Principal Risks
As with all funds, a shareholder is subject
to the risk that his or her investment could lose money. The principal risks affecting shareholders' investments in the Fund
are set forth below. An investment in the Fund is not a bank deposit and is not insured or guaranteed by the FDIC or any government
agency.
United States Regulatory Risks of
the Marijuana Industry: The possession and use of marijuana, even for medical purposes, is illegal under federal and certain
states' laws, which may negatively impact the value of the Fund's investments. Use of marijuana is regulated by both
the federal government and state governments, and state and federal laws regarding marijuana often conflict. Even in those states
in which the use of marijuana has been legalized, its possession and use remains a violation of federal law. Federal law criminalizing
the use of marijuana pre-empts state laws that legalizes its use for medicinal and recreational purposes. It is not yet known
whether the current Administration will push back against states where marijuana use and possession is legal, step up the enforcement
of federal marijuana laws and the prosecution of nonviolent federal drug crimes and, in the event the Rohrabacher-Blumenauer amendment
is not renewed by Congress, begin using federal funds to prevent states from implementing laws that authorize medical marijuana
use, possession, distribution, and cultivation. Such actions by the DOJ could produce a chilling effect on the industry's
growth and discourage banks from expanding their services to cannabis-related companies where such services are currently limited.
This conflict between the regulation of marijuana under federal and state law creates volatility and risk for all cannabis-related
companies. In particular, the stepped up enforcement of marijuana laws by the federal government would adversely affect the value
of the Fund's U.S. investments. Certain Cannabis Companies or Pharmaceutical Companies may never be able to legally produce
and sell products in the United States or other national or local jurisdictions.
Marijuana is a Schedule I controlled
substance under the Controlled Substances Act ("CSA") (21 U.S.C. § 811), meaning that it has a high potential
for abuse, has no currently "accepted medical use" in the United States, lacks accepted safety for use under medical
supervision, and may not be prescribed, marketed or sold in the United States. Few drug products containing natural cannabis or
naturally-derived cannabis extracts have been approved by the Food and Drug Administration ("FDA") for use in the
United States or obtained registrations from the United States Drug Enforcement Administration ("DEA") for commercial
production.
Cannabis-related companies in the U.S.
that engage in medical or pharmaceutical research or the production and distribution of controlled substances such as marijuana
must be registered with the DEA to perform such activities and have the security, control, recordkeeping, reporting and inventory
mechanisms required by the DEA to prevent drug loss and diversion. Failure to obtain the necessary registrations or comply with
necessary regulatory requirements may significantly impair the ability of certain companies in which the Fund invests to pursue
medical marijuana research or to otherwise cultivate, possess or distribute marijuana.
Non-U.S. Regulatory Risks of the Marijuana
Industry: The companies in which the Fund invests are subject to various laws, regulations and guidelines relating to the manufacture,
management, transportation, storage and disposal of marijuana, as well as being subject to laws and regulations relating to health
and safety, the conduct of operations and the protection of the environment. Even if a company's operations are permitted
under current law, they may not be permitted in the future, in which case such company may not be in a position to carry on its
operations in its current locations. Additionally, controlled substance legislation differs between countries and legislation in
certain countries may restrict or limit the ability of certain companies in which the Fund invests to sell their products.
Operational Risks of the Marijuana Industry:
Companies involved in the marijuana industry face intense competition, may have limited access to the services of banks, may have
substantial burdens on company resources due to litigation, complaints or enforcement actions, and are heavily dependent on receiving
necessary permits and authorizations to engage in medical marijuana research or to otherwise cultivate, possess or distribute marijuana.
Since the use of marijuana is illegal under United States federal law, federally regulated banking institutions may be unwilling
to make financial services available to growers and sellers of marijuana.
United States Regulatory Risks of
Hemp: The Agriculture Improvement Act of 2018 (or the "Farm Bill") effectively removes hemp from the list
of controlled substances and allows states to regulate its production, commerce and research with approval from the United States
Department of Agriculture. Certain Index constituents may sell dietary supplements and/or foods containing CBD within the
United States. The Farm Bill delegates to the FDA responsibility for regulating products containing hemp or derivatives thereof
(including CBD) under the Federal Food, Drug, and Cosmetic Act (the "FD&C"). Under the FD&C, if a substance
(such as CBD) is an active ingredient in a drug product that has been approved by the FDA, then the substance cannot be sold in
dietary supplements or foods without FDA approval, unless the substance was marketed as a dietary supplement or as a conventional
food before the drug was approved or before the new drug investigations were authorized. The FDA has publicly taken the
position that CBD cannot be sold in dietary supplements or foods because CBD is an active ingredient in an FDA-approved drug.
However, companies that sell CBD in dietary supplements and foods have taken the position that CBD was marketed as a dietary supplement
and/or as a conventional food before the drug was approved or before the new drug investigations were authorized, and because
the FDA has not brought enforcement action against such companies, this question of fact has not yet been adjudicated. In the
absence of a conclusive legal determination to the contrary, as of the date of this prospectus, it has not been determined that
the sale of dietary supplements and/or foods containing CBD within the United States would cause a company's securities
to be ineligible for inclusion in the Index. It is possible that such a legal determination or future federal and/or state laws
or regulations could drastically curtail permissible uses of hemp, which could have an adverse effect of the value of the Fund's
investments in companies with business interests in hemp and hemp-based products.
The remaining principal risks are presented
in alphabetical order. Each risk summarized below is considered a "principal risk" of investing in the Fund, regardless
of the order in which it appears.
Associated Risks of Investments
in SPACs. The Fund invests in equity securities of SPACs, which raise assets to seek potential acquisition opportunities.
Unless and until an acquisition is completed, a SPAC generally invests its assets in U.S. government securities, money market
securities, and cash. Because SPACs have no operating history or ongoing business other than seeking acquisitions, the value of
their securities is particularly dependent on the ability of the entity's management to identify and complete a profitable
acquisition. There is no guarantee that the SPACs in which the Fund invests will complete an acquisition or that any acquisitions
that are completed will be profitable. Public stockholders of SPACs may not be afforded a meaningful opportunity to vote on a
proposed initial business combination because certain stockholders, including stockholders affiliated with the management of the
SPAC, may have sufficient voting power, and a financial incentive, to approve such a transaction without support from public stockholders.
As a result, a SPAC may complete a business combination even though a majority of its public stockholders do not support such
a combination. Because the SPACs included in the Index will be designed to pursue acquisitions only within certain industries
or regions, their stock prices may experience greater volatility than stocks of other SPACs.
Associated Risks of SPAC-Derived
Companies. The Fund invests in companies that are derived from a SPAC. These companies may be unseasoned and lack a trading
history, a track record of reporting to investors, and widely available research coverage. SPAC-derived companies are thus often
subject to extreme price volatility and speculative trading. These stocks may have above-average price appreciation in connection
with a potential business combination with a SPAC prior to inclusion in the Index. The price of stocks included in the Index may
not continue to appreciate and the performance of these stocks may not replicate the performance exhibited in the past. In addition,
SPAC-derived companies may share similar illiquidity risks of private equity and venture capital. The free float shares held by
the public in a SPAC-derived company are typically a small percentage of the market capitalization. The ownership of many SPAC-derived
companies often includes large holdings by venture capital and private equity investors who seek to sell their shares in the public
market in the months following a business combination transaction when shares restricted by lock-up are released, causing greater
volatility and possible downward pressure during the time that locked-up shares are released.
Concentration Risk: The Fund's
investments will be concentrated in an industry or group of industries to the extent that the Index is so concentrated. In such
event, the value of the Fund's shares may rise and fall more than the value of shares of a fund that invests in securities
of companies in a broader range of industries.
Consumer Staples Sector Risk: The
consumer staples sector may be affected by the permissibility of using various product components and production methods, marketing
campaigns and other factors affecting consumer demand. Tobacco companies, in particular, may be adversely affected by new laws,
regulations and litigation. The consumer staples sector may also be adversely affected by changes or trends in commodity prices,
which may be influenced or characterized by unpredictable factors.
Equity Market Risk: The equity
securities held in the Fund's portfolio may experience sudden, unpredictable drops in value or long periods of decline in
value. This may occur because of factors that affect securities markets generally or factors affecting specific issuers, industries,
or sectors in which the Fund invests such as political, market and economic developments, as well as events that impact specific
issuers. Additionally, natural or environmental disasters, widespread disease or other public health issues, war, acts of terrorism
or other events could result in increased premiums or discounts to the Fund's NAV.
ETF Risks:
Absence of an Active Market: Although
the Fund's shares are approved for listing on the Exchange, there can be no assurance that an active trading market will
develop and be maintained for Fund shares. There can be no assurance that the Fund will grow to or maintain an economically viable
size, in which case the Fund may experience greater tracking error to its Index than it otherwise would at higher asset levels
or the Fund may ultimately liquidate.
Authorized Participants ("APs"),
Market Makers, and Liquidity Providers Concentration Risk: The Fund has a limited number of financial institutions that
may act as APs. In addition, there may be a limited number of market makers and/or liquidity providers in the marketplace. To the
extent either of the following events occur, Shares may trade at a material discount to net asset value ("NAV") and
possibly face delisting: (i) APs exit the business or otherwise become unable to process creation and/or redemption orders
and no other APs step forward to perform these services, or (ii) market makers and/or liquidity providers exit the business
or significantly reduce their business activities and no other entities step forward to perform their functions. The risks associated
with limited APs may be heightened in scenarios where APs have limited or diminished access to the capital required to post collateral.
Costs of Buying or Selling
Shares: Investors buying or selling Fund shares in the secondary market will pay brokerage commissions or other charges
imposed by brokers as determined by that broker. Brokerage commissions are often a fixed amount and may be a significant proportional
cost for investors seeking to buy or sell relatively small amounts of shares.
Fluctuation of NAV: The
NAV of Fund shares will generally fluctuate with changes in the market value of the Fund's securities holdings. The market
prices of shares will generally fluctuate in accordance with changes in the Fund's NAV and supply and demand of shares on
the Exchange. It cannot be predicted whether Fund shares will trade below, at or above their NAV. During periods of unusual volatility
or market disruptions, market prices of Fund shares may deviate significantly from the market value of the Fund's securities
holdings or the NAV of Fund shares. As a result, investors in the Fund may pay significantly more or receive significantly less
for Fund shares than the value of the Fund's underlying securities or the NAV of Fund shares.
Market Trading Risk: An
investment in the Fund faces numerous market trading risks, including the potential lack of an active market for Fund shares, losses
from trading in secondary markets, periods of high volatility and disruption in the creation/redemption process of the Fund. Any
of these factors, among others, may lead to the Fund's shares trading at a premium or discount to NAV.
Trading Issues: Although
Fund shares are listed for trading on the NYSE Arca, Inc. (the "Exchange"), there can be no assurance that an active
trading market for such shares will develop or be maintained. Trading in Fund shares may be halted due to market conditions or
for reasons that, in the view of the Exchange, make trading in shares inadvisable. There can be no assurance that the requirements
of the Exchange necessary to maintain the listing of any Fund will continue to be met or will remain unchanged or that the shares
will trade with any volume, or at all. Further, secondary markets may be subject to erratic trading activity, wide bid/ask spreads
and extended trade settlement periods in times of market stress because market makers and Authorized Participants may step away
from making a market in Fund shares and in executing creation and redemption orders, which could cause a material deviation in
the Fund's market price from its NAV.
Foreign Investment Risk: Returns
on investments in foreign stocks could be more volatile than, or trail the returns on, investments in U.S. stocks.
Currency Risk: Indirect
and direct exposure to foreign currencies subjects the Fund to the risk that currencies will decline in value relative to the U.S.
dollar. Currency rates in foreign countries may fluctuate significantly over short periods of time for a number of reasons, including
changes in interest rates and the imposition of currency controls or other political developments in the U.S. or abroad.
Depositary Receipts Risk: The
Fund may invest in depositary receipts. Investment in ADRs and GDRs may be less liquid than the underlying shares in their primary
trading market and GDRs, many of which are issued by companies in emerging markets, may be more volatile and less liquid than depositary
receipts issued by companies in more developed markets.
Foreign Market and Trading
Risk: The trading markets for many foreign securities are not as active as U.S. markets and may have less governmental
regulation and oversight. Foreign markets also may have clearance and settlement procedures that make it difficult for the Fund
to buy and sell securities. These factors could result in a loss to the Fund by causing the Fund to be unable to dispose of an
investment or to miss an attractive investment opportunity, or by causing Fund assets to be uninvested for some period of time.
Foreign Securities Risk:
The Fund invests a significant portion of its assets directly in securities of issuers based outside of the U.S., or in depositary
receipts that represent such securities. Investments in securities of non-U.S. issuers involve certain risks that may not be present
with investments in securities of U.S. issuers, such as risk of loss due to foreign currency fluctuations or to political or economic
instability, as well as varying regulatory requirements applicable to investments in non-U.S. issuers. There may be less information
publicly available about a non-U.S. issuer than a U.S. issuer. Non-U.S. issuers may also be subject to different regulatory, accounting,
auditing, financial reporting and investor protection standards than U.S. issuers.
Political and Economic Risk: The
Fund is subject to foreign political and economic risk not associated with U.S. investments, meaning that political events, social
and economic events and natural disasters occurring in a country where the Fund invests could cause the Fund's investments
in that country to experience gains or losses. The Fund also could be unable to enforce its ownership rights or pursue legal remedies
in countries where it invests.
Health Care Companies Risk: Health
care companies are subject to extensive government regulation and their profitability can be significantly affected by restrictions
on government reimbursement for medical expenses, rising costs of medical products and services, pricing pressure (including price
discounting), limited product lines, and an increased emphasis on the delivery of healthcare through outpatient services. Health
care companies are heavily dependent on obtaining and defending patents, which may be time consuming and costly, and the expiration
of patents may also adversely affect the profitability of the companies. Health care companies are also subject to extensive litigation
based on product liability and similar claims. In addition, their products can become obsolete due to industry innovation, changes
in technologies, or other market developments. Many new products in the health care field require significant research and development
and may be subject to regulatory approvals, all of which may be time consuming and costly with no guarantee that any product will
come to market.
Biotechnology Company Risk: A
biotechnology company's valuation can often be based largely on the potential or actual performance of a limited number of
products and can accordingly be greatly affected if one of its products proves, among other things, unsafe, ineffective or unprofitable.
Biotechnology companies are subject to regulation by, and the restrictions of, the FDA, the U.S. Environmental Protection Agency,
state and local governments, and foreign regulatory authorities.
Pharmaceutical Company Risk: Companies
in the pharmaceutical industry can be significantly affected by, among other things, government approval of products and services,
government regulation and reimbursement rates, product liability claims, patent expirations and protection and intense competition.
Natural Disaster/Epidemic Risk:
Natural or environmental disasters, such as earthquakes, fires, floods, hurricanes, tsunamis and other severe weather-related
phenomena generally, and widespread disease, including pandemics and epidemics, have been and may be highly disruptive to economies
and markets, adversely impacting individual companies, sectors, industries, markets, currencies, interest and inflation rates,
credit ratings, investor sentiment, and other factors affecting the value of the Fund's investments, Given the increasing
interdependence among global economies and markets, conditions in one country, market, or region are increasingly likely to adversely
affect markets, issues, and/or foreign exchange rates in other countries, including the U.S. Any such events could have a significant
adverse impact on the value of the Fund's investments.
Non-Diversification Risk: Because
the Fund is "non-diversified," it may invest a greater percentage of its assets in the securities of a single issuer
or a small number of issuers than if it was a diversified fund. As a result, a decline in the value of an investment in a single
issuer or a small number of issuers could cause the Fund's overall value to decline to a greater degree than if the Fund
held a more diversified portfolio. This may increase the Fund's volatility and have a greater impact on the Fund's
performance.
Non-Cannabis Related Business Risk:
Many of the companies in the Index are engaged in other lines of business unrelated to the activities identified in the principal
investment strategies, above, and these lines of business could adversely affect their operating results. The operating results
of these companies may fluctuate as a result of events in the other lines of business. In addition, a company's ability to
engage in new activities may expose it to business risks with which it has less experience than it has with the business risks
associated with its traditional businesses. There can be no assurance that the other lines of business in which these companies
are engaged will not have an adverse effect on a company's business or financial condition.
Passive Investment Risk: The
Fund is not actively managed and therefore would not sell an equity security due to current or projected underperformance of a
security, industry or sector, unless that security is removed from the Index. Unlike with an actively managed fund, the Advisor
does not use techniques or defensive strategies designed to lessen the effects of market volatility or to reduce the impact of
periods of market decline. The means that, based on market and economic conditions, the Fund's performance could be lower
than that of other types of funds that may actively shift their portfolio assets to take advantage of market opportunities or
to lessen the impact of a market decline.
Risks Related to Investing in Canada:
Because the investments of the Fund are geographically concentrated in Canadian companies or companies that have a significant
presence in Canada, investment results could be dependent on the financial condition of the Canadian economy. The Canadian economy
is reliant on the sale of natural resources and commodities, which can pose risks such as the fluctuation of prices and the variability
of demand for exportation of such products. Changes in spending on Canadian products by the economies of other countries or changes
in any of these economies may cause a significant impact on the Canadian economy. In particular, the Canadian economy is heavily
dependent on relationships with certain key trading partners, including the United States and China.
Sector Risk: To the extent the Fund
invests more heavily in particular sectors of the economy, its performance will be especially sensitive to developments that significantly
affect those sectors.
Securities Lending Risk: The
Fund may engage in securities lending. The Fund may lose money if the borrower of the loaned securities delays returning in a timely
manner or fails to return the loaned securities. Securities lending involves the risk that the Fund could lose money in the event
of a decline in the value of collateral provided for loaned securities. In addition, the Fund bears the risk of loss in connection
with its investment of the cash collateral it receives from a borrower. To the extent that the value or return of the Fund's
investment of the cash collateral declines below the amount owed to the borrower, the Fund may incur losses that exceed the amount
it earned on lending the security.
Smaller Companies Risk: The Fund's
Index may be composed primarily of, or have significant exposure to, securities of smaller companies. If it does so, it may be
subject to certain risks associated with smaller companies. Smaller companies may be more vulnerable to adverse business or economic
events than larger, more established companies, and may underperform other segments of the market or the equity market as a whole.
The securities of smaller companies also tend to be bought and sold less frequently and at significantly lower trading volumes
than the securities of larger companies. As a result, it may be more difficult for the Fund to buy or sell a significant amount
of the securities of a smaller company without an adverse impact on the price of the company's securities, or the Fund may
have to sell such securities in smaller quantities over a longer period of time, which may increase the Fund's tracking error.
Tax Risk: To qualify for the favorable
tax treatment generally available to regulated investment companies, the Fund must satisfy certain diversification requirements
under the Internal Revenue Code of 1986, as amended (the "Code"). In particular, the Fund generally may not acquire
a security if, as a result of the acquisition, more than 50% of the value of the Fund's assets would be invested in (a) issuers
in which the Fund has, in each case, invested more than 5% of the Fund's assets and (b) issuers more than 10% of whose outstanding
voting securities are owned by the Fund. When the Index is concentrated in a relatively small number of securities, it may not
be possible for the Fund to fully implement a replication strategy or a representative sampling strategy while satisfying these
diversification requirements. The Fund's efforts to satisfy the diversification requirements may cause the Fund's return
to deviate from that of the Index, and the Fund's efforts to replicate the Index may cause it inadvertently to fail to satisfy
the diversification requirements. If the Fund were to fail to qualify as a regulated investment company, it would be taxed in the
same manner as an ordinary corporation, and distributions to its shareholders would not be deductible by the Fund in computing
its taxable income.
Tracking Error Risk: The Fund's
return may not match or achieve a high degree of correlation with the return of the Index. To the extent the Fund utilizes a sampling
approach, it may experience tracking error to a greater extent than if the Fund sought to replicate the Index. In addition, in
order to minimize the market impact of an Index rebalance, the Fund may begin trading to effect the rebalance in advance of the
effective date of the rebalance and continue trading after the effective date of the rebalance, which may contribute to tracking
error.
Valuation Risk: The sales price
that the Fund could receive for a security may differ from the Fund's valuation of the security and may differ from the value
used by the Index, particularly for securities that trade in low volume or volatile markets or that are valued using a fair value
methodology. In addition, the value of the securities in the Fund's portfolio may change on days when shareholders will not
be able to purchase or sell the Fund's shares.
Additional Information
about the Fund's Investment Objective and Strategies
The Fund, using an "indexing"
investment approach, seeks to provide investment results that, before fees and expenses, correspond generally to the total return
performance of the Index. A number of factors may affect the Fund's ability to achieve a high correlation with the Index,
including the degree to which the Fund utilizes a sampling methodology. There can be no guarantee that the Fund will achieve a
high degree of correlation. The Adviser may sell securities that are represented in the Fund's Index or purchase securities
not yet represented in the Index, in anticipation of their removal from or addition to the Index. There may also be instances in
which the Adviser may choose to overweight securities in the Fund's Index, thus causing the Fund to purchase or sell securities
not in the Index, but which the Adviser believes are appropriate to substitute for certain securities in the Index. The Fund will
not take defensive positions.
As of the date of this prospectus, the
securities of Cannabis Companies and Pharmaceutical Companies held by the Fund will be purchased on regulated, major stock exchanges,
such as the New York Stock Exchange, NYSE American, Nasdaq Stock Market, TSX Exchange, and TSX Venture Exchange. Cannabis Companies
and Pharmaceutical Companies do not, as of the date of this prospectus, include those companies whose securities trade on the Canadian
Stock Exchange.
The Fund's investment objective and
80% Policy have been adopted as non-fundamental investment policies and may be changed by Fund's Board of Trustees (the "Board")
without shareholder approval upon written notice to shareholders.
The Fund, as part of its securities
lending program, may invest collateral in an affiliated series of ETF Managers Trust, ETFMG Sit Ultra Short ETF. ETF Managers
Group LLC serves as the investment adviser to ETFMG Sit Ultra Short ETF. Other investment companies, including Ultra Short ETF,
in which a Fund may invest cash collateral can be expected to incur fees and expenses for operations, such as investment advisory
and administration fees, which would be in addition to those incurred by the Fund, and which, with respect to Ultra Short ETF,
will be received in full or in part by the Adviser.
Additional Risk
Information
The following section provides additional
information regarding the principal risks identified under "Principal Risks" in the Fund's summary.
United States Regulatory Risks of
the Marijuana Industry: The possession and use of marijuana, even for medical purposes, is illegal under federal and certain
states' laws, which may negatively impact the value of the Fund's investments. Use of marijuana is regulated by both
the federal government and state governments, and state and federal laws regarding marijuana often conflict. Marijuana is a Schedule
I controlled substance under the CSA and is illegal under federal law. Currently, over half of the states plus the District of
Columbia have laws and/or regulations that recognize, in one form or another, legitimate medical uses for cannabis and consumer
use of cannabis in connection with medical treatment or for non-medical purposes. Even in those states in which the use of marijuana
for medical or non-medical purposes has been legalized, its sale and use remains a violation of federal law. Federal law criminalizing
the use of marijuana pre-empts state laws that legalizes its use for medicinal and recreational purposes. It is not yet known
whether the current Administration will push back against states where marijuana use and possession is legal and step up the enforcement
of federal marijuana laws and the prosecution of nonviolent federal drug crimes. Congress may fail to renew the Rohrabacher-Blumenauer
amendment, which currently prohibits the DOJ from using federal funds to prevent states from implementing laws that authorize
medical marijuana use, possession, distribution, and cultivation. Such actions could produce a chilling effect on the industry's
growth and discourage banks from expanding their services to cannabis-related companies. This conflict between the regulation
of marijuana under federal and state law creates volatility and risk for all cannabis-related companies. In particular, the stepped
up enforcement of marijuana laws by the federal government would adversely affect the value of the Fund's U.S. investments.
Certain Cannabis Companies or Pharmaceutical Companies may never be able to legally produce and sell products in the United States
or other national or local jurisdictions.
As noted above, marijuana is a Schedule
I controlled substance in the United States under the CSA. The DEA classifies controlled substances into five schedules: Schedule
I, II, III, IV or V substances. Schedule I substances by definition have a high potential for abuse, have no currently "accepted
medical use" in the United States, lack accepted safety for use under medical supervision, and may not be prescribed, marketed
or sold in the United States. Pharmaceutical products approved by the FDA for use in the United States may be listed as Schedule
II, III, IV or V, with Schedule II substances considered to present the highest potential for abuse or dependence and Schedule
V substances the lowest relative risk among such substances.
Few drug products containing natural
cannabis or naturally-derived cannabis extracts have been approved by the FDA for use in the United States or obtained DEA registrations
for commercial production. Drug products containing cannabis or cannabis extracts that receive the required government approvals
for use in commercial production may be subject to significant government regulation regarding manufacture, importation, exportation,
domestic distribution, storage, sale, and legitimate use. In addition, the scheduling process may take one or more years, thereby
delaying the launch of the drug product in the United States.
Cannabis-related companies in the U.S.
that engage in medical or pharmaceutical research or the production and distribution of controlled substances such as marijuana
must be registered with the DEA to perform such activities and have the security, control, recordkeeping, reporting and inventory
mechanisms required by the DEA to prevent drug loss and diversion. Failure to obtain the necessary registrations or comply with
necessary regulatory requirements may significantly impair the ability of certain companies in which the Fund invests to pursue
medical marijuana research or to otherwise cultivate, possess or distribute marijuana.
Additionally, U.S. Federal tax law
prohibits a taxpayer from claiming a deduction or credit for any amount paid or incurred during the tax year in carrying on any
trade or business if that trade or business (or the activities that comprise that trade or business) consists of trafficking in
controlled substances (e.g., marijuana) where that trafficking is prohibited by either federal law or the state law for the state
in which the trade or business is conducted. Consequently, Cannabis Companies may pay higher amounts of taxes than non-Cannabis
Companies, which could result in less income to the Fund and, in turn, less for the Fund to distribute to shareholders.
Non-U.S. Regulatory Risks of the Marijuana
Industry: The companies in which the Fund invests are subject to various laws, regulations and guidelines relating to the manufacture,
management, transportation, storage and disposal of marijuana, as well as being subject to laws and regulations relating to health
and safety, the conduct of operations and the protection of the environment. Even if a company's operations are permitted
under current law, they may not be permitted in the future, in which case such company may not be in a position to carry on its
operations in its current locations. Additionally, controlled substance legislation differs between countries and legislation in
certain countries may restrict or limit the ability of certain companies in which the Fund invests to sell their products.
Operational Risks of the Marijuana Industry:
Companies involved in the marijuana industry face intense competition, may have limited access to the services of banks, may have
substantial burdens on company resources due to litigation, complaints or enforcement actions, and are heavily dependent on receiving
necessary permits and authorizations to engage in medical marijuana research or to otherwise cultivate, possess or distribute marijuana.
Since the use of marijuana is illegal under United States federal law, federally regulated banking institutions may be unwilling
to make financial services available to growers and sellers of marijuana. Additionally, to the extent that the United States and
other countries pass laws that permit the personal cultivation of marijuana, the markets may shrink for certain companies in which
the Fund invests.
Companies participating in the marijuana
industry may face litigation, formal or informal complaints, enforcement actions, and inquiries by various federal, state, or local
governmental authorities. Litigation, complaints, and enforcement actions could consume considerable amounts of financial and other
corporate resources, which could have a negative impact on sales, revenue, profitability, and growth prospects. Similarly, certain
companies may not be able to obtain or maintain the necessary licenses, permits, authorizations, or accreditations, or may only
be able to do so at great cost, to engage in medical marijuana research or to otherwise cultivate, possess or distribute marijuana.
Failure to comply with or to obtain the necessary licenses, permits, authorizations, or accreditations could result in restrictions
on a company's ability to legally engage in medical marijuana research or to otherwise cultivate, possess or distribute marijuana,
which could have a negative impact on the value of the Fund's investments.
United States Regulatory Risks of
Hemp: The Agriculture Improvement Act of 2018 (or the "Farm Bill") effectively removes hemp from the list
of controlled substances and allows states to regulate its production, commerce and research with approval from the United States
Department of Agriculture. Certain Index constituents may sell dietary supplements and/or foods containing CBD within the
United States. The Farm Bill delegates to the FDA responsibility for regulating products containing hemp or derivatives thereof
(including CBD) under the Federal Food, Drug, and Cosmetic Act (the "FD&C"). Under the FD&C, if a substance
(such as CBD) is an active ingredient in a drug product that has been approved by the FDA, then the substance cannot be sold in
dietary supplements or foods without FDA approval, unless the substance was marketed as a dietary supplement or as a conventional
food before the drug was approved or before the new drug investigations were authorized. The FDA has publicly taken the
position that CBD cannot be sold in dietary supplements or foods because CBD is an active ingredient in an FDA-approved drug.
However, companies that sell CBD in dietary supplements and foods have taken the position that CBD was marketed as a dietary supplement
and/or as a conventional food before the drug was approved or before the new drug investigations were authorized, and because
the FDA has not brought enforcement action against such companies, this question of fact has not yet been adjudicated. In the
absence of a conclusive legal determination to the contrary, as of the date of this prospectus, it has not been determined that
the sale of dietary supplements and/or foods containing CBD within the United States would cause a company's securities
to be ineligible for inclusion in the Index. It is possible that such a legal determination or future federal and/or state laws
or regulations could drastically curtail permissible uses of hemp, which could have an adverse effect of the value of the Fund's
investments in companies with business interests in hemp and hemp-based products.
The remaining principal risks are
presented in alphabetical order. Each risk summarized below is considered a "principal risk" of investing in the Fund,
regardless of the order in which it appears.
Associated Risks of Investments
in SPACs. The Fund invests in equity securities of SPACs, which raise assets to seek potential acquisition opportunities.
Unless and until an acquisition is completed, a SPAC generally invests its assets in U.S. government securities, money market
securities, and cash. If an acquisition that meets the requirements for the SPAC is not completed within a pre-established period
of time (e.g., two years), the invested funds are returned to the entity's shareholders. Because SPACs have no operating
history or ongoing business other than seeking acquisitions, the value of their securities is particularly dependent on the ability
of the entity's management to identify and complete a profitable acquisition. Public stockholders of SPACs may not be afforded
a meaningful opportunity to vote on a proposed initial business combination because certain stockholders, including stockholders
affiliated with the management of the SPAC, may have sufficient voting power, and a financial incentive, to approve such a transaction
without support from public stockholders. As a result, a SPAC may complete a business combination even though a majority of its
public stockholders do not support such a combination. There is no guarantee that the SPACs in which the Fund invests will complete
an acquisition or that any acquisitions that are completed will be profitable. Because the SPACs included in the Index will be
designed to pursue acquisitions only within certain industries or regions, their stock prices may experience greater volatility
than stocks of other SPACs. SPACs may also encounter intense competition from other entities having a similar business objective,
such as private investors or investment vehicles and other SPACs, competing for the same acquisition opportunities, which could
make completing an attractive business combination more difficult.
Associated Risks of SPAC-Derived
Companies. The Fund invests in companies that are derived from a SPAC. These companies may be unseasoned and lack a trading
history, a track record of reporting to investors, and widely available research coverage. SPAC-derived companies are thus often
subject to extreme price volatility and speculative trading. These stocks may have above-average price appreciation in connection
with a potential business combination with a SPAC prior to inclusion in the Index. The price of stocks included in the Index may
not continue to appreciate and the performance of these stocks may not replicate the performance exhibited in the past. In addition,
SPAC-derived companies may share similar illiquidity risks of private equity and venture capital. The free float shares held by
the public in a SPAC-derived company are typically a small percentage of the market capitalization. The ownership of many SPAC-derived
companies often includes large holdings by venture capital and private equity investors who seek to sell their shares in the public
market in the months following a business combination transaction when shares restricted by lock-up are released, causing greater
volatility and possible downward pressure during the time that locked-up shares are released.
Concentration Risk: The Fund's
investments will be concentrated in an industry or group of industries to the extent the Index is so concentrated. To the extent
the Fund invests more heavily in particular industries, groups of industries, or sectors of the economy, its performance will
be especially sensitive to developments that significantly affect those industries, groups of industries, or sectors of the economy,
and the value of Fund shares may rise and fall more than the value of shares that invest in securities of companies in a broader
range of industries or sectors.
Consumer Staples Sector Risk: Companies
in the consumer staples sector may be adversely affected by changes in the global economy, consumer spending, competition, demographics
and consumer preferences, and production spending. Companies in the consumer staples sector may also be affected by changes in
global economic, environmental and political events, economic conditions, the depletion of resources, and government regulation.
For instance, government regulations may affect the permissibility of using various food additives and production methods of companies
that make food products, which could affect company profitability. In addition, tobacco companies may be adversely affected by
the adoption of proposed legislation and/or by litigation. Companies in the consumer staples sector also may be subject to risks
pertaining to the supply of, demand for and prices of raw materials. The prices of raw materials fluctuate in response to a number
of factors, including, without limitation, changes in government agricultural support programs, exchange rates, import and export
controls, changes in international agricultural and trading policies, and seasonal and weather conditions. Companies in the consumer
staples sector may be subject to severe competition, which may also have an adverse impact on their profitability.
Equity Market Risk: An investment
in the Fund involves risks of investing in equity securities, such as market fluctuations caused by such factors as economic and
political developments, changes in interest rates and perceived trends in securities prices. The values of equity securities could
decline generally or could underperform other investments. Different types of equity securities tend to go through cycles of out-performance
and under-performance in comparison to the general securities markets. In addition, securities may decline in value due to factors
affecting a specific issuer, market or securities markets generally. Holders of common stocks incur more risk than holders of
preferred stocks and debt obligations because common stockholders, as owners of the issuer, 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. Additionally, natural or environmental disasters, widespread disease or other public health issues, war,
acts of terrorism or other events could result in increased premiums or discounts to the Fund's NAV.
ETF Risks:
Absence of an Active Market: Although
the Fund's shares are approved for listing on the Exchange, there can be no assurance that an active trading market will
develop and be maintained for Fund shares. There can be no assurance that the Fund will grow to or maintain an economically viable
size, in which case the Fund may experience greater tracking error to its Index than it otherwise would at higher asset levels
or the Fund may ultimately liquidate.
Authorized Participants, Market
Makers and Liquidity Providers Concentration Risk: The Fund has a limited number of financial institutions that may act
as Authorized Participants ("APs"), none of which are obligated to engage in creation and/or redemption transactions.
In addition, there may be a limited number of market makers and/or liquidity providers in the marketplace. To the extent either
of the following events occur, there may be a significantly diminished trading market for Fund shares and shares may trade at a
material discount to NAV and possibly face delisting: (i) APs exit the business or otherwise become unable to process creation
and/or redemption orders and no other APs step forward to perform these services, or (ii) market makers and/or liquidity providers
exit the business or significantly reduce their business activities and no other entities step forward to perform their functions.
The risks associated with limited APs may be heightened in scenarios where APs have limited or diminished access to the capital
required to post collateral.
Costs of Buying or Selling
Shares: Investors buying or selling Fund shares in the secondary market will pay brokerage commissions or other charges
imposed by brokers as determined by that broker. Brokerage commissions are often a fixed amount and may be a significant proportional
cost for investors seeking to buy or sell relatively small amounts of shares. In addition, secondary market investors will also
incur the cost of the difference between the price that an investor is willing to pay for shares (the "bid" price)
and the price at which an investor is willing to sell shares (the "ask" price). This difference in bid and ask prices
is often referred to as the "spread" or "bid/ask spread." The bid/ask spread varies over time for shares
based on trading volume and market liquidity, and is generally lower if the Fund's shares have more trading volume and market
liquidity and higher if the Fund's shares have little trading volume and market liquidity. Further, increased market volatility
may cause increased bid/ask spreads. Due to the costs of buying or selling shares, including bid/ask spreads, frequent trading
of shares may significantly reduce investment results and an investment in shares may not be advisable for investors who anticipate
regularly making small investments.
Fluctuation of NAV: The
NAV of Fund shares will generally fluctuate with changes in the market value of the Fund's securities holdings. The market
prices of shares will generally fluctuate in accordance with changes in the Fund's NAV and supply and demand of shares on
the Exchange. It cannot be predicted whether Fund 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 securities of the Index trading individually or in the
aggregate at any point in time. The market prices of Fund shares may deviate significantly from the NAV of the shares during periods
of market volatility. While the creation/redemption feature is designed to make it likely that Fund shares normally will trade
close to the Fund's NAV, disruptions to creations and redemptions may result in trading prices that differ significantly
from the Fund's NAV. As a result, investors in the Fund may pay significantly more or receive significantly less for Fund
shares than the value of a Fund's underlying securities or the NAV of Fund shares. If an investor purchases Fund shares
at a time when the market price is at a premium to the NAV of the shares or sells at a time when the market price is at a discount
to the NAV of the shares, then the investor may sustain losses.
Market Trading Risk: An
investment in the Fund faces numerous market trading risks, including the potential lack of an active market for Fund shares, losses
from trading in secondary markets, periods of high volatility and disruption in the creation/redemption process of the Fund. Any
of these factors, among others, may lead to the Fund's shares trading at a premium or discount to NAV.
Trading Issues: Although
Fund shares are listed for trading on the Exchange, there can be no assurance that an active trading market for such shares will
develop or be maintained. Trading in Fund shares may be halted due to market conditions or for reasons that, in the view of the
Exchange, make trading in shares inadvisable. In addition, trading in shares is subject to trading halts caused by extraordinary
market volatility pursuant to Exchange "circuit breaker" rules, which temporarily halt trading on the Exchange when
a decline in the S&P 500 Index during a single day reaches certain thresholds (e.g., 7%., 13%, and 20%). Additional rules applicable
to the Exchange may halt trading in Fund shares when extraordinary volatility causes sudden, significant swings in the market price
of Fund shares. There can be no assurance that the requirements of the Exchange necessary to maintain the listing of the Fund will
continue to be met or will remain unchanged or that the shares will trade with any volume, or at all. In stressed market conditions,
the liquidity of the Fund's shares may begin to mirror the liquidity of the Fund's underlying portfolio holdings, which
can be significantly less liquid than the Fund's shares, potentially causing the market price of the Fund's shares
to deviate from their NAV.
Further, secondary markets may
be subject to erratic trading activity, wide bid/ask spreads and extended trade settlement periods in times of market stress because
market makers and Authorized Participants may step away from making a market in Fund shares and in executing creation and redemption
orders, which could cause a material deviation in a Fund's market price from its NAV. Decisions by market makers or
Authorized Participants to reduce their role or step away from these activities in times of market stress could inhibit the effectiveness
of the arbitrage process in maintaining the relationship between the underlying value of a Fund's portfolio securities and
the Fund's market price. This reduced effectiveness could result in Fund shares trading at a price which differs materially
from NAV and also in greater than normal intraday bid/ask spreads for Fund shares.
Foreign Investment Risk: Returns
on investments in foreign stocks could be more volatile than, or trail the returns on, investments in U.S. stocks.
Currency Risk. Indirect
and direct exposure to foreign currencies subjects the Fund to the risk that currencies will decline in value relative to the U.S.
dollar. Currency rates in foreign countries may fluctuate significantly over short periods of time for a number of reasons, including
changes in interest rates and the imposition of currency controls or other political developments in the U.S. or abroad. The Fund's
NAV is determined on the basis of U.S. dollars and, therefore, the Fund may lose value if the local currency of a foreign market
depreciates against the U.S. dollar, even if the local currency value of the Fund's holdings goes up.
Depositary Receipts Risk. The
Fund may invest in depositary receipts. Depositary receipts include ADRs and GDRs. ADRs are U.S. dollar-denominated receipts representing
shares of foreign-based corporations. ADRs are issued by U.S. banks or trust companies, and entitle the holder to all dividends
and capital gains that are paid out on the underlying foreign shares.
GDRs are depositary receipts
which are similar to ADRs, but are shares of foreign-based corporations generally issued by international banks in one or more
markets around the world. Investment in ADRs and GDRs may be less liquid than the underlying shares in their primary trading market
and GDRs, many of which are issued by companies in emerging markets, may be more volatile and less liquid than depositary receipts
issued by companies in more developed markets.
Depositary receipts may be sponsored
or unsponsored. Sponsored depositary receipts are established jointly by a depositary and the underlying issuer, whereas unsponsored
depositary receipts may be established by a depositary without participation by the underlying issuer. Holders of an unsponsored
depositary receipt generally bear all the costs associated with establishing the unsponsored depositary receipt. In addition, the
issuers of the securities underlying unsponsored depositary receipts are not obligated to disclose material information in the
United States and, therefore, there may be less information available regarding such issuers and there may not be a correlation
between such information and the market value of the depositary receipts.
Depositary receipts may be unregistered
and unlisted. The Fund's investments also may include ADRs and GDRs that are not purchased in the public markets and
are restricted securities that can be offered and sold only to "qualified institutional buyers" under Rule 144A
of the Securities Act of 1933, as amended. The Adviser will determine the liquidity of such investments pursuant to guidelines
established by the Board. If a particular investment in such ADRs or GDRs is deemed illiquid, that investment will be included
within the Fund's limitation on investment in illiquid securities. Moreover, if adverse market conditions were to develop
during the period between the Fund's decision to sell these types of ADRs or GDRs and the point at which the Fund is permitted
or able to sell such security, the Fund might obtain a price less favorable than the price that prevailed when it decided to sell.
Foreign Market and Trading
Risk. The trading markets for many foreign securities are not as active as U.S. markets and may have less governmental
regulation and oversight. Foreign markets also may have clearance and settlement procedures that make it difficult for the Fund
to buy and sell securities. These factors could result in a loss to the Fund by causing the Fund to be unable to dispose of an
investment or to miss an attractive investment opportunity, or by causing Fund assets to be uninvested for some period of time.
Where all or a part of the Fund's underlying securities trade in a market that is closed when the Exchange is open, there
may be changes between the last quotation from its closed foreign market and the value of such securities during the Fund's
domestic trading day. This could lead to differences between the market price of the Fund shares and the value of the Fund's
underlying securities.
Foreign Securities Risk. The
Fund invests in foreign securities, including non-U.S. dollar-denominated securities traded outside of the United States and U.S.
dollar-denominated securities of foreign issuers traded in the United States. Investment in foreign securities may involve higher
costs than investment in U.S. securities, including higher transaction and custody costs as well as the imposition of additional
taxes by foreign governments. Foreign investments may also involve risks associated with the level of currency exchange rates,
less complete financial information about the issuers, less market liquidity, more market volatility and political instability,
as well as varying regulatory requirements applicable to investment in non-U.S. issuers. Future political and economic developments,
the possible imposition of withholding taxes on dividend income, the possible seizure or nationalization of foreign holdings, the
possible establishment of exchange controls or freezes on the convertibility of currency, or the adoption of other governmental
restrictions might adversely affect an investment in foreign securities. Additionally, foreign issuers may be subject to less stringent
regulation, and to different accounting, auditing and recordkeeping requirements.
Political and Economic Risk. The
Fund is subject to foreign political and economic risk not associated with U.S. investments, meaning that political events (civil
unrest, national elections, changes in political conditions and foreign relations, imposition of exchange controls and repatriation
restrictions), social and economic events (labor strikes, rising inflation) and natural disasters occurring in a country where
the Fund invests could cause the Fund's investments in that country to experience gains or losses. The Fund also could be
unable to enforce its ownership rights or pursue legal remedies in countries where it invests.
Health Care Companies Risk: Health
care companies are subject to extensive government regulation and their profitability can be significantly affected by restrictions
on government reimbursement for medical expenses, rising costs of medical products and services, pricing pressure (including price
discounting), limited product lines, and an increased emphasis on the delivery of healthcare through outpatient services. Health
care companies are heavily dependent on obtaining and defending patents, which may be time consuming and costly, and the expiration
of patents may also adversely affect the profitability of the companies. Health care companies are also subject to extensive litigation
based on product liability and similar claims. In addition, their products can become obsolete due to industry innovation, changes
in technologies, or other market developments. Many new products in the health care field require significant research and development
and may be subject to regulatory approvals, all of which may be time consuming and costly with no guarantee that any product will
come to market. Additionally, liability for products that are later alleged to be harmful or unsafe may be substantial, and may
have a significant impact on a health care company's market value and/or share price.
Biotechnology Company Risk: A
biotechnology company's valuation can often be based largely on the potential or actual performance of a limited number of
products and can accordingly be greatly affected if one of its products proves, among other things, unsafe, ineffective or unprofitable.
Biotechnology companies are subject to regulation by, and the restrictions of, the FDA, the U.S. Environmental Protection Agency,
state and local governments, and foreign regulatory authorities.
Pharmaceutical Company Risk: Companies
in the pharmaceutical industry can be significantly affected by, among other things, government approval of products and services,
government regulation and reimbursement rates, product liability claims, patent expirations and protection and intense competition.
The process for obtaining regulatory approval from the FDA or other governmental regulatory authorities is long and costly and
there is no assurance that the necessary approvals will be obtained or maintained by these companies.
Additionally, companies in the
pharmaceutical industry may be adversely affected by government regulation and changes in reimbursement rates from such third party
payors, such as Medicare, Medicaid and other government sponsored programs, private health insurance plans and health maintenance
organizations. The ability of pharmaceutical companies to commercialize current and any futures products also depends in part on
the extent reimbursement for the cost of such products and related treatments are available from these third party payors. A pharmaceutical
company's valuation may also be affected if one of its products prove unsafe, ineffective or unprofitable. The stock prices
of companies in this sector have been and will likely continue to be volatile.
Natural Disaster/Epidemic Risk:
Natural or environmental disasters, such as earthquakes, fires, floods, hurricanes, tsunamis and other severe weather-related
phenomena generally, and widespread disease, including pandemics and epidemics, have been and may be highly disruptive to economies
and markets, adversely impacting individual companies, sectors, industries, markets, currencies, interest and inflation rates,
credit ratings, investor sentiment, and other factors affecting the value of the Fund's investments, Given the increasing
interdependence among global economies and markets, conditions in one country, market, or region are increasingly likely to adversely
affect markets, issues, and/or foreign exchange rates in other countries, including the U.S. Any such events could have a significant
adverse impact on the value of the Fund's investments.
Non-Diversification Risk: Because
the Fund is "non-diversified," it may invest a greater percentage of its assets in the securities of a single issuer
or a small number of issuers than if it was a diversified fund. As a result, a decline in the value of an investment in a single
issuer or a small number of issuers could cause the Fund's overall value to decline to a greater degree than if the Fund
held a more diversified portfolio. This may increase the Fund's volatility and have a greater impact on the Fund's
performance.
Non-Cannabis Related Business Risk:
Many of the companies in the Index are engaged in other lines of business unrelated to the activities identified in principal investment
strategies, above, and these lines of business could adversely affect their operating results. The operating results of these companies
may fluctuate as a result of events in the other lines of business. In addition, a company's ability to engage in new activities
may expose it to business risks with which it has less experience than it has with the business risks associated with its traditional
businesses. There can be no assurance that the other lines of business in which these companies are engaged will not have an adverse
effect on a company's business or financial condition.
Passive Investment Risk: The Fund
is not actively managed. Therefore, unless a specific security is removed from the Fund's Index, the Fund generally would
not sell a security because the security's issuer was in financial trouble. If a specific security is removed from the Fund's
Index, the Fund may be forced to sell such security at an inopportune time or for a price other than the security's current
market value. An investment in the Fund involves risks similar to those of investing in any equity securities traded on an exchange,
such as market fluctuations caused by such factors as economic and political developments, changes in interest rates and perceived
trends in security prices. It is anticipated that the value of Fund shares will decline, more or less, in correspondence with any
decline in value of the Fund's Index. The Index may not contain the appropriate mix of securities for any particular economic
cycle, and the timing of movements from one type of security to another in seeking to replicate the Index could have a negative
effect on the Fund. Unlike with an actively managed fund, the Adviser does not use techniques or defensive strategies designed
to lessen the effects of market volatility or to reduce the impact of periods of market decline. This means that, based on market
and economic conditions, the Fund's performance could be lower than other types of funds that may actively shift their portfolio
assets to take advantage of market opportunities or to lessen the impact of a market decline.
Risks Related to Investing in Canada:
Because the investments of the Fund are geographically concentrated in Canadian companies or companies that have a significant
presence in Canada, investment results could be dependent on the financial condition of the Canadian economy. The Canadian economy
is reliant on the sale of natural resources and commodities, which can pose risks such as the fluctuation of prices and the variability
of demand for exportation of such products. Changes in spending on Canadian products by the economies of other countries or changes
in any of these economies may cause a significant impact on the Canadian economy. The United States is Canada's largest trading
and investment partner, and the Canadian economy is significantly affected by developments in the U.S. economy. Since the implementation
of North American Free Trade Agreement in 1994 among Canada, the United States and Mexico, total two-way merchandise trade between
the United States and Canada has more than doubled. Any downturn in U.S. or Mexican economic activity is likely to have an adverse
impact on the Canadian economy. The Canadian economy is also dependent upon external trade with other key trading partners, including
China. In addition, Canada is a large supplier of natural resources (e.g., oil, natural gas and agricultural products). As a result,
the Canadian economy is sensitive to fluctuations in certain commodity prices.
Securities Lending Risk: The
Fund may engage in securities lending. The Fund may lose money if the borrower of the loaned securities delays returning in a timely
manner or fails to return the loaned securities. Securities lending involves the risk that the Fund could lose money in the event
of a decline in the value of collateral provided for loaned securities. In addition, the Fund bears the risk of loss in connection
with its investment of the cash collateral it receives from a borrower. When the Fund invests cash collateral in other investment
companies, such investments of cash collateral will be subject to substantially the same risks as those associated with the
direct ownership of securities held by such investment companies. To the extent that the value or return of the Fund's investment
of the cash collateral declines below the amount owed to the borrower, the Fund may incur losses that exceed the amount it earned
on lending the security.
Smaller Companies Risk: The Fund's
Index may be composed primarily of, or have significant exposure to, securities of smaller companies. As a result, the Fund may
be subject to the risk that securities of smaller companies represented in the Index may underperform securities of larger companies
or the equity market as a whole. In addition, in comparison to securities of companies with larger capitalizations, securities
of smaller-capitalization companies may experience more price volatility, greater spreads between their bid and ask prices, less
frequent trading, significantly lower trading volumes, and cyclical or static growth prospects. As a result of the differences
between the securities of smaller companies and those of companies with larger capitalizations, it may be more difficult for a
Fund to buy or sell a significant amount of the securities of a smaller company without an adverse impact on the price of the company's
securities, or a Fund may have to sell such securities in smaller quantities over a longer period of time, which may increase the
Fund's tracking error. Smaller-capitalization companies often have limited product lines, markets or financial resources,
and may therefore be more vulnerable to adverse developments than larger capitalization companies. These securities may or may
not pay dividends.
Tax Risk: To qualify for the favorable
tax treatment generally available to regulated investment companies, the Fund must satisfy certain diversification requirements
under the Code. In particular, the Fund generally may not acquire a security if, as a result of the acquisition, more than 50%
of the value of the Fund's assets would be invested in (a) issuers in which the Fund has, in each case, invested more than
5% of the Fund's assets and (b) issuers more than 10% of whose outstanding voting securities are owned by the Fund. When
an Index is concentrated in a relatively small number of securities, it may not be possible for the Fund to fully implement a replication
strategy or a representative sampling strategy while satisfying these diversification requirements. The Fund's efforts to
satisfy the diversification requirements may cause the Fund's return to deviate from that of its Index, and the Fund's
efforts to replicate its Index may cause it inadvertently to fail to satisfy the diversification requirements.
If the Fund were to fail to qualify as
a regulated investment company, it would be taxed in the same manner as an ordinary corporation, and distributions to its shareholders
would not be deductible by the Fund in computing its taxable income. Distributions to the Fund's shareholders would generally
be taxed as ordinary dividends. Under certain circumstances, the Fund may be able to cure a failure to qualify as a regulated investment
company, but in order to do so the Fund may incur significant Fund-level taxes and may be forced to dispose of certain assets.
Relief is provided for certain de minimis failures of the diversification requirements where the Fund corrects the failure within
a specified period. If the Fund were to fail to qualify as a regulated investment company in any taxable year, the Fund would be
required to pay out its earnings and profits accumulated in that year in order to qualify for treatment as a regulated investment
company in a subsequent year. If the Fund failed to qualify as a regulated investment company for a period greater than two taxable
years, the Fund would generally be required to pay the Fund-level tax on any net built-in gains with respect to certain of its
assets upon a disposition of such assets within five years of qualifying as a regulated investment company in a subsequent year.
Tracking Error Risk: Tracking error
refers to the risk that the Adviser may not be able to cause the Fund's performance to match or correlate to that of the
Fund's Index, either on a daily or aggregate basis. There are a number of factors that may contribute to the Fund's
tracking error, such as Fund expenses, imperfect correlation between the Fund's investments and those of its Index, rounding
of share prices, changes to the composition of the Index, regulatory policies, and high portfolio turnover rate. In addition, mathematical
compounding may prevent the Fund from correlating with the monthly, quarterly, annual or other period performance of its Index.
In addition, in order to minimize the market impact of an Index rebalance, a Fund may begin trading to effect the rebalance in
advance of the effective date of the rebalance and continue trading after the effective date of the rebalance. This may contribute
to tracking error if the weights of the Fund's portfolio securities diverge from the weights of the securities in the Index
during the rebalancing. Tracking error in such circumstances may be greater if the Fund is trading in securities that are less
liquid or lightly traded. Tracking error may cause the Fund's performance to be less than expected.
Valuation Risk: The sales price
that the Fund could receive for a security may differ from the Fund's valuation of the security and may differ from the value
used by the Index, particularly for securities that trade in low volume or volatile markets or that are valued using a fair value
methodology. In addition, the value of the securities in the Fund's portfolio may change on days when shareholders will not
be able to purchase or sell the Fund's shares.
Portfolio Holdings
Information about the Fund's
daily portfolio holdings is available at www.etfmj.com. A summarized description of the Fund's policies and procedures with
respect to the disclosure of the Fund's portfolio holdings is available in the Fund's Statement of Additional Information
("SAI").
STATEMENT OF ADDITIONAL INFORMATION
ETFMG Alternative Harvest ETF
(MJ)
Listed on: NYSE Arca
a series of ETF Managers Trust
January 29, 2021
This Statement of Additional Information
("SAI") is not a prospectus and should be read in conjunction with the prospectus dated January 29, 2021, as may be
supplemented from time to time (the "Prospectus"), of the ETFMG Alternative Harvest ETF (the "Fund"),
a series of ETF Managers Trust (the "Trust"). The Fund's name changed effective December 26, 2017, prior to
which it was known as the Tierra XP Latin America Real Estate ETF. The Financial Statements and Notes contained in the Annual
Report of the Fund for the fiscal year ended September 30, 2020 (the "Annual Report") are incorporated by reference
into and are deemed part of this SAI. 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 the Fund's distributor, ETFMG
Financial LLC (the "Distributor"), 30 Maple Street, Summit, New Jersey 07901, by visiting the Fund's website
at www.etfmj.com or by calling 1-844-ETFMGRS (383-6477).
GENERAL INFORMATION ABOUT THE TRUST
ETF Managers Trust (the "Trust") is an open-end
management investment company currently consisting of multiple investment series, one of which is the Fund. The Trust was organized
as a Delaware statutory trust on July 1, 2009. The Trust is registered with the Securities and Exchange Commission (the "SEC")
under the Investment Company Act of 1940, as amended, (the "1940 Act") as an open-end management investment company
and the offering of the Fund's shares ("Shares") is registered under the Securities Act of 1933, as amended (the
"Securities Act"). ETF Managers Group, LLC (the "Adviser") serves as investment adviser to the Fund. The
investment objective of the Fund is to provide investment results that, before fees and expenses, correspond generally to the performance
of a specified market index (the "Index" or "Underlying Index").
The Fund offers and issues Shares at
their net asset value only in aggregations of a specified number of Shares (each, a "Creation Unit"). The Fund generally
offers and issues Shares in exchange for a basket of securities included in its Index ("Deposit Securities") together
with the deposit of a specified cash payment ("Cash Component"). The Trust reserves the right to permit or require
the substitution of a "cash in lieu" amount ("Deposit Cash") to be added to the Cash Component to replace
any Deposit Security. The Shares are listed on the NYSE Arca, Inc. (the "Exchange") and trade on the Exchange at market
prices. These prices may differ from the Shares' net asset values. The Shares are also redeemable only in Creation Unit
aggregations, and generally in exchange for portfolio securities and a specified cash payment. A Creation Unit of the Fund generally
consists of 50,000 Shares, though this may change from time to time. As a practical matter, only institutions or large investors
purchase or redeem Creation Units. Except when aggregated in Creation Units, Shares are not redeemable securities.
Shares may be issued in advance of receipt
of Deposit Securities subject to various conditions including a requirement to maintain on deposit with the Trust an amount in
cash at least equal to a specified percentage of the market value of the missing Deposit Securities as set forth in the Participant
Agreement (as defined below). The Trust may impose a transaction fee for each creation or redemption. In all cases, such fees will
be limited in accordance with the requirements of the SEC applicable to management investment companies offering redeemable securities.
CONTINUOUS OFFERING
The method by which Creation Unit Aggregations of 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 the Fund on an ongoing basis, at any point a "distribution," as such term is used in the Securities
Act, may occur. 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 the Distributor,
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 categorization 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, generally are required to deliver a prospectus. This is because the prospectus delivery exemption
in Section 4(a)(3) of the Securities Act is not available in respect of such transactions as a result of Section 24(d) of the 1940
Act. Firms that incur a prospectus delivery obligation with respect to shares of the Fund are reminded that, pursuant to Rule 153
under the Securities Act, a prospectus delivery obligation under Section 5(b)(2) of the Securities Act owed to an exchange member
in connection with a sale on the Exchange is satisfied by the fact that the prospectus is available at the Exchange upon request.
The prospectus delivery mechanism provided in Rule 153 is only available with respect to transactions on an exchange.
PORTFOLIO HOLDINGS
Policy on Disclosure of Portfolio Holdings
The Board of Trustees of the Trust (the
"Board") has adopted a policy on disclosure of portfolio holdings, which it believes is in the best interest of the
Fund's shareholders. The policy requires that the Fund's portfolio holdings be disclosed in a manner that: (i) is consistent
with applicable legal requirements and is in the best interests of the Fund's shareholders; (ii) does not put the interests
of the Adviser or the Distributor, or any affiliated person of the Adviser or the Distributor, above those of the Fund's
shareholders; (iii) does not advantage any current or prospective Fund shareholder over any other current or prospective Fund shareholder,
except to the extent that certain entities (as described below) may receive portfolio holdings information not available to other
current or prospective Fund shareholders in connection with the dissemination of information necessary for transactions in Creation
Units; and (iv) does not provide selective access to portfolio holdings information except pursuant to the procedures outlined
below and to the extent appropriate confidentiality arrangements limiting the use of such information are in effect.
The "entities" referred to
in sub-section (iii) above are generally limited to National Securities Clearing Corporation ("NSCC") members and subscribers
to various fee-based subscription services, including Authorized Participants (defined below), and other institutional market participants
and entities that provide information services.
Information with respect to the Fund's
portfolio holdings is disseminated daily on the Fund's website. Each business day portfolio holdings information may also
be provided to the Fund's transfer agent or other agent for dissemination through the facilities of the NSCC and/or other
fee based subscription services to NSCC members and/or subscribers to those other fee based subscription services, including Authorized
Participants, and to entities that publish and/or analyze such information in connection with the process of purchasing or redeeming
Creation Units or trading shares of the Fund in the secondary market.
The transfer agent may also make available
portfolio holdings information to other institutional market participants and entities that provide information services. This
information typically reflects the Fund's anticipated holdings on the following business day. "Authorized Participants"
are broker-dealer firms that have entered into Authorized Participant Agreements with the Distributor to purchase and redeem Creation
Units pursuant to legal requirements, including the exemptive order granted by the SEC, through which the Fund offers and redeems
shares. Other than portfolio holdings information made available in connection with the creation/redemption process, as discussed
above, portfolio holdings information that is not filed with the SEC or posted on the publicly available website may be provided
to third parties only in limited circumstances, as described above.
Disclosure to providers of auditing, custody,
proxy voting, liquidity risk management and other similar services for the Fund, broker-dealers that are involved in executing
portfolio transactions on behalf of the Fund, as well as rating and ranking organizations, will generally be permitted; however,
information may be disclosed to other third parties (including, without limitation, individuals, institutional investors, and Authorized
Participants that sell shares of the Fund) only upon approval by the CCO. The recipients who may receive non-public portfolio holdings
information are as follows: the Adviser and its affiliates, the Fund's independent registered public accounting firm, the
Fund's distributor, administrator and custodian, the Fund's legal counsel, the Fund's financial printer and the
Fund's proxy voting service. These entities are obligated to keep such information confidential. Third-party providers of
custodial or accounting services to the Fund may release non-public portfolio holdings information of the Fund only with the permission
of the CCO.
The Fund will disclose its complete
portfolio holdings in public filings with the SEC. on a quarterly basis within 60 days of the end of the quarter, and will provide
that information to shareholders, as required by federal securities laws and regulations thereunder. These filings are available,
free of charge, on the EDGAR database on the SEC's website http://www.sec.gov. Under the policy, the Board is
to receive information, on a quarterly basis, regarding any other disclosures of non-public portfolio holdings information that
were permitted during the preceding quarter.
ADDITIONAL INFORMATION ABOUT INVESTMENT OBJECTIVES, POLICIES
AND RELATED RISKS
The Fund's investment objective and
principal investment strategies are described in the Prospectus. The following information supplements, and should be read in conjunction
with, the Prospectus. For a description of certain permitted investments, see "Description of Permitted Investments"
in this SAI.
Non-Diversification
The Fund is classified as a non-diversified
investment company under the 1940 Act. A "non-diversified" classification means that the Fund is not limited by the
1940 Act with regard to the percentage of its assets that may be invested in the securities of a single issuer. This means that
the Fund may invest a greater portion of its assets in the securities of a single issuer or a small number of issuers than a diversified
fund. The securities of a particular issuer or a small number of issuers may constitute a greater portion of the Underlying Index
and, therefore, the securities may constitute a greater portion of the Fund's portfolio. This may have an adverse effect
on the Fund's performance or subject the Fund's Shares to greater price volatility than more diversified investment
companies. Moreover, in pursuing its objective, the Fund may hold the securities of a single issuer in an amount exceeding 10%
of the market value of the outstanding securities of the issuer, subject to restrictions imposed by the Internal Revenue Code of
1986, as amended (the "Code"). In particular, as the Fund's size grows and its assets increase, it will be more
likely to hold more than 10% of the securities of a single issuer if the issuer has a relatively small public float as compared
to other components in its Underlying Index.
Concentration
The Fund will, to the extent its Underlying
Index does, concentrate its investments in a particular industry or group of industries, as described in the Prospectus. The securities
of issuers in particular industries may dominate the Underlying Index of the Fund and consequently the Fund's investment
portfolio. This may adversely affect the Fund's performance or subject its Shares to greater price volatility than that experienced
by less concentrated investment companies.
DESCRIPTION OF PERMITTED INVESTMENTS
The following are descriptions of the permitted investments
and investment practices and the associated risk factors. The Fund will only invest in any of the following instruments or engage
in any of the following investment practices if such investment or activity is consistent with the Fund's investment objective
and permitted by the Fund's stated investment policies. The information below should be read in conjunction with the "Principal
Investment Strategies" and "Principal Risks" sections of the Prospectus. The information below pertains to non-principal
investment strategies and risks of the Fund, while the information in the Prospectus pertains to principal investment strategies
and risks of the Fund.
EQUITY SECURITIES
Equity securities represent ownership interests in a company
and include common stocks, preferred stocks, warrants to acquire common stock, and securities convertible into common stock. Investments
in equity securities in general are subject to market risks that may cause their prices to fluctuate over time. Fluctuations in
the value of equity securities in which the Fund invests will cause the net asset value of the Fund to fluctuate.
Types of Equity Securities:
Common Stocks — Common stocks represent
units of ownership in a company. Common stocks usually carry voting rights and earn dividends. Unlike preferred stocks, which are
described below, dividends on common stocks are not fixed but are declared at the discretion of the company's board of directors.
Preferred Stocks — Preferred stocks
are also units of ownership in a company. Preferred stocks normally have preference over common stock in the payment of dividends
and the liquidation of the company. However, in all other respects, preferred stocks are subordinated to the liabilities of the
issuer. Unlike common stocks, preferred stocks are generally not entitled to vote on corporate matters. Types of preferred stocks
include adjustable-rate preferred stock, fixed dividend preferred stock, perpetual preferred stock, and sinking fund preferred
stock.
Generally, the market values of preferred
stock with a fixed dividend rate and no conversion element vary inversely with interest rates and perceived credit risk.
Convertible Securities — Convertible
securities are securities that may be exchanged for, converted into, or exercised to acquire a predetermined number of shares of
the issuer's common stock at the Fund's option during a specified time period (such as convertible preferred stocks,
convertible debentures and warrants). A convertible security is generally a fixed income security that is senior to common stock
in an issuer's capital structure, but is usually subordinated to similar non-convertible securities. In exchange for the
conversion feature, many corporations will pay a lower rate of interest on convertible securities than debt securities of the same
corporation. In general, the market value of a convertible security is at least the higher of its "investment value"
(i.e., its value as a fixed income security) or its "conversion value" (i.e., its value upon conversion
into its underlying common stock).
Convertible securities are subject to the
same risks as similar securities without the convertible feature. The price of a convertible security is more volatile during times
of steady interest rates than other types of debt securities. The price of a convertible security tends to increase as the market
value of the underlying stock rises, whereas it tends to decrease as the market value of the underlying common stock declines.
Rights and Warrants — A right is
a privilege granted to existing shareholders of a corporation to subscribe to shares of a new issue of common stock before it is
issued. Rights normally have a short life of usually two to four weeks, are freely transferable and entitle the holder to buy the
new common stock at a lower price than the public offering price. Warrants are securities that are usually issued together with
a debt security or preferred stock and that give the holder the right to buy proportionate amount of common stock at a specified
price. Warrants are freely transferable and are traded on major exchanges. Unlike rights, warrants normally have a life that is
measured in years and entitles the holder to buy common stock of a company at a price that is usually higher than the market price
at the time the warrant is issued. Corporations often issue warrants to make the accompanying debt security more attractive.
An investment in warrants and rights may
entail greater risks than certain other types of investments. Generally, rights and warrants do not carry the right to receive
dividends or exercise voting rights with respect to the underlying securities, and they do not represent any rights in the assets
of the issuer. In addition, their value does not necessarily change with the value of the underlying securities, and they cease
to have value if they are not exercised on or before their expiration date. Investing in rights and warrants increases the potential
profit or loss to be realized from the investment as compared with investing the same amount in the underlying securities.
Risks of Investing in Equity Securities:
General Risks of Investing in Stocks
— While investing in stocks allows investors to participate in the benefits of owning a company, such investors must
accept the risks of ownership. Unlike bondholders, who have preference to a company's earnings and cash flow, preferred stockholders,
followed by common stockholders in order of priority, are entitled only to the residual amount after a company meets its other
obligations. For this reason, the value of a company's stock will usually react more strongly to actual or perceived changes
in the company's financial condition or prospects than its debt obligations. Stockholders of a company that fares poorly
can lose money.
Stock markets tend to move in cycles with
short or extended periods of rising and falling stock prices. The value of a company's stock may fall because of:
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Factors that directly relate to that company, such as decisions made by its management or lower demand for the company's products or services;
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Factors affecting an entire industry, such as increases in production costs; and
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Changes in general financial market conditions that are relatively unrelated to the company or its industry, such as changes in interest rates, currency exchange rates or inflation rates.
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Because preferred stock is generally junior
to debt securities and other obligations of the issuer, deterioration in the credit quality of the issuer will cause greater changes
in the value of a preferred stock than in a more senior debt security with similar stated yield characteristics.
Small- and Medium-Sized Companies —
Investors in small- and medium-sized companies typically take on greater risk and price volatility than they would by investing
in larger, more established companies. This increased risk may be due to the greater business risks of their small or medium size,
limited markets and financial resources, narrow product lines and frequent lack of management depth. The securities of small- and
medium-sized companies are often traded in the over-the-counter market and might not be traded in volumes typical of securities
traded on a national securities exchange. Thus, the securities of small and medium capitalization companies are likely to experience
less frequent trading and be less liquid, and subject to more abrupt or erratic market movements, than securities of larger, more
established companies. As a result of the differences between the securities of small- and medium-sized companies and those of
companies with larger capitalizations, it may be more difficult for the Fund to buy or sell a significant amount of the securities
of a small- or medium- company without an adverse impact on the price of the company's securities, or the Fund may have to
sell such securities in smaller quantities over a longer period of time, which may increase the Fund's tracking error.
When-Issued Securities — A
when-issued security is one whose terms are available and for which a market exists, but which have not been issued. When the Fund
engages in when-issued transactions, it relies on the other party to consummate the sale. If the other party fails to complete
the sale, the Fund may miss the opportunity to obtain the security at a favorable price or yield.
When purchasing a security on a when-issued
basis, the Fund assumes the rights and risks of ownership of the security, including the risk of price and yield changes. At the
time of settlement, the market value of the security may be more or less than the purchase price. The yield available in the market
when the delivery takes place also may be higher than those obtained in the transaction itself. Because the Fund does not pay for
the security until the delivery date, these risks are in addition to the risks associated with its other investments.
Decisions to enter into "when-issued"
transactions will be considered on a case-by-case basis when necessary to maintain continuity in a company's index membership.
The Fund will segregate cash or liquid securities equal in value to commitments for the when-issued transactions. The Fund will
segregate additional liquid assets daily so that the value of such assets is equal to the amount of the commitments.
FOREIGN SECURITIES
FOREIGN ISSUERS
The Fund may invest a significant portion
of its assets in issuers located outside the United States directly, or in financial instruments that are indirectly linked to
the performance of foreign issuers. Examples of such financial instruments include depositary receipts, which are described further
below, "ordinary shares," and "New York shares" issued and traded in the United States. Ordinary shares
are shares of foreign issuers that are traded abroad and on a United States exchange. New York shares are shares that a foreign
issuer has allocated for trading in the United States. American Depositary Receipts ("ADRs"), ordinary shares, and
New York shares all may be purchased with and sold for U.S. dollars, which protects the Fund from the foreign settlement risks
described below.
Investing in foreign companies may involve
risks not typically associated with investing in United States companies. The value of securities denominated in foreign currencies,
and of dividends from such securities, can change significantly when foreign currencies strengthen or weaken relative to the U.S.
dollar. Foreign securities markets generally have less trading volume and less liquidity than United States markets, and prices
in some foreign markets can be more volatile than those of domestic securities. Therefore, the Fund's investment in foreign
securities may be less liquid and subject to more rapid and erratic price movements than comparable securities listed for trading
on U.S. exchanges. Non-U.S. equity securities may trade at price/earnings multiples higher than comparable U.S. securities and
such levels may not be sustainable. There may be less government supervision and regulation of foreign stock exchanges, brokers,
banks and listed companies abroad than in the U.S. Moreover, settlement practices for transactions in foreign markets may differ
from those in U.S. markets. Such differences may include delays beyond periods customary in the U.S. and practices, such as delivery
of securities prior to receipt of payment, that increase the likelihood of a failed settlement, which can result in losses to the
Fund. The value of non-U.S. investments and the investment income derived from them may also be affected unfavorably by changes
in currency exchange control regulations. Foreign brokerage commissions, custodial expenses and other fees are also generally higher
than for securities traded in the U.S. This may cause the Fund to incur higher portfolio transaction costs than domestic equity
funds. Fluctuations in exchange rates may also affect the earning power and asset value of the foreign entity issuing a security,
even one denominated in U.S. dollars. Dividend and interest payments may be repatriated based on the exchange rate at the time
of disbursement, and restrictions on capital flows may be imposed. Many foreign countries lack uniform accounting, auditing and
financial reporting standards comparable to those that apply to United States companies, and it may be more difficult to obtain
reliable information regarding a foreign issuer's financial condition and operations. In addition, the costs of foreign investing,
including withholding taxes, brokerage commissions, and custodial fees, generally are higher than for United States investments.
Investing in companies located abroad carries
political and economic risks distinct from those associated with investing in the United States. Foreign investment may be affected
by actions of foreign governments adverse to the interests of United States investors, including the possibility of expropriation
or nationalization of assets, confiscatory taxation, restrictions on United States investment, or on the ability to repatriate
assets or to convert currency into U.S. dollars. There may be a greater possibility of default by foreign governments or foreign-government
sponsored enterprises. Losses and other expenses may be incurred in converting between various currencies in connection with purchases
and sales of foreign securities. Investments in foreign countries also involve a risk of local political, economic, or social instability,
military action or unrest, or adverse diplomatic developments.
Investing in companies domiciled in emerging
market countries may be subject to greater risks than investments in developed countries. These risks include: (i) less social,
political, and economic stability; (ii) greater illiquidity and price volatility due to smaller or limited local capital markets
for such securities, or low or non-existent trading volumes; (iii) foreign exchanges and broker-dealers may be subject to
less scrutiny and regulation by local authorities; (iv) local governments may decide to seize or confiscate securities held
by foreign investors and/or local governments may decide to suspend or limit an issuer's ability to make dividend or interest
payments; (v) local governments may limit or entirely restrict repatriation of invested capital, profits, and dividends; (vi) capital
gains may be subject to local taxation, including on a retroactive basis; (vii) issuers facing restrictions on dollar or euro
payments imposed by local governments may attempt to make dividend or interest payments to foreign investors in the local currency;
(viii) investors may experience difficulty in enforcing legal claims related to the securities and/or local judges may favor
the interests of the issuer over those of foreign investors; (ix) bankruptcy judgments may only be permitted to be paid in
the local currency; (x) limited public information regarding the issuer may result in greater difficulty in determining market
valuations of the securities, and (xi) lax financial reporting on a regular basis, substandard disclosure, and differences
in accounting standards may make it difficult to ascertain the financial health of an issuer.
Geographic
Concentration
Funds that are less diversified across
countries or geographic regions are generally riskier than more geographically diversified funds. A fund that focuses on a single
country or a specific region is more exposed to that country's or region's economic cycles, currency exchange rates,
stock market valuations and political risks, among others, compared with a more geographically diversified fund. The economies
and financial markets of certain regions, such as Asia and the Middle East, can be interdependent and may be adversely affected
by the same events.
Set forth below for certain markets
in which a Fund may invest are brief descriptions of some of the conditions and risks in each such market.
Investments in Europe. The economies
of Europe are highly dependent on each other, both as key trading partners and as in many cases as fellow members maintaining
the euro. Reduction in trading activity among European countries may cause an adverse impact on each nation's individual
economies. European countries that are part of the Economic and Monetary Union of the EU are required to comply with restrictions
on inflation rates, deficits, interest rates, debt levels, and fiscal and monetary controls, each of which may significantly affect
every country in Europe. Decreasing imports or exports, changes in governmental or EU regulations on trade, changes in the exchange
rate of the euro, the default or threat of default by an EU member country on its sovereign debt, and recessions in an EU member
country may have a significant adverse effect on the economies of EU member countries and their trading partners.
The European financial markets have
recently experienced volatility and adverse trends due to concerns about rising government debt levels of several European countries,
including Greece, Spain, Ireland, Italy, and Portugal. These events have adversely affected the exchange rate of the euro and
may continue to significantly affect every country in Europe. For some countries, the ability to repay sovereign debt is in question,
and default is possible, which could affect their ability to borrow in the future. For example, Greece has been required to impose
harsh austerity measures on its population to receive financial aid from the International Monetary Fund and EU member countries.
These austerity measures have also led to social uprisings within Greece, as citizens have protested – at times violently
– the actions of their government. The persistence of these factors may seriously reduce the economic performance of Greece
and pose serious risks for the country's economy in the future. Furthermore, there is the possibility of contagion that
could occur if one country defaults on its debt, and that a default in one country could trigger declines and possible additional
defaults in other countries in the region.
Responses to the financial problems
by European governments, central banks and others, including austerity measures and reforms, may not work, may result in social
unrest and may limit future growth and economic recovery or have other unintended consequences. Further defaults or restructurings
by governments and other entities of their debt could have additional adverse effects on economies, financial markets, and asset
valuations around the world. In addition, one or more countries may abandon the euro, the common currency of the EU, and/or withdraw
from the EU alongside the UK, as discussed below. The impact of these actions, especially if they occur in a disorderly fashion,
is not clear but could be significant and far-reaching.
In June 2016, the UK held a referendum
resulting in a vote in favor of the exit of the UK from the EU (known as "Brexit"). Because of the referendum, Standard
& Poor's ("S&P") downgraded the UK's credit rating from "AAA" to "AA"
and the EU's credit rating from "AA+" to "AA" in the days that followed the vote. Other credit ratings
agencies have taken similar actions. On March 29, 2017, the UK invoked article 50 of the Lisbon Treaty, notifying the European
Council of the UK's intention to withdraw from the EU by the end of March 2019. The effects of Brexit will depend,
in part, on whether the United Kingdom is able to negotiate agreements to retain access to EU markets including, but not limited
to, trade and finance agreements. Brexit could lead to legal and tax uncertainty and potentially divergent national
laws and regulations as the United Kingdom determines which EU laws to replace or replicate. The extent of the impact of the withdrawal
in the United Kingdom and in global markets as well as any associated adverse consequences remain unclear, and the uncertainty
may have a significant negative effect on the value of a Fund's investments. While certain measures are being proposed and/or
will be introduced, at the EU level or at the member state level, which are designed to minimize disruption in the financial markets,
it is not currently possible to determine whether such measures would achieve their intended effects.
On January 31, 2020, the United
Kingdom withdrew from the EU subject to a withdrawal agreement that permits the United Kingdom to effectively remain in the EU
from an economic perspective during a transition phase that expires at the end of 2020. During this transition phase, the United
Kingdom and the EU will seek to negotiate and finalize a new, more permanent trade deal. Negotiators representing the United Kingdom
and EU came to a preliminary trade agreement on December 24, 2020. The trade agreement must be ratified by the UK Parliament
and the European Parliament. If approved, the agreement would take effect on January 1, 2021, and many aspects of the United
Kingdom-EU trade relationship would remain subject to further negotiation. Due to political uncertainty, it is not possible to
anticipate whether the United Kingdom and the EU will be able to agree on and implement a new trade agreement or what the nature
of such trade arrangement will be. In the event that no agreement is reached, the relationship between the United Kingdom and
the EU would be based on the World Trade Organization rules.
DEPOSITARY RECEIPTS
The Fund's investment in securities
of foreign companies may be in the form of depositary receipts or other securities convertible into securities of foreign issuers.
ADRs are dollar-denominated receipts representing interests in the securities of a foreign issuer, which securities may not necessarily
be denominated in the same currency as the securities into which they may be converted. ADRs are receipts typically issued by United
States banks and trust companies which evidence ownership of underlying securities issued by a foreign corporation. Generally,
ADRs in registered form are designed for use in domestic securities markets and are traded on exchanges or over-the-counter in
the United States. Global Depositary Receipts ("GDRs"), European Depositary Receipts ("EDRs"), and International
Depositary Receipts ("IDRs") are similar to ADRs in that they are certificates evidencing ownership of shares of a
foreign issuer, however, GDRs, EDRs, and IDRs may be issued in bearer form and denominated in other currencies, and are generally
designed for use in specific or multiple securities markets outside the U.S. EDRs, for example, are designed for use in European
securities markets while GDRs are designed for use throughout the world. Depositary receipts will not necessarily be denominated
in the same currency as their underlying securities.
The Fund will not invest in any unlisted
Depositary Receipts or any Depositary Receipt that the Adviser deems to be illiquid or for which pricing information is not readily
available. In addition, all Depositary Receipts generally must be sponsored. However, the Fund may invest in unsponsored Depositary
Receipts under certain limited circumstances. The issuers of unsponsored Depositary Receipts are not obligated to disclose material
information in the United States, and, therefore, there may be less information available regarding such issuers and there may
not be a correlation between such information and the market value of the Depositary Receipts. The use of Depositary Receipts may
increase tracking error relative to an Underlying Index.
Special
Purpose Acquisition Companies
The Fund may invest in stock, warrants,
and other securities of special purpose acquisition companies ("SPACs") or similar special purpose entities that pool
funds to seek potential acquisition opportunities. Unless and until an acquisition is completed, a SPAC generally invests its
assets (less a portion retained to cover expenses) in U.S. Government securities, money market fund securities, and cash. If an
acquisition that meets the requirements for the SPAC is not completed within a pre-established period of time, the invested funds
are returned to the entity's shareholders, less certain permitted expense, and any warrants issued by the SPAC will expire
worthless. Because SPACs and similar entities are in essence blank check companies without an operating history or ongoing business
other than seeking acquisitions, the value of their securities is particularly dependent on the ability of the entity's
management to identify and complete a profitable acquisition. SPACs may pursue acquisitions only within certain industries or
regions, which may increase the volatility of their prices. In addition, these securities, may be traded in the over-the-counter
market, may be considered illiquid and/or be subject to restrictions on resale.
REAL ESTATE INVESTMENT TRUSTS ("REITS")
A REIT is a corporation or business trust
(that would otherwise be taxed as a corporation) that meets the definitional requirements of the Code. The Code permits a qualifying
REIT to deduct from taxable income the dividends paid, thereby effectively eliminating corporate level federal income tax and making
the REIT a pass-through vehicle for federal income tax purposes. To meet the definitional requirements of the Code, a REIT must,
among other things: invest substantially all of its assets in interests in real estate (including mortgages and other REITs), cash
and government securities; derive most of its income from rents from real property or interest on loans secured by mortgages on
real property; and distribute annually 90% or more of its otherwise taxable income to shareholders.
REITs are sometimes informally characterized
as Equity REITs and Mortgage REITs. An Equity REIT invests primarily in the fee ownership or leasehold ownership of land and buildings;
a Mortgage REIT invests primarily in mortgages on real property, which may secure construction, development or long-term loans.
REITs may be affected by changes in underlying
real estate values, which may have an exaggerated effect to the extent that REITs in which a Fund invests may concentrate investments
in particular geographic regions or property types. Additionally, rising interest rates may cause investors in REITs to demand
a higher annual yield from future distributions, which may in turn decrease market prices for equity securities issued by REITs.
Rising interest rates also generally increase the costs of obtaining financing, which could cause the value of the Fund's
investments to decline. During periods of declining interest rates, certain Mortgage REITs may hold mortgages that the mortgagors
elect to prepay, which prepayment may diminish the yield on securities issued by such Mortgage REITs. In addition, Mortgage REITs
may be affected by the ability of borrowers to repay when due the debt extended by the REIT and Equity REITs may be affected by
the ability of tenants to pay rent.
Certain REITs have relatively small market
capitalization, which may tend to increase the volatility of the market price of securities issued by such REITs. Furthermore,
REITs are dependent upon specialized management skills, have limited diversification and are, therefore, subject to risks inherent
in operating and financing a limited number of projects. By investing in REITs indirectly through a Fund, a shareholder will bear
not only his or her proportionate share of the expenses of the Fund, but also, indirectly, similar expenses of the REITs. REITs
depend generally on their ability to generate cash flow to make distributions to shareholders.
In addition to these risks, Equity REITs
may be affected by changes in the value of the underlying property owned by the trusts, while Mortgage REITs may be affected by
the quality of any credit extended. Further, Equity and Mortgage REITs are dependent upon management skills and generally may not
be diversified. Equity and Mortgage REITs are also subject to heavy cash flow dependency defaults by borrowers and self-liquidation.
In addition, Equity and Mortgage REITs could possibly fail to qualify for favorable tax treatment under the Code or to maintain
their exemptions from registration under the 1940 Act. The above factors may also adversely affect a borrower's or a lessee's
ability to meet its obligations to the REIT. In the event of default by a borrower or lessee, the REIT may experience delays in
enforcing its rights as a mortgagee or lessor and may incur substantial costs associated with protecting its investments.
U.S. GOVERNMENT SECURITIES
The Fund may invest in U.S. government
securities. Securities issued or guaranteed by the U.S. government or its agencies or instrumentalities include U.S. Treasury securities,
which are backed by the full faith and credit of the U.S. Treasury and which differ only in their interest rates, maturities, and
times of issuance. There can be no guarantee that the United States will be able to meet
its payment obligations with respect to such securities. Additionally, market prices and yields of securities supported by the
full faith and credit of the U.S. government may decline or be negative for short or long periods of time. U.S. Treasury
bills have initial maturities of one-year or less; U.S. Treasury notes have initial maturities of one to ten years; and U.S. Treasury
bonds generally have initial maturities of greater than ten years. Certain U.S. government securities are issued or guaranteed
by agencies or instrumentalities of the U.S. government including, but not limited to, obligations of U.S. government agencies
or instrumentalities such as Fannie Mae, the Government National Mortgage Association ("Ginnie Mae"), the Small Business
Administration, the Federal Farm Credit Administration, the Federal Home Loan Banks, Banks for Cooperatives (including the Central
Bank for Cooperatives), the Federal Land Banks, the Federal Intermediate Credit Banks, the Tennessee Valley Authority, the Export-Import
Bank of the United States, the Commodity Credit Corporation, the Federal Financing Bank, the National Credit Union Administration
and the Federal Agricultural Mortgage Corporation (Farmer Mac).
Some obligations issued or guaranteed by
U.S. government agencies and instrumentalities, including, for example, Ginnie Mae pass-through certificates, are supported by
the full faith and credit of the U.S. Treasury. Other obligations issued by or guaranteed by federal agencies, such as those securities
issued by Fannie Mae, are supported by the discretionary authority of the U.S. government to purchase certain obligations of the
federal agency, while other obligations issued by or guaranteed by federal agencies, such as those of the Federal Home Loan Banks,
are supported by the right of the issuer to borrow from the U.S. Treasury, while the U.S. government provides financial support
to such U.S. government-sponsored federal agencies, no assurance can be given that the U.S. government will always do so, since
the U.S. government is not so obligated by law. U.S. Treasury notes and bonds typically pay coupon interest semi-annually and repay
the principal at maturity.
The
total public debt of the United States as a percentage of gross domestic product has grown rapidly since the beginning of the
2008-2009 financial downturn. Although high debt levels do not necessarily indicate or cause economic problems, they may create
certain systemic risks if sound debt management practices are not implemented. A high national debt can raise concerns that the
U.S. government will not be able to make principal or interest payments when they are due. This increase has also necessitated
the need for the U.S. Congress to negotiate adjustments to the statutory debt limit to increase the cap on the amount the U.S.
government is permitted to borrow to meet its existing obligations and finance current budget deficits. In August 2011, Standard
& Poor's lowered its long-term sovereign credit rating on the U.S. In explaining the downgrade at that time, S&P
cited, among other reasons, controversy over raising the statutory debt limit and growth in public spending. On August 2, 2019,
following passage by Congress, the President of the United States signed the Bipartisan Budget Act of 2019, which suspends the
statutory debt limit through July 31, 2021. Any controversy or ongoing uncertainty regarding the statutory debt ceiling negotiations
may impact the U.S. long-term sovereign credit rating and may cause market uncertainty. As a result, market prices and yields
of securities supported by the full faith and credit of the U.S. government may be adversely affected.
The value of direct or indirect investments
in fixed income securities will fluctuate with changes in interest rates. Typically, a rise in interest rates causes a decline
in the value of fixed income securities. On the other hand, if rates fall, the value of the fixed income securities generally increases.
In general, the market price of fixed income securities with longer maturities will increase or decrease more in response to changes
in interest rates than shorter-term securities. The value of direct or indirect investments in fixed income securities may be affected
by the inability of issuers to repay principal and interest or illiquidity in debt securities markets.
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●
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U.S. Treasury Obligations. U.S. Treasury obligations consist of bills, notes and bonds issued by the U.S. Treasury and separately traded interest and principal component parts of such obligations that are transferable through the federal book-entry system known as Separately Traded Registered Interest and Principal Securities ("STRIPS") and Treasury Receipts ("TRs").
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|
●
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Receipts. Interests in separately traded interest and principal component parts of U.S. government obligations that are issued by banks or brokerage firms and are created by depositing U.S. government obligations into a special account at a custodian bank. The custodian holds the interest and principal payments for the benefit of the registered owners of the certificates or receipts. The custodian arranges for the issuance of the certificates or receipts evidencing ownership and maintains the register. TRs and STRIPS are interests in accounts sponsored by the U.S. Treasury. Receipts are sold as zero coupon securities.
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●
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U.S. Government Zero Coupon Securities. STRIPS and receipts are sold as zero coupon securities, that is, fixed income securities that have been stripped of their unmatured interest coupons. Zero coupon securities are sold at a (usually substantial) discount and redeemed at face value at their maturity date without interim cash payments of interest or principal. The amount of this discount is accreted over the life of the security, and the accretion constitutes the income earned on the security for both accounting and tax purposes. Because of these features, the market prices of zero coupon securities are generally more volatile than the market prices of securities that have similar maturity but that pay interest periodically. Zero coupon securities are likely to respond to a greater degree to interest rate changes than are non-zero coupon securities with similar maturity and credit qualities.
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U.S. Government Agencies. Some obligations issued or guaranteed by agencies of the U.S. government are supported by the full faith and credit of the U.S. Treasury, others are supported by the right of the issuer to borrow from the U.S. Treasury, while still others are supported only by the credit of the instrumentality. Guarantees of principal by agencies or instrumentalities of the U.S. government may be a guarantee of payment at the maturity of the obligation so that in the event of a default prior to maturity there might not be a market and thus no means of realizing on the obligation prior to maturity. Guarantees as to the timely payment of principal and interest do not extend to the value or yield of these securities nor to the value of a Fund's Shares
|
BORROWING
Although the Fund does not intend to borrow money, the Fund
may do so to the extent permitted by the 1940 Act. Under the 1940 Act, the Fund may borrow up to one-third (1/3) of its net assets.
The Fund will borrow money only for short-term or emergency purposes. Such borrowing is not for investment purposes and will be
repaid by the Fund promptly. Borrowing will tend to exaggerate the effect on net asset value ("NAV") of any increase
or decrease in the market value of the Fund's portfolio. Money borrowed will be subject to interest costs that may or may
not be recovered by earnings on the securities purchased. The Fund also may be required to maintain minimum average balances in
connection with a borrowing or to pay a commitment or other fee to maintain a line of credit; either of these requirements would
increase the cost of borrowing over the stated interest rate.
OTHER SHORT-TERM INSTRUMENTS
The Fund may invest in short-term instruments,
including money market instruments, on an ongoing basis to provide liquidity or for other reasons. Money market instruments are
generally short-term investments that may include but are not limited to: (i) shares of money market funds; (ii) obligations
issued or guaranteed by the U.S. government, its agencies or instrumentalities (including government-sponsored enterprises); (iii) negotiable
certificates of deposit ("CDs"), bankers' acceptances, fixed time deposits and other obligations of U.S. and
foreign banks (including foreign branches) and similar institutions; (iv) commercial paper rated at the date of purchase "Prime-1"
by Moody's or "A-1" by S&P, or if unrated, of comparable quality as determined by the Adviser; (v) non-convertible
corporate debt securities (e.g., bonds and debentures) with remaining maturities at the date of purchase of not more than
397 days and that satisfy the rating requirements set forth in Rule 2a-7 under the 1940 Act; and (vi) short-term U.S. dollar-denominated
obligations of foreign banks (including U.S. branches) that, in the opinion of the Adviser, are of comparable quality to obligations
of U.S. banks which may be purchased by the Fund. Any of these instruments may be purchased on a current or a forward-settled basis.
Money market instruments also include shares of money market funds. Time deposits are non-negotiable deposits maintained in banking
institutions for specified periods of time at stated interest rates. Bankers' acceptances are time drafts drawn on commercial
banks by borrowers, usually in connection with international transactions. Short-term instruments that are fixed-income instruments
are generally subject to the same risks as other fixed-income instruments, including credit risk and interest rate risk, and short-term
instruments that are money market funds are generally subject to the same risks as other investment companies, including the obligation
to the pay the Fund's share of the underlying fund's expenses.
INVESTMENT COMPANIES
The Fund may invest in the securities
of other investment companies, including money market funds, subject to applicable limitations under Section 12(d)(1) of
the 1940 Act and the rules thereunder. Pursuant to Section 12(d)(1), the Fund may invest in the securities of another investment
company (the "acquired company") provided that the Fund, immediately after such purchase or acquisition, does not
own in the aggregate: (i) more than 3% of the total outstanding voting stock of the acquired company; (ii) securities
issued by the acquired company having an aggregate value in excess of 5% of the value of the total assets of the Fund; or (iii) securities
issued by the acquired company and all other investment companies (other than Treasury stock of the Fund) having an aggregate
value in excess of 10% of the value of the total assets of the Fund. To the extent allowed by law or regulation, the Fund may
invest its assets in securities of investment companies that are money market funds in excess of the limits discussed above.
If the Fund invests in and, thus, is a
shareholder of, another investment company, the Fund's shareholders will indirectly bear the Fund's proportionate share
of the fees and expenses paid by such other investment company, including advisory fees, in addition to both the management fees
payable directly by the Fund to the Fund's own investment adviser and the other expenses that the Fund bears directly in
connection with the Fund's own operations.
Section 12(d)(1) of the 1940 Act
restricts investments by registered investment companies in securities of other registered investment companies, including the
Fund. The acquisition of a Fund's Shares by registered investment companies is subject to the restrictions of Section 12(d)(1)
of the 1940 Act and the rules thereunder, except as may be permitted by exemptive rules under the 1940 Act or as may at some future
time be permitted by an exemptive order that permits registered investment companies to invest in the Fund beyond the limits of
Section 12(d)(1), subject to certain terms and conditions, including that the registered investment company enter into an
agreement with the Fund regarding the terms of the investment.
The Fund may rely on Section 12(d)(1)(F)
and Rule 12d1-3 of the 1940 Act, which provide an exemption from Section 12(d)(1) that allows the Fund to invest all of its
assets in other registered funds, including ETFs, if, among other conditions: (a) the Fund, together with its affiliates,
acquires no more than three percent of the outstanding voting stock of any acquired fund, and (b) the sales load charged on the
Fund's shares is no greater than the limits set forth in Rule 2830 of the Conduct Rules of the Financial Industry Regulatory
Authority, Inc. ("FINRA").
The Fund will incur higher and duplicative
expenses when it invests in other investment companies such as mutual funds and ETFs. There is also the risk that the Fund may
suffer losses due to the investment practices of the underlying funds. When the Fund invests in other investment companies, the
Fund will be subject to substantially the same risks as those associated with the direct ownership of securities held by such investment
companies.
LENDING PORTFOLIO SECURITIES
The Fund may lend portfolio securities
to certain creditworthy borrowers in U.S. and non-U.S. markets in an amount not to exceed
one-third (33 1/3%) of the value of its total assets. The borrowers provide collateral that is maintained in an amount
at least equal to the current value of the securities loaned. The Fund may terminate a loan at any time and obtain the return of
the securities loaned. The Fund receives the value of any interest or cash or non-cash distributions paid on the loaned securities.
Distributions received on loaned securities in lieu of dividend payments (i.e., substitute payments) would not be considered
qualified dividend income.
The borrower will be entitled to receive
a fee based on the amount of cash collateral. The Fund receives compensation in the form of fees. The amount of fees depends on
a number of factors including the type of security and length of the loan. Any cash collateral may be reinvested in certain short-term
instruments either directly on behalf of the lending Fund or through one or more joint accounts or money market funds, which may
include those managed by the Adviser. In that case, the Fund would also be compensated by the amount earned on the reinvestment
of cash collateral.
The Fund may pay a portion of the interest
or fees earned from securities lending to a borrower as described above, and to one or more securities lending agents approved
by the Board who administer the lending program for the Fund in accordance with guidelines approved by the Board. In such capacity,
the lending agent causes the delivery of loaned securities from the Fund to borrowers, arranges for the return of loaned securities
to the Fund at the termination of a loan, requests deposit of collateral, monitors the daily value of the loaned securities and
collateral, requests that borrowers add to the collateral when required by the loan agreements, and provides recordkeeping and
accounting services necessary for the operation of the program.
Securities lending involves exposure to
certain risks, including operational risk (i.e., the risk of losses resulting from problems in the settlement and accounting
process), "gap" risk (i.e., the risk of a mismatch between the return on cash collateral reinvestments and the
fees the Fund has agreed to pay a borrower), and credit, legal, counterparty and market risk. Counterparty risk may be greater
when the Fund loans its securities to a single or small group of counterparties. In the event a borrower does not return the Fund's
securities as agreed, the Fund may experience losses if the proceeds received from liquidating the collateral do not at least equal
the value of the loaned security at the time the collateral is liquidated plus the transaction costs incurred in purchasing replacement
securities.
The Fund will generally seek to recall
securities on loan to vote on matters if the result of the vote may materially affect the investment. However, in some circumstances
the Fund may be unable to recall the securities in time to vote or may determine that the benefits to the Fund of voting are outweighed
by the direct or indirect costs of such a recall. In these circumstances, loaned securities may be voted or not voted in a manner
adverse to the best interests of the Fund.
The following table shows the dollar
amounts of income and fees/compensation related to the securities lending activities of the Fund during the fiscal year ended
September 30, 2020.
Gross income from securities lending activities
|
|
$
|
55,820,903
|
|
Fees and/or compensation for securities lending activities and related services:
|
|
|
|
|
Fees paid to securities lending agent from a revenue split
|
|
$
|
22,328,361
|
|
Fees paid for any cash collateral management service that are not included in the revenue split
|
|
|
(0
|
)
|
Administrative fees not included in revenue split
|
|
|
(0
|
)
|
Indemnification fee not included in revenue split
|
|
|
(0
|
)
|
Rebates (paid to borrower)
|
|
|
(0
|
)
|
Other fees not included in revenue split (specify)
|
|
|
(0
|
)
|
Aggregate fees/compensation for securities lending activities:
|
|
$
|
(22,328,361
|
)
|
Net income from securities lending activities:
|
|
$
|
33,492,542
|
|
FUTURES CONTRACTS, OPTIONS AND SWAP AGREEMENTS
The Fund may utilize futures contracts,
options contracts and swap agreements. The Fund will segregate cash and/or appropriate liquid assets if required to do so by SEC
or Commodity Futures Trading Commission ("CFTC") regulation or interpretation.
Futures Contracts. Futures contracts
generally provide for the future sale by one party and purchase by another party of a specified commodity or security at a specified
future time and at a specified price. Index futures contracts are settled daily with a payment by one party to the other of a cash
amount based on the difference between the level of the index specified in the contract from one day to the next. Futures contracts
are standardized as to maturity date and underlying instrument and are traded on futures exchanges.
The Fund is required to make a good faith
margin deposit in cash or U.S. government securities with a broker or custodian to initiate and maintain open positions in futures
contracts. A margin deposit is intended to assure completion of the contract (delivery or acceptance of the underlying commodity
or payment of the cash settlement amount) if it is not terminated prior to the specified delivery date. Brokers may establish deposit
requirements which are higher than the exchange minimums. Futures contracts are customarily purchased and sold on margin deposits
which may range upward from less than 5% of the value of the contract being traded.
After a futures contract position is opened,
the value of the contract is marked to market daily. If the futures contract price changes to the extent that the margin on deposit
does not satisfy margin requirements, payment of additional "variation" margin will be required. Conversely, change
in the contract value may reduce the required margin, resulting in a repayment of excess margin to the contract holder. Variation
margin payments are made to and from the futures broker for as long as the contract remains open. In such case, the Fund would
expect to earn interest income on its margin deposits. Closing out an open futures position is done by taking an opposite position
("buying" a contract which has previously been "sold," or "selling" a contract previously "purchased")
in an identical contract to terminate the position. Brokerage commissions are incurred when a futures contract position is opened
or closed.
Options. The Fund may purchase and
sell put and call options. Such options may relate to particular securities and may or may not be listed on a national securities
exchange and issued by the Options Clearing Corporation. Options trading is a highly specialized activity that entails greater
than ordinary investment risk. Options on particular securities may be more volatile than the underlying securities, and therefore,
on a percentage basis, an investment in options may be subject to greater fluctuation than an investment in the underlying securities
themselves.
The Fund may use exchange-traded futures
and options, together with positions in cash and money market instruments, to simulate full investment in its Underlying Index.
Exchange-traded futures and options contracts are not currently available for the Index. Under such circumstances, the Adviser
may seek to utilize other instruments that it believes to be correlated to the applicable Index components or a subset of the components.
To the extent the Fund invests in futures,
options on futures or other instruments subject to regulation by the CFTC, it will seek to do so in reliance upon and in accordance
with CFTC Rule 4.5. Specifically, pursuant to CFTC Rule 4.5, the Trust may claim exclusion from the definition of CPO, and thus
from having to register as a CPO, with regard to a Fund that enters into commodity futures, commodity options or swaps solely for
"bona fide hedging purposes," or that limits its investment in commodities to a "de minimis" amount, as
defined in CFTC rules, so long as the shares of such Fund are not marketed as interests in a commodity pool or other vehicle for
trading in commodity futures, commodity options or swaps. To the extent the Fund invests in futures, options on futures or other
instruments subject to regulation by the CFTC, the Trust, on behalf of the Fund, will file a notice of eligibility for exclusion
from the definition of the term "commodity pool operator" in accordance with CFTC Rule 4.5. It is expected that the
Fund will be able to operate pursuant to the limitations under CFTC Rule 4.5 without materially adversely affecting its ability
to achieve its investment objective. If, however, these limitations were to make it difficult for the Fund to achieve its investment
objective in the future, the Trust may determine to operate the Fund as a regulated commodity pool pursuant to the Trust's
CPO registration or to reorganize or close the Fund or to materially change the Fund's investment objective and strategy.
In addition, as of the date of this SAI, the Adviser is not deemed to be a "commodity pool operator" or "commodity
trading adviser" with respect to the advisory services it provides to the Fund.
Restrictions on the Use of Futures and
Options. The Fund reserves the right to engage in transactions involving futures and options thereon to the extent allowed by the
CFTC regulations in effect from time to time and in accordance with the Fund's policies. The Fund would take steps to prevent
its futures positions from "leveraging" its securities holdings. When it has a long futures position, it will maintain
with its custodian bank, cash or equivalents. When it has a short futures position, it will maintain with its custodian bank assets
substantially identical to those underlying the contract or cash and equivalents (or a combination of the foregoing) having a value
equal to the net obligation of the Fund under the contract (less the value of any margin deposits in connection with the position).
Short Sales. The Fund may engage
in short sales that are either "uncovered" or "against the box." A short sale is "against the box"
if at all times during which the short position is open, the Fund owns at least an equal amount of the securities or securities
convertible into, or exchangeable without further consideration for, securities of the same issue as the securities that are sold
short. A short sale against the box is a taxable transaction to the Fund with respect to the securities that are sold short.
Uncovered short sales are transactions
under which the Fund sells a security it does not own. To complete such a transaction, the Fund must borrow the security to make
delivery to the buyer. The Fund then is obligated to replace the security borrowed by purchasing the security at the market price
at the time of the replacement. The price at such time may be more or less than the price at which the security was sold by the
Fund. Until the security is replaced, the Fund is required to pay the lender amounts equal to any dividends or interest that accrue
during the period of the loan. To borrow the security, the Fund also may be required to pay a premium, which would increase the
cost of the security sold. The proceeds of the short sale will be retained by the broker, to the extent necessary to meet margin
requirements, until the short position is closed out.
Until the Fund closes its short position
or replaces the borrowed security, the Fund may: (a) segregate cash or liquid securities at such a level that (i) the
amount segregated plus the amount deposited with the broker as collateral will equal the current value of the security sold short;
and (ii) the amount segregated plus the amount deposited with the broker as collateral will not be less than the market value
of the security at the time the security was sold short; or (b) otherwise cover the Fund's short position.
Swap Agreements. The Fund may enter
into swap agreements; including interest rate, index, and total return swap agreements. Swap agreements are contracts between parties
in which one party agrees to make periodic payments to the other party based on the change in market value or level of a specified
rate, index or asset. In return, the other party agrees to make payments to the first party based on the return of a different
specified rate, index or asset. Swap agreements will usually be done on a net basis, i.e., where the two parties make net
payments with the Fund receiving or paying, as the case may be, only the net amount of the two payments. The net amount of the
excess, if any, of the Fund's obligations over its entitlements with respect to each swap is accrued on a daily basis and
an amount of cash or equivalents having an aggregate value at least equal to the accrued excess is maintained by the Fund.
FUTURE DEVELOPMENTS
The Fund may take advantage of opportunities
in the area of options and futures contracts, options on futures contracts, warrants, swaps and any other investments which are
not presently contemplated for use by the Fund or which are not currently available but which may be developed, to the extent such
opportunities are both consistent with the Fund's investment objective and legally permissible for the Fund. Before entering
into such transactions or making any such investment, the Fund will provide appropriate disclosure.
SPECIAL CONSIDERATIONS AND RISKS
A discussion of the risks associated with
an investment in the Fund is contained in the Prospectus. The discussion below supplements, and should be read in conjunction with,
the Prospectus.
GENERAL
Investment in the Fund should be made with
an understanding that the value of the Fund's portfolio securities may fluctuate in accordance with changes in the financial
condition of the issuers of the portfolio securities, the value of securities generally and other factors.
An investment in the Fund should also be
made with an understanding of the risks inherent in an investment in securities, including the risk that the financial condition
of issuers may become impaired or that the general condition of the securities markets may deteriorate (either of which may cause
a decrease in the value of the portfolio securities and thus in the value of Shares). Securities are susceptible to general market
fluctuations and to volatile increases and decreases in value as market confidence in and perceptions of their issuers change.
These investor perceptions are based on various and 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 and banking crises.
Holders of common stocks incur more risk
than holders of preferred stocks and debt obligations because common stockholders, as owners of the issuer, 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. Further, unlike debt securities which typically have a stated principal amount payable at maturity
(whose value, however, will be subject to market fluctuations prior thereto), or preferred stocks which typically have a liquidation
preference and which may have stated optional or mandatory redemption provisions, common stocks have neither a fixed principal
amount nor a maturity. Common stock values are subject to market fluctuations as long as the common stock remains outstanding.
CYBER SECURITY RISK
Investment companies, such as the Fund,
and their service providers may be subject to operational and information security risks resulting from cyber attacks. Cyber attacks
include, among other behaviors, stealing or corrupting data maintained online or digitally, denial of service attacks on websites,
the unauthorized release of confidential information or various other forms of cyber security breaches. Cyber attacks affecting
the Fund or the Adviser, custodian, transfer agent, intermediaries and other third-party service providers may adversely impact
the Fund. For instance, cyber attacks may interfere with the processing of shareholder transactions, impact the Fund's ability
to calculate its net asset value, cause the release of private shareholder information or confidential company information, impede
trading, subject the Fund to regulatory fines or financial losses, and cause reputational damage. The Fund may also incur additional
costs for cyber security risk management purposes. Similar types of cyber security risks are also present for issuers of securities
in which the Fund invests, which could result in material adverse consequences for such issuers, and may cause the Fund's
investment in such portfolio companies to lose value.
RECENT MARKET EVENTS
Beginning in the first quarter of 2020,
financial markets in the United States and around the world experienced extreme and in many cases unprecedented volatility and
severe losses due to the global pandemic caused by COVID-19, a novel coronavirus. The pandemic has resulted in a wide range of
social and economic disruptions, including closed borders, voluntary or compelled quarantines of large populations, stressed healthcare
systems, reduced or prohibited domestic or international travel, supply chain disruptions, and so-called "stay-at-home"
orders throughout much of the United States and many other countries. The fall-out from these disruptions has included the rapid
closure of businesses deemed "non-essential" by federal, state, or local governments and rapidly increasing unemployment,
as well as greatly reduced liquidity for certain instruments at times. Some sectors of the economy and individual issuers have
experienced particularly large losses. Such disruptions may continue for an extended period of time or reoccur in the future to
a similar or greater extent. In response, the U.S. government and the Federal Reserve have taken extraordinary actions to support
the domestic economy and financial markets, resulting in very low interest rates and in some cases negative yields. It is unknown
how long circumstances related to the pandemic will persist, whether they will reoccur in the future, whether efforts to support
the economy and financial markets will be successful, and what additional implications may follow from the pandemic. The impact
of these events and other epidemics or pandemics in the future could adversely affect Fund performance.
FUTURES AND OPTIONS TRANSACTIONS
Positions in futures contracts and options
may be closed out only on an exchange which provides a secondary market therefore. However, there can be no assurance that a liquid
secondary market will exist for any particular futures contract or option at any specific time. Thus, it may not be possible to
close a futures or options position. In the event of adverse price movements, the Fund would continue to be required to make daily
cash payments to maintain its required margin. In such situations, if the Fund has insufficient cash, it may have to sell portfolio
securities to meet daily margin requirements at a time when it may be disadvantageous to do so. In addition, the Fund may be required
to make delivery of the instruments underlying futures contracts it has sold. The Fund will minimize the risk that it will be unable
to close out a futures or options contract by only entering into futures and options for which there appears to be a liquid secondary
market.
The risk of loss in trading futures contracts
or uncovered call options in some strategies (e.g., selling uncovered index futures contracts) is potentially unlimited.
The Fund does not plan to use futures and options contracts, when available, in this manner. The risk of a futures position may
still be large as traditionally measured due to the low margin deposits required. In many cases, a relatively small price movement
in a futures contract may result in immediate and substantial loss or gain to the investor relative to the size of a required margin
deposit. The Fund, however, intends to utilize futures and options contracts in a manner designed to limit the Fund's risk
exposure to that which is comparable to what the Fund would have incurred through direct investment in securities.
Utilization of futures transactions by
the Fund involves the risk of imperfect or even negative correlation to its Underlying Index if the index underlying the futures
contracts differs from Underlying Index. There is also the risk of loss by the Fund of margin deposits in the event of bankruptcy
of a broker with whom the Fund has an open position in the futures contract or option.
Certain financial futures exchanges limit
the amount of fluctuation permitted in futures contract prices during a single trading day. The daily 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 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 futures traders to substantial losses.
RISKS OF SWAP AGREEMENTS
Swap agreements are subject to the risk
that the swap counterparty will default on its obligations. If such a default occurs, the Fund will have contractual remedies pursuant
to the agreements related to the transaction, but such remedies may be subject to bankruptcy and insolvency laws which could affect
the Fund's rights as a creditor.
The use of interest-rate and index swaps
is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio
security transactions. These transactions generally do not involve the delivery of securities or other underlying assets or principal.
TAX RISKS
As with any investment, you should consider
how your investment in Shares of the Fund will be taxed. The tax information in the Prospectus and this SAI is provided as general
information. You should consult your own tax professional about the tax consequences of an investment in Shares of the Fund.
Unless your investment in Shares is made
through a tax-exempt entity or tax-deferred retirement account, such as an individual retirement account, you need to be aware
of the possible tax consequences when the Fund makes distributions or you sell Shares.
FURTHER INFORMATION ABOUT THE REGULATION OF CANNABIS
United States
The risk of strict enforcement of federal
marijuana laws in light of recent Congressional activity, judicial holdings, and stated federal policy remains uncertain. The U.S.
Supreme Court declined to hear a case brought by San Diego County, California that sought to establish federal preemption over
state medical marijuana laws. The preemption claim was rejected by every court that reviewed the case, holding that Congress does
not have the authority to compel the states to direct their law enforcement personnel to enforce federal laws. The U.S. Supreme
Court had previously held that, as long as the Controlled Substances Act ("CSA") contains prohibitions against marijuana,
under the Commerce Clause of the United States Constitution, the United States may criminalize the production and use of homegrown
cannabis even where states approve its use for medical purposes.
In an effort to provide guidance to federal
law enforcement, the Department of Justice ("DOJ") has issued Guidance Regarding Marijuana Enforcement to all United
States Attorneys in a memorandum from Deputy Attorney General David Ogden on October 19, 2009, in a memorandum from Deputy Attorney
General James Cole on June 29, 2011 and in a memorandum from Deputy Attorney General James Cole on August 29, 2013 (the "Cole
Memorandum"). Each memorandum states that the DOJ is committed to the enforcement of the CSA, but, the DOJ is also committed
to using its limited investigative and prosecutorial resources to address the most significant threats in the most effective, consistent,
and rational way.
The Cole Memorandum provides updated guidance
to federal prosecutors concerning marijuana enforcement in light of state laws legalizing medical and recreational marijuana possession
in small amounts.
The memorandum sets forth certain enforcement
priorities that are important to the federal government:
|
·
|
Distribution of marijuana to children;
|
|
·
|
Revenue from the sale of marijuana going to criminals;
|
|
·
|
Diversion of medical marijuana from states where it is legal to states where it is not;
|
|
·
|
Using state authorized marijuana activity as a pretext for other illegal drug activity;
|
|
·
|
Preventing violence in the cultivation and distribution of marijuana;
|
|
·
|
Preventing impaired driving;
|
|
·
|
Growing marijuana on federal property; and
|
|
·
|
Preventing possession or use of marijuana on federal property.
|
In January 2018, former Attorney General,
Jeff Sessions rescinded the Cole Memorandum. However, the federal government, to date, has not determined to devote
federal government resources to companies operating in states which have passed laws legalizing medical and recreational marijuana
use whose businesses are operating in conformity with the provisions of the Cole Memorandum. President
Biden has nominated Merrick Garland to serve as Attorney General in his administration. It is not yet known whether the Department
of Justice under President Biden and Attorney General Garland, if confirmed, will re-adopt the Cole Memorandum or announce a substantive
cannabis enforcement policy. Currently, the Rohrabacher-Blumenauer amendment to appropriations legislation prohibits the
DOJ from using federal funds to prevent states from implementing laws that authorize medical marijuana use, possession, distribution,
and cultivation. In the event the Rohrabacher-Blumenauer amendment (also referred to as the Rohrabacher-Farr amendment) is not
renewed by Congress, the DOJ may begin using federal funds to prevent states from implementing such laws.
On December 20, 2018, President Trump signed
the Agriculture Improvement Act of 2018 (or the "Farm Bill") that effectively removes hemp from the list of controlled
substances and allows states to regulate its production, commerce and research with approval from the United States Department
of Agriculture ("USDA"). Hemp is a cousin to marijuana, as both are classified under the same botanical category of
Cannabis sativa. The major difference between the two is that recreational marijuana has significant amounts of tetrahydrocannabinol
("THC") , whereas industrial hemp has virtually no THC (less than 0.3%). This 0.3% THC in industrial hemp is not enough
to provide psychotropic effects, which renders industrial hemp useless for recreational use or abuse. Products made from the seeds
(incapable of germination) and the mature stalks of the Cannabis sativa plant are legal products that could potentially be used
in pharmaceutical products, nutritional products, cosmetics, plastics, fuel, textiles, and medical delivery devices. Under the
Farm Bill, state departments of agriculture must consult with the state's governor and chief law enforcement officer to devise
a plan that must be submitted to the Secretary of USDA. A state's plan to license and regulate hemp can only commence once
the Secretary of USDA approves that state's plan.
The 2018 Farm Bill delegates to the
Food and Drug Administration ("FDA") responsibility for regulating products containing hemp or derivatives thereof
(including cannabidiol ("CBD")) under the Federal Food, Drug, and Cosmetic Act (the "FD&C").
The FD&C Act establishes a comprehensive federal scheme to regulate food, drugs, and cosmetics, among other things. Under
the FD&C Act, the introduction of "new drugs" into interstate commerce without meeting certain regulatory approvals
is prohibited. In addition, the FD&C Act proscribes the introduction of adulterated or misbranded drugs into interstate commerce.
With the passing of the 2018 Farm Bill, the FDA issued a statement "clarifying" its position on the regulation of
products containing cannabis and cannabis-derived products (the "Statement").
The Statement begins with the broad
proposition that the FDA will "treat products containing cannabis or cannabis-derived compounds as we do any other FDA-regulated
products" regardless of the source of the substance. Despite this position, the Statement recognizes the "growing
public interest in cannabis and cannabis-derived products, including [CBD]," as well as the "potential opportunities
that cannabis or cannabis-derived products." The FDA then promises to "continue to take steps to make the pathways
for the marketing of these products more efficient." Conservative estimates suggest that it will take another 18-24 months
for the FDA to implement these steps; the FDA has a designated group to review the issue.
Substantively, the Statement provides
that "[c]annabis and cannabis-derived products claiming in their marketing and promotion materials that they are intended
for use in the diagnosis, cure, mitigation, treatment, or prevention of diseases (such as cancer, Alzheimer's disease, psychiatric
disorders and diabetes) are considered new drugs or new animal drugs and must go through the FDA drug approval process for human
or animal use before they are marketed in the U.S." The Statement also provides that "it's unlawful under the
FD&C Act to introduce food containing added CBD or THC into interstate commerce, or to market CBD or THC products as, or in,
dietary supplements. . . . because both CBD and THC are active ingredients in FDA-approved drugs (Epidiolex) and were the subject
of substantial clinical investigations before they were marketed as foods or dietary supplements." Considering that the
FDA considers CBD a drug and that ingestible products cannot be sold with CBD in them unless and until they receive regulatory
approval, there is regulatory and financial risk to any company selling such products and, thus, to the Fund's investment
in those companies.
That said, a careful reading of the
Statement suggests that the FDA's enforcement priorities involve only the most serious health claims. In fact, since 2015,
the FDA has issued warning letters to twenty-two different entities: six in 2015, eight in 2016, four in 2017, one in 2018, and
(to date) four in 2019 thus far. A cursory reading of these letters supports the above conclusion that the FDA is mainly focusing
on serious health claims. At bottom, "when a product is in violation of the FD&C Act, the FDA considers many factors
in deciding whether or not to initiate an enforcement action. Those factors include, among other things, agency resources and
the threat to the public health." Although the FDA has focused only on sending cease and desist letters to date regarding
the marketing of CBD products, there is a risk that the FDA changes it position and seeks to further enforce the FD&C Act
in a manner that has not been done to date regarding cannabis-infused products.
On May 31, 2019, the FDA conducted
hearings on, among other things, CBD. The FDA is committed to review this issue further and to develop regulations to oversee
the use of CBD. Unfortunately, there is no definitive timeframe for the FDA to take action and provide further guidance on the
sale of CBD products. Companies that sell CBD in dietary supplements and foods have taken the position that CBD was marketed as
a dietary supplement and/or as a conventional food before the drug was approved or before the new drug investigations were authorized,
and because the FDA has not brought enforcement action against such companies, this question of fact has not yet been adjudicated.
Canada
Several recent court cases have influenced
the law governing the medical marijuana industry in Canada. On February 24, 2016, the Federal Court of Canada ruled in the case
of Allard et al v. Canada that Canada's Marijuana for Medical Purposes Regulations ("MMPR"), which governed production,
distribution and use of medical marijuana by creating a regime that provided access to "licensed producers" of medical
marijuana, violated the rights of patients by limiting patient access medical marijuana. On that basis, the entire MMPR was declared
invalid. Additionally, the Federal Court of Canada ruled that a previous injunction should be upheld, allowing patients with an
existing personal production license under the prior legislation to continue to produce their own medical marijuana, subject to
certain conditions.
On June 11, 2015 the Supreme Court of Canada
held that the restriction on the use of non-dried forms of marijuana for medical marijuana users violates the right to liberty
and security of individuals in a manner that is arbitrary and not in keeping with the principles of fundamental justice. As a result,
the Supreme Court of Canada declared that the sections of Canada's Controlled Drugs and Substances Act that prohibit possession
and trafficking of non-dried forms of marijuana no longer have force and effect to the extent that they prohibit a person with
medical authorization from possessing cannabis derivatives for medical purposes. This ruling means that medical marijuana patients
authorized to possess and use medical marijuana are no longer limited to using dried forms of marijuana and may now consume marijuana
and its derivative forms for medical purposes.
As a result of these court cases, on August
11, 2016, Health Canada, the Canadian department with responsibility for national public health, announced the new Access to Cannabis
for Medical Purposes Regulations ("ACMPR"), which took effect on August 24, 2016, to replace the MMPR. The ACMPR will
allow Canadians who have been authorized by their health care practitioner, and who are registered with Health Canada, to produce
a limited amount of medical marijuana for their own medical purposes, or to designate someone who is registered with Health Canada
to produce it for them, in addition to obtaining marijuana products from licensed producers, as was permitted under the MMPR. Starting
materials such as plants or seeds are to be obtained from licensed producers only.
On October 19, 2015, the Liberal Party
of Canada obtained a majority government in Canada. The Liberal Party has committed to the legalization of recreational cannabis
in Canada. On June 30, 2016, the Canadian Federal Government established the Task Force on Cannabis Legalization and Regulation
(the "Task Force") to seek input on the design of a new system to legalize, strictly regulate and restrict access to
marijuana. The Task Force has completed its review and published a report dated November 30, 2016, which outlines its recommendations.
The extent and impact of any regulatory changes that may result from the Task Force's report are unknown and may have a negative
impact on the value of the Fund's investments.
Prime Minister Justin Trudeau introduced
legislation in April 2017 to legalize the recreational use of marijuana in Canada. The House of Commons of Canada initially passed
the legalization legislation in November 2017. After amendments passed by the Senate of Canada, the House passed a final version
on June 18, 2018, to which the Senate voted in favor on June 19, 2018. On June 20, 2018, Prime Minister Trudeau announced that
recreational use of cannabis would no longer violate Canadian criminal law effective October 17, 2018. As of the date of this Statement
of Additional Information, the legal cannabis market in Canada is novel and still developing.
United Kingdom
Cannabis is a Class B drug under the law
of the United Kingdom ("UK") and its possession and sale are generally illegal. There has been little progress in the
United Kingdom towards the general legalization of the use and possession of marijuana. However, effective November 1, 2018, the
law was changed to give specialist doctors the option to legally issue prescriptions for cannabis-based medicines when they believe
that their patients could benefit. A product license is necessary before cannabis-based products can be legally sold, supplied
or advertised in the UK. In the UK, licenses to cultivate, possess and supply cannabis for medical research may be granted by the
Home Office. If a company in which the Fund invests fails to receive the necessary licenses, it may not be in a position to conduct
its business in the United Kingdom.
INVESTMENT RESTRICTIONS
The Trust has adopted the following investment
restrictions as fundamental policies with respect to the Fund. These restrictions cannot be changed with respect to the Fund without
the approval of the holders of a majority of the Fund's outstanding voting securities. For the purposes of the 1940 Act,
a "majority of outstanding shares" means the vote of the lesser of: (1) 67% or more of the voting securities of
the Fund present at the meeting if the holders of more than 50% of the Fund's outstanding voting securities are present or
represented by proxy; or (2) more than 50% of the outstanding voting securities of the Fund. Except with the approval of a
majority of the outstanding voting securities, the Fund may not:
|
1.
|
Concentrate its investments in an industry or group of industries (i.e. , hold 25% or more
of its net assets in the stocks of a particular industry or group of industries), except that the Fund will concentrate to approximately
the same extent that its Underlying Index concentrates in the stocks of such particular industry or group of industries. For purposes
of this limitation, securities of the U.S. government (including its agencies and instrumentalities), and securities of state or
municipal governments and their political subdivisions are not considered to be issued by members of any industry.
|
|
2.
|
Borrow money or issue senior securities (as defined under the 1940 Act), except to the extent permitted
under the 1940 Act, the rules and regulations thereunder or any exemption therefrom, as such statute, rules or regulations may
be amended or interpreted from time to time.
|
|
3.
|
Lend any security or make any other loan, except to the extent permitted under the 1940 Act the
rules and regulations thereunder or any exemption therefrom, as such statute, rules or regulations may be amended or interpreted
from time to time.
|
|
4.
|
Purchase or sell commodities or real estate, except to the extent permitted under the 1940 Act,
the rules and regulations thereunder or any exemption therefrom, as such statute, rules or regulations may be amended or interpreted
from time to time.
|
|
5.
|
Underwrite securities issued by other persons, except to the extent permitted under the 1940 Act,
the rules and regulations thereunder or any exemption therefrom, as such statute, rules or regulations may be amended or interpreted
from time to time.
|
In addition to the investment restrictions
adopted as fundamental policies as set forth above, the Fund observes the following restrictions, which may be changed without
a shareholder vote.
|
1.
|
The Fund will not invest in illiquid assets in excess of 15% of its net assets. An illiquid asset
is any asset that the Fund reasonably expects cannot be sold or disposed of in current market conditions in seven calendar days
or less without the sale or disposition significantly changing the market value of the asset.
|
|
2.
|
Under normal circumstances, the Fund will not invest less than 80% of its net assets, plus the
amount of any borrowings for investment purposes, in the component securities of its Underlying Index. For purposes of this policy,
ADRs and GDRs based on the component securities of the Underlying Index are treated as component securities of the Underlying Index.
|
If a percentage limitation is adhered to
at the time of investment or contract, a later increase or decrease in percentage resulting from any change in value or total or
net assets will not result in a violation of such restriction, except that the percentage limitations with respect to the borrowing
of money will be observed continuously. In addition, if a Fund's holdings of illiquid securities exceeds 15% of net assets
because of changes in the value of the Fund's investments, the Fund will act in accordance with Rule 22e-4 under the 1940
Act and will take action to reduce its holdings of illiquid securities pursuant to its written liquidity risk management program.
The following descriptions of certain provisions
of the 1940 Act may assist investors in understanding the above policies and restrictions:
Concentration. The SEC has defined
concentration as investing 25% or more of an investment company's net assets in an industry or group of industries, with
certain exceptions.
Borrowing. The 1940 Act presently
allows a fund to borrow from any bank (including pledging, mortgaging or hypothecating assets) in an amount up to 33 1/3% of its
total assets (not including temporary borrowings not in excess of 5% of its total assets).
Senior Securities. Senior securities
may include any obligation or instrument issued by a fund evidencing indebtedness. The 1940 Act generally prohibits funds from
issuing senior securities, although it does not treat certain transactions as senior securities, such as certain borrowings, short
sales, reverse repurchase agreements, firm commitment agreements and standby commitments, with appropriate earmarking or segregation
of assets to cover such obligation.
Lending. Under the 1940 Act, a fund
may only make loans if expressly permitted by its investment policies. The Fund's current investment policy on lending is
as follows: the Fund may not make loans if, as a result, more than 33 1/3% of its total assets would be lent to other parties,
except that the Fund may: (i) purchase or hold debt instruments in accordance with its investment objective and policies; (ii)
enter into repurchase agreements; and (iii) engage in securities lending subject to the limitations described in this SAI.
Underwriting. Under the 1940 Act,
underwriting securities involves a fund purchasing securities directly from an issuer for the purpose of selling (distributing) them
or participating in any such activity either directly or indirectly.
Real Estate. The 1940 Act does not
directly restrict an investment company's ability to invest in real estate, but does require that every investment company
have a fundamental investment policy governing such investments. The Fund will not purchase or sell real estate, except that the
Fund may purchase marketable securities issued by companies which own or invest in real estate (including REITs).
Commodities. The Fund will not purchase
or sell physical commodities or commodities contracts, except that the Fund may purchase: (i) marketable securities issued
by companies which own or invest in commodities or commodities contracts; and (ii) commodities contracts relating to financial
instruments, such as financial futures contracts and options on such contracts.
EXCHANGE LISTING AND TRADING
A discussion of exchange listing and trading
matters associated with an investment in the Fund is contained in the summary section of the Fund's Prospectus under the
"PURCHASE AND SALE OF FUND SHARES" and in the statutory Prospectus under "BUYING AND SELLING THE FUND."
The discussion below supplements, and should be read in conjunction with, such sections of the Prospectus.
The Shares of the Fund are approved for
listing and trading on the Exchange, subject to notice of issuance. The Shares trade on the Exchange at prices that may differ
to some degree from their net asset value. There can be no assurance that the requirements of the Exchange necessary to maintain
the listing of Shares of the Fund will continue to be met.
There can be no assurance that the
Fund will continue to meet the requirements of the Exchange necessary to maintain the listing of Shares. The Exchange will consider
the suspension of trading in, and will initiate delisting proceedings of, the Shares under any of the following circumstances:
(i) if any of the requirements set forth in the Exchange rules, including compliance with Rule 6c-11(c) under the 1940 Act, are
not continuously maintained; (ii) if, following the initial 12-month period beginning at the commencement of trading of the Fund,
there are fewer than 50 beneficial owners of Shares of the Fund; or (iii) if such other event shall occur or condition shall
exist that, in the opinion of the Exchange, makes further dealings on the Exchange inadvisable. The Exchange will remove the Shares
of the Fund from listing and trading upon termination of the Fund.
The Trust reserves 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 the Fund.
MANAGEMENT OF THE TRUST
The following information supplements and
should be read in conjunction with the section in the Prospectus entitled "Fund Management."
TRUSTEES AND OFFICERS OF THE TRUST
Board Responsibilities. The management
and affairs of the Trust and the Fund described in this SAI, are overseen by the Trustees. The Board elects the officers of the
Trust who are responsible for administering the day-to-day operations of the Trust and the Fund. The Board has approved contracts,
as described below, under which certain companies provide essential services to the Trust.
Like most registered investment companies,
the day-to-day business of the Trust, including the management of risk, is performed by third party service providers, such as
the Adviser, the Distributor and the Fund's administrator. The Trustees are responsible for overseeing the Trust's
service providers and, thus, have oversight responsibility with respect to risk management performed by those service providers.
Risk management seeks to identify and address risks, i.e., events or circumstances that could have material adverse effects
on the business, operations, shareholder services, investment performance or reputation of the Fund. The Fund and its service providers
employ a variety of processes, procedures and controls to identify various of those possible events or circumstances, to lessen
the probability of their occurrence and/or to mitigate the effects of such events or circumstances if they do occur. Each service
provider is responsible for one or more discrete aspects of the Trust's business (e.g., the Adviser is responsible
for the day-to-day management of the Fund's portfolio investments) and, consequently, for managing the risks associated with
that business. The Board has emphasized to the Fund's service providers the importance of maintaining vigorous risk management.
The Trustees' role in risk oversight
begins before the inception of the Fund, at which time certain of the Fund's service providers present the Board with information
concerning the investment objectives, strategies and risks of the Fund as well as proposed investment limitations for the Fund.
Additionally, the Fund's Adviser provides the Board with an overview of, among other things, its investment philosophy, brokerage
practices and compliance infrastructure. Thereafter, the Board continues its oversight function as various personnel, including
the Trust's Chief Compliance Officer, as well as personnel of the Adviser and other service providers such as the Fund's
independent accountants, make periodic reports to the Audit Committee or to the Board with respect to various aspects of risk management.
The Board and the Audit Committee oversee efforts by management and service providers to manage risks to which the Fund may be
exposed.
The Board is responsible for overseeing
the nature, extent and quality of the services provided to the Fund by the Adviser and receives information about those services
at its regular meetings. In addition, on an annual basis, in connection with its consideration of whether to renew the Advisory
Agreements with the Adviser, the Board meets with the Adviser to review such services. Among other things, the Board regularly
considers the Adviser's adherence to the Fund's investment restrictions and compliance with various Fund policies and
procedures and with applicable securities regulations. The Board also reviews information about the Fund's performance and
the Fund's investments, including, for example, portfolio holdings schedules.
The Trust's Chief Compliance Officer
reports regularly to the Board to review and discuss compliance issues and Fund and Adviser risk assessments. At least annually,
the Trust's Chief Compliance Officer provides the Board with a report reviewing the adequacy and effectiveness of the Trust's
policies and procedures and those of its service providers, including the Adviser. The report addresses the operation of the policies
and procedures of the Trust and each service provider since the date of the last report; any material changes to the policies and
procedures since the date of the last report; any recommendations for material changes to the policies and procedures; and any
material compliance matters since the date of the last report.
The Board receives reports from the Fund's
service providers regarding operational risks and risks related to the valuation and liquidity of portfolio securities. The Board
has also established a Fair Value Committee that is responsible for implementing the Trust's Fair Value Procedures and providing
reports to the Board concerning investments for which market quotations are not readily available. Annually, the independent registered
public accounting firm reviews with the Audit Committee its audit of the Fund's financial statements, focusing on major areas
of risk encountered by the Fund and noting any significant deficiencies or material weaknesses in the Fund's internal controls.
Additionally, in connection with its oversight function, the Board oversees Fund management's implementation of disclosure
controls and procedures, which are designed to ensure that information required to be disclosed by the Trust in its periodic reports
with the SEC are recorded, processed, summarized, and reported within the required time periods. The Board also oversees the Trust's
internal controls over financial reporting, which comprise policies and procedures designed to provide reasonable assurance regarding
the reliability of the Trust's financial reporting and the preparation of the Trust's financial statements.
From their review of these reports and
discussions with the Adviser, the Chief Compliance Officer, the independent registered public accounting firm and other service
providers, the Board and the Audit Committee learn in detail about the material risks of the Fund, thereby facilitating a dialogue
about how management and service providers identify and mitigate those risks.
The Board recognizes that not all risks
that may affect the Fund can be identified and/or quantified, that it may not be practical or cost-effective to eliminate or mitigate
certain risks, that it may be necessary to bear certain risks (such as investment-related risks) to achieve the Fund's goals,
and that the processes, procedures and controls employed to address certain risks may be limited in their effectiveness. Moreover,
reports received by the Trustees as to risk management matters are typically summaries of the relevant information. Most of the
Fund's investment management and business affairs are carried out by or through the Fund's Adviser and other service
providers each of which has an independent interest in risk management but whose policies and the methods by which one or more
risk management functions are carried out may differ from the Fund's and each other's in the setting of priorities,
the resources available or the effectiveness of relevant controls. As a result of the foregoing and other factors, the Board's
ability to monitor and oversee the management of risk, as a practical matter, is subject to limitations.
Members of the Board. There
are three members of the Board, two of whom are not interested persons of the Trust, as that term is defined in the 1940
Act ("Independent Trustees"). Samuel Masucci, III, an interested person of the Trust, serves as Chairman of the Board.
Terry Loebs serves as the Trust's Lead Independent Trustee. As Lead Independent Trustee, Mr. Loebs acts as a spokesperson
for the Independent Trustees in between meetings of the Board, participates in setting the agenda for meetings of the Board and
separate meetings or executive sessions of the Independent Trustees, and serves as chair during executive sessions of the Independent
Trustees.
The Board is comprised of 67% Independent
Trustees. There is an Audit Committee of the Board that is chaired by an Independent Trustee and comprised solely of Independent
Trustees. The Audit Committee chair presides at the Committee meetings, participates in formulating agendas for Committee meetings,
and coordinates with management to serve as a liaison between the Independent Trustees and management on matters within the scope
of responsibilities of the Committee as set forth in its Board-approved charter.
The Trust has determined its leadership
structure is appropriate given the specific characteristics and circumstances of the Trust. The Trust made this determination in
consideration of, among other things, the fact that the Independent Trustees constitute 67% of the Board, the number of Independent
Trustees that constitute the Board, the amount of assets under management in the Trust, and the number of funds overseen by the
Board. The Board also believes that its leadership structure facilitates the orderly and efficient flow of information to the Independent
Trustees from Fund management.
The Board of Trustees has two standing
committees: the Audit Committee and Nominating Committee. The Audit Committee and Nominating Committee are each chaired by an
Independent Trustee and composed of Independent Trustees.
Set forth below are the names, birth years,
positions with the Trust, length of term of office, and the principal occupations and other directorships held during at least
the last five years of each of the persons currently serving as a Trustee of the Trust, as well as information about each officer.
The business address of each Trustee and officer is 30 Maple Street, 2nd Floor, Summit, New Jersey 07901.
Name
and
Year of Birth
|
Position(s)
Held with
the Trust,
Term of
Office and
Length of
Time Served
|
Principal
Occupation(s)
During Past
5 Years
|
Number of
Portfolios in
Fund Complex
Overseen By
Trustee
|
Other
Directorships
Held by
Trustee
During Past
5 Years
|
Interested Trustee and Officers
|
Samuel R.
Masucci, III
(1962)
|
Trustee,
Chairman of the Board and President
(since 2012);
Secretary (since 2014)
|
Chief Executive Officer, Exchange Traded Managers Group LLC (since 2013); Chief Executive Officer, ETF Managers Group LLC (since 2016); Chief Executive Officer, ETF Managers Capital LLC (commodity pool operator) (since 2014); Chief Executive Officer (2012–2016) and Chief Compliance Officer (2012–2014), Factor Advisors, LLC (investment adviser); President and Chief Executive Officer, Factor Capital Management LLC (2012-2014) (commodity pool operator);
|
12
|
None
|
John A. Flanagan, (1946)
|
Treasurer
(since 2015)
|
President, John A. Flanagan CPA, LLC (accounting services) (since 2010); Treasurer, ETF Managers Trust (since 2015); Chief Financial Officer, ETF Managers Capital LLC (commodity pool operator) (since 2015)
|
n/a
|
n/a
|
Reshma A. Tanczos
(1978)
|
Chief Compliance Officer (since 2016)
|
Chief Compliance Officer of ETFMG Financial LLC (since 2017); Chief Compliance Officer, ETF Managers Group LLC (since 2016); Chief Compliance Officer, ETF Managers Capital LLC (since 2016); Partner, Crow & Cushing (law firm) (2007-2016).
|
n/a
|
n/a
|
Matthew J. Bromberg
(1973)
|
Assistant Secretary (since 2020)
|
General Counsel and Secretary of Exchange Traded Managers Group LLC (since 2020); ETF Managers Group LLC (since 2020); ETFMG Financial LLC (since 2020); ETF Managers Capital LLC (since 2020); Partner of Dorsey & Whitney LLP (law firm) (2019-2020); General Counsel of WBI Investments, Inc. (2016-2019); Millington Securities, Inc. (2016-2019); and Partner of Reed Smith (law firm) (2015-2016).
|
n/a
|
n/a
|
* Mr. Masucci is an interested Trustee by virtue of his
role as the Chief Executive Officer of the Adviser.
Name
and
Year of Birth
|
Position(s)
Held with
the Trust,
Term of
Office and
Length of
Time Served
|
Principal
Occupation(s)
During Past
5 Years
|
Number of
Portfolios in
Fund Complex
Overseen By
Trustee
|
Other
Directorships
Held by
Trustee
During Past
5 Years
|
Independent Trustees
|
Terry Loebs
(1963)
|
Trustee (since 2014); Lead Independent Trustee (since 2020)
|
Founder and Managing Member, Pulsenomics LLC (index product development and consulting firm) (since 2011); Managing Director, MacroMarkets, LLC (exchange-traded products firm) (2006–2011).
|
12
|
None
|
Eric Weigel1 (1960)
|
Trustee (since 2020)
|
Little House Capital (2019-present); Global Focus Capital, LLC (2013-present); Insight Financial Strategist LLC (2017-2018).
|
12
|
None
|
1
Effective September 4, 2020, Mr. Weigel was appointed as an Independent Trustee to the Board.
Individual Trustee Qualifications.
The Trust has concluded that each of the Trustees should serve on the Board because of their ability to review and understand information
about the Fund provided to them by management, to identify and request other information they may deem relevant to the performance
of their duties, to question management and other service providers regarding material factors bearing on the management and administration
of the Fund, and to exercise their business judgment in a manner that serves the best interests of the Fund's shareholders.
The Trust has concluded that each of the Trustees should serve as a Trustee based on their own experience, qualifications, attributes
and skills as described below.
The Trust has concluded that Mr. Masucci
should serve as Trustee because of the experience he has gained as chief executive officer of multiple investment advisory firms
as well as his knowledge of and experience in the financial services industry.
The Trust has concluded that Mr. Loebs
should serve as Trustee because of his diverse experience in capital markets, including asset pricing and trading, market research,
index development, and exchange-traded products, as well as his knowledge of and experience in the financial services industry.
The Trust has concluded that Mr. Weigel
should serve as Trustee because of his more than 30 years of executive experience at investment advisory firms. He has gained
in-depth knowledge of and experience in the financial services industry.
BOARD COMMITTEES
The Board has established the following
standing committees:
Audit Committee. The Board has
a standing Audit Committee that is composed of 100% of the Independent Trustees of the Trust, with Mr. Weigel as Chairman. The
Audit Committee operates under a written charter approved by the Board. The principal responsibilities of the Audit Committee
include: recommending which firm to engage as the Fund's independent registered public accounting firm and whether to terminate
this relationship; reviewing the independent registered public accounting firm's compensation, the proposed scope and terms
of its engagement, and the firm's independence; pre-approving audit and non-audit services provided by the Fund's
independent registered public accounting firm to the Trust and certain other affiliated entities; serving as a channel of communication
between the independent registered public accounting firm and the Trustees; reviewing the results of each external audit, including
any qualifications in the independent registered public accounting firm's opinion, any related management letter, management's
responses to recommendations made by the independent registered public accounting firm in connection with the audit, reports submitted
to the Committee by the internal auditing department of the Fund's administrator, if any, and management's responses
to any such reports; reviewing the Fund's audited financial statements and considering any significant disputes between
the Trust's management and the independent registered public accounting firm that arose in connection with the preparation
of those financial statements; considering, in consultation with the independent registered public accounting firm and the Trust's
senior internal accounting executive, if any, the independent registered public accounting firms' report on the adequacy
of the Trust's internal financial controls; reviewing, in consultation with the Fund's independent registered public
accounting firm, major changes regarding auditing and accounting principles and practices to be followed when preparing the Fund's
financial statements; and other audit related matters. All of the Independent Trustees currently serve as members of the Audit
Committee. The Audit Committee also acts as the Trust's qualified legal compliance committee. During the fiscal year ended
September 30, 2020, the Audit Committee met five times.
Nominating Committee. The Board
has a standing Nominating Committee that is composed of 100% of the Independent Trustees of the Trust, with Mr. Loebs as Chairman.
The Nominating Committee operates under a written charter approved by the Board. The principal responsibility of the Nominating
Committee is to consider, recommend and nominate candidates to fill vacancies on the Trust's Board, if any. The Nominating
Committee generally will not consider nominees recommended by shareholders. All of the Independent Trustees currently serve as
members of the Nominating Committee. During the fiscal year ended September 30, 2020, the Nominating Committee met two times.
Fair Value Committee. In addition
to the Board's standing committees described above, the Board has established a Fair Value Committee that is composed of
certain officers of the Trust and representatives from the Adviser. The Fair Value Committee operates under procedures approved
by the Board. The Fair Value Committee is responsible for the valuation and revaluation of any portfolio investments for which
market quotations or prices are not readily available. The Fair Value Committee meets periodically, as necessary.
OWNERSHIP OF SHARES
The following table shows the dollar
amount ranges of each Trustee's "beneficial ownership" of shares of the Fund as of the end of the most recently
completely calendar year. Dollar amount ranges disclosed are established by the SEC. "Beneficial ownership" is determined
in accordance with Rule 16a-1(a)(2) under the 1934 Act. As of December 31, 2020, the Trustees and officers of the Trust owned
less than 1% of the outstanding shares of the Fund.
Name
|
Dollar Range of Shares of the Fund
|
Aggregate Dollar Range of Shares
(All Funds in the Complex)
|
Interested Trustee
|
Samuel R. Masucci, III
|
None
|
None
|
Independent Trustees
|
Terry Loebs
|
None
|
None
|
Eric Weigel
|
None
|
None
|
COMPENSATION OF THE TRUSTEES AND OFFICER
The Trustees received the following compensation during
the fiscal year ended September 30, 2020. Because Trustee compensation is covered by the unitary fee paid by the Fund, the Adviser,
and not the Fund, is responsible for compensating the Trustees.
Name
|
Aggregate
Compensation
|
Pension or
Retirement
Benefits Accrued as
Part of Fund
Expenses
|
Estimated Annual
Benefits Upon
Retirement
|
Total
Compensation
from the Trust and
Fund Complex
|
Interested Trustee
|
Samuel R.Masucci, III
|
$0
|
$0
|
$0
|
$0
|
Independent Trustees
|
Jared Chase1
|
$0
|
$0
|
$0
|
$71,124.46*
|
Terry Loebs
|
$0
|
$0
|
$0
|
$97,768.21*
|
Eric Weigel2
|
$0
|
$0
|
$0
|
$7,529.76*
|
1
Mr. Chase resigned as an Independent Trustee on June 29, 2020.
2
Mr. Weigel was appointed as an Independent Trustee on September 4, 2020.
*
Compensation reflected does not include certain additional hourly fees which the Trustees may receive from the Adviser in connection
with special matters relating to the Trust.
CODES OF ETHICS
The Trust, the Adviser, and ETFMG Financial
LLC (the "Distributor") have each adopted codes of ethics pursuant to Rule 17j-1 of the 1940 Act. These codes
of ethics are designed to prevent affiliated persons of the Trust, the Adviser and the Distributor from engaging in deceptive,
manipulative or fraudulent activities in connection with securities held or to be acquired by the Fund (which may also be held
by persons subject to the codes of ethics). Each Code of Ethics permits personnel subject to that Code of Ethics to invest in securities
for their personal investment accounts, subject to certain limitations, including limitations related to securities that may be
purchased or held by the Fund.
There can be no assurance that the codes
of ethics will be effective in preventing such activities. Each code of ethics has been filed with the SEC and may be examined
at the office of the SEC in Washington, D.C. or on the Internet at the SEC's website at http://www.sec.gov.
PROXY VOTING POLICIES
Proxies
for the Fund's portfolio securities are voted in accordance with the Adviser's proxy voting policies and procedures,
which are set forth in Appendix A to this SAI.
Information on how the Fund voted proxies
relating to portfolio securities during the most recent 12 month period ended June 30 is available (1) without
charge, upon request, by calling 1-844-ETF-MGRS (383-6477) and (2) on the SEC's
website at www.sec.gov.
INVESTMENT ADVISORY AND OTHER SERVICES
Investment
Adviser. ETF Managers Group, LLC, a Delaware limited liability company located at 30 Maple Street, 2nd Floor,
Summit, New Jersey 07901, serves as the investment adviser to the Fund. The Adviser is a wholly-owned subsidiary of Exchange
Traded Managers Group, LLC, an entity controlled by Samuel Masucci, III, the Adviser's Chief Executive Officer and a Trustee
and Chairman of the Board of the Trust.
The Trust and the Adviser have entered
into an investment advisory agreement (the "Advisory Agreement") with respect to the Fund. Under the Advisory Agreement,
the Adviser serves as the investment adviser, makes investment decisions for the Fund, and manages the investment portfolios of
the Fund, subject to the supervision of, and policies established by, the Board. The Adviser is responsible for trading portfolio
securities on behalf of the Fund, including selecting broker-dealers to execute purchase and sale transactions as instructed by
the Adviser or in connection with any rebalancing or reconstitution of the Fund's Index, subject to the supervision of the
Board. The Advisory Agreement provides that the Adviser shall not be protected against any liability to the Trust or its shareholders
by reason of willful misfeasance, bad faith or gross negligence generally in the performance of its duties hereunder or its reckless
disregard of its obligation and duties under the Advisory Agreement.
After the initial two-year term, the continuance
of the Advisory Agreement must be specifically approved at least annually: (i) by the vote of the Trustees or by a vote of
the shareholders of the Fund; and (ii) by the vote of a majority of the Trustees who are not parties to the Advisory Agreement
or "interested persons" or of any party thereto, cast in person at a meeting called for the purpose of voting on such
approval. The Advisory Agreement will terminate automatically in the event of its assignment, and is terminable at any time without
penalty by the Trustees of the Trust or, with respect to the Fund, by a majority of the outstanding voting securities of the Fund,
or by the Adviser on not more than 60 days' nor less than 30 days' written notice to the Trust. As used in
the Advisory Agreement, the terms "majority of the outstanding voting securities," "interested persons"
and "assignment" have the same meaning as such terms in the 1940 Act.
For its services, the Adviser receives
a fee that is equal to 0.75% per annum of the average daily net assets of the Fund, calculated daily and paid monthly. Additionally,
under the Investment Advisory Agreement, the Adviser has agreed to pay all expenses of the Fund, except for: the fee paid to the
Adviser pursuant to the Investment Advisory Agreement, interest charges on any borrowings, taxes, brokerage commissions and other
expenses incurred in placing orders for the purchase and sale of securities and other investment instruments, acquired fund fees
and expenses, accrued deferred tax liability, extraordinary expenses (such as, among other things and subject to Board approval,
certain proxy solicitation costs and non-standard Board-related expenses and litigation against the Board, Trustees, Fund, Adviser,
and officers of the Adviser), and distribution (12b-1) fees and expenses.
For the fiscal periods indicated below,
the Fund paid the following management fees to the Adviser:
|
|
Aggregate Advisory Fees Paid to Adviser
|
|
|
|
Fiscal year ended September 30, 2018
|
|
$2,207,335
|
Fiscal year ended September 30, 2019
|
|
$7,180,611
|
Fiscal year ended September 30, 2020
|
|
$4,599,419
|
THE PORTFOLIO MANAGERS
This section includes information about
the Fund's portfolio managers, including information about other accounts they manage, the dollar range of Shares they own
and how they are compensated.
Portfolio Manager Compensation.
Samuel R. Masucci, III, Devin Ryder, Frank Vallario and Donal Bishnoi are the portfolio managers of the Fund. Their portfolio management
compensation includes a salary and discretionary bonus based on the profitability of the Adviser. No compensation is directly related
to the performance of the underlying assets.
Portfolio Manager Fund Ownership.
As of September 30, 2020, Samuel R. Masucci, III, Devin Ryder, Frank Vallario and Donal Bishnoi did not own Shares of
the Fund.
Other
Accounts
In addition to the Fund, Samuel R.
Masucci, III, Donal Bishnoi, and Devin Ryder managed the following other accounts for the Adviser as of September 30, 2020.
Type of Accounts
|
Total
Number of
Accounts
|
Total Assets
of Accounts
|
Total
Number of
Accounts
with
Performance
Based Fees
|
Total
Assets
of Accounts
with
Performance
Based Fees
|
Registered Investment Companies
|
10
|
$3,253,942,178
|
0
|
NA
|
Other Pooled Investment Vehicles
|
0
|
NA
|
0
|
NA
|
Other Accounts
|
0
|
NA
|
0
|
NA
|
Description of Material Conflicts
of Interest. The portfolio managers' management of "other accounts" is not expected to give rise to potential
conflicts of interest in connection with their management of the Fund's investments, on the one hand, and the investments
of the other accounts, on the other. The other accounts may have the same investment objectives as the Fund. Therefore, a potential
conflict of interest may arise as a result of the identical investment objectives, whereby a portfolio manager could favor one
account over another. Another potential conflict could include a portfolio manager's knowledge about the size, timing and
possible market impact of Fund trades, whereby the portfolio manager could use this information to the advantage of other accounts
and to the disadvantage of the Fund. However, the Adviser has established policies and procedures to ensure that the purchase and
sale of securities among all accounts the Adviser manages are fairly and equitably allocated.
Administrator and Other Services.
Pursuant to the Advisory Agreement, the Adviser provides the Fund with administrative services, including regulatory reporting
and all necessary office space, equipment, personnel and facilities. Additionally, the Adviser also serves as the shareholder
servicing agent for the Fund whereby the Adviser provides certain shareholder services to the Fund.
The Adviser also provides the Fund
with accounting services, including, without limitation: (i) daily computation of NAV; (ii) maintenance of security ledgers and
books and records as required by the 1940 Act; (iii) production of the Fund's listing of portfolio securities and general
ledger reports; (iv) reconciliation of accounting records; and (v) maintaining certain books and records described in Rule 31a-1
under the 1940 Act, and reconciling account information and balances among the Fund's custodian and Adviser.
The Adviser is compensated for providing
administrative and fund accounting services out of the Advisor's unified management fee. For a description of this fee and
the terms of its payment, see the above discussion under the caption Investment Advisor on pages 25-26.
Prior to September 17, 2018, the Fund's administrator
was U.S. Bancorp Fund Services, LLC ("Fund Services"). During the fiscal year
ended September 30, 2018 (through September 16, 2018), $105,086 was paid to Fund Services under an administration agreement.
THE DISTRIBUTOR
The Trust and ETFMG Financial LLC, an affiliate
of the Adviser, are parties to a distribution agreement (the "Distribution Agreement"), whereby the Distributor acts
as principal underwriter for the Trust's shares and distributes the shares of the Fund. Shares are continuously offered for
sale by the Distributor only in Creation Units. Each Creation Unit is made up of 50,000 Shares. The Distributor will not distribute
Shares in amounts less than a Creation Unit and does not maintain a secondary market in Fund Shares. The principal business address
of the Distributor is 30 Maple Street, Summit, New Jersey 07901.
Under the Distribution Agreement, the Distributor,
as agent for the Trust, will receive orders for the purchase and redemption of Creation Units, provided that any subscriptions
and orders will not be binding on the Trust until accepted by the Trust. The Distributor will deliver a prospectus to authorized
participants purchasing Shares in Creation Units 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 FINRA.
Upon direction from the Trust, the Distributor
may also enter into agreements with securities dealers ("Soliciting Dealers") who will solicit purchases of Creation
Units of Shares. Such Soliciting Dealers may also be Authorized Participants (as discussed in "Procedures for Creation of
Creation Units" below) or DTC Participants (as defined below).
The Distribution Agreement will continue
for two years from its effective date and is renewable thereafter. The continuance of the Distribution Agreement must be specifically
approved at least annually (i) by the vote of the Trustees or by a vote of the shareholders of the Fund and (ii) by the
vote of a majority of the Trustees who are not "interested persons" of the Trust and have no direct or indirect financial
interest in the operations of the Distribution Agreement or any related agreement, cast in person at a meeting called for the purpose
of voting on such approval. The Distribution Agreement is terminable without penalty by the Trust on 60 days' written
notice when authorized either by majority vote of its outstanding voting shares or by a vote of a majority of its Board (including
a majority of the Independent Trustees), or by the Distributor on 60 days written notice, and will automatically terminate
in the event of its assignment. The Distribution Agreement provides that in the absence of willful misfeasance, bad faith or negligence
on the part of the Distributor, or reckless disregard by it of its obligations thereunder, the Distributor shall not be liable
for any action or failure to act in accordance with its duties thereunder.
Distribution
Plan. The Trust has adopted a Distribution Plan (the "Plan") in accordance with the provisions of Rule 12b-1
under the 1940 Act, which regulates circumstances under which an investment company may directly or indirectly bear expenses relating
to the distribution of its shares. No distribution fees are currently charged to the Fund; there are no plans to impose these fees.
Continuance of
the Plan must be approved annually by a majority of the Trustees of the Trust and by a majority of the Trustees who are not interested
persons (as defined in the 1940 Act) of the Trust and have no direct or indirect financial interest in the Plan or in any agreements
related to the Plan ("Qualified Trustees"). The Plan requires that quarterly written reports of amounts spent under
the Plan and the purposes of such expenditures be furnished to and reviewed by the Trustees. The Plan may not be amended to increase
materially the amount that may be spent thereunder without approval by a majority of the outstanding shares of any class of the
Fund that is affected by such increase. All material amendments of the Plan will require approval by a majority of the Trustees
of the Trust and of the Qualified Trustees.
The Plan provides
that Shares ("Shares") of the Fund pay the Distributor an annual fee of up to a maximum of 0.25% of the average daily
net assets of the Shares. Under the Plan, the Distributor may make payments pursuant to written agreements to financial institutions
and intermediaries such as banks, savings and loan associations and insurance companies including, without limit, investment counselors,
broker-dealers and the Distributor's affiliates and subsidiaries (collectively, "Agents") as compensation for
services and reimbursement of expenses incurred in connection with distribution assistance. The Plan is characterized as a compensation
plan since the distribution fee will be paid to the Distributor without regard to the distribution expenses incurred by the Distributor
or the amount of payments made to other financial institutions and intermediaries. The Trust intends to operate the Plan in accordance
with its terms and with FINRA rules concerning sales charges.
Under the Plan,
subject to the limitations of applicable law and regulations, the Fund is authorized to compensate the Distributor up to the maximum
amount to finance any activity primarily intended to result in the sale of Creation Units of the Fund or for providing or arranging
for others to provide shareholder services and for the maintenance of shareholder accounts. Such activities may include, but are
not limited to: (i) delivering copies of the Fund's then current reports, prospectuses, notices, and similar materials, to
prospective purchasers of Creation Units; (ii) marketing and promotional services, including advertising; (iii) paying the costs
of and compensating others, including Authorized Participants with whom the Distributor has entered into written Authorized Participant
Agreements, for performing shareholder servicing on behalf of the Fund; (iv) compensating certain Authorized Participants for providing
assistance in distributing the Creation Units of the Fund, including the travel and communication expenses and salaries and/or
commissions of sales personnel in connection with the distribution of the Creation Units of the Fund; (v) payments to financial
institutions and intermediaries such as banks, savings and loan associations, insurance companies and investment counselors, broker-dealers,
mutual fund supermarkets and the affiliates and subsidiaries of the Trust's service providers as compensation for services
or reimbursement of expenses incurred in connection with distribution assistance; (vi) facilitating communications with beneficial
owners of Shares, including the cost of providing (or paying others to provide) services to beneficial owners of Shares, including,
but not limited to, assistance in answering inquiries related to shareholder accounts, and (vi) such other services and obligations
as are set forth in the Distribution Agreement.
SUB-ADMINISTRATIVE AND ACCOUNTING
AGENT
The Trust has
entered into an agreement with Ultimus Fund Solutions, LLC ("Ultimus"), 80 Arkay Drive, Suite 110, Hauppauge, NY 11788,
pursuant to which Ultimus acts as sub-administrative and sub-accounting agent of the Fund. On February 1, 2019, NorthStar Financial
Services Group, LLC, the parent company of Gemini Fund Services, LLC and its affiliated companies (collectively, the "Gemini
Companies"), sold its interest in the Gemini Companies to a third party private equity firm that contemporaneously acquired
Ultimus (an independent mutual fund administration firm) and its affiliates (collectively, the "Ultimus Companies").
As a result of these separate transactions, the Gemini Companies and the Ultimus Companies are now indirectly owned through a common
parent entity, The Ultimus Group, LLC.
For its services
in this capacity, Ultimus is entitled to a fee based on the average daily net assets of the Fund and subject to a minimum annual
fee. In addition to the asset-based fee, Ultimus is entitled to certain non-material fees, as well as out of pocket expenses. The
fee paid to Ultimus is paid out of the investment advisory fee paid to the Adviser by the Fund.
For
the fiscal periods indicated below, the following fees were paid to the Fund's sub-administrator.
|
|
Fees Paid to the Sub-Administrator
|
|
|
|
Fiscal year ended September 30, 2019*
|
|
$475,480
|
Fiscal year ended September 30, 2020
|
|
$464,937
|
*
Ultimus became sub-administrative and sub-accounting agent for the Fund effective February 1, 2019.
THE CUSTODIAN
WedbushSecurities
Inc. ("Wedbush"), a broker-dealer that is a member of a national securities exchange, as defined in the Exchange Act,
serves as the custodian of the Fund. Wedbush holds cash, securities and other assets of the Fund as required by the 1940 Act. The principal business address of Wedbush is 1000
Wilshire Blvd., Suite 900, Los Angeles, CA 90017.
In May, 2020,
Wedbush acquired a minority, non-voting, equity interest in the parent company of the Adviser, Exchange Traded Managers Group,
LLC.
THE TRANSFER AGENT
Computershare
Trust Company N.A. (the "Transfer Agent"), 250 Royall Street, Canton, MA 02021, serves as the Fund's transfer
agent and dividend disbursing agent under a transfer agency agreement with the Trust.
LEGAL COUNSEL
Sullivan
& Worcester LLP, 1666 K Street NW, Washington, D.C. 20006, serves as legal counsel to the Trust.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
WithumSmith
+ Brown, PC, with offices located at 1411 Broadway, 9th Floor, New York, New York, 10018, serves as the independent registered
public accounting firm for the Fund.
Additional
Information About Financial Intermediary Compensation
The Adviser or its affiliates, including the Distributor
(for purposes of this subsection only, collectively, "Advisory Affiliates") makes payments ("Payments")
to certain broker-dealers and other financial intermediaries ("Intermediaries") related to activities that are designed
to make registered representatives, other professionals and individual investors more knowledgeable about the Fund or for other
activities, such as participation in marketing activities and presentations, educational training programs, the support of technology
platforms and/or reporting systems. The Advisory Affiliates also make Payments to Intermediaries for certain printing, publishing
and mailing costs associated with the Fund or materials relating to exchange traded funds in general. In addition, Advisory Affiliates
make Payments to Intermediaries that make Fund shares available to their clients, including on zero or negative transaction fee
platforms, or for otherwise promoting the Fund. Payments of this type are sometimes referred to as marketing support or revenue-sharing
payments. Any Payments made by an Advisory Affiliate will be made from its own assets and not from the assets of the Fund.
Although a
portion of the Advisory Affiliates' revenue comes directly or indirectly, in part, from management fees paid by the Fund,
Payments do not increase the price paid by investors for the purchase of shares of, or the cost of owning, the Fund. As a result,
an Intermediary may make decisions about which investment options it will recommend or make available to its clients or what services
to provide for various products based on payments it receives or is eligible to receive. Payments create conflicts of interest
between the Intermediary and its clients and these financial incentives may cause the Intermediary to recommend the Fund over
other investments. Advisory Affiliates determine to make Payments based on any number of metrics. For example, Advisory Affiliates
may make Payments at year-end and/or other intervals in a fixed amount, an amount based upon an Intermediary's services
at defined levels, an amount based upon the total assets represented by funds subject to arrangements with the Intermediary, or
an amount based on the Intermediary's net sales of one or more funds in a year or other period, any of which arrangements
may include an agreed upon minimum or maximum payment, or any combination of the foregoing. A shareholder should contact his or
her Intermediary's salesperson or other investment professional for more information regarding any Payments the Intermediary
firm may receive.
DESCRIPTION OF SHARES
The Declaration
of Trust authorizes the issuance of an unlimited number of funds and shares of each fund. Each share of a fund represents an equal
proportionate interest in that fund with each other share. Shares are entitled upon liquidation to a pro rata share in the net
assets of the fund. Shareholders have no preemptive rights. The Declaration of Trust provides that the Trustees of the Trust may
create additional series or classes of shares. All consideration received by the Trust for shares of any additional funds and all
assets in which such consideration is invested would belong to that fund and would be subject to the liabilities related thereto.
Share certificates representing shares will not be issued. The Fund's shares, when issued, are fully paid and non-assessable.
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 funds vote together as a single class, except that if the matter being voted on
affects only a particular fund it will be voted on only by that fund and if a matter affects a particular fund differently from
other funds, that fund will vote separately on such matter. As a Delaware statutory trust, the Trust is not required, and does
not intend, to hold annual meetings of shareholders. Approval of shareholders will be sought, however, for certain changes in the
operation of the Trust and for the election of Trustees under certain circumstances. Upon the written request of shareholders owning
at least 10% of the Trust's shares, the Trust will call for a meeting of shareholders to consider the removal of one or more
trustees and other certain matters. In the event that such a meeting is requested, the Trust will provide appropriate assistance
and information to the shareholders requesting the meeting.
Under the Declaration
of Trust, the Trustees have the power to liquidate each fund without shareholder approval. While the Trustees have no present intention
of exercising this power, they may do so if any fund fails to reach a viable size within a reasonable amount of time or for such
other reasons as may be determined by the Board.
BROKERAGE TRANSACTIONS
The policy of
the Trust regarding purchases and sales of securities for the Fund is that primary consideration will be given to obtaining the
most favorable prices and efficient executions of transactions. Consistent with this policy, when securities transactions are effected
on a stock exchange, the Trust's policy is to pay commissions which are considered fair and reasonable without necessarily
determining that the lowest possible commissions are paid in all circumstances. The Trust believes that a requirement always to
seek the lowest possible commission cost could impede effective portfolio management and preclude the Fund and the Adviser from
obtaining a high quality of brokerage and research services. In seeking to determine the reasonableness of brokerage commissions
paid in any transaction, the Adviser will rely upon its experience and knowledge regarding commissions generally charged by various
brokers and on its judgment in evaluating the brokerage and research services received from the broker effecting the transaction.
Such determinations are necessarily subjective and imprecise, as in most cases, an exact dollar value for those services is not
ascertainable. The Trust has adopted policies and procedures that prohibit the consideration of sales of the Fund's shares
as a factor in the selection of a broker or dealer to execute its portfolio transactions.
The Adviser owes
a fiduciary duty to its clients to seek to provide best execution on trades effected. In selecting a broker/dealer for each specific
transaction, the Adviser chooses the broker/dealer deemed most capable of providing the services necessary to obtain the most favorable
execution. Best execution is generally understood to mean the most favorable cost or net proceeds reasonably obtainable under the
circumstances. The full range of brokerage services applicable to a particular transaction may be considered when making this judgment,
which may include, but is not limited to: liquidity, price, commission, timing, aggregated trades, capable floor brokers or traders,
competent block trading coverage, ability to position, capital strength and stability, reliable and accurate communications and
settlement processing, use of automation, knowledge of other buyers or sellers, arbitrage skills, administrative ability, underwriting
and provision of information on a particular security or market in which the transaction is to occur. The specific criteria will
vary depending upon the nature of the transaction, the market in which it is executed, and the extent to which it is possible to
select from among multiple broker/dealers. The Adviser will also use electronic crossing networks ("ECNs") when appropriate.
The Adviser may
use a Fund's assets for, or participate in, third-party soft dollar arrangements, in addition to receiving proprietary research
from various full service brokers, the cost of which is bundled with the cost of the broker's execution services. The Adviser
does not "pay up" for the value of any such proprietary research. Section 28(e) of the 1934 Act permits the Adviser,
under certain circumstances, to cause a Fund to pay a broker or dealer a commission for effecting a transaction in excess of the
amount of commission another broker or dealer would have charged for effecting the transaction in recognition of the value of brokerage
and research services provided by the broker or dealer. The Adviser may receive a variety of research services and information
on many topics, which it can use in connection with its management responsibilities with respect to the various accounts over which
it exercises investment discretion or otherwise provides investment advice. The research services may include qualifying order
management systems, portfolio attribution and monitoring services and computer software and access charges which are directly related
to investment research. Accordingly, a Fund may pay a broker commission higher than the lowest available in recognition of the
broker's provision of such services to the Adviser, but only if the Adviser determines the total commission (including the
soft dollar benefit) is comparable to the best commission rate that could be expected to be received from other brokers. The amount
of soft dollar benefits received depends on the amount of brokerage transactions effected with the brokers. A conflict of interest
exists because there is an incentive to: 1) cause clients to pay a higher commission than the firm might otherwise be able to negotiate;
2) cause clients to engage in more securities transactions than would otherwise be optimal; and 3) only recommend brokers that
provide soft dollar benefits.
The Adviser faces
a potential conflict of interest when it uses client trades to obtain brokerage or research services. This conflict exists because
the Adviser is able to use the brokerage or research services to manage client accounts without paying cash for such services,
which reduces the Adviser's expenses to the extent that the Adviser would have purchased such products had they not been
provided by brokers. Section 28(e) permits the Adviser to use brokerage or research services for the benefit of any account it
manages. Certain accounts managed by the Adviser may generate soft dollars used to purchase brokerage or research services that
ultimately benefit other accounts managed by the Adviser, effectively cross subsidizing the other accounts managed by the Adviser
that benefit directly from the product. The Adviser may not necessarily use all of the brokerage or research services in connection
with managing a Fund whose trades generated the soft dollars used to purchase such products.
The Adviser is
responsible, subject to oversight by the Board, for placing orders on behalf of the Fund for the purchase or sale of portfolio
securities. If purchases or sales of portfolio securities of the Fund and one or more other investment companies or clients supervised
by the Adviser are considered at or about the same time, transactions in such securities are allocated among the several investment
companies and clients in a manner deemed equitable and consistent with its fiduciary obligations to all by the Adviser. In some
cases, this procedure could have a detrimental effect on the price or volume of the security so far as the Fund is concerned. However,
in other cases, it is possible that the ability to participate in volume transactions and to negotiate lower brokerage commissions
will be beneficial to the Fund. The primary consideration is prompt execution of orders at the most favorable net price.
The Fund may deal
with affiliates in principal transactions to the extent permitted by exemptive order or applicable rule or regulation.
For the fiscal
periods indicated below, the Fund paid the following amounts in brokerage commissions:
|
|
Brokerage Commissions
|
|
|
|
Fiscal year ended September 30, 2018
|
|
$1,074,475
|
Fiscal year ended September 30, 2019
|
|
$1,263,360
|
Fiscal year ended September 30, 2020
|
|
$1,568,543
|
There were
no brokerage commissions paid to affiliated broker-dealers.
Brokerage with
Fund Affiliates. The Fund may execute brokerage or other agency transactions through registered broker-dealer affiliates of
either the Fund, the Adviser, or the Distributor for a commission in conformity with the 1940 Act, the 1934 Act and rules promulgated
by the SEC. These rules require that commissions paid to the affiliate by the Fund for exchange transactions not exceed "usual
and customary" brokerage commissions. The rules define "usual and customary" commissions to include amounts which
are "reasonable and fair compared to the commission, fee or other remuneration received or to be received by other brokers
in connection with comparable transactions involving similar securities being purchased or sold on a securities exchange during
a comparable period of time." The Trustees, including those who are not "interested persons" of the Fund, have
adopted procedures for evaluating the reasonableness of commissions paid to affiliates and review these procedures periodically.
Securities
of "Regular Broker-Dealer." The Fund is required to identify any securities of its "regular brokers and
dealers" (as such term is defined in the 1940 Act) which it may hold at the close of its most recent fiscal year. "Regular
brokers or dealers" of the Trust are the ten brokers or dealers that, during the most recent fiscal year: (i) received
the greatest dollar amounts of brokerage commissions from the Trust's portfolio transactions; (ii) engaged as principal
in the largest dollar amounts of portfolio transactions of the Trust; or (iii) sold the largest dollar amounts of the Trust's
shares. For the fiscal year ended September 30, 2020, the Fund did not hold any securities of "regular broker dealers"
to report.
PORTFOLIO TURNOVER RATE
Portfolio turnover
may vary from year to year, as well as within a year. High turnover rates are likely to result in comparatively greater brokerage
expenses. The overall reasonableness of brokerage commissions is evaluated by the Adviser based upon its knowledge of available
information as to the general level of commissions paid by other institutional investors for comparable services.
For the fiscal
periods indicated below, the Fund had the following portfolio turnover rates:
|
|
|
|
|
Portfolio Turnover
|
Fiscal year ended September 30, 2019
|
|
71%
|
Fiscal year ended September 30, 2020
|
|
46%
|
BOOK ENTRY ONLY SYSTEM
Depositary Trust
Company ("DTC") acts as securities depositary for the Shares. Shares of the Fund are represented by securities registered
in the name of DTC or its nominee, Cede & Co., and deposited with, or on behalf of, DTC. Except in limited circumstances set
forth below, certificates will not be issued for Shares.
DTC is a limited-purpose
trust company that 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 NYSE 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 of Shares. The Trust recognizes DTC or its nominee as the record owner of all Shares for all purposes. Beneficial Owners
of Shares are not entitled to have Shares registered in their names, and will not receive or be entitled to physical delivery of
share certificates. Each Beneficial Owner must rely on the procedures of DTC and any DTC Participant and/or Indirect Participant
through which such Beneficial Owner holds its interests, to exercise any rights of a holder of Shares.
Conveyance of
all notices, statements, and other communications to Beneficial Owners is effected as follows. DTC will make available to the Trust
upon request and for a fee a listing of Shares held by each DTC Participant. The Trust shall obtain from each such DTC Participant
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 Participant a fair and reasonable
amount as reimbursement for the expenses attendant to such transmittal, all subject to applicable statutory and regulatory requirements.
Share distributions
shall be made to DTC or its nominee, Cede & Co., as the registered holder of all shares. DTC or its nominee, upon receipt of
any such distributions, shall credit immediately DTC Participants' accounts with payments in amounts proportionate to their
respective beneficial interests in the Fund 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 the Fund's 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 determine
to discontinue providing its service with respect to the Fund at any time by giving reasonable notice to the Fund and discharging
its responsibilities with respect thereto under applicable law. Under such circumstances, the Fund shall take action either to
find a replacement for DTC to perform its functions at a comparable cost or, if such replacement is unavailable, to issue and deliver
printed certificates representing ownership of Shares, unless the Trust makes other arrangements with respect thereto satisfactory
to the Exchange.
CONTROL PERSONS AND PRINCIPAL HOLDERS
OF SECURITIES
A principal shareholder is any person
who owns of record or beneficially 5% or more of the outstanding shares of a fund. A control person is a shareholder that owns
beneficially or through controlled companies more than 25% of the voting securities of a company or acknowledges the existence
of control. Shareholders owning voting securities in excess of 25% may determine the outcome of any matter affecting and voted
on by shareholders of the Fund.
The following table sets forth the
name, address, and percentage of ownership of each person who is known by the Trust to own, of record or beneficially, 5% or more
of each Fund's outstanding equity securities as of January 15, 2021:
Name and Address
|
%
Ownership
|
Parent
Company
(if applicable)
|
Jurisdiction
(if applicable)
|
Type of
Ownership
|
National Financial Services LLC
200 Liberty Street
New York, NY 10281
|
19.58%
|
N/A
|
N/A
|
Record
|
Charles Schwab & Co., Inc.
211 Main Street
San Francisco, CA 94105-1905
|
12.48%
|
N/A
|
N/A
|
Record
|
TD Ameritrade, Inc.
P.O. Box 2226
Omaha, NE 68103-2226
|
12.28%
|
N/A
|
N/A
|
Record
|
PURCHASE AND ISSUANCE OF SHARES
IN CREATION UNITS
The Trust issues and sells Shares of the
Fund only in Creation Units on a continuous basis through the Distributor, without a sales load (but subject to transaction
fees), at their NAV per share next determined after receipt of an order, on any Business Day, in proper form pursuant to the terms
of the Authorized Participant Agreement ("Participant Agreement"). The NAV of the Fund's shares is calculated
each business day as of the close of regular trading on the New York Stock Exchange, generally 4:00 p.m., Eastern Time. The Fund
will not issue fractional Creation Units. A Business Day is any day on which the New York Stock Exchange is generally open for
business.
FUND DEPOSIT. The Trust has adopted
policies and procedures governing the process of constructing baskets of Deposit Securities (defined below), Fund Securities (defined
below) and/or cash, and acceptance of the same (the "Basket Procedures"). The consideration for purchase of a Creation
Unit of the Fund generally consists of either (i) in-kind deposit of a designated portfolio of securities (the "Deposit
Securities") and a Cash Component (defined below), or (ii) the substitution of a "cash in lieu" amount ("Deposit
Cash") to be added to the Cash Component to replace any Deposit Security. When accepting purchases of Creation Units for
all or a portion of Deposit Cash, the Fund may incur additional costs associated with the acquisition of Deposit Securities that
would otherwise be provided by an in-kind purchaser.
Together, the Deposit Securities or Deposit
Cash, as applicable, and the Cash Component constitute the "Fund Deposit," which represents the minimum initial and
subsequent investment amount for a Creation Unit of the Fund. The "Cash Component" is an amount equal to the difference
between the net asset value of the Shares (per Creation Unit) and the market value of the Deposit Securities or Deposit Cash, as
applicable. If the Cash Component is a positive number (i.e., the net asset value per Creation Unit exceeds the market value
of the Deposit Securities or Deposit Cash, as applicable), the Cash Component shall be such positive amount. If the Cash Component
is a negative number (i.e., the net asset value per Creation Unit is less than the market value of the Deposit Securities
or Deposit Cash, as applicable), the Cash Component shall be such negative amount and the creator will be entitled to receive cash
in an amount equal to the Cash Component. The Cash Component serves the function of compensating for any differences between the
net asset value per Creation Unit and the market value of the Deposit Securities or Deposit Cash, as applicable. Computation of
the Cash Component excludes any stamp duty or other similar fees and expenses payable upon transfer of beneficial ownership of
the Deposit Securities, if applicable, which shall be the sole responsibility of the Authorized Participant (as defined below).
The Fund, through the National Securities
Clearance Corporation (the "NSCC") or through other means of public dissemination, makes available on each Business
Day, immediately prior to the opening of business on the Exchange (generally 9:30 a.m., Eastern time), the list of the names and
the required number of shares of each Deposit Security or the required amount of Deposit Cash, as applicable, to be included in
the current Fund Deposit (based on information at the end of the previous Business Day) for the Fund. Such Fund Deposit is subject
to any applicable adjustments as described below, in order to effect purchases of Creation Units of the Fund until such time as
the next-announced composition of the Deposit Securities or the required amount of Deposit Cash, as applicable, is made available.
The identity and number of shares of
the Deposit Securities or the amount of Deposit Cash, as applicable, required for the Fund Deposit for the Fund may be changed
from time to time by the Adviser, in accordance with the Basket Procedures, with a view to the investment objective of the Fund.
The composition of the Deposit Securities may also change in response to interest payments and corporate action events.
The Trust reserves the right to permit
or require the substitution of an amount of cash (i.e., a "cash in lieu" amount) to replace any Deposit
Security, including, without limitation, in situations where the Deposit Security: (i) may not be available in sufficient
quantity for delivery; (ii) may not be eligible for transfer through the systems of DTC for corporate securities and municipal
securities; (iii) may not be eligible for trading by an Authorized Participant (as defined below) or the investor for which
it is acting; (iv) would be restricted under the securities laws or where the delivery of the Deposit Security to the Authorized
Participant would result in the disposition of the Deposit Security by the Authorized Participant becoming restricted under the
securities laws; or (v) in certain other situations, in accordance with the Basket Procedures.
PROCEDURES FOR PURCHASE OF CREATION
UNITS. To be eligible to place orders with the Distributor to purchase a Creation Unit of the 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 "BOOK ENTRY ONLY SYSTEM"). In addition, each Participating Party or DTC Participant
(each, an "Authorized Participant") must execute a Participant Agreement that has been agreed to by the Distributor,
and that has been accepted by the Transfer Agent, with respect to purchases and redemptions of Creation Units. Each Authorized
Participant will agree, pursuant to the terms of a Participant Agreement, on behalf of itself or any investor on whose behalf
it will act, to certain conditions, including that it will pay to the Trust, an amount of cash sufficient to pay the Cash Component
together with the Creation Transaction Fee (defined below) and any other applicable fees and taxes. The Adviser may retain all
or a portion of the Transaction Fee to the extent the Adviser bears the expenses that otherwise would be borne by the Trust in
connection with the purchase of a Creation Unit, which the Transaction Fee is designed to cover.
All orders to purchase Shares directly
from the Fund must be placed for one or more Creation Units and in the manner and by the time set forth in the Participant Agreement
and/or applicable order form. The date on which an order to purchase Creation Units (or an order to redeem Creation Units, as set
forth below) is received and accepted is referred to as the "Order Placement Date."
An Authorized Participant may require an
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 purchase Shares directly from the Fund in Creation Units 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 and
only a small number of such Authorized Participants may have international capabilities.
On days when the Exchange closes earlier
than normal, the Fund may require orders to create Creation Units to be placed earlier in the day. In addition, if a market or
markets on which the Fund's investments are primarily traded is closed, the Fund will also generally not accept orders on
such day(s). Orders must be transmitted by an Authorized Participant by telephone or other transmission method acceptable to the
Distributor pursuant to procedures set forth in the Participant Agreement and in accordance with the applicable order form. With
respect to the Fund, the Distributor will notify the Custodian of such order. The Custodian will then provide such information
to the appropriate local sub-custodian(s). Those placing orders through an Authorized Participant should allow sufficient time
to permit proper submission of the purchase order to the Transfer Agent, and accepted by the Distributor, by the cut-off time on
such Business Day. Economic or market disruptions or changes, or telephone or other communication failure may impede the ability
to reach the Distributor or an Authorized Participant.
Fund Deposits must be delivered by an Authorized
Participant through the Federal Reserve System (for cash) or through DTC (for corporate securities), through a sub-custody agent
(for foreign securities) and/or through such other arrangements allowed by the Trust or its agents. With respect to foreign Deposit
Securities, the Custodian shall cause the sub-custodian of the Fund to maintain an account into which the Authorized Participant
shall deliver, on behalf of itself or the party on whose behalf it is acting, such Deposit Securities (or Deposit Cash for all
or a part of such securities, as permitted or required), with any appropriate adjustments as advised by the Trust. Foreign Deposit
Securities must be delivered to an account maintained at the applicable local sub-custodian. The Fund Deposit transfer must be
ordered by the Authorized Participant in a timely fashion so as to ensure the delivery of the requisite number of Deposit Securities
or Deposit Cash, as applicable, to the account of the Fund or its agents by no later than the Settlement Date. The "Settlement
Date" for the Fund is generally the second Business Day after the Order Placement Date. All questions as to the number of
Deposit Securities or Deposit Cash to be delivered, as applicable, and the validity, form and eligibility (including time of receipt)
for the deposit of any tendered securities or cash, as applicable, will be determined by the Trust, whose determination shall be
final and binding. The amount of cash represented by the Cash Component must be transferred directly to the Custodian through the
Federal Reserve Bank wire transfer system or through DTC in a timely manner so as to be received by the Custodian no later than
the Settlement Date. If the Cash Component and the Deposit Securities or Deposit Cash, as applicable, are not received by in a
timely manner by the Settlement Date, the creation order may be cancelled. Upon written notice to the Distributor, such canceled
order may be resubmitted the following Business Day using the Fund Deposit as newly constituted to reflect the then current NAV
of the Fund.
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 the applicable cut-off
time and the federal funds in the appropriate amount are deposited with the Custodian on the Settlement Date. If the order is
not placed in proper form as required, or federal funds in the appropriate amount are not received on the Settlement Date, then
the order may be deemed to be rejected and the Authorized Participant shall be liable to the Fund for losses, if any, resulting
therefrom. A creation request is considered to be in "proper form" if all procedures set forth in the Participant
Agreement, order form and this SAI are properly followed.
ISSUANCE OF A CREATION UNIT. Except
as provided herein, Creation Units will not be issued until the transfer of good title to the Trust of the Deposit Securities
or payment of Deposit Cash, as applicable, and the payment of the Cash Component have been completed. When the sub-custodian has
confirmed to the Custodian that the required Deposit Securities (or the cash value thereof) have been delivered to the account
of the relevant sub-custodian or sub-custodians, the Distributor and the Adviser shall be notified of such delivery, and the Trust
will issue and cause the delivery of the Creation Units. The delivery of Creation Units so created generally will occur no later
than the second Business Day following the day on which the purchase order is deemed received by the Distributor. The Authorized
Participant shall be liable to the Fund for losses, if any, resulting from unsettled orders.
In instances where the Trust accepts
Deposit Securities for the purchase of a Creation Unit, the Creation Units may be purchased 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 net asset value of the 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) an
additional amount of cash equal to a percentage of the market value as set forth in the Participant Agreement, of the undelivered
Deposit Securities (the "Additional Cash Deposit"), which shall be maintained in a separate non-interest bearing collateral
account. 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 the applicable
percentage, as set forth in the Participant Agreement, of the daily marked to market value of the missing Deposit Securities.
The Participant Agreement will permit the Trust to buy the missing Deposit Securities at any time. Authorized Participants will
be liable to the Trust 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 set forth below under "Creation Transaction Fee" will be charged in all cases. The delivery of Creation Units
so created generally will occur no later than the Settlement Date.
ACCEPTANCE OF ORDERS OF CREATION UNITS.
The Trust reserves the absolute right to reject an order for Creation Units transmitted to it by the Distributor in respect of
the Fund including, without limitation, if (a) the order is not in proper form; (b) the Deposit Securities or Deposit
Cash, as applicable, delivered by the Participant are not as disseminated through the facilities of the NSCC for that date
by the Custodian; (c) the investor(s), upon obtaining the Shares ordered, would own 80% or more of the currently outstanding
Shares of the Fund; (d) acceptance of the Deposit Securities would have certain adverse tax consequences to the Fund; (e) the
acceptance of the Fund Deposit would, in the opinion of counsel, be unlawful; (f) the acceptance of the Fund Deposit would
otherwise, in the discretion of the Trust or the Adviser, have an adverse effect on the Trust or the rights of beneficial owners;
(g) the acceptance or receipt of the order for a Creation Unit would, in the opinion of counsel to the Trust, be unlawful;
or (h) in the event that circumstances outside the control of the Trust, the Custodian, the Transfer Agent and/or the Adviser
make it for all practical purposes not feasible to process orders for Creation Units.
Examples of such circumstances include
acts of God or 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, the Distributor, the Custodian, a sub-custodian, the Transfer Agent,
DTC, NSCC, Federal Reserve System, or any other participant in the creation process, and other extraordinary events. The Distributor
shall notify a prospective creator of a Creation Unit and/or the Authorized Participant acting on behalf of the creator of a Creation
Unit of its rejection of the order of such person. The Trust, the Transfer Agent, 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 either
of them incur any liability for the failure to give any such notification. The Trust, the Transfer Agent, the Custodian and the
Distributor shall not be liable for the rejection of any purchase order for Creation Units.
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. A purchase (i.e.,
creation) transaction fee, payable to the Fund's custodian, may be imposed for the transfer and other transaction costs associated
with the purchase of Creation Units, and investors will be required to pay a creation transaction fee regardless of the number
of Creation Units created in the transaction. The Fund may adjust the creation transaction fee from time to time. The standard
fixed creation transaction fee for the Fund will be $750. In addition, a variable fee will be charged on all cash transactions
or substitutes for Creation Units of up to a maximum of 2% as a percentage of the value of the Creation Units subject to the transaction.
The variable charge may be imposed for cash purchases, non-standard orders, or partial cash purchases incurred by the Fund, primarily
designed to cover expenses related to broker commissions. Investors who use the services of a broker or other such intermediary
may be charged a fee for such services. Investors are responsible for the fixed costs of transferring the securities constituting
the Deposit Securities to the account of the Trust.
RISKS OF PURCHASING CREATION UNITS. There
are certain legal risks unique to investors purchasing Creation Units directly from the Fund. Because the Fund's shares may
be issued on an ongoing basis, a "distribution" of Shares could be occurring at any time. Certain activities that a
shareholder performs as a dealer could, depending on the circumstances, result in the shareholder being deemed a participant in
the distribution in a manner that could render the shareholder a statutory underwriter and subject to the prospectus delivery and
liability provisions of the Securities Act. For example, a shareholder could be deemed a statutory underwriter if it purchases
Creation Units from the Fund, breaks them down into the constituent Shares, and sells those Shares directly to customers, or if
a shareholder chooses to couple the creation of a supply of new Shares with an active selling effort involving solicitation of
secondary-market demand for Shares. Whether a person is an underwriter depends upon all of the facts and circumstances pertaining
to that person's activities, and the examples mentioned here should not be considered a complete description of all the activities
that could cause you to be deemed an underwriter.
Dealers who are not "underwriters"
but are participating in a distribution (as opposed to engaging in ordinary secondary-market transactions), and thus dealing with
the Fund's Shares as part of an "unsold allotment" within the meaning of Section 4(a)(3)(C) of the Securities
Act, will be unable to take advantage of the prospectus delivery exemption provided by Section 4(a)(3) of the Securities Act.
REDEMPTION. Shares may be redeemed only
in Creation Units at their net asset value next determined after receipt of a redemption request in proper form by the Fund through
the Transfer Agent and only on a Business Day. EXCEPT UPON LIQUIDATION OF THE FUND, THE TRUST WILL NOT REDEEM SHARES IN AMOUNTS
LESS THAN CREATION UNITS. Investors must accumulate enough Shares in the secondary market to constitute a Creation Unit 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. Investors should expect to incur brokerage and other costs in
connection with assembling a sufficient number of Shares to constitute a redeemable Creation Unit.
With respect to the Fund, the Custodian,
through the NSCC, makes available immediately prior to the opening of business on the Exchange (generally 9:30 a.m. Eastern time)
on each Business Day, the list of the names and share quantities of the Fund's portfolio securities that will be applicable
(subject to possible amendment or correction) to redemption requests received in proper form (as defined below) on that day ("Fund
Securities"). Fund Securities received on redemption may not be identical to Deposit Securities.
Redemption proceeds for a Creation
Unit are paid either in-kind or in cash, or a combination thereof, as determined by the Trust in accordance with the Basket Procedures.
With respect to in-kind redemptions of the Fund, redemption proceeds for a Creation Unit will consist of Fund Securities —
as announced by the Custodian on the Business Day of the request for redemption received in proper form plus cash in an amount
equal to the difference between the net asset value of the 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 fixed redemption transaction
fee as set forth below. In the event that the Fund Securities have a value greater than the net asset value of the Shares, a compensating
cash payment equal to the differential is required to be made by or through an Authorized Participant by the redeeming shareholder.
Notwithstanding the foregoing, at the Trust's discretion, an Authorized Participant may receive the corresponding cash value
of the securities in lieu of the in-kind securities value representing one or more Fund Securities.
REDEMPTION TRANSACTION FEE. A redemption
transaction fee, payable to the Fund's custodian, may be imposed for the transfer and other transaction costs associated
with the redemption of Creation Units, and investors will be required to pay a fixed redemption transaction fee regardless of the
number of Creation Units created in the transaction, as set forth in the Fund's Prospectus, as may be revised from time to
time. The redemption transaction fee is the same no matter how many Creation Units are being redeemed pursuant to any one redemption
request. The Fund may adjust the redemption transaction fee from time to time. The standard fixed redemption transaction fee for
the Fund will be $750. In addition, a variable fee will be charged on all cash transactions or substitutes for Creation Units of
up to a maximum of 2% as a percentage of the value of the Creation Units subject to the transaction. The variable charge may be
imposed for cash redemptions, non-standard orders, or partial cash redemptions (when cash redemptions are available) incurred by
the Fund, primarily designed to cover expenses related to broker commissions. Investors who use the services of a broker or other
such intermediary may be charged a fee for such services. Investors are responsible for the fixed costs of transferring the Fund
Securities from the Trust to their account or on their order.
PROCEDURES FOR REDEMPTION OF CREATION UNITS.
Orders to redeem Creation Units must be submitted in proper form to the Transfer Agent prior to the time as set forth in the Participant
Agreement. A redemption request is considered to be in "proper form" if (i) an Authorized Participant has transferred
or caused to be transferred to the Trust's Transfer Agent the Creation Unit(s) being redeemed through the book-entry system
of DTC so as to be effective by the time as set forth in the Participant Agreement and (ii) a request in form satisfactory
to the Trust is received by the Transfer Agent from the Authorized Participant on behalf of itself or another redeeming investor
within the time periods specified in the Participant Agreement. If the Transfer Agent does not receive the investor's Shares
through DTC's facilities by the times and pursuant to the other terms and conditions set forth in the Participant Agreement,
the redemption request shall be rejected.
The Authorized Participant must transmit
the request for redemption, in the form required by the Trust, to the Transfer Agent in accordance with procedures set forth in
the Authorized Participant Agreement. Investors should be aware that their particular broker may not have executed an Authorized
Participant Agreement, and that, therefore, requests to redeem Creation Units may have to be placed by the investor's broker
through an Authorized Participant who has executed an Authorized Participant Agreement. Investors making a redemption request should
be aware that such request must be in the form specified by such Authorized Participant. Investors making a request to redeem Creation
Units should allow sufficient time to permit proper submission of the request by an Authorized Participant and transfer of the
Shares to the Trust's Transfer Agent; such investors should allow for the additional time that may be required to effect
redemptions through their banks, brokers or other financial intermediaries if such intermediaries are not Authorized Participants.
ADDITIONAL REDEMPTION PROCEDURES. In
connection with taking delivery of shares of Fund Securities upon redemption of Creation Units, the Authorized Participant must
maintain appropriate custody arrangements with a qualified broker-dealer, bank or other custody providers in each jurisdiction
in which any of the Fund Securities are customarily traded, to which account such Fund Securities will be delivered. Deliveries
of redemption proceeds generally will be made within two business days of the trade date. However, due to the schedule of holidays
in certain countries, the different treatment among foreign and U.S. markets of dividend record dates and dividend ex-dates (that
is the last date the holder of a security can sell the security and still receive dividends payable on the security sold), and
in certain other circumstances, the delivery of in-kind redemption proceeds may take longer than two Business Days after the day
on which the redemption request is received in proper form. If neither the redeeming shareholder nor the Authorized Participant
acting on behalf of such redeeming shareholder has appropriate arrangements to take delivery of the Fund Securities in the applicable
foreign jurisdiction and it is not possible to make other such arrangements, or if it is not possible to effect deliveries of
the Fund Securities in such jurisdiction, the Trust may, in its discretion and in accordance with the Basket Procedures, exercise
its option to redeem such Shares in cash, and the redeeming investor will be required to receive its redemption proceeds in cash.
In addition, an investor may request a
redemption in cash that the Fund may, in its sole discretion, permit. In either case, the investor will receive a cash payment
equal to the NAV of its Shares based on the NAV of Shares of the 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 Trust's brokerage and other transaction costs associated with the disposition of Fund Securities).
The Fund may also, in its sole discretion
and in accordance with the Basket Procedures, upon request of a shareholder, provide such redeemer a portfolio of securities that
differs from the exact composition of the Fund Securities but does not differ in net asset value.
Redemptions of shares for Fund Securities
will be subject to compliance with applicable federal and state securities laws and the Fund (whether or not it otherwise permits
cash redemptions) reserves the right to redeem Creation Units 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 security
included in the Fund Securities applicable to the redemption of Creation Units may be paid an equivalent amount of cash. The Authorized
Participant may request the redeeming investor of the Shares to complete an order form or to enter into agreements with respect
to such matters as compensating cash payment. Further, an Authorized Participant that is not a "qualified institutional buyer"
("QIB"), as such term is defined under Rule 144A of the Securities Act, will not be able to receive Fund Securities
that are restricted securities eligible for resale under Rule 144A. An Authorized Participant may be required by the Trust
to provide a written confirmation with respect to QIB status in order to receive Fund Securities.
Because the portfolio securities of the
Fund may trade on the relevant exchange(s) on days that the Exchange is closed or are otherwise not Business Days for the Fund,
shareholders may not be able to redeem their shares of the Fund, or to purchase or sell shares of the Fund on the Exchange, on
days when the NAV of the Fund could be significantly affected by events in the relevant foreign markets.
The right of redemption may be suspended
or the date of payment postponed with respect to the Fund (1) for any period during which the Exchange is closed (other than
customary weekend and holiday closings); (2) for any period during which trading on the Exchange is suspended or restricted;
(3) for any period during which an emergency exists as a result of which disposal of the Shares of the Fund or determination of
the NAV of the Shares is not reasonably practicable; or (4) in such other circumstance as is permitted by the SEC.
REQUIRED EARLY ACCEPTANCE OF ORDERS. Notwithstanding
the foregoing, as described in the Participant Agreement and/or applicable order form, the Fund may require orders to be placed
up to one or more business days prior to the trade date, as described in the Participant Agreement or the applicable order form,
in order to receive the trade date's net asset value. Orders to purchase Shares of the Fund that are submitted on the Business
Day immediately preceding a holiday or a day (other than a weekend) that the equity markets in the relevant foreign market are
closed will not be accepted. Authorized Participants may be notified that the cut-off time for an order may be earlier on a particular
business day, as described in the Participant Agreement and the order form.
DETERMINATION OF NET ASSET VALUE
Net asset value
per Share for the Fund is computed by dividing the value of the net assets of the Fund (i.e., the value of its total assets
less total liabilities) by the total number of Shares outstanding, rounded to the nearest cent. Expenses and fees, including the
management fees, are accrued daily and taken into account for purposes of determining net asset value. The net asset value of the
Fund is calculated by the Custodian and determined at the close of the regular trading session on the NYSE (ordinarily 4:00 p.m.
Eastern time) on each day that such exchange is open, provided that fixed-income assets may be valued as of the announced closing
time for trading in fixed-income instruments on any day that the Securities Industry and Financial Markets Association ("SIFMA")
announces an early closing time.
In calculating
the Fund's net asset value per Share, the Fund's investments are generally valued using market valuations. A market
valuation generally means a valuation (i) obtained from an exchange, a pricing service, or a major market maker (or dealer),
(ii) based on a price quotation or other equivalent indication of value supplied by an exchange, a pricing service, or a major
market maker (or dealer) or (iii) based on amortized cost. In the case of shares of other funds that are not traded on an
exchange, a market valuation means such fund's published net asset value per share. The Adviser may use various pricing services,
or discontinue the use of any pricing service, as approved by the Board from time to time. A price obtained from a pricing service
based on such pricing service's valuation matrix may be considered a market valuation. Any assets or liabilities denominated
in currencies other than the U.S. dollar are converted into U.S. dollars at the current market rates on the date of valuation as
quoted by one or more sources.
In the event that
current market valuations are not readily available or such valuations do not reflect current market value, the Trust's procedures
require the Fair Value Committee to determine a security's fair value if a market price is not readily available. In determining
such value the Fair Value Committee may consider, among other things, (i) price comparisons among multiple sources, (ii) a
review of corporate actions and news events, and (iii) a review of relevant financial indicators (e.g., movement in
interest rates, market indices, and prices from the Fund's index provider). In these cases, the Fund's net asset value
may reflect certain portfolio securities' fair values rather than their market prices. Fair value pricing involves subjective
judgments and it is possible that the fair value determination for a security is materially different than the value that could
be realized upon the sale of the security. In addition, fair value pricing could result in a difference between the prices used
to calculate the Fund's net asset value and the prices used by the Fund's Underlying Index. This may result in a difference
between the Fund's performance and the performance of the Fund's Underlying Index. With respect to securities that
are primarily listed on foreign exchanges, the value of the Fund's portfolio securities may change on days when you will
not be able to purchase or sell your Shares.
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 quarterly by the Fund. Distributions of net realized securities
gains, if any, generally are declared and paid once a year, but the Fund may make distributions on a more frequent basis for the
Fund to improve index tracking or to comply with the distribution requirements of the Code, in all events in a manner consistent
with the provisions of the 1940 Act.
Dividends and
other distributions on 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 Fund.
The Fund may make
additional distributions to the extent necessary (i) to distribute the entire annual taxable income of the Fund, plus any
net capital gains and (ii) to avoid imposition of the excise tax imposed by Section 4982 of the Code. Management of the
Trust reserves the right to declare special dividends if, in its reasonable discretion, such action is necessary or advisable to
preserve the status of the Fund as a regulated investment company ("RIC") or to avoid imposition of income or excise
taxes on undistributed income.
Dividend Reinvestment
Service. The Trust will not make the DTC book-entry dividend reinvestment service available for use by Beneficial Owners for
reinvestment of their cash proceeds, but certain individual broker-dealers may make available the DTC book-entry Dividend Reinvestment
Service for use by Beneficial Owners of the Fund through DTC Participants for reinvestment of their dividend distributions. Investors
should contact their brokers to ascertain the availability and description of these services. Beneficial Owners should be aware
that each broker may require investors to adhere to specific procedures and timetables in order to participate in the dividend
reinvestment service and investors should ascertain from their brokers such necessary details. If this service is available and
used, dividend distributions of both income and realized gains will be automatically reinvested in additional whole Shares issued
by the Trust of the Fund at NAV per share. Distributions reinvested in additional shares of the Fund will nevertheless be taxable
to Beneficial Owners acquiring such additional shares to the same extent as if such distributions had been received in cash.
FEDERAL INCOME TAXES
The following
is only a summary of certain additional federal income tax considerations generally affecting the Fund and its shareholders. No
attempt is made to present a comprehensive explanation of the federal, state, local or foreign tax treatment of the Fund or its
shareholders, and the discussion here and in the Prospectus is not intended to be a substitute for careful tax planning.
The following
general discussion of certain federal income tax consequences is based on provisions of the Code and the regulations issued thereunder
as in effect on the date of this SAI. New legislation, as well as administrative changes or court decisions, may significantly
change the conclusions expressed herein, and may have a retroactive effect with respect to the transactions contemplated herein.
The recently enacted
tax legislation commonly referred to as the Tax Cuts and Jobs Act (the "Tax Act") makes significant changes to the
U.S. federal income tax rules for taxation of individuals and corporations, generally effective for taxable years beginning after
December 31, 2017. Many of the changes applicable to individuals are temporary and would apply only to taxable years
beginning after December 31, 2017 and before January 1, 2026. There are only minor changes with respect to the specific rules
only applicable to a RIC, such as the Fund. The Tax Act, however, makes numerous other changes to the tax rules that may
affect shareholders and the Fund. You are urged to consult with your own tax advisor regarding how the Tax Act affects your
investment in the Fund.
Shareholders are
urged to consult their own tax advisers regarding the application of the provisions of tax law described in this SAI in light of
the particular tax situations of the shareholders and regarding specific questions as to federal, state, or local taxes.
Regulated Investment
Company (RIC) Status. The Fund will seek to qualify for treatment as a RIC under the Code. Provided that for each tax
year the Fund: (i) meets the requirements to be treated as a RIC (as discussed below); and (ii) distributes at least
an amount equal to the sum of 90% of the Fund's net investment income for such year (including, for this purpose, the excess
of net realized short-term capital gains over net long-term capital losses) and 90% of its net tax-exempt interest income, the
Fund itself will not be subject to federal income taxes to the extent the Fund's net investment income and the Fund's
net realized capital gains, if any, are distributed to the Fund's shareholders. One of several requirements for RIC qualification
is that the Fund must receive at least 90% of the Fund's gross income each year from dividends, interest, payments with respect
to certain securities loans, gains from the sale or other disposition of stock, securities or foreign currencies, or other income
derived with respect to the Fund's business of investing in stock, securities, foreign currencies and net income from an
interest in a qualified publicly traded partnership (the "90% Test"). A second requirement for qualification as a RIC
is that the Fund must diversify its holdings so that, at the end of each quarter of the Fund's taxable year: (a) at
least 50% of the market value of the Fund's total assets is represented by cash and cash items, U.S. government securities,
securities of other RICs, and other securities, with these other securities limited, in respect to any one issuer, to an amount
not greater than 5% of the value of the Fund's total assets or 10% of the outstanding voting securities of such issuer; and
(b) not more than 25% of the value of its total assets are invested in the securities (other than U.S. government securities
or securities of other RICs) of any one issuer, the securities (other than securities of other RICs) of two or more issuers which
the Fund controls and which are engaged in the same, similar, or related trades or businesses, or the securities of one or more
qualified publicly traded partnerships (the "Asset Test").
Under the Asset
Test, the Fund generally may not acquire a security if, as a result of the acquisition, more than 50% of the value of the Fund's
assets would be invested in (a) issuers in which the Fund has, in each case, invested more than 5% of the Fund's assets
and (b) issuers more than 10% of whose outstanding voting securities are owned by the Fund. Because the Underlying Index has
a relatively small number of constituents, the 5% limitation could affect the Fund's ability to effectively implement a replication
strategy or a representative sampling strategy. As the Fund grows, the 10% limitation might also affect its ability to effectively
implement a replication strategy or a representative sampling strategy.
If the Fund fails
to satisfy the 90% Test or the Asset Test, the Fund may be eligible for relief provisions if the failures are due to reasonable
cause and not willful neglect and if a penalty tax is paid with respect to each failure to satisfy the applicable requirements.
Additionally, relief is provided for certain de minimis failures of the Asset Test. In order to qualify for relief provisions
for a failure to meet the Asset Test, the Fund may be required to dispose of certain assets. If the Fund fails to qualify for treatment
as a RIC for any year, and the relief provisions are not available, all of its taxable income will be subject to federal income
tax at regular corporate rates (which the Tax Act reduced to 21%) without any deduction for distributions to shareholders. In such
case, its shareholders would be taxed as if they received ordinary dividends, although the dividends could be eligible for the
dividends received deduction for corporate shareholders and the dividends may be eligible for the lower tax rates available to
non-corporate shareholders on qualified dividend income. To requalify for treatment as a RIC in a subsequent taxable year, the
Fund would be required to satisfy the RIC qualification requirements for that year and to distribute any earnings and profits from
any taxable year for which the Fund failed to qualify for tax treatment as a RIC. If the Fund failed to qualify as a RIC for a
period greater than two taxable years, the Fund would generally be required to pay a Fund-level tax on any net built-in gains recognized
with respect to certain of its assets upon a disposition of such assets within five years of qualifying as a RIC in a subsequent
year. The Board reserves the right not to maintain the qualification of the Fund for treatment as a RIC if it determines such course
of action to be beneficial to shareholders. If the Fund determines that it will not qualify for treatment as a RIC, the Fund will
establish procedures to reflect the anticipated tax liability in the Fund's NAV.
The Fund may elect
to treat part or all of any "qualified late year loss" as if it had been incurred in the succeeding taxable year in
determining the Fund's taxable income, net capital gain, net short-term capital gain, and earnings and profits. A "qualified
late year loss" generally includes net capital loss, net long-term capital loss, or net short-term capital loss incurred
after October 31 of the current taxable year and certain other late-year losses.
If the Fund has
a "net capital loss" (that is, capital losses in excess of capital gains) for a taxable year, the excess of the Fund's
net short-term capital losses over its net long-term capital gains is treated as a short-term capital loss arising on the first
day of the Fund's next taxable year, and the excess (if any) of the Fund's net long-term capital losses over its net
short-term capital gains is treated as a long-term capital loss arising on the first day of the Fund's next taxable year.
The Fund will
generally be subject to a nondeductible 4% federal excise tax to the extent it fails to distribute by the end of any calendar year
at least the sum of 98% of its ordinary income for the year, 98.2% of its capital gain net income for the one-year period ending
on October 31 of that year, and certain other amounts. The Fund intends to make sufficient distributions, or deemed distributions,
to avoid imposition of the excise tax, but can make no assurances that all such tax liability will be eliminated.
The Fund intends
to distribute substantially all its net investment income and net realized capital gains to shareholders annually. The distribution
of net investment income and net realized capital gains generally will be taxable to Fund shareholders regardless of whether the
shareholder elects to receive these distributions in cash or in additional shares. However, the Fund may determine not to distribute,
or determine to defer the distribution of, some portion of its income in non-routine circumstances. If the Fund retains for investment
an amount equal to all or a portion of its net long-term capital gains in excess of its net short-term capital losses (including
any capital loss carryovers), it will be subject to a corporate tax on the amount retained. In that event, the Fund will designate
such retained amounts as undistributed capital gains in a notice to its shareholders who (a) will be required to include in
income for U.S. federal income tax purposes, as long-term capital gains, their proportionate shares of the undistributed amount,
(b) will be entitled to credit their proportionate shares of the income tax paid by the Fund on the undistributed amount against
their U.S. federal income tax liabilities, if any, and to claim refunds to the extent their credits exceed their liabilities, if
any, and (c) will be entitled to increase their tax basis, for U.S. federal income tax purposes, in their shares by an amount
equal to the excess of the amount of undistributed net capital gain included in their respective income over their respective income
tax credits. Organizations or persons not subject to U.S. federal income tax on such capital gains will be entitled to a refund
of their pro rata share of such taxes paid by the Fund upon timely filing appropriate returns or claims for refund with the Internal
Revenue Service (the "IRS").
A portion of the
net investment income distributions of the Fund may be treated as qualified dividend income (which, for non-corporate shareholders,
is generally eligible for taxation at reduced rates). The portion of distributions that the Fund may report as qualified dividend
income is generally limited to the amount of qualified dividend income received by the Fund, but if for any Fund taxable year 95%
or more of the Fund's gross income (exclusive of net capital gain from sales of stocks and securities) consists of qualified
dividend income, all distributions of such income for that taxable year may be reported as qualified dividend income. Qualified
dividend income is, in general, dividend income from taxable domestic corporations and certain foreign corporations (i.e.,
foreign corporations incorporated in a possession of the United States or in certain countries with a comprehensive tax treaty
with the United States, and other foreign corporations if the stock with respect to which the dividend income is paid is readily
tradable on an established securities market in the United States).
In order for some
portion of the dividends received by a shareholder to be qualified dividend income, the Fund must meet holding period and other
requirements with respect to the dividend paying stocks in its portfolio, and the shareholder must meet holding period and other
requirements with respect to the Fund's shares. Distributions reported to Fund shareholders as capital gain dividends will
be taxable at the rates applicable to long-term capital gains (generally, at a maximum rate of 20% for non-corporate shareholders),
regardless of how long the shareholder has owned the shares. The Fund's shareholders will be notified annually by the Fund
as to the federal tax status of all distributions made by the Fund. Distributions may be subject to state and local taxes.
U.S. individuals
with income exceeding $200,000 ($250,000 if married and filing jointly) are subject to an additional 3.8% Medicare contribution
tax on their "net investment income," including interest, dividends, and capital gains (including capital gains realized
on the sale or exchange of shares of the Fund). This 3.8% tax also applies to all or a portion of the undistributed net investment
income of certain shareholders that are estates and trusts.
Shareholders who
have held Fund shares for less than a full year should be aware that the Fund may report and distribute, as ordinary dividends
or capital gain dividends, a percentage of income that is not equal to the percentage of the Fund's total ordinary income
or net capital gain, respectively, actually earned during the period of investment in the Fund.
If the Fund's
distributions for a taxable year exceed its taxable income and capital gains realized during a taxable year, all or a portion of
the distributions made for the taxable year may be recharacterized as a return of capital to shareholders. A return of capital
distribution will generally not be taxable, but will reduce each shareholder's cost basis in the Fund and generally result
in a higher reported capital gain or lower reported capital loss when those shares on which the distribution was received are sold.
A sale or exchange
of shares in the Fund may give rise to a capital gain or loss. In general, any capital gain or loss realized upon a taxable disposition
of shares will be treated as long-term capital gain or loss if the shares have been held for more than 12 months. Otherwise,
the capital gain or loss on the taxable disposition of shares will be treated as short-term capital gain or loss. Any loss realized
upon a taxable disposition of shares held for six months or less will be treated as long-term, rather than short-term, to the extent
of any long-term capital gain distributions received (or deemed received) by the shareholder with respect to the shares. All or
a portion of any loss realized upon a taxable disposition of shares will be disallowed if substantially identical shares are purchased
(through reinvestment of dividends or otherwise) within 30 days before or after the disposition. In such a case, the basis
of the newly purchased shares will be adjusted to reflect the disallowed loss.
An Authorized
Participant who exchanges securities for Creation Units generally will 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 sum of the exchanger's aggregate basis
in the securities surrendered plus the amount of cash paid for such Creation Units. A person who redeems Creation Units will generally
recognize a gain or loss equal to the difference between the exchanger's basis in the Creation Units and the sum of the aggregate
market value of any securities received plus the amount of any cash received for such Creation Units. The IRS, 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.
Any capital gain
or loss realized upon the creation of Creation Units will generally be treated as long-term capital gain or loss if the securities
exchanged for such Creation Units have been held for more than one year. Any capital gain or loss realized upon the redemption
of Creation Units will generally be treated as long-term capital gain or loss if the shares comprising the Creation Units have
been held for more than one year. Otherwise, such capital gains or losses will be treated as short-term capital gains or losses.
The Trust on behalf
of the Fund has the right to reject an order for a purchase of shares of the Trust if the purchaser (or group of purchasers) would,
upon obtaining the shares so ordered, own 80% or more of the outstanding shares of the Fund and if, pursuant to Section 351
of the Code, the Fund would have a basis in the securities different from the market value of such securities on the date of deposit.
The Trust also has the right to require information necessary to determine beneficial share ownership for purposes of the 80% determination.
The Trust reserves the absolute right to reject an order for Creation Units if acceptance of the securities to be exchanged for
the Creation Units would have certain adverse tax consequences to the Fund.
Persons purchasing
or redeeming Creation Units should consult their own tax advisors with respect to the tax treatment of any creation or redemption
transaction.
Foreign Investments.
Income received by the Fund from sources within foreign countries (including, for example, dividends or interest on stock or securities
of non-U.S. issuers) may be subject to withholding and other taxes imposed by such countries. Tax treaties between such countries
and the U.S. may reduce or eliminate such taxes in some cases. If as of the end of the Fund's taxable year more than 50%
of the value of the Fund's assets consist of the securities of foreign corporations, the Fund may elect to permit shareholders
who are U.S. citizens, resident aliens, or U.S. corporations to claim a foreign tax credit or deduction (but not both) on their
income tax returns for their pro rata portions of qualified taxes paid by the Fund during that taxable year to foreign countries
in respect of foreign securities the Fund has held for at least the minimum period specified in the Code. In such a case, shareholders
will include in gross income from foreign sources their pro rata shares of such taxes. A shareholder's ability to claim a
foreign tax credit or deduction in respect of foreign taxes paid by the Fund may be subject to certain limitations imposed by the
Code, which may result in the shareholder not getting a full credit or deduction for the amount of such taxes. Shareholders who
do not itemize deductions on their federal income tax returns may claim a credit, but not a deduction, for such foreign taxes.
Foreign Currency
Transactions. Under the Code, gains or losses attributable to fluctuations in exchange rates which occur between the
time the Fund accrues income or other receivables or accrues expenses or other liabilities denominated in a foreign currency and
the time the Fund actually collects such income or receivables or pays such expenses or liabilities generally are treated as ordinary
income or loss. Similarly, on the disposition of debt securities denominated in a foreign currency and on the disposition of certain
other instruments, gains or losses attributable to fluctuations in the value of the foreign currency between the date of acquisition
of the security or contract and the date of disposition are also treated as ordinary gain or loss. The gains and losses may increase
or decrease the amount of the Fund's income to be distributed to its shareholders as ordinary income.
Options, Swaps
and Other Complex Securities. The Fund may invest in complex securities such as equity options, index options, repurchase agreements,
foreign currency contracts, hedges and swaps, transactions treated as straddles for U.S. federal income tax purposes, and futures
contracts. These investments may be subject to numerous special and complex tax rules. These rules could affect whether gains and
losses recognized by the Fund are treated as ordinary income or capital gain, accelerate the recognition of income to the Fund,
cause income or gain to be recognized even though corresponding cash is not received by the Fund, and/or defer the Fund's
ability to recognize losses. In turn, those rules may affect the amount, timing or character of the income distributed by the Fund.
With respect to
any investments in zero coupon securities which are sold at original issue discount and thus do not make periodic cash interest
payments, the Fund may be required to include as part of its current income the imputed interest on such obligations even though
the Fund may not have received any interest payments on such obligations during that period. Because the Fund is required to distribute
all of its net investment income to its shareholders, the Fund may have to sell Fund securities to distribute such imputed income.
Those sales may occur at a time when the Advisor would not otherwise have chosen to sell such securities and will generally result
in taxable gain or loss.
Back-Up Withholding.
The Fund or your broker will be required to withhold (as "backup withholding") on taxable dividends paid to any shareholder,
as well as the proceeds of any redemptions of Creation Units, paid to a shareholder or Authorized Participant who (1) fails
to provide a correct taxpayer identification number certified under penalty of perjury; (2) is subject to withholding by the
IRS for failure to properly report all payments of interest or dividends; (3) fails to provide a certified statement that
he or she is not subject to "backup withholding;" or (4) fails to provide a certified statement that he or she
is a U.S. person (including a U.S. resident alien). The backup withholding rate is currently 24%. Backup withholding is not an
additional tax and any amounts withheld may be credited against the shareholder's ultimate U.S. tax liability.
Foreign Shareholders.
Foreign shareholders (i.e., nonresident alien individuals and foreign corporations, partnerships, trusts and estates) are
generally subject to U.S. withholding tax at the rate of 30% (or a lower tax treaty rate) on distributions derived from net investment
income and short-term capital gains. Gains from the sale or other disposition of shares of the Fund generally are not subject to
U.S. taxation, unless the recipient is an individual who either (1) meets the Code's definition of "resident alien"
or (2) is physically present in the U.S. for 183 days or more per year. Different tax consequences may result if the
foreign shareholder is engaged in a trade or business within the United States. In addition, the tax consequences to a foreign
shareholder entitled to claim the benefits of a tax treaty may be different than those described above.
Ordinary dividends
paid to a shareholder that is a "foreign financial institution" as defined in Section 1471 of the Code and that does
not meet the requirements imposed on foreign financial institutions by Section 1471 will generally be subject to withholding
tax at a 30% rate. The extent, if any, to which such withholding tax may be reduced or eliminated by an applicable tax treaty
is unclear. A non-U.S. shareholder may be exempt from the withholding described in this paragraph under an applicable intergovernmental
agreement between the U.S. and a foreign government, provided that the shareholder and the applicable foreign government comply
with the terms of such agreement.
In order for a
foreign investor to qualify for an exemption from backup withholding, the foreign investor must comply with special certification
and filing requirements. Foreign investors in the Fund should consult their tax advisors in this regard.
Tax Shelter
Reporting Regulations. Under U.S. Treasury regulations, if a shareholder recognizes a loss of $2 million or more for an
individual shareholder or $10 million or more for a corporate shareholder, the shareholder must file with the IRS a disclosure
statement on Form 8886. Direct shareholders of portfolio securities are in many cases excepted from this reporting requirement,
but under current guidance shareholders of a RIC are not excepted. The fact that a loss is reportable under these regulations does
not affect the legal determination of whether the taxpayer's treatment of the loss is proper. Shareholders should consult
their tax advisors to determine the applicability of these regulations in light of their individual circumstances.
Other Issues. The Fund may be
subject to tax or taxes in certain states where the Fund does business. Furthermore, in those states which have income tax laws,
the tax treatment of the Fund and of Fund shareholders with respect to distributions by the Fund may differ from federal tax treatment.
Shareholders are advised to consult
their tax advisors concerning their specific situations and the application of state, local and foreign taxes.
At September
30, 2020, the Fund had capital loss carry forwards for federal income tax purposes available to offset future capital gains as
follows:
Expiring
|
Non-Expiring Short-Term
|
Non-Expiring Long-Term
|
Total
|
|
|
|
|
$ 0
|
$ 128,346,757
|
$ 33,147,351
|
$ 161,494,108
|
FINANCIAL STATEMENTS
The annual report for the Fund
for the fiscal period ended September 30, 2020 is a separate document and the financial statements and accompanying notes appearing
therein are incorporated by reference into this SAI. You may request a copy of the Fund's Annual Report at no charge by
calling 1-844-ETFMGRS (383-6477) or through the Fund's website at www.etfmj.com.