If You Invested in First Trust Nasdaq-100 Select Equal Weight ETF (QQEW)

First Trust Nasdaq-100 Select Equal Weight ETF (QQEW) is an exchange-traded fund that is a series of the First Trust Exchange-Traded Fund. According to shareholder materials and related announcements, the fund has historically sought investment results that correspond generally to the price and yield, before fees and expenses, of the NASDAQ-100 Equal Weighted™ Index. This index is described as the equal-weighted version of the Nasdaq-100 Index®, which is designed to measure the performance of 100 of the largest Nasdaq-listed non-financial companies.

Based on proxy and shareholder approval documents, the fund’s investment objective is a fundamental policy that can only be changed with shareholder approval. First Trust Advisors L.P. (FTA), the fund’s investment advisor, recommended a change to this objective so that the fund would instead seek investment results that correspond generally to the price and yield, before fees and expenses, of the Nasdaq-100 Select Equal Weight™ Index. This new index is also equal-weighted but is designed to track the performance of fifty companies from the Nasdaq-100 Index® with the highest combined “Blended Quality and Growth Scores.”

The Blended Quality and Growth Score referenced in the proxy materials is calculated for each constituent of the Nasdaq-100 Index® and is a composite of quality and growth metrics. These metrics include 3‑year revenue annualized growth, 3‑year forward earnings per share estimate annualized growth, 3‑year free cash flow annualized growth, return on equity, and profit margin. The fifty constituents with the highest combined scores are selected for inclusion in the Nasdaq-100 Select Equal Weight™ Index and are equally weighted.

Fund structure and advisory relationship

The fund is part of the First Trust Exchange-Traded Fund trust and is advised by First Trust Advisors L.P., a federally registered investment advisor. According to the provided information, FTA is based in Wheaton, Illinois and serves as the investment advisor to the fund. FTA and its affiliate First Trust Portfolios L.P. (FTP), a FINRA-registered broker-dealer, are privately held companies that provide investment services through vehicles such as exchange-traded funds, unit investment trusts, closed-end funds, mutual funds and separate managed accounts. FTP acts as sponsor of First Trust unit investment trusts and as a distributor of mutual fund shares and exchange-traded fund creation units.

Proxy materials indicate that the fund’s advisory arrangement and fee structure have been evaluated relative to other exchange-traded funds advised by FTA and to industry practice. Historically, the fund has paid an investment management fee to FTA and also separately paid other operating expenses. Shareholders have approved a new investment management agreement under which the fund will pay a single “unitary fee” to FTA, and FTA will then be responsible for paying other expenses of the fund, subject to certain exclusions. This unitary fee structure is described in the proxy statement as common in the ETF industry and intended to provide clarity and consistency of fees, including a more predictable expense ratio.

Index-tracking approach and investment focus

According to the proxy statement, when the fund tracks the NASDAQ-100 Equal Weighted™ Index, it normally invests at least 90% of its net assets (including investment borrowings) in the securities that comprise that index. In connection with the transition to the Nasdaq-100 Select Equal Weight™ Index, the fund’s policy is expected to change so that it will normally invest at least 80% of its net assets (including investment borrowings) in the securities that comprise the new index. This change is described as intended to align the fund with policies of more recently launched index-based ETFs and to provide additional flexibility to the advisor in managing the fund.

The proxy materials state that both the current and new indexes provide exposure to constituents of the Nasdaq-100 Index®, so the fund’s general focus on Nasdaq-listed non-financial companies is expected to continue. However, the methodology of the Nasdaq-100 Select Equal Weight™ Index emphasizes growth and quality metrics through the Blended Quality and Growth Score. As a result, the proxy statement notes that the fund will be subject to growth stocks investment risk in light of the new index methodology.

Fund name and ticker symbol

In connection with the change in investment objective and underlying index, shareholder documents explain that the fund’s name is expected to change from “First Trust NASDAQ-100 Equal Weighted Index Fund” to “First Trust Nasdaq-100 Select Equal Weight ETF.” The ticker symbol QQEW is expected to remain the same. The fund’s CUSIP and ticker are not expected to change according to the shareholder communication describing the approved changes.

Governance and shareholder approvals

The fund is overseen by a Board of Trustees of the First Trust Exchange-Traded Fund. Proxy statements describe special meetings of shareholders at which investors are asked to vote on matters such as changes to the fund’s investment objective, approval of new investment management agreements, and the election or re-election of trustees. The documents explain that the fund’s investment objective is a fundamental policy, and any change requires shareholder approval. They also outline how shareholders can vote (by mail, phone, internet, or in person) and emphasize the importance of shareholder participation for achieving quorum and approving proposals.

Materials relating specifically to the investment objective change describe that, if shareholders did not approve the proposal to move to the Nasdaq-100 Select Equal Weight™ Index, the fund would continue to seek investment results that correspond generally to the price and yield of the NASDAQ-100 Equal Weighted™ Index. The Board of Trustees indicates that, in considering the fund’s long-term future, it would review all alternatives available to the fund and take actions it deems in the best interests of shareholders.

Risk and repositioning considerations

The proxy statement explains that changing the fund’s underlying index requires a transition in the securities the fund holds, referred to as a “Repositioning.” To implement the new investment objective and index, the fund will need to acquire and dispose of securities, incurring trading costs such as brokerage commissions. The materials note that the fund may recognize gains and/or losses as a result of disposing of securities it holds prior to the investment objective change, and that any gains may be taxable to shareholders to the extent not offset by capital loss carryforwards. These trading costs and taxes are to be borne by the fund and its shareholders.

In addition, the proxy statement notes that, after the change, the fund will continue to be an ETF that, in general terms, seeks to track an equity index providing exposure to constituents of the Nasdaq-100 Index®. Therefore, it will remain subject to the principal investment risks set forth in its current prospectus, with the additional growth stocks investment risk associated with the new index methodology.

Advisor’s perspective

According to the proxy materials, First Trust Advisors L.P. recommended the investment objective change based on its analysis. The advisor believes that, over time, the change may cause the fund to be more attractive to investors in exchange-traded funds and may potentially benefit fund performance. The materials also state that it is impossible to predict the future and that no assurance can be given that the desired results will be achieved. The discussion of the unitary fee structure similarly notes that it is intended to benefit shareholders by providing clarity and consistency of fees, while also explaining that such a structure generally eliminates the possibility of a reduction in the fund’s expense ratio if certain expenses decrease, which would instead benefit the advisor.

Role within the First Trust product family

Within the broader First Trust product lineup, QQEW is one of multiple exchange-traded funds offered under the First Trust Exchange-Traded Fund trust. FTA’s materials indicate that it provides investment advisory services across unit investment trusts, ETFs, closed-end funds, mutual funds and separate managed accounts, and that FTP acts as sponsor or distributor for various products. QQEW fits within this framework as an index-based ETF that seeks to track an equity index tied to the Nasdaq-100 Index® universe, using an equal-weighted methodology and, following the approved change, a selection approach based on blended quality and growth metrics.