Amendment No. 292 ☒
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.
Additional Principal Risk Information
The following section provides additional
information regarding the principal risks of the Fund.
Artificial Intelligence Companies
Risk: The Fund invests primarily in the equity securities of Artificial Intelligence Companies and, as such, is particularly
sensitive to risks to those types of companies. These risks include, but are not limited to, small or limited markets for such
securities, changes in business cycles, world economic growth, technological progress, rapid obsolescence, and government regulation.
Artificial Intelligence Companies may have limited product lines, markets, financial resources or personnel. Securities of Artificial
Intelligence Companies, especially smaller, start-up companies, tend to be more volatile than securities of companies that do
not rely heavily on technology. Rapid change to technologies that affect a company’s products could have a material adverse
effect on such company’s operating results. Artificial Intelligence Companies also rely heavily on a combination of patents,
copyrights, trademarks and trade secret laws to establish and protect their proprietary rights in their products and technologies.
There can be no assurance that the steps taken by these companies to protect their proprietary rights will be adequate to prevent
the misappropriation of their technology or that competitors will not independently develop technologies that are substantially
equivalent or superior to such companies’ technology. Artificial Intelligence Companies typically engage in significant
amounts of spending on research and development, and there is no guarantee that the products or services produced by these companies
will be successful.
China A-Shares Investment Risk:
The liquidity of the A-shares market and trading prices of A-shares could be more severely affected than the liquidity and trading
prices of other markets because the Chinese government restricts the flow of capital into and out of the A-shares market. The nature,
duration and impact of a market disruption on the A-shares market and the Fund’s investments cannot be predicted. Depending
on its allocation to A-shares, the Fund may experience significant losses, or may not be able fully to implement or pursue its
investment objectives or strategies, due to illiquidity of the Chinese securities markets or delay or disruption in execution or
settlement of trades. The Fund’s investments in A-shares may become subject to frequent and widespread trading halts. The
Chinese government previously has acted in a manner that has benefitted holders of A-shares, but there can be no guarantee that
it will do so in the future.
Stock Connect, which is a securities trading
and clearing link between the mainland China stock exchanges and the Hong Kong stock exchange, only operates on days when the Chinese
and Hong Kong stock markets are each open for trading and when banks in each market are open on the corresponding settlement days.
The Fund may purchase and sell A-shares through Stock Connect only on days when Stock Connect and U.S. markets are open for trading.
Therefore, if it is a normal trading day for the Chinese market but Hong Kong and/or U.S. markets are closed, the Fund will not
be able to trade any A-shares. The Fund may be subject to the risk of price fluctuations in A-shares on such days. The Fund is
also subject to the risk that it will not be able to buy or sell A-shares in a timely manner on days when the U.S. markets are
open but Stock Connect is not.
Common Stock Risk: Common stock
holds the lowest priority in the capital structure of a company, and therefore takes the largest share of the company’s risk
and its accompanying volatility. Holders of common stocks incur more risk than holders of preferred stocks and debt obligations
because common stockholders, as owners of the issuer, generally have inferior rights to receive payments from the issuer in comparison
with the rights of creditors or holders of debt obligations or preferred stocks. Further, unlike debt securities, which typically
have a stated principal amount payable at maturity (whose value, however, is 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. An adverse event, such as an unfavorable earnings report, may
depress the value of a particular common stock. Also, prices of common stocks are susceptible to general stock market fluctuations
and economic conditions, and to volatile increases and decreases in value as market confidence and perceptions 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 or
banking crises.
Currency Exchange Rate Risk: Changes
in currency exchange rates and the relative value of non-U.S. currencies will affect the value of the Fund’s investments
and the value of your shares. Because the Fund’s NAV is determined on the basis of U.S. dollars, the U.S. dollar value of
your investment in the Fund may go down if the value of the local currency of the non-U.S. markets in which the Fund invests depreciates
against the U.S. dollar. This is true even if the local currency value of securities in the Fund’s holdings goes up. Conversely,
the dollar value of your investment in the Fund may go up if the value of the local currency appreciates against the U.S. dollar.
The value of the U.S. dollar measured against other currencies is influenced by a variety of factors. These factors include: national
debt levels and trade deficits, changes in balances of payments and trade, domestic and foreign interest and inflation rates, global
or regional political, economic or financial events, monetary policies of governments, actual or potential government intervention,
and global energy prices. Political instability, the possibility of government intervention and restrictive or opaque business
and investment policies may also reduce the value of a country’s currency. Government monetary policies and the buying or
selling of currency by a country’s government may also influence exchange rates. Currency exchange rates can be very volatile
and can change quickly and unpredictably. As a result, the value of an investment in the Fund may change quickly and without warning,
and you may lose money.
Depositary Receipt Risk: Depositary
receipts are subject to the risks associated with investing directly in foreign securities. In addition, investments in depositary
receipts may be less liquid than the underlying shares in their primary trading market.
Early Close/Trading Halt Risk:
An exchange or market may close early or issue trading halts on specific securities or financial instruments. The ability to trade
certain securities or financial instruments may be restricted, which may disrupt the Fund’s creation and redemption process,
potentially affect the price at which the Fund’s shares trade in the secondary market, and/or result in the Fund being unable
to trade certain securities or financial instruments. In these circumstances, the Fund may be unable to rebalance its portfolio,
may be unable to accurately price its investments and/or may incur substantial trading losses.
Emerging Markets Securities Risk:
Emerging markets are subject to greater market volatility, lower trading volume, political and economic instability, uncertainty
regarding the existence of trading markets and more governmental limitations on foreign investment than more developed markets.
In addition, securities in emerging markets may be subject to greater price fluctuations than securities in more developed markets.
Investments in debt securities of foreign governments present special risks, including the fact that issuers may be unable or unwilling
to repay principal and/or interest when due in accordance with the terms of such debt, or may be unable to make such repayments
when due in the currency required under the terms of the debt. Political, economic and social events also may have a greater impact
on the price of debt securities issued by foreign governments than on the price of U.S. securities. In addition, brokerage and
other transaction costs on foreign securities exchanges are often higher than in the United States and there is generally less
government supervision and regulation of exchanges, brokers and issuers in foreign countries.
Foreign Securities Risk: Investments
in non-U.S. securities involve certain risks that may not be present with investments in U.S. securities. For example, investments
in non-U.S. securities may be subject to risk of loss due to foreign currency fluctuations or to political or economic instability.
There may be less information publicly available about a non-U.S. issuer than a U.S. issuer. Non-U.S. issuers may be subject to
inconsistent and potentially less stringent accounting, auditing, financial reporting and investor protection standards than U.S.
issuers. Investments in non-U.S. securities may be subject to withholding or other taxes and may be subject to additional trading,
settlement, custodial, and operational risks. With respect to certain countries, there is the possibility of government intervention
and expropriation or nationalization of assets. Because legal systems differ, there is also the possibility that it will be difficult
to obtain or enforce legal judgments in certain countries. Because foreign exchanges may be open on days when the Fund does not
price its shares, the value of the securities in the Fund’s portfolio may change on days when shareholders will not be able
to purchase or sell the Fund’s shares. Conversely, shares may trade on days when foreign exchanges are closed. Each of these
factors can make investments in the Fund more volatile and potentially less liquid than other types of investments.
Geographic Investment Risk:
To the extent the Fund invests a significant portion of its assets in the securities of companies of a single country or region,
it is more likely to be impacted by events or conditions affecting that country or region. For example, political and economic
conditions and changes in regulatory, tax, or economic policy in a country could significantly affect the market in that country
and in surrounding or related countries and have a negative impact on the Fund’s performance. Currency developments or restrictions,
political and social instability, and changing economic conditions have resulted in significant market volatility.
Illiquid Investments Risk: In
certain circumstances, it may be difficult for the Fund to purchase and sell particular portfolio investments due to infrequent
trading in such investments. The prices of such securities may experience significant volatility, make it more difficult for the
Fund to transact significant amounts of such securities without an unfavorable impact on prevailing market prices, or make it
difficult for the Adviser to dispose of such securities at a fair price.
Index Tracking Risk: Tracking
error refers to the risk that the Adviser may not be able to cause the Fund’s performance to match or correlate to that
of the Index, either on a daily or aggregate basis. There are a number of factors that may contribute to the Fund’s tracking
error, such as Fund expenses, imperfect correlation between the Fund’s investments and those of the Index, rounding of share
prices, the timing or magnitude of changes to the composition of the Index, regulatory policies, and high portfolio turnover rate.
The Fund incurs operating expenses not applicable to the Index and incurs costs associated with buying and selling securities,
especially when rebalancing the Fund’s securities holdings to reflect changes in the composition of the Index. To the extent
the Fund utilizes a sampling approach, it may experience tracking error to a greater extent than if the Fund sought to replicate
the Index. Tracking error may cause the Fund’s performance to be less than expected.
Industry Concentration Risk: Because
the Fund’s assets will be concentrated in an industry or group of industries to the extent the Index concentrates in a particular
industry or group of industries, the Fund is subject to loss due to adverse occurrences that may affect that industry or group
of industries. To the extent the Fund concentrates in the securities of issuers in a particular industry, the Fund may face more
risks than if it were diversified more broadly over numerous industries. Such industry-based risks, any of which may adversely
affect the Fund may include, but are not limited to, the following: general economic conditions or cyclical market patterns that
could negatively affect supply and demand in a particular industry; competition for resources, adverse labor relations, political
or world events; obsolescence of technologies; and increased competition or new product introductions that may affect the profitability
or viability of companies in an industry. In addition, at times, an industry may be out of favor and underperform other industries
or the market as a whole. As of April 30, 2020, the Fund was concentrated in the software industry.
Software Industry Concentration
Risk: Various factors may significantly affect the software industry, such as technological developments, fixed-rate pricing
and the ability to attract and retain skilled employees. Changing domestic and international demand, research and development
costs and product obsolescence can affect the profitability of software companies. Software company stocks may experience substantial
fluctuations in market price.
The market for software products
is characterized by rapidly changing technology, rapid product obsolescence, cyclical market patterns, evolving industry standards
and frequent new product introductions. The success of software and services companies depends substantially on the timely and
successful introduction of new products. An unexpected change in one or more of the technologies affecting a company’s products
or in the market for products based on a particular technology could have a material adverse effect on the company’s operating
results. Furthermore, there can be no assurance that the software companies will be able to respond in a timely manner to compete
in the rapidly developing marketplace.
Many software companies rely
on a combination of patents, copyrights, trademarks and trade secret laws to establish and protect their proprietary rights in
their products and technologies. There can be no assurance that the steps taken by software companies to protect their proprietary
rights will be adequate to prevent misappropriation of their technology or that competitors will not develop technologies independently
that substantially are equivalent or superior to such companies’ technology.
Issuer-Specific Risk: Changes
in the financial condition of an issuer or counterparty, changes in specific economic or political conditions that affect a particular
type of security or issuer, and changes in general economic or political conditions can affect a security’s or instrument’s
value. The value of securities of smaller, less well-known issuers can be more volatile than that of larger issuers. Issuer-specific
events can have a negative impact on the value of the Fund.
Large-Capitalization Risk: Returns
on investments in securities of large companies could trail the returns on investments in securities of smaller and mid-sized companies.
The securities of large capitalization companies may also be relatively mature compared to smaller companies and therefore subject
to slower growth during times of economic expansion. Large capitalization companies may also be unable to respond quickly to new
competitive challenges, such as changes in technology and consumer tastes.
Limited Authorized Participants,
Market Makers and Liquidity Providers Risk: Only an Authorized Participant may engage in creation or redemption transactions
directly with the Fund. The Fund has a limited number of financial institutions that may act as Authorized Participants. In addition,
there may be a limited number of market makers and/or liquidity providers in the marketplace. To the extent either of the following
events occur, the Fund’s shares may trade at a material discount to NAV and possibly face delisting: (i) Authorized Participants
exit the business or otherwise become unable to process creation and/or redemption orders and no other Authorized Participants
step forward to perform these services, or (ii) market makers and/or liquidity providers exit the business or significantly reduce
their business activities and no other entities step forward to perform their functions. An active trading market for shares of
the Fund may not develop or be maintained, and, particularly during times of market stress, Authorized Participants or market
makers may step away from their respective roles in making a market in shares of the Fund and in executing purchase or redemption
orders. This could, in turn, lead to variances between the market price of the Fund’s shares and the value of its underlying
securities.
Management Risk: Because the
Fund may not fully replicate its Index and may hold fewer than the total number of securities in the Index and may hold securities
not included in the Index, the Fund is subject to management risk. This is the risk that the Adviser’s security selection
process, which is subject to a number of constraints, may not produce the intended results.
Market Risk: An investment in
the Fund involves risks similar to those of investing in any fund of equity securities, such as market fluctuations caused by
such factors as economic and political developments, changes in interest rates and perceived trends in securities prices. Local,
regional, or global events such as war, acts of terrorism, the spread of infectious illness or other public health issues, recessions,
or other events could have a significant impact on the market generally and on specific securities. The values of the securities
in which the Fund invests could decline generally or could underperform other investments. Different types of securities tend
to go through cycles of out-performance and under-performance in comparison to the general securities markets. In addition, securities
may decline in value due to factors affecting a specific issuer, market or securities markets generally. During a general market
downturn, multiple asset classes may be negatively affected. Changes in market conditions and interest rates generally do not
have the same impact on all types of securities and instruments.
Micro-Capitalization Risk: The
micro-capitalization companies in which the Fund may invest may be more vulnerable to adverse business or economic events than
larger, more established companies, and may underperform other segments of the market or the equity market as a whole. Securities
of micro-capitalization companies generally trade in lower volumes, are often more vulnerable to market volatility, and are subject
to greater and more unpredictable price changes than larger capitalization stocks or the stock market as a whole.
New/Smaller Fund Risk: A new
or smaller fund’s performance may not represent how the fund is expected to or may perform in the long term if and when
it becomes larger and has fully implemented its investment strategies. Investment positions may have a disproportionate impact
(negative or positive) on performance in new and smaller funds. New and smaller funds may also require a period of time before
they are fully invested in securities that meet their investment objectives and policies and achieve a representative portfolio
composition. Fund performance may be lower or higher during this “ramp-up” period, and may also be more volatile,
than would be the case after the fund is fully invested. Similarly, a new or smaller Fund’s investment strategy may require
a longer period of time to show returns that are representative of the strategy. New funds have limited performance histories
for investors to evaluate and new and smaller funds may not attract sufficient assets to achieve investment and trading efficiencies.
If a new or smaller Fund were to fail to successfully implement its investment strategies or achieve its investment objective,
performance may be negatively impacted. Further, when a fund’s size is small, the fund may experience low trading volumes
and wide bid/ask spreads. In addition, the fund may face the risk of being delisted if the fund does not meet certain conditions
of the listing exchange. If the fund were to be required to delist from the listing exchange, the value of the fund may rapidly
decline and performance may be negatively impacted. There can be no assurance that the Fund will achieve an economically viable
size. Any of the foregoing may result in the Fund being liquidated. The Fund may be liquidated by the Board of Trustees without
a shareholder vote. In a liquidation, shareholders of the Fund will receive an amount equal to the Fund’s NAV, after the
deducting the costs of liquidation, including the transaction costs of disposing of the Fund’s portfolio investments. Receipt
of a liquidation distribution may have negative tax consequences for shareholders. Additionally, during the Fund’s liquidation
all or a portion of the Fund’s portfolio may be invested in a manner not consistent with its investment objective and investment
policies.
Non-Diversification Risk: The
Fund is non-diversified under the 1940 Act, meaning that, as compared to a diversified fund, it can invest a greater percentage
of its assets in securities issued by or representing a small number of issuers. As a result, the performance of these
issuers can have a substantial impact on the Fund’s performance.
Operational Risk: Your ability
to transact in shares of the Fund or the valuation of your investment may be negatively impacted because of the operational risks
arising from factors such as processing errors and human errors, inadequate or failed internal or external processes, failures
in systems and technology, changes in personnel, and errors caused by third party service providers or trading counterparties.
Although the Fund attempts to minimize such failures through controls and oversight, it is not possible to identify all of the
operational risks that may affect the Fund or to develop processes and controls that completely eliminate or mitigate the occurrence
of such failures. The Fund and its shareholders could be negatively impacted as a result.
Passive Investment Risk: The
Fund is not actively managed. Therefore, unless a specific security is removed from the Index, or selling that security is otherwise
required upon a rebalancing of the Index as addressed in the Index methodology, the Fund generally would not sell a security because
the security’s issuer was in financial trouble. If a specific security is removed from the Index, the Fund may be forced
to sell such security at an inopportune time or for a price other than the security’s current market value. An investment
in the Fund involves risks similar to those of investing in any equity securities traded on an exchange, such as market fluctuations
caused by such factors as economic and political developments, changes in interest rates and perceived trends in security prices.
It is anticipated that the value of the Fund’s shares will decline, more or less, in correspondence with any decline in
value of the Index. The Index may not contain the appropriate mix of securities for any particular point in the business cycle
of the overall economy, particular economic sectors, or narrow industries within which the commercial activities of the companies
comprising the portfolio securities holdings of the Fund are conducted, and the timing of movements from one type of security
to another in seeking to replicate the Index could have a negative effect on the Fund. Unlike other funds that select investments
based on analyses of financial or other information relating to companies, the economy or markets, the Fund, like other sector-focused
or other narrowly-focused index funds, invests in companies included in the Index in accordance with its investment objective
of tracking the performance of the Index. There can be no assurance that an investment in such companies would not underperform
the broader market or investments with a different focus. The Fund should not be considered a complete investment program. Unlike
with an actively managed fund, the Adviser does not use techniques or defensive strategies designed to lessen the effects of market
volatility or to reduce the impact of periods of market decline. This means that, based on market and economic conditions, the
Fund’s performance could be lower than other types of mutual funds that may actively shift their portfolio assets to take
advantage of market opportunities or to lessen the impact of a market decline.
Preferred Securities Risk: Preferred
securities are subordinated to bonds and other debt instruments in a company’s capital structure and therefore will be subject
to greater credit risk than those debt instruments. In addition, preferred securities are subject to other risks, such as having
no or limited voting rights, being subject to special redemption rights, having distributions deferred or skipped, having limited
liquidity, changing tax treatments and possibly being in heavily regulated industries.
Sector
Focus Risk: The Fund may invest a significant portion of its assets in one or more sectors and thus will be more susceptible
to the risks affecting those sectors. While the Fund’s sector exposure is expected to vary over time based on the
composition of the Index, the Fund anticipates that it may be subject to some or all of the risks described below. The list below
is not a comprehensive list of the sectors to which the Fund may have exposure over time and should not be relied on as such.
Information Technology
Sector Risk: The Fund is subject to the risk that market or economic factors impacting information technology companies and
companies that rely heavily on technology advances could have a major effect on the value of the Fund’s investments. The
value of stocks of technology companies and companies that rely heavily on technology is particularly vulnerable to rapid changes
in technology product cycles, rapid product obsolescence, government regulation and competition, both domestically and internationally,
including competition from foreign competitors with lower production costs. Technology companies and companies that rely heavily
on technology, especially those of smaller, less-seasoned companies, tend to be more volatile than the overall market. Technology
companies are heavily dependent on patent and intellectual property rights, the loss or impairment of which may adversely affect
profitability. Additionally, companies in the technology sector may face dramatic and often unpredictable changes in growth rates
and competition for the services of qualified personnel.
Small- and Mid-Capitalization Risk: The
small- and mid-capitalization companies in which the Fund invests may be more vulnerable to adverse business or economic events
than larger, more established companies, and may underperform other segments of the market or the equity market as a whole. Securities
of small- and mid-capitalization companies generally trade in lower volumes, are often more vulnerable to market volatility, and
are subject to greater and more unpredictable price changes than larger capitalization stocks or the stock market as a whole.
Some small- and mid-capitalization companies have limited product lines, markets, financial resources, and management personnel
and tend to concentrate on fewer geographical markets relative to large capitalization companies. Also, there is typically less
publicly available information concerning smaller capitalization companies than for larger, more established companies. Small
capitalization companies also may be particularly sensitive to changes in interest rates, government regulation, borrowing costs
and earnings.
Trading Risk: Although the shares
of the Fund are listed for trading on a listing exchange, there can be no assurance that an active trading market for such shares
will develop or be maintained. Secondary market trading in the Fund’s shares may be halted by a listing exchange because
of market conditions or for other reasons. In addition, trading in the Fund’s shares is subject to trading halts caused
by extraordinary market volatility pursuant to “circuit breaker” rules. There can be no assurance that the requirements
necessary to maintain the listing of the shares of the Fund will continue to be met or will remain unchanged.
Shares of the Fund may trade at, above
or below their most recent NAV. The per share NAV of the Fund is calculated at the end of each business day and fluctuates with
changes in the market value of the Fund’s holdings since the prior most recent calculation. The trading prices of the Fund’s
shares will fluctuate continuously throughout trading hours based on market supply and demand. The trading prices of the Fund’s
shares may deviate significantly from NAV during periods of market volatility. These factors, among others, may lead to the Fund’s
shares trading at a premium or discount to NAV. However, given that shares can be created and redeemed only in Creation Units
at NAV (unlike shares of many closed-end funds, which frequently trade at appreciable discounts from, and sometimes at premiums
to, their NAVs), the Adviser does not believe that large discounts or premiums to NAV will exist for extended periods of time.
While the creation/redemption feature is designed to make it likely that the Fund’s shares normally will trade close to
its NAV, exchange prices are not expected to correlate exactly with NAV due to timing reasons as well as market supply and demand
factors. In addition, disruptions to creations and redemptions or the existence of extreme volatility may result in trading prices
that differ significantly from NAV. If a shareholder purchases at a time when the market price of the Fund is at a premium to
its NAV or sells at time when the market price is at a discount to the NAV, the shareholder may sustain losses.
Investors buying or selling shares
of the Fund in the secondary market will pay brokerage commissions or other charges imposed by brokers as determined by that broker.
Brokerage commissions are often a fixed amount and may be a significant proportional cost for investors seeking to buy or sell
relatively small amounts of shares. In addition, secondary market investors will also incur the cost of the difference between
the price that an investor is willing to pay for shares (the “bid” price) and the price at which an investor is willing
to sell shares (the “ask” price). This difference in bid and ask prices is often referred to as the “spread”
or “bid/ask spread.” The bid/ask spread varies over time for shares based on trading volume and market liquidity,
and is generally lower if the Fund’s shares have more trading volume and market liquidity and higher if the Fund’s
shares have little trading volume and market liquidity. Further, increased market volatility may cause increased bid/ask spreads.
Due to the costs of buying or selling shares of the Fund, including bid/ask spreads, frequent trading of shares may significantly
reduce investment results and an investment in the Fund’s shares may not be advisable for investors who anticipate regularly
making small investments.
Portfolio Holdings
A description of the Fund’s policies
and procedures with respect to the disclosure of the Fund’s portfolio securities is available in the Fund’s Statement
of Additional Information (the “SAI”).
STATEMENT OF ADDITIONAL INFORMATION
Robo
Global® ARTIFICIAL INTELLIGENCE ETF
Ticker
Symbol: THNQ
a series of EXCHANGE TRADED CONCEPTS
TRUST
May 7, 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
7, 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 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 www.roboglobaletfs.com, or by calling toll-free 1-855-456-ROBO.
ROB-SX-003-0100
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 ROBO Global® Artificial Intelligence ETF (the “Fund”). The Trust was organized as a Delaware statutory
trust on July 17, 2009. The Trust is registered with the U.S. 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 the 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
price and yield performance of the ROBO Global® Artificial Intelligence 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 also
redeemable only in Creation Unit aggregations, and generally in exchange for portfolio securities and a specified cash payment.
A Creation Unit of the Fund 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 or 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.
NON-DIVERSIFICATION
The Fund is classified as a non-diversified
investment company under the 1940 Act. A “non-diversified” classification means that the Fund is not limited by the
1940 Act with regard to the percentage of its assets that may be invested in the securities of a single issuer. This means that
the Fund may invest a greater portion of its assets in the securities of a single issuer than a diversified fund. The securities
of a particular issuer may constitute a greater portion of the Index and, therefore, the securities may constitute a greater portion
of the Fund’s portfolio. This may have an adverse effect on the Fund’s performance or subject the Fund’s shares
to greater price volatility than more diversified investment companies. Moreover, in pursuing its objective, the Fund may hold
the securities of a single issuer in an amount exceeding 10% of the market value of the outstanding securities of the issuer,
subject to restrictions imposed by the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”) for
the Fund to qualify as a regulated investment company (“RIC”). In particular, as the Fund’s size grows and its
assets increase, it will be more likely to hold more than 10% of the securities of a single issuer if the issuer has a relatively
small public float as compared to other components in its Index.
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. 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.
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.
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 a 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, a 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. If the Fund enters into such transactions directly, it 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.
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.
REAL ESTATE INVESTMENT TRUSTS (“REITs”)
A REIT is a corporation or business
trust (that would otherwise be taxed as a corporation) which meets the definitional requirements of the Internal Revenue Code.
The Internal Revenue Code of 1986 permits a qualifying REIT to deduct from taxable income the dividends paid, thereby effectively
eliminating corporate level federal income tax and making the REIT a pass-through vehicle for federal income tax purposes. To
meet the definitional requirements of the Internal Revenue Code, a REIT must, among other things: invest substantially all of
its assets in interests in real estate (including mortgages and other REITs), cash and government securities; derive most of its
income from rents from real property or interest on loans secured by mortgages on real property; and, in general, distribute annually
90% or more of its otherwise taxable income to shareholders.
REITs are sometimes informally characterized
as Equity REITs and Mortgage REITs. An Equity REIT invests primarily in the fee ownership or leasehold ownership of land and buildings;
a Mortgage REIT invests primarily in mortgages on real property, which may secure construction, development or long-term loans.
REITs may be affected by changes in
underlying real estate values, which may have an exaggerated effect to the extent that REITs in which the Fund invests may concentrate
investments in particular geographic regions or property types. Additionally, rising interest rates may cause investors in REITs
to demand a higher annual yield from future distributions, which may in turn decrease market prices for equity securities issued
by REITs. Rising interest rates also generally increase the costs of obtaining financing, which could cause the value of the Fund’s
investments to decline. During periods of declining interest rates, certain Mortgage REITs may hold mortgages that the mortgagors
elect to prepay, which prepayment may diminish the yield on securities issued by such Mortgage REITs. In addition, Mortgage REITs
may be affected by the ability of borrowers to repay when due the debt extended by the REIT and Equity REITs may be affected by
the ability of tenants to pay rent.
Certain REITs have relatively small
market capitalization, which may tend to increase the volatility of the market price of securities issued by such REITs. Furthermore,
REITs are dependent upon specialized management skills, have limited diversification and are, therefore, subject to risks inherent
in operating and financing a limited number of projects. By investing in REITs indirectly through the Fund, a shareholder will
bear not only his or her proportionate share of the expenses of the Fund, but also, indirectly, similar expenses of the REITs.
REITs depend generally on their ability to generate cash flow to make distributions to shareholders.
In addition to these risks, Equity REITs
may be affected by changes in the value of the underlying property owned by the trusts, while Mortgage REITs may be affected by
the quality of any credit extended. Further, Equity and Mortgage REITs are dependent upon management skills and generally may not
be diversified. Equity and Mortgage REITs are also subject to heavy cash flow dependency defaults by borrowers and self-liquidation.
In addition, Equity and Mortgage REITs could possibly fail to qualify for tax free pass-through of income under the Internal Revenue
Code or to maintain their exemptions from registration under the 1940 Act. The above factors may also adversely affect a borrower’s
or a lessee’s ability to meet its obligations to the REIT. In the event of default by a borrower or lessee, the REIT may
experience delays in enforcing its rights as a mortgagee or lessor and may incur substantial costs associated with protecting its
investments.
REPURCHASE AGREEMENTS
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.
BORROWING
The Fund may
borrow money 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 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.
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.
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
business development companies (“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,
the 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 the 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.
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 the 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.
SHORT SALES
The Fund may engage in short sales
that are either “uncovered” or “against the box.” A short sale is “against the box” if at
all times during which the short position is open, the Fund owns at least an equal amount of the securities or securities convertible
into, or exchangeable without further consideration for, securities of the same issue as the securities that are sold short. A
short sale against the box is a taxable transaction to the Fund with respect to the securities that are sold short.
Uncovered short sales are transactions
under which the Fund sells a security it does not own. To complete such a transaction, the Fund must borrow the security to make
delivery to the buyer. The Fund then is obligated to replace the security borrowed by purchasing the security at the market price
at the time of the replacement. The price at such time may be more or less than the price at which the security was sold by the
Fund. Until the security is replaced, the Fund is required to pay the lender amounts equal to any dividends or interest that accrue
during the period of the loan. To borrow the security, the Fund also may be required to pay a premium, which would increase the
cost of the security sold. The proceeds of the short sale will be retained by the broker, to the extent necessary to meet margin
requirements, until the short position is closed out.
Until the Fund closes its short position
or replaces the borrowed security, the Fund may: (a) segregate cash or liquid securities at such a level that the amount segregated
plus the amount deposited with the broker as collateral will equal the current value of the security sold short; or (b) otherwise
cover its short position.
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 has also 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.
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.
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.
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.
|
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 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.
|
|
2.
|
Borrow money or issue senior securities (as defined under the 1940 Act), except to the extent permitted
under the 1940 Act, the rules and regulations thereunder or any exemption therefrom, as such statute, rules or regulations may
be amended or interpreted from time to time.
|
|
3.
|
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.
|
|
4.
|
Purchase or sell commodities or real estate, except to the extent permitted under the 1940 Act,
the rules and regulations thereunder or any exemption therefrom, as such statute, rules or regulations may be amended or interpreted
from time to time.
|
|
5.
|
Underwrite securities issued by other persons, except to the extent permitted under the 1940 Act,
the rules and regulations thereunder or any exemption therefrom, as such statute, rules or regulations may be amended or interpreted
from time to time.
|
In addition to the investment restrictions
adopted as fundamental policies as set forth above, the Fund has the following non-fundamental policies, which may be changed
without shareholder approval.
|
1.
|
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 its underlying index (or, if depositary receipts
themselves are index securities, the underlying securities in respect of such depositary
receipts).
|
|
2.
|
Without providing 60 days prior notice
to shareholders, the Fund may not change its policy to invest, under normal circumstances,
at least 80% of its net assets, plus the amount of any borrowings for investment purposes,
in Artificial Intelligence Companies, as such term is defined in the Prospectus.
|
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 net assets in a particular industry or group of industries,
with certain exceptions.
Borrowing. The 1940 Act presently
allows a fund to borrow from any bank (including pledging, mortgaging or hypothecating assets) in an amount up to 33 1/3% of its
total assets (not including temporary borrowings not in excess of 5% of its total assets).
Senior Securities. Senior securities
may include any obligation or instrument issued by a fund evidencing indebtedness. The 1940 Act generally prohibits funds from
issuing senior securities, although it does not treat certain transactions as senior securities, such as certain borrowings, short
sales, reverse repurchase agreements, firm commitment agreements and standby commitments, with appropriate earmarking or segregation
of assets to cover such obligation.
Lending. Under the 1940 Act,
a fund may only make loans if expressly permitted by its investment policies. The Fund’s current investment policy on lending
is as follows: the Fund may not make loans if, as a result, more than 33 1/3% of its total assets would be lent to other parties,
except that the Fund may: (i) purchase or hold debt instruments in accordance with its investment objective and policies; (ii)
enter into repurchase agreements; and (iii) engage in securities lending 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 shares of the Fund trade on the Exchange at prices that may differ to some degree
from the Fund’s 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, nor any of their affiliates are involved in, or responsible for, the calculation or dissemination of the
IIV 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 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 Trust’s
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
accountant, 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 (the
“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
of the Trust 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
Served(1)
|
Principal
Occupation(s)
During Past 5 Years
|
Number
of
Portfolios in
Fund
Complex(2)
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).
|
13
|
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).
|
22
|
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 to 2015).
|
David M. Mahle
(1943)
|
Trustee
|
Since
2011
|
Consultant,
Jones Day (2012-2015); Of Counsel, Jones Day (2008-2011); Partner, Jones Day (1988-2008).
|
22
|
Independent
Trustee, Exchange Listed Funds Trust (9 portfolios) (since 2012); Independent Trustee, Source ETF Trust (2014 to 2015).
|
Name
and Year of
Birth
|
Position(s)
Held with
the Trust
|
Term
of
Office and
Length of
Time
Served(1)
|
Principal
Occupation(s)
During Past 5 Years
|
Number
of
Portfolios in
Fund
Complex(2)
Overseen By
Trustee
|
Other
Directorships
Held by Trustee
During Past 5
Years
|
Linda Petrone3
(1962)
|
Trustee
|
Since
2019
|
Founding Partner, Sage Search Advisors (since 2012).
|
22
|
Independent
Trustee, Exchange Listed Funds Trust (9 portfolios) (since 2019).
|
Mark
Zurack
(1957)
|
Trustee
|
Since
2011
|
Professor,
Columbia Business School (since 2002).
|
13
|
Independent
Trustee, AQR Funds (45 portfolios) (since 2014); Independent Trustee, Exchange Listed Funds Trust (2019); Independent Trustee,
Source ETF Trust, (2014 to 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) Ms. 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 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 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.
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.
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, Pennsylvania 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).
|
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.
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
|
Stevens
|
None
|
None
|
Independent
Trustees
|
Jacoby
|
None
|
None
|
Mahle
|
None
|
None
|
Wolfgruber
|
None
|
None
|
Zurack
|
None
|
None
|
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
compensation paid to the Trustees of the Trust for the fiscal year ended April 30, 2020. Independent Trustee fees are paid from
the unitary fee paid to the Adviser by the Fund. 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
|
$68,500
|
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 of 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.
|
CODES OF ETHICS
The Trust, the Adviser and SEI Investments
Distribution Co. (the “Distributor”) have each adopted a code of ethics pursuant to Rule 17j-1 of the 1940 Act. The
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 toll-free 1-855-456-ROBO; and (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,
the Fund pays the Adviser a fee calculated daily and paid monthly at an annual rate of 0.75% of the Fund’s average daily
net assets. The Adviser has contractually agreed to waive a portion of its fee in an amount equal to 0.07% of the Fund’s
average daily net assets through August 31, 2021. This arrangement may be terminated only by the Trust’s Board of Trustees.
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 a 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, the portfolio managers did not beneficially own 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 with respect
to the Fund 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”), a Delaware statutory trust with its principal business offices at One Freedom Valley Drive, Oaks,
Pennsylvania 19456, serves as administrator of the Trust and the Fund. 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
The Bank of New York Mellon (the “Custodian”),
located at 240 Greenwich Street, New York, New York 10286, 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
The Bank of New York Mellon, located
at 240 Greenwich Street, New York, New York 10286, 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 Trust’s
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: www.roboglobaletfs.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 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 that
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.
The Fund is new and therefore did not
pay commissions to affiliated brokers during the past fiscal year.
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 any securities of its “regular broker 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 of the Fund.
DTC is a limited-purpose trust company
that was created to hold securities of its participants (the “DTC’s 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 of the Fund 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 Fund shares. DTC or its nominee, upon receipt of any such
distributions, shall credit immediately DTC Participants' accounts with payments in amounts proportionate to their respective
beneficial interests in the Fund as shown on the records of DTC or its nominee. Payments by DTC Participants to Indirect Participants
and Beneficial Owners of shares 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. The 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 (defined below) 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 applicable 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 applicable 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 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 $550 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 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’s
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 $550 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 fees and non-standard charges. Investors are responsible for the costs of transferring the securities
constituting the Fund’s 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 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 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 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’s 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. 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 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 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 the 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 Index. This may result in a difference between the Fund’s performance and
the performance of the 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 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
Fund shares are distributed, as described below, on a pro rata basis to Beneficial Owners of such shares. Dividend payments are
made through DTC Participants and Indirect Participants to Beneficial Owners then of record with proceeds received from the Fund.
The Fund 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 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 same Fund at NAV per share. Distributions reinvested in additional shares of the Fund will nevertheless be
taxable to Beneficial Owners acquiring such additional shares to the same extent as if such distributions had been received in
cash.
FEDERAL INCOME TAXES
The following
is 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 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 seek to qualify and elect 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 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 the Fund’s 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 “Qualifying Income 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 another RIC) 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
Qualifying Income 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 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 21% corporate income tax rate without any deduction for
distributions to shareholders, and its distributions (including capital gains distributions) 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. In addition, the Fund could be required
to recognize unrealized gains, pay substantial taxes and interest, and make substantial distributions before requalifying as
a RIC. 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) and any realized net capital gain (after taking into account any capital loss carryovers). If the Fund failed
to satisfy the Distribution Requirement for any taxable year, the Fund 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.
Notwithstanding the Distribution Requirement
described above, a Fund will be subject to a nondeductible 4% federal excise tax on certain undistributed 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 such tax will be completely 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 (as discussed below), whether you take
them in cash or in additional shares.
Distributions of net capital gains,
if any, that the Fund reports as capital gain dividends are taxable as long-term capital gains, whether paid in cash or reinvested
in shares and regardless of how long a shareholder has held shares of the Fund. Long-term capital gains are generally taxed to
non-corporate shareholders at a maximum rate currently set at 20% (lower rates apply to individuals in lower tax brackets).
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.
Certain dividends received by the Fund
on stock of U.S. corporations (generally, dividends received by the Fund in respect of any share of stock (1) as to which the
Fund has met certain holding period requirements and (2) that is held in an unleveraged position) may be eligible for the dividends-received
deduction generally available to corporate shareholders under the Internal Revenue Code, provided such dividends are also appropriately
reported as eligible for the dividends-received deduction by the Fund. In order to qualify for the dividends-received deduction,
corporate shareholders must also meet minimum holding period requirements with respect to their Fund shares, taking into account
any holding period reductions from certain hedging or other transactions or positions that diminish their risk of loss with respect
to their Fund shares.
The Fund’s participation in loans
of securities may affect the amount, timing, and character of distributions to its 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. In
addition, 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.
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 on which the distribution was received are
sold. After a shareholder’s basis in the shares 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 intends to take appropriate measures to minimize
the return of capital.
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.
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.
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
of Shares. 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. Any loss realized upon a taxable
disposition of shares held for six months or less will be treated as long-term, rather than short-term, to the extent of any amounts
treated as distributions to the shareholder of long-term capital gain with respect to the shares (including any amounts credited
to the shareholder as undistributed capital gains). All or a portion of any loss realized upon a taxable disposition of shares
of the Fund will be disallowed if substantially identical shares of the Fund are purchased (through reinvestment of dividends
or otherwise) within 30 days before or after the disposition. In such a case, the basis of the newly purchased shares will be
adjusted to reflect the disallowed loss.
An Authorized Participant who exchanges
securities for Creation Units generally will recognize 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 (“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 a 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 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 rule applies and when a loss may be deductible.
Cost Basis Reporting. The cost basis
of shares 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.
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 Requirement 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. To the extent the Fund invests in an underlying fund that is taxable as a RIC,
the foregoing discussion regarding the tax treatment of complex securities will also apply to the underlying funds that also invest
in such complex securities and investments.
Foreign Investments. If the
Fund acquires any equity interest in certain foreign investment entities (i) that receive at least 75% of their annual gross income
from passive sources (such as interest, dividends, certain rents and royalties, or capital gains) or (ii) where at least 50% of
the corporation’s assets (computed based on average fair market value) either produce or are held for the production of
passive income (“passive foreign investment companies” or “PFICs”), the Fund will generally be subject
to one of the following special tax regimes: (i) the Fund may be liable for U.S. federal income tax, and an additional interest
charge, on a portion of any “excess distribution” from such foreign entity or any gain from the disposition of such
shares, even if the entire distribution or gain is paid out by the Fund as a dividend to its shareholders; (ii) if the Fund were
able and elected to treat a PFIC as a “qualified electing fund” or “QEF,” the Fund would be required each
year to include in income, and distribute to shareholders in accordance with the distribution requirements set forth above, the
Fund's pro rata share of the ordinary earnings and net capital gains of the PFIC, whether or not such earnings or gains are distributed
to the Fund; or (iii) the Fund may be entitled to mark-to-market annually shares of the PFIC, and in such event would be required
to distribute to shareholders any such mark-to-market gains in accordance with the distribution requirements set forth above.
The Fund intends to make the appropriate tax elections, if possible, and take any additional steps that are necessary to mitigate
the effect of these rules. The Fund may limit and/or manage its holdings in passive foreign investment companies to limit its
tax liability or maximize its return from these investments. Amounts included in income each year by the Fund arising from a QEF election, will be “qualifying income” under
the Qualifying Income Test (as described above) even if not distributed to the Fund, if the Fund derives such income from
its business of investing in stock, securities or currencies.
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.
If more than 50 percent of the value
of the Fund’s total assets at the close of any taxable year consists of certain foreign securities, then the Fund will be
eligible to and intends to file and election with the IRS that may enable shareholders, in effect, to receive either the benefit
of a foreign tax credit, or a deduction from such taxes, with respect to any foreign and U.S. possessions income taxes paid by
the Fund, subject to certain limitations. Pursuant to this election, the Fund will treat those taxes as dividends paid to its
shareholders. Each such shareholder will be required to include a proportionate share of those taxes in gross income as income
received from a foreign source and must treat the amount so included as if the shareholder had paid the foreign tax directly.
The shareholder may then either deduct the taxes deemed paid by him or her in computing his or her taxable income or, alternatively,
use the foregoing information in calculating any foreign tax credit they may be entitled to use against the shareholders’
federal income tax. As a result of these rules, which may have different effects depending upon each shareholder’s particular
tax situation, certain shareholders may not be able to claim a credit for the full amount of their proportionate share of the
foreign taxes paid by the Fund. Shareholders who are not liable for U.S. federal income taxes, including tax-exempt shareholders,
will ordinarily not benefit from this election. If the Fund makes the election, the Fund (or your broker) will report annually
to its shareholders the respective amounts per share of the Fund’s income from sources within, and taxes paid to, foreign
countries and U.S. possessions. The Fund generally may deduct any foreign taxes that are not passed through to its shareholders
in computing its income available for distribution to shareholders to satisfy applicable tax distribution requirements.
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 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.
Backup Withholding. The
Fund (or financial intermediaries, such as brokers, through which a shareholder holds shares) generally is required to withhold
and to remit to the U.S. Treasury a percentage of the taxable distributions and sale or redemption proceeds paid to any shareholder
who fails to properly furnish a correct taxpayer identification number, who has under-reported dividend or interest income, or
who fails to certify that he, she or it is not subject to such withholding. The backup withholding tax rate is 24%. Backup withholding
is not an additional tax. Any amounts withheld may be credited against the shareholder’s U.S. federal income tax liability,
provided the appropriate information is furnished to the IRS.
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.
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,
a 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. 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. The Fund’s
shares held in a tax qualified retirement account will generally not be subject to federal taxation on income and capital gains
distributions from the Fund until a shareholder begins receiving payments from their retirement account.
State and Local Taxes.
The Fund may be subject to tax or taxes in certain states where the Fund does business. Furthermore, in those states which have
income tax laws, the tax treatment of the Fund and of Fund shareholders with respect to distributions by the Fund may differ from
federal tax treatment.
General Considerations. The
federal income tax discussion set forth above is for general information only. Prospective investors should consult their tax
advisors regarding the specific federal income tax consequences of purchasing, holding and disposing of shares of the Fund, as
well as the effect of state, local and foreign tax law and any proposed tax law changes.
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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