Active Management: The Benefits in High Yield And Senior ...forums.capitallink.com/cef/2013/pres/housey.pdf · High Yield Bond Index represented by the BofA Merrill Lynch High Yield

April 2013

For broker use only. Not for use with the public.

Active Management: The Benefits in High Yield And Senior Loan ETFs

First Trust High Yield Long/Short ETF - HYLS First Trust Senior Loan Fund - FTSL

1

William Housey, CFA, Sr. Vice President, Sr. Portfolio Manager, First Trust


The First Trust Advisors L.P. Leveraged Finance Team was formed in June 2010 when six experienced credit professionals from Morgan Stanley Investment Management joined the firm. Since that time, the team has grown to 10 investment professionals, creating a robust team specializing in below investment grade securities. The team is comprised of portfolio management, research, trading, and operations. Several principals have worked together for over a decade. Leveraged Finance Investment Committee has combined experience of over 90 years. Each senior member holds:

• Chartered Financial Analyst (CFA) Designation • MBA degrees from highly regarded institutions (Northwestern University, University of Chicago,

and DePaul University)

Team has proven results over time. Demonstrated success in managing assets across vehicle types

• Retail: open-end funds, closed-end funds, asset selection for unit investment trusts • Institutional: separate accounts, structured products (CLOs), commingled institutional funds

Varied and successful experience includes: Rigorous fundamental credit analysis of high yield credit, including bonds, broadly syndicated and

middle market loans in both the US and Europe Work-out/restructuring experience

Leveraged Finance Team Overview The First Trust Leveraged Finance Team currently manages or supervises approximately $923 million in senior secured bank loans and high yield bonds. These assets are spread across a closed-end fund, an open-end fund, an exchange-traded fund, a series of unit investment trusts, and two institutional separate accounts.

*First Trust Short Duration High Income fund is included under retail bank loan assets, although the fund holds some high yield assets as well.

First Trust Leveraged Finance Team

2

$586.7 $166.3

$170.5

Assets under Management and Supervision

as of 3/31/2013 in Millions

Bank Loans*

High Yield Bonds

Institutional Separate Accounts


Source: S&P/LSTA Leveraged Loan Index March 2013, Review S&P LCD High-Yield Weekly Review April 4, 2013, Barclays Capital March 2013, Russell Investments March 2013

Trade and Other Current Liabilities

Subordinated Bonds

Senior Loans

Preferred Stock

Common Stock

Senior Loans typically:

Are senior secured Are floating interest rate Have protective

covenants High-Yield Bonds typically:

Have call protection Pay a fixed coupon Are junior to senior

secured loans

Characteristics of Senior Loans and High-Yield Bonds

3

$-

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

Billi

ons

Total Par Amount Outstanding

Institutional Loans Outstanding High Yield Bonds Outstanding


Senior Secured Floating Rate Loans represented by the S&P LSTA Index. 1-5 Year US TIPS represented by the Barclays Capital 1-5 Year US TIPS Index which tracks inflation-protected securities issued by the U.S. Treasury with maturities from 1 and up to 5 years. 1-3 Year Treasury Index represented by the Barclays Capital 1-3 Year Treasury Index which consists of public obligations of the U.S. Treasury with maturities from 1 and up to 3 years. High Yield Bond Index represented by the BofA Merrill Lynch High Yield Index. US Aggregate Bond Index represented by the Barclays Capital US Aggregate Bond Index which covers the investment-grade, U.S. dollar-denominated, fixed-rate taxable bond market, including Treasuries, government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM pass throughs), ABS, and CMBS. US Government Index represented by the Barclays Capital US Government Index which is comprised of the U.S. Treasury and U.S. Agency Indices and includes Treasuries and U.S. agency debentures. Investment Grade Corporate Index represented by the Barclays Capital US Corporate Investment Grade Index which consists of publicly issued U.S. corporate and specified foreign debentures and secured notes that meet the specified maturity, liquidity, and quality requirements.

In a persistently low interest rate environment, we believe investors have few options to generate a high level of income without assuming significant duration risk.

Fixed Income Opportunity Set

4

Sources: Barclays Capital, S&P LCD, First Trust Advisors L.P. Chart data as of March 31, 2013. The chart is for illustrative purposes only and not indicative of any fund. The illustration excludes the effects of taxes and brokerage commissions or other expenses incurred when investing. Past performance is not indicative of future results. Investors cannot invest directly in an index.

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

9.00%

10.00%

0 1 2 3 4 5 6 7 8

Yie

ld to

Mat

urity

Duration

Fixed Income Opportunity Set -- Duration / YTM

1-3 Year Treasury

Index 1-5 Year US TIPS

Senior Secured Floating Rate

Loans

High Yield Bond Index

US Aggregate Bond Index

US Government

Index

Investment Grade Corporate Index


The Effect of a 1% Rise in Interest Rates

-4.78%

-7.36%

-2.70% -0.95%

1.91%

5.10%

-1.64%

-3.36%

-8.45% -8.15% -10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

Barclays U.S.Treasury, 5-7

Year

Barclays U.S.Treasury, 10

YearBellwether

Barclays U.S.Investment

GradeCorporateBond, 5-7

Year

Barclays USDEmerging

Markets Debt,5-7 Year

Barclays U.S.IntermediateHigh YieldCorporate

Bond

S&P/LSTALeveragedLoan Index

Merrill LynchUS PreferredStock, Fixed

Rate

BarclaysMunicipal, 7Year (6-8)

BarclaysMunicipal,Long Bond

(22+)

BarclaysTaxable

Municipal -Build America

Bonds

Hypothetical Total Return

Yield 1.03% 1.86% 2.39% 4.01% 5.60% 5.10% 4.77% 1.55% 3.40% 3.97% Duration 5.81 9.22 5.09 4.97 3.69 0.25 6.40 4.91 11.85 12.12

The table illustrates hypothetical examples and does not represent the return on any particular investment. Data as of 3/31/13. Effective duration is used for the preferred index and modified adjusted duration for all others. Duration is a measure of a bond’s sensitivity to interest rate changes that reflects the change in a bond’s price given a change in yield. The performance figures are for illustrative purposes only and do not account for all factors that may potentially impact returns. Given that senior loans typically pay a floating rate of interest, they tend to have an effective duration of approximately zero. As such, we estimate the duration for senior loans to be approximately 0.25 years.

5


Comparison of Asset Class Performance in Periods of Rising Interest Rates

Source: Credit Suisse Asset Management. Credit Suisse Asset Management defines periods of rising rates as those in which the 10-Year US Treasury yield rose on a monthly basis for a period of six months or more. Indices used as proxies for asset classes are: US Equities (S&P 500 Index); Inflation-Linked (Barclays Capital US TIPS Index); Senior Loans (Credit Suisse Leveraged Loan Index); High Yield (Barclays Capital US Corporate High Yield Index); US Core Bonds (Barclays Capital US Aggregate Bond Index); and Emerging Markets Debt (Barclays Capital Emerging Markets Sovereign Bond Index). Indices are unmanaged and cannot be purchased directly by investors. The historical performance of the indices shown is for illustrative purposes only and it is not intended to imply or guarantee the future performance of any asset class or any fund. Past performance is no guarantee of future results.

6


Credit Spreads Remain Attractive

High Yield Bonds Average Spread over Treasuries

March 2001 – March 2013

Senior Loans Average Spread over LIBOR March 2001 – March 2013

Sources: Bloomberg and Standard & Poor's Leveraged Commentary and Data March 2013. High-yield bonds are represented by the BofA Merrill US High-Yield Master II Constrained Index. The BofA Merrill Lynch US High Yield Master II Constrained Index tracks the performance of U.S. dollar denominated below investment grade corporate debt publicly issued in the U.S. domestic market but caps issuer exposure at 2%. Senior loans are represented by the S&P/LSTA (Loan Syndications and Trading Association) U.S. Leveraged Loan Index (LLI). LLI tracks the current outstanding balance and spread over LIBOR for fully funded term loans. The average spread over LIBOR is discounted spread to three-year life. These charts are for illustrative purposes only and not indicative of the fund. Past performance is no guarantee of future results.

Average Average

7

T+

T+500

T+1000

T+1500

T+2000

Mar

-01

Mar

-02

Mar

-03

Mar

-04

Mar

-05

Mar

-06

Mar

-07

Mar

-08

Mar

-09

Mar

-10

Mar

-11

Mar

-12

Mar

-13

L+0

L+500

L+1000

L+1500

L+2000

L+2500

Mar

-01

Mar

-02

Mar

-03

Mar

-04

Mar

-05

Mar

-06

Mar

-07

Mar

-08

Mar

-09

Mar

-10

Mar

-11

Mar

-12

Mar

-13

For broker use only. Not for use with the public. 8

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

Senior Loan and High Yield Historical Default Rates January 1999 - December 2012

Senior Loan LTM Default Rate High Yield LTM Default Rate Average Senior Loan Average High Yield

Source: Standard & Poor’s LCD Dec 2012, JP Morgan high yield research Dec 2012, Moody’s Annual Default Study: Corporate Default & Recovery Rates, 1920-2011. Universe includes Senior Loans and High-Yield Bonds. The charts are for illustrative purposes only and not indicative of any fund. Past performance is not indicative of future results. Investors cannot invest directly in an index.

Senior Loan & High Yield Bond Default Rate


An issuer’s weight in the index is a function of the quantity and current price of its outstanding debt.

Market-Cap Weighted Senior Loan and High Yield Indices

Traditional Cap-Weighting Approach

Debt Issuance

Wei

ght i

n In

dex

Traditional market-cap weighted high yield and senior loan index ETFs

Two factors determine which high yield bonds or senior loans are selected, and how they are weighted within the underlying index:

Quantity of corporate issues

Price of loans/bonds

Investment implications: Investors lend more to the most indebted borrowers, and less to the least indebted

borrowers, irrespective of their relative ability to repay their debt. Greater exposure to issuers that are either more heavily indebted or overvalued may

result in an unnecessary drag on investment returns.

9


First Trust Takes a Different Approach

The investment process is a balanced combination of bottom-up fundamental credit analysis and portfolio construction. Asset Selection involves evaluation of the macro-economy, industry

trends, consistency of cash flows, collateral coverage, and management quality.

Portfolio Construction focuses on relative value within a risk management framework.

10


Actively managed high-yield portfolio with a tactical short component.

Seeks to generate both attractive risk-adjusted and absolute returns over time.

Seeks to provide high current income, while potentially limiting interest rate risk.

Management expertise. Low correlation to other asset classes.

First Trust High Yield Long/Short ETF (HYLS)

Fund Ticker HYLS

Fund Inception 2/25/13

CUSIP 33738D408

Intraday NAV HYLSIV

Primary Listing NASDAQ

30-Day SEC Yield* 5.13%

Distribution Rate** 6.67%

Fund Details Potential Benefits of Investing

*As of 3/28/13. 30-day SEC yield is calculated by dividing the net investment income per share earned during the most recent 30-day period by the maximum offering price per share on the last day of the period. **As of 3/28/13. Distribution rate is calculated by dividing the most recent annualized distribution paid or declared by the Net Asset Value. ***Leverage costs include the interest expense on investments sold short. ****Acquired fund fees and expenses reflect the fund’s pro rata share of the indirect fees and expenses incurred by investing in one or more acquired funds.

Management Fee 0.95%

Leverage Costs*** 0.23%

Acquired Fund Fees and Expenses**** 0.01%

Total Annual Expenses 1.19%

11

Performance Summary (%) Since

Inception Fund Performance*

NAV 1.34 After Tax Held 1.10 After Tax Sold 0.76 Market Price 0.96

Index Performance BofA Merrill Lynch US High Yield Constrained Index 1.16

Performance data quoted represents past performance. Past performance is not a guarantee of future results and current performance may be higher or lower than performance quoted. Investment returns and principal value will fluctuate and shares when sold or redeemed, may be worth more or less than their original cost. You can obtain performance information which is current through the most recent month-end by visiting ftportfolios.com. *After Tax Held returns represent return after taxes on distributions. Assumes shares have not been sold. After Tax Sold returns represent the return after taxes on distributions and the sale of fund shares. Returns do not represent the returns you would receive if you traded shares at other times. Market Price returns are based on the midpoint of the bid/ask spread. Returns are average annualized total returns, except those for periods of less than one year, which are cumulative. After-tax returns are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on the investor’s tax situation and may differ from those shown. The after-tax returns shown are not relevant to investors who hold their fund shares through tax-deferred arrangements such as 401(k) plans or individual retirement accounts.

The BofA Merrill Lynch US High Yield Master II Constrained Index tracks the performance of U.S. dollar denominated below investment grade corporate debt publicly issued in the U.S. domestic market but caps issuer exposure at 2%.


Duration Match/Positive Carry Shorting the 5-year Treasury allows the Fund to potentially mitigate some of the interest rate risk of the portfolio.

5-Year treasury duration: 4.67

High-Yield market duration: 4.08

5-Year Treasury/HY market yield differential: 486 bps

Limited Risk at Current Level of Rates Downside risk is manageable if rates move lower

Current 5-Year Treasury price: 99.93

Current 5-year Treasury yield: 0.77%

Estimated one-year loss from shorting if rates decline to 0%: -3.78%

YTW of HY market: 5.63%

Estimated Positive Carry: 185 bps Source: Bloomberg. Data as of 3/31/2013. The chart is for illustrative purposes only. Past performance is no guarantee of future results.

HYLS - Long/Short Strategy – Rate Risk Management

BofA Merrill Lynch US HY Constrained Index used for HY market

Data as of 3/31/2013

This example is for illustrative purposes only. Positive carry calculation does not include any associated costs of shorting. The estimated positive carry calculation above is YTW of HY market less return (loss) from shorting the 5-Yr. Treasury if rates move to 0% in 1 year. Shorting may result in greater gains or greater losses. Short selling creates special risks which could result in increased volatility of returns. There is no guarantee that any leveraging strategy the fund employs will be successful during any period in which it is employed. 12

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

18.00%

5 Year Treasury Yield


First Trust Senior Loan Fund (FTSL)

Senior Loans: Senior loans are generally secured by the assets of a given company. Senior loans secured position within a capital structure may mitigate losses in the event of a default.

Income in a low rate environment: The fund has the potential to provide high current income, while potentially limiting interest rate risk.

Floating Rate: The fund may provide an element of protection against rising interest rates because of the floating-rate feature of the senior loans in which the fund invests.

Diversification: The fund offers a potential diversification benefit because of the historically low correlation of senior loans to other asset classes.

Active Management: FTSL is an actively managed senior loan ETF, providing credit risk management, enhanced liquidity and transparency for senior loan investors.

Fund Ticker FTSL

Anticipated Exchange Listing TBA

CUSIP 33738D309

Intraday NAV FTSLIV

Primary Listing NASDAQ

Expense Ratio 0.85%

Fund Details Potential Benefits of Investing

Portfolio Managers William Housey, CFA Senior Vice President, Senior Portfolio Manager 16 years portfolio management/investment experience

Scott D. Fries, CFA Senior Vice President, Portfolio Manager 18 years investment industry experience

13


Economic backdrop…

• Supportive of senior loan & high-yield credit performance:

Modest economic growth

Low default rates

Generally sound corporate health

• Spreads continue to look attractive

• Potentially offering an attractive yield in a low interest rate environment

FTSL & HYLS Strategy rationale in current environment…

• Through an actively managed strategy, the funds may:

Limit interest rate risk

HYLS: Through short bond positions and allocation to floating rate senior loans

FTSL: Through investment in floating rate senior loans

Limit potential credit losses through continuous credit monitoring and active selection

HYLS: Potentially add additional return opportunities through positive carry of long/short portfolio

Experienced Team…

• Bottom-up fundamentally driven credit process within a risk-controlled portfolio construction framework

• Successful track record 14

Senior Loans and High Yield – Why now?


Appendix

15


Allows the portfolio to potentially benefit from securities that the investment team believes will underperform the high-yield bond market.

Intended to allow the Fund to maintain additional long positions while keeping the Fund’s net exposure to the market at a similar level to a long only strategy.

Shorting high-yield bonds has a natural risk control mechanism, as bonds typically do not trade significantly above par (or call price).

Allows the ability to potentially exploit relative value opportunities within a company's capital structure or within an industry group.

Ability to potentially reduce the volatility of returns over a market cycle compared to a long only strategy.

HYLS Long/Short Strategy Expands the Universe of Return Opportunities

Shorting may result in greater gains or greater losses. Short selling creates special risks which could result in increased volatility of returns. There is no guarantee that any leveraging strategy the fund employs will be successful during any period in which it is employed. This example is for illustrative purposes only.

16

How Does a Long/Short Strategy Work?

William Housey, CFA Senior Vice President, Senior Portfolio Manager 16 years portfolio management/investment experience

Scott D. Fries, CFA Senior Vice President, Portfolio Manager 18 years investment industry experience

Peter Fasone, CFA Vice President, Portfolio Manager 27 years investment industry experience

Portfolio Managers


William Housey, CFA – Senior Vice President, Senior Portfolio Manager Mr. Housey joined First Trust Advisors in June 2010 as Senior Portfolio Manager and has over 16 years of investment experience. Prior to joining First Trust, Mr. Housey was at Morgan Stanley/Van Kampen Funds, Inc. for 11 years and served as Executive Director and Co-Portfolio Manager. Mr. Housey has extensive experience in portfolio management of both leveraged and unleveraged credit products, including Senior Loans, high-yield bonds, credit derivatives and corporate restructurings. Mr. Housey received a B.S. in Finance from Eastern Illinois University and an M.B.A. in Finance as well as Management and Strategy from Northwestern University’s Kellogg School of Business. He also holds the FINRA Series 7, Series 52 and Series 63 licenses. Mr. Housey also holds the Chartered Financial Analyst designation. He is a member of the CFA Institute and the CFA Society of Chicago. Mr. Housey also serves on the Village of Glen Ellyn, IL Police Pension Board. Scott D. Fries, CFA– Senior Vice President, Portfolio Manager Mr. Fries joined First Trust Advisors in June 2010 as Portfolio Manager in the Leveraged Finance Investment Team and has 18 years of investment industry experience. Prior to joining First Trust, Mr. Fries spent 15 years at Morgan Stanley/Van Kampen Funds, Inc. where he most recently served as Executive Director and Co-Portfolio Manager of Institutional Separately Managed Accounts. Mr. Fries received a B.A. in International Business from Illinois Wesleyan University and an M.B.A. in Finance from DePaul University. Mr. Fries holds the Chartered Financial Analyst designation. He is a member of the CFA Institute and the CFA Society of Chicago. Peter Fasone, CFA – Vice President, Portfolio Manager Mr. Fasone joined First Trust Advisors in December 2011 as a Senior Credit Analyst and has 27 years of industry experience, most recently as Senior Global Credit Analyst with BNP Paribas Asset Management. Since 1996, his focus has been primarily on investing in high yield and investment grade bonds for total return and structured credit portfolios. Prior to BNP, Mr. Fasone served as Portfolio Manager and Senior Analyst for Fortis Investments. From 2001 to 2008 he was Vice President and Senior Analyst at ABN AMRO Asset Management where he assumed a leadership role in designing and implementing a disciplined investment process for ABN's $1 billion global high yield fund. Mr. Fasone received a B.S. degree from Arizona State University and an M.B.A. degree from DePaul University's Kellstadt Graduate School of Business. He holds a Chartered Financial Analyst designation and a Certified Public Accountant designation. He is a member of the CFA Institute and the CFA Society of Chicago. Gregory Olsen, CFA – Senior Vice President, Portfolio Specialist and Senior Credit Analyst Mr. Olsen is a Senior Credit Analyst and Portfolio Specialist for the Leveraged Finance Investment Team at First Trust Advisors and has 20 years of investment experience. Mr. Olsen served most recently as Executive Director and Portfolio Specialist in leveraged finance for Morgan Stanley/Van Kampen. His professional experience is concentrated within the credit markets including senior secured loans, high-yield bonds, and convertible securities. Mr. Olsen has traveled extensively throughout the world to work with a broad range of institutional and retail clients. His client experience spans sovereign wealth funds, pension plans, foundations, corporations, family offices, high net worth retail, and traditional retail investors in North America, Europe and Asia. Mr. Olsen received a B.S. in business administration from Illinois Wesleyan University and an M.B.A. with a concentration in finance from DePaul University. He holds the Chartered Financial Analyst designation and is a member of the CFA Institute and the CFA Society of Chicago.

First Trust Advisors Leveraged Finance Team

17


Jeffrey Scott, CFA– Vice President, Chief Credit Officer Mr. Scott is Chief Credit Officer for the Leveraged Finance Investment Team at First Trust Advisors. He has over 22 years of experience in the investment management industry and has extensive experience in credit analysis, product development, and product management. Prior to joining First Trust Advisors, Jeff served as an Assistant Portfolio Manager and as a Senior Credit Analyst for Morgan Stanley/Van Kampen from October 2008 to June 2010. As Assistant Portfolio Manager, Jeff served on a team that managed over $4.0 billion of Senior Loan assets in three separate funds: Van Kampen Senior Loan Fund; Van Kampen Senior Income Trust; and Van Kampen Dynamic Credit Opportunities Fund. His responsibilities included assisting with portfolio construction, buy and sell decision making, and monitoring fund liquidity and leverage. Mr. Scott earned a B.S. in finance and economics from Elmhurst College and an M.B.A. with specialization in analytical finance and econometrics and statistics from the University of Chicago. He also holds the Chartered Financial Analyst designation and is a member of the CFA Institute and the CFA Society of Chicago. Andy Rybak, CFA– Vice President, Trader, Assoc. Credit Analyst Mr. Rybak is the Trader for the Leveraged Finance Investment Team at First Trust Advisors. Mr. Rybak has approximately 13 years of investment industry experience. Prior to joining First Trust, he served as a Senior Associate and team leader overseeing Portfolio Management Support within the Morgan Stanley / Van Kampen Senior Loan Operations Group. Previously at Morgan Stanley / Van Kampen, he worked in the Financial Control group, as well as in the Non-Financial Data and Reporting Group. Mr. Rybak has a B.S. in marketing and an M.B.A. in finance from Lewis University. Mr. Rybak holds the Chartered Financial Analyst designation and is a member of the CFA Institute and the CFA Society of Chicago. Brian Kessler – Vice President, Assoc. Credit Analyst Mr. Kessler is an Associate Credit Analyst for the Leveraged Finance Investment Team at First Trust Advisors. Mr. Kessler is a Generalist, providing research support to the team. He has approximately 8 years of financial experience, all of which has been at First Trust. He received his B.A. from Western Michigan University. He is a candidate for Level III of the CFA exam. Ryan Kommers – Vice President, Manager of Operations Mr. Kommers is Manager of Operations for the Leveraged Finance Investment Team at First Trust Advisors. Mr. Kommers has over 15 years of investment industry experience. Prior to joining First Trust, he served as Vice President, co-manager and compliance officer of structured products in the Senior Loan Group at Morgan Stanley / Van Kampen. Prior to his role as Co-manager of Operations, Mr. Kommers was an operations specialist for the Senior Loan Group. Mr. Kommers received a B.A. in history from University of Illinois. Ashley Luse – Associate, Assoc. Credit Analyst Ms. Luse is an Associate Credit Analyst for the Leveraged Finance Investment Team at First Trust Advisors. Ms. Luse is a Generalist, providing research support to the team. She has approximately 3 years of financial experience, which has been at First Trust. She also has prior internship experience in investment banking and private wealth management. Ms. Luse graduated with honors from Calvin College, where she received a B.A. in Business and Mathematics. Ms. Luse holds Series 7 and Series 63 licenses and has passed Level I of the CFA exam.

18

First Trust Advisors Leveraged Finance Team


First Trust High Yield Long/Short ETF Risks and Considerations

ETF Characteristics

The fund lists and principally trades its shares on the NASDAQ Stock Market LLC.

Investors buying or selling fund shares on the secondary market may incur customary brokerage commissions. Market prices may differ to some degree from the net asset value of the shares. Investors who sell fund shares may receive less than the share’s net asset value. Shares may be sold throughout the day on the exchange through any brokerage account. However, unlike mutual funds, shares may only be redeemed directly from the fund by authorized participants, in very large creation/redemption units.

RISKS

The fund’s shares will change in value, and you could lose money by investing in the fund.

High-yield securities are subject to numerous risks, including higher interest rates, economic recession, deterioration of the junk bond market, possible downgrades and defaults of interest and/or principal. High yield securities are subject to greater market fluctuations and risk of loss than securities with higher ratings. These securities are issued by companies that may have limited operating history, narrowly focused operations, and/or other impediments to the timely payment of periodic interest and principal at maturity.

High-yield securities are subject to credit risk, interest rate risk, income risk and prepayment risk. Credit risk is the risk that an issuer of a security will be unable or unwilling to make dividend, interest and/or principal payments when due and the related risk that the value of a security may decline because of concerns about the issuer’s ability to make such payments. Interest rate risk is the risk that if interest rates rise, the prices of the fixed-rate instruments held by the fund may fall. Income risk is the risk that if interest rates fall, the income from the fund’s portfolio will decline as the fund intends to hold floating- rate debt that will adjust lower with falling interest rates. Prepayment risk is the risk that an issuer of a loan may exercise its right to pay principal on an obligation earlier than expected. This may result in the fund reinvesting proceeds at lower interest rates, resulting in a decline in the fund’s income.

19

You should consider the fund’s investment objectives, risks, and charges and expenses carefully before investing. Contact First Trust Portfolios L.P. at 1-800-621-1675 to obtain a prospectus or summary prospectus which contains this and other information about the fund. The prospectus or summary prospectus should be read carefully before investing.


First Trust High Yield Long/Short ETF Risks and Considerations

Not FDIC Insured • Not Bank Guaranteed • May Lose Value

20

Risks Continued

The fund is subject to market risk. Market risk is the risk that a particular security owned by the fund or shares of the fund in general may fall in value.

The fund may invest in convertible bonds. The market values of convertible bonds tend to decline as interest rates increase and, conversely, to increase as interest rates decline. A convertible bond’s market value also tends to reflect the market price of the common stock of the issuing company.

Companies that issue loans tend to be highly leveraged and thus are more susceptible to the risks of interest deferral, default and/or bankruptcy. Senior floating rate loans, in which the fund may invest, are usually rated below investment grade but may also be unrated. As a result, the risks associated with these loans are similar to the risks of high yield fixed income instruments. Loans are subject to pre-payment risk. The degree to which borrowers prepay loans may be affected by general business conditions, the financial condition of the borrower and competitive conditions among loan investors, among others. The fund may not be able to reinvest the proceeds received on terms as favorable as the prepaid loan.

In times of unusual or adverse market, economic, regulatory or political conditions, the fund may not be able, fully or partially, to implement its short selling strategy.

Lower-quality debt tends to be less liquid than higher-quality debt. The fund may invest in Distressed Securities and many Distressed Securities are illiquid or trade in low volumes and thus may be more difficult to value.

The fund invests in securities of non-U.S. issuers. Such securities are subject to higher volatility than securities of domestic issuers. Because the fund’s NAV is determined on the basis of U.S. dollars and the fund invests in foreign securities, you may lose money if the local currency of a foreign market depreciates against the U.S. dollar.

The fund currently intends to effect a significant portion of creations and redemptions for cash, rather than in-kind securities. As a result, the fund may be less tax-efficient than if it were to sell and redeem its shares principally in-kind.

The fund is subject to management risk because it is an actively managed portfolio. In managing the fund’s investment portfolio, the advisor will apply investment techniques and risk analyses that may not have the desired result. There can be no guarantee that the fund will meet its investment objectives.


First Trust Senior Loan Fund Risks and Considerations

ETF Characteristics

The fund intends to list its shares on the NASDAQ Stock Market LLC.

Investors buying or selling fund shares on the secondary market may incur customary brokerage commissions. Market prices may differ to some degree from the net asset value of the shares. Investors who sell fund shares may receive less than the share’s net asset value. Shares may be sold throughout the day on the exchange through any brokerage account. However, unlike mutual funds, shares may only be redeemed directly from the fund by authorized participants, in very large creation/redemption units.

RISKS

The fund’s shares will change in value and you could lose money by investing in the fund.

The fund is subject to market risk. Market risk is the risk that a particular security owned by the fund or shares of the fund in general may fall in value.

Senior Loan securities are subject to numerous risks, including credit risk, interest rate risk, income risk and prepayment risk. Credit risk is the risk that an issuer of a security will be unable or unwilling to make dividend, interest and/or principal payments when due and the related risk that the value of a security may decline because of concerns about the issuer’s ability to make such payments. Credit risk may be heightened for senior loans because companies that issue loans tend to be highly leveraged and thus are more susceptible to the risks of interest deferral, default and/or bankruptcy. Interest rate risk is the risk that if interest rates rise, the prices of the fixed-rate instruments held by the fund may fall. Income risk is the risk that if interest rates fall, the income from the fund’s portfolio will decline as the fund intends to hold floating- rate debt that will adjust lower with falling interest rates. Prepayment risk is the risk that an issuer of a loan may exercise its right to pay principal on an obligation earlier than expected. This may result in the fund reinvesting proceeds at lower interest rates, resulting in a decline in the fund’s income.


Risks Continued

Senior floating rate loans are usually rated below investment grade but may also be unrated. As a result, the risks associated with these loans are similar to the risks of high yield fixed income instruments. High yield securities are subject to greater market fluctuations and risk of loss than securities with higher ratings. High-yield securities are subject to numerous risks, including higher interest rates, economic recession, deterioration of the junk bond market, possible downgrades and defaults of interest and/or principal. High yield securities are subject to greater market fluctuations and risk of loss than securities with higher ratings. These securities are issued by companies that may have limited operating history, narrowly focused operations, and/or other impediments to the timely payment of periodic interest and principal at maturity.

Lower-quality debt tends to be less liquid than higher-quality debt.

The fund invests in securities of non-U.S. issuers. Such securities are subject to higher volatility than securities of domestic issuers. Because the fund’s NAV is determined on the basis of U.S. dollars and the fund invests in foreign securities, you may lose money if the local currency of a foreign market depreciates against the U.S. dollar.

The fund currently intends to effect a significant portion of creations and redemptions for cash, rather than in-kind securities. As a result, the fund may be less tax-efficient than if it were to sell and redeem its shares principally in-kind.

The fund is subject to management risk because it is an actively managed portfolio. In managing the fund’s investment portfolio, the advisor will apply investment techniques and risk analyses that may not have the desired result. There can be no guarantee that the fund will meet its investment objectives.

The fund is classified as “non-diversified.” A non-diversified fund generally may invest a larger percentage of its assets in the securities of a smaller number of issuers. As a result, the fund may be more susceptible to the risks associated with these particular issuers, or to a single economic, political or regulatory occurrence affecting these issuers.

First Trust Senior Loan Fund Risks and Considerations

Not FDIC Insured • Not Bank Guaranteed • May Lose Value


1-866-848-9727 www.ftportfolios.com

23

Documents

Active Management: The Benefits in High Yield And Senior ...forums.capitallink.com/cef/2013/pres/housey.pdf · High Yield Bond Index represented by the BofA Merrill Lynch High Yield