as income taxable to you. NON-U.S. TAX CREDIT If your Fund invests in any non-U.S. securities, the tax statement that you receive may include an item showing non-U.S. taxes your Fund paid to other countries. In this case, dividends taxed to you will include your share of the taxes your Fund paid to other countries. You may be able to deduct or receive a tax credit for your share of these taxes. NON-U.S. INVESTORS If you are a non-U.S. investor (i.e., an investor other than a U.S. citizen or resident or a U.S. corporation, partnership, estate or trust), you should be aware that, generally, subject to applicable tax treaties, distributions from a Fund will be characterized as dividends for federal income tax purposes (other than dividends which the Funds designate as capital gain dividends) and will be subject to U.S. federal income taxes, including withholding taxes, subject to certain exceptions described below. However, distributions received by a non-U.S. investor from the Funds that are properly designated by the Funds as capital gain dividends may not be subject to U.S. federal income taxes, including withholding taxes, provided that the Funds makes certain elections and certain other conditions are met. In the case of dividends with respect to taxable years of the Funds beginning prior to 2008, distributions from the Funds that are properly designated by the Funds as an interest-related dividend attributable to certain interest income received by the Funds or as a short-term capital gain dividend attributable to certain net short-term capital gain income received by the Funds may not be subject to U.S. federal income taxes, including withholding taxes when received by certain non-U.S. investors, provided that the Funds make certain elections and certain other conditions are met. Distribution Plan FTP serves as the distributor of Creation Units for the Funds on an agency basis. FTP does not maintain a secondary market in Shares. The Board has adopted a Distribution and Service Plan pursuant to Rule 12b-1 under the 1940 Act. In accordance with the Rule 12b-1 plan, the Funds are authorized to pay an amount up to 0.25% of their average daily net assets each year to reimburse FTP for amounts expended to finance activities primarily intended to result in the sale of Creation Units or the provision of investor services. FTP may also use this amount to compensate securities dealers or other persons that are APs for providing distribution assistance, including broker-dealer and shareholder support and educational and promotional services. Page 40 No 12b-1 fees are currently paid by the Funds, and there are no plans to impose these fees. However, in the event 12b-1 fees are charged in the future, because these fees are paid out of the Funds' assets, over time these fees will increase the cost of your investment and may cost you more than certain other types of sales charges. Net Asset Value Each Fund's NAV is determined as of the close of trading (normally 4:00 p.m., Eastern time) on each day the New York Stock Exchange is open for business. NAV is calculated for each Fund by taking the market price of a Fund's total assets, including interest or dividends accrued but not yet collected, less all liabilities, and dividing such amount by the total number of Shares outstanding. The result, rounded to the nearest cent, is the net asset value per Share. All valuations are subject to review by the Board of Trustees or its delegate. In determining NAV, expenses are accrued and applied daily and securities and other assets are generally valued as set forth below. Common stocks and other equity securities listed on any national or non-U.S. exchange or on NASDAQ will be valued at the last sale price for all exchanges other than NASDAQ and the official closing price for NASDAQ on the exchange or system in which they are principally traded on the valuation date. If there are no transactions on the valuation day, securities traded principally on an exchange or on NASDAQ will be valued at the mean between the most recent bid and ask prices. Equity securities traded in the over-the- counter market are valued at their closing bid prices. Fixed income securities with a remaining maturity of 60 days or more will be valued by the Fund accounting agent using a pricing service. When price quotes are not available, fair market value is based on prices of comparable securities. Fixed income securities maturing within 60 days are valued by the Fund accounting agent on an amortized cost basis. The value of any portfolio security held by a Fund for which reliable market quotations are not readily available or if a valuation is deemed inappropriate will be determined by the Board of Trustees or its designee in a manner that most fairly reflects the fair market value of the security on the valuation date. Certain securities may not be able to be priced by pre-established pricing methods. Such securities may be valued by the Board of Trustees or its delegate at fair value. These securities generally include, but are not limited to, restricted securities (securities which may not be publicly sold without registration under the Securities Act of 1933) for which a pricing service is unable to provide a market price; securities whose trading has been formally suspended; a security whose market price is not available from a pre-established pricing source; a security with respect to which an event has occurred that is likely to materially affect the value of the security after the market has closed but before the calculation of Fund NAV or make it difficult or impossible to obtain a reliable market quotation; and a security whose price, as provided by the pricing service, does not reflect the security's "fair value." As a general principal, the current "fair value" of a security would appear to be the amount which the owner might reasonably expect to receive for the security upon its current sale. The use of fair value prices by the Funds generally results in the prices used by the Funds differing from the closing sale prices on the applicable exchange and fair value prices may not reflect the actual value of a security. A variety of factors may be considered in determining the fair value of such securities. See the SAI for details. Fund Service Providers The Bank of New York is the administrator, custodian and fund accounting and transfer agent for the Funds. Chapman and Cutler LLP, 111 West Monroe Street, Chicago, Illinois 60603, serves as legal counsel to the Funds. The Trust, on behalf of the Fund(s), has entered into an agreement with PFPC, Inc. ("PFPC"), 301 Bellevue Parkway, Wilmington, Delaware 19809, whereby PFPC will provide certain administrative services to the Trust in connection with the Board's meetings and other related matters. Page 41 Index Provider Each equity index in the Defined Index Series that each respective Fund seeks to track is compiled by S&P. S&P is not affiliated with the Funds, First Trust or FTP. The Funds are entitled to use each equity index in the Defined Index Series pursuant to sublicensing arrangements by and among each Fund, S&P, First Trust and FTP, which in turn has a licensing agreement with S&P. Disclaimers First Trust does not guarantee the accuracy and/or the completeness of the Defined Index Series or any data included therein, and First Trust shall have no liability for any errors, omissions or interruptions therein. First Trust makes no warranty, express or implied, as to results to be obtained by the Funds, owners of the Shares of the Funds or any other person or entity from the use of the Defined Index Series or any data included therein. First Trust makes no express or implied warranties, and expressly disclaims all warranties of merchantability or fitness for a particular purpose or use with respect to the Defined Index Series or any data included therein. Without limiting any of the foregoing, in no event shall First Trust have any liability for any special, punitive, direct, indirect or consequential damages (including lost profits) arising out of matters relating to the use of the Defined Index Series, even if notified of the possibility of such damages. The Funds are not sponsored, endorsed, sold or promoted by S&P. S&P makes no representation or warranty, express or implied, to the owners of the Funds or any member of the public regarding the advisability of investing in securities generally or in the Funds particularly or the ability of the Defined Index Series to track general stock market performance or a segment of the same. S&P's publication of the Defined Index Series in no way suggests or implies an opinion by S&P as to the advisability of investment in any or all of the securities upon which the Defined Index Series is based. FTP has licensed to S&P, free of charge, the right to use certain intellectual property owned by FTP, including the AlphaDEX(TM) trademark and the AlphaDEX(TM) stock selection method, in connection with the S&P's creation of the Defined Index Series. A patent application with respect to the AlphaDEX(TM) stock selection method is pending at the United States Patent and Trademark Office. Notwithstanding such license, S&P is solely responsible for the creation, compilation and administration of the Defined Index Series and has the exclusive right to determine the stocks included in the indices and the indices' methodologies. The Funds are not sponsored, endorsed, sold or promoted by Standard & Poor's, a division of the McGraw-Hill Companies, Inc. ("S&P"). S&P makes no representation or warranty, express or implied, to the owners of the Funds or any member of the public regarding the advisability of investing in securities generally or in the Funds particularly or the ability of the Defined Index Series to track general stock market performance or a segment of the same. S&P's publication of the Defined Index Series in no way suggests or implies an opinion by S&P as to the advisability of investment in any or all of the securities upon which the Defined Index Series is based. S&P's only relationship to First Trust Portfolios L.P. is the licensing of certain trademarks and trade names of S&P and of the Defined Index Series, which is determined, composed and calculated by S&P without regard to First Trust Portfolios L.P. or the Funds. S&P is not responsible for and has not reviewed the Funds nor any associated literature or publications and S&P makes no representation or warranty express or implied as to their accuracy or completeness, or otherwise. S&P reserves the right, at any time and without notice, to alter, amend, terminate or in any way change the Defined Index Series. S&P has no obligation or liability in connection with the administration, marketing or trading of the Funds. S&P, ITS AFFILIATES AND THEIR THIRD PARTY LICENSORS DO NOT GUARANTEE THE ACCURACY, TIMELINESS AND/OR THE COMPLETENESS OF THE DEFINED INDEX SERIES OR ANY DATA INCLUDED THEREIN AND S&P, ITS AFFILIATES AND THEIR THIRD Page 42 PARTY LICENSORS SHALL NOT BE SUBJECT TO ANY DAMAGES OR LIABILITY FOR ANY ERRORS, OMISSIONS, DELAYS OR INTERRUPTIONS THEREIN. S&P, ITS AFFILIATES AND THEIR THIRD PARTY LICENSORS MAKE NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY FIRST TRUST PORTFOLIOS L.P., INVESTORS, OWNERS OF THE FUNDS, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE DEFINED INDEX SERIES OR ANY DATA INCLUDED THEREIN. S&P, ITS AFFILIATES AND THEIR THIRD PARTY LICENSORS MAKE NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIM ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE DEFINED INDEX SERIES OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL S&P, ITS AFFILIATES AND THEIR THIRD PARTY LICENSORS HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES. "AlphaDEX(TM)" is a trademark of FTP. The Funds and First Trust on behalf of the Funds have been granted the right by FTP to use the name "AlphaDEX(TM)" for certain purposes. Additional Index Information The Defined Index Series was created and trademarked by S&P. The Funds expect to make changes to their portfolios shortly after changes to the Defined Index Series are released to the public. Investors will be able to access the holdings of each Fund and the composition and compilation methodology of the Defined Index Series through the Funds' website at www.ftportfolios.com. In the event that S&P no longer calculates the Defined Index Series, the Defined Index Series license is terminated or the identity or character of any equity index of the Defined Index Series is materially changed, the Board will seek to engage a replacement index. However, if that proves to be impracticable, the Board will take whatever action it deems to be in the best interests of the Funds. The Board will also take whatever actions it deems to be in the best interests of the Funds if the Funds' Shares are delisted. Other Information For purposes of the 1940 Act, each Fund is treated as a registered investment company and the acquisition of Shares by other investment companies is subject to the restrictions of Section 12(d)(1) of the 1940 Act. CONTINUOUS OFFERING Each Fund will issue, on a continuous offering basis, its Shares in one or more groups of a fixed number of Fund Shares (each such group of such specified number of individual Fund Shares, a "Creation Unit Aggregation"). The method by which Creation Unit Aggregations of Fund Shares are created and traded may raise certain issues under applicable securities laws. Because new Creation Unit Aggregations of Shares are issued and sold by a Fund on an ongoing basis, a "distribution," as such term is used in the Securities Act of 1933, as amended (the "Securities Act"), may occur at any point. Broker-dealers and other persons are cautioned that some activities on their part may, depending on the circumstances, result in their being deemed participants in a distribution in a manner which could render them statutory underwriters and subject them to the prospectus delivery requirement and liability provisions of the Securities Act. For example, a broker-dealer firm or its client may be deemed a statutory underwriter if it takes Creation Unit Aggregations after placing an order with FTP, breaks them down into constituent Shares and sells such Shares directly to customers, or if it chooses to couple the creation of a supply of new Shares with an active selling effort involving solicitation of secondary market demand for Shares. A determination of whether one is an underwriter for purposes of the Securities Act must take into account all the facts and circumstances pertaining to the activities of the broker-dealer or its client in the particular case, and the examples mentioned above should not be considered a complete description of all the activities that could lead to a characterization as an underwriter. Page 43 Broker-dealer firms should also note that dealers who are not "underwriters" but are effecting transactions in Shares, whether or not participating in the distribution of Shares, are generally required to deliver a prospectus. This is because the prospectus delivery exemption in Section 4(3) of the Securities Act is not available in respect of such transactions as a result of Section 24(d) of the 1940 Act. The Trust, on behalf of each Fund, however, has received from the Securities and Exchange Commission an exemption from the prospectus delivery obligation in ordinary secondary market transactions under certain circumstances, on the condition that purchasers are provided with a product description of the Shares. As a result, broker-dealer firms should note that dealers who are not underwriters but are participating in a distribution (as contrasted with ordinary secondary market transactions) and thus dealing with the Shares that are part of an overallotment within the meaning of Section 4(3)(a) of the Securities Act would be unable to take advantage of the prospectus delivery exemption provided by Section 4(3) of the Securities Act. Firms that incur a prospectus delivery obligation with respect to Shares are reminded that, under the Securities Act Rule 153, a prospectus delivery obligation under Section 5(b)(2) of the Securities Act owed to a broker-dealer in connection with a sale on the AMEX is satisfied by the fact that the prospectus is available from the AMEX upon request. The prospectus delivery mechanism provided in Rule 153 is available with respect to transactions on a national securities exchange, a trading facility or an alternative trading system. FOR MORE INFORMATION For more detailed information on the Funds, several additional sources of information are available to you. The SAI, incorporated by reference into this Prospectus, contains detailed information on the Funds' policies and operation. The Funds' most recent SAI and certain other information are available free of charge by calling the Funds at (800) 621-1675, on the Funds' website at www.ftportfolios.com or through your financial adviser. Shareholders may call the toll-free number above with any inquiries. You may obtain this and other information regarding the Funds, including the Codes of Ethics adopted by First Trust, FTP and the Trust, directly from the Securities and Exchange Commission (the "SEC"). Information on the SEC's website is free of charge. Visit the SEC's on-line EDGAR database at http://www.sec.gov or in person at the SEC's Public Reference Room in Washington, D.C., or call the SEC at (202) 551-5850 for information on the Public Reference Room. You may also request information regarding the Funds by writing to the SEC's Public Reference Section, 100 F Street, N.E., Washington, D.C. 20549 or by sending an electronic request, along with a duplication fee to publicinfo@sec.gov. Page 44 First Trust Large Cap Core AlphaDEX(TM) Fund First Trust Mid Cap Core AlphaDEX(TM) Fund First Trust Small Cap Core AlphaDEX(TM) Fund First Trust Large Cap Value Opportunities AlphaDEX(TM) Fund First Trust Large Cap Growth Opportunities AlphaDEX(TM) Fund First Trust Multi Cap Value AlphaDEX(TM) Fund First Trust Multi Cap Growth AlphaDEX(TM) Fund 1001 Warrenville Road Suite 300 Lisle, Illinois 60532 (800) 621-1675 www.ftportfolios.com SEC File #: 333-140895 811-22019 Back Cover Statement of Additional Information Investment Company Act File No. 811-22019 First Trust AMEX-Traded AlphaDEX(TM) Fund First Trust Large Cap Core AlphaDEX(TM) Fund First Trust Mid Cap Core AlphaDEX(TM) Fund First Trust Small Cap Core AlphaDEX(TM) Fund First Trust Large Cap Value Opportunities AlphaDEX(TM) Fund First Trust Large Cap Growth Opportunities AlphDEX(TM) Fund First Trust Multi Cap Value AlphaDEX(TM) Fund First Trust Multi Cap Growth AlphaDEX(TM) Fund Dated April 27, 2007 This Statement of Additional Information is not a Prospectus. It should be read in conjunction with the Prospectus dated April 27, 2007 (the "Prospectus") for the First Trust Large Cap Core AlphaDEX(TM) Fund, First Trust Mid Cap Core AlphaDEX(TM) Fund, First Trust Small Cap Core AlphaDEX(TM) Fund, First Trust Large Cap Value Opportunities AlphaDEX(TM) Fund, First Trust Large Cap Growth Opportunities AlphDEX(TM) Fund, First Trust Multi Cap Value AlphaDEX(TM) Fund and First Trust Multi Cap Growth AlphaDEX(TM) Fund, each a series of the First Trust AMEX-Traded AlphaDEX(TM) Fund (the "Trust"), as it may be revised from time to time. Capitalized terms used herein that are not defined have the same meaning as in the Prospectus, unless otherwise noted. A copy of the Prospectus may be obtained without charge by writing to the Trust's Distributor, First Trust Portfolios L.P., 1001 Warrenville Road, Lisle, Illinois 60532, or by calling toll free at (800) 621-1675. Table of Contents General Description of the Trust and the Funds.............................1 AMEX Listing and Trading...................................................2 Investment Objective and Policies..........................................3 Investment Strategies......................................................4 Sublicense Agreement......................................................14 Investment Risks..........................................................14 Funds Management..........................................................19 Accounts Managed by Investment Committee..................................29 Brokerage Allocations.....................................................29 Custodian, Distributor, Transfer Agent, Fund Accounting Agent, Index Provider and AMEX..................................................31 Additional Information....................................................34 Proxy Voting Policies and Procedures......................................35 Creation and Redemption of Creation Unit Aggregations.....................36 Federal Tax Matters.......................................................46 Determination of NAV......................................................52 Dividends and Distributions...............................................53 Miscellaneous Information.................................................54 General Description of the Trust and the Funds The Trust was organized as a Massachusetts business trust on December 6, 2006 and is authorized to issue an unlimited number of shares in one or more series or "Funds." The Trust is an open-end management investment company, registered under the Investment Company Act of 1940, as amended (the "1940 Act"). The Trust currently offers Shares in 16 series, including the First Trust Large Cap Core AlphaDEX(TM) Fund, First Trust Mid Cap Core AlphaDEX(TM) Fund, First Trust Small Cap Core AlphaDEX(TM) Fund, First Trust Large Cap Value Opportunities AlphaDEX(TM) Fund, First Trust Large Cap Growth Opportunities AlphDEX(TM) Fund and First Trust Multi Cap Value AlphaDEX(TM) Fund and First Trust Multi Cap Growth AlphaDEX(TM) Fund (each, a "Fund," and collectively, the "Funds"), each a non-diversified series. This Statement of Additional Information relates only to the Funds. The shares of the Funds are referred to herein as "Shares" or "Fund Shares." Each series of the Trust represents a beneficial interest in a separate portfolio of securities and other assets, with its own objective and policies. The Board of Trustees of the Trust (the "Board of Trustees" or the "Trustees") has the right to establish additional series in the future, to determine the preferences, voting powers, rights and privileges thereof and to modify such preferences, voting powers, rights and privileges without shareholder approval. Shares of any series may also be divided into one or more classes at the discretion of the Trustees. The Trust or any series or class thereof may be terminated at any time by the Board of Trustees upon written notice to the shareholders. Each Share has one vote with respect to matters upon which a shareholder vote is required consistent with the requirements of the 1940 Act and the rules promulgated thereunder. Shares of all series of the Trust vote together as a single class except as otherwise required by the 1940 Act, or if the matter being voted on affects only a particular series, and, if a matter affects a particular series differently from other series, the shares of that series will vote separately on such matter. The Trust's Declaration of Trust (the "Declaration") provides that by becoming a shareholder of a Fund, each shareholder shall be expressly held to have agreed to be bound by the provisions of the Declaration. The Declaration may, except in limited circumstances, be amended or supplemented by the Trustees without shareholder vote. The holders of Fund Shares are required to disclose information on direct or indirect ownership of Fund Shares as may be required to comply with various laws applicable to the Funds, and ownership of Fund Shares may be disclosed by the Funds if so required by law or regulation. In addition, pursuant to the Declaration, the Trustees may, in their discretion, require the Trust to redeem Shares held by any shareholder for any reason under terms set by the Trustees. The Trust's Declaration also provides that shareholders may not bring suit on behalf of a Fund without first requesting that the Trustees bring such suit unless there would be irreparable injury to the Fund, or if a majority of the Trustees have a personal financial interest in the action. Trustees are not considered to have a personal financial interest by virtue of being compensated for their services as Trustees. The Trust is not required and does not intend to hold annual meetings of shareholders. Under Massachusetts law applicable to Massachusetts business trusts, shareholders of such a trust may, under certain circumstances, be held personally liable as partners for its obligations. However, the Declaration contains an express disclaimer of shareholder liability for acts or obligations of the Trust and requires that notice of this disclaimer be given in each agreement, obligation or instrument entered into or executed by the Trust or the Trustees. The Trust's Declaration of Trust further provides for indemnification out of the assets and property of the Trust for all losses and expenses of any shareholder held personally liable for the obligations of the Trust. Thus, the risk of a shareholder incurring financial loss on account of shareholder liability is limited to circumstances in which both inadequate insurance existed and the Trust or a Fund itself was unable to meet its obligations. The Funds are managed by First Trust Advisors L.P. (the "Adviser" or "First Trust"). Each Fund offers and issues Shares at net asset value ("NAV") only in aggregations of a specified number of Shares (each a "Creation Unit" or a "Creation Unit Aggregation"), generally in exchange for a basket of equity securities (the "Deposit Securities") included in the applicable Index (as hereinafter defined), together with the deposit of a specified cash payment (the "Cash Component"). The Shares have been approved for listing and secondary trading on the American Stock AMEX LLC (the "AMEX"), subject to notice of issuance. Fund Shares will trade on the AMEX at market prices that may be below, at or above NAV. Shares are redeemable only in Creation Unit Aggregations and, generally, in exchange for portfolio securities and a specified cash payment. Creation Units are aggregations of 50,000 Shares. The Trust reserves the right to offer a "cash" option for creations and redemptions of Fund Shares, although it has no current intention of doing so. Fund Shares may be issued in advance of receipt of Deposit Securities subject to various conditions including a requirement to maintain on deposit with the Trust cash at least equal to 115% of the market value of the missing Deposit Securities. See the "Creation and Redemption of Creation Unit Aggregations" section. In each instance of such cash creations or redemptions, transaction fees may be imposed that will be higher than the transaction fees associated with in-kind creations or redemptions. In all cases, such fees will be limited in accordance with the requirements of the Securities and AMEX Commission (the "SEC") applicable to management investment companies offering redeemable securities. AMEX Listing and Trading There can be no assurance that the requirements of the AMEX necessary to maintain the listing of Shares of a Fund will continue to be met. The AMEX may, but is not required to, remove the Shares of a Fund from listing if (i) following the initial 12-month period beginning at the commencement of trading of a Fund, there are fewer than 50 beneficial owners of the Shares of a Fund for 30 or more consecutive trading days; (ii) the value of the Index is no longer calculated or available; or (iii) such other event shall occur or condition exist that, in the opinion of the AMEX, makes further dealings on the AMEX inadvisable. The AMEX will remove the Shares of a Fund from listing and trading upon termination of a Fund. -2- As in the case of other stocks traded on the AMEX, broker's commissions on transactions will be based on negotiated commission rates at customary levels. The Funds reserve the right to adjust the price levels of Shares in the future to help maintain convenient trading ranges for investors. Any adjustments would be accomplished through stock splits or reverse stock splits, which would have no effect on the net assets of a Fund. Investment Objective and Policies The Prospectus describes the investment objective and policies of the Funds. The following supplements the information contained in the Prospectus concerning the investment objective and policies of the Funds. Each Fund is subject to the following fundamental policies, which may not be changed without approval of the holders of a majority of the outstanding voting securities of the Fund: (1) A Fund may not issue senior securities, except as permitted under the 1940 Act. (2) A Fund may not borrow money, except that a Fund may (i) borrow money from banks for temporary or emergency purposes (but not for leverage or the purchase of investments) and (ii) engage in other transactions permissible under the 1940 Act that may involve a borrowing (such as obtaining short-term credits as are necessary for the clearance of transactions, engaging in delayed-delivery transactions, or purchasing certain futures, forward contracts and options), provided that the combination of (i) and (ii) shall not exceed 33-1/3% of the value of a Fund's total assets (including the amount borrowed), less a Fund's liabilities (other than borrowings). (3) A Fund will not underwrite the securities of other issuers except to the extent the Fund may be considered an underwriter under the Securities Act of 1933 (the "1933 Act") in connection with the purchase and sale of portfolio securities. (4) A Fund will not purchase or sell real estate or interests therein, unless acquired as a result of ownership of securities or other instruments (but this shall not prohibit a Fund from purchasing or selling securities or other instruments backed by real estate or of issuers engaged in real estate activities). (5) A Fund may not make loans to other persons, except through (i) the purchase of debt securities permissible under the Fund's investment policies, (ii) repurchase agreements, or (iii) the lending of portfolio securities, provided that no such loan of portfolio securities may be made by a Fund if, as a result, the aggregate of such loans would exceed 33-1/3% of the value of the Fund's total assets. (6) A Fund may not purchase or sell physical commodities unless acquired as a result of ownership of securities or other -3- instruments (but this shall not prevent the Fund from purchasing or selling options, futures contracts, forward contracts or other derivative instruments, or from investing in securities or other instruments backed by physical commodities). (7) A Fund may not invest 25% or more of the value of its total assets in securities of issuers in any one industry or group of industries, except to the extent that the index that the Fund replicates, concentrates in an industry or a group of industries. This restriction does not apply to obligations issued or guaranteed by the U.S. Government, its agencies or instrumentalities. Except for restriction (2), if a percentage restriction is adhered to at the time of investment, a later increase in percentage resulting from a change in market value of the investment or the total assets will not constitute a violation of that restriction. The foregoing fundamental policies of the Funds may not be changed without the affirmative vote of the majority of the outstanding voting securities of the respective Fund. The 1940 Act defines a majority vote as the vote of the lesser of (i) 67% or more of the voting securities represented at a meeting at which more than 50% of the outstanding securities are represented; or (ii) more than 50% of the outstanding voting securities. With respect to the submission of a change in an investment policy to the holders of outstanding voting securities of a Fund, such matter shall be deemed to have been effectively acted upon with respect to the Fund if a majority of the outstanding voting securities of the Fund vote for the approval of such matter, notwithstanding that (1) such matter has not been approved by the holders of a majority of the outstanding voting securities of any other series of the Trust affected by such matter, and (2) such matter has not been approved by the vote of a majority of the outstanding voting securities. In addition to the foregoing fundamental policies, the Funds are also subject to strategies and policies discussed herein which, unless otherwise noted, are non-fundamental restrictions and policies which may be changed by the Board of Trustees. Investment Strategies Under normal circumstances, each Fund will invest at least 90% of its total assets in common stocks that comprise such Fund's corresponding equity index (the "Index") in a family of custom "enhanced" indices created and administered by Standard & Poor's, a division of The McGraw- Hill Companies, Inc. ("S&P") (the "Defined Index Series"), which is comprised of the Defined Large Cap Core Index, the Defined Mid Cap Core Index, the Defined Small Cap Core Index, the Defined Large Cap Value Opportunities Index, the Defined Large Cap Growth Opportunities Index, the Defined Multi Cap Value Index and the Defined Multi Cap Growth Index. A Fund's Shareholders are entitled to 60 days' notice prior to any change in this non-fundamental investment policy. -4- Types of Investments Warrants: The Funds may invest in warrants. Warrants acquired by a Fund entitles it to buy common stock from the issuer at a specified price and time. They do not represent ownership of the securities but only the right to buy them. Warrants are subject to the same market risks as stocks, but may be more volatile in price. A Fund's investment in warrants will not entitle it to receive dividends or exercise voting rights and will become worthless if the warrants cannot be profitably exercised before their expiration date. Delayed-Delivery Transactions: The Funds may from time to time purchase securities on a "when-issued" or other delayed-delivery basis. The price of securities purchased in such transactions is fixed at the time the commitment to purchase is made, but delivery and payment for the securities take place at a later date. Normally, the settlement date occurs within 45 days of the purchase. During the period between the purchase and settlement, no payment is made by the Funds to the issuer and no interest is accrued on debt securities or dividend income is earned on equity securities. Delayed-delivery commitments involve a risk of loss if the value of the security to be purchased declines prior to the settlement date, which risk is in addition to the risk of decline in value of a Fund's other assets. While securities purchased in delayed-delivery transactions may be sold prior to the settlement date, the Funds intend to purchase such securities with the purpose of actually acquiring them. At the time a Fund makes the commitment to purchase a security in a delayed-delivery transaction, it will record the transaction and reflect the value of the security in determining its net asset value. The Funds do not believe that net asset value will be adversely affected by purchases of securities in delayed-delivery transactions. The Funds will earmark or maintain in a segregated account cash, U.S. Government securities, and high-grade liquid debt securities equal in value to commitments for delayed-delivery securities. Such earmarked or segregated securities will mature or, if necessary, be sold on or before the settlement date. When the time comes to pay for delayed-delivery securities, a Fund will meet its obligations from then-available cash flow, sale of the securities earmarked or held in the segregated account described above, sale of other securities, or, although it would not normally expect to do so, from the sale of the delayed-delivery securities themselves (which may have a market value greater or less than the Fund's payment obligation). Illiquid Securities: The Funds may invest in illiquid securities (i.e., securities that are not readily marketable). For purposes of this restriction, illiquid securities include, but are not limited to, restricted securities (securities the disposition of which is restricted under the federal securities laws), securities that may only be resold pursuant to Rule 144A under the 1933 Act, as amended, but that are deemed to be illiquid; and repurchase agreements with maturities in excess of seven days. However, a Fund will not acquire illiquid securities if, as a result, such securities would comprise more than 15% of the value of the Fund's net assets. The Trustees or its delegates have the ultimate authority to determine, to the extent permissible under the federal securities laws, which securities are liquid or illiquid for purposes of this 15% limitation. The Board of Trustees has delegated to First Trust the day-to-day determination of the illiquidity of any equity or fixed-income security, although it has retained oversight and ultimate responsibility for such determinations. Although no definitive liquidity criteria are used, the Board of Trustees have -5- directed First Trust to look to factors such as (i) the nature of the market for a security (including the institutional private resale market; the frequency of trades and quotes for the security; the number of dealers willing to purchase or sell the security; and the amount of time normally needed to dispose of the security, the method of soliciting offers and the mechanics of transfer), (ii) the terms of certain securities or other instruments allowing for the disposition to a third party or the issuer thereof (e.g., certain repurchase obligations and demand instruments), and (iii) other permissible relevant factors. Restricted securities may be sold only in privately negotiated transactions or in a public offering with respect to which a registration statement is in effect under the 1933 Act. Where registration is required, a Fund may be obligated to pay all or part of the registration expenses and a considerable period may elapse between the time of the decision to sell and the time the Fund may be permitted to sell a security under an effective registration statement. If, during such a period, adverse market conditions were to develop, a Fund might obtain a less favorable price than that which prevailed when it decided to sell. Illiquid securities will be priced at fair value as determined in good faith under procedures adopted by the Board of Trustees. If, through the appreciation of illiquid securities or the depreciation of liquid securities, a Fund should be in a position where more than 15% of the value of its net assets are invested in illiquid securities, including restricted securities which are not readily marketable, the Fund will take such steps as is deemed advisable, if any, to protect liquidity. Temporary Investments: The Funds may, without limit as to percentage of assets, purchase U.S. Government securities or short-term debt securities to keep cash on hand fully invested or for temporary defensive purposes. Short-term debt securities are securities from issuers having a long-term debt rating of at least A or higher by Standard & Poor's Ratings Group ("S&P"), Moody's Investors Service, Inc. ("Moody's") or Fitch, Inc. ("Fitch") and having a maturity of one year or less.Money Market Funds: The Funds may invest in shares of money market funds to the extent permitted by the 1940 Act. Short-term debt securities are defined to include, without limitation, the following: (1) U.S. Government securities, including bills, notes and bonds differing as to maturity and rates of interest, which are either issued or guaranteed by the U.S. Treasury or by U.S. Government agencies or instrumentalities. U.S. Government agency securities include securities issued by (a) the Federal Housing Administration, Farmers Home Administration, Export-Import Bank of United States, Small Business Administration, and the Government National Mortgage Association, whose securities are supported by the full faith and credit of the United States; (b) the Federal Home Loan Banks, Federal Intermediate Credit Banks, and the Tennessee Valley Authority, whose securities are supported by the right of the agency to borrow from the U.S. Treasury; (c) Fannie Mae, whose securities are supported by the discretionary authority of the U.S. Government to purchase certain obligations of the agency or instrumentality; and (d) the Student Loan Marketing Association, whose securities are supported only by its credit. While -6- the U.S. Government provides financial support to such U.S. Government- sponsored agencies or instrumentalities, no assurance can be given that it always will do so since it is not so obligated by law. The U.S. Government, its agencies, and instrumentalities do not guarantee the market value of their securities, and consequently, the value of such securities may fluctuate. (2) Certificates of deposit issued against funds deposited in a bank or savings and loan association. Such certificates are for a definite period of time, earn a specified rate of return, and are normally negotiable. If such certificates of deposit are non- negotiable, they will be considered illiquid securities and be subject to the Fund's 15% restriction on investments in illiquid securities. Pursuant to the certificate of deposit, the issuer agrees to pay the amount deposited plus interest to the bearer of the certificate on the date specified thereon. Under current FDIC regulations, the maximum insurance payable as to any one certificate of deposit is $100,000; therefore certificates of deposit purchased by the Funds may not be fully insured. (3) Bankers' acceptances which are short-term credit instruments used to finance commercial transactions. Generally, an acceptance is a time draft drawn on a bank by an exporter or an importer to obtain a stated amount of funds to pay for specific merchandise. The draft is then "accepted" by a bank that, in effect, unconditionally guarantees to pay the face value of the instrument on its maturity date. The acceptance may then be held by the accepting bank as an asset or it may be sold in the secondary market at the going rate of interest for a specific maturity. (4) Repurchase agreements, which involve purchases of debt securities. In such an action, at the time the Fund purchases the security, it simultaneously agrees to resell and redeliver the security to the seller, who also simultaneously agrees to buy back the security at a fixed price and time. This assures a predetermined yield for a Fund during its holding period since the resale price is always greater than the purchase price and reflects an agreed upon market rate. The period of these repurchase agreements will usually be short, from overnight to one week. Such actions afford an opportunity for a Fund to invest temporarily available cash. The Funds may enter into repurchase agreements only with respect to obligations of the U.S. Government, its agencies or instrumentalities; certificates of deposit; or bankers acceptances in which the Funds may invest. In addition, the Funds may only enter into repurchase agreements where the market value of the purchased securities/collateral equals at least 100% of principal including accrued interest and is marked-to-market daily. The risk to the Funds is limited to the ability of the seller to pay the agreed-upon sum on the repurchase date; in the event of default, the repurchase agreement provides that the affected Fund is entitled to sell the underlying collateral. If the value of the collateral declines after the agreement is entered into, however, and if the seller defaults under a repurchase agreement when the value of the underlying collateral is less than the repurchase price, the Fund could incur a loss of both principal and interest. The Funds, however, intend to enter into repurchase agreements only with financial institutions and dealers believed by First Trust to present minimal credit risks in accordance with criteria established by the Board of Trustees. First Trust will review and monitor the creditworthiness of such institutions. First Trust monitors the value of the collateral at the time the action is -7- entered into and at all times during the term of the repurchase agreement. First Trust does so in an effort to determine that the value of the collateral always equals or exceeds the agreed-upon repurchase price to be paid to the Fund. If the seller were to be subject to a federal bankruptcy proceeding, the ability of the Fund to liquidate the collateral could be delayed or impaired because of certain provisions of the bankruptcy laws. (5) Bank time deposits, which are monies kept on deposit with banks or savings and loan associations for a stated period of time at a fixed rate of interest. There may be penalties for the early withdrawal of such time deposits, in which case the yields of these investments will be reduced. (6) Commercial paper, which are short-term unsecured promissory notes, including variable rate master demand notes issued by corporations to finance their current operations. Master demand notes are direct lending arrangements between the Fund and a corporation. There is no secondary market for the notes. However, they are redeemable by a Fund at any time. A Fund's portfolio manager will consider the financial condition of the corporation (e.g., earning power, cash flow, and other liquidity ratios) and will continuously monitor the corporation's ability to meet all of its financial obligations, because the Fund's liquidity might be impaired if the corporation were unable to pay principal and interest on demand. The Funds may only invest in commercial paper rated A-1 or higher by S&P, Prime-1 or higher by Moody's or Fitch 2 or higher by Fitch. Portfolio Turnover The Funds buy and sell portfolio securities in the normal course of their investment activities. The proportion of a Fund's investment portfolio that is sold and replaced with new securities during a year is known as the Fund's portfolio turnover rate. A turnover rate of 100% would occur, for example, if a Fund sold and replaced securities valued at 100% of its net assets within one year. Active trading would result in the payment by the Fund of increased brokerage costs and expenses. Hedging Strategies General Description of Hedging Strategies The Funds may engage in hedging activities. First Trust may cause the Funds to utilize a variety of financial instruments, including options, forward contracts, futures contracts (hereinafter referred to as "Futures" or "Futures Contracts"), and options on Futures Contracts to attempt to hedge each Fund's holdings. Hedging or derivative instruments on securities generally are used to hedge against price movements in one or more particular securities positions that a Fund owns or intends to acquire. Such instruments may also be used to "lock-in" realized but unrecognized gains in the value of portfolio securities. Hedging instruments on stock indices, in -8- contrast, generally are used to hedge against price movements in broad equity market sectors in which a Fund has invested or expects to invest. Hedging strategies, if successful, can reduce the risk of loss by wholly or partially offsetting the negative effect of unfavorable price movements in the investments being hedged. However, hedging strategies can also reduce the opportunity for gain by offsetting the positive effect of favorable price movements in the hedged investments. The use of hedging instruments is subject to applicable regulations of the SEC, the several options and Futures exchanges upon which they are traded, the Commodity Futures Trading Commission (the "CFTC") and various state regulatory authorities. In addition, a Fund's ability to use hedging instruments may be limited by tax considerations. General Limitations on Futures and Options Transactions The Trust has filed a notice of eligibility for exclusion from the definition of the term "commodity pool operator" with the National Futures Association, the Futures industry's self-regulatory organization. A Fund will not enter into Futures and options transactions if the sum of the initial margin deposits and premiums paid for unexpired options exceeds 5% of the Fund's total assets. In addition, a Fund will not enter into Futures Contracts and options transactions if more than 30% of its net assets would be committed to such instruments. The foregoing limitations are not fundamental policies of the Funds and may be changed without shareholder approval as regulatory agencies permit. Various exchanges and regulatory authorities have undertaken reviews of options and Futures trading in light of market volatility. Among the possible actions that have been presented are proposals to adopt new or more stringent daily price fluctuation limits for Futures and options transactions and proposals to increase the margin requirements for various types of Futures transactions. Asset Coverage for Futures and Options Positions The Funds will comply with the regulatory requirements of the SEC and the CFTC with respect to coverage of options and Futures positions by registered investment companies and, if the guidelines so require, will earmark or set aside cash, U.S. Government securities, high grade liquid debt securities and/or other liquid assets permitted by the SEC and CFTC in a segregated custodial account in the amount prescribed. Securities earmarked or held in a segregated account cannot be sold while the Futures or options position is outstanding, unless replaced with other permissible assets, and will be marked-to-market daily. Stock Index Options The Funds may purchase stock index options, sell stock index options in order to close out existing positions and/or write covered options on stock indices for hedging purposes. Stock index options are put options and call options on various stock indices. In most respects, they are identical to listed options on common stocks. The primary difference between stock options and index options occurs when index options are exercised. In the case of stock options, the underlying security, common stock, is delivered. However, upon the exercise of an index option, settlement does not occur by delivery of the securities comprising the stock index. The option holder who exercises the index -9- option receives an amount of cash if the closing level of the stock index upon which the option is based is greater than, in the case of a call, or less than, in the case of a put, the exercise price of the option. This amount of cash is equal to the difference between the closing price of the stock index and the exercise price of the option expressed in dollars times a specified multiple. A stock index fluctuates with changes in the market values of the stocks included in the index. For example, some stock index options are based on a broad market index, such as the Standard & Poor's 500 or the Value Line(R) Composite Indices or a more narrow market index, such as the Standard & Poor's 100. Indices may also be based on an industry or market segment. Options on stock indices are currently traded on the following exchanges: the Chicago Board Options AMEX, the New York Stock AMEX ("NYSE"), the American Stock AMEX ("AMEX"), the NASDAQ Global Market(R), the NYSE Avca, Inc., and the Philadelphia Stock AMEX. The Funds' use of stock index options is subject to certain risks. Successful use by a Fund of options on stock indices will be subject to the ability of First Trust to correctly predict movements in the directions of the stock market. This requires different skills and techniques than predicting changes in the prices of individual securities. In addition, a Fund's ability to effectively hedge all or a portion of the securities in its portfolio, in anticipation of or during a market decline through transactions in put options on stock indices, depends on the degree to which price movements in the underlying index correlate with the price movements of the securities held by the Fund. Inasmuch as the Funds' securities will not duplicate the components of an index, the correlation will not be perfect. Consequently, a Fund will bear the risk that the prices of its securities being hedged will not move in the same amount as the prices of its put options on the stock indices. It is also possible that there may be a negative correlation between the index and a Fund's securities, which would result in a loss on both such securities and the options on stock indices acquired by the Fund. The hours of trading for options may not conform to the hours during which the underlying securities are traded. To the extent that the options markets close before the markets for the underlying securities, significant price and rate movements can take place in the underlying markets that cannot be reflected in the options markets. The purchase of options is a highly specialized activity which involves investment techniques and risks different from those associated with ordinary portfolio securities transactions. The purchase of stock index options involves the risk that the premium and transaction costs paid by a Fund in purchasing an option will be lost as a result of unanticipated movements in prices of the securities comprising the stock index on which the option is based. Certain Considerations Regarding Options There is no assurance that a liquid secondary market on an options exchange will exist for any particular option, or at any particular time, and for some options no secondary market on an exchange or elsewhere may exist. If a Fund is unable to close out a call option on securities that it has written before the option is exercised, the Fund may be required to purchase the optioned securities in order to satisfy its obligation under the option to deliver such securities. If a Fund -10- is unable to effect a closing sale transaction with respect to options on securities that it has purchased, it would have to exercise the option in order to realize any profit and would incur transaction costs upon the purchase and sale of the underlying securities. The writing and purchasing of options is a highly specialized activity which involves investment techniques and risks different from those associated with ordinary portfolio securities transactions. Imperfect correlation between the options and securities markets may detract from the effectiveness of attempted hedging. Options transactions may result in significantly higher transaction costs and portfolio turnover for the Funds. Futures Contracts The Funds may enter into Futures Contracts, including index Futures as a hedge against movements in the equity markets, in order to hedge against changes on securities held or intended to be acquired by a Fund or for other purposes permissible under the Commodity AMEX Act (the "CEA"). A Fund's hedging may include sales of Futures as an offset against the effect of expected declines in stock prices and purchases of Futures as an offset against the effect of expected increases in stock prices. The Funds will not enter into Futures Contracts which are prohibited under the CEA and will, to the extent required by regulatory authorities, enter only into Futures Contracts that are traded on national Futures exchanges and are standardized as to maturity date and underlying financial instrument. The principal interest rate Futures exchanges in the United States are the Chicago Board of Trade and the Chicago Mercantile AMEX. Futures exchanges and trading are regulated under the CEA by the CFTC. An interest rate Futures Contract provides for the future sale by one party and purchase by another party of a specified amount of a specific financial instrument (e.g., a debt security) or currency for a specified price at a designated date, time and place. An index Futures Contract is an agreement pursuant to which the parties agree to take or make delivery of an amount of cash equal to the difference between the value of the index at the close of the last trading day of the contract and the price at which the index Futures Contract was originally written. Transaction costs are incurred when a Futures Contract is bought or sold and margin deposits must be maintained. A Futures Contract may be satisfied by delivery or purchase, as the case may be, of the instrument or by payment of the change in the cash value of the index. More commonly, Futures Contracts are closed out prior to delivery by entering into an offsetting transaction in a matching Futures Contract. Although the value of an index might be a function of the value of certain specified securities, no physical delivery of those securities is made. If the offsetting purchase price is less than the original sale price, a gain will be realized. Conversely, if the offsetting sale price is more than the original purchase price, a gain will be realized; if it is less, a loss will be realized. The transaction costs must also be included in these calculations. There can be no assurance, however, that a Fund will be able to enter into an offsetting transaction with respect to a particular Futures Contract at a particular time. If a Fund is not able to enter into an offsetting transaction, the Fund will continue to be required to maintain the margin deposits on the Futures Contract. Margin is the amount of funds that must be deposited by a Fund with its custodian in a segregated account in the name of the Futures commission -11- merchant in order to initiate Futures trading and to maintain the Fund's open positions in Futures Contracts. A margin deposit is intended to ensure a Fund's performance of the Futures Contract. The margin required for a particular Futures Contract is set by the exchange on which the Futures Contract is traded and may be significantly modified from time to time by the exchange during the term of the Futures Contract. Futures Contracts are customarily purchased and sold on margins that may range upward from less than 5% of the value of the Futures Contract being traded. If the price of an open Futures Contract changes (by increase in the case of a sale or by decrease in the case of a purchase) so that the loss on the Futures Contract reaches a point at which the margin on deposit does not satisfy margin requirements, the broker will require an increase in the margin. However, if the value of a position increases because of favorable price changes in the Futures Contract so that the margin deposit exceeds the required margin, the broker will pay the excess to the Fund. In computing daily net asset value, a Fund will mark to market the current value of its open Futures Contracts. The Funds expect to earn interest income on their margin deposits. Most United States Futures exchanges limit the amount of fluctuation permitted in Futures Contract prices during a single trading day. The day limit establishes the maximum amount that the price of a Futures Contract may vary either up or down from the previous day's settlement price at the end of a trading session. Once the daily limit has been reached in a particular type of Futures Contract, no trades may be made on that day at a price beyond that limit. The daily limit governs only price movement during a particular trading day and therefore does not limit potential losses, because the limit may prevent the liquidation of unfavorable positions. Futures Contract prices have occasionally moved to the daily limit for several consecutive trading days with little or no trading, thereby preventing prompt liquidation of Futures positions and subjecting some investors to substantial losses.Because of the low margin deposits required, Futures trading involves an extremely high degree of leverage. As a result, a relatively small price movement in a Futures Contract may result in immediate and substantial loss, as well as gain, to the investor. For example, if at the time of purchase, 10% of the value of the Futures Contract is deposited as margin, a subsequent 10% decrease in the value of the Futures Contract would result in a total loss of the margin deposit, before any deduction for the transaction costs, if the account were then closed out. A 15% decrease would result in a loss equal to 150% of the original margin deposit, if the Future Contracts were closed out. Thus, a purchase or sale of a Futures Contract may result in losses in excess of the amount initially invested in the Futures Contract. However, a Fund would presumably have sustained comparable losses if, instead of the Futures Contract, it had invested in the underlying financial instrument and sold it after the decline. There can be no assurance that a liquid market will exist at a time when a Fund seeks to close out a Futures position. The Fund would continue to be required to meet margin requirements until the position is closed, possibly resulting in a decline in a Fund's net asset value. In addition, many of the contracts discussed above are relatively new -12- instruments without a significant trading history. As a result, there can be no assurance that an active secondary market will develop or continue to exist. A public market exists in Futures Contracts covering a number of indices, including but not limited to, the S&P 500 Index, the S&P 100 Index, the NASDAQ-100 Index(R), the Value Line(R) Composite Index and the New York Stock AMEX Composite Index. Options on Futures The Funds may also purchase or write put and call options on Futures Contracts and enter into closing transactions with respect to such options to terminate an existing position. A Futures option gives the holder the right, in return for the premium paid, to assume a long position (call) or short position (put) in a Futures Contract at a specified exercise price prior to the expiration of the option. Upon exercise of a call option, the holder acquires a long position in the Futures Contract and the writer is assigned the opposite short position. In the case of a put option, the opposite is true. Prior to exercise or expiration, a Futures option may be closed out by an offsetting purchase or sale of a Futures option of the same series. The Funds may use options on Futures Contracts in connection with hedging strategies. Generally, these strategies would be applied under the same market and market sector conditions in which the Funds use put and call options on securities or indices. The purchase of put options on Futures Contracts is analogous to the purchase of puts on securities or indices so as to hedge a Fund's securities holdings against the risk of declining market prices. The writing of a call option or the purchasing of a put option on a Futures Contract constitutes a partial hedge against declining prices of securities which are deliverable upon exercise of the Futures Contract. If the price at expiration of a written call option is below the exercise price, a Fund will retain the full amount of the option premium which provides a partial hedge against any decline that may have occurred in the Fund's holdings of securities. If the price when the option is exercised is above the exercise price, however, a Fund will incur a loss, which may be offset, in whole or in part, by the increase in the value of the securities held by the Fund that were being hedged. Writing a put option or purchasing a call option on a Futures Contract serves as a partial hedge against an increase in the value of the securities the Fund intends to acquire. As with investments in Futures Contracts, the Funds are required to deposit and maintain margin with respect to put and call options on Futures Contracts written by them. Such margin deposits will vary depending on the nature of the underlying Futures Contract (and the related initial margin requirements), the current market value of the option, and other Futures positions held by a Fund. A Fund will earmark or set aside in a segregated account at such Fund's custodian, liquid assets, such as cash, U.S. Government securities or other high-grade liquid debt obligations equal in value to the amount due on the underlying obligation. Such segregated assets will be marked-to-market daily, and additional assets will be earmarked or placed in the segregated account whenever the total value of the earmarked or segregated assets falls below the amount due on the underlying obligation. The risks associated with the use of options on Futures Contracts include the risk that the Funds may close out its position as a writer -13- of an option only if a liquid secondary market exists for such options, which cannot be assured. A Fund's successful use of options on Futures Contracts depends on First Trust's ability to correctly predict the movement in prices of Futures Contracts and the underlying instruments, which may prove to be incorrect. In addition, there may be imperfect correlation between the instruments being hedged and the Futures Contract subject to the option. For additional information, see "Futures Contracts." Certain characteristics of the Futures market might increase the risk that movements in the prices of Futures Contracts or options on Futures Contracts might not correlate perfectly with movements in the prices of the investments being hedged. For example, all participants in the Futures and options on Futures Contracts markets are subject to daily variation margin calls and might be compelled to liquidate Futures or options on Futures Contracts positions whose prices are moving unfavorably to avoid being subject to further calls. These liquidations could increase the price volatility of the instruments and distort the normal price relationship between the Futures or options and the investments being hedged. Also, because of initial margin deposit requirements, there might be increased participation by speculators in the Futures markets. This participation also might cause temporary price distortions. In addition, activities of large traders in both the Futures and securities markets involving arbitrage, "program trading," and other investment strategies might result in temporary price distortions. Sublicense Agreement The Funds have entered into a sublicense agreement (the "Sublicense Agreement") with First Trust Portfolios L.P. ("First Trust Portfolios") and First Trust that grants the Funds a non-exclusive and non- transferable sublicense to use certain intellectual property of S&P and First Trust Portfolios in connection with the issuance, distribution, marketing and/or promotion of the Funds. Pursuant to the Sublicense Agreement, the Funds have agreed to be bound by certain provisions of a product license agreement between S&P and First Trust Portfolios (the "Product License Agreement"). Pursuant to the Product License Agreement, First Trust Portfolios will pay S&P an annual fee of $55,000 for each Fund for the initial two years of the Product Licensing Agreement and $30,000 for each Fund for each subsequent year. In addition, First Trust Portfolios shall pay S&P .05% of the average daily net assets of each Fund. First Trust shall reimburse First Trust Portfolios for its costs associated with the Product Licensing Agreement and each Fund shall reimburse First Trust for the reimbursement payments made to First Trust Portfolios. Investment Risks Overview An investment in a Fund should be made with an understanding of the risks which an investment in common stocks entails, including the risk that the financial condition of the issuers of the equity securities or the general condition of the common stock market may worsen and the value of the equity securities and therefore the value of a Fund may decline. The Funds may not be an appropriate investment for those who are unable or unwilling to assume the risks involved generally with an equity investment. The past market and earnings performance of any of the equity securities included in a Fund is not predictive of their future performance. Common stocks are especially susceptible to general -14- stock market movements and to volatile increases and decreases of value as market confidence in and perceptions of the issuers change. These perceptions are based on unpredictable factors including expectations regarding government, economic, monetary and fiscal policies, inflation and interest rates, economic expansion or contraction, and global or regional political, economic or banking crises. First Trust cannot predict the direction or scope of any of these factors. Shareholders of common stocks have rights to receive payments from the issuers of those common stocks that are generally subordinate to those of creditors of, or holders of debt obligations or preferred stocks of, such issuers. Shareholders of common stocks of the type held by the Funds have a right to receive dividends only when and if, and in the amounts, declared by the issuer's board of directors and have a right to participate in amounts available for distribution by the issuer only after all other claims on the issuer have been paid. Common stocks do not represent an obligation of the issuer and, therefore, do not offer any assurance of income or provide the same degree of protection of capital as do debt securities. The issuance of additional debt securities or preferred stock will create prior claims for payment of principal, interest and dividends which could adversely affect the ability and inclination of the issuer to declare or pay dividends on its common stock or the rights of holders of common stock with respect to assets of the issuer upon liquidation or bankruptcy. The value of common stocks is subject to market fluctuations for as long as the common stocks remain outstanding, and thus the value of the equity securities in the Funds will fluctuate over the life of the Funds and may be more or less than the price at which they were purchased by the Funds. The equity securities held by the Funds may appreciate or depreciate in value (or pay dividends) depending on the full range of economic and market influences affecting these securities, including the impact of a Fund's purchase and sale of the equity securities and other factors. Holders of common stocks incur more risk than holders of preferred stocks and debt obligations because common stockholders, as owners of the entity, have generally inferior rights to receive payments from the issuer in comparison with the rights of creditors of, or holders of debt obligations or preferred stocks issued by, the issuer. Cumulative preferred stock dividends must be paid before common stock dividends and any cumulative preferred stock dividend omitted is added to future dividends payable to the holders of cumulative preferred stock. Preferred stockholders are also generally entitled to rights on liquidation which are senior to those of common stockholders. Additional Risks of Investing in the Funds Liquidity Whether or not the equity securities held by the Funds are listed on a securities exchange, the principal trading market for the equity securities may be in the over-the-counter market. As a result, the existence of a liquid trading market for the equity securities may depend on whether dealers will make a market in the equity securities. There can be no assurance that a market will be made for any of the equity securities, that any market for the equity securities will be maintained or that there will be sufficient liquidity of the equity securities in any markets made. The price at which the equity -15- securities are held by the Funds will be adversely affected if trading markets for the equity securities are limited or absent. Small Capitalization and Mid Capitalization Companies The equity securities held by the Funds may include small cap and mid cap company stocks. Small cap and mid cap company stocks have customarily involved more investment risk than large capitalization stocks. Small cap and mid cap companies may have limited product lines, markets or financial resources; may lack management depth or experience; and may be more vulnerable to adverse general market or economic developments than large cap companies. Some of these companies may distribute, sell or produce products that have recently been brought to market and may be dependent on key personnel. The prices of small cap and mid cap company securities are often more volatile than prices associated with large cap company issues, and can display abrupt or erratic movements at times, due to limited trading volumes and less publicly available information. Also, because small cap and mid cap companies normally have fewer shares outstanding and these shares trade less frequently than large cap companies, it may be more difficult for a Fund which contains these equity securities to buy and sell significant amounts of such shares without an unfavorable impact on prevailing market prices. The securities of small cap and mid cap companies are often traded over-the-counter and may not be traded in the volumes typical of a national securities exchange. Non-Diversification Each Fund is classified as "non-diversified" under the 1940 Act. As a result, each Fund is limited as to the percentage of its assets which may be invested in the securities of any one issuer only by the diversification requirements imposed by the Internal Revenue Code of 1986, as amended. Because each Fund may invest a relatively high percentage of its assets in a limited number of issuers, each Fund may be more susceptible to any single economic, political or regulatory occurrence and to the financial conditions of the issuers in which it invests. Intellectual Property Risk Intellectual Property Risk. Each Fund relies on a license from S&P that permits such Fund to use its corresponding equity index in the Defined Index Series and the associated trade names and trademarks ("Intellectual Property") in connection with the name and investment strategies of a Fund. Such license may be terminated by S&P and, as a result, a Fund may lose its ability to use the Intellectual Property. There is also no guarantee that S&P has all rights to license the Intellectual Property to FTP, on behalf of First Trust and the Funds. Accordingly, in the event the license is terminated or S&P does not have rights to license the Intellectual Property, it may have a significant effect on the operation of the Funds. -16- Issuer Specific Changes Risk. The value of an individual security or particular type of security can be more volatile than the market as a whole and can perform differently from the value of the market as a whole. Non-U.S. Securities Risk A Fund may invest in the securities of issuers domiciled in jurisdictions other than the United States and such stocks may be denominated in currencies other than the U.S. dollar. These securities are either in the form of American Depositary Receipts ("ADRs") or are directly listed on a U.S. securities exchange. Investments in securities of non-U.S. issuers involve special risks not presented by investments in securities of U.S. issuers, including: (i) there may be less publicly available information about non-U.S. issuers or markets due to less rigorous disclosure or accounting standards or regulatory practices; (ii) many non-U.S. markets are smaller, less liquid and more volatile than the U.S. market; (iii) potential adverse effects of fluctuations in currency exchange rates or controls on the value of the Fund's investments; (iv) the economies of non-U.S. countries may grow at slower rates than expected or may experience a downturn or recession; (v) the impact of economic, political, social or diplomatic events; (vi) certain non-U.S. countries may impose restrictions on the ability of non- U.S. issuers to make payments of principal and interest to investors located in the U.S. due to blockage of non-U.S. currency exchanges or otherwise; and (vii) withholding and other non-U.S. taxes may decrease a Fund's return. Risks and Special Considerations Concerning Derivatives In addition to the foregoing, the use of derivative instruments involves certain general risks and considerations as described below. (1) Market Risk. Market risk is the risk that the value of the underlying assets may go up or down. Adverse movements in the value of an underlying asset can expose the Funds to losses. Market risk is the primary risk associated with derivative transactions. Derivative instruments may include elements of leverage and, accordingly, fluctuations in the value of the derivative instrument in relation to the underlying asset may be magnified. The successful use of derivative instruments depends upon a variety of factors, particularly the portfolio manager's ability to predict movements of the securities, currencies, and commodities markets, which may require different skills than predicting changes in the prices of individual securities. There can be no assurance that any particular strategy adopted will succeed. A decision to engage in a derivative transaction will reflect the portfolio manager's judgment that the derivative transaction will provide value to a Fund and its shareholders and is consistent with a Fund's objective, investment limitations, and operating policies. In making such a judgment, the portfolio manager will analyze the benefits and risks of the derivative transactions and weigh them in the context of the Fund's overall investments and investment objective. (2) Credit Risk. Credit risk is the risk that a loss may be sustained as a result of the failure of a counterparty to comply with the terms of a derivative instrument. The counterparty risk for exchange-traded derivatives is generally less than for privately- -17- negotiated or over-the-counter ("OTC") derivatives, since generally a clearing agency, which is the issuer or counterparty to each exchange- traded instrument, provides a guarantee of performance. For privately- negotiated instruments, there is no similar clearing agency guarantee. In all transactions, the Funds will bear the risk that the counterparty will default, and this could result in a loss of the expected benefit of the derivative transactions and possibly other losses to the Funds. The Funds will enter into transactions in derivative instruments only with counterparties that First Trust reasonably believes are capable of performing under the contract. (3) Correlation Risk. Correlation risk is the risk that there might be an imperfect correlation, or even no correlation, between price movements of a derivative instrument and price movements of investments being hedged. When a derivative transaction is used to completely hedge another position, changes in the market value of the combined position (the derivative instrument plus the position being hedged) result from an imperfect correlation between the price movements of the two instruments. With a perfect hedge, the value of the combined position remains unchanged with any change in the price of the underlying asset. With an imperfect hedge, the value of the derivative instrument and its hedge are not perfectly correlated. For example, if the value of a derivative instrument used in a short hedge (such as writing a call option, buying a put option or selling a Futures Contract) increased by less than the decline in value of the hedged investments, the hedge would not be perfectly correlated. This might occur due to factors unrelated to the value of the investments being hedged, such as speculative or other pressures on the markets in which these instruments are traded. The effectiveness of hedges using instruments on indices will depend, in part, on the degree of correlation between price movements in the index and the price movements in the investments being hedged. (4)Liquidity Risk. Liquidity risk is the risk that a derivative instrument cannot be sold, closed out, or replaced quickly at or very close to its fundamental value. Generally, exchange contracts are very liquid because the exchange clearinghouse is the counterparty of every contract. OTC transactions are less liquid than exchange-traded derivatives since they often can only be closed out with the other party to the transaction. The Funds might be required by applicable regulatory requirements to maintain assets as "cover," maintain segregated accounts, and/or make margin payments when they take positions in derivative instruments involving obligations to third parties (i.e., instruments other than purchase options). If a Fund is unable to close out its positions in such instruments, it might be required to continue to maintain such assets or accounts or make such payments until the position expires, matures, or is closed out. These requirements might impair the Fund's ability to sell a security or make an investment at a time when it would otherwise be favorable to do so, or require that the Fund sell a portfolio security at a disadvantageous time. A Fund's ability to sell or close out a position in an instrument prior to expiration or maturity depends upon the existence of a liquid secondary market or, in the absence of such a market, the ability and willingness of the counterparty to enter into a transaction closing out the position. Due to liquidity risk, there is no assurance that any derivatives position can be sold or closed out at a time and price that is favorable to the Fund. -18- (5) Legal Risk. Legal risk is the risk of loss caused by the unenforceability of a party's obligations under the derivative. While a party seeking price certainty agrees to surrender the potential upside in exchange for downside protection, the party taking the risk is looking for a positive payoff. Despite this voluntary assumption of risk, a counterparty that has lost money in a derivative transaction may try to avoid payment by exploiting various legal uncertainties about certain derivative products. (6) Systemic or "Interconnection" Risk. Systemic or interconnection risk is the risk that a disruption in the financial markets will cause difficulties for all market participants. In other words, a disruption in one market will spill over into other markets, perhaps creating a chain reaction. Much of the OTC derivatives market takes place among the OTC dealers themselves, thus creating a large interconnected web of financial obligations. This interconnectedness raises the possibility that a default by one large dealer could create losses for other dealers and destabilize the entire market for OTC derivative instruments. Funds Management The general supervision of the duties performed for the Funds under the investment management agreement is the responsibility of the Board of Trustees. There are five Trustees of the Trust, one of whom is an "interested person" (as the term is defined in the 1940 Act) and four of whom are Trustees who are not officers or employees of First Trust or any of its affiliates ("Independent Trustees"). The Trustees set broad policies for the Funds, choose the Trust's officers and hire the Trust's investment adviser. The officers of the Trust manage its day to day operations and are responsible to the Trust's Board of Trustees. The following is a list of the Trustees and officers of the Trust and a statement of their present positions and principal occupations during the past five years, the number of portfolios each Trustee oversees and the other directorships they hold, if applicable.
Name, Address Position and Offices Term of Office Principal Occupations Number of Other and Date of Birth with Trust and Year First During Past 5 Years Portfolios in Trusteeships or Elected or the First Directorships Appointed Trust Fund Held by Trustee Complex Overseen by Trustee Trustee who is an Interested Person of the Trust - ---------------------------- James A. Bowen(1) President, Chairman oIndefinite term President, First Trust 49 Portfolios Trustee of 1001 Warrenville Road, of the Board, Chief o2006 Portfolios and First Wheaton College Suite 300 Executive Officer Trust Advisors; Chairman Lisle, IL 60532 and Trustee of the Board of D.O.B.: 09/55 Directors, Bond Wave, LLC and Stonebridge Advisors LLC -19- Name, Address Position and Offices Term of Office Principal Occupations Number of Other and Date of Birth with Trust and Year First During Past 5 Years Portfolios in Trusteeships or Elected or the First Directorships Appointed Trust Fund Held by Trustee Complex Overseen by Trustee Trustees who are not Interested Persons of the Trust - ------------------------------- Richard E. Erickson Trustee oIndefinite term Physician, President 49 Portfolios None c/o First Trust Advisors L.P. o2006 Wheaton Orthopedics; Co- 1001 Warrenville Road, Owner, Co-Director Sports Suite 300 Med Center for Fitness; Lisle, IL 60532 Limited Partner Gundersen D.O.B.: 04/51 Real Estate Partnership Thomas R. Kadlec Trustee oIndefinite term President, ADM 49 Portfolios None c/o First Trust Advisors L.P. o2006 Derivatives, Inc. (May 1001 Warrenville Road, 2005 to Present); Vice Suite 300 President, Chief Lisle, IL 60532 Financial Officer (1990 D.O.B.: 11/57 to Present), ADM Investor Services, Inc. (Futures Commission Merchant); Registered Representative (2000 to Present), Segerdahl & Company, Inc., an NASD member (Broker-Dealer) Robert F. Keith Trustee oIndefinite term President Hibs 49 Portfolios None c/o First Trust Advisors L.P. o2006 Enterprises Financial and 1001 Warrenville Road, Management Consulting Suite 300 (2003 to Present); Lisle, IL 60532 Aramark Service Master D.O.B.: 11/56 Management Services (2001 to 2003); President and Chief Operating Officer, Service Master Management Services (1998 to 2003) Niel B. Nielson Trustee oIndefinite term President (2002 to 49 Portfolios Director of c/o First Trust Advisors L.P. o2006 Present), Covenant Covenant 1001 Warrenville Road, College; Associate Pastor Transport Inc. Suite 300 (1997 to 2002), College Lisle, IL 60532 Church in Wheaton D.O.B.: 03/54 Officers of the Trust - -------------------- Mark R. Bradley Treasurer, oIndefinite term Chief Financial Officer, N/A N/A 1001 Warrenville Road, Controller, Chief o2006 Managing Director, First Suite 300 Financial Officer Trust Portfolios and Lisle, IL 60532 and Chief Accounting First Trust Advisors; D.O.B.: 11/57 Officer Chief Financial Officer, Bond Wave LLC and Stonebridge Advisors LLC Kelley Christensen Vice President oIndefinite term Assistant Vice President N/A N/A 1001 Warrenville Road, o2006 of First Trust Portfolios Suite 300 and First Trust Advisors Lisle, IL 60532 D.O.B.: 09/70 -20- Name, Address Position and Offices Term of Office Principal Occupations Number of Other and Date of Birth with Trust and Year First During Past 5 Years Portfolios in Trusteeships or Elected or the First Directorships Appointed Trust Fund Held by Trustee Complex Overseen by Trustee James M. Dykas Assistant Treasurer oIndefinite term Vice President, First N/A N/A 1001 Warrenville Road, o2006 Trust Portfolios L.P. Suite 300 (January 2005 to Lisle, IL 60532 present); Executive D.O.B.: 01/66 Director of Van Kampen Asset Management and Morgan Stanley Investment Management (December 2002 to January 2005); Vice President, Van Kampen Asset Management and Morgan Stanley Investment Management (December 2000 to December 2002) W. Scott Jardine Secretary and Chief oIndefinite term General Counsel, First N/A N/A 1001 Warrenville Road, Compliance Officer o2006 Trust Portfolios and Suite 300 First Trust Advisors; Lisle, IL 60532 Secretary, Bond Wave, LLC D.O.B.: 05/60 and Stonebridge Advisors LLC Daniel J. Lindquist Vice President oIndefinite term Senior Vice President, N/A N/A 1001 Warrenville Road, o2006 First Trust Advisors, Suite 300 L.P.; Senior Vice Lisle, IL 60532 President, First Trust D.O.B.: 02/70 Portfolios L.P. (April 2004 to present); Chief Operating Officer, Mina Capital Management, LLC (January 2004 to April 2004); Chief Operating Officer, Samaritan Asset Management Service, Inc. Kristi A. Maher Assistant Secretary oIndefinite term Assistant General Counsel N/A N/A 1001 Warrenville Road, o2006 (March 2004 to Present), Suite 300 First Trust Portfolios Lisle, IL 60532 and First Trust Advisors D.O.B.: 12/66 L.P.; Associate (1995 to March 2004), Chapman and Cutler LLP Roger Testin Vice President oIndefinite term Senior Vice President, N/A N/A 1001 Warrenville Road, o2006 First Trust Advisors L.P. Suite 300 (August 2001 to Present), Lisle, IL 60532 Senior Vice President, D.O.B.: 06/66 First Trust Portfolios L.P. (August 2004 to Present); Analyst (1998 to 2001), Dolan Capital Management -21- Name, Address Position and Offices Term of Office Principal Occupations Number of Other and Date of Birth with Trust and Year First During Past 5 Years Portfolios in Trusteeships or Elected or the First Directorships Appointed Trust Fund Held by Trustee Complex Overseen by Trustee Stan Ueland Assistant Vice oIndefinite term Vice President of First N/A N/A 1001 Warrenville Road, President o2006 Trust and First Trust Suite 300 Portfolios (August 2005 Lisle, IL 60532 to present); Vice D.O.B.: 11/70 President; BondWave LLC (May 2004 - August 2005); Account Executive, Mina Capital Management LLC and Samaritan Asset Management LLC (January 2003 through May 2004); Sales Consultant, Oracle Corporation (January 1997 through January 2003) ____________________ (1) Mr. Bowen is deemed an "interested person" of the Trust due to his position of President of First Trust, investment adviser of the Funds.
The Board of Trustees of the Trust has four standing committees: the Executive Committee (and Pricing and Dividend Committee), the Nominating and Governance Committee, the Valuation Committee and the Audit Committee. The Executive Committee, which meets between Board meetings, is authorized to exercise all powers of and to act in the place of the Board of Trustees to the extent permitted by the Trust's Declaration of Trust and By-laws. The members of the Executive Committee shall also serve as a special committee of the Board known as the Pricing and Dividend Committee which is authorized to exercise all of the powers and authority of the Board in respect of the declaration and setting of dividends. Messrs. Kadlec and Bowen are members of the Executive Committee. The Nominating and Governance Committee is responsible for appointing and nominating non-interested persons to the Trust's Board of Trustees. Messrs. Erickson, Nielson, Kadlec and Keith are members of the Nominating and Governance Committee. If there is no vacancy on the Board of Trustees, the Board will not actively seek recommendations from other parties, including Shareholders. When a vacancy on the Board occurs and nominations are sought to fill such vacancy, the Nominating and Governance Committee may seek nominations from those sources it deems appropriate in its discretion, including Shareholders of the Funds. To submit a recommendation for nomination as a candidate for a position on the Board, Shareholders of the Funds shall mail such recommendation to W. Scott Jardine at the Funds' address, 1001 Warrenville Road, Suite 300, Lisle, Illinois 60532. Such recommendation shall include the following information: (a) evidence of Fund ownership of the person or entity recommending the candidate (if a Fund Shareholder); (b) a full description of the proposed candidate's background, including his or her education, experience, current employment and date of birth; (c) names and addresses of at least three professional references for the candidate; (d) information as to whether the candidate is an "interested person" in relation to the Funds, as such term is defined in the 1940 Act, and such other information that may be considered to impair the candidate's independence; and (e) any other information that may be helpful to the Nominating and Governance Committee in evaluating the candidate. If a recommendation is received -22- with satisfactorily completed information regarding a candidate during a time when a vacancy exists on the Board or during such other time as the Nominating and Governance Committee is accepting recommendations, the recommendation will be forwarded to the chairman of the Nominating and Governance Committee and the outside counsel to the Independent Trustees. Recommendations received at any other time will be kept on file until such time as the Nominating and Governance Committee is accepting recommendations, at which point they may be considered for nomination. The Valuation Committee is responsible for the oversight of the pricing procedures of the Funds. Messrs. Erickson, Kadlec, Nielson and Keith are members of the Valuation Committee. The Audit Committee is responsible for overseeing the Funds' accounting and financial reporting process, the system of internal controls, audit process and evaluating and appointing independent auditors (subject also to Board approval). Messrs. Erickson, Nielson, Kadlec and Keith serve on the Audit Committee. Messrs. Erickson, Kadlec, Keith, Nielson and Bowen are also trustees of First Defined Portfolio Fund, LLC, an open-end fund advised by First Trust with 8 portfolios, First Trust Value Line(R) 100 Fund, First Trust/Four Corners Senior Floating Rate Income Fund, First Trust/Four Corners Senior Floating Rate Income Fund II, Macquarie/First Trust Global Infrastructure/Utilities Dividend & Income Fund, Energy Income and Growth Fund, First Trust/Fiduciary Asset Management Covered Call Fund, First Trust/Aberdeen Global Opportunity Income Fund, First Trust/FIDAC Mortgage Income Fund, First Trust Strategic High Income Fund, First Trust Strategic High Income Fund II, First Trust Strategic High Income Fund III, First Trust Tax-Advantaged Preferred Income Fund and First Trust/Aberdeen Emerging Opportunity Fund, closed-end funds advised by First Trust, and First Trust AMEX-Traded Fund, an exchange- traded fund advised by First Trust with 12 portfolios. None of the Trustees who are not "interested persons" of the Trust, nor any of their immediate family members, has ever been a director, officer or employee of, or consultant to, First Trust, First Trust Portfolios or their affiliates. In addition, Mr. Bowen and the other officers of the Trust (other than Stan Ueland and Roger Testin) hold the same positions with the First Defined Portfolio Fund, LLC, First Trust Value Line(R) 100 Fund, First Trust/Four Corners Senior Floating Rate Income Fund, First Trust/Four Corners Senior Floating Rate Income Fund II, Macquarie/First Trust Global Infrastructure/Utilities Dividend & Income Fund, Energy Income and Growth Fund, First Trust/Fiduciary Asset Management Covered Call Fund, First Trust/Aberdeen Global Opportunity Income Fund, First Trust/FIDAC Mortgage Income Fund, First Trust Strategic High Income Fund, First Trust Strategic High Income Fund II, First Trust Strategic High Income Fund III, First Trust Tax-Advantaged Preferred Income Fund, First Trust/Aberdeen Emerging Opportunity Fund and First Trust AMEX- Traded Fund (collectively with the Trust, the "First Trust Fund Complex") as they hold with the Trust. Mr. Ueland, Assistant Vice President of the Trust, serves in the same position for the First Trust AMEX-Traded Fund. Mr. Testin, Vice President of the Trust, serves in the same position for First Trust Value Line(R) 100 Fund and First Defined Portfolio Fund, LLC. The Independent Trustees are paid an annual retainer of $10,000 for each investment company in the First Trust Fund Complex up to a total of 14 investment companies (the "Trustee Compensation I") and an annual retainer of $7,500 for each subsequent investment company added to the -23- First Trust Fund Complex (the "Trustee Compensation II," and together with Trustee Compensation I, the "Aggregate Trustee Compensation"). The Aggregate Trustee Compensation is divided equally among each of the investment companies in the First Trust Fund Complex. No additional meeting fees are paid in connection with board or committee meetings. Trustees are also reimbursed for travel and out-of-pocket expenses in connection with all meetings. Additionally, Mr. Kadlec is paid annual compensation of $10,000 to serve as the Lead Trustee and Niel B. Nielson is paid annual compensation of $5,000 to serve as the chairman of the Audit Committee of each of the investment companies in the First Trust Fund Complex. Such additional compensation to Messrs. Kadlec and Nielson is paid by the investment companies in the First Trust Fund Complex and equally divided among those investment companies. The following table sets forth the estimated compensation to be paid by each Fund projected during each Fund's full fiscal year to each of the Trustees and the estimated total compensation to be paid to each of the Trustees by the First Trust Fund Complex for a full calendar year. The Trust has no retirement or pension plans. The officers and Trustees who are "interested persons" as designated above serve without any compensation from the Fund.
Name of Trustee Estimated Aggregate Estimated Total Compensation Compensation from a Fund(1) from the First Trust Fund Complex(2) James A. Bowen $0 $0 Richard E. Erickson $________ $140,000 Thomas R. Kadlec $________ $150,000 Robert F. Keith $________ $130,000 Niel B. Nielson $________ $145,000 ____________________ (1) The compensation estimated to be paid by each Fund to the Trustees for the full fiscal year for services to each Fund. (2) The total estimated compensation to be paid to Messrs. Erickson, Kadlec, Keith and Nielson, Independent Trustees, from the Fund and the investment companies in the First Trust Fund Complex for a full calendar year is based on estimated compensation to be paid to these Trustees for a full calendar year for services as Trustees to the Trust and the First Defined Portfolio Fund, LLC, an open-end fund (with 8 portfolios) advised by First Trust, plus estimated compensation to be paid to these Trustees by the First Value Line(R) 100 Fund, the First Trust/Four Corners Senior Floating Rate Income Fund, the First Trust/Four Corners Senior Floating Rate Income Fund II, the Macquarie/First Trust Global Infrastructure/Utilities Dividend & Income Fund, the Energy Income and Growth Fund, the First Trust/Fiduciary Asset Management Covered Call Fund, the First Trust/Aberdeen Global Opportunity Income Fund, the First Trust/FIDAC Mortgage Income Fund, the First Trust Strategic High Income Fund, the First Trust Strategic High Income Fund II, the First Trust Strategic High Income Fund III, the First Trust Tax-Advantaged Preferred Income Fund, the First Trust/Aberdeen Emerging Opportunity Fund and the First Trust AMEX-Traded Fund.
The Trust has no employees. Its officers are compensated by First Trust. -24- The following table sets forth the dollar range of equity securities beneficially owned by the Trustees in the Funds and in other funds overseen by the Trustees in the First Trust Fund Complex as of December 31, 2006: Aggregate Dollar Range of Equity Securities in Dollar Range of All Registered Investment Companies Equity Securities Overseen by Trustee in the First Trust Trustee in the Funds Fund Complex Mr. Bowen None Over $100,000 Mr. Erickson None $50,001-$100,000 Mr. Kadlec None Over $100,000 Mr. Keith None Over $100,000 Mr. Nielson None $50,001-$100,000 As of the date of this SAI, the Trustees of the Trust who are not "interested persons" of the Trust and immediate family members do not own beneficially or of record any class of securities of an investment adviser or principal underwriter of the Funds or any person directly or indirectly controlling, controlled by, or under common control with an investment adviser or principal underwriter of the Funds. As of the date of this SAI, the officers and Trustees of the Trust, in the aggregate, owned less than 1% of the Shares of each Fund. As of the date of this SAI, no person owned of record, or is known by the Trust to own of record, beneficially 5% or more of the Shares of each Fund. The Board of Trustees of the Trust, including the Independent Trustees, approved the Investment Management Agreement (the "Agreement") for each Fund for an initial two-year term at a meeting held on December 11, 2006. The Board of Trustees determined that the Agreement is in the best interests of each Fund in light of the services, expenses and such other matters as the Board considered to be relevant in the exercise of its reasonable business judgment. Investment Adviser. First Trust provides investment tools and portfolios for advisers and investors. First Trust is committed to theoretically sound portfolio construction and empirically verifiable investment management approaches. Its asset management philosophy and investment discipline is deeply rooted in the application of intuitive factor analysis and model implementation to enhance investment decisions. First Trust acts as investment adviser for and manages the investment and reinvestment of the assets of the Funds. First Trust also administers the Trust's business affairs, provides office facilities and equipment and certain clerical, bookkeeping and administrative services, and permits any of its officers or employees to serve without compensation as Trustees or officers of the Trust if elected to such positions. -25- Pursuant to the Agreement between First Trust and the Trust, each Fund has agreed to pay an annual management fee equal to 0.50% of its average daily net assets. Each Fund is responsible for all its expenses, including the investment advisory fees, costs of transfer agency, custody, fund administration, legal, audit and other services, interest, taxes, sublicensing fees, brokerage commissions and other expenses connected with executions of portfolio transactions, any distribution fees or expenses and extraordinary expenses. Until two years after the initial public issuance of Fund Shares, First Trust has agreed to waive fees and/or pay Fund expenses to the extent necessary to prevent the operating expenses of each Fund (excluding interest expense, brokerage commissions and other trading expenses, taxes and extraordinary expenses) from exceeding 0.70% of average daily net assets until two years after the issuance of Fund Shares. Expenses borne by First Trust are subject to reimbursement by the Funds up to three years from the date the fee or expense was incurred, but no reimbursement payment will be made by the Funds at any time if it would result in the Fund's expenses exceeding 0.70% of average daily net assets. Under the Agreement, First Trust shall not be liable for any loss sustained by reason of the purchase, sale or retention of any security, whether or not such purchase, sale or retention shall have been based upon the investigation and research made by any other individual, firm or corporation, if such recommendation shall have been selected with due care and in good faith, except loss resulting from willful misfeasance, bad faith, or gross negligence on the part of First Trust in the performance of its obligations and duties, or by reason of its reckless disregard of its obligations and duties. The Agreement continues until two years after the initial issuance of Fund Shares and thereafter only if approved annually by the Board, including a majority of the Independent Trustees. The Agreement terminates automatically upon assignment and is terminable at any time without penalty as to the Funds by the Board, including a majority of the Independent Trustees, or by vote of the holders of a majority of a Fund's outstanding voting securities on 60 days' written notice to First Trust, or by First Trust on 60 days' written notice to the Funds. First Trust is located at 1001 Warrenville Road, Lisle, Illinois 60532. -26- Investment Committee. The Investment Committee of First Trust is primarily responsible for the day-to-day management of the Funds. There are currently six members of the Investment Committee, as follows:
Position with Length of Service Principal Occupation Name First Trust with First Trust During Past Five Years Daniel J. Lindquist Senior Vice President Since 2004 Senior Vice President, First Trust and First Trust Portfolios L.P. (April 2004 to present); Chief Operating Officer, Mina Capital Management, LLC (January 2004 to April 2004); Chief Operating Officer, Samaritan Asset Management Service, Inc. (April 2000 to January 2004) Robert F. Carey Chief Investment Officer and Since 1991 Chief Investment Officer and Senior Vice President Senior Vice President of First Trust; Senior Vice President of First Trust Portfolios L.P. Jon C. Erickson Senior Vice President Since 1994 Senior Vice President of First Trust and First Trust Portfolios L.P. (August 2002 to present); Vice President of First Trust and First Trust Portfolios L.P. (March 1994 to August 2002) David G. McGarel Senior Vice President Since 1997 Senior Vice President of First Trust and First Trust Portfolios L.P. (August 2002 to present); Vice President of First Trust and First Trust Portfolios L.P. (August 1997 to August 2002) Roger F. Testin Senior Vice President Since 2001 Senior Vice President of First Trust and First Trust Portfolios L.P. (August 2001 to present); Analyst, Dolan Capital Management (1998 to 2001) -27- Position with Length of Service Principal Occupation Name First Trust with First Trust During Past Five Years Stan Ueland Vice President Since 2005 Vice President of First Trust and First Trust Portfolios (August 2005 to present); Vice President; BondWave LLC (May 2004 - August 2005); Account Executive, Mina Capital Management LLC and Samaritan Asset Management LLC (January 2003 - May 2004); Sales Consultant, Oracle Corporation (January 1997 - January 2003) Daniel J. Lindquist: As Senior Vice President of First Trust, Mr. Lindquist is Chairman of the Investment Committee and presides over Investment Committee meetings. Mr. Lindquist is also responsible for overseeing the implementation of the Funds' investment strategies. David G. McGarel: As the head of First Trust's Strategy Research Group, Mr. McGarel is responsible for developing and implementing quantitative investment strategies for those funds that have investment policies that require them to follow such strategies. Jon C. Erickson: As the head of First Trust's Equity Research Group, Mr. Erickson is responsible for determining the securities to be purchased and sold by funds that do not utilize quantitative investment strategies. Roger F. Testin: Mr. Testin is the head of First Trust's Portfolio Management Group. Robert F. Carey: As First Trust's Chief Investment Officer, Mr. Carey consults with the Investment Committee on market conditions and First Trust's general investment philosophy. Stan Ueland: Mr. Ueland plays an important role in executing the investment strategies of each portfolio of exchange-traded funds advised by First Trust.
Compensation. The compensation structure for each member of the Investment Committee is based upon a fixed salary as well as a discretionary bonus determined by the management of First Trust. Salaries are determined by management and are based upon an individual's position and overall value to the firm. Bonuses are also determined by management and are based upon an individual's overall contribution to the success of the firm and the profitability of the firm. Salaries and bonuses for members of the Investment Committee are not based upon criteria such as performance of the Funds or the value of assets included in the Funds' portfolios. In addition, Mr. Carey, Mr. Erickson, Mr. Lindquist and Mr. McGarel also have an indirect ownership stake in the firm and will therefore receive their allocable share of ownership-related distributions. -28- The Investment Committee manages the investment vehicles with the number of accounts and assets, as of December 31, 2006, set forth in the table below:
Accounts Managed by Investment Committee Registered Investment Companies Other Pooled Investment Vehicles Number of Accounts Number of Accounts Investment Committee Member ($ assets) ($ assets) Robert F. Carey 37 ($2,680,560,650) 2 ($73,595,630) Roger F. Testin 37 ($2,680,560,650) 2 ($73,595,630) Jon C. Erickson 37 ($2,680,560,650) 2 ($73,595,630) David G. McGarel 37 ($2,680,560,650) 2 ($73,595,630) Daniel J. Lindquist 37 ($2,680,560,650) 2 ($73,595,630) Stan Ueland 10 ($709,673,350) 0 ($0) ____________________ None of the accounts managed by the Investment Committee pay an advisory fee that is based upon the performance of the account. In addition, First Trust believes that there are no material conflicts of interest that may arise in connection with the Investment Committee's management of the Funds' investments and the investments of the other accounts managed by the Investment Committee. However, because the investment strategy of the Funds and the investment strategies of many of the other accounts managed by the Investment Committee are based on fairly mechanical investment processes, the Investment Committee may recommend that certain clients sell and other clients buy a given security at the same time. In addition, because the investment strategies of the Funds and other accounts managed by the Investment Committee generally result in the clients investing in readily available securities, First Trust believes that there should not be material conflicts in the allocation of investment opportunities between the Funds and other accounts managed by the Investment Committee.
Brokerage Allocations First Trust is responsible for decisions to buy and sell securities for the Funds and for the placement of the Funds' securities business, the negotiation of the commissions to be paid on brokered transactions, the prices for principal trades in securities, and the allocation of portfolio brokerage and principal business. It is the policy of First Trust to seek the best execution at the best security price available with respect to each transaction, and with respect to brokered transactions in light of the overall quality of brokerage and research services provided to First Trust and its clients. The best price to a -29- Fund means the best net price without regard to the mix between purchase or sale price and commission, if any. Purchases may be made from underwriters, dealers, and, on occasion, the issuers. Commissions will be paid on a Fund's Futures and options transactions, if any. The purchase price of portfolio securities purchased from an underwriter or dealer may include underwriting commissions and dealer spreads. A Fund may pay mark-ups on principal transactions. In selecting broker/dealers and in negotiating commissions, First Trust considers, among other things, the firm's reliability, the quality of its execution services on a continuing basis and its financial condition. Fund portfolio transactions may be effected with broker/dealers who have assisted investors in the purchase of Shares. Section 28(e) of the Securities AMEX Act of 1934 ("Section 28(e)") permits an investment adviser, under certain circumstances, to cause an account to pay a broker or dealer who supplies brokerage and research services a commission for effecting a transaction in excess of the amount of commission another broker or dealer would have charged for effecting the transaction. Brokerage and research services include (a) furnishing advice as to the value of securities, the advisability of investing, purchasing or selling securities, and the availability of securities or purchasers or sellers of securities, (b) furnishing analyses and reports concerning issuers, industries, securities, economic factors and trends, portfolio strategy, and the performance of accounts; and (c) effecting securities transactions and performing functions incidental thereto (such as clearance, settlement, and custody). In light of the above, in selecting brokers, First Trust may consider investment and market information and other research, such as economic, securities and performance measurement research, provided by such brokers, and the quality and reliability of brokerage services, including execution capability, performance, and financial responsibility. Accordingly, the commissions charged by any such broker may be greater than the amount another firm might charge if First Trust determines in good faith that the amount of such commissions is reasonable in relation to the value of the research information and brokerage services provided by such broker to First Trust or the Trust. First Trust believes that the research information received in this manner provides a Fund with benefits by supplementing the research otherwise available to a Fund. The Investment Management Agreement provides that such higher commissions will not be paid by the Funds unless the adviser determines in good faith that the amount is reasonable in relation to the services provided. The investment advisory fees paid by the Funds to First Trust under the Investment Management Agreement are not reduced as a result of receipt by First Trust of research services. First Trust has advised the Board that it does not use soft dollars. First Trust places portfolio transactions for other advisory accounts advised by it, and research services furnished by firms through which a Fund effects their securities transactions may be used by First Trust in servicing all of its accounts; not all of such services may be used by First Trust in connection with the Funds. First Trust believes it is not possible to measure separately the benefits from research services to each of the accounts (including the Funds) advised by it. Because the volume and nature of the trading activities of the accounts are not uniform, the amount of commissions in excess of those charged by another broker paid by each account for brokerage and research services will vary. However, First Trust believes such costs to the Funds will not be disproportionate to the benefits received by the Funds on a continuing basis. First Trust seeks to allocate portfolio transactions equitably whenever concurrent decisions are made to purchase or sell securities by the Funds and another advisory account. In some cases, this procedure -30- could have an adverse effect on the price or the amount of securities available to the Funds. In making such allocations between a Fund and other advisory accounts, the main factors considered by First Trust are the respective investment objectives, the relative size of portfolio holding of the same or comparable securities, the availability of cash for investment and the size of investment commitments generally held. Administrator. The Bank of New York ("BONY") serves as Administrator for the Funds. Its principal address is 101 Barclay St., New York, NY 10286. The Trustees approved an agreement with PFPC, Inc., 301 Bellevue Parkway, Wilmington, Delaware 19809, whereby PFPC, Inc. will provide certain administrative services to the Trust in connection with the Board's meetings and other related matters. BONY serves as Administrator for the Trust pursuant to a Fund Administration and Accounting Agreement. Under such agreement, BONY is obligated on a continuous basis, to provide such administrative services as the Board reasonably deems necessary for the proper administration of the Trust and the Funds. BONY will generally assist in all aspects of the Trust's and the Funds; operations; supply and maintain office facilities (which may be in BONY's own offices), statistical and research data, data processing services, clerical, accounting, bookkeeping and record keeping services (including, without limitation, the maintenance of such books and records as are required under the 1940 Act and the rules thereunder, except as maintained by other agency agents), internal auditing, executive and administrative services, and stationery and office supplies; prepare reports to shareholders or investors; prepare and file tax returns; supply financial information and supporting data for reports to and filings with the SEC and various state Blue Sky authorities; supply supporting documentation for meetings of the Board; provide monitoring reports and assistance regarding compliance with the Declaration of Trust, by-laws, investment objectives and policies and with federal and state securities laws; and negotiate arrangements with, and supervise and coordinate the activities of, agents and others to supply services. Pursuant to the Fund Administration and Accounting Agreement, the Trust has agreed to indemnify the Administrator for certain liabilities, including certain liabilities arising under the federal securities laws, unless such loss or liability results from negligence or willful misconduct in the performance of its duties. Pursuant to the Fund Administration and Accounting Agreement between BONY and the Trust, the Funds have agreed to pay such compensation as is mutually agreed from time to time and such out-of-pocket expenses as incurred by BONY in the performance of its duties. This fee is subject to reduction for assets over $1 billion. Custodian, Distributor, Transfer Agent, Fund Accounting Agent, Index Provider and AMEX Custodian. BONY, as custodian for the Funds pursuant to a Custody Agreement, holds each Fund's assets. BONY also serves as transfer agent of the Funds pursuant to a Transfer Agency and Service Agreement. As the Funds' accounting agent, BONY calculates the net asset value of -31- Shares and calculates net income and realized capital gains or losses. BONY may be reimbursed by the Funds for its out-of-pocket expenses. Distributor. First Trust Portfolios L.P. is the Distributor of the Shares of the Funds. Its principal address is 1001 Warrenville Road, Lisle, Illinois 60532. The Distributor has entered into a Distribution Agreement with the Trust pursuant to which it distributes Fund Shares. Shares are continuously offered for sale by the Funds through the Distributor only in Creation Unit Aggregations, as described in the Prospectus and below under the heading "Creation and Redemption of Creation Units." 12b-1 Plan. The Trust has adopted a Plan of Distribution pursuant to Rule 12b-1 under the 1940 Act (the "Plan") pursuant to which the Funds may reimburse the Distributor up to a maximum annual rate of 0.25% its average daily net assets. Under the Plan and as required by Rule 12b-1, the Trustees will receive and review after the end of each calendar quarter a written report provided by the Distributor of the amounts expended under the Plan and the purpose for which such expenditures were made. The Plan was adopted in order to permit the implementation of the Funds' method of distribution. However, no such fee is currently charged to the Funds, and there are no plans in place to impose such a fee. Aggregations. Fund Shares in less than Creation Unit Aggregations are not distributed by the Distributor. The Distributor will deliver the Prospectus and, upon request, this SAI to persons purchasing Creation Unit Aggregations and will maintain records of both orders placed with it and confirmations of acceptance furnished by it. The Distributor is a broker-dealer registered under the Securities AMEX Act of 1934 (the "AMEX Act") and a member of the National Association of Securities Dealers, Inc. ("NASD"). The Distribution Agreement provides that it may be terminated as to the Funds at any time, without the payment of any penalty, on at least 60 days' written notice by the Trust to the Distributor (i) by vote of a majority of the Independent Trustees or (ii) by vote of a majority of the outstanding voting securities (as defined in the 1940 Act) of the Funds. The Distribution Agreement will terminate automatically in the event of its assignment (as defined in the 1940 Act). The Distributor may also enter into agreements with securities dealers ("Soliciting Dealers") who will solicit purchases of Creation Unit Aggregations of Fund Shares. Such Soliciting Dealers may also be Participating Parties (as defined in "Procedures for Creation of Creation Unit Aggregations" below) and DTC Participants (as defined in "DTC Acts as Securities Depository for Fund Shares" below). Index Provider. The Index that each respective Fund seeks to track is compiled by S&P. -32- S&P is not affiliated with the Funds, First Trust or First Trust Portfolios. The Funds are entitled to use each Index pursuant to a sublicensing arrangement by and among the Funds, First Trust and First Trust Portfolios. First Trust Portfolios has a licensing agreement with S&P. The Funds are not sponsored, endorsed, sold or promoted by Standard & Poor's, a division of the McGraw-Hill Companies, Inc. ("S&P"). S&P makes no representation or warranty, express or implied, to the owners of the Funds or any member of the public regarding the advisability of investing in securities generally or in the Funds particularly or the ability of the Defined Index Series to track general stock market performance or a segment of the same. S&P's publication of the Defined Index Series in no way suggests or implies an opinion by S&P as to the advisability of investment in any or all of the securities upon which the Defined Index Series is based. S&P's only relationship to First Trust Portfolios L.P. is the licensing of certain trademarks and trade names of S&P and of the Defined Index Series, which is determined, composed and calculated by S&P without regard to First Trust Portfolios L.P. or the Funds. S&P is not responsible for and has not reviewed the Funds nor any associated literature or publications and S&P makes no representation or warranty express or implied as to their accuracy or completeness, or otherwise. S&P reserves the right, at any time and without notice, to alter, amend, terminate or in any way change the Defined Index Series. S&P has no obligation or liability in connection with the administration, marketing or trading of the Funds. S&P, ITS AFFILIATES AND THEIR THIRD PARTY LICENSORS DO NOT GUARANTEE THE ACCURACY, TIMELINESS AND/OR THE COMPLETENESS OF THE DEFINED INDEX SERIES OR ANY DATA INCLUDED THEREIN AND S&P, ITS AFFILIATES AND THEIR THIRD PARTY LICENSORS SHALL NOT BE SUBJECT TO ANY DAMAGES OR LIABILITY FOR ANY ERRORS, OMISSIONS, DELAYS OR INTERRUPTIONS THEREIN. S&P, ITS AFFILIATES AND THEIR THIRD PARTY LICENSORS MAKE NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY FIRST TRUST PORTFOLIOS L.P., INVESTORS, OWNERS OF THE FUNDS, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE DEFINED INDEX SERIES OR ANY DATA INCLUDED THEREIN. S&P, ITS AFFILIATES AND THEIR THIRD PARTY LICENSORS MAKE NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIM ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE DEFINED INDEX SERIES OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL S&P, ITS AFFILIATES AND THEIR THIRD PARTY LICENSORS HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES. "AlphaDEX(TM)" is a trademark of First Trust Portfolios L.P. and First Trust on behalf of the Funds has been granted certain rights to use the trademark. AMEX. The only relationship that the AMEX has with First Trust or the Distributor of the Funds in connection with the Funds is that the AMEX lists the Shares of the Funds pursuant to its Listing Agreement with the Trust. The AMEX is not responsible for and has not participated in the determination of pricing or the timing of the issuance or sale of the -33- Shares of the Funds or in the determination or calculation of the net asset value of the Funds. The AMEX has no obligation or liability in connection with the administration, marketing or trading of the Funds. Additional Information Book Entry Only System. The following information supplements and should be read in conjunction with the section in the Prospectus entitled "Book Entry." DTC Acts as Securities Depository for Fund Shares. Shares of the Funds are represented by securities registered in the name of DTC or its nominee, Cede & Co., and deposited with, or on behalf of, DTC. DTC, a limited-purpose trust company, was created to hold securities of its participants (the "DTC Participants") and to facilitate the clearance and settlement of securities transactions among the DTC Participants in such securities through electronic book-entry changes in accounts of the DTC Participants, thereby eliminating the need for physical movement of securities, certificates. DTC Participants include securities brokers and dealers, banks, trust companies, clearing corporations and certain other organizations, some of whom (and/or their representatives) own DTC. More specifically, DTC is owned by a number of its DTC Participants and by the NYSE, the AMEX and the NASD. Access to the DTC system is also available to others such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a DTC Participant, either directly or indirectly (the "Indirect Participants"). Beneficial ownership of Shares is limited to DTC Participants, Indirect Participants and persons holding interests through DTC Participants and Indirect Participants. Ownership of beneficial interests in Shares (owners of such beneficial interests are referred to herein as "Beneficial Owners") is shown on, and the transfer of ownership is effected only through, records maintained by DTC (with respect to DTC Participants) and on the records of DTC Participants (with respect to Indirect Participants and Beneficial Owners that are not DTC Participants). Beneficial Owners will receive from or through the DTC Participant a written confirmation relating to their purchase and sale of Shares. Conveyance of all notices, statements and other communications to Beneficial Owners is effected as follows. Pursuant to a letter agreement between DTC and the Trust, DTC is required to make available to the Trust upon request and for a fee to be charged to the Trust a listing of the Shares of the Funds held by each DTC Participant. The Trust shall inquire of each such DTC Participant as to the number of Beneficial Owners holding Shares, directly or indirectly, through such DTC Participant. The Trust shall provide each such DTC Participant with copies of such notice, statement or other communication, in such form, number and at such place as such DTC Participant may reasonably request, in order that such notice, statement or communication may be transmitted by such DTC Participant, directly or indirectly, to such Beneficial Owners. In addition, the Trust shall pay to each such DTC Participants a fair and reasonable amount as reimbursement for the expenses attendant to such transmittal, all subject to applicable statutory and regulatory requirements. -34- Fund distributions shall be made to DTC or its nominee, as the registered holder of all Fund Shares. DTC or its nominee, upon receipt of any such distributions, shall immediately credit DTC Participants' accounts with payments in amounts proportionate to their respective beneficial interests in Shares of the Funds as shown on the records of DTC or its nominee. Payments by DTC Participants to Indirect Participants and Beneficial owners of Shares held through such DTC Participants will be governed by standing instructions and customary practices, as is now the case with securities held for the accounts of customers in bearer form or registered in a "street name," and will be the responsibility of such DTC Participants. The Trust has no responsibility or liability for any aspect of the records relating to or notices to Beneficial Owners, or payments made on account of beneficial ownership interests in such Shares, or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests, or for any other aspect of the relationship between DTC and the DTC Participants or the relationship between such DTC Participants and the Indirect Participants and Beneficial Owners owning through such DTC Participants. DTC may decide to discontinue providing its service with respect to Shares at any time by giving reasonable notice to the Trust and discharging its responsibilities with respect thereto under applicable law. Under such circumstances, the Trust shall take action to find a replacement for DTC to perform its functions at a comparable cost. The Trust has adopted a proxy voting policy that seeks to ensure that proxies for securities held by the Funds are voted consistently and solely in the best economic interests of the Funds.Proxy Voting Policies and Procedures A senior member of First Trust is responsible for oversight of the Funds' proxy voting process. First Trust has engaged the services of Institutional Shareholder Services, Inc. ("ISS"), to make recommendations to First Trust on the voting of proxies relating to securities held by the Funds. ISS provides voting recommendations based upon established guidelines and practices. First Trust reviews ISS recommendations and frequently follows the ISS recommendations. However, on selected issues, First Trust may not vote in accordance with the ISS recommendations when First Trust believes that specific ISS recommendations are not in the best interests of the Funds. If First Trust manages the assets of a company or its pension plan and any of First Trust's clients hold any securities of that company, First Trust will vote proxies relating to such company's securities in accordance with the ISS recommendations to avoid any conflict of interest. If a client requests First Trust to follow specific voting guidelines or additional guidelines, First Trust will review the request and inform the client only if First Trust is not able to follow the client's request. First Trust has adopted the ISS Proxy Voting Guidelines. While these guidelines are not intended to be all-inclusive, they do provide guidance on First Trust's general voting policies. Information regarding how the Funds vote future proxies relating to portfolio securities during the most recent 12-month period ended June -35- 30, will be available upon request and without charge on the Funds' website at www.ftportfolios.com, by calling (800) 621-1675 or by accessing the SEC's website at http://www.sec.gov. Quarterly Portfolio Schedule. The Trust is required to disclose, after its first and third fiscal quarters, the complete schedule of the Funds' portfolio holdings with the SEC on Form N-Q. Form N-Q for the Trust is available on the SEC's website at http://www.sec.gov. Each Fund's Form N-Q may also be reviewed and copied at the SEC's Public Reference Room in Washington, D.C. and information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Trust's Form N-Q is available without charge, upon request, by calling (800) 621- 1675 or (800) 983-0903 or by writing to First Trust Portfolios L.P., 1001 Warrenville Road, Lisle, Illinois 60532. Policy Regarding Disclosure of Portfolio Holdings. The Trust has adopted a policy regarding the disclosure of information about each Fund's portfolio holdings. The Board of Trustees of the Trust must approve all material amendments to this policy. Each Fund's portfolio holdings are publicly disseminated each day the Fund is open for business through financial reporting and news services, including publicly accessible Internet web sites. In addition, a basket composition file, which includes the security names and share quantities to deliver in exchange for Fund Shares, together with estimates and actual cash components, is publicly disseminated daily prior to the opening of the AMEX via the National Securities Clearing Corporation (NSCC). The basket represents one Creation Unit of a Fund. The Trust, First Trust and BONY will not disseminate non-public information concerning the Trust. Code of Ethics. In order to mitigate the possibility that the Funds will be adversely affected by personal trading, the Trust, First Trust and the Distributor have adopted Codes of Ethics under Rule 17j-1 of the 1940 Act. These Codes contain policies restricting securities trading in personal accounts of the officers, Trustees and others who normally come into possession of information on portfolio transactions. These Codes are on public file with, and are available from, the SEC. Creation and Redemption of Creation Unit Aggregations Creation. The Trust issues and sells Shares of the Funds only in Creation Unit Aggregations on a continuous basis through the Distributor, without a sales load, at their NAVs next determined after receipt, on any Business Day (as defined below), of an order in proper form. A "Business Day" is any day on which the NYSE is open for business. As of the date of this SAI, the NYSE observes the following holidays: New Year's Day, Martin Luther King, Jr. Day, Washington's Birthday, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. Deposit of Securities and Deposit or Delivery of Cash. The consideration for purchase of Creation Unit Aggregations of a Fund generally consists of the in-kind deposit of a designated portfolio of equity securities-the "Deposit Securities"-per each Creation Unit Aggregation constituting a substantial replication of the stocks included in the Underlying Index ("Fund Securities") and an amount of -36- cash-the "Cash Component"-computed as described below. Together, the Deposit Securities and the Cash Component constitute the "Fund Deposit," which represents the minimum initial and subsequent investment amount for a Creation Unit Aggregation of the Fund. The Cash Component is sometimes also referred to as the Balancing Amount. The Cash Component serves the function of compensating for any differences between the NAV per Creation Unit Aggregation and the Deposit Amount (as defined below). The Cash Component is an amount equal to the difference between the NAV of the Fund Shares (per Creation Unit Aggregation) and the "Deposit Amount"-an amount equal to the market value 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 creator 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 creator will receive the Cash Component. The Custodian, through the National Securities Clearing Corporation ("NSCC") (discussed below), makes available on each Business Day, prior to the opening of business on the AMEX (currently 9:30 a.m., Eastern time), the list of the names and the required number of shares of each Deposit Security to be included in the current Fund Deposit (based on information at the end of the previous Business Day) for a Fund. Such Fund Deposit is applicable, subject to any adjustments as described below, in order to effect creations of Creation Unit Aggregations of a Fund until such time as the next-announced composition of the Deposit Securities is made available. The identity and number of shares of the Deposit Securities required for a Fund Deposit for a Fund changes as rebalancing adjustments and corporate action events are reflected within a Fund from time to time by First Trust with a view to the investment objective of the Fund. The composition of the Deposit Securities may also change in response to adjustments to the weighting or composition of the Component Stocks of the Underlying Index. In addition, the Trust reserves the right to permit or require the substitution of an amount of cash-i.e., a "cash in lieu" amount-to be added to the Cash Component to replace any Deposit Security that may not be available in sufficient quantity for delivery or that may not be eligible for transfer through the systems of DTC or the Clearing Process (discussed below), or which might not be eligible for trading by an Authorized Participant (as defined below) or the investor for which it is acting or other relevant reason. Brokerage commissions incurred in connection with the acquisition of Deposit Securities not eligible for transfer through the systems of DTC and hence not eligible for transfer through the Clearing Process (discussed below) will at the expense of the Fund and will affect the value of all Shares; but First Trust, subject to the approval of the Board of Trustees, may adjust the transaction fee within the parameters described above to protect ongoing shareholders. The adjustments described above will reflect changes known to First Trust on the date of announcement to be in effect by the time of delivery of the Fund Deposit, in the composition of the Underlying Index or resulting from certain corporate actions. In addition to the list of names and numbers of securities constituting the current Deposit Securities of a Fund Deposit, the Custodian, through the NSCC, also makes available on each Business Day, the estimated Cash -37- Component, effective through and including the previous Business Day, per outstanding Creation Unit Aggregation of the Fund. Procedures for Creation of Creation Unit Aggregations. In order to be eligible to place orders with the Distributor and to create a Creation Unit Aggregation of a Fund, an entity must be (i) a "Participating Party," i.e., a broker-dealer or other participant in the clearing process through the Continuous Net Settlement System of the NSCC (the "Clearing Process"), a clearing agency that is registered with the SEC; or (ii) a DTC Participant (see the Book Entry Only System section), and, in each case, must have executed an agreement with the Distributor, with respect to creations and redemptions of Creation Unit Aggregations ("Participant Agreement") (discussed below). A Participating Party and DTC Participant are collectively referred to as an "Authorized Participant." Investors should contact the Distributor for the names of Authorized Participants that have signed a Participant Agreement. All Fund Shares, however created, will be entered on the records of DTC in the name of Cede & Co. for the account of a DTC Participant. All orders to create Creation Unit Aggregations, whether through the Clearing Process (through a Participating Party) or outside the Clearing Process (through a DTC Participant), must be received by the Distributor no later than the closing time of the regular trading session on the AMEX ("Closing Time") (ordinarily 4:00 p.m., Eastern time) in each case on the date such order is placed in order for creation of Creation Unit Aggregations to be effected based on the NAV of Shares of the Funds as next determined on such date after receipt of the order in proper form. In the case of custom orders, the order must be received by the Distributor no later than 3:00 p.m. Eastern time on the trade date. A custom order may be placed by an Authorized Participant in the event that the Trust permits or requires the substitution of an amount of cash to be added to the Cash Component to replace any Deposit Security which may not be available in sufficient quantity for delivery or which may not be eligible for trading by such Authorized Participant or the investor for which it is acting or other relevant reason. The date on which an order to create Creation Unit Aggregations (or an order to redeem Creation Unit Aggregations, as discussed below) is placed is referred to as the "Transmittal Date." Orders must be transmitted by an Authorized Participant by telephone or other transmission method acceptable to the Distributor pursuant to procedures set forth in the Participant Agreement, as described below (see the Placement of Creation Orders Using Clearing Process and the Placement of Creation Orders Outside Clearing Process sections). Severe economic or market disruptions or changes, or telephone or other communication failure may impede the ability to reach the Distributor or an Authorized Participant. All orders from investors who are not Authorized Participants to create Creation Unit Aggregations shall be placed with an Authorized Participant, as applicable, in the form required by such Authorized Participant. In addition, the Authorized Participant may request the investor to make certain representations or enter into agreements with respect to the order, e.g., to provide for payments of cash, when required. Investors should be aware that their particular broker may not have executed a Participant Agreement and that, therefore, orders to create Creation Unit Aggregations of a Fund have to be placed by the investor's broker through an Authorized Participant that has executed a Participant Agreement. In such cases there may be additional charges to such investor. At any given time, there may be only a limited number of -38- broker-dealers that have executed a Participant Agreement. Those placing orders for Creation Unit Aggregations through the Clearing Process should afford sufficient time in order to permit proper submission of the order to the Distributor prior to the Closing Time on the Transmittal Date. Orders for Creation Unit Aggregations that are effected outside the Clearing Process are likely to require transmittal by the DTC Participant earlier on the Transmittal Date than orders effected using the Clearing Process. Those persons placing orders outside the Clearing Process should ascertain the deadlines applicable to DTC and the Federal Reserve Bank wire system by contacting the operations department of the broker or depository institution effectuating such transfer of Deposit Securities and Cash Component. Placement of Creation Orders Using Clearing Process. The Clearing Process is the process of creating or redeeming Creation Unit Aggregations through the Continuous Net Settlement System of the NSCC. Fund Deposits made through the Clearing Process must be delivered through a Participating Party that has executed a Participant Agreement. The Participant Agreement authorizes the Distributor to transmit through the Custodian to NSCC, on behalf of the Participating Party, such trade instructions as are necessary to effect the Participating Party's creation order. Pursuant to such trade instructions to NSCC, the Participating Party agrees to deliver the requisite Deposit Securities and the Cash Component to the Trust, together with such additional information as may be required by the Distributor. An order to create Creation Unit Aggregations through the Clearing Process is deemed received by the Distributor on the Transmittal Date if (i) such order is received by the Distributor not later than the Closing Time on such Transmittal Date and (ii) all other procedures set forth in the Participant Agreement are properly followed. Placement of Creation Orders Outside Clearing Process. Fund Deposits made outside the Clearing Process must be delivered through a DTC Participant that has executed a Participant Agreement pre-approved by First Trust and the Distributor. A DTC Participant who wishes to place an order creating Creation Unit Aggregations to be effected outside the Clearing Process does not need to be a Participating Party, but such orders must state that the DTC Participant is not using the Clearing Process and that the creation of Creation Unit Aggregations will instead be effected through a transfer of securities and cash directly through DTC. The Fund Deposit transfer must be ordered by the DTC Participant on the Transmittal Date in a timely fashion so as to ensure the delivery of the requisite number of Deposit Securities through DTC to the account of a Fund by no later than 11:00 a.m., Eastern time, of the next Business Day immediately following the Transmittal Date. All questions as to the number of Deposit Securities to be delivered, and the validity, form and eligibility (including time of receipt) for the deposit of any tendered securities, will be determined by the Trust, whose determination shall be final and binding. The amount of cash equal to the Cash Component must be transferred directly to the Custodian through the Federal Reserve Bank wire transfer system in a timely manner so as to be received by the Custodian no later than 2:00 p.m., Eastern time, on the next Business Day immediately following such Transmittal Date. An order to create Creation Unit Aggregations outside the Clearing Process is deemed received by the Distributor on the Transmittal Date if (i) such order is received by the Distributor not later than the Closing Time on such Transmittal Date; and (ii) all other procedures set forth in the Participant Agreement are properly followed. -39- However, if the Custodian does not receive both the required Deposit Securities and the Cash Component by 11:00 a.m. and 2:00 p.m., respectively on the next Business Day immediately following the Transmittal Date, such order will be canceled. Upon written notice to the Distributor, such canceled order may be resubmitted the following Business Day using a Fund Deposit as newly constituted in order to reflect the then current Deposit Securities and Cash Component. The delivery of Creation Unit Aggregations so created will occur no later than the third (3rd) Business Day following the day on which the purchase order is deemed received by the Distributor. Additional transaction fees may be imposed with respect to transactions effected outside the Clearing Process (through a DTC participant) and in the limited circumstances in which any cash can be used in lieu of Deposit Securities to create Creation Units. (See "Creation Transaction Fee" section below.) Creation Unit Aggregations may be created in advance of receipt by the Trust of all or a portion of the applicable Deposit Securities as described below. In these circumstances, the initial deposit will have a value greater than the NAV of the Fund Shares on the date the order is placed in proper form since, in addition to available Deposit Securities, cash must be deposited in an amount equal to the sum of (i) the Cash Component, plus (ii) 115% of the market value of the undelivered Deposit Securities (the "Additional Cash Deposit"). The order shall be deemed to be received on the Business Day on which the order is placed provided that the order is placed in proper form prior to 4:00 p.m., Eastern time, on such date, and federal funds in the appropriate amount are deposited with the Custodian by 11:00 a.m., Eastern time, the following Business Day. If the order is not placed in proper form by 4:00 p.m. or federal funds in the appropriate amount are not received by 11:00 a.m. the next Business Day, then the order may be deemed to be canceled and the Authorized Participant shall be liable to the Funds for losses, if any, resulting therefrom. An additional amount of cash shall be required to be deposited with the Trust, pending delivery of the missing Deposit Securities to the extent necessary to maintain the Additional Cash Deposit with the Trust in an amount at least equal to 115% of the daily marked-to-market value of the missing Deposit Securities. To the extent that missing Deposit Securities are not received by 1:00 p.m., Eastern time, on the third Business Day following the day on which the purchase order is deemed received by the Distributor or in the event a marked-to-market payment is not made within one Business Day following notification by the Distributor that such a payment is required, the Trust may use the cash on deposit to purchase the missing Deposit Securities. Authorized Participants will be liable to the Trust and the Funds for the costs incurred by the Trust in connection with any such purchases. These costs will be deemed to include the amount by which the actual purchase price of the Deposit Securities exceeds the market value of such Deposit Securities on the day the purchase order was deemed received by the Distributor plus the brokerage and related transaction costs associated with such purchases. The Trust will return any unused portion of the Additional Cash Deposit once all of the missing Deposit Securities have been properly received by the Custodian or purchased by the Trust and deposited into the Trust. In addition, a transaction fee, as listed below, will be charged in all cases. The delivery of Creation Unit Aggregations so created will occur no later than the third Business Day following the day on which the purchase order is deemed received by the Distributor. -40- Acceptance of Orders for Creation Unit Aggregations. The Trust reserves the absolute right to reject a creation order transmitted to it by the Distributor with respect to a Fund if: (i) the order is not in proper form; (ii) the investor(s), upon obtaining the Fund Shares ordered, would own 80% or more of the currently outstanding shares of the Fund; (iii) the Deposit Securities delivered are not as disseminated for that date by the Custodian, as described above; (iv) acceptance of the Deposit Securities would have certain adverse tax consequences to the Fund; (v) acceptance of the Fund Deposit would, in the opinion of counsel, be unlawful; (vi) acceptance of the Fund Deposit would otherwise, in the discretion of the Trust or First Trust, have an adverse effect on the Trust or the rights of beneficial owners; or (vii) in the event that circumstances outside the control of the Trust, the Custodian, the Distributor and First Trust make it for all practical purposes impossible to process creation orders. Examples of such circumstances include acts of God; public service or utility problems such as fires, floods, extreme weather conditions and power outages resulting in telephone, telecopy and computer failures; market conditions or activities causing trading halts; systems failures involving computer or other information systems affecting the Trust, First Trust, the Distributor, DTC, NSCC, the Custodian or sub-custodian or any other participant in the creation process, and similar extraordinary events. The Distributor shall notify a prospective creator of a Creation Unit and/or the Authorized Participant acting on behalf of such prospective creator of its rejection of the order of such person. The Trust, the Custodian, any sub-custodian and the Distributor are under no duty, however, to give notification of any defects or irregularities in the delivery of Fund Deposits, nor shall any of them incur any liability for the failure to give any such notification. All questions as to the number of shares of each security in the Deposit Securities and the validity, form, eligibility, and acceptance for deposit of any securities to be delivered shall be determined by the Trust, and the Trust's determination shall be final and binding. Creation Transaction Fee. Investors will be required to pay a fixed creation transaction fee, described below, payable to BONY regardless of the number of creations made each day. An additional charge of up to four times the fixed transaction fee (expressed as a percentage of the value of the Deposit Securities) may be imposed for (i) creations effected outside the Clearing Process; and (ii) cash creations (to offset the Trust's brokerage and other transaction costs associated with using cash to purchase the requisite Deposit Securities). Investors are responsible for the costs of transferring the securities constituting the Deposit Securities to the account of the Trust. The Standard Creation/Redemption Transaction Fee for the Funds will be $500. The Maximum Creation/Redemption Transaction Fee for the Funds will be $2,000. Redemption of Fund Shares in Creation Units Aggregations. Fund Shares may be redeemed only in Creation Unit Aggregations at their NAV next determined after receipt of a redemption request in proper form by the Fund through the Transfer Agent and only on a Business Day. A Fund will not redeem Shares in amounts less than Creation Unit Aggregations. Beneficial owners must accumulate enough Shares in the secondary market to constitute a Creation Unit Aggregation in order to have such Shares redeemed by the Trust. There can be no assurance, however, that there will be sufficient liquidity in the public trading market at any time to -41- permit assembly of a Creation Unit Aggregation. Investors should expect to incur brokerage and other costs in connection with assembling a sufficient number of Fund Shares to constitute a redeemable Creation Unit Aggregation. With respect to the Funds, the Custodian, through the NSCC, makes available prior to the opening of business on the AMEX (currently 9:30 a.m., Eastern time) on each Business Day, the identity of the Fund Securities that will be applicable (subject to possible amendment or correction) to redemption requests received in proper form (as described below) on that day. Fund Securities received on redemption may not be identical to Deposit Securities that are applicable to creations of Creation Unit Aggregations. Unless cash redemptions are available or specified for a Fund, the redemption proceeds for a Creation Unit Aggregation generally consist of Fund Securities-as announced on the Business Day of the request for redemption received in proper form-plus or minus cash in an amount equal to the difference between the NAV of the Fund Shares being redeemed, as next determined after a receipt of a request in proper form, and the value of the Fund Securities (the "Cash Redemption Amount"), less a redemption transaction fee as listed below. In the event that the Fund Securities have a value greater than the NAV of the Fund Shares, a compensating cash payment equal to the difference is required to be made by or through an Authorized Participant by the redeeming shareholder. The right of redemption may be suspended or the date of payment postponed (i) for any period during which the NYSE is closed (other than customary weekend and holiday closings); (ii) for any period during which trading on the NYSE is suspended or restricted; (iii) for any period during which an emergency exists as a result of which disposal of the Shares of the Funds or determination of a Fund's NAV is not reasonably practicable; or (iv) in such other circumstances as is permitted by the SEC. Redemption Transaction Fee. A redemption transaction fee is imposed to offset transfer and other transaction costs that may he incurred by a Fund. An additional variable charge for cash redemptions (when cash redemptions are available or specified) for a Fund may be imposed. Investors will also bear the costs of transferring the Fund Securities from the Trust to their account or on their order. Investors who use the services of a broker or other such intermediary in addition to an Authorized Participant to effect a redemption of a Creation Unit Aggregation may be charged an additional fee for such services. The redemption transaction fees for a Fund are the same as the creation fees set forth above. Placement of Redemption Orders Using Clearing Process. Orders to redeem Creation Unit Aggregations through the Clearing Process must be delivered through a Participating Party that has executed the Participant Agreement. An order to redeem Creation Unit Aggregations using the Clearing Process is deemed received by the Trust on the Transmittal Date if (i) such order is received by the Transfer Agent not later than 4:00 p.m., Eastern time, on such Transmittal Date, and (ii) all other procedures set forth in the Participant Agreement are properly followed; such order will be effected based on the NAV of a Fund as next determined. An order to redeem Creation Unit Aggregations using the Clearing Process made in proper form but received by the Trust after 4:00 p.m., Eastern time, will be deemed received on the next Business -42- Day immediately following the Transmittal Date and will be effected at the NAV next determined on such next Business Day. The requisite Fund Securities and the Cash Redemption Amount will be transferred by the third NSCC Business Day following the date on which such request for redemption is deemed received. Placement of Redemption Orders Outside Clearing Process. Orders to redeem Creation Unit Aggregations outside the Clearing Process must be delivered through a DTC Participant that has executed the Participant Agreement. A DTC Participant who wishes to place an order for redemption of Creation Unit Aggregations to be effected outside the Clearing Process does not need to be a Participating Party, but such orders must state that the DTC Participant is not using the Clearing Process and that redemption of Creation Unit Aggregations will instead be effected through transfer of Fund Shares directly through DTC. An order to redeem Creation Unit Aggregations outside the Clearing Process is deemed received by the Trust on the Transmittal Date if (i) such order is received by the Transfer Agent not later than 4:00 p.m., Eastern time on such Transmittal Date; (ii) such order is accompanied or followed by the requisite number of Shares of the Fund, which delivery must be made through DTC to the Custodian no later than 11:00 a.m., Eastern time, (for the Fund Shares) on the next Business Day immediately following such Transmittal Date (the "DTC Cut-Off-Time") and 2:00 p.m., Eastern Time for any Cash Component, if any owed to a Fund; and (iii) all other procedures set forth in the Participant Agreement are properly followed. After the Trust has deemed an order for redemption outside the Clearing Process received, the Trust will initiate procedures to transfer the requisite Fund Securities which are expected to be delivered within three Business Days and the Cash Redemption Amount, if any owed to the redeeming Beneficial Owner to the Authorized Participant on behalf of the redeeming Beneficial Owner by the third Business Day following the Transmittal Date on which such redemption order is deemed received by the Trust. The calculation of the value of the Fund Securities and the Cash Redemption Amount to be delivered/received upon redemption will be made by the Custodian according to the procedures set forth in this SAI under "Determination of NAV" computed on the Business Day on which a redemption order is deemed received by the Trust. Therefore, if a redemption order in proper form is submitted to the Transfer Agent by a DTC Participant not later than Closing Time on the Transmittal Date, and the requisite number of Shares of the Fund are delivered to the Custodian prior to the DTC Cut-Off-Time, then the value of the Fund Securities and the Cash Redemption Amount to be delivered/received will be determined by the Custodian on such Transmittal Date. If, however, either (i) the requisite number of Shares of the Fund are not delivered by the DTC Cut-Off-Time, as described above, or (ii) the redemption order is not submitted in proper form, then the redemption order will not be deemed received as of the Transmittal Date. In such case, the value of the Fund Securities and the Cash Redemption Amount to be delivered/received will be computed on the Business Day following the Transmittal Date provided that the Fund Shares of a Fund are delivered through DTC to the Custodian by 11:00 a.m. the following Business Day pursuant to a properly submitted redemption order. If it is not possible to effect deliveries of the Fund Securities, the Trust may in its discretion exercise its option to redeem such Fund Shares in cash, and the redeeming Beneficial Owner will be required to receive its redemption proceeds in cash. In addition, an investor may -43- request a redemption in cash that the Fund may, in its sole discretion, permit. In either case, the investor will receive a cash payment equal to the NAV of its Fund Shares based on the NAV of Shares of a Fund next determined after the redemption request is received in proper form (minus a redemption transaction fee and additional charge for requested cash redemptions specified above, to offset a Fund's brokerage and other transaction costs associated with the disposition of Fund Securities). A Fund may also, in its sole discretion, upon request of a shareholder, provide such redeemer a portfolio of securities that differs from the exact composition of the Fund Securities, or cash lieu of some securities added to the Cash Component, but in no event will the total value of the securities delivered and the cash transmitted differ from the NAV. Redemptions of Fund Shares for Fund Securities will be subject to compliance with applicable federal and state securities laws and a Fund (whether or not it otherwise permits cash redemptions) reserves the right to redeem Creation Unit Aggregations for cash to the extent that the Trust could not lawfully deliver specific Fund Securities upon redemptions or could not do so without first registering the Fund Securities under such laws. An Authorized Participant or an investor for which it is acting subject to a legal restriction with respect to a particular stock included in the Fund Securities applicable to the redemption of a Creation Unit Aggregation may be paid an equivalent amount of cash. The Authorized Participant may request the redeeming Beneficial Owner of the Fund Shares to complete an order form or to enter into agreements with respect to such matters as compensating cash payment, beneficial ownership of shares or delivery instructions. The chart below describes in further detail the placement of redemption orders outside the clearing process.
Transmittal Next Business Second Business Third Business Date (T) Day (T+1) Day (T+2) Day (T+3) Creation Through NSCC Standard Orders 4:00 p.m. No action. No action. Creation Unit Aggregations will be delivered. Order must be received by the Distributor. Custom Orders 3:00 p.m. No action. No action. Creation Unit Aggregations will be delivered. Order must be received by the Distributor. Orders received after 3:00 p.m. will be treated as standard orders. -44- Transmittal Next Business Second Business Third Business Date (T) Day (T+1) Day (T+2) Day (T+3) Creation Outside NSCC Standard Orders 4:00 p.m. (ET) 11:00 a.m. (ET) No action. Creation Unit Aggregations will be delivered. Order in proper form Deposit Securities must must be received by the be received by the Fund's Distributor. account through DTC. 2:00 p.m. (ET) Cash Component must be received by the Custodian. Standard Orders Created 4:00 p.m. (ET) 11:00 a.m. (ET) No action. 1:00 p.m. in Advance of Receipt by the Trust of all or a Order in proper form Available Deposit Missing Deposit Securities portion of the Deposit must be received by the Securities. are due to the Trust or th Securities Distributor. Trust may use cash on Cash in an amount equal deposit to purchase missin to the sum of (i) the Deposit Securities. Cash Component, plus (ii) 115% of the market value Creation Unit Aggregations of the undelivered will be delivered. Deposit Securities. Custom Orders 3:00 p.m. 11:00 a.m. (ET) No action. Creation Unit Aggregations will be delivered. Order in proper form Deposit Securities must must be received by the be received by the Fund's Distributor. account through DTC. Order received after 2:00 p.m. (ET) 3:00 p.m. will be treated as standard Cash Component must be orders. received by the Orders Custodian. Redemption Through NSCC Standard Orders 4:00 p.m. (ET) No action. No action. Fund Securities and Cash Redemption Amount will be Order must be received transferred. by the Transfer Agent. Orders received after 4:00 p.m. (ET) will be deemed received on the next business day (T+1) Custom Orders 3:00 p.m. (ET) No action. No action. Fund Securities and Cash Redemption Amount will be Order must be received transferred. by the Transfer Agent Order received after 3:00 p.m. will be treated as standard orders. -45- Transmittal Next Business Second Business Third Business Date (T) Day (T+1) Day (T+2) Day (T+3) Redemption Outside NSCC Standard Orders 4:00 p.m. (ET) 11:00 a.m. (ET) No action. Fund Securities and Cash Redemption Amount is Order must be received Fund Shares must be delivered to the redeemin by the Transfer Agent. delivered through DTC to beneficial owner. the Custodian. Order received after 2:00 p.m. 4:00 p.m. (ET) will be deemed received on the Cash Component, if any, next business day (T+1). is due. *If the order is not in proper form or the Fund Shares are not delivered, then the order will not be deemed received as of T. Custom Orders 3:00 p.m. (ET) 11:00 a.m. (ET) No action. Fund Securities and Cash Redemption Amount is Order must be received Fund Shares must be delivered to the redeemin by the Transfer Agent. delivered through DTC to beneficial owner. the Custodian. Order received after 3:00 p.m. will be 2:00 p.m. treated as standard orders. Cash Component, if any, is due. *If the order is not in proper form or the Fund Shares are not delivered, then the order will not be deemed received as of T.
Federal Tax Matters This section summarizes some of the main U.S. federal income tax consequences of owning Shares of a Fund. This section is current as of the date of each Prospectus. Tax laws and interpretations change frequently, and these summaries do not describe all of the tax consequences to all taxpayers. For example, these summaries generally do not describe your situation if you are a corporation, a non-U.S. person, a broker-dealer, or other investor with special circumstances. In addition, this section does not describe your state or foreign tax consequences. This federal income tax summary is based in part on the advice of counsel to the Funds. The Internal Revenue Service could disagree with any conclusions set forth in this section. In addition, our counsel was not asked to review, and has not reached a conclusion with respect to the federal income tax treatment of the assets to be deposited in the Funds. This may not be sufficient for prospective investors to use for the purpose of avoiding penalties under federal tax law. -46- As with any investment, prospective investors should seek advice based on their individual circumstances from their own tax advisor. The Funds intend to qualify annually and to elect to be treated as regulated investment companies under the Internal Revenue Code (the "Code"). To qualify for the favorable U.S. federal income tax treatment generally accorded to regulated investment companies, each Fund must, among other things, (a) derive in each taxable year at least 90% of its gross income from dividends, interest, payments with respect to securities loans and gains from the sale or other disposition of stock, securities or foreign currencies or other income derived with respect to its business of investing in such stock, securities or currencies; (b) diversify its holdings so that, at the end of each quarter of the taxable year, (i) at least 50% of the market value of each Fund's assets is represented by cash and cash items (including receivables), U.S. Government securities, the securities of other regulated investment companies and other securities, with such other securities of any one issuer generally limited for the purposes of this calculation to an amount not greater than 5% of the value of each Fund's total assets and not greater than 10% of the outstanding voting securities of such issuer, and (ii) not more than 25% of the value of its total assets is invested in the securities (other than U.S. Government securities or the securities of other regulated investment companies) of any one issuer, or two or more issuers which a Fund controls which are engaged in the same, similar or related trades or businesses; and (c) distribute at least 90% of its investment company taxable income (which includes, among other items, dividends, interest and net short-term capital gains in excess of net long-term capital losses) and at least 90% of its net tax-exempt interest income each taxable year. As regulated investment companies, the Funds generally will not be subject to U.S. federal income tax on their investment company taxable income (as that term is defined in the Code, but without regard to the deduction for dividends paid) and net capital gain (the excess of net long-term capital gain over net short-term capital loss), if any, that they distribute to shareholders. The Funds intend to distribute to its shareholders, at least annually, substantially all of its investment company taxable income and net capital gain. If a Fund retains any net capital gain or investment company taxable income, it will generally be subject to federal income tax at regular corporate rates on the amount retained. In addition, amounts not distributed on a timely basis in accordance with a calendar year distribution requirement are subject to a nondeductible 4% excise tax unless, generally, each Fund distributes during each calendar year an amount equal to the sum of (1) at least 98% of its ordinary income (not taking into account any capital gains or losses) for the calendar year, (2) at least 98% of its capital gains in excess of its capital losses (adjusted for certain ordinary losses) for the one-year period ending October 31 of the calendar year, and (3) any ordinary income and capital gains for previous years that were not distributed during those years. In order to prevent application of the excise tax, each Fund intends to make its distributions in accordance with the calendar year distribution requirement. A distribution will be treated as paid on December 31 of the current calendar year if it is declared by a Fund in October, November or December with a record date in such a month and paid by the Fund during January of the following calendar year. Such distributions will be taxable to shareholders in the calendar year in which the distributions are declared, rather than the calendar year in which the distributions are received. -47- If a Fund failed to qualify as a regulated investment company or failed to satisfy the 90% distribution requirement in any taxable year, the Fund would be taxed as an ordinary corporation on its taxable income (even if such income were distributed to its shareholders) and all distributions out of earnings and profits would be taxed to shareholders as ordinary income. Distributions Dividends paid out of the Funds' investment company taxable income are generally taxable to a shareholder as ordinary income to the extent of the Fund's earnings and profits, whether paid in cash or reinvested in additional shares. However, certain ordinary income distributions received from a Fund may be taxed at capital gains tax rates. In particular, ordinary income dividends received by an individual shareholder from regulated investment companies such as the Funds are generally taxed at the same rates that apply to net capital gain, provided that certain holding period requirements are satisfied and provided the dividends are attributable to qualifying dividends received by each Fund itself. Dividends received by the Funds from REITs and foreign corporations are qualifying dividends eligible for this lower tax rate only in certain circumstances. These special rules relating to the taxation of ordinary income dividends from regulated investment companies generally apply to taxable years beginning before January 1, 2011. Each Fund will provide notice to its shareholders of the amount of any distributions which may be taken into account as a dividend which is eligible for the capital gains tax rates. The Funds can not make any guarantees as to the amount of any distribution which will be regarded as a qualifying dividend. A corporation that owns Shares generally will not be entitled to the dividends received deduction with respect to many dividends received from the Funds because the dividends received deduction is generally not available for distributions from regulated investment companies. However, certain ordinary income dividends on Shares that are attributable to qualifying dividends received by the Funds from certain domestic corporations may be designated by the Funds as being eligible for the dividends received deduction. Distributions of net capital gain (the excess of net long-term capital gain over net short-term capital loss), if any, properly designated as capital gain dividends are taxable to a shareholder as long-term capital gains, regardless of how long the shareholder has held Fund Shares. Shareholders receiving distributions in the form of additional Shares, rather than cash, generally will have a cost basis in each such Share equal to the value of a Share of the Fund on the reinvestment date. A distribution of an amount in excess of a Fund's current and accumulated earnings and profits will be treated by a shareholder as a return of capital which is applied against and reduces the shareholder's basis in his or her Shares. To the extent that the amount of any such distribution exceeds the shareholder's basis in his or her Shares, the excess will be treated by the shareholder as gain from a sale or exchange of the Shares. Shareholders will be notified annually as to the U.S. federal income tax status of distributions, and shareholders receiving distributions in the form of additional Shares will receive a report as to the value of those Shares. -48- Sale or AMEX of Fund Shares Upon the sale or other disposition of Shares of a Fund, which a shareholder holds as a capital asset, such a shareholder may realize a capital gain or loss which will be long-term or short-term, depending upon the shareholder's holding period for the Shares. Generally, a shareholder's gain or loss will be a long-term gain or loss if the Shares have been held for more than one year. Any loss realized on a sale or exchange will be disallowed to the extent that Shares disposed of are replaced (including through reinvestment of dividends) within a period of 61 days beginning 30 days before and ending 30 days after disposition of Shares or to the extent that the shareholder, during such period, acquires or enters into an option or contract to acquire, substantially identical stock or securities. In such a case, the basis of the Shares acquired will be adjusted to reflect the disallowed loss. Any loss realized by a shareholder on a disposition of Fund Shares held by the shareholder for six months or less will be treated as a long-term capital loss to the extent of any distributions of long-term capital gain received by the shareholder with respect to such Shares. Taxes on Purchase and Redemption of Creation Units If a shareholder exchanges equity securities for Creation Units the shareholder will generally recognize a gain or a loss. The gain or loss will be equal to the difference between the market value of the Creation Units at the time and the shareholder's aggregate basis in the securities surrendered and the Cash Component paid. If a shareholder exchanges Creation Units for equity securities, then the shareholder will generally recognize a gain or loss equal to the difference between the shareholder's basis in the Creation Units and the aggregate market value of the securities received and the Cash Redemption Amount. The Internal Revenue Service, however, may assert that a loss realized upon an exchange of securities for Creation Units or Creation Units for securities cannot be deducted currently under the rules governing "wash sales," or on the basis that there has been no significant change in economic position. Nature of Fund Investments Certain of the Funds' investment practices are subject to special and complex federal income tax provisions that may, among other things, (i) disallow, suspend or otherwise limit the allowance of certain losses or deductions, (ii) convert lower taxed long-term capital gain into higher taxed short-term capital gain or ordinary income, (iii) convert an ordinary loss or a deduction into a capital loss (the deductibility of which is more limited), (iv) cause the Funds to recognize income or gain without a corresponding receipt of cash, (v) adversely affect the time as to when a purchase or sale of stock or securities is deemed to occur and (vi) adversely alter the characterization of certain complex financial transactions. -49- Futures Contracts and Options The Funds' transactions in Futures Contracts and options will be subject to special provisions of the Code that, among other things, may affect the character of gains and losses realized by the Funds (i.e., may affect whether gains or losses are ordinary or capital, or short-term or long-term), may accelerate recognition of income to the Funds and may defer Fund losses. These rules could, therefore, affect the character, amount and timing of distributions to shareholders. These provisions also (a) will require the Funds to mark-to-market certain types of the positions in its portfolio (i.e., treat them as if they were closed out), and (b) may cause the Funds to recognize income without receiving cash with which to make distributions in amounts necessary to satisfy the 90% distribution requirement for qualifying to be taxed as a regulated investment company and the 98% distribution requirement for avoiding excise taxes. Backup Withholding The Funds may be required to withhold U.S. federal income tax from all taxable distributions and sale proceeds payable to shareholders who fail to provide the Funds with their correct taxpayer identification number or to make required certifications, or who have been notified by the Internal Revenue Service that they are subject to backup withholding. The withholding percentage is 28% until 2011, when the percentage will revert to 31% unless amended by Congress. Corporate shareholders and certain other shareholders specified in the Code generally are exempt from such backup withholding. This withholding is not an additional tax. Any amounts withheld may be credited against the shareholder's U.S. federal income tax liability. Non-U.S. Shareholders U.S. taxation of a shareholder who, as to the United States, is a nonresident alien individual, a foreign trust or estate, a foreign corporation or foreign partnership ("non-U.S. shareholder") depends on whether the income of the Fund is "effectively connected" with a U.S. trade or business carried on by the shareholder. Income Not Effectively Connected. If the income from a Fund is not "effectively connected" with a U.S. trade or business carried on by the non-U.S. shareholder, distributions of investment company taxable income will generally be subject to a U.S. tax of 30% (or lower treaty rate), which tax is generally withheld from such distributions. Distributions of capital gain dividends and any amounts retained by a Fund which are designated as undistributed capital gains will not be subject to U.S. tax at the rate of 30% (or lower treaty rate) unless the non-U.S. shareholder is a nonresident alien individual and is physically present in the United States for more than 182 days during the taxable year and meets certain other requirements. However, this 30% tax on capital gains of nonresident alien individuals who are physically present in the United States for more than the 182 day period only applies in exceptional cases because any individual present in the United States for more than 182 days during the taxable year is generally treated as a resident for U.S. income tax purposes; in that case, he or she would be subject to U.S. income tax on his or her -50- worldwide income at the, graduated rates applicable to U.S. citizens, rather than the 30% U.S. tax. In the case of a non-U.S. shareholder who is a nonresident alien individual, the Funds may be required to withhold U.S. income tax from distributions of net capital gain unless the non- U.S. shareholder certifies his or her non-U.S. status under penalties of perjury or otherwise establishes an exemption. If a non-U.S. shareholder is a nonresident alien individual, any gain such shareholder realizes upon the sale or exchange of such shareholder's shares of the Funds in the United States will ordinarily be exempt from U.S. tax unless the gain is U.S. source income and such shareholder is physically present in the United States for more than 182 days during the taxable year and meets certain other requirements. Under the provisions of the American Jobs Creation Act of 2004 (the "2004 Tax Act"), dividends paid by the Funds to shareholders who are nonresident aliens or foreign entities and that are derived from short- term capital gains and qualifying net interest income (including income from original issue discount and market discount), and that are properly designated by the Funds as "interest-related dividends" or "short-term capital gain dividends," will generally not be subject to United States withholding tax, provided that the income would not be subject to federal income tax if earned directly by the foreign shareholder. In addition, pursuant to the 2004 Tax Act, capital gains distributions attributable to gains from U.S. real property interests (including certain U.S. real property holding corporations) will generally be subject to United States withholding tax and will give rise to an obligation on the part of the foreign shareholder to file a United States tax return. The provisions contained in the legislation relating to distributions to shareholders who are nonresident aliens or foreign entities generally would apply to distributions with respect to taxable years of the Funds beginning after December 31, 2004 and before January 1, 2008. Income Effectively Connected. If the income from a Fund is "effectively connected" with a U.S. trade or business carried on by a non-U.S. shareholder, then distributions of investment company taxable income and capital gain dividends, any amounts retained by the Funds which are designated as undistributed capital gains and any gains realized upon the sale or exchange of shares of the Funds will be subject to U.S. income tax at the graduated rates applicable to U.S. citizens, residents and domestic corporations. Non-U.S. corporate shareholders may also be subject to the branch profits tax imposed by the Code. The tax consequences to a non-U.S. shareholder entitled to claim the benefits of an applicable tax treaty may differ from those described herein. Non- U.S. shareholders are advised to consult their own tax advisors with respect to the particular tax consequences to them of an investment in the Funds. Other Taxation Fund shareholders may be subject to state, local and foreign taxes on their Fund distributions. Shareholders are advised to consult their own tax advisors with respect to the particular tax consequences to them of an investment in the Funds. -51- Determination of NAV The following information supplements and should be read in conjunction with the section in the Prospectus entitled "Net Asset Value." The per share NAV of a Fund is determined by dividing the total value of the securities and other assets, less liabilities, by the total number of Shares outstanding. A Fund's NAV may not be calculated on days during which a Fund receives no orders to purchase shares and no shares are tendered for redemption. In determining NAV, portfolio securities for a Fund for which accurate market quotations are readily available will be valued by a Fund accounting agent as follows: (1) Common stocks and other equity securities listed on any national or foreign exchange will be valued at the last sale price on the exchange or system in which they are principally traded on the valuation date and at the official closing price for securities listed on the AMEX. If there are no transactions on the valuation day, securities traded principally on an exchange will be valued at the mean between the most recent bid and ask prices. (2) Securities traded in the over-the-counter market are valued at their closing bid prices. (3) AMEX traded options and Futures Contracts will be valued at the closing price in the market where such contracts are principally traded. Over-the-counter options and Futures Contracts will be valued at their closing bid prices. (4) Forward foreign currency exchange contracts which are traded in the United States on regulated exchanges will be valued by calculating the mean between the last bid and asked quotations supplied to a pricing service by certain independent dealers in such contracts. In addition, the following types of securities will be valued as follows: (1) Fixed income securities with a remaining maturity of 60 days or more will be valued by the fund accounting agent using a pricing service. When price quotes are not available, fair market value is based on prices of comparable securities. (2) Fixed income securities maturing within 60 days are valued by the fund accounting agent on an amortized cost basis. (3) Repurchase agreements will be valued as follows. Overnight repurchase agreements will be valued at cost. Term purchase agreements (i.e., those whose maturity exceeds seven days) will be valued by First Trust at the average of the bid quotations obtained daily from at least two recognized dealers. -52- (4) Structured Products, including currency-linked notes, credit-linked notes and other similar instruments, will be valued by the Fund Accounting Agent using a pricing service or quotes provided by the selling dealer or financial institution. When price quotes are not available, fair market value is based on prices of comparable securities. Absent a material difference between the exit price for a particular structured product and the market rates for similar transactions, the structured product will be valued at its exit price. (5) Interest rate swaps and credit default swaps will be valued by the Fund Accounting Agent using a pricing service or quotes provided by the selling dealer or financial institution. When price quotes are not available, fair market value is based on prices of comparable securities. Absent a material difference between the exit price for a particular swap and the market rates for similar transactions, the swap will be valued at its exit price. The value of any portfolio security held by a Fund for which market quotations are not readily available will be determined by First Trust in a manner that most fairly reflects fair market value of the security on the valuation date, based on a consideration of all available information. Certain securities may not be able to be priced by pre-established pricing methods. Such securities may be valued by the Board of Trustees or its delegate at fair value. These securities generally include but are not limited to, restricted securities (securities which may not be publicly sold without registration under the Securities Act of 1933) for which a pricing service is unable to provide a market price; securities whose trading has been formally suspended; a security whose market price is not available from a pre-established pricing source; a security with respect to which an event has occurred that is likely to materially affect the value of the security after the market has closed but before the calculation of Fund NAV (as may be the case in foreign markets on which the security is primarily traded) or make it difficult or impossible to obtain a reliable market quotation; and a security whose price, as provided by the pricing service, does not reflect the security's "fair value." As a general principle, the current "fair value" of an issue of securities would appear to be the amount which the owner might reasonably expect to receive for them upon their current sale. A variety of factors may be considered in determining the fair value of such securities. A Fund may suspend the right of redemption for the Fund only under the following unusual circumstances: (a) when the NYSE is closed (other than weekends and holidays) or trading is restricted; (b) when trading in the markets normally utilized is restricted, or when an emergency exists as determined by the SEC so that disposal of a Fund's investments or determination of its net assets is not reasonably practicable; or (c) during any period when the SEC may permit. Dividends and Distributions The following information supplements and should be read in conjunction with the section in the Prospectus entitled "Dividends, Distributions and Taxes." -53- General Policies. Dividends from net investment income, if any, are declared and paid semi-annually. Distributions of net realized securities gains, if any, generally are declared and paid once a year, but the Trust may make distributions on a more frequent basis. The Trust reserves the right to declare special distributions if, in its reasonable discretion, such action is necessary or advisable to preserve the status of the Funds as a RIC or to avoid imposition of income or excise taxes on undistributed income. Dividends and other distributions of Fund Shares are distributed, as described below, on a pro rata basis to Beneficial Owners of such Shares. Dividend payments are made through DTC Participants and Indirect Participants to Beneficial Owners then of record with proceeds received from the Funds. Dividend Reinvestment Service. No reinvestment service is provided by the Trust. Broker-dealers may make available the DTC book-entry Dividend Reinvestment Service for use by Beneficial Owners of the Funds for reinvestment of their dividend distributions. Beneficial Owners should contact their brokers in order to determine the availability and costs of the service and the details of participation therein. Brokers may require Beneficial Owners to adhere to specific procedures and timetables. If this service is available and used, dividend distributions of both income and realized gains will be automatically reinvested in additional whole Shares of each Fund purchased in the secondary market. Miscellaneous Information Counsel. Chapman and Cutler LLP, 111 West Monroe Street, Chicago, Illinois 60603, is counsel to the Trust. Independent Registered Public Accounting Firm. Deloitte & Touche LLP, 111 South Wacker Drive, Chicago, Illinois 60601, serves as the Funds' independent registered public accounting firm. The firm audits each Fund's financial statements and performs other related audit services. -54- FIRST TRUST EXCHANGE-TRADED FUND PART C - OTHER INFORMATION ITEM 23. EXHIBITS EXHIBIT NO. DESCRIPTION (a) Declaration of Trust of Registrant. (1) (b) By-Laws of the Registrant. (2) (c) Not Applicable. (d)(1) Investment Management Agreement dated April 26, 2007. (2) (2) Expense Reimbursement, Fee Waiver and Recovery Agreement dated April 26, 2007. (2) (e) Distribution Agreement dated April 26, 2007. (2) (f) Not Applicable. (g) Form of Custody Agreement between the Registrant and The Bank of New York. (3) (h)(1) Form of Transfer Agency Agreement between the Registrant and The Bank of New York. (3) (2) Form of Administration and Accounting Agreement between the Registrant and The Bank of New York. (3) (3) Form of Subscription Agreement. (2) (4) Form of Participant Agreement. (2) (5) Form of Board Administration Services Agreement among PFPC, Inc., First Trust Exchange-Traded Fund and First Trust Exchange-Traded AlphaDEX Fund. (2) (6) Sublicense Agreement by and among First Trust Portfolios L.P., First Trust Advisors L.P., American Stock Exchange LLC and First Trust Consumer Discretionary AlphaDEX(TM) Fund dated April 26, 2007. (2) (7) Sublicense Agreement by and among First Trust Portfolios L.P., First Trust Advisors L.P., American Stock Exchange LLC and First Trust Consumer Staples AlphaDEX(TM) Fund dated April 26, 2007. (2) (8) Sublicense Agreement by and among First Trust Portfolios L.P., First Trust Advisors L.P., American Stock Exchange LLC and First Trust Energy AlphaDEX(TM) Fund dated April 26, 2007. (2) (9) Sublicense Agreement by and among First Trust Portfolios L.P., First Trust Advisors L.P., American Stock Exchange LLC and First Trust Financials AlphaDEX(TM) Fund dated April 26, 2007. (2) (10) Sublicense Agreement by and among First Trust Portfolios L.P., First Trust Advisors L.P., American Stock Exchange LLC and First Trust Health Care AlphaDEX(TM) Fund dated April 26, 2007. (2) (11) Sublicense Agreement by and among First Trust Portfolios L.P., First Trust Advisors L.P., American Stock Exchange LLC and First Trust Industrials AlphaDEX(TM) Fund dated April 26, 2007. (2) (12) Sublicense Agreement by and among First Trust Portfolios L.P., First Trust Advisors L.P., American Stock Exchange LLC and First Trust Materials AlphaDEX(TM) Fund dated April 26, 2007. (2) (13) Sublicense Agreement by and among First Trust Portfolios L.P., First Trust Advisors L.P., American Stock Exchange LLC and First Trust Technology AlphaDEX(TM) Fund dated April 26, 2007. (2) (14) Sublicense Agreement by and among First Trust Portfolios L.P., First Trust Advisors L.P., American Stock Exchange LLC and First Trust Utilities AlphaDEX(TM) Fund dated April 26, 2007. (2) -2- (15) Sublicense Agreement by and among First Trust Portfolios L.P., First Trust Advisors L.P., Standard & Poor's, a division of The McGraw-Hill Companies, Inc. and First Trust Large Cap Core AlphaDEX(TM) Fund dated April 26, 2007. (2) (16) Sublicense Agreement by and among First Trust Portfolios L.P., First Trust Advisors L.P., Standard & Poor's, a division of The McGraw-Hill Companies, Inc. and First Trust Mid Cap Core AlphaDEX(TM) Fund dated April 26, 2007. (2) (17) Sublicense Agreement by and among First Trust Portfolios L.P., First Trust Advisors L.P., Standard & Poor's, a division of The McGraw-Hill Companies, Inc. and First Trust Small Cap Core AlphaDEX(TM) Fund dated April 26, 2007. (2) (18) Sublicense Agreement by and among First Trust Portfolios L.P., First Trust Advisors L.P., Standard & Poor's, a division of The McGraw-Hill Companies, Inc. and First Trust Large Cap Value Opportunities AlphaDEX(TM) Fund dated April 26, 2007. (2) (19) Sublicense Agreement by and among First Trust Portfolios L.P., First Trust Advisors L.P., Standard & Poor's, a division of The McGraw-Hill Companies, Inc. and First Trust Large Cap Growth Opportunities AlphaDEX(TM) Fund dated April 26, 2007. (2) (20) Sublicense Agreement by and among First Trust Portfolios L.P., First Trust Advisors L.P., Standard & Poor's, a division of The McGraw-Hill Companies, Inc. and First Trust Multi Cap Value AlphaDEX(TM) Fund dated April 26, 2007. (2) (21) Sublicense Agreement by and among First Trust Portfolios L.P., First Trust Advisors L.P., Standard & Poor's, a division of The McGraw-Hill Companies, Inc. and First Trust Multi Cap Growth AlphaDEX(TM) Fund dated April 26, 2007. (2) (i)(1) Opinion and Consent of Chapman and Cutler LLP dated April 26, 2007. (2) (2) Opinion and Consent of Bingham McCutchen LLP dated April 26, 2007. (2) (3) Consent of Deloitte & Touche LLP dated April 25, 2007. (2) (j) Not Applicable. (k) Not Applicable. (l) Not Applicable. (m) 12b-1 Service Plan. (2) (n) Not Applicable. (o) Not Applicable. (p)(1) First Trust Advisors L.P. Investment Adviser Code of Ethics, amended on May 31, 2006. (2) (2) First Trust Portfolios L.P. Code of Ethics, amended on May 31, 2006. (2) (3) First Trust Funds Code of Ethics, amended on May 31, 2006. (2) (q) Powers of Attorney for Messrs. Bowen, Erickson, Kadlec, Keith and Nielson authorizing, among others, James A. Bowen, W. Scott Jardine and Eric F. Fess to execute the Registration Statement. (1) - ------------------ (1) Incorporated by reference to the Registrant's Registration Statement on Form N-1A (File No. 333-140895) filed on February 26, 2007. (2) Filed herewith. (3) To be filed by amendment. ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT NOT APPLICABLE ITEM 25. INDEMNIFICATION Section 9.5 of the Registrant's Declaration of Trust provides as follows: Section 9.5. Indemnification and Advancement of Expenses. Subject to the exceptions and limitations contained in this Section 9.5, every person who is, or has been, a Trustee, officer, or employee of the Trust, including persons who serve at the request of the Trust as directors, trustees, officers, employees or agents of another organization in which the Trust has an interest -3- as a shareholder, creditor or otherwise (hereinafter referred to as a "Covered Person"), shall be indemnified by the Trust to the fullest extent permitted by law against liability and against all expenses reasonably incurred or paid by him or in connection with any claim, action, suit or proceeding in which he becomes involved as a party or otherwise by virtue of his being or having been such a Trustee, director, officer, employee or agent and against amounts paid or incurred by him in settlement thereof. No indemnification shall be provided hereunder to a Covered Person to the extent such indemnification is prohibited by applicable federal law. The rights of indemnification herein provided may be insured against by policies maintained by the Trust, shall be severable, shall not affect any other rights to which any Covered Person may now or hereafter be entitled, shall continue as to a person who has ceased to be such a Covered Person and shall inure to the benefit of the heirs, executors and administrators of such a person. Subject to applicable federal law, expenses of preparation and presentation of a defense to any claim, action, suit or proceeding subject to a claim for indemnification under this Section 9.5 shall be advanced by the Trust prior to final disposition thereof upon receipt of an undertaking by or on behalf of the recipient to repay such amount if it is ultimately determined that he is not entitled to indemnification under this Section 9.5. To the extent that any determination is required to be made as to whether a Covered Person engaged in conduct for which indemnification is not provided as described herein, or as to whether there is reason to believe that a Covered Person ultimately will be found entitled to indemnification, the Person or Persons making the determination shall afford the Covered Person a rebuttable presumption that the Covered Person has not engaged in such conduct and that there is reason to believe that the Covered Person ultimately will be found entitled to indemnification. As used in this Section 9.5, the words "claim," "action," "suit" or "proceeding" shall apply to all claims, demands, actions, suits, investigations, regulatory inquiries, proceedings or any other occurrence of a similar nature, whether actual or threatened and whether civil, criminal, administrative or other, including appeals, and the words "liability" and "expenses" shall include without limitation, attorneys' fees, costs, judgments, amounts paid in settlement, fines, penalties and other liabilities. ITEM 26. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISER First Trust Advisors L.P. ("First Trust") serves as investment adviser to the Registrant, serves as adviser or subadviser to 26 mutual funds, 12 exchange-traded funds and 12 closed-end funds and is the portfolio supervisor of certain unit investment trusts. Its principal address is 1001 Warrenville Road, Suite 300, Lisle, Illinois 60532. The principal business of certain of First Trust's principal executive officers involves various activities in connection with the family of unit -4- investment trusts sponsored by First Trust Portfolios L.P. ("FTP"). FTP's principal address is 1001 Warrenville Road, Suite 300, Lisle, Illinois 60532. Information as to other business, profession, vocation or employment during the past two years of the officers and directors of First Trust is as follows:
NAME AND POSITION WITH FIRST TRUST EMPLOYMENT DURING PAST TWO YEARS James A. Bowen, Managing Director/President Managing Director/President, FTP; Chairman of the Board of Directors, BondWave LLC and Stonebridge Advisors LLC Ronald D. McAlister, Managing Director Managing Director, FTP Mark R. Bradley, Chief Financial Officer and Managing Chief Financial Officer and Managing Director, FTP; Chief Director Financial Officer, BondWave LLC and Stonebridge Advisors LLC Robert F. Carey, Chief Investment Officer and Senior Vice Senior Vice President, FTP President W. Scott Jardine, General Counsel General Counsel, FTP; Secretary of BondWave LLC and Stonebridge Advisors LLC Kristi A. Maher, Assistant General Counsel Assistant General Counsel, FTP Michelle Quintos, Assistant General Counsel Assistant General Counsel, FTP; Associate, 2002 to December 2005, Jones Day R. Scott Hall, Managing Director Managing Director, FTP Andrew S. Roggensack, Managing Director Managing Director, FTP Elizabeth H. Bull, Senior Vice President Senior Vice President, FTP Christopher L. Dixon, Senior Vice President Senior Vice President, FTP Jane Doyle, Senior Vice President Senior Vice President, FTP Jon C. Erickson, Senior Vice President Senior Vice President, FTP Kenneth N. Hass, Senior Vice President Senior Vice President, FTP Jason T. Henry, Senior Vice President Senior Vice President, FTP Daniel J. Lindquist, Senior Vice President Senior Vice President, FTP David G. McGarel, Senior Vice President Senior Vice President, FTP Mitchell Mohr, Senior Vice President Senior Vice President, FTP -5- NAME AND POSITION WITH FIRST TRUST EMPLOYMENT DURING PAST TWO YEARS Joseph McDermott, Chief Compliance Officer Senior Vice President, FTP since 2006; CCO Driehaus Capital Management LLC, Driehaus Securities LLC and Driehaus Mutual Funds, January 2004 to April 2006 Robert M. Porcellino, Senior Vice President Senior Vice President, FTP Roger F. Testin, Senior Vice President Senior Vice President, FTP James M. Dykas, Vice President Vice President, FTP since January 2005; Executive Director, Van Kampen Asset Management and Morgan Stanley Investment Management, 1999 to January 2005 James P. Koeneman, Vice President Vice President, FTP Alan M. Rooney, Vice President Senior Vice President, FTP Ronda L. Saeli, Vice President Vice President, FTP Kirk Sims, Vice President Vice President, FTP Walter E. Stubbings, Jr., Vice President Vice President, FTP Richard S. Swiatek, Vice President Vice President, FTP Michael Zinsky, Vice President Vice President, FTP since April 2005; Senior Tax Manager, Blackman Kallick, September 2004 through April 2005 Brad Bradley, Assistant Vice President Assistant Vice President, FTP Kelley A. Christensen, Assistant Vice President Assistant Vice President, FTP Katie D. Collins, Assistant Vice President Assistant Vice President, FTP Kristen Johanneson, Assistant Vice President Assistant Vice President Lynae Peays, Assistant Vice President Assistant Vice President, FTP Omar Sepulveda, Assistant Vice President Assistant Vice President, FTP John H. Sherren, Assistant Vice President Assistant Vice President, FTP Michael S. Stange, Assistant Vice President Assistant Vice President, FTP
-6- ITEM 27. PRINCIPAL UNDERWRITER (a) FTP serves as principal underwriter of the shares of the Registrant, First Trust Exchange-Traded Fund and the First Defined Portfolio Fund LLC. FTP serves as principal underwriter and depositor of the following investment companies registered as unit investment trusts: the First Trust Combined Series, FT Series (formerly known as the First Trust Special Situations Trust), the First Trust Insured Corporate Trust, the First Trust of Insured Municipal Bonds, and the First Trust GNMA. The name of each director, officer and partner of FTP is provided below. (b) Positions and Offices with Underwriter.
NAME AND PRINCIPAL POSITIONS AND OFFICES POSITIONS AND BUSINESS ADDRESS* WITH UNDERWRITER OFFICES WITH FUND The Charger Corporation General Partner None Grace Partners of DuPage L.P. Limited Partner None James A. Bowen Managing Director/President President, Chairman of the Board, Trustee, Chief Executive Officer Mark R. Bradley Chief Financial Officer; Managing Treasurer, Chief Financial Officer Director and Chief Accounting Officer Robert W. Bredemeier Managing Director None Frank L. Fichera Managing Director None Russell J. Graham Managing Director None R. Scott Hall Managing Director None W. Scott Jardine General Counsel Chief Compliance Officer and Secretary Kristi A. Maher Assistant General Counsel Assistant Secretary Michelle Quintos Assistant General Counsel None Ronald D. McAlister Managing Director None Richard A. Olson Managing Director None Andrew S. Roggensack Managing Director None Elizabeth H. Bull Senior Vice President None Robert F. Carey Senior Vice President None -7- NAME AND PRINCIPAL POSITIONS AND OFFICES POSITIONS AND BUSINESS ADDRESS* WITH UNDERWRITER OFFICES WITH FUND Patricia L. Costello Senior Vice President None Christopher L. Dixon Senior Vice President None Jane Doyle Senior Vice President None Jon C. Erickson Senior Vice President None Kenneth N. Hass Senior Vice President None Thomas V. Hendricks Senior Vice President None Jason T. Henry Senior Vice President None Christian D. Jeppesen Senior Vice President None Christopher A. Lagioia Senior Vice President None Daniel J. Lindquist Senior Vice President Vice President Joseph McDermott Senior Vice President None David G. McGarel Senior Vice President None Mark R. McHenney Senior Vice President None Mitchell Mohr Senior Vice President None Paul E. Nelson Senior Vice President None Steve R. Nelson Senior Vice President None Robert M. Porcellino Senior Vice President None Steven R. Ritter Senior Vice President None Alan Rooney Senior Vice President None Francine Russell Senior Vice President None Brad A. Shaffer Senior Vice President None Brian Sheehan Senior Vice President None James J. Simpson Senior Vice President None Andrew C. Subramanian Senior Vice President None Mark P. Sullivan Senior Vice President None -8- NAME AND PRINCIPAL POSITIONS AND OFFICES POSITIONS AND BUSINESS ADDRESS* WITH UNDERWRITER OFFICES WITH FUND Roger F. Testin Senior Vice President Vice President Chadwick K. Thorson Senior Vice President None Gregory E. Wearsch Senior Vice President None Patrick Woelfel Senior Vice President None Dan Affetto Vice President None Lance Allen Vice President None Eric Anderson Vice President None Michael Bean Vice President None Carlos Barbosa Vice President None Rob Biddinger Vice President None Mike Britt Vice President None Nathan S. Cassel Vice President None Robert E. Christensen Vice President None Will Cobb Vice President None Joshua Crosley Vice President None Kit Dailey Vice President None Michael Darr Vice President None Albert K. Davis Vice President None Daren J. Davis Vice President None Michael Dawson Vice President None Sean Degnan Vice President None Robert T. Doak Vice President None Joel D. Donley Vice President None James M. Dykas Vice President Assistant Treasurer Brett Egner Vice President None -9- NAME AND PRINCIPAL POSITIONS AND OFFICES POSITIONS AND BUSINESS ADDRESS* WITH UNDERWRITER OFFICES WITH FUND Mike Flaherty Vice President None Wendy Flaherty Vice President None Edward Foley Vice President None Don Fuller Vice President None John Gillis Vice President None Patrick Good Vice President None Matt D. Graham Vice President None Matt Griffin Vice President None William M. Hannold Vice President None Mary Jane Hansen Vice President None Vance Hicks Vice President None Rick Johnson Vice President None Tom Knickerbocker Vice President None James P. Koeneman Vice President None Thomas E. Kotcher Vice President None Daniel Lavin Vice President None Michael P. Leyden Vice President None Keith L. Litavsky Vice President None Stephanie L. Martin Vice President None Marty McFadden Vice President None Sean Moriarty Vice President None John O'Sullivan Vice President None David Pagano Vice President None Brian K. Penney Vice President None Blair R. Peterson Vice President None -10- NAME AND PRINCIPAL POSITIONS AND OFFICES POSITIONS AND BUSINESS ADDRESS* WITH UNDERWRITER OFFICES WITH FUND Jason Peterson Vice President None Tom Powell Vice President None Marisa Prestigiacomo Vice President None Craig Prichard Vice President None David A. Rieger Vice President None Michael Rogers Vice President None Paul Rowe Vice President None James Rowlette Vice President None Ronda L. Saeli Vice President None Jeffrey M. Samuel Vice President None Peter H. Sandford Vice President None Timothy Schival Vice President None Stacy Shearer Vice President None Nim Short Vice President None Kirk Sims Vice President None Edward J. Sistowicz Vice President None Jonathan L. Steiner Vice President None Eric Stoiber Vice President None Walter E. Stubbings, Jr. Vice President None Terry Swagerty Vice President None Richard S. Swiatek Vice President None Brian Taylor Vice President None John Taylor Vice President None Kerry Tazakine Vice President None Timothy Trudo Vice President None -11- NAME AND PRINCIPAL POSITIONS AND OFFICES POSITIONS AND BUSINESS ADDRESS* WITH UNDERWRITER OFFICES WITH FUND Stanley Ueland Vice President Assistant Vice President Bryan Ulmer Vice President None Barbara E. Vinson Vice President None Dan Waldron Vice President None Christopher Walsh Vice President None Jeff Westergaard Vice President None Lewin M. Williams Vice President None Michael Zinsky Vice President None Jeffrey S. Barnum Assistant Vice President None Owen Birts III Assistant Vice President None Toby A. Bohl Assistant Vice President None Brad Bradley Assistant Vice President None Kelley A. Christensen Assistant Vice President Vice President Katie D. Collins Assistant Vice President None Michael DeBella Assistant Vice President None Debbie Del Giudice Assistant Vice President None Chris Fallow Assistant Vice President None Ann Marie Giudice Assistant Vice President None Anita K. Henderson Assistant Vice President None James V. Huber Assistant Vice President None Kristen Johanneson Assistant Vice President None Daniel C. Keller Assistant Vice President None Robert J. Madeja Assistant Vice President None David M. McCammond-Watts Assistant Vice President None Michelle Parker Assistant Vice President None -12- NAME AND PRINCIPAL POSITIONS AND OFFICES POSITIONS AND BUSINESS ADDRESS* WITH UNDERWRITER OFFICES WITH FUND Lynae Peays Assistant Vice President None Debra K. Scherbring Assistant Vice President None Steve Schwarting Assistant Vice President None Omar Sepulveda Assistant Vice President None John H. Sherren Assistant Vice President None Michael S. Stange Assistant Vice President None Lee Sussman Assistant Vice President None Christopher J. Thill Assistant Vice President None Dave Tweeten Assistant Vice President None Thomas G. Wisnowski Assistant Vice President None
* All addresses are 1001 Warrenville Road, Lisle, IL 60532 unless otherwise noted. (c) Not Applicable. ITEM 28. LOCATION OF ACCOUNTS AND RECORDS First Trust Advisors L.P. ("First Trust"), 1001 Warrenville Road, Suite 300, Lisle, Illinois 60532, maintains the Registrant's organizational documents, minutes of meetings, contracts of the Registrant and all advisory material of the investment adviser. The Bank of New York ("BONY"), 101 Barclay Street, New York, New York 10286, maintains all general and subsidiary ledgers, journals, trial balances, records of all portfolio purchases and sales, and all other requirement records not maintained by First Trust. BONY also maintains all the required records in its capacity as transfer, accounting, dividend payment and interest holder service agent for the Registrant. ITEM 29. MANAGEMENT SERVICES Not Applicable. ITEM 30. UNDERTAKINGS Not Applicable. -13- SIGNATURES Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant has duly caused this Registration Statement on Form N-1A to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Lisle, in the State of Illinois, on the 26th day of April, 2007 FIRST TRUST EXCHANGE-TRADED ALPHADEX(TM) FUND By: /s/ James A. Bowen -------------------------------------------- James A. Bowen, President Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities and on the date indicated: SIGNATURE TITLE DATE /s/ Mark R. Bradley Treasurer, Controller and Chief - -------------------- Financial and Accounting Officer April 26, 2007 Mark R. Bradley /s/ James A. Bowen President, Chief Executive - --------------------- Officer, Chairman and Trustee April 26, 2007 James A. Bowen */s/ Richard E. Erickson Trustee ) - ------------------------ ) Richard E. Erickson ) ) */s/ Thomas R. Kadlec Trustee ) - ------------------------ ) By: /s/ James A. Bowen Thomas R. Kadlec ) --------------------- ) James A. Bowen */s/ Robert F. Keith Trustee ) Attorney-In-Fact - ------------------------ ) April 26, 2007 Robert F. Keith ) */s/ Niel B. Nielson Trustee ) - ------------------------ ) Niel B. Nielson ) * Original powers of attorney authorizing James A. Bowen, W. Scott Jardine and Eric F. Fess to execute Registrant's Registration Statement, and Amendments thereto, for each of the trustees of the Registrant on whose behalf this Registration Statement is filed, were previously executed and filed as an Exhibit and are incorporated by reference herein. INDEX OF EXHIBITS
(b) By-Laws (d)(1) Investment Management Agreement (d)(2) Expense Reimbursement, Fee Waiver and Recovery Agreement (e) Form of Distribution Agreement (h)(3) Form of Subscription Agreement (h)(4) Form of Participant Agreement (h)(5) Form of Board Administration and Services Agreement (h)(6) Sublicense Agreement of First Trust Consumer Discretionary AlphaDEX(TM) Fund (h)(7) Sublicense Agreement of First Trust Consumer Staples AlphaDEX(TM) Fund (h)(8) Sublicense Agreement of First Trust Energy AlphaDEX(TM) Fund (h)(9) Sublicense Agreement of First Trust Financials AlphaDEX(TM) Fund (h)(10) Sublicense Agreement of First Trust Health Care AlphaDEX(TM) Fund (h)(11) Sublicense Agreement of First Trust Industrials AlphaDEX(TM) Fund (h)(12) Sublicense Agreement of First Trust Materials AlphaDEX(TM) Fund (h)(13) Sublicense Agreement of First Trust Technology AlphaDEX(TM) Fund (h)(14) Sublicense Agreement of First Trust Utilities AlphaDEX(TM) Fund (h)(15) Sublicense Agreement of First Trust Large Cap Core AlphaDEX(TM) Fund (h)(16) Sublicense Agreement of First Trust Mid Cap Core AlphaDEX(TM) Fund (h)(17) Sublicense Agreement of First Trust Small Cap Core AlphaDEX(TM) Fund (h)(18) Sublicense Agreement of First Trust Large Cap Value Opportunities AlphaDEX(TM) Fund (h)(19) Sublicense Agreement of First Trust Large Cap Growth Opportunities AlphaDEX(TM) Fund (h)(20) Sublicense Agreement of by First Trust Multi Cap Value AlphaDEX(TM) Fund (h)(21) Sublicense Agreement of First Trust Multi Cap Growth AlphaDEX(TM) Fund (i)(1) Opinion and Consent of Chapman and Cutler LLP (i)(2) Opinion and Consent of Bingham McCutchen LLP (i)(3) Opinion and Consent of Deloitte & Touche LLP (m) 12b-1 Service Plan (p)(1) First Trust Advisors L.P. Investment Advisor Code of Ethics (p)(2) First Trust Portfolios L.P. Code of Ethics (p)(1) First Trust Funds Code of Ethics
EX-99.B 2 exhibit_b.txt BY-LAWS OF FIRST TRUST EXCHANGE-TRADED ALPHADEX(TM) FUND ARTICLE I DEFINITIONS Any capitalized terms not defined herein shall have the respective meanings given them in the Declaration of Trust of the Trust as the same may be in effect from time to time. ARTICLE II OFFICES Section 2.1. Principal Office. Until changed by the Trustees, the principal office of the Trust shall be 1001 Warrenville Road, Suite 300, Lisle, Illinois 60532. The Trust shall maintain a registered agent for service of process in The Commonwealth of Massachusetts unless such maintenance is not required by law. Section 2.2. Other Offices. The Trust may have offices in such other places without as well as within The Commonwealth of Massachusetts as the Trustees may from time to time determine. ARTICLE III SHAREHOLDERS Section 3.1. Meetings. There shall be no annual meetings of Shareholders except as required by law. A meeting of the Shareholders of the Trust or of any Series or Class shall be called by the Secretary whenever ordered by a majority of Trustees then in office. Meetings of the Shareholders of the Trust or of any Series or Class shall also be called by the Secretary upon the order of the Trustees upon the written request of the Shareholders holding Shares representing in the aggregate not less than one-third of the voting power of the Outstanding Shares entitled to vote on the matters specified in such written -2- request provided that (1) such request shall state the purposes of such meeting and the matters proposed to be acted on, and (2) the Shareholders requesting such meeting shall have paid to the Trust the reasonably estimated cost of preparing and mailing the notice thereof, which the Secretary shall determine and specify to such Shareholders. Any such meeting shall be held at such place within or without The Commonwealth of Massachusetts on such day and at such time as the Trustees shall designate or as designated by an officer authorized by the Trustees to so designate. Any meeting so called may be postponed prior to the meeting with notice to the Shareholders entitled to vote at that meeting. If the meeting is a meeting of Shareholders of any Series or Class, but not a meeting of all Shareholders of the Trust, only Shareholders of such Series or Class shall be entitled to notice of and to vote at such meeting. Whenever a matter is required to be voted by Shareholders of the Trust in the aggregate under the Declaration, if there is then more than one Series or Class of Shares outstanding, the Trust may either hold a meeting of Shareholders of all Series and Classes to vote on such matter, or hold separate meetings of Shareholders of one or more of the individual Series and/or Classes to vote on such matter, provided that (i) such separate meetings shall be held within one year of each other and (ii) a quorum of the individual Series or Classes shall be present at each such separate meeting, and the votes of Shareholders at all such separate meetings shall be aggregated in order to determine if sufficient votes have been cast for such matter to be voted. Section 3.2. Quorum. The holders of Outstanding Shares representing thirty-three and a third percent (33-1/3%) of the voting power of the Outstanding Shares entitled to vote present in person or by proxy shall constitute a quorum at any meeting of the Shareholders, except that where pursuant to any provision of law, the Declaration or these By-Laws a vote shall be taken by individual Series or Classes, then Shares representing thirty-three and a third percent (33-1/3%) of the voting power of the aggregate number of Outstanding Shares of that Series or Class entitled to vote shall be necessary to constitute a quorum for the transaction of business by that Series or Class. For the purposes of establishing whether a quorum is present, all shares present and entitled to vote, including abstentions and broker non-votes, shall be counted. Section 4.7 of the Declaration contains further provisions relating to quorum requirements. Section 3.3. Notice of Meetings. Notice of all meetings of Shareholders and any postponements thereof, stating the time, place and purposes of the meeting, shall be given by the Secretary in accordance with Section 3.9 hereof at least seven days and not more than 120 days before the date for the meeting set forth in such notice to each Shareholder of record of the applicable Series or Class on the date set in accordance with Section 3.1 hereof. Any adjourned -3- meeting may be held as adjourned without further notice, even if the date of such adjourned meeting is more than 120 days after the notice of the original meeting or the postponement thereof, was given. Where separate meetings are held for Shareholders of the individual Series or Class to vote on a matter required to be voted on by Shareholders of the Trust in the aggregate, notice of each such separate meeting shall be provided in the manner described above in this Section. Section 3.4. Record Date. For the purpose of determining the Shareholders who are entitled to notice of and to vote at any meeting or any adjournment or postponement thereof, or to participate in any distribution, or for the purpose of any other action, the Trustees may from time to time close the transfer books for such period, not exceeding 30 days, as the Trustees may determine; or without closing the transfer books the Trustees may fix a date not more than 120 days prior to the date set for any meeting of Shareholders (before giving effect to any adjournments or postponements thereof) or more than 60 days before the date of payment of any distribution or other action as a record date for the determination of the persons to be treated as Shareholders of record for such purpose, provided however that the Trustees may delegate the determination of such dates to one or more officers of the Trust. Where separate meetings are held for Shareholders of one or more of the individual series or classes to vote on a matter required to be voted on by Shareholders of the Trust in the aggregate, the record date of each such separate meeting shall be determined in the manner described above in this Section 3.4. Only Shareholders of record on the record date so determined shall have the rights described in this Section, notwithstanding any subsequent transfer of Shares on the books of the Trust. The Trustees also may select, or may authorize one or more officers to select, the time of day as of which the calculations for determining how many votes each Shareholder is entitled to pursuant to the Declaration shall be performed. Section 3.5. Adjournments. Any meeting of Shareholders may, by action of the person presiding thereat, be adjourned without further notice with respect to one or more matters to be considered at such meeting to a designated time and place, if a quorum is not present with respect to such matter; any meeting of Shareholders may, by motion of the person presiding thereat, be adjourned with respect to one or more matters to be considered at such meeting, even if a quorum is present with respect to such matters, to a designated time and place, when such adjournment is approved by the vote of holders of Shares representing a majority of the voting power of the Shares present and entitled to vote with respect to the matter or matters adjourned, and voting on the adjournment, without further notice. Unless a proxy is otherwise limited in this regard, any Shares present and entitled to vote at a meeting that are represented by broker non-votes, may, at the discretion of the proxies named therein, be voted in favor of such an adjournment. -4- Section 3.6. Proxies. At any meeting of Shareholders, any holder of Shares entitled to vote thereat may vote by proxy, provided that no proxy shall be voted at any meeting unless it shall have been placed on file with the Secretary, or with such other officer or agent of the Trust as the Secretary may direct, for verification prior to the time at which such vote shall be taken. In connection with the solicitation of proxies by the Trustees, a Shareholder may give instructions through telephonic or electronic methods of communication or via the Internet for another person to execute his or her proxy, if in each case such method has been authorized by the Trust by its officers, and pursuant in each case to procedures established or approved by the officers of the Trust or agents employed by the Trust for such purpose as reasonably designed to verify that such instructions have been authorized by such Shareholder; and the placing of a Shareholder's name on a proxy pursuant to such instructions shall constitute execution of such proxy by or on behalf of such Shareholder. Proxies may also be submitted via facsimile if such method has been authorized by the Trust by its officers, and pursuant to procedures established or approved by the officers of the Trust or agents employed by the Trust for such purpose. Pursuant to a vote of the Trustees, proxies may be solicited in the name of one or more Trustees and/or one or more of the officers of the Trust. When any Share is held jointly by several persons, any one of them may vote at any meeting in person or by proxy in respect of such Share, but if more than one of them shall be present at such meeting in person or by proxy and such joint owners or their proxies so present disagree as to any vote to be cast, such vote shall not be received in respect of such Share, but shall be counted as present at the meeting for all other purposes. A proxy purporting to be executed by or on behalf of a Shareholder shall be deemed valid unless challenged at or prior to its exercise, and the burden of proving invalidity shall rest on the challenger. If the holder of any such Share is a minor or a person of unsound mind, and subject to guardianship or to the legal control of any other person as regards the charge or management of such Share, such Share may be voted by such guardian or such other person appointed or having such control, and such vote may be given in person or by proxy. Unless otherwise specifically limited by their terms, proxies shall entitle the holder thereof to vote at any postponement or adjournment of a meeting, and no proxy shall be valid after eleven months from its date. A Shareholder who has submitted a proxy may revoke or withdraw the proxy with respect to any matter to be considered at a meeting or any adjournment or postponement thereof if such revocation or withdrawal is properly received prior to the vote on that matter, or a Shareholder may revoke a prior proxy by delivering in a timely manner a duly executed proxy bearing a later date or by attending the meeting or the adjournment or postponement thereof and voting in person on the matter or matters. Section 3.7. Conduct of Meetings. For any matter to be properly before any meeting of Shareholders, the matter must be either specified in the notice -5- of meeting given by or at the direction of a majority of the Trustees then in office or otherwise brought before the meeting by or at the direction of the Chair or other presiding officer. With the exception of Shareholder proposals submitted in accordance with the requirements of Rule 14a-8 under the Securities Exchange Act of 1934, as amended, or any successor provisions, only matters proposed by the Trustees may be included in the Trust's proxy materials. The Trustees may from time to time in their discretion provide for procedures by which Shareholders may, prior to any meeting at which Trustees are to be elected, submit the names of potential candidates for Trustee, to be considered by the Trustees, or any proper committee thereof. At all meetings of Shareholders, unless voting is conducted by inspectors, all questions relating to the qualification of voters and the validity of proxies and the acceptance or rejection of votes shall be decided by the Chair or other presiding officer. Section 3.8. Inspectors of Election. In advance of any meeting of Shareholders the Trustees, or at any such meeting of the Shareholders the Trustees or the Chair or other presiding officer, may appoint Inspectors of Election to act at the meeting or any adjournment thereof. If any person appointed as inspector fails to appear or fails or refuses to act, the Chair or other presiding officer may appoint a person to fill the vacancy. Unless otherwise instructed by the Trustees, or by the Chair or other presiding officer at the meeting, the Inspectors of Election shall determine the number of Outstanding Shares, the Shares represented at the meeting, the existence of a quorum, the authenticity, validity and effect of proxies, shall receive votes, ballots or consents, shall hear and determine all challenges and questions in any way arising in connection with the right to vote, shall count and tabulate all votes and consents, determine the results, and do such other acts as may be proper to conduct the election or vote. Section 3.9. Communications with Shareholders. Any notices, reports, statements or other communications with Shareholders of any kind required under the Declaration, these By-Laws or applicable law may be sent, delivered or made available in any reasonable manner as may be determined by the Trustees if not otherwise prohibited by applicable law, including, without limitation, by email or other electronic means or by posting on a website or other publication; and such communications may be sent, delivered or otherwise made available to Shareholders in accordance with householding or other similar rules under which a single copy of such notice or report may be sent to Shareholders who reside at the same address. No communication need be given to any Shareholder who shall have failed to inform the Trust of the Shareholder's current address and the Trustees may from time to time adopt, or may authorize the officers or agents of the Trust to adopt, procedures or policies with respect to communications to Shareholders that are returned to the Trust or its agents as undeliverable and -6- similar matters. Any Shareholder may waive receipt of any notice or other communication. Communications shall be deemed to have been given at the time when delivered personally or deposited in the mail or with another carrier or sent by any means of written or electronic communication or, where notice is given by posting on a website or by publication, on the date of posting or publication. An affidavit of the mailing or other means of giving any notice of any meeting of Shareholders shall be filed and maintained with the records of the Trust. The foregoing provisions shall apply mutatis mutandis to any communications given to a Shareholder's counsel under Section 9.8 of the Declaration, provided however that communications provided to either a Shareholder or Shareholder's counsel under Section 9.8 may not by made by means of posting on a website or by publication. Section 3.10. Action by Consent of Shareholders. Section 4.8 of the Declaration contains provisions relating to action by written consent in lieu of a meeting of shareholders. ARTICLE IV TRUSTEES Section 4.1. Chair. The Trustees may elect from their own number a Chair, to hold office until his or her successor shall have been duly elected and qualified. The Chair (or, if the Chair is unable to attend any such meeting, the Chair's designee) shall preside at all meetings of the Trustees and the Shareholders. The Chair shall have such other duties and powers as may be assigned to him or her from time to time by the Trustees. Section 4.2. Meetings of the Trustees. The Trustees may in their discretion provide for regular or stated meetings of the Trustees. Notice of regular or stated meetings need not be given. Meetings of the Trustees other than regular or stated meetings shall be held whenever called by the Chair or by any Trustee. Notice of the time and place of each meeting other than regular or stated meetings shall be given by the Secretary or an Assistant Secretary or by the Chair or Trustee calling the meeting and shall be mailed to each Trustee, at least two days before the meeting, or shall be faxed, telephoned, emailed or sent by other electronic means to each Trustee at the Trustee's business or residence, or personally delivered to the Trustee, at least one day before the meeting. Such notice may, however, be waived by any Trustee. Notice of a meeting need not be given to any Trustee if a written waiver of notice, executed by the Trustee before or after the meeting, is filed with the records of the meeting, -7- or to any Trustee who attends the meeting without protesting prior thereto or at its commencement the lack of notice. A notice or waiver of notice need not specify the purpose of any meeting. The Trustees may meet by means of a telephone or video conference circuit or similar communications equipment by means of which all persons participating in the meeting can hear each other. Participation in a telephone or video conference meeting shall constitute presence in person at such meeting. Section 4.3. Quorum and Manner of Acting. A majority of the Trustees then in office shall constitute a quorum for the transaction of business at any regular or special meeting of the Trustees. In the absence of a quorum, a majority of the Trustees present may adjourn the meeting from time to time until a quorum shall be present. Notice of an adjourned meeting need not be given. Section 6.7 of the Declaration contains provisions relating to the manner of acting by the Trustees. Section 4.4. Actions by Consent. If in accordance with Section 6.7 of the Declaration any action is taken by the Trustees by a written consent of fewer than all of the Trustees, prompt notice of any such action shall be furnished to each Trustee who did not execute such written consent, provided that the effectiveness of such action shall not be impaired by any delay or failure to furnish such notice. Any written consents may be executed and delivered by electronic means. Section 4.5. Counsel and Experts. The Trustees who are not Interested Persons may, by vote of a majority of such Trustees, at the Trust's expense, hire such employees and retain such counsel, accountants, appraisers or other experts or consultants whose services such Trustees may, in their discretion, determine to be necessary or desirable from time to time, including services to one or more committees established by the Trustees, and may execute any agreements, contracts, instruments or other documents in connection therewith. ARTICLE V COMMITTEES AND ADVISORY BOARD Section 5.1 Establishment and Authority. Section 6.4 of the Declaration contains provisions relating to the establishment of committees by the Trustees (which committees may include individuals who are not Trustees). Each committee shall have such powers and authority as shall be authorized by the Trustees, and may fix its own rules and procedures, and adopt its own charter, in each case subject to approval by the Trustees. The Trustees may designate a chair of any such committee, provided however that in the absence of such designation a -8- committee may elect its own chair. The Trustees may abolish any such committee at any time in their sole discretion. Any committee to which the Trustees delegate any of their powers shall maintain records of its meetings and shall report its actions to the Trustees. The Trustees shall have the power to rescind any action of any committee, but no such rescission shall have retroactive effect. The Trustees shall have the power at any time to fill vacancies in the committees. The Trustees may designate one or more Trustees as alternate members of any committee who may replace any absent member at any meeting of the committee. Section 5.2. Executive Committee. The Trustees may elect from their own number an Executive Committee to consist of not less than two Trustees to hold office at the pleasure of the Trustees. While the Trustees are not in session, the Executive Committee shall have the power to conduct the current and ordinary business of the Trust, including the purchase and sale of securities and the designation of securities to be delivered upon redemption of Shares of the Trust, the terms of any underwriting of Shares of the Trust, and such other powers of the Trustees as the Trustees may, from time to time, delegate to the Executive Committee except those powers which by the Declaration or these By-Laws the Trustees are prohibited from so delegating. Section 5.3. Meetings, Quorum and Manner of Acting. The Trustees may (i) provide for stated meetings of any committee, (ii) specify the manner of calling and notice required for special meetings of any committee, (iii) specify the number of members of a committee required to constitute a quorum and the number of members of a committee required to exercise specified powers delegated to such committee, (iv) authorize the making of decisions to exercise specified powers by written assent of the requisite number of members of a committee without a meeting, and (v) authorize the members of a committee to meet by means of a telephone or video conference circuit. Notwithstanding the foregoing, in the absence of such provision, specification or authorization by the Trustees, the provisions of these By-Laws applicable to meetings and actions by the Trustees shall apply, mutatis mutandis, to meetings of, and the exercise of powers delegated to, a committee. Section 5.4. Advisory Board. The Trustees may appoint an Advisory Board to consist in the first instance of not less than three members. Members of such Advisory Board shall not be Trustees or officers and need not be Shareholders. A member of such Advisory Board shall hold office for such period as the Trustees may by vote provide and may resign therefrom by a written instrument signed by him or her which shall take effect upon its delivery to the Trustees. The Advisory Board shall have no legal powers and shall not perform the functions of Trustees in any manner, such Advisory Board being intended merely to act in an advisory capacity. Such Advisory Board shall meet at such times and upon such notice as the Trustees may by resolution provide. -9- ARTICLE VI OFFICERS Section 6.1. General Provisions. The officers of the Trust shall be a President, a Treasurer or a Controller, a Chief Compliance Officer and a Secretary, who shall be elected by the Trustees. The Trustees may elect or appoint such other officers or agents as the business of the Trust may require, including one or more Vice Presidents, one or more Assistant Treasurers or Assistant Controllers and one or more Assistant Secretaries. The Trustees may delegate to any officer or committee the power to appoint any subordinate officers or agents. Section 6.2. Term of Office and Qualifications. Except as otherwise provided by law, the Declaration or these By-Laws, each of the President, the Treasurer (or Controller), the Chief Compliance Officer and the Secretary shall be in office until his or her resignation is accepted by the Trustees or until his or her respective successor shall have been duly elected and qualified, or in each case until he or she sooner dies or is removed. All other officers shall hold office at the pleasure of the Trustees. Any two or more offices, except those of President and Vice-President, may be held by the same person. Any officer may be, but none need be, a Trustee or Shareholder. Section 6.3. Removal. The Trustees, at any regular or special meeting of the Trustees, may remove any officer with or without cause by a vote of a majority of the Trustees. Any officer or agent appointed by any officer or Committee may be removed with or without cause by such appointing officer or Committee. Section 6.4. Powers and Duties of the President. The President shall be the principal executive officer of the Trust. Subject to the control of the Trustees and any committee of the Trustees, the President shall at all times exercise a general supervision and direction over the affairs of the Trust. The President shall have the power to employ attorneys and counsel for the Trust and to employ such subordinate officers, agents, clerks and employees as he or she may find necessary to transact the business of the Trust. The President shall also have the power to grant, issue, execute or sign such powers of attorney, proxies or other documents as may be deemed advisable or necessary in the furtherance of the interests of the Trust. The President shall have such other powers and duties as, from time to time, may be conferred upon or assigned to him or her by the Trustees. -10- Section 6.5. Powers and Duties of Vice Presidents. In the absence or disability of the President, the Vice President or, if there be more than one Vice President, any Vice President designated by the Trustees shall perform all the duties and may exercise any of the powers of the President, subject to the control of the Trustees. Each Vice President shall perform such other duties as may be assigned to him or her from time to time by the Trustees or the President. Section 6.6. Powers and Duties of the Treasurer (or Controller). The Treasurer shall be the principal financial and accounting officer of the Trust. The Treasurer shall deliver all funds of the Trust that may come into his or her hands to such custodian as the Trustees may employ. The Treasurer shall render a statement of condition of the finances of the Trust to the Trustees as often as they shall require the same and shall in general perform all the duties incident to the office of Treasurer and such other duties as from time to time may be assigned to him or her by the Trustees. The Treasurer shall give a bond for the faithful discharge of his or her duties, if required to do so by the Trustees, in such sum and with such surety or sureties as the Trustees shall require. The principal financial and accounting officer of the Trust may be the Controller instead of the Treasurer, in which case all provisions of these By-Laws concerning the Treasurer shall be deemed to refer to the Controller instead. Section 6.7. Powers and Duties of the Chief Compliance Officer. The Chief Compliance Officer shall be the principal compliance officer of the Trust. The Chief Compliance Officer shall have full responsibility and authority to develop and enforce appropriate policies and procedures for the Trust. The Chief Compliance Officer shall have sufficient seniority and authority to compel others to adhere to the compliance policies and procedures of the Trust. The Chief Compliance Officer shall be appointed by the Trustees and may only be removed by the Trustees, including a majority of the Trustees who are not "interested persons" of the Trust (the "independent Trustees"). The Chief Compliance Officer shall report periodically to the Trustees with respect to compliance matters and at least annually meet separately in executive session with the independent Trustees, without other officers or interested Trustees. The Chief Compliance Officer shall annually review the policies and procedures of the Trust and prepare an annual written report to the Trustees. Section 6.8. Powers and Duties of the Secretary. The Secretary shall keep the minutes of all meetings of the Shareholders in proper books provided for that purpose; shall keep the minutes of all meetings of the Trustees; shall have custody of the seal of the Trust, if any, and shall have charge of the Share transfer books, lists and records unless the same are in the charge of the -11- Transfer Agent. The Secretary shall attend to the giving and serving of all notices by the Trust in accordance with the provisions of these By-Laws and as required by law; and subject to these By-Laws, shall in general perform all the duties incident to the office of Secretary and such other duties as from time to time may be assigned to him or her by the Trustees. Section 6.9. Powers and Duties of Assistant Treasurers. In the absence or disability of the Treasurer, any Assistant Treasurer designated by the Trustees shall perform all the duties, and may exercise any of the powers, of the Treasurer. Each Assistant Treasurer shall perform such other duties as from time to time may be assigned to him or her by the Trustees or by the Treasurer. Each Assistant Treasurer shall give a bond for the faithful discharge of his or her duties, if required to do so by the Trustees, in such sum and with such surety or sureties as the Trustees shall require. If the principal financial and accounting officer of the Trust is the Controller, all provisions of these By-Laws concerning Assistant Treasurers shall be deemed to refer to Assistant Controllers. Section 6.10. Powers and Duties of Assistant Secretaries. In the absence or disability of the Secretary, any Assistant Secretary designated by the Trustees shall perform all of the duties, and may exercise any of the powers, of the Secretary. Each Assistant Secretary shall perform such other duties as from time to time may be assigned to him or her by the Trustees or by the Secretary. Section 6.11. Compensation. Subject to any applicable law or provision of the Declaration, the compensation of the officers, Trustees, and members of the Advisory Board, if any, shall be fixed from time to time by the Trustees or, in the case of officers, by any committee of officers upon whom such power may be conferred by the Trustees. No officer shall be prevented from receiving such compensation as such officer by reason of the fact that he or she is also a Trustee. ARTICLE VII SHARES OF THE TRUST Section 7.1. Share Certificates. Unless the issuance of certificates is authorized by the Trustees, Shares shall be held on the books of the Trust by one or more transfer agents appointed in accordance with Section 7.2 of the Declaration (each, a "Transfer Agent") in uncertificated form, and the record holders of such shares shall be treated for all purposes as Shareholders under the Declaration. -12- The Trustees may at any time authorize the issuance of share certificates for Shares of any Series or Class in such form as the Trustees may prescribe from time to time. Each such certificate shall bear a distinguishing number, shall exhibit the holder's name and the number of whole shares owned by such holder, and shall be signed in the name of the Trust by the Chair of the Board, the President or a Vice President, and by the Secretary or an Assistant Secretary (which signatures may be either manual or facsimile, engraved or printed if the certificate is signed by the Transfer Agent with respect to such Shares or by a registrar), or, in the event of one or more global certificates issued to a depository, may otherwise be signed in accordance with the requirements of such depository. In case the Chair of the Board or any officer who shall have signed such certificates shall have ceased to hold such position or office before such certificates shall be issued, they may nevertheless be issued by the Trust with the same effect as if such person were still in such position or office at the date of their issuance. Section 7.2 Share Transfers. Transfers of Shares of the Trust shall be made only on the books of the Trust, as maintained by the Transfer Agent with respect to such Shares, by the registered holder thereof, or by his attorney thereunto authorized by power of attorney duly executed and filed with the Transfer Agent for such Shares and upon surrender of any certificate or certificates representing such Shares, if any, properly endorsed and the payment of all taxes thereon. Except as may be otherwise provided by law or these By-Laws, the person in whose name Shares stand on the books of the Trust shall be deemed the owner thereof for all purposes as regards the Trust; provided that properly documented pledges of Shares as collateral security may be accounted for by the Transfer Agent in accordance with its standard procedures with respect thereto. Section 7.3. Loss of Certificates. The Transfer Agent for any Series or Class of Shares, with the approval of any two officers of the Trust, is authorized to issue and countersign replacement certificates for Shares which have been lost, stolen or destroyed upon (i) receipt of an affidavit or affidavits of loss or non receipt and of an indemnity agreement executed by the registered holder or his legal representative and supported by an open penalty surety bond, said agreement and said bond in all cases to be in form and content satisfactory to and approved by the President or the Treasurer, or (ii) receipt of such other documents and assurances as may be approved by the President or the Treasurer. Section 7.4. Regulations. The Trustees may make, or may authorize the officers or agents of the Trust to make, such additional rules and regulations, not inconsistent with these By-Laws, as they may deem expedient concerning the issue, certification, transfer and registration of Shares. -13- ARTICLE VIII MISCELLANEOUS Section 8.1. Books and Records. The books and records of the Trust and any Series or Classes thereof, including the share ledger or ledgers, may be kept in or outside the Commonwealth of Massachusetts at such office or offices of the Trust and/or its agents as may from time to time be determined by the officers of the Trust. Section 8.2. Access to Book and Records. Section 4.11 of the Declaration contains provisions relating to access to books and records. Section 8.3 Seal. Section 6.2(b)(ix) of the Declaration provides for the adoption of a seal. Section 8.4 Execution of Papers. All deeds, leases, contracts, notes and other obligations made by the Trustees shall be signed by the President, any Vice President elected by the Trustees, the Treasurer, the Secretary or any other officer elected by the Trustees, except as the Trustees may generally or in particular cases authorize the execution thereof in some other manner, or as otherwise provided in these By-Laws. Section 8.5 Severability. The provisions of these By-Laws are severable. If the Trustees determine, with the advice of counsel, that any provision hereof conflicts with the 1940 Act, the regulated investment company or other provisions of the Code or with other applicable laws and regulations, the conflicting provision shall be deemed never to have constituted a part of these By-Laws; provided, however, that such determination shall not affect any of the remaining provisions of these By-Laws or render invalid or improper any action taken or omitted prior to such determination. If any provision hereof shall be held invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall attach only to such provision only in such jurisdiction and shall not affect any other provision of these By-Laws. Section 8.6 Headings. Headings are placed in these By-Laws for convenience of reference only and in case of any conflict, the text of these By-Laws rather than the headings shall control. -14- ARTICLE IX AMENDMENTS These By-Laws, or any of them, may be altered, amended, repealed in whole or in part or restated, or new By-Laws may be adopted, at any time by a majority of the Trustees then in office at any meeting of the Trustees, or by one or more writings signed by such a majority. EX-99.D.1 3 exhibit_d1.txt INVESTMENT MANAGEMENT AGREEMENT INVESTMENT MANAGEMENT AGREEMENT made this 26th day of April, 2007, by and between FIRST TRUST EXCHANGE-TRADED ALPHADEX(TM) FUND, a Massachusetts business trust (the "Company"), and FIRST TRUST ADVISORS L.P., an Illinois limited partnership (the "Adviser"). WHEREAS, the Company is registered under the Investment Company Act of 1940, as amended ("1940 Act"), as an open-end management investment company; WHEREAS, the Company is authorized to issue shares in separate series, with each such series representing interests in a separate portfolio of securities and other assets; WHEREAS, the Company intends to initially offer shares in sixteen (16) series as set forth on Schedule A attached hereto and any other series as to which this Agreement may hereafter be made applicable and set forth on Schedule A, which may be amended from time to time (each such series being herein referred to as a "Fund," and collectively as the "Funds"); and WHEREAS, the Company desires to retain the Adviser as investment adviser, to furnish certain investment advisory and portfolio management services to the Company with respect to the Funds, and the Adviser is willing to furnish such services. WITNESSETH: In consideration of the mutual covenants hereinafter contained, it is hereby agreed by and between the parties hereto as follows: 1. The Company hereby engages the Adviser to act as the investment adviser for, and to manage the investment and reinvestment of the assets of, each Fund in accordance with each Fund's investment objectives and policies and limitations, and to administer each Fund's affairs to the extent requested by and subject to the supervision of the Board of Trustees of the Company for the period and upon the terms herein set forth. The investment of each Fund's assets shall be subject to the Fund's policies, restrictions and limitations with respect to securities investments as set forth in the Fund's then current registration statement under the l940 Act, and all applicable laws and the regulations of the Securities and Exchange Commission relating to the management of registered open-end management investment companies. The Adviser accepts such employment and agrees during such period to render such services, to furnish office facilities and equipment and clerical, bookkeeping and administrative services (other than such services, if any, provided by the Funds' transfer agent, administrator or other service providers) for the Funds, to permit any of its officers or employees to serve without compensation as trustees or officers of the Company if elected to such positions, and to assume the obligations herein set forth for the compensation herein provided. The Adviser shall at its own expense furnish all executive and -2- other personnel, office space, and office facilities required to render the investment management and administrative services set forth in this Agreement. In the event that the Adviser pays or assumes any expenses of a Fund not required to be paid or assumed by the Adviser under this Agreement, the Adviser shall not be obligated hereby to pay or assume the same or similar expense in the future; provided, that nothing contained herein shall be deemed to relieve the Adviser of any obligation to a Fund under any separate agreement or arrangement between the parties. 2. The Adviser shall, for all purposes herein provided, be deemed to be an independent contractor and, unless otherwise expressly provided or authorized, shall neither have the authority to act for nor represent the Company in any way, nor otherwise be deemed an agent of the Company. 3. For the services and facilities described in Section 1, each Fund will pay to the Adviser, at the end of each calendar month, and the Adviser agrees to accept as full compensation therefor, an investment management fee equal to the annual rate of each Fund's average daily net assets as set forth on Schedule A. For the month and year in which this Agreement becomes effective, or terminates, there shall be an appropriate proration on the basis of the number of days that the Agreement shall have been in effect during the month and year, respectively. The services of the Adviser to the Company under this Agreement are not to be deemed exclusive, and the Adviser shall be free to render similar services or other services to others so long as its services hereunder are not impaired thereby. 4. The Adviser shall arrange for suitably qualified officers or employees of the Adviser to serve, without compensation from the Company, as trustees, officers or agents of the Company, if duly elected or appointed to such positions, and subject to their individual consent and to any limitations imposed by law. 5. For purposes of this Agreement, brokerage commissions paid by a Fund upon the purchase or sale of a Fund's portfolio securities shall be considered a cost of securities of the Fund and shall be paid by the Fund. 6. The Adviser is authorized to select the brokers or dealers that will execute the purchases and sales of a Fund's securities on behalf of the Fund, and is directed to use its commercially reasonable efforts to obtain best execution, which includes most favorable net results and execution of the Fund's orders, taking into account all appropriate factors, including price, dealer spread or commission, size and difficulty of the transaction and research or other services provided. Subject to approval by the Company's Board of Trustees and to the extent permitted by and in conformance with applicable law (including Rule 17e-1 of the 1940 Act), the Adviser may select brokers or dealers affiliated with the Adviser. It is understood that the Adviser will not be deemed to have acted unlawfully, or to have breached a fiduciary duty to the Company, or be in breach of any obligation owing to the Company under this Agreement, or otherwise, solely by reason of its having caused the Fund to pay a member of a securities exchange, a broker or a dealer a commission for effecting a securities transaction for the Fund in excess of the amount of commission another member of an exchange, broker or dealer would have charged if the Adviser determined in good faith that the commission paid was reasonable in relation to the brokerage or research services provided by such member, broker or dealer, viewed in terms of that particular transaction or the Adviser's overall responsibilities with respect to its accounts, including the Fund, as to which it exercises investment discretion. In addition, the Adviser may, to the extent permitted by applicable law, aggregate purchase and sale orders of securities with similar orders being made simultaneously for other accounts managed by the Adviser or its affiliates, if in the Adviser's reasonable judgment such aggregation shall result in an overall economic benefit to a Fund, taking into consideration the selling or purchase price, brokerage commissions and other expenses. In the event that a purchase or sale of an asset of a Fund occurs as part of any aggregate sale or purchase orders, the objective of the Adviser and any of its affiliates involved in such transaction shall be to allocate the securities so purchased or sold, as well as expenses incurred in the transaction, among the Fund and other accounts in an equitable manner. Nevertheless, each Fund acknowledges that under some circumstances, such allocation may adversely affect the Fund with respect to the price or size of the securities positions obtainable or salable. Whenever a Fund and one or more other investment advisory clients of the Adviser have available funds for investment, investments suitable and appropriate for each will be allocated in a manner believed by the Adviser to be equitable to each, although such allocation may result in a delay in one or more client accounts being fully invested that would not occur if such an allocation were not made. Moreover, it is possible that due to differing investment objectives or for other reasons, the Adviser and its affiliates may purchase securities of an issuer for one client and at approximately the same time recommend selling or sell the same or similar types of securities for another client. The Adviser will not arrange purchases or sales of securities between a Fund and other accounts advised by the Adviser or its affiliates unless (a) such purchases or sales are in accordance with applicable law (including Rule 17a-7 of the 1940 Act) and the Company's policies and procedures, (b) the Adviser determines the purchase or sale is in the best interests of each Fund, and (c) the Company's Board of Trustees have approved these types of transactions. To the extent a Fund seeks to adopt, amend or eliminate any objectives, policies, restrictions or procedures in a manner that modifies or restricts Adviser's authority regarding the execution of the Fund's portfolio transactions, the Fund agrees to use reasonable commercial efforts to consult with the Adviser regarding the modifications or restrictions prior to such adoption, amendment or elimination. The Adviser will communicate to the officers and trustees of the Company such information relating to transactions for the Funds as they may reasonably request. In no instance will portfolio securities be purchased by or sold to the Adviser or any affiliated person of either the Company or the Adviser, except as may be permitted under the 1940 Act. The Adviser further agrees that it: (a) will use the same degree of skill and care in providing such services as it uses in providing services to fiduciary accounts for which it has investment responsibilities; -3- (b) will conform in all material respects to all applicable rules and regulations of the Securities and Exchange Commission and comply in all material respects with all policies and procedures adopted by the Board of Trustees for the Company and communicated to the Adviser and, in addition, will conduct its activities under this Agreement in all material respects in accordance with any applicable regulations of any governmental authority pertaining to its investment advisory activities; (c) will report regularly to the Board of Trustees of the Company (generally on a quarterly basis) and will make appropriate persons available for the purpose of reviewing with representatives of the Board of Trustees on a regular basis at reasonable times the management of each Fund, including, without limitation, review of the general investment strategies of each Fund, the performance of each Fund's investment portfolio in relation to relevant standard industry indices and general conditions affecting the marketplace and will provide various other reports from time to time as reasonably requested by the Board of Trustees of the Company; and (d) will prepare and maintain such books and records with respect to each Fund's securities and other transactions as required under applicable law and will prepare and furnish the Company's Board of Trustees such periodic and special reports as the Board of Trustees may reasonably request. The Adviser further agrees that all records which it maintains for each Fund are the property of the Fund and the Adviser will surrender promptly to the Fund any such records upon the request of the Fund (provided, however, that Adviser shall be permitted to retain copies thereof); and shall be permitted to retain originals (with copies to the Fund) to the extent required under Rule 204-2 of the Investment Advisers Act of 1940 or other applicable law. 7. Subject to applicable statutes and regulations, it is understood that officers, trustees, or agents of the Company are, or may be, interested persons (as such term is defined in the 1940 Act and rules and regulations thereunder) of the Adviser as officers, directors, agents, shareholders or otherwise, and that the officers, directors, shareholders and agents of the Adviser may be interested persons of the Fund otherwise than as trustees, officers or agents. 8. The Adviser shall not be liable for any loss sustained by reason of the purchase, sale or retention of any security, whether or not such purchase, sale or retention shall have been based upon the investigation and research made by any other individual, firm or corporation, if such recommendation shall have been selected with due care and in good faith, except loss resulting from willful misfeasance, bad faith, or gross negligence on the part of the Adviser in the performance of its obligations and duties, or by reason of its reckless disregard of its obligations and duties under this Agreement. 9. Subject to obtaining the initial and periodic approvals required under Section 15 of the 1940 Act, the Adviser may retain one or more sub-advisers at the Adviser's own cost and expense for the purpose of furnishing one or more of the services described in Section 1 hereof with respect to a Fund. Retention of a sub-adviser shall in no way reduce the responsibilities or -4- obligations of the Adviser under this Agreement and the Adviser shall be responsible to a Fund for all acts or omissions of any sub-adviser in connection with the performance of the Adviser's duties hereunder. 10. The Company acknowledges that the Adviser now acts, and intends in the future to act, as an investment adviser to other managed accounts and as investment adviser or sub-investment adviser to one or more other investment companies that are not a series of the Company. In addition, the Company acknowledges that the persons employed by the Adviser to assist in the Adviser's duties under this Agreement will not devote their full time to such efforts. It is also agreed that the Adviser may use any supplemental research obtained for the benefit of the Company in providing investment advice to its other investment advisory accounts and for managing its own accounts. 11. This Agreement shall be effective on the date provided on Schedule A for each respective Fund, provided it has been approved by a vote of a majority of the outstanding voting securities held by shareholders of the respective Fund in accordance with the requirements of the 1940 Act. This Agreement shall continue in effect until the two-year anniversary of the date of its effectiveness, unless and until terminated by either party as hereinafter provided, and shall continue in force from year to year thereafter, but only as long as such continuance is specifically approved, at least annually, in the manner required by the 1940 Act. This Agreement shall automatically terminate in the event of its assignment, and may be terminated at any time without the payment of any penalty by a Fund or by the Adviser upon sixty (60) days' written notice to the other party. Each Fund may effect termination by action of the Board of Trustees or by vote of a majority of the outstanding voting securities of the Fund, accompanied by appropriate notice. This Agreement may be terminated, at any time, without the payment of any penalty, by the Board of Trustees of the Company, or by vote of a majority of the outstanding voting securities of the Company, in the event that it shall have been established by a court of competent jurisdiction that the Adviser, or any officer or director of the Adviser, has taken any action which results in a breach of the material covenants of the Adviser set forth herein. Termination of this Agreement shall not affect the right of the Adviser to receive payments on any unpaid balance of the compensation, described in Section 3, earned prior to such termination and for any additional period during which the Adviser serves as such for the Fund, subject to applicable law. The terms "assignment" and "vote of the majority of outstanding voting securities" shall have the same meanings set forth in the 1940 Act and the rules and regulations thereunder. 12. This Agreement may be amended or modified only by a written instrument executed by both parties. 13. If any provision of this Agreement shall be held or made invalid by a court decision, statute, rule, or otherwise, the remainder shall not be thereby affected. 14. Any notice under this Agreement shall be in writing, addressed and delivered or mailed, postage prepaid, to the other party at such address as such other party may designate for receipt of such notice. -5- 15. All parties hereto are expressly put on notice of the Company's Agreement and Declaration of Trust and all amendments thereto, a copy of which is on file with the Secretary of the Commonwealth of Massachusetts and the limitation of shareholder and trustee liability contained therein. This Agreement is executed on behalf of the Company by the Company's officers as officers and not individually and the obligations imposed upon the Company by this Agreement are not binding upon any of the Company's Trustees, officers or shareholders individually but are binding only upon the assets and property of the Company, and persons dealing with the Company must look solely to the assets of the Company and those assets belonging to the subject Company, for the enforcement of any claims. 16. This Agreement shall be construed in accordance with applicable federal law and (except as to Section 15 hereof which shall be construed in accordance with the laws of Massachusetts) the laws of the State of Illinois. -6- IN WITNESS WHEREOF, the Company and the Adviser have caused this Agreement to be executed on the day and year above written. FIRST TRUST EXCHANGE-TRADED ALPHADEX(TM) FUND By: /s/ James A. Bowen ------------------- Name: James A. Bowen Title: President ATTEST: /s/ Mark R. Bradley ------------------- Name: Mark R. Bradley Title: Chief Financial Officer FIRST TRUST ADVISORS L.P. By: /s/ James A. Bowen ------------------- Name: James A. Bowen Title: President ATTEST: /s/ Mark R. Bradley --------------------- Name: Mark R. Bradley Title: Chief Financial Officer SCHEDULE A FUNDS
ANNUAL RATE OF AVERAGE DAILY Index Series NET ASSETS EFFECTIVE DATE ____________ ______________ ______________ First Trust Consumer Discretionary AlphaDEX(TM) Fund 0.50% 04/26/2007 First Trust Consumer Staples AlphaDEX(TM) Fund 0.50% 04/26/2007 First Trust Energy AlphaDEX(TM) Fund 0.50% 04/26/2007 First Trust Financials AlphaDEX(TM) Fund 0.50% 04/26/2007 First Trust Health Care AlphaDEX(TM) Fund 0.50% 04/26/2007 First Trust Industrials AlphaDEX(TM) Fund 0.50% 04/26/2007 First Trust Materials AlphaDEX(TM) Fund 0.50% 04/26/2007 First Trust Technology AlphaDEX(TM) Fund 0.50% 04/26/2007 First Trust Utilities AlphaDEX(TM) Fund 0.50% 04/26/2007 First Trust Large Cap Core AlphaDEX(TM) Fund 0.50% 04/26/2007 First Trust Mid Cap Core AlphaDEX(TM) Fund 0.50% 04/26/2007 First Trust Small Cap Core AlphaDEX(TM) Fund 0.50% 04/26/2007 First Trust Large Cap Value Opportunities AlphaDEX(TM) Fund 0.50% 04/26/2007 First Trust Large Cap Growth Opportunities AlphaDEX(TM) Fund 0.50% 04/26/2007 First Trust Multi Cap Value AlphaDEX(TM) Fund 0.50% 04/26/2007 First Trust Multi Cap Growth AlphaDEX(TM) Fund 0.50% 04/26/2007
EX-99.D.2 4 exhibit_d2.txt EXPENSE REIMBURSEMENT, FEE WAIVER AND RECOVERY AGREEMENT THIS EXPENSE REIMBURSEMENT, FEE WAIVER AND RECOVERY AGREEMENT (this "Agreement") is entered into between First Trust Exchange-Traded AlphaDEX(TM) Fund, a Massachusetts business trust (the "Trust"), and First Trust Advisors L.P., an Illinois limited partnership ("FTA"), as of April 26th, 2007. RECITALS: A. WHEREAS, the Trust is an open-end management investment company registered under the Investment Company Act of 1940, as amended (the "1940 Act"), comprised of various exchange-traded funds (each, a "Fund," and, collectively, the "Funds") set forth on Exhibit A attached hereto, which may be amended from time to time. Each Fund constitutes a separate exchange-traded fund with its own investment objectives and policies. B. WHEREAS, FTA is the investment adviser to the Funds and is responsible for the selection and ongoing monitoring of the securities in the Funds' portfolios and certain other services necessary for the management of the Funds and is paid an annual management fee by the Funds. C. WHEREAS, FTA has contractually agreed to waive management fees and reimburse certain expenses to prevent a Fund's Expense Ratio from exceeding a particular Expense Cap (as such terms are hereinafter defined) for a term provided herein; provided, however, FTA has reserved the right to seek restitution of any fees waived and expenses reimbursed within three years to the extent that such restitution would not cause a Fund to exceed the current expense limitations. D. WHEREAS, FTA and the Trust desire to more fully describe and document the above-described fee waivers, expense reimbursements and recovery all in accordance with the terms and provisions hereinafter set forth. NOW, THEREFORE, IN CONSIDERATION of the foregoing facts and other good and valuable consideration, the parties hereto hereby agree as follows: Section 1. Definitions. The following terms shall have the following definitions in this Agreement: "Expense Ratio" is defined as a Fund's annual investment management fees and expenses (excluding taxes, interest, all brokerage commissions, other normal charges incident to the purchase and sale of portfolio securities, and extraordinary expenses) as a percentage of such Fund's daily net asset value. "Expense Cap" shall be equal to an Expense Ratio for the Funds as set forth on Exhibit A. Section 2. Waiver of Fees and Reimbursement of Expenses. On a Fund by Fund basis, FTA will waive investment management fees payable to it by a Fund and/or reimburse a Fund for other expenses borne by such Fund up to such Fund's respective Expense Cap set forth in Exhibit A for the term set forth in Exhibit A (the "Expense Cap Term"), subject to FTA's right to recover such fees and expenses set forth in Section 3. The aggregate amount of investment management fees waived and expenses reimbursed for a Fund from time to time under this Agreement for a particular Fund shall collectively be referred to as the "Reimbursed Amount." The Reimbursed Amount shall be accrued and paid on a monthly basis for each Fund but calculated and settled on an annual fiscal year basis. Section 3. Recovery. To the extent that the Expense Ratio of a particular Fund is less than such Fund's applicable Expense Cap, FTA may recover a portion of the Reimbursed Amount for such Fund equal to the amount of the Expense Cap less the actual Expense Ratio for such Fund (the "Recovered Amount") for up to three (3) years from the date the fee or expense was incurred during the Expense Cap Term (the "Recovery Period"). The Recovered Amount shall be accrued and paid on a monthly basis for each Fund but calculated and settled on an annual fiscal year basis. Under no circumstances, however, will FTA be eligible to recover any of the Reimbursed Amount if such recovery would cause the Expense Ratio for a particular Fund to exceed such Fund's Expense Cap for the most recent fiscal year period for which the Expense Cap was in place. Accordingly, if during the Recovery Period the Expense Cap is no longer in place, FTA may not recover any portion of the Reimbursed Amount if such recovery would cause the Fund's Expense Ratio to exceed the Fund's Expense Cap that was most recently in place. Notwithstanding anything to the contrary herein, the obligations set forth in this Section 3 shall survive any termination of this Agreement as contemplated in Section 5. Section 4. FTA's fund accounting department shall develop and maintain appropriate internal accounting policies and procedures to monitor and calculate the Reimbursed Amount and the Recovered Amount on a monthly basis for each Fund. Section 5. Term and Continuation. This Agreement shall be effective on the date provided on Exhibit A (the "Effective Date") for each respective Fund. This Agreement shall continue in effect for each respective Fund until the end of such Fund's Recovery Period unless the Agreement is continued for additional periods as agreed to by the parties. This Agreement may be terminated by the Trust on behalf of a Fund at any time and by FTA after the expiration of the Expense Cap Term of a particular Fund upon sixty (60) days' written notice to the other party. Notwithstanding the foregoing, this Agreement shall terminate immediately with respect to a Fund in the event that the investment advisory agreement between such Fund and FTA is either (i) terminated for any reason or (ii) not renewed by the Board of Trustees. Section 6. Notices. Any notice shall be sufficient when sent by registered or certified mail to the other party at the address of such party, set forth below such party's signature on this Agreement. Section 7. Entire Agreement; Amendments. This Agreement supersedes and abrogates all prior understandings, communications and agreements (whether written or oral) between the parties with respect to the subject matter hereof, and this Agreement constitutes the entire agreement between the parties with -2- respect to such subject matter. This Agreement may not be amended except by an instrument in writing signed by each of the parties hereto. No assignment by either party shall be of any force except with the prior written consent of the other party. Section 8. Governing Law; Miscellaneous. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Illinois (without regard to principles of law), including all matters of construction, validity, and performance; provided that nothing herein shall be construed in a manner inconsistent with the 1940 Act or any rule or regulation of the Securities and Exchange Commission. If any provision of this Agreement shall be held or made invalid by a court's decision, statute, rule or otherwise, the remainder of this Agreement shall not be affected thereby. The captions in this Agreement are included for convenience only and in no way define any of the provisions hereof or otherwise affect their construction or effect. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. FIRST TRUST ADVISORS L.P. FIRST TRUST EXCHANGE-TRADED ALPHADEX(TM) FUND By /s/ James A. Bowen By /s/ James A. Bowen ------------------------------ ------------------------------ James A. Bowen, President James A. Bowen, President Address: First Trust Advisors L.P. Address: First Trust Advisors L.P. 1001 Warrenville Road 1001 Warrenville Road Suite 300 Suite 300 Lisle, Illinois 60532 Lisle, Illinois 60532 Fax: (630) 322-7437 Fax: (630) 322-7437 Attention: W. Scott Jardine Attention: W. Scott Jardine -3- EXHIBIT A
EXPENSE CAP (OF AVERAGE NAME OF FUND NET ASSETS) EFFECTIVE DATE EXPENSE CAP TERM ______________ ___________ _______________ ________________ First Trust Consumer Discretionary 0.70% 04/26/2007 04/26/2007- AlphaDEX(TM) Fund 04/26/2009 First Trust Consumer Staples 0.70% 04/26/2007 04/26/2007- AlphaDEX(TM) Fund 04/26/2009 First Trust Energy AlphaDEX(TM) Fund 0.70% 04/26/2007 04/26/2007- 04/26/2009 First Trust Financials AlphaDEX(TM) Fund 0.70% 04/26/2007 04/26/2007- 04/26/2009 First Trust Health Care AlphaDEX(TM) Fund 0.70% 04/26/2007 04/26/2007- 04/26/2009 First Trust Industrials AlphaDEX(TM) Fund 0.70% 04/26/2007 04/26/2007- 04/26/2009 First Trust Materials AlphaDEX(TM) Fund 0.70% 04/26/2007 04/26/2007- 04/26/2009 First Trust Technology AlphaDEX(TM) Fund 0.70% 04/26/2007 04/26/2007- 04/26/2009 First Trust Utilities AlphaDEX(TM) Fund 0.70% 04/26/2007 04/26/2007- 04/26/2009 First Trust Large Cap Core AlphaDEX(TM) 0.70% 04/26/2007 04/26/2007- Fund 04/26/2009 First Trust Mid Cap Core AlphaDEX(TM) 0.70% 04/26/2007 04/26/2007- Fund 04/26/2009 First Trust Small Cap Core AlphaDEX(TM) 0.70% 04/26/2007 04/26/2007- Fund 04/26/2009 First Trust Large Cap Value 0.70% 04/26/2007 04/26/2007- Opportunities AlphaDEX(TM) Fund 04/26/2009 First Trust Large Cap Growth 0.70% 04/26/2007 04/26/2007- Opportunities AlphaDEX(TM) Fund 04/26/2009 First Trust Multi Cap Value AlphaDEX(TM) 0.70% 04/26/2007 04/26/2007- Fund 04/26/2009 First Trust Multi Cap Growth 0.70% 04/26/2007 04/26/2007- AlphaDEX(TM) Fund 04/26/2009
EX-99.E 5 exhibit_e.txt DISTRIBUTION AGREEMENT FIRST TRUST EXCHANGE-TRADED ALPHADEX(TM) FUND April 26, 2007 First Trust Portfolios L.P. 1001 Warrenville Road, Suite 300 Lisle, Illinois 60532 To Whom It May Concern: This is to confirm that, in consideration of the agreements hereinafter contained, the above-named investment company (the "Trust") has agreed that you shall be, during the term of this agreement, the distributor of shares of each Index Series of the Trust set forth on Exhibit A hereto, as such Exhibit may be revised from time to time (each, an "Index Series"). For purposes of this agreement the term "Shares" shall mean the authorized shares of the relevant Index Series. 1. SERVICES AS DISTRIBUTOR 1.1. You will act as an agent of the Trust for the distribution of Shares in Creation Units (as defined herein) covered by, and in accordance with, the registration statement and prospectus then in effect under the Securities Act of 1933, as amended (the "1933 Act"), and will transmit promptly any orders received by you for purchase or redemption of Shares in Creation Units to the transfer agent for the Trust as identified in the Trust's prospectus. You shall deliver or cause the delivery of a prospectus to persons purchasing Shares in Creation Units and shall maintain records of both orders placed with you and confirmations of acceptance furnished by you. You represent and warrant that you are a broker-dealer registered under the Securities Exchange Act of 1934 (the "1934 Act") and a member of the National Association of Securities Dealers, Inc. You agree to comply with all of the applicable terms and provisions of the 1934 Act. 1.2. You agree to use your best efforts to perform the services contemplated herein on a continuous basis. It is contemplated that you may enter into "Participant Agreements" with broker-dealers who agree to solicit orders for Shares. In addition, you may enter into sales or servicing agreements with securities dealers, financial institutions and other industry professionals, such as investment advisers, accountants and estate planning firms. In entering into sales or servicing agreements, you will act only on your own behalf as principal. 1.3. You shall act as distributor of Shares in Creation Units in compliance in all material respects with all applicable laws, rules and regulations, including, without limitations, all rules and regulations made or adopted pursuant to the Investment Company Act of 1940, as amended (the "1940 Act"), by the Securities and Exchange Commission or any securities association registered under the 1934 Act. 1.4. Whenever the parties hereto, in their collective judgment, mutually agree that such action is warranted by unusual market, economic or political conditions, or by abnormal circumstances of any kind deemed by them to render sales of a Trust's Shares in Creation Units not in the best interest of the Trust, the parties hereto may agree to decline to accept any orders for, or make any sales of, any Shares in Creation Units until such time as the parties deem it advisable to accept such orders and to make such sales. 1.5. The Trust agrees to pay all appropriate costs and expenses, including but not limited to, all expenses in connection with the registration of Shares under the 1933 Act and all expenses in connection with maintaining facilities for the issue and transfer of Shares in Creation Units and for supplying information, prices and other data to be furnished by the Trust hereunder, and all expenses in connection with the preparation and printing of the Trust's prospectuses and statements of additional information for regulatory purposes and for distribution to shareholders; provided, however, that the Trust shall not pay any of the costs of advertising or promotion for the sale of Shares, except as such payments may be made pursuant to Rule 12b-1 of the 1940 Act. 1.6. The Trust agrees to execute any and all documents and to furnish any and all information and otherwise to take all actions which may be reasonably necessary in the discretion of the Trust's officers in connection with the qualification of Shares for sale in Creation Units in such states as you may designate to the Trust and the Trust may approve, and the Trust agrees to pay all expenses which may be incurred in connection with such qualification. You shall pay all expenses connected with your own qualification as a dealer under state or Federal laws and, except as otherwise specifically provided in this agreement, all other expenses incurred by you in connection with the sale of Shares in Creation Units as contemplated in this agreement. 1.7. The Trust shall furnish you from time to time, for use in connection with the sale of Shares in Creation Units, such information with respect to the Trust or any relevant Index Series and the Shares as you may reasonably request, all of which shall be signed by one or more of the Trust's duly authorized officers; and the Trust warrants that the statements contained in any such information, when so signed by the Trust's officers, shall be true and correct. The Trust also shall furnish you upon request with: (a) semi-annual reports and annual audited reports of the Trust's books and accounts made by independent public accountants regularly retained by the Trust, (b) quarterly earnings statements prepared by the Trust, (c) a monthly itemized list of the securities in the Trust's or, if applicable, each Index Series' portfolio, (d) monthly balance sheets as soon as practicable after the end of each month, and (e) from time to time such additional information regarding the Trust's financial condition as you may reasonably request. -2- 1.8. The Trust represents to you that all registration statements and prospectuses filed by the Trust with the Securities and Exchange Commission under the 1933 Act and the 1940 Act, with respect to the Shares have been prepared in conformity with the requirements of said Acts and rules and regulations of the Securities and Exchange Commission thereunder. As used in this agreement the terms "registration statement" and "prospectus" shall mean any registration statement and prospectus, including the statement of additional information incorporated by reference therein, filed with the Securities and Exchange Commission and any amendments and supplements thereto which at any time shall have been filed with said Commission. The Trust represents and warrants to you that any registration statement and prospectus, when such registration statement becomes effective, will contain all statements required to be stated therein in conformity with said Acts and the rules and regulations of said Commission; that all statements of fact contained in any such registration statement and prospectus will be true and correct when such registration statement becomes effective; and that neither any registration statement nor any prospectus when such registration statement becomes effective will include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. The Trust may, but shall not be obligated to, propose from time to time such amendment or amendments to any registration statement and such supplement or supplements to any prospectus as it may deem necessary or advisable. If the Trust shall not propose such amendment or amendments and/or supplement or supplements within fifteen days after receipt by the Trust of a written request from you to do so, you may, at your option, terminate this agreement or decline to make offers of the Trust's securities until such amendments are made. The Trust will give you reasonable notice in advance of its filing of any amendment to any registration statement or supplement to any prospectus; provided, however, that nothing contained in this agreement shall in any way limit the Trust's right to file at any time such amendments to any registration statement and/or supplements to any prospectus, of whatever character, as the Trust may deem advisable, such right being in all respects absolute and unconditional. 1.9. The Trust authorizes you and any dealers with whom you have entered into Participant Agreements to use any prospectus in the form most recently furnished by the Trust in connection with the sale of Shares in Creation Units. The Trust agrees to indemnify, defend and hold you, your several officers and directors, and any person who controls you within the meaning of Section 15 of the 1933 Act, free and harmless from and against any and all claims, demands, liabilities and expenses (including the cost of investigating or defending such claims, demands or liabilities and any reasonable counsel fees incurred in connection therewith) which you, your officers and directors, or any such controlling persons, may incur under the 1933 Act, the 1940 Act or common law or otherwise, (a) arising out of or on the basis of any untrue statement, or alleged untrue statement, of a material fact required to be stated in either any registration statement or any prospectus or any statement of additional information, or (b) arising out of or based upon any omission, or alleged omission, to state a material fact required to be stated in any registration statement, any prospectus or any statement of additional information or necessary to make the statements in any of them not misleading, or (c) arising -3- out of breach of any obligation, representation or warranty pursuant to this Agreement by the Trust, or (d) the Trust's failure to comply with applicable securities laws, except that the Trust's agreement to indemnify you, your officers or directors, and any such controlling person will not be deemed to cover any such claim, demand, liability or expense to the extent that it arises out of or is based upon any such untrue statement, alleged untrue statement, omission or alleged omission made in any registration statement, any prospectus or any statement of additional information in reliance upon information furnished by you, your officers, directors or any such controlling person to the Trust or its representatives for use in the preparation thereof, and except that the Trust's agreement to indemnify you and the Trust's representations and warranties set out in paragraph 1.8 of this Agreement will not be deemed to cover any liability to the Trusts or their shareholders to which you would otherwise be subject by reason of willful misfeasance, bad faith or gross negligence in the performance of your duties, or by reason of your reckless disregard of your obligations and duties under this Agreement ("Disqualifying Conduct"). The Trust's agreement to indemnify you, your officers and directors, and any such controlling person, as aforesaid, is expressly conditioned upon the Trust's being notified of any action brought against you, your officers or directors, or any such controlling person, such notification to be given by letter, by facsimile or by telegram addressed to the Trust at its address set forth above within a reasonable period of time after the summons or other first legal process shall have been served. The failure so to notify the Trust of any such action shall not relieve the Trust from any liability which the Trust may have to the person against whom such action is brought by reason of any such untrue, or alleged untrue, statement or omission, or alleged omission, otherwise than on account of the Trust's indemnity agreement contained in this paragraph 1.9. The Trust will be entitled to assume the defense of any suit brought to enforce any such claim, demand or liability, but, in such case, such defense shall be conducted by counsel of good standing chosen by the Trust and approved by you. In the event the Trust elects to assume the defense of any such suit and retain counsel of good standing approved by you, the defendant or defendants in such suit shall bear the fees and expenses of any additional counsel retained by any of them; but in case the Trust does not elect to assume the defense of any such suit, the Trust will reimburse you, your officers and directors, or the controlling person or persons named as defendant or defendants in such suit, for the reasonable fees and expenses of any counsel retained by you or them. The Trust's indemnification agreement contained in this paragraph 1.9 and the Trust's representations and warranties in this Agreement shall remain operative and in full force and effect regardless of any investigation made by or on behalf of you, your officers and directors, or any controlling person, and shall survive the delivery of any Shares. This agreement of indemnity will inure exclusively to your benefit, to the benefit of your several officers and directors, and their respective estates, and to the benefit of any controlling persons or other affiliates, and their successors. The Trust agrees promptly to notify you of the commencement of any litigation or proceedings against the Trust or any of its officers or Board members in connection with the issue and sale of Shares. 1.10. You agree to indemnify, defend and hold the Trust, its several officers and Board members, and any person who controls the Trust within the meaning of Section 15 of the 1933 Act, free and harmless from and against any and all claims, demands, liabilities and expenses (including the cost of investigating or defending such claims, demands or liabilities and any counsel fees incurred in connection therewith) which the Trust, its officers or Board members, or any such controlling person, may incur under the 1933 Act, the 1940 Act, or under common law or otherwise, but only to the extent that such liability or expense incurred by the Trust, its officers or Board members, or -4- such controlling person resulting from such claims or demands, (a) shall arise out of or be based upon any information, statements or representations made or provided by you in any sales literature or advertisements, or any Disqualifying Conduct by you in connection with the offering and sale of any Shares, (b) shall arise out of or be based upon any untrue, or alleged untrue, statement of a material fact contained in information furnished in writing by you to the Trust specifically for use in the Trust's registration statement and used in the answers to any of the items of the registration statement or in the corresponding statements made in the prospectus or statement of additional information, or shall arise out of or be based upon any omission, or alleged omission, to state a material fact in connection with such information furnished in writing by you to the Trust and required to be stated in such answers or necessary to make such information not misleading, (c) arising out of your breach of any obligation, representation or warranty pursuant to this Agreement, or (d) your failure to comply with applicable securities laws. Your agreement to indemnify the Trust, its officers and Board members, and any such controlling person, as aforesaid, is expressly conditioned upon your being notified of any action brought against the Trust, its officers or Board members, or any such controlling person, such notification to be given by letter, by facsimile or by telegram addressed to you at your address set forth above within a reasonable period of time after the summons or other first legal process shall have been served. The failure so to notify you of any such action shall not relieve you from any liability which you may have to the Trust, its officers or Board members, or to such controlling person by reason of any such untrue, or alleged untrue, statement or omission, or alleged omission, otherwise than on account of your indemnity agreement contained in this paragraph. You will be entitled to assume the defense of such action, but, in such case, such defense shall be conducted by counsel of good standing chosen by you and approved by an executive officer of the Trust, if such action is based solely upon such alleged misstatement or omission on your part, and in any other event Trust, its officers or Board members, or such controlling person shall each have the right to participate in the defense or preparation of the defense of any such action. This agreement of indemnity will inure exclusively to the Trust's benefit, to the benefit of the Trust's officers and Board members, and their respective estates, and to the benefit of any controlling persons and their successors. You agree promptly to notify the Trust of the commencement of any litigation or proceedings against you or any of your officers or directors in connection with the issue and sale of Shares. 1.11. No Shares shall be offered by either you or the Trust under any of the provisions of this agreement and no orders for the purchase or sale of such Shares hereunder shall be accepted by the Trust if and so long as the effectiveness of the registration statement then in effect or any necessary amendments thereto shall be suspended under any of the provisions of the 1933 Act or if and so long as a current prospectus as required by Section 10 of said 1933 Act is not on file with the Securities and Exchange Commission; provided, however, that nothing contained in this paragraph 1.11 shall in any way restrict or have any application to or bearing upon the Trust's obligation to redeem or repurchase any Shares from any shareholder in accordance with the provisions of the Trust's prospectus or charter documents. 1.12. The Trust agrees to advise you immediately in writing of the occurrence of any of the following events, as soon as any such event comes to the attention of the Trust: (a) any request by the Securities and Exchange Commission for amendments to the registration statement or prospectus then in effect or for additional information; -5- (b) the event of the issuance by the Securities and Exchange Commission of any stop order suspending the effectiveness of the registration statement or prospectus then in effect or the initiation of any proceeding for that purpose; (c) the happening of any event which makes untrue any statement of a material fact made in the registration statement or prospectus then in effect or which requires the making of a change in such registration statement or prospectus in order to make the statements therein not misleading; and (d) all actions of the Securities and Exchange Commission with respect to any amendments to any registration statement or prospectus which may from time to time be filed with the Securities and Exchange Commission. 2. OFFERING CREATION UNITS Shares in Creation Units of each Index Series will be offered for sale by you at a price per Creation Unit in the manner set forth in the then-current prospectus, based on a net asset value determined in accordance with the Trust's prospectus and charter documents. Any payments to dealers shall be governed by a separate agreement between you and such dealer and the Trust's then-current prospectus. You will accept as compensation for the performance of your obligations hereunder such compensation, if any, as may be provided for in any plan of distribution adopted by the Trust with respect to the Trust or any Index Series pursuant to Rule 12b-1 under the 1940 Act. 3. TERM This Agreement shall become effective with respect to each Index Series of the Trust as of the date set forth in Exhibit A attached hereto and will continue for an initial two-year term from the date of effectiveness and is renewable annually thereafter so long as such continuance is specifically approved (a) by the Trust's Board on behalf of each Index Series or (b) by a vote of a majority (as defined in the 1940 Act) of the Shares of the Trust or the relevant Index Series, as the case may be, provided that in either event its continuance also is approved by a majority of the Board members who are not "interested persons" (as defined in the 1940 Act) of any party to this Agreement, by vote cast in person at a meeting called for the purpose of voting on such approval. This agreement may be terminated in respect of an Index Series at any time, without the payment of any penalty, (i) by vote of a majority of the Trustees who are not interested persons of the Trust (as defined under the 1940 Act) or (ii) by vote of a majority (as defined under the 1940 Act) of the outstanding voting securities of the relevant Index Series, on at least 60 days' written notice to you. This agreement may also be terminated at any time by you, without the payment of any penalty, upon 60 days' notice by you and will terminate automatically in the event of its assignment (as defined under the 1940 Act). -6- 4. MISCELLANEOUS 4.1. The Trust recognizes that your directors, officers and employees may from time to time serve as directors, trustees, officers and employees of corporations and business trusts (including other investment companies), and that you or your affiliates may enter into distribution or other agreements with such other corporations and trusts. 4.2. No provision of this Agreement may be changed, waived, discharged or terminated orally, but only by an instrument in writing signed by the party against which an enforcement of the change, waiver, discharge or termination is sought. 4.3. This Agreement shall be governed by the laws of the State of New York, without regard to principles of conflicts of laws. 4.4. If any provision of this Agreement shall be held or made invalid by a court decision, statute, rule, or otherwise, the remainder of this Agreement shall not be affected thereby. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors. Please confirm that the foregoing is in accordance with your understanding and indicate your acceptance hereof by signing below, whereupon it shall become a binding agreement between us. Very truly yours, FIRST TRUST EXCHANGE-TRADED ALPHADEX(TM) FUND By ____________________________________________ ACCEPTED: FIRST TRUST PORTFOLIOS L.P. By __________________________________________ -7- EXHIBIT A INDEX SERIES OF THE FUND
INDEX SERIES EFFECTIVE DATE ____________ ______________ First Trust Consumer Discretionary AlphaDEX(TM) Fund 04/26/2007 First Trust Consumer Staples AlphaDEX(TM) Fund 04/26/2007 First Trust Energy AlphaDEX(TM) Fund 04/26/2007 First Trust Financials AlphaDEX(TM) Fund 04/26/2007 First Trust Health Care AlphaDEX(TM) Fund 04/26/2007 First Trust Industrials AlphaDEX(TM) Fund 04/26/2007 First Trust Materials AlphaDEX(TM) Fund 04/26/2007 First Trust Technology AlphaDEX(TM) Fund 04/26/2007 First Trust Utilities AlphaDEX(TM) Fund 04/26/2007 First Trust Large Cap Core AlphaDEX(TM) Fund 04/26/2007 First Trust Mid Cap Core AlphaDEX(TM) Fund 04/26/2007 First Trust Small Cap Core AlphaDEX(TM) Fund 04/26/2007 First Trust Large Cap Value Opportunities AlphaDEX(TM) Fund 04/26/2007 First Trust Large Cap Growth Opportunities AlphaDEX(TM) Fund 04/26/2007 First Trust Multi Cap Value AlphaDEX(TM) Fund 04/26/2007 First Trust Multi Cap Growth AlphaDEX(TM) Fund 04/26/2007
EX-99.H.3 6 exhibit_h3.txt FORM OF SUBSCRIPTION AGREEMENT This Subscription Agreement (the "Agreement") made this _______________ by and between First Trust Technology AlphaDEX(TM) Fund , a Massachusetts business trust (the "Fund"), and First Trust Portfolios, L.P., an Illinois limited partnership (the "Subscriber"); WITNESSETH: WHEREAS, the Fund has been formed for the purposes of carrying on business as an open-end management investment company; and WHEREAS, the Subscriber wishes to subscribe for and purchase, and the Fund wishes to sell to the Subscriber, ________ common shares for a purchase price of $_____ per share; NOW THEREFORE, IT IS AGREED: l. The Subscriber subscribes for and agrees to purchase from the Fund ________ common shares for a purchase price of $_____ per share. Subscriber agrees to make payment for these shares at such time as demand for payment may be made by an officer of the Fund. 2. The Fund agrees to issue and sell said shares to Subscriber promptly upon its receipt of the purchase price. 3. To induce the Fund to accept its subscription and issue the shares subscribed for, the Subscriber represents that it is informed as follows: (a) That the shares being subscribed for have not been and will not be registered under the Securities Act of l933 ("Securities Act"); (b) That the shares will be sold by the Fund in reliance on an exemption from the registration requirements of the Securities Act; (c) That the Fund's reliance upon an exemption from the registration requirements of the Securities Act is predicated in part on the representations and agreements contained in this Agreement; (d) That when issued, the shares will be "restricted securities" as defined in paragraph (a)(3) of Rule l44 of the General Rules and Regulations under the Securities Act ("Rule l44") and cannot be sold or transferred by Subscriber unless they are subsequently registered under the Securities Act or unless an exemption from such registration is available; and (e) That there do not appear to be any exemptions from the registration provisions of the Securities Act available to the Subscriber for resale of the shares. In the future, certain exemptions may possibly become available, including an exemption for limited sales including an exemption for limited sales in accordance with the conditions of Rule l44. The Subscriber understands that a primary purpose of the information acknowledged in subparagraphs (a) through (e) above is to put it on notice as to restrictions on the transferability of the shares. 4. To further induce the Fund to accept its subscription and issue the shares subscribed for, the Subscriber: (a) Represents and warrants that the shares subscribed for are being and will be acquired for investment for its own account and not on behalf of any other person or persons and not with a view to, or for sale in connection with, any public distribution thereof; and (b) Agrees that any certificates representing the shares subscribed for may bear a legend substantially in the following form: The shares represented by this certificate have been acquired for investment and have not been registered under the Securities Act of l933 or any other federal or state securities law. These shares may not be offered for sale, sold or otherwise transferred unless registered under said securities laws or unless some exemption from registration is available. 5. This Subscription Agreement and all of its provisions shall be binding upon the legal representatives, heirs, successors and assigns of the parties hereto. 6. The Fund's Declaration of Trust is on file with the Secretary of the Commonwealth of Massachusetts. This Agreement is executed on behalf of the Fund by the Fund's officers as officers and not individually and the obligations imposed upon the Fund by this Agreement are not binding upon any of the Fund's Trustees, officers or shareholders individually but are binding only upon the assets and property of the Fund. -2- IN WITNESS WHEREOF, this Subscription Agreement has been executed by the parties hereto as of the day and date first above written. FIRST TRUST TECHNOLOGY ALPHADEX(TM) FUND, A SERIES OF THE FIRST TRUST EXCHANGE-TRADED ALPHADEX(TM) FUND By /s/ James A. Bowen -------------------- Name: James A. Bowen Title: President FIRST TRUST PORTFOLIOS, L.P. By /s/ James A. Bowen -------------------- Name: James A. Bowen Title: President EX-99.H.4 7 exhibit_h4.txt PARTICIPANT AGREEMENT FIRST TRUST EXCHANGE-TRADED FUND, FIRST TRUST EXCHANGE-TRADED FUND II AND FIRST TRUST EXCHANGE-TRADED ALPHADEX (TM) FUND This Participant Agreement (this "Agreement") is entered into between First Trust Portfolios, L.P. (the "Distributor"), ______________________________ (the "Participant") and The Bank of New York (the "Transfer Agent"). The Transfer Agent serves as the Transfer Agent of the First Trust Exchange-Traded Fund, First Trust Exchange-Traded Fund II and First Trust Exchange-Traded AlphaDEX(TM) Fund (each, a "Trust" and, collectively, the "Trusts") and is an Index Receipt Agent as that term is defined in the rules of the National Securities Clearing Corporation ("NSCC"). The Distributor has been retained to provide certain services with respect to acting as principal underwriter of each Trust in connection with the sale and distribution of shares of beneficial interest, par value $0.01 per share ("Shares"), of the Series of each Trust (each a "Fund") on Schedule I attached hereto and incorporated herein, as the same may be amended from time to time. Certain Funds (each, an "International Fund") may include securities of issuers that are domiciled outside the United States and listed on the foreign equivalent of a U.S. national securities exchange (a "U.S. exchange"). The Distributor, the Transfer Agent and the Participant acknowledge and agree that each Trust and Fund shall be a third-party beneficiary of this Agreement and shall receive the benefits contemplated by this Agreement to the extent specified herein. The prospectus and statement of additional information for each Fund (collectively, the "Prospectus") are incorporated herein and included as part of the respective Trust's Registration Statement as amended on Form N-1A. Shares may be created or redeemed only in aggregations of 50,000 (or such other aggregation as is specified in the relevant Fund's Prospectus), referred to therein and herein as a "Creation Unit." Capitalized terms not otherwise defined herein are used herein as defined in the relevant Fund's Prospectus. All references to "cash" shall refer to U.S. dollars. This Agreement is intended to set forth certain premises and the procedures by which the Participant may create and/or redeem Creation Units (i) through the Continuous Net Settlement ("CNS") clearing processes of NSCC as such processes have been enhanced to effect creations and redemptions of Creation Units, such processes being referred to herein as the "Trusts' Clearing Process," or (ii) outside the Trusts' Clearing Process (e.g., through the facilities of the Depository Trust Company ("DTC")). This Agreement supersedes any prior Participant Agreement entered into by the parties with respect to the Trusts and any Fund from and after the date hereof. Any and all prior Participant Agreements entered into by the parties are deemed terminated upon execution of this Agreement. The parties hereto in consideration of the premises and of the agreements contained herein agree as follows: SECTION 1. STATUS OF PARTICIPANT. The Participant hereby represents, covenants and warrants that (i) with respect to orders for the creation or redemption of Creation Units by means of the Trusts' Clearing Process, it is a member of NSCC and a participant in the CNS System of NSCC (as defined in the Prospectus, a "Participating Party"); and (ii) with respect to orders for the creation or redemption of Creation Units outside the Trusts' Clearing Process, it is a DTC Participant (as defined in the Prospectus, a "DTC Participant"). The Participant may place orders for the creation or redemption of Creation Units (a "Creation Order" and "Redemption Order," respectively) either through the Trusts' Clearing Process or outside the Trusts' Clearing Process, subject to the procedures for creation and redemption referred to in Section 2 of this Agreement ("Execution of Orders") and the procedures described in Attachment A attached hereto and incorporated herein and made a part hereof, as the same may be amended from time to time ("Attachment A"). Any change in the foregoing status of the Participant shall terminate this Agreement, and the Participant shall give immediate notice to the Distributor and the Transfer Agent of such change. The Participant further represents that it is a broker-dealer registered with the Securities and Exchange Commission and a member of the National Association of Securities Dealers, Inc. (the "NASD") or is exempt from or otherwise not required to be licensed as a broker-dealer or a member of the NASD. The Participant is qualified as a broker or dealer, or otherwise, under all applicable state laws where it is required to do so in order that Shares may be sold in such states where the Participant intends to sell such Shares. The Participant agrees to conform to the rules of the NASD (if it is a member of NASD) and the securities laws of any jurisdiction in which it sells, directly or indirectly, Shares, to the extent such laws, rules and regulations relate to the Participant's transactions in, and activities with respect to, the Shares. The Participant understands and acknowledges that the proposed method by which Creation Units of Shares will be purchased and traded may raise certain issues under applicable securities laws. For example, because new Creation Units of Shares may be issued and sold by the Trusts and their respective Funds on an ongoing basis, the offer and sale of Shares to investors may involve a "distribution," as such term is used in the Securities Act of 1933 (the "Securities Act"). The Participant understands and acknowledges that its offer and sale of Shares to investors, depending on the circumstances, may result in its being deemed a participant in a distribution in a manner which could render it a statutory underwriter and subject it to the prospectus delivery and liability provisions of the Securities Act. The Participant also understands and acknowledges that dealers who are not "underwriters" but are effecting transactions in Shares, whether or not participating in the distribution of Shares, may be required to deliver a prospectus. SECTION 2. EXECUTION OF ORDERS. All orders for the creation or redemption of Creation Units shall be handled in accordance with the terms of the respective Fund's Prospectus, and the procedures described in Attachment A to this Agreement. In the event the procedures include the use of recorded telephone lines, the Participant hereby -2- consents to such use. Each Trust reserves the right to issue additional or other procedures relating to the manner of creating or redeeming Creation Units (and the procedures for the Trusts may, but need not be, identical), and the Participant, the Distributor and the Transfer Agent agree to comply with such procedures as may be issued from time to time, upon reasonable notice thereof. The Participant understands and agrees that Creations Orders and Redemption Orders may be submitted only on days that the U.S. exchange where the Shares are principally listed (as specified in the Prospectus) is open for trading or business. SECTION 3. NSCC. Solely with respect to orders for the creation or redemption of Creation Units through the Trusts' Clearing Process, the Participant as a Participating Party hereby authorizes the Distributor or the Transfer Agent, as the case may be, to transmit to NSCC on behalf of the Participant such instructions, including share and cash amounts as are necessary with respect to the creation and redemption of Creation Units consistent with the instructions issued by the Participant to the Trust telephone representative identified in Attachment A hereto (the "Trust Telephone Representative"). The Participant agrees to be bound by the terms of such instructions issued by the Distributor or the Transfer Agent, as the case may be, and reported to NSCC as though such instructions were issued by the Participant directly to NSCC. With respect to any Redemption Order, the Participant also acknowledges and agrees to use its best efforts to return to the applicable Fund any dividend, distribution or other corporate action paid to it or to the party for which it is acting in respect of any Deposit Securities that are transferred to the Participant or any party for which it is acting that, based on the valuation of such Deposit Securities at the time of transfer, should have been paid to the Fund. With respect to any Redemption Order, the Participant also acknowledges and agrees that the applicable Fund is entitled to reduce the amount of money or other proceeds due to the Participant or any party for which it is acting that, based on the valuation of such Deposit Securities at the time of transfer, should be paid to the Fund. With respect to any Creation Order, the Distributor shall cause the applicable Fund's Custodian to return to the Participant or any party for which it is acting any dividend, distribution or other corporate action paid to the Fund in respect of any Deposit Securities that are transferred to a Fund that, based on the valuation of such Deposit Securities at the time of transfer, should have been paid to the Participant or any party for which it is acting. SECTION 4. DEPOSIT SECURITIES. The Participant understands that the number and names of the designated portfolio of securities (each, a "Deposit Security" and, collectively, the "Deposit Securities") and relevant cash amounts (the "Cash Component") to be deposited in connection with the purchase of a Creation Unit (the current "Fund Deposit") for each Fund will be made available each day that the New York Stock Exchange (the "NYSE") is open for trading through the facilities of the NSCC. The Participant will not be responsible for errors in the information relating -3- to the Deposit Securities to be included in the current Fund Deposit to be transmitted through the facilities of the NSCC in connection with Redemption Orders and Creation Orders that are caused by the applicable Trust or Fund, the Distributor or the Transfer Agent. Under certain circumstances, a Trust may, in its discretion, permit or require, with respect to one or more Funds a Participant to substitute cash in lieu of depositing some or all of the requisite Deposit Securities. A Trust may additionally permit, in its discretion, with respect to one or more International Funds under certain circumstances, a Participant to substitute a different security in lieu of depositing some or all of the Deposit Securities. Substitution of cash or a different security might be permitted or required, for example, because one or more Deposit Securities may be unavailable, may not be available in the quantity needed, or may not be eligible for trading by the Participant (or any party on whose behalf the Participant is acting) due to local trading restrictions (including, for example, requirements that securities be traded only for cash in local currency) or other circumstances. SECTION 5. ROLE OF PARTICIPANT. The Participant shall have no authority in any transaction to act as agent of the Distributor, the Transfer Agent, any Trust or any Fund. (a) The Participant agrees (i) subject to any privacy obligations or other obligations arising under the federal or state securities laws it may have to it customers, to assist the Distributor in ascertaining certain information regarding sales of Shares made by or through Participant upon the request of a Trust or Fund or the Distributor necessary for the applicable Trust or Fund to comply with its obligation to distribute information to its shareholders as may be required from time to time under applicable state or federal securities laws, or (ii) in lieu thereof, and at the option of the Participant, the Participant may undertake to deliver Prospectuses, as may be amended or supplemented from time to time, proxy material, annual and other reports of a Fund or other similar information that the applicable Trust or Fund is obligated to deliver to its shareholders to the Participant's customers that custody Fund Shares with the Participant, after receipt from the applicable Trust or Fund or the Distributor of sufficient quantities to allow mailing thereof to such customers. The expenses associated with such transmissions shall be borne by the Distributor or the applicable Trust or Fund in accordance with usual custom and practice in respect of such communications. None of the Distributor, the applicable Trust or Fund or any of their respective affiliates shall use the names and addresses and other information concerning Participant's customers for any purpose except in connection with the performance of their duties and responsibilities hereunder and except for servicing and informational mailings described in this clause (a) of Section 5, or as may otherwise be required by applicable law. (b) The Participant certifies that it has policies, procedures and internal controls in place that are reasonably designed to comply with all applicable anti-money laundering laws and regulations, including applicable provisions of the USA Patriot Act of 2001 and the regulations administered by the U.S. Department of the Treasury's Office of Foreign Assets Control as the same may in effect from time to time. -4- SECTION 6. PARTICIPANT REPRESENTATIONS. (a) The Participant represents, warrants and agrees that it will not make any representations concerning any Fund, the applicable Trust, the Creation Units or the Shares other than those consistent with the Fund's then current Prospectus or any promotional or sales literature furnished to the Participant by the Distributor or the applicable Trust or Fund, or any such materials permitted by clause (b) of this Section 6. (b) The Participant agrees not to furnish or cause to be furnished by Participant or its employees to any person or to display or publish any information or materials relating to a Trust or any Fund (including, without limitation, promotional materials and sales literature, advertisements, press releases, announcements, statements, posters, signs or other similar materials, but not including any materials prepared and used for Participant's internal use only, any brokerage communications between employees of Participant and customers or any communications prepared and directed to registered broker-dealers) ("Marketing Materials"), except (i) such Marketing Materials as may be furnished to the Participant by the Distributor or the applicable Trust or Fund and (ii) such other Marketing Materials as are consistent with the applicable Fund's then current Prospectus or otherwise approved by the Distributor or the Trust; provided that such Marketing Materials clearly indicate that such Marketing Materials are prepared and distributed by Participant and, upon request, a copy is forwarded to the Distributor as soon as practicable. (c) Notwithstanding anything to the contrary in this Agreement, Participant and its affiliates may prepare and circulate in the regular course of their businesses (i) research reports that include information, opinions or recommendations relating to Shares; and (ii) without reference to a Fund or its Prospectus, data and information relating to the various indices to which the Funds are benchmarked. SECTION 7. SUBCUSTODIAN ACCOUNTS. The Participant understands and agrees that in the case of an International Fund, the relevant Trust has caused The Bank of New York acting in its capacity as the Trust's custodian ("Custodian") to maintain with one or more applicable subcustodians (each, a "Subcustodian") for such International Fund an account in the relevant foreign jurisdiction(s) to which the Participant shall deliver or cause to be delivered in connection with the purchase of a Creation Unit the securities and any other cash amounts (or the cash value of all or a part of such securities, in the case of a permitted or required cash purchase or "cash in lieu" amount) on behalf of itself or any party for which it is acting (whether or not a customer), with any appropriate adjustments as advised by the Trust or such International Fund, in accordance with the terms and conditions applicable to such account in such foreign jurisdiction. SECTION 8. TITLE TO SECURITIES: RESTRICTED SHARES. The Participant represents that upon delivery of a portfolio of Deposit Securities to a Fund's custodian, the Fund will acquire good and unencumbered -5- title to such securities, free and clear of all liens, restrictions, charges and encumbrances and not subject to any adverse claims, including, without limitation, any special restriction upon the sale or transfer of such securities imposed by (i) any agreement or arrangement entered into by the Participant or any party for which it is acting in connection with a Creation Order or (ii) any provision of the Securities Act, and any regulations thereunder (except that portfolio securities of issuers other than U.S. issuers shall not be required to have been registered under the Securities Act if exempt from such registration), or of the applicable laws or regulations of any other applicable jurisdiction. SECTION 9. FEES. In connection with the creation or redemption of Creation Units, the Transfer Agent shall charge, and the Participant agrees to pay to the Transfer Agent, (i) the Creation Transaction Fee or Redemption Transaction Fee (each also sometimes referred to individually herein as the "Transaction Fee") prescribed in the relevant Fund's Prospectus applicable to creations or redemptions through the Trusts' Clearing Process, or (ii) the applicable Creation Transaction Fee or Redemption Transaction Fee plus, in each case, such additional variable amounts as may be prescribed in the relevant Fund's Prospectus for (a) creations or redemptions outside the Trusts' Clearing Process and (b) creations through the Trusts' Clearing Process where the cash equivalent value of one or more Deposit Securities is being deposited in lieu of the inclusion of such Deposit Securities in the securities portion of the Fund Deposit. The Transaction Fee may be waived or otherwise adjusted from time to time subject to the provisions relating thereto and any limitations as prescribed in the relevant Fund's Prospectus. With respect to International Funds (for which creations and redemptions are processed outside the Trusts' Clearing Process), such additional variable amounts may include any expenses incurred by a Fund in the transfer of Deposit Securities to the Fund in connection with a creation of Creation Units, and in the transfer of Deposit Securities to the Participant in connection with a redemption of Creation Units; such expenses may include operational processing and brokerage costs, transfer fees, stamp taxes and the like. When an International Fund permits a Participant to substitute cash or a different security in lieu of depositing one or more of the requisite Deposit Securities, the Participant may be assessed a higher Transaction Fee on the substitute security portion of its investment 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. SECTION 10. AUTHORIZED PERSONS. Concurrently with the execution of this Agreement and from time to time thereafter, the Participant shall deliver to the Distributor and the Transfer Agent, duly certified as appropriate by its secretary or other duly authorized person, a certificate setting forth the names and signatures of all persons authorized to give instructions relating to activity contemplated hereby or any other notice, request or instruction on behalf of the Participant (each, an "Authorized Person"). Such certificate may be accepted and relied upon by the Distributor and the Transfer Agent as conclusive evidence of the facts set forth therein and shall be considered to be in full force and effect until delivery to -6- the Distributor and the Transfer Agent of a superseding certificate bearing a subsequent date. The Transfer Agent shall issue to each Authorized Person a unique personal identification number ("PIN Number") by which such Authorized Person and the Participant shall be identified and instructions issued by the Participant hereunder shall be authenticated. Upon the termination or revocation of authority of such Authorized Person by the Participant, the Participant shall give prompt written notice of such fact to the Distributor and the Transfer Agent and such notice shall be effective upon receipt by both the Distributor and the Transfer Agent. SECTION 11. REDEMPTION. The Participant represents and warrants that it will not obtain a Submission Number (as defined in Attachment A) from the Transfer Agent for the purpose of redeeming a Creation Unit unless it first ascertains that (a) it or its customer, as the case may be, owns outright or has full legal authority and legal beneficial right to tender for redemption the requisite number of Shares of any Fund to be redeemed, and the entire proceeds of the redemption, (b) the delivery of such Shares to the Transfer Agent in accordance with the Prospectus or as otherwise required by the Trust or Fund would not be precluded as the result of their being subject to or the subject of a loan, repurchase agreement, securities lending agreement or other arrangement and (c) upon delivery to the Fund's custodian, the Shares will be free and clear of all liens. A Trust may make redemptions in cash in lieu of transferring one or more Deposit Securities if the Trust or Fund determines, in its discretion, that such method is warranted because a Participant who has placed the Redemption Order is restrained by regulation or policy from transacting in the Deposit Securities, delivery of the Deposit Securities is not permissible under applicable law or foreign stock exchange regulations, or for other reasons. In connection with an International Fund, a Participant must maintain appropriate securities broker-dealer, bank or other custody arrangements to which account Deposit Securities will be delivered in connection with a redemption. If a redeeming Participant, or any party on whose behalf the Participant is acting, does not have appropriate arrangements to take delivery of the Deposit Securities in the relevant foreign jurisdiction(s) and it is not possible to make other such arrangements, or if it is not possible to effect deliveries of the Deposit Securities in such foreign jurisdiction(s) and in certain other circumstances, the Trust or Fund may in its discretion redeem Shares for cash, and the redeeming Participant, on behalf of itself or any part for which it is acting, will be required to receive redemption proceeds in cash. In such case, the Participant will receive a cash payment equal to the net asset value (next determined after receipt of the Redemption Order) times the number of Shares in a Creation Unit of the relevant International Fund, minus the Transaction Fee and other costs specified in Section 9. In the case of a beneficial owner of an International Fund who is a resident of Australia or New Zealand, the Participant understands and agrees that such beneficial owner is only entitled to receive cash upon its redemption of Creation Units. In a Redemption Order, the Participant will be required to confirm that an in-kind redemption request has not been submitted on behalf of a beneficial owner who is an Australian or New Zealand resident. -7- SECTION 12. FUND'S TAX BASIS. The Participant represents and warrants to the Distributor and each Trust and Fund that with respect to any Creation Units it shall only deliver or transfer, or cause to be delivered or transferred, Deposit Securities (or contracts therefor) that, should Section 351 of the Internal Revenue Code of 1986, as amended, apply to such delivery or transfer, will have a tax basis in the hands of the Fund receiving the Deposit Securities equal to the closing market price of such Deposit Securities on the date the Creation Order with respect thereto is Deemed Received (as such term is defined in Attachment A hereto). Such representation and warranty shall be deemed repeated with respect to each Creation Order. SECTION 13. INDEMNIFICATION. (a) The Participant hereby agrees to indemnify and hold harmless the Distributor in its capacity as principal underwriter, each Trust, each Fund, the Transfer Agent, their respective affiliates, directors, officers, employees and agents, and each person, if any, who controls such persons within the meaning of Section 15 of the Securities Act (each, for purposes of this paragraph, an "Indemnified Party") from and against any loss, liability, cost and expense (including reasonable attorneys' fees) incurred by such Indemnified Party as a result of (i) any breach by the Participant of any provision of this Agreement that relates to the Participant; (ii) any failure on the part of the Participant to perform any of its obligations set forth in this Agreement; (iii) any failure by the Participant to comply with applicable laws, including rules and regulations of self-regulatory organizations in relation to the sales, trading or marketing of Shares and the creation or redemption of or investment in a Fund or Funds, except that the Participant shall not be required to indemnify an Indemnified Party to the extent that such failure was caused by Participant's adherence to instructions given or representations made by the Distributor, the Transfer Agent or any Indemnified Party, as applicable; or (iv) actions of such Indemnified Party in reliance upon any instructions issued or representations made in accordance with Attachment A (as it may be amended from time to time) reasonably believed by the Distributor or the Transfer Agent, as applicable, to be genuine and to have been given by the Participant except to the extent that the Participant had previously revoked a PIN Number used in giving such instructions or representations (where applicable) and such revocation was given by the Participant and received by the Distributor and the Transfer Agent in accordance with the terms of Section 10 hereto. The Participant and the Distributor understand and agree that each Trust and Fund as a third party beneficiary of this Agreement is entitled and intends to proceed directly against the Participant in the event that the Participant fails to honor any of its obligations pursuant to this Agreement that benefit each such Trust and Fund. (b) The Distributor hereby agrees to indemnify and hold harmless the Participant, its respective subsidiaries, affiliates, directors, officers, employees and agents, and each person, if any, who controls such persons within the meaning of Section 15 of the Securities Act (each, for purposes of this paragraph, an "Indemnified Party") from and against any loss, liability, cost and expense (including reasonable attorneys' fees) incurred by such Indemnified Party as a result of (i) any breach by the Distributor of any provision of this Agreement that relates to the Distributor; (ii) any failure on the part of the -8- Distributor to perform any of its obligations set forth in this Agreement; (iii) any failure by the Distributor to comply with applicable laws, including rules and regulations of self-regulatory organizations in relation to its role as Distributor of the Funds; or (iv) actions of such Indemnified Party in reliance upon any instructions issued or representations made in accordance with Attachment A (as it may be amended from time to time) reasonably believed by the Participant to be genuine and to have been given by the Distributor or the Transfer Agent. (c) Each of the Distributor and Participant agrees to jointly and severally indemnify Transfer Agent and hold Transfer Agent harmless from and against any and all losses sustained or incurred by or asserted against Transfer Agent by reason of or as a result of any action or inaction, or arising out of Transfer Agent's performance hereunder, including reasonable fees and expenses of counsel incurred by Transfer Agent in a successful defense of claims by the Distributor and/or Participant; provided however, Distributor and/or Participant shall not indemnify Transfer Agent for those losses arising out of Transfer Agent's own negligence or willful misconduct or that of its employees. This indemnity shall be a continuing obligation of the Distributor and/or Participant, and their respective successors and assigns, notwithstanding the termination of this Agreement. (d) Except to the extent that the Transfer Agent is to be indemnified as provided in this Section 13, no party to this Agreement shall be liable to the other party or to any other person for any damages arising out of mistakes or errors in data provided to such Indemnified Party by a third party, or out of interruptions or delays of electronic means of communications with the Indemnified Parties. SECTION 14. STANDARD OF CARE. Transfer Agent shall have no responsibility and shall not be liable for any loss or damage unless such loss or damage is caused by its own negligence or willful misconduct or that of its employees, or its breach of any of its obligations hereunder. In no event shall the Transfer Agent be liable for special, indirect or consequential damages regardless of the form of action and even if the same were foreseeable. SECTION 15. FORCE MAJEURE. Transfer Agent shall establish and maintain a disaster recovery plan and back-up system at all times satisfying the requirements of all laws, rules and regulations (the "Disaster Recovery Plan and Back-Up System") applicable to the Transfer Agent for providing services as such. Transfer Agent shall not be responsible or liable for any failure or delay in the performance of its obligations under this Agreement arising out of or caused, directly or indirectly, by circumstances beyond its control which are not a result of its negligence, including without limitation, acts of God; earthquakes; fires; floods; wars; civil or military disturbances; sabotage; epidemics; riots; interruptions, loss or malfunctions of utilities, transportation, computer (hardware or software) or communications service; accidents; labor disputes; acts of civil or military authority; governmental actions; or inability to -9- obtain labor, material, equipment or transportation, provided that Transfer Agent has established and is maintaining the Disaster Recovery Plan and Back-Up System, or if not, that such delay or failure would have occurred even if Transfer Agent had established and was maintaining the Disaster Recovery Plan and Back-Up System. Upon the occurrence of any such delay or failure, Transfer Agent shall use commercially reasonable best efforts to resume performance as soon as practicable under the circumstances. SECTION 16. ACKNOWLEDGMENT. The Participant acknowledges receipt of each relevant Fund's Prospectus and represents it has reviewed such document and understands the terms thereof. SECTION 17. NOTICES. Except as otherwise specifically provided in this Agreement, all notices required or permitted to be given pursuant to this Agreement shall be given in writing and delivered by personal delivery or by postage prepaid registered or certified United States first class mail, return receipt requested, or by telex, telegram or facsimile or similar means of same day delivery (with a confirming copy by mail as provided herein). Unless otherwise notified in writing, all notices to the Transfer Agent shall be given or sent as follows: The Bank of New York, 101 Barclay Street, New York, New York 10286, Attn: ETF Services Group. All notices to the Participant and the Distributor shall be directed to the address or telephone, facsimile or telex numbers indicated below the signature line of such party. SECTION 18. TERMINATION. This Agreement shall become effective in this form as of the date accepted by the Transfer Agent and may be terminated at any time by any party upon thirty (30) days prior notice to the other parties (i) unless earlier terminated by the Transfer Agent in the event of a breach of this Agreement or the procedures described herein by the Participant or (ii) in the event that a Trust is terminated pursuant to its Declaration of Trust. This Agreement supersedes any prior Participant Agreement entered into by the parties. Any and all prior Participant Agreements entered into by the parties are deemed terminated upon execution of this Agreement. SECTION 19. PROSPECTUS. (a) The Distributor will provide to the Participant copies of the then current Prospectus for each Fund and any printed supplemental information in reasonable quantities upon request. The Distributor represents, warrants and agrees that it will notify the Participant when a revised, supplemented or amended Prospectus for any Shares is available and deliver or otherwise make available to the Participant copies of such revised, supplemented or amended Prospectus at such time and in such numbers as to enable the Participant to comply with any obligation it may have to deliver such Prospectus to customers. As a general matter, the Distributor will make such revised, supplemented or amended Prospectus available to the Participant no later than its effective date. The Distributor shall be deemed to have complied with this Section 19 when -10- the Participant has received such revised, supplemented or amended Prospectus by email at _____________________, in printable form, with such number of hard copies as may be agreed from time to time by the parties promptly thereafter. (b) Distributor represents and warrants that (i) the registration statement(s) for First Trust Exchange-Traded Fund on Form N-1A (No. 333-125751) and the Prospectus(es) contained therein, the registration statement(s) for First Trust Exchange-Traded Fund II on Form N-1A (No. 333-137036) and the Prospectus(es) contained therein, and the registration statement(s) for First Trust Exchange-Traded AlphaDEX(TM) Fund (No. 333-140895) conform in all material respects to the requirements of the Securities Act, and the rules and regulations of the Securities and Exchange Commission thereunder and do not and will not, as of the applicable effective date as to the registration statement and any amendment thereto and as of the applicable filing date as to the Prospectus and any amendment or supplement thereto, contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; (ii) the sale and distribution of the Shares as contemplated herein will not conflict with or result in a breach or violation of any statute or any order, rule or regulation of any court or governmental agency or body having jurisdiction over the Trusts, any Fund or the Distributor; and (iii) no consent, approval, authorization, order, registration or qualification of or with any such court or governmental agency or body is required for the issue and sale of the Shares, except the registration under the Securities Act of the Shares. SECTION 20. COUNTERPARTS. This Agreement may be simultaneously executed in several counterparts, each of which shall be an original and all shall constitute but one and the same instrument. SECTION 21. NO WAIVER. Each and every right granted to any party hereunder or under any other document delivered hereunder or in connection herewith, or allowed it by law or equity, shall be cumulative and may be exercised from time to time. No failure on the part of any party hereto to exercise, and no delay in exercising, any right will operate as a waiver thereof, nor will any single or partial exercise by any party hereto of any right preclude any other or future exercise thereof or the exercise of any other right. SECTION 22. ENFORCEABILITY; AMENDMENT. In case any provision in or obligation under this Agreement shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions shall not in any way be affected thereby. This Agreement may not be amended or modified in any manner except by a written agreement executed by the parties hereto, except that any amendment to Schedule I approved in writing by the Distributor (upon which written approval the Transfer Agent may conclusively rely) and any amendment to Attachment A hereto need be signed only by the Transfer Agent. The Transfer Agent shall provide the Participant a copy of any such amendment in the manner provided in -11- Section 17. This Agreement shall extend to and shall be binding upon the parties hereto, and their respective successors and assigns; provided, however, that this Agreement shall not be assignable by any party without the written consent of the others. SECTION 23. GOVERNING LAW; CONSENT TO JURISDICTION. This Agreement shall be construed in accordance with the substantive laws of the State of New York, without regard to conflicts of laws principles thereof. The parties hereby consent to the jurisdiction of a state or federal court situated in New York City, New York in connection with any dispute arising hereunder. Each party hereby irrevocably waives, to the fullest extent permitted by applicable law, any objection which it may now or hereafter have to the laying of venue of any such proceeding brought in such a court and any claim that such proceeding brought in such a court has been brought in an inconvenient forum. Each party hereby irrevocably waives any and all rights to trial by jury in any legal proceeding arising out of or relating to this Agreement. SECTION 24. STATUS OF FUND The Distributor hereby represents that each Series (i) of the First Trust Exchange-Traded Fund (ii) of the First Trust Exchange-Traded Fund II, and (iii) of the First Trust Exchange-Traded AlphaDEX (TM) Fund is a registered open ended investment company operating in accordance with the exemptive order granted under 812-13000 and I.C. Release No. 27068 dated September 20, 2005, as the same may be amended from time to time, and I.C. Release No. 27051 dated August 26, 2005 and any additional I.C. Releases related to such amendments. -12- FIRST TRUST PORTFOLIOS, L.P. By Name:_______________________________________ Title:______________________________________ Address: 1001 Warrenville Road Lisle, Illinois 60532 Telephone: (630) 241-8798 Facsimile: (630) 322-7437 ----------------------------- By Name:_______________________________________ Title:______________________________________ Address: _______________________________ _______________________________ Telephone:_____________________________________ Facsimile:_____________________________________ THE BANK OF NEW YORK, as Transfer Agent By Name:_______________________________________ Title:______________________________________ Address: 101 Barclay Street New York, New York 10286 Telephone: (212) 815-5031 Facsimile: (212) 815-2889 Dated: _________________________________ -13- SCHEDULE I Series of First Trust Exchange-Traded Fund First Trust Dow Jones Select MicroCap IndexSM Fund First Trust Morningstar(R) Dividend LeadersSM Index Fund First Trust NASDAQ-100 Equal Weighted IndexSM Fund First Trust NASDAQ-100-Technology Sector IndexSM Fund First Trust IPOX-100 Index Fund First Trust AMEX(R) Biotechnology Index Fund First Trust DB Strategic Value Index Fund First Trust Dow Jones Internet IndexSM Fund First Trust NASDAQ(R) Clean Edge(R) U.S. Liquid Series Index Fund First Trust NASDAQ-100 Ex-Technology Sector IndexSM Fund First Trust Value Line(R) Dividend Index Fund First Trust Value Line(R) Equity Allocation Index Fund Participant shall be a participant with respect to, and this Agreement shall be applicable to, the following additional Funds if and when they shall become Series of First Trust Exchange-Traded Fund: First Trust Value Line(R) Arithmetic Index Fund First Trust Ibbotson Core U.S. Equity Allocation Index Fund First Trust S&P REIT Index Fund First Trust ISE Water Index Fund First Trust ISE-Revere Natural Gas Index Fund First Trust ISE Chindia Index Fund First Trust Value Line(R) 100 Exchange-Traded Fund Series of First Trust Exchange-Traded Fund II Series of First Trust Exchange-Traded AlphaDEX(TM) Fund First Trust Consumer Discretionary AlphaDEX(TM) Fund First Trust Consumer Staples AlphaDEX(TM) Fund Sch. I First Trust Energy AlphaDEX(TM) Fund First Trust Financials AlphaDEX(TM) Fund First Trust Health Care AlphaDEX(TM) Fund First Trust Industrials AlphaDEX(TM) Fund First Trust Materials AlphaDEX(TM) Fund First Trust Technology AlphaDEX(TM) Fund First Trust Utilities AlphaDEX(TM) Fund First Trust Large Cap Core AlphaDEX(TM) Fund First Trust Mid Cap Core AlphaDEX(TM) Fund First Trust Small Cap Core AlphaDEX(TM) Fund First Trust Large Cap Growth Opportunities AlphaDEX(TM) Fund First Trust Large Cap Value Opportunities AlphaDEX(TM) Fund First Trust Multi Cap Growth AlphaDEX(TM) Fund First Trust Multi Cap Value AlphaDEX(TM) Fund -2- ATTACHMENT A Subject to the terms and conditions of the attached Participant Agreement, this document supplements the Prospectuses for the Series of First Trust Exchange-Traded Fund, for the Series of First Trust Exchange-Traded Fund II, and for the Series of First Trust Exchange-Traded AlphaDEX(TM) Fund and is an attachment to, and incorporated into and made a part of, the Participant Agreement with respect to the procedures to be used by (i) the Transfer Agent in processing an order for the creation of Shares, and (ii) the Transfer Agent in processing a request for the redemption of Shares, and (iii) the Participants and the Transfer Agent in delivering or arranging for the delivery of requisite cash payments, Fund Deposit or Shares, as the case may be, in connection with the submission of orders for creation or requests for redemption. Capitalized terms not otherwise defined have the meaning assigned to them in the Participant Agreement. A Participant is first required to have signed the Participant Agreement. Upon acceptance of the Participant Agreement by the Distributor, the Transfer Agent will assign a unique personal identification number ("PIN Number") to each Authorized Person authorized to act for the Participant. This will allow a Participant through its Authorized Person(s) to place orders for either creation or redemption of Shares. SECTION I. TO PLACE AN ORDER FOR CREATION OR REDEMPTION OF SHARES 1. Call to Receive a Submission Number. An Authorized Person for the Participant will call the Trust Telephone Representative at (212) 815-5031 not later than the closing time of the regular trading session on The New York Stock Exchange (the "NYSE Closing Time") (ordinarily 4:00 p.m. New York time) to receive a submission number ("Submission Number"). In the case of custom orders, the order must be received by the Transfer Agent no later than 3:00 p.m. Eastern time on the trade date. Upon verifying the authenticity of the caller (as determined by the use of the appropriate PIN Number) and the terms of the order for creation or request for redemption, the Trust Telephone Representative will issue a unique Submission Number. All orders with respect to the creation or redemption of Shares are required to be in writing and accompanied by the designated Submission Number. Incoming telephone calls are queued and will be handled in the sequence received. Calls placed before the NYSE Closing Time will be processed even if the call is taken after this cut-off time. ACCORDINGLY, DO NOT HANG UP AND REDIAL. INCOMING CALLS THAT ARE ATTEMPTED LATER THAN THE NYSE CLOSING TIME WILL NOT BE ACCEPTED. 2. Assemble the Submission. The Authorized Person submitting an order to create or a request to redeem shall assemble (a) written instructions regarding such creation order or redemption request and (b) the designated Submission Number in one document and transmit such document by facsimile or telex to the Trust Telephone Representative and the Distributor, as applicable, according to the Attachment 1 -1- procedures set forth below in subsection 3. The document so transmitted is hereinafter referred to as the "Submission," and the Business Day on which a Submission is made is hereinafter referred to as the "Transmittal Date." As used herein, a Business Day ("Business Day") is any day on which The New York Stock Exchange is open. NOTE THAT THE TELEPHONE CALL IN WHICH THE SUBMISSION NUMBER IS ISSUED INITIATES THE ORDER PROCESS BUT DOES NOT ALONE CONSTITUTE THE ORDER. AN ORDER OR REQUEST IS ONLY COMPLETED AND PROCESSED UPON RECEIPT OF THE SUBMISSION. 3. Transmit the Submission. A Submission Number is only valid for a limited time. The Submission for either creations or redemptions of Shares must be sent by facsimile or telex to the Trust Telephone Representative, as applicable, within fifteen (15) minutes of the issuance of the Submission Number. In the event that the Submission is not received within such time period, the Trust Telephone Representative will attempt to contact the Participant to request immediate transmission of the Submission. (a) In the case of a Submission for creation, unless the Submission is received by the Trust Telephone Representative upon the earlier of within (i) fifteen (15) minutes of contact with the Participant or (ii) forty-five (45) minutes after the NYSE Closing Time, the Submission will be deemed invalid. (b) In the case of a Submission for redemption, unless such Submission is received by the Trust Telephone Representative within (i) fifteen (15) minutes of contact with the Participant or (ii) forty-five (45) minutes after the NYSE Closing Time, whichever is earlier, such order for redemption contained therein shall be deemed invalid. 4. Await Receipt of Confirmation. (a) Trusts' Clearing Process-Creation Orders. The Transfer Agent shall issue to the Participating Party a confirmation of acceptance of an order to create Shares in Creation Unit size aggregations ("Creation Order") through the Trusts' Clearing Process within fifteen (15) minutes of its receipt of a Submission received in good form. In the event the Participating Party does not receive a timely confirmation from the Transfer Agent, it should contact the Distributor and the Trust Telephone Representative at the business numbers indicated. (b) Trusts' Clearing Process-Requests for Redemptions. The Transfer Agent shall issue to the Participating Party a confirmation of acceptance of a request to redeem Shares in Creation Unit size aggregations ("Redemption Order") through the Trusts' Clearing Process within fifteen (15) minutes of its receipt of a Submission received in good form. In the event the Participating Party does not receive a timely confirmation from the Transfer Agent, it should contact the Transfer Agent directly at the business number indicated. (c) Outside the Trusts' Clearing Process--Creation Orders. The Transfer Agent shall issue to the DTC Participant an acknowledgment of receipt of a Creation Order outside the Trusts' Clearing Process within fifteen (15) minutes of its receipt of a Submission received in good form. In the event the DTC Participant does not receive a timely acknowledgment from the Transfer Agent, it should contact the Transfer Agent at the business numbers indicated. Attachment 1 -2- (d) Outside the Trusts' Clearing Process--Redemption Orders. The Transfer Agent shall issue to the DTC Participant an acknowledgment of receipt of a Redemption Order outside the Trusts' Clearing Process within fifteen (15) minutes of its receipt of a Submission received in good form. In the event the DTC Participant does not receive a timely acknowledgment from the Transfer Agent, it should contact the Transfer Agent directly at the business number indicated. SECTION II. PARTICIPANTS' RESPONSIBILITY FOR DELIVERING OR EFFECTING THE DELIVERY OF REQUISITE FUND DEPOSIT OR SHARES AND CASH PAYMENTS IN CONNECTION WITH CREATION ORDERS OR REDEMPTION ORDERS 1. Trusts' Clearing Process -- Creation Orders. The Participating Party notified of confirmation of a Creation Order to create Shares through the Trusts' Clearing Process shall be required to transfer or arrange for the transfer of (a) the requisite Deposit Securities (or contracts to purchase such Deposit Securities expected to be delivered through NSCC by the "regular way" settlement date) and (b) the Cash Component, if any, to the Transfer Agent by means of the Trusts' Clearing Process so as to be received no later than on the "regular way" settlement date following the Business Day on which such order is Deemed Received by the Transfer Agent as set forth below in Section IV. 2. Trusts' Clearing Process -- Redemption Orders. The Participating Party notified of confirmation of a Redemption Order to redeem Shares through the Trusts' Clearing Process shall be required to transfer or arrange for the transfer of the requisite Shares and the Cash Redemption Amount, as defined in the applicable Fund's Prospectus ("Cash Redemption Amount"), if any, to the Transfer Agent by means of the Trusts' Clearing Process so as to be received no later than on the "regular way" settlement date following the Business Day on which such order is Deemed Received by the Transfer Agent as set forth below in Section IV. 3. Outside the Trusts' Clearing Process -- Creation Orders. The DTC Participant notified of acknowledgment of a Creation Order to create Shares outside the Trusts' Clearing Process shall be required to effect a transfer to the Transfer Agent of (a) the requisite Deposit Securities through DTC so as to be received by the Transfer Agent no later than 11:00 a.m., Eastern Time, on the next Business Day immediately following the Business Day on which such order is Deemed Received by the Distributor as set forth below in Section IV, in such a way as to replicate the Fund Deposit established on the Transmittal Date by the Transfer Agent and (b) the Cash Component, if there is a positive Cash Component, through the Federal Reserve Bank wire system so as to be received by the Transfer Agent by 2:00 p.m., Eastern Time, on the next Business Day immediately following the day such order is Deemed Received. If the Transfer Agent does not receive the Deposit Securities by 11:00 a.m. Eastern Time and the Cash Component, if any, by 2:00 p.m., Eastern Time, on the Business Day immediately following the day such order is Deemed Received, the Creation Order contained in such Submission shall be canceled. Upon written notice to the Transfer Agent, the DTC Participant may resubmit such canceled order on the following Business Day using a Fund Deposit as newly constituted. Attachment 1 -3- 4. Purchase of Creation Unit Aggregations Prior to Receipt of Deposit Securities. Creation Unit Aggregations may be created in advance of receipt by a Fund of all or a portion of the applicable Deposit Securities as described below. In these circumstances, the initial deposit will have a value greater than the NAV of the applicable Fund's Shares on the date the Creation Order is placed in proper form since, in addition to available Deposit Securities, cash must be deposited in an amount equal to the sum of (i) the Cash Component, plus (ii) one hundred fifteen percent (115%) of the market value of the undelivered Deposit Securities (the "Additional Cash Deposit"). The Creation Order shall be deemed to be received on the Business Day on which the order is placed provided that the Creation Order is placed in proper form prior to 4:00 p.m., Eastern time, on such date, and federal funds in the appropriate amount are deposited with the Transfer Agent by 11:00 a.m., Eastern time, the following Business Day. If the Creation Order is not placed in proper form by 4:00 p.m., Eastern time, or federal funds in the appropriate amount are not received by 11:00 a.m., Eastern time, the next Business Day, then the Creation Order may be deemed to be canceled and the Authorized Participant shall be liable to the Fund for losses, if any, resulting therefrom. An additional amount of cash shall be required to be deposited with the applicable Fund, pending delivery of the missing Deposit Securities to the extent necessary to maintain the Additional Cash Deposit with the Fund in an amount at least equal to one hundred fifteen percent (115%) of the daily marked to market value of the missing Deposit Securities. The parties hereto further agree that the Trust may purchase the missing Deposit Securities at any time and the Participant agrees to accept liability for any shortfall between the cost to the Trust of purchasing such securities and the amount of the Additional Cash Deposit maintained with the Fund, as the Trust may determine in its sole discretion. 5. Outside the Trusts' Clearing Process -- Redemption Orders. The DTC Participant notified of acknowledgment of a Redemption Order to redeem Shares outside the Trusts' Clearing Process shall be required to effect a transfer to the Transfer Agent (a) the requisite number of Shares through DTC no later than the NYSE Closing Time on the Business Day on which such Redemption Order is Deemed Received by the Transfer Agent and (b) the Cash Redemption Amount, if any, through the Federal Reserve Bank wire system by no later than 2:00 p.m. on the next Business Day immediately following the Business Day on which such order is Deemed Received by the Transfer Agent. 6. Transaction Fee. In connection with the creation or redemption of Creation Units, the Transfer Agent shall charge, and the Participant agrees to pay to the Transfer Agent, (i) the Creation Transaction Fee or Redemption Transaction Fee prescribed in the relevant Fund's Prospectus applicable to creations or redemptions through the Trusts' Clearing Process, or (ii) the applicable Creation Transaction Fee or Redemption Transaction Fee plus, in each case, such additional variable amounts as may be prescribed in the relevant Fund's Prospectus for (a) creations or redemptions outside the Trusts' Clearing Process and (b) creations through the Trusts' Clearing Process where the cash equivalent value of one or more Deposit Securities is being deposited in lieu of the inclusion of such Deposit Securities in the securities portion of the Fund Deposit. The Cash Component or Cash Redemption Amount payable or to be received, as the case may be, by the Participant in connection with the Creation Order or Redemption Order shall be adjusted by the amount of such applicable Transaction Fee and additional variable amounts, if any. Attachment 1 -4- 7. International Funds -- Creation Orders. (a) Except as provided below, Deposit Securities must be delivered to an account maintained at the applicable local Subcustodian of the Trust on or before the International Contractual Settlement Date (defined below). The Participant must also pay on or before the International Contractual Settlement Date immediately available or same day funds estimated by Trust to be sufficient to pay the Cash Component next determined after acceptance of the Creation Order, together with the applicable Creation Transaction Fee and additional variable amounts (as described below and in the Prospectus). The "International Contractual Settlement Date" with respect to each International Fund is the earlier of (i) the date upon which all of the required Deposit Securities, the Cash Component and any other cash amounts which may be due are delivered to the Fund and (ii) the latest day for settlement on the customary settlement cycle in the jurisdiction(s) where any of the securities of such International Fund are customarily traded. (b) Except as provided in the next two paragraphs, a Creation Unit of Shares will not be issued until the transfer of good title to the Trust of the portfolio of Deposit Securities, the payment of the Cash Component, the payment of any other cash amounts and the Creation Transaction Fee have been completed. When the Subcustodian confirms to Custodian that the required Deposit Securities (or, when permitted in the sole discretion of Trust, the cash in lieu thereof) have been delivered to the account of the relevant Subcustodian, the Custodian shall notify Distributor and the Transfer Agent which, acting on behalf of the Trust, will issue and cause the delivery of the Creation Unit of Shares. (c) The Trust may in its sole discretion permit or require the substitution of an amount of cash (i.e., a "cash in lieu" amount) to be added to the Cash Component to replace any Deposit Security which may not be available in sufficient quantity for delivery or for other similar reasons. If the Distributor, acting on behalf of the Trust, determines that a "cash in lieu" amount will be accepted, Distributor will notify the Participant and the Transfer Agent, and the Participant shall deliver, on behalf of itself or the party on whose behalf it is acting, the "cash in lieu" amount, with any appropriate adjustments as advised by the Trust. (d) In the event that a Fund Deposit is incomplete on the International Contractual Settlement Date for a Creation Order because certain or all of the Deposit Securities are missing, the Trust may issue a Creation Unit of Shares notwithstanding such deficiency in reliance on the undertaking of the Participant to deliver the missing Deposit Securities as soon as possible, which undertaking shall be secured by an Additional Cash Deposit with respect undelivered Deposit Securities as described above in Section 4. (e) Cash shall be delivered in the manner provided above for Creation Orders outside the Trusts' Clearing Process. Attachment 1 -5- (f) In addition to the Creation Transaction Fee, the Participant shall pay additional variable amounts which may include expenses incurred by the Fund in the transfer of Deposit Securities to the Fund in connection with a creation of Creation Units. These expenses may include operational processing and brokerage costs, transfer fees, stamp taxes and the like. When an International Fund permits a Participant to substitute cash or a different security in lieu of depositing one or more of the requisite Deposit Securities, the 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. 8. International Funds -- Redemption Orders. (a) A Participant must maintain appropriate securities broker-dealer, bank or other custody arrangements to which account Deposit Securities will be delivered in connection with a Redemption Order. If the Participant, or any party on whose behalf the Participant is acting, does not have appropriate arrangements to take delivery of the Deposit Securities in the relevant foreign jurisdiction(s) and it is not possible to make other such arrangements, the Participant will be required to receive redemption proceeds in cash, as described in paragraph (d) below. (b) The delivery of redemption proceeds will be made within twelve calendar days after the Redemption Order is received in proper form, except to the extent that a delivery is delayed due to the introduction of new or special holidays, the treatment by participants in the local market of certain days as "informal holidays" (e.g., days on which no or limited securities transactions occur, as a result of substantially shortened trading hours), or changes in local securities delivery practices. Under these circumstances, the Fund will notify the Participant as soon as reasonably practicable (c) The Trust may in its sole discretion permit or require the substitution of an amount of cash (i.e., a "cash in lieu" amount) to be added to the Cash Component to replace any Deposit Security which may not be available in sufficient quantity for delivery or for other similar reasons. If the Distributor, acting on behalf of the Trust, determines that a "cash in lieu" amount will be delivered, Distributor will notify the Participant and the Transfer Agent and the Participant shall receive the "cash in lieu" amount, with any appropriate adjustments as advised by Trust. (d) If a redeeming Participant, or any party on whose behalf the Participant is acting, does not have appropriate arrangements to take delivery of the Deposit Securities in the relevant foreign jurisdiction(s) and it is not possible to make other such arrangements, or if it is not possible to effect deliveries of the Deposit Securities in such foreign jurisdiction(s) and in certain other circumstances, the Trust may in its discretion redeem Shares for cash, and the redeeming Participant, on behalf of itself or any party for which it is acting, will be required to receive redemption proceeds in cash. In such case, Attachment 1 -6- the Participant will receive a cash payment equal to the net asset value (next determined after receipt of the Redemption Order) times the number of Shares in a Creation Unit of the relevant International Fund, minus the Transaction Fee. (e) Cash shall be delivered in the manner provided above for Redemption Orders outside the Trusts' Clearing Process. (f) In addition to the Redemption Transaction Fee, the Participant shall pay additional variable amounts which may include expenses incurred by the Fund in the transfer of Deposit Securities to the Participant. These expenses may include operational processing and brokerage costs, transfer fees, stamp taxes and the like. When an International Fund redeems Shares for cash, the Participant may also be assessed an amount to cover the cost of selling the Deposit Securities, including operational processing and brokerage costs, transfer fees and stamp taxes. SECTION III. TRANSFER AGENT'S RESPONSIBILITY FOR EFFECTING DELIVERY OF REQUISITE SHARES OR SECURITIES AND CASH PAYMENTS IN CONNECTION WITH ORDERS FOR CREATION OR REQUESTS FOR REDEMPTION 1. Trusts' Clearing Process -- Creation Orders. After the Transfer Agent has received notification of a Submission from the Participant for a Creation Order for Shares through the Trusts' Clearing Process which has been Deemed Received by the Transfer Agent as set forth below in Section IV, the Transfer Agent shall initiate procedures to transfer the requisite Shares and the Cash Component, if any, through the Trusts' Clearing Process so as to be received by the creator no later than on the "regular way" settlement date following the Business Day on which the Submission is Deemed Received by the Transfer Agent. 2. Trusts' Clearing Process -- Redemption Orders. After the Transfer Agent has received a Submission for a Redemption Order for Shares through the Trusts' Clearing Process which has been Deemed Received by the Transfer Agent as set forth below in Section IV, the Transfer Agent shall initiate procedures to transfer the requisite securities (or contracts to purchase such securities expected to be delivered through NSCC by the "regular way" settlement date) and the Cash Redemption Amount, if any, through the Trusts' Clearing Process so as to be received by the beneficial owner no later than on the "regular way" settlement date following the Business Day on which the Submission is Deemed Received by the Transfer Agent. 3. Outside the Trusts' Clearing Process -- Creation Orders. After the Transfer Agent has received notification of a Submission from the Participant for a Creation Order for Shares outside the Trusts' Clearing Process which has been Deemed Received by the Transfer Agent as set forth below in Section IV, the Transfer Agent shall initiate procedures to transfer the requisite Shares through DTC and the DTC Participants and the Cash Component, if any, through the Federal Reserve Bank wire system so as to be received by the creator no later than the same Business Day on which the transfer of Deposit Securities is required to be made pursuant to Section IV (3) in order for the Deemed Received Attachment 1 -7- order to continue to be Deemed Received. A Creation Order relating to Shares of an International Fund will be processed in the manner provided in this paragraph. 4. Outside the Trusts' Clearing Process -- Redemption Orders. After the Transfer Agent has received a Submission for a Redemption Order for Shares outside the Trusts' Clearing Process which has been Deemed Received by the Transfer Agent as set forth below in Section IV, the Transfer Agent shall initiate procedures to transfer the requisite securities (or contracts to purchase such securities expected to be delivered within three Business Days) through DTC and the DTC Participants and the Cash Redemption Amount, if any, through the Federal Reserve Bank wire system so as to be received by the Participant no later than the same Business Day on which the transfer of Shares is required to be made pursuant to Section IV (4) in order for the Deemed Received order to continue to be Deemed Received. A Redemption Order relating to Shares of an International Fund will be processed in the manner provided in this paragraph, except as otherwise provided in Section II 8 (b). SECTION IV. PROCEDURES BY WHICH AN ORDER TO CREATE OR A REQUEST TO REDEEM SHALL BE "DEEMED RECEIVED" 1. Trusts' Clearing Process -- Creation Orders. A Creation Order to create Shares through the Trusts' Clearing Process shall be "Deemed Received" by the Transfer Agent on the Transmittal Date only if (a) the Submission containing such order is in proper form and (b) such Submission is received by the Transfer Agent no later than the time on such Transmittal Date as set forth in Section I (3) (a) hereof. Orders to create Shares contained in Submissions transmitted after such time on a Transmittal Date shall be deemed invalid. 2. Trusts' Clearing Process -- Redemption Orders. A Redemption Order to redeem Shares through the Trusts' Clearing Process shall be Deemed Received by the Transfer Agent on the Transmittal Date only if (a) the Submission containing such request is in proper form and (b) such Submission is received by the Transfer Agent no later than the time on such Transmittal Date as set forth in Section I(3)(b) hereof. Requests to redeem Shares contained in Submissions transmitted after such time on a Transmittal Date shall be "Deemed Received" by the Transfer Agent on the next Business Day immediately following such Transmittal Date. 3. Outside the Trusts' Clearing Process -- Creation Orders. An Creation Order to create Shares outside the Trusts' Clearing Process shall be Deemed Received by the Transfer Agent on the Transmittal Date only if: (a) the Submission containing such order is in proper form, and (b) such Submission is received by the Transfer Agent no later than the time on such Transmittal Date as set forth in Section I(3)(a) hereof, provided, however, that such order shall cease to be Deemed Received unless (a) the requisite number of Deposit Securities is transferred through DTC to the account of the applicable Fund no later than 11:00 a.m., Eastern Time, on the Business Day next following the Transmittal Date and (b) the cash equal to the Cash Component, if any, is transferred via the Federal Reserve Bank wire system to the account of the applicable Fund by no later than 2:00 p.m., Eastern Time, on the Business Day next following the Transmittal Date. If either the Submission, the requisite Attachment 1 -8- Deposit Securities or the cash equal to the Cash Component is not received by the Transfer Agent within the time periods set forth above, such order shall be deemed invalid. 4. Outside the Trusts' Clearing Process -- Redemption Orders. A request to redeem Shares outside the Trusts' Clearing Process shall be Deemed Received by the Transfer Agent on the Transmittal Date only if (a) the Submission containing such request is in proper form, and (b) such Submission is received by the Transfer Agent no later than the time as set forth in Section I(3)(b) hereof, provided, however, that such order shall cease to be Deemed Received unless (a) the requisite number of Shares is transferred via DTC to the account of the Transfer Agent by the NYSE Closing Time on such Transmittal Date and (b) the Cash Redemption Amount owed to the applicable Fund, if any, is received by the Transfer Agent no later than 2:00 p.m., Eastern Time, of the Business Day next following such Transmittal Date. If either the Submission, the Shares or cash equal to the Cash Redemption Amount, if any, is not received by the applicable Fund within the time periods set forth above, such redemption request shall be Deemed Received by the Transfer Agent on the Business Day on which both the Submission and the requisite number of Shares are delivered to the Transfer Agent within the proper time periods as set forth above; provided that the Cash Redemption Amount, if any, is then paid on the next Business Day within the time period set forth above. 5. Ambiguous Instructions. In the event that a Submission contains terms that differ from the information provided in the telephone call at the time of issuance of the Submission Number, the Trust Telephone Representative will attempt to contact the Participant to request confirmation of the terms of the order. If an Authorized Person confirms the terms as they appear in the Submission then the Submission will be accepted and processed. If an Authorized Person contradicts its terms, the Submission will be deemed invalid, and a corrected Submission must be received by the Transfer Agent, as applicable, not later than the earlier of (i) within fifteen (15) minutes of such contact with the Participant or (ii) forty-five (45) minutes after the NYSE Closing Time. For the avoidance of doubt, notwithstanding the invalidation of the initial Submission pursuant to this paragraph, a Submission that is otherwise in proper form shall be deemed submitted at the time of its initial Submission for purposes of determining when orders are Deemed Received hereunder. If the Trust Telephone Representative is not able to contact an Authorized Person, then the Submission shall be accepted and processed in accordance with its terms notwithstanding any inconsistency from the terms of the telephone information. In the event that a Submission contains terms that are illegible, the Submission will be deemed invalid and the Trust Telephone Representative will attempt to contact the Participant to request retransmission of the Submission. A corrected Submission must be received by the Transfer Agent, as applicable, not later than the earlier of (i) within fifteen (15) minutes of such contact with the Participant or (ii) forty-five (45) minutes after the NYSE Closing Time. 6. Suspension or Rejection of an Order. Each Trust reserves the absolute right to reject a Creation Order transmitted to it by the Distributor in respect of a Fund if: (i) the order is not in proper form; (ii) the Deposit Securities delivered are not as disseminated for that date by the Custodian, as described above; (iii) acceptance of the Fund Deposit would, in the opinion of counsel, be Attachment 1 -9- unlawful; (iv) acceptance of the Fund Deposit would otherwise, in the reasonable opinion of the applicable Trust or its investment adviser (the "Adviser"), have an adverse effect on the Trust, the applicable Fund or the rights of beneficial owners; or (v) in the event that circumstances exist outside the control of the applicable Trust or Fund, the Transfer Agent, the Distributor and the Adviser that, in their reasonable judgment, make it for all practical purposes impossible to process Creation Orders. Examples of such circumstances include acts of God; public service or utility problems such as fires, floods, extreme weather conditions and power outages resulting in telephone, telecopy and computer failures; market conditions or activities causing trading halts; systems failures involving computer or other information systems affecting a Trust or Fund, the Adviser, the Distributor, DTC, NSCC, the Transfer Agent, the Custodian or sub-custodian or any other participant in the creation process, and similar extraordinary events. The applicable Trust shall notify immediately a prospective creator of a Creation Unit and/or the Authorized Participant acting on behalf of such prospective creator of its rejection of the order of such person. Each Trust and Fund, the Custodian, any sub-custodian and the Distributor are under no duty, however, to give notification of any defects or irregularities in the delivery of Fund Deposits, and shall not incur any liability for the failure to give any such notification. SECTION V. TELEPHONE, FACSIMILE, AND TELEX NUMBERS FIRST TRUST EXCHANGE-TRADED FUND, FIRST TRUST EXCHANGE-TRADED FUND II AND FIRST TRUST EXCHANGE-TRADED ALPHADEX (TM) FUND: Telephone: (630) 241-4141 Facsimile: (630) 322-7509 TRANSFER AGENT: Telephone: (212) 815-5031 Facsimile: (212) 815-2889 PARTICIPANT:: Telephone: ______________ Facsimile: ______________ FIRST TRUST PORTFOLIOS, L.P. By Title:______________________________________ Attachment 1 -10- PARTICIPANT: ----------------------------- By Title:______________________________________ ACCEPTED BY: THE BANK OF NEW YORK, as Transfer Agent By__________________________________________ Title:__________________________________ Dated:______________________________________ Attachment 1 -11- EX-99.H.5 8 exhibit_h5.txt FORM OF BOARD ADMINISTRATION SERVICES AGREEMENT THIS AGREEMENT is made as of February 5, 2007 by and between PFPC INC., a Massachusetts corporation ("PFPC"), and each of the entities listed on Exhibit A attached hereto and made a part hereof (each, a "Fund" and together, the "Funds"). W I T N E S S E T H : WHEREAS, each Fund is registered as a management investment company under the Investment Company Act of 1940, as amended (the "1940 Act"); and WHEREAS, each Fund wishes to retain PFPC to provide board administration services and PFPC wishes to furnish such services. NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, and intending to be legally bound hereby the parties hereto agree as follows: 1. Definitions. As used in this Agreement: (a) "1933 Act" means the Securities Act of 1933, as amended. (b) "1934 Act" means the Securities Exchange Act of 1934, as amended. (c) "Authorized Person" means any officer of a Fund and any other person duly authorized by a Fund to give Oral Instructions and Written Instructions on behalf of such Fund. An Authorized Person's scope of authority may be limited by setting forth such limitation in a written document signed by both parties hereto. (d) "Oral Instructions" mean oral instructions received by PFPC from an Authorized Person or from a person reasonably believed by PFPC to be an Authorized Person. PFPC may, in its sole discretion in each separate instance, consider and rely upon instructions it receives from an Authorized Person via electronic mail as Oral Instructions. (e) "SEC" means the Securities and Exchange Commission. (f) "Securities Laws" means the 1933 Act, the 1934 Act and the 1940 Act. (g) "Shares" mean the shares of beneficial interest of a Fund. (h) "Written Instructions" mean (i) written instructions signed by an Authorized Person and received by PFPC or (ii) trade instructions transmitted (and received by PFPC) by means of an electronic transaction reporting system access to which requires use of a password or other authorized identifier. The instructions may be delivered electronically (with respect to sub-item (ii) above) or by hand, mail, tested telegram, cable, telex or facsimile sending device. 2. Appointment. Each Fund hereby appoints PFPC to provide board administration services to such Fund, in accordance with the terms set forth in this Agreement, effective as of the date set forth on Exhibit A with respect to the Fund. PFPC accepts such appointment and agrees to furnish such services. 3. Compliance with Rules and Regulations. PFPC undertakes to comply with all applicable requirements of the Securities Laws, and any laws, rules and regulations of governmental authorities having jurisdiction with respect to the duties to be performed by PFPC hereunder. Except as specifically set forth herein, PFPC assumes no responsibility for such compliance by a Fund or other entity. 4. Instructions. (a) Unless otherwise provided in this Agreement, PFPC shall act only upon Oral Instructions or Written Instructions. (b) PFPC shall be entitled to rely upon any Oral Instruction or Written Instruction it receives from an Authorized Person (or from a person reasonably believed by PFPC to be an Authorized Person) pursuant to this Agreement. PFPC may assume that any Oral Instruction or Written Instruction received hereunder is not in any way inconsistent with the provisions of organizational documents or this Agreement or of any vote, resolution or proceeding of a Fund's board of directors or of a Fund's shareholders, unless and until PFPC receives Written Instructions to the contrary. (c) Each Fund agrees to forward to PFPC Written Instructions confirming Oral Instructions (except where such Oral Instructions are given by PFPC or its affiliates) so that PFPC receives the Written Instructions by the close of business on the same day that such Oral Instructions are received. The fact that such confirming Written Instructions are not received by PFPC or differ from the Oral Instructions shall in no way invalidate the transactions or enforceability of the transactions authorized by the Oral Instructions or PFPC's ability to rely upon such Oral Instructions. 5. Right to Receive Advice. (a) Advice of a Fund. If PFPC is in doubt as to any action it should or should not take, PFPC may request directions or advice, including Oral Instructions or Written Instructions, from a Fund. (b) Advice of Counsel. If PFPC shall be in doubt as to any question of law pertaining to any action it should or should not take, PFPC may request advice from counsel of its own choosing (who may be counsel for a Fund, a Fund's investment adviser or PFPC, at the option of PFPC). Each Fund shall pay the reasonable cost of any counsel retained by PFPC with prior notice to such Fund. (c) Conflicting Advice. In the event of a conflict between directions or advice or Oral Instructions or Written Instructions PFPC receives from a Fund and the advice PFPC receives from counsel, PFPC may rely upon and follow the advice of counsel. (d) Protection of PFPC. PFPC shall be indemnified by a Fund and without liability for any action PFPC takes or does not take in reliance upon directions or advice or Oral Instructions or Written Instructions PFPC receives from or on behalf of such Fund or from counsel and which PFPC believes, in good faith, to be consistent with those directions or advice and Oral Instructions or Written Instructions. Nothing in this section shall be construed so as to impose an obligation upon PFPC (i) to seek such directions or advice or Oral Instructions or Written Instructions, or (ii) to act in accordance with such directions or advice or Oral Instructions or Written Instructions. 6. Records; Visits. The books and records pertaining to a Fund which are in the possession or under the control of PFPC shall be the property of such Fund. Such books and records shall be prepared and maintained as required by the 1940 Act and other applicable securities laws, rules and regulations provided a Fund provides PFPC with written notice of such laws, rules and regulations, other than the 1940 Act and the Internal Revenue Code of 1986, as amended, that are applicable. A Fund and Authorized Persons shall have access to such books and records at all times during PFPC's normal business hours upon reasonable advance notice. Upon the reasonable request of a Fund, copies of any such books and records shall be provided by PFPC to such Fund or to an Authorized Person, at the Fund's expense. 7. Confidentiality. The parties shall keep confidential any information relating to another party's business ("Confidential Information"). Confidential Information shall include (a) any data or information that is competitively sensitive material, and not generally known to the public, including, but not limited to, information about product plans, marketing strategies, finances, operations, customer relationships, customer profiles, customer lists, sales estimates, business plans, and internal performance results relating to the past, present or future business activities of a Fund or PFPC and their respective subsidiaries and affiliated companies; (b) any scientific or technical information, design, process, procedure, formula, or improvement that is commercially valuable and secret in the sense that its confidentiality affords a Fund or PFPC a competitive advantage over its competitors; (c) all confidential or proprietary concepts, documentation, reports, data, specifications, computer software, source code, object code, flow charts, databases, inventions, know-how, and trade secrets, whether or not patentable or copyrightable; and (d) anything designated as confidential. Notwithstanding the foregoing, information shall not be Confidential Information and shall not be subject to such confidentiality obligations if: (a) it is necessary for PFPC to release such information in connection with the provision of services under this Agreement; (b) it is already known to the receiving party at the time it is obtained; (c) it is or becomes publicly known or available through no wrongful act of the receiving party; (d) it is rightfully received from a third party who, to the best of the receiving party's knowledge, is not under a duty of confidentiality; (e) it is released by the protected party to a third party without restriction; (f) it is requested or required to be disclosed by the receiving party pursuant to a court order, subpoena, governmental or regulatory agency request or law (provided the receiving party will provide the other party written notice of the same, to the extent such notice is permitted); (g) it is Fund information provided by PFPC in connection with an independent third party compliance or other review; (h) it is relevant to the defense of any claim or cause of action asserted against the receiving party; or (i) it has been or is independently developed or obtained by the receiving party. PFPC acknowledges and agrees that in connection with its services under this Agreement it receives non-public confidential portfolio holdings information ("Portfolio Information") with respect to the Fund. PFPC agrees that, subject to the foregoing provisions of and the exceptions set forth in this Section 7 (other than the exception set forth above in this Section 7 as sub-item (a), which exception set forth in sub-item (a) shall not be applicable to a Fund's Portfolio Information), PFPC will keep confidential a Fund's Portfolio Information and will not disclose a Fund's Portfolio Information other than pursuant to a Written Instruction (which Written Instruction may be a standing Written Instruction); provided that without the need for such a Written Instruction and notwithstanding any other provision of this Section 7 to the contrary, a Fund's Portfolio Information may be disclosed to third party pricing services which are engaged by PFPC in connection with the provision of services under this Agreement and which shall be subject to a duty of confidentiality with respect to such Portfolio Information. 8. PFPC System. PFPC shall retain title to and ownership of any and all data bases, computer programs, screen formats, report formats, interactive design techniques, derivative works, inventions, discoveries, patentable or copyrightable matters, concepts, expertise, patents, copyrights, trade secrets, and other related legal rights utilized by PFPC in connection with the services provided by PFPC to a Fund. 9. Disaster Recovery. PFPC shall enter into and shall maintain in effect with appropriate parties one or more agreements making reasonable provisions for emergency use of electronic data processing equipment to the extent appropriate equipment is available. In the event of equipment failures, PFPC shall, at no additional expense to a Fund, take reasonable steps to minimize service interruptions. PFPC shall have no liability with respect to the loss of data or service interruptions caused by equipment failure, provided such loss or interruption is not caused by PFPC's own willful misfeasance, bad faith, negligence or reckless disregard of its duties or obligations under this Agreement. 10. Compensation. (a) As compensation for services rendered by PFPC during the term of this Agreement, each Fund, on behalf of each of its portfolios, will pay to PFPC a fee or fees as may be agreed to in writing by the Fund and PFPC. (b) The undersigned hereby represents and warrants to PFPC that (i) the terms of this Agreement, (ii) the fees and expenses associated with this Agreement, and (iii) any benefits accruing to PFPC or to the adviser or sponsor to a Fund in connection with this Agreement, including but not limited to any fee waivers, conversion cost reimbursements, up front payments, signing payments or periodic payments made or to be made by PFPC to such adviser or sponsor or any affiliate of a Fund relating to this Agreement have been fully disclosed to the board of directors of such Fund and that, if required by applicable law, such board of directors has approved or will approve the terms of this Agreement, any such fees and expenses, and any such benefits. 11. Indemnification. (a) Each Fund agrees severally and not jointly to indemnify, defend and hold harmless PFPC and its affiliates, including their respective officers, directors, agents and employees, from all taxes, charges, expenses, assessments, claims and liabilities (including, without limitation, reasonable attorneys' fees and disbursements and liabilities arising under the Securities Laws and any state and foreign securities and blue sky laws) ("Claims") arising directly or indirectly from any action or omission to act which PFPC takes in connection with the provision of services to a Fund. Neither PFPC, nor any of its affiliates, shall be indemnified against any liability (or any expenses incident to such liability) caused by PFPC's or its affiliates' own willful misfeasance, bad faith, negligence or reckless disregard in the performance of PFPC's activities under this Agreement. The provisions of this Section 11 shall survive termination of this Agreement. (b) Indemnification of a Fund. PFPC agrees to defend, indemnify and hold a Fund and its officers, directors and employees harmless from any and all Claims arising directly or indirectly from the negligence, bad faith or willful misfeasance of PFPC in the performance of its duties hereunder. Notwithstanding the foregoing, a Fund shall not be indemnified against any Claim caused by such Fund's or such Fund's other service providers' willful misfeasance, bad faith or negligence. (c) Indemnification Procedure. (i) Notice of the Action. A party that seeks indemnification under this Agreement must promptly give the other party notice of any legal action; provided, however, that a delay in notice does not relieve an indemnifying party of any liability to an indemnified party, except to the extent the indemnifying party shows that the delay prejudiced the defense of the action. (ii) Participating in or Assuming the Defense. The indemnifying party may participate in the defense at any time or it may assume the defense by giving notice to the other party. After assuming the defense, the indemnifying party: (1) must select an attorney that is satisfactory to the other party; (2) is not liable to the other party for any later attorney's fees or for any other later expenses that the other party incurs, except for reasonable investigation costs; (3) must not compromise or settle the action without the other party's consent (but the other party must not unreasonably withhold its consent); and (4) is not liable for any compromise or settlement made without its consent. (iii) Failing to Assume the Defense. If the indemnifying party fails to participate in or assume the defense within 15 days after receiving notice of the action, the indemnifying party is bound by any determination made in the action or by any compromise or settlement made by the other party. 12. Responsibility of PFPC. (a) PFPC shall be under no duty to take any action hereunder on behalf of a Fund except as specifically set forth herein or as may be specifically agreed to by PFPC and such Fund in a written amendment hereto. PFPC shall be obligated to exercise commercially reasonable care and diligence in the performance of its duties hereunder and to act in good faith in performing services provided for under this Agreement. PFPC shall be liable only for any damages arising out of PFPC's failure to perform its duties under this Agreement to the extent such damages arise out of PFPC's willful misfeasance, bad faith, negligence or reckless disregard of such duties. (b) Notwithstanding anything in this Agreement to the contrary, (i) PFPC shall not be liable for losses, delays, failure, errors, interruption or loss of data occurring directly or indirectly by reason of circumstances beyond its reasonable control, including without limitation acts of God; action or inaction of civil or military authority; public enemy; war; terrorism; riot; fire; flood; sabotage; epidemics; labor disputes; civil commotion; interruption, loss or malfunction of utilities, transportation, computer or communications capabilities; insurrection; elements of nature; or non-performance by a third party; and (ii) PFPC shall not be under any duty or obligation to inquire into and shall not be liable for the validity or invalidity, authority or lack thereof, or truthfulness or accuracy or lack thereof, of any instruction, direction, notice, instrument or other information which PFPC reasonably believes to be genuine. (c) Notwithstanding anything in this Agreement to the contrary, (i) neither PFPC nor its affiliates shall be liable for any consequential, incidental, exemplary, punitive, special or indirect losses or damages, whether or not the likelihood of such losses or damages was known by PFPC or its affiliates; and (ii) PFPC's liability to a Fund for any loss, claim, suit, controversy, breach or damage of any nature whatsoever (including but not limited to those arising out of or related to this Agreement) and regardless of the form of action or legal theory ("Loss") shall not exceed the fees received by PFPC for services provided hereunder during the twelve (12) months immediately prior to the date of Loss; provided that PFPC's cumulative maximum liability for all Losses shall not exceed $100,000. (d) Each party shall have a duty to mitigate damages for which the other party may become responsible. (e) The provisions of this Section 12 shall survive termination of this Agreement. 13. Description of Board Administration Services on a Continuous Basis. PFPC will perform the following Board administration services with respect to a Fund: (i) Add items relating to the Funds to meeting notices, agendas and resolutions being prepared by PFPC for audit committee meetings, quarterly meetings and special board meetings of First Defined Portfolio Fund, LLC and First Trust closed-end funds, for which PFPC currently provides board administration services along with any closed-end or open-end funds to which the parties mutually agree in writing that PFPC will provide board administration services for in the future ("Covered Funds"); (ii) Gather other materials for the Funds' board meetings for insertion into the board books of the Covered Funds; (iii) Attend the Funds' board meetings, provided that such meetings are concurrent with the Covered Funds' board meetings and that the Funds and the Covered Funds share the same board; (iv) Add Fund board matters (i.e., resolutions and relevant disclosure) to the Covered Funds' board meeting minutes being drafted by PFPC; and (v) Maintain the files for the Funds' board meeting materials. All board services are subject to the review and approval of Fund counsel. 14. Duration and Termination. (a) This Agreement shall be effective on the date first written above and shall continue until June 12, 2008 (the "Initial Term"). (b) Upon the expiration of the Initial Term, this Agreement shall automatically renew for successive terms of one (1) year ("Renewal Terms") each, unless a Fund or PFPC provides written notice to the other of its intent not to renew. Such notice must be received not less than ninety (90) days prior to the expiration of the Initial Term or the then current Renewal Term. If this Agreement is terminated with respect to less than all of the Funds, the rights, obligations and duties of the remaining parties shall not be affected. (c) In the event a termination notice is given by a Fund, all expenses associated with movement of records and materials and conversion thereof to a successor accounting and administration services agent(s) (and any other service provider(s)), and all trailing expenses incurred by PFPC, will be borne by such Fund. (d) If a party hereto is guilty of a material failure to perform its duties and obligations hereunder (a "Defaulting Party") the other party (the "Non-Defaulting Party") may give written notice thereof to the Defaulting Party, and if such material breach shall not have been remedied within thirty (30) days after such written notice is given, then the Non-Defaulting Party may terminate this Agreement by giving thirty (30) days written notice of such termination to the Defaulting Party. In all cases, termination by the Non-Defaulting Party shall not constitute a waiver by the Non-Defaulting Party of any other rights it might have under this Agreement or otherwise against the Defaulting Party. 15. Notices. Notices shall be addressed (a) if to PFPC, at 301 Bellevue Parkway, Wilmington, Delaware 19809, Attention: President (or such other address as PFPC may inform a Fund in writing); (b) if to the Funds, at 1001 Warrenville Road, Lisle, IL 60532, Attention: W. Scott Jardine or (c) if to neither of the foregoing, at such other address as shall have been given by like notice to the sender of any such notice or other communication by the other party. If notice is sent by confirming telegram, cable, telex or facsimile sending device, it shall be deemed to have been given immediately. If notice is sent by first-class mail, it shall be deemed to have been given three days after it has been mailed. If notice is sent by messenger, it shall be deemed to have been given on the day it is delivered. 16. Amendments. This Agreement, or any term thereof, may be changed or waived only by written amendment, signed by the party against whom enforcement of such change or waiver is sought. 17. Assignment. PFPC may assign its rights hereunder to any majority-owned direct or indirect subsidiary of PFPC or of The PNC Financial Services Group, Inc., provided that PFPC gives the Fund 30 days prior written notice of such assignment. 18. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 19. Further Actions. The parties agree to perform such further acts and execute such further documents as are necessary to effectuate the purposes hereof. 20. Miscellaneous. (a) Notwithstanding anything in this Agreement to the contrary, each Fund agrees not to make any modifications to its registration statement or adopt any policies which would affect materially the obligations or responsibilities of PFPC hereunder without the prior written approval of PFPC, which approval shall not be unreasonably withheld or delayed. (b) Except as expressly provided in this Agreement, PFPC hereby disclaims all representations and warranties, express or implied, made to a Fund or any other person, including, without limitation, any warranties regarding quality, suitability, merchantability, fitness for a particular purpose or otherwise (irrespective of any course of dealing, custom or usage of trade), of any services or any goods provided incidental to services provided under this Agreement. PFPC disclaims any warranty of title or non-infringement except as otherwise set forth in this Agreement. (c) As between each separate Fund and PFPC, this Agreement embodies the entire agreement and understanding between the parties and supersedes all prior agreements and understandings relating to the subject matter hereof, provided that the parties may embody in one or more separate documents their agreement, if any, with respect to delegated duties. The captions in this Agreement are included for convenience of reference only and in no way define or delimit any of the provisions hereof or otherwise affect their construction or effect. Notwithstanding any provision hereof, the services of PFPC are not, nor shall they be, construed as constituting legal advice or the provision of legal services for or on behalf of a Fund or any other person. (d) Each Fund will provide such information and documentation as PFPC may reasonably request in connection with services provided by PFPC to a Fund. (e) This Agreement shall be deemed to be a contract made in Delaware and governed by Delaware law, without regard to principles of conflicts of law. (f) If any provision of this Agreement shall be held or made invalid by a court decision, statute, rule or otherwise, the remainder of this Agreement shall not be affected thereby. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and permitted assigns. (g) The facsimile signature of any party to this Agreement shall constitute the valid and binding execution hereof by such party. (h) Each Fund and PFPC agree that the obligations of a Fund under the Agreement shall not be binding upon any of the directors, shareholders, nominees, officers, employees or agents, whether past, present or future, of such Fund individually, but are binding only upon the assets and property of such Fund (or applicable series thereof), as provided in the Declaration of Trust. The execution and delivery of this Agreement have been authorized by the directors of each Fund, and signed by an authorized officer of each Fund, acting as such, and neither such authorization by such directors nor such execution and delivery by such officer shall be deemed to have been made by any of them or any shareholder of a Fund individually or to impose any liability on any of them or any shareholder of a Fund personally, but shall bind only the assets and property of a Fund (or applicable series thereof), as provided in the Articles of Incorporation or Declaration of Trust. (i) PFPC is entering into this Agreement with each of the Funds separately and not jointly, and any duty, obligation or liability owed or incurred by PFPC with respect to a particular Fund shall be owed or incurred solely with respect to that Fund, and shall not in any way create any duty, obligation or liability with respect to any other Fund. This Agreement shall be interpreted to carry out the intent of the parties hereto that PFPC is entering into a separate arrangement with each separate Fund. (j) To help the U.S. government fight the funding of terrorism and money laundering activities, U.S. Federal law requires each financial institution to obtain, verify, and record certain information that identifies each person who initially opens an account with that financial institution on or after October 1, 2003. Certain of PFPC's affiliates are financial institutions, and PFPC may, as a matter of policy, request (or may have already requested) a Fund's name, address and taxpayer identification number or other government-issued identification number, and, if such party is a natural person, that party's date of birth. PFPC may also ask (and may have already asked) for additional identifying information, and PFPC may take steps (and may have already taken steps) to verify the authenticity and accuracy of these data elements. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year first above written. PFPC INC. By: ____________________ Title: ____________________ FIRST TRUST EXCHANGE-TRADED FUND By: ____________________ Title: ____________________ FIRST TRUST EXCHANGE-TRADED ALPHADEX FUND By: ____________________ Title: ____________________ FIRST TRUST EXCHANGE-TRADED FUND II By: ____________________ Title: ____________________ EXHIBIT A List of Funds Fund Agreement Effective Date - ---- ------------------------ FIRST TRUST EXCHANGE-TRADED FUND February 5, 2007 FIRST TRUST EXCHANGE-TRADED ALPHADEX FUND February 5, 2007 FIRST TRUST EXCHANGE-TRADED FUND II April __, 2007 EX-99.H.6 9 exhibit_h6.txt SUBLICENSE AGREEMENT This Sublicense Agreement (the "Sublicense Agreement"), dated as of April 26, 2007 is made by and among the First Trust Advisors L.P., First Trust Consumer Discretionary AlphaDEX(TM) Fund (each a "Sub-Licensee" and collectively the "Sub-Licensees"), the American Stock Exchange LLC ("Index Provider"), and First Trust Portfolios L.P. ("First Trust"). W I T N E S S E T H : WHEREAS, pursuant to the License Agreement dated as of January 1, 2007, entered by and between Index Provider and First Trust and to which this Exhibit B is attached (the "License Agreement"), Index Provider has granted First Trust a license to use certain indexes, copyright, trademark and proprietary rights and trade secrets of Index Provider (as further described in the License Agreement, the "Index Provider Enhanced Indexes" and the "Index Provider Marks") in connection with the issuance, sale, marketing and/or promotion of certain financial products (as further defined in the License Agreement, the "Products"); WHEREAS, Sub-Licensees wish to issue, sell, market and/or promote the Products and to use and refer to the Index Provider Enhanced Indexes and Index Provider Marks in connection therewith; and WHEREAS, all capitalized terms used herein shall have the meanings assigned to them in the License Agreement unless otherwise defined herein. NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements contained herein, the parties hereto agree as follows: 1. License. First Trust hereby grants to Sub-licensees a non-exclusive and non-transferable sublicense to use the Index Provider Enhanced Indexes and the Index Provider Marks in connection with the issuance, distribution, marketing and/or promotion of the Products. 2. Each Sub-licensee acknowledges that it has received and read a copy of the License Agreement (excluding the Exhibit setting forth the license fees) and agrees to be bound by all the provisions thereof, including, without limitation, those provisions imposing any obligations on the First Trust (including, without limitation, the exclusive listing obligation in Section 1(e) and the indemnification obligations in Section 11 insofar as such obligations arise out of or relate to the Products to be sold, issued, marketed and/or promoted by each Sub-licensee). 3. Each Sub-licensee agrees that its obligations under the License Agreement pursuant to Section 2 of this Sublicense Agreement are as principal, and may be enforced by the Index Provider, and shall be unaffected by any defense or claim that First Trust may have against Index Provider. 4. This Sublicense Agreement shall be construed in accordance with the laws of the State of New York, without regard to its conflict of laws provisions. The provisions of Section 14(e) of the License Agreement with respect to the venue for any action shall be applicable to any action relating to or arising out of this Sublicense Agreement to which the Index Provider is, or should be, a party. IN WITNESS WHEREOF, the parties hereto have executed this Sublicense Agreement as of the date first set forth above. FIRST TRUST PORTFOLIOS L.P. /s/ James A. Bowen - ---------------------------------- By: James A. Bowen Title: President AMERICAN STOCK EXCHANGE LLC /s/ Scott R. Ebner - ---------------------------------- By: Scott R. Ebner Title: Senior Vice President FIRST TRUST ADVISORS L.P. /s/ James A. Bowen - ---------------------------------- By: James A. Bowen Title: President First Trust Consumer Discretionary AlphaDEX(TM) Fund /s/ James A. Bowen - ---------------------------------- By: James A. Bowen Title: President EX-99.H.7 10 exhibit_h7.txt SUBLICENSE AGREEMENT This Sublicense Agreement (the "Sublicense Agreement"), dated as of April 26, 2007 is made by and among the First Trust Advisors L.P., First Trust Consumer Staples AlphaDEX(TM) Fund (each a "Sub-Licensee" and collectively the "Sub-Licensees"), the American Stock Exchange LLC ("Index Provider"), and First Trust Portfolios L.P. ("First Trust"). W I T N E S S E T H : WHEREAS, pursuant to the License Agreement dated as of January 1, 2007, entered by and between Index Provider and First Trust and to which this Exhibit B is attached (the "License Agreement"), Index Provider has granted First Trust a license to use certain indexes, copyright, trademark and proprietary rights and trade secrets of Index Provider (as further described in the License Agreement, the "Index Provider Enhanced Indexes" and the "Index Provider Marks") in connection with the issuance, sale, marketing and/or promotion of certain financial products (as further defined in the License Agreement, the "Products"); WHEREAS, Sub-Licensees wish to issue, sell, market and/or promote the Products and to use and refer to the Index Provider Enhanced Indexes and Index Provider Marks in connection therewith; and WHEREAS, all capitalized terms used herein shall have the meanings assigned to them in the License Agreement unless otherwise defined herein. NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements contained herein, the parties hereto agree as follows: 1. License. First Trust hereby grants to Sub-licensees a non-exclusive and non-transferable sublicense to use the Index Provider Enhanced Indexes and the Index Provider Marks in connection with the issuance, distribution, marketing and/or promotion of the Products. 2. Each Sub-licensee acknowledges that it has received and read a copy of the License Agreement (excluding the Exhibit setting forth the license fees) and agrees to be bound by all the provisions thereof, including, without limitation, those provisions imposing any obligations on the First Trust (including, without limitation, the exclusive listing obligation in Section 1(e) and the indemnification obligations in Section 11 insofar as such obligations arise out of or relate to the Products to be sold, issued, marketed and/or promoted by each Sub-licensee). 3. Each Sub-licensee agrees that its obligations under the License Agreement pursuant to Section 2 of this Sublicense Agreement are as principal, and may be enforced by the Index Provider, and shall be unaffected by any defense or claim that First Trust may have against Index Provider. 4. This Sublicense Agreement shall be construed in accordance with the laws of the State of New York, without regard to its conflict of laws provisions. The provisions of Section 14(e) of the License Agreement with respect to the venue for any action shall be applicable to any action relating to or arising out of this Sublicense Agreement to which the Index Provider is, or should be, a party. IN WITNESS WHEREOF, the parties hereto have executed this Sublicense Agreement as of the date first set forth above. FIRST TRUST PORTFOLIOS L.P. /s/ James A. Bowen - ---------------------------------- By: James A. Bowen Title: President AMERICAN STOCK EXCHANGE LLC /s/ Scott R. Ebner - ---------------------------------- By: Scott R. Ebner Title: Senior Vice President FIRST TRUST ADVISORS L.P. /s/ James A. Bowen - ---------------------------------- By: James A. Bowen Title: President First Trust Consumer Staples AlphaDEX(TM) Fund /s/ James A. Bowen - ---------------------------------- By: James A. Bowen Title: President EX-99.H.8 11 exhibit_h8.txt SUBLICENSE AGREEMENT This Sublicense Agreement (the "Sublicense Agreement"), dated as of April 26, 2007 is made by and among the First Trust Advisors L.P., First Trust Energy AlphaDEX(TM) Fund (each a "Sub-Licensee" and collectively the "Sub-Licensees"), the American Stock Exchange LLC ("Index Provider"), and First Trust Portfolios L.P. ("First Trust"). W I T N E S S E T H : WHEREAS, pursuant to the License Agreement dated as of January 1, 2007, entered by and between Index Provider and First Trust and to which this Exhibit B is attached (the "License Agreement"), Index Provider has granted First Trust a license to use certain indexes, copyright, trademark and proprietary rights and trade secrets of Index Provider (as further described in the License Agreement, the "Index Provider Enhanced Indexes" and the "Index Provider Marks") in connection with the issuance, sale, marketing and/or promotion of certain financial products (as further defined in the License Agreement, the "Products"); WHEREAS, Sub-Licensees wish to issue, sell, market and/or promote the Products and to use and refer to the Index Provider Enhanced Indexes and Index Provider Marks in connection therewith; and WHEREAS, all capitalized terms used herein shall have the meanings assigned to them in the License Agreement unless otherwise defined herein. NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements contained herein, the parties hereto agree as follows: 1. License. First Trust hereby grants to Sub-licensees a non-exclusive and non-transferable sublicense to use the Index Provider Enhanced Indexes and the Index Provider Marks in connection with the issuance, distribution, marketing and/or promotion of the Products. 2. Each Sub-licensee acknowledges that it has received and read a copy of the License Agreement (excluding the Exhibit setting forth the license fees) and agrees to be bound by all the provisions thereof, including, without limitation, those provisions imposing any obligations on the First Trust (including, without limitation, the exclusive listing obligation in Section 1(e) and the indemnification obligations in Section 11 insofar as such obligations arise out of or relate to the Products to be sold, issued, marketed and/or promoted by each Sub-licensee). 3. Each Sub-licensee agrees that its obligations under the License Agreement pursuant to Section 2 of this Sublicense Agreement are as principal, and may be enforced by the Index Provider, and shall be unaffected by any defense or claim that First Trust may have against Index Provider. 4. This Sublicense Agreement shall be construed in accordance with the laws of the State of New York, without regard to its conflict of laws provisions. The provisions of Section 14(e) of the License Agreement with respect to the venue for any action shall be applicable to any action relating to or arising out of this Sublicense Agreement to which the Index Provider is, or should be, a party. IN WITNESS WHEREOF, the parties hereto have executed this Sublicense Agreement as of the date first set forth above. FIRST TRUST PORTFOLIOS L.P. /s/ James A. Bowen - ---------------------------------- By: James A. Bowen Title: President AMERICAN STOCK EXCHANGE LLC /s/ Scott R. Ebner - ---------------------------------- By: Scott R. Ebner Title: Senior Vice President FIRST TRUST ADVISORS L.P. /s/ James A. Bowen - ---------------------------------- By: James A. Bowen Title: President First Trust Energy AlphaDEX(TM) Fund /s/ James A. Bowen - ---------------------------------- By: James A. Bowen Title: President EX-99.H.9 12 exhibit_h9.txt SUBLICENSE AGREEMENT This Sublicense Agreement (the "Sublicense Agreement"), dated as of April 26, 2007 is made by and among the First Trust Advisors L.P., First Trust Financial AlphaDEX(TM) Fund (each a "Sub-Licensee" and collectively the "Sub-Licensees"), the American Stock Exchange LLC ("Index Provider"), and First Trust Portfolios L.P. ("First Trust"). W I T N E S S E T H : WHEREAS, pursuant to the License Agreement dated as of January 1, 2007, entered by and between Index Provider and First Trust and to which this Exhibit B is attached (the "License Agreement"), Index Provider has granted First Trust a license to use certain indexes, copyright, trademark and proprietary rights and trade secrets of Index Provider (as further described in the License Agreement, the "Index Provider Enhanced Indexes" and the "Index Provider Marks") in connection with the issuance, sale, marketing and/or promotion of certain financial products (as further defined in the License Agreement, the "Products"); WHEREAS, Sub-Licensees wish to issue, sell, market and/or promote the Products and to use and refer to the Index Provider Enhanced Indexes and Index Provider Marks in connection therewith; and WHEREAS, all capitalized terms used herein shall have the meanings assigned to them in the License Agreement unless otherwise defined herein. NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements contained herein, the parties hereto agree as follows: 1. License. First Trust hereby grants to Sub-licensees a non-exclusive and non-transferable sublicense to use the Index Provider Enhanced Indexes and the Index Provider Marks in connection with the issuance, distribution, marketing and/or promotion of the Products. 2. Each Sub-licensee acknowledges that it has received and read a copy of the License Agreement (excluding the Exhibit setting forth the license fees) and agrees to be bound by all the provisions thereof, including, without limitation, those provisions imposing any obligations on the First Trust (including, without limitation, the exclusive listing obligation in Section 1(e) and the indemnification obligations in Section 11 insofar as such obligations arise out of or relate to the Products to be sold, issued, marketed and/or promoted by each Sub-licensee). 3. Each Sub-licensee agrees that its obligations under the License Agreement pursuant to Section 2 of this Sublicense Agreement are as principal, and may be enforced by the Index Provider, and shall be unaffected by any defense or claim that First Trust may have against Index Provider. 4. This Sublicense Agreement shall be construed in accordance with the laws of the State of New York, without regard to its conflict of laws provisions. The provisions of Section 14(e) of the License Agreement with respect to the venue for any action shall be applicable to any action relating to or arising out of this Sublicense Agreement to which the Index Provider is, or should be, a party. IN WITNESS WHEREOF, the parties hereto have executed this Sublicense Agreement as of the date first set forth above. FIRST TRUST PORTFOLIOS L.P. /s/ James A. Bowen - ---------------------------------- By: James A. Bowen Title: President AMERICAN STOCK EXCHANGE LLC /s/ Scott R. Ebner - ---------------------------------- By: Scott R. Ebner Title: Senior Vice President FIRST TRUST ADVISORS L.P. /s/ James A. Bowen - ---------------------------------- By: James A. Bowen Title: President First Trust Financial AlphaDEX(TM) Fund /s/ James A. Bowen - ---------------------------------- By: James A. Bowen Title: President EX-99.H.10 13 exhibit_h10.txt SUBLICENSE AGREEMENT This Sublicense Agreement (the "Sublicense Agreement"), dated as of April 26, 2007 is made by and among the First Trust Advisors L.P., First Trust Health Care AlphaDEX(TM) Fund (each a "Sub-Licensee" and collectively the "Sub-Licensees"), the American Stock Exchange LLC ("Index Provider"), and First Trust Portfolios L.P. ("First Trust"). W I T N E S S E T H : WHEREAS, pursuant to the License Agreement dated as of January 1, 2007, entered by and between Index Provider and First Trust and to which this Exhibit B is attached (the "License Agreement"), Index Provider has granted First Trust a license to use certain indexes, copyright, trademark and proprietary rights and trade secrets of Index Provider (as further described in the License Agreement, the "Index Provider Enhanced Indexes" and the "Index Provider Marks") in connection with the issuance, sale, marketing and/or promotion of certain financial products (as further defined in the License Agreement, the "Products"); WHEREAS, Sub-Licensees wish to issue, sell, market and/or promote the Products and to use and refer to the Index Provider Enhanced Indexes and Index Provider Marks in connection therewith; and WHEREAS, all capitalized terms used herein shall have the meanings assigned to them in the License Agreement unless otherwise defined herein. NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements contained herein, the parties hereto agree as follows: 1. License. First Trust hereby grants to Sub-licensees a non-exclusive and non-transferable sublicense to use the Index Provider Enhanced Indexes and the Index Provider Marks in connection with the issuance, distribution, marketing and/or promotion of the Products. 2. Each Sub-licensee acknowledges that it has received and read a copy of the License Agreement (excluding the Exhibit setting forth the license fees) and agrees to be bound by all the provisions thereof, including, without limitation, those provisions imposing any obligations on the First Trust (including, without limitation, the exclusive listing obligation in Section 1(e) and the indemnification obligations in Section 11 insofar as such obligations arise out of or relate to the Products to be sold, issued, marketed and/or promoted by each Sub-licensee). 3. Each Sub-licensee agrees that its obligations under the License Agreement pursuant to Section 2 of this Sublicense Agreement are as principal, and may be enforced by the Index Provider, and shall be unaffected by any defense or claim that First Trust may have against Index Provider. 4. This Sublicense Agreement shall be construed in accordance with the laws of the State of New York, without regard to its conflict of laws provisions. The provisions of Section 14(e) of the License Agreement with respect to the venue for any action shall be applicable to any action relating to or arising out of this Sublicense Agreement to which the Index Provider is, or should be, a party. IN WITNESS WHEREOF, the parties hereto have executed this Sublicense Agreement as of the date first set forth above. FIRST TRUST PORTFOLIOS L.P. /s/ James A. Bowen - ---------------------------------- By: James A. Bowen Title: President AMERICAN STOCK EXCHANGE LLC /s/ Scott R. Ebner - ---------------------------------- By: Scott R. Ebner Title: Senior Vice President FIRST TRUST ADVISORS L.P. /s/ James A. Bowen - ---------------------------------- By: James A. Bowen Title: President First Trust Health Care AlphaDEX(TM) Fund /s/ James A. Bowen - ---------------------------------- By: James A. Bowen Title: President EX-99.H.11 14 exhibit_h11.txt SUBLICENSE AGREEMENT This Sublicense Agreement (the "Sublicense Agreement"), dated as of April 26, 2007 is made by and among the First Trust Advisors L.P., First Trust Industrials AlphaDEX(TM) Fund (each a "Sub-Licensee" and collectively the "Sub-Licensees"), the American Stock Exchange LLC ("Index Provider"), and First Trust Portfolios L.P. ("First Trust"). W I T N E S S E T H : WHEREAS, pursuant to the License Agreement dated as of January 1, 2007, entered by and between Index Provider and First Trust and to which this Exhibit B is attached (the "License Agreement"), Index Provider has granted First Trust a license to use certain indexes, copyright, trademark and proprietary rights and trade secrets of Index Provider (as further described in the License Agreement, the "Index Provider Enhanced Indexes" and the "Index Provider Marks") in connection with the issuance, sale, marketing and/or promotion of certain financial products (as further defined in the License Agreement, the "Products"); WHEREAS, Sub-Licensees wish to issue, sell, market and/or promote the Products and to use and refer to the Index Provider Enhanced Indexes and Index Provider Marks in connection therewith; and WHEREAS, all capitalized terms used herein shall have the meanings assigned to them in the License Agreement unless otherwise defined herein. NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements contained herein, the parties hereto agree as follows: 1. License. First Trust hereby grants to Sub-licensees a non-exclusive and non-transferable sublicense to use the Index Provider Enhanced Indexes and the Index Provider Marks in connection with the issuance, distribution, marketing and/or promotion of the Products. 2. Each Sub-licensee acknowledges that it has received and read a copy of the License Agreement (excluding the Exhibit setting forth the license fees) and agrees to be bound by all the provisions thereof, including, without limitation, those provisions imposing any obligations on the First Trust (including, without limitation, the exclusive listing obligation in Section 1(e) and the indemnification obligations in Section 11 insofar as such obligations arise out of or relate to the Products to be sold, issued, marketed and/or promoted by each Sub-licensee). 3. Each Sub-licensee agrees that its obligations under the License Agreement pursuant to Section 2 of this Sublicense Agreement are as principal, and may be enforced by the Index Provider, and shall be unaffected by any defense or claim that First Trust may have against Index Provider. 4. This Sublicense Agreement shall be construed in accordance with the laws of the State of New York, without regard to its conflict of laws provisions. The provisions of Section 14(e) of the License Agreement with respect to the venue for any action shall be applicable to any action relating to or arising out of this Sublicense Agreement to which the Index Provider is, or should be, a party. IN WITNESS WHEREOF, the parties hereto have executed this Sublicense Agreement as of the date first set forth above. FIRST TRUST PORTFOLIOS L.P. /s/ James A. Bowen - ---------------------------------- By: James A. Bowen Title: President AMERICAN STOCK EXCHANGE LLC /s/ Scott R. Ebner - ---------------------------------- By: Scott R. Ebner Title: Senior Vice President FIRST TRUST ADVISORS L.P. /s/ James A. Bowen - ---------------------------------- By: James A. Bowen Title: President First Trust Industrials AlphaDEX(TM) Fund /s/ James A. Bowen - ---------------------------------- By: James A. Bowen Title: President EX-99.H 15 exhibit_h12.txt SUBLICENSE AGREEMENT This Sublicense Agreement (the "Sublicense Agreement"), dated as of April 26, 2007 is made by and among the First Trust Advisors L.P., First Trust Materials AlphaDEX(TM) Fund (each a "Sub-Licensee" and collectively the "Sub-Licensees"), the American Stock Exchange LLC ("Index Provider"), and First Trust Portfolios L.P. ("First Trust"). W I T N E S S E T H : WHEREAS, pursuant to the License Agreement dated as of January 1, 2007, entered by and between Index Provider and First Trust and to which this Exhibit B is attached (the "License Agreement"), Index Provider has granted First Trust a license to use certain indexes, copyright, trademark and proprietary rights and trade secrets of Index Provider (as further described in the License Agreement, the "Index Provider Enhanced Indexes" and the "Index Provider Marks") in connection with the issuance, sale, marketing and/or promotion of certain financial products (as further defined in the License Agreement, the "Products"); WHEREAS, Sub-Licensees wish to issue, sell, market and/or promote the Products and to use and refer to the Index Provider Enhanced Indexes and Index Provider Marks in connection therewith; and WHEREAS, all capitalized terms used herein shall have the meanings assigned to them in the License Agreement unless otherwise defined herein. NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements contained herein, the parties hereto agree as follows: 1. License. First Trust hereby grants to Sub-licensees a non-exclusive and non-transferable sublicense to use the Index Provider Enhanced Indexes and the Index Provider Marks in connection with the issuance, distribution, marketing and/or promotion of the Products. 2. Each Sub-licensee acknowledges that it has received and read a copy of the License Agreement (excluding the Exhibit setting forth the license fees) and agrees to be bound by all the provisions thereof, including, without limitation, those provisions imposing any obligations on the First Trust (including, without limitation, the exclusive listing obligation in Section 1(e) and the indemnification obligations in Section 11 insofar as such obligations arise out of or relate to the Products to be sold, issued, marketed and/or promoted by each Sub-licensee). 3. Each Sub-licensee agrees that its obligations under the License Agreement pursuant to Section 2 of this Sublicense Agreement are as principal, and may be enforced by the Index Provider, and shall be unaffected by any defense or claim that First Trust may have against Index Provider. 4. This Sublicense Agreement shall be construed in accordance with the laws of the State of New York, without regard to its conflict of laws provisions. The provisions of Section 14(e) of the License Agreement with respect to the venue for any action shall be applicable to any action relating to or arising out of this Sublicense Agreement to which the Index Provider is, or should be, a party. IN WITNESS WHEREOF, the parties hereto have executed this Sublicense Agreement as of the date first set forth above. FIRST TRUST PORTFOLIOS L.P. /s/ James A. Bowen - ---------------------------------- By: James A. Bowen Title: President AMERICAN STOCK EXCHANGE LLC /s/ Scott R. Ebner - ---------------------------------- By: Scott R. Ebner Title: Senior Vice President FIRST TRUST ADVISORS L.P. /s/ James A. Bowen - ---------------------------------- By: James A. Bowen Title: President First Trust Materials AlphaDEX(TM) Fund /s/ James A. Bowen - ---------------------------------- By: James A. Bowen Title: President EX-99.H.13 16 exhibit_h13.txt SUBLICENSE AGREEMENT This Sublicense Agreement (the "Sublicense Agreement"), dated as of April 26, 2007 is made by and among the First Trust Advisors L.P., First Trust Technology AlphaDEX(TM) Fund (each a "Sub-Licensee" and collectively the "Sub-Licensees"), the American Stock Exchange LLC ("Index Provider"), and First Trust Portfolios L.P. ("First Trust"). W I T N E S S E T H : WHEREAS, pursuant to the License Agreement dated as of January 1, 2007, entered by and between Index Provider and First Trust and to which this Exhibit B is attached (the "License Agreement"), Index Provider has granted First Trust a license to use certain indexes, copyright, trademark and proprietary rights and trade secrets of Index Provider (as further described in the License Agreement, the "Index Provider Enhanced Indexes" and the "Index Provider Marks") in connection with the issuance, sale, marketing and/or promotion of certain financial products (as further defined in the License Agreement, the "Products"); WHEREAS, Sub-Licensees wish to issue, sell, market and/or promote the Products and to use and refer to the Index Provider Enhanced Indexes and Index Provider Marks in connection therewith; and WHEREAS, all capitalized terms used herein shall have the meanings assigned to them in the License Agreement unless otherwise defined herein. NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements contained herein, the parties hereto agree as follows: 1. License. First Trust hereby grants to Sub-licensees a non-exclusive and non-transferable sublicense to use the Index Provider Enhanced Indexes and the Index Provider Marks in connection with the issuance, distribution, marketing and/or promotion of the Products. 2. Each Sub-licensee acknowledges that it has received and read a copy of the License Agreement (excluding the Exhibit setting forth the license fees) and agrees to be bound by all the provisions thereof, including, without limitation, those provisions imposing any obligations on the First Trust (including, without limitation, the exclusive listing obligation in Section 1(e) and the indemnification obligations in Section 11 insofar as such obligations arise out of or relate to the Products to be sold, issued, marketed and/or promoted by each Sub-licensee). 3. Each Sub-licensee agrees that its obligations under the License Agreement pursuant to Section 2 of this Sublicense Agreement are as principal, and may be enforced by the Index Provider, and shall be unaffected by any defense or claim that First Trust may have against Index Provider. 4. This Sublicense Agreement shall be construed in accordance with the laws of the State of New York, without regard to its conflict of laws provisions. The provisions of Section 14(e) of the License Agreement with respect to the venue for any action shall be applicable to any action relating to or arising out of this Sublicense Agreement to which the Index Provider is, or should be, a party. IN WITNESS WHEREOF, the parties hereto have executed this Sublicense Agreement as of the date first set forth above. FIRST TRUST PORTFOLIOS L.P. /s/ James A. Bowen - ---------------------------------- By: James A. Bowen AMERICAN STOCK EXCHANGE LLC /s/ Scott R. Ebner - ---------------------------------- By: Scott R. Ebner Title: Senior Vice President FIRST TRUST ADVISORS L.P. /s/ James A. Bowen - ---------------------------------- By: James A. Bowen First Trust Technology AlphaDEX(TM) Fund /s/ James A. Bowen - ---------------------------------- By: James A. Bowen EX-99.H.14 17 exhibit_h14.txt SUBLICENSE AGREEMENT This Sublicense Agreement (the "Sublicense Agreement"), dated as of April 26, 2007 is made by and among the First Trust Advisors L.P., First Trust Utilities AlphaDEX(TM) Fund (each a "Sub-Licensee" and collectively the "Sub-Licensees"), the American Stock Exchange LLC ("Index Provider"), and First Trust Portfolios L.P. ("First Trust"). W I T N E S S E T H : WHEREAS, pursuant to the License Agreement dated as of January 1, 2007, entered by and between Index Provider and First Trust and to which this Exhibit B is attached (the "License Agreement"), Index Provider has granted First Trust a license to use certain indexes, copyright, trademark and proprietary rights and trade secrets of Index Provider (as further described in the License Agreement, the "Index Provider Enhanced Indexes" and the "Index Provider Marks") in connection with the issuance, sale, marketing and/or promotion of certain financial products (as further defined in the License Agreement, the "Products"); WHEREAS, Sub-Licensees wish to issue, sell, market and/or promote the Products and to use and refer to the Index Provider Enhanced Indexes and Index Provider Marks in connection therewith; and WHEREAS, all capitalized terms used herein shall have the meanings assigned to them in the License Agreement unless otherwise defined herein. NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements contained herein, the parties hereto agree as follows: 1. License. First Trust hereby grants to Sub-licensees a non-exclusive and non-transferable sublicense to use the Index Provider Enhanced Indexes and the Index Provider Marks in connection with the issuance, distribution, marketing and/or promotion of the Products. 2. Each Sub-licensee acknowledges that it has received and read a copy of the License Agreement (excluding the Exhibit setting forth the license fees) and agrees to be bound by all the provisions thereof, including, without limitation, those provisions imposing any obligations on the First Trust (including, without limitation, the exclusive listing obligation in Section 1(e) and the indemnification obligations in Section 11 insofar as such obligations arise out of or relate to the Products to be sold, issued, marketed and/or promoted by each Sub-licensee). 3. Each Sub-licensee agrees that its obligations under the License Agreement pursuant to Section 2 of this Sublicense Agreement are as principal, and may be enforced by the Index Provider, and shall be unaffected by any defense or claim that First Trust may have against Index Provider. 4. This Sublicense Agreement shall be construed in accordance with the laws of the State of New York, without regard to its conflict of laws provisions. The provisions of Section 14(e) of the License Agreement with respect to the venue for any action shall be applicable to any action relating to or arising out of this Sublicense Agreement to which the Index Provider is, or should be, a party. IN WITNESS WHEREOF, the parties hereto have executed this Sublicense Agreement as of the date first set forth above. FIRST TRUST PORTFOLIOS L.P. /s/ James A. Bowen - ---------------------------------- By: James A. Bowen Title: President AMERICAN STOCK EXCHANGE LLC /s/ Scott R. Ebner - ---------------------------------- By: Scott R. Ebner Title: Senior Vice President FIRST TRUST ADVISORS L.P. /s/ James A. Bowen - ---------------------------------- By: James A. Bowen First Trust Utilities AlphaDEX(TM) Fund /s/ James A. Bowen - ---------------------------------- By: James A. Bowen EX-99.H.15 18 exhibit_h15.txt SUBLICENSE AGREEMENT This Sublicense Agreement (the "Sublicense Agreement"), dated as of April 26, 2007 is made by and among First Trust Large Cap Core AlphaDEX(TM) Fund and First Trust Advisors L.P. (each, a "Sub-Licensee" and collectively, the "Sub-Licensees"), STANDARD & POOR'S, a division of The McGraw-Hill Companies, Inc., a New York corporation ("S&P"), and First Trust Portfolios L.P. ("FTP"). W I T N E S S E T H : WHEREAS, pursuant to the Standard & Poor's Custom Index License Agreement dated as of February 22, 2007, entered by and between S&P and FTP and to which this form of Sublicense Agreement is attached (the "License Agreement"), S&P has granted FTP a license to use certain indexes, copyright, trademark and proprietary rights and trade secrets of S&P (as further described in the License Agreement, (the "Custom Indices" and "Marks")) in connection with the issuance, sale, marketing and/or promotion of certain financial products including exchange-traded funds (as further defined in the License Agreement, the "Products"); WHEREAS, Sub-Licensees wish to issue, sell, market and/or promote the Products as defined under the License Agreement and as such, desire to use and refer to the Custom Indices and Marks in connection with the registration statement and prospectus for the Products as well as other marketing or promotion of the Products; and WHEREAS, all capitalized terms used herein shall have the meanings assigned to them in the License Agreement unless otherwise defined herein. NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements contained herein, the parties hereto agree as follows: 1. LICENSE. FTP hereby grants Sub-Licensees a non-exclusive and non-transferable sublicense to use Custom Indices and Marks in connection with the issuance, distribution, marketing and/or promotion of the Products, as included on Custom Index Order Schedule Number 1 (including all exhibits thereto). 2. Each Sub-Licensee acknowledges that it has received and read a copy of the License Agreement (excluding the Exhibit setting forth the license fees) and, except for the payment of Fees, agrees to be bound by all the provisions thereof, including, without limitation, those provisions imposing any obligations on FTP (including, without limitation, the indemnification obligations insofar as such obligations arise out of or relate to the Products to be sold, issued, marketed and/or promoted by the Sub-Licensee). 3. Each Sub-Licensee agrees that its obligations under the License Agreement pursuant to Section 2 of this Sublicense Agreement are as principal and shall be unaffected by any defense or claim that FTP may have against S&P. 4. This Sublicense Agreement shall be construed in accordance with the laws of the State of New York. IN WITNESS WHEREOF, the parties hereto have executed this Sublicense Agreement as of the date first set forth above. FIRST TRUST PORTFOLIOS L.P. __________________________________ By:_______________________________ Title:____________________________ STANDARD & POOR'S, A division of The McGraw-Hill Companies, Inc. __________________________________ By:_______________________________ Title:____________________________ FIRST TRUST LARGE CAP CORE ALPHADEX(TM) FUND __________________________________ By:_______________________________ Title:____________________________ FIRST TRUST ADVISORS L.P. __________________________________ By:_______________________________ Title:____________________________ EX-99.H.16 19 exhibit_h16.txt SUBLICENSE AGREEMENT This Sublicense Agreement (the "Sublicense Agreement"), dated as of April 26, 2007 is made by and among First Trust Mid Cap Core AlphaDEX(TM) Fund and First Trust Advisors L.P. (each a "Sub-Licensee" and collectively, the "Sub-Licensees"), STANDARD & POOR'S, a division of The McGraw-Hill Companies, Inc., a New York corporation ("S&P"), and First Trust Portfolios L.P. ("FTP"). W I T N E S S E T H : WHEREAS, pursuant to the Standard & Poor's Custom Index License Agreement dated as of February 22, 2007, entered by and between S&P and FTP and to which this form of Sublicense Agreement is attached (the "License Agreement"), S&P has granted FTP a license to use certain indexes, copyright, trademark and proprietary rights and trade secrets of S&P (as further described in the License Agreement, (the "Custom Indices" and "Marks")) in connection with the issuance, sale, marketing and/or promotion of certain financial products including exchange-traded funds (as further defined in the License Agreement, the "Products"); WHEREAS, Sub-Licensees wish to issue, sell, market and/or promote the Products as defined under the License Agreement and as such, desire to use and refer to the Custom Indices and Marks in connection with the registration statement and prospectus for the Products as well as other marketing or promotion of the Products; and WHEREAS, all capitalized terms used herein shall have the meanings assigned to them in the License Agreement unless otherwise defined herein. NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements contained herein, the parties hereto agree as follows: 1. License. FTP hereby grants Sub-Licensees a non-exclusive and non-transferable sublicense to use Custom Indices and Marks in connection with the issuance, distribution, marketing and/or promotion of the Products, as included on Custom Index Order Schedule Number 1 (including all exhibits thereto). 2. Each Sub-Licensee acknowledges that it has received and read a copy of the License Agreement (excluding the Exhibit setting forth the license fees) and, except for the payment of Fees, agrees to be bound by all the provisions thereof, including, without limitation, those provisions imposing any obligations on FTP (including, without limitation, the indemnification obligations insofar as such obligations arise out of or relate to the Products to be sold, issued, marketed and/or promoted by the Sub-Licensee). 3. Each Sub-Licensee agrees that its obligations under the License Agreement pursuant to Section 2 of this Sublicense Agreement are as principal and shall be unaffected by any defense or claim that FTP may have against S&P. 4. This Sublicense Agreement shall be construed in accordance with the laws of the State of placeStateNew York. IN WITNESS WHEREOF, the parties hereto have executed this Sublicense Agreement as of the date first set forth above. FIRST TRUST PORTFOLIOS L.P. - ---------------------------------- By:_______________________________ Title:______________________________ STANDARD & POOR'S, A DIVISION OF THE MCGRAW-HILL COMPANIES, INC. - ---------------------------------- By:_______________________________ Title:______________________________ FIRST TRUST MID CAP CORE ALPHADEX(TM) FUND - ---------------------------------- By:_______________________________ Title:______________________________ FIRST TRUST ADVISORS L.P. - ---------------------------------- By:_______________________________ Title:______________________________ EX-99.H.17 20 exhibit_h17.txt SUBLICENSE AGREEMENT This Sublicense Agreement (the "Sublicense Agreement"), dated as of April 26, 2007 is made by and among First Trust Small Cap Core AlphaDEX(TM) Fund and First Trust Advisors L.P. (each a "Sub-Licensee" and collectively, the "Sub-Licensees"), STANDARD & POOR'S, a division of The McGraw-Hill Companies, Inc., a New York corporation ("S&P"), and First Trust Portfolios L.P. ("FTP"). W I T N E S S E T H : WHEREAS, pursuant to the Standard & Poor's Custom Index License Agreement dated as of February 22, 2007, entered by and between S&P and FTP and to which this form of Sublicense Agreement is attached (the "License Agreement"), S&P has granted FTP a license to use certain indexes, copyright, trademark and proprietary rights and trade secrets of S&P (as further described in the License Agreement, (the "Custom Indices" and "Marks")) in connection with the issuance, sale, marketing and/or promotion of certain financial products including exchange-traded funds (as further defined in the License Agreement, the "Products"); WHEREAS, Sub-Licensees wish to issue, sell, market and/or promote the Products as defined under the License Agreement and as such, desire to use and refer to the Custom Indices and Marks in connection with the registration statement and prospectus for the Products as well as other marketing or promotion of the Products; and WHEREAS, all capitalized terms used herein shall have the meanings assigned to them in the License Agreement unless otherwise defined herein. NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements contained herein, the parties hereto agree as follows: 1. LICENSE. FTP hereby grants Sub-Licensees a non-exclusive and non-transferable sublicense to use Custom Indices and Marks in connection with the issuance, distribution, marketing and/or promotion of the Products, as included on Custom Index Order Schedule Number 1 (including all exhibits thereto). 2. Each Sub-Licensee acknowledges that it has received and read a copy of the License Agreement (excluding the Exhibit setting forth the license fees) and, except for the payment of Fees, agrees to be bound by all the provisions thereof, including, without limitation, those provisions imposing any obligations on FTP (including, without limitation, the indemnification obligations insofar as such obligations arise out of or relate to the Products to be sold, issued, marketed and/or promoted by the Sub-Licensee). 3. Each Sub-Licensee agrees that its obligations under the License Agreement pursuant to Section 2 of this Sublicense Agreement are as principal and shall be unaffected by any defense or claim that FTP may have against S&P. 4. This Sublicense Agreement shall be construed in accordance with the laws of the State of New York. IN WITNESS WHEREOF, the parties hereto have executed this Sublicense Agreement as of the date first set forth above. FIRST TRUST PORTFOLIOS L.P. __________________________________ By:_______________________________ Title:____________________________ STANDARD & POOR'S, a division of The McGraw-Hill Companies, Inc. __________________________________ By:_______________________________ Title:____________________________ FIRST TRUST SMALL CAP CORE ALPHADEX(TM) FUND __________________________________ By:_______________________________ Title:____________________________ FIRST TRUST ADVISORS L.P. __________________________________ By:_______________________________ Title:____________________________ EX-99.H.18 21 exhibit_h18.txt SUBLICENSE AGREEMENT This Sublicense Agreement (the "Sublicense Agreement"), dated as of April 26, 2007 is made by and among First Trust Large Cap Value Opportunities AlphaDEX(TM) Fund and First Trust Advisors L.P. (each a "Sub-Licensee" and collectively, the "Sub-Licensees"), STANDARD & POOR'S, a division of The McGraw-Hill Companies, Inc., a New York corporation ("S&P"), and First Trust Portfolios L.P. ("FTP"). W I T N E S S E T H : WHEREAS, pursuant to the Standard & Poor's Custom Index License Agreement dated as of February 22, 2007, entered by and between S&P and FTP and to which this form of Sublicense Agreement is attached (the "License Agreement"), S&P has granted FTP a license to use certain indexes, copyright, trademark and proprietary rights and trade secrets of S&P (as further described in the License Agreement, (the "Custom Indices" and "Marks")) in connection with the issuance, sale, marketing and/or promotion of certain financial products including exchange-traded funds (as further defined in the License Agreement, the "Products"); WHEREAS, Sub-Licensees wish to issue, sell, market and/or promote the Products as defined under the License Agreement and as such, desire to use and refer to the Custom Indices and Marks in connection with the registration statement and prospectus for the Products as well as other marketing or promotion of the Products; and WHEREAS, all capitalized terms used herein shall have the meanings assigned to them in the License Agreement unless otherwise defined herein. NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements contained herein, the parties hereto agree as follows: 1. LICENSE. FTP hereby grants Sub-Licensees a non-exclusive and non-transferable sublicense to use Custom Indices and Marks in connection with the issuance, distribution, marketing and/or promotion of the Products, as included on Custom Index Order Schedule Number 1 (including all exhibits thereto). 2. Each Sub-Licensee acknowledges that it has received and read a copy of the License Agreement (excluding the Exhibit setting forth the license fees) and, except for the payment of Fees, agrees to be bound by all the provisions thereof, including, without limitation, those provisions imposing any obligations on FTP (including, without limitation, the indemnification obligations insofar as such obligations arise out of or relate to the Products to be sold, issued, marketed and/or promoted by the Sub-Licensee). 3. Each Sub-Licensee agrees that its obligations under the License Agreement pursuant to Section 2 of this Sublicense Agreement are as principal and shall be unaffected by any defense or claim that FTP may have against S&P. 4. This Sublicense Agreement shall be construed in accordance with the laws of the State of New York. IN WITNESS WHEREOF, the parties hereto have executed this Sublicense Agreement as of the date first set forth above. FIRST TRUST PORTFOLIOS L.P. __________________________________ By:_______________________________ Title:____________________________ STANDARD & POOR'S, a division of The McGraw-Hill Companies, Inc. __________________________________ By:_______________________________ Title:____________________________ FIRST TRUST LARGE CAP VALUE OPPORTUNITIES ALPHADEX(TM) FUND __________________________________ By:_______________________________ Title:____________________________ FIRST TRUST ADVISORS L.P. __________________________________ By:_______________________________ Title:____________________________ EX-99.H.19 22 exhibit_h19.txt SUBLICENSE AGREEMENT This Sublicense Agreement (the "Sublicense Agreement"), dated as of April 26, 2007 is made by and among First Trust Large Cap Growth Opportunities AlphaDEX(TM) Fund and First Trust Advisors L.P. (each a "Sub-Licensee" and collectively, the "Sub-Licensees"), STANDARD & POOR'S, a division of The McGraw-Hill Companies, Inc., a New York corporation ("S&P"), and First Trust Portfolios L.P. ("FTP"). W I T N E S S E T H : WHEREAS, pursuant to the Standard & Poor's Custom Index License Agreement dated as of February 22, 2007, entered by and between S&P and FTP and to which this form of Sublicense Agreement is attached (the "License Agreement"), S&P has granted FTP a license to use certain indexes, copyright, trademark and proprietary rights and trade secrets of S&P (as further described in the License Agreement, (the "Custom Indices" and "Marks")) in connection with the issuance, sale, marketing and/or promotion of certain financial products including exchange-traded funds (as further defined in the License Agreement, the "Products"); WHEREAS, Sub-Licensees wish to issue, sell, market and/or promote the Products as defined under the License Agreement and as such, desire to use and refer to the Custom Indices and Marks in connection with the registration statement and prospectus for the Products as well as other marketing or promotion of the Products; and WHEREAS, all capitalized terms used herein shall have the meanings assigned to them in the License Agreement unless otherwise defined herein. NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements contained herein, the parties hereto agree as follows: 1. License. FTP hereby grants Sub-Licensees a non-exclusive and non-transferable sublicense to use Custom Indices and Marks in connection with the issuance, distribution, marketing and/or promotion of the Products, as included on Custom Index Order Schedule Number 1 (including all exhibits thereto). 2. Each Sub-Licensee acknowledges that it has received and read a copy of the License Agreement (excluding the Exhibit setting forth the license fees) and, except for the payment of Fees, agrees to be bound by all the provisions thereof, including, without limitation, those provisions imposing any obligations on FTP (including, without limitation, the indemnification obligations insofar as such obligations arise out of or relate to the Products to be sold, issued, marketed and/or promoted by the Sub-Licensee). 3. Each Sub-Licensee agrees that its obligations under the License Agreement pursuant to Section 2 of this Sublicense Agreement are as principal and shall be unaffected by any defense or claim that FTP may have against S&P. 4. This Sublicense Agreement shall be construed in accordance with the laws of the State of New York. IN WITNESS WHEREOF, the parties hereto have executed this Sublicense Agreement as of the date first set forth above. FIRST TRUST PORTFOLIOS L.P. __________________________________ By:_______________________________ Title:____________________________ STANDARD & POOR'S, a division of The McGraw-Hill Companies, Inc. __________________________________ By:_______________________________ Title:____________________________ FIRST TRUST LARGE CAP GROWTH OPPORTUNITIES ALPHADEX(TM) FUND __________________________________ By:_______________________________ Title:____________________________ FIRST TRUST ADVISORS L.P. __________________________________ By:_______________________________ Title:____________________________ EX-99.H.20 23 exhibit_h20.txt SUBLICENSE AGREEMENT This Sublicense Agreement (the "Sublicense Agreement"), dated as of April 26, 2007 is made by and among First Trust Multi Cap Value AlphaDEX(TM) Fund and First Trust Advisors L.P. (each a "Sub-Licensee" and collectively, the "Sub-Licensees"), STANDARD & POOR'S, a division of The McGraw-Hill Companies, Inc., a New York corporation ("S&P"), and First Trust Portfolios L.P. ("FTP"). W I T N E S S E T H : WHEREAS, pursuant to the Standard & Poor's Custom Index License Agreement dated as of February 22, 2007, entered by and between S&P and FTP and to which this form of Sublicense Agreement is attached (the "License Agreement"), S&P has granted FTP a license to use certain indexes, copyright, trademark and proprietary rights and trade secrets of S&P (as further described in the License Agreement, (the "Custom Indices" and "Marks")) in connection with the issuance, sale, marketing and/or promotion of certain financial products including exchange-traded funds (as further defined in the License Agreement, the "Products"); WHEREAS, Sub-Licensees wish to issue, sell, market and/or promote the Products as defined under the License Agreement and as such, desire to use and refer to the Custom Indices and Marks in connection with the registration statement and prospectus for the Products as well as other marketing or promotion of the Products; and WHEREAS, all capitalized terms used herein shall have the meanings assigned to them in the License Agreement unless otherwise defined herein. NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements contained herein, the parties hereto agree as follows: 1. LICENSE. FTP hereby grants Sub-Licensees a non-exclusive and non-transferable sublicense to use Custom Indices and Marks in connection with the issuance, distribution, marketing and/or promotion of the Products, as included on Custom Index Order Schedule Number 1 (including all exhibits thereto). 2. Each Sub-Licensee acknowledges that it has received and read a copy of the License Agreement (excluding the Exhibit setting forth the license fees) and, except for the payment of Fees, agrees to be bound by all the provisions thereof, including, without limitation, those provisions imposing any obligations on FTP (including, without limitation, the indemnification obligations insofar as such obligations arise out of or relate to the Products to be sold, issued, marketed and/or promoted by the Sub-Licensee). 3. Each Sub-Licensee agrees that its obligations under the License Agreement pursuant to Section 2 of this Sublicense Agreement are as principal and shall be unaffected by any defense or claim that FTP may have against S&P. 4. This Sublicense Agreement shall be construed in accordance with the laws of the State of New York. IN WITNESS WHEREOF, the parties hereto have executed this Sublicense Agreement as of the date first set forth above. FIRST TRUST PORTFOLIOS L.P. __________________________________ By:_______________________________ Title:____________________________ STANDARD & POOR'S, a division of The McGraw-Hill Companies, Inc. __________________________________ By:_______________________________ Title:____________________________ FIRST TRUST MULTI CAP VALUE ALPHADEX(TM) FUND __________________________________ By:_______________________________ Title:____________________________ FIRST TRUST ADVISORS L.P. __________________________________ By:_______________________________ Title:____________________________ EX-99.H.21 24 exhibit_h21.txt SUBLICENSE AGREEMENT This Sublicense Agreement (the "Sublicense Agreement"), dated as of April 26, 2007 is made by and among First Trust Multi Cap Growth AlphaDEX(TM) Fund and First Trust Advisors L.P. (each a "Sub-Licensee" and collectively, the "Sub-Licensees"), STANDARD & POOR'S, a division of The McGraw-Hill Companies, Inc., a New York corporation ("S&P"), and First Trust Portfolios L.P. ("FTP"). W I T N E S S E T H : WHEREAS, pursuant to the Standard & Poor's Custom Index License Agreement dated as of February 22, 2007, entered by and between S&P and FTP and to which this form of Sublicense Agreement is attached (the "License Agreement"), S&P has granted FTP a license to use certain indexes, copyright, trademark and proprietary rights and trade secrets of S&P (as further described in the License Agreement, (the "Custom Indices" and "Marks")) in connection with the issuance, sale, marketing and/or promotion of certain financial products including exchange-traded funds (as further defined in the License Agreement, the "Products"); WHEREAS, Sub-Licensees wish to issue, sell, market and/or promote the Products as defined under the License Agreement and as such, desire to use and refer to the Custom Indices and Marks in connection with the registration statement and prospectus for the Products as well as other marketing or promotion of the Products; and WHEREAS, all capitalized terms used herein shall have the meanings assigned to them in the License Agreement unless otherwise defined herein. NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements contained herein, the parties hereto agree as follows: 1. LICENSE. FTP hereby grants Sub-Licensees a non-exclusive and non-transferable sublicense to use Custom Indices and Marks in connection with the issuance, distribution, marketing and/or promotion of the Products, as included on Custom Index Order Schedule Number 1 (including all exhibits thereto). 2. Each Sub-Licensee acknowledges that it has received and read a copy of the License Agreement (excluding the Exhibit setting forth the license fees) and, except for the payment of Fees, agrees to be bound by all the provisions thereof, including, without limitation, those provisions imposing any obligations on FTP (including, without limitation, the indemnification obligations insofar as such obligations arise out of or relate to the Products to be sold, issued, marketed and/or promoted by the Sub-Licensee). 3. Each Sub-Licensee agrees that its obligations under the License Agreement pursuant to Section 2 of this Sublicense Agreement are as principal and shall be unaffected by any defense or claim that FTP may have against S&P. 4. This Sublicense Agreement shall be construed in accordance with the laws of the State of New York. IN WITNESS WHEREOF, the parties hereto have executed this Sublicense Agreement as of the date first set forth above. FIRST TRUST PORTFOLIOS L.P. __________________________________ By:_______________________________ Title:____________________________ STANDARD & POOR'S, a division of The McGraw-Hill Companies, Inc. __________________________________ By:_______________________________ Title:____________________________ FIRST TRUST MULTI CAP GROWTH ALPHADEX(TM) FUND __________________________________ By:_______________________________ Title:____________________________ FIRST TRUST ADVISORS L.P. __________________________________ By:_______________________________ Title:____________________________ EX-99.I.1 25 exhibit_i1.txt April 26, 2007 First Trust Exchange-Traded AlphaDEX(TM)Fund 1001 Warrenville Road, Suite 300 Lisle, Illinois 60532 Re: First Trust Exchange-Traded AlphaDEX(TM) Fund --------------------------------------------------------- Ladies and Gentlemen: We have served as counsel for the First Trust Exchange-Traded AlphaDEX(TM) Fund (the "Trust"), which proposes to offer and sell shares of each of its series (the "Shares"), First Trust Consumer Discretionary AlphaDEX(TM) Fund, First Trust Consumer Staples AlphaDEX(TM) Fund, First Trust Energy AlphaDEX(TM) Fund, First Trust Financials AlphaDEX(TM) Fund, First Trust Health Care AlphaDEX(TM) Fund, First Trust Industrials AlphaDEX(TM) Fund, First Trust Materials AlphaDEX(TM) Fund, First Trust Technology AlphaDEX(TM) Fund, First Trust Utilities AlphaDEX(TM) Fund, First Trust Large Cap Core AlphaDEX(TM) Fund, First Trust Mid Cap Core AlphaDEX(TM) Fund, First Trust Small Cap Core AlphaDEX(TM) Fund, First Trust Large Cap Value Opportunities AlphaDEX(TM) Fund, First Trust Large Cap Growth Opportunities AlphaDEX(TM) Fund, First Trust Multi Cap Value AlphaDEX(TM) Fund and First Trust Multi Cap Growth AlphaDEX(TM) Fund (each, a "Fund," and collectively, the "Funds"), in the manner and on the terms set forth in Amendment No. 3 and Pre-Effective Amendment No. 3 to its Registration Statement on Form N-1A filed on April 26, 2007 (the "Amendment") with the Securities and Exchange Commission under the Investment Company Act of 1940, as amended, and the Securities Act of 1933, as amended, respectively. In connection therewith, we have examined such pertinent records and documents and matters of law, including the opinion of Bingham McCutchen LLP issued to the Trust or Trust's counsel upon which we have relied as they relate to the laws of the Commonwealth of Massachusetts, as we have deemed necessary in order to enable us to express the opinion hereinafter set forth. Based upon the foregoing, we are of the opinion that: April 27, 2007 Page 2 The Shares of each Fund may be issued from time to time in accordance with the Trust's Declaration of Trust dated December 6, 2006 and the Trust's By-Laws, and subject to compliance with the Securities Act of 1933, as amended, the Investment Company Act of 1940, as amended, and applicable state laws regulating the sale of securities and the receipt by each Fund of the purchase price, and such Shares, when so issued and sold by each Fund, will be legally issued, fully paid and non-assessable, except that, as set forth in the Amendment, shareholders of each Fund may under certain circumstances be held personally liable for its obligations. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement (File No. 333-140895) relating to the Shares referred to above, to the use of our name and to the reference to our firm in said Registration Statement. Respectfully submitted, CHAPMAN AND CUTLER LLP EX-99.I.2 26 exhibit_i2.txt April 26, 2007 First Trust Exchange-Traded AlphaDEX(TM) Fund 1001 Warrenville Road, Suite 300 Lisle, Illinois 60532 Chapman and Cutler LLP 111 West Monroe Street Chicago, IL 60603 Re: First Trust Exchange-Traded AlphaDEX(TM) Fund Ladies and Gentlemen: We have acted as special Massachusetts counsel to First Trust Exchange-Traded AlphaDEX(TM) Fund (the "Trust") on behalf of the following series: First Trust Large Cap Core AlphaDEX(TM) Fund, First Trust Mid Cap Core AlphaDEX(TM) Fund, First Trust Small Cap Core AlphaDEX(TM) Fund, First Trust Large Cap Value Opportunities AlphaDEX(TM) Fund, First Trust Large Cap Growth Opportunities AlphaDEX(TM) Fund, First Trust Multi Cap Value AlphaDEX(TM) Fund, First Trust Multi Cap Growth AlphaDEX(TM) Fund, First Trust Consumer Discretionary AlphaDEX(TM) Fund, First Trust Consumer Staples AlphaDEX(TM) Fund, First Trust Energy AlphaDEX(TM) Fund, First Trust Financials AlphaDEX(TM) Fund, First Trust Health Care AlphaDEX(TM) Fund, First Trust Industrials AlphaDEX(TM) Fund, First Trust Materials AlphaDEX(TM) Fund, First Trust Technology AlphaDEX(TM) Fund, and First Trust Utilities AlphaDEX(TM) Fund (each, a "Fund" and collectively, the "Funds") in connection with the Trust's Post-Effective Amendment to its Registration Statement on Form N-1A to be filed with the Securities and Exchange Commission on or about April 26, 2007 (as so amended, the "Registration Statement") with respect each Fund's shares of beneficial interest, par value $.01 per share (the "Shares"). You have requested that we deliver this opinion to you in connection with the Trust's filing of such Registration Statement. In connection with the furnishing of this opinion, we have examined the following documents: (a) a certificate of the Secretary of the Commonwealth of Massachusetts as to the existence of the Trust; (b) a copy, stamped as filed with the Secretary of the Commonwealth of Massachusetts, of the Trust's Declaration of Trust dated as of December 6, 2006 (the "Declaration"); First Trust Exchange-Traded AlphaDEX(TM) Fund Chapman and Cutler LLP April 26, 2007 Page 2 of 3 (c) a copy of the Trust's Desgination of Series effective as of December 6, 2006 and attached as Schedule A to the Declaration (the "Designation"); (d) a certificate executed by an appropriate officer of the Trust, certifying as to, and attaching copies of, the Trust's Declaration, Designation, By-Laws, and certain resolutions adopted by the Trustees of the Trust at a meeting held on December 11, 2006 (the "Resolutions"); and (e) a printer's proof received on April 18, 2007 of the Registration Statement. In such examination, we have assumed the genuineness of all signatures, the conformity to the originals of all of the documents reviewed by us as copies, the authenticity and completeness of all original documents reviewed by us in original or copy form and the legal competence of each individual executing any document. We have assumed that the Registration Statement, as filed with the Securities and Exchange Commission, will be in substantially the form of the printer's proof referred to in paragraph (e) above. We have further assumed that the Trust's Declaration, Designation, By-Laws and the Resolutions will not have been amended, modified or withdrawn with respect to matters relating to the Shares and will be in full force and effect on the date of the issuance of such Shares. This opinion is based entirely on our review of the documents listed above and such investigation of law as we have deemed necessary or appropriate. We have made no other review or investigation of any kind whatsoever, and we have assumed, without independent inquiry, the accuracy of the information set forth in such documents. As to any opinion below relating to the due formation or existence of the Trust under the laws of the Commonwealth of Massachusetts, our opinion relies entirely upon and is limited by the certificate of public officials referred to in (a) above. This opinion is limited solely to the internal substantive laws of the Commonwealth of Massachusetts, as applied by courts located in Massachusetts (other than Massachusetts securities laws, as to which we express no opinion), to the extent that the same may apply to or govern the transactions referred to herein. No opinion is given herein as to the choice of law or internal substantive rules of law, which any tribunal may apply to such transaction. In addition, to the extent that the Trust's Declaration, Designation or By-Laws refer to, incorporate or require compliance with the Investment Company Act of 1940, as amended, or any other law or regulation applicable to the Trust, except for the internal substantive laws of the Commonwealth of Massachusetts, as aforesaid, we have assumed compliance by the Trust with such Act and such other laws and regulations. We understand that all of the foregoing assumptions and limitations are acceptable to you. Based upon and subject to the foregoing, please be advised that it is our opinion that: 1. The Trust has been duly formed and is existing under the Trust's Declaration of Trust and the laws of the Commonwealth of Massachusetts as a voluntary association with transferable shares of beneficial interest commonly referred to as a "Massachusetts business trust." 2. The Shares, when issued and sold in accordance with the Trust's Declaration, Designation and By-Laws and for the consideration described in the Registration Statement, will be validly issued, fully paid and nonassessable, except that, as set forth in the Registration Statement, shareholders of the Trust may under certain circumstances be held personally liable for its obligations. This opinion is given as of the date hereof and we assume no obligation to update this opinion to reflect any changes in law or any other facts or circumstances which may hereafter come to our attention. We hereby consent to First Trust Exchange-Traded AlphaDEX(TM) Fund Chapman and Cutler LLP April 26, 2007 Page 3 of 3 your reliance on this opinion in connection with your opinion to the Trust with respect to the Shares and to the filing of this opinion as an exhibit to the Registration Statement. Very truly yours, BINGHAM McCUTCHEN LLP EX-99.I.3 27 exhibit_i3.txt CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the use in this Pre-Effective Amendment No. 3 to Registration Statement No. 333-140895 of First Trust Exchange-Traded AlphaDEXTM Fund (comprising, First Trust Consumer Discretionary AlphaDEX(TM) Fund, First Trust Consumer Staples AlphaDEX(TM) Fund, First Trust Energy AlphaDEX(TM) Fund, First Trust Financial AlphaDEX(TM) Fund, First Trust Health Care AlphaDEX(TM) Fund, First Trust Industrials AlphaDEX(TM) Fund, First Trust Materials AlphaDEX(TM) Fund, First Trust Technology AlphaDEX(TM) Fund, First Trust Utilities AlphaDEX(TM) Fund, First Trust Large Cap Core AlphaDEX(TM) Fund, First Trust Mid Cap Core AlphaDEX(TM) Fund, First Trust Small Cap Core AlphaDEX(TM) Fund, First Trust Large Cap Value Opportunities AlphaDEX(TM) Fund, First Trust Large Cap Growth Opportunities AlphaDEX(TM) Fund, First Trust Multi Cap Value AlphaDEX(TM) Fund, and First Trust Multi Cap Growth AlphaDEX(TM) Fund), on Form N-2 of our report dated April 25, 2007, relating to First Trust Technology AlphaDEX(TM) Fund, appearing in the Statement of Additional Information, which is a part of such Registration Statement. We also consent to the reference to us under the caption "Independent Registered Public Accounting Firm" also appearing in the Statement of Additional Information. DELOITTE & TOUCHE LLP Chicago, IL April 25, 2007 EX-99.M 28 exhibit_m.txt FIRST TRUST EXCHANGE-TRADED ALPHADEX(TM) FUND DISTRIBUTION AND SERVICE PLAN 1. The Trust. First Trust Exchange-Traded AlphaDEX(TM) Fund (the "Trust") is an open-end management investment company registered as such under the Investment Company Act of 1940, as amended (the "1940 Act"), and organized as a series trust (each such series is referred to herein as a "Fund"). 2. The Plan. The Trust desires to adopt a plan of distribution pursuant to Rule l2b-1 under the 1940 Act with respect to the shares of beneficial interest ("Shares") of certain of the Funds which are identified in Exhibit A hereof, and the Board of Trustees of the Trust (the "Board of Trustees") has determined that there is a reasonable likelihood that adoption of this Distribution and Service Plan (the "Plan") will benefit each such Fund (the "Designated Funds") and its holders of Shares. Accordingly, on behalf of each Designated Fund, the Trust hereby adopts this Plan in accordance with Rule 12b-1 under the 1940 Act on the following terms and conditions (capitalized terms not otherwise defined herein have the meanings assigned thereto in the Trust's registration statement under the 1940 Act and under the Securities Act of 1933, as amended, as such registration statement is amended by any amendments thereto at the time in effect). 3. The Distributor. The Trust has entered into a written Distribution Agreement with First Trust Portfolios, L.P. (the "Distributor"), pursuant to which the Distributor will act as the exclusive distributor with respect to the creation and distribution of Creation Unit size aggregations of Shares as described in the Trust's registration statement ("Creation Units") of each Fund. 4. Payments. (a) The Trust may pay a monthly fee not to exceed 0.25% per annum of each Fund's average daily net assets to reimburse the Distributor for actual amounts expended to finance any activity primarily intended to result in the sale of Creation Units of each Fund or the provision of investor services, including but not limited to (i) delivering copies of the Trust's then-current prospectus to prospective purchasers of such Creation Units, statement of additional information or annual or semi-annual reports relating to the Trust; (ii) marketing and promotional services including advertising; (iii) facilitating communications with beneficial owners of shares of the Trust, including providing explanations to owners regarding fund investment objectives and policies and other information about the Trust or any Funds thereof; (iv) delivering any notices of shareholder meetings and proxy statements accompanying such notices in connection with general and special meetings of interest holders of the Trust; and (v) such other services and obligations as are set forth in the Distribution Agreement. Such payments shall be made within ten (10) days of the end of each calendar month. The determination of daily net assets shall be made at the close of business each day throughout the month and computed in the manner specified in the then current Prospectus for the determination of the net asset value of Creation Units. (b) Distribution expenses incurred in any one year in excess of 0.25% of each Fund's average daily net assets may be reimbursed in subsequent years subject to the annual 0.25% limit and subject further to the approval of the Board of Trustees including a majority of the Trustees who are not "interested persons" of the Trust (as defined in the 1940 Act) and who have no direct or indirect financial interest in the operation of this Plan or in any agreement related to this Plan (the "Independent Trustees"). (c) The Distributor may use all or any portion of the amount received pursuant to this Plan 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, pursuant to agreements with the Distributor, or to pay any of the expenses associated with other activities authorized under paragraph 4(a) hereof. (d) First Trust Advisors, L.P., may use any portion of its advisory fee to compensate dealers, including the Distributor, for expenses incurred in connection with the sales and distribution of a Fund's shares, including, without limitation, compensation of its sales force, expenses of printing and distributing prospectuses to persons other than shareholders, expenses of preparing, printing and distributing advertising and sales literature and reports to shareholders used in connection with the sale of a Fund's share, certain other expenses associated with the distribution of shares of a Fund, and any distribution-related expenses that may be authorized from time to time by the Board of Trustees. All such expenses covered by the Plan shall be deemed incurred whether paid directly by the Distributor or by a third party to the extent reimbursed therefor by the Distributor. 5. Effective Date. This Plan shall become effective upon approval by a vote of both a majority of the Board of Trustees and a majority of the Independent Trustees, cast in person at a meeting called for the purpose of voting on this Plan. 6. Term. This Plan shall, unless terminated as hereinafter provided, remain in effect with respect to the Designated Fund for one year from its effective date and shall continue thereafter, provided that its continuance is specifically approved at least annually by a vote of both a majority of the Trustees and a majority of the Independent Trustees, cast in person at a meeting called for the purpose of voting on this Plan. 7. Amendment. This Plan may be amended at any time by the Board of Trustees, provided that (a) any amendment to increase materially the amount to be spent for the services provided for in paragraph 4 hereof shall be effective only upon approval by a vote of a majority of the outstanding voting securities (as such term is defined in the 1940 Act) of the Designated Fund, and (b) any material amendment of this Plan shall be effective only upon approval by a vote of both a majority of the Board of Trustees and a majority of the Independent Trustees, cast in person at a meeting called for the purpose of voting on such amendment. 8. Termination. This Plan may be terminated at any time, without payment of any penalty, by vote of a majority of the Independent Trustees, or by vote of a majority of the outstanding voting securities (as such term is defined in the 1940 Act) of the Designated Fund. In the event of termination or non-continuance of this Plan, the Trust may reimburse any expense which it incurred prior to -2- such termination or non-continuance, provided that such reimbursement is specifically approved by both a majority of the Board of Trustees and a majority of the Independent Trustees. 9. Assignment. This Plan will not be terminated by an assignment, however, an assignment will terminate any agreement under the Plan involving any such assignment. 10. Reports. While this Plan is in effect, the Distributor shall provide to the Trustees, and the Trustees shall review, at least quarterly, a written report of the amounts expended pursuant to the Plan and the purposes for which such expenditures were made. 11. Records. The Trust shall preserve copies of this Plan, each agreement related hereto and each report referred to in paragraph 9 hereof for a period of at least six years from the date of the Plan, agreement and report, the first two years in an easily accessible place. 12. Independent Trustees. While this Plan is in effect, the selection and nomination of Independent Trustees shall be committed to the discretion of the Trustees who are not "interested persons" of the Trust (as defined in the 1940 Act). 13. Severability. If any provision of the Plan shall be held or made invalid by a court decision, statute, rule or otherwise, the remainder of the Plan shall not be affected thereby. -3- EXHIBIT A
Funds Effective Date - ----- -------------- First Trust Consumer Discretionary AlphaDEX(TM) Fund April 26, 2007 First Trust Consumer Staples AlphaDEX(TM) Fund April 26, 2007 First Trust Energy AlphaDEX(TM) Fund April 26, 2007 First Trust Financials AlphaDEX(TM) Fund April 26, 2007 First Trust Health Care AlphaDEX(TM) Fund April 26, 2007 First Trust Industrials AlphaDEX(TM) Fund April 26, 2007 First Trust Materials AlphaDEX(TM) Fund April 26, 2007 First Trust Technology AlphaDEX(TM) Fund April 26, 2007 First Trust Utilities AlphaDEX(TM) Fund April 26, 2007 First Trust Large Cap Core AlphaDEX(TM) Fund April 26, 2007 First Trust Mid Cap Core AlphaDEX(TM) Fund April 26, 2007 First Trust Small Cap Core AlphaDEX(TM) Fund April 26, 2007 First Trust Large Cap Value Opportunities AlphaDEX(TM) Fund April 26, 2007 First Trust Large Cap Growth Opportunities AlphaDEX(TM) Fund April 26, 2007 First Trust Multi Cap Value AlphaDEX(TM) Fund April 26, 2007 First Trust Multi Cap Growth AlphaDEX(TM) Fund April 26, 2007
EX-99.P.1 29 exhibit_p1.txt FIRST TRUST ADVISORS L.P. INVESTMENT ADVISER CODE OF ETHICS I. STATEMENT OF GENERAL PRINCIPLES This Code of Ethics is being adopted by First Trust Advisors L.P. (the "Company"), in recognition of the fact that the Company owes a fiduciary duty of loyalty at all times to Clients, including investment companies for which the Company provides investment advisory services. This duty requires that the Company act in the best interests of Clients and always place the Clients' interests first and foremost. In recognition of such duty it is the Company's policy that the personal securities transactions and other activities of Company personnel be conducted consistent with this Code of Ethics and in such a manner as to avoid any actual or potential conflict of interest or any abuse of an individual's position of trust and responsibility that could occur through activities including, taking an investment opportunity from the Client for an employee's own portfolio, "insider trading" or "frontrunning" Clients or investment company securities trades. It is also the Company's policy that Company personnel should not take inappropriate advantage of their position with respect to investors in investment companies for which the Company provides investment advisory services and that such personnel should avoid any situation that might compromise, or call into question, their exercise of fully independent judgment in the interest of Clients including investors in investment companies for which the Company provides investment advisory services. II. DEFINITIONS For Purposes of this Code of Ethics: A. "Client" shall mean any client of the Company, including separate managed accounts and any Reportable Fund. B. "Access Person" shall mean any officer, director and partner of the Company and any Supervised Person who (1) has access to nonpublic information regarding any Clients' purchase or sale of securities, or nonpublic information regarding the portfolio holdings of any Reportable Fund; or (2) is involved in making securities recommendations to Clients, or who has access to such recommendations that are nonpublic. C. "Investment Person" shall mean any Access Person of the Company who makes, participates in or executes decisions regarding the purchase or sale of securities for a Client's portfolio. Each person designated as an Investment Person is therefore also designated as an Access Person for purposes of this Code of Ethics. D. "Supervised Person" shall include any of the Company's directors, officers, partners, employees and any other person who provides advice on behalf of the Company and is subject to the Company's supervision and control as well as any other person designated by the Company's Chief Compliance Officer. E. "Reportable Fund" shall have the same meaning as it does in Rule 204A-1 and generally means (1) any fund for which the Company serves as an investment adviser (including sub-adviser), including closed-end funds and open-end funds, (2) any fund whose investment adviser or principal underwriter controls the Company, is controlled by the Company, or is under common control with the Company, or (3) exchange-traded funds ("ETFs"), including both open-end ETFs and ETFs that are unit investment trusts. III. STANDARDS OF BUSINESS CONDUCT The Company and all of its Supervised Persons shall at all times comply and adhere to the following standards of business conduct which reflect the Company's and all Supervised Persons fiduciary obligations: A. Federal Securities Laws. The Company and all Supervised Persons must at all times comply with applicable federal securities laws, including the Securities Act of 1933, the Securities Exchange Act of 1934, the Sarbanes-Oxley Act of 2002, the Investment Company Act of 1940, the Investment Advisers Act of 1940, Title V of the Gramm-Leach Bliley Act, any rules adopted by the Securities Exchange Commission under any of these statutes, the Bank Secrecy Act as it applies to funds and investment advisers, and any rules adopted thereunder by the Commission or the Department of the Treasury. In connection with this standard of business conduct, Supervised Persons shall not, in connection with the purchase or sale, directly or indirectly, of a security held or to be acquired by a Client: a. Defraud such Client in any manner; b. Mislead such Client, including by making a statement that omits material facts; c. Engage in any act, practice or course of conduct which operates or would operate as a fraud or deceit upon such Client; d. Engage in any manipulative practice with respect to such Client; or e. Engage in any manipulative practice with respect to securities, including price manipulation. B. Conflicts of Interest. As a fiduciary, the Company has an affirmative duty of care, loyalty and honesty and good faith to act in the best interests of Clients. Supervised Persons can fulfill this duty by trying to avoid conflicts of interest and by fully disclosing all material facts with respect to any conflicts that may arise. Specific types of conflicts of interest that are prohibited include: a. Conflicts among different Client accounts or favoring one account over another; b. Competition with trading in Client accounts. C. Insider Trading. In accordance with the Company's Insider Trading Policy, all Supervised Persons are prohibited from trading, either for their own accounts or on behalf of others, while in possession of material, non-public information as well as communicating material non-public information to others. -2- Refer to Section 11 of the Company's Compliance Manual. D. Personal Securities Transactions. All Access Persons shall comply with the policies and procedures included in this Code of Ethics with respect to personal securities transactions. IV. PROHIBITED PRACTICES In furtherance of the general principles and standards of business conduct set forth in this Code of Ethics, the following practices shall be prohibited: A. No Access Person shall purchase any security during the initial public offering of such security. B. No Access Person shall purchase any security in a private placement transaction unless the purchase has been approved in writing and in advance by the Compliance Department. In considering whether to approve any such transaction, the Compliance Department shall take into account, among other factors, whether the investment opportunity should be reserved for Clients and whether the opportunity is being offered to an individual by virtue of his position. Any Access Person who has been authorized to acquire securities in a private placement shall disclose that investment to the Compliance Department before he takes part in a subsequent consideration of any Client's investment in that issuer, and the decision to include securities of such issuer in a Client's portfolio shall be subject to independent review by the Compliance Department. The Compliance Department shall maintain a written record of any approvals granted hereunder including the reasons supporting such approvals. C. No Access Person shall purchase or sell any security on a day during which there is "buy" or a "sell" order from any Client for that security until such order is executed or withdrawn. No Investment Person shall purchase or sell a security within seven days before or after that security is bought or sold by a Client. D. No Investment Person shall profit from the purchase and sale, or sale and purchase, of the same (or equivalent) securities within 30 days. E. No Investment Person shall serve on the Board of Directors of a publicly traded company absent prior authorization of the Compliance Department upon a determination that board service would be consistent with the interests of Clients (including any investors with respect to investment companies) and the establishment of appropriate "Chinese wall" procedures by the Compliance Department. F. Any provision of this Code of Ethics prohibiting any transaction by an Access Person or Investment Person shall prohibit any transaction in which such person has, obtains or disposes of any beneficial ownership interest. -3- V. REPORTING REQUIREMENTS In order to effectuate and monitor the foregoing policies and prohibitions, all Access Persons shall be required to comply with the following procedures: A. The securities trading personnel of the Company shall provide the Compliance Department with a daily summary of buy and sell orders entered by, on behalf of, or with respect to Clients. B. Each Access Person shall direct any brokers, dealers or banks at which he or she maintains accounts to provide on a timely basis (within 30 days of the calendar quarter) duplicate copies of confirmations of all personal securities transactions and periodic statements for all securities accounts to the Compliance Department. The Compliance Department shall date stamp all duplicate copies of personal securities transactions and account statements upon receipt. C. Upon commencement of employment with the Company, each Access Person shall disclose all personal securities holdings to the Compliance Department within 10 days after such person becomes an Access Person and the information provided must be current as of a date no more than 45 days prior to the date such person becomes an access person by submitting the form attached to this Code of Ethics as Exhibit A. D. Each Access Person shall disclose all personal securities holdings to the Compliance Department within 30 days of the end of each calendar year and the information provided must be current as of a date no more than 45 days prior to the date of the report by submitting the form attached to this Code of Ethics as Exhibit A. E. Any provision of this Code of Ethics requiring an Access Person to report securities transactions or securities positions to the Company shall require the reporting of any transaction or position, in which such person has, acquires or disposes of any beneficial ownership interest. F. The Chief Compliance Officer shall review all reports submitted by Access Persons to ensure that all reporting requirements are complied with. VI. EXEMPTIONS A. The following transactions shall be exempt from the Reporting Requirements included in Section V, as well as the Prohibited Transactions in Section IV; provided, however that transactions included in Section VI.A(7) must be included in the initial and annual holdings reports submitted pursuant to Sections V.C and V.D. (1) Direct obligations of the Government of the United States; (2) Bankers' acceptances, bank certificates of deposit, commercial paper and high quality short-term debt instruments, including repurchase agreements; -4- (3) Shares issued by money market funds; (4) Shares issued by open-end funds other than Reportable Funds; (5) Shares issued by unit investment trusts that are invested exclusively in one or more open-end funds, none of which are Reportable Funds; (6) Securities held in accounts over which the Access Person has no direct influence or control; or (7) Transactions effected pursuant to an automatic investment plan, including dividend reinvestment plans. B. The following transactions shall be exempted from the provisions of Section IV C and D but not from the Reporting Requirements set forth in Section V above: (1) The purchase or sale of shares of issuers whose shares are traded on a national or foreign securities exchange and which have a market capitalization of at least $1 billion; or (2) Purchases and sales which are effected to establish or maintain a model investment portfolio on behalf of the Company VII. REPORTING OF VIOLATIONS AND ANNUAL CERTIFICATION A. All Supervised Persons must report any violations of this Code of Ethics promptly to the Chief Compliance Officer. B. The Company shall provide each Supervised Person with a copy of this Code of Ethics and any amendments and require each Supervised Person to provide the Company with a written acknowledgement of their receipt of the Code of Ethics and any amendment. C. Within 30 days following the end of each calendar year, each Access Person shall certify to the Company that he has received, read and understands this Code of Ethics and recognizes that he or she is subject to it and that he or she has complied with the requirements of this Code of Ethics by submitting the form attached hereto as Exhibit B. D. The requirements of Section V(B), V(C), V(D), and VII(C) shall be deemed to be complied with by any Access Person who complies with substantially similar requirements contained in the First Trust Portfolios L.P. Code of Ethics. -5- VIII. SANCTIONS Upon discovery of a violation of this Code of Ethics, including either violations of the enumerated provisions, the general principles or the standards of business conduct described herein, the Company may impose such sanctions as it deems appropriate, including, but not limited to, a fine, letter of censure, suspension or termination of the employment of the violator. Amended as of May 31, 2006. -6- ACKNOWLEDGEMENT OF RECEIPT I, ____________________________________, hereby acknowledge that I have received and read the Code of Ethics of First Trust Advisors L.P. dated as of May 31, 2006. - ------------------------------- ----------------------------- Employee Signature Date EXHIBIT A FIRST TRUST ADVISORS L.P. ACCESS/INVESTMENT PERSON SECURITIES HOLDINGS REPORT Name of Access/Investment Person: _____________________________________ Date: ______________________________________________________ [ ] I hereby certify that as of _________________, I had a beneficial ownership interest in no securities other than those set forth below. Issuer Ticker/CUSIP Type of Security # of Shrs/Principal Amount Market Value _____ ____________ ________________ __________________________ ____________ OR [ ] I hereby certify that as of __________________, I had a beneficial ownership interest in no securities other than those set forth on the attached brokerage account statements. OR [ ] I hereby certify that as of __________________, I had a beneficial interest in no securities. As of _____________________, I maintained accounts where securities are held for my direct or indirect benefit at the following brokers, dealers or banks:________________________________. ---------------------------- Signature EXHIBIT B FIRST TRUST ADVISORS L.P. ACCESS/INVESTMENT PERSON CODE OF ETHICS CERTIFICATION I, ___________________________, hereby certify that I have received, read, and understand the FIRST TRUST ADVISORS L.P. Code of Ethics. Furthermore, I certify that I have complied with its provisions during the preceding year. ------------------------ ------------------ Signature Date EX-99.P.2 30 exhibit_p2.txt FIRST TRUST PORTFOLIOS L.P. CODE OF ETHICS I. STATEMENT OF GENERAL PRINCIPLES This Code of Ethics is being adopted by First Trust Portfolios L.P. (the "Company"), The FT Series (formerly known as The First Trust Special Situations Trust), The First Trust Combined Series, The First Trust of Insured Municipal Bonds, The First Trust GNMA, and The First Trust of Insured Municipal Bonds - Multi-State (the "Trusts") in recognition of the fact that the Company owes a duty at all times to place the interests of Unit holders the Trusts and shareholders of the Funds first. In recognition of such duty it is the Company's policy that the personal securities transactions and other activities of Company personnel be conducted consistent with this Code of Ethics and in such a manner as to avoid any actual or potential conflict of interest or any abuse of an individual's position of trust and responsibility that could occur through such activities as "insider trading" or "frontrunning" Trust or Fund securities trades. It is also the Company's policy that Company personnel should not take inappropriate advantage of their position with respect to Trusts or Funds sponsored by the Company and that such personnel should avoid any situation that might compromise, or call into question, their exercise of fully independent judgment in the interest of Unit holders or Shareholders. II. DEFINITIONS For Purposes of this Code of Ethics: A. "Company" shall mean First Trust Portfolios L.P. B. "Trust" shall mean any unit investment trust sponsored by the Company. C. "Unit holder" shall mean the holder of any unit of any Trust. D. "Fund" shall mean any open-end management investment company for which the Company acts as distributor or principal underwriter. E. "Shareholder" shall mean the holder of any share of any Fund. F. "Access Person" shall mean any partner, officer or employee of the Company who makes, participates in or obtains information regarding the purchase or sale of securities for a Trust's or Fund's portfolio or whose functions or duties as part of the ordinary course of his business relate to the making of any recommendation regarding the purchase or sale of securities for a Trust or Fund and includes, but is not limited to, all personnel in the Company's research, new products, securities trading, unit investment trust trading, wholesaling, evaluation, marketing, trust administration, compliance, legal, corporate publishing and investment advisory departments and any and all supervisors thereof. G. "Investment Person" shall mean any officer or employee of the Company who makes, participates in or executes decisions regarding the purchase or sale of securities for a Trust's or Fund's portfolio and includes, but is not limited to, all personnel in the Company's research, new products, securities trading, trust administration and investment advisory departments and any and all supervisors thereof; provided, however, that any person shall be deemed to be an Investment Person for purposes of this Code of Ethics only with respect to the type of security for which such person makes, participates in or executes purchase or sale decisions and provided further that any person who is an Investment Person with respect to any type of security under the Code shall be an Access person for purposes of all provisions of the Code. III. PROHIBITED PRACTICES In furtherance of the policies set forth in paragraph I above, the following practices shall be prohibited: A. No Investment Person shall purchase any security during the initial public offering of such security. B. No Investment Person shall purchase any security in a private placement transaction unless the purchase has been approved in writing and in advance by the Compliance Department. In considering whether to approve any such transaction, the Compliance Department shall take into account, among other factors, whether the investment opportunity should be reserved for any existing or proposed Trust and its Unit holders or any Fund and its Shareholders and whether the opportunity is being offered to an individual by virtue of his position. Any Investment Person who has been authorized to acquire securities in a private placement shall disclose that investment to the Compliance Department before he takes part in a subsequent consideration of any Trust's or Fund's investment in that issuer, and the decision to include securities of such issuer in a Trust or Fund shall be subject to independent review by the Compliance Department of the Company. The Compliance Coordinator shall maintain a written record of any approvals granted under Section III A and B hereof. C. No Access Person shall purchase or sell any security prior to the initial public offering period of a Trust which it is proposed may contain that security in its portfolio. No Access Person shall purchase or sell any security on a day during which there is "buy" or a "sell" order from a Trust or Fund for that security until such order is executed or withdrawn. No Investment Person shall purchase or sell a security within seven days before or after that security is bought or sold by a Trust or Fund. Any profits realized on transactions prohibited by this Section shall be disgorged. D. No Investment Person shall profit from the purchase and sale, or sale and purchase, of the same (or equivalent) securities within 30 days. Any profits realized on transactions prohibited by this Section shall be disgorged. -2-> E. No Investment Person shall serve on the Board of Directors of a publicly traded company absent prior authorization of the Compliance Department upon a determination that board service would be consistent with the interests of Trusts and their Unit holders and the Funds and their Shareholders and the establishment of appropriate "Chinese wall" procedures by the Compliance Department. F. Any provision of this Code of Ethics prohibiting any transaction by an Access Person or Investment Person shall prohibit any transaction in which such person has, obtains or disposes of any beneficial ownership interest. IV. COMPLIANCE PROCEDURES In order to effectuate and monitor the foregoing policies and prohibitions, all Access Persons and Investment Persons shall be required to comply with the following procedures: A. The securities trading personnel of the Company shall provide the Compliance Department with a daily summary of buy and sell orders entered by, on behalf of, or with respect to both Trusts, Funds and the Company's unit investment trust accumulation account or accounts. The Research Department shall notify the Compliance Department, in writing, of the composition of the proposed portfolio of any proposed Trust on the day that portfolio is determined. The Trust Administration Department shall provide the Compliance Department with a daily written summary of the Trusts, if any, for which a public offering has either commenced or been terminated. B. Each Access Person shall direct any firms at which he maintains brokerage accounts to provide on a timely basis (within 30 days of the calendar quarter) duplicate copies of confirmations of all personal securities transactions and periodic statements for all securities accounts to the Compliance Department. The Compliance Department shall date stamp all duplicate copies of personal securities transactions and account statements upon receipt. C. Each Access Person shall disclose all personal securities holdings to the Compliance Department within 10 days of commencement of employment with the Company and within 30 days of the end of each calendar year by submitting the form attached to this Code of Ethics as Exhibit A. D. Within 30 days following the end of each calendar year, each Access Person shall certify to the Company that he has read and understands this Code of Ethics and recognizes that he is subject to it and that he has complied with the requirements of this Code of Ethics by submitting the form attached hereto as Exhibit B. E. Any provision of this Code of Ethics requiring an Access Person or Investment Person to report securities transactions or securities positions to the Company shall require the reporting of any transaction or position in which such person has, acquires or disposes of any beneficial ownership interest. -3- V. EXEMPTIONS A. The following transactions shall be exempted from the Prohibited Practices of Section III and the Compliance Procedures set forth in Section IV; provided, however, that transactions included in Section V.A.2 must be included in the initial and annual holdings reports submitted pursuant to Section IV C. 1. The purchase or sale of U.S. government securities, money market instruments, mutual funds or unit investment trusts; provided, however, that any exchange-traded fund ("ETF"), including both open-end ETFs and ETFs that are unit investment trusts, are subject to both Section III and Section IV. 2. Purchases which are part of an automatic dividend reinvestment plan or which involve no investment decision by the purchaser. B. The following transactions shall be exempted from the Prohibited Practices of Section III C and D but not from the Compliance Procedures set forth in Section IV above: 1. The purchase or sale of shares of issuers whose shares are traded on a national or foreign securities exchange and which have a market capitalization of at least $1 billion. 2. Purchases and sales which are effected to establish or maintain a model investment portfolio on behalf of First Trust Advisors L.P. VI. SANCTIONS Upon discovery of a violation of this Code of Ethics, including either violations of the enumerated provisions or the general principles provided, the Company may impose such sanctions as it deems appropriate, including, inter alia, a fine, letter of censure or suspension or termination of the employment of the violator. Amended as of May 31, 2006. -4- ACKNOWLEDGEMENT OF RECEIPT I, __________________________________________, hereby acknowledge that I have received and read the Code of Ethics of First Trust Portfolios L.P. dated as of May 31, 2006. - ------------------------------- ----------------------------- Employee Signature Date EXHIBIT A FIRST TRUST PORTFOLIOS L.P. ACCESS/INVESTMENT PERSON SECURITIES HOLDINGS REPORT Name of Access/Investment Person: ____________________________________ Date: ______________________________________________________ I hereby certify that as of _________________, I had a beneficial ownership interest in no securities other than those set forth below. Issuer Ticker/CUSIP Type of Security # of Shrs/Principal Amount Market Value OR I hereby certify that as of __________________, I had a beneficial ownership interest in no securities other than those set forth on the attached brokerage account statements. OR I hereby certify that as of __________________, I had a beneficial interest in no securities. As of _____________________, I maintained accounts where securities are held for my direct or indirect benefit at the following brokers, dealers or banks:________________________________. --------------------------- Signature EXHIBIT B FIRST TRUST PORTFOLIOS L.P. ACCESS/INVESTMENT PERSON CODE OF ETHICS CERTIFICATION I, ___________________________, hereby certify that I have read, and understand the FIRST TRUST PORTFOLIOS L.P. Code of Ethics. Furthermore, I certify that I have complied with its provisions during the preceding year. ----------------------------------- ---------------------- Signature Date EX-99.P.3 31 exhibit_p3.txt FIRST TRUST FUNDS CODE OF ETHICS I. STATEMENT OF GENERAL PRINCIPLES. This Code of Ethics is being adopted by the funds advised by First Trust Advisors L.P. from time to time (each a "Fund" and collectively, the "Funds"), in recognition of the fact that each Fund owes a duty at all times to place the interests of its Investors first. In recognition of such duty it is the Funds' policy that the personal securities transactions and other activities of Fund personnel be conducted consistent with this Code of Ethics and in such a manner as to avoid any actual or potential conflicts of interest or any abuse of an individual's position of trust and responsibility that could occur through such activities as "insider trading" or "frontrunning" investment company securities trades. It is also the Funds' policy that Fund personnel should not take inappropriate advantage of their position with respect to a Fund and that such personnel should avoid any situation that might compromise, or call into question, their exercise of fully independent judgment in the interest of Investors in the Funds. II. DEFINITIONS. For Purposes of this Code of Ethics: A. "Investor" shall mean any investor in a Fund. B. "Access Person" shall mean any trustee, officer or employee of the Fund who makes, participates in or obtains information regarding the purchase or sale of securities for a Fund's portfolio or whose functions or duties as part of the ordinary course of his business relate to the making of any recommendation regarding the purchase or sale of securities for any Fund. C. "Investment Person" shall mean any officer or employee of any Fund who makes, participates in or executes decisions regarding the purchase or sale of securities for a Fund's portfolio. Each person designated as an Investment Person is therefore also designated as an Access Person for purposes of this Code of Ethics. III. PROHIBITED PRACTICES. In furtherance of the policies set forth in paragraph I above, the following practices shall be prohibited: A. No Investment Person shall purchase any security during the initial public offering of such security. B. No Investment Person shall purchase any security in a private placement transaction unless the purchase has been approved in writing and in advance by the Compliance Coordinator. In considering whether to approve any such transaction, the Compliance Coordinator shall take into account, among other factors, whether the investment opportunity should be reserved for a Fund and its Investors and whether the opportunity is being offered to an individual by virtue of his position. Any Investment Person who has been authorized to acquire securities in a private placement shall disclose that investment to the Compliance Coordinator before he takes part in a subsequent consideration of a Fund's investment in that issuer, and the decision to include securities of such issuer in a Fund shall be subject to independent review by the Compliance Coordinator to a Fund. The Compliance Coordinator shall maintain a written record of any approvals granted under Section III A and B hereof. C. No Access Person shall purchase or sell a security within seven days before or after that security is bought or sold by a Fund if such Access Person knows or should know that such security is being bought or sold by such Fund. D. No Investment Person shall profit from the purchase and sale, or sale and purchase, of the same (or equivalent) securities within 30 days. E. No Investment Person shall serve on the Board of Directors of a publicly traded company absent prior authorization of the Compliance Coordinator upon a determination that board service would be consistent with the interests of a Fund and its Investors and the establishment of appropriate "Chinese wall" procedures by the Compliance Coordinator. F. Any provision of this Code of Ethics prohibiting any transaction by an Access Person or Investment Person shall prohibit any transaction in which such person has, obtains or disposes of any beneficial ownership interest. G. No Access Person or Investment Person who has had two violations of this Code of Ethics during the prior 12 month period shall purchase or sell any security unless such purchase or sale has been approved in advance by the Compliance Coordinator. IV. COMPLIANCE PROCEDURES. In order to effectuate and monitor the foregoing policies and prohibitions, all Access Persons and Investment Persons shall be required to comply with the following procedures: A. The securities trading personnel of the Funds shall provide the Compliance Coordinator with a daily summary of buy and sell orders entered by, on behalf of, or with respect to the Funds. B. Each Access Person shall direct any firms at which he maintains brokerage accounts to provide on a timely basis (within 30 days of the calendar quarter) duplicate copies of confirmations of all personal securities transactions and periodic statements for all securities -2- accounts to the Compliance Coordinator. The Compliance Coordinator shall date stamp all duplicate copies of personal securities transactions and account statements upon receipt. C. Each Access Person shall disclose all personal securities holdings to the Compliance Coordinator both within 10 days of commencement of employment with a Fund and within 30 days of the end of each calendar year by submitting the form attached to this Code of Ethics as Exhibit A. D. Within 30 days following the end of each calendar year, each Access Person shall certify to the Funds that he has read and understands this Code of Ethics and recognizes that he is subject to it and that he has complied with the requirements of this Code of Ethics by submitting the form attached hereto as Exhibit B. E. Any provision of this Code of Ethics requiring an Access Person or Investment Person to report securities transactions or securities positions to the Funds shall require the reporting of any transaction or position in which such person has, acquires or disposes of any beneficial ownership interest. F. The requirements of Section IV.B and IV.C shall be deemed to be complied with by any Access Person who complies with substantially similar requirements contained in the First Trust Portfolios L.P. Code of Ethics or the First Trust Advisors L.P. Investment Adviser Code of Ethics. G. The requirements of Section IV.B and IV.C shall not apply to any member of the Board of Trustees of the Funds, unless such member knows or, in the ordinary course of fulfilling his official duties as a Trustee of the Funds, should have known that during the seven day period immediately preceding or after the date of any transaction in a security by the member such security was purchased or sold by a Fund or such purchase or sale was considered by a Fund or its investment adviser. V. EXEMPTIONS. A. The following transactions shall be exempted from the Prohibited Practices of Section III and the Compliance Procedures set forth in Section IV; provided, however, that transactions included in Section V.A.2 must be included in the initial and annual holdings reports submitted pursuant to Section IV C. 1. The purchase or sale of U.S. government securities, money market instruments, mutual funds or unit investment trusts; provided, however, that any exchange-traded fund ("ETF"), including both open-end ETFs and ETFs that are unit investment trusts, are subject to both Sections III and Section IV. 2. Purchases which are part of an automatic dividend reinvestment plan or which involve no investment decision by the purchaser. -3- B. The following transactions shall be exempted from the Prohibited Practices of Section III C and D but not from the Compliance Procedures set forth in Section IV above: 1. The purchase or sale of shares of issuers whose shares are traded on a national or foreign securities exchange and which have a market capitalization of at least $1 billion. 2. Purchases and sales which are effected to establish or maintain a model investment portfolio on behalf of First Trust Advisors L.P., subject to prior notice to the Funds' Board of Trustees. VI. SANCTIONS. Upon discovery of a violation of this Code of Ethics, including either violations of the enumerated provisions or the general principles provided, the Funds may impose such sanctions as deemed appropriate, including, inter alia, a fine, letter of censure or suspension or termination of the employment of the violator. Amended as of May 31, 2006. -4- EXHIBIT A CODE OF ETHICS ACCESS/INVESTMENT PERSON SECURITIES HOLDINGS REPORT Name of Access/Investment Person: ____________________________________________ Date: _______________ [ ] I hereby certify that as of _______________, I had a beneficial ownership interest in no securities other than those set forth below. ISSUER # OF SHARES/PRINCIPAL AMOUNT MARKET VALUE OR [ ] I hereby certify that as of _______________, I had a beneficial ownership interest in no securities other than those set forth on the attached brokerage account statements. OR [ ] I hereby certify that as of _______________, I had a beneficial interest in no securities. ------------------------------- Signature EXHIBIT B ACCESS/INVESTMENT PERSON CODE OF ETHICS CERTIFICATION I, ____________________, hereby certify that I have read, and understand the Code of Ethics for the Funds, as defined in the Code. Furthermore, I certify that I have complied with its provisions during the preceding year. Date: _______________ ----------------------------------- Signature -----END PRIVACY-ENHANCED MESSAGE-----