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The Facts and Fallacies of ETF Investing

Stan UelandETF Portfolio Manager

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ETFs - State of the State

• ETPs @ 2010*– > 1,000 U.S. Listed– > $ 1 Trillion Assets– 40% Assets in 10 ETPs– 50% ETFs have < $100m– Beta vs. Alpha

• ETF Structure– vs. Mutual Funds– vs. CEFs– vs. Stocks

• Unique to ETFs– INAV– Basket– Creation/Redemption

Process

* Includes ETFs, ETNs as of 12/31/2010

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TICKER SHARES PRICE MV of 1 CUAFFX 7,987 $6.34 $50,638ALXN 1,542 $47.99 $74,001AMGN 1,156 $54.33 $62,805AMLN 5,107 $12.24 $62,510BIIB 1,441 $44.16 $63,635CELG 1,257 $52.62 $66,143CEPH 1,304 $53.59 $69,881CRA 10,634 $6.20 $65,931GENZ 1,268 $51.70 $65,556GILD 1,536 $43.43 $66,708HGSI 3,552 $19.43 $69,015ILMN 1,626 $41.02 $66,699ITMN 4,919 $12.32 $60,602LIFE 1,458 $47.05 $68,599MIL 989 $69.42 $68,656MYGN 2,624 $25.06 $65,757NKTR 7,381 $8.57 $63,255OSIP 2,223 $32.00 $71,136SQNM 19,593 $3.28 $64,265VRTX 2,036 $32.11 $65,376

Total: $1,311,168Per share: $26.22

FT NYSE Arca Biotechnology Index Fund (FBT) Basket Shares

Example of ETF Pricing

This example is for illustrative purposes and does not represent any actual investment or fund. Source: First Trust Advisors, 8/6/09.

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This example is for illustrative purposes only. Fund: FTA – First Trust Large Cap Value AlphaDEX Fund. Source: Bloomberg.

The intraday NAV for an ETF is typically calculated and published by a third party under a separate symbol every 15 seconds throughout the trading day over the Consolidated Tape based on the current value of the securities specified for creation and redemption plus any estimated cash amounts associated with the creation unit, all on a per-ETF share basis. The intraday NAV is designed to give investors a sense of the relationship between a basket of securities that are representative of those held in the ETF’s portfolio and the share price of the ETF on an intraday basis.

Example of ETF Pricing

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Liquidity of the underlying holdings is a significant factor in the liquidity of an ETF.

Liquidity of underlying: Shares trade $7.5b per day

$10m / $7.5b = 0.13% of ADV

Buy $10m in FNX (First Trust Mid Cap Core AlphaDEX Fund)

Trader’s perspective:“Stock trades $467k per day”

$10m / $467k= 2,140% of ADV

This example is for illustrative purposes only. ADV statistics as of 1/7/2010.

ETF Liquidity

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ETF SponsorETF

Market MakerAP

InvestorAdvisor

ETF

ETF Structure Provides Liquidity

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Market MakerAP

ETF SponsorETF

This example is for illustrative purposes and does not represent any actual investment or fund.

ETF Structure – Creation

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8,300 = Average Daily Volume 145,000 = Total Volume for the Day 92,800 = Size of a Single Trade $4.6m (28%) = Growth in the Fund for the Day

ETF Liquidity Examined

FTA – First Trust Large Cap Value AlphaDEX Fund. (7/1/08) This example uses actual data for illustrative purposes only.

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ETF Liquidity – Cases in Point

• 1.8M share trade (17k = 30 day ADV)• Microcaps – Smallest/Compelling

FDM

• 3.8M shares trade (21k = 30 day ADV)• $114M – growth in a single day

BICK

• 16.3M shares trade (257k = 30 day ADV)• 250k shares at the bid

FXO

• 4.5M shares trade (85k = 30 day ADV)• Buying commodity exposure via equities

CU

FDM – 5/7/10; BICK – 10/4/10; FXO & CU – 3/23/11

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ETF Structure – Redemption

Market MakerAP

ETF SponsorETF

This example is for illustrative purposes and does not represent any actual investment or fund.

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Traditional Mutual Fund Example

ETF Structure Compared to Mutual Fund Structure

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Market MakerAP

InvestorAdvisor

ETF

ETF SponsorETF

ETF Structure – Redemption Revisited

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17.6

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8:30 9:00 9:30 10:00 10:30 11:00

FXG-IV FXG trades

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8:30 9:00 9:30 10:00 10:30 11:00

FXD-IV FXD trades

Despite a meaningful selloff, both small and large ETFs trade up tight to their Indicative Value.

ETF Liquidity – Case in Point (FXG & FXD)

Graphs reflect Central time. Source: Bloomberg – 5/21/10. This example uses actual data for illustrative purposes only.

Ticker: FXGMarket Cap 26,131,65330 day ADV 14,2818:30-11 Volume 110,385% of 30 day ADV 773%Shares Redeemed 100,000

Ticker: FXDMarket Cap 150,330,070 30 day ADV 173,251 8:30-11 Volume 1,148,268 % of 30 day ADV 663%Shares Redeemed 300,000

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Thoughts on Trading ETFs

Tips— Open/Close— Limits— iNAV— INTL funds— Stops Stop Limits Alerts— Implementation

Engage Us— Assistance— Access— Trading Desks

‘It’s an ETF’

This example is for illustrative purposes and does not represent any actual investment or fund. Graph reflects Central time. Blue line = iNav, Red line = Best Bid, Green line = Best Offer

8:30 9:00 9:30 10:0010:3011:0021.4

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Daily Fund Pricing

Time

Price

Example of Daily Fund Pricing

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 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.