-----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, B6NwZfFrPeR7EvbCYVTwzMgfwCeobm/uz/bjuuOT6dJksY9CglUD3WdwS0WsDcxc 1PvDe5orCe8n3VhY2CX2rQ== 0000875626-07-002721.txt : 20071205 0000875626-07-002721.hdr.sgml : 20071205 20071205153520 ACCESSION NUMBER: 0000875626-07-002721 CONFORMED SUBMISSION TYPE: 497 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 20071205 DATE AS OF CHANGE: 20071205 EFFECTIVENESS DATE: 20071205 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: 497 SEC ACT: 1933 Act SEC FILE NUMBER: 333-140895 FILM NUMBER: 071286639 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 FEX 0001383496 S000017338 First Trust Mid Cap Core AlphaDEX Fund C000047996 First Trust Mid Cap Core AlphaDEX Fund FNX 0001383496 S000017339 First Trust Small Cap Core AlphaDEX Fund C000047997 First Trust Small Cap Core AlphaDEX Fund FYX 0001383496 S000017340 First Trust Large Cap Value Opportunities AlphaDEX Fund C000047998 First Trust Large Cap Value Opportunities AlphaDEX Fund FTA 0001383496 S000017341 First Trust Large Cap Growth Opportunities AlphaDEX Fund C000047999 First Trust Large Cap Growth Opportunities AlphaDEX Fund FTC 0001383496 S000017342 First Trust Multi Cap Value AlphaDEX Fund C000048000 First Trust Multi Cap Value AlphaDEX Fund FAB 0001383496 S000017343 First Trust Multi Cap Growth AlphaDEX Fund C000048001 First Trust Multi Cap Growth AlphaDEX Fund FAD 0001383496 S000017696 First Trust Consumer Discretionary AlphaDEX Fund C000048896 First Trust Consumer Discretionary AlphaDEX Fund FXD 0001383496 S000017697 First Trust Consumer Staples AlphaDEX Fund C000048897 First Trust Consumer Staples AlphaDEX Fund FXG 0001383496 S000017698 First Trust Energy AlphaDEX Fund C000048898 First Trust Energy AlphaDEX Fund FXN 0001383496 S000017699 First Trust Financial AlphaDEX Fund C000048899 First Trust Financial AlphaDEX Fund FXO 0001383496 S000017700 First Trust Health Care AlphaDEX Fund C000048900 First Trust Health Care AlphaDEX Fund FXH 0001383496 S000017701 First Trust Industrials/Producer Durables AlphaDEX Fund C000048901 First Trust Industrials/Producer Durables AlphaDEX Fund FXR 0001383496 S000017702 First Trust Materials AlphaDEX Fund C000048902 First Trust Materials AlphaDEX Fund FXZ 0001383496 S000017703 First Trust Technology AlphaDEX Fund C000048903 First Trust Technology AlphaDEX Fund FXL 0001383496 S000017704 First Trust Utilities AlphaDEX Fund C000048904 First Trust Utilities AlphaDEX Fund FXU 497 1 adex_497.txt DEFINITIVE MATERIALS Rule 497(c) File No. 333-140895 ============================================================================== [LOGO OMITTED] AlphaDEX(TM) Family of ETFs _______________________________________________________________________________ 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/Producer Durables AlphaDEX(TM) Fund First Trust Materials AlphaDEX(TM) Fund First Trust Technology AlphaDEX(TM) Fund First Trust Utilities AlphaDEX(TM) Fund First Trust AlphaDEX(TM) Funds November 28, 2007 _______________________________________________________________________________ Front Cover [BLANK INSIDE 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/PRODUCER DURABLES ALPHADEX(TM) FUND FIRST TRUST MATERIALS ALPHADEX(TM) FUND FIRST TRUST TECHNOLOGY ALPHADEX(TM) FUND FIRST TRUST UTILITIES ALPHADEX(TM) FUND PROSPECTUS November 28, 2007 Each of 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/Producer Durables 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") is a series of a registered management investment company that is offering its shares (the "Shares") through this Prospectus. Each Fund lists and trades its Shares on the American Stock Exchange LLC (the "AMEX") at market prices that may differ to some degree from the net asset value ("NAV") of its Shares. Unlike conventional mutual funds, each Fund issues and redeems 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 EACH FUND. 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. _______________________________________________________________________________ 1 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 ....................................................... 9 First Trust Energy AlphaDEX(TM) Fund Investment Objective, Strategies and Risks .................................................................. 13 First Trust Financials AlphaDEX(TM) Fund Investment Objective, Strategies and Risks .................................................................. 17 First Trust Health Care AlphaDEX(TM) Fund Investment Objective, Strategies and Risks ................................................................. 22 First Trust Industrials/Producer Durables AlphaDEX(TM) Fund Investment Objective, Strategies and Risks ............................................ 26 First Trust Materials AlphaDEX(TM) Fund Investment Objective, Strategies and Risks .................................................................. 30 First Trust Technology AlphaDEX(TM) Fund Investment Objective, Strategies and Risks .................................................................. 34 First Trust Utilities AlphaDEX(TM) Fund Investment Objective, Strategies and Risks .................................................................. 38 Additional Investment Strategies ........................................... 44 Additional Risks of Investing in the Funds ................................. 45 Fund Organization .......................................................... 46 Management of the Funds .................................................... 47 How to Buy and Sell Shares ................................................. 48 Creations, Redemptions and Transaction Fees ................................ 50 Dividends, Distributions and Taxes ......................................... 53 Federal Tax Matters ........................................................ 53 Distribution Plan .......................................................... 55 Net Asset Value ............................................................ 56 Fund Service Providers ..................................................... 57 Index Provider ............................................................. 57 Disclaimers ................................................................ 57 Additional Index Information ............................................... 59 Premium/Discount Information ............................................... 59 Total Return Information ................................................... 62 Financial Highlights ....................................................... 65 Other Information .......................................................... 70 _______________________________________________________________________________ 2 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/PRODUCER DURABLES ALPHADEX(TM) FUND FIRST TRUST MATERIALS ALPHADEX(TM) FUND FIRST TRUST TECHNOLOGY ALPHADEX(TM) FUND FIRST TRUST UTILITIES ALPHADEX(TM) FUND Each Fund is a series of the First Trust Exchange-Traded AlphaDEX(TM) Fund (the "Trust"), an 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 developed, maintained and sponsored by the AMEX, the "Index Provider" (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 indices within 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 of each Fund are traded throughout the day on the AMEX, whereas mutual funds are typically only bought and sold at closing NAVs. The Shares of each Fund 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. _______________________________________________________________________________ 3 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"). EXCHANGE-LISTED The Shares are listed and trade on the AMEX under the ticker symbol "FXD." 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. The Consumer Discretionary AlphaDEX(TM) Fund's investment objective and the 90% investment strategy are non-fundamental policies and require 60 days' prior written notice to shareholders before they can be changed. As non-fundamental policies, the Board of Trustees of the Trust can change such policies 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 fees and 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. _______________________________________________________________________________ 4 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 generate positive alpha relative to traditional passive style indices through the use of the AlphaDEX(TM) screening methodology. Alpha is an indication of how much an investment outperforms or underperforms on a risk-adjusted basis relative to its benchmark. The Russell 1000(R) Index consists of approximately 1,000 of the largest stocks within the Russell 3000(R) Index. The Russell 3000(R) Index is constructed to represent approximately 98% of the U.S. market. The initial divisor was created to set a benchmark value of 1000.00 on July 3, 2003. The Consumer Discretionary Index was created and trademarked by the AMEX on April 11, 2007. As of October 31, 2007, the Russell 1000(R) Index consisted of 1,004 stocks and the Consumer Discretionary Index consisted of 136 stocks. The Consumer Discretionary Index is constructed by the AMEX in the following manner: 1. The AMEX begins 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 in the Russell 1000(R) Index that Russell has classified solely as growth or value, such stocks receive a rank for that style from step 2a as their selection score. For stocks in the Russell 1000(R) Index that Russell has allocated between growth and value, such stocks receive the best rank from step 2a as their selection score. 3. The 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. An 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. _______________________________________________________________________________ 5 PRINCIPAL RISKS OF INVESTING IN THE FUND Risk is inherent in all investing. The Shares of the Consumer Discretionary AlphaDEX(TM) Fund 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, Shares of the Consumer Discretionary 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 Consumer Discretionary Index. 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 fees and 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 AlphaDEX(TM) Fund will generally _______________________________________________________________________________ 6 not be bought or sold in response to market fluctuations and the securities may be issued by companies concentrated in a particular industry. Therefore, the Consumer Discretionary AlphaDEX(TM) Fund will generally not sell a stock because the stock's issuer is in financial trouble, unless that stock is removed or is anticipated to be removed from the Consumer Discretionary Index. 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 in the StrataQuant(TM) Series and 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. 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. The value of securities of smaller issuers can be more volatile than that of larger issuers. CONCENTRATION RISK. The Consumer Discretionary AlphaDEX(TM) Fund will be concentrated in the securities of a given industry if the Consumer Discretionary Index is concentrated in such industry. A concentration makes the Consumer Discretionary AlphaDEX(TM) Fund more susceptible to any single occurrence affecting the industry and may subject the Consumer Discretionary AlphaDEX(TM) Fund to greater market risk than more diversified funds. NON-DIVERSIFICATION RISK. The Consumer Discretionary AlphaDEX(TM) Fund is classified as "non-diversified" under the Investment Company Act of 1940, as amended (the "1940 Act"). As a result, the Consumer Discretionary AlphaDEX(TM) Fund is only limited as to the percentage of its assets which may be invested in the securities of any one issuer by the diversification requirements imposed by the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code"). Because the Consumer Discretionary AlphaDEX(TM) Fund may invest a relatively high percentage of its assets in a limited number of issuers, the Consumer Discretionary AlphaDEX(TM) 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. CONSUMER DISCRETIONARY SECTOR RISK. The Consumer Discretionary AlphaDEX(TM) Fund invests in the securities of companies in the consumer discretionary sector. Because companies in the consumer discretionary sector manufacture products and provide discretionary services directly to the consumer, the success of these companies is tied closely to the performance of the overall domestic and international economy, interest rates, competition 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 discretionary products in the marketplace. _______________________________________________________________________________ 7 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. See "Additional Risks of Investing in the Funds" for additional information regarding risks. _______________________________________________________________________________ 8 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"). EXCHANGE-LISTED The Shares are listed and trade on the AMEX under the ticker symbol "FXG." 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. The Consumer Staples AlphaDEX(TM) Fund's investment objective and the 90% investment strategy are non-fundamental policies and require 60 days' prior written notice to shareholders before they can be changed. As non-fundamental policies, the Board of Trustees of the Trust can change such policies 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 fees and 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 generate positive alpha relative to traditional passive style _______________________________________________________________________________ 9 indices through the use of the AlphaDEX(TM) screening methodology. Alpha is an indication of how much an investment outperforms or underperforms on a risk-adjusted basis relative to its benchmark. The Russell 1000(R) Index consists of approximately 1,000 of the largest stocks within the Russell 3000(R) Index. The Russell 3000(R) Index is constructed to represent approximately 98% of the U.S. market. 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 October 31, 2007, the Russell 1000(R) consisted of 1,004 stocks and the Consumer Staples Index consisted of 32 stocks. The Consumer Staples Index is constructed by the AMEX in the following manner: 1. The AMEX begins 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 in the Russell 1000(R) Index that Russell has classified solely as growth or value, such stocks receive a rank for that style from step 2a as their selection score. For stocks in the Russell 1000(R) Index that Russell has allocated between growth and value, such stocks receive the best rank from step 2a as their selection score. 3. The 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. An 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 Shares of the Consumer Staples AlphaDEX(TM) Fund 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 _______________________________________________________________________________ 10 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, Shares of the Consumer Staples 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 Consumer Staples Index. 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 fees and 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 AlphaDEX(TM) Fund 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. Therefore, the Consumer Staples AlphaDEX(TM) Fund will generally not sell a stock because the stock's issuer is in financial trouble, unless that stock is removed or is anticipated to be removed from the Consumer Staples Index. 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 in the StrataQuant(TM) Series and the Intellectual Property in connection with the name and investment strategies of the Consumer _______________________________________________________________________________ 11 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. 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. The value of securities of smaller issuers can be more volatile than that of larger issuers. CONCENTRATION RISK. The Consumer Staples AlphaDEX(TM) Fund will be concentrated in the securities of a given industry if the Consumer Staples Index is concentrated in such industry. A concentration makes the Consumer Staples AlphaDEX(TM) Fund more susceptible to any single occurrence affecting the industry and may subject the Consumer Staples AlphaDEX(TM) Fund to greater market risk than more diversified funds. NON-DIVERSIFICATION RISK. The Consumer Staples AlphaDEX(TM) Fund is classified as "non-diversified" under the 1940 Act. As a result, the Consumer Staples AlphaDEX(TM) Fund is only limited as to the percentage of its assets which may be invested in the securities of any one issuer by the diversification requirements imposed by the Internal Revenue Code. Because the Consumer Staples AlphaDEX(TM) Fund may invest a relatively high percentage of its assets in a limited number of issuers, the Consumer Staples AlphaDEX(TM) 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. CONSUMER STAPLES SECTOR RISK. The Consumer Staples AlphaDEX(TM) Fund invests in the securities of companies in the consumer staples sector. Because companies in the consumer staples sector provide products directly to the consumer that are typically considered non-discretionary items based on consumer purchasing habits, these companies may be affected by a variety of factors which could impact company profitability. For instance, government regulations may affect the permissibility of using various food additives and the production methods of companies that manufacture food products. 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. 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. See "Additional Risks of Investing in the Funds" for additional information regarding risks. _______________________________________________________________________________ 12 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"). EXCHANGE-LISTED The Shares are listed and trade on the AMEX under the ticker symbol "FXN." 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. The Energy AlphaDEX(TM) Fund's investment objective and the 90% investment strategy are non-fundamental policies and require 60 days' prior written notice to shareholders before they can be changed. As non-fundamental policies, the Board of Trustees of the Trust can change such policies 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 fees and 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 generate positive alpha relative to traditional passive style indices through the use of the AlphaDEX(TM) screening methodology. Alpha is an indication of how much an investment outperforms or underperforms on a risk-adjusted basis relative to its benchmark. The Russell 1000(R) Index consists of approximately 1,000 of the largest stocks within the Russell 3000(R) _______________________________________________________________________________ 13 Index. The Russell 3000(R) Index is constructed to represent approximately 98% of the U.S. market. 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 October 31, 2007, the Russell 1000(R) Index consisted of 1,004 stocks and the Energy Index consisted of 56 stocks. The Energy Index is constructed by the AMEX in the following manner: 1. The AMEX begins 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 in the Russell 1000(R) Index that Russell has classified solely as growth or value, such stocks receive the rank for that style from step 2a as their selection score. For stocks in the Russell 1000(R) Index that Russell has allocated between growth and value, such stocks receive the best rank from step 2a as their selection score. 3. The 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. An 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 Shares of the Energy AlphaDEX(TM) Fund 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. _______________________________________________________________________________ 14 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, Shares of the Energy 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 Energy Index. 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 fees and 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 AlphaDEX(TM) Fund 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. Therefore, the Energy AlphaDEX(TM) Fund will generally not sell a stock because the stock's issuer is in financial trouble, unless that stock is removed or is anticipated to be removed from the Energy Index. 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 in the StrataQuant(TM) Series and the 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. _______________________________________________________________________________ 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. The value of securities of smaller issuers can be more volatile than that of larger issuers. CONCENTRATION RISK. The Energy AlphaDEX(TM) Fund will be concentrated in the securities of a given industry if the Energy Index is concentrated in such industry. 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 market risk than more diversified funds. NON-DIVERSIFICATION RISK. The Energy AlphaDEX(TM) Fund is classified as "non-diversified" under the 1940 Act. As a result, the Energy AlphaDEX(TM) Fund is only limited as to the percentage of its assets which may be invested in the securities of any one issuer by the diversification requirements imposed by the Internal Revenue Code. Because the Energy AlphaDEX(TM) Fund may invest a relatively high percentage of its assets in a limited number of issuers, the Energy AlphaDEX(TM) 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. ENERGY SECTOR RISK. The Energy AlphaDEX(TM) Fund invests in the securities of companies in the energy sector. The companies in the energy sector include integrated oil companies that are involved in the exploration, production and refining process, gas distributors and pipeline-related companies and other energy companies involved with mining, producing and delivering energy-related services and drilling. 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. 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. See "Additional Risks of Investing in the Funds" for additional information regarding risks. _______________________________________________________________________________ 16 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"). EXCHANGE-LISTED The Shares are listed and trade on the AMEX under the ticker symbol "FXO." 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. The Financials AlphaDEX(TM) Fund's investment objective and the 90% investment strategy are non-fundamental policies and require 60 days' prior written notice to shareholders before they can be changed. As non-fundamental policies, the Board of Trustees of the Trust can change such policies 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 fees and 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 generate positive alpha relative to traditional passive style indices through the use of the AlphaDEX(TM) screening methodology. Alpha is an indication of how much an investment outperforms or underperforms on a risk-adjusted basis relative to its benchmark. The Russell 1000(R) Index consists of approximately 1,000 of the largest stocks within the Russell 3000(R) _______________________________________________________________________________ 17 Index. The Russell 3000(R) Index is constructed to represent approximately 98% of the U.S. market. 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 October 31, 2007, the Russell 1000(R) Index consisted of 1,004 stocks and the Financials Index consisted of 168 stocks. The Financials Index is constructed by the AMEX in the following manner: 1. The AMEX begins 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 in the Russell 1000(R) Index that Russell has classified solely as growth or value, such stocks receive a rank for that style from step 2a as their selection score. For stocks in the Russell 1000(R) Index that Russell has allocated between growth and value, such stocks receive the best rank from step 2a as their selection score. 3. The 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. An 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 Shares of the Financials AlphaDEX(TM) Fund 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. _______________________________________________________________________________ 18 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, Shares of the Financials 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 Financials Index. 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 fees and 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 AlphaDEX(TM) Fund 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. Therefore, the Financials AlphaDEX(TM) Fund will generally not sell a stock because the stock's issuer is in financial trouble, unless that stock is removed or is anticipated to be removed from the Financials Index. 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 in the StrataQuant(TM) Series and the 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 _______________________________________________________________________________ 19 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. 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. The value of securities of smaller issuers can be more volatile than that of larger issuers. CONCENTRATION RISK. The Financials AlphaDEX(TM) Fund will be concentrated in the securities of a given industry if the Financial Index is concentrated in such industry. 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 market risk than more diversified funds. NON-DIVERSIFICATION RISK. The Financials AlphaDEX(TM) Fund is classified as "non-diversified" under the 1940 Act. As a result, the Financials AlphaDEX(TM) Fund is only limited as to the percentage of its assets which may be invested in the securities of any one issuer by the diversification requirements imposed by the Internal Revenue Code. Because the Financials AlphaDEX(TM) Fund may invest a relatively high percentage of its assets in a limited number of issuers, the Financials AlphaDEX(TM) 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. 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. 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. _______________________________________________________________________________ 20 The Financials AlphaDEX(TM) Fund may invest in companies that may be affected by the downturn in the subprime mortgage lending market in the United States. Subprime loans have higher defaults and losses than prime loans. Subprime loans also have higher serious delinquency rates than prime loans. The downturn in the subprime mortgage lending market may have far-reaching consequences into various aspects of the financials sector, and consequently, the value of the Financials AlphaDEX(TM) Fund may decline in response to such developments. 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. See "Additional Risks of Investing in the Funds" for additional information regarding risks. _______________________________________________________________________________ 21 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"). EXCHANGE-LISTED The Shares are listed and trade on the AMEX under the ticker symbol "FXH." 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. The Health Care AlphaDEX(TM) Fund's investment objective and the 90% investment strategy are non-fundamental policies and require 60 days' prior written notice to shareholders before they can be changed. As non-fundamental policies, the Board of Trustees of the Trust can change such policies 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 fees and 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 generate positive alpha relative to traditional passive style indices through the use of the AlphaDEX(TM) screening methodology. Alpha is an indication of how much an investment outperforms or underperforms on a _______________________________________________________________________________ 22 risk-adjusted basis relative to its benchmark. The Russell 1000(R) Index consists of approximately 1,000 of the largest stocks within the Russell 3000(R) Index. The Russell 3000(R) Index is constructed to represent approximately 98% of the U.S. market. 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 October 31, 2007, the Russell 1000(R) Index consisted of 1,004 stocks and the Health Care Index consisted of 72 stocks. The Health Care Index is constructed by the AMEX in the following manner: 1. The AMEX begins 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 in the Russell 1000(R) Index that Russell has classified solely as growth or value, such stocks receive a rank for that style from step 2a as their selection score. For stocks in the Russell 1000(R) Index that Russell has allocated between growth and value, such stocks receive the best rank from step 2a as their selection score. 3. The 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. An 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 Shares of the Health Care AlphaDEX(TM) Fund 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. _______________________________________________________________________________ 23 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, Shares of the Health Care 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 Health Care Index. 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 fees and 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 AlphaDEX(TM) Fund 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. Therefore, the Health Care AlphaDEX(TM) Fund will generally not sell a stock because the stock's issuer is in financial trouble, unless that stock is removed or is anticipated to be removed from the Health Care Index. 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 in the StrataQuant(TM) Series and the 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 _______________________________________________________________________________ 24 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. 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. The value of securities of smaller issuers can be more volatile than that of larger issuers. CONCENTRATION RISK. The Health Care AlphaDEX(TM) Fund will be concentrated in the securities of a given industry if the Health Care Index is concentrated in such industry. 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 market risk than more diversified funds. NON-DIVERSIFICATION RISK. The Health Care AlphaDEX(TM) Fund is classified as "non-diversified" under the 1940 Act. As a result, the Health Care AlphaDEX(TM) Fund is only limited as to the percentage of its assets which may be invested in the securities of any one issuer by the diversification requirements imposed by the Internal Revenue Code. Because the Health Care AlphaDEX(TM) Fund may invest a relatively high percentage of its assets in a limited number of issuers, the Health Care AlphaDEX(TM) 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. HEALTH CARE SECTOR RISK. The Health Care AlphaDEX(TM) Fund invests in the securities of companies in the health care sector. Because companies in the health care sector are involved in medical services or health care including biotechnology research and production, drugs and pharmaceuticals, and health care facilities and services, general problems of these companies 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. 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. See "Additional Risks of Investing in the Funds" for additional information regarding risks. _______________________________________________________________________________ 25 First Trust Industrials/Producer Durables AlphaDEX(TM) Fund Investment Objective, Strategies and Risks INVESTMENT OBJECTIVE The First Trust Industrials/Producer Durables 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"). EXCHANGE-LISTED The Shares are listed and trade on the AMEX under the ticker symbol "FXR." 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. The Industrials AlphaDEX(TM) Fund's investment objective and the 90% investment strategy are non-fundamental policies and require 60 days' prior written notice to shareholders before they can be changed. As non-fundamental policies, the Board of Trustees of the Trust can change such policies 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 fees and 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 generate positive alpha relative to traditional passive style indices through the use of the AlphaDEX(TM) screening methodology. Alpha is an indication of how much an investment outperforms or underperforms on a risk-adjusted basis relative to its benchmark. The Russell 1000(R) Index _______________________________________________________________________________ 26 consists of approximately 1,000 of the largest stocks within the Russell 3000(R) Index. The Russell 3000(R) Index is constructed to represent approximately 98% of the U.S. market. 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 October 31, 2007, the Russell 1000(R) Index consisted of 1,004 stocks and the Industrials Index consisted of 52 stocks. The Industrials Index is constructed by the AMEX in the following manner: 1. The AMEX begins 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 in the Russell 1000(R) Index that Russell has classified solely as growth or value, such stocks receive a rank for that style from step 2a as their selection score. For stocks in the Russell 1000(R) Index that Russell has allocated between growth and value, such stocks receive the best rank from step 2a as their selection score. 3. The 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. An 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 Shares of the Industrials AlphaDEX(TM) Fund 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. _______________________________________________________________________________ 27 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, Shares of the Industrials 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 Industrials Index. 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 fees and 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 AlphaDEX(TM) Fund 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. Therefore, the Industrials AlphaDEX(TM) Fund will generally not sell a stock because the stock's issuer is in financial trouble, unless that stock is removed or is anticipated to be removed from the Industrials Index. 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 in the StrataQuant(TM) Series and the 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 _______________________________________________________________________________ 28 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. 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. The value of securities of smaller issuers can be more volatile than that of larger issuers. CONCENTRATION RISK. The Industrials AlphaDEX(TM) Fund will be concentrated in the securities of a given industry if the Industrials Index is concentrated in such industry. 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 market risk than more diversified funds. NON-DIVERSIFICATION RISK. The Industrials AlphaDEX(TM) Fund is classified as "non-diversified" under the 1940 Act. As a result, the Industrials AlphaDEX(TM) Fund is only limited as to the percentage of its assets which may be invested in the securities of any one issuer by the diversification requirements imposed by the Internal Revenue Code. Because the Industrials AlphaDEX(TM) Fund may invest a relatively high percentage of its assets in a limited number of issuers, the Industrials AlphaDEX(TM) 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. INDUSTRIALS AND PRODUCER DURABLES SECTORS RISK. The Industrials AlphaDEX(TM) Fund invests in the securities of companies in the industrials and producer durables sectors. Many companies in these sectors convert unfinished goods into finished durables used to manufacture other goods or provide services. Some industries included in these sectors are electrical equipment and components, industrial products, manufactured housing and telecommunications equipment. General risks of these companies include the general state of the economy, intense competition, consolidation, domestic and international politics, excess capacity and consumer demand and 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. 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. See "Additional Risks of Investing in the Funds" for additional information regarding risks. _______________________________________________________________________________ 29 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"). EXCHANGE-LISTED The Shares are listed and trade on the AMEX under the ticker symbol "FXZ." 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. The Materials AlphaDEX(TM) Fund's investment objective and the 90% investment strategy are non-fundamental policies and require 60 days' prior written notice to shareholders before they can be changed. As non-fundamental policies, the Board of Trustees of the Trust can change such policies 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 fees and 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 generate positive alpha relative to traditional passive style indices through the use of the AlphaDEX(TM) screening methodology. Alpha is an indication of how much an investment outperforms or underperforms on a _______________________________________________________________________________ 30 risk-adjusted basis relative to its benchmark. The Russell 1000(R) Index consists of approximately 1,000 of the largest stocks within the Russell 3000(R) Index. The Russell 3000(R) Index is constructed to represent approximately 98% of the U.S. market. 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 October 31, 2007, the Russell 1000(R) Index consisted of 1,004 stocks and the Materials Index consisted of 63 stocks. The Materials Index is constructed by the AMEX in the following manner: 1. The AMEX begins 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 in the Russell 1000(R) Index that Russell has classified solely as growth or value, such stocks receive a rank for that style from step 2a as their selection score. For stocks in the Russell 1000(R) Index that Russell has allocated between growth and value, such stocks receive the best rank from step 2a as their selection score. 3. The 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. An 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 Shares of the Materials AlphaDEX(TM) Fund 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. _______________________________________________________________________________ 31 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, Shares of the Materials 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 Materials Index. 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 fees and 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 AlphaDEX(TM) Fund 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. Therefore, the Materials AlphaDEX(TM) Fund will generally not sell a stock because the stock's issuer is in financial trouble, unless that stock is removed or is anticipated to be removed from the Materials Index. 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 in the StrataQuant(TM) Series and the 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 _______________________________________________________________________________ 32 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. 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. The value of securities of smaller issuers can be more volatile than that of larger issuers. CONCENTRATION RISK. The Materials AlphaDEX(TM) Fund will be concentrated in the securities of a given industry if the Materials Index is concentrated in such industry. 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 market risk than more diversified funds. NON-DIVERSIFICATION RISK. The Materials AlphaDEX(TM) Fund is classified as "non-diversified" under the 1940 Act. As a result, the Materials AlphaDEX(TM) Fund is only limited as to the percentage of its assets which may be invested in the securities of any one issuer by the diversification requirements imposed by the Internal Revenue Code. Because the Materials AlphaDEX(TM) Fund may invest a relatively high percentage of its assets in a limited number of issuers, the Materials AlphaDEX(TM) 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. MATERIALS SECTOR RISK. The Materials AlphaDEX(TM) Fund invests in the securities of companies in the materials sector. Because companies in the materials sector are involved in the extracting or processing of raw materials, general risks of these companies 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. 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. See "Additional Risks of Investing in the Funds" for additional information regarding risks. _______________________________________________________________________________ 33 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"). EXCHANGE-LISTED The Shares are listed and trade on the AMEX under the ticker symbol "FXL." 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. The Technology AlphaDEX(TM) Fund's investment objective and the 90% investment strategy are non-fundamental policies and require 60 days' prior written notice to shareholders before they can be changed. As non-fundamental policies, the Board of Trustees of the Trust can change such policies 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 fees and 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 generate positive alpha relative to traditional passive style indices through the use of the AlphaDEX(TM) screening methodology. Alpha is an indication of how much an investment outperforms or underperforms on a _______________________________________________________________________________ 34 risk-adjusted basis relative to its benchmark. The Russell 1000(R) Index consists of approximately 1,000 of the largest stocks within the Russell 3000(R) Index. The Russell 3000(R) Index is constructed to represent approximately 98% of the U.S. market. 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 October 31, 2007, the Russell 1000(R) Index consisted of 1,004 stocks and the Technology Index consisted of 76 stocks. The Technology Index is constructed by the AMEX in the following manner: 1. The AMEX begins 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 in the Russell 1000(R) Index that Russell has classified solely as growth or value, such stocks receive a rank for that style from step 2a as their selection score. For stocks in the Russell 1000(R) Index that Russell has allocated between growth and value, such stocks receive the best rank from step 2a as their selection score. 3. The 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. An 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 Shares of the Technology AlphaDEX(TM) Fund 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. _______________________________________________________________________________ 35 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, Shares of the Technology 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 Technology Index. 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 fees and 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 AlphaDEX(TM) Fund 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. Therefore, the Technology AlphaDEX(TM) Fund will generally not sell a stock because the stock's issuer is in financial trouble, unless that stock is removed or is anticipated to be removed from the Technology Index. 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 in the StrataQuant(TM) Series and the 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 _______________________________________________________________________________ 36 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. 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. The value of securities of smaller issuers can be more volatile than that of larger issuers. CONCENTRATION RISK. The Technology AlphaDEX(TM) Fund will be concentrated in the securities of a given industry if the Technology Index is concentrated in such industry. 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 market risk than more diversified funds. NON-DIVERSIFICATION RISK. The Technology AlphaDEX(TM) Fund is classified as "non-diversified" under the 1940 Act. As a result, the Technology AlphaDEX(TM) Fund is only limited as to the percentage of its assets which may be invested in the securities of any one issuer by the diversification requirements imposed by the Internal Revenue Code. Because the Technology AlphaDEX(TM) Fund may invest a relatively high percentage of its assets in a limited number of issuers, the Technology AlphaDEX(TM) 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. TECHNOLOGY SECTOR RISK. The Technology AlphaDEX(TM) Fund invests in the securities of companies in the technology sector. Because companies in the technology sector serve the electronics and computer industries or manufacture products based on the latest applied science, general risks of these companies include 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. 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. See "Additional Risks of Investing in the Funds" for additional information regarding risks. _______________________________________________________________________________ 37 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"). EXCHANGE-LISTED The Shares are listed and trade on the AMEX under the ticker symbol "FXU." 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. The Utilities AlphaDEX(TM) Fund's investment objective and the 90% investment strategy are non-fundamental policies and require 60 days' prior written notice to shareholders before they can be changed. As non-fundamental policies, the Board of Trustees of the Trust can change such policies 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 fees and 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 generate positive alpha relative to traditional passive style indices through the use of the AlphaDEX(TM) screening methodology. Alpha is an indication of how much an investment outperforms or underperforms on a risk-adjusted basis relative to its benchmark. The Russell 1000(R) Index consists of approximately 1,000 of the largest stocks within the Russell 3000(R) Index. The Russell 3000(R) Index is constructed to represent approximately 98% _______________________________________________________________________________ 38 of the U.S. market. 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 October 31, 2007, the Russell 1000(R) Index consisted of 1,004 stocks and the Utilities Index consisted of 55 stocks. The Utilities Index is constructed by the AMEX in the following manner: 1. The AMEX begins 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 in the Russell 1000(R) Index that Russell has classified solely as growth or value, such stocks receive a rank for that style from step 2a as their selection score. For stocks in the Russell 1000(R) Index that Russell has allocated between growth and value, such stocks receive the best rank from step 2a as their selection score. 3. The 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. An 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 Shares of the Utilities AlphaDEX(TM) Fund 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. _______________________________________________________________________________ 39 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, Shares of the Utilities 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 Utilities Index. 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 fees and 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 AlphaDEX(TM) Fund 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. Therefore, the Utilities AlphaDEX(TM) Fund will generally not sell a stock because the stock's issuer is in financial trouble, unless that stock is removed or is anticipated to be removed from the Utilities Index. 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 in the StrataQuant(TM) Series and the 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. _______________________________________________________________________________ 40 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. The value of securities of smaller issuers can be more volatile than that of larger issuers. CONCENTRATION RISK. The Utilities AlphaDEX(TM) Fund will be concentrated in a given industry if the Utilities Index is concentrated in such industry. 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 market risk than more diversified funds. NON-DIVERSIFICATION RISK. The Utilities AlphaDEX(TM) Fund is classified as "non-diversified" under the 1940 Act. As a result, the Utilities AlphaDEX(TM) Fund is only limited as to the percentage of its assets which may be invested in the securities of any one issuer by the diversification requirements imposed by the Internal Revenue Code. Because the Utilities AlphaDEX(TM) Fund may invest a relatively high percentage of its assets in a limited number of issuers, the Utilities AlphaDEX(TM) 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. 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. 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. See "Additional Risks of Investing in the Funds" for additional information regarding risks. _______________________________________________________________________________ 41 HOW THE FUNDS HAVE PERFORMED The Funds have not yet operated for a full calendar year and therefore, performance information is not included in this section of the Prospectus. However, see "Total Return Information" for performance information regarding the Funds. WHAT ARE THE COSTS OF INVESTING? The following table describes the estimated fees and expenses you may pay when you buy or sell Creation Units of each Fund. Investors purchasing Shares in the secondary market will not pay the shareholder fees shown below, but may be subject to costs (including customary brokerage commissions) charged by their broker.
Consumer Consumer Discretionary Staples Energy Financials Health Care Industrials Materials AlphaDEX(TM) AlphaDEX(TM) AlphaDEX(TM) AlphaDEX(TM) AlphaDEX(TM) AlphaDEX(TM) AlphaDEX(TM) Fund Fund Fund Fund Fund Fund Fund Shareholder Fees (paid directly by Authorized Participants) Sales charges (loads) None None None None None None None Standard transaction fee per order(1) $1,000 $500 $500 $1,000 $500 $500 $500 Additional Up to 3 Up to 3 Up to 3 Up to 3 Up to 3 Up to 3 Up to 3 transaction times the times the times the times the times the times the times the charge if settled standard standard standard standard standard standard standard outside of the transaction transaction transaction transaction transaction transaction transaction usual process fee fee fee fee fee fee fee through the Continuous Net Settlement System of the National Securities Clearing Corporation(1) - --------------------------------------------------------------------------------------------------------------------------------- Annual Fund Operating Expenses(2) (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 Service (12b-1) Fees(3) 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Other Expenses(4) 4.76% 3.90% 4.02% 4.84% 4.80% 4.28% 4.00% Total Annual Fund Operating Expenses 5.26% 4.40 % 4.52% 5.34% 5.30% 4.78% 4.50% Fee Waivers and Expense Reimbursement(5) 4.56% 3.70% 3.82% 4.64% 4.60% 4.08% 3.80% Total Net Annual Operating Expenses 0.70% 0.70% 0.70% 0.70% 0.70% 0.70% 0.70%
Technology Utilities AlphaDEX(TM) AlphaDEX(TM) Fund Fund Shareholder Fees (paid directly by Authorized Participants) Sales charges (loads) None None Standard transaction fee per order(1) $500 $500 Additional Up to 3 Up to 3 transaction times the times the charge if settled standard standard outside of the transaction transaction usual process fee fee through the Continuous Net Settlement System of the National Securities Clearing Corporation(1) - --------------------------------------------------- Annual Fund Operating Expenses(2) (Expenses that are deducted from the Fund's assets) - --------------- Management Fees 0.50% 0.50% Distribution and Service (12b-1) Fees(3) 0.00% 0.00% Other Expenses(4) 4.45% 4.24% Total Annual Fund Operating Expenses 4.95% 4.74% Fee Waivers and Expense Reimbursement(5) 4.25% 4.04% Total Net Annual Operating Expenses 0.70% 0.70%
_______________________________________________________________________________ 42 EXAMPLE This example is intended to help you compare the cost of investing in each Fund with the cost of investing in other funds. This example does not take into account transaction fees on purchases and redemptions of Creation Units of each of the Funds or customary brokerage commissions that you pay when purchasing or selling Shares of each of the Funds in the secondary market. 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 as set forth in the table below:
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS Consumer Discretionary AlphaDEX(TM) Fund $ 72 $1,215 $2,347 $5,127 Consumer Staples AlphaDEX(TM) Fund 72 1,045 2,025 4,506 Energy AlphaDEX(TM) Fund 72 1,069 2,071 4,596 Financials AlphaDEX(TM) Fund 72 1,231 2,376 5,182 Health Care AlphaDEX(TM) Fund 72 1,223 2,362 5,154 Industrials AlphaDEX(TM) Fund 72 1,120 2,169 4,787 Materials AlphaDEX(TM) Fund 72 1,065 2,063 4,581 Technology AlphaDEX(TM) Fund 72 1,154 2,232 4,909 Utilities AlphaDEX(TM) Fund 72 1,113 2,154 4,758 - ------------- (1) Purchasers of Creation Units and parties redeeming Creation Units must pay a standard creation or redemption transaction fee of $1,000 for the Consumer Discretionary AlphaDEX(TM) Fund (assuming 101 to 200 different securities in a Creation Unit); $500 for the Consumer Staples AlphaDEX(TM) Fund (assuming 1 to 100 different securities in a Creation Unit); $500 for the Energy AlphaDEX(TM) Fund (assuming 1 to 100 different securities in a Creation Unit); $1,000 for the Financials AlphaDEX(TM) Fund (assuming 101 to 200 different securities in a Creation Unit); $500 for the Health Care AlphaDEX(TM) Fund (assuming 1 to 100 different securities in a Creation Unit); $500 for the Industrials AlphaDEX(TM) Fund (assuming 1 to 100 different securities in a Creation Unit); $500 for the Materials AlphaDEX(TM) Fund (assuming 1 to 100 different securities in a Creation Unit); $500 for the Technology AlphaDEX(TM) Fund (assuming 1 to 100 different securities in a Creation Unit); and $500 for the Utilities AlphaDEX(TM) Fund (assuming 1 to 100 different securities in a Creation Unit). However, if a Creation Unit is purchased or redeemed outside the usual process through the National Securities Clearing Corporation or for cash, an additional variable fee of up to three times the standard creation or redemption transaction fee may be charged. See "Creation Transaction Fees and Redemption Transaction Fees" below. (2) Expressed as a percentage of average daily net assets. (3) Each Fund has 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 the Fund's average daily net assets. However, no such fee is currently paid by a Fund and pursuant to a contractual arrangement, the Funds will not pay 12b-1 fees any time before April 30, 2009. (4) Other Expenses are based on estimated expenses for the current fiscal year. (5) 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, at least until May 10, 2009. 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.
_______________________________________________________________________________ 43 CREATION TRANSACTION FEES AND REDEMPTION TRANSACTION FEES The Funds 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 (as defined below) as set forth on the expense table for each purchase transaction (regardless of the number of Creation Units involved). 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) as set forth on the expense table 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 as set forth in the table below if the Creation Unit is redeemed after the periods indicated:
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS Consumer Discretionary AlphaDEX(TM) Fund $9,151 $123,504 $236,693 $514,655 Consumer Staples AlphaDEX(TM) Fund 8,151 105,489 203,511 451,582 Energy AlphaDEX(TM) Fund 8,151 107,882 207,572 460,572 Financials AlphaDEX(TM) Fund 9,151 125,071 239,628 520,157 Health Care AlphaDEX(TM) Fund 8,151 123,288 237,162 516,412 Industrials AlphaDEX(TM) Fund 8,151 113,045 217,876 479,680 Materials AlphaDEX(TM) Fund 8,151 107,483 207,314 459,081 Technology AlphaDEX(TM) Fund 8,151 116,406 224,228 491,903 Utilities AlphaDEX(TM) Fund 8,151 112,252 216,375 476,773
If a Creation Unit is purchased or redeemed outside the usual process through the National Securities Clearing Corporation or for cash, an additional variable fee of up to three times the standard Creation or Redemption Transaction Fee may be charged to the AP making the transaction. The Creation Transaction Fee, Redemption Transaction Fee and variable fee are not expenses of a Fund and do not impact a Fund's expense ratio. ADDITIONAL INVESTMENT STRATEGIES Each of the policies described herein is a non-fundamental policy of each Fund that may be changed by the Board of Trustees of the Trust without shareholder approval. Certain fundamental policies of the Funds are set forth in the Statement of Additional Information ("SAI") under "Investment Objective and Policies." _______________________________________________________________________________ 44 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 if such securities are included in the applicable equity index in the StrataQuant(TM) Series, including depositary receipts that represent non-U.S. common stocks deposited with a custodian. 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 Fund's SAI. ADDITIONAL RISKS OF INVESTING IN THE FUNDS Risk is inherent in all investing. Investing in each Fund involves risk, including the risk that you may lose all or part of your investment. There can be no assurance that each Fund will meet its stated objective. 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. _______________________________________________________________________________ 45 FLUCTUATION OF NET ASSET VALUE The NAV of Shares of each Fund will generally fluctuate with changes in the market value of each Fund's holdings. The market prices of Shares will generally fluctuate in accordance with changes in NAV 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 NAV. 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 NAV), First Trust believes that large discounts or premiums to the NAV of Shares should not be sustained. 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 the 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 Each Fund is a series of the Trust, an investment company registered under 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. _______________________________________________________________________________ 46 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 25 mutual fund portfolios, 36 exchange-traded fund portfolios and 14 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 Shares of each Fund. 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 as a Vice President 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 is 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 _______________________________________________________________________________ 47 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. The table below sets forth the annual management fee that First Trust receives from each Fund. Due to expense reimbursements, none of the Funds paid a management fee for the period ended July 31, 2007. A discussion regarding the approval of the Investment Management Agreement is available in the Funds' Annual Report to Shareholders for the period ended July 31, 2007. FUND ANNUAL MANAGEMENT FEE Consumer Discretionary AlphaDEX(TM) Fund 0.50% of average daily net assets Consumer Staples AlphaDEX(TM) Fund 0.50% of average daily net assets Energy AlphaDEX(TM) Fund 0.50% of average daily net assets Financials AlphaDEX(TM) Fund 0.50% of average daily net assets Health Care AlphaDEX(TM) Fund 0.50% of average daily net assets Industrials AlphaDEX(TM) Fund 0.50% of average daily net assets Materials AlphaDEX(TM) Fund 0.50% of average daily net assets Technology AlphaDEX(TM) Fund 0.50% of average daily net assets Utilities AlphaDEX(TM) Fund 0.50% of average daily net assets 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 May 10, 2009. 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. HOW TO BUY AND SELL SHARES Shares will be issued or redeemed by the Funds at NAV 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, _______________________________________________________________________________ 48 you may receive less than the NAV 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. 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. For the purpose of the 1940 Act, each Fund is treated as a registered investment company, and the acquisition of Shares by other registered investment companies is subject to the restrictions of Section 12(d)(1) of the 1940 Act. The Trust, on behalf of the Funds, has received an exemptive order from the Securities and Exchange Commission that permits certain registered investment companies to invest in a Fund beyond the limits set forth in Section 12(d)(1), subject to certain terms and conditions, including that any such investment companies enter into such agreements with a Fund regarding the terms of any investment. 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. 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 disseminates 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 Each Fund imposes no restrictions on the frequency of purchases and redemptions ("market timing"). In determining not to approve a written, established policy, the Board evaluated the risks of market timing activities by each Fund's shareholders. The Board considered that, unlike traditional mutual funds, the _______________________________________________________________________________ 49 Funds issue and redeem their Shares at NAV 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. The Board noted that a Fund's Shares can only be purchased and redeemed directly from the Fund in Creation Units by APs and that the vast majority of trading in Shares occurs on the secondary market. Because the secondary market trades do not involve a Fund directly, it is unlikely those trades would cause many of the harmful effects of market timing, including: dilution, disruption of portfolio management, increases in a Fund's trading costs and the realization of capital gains. With respect to trades directly with a Fund, to the extent effected in-kind (i.e., for securities), those trades do not cause any of the harmful effects (as noted above) that may result from frequent cash trades. To the extent trades are effected in whole or in part in cash, the Board noted that those trades could result in dilution to a Fund and increased transaction costs, which could negatively impact a Fund's ability to achieve its investment objective. However, the Board noted that direct trading by APs is critical to ensuring that the Shares trade at or close to NAV. The Funds also employ fair valuation pricing to minimize potential dilution from market timing. The Funds impose transaction fees on in-kind purchases and redemptions of Shares to cover the custodial and other costs incurred by a Fund in executing in-kind trades, and with respect to the redemption fees, these fees increase if an investor substitutes cash in part or in whole for securities, reflecting the fact that a Fund's trading costs increase in those circumstances. 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 AP agreement with the Funds' distributor and 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 the Funds, an investor must generally deposit a designated portfolio of equity securities constituting a substantial replication, or a representation, of the stocks included in each 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 the Funds' distributor and transfer agent, with respect to purchases and redemptions of Creation Units of each Fund. All orders must be placed for one or more whole Creation Units of Shares of the _______________________________________________________________________________ 50 Funds and must be received by the Funds' transfer agent in proper form no later than the close of regular trading on the New York Stock Exchange (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 the Funds' 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. Purchasers of Creation Units must pay a standard creation transaction fee (the "Creation Transaction Fee"), which is based on the number of different securities in a Creation Unit according to the fee schedule set forth below: NUMBER OF SECURITIES CREATION IN A CREATION UNIT TRANSACTION FEE 1-100 $500 101-200 $1,000 201-300 $1,500 301-400 $2,000 401-500 $2,500 501-600 $3,000 601-700 $3,500 The Creation Transaction Fee is applicable to each purchase transaction regardless of the number of Creation Units purchased in the transaction. An additional variable fee of up to three times the Creation Transaction Fee may be charged to approximate additional expenses incurred by a Fund 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. _______________________________________________________________________________ 51 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 a 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 Funds' 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 NAV 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 customary brokerage commissions in connection with assembling a sufficient number of Shares of a Fund 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 Funds' transfer agent in proper form no later than the 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 the Funds' transfer agent no later than 3:00 p.m., Eastern time. Parties redeeming Creation Units must pay a standard redemption transaction fee (the "Redemption Transaction Fee"), which is based on the number of different securities in a Creation Unit according to the fee schedule set forth below: NUMBER OF SECURITIES REDEMPTION IN A CREATION UNIT TRANSACTION FEE 1-100 $500 101-200 $1,000 201-300 $1,500 301-400 $2,000 401-500 $2,500 501-600 $3,000 601-700 $3,500 The Redemption Transaction Fee is applicable to each redemption transaction regardless of the number of Creation Units redeemed in the transaction. An additional variable fee of up to three times the Redemption Transaction Fee may be charged to approximate additional expenses incurred by a Fund 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. _______________________________________________________________________________ 52 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 charged by the broker. 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, 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 Funds' distributions are generally taxable. After the end of each year, you will receive a tax statement that separates the distributions of a Fund 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 the 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 Fund 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 _______________________________________________________________________________ 53 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 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 corporations may be designated by the Funds 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. The Funds 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. _______________________________________________________________________________ 54 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 a Fund invests in any non-U.S. securities, the tax statement that you receive may include an item showing non-U.S. taxes a Fund paid to other countries. In this case, dividends taxed to you will include your share of the taxes a 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 Fund designates 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 Fund that are properly designated by the Fund as capital gain dividends may not be subject to U.S. federal income taxes, including withholding taxes, provided that the Fund makes certain elections and certain other conditions are met. In the case of dividends with respect to taxable years of the Fund beginning prior to 2008, distributions from the Fund that are properly designated by the Fund as an interest-related dividend attributable to certain interest income received by the Fund or as a short-term capital gain dividend attributable to certain net short-term capital gain income received by the Fund 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 _______________________________________________________________________________ 55 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 pursuant to a contractual arrangement, the Funds will not pay 12b-1 fees any time before April 30, 2009. 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 a Fund by taking the market price of the 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 NAV 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 will be valued at the last sale price 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 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 market quotations are not readily available or securities for which market quotations are deemed unreliable will be determined by the Board or its designee in a manner that most fairly reflects the 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 a Fund's 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 principle, 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 Fund generally results in the _______________________________________________________________________________ 56 prices used by the Fund 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 Mellon Corporation 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. 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. The American Stock Exchange LLC 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 the Funds particularly 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. _______________________________________________________________________________ 57 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 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 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. _______________________________________________________________________________ 58 ADDITIONAL INDEX INFORMATION The StrataQuant(TM) Series was created and trademarked by the AMEX. The Funds will make changes to their portfolios shortly after changes to the StrataQuant(TM) Series are released to the public. Investors are 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, the StrataQuant(TM) Series license is terminated or 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. PREMIUM/DISCOUNT INFORMATION The tables that follow present information about the differences between each Fund's daily market price on the AMEX and its NAV. The "Market Price" of a Fund generally is determined using the midpoint between the highest bid and lowest offer on the exchange, as of the time a Fund's NAV is calculated. A Fund's Market Price may be at, above, or below its NAV. The NAV of a Fund will fluctuate with changes in the market value of its portfolio holdings. The Market Price of a Fund will fluctuate in accordance with changes in its NAV, as well as market supply and demand. Premiums or discounts are the differences (generally expressed as a percentage) between the NAV and Market Price of a Fund on a given day, generally at the time NAV is calculated. A premium is the amount that a Fund is trading above the reported NAV, expressed as a percentage of the NAV. A discount is the amount that a Fund is trading below the reported NAV, expressed as a percentage of the NAV. The following information shows the frequency distribution of premiums and discounts of the daily bid/ask price of each Fund against each Fund's NAV. The information shown for each Fund is for the period indicated. All data presented here represents past performance, which cannot be used to predict future results. FIRST TRUST CONSUMER DISCRETIONARY ALPHADEX(TM) FUND BID/ASK MIDPOINT VS. NAV
NUMBER OF DAYS BID/ASK MIDPOINT AT/ABOVE NAV QUARTER ENDED 0-49 BASIS POINTS 50-99 BASIS POINTS 100-199 BASIS POINTS >= 200 BASIS POINTS 10/31/07 45 1 0 0 7/31/07* 15 0 0 0 NUMBER OF DAYS BID/ASK MIDPOINT BELOW NAV QUARTER ENDED 0-49 BASIS POINTS 50-99 BASIS POINTS 100-199 BASIS POINTS >= 200 BASIS POINTS 10/31/07 19 0 0 0 7/31/07* 42 0 0 0
_______________________________________________________________________________ 59 FIRST TRUST CONSUMER STAPLES ALPHADEX(TM) FUND BID/ASK MIDPOINT VS. NAV
NUMBER OF DAYS BID/ASK MIDPOINT AT/ABOVE NAV QUARTER ENDED 0-49 BASIS POINTS 50-99 BASIS POINTS 100-199 BASIS POINTS >= 200 BASIS POINTS 10/31/07 29 0 0 0 7/31/07* 27 0 1 0 NUMBER OF DAYS BID/ASK MIDPOINT BELOW NAV QUARTER ENDED 0-49 BASIS POINTS 50-99 BASIS POINTS 100-199 BASIS POINTS >= 200 BASIS POINTS 10/31/07 36 0 0 0 7/31/07* 29 0 0 0
FIRST TRUST ENERGY ALPHADEX(TM) FUND BID/ASK MIDPOINT VS. NAV
NUMBER OF DAYS BID/ASK MIDPOINT AT/ABOVE NAV QUARTER ENDED 0-49 BASIS POINTS 50-99 BASIS POINTS 100-199 BASIS POINTS >= 200 BASIS POINTS 10/31/07 35 0 0 0 7/31/07* 27 1 0 0 NUMBER OF DAYS BID/ASK MIDPOINT BELOW NAV QUARTER ENDED 0-49 BASIS POINTS 50-99 BASIS POINTS 100-199 BASIS POINTS >= 200 BASIS POINTS 10/31/07 29 1 0 0 7/31/07* 29 0 0 0
FIRST TRUST FINANCIALS ALPHADEX(TM) FUND BID/ASK MIDPOINT VS. NAV
NUMBER OF DAYS BID/ASK MIDPOINT AT/ABOVE NAV QUARTER ENDED 0-49 BASIS POINTS 50-99 BASIS POINTS 100-199 BASIS POINTS >= 200 BASIS POINTS 10/31/07 37 0 0 0 7/31/07* 19 0 0 0 NUMBER OF DAYS BID/ASK MIDPOINT BELOW NAV QUARTER ENDED 0-49 BASIS POINTS 50-99 BASIS POINTS 100-199 BASIS POINTS >= 200 BASIS POINTS 10/31/07 28 0 0 0 7/31/07* 38 0 0 0
_______________________________________________________________________________ 60 FIRST TRUST HEALTH CARE ALPHADEX(TM) FUND BID/ASK MIDPOINT VS. NAV
NUMBER OF DAYS BID/ASK MIDPOINT AT/ABOVE NAV QUARTER ENDED 0-49 BASIS POINTS 50-99 BASIS POINTS 100-199 BASIS POINTS >= 200 BASIS POINTS 10/31/07 42 1 1 0 7/31/07* 27 0 0 0 NUMBER OF DAYS BID/ASK MIDPOINT BELOW NAV QUARTER ENDED 0-49 BASIS POINTS 50-99 BASIS POINTS 100-199 BASIS POINTS >= 200 BASIS POINTS 10/31/07 21 0 0 0 7/31/07* 30 0 0 0
FIRST TRUST INDUSTRIALS/PRODUCER DURABLES ALPHADEX(TM) FUND BID/ASK MIDPOINT VS. NAV
NUMBER OF DAYS BID/ASK MIDPOINT AT/ABOVE NAV QUARTER ENDED 0-49 BASIS POINTS 50-99 BASIS POINTS 100-199 BASIS POINTS >= 200 BASIS POINTS 10/31/07 31 0 0 0 7/31/07* 40 1 0 0 NUMBER OF DAYS BID/ASK MIDPOINT BELOW NAV QUARTER ENDED 0-49 BASIS POINTS 50-99 BASIS POINTS 100-199 BASIS POINTS >= 200 BASIS POINTS 10/31/07 34 0 0 0 7/31/07* 16 0 0 0
FIRST TRUST MATERIALS ALPHADEX(TM) FUND BID/ASK MIDPOINT VS. NAV
NUMBER OF DAYS BID/ASK MIDPOINT AT/ABOVE NAV QUARTER ENDED 0-49 BASIS POINTS 50-99 BASIS POINTS 100-199 BASIS POINTS >= 200 BASIS POINTS 10/31/07 41 0 0 0 7/31/07* 27 1 0 0 NUMBER OF DAYS BID/ASK MIDPOINT BELOW NAV QUARTER ENDED 0-49 BASIS POINTS 50-99 BASIS POINTS 100-199 BASIS POINTS >= 200 BASIS POINTS 10/31/07 21 3 0 0 7/31/07* 29 0 0 0
_______________________________________________________________________________ 61 FIRST TRUST TECHNOLOGY ALPHADEX(TM) FUND BID/ASK MIDPOINT VS. NAV
NUMBER OF DAYS BID/ASK MIDPOINT AT/ABOVE NAV QUARTER ENDED 0-49 BASIS POINTS 50-99 BASIS POINTS 100-199 BASIS POINTS >= 200 BASIS POINTS 10/31/07 38 0 0 0 7/31/07* 23 1 0 0 NUMBER OF DAYS BID/ASK MIDPOINT BELOW NAV QUARTER ENDED 0-49 BASIS POINTS 50-99 BASIS POINTS 100-199 BASIS POINTS >= 200 BASIS POINTS 10/31/07 27 0 0 0 7/31/07* 33 0 0 0
FIRST TRUST UTILITIES ALPHADEX(TM) FUND
BID/ASK MIDPOINT VS. NAV NUMBER OF DAYS BID/ASK MIDPOINT AT/ABOVE NAV QUARTER ENDED 0-49 BASIS POINTS 50-99 BASIS POINTS 100-199 BASIS POINTS >= 200 BASIS POINTS 10/31/07 44 0 0 0 7/31/07* 27 1 0 0 NUMBER OF DAYS BID/ASK MIDPOINT BELOW NAV QUARTER ENDED 0-49 BASIS POINTS 50-99 BASIS POINTS 100-199 BASIS POINTS >= 200 BASIS POINTS 10/31/07 21 0 0 0 7/31/07* 29 0 0 0
* TRADING COMMENCED ON MAY 10, 2007. TOTAL RETURN INFORMATION The tables below compare the total return of each Fund to the total return of the Index on which it is based. In addition, the total return of each Fund is compared to the total return of a broad measure of market performance. The information presented for each Fund is for the periods indicated. "Cumulative total returns" represent the total change in value of an investment over the period indicated. The NAV return is based on the NAV per Share of a Fund, and the market return is based on the market price per Share of a Fund. The price used to calculate market return ("Market Price") is determined by using the midpoint between the highest bid and the lowest offer on the applicable exchange, as of the time that a Fund's NAV is calculated. Since the Shares of each Fund typically do not trade in the secondary market until several days after a Fund's inception, for the period from inception to the first day of secondary market trading in Shares of a Fund, the NAV of a Fund is used as a proxy for the secondary market trading price to calculate market returns. Market and NAV returns assume that dividends and capital gain distributions have been reinvested in a Fund at Market Price and NAV, respectively. An index is a statistical composite that tracks a specified financial market or sector. Unlike each Fund, an index does not actually hold a portfolio of securities and therefore does not incur the expenses incurred by a Fund. These expenses negatively impact the performance of each Fund. Also, market returns do not _______________________________________________________________________________ 62 include brokerage commissions that may be payable on secondary market transactions. If brokerage commissions were included, market returns would be lower. The returns shown in the table below do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Shares of a Fund. The investment return and principal value of Shares of a Fund will vary with changes in market conditions. Shares of a Fund may be worth more or less than their original cost when they are redeemed or sold in the market. A Fund's past performance is no guarantee of future results.
FIRST TRUST CONSUMER DISCRETIONARY ALPHADEX(TM) FUND Cumulative Total Returns Inception (5/8/07) Quarter Ended to 7/31/07 10/31/07 FUND PERFORMANCE NAV -5.85% 0.80% Market Price -5.80% 0.48% INDEX PERFORMANCE Russell 1000(R) Index -3.26% 7.07% StrataQuant(TM) Consumer Discretionary Index -5.61% 1.00% Russell 1000(R) Consumer Discretionary and Services Index -4.94% 5.05%
FIRST TRUST CONSUMER STAPLES ALPHADEX(TM) FUND Cumulative Total Returns Inception (5/8/07) Quarter Ended to 7/31/07 10/31/07 FUND PERFORMANCE NAV -4.45% 6.38% Market Price -4.45% 6.23% INDEX PERFORMANCE Russell 1000(R) Index -3.26% 7.07% StrataQuant(TM) Consumer Staples Index -4.26% 6.50% Russell 1000(R) Consumer Staples Index -2.20% 9.75%
FIRST TRUST ENERGY ALPHADEX(TM) FUND Cumulative Total Returns Inception (5/8/07) Quarter Ended to 7/31/07 10/31/07 FUND PERFORMANCE NAV 3.70% 9.02% Market Price 3.75% 8.82% INDEX PERFORMANCE Russell 1000(R) Index -3.26% 7.07% StrataQuant(TM) Energy Index 3.87% 9.17% Russell 1000(R) Integrated Oils Index 7.37% 8.96% Russell 1000(R) Other Energy Index 4.00% 12.66%
_______________________________________________________________________________ 63
FIRST TRUST FINANCIALS ALPHADEX(TM) FUND Cumulative Total Returns Inception (5/8/07) Quarter Ended to 7/31/07 10/31/07 FUND PERFORMANCE NAV -10.45% -2.23% Market Price -10.35% -2.57% INDEX PERFORMANCE StrataQuant(TM) Financials Index -10.14% -1.98% Russell 1000(R) Index -3.26% 7.07% Russell 1000(R) Financial Services Index -10.82% 2.28%
FIRST TRUST HEALTH CARE ALPHADEX(TM) FUND Cumulative Total Returns Inception (5/8/07) Quarter Ended to 7/31/07 10/31/07 FUND PERFORMANCE NAV -2.60% 5.44% Market Price -2.50% 5.18% INDEX PERFORMANCE Russell 1000(R) Index -3.26% 7.07% StrataQuant(TM) Health Care Index -2.36% 5.55% Russell 1000(R) Health Care Index -7.09% 7.67%
FIRST TRUST INDUSTRIALS/PRODUCER DURABLES ALPHADEX(TM) FUND Cumulative Total Returns Inception (5/8/07) Quarter Ended to 7/31/07 10/31/07 FUND PERFORMANCE NAV -5.65% 3.92% Market Price -5.40% 3.59% INDEX PERFORMANCE Russell 1000(R) Index -3.26% 7.07% StrataQuant(TM) Industrials Index -5.43% 4.09% Russell 1000(R) Producer Durables Index 2.91% 3.55%
FIRST TRUST MATERIALS ALPHADEX(TM) FUND Cumulative Total Returns Inception (5/8/07) Quarter Ended to 7/31/07 10/31/07 FUND PERFORMANCE NAV 0.85% 12.30% Market Price 0.85% 12.35% INDEX PERFORMANCE Russell 1000(R) Index -3.26% 7.07% StrataQuant(TM) Materials Index 1.04% 12.38% Russell 1000(R) Materials and Processing Index 1.21% 11.42%
_______________________________________________________________________________ 64
FIRST TRUST TECHNOLOGY ALPHADEX(TM) FUND Cumulative Total Returns Inception (5/8/07) Quarter Ended to 7/31/07 10/31/07 FUND PERFORMANCE NAV 2.35% 11.09% Market Price 2.25% 11.05% INDEX PERFORMANCE Russell 1000(R) Index -3.26% 7.07% StrataQuant(TM) Technology Index 2.52% 11.17% Russell 1000(R) Technology Index 2.26% 13.51%
FIRST TRUST UTILITIES ALPHADEX(TM) FUND Cumulative Total Returns Inception (5/8/07) Quarter Ended to 7/31/07 10/31/07 FUND PERFORMANCE NAV -8.15% 7.08% Market Price -8.15% 6.91% INDEX PERFORMANCE Russell 1000(R) Index -3.26% 7.07% StrataQuant(TM) Utilities Index -7.95% 7.12% Russell 1000(R) Utilities Index -4.22% 4.94%
FINANCIAL HIGHLIGHTS The financial highlights table is intended to help you understand each Fund's financial performance since its inception. Certain information reflects financial results for a single Share of each Fund. The total returns represent the rate that an investor would have earned (or lost) on an investment in a Fund (assuming reinvestment of all dividends and distributions). The information for the periods indicated has been derived from financial statements audited by Deloitte & Touche LLP, whose report for the period ended July 31, 2007, along with each Fund's financial statements, are included in the Annual Report to Shareholders dated July 31, 2007 and are incorporated by reference in the SAI, which are available upon request. _______________________________________________________________________________ 65 FINANCIAL HIGHLIGHTS FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
FIRST TRUST CONSUMER DISCRETIONARY ALPHADEX(TM) FUND FOR THE PERIOD MAY 8, 2007 (A) THROUGH JULY 31, 2007 ------------------ Net asset value, beginning of period $20.00 ----------- Income from investment operations: Net investment income (loss) (b) 0.00 (f) Net realized and unrealized gain (loss) (1.17) ----------- Total from investment operations (1.17) ----------- Net asset value, end of period $18.83 =========== TOTAL RETURN (c) (5.85)% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (in 000's) $1,883 Ratios to average net assets: Ratio of net expenses to average net assets 0.70% (d) Ratio of total expenses to average net assets 11.39% (d) Ratio of net investment income to average net assets 0.04% (d) Portfolio turnover rate (e) 34% FIRST TRUST CONSUMER STAPLES ALPHADEX(TM) FUND FOR THE PERIOD MAY 8, 2007 (A) THROUGH JULY 31, 2007 ------------------ Net asset value, beginning of period $20.00 ----------- Income from investment operations: Net investment income (loss) (b) 0.04 Net realized and unrealized gain (loss) (0.93) ----------- Total from investment operations (0.89) ----------- Net asset value, end of period $19.11 =========== TOTAL RETURN (c) (4.45)% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (in 000's) $2,866 Ratios to average net assets: Ratio of net expenses to average net assets 0.70% (d) Ratio of total expenses to average net assets 9.34% (d) Ratio of net investment income to average net assets 0.98% (d) Portfolio turnover rate (e) 1% SEE "NOTES TO FINANCIAL HIGHLIGHTS" ON PAGE 70. _______________________________________________________________________________ 66 FINANCIAL HIGHLIGHTS FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD FIRST TRUST ENERGY ALPHADEX(TM) FUND FOR THE PERIOD MAY 8, 2007 (A) THROUGH JULY 31, 2007 ------------------ Net asset value, beginning of period $20.00 ----------- Income from investment operations: Net investment income (loss) (b) (0.00) (f) Net realized and unrealized gain (loss) 0.74 ----------- Total from investment operations 0.74 ----------- Net asset value, end of period $20.74 =========== TOTAL RETURN (c) 3.70% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (in 000's) $5,184 Ratios to average net assets: Ratio of net expenses to average net assets 0.70% (d) Ratio of total expenses to average net assets 9.49% (d) Ratio of net investment loss to average net assets (0.03)% (d) Portfolio turnover rate (e) 1% FIRST TRUST FINANCIALS ALPHADEX(TM) FUND FOR THE PERIOD MAY 8, 2007 (A) THROUGH JULY 31, 2007 ------------------ Net asset value, beginning of period $20.00 ----------- Income from investment operations: Net investment income (loss) (b) 0.07 Net realized and unrealized gain (loss) (2.16) ----------- Total from investment operations (2.09) ----------- Net asset value, end of period $17.91 =========== TOTAL RETURN (c) (10.45)% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (in 000's) $1,791 Ratios to average net assets: Ratio of net expenses to average net assets 0.70% (d) Ratio of total expenses to average net assets 11.58% (d) Ratio of net investment income to average net assets 1.46% (d) Portfolio turnover rate (e) 26% SEE "NOTES TO FINANCIAL HIGHLIGHTS" ON PAGE 70. _______________________________________________________________________________ 67 FINANCIAL HIGHLIGHTS FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD FIRST TRUST HEALTH CARE ALPHADEX(TM) FUND FOR THE PERIOD MAY 8, 2007 (A) THROUGH JULY 31, 2007 ------------------ Net asset value, beginning of period $20.00 ----------- Income from investment operations: Net investment income (loss) (b) (0.01) Net realized and unrealized gain (loss) (0.51) ----------- Total from investment operations (0.52) ----------- Net asset value, end of period $19.48 =========== TOTAL RETURN (c) (2.60)% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (in 000's) $1,949 Ratios to average net assets: Ratio of net expenses to average net assets 0.70% (d) Ratio of total expenses to average net assets 11.48% (d) Ratio of net investment loss to average net assets (0.31)% (d) Portfolio turnover rate (e) 30% FIRST TRUST INDUSTRIALS/PRODUCER DURABLES ALPHADEX(TM) FUND FOR THE PERIOD MAY 8, 2007 (A) THROUGH JULY 31, 2007 ------------------ Net asset value, beginning of period $20.00 ----------- Income from investment operations: Net investment income (loss) (b) (0.00) (f) Net realized and unrealized gain (loss) (1.13) ----------- Total from investment operations (1.13) ----------- Net asset value, end of period $18.87 =========== TOTAL RETURN (c) (5.65)% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (in 000's) $4,718 Ratios to average net assets: Ratio of net expenses to average net assets 0.70% (d) Ratio of total expenses to average net assets 10.09% (d) Ratio of net investment loss to average net assets (0.14)% (d) Portfolio turnover rate (e) 24% SEE "NOTES TO FINANCIAL HIGHLIGHTS" ON PAGE 70. _______________________________________________________________________________ 68 FINANCIAL HIGHLIGHTS FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD FIRST TRUST MATERIALS ALPHADEX(TM) FUND FOR THE PERIOD MAY 8, 2007 (A) THROUGH JULY 31, 2007 ------------------ Net asset value, beginning of period $20.00 ----------- Income from investment operations: Net investment income (loss) (b) 0.02 Net realized and unrealized gain (loss) 0.15 ----------- Total from investment operations 0.17 ----------- Net asset value, end of period $20.17 =========== TOTAL RETURN (c) 0.85% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (in 000's) $3,025 Ratios to average net assets: Ratio of net expenses to average net assets 0.70% (d) Ratio of total expenses to average net assets 9.56% (d) Ratio of net investment income to average net assets 0.46% (d) Portfolio turnover rate (e) 1% FIRST TRUST TECHNOLOGY ALPHADEX(TM) FUND FOR THE PERIOD MAY 8, 2007 (A) THROUGH JULY 31, 2007 ------------------ Net asset value, beginning of period $20.00 ----------- Income from investment operations: Net investment income (loss) (b) (0.02) Net realized and unrealized gain (loss) 0.49 ----------- Total from investment operations 0.47 ----------- Net asset value, end of period $20.47 =========== TOTAL RETURN (c) 2.35% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (in 000's) $2,149 Ratios to average net assets: Ratio of net expenses to average net assets 0.70% (d) Ratio of total expenses to average net assets 10.64% (d) Ratio of net investment loss to average net assets (0.47)% (d) Portfolio turnover rate (e) 6% SEE "NOTES TO FINANCIAL HIGHLIGHTS" ON PAGE 70. _______________________________________________________________________________ 69 FINANCIAL HIGHLIGHTS FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD FIRST TRUST UTILITIES ALPHADEX(TM) FUND FOR THE PERIOD MAY 8, 2007 (A) THROUGH JULY 31, 2007 ------------------ Net asset value, beginning of period $20.00 ----------- Income from investment operations: Net investment income (loss) (b) 0.09 Net realized and unrealized gain (loss) (1.72) ----------- Total from investment operations (1.63) ----------- Net asset value, end of period $18.37 =========== TOTAL RETURN (c) (8.15)% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (in 000's) $2,756 Ratios to average net assets: Ratio of net expenses to average net assets 0.70% (d) Ratio of total expenses to average net assets 10.12% (d) Ratio of net investment income to average net assets 2.18% (d) Portfolio turnover rate (e) 1%
NOTES TO FINANCIAL HIGHLIGHTS (a) Inception date. (b) Based on average shares outstanding. (c) Total return is calculated assuming an initial investment made at the net asset value at the beginning of the period, reinvestment of all dividend distributions at net asset value during the period, and redemption at net asset value on the last day of the period. The return presented does not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption or sale of fund shares. Total return calculated for a period of less than one year is not annualized. The total return would have been lower if certain fees had not been waived and expenses reimbursed by the investment advisor. (d) Annualized. (e) Portfolio turnover is not annualized and does not include securities received or delivered from processing creations or redemptions. (f) Amount represents less than $0.01 Per share. 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. The Trust, on behalf of the Funds, has received an exemptive order from the Securities and Exchange Commission that permits certain registered investment companies to invest in a Fund beyond the limits set forth in Section 12(d)(1), subject to certain terms and conditions, including that any such investment companies enter into agreements with a Fund regarding the terms of any investment. _______________________________________________________________________________ 70 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 Shares of a Fund, 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. 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. _______________________________________________________________________________ 71 This page intentionally left blank. _______________________________________________________________________________ 72 [BLANK INSIDE BACK COVER] ============================================================================== [LOGO OMITTED] AlphaDEX(TM) Family of ETFs _______________________________________________________________________________ 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/Producer Durables AlphaDEX(TM) Fund First Trust Materials AlphaDEX(TM) Fund First Trust Technology AlphaDEX(TM) Fund First Trust Utilities AlphaDEX(TM) Fund 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. Additional information about the Funds' investments is available in the annual and semi-annual reports to Shareholders. In the Funds' annual reports, you will find a discussion of the market conditions and investment strategies that significantly impacted the Funds' performance during the last fiscal year. 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) 551-8090 for information on the Public Reference Room. You may also request information regarding the Funds by sending a request (along with a duplication fee) to the SEC's Public Reference Section, 100 F Street, N.E., Washington, D.C. 20549 or by sending an electronic request to publicinfo@sec.gov. 1001 Warrenville Road Suite 300 Lisle, Illinois 60532 (800) 621-1675 SEC File #: 333-140895 www.ftportfolios.com 811-22019 ________________________________________________________________________________ Back Cover ============================================================================== [LOGO OMITTED] AlphaDEX(TM) Family of ETFs _______________________________________________________________________________ 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 AlphaDEX(TM) Funds November 28, 2007 _______________________________________________________________________________ Front Cover [BLANK INSIDE 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 November 28, 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. Each Fund lists and trades its Shares on the American Stock Exchange LLC (the "AMEX") at market prices that may differ to some degree from the net asset value ("NAV") of its Shares. Unlike conventional mutual funds, each Fund issues and redeems Shares on a continuous basis, at NAV, only in large specified blocks consisting of 100,000 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 EACH FUND. 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. _______________________________________________________________________________ 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 .................................................... 8 First Trust Small Cap Core AlphaDEX(TM) Fund Investment Objective, Strategies and Risks .................................................... 12 First Trust Large Cap Value Opportunities AlphaDEX(TM) Fund Investment Objective, Strategies and Risks ......................................... 16 First Trust Large Cap Growth Opportunities AlphaDEX(TM) Fund Investment Objective, Strategies and Risks ......................................... 20 First Trust Multi Cap Value AlphaDEX(TM) Fund Investment Objective, Strategies and Risks .................................................... 24 First Trust Multi Cap Growth AlphaDEX(TM) Fund Investment Objective, Strategies and Risks .................................................... 30 Additional Investment Strategies ........................................... 38 Additional Risks of Investing in the Funds ................................. 39 Fund Organization .......................................................... 40 Management of the Funds .................................................... 40 How to Buy and Sell Shares ................................................. 42 Creations, Redemptions and Transaction Fees ................................ 44 Dividends, Distributions and Taxes ......................................... 46 Federal Tax Matters ........................................................ 47 Distribution Plan .......................................................... 49 Net Asset Value ............................................................ 50 Fund Service Providers ..................................................... 50 Index Provider ............................................................. 51 Disclaimers ................................................................ 51 Additional Index Information ............................................... 52 Premium/Discount Information ............................................... 52 Total Return Information ................................................... 55 Financial Highlights ....................................................... 57 Other Information .......................................................... 61 _______________________________________________________________________________ 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 Each Fund is a series of the First Trust Exchange-Traded AlphaDEX(TM) Fund (the "Trust"), an 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 (the "Defined Index Series") developed, maintained and sponsored by Standard & Poor's, a division of The McGraw-Hill Companies, Inc. ("S&P" or the "Index Provider"), 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 indices within 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 of each Fund are traded throughout the day on the AMEX, whereas mutual funds are typically only bought and sold at closing NAVs. The Shares of each Fund 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. _______________________________________________________________________________ 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"). EXCHANGE-LISTED The Shares are listed and trade on the AMEX under the ticker symbol "FEX." 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. The Large Cap Core AlphaDEX(TM) Fund's investment objective and the 90% investment strategy are non-fundamental policies and require 60 days' prior written notice to shareholders before they can be changed. As non-fundamental policies, the Board of Trustees of the Trust can change such policies 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 indices through the use of the AlphaDEX(TM) screening methodology. Alpha is an indication of how much an investment outperforms or underperforms on a risk-adjusted basis _______________________________________________________________________________ 4 relative to its benchmark. The S&P 500 Index includes 500 leading companies in leading industries of the U.S. economy representing approximately 75% of the U.S. equities market. 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 October 31, 2007, the S&P 500 consisted of 500 stocks and the Large Cap Core Index consisted of 371 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. 2b. S&P/Citigroup Growth and Value series is a family of indices wherein each stock is classified in one of three ways: solely growth, solely value or a blend of growth and value. For stocks that S&P/Citigroup 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/Citigroup 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 sixth 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. An 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. The Shares of the Large Cap Core AlphaDEX(TM) Fund will change in value, and loss of money is a risk of investing in the Large Cap Core AlphaDEX(TM) 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 _______________________________________________________________________________ 5 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 Large Cap Core Index. 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. 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 fees and 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 AlphaDEX(TM) Fund 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. Therefore, the Large Cap Core AlphaDEX(TM) Fund will generally not sell a stock because the stock's issuer is in financial trouble, unless that stock is removed or is anticipated to be removed from the Large Cap Core Index. INTELLECTUAL PROPERTY RISK. The Large Cap Core AlphaDEX(TM) Fund relies on a license and related sublicense that permits the Large Cap Core AlphaDEX(TM) Fund to use its corresponding equity index in the Defined Index Series and 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 _______________________________________________________________________________ 6 sublicense may be terminated by the Index Provider 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 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 Large Cap Core 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 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. 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 and may subject the Large Cap Core AlphaDEX(TM) Fund to greater market risk than more diversified funds. NON-DIVERSIFICATION RISK. The Large Cap Core AlphaDEX(TM) Fund is classified as "non-diversified" under the Investment Company Act of 1940, as amended (the "1940 Act"). As a result, the Large Cap Core AlphaDEX(TM) Fund is only limited as to the percentage of its assets which may be invested in the securities of any one issuer by the diversification requirements imposed by the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code"). Because the Large Cap Core AlphaDEX(TM) Fund may invest a relatively high percentage of its assets in a limited number of issuers, the Large Cap Core AlphaDEX(TM) 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. See "Additional Risks of Investing in the Funds" for additional information regarding risks. _______________________________________________________________________________ 7 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"). EXCHANGE-LISTED The Shares are listed and trade on the AMEX under the ticker symbol "FNX." 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. The Mid Cap Core AlphaDEX(TM) Fund's investment objective and the 90% investment strategy are non-fundamental and require 60 days' prior written notice to shareholders before they can be changed. As non-fundamental policies, the Board of Trustees of the Trust can change such policies 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 indices through the use of the AlphaDEX(TM) screening methodology. Alpha is an indication of how much an investment outperforms or underperforms on a risk-adjusted basis _______________________________________________________________________________ 8 relative to its benchmark. The S&P MidCap 400 Index includes 400 stocks selected on market capitalization, liquidity and industry representation covering over 7% of the U.S. equities market. 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 October 31, 2007, the S&P MidCap 400 Index consisted of 400 stocks and the Mid Cap Core Index consisted of 297 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 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. S&P/Citigroup Growth and Value series is a family of indices wherein each stock is classified in one of three ways: solely growth, solely value or a blend of growth and value. For stocks that S&P/Citigroup 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/Citigroup 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 sixth 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. An 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. The 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 _______________________________________________________________________________ 9 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-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 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 fees and 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 AlphaDEX(TM) Fund 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. Therefore, the Mid Cap Core AlphaDEX(TM) Fund will generally not sell a stock because the stock's issuer is in financial trouble, unless that stock is removed or is anticipated to be removed from the Mid Cap Core Index. INTELLECTUAL PROPERTY RISK. The Mid Cap Core AlphaDEX(TM) Fund relies on a license and related sublicense that permits the Mid Cap Core AlphaDEX(TM) Fund to use its corresponding equity index in the Defined Index Series and the 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 the Index Provider and, _______________________________________________________________________________ 10 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 the Index Provider 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 the Index Provider 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. The value of securities of smaller issuers can be more volatile than that of larger issuers. 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. NON-DIVERSIFICATION RISK. The Mid Cap Core AlphaDEX(TM) Fund is classified as "non-diversified" under the 1940 Act. As a result, the Mid Cap Core AlphaDEX(TM) Fund is only limited as to the percentage of its assets which may be invested in the securities of any one issuer by the diversification requirements imposed by the Internal Revenue Code. Because the Mid Cap Core AlphaDEX(TM) Fund may invest a relatively high percentage of its assets in a limited number of issuers, the Mid Cap Core AlphaDEX(TM) 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. 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. See "Additional Risks of Investing in the Funds" for additional information regarding risks. _______________________________________________________________________________ 11 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"). EXCHANGE-LISTED The Shares are listed and trade on the AMEX under the ticker symbol "FYX." 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. The Small Cap Core AlphaDEX(TM) Fund's investment objective and the 90% investment strategy are non-fundamental policies and require 60 days' prior written notice to shareholders before they can be changed. As non-fundamental policies, the Board of Trustees of the Trust can change such policies 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 indices through the use of the AlphaDEX(TM) screening methodology. Alpha is an indication of how much an investment outperforms or underperforms on a _______________________________________________________________________________ 12 risk-adjusted basis relative to its benchmark. The S&P SmallCap 600 Index includes 600 stocks selected on size, financial viability, liquidity, adequate float size and other trading requirements covering 3%-4% of the U.S. equities market. 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 October 31, 2007, the S&P SmallCap 600 Index consisted of 600 stocks and the Small Cap Core Index consisted of 447 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 600 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. 2b. S&P/Citigroup Growth and Value series is a family of indices wherein each stock is classified in one of three ways: solely growth, solely value or a blend of growth and value. For stocks that S&P/Citigroup 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/Citigroup 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 sixth 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. An 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. The 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 _______________________________________________________________________________ 13 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-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 fees and 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 AlphaDEX(TM) Fund 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. Therefore, the Small Cap Core AlphaDEX(TM) Fund will generally not sell a stock because the stock's issuer is in financial trouble, unless that stock is removed or is anticipated to be removed from the Small Cap Core Index. INTELLECTUAL PROPERTY RISK. The Small Cap Core AlphaDEX(TM) Fund relies on a license and related sublicense that permits the Small Cap Core AlphaDEX(TM) Fund to use its corresponding equity index in the Defined Index Series and the Intellectual Property in connection with the name and investment strategies of the Small Cap Core _______________________________________________________________________________ 14 AlphaDEX(TM) Fund. Such license and related sublicense may be terminated by the Index Provider 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 the Index Provider 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 the Index Provider 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. The value of securities of smaller issuers can be more volatile than that of larger issuers. 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. NON-DIVERSIFICATION RISK. The Small Cap Core AlphaDEX(TM) Fund is classified as "non-diversified" under the 1940 Act. As a result, the Small Cap Core AlphaDEX(TM) Fund is only limited as to the percentage of its assets which may be invested in the securities of any one issuer by the diversification requirements imposed by the Internal Revenue Code. Because the Small Cap Core AlphaDEX(TM) Fund may invest a relatively high percentage of its assets in a limited number of issuers, the Small Cap Core AlphaDEX(TM) 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. 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. See "Additional Risks of Investing in the Funds" for additional information regarding risks. _______________________________________________________________________________ 15 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"). EXCHANGE-LISTED The Shares are listed and trade on the AMEX under the ticker symbol "FTA." 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 Index. The Large Cap Value Opportunities AlphaDEX(TM) Fund's investment objective and the 90% investment strategy are non-fundamental policies and require 60 days' prior written notice to shareholders before they can be changed. As non-fundamental policies, the Board of Trustees of the Trust can change such policies 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 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 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 Index in proportion to their weightings in the Large 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 Large Cap Value Opportunities AlphaDEX(TM) Fund may purchase a sample of stocks in the Large Cap Value Index. There may also be instances in which First Trust may choose to overweight certain stocks in the Large Cap Value Index, purchase securities not in the Large Cap Value Index which First Trust believes are appropriate to substitute for certain securities in the Large Cap Value Index, use futures or other derivative instruments, or utilize various combinations of the above techniques in seeking to track the Large Cap Value Index. The Large Cap Value Opportunities AlphaDEX(TM) Fund may sell stocks that are represented in the Large Cap Value Index in anticipation of their removal from the Large Cap Value Index or purchase stocks not represented in the Large Cap Value Index in anticipation of their addition to the Large Cap Value Index. _______________________________________________________________________________ 16 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 indices through the use of the AlphaDEX(TM) screening methodology. Alpha is an indication of how much an investment outperforms or underperforms on a risk-adjusted basis relative to its benchmark. The S&P 500/Citigroup Value Index includes certain stocks within the S&P 500 Index selected on value factors. 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 October 31, 2007, the S&P 500/Citigroup Value Index consisted of 347 stocks and the Large Cap Value Index consisted of 193 stocks. The Large Cap Value Index is constructed by S&P in the following manner: 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. S&P/Citigroup Growth and Value series is a family of indices wherein each stock is classified in one of three ways: solely growth, solely value or a blend of growth and value. 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 Large 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 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 2. 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 sixth 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. An 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. _______________________________________________________________________________ 17 PRINCIPAL RISKS OF INVESTING IN THE FUND Risk is inherent in all investing. The 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 Index. NON-CORRELATION RISK The Large Cap Value Opportunities AlphaDEX(TM) Fund's return may not match the return of the Large Cap Value 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 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 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 Index or the ratios between the securities included in the Large Cap Value 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 Index, as would be the case if it purchased all of the stocks in the Large Cap Value Index with the same weightings as the Large Cap Value Index. While First Trust seeks to have 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 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 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 Index. As a result of this policy, securities held by the Large Cap Value Opportunities AlphaDEX(TM) Fund will _______________________________________________________________________________ 18 generally not be bought or sold in response to market fluctuations and the securities may be issued by companies concentrated in a particular industry. Therefore, the Large Cap Value Opportunities AlphaDEX(TM) Fund will generally not sell a stock because the stock's issuer is in financial trouble, unless that stock is removed or is anticipated to be removed from the Large Cap Value Index. INTELLECTUAL PROPERTY RISK. The Large Cap Value Opportunities AlphaDEX(TM) Fund relies on a license and related sublicense that permits the Large Cap Value Opportunities AlphaDEX(TM) Fund to use its corresponding equity index in the Defined Index Series and the 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 the Index Provider 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 the Index Provider 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 the Index Provider 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. 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. 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 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. NON-DIVERSIFICATION RISK. The Large Cap Value Opportunities AlphaDEX(TM) Fund is classified as "non-diversified" under the 1940 Act. As a result, the Large Cap Value Opportunities AlphaDEX(TM) Fund is only limited as to the percentage of its assets which may be invested in the securities of any one issuer by the diversification requirements imposed by the Internal Revenue Code. Because the Large Cap Value Opportunities AlphaDEX(TM) Fund may invest a relatively high percentage of its assets in a limited number of issuers, the Large Cap Value Opportunities AlphaDEX(TM) 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. 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 objective. 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. _______________________________________________________________________________ 19 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"). EXCHANGE-LISTED The Shares are listed and trade on the AMEX under the ticker symbol "FTC." 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 Index. The Large Cap Growth Opportunities AlphaDEX(TM) Fund's investment objective and the 90% investment strategy are non-fundamental policies and require 60 days' prior written notice to shareholders before they can be changed. As non-fundamental policies, the Board of Trustees of the Trust can change such policies 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 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 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 Index in proportion to their weightings in the Large 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 Large Cap Growth Opportunities AlphaDEX(TM) Fund may purchase a sample of stocks in the Large Cap Growth Index. There may also be instances in which First Trust may choose to overweight certain stocks in the Large Cap Growth Index, purchase securities not in the Large Cap Growth Index which First Trust believes are appropriate to substitute for certain securities in the Large Cap Growth Index, use futures or other derivative instruments, or utilize various combinations of the above techniques in seeking to track the Large Cap Growth Index. The Large Cap Growth Opportunities AlphaDEX(TM) Fund may sell stocks that are represented in the Large Cap Growth Index in anticipation of their removal from the Large Cap Growth Index or purchase stocks not represented in the Large Cap Growth Index in anticipation of their addition to the Large Cap Growth Index. _______________________________________________________________________________ 20 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 indices through the use of the AlphaDEX(TM) screening methodology. Alpha is an indication of how much an investment outperforms or underperforms on a risk-adjusted basis relative to its benchmark. The S&P 500/Citigroup Growth Index includes certain stocks within the S&P 500 Index selected on growth factors. 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 October 31, 2007, the S&P 500/Citigroup Growth Index consisted of 318 stocks and the Large Cap Growth Index consisted of 179 stocks. The Large Cap Growth Index is constructed by S&P in the following manner: 1. S&P ranks all stocks in the S&P 500/Citigroup Growth Index 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. 2. S&P/Citigroup Growth and Value series is a family of indices wherein each stock is classified in one of three ways: solely growth, solely value or a blend of growth and value. 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 Large 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 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 2. 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 sixth 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. An 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. _______________________________________________________________________________ 21 PRINCIPAL RISKS OF INVESTING IN THE FUND Risk is inherent in all investing. The 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 Index. NON-CORRELATION RISK The Large Cap Growth Opportunities AlphaDEX(TM) Fund's return may not match the return of the Large Cap Growth 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 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 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 Index or the ratios between the securities included in the Large Cap Growth 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 Index, as would be the case if it purchased all of the stocks in the Large Cap Growth Index with the same weightings as the Large Cap Growth Index. While First Trust seeks to have 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 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 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 Index. As a result of this policy, _______________________________________________________________________________ 22 securities held by the Large Cap Growth Opportunities AlphaDEX(TM) Fund 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. Therefore, the Large Cap Growth Opportunities AlphaDEX(TM) Fund will generally not sell a stock because the stock's issuer is in financial trouble, unless that stock is removed or is anticipated to be removed from the Large Cap Growth Index. INTELLECTUAL PROPERTY RISK. The Large Cap Growth Opportunities AlphaDEX(TM) Fund relies on a license and related sublicense that permits the Large Cap Growth Opportunities AlphaDEX(TM) Fund to use its corresponding equity index in the Defined Index Series and the 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 the Index Provider 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 the Index Provider 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 the Index Provider 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. 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. 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 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. NON-DIVERSIFICATION RISK. The Large Cap Growth Opportunities AlphaDEX(TM) Fund is classified as "non-diversified" under the 1940 Act. As a result, the Large Cap Growth Opportunities AlphaDEX(TM) Fund is only limited as to the percentage of its assets which may be invested in the securities of any one issuer by the diversification requirements imposed by the Internal Revenue Code. Because the Large Cap Growth Opportunities AlphaDEX(TM) Fund may invest a relatively high percentage of its assets in a limited number of issuers, the Large Cap Growth Opportunities AlphaDEX(TM) 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. 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 objective. Securities of growth companies may experience significant fluctuations in price in response to economic, political, regulatory, company specific, sector or market developments, changes in perceptions or interest rate changes. See "Additional Risks of Investing in the Funds" for additional information regarding risks. _______________________________________________________________________________ 23 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"). EXCHANGE-LISTED The Shares are listed and trade on the AMEX under the ticker symbol "FAB." 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. The Multi Cap Value AlphaDEX(TM) Fund's investment objective and the 90% investment strategy are non-fundamental policies and require 60 days' prior written notice to shareholders before they can be changed. As non-fundamental policies, the Board of Trustees of the Trust can change such policies 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 Composite 1500/Citigroup Value Index that may generate positive alpha relative to traditional passive style indices through the use of the AlphaDEX(TM) screening methodology. Alpha is an indication of how much an investment outperforms or underperforms on a risk-adjusted basis relative to its benchmark. The S&P _______________________________________________________________________________ 24 Composite 1500/Citigroup Value Index includes certain stocks within the S&P Composite 1500 Index considered to have value characteristics. 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 October 31, 2007, the S&P Composite 1500/Citigroup Value Index consisted of 1,096 stocks and the Multi Cap Value Index consisted of 595 stocks. The stocks of the S&P Composite 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 MidCap 400/Citigroup Value Index will comprise 30% of the Multi Cap Value Index and (iii) that are members of the S&P SmallCap 600/Citigroup Value Index will comprise 20% of the Multi Cap Value Index. The Multi Cap Value Index is constructed in the following manner: 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. S&P/Citigroup Growth and Value series is a family of indices wherein each stock is classified in one of three ways: solely growth, solely value or a blend of growth and value. 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 MidCap 400/Citigroup Value Index: 1. S&P ranks all stocks in the S&P MidCap 400/Citigroup Value Index against all the stocks in the S&P MidCap 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. _______________________________________________________________________________ 25 2. S&P/Citigroup Growth and Value series is a family of indices wherein each stock is classified in one of three ways: solely growth, solely value or a blend of growth and value. 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 SmallCap 600/Citigroup Value Index: 1. S&P ranks all stocks in the S&P SmallCap 600/Citigroup Value Index against all the stocks in the S&P SmallCap 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. 2. S&P/Citigroup Growth and Value series is a family of indices wherein each stock is classified in one of three ways: solely growth, solely value or a blend of growth and value. 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. _______________________________________________________________________________ 26 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 sixth 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. An 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. The 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-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 fees and 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 _______________________________________________________________________________ 27 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 AlphaDEX(TM) Fund 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. Therefore, the Multi Cap Value AlphaDEX(TM) Fund will generally not sell a stock because the stock's issuer is in financial trouble, unless that stock is removed or is anticipated to be removed from the Multi Cap Value Index. INTELLECTUAL PROPERTY RISK. The Multi Cap Value AlphaDEX(TM) Fund relies on a license and related sublicense that permits the Multi Cap Value AlphaDEX(TM) Fund to use its corresponding equity index in the Defined Index Series and the 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 the Index Provider 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 the Index Provider 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 the Index Provider 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. The value of securities of smaller issuers can be more volatile than that of larger issuers. 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. NON-DIVERSIFICATION RISK. The Multi Cap Value AlphaDEX(TM) Fund is classified as "non-diversified" under the 1940 Act. As a result, the Multi Cap Value AlphaDEX(TM) Fund is only limited as to the percentage of its assets which may be invested in the securities of any one issuer by the diversification requirements imposed by the Internal Revenue Code. Because the Multi Cap Value AlphaDEX(TM) Fund may invest a relatively high percentage of its assets in a limited number of issuers, the Multi Cap Value AlphaDEX(TM) 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. 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 _______________________________________________________________________________ 28 available information. Accordingly, such companies are generally subject to greater market risk than larger, more established companies. 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 objective. 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. _______________________________________________________________________________ 29 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"). EXCHANGE-LISTED The Shares are listed and trade on the AMEX under the ticker symbol "FAD." 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. The Multi Cap Growth AlphaDEX(TM) Fund's investment objective and the 90% investment strategy are non-fundamental policies and require 60 days' prior written notice to shareholders before they can be changed. As non-fundamental policies, the Board of Trustees of the Trust can change such policies 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. _______________________________________________________________________________ 30 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 Composite 1500/Citigroup Growth Index that may generate positive alpha relative to traditional passive style indices through the use of the AlphaDEX(TM) screening methodology. Alpha is an indication of how much an investment outperforms or underperforms on a risk-adjusted basis relative to its benchmark. The S&P Composite 1500/Citigroup Growth Index includes certain stocks within the S&P Composite 1500 Index considered to have growth characteristics. 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 October 31, 2007, the S&P Composite 1500/Citigroup Growth Index consisted of 939 stocks and the Multi Cap Growth Index consisted of 522 stocks. The stocks of the S&P Composite 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 MidCap 400/Citigroup Growth Index will comprise 30% of the Multi Cap Growth Index and (iii) that are members of the S&P SmallCap 600/Citigroup 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. S&P/Citigroup Growth and Value series is a family of indices wherein each stock is classified in one of three ways: solely growth, solely value or a blend of growth and value. 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. _______________________________________________________________________________ 31 For the stocks selected from the S&P MidCap 400/Citigroup Growth Index: 1. S&P ranks all stocks in the S&P MidCap 400/Citigroup Growth Index against all the stocks in the S&P MidCap 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. S&P/Citigroup Growth and Value series is a family of indices wherein each stock is classified in one of three ways: solely growth, solely value or a blend of growth and value. 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 SmallCap 600/Citigroup Growth Index: 1. S&P ranks all stocks in the S&P SmallCap 600/Citigroup Growth Index against all the stocks in the S&P SmallCap 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. 2. S&P/Citigroup Growth and Value series is a family of indices wherein each stock is classified in one of three ways: solely growth, solely value or a blend of growth and value. 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. _______________________________________________________________________________ 32 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 sixth 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. An 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. The 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-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 _______________________________________________________________________________ 33 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 fees and 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 AlphaDEX(TM) Fund 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. Therefore, the Multi Cap Growth AlphaDEX(TM) Fund will generally not sell a stock because the stock's issuer is in financial trouble, unless that stock is removed or is anticipated to be removed from the Multi Cap Growth Index. INTELLECTUAL PROPERTY RISK. The Multi Cap Growth AlphaDEX(TM) Fund relies on a license and related sublicense that permits Multi Cap Growth AlphaDEX(TM) Fund to use its corresponding equity index in the Defined Index Series and the 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 the Index Provider 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 the Index Provider 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 the Index Provider 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. The value of securities of smaller issuers can be more volatile than that of larger issuers. 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. NON-DIVERSIFICATION RISK. The Multi Cap Growth AlphaDEX(TM) Fund is classified as "non-diversified" under the 1940 Act. As a result, the Multi Cap Growth AlphaDEX(TM) Fund is only limited as to the percentage of its assets which may be invested in the securities of any one issuer by the diversification requirements imposed by the Internal Revenue Code. Because the Multi Cap Growth AlphaDEX(TM) Fund may invest a relatively high percentage of its assets in a limited number of issuers, the Multi Cap Growth AlphaDEX(TM) 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. _______________________________________________________________________________ 34 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. 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 objective. Securities of growth companies may experience significant fluctuations in price in response to economic, political, regulatory, company specific, sector or market developments, changes in perceptions or interest rate changes. See "Additional Risks of Investing in the Funds" for additional information regarding risks. _______________________________________________________________________________ 35 HOW THE FUNDS HAVE PERFORMED The Funds have not yet operated for a full calendar year and therefore, performance information is not included in this section of the Prospectus. However, see "Total Return Information" for performance information regarding the Funds. WHAT ARE THE COSTS OF INVESTING? The following table describes the estimated fees and expenses you may pay when you buy or sell Creation Units of each Fund. Investors purchasing Shares in the secondary market will not pay the shareholder fees shown below, but may be subject to costs (including customary brokerage commissions) charged by their broker.
Large Cap Mid Cap Core Small Cap Large Cap Large Cap Core AlphaDEX(TM) Core Value Growth AlphaDEX(TM) Fund AlphaDEX(TM) Opportunities Opportunities Fund Fund AlphaDEX(TM) AlphaDEX(TM) Fund Fund Shareholder Fees None None None None None (paid directly by Authorized Participants) Sales charges (loads) Standard $2,000 $1,500 $2,500 $1,000 $1,000 transaction fee per order(1) Additional Up to 3 times Up to 3 times Up to 3 times Up to 3 times Up to 3 times transaction charge the standard the standard the standard the standard the standard if settled outside transaction fee transaction fee transaction fee transaction fee transaction fee of the usual process through the Continuous Net Settlement System of the National Securities Clearing Corporation(1) Annual Fund Operating Expenses(2) (Expenses that are deducted from the Fund's assets) Management Fees 0.50% 0.50% 0.50% 0.50% 0.50% Distribution and 0.00% 0.00% 0.00% 0.00% 0.00% Service (12b-1) Fees(3) Other Expenses(4) 3.28% 2.49% 3.05% 2.91% 2.49% Total Annual Fund 3.78% 2.99% 3.55% 3.41% 2.99% Operating Expenses Fee Waivers 3.08% 2.29% 2.85% 2.71% 2.29% and Expense Reimbursement(5) Total Net Annual Fund Operating Expenses 0.70% 0.70% 0.70% 0.70% 0.70%
Multi Cap Multi Cap Value Growth AlphaDEX(TM) AlphaDEX(TM) Fund Fund Shareholder Fees None None (paid directly by Authorized Participants) Sales charges (loads) Standard $3,500 $3,000 transaction fee per order(1) Additional Up to 3 times Up to 3 times transaction charge the standard the standard if settled outside transaction fee transaction fee of the usual process through the Continuous Net Settlement System of the National Securities Clearing Corporation(1) Annual Fund Operating Expenses(2) (Expenses that are deducted from the Fund's assets) Management Fees 0.50% 0.50% Distribution and 0.00% 0.00% Service (12b-1) Fees(3) Other Expenses(4) 3.31% 2.54% Total Annual Fund 3.81% 3.04% Operating Expenses Fee Waivers 3.11% 2.34% and Expense Reimbursement(5) Total Net Annual Fund Operating Expenses 0.70% 0.70%
_______________________________________________________________________________ 36 EXAMPLE This example is intended to help you compare the cost of investing in each Fund with the cost of investing in other funds. This example does not take into account transaction fees on purchases and redemptions of Creation Units of each of the Funds or customary brokerage commissions that you pay when purchasing or selling Shares of each of the Funds in the secondary market. 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 as set forth in the table below:
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS Large Cap Core AlphaDEX(TM) Fund $ 72 $ 920 $1,786 $4,024 Mid Cap Core AlphaDEX(TM) Fund 72 759 1,472 3,365 Small Cap Core AlphaDEX(TM) Fund 72 874 1,695 3,837 Large Cap Value Opportunities AlphaDEX(TM) Fund 72 845 1,640 3,721 Large Cap Growth Opportunities AlphaDEX(TM) Fund 72 759 1,472 3,365 Multi Cap Value AlphaDEX(TM) Fund 72 926 1,797 4,048 Multi Cap Growth AlphaDEX(TM) Fund 72 770 1,492 3,408
1) Purchasers of Creation Units and parties redeeming Creation Units must pay a standard creation or redemption transaction fee of $2,000 for the Large Cap Core AlphaDEX(TM) Fund (assuming 301 to 400 different securities in a Creation Unit); $1,500 for the Mid Cap Core AlphaDEX(TM) Fund (assuming 201 to 300 different securities in a Creation Unit); $2,500 for the Small Cap Core AlphaDEX(TM) Fund (assuming 401 to 500 different securities in a Creation Unit); $1,000 for the Large Cap Value Opportunities AlphaDEX(TM) Fund (assuming 101 to 200 different securities in a Creation Unit); $1,000 for the Large Cap Growth Opportunities AlphaDEX(TM) Fund (assuming 101 to 200 different securities in a Creation Unit); $3,500 for the Multi Cap Value AlphaDEX(TM) Fund (assuming 601 to 700 different securities in a Creation Unit); and $3,000 for the Multi Cap Growth AlphaDEX(TM) Fund (assuming 501 to 600 different securities in a Creation Unit). However, if a Creation Unit is purchased or redeemed outside the usual process through the National Securities Clearing Corporation or for cash, an additional variable fee of up to three times the standard creation or redemption transaction fee may be charged. See "Creation Transaction Fees and Redemption Transaction Fees" below. (2) Expressed as a percentage of average daily net assets. (3) Each Fund has 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 the Fund's average daily net assets. However, no such fee is currently paid by a Fund and pursuant to a contractual arrangement, the Funds will not pay 12b-1 fees any time before April 30, 2009. (4) Other Expenses are based on estimated expenses for the current fiscal year. (5) 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, at least until May 10, 2009. 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. _______________________________________________________________________________ 37 CREATION TRANSACTION FEES AND REDEMPTION TRANSACTION FEES The Funds issue and redeem Shares at NAV only in large blocks of 100,000 Shares (each block of 100,000 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 (as defined below) as set forth on the expense table for each purchase transaction (regardless of the number of Creation Units involved). The value of a Creation Unit as of the first creation of such Creation Unit was approximately $3,000,000. An AP who holds Creation Units and wishes to redeem at NAV would also pay a standard Redemption Transaction Fee (as defined below) as set forth on the expense table 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 $3,000,000 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 as set forth in the table below if the Creation Unit is redeemed after the periods indicated:
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS Large Cap Core AlphaDEX(TM) Fund $ 25,452 $ 280,101 $ 539,715 $1,211,107 Mid Cap Core AlphaDEX(TM) Fund 24,452 230,795 444,466 1,012,429 Small Cap Core AlphaDEX(TM) Fund 26,452 267,118 513,595 1,156,137 Large Cap Value Opportunities AlphaDEX(TM) Fund 23,452 255,574 493,959 1,118,439 Large Cap Growth Opportunities AlphaDEX(TM) Fund 23,452 229,795 443,466 1,011,429 Multi Cap Value AlphaDEX(TM) Fund 28,452 284,920 546,233 1,221,314 Multi Cap Growth AlphaDEX(TM) Fund 27,452 236,875 453,523 1,028,401
If a Creation Unit is purchased or redeemed outside the usual process through the National Securities Clearing Corporation or for cash, an additional variable fee of up to three times the standard Creation or Redemption Transaction Fee may be charged to the AP making the transaction. The Creation Transaction Fee, Redemption Transaction Fee and variable fee are not expenses of a Fund and do not impact a Fund's expense ratio. ADDITIONAL INVESTMENT STRATEGIES Each of the policies described herein is a non-fundamental policy of each Fund that may be changed by the Board of Trustees of the Trust without shareholder approval. Certain 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 _______________________________________________________________________________ 38 on any national exchange if such securities are included in the applicable equity index in the Defined Index Series, including depositary receipts that represent non-U.S. common stocks deposited with a custodian. 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 Fund's SAI. ADDITIONAL RISKS OF INVESTING IN THE FUNDS Risk is inherent in all investing. Investing in each Fund involves risk, including the risk that you may lose all or part of your investment. There can be no assurance that each Fund will meet its stated objective. 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 NAV of Shares of each Fund will generally fluctuate with changes in the market value of each Fund's holdings. The market prices of Shares will generally fluctuate in accordance with changes in NAV 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 NAV. Price differences may be due, in large part, to the fact that supply and demand forces at work in the secondary trading _______________________________________________________________________________ 39 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 NAV), First Trust believes that large discounts or premiums to the NAV of Shares should not be sustained. 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 the 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 Each Fund is a series of the Trust, an investment company registered under 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. _______________________________________________________________________________ 40 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 25 mutual fund portfolios, 36 exchange-traded fund portfolios and 14 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 Shares of each Fund. 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 as a Vice President 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 is 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. The table below sets forth the annual management fee that First Trust receives from each Fund. Due to expense reimbursements, none of the Funds paid a management fee for the period ended July 31, 2007. A discussion regarding the approval of the Investment Management Agreement is available in the Funds' Annual Report to Shareholders for the period ended July 31, 2007. _______________________________________________________________________________ 41
FUND ANNUAL MANAGEMENT FEE Large Cap Core AlphaDEX(TM) Fund 0.50% of average daily net assets Mid Cap Core AlphaDEX(TM) Fund 0.50% of average daily net assets Small Cap Core AlphaDEX(TM) Fund 0.50% of average daily net assets Large Cap Value Opportunities AlphaDEX(TM) Fund 0.50% of average daily net assets Large Cap Growth Opportunities AlphaDEX(TM) Fund 0.50% of average daily net assets Multi Cap Value AlphaDEX(TM) Fund 0.50% of average daily net assets Multi Cap Growth AlphaDEX(TM) Fund 0.50% of average daily net assets
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 May 10, 2009. 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. HOW TO BUY AND SELL SHARES Shares will be issued or redeemed by the Funds at NAV 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 NAV 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. 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 100,000 Shares, as discussed in the "Creations, Redemptions and Transaction Fees" section below. For the purpose of the 1940 Act, each Fund is treated as a registered investment company, and the acquisition of Shares by other registered investment companies is subject to the restrictions of Section 12(d)(1) of the 1940 Act. The Trust, on behalf of the Funds, has received an exemptive order from the Securities and Exchange Commission that permits certain registered investment companies to _______________________________________________________________________________ 42 invest in a Fund beyond the limits set forth in Section 12(d)(1), subject to certain terms and conditions, including that any such investment companies enter into such agreements with a Fund regarding the terms of any investment. 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. 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 disseminates 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 Each Fund imposes no restrictions on the frequency of purchases and redemptions ("market timing"). In determining not to approve a written, established policy, the Board evaluated the risks of market timing activities by each Fund's shareholders. The Board considered that, unlike traditional mutual funds, the Funds issue and redeem their Shares at NAV 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. The Board noted that a Fund's Shares can only be purchased and redeemed directly from the Fund in Creation Units by APs and that the vast majority of trading in Shares occurs on the secondary market. Because the secondary market trades do not involve a Fund directly, it is unlikely those trades would cause many of the harmful effects of market timing, including: dilution, disruption of portfolio management, increases in a Fund's trading costs and the realization of capital gains. With respect to trades directly with a Fund, to the extent effected in-kind (i.e., for securities), those trades do not cause any of the harmful effects (as noted above) that may result from frequent cash trades. To the extent trades are effected in whole or in part in cash, the Board noted that those trades could result in dilution to a Fund and increased transaction costs, which could negatively impact a Fund's ability to achieve its investment objective. However, the Board noted that direct trading by APs is critical to ensuring that the Shares trade at or close to NAV. The Funds also employ fair valuation pricing to minimize potential dilution from market timing. The Funds impose transaction fees on in-kind purchases and redemptions of Shares to cover _______________________________________________________________________________ 43 the custodial and other costs incurred by a Fund in executing in-kind trades, and with respect to the redemption fees, these fees increase if an investor substitutes cash in part or in whole for securities, reflecting the fact that a Fund's trading costs increase in those circumstances. 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 AP agreement with the Funds' distributor and 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 the Funds, an investor must generally deposit a designated portfolio of equity securities constituting a substantial replication, or a representation, of the stocks included in each 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 the Funds' distributor and transfer agent, with respect to purchases and redemptions of Creation Units of each Fund. All orders must be placed for one or more whole Creation Units of Shares of the Funds and must be received by the Funds' transfer agent in proper form no later than the close of regular trading on the New York Stock Exchange (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 the Funds' 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. Purchasers of Creation Units must pay a standard creation transaction fee (the "Creation Transaction Fee"), which is based on the number of different securities in a Creation Unit according to the fee schedule set forth below: _______________________________________________________________________________ 44 NUMBER OF SECURITIES CREATION IN A CREATION UNIT TRANSACTION FEE 1-100 $500 101-200 $1,000 201-300 $1,500 301-400 $2,000 401-500 $2,500 501-600 $3,000 601-700 $3,500 The Creation Transaction Fee is applicable to each purchase transaction regardless of the number of Creation Units purchased in the transaction. An additional variable fee of up to three times the Creation Transaction Fee may be charged to approximate additional expenses incurred by a Fund 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 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 a 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 Funds' 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 NAV 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 customary brokerage commissions in connection with assembling a sufficient number of Shares of a Fund to constitute a redeemable _______________________________________________________________________________ 45 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 Funds' transfer agent in proper form no later than the 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 the Funds' transfer agent no later than 3:00 p.m., Eastern time. Parties redeeming Creation Units must pay a standard redemption transaction fee (the "Redemption Transaction Fee"), which is based on the number of different securities in a Creation Unit according to the fee schedule set forth below: NUMBER OF SECURITIES REDEMPTION IN A CREATION UNIT TRANSACTION FEE 1-100 $500 101-200 $1,000 201-300 $1,500 301-400 $2,000 401-500 $2,500 501-600 $3,000 601-700 $3,500 The Redemption Transaction Fee is applicable to each redemption transaction regardless of the number of Creation Units redeemed in the transaction. An additional variable fee of up to three times the Redemption Transaction Fee may be charged to approximate additional expenses incurred by a Fund 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. 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 charged by the broker. _______________________________________________________________________________ 46 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, 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 Funds' distributions are generally taxable. After the end of each year, you will receive a tax statement that separates the distributions of a Fund 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 the 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 Fund 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 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 corporations may be designated by the Funds as being eligible for the dividends received deduction. _______________________________________________________________________________ 47 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. The Funds 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. _______________________________________________________________________________ 48 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 a Fund invests in any non-U.S. securities, the tax statement that you receive may include an item showing non-U.S. taxes a Fund paid to other countries. In this case, dividends taxed to you will include your share of the taxes a 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 Fund designates 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 Fund that are properly designated by the Fund as capital gain dividends may not be subject to U.S. federal income taxes, including withholding taxes, provided that the Fund makes certain elections and certain other conditions are met. In the case of dividends with respect to taxable years of the Fund beginning prior to 2008, distributions from the Fund that are properly designated by the Fund as an interest-related dividend attributable to certain interest income received by the Fund or as a short-term capital gain dividend attributable to certain net short-term capital gain income received by the Fund 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 pursuant to a contractual arrangement, the Funds will not pay 12b-1 fees any time before April 30, 2009. 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. _______________________________________________________________________________ 49 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 a Fund by taking the market price of the 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 NAV 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 will be valued at the last sale price 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 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 market quotations are not readily available or securities for which market quotations are deemed unreliable will be determined by the Board or its designee in a manner that most fairly reflects the 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 a Fund's 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 principle, 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 Fund generally results in the prices used by the Fund 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 Mellon Corporation 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. _______________________________________________________________________________ 50 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 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. 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 _______________________________________________________________________________ 51 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 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 will make changes to their portfolios shortly after changes to the Defined Index Series are released to the public. Investors are 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. PREMIUM/DISCOUNT INFORMATION The tables that follow present information about the differences between each Fund's daily market price on the AMEX and its NAV. The "Market Price" of a Fund generally is determined using the midpoint between the highest bid and lowest offer on the exchange, as of the time a Fund's NAV is calculated. A Fund's Market Price may be at, above, or below its NAV. The NAV of a Fund will fluctuate with changes in the market value of its portfolio holdings. The Market Price of a Fund will fluctuate in accordance with changes in its NAV, as well as market supply and demand. _______________________________________________________________________________ 52 Premiums or discounts are the differences (generally expressed as a percentage) between the NAV and Market Price of a Fund on a given day, generally at the time NAV is calculated. A premium is the amount that a Fund is trading above the reported NAV, expressed as a percentage of the NAV. A discount is the amount that a Fund is trading below the reported NAV, expressed as a percentage of the NAV. The following information shows the frequency distribution of premiums and discounts of the daily bid/ask price of each Fund against each Fund's NAV. The information shown for each Fund is for the period indicated. All data presented here represents past performance, which cannot be used to predict future results. FIRST TRUST LARGE CAP CORE ALPHADEX(TM) FUND BID/ASK MIDPOINT VS. NAV
NUMBER OF DAYS BID/ASK MIDPOINT AT/ABOVE NAV QUARTER ENDED 0-49 BASIS POINTS 50-99 BASIS POINTS 100-199 BASIS POINTS >= 200 BASIS POINTS 10/31/07 38 0 0 0 7/31/07* 18 1 0 0 NUMBER OF DAYS BID/ASK MIDPOINT BELOW NAV QUARTER ENDED 0-49 BASIS POINTS 50-99 BASIS POINTS 100-199 BASIS POINTS >= 200 BASIS POINTS 10/31/07 27 0 0 0 7/31/07* 38 0 0 0
FIRST TRUST MID CAP CORE ALPHADEX(TM) FUND BID/ASK MIDPOINT VS. NAV
NUMBER OF DAYS BID/ASK MIDPOINT AT/ABOVE NAV QUARTER ENDED 0-49 BASIS POINTS 50-99 BASIS POINTS 100-199 BASIS POINTS >= 200 BASIS POINTS 10/31/07 42 7 0 0 7/31/07* 22 1 0 0 NUMBER OF DAYS BID/ASK MIDPOINT BELOW NAV QUARTER ENDED 0-49 BASIS POINTS 50-99 BASIS POINTS 100-199 BASIS POINTS >= 200 BASIS POINTS 10/31/07 16 0 0 0 7/31/07* 34 0 0 0
_______________________________________________________________________________ 53 FIRST TRUST SMALL CAP CORE ALPHADEX(TM) FUND BID/ASK MIDPOINT VS. NAV
NUMBER OF DAYS BID/ASK MIDPOINT AT/ABOVE NAV QUARTER ENDED 0-49 BASIS POINTS 50-99 BASIS POINTS 100-199 BASIS POINTS >= 200 BASIS POINTS 10/31/07 28 0 0 0 7/31/07* 24 0 1 0 NUMBER OF DAYS BID/ASK MIDPOINT BELOW NAV QUARTER ENDED 0-49 BASIS POINTS 50-99 BASIS POINTS 100-199 BASIS POINTS >= 200 BASIS POINTS 10/31/07 37 0 0 0 7/31/07* 32 0 0 0
FIRST TRUST LARGE CAP VALUE OPPORTUNITIES ALPHADEX(TM) FUND BID/ASK MIDPOINT VS. NAV
NUMBER OF DAYS BID/ASK MIDPOINT AT/ABOVE NAV QUARTER ENDED 0-49 BASIS POINTS 50-99 BASIS POINTS 100-199 BASIS POINTS >= 200 BASIS POINTS 10/31/07 39 0 0 0 7/31/07* 40 0 0 0 NUMBER OF DAYS BID/ASK MIDPOINT BELOW NAV QUARTER ENDED 0-49 BASIS POINTS 50-99 BASIS POINTS 100-199 BASIS POINTS >= 200 BASIS POINTS 10/31/07 26 0 0 0 7/31/07* 17 0 0 0
FIRST TRUST LARGE CAP GROWTH OPPORTUNITIES ALPHADEX(TM) FUND BID/ASK MIDPOINT VS. NAV
NUMBER OF DAYS BID/ASK MIDPOINT AT/ABOVE NAV QUARTER ENDED 0-49 BASIS POINTS 50-99 BASIS POINTS 100-199 BASIS POINTS >= 200 BASIS POINTS 10/31/07 41 0 0 0 7/31/07* 37 1 0 0 NUMBER OF DAYS BID/ASK MIDPOINT BELOW NAV QUARTER ENDED 0-49 BASIS POINTS 50-99 BASIS POINTS 100-199 BASIS POINTS >= 200 BASIS POINTS 10/31/07 24 0 0 0 7/31/07* 19 0 0 0
_______________________________________________________________________________ 54 FIRST TRUST MULTI CAP VALUE ALPHADEX(TM) FUND BID/ASK MIDPOINT VS. NAV
NUMBER OF DAYS BID/ASK MIDPOINT AT/ABOVE NAV QUARTER ENDED 0-49 BASIS POINTS 50-99 BASIS POINTS 100-199 BASIS POINTS >= 200 BASIS POINTS 10/31/07 31 0 0 0 7/31/07* 39 0 0 0 NUMBER OF DAYS BID/ASK MIDPOINT BELOW NAV QUARTER ENDED 0-49 BASIS POINTS 50-99 BASIS POINTS 100-199 BASIS POINTS >= 200 BASIS POINTS 10/31/07 34 0 0 0 7/31/07* 18 0 0 0
FIRST TRUST MULTI CAP GROWTH ALPHADEX(TM) FUND BID/ASK MIDPOINT VS. NAV
NUMBER OF DAYS BID/ASK MIDPOINT AT/ABOVE NAV QUARTER ENDED 0-49 BASIS POINTS 50-99 BASIS POINTS 100-199 BASIS POINTS >= 200 BASIS POINTS 10/31/07 36 0 0 0 7/31/07* 29 1 0 0 NUMBER OF DAYS BID/ASK MIDPOINT BELOW NAV QUARTER ENDED 0-49 BASIS POINTS 50-99 BASIS POINTS 100-199 BASIS POINTS >= 200 BASIS POINTS 10/31/07 29 0 0 0 7/31/07* 27 0 0 0
* Trading commenced on May 10, 2007 TOTAL RETURN INFORMATION The tables below compare the total return of each Fund to the total return of the Index on which it is based. In addition, the total return of each Fund is compared to the total return of a broad measure of market performance. The information presented for each Fund is for the periods indicated. "Cumulative total returns" represent the total change in value of an investment over the period indicated. The NAV return is based on the NAV per Share of a Fund, and the market return is based on the market price per Share of a Fund. The price used to calculate market return ("Market Price") is determined by using the midpoint between the highest bid and the lowest offer on the applicable exchange, as of the time that a Fund's NAV is calculated. Since the Shares of each Fund typically do not trade in the secondary market until several days after a Fund's inception, for the period from inception to the first day of secondary market trading in Shares of a Fund, the NAV of a Fund is used as a proxy for the secondary market trading price to calculate market returns. Market and NAV returns assume that dividends and capital gain distributions have been reinvested in a Fund at Market Price and NAV, respectively. An index is a statistical composite that tracks a specified financial market or sector. Unlike each Fund, an index does not actually hold a portfolio of securities and therefore does not incur the expenses incurred by a Fund. These expenses _______________________________________________________________________________ 55 negatively impact the performance of each Fund. Also, market returns do not include brokerage commissions that may be payable on secondary market transactions. If brokerage commissions were included, market returns would be lower. The returns shown in the table below do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Shares of a Fund. The investment return and principal value of Shares of a Fund will vary with changes in market conditions. Shares of a Fund may be worth more or less than their original cost when they are redeemed or sold in the market. A Fund's past performance is no guarantee of future results.
FIRST TRUST LARGE CAP CORE ALPHADEX(TM) FUND Cumulative Total Returns Inception (5/8/07) Quarter Ended to 7/31/07 10/31/07 FUND PERFORMANCE NAV -4.40% 4.01% Market Price -4.43% 3.91% INDEX PERFORMANCE S&P 500 Index -3.10% 6.97% Defined Large Cap Core Index -4.21% 4.17%
FIRST TRUST MID CAP CORE ALPHADEX(TM) FUND Cumulative Total Returns Inception (5/8/07) Quarter Ended to 7/31/07 10/31/07 FUND PERFORMANCE NAV -4.73% 4.23% Market Price -4.77% 3.82% INDEX PERFORMANCE Defined Mid Cap Core Index -4.60% 4.41% S&P MidCap 400 Index -3.85% 6.32%
FIRST TRUST SMALL CAP CORE ALPHADEX(TM) FUND Cumulative Total Returns Inception (5/8/07) Quarter Ended to 7/31/07 10/31/07 FUND PERFORMANCE NAV -5.67% 2.05% Market Price -5.77% 2.02% INDEX PERFORMANCE Defined Small Cap Core Index -5.46% 2.30% S&P SmallCap 600 Index -4.65% 5.32%
FIRST TRUST LARGE CAP VALUE OPPORTUNITIES ALPHADEX(TM) FUND Cumulative Total Returns Inception (5/8/07) Quarter Ended to 7/31/07 10/31/07 FUND PERFORMANCE NAV -5.50% -0.07% Market Price -5.30% -0.39% INDEX PERFORMANCE S&P 500 Index -3.10% 6.97% Defined Large Cap Value Opportunities Index -5.38% 0.11% S&P 500/Citigroup Value Index -4.14% 5.59%
_______________________________________________________________________________ 56
FIRST TRUST LARGE CAP GROWTH OPPORTUNITIES ALPHADEX(TM) FUND Cumulative Total Returns Inception (5/8/07) Quarter Ended to 7/31/07 10/31/07 FUND PERFORMANCE NAV -2.60% 8.90% Market Price -2.43% 8.61% INDEX PERFORMANCE S&P 500 Index -3.10% 6.97% Defined Large Cap Growth Opportunities Index -2.43% 9.06% S&P 500/Citigroup Growth Index -1.98% 8.39%
FIRST TRUST MULTI CAP VALUE ALPHADEX(TM) FUND Cumulative Total Returns Inception (5/8/07) Quarter Ended to 7/31/07 10/31/07 FUND PERFORMANCE NAV -6.83% -0.36% Market Price -6.50% -0.86% INDEX PERFORMANCE S&P Composite 1500 Index -3.22% 6.86% Defined Multi Cap Value Index -6.66% -0.18% S&P Composite 1500/Citigroup Value Index -4.33% 5.37%
FIRST TRUST MULTI CAP GROWTH ALPHADEX(TM) FUND Cumulative Total Returns Inception (5/8/07) Quarter Ended to 7/31/07 10/31/07 FUND PERFORMANCE NAV -2.03% 8.47% Market Price -1.90% 8.26% INDEX PERFORMANCE S&P Composite 1500 Index -3.22% 6.86% Defined Multi Cap Growth Index -1.82% 8.68% S&P Composite 1500/Citigroup Growth Index -2.04% 8.39%
FINANCIAL HIGHLIGHTS The financial highlights table is intended to help you understand each Fund's financial performance since its inception. Certain information reflects financial results for a single Share of each Fund. The total returns represent the rate that an investor would have earned (or lost) on an investment in a Fund (assuming reinvestment of all dividends and distributions). The information for the periods indicated has been derived from financial statements audited by Deloitte & Touche LLP, whose report for the period ended July 31, 2007, along with each Fund's financial statements, are included in the Annual Report to Shareholders dated July 31, 2007 and are incorporated by reference in the SAI, which are available upon request. _______________________________________________________________________________ 57 FINANCIAL HIGHLIGHTS FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
FIRST TRUST LARGE CAP CORE ALPHADEX(TM) FUND FOR THE PERIOD MAY 8, 2007 (A) THROUGH JULY 31, 2007 ------------------ Net asset value, beginning of period $30.00 ----------- Income from investment operations: Net investment income (loss) (b) 0.04 Net realized and unrealized gain (loss) (1.36) ----------- Total from investment operations (1.32) ----------- Net asset value, end of period $28.68 =========== TOTAL RETURN (c) (4.40)% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (in 000's) $2,868 Ratios to average net assets: Ratio of net expenses to average net assets 0.70% (d) Ratio of total expenses to average net assets 7.86% (d) Ratio of net investment income to average net assets 0.62% (d) Portfolio turnover rate (e) 1% FIRST TRUST MID CAP CORE ALPHADEX(TM) FUND FOR THE PERIOD MAY 8, 2007 (A) THROUGH JULY 31, 2007 ------------------ Net asset value, beginning of period $30.00 ----------- Income from investment operations: Net investment income (loss) (b) 0.01 Net realized and unrealized gain (loss) (1.43) ----------- Total from investment operations (1.42) ----------- Net asset value, end of period $28.58 =========== TOTAL RETURN (c) (4.73)% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (in 000's) $5,715 Ratios to average net assets: Ratio of net expenses to average net assets 0.70% (d) Ratio of total expenses to average net assets 5.98% (d) Ratio of net investment income to average net assets 0.19% (d) Portfolio turnover rate (e) 1% See "Notes to Financial Highlights" on page 61. _______________________________________________________________________________ 58 FINANCIAL HIGHLIGHTS FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD FIRST TRUST SMALL CAP CORE ALPHADEX(TM) FUND FOR THE PERIOD MAY 8, 2007 (A) THROUGH JULY 31, 2007 ------------------ Net asset value, beginning of period $30.00 ----------- Income from investment operations: Net investment income (loss) (b) 0.02 Net realized and unrealized gain (loss) (1.72) ----------- Total from investment operations (1.70) ----------- Net asset value, end of period $28.30 =========== TOTAL RETURN (c) (5.67)% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (in 000's) $5,660 Ratios to average net assets: Ratio of net expenses to average net assets 0.70% (d) Ratio of total expenses to average net assets 7.25% (d) Ratio of net investment loss to average net assets 0.42% (d) Portfolio turnover rate (e) 2% FIRST TRUST LARGE CAP VALUE OPPORTUNITIES ALPHADEX(TM) FUND FOR THE PERIOD MAY 8, 2007 (A) THROUGH JULY 31, 2007 ------------------ Net asset value, beginning of period $30.00 ----------- Income from investment operations: Net investment income (loss) (b) 0.06 Net realized and unrealized gain (loss) (1.71) ----------- Total from investment operations (1.65) ----------- Net asset value, end of period $28.35 =========== TOTAL RETURN (c) (5.50)% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (in 000's) $5,669 Ratios to average net assets: Ratio of net expenses to average net assets 0.70% (d) Ratio of total expenses to average net assets 6.95% (d) Ratio of net investment income to average net assets 0.97% (d) Portfolio turnover rate (e) 1% See "Notes to Financial Highlights" on page 61. _______________________________________________________________________________ 59 FINANCIAL HIGHLIGHTS FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD FIRST TRUST LARGE CAP GROWTH OPPORTUNITIES ALPHADEX(TM) FUND FOR THE PERIOD MAY 8, 2007 (A) THROUGH JULY 31, 2007 ------------------ Net asset value, beginning of period $30.00 ----------- Income from investment operations: Net investment income (loss) (b) (0.00) (f) Net realized and unrealized gain (loss) (0.78) ----------- Total from investment operations (0.78) ----------- Net asset value, end of period $29.22 =========== TOTAL RETURN (c) (2.60)% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (in 000's) $5,845 Ratios to average net assets: Ratio of net expenses to average net assets 0.70% (d) Ratio of total expenses to average net assets 5.98% (d) Ratio of net investment loss to average net assets (0.07)% (d) Portfolio turnover rate (e) 163 FIRST TRUST MULTI CAP VALUE ALPHADEX(TM) FUND FOR THE PERIOD MAY 8, 2007 (A) THROUGH JULY 31, 2007 ------------------ Net asset value, beginning of period $30.00 ----------- Income from investment operations: Net investment income (loss) (b) 0.06 Net realized and unrealized gain (loss) (2.11) ----------- Total from investment operations (2.05) ----------- Net asset value, end of period $27.95 =========== TOTAL RETURN (c) (6.83)% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (in 000's) $2,795 Ratios to average net assets: Ratio of net expenses to average net assets 0.70% (d) Ratio of total expenses to average net assets 7.91% (d) Ratio of net investment loss to average net assets 0.93% (d) Portfolio turnover rate (e) 2% See "Notes to Financial Highlights" on page 61. _______________________________________________________________________________ 60 FINANCIAL HIGHLIGHTS FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD FIRST TRUST MULTI CAP GROWTH ALPHADEX(TM) FUND FOR THE PERIOD MAY 8, 2007 (A) THROUGH JULY 31, 2007 ------------------ Net asset value, beginning of period $30.00 ----------- Income from investment operations: Net investment income (loss) (b) (0.01) Net realized and unrealized gain (loss) (0.60) ----------- Total from investment operations (0.61) ----------- Net asset value, end of period $29.39 =========== TOTAL RETURN (c) (2.03)% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (in 000's) $8,818 Ratios to average net assets: Ratio of net expenses to average net assets 0.70% (d) Ratio of total expenses to average net assets 6.01% (d) Ratio of net investment income to average net assets (0.21)% (d) Portfolio turnover rate (e) 1%
NOTES TO FINANCIAL HIGHLIGHTS (a) Inception date. (b) Based on average shares outstanding. (c) Total return is calculated assuming an initial investment made at the net asset value at the beginning of the period, reinvestment of all dividend distributions at net asset value during the period, and redemption at net asset value on the last day of the period. The return presented does not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. Total return calculated for a period of less than one year is not annualized. The total return would have been lower if certain fees had not been waived and expenses reimbursed by the investment advisor. (d) Annualized. (e) Portfolio turnover is not annualized and does not include securities received or delivered from processing creations or redemptions. (f) Amount represents less than $0.01 per share. 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. The Trust, on behalf of the Funds, has received an exemptive order from the Securities and Exchange Commission that permits certain registered investment companies to invest in a Fund beyond the limits set forth in Section 12(d)(1), subject to certain terms and conditions, including that any such investment companies enter into agreements with a Fund regarding the terms of any investment. _______________________________________________________________________________ 61 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 Shares of a Fund, 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. 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. _______________________________________________________________________________ 62 This page intentionally left blank. _______________________________________________________________________________ 63 This page intentionally left blank. _______________________________________________________________________________ 64 [BLANK INSIDE BACK COVER] ============================================================================== [LOGO OMITTED] AlphaDEX(TM) Family of ETFs _______________________________________________________________________________ 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 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. Additional information about the Funds' investments is available in the annual and semi-annual reports to Shareholders. In the Funds' annual reports, you will find a discussion of the market conditions and investment strategies that significantly impacted the Funds' performance during the last fiscal year. 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) 551-8090 for information on the Public Reference Room. You may also request information regarding the Funds by sending a request (along with a duplication fee) to the SEC's Public Reference Section, 100 F Street, N.E., Washington, D.C. 20549 or by sending an electronic request to publicinfo@sec.gov. 1001 Warrenville Road Suite 300 Lisle, Illinois 60532 (800) 621-1675 SEC File #: 333-140895 www.ftportfolios.com 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/PRODUCER DURABLES ALPHADEX(TM) FUND FIRST TRUST MATERIALS ALPHADEX(TM) FUND FIRST TRUST TECHNOLOGY ALPHADEX(TM) FUND FIRST TRUST UTILITIES ALPHADEX(TM) FUND DATED NOVEMBER 28, 2007 This Statement of Additional Information is not a Prospectus. It should be read in conjunction with the Prospectus dated November 28, 2007 (the "Prospectus") for each of 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/Producer Durables 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..................................................3 INVESTMENT OBJECTIVE AND POLICIES.............................................4 INVESTMENT STRATEGIES.........................................................5 SUBLICENSE AGREEMENTS........................................................15 INVESTMENT RISKS.............................................................15 FUNDS MANAGEMENT.............................................................19 ACCOUNTS MANAGED BY INVESTMENT COMMITTEE.....................................30 BROKERAGE ALLOCATIONS........................................................30 CUSTODIAN, DISTRIBUTOR, TRANSFER AGENT, FUND ACCOUNTING AGENT, INDEX PROVIDER AND EXCHANGE.....................................................33 ADDITIONAL INFORMATION.......................................................36 PROXY VOTING POLICIES AND PROCEDURES.........................................37 CREATION AND REDEMPTION OF CREATION UNIT AGGREGATIONS........................39 FEDERAL TAX MATTERS..........................................................49 DETERMINATION OF NAV.........................................................55 DIVIDENDS AND DISTRIBUTIONS..................................................57 MISCELLANEOUS INFORMATION....................................................57 FINANCIAL STATEMENTS.........................................................58 The audited financial statements for the Funds' most recent fiscal year appear in the Funds' Annual Report to Shareholders dated July 31, 2007, which is attached hereto. The Annual Report was filed with the Securities and Exchange Commission ("SEC") on September 28, 2007. The financial statements from such Annual Report are incorporated herein by reference. - 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/Producer Durables 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. 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") requires a shareholder vote only on those matters where the 1940 Act requires a vote of shareholders and otherwise permits the Trustees to take actions without seeking the consent of shareholders. For example, the Declaration gives the Trustees broad authority to approve reorganizations between a Fund and another entity, such as another exchange-traded fund, or the sale of all or substantially all of a Fund's assets, or the termination of the Trust or any Fund without shareholder approval if the 1940 Act would not require such approval. 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 be amended or supplemented by the Trustees in any respect without shareholder vote. The Declaration provides that the Trustees may establish the number of Trustees and that vacancies on the Board of Trustees may be filled by the remaining Trustees, except when election of Trustees by the shareholders is required under the 1940 Act. Trustees are then elected by a plurality of votes cast by shareholders at a meeting at which a quorum is present. The Declaration also provides that Trustees may be removed, with or without cause, by a vote of shareholders holding at least two-thirds of the voting power of the Trust, or by a vote of two thirds of the remaining Trustees. The provisions of the Declaration relating to the election and removal of Trustees may not be amended without the approval of two-thirds of the Trustees. 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 or as the Trustees may determine, 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 Declaration provides a detailed process for the bringing of derivative actions by shareholders in order to permit legitimate inquiries and claims while avoiding the time, expense, distraction and other harm that can be caused to a Fund or its shareholders as a result of spurious shareholder demands and derivative actions. Prior to bringing a derivative action, a demand must first be made on the Trustees. The Declaration details various information, certifications, undertakings and acknowledgements that must be included in the demand. Following receipt of the demand, the Trustees have a period of 90 days, which may be extended by an additional 60 days, to consider the demand. If a majority of the Trustees who are considered independent for the purposes of considering the demand determine that maintaining the suit would not be in the best interests of a Fund, the Trustees are required to reject the demand and the complaining shareholder may not proceed with the derivative action unless the shareholder is able to sustain the burden of proof to a court that the decision of the Trustees not to pursue the requested action was not a good faith exercise of their business judgment on behalf of a Fund. In making such a determination, a Trustee is not considered to have a personal financial interest by virtue of being compensated for his or her services as a Trustee. If a demand is rejected, the complaining shareholder will be responsible for the costs and expenses (including attorneys' fees) incurred by a Fund in connection with the consideration of the demand under a number of circumstances. If a derivative action is brought in violation of the Declaration, the shareholder bringing the action may be responsible for a Fund's costs, including attorneys' fees. The Declaration also provides that any shareholder bringing an action against a Fund waives the right to trial by jury to the fullest extent permitted by law. The Trust is not required to 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 Declaration 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 Declaration further provides that a Trustee acting in his or her capacity as Trustee is not personally liable to any person other than the Trust or its shareholders, for any act, omission, or obligation of the Trust. The Declaration requires the Trust to indemnify any persons who are or who have been Trustees, officers or employees of the Trust for any liability for actions or failure to act except to the extent prohibited by applicable federal law. In making any determination as to whether any person is entitled to the advancement of expenses in - 2 - connection with a claim for which indemnification is sought, such person is entitled to a rebuttable presumption that he or she did not engage in conduct for which indemnification is not available. The Declaration provides that any Trustee who serves as chair of the Board of Trustees or of a committee of the Board of Trustees, lead independent Trustee, or audit committee financial expert, or in any other similar capacity will not be subject to any greater standard of care or liability because of such position. The Funds are advised 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 each Fund's corresponding Index (as hereinafter defined), together with the deposit of a specified cash payment (the "Cash Component"). The Shares are listed and trade on the American Stock Exchange LLC (the "AMEX"). The 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. Fund Shares may be issued in advance of receipt of Deposit Securities subject to various conditions including a requirement to maintain on deposit with each Fund 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 such Fund for 30 or more consecutive trading days; (ii) the value of such Fund's Index (as defined below) 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. Please note that the AMEX may have a conflict of interest with respect to the Funds because the Shares are listed on the AMEX and the AMEX is also the Funds' Index Provider. The AMEX will remove the Shares of a Fund from listing and trading upon termination of such Fund. 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. - 3 - 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 each 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 a 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 a 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 instruments (but this shall not prevent a 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). - 4 - (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 a Fund is based upon, 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 each Fund 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 a Fund if a majority of the outstanding voting securities of a 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 respective corresponding equity index (the "Index") in a family of custom "enhanced" indices created and administered by the AMEX (the "Index Provider") (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. Fund Shareholders are entitled to 60 days' notice prior to any change in this non-fundamental investment policy. TYPES OF INVESTMENTS Warrants: The Funds may invest in warrants. Warrants acquired by a Fund entitle 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 - 5 - 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, a Fund does not remit payment to the issuer, no interest is accrued on debt securities and dividend income is not 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 a 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 NAV. The Funds do not believe that NAV 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 a 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 a 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 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 - 6 - 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 a 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, a Fund will take such steps as is deemed advisable, if any, to protect liquidity. Money Market Funds: The Funds may invest in shares of money market funds to the extent permitted by the 1940 Act. 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 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. 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 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. - 7 - (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 a 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 Federal Deposit Insurance Corporation 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 a 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, a 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 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 a Fund. If the seller were to be subject to a federal bankruptcy proceeding, the ability of a - 8 - 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 a 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 better 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 a 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 a 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. 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 - 9 - 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. The foregoing limitations are not fundamental policies of the Funds and may be changed without shareholder approval as regulatory agencies permit. 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 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 - 10 - market segment. Options on stock indices are currently traded on the following exchanges: the Chicago Board Options Exchange, the AMEX, 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, a 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 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. - 11 - 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, a 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 a 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. - 12 - 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 a Fund. In computing daily NAV, 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. 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. 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. There can be no assurance that a liquid market will exist at a time when a Fund seeks to close out a Futures position. A Fund would continue to be required to meet margin requirements until the position is closed, possibly resulting in a decline in the Fund's NAV. In addition, many of the contracts discussed above are relatively new 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 NYSE Composite Index(R). - 13 - 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 a 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 a 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 a 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, 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 - 14 - 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 AGREEMENTS Each Fund has entered into a sublicense agreement (the "Sublicense Agreement") with First Trust, First Trust Portfolios L.P. ("First Trust Portfolios") and the Index Provider that grants each Fund and First Trust a non-exclusive and non-transferable sublicense to use certain intellectual property of AMEX in connection with the issuance, distribution, marketing and/or promotion of each Fund. Pursuant to each Sublicense Agreement, each Fund and First Trust have agreed to be bound by certain provisions of the product license agreement by and between the Index Provider and First Trust Portfolios (the "Product License Agreement"). Pursuant to the Product License Agreement, First Trust Portfolios will pay the Index Provider an annual license fee of 0.10% of the average daily net assets of each Fund, provided, that, the minimum annual payment paid to the Index Provider under the Product License Agreement shall be $50,000. Each Fund will reimburse First Trust and First Trust will reimburse First Trust Portfolios for the costs associated with the Product License Agreement. 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 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 - 15 - 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 in 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 Risk Whether or not the equity securities in 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 in the Funds will be adversely affected if trading markets for the equity securities are limited or absent. 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 - 16 - are in the form of American Depositary Receipts ("ADRs"), American Depositary Shares ("ADSs") 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 a 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 a 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 a 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 a 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.
NUMBER OF PORTFOLIOS IN THE FIRST OTHER TERM OF OFFICE TRUST FUND TRUSTEESHIPS AND YEAR FIRST COMPLEX OR NAME, ADDRESS POSITION AND ELECTED OR PRINCIPAL OCCUPATIONS OVERSEEN BY DIRECTORSHIPS AND DATE OF BIRTH OFFICES WITH TRUST APPOINTED DURING PAST 5 YEARS TRUSTEE HELD BY TRUSTEE Trustee who is an Interested Person of the Trust - --------------------- James A. Bowen(1) President, o Indefinite President, First 58 Trustee of 1001 Warrenville Road Chairman of the term Trust Advisors L.P. Portfolios Wheaton Suite 300 Board, Chief and First Trust College Lisle, IL 60532 Executive Officer o 2006 Portfolios L.P.; D.O.B.: 09/55 and Trustee Chairman of the Board, BondWave LLC (Software Development Company/Broker-Dealer) and Stonebridge Advisors LLC (Investment Adviser) Trustees who are not Interested Persons of the Trust - ------------------------- Richard E. Erickson Trustee o Indefinite Physician; President, 58 None c/o First Trust Advisors term Wheaton Orthopedics; Portfolios L.P. Co-Owner and 1001 Warrenville Road o 2006 Co-Director (January Suite 300 1996 to May 2007), Lisle, IL 60532 Sports Med Center for D.O.B.: 04/51 Fitness; Limited Partner, Gundersen Real Estate Partnership; Limited Partner, Sportsmed LLC - 19 - NUMBER OF PORTFOLIOS IN THE FIRST OTHER TERM OF OFFICE TRUST FUND TRUSTEESHIPS AND YEAR FIRST COMPLEX OR NAME, ADDRESS POSITION AND ELECTED OR PRINCIPAL OCCUPATIONS OVERSEEN BY DIRECTORSHIPS AND DATE OF BIRTH OFFICES WITH TRUST APPOINTED DURING PAST 5 YEARS TRUSTEE HELD BY TRUSTEE Thomas R. Kadlec Trustee o Indefinite Senior Vice President 58 None c/o First Trust Advisors term (May 2007 to Portfolios L.P. Present), Vice 1001 Warrenville Road o 2006 President and Chief Suite 300 Financial Officer Lisle, IL 60532 (1990 to May 2007), D.O.B.: 11/57 ADM Investor Services, Inc. (Futures Commission Merchant); Vice President (May 2005 to Present), ADM Derivatives, Inc.; Registered Representative (2000 to present), Segerdahl & Company, Inc., a FINRA member (Broker-Dealer) Robert F. Keith Trustee o Indefinite President (2003 to 58 None c/o First Trust Advisors term Present), Hibs Portfolios L.P. Enterprises 1001 Warrenville Road o 2006 (Financial and Suite 300 Management Lisle, IL 60532 Consulting); D.O.B.: 11/56 President (2001 to 2003), Aramark Service Master Management; President and Chief Operating Officer (1998 to 2003), Service Master Management Services Niel B. Nielson Trustee o Indefinite President (June 2002 58 Director of c/o First Trust Advisors term to Present), Covenant Portfolios Covenant L.P. College Transport Inc. 1001 Warrenville Road o 2006 Suite 300 Lisle, IL 60532 D.O.B.: 03/54 Officers of the Trust - --------------------- Mark R. Bradley Treasurer, o Indefinite Chief Financial N/A N/A 1001 Warrenville Road, Controller, Chief term Officer, First Trust Suite 300 Financial Officer Advisors L.P. and Lisle, IL 60532 and Chief o 2006 First Trust D.O.B.: 11/57 Accounting Officer Portfolios L.P.; Chief Fsinancial Officer, BondWave LLC (Software Development Company/Broker-Dealer) and Stonebridge Advisors LLC (Investment Adviser) Kelley Christensen Vice President o Indefinite Assistant Vice N/A N/A 1001 Warrenville Road, term President, First Suite 300 Trust Advisors L.P. Lisle, IL 60532 o 2006 and First Trust D.O.B.: 09/70 Portfolios L.P. - 20 - NUMBER OF PORTFOLIOS IN THE FIRST OTHER TERM OF OFFICE TRUST FUND TRUSTEESHIPS AND YEAR FIRST COMPLEX OR NAME, ADDRESS POSITION AND ELECTED OR PRINCIPAL OCCUPATIONS OVERSEEN BY DIRECTORSHIPS AND DATE OF BIRTH OFFICES WITH TRUST APPOINTED DURING PAST 5 YEARS TRUSTEE HELD BY TRUSTEE James M. Dykas Assistant o Indefinite Senior Vice President N/A N/A 1001 Warrenville Road, Treasurer term (April 2007 to Suite 300 Present), Vice Lisle, IL 60532 o 2006 President (January D.O.B.: 01/66 2005 to April 2007), First Trust Advisors L.P. and First Trust Portfolios L.P.; Executive Director (December 2002 to January 2005), Vice President (December 2000 to December 2002), Van Kampen Asset Management and Morgan Stanley Investment Management W. Scott Jardine Secretary and o Indefinite General Counsel, First N/A N/A 1001 Warrenville Road, Chief Compliance term Trust Advisors L.P. and Suite 300 Officer First Trust Portfolios Lisle, IL 60532 o 2006 L.P.; Secretary, BondWave D.O.B.: 05/60 LLC (Software Development Company/Broker-Dealer) and Stonebridge Advisors LLC (Investment Adviser) Daniel J. Lindquist Vice President o Indefinite Senior Vice President 1001 Warrenville Road, term (September 2005 to N/A N/A Suite 300 Present), Vice Lisle, IL 60532 o 2006 President (April 2004 D.O.B.: 02/70 to September 2005), First Trust Advisors L.P. and First Trust Portfolios L.P.; Chief Operating Officer (January 2004 to April 2004), Mina Capital Management, LLC; Chief Operating Officer (April 2000 to January 2004), Samaritan Asset Management Services, Inc. Kristi A. Maher Assistant o Indefinite Deputy General 1001 Warrenville Road, Secretary term Counsel (May 2007 to N/A N/A Suite 300 Present), Assistant Lisle, IL 60532 o 2006 General Counsel D.O.B.: 12/66 (March 2004 to May 2007), First Trust Advisors L.P. and First Trust Portfolios L.P.; Associate (December 1995 to March 2004), Chapman and Cutler LLP Roger F. Testin Vice President o Indefinite Senior Vice President 1001 Warrenville Road, term (November 2003 to N/A N/A Suite 300 Present), Vice Lisle, IL 60532 o 2006 President (August D.O.B.: 06/66 2001 to November 2003), First Trust Advisors L.P. and First Trust Portfolios L.P. - 21 - NUMBER OF PORTFOLIOS IN THE FIRST OTHER TERM OF OFFICE TRUST FUND TRUSTEESHIPS AND YEAR FIRST COMPLEX OR NAME, ADDRESS POSITION AND ELECTED OR PRINCIPAL OCCUPATIONS OVERSEEN BY DIRECTORSHIPS AND DATE OF BIRTH OFFICES WITH TRUST APPOINTED DURING PAST 5 YEARS TRUSTEE HELD BY TRUSTEE Stan Ueland Vice President o Indefinite Vice President N/A N/A 1001 Warrenville Road, term (August 2005 to Suite 300 Present), First Lisle, IL 60532 o 2006 Trust Advisors L.P. D.O.B.: 11/70 and First Trust Portfolios L.P.; Vice President (May 2004 to August 2005), BondWave LLC (Software Development Company/Broker-Dealer); Account Executive (January 2003 to May 2004), Mina Capital Management, LLC and Samaritan Asset Management Services, Inc.; Sales Consultant (January 1997 to January 2003), Oracle Corporation - ------------ (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 has four standing committees: the Executive Committee (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. During the last fiscal year, the Executive Committee held one meeting. The Nominating and Governance Committee is responsible for appointing and nominating non-interested persons to the Board. Messrs. Erickson, Kadlec, Keith and Nielson, 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 - 22 - 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. During the last fiscal year, the Nominating and Governance Committee held two meetings. The Valuation Committee is responsible for the oversight of the pricing procedures of the Funds. Messrs. Erickson, Kadlec, Keith, and Nielson are members of the Valuation Committee. During the last fiscal year, the Valuation Committee held two meetings. 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, Kadlec, Keith and Nielson serve on the Audit Committee. During the last fiscal year, the Audit Committee held two meetings. Messrs. Erickson, Nielson, Kadlec, Keith and Bowen are trustees of one open-end mutual fund with eight portfolios, 14 closed-end funds and three exchange-traded fund trusts with 36 portfolios (collectively, the "First Trust Fund Complex"). 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 L.P. ("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 other funds and trusts of the First Trust Fund Complex as they hold with the Trust. Mr. Ueland, Vice President of the Trust, serves in the same position for the exchange-traded fund trusts of the First Trust Fund Complex. Mr. Testin, Vice President of the Trust, serves in the same position for the exchange-traded fund trusts and the open-end mutual fund of the First Trust Fund Complex. 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 Mr. Nielson is paid annual compensation - 23 - 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 divided among those investment companies. The following table sets forth the estimated compensation to be paid by the Trust projected during a full fiscal year to each of the Trustees and the total compensation paid to each of the Trustees by the First Trust Fund Complex for the calendar year ended December 31, 2006. The Trust has no retirement or pension plans. The officers and Trustee who are "interested persons" as designated above serve without any compensation from the Trust.
TOTAL COMPENSATION FROM TOTAL COMPENSATION FROM NAME OF TRUSTEE THE TRUST(1) THE FIRST TRUST FUND COMPLEX(2) James A. Bowen $0 $0 Richard E. Erickson $9,444 $148,538 Thomas R. Kadlec $10,000 $153,538 Robert F. Keith(3) $9,444 $105,000 Niel B. Nielson $9,722 $148,538 - ------------ (1) The compensation estimated to be paid by the Trust to the Trustees for a full fiscal year for services to the Trust. (2) This information is based on compensation paid to the Independent Trustees for the fiscal year ended December 31, 2006 for services to the eight portfolios of First Defined Portfolio Fund, LLC, an open-end fund, four portfolios of First Defined Portfolio Fund, LLC that were liquidated on March 16, 2007, fourteen closed-end funds and ten series of the First Trust Exchange-Traded Fund, all advised by First Trust. (3) Mr. Keith joined the Board of Trustees of certain funds in the First Trust Fund Complex on June 12, 2006 and First Defined Portfolio Fund on April 30, (2007.)
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 DOLLAR RANGE OF EQUITY SECURITIES IN EQUITY SECURITIES ALL REGISTERED INVESTMENT COMPANIES IN THE FUNDS OVERSEEN BY TRUSTEE IN THE FIRST TRUST TRUSTEE (NUMBER OF SHARES HELD) FUND COMPLEX Mr. Bowen None Over $100,000 Dr. Erickson None Over $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 Statement of Additional Information, the Trustees 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 - 24 - 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 Statement of Additional Information, the officers and Trustees, in the aggregate, owned less than 1% of the Shares of each Fund. As of the date of this Statement of Additional Information, 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 "Investment Management 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 Investment Management 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 Investment Management 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. 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 May 10, 2009. 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 Investment Management 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 - 25 - 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 Investment Management Agreement continues until two years after the initial issuance of Fund Shares and thereafter only if approved annually by the Board of Trustees, including a majority of the Independent Trustees. The Investment Management Agreement terminates automatically upon assignment and is terminable at any time without penalty as to the Funds by the Board of Trustees, 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. The following table sets forth the management fees (net of fee waivers and expense reimbursements) paid by each Fund and the fees waived and expenses reimbursed by First Trust for the specified period.
AMOUNT OF MANAGEMENT FEES (NET OF FEE WAIVERS AND EXPENSE AMOUNT OF FEES WAIVED AND EXPENSES REIMBURSEMENTS BY FIRST TRUST) REIMBURSED BY FIRST TRUST (FOR THE PERIOD (FOR THE PERIOD FUND ENDED 7/31/07) ENDED 7/31/07) FIRST TRUST CONSUMER $0 $48,919 DISCRETIONARY ALPHADEX(TM) FUND FIRST TRUST CONSUMER $0 $49,097 STAPLES ALPHADEX(TM) FUND FIRST TRUST ENERGY $0 $49,595 ALPHADEX(TM) FUND FIRST TRUST FINANCIALS $0 $48,915 ALPHADEX(TM) FUND FIRST TRUST HEALTH CARE $0 $48,919 ALPHADEX(TM) FUND - 26 - FIRST TRUST INDUSTRIALS/ $0 $49,565 PRODUCER DURABLES ALPHADEX(TM) FUND FIRST TRUST MATERIALS $0 $49,119 ALPHADEX(TM) FUND FIRST TRUST TECHNOLOGY $0 $48,964 ALPHADEX(TM) FUND FIRST TRUST UTILITIES $0 $49,113 ALPHADEX(TM) FUND
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. (September 2005 to Present); Vice President, First Trust and First Trust Portfolios L.P. (April 2004 to September 2005); Chief Operating Officer, Mina Capital Management, LLC (January 2004 to April 2004); Chief Operating Officer, Samaritan Asset Management Services, Inc. (April 2000 to January 2004) Robert F. Carey Chief Investment Officer Since 1991 Chief Investment Officer and and Senior Vice President Senior Vice President, First Trust; Senior Vice President, First Trust Portfolios L.P. - 27 - POSITION WITH LENGTH OF SERVICE PRINCIPAL OCCUPATION NAME FIRST TRUST WITH FIRST TRUST DURING PAST FIVE YEARS Jon C. Erickson Senior Vice President Since 1994 Senior Vice President, First Trust and First Trust Portfolios L.P. (August 2002 to Present); Vice President, First Trust and First Trust Portfolios L.P. (March 1994 to August 2002) David G. McGarel Senior Vice President Since 1997 Senior Vice President, First Trust and First Trust Portfolios L.P. (August 2002 to present); Vice President, First Trust and First Trust Portfolios L.P. (August 1997 to August 2002) Roger F. Testin Senior Vice President Since 2001 Senior Vice President, First Trust and First Trust Portfolios L.P. (November 2003 to Present); Vice President, First Trust and First Trust Portfolios L.P. (August 2001 to November 2003); Analyst, Dolan Capital Management (1998 to 2001) Stan Ueland Vice President Since 2005 Vice President, First Trust and First Trust Portfolios L.P. (August 2005 to Present); Vice President, BondWave LLC (May 2004 to August 2005); Account Executive, Mina Capital Management, LLC and Samaritan Asset Management Services, Inc. (January 2003 to May 2004); Sales Consultant, Oracle Corporation (January 1997 to January 2003)
Daniel J. Lindquist: 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. - 28 - 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: As head of First Trust's Portfolio Management Group, Mr. Testin is responsible for executing the instructions of the Strategy Research Group and Equity Research Group in the Funds' portfolios. 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. No member of the Investment Committee beneficially owns any Shares of a Fund. 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. 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: - 29 - ACCOUNTS MANAGED BY INVESTMENT COMMITTEE
REGISTERED OTHER POOLED INVESTMENT INVESTMENT COMPANIES VEHICLES OTHER ACCOUNTS NUMBER OF ACCOUNTS NUMBER OF ACCOUNTS NUMBER OF ACCOUNTS INVESTMENT COMMITTEE MEMBER ($ ASSETS) ($ ASSETS) ($ ASSETS) Robert F. Carey 37 ($2,680,560,650) 2 ($73,595,630) 0($0) Roger F. Testin 37 ($2,680,560,650) 2 ($73,595,630) 3,547($816,900,185) Jon C. Erickson 37 ($2,680,560,650) 2 ($73,595,630) 3,547($816,900,185) David G. McGarel 37 ($2,680,560,650) 2 ($73,595,630) 3,547($816,900,185) Daniel J. Lindquist 37 ($2,680,560,650) 2 ($73,595,630) 0($0) Stan Ueland 10 ($709,673,350) 0 ($0) 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 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 - 30 - 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. The Funds 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 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 the Funds with benefits by supplementing the research otherwise available to the Funds. 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 of Trustees 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 the Funds effect 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 - 31 - could have an adverse effect on the price or the amount of securities available to the Funds. In making such allocations between the Funds 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. BROKERAGE COMMISSIONS The following table sets forth the aggregate amount of brokerage commissions paid by each Fund for the specified period:
AGGREGATE AMOUNT OF BROKERAGE COMMISSIONS FUND (FOR THE PERIOD ENDED JULY 31, 2007) FIRST TRUST CONSUMER DISCRETIONARY ALPHADEX(TM) FUND $701 FIRST TRUST CONSUMER STAPLES ALPHADEX(TM) FUND $48 FIRST TRUST ENERGY ALPHADEX(TM) FUND $35 FIRST TRUST FINANCIALS ALPHADEX(TM) FUND $471 FIRST TRUST HEALTH CARE ALPHADEX(TM) FUND $554 FIRST TRUST INDUSTRIALS/PRODUCER DURABLES ALPHADEX(TM) FUND $667 FIRST TRUST MATERIALS ALPHADEX(TM) FUND $89 FIRST TRUST TECHNOLOGY ALPHADEX(TM) FUND $283 FIRST TRUST UTILITIES ALPHADEX(TM) FUND $36
Administrator. The Bank of New York Mellon Corporation ("BONY") serves as Administrator for the Funds. Its principal address is 101 Barclay St., New York, NY 10286. 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 - 32 - 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 of Trustees; provide monitoring reports and assistance regarding compliance with federal and state securities laws. Pursuant to the Fund Administration and Accounting Agreement, the Trust on behalf of the Funds 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. The following table sets forth the aggregate amount paid to BONY under the Fund Administration and Accounting Agreement. PERIOD AGGREGATE AMOUNT PAID TO ADMINISTRATOR Ended July 31, 2007 $2,295 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 board administrative services to the Trust in connection with the Board's meetings and other related matters. 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 NAV 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 is the Distributor and principal underwriter 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 - 33 - 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." For the fiscal year ended July 31, 2007, there were no underwriting commissions with respect to the sale of Fund Shares and First Trust Portfolios L.P. did not receive compensation on redemptions for the Funds for that period. 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 paid by a Fund and pursuant to a contractual agreement, the Funds will not pay 12b-1 fees any time before April 30, 2009. No fees were charged under the Plan in 2007. 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 Financial Industry Regulatory Authority ("FINRA"). 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 the AMEX, the Index Provider. - 34 - The Index Provider is not affiliated with the Funds, First Trust Portfolios or First Trust. Each Fund is entitled to use the applicable Index pursuant to a sublicensing arrangement by and among each Fund, the Index Provider, First Trust and First Trust Portfolios, which in turn has a license agreement with the Index Provider. 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. First Trust Portfolios sublicenses the StrataQuant(TM) Series indices to the Funds and to First Trust. First Trust Portfolios has licensed to AMEX, free of charge, the right to use certain intellectual property owned by First Trust Portfolios, 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 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 First Trust Portfolios 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 Portfolios, 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 FIRST TRUST PORTFOLIO, 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, - 35 - 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 Portfolios. The Funds and First Trust on behalf of the Funds have been granted the right by First Trust Portfolios to use the name "AlphaDEX(TM)" for certain purposes. 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 New York Stock Exchange (the "NYSE"), the AMEX and FINRA. 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 - 36 - 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. 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 - 37 - 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. 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. - 38 - 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 a 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 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 NYSE (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 - 39 - 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 a 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 a 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 and transfer agent, 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 transfer agent no later than the closing time of the regular trading session on the NYSE ("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 transfer agent 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 - 40 - Authorized Participant by telephone or other transmission method acceptable to the transfer agent 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 transfer agent 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 transfer agent 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 - 41 - 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 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 - 42 - 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 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. Purchasers of Creation Units will be required to pay a standard creation transaction fee (the "Creation Transaction Fee"), described below, payable to BONY regardless of the number of Creation Units. An additional variable fee of up to three times - 43 - the Creation Transaction Fee may be charged to approximate additional expenses incurred by a Fund 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. Investors are responsible for the costs of transferring the securities constituting the Deposit Securities to the account of the Trust. The standard creation transaction fee is based on the number of different securities in a Creation Unit according to the fee schedule set forth below: NUMBER OF SECURITIES CREATION IN A CREATION UNIT TRANSACTION FEE 1-100 $500 101-200 $1,000 201-300 $1,500 301-400 $2,000 401-500 $2,500 501-600 $3,000 601-700 $3,500 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 a 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 NYSE (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. - 44 - 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 a Fund or determination of the 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 (the "Redemption Transaction Fee") is imposed to offset transfer and other transaction costs that may be incurred by a Fund. An additional variable fee of up to three times the Redemption Transaction Fee may be charged to approximate additional expenses incurred by a Fund with respect to redemptions effected outside of the Clearing Process or to the extent that redemptions are for cash. A Fund reserves 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. 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 standard redemption transaction fee is based on the number of different securities in a Creation Unit according to the fee schedule set forth below: NUMBER OF SECURITIES REDEMPTION IN A CREATION UNIT TRANSACTION FEE 1-100 $500 101-200 $1,000 201-300 $1,500 301-400 $2,000 401-500 $2,500 501-600 $3,000 601-700 $3,500 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. - 45 - 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 a 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 a 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 a 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 the Fund's brokerage and other transaction costs associated with the disposition of Fund Securities). The Funds may also, in their sole discretion, upon - 46 - 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 each 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 Order must be delivered. received by the Distributor. CUSTOM ORDERS 3:00 p.m. No action. No action. Creation Unit Aggregations will be Order must be delivered. 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 Order in proper Deposit Securities must delivered. form must be be received by a Fund's received by the account through DTC. Distributor. 2:00 p.m. (ET) Cash Component must be received by the Custodian. - 47 - TRANSMITTAL NEXT BUSINESS SECOND BUSINESS THIRD BUSINESS DATE (T) DAY (T+1) DAY (T+2) DAY (T+3) 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 Order in proper Available Deposit Missing Deposit A PORTION OF THE form must be Securities. Securities are due to DEPOSIT SECURITIES received by the the Trust or the Trust Distributor. Cash in an amount equal may use cash on deposit to the sum of (i) the to purchase missing Cash Component, plus Deposit Securities. (ii) 115% of the market value of the Creation Unit undelivered Deposit Aggregations will be Securities. delivered. CUSTOM ORDERS 3:00 p.m. 11:00 a.m. (ET) No action. Creation Unit Aggregations will be Order in proper Deposit Securities must delivered. form must be be received by a Fund's received by the account through DTC. Distributor. Order received 2:00 p.m. (ET) after 3:00 p.m. will be treated as Cash Component must be standard 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 Order must be be transferred. received 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 Order must be be transferred. received by the Transfer Agent Order received after 3:00 p.m. will be treated as standard orders. - 48 - 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 Fund Shares must be delivered to the received by the delivered through DTC redeeming beneficial Transfer Agent. to the Custodian. owner. Order received 2:00 p.m. after 4:00 p.m. (ET) will be deemed Cash Component, if any, received on the is due. next business day (T+1). *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 Fund Shares must be delivered to the received by the delivered through DTC redeeming beneficial Transfer Agent. to the Custodian. owner. Order received 2:00 p.m. after 3:00 p.m. will be treated as Cash Component, if any, standard orders. 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 the 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 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. - 49 - As with any investment, prospective investors should seek advice based on their individual circumstances from their own tax advisor. Each Fund intends to qualify annually and to elect to be treated as a regulated investment company 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, or no income derived from interests in certain publicly traded partnerships; (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, or the securities of one or more of certain publicly traded partnerships; 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, the Funds intend 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 - 50 - 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 the 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. The Funds 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. - 51 - 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 the Funds, 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. - 52 - 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. INVESTMENTS IN CERTAIN FOREIGN CORPORATIONS If a Fund holds an equity interest in any "passive foreign investment companies" ("PFICs"), which are generally certain foreign corporations that receive at least 75% of their annual gross income from passive sources (such as interest, dividends, certain rents and royalties or capital gains) or that hold at least 50% of their assets in investments producing such passive income, the Fund could be subject to U.S. federal income tax and additional interest charges on gains and certain distributions with respect to those equity interests, even if all the income or gain is timely distributed to its Unitholders. A Fund will not be able to pass through to its Unitholders any credit or deduction for such taxes. A Fund may be able to make an election that could ameliorate these adverse tax consequences. In this case, the Fund would recognize as ordinary income any increase in the value of such PFIC shares, and as ordinary loss any decrease in such value to the extent it did not exceed prior increases included in income. Under this election, a Fund might be required to recognize in a year income in excess of its distributions from PFICs and its proceeds from dispositions of PFIC stock during that year, and such income would nevertheless be subject to the distribution requirement and would be taken into account for purposes of the 4% excise tax (described above). Dividends paid by PFICs will not be treated as qualified dividend income. 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. - 53 - 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 a 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. - 54 - 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. 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. Under normal circumstances, daily calculation of the NAV will utilize the last closing price of each security held by a Fund at the close of the market on which such security is principally listed. In determining NAV, portfolio securities for a Fund for which accurate market quotations are readily available will be valued by the 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 NASDAQ. 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 - 55 - 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. (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; - 56 - 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." 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. - 57 - 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. FINANCIAL STATEMENTS The audited financial statements and notes thereto for the Funds, contained in the Annual Report to Shareholders dated July 31, 2007, are incorporated by reference into this Statement of Additional Information and have been audited by Deloitte & Touche LLP, independent registered public accounting firm, whose report also appears in the Annual Report and is also incorporated by reference herein. No other parts of the Annual Report are incorporated by reference herein. The Annual Report is attached to this Statement of Additional Information. - 58 - STATEMENT OF ADDITIONAL INFORMATION INVESTMENT COMPANY ACT FILE NO. 811-22019 FIRST TRUST EXCHANGE-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 ALPHADEX(TM) FUND FIRST TRUST MULTI CAP VALUE ALPHADEX(TM) FUND FIRST TRUST MULTI CAP GROWTH ALPHADEX(TM) FUND DATED NOVEMBER 28, 2007 This Statement of Additional Information is not a Prospectus. It should be read in conjunction with the Prospectus dated November 28, 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 AlphaDEX(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 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..................................................3 INVESTMENT OBJECTIVE AND POLICIES.............................................4 INVESTMENT STRATEGIES.........................................................5 SUBLICENSE AGREEMENTS........................................................15 INVESTMENT RISKS.............................................................15 FUNDS MANAGEMENT.............................................................19 ACCOUNTS MANAGED BY INVESTMENT COMMITTEE.....................................29 BROKERAGE ALLOCATIONS........................................................30 CUSTODIAN, DISTRIBUTOR, TRANSFER AGENT, FUND ACCOUNTING AGENT, INDEX PROVIDER AND EXCHANGE.....................................................33 ADDITIONAL INFORMATION.......................................................35 PROXY VOTING POLICIES AND PROCEDURES.........................................37 CREATION AND REDEMPTION OF CREATION UNIT AGGREGATIONS........................38 FEDERAL TAX MATTERS..........................................................49 DETERMINATION OF NAV.........................................................54 DIVIDENDS AND DISTRIBUTIONS..................................................56 MISCELLANEOUS INFORMATION....................................................57 FINANCIAL STATEMENTS.........................................................57 The audited financial statements for the Funds' most recent fiscal year appear in the Funds' Annual Report to Shareholders dated July 31, 2007, which is attached hereto. The Annual Report was filed with the Securities and Exchange Commission ("SEC") on September 28, 2007. The financial statements from such Annual Report are incorporated herein by reference. - 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 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"), 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. 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") requires a shareholder vote only on those matters where the 1940 Act requires a vote of shareholders and otherwise permits the Trustees to take actions without seeking the consent of shareholders. For example, the Declaration gives the Trustees broad authority to approve reorganizations between a Fund and another entity, such as another exchange-traded fund, or the sale of all or substantially all of a Fund's assets, or the termination of the Trust or any Fund without shareholder approval if the 1940 Act would not require such approval. 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 be amended or supplemented by the Trustees in any respect without shareholder vote. The Declaration provides that the Trustees may establish the number of Trustees and that vacancies on the Board of Trustees may be filled by the remaining Trustees, except when election of Trustees by the shareholders is required under the 1940 Act. Trustees are then elected by a plurality of votes cast by shareholders at a meeting at which a quorum is present. The Declaration also provides that Trustees may be removed, with or without cause, by a vote of shareholders holding at least two-thirds of the voting power of the Trust, or by a vote of two thirds of the remaining Trustees. The provisions of the Declaration relating to the election and removal of Trustees may not be amended without the approval of two-thirds of the Trustees. 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 or as the Trustees may determine, 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 Declaration provides a detailed process for the bringing of derivative actions by shareholders in order to permit legitimate inquiries and claims while avoiding the time, expense, distraction and other harm that can be caused to a Fund or its shareholders as a result of spurious shareholder demands and derivative actions. Prior to bringing a derivative action, a demand must first be made on the Trustees. The Declaration details various information, certifications, undertakings and acknowledgements that must be included in the demand. Following receipt of the demand, the Trustees have a period of 90 days, which may be extended by an additional 60 days, to consider the demand. If a majority of the Trustees who are considered independent for the purposes of considering the demand determine that maintaining the suit would not be in the best interests of a Fund, the Trustees are required to reject the demand and the complaining shareholder may not proceed with the derivative action unless the shareholder is able to sustain the burden of proof to a court that the decision of the Trustees not to pursue the requested action was not a good faith exercise of their business judgment on behalf of a Fund. In making such a determination, a Trustee is not considered to have a personal financial interest by virtue of being compensated for his or her services as a Trustee. If a demand is rejected, the complaining shareholder will be responsible for the costs and expenses (including attorneys' fees) incurred by a Fund in connection with the consideration of the demand under a number of circumstances. If a derivative action is brought in violation of the Declaration, the shareholder bringing the action may be responsible for a Fund's costs, including attorneys' fees. The Declaration also provides that any shareholder bringing an action against a Fund waives the right to trial by jury to the fullest extent permitted by law. The Trust is not required to 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 Declaration 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 Declaration further provides that a Trustee acting in his or her capacity as Trustee is not personally liable to any person other than the Trust or its shareholders, for any act, omission, or obligation of the Trust. The Declaration requires the Trust to indemnify any persons who are or who have been Trustees, officers or employees of the Trust for any liability for actions or failure to act except to the extent prohibited by applicable federal law. In making any determination as to whether any person is entitled to the advancement of expenses in - 2 - connection with a claim for which indemnification is sought, such person is entitled to a rebuttable presumption that he or she did not engage in conduct for which indemnification is not available. The Declaration provides that any Trustee who serves as chair of the Board of Trustees or of a committee of the Board of Trustees, lead independent Trustee, or audit committee financial expert, or in any other similar capacity will not be subject to any greater standard of care or liability because of such position. The Funds are advised 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 each Fund's corresponding Index (as hereinafter defined), together with the deposit of a specified cash payment (the "Cash Component"). The Shares are listed and trade on the American Stock Exchange LLC (the "AMEX"). The 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 100,000 Shares. The Trust reserves the right to offer a "cash" option for creations and redemptions of Fund Shares. Fund Shares may be issued in advance of receipt of Deposit Securities subject to various conditions including a requirement to maintain on deposit with each Fund 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 such Fund for 30 or more consecutive trading days; (ii) the value of such Fund's Index (as defined below) 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 such Fund. 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 - 3 - stock splits, which would have no effect on the net assets of each 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 a 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 a 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 instruments (but this shall not prevent a 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). - 4 - (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 a Fund is based upon, 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 each Fund 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 a Fund if a majority of the outstanding voting securities of a 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 respective 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"or the "Index Provider") (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. Fund Shareholders are entitled to 60 days' notice prior to any change in this non-fundamental investment policy. TYPES OF INVESTMENTS Warrants: The Funds may invest in warrants. Warrants acquired by a Fund entitle 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 - 5 - 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, a Fund does not remit payment to the issuer, no interest is accrued on debt securities and dividend income is not 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 a 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 NAV. The Funds do not believe that NAV 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 a 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 a 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 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. - 6 - 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 a 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, a Fund will take such steps as is deemed advisable, if any, to protect liquidity. Money Market Funds: The Funds may invest in shares of money market funds to the extent permitted by the 1940 Act. 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 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. 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 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 - 7 - certificates of deposit are non-negotiable, they will be considered illiquid securities and be subject to a 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 Federal Deposit Insurance Corporation 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 a 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, a 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 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 a Fund. If the seller were to be subject to a federal bankruptcy proceeding, the ability of a Fund to liquidate the collateral could be delayed or impaired because of certain provisions of the bankruptcy laws. - 8 - (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 a 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 better 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 a 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 a 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. 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 - 9 - 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. The foregoing limitations are not fundamental policies of the Funds and may be changed without shareholder approval as regulatory agencies permit. 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 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 AMEX, NYSE Arca, Inc. and the Philadelphia Stock Exchange. - 10 - 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, a 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 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 - 11 - (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, a 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 a 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 a Fund. In computing daily NAV, a Fund will mark to market the - 12 - current value of its open Futures Contracts. The Funds expect to earn interest income on their margin deposits. 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. 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. There can be no assurance that a liquid market will exist at a time when a Fund seeks to close out a Futures position. A Fund would continue to be required to meet margin requirements until the position is closed, possibly resulting in a decline in the Fund's NAV. In addition, many of the contracts discussed above are relatively new 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 NYSE Composite Index(R). 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 - 13 - 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 a 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 a 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 a 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, 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 - 14 - and securities markets involving arbitrage, "program trading," and other investment strategies might result in temporary price distortions. SUBLICENSE AGREEMENTS Each Fund has entered into a sublicense agreement (the "Sublicense Agreement") with First Trust, First Trust Portfolios L.P. ("First Trust Portfolios") and the Index Provider that grants each Fund and First Trust a non-exclusive and non-transferable sublicense to use certain intellectual property of S&P in connection with the issuance, distribution, marketing and/or promotion of each Fund. Pursuant to each Sublicense Agreement, each Fund and First Trust have agreed to be bound by certain provisions of the product license agreement by and between the Index Provider and First Trust Portfolios (the "Product License Agreement"). Pursuant to the Product License Agreement, First Trust Portfolios will pay the Index Provider an annual fee of $55,000 for each Fund for the initial two years of the Product License Agreement and $30,000 for each Fund for each subsequent year. In addition, First Trust Portfolios shall pay the Index Provider .05% of the average daily net assets of each Fund. Each Fund will reimburse First Trust and First Trust will reimburse First Trust Portfolios for the costs associated with the Product License Agreement. 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 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 - 15 - 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 in 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 Risk Whether or not the equity securities in 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 in the Funds will be adversely affected if trading markets for the equity securities are limited or absent. 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 in the form of American Depositary Receipts ("ADRs"), American Depositary Shares ("ADSs") 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 - 16 - 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 a 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. (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 - 17 - 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 a 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 a 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 a 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. (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 - 18 - 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.
NUMBER OF PORTFOLIOS IN THE FIRST OTHER TERM OF OFFICE TRUST FUND TRUSTEESHIPS AND YEAR FIRST COMPLEX OR NAME, ADDRESS POSITION AND ELECTED OR PRINCIPAL OCCUPATIONS OVERSEEN BY DIRECTORSHIPS AND DATE OF BIRTH OFFICES WITH TRUST APPOINTED DURING PAST 5 YEARS TRUSTEE HELD BY TRUSTEE Trustee who is an Interested Person of the Trust - --------------------- James A. Bowen(1) President, o Indefinite President, First 58 Trustee of 1001 Warrenville Road Chairman of the term Trust Advisors L.P. Portfolios Wheaton Suite 300 Board, Chief and First Trust College Lisle, IL 60532 Executive Officer o 2006 Portfolios L.P.; D.O.B.: 09/55 and Trustee Chairman of the Board, BondWave LLC (Software Development Company/Broker-Dealer) and Stonebridge Advisors LLC (Investment Adviser) Trustees who are not Interested Persons of the Trust - ------------------------- Richard E. Erickson Trustee o Indefinite Physician; President, 58 None c/o First Trust Advisors term Wheaton Orthopedics; Portfolios L.P. Co-Owner and 1001 Warrenville Road o 2006 Co-Director (January Suite 300 1996 to May 2007), Lisle, IL 60532 Sports Med Center for D.O.B.: 04/51 Fitness; Limited Partner, Gundersen Real Estate Partnership; Limited Partner, Sportsmed LLC - 19 - NUMBER OF PORTFOLIOS IN THE FIRST OTHER TERM OF OFFICE TRUST FUND TRUSTEESHIPS AND YEAR FIRST COMPLEX OR NAME, ADDRESS POSITION AND ELECTED OR PRINCIPAL OCCUPATIONS OVERSEEN BY DIRECTORSHIPS AND DATE OF BIRTH OFFICES WITH TRUST APPOINTED DURING PAST 5 YEARS TRUSTEE HELD BY TRUSTEE Thomas R. Kadlec Trustee o Indefinite Senior Vice President 58 None c/o First Trust Advisors term (May 2007 to Portfolios L.P. Present), Vice 1001 Warrenville Road o 2006 President and Chief Suite 300 Financial Officer Lisle, IL 60532 (1990 to May 2007), D.O.B.: 11/57 ADM Investor Services, Inc. (Futures Commission Merchant); Vice President (May 2005 to Present), ADM Derivatives, Inc.; Registered Representative (2000 to present), Segerdahl & Company, Inc., a FINRA member (Broker-Dealer) Robert F. Keith Trustee o Indefinite President (2003 to 58 None c/o First Trust Advisors term Present), Hibs Portfolios L.P. Enterprises 1001 Warrenville Road o 2006 (Financial and Suite 300 Management Lisle, IL 60532 Consulting); D.O.B.: 11/56 President (2001 to 2003), Aramark Service Master Management; President and Chief Operating Officer (1998 to 2003), Service Master Management Services Niel B. Nielson Trustee o Indefinite President (June 2002 58 Director of c/o First Trust Advisors term to Present), Covenant Portfolios Covenant L.P. College Transport Inc. 1001 Warrenville Road o 2006 Suite 300 Lisle, IL 60532 D.O.B.: 03/54 Officers of the Trust - --------------------- Mark R. Bradley Treasurer, o Indefinite Chief Financial N/A N/A 1001 Warrenville Road, Controller, Chief term Officer, First Trust Suite 300 Financial Officer Advisors L.P. and Lisle, IL 60532 and Chief o 2006 First Trust D.O.B.: 11/57 Accounting Officer Portfolios L.P.; Chief Fsinancial Officer, BondWave LLC (Software Development Company/Broker-Dealer) and Stonebridge Advisors LLC (Investment Adviser) Kelley Christensen Vice President o Indefinite Assistant Vice N/A N/A 1001 Warrenville Road, term President, First Suite 300 Trust Advisors L.P. Lisle, IL 60532 o 2006 and First Trust D.O.B.: 09/70 Portfolios L.P. - 20 - NUMBER OF PORTFOLIOS IN THE FIRST OTHER TERM OF OFFICE TRUST FUND TRUSTEESHIPS AND YEAR FIRST COMPLEX OR NAME, ADDRESS POSITION AND ELECTED OR PRINCIPAL OCCUPATIONS OVERSEEN BY DIRECTORSHIPS AND DATE OF BIRTH OFFICES WITH TRUST APPOINTED DURING PAST 5 YEARS TRUSTEE HELD BY TRUSTEE James M. Dykas Assistant o Indefinite Senior Vice President N/A N/A 1001 Warrenville Road, Treasurer term (April 2007 to Suite 300 Present), Vice Lisle, IL 60532 o 2006 President (January D.O.B.: 01/66 2005 to April 2007), First Trust Advisors L.P. and First Trust Portfolios L.P.; Executive Director (December 2002 to January 2005), Vice President (December 2000 to December 2002), Van Kampen Asset Management and Morgan Stanley Investment Management W. Scott Jardine Secretary and o Indefinite General Counsel, First N/A N/A 1001 Warrenville Road, Chief Compliance term Trust Advisors L.P. and Suite 300 Officer First Trust Portfolios Lisle, IL 60532 o 2006 L.P.; Secretary, BondWave D.O.B.: 05/60 LLC (Software Development Company/Broker-Dealer) and Stonebridge Advisors LLC (Investment Adviser) Daniel J. Lindquist Vice President o Indefinite Senior Vice President 1001 Warrenville Road, term (September 2005 to N/A N/A Suite 300 Present), Vice Lisle, IL 60532 o 2006 President (April 2004 D.O.B.: 02/70 to September 2005), First Trust Advisors L.P. and First Trust Portfolios L.P.; Chief Operating Officer (January 2004 to April 2004), Mina Capital Management, LLC; Chief Operating Officer (April 2000 to January 2004), Samaritan Asset Management Services, Inc. Kristi A. Maher Assistant o Indefinite Deputy General 1001 Warrenville Road, Secretary term Counsel (May 2007 to N/A N/A Suite 300 Present), Assistant Lisle, IL 60532 o 2006 General Counsel D.O.B.: 12/66 (March 2004 to May 2007), First Trust Advisors L.P. and First Trust Portfolios L.P.; Associate (December 1995 to March 2004), Chapman and Cutler LLP Roger F. Testin Vice President o Indefinite Senior Vice President 1001 Warrenville Road, term (November 2003 to N/A N/A Suite 300 Present), Vice Lisle, IL 60532 o 2006 President (August D.O.B.: 06/66 2001 to November 2003), First Trust Advisors L.P. and First Trust Portfolios L.P. - 21 - NUMBER OF PORTFOLIOS IN THE FIRST OTHER TERM OF OFFICE TRUST FUND TRUSTEESHIPS AND YEAR FIRST COMPLEX OR NAME, ADDRESS POSITION AND ELECTED OR PRINCIPAL OCCUPATIONS OVERSEEN BY DIRECTORSHIPS AND DATE OF BIRTH OFFICES WITH TRUST APPOINTED DURING PAST 5 YEARS TRUSTEE HELD BY TRUSTEE Stan Ueland Vice President o Indefinite Vice President N/A N/A 1001 Warrenville Road, term (August 2005 to Suite 300 Present), First Lisle, IL 60532 o 2006 Trust Advisors L.P. D.O.B.: 11/70 and First Trust Portfolios L.P.; Vice President (May 2004 to August 2005), BondWave LLC (Software Development Company/Broker-Dealer); Account Executive (January 2003 to May 2004), Mina Capital Management, LLC and Samaritan Asset Management Services, Inc.; Sales Consultant (January 1997 to January 2003), Oracle Corporation - ------------ (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 has four standing committees: the Executive Committee (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. During the last fiscal year, the Executive Committee held one meeting. The Nominating and Governance Committee is responsible for appointing and nominating non-interested persons to the Board. Messrs. Erickson, Kadlec, Keith and Nielson, 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 - 22 - 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. During the last fiscal year, the Nominating and Governance Committee held two meetings. The Valuation Committee is responsible for the oversight of the pricing procedures of the Funds. Messrs. Erickson, Kadlec, Keith, and Nielson are members of the Valuation Committee. During the last fiscal year, the Valuation Committee held two meetings. 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, Kadlec, Keith and Nielson serve on the Audit Committee. During the last fiscal year, the Audit Committee held two meetings. Messrs. Erickson, Nielson, Kadlec, Keith and Bowen are trustees of one open-end mutual fund with eight portfolios, 14 closed-end funds and three exchange-traded fund trusts with 36 portfolios (collectively, the "First Trust Fund Complex"). 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 L.P. ("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 other funds and trusts of the First Trust Fund Complex as they hold with the Trust. Mr. Ueland, Vice President of the Trust, serves in the same position for the exchange-traded fund trusts of the First Trust Fund Complex. Mr. Testin, Vice President of the Trust, serves in the same position for the exchange-traded fund trusts and the open-end mutual fund of the First Trust Fund Complex. 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 Mr. Nielson is paid annual compensation - 23 - 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 divided among those investment companies. The following table sets forth the estimated compensation to be paid by the Trust projected during a full fiscal year to each of the Trustees and the total compensation paid to each of the Trustees by the First Trust Fund Complex for the calendar year ended December 31, 2006. The Trust has no retirement or pension plans. The officers and Trustee who are "interested persons" as designated above serve without any compensation from the Trust.
TOTAL COMPENSATION FROM TOTAL COMPENSATION FROM NAME OF TRUSTEE THE TRUST(1) THE FIRST TRUST FUND COMPLEX(2) James A. Bowen $0 $0 Richard E. Erickson $9,444 $148,538 Thomas R. Kadlec $10,000 $153,538 Robert F. Keith(3) $9,444 $105,000 Niel B. Nielson $9,722 $148,538 - ------------ (1) The compensation estimated to be paid by the Trust to the Trustees for a full fiscal year for services to the Trust. (2) This information is based on compensation paid to the Independent Trustees for the fiscal year ended December 31, 2006 for services to the eight portfolios of First Defined Portfolio Fund, LLC, an open-end fund, four portfolios of First Defined Portfolio Fund, LLC that were liquidated on March 16, 2007, fourteen closed-end funds and ten series of the First Trust Exchange-Traded Fund, all advised by First Trust. (3) Mr. Keith joined the Board of Trustees of certain funds in the First Trust Fund Complex on June 12, 2006 and First Defined Portfolio Fund on April 30, (2007.)
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 DOLLAR RANGE OF EQUITY SECURITIES IN EQUITY SECURITIES ALL REGISTERED INVESTMENT COMPANIES IN THE FUNDS OVERSEEN BY TRUSTEE IN THE FIRST TRUST TRUSTEE (NUMBER OF SHARES HELD) FUND COMPLEX Mr. Bowen None Over $100,000 Dr. Erickson None Over $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 Statement of Additional Information, the Trustees 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 - 24 - 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 Statement of Additional Information, the officers and Trustees, in the aggregate, owned less than 1% of the Shares of each Fund. As of the date of this Statement of Additional Information, 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 "Investment Management 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 Investment Management 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 Investment Management 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. 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 May 10, 2009. 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 Investment Management 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 - 25 - 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 Investment Management Agreement continues until two years after the initial issuance of Fund Shares and thereafter only if approved annually by the Board of Trustees, including a majority of the Independent Trustees. The Investment Management Agreement terminates automatically upon assignment and is terminable at any time without penalty as to the Funds by the Board of Trustees, 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. The following table sets forth the management fees (net of fee waivers and expense reimbursements) paid by each Fund and the fees waived and expenses reimbursed by First Trust for the specified period.
AMOUNT OF MANAGEMENT FEES (NET OF FEE WAIVERS AND EXPENSE AMOUNT OF FEES WAIVED AND EXPENSES REIMBURSEMENTS BY FIRST TRUST) REIMBURSED BY FIRST TRUST (FOR THE PERIOD (FOR THE PERIOD FUND ENDED 7/31/07) ENDED 7/31/07) FIRST TRUST LARGE CAP $0 $49,175 CORE ALPHADEX(TM) FUND FIRST TRUST MID CAP CORE $0 $49,625 ALPHADEX(TM) FUND FIRST TRUST SMALL CAP $0 $49,675 CORE ALPHADEX(TM) FUND FIRST TRUST LARGE CAP $0 $49,517 VALUE OPPORTUNITIES ALPHADEX(TM) FUND FIRST TRUST LARGE CAP $0 $49,614 GROWTH OPPORTUNITIES ALPHADEX(TM) FUND - 26 - FIRST TRUST MULTI CAP $0 $49,334 VALUE ALPHADEX(TM) FUND FIRST TRUST MULTI CAP $0 $50,158 GROWTH ALPHADEX(TM) FUND
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. (September 2005 to Present); Vice President, First Trust and First Trust Portfolios L.P. (April 2004 to September 2005) Chief Operating Officer, Mina Capital Management, LLC (January 2004 to April 2004); Chief Operating Officer, Samaritan Asset Management Services, Inc. (April 2000 to January 2004) Robert F. Carey Chief Investment Officer Since 1991 Chief Investment Officer and and Senior Vice President Senior Vice President, First Trust; Senior Vice President, First Trust Portfolios L.P. Jon C. Erickson Senior Vice President Since 1994 Senior Vice President, First Trust and First Trust Portfolios L.P. (August 2002 to Present); Vice President, First Trust and First Trust Portfolios L.P. (March 1994 to August 2002) David G. McGarel Senior Vice President Since 1997 Senior Vice President, First Trust and First Trust Portfolios L.P. (August 2002 to present); Vice President, First Trust and First Trust Portfolios L.P. (August 1997 to August 2002) - 27 - 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, First Trust and First Trust Portfolios L.P. (November 2003 to Present); Vice President, First Trust and First Trust Portfolios L.P. (August 2001 to November 2003); Analyst, Dolan Capital Management (1998 to 2001) Stan Ueland Vice President Since 2005 Vice President, First Trust and First Trust Portfolios L.P. (August 2005 to Present); Vice President, BondWave LLC (May 2004 to August 2005); Account Executive, Mina Capital Management, LLC and Samaritan Asset Management Services, Inc. (January 2003 to May 2004); Sales Consultant, Oracle Corporation (January 1997 to January 2003)
Daniel J. Lindquist: 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: As head of First Trust's Portfolio Management Group, Mr. Testin is responsible for executing the instructions of the Strategy Research Group and Equity Research Group in the Funds' portfolios. 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. - 28 - No member of the Investment Committee beneficially owns any Shares of a Fund. 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. 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 OTHER POOLED INVESTMENT INVESTMENT COMPANIES VEHICLES OTHER ACCOUNTS NUMBER OF ACCOUNTS NUMBER OF ACCOUNTS NUMBER OF ACCOUNTS INVESTMENT COMMITTEE MEMBER ($ ASSETS) ($ ASSETS) ($ ASSETS) Robert F. Carey 37 ($2,680,560,650) 2 ($73,595,630) 0($0) Roger F. Testin 37 ($2,680,560,650) 2 ($73,595,630) 3,547($816,900,185) Jon C. Erickson 37 ($2,680,560,650) 2 ($73,595,630) 3,547($816,900,185) David G. McGarel 37 ($2,680,560,650) 2 ($73,595,630) 3,547($816,900,185) Daniel J. Lindquist 37 ($2,680,560,650) 2 ($73,595,630) 0($0) Stan Ueland 10 ($709,673,350) 0 ($0) 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 - 29 - 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 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. The Funds 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 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 the Funds with benefits by supplementing the research otherwise available to the Funds. 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 - 30 - 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 of Trustees 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 the Funds effect 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 could have an adverse effect on the price or the amount of securities available to the Funds. In making such allocations between the Funds 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. BROKERAGE COMMISSIONS The following table sets forth the aggregate amount of brokerage commissions paid by each Fund for the specified period:
AGGREGATE AMOUNT OF BROKERAGE COMMISSIONS FUND (FOR THE PERIOD ENDED JULY 31, 2007) FIRST TRUST LARGE CAP CORE ALPHADEX(TM) FUND $127 FIRST TRUST MID CAP CORE ALPHADEX(TM) FUND $348 FIRST TRUST SMALL CAP CORE ALPHADEX(TM) FUND $247 FIRST TRUST LARGE CAP VALUE OPPORTUNITIES ALPHADEX(TM) FUND $64 FIRST TRUST LARGE CAP GROWTH OPPORTUNITIES ALPHADEX(TM) FUND $13 - 31 - FIRST TRUST MULTI CAP VALUE ALPHADEX(TM) FUND $129 FIRST TRUST MULTI CAP GROWTH ALPHADEX(TM) FUND $293
Administrator. The Bank of New York Mellon Corporation ("BONY") serves as Administrator for the Funds. Its principal address is 101 Barclay St., New York, NY 10286. 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 of Trustees; provide monitoring reports and assistance regarding compliance with federal and state securities laws. Pursuant to the Fund Administration and Accounting Agreement, the Trust on behalf of the Funds 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. The following table sets forth the aggregate amount paid to BONY under the Fund Administration and Accounting Agreement. PERIOD AGGREGATE AMOUNT PAID TO ADMINISTRATOR Ended July 31, 2007 $2,873 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 board administrative services to the Trust in connection with the Board's meetings and other related matters. - 32 - 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 NAV 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 is the Distributor and principal underwriter 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." For the fiscal year ended July 31, 2007, there were no underwriting commissions with respect to the sale of Fund Shares and First Trust Portfolios L.P. did not receive compensation on redemptions for the Funds for that period. 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 paid by a Fund and pursuant to a contractual agreement, the Funds will not pay 12b-1 fees any time before April 30, 2009. No fees were charged under the Plan in 2007. 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 - 33 - Act of 1934 (the "Exchange Act") and a member of the Financial Industry Regulatory Authority ("FINRA"). 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, the Index Provider. The Index Provider is not affiliated with the Funds, First Trust Portfolios or First Trust. Each Fund is entitled to use the applicable Index pursuant to a sublicensing arrangement by and among each Fund, the Index Provider, First Trust and First Trust Portfolios, which in turn has a license agreement with the Index Provider. Each of the Defined Index Series indices is a trademark of S&P and is licensed for use by First Trust Portfolios. First Trust Portfolios sublicenses the Defined Index Series indices to the Funds and to First Trust. First Trust Portfolios has licensed to S&P, free of charge, the right to use certain intellectual property owned by First Trust Portfolios, including the AlphaDEX(TM) trademark and the AlphaDEX(TM) stock seleCtion method, in connection with AMEX's creation of the Defined Index 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, S&P is solely responsible for the creation, compilation and administration of the Defined Index 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 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 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 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. - 34 - 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, 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 LICENSOR 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. The Funds and First Trust on behalf of the FunDs have been granted the right by First Trust Portfolios to use the name "AlphaDEX(TM)" for certain purposes. 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 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 - 35 - representatives) own DTC. More specifically, DTC is owned by a number of its DTC Participants and by the New York Stock Exchange (the "NYSE"), the AMEX and FINRA. 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. 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 - 36 - law. Under such circumstances, the Trust shall take action to find a replacement for DTC to perform its functions at a comparable cost. 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. 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 - 37 - 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 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 a 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 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 NYSE (currently 9:30 a.m., - 38 - 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 a 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 a 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 and transfer agent, 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 - 39 - transfer agent no later than the closing time of the regular trading session on the NYSE ("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 transfer agent 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 transfer agent 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 transfer agent 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 transfer agent 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 - 40 - 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. 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, - 41 - 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. 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 - 42 - 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. Purchasers of Creation Units will be required to pay a standard creation transaction fee (the "Creation Transaction Fee"), described below, payable to BONY regardless of the number of Creation Units. An additional variable fee of up to three times the Creation Transaction Fee may be charged to approximate additional expenses incurred by a Fund 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. Investors are responsible for the costs of transferring the securities constituting the Deposit Securities to the account of the Trust. The standard creation transaction fee is based on the number of different securities in a Creation Unit according to the fee schedule set forth below: NUMBER OF SECURITIES CREATION IN A CREATION UNIT TRANSACTION FEE 1-100 $500 101-200 $1,000 201-300 $1,500 301-400 $2,000 401-500 $2,500 501-600 $3,000 601-700 $3,500 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 a 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 NYSE (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 - 43 - 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 a Fund or determination of the 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 (the "Redemption Transaction Fee") is imposed to offset transfer and other transaction costs that may be incurred by a Fund. An additional variable fee of up to three times the Redemption Transaction Fee may be charged to approximate additional expenses incurred by a Fund with respect to redemptions effected outside of the Clearing Process or to the extent that redemptions are for cash. A Fund reserves 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. 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 standard redemption transaction fee is based on the number of different securities in a Creation Unit according to the fee schedule set forth below: NUMBER OF SECURITIES REDEMPTION IN A CREATION UNIT TRANSACTION FEE 1-100 $500 101-200 $1,000 201-300 $1,500 301-400 $2,000 401-500 $2,500 501-600 $3,000 601-700 $3,500 - 44 - 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 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 a 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 a 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 - 45 - 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 a 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 the Fund's brokerage and other transaction costs associated with the disposition of Fund Securities). The Funds may also, in their 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 each 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 Order must be delivered. received by the Distributor. - 46 - TRANSMITTAL NEXT BUSINESS SECOND BUSINESS THIRD BUSINESS DATE (T) DAY (T+1) DAY (T+2) DAY (T+3) CUSTOM ORDERS 3:00 p.m. No action. No action. Creation Unit Aggregations will be Order must be delivered. 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 Order in proper Deposit Securities must delivered. form must be be received by a Fund's received by the account through DTC. Distributor. 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 Order in proper Available Deposit Missing Deposit A PORTION OF THE form must be Securities. Securities are due to DEPOSIT SECURITIES received by the the Trust or the Trust Distributor. Cash in an amount equal may use cash on deposit to the sum of (i) the to purchase missing Cash Component, plus Deposit Securities. (ii) 115% of the market value of the Creation Unit undelivered Deposit Aggregations will be Securities. delivered. CUSTOM ORDERS 3:00 p.m. 11:00 a.m. (ET) No action. Creation Unit Aggregations will be Order in proper Deposit Securities must delivered. form must be be received by a Fund's received by the account through DTC. Distributor. Order received 2:00 p.m. (ET) after 3:00 p.m. will be treated as Cash Component must be standard 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 Order must be be transferred. received by the Transfer Agent. Orders received after 4:00 p.m. (ET) will be deemed received on the next business day (T+1) - 47 - TRANSMITTAL NEXT BUSINESS SECOND BUSINESS THIRD BUSINESS DATE (T) DAY (T+1) DAY (T+2) DAY (T+3) CUSTOM ORDERS 3:00 p.m. (ET) No action. No action. Fund Securities and Cash Redemption Amount will Order must be be transferred. received 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 Fund Shares must be delivered to the received by the delivered through DTC redeeming beneficial Transfer Agent. to the Custodian. owner. Order received 2:00 p.m. after 4:00 p.m. (ET) will be deemed Cash Component, if any, received on the is due. next business day (T+1). *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 Fund Shares must be delivered to the received by the delivered through DTC redeeming beneficial Transfer Agent. to the Custodian. owner. Order received 2:00 p.m. after 3:00 p.m. will be treated as Cash Component, if any, standard orders. 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 the 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 foreign tax consequences. - 48 - 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. Each Fund intends to qualify annually and to elect to be treated as a regulated investment company 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, or no income derived from interests in certain publicly traded partnerships; (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, or the securities of one or more of certain publicly traded partnerships; 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 - 49 - ordinary income and capital gains for previous years that were not distributed during those years. In order to prevent application of the excise tax, the Funds intend 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 the 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. The Funds 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 - 50 - 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 the Funds, 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 - 51 - 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. INVESTMENTS IN CERTAIN FOREIGN CORPORATIONS If a Fund holds an equity interest in any "passive foreign investment companies" ("PFICs"), which are generally certain foreign corporations that receive at least 75% of their annual gross income from passive sources (such as interest, dividends, certain rents and royalties or capital gains) or that hold at least 50% of their assets in investments producing such passive income, the Fund could be subject to U.S. federal income tax and additional interest charges on gains and certain distributions with respect to those equity interests, even if all the income or gain is timely distributed to its Unitholders. A Fund will not be able to pass through to its Unitholders any credit or deduction for such taxes. A Fund may be able to make an election that could ameliorate these adverse tax consequences. In this case, the Fund would recognize as ordinary income any increase in the value of such PFIC shares, and as ordinary loss any decrease in such value to the extent it did not exceed prior increases included in income. Under this election, a Fund might be required to recognize in a year income in excess of its distributions from PFICs and its proceeds from dispositions of PFIC stock during that year, and such income would nevertheless be subject to the distribution requirement and would be taken into account for purposes of the 4% excise tax (described above). Dividends paid by PFICs will not be treated as qualified dividend income. 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. - 52 - 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 a 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 - 53 - 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. 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. Under normal circumstances, daily calculation of the NAV will utilize the last closing price of each security held by a Fund at the close of the market on which such security is principally listed. In determining NAV, portfolio securities for a Fund for which accurate market quotations are readily available will be valued by the 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 NASDAQ. 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. - 54 - (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. 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 - 55 - 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." 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. - 56 - 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. FINANCIAL STATEMENTS The audited financial statements and notes thereto for the Funds, contained in the Annual Report to Shareholders dated July 31, 2007, are incorporated by reference into this Statement of Additional Information and have been audited by Deloitte & Touche LLP, independent registered public accounting firm, whose report also appears in the Annual Report and is also incorporated by reference herein. No other parts of the Annual Report are incorporated by reference herein. The Annual Report is attached to this Statement of Additional Information. - 57 - - -------------------------------------------------------------------------------- FIRST TRUST EXCHANGE-TRADED ALPHADEX(TM) FUND ANNUAL REPORT JULY 31, 2007 - -------------------------------------------------------------------------------- SECTOR SERIES 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/Producer Durables AlphaDEX(TM) Fund First Trust Materials AlphaDEX(TM) Fund First Trust Technology AlphaDEX(TM) Fund First Trust Utilities AlphaDEX(TM) Fund CORE 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 STYLE SERIES First Trust Large Cap Value Opportunities AlphaDEX(TM) Fund First Trust Large Cap Growth Opportunities AlphaDEX(TM) Fund MULTI CAP SERIES First Trust Multi Cap Value AlphaDEX(TM) Fund First Trust Multi Cap Growth AlphaDEX(TM) Fund [LOGO OMITTED] AlphaDEX (TM) Family of ETFs AlphaDEX(TM) is a trademartk of First Trust Portfolios L.P. - -------------------------------------------------------------------------------- Front Cover - -------------------------------------------------------------------------------- Table of Contents - -------------------------------------------------------------------------------- FIRST TRUST EXCHANGE-TRADED ALPHADEX(TM) FUND JULY 31, 2007 Shareholder Letter...................................................... 2 Market Overview......................................................... 3 Fund Performance Overview First Trust Consumer Discretionary AlphaDEX(TM) Fund.............. 4 First Trust Consumer Staples AlphaDEX(TM) Fund.................... 6 First Trust Energy AlphaDEX(TM) Fund.............................. 8 First Trust Financials AlphaDEX(TM) Fund.......................... 10 First Trust Health Care AlphaDEX(TM) Fund......................... 12 First Trust Industrials/Producer Durables AlphaDEX(TM) Fund....... 14 First Trust Materials AlphaDEX(TM) Fund........................... 16 First Trust Technology AlphaDEX(TM) Fund.......................... 18 First Trust Utilities AlphaDEX(TM) Fund........................... 20 First Trust Large Cap Core AlphaDEX(TM) Fund...................... 22 First Trust Mid Cap Core AlphaDEX(TM) Fund........................ 24 First Trust Small Cap Core AlphaDEX(TM) Fund...................... 26 First Trust Large Cap Value Opportunities AlphaDEX(TM) Fund....... 28 First Trust Large Cap Growth Opportunities AlphaDEX(TM) Fund...... 30 First Trust Multi Cap Value AlphaDEX(TM) Fund..................... 32 First Trust Multi Cap Growth AlphaDEX(TM) Fund.................... 34 Notes to Fund Performance Overview...................................... 36 Understanding Your Fund Expenses........................................ 37 Portfolio of Investments First Trust Consumer Discretionary AlphaDEX(TM) Fund.............. 39 First Trust Consumer Staples AlphaDEX(TM) Fund.................... 41 First Trust Energy AlphaDEX(TM) Fund.............................. 42 First Trust Financials AlphaDEX(TM) Fund.......................... 43 First Trust Health Care AlphaDEX(TM) Fund......................... 46 First Trust Industrials/Producer Durables AlphaDEX(TM) Fund....... 47 First Trust Materials AlphaDEX(TM) Fund........................... 48 First Trust Technology AlphaDEX(TM) Fund.......................... 49 First Trust Utilities AlphaDEX(TM) Fund........................... 51 First Trust Large Cap Core AlphaDEX(TM) Fund...................... 52 First Trust Mid Cap Core AlphaDEX(TM) Fund........................ 58 First Trust Small Cap Core AlphaDEX(TM) Fund...................... 63 First Trust Large Cap Value Opportunities AlphaDEX(TM) Fund....... 70 First Trust Large Cap Growth Opportunities AlphaDEX(TM) Fund...... 74 First Trust Multi Cap Value AlphaDEX(TM) Fund..................... 78 First Trust Multi Cap Growth AlphaDEX(TM) Fund.................... 86 Statements of Assets and Liabilities.................................... 94 Statements of Operations................................................ 98 Statements of Changes in Net Assets..................................... 102 Financial Highlights.................................................... 106 Notes to Financial Statements........................................... 114 Report of Independent Registered Public Accounting Firm................. 121 Additional Information.................................................. 122 Board of Trustees and Officers.......................................... 125 Risk Considerations..................................................... 127 CAUTION REGARDING FORWARD-LOOKING STATEMENTS This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933. Forward-looking statements include statements regarding the goals, beliefs, plans or current expectations of First Trust Advisors L.P. (the "Advisor") and its representatives, taking into account the information currently available to them. Forward-looking statements include all statements that do not relate solely to current or historical fact. For example, forward-looking statements include the use of words such as "anticipate," "estimate," "intend," "expect," "believe," "plan," "may," "should," "would" or other words that convey uncertainty of future events or outcomes. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of First Trust Exchange-Traded AlphaDEX(TM) Fund (the "Trust") to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. When evaluating the information included in this report, you are cautioned not to place undue reliance on these forward-looking statements, which reflect the judgment of the Advisor and its representatives only as of the date hereof. We undertake no obligation to publicly revise or update these forward-looking statements to reflect events and circumstances that arise after the date hereof. PERFORMANCE AND RISK DISCLOSURE There is no assurance that any Fund (individually called a "Fund" and collectively, the "Funds") of the Trust will achieve its investment objective. Each Fund of the Trust is subject to market risk, which is the possibility that the market values of securities owned by the Fund will decline and that the value of the Fund shares may therefore be less than what you paid for them. Accordingly, you can lose money investing in a Fund. Performance data quoted represents past performance, which is no guarantee of future results, and current performance may be lower or higher than the figures shown. For the most recent month-end performance figures, please visit http://www.ftportfolios.com or speak with your financial advisor. Investment returns, net asset value and market price will fluctuate and Fund shares may be worth more or less than their original cost. HOW TO READ THIS REPORT This report contains information that may help you evaluate your investment. It includes details about the portfolios and presents data and analysis that provide insight into each Fund's performance and investment approach. By reading the letter from the President of the Trust, James A. Bowen, together with the portfolio commentary by Robert F. Carey, Chief Investment Officer of the Advisor, you may obtain an understanding of how the market environment affected the performance of each Fund. The statistical information that follows may help you understand each Fund's performance compared to that of relevant market benchmarks. It is important to keep in mind that the opinions expressed by Mr. Bowen and Mr. Carey are just that: informed opinions. They should not be considered to be promises or advice. The opinions, like the statistics, cover the period through the date on the cover of this report. Of course, the risks of investing in each Fund are spelled out in its prospectus. Page 1 - -------------------------------------------------------------------------------- Shareholder Letter - -------------------------------------------------------------------------------- FIRST TRUST EXCHANGE-TRADED ALPHADEX(TM) FUND ANNUAL REPORT FOR THE PERIOD MAY 8, 2007 (INCEPTION DATE) TO JULY 31, 2007 Dear Shareholders: We believe investment opportunities abound, both here and abroad, affording the potential for exceptional returns for investors. At First Trust Advisors L.P. ("First Trust"), we realize that we must be mindful of the complexities of the global economy and at the same time address the needs of our customers through the types of investments we bring to market. First Trust is single-minded about providing a range of investment products, including our family of exchange-traded funds ("ETFs"), to help us meet the challenge of maximizing our customers' financial opportunities. Translating investment ideas into products which can deliver performance over the long-term while continuing to support our current product line remains a focus for First Trust as we head into the future. Over the past 12 months, we have added 25 ETFs to our family of funds, including 16 AlphaDEX(TM) exchange-traded funds, one or more of which you have purchased. The AlphaDEX(TM) exchange-traded funds are designed to track the performance of a group of custom "enhanced" indices created by Standard & Poor's or the American Stock Exchange LLC. We are proud to bring these unique investments to our customers, and are pleased you have chosen the AlphaDEX(TM) exchange-traded fund(s) for a portion of your investment portfolio. The report you hold will give you detailed information about each fund in the First Trust Exchange-Traded AlphaDEX(TM) Fund for the period from May 8, 2007 (inception date) to July 31, 2007. I encourage you to read this report and discuss it with your financial advisor. First Trust will continue to offer you current information about your investment, as well as new opportunities in the financial marketplace, through your financial advisor. We value our relationship with you and appreciate the opportunity to assist you in achieving your financial goals. Sincerely, /s/ James A. Bowen James A. Bowen President of First Trust Exchange-Traded AlphaDEX(TM) Fund September 14, 2007 Page 2 - -------------------------------------------------------------------------------- Market Overview - -------------------------------------------------------------------------------- FIRST TRUST EXCHANGE-TRADED ALPHADEX(TM) FUND ANNUAL REPORT FOR THE PERIOD MAY 8, 2007 TO JULY 31, 2007 [PHOTO OMITTED] ROBERT F. CAREY, CFA SENIOR VICE PRESIDENT AND CHIEF INVESTMENT OFFICER FIRST TRUST ADVISORS L.P. Mr. Carey is responsible for the overall management of research and analysis of the First Trust product line. Mr. Carey has 21 years of experience as an Equity and Fixed-Income Analyst and is a recipient of the Chartered Financial Analyst ("CFA") designation. He is a graduate of the University of Illinois at Champaign-Urbana with a B.S. in Physics. He is also a member of the Investment Analysts Society of Chicago and the CFA Institute. Mr. Carey has appeared as a guest on such programs as Bloomberg TV, CNBC, and WBBM Radio, and has been quoted by several publications, including The Wall Street Journal, The Wall Street Reporter, Bloomberg News Service, and Registered Rep. MARKET OVERVIEW. The equities markets were mixed in the first seven months of 2007. The S&P 500 Index posted a total return of 3.64%, while the S&P MidCap 400 Index and Russell 2000 Index of small-caps returned 7.15% and -0.83%, respectively. According to Ibbotson Associates, the S&P 500 Index averaged 10.42% a year from 1926 through 2006, while small-cap stocks averaged 12.69%. Both large- and small-caps are lagging their historical pace as of July. Mid-cap issues continue to be the sweet spot of the market. We believe mid-caps are outperforming their two counterparts because their size makes them attractive to private equity firms and others looking to make acquisitions. Private equity firms, in particular, are well-capitalized so small companies are not big enough to meet the needs of such firms, while most large companies are out of reach. With interest rates still at relatively low levels, we believe merger and acquisition activity will remain strong through at least the end of this year. With respect to fixed-income securities, the Lehman Brothers U.S. Treasury: Intermediate Index posted a total return of 4.48% in the first seven months of 2007. From 1926 through 2006, Treasury bonds returned 5.42%, on average, according to Ibbotson Associates. At this juncture they are on pace to achieve or top their average. Treasury securities, in our opinion, have benefited from a flight to quality inspired by heavy selling in speculative-grade debt in July. The Federal Reserve Board (the "Fed") has held the federal funds rate at 5.25% over the past 12 months. The Fed has been monitoring the weakness in the housing market and weighing its influence against the overall strength of the economy. Its primary concern is curbing inflation, which is still tracking above its 2.0% ceiling. The Fed also has a new concern on its hands: sub-prime mortgages. A high percentage of sub-prime mortgages written in recent years were adjustable-rate. Unfortunately, some of these homeowners will not be able to afford their homes once these mortgages reset higher over the next 6-12 months. In fact, foreclosures were already 93% higher in July 2007 versus the same period a year ago, according to RealtyTrac. As of June, the Fed did not believe the sub-prime fallout would derail the current economic expansion, according to Fed Chairman Ben Bernanke. Despite the good showing by government bonds in 2007, we still favor equities over debt in the current climate. The outlook for large-cap stocks is more optimistic than for mid- and small-cap stocks at this stage of the economic cycle, in our opinion. Mid- and small-caps have dominated their larger counterparts since the start of this decade. From December 31, 1999 through July 31, 2007, the S&P 500 Index posted a cumulative total return of 12.07%, which paled in comparison to the 109.80% gain posted by the S&P Midcap 400 Index and the 69.82% gain posted by the Russell 2000 Index. The primary reason for the anticipated shift in sentiment is the tempering of economic growth due to weakness in the housing market and fallout from sub-prime mortgages. The Blue Chip Economic Consensus Forecast out in July called for 2.1% GDP growth in 2007, well below last year's 3.3% growth rate and the 3.9% growth registered in 2004. Page 3 - -------------------------------------------------------------------------------- Fund Performance Overview - -------------------------------------------------------------------------------- FXD - FIRST TRUST CONSUMER DISCRETIONARY ALPHADEX(TM) FUND The First Trust Consumer Discretionary AlphaDEX(TM) Fund (the "Fund") seeks investment results that correspond generally to the price and yield (before the Fund's fees and expenses) of an equity index called the StrataQuant(TM) Consumer Discretionary Index (the "Consumer Discretionary Index"). The Fund will normally invest at least 90% of its total assets in common stocks that comprise the Consumer Discretionary Index. The Shares of the Fund are listed and trade on the American Stock Exchange LLC (the "AMEX") under the ticker symbol "FXD." The Fund began trading on May 10, 2007. 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 generate positive alpha relative to traditional passive style indices through the use of the AlphaDEX(TM) screening methodology. Alpha is an indication of how much an investment outperforms or underperforms on a risk-adjusted basis relative to its benchmark (Russell 1000(R) Consumer Discretionary and Services Index). - -------------------------------------------------------------------------------- Performance as of July 31, 2007 Since Fund Inception (May 8, 2007) FUND PERFORMANCE NAV -5.85% Market Price -5.80% INDEX PERFORMANCE Russell 1000(R) Index -3.26% StrataQuant(TM) Consumer Discretionary Index -5.61% Russell 1000(R) Consumer Discretionary and Services Index -4.94% - -------------------------------------------------------------------------------- (See Notes to Fund Performance Overview on page 36.) FUND RECAP. Since Fund inception (May 8, 2007), the Fund has posted an NAV total return of -5.85%, slightly underperforming the Russell 1000(R) Consumer Discretionary and Services Index return of -4.94%. Fund performance was hurt by retail stocks which came under pressure during the period as questions about the sustainability of economic growth were raised. The top three performing stocks in the Fund over the period ended July 31, 2007, by contribution to return, were Crocs, Inc., Hilton Hotels Corp. and Amazon.com, Inc. The worst-performing stocks, by percentage loss, were Foot Locker, Inc., Convergys Corp. and RadioShack Corp. PORTFOLIO SECTOR ALLOCATION AS OF JULY 31, 2007 SECTOR % OF NET ASSETS Consumer Discretionary 79.76% Industrials 10.25 Information Technology 6.98 Consumer Staples 3.85 Materials 0.50 Net Other Assets and Liabilities (1.34) ------ Total 100.00% ====== TOP TEN PORTFOLIO HOLDINGS AS OF JULY 31, 2007 SECURITY % OF NET ASSETS Crocs, Inc. 1.81% Amazon.com, Inc. 1.50 aQuantive, Inc. 1.36 GameStop Corp., Class A 1.35 Liberty Global, Inc., Class A 1.34 CDW Corp. 1.30 Guess?, Inc. 1.29 McClatchy (The) Co., Class A 1.26 Penn National Gaming Inc. 1.25 Liz Claiborne, Inc. 1.23 ----- Total 13.69% ===== - ---------- The StrataQuant(TM) Consumer Discretionary Index is a trademark of the AMEX and has been licensed for use by First Trust Portfolios L.P. The First Trust Consumer Discretionary AlphaDEX(TM) Fund is not sponsored, endorsed, sold or promoted by the AMEX and the AMEX makes no representation or warranty regarding the advisability of investing in the Fund or as to the result to be obtained by any person from use of the StrataQuant(TM) Consumer Discretionary Index in connection with the trading of the Fund. Page 4 - -------------------------------------------------------------------------------- Fund Performance Overview (Continued) - -------------------------------------------------------------------------------- FXD - FIRST TRUST CONSUMER DISCRETIONARY ALPHADEX(TM) FUND (CONTINUED) Growth of a $10,000 Initial Investment May 8, 2007 - July 31, 2007 [GRAPHIC OMITTED] EDGARIZATION OF DATA POINTS
- --------------------------------------------------------------------------------------------------------------------- First Trust StrataQuant(TM) Consumer Discretionary Consumer Russell 1000(R) Russell 1000(R) Consumer AlphaDEX(TM) Fund Discretionary Index Index Discretionary and Services Index - --------------------------------------------------------------------------------------------------------------------- 5/8/2007 $10,000 $10,000 $10,000 $10,000 7/31/2007 $ 9,415 $ 9,439 $ 9,674 $ 9,506
Performance figures assume reinvestment of all dividend distributions and do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. An index is a statistical composite that tracks a specified financial market or sector. Unlike the Fund, the indices do not actually hold a portfolio of securities and therefore do not incur the expenses incurred by the Fund. These expenses negatively impact the performance of the Fund. The Fund's past performance is no guarantee of future results. FREQUENCY DISTRIBUTION OF DISCOUNTS AND PREMIUMS BID/ASK MIDPOINT VS. NAV AS OF JULY 31, 2007 The following Frequency Distribution of Discounts and Premiums charts are provided to show the frequency at which the bid/ask midpoint price for the Fund was at a discount or premium to the daily NAV. The following tables are for comparative purposes only and represent the period May 10, 2007 (commencement of trading) through July 31, 2007.
NUMBER OF DAYS BID/ASK MIDPOINT AT/ABOVE NAV FOR THE PERIOD 0-49 BASIS POINTS 50-99 BASIS POINTS 100-199 BASIS POINTS >= 200 BASIS POINTS 5/10/07 - 7/31/07 15 0 0 0 NUMBER OF DAYS BID/ASK MIDPOINT BELOW NAV FOR THE PERIOD 0-49 BASIS POINTS 50-99 BASIS POINTS 100-199 BASIS POINTS >= 200 BASIS POINTS 5/10/07 - 7/31/07 42 0 0 0
Page 5 - -------------------------------------------------------------------------------- Fund Performance Overview (Continued) - -------------------------------------------------------------------------------- FXG - FIRST TRUST CONSUMER STAPLES ALPHADEX(TM) FUND The First Trust Consumer Staples AlphaDEX(TM) Fund (the "Fund") seeks investment results that correspond generally to the price and yield (before the Fund's fees and expenses) of an equity index called the StrataQuant(TM) Consumer Staples Index (the "Consumer Staples Index"). The Fund will normally invest at least 90% of its total assets in common stocks that comprise the Consumer Staples Index. The Shares of the Fund are listed and trade on the AMEX under the ticker symbol "FXG." The Fund began trading on May 10, 2007. 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 generate positive alpha relative to traditional passive style indices through the use of the AlphaDEX(TM) screening methodology. Alpha is an indication of how much an investment outperforms or underperforms on a risk-adjusted basis relative to its benchmark (Russell 1000(R) Consumer Staples Index). - -------------------------------------------------------------------------------- Performance as of July 31, 2007 Since Fund Inception (May 8, 2007) FUND PERFORMANCE NAV -4.45% Market Price -4.45% INDEX PERFORMANCE Russell 1000(R) Index -3.26% StrataQuant(TM) Consumer Staples Index -4.26% Russell 1000(R) Consumer Staples Index -2.20% - -------------------------------------------------------------------------------- (See Notes to Fund Performance Overview on page 36.) FUND RECAP. Since Fund inception (May 8, 2007), the Fund has posted an NAV total return of -4.45%, underperforming the Russell 1000(R) Consumer Staples Index return of -2.20%. Beverage companies performed well over the period, leading Fund performance. Performance was hurt by the Fund's grocery and drug retailers whose performance trailed the benchmark. The top three performing stocks in the Fund over the period ended July 31, 2007, by contribution to return, were PepsiAmericas, Inc., Hansen Natural Corp. and Wm. Wrigley Jr. Co. The worst-performing stocks, by percentage loss, were Rite Aid Corp., Dean Foods Co. and SUPERVALU, Inc. PORTFOLIO SECTOR ALLOCATION AS OF JULY 31, 2007 SECTOR % OF NET ASSETS Consumer Staples 100.81% Net Other Assets and Liabilities (0.81) ------ Total 100.00% ====== TOP TEN PORTFOLIO HOLDINGS AS OF JULY 31, 2007 SECURITY % OF NET ASSETS PepsiAmericas, Inc. 6.60% Molson Coors Brewing Co., Class B 5.64 Safeway, Inc. 5.49 Dean Foods Co. 5.29 SUPERVALU, Inc. 5.27 Rite Aid Corp. 5.06 Smithfield Foods, Inc. 4.73 Loews Corp. - Carolina Group 4.60 Del Monte Foods Co. 4.47 Kroger (The) Co. 4.33 ----- Total 51.48% ===== - ---------- The StrataQuant(TM) Consumer Staples Index is a trademark of the AMEX and has been licensed for use by First Trust Portfolios L.P. The First Trust Consumer Staples AlphaDEX(TM) Fund is not sponsored, endorsed, sold or promoted by the AMEX and the AMEX makes no representation or warranty regarding the advisability of investing in the Fund or as to the result to be obtained by any person from use of the StrataQuant(TM) Consumer Staples Index in connection with the trading of the Fund. Page 6 - -------------------------------------------------------------------------------- Fund Performance Overview (Continued) - -------------------------------------------------------------------------------- FXG - FIRST TRUST CONSUMER STAPLES ALPHADEX(TM) FUND (CONTINUED) Growth of a $10,000 Initial Investment May 8, 2007 - July 31, 2007 [GRAPHIC OMITTED] EDGARIZATION OF DATA POINTS
- ------------------------------------------------------------------------------------------------------------------- First Trust StrataQuant(TM) Consumer Staples Consumer Russell 1000(R) Russell 1000(R) Consumer AlphaDEX(TM) Fund Staples Index Index Staples Index - ------------------------------------------------------------------------------------------------------------------- 5/8/2007 $10,000 $10,000 $10,000 $10,000 7/31/2007 $ 9,555 $ 9,574 $ 9,674 $ 9,780
Performance figures assume reinvestment of all dividend distributions and do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. An index is a statistical composite that tracks a specified financial market or sector. Unlike the Fund, the indices do not actually hold a portfolio of securities and therefore do not incur the expenses incurred by the Fund. These expenses negatively impact the performance of the Fund. The Fund's past performance is no guarantee of future results. FREQUENCY DISTRIBUTION OF DISCOUNTS AND PREMIUMS BID/ASK MIDPOINT VS. NAV AS OF JULY 31, 2007 The following Frequency Distribution of Discounts and Premiums charts are provided to show the frequency at which the bid/ask midpoint price for the Fund was at a discount or premium to the daily NAV. The following tables are for comparative purposes only and represent the period May 10, 2007 (commencement of trading) through July 31, 2007.
NUMBER OF DAYS BID/ASK MIDPOINT AT/ABOVE NAV FOR THE PERIOD 0-49 BASIS POINTS 50-99 BASIS POINTS 100-199 BASIS POINTS >= 200 BASIS POINTS 5/10/07 - 7/31/07 27 0 1 0 NUMBER OF DAYS BID/ASK MIDPOINT BELOW NAV FOR THE PERIOD 0-49 BASIS POINTS 50-99 BASIS POINTS 100-199 BASIS POINTS >= 200 BASIS POINTS 5/10/07 - 7/31/07 29 0 0 0
Page 7 - -------------------------------------------------------------------------------- Fund Performance Overview (Continued) - -------------------------------------------------------------------------------- FXN - FIRST TRUST ENERGY ALPHADEX(TM) FUND The First Trust Energy AlphaDEX(TM) Fund (the "Fund") seeks investment results that correspond generally to the price and yield (before the Fund's fees and expenses) of an equity index called the StrataQuant(TM) Energy Index (the "Energy Index"). The Fund will normally invest at least 90% of its total assets in common stocks that comprise the Energy Index. The Shares of the Fund are listed and trade on the AMEX under the ticker symbol "FXN." The Fund began trading on May 10, 2007. 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 generate positive alpha relative to traditional passive style indices through the use of the AlphaDEX(TM) screening methodology. Alpha is an indication of how much an investment outperforms or underperforms on a risk-adjusted basis relative to its benchmark (Russell 1000(R) Integrated Oils Index and Russell 1000(R) Other Energy Index). - -------------------------------------------------------------------------------- Performance as of July 31, 2007 Since Fund Inception (May 8, 2007) FUND PERFORMANCE NAV 3.70% Market Price 3.75% INDEX PERFORMANCE Russell 1000(R) Index -3.26% StrataQuant(TM) Energy Index 3.87% Russell 1000(R) Integrated Oils Index 7.37% Russell 1000(R) Other Energy Index 4.00% - -------------------------------------------------------------------------------- (See Notes to Fund Performance Overview on page 36.) FUND RECAP. Since Fund inception (May 8, 2007), the Fund has posted an NAV total return of 3.70%, trailing both the Russell 1000(R) Integrated Oils Index (7.37% return) and the Russell 1000(R) Other Energy Index (4.00% return). Strong performance of the Fund's energy services components was unable to make up for the relative underperformance of the Fund's energy production components. The top three performing stocks in the Fund over the period ended July 31, 2007, by contribution to return, were National Oilwell Varco, Inc., Global Industries Ltd. and ConocoPhillips. The worst-performing stocks, by percentage loss, were Plains Exploration & Production Co., Western Refining, Inc. and Patterson-UTI Energy, Inc. TOP TEN PORTFOLIO HOLDINGS AS OF JULY 31, 2007 SECTOR % OF NET ASSETS Energy 98.12% Utilities 2.37 Net Other Assets and Liabilities (0.49) ------ Total 100.00% ====== TOP TEN PORTFOLIO HOLDINGS AS OF JULY 31, 2007 SECURITY % OF NET ASSETS ConocoPhillips 3.29% Continental Resources, Inc. 3.14 Global Industries Ltd. 3.08 Cimarex Energy Co. 3.06 Western Refining, Inc. 3.06 National Oilwell Varco, Inc. 2.94 Helmerich & Payne, Inc. 2.92 Holly Corp. 2.90 Valero Energy Corp. 2.90 Plains Exploration & Production Co. 2.88 ----- Total 30.17% ===== - ---------- The StrataQuant(TM) Energy Index is a trademark of the AMEX and has been licensed for use by First Trust Portfolios L.P. The First Trust Energy AlphaDEX(TM) Fund is not sponsored, endorsed, sold or promoted by the AMEX and the AMEX makes no representation or warranty regarding the advisability of investing in the Fund or as to the result to be obtained by any person from use of the StrataQuant(TM) Energy Index in connection with the trading of the Fund. Page 8 - -------------------------------------------------------------------------------- Fund Performance Overview (Continued) - -------------------------------------------------------------------------------- FXN - FIRST TRUST ENERGY ALPHADEX(TM) FUND (CONTINUED) Growth of a $10,000 Initial Investment May 8, 2007 - July 31, 2007 [GRAPHIC OMITTED] EDGARIZATION OF DATA POINTS
- --------------------------------------------------------------------------------------------------------------- First Trust StrataQuant(TM) Russell 1000(R) Russell 1000(R) Energy Energy Russell 1000(R) Integrated Oils Other Energy AlphaDEX(TM) Fund Index Index Index Index - --------------------------------------------------------------------------------------------------------------- 5/8/2007 $10,000 $10,000 $10,000 $10,000 $10,000 7/31/2007 $10,370 $10,387 $ 9,674 $10,737 $10,400
Performance figures assume reinvestment of all dividend distributions and do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. An index is a statistical composite that tracks a specified financial market or sector. Unlike the Fund, the indices do not actually hold a portfolio of securities and therefore do not incur the expenses incurred by the Fund. These expenses negatively impact the performance of the Fund. The Fund's past performance is no guarantee of future results. FREQUENCY DISTRIBUTION OF DISCOUNTS AND PREMIUMS BID/ASK MIDPOINT VS. NAV AS OF JULY 31, 2007 The following Frequency Distribution of Discounts and Premiums charts are provided to show the frequency at which the bid/ask midpoint price for the Fund was at a discount or premium to the daily NAV. The following tables are for comparative purposes only and represent the period May 10, 2007 (commencement of trading) through July 31, 2007.
NUMBER OF DAYS BID/ASK MIDPOINT AT/ABOVE NAV FOR THE PERIOD 0-49 BASIS POINTS 50-99 BASIS POINTS 100-199 BASIS POINTS >= 200 BASIS POINTS 5/10/07 - 7/31/07 27 1 0 0 NUMBER OF DAYS BID/ASK MIDPOINT BELOW NAV FOR THE PERIOD 0-49 BASIS POINTS 50-99 BASIS POINTS 100-199 BASIS POINTS >= 200 BASIS POINTS 5/10/07 - 7/31/07 29 0 0 0
Page 9 - -------------------------------------------------------------------------------- Fund Performance Overview (Continued) - -------------------------------------------------------------------------------- FXO - FIRST TRUST FINANCIALS ALPHADEX(TM) FUND The First Trust Financials AlphaDEX(TM) Fund (the "Fund") seeks investment results that correspond generally to the price and yield (before the Fund's fees and expenses) of an equity index called the StrataQuant(TM) Financials Index (the "Financials Index"). The Fund will normally invest at least 90% of its total assets in common stocks that comprise the Financials Index. The Shares of the Fund are listed and trade on the AMEX under the ticker symbol "FXO." The Fund began trading on May 10, 2007. 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 generate positive alpha relative to traditional passive style indices through the use of the AlphaDEX(TM) screening methodology. Alpha is an indication of how much an investment outperforms or underperforms on a risk-adjusted basis relative to its benchmark (Russell 1000(R) Financial Services Index). - -------------------------------------------------------------------------------- Performance as of July 31, 2007 Since Fund Inception (May 8, 2007) FUND PERFORMANCE NAV -10.45% Market Price -10.35% INDEX PERFORMANCE StrataQuant(TM) Financials Index -10.14% Russell 1000(R) Index -3.26% Russell 1000(R) Financial Services Index -10.82% - -------------------------------------------------------------------------------- (See Notes to Fund Performance Overview on page 36.) FUND RECAP. Since Fund inception (May 8, 2007), the Fund has posted an NAV total return of -10.45%, outperforming the Russell 1000(R) Financial Services Index return of -10.82%. Fund performance, relative to the broader market (Russell 1000(R) Index), was hurt by sub-prime mortgage concerns which roiled global credit markets toward the end of the period. The top three performing stocks in the Fund over the period ended July 31, 2007, by contribution to return, were Alliance Data Systems Corp., CBOT Holdings, Class A and Alleghany Corp. The worst-performing stocks, by percentage loss, were Radian Group, Inc., MGIC Investment Corp. and PMI Group (The), Inc. PORTFOLIO SECTOR ALLOCATION AS OF JULY 31, 2007 SECTOR % OF NET ASSETS Financials 88.65% Information Technology 6.56 Industrials 4.10 Consumer Discretionary 1.13 Health Care 0.87 Net Other Assets and Liabilities (1.31) ------ Total 100.00% ====== TOP TEN PORTFOLIO HOLDINGS AS OF JULY 31, 2007 SECURITY % OF NET ASSETS IntercontinentalExchange, Inc. 1.16% Ryder System, Inc. 1.14 Dow Jones & Co., Inc. 1.13 Alliance Data Systems Corp. 1.12 United Rental, Inc. 1.12 TFS Financial Corp. 1.11 Jones Lang LaSalle, Inc. 1.10 MasterCard, Inc., Class A 1.10 Arch Capital Group Ltd. 1.09 A.G. Edwards, Inc. 1.08 ----- Total 11.15% ===== - ---------- The StrataQuant(TM) Financials Index is a trademark of the AMEX and has been licensed for use by First Trust Portfolios L.P. The First Trust Financials AlphaDEX(TM) Fund is not sponsored, endorsed, sold or promoted by the AMEX and the AMEX makes no representation or warranty regarding the advisability of investing in the Fund or as to the result to be obtained by any person from use of the StrataQuant(TM) Financials Index in connection with the trading of the Fund. Page 10 - -------------------------------------------------------------------------------- Fund Performance Overview (Continued) - -------------------------------------------------------------------------------- FXO - FIRST TRUST FINANCIALS ALPHADEX(TM) FUND (CONTINUED) Growth of a $10,000 Initial Investment May 8, 2007 - July 31, 2007 [GRAPHIC OMITTED] EDGARIZATION OF DATA POINTS
- ------------------------------------------------------------------------------------------------------------------- First Trust StrataQuant(TM) Financials Financials Russell 1000(R) Russell 1000(R) AlphaDEX(TM) Fund Index Index Financial Services Index - ------------------------------------------------------------------------------------------------------------------- 5/8/2007 $10,000 $10,000 $10,000 $10,000 7/31/2007 $ 8,955 $ 8,986 $ 9,674 $ 8,918
Performance figures assume reinvestment of all dividend distributions and do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. An index is a statistical composite that tracks a specified financial market or sector. Unlike the Fund, the indices do not actually hold a portfolio of securities and therefore do not incur the expenses incurred by the Fund. These expenses negatively impact the performance of the Fund. The Fund's past performance is no guarantee of future results. FREQUENCY DISTRIBUTION OF DISCOUNTS AND PREMIUMS BID/ASK MIDPOINT VS. NAV AS OF JULY 31, 2007 The following Frequency Distribution of Discounts and Premiums charts are provided to show the frequency at which the bid/ask midpoint price for the Fund was at a discount or premium to the daily NAV. The following tables are for comparative purposes only and represent the period May 10, 2007 (commencement of trading) through July 31, 2007.
NUMBER OF DAYS BID/ASK MIDPOINT AT/ABOVE NAV FOR THE PERIOD 0-49 BASIS POINTS 50-99 BASIS POINTS 100-199 BASIS POINTS >= 200 BASIS POINTS 5/10/07 - 7/31/07 19 0 0 0 NUMBER OF DAYS BID/ASK MIDPOINT BELOW NAV FOR THE PERIOD 0-49 BASIS POINTS 50-99 BASIS POINTS 100-199 BASIS POINTS >= 200 BASIS POINTS 5/10/07 - 7/31/07 38 0 0 0
Page 11 - -------------------------------------------------------------------------------- Fund Performance Overview (Continued) - -------------------------------------------------------------------------------- FXH - FIRST TRUST HEALTH CARE ALPHADEX(TM) FUND The First Trust Health Care AlphaDEX(TM) Fund (the "Fund") seeks investment results that correspond generally to the price and yield (before the Fund's fees and expenses) of an equity index called the StrataQuant(TM) Health Care Index (the "Health Care Index"). The Fund will normally invest at least 90% of its total assets in common stocks that comprise the Health Care Index. The Shares of the Fund are listed and trade on the AMEX under the ticker symbol "FXH." The Fund began trading on May 10, 2007. 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 generate positive alpha relative to traditional passive style indices through the use of the AlphaDEX(TM) screening methodology. Alpha is an indication of how much an investment outperforms or underperforms on a risk-adjusted basis relative to its benchmark (Russell 1000(R) Health Care Index). - -------------------------------------------------------------------------------- Performance as of July 31, 2007 Since Fund Inception (May 8, 2007) FUND PERFORMANCE NAV -2.60% Market Price -2.50% INDEX PERFORMANCE Russell 1000(R) Index -3.26% StrataQuant(TM) Health Care Index -2.36% Russell 1000(R) Health Care Index -7.09% - -------------------------------------------------------------------------------- (See Notes to Fund Performance Overview on page 36.) FUND RECAP. Since Fund inception (May 8, 2007), the Fund has posted an NAV total return of -2.60%, outperforming the Russell 1000(R) Health Care Index return of - -7.09%. Fund performance was led by health care equipment and services firms, while performance was hurt by the Fund's pharmaceuticals and biotechnology holdings. The top three performing stocks in the Fund over the period ended July 31, 2007, by contribution to return, were Intuitive Surgical, Inc., Dade Behring Holdings, Inc. and Cytyc Corp. The worst-performing stocks, by percentage loss, were LifePoint Hospitals, Inc., ImClone Systems, Inc. and King Pharmaceuticals, Inc. PORTFOLIO SECTOR ALLOCATION AS OF JULY 31, 2007 SECTOR % OF NET ASSETS Health Care 94.57% Industrials 1.95 Consumer Staples 1.74 Net Other Assets and Liabilities 1.74 ------ Total 100.00% ====== TOP TEN PORTFOLIO HOLDINGS AS OF JULY 31, 2007 SECURITY % OF NET ASSETS Intuitive Surgical, Inc. 2.77% WellCare Health Plans, Inc. 2.71 Humana, Inc. 2.55 Dade Behring Holdings, Inc. 2.54 Medco Health Solutions, Inc. 2.52 Express Scripts, Inc. 2.42 Cytyc Corp. 2.36 Manor Care, Inc. 2.35 Schering-Plough Corp. 2.27 Watson Pharmaceuticals, Inc. 2.26 ----- Total 24.75% ===== - ---------- The StrataQuant(TM) Health Care Index is a trademark of the AMEX and has been licensed for use by First Trust Portfolios L.P. The First Trust Health Care AlphaDEX(TM) Fund is not sponsored, endorsed, sold or promoted by the AMEX and the AMEX makes no representation or warranty regarding the advisability of investing in the Fund or as to the result to be obtained by any person from use of the StrataQuant(TM) Health Care Index in connection with the trading of the Fund. Page 12 - -------------------------------------------------------------------------------- Fund Performance Overview (Continued) - -------------------------------------------------------------------------------- FXH - FIRST TRUST HEALTH CARE ALPHADEX(TM) FUND (CONTINUED) Growth of a $10,000 Initial Investment May 8, 2007 - July 31, 2007 [GRAPHIC OMITTED] EDGARIZATION OF DATA POINTS
- ------------------------------------------------------------------------------------------------------------------- First Trust StrataQuant(TM) Health Care Health Care Russell 1000(R) Russell 1000(R) AlphaDEX(TM) Fund Index Index Health Care Index - ------------------------------------------------------------------------------------------------------------------- 5/8/2007 $10,000 $10,000 $10,000 $10,000 7/31/2007 $ 9,740 $ 9,764 $ 9,674 $ 9,291
Performance figures assume reinvestment of all dividend distributions and do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. An index is a statistical composite that tracks a specified financial market or sector. Unlike the Fund, the indices do not actually hold a portfolio of securities and therefore do not incur the expenses incurred by the Fund. These expenses negatively impact the performance of the Fund. The Fund's past performance is no guarantee of future results. FREQUENCY DISTRIBUTION OF DISCOUNTS AND PREMIUMS BID/ASK MIDPOINT VS. NAV AS OF JULY 31, 2007 The following Frequency Distribution of Discounts and Premiums charts are provided to show the frequency at which the bid/ask midpoint price for the Fund was at a discount or premium to the daily NAV. The following tables are for comparative purposes only and represent the period May 10, 2007 (commencement of trading) through July 31, 2007.
NUMBER OF DAYS BID/ASK MIDPOINT AT/ABOVE NAV FOR THE PERIOD 0-49 BASIS POINTS 50-99 BASIS POINTS 100-199 BASIS POINTS >= 200 BASIS POINTS 5/10/07 - 7/31/07 27 0 0 0 NUMBER OF DAYS BID/ASK MIDPOINT BELOW NAV FOR THE PERIOD 0-49 BASIS POINTS 50-99 BASIS POINTS 100-199 BASIS POINTS >= 200 BASIS POINTS 5/10/07 - 7/31/07 30 0 0 0
Page 13 - -------------------------------------------------------------------------------- Fund Performance Overview (Continued) - -------------------------------------------------------------------------------- FXR - FIRST TRUST INDUSTRIALS/PRODUCER DURABLES ALPHADEX(TM) FUND The First Trust Industrials/Producer Durables AlphaDEX(TM) Fund (the "Fund") seeks investment results that correspond generally to the price and yield (before the Fund's fees and expenses) of an equity index called the StrataQuant(TM) Industrials Index (the "Industrials Index"). The Fund will normally invest at least 90% of its total assets in common stocks that comprise the Industrials Index. The Shares of the Fund are listed and trade on the AMEX under the ticker symbol "FXR." The Fund began trading on May 10, 2007. 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 generate positive alpha relative to traditional passive style indices through the use of the AlphaDEX(TM) screening methodology. Alpha is an indication of how much an investment outperforms or underperforms on a risk-adjusted basis relative to its benchmark (Russell 1000(R) Producer Durables Index). - -------------------------------------------------------------------------------- Performance as of July 31, 2007 Since Fund Inception (May 8, 2007) FUND PERFORMANCE NAV -5.65% Market Price -5.40% INDEX PERFORMANCE Russell 1000(R) Index -3.26% StrataQuant(TM) Industrials Index -5.43% Russell 1000(R) Producer Durables Index 2.91% - -------------------------------------------------------------------------------- (See Notes to Fund Performance Overview on page 36.) FUND RECAP. Since Fund inception (May 8, 2007), the Fund has posted an NAV total return of -5.65%, trailing the Russell 1000(R) Producer Durables Index return of 2.91%. Machinery and aerospace and defense companies were among the stronger performers in the Fund. Fund performance was hurt by an overweight position (relative to the benchmark) in homebuilders, which declined significantly over the period. The top three performing stocks in the Fund over the period ended July 31, 2007, by contribution to return, were Cummins, Inc., Varian Semiconductor Equipment Associates, Inc. and Flowserve Corp. The worst-performing stocks, by percentage loss, were Beazer Homes USA, Inc., D.R. Horton, Inc. and Toll Brothers, Inc. PORTFOLIO SECTOR ALLOCATION AS OF JULY 31, 2007 SECTOR % OF NET ASSETS Industrials 66.51% Information Technology 15.94 Consumer Discretionary 15.83 Telecommunication Services 2.00 Net Other Assets and Liabilities (0.28) ------ Total 100.00% ====== TOP TEN PORTFOLIO HOLDINGS AS OF JULY 31, 2007 SECURITY % OF NET ASSETS Cummins, Inc. 4.06% Terex Corp. 3.67 General Cable Corp. 3.63 BE Aerospace, Inc. 3.40 Manitowoc (The) Co., Inc. 3.34 Varian Semiconductor Equipment Associates, Inc. 3.25 Kennametal, Inc. 3.23 Ryland Group (The), Inc. 3.08 Toll Brothers, Inc. 3.04 NVR, Inc. 2.94 ----- Total 33.64% ===== - ---------- The StrataQuant(TM) Industrials Index is a trademark of the AMEX and has been licensed for use by First Trust Portfolios L.P. The First Trust Industrials/Producer Durables AlphaDEX(TM) Fund is not sponsored, endorsed, sold or promoted by the AMEX and the AMEX makes no representation or warranty regarding the advisability of investing in the Fund or as to the result to be obtained by any person from use of the StrataQuant(TM) Industrials Index in connection with the trading of the Fund. Page 14 - -------------------------------------------------------------------------------- Fund Performance Overview (Continued) - -------------------------------------------------------------------------------- FXR - FIRST TRUST INDUSTRIALS/PRODUCER DURABLES ALPHADEX(TM) FUND (CONTINUED) Growth of a $10,000 Initial Investment May 8, 2007 - July 31, 2007 [GRAPHIC OMITTED] EDGARIZATION OF DATA POINTS
- ------------------------------------------------------------------------------------------------------------------- First Trust Industrials/Producer StrataQuant(TM) Durables Industrials Russell 1000(R) Russell 1000(R) AlphaDEX(TM) Fund Index Index Producer Durables Index - ------------------------------------------------------------------------------------------------------------------- 5/8/2007 $10,000 $10,000 $10,000 $10,000 7/31/2007 $ 9,435 $ 9,457 $ 9,674 $10,291
Performance figures assume reinvestment of all dividend distributions and do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. An index is a statistical composite that tracks a specified financial market or sector. Unlike the Fund, the indices do not actually hold a portfolio of securities and therefore do not incur the expenses incurred by the Fund. These expenses negatively impact the performance of the Fund. The Fund's past performance is no guarantee of future results. FREQUENCY DISTRIBUTION OF DISCOUNTS AND PREMIUMS BID/ASK MIDPOINT VS. NAV AS OF JULY 31, 2007 The following Frequency Distribution of Discounts and Premiums charts are provided to show the frequency at which the bid/ask midpoint price for the Fund was at a discount or premium to the daily NAV. The following tables are for comparative purposes only and represent the period May 10, 2007 (commencement of trading) through July 31, 2007.
NUMBER OF DAYS BID/ASK MIDPOINT AT/ABOVE NAV FOR THE PERIOD 0-49 BASIS POINTS 50-99 BASIS POINTS 100-199 BASIS POINTS >= 200 BASIS POINTS 5/10/07 - 7/31/07 40 1 0 0 NUMBER OF DAYS BID/ASK MIDPOINT BELOW NAV FOR THE PERIOD 0-49 BASIS POINTS 50-99 BASIS POINTS 100-199 BASIS POINTS >= 200 BASIS POINTS 5/10/07 - 7/31/07 16 0 0 0
Page 15 - -------------------------------------------------------------------------------- Fund Performance Overview (Continued) - -------------------------------------------------------------------------------- FXZ - FIRST TRUST MATERIALS ALPHADEX(TM) FUND The First Trust Materials AlphaDEX(TM) Fund (the "Fund") seeks investment results that correspond generally to the price and yield (before the Fund's fees and expenses) of an equity index called the StrataQuant(TM) Materials Index (the "Materials Index"). The Fund will normally invest at least 90% of its total assets in common stocks that comprise the Materials Index. The Shares of the Fund are listed and trade on the AMEX under the ticker symbol "FXZ." The Fund began trading on May 10, 2007. 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 generate positive alpha relative to traditional passive style indices through the use of the AlphaDEX(TM) screening methodology. Alpha is an indication of how much an investment outperforms or underperforms on a risk-adjusted basis relative to its benchmark (Russell 1000(R) Materials and Processing Index). - -------------------------------------------------------------------------------- Performance as of July 31, 2007 Since Fund Inception (May 8, 2007) FUND PERFORMANCE NAV 0.85% Market Price 0.85% INDEX PERFORMANCE Russell 1000(R) Index -3.26% StrataQuant(TM) Materials Index 1.04% Russell 1000(R) Materials and Processing Index 1.21% - -------------------------------------------------------------------------------- (See Notes to Fund Performance Overview on page 36.) FUND RECAP. Since Fund inception (May 8, 2007), the Fund has posted an NAV total return of 0.85%, trailing the Russell 1000(R) Materials and Processing Index return of 1.21%. Construction, engineering, chemicals and containers and packaging were among the portfolio leaders. Building products and materials and paper related stocks weighed on Fund performance. The top three performing stocks in the Fund over the period ended July 31, 2007, by contribution to return, were Southern Copper Corp., Owens-Illinois, Inc. and Freeport-McMoRan Copper & Gold, Inc. The worst-performing stocks, by percentage loss, were Reliance Steel & Aluminum Co., Nucor Corp. and American Standard Cos., Inc. PORTFOLIO SECTOR ALLOCATION AS OF JULY 31, 2007 SECTOR % OF NET ASSETS Materials 65.98% Industrials 27.70 Consumer Staples 4.26 Net Other Assets and Liabilities 2.06 ------ Total 100.00% ====== TOP TEN PORTFOLIO HOLDINGS AS OF JULY 31, 2007 SECURITY % OF NET ASSETS Shaw Group (The), Inc. 3.26% Owens-Illinois, Inc. 3.24 Jacobs Engineering Group, Inc. 3.04 AK Steel Holding Corp. 3.03 McDermott International, Inc. 2.83 Celanese Corp., Series A 2.74 International Paper Co. 2.69 Reliance Steel & Aluminum Co. 2.65 Owens Corning, Inc. 2.57 Westlake Chemical Corp. 2.52 ----- Total 28.57% ===== - ---------- The StrataQuant(TM) Materials Index is a trademark of the AMEX and has been licensed for use by First Trust Portfolios L.P. The First Trust Materials AlphaDEX(TM) Fund is not sponsored, endorsed, sold or promoted by the AMEX and the AMEX makes no representation or warranty regarding the advisability of investing in the Fund or as to the result to be obtained by any person from use of the StrataQuant(TM) Materials Index in connection with the trading of the Fund. Page 16 - -------------------------------------------------------------------------------- Fund Performance Overview (Continued) - -------------------------------------------------------------------------------- FXZ - FIRST TRUST MATERIALS ALPHADEX(TM) FUND (CONTINUED) Growth of a $10,000 Initial Investment May 8, 2007 - July 31, 2007 [GRAPHIC OMITTED] EDGARIZATION OF DATA POINTS
- ------------------------------------------------------------------------------------------------------------------- First Trust StrataQuant(TM) Materials Materials Russell 1000(R) Russell 1000(R) Materials AlphaDEX(TM) Fund Index Index and Processing Index - ------------------------------------------------------------------------------------------------------------------- 5/8/2007 $10,000 $10,000 $10,000 $10,000 7/31/2007 $10,085 $10,104 $ 9,674 $10,121
Performance figures assume reinvestment of all dividend distributions and do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. An index is a statistical composite that tracks a specified financial market or sector. Unlike the Fund, the indices do not actually hold a portfolio of securities and therefore do not incur the expenses incurred by the Fund. These expenses negatively impact the performance of the Fund. The Fund's past performance is no guarantee of future results. FREQUENCY DISTRIBUTION OF DISCOUNTS AND PREMIUMS BID/ASK MIDPOINT VS. NAV AS OF JULY 31, 2007 The following Frequency Distribution of Discounts and Premiums charts are provided to show the frequency at which the bid/ask midpoint price for the Fund was at a discount or premium to the daily NAV. The following tables are for comparative purposes only and represent the period May 10, 2007 (commencement of trading) through July 31, 2007.
NUMBER OF DAYS BID/ASK MIDPOINT AT/ABOVE NAV FOR THE PERIOD 0-49 BASIS POINTS 50-99 BASIS POINTS 100-199 BASIS POINTS >= 200 BASIS POINTS 5/10/07 - 7/31/07 27 1 0 0 NUMBER OF DAYS BID/ASK MIDPOINT BELOW NAV FOR THE PERIOD 0-49 BASIS POINTS 50-99 BASIS POINTS 100-199 BASIS POINTS >= 200 BASIS POINTS 5/10/07 - 7/31/07 29 0 0 0
Page 17 - -------------------------------------------------------------------------------- Fund Performance Overview (Continued) - -------------------------------------------------------------------------------- FXL - FIRST TRUST TECHNOLOGY ALPHADEX(TM) FUND The First Trust Technology AlphaDEX(TM) Fund (the "Fund") seeks investment results that correspond generally to the price and yield (before the Fund's fees and expenses) of an equity index called the StrataQuant(TM) Technology Index (the "Technology Index"). The Fund will normally invest at least 90% of its total assets in common stocks that comprise the Technology Index. The Shares of the Fund are listed and trade on the AMEX under the ticker symbol "FXL." The Fund began trading on May 10, 2007. 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 generate positive alpha relative to traditional passive style indices through the use of the AlphaDEX(TM) screening methodology. Alpha is an indication of how much an investment outperforms or underperforms on a risk-adjusted basis relative to its benchmark (Russell 1000(R) Technology Index). - -------------------------------------------------------------------------------- Performance as of July 31, 2007 Since Fund Inception (May 8, 2007) FUND PERFORMANCE NAV 2.35% Market Price 2.25% INDEX PERFORMANCE Russell 1000(R) Index -3.26% StrataQuant(TM) Technology Index 2.52% Russell 1000(R) Technology Index 2.26% - -------------------------------------------------------------------------------- (See Notes to Fund Performance Overview on page 36.) FUND RECAP. Since Fund inception (May 8, 2007), the Fund has posted an NAV total return of 2.35%, slightly outperforming the Russell 1000(R) Technology Index return of 2.26%. Performance was led by computer and semiconductor related shares. Software and electronics held back Fund performance. The top three performing stocks in the Fund over the period ended July 31, 2007, by contribution to return, were Cree, Inc., Apple, Inc. and Avaya, Inc. The worst-performing stocks, by percentage loss, were Avnet, Inc., AVX Corp. and Vishay Intertechnology, Inc. PORTFOLIO SECTOR ALLOCATION AS OF JULY 31, 2007 SECTOR % OF NET ASSETS Information Technology 89.43% Industrials 8.23 Consumer Discretionary 2.55 Health Care 0.96 Net Other Assets and Liabilities (1.17) ------ Total 100.00% ====== TOP TEN PORTFOLIO HOLDINGS AS OF JULY 31, 2007 SECURITY % OF NET ASSETS Garmin Ltd. 2.55% SunPower Corp., Class A 2.52 NVIDIA Corp. 2.49 Western Digital Corp. 2.48 Apple, Inc. 2.43 Cypress Semiconductor Corp. 2.42 Trimble Navigation Ltd. 2.31 EMC Corp. 2.30 ADC Telecommunications, Inc. 2.30 L-3 Communications Holdings, Inc. 2.26 ----- Total 24.06% ===== - ---------- The StrataQuant(TM) Technology Index is a trademark of the AMEX and has been licensed for use by First Trust Portfolios L.P. The First Trust Technology AlphaDEX(TM) Fund is not sponsored, endorsed, sold or promoted by the AMEX and the AMEX makes no representation or warranty regarding the advisability of investing in the Fund or as to the result to be obtained by any person from use of the StrataQuant(TM) Technology Index in connection with the trading of the Fund. Page 18 - -------------------------------------------------------------------------------- Fund Performance Overview (Continued) - -------------------------------------------------------------------------------- FXL - FIRST TRUST TECHNOLOGY ALPHADEX(TM) FUND (CONTINUED) Growth of a $10,000 Initial Investment May 8, 2007 - July 31, 2007 [GRAPHIC OMITTED] EDGARIZATION OF DATA POINTS
- ------------------------------------------------------------------------------------------------------------------- First Trust StrataQuant(TM) Technology Technology Russell 1000(R) Russell 1000(R) AlphaDEX(TM) Fund Index Index Technology Index - ------------------------------------------------------------------------------------------------------------------- 5/8/2007 $10,000 $10,000 $10,000 $10,000 7/31/2007 $10,235 $10,252 $ 9,674 $10,226
Performance figures assume reinvestment of all dividend distributions and do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. An index is a statistical composite that tracks a specified financial market or sector. Unlike the Fund, the indices do not actually hold a portfolio of securities and therefore do not incur the expenses incurred by the Fund. These expenses negatively impact the performance of the Fund. The Fund's past performance is no guarantee of future results. FREQUENCY DISTRIBUTION OF DISCOUNTS AND PREMIUMS BID/ASK MIDPOINT VS. NAV AS OF JULY 31, 2007 The following Frequency Distribution of Discounts and Premiums charts are provided to show the frequency at which the bid/ask midpoint price for the Fund was at a discount or premium to the daily NAV. The following tables are for comparative purposes only and represent the period May 10, 2007 (commencement of trading) through July 31, 2007.
NUMBER OF DAYS BID/ASK MIDPOINT AT/ABOVE NAV FOR THE PERIOD 0-49 BASIS POINTS 50-99 BASIS POINTS 100-199 BASIS POINTS >= 200 BASIS POINTS 5/10/07 - 7/31/07 23 1 0 0 NUMBER OF DAYS BID/ASK MIDPOINT BELOW NAV FOR THE PERIOD 0-49 BASIS POINTS 50-99 BASIS POINTS 100-199 BASIS POINTS >= 200 BASIS POINTS 5/10/07 - 7/31/07 33 0 0 0
Page 19 - -------------------------------------------------------------------------------- Fund Performance Overview (Continued) - -------------------------------------------------------------------------------- FXU - FIRST TRUST UTILITIES ALPHADEX(TM) FUND The First Trust Utilities AlphaDEX(TM) Fund (the "Fund") seeks investment results that correspond generally to the price and yield (before the Fund's fees and expenses) of an equity index called the StrataQuant(TM) Utilities Index (the "Utilities Index"). The Fund will normally invest at least 90% of its total assets in common stocks that comprise the Utilities Index. The Shares of the Fund are listed and trade on the AMEX under the ticker symbol "FXU." The Fund began trading on May 10, 2007. 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 generate positive alpha relative to traditional passive style indices through the use of the AlphaDEX(TM) screening methodology. Alpha is an indication of how much an investment outperforms or underperforms on a risk-adjusted basis relative to its benchmark (Russell 1000(R) Utilities Index). - -------------------------------------------------------------------------------- Performance as of July 31, 2007 Since Fund Inception (May 8, 2007) FUND PERFORMANCE NAV -8.15% Market Price -8.15% INDEX PERFORMANCE Russell 1000(R) Index -3.26% StrataQuant(TM) Utilities Index -7.95% Russell 1000(R) Utilities Index -4.22% - -------------------------------------------------------------------------------- (See Notes to Fund Performance Overview on page 36.) FUND RECAP. Since Fund inception (May 8, 2007), the Fund has posted an NAV total return of -8.15%, underperforming the Russell 1000(R) Utilities Index retrun of - -4.22%. Telecommunications stocks led Fund performance while electric and gas utilities hurt Fund performance. The top three performing stocks in the Fund over the period ended July 31, 2007, by contribution to return, were United States Cellular Corp., Leap Wireless International, Inc. and Telephone and Data Systems, Inc. The worst-performing stocks, by percentage loss, were Pinnacle West Capital Corp., NiSource, Inc. and Mirant Corp. PORTFOLIO SECTOR ALLOCATION AS OF JULY 31, 2007 SECTOR % OF NET ASSETS Utilities 80.16% Telecommunication Services 17.38 Consumer Discretionary 3.11 Net Other Assets and Liabilities (0.65) ------ Total 100.00% ====== TOP TEN PORTFOLIO HOLDINGS AS OF JULY 31, 2007 SECURITY % OF NET ASSETS United States Cellular Corp. 3.39% Leap Wireless International, Inc. 3.31 Cablevision Systems Corp., Class A 3.11 Puget Energy, Inc. 3.03 Alliant Energy Corp. 3.01 Pinnacle West Capital Corp. 2.98 CenturyTel, Inc. 2.96 Atmos Energy Corp. 2.96 Duke Energy Corp. 2.95 NiSource, Inc. 2.92 ----- Total 30.62% ===== - ---------- The StrataQuant(TM) Utilities Index is a trademark of the AMEX and has been licensed for use by First Trust Portfolios L.P. The First Trust Utilities AlphaDEX(TM) Fund is not sponsored, endorsed, sold or promoted by the AMEX and the AMEX makes no representation or warranty regarding the advisability of investing in the Fund or as to the result to be obtained by any person from use of the StrataQuant(TM) Utilities Index in connection with the trading of the Fund. Page 20 - -------------------------------------------------------------------------------- Fund Performance Overview (Continued) - -------------------------------------------------------------------------------- FXU - FIRST TRUST UTILITIES ALPHADEX(TM) FUND (CONTINUED) Growth of a $10,000 Initial Investment May 8, 2007 - July 31, 2007 [GRAPHIC OMITTED] EDGARIZATION OF DATA POINTS
- ------------------------------------------------------------------------------------------------------------------- First Trust StrataQuant(TM) Utilities Utilities Russell 1000(R) Russell 1000(R) AlphaDEX(TM) Fund Index Index Utilities Index - ------------------------------------------------------------------------------------------------------------------- 5/8/2007 $10,000 $10,000 $10,000 $10,000 7/31/2007 $ 9,185 $ 9,205 $ 9,674 $ 9,578
Performance figures assume reinvestment of all dividend distributions and do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. An index is a statistical composite that tracks a specified financial market or sector. Unlike the Fund, the indices do not actually hold a portfolio of securities and therefore do not incur the expenses incurred by the Fund. These expenses negatively impact the performance of the Fund. The Fund's past performance is no guarantee of future results. FREQUENCY DISTRIBUTION OF DISCOUNTS AND PREMIUMS BID/ASK MIDPOINT VS. NAV AS OF JULY 31, 2007 The following Frequency Distribution of Discounts and Premiums charts are provided to show the frequency at which the bid/ask midpoint price for the Fund was at a discount or premium to the daily NAV. The following tables are for comparative purposes only and represent the period May 10, 2007 (commencement of trading) through July 31, 2007.
NUMBER OF DAYS BID/ASK MIDPOINT AT/ABOVE NAV FOR THE PERIOD 0-49 BASIS POINTS 50-99 BASIS POINTS 100-199 BASIS POINTS >= 200 BASIS POINTS 5/10/07 - 7/31/07 27 1 0 0 NUMBER OF DAYS BID/ASK MIDPOINT BELOW NAV FOR THE PERIOD 0-49 BASIS POINTS 50-99 BASIS POINTS 100-199 BASIS POINTS >= 200 BASIS POINTS 5/10/07 - 7/31/07 29 0 0 0
Page 21 - -------------------------------------------------------------------------------- Fund Performance Overview (Continued) - -------------------------------------------------------------------------------- FEX - FIRST TRUST LARGE CAP CORE ALPHADEX(TM) FUND The First Trust Large Cap Core AlphaDEX(TM) Fund (the "Fund") seeks investment results that correspond generally to the price and yield (before the Fund's fees and expenses) of an equity index called the Defined Large Cap Core Index (the "Large Cap Core Index"). The Fund will normally invest at least 90% of its total assets in common stocks that comprise the Large Cap Core Index. The Shares of the Fund are listed and trade on the AMEX under the ticker symbol "FEX." The Fund began trading on May 10, 2007. The Large Cap Core Index is a modified equal-dollar weighted index designed by Standard & Poor's, a division of the McGraw-Hill Companies, Inc. ("S&P"), to objectively identify and select stocks from the S&P 500 Index that may generate positive alpha relative to traditional passive style indices through the use of the AlphaDEX(TM) screening methodology. Alpha is an indication of how much an investment outperforms or underperforms on a risk-adjusted basis relative to its benchmark (S&P 500 Index). - -------------------------------------------------------------------------------- Performance as of July 31, 2007 Since Fund Inception (May 8, 2007) FUND PERFORMANCE NAV -4.40% Market Price -4.43% INDEX PERFORMANCE S&P 500 Index -3.10% Defined Large Cap Core Index -4.21% - -------------------------------------------------------------------------------- (See Notes to Fund Performance Overview on page 36.) FUND RECAP. Energy, industrials, and information technology, together comprising about 39% of the Fund's net assets, were the only sectors to post positive returns for the period ended July 31, 2007. Consumer discretionary and utility stocks had the most negative impact on the Fund's total return relative to its benchmark. The top three performing stocks in the Fund over the period ended July 31, 2007, by contribution to return, were Cummins, Inc., National Oilwell Varco, Inc. and Amazon.com, Inc. The worst-performing stocks, by percentage loss, were MGIC Investment Corp., American Standard Cos., Inc. and KB Home. PORTFOLIO SECTOR ALLOCATION AS OF JULY 31, 2007 SECTOR % OF NET ASSETS Consumer Discretionary 16.32% Financials 14.54 Industrials 14.27 Information Technology 14.21 Energy 10.62 Utilities 9.20 Health Care 7.56 Materials 7.07 Consumer Staples 4.47 Telecommunication Services 2.09 Net Other Assets and Liabilities (0.35) ------ Total 100.00% ====== TOP TEN PORTFOLIO HOLDINGS AS OF JULY 31, 2007 SECURITY % OF NET ASSETS National Oilwell Varco, Inc. 0.54% Amazon.com, Inc. 0.54 Precision Castparts Corp. 0.53 Tyco International Ltd. 0.52 Schlumberger Ltd. 0.52 NVIDIA Corp. 0.52 Apple, Inc. 0.51 Terex Corp. 0.50 Noble Corp. 0.49 Smith International, Inc. 0.49 ---- Total 5.16% ==== - ---------- The Defined Large Cap Core Index is the exclusive property of S&P. First Trust Portfolios L.P. has contracted with S&P to calculate and maintain the Defined Large Cap Core Index. STANDARD & POOR'S and S&P are trademarks of The McGraw-Hill Companies, Inc. and have been licensed for use by First Trust Portfolios L.P. The First Trust Large Cap Core AlphaDEX(TM) Fund is not sponsored, endorsed, sold or promoted by Standard & Poor's and Standard & Poor's does not make any representation regarding the advisability of investing in the Fund. Page 22 - -------------------------------------------------------------------------------- Fund Performance Overview (Continued) - -------------------------------------------------------------------------------- FEX - FIRST TRUST LARGE CAP CORE ALPHADEX(TM) FUND (CONTINUED) Growth of a $10,000 Initial Investment May 8, 2007 - July 31, 2007 [GRAPHIC OMITTED] EDGARIZATION OF DATA POINTS
- ------------------------------------------------------------------------------- First Trust Large Cap Core Defined Large S&P 500 AlphaDEX(TM) Fund Cap Core Index Index - ------------------------------------------------------------------------------- 5/8/2007 $10,000 $10,000 $10,000 7/31/2007 $ 9,560 $ 9,579 $ 9,690
Performance figures assume reinvestment of all dividend distributions and do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. An index is a statistical composite that tracks a specified financial market or sector. Unlike the Fund, the indices do not actually hold a portfolio of securities and therefore do not incur the expenses incurred by the Fund. These expenses negatively impact the performance of the Fund. The Fund's past performance is no guarantee of future results. FREQUENCY DISTRIBUTION OF DISCOUNTS AND PREMIUMS BID/ASK MIDPOINT VS. NAV AS OF JULY 31, 2007 The following Frequency Distribution of Discounts and Premiums charts are provided to show the frequency at which the bid/ask midpoint price for the Fund was at a discount or premium to the daily NAV. The following tables are for comparative purposes only and represent the period May 10, 2007 (commencement of trading) through July 31, 2007.
NUMBER OF DAYS BID/ASK MIDPOINT AT/ABOVE NAV FOR THE PERIOD 0-49 BASIS POINTS 50-99 BASIS POINTS 100-199 BASIS POINTS >= 200 BASIS POINTS 5/10/07 - 7/31/07 18 1 0 0 NUMBER OF DAYS BID/ASK MIDPOINT BELOW NAV FOR THE PERIOD 0-49 BASIS POINTS 50-99 BASIS POINTS 100-199 BASIS POINTS >= 200 BASIS POINTS 5/10/07 - 7/31/07 38 0 0 0
Page 23 - -------------------------------------------------------------------------------- Fund Performance Overview (Continued) - -------------------------------------------------------------------------------- FNX - FIRST TRUST MID CAP CORE ALPHADEX(TM) FUND The First Trust Mid Cap Core AlphaDEX(TM) Fund (the "Fund") seeks investment results that correspond generally to the price and yield (before the Fund's fees and expenses) of an equity index called the Defined Mid Cap Core Index (the "Mid Cap Core Index"). The Fund will normally invest at least 90% of its total assets in common stocks that comprise the Mid Cap Core Index. The Shares of the Fund are listed and trade on the AMEX under the ticker symbol "FNX." The Fund began trading on May 10, 2007. 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 indices through the use of the AlphaDEX(TM) screening methodology. Alpha is an indication of how much an investment outperforms or underperforms on a risk-adjusted basis relative to its benchmark (S&P MidCap 400 Index). - -------------------------------------------------------------------------------- Performance as of July 31, 2007 Since Fund Inception (May 8, 2007) FUND PERFORMANCE NAV -4.73% Market Price -4.77% INDEX PERFORMANCE Defined Mid Cap Core Index -4.60% S&P MidCap 400 Index -3.85% - -------------------------------------------------------------------------------- (See Notes to Fund Performance Overview on page 36.) FUND RECAP. Energy and industrials were the only sectors to have positive performance over the period. An underweight position in financials, relative to its benchmark also benefited the Fund as it was the worst-performing sector for the period ended July 31, 2007. Consumer discretionary was the biggest detractor from Fund performance, relative to its benchmark, due to an overweight position in that sector. The top three performing stocks in the Fund over the period ended July 31, 2007, by contribution to return, were Intuitive Surgical, Inc., FMC Technologies, Inc. and GameStop Corp., Class A. The worst-performing stocks, by percentage loss, were Beazer Homes USA, Inc., Radian Group, Inc. and Kindred Healthcare, Inc. PORTFOLIO SECTOR ALLOCATION AS OF JULY 31, 2007 SECTOR % OF NET ASSETS Industrials 17.60% Consumer Discretionary 17.11 Information Technology 15.15 Financials 10.08 Health Care 9.43 Utilities 9.19 Energy 8.79 Materials 7.29 Consumer Staples 3.80 Telecommunication Services 0.92 Net Other Assets and Liabilities 0.64 ------ Total 100.00% ====== TOP TEN PORTFOLIO HOLDINGS AS OF JULY 31, 2007 SECURITY % OF NET ASSETS Intuitive Surgical, Inc. 0.72% Modine Manufacturing Co. 0.67 WellCare Health Plans, Inc. 0.66 RF Micro Devices, Inc. 0.66 Cameron International Corp. 0.64 Ventana Medical Systems, Inc. 0.64 Cypress Semiconductor Corp. 0.63 Jacobs Engineering Group, Inc. 0.63 SPX Corp. 0.63 GameStop Corp., Class A 0.61 ---- Total 6.49% ==== - ---------- The Defined Mid Cap Core Index is the exclusive property of S&P. First Trust Portfolios L.P. has contracted with S&P to calculate and maintain the Defined Mid Cap Core Index. STANDARD & POOR'S and S&P are trademarks of The McGraw-Hill Companies, Inc. and have been licensed for use by First Trust Portfolios L.P. The First Trust Mid Cap Core AlphaDEX(TM) Fund is not sponsored, endorsed, sold or promoted by Standard & Poor's and Standard & Poor's does not make any representation regarding the advisability of investing in the Fund. Page 24 - -------------------------------------------------------------------------------- Fund Performance Overview (Continued) - -------------------------------------------------------------------------------- FNX - FIRST TRUST MID CAP CORE ALPHADEX(TM) FUND (CONTINUED) Growth of a $10,000 Initial Investment May 8, 2007 - July 31, 2007 [GRAPHIC OMITTED] EDGARIZATION OF DATA POINTS
- ------------------------------------------------------------------------------- First Trust Defined Mid Cap Core Mid Cap Core S&P Mid Cap AlphaDEX(TM) Fund Index 400 Index - ------------------------------------------------------------------------------- 5/8/2007 $10,000 $10,000 $10,000 7/31/2007 $ 9,527 $ 9,540 $ 9,615
Performance figures assume reinvestment of all dividend distributions and do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. An index is a statistical composite that tracks a specified financial market or sector. Unlike the Fund, the indices do not actually hold a portfolio of securities and therefore do not incur the expenses incurred by the Fund. These expenses negatively impact the performance of the Fund. The Fund's past performance is no guarantee of future results. FREQUENCY DISTRIBUTION OF DISCOUNTS AND PREMIUMS BID/ASK MIDPOINT VS. NAV AS OF JULY 31, 2007 The following Frequency Distribution of Discounts and Premiums charts are provided to show the frequency at which the bid/ask midpoint price for the Fund was at a discount or premium to the daily NAV. The following tables are for comparative purposes only and represent the period May 10, 2007 (commencement of trading) through July 31, 2007.
NUMBER OF DAYS BID/ASK MIDPOINT AT/ABOVE NAV FOR THE PERIOD 0-49 BASIS POINTS 50-99 BASIS POINTS 100-199 BASIS POINTS >= 200 BASIS POINTS 5/10/07 - 7/31/07 22 1 0 0 NUMBER OF DAYS BID/ASK MIDPOINT BELOW NAV FOR THE PERIOD 0-49 BASIS POINTS 50-99 BASIS POINTS 100-199 BASIS POINTS >= 200 BASIS POINTS 5/10/07 - 7/31/07 34 0 0 0
Page 25 - -------------------------------------------------------------------------------- Fund Performance Overview (Continued) - -------------------------------------------------------------------------------- FYX - FIRST TRUST SMALL CAP CORE ALPHADEX(TM) FUND The First Trust Small Cap Core AlphaDEX(TM) Fund (the "Fund") seeks investment results that correspond generally to the price and yield (before the Fund's fees and expenses) of an equity index called the Defined Small Cap Core Index (the "Small Cap Core Index"). The Fund will normally invest at least 90% of its total assets in common stocks that comprise the Small Cap Core Index. The Shares of the Fund are listed and trade on the AMEX under the ticker symbol "FYX." The Fund began trading on May 10, 2007. 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 indices through the use of the AlphaDEX(TM) screening methodology. Alpha is an indication of how much an investment outperforms or underperforms on a risk-adjusted basis relative to its benchmark (S&P SmallCap 600 Index). - -------------------------------------------------------------------------------- Performance as of July 31, 2007 Since Fund Inception (May 8, 2007) FUND PERFORMANCE NAV -5.67% Market Price -5.77% INDEX PERFORMANCE Defined Small Cap Core Index -5.46% S&P SmallCap 600 Index -4.65% - -------------------------------------------------------------------------------- (See Notes to Fund Performance Overview on page 36.) FUND RECAP. Telecommunication services and energy were the only two sectors to have positive returns over the period ended July 31, 2007. An underweight position in financials, relative to its benchmark, also benefited the Fund as it was the worst-performing sector for the period ended July 31, 2007. Consumer discretionary and industrials were the biggest detractors from Fund performance, relative to its benchmark, due to underperformance of the Fund's holdings in those sectors. The top three performing stocks in the Fund over the period ended July 31, 2007, by contribution to return, were Crocs, Inc., Penford Corp. and Blue Nile, Inc. The worst-performing stocks, by percentage loss, were Standard Motor Products, Inc., Finish Line (The), Inc., Class A and Advanced Energy Industries, Inc. PORTFOLIO SECTOR ALLOCATION AS OF JULY 31, 2007 SECTOR % OF NET ASSETS Industrials 20.28% Information Technology 19.07 Consumer Discretionary 18.59 Financials 10.55 Health Care 9.69 Materials 7.71 Utilities 5.56 Energy 4.91 Consumer Staples 2.89 Telecommunication Services 0.32 Net Other Assets and Liabilities 0.43 ------ Total 100.00% ====== TOP TEN PORTFOLIO HOLDINGS AS OF JULY 31, 2007 SECURITY % OF NET ASSETS Crocs, Inc. 0.55% Penford Corp. 0.52 Option Care, Inc. 0.50 Blue Nile, Inc. 0.50 Chaparral Steel Co. 0.46 Triumph Group, Inc. 0.46 Keystone Automotive Industries, Inc. 0.45 Woodward Governor Co. 0.43 Hutchinson Technology, Inc. 0.42 Oceaneering International, Inc. 0.42 ---- Total 4.71% ==== - ---------- The Defined Small Cap Core Index is the exclusive property of S&P. First Trust Portfolios L.P. has contracted with S&P to calculate and maintain the Defined Small Cap Core Index. STANDARD & POOR'S and S&P are trademarks of The McGraw-Hill Companies, Inc. and have been licensed for use by First Trust Portfolios L.P. The First Trust Small Cap Core AlphaDEX(TM) Fund is not sponsored, endorsed, sold or promoted by Standard & Poor's and Standard & Poor's does not make any representation regarding the advisability of investing in the Fund. Page 26 - -------------------------------------------------------------------------------- Fund Performance Overview (Continued) - -------------------------------------------------------------------------------- FYX - FIRST TRUST SMALL CAP CORE ALPHADEX(TM) FUND (CONTINUED) Growth of a $10,000 Initial Investment May 8, 2007 - July 31, 2007 [GRAPHIC OMITTED] EDGARIZATION OF DATA POINTS
- -------------------------------------------------------------------------------- First Trust Small Defined Small S&P SmallCap Cap Core Cap Core 600 AlphaDEX(TM) Fund Index Index - -------------------------------------------------------------------------------- 5/8/2007 $10,000 $10,000 $10,000 7/31/2007 $ 9,433 $ 9,454 $ 9,535
Performance figures assume reinvestment of all dividend distributions and do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. An index is a statistical composite that tracks a specified financial market or sector. Unlike the Fund, the indices do not actually hold a portfolio of securities and therefore do not incur the expenses incurred by the Fund. These expenses negatively impact the performance of the Fund. The Fund's past performance is no guarantee of future results. FREQUENCY DISTRIBUTION OF DISCOUNTS AND PREMIUMS BID/ASK MIDPOINT VS. NAV AS OF JULY 31, 2007 The following Frequency Distribution of Discounts and Premiums charts are provided to show the frequency at which the bid/ask midpoint price for the Fund was at a discount or premium to the daily NAV. The following tables are for comparative purposes only and represent the period May 10, 2007 (commencement of trading) through July 31, 2007.
NUMBER OF DAYS BID/ASK MIDPOINT AT/ABOVE NAV FOR THE PERIOD 0-49 BASIS POINTS 50-99 BASIS POINTS 100-199 BASIS POINTS >= 200 BASIS POINTS 5/10/07 - 7/31/07 24 0 1 0 NUMBER OF DAYS BID/ASK MIDPOINT BELOW NAV FOR THE PERIOD 0-49 BASIS POINTS 50-99 BASIS POINTS 100-199 BASIS POINTS >= 200 BASIS POINTS 5/10/07 - 7/31/07 32 0 0 0
Page 27 - -------------------------------------------------------------------------------- Fund Performance Overview (Continued) - -------------------------------------------------------------------------------- FTA - FIRST TRUST LARGE CAP VALUE OPPORTUNITIES ALPHADEX(TM) FUND The First Trust Large Cap Value Opportunities AlphaDEX(TM) Fund (the "Fund") seeks investment results that correspond generally to the price and yield (before the Fund's fees and expenses) of an equity index called the Defined Large Cap Value Opportunities Index (the "Large Cap Value Index"). The Fund will normally invest at least 90% of its total assets in common stocks that comprise the Large Cap Value Index. The Shares of the Fund are listed and trade on the AMEX under the ticker symbol "FTA." The Fund began trading on May 10, 2007. 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 indices through the use of the AlphaDEX(TM) screening methodology. Alpha is an indication of how much an investment outperforms or underperforms on a risk-adjusted basis relative to its benchmark (S&P 500/Citigroup Value Index). - -------------------------------------------------------------------------------- Performance as of July 31, 2007 Since Fund Inception (May 8, 2007) FUND PERFORMANCE NAV -5.50% Market Price -5.30% INDEX PERFORMANCE S&P 500 Index -3.10% Defined Large Cap Value Opportunities Index -5.38% S&P 500/Citigroup Value Index -4.14% - -------------------------------------------------------------------------------- (See Notes to Fund Performance Overview on page 36.) FUND RECAP. Energy and industrials were the two best-performing sectors over the period ended July 31, 2007 and biggest contributors to the Fund's return. A significantly underweight position in financials benefited the Fund as it was the worst-performing sector over the period ended July 31, 2007. Consumer discretionary was the biggest detractor to performance due to an overweight position and underperformance relative to its benchmark. An overweight position in utilities also hurt Fund performance. The top three performing stocks in the Fund over the period ended July 31, 2007, by contribution to return, were Cummins, Inc., Freeport-McMoRan Copper & Gold, Inc. and VeriSign, Inc. The worst-performing stocks, by percentage loss, were MGIC Investment Corp., KB Home and CIT Group, Inc. PORTFOLIO SECTOR ALLOCATION AS OF JULY 31, 2007 SECTOR % OF NET ASSETS Financials 17.91% Consumer Discretionary 16.39 Utilities 14.28 Industrials 13.00 Information Technology 9.90 Materials 8.59 Energy 8.39 Consumer Staples 5.45 Telecommunication Services 3.67 Health Care 2.45 Net Other Assets and Liabilities (0.03) ------ Total 100.00% ====== TOP TEN PORTFOLIO HOLDINGS AS OF JULY 31, 2007 SECURITY % OF NET ASSETS Tyco International Ltd. 1.01% Hess Corp. 0.94 ConocoPhillips 0.93 Rowan Cos., Inc. 0.93 ADC Telecommunications, Inc. 0.92 Archer-Daniels-Midland Co. 0.92 Chevron Corp. 0.91 Ryder System, Inc. 0.91 Parker Hannifin Corp. 0.91 Novellus Systems, Inc. 0.91 ---- Total 9.29% ==== - ---------- The Defined Large Cap Value Opportunities Index is the exclusive property of S&P. First Trust Portfolios L.P. has contracted with S&P to calculate and maintain the Defined Large Cap Value Opportunities Index. STANDARD & POOR'S and S&P are trademarks of The McGraw-Hill Companies, Inc. and have been licensed for use by First Trust Portfolios L.P. The First Trust Large Cap Value Opportunities AlphaDEX(TM) Fund is not sponsored, endorsed, sold or promoted by Standard & Poor's and Standard & Poor's does not make any representation regarding the advisability of investing in the Fund. Page 28 - -------------------------------------------------------------------------------- Fund Performance Overview (Continued) - -------------------------------------------------------------------------------- FTA - FIRST TRUST LARGE CAP VALUE OPPORTUNITIES ALPHADEX(TM) FUND (CONTINUED) Growth of a $10,000 Initial Investment May 8, 2007 - July 31, 2007 [GRAPHIC OMITTED] EDGARIZATION OF DATA POINTS
- ------------------------------------------------------------------------------------------------------------------- First Trust Large Cap Defined Large Cap Value Opportunities Value Opportunities S&P 500 S&P 500/Citigroup AlphaDEX(TM) Fund Index Index Value Index - ------------------------------------------------------------------------------------------------------------------- 5/8/2007 $10,000 $10,000 $10,000 $10,000 7/31/2007 $ 9,450 $ 9,462 $ 9,690 $ 9,586
Performance figures assume reinvestment of all dividend distributions and do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. An index is a statistical composite that tracks a specified financial market or sector. Unlike the Fund, the indices do not actually hold a portfolio of securities and therefore do not incur the expenses incurred by the Fund. These expenses negatively impact the performance of the Fund. The Fund's past performance is no guarantee of future results. FREQUENCY DISTRIBUTION OF DISCOUNTS AND PREMIUMS BID/ASK MIDPOINT VS. NAV AS OF JULY 31, 2007 The following Frequency Distribution of Discounts and Premiums charts are provided to show the frequency at which the bid/ask midpoint price for the Fund was at a discount or premium to the daily NAV. The following tables are for comparative purposes only and represent the period May 10, 2007 (commencement of trading) through July 31, 2007.
NUMBER OF DAYS BID/ASK MIDPOINT AT/ABOVE NAV FOR THE PERIOD 0-49 BASIS POINTS 50-99 BASIS POINTS 100-199 BASIS POINTS >= 200 BASIS POINTS 5/10/07 - 7/31/07 40 0 0 0 NUMBER OF DAYS BID/ASK MIDPOINT BELOW NAV FOR THE PERIOD 0-49 BASIS POINTS 50-99 BASIS POINTS 100-199 BASIS POINTS >= 200 BASIS POINTS 5/10/07 - 7/31/07 17 0 0 0
Page 29 - -------------------------------------------------------------------------------- Fund Performance Overview (Continued) - -------------------------------------------------------------------------------- FTC - FIRST TRUST LARGE CAP GROWTH OPPORTUNITIES ALPHADEX(TM) FUND The First Trust Large Cap Growth Opportunities AlphaDEX(TM) Fund (the "Fund") seeks investment results that correspond generally to the price and yield (before the Fund's fees and expenses) of an equity index called the Defined Large Cap Growth Opportunities Index (the "Large Cap Growth Index"). The Fund will normally invest at least 90% of its total assets in common stocks that comprise the Large Cap Growth Index. The Shares of the Fund are listed and trade on the AMEX under the ticker symbol "FTC." The Fund began trading on May 10, 2007. 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 indices through the use of the AlphaDEX(TM) screening methodology. Alpha is an indication of how much an investment outperforms or underperforms on a risk-adjusted basis relative to its benchmark (S&P 500/Citigroup Growth Index). - -------------------------------------------------------------------------------- Performance as of July 31, 2007 Since Fund Inception (May 8, 2007) FUND PERFORMANCE NAV -2.60% Market Price -2.43% INDEX PERFORMANCE S&P 500 Index -3.10% Defined Large Cap Growth Opportunities Index -2.43% S&P 500/Citigroup Growth Index -1.98% - -------------------------------------------------------------------------------- (See Notes to Fund Performance Overview on page 36.) FUND RECAP. Energy was the best-performing sector in the Fund and had the largest contribution to return. The Fund also benefited from an underweight position in the health care sector, the second worst-performing sector over the period ended July 31, 2007. Information technology was the biggest detractor from performance, relative to its benchmark, due to an underweight position in the sector. The top three performing stocks in the Fund over the period ended July 31, 2007, by contribution to return, were National Oilwell Varco, Inc., Amazon.com, Inc. and Hilton Hotels Corp. The worst-performing stocks, by percentage loss, were American Standard Cos., Inc., Big Lots, Inc. and Sunoco, Inc. PORTFOLIO SECTOR ALLOCATION AS OF JULY 31, 2007 SECTOR % OF NET ASSETS Information Technology 20.14% Consumer Discretionary 16.18 Industrials 15.67 Health Care 14.16 Energy 13.28 Financials 10.29 Materials 4.73 Utilities 2.94 Consumer Staples 2.64 Net Other Assets and Liabilities (0.03) ------ Total 100.00% ====== TOP TEN PORTFOLIO HOLDINGS AS OF JULY 31, 2007 SECURITY % OF NET ASSETS National Oilwell Varco, Inc. 1.14% Amazon.com, Inc. 1.14 Precision Castparts Corp. 1.12 Schlumberger Ltd. 1.10 NVIDIA Corp. 1.10 Apple, Inc. 1.07 Terex Corp. 1.05 Noble Corp. 1.04 Smith International, Inc. 1.04 Fluor Corp. 1.03 ----- Total 10.83% ===== - ---------- The Defined Large Cap Growth Opportunities Index is the exclusive property of S&P. First Trust Portfolios L.P. has contracted with S&P to calculate and maintain the Defined Large Cap Growth Opportunities Index. STANDARD & POOR'S and S&P are trademarks of The McGraw-Hill Companies, Inc. and have been licensed for use by First Trust Portfolios L.P. The First Trust Large Cap Growth Opportunities AlphaDEX(TM) Fund is not sponsored, endorsed, sold or promoted by Standard & Poor's and Standard & Poor's does not make any representation regarding the advisability of investing in the Fund. Page 30 - -------------------------------------------------------------------------------- Fund Performance Overview (Continued) - -------------------------------------------------------------------------------- FTC - FIRST TRUST LARGE CAP GROWTH OPPORTUNITIES ALPHADEX(TM) FUND (CONTINUED) Growth of a $10,000 Initial Investment May 8, 2007 - July 31, 2007 [GRAPHIC OMITTED] EDGARIZATION OF DATA POINTS
- ------------------------------------------------------------------------------------------------------------------- First Trust Large Cap Defined Large Cap Growth Opportunities Growth Opportunities S&P 500 S&P 500/Citigroup AlphaDEX(TM) Fund Index Index Growth Index - ------------------------------------------------------------------------------------------------------------------- 5/8/2007 $10,000 $10,000 $10,000 $10,000 7/31/2007 $ 9,740 $ 9,757 $ 9,690 $ 9,802
Performance figures assume reinvestment of all dividend distributions and do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. An index is a statistical composite that tracks a specified financial market or sector. Unlike the Fund, the indices do not actually hold a portfolio of securities and therefore do not incur the expenses incurred by the Fund. These expenses negatively impact the performance of the Fund. The Fund's past performance is no guarantee of future results. FREQUENCY DISTRIBUTION OF DISCOUNTS AND PREMIUMS BID/ASK MIDPOINT VS. NAV AS OF JULY 31, 2007 The following Frequency Distribution of Discounts and Premiums charts are provided to show the frequency at which the bid/ask midpoint price for the Fund was at a discount or premium to the daily NAV. The following tables are for comparative purposes only and represent the period May 10, 2007 (commencement of trading) through July 31, 2007.
NUMBER OF DAYS BID/ASK MIDPOINT AT/ABOVE NAV FOR THE PERIOD 0-49 BASIS POINTS 50-99 BASIS POINTS 100-199 BASIS POINTS >= 200 BASIS POINTS 5/10/07 - 7/31/07 37 1 0 0 NUMBER OF DAYS BID/ASK MIDPOINT BELOW NAV FOR THE PERIOD 0-49 BASIS POINTS 50-99 BASIS POINTS 100-199 BASIS POINTS >= 200 BASIS POINTS 5/10/07 - 7/31/07 19 0 0 0
Page 31 - -------------------------------------------------------------------------------- Fund Performance Overview (Continued) - -------------------------------------------------------------------------------- FAB - FIRST TRUST MULTI CAP VALUE ALPHADEX(TM) FUND The First Trust Multi Cap Value AlphaDEX(TM) Fund (the "Fund") seeks investment results that correspond generally to the price and yield (before the Fund's fees and expenses) of an equity index called the Defined Multi Cap Value Index (the "Multi Cap Value Index"). The Fund will normally invest at least 90% of its total assets in common stocks that comprise the Multi Cap Value Index. The Shares of the Fund are listed and trade on the AMEX under the ticker symbol "FAB." The Fund began trading on May 10, 2007. 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 Composite 1500/Citigroup Value Index that may generate positive alpha relative to traditional passive style indices through the use of the AlphaDEX(TM) screening methodology. Alpha is an indication of how much an investment outperforms or underperforms on a risk-adjusted basis relative to its benchmark (S&P Composite 1500/Citigroup Value Index). - -------------------------------------------------------------------------------- Performance as of July 31, 2007 Since Fund Inception (May 8, 2007) FUND PERFORMANCE NAV -6.83% Market Price -6.50% INDEX PERFORMANCE S&P Composite 1500 Index -3.22% Defined Multi Cap Value Index -6.66% S&P Composite 1500/Citigroup Value Index -4.33% - -------------------------------------------------------------------------------- (See Notes to Fund Performance Overview on page 36.) FUND RECAP. Energy was the best-performing sector over the period ended July 31, 2007, followed by telecommunication services. A significantly underweight position in financials also benefited the Fund as it was the worst-performing sector over the period ended July 31, 2007. Consumer discretionary was the biggest detractor from Fund performance over the period ended July 31, 2007 due to an overweight position and underperformance of the Fund's holdings in that sector. The top three performing stocks in the Fund over the period ended July 31, 2007, by contribution to return, were Cummins, Inc., Penford Corp. and Freeport-McMoRan Copper & Gold, Inc. The worst-performing stocks, by percentage loss, were Beazer Homes USA, Inc., MGIC Investment Corp. and Radian Group, Inc. PORTFOLIO SECTOR ALLOCATION AS OF JULY 31, 2007 SECTOR % OF NET ASSETS Financials 16.78% Consumer Discretionary 16.17 Utilities 14.43 Industrials 14.22 Information Technology 11.88 Materials 9.41 Energy 7.21 Consumer Staples 4.90 Health Care 2.91 Telecommunication Services 2.25 Net Other Assets and Liabilities (0.16) ------ Total 100.00% ====== TOP TEN PORTFOLIO HOLDINGS AS OF JULY 31, 2007 SECURITY % OF NET ASSETS Tyco International Ltd. 0.51% Hess Corp. 0.48 Rowan Cos., Inc. 0.47 ConocoPhillips 0.47 ADC Telecommunications, Inc. 0.47 Archer-Daniels Midland Co. 0.47 Chevron Corp. 0.46 Ryder System, Inc. 0.46 Parker Hannifin Corp. 0.46 Novellus System, Inc. 0.46 ---- Total 4.71% ==== - ---------- The Defined Multi Cap Value Index is the exclusive property of S&P. First Trust Portfolios L.P. has contracted with S&P to calculate and maintain the Defined Multi Cap Value Index. STANDARD & POOR'S and S&P are trademarks of The McGraw-Hill Companies, Inc. and have been licensed for use by First Trust Portfolios L.P. The First Trust Multi Cap Value AlphaDEX(TM) Fund is not sponsored, endorsed, sold or promoted by Standard & Poor's and Standard & Poor's does not make any representation regarding the advisability of investing in the Fund. Page 32 - -------------------------------------------------------------------------------- Fund Performance Overview (Continued) - -------------------------------------------------------------------------------- FAB - FIRST TRUST MULTI CAP VALUE ALPHADEX(TM) FUND (CONTINUED) Growth of a $10,000 Initial Investment May 8, 2007 - July 31, 2007 [GRAPHIC OMITTED] EDGARIZATION OF DATA POINTS
- ------------------------------------------------------------------------------------------------------------ First Trust Defined Multi Multi Cap Value Cap Value S&P Composite S&P Composite 1500/Citigroup AlphaDEX(TM) Fund Index 1500 Index Value Index - ------------------------------------------------------------------------------------------------------------ 5/8/2007 $10,000 $10,000 $10,000 $10,000 7/31/2007 $ 9,317 $ 9,334 $ 9,678 $ 9,567
Performance figures assume reinvestment of all dividend distributions and do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. An index is a statistical composite that tracks a specified financial market or sector. Unlike the Fund, the indices do not actually hold a portfolio of securities and therefore do not incur the expenses incurred by the Fund. These expenses negatively impact the performance of the Fund. The Fund's past performance is no guarantee of future results. FREQUENCY DISTRIBUTION OF DISCOUNTS AND PREMIUMS BID/ASK MIDPOINT VS. NAV AS OF JULY 31, 2007 The following Frequency Distribution of Discounts and Premiums charts are provided to show the frequency at which the bid/ask midpoint price for the Fund was at a discount or premium to the daily NAV. The following tables are for comparative purposes only and represent the period May 10, 2007 (commencement of trading) through July 31, 2007.
NUMBER OF DAYS BID/ASK MIDPOINT AT/ABOVE NAV FOR THE PERIOD 0-49 BASIS POINTS 50-99 BASIS POINTS 100-199 BASIS POINTS >= 200 BASIS POINTS 5/10/07 - 7/31/07 39 0 0 0 NUMBER OF DAYS BID/ASK MIDPOINT BELOW NAV FOR THE PERIOD 0-49 BASIS POINTS 50-99 BASIS POINTS 100-199 BASIS POINTS >= 200 BASIS POINTS 5/10/07 - 7/31/07 18 0 0 0
Page 33 - -------------------------------------------------------------------------------- Fund Performance Overview (Continued) - -------------------------------------------------------------------------------- FAD - FIRST TRUST MULTI CAP GROWTH ALPHADEX(TM) FUND The First Trust Multi Cap Growth AlphaDEX(TM) Fund (the "Fund") seeks investment results that correspond generally to the price and yield (before the Fund's fees and expenses) of an equity index called the Defined Multi Cap Growth Index (the "Multi Cap Growth Index"). The Fund will normally invest at least 90% of its total assets in common stocks that comprise the Multi Cap Growth Index. The Shares of the Fund are listed and trade on the AMEX under the ticker symbol "FAD." The Fund began trading on May 10, 2007. 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 Composite 1500/Citigroup Growth Index that may generate positive alpha relative to traditional passive style indices through the use of the AlphaDEX(TM) screening methodology. Alpha is an indication of how much an investment outperforms or underperforms on a risk-adjusted basis relative to its benchmark (S&P Composite 1500/Citigroup Growth Index). - -------------------------------------------------------------------------------- Performance as of July 31, 2007 Since Fund Inception (May 8, 2007) FUND PERFORMANCE NAV -2.03% Market Price -1.90% INDEX PERFORMANCE S&P Composite 1500 Index -3.22% Defined Multi Cap Growth Index -1.82% S&P Composite 1500/Citigroup Growth Index -2.04% - -------------------------------------------------------------------------------- (See Notes to Fund Performance Overview on page 36.) FUND RECAP. Energy was the best-performing sector in the Fund over the period ended July 31, 2007, followed by industrials. Health care was the biggest contributor to performance, relative to its benchmark, due to the outperformance of the Fund's holdings in the sector versus its benchmark. The consumer discretionary sector had the worst contribution to return due to an overweight position in that sector. An underweight position in information technology also held back Fund performance as it was the third best-performing sector over the period ended July 31, 2007. The top three performing stocks in the Fund over the period ended July 31, 2007, by contribution to return, were National Oilwell Varco, Inc., Intuitive Surgical, Inc. and Crocs, Inc. The worst-performing stocks, by percentage loss, were American Standard Cos., Inc., Big Lots, Inc. and Sunoco, Inc. PORTFOLIO SECTOR ALLOCATION AS OF JULY 31, 2007 SECTOR % OF NET ASSETS Information Technology 20.28% Industrials 18.95 Consumer Discretionary 17.89 Health Care 15.15 Energy 11.27 Financials 7.17 Materials 4.41 Consumer Staples 2.52 Utilities 1.54 Telecommunication Services 0.26 Net Other Assets and Liabilities 0.56 ------ Total 100.00% ====== TOP TEN PORTFOLIO HOLDINGS AS OF JULY 31, 2007 SECURITY % OF NET ASSETS National Oilwell Varco, Inc. 0.57% Amazon.com, Inc. 0.57 Precision Castparts Corp. 0.56 Schlumberger Ltd. 0.55 NVIDIA Corp. 0.55 Apple, Inc. 0.54 Terex Corp. 0.53 Noble Corp. 0.52 Smith International, Inc. 0.52 Fluor Corp. 0.51 ---- Total 5.42% ==== - ---------- The Defined Multi Cap Growth Index is the exclusive property of S&P. First Trust Portfolios L.P. has contracted with S&P to calculate and maintain the Defined Multi Cap Growth Index. STANDARD & POOR'S and S&P are trademarks of The McGraw-Hill Companies, Inc. and have been licensed for use by First Trust Portfolios L.P. The First Trust Multi Cap Growth AlphaDEX(TM) Fund is not sponsored, endorsed, sold or promoted by Standard & Poor's and Standard & Poor's does not make any representation regarding the advisability of investing in the Fund. Page 34 - -------------------------------------------------------------------------------- Fund Performance Overview (Continued) - -------------------------------------------------------------------------------- FAD - FIRST TRUST MULTI CAP GROWTH ALPHADEX(TM) FUND (CONTINUED) Growth of a $10,000 Initial Investment May 8, 2007 - July 31, 2007 [GRAPHIC OMITTED] EDGARIZATION OF DATA POINTS
- ------------------------------------------------------------------------------------------------------------------- First Trust Multi Defined Multi Cap S&P S&P Composite Cap Growth Growth Composite 1500/Citigroup AlphaDEX(TM) Fund Index 1500 Index Growth Index - ------------------------------------------------------------------------------------------------------------------- 5/8/2007 $10,000 $10,000 $10,000 $10,000 7/31/2007 $ 9,797 $ 9,818 $ 9,678 $ 9,796
Performance figures assume reinvestment of all dividend distributions and do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. An index is a statistical composite that tracks a specified financial market or sector. Unlike the Fund, the indices do not actually hold a portfolio of securities and therefore do not incur the expenses incurred by the Fund. These expenses negatively impact the performance of the Fund. The Fund's past performance is no guarantee of future results. FREQUENCY DISTRIBUTION OF DISCOUNTS AND PREMIUMS BID/ASK MIDPOINT VS. NAV AS OF JULY 31, 2007 The following Frequency Distribution of Discounts and Premiums charts are provided to show the frequency at which the bid/ask midpoint price for the Fund was at a discount or premium to the daily NAV. The following tables are for comparative purposes only and represent the period May 10, 2007 (commencement of trading) through July 31, 2007.
NUMBER OF DAYS BID/ASK MIDPOINT AT/ABOVE NAV FOR THE PERIOD 0-49 BASIS POINTS 50-99 BASIS POINTS 100-199 BASIS POINTS >= 200 BASIS POINTS 5/10/07 - 7/31/07 29 1 0 0 NUMBER OF DAYS BID/ASK MIDPOINT BELOW NAV FOR THE PERIOD 0-49 BASIS POINTS 50-99 BASIS POINTS 100-199 BASIS POINTS >= 200 BASIS POINTS 5/10/07 - 7/31/07 27 0 0 0
Page 35 - -------------------------------------------------------------------------------- Notes to Fund Performance Overview - -------------------------------------------------------------------------------- Total returns for the periods since inception are calculated from the inception date of each Fund. The total returns would have been lower if certain fees had not been waived and expenses reimbursed by the Advisor. The Fund's per share net asset value ("NAV") is the value of one share of the Fund and is computed by dividing the value of all assets of the Fund (including accrued interest and dividends), less all liabilities (including accrued expenses and dividends declared but unpaid), by the total number of outstanding shares. The price used to calculate market return ("Market Price") is determined by using the midpoint between the highest bid and the lowest offer on the stock exchange on which shares of the Fund are listed for trading as of the time that the Fund's NAV is calculated. Since shares of the Fund did not trade in the secondary market until after the Fund's inception, for the period from inception to the first day of secondary market trading in shares of the Fund, the NAV of the Fund is used as a proxy for the secondary market trading price to calculate market returns. NAV and market returns assume that all dividend distributions have been reinvested in the Fund at NAV and Market Price, respectively. An index is a statistical composite that tracks a specified financial market or sector. Unlike the Fund, the indices do not actually hold a portfolio of securities and therefore do not incur the expenses incurred by the Fund. These expenses negatively impact the performance of the Fund. Also, market returns do not include brokerage commissions that may be payable on secondary market transactions. If brokerage commissions were included, market returns would be lower. The total returns presented reflect the reinvestment of dividends on securities in the indices. The returns presented do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. The investment return and principal value of shares of the Fund will vary with changes in market conditions. Shares of the Fund may be worth more or less than their original cost when they are redeemed or sold in the market. The Fund's past performance is no guarantee of future results. Page 36 First Trust Exchange-Traded AlphaDEX(TM) Fund Understanding Your Fund Expenses July 31, 2007 (Unaudited) As a shareholder of 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/Producer Durables 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, or First Trust Multi Cap Growth AlphaDEX(TM) Fund (collectively, the "Funds"), you incur two types of costs: (1) transaction costs; and (2) ongoing costs, including management fees, distribution and/or service fees, and other Fund expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Funds and to compare these costs with the ongoing costs of investing in other mutual funds. The Hypothetical Example is based on an investment of $1,000 invested for the most recent fiscal half-year ended July 31, 2007. The Actual Example is based on an investment of $1,000 invested for the period since inception through July 31, 2007. ACTUAL EXPENSES The first line in the following table provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled "Expenses Paid During the Period" to estimate the expenses you paid on your account during this period. HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES The second line in the following table provides information about hypothetical account values and hypothetical expenses based on the Funds' actual expense ratios and an assumed rate of return of 5% per year before expenses, which are not the Funds' actual returns. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Funds and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs such as brokerage commissions paid on purchases and sales of Fund shares. Therefore, the second line in the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
ANNUALIZED EXPENSE RATIO EXPENSES PAID BEGINNING ENDING BASED ON THE DURING THE PERIOD ACCOUNT VALUE ACCOUNT VALUE NUMBER OF DAYS MAY 8, 2007 (A) TO MAY 8, 2007 (A) JULY 31, 2007 IN THE PERIOD (B) JULY 31, 2007 (C) FIRST TRUST CONSUMER DISCRETIONARY ALPHADEX(TM) FUND Actual $1,000.00 $941.50 0.70% $1.58 Hypothetical (5% return before expenses) $1,000.00 $1,021.32 0.70% $3.51 FIRST TRUST CONSUMER STAPLES ALPHADEX(TM) FUND Actual $1,000.00 $955.50 0.70% $1.59 Hypothetical (5% return before expenses) $1,000.00 $1,021.32 0.70% $3.51 FIRST TRUST ENERGY ALPHADEX(TM) FUND Actual $1,000.00 $1,037.00 0.70% $1.66 Hypothetical (5% return before expenses) $1,000.00 $1,021.32 0.70% $3.51 FIRST TRUST FINANCIALS ALPHADEX(TM) FUND Actual $1,000.00 $895.50 0.70% $1.54 Hypothetical (5% return before expenses) $1,000.00 $1,021.32 0.70% $3.51 FIRST TRUST HEALTH CARE ALPHADEX(TM) FUND Actual $1,000.00 $974.00 0.70% $1.61 Hypothetical (5% return before expenses) $1,000.00 $1,021.32 0.70% $3.51 Page 37 First Trust Exchange-Traded AlphaDEX(TM) Fund Understanding Your Fund Expenses (Continued) July 31, 2007 (Unaudited) ANNUALIZED EXPENSE RATIO EXPENSES PAID BEGINNING ENDING BASED ON THE DURING THE PERIOD ACCOUNT VALUE ACCOUNT VALUE NUMBER OF DAYS MAY 8, 2007 (A) TO MAY 8, 2007 (A) JULY 31, 2007 IN THE PERIOD (B) JULY 31, 2007 (C) FIRST TRUST INDUSTRIALS/PRODUCER DURABLES ALPHADEX(TM) FUND Actual $1,000.00 $943.50 0.70% $1.58 Hypothetical (5% return before expenses) $1,000.00 $1,021.32 0.70% $3.51 FIRST TRUST MATERIALS ALPHADEX(TM) FUND Actual $1,000.00 $1,008.50 0.70% $1.64 Hypothetical (5% return before expenses) $1,000.00 $1,021.32 0.70% $3.51 FIRST TRUST TECHNOLOGY ALPHADEX(TM) FUND Actual $1,000.00 $1,023.50 0.70% $1.65 Hypothetical (5% return before expenses) $1,000.00 $1,021.32 0.70% $3.51 FIRST TRUST UTILITIES ALPHADEX(TM) FUND Actual $1,000.00 $918.50 0.70% $1.56 Hypothetical (5% return before expenses) $1,000.00 $1,021.32 0.70% $3.51 FIRST TRUST LARGE CAP CORE ALPHADEX(TM) FUND Actual $1,000.00 $956.00 0.70% $1.59 Hypothetical (5% return before expenses) $1,000.00 $1,021.32 0.70% $3.51 FIRST TRUST MID CAP CORE ALPHADEX(TM) FUND Actual $1,000.00 $952.70 0.70% $1.59 Hypothetical (5% return before expenses) $1,000.00 $1,021.32 0.70% $3.51 FIRST TRUST SMALL CAP CORE ALPHADEX(TM) FUND Actual $1,000.00 $943.30 0.70% $1.58 Hypothetical (5% return before expenses) $1,000.00 $1,021.32 0.70% $3.51 FIRST TRUST LARGE CAP VALUE OPPORTUNITIES ALPHADEX(TM) FUND Actual $1,000.00 $945.00 0.70% $1.59 Hypothetical (5% return before expenses) $1,000.00 $1,021.32 0.70% $3.51 FIRST TRUST LARGE CAP GROWTH OPPORTUNITIES ALPHADEX(TM) FUND Actual $1,000.00 $974.00 0.70% $1.61 Hypothetical (5% return before expenses) $1,000.00 $1,021.32 0.70% $3.51 FIRST TRUST MULTI CAP VALUE ALPHADEX(TM) FUND Actual $1,000.00 $931.70 0.70% $1.57 Hypothetical (5% return before expenses) $1,000.00 $1,021.32 0.70% $3.51 FIRST TRUST MULTI CAP GROWTH ALPHADEX(TM) FUND Actual $1,000.00 $979.70 0.70% $1.61 Hypothetical (5% return before expenses) $1,000.00 $1,021.32 0.70% $3.51
(a) Inception date. (b) These expense ratios reflect expense caps. (c) Actual expenses are equal to the annualized expense ratio of 0.70%, multiplied by the average account value over the period, multiplied by 85/365 (to reflect the actual period May 8, 2007 to July 31, 2007). Hypothetical expenses are assumed for the most recent fiscal half-year. Page 38 First Trust Consumer Discretionary AlphaDEX(TM) Fund Portfolio of Investments July 31, 2007 (Unaudited) SHARES DESCRIPTION MARKET VALUE - -------------------------------------------------------------- COMMON STOCK--101.3% CHEMICALS--0.5% 189 International Flavors & Fragrances, Inc. $ 9,471 ------------- COMMERCIAL SERVICES & SUPPLIES--6.6% 1,098 Allied Waste Industries, Inc. (a) 14,131 77 Brink's (The) Co. 4,709 375 Cintas Corp. 13,710 322 Copart, Inc. (a) 9,061 781 Corrections Corp. of America (a) 22,533 267 Manpower, Inc. 21,106 340 R.R. Donnelley & Sons Co. 14,368 322 Republic Services, Inc. 10,288 378 Waste Management, Inc. 14,375 ------------- 124,281 ------------- DIVERSIFIED CONSUMER SERVICES--3.7% 253 Apollo Group, Inc., Class A (a) 14,955 292 Career Education Corp. (a) 8,667 210 ITT Educational Services, Inc. (a) 22,188 320 Laureate Education, Inc. (a) 19,731 94 Weight Watchers International, Inc. 4,561 ------------- 70,102 ------------- ELECTRONIC EQUIPMENT & INSTRUMENTS--1.8% 290 CDW Corp. (a) 24,410 278 Dolby Laboratories, Inc., Class A (a) 9,246 ------------- 33,656 ------------- FOOD & STAPLES RETAILING--2.0% 273 BJ's Wholesale Club, Inc. (a) 9,271 253 Costco Wholesale Corp. 15,129 307 Wal-Mart Stores, Inc. 14,107 ------------- 38,507 ------------- HOTELS, RESTAURANTS & LEISURE--9.1% 935 Burger King Holdings, Inc. 22,711 404 Carnival Corp. 17,901 108 Darden Restaurants, Inc. 4,598 116 Harrah's Entertainment, Inc. 9,824 142 Hilton Hotels Corp. 6,278 90 International Speedway Corp., Class A 4,310 291 McDonald's Corp. 13,930 239 MGM MIRAGE, Inc. (a) 17,473 89 Orient-Express Hotels Ltd., Class A 4,134 410 Penn National Gaming, Inc. (a) 23,576 459 Royal Caribbean Cruises Ltd. 17,685 136 Scientific Games Corp., Class A (a) 4,666 55 Station Casinos, Inc. 4,759 272 Wyndham Worldwide Corp. (a) 9,153 301 Yum! Brands, Inc. 9,644 ------------- 170,642 ------------- HOUSEHOLD DURABLES--7.5% 112 Black & Decker (The) Corp. $ 9,696 169 Harman International Industries, Inc. 19,604 573 Jarden Corp. (a) 20,702 1,117 Leggett & Platt, Inc. 23,156 244 Mohawk Industries, Inc. (a) 21,962 94 Snap-on, Inc. 4,919 325 Stanley Works (The) 17,982 222 Whirlpool Corp. 22,669 ------------- 140,690 ------------- HOUSEHOLD PRODUCTS--0.5% 147 Kimberly-Clark Corp. 9,889 ------------- INTERNET & CATALOG RETAIL--3.8% 360 Amazon.com, Inc. (a) 28,274 162 Expedia, Inc. (a) 4,311 137 IAC/InterActiveCorp. (a) 3,937 1,103 Liberty Media Corp. - Interactive, Class A (a) 23,108 212 NutriSystem, Inc. (a) 11,813 ------------- 71,443 ------------- INTERNET SOFTWARE & SERVICES--2.6% 386 aQuantive, Inc. (a) 25,533 28 Google, Inc., Class A (a) 14,280 311 VeriSign, Inc. (a) 9,234 ------------- 49,047 ------------- IT SERVICES--2.6% 459 Accenture Ltd., Class A 19,337 813 Convergys Corp. (a) 15,488 462 Hewitt Associates, Inc., Class A (a) 13,823 ------------- 48,648 ------------- LEISURE EQUIPMENT & PRODUCTS --2.1% 627 Hasbro, Inc. 17,569 584 Mattel, Inc. 13,379 252 Pool Corp. 8,470 ------------- 39,418 ------------- MACHINERY--0.7% 251 Toro (The) Co. 14,111 ------------- MEDIA--19.1% 444 CBS Corp., Class B 14,084 202 Central European Media Enterprises Ltd., Class A (a) 18,681 126 Clear Channel Communications, Inc. 4,649 168 Clear Channel Outdoor Holdings, Inc., Class A (a) 4,612 545 CTC Media, Inc. (a) 13,314 206 DIRECTV Group (The), Inc. (a) 4,616 643 Discovery Holding Co., Class A (a) 15,252 216 E.W. Scripps (The) Co., Class A 8,850 See Notes to Financial Statements Page 39 First Trust Consumer Discretionary AlphaDEX(TM) Fund Portfolio of Investments (Continued) July 31, 2007 SHARES DESCRIPTION MARKET VALUE - -------------------------------------------------------------- COMMON STOCKS (CONTINUED) MEDIA (CONTINUED) 341 EchoStar Communications Corp., Class A (a) $ 14,421 448 Gannett Co., Inc. 22,355 309 Getty Images, Inc. (a) 13,883 384 Harte-Hanks, Inc. 9,043 409 Hearst-Argyle Television, Inc. 8,589 558 Idearc, Inc. 19,368 408 John Wiley & Sons, Inc., Class A 17,254 600 Liberty Global, Inc., Class A (a) 25,159 973 McClatchy (The) Co., Class A 23,761 70 McGraw-Hill (The) Cos., Inc. 4,235 160 Meredith Corp. 9,038 465 News Corp., Class A 9,821 90 Omnicom Group, Inc. 4,668 449 Regal Entertainment Group, Class A 9,604 937 Time Warner, Inc. 18,047 670 Tribune Co. 18,733 114 Viacom, Inc., Class B (a) 4,366 606 Virgin Media, Inc. 15,053 577 Walt Disney (The) Co. 19,041 13 Washington Post (The) Co., Class B 10,280 ------------- 360,777 ------------- MULTILINE RETAIL--8.5% 670 Big Lots, Inc. (a) 17,326 686 Dillard's, Inc., Class A 20,505 566 Dollar Tree Stores, Inc. (a) 21,654 718 Family Dollar Stores, Inc. 21,267 67 Kohl's Corp. (a) 4,074 495 Macy's, Inc. 17,855 193 Nordstrom, Inc. 9,183 692 Saks, Inc. (a) 12,809 116 Sears Holdings Corp. (a) 15,868 310 Target Corp. 18,777 ------------- 159,318 ------------- PERSONAL PRODUCTS--1.3% 623 Alberto-Culver Co. 14,653 129 Avon Products, Inc. 4,645 105 Estee Lauder (The) Cos., Inc., Class A 4,727 ------------- 24,025 ------------- ROAD & RAIL--1.2% 693 Avis Budget Group, Inc. (a) 17,789 179 Hertz Global Holdings, Inc. (a) 4,008 ------------- 21,797 ------------- SPECIALTY RETAIL--19.1% 135 Abercrombie & Fitch Co., Class A 9,437 365 Advance Auto Parts, Inc. 12,691 695 AnnTaylor Stores Corp. (a) 21,837 878 AutoNation, Inc. (a) 17,103 108 Autozone, Inc. (a) 13,695 SPECIALTY RETAIL (CONTINUED) 512 Barnes & Noble, Inc. $ 17,178 580 CarMax, Inc. (a) 13,879 195 Chico's FAS, Inc. (a) 3,775 315 Circuit City Stores, Inc. 3,749 205 Coldwater Creek, Inc. (a) 4,036 339 Dick's Sporting Goods, Inc. (a) 19,062 1,130 Foot Locker, Inc. 20,973 630 GameStop Corp., Class A (a) 25,421 774 Gap (The), Inc. 13,313 513 Guess?, Inc. 24,362 501 Home Depot (The), Inc. 18,622 173 Limited Brands, Inc. 4,178 501 OfficeMax, Inc. 16,473 404 O'Reilly Automotive, Inc. (a) 13,457 694 Penske Automotive Group, Inc. 13,519 304 PetSmart, Inc. 9,828 743 RadioShack Corp. 18,672 154 Ross Stores, Inc. 4,455 464 Tiffany & Co. 22,388 173 TJX (The) Cos., Inc. 4,801 189 Tractor Supply Co. (a) 8,981 198 Urban Outfitters, Inc. (a) 3,972 ------------- 359,857 ------------- TEXTILES, APPAREL & LUXURY GOODS--6.9% 208 Coach, Inc. (a) 9,456 573 Crocs, Inc. (a) 33,990 660 Liz Claiborne, Inc. 23,192 254 NIKE, Inc., Class B 14,338 325 Phillips-Van Heusen Corp. 16,920 251 Polo Ralph Lauren Corp. 22,427 108 VF Corp. 9,265 ------------- 129,588 ------------- TRADING COMPANIES & DISTRIBUTORS --1.7% 235 Fastenal Co. 10,591 358 MSC Industrial Direct Co., Inc., Class A 18,005 79 WESCO International, Inc. (a) 4,230 ------------- 32,826 ------------- TOTAL INVESTMENTS--101.3% (Cost $2,023,036) 1,908,093 NET OTHER ASSETS AND LIABILITIES--(1.3%) (25,267) ------------- NET ASSETS--100.0% $ 1,882,826 ============= (a) Non-income producing security. Page 40 See Notes to Financial Statements First Trust Consumer Staples AlphaDEX(TM) Fund Portfolio of Investments July 31, 2007 SHARES DESCRIPTION MARKET VALUE - -------------------------------------------------------------- COMMON STOCKS--100.8% BEVERAGES--25.2% 552 Anheuser-Busch Cos., Inc. $ 26,921 394 Brown-Forman Corp., Class B 26,177 551 Coca-Cola (The) Co. 28,713 5,537 Constellation Brands, Inc., Class A (a) 121,426 2,011 Hansen Natural Corp. (a) 81,546 1,818 Molson Coors Brewing Co., Class B 161,693 2,566 Pepsi Bottling Group (The), Inc. 85,858 6,842 PepsiAmericas, Inc. 189,319 ------------- 721,653 ------------- FOOD & STAPLES RETAILING--20.1% 4,779 Kroger (The) Co. 124,063 26,340 Rite Aid Corp. (a) 145,133 4,938 Safeway, Inc. 157,374 3,628 SUPERVALU, Inc. 151,179 ------------- 577,749 ------------- FOOD PRODUCTS--34.0% 1,732 Campbell Soup Co. 63,790 1,073 ConAgra Foods, Inc. 27,201 5,273 Dean Foods Co. (a) 151,703 11,056 Del Monte Foods Co. 128,249 1,151 General Mills, Inc. 64,019 3,599 Hormel Foods Corp. 123,878 1,056 J.M. Smucker (The) Co. 58,935 2,452 Kraft Foods, Inc., Class A 80,303 755 McCormick & Co., Inc. 25,791 1,656 Sara Lee Corp. 26,248 4,366 Smithfield Foods, Inc. (a) 135,607 1,563 Wm. Wrigley Jr. Co. 90,154 ------------- 975,878 ------------- HOUSEHOLD PRODUCTS--7.1% 1,783 Church & Dwight Co., Inc. 87,475 464 Clorox (The) Co. 28,053 1,412 Procter & Gamble (The) Co. 87,346 ------------- 202,874 ------------- PERSONAL PRODUCTS--2.4% 1,556 NBTY, Inc. (a) 67,748 ------------- TOBACCO--12.0% 958 Altria Group, Inc. $ 63,678 1,740 Loews Corp. - Carolina Group 131,875 1,326 Reynolds American, Inc. 81,111 1,252 UST, Inc. 67,045 ------------- 343,709 ------------- TOTAL INVESTMENTS--100.8% (Cost $3,048,199) 2,889,611 NET OTHER ASSETS AND LIABILITIES--(0.8%) (23,125) ------------- NET ASSETS--100.0% $ 2,866,486 ============= (a) Non-income producing security. See Notes to Financial Statements Page 41 First Trust Energy AlphaDEX(TM) Fund Portfolio of Investments July 31, 2007 SHARES DESCRIPTION MARKET VALUE - -------------------------------------------------------------- COMMON STOCKS--100.5% ENERGY EQUIPMENT & SERVICES--39.1% 361 Baker Hughes, Inc. $ 28,537 1,272 Cameron International Corp. (a) 99,216 297 Diamond Offshore Drilling, Inc. 30,644 3,350 Dresser-Rand Group, Inc. (a) 124,285 1,491 ENSCO International, Inc. 91,055 382 FMC Technologies, Inc. (a) 34,961 6,167 Global Industries Ltd. (a) 159,726 421 GlobalSantaFe Corp. 30,190 563 Grant Prideco, Inc. (a) 31,584 4,670 Helmerich & Payne, Inc. 151,168 3,963 Nabors Industries Ltd. (a) 115,878 1,270 National Oilwell Varco, Inc. (a) 152,540 678 Noble Corp. 69,468 1,256 Oceaneering International, Inc. (a) 70,537 6,312 Patterson-UTI Energy, Inc. 144,545 1,767 Pride International, Inc. (a) 61,933 1,613 Rowan Cos., Inc. 68,052 779 Schlumberger Ltd. 73,787 1,417 SEACOR Holdings, Inc. (a) 123,591 1,552 Smith International, Inc. 95,308 759 Superior Energy Services, Inc. (a) 30,603 623 Transocean, Inc. (a) 66,941 2,628 Unit Corp. (a) 144,698 548 Weatherford International Ltd. (a) 30,321 ------------- 2,029,568 ------------- INDEPENDENT POWER PRODUCERS & ENERGY TRADERS--2.4% 3,184 NRG Energy, Inc. (a) 122,743 ------------- OIL, GAS & CONSUMABLE FUELS--59.0% 1,749 Anadarko Petroleum Corp. 88,027 1,622 Apache Corp. 131,122 3,823 Chesapeake Energy Corp. 130,135 1,571 Chevron Corp. 133,943 4,198 Cimarex Energy Co. 158,894 2,108 ConocoPhillips 170,411 10,336 Continental Resources, Inc. (a) 162,585 809 Denbury Resources, Inc. (a) 32,360 1,161 Devon Energy Corp. 86,622 905 EOG Resources, Inc. 63,441 789 Exxon Mobil Corp. 67,168 2,154 Forest Oil Corp. (a) 87,172 2,079 Frontier Oil Corp. 80,520 2,280 Helix Energy Solutions Group, Inc. (a) 88,806 1,542 Hess Corp. 94,370 2,230 Holly Corp. 150,280 2,206 Marathon Oil Corp. 121,771 511 Murphy Oil Corp. 31,702 1,452 Newfield Exploration Co. (a) 69,769 487 Noble Energy, Inc. 29,775 2,286 Occidental Petroleum Corp. 129,662 623 Pioneer Natural Resources Co. 28,347 3,460 Plains Exploration & Production Co. (a) 149,507 2,606 Pogo Producing Co. 138,796 OIL, GAS & CONSUMABLE FUELS (CONTINUED) 809 Range Resources Corp. $ 30,046 2,485 St. Mary Land & Exploration Co. 82,726 829 Sunoco, Inc. 55,311 1,592 Tesoro Corp. 79,282 2,240 Valero Energy Corp. 150,102 3,250 W&T Offshore, Inc. 76,115 2,862 Western Refining, Inc. 158,841 ------------- 3,057,608 ------------- TOTAL INVESTMENTS--100.5% (Cost $5,463,172) 5,209,919 NET OTHER ASSETS AND LIABILITIES--(0.5%) (25,432) ------------- NET ASSETS--100.0% $ 5,184,487 ============= (a) Non-income producing security. Page 42 See Notes to Financial Statements First Trust Financials AlphaDEX(TM) Fund Portfolio of Investments July 31, 2007 SHARES DESCRIPTION MARKET VALUE - -------------------------------------------------------------- COMMON STOCKS--101.3% CAPITAL MARKETS--14.7% 240 A.G. Edwards, Inc. $ 19,406 122 Affiliated Managers Group, Inc. (a) 13,786 381 Allied Capital Corp. 10,790 477 American Capital Strategies Ltd. 18,112 112 Bear Stearns (The) Cos., Inc. 13,577 25 BlackRock, Inc. 3,988 201 Charles Schwab (The) Corp. 4,046 178 E*TRADE Financial Corp. (a) 3,297 356 Eaton Vance Corp. 14,902 103 Federated Investors, Inc., Class B 3,709 89 Franklin Resources, Inc. 11,336 73 Goldman Sachs Group (The), Inc. 13,749 91 Investment Technology Group, Inc. (a) 3,636 565 Janus Capital Group, Inc. 16,984 146 Jefferies Group, Inc. 3,835 120 Legg Mason, Inc. 10,800 104 Lehman Brothers Holdings, Inc. 6,448 141 Merrill Lynch & Co., Inc. 10,462 188 Morgan Stanley 12,008 123 Northern Trust Corp. 7,683 253 Nuveen Investments, Inc. 15,468 127 Raymond James Financial, Inc. 3,895 135 SEI Investments Co. 3,680 115 State Street Corp. 7,708 227 T. Rowe Price Group, Inc. 11,834 1,014 TD Ameritrade Holding Corp. (a) 17,187 ------------- 262,326 ------------- COMMERCIAL BANKS--13.5% 241 Associated Banc-Corp. 6,926 322 BancorpSouth, Inc. 7,519 193 BB&T Corp. 7,222 74 BOK Financial Corp. 3,701 52 City National Corp. 3,681 315 Colonial BancGroup (The), Inc. 6,870 132 Comerica, Inc. 6,951 213 Commerce Bancorp, Inc. 7,125 174 Commerce Bancshares, Inc. 7,734 74 Cullen/Frost Bankers, Inc. 3,676 101 East West Bancorp, Inc. 3,703 61 First Citizens BancShares, Inc., Class A 10,960 101 First Horizon National Corp. 3,204 546 Fulton Financial Corp. 7,218 519 Huntington Bancshares, Inc. 9,965 344 KeyCorp 11,933 74 M&T Bank Corp. 7,865 165 Marshall & Ilsley Corp. 6,800 472 National City Corp. 13,872 220 PNC Financial Services Group, Inc. 14,664 735 Popular, Inc. 9,695 238 Regions Financial Corp. 7,157 92 SunTrust Banks, Inc. 7,204 128 Synovus Financial Corp. 3,579 142 TCF Financial Corp. 3,492 COMMERCIAL BANKS (CONTINUED) 119 U.S. Bancorp $ 3,564 198 UnionBanCal Corp. 10,941 175 Valley National Bancorp 3,705 230 Wachovia Corp. 10,858 184 Webster Financial Corp. 7,997 224 Wells Fargo & Co. 7,564 261 Whitney Holding Corp. 6,522 102 Zions Bancorporation 7,604 ------------- 241,471 ------------- COMMERCIAL SERVICES & SUPPLIES --1.2% 115 Dun & Bradstreet (The) Corp. 11,243 266 Equifax, Inc. 10,762 ------------- 22,005 ------------- CONSUMER FINANCE--2.6% 129 American Express Co. 7,552 593 AmeriCredit Corp. (a) 12,062 150 Capital One Financial Corp. 10,614 273 SLM Corp. (a) 13,423 19 Student Loan (The) Corp. 3,534 ------------- 47,185 ------------- DIVERSIFIED FINANCIAL SERVICES --3.9% 241 Bank of America Corp. 11,428 287 CIT Group, Inc. 11,819 153 Citigroup, Inc. 7,125 7 CME Group, Inc. 3,868 137 IntercontinentalExchange, Inc. (a) 20,704 244 JPMorgan Chase & Co. 10,738 132 Nasdaq Stock Market, Inc. (a) 4,062 ------------- 69,744 ------------- HEALTH CARE PROVIDERS & SERVICES--0.9% 301 CIGNA Corp. 15,544 ------------- INSURANCE--39.4% 324 ACE Ltd. 18,701 77 AFLAC, Inc. 4,013 39 Alleghany Corp. (a) 16,380 396 Allied World Assurance Holdings Ltd. 18,790 256 Allstate (The) Corp. 13,606 181 Ambac Financial Group, Inc. 12,154 461 American Financial Group, Inc. 12,949 169 American International Group, Inc. 10,846 52 American National Insurance Co. 7,776 92 Aon Corp. 3,684 279 Arch Capital Group Ltd. (a) 19,435 141 Arthur J. Gallagher & Co. 3,889 200 Assurant, Inc. 10,144 499 Axis Capital Holdings Ltd. 18,388 374 Chubb (The) Corp. 18,853 See Notes to Financial Statements Page 43 First Trust Financials AlphaDEX(TM) Fund Portfolio of Investments (Continued) July 31, 2007 SHARES DESCRIPTION MARKET VALUE - -------------------------------------------------------------- COMMON STOCKS (CONTINUED) INSURANCE (CONTINUED) 363 Cincinnati Financial Corp. $ 14,230 330 CNA Financial Corp. 13,702 753 Conseco, Inc. (a) 13,697 506 Endurance Specialty Holdings Ltd. 18,924 146 Erie Indemnity Co., Class A 7,539 187 Everest Re Group, Ltd. 18,373 855 Fidelity National Financial, Inc., Class A 17,861 318 First American Corp. 14,720 343 Genworth Financial, Inc., Class A 10,468 242 Hanover Insurance Group, Inc. 10,621 120 Hartford Financial Services Group (The), Inc. 11,024 471 HCC Insurance Holdings, Inc. 13,791 111 Lincoln National Corp. 6,696 309 Loews Corp. 14,647 24 Markel Corp. (a) 11,172 255 Marsh & McLennan Cos., Inc. 7,025 253 MBIA, Inc. 14,193 286 Mercury General Corp. 14,809 122 MetLife, Inc. 7,347 124 Nationwide Financial Services, Class A 7,057 740 Old Republic International Corp. 13,586 621 OneBeacon Insurance Group Ltd. 14,345 262 PartnerRe Ltd. 18,610 485 Philadelphia Consolidated Holding Corp. (a) 17,528 68 Principal Financial Group, Inc. 3,835 658 Progressive (The) Corp. 13,805 247 Protective Life Corp. 10,626 121 Prudential Financial, Inc. 10,724 196 Reinsurance Group of America, Inc. 10,449 327 RenaissanceRe Holdings Ltd. 18,803 326 SAFECO Corp. 19,061 150 StanCorp Financial Group, Inc. 7,044 176 Torchmark Corp. 10,831 166 Transatlantic Holdings, Inc. 12,143 379 Travelers (The) Cos., Inc. 19,246 320 Unitrin, Inc. 13,562 301 Unum Group 7,314 26 White Mountains Insurance Group Ltd. 14,287 623 W.R. Berkley Corp. 18,329 187 XL Capital Ltd., Class A 14,560 ------------- 706,192 ------------- IT SERVICES--5.5% 262 Alliance Data Systems Corp. (a) 20,122 196 CheckFree Corp. (a) 7,221 99 DST Systems, Inc. (a) 7,511 373 Fidelity National Information Services, Inc. 18,512 241 First Data Corp. 7,661 IT SERVICES (CONTINUED) 208 Fiserv, Inc. (a) $ 10,279 122 MasterCard, Inc., Class A 19,618 133 Total System Services, Inc. 3,741 189 Western Union Co. 3,771 ------------- 98,436 ------------- MEDIA--1.1% 353 Dow Jones & Co., Inc. 20,255 ------------- REAL ESTATE INVESTMENT TRUSTS --5.0% 273 Annaly Capital Management, Inc. 3,945 198 Boston Properties, Inc. 18,709 160 CapitalSource, Inc. 3,040 556 Colonial Properties Trust 19,233 95 Hospitality Properties Trust 3,644 1,135 HRPT Properties Trust 10,612 89 iStar Financial, Inc. 3,233 69 ProLogis 3,926 262 Rayonier, Inc. 11,093 451 Thornburg Mortgage, Inc. 11,464 ------------- 88,899 ------------- REAL ESTATE MANAGEMENT & DEVELOPMENT--1.9% 431 CB Richard Ellis Group, Inc., Class A (a) 15,051 179 Jones Lang LaSalle, Inc. 19,650 ------------- 34,701 ------------- ROAD & RAIL--1.1% 377 Ryder System, Inc. 20,497 ------------- SOFTWARE--1.1% 173 FactSet Research Systems, Inc. 11,416 196 Fair Isaac Corp. 7,695 ------------- 19,111 ------------- THRIFTS & MORTGAGE FINANCE --7.7% 157 Astoria Financial Corp. 3,697 433 Countrywide Financial Corp. 12,198 120 Fannie Mae 7,181 334 Freddie Mac 19,128 695 IndyMac Bancorp, Inc. 15,290 356 MGIC Investment Corp. 13,763 231 New York Community Bancorp, Inc. 3,749 454 PMI Group (The), Inc. 15,468 375 Radian Group, Inc. 12,641 1,757 TFS Financial Corp. (a) 19,959 162 Washington Federal, Inc. 3,650 277 Washington Mutual, Inc. 10,396 ------------- 137,120 ------------- Page 44 See Notes to Financial Statements First Trust Financials AlphaDEX(TM) Fund Portfolio of Investments (Continued) July 31, 2007 SHARES DESCRIPTION MARKET VALUE - -------------------------------------------------------------- COMMON STOCKS (CONTINUED) TRADING COMPANIES & DISTRIBUTORS --1.7% 240 GATX Corp. $ 10,886 623 United Rentals, Inc. (a) 20,024 ------------- 30,910 ------------- TOTAL INVESTMENTS--101.3% (Cost $2,026,884) 1,814,396 NET OTHER ASSETS AND LIABILITIES--(1.3%) (23,435) ------------- NET ASSETS--100.0% $ 1,790,961 ============= (a) Non-income producing security. See Notes to Financial Statements Page 45 First Trust Health Care AlphaDEX(TM) Fund Portfolio of Investments July 31, 2007 SHARES DESCRIPTION MARKET VALUE - -------------------------------------------------------------- COMMON STOCKS--98.3% BIOTECHNOLOGY--8.9% 318 Amgen, Inc. (a) $ 17,089 214 Amylin Pharmaceuticals, Inc. (a) 9,953 329 Biogen Idec, Inc. (a) 18,602 307 Celgene Corp. (a) 18,592 586 Cephalon, Inc. (a) 44,031 137 Genzyme Corp. (a) 8,641 729 Gilead Sciences, Inc. (a) 27,141 1,214 PDL BioPharma, Inc. (a) 28,517 ------------- 172,566 ------------- COMMERCIAL SERVICES & SUPPLIES --2.0% 792 Stericycle, Inc. (a) 37,968 ------------- FOOD & STAPLES RETAILING--1.7% 965 CVS Caremark Corp. 33,958 ------------- HEALTH CARE EQUIPMENT & SUPPLIES --22.3% 679 Bausch & Lomb, Inc. 43,408 502 Baxter International, Inc. 26,405 136 Beckman Coulter, Inc. 9,632 192 Biomet, Inc. (a) 8,742 330 Cooper Cos. (The), Inc. 16,543 1,093 Cytyc Corp. (a) 46,015 662 Dade Behring Holdings, Inc. 49,551 920 DENTSPLY International, Inc. 33,571 291 Gen-Probe, Inc. (a) 18,336 299 IDEXX Laboratories, Inc. (a) 29,978 254 Intuitive Surgical, Inc. (a) 54,003 544 Kinetic Concepts, Inc. (a) 33,445 413 Respironics, Inc. (a) 18,895 682 St. Jude Medical, Inc. (a) 29,421 139 Stryker Corp. 8,678 104 Zimmer Holdings, Inc. (a) 8,087 ------------- 434,710 ------------- HEALTH CARE PROVIDERS & SERVICES --37.6% 712 Aetna, Inc. 34,226 572 AmerisourceBergen Corp. 26,947 193 Brookdale Senior Living, Inc. 7,722 249 Cardinal Health, Inc. 16,367 870 Community Health Systems, Inc. (a) 33,843 610 Coventry Health Care, Inc. (a) 34,044 327 DaVita, Inc. (a) 17,311 942 Express Scripts, Inc. (a) 47,222 333 Health Net, Inc. (a) 16,497 329 Henry Schein, Inc. (a) 17,878 774 Humana, Inc. (a) 49,606 225 Laboratory Corp. of America Holdings (a) 16,616 1,218 LifePoint Hospitals, Inc. (a) 35,992 221 Lincare Holdings, Inc. (a) 7,887 722 Manor Care, Inc. 45,739 HEALTH CARE PROVIDERS & SERVICES (CONTINUED) 590 McKesson Corp. $ 34,078 604 Medco Health Solutions, Inc. (a) 49,087 244 Omnicare, Inc. 8,091 236 Patterson Cos., Inc. (a) 8,465 160 Pediatrix Medical Group, Inc. (a) 8,634 681 Quest Diagnostics, Inc. 37,775 423 Sierra Health Services, Inc. (a) 17,191 344 UnitedHealth Group, Inc. 16,660 766 Universal Health Services, Inc., Class B 40,169 467 VCA Antech, Inc. (a) 18,372 521 WellCare Health Plans, Inc. (a) 52,757 441 WellPoint, Inc. (a) 33,128 ------------- 732,304 ------------- HEALTH CARE TECHNOLOGY--3.0% 634 Cerner Corp. (a) 33,520 880 IMS Health, Inc. 24,754 ------------- 58,274 ------------- LIFE SCIENCES TOOLS & SERVICES--9.3% 682 Charles River Laboratories International, Inc. (a) 34,905 412 Covance, Inc. (a) 29,075 383 Invitrogen Corp. (a) 27,499 377 Millipore Corp. (a) 29,636 739 Pharmaceutical Product Development, Inc. 24,757 680 Thermo Fisher Scientific, Inc. (a) 35,502 ------------- 181,374 ------------- PHARMACEUTICALS--13.5% 153 Allergan, Inc. 8,894 175 Barr Pharmaceuticals, Inc. (a) 8,964 279 Bristol-Myers Squibb Co. 7,926 257 Endo Pharmaceuticals Holdings, Inc. (a) 8,741 459 Johnson & Johnson 27,770 2,304 King Pharmaceuticals, Inc. (a) 39,191 353 Merck & Co., Inc. 17,526 1,376 Pfizer, Inc. 32,350 1,548 Schering-Plough Corp. 44,179 1,449 Watson Pharmaceuticals, Inc. (a) 44,079 493 Wyeth 23,920 ------------- 263,540 ------------- TOTAL INVESTMENTS--98.3% (Cost $1,939,767) 1,914,694 NET OTHER ASSETS AND LIABILITIES--1.7% 33,838 ------------- NET ASSETS--100.0% $ 1,948,532 ============= (a) Non-income producing security. Page 46 See Notes to Financial Statements First Trust Industrials/Producer Durables AlphaDEX(TM) Fund Portfolio of Investments July 31, 2007 SHARES DESCRIPTION MARKET VALUE - -------------------------------------------------------------- COMMON STOCKS--100.3% AEROSPACE & DEFENSE--12.2% 1,318 Alliant Techsystems, Inc. (a) $ 130,627 3,950 BE Aerospace, Inc. (a) 160,213 310 Boeing (The), Co. 32,063 2,191 Goodrich Corp. 137,836 1,143 Northrop Grumman Corp. 86,982 417 United Technologies Corp. 30,428 ------------- 578,149 ------------- COMMERCIAL SERVICES & SUPPLIES--1.9% 2,647 Covanta Holding Corp. (a) 60,034 1,604 Steelcase, Inc., Class A 27,926 ------------- 87,960 ------------- COMPUTERS & PERIPHERALS--2.5% 1,252 Diebold, Inc. 63,439 1,323 Lexmark International, Inc., Class A (a) 52,311 ------------- 115,750 ------------- ELECTRICAL EQUIPMENT--10.8% 2,245 AMETEK, Inc. 87,600 1,559 Cooper Industries Ltd., Class A 82,502 2,155 General Cable Corp. (a) 171,322 1,203 Hubbell, Inc., Class B 69,353 521 Roper Industries, Inc. 31,250 1,127 Thomas & Betts Corp. (a) 69,649 ------------- 511,676 ------------- ELECTRONIC EQUIPMENT & INSTRUMENTS--3.8% 682 Mettler-Toledo International, Inc. (a) 64,899 2,967 Molex, Inc. 84,085 878 Tektronix, Inc. 28,842 ------------- 177,826 ------------- HOUSEHOLD DURABLES--15.8% 8,189 D.R. Horton, Inc. 133,644 3,317 KB Home 105,514 1,785 Lennar Corp., Class A 54,728 240 NVR, Inc. (a) 138,835 1,323 Pulte Homes, Inc. 25,587 4,366 Ryland Group (The), Inc. 145,169 6,535 Toll Brothers, Inc. (a) 143,313 ------------- 746,790 ------------- MACHINERY--39.8% 3,007 AGCO Corp. (a 115,559 1,137 Caterpillar, Inc. 89,596 652 Crane Co. 29,901 1,613 Cummins, Inc. 191,463 737 Deere & Co. 88,750 1,824 Flowserve Corp. 131,820 2,091 Gardner Denver, Inc. (a) 86,965 2,310 IDEX Corp. 83,645 MACHINERY (CONTINUED) 1,204 Illinois Tool Works, Inc. $ 66,280 2,381 Ingersoll-Rand Co., Ltd., Class A 119,812 1,118 Joy Global, Inc. 55,330 1,990 Kennametal, Inc. 152,553 1,759 Lincoln Electric Holdings, Inc. 126,630 2,030 Manitowoc (The) Co., Inc. 157,670 2,838 Pall Corp. 117,834 908 Parker Hannifin Corp. 89,601 2,009 Terex Corp. (a) 173,276 ------------- 1,876,685 ------------- OFFICE ELECTRONICS--1.8% 4,817 Xerox Corp. (a) 84,105 ------------- SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT--7.9% 1,493 Applied Materials, Inc. 32,906 541 KLA-Tencor Corp. 30,723 4,601 Novellus Systems, Inc. (a) 131,221 1,689 Teradyne, Inc. (a) 26,500 3,258 Varian Semiconductor Equipment Associates, Inc. (a) 153,126 ------------- 374,476 ------------- TRADING COMPANIES & DISTRIBUTORS --1.8% 957 W.W. Grainger, Inc. 83,604 ------------- WIRELESS TELECOMMUNICATION SERVICES--2.0% 707 American Tower Corp., Class A (a) 29,454 1,944 SBA Communications Corp. (a) 64,774 ------------- 94,228 ------------- TOTAL INVESTMENTS--100.3% (Cost $4,997,436) 4,731,249 NET OTHER ASSETS AND LIABILITIES--(0.3%) (12,930) ------------- NET ASSETS--100.0% $ 4,718,319 ============= (a) Non-income producing security. See Notes to Financial Statements Page 47 First Trust Materials AlphaDEX(TM) Fund Portfolio of Investments July 31, 2007 SHARES DESCRIPTION MARKET VALUE - -------------------------------------------------------------- COMMON STOCK--97.9% AEROSPACE & DEFENSE--2.4% 522 Precision Castparts Corp. $ 71,545 ------------- BUILDING PRODUCTS--9.0% 806 American Standard Cos., Inc. 43,564 1,711 Armstrong World Industries, Inc. (a) 74,121 926 Lennox International, Inc. 35,466 2,551 Owens Corning, Inc. (a) 77,627 969 USG Corp. (a) 40,223 ------------- 271,001 ------------- CHEMICALS--25.8% 394 Air Products and Chemicals, Inc. 34,030 992 Airgas, Inc. 46,327 248 Ashland, Inc. 15,143 664 Cabot Corp. 26,812 2,213 Celanese Corp., Class A 82,989 2,852 Chemtura Corp. 29,746 745 Cytec Industries, Inc. 49,908 1,075 Dow Chemical (The) Co. 46,741 312 E.I. du Pont de Nemours and Co. 14,580 739 Eastman Chemical Co. 50,858 982 Lubrizol (The) Corp. 61,532 704 Monsanto Co. 45,373 1,218 Mosaic (The) Co. (a) 45,748 1,731 Nalco Holding Co. 39,882 208 PPG Industries, Inc. 15,864 220 Praxair, Inc. 16,856 579 Rohm and Haas Co. 32,725 685 RPM International, Inc. 16,104 371 Sigma-Aldrich Corp. 16,814 558 Valspar (The) Corp. 15,395 3,051 Westlake Chemical Corp. 76,214 ------------- 779,641 ------------- CONSTRUCTION & ENGINEERING--10.9% 427 Fluor Corp. 49,323 1,492 Jacobs Engineering Group, Inc. (a) 91,952 2,066 Quanta Services, Inc. (a) 58,736 1,854 Shaw Group (The), Inc. (a) 98,670 653 URS Corp. (a) 32,167 ------------- 330,848 ------------- CONSTRUCTION MATERIALS--1.3% 293 Martin Marietta Materials, Inc. 40,141 ------------- CONTAINERS & PACKAGING--9.1% 1,192 Ball Corp. 61,114 955 Bemis Co., Inc. 28,144 1,269 Crown Holdings, Inc. (a) 31,167 2,452 Owens-Illinois, Inc. (a) 98,030 626 Packaging Corp. of America 15,976 1,021 Sealed Air Corp. 27,822 370 Sonoco Products Co. 13,568 ------------- 275,821 ------------- FOOD PRODUCTS--2.7% 1,436 Archer-Daniels-Midland Co. $ 48,250 187 Bunge Ltd. 16,944 349 Corn Products International, Inc. 15,572 ------------- 80,766 ------------- HOUSEHOLD PRODUCTS--1.6% 477 Energizer Holdings, Inc. (a) 48,129 ------------- INDUSTRIAL CONGLOMERATES--2.8% 1,032 McDermott International, Inc. (a) 85,594 ------------- MACHINERY--2.6% 1,219 Harsco Corp. 64,192 439 Timken (The) Co. 14,663 ------------- 78,855 ------------- METALS & MINING--26.1% 2,296 AK Steel Holding Corp. (a) 91,770 782 Alcoa, Inc. 29,872 302 Allegheny Technologies, Inc. 31,689 243 Carpenter Technology Corp. 28,842 882 Chaparral Steel Co. 74,123 816 Cleveland-Cliffs, Inc. 56,524 1,876 Commercial Metals Co. 57,856 765 Freeport-McMoRan Copper & Gold, Inc. 71,895 406 Newmont Mining Corp. 16,951 1,080 Nucor Corp. 54,216 1,525 Reliance Steel & Aluminum Co. 80,124 672 Southern Copper Corp. 75,741 1,512 Steel Dynamics, Inc. 63,398 583 United States Steel Corp. 57,303 ------------- 790,304 ------------- PAPER & FOREST PRODUCTS--3.6% 2,197 International Paper Co. 81,443 401 Weyerhaeuser Co. 28,567 ------------- 110,010 ------------- TOTAL INVESTMENTS--97.9% (Cost $3,016,697) 2,962,655 NET OTHER ASSETS AND LIABILITIES--2.1% 62,452 ------------- NET ASSETS--100.0% $ 3,025,107 ============= (a) Non-income producing security. Page 48 See Notes to Financial Statements First Trust Technology AlphaDEX(TM) Fund Portfolio of Investments July 31, 2007 SHARES DESCRIPTION MARKET VALUE - -------------------------------------------------------------- COMMON STOCKS--101.2% AEROSPACE & DEFENSE--4.8% 676 DRS Technologies, Inc. $ 35,395 247 General Dynamics Corp. 19,404 497 L-3 Communications Holdings, Inc. 48,488 ------------- 103,287 ------------- COMMUNICATIONS EQUIPMENT--17.4% 2,639 ADC Telecommunications, Inc. (a) 49,323 2,298 Avaya, Inc. (a) 38,009 1,071 Ciena Corp. (a) 39,124 695 Cisco Systems, Inc. (a) 20,092 829 CommScope, Inc. (a) 45,122 355 Corning, Inc. 8,463 480 F5 Networks, Inc. (a) 41,611 709 Harris Corp. 38,910 1,537 Juniper Networks, Inc. (a) 46,049 1,093 Motorola, Inc. 18,570 209 QUALCOMM, Inc. 8,705 1,798 Tellabs, Inc. (a) 20,407 ------------- 374,385 ------------- COMPUTERS & PERIPHERALS--16.2% 396 Apple, Inc. (a) 52,177 1,160 Brocade Communications Systems, Inc. (a) 8,166 1,016 Dell, Inc. (a) 28,418 2,672 EMC Corp. (a) 49,459 650 Hewlett-Packard Co. 29,920 184 International Business Machines Corp. 20,360 552 NCR Corp. (a) 28,825 1,162 QLogic Corp. (a) 15,443 395 SanDisk Corp. (a) 21,184 1,333 Seagate Technology 31,339 1,724 Sun Microsystems, Inc. (a) 8,792 2,500 Western Digital Corp. (a) 53,374 ------------- 347,457 ------------- ELECTRICAL EQUIPMENT--3.4% 279 Rockwell Automation, Inc. 19,527 767 SunPower Corp., Class A (a) 54,097 ------------- 73,624 ------------- ELECTRONIC EQUIPMENT & INSTRUMENTS --17.2% 1,085 Amphenol Corp., Class A 37,172 1,259 Arrow Electronics, Inc. (a) 48,119 1,220 Avnet, Inc. (a) 46,214 2,311 AVX Corp. 36,953 1,337 Ingram Micro, Inc., Class A (a) 26,807 411 Jabil Circuit, Inc. 9,260 891 National Instruments Corp. 28,824 10,514 Solectron Corp. (a) 39,533 1,502 Trimble Navigation Ltd. (a) 49,610 ELECTRONIC EQUIPMENT & INSTRUMENTS (CONTINUED) 3,057 Vishay Intertechnology, Inc. (a) $ 47,414 ------------- 369,906 ------------- HOUSEHOLD DURABLES--2.6% 654 Garmin Ltd. 54,871 ------------- IT SERVICES--6.0% 343 Acxiom Corp. 8,630 512 Affiliated Computer Services, Inc., Class A (a) 27,474 553 Ceridian Corp. (a) 18,747 654 Computer Sciences Corp. (a) 36,415 1,395 Electronic Data Systems Corp. 37,650 ------------- 128,916 ------------- LIFE SCIENCES TOOLS & SERVICES--1.0% 742 PerkinElmer, Inc. 20,650 ------------- OFFICE ELECTRONICS--0.4% 234 Zebra Technologies Corp., Class A (a) 8,478 ------------- SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT--18.7% 874 Altera Corp. 20,277 241 Analog Devices, Inc. 8,543 748 Cree, Inc. (a) 19,164 2,077 Cypress Semiconductor Corp. (a) 52,050 1,502 Fairchild Semiconductor International, Inc. (a) 27,412 382 Intel Corp. 9,023 779 International Rectifier Corp. (a) 28,597 922 Intersil Corp., Class A 26,969 5,152 LSI Corp. (a) 37,094 271 Maxim Integrated Products, Inc. 8,591 475 MEMC Electronic Materials, Inc. (a) 29,127 3,860 Micron Technology, Inc. (a) 45,818 321 National Semiconductor Corp. 8,343 1,171 NVIDIA Corp. (a) 53,584 771 Texas Instruments, Inc. 27,131 ------------- 401,723 ------------- SOFTWARE--13.5% 228 Amdocs Ltd. (a) 8,251 822 Autodesk, Inc. (a) 34,829 1,413 BEA Systems, Inc. (a) 17,493 881 Cadence Design Systems, Inc. (a) 18,853 269 Citrix Systems, Inc. (a) 9,730 3,262 Compuware Corp. (a) 30,434 1,099 McAfee, Inc. (a) 39,411 308 Microsoft Corp. 8,929 457 NAVTEQ Corp. (a) 24,737 1,164 Novell, Inc. (a) 7,810 1,472 Oracle Corp. (a) 28,145 677 Salesforce.com, Inc. (a) 26,308 See Notes to Financial Statements Page 49 First Trust Technology AlphaDEX(TM) Fund Portfolio of Investments (Continued) July 31, 2007 SHARES DESCRIPTION MARKET VALUE - -------------------------------------------------------------- COMMON STOCKS (CONTINUED) SOFTWARE (CONTINUED) 1,437 Symantec Corp. (a) $ 27,590 343 Synopsys, Inc. (a) 8,390 ------------- 290,910 ------------- TOTAL INVESTMENTS--101.2% (Cost $2,170,215) 2,174,207 NET OTHER ASSETS AND LIABILITIES--(1.2%) (25,271) ------------- NET ASSETS--100.0% $ 2,148,936 ============= (a) Non-income producing security. Page 50 See Notes to Financial Statements First Trust Utilities AlphaDEX(TM) Fund Portfolio of Investments July 31, 2007 SHARES DESCRIPTION MARKET VALUE - -------------------------------------------------------------- COMMON STOCKS--100.6% DIVERSIFIED TELECOMMUNICATION SERVICES--4.2% 421 AT&T, Inc. $ 16,486 1,780 CenturyTel, Inc. 81,649 424 Verizon Communications, Inc. 18,071 ------------- 116,206 ------------- ELECTRIC UTILITIES--24.7% 775 American Electric Power Co., Inc. 33,705 4,770 Duke Energy Corp. 81,232 622 Edison International 32,898 163 Entergy Corp. 16,293 809 FirstEnergy Corp. 49,147 308 FPL Group, Inc. 17,781 2,398 Great Plains Energy, Inc. 66,568 737 Hawaiian Electric Industries, Inc. 16,811 1,231 Northeast Utilities 33,656 1,238 Pepco Holdings, Inc. 33,513 2,191 Pinnacle West Capital Corp. 82,118 1,119 PPL Corp. 52,750 1,532 Progress Energy, Inc. 66,887 3,977 Sierra Pacific Resources (a) 63,195 1,018 Southern Co. 34,246 ------------- 680,800 ------------- GAS UTILITIES--9.6% 863 AGL Resources, Inc. 32,535 2,904 Atmos Energy Corp. 81,514 1,271 Energen Corp. 67,249 346 ONEOK, Inc. 17,560 330 Questar Corp. 16,992 536 Southern Union Company 16,552 1,280 UGI Corp. 33,037 ------------- 265,439 ------------- INDEPENDENT POWER PRODUCERS & ENERGY TRADERS--4.0% 401 Constellation Energy Group 33,604 2,047 Mirant Corp. (a) 77,438 ------------- 111,042 ------------- MEDIA--3.1% 2,412 Cablevision Systems Corp., Class A (a) 85,843 ------------- MULTI-UTILITIES--41.8% 2,247 Alliant Energy Corp. 83,027 1,425 Ameren Corp. 68,372 1,015 CMS Energy Corp. 16,402 1,548 Consolidated Edison, Inc. 67,617 202 Dominion Resources, Inc. 17,012 1,448 DTE Energy Co. 67,158 2,677 Energy East Corp. 67,755 344 Integrys Energy Group, Inc. 17,025 1,248 KeySpan Corp. 51,854 MULTI-UTILITIES (CONTINUED) 1,868 MDU Resources Group, Inc. $ 50,922 4,215 NiSource, Inc. 80,380 1,614 NSTAR 50,760 1,429 OGE Energy Corp. 47,371 1,156 PG&E Corp. 49,488 3,610 Puget Energy, Inc. 83,571 1,824 SCANA Corp. 68,181 590 Sempra Energy 31,105 3,049 TECO Energy, Inc. 49,211 2,593 Vectren Corp. 64,747 1,184 Wisconsin Energy Corp. 50,829 3,412 Xcel Energy, Inc. 69,264 ------------- 1,152,051 ------------- WIRELESS TELECOMMUNICATION SERVICES--13.2% 517 ALLTEL Corp. 34,096 1,033 Leap Wireless International, Inc. (a) 91,317 432 NII Holdings, Inc. (a) 36,297 2,529 Sprint Nextel Corp. 51,920 837 Telephone and Data Systems, Inc. 55,577 964 United States Cellular Corp. (a) 93,508 ------------- 362,715 ------------- TOTAL INVESTMENTS--100.6% (Cost $3,010,654) 2,774,096 NET OTHER ASSETS AND LIABILITIES--(0.6%) (17,883) ------------- NET ASSETS--100.0% $ 2,756,213 ============= (a) Non-income producing security. See Notes to Financial Statements Page 51 First Trust Large Cap Core AlphaDEX(TM) Fund Portfolio of Investments July 31, 2007 SHARES DESCRIPTION MARKET VALUE - -------------------------------------------------------------- COMMON STOCKS --100.4% AEROSPACE & DEFENSE--2.7% 84 Boeing (The) Co. $ 8,688 103 General Dynamics Corp. 8,092 45 Goodrich Corp. 2,831 138 L-3 Communications Holdings, Inc. 13,463 29 Lockheed Martin Corp. 2,856 138 Northrop Grumman Corp. 10,502 111 Precision Castparts Corp. 15,213 50 Raytheon Co. 2,768 76 Rockwell Collins, Inc. 5,221 113 United Technologies Corp. 8,246 ------------- 77,880 ------------- AIR FREIGHT & LOGISTICS--0.8% 153 C.H. Robinson Worldwide, Inc. 7,443 97 FedEx Corp. 10,743 74 United Parcel Service, Inc., Class B 5,603 ------------- 23,789 ------------- AIRLINES--0.3% 540 Southwest Airlines Co. 8,456 ------------- AUTO COMPONENTS--0.2% 46 Johnson Controls, Inc. 5,205 ------------- BEVERAGES--1.0% 37 Brown-Forman Corp., Class B 2,458 51 Coca-Cola (The) Co. 2,658 331 Constellation Brands, Inc., Class A (a) 7,259 116 Molson Coors Brewing Co., Class B 10,317 159 Pepsi Bottling Group (The), Inc. 5,320 ------------- 28,012 ------------- BIOTECHNOLOGY--0.7% 100 Biogen Idec, Inc. (a) 5,654 94 Celgene Corp. (a) 5,693 208 Gilead Sciences, Inc. (a) 7,743 ------------- 19,090 ------------- BUILDING PRODUCTS--0.4% 227 American Standard Cos., Inc. 12,269 ------------- CAPITAL MARKETS--3.5% 169 Ameriprise Financial, Inc. 10,186 77 Bear Stearns (The) Cos., Inc. 9,334 121 E*TRADE Financial Corp. (a) 2,241 70 Federated Investors, Inc., Class B 2,521 81 Franklin Resources, Inc. 10,317 62 Goldman Sachs Group (The), Inc. 11,677 385 Janus Capital Group, Inc. 11,573 55 Legg Mason, Inc. 4,950 144 Lehman Brothers Holdings, Inc. 8,928 96 Merrill Lynch & Co., Inc. 7,123 32 Morgan Stanley 2,044 84 Northern Trust Corp. 5,247 CAPITAL MARKETS (CONTINUED) 78 State Street Corp. $ 5,228 155 T. Rowe Price Group, Inc. 8,080 ------------- 99,449 ------------- CHEMICALS--3.3% 100 Air Products and Chemicals, Inc. 8,637 42 Ashland, Inc. 2,565 303 Dow Chemical (The) Co. 13,174 158 E.I. du Pont de Nemours & Co. 7,383 167 Eastman Chemical Co. 11,493 273 Hercules, Inc. (a) 5,667 154 International Flavors & Fragrances, Inc. 7,717 199 Monsanto Co. 12,826 70 PPG Industries, Inc. 5,339 112 Praxair, Inc. 8,581 196 Rohm and Haas Co. 11,078 ------------- 94,460 ------------- COMMERCIAL BANKS--3.0% 66 BB&T Corp. 2,470 90 Comerica, Inc. 4,739 145 Commerce Bancorp, Inc. 4,850 78 Compass Bancshares, Inc. 5,404 69 First Horizon National Corp. 2,189 354 Huntington Bancshares, Inc. 6,797 234 KeyCorp 8,117 50 M&T Bank Corp. 5,315 56 Marshall & Ilsley Corp. 2,308 322 National City Corp. 9,463 150 PNC Financial Services Group, Inc. 9,997 162 Regions Financial Corp. 4,871 31 SunTrust Banks, Inc. 2,427 81 U.S. Bancorp 2,426 157 Wachovia Corp. 7,412 76 Wells Fargo & Co. 2,567 70 Zions Bancorporation 5,219 ------------- 86,571 ------------- COMMERCIAL SERVICES & SUPPLIES --1.3% 797 Allied Waste Industries, Inc. (a) 10,257 81 Avery Dennison Corp. 4,969 121 Equifax, Inc. 4,896 185 R.R. Donnelley & Sons Co. 7,818 74 Robert Half International, Inc. 2,515 206 Waste Management, Inc. 7,834 ------------- 38,289 ------------- COMMUNICATIONS EQUIPMENT--2.6% 732 ADC Telecommunications, Inc. (a) 13,682 797 Avaya, Inc. (a) 13,182 297 Ciena Corp. (a) 10,849 289 Cisco Systems, Inc. (a) 8,355 105 Corning, Inc. (a) 2,503 426 Juniper Networks, Inc. (a) 12,763 Page 52 See Notes to Financial Statements First Trust Large Cap Core AlphaDEX(TM) Fund Portfolio of Investments (Continued) July 31, 2007 SHARES DESCRIPTION MARKET VALUE - -------------------------------------------------------------- COMMON STOCKS (CONTINUED) COMMUNICATIONS EQUIPMENT (CONTINUED) 303 Motorola, Inc. $ 5,148 62 QUALCOMM, Inc. 2,582 499 Tellabs, Inc. (a) 5,664 ------------- 74,728 ------------- COMPUTERS & PERIPHERALS--2.4% 110 Apple, Inc. (a) 14,493 282 Dell, Inc. (a) 7,888 741 EMC Corp. (a) 13,716 120 Hewlett-Packard Co. 5,524 76 International Business Machines Corp. 8,409 204 NCR Corp. (a) 10,653 110 SanDisk Corp. (a) 5,899 510 Sun Microsystems, Inc. (a) 2,601 ------------- 69,183 ------------- CONSTRUCTION & ENGINEERING--0.5% 120 Fluor Corp. 13,861 ------------- CONSTRUCTION MATERIALS--0.2% 47 Vulcan Materials Co. 4,499 ------------- CONSUMER FINANCE--0.4% 44 American Express Co. 2,576 186 SLM Corp. (a) 9,145 ------------- 11,721 ------------- CONTAINERS & PACKAGING--1.2% 252 Ball Corp. 12,919 323 Bemis Co., Inc. 9,519 346 Sealed Air Corp. 9,429 44 Temple-Inland, Inc. 2,558 ------------- 34,425 ------------- DISTRIBUTORS--0.2% 108 Genuine Parts Co. 5,139 ------------- DIVERSIFIED CONSUMER SERVICES --0.4% 138 Apollo Group, Inc., Class A (a) 8,157 115 H&R Block, Inc. 2,294 ------------- 10,451 ------------- DIVERSIFIED FINANCIAL SERVICES--0.9% 165 Bank of America Corp. 7,824 196 CIT Group, Inc. 8,071 52 Citigroup, Inc. 2,422 166 JPMorgan Chase & Co. 7,306 ------------- 25,623 ------------- DIVERSIFIED TELECOMMUNICATION SERVICES--1.3% 129 AT&T, Inc. 5,052 273 CenturyTel, Inc. 12,522 DIVERSIFIED TELECOMMUNICATION SERVICES (CONTINUED) 351 Citizens Communications Co. $ 5,065 85 Embarq Corp. 5,252 195 Verizon Communications, Inc. 8,311 182 Windstream Corp. 2,504 ------------- 38,706 ------------- ELECTRIC UTILITIES--3.5% 52 Allegheny Energy, Inc. (a) 2,716 238 American Electric Power Co., Inc. 10,351 733 Duke Energy Corp. 12,483 191 Edison International 10,102 50 Entergy Corp. 4,998 74 Exelon Corp. 5,191 166 FirstEnergy Corp. 10,085 142 FPL Group, Inc. 8,198 337 Pinnacle West Capital Corp. 12,631 57 PPL Corp. 2,687 294 Progress Energy, Inc. 12,835 235 Southern Co. 7,905 ------------- 100,182 ------------- ELECTRICAL EQUIPMENT--0.7% 188 Cooper Industries Ltd., Class A 9,949 115 Emerson Electric Co. 5,413 77 Rockwell Automation, Inc. 5,389 ------------- 20,751 ------------- ELECTRONIC EQUIPMENT & INSTRUMENTS--1.1% 70 Agilent Technologies, Inc. (a) 2,671 122 Jabil Circuit, Inc. 2,749 447 Molex, Inc. 12,667 1,458 Solectron Corp. (a) 5,482 239 Tektronix, Inc. 7,851 ------------- 31,420 ------------- ENERGY EQUIPMENT & SERVICES--4.8% 159 Baker Hughes, Inc. 12,569 220 ENSCO International, Inc. 13,435 233 Halliburton Co. 8,393 241 Nabors Industries Ltd. (a) 7,047 129 National Oilwell Varco, Inc. (a) 15,494 138 Noble Corp. 14,139 327 Rowan Cos., Inc. 13,796 158 Schlumberger Ltd. 14,966 229 Smith International, Inc. 14,063 27 Transocean, Inc. (a) 13,646 194 Weatherford International Ltd. (a) 10,734 ------------- 138,282 ------------- FOOD & STAPLES RETAILING--1.5% 46 Costco Wholesale Corp. 2,751 294 CVS Caremark Corp. 10,347 See Notes to Financial Statements Page 53 First Trust Large Cap Core AlphaDEX(TM) Fund Portfolio of Investments (Continued) July 31, 2007 SHARES DESCRIPTION MARKET VALUE - -------------------------------------------------------------- COMMON STOCKS (CONTINUED) FOOD & STAPLES RETAILING (CONTINUED) 191 Kroger (The) Co. $ 4,958 315 Safeway, Inc. 10,039 232 SUPERVALU, Inc. 9,667 56 Wal-Mart Stores, Inc. 2,573 70 Whole Foods Market, Inc. 2,593 ------------- 42,928 ------------- FOOD PRODUCTS--1.3% 405 Archer-Daniels-Midland Co. 13,608 337 Dean Foods Co. (a) 9,695 46 General Mills, Inc. 2,559 152 Kraft Foods, Inc., Class A 4,978 97 Wm. Wrigley Jr. Co. 5,595 ------------- 36,435 ------------- GAS UTILITIES--0.5% 250 Nicor, Inc. 9,852 102 Questar Corp. 5,252 ------------- 15,104 ------------- HEALTH CARE EQUIPMENT & SUPPLIES--0.8% 143 Baxter International, Inc. 7,522 59 Biomet, Inc. (a) 2,686 194 St. Jude Medical, Inc. (a) 8,370 43 Stryker Corp. 2,684 32 Zimmer Holdings, Inc. (a) 2,488 ------------- 23,750 ------------- HEALTH CARE PROVIDERS & SERVICES --3.0% 54 Aetna, Inc. 2,596 54 AmerisourceBergen Corp. 2,544 76 Cardinal Health, Inc. 4,995 206 CIGNA Corp. 10,638 140 Coventry Health Care, Inc. (a) 7,813 268 Express Scripts, Inc. (a) 13,435 176 Humana, Inc. (a) 11,280 69 Laboratory Corp. of America Holdings (a) 5,096 205 Manor Care, Inc. 12,987 45 McKesson Corp. 2,599 105 UnitedHealth Group, Inc. 5,085 101 WellPoint, Inc. (a) 7,587 ------------- 86,655 ------------- HEALTH CARE TECHNOLOGY- 0.2% 250 IMS Health, Inc. 7,033 ------------- HOTELS, RESTAURANTS & LEISURE--1.7% 220 Carnival Corp. 9,749 61 Darden Restaurants, Inc. 2,597 63 Harrah's Entertainment, Inc. 5,335 80 Hilton Hotels Corp. 3,537 HOTELS, RESTAURANTS & LEISURE (CONTINUED) 159 McDonald's Corp. $ 7,611 120 Starwood Hotels & Resorts Worldwide, Inc. 7,555 148 Wyndham Worldwide Corp. (a) 4,980 246 Yum! Brands, Inc. 7,882 ------------- 49,246 ------------- HOUSEHOLD DURABLES--2.5% 30 Black & Decker (The) Corp. 2,597 65 Fortune Brands, Inc. 5,285 92 Harman International Industries, Inc. 10,672 341 KB Home 10,847 608 Leggett & Platt, Inc. 12,604 220 Lennar Corp., Class A 6,745 359 Pulte Homes, Inc. 6,943 133 Stanley Works (The) 7,359 72 Whirlpool Corp. 7,352 ------------- 70,404 ------------- HOUSEHOLD PRODUCTS--0.2% 80 Kimberly-Clark Corp. 5,382 ------------- INDEPENDENT POWER PRODUCERS & ENERGY TRADERS--0.5% 245 AES (The) Corp. (a) 4,814 123 Constellation Energy Group. 10,308 ------------- 15,122 ------------- INDUSTRIAL CONGLOMERATES--0.9% 93 3M Co. 8,270 70 General Electric Co. 2,713 318 Tyco International Ltd. 15,038 ------------- 26,021 ------------- INSURANCE--5.2% 215 ACE Ltd. 12,410 52 AFLAC, Inc. 2,710 174 Allstate (The) Corp. 9,248 38 American International Group, Inc. 2,439 63 Aon Corp. 2,523 137 Assurant, Inc. 6,949 248 Chubb (The) Corp. 12,502 185 Cincinnati Financial Corp. 7,252 156 Genworth Financial, Inc., Class A 4,761 82 Hartford Financial Services Group (The), Inc. 7,533 38 Lincoln National Corp. 2,292 211 Loews Corp. 10,001 87 Marsh & McLennan Cos., Inc. 2,397 172 MBIA, Inc. 9,649 125 MetLife, Inc. 7,528 28 Prudential Financial, Inc. 2,482 215 SAFECO Corp. 12,571 80 Torchmark Corp. 4,923 Page 54 See Notes to Financial Statements First Trust Large Cap Core AlphaDEX(TM) Fund Portfolio of Investments (Continued) July 31, 2007 SHARES DESCRIPTION MARKET VALUE - -------------------------------------------------------------- COMMON STOCKS (CONTINUED) INSURANCE (CONTINUED) 251 Travelers (The) Cos., Inc. $ 12,745 103 Unum Group 2,503 159 XL Capital Ltd., Class A 12,380 ------------- 147,798 ------------- INTERNET & CATALOG RETAIL--0.5% 196 Amazon.com, Inc. (a) 15,394 ------------- INTERNET SOFTWARE & SERVICES--0.5% 15 Google, Inc., Class A (a) 7,650 254 VeriSign, Inc. (a) 7,541 ------------- 15,191 ------------- IT SERVICES--1.9% 47 Affiliated Computer Services, Inc., Class A (a) 2,522 181 Computer Sciences Corp. (a) 10,078 443 Convergys Corp. (a) 8,439 387 Electronic Data Systems Corp. 10,445 247 Fidelity National Information Services, Inc. 12,259 164 First Data Corp. 5,214 94 Fiserv, Inc. (a) 4,645 ------------- 53,602 ------------- LEISURE EQUIPMENT & PRODUCTS--0.9% 411 Brunswick Corp. 11,492 256 Hasbro, Inc. 7,173 318 Mattel, Inc. 7,285 ------------- 25,950 ------------- LIFE SCIENCES TOOLS & SERVICES--1.0% 107 Millipore Corp. (a) 8,412 103 PerkinElmer, Inc. 2,866 207 Thermo Fisher Scientific, Inc. (a) 10,808 90 Waters Corp. (a) 5,243 ------------- 27,329 ------------- MACHINERY--4.2% 137 Caterpillar, Inc. 10,796 106 Cummins, Inc. 12,582 71 Danaher Corp. 5,302 89 Deere & Co. 10,717 105 Dover Corp. 5,355 58 Eaton Corp. 5,636 149 Illinois Tool Works, Inc. 8,202 98 Ingersoll-Rand Co., Ltd., Class A 4,931 196 ITT Corp. 12,324 62 PACCAR, Inc. 5,073 292 Pall Corp. 12,124 137 Parker Hannifin Corp. 13,520 165 Terex Corp. (a) 14,232 ------------- 120,794 ------------- MEDIA--3.0% 242 CBS Corp., Class B $ 7,676 71 Clear Channel Communications, Inc. 2,620 191 Comcast Corp., Class A (a) 5,018 348 DIRECTV Group (The), Inc. (a) 7,799 117 E.W. Scripps (The) Co., Class A 4,793 244 Gannett Co., Inc. 12,176 87 Meredith Corp. 4,915 126 News Corp., Class A 2,661 51 Omnicom Group, Inc. 2,645 510 Time Warner, Inc. 9,823 456 Tribune Co. 12,749 64 Viacom, Inc., Class B (a) 2,451 314 Walt Disney (The) Co. 10,362 ------------- 85,688 ------------- METALS & MINING--1.5% 265 Alcoa, Inc. 10,123 102 Allegheny Technologies, Inc. 10,703 97 Freeport-McMoRan Copper & Gold, Inc. 9,116 46 Nucor Corp. 2,309 123 United States Steel Corp. 12,090 ------------- 44,341 ------------- MULTILINE RETAIL--2.7% 365 Big Lots, Inc. (a) 9,439 373 Dillard's, Inc., Class A 11,149 391 Family Dollar Stores, Inc. 11,581 111 J. C. Penney Co., Inc. 7,552 38 Kohl's Corp. (a) 2,310 337 Macy's, Inc. 12,157 105 Nordstrom, Inc. 4,996 63 Sears Holdings Corp. (a) 8,618 169 Target Corp. 10,236 ------------- 78,038 ------------- MULTI-UTILITIES--4.7% 274 Ameren Corp. 13,147 308 CenterPoint Energy, Inc. 5,076 468 CMS Energy Corp. 7,563 297 Consolidated Edison, Inc. 12,973 93 Dominion Resources, Inc. 7,832 278 DTE Energy Co. 12,894 159 Integrys Energy Group, Inc. 7,869 256 KeySpan Corp. 10,637 648 NiSource, Inc. 12,357 237 PG&E Corp. 10,146 181 Sempra Energy 9,542 625 TECO Energy, Inc. 10,088 655 Xcel Energy, Inc. 13,296 ------------- 133,420 ------------- OFFICE ELECTRONICS--0.4% 581 Xerox Corp. (a) 10,144 ------------- See Notes to Financial Statements Page 55 First Trust Large Cap Core AlphaDEX(TM) Fund Portfolio of Investments (Continued) July 31, 2007 SHARES DESCRIPTION MARKET VALUE - -------------------------------------------------------------- COMMON STOCKS (CONTINUED) OIL, GAS & CONSUMABLE FUELS--5.8% 206 Anadarko Petroleum Corp. $ 10,368 66 Apache Corp. 5,335 310 Chesapeake Energy Corp. 10,552 159 Chevron Corp. 13,556 171 ConocoPhillips 13,824 58 CONSOL Energy, Inc. 2,416 69 Devon Energy Corp. 5,148 156 El Paso Corp. 2,597 96 Exxon Mobil Corp. 8,172 228 Hess Corp. 13,955 224 Marathon Oil Corp. 12,365 181 Murphy Oil Corp. 11,229 232 Occidental Petroleum Corp. 13,159 111 Peabody Energy Corp. 4,691 168 Sunoco, Inc. 11,209 182 Valero Energy Corp. 12,196 255 Williams (The) Cos., Inc. 8,224 134 XTO Energy, Inc. 7,307 ------------- 166,303 ------------- PAPER & FOREST PRODUCTS--0.9% 344 International Paper Co. 12,753 152 MeadWestvaco Corp. 4,946 102 Weyerhaeuser Co. 7,266 ------------- 24,965 ------------- PERSONAL PRODUCTS--0.2% 73 Avon Products, Inc. 2,629 59 Estee Lauder (The) Cos., Inc., Class A 2,656 ------------- 5,285 ------------- PHARMACEUTICALS--1.9% 53 Barr Pharmaceuticals, Inc. (a) 2,715 656 King Pharmaceuticals, Inc. (a) 11,159 420 Pfizer, Inc. 9,874 353 Schering-Plough Corp. 10,075 412 Watson Pharmaceuticals, Inc. (a) 12,532 140 Wyeth 6,793 ------------- 53,148 ------------- REAL ESTATE INVESTMENT TRUSTS--0.5% 131 Boston Properties, Inc. 12,378 47 ProLogis 2,674 ------------- 15,052 ------------- REAL ESTATE MANAGEMENT & DEVELOPMENT--0.4% 294 CB Richard Ellis Group, Inc., Class A (a) 10,266 ------------- ROAD & RAIL--1.9% 95 Burlington Northern Santa Fe Corp. 7,803 238 CSX Corp. 11,284 ROAD & RAIL (CONTINUED) 204 Norfolk Southern Corp. $ 10,971 249 Ryder System, Inc. 13,538 93 Union Pacific Corp. 11,080 ------------- 54,676 ------------- SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT--4.2% 242 Altera Corp. 5,614 71 Analog Devices, Inc. 2,517 405 Applied Materials, Inc. 8,926 226 Intel Corp. 5,338 146 KLA-Tencor Corp. 8,291 74 Linear Technology Corp. 2,638 1,786 LSI Corp. (a) 12,859 80 Maxim Integrated Products, Inc. 2,536 176 MEMC Electronic Materials, Inc. (a) 10,792 1,071 Micron Technology, Inc. (a) 12,713 95 National Semiconductor Corp. 2,469 473 Novellus Systems, Inc. (a) 13,491 325 NVIDIA Corp. (a) 14,873 694 PMC-Sierra, Inc. (a) 5,288 305 Teradyne, Inc. (a) 4,785 214 Texas Instruments, Inc. 7,531 ------------- 120,661 ------------- SOFTWARE--1.1% 228 Autodesk, Inc. (a) 9,659 80 Citrix Systems, Inc. (a) 2,894 226 Compuware Corp. (a) 2,109 91 Microsoft Corp. 2,638 408 Oracle Corp. (a) 7,801 398 Symantec Corp. (a) 7,642 ------------- 32,743 ------------- SPECIALTY RETAIL--3.1% 74 Abercrombie & Fitch Co., Class A 5,173 478 AutoNation, Inc. (a) 9,311 59 AutoZone, Inc. (a) 7,482 421 Gap (The), Inc. 7,241 68 Home Depot (The), Inc. 2,528 293 Limited Brands, Inc. 7,076 354 Office Depot, Inc. (a) 8,836 273 OfficeMax, Inc. 8,976 405 RadioShack Corp. 10,178 81 Sherwin-Williams (The) Co. 5,645 253 Tiffany & Co. 12,206 98 TJX (The) Cos., Inc. 2,720 ------------- 87,372 ------------- TEXTILES, APPAREL & LUXURY GOODS --1.2% 113 Coach, Inc. (a) 5,137 184 NIKE, Inc., Class B 10,387 137 Polo Ralph Lauren Corp. 12,240 Page 56 See Notes to Financial Statements First Trust Large Cap Core AlphaDEX(TM) Fund Portfolio of Investments (Continued) July 31, 2007 SHARES DESCRIPTION MARKET VALUE - -------------------------------------------------------------- COMMON STOCKS (CONTINUED) TEXTILES, APPAREL & LUXURY GOODS (CONTINUED) 88 VF Corp. $ 7,550 ------------- 35,314 ------------- THRIFTS & MORTGAGE FINANCE--0.7% 148 Countrywide Financial Corp. 4,169 44 Freddie Mac 2,520 236 MGIC Investment Corp. 9,124 126 Washington Mutual, Inc. 4,729 ------------- 20,542 ------------- TOBACCO--0.4% 38 Altria Group, Inc. 2,526 82 Reynolds American, Inc. 5,015 50 UST, Inc. 2,678 ------------- 10,219 ------------- TRADING COMPANIES & DISTRIBUTORS --0.4% 144 W.W. Grainger, Inc. 12,580 ------------- WIRELESS TELECOMMUNICATION SERVICES--0.7% 159 ALLTEL Corp. 10,486 518 Sprint Nextel Corp. 10,635 ------------- 21,121 ------------- TOTAL INVESTMENTS--100.4% (Cost $3,123,253) 2,878,457 NET OTHER ASSETS AND LIABILITIES--(0.4%) (10,098) ------------- NET ASSETS--100.0% $ 2,868,359 ============= (a) Non-income producing security. See Notes to Financial Statements Page 57 First Trust Mid Cap Core AlphaDEX(TM) Fund Portfolio of Investments July 31, 2007 SHARES DESCRIPTION MARKET VALUE - -------------------------------------------------------------- COMMON STOCKS--99.4% AEROSPACE & DEFENSE--1.0% 340 Alliant Techsystems, Inc. (a) $ 33,697 471 DRS Technologies, Inc. 24,662 ------------- 58,359 ------------- AIRLINES--0.6% 617 AirTran Holdings, Inc. (a) 6,071 968 Alaska Air Group, Inc. (a) 22,584 574 JetBlue Airways Corp. (a) 5,654 ------------- 34,309 ------------- AUTO COMPONENTS--1.3% 157 BorgWarner, Inc. 13,573 1,027 Gentex Corp. 20,273 1,491 Modine Manufacturing Co. 38,169 ------------- 72,015 ------------- AUTOMOBILES--0.1% 149 Thor Industries, Inc. 6,112 ------------- BEVERAGES--0.6% 314 Hansen Natural Corp. (a) 12,733 823 PepsiAmericas, Inc. 22,772 ------------- 35,505 ------------- BIOTECHNOLOGY--0.7% 335 Cephalon, Inc. (a) 25,172 578 PDL BioPharma, Inc. (a) 13,577 ------------- 38,749 ------------- CAPITAL MARKETS--1.4% 80 A.G. Edwards, Inc. 6,469 763 Eaton Vance Corp. 31,939 434 Nuveen Investments, Inc., Class A 26,535 218 Raymond James Financial, Inc. 6,686 259 Waddell & Reed Financial, Inc., Class A 6,529 ------------- 78,158 ------------- CHEMICALS--3.3% 563 Airgas, Inc. 26,292 175 Albemarle Corp. 7,040 424 Cabot Corp. 17,121 423 Cytec Industries, Inc. 28,336 151 FMC Corp. 13,459 209 Lubrizol (The) Corp. 13,096 201 Minerals Technologies, Inc. 12,999 1,284 Olin Corp. 26,797 1,062 Sensient Technologies Corp. 26,975 474 Valspar (The) Corp. 13,078 ------------- 185,193 ------------- COMMERCIAL BANKS--0.9% 206 Associated Banc-Corp. $ 5,920 201 Cathay General Bancorp 6,153 89 City National Corp. 6,300 242 Greater Bay Bancorp 6,505 254 SVB Financial Group (a) 13,381 316 Webster Financial Corp. 13,733 ------------- 51,992 ------------- COMMERCIAL SERVICES & SUPPLIES --2.4% 109 Brink's (The) Co. 6,665 131 Dun & Bradstreet (The) Corp. 12,807 427 Herman Miller, Inc. 13,036 164 HNI Corp. 6,696 982 Kelly Services, Inc., Class A 24,403 1,027 Korn/Ferry International (a) 24,268 1,089 Navigant Consulting, Inc. (a) 17,152 220 Republic Services, Inc. 7,029 455 Stericycle, Inc. (a) 21,813 ------------- 133,869 ------------- COMMUNICATIONS EQUIPMENT --2.4% 260 ADTRAN, Inc. 6,783 232 Avocent Corp. (a) 6,345 577 CommScope, Inc. (a) 31,407 225 Dycom Industries, Inc. (a) 6,289 334 F5 Networks, Inc. (a) 28,954 494 Harris Corp. 27,111 514 Plantronics, Inc. 14,402 401 Polycom, Inc. (a) 12,419 ------------- 133,710 ------------- COMPUTERS & PERIPHERALS--1.1% 387 Diebold, Inc. 19,609 731 Imation Corp. 22,866 421 Palm, Inc. (a) 6,281 697 Western Digital Corp. (a) 14,881 ------------- 63,637 ------------- CONSTRUCTION & ENGINEERING --1.8% 525 Granite Construction, Inc. 34,120 586 Jacobs Engineering Group, Inc. (a) 36,115 1,099 Quanta Services, Inc. (a) 31,245 ------------- 101,480 ------------- CONSTRUCTION MATERIALS--0.5% 100 Florida Rock Industries, Inc. 6,351 166 Martin Marietta Materials, Inc. 22,742 ------------- 29,093 ------------- CONSUMER FINANCE--0.3% 762 AmeriCredit Corp. (a) 15,499 ------------- Page 58 See Notes to Financial Statements First Trust Mid Cap Core AlphaDEX(TM) Fund Portfolio of Investments (Continued) July 31, 2007 SHARES DESCRIPTION MARKET VALUE - -------------------------------------------------------------- COMMON STOCKS (CONTINUED) CONTAINERS & PACKAGING--0.6% 799 Packaging Corp. of America $ 20,391 315 Sonoco Products Co. 11,551 ------------- 31,942 ------------- DIVERSIFIED CONSUMER SERVICES --3.2% 199 Career Education Corp. (a) 5,906 827 Corinthian Colleges, Inc. (a) 11,140 792 DeVry, Inc. 25,661 287 ITT Educational Services, Inc. (a) 30,324 437 Laureate Education, Inc. (a) 26,945 309 Matthews International Corp., Class A 11,822 705 Regis Corp. 24,576 586 Sotheby's 25,052 154 Strayer Education, Inc. 23,336 ------------- 184,762 ------------- DIVERSIFIED FINANCIAL SERVICES --0.1% 191 Leucadia National Corp. 7,182 ------------- DIVERSIFIED TELECOMMUNICATION SERVICES--0.4% 4,664 Cincinnati Bell, Inc. (a) 24,066 ------------- ELECTRIC UTILITIES--3.1% 926 Great Plains Energy, Inc. 25,706 853 Hawaiian Electric Industries, Inc. 19,457 1,052 IDACORP, Inc. 32,570 713 Northeast Utilities 19,493 717 Pepco Holdings, Inc. 19,409 1,919 Sierra Pacific Resources (a) 30,493 1,388 Westar Energy, Inc. 31,952 ------------- 179,080 ------------- ELECTRICAL EQUIPMENT--1.4% 679 AMETEK, Inc. 26,495 249 Hubbell, Inc., Class B 14,355 236 Roper Industries, Inc. 14,155 349 Thomas & Betts Corp. (a) 21,568 ------------- 76,573 ------------- ELECTRONIC EQUIPMENT & INSTRUMENTS--3.4% 756 Amphenol Corp., Class A 25,901 877 Arrow Electronics, Inc. (a) 33,520 340 Avnet, Inc. (a) 12,879 397 CDW Corp. (a) 33,415 931 Ingram Micro, Inc., Class A (a) 18,667 1,912 KEMET Corp. (a) 13,460 621 National Instruments Corp. 20,089 2,130 Vishay Intertechnology, Inc. (a) 33,036 ------------- 190,967 ------------- ENERGY EQUIPMENT & SERVICES--4.0% 471 Cameron International Corp. (a) $ 36,737 340 FMC Technologies, Inc. (a) 31,117 376 Grant Prideco, Inc. (a) 21,094 565 Hanover Compressor Co. (a) 13,464 951 Helmerich & Payne, Inc. 30,784 514 Patterson-UTI Energy, Inc. 11,771 720 Pride International, Inc. (a) 25,236 675 Superior Energy Services, Inc. (a) 27,216 475 Tidewater, Inc. 32,499 ------------- 229,918 ------------- FOOD & STAPLES RETAILING--0.7% 374 BJ's Wholesale Club, Inc. (a) 12,701 895 Ruddick Corp. 24,881 ------------- 37,582 ------------- FOOD PRODUCTS--1.2% 541 Hormel Foods Corp. 18,621 212 J.M. Smucker (The) Co. 11,832 322 Lancaster Colony Corp. 12,468 657 Smithfield Foods, Inc. (a) 20,406 243 Tootsie Roll Industries, Inc. 6,082 ------------- 69,409 ------------- GAS UTILITIES--1.2% 499 AGL Resources, Inc. 18,812 136 Equitable Resources, Inc. 6,407 156 National Fuel Gas Co. 6,763 267 ONEOK, Inc. 13,550 826 WGL Holdings, Inc. 24,731 ------------- 70,263 ------------- HEALTH CARE EQUIPMENT & SUPPLIES--2.5% 193 Advanced Medical Optics, Inc. (a) 5,834 104 Beckman Coulter, Inc. 7,365 782 Cytyc Corp. (a) 32,923 528 DENTSPLY International, Inc. 19,267 112 Gen-Probe, Inc. (a) 7,057 207 Hillenbrand Industries, Inc. 13,049 194 Intuitive Surgical, Inc. (a) 41,247 661 STERIS Corp. 18,078 ------------- 144,820 ------------- HEALTH CARE PROVIDERS & SERVICES --3.4% 234 Apria Healthcare Group, Inc. (a) 6,135 666 Community Health Systems, Inc. (a) 25,907 255 Health Net, Inc. (a) 12,633 252 Henry Schein, Inc. (a) 13,694 1,097 Kindred Healthcare, Inc. (a) 29,378 697 LifePoint Hospitals, Inc. (a) 20,596 169 Lincare Holdings, Inc. (a) 6,032 187 Omnicare, Inc. 6,201 See Notes to Financial Statements Page 59 First Trust Mid Cap Core AlphaDEX(TM) Fund Portfolio of Investments (Continued) July 31, 2007 SHARES DESCRIPTION MARKET VALUE - -------------------------------------------------------------- COMMON STOCKS (CONTINUED) HEALTH CARE PROVIDERS & SERVICES (CONTINUED) 186 Psychiatric Solutions, Inc. (a) $ 6,341 329 Universal Health Services, Inc., Class B 17,253 358 VCA Antech, Inc. (a) 14,084 372 WellCare Health Plans, Inc. (a) 37,668 ------------- 195,922 ------------- HEALTH CARE TECHNOLOGY--0.4% 364 Cerner Corp. (a) 19,245 ------------- HOTELS, RESTAURANTS & LEISURE --0.6% 732 Bob Evans Farms, Inc. 23,754 159 CBRL Group, Inc. 6,110 193 Scientific Games Corp., Class A (a) 6,622 ------------- 36,486 ------------- HOUSEHOLD DURABLES--2.0% 238 American Greetings Corp., Class A 5,886 1,092 Beazer Homes USA, Inc. 15,277 1,014 Blyth, Inc. 22,633 1,423 Furniture Brands International, Inc. 15,681 334 Mohawk Industries, Inc. (a) 30,064 30 NVR, Inc. (a) 17,354 234 Tupperware Brands Corp. 6,086 ------------- 112,981 ------------- HOUSEHOLD PRODUCTS--0.8% 278 Church & Dwight Co., Inc. 13,639 338 Energizer Holdings, Inc. (a) 34,104 ------------- 47,743 ------------- INDUSTRIAL CONGLOMERATES--1.4% 435 Carlisle Cos., Inc. 19,697 181 Sequa Corp., Class A (a) 29,883 412 Teleflex, Inc. 31,489 ------------- 81,069 ------------- INSURANCE--4.6% 789 American Financial Group, Inc. 22,163 970 Commerce Group (The), Inc. 27,868 62 Everest Re Group Ltd. 6,092 1,422 Fidelity National Financial, Inc., Class A 29,707 545 First American Corp. 25,228 414 Hanover Insurance Group, Inc. 18,170 605 HCC Insurance Holdings, Inc. 17,714 952 Horace Mann Educators Corp. 16,974 367 Mercury General Corp. 19,003 467 Ohio Casualty Corp. 20,272 1,268 Old Republic International Corp. 23,280 282 Protective Life Corp. 12,132 128 StanCorp Financial Group, Inc. 6,011 INSURANCE (CONTINUED) 411 Unitrin, Inc. $ 17,418 ------------- 262,032 ------------- INTERNET & CATALOG RETAIL--0.5% 1,738 Netflix, Inc. (a) 29,946 ------------- INTERNET SOFTWARE & SERVICES--0.4% 1,144 ValueClick, Inc. (a) 24,459 ------------- IT SERVICES--2.0% 255 Acxiom Corp. 6,416 436 Alliance Data Systems Corp. (a) 33,485 385 Ceridian Corp. (a) 13,052 335 CheckFree Corp. (a) 12,341 85 DST Systems, Inc. (a) 6,449 822 Gartner, Inc. (a) 17,204 2,016 MPS Group, Inc. (a) 26,873 ------------- 115,820 ------------- LEISURE EQUIPMENT & PRODUCTS --0.1% 378 Callaway Golf Co. 6,135 ------------- LIFE SCIENCES TOOLS & SERVICES --1.9% 392 Charles River Laboratories International, Inc. (a) 20,063 197 Covance, Inc. (a) 13,902 183 Invitrogen Corp. (a) 13,139 352 Pharmaceutical Product Development, Inc. 11,792 246 Varian, Inc. (a) 14,794 436 Ventana Medical Systems, Inc. (a) 36,337 ------------- 110,027 ------------- MACHINERY--5.0% 445 Crane Co. 20,408 850 Federal Signal Corp. 11,433 471 Flowserve Corp. 34,039 259 Harsco Corp. 13,639 347 Joy Global, Inc. 17,173 411 Kennametal, Inc. 31,507 454 Lincoln Electric Holdings, Inc. 32,683 269 Nordson Corp. 12,309 536 Oshkosh Truck Corp. 30,686 349 Pentair, Inc. 12,634 384 SPX Corp. 36,046 373 Timken (The) Co. 12,458 464 Trinity Industries, Inc. 17,739 ------------- 282,754 ------------- MARINE--0.2% 254 Alexander & Baldwin, Inc. 13,772 ------------- Page 60 See Notes to Financial Statements First Trust Mid Cap Core AlphaDEX(TM) Fund Portfolio of Investments (Continued) July 31, 2007 SHARES DESCRIPTION MARKET VALUE - -------------------------------------------------------------- COMMON STOCKS (CONTINUED) MEDIA--2.5% 1,309 Belo Corp., Class A $ 23,431 558 John Wiley & Sons, Inc., Class A 23,598 1,615 Lee Enterprises, Inc. 28,440 1,013 Media General, Inc., Class A 28,567 563 Scholastic Corp. (a) 18,117 26 Washington Post (The) Co., Class B 20,560 ------------- 142,713 ------------- METALS & MINING--2.5% 155 Carpenter Technology Corp. 18,397 998 Commercial Metals Co. 30,778 599 Reliance Steel & Aluminum Co. 31,471 643 Steel Dynamics, Inc. 26,961 1,556 Worthington Industries, Inc. 32,210 ------------- 139,817 ------------- MULTILINE RETAIL--0.6% 514 99 Cents Only Stores (a) 6,255 774 Dollar Tree Stores, Inc. (a) 29,614 ------------- 35,869 ------------- MULTI-UTILITIES--4.8% 867 Alliant Energy Corp. 32,036 678 Black Hills Corp. 25,289 1,033 Energy East Corp. 26,145 961 MDU Resources Group, Inc. 26,197 623 NSTAR 19,593 552 OGE Energy Corp. 18,299 970 PNM Resources, Inc. 25,055 1,394 Puget Energy, Inc. 32,271 704 SCANA Corp. 26,316 1,001 Vectren Corp. 24,995 457 Wisconsin Energy Corp. 19,619 ------------- 275,815 ------------- OIL, GAS & CONSUMABLE FUELS --4.8% 387 Arch Coal, Inc. 11,567 855 Cimarex Energy Co. 32,363 539 Denbury Resources, Inc. (a) 21,560 727 Encore Acquisition Co. (a) 18,807 797 Forest Oil Corp. (a) 32,255 770 Frontier Oil Corp. 29,822 432 Noble Energy 26,412 414 Overseas Shipholding Group, Inc. 32,122 138 Pioneer Natural Resources Co. 6,279 705 Plains Exploration & Production Co. (a) 30,463 302 Quicksilver Resources, Inc. (a) 12,720 454 Southwestern Energy Co. (a) 18,446 ------------- 272,816 ------------- PAPER & FOREST PRODUCTS--0.5% 540 Bowater, Inc. $ 10,595 992 Glatfelter 13,322 356 Louisiana-Pacific Corp. 6,593 ------------- 30,510 ------------- PERSONAL PRODUCTS--0.5% 852 Alberto-Culver Co. 20,039 156 NBTY, Inc. (a) 6,792 ------------- 26,831 ------------- PHARMACEUTICALS--0.5% 197 Endo Pharmaceuticals Holdings, Inc. (a) 6,700 716 Par Pharmaceutical Cos., Inc. (a) 16,962 344 Perrigo Co. 6,416 ------------- 30,078 ------------- REAL ESTATE INVESTMENT TRUSTS --1.0% 697 Cousins Properties, Inc. 17,920 162 Hospitality Properties Trust 6,214 313 Potlatch Corp. 13,675 448 Rayonier, Inc. 18,968 ------------- 56,777 ------------- ROAD & RAIL--2.4% 948 Avis Budget Group, Inc. (a) 24,335 671 Con-way, Inc. 33,140 690 J.B. Hunt Transport Services, Inc. 19,272 1,672 Werner Enterprises, Inc. 32,504 916 YRC Worldwide, Inc. (a) 29,422 ------------- 138,673 ------------- SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT--3.2% 261 Cree, Inc. (a) 6,687 1,447 Cypress Semiconductor Corp. (a) 36,262 349 Fairchild Semiconductor International, Inc. (a) 6,369 362 International Rectifier Corp. (a) 13,289 214 Intersil Corp., Class A 6,260 524 Lam Research Corp. (a) 30,308 1,060 Micrel, Inc. 10,971 182 Microchip Technology, Inc. 6,608 5,400 RF Micro Devices, Inc. (a) 37,476 778 Semtech Corp. (a) 12,643 3,996 TriQuint Semiconductor, Inc. (a) 17,662 ------------- 184,535 ------------- SOFTWARE--2.7% 621 Advent Software, Inc. (a) 23,617 614 Cadence Design Systems, Inc. (a) 13,140 785 Jack Henry & Associates, Inc. 18,856 673 Macrovision Corp. (a) 16,004 See Notes to Financial Statements Page 61 First Trust Mid Cap Core AlphaDEX(TM) Fund Portfolio of Investments (Continued) July 31, 2007 SHARES DESCRIPTION MARKET VALUE - -------------------------------------------------------------- COMMON STOCKS (CONTINUED) SOFTWARE (CONTINUED) 766 McAfee, Inc. (a) $ 27,468 512 Mentor Graphics Corp. (a) 6,149 1,247 Parametric Technology Corp. (a) 21,985 564 Sybase, Inc. (a) 13,378 255 Synopsys, Inc. (a) 6,237 613 Wind River Systems, Inc. (a) 5,860 ------------- 152,694 ------------- SPECIALTY RETAIL--5.6% 499 Advance Auto Parts, Inc. 17,350 647 Aeropostale, Inc. (a) 24,638 761 AnnTaylor Stores Corp. (a) 23,911 701 Barnes & Noble, Inc. 23,519 793 CarMax, Inc. (a) 18,976 3,111 Charming Shoppes, Inc. (a) 30,737 290 Coldwater Creek, Inc. (a) 5,710 463 Dick's Sporting Goods, Inc. (a) 26,034 1,546 Foot Locker, Inc. 28,694 862 GameStop Corp., Class A (a) 34,781 369 O'Reilly Automotive, Inc. (a) 12,291 613 Pacific Sunwear of California, Inc. (a) 11,046 641 Payless ShoeSource, Inc. (a) 17,063 415 PetSmart, Inc. 13,417 1,028 Rent-A-Center, Inc. (a) 19,953 219 Ross Stores, Inc. 6,336 280 Urban Outfitters, Inc. (a) 5,617 ------------- 320,073 ------------- TEXTILES, APPAREL & LUXURY GOODS--0.5% 249 Hanesbrands, Inc. (a) 7,721 445 Phillips-Van Heusen Corp. 23,167 ------------- 30,888 ------------- THRIFTS & MORTGAGE FINANCE --1.8% 269 Astoria Financial Corp. 6,335 1,543 First Niagara Financial Group, Inc. 19,843 1,155 IndyMac Bancorp, Inc. 25,410 754 PMI Group (The), Inc. 25,689 624 Radian Group, Inc. 21,035 277 Washington Federal, Inc. 6,241 ------------- 104,553 ------------- TRADING COMPANIES & DISTRIBUTORS--1.5% 322 Fastenal Co. 14,513 274 GATX Corp. 12,429 490 MSC Industrial Direct Co., Inc., Class A 24,642 1,036 United Rentals, Inc. (a) 33,296 ------------- 84,880 ------------- WIRELESS TELECOMMUNICATION SERVICES--0.5% 431 Telephone and Data Systems, Inc. $ 28,618 ------------- TOTAL INVESTMENTS--99.4% (Cost $6,133,306) 5,678,775 NET OTHER ASSETS AND LIABILITIES--0.6% 36,670 ------------- NET ASSETS--100.0% $ 5,715,445 ============= (a) Non-income producing security. Page 62 See Notes to Financial Statements First Trust Small Cap Core AlphaDEX(TM) Fund Portfolio of Investments July 31, 2007 SHARES DESCRIPTION MARKET VALUE - -------------------------------------------------------------- COMMON STOCKS--99.6% AEROSPACE & DEFENSE--3.1% 408 AAR Corp. (a) $ 12,171 304 Ceradyne, Inc. (a) 22,688 595 Cubic Corp. 16,380 386 Curtiss-Wright Corp. 16,818 683 EDO Corp. 22,573 465 Esterline Technologies Corp. (a) 21,525 306 Moog, Inc., Class A (a) 13,103 488 Teledyne Technologies, Inc. (a) 21,653 343 Triumph Group, Inc. 26,139 ------------- 173,050 ------------- AIR FREIGHT & LOGISTICS--0.5% 264 Forward Air Corp. 8,994 638 Hub Group, Inc., Class A (a) 21,705 ------------- 30,699 ------------- AIRLINES--0.8% 1,603 Frontier Airlines Holdings, Inc. (a) 8,496 2,717 Mesa Air Group, Inc. (a) 18,068 942 SkyWest, Inc. 21,016 ------------- 47,580 ------------- AUTO COMPONENTS--0.8% 406 Drew Industries, Inc. (a) 14,121 1,494 Standard Motor Products, Inc. 18,599 619 Superior Industries International, Inc. 11,452 ------------- 44,172 ------------- AUTOMOBILES--0.1% 313 Monaco Coach Corp. 4,366 ------------- BIOTECHNOLOGY--0.5% 299 Digene Corp. (a) 18,313 346 Martek Biosciences Corp. (a) 8,865 ------------- 27,178 ------------- BUILDING PRODUCTS--1.2% 162 Apogee Enterprises, Inc. 4,173 608 Gibraltar Industries, Inc. 11,740 618 Griffon Corp. (a) 10,858 394 Lennox International, Inc. 15,091 273 NCI Building Systems, Inc. (a) 13,202 134 Simpson Manufacturing Co., Inc. 4,533 212 Universal Forest Products, Inc. 8,387 ------------- 67,984 ------------- CAPITAL MARKETS--0.6% 208 Investment Technology Group, Inc. (a) 8,312 608 LaBranche & Co., Inc. (a) 3,934 162 Piper Jaffray Cos., Inc. (a) 7,763 831 SWS Group, Inc. 14,667 ------------- 34,676 ------------- CHEMICALS--2.7% 369 A. Schulman, Inc. $ 8,568 128 Arch Chemicals, Inc. 4,529 744 Georgia Gulf Corp. 12,045 300 H.B. Fuller Co. 8,289 1,905 Material Sciences Corp. (a) 20,955 170 OM Group, Inc. (a) 8,235 823 Penford Corp. 29,406 2,498 PolyOne Corp. (a) 18,785 951 Quaker Chemical Corp. 20,656 1,598 Tronox, Inc., Class B 19,655 ------------- 151,123 ------------- COMMERCIAL BANKS--2.4% 72 Alabama National BanCorporation 3,843 502 Boston Private Financial Holdings, Inc. 12,795 408 Central Pacific Financial Corp. 11,509 257 Chittenden Corp. 8,597 897 Community Bank System, Inc. 16,136 116 East West Bancorp, Inc. 4,253 822 First Commonwealth Financial Corp. 7,793 168 First Republic Bank 9,198 526 Hanmi Financial Corp. 7,627 138 Prosperity Bancshares, Inc. 3,908 274 Provident Bankshares Corp. 7,864 132 Signature Bank (a) 4,077 198 South Financial Group (The), Inc. 4,269 310 Sterling Financial Corp. 7,040 602 Susquehanna Bancshares, Inc. 10,415 382 Umpqua Holdings Corp. 7,266 150 Whitney Holding Corp. 3,749 102 Wintrust Financial Corp. 4,020 ------------- 134,359 ------------- COMMERCIAL SERVICES & SUPPLIES --5.2% 870 ABM Industries, Inc. 21,889 134 Administaff, Inc. 4,382 1,065 Angelica Corp. 23,248 921 Bowne & Co., Inc. 15,970 484 Brady Corp., Class A 16,935 140 CDI Corp. 3,961 260 Consolidated Graphics, Inc. (a) 17,137 568 G&K Services, Inc., Class A 21,164 456 Healthcare Services Group 12,640 350 Heidrick & Struggles International, Inc. (a) 18,809 476 Interface, Inc., Class A 8,773 972 Labor Ready, Inc. (a) 22,899 308 Mobile Mini, Inc. (a) 8,800 419 On Assignment, Inc. (a) 4,203 254 School Specialty, Inc. (a) 8,748 1,913 Spherion Corp. (a) 16,892 416 Tetra Tech, Inc. (a) 8,748 270 United Stationers, Inc. (a) 17,210 See Notes to Financial Statements Page 63 First Trust Small Cap Core AlphaDEX(TM) Fund Portfolio of Investments (Continued) July 31, 2007 SHARES DESCRIPTION MARKET VALUE - -------------------------------------------------------------- COMMON STOCKS (CONTINUED) COMMERCIAL SERVICES & SUPPLIES (CONTINUED) 426 Viad Corp. $ 15,315 730 Volt Information Sciences, Inc. (a) 11,373 356 Watson Wyatt Worldwide, Inc., Class A 15,860 ------------- 294,956 ------------- COMMUNICATIONS EQUIPMENT --2.4% 1,277 Arris Group, Inc. (a) 18,926 396 Bel Fuse, Inc., Class B 11,975 434 Black Box Corp. 17,469 182 Blue Coat Systems, Inc. (a) 8,869 958 C-COR, Inc. (a) 12,885 290 Comtech Telecommunications Corp. (a) 12,606 914 Digi International, Inc. (a) 13,052 548 Ditech Networks, Inc. (a) 4,088 620 NETGEAR, Inc. (a) 17,149 534 Symmetricom, Inc. (a) 3,984 426 Tollgrade Communications, Inc. (a) 4,396 280 ViaSat, Inc. (a) 8,016 ------------- 133,415 ------------- COMPUTERS & PERIPHERALS--1.8% 3,536 Adaptec, Inc. (a) 12,376 1,194 Hutchinson Technology, Inc. (a) 23,952 212 Intevac, Inc. (a) 3,445 422 Komag, Inc. (a) 13,508 863 Novatel Wireless, Inc. (a) 18,580 382 Stratasys, Inc. (a) 16,812 376 Synaptics, Inc. (a) 13,205 ------------- 101,878 ------------- CONSTRUCTION & ENGINEERING --0.3% 152 EMCOR Group, Inc. (a) 5,457 278 URS Corp. (a) 13,694 ------------- 19,151 ------------- CONSTRUCTION MATERIALS--0.2% 172 Texas Industries, Inc. 13,555 ------------- CONSUMER FINANCE--0.6% 340 Cash America International, Inc. 12,451 575 First Cash Financial Services, Inc. (a) 12,529 210 World Acceptance Corp. (a) 6,760 ------------- 31,740 ------------- CONTAINERS & PACKAGING--1.0% 505 AptarGroup, Inc. 18,382 1,072 Chesapeake Corp. (a) 11,953 203 Myers Industries, Inc. 4,342 CONTAINERS & PACKAGING (CONTINUED) 708 Rock-Tenn Co., Class A $ 21,750 ------------- 56,427 ------------- DISTRIBUTORS--1.2% 346 Audiovox Corp., Class A (a) 3,502 1,266 Building Materials Holding Corp. 17,585 543 Keystone Automotive Industries, Inc. (a) 25,390 728 LKQ Corp. (a) 20,697 ------------- 67,174 ------------- DIVERSIFIED CONSUMER SERVICES --0.9% 230 Bright Horizons Family Solutions, Inc. (a) 8,924 64 CPI Corp. 3,759 280 Pre-Paid Legal Services, Inc. (a) 14,756 354 Universal Technical Institute, Inc. (a) 7,657 368 Vertrue, Inc. (a) 18,183 ------------- 53,279 ------------- DIVERSIFIED FINANCIAL SERVICES --0.4% 150 Financial Federal Corp. 4,253 374 Portfolio Recovery Associates, Inc. (a) 19,541 ------------- 23,794 ------------- DIVERSIFIED TELECOMMUNICATION SERVICES--0.3% 589 CT Communications, Inc. 18,053 ------------- ELECTRIC UTILITIES--1.8% 190 ALLETE, Inc. 8,330 596 Central Vermont Public Service Corp. 20,264 733 Cleco Corp. 17,409 914 El Paso Electric Co. (a) 21,268 542 UIL Holdings Corp. 16,032 683 Unisource Energy Corp. 20,784 ------------- 104,087 ------------- ELECTRICAL EQUIPMENT--1.5% 298 Acuity Brands, Inc. 17,612 338 A.O. Smith Corp. 16,410 92 Baldor Electric Co. 4,199 82 Belden, Inc. 4,492 386 Regal-Beloit Corp. 19,578 418 Woodward Governor Co. 24,139 ------------- 86,430 ------------- Page 64 See Notes to Financial Statements First Trust Small Cap Core AlphaDEX(TM) Fund Portfolio of Investments (Continued) July 31, 2007 SHARES DESCRIPTION MARKET VALUE - -------------------------------------------------------------- COMMON STOCKS (CONTINUED) ELECTRONIC EQUIPMENT & INSTRUMENTS--5.4% 634 Aeroflex, Inc. (a) $ 8,895 399 Agilysys, Inc. 7,665 238 Anixter International, Inc. (a) 19,671 1,377 Bell Microproducts, Inc. (a) 8,648 596 Benchmark Electronics, Inc. (a) 13,231 356 Checkpoint Systems, Inc. (a) 8,213 294 Coherent, Inc. (a) 8,511 1,064 CTS Corp. 13,555 216 Electro Scientific Industries, Inc. (a) 4,741 388 FLIR Systems, Inc. (a) 16,936 386 Gerber Scientific, Inc. (a) 4,007 597 Insight Enterprises, Inc. (a) 13,468 116 Itron, Inc. (a) 9,214 806 LoJack Corp. (a) 17,184 1,148 Methode Electronics, Inc. 18,563 302 MTS Systems Corp. 12,609 870 Newport Corp. (a) 11,371 478 Park Electrochemical Corp. 14,173 196 Plexus Corp. (a) 4,753 122 Rogers Corp. (a) 4,409 702 ScanSource, Inc. (a) 18,835 783 Technitrol, Inc. 20,358 558 Trimble Navigation Ltd. (a) 18,431 1,727 TTM Technologies, Inc. (a) 22,519 608 X-Rite, Inc. (a) 8,208 ------------- 308,168 ------------- ENERGY EQUIPMENT & SERVICES--4.2% 328 Atwood Oceanics, Inc. (a) 22,501 453 Bristow Group, Inc. (a) 21,486 205 CARBO Ceramics, Inc. 9,241 300 Dril-Quip, Inc. (a) 14,397 464 Hornbeck Offshore Services, Inc. (a) 19,975 863 Input/Output, Inc. (a) 12,298 278 Lufkin Industries, Inc. 16,460 904 Matrix Service Co. (a) 20,873 426 Oceaneering International, Inc. (a) 23,925 240 SEACOR Holdings, Inc. (a) 20,933 637 TETRA Technologies, Inc. (a) 17,715 286 Unit Corp. (a) 15,747 362 W-H Energy Services, Inc. (a) 23,197 ------------- 238,748 ------------- FOOD & STAPLES RETAILING--1.0% 330 Casey's General Stores, Inc. 8,227 536 Great Atlantic & Pacific Tea (The) Co., Inc. (a) 15,624 171 Longs Drug Stores Corp. 8,270 182 Nash Finch Co. 7,329 276 Performance Food Group Co. (a) 7,910 273 Spartan Stores, Inc. 7,991 ------------- 55,351 ------------- FOOD PRODUCTS--1.4% 396 Corn Products International, Inc. $ 17,670 134 Flowers Foods, Inc. 2,747 166 Hain Celestial Group (The), Inc. (a) 4,497 238 J & J Snack Foods Corp. 8,199 168 Ralcorp Holdings, Inc. (a) 8,729 499 Sanderson Farms, Inc. 19,895 675 TreeHouse Foods, Inc. (a) 15,127 ------------- 76,864 ------------- GAS UTILITIES--3.0% 747 Atmos Energy Corp. 20,967 327 Energen Corp. 17,302 422 Laclede Group (The), Inc. 12,470 264 New Jersey Resources Corp. 12,408 486 Northwest Natural Gas Co. 20,252 546 Piedmont Natural Gas Co. 12,662 508 South Jersey Industries, Inc. 16,647 551 Southern Union Co. 17,015 664 Southwest Gas Corp. 20,637 658 UGI Corp. 16,983 ------------- 167,343 ------------- HEALTH CARE EQUIPMENT & SUPPLIES--3.7% 62 Analogic Corp. 4,116 306 ArthroCare Corp. (a) 15,490 306 CONMED Corp. (a) 8,537 352 Datascope Corp. 12,112 108 DJO, Inc. (a) 5,128 278 Greatbatch, Inc. (a) 8,626 170 Haemonetics Corp. (a) 8,401 162 Hologic, Inc. (a) 8,392 210 ICU Medical, Inc. (a) 6,980 142 IDEXX Laboratories, Inc. (a) 14,237 160 Immucor, Inc. (a) 4,986 272 Integra LifeSciences Holdings (a) 13,505 622 Meridian Bioscience, Inc. 13,889 2,495 Osteotech, Inc. (a) 17,889 330 PolyMedica Corp. 13,329 210 Respironics, Inc. (a) 9,608 270 SurModics, Inc. (a) 12,385 280 Symmetry Medical, Inc. (a) 4,180 5,385 Theragenics Corp. (a) 21,271 80 Vital Signs, Inc. 4,161 ------------- 207,222 ------------- HEALTH CARE PROVIDERS & SERVICES--3.9% 494 Amedisys, Inc. (a) 18,698 378 AMERIGROUP Corp. (a) 10,463 408 AMN Healthcare Services, Inc. (a) 8,760 186 AmSurg Corp. (a) 4,676 420 Centene Corp. (a) 9,076 1,035 CryoLife, Inc. (a) 9,884 672 Gentiva Health Services, Inc. (a) 13,420 See Notes to Financial Statements Page 65 First Trust Small Cap Core AlphaDEX(TM) Fund Portfolio of Investments (Continued) July 31, 2007 SHARES DESCRIPTION MARKET VALUE - -------------------------------------------------------------- COMMON STOCKS (CONTINUED) HEALTH CARE PROVIDERS & SERVICES (CONTINUED) 759 HealthExtras, Inc. (a) $ 20,364 190 Healthways, Inc. (a) 8,303 246 inVentiv Health, Inc. (a) 8,728 475 LCA-Vision, Inc. 16,867 445 Matria Healthcare, Inc. (a) 11,494 1,458 Option Care, Inc. 28,271 128 Owens & Minor, Inc. 4,922 82 Pediatrix Medical Group, Inc. (a) 4,425 1,261 RehabCare Group, Inc. (a) 17,868 637 Res-Care, Inc. (a) 12,377 324 Sierra Health Services, Inc. (a) 13,167 ------------- 221,763 ------------- HOTELS, RESTAURANTS & LEISURE --2.7% 418 California Pizza Kitchen, Inc. (a) 7,934 224 CKE Restaurants, Inc. 3,873 190 Jack in the Box, Inc. (a) 12,158 594 Landry's Restaurants, Inc. 15,735 378 Marcus (The) Corp. 7,439 168 Monarch Casino & Resort, Inc. (a) 4,753 1,114 O'Charley's, Inc. 19,751 312 Papa John's International, Inc. (a) 8,558 160 Pinnacle Entertainment, Inc. (a) 4,242 336 RARE Hospitality International, Inc. (a) 8,991 445 Red Robin Gourmet Burgers, Inc. (a) 17,164 528 Ruth's Chris Steak House, Inc. (a) 8,828 1,345 Steak n Shake (The) Co. (a) 20,175 351 Texas Roadhouse, Inc., Class A (a) 4,166 467 WMS Industries, Inc. (a) 12,184 ------------- 155,951 ------------- HOUSEHOLD DURABLES--0.8% 914 Champion Enterprises, Inc. (a) 10,712 132 Ethan Allen Interiors, Inc. 4,509 208 Libbey, Inc. 4,150 338 M/I Homes, Inc. 8,298 216 National Presto Industries, Inc. 12,128 241 Russ Berrie and Co., Inc. (a) 3,709 ------------- 43,506 ------------- HOUSEHOLD PRODUCTS--0.2% 766 Central Garden & Pet Co., Class A (a) 9,376 136 WD-40 Co. 4,514 ------------- 13,890 ------------- INDUSTRIAL CONGLOMERATES--0.5% 316 Standex International Corp. 7,489 1,054 Tredegar Corp. 19,352 ------------- 26,841 ------------- INSURANCE--3.5% 322 Delphi Financial Group, Inc., Class A $ 12,935 88 Infinity Property & Casualty Corp. 3,876 232 LandAmerica Financial Group, Inc. 17,769 108 Philadelphia Consolidated Holding Corp. (a) 3,903 685 Presidential Life Corp. 11,172 322 ProAssurance Corp. (a) 15,900 402 RLI Corp. 23,317 434 Safety Insurance Group, Inc. 14,452 718 SCPIE Holdings, Inc. (a) 16,133 668 Selective Insurance Group, Inc. 13,707 564 Stewart Information Services Corp. 20,575 140 Tower Group, Inc. 3,710 634 United Fire & Casualty Co. 21,822 477 Zenith National Insurance Corp. 19,252 ------------- 198,523 ------------- INTERNET & CATALOG RETAIL--0.8% 372 Blue Nile, Inc. (a) 28,127 1,049 PetMed Express, Inc. (a) 15,294 ------------- 43,421 ------------- INTERNET SOFTWARE & SERVICES --0.8% 375 Bankrate, Inc. (a) 16,819 194 InfoSpace, Inc. 4,039 514 j2 Global Communications, Inc. (a) 16,777 544 United Online, Inc. 7,681 ------------- 45,316 ------------- IT SERVICES--1.6% 502 Authorize.Net Holdings, Inc. (a) 8,700 92 CACI International Inc., Class A (a) 4,088 2,745 CIBER, Inc. (a) 20,835 254 eFunds Corp. (a) 9,081 146 ManTech International Corp., Class A (a) 4,768 104 MAXIMUS, Inc. 4,346 408 SI International, Inc. (a) 11,885 1,249 StarTek, Inc. (a) 13,689 946 Sykes Enterprises, Inc. (a) 15,836 ------------- 93,228 ------------- LEISURE EQUIPMENT & PRODUCTS --1.9% 907 Arctic Cat, Inc. 16,435 798 JAKKS Pacific, Inc. (a) 18,921 1,478 K2, Inc. (a) 21,593 673 MarineMax, Inc. (a) 12,585 248 Polaris Industries, Inc. 12,241 460 Pool Corp. 15,461 224 RC2 Corp. (a) 7,932 ------------- 105,168 ------------- Page 66 See Notes to Financial Statements First Trust Small Cap Core AlphaDEX(TM) Fund Portfolio of Investments (Continued) July 31, 2007 SHARES DESCRIPTION MARKET VALUE - -------------------------------------------------------------- COMMON STOCKS (CONTINUED) LIFE SCIENCES TOOLS & SERVICES --0.9% 126 Dionex Corp. (a) $ 8,569 366 Kendle International, Inc. (a) 13,524 534 PAREXEL International Corp. (a) 21,590 282 Pharmanet Development Group, Inc. (a) 7,896 ------------- 51,579 ------------- MACHINERY--5.0% 111 Albany International Corp., Class A 4,160 426 Astec Industries, Inc. (a) 22,224 260 A.S.V., Inc. (a) 3,793 426 Barnes Group, Inc. 13,291 286 Cascade Corp. 19,388 240 CLARCOR, Inc. 8,350 210 EnPro Industries, Inc. (a) 8,270 528 Gardner Denver, Inc. (a) 21,960 466 IDEX Corp. 16,874 258 Kaydon Corp. 13,728 507 Lindsay Corp. 20,615 1,537 Lydall, Inc. (a) 17,752 280 Manitowoc (The) Co., Inc. 21,748 522 Mueller Industries, Inc. 19,251 254 Robbins & Myers, Inc. 13,393 305 Toro (The) Co. 17,147 247 Valmont Industries, Inc. 18,671 307 Wabash National Corp. 3,902 480 Watts Water Technologies, Inc., Class A 16,757 ------------- 281,274 ------------- MARINE--0.3% 351 Kirby Corp. (a) 14,219 ------------- MEDIA--0.2% 174 Arbitron, Inc. 8,665 ------------- METALS & MINING--2.4% 375 A.M. Castle & Co. 12,383 164 AMCOL International Corp. 4,695 535 Brush Engineered Materials, Inc. (a) 20,260 246 Century Aluminum Co. (a) 12,679 312 Chaparral Steel Co. 26,221 289 Cleveland-Cliffs, Inc. 20,019 369 Quanex Corp. 16,627 60 RTI International Metals, Inc. (a) 4,754 596 Ryerson, Inc. 19,126 ------------- 136,764 ------------- MULTILINE RETAIL--0.4% 1,343 Fred's, Inc. 15,942 364 Tuesday Morning Corp. 4,244 ------------- 20,186 ------------- MULTI-UTILITIES--0.6% 834 Avista Corp. $ 16,530 400 CH Energy Group, Inc. 17,740 ------------- 34,270 ------------- OIL, GAS & CONSUMABLE FUELS --0.7% 122 Cabot Oil & Gas Corp. 4,172 450 Helix Energy Solutions Group, Inc. (a) 17,529 210 Swift Energy Co. (a) 8,975 214 World Fuel Services Corp. 8,750 ------------- 39,426 ------------- PAPER & FOREST PRODUCTS--1.4% 1,451 Buckeye Technologies, Inc. (a) 22,244 436 Neenah Paper, Inc. 16,886 4,525 Pope & Talbot, Inc. (a) 11,901 724 Schweitzer-Mauduit International, Inc. 16,529 1,005 Wausau Paper Corp. 11,246 ------------- 78,806 ------------- PERSONAL PRODUCTS--0.3% 142 Chattem, Inc. (a) 7,974 565 Mannatech, Inc. 5,317 100 USANA Health Sciences, Inc. (a) 4,036 ------------- 17,327 ------------- PHARMACEUTICALS--0.7% 346 Alpharma, Inc., Class A (a) 8,577 206 Bradley Pharmaceuticals, Inc. (a) 3,304 192 Noven Pharmaceuticals, Inc. (a) 3,410 190 Sciele Pharma, Inc. (a) 4,406 1,627 ViroPharma, Inc. (a) 20,908 ------------- 40,605 ------------- REAL ESTATE INVESTMENT TRUSTS --0.8% 250 Entertainment Properties Trust 11,138 592 LTC Properties, Inc. 11,881 679 Medical Properties Trust, Inc. 7,605 411 National Retail Properties, Inc. 8,902 442 Senior Housing Properties Trust 7,638 ------------- 47,164 ------------- ROAD & RAIL--1.4% 346 Arkansas Best Corp. 12,466 276 Heartland Express, Inc. 4,115 598 Kansas City Southern (a) 20,637 695 Knight Transportation, Inc. 12,260 280 Landstar System, Inc. 12,729 596 Old Dominion Freight Line, Inc. (a) 17,201 ------------- 79,408 ------------- See Notes to Financial Statements Page 67 First Trust Small Cap Core AlphaDEX(TM) Fund Portfolio of Investments (Continued) July 31, 2007 SHARES DESCRIPTION MARKET VALUE - -------------------------------------------------------------- COMMON STOCKS (CONTINUED) SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT--4.1% 991 Advanced Energy Industries, Inc. (a) $ 17,551 1,076 AMIS Holdings, Inc. (a) 11,094 150 ATMI, Inc. (a) 4,347 3,460 Axcelis Technologies, Inc. (a) 19,203 1,237 Brooks Automation, Inc. (a) 21,733 126 Cabot Microelectronics Corp. (a) 5,371 404 Cohu, Inc. 8,076 112 Cymer, Inc. (a) 4,788 645 Diodes, Inc. (a) 17,138 335 Exar Corp. (a) 4,734 138 FEI Co. (a) 3,958 188 Microsemi Corp. (a) 4,382 811 MKS Instruments, Inc. (a) 18,410 1,207 Pericom Semiconductor Corp. (a) 12,891 1,509 Photronics, Inc. (a) 21,156 1,352 Rudolph Technologies, Inc. (a) 21,158 611 Skyworks Solutions, Inc. (a) 4,839 392 Standard Microsystems Corp. (a) 13,089 448 Varian Semiconductor Equipment Associates, Inc. (a) 21,056 ------------- 234,974 ------------- SOFTWARE--2.9% 152 Ansoft Corp. (a) 3,844 339 ANSYS, Inc. (a) 8,828 2,631 Captaris, Inc. (a) 13,497 983 Concur Technologies, Inc. (a) 23,455 906 Epicor Software Corp. (a) 11,832 1,389 EPIQ Systems, Inc. (a) 23,683 197 FactSet Research Systems, Inc. 13,000 608 Informatica Corp. (a) 8,476 915 JDA Software Group, Inc. (a) 20,688 160 Manhattan Associates, Inc. (a) 4,459 82 MICROS Systems, Inc. (a) 4,369 118 Quality Systems, Inc. 4,571 339 Radiant Systems, Inc. (a) 4,712 306 SPSS, Inc. (a) 12,558 148 THQ, Inc. (a) 4,256 ------------- 162,228 ------------- SPECIALTY RETAIL--5.7% 615 Aaron Rents, Inc. 14,219 352 Big 5 Sporting Goods Corp. 7,522 554 Brown Shoe Co., Inc. 11,601 204 Cato (The) Corp., Class A 4,219 502 Charlotte Russe Holding, Inc. (a) 8,921 174 Children's Place Retail Stores (The), Inc. (a) 5,935 262 Christopher & Banks Corp. 3,909 218 Dress Barn (The), Inc. (a) 3,965 1,971 Finish Line (The), Inc., Class A 13,324 430 Genesco, Inc. (a) 21,736 SPECIALTY RETAIL (CONTINUED) 222 Group 1 Automotive, Inc. $ 8,329 226 Guitar Center, Inc. (a) 13,119 342 Gymboree (The) Corp. (a) 14,723 1,539 Haverty Furniture Cos., Inc. 17,160 164 Hibbett Sports, Inc. (a) 4,203 790 Jo-Ann Stores, Inc. (a) 18,810 542 Jos. A. Bank Clothiers, Inc. (a) 18,699 709 Lithia Motors, Inc., Class A 14,598 352 Men's Wearhouse (The), Inc. 17,389 1,114 Pep Boys-Manny, Moe & Jack (The) 18,860 277 Select Comfort Corp. (a) 4,415 775 Sonic Automotive, Inc., Class A 21,235 428 Stage Stores, Inc. 7,636 732 Stein Mart, Inc. 7,876 258 Tractor Supply Co. (a) 12,260 402 Tween Brands, Inc. (a) 15,381 566 Zale Corp. (a) 12,016 ------------- 322,060 ------------- TEXTILES, APPAREL & LUXURY GOODS--3.2% 522 Crocs, Inc. (a) 30,965 222 Deckers Outdoor Corp. (a) 22,888 609 Fossil, Inc. (a) 15,560 606 Iconix Brand Group, Inc. (a) 11,987 160 Kellwood Co. 4,102 532 Movado Group, Inc. 15,024 405 Oxford Industries, Inc. 16,362 636 Quiksilver, Inc. (a) 8,160 308 Skechers U.S.A., Inc., Class A (a) 6,403 665 Stride Rite (The) Corp. 13,546 510 UniFirst Corp. 19,156 448 Volcom, Inc. (a) 15,895 162 Wolverine World Wide, Inc. 4,384 ------------- 184,432 ------------- THRIFTS & MORTGAGE FINANCE --2.2% 172 Anchor BanCorp Wisconsin, Inc. 3,844 895 BankUnited Financial Corp., Class A 15,072 1,041 Corus Bankshares, Inc. 16,927 340 Dime Community Bancshares 3,805 340 Downey Financial Corp. 18,084 396 FirstFed Financial Corp. (a) 17,898 1,491 Flagstar Bancorp, Inc. 15,954 1,669 Fremont General Corp. (a) 9,630 248 MAF Bancorp, Inc. 13,025 450 Triad Guaranty, Inc. (a) 12,407 ------------- 126,646 ------------- Page 68 See Notes to Financial Statements First Trust Small Cap Core AlphaDEX(TM) Fund Portfolio of Investments (Continued) July 31, 2007 SHARES DESCRIPTION MARKET VALUE - -------------------------------------------------------------- COMMON STOCKS (CONTINUED) TRADING COMPANIES & DISTRIBUTORS --0.5% 152 Applied Industrial Technologies, Inc. $ 4,315 288 Kaman Corp. 9,645 248 Watsco, Inc. 12,378 ------------- 26,338 ------------- WATER UTILITIES--0.2% 252 American States Water Co. 9,297 ------------- TOTAL INVESTMENTS--99.6% (Cost $6,171,934) 5,636,097 NET OTHER ASSETS AND LIABILITIES--0.4% 24,334 ------------- NET ASSETS--100.0% $ 5,660,431 ============= (a) Non-income producing security. See Notes to Financial Statements Page 69 First Trust Large Cap Value Opportunities AlphaDEX(TM) Fund Portfolio of Investments July 31, 2007 SHARES DESCRIPTION MARKET VALUE - -------------------------------------------------------------- COMMON STOCKS--100.0% AEROSPACE & DEFENSE--1.1% 168 Goodrich Corp. $ 10,569 106 Lockheed Martin Corp. 10,439 525 Northrop Grumman Corp. 39,952 ------------- 60,960 ------------- AIR FREIGHT & LOGISTICS--0.9% 369 FedEx Corp. 40,863 137 United Parcel Service, Inc., Class B 10,374 ------------- 51,237 ------------- AIRLINES--0.6% 2,059 Southwest Airlines Co. 32,244 ------------- AUTO COMPONENTS--0.2% 86 Johnson Controls, Inc. 9,731 ------------- BEVERAGES--1.0% 843 Constellation Brands, Inc., Class A (a) 18,487 443 Molson Coors Brewing Co., Class B 39,400 ------------- 57,887 ------------- CAPITAL MARKETS--1.6% 293 Bear Stearns (The) Cos., Inc. 35,517 451 E*TRADE Financial Corp. (a) 8,353 208 Legg Mason, Inc. 18,720 245 Merrill Lynch & Co., Inc. 18,179 119 Morgan Stanley 7,601 ------------- 88,370 ------------- CHEMICALS--3.8% 255 Air Products and Chemicals, Inc. 22,024 156 Ashland, Inc. 9,525 1,157 Dow Chemical (The) Co. 50,306 636 Eastman Chemical Co. 43,770 403 E.I. du Pont de Nemours and Co. 18,832 1,041 Hercules, Inc. (a) 21,611 269 PPG Industries, Inc. 20,517 561 Rohm and Haas Co. 31,708 ------------- 218,293 ------------- COMMERCIAL BANKS--4.0% 245 BB&T Corp. 9,168 168 Comerica, Inc. 8,847 256 First Horizon National Corp. 8,120 900 Huntington Bancshares, Inc. 17,280 894 KeyCorp 31,013 94 M&T Bank Corp. 9,991 1,229 National City Corp. 36,120 429 PNC Financial Services Group, Inc. 28,593 301 Regions Financial Corp. 9,051 116 SunTrust Banks, Inc. 9,083 599 Wachovia Corp. 28,279 COMMERCIAL BANKS (CONTINUED) 283 Wells Fargo & Co. $ 9,557 266 Zions Bancorporation 19,830 ------------- 224,932 ------------- COMMERCIAL SERVICES & SUPPLIES --1.9% 2,280 Allied Waste Industries, Inc. (a) 29,344 150 Avery Dennison Corp. 9,201 706 R.R. Donnelley & Sons Co. 29,836 273 Robert Half International, Inc. 9,279 786 Waste Management, Inc. 29,891 ------------- 107,551 ------------- COMMUNICATIONS EQUIPMENT--1.3% 2,791 ADC Telecommunications, Inc. (a) 52,165 564 Motorola, Inc. 9,582 927 Tellabs, Inc. (a) 10,521 ------------- 72,268 ------------- COMPUTERS & PERIPHERALS--0.4% 459 Hewlett-Packard Co. 21,128 ------------- CONTAINERS & PACKAGING--1.1% 925 Bemis Co., Inc. 27,260 989 Sealed Air Corp. 26,950 162 Temple-Inland, Inc. 9,417 ------------- 63,627 ------------- DISTRIBUTORS--0.3% 413 Genuine Parts Co. 19,651 ------------- DIVERSIFIED FINANCIAL SERVICES --1.7% 628 Bank of America Corp. 29,780 746 CIT Group, Inc. 30,721 195 Citigroup, Inc. 9,081 634 JPMorgan Chase & Co. 27,902 ------------- 97,484 ------------- DIVERSIFIED TELECOMMUNICATION SERVICES--2.4% 493 AT&T, Inc. 19,306 1,043 CenturyTel, Inc. 47,842 1,340 Citizens Communications Co. 19,336 158 Embarq Corp. 9,763 746 Verizon Communications, Inc. 31,795 676 Windstream Corp. 9,302 ------------- 137,344 ------------- ELECTRIC UTILITIES--5.2% 682 American Electric Power Co., Inc. 29,660 2,795 Duke Energy Corp. 47,599 191 Entergy Corp. 19,092 632 FirstEnergy Corp. 38,394 361 FPL Group, Inc. 20,841 Page 70 See Notes to Financial Statements First Trust Large Cap Value Opportunities AlphaDEX(TM) Fund Portfolio of Investments (Continued) July 31, 2007 SHARES DESCRIPTION MARKET VALUE - -------------------------------------------------------------- COMMON STOCKS (CONTINUED) ELECTRIC UTILITIES (CONTINUED) 1,284 Pinnacle West Capital Corp. $ 48,124 213 PPL Corp. 10,041 1,123 Progress Energy, Inc. 49,030 895 Southern Co. 30,108 ------------- 292,889 ------------- ELECTRONIC EQUIPMENT & INSTRUMENTS--1.2% 1,705 Molex, Inc. 48,320 5,561 Solectron Corp. (a) 20,909 ------------- 69,229 ------------- ENERGY EQUIPMENT & SERVICES --3.1% 487 Baker Hughes, Inc. 38,497 838 ENSCO International, Inc. 51,177 890 Halliburton Co. 32,058 1,249 Rowan Cos., Inc. 52,695 ------------- 174,427 ------------- FOOD & STAPLES RETAILING--1.8% 728 Kroger (The) Co. 18,899 1,203 Safeway, Inc. 38,340 884 SUPERVALU, Inc. 36,836 261 Whole Foods Market, Inc. 9,667 ------------- 103,742 ------------- FOOD PRODUCTS--1.9% 1,546 Archer-Daniels-Midland Co. 51,946 1,284 Dean Foods Co. (a) 36,941 171 General Mills, Inc. 9,511 283 Kraft Foods, Inc., Class A 9,268 ------------- 107,666 ------------- GAS UTILITIES--0.7% 954 Nicor, Inc. 37,597 ------------- HEALTH CARE PROVIDERS & SERVICES--0.9% 202 Aetna, Inc. 9,710 167 McKesson Corp. 9,646 385 WellPoint, Inc. (a) 28,921 ------------- 48,277 ------------- HOTELS, RESTAURANTS & LEISURE --1.3% 839 Carnival Corp. 37,176 457 Starwood Hotels & Resorts Worldwide, Inc. 28,773 275 Wyndham Worldwide Corp. 9,254 ------------- 75,203 ------------- HOUSEHOLD DURABLES--3.5% 249 Fortune Brands, Inc. $ 20,244 1,299 KB Home 41,321 2,320 Leggett & Platt, Inc. 48,095 840 Lennar Corp., Class A 25,754 912 Pulte Homes, Inc. 17,638 337 Stanley Works (The) 18,646 276 Whirlpool Corp. 28,182 ------------- 199,880 ------------- HOUSEHOLD PRODUCTS--0.4% 306 Kimberly-Clark Corp. 20,585 ------------- INDUSTRIAL CONGLOMERATES--1.6% 353 3M Co. 31,389 1,211 Tyco International Ltd. 57,268 ------------- 88,657 ------------- INSURANCE--8.9% 818 ACE Ltd. 47,215 666 Allstate (The) Corp. 35,398 521 Assurant, Inc. 26,425 945 Chubb (The) Corp. 47,637 708 Cincinnati Financial Corp. 27,754 595 Genworth Financial, Inc., Class A 18,159 311 Hartford Financial Services Group (The), Inc. 28,572 140 Lincoln National Corp. 8,445 802 Loews Corp. 38,015 323 Marsh & McLennan Cos., Inc. 8,899 658 MBIA, Inc. 36,914 102 Prudential Financial, Inc. 9,040 822 SAFECO Corp. 48,061 305 Torchmark Corp. 18,770 956 Travelers (The) Cos., Inc. 48,545 383 Unum Group 9,307 607 XL Capital Ltd., Class A 47,261 ------------- 504,417 ------------- INTERNET SOFTWARE & SERVICES --0.5% 967 VeriSign, Inc. (a) 28,710 ------------- IT SERVICES--1.8% 692 Computer Sciences Corp. (a) 38,531 1,688 Convergys Corp. (a) 32,156 1,107 Electronic Data Systems Corp. 29,878 ------------- 100,565 ------------- LEISURE EQUIPMENT & PRODUCTS --1.4% 1,568 Brunswick Corp. 43,842 652 Hasbro, Inc. 18,269 809 Mattel, Inc. 18,534 ------------- 80,645 ------------- See Notes to Financial Statements Page 71 First Trust Large Cap Value Opportunities AlphaDEX(TM) Fund Portfolio of Investments (Continued) July 31, 2007 SHARES DESCRIPTION MARKET VALUE - -------------------------------------------------------------- COMMON STOCKS (CONTINUED) LIFE SCIENCES TOOLS & SERVICES --0.2% 383 PerkinElmer, Inc. $ 10,659 ------------- MACHINERY--3.5% 303 Cummins, Inc. 35,966 401 Dover Corp. 20,451 220 Eaton Corp. 21,380 566 Illinois Tool Works, Inc. 31,158 373 Ingersoll-Rand Co., Ltd., Class A 18,769 235 PACCAR, Inc. 19,228 523 Parker Hannifin Corp. 51,610 ------------- 198,562 ------------- MEDIA--4.4% 921 CBS Corp., Class B 29,214 1,328 DIRECTV Group (The), Inc. (a) 29,760 448 E.W. Scripps (The) Co., Class A 18,355 931 Gannett Co., Inc. 46,457 471 News Corp., Class A 9,948 1,945 Time Warner, Inc. 37,461 1,392 Tribune Co. 38,920 1,199 Walt Disney (The) Co. 39,567 ------------- 249,682 ------------- METALS & MINING--2.1% 1,010 Alcoa, Inc. 38,582 371 Freeport-McMoRan Copper & Gold, Inc. 34,867 471 United States Steel Corp. 46,294 ------------- 119,743 ------------- MULTILINE RETAIL--2.5% 1,424 Dillard's, Inc., Class A 42,564 424 J. C. Penney Co., Inc. 28,849 1,029 Macy's, Inc. 37,116 241 Sears Holdings Corp. (a) 32,966 ------------- 141,495 ------------- MULTI-UTILITIES--8.4% 835 Ameren Corp. 40,063 1,176 CenterPoint Energy, Inc. 19,380 1,189 CMS Energy Corp. 19,214 1,133 Consolidated Edison, Inc. 49,489 237 Dominion Resources, Inc. 19,960 1,061 DTE Energy Co. 49,209 605 Integrys Energy Group, Inc. 29,941 975 KeySpan Corp. 40,511 2,470 NiSource, Inc. 47,103 904 PG&E Corp. 38,700 691 Sempra Energy 36,430 2,382 TECO Energy, Inc. 38,445 2,499 Xcel Energy, Inc. 50,731 ------------- 479,176 ------------- OFFICE ELECTRONICS--0.7% 2,214 Xerox Corp. (a) $ 38,656 ------------- OIL, GAS & CONSUMABLE FUELS --5.3% 607 Chevron Corp. 51,753 652 ConocoPhillips 52,707 868 Hess Corp. 53,121 853 Marathon Oil Corp. 47,086 884 Occidental Petroleum Corp. 50,140 692 Valero Energy Corp. 46,371 ------------- 301,178 ------------- PAPER & FOREST PRODUCTS--1.5% 1,310 International Paper Co. 48,562 283 MeadWestvaco Corp. 9,209 389 Weyerhaeuser Co. 27,712 ------------- 85,483 ------------- PHARMACEUTICALS--1.4% 2,500 King Pharmaceuticals, Inc. (a) 42,525 1,600 Pfizer, Inc. 37,616 ------------- 80,141 ------------- REAL ESTATE INVESTMENT TRUSTS --0.8% 501 Boston Properties, Inc. 47,339 ------------- ROAD & RAIL--3.5% 361 Burlington Northern Santa Fe Corp. 29,653 908 CSX Corp. 43,048 778 Norfolk Southern Corp. 41,841 951 Ryder System, Inc. 51,706 267 Union Pacific Corp. 31,810 ------------- 198,058 ------------- SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT--4.1% 265 Analog Devices, Inc. 9,394 1,544 Applied Materials, Inc. 34,030 861 Intel Corp. 20,337 5,450 LSI Corp. (a) 39,240 299 Maxim Integrated Products, Inc. 9,478 4,083 Micron Technology, Inc. (a) 48,465 1,803 Novellus Systems, Inc. (a) 51,422 1,164 Teradyne, Inc. (a) 18,263 ------------- 230,629 ------------- SPECIALTY RETAIL--2.7% 1,823 AutoNation, Inc. (a) 35,512 1,071 Gap (The), Inc. 18,421 746 Limited Brands, Inc. 18,016 1,013 Office Depot, Inc. (a) 25,284 1,041 OfficeMax, Inc. 34,228 308 Sherwin-Williams (The) Co. 21,465 ------------- 152,926 ------------- Page 72 See Notes to Financial Statements First Trust Large Cap Value Opportunities AlphaDEX(TM) Fund Portfolio of Investments (Continued) July 31, 2007 SHARES DESCRIPTION MARKET VALUE - -------------------------------------------------------------- COMMON STOCKS (CONTINUED) THRIFTS & MORTGAGE FINANCE --0.9% 900 MGIC Investment Corp. $ 34,794 480 Washington Mutual, Inc. 18,014 ------------- 52,808 ------------- TOBACCO--0.3% 142 Altria Group, Inc. 9,439 153 Reynolds American, Inc. 9,359 ------------- 18,798 ------------- WIRELESS TELECOMMUNICATION SERVICES--1.2% 455 ALLTEL Corp. 30,007 1,976 Sprint Nextel Corp. 40,568 ------------- 70,575 ------------- TOTAL INVESTMENTS)--100.0% (Cost $6,202,618) 5,671,104 NET OTHER ASSETS AND LIABILITIES--(0.0%) (1,862) ------------- NET ASSETS--100.0% $ 5,669,242 ============= (a) Non-income producing security. See Notes to Financial Statements Page 73 First Trust Large Cap Growth Opportunities AlphaDEX(TM) Fund Portfolio of Investments July 31, 2007 SHARES DESCRIPTION MARKET VALUE - -------------------------------------------------------------- COMMON STOCK--100.0% AEROSPACE & DEFENSE--4.5% 468 Boeing (The) Co. $ 48,405 431 General Dynamics Corp. 33,859 594 L-3 Communications Holdings, Inc. 57,951 477 Precision Castparts Corp. 65,377 318 Rockwell Collins, Inc. 21,847 476 United Technologies Corp. 34,734 ------------- 262,173 ------------- AIR FREIGHT & LOGISTICS--0.5% 642 C.H. Robinson Worldwide, Inc. 31,233 ------------- BEVERAGES--0.7% 154 Brown-Forman Corp., Class B 10,232 215 Coca-Cola (The) Co. 11,204 668 Pepsi Bottling Group (The), Inc. 22,351 ------------- 43,787 ------------- BIOTECHNOLOGY--1.6% 420 Biogen Idec, Inc. (a) 23,747 392 Celgene Corp. (a) 23,740 175 Genzyme Corp. (a) 11,037 870 Gilead Sciences, Inc. (a) 32,390 ------------- 90,914 ------------- BUILDING PRODUCTS--0.9% 981 American Standard Cos., Inc. 53,023 ------------- CAPITAL MARKETS--5.7% 708 Ameriprise Financial, Inc. 42,671 548 Charles Schwab (The) Corp. 11,031 293 Federated Investors, Inc., Class B 10,551 340 Franklin Resources, Inc. 43,306 265 Goldman Sachs Group (The), Inc. 49,910 1,616 Janus Capital Group, Inc. 48,577 604 Lehman Brothers Holdings, Inc. 37,448 350 Northern Trust Corp. 21,861 329 State Street Corp. 22,053 867 T. Rowe Price Group, Inc. 45,197 ------------- 332,605 ------------- CHEMICALS--2.5% 647 International Flavors & Fragrances, Inc. 32,421 856 Monsanto Co. 55,169 625 Praxair, Inc. 47,888 264 Sigma-Aldrich Corp. 11,964 ------------- 147,442 ------------- COMMERCIAL BANKS--1.3% 912 Commerce Bancorp, Inc. 30,506 489 Compass Bancshares, Inc. 33,879 366 Synovus Financial Corp. 10,233 ------------- 74,618 ------------- COMMERCIAL SERVICES & SUPPLIES--0.7% 285 Cintas Corp., Class A $ 10,420 760 Equifax, Inc. 30,749 ------------- 41,169 ------------- COMMUNICATIONS EQUIPMENT --3.8% 3,435 Avaya, Inc. (a) 56,815 1,245 Ciena Corp. (a) 45,480 1,211 Cisco Systems, Inc. (a) 35,010 880 Corning, Inc. (a) 20,979 1,787 Juniper Networks, Inc. (a) 53,539 259 QUALCOMM, Inc. 10,787 ------------- 222,610 ------------- COMPUTERS & PERIPHERALS--5.0% 474 Apple, Inc. (a) 62,454 1,576 Dell, Inc. (a) 44,081 3,196 EMC Corp. (a) 59,158 321 International Business Machines Corp. 35,519 856 NCR Corp. (a) 44,700 689 SanDisk Corp. (a) 36,951 2,138 Sun Microsystems, Inc. (a) 10,904 ------------- 293,767 ------------- CONSTRUCTION & ENGINEERING--1.0% 519 Fluor Corp. 59,950 ------------- CONSTRUCTION MATERIALS--0.3% 196 Vulcan Materials Co. 18,761 ------------- CONSUMER FINANCE--1.2% 368 American Express Co. 21,543 143 Capital One Financial Corp. 10,119 781 SLM Corp. (a) 38,401 ------------- 70,063 ------------- CONTAINERS & PACKAGING--1.0% 1,088 Ball Corp. 55,782 ------------- DIVERSIFIED CONSUMER SERVICES --0.7% 577 Apollo Group, Inc., Class A (a) 34,106 481 H&R Block, Inc. 9,596 ------------- 43,702 ------------- ELECTRIC UTILITIES--1.3% 217 Allegheny Energy, Inc. (a) 11,334 802 Edison International$ 42,417 310 Exelon Corp. 21,747 ------------- 75,498 ------------- ELECTRICAL EQUIPMENT--1.9% 1,013 Cooper Industries Ltd., Class A 53,608 721 Emerson Electric Co. 33,937 Page 74 See Notes to Financial Statements First Trust Large Cap Growth Opportunities AlphaDEX(TM) Fund Portfolio of Investments (Continued) July 31, 2007 SHARES DESCRIPTION MARKET VALUE - -------------------------------------------------------------- COMMON STOCK (CONTINUED) ELECTRICAL EQUIPMENT (CONTINUED) 324 Rockwell Automation, Inc. $ 22,677 ------------- 110,222 ------------- ELECTRONIC EQUIPMENT & INSTRUMENTS--0.9% 293 Agilent Technologies, Inc. (a) 11,178 510 Jabil Circuit, Inc. 11,490 1,000 Tektronix, Inc. 32,850 ------------- 55,518 ------------- ENERGY EQUIPMENT & SERVICES--6.8% 1,011 Nabors Industries Ltd. (a) 29,562 555 National Oilwell Varco, Inc. (a) 66,661 593 Noble Corp. 60,759 681 Schlumberger Ltd. 64,504 986 Smith International, Inc. 60,550 546 Transocean, Inc. (a) 58,668 1,047 Weatherford International Ltd. (a) 57,931 ------------- 398,635 ------------- FOOD & STAPLES RETAILING--1.1% 1,234 CVS Caremark Corp. 43,424 468 Wal-Mart Stores, Inc. 21,505 ------------- 64,929 ------------- FOOD PRODUCTS--0.4% 407 Wm. Wrigley Jr. Co. 23,476 ------------- GAS UTILITIES--0.6% 638 Questar Corp. 32,851 ------------- HEALTH CARE EQUIPMENT & SUPPLIES--2.1% 599 Baxter International, Inc. 31,507 492 Biomet, Inc. (a) 22,401 813 St. Jude Medical, Inc. (a) 35,073 357 Stryker Corp. 22,288 132 Zimmer Holdings, Inc. (a) 10,264 ------------- 121,533 ------------- HEALTH CARE PROVIDERS & SERVICES--5.5% 478 Cardinal Health, Inc. 31,419 861 CIGNA Corp. 44,462 585 Coventry Health Care, Inc. (a) 32,649 1,157 Express Scripts, Inc. (a) 58,000 739 Humana, Inc. (a) 47,363 287 Laboratory Corp. of America Holdings (a) 21,195 886 Manor Care, Inc. 56,128 302 Patterson Cos., Inc. (a) 10,833 440 UnitedHealth Group, Inc. 21,309 ------------- 323,358 ------------- HEALTH CARE TECHNOLOGY--0.5% 1,050 IMS Health, Inc. $ 29,537 ------------- HOTELS, RESTAURANTS & LEISURE --2.4% 256 Darden Restaurants, Inc. 10,898 264 Harrah's Entertainment, Inc. 22,358 672 Hilton Hotels Corp. 29,709 886 McDonald's Corp. 42,413 1,031 Yum! Brands, Inc. 33,033 ------------- 138,411 ------------- HOUSEHOLD DURABLES--1.0% 127 Black & Decker (The) Corp. 10,994 385 Harman International Industries, Inc. 44,660 ------------- 55,654 ------------- INDEPENDENT POWER PRODUCERS & ENERGY TRADERS--1.1% 1,028 AES (The) Corp. (a) 20,200 516 Constellation Energy Group 43,241 ------------- 63,441 ------------- INDUSTRIAL CONGLOMERATES--0.2% 294 General Electric Co. 11,395 ------------- INSURANCE--0.9% 219 AFLAC, Inc. 11,414 161 American International Group, Inc. 10,333 523 MetLife, Inc. 31,495 ------------- 53,242 ------------- INTERNET & CATALOG RETAIL--1.1% 845 Amazon.com, Inc. (a) 66,366 ------------- INTERNET SOFTWARE & SERVICES--0.8% 86 Google, Inc., Class A (a) 43,860 ------------- IT SERVICES--2.1% 397 Affiliated Computer Services, Inc., Class A (a) 21,303 1,066 Fidelity National Information Services, Inc. 52,906 688 First Data Corp. 21,872 594 Fiserv, Inc. (a) 29,355 ------------- 125,436 ------------- LIFE SCIENCES TOOLS & SERVICES --1.9% 449 Millipore Corp. (a) 35,296 870 Thermo Fisher Scientific, Inc. (a) 45,422 568 Waters Corp. (a) 33,092 ------------- 113,810 ------------- MACHINERY--5.0% 575 Caterpillar, Inc. 45,310 298 Danaher Corp. 22,255 See Notes to Financial Statements Page 75 First Trust Large Cap Growth Opportunities AlphaDEX(TM) Fund Portfolio of Investments (Continued) July 31, 2007 SHARES DESCRIPTION MARKET VALUE - -------------------------------------------------------------- COMMON STOCK (CONTINUED) MACHINERY (CONTINUED) 479 Deere & Co. $ 57,681 847 ITT Corp. 53,259 1,258 Pall Corp. 52,232 711 Terex Corp. (a) 61,324 ------------- 292,061 ------------- MEDIA--2.0% 595 Clear Channel Communications, Inc. 21,956 1,200 Comcast Corp., Class A (a) 31,523 165 McGraw-Hill (The) Cos., Inc. 9,983 548 Meredith Corp. 30,957 213 Omnicom Group, Inc. 11,048 270 Viacom, Inc., Class B (a) 10,341 ------------- 115,808 ------------- METALS & MINING--0.9% 429 Allegheny Technologies, Inc. 45,015 192 Nucor Corp. 9,638 ------------- 54,653 ------------- MULTILINE RETAIL--3.0% 1,529 Big Lots, Inc. (a) 39,540 1,685 Family Dollar Stores, Inc. 49,909 317 Kohl's Corp. (a) 19,274 440 Nordstrom, Inc. 20,935 707 Target Corp. 42,823 ------------- 172,481 ------------- OIL, GAS & CONSUMABLE FUELS --6.5% 865 Anadarko Petroleum Corp. 43,535 414 Apache Corp. 33,468 1,300 Chesapeake Energy Corp. 44,252 244 CONSOL Energy, Inc. 10,163 287 Devon Energy Corp. 21,413 402 Exxon Mobil Corp. 34,222 757 Murphy Oil Corp. 46,964 465 Peabody Energy Corp. 19,651 726 Sunoco, Inc. 48,440 1,067 Williams (The) Cos., Inc. 34,411 749 XTO Energy, Inc. 40,843 ------------- 377,362 ------------- PERSONAL PRODUCTS--0.4% 306 Avon Products, Inc. 11,019 247 Estee Lauder (The) Cos., Inc., Class A 11,120 ------------- 22,139 ------------- PHARMACEUTICALS--2.5% 224 Barr Pharmaceuticals, Inc. (a) 11,473 1,900 Schering-Plough Corp. 54,226 1,778 Watson Pharmaceuticals, Inc. (a) 54,087 PHARMACEUTICALS (CONTINUED) 588 Wyeth $ 28,530 ------------- 148,316 ------------- REAL ESTATE MANAGEMENT & DEVELOPMENT--0.7% 1,233 CB Richard Ellis Group, Inc., Class A (a) 43,056 ------------- SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT--4.9% 1,525 Altera Corp. 35,380 614 KLA-Tencor Corp. 34,869 311 Linear Technology Corp. 11,087 736 MEMC Electronic Materials, Inc. (a) 45,132 796 National Semiconductor Corp. 20,688 1,400 NVIDIA Corp. (a) 64,064 2,910 PMC-Sierra, Inc. (a) 22,174 1,195 Texas Instruments, Inc. 42,052 420 Xilinx, Inc. 10,500 ------------- 285,946 ------------- SOFTWARE--2.6% 956 Autodesk, Inc. (a) 40,506 435 CA, Inc. 10,910 334 Citrix Systems, Inc. (a) 12,081 382 Microsoft Corp. 11,074 2,282 Oracle Corp. (a) 43,631 1,670 Symantec Corp. (a) 32,064 ------------- 150,266 ------------- SPECIALTY RETAIL--3.5% 308 Abercrombie & Fitch Co., Class A 21,529 329 AutoZone, Inc. (a) 41,720 572 Home Depot (The), Inc. 21,261 1,745 RadioShack Corp. 43,852 1,090 Tiffany & Co. 52,593 818 TJX (The) Cos., Inc. 22,700 ------------- 203,655 ------------- TEXTILES, APPAREL & LUXURY GOODS--2.6% 475 Coach, Inc. (a) 21,594 772 NIKE, Inc., Class B 43,579 590 Polo Ralph Lauren Corp. 52,716 368 VF Corp. 31,571 ------------- 149,460 ------------- THRIFTS & MORTGAGE FINANCE --0.5% 619 Countrywide Financial Corp. 17,437 185 Freddie Mac 10,595 ------------- 28,032 ------------- Page 76 See Notes to Financial Statements First Trust Large Cap Growth Opportunities AlphaDEX(TM) Fund Portfolio of Investments (Continued) July 31, 2007 SHARES DESCRIPTION MARKET VALUE - -------------------------------------------------------------- COMMON STOCK (CONTINUED) TRADING COMPANIES & DISTRIBUTORS --0.9% 622 W.W. Grainger, Inc. $ 54,338 ------------- TOTAL INVESTMENTS--100.0% (Cost $6,078,689) 5,846,344 NET OTHER ASSETS AND LIABILITIES--(0.0%) (1,786) ------------- NET ASSETS--100.0% $ 5,844,558 ============= (a) Non-income producing security. See Notes to Financial Statements Page 77 First Trust Multi Cap Value AlphaDEX(TM) Fund Portfolio of Investments July 31, 2007 SHARES DESCRIPTION MARKET VALUE - -------------------------------------------------------------- COMMON STOCKS --100.2% AEROSPACE & DEFENSE--0.9% 71 AAR Corp. (a) $ 2,118 83 Esterline Technologies Corp. (a) 3,842 42 Goodrich Corp. 2,642 27 Lockheed Martin Corp. 2,659 132 Northrop Grumman Corp. 10,045 61 Triumph Group, Inc. 4,649 ------------- 25,955 ------------- AIR FREIGHT & LOGISTICS--0.5% 92 FedEx Corp. 10,189 34 United Parcel Service, Inc., Class B 2,574 ------------- 12,763 ------------- AIRLINES--0.8% 278 Alaska Air Group, Inc. (a) 6,486 286 Frontier Airlines Holdings, Inc. (a) 1,516 484 Mesa Air Group, Inc. (a) 3,219 168 SkyWest, Inc. 3,748 516 Southwest Airlines Co. 8,080 ------------- 23,049 ------------- AUTO COMPONENTS--0.8% 45 BorgWarner, Inc. 3,890 22 Johnson Controls, Inc. 2,489 428 Modine Manufacturing Co. 10,957 266 Standard Motor Products, Inc. 3,312 108 Superior Industries International, Inc. 1,998 ------------- 22,646 ------------- AUTOMOBILES--0.0% 55 Monaco Coach Corp. 767 ------------- BEVERAGES--0.8% 211 Constellation Brands, Inc., Class A (a) 4,627 111 Molson Coors Brewing Co., Class B 9,873 236 PepsiAmericas, Inc. 6,530 ------------- 21,030 ------------- BUILDING PRODUCTS--0.3% 28 Apogee Enterprises, Inc. 721 106 Gibraltar Industries, Inc. 2,047 108 Griffon Corp. (a) 1,898 69 Lennox International, Inc. 2,643 38 Universal Forest Products, Inc. 1,503 ------------- 8,812 ------------- CAPITAL MARKETS--1.0% 73 Bear Stearns (The) Cos., Inc. 8,849 113 E*TRADE Financial Corp. (a) 2,093 106 LaBranche & Co, Inc. (a) 686 52 Legg Mason, Inc. 4,680 CAPITAL MARKETS (CONTINUED) 61 Merrill Lynch & Co., Inc. $ 4,526 30 Morgan Stanley 1,916 29 Piper Jaffray Cos., Inc. (a) 1,390 148 SWS Group, Inc. 2,612 ------------- 26,752 ------------- CHEMICALS--4.4% 66 A. Schulman, Inc. 1,533 64 Air Products & Chemicals, Inc. 5,528 49 Albemarle Corp. 1,971 22 Arch Chemicals, Inc. 778 39 Ashland, Inc. 2,381 122 Cabot Corp. 4,926 121 Cytec Industries, Inc. 8,106 290 Dow Chemical (The) Co. 12,610 101 E.I. du Pont de Nemours and Co. 4,720 159 Eastman Chemical Co. 10,942 43 FMC Corp. 3,833 88 Georgia Gulf Corp. 1,425 54 H.B. Fuller Co. 1,492 261 Hercules, Inc. (a) 5,418 60 Lubrizol (The) Corp. 3,760 339 Material Sciences Corp. (a) 3,729 369 Olin Corp. 7,701 30 OM Group, Inc. (a) 1,453 147 Penford Corp. 5,252 445 PolyOne Corp. (a) 3,346 67 PPG Industries, Inc. 5,110 136 Quaker Chemical Corp. 2,954 141 Rohm & Haas Co. 7,969 305 Sensient Technologies Corp. 7,747 285 Tronox, Inc., Class B 3,506 136 Valspar (The) Corp. 3,752 ------------- 121,942 ------------- COMMERCIAL BANKS--3.1% 13 Alabama National BanCorporation 694 57 Associated Banc-Corp. 1,638 61 BB&T Corp. 2,283 88 Boston Private Financial Holdings, Inc. 2,243 56 Cathay General Bancorp 1,714 71 Central Pacific Financial Corp. 2,003 46 Chittenden Corp. 1,539 42 Comerica, Inc. 2,212 160 Community Bank System, Inc. 2,878 147 First Commonwealth Financial Corp. 1,394 64 First Horizon National Corp. 2,030 67 Greater Bay Bancorp 1,801 94 Hanmi Financial Corp. 1,363 226 Huntington Bancshares, Inc. 4,339 52 Irwin Financial Corp. 609 224 KeyCorp 7,770 23 M&T Bank Corp. 2,445 308 National City Corp. 9,051 107 PNC Financial Services Group, Inc. 7,131 Page 78 See Notes to Financial Statements First Trust Multi Cap Value AlphaDEX(TM) Fund Portfolio of Investments (Continued) July 31, 2007 SHARES DESCRIPTION MARKET VALUE - -------------------------------------------------------------- COMMON STOCKS (CONTINUED) COMMERCIAL BANKS (CONTINUED) 24 Prosperity Bancshares, Inc. $ 680 49 Provident Bankshares Corp. 1,406 76 Regions Financial Corp. 2,285 35 South Financial Group (The), Inc. 755 55 Sterling Financial Corp. 1,249 29 SunTrust Banks, Inc. 2,271 72 Susquehanna Bancshares, Inc. 1,246 68 Umpqua Holdings Corp. 1,293 150 Wachovia Corp. 7,082 91 Webster Financial Corp. 3,955 71 Wells Fargo & Co. 2,398 26 Whitney Holding Corp. 650 18 Wintrust Financial Corp. 709 67 Zions Bancorporation 4,995 ------------- 86,111 ------------- COMMERCIAL SERVICES & SUPPLIES--2.8% 155 ABM Industries, Inc. 3,900 572 Allied Waste Industries, Inc. (a) 7,362 190 Angelica Corp. 4,148 38 Avery Dennison Corp. 2,331 164 Bowne & Co., Inc. 2,844 30 Brink's (The) Co. 1,835 24 CDI Corp. 679 46 Consolidated Graphics, Inc. (a) 3,032 101 G&K Services, Inc., Class A 3,763 59 Herman Miller, Inc. 1,801 46 HNI Corp. 1,878 282 Kelly Services, Inc., Class A 7,008 313 Navigant Consulting, Inc. (a) 4,930 73 On Assignment, Inc. (a) 732 177 R.R. Donnelley & Sons Co. 7,479 61 Republic Services, Inc. 1,949 68 Robert Half International, Inc. 2,311 45 School Specialty, Inc. (a) 1,550 341 Spherion Corp. (a) 3,011 48 United Stationers, Inc. (a) 3,060 76 Viad Corp. 2,732 128 Volt Information Sciences, Inc. (a) 1,994 197 Waste Management, Inc. 7,491 ------------- 77,820 ------------- COMMUNICATIONS EQUIPMENT--1.1% 699 ADC Telecommunications, Inc. (a) 13,064 72 ADTRAN, Inc. 1,878 47 Bel Fuse, Inc., Class B 1,421 77 Black Box Corp. 3,099 160 Digi International, Inc. (a) 2,285 63 Dycom Industries, Inc. (a) 1,761 33 Inter-Tel, Inc. 819 141 Motorola, Inc. 2,396 93 Symmetricom, Inc. (a) 694 232 Tellabs, Inc. (a) 2,633 COMMUNICATIONS EQUIPMENT (CONTINUED) 74 Tollgrade Communications, Inc. (a) $ 764 ------------- 30,814 ------------- COMPUTERS & PERIPHERALS--0.7% 618 Adaptec, Inc. (a) 2,163 115 Hewlett-Packard Co. 5,293 213 Hutchinson Technology, Inc. (a) 4,273 210 Imation Corp. 6,569 37 Intevac, Inc. (a) 601 117 Palm, Inc. (a) 1,746 ------------- 20,645 ------------- CONSTRUCTION & ENGINEERING --0.1% 27 EMCOR Group, Inc. (a) 969 48 URS Corp. (a) 2,365 ------------- 3,334 ------------- CONSTRUCTION MATERIALS--0.1% 28 Florida Rock Industries, Inc. 1,778 30 Texas Industries, Inc. 2,365 ------------- 4,143 ------------- CONSUMER FINANCE--0.2% 219 AmeriCredit Corp. (a) 4,454 40 Cash America International, Inc. 1,465 ------------- 5,919 ------------- CONTAINERS & PACKAGING--1.3% 90 AptarGroup, Inc. 3,276 232 Bemis Co., Inc. 6,837 187 Chesapeake Corp. 2,085 35 Myers Industries, Inc. 749 229 Packaging Corp of America 5,844 126 Rock-Tenn Co., Class A 3,871 248 Sealed Air Corp. 6,758 90 Sonoco Products Co. 3,300 41 Temple-Inland, Inc. 2,383 ------------- 35,103 ------------- DISTRIBUTORS--0.3% 60 Audiovox Corp., Class A (a) 607 226 Building Materials Holding Corp. 3,139 103 Genuine Parts Co. 4,901 ------------- 8,647 ------------- DIVERSIFIED CONSUMER SERVICES --0.3% 11 CPI Corp. 646 202 Regis Corp. 7,042 ------------- 7,688 ------------- See Notes to Financial Statements Page 79 First Trust Multi Cap Value AlphaDEX(TM) Fund Portfolio of Investments (Continued) July 31, 2007 SHARES DESCRIPTION MARKET VALUE - -------------------------------------------------------------- COMMON STOCKS (CONTINUED) DIVERSIFIED FINANCIAL SERVICES --0.9% 157 Bank of America Corp. $ 7,445 187 CIT Group, Inc. 7,700 49 Citigroup, Inc. 2,282 26 Financial Federal Corp. 737 159 JPMorgan Chase & Co. 6,998 ------------- 25,162 ------------- DIVERSIFIED TELECOMMUNICATION SERVICES--1.3% 124 AT&T, Inc. 4,856 250 CenturyTel, Inc. 11,468 336 Citizens Communications Co. 4,848 105 CT Communications, Inc. 3,218 39 Embarq Corp. 2,410 187 Verizon Communications, Inc. 7,970 169 Windstream Corp. 2,325 ------------- 37,095 ------------- ELECTRIC UTILITIES--5.0% 34 ALLETE, Inc. 1,491 171 American Electric Power Co., Inc. 7,437 106 Central Vermont Public Service Corp. 3,604 131 Cleco Corp. 3,111 701 Duke Energy Corp. 11,938 163 El Paso Electric Co. (a) 3,793 48 Entergy Corp. 4,798 158 FirstEnergy Corp. 9,599 90 FPL Group, Inc. 5,196 266 Great Plains Energy, Inc. 7,384 163 Hawaiian Electric Industries, Inc. 3,718 302 IDACORP, Inc. 9,350 205 Northeast Utilities 5,605 206 Pepco Holdings, Inc. 5,576 322 Pinnacle West Capital Corp. 12,069 53 PPL Corp. 2,498 281 Progress Energy, Inc. 12,268 441 Sierra Pacific Resources (a) 7,007 224 Southern Co. 7,535 97 UIL Holdings Corp. 2,869 97 Unisource Energy Corp. 2,952 399 Westar Energy, Inc. 9,185 ------------- 138,983 ------------- ELECTRICAL EQUIPMENT--0.4% 59 A.O. Smith Corp. 2,864 16 Baldor Electric Co. 730 14 Belden, Inc. 767 71 Hubbell, Inc., Class B 4,093 51 Regal-Beloit Corp. 2,587 ------------- 11,041 ------------- ELECTRONIC EQUIPMENT & INSTRUMENTS--2.7% 71 Agilysys, Inc. $ 1,364 43 Anixter International, Inc. (a) 3,554 252 Arrow Electronics, Inc. (a) 9,631 98 Avnet, Inc. (a) 3,712 245 Bell Microproducts, Inc. (a) 1,539 104 Benchmark Electronics, Inc. (a) 2,309 52 Coherent, Inc. (a) 1,505 186 CTS Corp. 2,370 38 Electro Scientific Industries, Inc. (a) 834 67 Gerber Scientific, Inc. (a) 695 267 Ingram Micro, Inc. Class A (a) 5,353 104 Insight Enterprises, Inc. (a) 2,346 549 KEMET Corp. (a) 3,865 204 Methode Electronics, Inc. 3,299 427 Molex, Inc. 12,102 152 Newport Corp. (a) 1,987 83 Park Electrochemical Corp. 2,461 34 Plexus Corp. (a) 825 21 Rogers Corp. (a) 759 1,394 Solectron Corp. (a) 5,241 612 Vishay Intertechnology, Inc. (a) 9,492 ------------- 75,243 ------------- ENERGY EQUIPMENT & SERVICES --2.6% 122 Baker Hughes, Inc. 9,644 81 Bristow Group, Inc. (a) 3,842 210 ENSCO International, Inc. 12,825 223 Halliburton Co. 8,032 162 Hanover Compressor Co. (a) 3,860 273 Helmerich & Payne, Inc. 8,837 313 Rowan Cos., Inc. 13,206 43 SEACOR Holdings, Inc. (a) 3,750 137 Tidewater, Inc. 9,374 ------------- 73,370 ------------- FOOD & STAPLES RETAILING--1.7% 107 BJ's Wholesale Club, Inc. (a) 3,634 59 Casey's General Stores, Inc. 1,471 95 Great Atlantic & Pacific Tea The) Co. (a) 2,769 182 Kroger (The) Co. 4,725 30 Longs Drug Stores Corp. 1,451 32 Nash Finch Co. 1,289 49 Performance Food Group Co. (a) 1,404 257 Ruddick Corp. 7,145 301 Safeway, Inc. 9,592 49 Spartan Stores, Inc. 1,434 221 SUPERVALU, Inc. 9,209 65 Whole Foods Market, Inc. 2,408 ------------- 46,531 ------------- FOOD PRODUCTS--1.9% 387 Archer-Daniels-Midland Co. 13,004 Page 80 See Notes to Financial Statements First Trust Multi Cap Value AlphaDEX(TM) Fund Portfolio of Investments (Continued) July 31, 2007 SHARES DESCRIPTION MARKET VALUE - -------------------------------------------------------------- COMMON STOCKS (CONTINUED) FOOD PRODUCTS (CONTINUED) 322 Dean Foods Co. (a) $ 9,264 24 Flowers Foods, Inc. 492 43 General Mills, Inc. 2,392 29 Hain Celestial Group (The), Inc. (a) 786 155 Hormel Foods Corp. 5,335 42 J & J Snack Foods Corp. 1,447 29 J.M. Smucker (The) Co. 1,618 71 Kraft Foods, Inc., Class A 2,325 92 Lancaster Colony Corp. 3,562 30 Ralcorp Holdings, Inc. (a) 1,559 189 Smithfield Foods, Inc. (a) 5,870 68 Tootsie Roll Industries, Inc. 1,702 120 TreeHouse Foods, Inc. (a) 2,689 ------------- 52,045 ------------- GAS UTILITIES--2.1% 143 AGL Resources, Inc. 5,391 133 Atmos Energy Corp. 3,733 58 Energen Corp. 3,069 74 Laclede Group (The), Inc. 2,187 43 National Fuel Gas Co. 1,864 46 New Jersey Resources Corp. 2,162 239 Nicor, Inc. 9,420 87 Northwest Natural Gas Co. 3,625 77 ONEOK, Inc. 3,908 95 Piedmont Natural Gas Co. 2,203 90 South Jersey Industries, Inc. 2,949 98 Southern Union Co. 3,026 118 Southwest Gas Corp. 3,667 117 UGI Corp. 3,020 237 WGL Holdings, Inc. 7,096 ------------- 57,320 ------------- HEALTH CARE EQUIPMENT & SUPPLIES--0.5% 54 Advanced Medical Optics, Inc. (a) 1,632 11 Analogic Corp. 730 55 CONMED Corp. (a) 1,535 61 Datascope Corp. 2,099 444 Osteotech, Inc. (a) 3,183 49 Symmetry Medical, Inc. (a) 732 959 Theragenics Corp. (a) 3,788 ------------- 13,699 ------------- HEALTH CARE PROVIDERS & SERVICES--1.4% 51 Aetna, Inc. 2,452 67 AMERIGROUP Corp. (a) 1,855 117 Gentiva Health Services, Inc. (a) 2,336 315 Kindred Healthcare, Inc. (a) 8,435 200 LifePoint Hospitals, Inc. (a) 5,910 78 Matria Healthcare, Inc. (a) 2,015 42 McKesson Corp. 2,426 52 Omnicare, Inc. 1,724 HEALTH CARE PROVIDERS & SERVICES (CONTINUED) 22 Owens & Minor, Inc. $ 846 165 RehabCare Group, Inc. (a) 2,338 111 Res-Care, Inc. (a) 2,157 96 WellPoint, Inc. (a) 7,212 ------------- 39,706 ------------- HOTELS, RESTAURANTS & LEISURE --1.5% 210 Bob Evans Farms, Inc. 6,815 74 California Pizza Kitchen, Inc. (a) 1,405 210 Carnival Corp. 9,304 44 CBRL Group, Inc. 1,691 39 CKE Restaurants, Inc. 674 106 Landry's Restaurants, Inc. 2,808 67 Marcus (The) Corp. 1,319 198 O'Charley's, Inc. 3,511 28 Pinnacle Entertainment, Inc. (a) 742 60 RARE Hospitality International, Inc. (a) 1,606 115 Starwood Hotels & Resorts Worldwide, Inc. 7,240 240 Steak n Shake (The) Co. (a) 3,600 69 Wyndham Worldwide Corp. (a) 2,322 ------------- 43,037 ------------- HOUSEHOLD DURABLES--2.5% 66 American Greetings Corp., Class A 1,632 314 Beazer Homes USA, Inc. 4,393 163 Champion Enterprises, Inc. (a) 1,910 23 Ethan Allen Interiors, Inc. 786 62 Fortune Brands, Inc. 5,041 409 Furniture Brands International, Inc. 4,507 326 KB Home 10,369 581 Leggett & Platt, Inc. 12,043 210 Lennar Corp., Class A 6,439 36 Libbey, Inc. 718 60 M/I Homes, Inc. 1,473 38 National Presto Industries, Inc. 2,134 228 Pulte Homes, Inc. 4,410 42 Russ Berrie and Co., Inc. (a) 646 84 Stanley Works (The) 4,648 65 Tupperware Brands Corp. 1,691 69 Whirlpool Corp. 7,046 ------------- 69,886 ------------- HOUSEHOLD PRODUCTS--0.2% 136 Central Garden & Pet Co., Class A (a) 1,665 77 Kimberly-Clark Corp. 5,179 ------------- 6,844 ------------- INDUSTRIAL CONGLOMERATES--1.2% 89 3M Co. 7,914 35 Sequa Corp., Class A (a) 5,779 See Notes to Financial Statements Page 81 First Trust Multi Cap Value AlphaDEX(TM) Fund Portfolio of Investments (Continued) July 31, 2007 SHARES DESCRIPTION MARKET VALUE - -------------------------------------------------------------- COMMON STOCKS (CONTINUED) INDUSTRIAL CONGLOMERATES (CONTINUED) 56 Standex International Corp. $ 1,327 188 Tredegar Corp. 3,452 304 Tyco International Ltd. 14,375 ------------- 32,847 ------------- INSURANCE--8.1% 205 ACE Ltd. 11,833 167 Allstate (The) Corp. 8,876 227 American Financial Group, Inc 6,376 131 Assurant, Inc. 6,644 237 Chubb (The) Corp. 11,947 177 Cincinnati Financial Corp. 6,938 279 Commerce Group (The), Inc. 8,016 56 Delphi Financial Group, Inc., Class A 2,250 408 Fidelity National Financial, Inc., Class A 8,523 156 First American Corp. 7,221 149 Genworth Financial, Inc., Class A 4,547 119 Hanover Insurance Group, Inc. 5,223 78 Hartford Financial Services Group (The), Inc. 7,166 273 Horace Mann Educators Corp. 4,868 41 LandAmerica Financial Group, Inc. 3,140 35 Lincoln National Corp. 2,111 201 Loews Corp. 9,527 81 Marsh & McLennan Cos., Inc. 2,232 165 MBIA, Inc. 9,257 105 Mercury General Corp. 5,437 134 Ohio Casualty Corp. 5,817 364 Old Republic International Corp. 6,683 120 Presidential Life Corp. 1,957 57 ProAssurance Corp. (a) 2,815 81 Protective Life Corp. 3,485 26 Prudential Financial, Inc. 2,304 71 RLI Corp. 4,118 206 SAFECO Corp. 12,045 77 Safety Insurance Group, Inc. 2,564 128 SCPIE Holdings, Inc. (a) 2,876 119 Selective Insurance Group 2,442 100 Stewart Information Services Corp. 3,648 77 Torchmark Corp. 4,739 240 Travelers (The) Cos., Inc. 12,186 113 United Fire & Casualty Co. 3,889 118 Unitrin, Inc. 5,001 96 Unum Group 2,333 152 XL Capital Ltd., Class A 11,835 85 Zenith National Insurance Corp. 3,431 ------------- 226,300 ------------- INTERNET & CATALOG RETAIL--0.3% 499 Netflix, Inc. (a) 8,598 ------------- INTERNET SOFTWARE & SERVICES--0.3% 34 InfoSpace, Inc. $ 708 97 United Online, Inc. 1,370 242 VeriSign, Inc. (a) 7,185 ------------- 9,263 ------------- IT SERVICES--1.6% 71 Acxiom Corp. 1,786 89 Authorize.Net Holdings, Inc. (a) 1,542 96 CheckFree Corp. (a) 3,537 489 CIBER, Inc. (a) 3,712 173 Computer Sciences Corp. (a) 9,633 423 Convergys Corp. (a) 8,058 277 Electronic Data Systems Corp. 7,476 579 MPS Group, Inc. (a) 7,718 218 StarTek, Inc. (a) 2,389 ------------- 45,851 ------------- LEISURE EQUIPMENT & PRODUCTS --1.2% 162 Arctic Cat, Inc. 2,935 393 Brunswick Corp. 10,989 163 Hasbro, Inc. 4,567 142 JAKKS Pacific, Inc. (a) 3,367 263 K2, Inc. (a) 3,842 118 MarineMax, Inc. (a) 2,207 203 Mattel, Inc. 4,651 40 RC2 Corp. (a) 1,416 ------------- 33,974 ------------- LIFE SCIENCES TOOLS & SERVICES--0.1% 96 PerkinElmer, Inc. 2,672 ------------- MACHINERY--3.3% 19 Albany International Corp., Class A 712 74 Barnes Group, Inc. 2,309 76 Cummins, Inc. 9,021 100 Dover Corp. 5,100 55 Eaton Corp. 5,345 244 Federal Signal Corp. 3,282 74 Harsco Corp. 3,897 142 Illinois Tool Works, Inc. 7,817 94 Ingersoll-Rand Co. Ltd., Class A 4,730 118 Kennametal, Inc. 9,046 274 Lydall, Inc. (a) 3,165 93 Mueller Industries, Inc. 3,430 77 Nordson Corp. 3,524 59 PACCAR, Inc. 4,827 131 Parker Hannifin Corp. 12,926 49 Pentair, Inc. 1,774 107 Timken (The) Co. 3,574 133 Trinity Industries, Inc. 5,085 54 Wabash National Corp. 686 63 Watts Water Technologies, Inc., Class A 2,199 ------------- 92,449 ------------- Page 82 See Notes to Financial Statements First Trust Multi Cap Value AlphaDEX(TM) Fund Portfolio of Investments (Continued) July 31, 2007 SHARES DESCRIPTION MARKET VALUE - -------------------------------------------------------------- COMMON STOCKS (CONTINUED) MARINE--0.1% 73 Alexander & Baldwin, Inc. $ 3,958 ------------- MEDIA--3.4% 376 Belo Corp., Class A 6,730 231 CBS Corp., Class B 7,327 333 DIRECTV Group (The), Inc. (a) 7,463 112 E.W. Scripps (The) Co., Class A 4,589 233 Gannett Co., Inc. 11,627 464 Lee Enterprises, Inc. 8,171 291 Media General, Inc., Class A 8,206 118 News Corp., Class A 2,492 162 Scholastic Corp. (a) 5,213 487 Time Warner, Inc. 9,380 349 Tribune Co. 9,758 300 Walt Disney (The) Co. 9,900 5 Washington Post (The) Co. 3,954 ------------- 94,810 ------------- METALS & MINING--2.1% 253 Alcoa, Inc. 9,665 66 A.M. Castle & Co. 2,179 29 AMCOL International, Corp. 830 95 Brush Engineered Materials, Inc. (a) 3,598 45 Carpenter Technology Corp. 5,341 43 Century Aluminum Co. (a) 2,216 93 Freeport-McMoRan Copper & Gold, Inc. 8,740 66 Quanex Corp. 2,974 106 Ryerson, Inc. 3,402 118 United States Steel Corp. 11,598 447 Worthington Industries, Inc. 9,253 ------------- 59,796 ------------- MULTILINE RETAIL--1.4% 357 Dillard's, Inc., Class A 10,671 239 Fred's, Inc. 2,837 106 J. C. Penney Co., Inc. 7,212 258 Macy's, Inc. 9,306 61 Sears Holdings Corp. (a) 8,344 63 Tuesday Morning Corp. 735 ------------- 39,105 ------------- MULTI-UTILITIES--7.3% 249 Alliant Energy Corp. 9,201 209 Ameren Corp. 10,028 148 Avista Corp. 2,933 195 Black Hills Corp. 7,274 295 CenterPoint Energy, Inc. 4,862 71 CH Energy Group, Inc. 3,149 298 CMS Energy Corp. 4,816 284 Consolidated Edison, Inc. 12,404 59 Dominion Resources, Inc. 4,969 266 DTE Energy Co. 12,336 297 Energy East Corp. 7,517 MULTI-UTILITIES (CONTINUED) 152 Integrys Energy Group, Inc. $ 7,522 244 KeySpan Corp. 10,138 276 MDU Resources Group, Inc. 7,524 619 NiSource, Inc. 11,804 179 NSTAR 5,630 158 OGE Energy Corp. 5,238 226 PG&E Corp. 9,675 279 PNM Resources, Inc. 7,207 400 Puget Energy, Inc. 9,260 202 SCANA Corp. 7,551 173 Sempra Energy 9,121 597 TECO Energy, Inc. 9,636 287 Vectren Corp. 7,166 131 Wisconsin Energy Corp. 5,624 626 Xcel Energy, Inc. 12,707 ------------- 205,292 ------------- OFFICE ELECTRONICS--0.4% 555 Xerox Corp. (a) 9,690 ------------- OIL, GAS & CONSUMABLE FUELS --4.6% 111 Arch Coal, Inc. 3,318 152 Chevron Corp. 12,960 246 Cimarex Energy Co. 9,311 163 ConocoPhillips 13,177 209 Encore Acquisition Co. (a) 5,407 229 Forest Oil Corp. (a) 9,268 217 Hess Corp. 13,280 214 Marathon Oil Corp. 11,813 124 Noble Energy, Inc. 7,581 222 Occidental Petroleum Corp. 12,592 119 Overseas Shipholding Group, Inc. 9,233 202 Plains Exploration & Production Co. (a) 8,728 174 Valero Energy Corp. 11,660 ------------- 128,328 ------------- PAPER & FOREST PRODUCTS--1.5% 155 Bowater, Inc. 3,041 259 Buckeye Technologies, Inc. (a) 3,970 138 Glatfelter 1,853 328 International Paper Co. 12,160 99 Louisiana-Pacific Corp. 1,833 71 MeadWestvaco Corp. 2,310 78 Neenah Paper, Inc. 3,021 806 Pope & Talbot, Inc. (a) 2,120 129 Schweitzer-Mauduit International, Inc. 2,945 176 Wausau Paper Corp. 1,969 97 Weyerhaeuser Co. 6,911 ------------- 42,133 ------------- PERSONAL PRODUCTS--0.2% 245 Alberto-Culver Co. 5,762 ------------- See Notes to Financial Statements Page 83 First Trust Multi Cap Value AlphaDEX(TM) Fund Portfolio of Investments (Continued) July 31, 2007 SHARES DESCRIPTION MARKET VALUE - -------------------------------------------------------------- COMMON STOCKS (CONTINUED) PHARMACEUTICALS--0.9% 62 Alpharma, Inc., Class A (a) $ 1,537 627 King Pharmaceuticals, Inc. (a) 10,664 401 Pfizer, Inc. 9,428 290 ViroPharma, Inc. (a) 3,727 ------------- 25,356 ------------- REAL ESTATE INVESTMENT TRUSTS --1.3% 126 Boston Properties, Inc. 11,907 200 Cousins Properties, Inc. 5,142 44 Entertainment Properties Trust 1,960 45 Hospitality Properties Trust 1,726 103 LTC Properties, Inc. 2,067 121 Medical Properties Trust, Inc. 1,355 73 National Retail Properties, Inc. 1,581 90 Potlatch Corp. 3,932 129 Rayonier, Inc. 5,462 79 Senior Housing Properties Trust 1,365 ------------- 36,497 ------------- ROAD & RAIL--3.2% 60 Arkansas Best Corp. 2,162 272 Avis Budget Group, Inc. (a) 6,982 90 Burlington Northern Santa Fe Corp. 7,393 193 Con-way, Inc. 9,532 228 CSX Corp. 10,809 107 Kansas City Southern (a) 3,693 195 Norfolk Southern Corp. 10,487 238 Ryder System, Inc. 12,940 67 Union Pacific Corp. 7,982 480 Werner Enterprises, Inc. 9,331 263 YRC Worldwide, Inc. (a) 8,448 ------------- 89,759 ------------- SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT--4.4% 177 Advanced Energy Industries, Inc. (a) 3,135 66 Analog Devices, Inc. 2,340 387 Applied Materials, Inc. 8,529 26 ATMI, Inc. (a) 753 616 Axcelis Technologies, Inc. (a) 3,419 220 Brooks Automation, Inc. (a) 3,865 72 Cohu, Inc. 1,439 59 Exar Corp. (a) 834 97 Fairchild Semiconductor International, Inc. (a) 1,770 216 Intel Corp. 5,102 104 International Rectifier Corp. (a) 3,818 60 Intersil Corp., Class A 1,755 151 Lam Research Corp. (a) 8,734 1,366 LSI Corp. (a) 9,835 75 Maxim Integrated Products, Inc. 2,378 304 Micrel, Inc. 3,146 51 Microchip Technology, Inc. 1,852 SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT (CONTINUED) 1,023 Micron Technology, Inc. (a) $ 12,144 144 MKS Instruments, Inc. (a) 3,269 452 Novellus Systems, Inc. (a) 12,892 211 Pericom Semiconductor Corp. (a) 2,253 269 Photronics, Inc. (a) 3,771 1,551 RF Micro Devices, Inc. (a) 10,764 241 Rudolph Technologies, Inc. (a) 3,772 107 Skyworks Solutions, Inc. (a) 847 69 Standard Microsystems Corp. (a) 2,304 292 Teradyne, Inc. (a) 4,581 1,148 TriQuint Semiconductor, Inc. (a) 5,074 ------------- 124,375 ------------- SOFTWARE--0.6% 178 Advent Software, Inc. (a) 6,769 460 Captaris, Inc. (a) 2,360 142 Mentor Graphics Corp. (a) 1,705 59 Radiant Systems, Inc. (a) 820 162 Sybase, Inc. (a) 3,843 26 THQ, Inc. (a) 748 ------------- 16,245 ------------- SPECIALTY RETAIL--3.9% 110 Aaron Rents, Inc. 2,543 219 AnnTaylor Stores Corp. (a) 6,881 457 AutoNation, Inc. (a) 8,901 151 Barnes & Noble, Inc. 5,066 97 Brown Shoe Co, Inc 2,031 88 Charlotte Russe Holding, Inc. (a) 1,564 894 Charming Shoppes, Inc. (a) 8,833 351 Finish Line (The), Inc., Class A 2,373 444 Foot Locker, Inc. 8,241 269 Gap (The), Inc. 4,627 40 Group 1 Automotive, Inc. 1,501 274 Haverty Furniture Cos., Inc. 3,055 141 Jo-Ann Stores, Inc. (a) 3,357 187 Limited Brands, Inc. 4,516 126 Lithia Motors, Inc., Class A 2,594 254 Office Depot, Inc. (a) 6,340 261 OfficeMax, Inc. 8,582 184 Payless ShoeSource, Inc. (a) 4,898 198 Pep Boys-Manny Moe & Jack (The) 3,352 295 Rent-A-Center, Inc. (a) 5,726 77 Sherwin-Williams (The) Co. 5,366 138 Sonic Automotive, Inc., Class A 3,781 131 Stein Mart, Inc. 1,410 99 Zale Corp. (a) 2,102 ------------- 107,640 ------------- TEXTILES, APPAREL & LUXURY GOODS--0.6% 69 Hanesbrands, Inc. (a) 2,140 28 Kellwood Co. 718 95 Movado Group, Inc. 2,683 Page 84 See Notes to Financial Statements First Trust Multi Cap Value AlphaDEX(TM) Fund Portfolio of Investments (Continued) July 31, 2007 SHARES DESCRIPTION MARKET VALUE - -------------------------------------------------------------- COMMON STOCKS (CONTINUED) TEXTILES, APPAREL & LUXURY GOODS (CONTINUED) 72 Oxford Industries, Inc. $ 2,909 55 Skechers U.S.A., Inc., Class A (a) 1,143 116 Stride Rite (The) Corp. 2,363 91 UniFirst Corp. 3,418 ------------- 15,374 ------------- THRIFTS & MORTGAGE FINANCE --2.2% 30 Anchor BanCorp Wisconsin, Inc 671 75 Astoria Financial Corp. 1,766 117 BankUnited Financial Corp., Class A 1,970 136 Corus Bankshares, Inc. 2,211 59 Dime Community Bancshares 660 61 Downey Financial Corp. 3,245 296 First Niagara Financial Group, Inc. 3,807 71 FirstFed Financial Corp. (a) 3,209 266 Flagstar Bancorp, Inc. 2,846 297 Fremont General Corp. (a) 1,714 332 IndyMac Bancorp, Inc. 7,304 43 MAF Bancorp, Inc. 2,258 225 MGIC Investment Corp. 8,698 217 PMI Group (The), Inc. 7,393 179 Radian Group, Inc. 6,034 80 Triad Guaranty, Inc. (a) 2,206 77 Washington Federal, Inc. 1,735 120 Washington Mutual, Inc. 4,504 ------------- 62,231 ------------- TOBACCO--0.2% 36 Altria Group, Inc. 2,393 38 Reynolds American, Inc. 2,324 ------------- 4,717 ------------- TRADING COMPANIES & DISTRIBUTORS --0.6% 27 Applied Industrial Technologies, Inc. 767 79 GATX Corp. 3,583 51 Kaman Corp. 1,708 297 United Rentals, Inc. (a) 9,546 ------------- 15,604 ------------- WATER UTILITIES--0.1% 45 American States Water Co. 1,660 ------------- WIRELESS TELECOMMUNICATION SERVICES--0.9% 112 ALLTEL Corp. $ 7,386 495 Sprint Nextel Corp. 10,162 124 Telephone and Data Systems, Inc. 8,233 ------------- 25,781 ------------- TOTAL INVESTMENTS--100.2% (Cost $3,134,218) 2,799,969 NET OTHER ASSETS AND LIABILITIES--(0.2%) (4,578) ------------- NET ASSETS--100.0% $ 2,795,391 ============= (a) Non-income producing security. See Notes to Financial Statements Page 85 First Trust Multi Cap Growth AlphaDEX(TM) Fund Portfolio of Investments July 31, 2007 SHARES DESCRIPTION MARKET VALUE - -------------------------------------------------------------- COMMON STOCKS--99.4% AEROSPACE & DEFENSE--3.8% 330 Alliant Techsystems, Inc. (a) $ 32,706 354 Boeing (The) Co. 36,614 213 Ceradyne, Inc. (a) 15,896 405 Cubic Corp. 11,150 263 Curtiss-Wright Corp. 11,459 443 DRS Technologies, Inc. 23,195 477 EDO Corp. 15,765 326 General Dynamics Corp. 25,611 449 L-3 Communications Holdings, Inc. 43,804 213 Moog, Inc., Class A (a) 9,121 360 Precision Castparts Corp. 49,342 240 Rockwell Collins, Inc. 16,488 342 Teledyne Technologies, Inc. (a) 15,175 360 United Technologies Corp. 26,269 ------------- 332,595 ------------- AIR FREIGHT & LOGISTICS--0.5% 486 C.H. Robinson Worldwide, Inc. 23,643 180 Forward Air Corp. 6,133 447 Hub Group, Inc., Class A (a) 15,207 ------------- 44,983 ------------- AIRLINES--0.2% 1,160 AirTran Holdings, Inc. (a) 11,415 539 JetBlue Airways Corp. (a) 5,309 ------------- 16,724 ------------- AUTO COMPONENTS--0.3% 285 Drew Industries, Inc. (a) 9,912 965 Gentex Corp. 19,049 ------------- 28,961 ------------- AUTOMOBILES--0.1% 141 Thor Industries, Inc. 5,784 ------------- BEVERAGES--0.5% 117 Brown-Forman Corp., Class B 7,773 162 Coca-Cola (The) Co. 8,442 294 Hansen Natural Corp. (a) 11,922 506 Pepsi Bottling Group (The), Inc. 16,931 ------------- 45,068 ------------- BIOTECHNOLOGY--1.5% 318 Biogen Idec, Inc. (a) 17,980 297 Celgene Corp. (a) 17,986 315 Cephalon, Inc. (a) 23,669 204 Digene Corp. (a) 12,495 132 Genzyme Corp. (a) 8,325 659 Gilead Sciences, Inc. (a) 24,536 236 Martek Biosciences Corp. (a) 6,046 815 PDL BioPharma, Inc. (a) 19,144 ------------- 130,181 ------------- BUILDING PRODUCTS--0.6% 741 American Standard Cos., Inc. $ 40,051 192 NCI Building Systems, Inc. (a) 9,285 90 Simpson Manufacturing Co., Inc. 3,045 ------------- 52,381 ------------- CAPITAL MARKETS--3.8% 536 Ameriprise Financial, Inc. 32,305 414 Charles Schwab (The) Corp. 8,334 743 Eaton Vance Corp. 31,102 222 Federated Investors, Inc., Class B 7,994 257 Franklin Resources, Inc. 32,734 201 Goldman Sachs Group (The), Inc. 37,857 141 Investment Technology Group, Inc. (a) 5,634 1,222 Janus Capital Group, Inc. 36,734 456 Lehman Brothers Holdings, Inc. 28,272 264 Northern Trust Corp. 16,489 408 Nuveen Investments, Inc., Class A 24,945 204 Raymond James Financial, Inc. 6,257 249 State Street Corp. 16,690 656 T. Rowe Price Group, Inc. 34,197 488 Waddell & Reed Financial, Inc., Class A 12,302 ------------- 331,846 ------------- CHEMICALS--1.7% 530 Airgas, Inc. 24,751 489 International Flavors & Fragrances, Inc. 24,504 189 Minerals Technologies, Inc. 12,223 647 Monsanto Co. 41,699 473 Praxair, Inc. 36,241 200 Sigma-Aldrich Corp. 9,064 ------------- 148,482 ------------- COMMERCIAL BANKS--1.0% 84 City National Corp. 5,946 689 Commerce Bancorp, Inc. 23,047 369 Compass Bancshares, Inc. 25,564 78 East West Bancorp, Inc. 2,859 114 First Republic Bank 6,242 239 SVB Financial Group (a) 12,591 276 Synovus Financial Corp. 7,717 ------------- 83,966 ------------- COMMERCIAL SERVICES & SUPPLIES--2.0% 92 Administaff, Inc. 3,008 330 Brady Corp., Class A 11,547 216 Cintas Corp. 7,897 207 Copart, Inc. (a) 5,825 123 Dun & Bradstreet (The) Corp. 12,024 575 Equifax, Inc. 23,264 320 Healthcare Services Group, Inc. 8,870 240 Heidrick & Struggles International, Inc. (a) 12,898 500 Interface, Inc., Class A 9,215 Page 86 See Notes to Financial Statements First Trust Multi Cap Growth AlphaDEX(TM) Fund Portfolio of Investments (Continued) July 31, 2007 SHARES DESCRIPTION MARKET VALUE - -------------------------------------------------------------- COMMON STOCKS (CONTINUED) COMMERCIAL SERVICES & SUPPLIES (CONTINUED) 965 Korn/Ferry International (a) $ 22,803 680 Labor Ready, Inc. (a) 16,021 210 Mobile Mini, Inc. (a) 6,000 428 Stericycle, Inc. (a) 20,518 285 Tetra Tech, Inc. (a) 5,994 243 Watson Wyatt Worldwide, Inc., Class A 10,826 ------------- 176,710 ------------- COMMUNICATIONS EQUIPMENT --3.9% 893 Arris Group, Inc. (a) 13,234 2,598 Avaya, Inc. (a) 42,971 219 Avocent Corp. (a) 5,990 123 Blue Coat Systems, Inc. (a) 5,994 671 C-COR, Inc. (a) 9,025 941 Ciena Corp. (a) 34,375 917 Cisco Systems, Inc. (a) 26,510 563 CommScope, Inc. (a) 30,644 264 Comtech Telecommunications Corp. (a) 11,476 665 Corning, Inc. (a) 15,854 374 Ditech Networks, Inc. (a) 2,790 315 F5 Networks, Inc. (a) 27,307 465 Harris Corp. 25,519 1,352 Juniper Networks, Inc. (a) 40,506 434 NETGEAR, Inc. (a) 12,004 725 Plantronics, Inc. 20,315 377 Polycom, Inc. (a) 11,676 195 QUALCOMM, Inc. 8,122 96 ViaSat, Inc. (a) 2,748 ------------- 347,060 ------------- COMPUTERS & PERIPHERALS--3.4% 359 Apple, Inc. (a) 47,302 1,192 Dell, Inc. (a) 33,340 363 Diebold, Inc. 18,393 2,416 EMC Corp. (a) 44,720 243 International Business Machines Corp. 26,888 296 Komag, Inc. (a) 9,475 647 NCR Corp. (a) 33,786 603 Novatel Wireless, Inc. (a) 12,983 521 SanDisk Corp. (a) 27,941 261 Stratasys, Inc. (a) 11,487 1,618 Sun Microsystems, Inc. (a) 8,252 264 Synaptics, Inc. (a) 9,272 654 Western Digital Corp. (a) 13,963 ------------- 297,802 ------------- CONSTRUCTION & ENGINEERING --1.6% 393 Fluor Corp. 45,396 512 Granite Construction, Inc. 33,275 CONSTRUCTION & ENGINEERING (CONTINUED) 570 Jacobs Engineering Group, Inc. (a) $ 35,129 1,070 Quanta Services, Inc. (a) 30,420 ------------- 144,220 ------------- CONSTRUCTION MATERIALS--0.4% 156 Martin Marietta Materials, Inc. 21,372 149 Vulcan Materials Co. 14,262 ------------- 35,634 ------------- CONSUMER FINANCE--0.7% 278 American Express Co. 16,274 108 Capital One Financial Corp. 7,642 402 First Cash Financial Services, Inc. (a) 8,760 591 SLM Corp. (a) 29,060 144 World Acceptance Corp. (a) 4,635 ------------- 66,371 ------------- CONTAINERS & PACKAGING--0.5% 824 Ball Corp. 42,246 ------------- DISTRIBUTORS--0.3% 380 Keystone Automotive Industries, Inc. (a) 17,769 497 LKQ Corp. (a) 14,130 ------------- 31,899 ------------- DIVERSIFIED CONSUMER SERVICES--2.5% 437 Apollo Group, Inc., Class A (a) 25,832 158 Bright Horizons Family Solutions, Inc. (a) 6,130 188 Career Education Corp. (a) 5,580 779 Corinthian Colleges, Inc. (a) 10,493 746 DeVry, Inc. 24,170 363 H&R Block, Inc. 7,242 279 ITT Educational Services, Inc. (a) 29,480 411 Laureate Education, Inc. (a) 25,342 291 Matthews International Corp., Class A 11,134 191 Pre-Paid Legal Services, Inc. (a) 10,066 551 Sotheby's 23,555 144 Strayer Education, Inc. 21,820 240 Universal Technical Institute, Inc. (a) 5,191 252 Vertrue, Inc. (a) 12,451 ------------- 218,486 ------------- DIVERSIFIED FINANCIAL SERVICES --0.2% 180 Leucadia National Corp. 6,768 261 Portfolio Recovery Associates, Inc. (a) 13,637 ------------- 20,405 ------------- See Notes to Financial Statements Page 87 First Trust Multi Cap Growth AlphaDEX(TM) Fund Portfolio of Investments (Continued) July 31, 2007 SHARES DESCRIPTION MARKET VALUE - -------------------------------------------------------------- COMMON STOCKS (CONTINUED) DIVERSIFIED TELECOMMUNICATION SERVICES--0.3% 4,384 Cincinnati Bell, Inc. (a) $ 22,621 ------------- ELECTRIC UTILITIES--0.6% 165 Allegheny Energy, Inc. (a) 8,618 606 Edison International 32,051 234 Exelon Corp. 16,415 ------------- 57,084 ------------- ELECTRICAL EQUIPMENT--1.9% 204 Acuity Brands, Inc. 12,056 638 AMETEK, Inc. 24,895 767 Cooper Industries Ltd., Class A 40,589 545 Emerson Electric Co. 25,652 245 Rockwell Automation, Inc. 17,148 222 Roper Industries, Inc. 13,316 327 Thomas & Betts Corp. (a) 20,209 293 Woodward Governor Co. 16,921 ------------- 170,786 ------------- ELECTRONIC EQUIPMENT & INSTRUMENTS--2.6% 432 Aeroflex, Inc. (a) 6,061 222 Agilent Technologies, Inc. (a) 8,469 710 Amphenol Corp., Class A 24,325 386 CDW Corp. (a) 32,489 243 Checkpoint Systems, Inc. (a) 5,606 264 FLIR Systems, Inc. (a) 11,524 78 Itron, Inc. (a) 6,196 386 Jabil Circuit, Inc. 8,697 549 LoJack Corp. (a) 11,705 210 MTS Systems Corp. 8,768 584 National Instruments Corp. 18,892 491 ScanSource, Inc. (a) 13,174 548 Technitrol, Inc. 14,248 756 Tektronix, Inc. 24,834 381 Trimble Navigation Ltd. (a) 12,584 1,208 TTM Technologies, Inc. (a) 15,752 414 X-Rite, Inc. (a) 5,589 ------------- 228,913 ------------- ENERGY EQUIPMENT & SERVICES --6.7% 228 Atwood Oceanics, Inc. (a) 15,641 459 Cameron International Corp. (a) 35,802 140 CARBO Ceramics, Inc. 6,311 210 Dril-Quip, Inc. (a) 10,078 320 FMC Technologies, Inc. (a) 29,286 353 Grant Prideco, Inc. (a) 19,803 315 Hornbeck Offshore Services, Inc. (a) 13,561 785 Input/Output, Inc. (a) 11,186 189 Lufkin Industries, Inc. 11,191 632 Matrix Service Co. (a) 14,593 764 Nabors Industries Ltd. (a) 22,339 ENERGY EQUIPMENT & SERVICES (CONTINUED) 420 National Oilwell Varco, Inc. (a) $ 50,446 449 Noble Corp. 46,005 299 Oceaneering International, Inc. (a) 16,792 725 Patterson-UTI Energy, Inc. 16,603 677 Pride International, Inc. (a) 23,729 515 Schlumberger Ltd. 48,781 746 Smith International, Inc. 45,812 635 Superior Energy Services, Inc. (a) 25,603 434 TETRA Technologies, Inc. (a) 12,070 413 Transocean, Inc. (a) 44,377 249 Unit Corp. (a) 13,710 791 Weatherford International Ltd. (a) 43,766 254 W-H Energy Services, Inc. (a) 16,276 ------------- 593,761 ------------- FOOD & STAPLES RETAILING--0.6% 932 CVS Caremark Corp. 32,797 354 Wal-Mart Stores, Inc. 16,266 ------------- 49,063 ------------- FOOD PRODUCTS--0.5% 270 Corn Products International, Inc. 12,047 348 Sanderson Farms, Inc. 13,875 308 Wm. Wrigley Jr. Co. 17,766 ------------- 43,688 ------------- GAS UTILITIES--0.3% 129 Equitable Resources, Inc. 6,077 483 Questar Corp. 24,870 ------------- 30,947 ------------- HEALTH CARE EQUIPMENT & SUPPLIES--3.5% 215 ArthroCare Corp. (a) 10,883 453 Baxter International, Inc. 23,828 99 Beckman Coulter, Inc. 7,011 124 Biomet, Inc. (a) 5,646 761 Cytyc Corp. (a) 32,038 497 DENTSPLY International, Inc. 18,136 75 DJO, Inc. (a) 3,561 105 Gen-Probe, Inc. (a) 6,616 189 Greatbatch, Inc. (a) 5,865 117 Haemonetics Corp. (a) 5,782 195 Hillenbrand Industries, Inc. 12,293 111 Hologic, Inc. (a) 5,750 143 ICU Medical, Inc. (a) 4,753 99 IDEXX Laboratories, Inc. (a) 9,926 110 Immucor, Inc. (a) 3,428 191 Integra LifeSciences Holdings (a) 9,483 183 Intuitive Surgical, Inc. (a) 38,907 435 Meridian Bioscience, Inc. 9,714 231 PolyMedica Corp. 9,330 144 Respironics, Inc. (a) 6,588 615 St. Jude Medical, Inc. (a) 26,531 Page 88 See Notes to Financial Statements First Trust Multi Cap Growth AlphaDEX(TM) Fund Portfolio of Investments (Continued) July 31, 2007 SHARES DESCRIPTION MARKET VALUE - -------------------------------------------------------------- COMMON STOCKS (CONTINUED) HEALTH CARE EQUIPMENT & SUPPLIES (CONTINUED) 621 STERIS Corp. $ 16,984 270 Stryker Corp. 16,856 189 SurModics, Inc. (a) 8,669 54 Vital Signs, Inc 2,809 99 Zimmer Holdings, Inc. (a) 7,698 ------------- 309,085 ------------- HEALTH CARE PROVIDERS & SERVICES--5.5% 336 Amedisys, Inc. (a) 12,718 279 AMN Healthcare Services, Inc. (a) 5,990 126 AmSurg Corp. (a) 3,168 219 Apria Healthcare Group, Inc. (a) 5,742 362 Cardinal Health, Inc. 23,794 285 Centene Corp. (a) 6,159 651 CIGNA Corp. 33,618 626 Community Health Systems, Inc. (a) 24,351 443 Coventry Health Care, Inc. (a) 24,724 725 CryoLife, Inc. (a) 6,924 875 Express Scripts, Inc. (a) 43,863 240 Health Net, Inc. (a) 11,890 531 HealthExtras, Inc. (a) 14,247 129 Healthways, Inc. (a) 5,637 237 Henry Schein, Inc. (a) 12,879 558 Humana, Inc. (a) 35,762 168 inVentiv Health, Inc. (a) 5,961 218 Laboratory Corp. of America Holdings (a) 16,099 333 LCA-Vision, Inc. 11,825 159 Lincare Holdings, Inc. (a) 5,675 671 Manor Care, Inc. 42,508 1,019 Option Care, Inc. 19,758 228 Patterson Cos., Inc. (a) 8,178 56 Pediatrix Medical Group, Inc. (a) 3,022 174 Psychiatric Solutions, Inc. (a) 5,932 294 Sierra Health Services, Inc. (a) 11,948 333 UnitedHealth Group, Inc. 16,127 309 Universal Health Services, Inc., Class B 16,204 336 VCA Antech, Inc. (a) 13,218 363 WellCare Health Plans, Inc. (a) 36,757 ------------- 484,678 ------------- HEALTH CARE TECHNOLOGY--0.4% 342 Cerner Corp. (a) 18,082 794 IMS Health, Inc. 22,335 ------------- 40,417 ------------- HOTELS, RESTAURANTS & LEISURE --1.8% 194 Darden Restaurants, Inc. 8,259 200 Harrah's Entertainment, Inc. 16,938 509 Hilton Hotels Corp. 22,503 132 Jack in the Box, Inc. (a) 8,447 HOTELS, RESTAURANTS & LEISURE (CONTINUED) 671 McDonald's Corp. $ 32,120 114 Monarch Casino & Resort, Inc. (a) 3,225 213 Papa John's International, Inc. (a) 5,843 303 Red Robin Gourmet Burgers, Inc. (a) 11,687 360 Ruth's Chris Steak House, Inc. (a) 6,019 180 Scientific Games Corp., Class A (a) 6,176 240 Texas Roadhouse, Inc. (a) 2,849 327 WMS Industries, Inc. (a) 8,531 779 Yum! Brands, Inc. 24,959 ------------- 157,556 ------------- HOUSEHOLD DURABLES--1.2% 96 Black & Decker (The) Corp. 8,311 953 Blyth, Inc. 21,271 291 Harman International Industries, Inc. 33,756 326 Mohawk Industries, Inc. (a) 29,343 27 NVR, Inc. (a) 15,619 ------------- 108,300 ------------- HOUSEHOLD PRODUCTS--0.6% 261 Church & Dwight Co., Inc. 12,805 330 Energizer Holdings, Inc. (a) 33,296 93 WD-40 Co. 3,087 ------------- 49,188 ------------- INDEPENDENT POWER PRODUCERS & ENERGY TRADERS--0.5% 777 AES (The) Corp. (a) 15,268 390 Constellation Energy Group 32,682 ------------- 47,950 ------------- INDUSTRIAL CONGLOMERATES--0.7% 408 Carlisle Cos., Inc. 18,474 222 General Electric Co. 8,605 401 Teleflex, Inc. 30,648 ------------- 57,727 ------------- INSURANCE--0.9% 165 AFLAC, Inc. 8,600 122 American International Group, Inc. 7,830 57 Everest Re Group Ltd. 5,600 569 HCC Insurance Holdings, Inc. 16,660 60 Infinity Property & Casualty Corp. 2,642 396 MetLife, Inc. 23,848 72 Philadelphia Consolidated Holding Co. (a) 2,602 120 StanCorp Financial Group, Inc. 5,635 96 Tower Group, Inc. 2,544 ------------- 75,961 ------------- INTERNET & CATALOG RETAIL--0.9% 639 Amazon.com, Inc. (a) 50,186 260 Blue Nile, Inc. (a) 19,659 See Notes to Financial Statements Page 89 First Trust Multi Cap Growth AlphaDEX(TM) Fund Portfolio of Investments (Continued) July 31, 2007 SHARES DESCRIPTION MARKET VALUE - -------------------------------------------------------------- COMMON STOCKS (CONTINUED) INTERNET & CATALOG RETAIL (CONTINUED) 734 PetMed Express, Inc. (a) $ 10,702 ------------- 80,547 ------------- INTERNET SOFTWARE & SERVICES--0.9% 255 Bankrate, Inc. (a) 11,437 66 Google, Inc., Class A (a) 33,660 351 j2 Global Communications, Inc. (a) 11,457 1,114 ValueClick, Inc. (a) 23,817 ------------- 80,371 ------------- IT SERVICES--2.2% 300 Affiliated Computer Services, Inc., Class A (a) 16,098 425 Alliance Data Systems Corp. (a) 32,640 63 CACI International Inc., Class A (a) 2,800 362 Ceridian Corp. (a) 12,272 81 DST Systems, Inc. (a) 6,145 174 eFunds Corp. (a) 6,221 806 Fidelity National Information Services, Inc. 40,001 521 First Data Corp. 16,563 449 Fiserv, Inc. (a) 22,190 773 Gartner, Inc. (a) 16,179 71 MAXIMUS, Inc. 2,967 285 SI International, Inc. (a) 8,302 645 Sykes Enterprises, Inc. (a) 10,797 ------------- 193,175 ------------- LEISURE EQUIPMENT & PRODUCTS --0.2% 174 Polaris Industries, Inc. 8,589 314 Pool Corp. 10,553 ------------- 19,142 ------------- LIFE SCIENCES TOOLS & SERVICES --2.6% 368 Charles River Laboratories International, Inc. (a) 18,834 185 Covance, Inc. (a) 13,055 87 Dionex Corp. (a) 5,917 171 Invitrogen Corp. (a) 12,278 255 Kendle International, Inc. (a) 9,422 339 Millipore Corp. (a) 26,649 374 PAREXEL International Corp. (a) 15,121 330 Pharmaceutical Product Development, Inc. 11,055 296 Pharmanet Development Group, Inc. (a) 8,288 657 Thermo Fisher Scientific, Inc. (a) 34,302 231 Varian, Inc. (a) 13,892 425 Ventana Medical Systems, Inc. (a) 35,420 429 Waters Corp. (a) 24,994 ------------- 229,227 ------------- MACHINERY--6.0% 290 Astec Industries, Inc. (a) $ 15,129 177 A.S.V., Inc. (a) 2,582 201 Cascade Corp. 13,626 435 Caterpillar, Inc. 34,278 164 CLARCOR, Inc 5,706 419 Crane Co. 19,215 225 Danaher Corp. 16,803 362 Deere & Co. 43,591 144 EnPro Industries, Inc. (a) 5,671 458 Flowserve Corp. 33,100 369 Gardner Denver, Inc. (a) 15,347 318 IDEX Corp. 11,515 641 ITT Corp. 40,306 326 Joy Global, Inc. 16,134 180 Kaydon Corp. 9,578 441 Lincoln Electric Holdings, Inc. 31,748 354 Lindsay Corp. 14,394 195 Manitowoc (The) Co., Inc. 15,146 521 Oshkosh Truck Corp. 29,827 950 Pall Corp. 39,444 177 Robbins & Myers, Inc. 9,333 374 SPX Corp. 35,107 539 Terex Corp. (a) 46,488 207 Toro (The) Co. 11,638 168 Valmont Industries, Inc. 12,699 ------------- 528,405 ------------- MARINE--0.1% 246 Kirby Corp. (a) 9,965 ------------- MEDIA--1.4% 120 Arbitron, Inc. 5,976 450 Clear Channel Communications, Inc. 16,605 908 Comcast Corp., Class A (a) 23,854 525 John Wiley & Sons, Inc., Class A 22,202 126 McGraw-Hill (The) Cos., Inc. 7,623 414 Meredith Corp. 23,387 161 Omnicom Group, Inc. 8,351 369 Valassis Communications, Inc. (a) 4,380 204 Viacom, Inc., Class B (a) 7,813 ------------- 120,191 ------------- METALS & MINING--1.8% 324 Allegheny Technologies, Inc. 33,997 219 Chaparral Steel Co. 18,405 201 Cleveland-Cliffs, Inc. 13,923 971 Commercial Metals Co. 29,946 144 Nucor Corp. 7,229 584 Reliance Steel & Aluminum Co. 30,683 42 RTI International Metals, Inc. (a) 3,328 605 Steel Dynamics, Inc. 25,368 ------------- 162,879 ------------- MULTILINE RETAIL--1.9% 483 99 Cents Only Stores (a) 5,878 1,157 Big Lots, Inc. (a) 29,920 Page 90 See Notes to Financial Statements First Trust Multi Cap Growth AlphaDEX(TM) Fund Portfolio of Investments (Continued) July 31, 2007 SHARES DESCRIPTION MARKET VALUE - -------------------------------------------------------------- COMMON STOCKS (CONTINUED) MULTILINE RETAIL (CONTINUED) 753 Dollar Tree Stores, Inc. (a) $ 28,810 1,274 Family Dollar Stores, Inc. 37,736 240 Kohl's Corp. (a) 14,592 333 Nordstrom, Inc. 15,844 534 Target Corp. 32,344 ------------- 165,124 ------------- OFFICE ELECTRONICS--0.1% 164 Zebra Technologies Corp., Class A (a) 5,942 ------------- OIL, GAS & CONSUMABLE FUELS --4.5% 654 Anadarko Petroleum Corp. 32,916 312 Apache Corp. 25,222 84 Cabot Oil & Gas Corp. 2,873 983 Chesapeake Energy Corp. 33,461 185 CONSOL Energy, Inc. 7,705 507 Denbury Resources, Inc. (a) 20,280 218 Devon Energy Corp. 16,265 305 Exxon Mobil Corp. 25,965 749 Frontier Oil Corp. 29,009 306 Helix Energy Solutions Group, Inc. (a) 11,919 572 Murphy Oil Corp. 35,486 351 Peabody Energy Corp. 14,833 129 Pioneer Natural Resources Co. 5,870 285 Quicksilver Resources, Inc. (a) 12,004 428 Southwestern Energy Co. (a) 17,390 549 Sunoco, Inc. 36,628 221 Swift Energy Co. (a) 9,446 806 Williams (The) Cos., Inc. 25,994 146 World Fuel Services Corp. 5,970 566 XTO Energy, Inc. 30,864 ------------- 400,100 ------------- PERSONAL PRODUCTS--0.4% 231 Avon Products, Inc. 8,318 96 Chattem, Inc. (a) 5,391 186 Estee Lauder (The) Cos., Inc., Class A 8,375 386 Mannatech, Inc. 3,632 147 NBTY, Inc. (a) 6,400 69 USANA Health Sciences, Inc. (a) 2,785 ------------- 34,901 ------------- PHARMACEUTICALS--1.6% 170 Barr Pharmaceuticals, Inc. (a) 8,707 141 Bradley Prarmaceuticals, Inc. (a) 2,262 186 Endo Pharmaceuticals Holdings, Inc. (a) 6,326 131 Noven Pharmaceuticals, Inc. (a) 2,327 674 Par Pharmaceutical Cos., Inc. (a) 15,967 1,436 Schering-Plough Corp. 40,982 129 Sciele Pharma, Inc. (a) 2,992 PHARMACEUTICALS (CONTINUED) 1,345 Watson Pharmaceuticals, Inc. (a) $ 40,915 444 Wyeth 21,543 ------------- 142,021 ------------- REAL ESTATE MANAGEMENT & DEVELOPMENT--0.4% 932 CB Richard Ellis Group, Inc., Class A (a) 32,545 ------------- ROAD & RAIL--0.6% 188 Heartland Express, Inc. 2,803 648 J.B. Hunt Transport Services, Inc. 18,098 486 Knight Transportation, Inc. 8,573 195 Landstar System, Inc. 8,865 407 Old Dominion Freight Line, Inc. (a) 11,746 ------------- 50,085 ------------- SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT--3.6% 1,153 Altera Corp. 26,750 752 AMIS Holdings, Inc. (a) 7,753 87 Cabot Microelectronics Corp. (a) 3,709 246 Cree, Inc. (a) 6,303 75 Cymer, Inc. (a) 3,206 1,409 Cypress Semiconductor Corp. (a) 35,310 441 Diodes, Inc. (a) 11,717 93 FEI Co. (a) 2,667 464 KLA-Tencor Corp. 26,351 234 Linear Technology Corp. 8,342 557 MEMC Electronic Materials, Inc. (a) 34,155 129 Microsemi Corp. (a) 3,007 602 National Semiconductor Corp. 15,646 1,058 NVIDIA Corp. (a) 48,413 2,200 PMC-Sierra, Inc. (a) 16,764 731 Semtech Corp. (a) 11,879 905 Texas Instruments, Inc. 31,847 306 Varian Semiconductor Equipment Associates, Inc. (a) 14,382 318 Xilinx, Inc. 7,950 ------------- 316,151 ------------- SOFTWARE--3.6% 105 Ansoft Corp. (a) 2,655 231 ANSYS, Inc. (a) 6,015 722 Autodesk, Inc. (a) 30,591 330 CA, Inc. 8,276 578 Cadence Design Systems, Inc. (a) 12,369 252 Citrix Systems, Inc. (a) 9,115 687 Concur Technologies, Inc. (a) 16,392 633 Epicor Software Corp. (a) 8,267 971 EPIQ Systems, Inc. (a) 16,556 138 FactSet Research Systems, Inc. 9,107 414 Informatica Corp. (a) 5,771 737 Jack Henry & Associates, Inc. 17,703 624 JDA Software Group, Inc. (a) 14,109 See Notes to Financial Statements Page 91 First Trust Multi Cap Value AlphaDEX(TM) Fund Portfolio of Investments (Continued) July 31, 2007 SHARES DESCRIPTION MARKET VALUE - -------------------------------------------------------------- COMMON STOCKS (CONTINUED) SOFTWARE (CONTINUED) 632 Macrovision Corp. (a) $ 15,029 110 Manhattan Associates, Inc. (a) 3,066 719 McAfee, Inc. (a) 25,783 57 MICROS Systems, Inc. (a) 3,037 288 Microsoft Corp. 8,349 1,726 Oracle Corp. (a) 33,001 1,172 Parametric Technology Corp. (a) 20,662 81 Quality Systems, Inc. 3,138 213 SPSS, Inc. (a) 8,742 1,262 Symantec Corp. (a) 24,230 240 Synopsys, Inc. (a) 5,870 1,151 Wind River Systems, Inc. (a) 11,004 ------------- 318,837 ------------- SPECIALTY RETAIL--4.9% 234 Abercrombie & Fitch Co., Class A 16,357 468 Advance Auto Parts, Inc. 16,272 608 Aeropostale, Inc. (a) 23,153 249 AutoZone, Inc. (a) 31,575 240 Big 5 Sporting Goods Corp. 5,129 746 CarMax, Inc. (a) 17,852 140 Cato (The) Corp., Class A 2,895 119 Children's Place Retail Stores (The), Inc. (a) 4,059 179 Christopher & Banks Corp. 2,671 273 Coldwater Creek, Inc. (a) 5,375 435 Dick's Sporting Goods, Inc. (a) 24,460 150 Dress Barn (The), Inc. (a) 2,729 839 GameStop Corp., Class A (a) 33,853 300 Genesco, Inc. (a) 15,165 158 Guitar Center, Inc. (a) 9,172 240 Gymboree (The) Corp. (a) 10,332 111 Hibbett Sports, Inc. (a) 2,845 432 Home Depot (The), Inc. 16,057 378 Jos. A. Bank Clothiers, Inc. (a) 13,041 240 Men's Wearhouse (The), Inc. 11,856 347 O'Reilly Automotive, Inc. (a) 11,559 576 Pacific Sunwear of California, Inc. (a) 10,380 390 PetSmart, Inc. 12,609 1,319 RadioShack Corp. 33,145 206 Ross Stores, Inc. 5,960 189 Select Comfort Corp. (a) 3,013 291 Stage Stores, Inc. 5,191 824 Tiffany & Co. 39,757 618 TJX (The) Cos., Inc. 17,150 236 Tractor Supply Co. (a) 11,215 275 Tween Brands, Inc. (a) 10,522 264 Urban Outfitters, Inc. (a) 5,296 ------------- 430,645 ------------- TEXTILES, APPAREL & LUXURY GOODS--2.4% 359 Coach, Inc. (a) $ 16,320 365 Crocs, Inc. (a) 21,652 156 Deckers Outdoor Corp. (a) 16,084 416 Fossil, Inc. (a) 10,629 423 Iconix Brand Group, Inc. (a) 8,367 584 NIKE, Inc., Class B 32,967 419 Phillips-Van Heusen Corp. 21,813 446 Polo Ralph Lauren Corp. 39,849 434 Quiksilver, Inc. (a) 5,568 279 VF Corp. 23,935 314 Volcom, Inc. (a) 11,141 111 Wolverine World Wide, Inc. 3,004 ------------- 211,329 ------------- THRIFTS & MORTGAGE FINANCE--0.2% 468 Countrywide Financial Corp. 13,184 141 Freddie Mac 8,075 ------------- 21,259 ------------- TRADING COMPANIES & DISTRIBUTORS --1.0% 303 Fastenal Co. 13,656 461 MSC Industrial Direct Co., Inc. 23,184 174 Watsco, Inc. 8,684 470 W.W. Grainger, Inc. 41,058 ------------- 86,582 ------------- TOTAL INVESTMENTS--99.4% (Cost $9,333,411) 8,768,952 NET OTHER ASSETS AND LIABILITIES--0.6% 49,150 ------------- NET ASSETS--100.0% $ 8,818,102 ============= (a) Non-income producing security. Page 92 See Notes to Financial Statements This page intentionally left blank. Page 93 First Trust Exchange-Traded AlphaDEX(TM) Fund Statement of Assets and Liabilities July 31, 2007
FIRST TRUST FIRST TRUST CONSUMER CONSUMER FIRST TRUST DISCRETIONARY STAPLES ENERGY ALPHADEX(TM) FUND ALPHADEX(TM) FUND ALPHADEX(TM) FUND ------------------- ------------------- ----------------- ASSETS: Investments at value .................................................. $ 1,908,093 $ 2,889,611 $ 5,209,919 Cash ................................................................. 16,016 6,539 6,013 Receivables: Dividends....................................................... 415 2,752 1,001 From investment advisor......................................... 18,187 18,374 18,867 ------------- ------------- ------------- TOTAL ASSETS................................................. 1,942,711 2,917,276 5,235,800 ------------- ------------- ------------- LIABILITIES: Payables: Investment securities purchased ................................. 9,930 -- -- Investment advisory fees ........................................ 854 1,271 1,322 Accrued expenses and other liabilities ................................ 49,101 49,519 49,991 ------------- ------------- ------------- TOTAL LIABILITIES............................................. 59,885 50,790 51,313 ------------- ------------- ------------- NET ASSETS............................................................. $ 1,882,826 $ 2,866,486 $ 5,184,487 ============= ============= ============= NET ASSETS CONSIST OF: Paid-in capital ....................................................... $ 1,999,040 $ 3,021,090 $ 5,434,348 Par value ............................................................. 1,000 1,500 2,500 Accumulated net investment income (loss) .............................. 188 5,552 -- Accumulated net realized gain (loss) on investments ................... (2,459) (3,068) 892 Net unrealized appreciation (depreciation) on investments ............. (114,943) (158,588) (253,253) ------------- ------------- ------------- NET ASSETS ............................................................ $ 1,882,826 $ 2,866,486 $ 5,184,487 ============= ============= ============= NET ASSET VALUE, per share............................................ $ 18.83 $ 19.11 $ 20.74 ============= ============= ============= Number of shares outstanding (unlimited number of shares authorized, par value $0.01 per share)..... 100,002 150,002 250,002 ------------- ------------- ------------- Investments at cost ................................................... $ 2,023,036 $ 3,048,199 $ 5,463,172 ============= ============= =============
Page 94 See Notes to Financial Statements
FIRST TRUST FIRST TRUST FIRST TRUST INDUSTRIALS/ FIRST TRUST FIRST TRUST FINANCIALS HEALTH CARE PRODUCER DURABLES MATERIALS TECHNOLOGY ALPHADEX(TM) FUND ALPHADEX(TM) FUND ALPHADEX(TM) FUND ALPHADEX(TM) FUND ALPHADEX(TM) FUND ------------------- ------------------- ------------------- ------------------- ------------------- $ 1,814,396 $ 1,914,694 $ 4,731,249 $ 2,962,655 $ 2,174,207 6,875 65,443 19,179 93,839 6,196 1,407 170 164 1,069 415 18,182 18,186 18,833 18,388 18,237 ------------- ------------- ------------- ------------- ------------- 1,840,860 1,998,493 4,769,425 3,075,951 2,199,055 ------------- ------------- ------------- ------------- ------------- -- -- -- -- -- 825 847 1,201 1,328 944 49,074 49,114 49,905 49,516 49,175 ------------- ------------- ------------- ------------- ------------- 49,899 49,961 51,106 50,844 50,119 ------------- ------------- ------------- ------------- ------------- $ 1,790,961 $ 1,948,532 $ 4,718,319 $ 3,025,107 $ 2,148,936 ============= ============= ============= ============= ============= $ 1,999,040 $ 1,997,615 $ 5,016,552 $ 3,080,728 $ 2,157,238 1,000 1,000 2,500 1,500 1,050 6,584 -- -- 2,537 -- (3,175) (25,010) (34,546) (5,616) (13,344) (212,488) (25,073) (266,187) (54,042) 3,992 ------------- ------------- ------------- ------------- ------------- $ 1,790,961 $ 1,948,532 $ 4,718,319 $ 3,025,107 $ 2,148,936 ============= ============= ============= ============= ============= $ 17.91 $ 19.48 $ 18.87 $ 20.17 $ 20.47 ============= ============= ============= ============= ============= 100,002 100,002 250,002 150,002 105,000 ------------- ------------- ------------- ------------- ------------- $ 2,026,884 $ 1,939,767 $ 4,997,436 $ 3,016,697 $ 2,170,215 ============= ============= ============= ============= =============
See Notes to Financial Statements Page 95 First Trust Exchange-Traded AlphaDEX(TM) Fund Statement of Assets and Liabilities (Continued) July 31, 2007
FIRST TRUST FIRST TRUST FIRST TRUST LARGE CAP MID CAP UTILITIES CORE CORE ALPHADEX(TM) FUND ALPHADEX(TM) FUND ALPHADEX(TM) FUND ------------------- ------------------- ------------------ ASSETS: Investments at value .................................................. $ 2,774,096 $ 2,878,457 $ 5,678,775 Cash ................................................................. 7,387 20,580 68,149 Receivables: Dividends....................................................... 7,019 1,663 2,575 From investment advisor......................................... 18,378 18,343 18,794 ------------- ------------- ------------- TOTAL ASSETS................................................. 2,806,880 2,919,043 5,768,293 ------------- ------------- ------------- LIABILITIES: Payables: Investment securities purchased ................................. -- -- -- Investment advisory fees ........................................ 1,215 1,286 2,546 Accrued expenses and other liabilities ................................ 49,452 49,398 50,302 ------------- ------------- ------------- TOTAL LIABILITIES............................................. 50,667 50,684 52,848 ------------- ------------- ------------- NET ASSETS............................................................. $ 2,756,213 $ 2,868,359 $ 5,715,445 ============= ============= ============= NET ASSETS consist of: Paid-in capital ....................................................... $ 2,980,862 $ 3,122,966 $ 6,182,502 Par value ............................................................. 1,500 1,000 2,000 Accumulated net investment income (loss) .............................. 11,354 4,291 1,760 Accumulated net realized gain (loss) on investments ................... (945) (15,102) (16,286) Net unrealized appreciation (depreciation) on investments ............. (236,558) (244,796) (454,531) ------------- ------------- ------------- NET ASSETS ............................................................ $ 2,756,213 $ 2,868,359 $ 5,715,445 ============= ============= ============= NET ASSET VALUE, per share............................................ $ 18.37 $ 28.68 $ 28.58 ============= ============= ============= Number of shares outstanding (unlimited number of shares authorized, par value $0.01 per share)..... 150,002 100,002 200,002 ------------- ------------- ------------- Investments at cost ................................................... $ 3,010,654 $ 3,123,253 $ 6,133,306 ============= ============= =============
Page 96 See Notes to Financial Statements
FIRST TRUST FIRST TRUST FIRST TRUST SMALL CAP LARGE CAP VALUE LARGE CAP GROWTH FIRST TRUST FIRST TRUST CORE OPPORTUNITIES OPPORTUNITIES MULTI CAP VALUE MULTI CAP GROWTH ALPHADEX(TM) FUND ALPHADEX(TM) FUND ALPHADEX(TM) FUND ALPHADEX(TM) FUND ALPHADEX(TM) FUND ------------------- ------------------- ------------------- ------------------- ------------------- $ 5,636,097 $ 5,671,104 $ 5,846,344 $ 2,799,969 $ 8,768,952 53,548 28,093 30,440 25,258 81,637 3,486 3,209 1,951 2,455 1,543 18,842 18,648 18,782 18,464 19,289 ------------- ------------- -------------- ------------- ------------- 5,711,973 5,721,054 5,897,517 2,846,146 8,871,421 ------------- ------------- -------------- ------------- ------------- -- -- -- -- -- 1,649 1,812 2,554 1,275 2,570 49,893 50,000 50,405 49,480 50,749 ------------- ------------- -------------- ------------- ------------- 51,542 51,812 52,959 50,755 53,319 ------------- ------------- -------------- ------------- ------------- $ 5,660,431 $ 5,669,242 $ 5,844,558 $ 2,795,391 $ 8,818,102 ============= ============= ============== ============= ============= $ 6,212,432 $ 6,196,418 $ 6,074,903 $ 3,130,837 $ 9,406,123 2,000 2,000 2,000 1,000 3,000 3,211 7,676 -- 6,372 -- (21,375) (5,338) -- (8,569) (26,562) (535,837) (531,514) (232,345) (334,249) (564,459) ------------- ------------- -------------- ------------- ------------- $ 5,660,431 $ 5,669,242 $ 5,844,558 $ 2,795,391 $ 8,818,102 ============= ============= ============== ============= ============= $ 28.30 $ 28.35 $ 29.22 $ 27.95 $ 29.39 ============= ============= ============== ============= ============= 200,002 200,002 200,002 100,002 300,002 ------------- ------------- -------------- ------------- ------------- $ 6,171,934 $ 6,202,618 $ 6,078,689 $ 3,134,218 $ 9,333,411 ============= ============= ============== ============= =============
See Notes to Financial Statements Page 97 First Trust Exchange-Traded AlphaDEX(TM) Fund Statements of Operations
FIRST TRUST FIRST TRUST CONSUMER CONSUMER FIRST TRUST DISCRETIONARY STAPLES ENERGY ALPHADEX(TM) FUND ALPHADEX(TM) FUND ALPHADEX(TM) FUND ------------------- ------------------ ----------------- For the Period For the Period For the Period May 8, 2007 (a) May 8, 2007 (a) May 8, 2007 (a) through through through July 31, 2007 July 31, 2007 July 31, 2007 ------------------- ------------------ ----------------- INVESTMENT INCOME: Dividends (b)......................................................... $ 3,390 $ 9,532 $ 3,775 -------------- -------------- -------------- Total investment income......................................... 3,390 9,532 3,775 -------------- -------------- -------------- EXPENSES: Audit and tax fees.................................................... 31,000 31,000 31,000 Printing fees......................................................... 7,500 7,500 7,500 Legal fees............................................................ 5,685 5,685 5,685 Listing fees.......................................................... 2,562 2,704 2,986 Investment advisory fees.............................................. 2,287 2,843 2,821 Trustees' fees and expenses........................................... 605 647 788 Licensing fees........................................................ 457 569 564 Custodian fees........................................................ 444 458 458 Accounting and administration fees.................................... 229 284 282 Registration and filing fees.......................................... 62 92 165 Transfer agent fees................................................... 23 28 28 Other expenses........................................................ 1,267 1,267 1,267 -------------- -------------- -------------- Total expenses.................................................. 52,121 53,077 53,544 Less fees waived and expenses reimbursed by the investment advisor........................................ (48,919) (49,097) (49,595) -------------- -------------- -------------- Net expenses.................................................... 3,202 3,980 3,949 -------------- -------------- -------------- NET INVESTMENT INCOME (LOSS).......................................... 188 5,552 (174) -------------- -------------- -------------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments..................................................... (2,459) (3,068) 1,066 In-kind redemptions............................................. -- 20,666 90,156 -------------- -------------- -------------- Net realized gain (loss).............................................. (2,459) 17,598 91,222 Net change in unrealized appreciation (depreciation) on investments... (114,943) (158,588) (253,253) -------------- -------------- -------------- NET REALIZED AND UNREALIZED GAIN (LOSS) .............................. (117,402) (140,990) (162,031) -------------- -------------- -------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS................................................. $ (117,214) $ (135,438) $ (162,205) ============== ============== ==============
(a) Inception date. (b) Net of foreign withholding tax of $15 for the First Trust Financials AlphaDEX(TM) Fund. Page 98 See Notes to Financial Statements
FIRST TRUST FIRST TRUST FIRST TRUST INDUSTRIALS/ FIRST TRUST FIRST TRUST FINANCIALS HEALTH CARE PRODUCER DURABLES MATERIALS TECHNOLOGY ALPHADEX(TM) FUND ALPHADEX(TM) FUND ALPHADEX(TM) FUND ALPHADEX(TM) FUND ALPHADEX(TM) FUND ---------------------- ---------------------- ---------------------- ---------------------- ---------------------- For the Period For the Period For the Period For the Period For the Period May 8, 2007 (a) May 8, 2007 (a) May 8, 2007 (a) May 8, 2007 (a) May 8, 2007 (a) through through through through through July 31, 2007 July 31, 2007 July 31, 2007 July 31, 2007 July 31, 2007 ---------------------- ---------------------- ---------------------- ---------------------- ---------------------- $ 9,733 $ 1,752 $ 2,951 $ 6,416 $ 1,145 ------------------ ------------------ ------------------ ------------------ ------------------ 9,733 1,752 2,951 6,416 1,145 ------------------ ------------------ ------------------ ------------------ ------------------ 31,000 31,000 31,000 31,000 31,000 7,500 7,500 7,500 7,500 7,500 5,685 5,685 5,685 5,685 5,685 2,563 2,562 2,986 2,704 2,577 2,249 2,269 2,638 2,771 2,463 598 604 757 664 643 450 454 528 554 493 443 443 453 455 448 225 227 264 277 246 62 62 154 93 65 22 23 26 28 25 1,267 1,267 1,267 1,267 1,267 ------------------ ------------------ ------------------ ------------------ ------------------ 52,064 52,096 53,258 52,998 52,412 (48,915) (48,919) (49,565) (49,119) (48,964) ------------------ ------------------ ------------------ ------------------ ------------------ 3,149 3,177 3,693 3,879 3,448 ------------------ ------------------ ------------------ ------------------ ------------------ 6,584 (1,425) (742) 2,537 (2,303) ------------------ ------------------ ------------------ ------------------ ------------------ (3,175) (25,010) (34,546) (5,616) (13,344) -- -- -- 59,892 60,591 ------------------ ------------------ ------------------ ------------------ ------------------ (3,175) (25,010) (34,546) 54,276 47,247 (212,488) (25,073) (266,187) (54,042) 3,992 ------------------ ------------------ ------------------ ------------------ ------------------ (215,663) (50,083) (300,733) 234 51,239 ------------------ ------------------ ------------------ ------------------ ------------------ $ (209,079) $ (51,508) $ (301,475) $ 2,771 $ 48,936 ================== ================== =================== ================== ==================
See Notes to Financial Statements Page 99 First Trust Exchange-Traded AlphaDEX(TM) Fund Statements of Operations (Continued)
FIRST TRUST FIRST TRUST FIRST TRUST LARGE CAP MID CAP UTILITIES CORE CORE ALPHADEX(TM) FUND ALPHADEX(TM) FUND ALPHADEX(TM) FUND ------------------- ------------------ ----------------- For the Period For the Period For the Period May 8, 2007 (a) May 8, 2007 (a) May 8, 2007 (a) through through through July 31, 2007 July 31, 2007 July 31, 2007 ------------------- ------------------ ----------------- Dividends (b)......................................................... $ 15,004 $ 9,097 $ 8,343 --------------- -------------- -------------- Total investment income......................................... 15,004 9,097 8,343 --------------- -------------- -------------- EXPENSES: Audit and tax fees.................................................... 31,000 31,000 31,000 Printing fees......................................................... 7,500 7,500 7,500 Legal fees............................................................ 5,685 5,685 5,685 Listing fees.......................................................... 2,704 2,562 2,845 Investment advisory fees.............................................. 2,607 3,433 4,702 Trustees' fees and expenses........................................... 649 905 1,062 Licensing fees........................................................ 521 687 940 Custodian fees........................................................ 452 473 505 Accounting and administration fees.................................... 261 343 470 Registration and filing fees.......................................... 91 92 185 Transfer agent fees................................................... 26 34 47 Other expenses........................................................ 1,267 1,267 1,267 --------------- -------------- -------------- Total expenses.................................................. 52,763 53,981 56,208 Less fees waived and expenses reimbursed by the investment advisor........................................ (49,113) (49,175) (49,625) --------------- -------------- -------------- Net expenses.................................................... 3,650 4,806 6,583 --------------- -------------- -------------- NET INVESTMENT INCOME (LOSS).......................................... 11,354 4,291 1,760 --------------- -------------- -------------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments..................................................... (945) (15,102) (16,286) In-kind redemptions............................................. 32,108 123,906 166,103 --------------- -------------- -------------- Net realized gain (loss).............................................. 31,163 108,804 149,817 Net change in unrealized appreciation (depreciation) on investments... (236,558) (244,796) (454,531) --------------- -------------- -------------- NET REALIZED AND UNREALIZED GAIN (LOSS) .............................. (205,395) (135,992) (304,714) --------------- -------------- -------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS................................................. $ (194,041) $ (131,701) $ (302,954) =============== ============== ==============
(a) Inception date. (b) Net of foreign withholding tax of $6 for the First Trust Small Cap Core AlphaDEX(TM) Fund. Page 100 See Notes to Financial Statements
FIRST TRUST FIRST TRUST FIRST TRUST SMALL CAP LARGE CAP VALUE LARGE CAP GROWTH FIRST TRUST FIRST TRUST CORE OPPORTUNITIES OPPORTUNITIES MULTI CAP VALUE MULTI CAP GROWTH ALPHADEX(TM) FUND ALPHADEX(TM) FUND ALPHADEX(TM) FUND ALPHADEX(TM) FUND ALPHADEX(TM) FUND ---------------------- ---------------------- ---------------------- ---------------------- ---------------------- For the Period For the Period For the Period For the Period For the Period May 8, 2007 (a) May 8, 2007 (a) May 8, 2007 (a) May 8, 2007 (a) May 8, 2007 (a) through through through through through July 31, 2007 July 31, 2007 July 31, 2007 July 31, 2007 July 31, 2007 ---------------------- ---------------------- ---------------------- ---------------------- ---------------------- $ 8,524 $ 13,219 $ 5,894 $ 11,160 $ 4,601 ------------------ ----------------- ------------------- ----------------- ----------------- 8,524 13,219 5,894 11,160 4,601 ------------------ ----------------- ------------------- ----------------- ----------------- 31,000 31,000 31,000 31,000 31,000 7,500 7,500 7,500 7,500 7,500 5,685 5,685 5,685 5,685 5,685 2,845 2,845 2,845 2,563 3,128 3,795 3,960 4,701 3,420 4,727 1,051 904 1,052 1,063 1,214 759 792 940 684 945 482 486 505 472 505 380 395 470 342 473 186 186 184 92 285 38 40 47 34 47 1,267 1,267 1,267 1,267 1,267 ------------------ ----------------- ------------------- ----------------- ----------------- 54,988 55,060 56,196 54,122 56,776 (49,675) (49,517) (49,614) (49,334) (50,158) ------------------ ----------------- ------------------- ----------------- ----------------- 5,313 5,543 6,582 4,788 6,618 ------------------ ----------------- ------------------- ----------------- ----------------- 3,211 7,676 (688) 6,372 (2,017) ------------------ ----------------- ------------------- ----------------- ----------------- (21,375) (5,338) 399 (8,569) (26,562) 164,380 128,924 84,145 131,777 146,477 ------------------ ----------------- ------------------- ----------------- ----------------- 143,005 123,586 84,544 123,208 119,915 (535,837) (531,514) (232,345) (334,249) (564,459) ------------------ ----------------- ------------------- ----------------- ----------------- (392,832) (407,928) (147,801) (211,041) (444,544) ------------------ ----------------- ------------------- ----------------- ----------------- $ (389,621) $ (400,252) $ (148,489) $ (204,669) $ (446,561) ================== ================= =================== ================= =================
See Notes to Financial Statements Page 101 First Trust Exchange-Traded AlphaDEX(TM) Fund Statement of Changes in Net Assets
FIRST TRUST FIRST TRUST CONSUMER CONSUMER FIRST TRUST DISCRETIONARY STAPLES ENERGY ALPHADEX(TM) FUND ALPHADEX(TM) FUND ALPHADEX(TM) FUND ------------------ ------------------ ------------------ For the Period For the Period For the Period May 8, 2007 (a) May 8, 2007 (a) May 8, 2007 (a) through through through July 31, 2007 July 31, 2007 July 31, 2007 ------------------ ------------------ ------------------ OPERATIONS: Net investment income (loss)..................................... $ 188 $ 5,552 $ (174) Net realized gain (loss)......................................... (2,459) 17,598 91,222 Net change in unrealized appreciation (depreciation)............. (114,943) (158,588) (253,253) --------------- -------------- --------------- Net increase (decrease) in net assets resulting from operations.. (117,214) (135,438) (162,205) --------------- -------------- --------------- SHAREHOLDER TRANSACTIONS: Proceeds from shares sold........................................ 2,000,040 4,005,824 6,438,163 Value of shares repurchased...................................... -- (1,003,900) (1,091,471) --------------- -------------- --------------- Net increase (decrease) in net assets resulting from shareholder transactions.................................. 2,000,040 3,001,924 5,346,692 --------------- -------------- --------------- Net increase (decrease) in net assets............................ 1,882,826 2,866,486 5,184,487 NET ASSETS: Beginning of Period.............................................. -- -- -- --------------- -------------- --------------- End of Period.................................................... $ 1,882,826 $ 2,866,486 $ 5,184,487 =============== ============== =============== Accumulated net investment income (loss) at end of period........ $ 188 $ 5,552 $ -- =============== ============== =============== CHANGES IN SHARES OUTSTANDING: Shares outstanding, beginning of period.......................... -- -- -- Shares sold...................................................... 100,002 200,002 300,002 Shares repurchased............................................... -- (50,000) (50,000) --------------- -------------- --------------- Shares outstanding, end of period................................ 100,002 150,002 250,002 =============== ============== ===============
(a) Inception date. Page 102 See Notes to Financial Statements
FIRST TRUST FIRST TRUST FIRST TRUST INDUSTRIALS/ FIRST TRUST FIRST TRUST FINANCIALS HEALTH CARE PRODUCER DURABLES MATERIALS TECHNOLOGY ALPHADEX(TM) FUND ALPHADEX(TM) FUND ALPHADEX(TM) FUND ALPHADEX(TM) FUND ALPHADEX(TM) FUND ---------------------- ---------------------- ---------------------- ---------------------- ---------------------- For the Period For the Period For the Period For the Period For the Period May 8, 2007 (a) May 8, 2007 (a) May 8, 2007 (a) May 8, 2007 (a) May 8, 2007 (a) through through through through through July 31, 2007 July 31, 2007 July 31, 2007 July 31, 2007 July 31, 2007 ---------------------- ---------------------- ---------------------- ---------------------- ---------------------- $ 6,584 $ (1,425) $ (742) $ 2,537 $ (2,303) (3,175) (25,010) (34,546) 54,276 47,247 (212,488) (25,073) (266,187) (54,042) 3,992 ------------------ ----------------- ----------------- ---------------- ---------------- (209,079) (51,508) (301,475) 2,771 48,936 ------------------ ----------------- ----------------- ---------------- ---------------- 2,000,040 2,000,040 5,019,794 4,071,138 3,148,212 -- -- -- (1,048,802) (1,048,212) ------------------ ----------------- ----------------- ---------------- ---------------- 2,000,040 2,000,040 5,019,794 3,022,336 2,100,000 ------------------ ----------------- ----------------- ---------------- ---------------- 1,790,961 1,948,532 4,718,319 3,025,107 2,148,936 -- -- -- -- -- ------------------ ----------------- ----------------- ---------------- ---------------- $ 1,790,961 $ 1,948,532 $ 4,718,319 $ 3,025,107 $ 2,148,936 ================== ================= ================= ================ ================ $ 6,584 $ -- $ -- $ 2,537 $ -- ================== ================= ================= ================ ================ -- -- -- -- -- 100,002 100,002 250,002 200,002 155,000 -- -- -- (50,000) (50,000) ------------------ ----------------- ----------------- ---------------- ---------------- 100,002 100,002 250,002 150,002 105,000 ================== ================= ================= ================ ================
See Notes to Financial Statements Page 103 First Trust Exchange-Traded AlphaDEX(TM) Fund Statement of Changes in Net Assets (Continued)
FIRST TRUST FIRST TRUST FIRST TRUST LARGE CAP MID CAP UTILITIES CORE CORE ALPHADEX(TM) FUND ALPHADEX(TM) FUND ALPHADEX(TM) FUND ------------------ ------------------ ------------------ For the Period For the Period For the Period May 8, 2007 (a) May 8, 2007 (a) May 8, 2007 (a) through through through July 31, 2007 July 31, 2007 July 31, 2007 ------------------- ------------------ ----------------- OPERATIONS: Net investment income (loss).................................... $ 11,354 $ 4,291 $ 1,760 Net realized gain (loss)........................................ 31,163 108,804 149,817 Net change in unrealized appreciation (depreciation)............ (236,558) (244,796) (454,531) --------------- -------------- -------------- Net increase (decrease) in net assets resulting from operations (194,041) (131,701) (302,954) --------------- -------------- -------------- SHAREHOLDER TRANSACTIONS: Proceeds from shares sold....................................... 3,917,512 6,064,190 9,115,197 Value of shares repurchased..................................... (967,258) (3,064,130) (3,096,798) --------------- -------------- -------------- Net increase (decrease) in net assets resulting from shareholder transactions................................... 2,950,254 3,000,060 6,018,399 --------------- -------------- -------------- Net increase (decrease) in net assets........................... 2,756,213 2,868,359 5,715,445 NET ASSETS: Beginning of Period............................................. -- -- -- --------------- -------------- -------------- End of Period................................................... $ 2,756,213 $ 2,868,359 $ 5,715,445 =============== ============== ============== Accumulated net investment income (loss) at end of period....... $ 11,354 $ 4,291 $ 1,760 =============== ============== ============== CHANGES IN SHARES OUTSTANDING: Shares outstanding, beginning of period......................... -- -- -- Shares sold..................................................... 200,002 200,002 300,002 Shares repurchased.............................................. (50,000) (100,000) (100,000) --------------- -------------- -------------- Shares outstanding, end of period............................... 150,002 100,002 200,002 =============== ============== ==============
(a) Inception date. Page 104 See Notes to Financial Statements
FIRST TRUST FIRST TRUST FIRST TRUST SMALL CAP LARGE CAP VALUE LARGE CAP GROWTH FIRST TRUST FIRST TRUST CORE OPPORTUNITIES OPPORTUNITIES MULTI CAP VALUE MULTI CAP GROWTH ALPHADEX(TM) FUND ALPHADEX(TM) FUND ALPHADEX(TM) FUND ALPHADEX(TM) FUND ALPHADEX(TM) FUND ---------------------- ---------------------- ---------------------- ---------------------- ---------------------- For the Period For the Period For the Period For the Period For the Period May 8, 2007 (a) May 8, 2007 (a) May 8, 2007 (a) May 8, 2007 (a) May 8, 2007 (a) through through through through through July 31, 2007 July 31, 2007 July 31, 2007 July 31, 2007 July 31, 2007 ---------------------- ---------------------- ---------------------- ---------------------- ---------------------- $ 3,211 $ 7,676 $ (688) $ 6,372 $ (2,017) 143,005 123,586 84,544 123,208 119,915 (535,837) (531,514) (232,345) (334,249) (564,459) ------------------ ----------------- ------------------ ----------------- ----------------- (389,621) (400,252) (148,489) (204,669) (446,561) ------------------ ----------------- ------------------ ----------------- ----------------- 9,134,960 9,133,000 9,069,027 6,057,410 12,375,183 (3,084,908) (3,063,506) (3,075,980) (3,057,350) (3,110,520) ------------------ ----------------- ------------------ ----------------- ----------------- 6,050,052 6,069,494 5,993,047 3,000,060 9,264,663 ------------------ ----------------- ------------------ ----------------- ----------------- 5,660,431 5,669,242 5,844,558 2,795,391 8,818,102 -- -- -- -- -- ------------------ ----------------- ------------------ ----------------- ----------------- $ 5,660,431 $ 5,669,242 $ 5,844,558 $ 2,795,391 $ 8,818,102 ================== ================= ================== ================= ================= $ 3,211 $ 7,676 $ -- $ 6,372 $ -- ================== ================= ================== ================= ================= -- -- -- -- -- 300,002 300,002 300,002 200,002 400,002 (100,000) (100,000) (100,000) (100,000) (100,000) ------------------ ----------------- ------------------ ----------------- ----------------- 200,002 200,002 200,002 100,002 300,002 ================== ================= ================== ================= =================
See Notes to Financial Statements Page 105 First Trust Exchange-Traded AlphaDEX(TM) Fund Financial Highlights For a share outstanding throughout the period FIRST TRUST CONSUMER DISCRETIONARY ALPHADEX(TM) FUND FOR THE PERIOD MAY 8, 2007 (A) THROUGH JULY 31, 2007 ------------------ Net asset value, beginning of period $ 20.00 ------------ INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) (b) 0.00(f) Net realized and unrealized gain (loss) (1.17) ------------ Total from investment operations (1.17) ------------ Net asset value, end of period $ 18.83 ============ TOTAL RETURN (C) (5.85)% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (in 000's) $ 1,883 RATIOS TO AVERAGE NET ASSETS: Ratio of net expenses to average net assets 0.70%(d) Ratio of total expenses to average net assets 11.39%(d) Ratio of net investment income to average net assets 0.04%(d) Portfolio turnover rate (e) 34% FIRST TRUST CONSUMER STAPLES ALPHADEX(TM) FUND FOR THE PERIOD MAY 8, 2007 (A) THROUGH JULY 31, 2007 ------------------ Net asset value, beginning of period $ 20.00 ------------ INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) (b) 0.04 Net realized and unrealized gain (loss) (0.93) ------------ Total from investment operations (0.89) ------------ Net asset value, end of period $ 19.11 ============ TOTAL RETURN (C) (4.45)% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (in 000's) $ 2,866 RATIOS TO AVERAGE NET ASSETS: Ratio of net expenses to average net assets 0.70%(d) Ratio of total expenses to average net assets 9.34%(d) Ratio of net investment income to average net assets 0.98%(d) Portfolio turnover rate (e) 1% (a) Inception date. (b) Based on average shares outstanding. (c) Total return is calculated assuming an initial investment made at the net asset value at the beginning of the period, reinvestment of all dividend distributions at net asset value during the period, and redemption at net asset value on the last day of the period. The return presented does not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. Total return calculated for a period of less than one year is not annualized. The total return would have been lower if certain fees had not been waived and expenses reimbursed by the investment advisor. (d) Annualized. (e) Portfolio turnover is not annualized and does not include securities received or delivered from processing creations or redemptions. (f) Amount represents less than $0.01 per share. Page 106 See Notes to Financial Statements First Trust Exchange-Traded AlphaDEX(TM) Fund Financial Highlights For a share outstanding throughout the period FIRST TRUST ENERGY ALPHADEX(TM) FUND FOR THE PERIOD MAY 8, 2007 (A) THROUGH JULY 31, 2007 ------------------ Net asset value, beginning of period $ 20.00 ------------ INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) (b) (0.00)(f) Net realized and unrealized gain (loss) 0.74 ------------ Total from investment operations 0.74 ------------ Net asset value, end of period $ 20.74 ============ TOTAL RETURN (C) 3.70% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (in 000's) $ 5,184 RATIOS TO AVERAGE NET ASSETS: Ratio of net expenses to average net assets 0.70%(d) Ratio of total expenses to average net assets 9.49%(d) Ratio of net investment loss to average net assets (0.03)%(d) Portfolio turnover rate (e) 1% FIRST TRUST FINANCIALS ALPHADEX(TM) FUND FOR THE PERIOD MAY 8, 2007 (A) THROUGH JULY 31, 2007 ------------------ Net asset value, beginning of period $ 20.00 ------------ INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) (b) 0.07 Net realized and unrealized gain (loss) (2.16) ------------ Total from investment operations (2.09) ------------ Net asset value, end of period $ 17.91 ============ TOTAL RETURN (C) (10.45)% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (in 000's) $ 1,791 RATIOS TO AVERAGE NET ASSETS: Ratio of net expenses to average net assets 0.70%(d) Ratio of total expenses to average net assets 11.58%(d) Ratio of net investment income to average net assets 1.46%(d) Portfolio turnover rate (e) 26% (a) Inception date. (b) Based on average shares outstanding. (c) Total return is calculated assuming an initial investment made at the net asset value at the beginning of the period, reinvestment of all dividend distributions at net asset value during the period, and redemption at net asset value on the last day of the period. The return presented does not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. Total return calculated for a period of less than one year is not annualized. The total return would have been lower if certain fees had not been waived and expenses reimbursed by the investment advisor. (d) Annualized. (e) Portfolio turnover is not annualized and does not include securities received or delivered from processing creations or redemptions. (f) Amount represents less than $0.01 per share. See Notes to Financial Statements Page 107 First Trust Exchange-Traded AlphaDEX(TM) Fund Financial Highlights For a share outstanding throughout the period FIRST TRUST HEALTH CARE ALPHADEX(TM) FUND FOR THE PERIOD MAY 8, 2007 (A) THROUGH JULY 31, 2007 ------------------ Net asset value, beginning of period $ 20.00 ------------ INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) (b) (0.01) Net realized and unrealized gain (loss) (0.51) ------------ Total from investment operations (0.52) ------------ Net asset value, end of period $ 19.48 ============ TOTAL RETURN (C) (2.60)% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (in 000's) $ 1,949 RATIOS TO AVERAGE NET ASSETS: Ratio of net expenses to average net assets 0.70%(d) Ratio of total expenses to average net assets 11.48%(d) Ratio of net investment loss to average net assets (0.31)%(d) Portfolio turnover rate (e) 30% FIRST TRUST INDUSTRIALS/PRODUCER DURABLES ALPHADEX(TM) FUND FOR THE PERIOD MAY 8, 2007 (A) THROUGH JULY 31, 2007 ------------------ Net asset value, beginning of period $ 20.00 ------------ INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) (b) (0.00)(f) Net realized and unrealized gain (loss) (1.13) ------------ Total from investment operations (1.13) ------------ Net asset value, end of period $ 18.87 ============ TOTAL RETURN (C) (5.65)% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (in 000's) $ 4,718 RATIOS TO AVERAGE NET ASSETS: Ratio of net expenses to average net assets 0.70%(d) Ratio of total expenses to average net assets 10.09%(d) Ratio of net investment loss to average net assets (0.14)%(d) Portfolio turnover rate (e) 24% (a) Inception date. (b) Based on average shares outstanding. (c) Total return is calculated assuming an initial investment made at the net asset value at the beginning of the period, reinvestment of all dividend distributions at net asset value during the period, and redemption at net asset value on the last day of the period. The return presented does not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. Total return calculated for a period of less than one year is not annualized. The total return would have been lower if certain fees had not been waived and expenses reimbursed by the investment advisor. (d) Annualized. (e) Portfolio turnover is not annualized and does not include securities received or delivered from processing creations or redemptions. (f) Amount represents less than $0.01 per share. Page 108 See Notes to Financial Statements First Trust Exchange-Traded AlphaDEX(TM) Fund Financial Highlights For a share outstanding throughout the period FIRST TRUST MATERIALS ALPHADEX(TM) FUND FOR THE PERIOD MAY 8, 2007 (A) THROUGH JULY 31, 2007 ------------------ Net asset value, beginning of period $ 20.00 ------------ INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) (b) 0.02 Net realized and unrealized gain (loss) 0.15 ------------ Total from investment operations 0.17 ------------ Net asset value, end of period $ 20.17 ============ TOTAL RETURN (C) 0.85% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (in 000's) $ 3,025 RATIOS TO AVERAGE NET ASSETS: Ratio of net expenses to average net assets 0.70%(d) Ratio of total expenses to average net assets 9.56%(d) Ratio of net investment income to average net assets 0.46%(d) Portfolio turnover rate (e) 1% FIRST TRUST TECHNOLOGY ALPHADEX(TM) FUND FOR THE PERIOD MAY 8, 2007 (A) THROUGH JULY 31, 2007 ------------------ Net asset value, beginning of period $ 20.00 ------------ INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) (b) (0.02) Net realized and unrealized gain (loss) 0.49 ------------ Total from investment operations 0.47 ------------ Net asset value, end of period $ 20.47 ============ TOTAL RETURN (C) 2.35% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (in 000's) $ 2,149 RATIOS TO AVERAGE NET ASSETS: Ratio of net expenses to average net assets 0.70%(d) Ratio of total expenses to average net assets 10.64%(d) Ratio of net investment loss to average net assets (0.47)%(d) Portfolio turnover rate (e) 6% (a) Inception date. (b) Based on average shares outstanding. (c) Total return is calculated assuming an initial investment made at the net asset value at the beginning of the period, reinvestment of all dividend distributions at net asset value during the period, and redemption at net asset value on the last day of the period. The return presented does not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. Total return calculated for a period of less than one year is not annualized. The total return would have been lower if certain fees had not been waived and expenses reimbursed by the investment advisor. (d) Annualized. (e) Portfolio turnover is not annualized and does not include securities received or delivered from processing creations or redemptions. See Notes to Financial Statements Page 109 First Trust Exchange-Traded AlphaDEX(TM) Fund Financial Highlights For a share outstanding throughout the period FIRST TRUST UTILITIES ALPHADEX(TM)FUND FOR THE PERIOD MAY 8, 2007 (A) THROUGH JULY 31, 2007 ------------------ Net asset value, beginning of period $ 20.00 ------------ INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) (b) 0.09 Net realized and unrealized gain (loss) (1.72) ------------ Total from investment operations (1.63) ------------ Net asset value, end of period $ 18.37 ============ TOTAL RETURN (C) (8.15)% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (in 000's) $ 2,756 RATIOS TO AVERAGE NET ASSETS: Ratio of net expenses to average net assets 0.70%(d) Ratio of total expenses to average net assets 10.12%(d) Ratio of net investment income to average net assets 2.18%(d) Portfolio turnover rate (e) 1% FIRST TRUST LARGE CAP CORE ALPHADEX(TM) FUND FOR THE PERIOD MAY 8, 2007 (A) THROUGH JULY 31, 2007 ------------------ Net asset value, beginning of period $ 30.00 ------------ INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) (b) 0.04 Net realized and unrealized gain (loss) (1.36) ------------ Total from investment operations (1.32) ------------ Net asset value, end of period $ 28.68 ============ TOTAL RETURN (C) (4.40)% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (in 000's) $ 2,868 RATIOS TO AVERAGE NET ASSETS: Ratio of net expenses to average net assets 0.70%(d) Ratio of total expenses to average net assets 7.86%(d) Ratio of net investment income to average net assets 0.62%(d) Portfolio turnover rate (e) 1% (a) Inception date. (b) Based on average shares outstanding. (c) Total return is calculated assuming an initial investment made at the net asset value at the beginning of the period, reinvestment of all dividend distributions at net asset value during the period, and redemption at net asset value on the last day of the period. The return presented does not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. Total return calculated for a period of less than one year is not annualized. The total return would have been lower if certain fees had not been waived and expenses reimbursed by the investment advisor. (d) Annualized. (e) Portfolio turnover is not annualized and does not include securities received or delivered from processing creations or redemptions. Page 110 See Notes to Financial Statements First Trust Exchange-Traded AlphaDEX(TM) Fund Financial Highlights For a share outstanding throughout the period FIRST TRUST MID CAP CORE ALPHADEX(TM) FUND FOR THE PERIOD MAY 8, 2007 (A) THROUGH JULY 31, 2007 ------------------ Net asset value, beginning of period $ 30.00 ------------ INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) (b) 0.01 Net realized and unrealized gain (loss) (1.43) ------------ Total from investment operations (1.42) ------------ Net asset value, end of period $ 28.58 ============ TOTAL RETURN (C) (4.73)% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (in 000's) $ 5,715 RATIOS TO AVERAGE NET ASSETS: Ratio of net expenses to average net assets 0.70%(d) Ratio of total expenses to average net assets 5.98%(d) Ratio of net investment income to average net assets 0.19%(d) Portfolio turnover rate (e) 1% FIRST TRUST SMALL CAP CORE ALPHADEX(TM) FUND FOR THE PERIOD MAY 8, 2007 (A) THROUGH JULY 31, 2007 ------------------ Net asset value, beginning of period $ 30.00 ------------ INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) (b) 0.02 Net realized and unrealized gain (loss) (1.72) ------------ Total from investment operations (1.70) ------------ Net asset value, end of period $ 28.30 ============ TOTAL RETURN (C) (5.67)% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (in 000's) $ 5,660 RATIOS TO AVERAGE NET ASSETS: Ratio of net expenses to average net assets 0.70%(d) Ratio of total expenses to average net assets 7.25%(d) Ratio of net investment income to average net assets 0.42%(d) Portfolio turnover rate (e) 2% (a) Inception date. (b) Based on average shares outstanding. (c) Total return is calculated assuming an initial investment made at the net asset value at the beginning of the period, reinvestment of all dividend distributions at net asset value during the period, and redemption at net asset value on the last day of the period. The return presented does not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. Total return calculated for a period of less than one year is not annualized. The total return would have been lower if certain fees had not been waived and expenses reimbursed by the investment advisor. (d) Annualized. (e) Portfolio turnover is not annualized and does not include securities received or delivered from processing creations or redemptions. See Notes to Financial Statements Page 111 First Trust Exchange-Traded AlphaDEX(TM) Fund Financial Highlights For a share outstanding throughout the period FIRST TRUST LARGE CAP VALUE OPPORTUNITIES ALPHADEX(TM) FUND FOR THE PERIOD MAY 8, 2007 (A) THROUGH JULY 31, 2007 ------------------ Net asset value, beginning of period $ 30.00 ------------ INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) (b) 0.06 Net realized and unrealized gain (loss) (1.71) ------------ Total from investment operations (1.65) ------------ Net asset value, end of period $ 28.35 ============ TOTAL RETURN (C) (5.50)% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (in 000's) $ 5,669 RATIOS TO AVERAGE NET ASSETS: Ratio of net expenses to average net assets 0.70%(d) Ratio of total expenses to average net assets 6.95%(d) Ratio of net investment income to average net assets 0.97%(d) Portfolio turnover rate (e) 1% FIRST TRUST LARGE CAP GROWTH OPPORTUNITIES ALPHADEX(TM) FUND FOR THE PERIOD MAY 8, 2007 (A) THROUGH JULY 31, 2007 ------------------ Net asset value, beginning of period $ 30.00 ------------ INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) (b) (0.00)(f) Net realized and unrealized gain (loss) (0.78) ------------ Total from investment operations (0.78) ------------ Net asset value, end of period $ 29.22 ============ TOTAL RETURN (C) (2.60)% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (in 000's) $ 5,845 RATIOS TO AVERAGE NET ASSETS: Ratio of net expenses to average net assets 0.70%(d) Ratio of total expenses to average net assets 5.98%(d) Ratio of net investment loss to average net assets (0.07)%(d) Portfolio turnover rate (e) 1% (a) Inception date. (b) Based on average shares outstanding. (c) Total return is calculated assuming an initial investment made at the net asset value at the beginning of the period, reinvestment of all dividend distributions at net asset value during the period, and redemption at net asset value on the last day of the period. The return presented does not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. Total return calculated for a period of less than one year is not annualized. The total return would have been lower if certain fees had not been waived and expenses reimbursed by the investment advisor. (d) Annualized. (e) Portfolio turnover is not annualized and does not include securities received or delivered from processing creations or redemptions. (f) Amount represents less than $0.01 per share. Page 112 See Notes to Financial Statements First Trust Exchange-Traded AlphaDEX(TM) Fund Financial Highlights For a share outstanding throughout the period FIRST TRUST MULTI CAP VALUE ALPHADEX(TM) FUND FOR THE PERIOD MAY 8, 2007 (A) THROUGH JULY 31, 2007 ------------------ Net asset value, beginning of period $ 30.00 ------------ INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) (b) 0.06 Net realized and unrealized gain (loss) (2.11) ------------ Total from investment operations (2.05) ------------ Net asset value, end of period $ 27.95 ============ TOTAL RETURN (C) (6.83)% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (in 000's) $ 2,795 RATIOS TO AVERAGE NET ASSETS: Ratio of net expenses to average net assets 0.70%(d) Ratio of total expenses to average net assets 7.91%(d) Ratio of net investment income to average net assets 0.93%(d) Portfolio turnover rate (e) 2% FIRST TRUST MULTI CAP GROWTH ALPHADEX(TM) FUND FOR THE PERIOD MAY 8, 2007 (A) THROUGH JULY 31, 2007 ------------------ Net asset value, beginning of period $ 30.00 ------------ INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) (b) (0.01) Net realized and unrealized gain (loss) (0.60) ------------ Total from investment operations (0.61) ------------ Net asset value, end of period $ 29.39 ============ TOTAL RETURN (C) (2.03)% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (in 000's) $ 8,818 RATIOS TO AVERAGE NET ASSETS: Ratio of net expenses to average net assets 0.70%(d) Ratio of total expenses to average net assets 6.01%(d) Ratio of net investment loss to average net assets (0.21)%(d) Portfolio turnover rate (e) 1% (a) Inception date. (b) Based on average shares outstanding. (c) Total return is calculated assuming an initial investment made at the net asset value at the beginning of the period, reinvestment of all dividend distributions at net asset value during the period, and redemption at net asset value on the last day of the period. The return presented does not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. Total return calculated for a period of less than one year is not annualized. The total return would have been lower if certain fees had not been waived and expenses reimbursed by the investment advisor. (d) Annualized. (e) Portfolio turnover is not annualized and does not include securities received or delivered from processing creations or redemptions. See Notes to Financial Statements Page 113 - ------------------------------------------------------------------------------- Notes to Financial Statements - ------------------------------------------------------------------------------- FIRST TRUST EXCHANGE-TRADED ALPHADEX(TM) FUND JULY 31, 2007 1. ORGANIZATION First Trust Exchange-Traded AlphaDEX(TM) Fund (the "Trust") is an open-end management investment company organized as a Massachusetts business trust on December 6, 2006, and is registered with the Securities and Exchange Commission ("SEC") under the Investment Company Act of 1940, as amended (the "1940 Act"). The Trust currently consists of sixteen funds: First Trust Consumer Discretionary AlphaDEX(TM) Fund - (AMEX ticker "FXD") First Trust Consumer Staples AlphaDEX(TM) Fund - (AMEX ticker "FXG") First Trust Energy AlphaDEX(TM) Fund - (AMEX ticker "FXN") First Trust Financials AlphaDEX(TM) Fund - (AMEX ticker "FXO") First Trust Health Care AlphaDEX(TM) Fund - (AMEX ticker "FXH") First Trust Industrials/Producer Durables AlphaDEX(TM) Fund - (AMEX ticker "FXR") First Trust Materials AlphaDEX(TM) Fund - (AMEX ticker "FXZ") First Trust Technology AlphaDEX(TM) Fund - (AMEX ticker "FXL") First Trust Utilities AlphaDEX(TM) Fund - (AMEX ticker "FXU") First Trust Large Cap Core AlphaDEX(TM) Fund - (AMEX ticker "FEX") First Trust Mid Cap Core AlphaDEX(TM) Fund - (AMEX ticker "FNX") First Trust Small Cap Core AlphaDEX(TM) Fund - (AMEX ticker "FYX") First Trust Large Cap Value Opportunities AlphaDEX(TM) Fund - (AMEX ticker "FTA") First Trust Large Cap Growth Opportunities AlphaDEX(TM) Fund - (AMEX ticker "FTC") First Trust Multi Cap Value AlphaDEX(TM) Fund - (AMEX ticker "FAB") First Trust Multi Cap Growth AlphaDEX(TM) Fund - (AMEX ticker "FAD") Each fund represents a separate series of beneficial interest in the Trust (the "Fund" or collectively, the "Funds"). The Funds' shares are listed and traded on the American Stock Exchange ("AMEX"). Unlike conventional mutual funds, each Fund issues and redeems shares on a continuous basis, at net asset value ("NAV"), only in large specified blocks consisting of shares called a "Creation Unit". Each Creation Unit consists of 50,000 shares for the First Trust Consumer Discretionary AlphaDEX(TM) Fund, the First Trust Consumer Staples AlphaDEX(TM) Fund, the First Trust Energy AlphaDEX(TM) Fund, the First Trust Financials AlphaDEX(TM) Fund, the First Trust Health Care AlphaDEX(TM) Fund, the First Trust Industrials/Producer Durables AlphaDEX(TM) Fund, the First Trust Materials AlphaDEX(TM) Fund, the First Trust Technology AlphaDEX(TM) Fund, and the First Trust Utilities AlphaDEX(TM) Fund and 100,000 shares for the First Trust Large Cap Core AlphaDEX(TM) Fund, the First Trust Mid Cap Core AlphaDEX(TM) Fund, the First Trust Small Cap Core AlphaDEX(TM) Fund, the First Trust Large Cap Value Opportunities AlphaDEX(TM) Fund, the First Trust Large Cap Growth Opportunities AlphaDEX(TM) Fund, the First Trust Multi Cap Value AlphaDEX(TM) Fund, and the First Trust Multi Cap Growth AlphaDEX(TM) Fund. Creation Units are issued and redeemed principally in-kind for securities included in the relevant index. Except when aggregated in Creation Units, shares are not redeemable securities of a 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 the following indices:
FUND INDEX First Trust Consumer Discretionary AlphaDEX(TM) Fund StrataQuant(TM) ConsumerDiscretionary Index First Trust Consumer Staples AlphaDEX(TM) Fund StrataQuant(TM) Consumer Staples Index First Trust Energy AlphaDEX(TM) Fund StrataQuant(TM) Energy Index First Trust Financials AlphaDEX(TM) Fund StrataQuant(TM) Financials Index First Trust Health Care AlphaDEX(TM) Fund StrataQuant(TM) Health Care Index First Trust Industrials/Producer Durables AlphaDEX(TM) Fund StrataQuant(TM) Industrials Index First Trust Materials AlphaDEX(TM) Fund StrataQuant(TM) Materials Index First Trust Technology AlphaDEX(TM) Fund StrataQuant(TM) TechnologyIndex First Trust Utilities AlphaDEX(TM) Fund StrataQuant(TM) UtilitiesIndex First Trust Large Cap Core AlphaDEX(TM) Fund Defined Large Cap Core Index First Trust Mid Cap Core AlphaDEX(TM) Fund Defined Mid Cap Core Index First Trust Small Cap Core AlphaDEX(TM) Fund Defined Small Cap Core Index First Trust Large Cap Value Opportunities AlphaDEX(TM) Fund Defined Large Cap Value Opportunities Index First Trust Large Cap Growth Opportunities AlphaDEX(TM) Fund Defined Large Cap Growth Opportunities Index First Trust Multi Cap Value AlphaDEX(TM) Fund Defined Multi Cap Value Index First Trust Multi Cap Growth AlphaDEX(TM) Fund Defined Multi Cap Growth Index
2. SIGNIFICANT ACCOUNTING POLICIES The following is a summary of significant accounting policies consistently followed by the Funds in the preparation of the financial statements. 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 those estimates. Page 114 - ------------------------------------------------------------------------------- Notes to Financial Statements (Continued) - ------------------------------------------------------------------------------- FIRST TRUST EXCHANGE-TRADED ALPHADEX(TM) FUND JULY 31, 2007 A.PORTFOLIO VALUATION Each Fund determines the NAV of its shares daily, as of the close of regular session trading on the New York Stock Exchange ("NYSE"), normally 4:00 p.m. Eastern time, on each day the NYSE is open for trading. The NAV is computed by dividing the value of all assets of the Fund (including accrued interest and dividends), less all liabilities (including accrued expenses and dividends declared but unpaid), by the total number of shares outstanding. Each Fund's investments are valued at market value or, in the absence of market value with respect to any portfolio securities, at fair value according to procedures adopted by the Trust's Board of Trustees. Portfolio securities listed on any exchange other than The NASDAQ Stock Market, Inc. ("NASDAQ(R)") are valued at the last sale price on the business day as of which such value is being determined. If there has been no sale on such day, the securities are valued at the mean of the most recent bid and asked prices on such day. Securities traded on the NASDAQ(R) are valued at the NASDAQ(R) Official Closing Price as determined by NASDAQ(R). Portfolio securities traded on more than one securities exchange are valued at the last sale price on the business day as of which such value is being determined at the close of the exchange representing the principal market for such securities. Portfolio securities traded in the over-the-counter market, but excluding securities traded on the NASDAQ(R), are valued at the closing bid prices. Short-term investments that mature in less than 60 days are valued at amortized cost. B. SECURITIES TRANSACTIONS AND INVESTMENT INCOME Securities transactions are recorded as of the trade date. Realized gains and losses from securities transactions are recorded on the identified cost basis. Dividend income is recorded on the ex-dividend date. Interest income, if any, is recorded on the accrual basis. The Funds may hold publicly-traded master limited partnerships ("MLP"). Distributions from such investments may include a return of capital component from the MLP to the extent of the cost basis of such MLP investments. Cumulative distributions received in excess of the Fund's cost basis in an MLP generally are recorded as dividend income. C. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS Dividends from net investment income of the Funds, if any, are declared and paid semi-annually or as the Board of Trustees may determine from time to time. Distributions of net realized capital gains earned by each Fund, if any, are distributed at least annually. Distributions from income and capital gains are determined in accordance with income tax regulations, which may differ from accounting principles generally accepted in the United States of America. These differences are primarily due to differing treatments of income and gains on various investment securities held by the Funds, timing differences and differing characterization of distributions made by the Funds. There were no distributions paid during the period ended July 31, 2007. As of July 31, 2007, the components of distributable earnings on a tax basis for the Funds were as follows:
Undistributed Accumulated Net Unrealized Ordinary Capital Appreciation Income Gain (Loss) (Depreciation) -------------- ---------------- ---------------- First Trust Consumer Discretionary AlphaDEX(TM) Fund $ 188 $ (2,058) $ (115,344) First Trust Consumer Staples AlphaDEX(TM) Fund 5,552 (3,068) (158,588) First Trust Energy AlphaDEX(TM) Fund 892 -- (253,253) First Trust Financials AlphaDEX(TM) Fund 6,584 (2,757) (212,906) First Trust Health Care AlphaDEX(TM) Fund -- (18,355) (31,728) First Trust Industrials/Producer Durables AlphaDEX(TM) Fund -- (23,631) (277,102) First Trust Materials AlphaDEX(TM) Fund 2,537 (4,424) (55,234) First Trust Technology AlphaDEX(TM) Fund -- (12,398) 3,046 First Trust Utilities AlphaDEX(TM) Fund 11,354 (945) (236,558) First Trust Large Cap Core AlphaDEX(TM) Fund 4,291 (15,102) (244,796) First Trust Mid Cap Core AlphaDEX(TM) Fund 1,760 (7,911) (462,906) First Trust Small Cap Core AlphaDEX(TM) Fund 3,211 (14,770) (542,442) First Trust Large Cap Value Opportunities AlphaDEX(TM) Fund 7,676 (1,854) (534,998) First Trust Large Cap Growth Opportunities AlphaDEX(TM) Fund -- -- (232,345) First Trust Multi Cap Value AlphaDEX(TM) Fund 6,372 (8,569) (334,249) First Trust Multi Cap Growth AlphaDEX(TM) Fund -- (26,562) (564,459)
D. INCOME TAXES Each Fund intends to qualify as a regulated investment company by complying with the requirements under Subchapter M of the Internal Revenue Code of 1986, as amended, by distributing substantially all of its net investment income and net realized gains to shareholders. Accordingly, no provision has been made for federal and state income taxes. Page 115 - ------------------------------------------------------------------------------- Notes to Financial Statements (Continued) - ------------------------------------------------------------------------------- FIRST TRUST EXCHANGE-TRADED ALPHADEX(TM) FUND JULY 31, 2007 In June 2006, Financial Accounting Standards Board Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" - an interpretation of FASB Statement 109 ("FIN 48") was issued and is effective for fiscal years beginning after December 15, 2006. This interpretation prescribes a minimum threshold for financial statement recognition of the benefit of a tax position taken or expected to be taken in a tax return. As of July 31, 2007, management has evaluated the application of FIN 48 to the Funds, and has determined that there is no material impact resulting from the adoption of this interpretation on the Funds' financial statements. At July 31, 2007 for federal income tax purposes, the Funds have capital loss carryforwards available as shown in the table below, to the extent provided by regulations, to offset future capital gains through the year indicated. To the extent that these loss carryforwards are used to offset future capital gains, it is probable that the capital gains so offset will not be distributed to shareholders. The following Funds incurred and elected to defer net capital losses as follows: Capital Loss Available through July 31, 2015 ----------------- First Trust Consumer Discretionary AlphaDEX(TM) Fund $ 2,058 First Trust Consumer Staples AlphaDEX(TM) Fund 3,068 First Trust Energy AlphaDEX(TM) Fund -- First Trust Financials AlphaDEX(TM) Fund 2,757 First Trust Health Care AlphaDEX(TM) Fund 18,355 First Trust Industrials/Producer Durables AlphaDEX(TM) Fund 23,631 First Trust Materials AlphaDEX(TM) Fund 4,424 First Trust Technology AlphaDEX(TM) Fund 12,398 First Trust Utilities AlphaDEX(TM) Fund 945 First Trust Large Cap Core AlphaDEX(TM) Fund 15,102 First Trust Mid Cap Core AlphaDEX(TM) Fund 7,911 First Trust Small Cap Core AlphaDEX(TM) Fund 14,770 First Trust Large Cap Value Opportunities AlphaDEX(TM) Fund 1,854 First Trust Large Cap Growth Opportunities AlphaDEX(TM) Fund -- First Trust Multi Cap Value AlphaDEX(TM) Fund 8,569 First Trust Multi Cap Growth AlphaDEX(TM) Fund 26,562 In order to present paid-in capital and accumulated net realized gain (loss) on the Statements of Assets and Liabilities that more closely represent their tax character, certain adjustments have been made to paid-in capital, accumulated net investment income (loss) and accumulated net realized gain (loss) on investments. For the period ended July 31, 2007, the adjustments were as follows:
Accumulated Accumulated Net Realized Net Investment Gain (Loss) Paid-in Income (Loss) on Investments Capital ---------------- ---------------- --------------- First Trust Consumer Discretionary AlphaDEX(TM) Fund $ -- $ -- $ -- First Trust Consumer Staples AlphaDEX(TM) Fund -- (20,666) 20,666 First Trust Energy AlphaDEX(TM) Fund 174 (90,330) 90,156 First Trust Financials AlphaDEX(TM) Fund -- -- -- First Trust Health Care AlphaDEX(TM) Fund 1,425 -- (1,425) First Trust Industrials/Producer Durables AlphaDEX(TM) Fund 742 -- (742) First Trust Materials AlphaDEX(TM) Fund -- (59,892) 59,892 First Trust Technology AlphaDEX(TM) Fund 2,303 (60,591) 58,288 First Trust Utilities AlphaDEX(TM) Fund -- (32,108) 32,108 First Trust Large Cap Core AlphaDEX(TM) Fund -- (123,906) 123,906 First Trust Mid Cap Core AlphaDEX(TM) Fund -- (166,103) 166,103 First Trust Small Cap Core AlphaDEX(TM) Fund -- (164,380) 164,380 First Trust Large Cap Value Opportunities AlphaDEX(TM) Fund -- (128,924) 128,924 First Trust Large Cap Growth Opportunities AlphaDEX(TM) Fund 688 (84,544) 83,856 First Trust Multi Cap Value AlphaDEX(TM) Fund -- (131,777) 131,777 First Trust Multi Cap Growth AlphaDEX(TM) Fund 2,017 (146,477) 144,460
Page 116 - ------------------------------------------------------------------------------- Notes to Financial Statements (Continued) - ------------------------------------------------------------------------------- FIRST TRUST EXCHANGE-TRADED ALPHADEX(TM) FUND JULY 31, 2007 E. EXPENSES Expenses that are directly related to one of the Funds are charged directly to the respective Fund. General expenses of the Trust are allocated to all the Funds based upon the average net assets of each Fund. First Trust Portfolios L.P. ("First Trust Portfolios") has entered into licensing agreements with each of the following "Licensors" for the respective Funds:
FUNDS LICENSOR First Trust Consumer Discretionary AlphaDEX(TM) Fund American Stock Exchange LLC First Trust Consumer Staples AlphaDEX(TM) Fund American Stock Exchange LLC First Trust Energy AlphaDEX(TM) Fund American Stock Exchange LLC First Trust Financials AlphaDEX(TM) Fund American Stock Exchange LLC First Trust Health Care AlphaDEX(TM) Fund American Stock Exchange LLC First Trust Industrials/Producer Durables AlphaDEX(TM) Fund American Stock Exchange LLC First Trust Materials AlphaDEX(TM) Fund American Stock Exchange LLC First Trust Technology AlphaDEX(TM) Fund American Stock Exchange LLC First Trust Utilities AlphaDEX(TM) Fund American Stock Exchange LLC First Trust Large Cap Core AlphaDEX(TM) Fund Standard & Poor's First Trust Mid Cap Core AlphaDEX(TM) Fund Standard & Poor's First Trust Small Cap Core AlphaDEX(TM) Fund Standard & Poor's First Trust Large Cap Value Opportunities AlphaDEX(TM) Fund Standard & Poor's First Trust Large Cap Growth Opportunities AlphaDEX(TM) Fund Standard & Poor's First Trust Multi Cap Value AlphaDEX(TM) Fund Standard & Poor's First Trust Multi Cap Growth AlphaDEX(TM) Fund Standard & Poor's
The Funds are entitled to use each index and corresponding trademarks and trade names pursuant to sublicensing arrangements by and among each Fund, the respective Licensor, First Trust Advisors L.P. ("First Trust") and First Trust Portfolios. As such, the Funds pay licensing fees, which are shown on the Statements of Operations. F. ACCOUNTING PRONOUNCEMENT In September 2006, Statement of Financial Accounting Standards No. 157 Fair Value Measurements ("SFAS 157") was issued by the FASB and is effective for fiscal years beginning after November 15, 2007. SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. Management is currently evaluating the impact the adoption of SFAS 157 will have on the Funds' financial statement disclosures. 3. INVESTMENT ADVISORY FEE AND OTHER AFFILIATED TRANSACTIONS First Trust (or the "Advisor") is a limited partnership with one limited partner, Grace Partners of DuPage L.P., and one general partner, The Charger Corporation. First Trust serves as investment advisor to the Funds pursuant to an Investment Management Agreement. First Trust 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. For these services, First Trust will receive monthly fees from each Fund calculated at an annual rate of 0.50% of such Fund's average daily net assets. The Trust and the Advisor have entered into an Expense Reimbursement, Fee Waiver and Recovery Agreement in which the Advisor has agreed to waive fees and/or reimburse the Funds to the extent that the operating expenses of each Fund (excluding interest expense, brokerage commissions and other trading expenses, taxes and extraordinary expenses) exceed 0.70% of average daily net assets per year (the "Expense Cap"). Each Fund's Expense Cap will be in effect for at least two years from its inception date. Expenses borne by the Advisor 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 a Fund if it would result in the Fund exceeding its Expense Cap. For the period ended July 31, 2007, the advisory fee waivers and reimbursements of expenses (in order to maintain the Expense Caps) were as follows: Page 117 - ------------------------------------------------------------------------------- Notes to Financial Statements (Continued) - ------------------------------------------------------------------------------- FIRST TRUST EXCHANGE-TRADED ALPHADEX(TM) FUND JULY 31, 2007
Advisory Fee Expense Waivers Reimbursements ----------------- ----------------- First Trust Consumer Discretionary AlphaDEX(TM) Fund $ 2,287 $ 46,632 First Trust Consumer Staples AlphaDEX(TM) Fund 2,843 46,254 First Trust Energy AlphaDEX(TM) Fund 2,821 46,774 First Trust Financials AlphaDEX(TM) Fund 2,249 46,666 First Trust Health Care AlphaDEX(TM) Fund 2,269 46,650 First Trust Industrials/Producer Durables AlphaDEX(TM) Fund 2,638 46,927 First Trust Materials AlphaDEX(TM) Fund 2,771 46,348 First Trust Technology AlphaDEX(TM) Fund 2,463 46,501 First Trust Utilities AlphaDEX(TM) Fund 2,607 46,506 First Trust Large Cap Core AlphaDEX(TM) Fund 3,433 45,742 First Trust Mid Cap Core AlphaDEX(TM) Fund 4,702 44,923 First Trust Small Cap Core AlphaDEX(TM) Fund 3,795 45,880 First Trust Large Cap Value Opportunities AlphaDEX(TM) Fund 3,960 45,557 First Trust Large Cap Growth Opportunities AlphaDEX(TM) Fund 4,701 44,913 First Trust Multi Cap Value AlphaDEX(TM) Fund 3,420 45,914 First Trust Multi Cap Growth AlphaDEX(TM) Fund 4,727 45,431
The Bank of New York is the administrator, custodian, fund accountant and transfer agent for each Fund. Effective July 2, 2007, The Bank of New York became a subsidiary of The Bank of New York Mellon Corporation. The Trust, on behalf of the Funds, has entered into an agreement with PFPC, Inc. ("PFPC") whereby PFPC will provide certain administrative services to the Trust and the Funds in connection with the Board's meetings and other related matters. Each Trustee who is not an officer or employee of First Trust, any sub-advisor or any of their affiliates ("Independent Trustees") is paid an annual retainer of $10,000 per trust for the first 14 trusts of the First Trust Fund Complex and an annual retainer of $7,500 per trust for each subsequent trust added to the First Trust Fund Complex. The annual retainer is allocated equally among each of the trusts. No additional meeting fees are paid in connection with board or committee meetings. Additionally, Thomas R. Kadlec is paid $10,000 annually to serve as the Lead Independent Trustee and Niel B. Nielson is paid $5,000 annually to serve as the chairman of the Audit Committee, with such compensation paid by the funds in the First Trust Fund Complex and divided among those funds. Independent Trustees are also reimbursed by the funds in the First Trust Fund Complex for travel and out-of-pocket expenses in connection with all meetings. 4. PURCHASES AND SALES OF SECURITIES For the period ended July 31, 2007, the cost of purchases and proceeds from sales of investment securities, excluding short-term investments and in-kind transactions, were as follows:
Purchases Sales ----------------- ----------------- First Trust Consumer Discretionary AlphaDEX(TM) Fund $ 702,705 $ 671,455 First Trust Consumer Staples AlphaDEX(TM) Fund 35,062 60,547 First Trust Energy AlphaDEX(TM) Fund 59,132 26,837 First Trust Financials AlphaDEX(TM) Fund 535,123 503,661 First Trust Health Care AlphaDEX(TM) Fund 584,838 621,003 First Trust Industrials/Producer Durables AlphaDEX(TM) Fund 696,613 690,243 First Trust Materials AlphaDEX(TM) Fund 26,086 218,843 First Trust Technology AlphaDEX(TM) Fund 122,790 198,231 First Trust Utilities AlphaDEX(TM) Fund 49,836 22,279 First Trust Large Cap Core AlphaDEX(TM) Fund 20,791 217,819 First Trust Mid Cap Core AlphaDEX(TM) Fund 28,324 484,010 First Trust Small Cap Core AlphaDEX(TM) Fund 71,643 329,643 First Trust Large Cap Value Opportunities AlphaDEX(TM) Fund 25,231 70,804 First Trust Large Cap Growth Opportunities AlphaDEX(TM) Fund 28,169 30,686 First Trust Multi Cap Value AlphaDEX(TM) Fund 58,577 154,471 First Trust Multi Cap Growth AlphaDEX(TM) Fund 27,797 526,545
Page 118 - ------------------------------------------------------------------------------- Notes to Financial Statements (Continued) - ------------------------------------------------------------------------------- FIRST TRUST EXCHANGE-TRADED ALPHADEX(TM) FUND JULY 31, 2007 For the period ended July 31, 2007, the cost of in-kind purchases and proceeds from in-kind sales were as follows:
Purchases Sales ----------------- ----------------- First Trust Consumer Discretionary AlphaDEX(TM) Fund $ 1,994,245 $ -- First Trust Consumer Staples AlphaDEX(TM) Fund 3,999,951 943,865 First Trust Energy AlphaDEX(TM) Fund 6,430,897 1,091,243 First Trust Financials AlphaDEX(TM) Fund 1,998,598 -- First Trust Health Care AlphaDEX(TM) Fund 2,000,942 -- First Trust Industrials/Producer Durables AlphaDEX(TM) Fund 5,025,611 -- First Trust Materials AlphaDEX(TM) Fund 4,075,556 920,378 First Trust Technology AlphaDEX(TM) Fund 3,049,640 851,232 First Trust Utilities AlphaDEX(TM) Fund 3,909,951 958,016 First Trust Large Cap Core AlphaDEX(TM) Fund 6,077,955 2,866,478 First Trust Mid Cap Core AlphaDEX(TM) Fund 9,142,904 2,703,729 First Trust Small Cap Core AlphaDEX(TM) Fund 9,176,045 2,889,110 First Trust Large Cap Value Opportunities AlphaDEX(TM) Fund 9,134,231 3,009,627 First Trust Large Cap Growth Opportunities AlphaDEX(TM) Fund 9,065,538 3,068,876 First Trust Multi Cap Value AlphaDEX(TM) Fund 6,040,056 2,933,151 First Trust Multi Cap Growth AlphaDEX(TM) Fund 12,410,890 2,698,642
Gains on in-kind transactions are not considered taxable for federal income tax purposes. As of July 31, 2007, the costs of investments for federal income tax purposes and accumulated net unrealized appreciation (depreciation) on investments were as follows:
Net Unrealized Gross Gross Appreciation Unrealized Unrealized Cost (Depreciation) Appreciation Depreciation -------------- -------------- -------------- -------------- First Trust Consumer Discretionary AlphaDEX(TM) Fund $ 2,023,437 $ (115,344) $ 37,030 $ (152,374) First Trust Consumer Staples AlphaDEX(TM) Fund 3,048,199 (158,588) 26,139 (184,727) First Trust Energy AlphaDEX(TM) Fund 5,463,172 (253,253) 28,886 (282,139) First Trust Financials AlphaDEX(TM) Fund 2,027,302 (212,906) 13,291 (226,197) First Trust Health Care AlphaDEX(TM) Fund 1,946,422 (31,728) 74,631 (106,359) First Trust Industrials/Producer Durables AlphaDEX(TM) Fund 5,008,351 (277,102) 43,386 (320,488) First Trust Materials AlphaDEX(TM) Fund 3,017,889 (55,234) 111,437 (166,671) First Trust Technology AlphaDEX(TM) Fund 2,171,161 3,046 75,565 (72,519) First Trust Utilities AlphaDEX(TM) Fund 3,010,654 (236,558) 17,560 (254,118) First Trust Large Cap Core AlphaDEX(TM) Fund 3,123,253 (244,796) 14,488 (259,284) First Trust Mid Cap Core AlphaDEX(TM) Fund 6,141,681 (462,906) 66,476 (529,382) First Trust Small Cap Core AlphaDEX(TM) Fund 6,178,539 (542,442) 37,408 (579,850) First Trust Large Cap Value Opportunities AlphaDEX(TM) Fund 6,206,102 (534,998) 7,534 (542,532) First Trust Large Cap Growth Opportunities AlphaDEX(TM) Fund 6,078,689 (232,345) 80,937 (313,282) First Trust Multi Cap Value AlphaDEX(TM) Fund 3,134,218 (334,249) 12,160 (346,409) First Trust Multi Cap Growth AlphaDEX(TM) Fund 9,333,411 (564,459) 69,658 (634,117)
Page 119 - ------------------------------------------------------------------------------- Notes to Financial Statements (Continued) - ------------------------------------------------------------------------------- FIRST TRUST EXCHANGE-TRADED ALPHADEX(TM) FUND JULY 31, 2007 5. CAPITAL Shares are created and redeemed by the Funds only in Creation Unit size aggregations of 50,000 and 100,000 shares (see Note 1). 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 each Fund on the transaction date. Purchasers of Creation Units must pay a standard creation transaction fee (the "Creation Transaction Fee"), which is based on the number of different securities in a Creation Unit according to the fee schedule set forth below: Number of Securities Creation in a Creation Unit Transaction Fee 1-100 $500 101-200 $1,000 201-300 $1,500 301-400 $2,000 401-500 $2,500 501-600 $3,000 601-700 $3,500 The Creation Transaction Fee is applicable to each purchase transaction regardless of the number of Creation Units purchased in the transaction. An additional variable fee of up to three times the Creation Transaction Fee may be charged to approximate additional expenses incurred by the Fund 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. 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. Parties redeeming Creation Units must pay a standard redemption transaction fee (the "Redemption Transaction Fee"), which is based on the number of different securities in a Creation Unit according to the fee schedule set forth below: Number of Securities Redemption in a Creation Unit Transaction Fee 1-100 $500 101-200 $1,000 201-300 $1,500 301-400 $2,000 401-500 $2,500 501-600 $3,000 601-700 $3,500 The Redemption Transaction Fee is applicable to each redemption transaction regardless of the number of Creation Units redeemed in the transaction. An additional variable fee of up to three times the Redemption Transaction Fee may be charged to approximate additional expenses incurred by a Fund 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. 6. DISTRIBUTION PLAN The Board of Trustees adopted a Distribution and Service Plan pursuant to Rule 12b-1 under the 1940 Act. In accordance with the Rule 12b-1 plan, the Funds are authorized to pay an amount up to 0.25% of their average daily net assets each year to reimburse First Trust Portfolios L.P. ("FTP"), the distributor, 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 Authorized Participants for providing distribution assistance, including broker-dealer and shareholder support and educational and promotional services. No 12b-1 fees are currently paid by the Funds, and pursuant to a contractual arrangement, the Funds will not pay 12b-1 fees any time before April 30, 2008. Page 120 - ------------------------------------------------------------------------------- Report of Indepenent Registered Public Accounting Firm - ------------------------------------------------------------------------------- TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF FIRST TRUST EXCHANGE-TRADED ALPHADEX(TM) FUND: We have audited the accompanying statements of assets and liabilities of First Trust Exchange-Traded AlphaDEX(TM) Fund, comprising 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 Financials AlphaDEX(TM) Fund, First Trust Energy AlphaDEX(TM) Fund, First Trust Health Care AlphaDEX(TM) Fund, First Trust Industrials/Producer Durables AlphaDEX(TM) Fund, First Trust Materials AlphaDEX(TM) Fund, First Trust Technology AlphaDEX(TM) Fund, and First Trust Utilities AlphaDEX(TM) Fund (collectively, the "Funds"), including the portfolios of investments, as of July 31, 2007, and the related statements of operations, changes in net assets and the financial highlights for the period May 8, 2007 (inception) through July 31, 2007. These financial statements and financial highlights are the responsibility of the Funds' management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits 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 financial statements and financial highlights are free of material misstatement. The Funds are not required to have, nor were we engaged to perform, an audit of their internal control over financial reporting. Our audits 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 Funds' 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. Our procedures included confirmation of securities owned as of July 31, 2007 by correspondence with the Funds' custodian and brokers. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of First Trust Exchange-Traded AlphaDEX(TM) Fund as of July 31, 2007, the results of their operations, changes in their net assets, and the financial highlights for the period May 8, 2007 (inception) through July 31, 2007 in conformity with accounting principles generally accepted in the United States of America. /s/ Deloitte & Touche LLP Chicago, Illinois September 14, 2007 Page 121 - ------------------------------------------------------------------------------- Additional Information (Unaudited) - ------------------------------------------------------------------------------- FIRST TRUST EXCHANGE-TRADED ALPHADEX(TM) FUND JULY 31, 2007 PROXY VOTING POLICIES AND PROCEDURES A description of the policies and procedures that the Trust uses to determine how to vote proxies and information on how the Funds voted proxies relating to portfolio securities during the period ended July 31, 2007 is available (1) without charge, upon request, by calling (800) 988-5891; (2) on the Trust's website located at http://www.ftportfolios.com; and (3) on the Securities and Exchange Commission's website at http://www.sec.gov. PORTFOLIO HOLDINGS The Trust files its complete schedule of portfolio holdings with the Securities and Exchange Commission ("SEC") for the first and third quarters of each fiscal year on Form N-Q. The Trust's Forms N-Q are available (1) by calling (800) 988-5891; (2) on the Trust's website located at http://www.ftportfolios.com; (3) on the SEC's website at http://www.sec.gov; and (4) for review and copying at the SEC's Public Reference Room ("PRR") in Washington, DC. Information regarding the operation of the PRR may be obtained by calling (800) SEC-0330. ADVISORY AGREEMENT BOARD CONSIDERATIONS REGARDING APPROVAL OF FIRST TRUST EXCHANGE-TRADED ALPHADEX(TM) FUND'S ADVISORY CONTRACT The Board of Trustees of the First Trust Exchange-Traded AlphaDEX(TM) Fund (the "Trust"), including the Independent Trustees, unanimously approved the Investment Management Agreement (the "Agreement") with First Trust Advisors L.P. ("First Trust") for the following funds: (a) First Trust Large Cap Core AlphaDEX(TM) Fund, First Trust Mid Cap Core AlphaDEX(TM) Fund and First Trust SMall Cap Core AlphaDEX(TM) Fund (each a "Core Fund" and collectively, the "Core Funds"); (b) First Trust Large Cap Value Opportunities AlphaDEX(TM) Fund and First Trust Large Cap Growth Opportunities AlphaDEX(TM) Fund (each a "Style Fund" and collectively, the "Style Funds"); (c) First Trust Multi Cap Value AlphaDEX(TM) Fund and First Trust Multi Cap Growth AlphaDEX(TM) Fund (each a "Multi Cap FUNd" and collectively, the "Multi Cap Funds"); and (d) 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/Producer Durables AlphaDEX(TM) Fund, First Trust Materials AlphaDEX(TM) Fund, First TruST Technology AlphaDEX(TM) Fund and First Trust Utilities AlphaDEX(TM) Fund (each a "Sector Fund" and collectively, the "Sector Funds"). Each Core Fund, Style Fund, Multi Cap Fund and Sector Fund is also referred to herein individually as a "Fund" and collectively as the "Funds." The Agreement was approved by the Board for an initial two-year term at a meeting held on December 11, 2006. The Board of Trustees determined for each Fund that the Agreement is in the best interests of the 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. To reach this determination for each Fund, the Board considered its duties under the Investment Company Act of 1940, as amended (the "1940 Act"), as well as under the general principles of state law in reviewing and approving advisory contracts; the requirements of the 1940 Act in such matters; the fiduciary duty of investment advisors with respect to advisory agreements and compensation; the standards used by courts in determining whether investment company boards of trustees have fulfilled their duties; and the factors to be considered by the Board in voting on such agreements. To assist the Board in its evaluation of the Agreement for each Fund, the Independent Trustees received a report in advance of the Board meeting responding to a request for information from counsel to the Independent Trustees. The report, among other things, outlined the services to be provided by First Trust (including the relevant personnel responsible for these services and their experience) to each Fund; the proposed advisory fee for each Fund as compared to fees charged by investment advisors to comparable funds and as compared to fees charged to other First Trust clients; estimated expenses of each Fund as compared to those of comparable funds; the nature of expenses to be incurred in providing services to each Fund and the potential for economies of scale, if any; financial data on First Trust; fall-out benefits to First Trust and First Trust Portfolios L.P.; and a summary of First Trust's compliance program. The Independent Trustees also met separately with their independent legal counsel to discuss the information provided by First Trust. The Board also applied its business judgment to determine whether the arrangement between the Trust and First Trust is a reasonable business arrangement from each Fund's perspective as well as from the perspective of shareholders. Page 122 - ------------------------------------------------------------------------------- Additional Information (Unaudited) (Continued) - ------------------------------------------------------------------------------- FIRST TRUST EXCHANGE-TRADED ALPHADEX(TM) FUND JULY 31, 2007 In evaluating whether to approve the Agreement for each Fund, the Board considered the nature, extent and quality of services to be provided under the Agreement, and noted that, while the Funds are the initial series of the Trust, First Trust employees provide management services to other investment companies, including other exchange-traded funds ("ETFs"), in the First Trust complex with diligence and care. The Board also considered the compliance program that had been developed by First Trust and the skills of its employees who would be working with the Funds. It also considered the efforts expended by First Trust in organizing the Trust and making arrangements for entities to provide services to the Funds. Since each Fund is newly organized, the Board did not consider the investment performance of the Funds, but the Board did consider the performance of the applicable index for each Fund. The Board concluded it was comfortable that First Trust had the capabilities and resources to oversee the operations of each Fund, including the services to be provided by other service providers. For each Fund, the Trustees reviewed information showing the advisory fee and estimated expense ratio as compared to those of a peer group selected by First Trust. They noted that the peer group for each Fund consisted solely of other ETFs. The Board considered certain limitations in the comparability of the funds in each peer group, including that certain peer funds had operated for less than a year. With respect to the advisory fees for the Funds, the Board noted the following: (a) The Board noted the services to be provided by First Trust to each Core Fund for the annual advisory fee of 0.50% of the Core Fund's average daily net assets and that the proposed advisory fee for each Core Fund was above the average of the advisory fees of the Core Fund's peer group. The Board noted that except for First Trust Mid Cap Core AlphaDEX(TM) Fund, in each case the fee was equal to the Core Fund's closest peer. The Board concluded that each Core Fund's advisory fee was within an acceptable range of the peer group and consistent with reasonable expectations in light of the nature, quality and extent of the services to be provided by First Trust. (b) The Board noted the services to be provided by First Trust to each Style Fund for the annual advisory fee of 0.50% of the Style Fund's average daily net assets and that the proposed advisory fee for each Style Fund was above the average of the advisory fees of the Style Fund's peer group. The Board noted that in each case the fee was equal to the Style Fund's closest peer. The Board concluded that each Style Fund's advisory fee was within an acceptable range of the peer group and consistent with reasonable expectations in light of the nature, quality and extent of the services to be provided by First Trust. (c) The Board noted the services to be provided by First Trust to each Multi Cap Fund for the annual advisory fee of 0.50% of the Multi Cap Fund's average daily net assets and that the proposed advisory fee for each Multi Cap Fund was above the average of the advisory fees of the Multi Cap Fund's peer group. The Board noted that in each case the fee was equal to the Multi Cap Fund's closest peer. The Board concluded that each Multi Cap Fund's advisory fee was within an acceptable range of the peer group and consistent with reasonable expectations in light of the nature, quality and extent of the services to be provided by First Trust. (d) The Board noted the services to be provided by First Trust to each Sector Fund for the annual advisory fee of 0.50% of the Sector Fund's average daily net assets and that the proposed advisory fee for each Sector Fund was above the average of the advisory fees of the Sector Fund's peer group. The Board noted that except for First Trust Materials AlphaDEX(TM) Fund, in each case the fee was equal to the Sector Fund's closesT peer. The Board concluded that each Sector Fund's advisory fee was within an acceptable range of the peer group and consistent with reasonable expectations in light of the nature, quality and extent of the services to be provided by First Trust. The Board also considered that First Trust has agreed to waive fees and/or pay expenses for each Fund to the extent necessary to prevent the operating expenses of the Fund (excluding interest expense, brokerage commissions and other trading expenses, taxes and extraordinary expenses) from exceeding 0.70% of average daily net assets for two years. The Trustees noted that expenses borne by First Trust are proposed to be subject to reimbursement by a Fund for up to three years from the date the fee or expense was incurred, but no reimbursement payment would be made by the Fund if it would result in the Fund exceeding its expense cap, or if the expense cap is no longer in effect, would result in the Fund exceeding an expense ratio equal to its most recent expense cap. The Board considered the fees charged by First Trust to funds with investment objectives and policies similar to the Funds', noting that those fees were identical for other ETFs that target alpha, and higher for non-ETFs, except non-ETFs for which First Trust serves as sub-advisor, for which the annual fee usually was 0.35% of average daily net assets, and the Board noted First Trust's statement that the services provided to these funds may not be comparable to those to be provided Page 123 - ------------------------------------------------------------------------------- Additional Information (Unaudited)(Continued) - ------------------------------------------------------------------------------- FIRST TRUST EXCHANGE-TRADED ALPHADEX(TM) FUND JULY 31, 2007 to the Funds. In light of nature, extent and quality of services to be provided to each Fund under the Agreement, and in light of First Trust's agreement to waive fees and/or pay each Fund's expenses for at least two years up to the expense cap, the Board determined for each Fund that the investment advisory fee was fair and reasonable. Finally, the Board noted First Trust's commitment to attempt to analyze whether economies of scale can be realized as Trust assets increase and operations experience is accumulated, and noted that First Trust intended to continue to make investments in infrastructure and personnel. The Board took the costs to be borne by First Trust in connection with its services to be performed under the Agreement into consideration and noted that First Trust was unable to estimate the profitability of the Agreement to First Trust for each Fund, but had agreed to cap each Fund's expenses for two years. The Board considered that First Trust had identified as a fall-out benefit to First Trust and First Trust Portfolios L.P. their exposure to investors and brokers who, in the absence of the Funds or other ETFs for which First Trust acts as investment advisor, may have had no dealings with First Trust. The Board also noted that First Trust would not utilize soft dollars in connection with its management of each Fund's portfolio. After discussion, the Board of Trustees, including the Independent Trustees, concluded that First Trust had the capabilities, resources and personnel necessary to manage each Fund. Based upon such information as it considered necessary to the exercise of its reasonable business judgment, the Board of Trustees concluded unanimously that it was in the best interests of each Fund to approve the Agreement. No single factor was determinative in the Board's analysis. Page 124 - ------------------------------------------------------------------------------- Board of Trustees and Officers (Unaudited) - ------------------------------------------------------------------------------- FIRST TRUST EXCHANGE-TRADED ALPHADEX(TM) FUND JULY 31, 2007 Each Fund's respective statement of additional information includes information about the Trustees and is available without charge, upon request, by calling (800) 988-5891.
- ----------------------------------------------------------------------------------------------------------------------------------- Interested Trustee - ----------------------------------------------------------------------------------------------------------------------------------- NUMBER OF PORTFOLIOS IN TERM OF OFFICE THE FIRST TRUST OTHER POSITION AND AND YEAR FIRST FUND COMPLEX TRUSTEESHIPS OR NAME, ADDRESS OFFICES WITH ELECTED OR PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS AND DATE OF BIRTH TRUST APPOINTED DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE - ----------------------------------------------------------------------------------------------------------------------------------- James A. Bowen(1) President, o Indefinite term President, First Trust 56 Trustee of 1001 Warrenville Road Chairman of Advisors L.P. and First Wheaton College Suite 300 the Board, o 2006 Trust Portfolios L.P.; Lisle, IL 60532 Chief Chairman of the Board, DOB. 9/55 Executive BondWave LLC (Software Officer and Development Company/ Trustee Broker-Dealer) and Stonebridge Advisors LLC (Investment Adviser) - ----------------------------------------------------------------------------------------------------------------------------------- Independent Trustees - ----------------------------------------------------------------------------------------------------------------------------------- Richard E. Erickson Trustee o Indefinite term Physician; President, 56 NONE c/o First Trust Advisors Wheaton Orthopedics; L.P. o 2006 Co-Owner and Co-Director, 1001 Warrenville Road (January 1996 to May 2007), Suite 300 Sports Med Center for Lisle, IL 60532 Fitness; Limited Partner, DOB: 4/51 Gundersen Real Estate Partnership; Limited Partner, Sportsmed LLC Thomas R. Kadlec Trustee o Indefinite term Senior Vice President (May 56 NONE c/o First Trust Advisors 2007 to Present), Vice L.P. o 2006 President and Chief 1001 Warrenville Road Financial Officer (1990 to Suite 300 May 2007), ADM Investor Lisle, IL 60532 Services, Inc. (Futures DOB: 11/57 Commission Merchant); Vice President (May 2005 to Present), ADM Derivatives, Inc.; Registered Representative (2000 to present), Segerdahl & Company, Inc., an NASD member (Broker-Dealer) Robert F. Keith Trustee o Indefinite term President (2003 to Present), 56 NONE c/o First Trust Advisors Hibs Enterprises (Financial L.P. o 2006 and Management Consulting); 1001 Warrenville Road President (2001 to 2003), Suite 300 Aramark Service Master Lisle, IL 60532 Management; President and DOB: 11/58 Chief Operating Officer (1998 to 2003), Service Master Management Services Niel B. Nielson Trustee o Indefinite term President (June 2002 to 56 Director of c/o First Trust Advisors Present), Covenant College Covenant L.P. o 2006 Transport Inc. 1001 Warrenville Road Suite 300 Lisle, IL 60532 DOB: 3/54
- -------------------- 1 Mr. Bowen is deemed an "interested person" of the Funds due to his position as President of First Trust Advisors L.P., investment adviser of the Funds. Page 125 - ------------------------------------------------------------------------------- Board of Trustees and Officers (Unaudited)(Continued) - ------------------------------------------------------------------------------- FIRST TRUST EXCHANGE-TRADED ALPHADEX(TM) FUND JULY 31, 2007
- ----------------------------------------------------------------------------------------------------------------------------------- Officers - ----------------------------------------------------------------------------------------------------------------------------------- POSITION(S) TERM OF OFFICE NAME, ADDRESS, AND HELD WITH AND LENGTH OF PRINCIPAL OCCUPATION(S) DATE OF BIRTH FUNDS TIME SERVED DURING PAST FIVE YEARS - ----------------------------------------------------------------------------------------------------------------------------------- Mark R. Bradley Treasurer, Controller, o Indefinite term Chief Financial Officer, First Trust Advisors 1001 Warrenville Road Chief Financial Officer L.P. and First Trust Portfolios L.P.; Chief Suite 300 and Chief Accounting o 2006 Financial Officer, BondWave LLC (Software Lisle, IL 60532 Officer Development Company/Broker-Dealer) and DOB: 11/57 Stonebridge Advisors LLC (Investment Adviser) Kelley Christensen Vice President o Indefinite term Assistant Vice President, First Trust 1001 Warrenville Road Portfolios L.P. and First Trust Advisors L.P. Suite 300 o 2006 Lisle, IL 60532 DOB: 9/70 James M. Dykas Assistant Treasurer o Indefinite term Senior Vice President (April 2007 to 1001 Warrenville Road Present), Vice President (January 2005 to Suite 300 o 2006 April 2007), First Trust Advisors L.P. and Lisle, IL 60532 First Trust Portfolios L.P.; Executive DOB: 1/66 Director (December 2002 to January 2005), Vice President (December 2000 to December 2002), Van Kampen Asset Management and Morgan Stanley Investment Management W. Scott Jardine Secretary and Chief o Indefinite term General Counsel, First Trust Advisors L.P. 1001 Warrenville Road Compliance Officer ("CCO") and First Trust Portfolios L.P.; Secretary, Suite 300 o 2006 BondWave LLC (Software Development Lisle, IL 60532 Company/Broker-Dealer) and Stonebridge DOB: 5/60 Advisors LLC (Investment Adviser) Daniel J. Lindquist Vice President o Indefinite term Senior Vice President (September 2005 to 1001 Warrenville Road Present), Vice President (April 2004 to Suite 300 o 2006 September 2005), First Trust Advisors L.P. Lisle, IL 60532 and First Trust Portfolios L.P.; Chief DOB: 2/70 Operating Officer (January 2004 to April 2004), Mina Capital Management, LLC; Chief Operating Officer (April 2000 to January 2004), Samaritan Asset Management Services, Inc. Kristi A. Maher Assistant Secretary o Indefinite term Deputy General Counsel (May 2007 to Present), 1001 Warrenville Road Assistant General Counsel (March 2004 to May Suite 300 o 2006 2007), First Trust Advisors L.P. and First Lisle, IL 60532 Trust Portfolios L.P.; Associate (1995-2004), DOB: 12/66 Chapman and Cutler LLP Roger Testin Vice President o Indefinite term Senior Vice President (November 2003 to 1001 Warrenville Road Present), Vice President (August 2001 to Suite 300 o 2006 November 2003), First Trust Portfolios L.P. Lisle, IL 60532 and First Trust Advisors L.P.; Analyst (1998 DOB: 06/66 to 2001), Dolan Capital Management Stan Ueland Vice President o Indefinite term Vice President .(August 2005 to Present), 1001 Warrenville Road First Trust Advisors L.P. and First Trust Suite 300 o 2006 Portfolios L.P; Vice President (May 2004 to Lisle, IL 60532 August 2005), BondWave LLC (Software DOB: 11/70 Development Company/Broker-Dealer); Account Executive (January 2003 to May 2004), Mina Capital Management, LLC and Samaritan Asset Management Services, Inc.; Sales Consultant (January 1997 to January 2003), Oracle Corporation
Page 126 - ------------------------------------------------------------------------------- Risk Considerations (Unaudited) - ------------------------------------------------------------------------------- FIRST TRUST EXCHANGE-TRADED ALPHADEX(TM) FUND JULY 31, 2007 YOU SHOULD CONSIDER EACH FUND'S INVESTMENT OBJECTIVE, RISKS, AND CHARGES AND EXPENSES CAREFULLY BEFORE INVESTING. YOU CAN DOWNLOAD EACH FUND'S PROSPECTUS AT HTTP://WWW.FTPORTFOLIOS.COM OR CONTACT FIRST TRUST PORTFOLIOS L.P. AT 1-800-621-1675 TO REQUEST A PROSPECTUS, WHICH CONTAINS THIS AND OTHER INFORMATION ABOUT THE PARTICULAR FUND. READ IT CAREFULLY BEFORE YOU INVEST. FIRST TRUST PORTFOLIOS L.P. IS THE DISTRIBUTOR OF THE FIRST TRUST EXCHANGE-TRADED ALPHADEX(TM) FUND. RISK CONSIDERATIONS Each Fund's shares will change in value, and you could lose money by investing in a Fund. An investment in a Fund involves risks similar to those of investing in any fund of equity securities traded on an exchange. Investors buying or selling Fund shares on the secondary market may incur brokerage commissions. In addition, investors who sell Fund shares may receive less than the shares' net asset value. Unlike shares of open-end mutual funds, investors are generally not able to purchase ETF shares directly from a Fund and individual ETF shares are not redeemable. However, specified large blocks of shares called creation units can be purchased from, or redeemed to, the Fund You should anticipate that the value of each Fund's shares will decline, more or less, in correlation with any decline in the value of that Fund's corresponding index. Each Fund's return may not match the return of its corresponding index for a number of reasons. For example, the Funds incur operating expenses not applicable to their corresponding indexes, and may incur costs in buying and selling securities, especially when rebalancing the Fund's portfolio holdings to reflect changes in the composition of its corresponding index. In addition, the each Fund's portfolio holdings may not exactly replicate the securities included in its corresponding index or the ratios between the securities included in such index. Each Fund is exposed to additional market risk due to its policy of investing principally in the securities included in its corresponding index. As a result of this policy, securities held by each Fund 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. Therefore, the Funds will generally not sell a stock because the stock's issuer is in financial trouble, unless that stock is removed or is anticipated to be removed from a Fund's index. Each Fund relies on a license and related sublicense that permits it to use its corresponding index and associated trade names and trademarks in connection with the name and investment strategies of the Fund. Such license and related sublicense may be terminated by the index provider and, as a result, a Fund may lose its ability to use such intellectual property. In the event the license is terminated or the index provider does not have rights to license such intellectual property, it may have a significant effect on the operation of the respective Fund. 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. Each Fund may be concentrated in stocks of companies in an individual industry or sector if the Fund's corresponding index is concentrated in an individual industry or sector. You should be aware that an investment in a portfolio that is concentrated in an individual industry or sector involves additional risk, including limited diversification. Each Fund is classified as "non-diversified" under the Investment Company Act of 1940, as amended. As a result, each Fund is only limited as to the percentage of its assets which may be invested in the securities of any one issuer by the diversification requirements imposed by the Internal Revenue Code of 1986, as amended. Because the Funds may invest a relatively high percentage of its assets in a limited number of issuers, the Funds may be more susceptible to any single economic, political or regulatory occurrence and to the financial conditions of the issuers in which it invests. The First Trust Consumer Discretionary AlphaDEX(TM) Fund, the First Trust Consumer Staples AlphaDEX(TM) Fund, the First Trust Energy AlphaDEX(TM) Fund, the First Trust Financials AlphaDEX(TM) Fund, the FIRst Trust Health Care AlphaDEX(TM) Fund, the First Trust Industrials/Producer Durables AlphaDEX(TM) FunD, the First Trust Materials AlphaDEX(TM) Fund, the First Trust Technology AlphaDEX(TM) Fund, the FirsT Trust Utilities AlphaDEX(TM) Fund, the First Trust Multi Cap Value AlphaDEX(TM) Fund and the First TRust Multi Cap Growth AlphaDEX(TM) Fund may invest in small capitalization and mid capitalization companies. Such companies may experience greater price volatility than larger, more established companies. The First Trust Mid Cap Core AlphaDEX(TM) Fund invests in mid-cap companies and is subject to additional risks because 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. Page 127 - ------------------------------------------------------------------------------- Risk Considerations (Unaudited)(Continued) - ------------------------------------------------------------------------------- FIRST TRUST EXCHANGE-TRADED ALPHADEX(TM) FUND JULY 31, 2007 The First Trust Small Cap Core AlphaDEX(TM) Fund invests in small-cap companies and is subject to additional risks, as the share prices of small-cap companies are often more volatile than those of larger companies. The First Trust Large Cap Value Opportunities AlphaDEX(TM) Fund and the First Trust Multi Cap Value AlphaDEX(TM) Fund invest with a value-oriented investment style and may not be successful in realizing their respective 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. The First Trust Large Cap Growth Opportunities AlphaDEX(TM) Fund the First Trust Multi Cap Growth AlphaDEX(TM) Fund invest with a growth-oriented investment style and may not be successful in realizing their respective investment objectives. Securities of growth companies may experience significant fluctuations in price in response to economic, political, regulatory, company specific, sector or market developments, changes in perceptions or interest rate changes. The First Trust Consumer Discretionary AlphaDEX(TM) Fund invests in the securities of companies in the consumer discretionary sector. Because companies in the consumer discretionary sector manufacture products and provide discretionary services directly to the consumer, the success of these companies is tied closely to the performance of the overall domestic and international economy, interest rates, competition 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 discretionary products in the marketplace. The First Trust Consumer Staples AlphaDEX(TM) Fund invests in the securities of companies in the consumer staples sector. Because companies in the consumer staples sector provide products directly to the consumer that are typically considered non-discretionary items based on consumer purchasing habits, these companies may be affected by a variety of factors which could impact company profitability. For instance, government regulations may affect the permissibility of using various food additives and the production methods of companies that manufacture food products. 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. The First Trust Energy AlphaDEX(TM) Fund invests in the securities of companies in the energy sectoR. The companies in the energy sector include integrated oil companies that are involved in the exploration, production and refining process, gas distributors and pipeline-related companies and other energy companies involved with mining, producing and delivering energy-related services and drilling. 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. The First Trust 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. The First Trust Health Care AlphaDEX(TM) Fund invests in the securities of companies in the health care sector. Because companies in the health care sector are involved in medical services or health care including biotechnology research and production, drugs and pharmaceuticals, and health care facilities and services, general problems of these companies 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. The First Trust Industrials/Producer Durables AlphaDEX(TM) Fund invests in the securities of companies in the industrials and producer durables sectors. Many companies in these sectors convert unfinished goods into finished durables used to manufacture other goods or provide services. Some industries included in these sectors are electrical equipment and components, industrial products, manufactured housing and telecommunications equipment. General risks of these companies include the general state of the economy, intense competition, consolidation, domestic and international politics, excess capacity and consumer Page 128 - ------------------------------------------------------------------------------- Risk Considerations (Unaudited)(Continued) - ------------------------------------------------------------------------------- FIRST TRUST EXCHANGE-TRADED ALPHADEX(TM) FUND JULY 31, 2007 demand and 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. The First Trust Materials AlphaDEX(TM) Fund invests in the securities of companies in the materials sector. Because companies in the materials sector are involved in the extracting or processing of raw materials, general risks of these companies 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. The First Trust Technology AlphaDEX(TM) Fund invests in the securities of companies in the technoloGY sector. Because companies in the technology sector serve the electronics and computer industries or manufacture products based on the latest applied science, general risks of these companies include 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. The First Trust 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. NOT FDIC INSURED NOT BANK GUARANTEED MAY LOSE VALUE Page 129 - -------------------------------------------------------------------------------- [LOGO OMITTED] FIRST TRUST ADVISORS, L.P. FIRST TRUST EXCHANGE-TRADED ALPHADEX(TM) FUND - -------------------------------------------------------------------------------- INVESTMENT ADVISOR First Trust Advisors L.P. 1001 Warrenville Road Lisle, IL 60532 ADMINISTRATOR, CUSTODIAN, FUND ACCOUNTANT & TRANSFER AGENT The Bank of New York 101 Barclay Street New York, NY 10286 BOARD ADMINISTRATOR PFPC, Inc. 301 Bellevue Parkway Wilmington, DE 19809 INDEPENDENT REGISTERED PUBLIC ACCOUNTANT Deloitte & Touche LLP 111 S. Wacker Drive Chicago, IL 60606 LEGAL COUNSEL CHAPMAN AND CUTLER LLP 111 W. MONROE STREET CHICAGO, IL 60603 Back Cover -----END PRIVACY-ENHANCED MESSAGE-----