Amendment No. 296 ☒
J. Garrett Stevens
It is proposed that this filing will
become effective (check appropriate box):
Neither the U.S. Securities and Exchange
Commission (“SEC”) nor any state securities commission has approved or disapproved of these securities or passed upon
the accuracy or adequacy of this Prospectus. Any representation to the contrary is a criminal offense.
Beginning on January 1, 2021, as permitted
by regulations adopted by the SEC, paper copies of the Fund’s shareholder reports will no longer be sent by mail, unless
you specifically request paper copies of the reports from your financial intermediary, such as a broker-dealer or bank. Instead,
the reports will be made available on a website, and you will be notified by mail each time a report is posted and provided with
a website link to access the report.
If you already elected to receive shareholder
reports electronically, you will not be affected by this change and you need not take any action. Please contact your financial
intermediary to elect to receive shareholder reports and other Fund communications electronically.
You may elect to receive all future reports
in paper free of charge. Please contact your financial intermediary to inform them that you wish to continue receiving paper copies
of your shareholder reports and for details about whether your election to receive reports in paper will apply to all funds held
with your financial intermediary.
STATEMENT OF ADDITIONAL INFORMATION
NORTH
SHORE DUAL SHARE CLASS ETF
Ticker
Symbol: DUAL
a series of EXCHANGE TRADED CONCEPTS
TRUST
May 29, 2020
Principal Listing Exchange for the Fund:
NYSE Arca, Inc.
Investment Adviser:
Exchange Traded Concepts, LLC
This Statement of Additional Information
(the “SAI”) is not a prospectus. The SAI should be read in conjunction with the Fund’s prospectus dated May
29, 2020, as may be revised from time to time (the “Prospectus”). Capitalized terms used herein that are not defined
have the same meaning as in the Prospectus, unless otherwise noted. A copy of the Fund’s Prospectus may be obtained without
charge by writing the Fund’s distributor, SEI Investments Distribution Co., at One Freedom Valley Drive, Oaks, PA 19456,
by visiting the Fund’s website at https://dualetf.com, or by calling toll-free 1-855-545-3524.
NOR-SX-002-0100
TABLE OF CONTENTS
GENERAL INFORMATION ABOUT THE TRUST
Exchange Traded Concepts Trust (the “Trust”)
is an open-end management investment company consisting of multiple investment series. This SAI relates to the North Shore Dual
Share Class ETF (the “Fund”). The Trust was organized as a Delaware statutory trust on July 17, 2009. The Trust is
registered with the Securities and Exchange Commission (the “SEC”) under the Investment Company Act of 1940 (the “1940
Act”) as an open-end management investment company and the offering of the Fund’s shares is registered under the Securities
Act of 1933 (the “Securities Act”). Exchange Traded Concepts, 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 total return performance of the North Shore Dual Share Class Index (the “Index”).
The Fund offers and issues shares at their
net asset value (“NAV”) 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 Fund’s 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’ NAV per share. The Fund’s shares are redeemable
only in Creation Unit aggregations, and generally in exchange for portfolio securities and a specified cash payment. A Creation
Unit of the Fund consists of at least 25,000 shares.
INFORMATION ABOUT INVESTMENT POLICIES, PERMITTED
INVESTMENTS, AND RELATED RISKS
The Fund’s principal investment strategies
and principal risks are described in the Prospectus.
An 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 of the Fund). 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.
The following are descriptions of the Fund’s
investment practices and permitted investments and the associated risk factors. The Fund will only engage in the following investment
practices and invest in the following instruments if such practice or investment is consistent with the Fund’s investment
objective and permitted by the Fund’s stated investment policies.
CONCENTRATION
The Fund will concentrate its investments (i.e.,
invest more than 25% of its total assets) in a particular industry or group of industries to approximately the same extent the
Index concentrates in an industry or group of industries. The securities of issuers in particular industries may dominate the Index
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.
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 NAV of the Fund to fluctuate.
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.
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.
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 value of preferred stock with a fixed dividend rate and no conversion element varies 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 a 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.
Master Limited Partnerships (“MLPs”).
MLPs are limited partnerships or limited liability companies, whose partnership units or limited liability interests are listed
and traded on a U.S. securities exchange, and are treated as publicly traded partnerships for federal income tax purposes. To
qualify to be treated as a partnership for tax purposes, an MLP must receive at least 90% of its income from qualifying sources
as set forth in Section 7704(d) of the Internal Revenue Code of 1986 (“Internal Revenue Code”). These qualifying sources
include activities such as the exploration, development, mining, production, processing, refining, transportation, storage and
marketing of mineral or natural resources. MLPs generally have two classes of owners, the general partner and limited partners.
MLPs that are formed as limited liability companies generally have two analogous classes of owners, the managing member and the
members. For purposes of this section, references to general partners also apply to managing members and references to limited
partners also apply to members. The general partner is typically owned by a major energy company, an investment fund, the direct
management of the MLP or is an entity owned by one or more of such parties. The general partner may be structured as a private
or publicly traded corporation or other entity. The general partner typically controls the operations and management of the MLP
through an equity interest of as much as 2% in the MLP plus, in many cases, ownership of common units and subordinated units.
Limited partners own the remainder of the MLP through ownership of common units and have a limited role in the MLP’s operations
and management.
MLPs are typically structured such that common
units and general partner interests have first priority to receive quarterly cash distributions up to an established minimum amount
(“minimum quarterly distributions” or “MQD”). Common and general partner interests also accrue arrearages
in distributions to the extent the MQD is not paid. Once common and general partner interests have been paid, subordinated units
receive distributions of up to the MQD; however, subordinated units do not accrue arrearages. Distributable cash in excess of the
MQD paid to both common and subordinated units is distributed to both common and subordinated units generally on a pro rata basis.
The general partner is also eligible to receive incentive distributions if the general partner operates the business in a manner
which results in distributions paid per common unit surpassing specified target levels. As the general partner increases cash distributions
to the limited partners, the general partner receives an increasingly higher percentage of the incremental cash distributions.
A common arrangement provides that the general partner can reach a tier where it receives 50% of every incremental dollar paid
to common and subordinated unit holders. These incentive distributions encourage the general partner to streamline costs, increase
capital expenditures and acquire assets in order to increase the partnership’s cash flow and raise the quarterly cash distribution
in order to reach higher tiers.
General partner interests of MLPs are typically
retained by an MLP’s original sponsors, such as its founders, corporate partners, entities that sell assets to the MLP and
investors such as us. A holder of general partner interests can be liable under certain circumstances for amounts greater than
the amount of the holder’s investment in the general partner interest. General partner interests often confer direct board
participation rights and in many cases, operating control, over the MLP. These interests themselves are not publicly traded, although
they may be owned by publicly traded entities. General partner interests receive cash distributions, typically 2% of the MLP’s
aggregate cash distributions, which are contractually defined in the partnership agreement. In addition, holders of general partner
interests typically hold incentive distribution rights (“IDRs”), which provide them with a larger share of the aggregate
MLP cash distributions as the distributions to limited partner unit holders are increased to prescribed levels. General partner
interests generally cannot be converted into common units. The general partner interest can be redeemed by the MLP if the MLP unitholders
choose to remove the general partner, typically with a supermajority vote by limited partner unitholders.
Royalty Trusts. A royalty trust generally
acquires an interest in natural resource companies or chemical companies and distributes the income it receives to the investors
of the royalty trust. A sustained decline in demand for crude oil, natural gas and refined petroleum products could adversely affect
income and royalty trust revenues and cash flows. Factors that could lead to a decrease in market demand include a recession or
other adverse economic conditions, an increase in the market price of the underlying commodity, higher taxes or other regulatory
actions that increase costs, or a shift in consumer demand for such products. A rising interest rate environment could adversely
impact the performance of royalty trusts. Rising interest rates could limit the capital appreciation of royalty trusts because
of the increased availability of alternative investments at more competitive yields.
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 be less liquid, and
subject to more abrupt or erratic market movements, than securities of larger, more established companies.
Large-Sized Companies. Investments in
large capitalization companies may go in and out of favor based on market and economic conditions and may underperform other market
segments. Some large capitalization companies may be unable to respond quickly to new competitive challenges, such as changes in
technology and consumer tastes, and may not be able to attain the high growth rate of successful smaller companies, especially
during extended periods of economic expansion. As such, returns on investments in stocks of large capitalization companies could
trail the returns on investments in stocks of small and mid-capitalization companies.
WHEN-ISSUED SECURITIES
A when-issued security is one whose terms are
available and for which a market exists, but which has 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.
BUSINESS DEVELOPMENT COMPANIES
The 1940 Act imposes certain restraints upon
the operations of a business development company (“BDC”). For example, BDCs are required to invest at least 70% of
their total assets primarily in securities of private companies or thinly traded U.S. public companies, cash, cash equivalents,
U.S. government securities and high quality debt investments that mature in one year or less. Generally, little public information
exists for private and thinly traded companies, and there is a risk that investors may not be able to make a fully informed investment
decision. With investments in debt instruments, there is a risk that the issuer may default on its payments or declare bankruptcy.
Additionally, a BDC may incur indebtedness only in amounts such that the BDC’s asset coverage equals at least 200% after
such incurrence. These limitations on asset mix and leverage may prohibit the way that the BDC raises capital. BDCs generally invest
in less mature private companies, which involve greater risk than well-established, publicly traded companies.
REAL ESTATE INVESTMENT TRUSTS
The Fund may invest in the securities of real
estate investment trusts (“REITs”) to the extent allowed by law. Risks associated with investments in securities of
REITs include decline in the value of real estate, risks related to general and local economic conditions, overbuilding and increased
competition, increases in property taxes and operating expenses, changes in zoning laws, casualty or condemnation losses, variations
in rental income, changes in neighborhood values, the appeal of properties to tenants, and increases in interest rates. In addition,
equity REITs may be affected by changes in the values of the underlying property owned by the trusts, while mortgage REITs may
be affected by the quality of credit extended. REITs are dependent upon management skills, may not be diversified and are subject
to the risks of financing projects. REITs are also subject to heavy cash-flow dependency, defaults by borrowers, self-liquidation
and the possibility of failing to qualify for the favorable U.S. federal income tax treatment generally available to them under
the Internal Revenue Code, and failing to maintain exemption from the 1940 Act. If an issuer of debt securities collateralized
by real estate defaults, it is conceivable that the REITs could end up holding the underlying real estate.
REPURCHASE AGREEMENTS
The Fund may invest in repurchase agreements
with commercial banks, brokers or dealers to generate income from its excess cash balances and to invest securities lending cash
collateral. A repurchase agreement is an agreement under which the Fund acquires a financial instrument (e.g., a security
issued by the U.S. Government or an agency thereof, a banker’s acceptance or a certificate of deposit) from a seller, subject
to resale to the seller at an agreed upon price and date (normally, the next Business Day). A repurchase agreement may be considered
a loan collateralized by securities. The resale price reflects an agreed upon interest rate effective for the period the instrument
is held by the Fund and is unrelated to the interest rate on the underlying instrument.
In these repurchase agreement transactions,
the securities acquired by the Fund (including accrued interest earned thereon) must have a total value in excess of the value
of the repurchase agreement and are held by the Fund’s custodian until repurchased. No more than an aggregate of 15% of the
Fund’s net assets will be invested in illiquid securities, including repurchase agreements having maturities longer than
seven days and securities subject to legal or contractual restrictions on resale, or for which there are no readily available market
quotations.
The use of repurchase agreements involves certain
risks. For example, if the other party to the agreement defaults on its obligation to repurchase the underlying security at a time
when the value of the security has declined, the Fund may incur a loss upon disposition of the security. If the other party to
the agreement becomes insolvent and subject to liquidation or reorganization under the U.S. Bankruptcy Code or other laws, a court
may determine that the underlying security is collateral for a loan by the Fund not within the control of the Fund and, therefore,
the Fund may not be able to substantiate its interest in the underlying security and may be deemed an unsecured creditor of the
other party to the agreement.
FOREIGN SECURITIES
Foreign Issuers. The Fund may invest
in securities of 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 U.S. dollar value of securities of foreign issuers
and of distributions in foreign currencies 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 very volatile compared to 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, which 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 companies located 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.
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. American Depositary Shares (ADSs) are U.S. dollar-denominated equity shares of a foreign-based company available
for purchase on an American stock exchange. ADSs are issued by depository banks in the United States under an agreement with the
foreign issuer, and the entire issuance is called an ADR and the individual shares are referred to as ADSs. 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.
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 the Index.
DEBT-RELATED INVESTMENTS
Debt securities include securities issued or
guaranteed by the U.S. Government, its agencies, instrumentalities, and political subdivisions, foreign governments, their authorities,
agencies, instrumentalities, and political subdivisions, supra-national agencies, corporate debt securities, master-demand notes,
Yankee dollar and Eurodollar bank certificates of deposit, time deposits, bankers’ acceptances, commercial paper and other
notes, inflation-indexed securities, and other debt securities. Debt securities may be investment grade securities or high yield
securities.
Debt and other fixed income securities include
fixed and floating rate securities of any maturity. Fixed rate securities pay a specified rate of interest or dividends. Floating
rate securities pay a rate that is adjusted periodically by reference to a specified index or market rate. Fixed and floating rate
securities include securities issued by federal, state, local, and foreign governments and related agencies, and by a wide range
of private issuers, and generally are referred to in this SAI as “fixed income securities.” Indexed bonds are a type
of fixed income security whose principal value and/or interest rate is adjusted periodically according to a specified instrument,
index, or other statistic (e.g., another security, inflation index, currency, or commodity).
Holders of fixed income securities are exposed
to both market and credit risk. Market risk (or “interest rate risk”) relates to changes in a security’s value
as a result of changes in interest rates. In general, the values of fixed income securities increase when interest rates fall and
decrease when interest rates rise. Given the historically low interest rate environment, risks associated with rising rates are
heightened. Credit risk relates to the ability of an issuer to make payments of principal and interest. Obligations of issuers
are subject to bankruptcy, insolvency and other laws that affect the rights and remedies of creditors.
Because interest rates vary, the future income
of a fund that invests in fixed income securities cannot be predicted with certainty. The future income of a fund that invests
in indexed securities also will be affected by changes in those securities’ indices over time (e.g., changes in inflation
rates, currency rates, or commodity prices).
Bonds. A bond is an interest-bearing
security issued by a company, governmental unit or, in some cases, a non-U.S. entity. The issuer of a bond has a contractual obligation
to pay interest at a stated rate on specific dates and to repay principal (the bond’s face value) periodically or on a specified
maturity date. Bonds generally are used by corporations and governments to borrow money from investors.
An issuer may have the right to redeem or “call”
a bond before maturity, in which case the investor may have to reinvest the proceeds at lower market rates. Most bonds bear interest
income at a “coupon” rate that is fixed for the life of the bond. The value of a fixed-rate bond usually rises when
market interest rates fall and falls when market interest rates rise. Accordingly, a fixed-rate bond’s yield (income as a
percent of the bond’s current value) may differ from its coupon rate as its value rises or falls. Other types of bonds bear
income at an interest rate that is adjusted periodically. Because of their adjustable interest rates, the value of “floating-rate”
or “variable-rate” bonds fluctuates much less in response to market interest rate movements than the value of fixed-rate
bonds. Generally, prices of higher quality issues tend to fluctuate less with changes in market interest rates than prices of lower
quality issues and prices of longer maturity issues tend to fluctuate more than prices of shorter maturity issues. Bonds may be
senior or subordinated obligations. Senior obligations generally have the first claim on a corporation’s earnings and assets
and, in the event of liquidation, are paid before subordinated obligations. Bonds may be unsecured (backed only by the issuer’s
general creditworthiness) or secured (backed by specified collateral).
The investment return of corporate bonds reflects
interest on the security and changes in the market value of the security. The market value of a corporate bond may be affected
by the credit rating of the corporation, the corporation’s performance and perceptions of the corporation in the market place.
There is a risk that the issuers of the bonds may not be able to meet their obligations on interest or principal payments at the
time called for by the bond.
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.
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 Student Loan Marketing
Association, 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.
Securities backed by the full faith and credit
of the United States are generally considered to be among the most creditworthy investments available. While the U.S. Government
continuously has honored its credit obligations, political events have, at times, called into question whether the United States
would default on its obligations. Such an event would be unprecedented and there is no way to predict its impact on the securities
markets; however, it is very likely that default by the United States would result in losses and market prices and yields of securities
supported by the full faith and credit of the U.S. Government would be adversely affected.
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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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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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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 the Fund’s shares.
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Ratings. An investment grade rating
means the security or issuer is rated investment-grade by Standard & Poor’s Ratings Group, a division of The McGraw-Hill
Companies, Inc. (“S&P”), Moody’s Investors Service, Inc. (“Moody’s”), Fitch Ratings, Ltd.
(“Fitch”) or another nationally recognized statistical rating organization, or is unrated but considered to be of equivalent
quality by the investment adviser, as applicable. Bonds rated Baa by Moody’s or BBB by S&P or above are considered “investment
grade” securities; bonds rated Baa are considered medium grade obligations which lack outstanding investment characteristics
and have speculative characteristics; and bonds rated BBB are regarded as having adequate capacity to pay principal and interest.
BORROWING
The Fund may borrow money and/or securities
for investment purposes. Borrowing for investment purposes is one form of leverage. Leveraging investments, by purchasing securities
with borrowed money, is a speculative technique that increases investment risk, but also increases investment opportunity. Because
substantially all of the Fund’s assets will fluctuate in value, whereas the interest obligations on borrowings may be fixed,
the NAV of the Fund will increase more when the Fund’s portfolio assets increase in value and decrease more when the Fund’s
portfolio assets decrease in value than would otherwise be the case. Moreover, interest costs on borrowings may fluctuate with
changing market rates of interest and may partially offset or exceed the returns on the borrowed funds. Under adverse conditions,
the Fund might have to sell portfolio securities to meet interest or principal payments at a time when investment considerations
would not favor such sales. The Fund intends to use leverage during periods when the Adviser believes that the Fund’s investment
objective would be furthered.
The Fund may also borrow money to facilitate
management of the Fund’s portfolio by enabling the Fund to meet redemption requests when the liquidation of portfolio instruments
would be inconvenient or disadvantageous. Such borrowing is not for investment purposes and will be repaid by the borrowing Fund
promptly. As required by the 1940 Act, the Fund must maintain continuous asset coverage (total assets, including assets acquired
with borrowed funds, less liabilities exclusive of borrowings) of 300% of all amounts borrowed. If, at any time, the value of the
Fund’s assets should fail to meet this 300% coverage test, the Fund, within three days (not including Sundays and holidays),
will reduce the amount of its borrowings to the extent necessary to meet this 300% coverage requirement. Maintenance of this percentage
limitation may result in the sale of portfolio securities at a time when investment considerations otherwise indicate that it would
be disadvantageous to do so.
LENDING PORTFOLIO SECURITIES
The Fund may lend portfolio securities to certain
creditworthy borrowers. The borrowers provide collateral that is maintained in an amount at least equal to the current market 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.
With respect to loans that are collateralized
by cash, the borrower will be entitled to receive a fee based on the amount of cash collateral. The Fund is compensated by the
difference between the amount earned on the reinvestment of cash collateral and the fee paid to the borrower. In the case of collateral
other than cash, the Fund is compensated by a fee paid by the borrower equal to a percentage of the market value of the loaned
securities. 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.
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 Trust’s Board of Trustees (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. 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.
REVERSE REPURCHASE AGREEMENTS
The Fund may enter into reverse repurchase
agreements, which involve the sale of securities with an agreement to repurchase the securities at an agreed-upon price, date and
interest payment and have the characteristics of borrowing. The securities purchased with the funds obtained from the agreement
and securities collateralizing the agreement will have maturity dates no later than the repayment date. Generally, the effect of
such transactions is that the Fund can recover all or most of the cash invested in the portfolio securities involved during the
term of the reverse repurchase agreement, while in many cases the Fund is able to keep some of the interest income associated with
those securities. Such transactions are only advantageous if the Fund has an opportunity to earn a greater rate of interest on
the cash derived from these transactions than the interest cost of obtaining the same amount of cash. Opportunities to realize
earnings from the use of the proceeds equal to or greater than the interest required to be paid may not always be available and
the Fund intends to use the reverse repurchase technique only when the Adviser believes it will be advantageous to the Fund. The
use of reverse repurchase agreements may exaggerate any interim increase or decrease in the value of the Fund’s assets. The
Fund’s exposure to reverse repurchase agreements will be covered by securities having a value equal to or greater than such
commitments. Under the 1940 Act, reverse repurchase agreements are considered borrowings. Although there is no limit on the percentage
of total assets the Fund may invest in reverse repurchase agreements, the use of reverse repurchase agreements is not a principal
strategy of the Fund.
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 in which
the Fund sells a security it does not own. To complete such a transaction, the Fund must borrow or otherwise obtain 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 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 to the lender amounts equal to any dividends or interest, which
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 Fund may also use repurchase agreements to satisfy delivery obligations in short sales transactions.
The proceeds of the short sale will be retained by the broker, to the extent necessary to meet the margin requirements, until the
short position is closed out.
Until the Fund closes its short position or
replaces the borrowed security, the Fund will: (a) maintain a segregated account containing cash or liquid securities at such a
level that the amount deposited in the account plus the amount deposited with the broker as collateral will equal the current value
of the security sold short; or (b) otherwise cover the Fund’s short position.
OTHER SHORT-TERM INSTRUMENTS
In addition to repurchase agreements, 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. 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.
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. 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.
Consistent with the restrictions discussed
above, the Fund may invest in different types of investment companies from time to time, including BDCs. A BDC is a less common
type of investment company that more closely resembles an operating company than a typical investment company. BDCs generally focus
on investing in, and providing managerial assistance to, small, developing, financially troubled, private companies or other companies
that may have value that can be realized over time and with managerial assistance. Similar to an operating company, a BDC’s
total annual operating expense ratio typically reflects all of the operating expenses incurred by the BDC, and is generally greater
than the total annual operating expense ratio of a mutual fund that does not bear the same types of operating expenses. However,
as a shareholder of a BDC, a fund does not directly pay for a portion of all of the operating expenses of the BDC, just as a shareholder
of a computer manufacturer does not directly pay for the cost of labor associated with producing such computers. As a result, the
fees and expenses of a fund that invests in a BDC will be effectively overstated by an amount equal to the “Acquired Fund
Fees and Expenses.” Acquired Fund Fees and Expenses are not included as an operating expense of a fund in the fund’s
financial statements, which more accurately reflect the fund’s actual operating expenses.
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 shares of the Fund by registered investment companies is subject to the restrictions of Section 12(d)(1) of the
1940 Act, except as may be permitted by exemptive rules under the 1940 Act or as permitted by an exemptive order obtained by the
Trust 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.
ILLIQUID INVESTMENTS
The Fund may not acquire any illiquid investments
if, immediately after the acquisition, the Fund would have invested more than 15% of its net assets in illiquid investments. An
illiquid investment is any investment 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 investment. If the
percentage of the Fund’s net assets invested in illiquid investments exceeds 15% due to market activity or changes in the
Fund’s portfolio, the Fund will take appropriate measures to reduce its holdings of illiquid investments.
FUTURES CONTRACTS, OPTIONS AND SWAP AGREEMENTS
The Fund may utilize futures contracts, options
contracts and swap agreements. The SEC has proposed a rule related to the use of derivatives by registered investment companies,
such as the Fund. Whether and when this proposed rule will be adopted and its potential effects on the Fund are unclear, although
they could be substantial and adverse to the Fund. The regulation of these types of transactions in the United States is a changing
area of law and is subject to ongoing modification by government, self-regulatory and judicial action.
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. A call option gives a holder the right to purchase a specific security or an index at a specified price (“exercise
price”) within a specified period of time. A put option gives a holder the right to sell a specific security or an index
at a specified price within a specified period of time. The initial purchaser of a call option pays the “writer,”
i.e., the party selling the option, a premium which is paid at the time of purchase and is retained by the writer whether
or not such option is exercised. The Fund may purchase put options to hedge its portfolio against the risk of a decline in the
market value of securities held and may purchase call options to hedge against an increase in the price of securities it is committed
to purchase. The Fund may write put and call options along with a long position in options to increase its ability to hedge against
a change in the market value of the securities it holds or is committed to purchase.
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.
Restrictions on the Use of Futures and Options.
Under Rule 4.5 of the Commodity Exchange Act (“CEA”), the investment adviser of a registered investment company may
claim exclusion from registration as a commodity pool operator only if the registered investment company that it advises uses futures
contracts solely for “bona fide hedging purposes” or limits its use of futures contracts for non-bona fide hedging
purposes such that (i) the aggregate initial margin and premiums required to establish non-bona fide hedging positions with respect
to futures contracts do not exceed 5% of the liquidation value of the registered investment company’s portfolio, or (ii)
the aggregate “notional value” of the non-bona fide hedging commodity interests do not exceed 100% of the liquidation
value of the registered investment company’s portfolio (taking into account unrealized profits and unrealized losses on any
such positions). The Adviser has claimed exclusion on behalf of the Fund under Rule 4.5. Rule 4.5 effectively limits the Fund’s
use, and its investment in funds that make use of futures, options on futures, swaps, or other commodity interests. The Fund currently
intends to comply with the terms of Rule 4.5 so as to avoid regulation as a commodity pool, and as a result, the ability of the
Fund to utilize, or invest in funds that utilize, futures, options on futures, swaps, or other commodity interests may be limited
in accordance with the terms of the rule.
Risks of 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 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.
Utilization of futures transactions by the
Fund involves the risk of imperfect or even negative correlation to its Index if the index underlying the futures contracts differs
from the 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.
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.
In a total return swap transaction, one party
agrees to pay the other party an amount equal to the total return on a defined underlying asset or a non-asset reference during
a specified period of time. The underlying asset might be a security or basket of securities, and the non-asset reference could
be a securities index. In return, the other party would make periodic payments based on a fixed or variable interest rate or on
the total return from a different underlying asset or non-asset reference. The payments of the two parties could be made on a net
basis.
Options on Swaps. An option on
a swap agreement, or a “swaption,” is a contract that gives a counterparty the right (but not the obligation) to enter
into a new swap agreement or to shorten, extend, cancel or otherwise modify an existing swap agreement, at some designated future
time on specified terms. In return, the purchaser pays a “premium” to the seller of the contract. The seller of the
contract receives the premium and bears the risk of unfavorable changes on the underlying swap. The Fund may write (sell) and purchase
put and call swaptions. The Fund may also enter into swaptions on either an asset-based or liability-based basis, depending on
whether the Fund is hedging its assets or its liabilities. The Fund may write (sell) and purchase put and call swaptions to the
same extent it may make use of standard options on securities or other instruments. The Fund may enter into these transactions
primarily to preserve a return or spread on a particular investment or portion of its holdings, as a duration management technique,
to protect against an increase in the price of securities the Fund anticipates purchasing at a later date, or for any other purposes,
such as for speculation to increase returns. Swaptions are generally subject to the same risks involved in the Fund’s use
of options.
Risks of Swap Agreements. The risk of
loss with respect to swaps generally is limited to the net amount of payments that the Fund is contractually obligated to make.
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 (e.g., the Fund may not receive
the net amount of payments that it contractually is entitled to receive).
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.
Total return swaps could result in losses if
the underlying asset or reference does not perform as anticipated. Total return swaps can have the potential for unlimited losses.
The Fund may lose money in a total return swap if the counterparty fails to meet its obligations.
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 NAV, 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 CIRCUMSTANCES
Since the financial crisis that started in
2008, the U.S. and many foreign economies continue to experience its after-effects. Conditions in the U.S. and many foreign economies
have resulted, and may continue to result, in certain instruments experiencing unusual liquidity issues, increased price volatility
and, in some cases, credit downgrades and increased likelihood of default. These events have reduced the willingness and ability
of some lenders to extend credit, and have made it more difficult for some borrowers to obtain financing on attractive terms, if
at all. In some cases, traditional market participants have been less willing to make a market in some types of debt instruments,
which has affected the liquidity of those instruments. During times of market turmoil, investors tend to look to the safety of
securities issued or backed by the U.S. Treasury, causing the prices of these securities to rise and the yields to decline. Reduced
liquidity in fixed income and credit markets may negatively affect many issuers worldwide. In addition, global economies and financial
markets are becoming increasingly interconnected, which increases the possibilities that conditions in one country or region might
adversely impact issuers in a different country or region. A rise in protectionist trade policies, and the possibility of changes
to some international trade agreements, could affect the economies of many nations in ways that cannot necessarily be foreseen
at the present time.
In response to the financial crisis, the U.S.
and other governments and the Federal Reserve and certain foreign central banks have taken steps to support financial markets.
In some countries where economic conditions are recovering, such countries are nevertheless perceived as still fragile. Withdrawal
of government support, failure of efforts in response to the crisis, or investor perception that such efforts are not succeeding,
could adversely impact the value and liquidity of certain securities. The severity or duration of adverse economic conditions may
also be affected by policy changes made by governments or quasi-governmental organizations, including changes in tax laws. The
impact of new financial regulation legislation on the markets and the practical implications for market participants may not be
fully known for some time. Regulatory changes are causing some financial services companies to exit long-standing lines of business,
resulting in dislocations for other market participants. In addition, the contentious domestic political environment, as well as
political and diplomatic events within the United States and abroad, such as the U.S. Government’s inability at times to
agree on a long-term budget and deficit reduction plan, the threat of a federal government shutdown and threats not to increase
the federal government’s debt limit, may affect investor and consumer confidence and may adversely impact financial markets
and the broader economy, perhaps suddenly and to a significant degree. The U.S. Government has recently reduced federal corporate
income tax rates, and future legislative, regulatory and policy changes may result in more restrictions on international trade,
less stringent prudential regulation of certain players in the financial markets, and significant new investments in infrastructure
and national defense. Markets may react strongly to expectations about the changes in these policies, which could increase volatility,
especially if the markets’ expectations for changes in government policies are not borne out.
Changes in market conditions will not have
the same impact on all types of securities. Interest rates have been unusually low in recent years in the United States and abroad.
Because there is little precedent for this situation, it is difficult to predict the impact of a significant rate increase on various
markets. For example, because investors may buy securities or other investments with borrowed money, a significant increase in
interest rates may cause a decline in the markets for those investments. Because of the sharp decline in the worldwide price of
oil, there is a concern that oil producing nations may withdraw significant assets now held in U.S. Treasuries, which could force
a substantial increase in interest rates. Regulators have expressed concern that rate increases may cause investors to sell fixed
income securities faster than the market can absorb them, contributing to price volatility. In addition, there is a risk that the
prices of goods and services in the U.S. and many foreign economies may decline over time, known as deflation (the opposite of
inflation). Deflation may have an adverse effect on stock prices and creditworthiness and may make defaults on debt more likely.
If a country’s economy slips into a deflationary pattern, it could last for a prolonged period and may be difficult to reverse.
On June 23, 2016, the United Kingdom (“UK”)
held a referendum on whether to remain a member state of the European Union (“EU”), in which voters favored the UK’s
withdrawal from the EU, an event widely referred to as “Brexit” and which triggered a two-year period of negotiations
on the terms of withdrawal. The formal notification to the European Council required under Article 50 of the Treaty on EU was made
on March 29, 2017, following which the terms of exit were negotiated. On January 31, 2020, the UK formally withdrew from the EU.
The longer term economic, legal, political and social framework to be put in place between the UK and the EU are unclear at this
stage, remain subject to negotiation and are likely to lead to ongoing political and economic uncertainty and periods of exacerbated
volatility in both the UK and in wider European markets for some time. The outcomes may cause increased volatility and have a significant
adverse impact on world financial markets, other international trade agreements, and the United Kingdom and European economies,
as well as the broader global economy for some time. Additionally, a number of countries in Europe have suffered terror attacks,
and additional attacks may occur in the future. Ukraine has experienced ongoing military conflict; this conflict may expand and
military attacks could occur elsewhere in Europe. Europe also has been struggling with mass migration from the Middle East and
Africa. The ultimate effects of these events and other socio-political or geographical issues are not known but could profoundly
affect global economies and markets.
The current political climate has intensified
concerns about a potential trade war between China and the United States, as each country has recently imposed tariffs on the other
country’s products. These actions may trigger a significant reduction in international trade, the oversupply of certain manufactured
goods, substantial price reductions of goods and possible failure of individual companies and/or large segments of China’s
export industry, which could have a negative impact on the Fund’s performance. U.S. companies that source material and goods
from China and those that make large amounts of sales in China would be particularly vulnerable to an escalation of trade tensions.
Uncertainty regarding the outcome of the trade tensions and the potential for a trade war could cause the U.S. dollar to decline
against safe haven currencies, such as the Japanese yen and the euro. Events such as these and their consequences are difficult
to predict and it is unclear whether further tariffs may be imposed or other escalating actions may be taken in the future.
Periods of market volatility may continue to
occur in response to pandemics or other events outside of our control. These types of events could adversely affect the Fund’s
performance. For example, since December 2019, a novel strain of coronavirus has spread globally, which has resulted in the temporary
closure of many corporate offices, retail stores, and manufacturing facilities and factories across the world. As the extent of
the impact on global markets from the coronavirus is difficult to predict, the extent to which the coronavirus may negatively affect
the Fund’s performance or the duration of any potential business disruption is uncertain. Any potential impact on performance
will depend to a large extent on future developments and new information that may emerge regarding the duration and severity of
the coronavirus and the actions taken by authorities and other entities to contain the coronavirus or treat its impact.
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 these purposes, a “majority
of outstanding voting securities” 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.
|
Purchase securities of an issuer that would cause the Fund to fail to satisfy the diversification
requirement for a diversified management company under the 1940 Act, the rules or regulations thereunder or any exemption therefrom,
as such statute, rules or regulations may be amended or interpreted from time to time.
|
|
2.
|
Concentrate its investments in an industry or group of industries (i.e., invest more than
25% of its total assets in the securities of companies in 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 securities of companies in such particular
industry or group of industries. For purposes of this limitation, securities of the U.S. Government (including its agencies and
instrumentalities), repurchase agreements collateralized by U.S. government securities and securities of state or municipal governments
and their political subdivisions are not considered to be issued by members of any industry.
|
|
3.
|
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.
|
|
4.
|
Make loans, 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.
|
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.
|
|
6.
|
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 has the following non-fundamental policy, which may be changed without
shareholder approval. The Fund will not invest less than 80% of its total assets, exclusive of collateral held from securities
lending, in securities that comprise its underlying index or in to-be-announced transactions and depositary receipts representing
securities comprising the underlying index (or, if depositary receipts themselves are index securities, the underlying securities
in respect of such depositary receipts).
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.
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 more than 25% of an investment company’s total assets in a particular industry or group of industries, with
certain exceptions.
Diversification. Under the 1940 Act,
a diversified investment management company, as to 75% of its total assets, may not purchase securities of any issuer (other than
securities issued or guaranteed by the U.S. Government, its agents or instrumentalities or securities of other investment companies)
if, as a result, more than 5% of its total assets would be invested in the securities of such issuer, or more than 10% of the issuer's
outstanding voting securities would be held by the company.
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 as described in its 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 Prospectus. The discussion below supplements, and should
be read in conjunction with the Prospectus.
The shares of the Fund are approved for listing
and trading on the Exchange. The Fund’s shares trade on the Exchange at prices that may differ to some degree from its NAV.
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.
The Exchange will consider the suspension of
trading in, and will initiate delisting procedures of, the shares of the Fund under any of the following circumstances: (1) following
the initial twelve-month period beginning upon the commencement of trading of the Fund, there are fewer than 50 record and/or beneficial
holders of the shares of the Fund; (2) the value of the Index or portfolio of securities on which the Fund is based is no longer
calculated or available; (3) if any of the continued listing requirements set forth in the Exchange’s rules are not continuously
maintained; (4) if the Exchange files separate proposals under Section 19(b) of the Securities Exchange Act of 1934 (“Exchange
Act”) and any of the statements regarding (a) the description of the index, portfolio or reference asset, (b) limitations
on index or portfolio holdings or reference assets, or (c) the applicability of the Exchange listing rules specified in such proposals
are not continuously maintained; or (5) such other event occurs or condition exists that, in the opinion of the Exchange, makes
further dealings on the Exchange inadvisable. If the “Intraday Indicative Value” (“IIV”) of the Fund or
the value of the Fund’s underlying index is not being disseminated as required by Exchange rules, the Exchange may halt trading
during the day in which such interruption occurs. If the interruption persists past the trading day in which it occurred, the Exchange
will halt trading in the Fund’s shares. In addition, the Exchange will remove the shares from listing and trading upon termination
of the Trust or the Fund.
The Exchange (or market data vendors or other
information providers) will disseminate, every fifteen seconds during the regular trading day, an IIV relating to the Fund. The
IIV calculations are estimates of the value of the Fund’s NAV per share and are based on the current market value of the
securities and/or cash required to be deposited in exchange for a Creation Unit. Premiums and discounts between the IIV and the
market price may occur. The IIV does not necessarily reflect the precise composition of the current portfolio of securities held
by the Fund at a particular point in time or the best possible valuation of the current portfolio. Therefore, it should not be
viewed as a “real-time” update of the NAV per share of the Fund, which is calculated only once a day. The quotations
of certain Fund holdings may not be updated during U.S. trading hours if such holdings do not trade in the United States. Neither
the Fund, the Adviser, or any of their affiliates are involved in, or responsible for, the calculation or dissemination of such
IIVs and make no warranty as to their accuracy.
The Trust reserves the right to adjust the
share price of the Fund in the future to 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.
As in the case of other publicly traded securities,
brokers’ commissions on transactions will be based on negotiated commission rates at customary levels.
The base and trading currencies of the Fund
is the U.S. dollar. The base currency is the currency in which the Fund’s NAV per share is calculated and the trading currency
is the currency in which shares of the Fund are listed and traded on the Exchange.
MANAGEMENT OF THE TRUST
Board Responsibilities. The management
and affairs of the Trust and its series, including the Fund described in this SAI, are overseen by the Trust’s Board. 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 funds, 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 Trust’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 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 agreement
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
also has 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 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 manage risk, as a practical matter, is subject to limitations.
Members of the Board. There are five
members of the Board, four of whom are not interested persons of the Trust, as that term is defined in the 1940 Act (“Independent
Trustees”). J. Garrett Stevens, the sole interested Trustee, serves as Chairman of the Board, and David Mahle serves as the
Trust’s lead Independent Trustee. As lead Independent Trustee, Mr. Mahle acts as a spokesperson for the Independent Trustees
in between meetings of the Board, serves as a liaison for the Independent Trustees with the Trust’s service providers, officers,
and legal counsel to discuss ideas informally, and participates as needed in setting the agenda for meetings of the Board and separate
meetings or executive sessions of the Independent Trustees. Independent Trustees comprise 80% of the Board. 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 a super-majority 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.
Set forth below is information about each of
the persons currently serving as a Trustee of the Trust. The address of each Trustee of the Trust is c/o Exchange Traded Concepts
Trust, 10900 Hefner Pointe Drive, Suite 401, Oklahoma City, Oklahoma 73120.
Name and Year of
Birth
|
Position(s)
Held with
the Trust
|
Term of
Office and
Length of
Time Served1
|
Principal Occupation(s)
During Past 5 Years
|
Number
of
Portfolios
in
Fund
Complex2
Overseen
By
Trustee
|
Other
Directorships
Held by Trustee
During Past 5
Years
|
Interested
Trustee
|
J. Garrett Stevens
(1979)
|
Trustee
and President
|
Trustee
(Since 2009); President
(Since 2011)
|
Investment
Adviser/Vice President, T.S. Phillips Investments, Inc. (since 2000); Chief Executive Officer, Exchange Traded Concepts, LLC
(since 2009); President, Exchange Traded Concepts Trust (since 2011); President, Exchange Listed Funds Trust (since 2012).
|
14
|
Trustee,
ETF Series Solutions (2012 to 2014)
|
Independent
Trustees
|
Timothy J. Jacoby
(1952)
|
Trustee
|
Since
2014
|
Senior
Partner, Deloitte & Touche LLP, Private Equity/Hedge Fund/Mutual Fund Services Practice (2000 – 2014).
|
23
|
Independent
Trustee, Exchange Listed Funds Trust (9 portfolios) (since 2014); Audit Committee Chair, Perth Mint Physical Gold ETF (since
2018); Independent Trustee, Edward Jones Money Market Fund (since 2017); Independent Trustee, Source ETF Trust (2014 –
2015).
|
Name and Year of
Birth
|
Position(s)
Held with
the Trust
|
Term of
Office and
Length of
Time Served1
|
Principal Occupation(s)
During Past 5 Years
|
Number
of
Portfolios
in
Fund
Complex2
Overseen
By
Trustee
|
Other
Directorships
Held by Trustee
During Past 5
Years
|
David M. Mahle
(1943)
|
Trustee
|
Since
2011
|
Consultant,
Jones Day (2012-2015); Of Counsel, Jones Day (2008-2011); Partner, Jones Day (1988-2008).
|
23
|
Independent
Trustee, Exchange Listed Funds Trust (9 portfolios) (since 2012); Independent Trustee, Source ETF Trust (2014 – 2015).
|
Linda Petrone3
(1962)
|
Trustee
|
Since
2019
|
Founding
Partner, Sage Search Advisors (since 2012).
|
23
|
Independent
Trustee, Exchange Listed Funds Trust (9 portfolios) (since 2019).
|
Mark Zurack
(1957)
|
Trustee
|
Since
2011
|
Professor,
Columbia Business School (since 2002).
|
14
|
Independent
Trustee, AQR Funds (45 portfolios) (since 2014); Independent Trustee, Exchange Listed Funds Trust (2019); Independent Trustee,
Source ETF Trust (2014 – 2015).
|
(1) Each Trustee shall serve during
the continued life of the Trust until he or she dies, resigns, is declared bankrupt or incompetent by a court of competent jurisdiction,
or is removed.
(2) The Fund Complex includes each
series of the Trust and of Exchange Listed Funds Trust.
(3) Linda Petrone was appointed
as an Independent Trustee effective October 17, 2019.
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. Stevens should
serve as a Trustee because of the experience he gained in his roles with registered broker-dealer and investment management firms,
as Chief Executive Officer of the Adviser, his experience in and knowledge of the financial services industry, and the experience
he has gained as serving as Trustee of the Trust since 2009.
The Trust has concluded that Mr. Jacoby should
serve as a Trustee because of the experience he has gained from over 25 years in or serving the investment management industry.
Until his retirement in June 2014, Mr. Jacoby served as a partner at the audit and professional services firm Deloitte & Touche
LLP, where he had worked since 2000, providing various services to asset management firms that manage mutual funds, hedge funds
and private equity funds. Prior to that, Mr. Jacoby held various senior positions at financial services firms. Additionally, he
served as a partner at Ernst & Young LLP. Mr. Jacoby is a Certified Public Accountant.
The Trust has concluded that Mr. Mahle should
serve as a Trustee because of the experience he has gained as an attorney in the investment management industry of a major law
firm, representing exchange-traded funds and other investment companies as well as their sponsors and advisers and his knowledge
and experience in investment management law and the financial services industry. Mr. Mahle is also a professor of law at Fordham
Law School, where he lectures on investment companies and investment adviser regulations.
The Trust has concluded that Mr. Zurack should
serve as a Trustee because of the experience he has gained serving in various leadership roles in the equity derivatives groups
of a large financial institution, his experience in teaching equity derivatives at the graduate level, as well as his knowledge
of the financial services industry.
The Trust has concluded that Ms. Petrone should
serve as a Trustee because of the experience she has gained serving in leadership roles in the equity derivatives group of a large
financial institution, as well as her knowledge of the financial services industry.
In its periodic assessment of the effectiveness
of the Board, the Board considers the complementary individual skills and experience of the individual Trustees primarily in the
broader context of the Board’s overall composition so that the Board, as a body, possesses the appropriate (and appropriately
diverse) skills and experience to oversee the business of the Fund.
Officers. Set forth below is information
about each of the persons currently serving as officers of the Trust. The address of J. Garrett Stevens, Richard Hogan, and James
J. Baker Jr. is c/o Exchange Traded Concepts Trust, 10900 Hefner Pointe Drive, Suite 401, Oklahoma City, Oklahoma 73120, the address
of Eric Kleinschmidt is SEI Investments Company, One Freedom Valley Drive, Oaks, Pennsylvania 19456, and the address of Joseph
Scavetti is Cipperman Compliance Services, 480 E. Swedesford Road, Suite 220, Wayne, PA 19087.
Name and
Year of Birth
|
Position(s)
Held with
the Trust
|
Term of
Office and
Length of
Time
Served1
|
Principal Occupation(s)
During Past 5 Years
|
J. Garrett Stevens
(1979)
|
Trustee and President
|
Trustee
(Since 2009),
President
(Since 2011)
|
Investment Adviser/Vice President, T.S. Phillips Investments, Inc. (since 2000); Chief Executive Officer, Exchange Traded Concepts, LLC (since 2009); President, Exchange Traded Concepts Trust (since 2011); President, Exchange Listed Funds Trust (since 2012).
|
Richard Hogan
(1961)
|
Secretary
|
Since 2011
|
President, Exchange Traded Concepts, LLC (since 2011); Private Investor (since 2003); Trustee and Secretary, Exchange Listed Funds Trust (since 2012); Board Member, Peconic Land Trust (2012-2016); Managing Member, Yorkville ETF Advisors (2011-2016).
|
Name and
Year of Birth
|
Position(s)
Held with
the Trust
|
Term of
Office and
Length of
Time
Served1
|
Principal Occupation(s)
During Past 5 Years
|
James J. Baker Jr.
(1951)
|
Treasurer
|
Since 2015
|
Managing Partner, Exchange Traded Concepts, LLC (since 2011); Managing Partner, Yorkville ETF Advisors (2012-2016); Vice President, Goldman Sachs (2000-2011).
|
Eric Kleinschmidt
(1968)
|
Assistant Treasurer
|
Since 2013
|
Director, Fund Accounting, SEI Investments Global Funds Services (since 2004); Manager, Fund Accounting (1999-2004).
|
Joseph Scavetti
(1968)
|
Chief Compliance Officer
|
Since 2018
|
Compliance Director, Cipperman Compliance Services, LLC (since 2018); Chief Operating Officer, Palladiem, LLC (2011-2018).
|
1 Each officer serves at the pleasure of the Board
of Trustees.
Trustee Compensation. As compensation
for service on the Trust’s Board, each Independent Trustee is entitled to receive a $40,000 annual base fee, as well as a
$3,000 fee for each in-person meeting and a $1,000 fee for each telephonic meeting. In addition, Mr. Jacoby is entitled to
a $5,000 annual fee for his service as Audit Committee chair, and Mr. Mahle is entitled to a $5,000 annual fee for his service
as lead Independent Trustee.
The following table sets forth the fees
paid to the Trustees for the fiscal year ended April 30, 2020. Independent Trustee fees are paid from the unitary fee paid to
the Adviser by the Fund and the other series of the Trust. Trustee compensation does not include reimbursed out-of-pocket expenses
in connection with attendance at meetings.
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 Complex1
|
Interested
Trustee
|
Stevens
|
$0
|
N/A
|
N/A
|
$0
for service on 1 board
|
Independent
Trustees
|
Jacoby
|
$67,000
|
N/A
|
N/A
|
$156,000
for service on 2 boards
|
Mahle
|
$68,5000
|
N/A
|
N/A
|
$138,000
for service on 2 boards
|
Petrone2
|
$31,000
|
N/A
|
N/A
|
$62,000
for service on 2 boards
|
Wolfgruber3
|
$10,000
|
N/A
|
N/A
|
$20,000
for service on 2 boards
|
Zurack
|
$69,000
|
N/A
|
N/A
|
$69,000
for service on 2 boards4
|
1 The Fund Complex includes each
series of the Trust and Exchange Listed Funds Trust.
2 Linda Petrone was appointed as
an Independent Trustee of the Trust effective October 17, 2019.
3 Kurt Wolfgruber served as an Independent
Trustee of the Trust and Exchange Listed Funds Trust until June 17, 2019.
4 Mark Zurack served as an Independent
Trustee of Exchange Listed Funds Trust from July 17, 2019 through October 17, 2019.
Committees.
The Board has established the following standing committees:
Audit Committee. The Board has an
Audit Committee that is composed of each of the Independent Trustees of the Trust. 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 Trust’s administrator that are material to the Trust as a whole, 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. The Audit Committee meets periodically, as necessary, and met six (6) times
during the most recently completed fiscal year.
Governance and Nominating Committee.
The Board has a Governance and Nominating Committee that is composed of each of the Independent Trustees of the Trust. The Governance
and Nominating Committee operates under a written charter approved by the Board. The principal responsibility of the Governance
and Nominating Committee is to consider, recommend and nominate candidates to fill vacancies on the Trust’s Board, if any.
The Governance and Nominating Committee generally will not consider nominees recommended by shareholders. The Governance and Nominating
Committee meets periodically, as necessary, and met two (2) times during the most recently completed fiscal year.
Fair Value Committee. In addition to
the Board’s standing committees described above, the Board also has established a Fair Value Committee that is composed of
certain officers of the Trust and representatives from the Adviser and the Trust’s administrator. The Fair Value Committee
operates under procedures approved by the Board. The Fair Value Committee is responsible for the valuation of any portfolio investments
for which market quotations or prices are not readily available. The Fair Value Committee meets periodically, as necessary.
Fund Shares Owned by Board Members.
If applicable, the following table shows the dollar range of each Trustee’s “beneficial ownership” of shares
of the Fund and each other series of the Trust as of the end of the most recently completed 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 Exchange Act. As of April 30, 2020, the Trustees and officers owned less than 1% of the outstanding shares of the Trust.
Name
|
Dollar Range of Shares Owned in
the Fund
|
Aggregate Dollar
Range of Shares of Series of the
Trust
|
Interested Trustee
|
|
|
J. Garrett Stevens
|
None
|
None
|
Independent Trustees
|
|
|
Timothy J. Jacoby
|
None
|
None
|
David M. Mahle
|
None
|
None
|
Linda Petrone
|
None
|
None
|
Mark A. Zurack
|
None
|
None
|
CODES OF ETHICS
The Trust, the Adviser, and the Distributor
have each adopted a code 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).
There can be no assurance that the codes of
ethics will be effective in preventing such activities. Each code of ethics, filed as exhibits to this registration statement,
may be examined at the office of the SEC in Washington, D.C. or on the Internet at the SEC’s website at www.sec.gov.
PROXY VOTING POLICIES
The Board has delegated the responsibility
to vote proxies for securities held in the Fund’s portfolio to the Adviser. Proxies for the portfolio securities are voted
in accordance with the Adviser’s proxy voting policies and procedures, which are set forth in Exhibit A to this SAI. Information
regarding how the Fund voted proxies relating to its portfolio securities during the most recent twelve-month period ended June
30 will be available: (1) without charge by calling 1-855-545-3524; or (2) on the SEC’s website at www.sec.gov.
INVESTMENT ADVISORY AND OTHER SERVICES
Exchange Traded Concepts, LLC, an Oklahoma
limited liability company located at 10900 Hefner Pointe Drive, Suite 401, Oklahoma City, Oklahoma 73120, its primary place of
business, and 295 Madison Avenue, New York, New York, 10017, serves as the investment adviser to the Fund. The Adviser is majority
owned by Cottonwood ETF Holdings LLC.
The Trust and the Adviser have entered
into an investment advisory agreement with respect to the Fund (the “Advisory Agreement”). Under the Advisory Agreement,
the Adviser provides investment advisory services to the Fund. The Adviser is responsible for the day-to-day management of the
Fund, including, among other things, implementing changes to the Fund’s portfolio in connection with any rebalancing or
reconstitution of the Index, trading portfolio securities on behalf of the Fund, and selecting broker-dealers to execute purchase
and sale transactions, subject to the supervision of the Board. The Adviser also arranges for transfer agency, custody, fund administration
and accounting, and other non-distribution related services necessary for the Fund to operate. The Adviser administers the Fund’s
business affairs, provides office facilities and equipment and certain clerical, bookkeeping and administrative services, and
provides its officers and employees to serve as officers or Trustees of the Trust. For the services the Adviser provides to the
Fund, the Fund pays the Adviser a fee calculated daily and paid monthly at an annual rate of 0.85% of the average daily net assets
of the Fund.
Under the Advisory Agreement, the Adviser has
agreed to pay all expenses incurred by the Fund except for the advisory fee, interest, taxes, brokerage commissions and other expenses
incurred in placing or settlement of orders for the purchase and sale of securities and other investment instruments, acquired
fund fees and expenses, extraordinary expenses, and distribution fees and expenses paid by the Fund under any distribution plan
adopted pursuant to Rule 12b-1 under the 1940 Act.
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 sixty (60) days’ nor less than thirty (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.
The Trust and the Adviser have obtained exemptive
relief, In the Matter of Exchange Traded Concepts Trust, et al., Investment Company Act Release Nos. 31453 (February 10,
2015) (Notice) and 31502 (March 10, 2015) (the “Order”), pursuant to which the Adviser may, with Board approval but
without shareholder approval, change or select new sub-advisers, materially amend the terms of an agreement with a sub-adviser
(including an increase in its fee), or continue the employment of a sub-adviser after an event that would otherwise cause the automatic
termination of services, subject to the conditions of the Order. Shareholders will be notified of any sub-adviser changes.
THE PORTFOLIO MANAGERS
Andrew Serowik and Travis Trampe serve as the
Fund’s portfolio managers. This section includes information about the portfolio managers, including information about compensation,
other accounts managed, and the dollar range of Fund shares owned.
Portfolio Manager Compensation. Mr.
Serowik’s portfolio management compensation includes a salary and discretionary bonus based on the profitability of the Adviser.
Mr. Trampe’s portfolio management compensation also includes a salary and discretionary bonus based upon the profitability
of the Adviser. Neither Mr. Serowik’s nor Mr. Trampe’s compensation is directly related to the performance of the underlying
assets.
Fund Shares Owned by the Portfolio Managers.
The Fund is required to show the dollar range of each portfolio manager’s “beneficial ownership” of shares
of the Fund as of the end of the most recently completed fiscal year. Dollar amount ranges disclosed are established by the SEC.
“Beneficial ownership” is determined in accordance with Rule 16a-1(a)(2) under the Exchange Act. As of April 30, 2020,
neither portfolio manager beneficially owned shares of the Fund.
Other Accounts Managed by the Portfolio
Managers. In addition to the Fund, as of April 30, 2020, the portfolio managers are responsible for the day-to-day management
of certain other accounts, as follows:
Name
|
Registered
Investment
Companies*
|
Other
Pooled Investment
Vehicles*
|
Other Accounts*
|
Number
of
Accounts
|
Total Assets
(in millions)
|
Number
of
Accounts
|
Total Assets
(in millions)
|
Number
of
Accounts
|
Total Assets
(in millions)
|
Andrew
Serowik
|
12
|
$316.4
|
0
|
$0
|
0
|
$0
|
Travis
Trampe
|
12
|
$316.4
|
0
|
$0
|
0
|
$0
|
* None of the accounts managed by
the portfolio managers are subject to performance-based advisory fees.
Conflicts
of Interest. The portfolio managers’ management of “other accounts”
may 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.
THE DISTRIBUTOR
The Trust and the Distributor, a
wholly-owned subsidiary of SEI Investments Company (“SEI Investments”), and an affiliate of the Administrator (as
defined below under “The Administrator”), are parties to an amended and restated distribution agreement dated
November 10, 2011 (the “Distribution Agreement”), whereby the Distributor acts as principal underwriter for the
Trust’s shares and distributes the shares of the Fund. Shares of the Fund are continuously offered for sale by the
Distributor only in Creation Units. Each Creation Unit is made up of at least 25,000 shares. The Distributor will not
distribute shares of the Fund in amounts less than a Creation Unit. The principal business address of the Distributor is One
Freedom Valley Drive, Oaks, Pennsylvania 19456.
Under the Distribution Agreement, the Distributor,
as agent for the Trust, will solicit orders for the purchase of shares of the Fund, provided that any subscriptions and orders
will not be binding on the Trust until accepted by the Trust. The Distributor will deliver prospectuses and, upon request, Statements
of Additional Information to persons purchasing Creation Units and will maintain records of orders placed with it. The Distributor
is a broker-dealer registered under the Exchange Act and a member of the Financial Industry Regulatory Authority (“FINRA”).
The Distributor also may enter into agreements
with securities dealers (“Soliciting Dealers”) who will solicit purchases of Creation Units of shares of the Fund.
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 the Fund’s 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 Distributor also may provide trade order
processing services pursuant to a services agreement.
Distribution and Service Plan. The Trust
has adopted a Distribution and Service 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 payments pursuant to the Plan will be made during the twelve (12) month period from the date
of the Fund’s Prospectus and this SAI. Thereafter, 12b-1 fees may only be imposed after approval by the Board.
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 the Fund pays the Distributor
an annual fee of up to a maximum of 0.25% of the average daily net assets of the shares of the Fund. 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 the Financial Industry Regulatory
Authority (“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 of the Fund,
including the cost of providing (or paying others to provide) services to beneficial owners of shares of the Fund, including, but
not limited to, assistance in answering inquiries related to shareholder accounts, and (vii) such other services and obligations
as are set forth in the Distribution Agreement.
THE ADMINISTRATOR
SEI Investments Global Funds Services (the
“Administrator”) has its principal business offices at One Freedom Valley Drive, Oaks, Pennsylvania 19456 and serves
as administrator of the Trust. SEI Investments Management Corporation (“SIMC”), a wholly-owned subsidiary of SEI Investments,
is the owner of all beneficial interest in the Administrator. SEI Investments and its subsidiaries and affiliates, including the
Administrator, are leading providers of funds evaluation services, trust accounting systems, and brokerage and information services
to financial institutions, institutional investors, and money managers. The Administrator and its affiliates also serve as administrator
or sub-administrator to other exchange-traded funds and mutual funds.
The Trust and the Administrator have entered
into an amended and restated administration agreement dated November 10, 2011 (the “Administration Agreement”). Under
the Administration Agreement, the Administrator provides the Trust with administrative services, including regulatory reporting
and all necessary office space, equipment, personnel and facilities. Pursuant to a schedule to the Administration Agreement, the
Administrator also serves as the shareholder servicing agent for the Fund whereby the Administrator provides certain shareholder
services to the Fund.
For its services under the Administration Agreement,
the Administrator is entitled to a fee paid by the Adviser based on assets under management, subject to a minimum fee.
THE CUSTODIAN
Brown Brothers Harriman & Co. (the
“Custodian”), located at 50 Post Office Square, Boston, Massachusetts 02110, serves as the custodian of the Fund.
The Custodian holds cash, securities and other assets of the Fund as required by the 1940 Act.
THE TRANSFER AGENT
Brown Brothers Harriman & Co. (the
“Transfer Agent”), located at 50 Post Office Square, Boston, Massachusetts 02110, serves as the Fund’s transfer
agent and dividend disbursing agent under a transfer agency agreement with the Trust.
LEGAL COUNSEL
Morgan, Lewis & Bockius LLP, located at
1111 Pennsylvania Avenue NW, Washington, DC 20004, serves as legal counsel to the Trust.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
Cohen & Company, Ltd., located at 151 North
Franklin Street, Suite 575, Chicago, Illinois 60606, serves as the independent registered public accounting firm for the Fund.
PORTFOLIO HOLDINGS DISCLOSURE POLICIES AND
PROCEDURES
The Board has adopted a policy regarding the
disclosure of information about the Fund’s security holdings.
The Fund’s entire portfolio holdings
are publicly disseminated each day the Fund is open for business through financial reporting and news services including publicly
available internet websites, as well as through the following website: https://dualetf.com.
In addition, the composition of the in-kind creation basket and the in-kind redemption basket is publicly disseminated daily prior
to the opening of the Exchange via the NSCC.
Greater than daily access to information concerning
the Fund’s portfolio holdings will be permitted (i) to certain personnel of service providers to the Fund involved in portfolio
management and providing administrative, operational, risk management, or other support to portfolio management, and (ii) to other
personnel of the Fund’s service providers who deal directly with, or assist in, functions related to investment management,
administration, custody and fund accounting, as may be necessary to conduct business in the ordinary course in a manner consistent
with the Trust’s exemptive relief, agreements with the Fund, and the terms of the Trust’s current registration statement.
From time to time, and in the ordinary course of business, such information may also be disclosed (i) to other entities that provide
services to the Fund, including pricing information vendors, and third parties that deliver analytical, statistical or consulting
services to the Fund and (ii) generally after it has been disseminated to the NSCC.
The Fund will disclose its complete portfolio
holdings in public filings with the SEC on a quarterly basis, based on the Fund’s fiscal year-end, 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.
No person is authorized to disclose any of
the Fund’s portfolio holdings or other investment positions (whether in writing, by fax, by e-mail, orally, or by other means)
except in accordance with this policy. The Trust’s Chief Compliance Officer may authorize disclosure of portfolio holdings.
The Board reviews the implementation of this policy on a periodic basis.
DESCRIPTION OF SHARES
The Declaration of Trust authorizes the issuance
of an unlimited number of funds (or series) and shares of each fund. Each share of a fund represents an equal proportionate interest
in that fund with each other share. Shares of a fund 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 Fund 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.
Under the Declaration of Trust, the Trustees
have the power to liquidate the Fund without shareholder approval. While the Trustees have no present intention of exercising this
power, they may do so if the 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.
LIMITATION OF TRUSTEES’ LIABILITY
The Declaration of Trust provides that a Trustee
shall be liable only for his or her own willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved
in the conduct of the office of Trustee, and shall not be liable for errors of judgment or mistakes of fact or law. The Trustees
shall not be responsible or liable in any event for any neglect or wrong-doing of any officer, agent, employee, investment adviser
or principal underwriter of the Trust, nor shall any Trustee be responsible for the act or omission of any other Trustee. The Declaration
of Trust also provides that the Trust shall indemnify each person who is, or has been, a Trustee, officer, employee or agent of
the Trust, any person who is serving or has served at the Trust’s request as a Trustee, officer, trustee, employee or agent
of another organization in which the Trust has any interest as a shareholder, creditor or otherwise to the extent and in the manner
provided in the By-Laws. However, nothing in the Declaration of Trust shall protect or indemnify a Trustee against any liability
for his or her willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of
the office of Trustee. Nothing contained in this section attempts to disclaim a Trustee’s individual liability in any manner
inconsistent with the federal securities laws.
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 services received from the broker effecting the transaction. Such determinations are necessarily subjective and imprecise,
as in most cases, an exact dollar value for the services provided 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 the 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 Exchange Act
permits the Adviser, under certain circumstances, to cause the 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, the 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 the 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.
The Fund is new and therefore did not pay brokerage
commissions during the past fiscal year.
Brokerage with Fund Affiliates.
The Fund may execute brokerage or other agency transactions through registered broker-dealer affiliates of the Fund, the Adviser,
or the Distributor for a commission in conformity with the 1940 Act, the Exchange 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 Trust, have adopted procedures for evaluating
the reasonableness of commissions paid to affiliates and review these procedures periodically.
Securities of “Regular Broker-Dealers.”
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.
The Fund is new and therefore did not hold securities of its “regular
brokers and dealers” during the past fiscal year.
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.
BOOK ENTRY ONLY SYSTEM
Depository Trust Company (“DTC”)
acts as securities depositary for the Fund’s 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 of the Fund
is limited to DTC Participants, Indirect Participants, and persons holding interests through DTC Participants and Indirect Participants.
Ownership of beneficial interests in shares of the Fund (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 of the Fund. The Trust recognizes DTC or its nominee as the record owner of all shares of the Fund 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 of the Fund.
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 of the Fund held by each DTC Participant. The Trust shall obtain from each such DTC Participant the number
of Beneficial Owners holding shares of the Fund, 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 of the Fund. 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 of the Fund 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 of the Fund, unless the Trust makes other arrangements with
respect thereto satisfactory to the Exchange.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF
SECURITIES
The Fund is new and therefore no person
owned of record or beneficially 5% or more of the Fund’s shares as of the date of this SAI.
PURCHASE AND REDEMPTION OF SHARES IN CREATION
UNITS
The Fund issues and redeems its shares on a
continuous basis, at NAV, only in a large specified number of shares called a “Creation Unit,” either principally in-kind
for securities included in the Index or in cash for the value of such securities. The NAV of the Fund’s shares is determined
once each business day, as described below under “Determination of Net Asset Value.” The Creation Unit size may change.
Authorized Participants will be notified of such change.
PURCHASE (CREATION). The Trust issues and sells
shares of the Fund only: (i) 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”); or (ii) pursuant to the Dividend Reinvestment
Service (defined below). The Fund will not issue fractional Creation Units. A business day is, generally, any day on which the
Exchange is open for business.
FUND DEPOSIT. The consideration for purchase
of a Creation Unit of the Fund generally consists of either (i) the in-kind deposit of a designated portfolio of securities (the
“Deposit Securities”) per each Creation Unit, constituting a substantial replication, or a portfolio sampling representation,
of the securities included in the Index and the Cash Component (defined below), computed as described below, or (ii) the cash value
of the Deposit Securities (“Deposit Cash”) and the Cash Component. When accepting purchases of Creation Units for cash,
the Fund may incur additional costs associated with the acquisition of Deposit Securities that would otherwise be provided by an
in-kind purchaser. These additional costs may be recoverable from the purchaser of Creation Units.
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 NAV of the shares of the Fund (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 NAV 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 NAV 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 NAV 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 NSCC, makes available on
each business day, prior to the opening of business on the Exchange (currently 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 changes as rebalancing adjustments
and corporate action events are reflected from time to time by the Adviser with a view to the investment objective of the Fund.
The composition of the Deposit Securities may also change in response to adjustments to the weighting or composition of the component
securities of the Index.
The Trust reserves the right to permit or require
the substitution of Deposit Cash to replace any Deposit Security, which shall be added to the Cash Component, 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 or the Federal Reserve System
for U.S. Treasury 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 (collectively, “custom orders”). The Trust also reserves
the right to (i) permit or require the substitution of Deposit Securities in lieu of Deposit Cash; and (ii) include or remove Deposit
Securities from the basket in anticipation of or implementation of Index rebalancing changes. The adjustments described above will
reflect changes, known to the Adviser on the date of announcement to be in effect by the time of delivery of the Fund Deposit,
in the composition of the Index or resulting from certain corporate actions.
CASH PURCHASE
METHOD. The Trust may at its discretion permit full or partial cash purchases of Creation Units of the Fund. When full or partial
cash purchases of Creation Units are available or specified for the Fund, they will be effected in essentially the same manner
as in-kind purchases thereof. In the case of a full or partial cash purchase, the Authorized Participant must pay the cash equivalent
of the Deposit Securities it would otherwise be required to provide through an in-kind purchase, plus the same Cash Component required
to be paid by an in-kind purchaser together with a creation transaction fee and non-standard charges, as may be applicable.
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 and the Trust, 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 and any other applicable fees, taxes, and additional variable charges. The Adviser may retain all or a portion
of the creation 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 creation transaction fee is designed to cover.
All orders to purchase shares directly from
the Fund, including custom orders, must be placed for one or more Creation Units 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 AP Handbook or applicable order form.
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 Distributor by the applicable 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 and U.S. government securities) or through DTC (for corporate securities),
through a subcustody 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 subcustodian 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 subcustodian. 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 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 the Custodian
in a timely manner by the Settlement Date, the creation order may be cancelled and the Authorized Participant shall be liable to
the Fund for losses, if any, resulting therefrom. 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 by 2:00 p.m. Eastern time, 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 by 2:00
p.m. Eastern time 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, AP Handbook, 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 subcustodian has confirmed to
the Custodian that the required Deposit Securities (or the cash value thereof) have been delivered to the account of the relevant
subcustodian or subcustodians, 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. However, the Fund reserves the
right to settle Creation Unit transactions on a basis other than the second business day following the day on which the purchase
order is deemed received by the Distributor in order to accommodate foreign market holiday schedules, to account for different
treatment among foreign and U.S. markets of dividend record dates and ex-dividend dates (that is the last day the holder of a security
can sell the security and still receive dividends payable on the security), and in certain other circumstances. The Authorized
Participant shall be liable to the Fund for losses, if any, resulting from unsettled orders.
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 NAV of the shares of the Fund 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. The Authorized Participant must deposit with the Custodian the Additional Cash Deposit, as applicable,
by the time set forth in the Participant Agreement on the Settlement Date. If the Fund or its agents do not receive the Additional
Cash Deposit in the appropriate amount, by such time, then the order may be deemed rejected and the Authorized Participant shall
be liable to the Fund for losses, if any, resulting therefrom. 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 Trust may use such Additional Cash Deposit to buy the missing Deposit Securities
at any time. Authorized Participants will be liable to the Trust for all costs, expenses, dividends, income, and taxes associated
with missing Deposit Securities, including 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 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 creation transaction fee as set forth below under “Creation Transaction Fee” may be charged and an additional variable
charge may also apply. 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) 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 fixed purchase
(i.e., creation) transaction fee may be imposed for the transfer and other transaction costs associated with the purchase
of Creation Units (“Creation Order Costs”). The standard creation transaction fee for the Fund is $600, regardless
of the number of Creation Units created in the transaction. The Fund may adjust the creation transaction fee from time to time.
The creation transaction fee may be waived on certain orders if the Custodian has determined to waive some or all of the Creation
Order Costs associated with the order or another party, such as the Adviser, has agreed to pay such fee.
In addition, a variable fee may be imposed
for cash purchases, non-standard orders, or partial cash purchases of Creation Units. The variable fee is primarily designed to
cover non-standard charges, e.g., brokerage, taxes, foreign exchange, execution, market impact, and other costs and expenses
related to the execution of trades resulting from such transaction. In all cases, such fees will be limited in accordance with
the requirements of the SEC applicable to management investment companies offering redeemable securities. The Fund may determine
not to charge a variable fee on certain orders when the Adviser has determined that doing so is in the best interests of Fund shareholders,
e.g., for creation orders that facilitate the rebalance of the Fund’s portfolio in a more efficient manner than could
have been achieved without such order.
Investors who use the services of an Authorized
Participant, broker or other such intermediary may be charged a fee for such services which may include an amount for the creation
transaction fee and non-standard charges. Investors are responsible for the costs of transferring the securities constituting the
Deposit Securities to the account of the Trust. 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 issuance of a Creation Unit, which
the Transaction Fee is designed to cover.
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 of the Fund may be redeemed
only in Creation Units at their NAV 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 prior to the opening of business on the Exchange (currently 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 combination thereof, as determined by the Trust. 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 NAV of the
shares of the Fund 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 any fixed redemption transaction fee as set forth below and any applicable additional
variable charge as set forth below. In the event that the Fund’s securities have a value greater than the NAV 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.
CASH REDEMPTION
METHOD. Although the Trust does not ordinarily permit full or partial cash redemptions of Creation Units of the Fund, when full
or partial cash redemptions of Creation Units are available or specified for the Fund, they will be effected in essentially the
same manner as in-kind redemptions thereof. In the case of full or partial cash redemptions, the Authorized Participant receives
the cash equivalent of the Fund Securities it would otherwise receive through an in-kind redemption, plus the same Cash Redemption
Amount to be paid to an in-kind redeemer.
REDEMPTION TRANSACTION FEE. A fixed redemption
transaction fee may be imposed for the transfer and other transaction costs associated with the redemption of Creation Units (“Redemption
Order Costs”). The standard redemption transaction fee for the Fund is $600 regardless of the number of Creation Units redeemed
in the transaction. The Fund may adjust the redemption transaction fee from time to time. The redemption transaction fee may be
waived on certain orders if the Custodian has determined to waive some or all of the Redemption Order Costs associated with the
order or another party, such as the Adviser, has agreed to pay such fee.
In addition, a variable fee, payable to the
Fund, may be imposed for cash redemptions, non-standard orders, or partial cash redemptions for the Fund. The variable fee is primarily
designed to cover non-standard charges, e.g., brokerage, taxes, foreign exchange, execution, market impact and other costs
and expenses related to the execution of trades resulting from such transaction. In all cases, such fees will be limited in accordance
with the requirements of the SEC applicable to management investment companies offering redeemable securities. The Fund may determine
not to charge a variable fee on certain orders when the Adviser has determined that doing so is in the best interests of Fund shareholders,
e.g., for redemption orders that facilitate the rebalance of the Fund’s portfolio in a more tax efficient manner than
could be achieved without such order.
Investors who use the services of an Authorized
Participant, broker or other such intermediary may be charged a fee for such services, which may include an amount for the redemption
transaction fee and non-standard charges. Investors are responsible for the costs of transferring the securities constituting the
Fund Securities to the account of the Trust. The non-standard charges are payable to the Fund as it incurs costs in connection
with the redemption of Creation Units, the receipt of Fund Securities and the Cash Redemption Amount and other transactions costs.
The Adviser may retain all or a portion of the redemption transaction fee to the extent the Adviser bears the expenses that otherwise
would be borne by the Trust in connection with the redemption of a Creation Unit, which the redemption transaction fee is designed
to cover.
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 of
the Fund 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, unless, to the extent contemplated by the Participant Agreement, collateral
is posted in an amount equal to a percentage of the value of the missing shares of the Fund as specified in the Participant Agreement
(and marked to market daily).
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
Participant Agreement. Investors should be aware that their particular broker may not have executed a 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 a 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 of the Fund 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, a redeeming shareholder or Authorized Participant
acting on behalf of such shareholder 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, exercise its option
to redeem such shares in cash, and the redeeming shareholders will be required to receive redemption proceeds in cash.
If it is not possible to make other such arrangements,
or it is not possible to effect deliveries of the Fund Securities, the Trust may in its discretion 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, 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 NAV.
Pursuant to the Participant Agreement, an Authorized
Participant submitting a redemption request is deemed to make certain representations to the Trust regarding the Authorized Participant’s
ability to tender for redemption the requisite number of shares of the Fund. The Trust reserves the right to verify these representations
at its discretion, but will typically require verification with respect to a redemption request from the Fund in connection with
higher levels of redemption activity and/or short interest in the Fund. If the Authorized Participant, upon receipt of a verification
request, does not provide sufficient verification of its representations as determined by the Trust, the redemption request will
not be considered to have been received in proper form and may be rejected by the Trust.
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 of the Fund 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, or to purchase or sell shares 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 New York Stock Exchange is closed (other
than customary weekend and holiday closings); (2) for any period during which trading on the New York Stock Exchange is suspended
or restricted; (3) for any period during which an emergency exists as a result of which disposal of the securities owned by the
Fund or determination of the NAV of the shares of the Fund is not reasonably practicable; or (4) in such other circumstance as
is permitted by the SEC.
DETERMINATION OF NET ASSET VALUE
NAV 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 NAV. The NAV of the Fund is calculated by the Administrator and determined at the close
of the regular trading session on the Exchange (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 NAV 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
NAV 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, if available). In these cases, the Fund’s NAV 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
NAV and the prices used by the Fund’s Index. This may result in a difference between the Fund’s performance and the
performance of the Fund’s 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 at least annually 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 Internal Revenue Code, in all events in a manner
consistent with the provisions of the 1940 Act.
Dividends and other distributions on shares
of the Fund 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 makes 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
the imposition of the excise tax imposed by Section 4982 of the Internal Revenue Code. Management of the Trust reserves the right
to declare special dividends by the Fund if, in its reasonable discretion, such action is necessary or advisable to preserve the
Fund’s eligibility for treatment 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. 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 a summary of certain additional
U.S. federal income tax considerations generally affecting the Fund and its shareholders that supplements the summary in the Prospectus.
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
summary is very general, and does not address investors subject to special rules, such as investors who hold shares through an
individual retirement account (“IRA”), 401(k) or other tax-advantaged account.
The following general discussion of certain
U.S. federal income tax consequences is based on provisions of the Internal Revenue 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.
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 Status.
The Fund will elect and will seek to qualify to be treated as a RIC under the Internal Revenue Code. By
following such a policy, the Fund expects to eliminate or reduce to a nominal amount the federal taxes to which it may be subject.
If the Fund qualifies as a RIC, it will generally not be subject to federal income taxes on the net investment income and net
realized capital gains that it timely distributes to its shareholders. The Board reserves the right not to maintain the qualification
of the Fund as a RIC if it determines such course of action to be beneficial to shareholders.
In order
to qualify as a RIC under the Internal Revenue Code, the Fund must distribute annually to its shareholders at least an amount
equal to the sum of 90% of the Fund’s net investment company taxable income for such year (including, for this purpose, dividends,
taxable interest, and the excess of net short-term capital gains over net long-term capital losses, less operating expenses), computed
without regard to the dividends paid deduction, and at least 90% of its net tax-exempt interest income for such year, if any (the
“Distribution Requirement”) and also must meet certain additional requirements. One of these additional requirements
for RIC qualification is that the Fund must receive at least 90% of its gross income each taxable 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 (including but not limited to gains from options, futures or forward contracts) derived with respect to the Fund’s
business of investing in such stock, securities, foreign currencies and net income from interests in qualified publicly traded
partnerships (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, including the equity securities of a qualified publicly
traded partnership; and (b) not more than 25% of the value of its total assets is invested, including through corporations in which
the Fund owns a 20% or more voting stock interest, in the securities (other than U.S. government securities or securities of other
RICs) of any one issuer or the securities (other than the securities of other RICs) of two or more issuers that the Fund controls
and which are engaged in the same or similar trades or businesses or related trades or businesses, or the securities of one or
more qualified publicly traded partnerships (the “Asset Test”).
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 where the Fund corrects the failure within a specified period
of time. In order to be eligible for the relief provisions with respect to a failure to meet the Asset Test, the Fund may be required
to dispose of certain assets. If these relief provisions are not available to the Fund and it fails to qualify for treatment as
a RIC for a taxable year, all of its taxable income would be subject to tax at the regular corporate income tax rate (currently
21%) without any deduction for distributions to shareholders, and its distributions (including capital gains distributions and
any exempt-interest dividends) generally would be taxable as ordinary income dividends to its shareholders, subject to the dividends-received
deduction for corporate shareholders and the lower tax rates on qualified dividend income received by non-corporate shareholders.
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 year in which the Fund failed to qualify for tax
treatment as a RIC. If the Fund fails to qualify as a RIC for a period longer than two taxable years, it would generally be required
to pay a Fund-level tax on certain 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. 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 intends to distribute annually to
its shareholders substantially all of its investment company taxable income (computed without regard to the dividends-paid deduction).
If the Fund failed to satisfy the Distribution Requirement for any taxable year, it would be taxed as a regular corporation, with
consequences generally similar to those described above. If the Fund meets the Distribution Requirement but retains some or all
of its income or gains, it will be subject to federal income tax to the extent any such income or gains are not distributed.
The Fund may designate certain amounts retained
as undistributed net capital gain in a notice to its shareholders, who (i) will be required to include in income for U.S. federal
income tax purposes, as long-term capital gain, their proportionate shares of the undistributed amount so designated, (ii) will
be entitled to credit their proportionate shares of the income tax paid by the Fund on that undistributed amount against their
federal income tax liabilities and to claim refunds to the extent such credits exceed their liabilities and (iii) will be entitled
to increase their tax basis, for federal income tax purposes, in their shares in the Fund 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.
Notwithstanding the Distribution Requirement
described above, the Fund will be subject to a nondeductible 4% federal excise tax on certain undistributed taxable income if it
does not distribute (and is not deemed to distribute) to its shareholders in each calendar year an amount at least equal to 98%
of its ordinary income for the calendar year plus 98.2% of its capital gain net income for the twelve months ended October 31
of that year, subject to an increase for any shortfall in the prior year’s distribution. For this purpose, any ordinary income
or capital gain net income retained by the Fund and subject to corporate income tax will be considered to have been distributed.
The Fund intends to declare and distribute dividends and distributions in the amounts and at the times necessary to avoid the application
of this 4% excise tax, but can make no assurances that all such tax liability will be eliminated. The Fund may in certain circumstances
be required to liquidate Fund investments in order to make sufficient distributions to avoid federal excise tax liability at a
time when the investment adviser might not otherwise have chosen to do so, and liquidation of investments in such circumstances
may affect the ability of the Fund to satisfy the requirement for qualification as a RIC.
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. The effect of this election is to treat
any such “qualified late year loss” as if it had been incurred in the succeeding taxable year in characterizing Fund
distributions for any calendar year. 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 (commonly referred to as “post-October
losses”) and certain other late-year losses.
Capital losses in excess of capital gains (“net
capital losses”) are not permitted to be deducted against a RIC’s net investment income. Instead, for U.S. federal
income tax purposes, potentially subject to certain limitations, a RIC may carry net capital losses from any taxable year forward
to offset capital gains in future years. The Fund is permitted to carry net capital losses forward indefinitely. To the extent
subsequent capital gains are offset by such losses, they will not result in U.S. federal income tax liability to the Fund and may
not be distributed as capital gains to shareholders. Generally, the Fund may not carry forward any losses other than net capital
losses. The carryover of capital losses may be limited under the general loss limitation rules
if the Fund experiences an ownership change as defined in the Internal Revenue Code.
Taxation of Shareholders. The Fund receives
income generally in the form of dividends and interest on investments. This income, plus net short-term capital gains, if any,
less expenses incurred in the operation of the Fund, constitutes the Fund’s net investment income from which dividends may
be paid to you. Any distributions by the Fund from such income will be taxable to you as ordinary income or at the lower capital
gains rates that apply to individuals receiving qualified dividend income, whether you take them in cash or in additional shares.
Subject to certain limitations and requirements,
dividends reported by the Fund as qualified dividend income will be taxable to non-corporate shareholders at rates of up to 20%.
In general, dividends may be reported by the Fund as qualified dividend income if they are paid from dividends received by the
Fund on common and preferred stock of U.S. corporations or on stock of certain eligible foreign corporations, provided that certain
holding period and other requirements are met by the Fund with respect to the dividend paying stocks in its portfolio. Subject
to certain limitations, eligible foreign corporations include those incorporated in possessions of the United States or in certain
countries with comprehensive tax treaties with the United States, and other foreign corporations if the stock with respect to
which the dividends are paid is readily tradable on an established securities market in the United States. A dividend will not
be treated as qualified dividend income to the extent that: (i) the shareholder has not held the shares on which the dividend
was paid for more than 60 days during the 121-day period that begins on the date that is 60 days before the date on which the
shares become “ex-dividend” (which is the day on which declared distributions (dividends or capital gains) are deducted
from the Fund’s assets before it calculates the net asset value) with respect to such dividend, (ii) the Fund has not satisfied
similar holding period requirements with respect to the securities it holds that paid the dividends distributed to the shareholder),
(iii) the shareholder is under an obligation (whether pursuant to a short sale or otherwise) to make related payments with respect
to substantially similar or related property, or (iv) the shareholder elects to treat such dividend as investment income under
section 163(d)(4)(B) of the Internal Revenue Code. Therefore, if you lend your shares in the Fund, such as pursuant to a securities
lending arrangement, you may lose the ability to treat dividends (paid while the shares are held by the borrower) as qualified
dividend income. Distributions that the Fund receives from an ETF, an underlying fund taxable as a RIC, or from a REIT will be
treated as qualified dividend income only to the extent so reported by such ETF, underlying fund or REIT.
Distributions by the Fund of its net short-term
capital gains will be taxable as ordinary income. Capital gains distributions consisting of the Fund’s net capital gains
will be taxable as long-term capital gains for individual shareholders currently set at a maximum rate of 20% regardless of how
long you have held your shares in the Fund and regardless of whether paid in cash or reinvested in shares of the Fund.
In the case of corporate shareholders,
the Fund’s distributions (other than capital gain distributions) generally qualify for the dividends-received deduction
to the extent such distributions are so reported and do not exceed the gross amount of qualifying dividends received by the Fund
for the year. Generally, and subject to certain limitations (including certain holding period limitations), a dividend will be
treated as a qualifying dividend if it has been received from a domestic corporation.
The Fund’s participation in loans of
securities may affect the amount, timing, and character of distributions to Fund shareholders. If the Fund participates in a securities
lending transaction and receives a payment in lieu of dividends (a “substitute payment”) with respect to securities
on loan in a securities lending transaction, such income generally will not constitute qualified dividend income and thus dividends
attributable to such income will not be eligible for taxation at the rates applicable to qualified dividend income for individual
shareholders and will not be eligible for the dividends-received deduction for corporate shareholders.
Although dividends generally will be treated
as distributed when paid, any dividend declared by the Fund in October, November or December and payable to shareholders of record
in such a month that is paid during the following January will be treated for U.S. federal income tax purposes as received by shareholders
on December 31 of the calendar year in which it was declared. A taxable shareholder may wish to avoid investing in the Fund shortly
before a dividend or other distribution, because the distribution will generally be taxable even though it may economically represent
a return of a portion of the shareholder’s investment.
If the Fund’s distributions exceed its
current and accumulated earnings and profits, all or a portion of the distributions made in the taxable year may be treated as
a return of capital to shareholders. A return of capital distribution generally will not be taxable but will reduce the shareholder’s
cost basis and result in a higher capital gain or lower capital loss when the shares of the Fund on which the distribution was
received are sold. After a shareholder’s basis in the shares of the Fund has been reduced to zero, distributions in excess
of earnings and profits will be treated as gain from the sale of the shareholder’s shares.
The Fund’s shareholders will be notified
annually by the Fund (or their broker) as to the federal tax status of all distributions made by the Fund. Distributions may be
subject to state and local taxes. Shareholders who have not held Fund shares for a full year should be aware that the Fund may
report and distribute to a shareholder, as ordinary dividends or capital gain dividends, a percentage of income that is not equal
to the percentage of the Fund’s ordinary income or net capital gain, respectively, actually earned during the shareholder’s
period of investment in the Fund.
Sales, Exchanges or Redemptions. A sale
of shares or redemption of Creation Units in the Fund may give rise to a gain or loss. In general, any gain or loss realized upon
a taxable disposition of shares will be treated as capital gain or loss if the shares are capital assets in the shareholder’s
hands, and will be long-term capital gain or loss if the shares have been held for more than twelve months, and short-term capital
gain or loss if the shares are held for twelve months or less. However, if shares on which a shareholder has received a long-term
capital gain distribution are subsequently sold, exchanged, or redeemed and such shares have been held for six months or less,
any loss recognized will be treated as a long-term capital loss to the extent of the long-term capital gain distribution. In addition,
the loss realized on a sale or other disposition of shares will be disallowed to the extent a shareholder repurchases (or enters
into a contract or option to repurchase) shares within a period of 61 days (beginning 30 days before and ending 30 days after the
disposition of the shares). This loss disallowance rule will apply to shares received through the reinvestment of dividends during
the 61-day period. 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 gain or loss from the exchange. The gain or loss will be equal to the difference between
the market value of the Creation Units at the time of the exchange and the sum of the exchanger’s aggregate basis in the
securities surrendered plus the amount of cash paid for such Creation Units. The ability of
Authorized Participants to receive a full or partial cash redemption of Creation Units of the Fund may
limit the tax efficiency of the Fund. A person who redeems Creation Units will generally recognize a gain or loss equal
to the difference between the sum of the aggregate market value of any securities received plus the amount of any cash received
for such Creation Units and the exchanger’s basis in the Creation Units. The Internal Revenue Service (the “IRS”),
however, may assert that an Authorized Participant may not be permitted to currently deduct losses realized upon an exchange of
securities for Creation Units under the rules governing “wash sales” (for an Authorized Participant that does not mark-to-market
its holdings), or on the basis that there has been no significant change in economic position.
Any 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 and were held as capital assets in the hands of the exchanging
Authorized Participant. 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. Any loss realized upon a redemption of Creation
Units held for six months or less should be treated as a long-term capital loss to the extent of any amounts treated as distributions
to the applicable Authorized Participant of long-term capital gains with respect to the Creation Units (including any amounts credited
to the Authorized Participant as undistributed capital gains).
The Trust on behalf of the Fund has the right
to reject an order for a purchase of shares of the Fund if the purchaser (or a 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 Internal Revenue 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.
If the Fund does issue Creation Units to a purchaser (or a group of purchasers) that would, upon obtaining the shares so ordered,
own 80% or more of the outstanding shares of the Fund, the purchaser (or a group of purchasers) may not recognize gain or loss
upon the exchange of securities for Creation Units.
Persons purchasing or redeeming Creation Units
should consult their own tax advisors with respect to the tax treatment of any creation or redemption transaction and whether the
wash sales rules apply and when a loss might be deductible.
Medicare Tax. U.S. individuals with
adjusted gross income (subject to certain adjustments) exceeding certain threshold amounts ($250,000 if married and filing jointly
or if considered a “surviving spouse” for federal income tax purposes, $125,000 if married filing separately, and $200,000
in other cases) are subject to a 3.8% Medicare contribution tax on all or a portion of their “net investment income.”
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. For these purposes, interest, dividends and certain capital gains (including capital gain distributions and capital
gains realized on the sale of shares of the Fund or the redemption of Creation Units), among other categories of income, are generally
taken into account in computing a shareholder’s net investment income.
Taxation of Fund Investments. Certain
of the Fund’s investments may be subject to complex provisions of the Internal Revenue Code (including provisions relating
to hedging transactions, straddles, integrated transactions, foreign currency contracts, forward foreign currency contracts, and
notional principal contracts) that, among other things, may affect the Fund’s ability to qualify as a RIC, affect the character
of gains and losses realized by the Fund (e.g., may affect whether gains or losses are ordinary or capital), accelerate
recognition of income to the Fund and defer losses and, in limited cases, subject the Fund to U.S. federal income tax on income
from certain of its foreign securities. These rules could therefore affect the character, amount and timing of distributions to
shareholders. These provisions also may require the Fund to mark to market certain types of positions in its portfolio (i.e.,
treat them as if they were closed out) which may cause the Fund to recognize income without receiving cash with which to make distributions
in amounts necessary to satisfy the RIC Distribution Requirements and for avoiding excise taxes. Accordingly, in order to avoid
certain income and excise taxes, the Fund may be required to liquidate its investments at a time when the investment adviser might
not otherwise have chosen to do so. The Fund intends to monitor its transactions, intends to make appropriate tax elections, and
intends to make appropriate entries in its books and records in order to mitigate the effect of these rules and preserve its qualification
for treatment as a RIC.
The Fund may be subject to withholding
and other taxes imposed by foreign countries, including taxes on interest, dividends and capital gains with respect to any investments
in those countries. Any such taxes would, if imposed, reduce the yield on or return from those investments. Tax conventions between
certain countries and the U.S. may reduce or eliminate such taxes in some cases. The Fund does not expect to satisfy the requirements
for passing through to its shareholders any share of foreign taxes paid by the Fund, with the result that shareholders will not
be required to include such taxes in their gross incomes and will not be entitled to a tax deduction or credit for any such taxes
on their own tax returns.
Backup Withholding. The Fund will be
required in certain cases to withhold (as “backup withholding”) at a 24% withholding rate and remit to the U.S. Treasury
the withheld amount of taxable dividends paid to any shareholder who: (1) fails to provide a correct taxpayer identification number
certified under penalty of perjury; (2) is subject to backup 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).
Foreign Shareholders. Any foreign
shareholders in the Fund may be subject to U.S. withholding and estate tax and are encouraged to consult their tax advisors prior
to investing in the Fund. 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 taxable ordinary income. The Fund may, under certain circumstances, report all or a portion of a dividend as an “interest-related
dividend” or a “short-term capital gain dividend,” which would generally be exempt from this 30% U.S. withholding
tax, provided certain other requirements are met. Short-term capital gain dividends received by a nonresident alien individual
who is present in the U.S. for a period or periods aggregating 183 days or more during the taxable year are not exempt from this
30% withholding tax. Gains realized by foreign shareholders 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 is physically present in the U.S. for 183 days or more
per year. Foreign shareholders who fail to provide an applicable IRS form may be subject to backup withholding on certain payments
from the Fund. Backup withholding will not be applied to payments that are subject to the 30% (or lower applicable treaty rate)
withholding tax described in this paragraph. 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.
Unless certain non-U.S. entities that hold
Fund shares comply with IRS requirements that generally require them to report information regarding U.S. persons investing in,
or holding accounts with, such entities, a 30% withholding tax may apply to Fund distributions payable to such entities. 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
the agreement.
A beneficial holder of shares of the Fund who
is a foreign person may be subject to foreign, state and local tax and to the U.S. federal estate tax in addition to the federal
income tax consequences referred to above. If a shareholder is eligible for the benefits of a tax treaty, any effectively connected
income or gain will generally be subject to U.S. federal income tax on a net basis only if it is also attributable to a permanent
establishment or fixed base maintained by the shareholder in the United States.
Tax-Exempt Shareholders. Certain
tax-exempt shareholders, including qualified pension plans, individual retirement accounts, salary deferral arrangements, 401(k)s,
and other tax-exempt entities, generally are exempt from federal income taxation except with respect to their unrelated business
taxable income (“UBTI”). Tax-exempt entities are not permitted to offset losses from one trade or business against
the income or gain of another trade or business. Certain net losses incurred prior to January 1, 2018 are permitted to offset
gain and income created by an unrelated trade or business, if otherwise available. Under current law, the Fund generally serves
to block UBTI from being realized by its tax-exempt shareholders. However, notwithstanding the foregoing, the tax-exempt shareholder
could realize UBTI by virtue of an investment in the Fund where, for example: (i) the Fund invests in residual interests of Real
Estate Mortgage Investment Conduits (“REMICs”), (ii) the Fund invests in a REIT that is a taxable mortgage pool (“TMP”)
or that has a subsidiary that is a TMP or that invests in the residual interest of a REMIC, or (iii) shares in the Fund constitute
debt-financed property in the hands of the tax-exempt shareholder within the meaning of section 514(b) of the Internal Revenue
Code. Charitable remainder trusts are subject to special rules and should consult their tax advisor. The IRS has issued guidance
with respect to these issues and prospective shareholders, especially charitable remainder trusts, are strongly encouraged to
consult their tax advisors regarding these issues.
Certain Potential Tax Reporting Requirements.
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 (or certain greater amounts over a combination of years), the shareholder must file
with the IRS a disclosure statement on IRS 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. A shareholder who fails to make
the required disclosure to the IRS may be subject to substantial penalties. 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.
Cost Basis Reporting. The cost basis
of shares of the Fund acquired by purchase will generally be based on the amount paid for the shares and then may be subsequently
adjusted for other applicable transactions as required by the Internal Revenue Code. The difference between the selling price and
the cost basis of shares generally determines the amount of the capital gain or loss realized on the sale or exchange of shares.
Contact the broker through whom you purchased your shares to obtain information with respect to the available cost basis reporting
methods and elections for your account.
State Taxes. Depending upon state and
local law, distributions by the Fund to its shareholders and the ownership of such shares may be subject to state and local taxes.
Rules of state and local taxation of dividend and capital gains distributions from RICs often differ from the rules for federal
income taxation described above. It is expected that the Fund will not be liable for any corporate excise, income or franchise
tax in Delaware if it qualifies as a RIC for federal income tax purposes.
The foregoing discussion is based on U.S. federal
tax laws and regulations which are in effect on the date of this SAI. Such laws and regulations may be changed by legislative or
administrative action. Shareholders are advised to consult their tax advisors concerning their specific situations and the application
of federal, state, local and foreign taxes.
FINANCIAL STATEMENTS
The Fund is new and therefore does not have
any financial statements. The Fund’s financial statements will be available after the Fund has completed its first fiscal
year of operations.
EXHIBIT A
EXCHANGE TRADED CONCEPTS, LLC
PROXY VOTING POLICY AND PROCEDURES
Introduction
Exchange Traded Concepts, LLC (“ETC”)
recognizes that proxies for companies whose securities are held in client portfolios have an economic value, and it seeks to maximize
that economic value by ensuring that votes are cast in a manner that it believes to be in the best interest of the affected clients.
Proxies are considered client assets and are to be managed with the same care, skill and diligence as all other client assets.
Proxy Voting Policies
Proxy voting will be conducted by either ETC
or the sub-advisers.(1) To the extent that ETC is responsible for proxy voting, ETC has engaged Institutional Shareholder
Services (“ISS”), to provide research on proxy matters and voting recommendations, and to cast votes on behalf of
ETC. ISS executes and maintains appropriate records related to the proxy voting process, and ETC has access to those records.
ETC maintains records of differences, if any, between this Policy and the actual votes cast. ETC may, in the future, decide to
engage a different proxy advisory firm.
ETC has reviewed ISS’s voting guidelines and has determined
that those guidelines provide guidance in the best interest of ETC’s clients. This Policy and ISS’s proxy voting guidelines
will be reviewed at least annually. This review will include, but will not necessarily be limited to, any proxy voting issues that
may have arisen or any material conflicts of interest that were identified and the steps that were taken to resolve those conflicts.
There may be times when ETC believes that the best interests of
the client will be better served if ETC votes a proxy counter to ISS’s guidelines pertaining to the matter to be voted upon.
In those cases, ETC will generally review the research provided by ISS on the particular issue, and it may also conduct its own
research or solicit additional research from another third party on the issue. After considering this information and, as necessary,
discussing the issue with other relevant parties, ETC will determine how to vote on the issue in a manner which ETC believes is
consistent with this Policy and in the best interests of the client.
Each sub-adviser’s proxy voting policies
and procedures have been approved by the Trusts’ Board of Trustees and when a sub-adviser has been delegated authority to
vote a proxy, it will vote such proxy in accordance with the approved proxy voting policies and procedures.
In addition, the sub-advisers may engage the
services of an independent third party (“Proxy Firm”) to cast proxy votes according to the sub-advisers’ established
guidelines. ETC has deemed in the best interest of clients to permit a sub-adviser the authority to cast proxy votes in accordance
with the proxy voting policies submitted by that firm and approved by the Trusts’ Board of Trustees. The sub-adviser must
promptly notify ETC of any proxy votes that are not voted consistently with the guidelines set forth in its policy.
Conflict of Interest Identification and
Resolution
Although ETC does not believe that conflicts
of interest will generally arise in connection with its proxy voting policies, ETC seeks to minimize the potential for conflict
by utilizing the services of ISS to provide voting recommendations that are consistent with relevant regulatory requirements. Occasions
may arise during the analysis and voting process in which the best financial interests of clients might conflict with the interests
of ISS. ISS has developed a “separation wall” as security between its proxy recommendation service and the other services
it and its affiliated companies provide to clients who may also be a portfolio company for which proxies are solicited.
(1) As of the date of the last
revision to this Policy, ETC’s only clients are the series (or portfolios) of Exchange Traded Concepts Trust, Exchange Listed
Funds Trust, and ETF Series Solutions (the “Trusts”) for which ETC serves as investment adviser. ETC has engaged one
or more sub-advisers for such series. For some series, ETC is responsible for voting proxies and, for the remaining series, a
sub-adviser is responsible for proxy voting.
In resolving a conflict, ETC may decide to
take one of the following courses of action: (1) determine that the conflict or potential conflict is not material, (2) request
that disclosure be made to clients for whom proxies will be voted to disclose the conflict of interest and the recommended proxy
vote and to obtain consent from such clients, (3) ETC may vote the proxy or engage an independent third-party or fiduciary to determine
how the proxies should be voted, (4) abstain from voting or (5) take another course of action that adequately addresses the potential
for conflict. Employees are required to report to the CCO any attempted or actual improper influence regarding proxy voting.
ETC will provide clients a copy of the complete
Policy. ETC will also provide to clients, upon request, information on how their securities were voted.
Proxy Voting Operational Procedures
Reconciliation Process
Each account’s custodian provides holdings
to ISS on a daily basis. Proxy materials are sent to ISS, which verifies that materials for future shareholder meetings are received
for each record date position. ISS researches and resolves situations where expected proxy materials have not been received. ISS
also notifies ETC of any proxy materials received that were not expected.
Voting Identified Proxies
A proxy is identified when it is reported through
the ISS automated system or when a custodian bank notifies ISS of its existence. As a general rule, ETC votes all proxies that
it is entitled to vote that are identified within the solicitation period. ETC may apply a cost-benefit analysis to determine whether
to vote a proxy. For example, if ETC is required to re-register shares of a company in order to vote a proxy and that re-registration
process imposes trading and transfer restrictions on the shares, commonly referred to as “blocking,” ETC generally
abstains from voting that proxy.
Although not necessarily an exhaustive list,
other instances in which ETC may be unable or may determine not to vote a proxy are as follows: (1) situations where the underlying
securities have been lent out pursuant to an account’s participation in a securities lending program and the cost-benefit
ETC analysis indicates that the cost to recall the security outweighs the benefit; (2) instances when proxy materials are not delivered
or are delivered in a manner that does not provide ETC sufficient time to analyze the proxy and make an informed decision by the
voting deadline; and (3) occasions when required local-market documentation cannot be filed and approved prior to the proxy voting
deadline.
Proxy Oversight Procedures
In order to fulfill its oversight responsibilities
related to the use of a proxy advisory firm, ETC will conduct a due diligence review of ISS annually and requests, at a minimum,
the following information:
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ISS’ Policies, Procedures and Practices Regarding Potential Conflicts of Interest
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ISS’ Regulatory Code of Ethics
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The most recent SSAE 16 report of ISS controls conducted by an independent auditor (if available)
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ISS’ Form ADV Part 2 to determine whether ISS disclosed any new potential conflicts of interest
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On a quarterly basis, ETC will request from
ISS a certification indicating that all proxies were voted and voted in accordance with pre-determined guidelines and a summary
of any material changes to the firm’s policies and procedures designed to address conflicts of interest. In addition, a Proxy
Voting Record Report is reviewed by ETC on a periodic basis. The Proxy Voting Record Report includes all proxies that were voted
during a period of time.
In order to fulfill its oversight responsibilities
when a sub-adviser is responsible for voting proxies, ETC will request a certification of compliance and completion and review
the sub-advisers’ Proxy Voting Record Report on a periodic basis.
Maintenance of Proxy Voting Records
The following records are maintained for a
period of five years, with records being maintained for the first two years on site:
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These policy and procedures, and any amendments thereto;
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Each proxy statement (the majority of which are maintained on a third-party automated system);
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Record of each vote cast;
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Documentation, if any, created by ETC that was material to making a decision how to vote proxies
on behalf of a client or that memorializes the basis for a decision;
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Various reports related to the above procedures; and
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Each written client request for information and a copy of any written response by ETC to a client’s
written or oral request for information.
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