Enhanced Indexing

Customized Beta Beta Plus

Alternative Beta New Beta

Alternative Indexing
Smart Beta

A Guide to AlphaDEX Exchange-Traded Funds

Seeking Alpha in a Smart Way

For decades, ETFs have served investors looking to replicate the returns of the market. Originally ETFs were based on traditional market indexes in which all of
the stocks in a relevant market segment were included and generally weighted based on market capitalization. Such traditional market indexes, like the S&P
500, overweight larger companies simply because of their size and not their actual worth.

Indexing Transformed Alpha, Beta and Smart Beta

The ETF industry has evolved to include alpha-pursuing index funds for
investors looking to achieve potentially better investment results. This
approach has been referred to as enhanced indexing, new beta, customized
beta, beta plus, and smart beta. No matter how you say it, it describes one
thing an enhanced form of passive index investing. This investment
approach is based on indexes which select and weight stocks using methods
other than the market capitalization weighted approach used by traditional
index funds.
In the early 1990s, several academic studies were released supporting the
ability to generate outperformance through the use of purely quantitative
measures. Drawing on this academic research, another evolution of enhanced
indexing occurred fundamental indexing. A fundamental index attempts to
limit exposure to over-priced stocks and increase exposure to those
companies which are trading at more attractive valuations based on its
fundamentals. Determining how much weight a company should represent
within an index is based on fundamental screens and factors such as:
Price-to-book value
Price-to-cash flow
Price-to-sales
Return on assets
Similar to active management, the goal of a fundamental index is to identify
those stocks from within a traditional broad-based index which exhibit the
fundamental characteristics that enable them to provide the greatest potential
for capital appreciation. Because ETFs provide additional features such as tax
efficiency, exchange-traded liquidity, and transparency, we believe ETFs may
be a better alternative to active management when seeking alpha.
Alpha and beta are two common measurements of an investments risk
that have been used for decades. Smart beta is a new term that describes
enhanced indexing strategies that attempt to provide exposure to a beta
index but with better risk adjusted returns.
Beta is a historical measure of volatility and measures how an investment
moves versus a benchmark index. In other words, it is the return achieved
from having overall market exposure.
Alpha is the portion of return arising from non-market risk and measures
performance on a risk adjusted basis. In other words, alpha is an indicator
of whether investors are being compensated for the risk taken.
Smart beta begins with a beta index and applies a rules-based methodology
to select stocks. It attempts to provide a better overall risk/return profile
than the cap-weighted index from which it selects stocks.
The First Trust AlphaDEX exchange-traded funds are designed to track the
performance of a group of indexes which employ the proprietary, rules-based
AlphaDEX fundamental stock selection methodology. While different methods
of indexing will have inherent limitations at different times, we believe that
fundamental indexes have the potential to generate higher long-term returns,
and often times reduce volatility, compared to similar cap-weighted indexes.
Index-Based Beta ETFs Actively-Managed Funds
Liquid Intraday Select and weight stocks
Fully Invested based on investment merit
Tax Efficient Potential to provide alpha
Transparent

Index-based, no active Select and weight stocks based on

management merit, not size
Fully transparent rules-based Potential for excess returns and
methodology positive alpha

Not FDIC Insured Not Bank Guaranteed May Lose Value

AlphaDEX Methodology

The indexes which provide the basis for the AlphaDEX exchange-traded funds start with a broad-based index and are enhanced through the use of the
patented AlphaDEX stock selection methodology. This methodology is designed to use fundamental valuation factors to select and weight stocks based on their
investment merit. The methodology used to select the stocks for the domestic equity AlphaDEX ETFs is described in the chart below.

Begin with the constituents of a broad-based

1 index and rank all stocks on growth and value
factors to determine a growth and value score.
Broad-Based Index Constituents

Value Factors: Growth Factors: Reconstitute

P/B, P/CF, ROA Momentum, Sales Growth, Price/Sales and Rebalance

Based on style designations, determine each

2 stocks selection score. Stocks designated as
core or blend receive the better of their growth
Value Core/Blend Growth

or value score.

Rank all stocks by their final selection score and Eliminate

3 eliminate from consideration the lowest 25%.
Keep Top 75% Bottom 25%

Place the remaining stocks into quintiles based

4 on their selection score rank. The top quintile
stocks get a total weight of 5/15ths, the second
33.3%
26.7%
20.0%
quintile stocks get a total weight of 4/15ths, etc.
13.3%
Each stock is equally-weighted within its quintile.
6.7%

Repeat the process quarterly, rebalancing and

5 reconstituting the index. 3 Month Hold

Risk Considerations
A funds return may not match the return of the index. Securities held by a fund will generally
not be bought or sold in response to market fluctuations.
Investors buying or selling fund shares on the secondary market may incur 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 shares 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 funds by authorized participants,
in very large creation/redemption units.
A funds shares will change in value, and you could lose money by investing in a fund. One
of the principal risks of investing in a fund is market risk. Market risk is the risk that a
particular stock owned by a fund, fund shares or stocks in general may fall in value. There
can be no assurance that a funds investment objective will be achieved.
A fund may invest in securities issued by companies concentrated in a particular industry,
sector or country. A fund may invest in small capitalization and mid capitalization
companies. Such companies may experience greater price volatility than larger, more
established companies.
An investment in a fund containing securities of non-U.S. issuers is subject to additional
risks, including currency fluctuations, political risks, withholding, the lack of adequate
financial information, and exchange control restrictions impacting non-U.S. issuers. These
risks may be heightened for securities of companies located in, or with significant operations
in, emerging market countries.
A fund may invest in depositary receipts which may be less liquid than the underlying shares
in their primary trading market. A fund may effect a portion of creations and redemptions
for cash, rather than in-kind securities. As a result, a fund may be less tax-efficient.
The funds are classified as non-diversified and may invest a relatively high percentage of
their assets in a limited number of issuers. As a result, the funds may be more susceptible to
a single adverse economic or regulatory occurrence affecting one or more of these issuers,
experience increased volatility and be highly concentrated in certain issuers.
The AlphaDEX Family of ETFs

Domestic Global/International
Sector Size/Style Broad/Regional Country

FXD FXG FMK FDT FAUS FBZ

First Trust First Trust First Trust First Trust First Trust Australia First Trust Brazil
Consumer Consumer Staples Mega Cap Developed AlphaDEX Fund AlphaDEX Fund
Discretionary AlphaDEX Fund AlphaDEX Fund Markets ex-US
AlphaDEX Fund AlphaDEX Fund

FXN FXO FTA FEX FTC FDTS FCAN FCA

First Trust Energy First Trust First Trust First Trust First Trust First Trust First Trust Canada First Trust China
AlphaDEX Fund Financials Large Cap Value Large Cap Core Large Cap Growth Developed Markets AlphaDEX Fund AlphaDEX Fund
AlphaDEX Fund AlphaDEX Fund AlphaDEX Fund AlphaDEX Fund ex-US Small Cap
AlphaDEX Fund

FXH FXR FNK FNX FNY FEM FGM FHK

First Trust First Trust First Trust First Trust First Trust First Trust First Trust First Trust
Health Care Industrials/ Mid Cap Value Mid Cap Core Mid Cap Growth Emerging Markets Germany Hong Kong
AlphaDEX Fund Producer Durables AlphaDEX Fund AlphaDEX Fund AlphaDEX Fund AlphaDEX Fund AlphaDEX Fund AlphaDEX Fund
AlphaDEX Fund

FXZ FXL FYT FYX FYC FEMS FJP FKO

First Trust First Trust First Trust First Trust First Trust First Trust First Trust Japan First Trust
Materials Technology Small Cap Value Small Cap Core Small Cap Growth Emerging Markets AlphaDEX Fund South Korea
AlphaDEX Fund AlphaDEX Fund AlphaDEX Fund AlphaDEX Fund AlphaDEX Fund Small Cap AlphaDEX Fund
AlphaDEX Fund

FXU FAB TUSA FAD FPA FSZ FTW

First Trust Utilities First Trust First Trust First Trust First Trust Asia First Trust First Trust Taiwan
AlphaDEX Fund Multi Cap Value Total US Market Multi Cap Growth Pacific ex-Japan Switzerland AlphaDEX Fund
AlphaDEX Fund AlphaDEX ETF AlphaDEX Fund AlphaDEX Fund AlphaDEX Fund

FEP FKU
First Trust Europe First Trust
AlphaDEX Fund United Kingdom
AlphaDEX Fund

FEUZ
First Trust
Eurozone
AlphaDEX ETF

FLN
First Trust
Latin America
AlphaDEX Fund

You should consider a funds investment objectives, risks, and charges and expenses carefully before investing. Contact First Trust Portfolios L.P. at 1-800-621-1675 or
visit www.ftportfolios.com 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.
AlphaDEX is a registered trademark of First Trust Portfolios L.P. First Trust Portfolios L.P. has obtained a patent for the AlphaDEX stock selection methodology from the United States Patent and Trademark Office.
First Trust Advisors L.P. is the adviser to the funds. First Trust Advisors L.P. is an affiliate of First Trust Portfolios L.P., the funds distributor.

1-866-848-9727 www.ftportfolios.com ALPHABRO0616